WHY CARS MATTER:  historically, the automobile industry was the "engine" of American employment, producing 3 other industrial or service jobs for every automotive manufacturing one.  It also became the fabricator of motorized materials for war;  question...is this mighty economic "driver" as extinct as T-Rex below?

TABLE OF CONTENTS TO 'ECONOMICS 101' HERE:

Another way of looking at global finance...

Lending new mean to the term "F.I.R.E." sale?
ECONOMICS 101:  where did crisis start?  Or here?  And what impact do you think shrinking consumption will have?  Housing Industry predictor.  What are the possible futures for the greenback?  VAT tax coming?

Nobel Prize 1973 laureate for inventing Input-Output economics (using the computer for developing economic theories);
An example of others who use input-output theory;
Nobel Prize economist at the NYTIMES
Other theories of economics; 
June 7, 2009 op-ed - "Economy Still at the Brink."
NYTIMES Sunday article; 
From May 2009 Atlantic Monthly. 
Interesting article on what things are worth...


THE PULSE OF ECONOMIC DATA IN THE USA...it is electric...or is it?  How about elsewhere?  How about trying new ideas for taxing?

Apology
Toyota probes Corolla steering, considers recall
YAHOO
By YURI KAGEYAMA, AP Business Writer
Feb. 17, 2010

TOKYO – Toyota is considering a recall of its hot-selling Corolla subcompact after complaints about power steering problems — another blow to the world's largest automaker already reeling from a string of recalls for safety troubles.

Despite pressure from some lawmakers, President Akio Toyoda said he won't be attending the U.S. congressional hearing on the automaker's quality lapses, entrusting the job to U.S.-based executives — though would consider an appearance if the committee requests it. He said he wanted to focus on improving quality worldwide.

"I trust that our officials in the U.S. will amply answer the questions," Toyoda said Wednesday in his third news conference in two weeks. "We are sending the best people to the hearing, and I hope to back up the efforts from headquarters."

He said Yoshi Inaba, who heads Toyota Motor Corp.'s North American unit, was more familiar with the U.S. situation and was the best executive to deal with the hearing. Toyoda said he was still making plans to go to the U.S. and dates have yet to be set.

But in an alarming disclosure that could widen Toyota's recall crisis, the executive in charge of quality controls, Shinichi Sasaki, said Toyota was taking seriously the complaints about power-steering problems in the Corolla, the world's best-selling car.

Speaking at Toyota's Tokyo office, Sasaki said the company was putting customers first in a renewed effort to salvage its reputation and would do whatever is necessary if a Corolla fix is needed.

He said it was still uncertain if a Corolla recall would be necessary, but it is an option the automaker is considering.

He didn't disclose model years or regions that could be affected and said there have been fewer than 100 complaints. Toyota sold nearly 1.3 million Corolla cars worldwide last year.

Drivers may feel as though they were losing control over the steering, but it was unclear why, Sasaki said. He mentioned problems with the braking system or tires as possible underlying reasons for the steering problem.

U.S. federal safety officials have also said they are examining complaints from Corolla owners about steering problems.

Toyota has already recalled 8.5 million vehicles globally during the past four months because of problems with sticking gas pedals, floor mats trapping accelerators and faulty brake programming.

Its once pristine reputation for quality has been hammered, and Toyota's share of the critical North American market has nose-dived. Last month was the first time since February 1998 that Toyota's monthly U.S. sales fell below 100,000 vehicles, according to Ward's AutoInfoBank.

Koji Endo, managing director at Advanced Research Japan, said the Corolla problems, if they expand into a recall, would deal another major blow to Toyota.

"If Toyota has to recall Corollas, I wouldn't be surprised if they have to recall more than a million units again. It's going to be another big, big negative," said Endo.

But others said Toyota was sending a message it was going to be quick and thorough about maintaining quality.

"It really shows the company has learned its lesson from the recall debacle by starting to announce every investigation far more quickly," said Ryoichi Saito, auto analyst at Mizuho Investors Securities Co. in Tokyo.

Analysts had mixed views about Toyoda's reluctance to show up at Congress — some critical but others saying it was OK.

Unlike Western chief executives, Japanese presidents are not always expected to be an authoritative figure and play more of a team leader role in a culture that values harmony and consensus. That role is even more pronounced for Toyoda, the grandson of the company's founder who holds special significance for rank-and-file workers and dealers in Japan.

The U.S. House Oversight and Government Reform Committee is holding a hearing on Feb. 24 on Toyota's gas pedal problems. The House Energy and Commerce Committee has scheduled one the next day.

Inaba, Transportation Secretary Ray LaHood and NHTSA Administrator David Strickland are expected to testify at both meetings. The Senate Commerce, Science and Transportation Committee has scheduled a March 2 hearing.

At Wednesday's news conference, a solemn Toyoda reiterated his promise beef up quality controls at the world's No. 1 automaker.

He promised a brake-override system in all future models worldwide that will add a safety measure against acceleration problems that are behind the recent massive recalls. The system is a mechanism that overrides the accelerator if the gas and brake pedals are pressed at the same time.

"We are not covering up anything, and we are not running away from anything," Toyoda said.

The automaker said it was also dealing with questions about whether the gas pedal flaw was electronic and reiterated its investigation has not found any electronic problems.

But it has commissioned an independent research organization to test its electronic throttle system, and will release the findings as they become available.

Scrutiny of Toyota is growing. The U.S. Transportation Department has demanded Toyota hand over documents related to its massive recalls. The department wants to know how long the automaker knew of safety defects before taking action.

Reports of deaths in the U.S. connected to sudden acceleration in Toyota vehicles have surged in recent weeks, with the alleged death toll reaching 34 since 2000, according to new consumer data gathered by the U.S. government.

Toyota told NHTSA in January that the problem appeared in Europe beginning in December 2008. Toyota has said it began fixes on that in August 2009, but the company failed to link that with gas pedal problems in the U.S., which surfaced in October 2009.

Toyota took full-page ads in major Japanese newspapers Wednesday to apologize for the recalls in Japan, which affect the flagship Prius hybrid and two other hybrid models.

"We apologize from the bottom of our hearts for the great inconvenience and worries that we have caused you all," the black-and-white ads say.

Previously...
Government-Owned GMAC Loses $5 Billion in 4Q
NYTIMES
By THE ASSOCIATED PRESS
February 4, 2010
Filed at 9:15 a.m. ET

DETROIT (AP) -- Home and auto lender GMAC Financial Services says it lost $5 billion in the last three months of the year, as losses from its mortgage operations kept the company in the red for another quarter.

GMAC is still working to sell its ResCap home lending division. The unit alone lost more than $4 billion during the quarter. GMAC also took a $3.3 billion charge related to its efforts to sell the unit. 

GMAC's fourth-quarter loss compares with a profit of $7.5 billion in the same quarter last year.

The federal government has poured $16.3 billion into GMAC to keep it afloat and is now its majority owner. The lender has been battered by the downturn in the housing market.

Page last updated at 23:42 GMT, Friday, 19 February 2010
General Motors boss Whitacre to receive $9m pay package
GM boss Ed Whitacre
Mr Whitacre will receive considerably more than his predecessor

General Motors (GM) has said chief executive Ed Whitacre will get an annual salary of $1.7m (£1.1m), plus $7.3m in shares at a later date.

The pay package was approved by the US Treasury, which spent billions of dollars bailing out the carmaker last year and now owns a large stake in it.

GM also said Mr Whitacre's predecessor, Fritz Henderson, is being paid $59,090 a month as an adviser.

Mr Whitacre took over as interim chief executive in December last year.

Last month, he was officially confirmed in the position on a permanent basis. He is also chairman of GM.

Mr Whitacre was appointed chairman by the US administration last year, having previously run telecoms company AT&T.

His salary compares favourably with that of his predecessor. In an agreement reached last October with the US government, Mr Henderson's pay was cut by 25% to $950,000, about half of what he made in 2008.

Collapsing sales during the economic downturn forced GM to turn to the US government for aid, but this could not prevent it entering bankruptcy protection in June last year.

It emerged from bankruptcy one month later, with the US government owning a 62% stake in the company.

In total, GM received some $60bn in government loans.


AP Source: GM Chairman to become permanent CEO
YAHOO
By TOM KRISHER, AP Auto Writer
January 25, 2010

DETROIT – General Motors Co.'s chairman and interim chief executive, Ed Whitacre Jr., will become the permanent CEO of the automaker, a person briefed on the matter said Monday.

The announcement will be made at an 11:30 a.m. Eastern news conference at GM's downtown Detroit headquarters, the person said.

The person, who asked not to be identified because the announcement had not been made, said Whitacre will say that he is taking the job for good, as well as give an update on GM's business plan.

Whitacre, 68, is a former CEO of telecommunications giant AT&T Inc.

He has been serving as interim CEO since the board ousted former CEO Fritz Henderson on Dec. 1. GM had hired a firm to conduct a global search for a successor.

Whitacre often says in a folksy Texas drawl that he knows little about cars. But he's already shaken up the company by hiring a new chief financial officer and transferring the old one to China, firing the Chevrolet and Buick-GMC brand managers, combining sales and marketing and consolidating control of GM's core North American market under one executive.

He also seems impatient to spur the plodding culture of GM, where decision by committee, an isolated upper management and fear of risk produced mediocre cars for years.

He wants to increase GM's sales and market share while shifting the company's focus to cars from trucks. And he aims to repay $8.1 billion in U.S. and Canadian government loans by the end of June.

Although GM had hired the search firm, there were strong signs that Whitacre would take the job permanently, or at least serve as CEO until the company is on solid enough ground to sell stock to the public in an effort to repay its government loans.

GM owes the U.S. government $52 billion that it used to survive and emerge from bankruptcy protection last year.

At his first meeting with GM's top executives after being named chairman last summer, Whitacre candidly said he likes to be in charge.

"I don't know how to be a chairman and not a CEO," a person at the meeting remembers Whitacre saying.

But he also has told employees and reporters that he would rely heavily on former Wall Street analyst Stephen Girsky and Vice Chairman Bob Lutz for advice in running the company.

Whitacre didn't realize how hard it would be to run the company as an interim CEO, and decided to take the job himself, said Gerald Meyers, a former chairman of American Motors Corp. who now teaches at the University of Michigan.

Having an interim CEO paralyzes the organization because workers tend to lie low to wait for the permanent boss, Meyers said.

"Therefore, his demands and requests and requirements are watered down a lot," Meyers said. "He realized if he's not going to run the joint, he shouldn't be there. So he finally stepped up."

Jeffrey Sonnenfeld, a professor at the Yale School of Management, said it was no secret that Whitacre wanted the CEO job when Henderson was ousted. He said it would have been difficult for anyone to take the post with Whitacre managing as chairman.

"The only surprise is that he wasn't transparent about his plans in the beginning. Why didn't he just assume command then?" Sonnenfeld asked. "His ambitions were clear from the beginning when he pulled the rug from beneath an extremely competent CEO."

Henderson, Sonnenfeld said, was leading a "remarkably, breathtakingly successful turnaround," yet was relieved of his command.

Whitacre, he said, retired too young and was looking for ways to spend his free time. Whitacre has said he was passing time using a bulldozer to clear brush at his Texas ranch.

Meyers, who knows Whitacre, said the move eliminates confusion among GM's ranks. And just because Whitacre is dropping interim from his title doesn't mean the search for a new CEO has ended.

"He doesn't have to stay forever — but that's always the case," Meyers said. "Now it's indefinite. It would be embarassing, two weeks from now, for him not be CEO. A decent amount of time is going to go by."

Earlier this month the GM board hired Microsoft Corp. CFO Chris Liddell to take the same post at GM, and Whitacre said Liddell would be a candidate to take the CEO post permanently.

Whitacre was chairman and chief executive of AT&T and its predecessor companies from 1990 to 2007. During his tenure, he led the company through several acquisitions and sales.

Whitacre also sits on the boards of Exxon Mobil Corp. and the railroad company Burlington Northern Santa Fe Corp.

In a wide-ranging talk with reporters at GM's Detroit headquarters earlier this month, Whitacre predicted that GM would be profitable this year, although he said that was dependent on the economy and other factors.

A full-year profit for GM, which left bankruptcy protection in July, would be the company's first since 2004 when it made $2.7 billion. It has posted more than $88 billion in losses since then.


Are you surprised?
GMAC to get $3.5 billion in added aid from government: report
Wed Dec 30, 2009 2:51 am ET

NEW YORK (Reuters) – GMAC Financial Services is close to getting about $3.5 billion in added aid from the U.S. government, on top of the $12.5 billion already received since December 2008, the Wall Street Journal reported.

The announcement is expected within days and will coincide with GMAC taking additional steps to absorb losses related to its mortgage operations, the Journal reported, citing people familiar with the situation.

One person told the Journal that the measure has been crafted to return the company to profitability in the first quarter of 2010.

The new capital will likely allow GMAC to avert placing its ailing mortgage unit, Residential Capital LLC, or ResCap, into bankruptcy, the Journal reported, citing these people.

"As we have previously stated, GMAC has been conducting a strategic review of its business and evaluating options to address the challenges at ResCap and the mortgage operations," said GMAC spokeswoman Gina Proia in an email statement.

"Critical objectives in the process would be to take actions that position GMAC for improved financial performance and to repay the U.S. government," she said.

GMAC did not detail any specific actions.

Payback Time: Many See the VAT Option as a Cure for Deficits
NYTIMES
By CATHERINE RAMPELL
December 11, 2009

Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services.

Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers.

“We have to start paying our bills eventually,” said Charles E. McLure, a tax economist who worked in the Reagan administration. “This strikes me as the best and most obvious way of doing it.”

The favored route of economists is known as a value-added tax, which is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Similar to a sales tax, it generally results in consumers paying more for the things they buy. The revenues could be used to pay for health care or other social programs, or just to pay down existing debt.

Like universal health care, every other industrialized country in the world already has a value-added tax (as do about 100 emerging countries). And also like universal health care, this once-taboo policy option has recently been invoked, at times begrudgingly, by many prominent Washingtonians, including the House speaker, Nancy Pelosi; John Podesta, who was co-chairman of President Obama’s transition team; and two former Federal Reserve chairmen, Alan Greenspan and Paul A. Volcker

Introducing such a tax would probably require an overhaul of the entire federal tax code, no small order, and something the government last did in 1986. At the time the goal was to simplify the tax system, to raise money more efficiently and with fewer headaches for taxpayers.

Since then, federal spending has ballooned, while the government’s ability to raise taxes has become increasingly inefficient. Consider the page length of the tax code and tax regulations, which has expanded by more than 70 percent, according to Thomson Reuters Tax and Accounting. (There are more words crammed onto each page, too.)

The tax system is now a compendium of lobbied-for ifs, ands and buts. As the tax code has been embellished and then Swiss-cheesed, the portion of Americans footing the nation’s income tax bill has shrunk.

“There are many more deductions and credits, which can often encourage inefficient behavior such as tax shelters,” said Leonard E. Burman, a public affairs professor at Syracuse University, about the changes to the tax system since the 1986 reform. “The ideal tax system has a broad base — few deductions or exemptions — and low rates.”

Most of the rest of the industrialized world — including, most recently, Australia — has already taken this lesson to heart by imposing value-added taxes. Unlike income taxes, which are often front-loaded on the rich, then subsequently diluted, a value-added tax is paid by almost everybody. That broad base is one of its major advantages, and why the International Monetary Fund frequently recommends it to countries that need to raise money quickly.

What is good for economic purposes, however, can be bad politics, especially since Mr. Obama pledged not to raise taxes on the bottom 95 percent of Americans. (And many Republicans have pledged not to raise taxes on the bottom 100 percent of Americans.)

The value-added tax is also the darling of many economists for its bounce-a-quarter-off-its-abs efficiency. Its administrative costs to the government are generally low. It is also considered less of a drag on the economy over the long run than raising income taxes, which discourage people from saving money and thereby making capital available to businesses.

To understand why a value-added tax is considered so efficient, you have to understand how it usually works.

Imagine the production of a new dress, in three steps:

¶A fabric store sells a tailor enough silk to make one dress, at a total price of $10 before taxes;

¶The tailor sews a dress and sells it to Macy’s for $30 before taxes;

¶Macy’s then sells the dress to a shopper for $50, before taxes.

Let’s say the value-added tax is 10 percent. The government will collect some tax revenue in each step of the production process, from roll of fabric to cocktail-party scene-stealer, but each business in the chain gets credit for the tax already paid by other suppliers.

When selling the cloth to the tailor, the fabric store adds a tax of 10 percent, or $1 on the $10 of supplies the tailor purchases. The tailor pays the fabric store $11, and the store remits $1 to the government.

When the tailor sells his dress to Macy’s, he calculates the value-added tax as $3, or 10 percent of his $30 pretax price. Macy’s pays the tailor $33.

But instead of sending the full $3 to the government, the tailor gets to subtract the $1 of taxes he had already paid to the fabric store. So he sends $2 to the government.

When Macy’s sells the dress to a shopper, it adds another 10 percent, so the shopper pays $55, or $50 plus $5 in tax. That would be in addition to any state or local sales taxes consumers have to pay, depending on the locale.

Macy’s checks to see how much the previous companies in the supply chain — the fabric store and the tailor — have already paid the government in value-added taxes, and subtracts that from the $5. Macy’s ends up remitting just $2 to the government.

The government receives $5 total, or 10 percent of the final purchase price, but from three different businesses.

Although more complicated, value-added taxes are considered better than equivalent sales taxes — where the tax is levied only when the consumer buys a product — for two main reasons.

First, if a single business evades the value-added tax, the government does not lose a large portion of money, because it will collect taxes at other stages of production.

Since companies usually get credit for taxes already paid by their suppliers, companies will pressure other businesses in the production chain to prove they paid their taxes. That means the system is somewhat self-policing.

To some foes of big government, though, the efficiency of the tax is also its fatal flaw. Conservatives worry that it enables the government to raise money with such little effort that it will encourage Washington to spend even more.

On the other hand, liberals are wary of value-added taxes because they are regressive. Poor people spend a higher portion of their income buying things than the rich, meaning lower-income people would be disproportionately hurt.

That is why countries often make other major changes to their tax code at the same time.

In Australia, the government imposed a value-added tax in the middle of an overhaul of the system in 2000, which included making the income tax system more progressive. “Many countries with VATs have income taxes that start out at higher income thresholds,” said James Poterba, an economics professor at M.I.T. Combining a broad-based VAT with a steeply progressive income tax, he said, avoids affecting the poor too much.

But just as the income tax has been hollowed out by countless loopholes, so could a value-added tax. Many European countries, for example, have counteracted the regressive qualities of the tax by exempting broad categories of goods, like groceries and children’s clothing.

This always creates problems, economists say. Companies are tempted to mislabel their products so they can avoid the tax.

“What really is the difference between prepared food versus nonprepared food?” said Alan J. Auerbach, an economics professor at the University of California, Berkeley. “You start having to split hairs, and that can become quite complicated.”

Besides cheating the government of revenue, this sort of behavior also distorts what people choose to buy, causing a drag on economic development, Mr. Auerbach said.

Moreover, in some industries — like financial services — it is difficult to evaluate how much value is added because of the way they make their money.

The solution in many places, like New Zealand, is to exempt the financial services industry. But that might not go over well in a country whose federal debt has recently swelled precisely because of a major banking crisis.

Such political hurdles, along with a still-tentative economic recovery, make a consumption tax — or a tax increase of any kind — unlikely in the immediate future. But with economists like Kenneth Rogoff of Harvard predicting that federal tax revenues will need to rise by 20 to 30 percent in the next few years, politicians may hold their noses and decide this tax is the least worst option.

“Of course, we want to take down the health care cost, that’s one part of it,” Ms. Pelosi told Charlie Rose of PBS. “But in the scheme of things, I think it’s fair to look at a value-added tax as well.”


Click below to follow this Global Business story...
Dubai debt fears hammer stocks
YAHOO
By Jeremy Gaunt, European Investment Correspondent
November 26, 2009

LONDON (Reuters) – Debt problems in Dubai hit financial markets across the board on Thursday, sinking global stocks, helping lift safe-haven bonds and taking the dollar up from a 14-year low against the yen.

Gold climbed to a new record high but fell back as the dollar rose.

Banking stocks came under pressure because of potential exposure to any bad debt in the Gulf, as did shares in European car companies, some of which are part-owned by sovereign wealth funds from the region.

Markets were also trading without much input from the United States, where it was the Thanksgiving holiday.

Dubai said on Wednesday it wanted creditors of Dubai World and property group Nakheel to agree a debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.

The announcement triggered widespread concern about the once-booming Gulf region's financial health, although some investors differentiated between leveraged Dubai and other more solidly wealthy emirates and countries in the region.

But the worries fed directly into a general nervousness in financial markets about the real state of the world economy at a time when investors are also seeking to lock in 2009 profits.

"The Dubai story is weighing heavily on stock markets and people are looking to safe havens so there's some flight to quality again," said Charles Berry, a bond trader at LBBW.

Others, such as Royal Bank of Scotland, said Dubai's bombshell meant investors would now have to "re-appraise the quality of sovereign support for state-owned entities in the region."

Dubai sought to ease some concerns about international port operator DP World (DPW.DI), saying its debt was not included in the restructuring.

But markets stayed nervous and the cost of insuring debt through credit default swaps around the Gulf rose.




GM to end Hummer after sale to Chinese buyer fails
By DAN STRUMPF, AP Auto Writer
Feb. 24, 2010

DETROIT – General Motors Co. said Wednesday it will shut down Hummer after its bid to sell the brand to a Chinese company collapsed.

Heavy equipment maker Sichuan Tengzhong Heavy Industrial Machines Co. pulled out of the deal for Hummer, known for its hulking, military-style SUVs, because it was unable to get clearance from Chinese regulators within the proposed deal timeframe, the manufacturer said in a separate statement.

GM said it will continue to honor existing Hummer warranties.

"We are disappointed that the deal with Tengzhong could not be completed," said John Smith, GM vice president of corporate planning and alliances. "GM will now work closely with Hummer employees, dealers and suppliers to wind down the business in an orderly and responsible manner."

GM has been trying to sell the loss-making brand for the last year and found a suitor in Tengzhong, but resistance from Chinese regulators created difficulties from the start.

As recently as Tuesday, private investors were trying to set up an offshore entity in a last-minute effort to complete the acquisition ahead of a Feb. 28 deadline. That plan, along with other options, was unsuccessful, according to a person close to the situation. The person declined to be identified in order to speak more freely.

"There's no way forward with that," this person said. "We're out of time."

Hummer, which traces its origins to the Humvee military vehicle built by AM General LLC in South Bend, Ind., acquired a devoted following among SUV lovers who were drawn to the off-road ready vehicles. But the vehicles drew scorn from environmentalists and sales never recovered after gasoline prices spiked above $4 a gallon in the summer of 2008.

The H3, the most fuel-efficient vehicle in Hummer's lineup, averages about 16 mpg. The vehicles are built at GM's factory in Shreveport, La. GM sold just over 9,000 Hummers in 2009, down two-thirds from 27,000 the year before.

Hummer is the second brand after Saturn that GM has failed to sell as part of its restructuring. GM sold Swedish brand Saab to Dutch carmaker Spyker Cars NV earlier this year. Pontiac is being discontinued.

GM is focusing its efforts on its four remaining brands: Chevrolet, GMC, Cadillac and Buick.
GM, Tengzhong reach Hummer deal
YAHOO
By Matt Andrejczak, MarketWatch
Oct. 9, 2009, 2:17 p.m. EDT

SAN FRANCISCO (MarketWatch) -- General Motors Co. said Friday it has clinched a definitive agreement to sell its Hummer brand to Chinese firm Sichuan Tengzhong Heavy Industrial Machinery Corp.

The deal, which still needs to be approved by regulators in the U.S. and China, is expected to preserve more than 3,000 sales and manufacturing jobs in the U.S.

Tengzhong will acquire ownership of the Hummer brand, trademarks, and assume existing dealer network agreements. GM will continue to manufacture the military-styled sports utility vehicle until June 2011, with an optional one-year extension.

The purchase price was not disclosed. Tengzhong will acquire Hummer through an investment entity, in which it will hold an 80% stake. Private entrepreneur Suolang Duoji from China's Sichuan Province will own the remaining 20%.

When GM made its quick trip through bankruptcy this summer, the auto maker indicated that Hummer could fetch $500 million or more. Before the sale was officially announced, Reuters and Bloomberg, citing sources familiar with the deal, said Hummer would sell for about $150 million.

Tengzhong said in June that it had struck a preliminary deal to take over Hummer, the civilian version of a vehicle built for U.S. military use. Tengzhong makes heavy trucks and industrial equipment.

The state of Michigan has offered tax breaks for Hummer to build its headquarters, design and engineering facility in the Detroit suburb of Southfield.

The H2 Hummer is assembled in Indiana, while the H3 is made in Louisiana.

The outsized SUV hit hard times when fuel prices began to escalate and the economy cratered. Hummer's smallest model gets only 16 miles per gallon in combined city and highway driving. Sales took a big hit when gasoline prices topped $4 a gallon and came under renewed pressure as the economy tumbled into recession.

Through September, GM had sold only 8,193 Hummers in the U.S. this year, down 64% from the same period last year. In September, only 426 Hummers were sold nationwide, according to Autodata Corp.

Design changes are afoot to make the Hummer more fuel-efficient.

Hummer said it will offer an alternative fuel powertrain in every model and add E85 FlexFuel capability in the 2010 H3 and H3T models. The SUV maker also said it's working to get certified for a diesel H3 to be sold outside North America.

"Backed by a privately owned and well-capitalized company, we are going to be able to focus on providing customers with more efficient models that deliver Hummer's promise of authentic, purpose-built design and engineering," Hummer CEO James Taylor said in a prepared statement.

As part of its restructuring, GM slimmed down to focus on the Chevrolet, GMC, Buick, and Cadillac brands. Saturn and Hummer are among the four brands GM planned to eliminate or sell.

Last week, GM's deal to sell its Saturn brand to Penske Automotive Group fell apart when Penske failed to line up a replacement manufacturer. GM now plans to shut down the brand.


"You should never see how laws or sausages are made." 
This is the version I am familiar with - a quote from almost EVERYBODY, originally attributed, in dispute on Wikipedia, to Otto von Bismarck!!!  AND IT IS SO TRUE...of course, if you didn't watch the CT Legislature on TV, you would have no way of knowing how hard they work!  Or how closely the Majority listens to the Minority (photo from newspapers, above).  UBS underattack?  All Greek to us!


Page last updated at 14:32 GMT, Thursday, 4 March 2010
The Greek island of Santorini in the Aegean Sea. File photomap
Only 227 of Greece's 6,000 islands are inhabited

Greece should sell islands to cut debt - Merkel allies
By Oana Lungescu , BBC News, Berlin

Greece should consider selling some of its uninhabited islands to cut its debt, according to political allies of German Chancellor Angela Merkel.

Josef Schlarmann and Frank Schaeffler told Germany's Bild daily that the Greek state should sell stakes in all its assets to raise more cash.

Greek PM George Papandreou is due to meet Mrs Merkel in Berlin later this week for talks about the crisis.

Mr Papandreou has already announced a strict austerity programme.

'Affordable' islands

"Sell your islands, you bankrupt Greeks - and the Acropolis too!" says the headline in the Bild newspaper.

It sounds like the sort of daydream induced by too much ouzo, but the idea comes from two senior politicians in Europe's biggest economy.

Mr Schlarmann is a senior member of Mrs Merkel's Christian Democrats and Mr Schaeffler is an MP for the Free Democrats - the junior partner in the centre-right coalition.

Both confirmed to the BBC that they wanted to start a debate about what Greece could do to help itself and bolster the battered euro.

Those who face insolvency, Mr Schlarmann said, must sell everything they have to pay their creditors.

He advised Mrs Merkel not to promise any financial aid when she met Mr Papandreou in Berlin.

According to a poll published on Thursday, 84% of Germans think that the EU should not help Greece out of its debt crisis.

It is true that dotted in the blue waters of the Aegean are some of the country's most valuable assets - about 6,000 islands, of which only 227 are inhabited. Many of them are privately owned by the world's super-rich.

According to a specialised real-estate website, Greek islands evoke images of sunglass-sporting shipping magnates sipping champagne on enormous yachts, but cost as little as $2m (£1.3m).

Relatively affordable, the website says - unless, of course, you're a Greek.


Europe Union Moves Toward a Bailout of Greece
NYTIMES
By STEPHEN CASTLE and LANDON THOMAS Jr.
March 1, 2010

BRUSSELS — In a tense game of brinksmanship, the European Union is moving toward the first bailout in the history of its common currency, which is expected to involve loan guarantees from the German and French governments to encourage their banks to buy Greek debt.

Even as the negotiations continue, the bloc is insisting that Athens impose further, painful austerity measures, in part to overcome political opposition in Germany to providing aid to the spendthrift Greeks.

During a brief visit, due to start Monday, Olli Rehn, the European commissioner for economic and monetary affairs, will press for more spending cuts and tax increases in Greece as a precursor to an emerging package of financial support.

With no structure in place for dealing with a threatened default within the 16-nation euro zone, officials are making up the rules as they go along. That means that politics — as much as economics — is determining the outcome of the worst crisis in the decade-long lifespan of the euro, creating a kind of phony war in which battles are being fought by leaks and behind-the-scenes briefings.

European officials say that the purchase of Greek bonds by state-owned lenders like Germany’s KfW — backed by German government guarantees — is likely to be involved in any solution and has been an option under discussion for three weeks.

Other alternatives, including ones that involve more countries in the euro zone, are also being discussed. France’s state-owned bank Caisse des Dépôts et Consignations, may be involved, one Greek newspaper reported Saturday, while France’s Finance Minister. Christine Lagarde, told Europe 1 radio on Sunday that there are “a certain number of proposals in the euro zone, involving either private partners or public partners or both.”

But Germany’s Chancellor, Angela Merkel, is not ready to sign off on a rescue, officials said, before Greece has pushed through further cuts.

One European official, speaking on condition of anonymity because of the sensitivity of the subject, said that Greek officials appeared to be briefing journalists on the prospect for an big rescue package in the hope of pushing the European Union into a quick solution, or of convincing the markets that help is at hand.

“The Germans will not put a euro on the table until there is a credible austerity package,” the official said.

Simon Tilford, chief economist at the Center for European Reform, said that France and Germany recognize that some form of bailout is inevitable, but that, to enable a bailout to be sold to a skeptical German public, the Greeks first “have to be seen to be suffering.”

Much of the negotiating focuses on the Greek prime minister George Papandreou. On Friday, Mr. Papandreou met with Josef Ackermann, the chairman of Deutsche Bank, in Athens; on March 5 he plans to visit Mrs. Merkel in Berlin. He also is scheduled to meet President Obama in Washington on March 9.

Lurking behind the discussion are a variety of power plays involving Brussels, Paris, Berlin and Athens. Germany is reluctant to sanction any bailout knowing that, as the euro zone’s biggest economy, it will bear the brunt of the cost. But France and Germany also believe that any recourse by Greece to the International Monetary Fund would damage the prestige of the euro, highlighting its inability to sort out internal problems.

Moreover, France’s president, Nicolas Sarkozy is said to be particularly reluctant to see a rescue orchestrated by the monetary fund, which is led by Dominique Strauss-Kahn, a Frenchman and a potential rival in the next presidential elections.

Precisely that threat is being made privately by Greek officials, according to one European diplomat, who spoke on condition of anonymity due to the sensitivity of the issue.

The Greek government can be pushed only so far, said Daniel Gros, director of the Center for European Policy Studies.

Such brinkmanship on both sides was brought about by the lack of clarity from an European Union summit earlier this month when leaders promised “determined and coordinated action” if needed to protect the euro’s stability.

Refusing to specify what this would be, European leaders sought to inject more rigor into Greece’s budget deficit reduction program.

Having concealed its true economic situation and largely squandered the proceeds of the good economic years, Greece is not seen as a deserving cause in Berlin.

“Germany has, in the last 10 years, been through very painful social reform which mean curtailing rights and social benefits and pushing back the retirement age,” said Thomas Klau of the European Council on Foreign Relations and author of a book on the birth of the euro. “The argument in Germany is ‘why should our workers work to the age of 67 to enable Greeks to retire earlier?’”

But Mrs. Merkel is under equally strong pressure from her European partners to protect the euro from the consequences of a Greek default. “She has to show leadership,” Mr. Klau said, “in taking and pushing through a decision which is unpopular with her electorate and much of her party and is not backed wholeheartedly by her junior coalition party”.

Already the Greeks have agreed to freeze wages, cut bonus, crackdown on tax evasion and raise the official retirement age. But European officials have made it clear that they do not believe these measures go far enough to narrow Greece’s budget deficit. Athens is now weighing an increase of two percentage points in the 19 percent value-added tax, higher fuel prices and the possible abolition of one of two additional months of pay received by public sector workers and by employees of many private firms.

The new austerity package is likely to be announced after Mr. Rehn’s visit to Athens but well in advance of a crucial meeting of European finance minister on March 16.

For weeks now the Greek government, which faces 23 billion in debt repayments in April and May, has been testing investor’s diminishing appetite for its bonds via a 3 to 6 billion euro ($4 billion to $8 billion) 10-year offering that it had hoped to bring off at an interest rate in the 6 percent range. That would be well above the roughly 3 percent rate investors receive on German bonds but not as costly as the 7 percent or so rate that some investors claim is necessary to compensate them for the extra risk of buying Greek bonds.

The offering itself is fairly small. But its significance for Europe and the bedraggled euro is far greater.

“I see this as a game of chicken between the markets and the German finance ministry,” Mr. Gros said.

Greece is pressing for a much detail as possible on rescue contingencies to ensure that it will be get some relief from the attack in the markets for imposing a harsh plan on its restive public.

Greek officials have privately pointed out that, when a country goes to the International Monetary Fund, it gets protection from the markets until its economy has stabilized.

For example, in November 2008 when Hungary went to the monetary fund it received a stand-by loan worth about euros 12.3 billion, then $15.7 billion, of which euros 4.9 billion or $6.3 billion was on tap immediately and the remainder available in five installments subject to quarterly reviews.

Without similar help the Greek austerity drive might prove counterproductive.

“Cutting public spending by this amount,” Mr. Tilford said, “when there is no other source of demand in the economy, when export demand is extremely weak and the country is running a huge current account deficit, is almost certain to push their economy into a slump.”

Without the I.M.F., the only credible source of support to ease the shift in fiscal policy in Greece are the other European governments that rely on the euro as well.

“The Greeks are in a bad position,” Mr. Tilford said, “but their bargaining power is stronger than some governments concede. If the euro zone doesn’t come up with something they will have little option but to go to the I.M.F.”

SEC examines destabilizing effects of CDS
YAHOO
Feb. 25, 2010

WASHINGTON (Reuters) – Securities regulators said on Thursday they are examining the potential abuses and destabilizing effects of credit default swaps, a financial instrument that can be used to speculate on an issuer's credit worthiness.

The Securities and Exchange Commission comments come after Federal Reserve Chairman Ben Bernanke said regulators were looking at how Goldman Sachs (GS.N) and other Wall Street companies helped Greece arrange derivative deals.[nN25251885]

The SEC would not confirm or deny it was investigating Goldman's role in Greece.

"As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices," SEC spokesman John Nester said.

Goldman had no comment.

It is unclear what regulators are examining regarding Goldman's dealings with Greece. Bernanke did not specify.

The SEC has said it has more than 50 probes involving credit default swaps, collateralized debt obligations and other derivatives-based instruments.

The SEC has already expanded some of its insider trading investigations to examine derivatives and credit default swaps.

Used to insure against the default of debt issuers, credit default swaps were blamed for exacerbating the financial crisis by spreading losses from bets on risky mortgages and other debt.

Because swaps and other over-the-counter derivatives are not traded on a central exchange, regulators cannot monitor their activity for any potential wrongdoing.

Congress is working on legislation to shed light on the $450 trillion private derivatives market. This legislation is currently stalled in the Senate.

The SEC said any derivatives legislation should ensure that securities-based swaps are regulated as strongly as the security that underlies the swap.

The agency also said Congress needs to give it the tools needed to police the markets and shed light on the opaque market.

(Reporting by Rachelle Younglai; editing by Carol Bishopric)

Fed to look into insurance contracts on Greek debt
YAHOO
By JEANNINE AVERSA, AP Economics Writer
Feb. 25, 2010

WASHINGTON – Federal Reserve Chairman Ben Bernanke told lawmakers Thursday that the central bank is looking into the use by Goldman Sachs and other Wall Street firms of a sophisticated investment instrument to make bets that Greece will default on its debt.  Bernanke said the Fed is looking into companies' use of credit default swaps, a form of insurance against bond defaults. Bernanke made the comments at the start of a Senate Banking Committee hearing, the second day where the Fed chief testified on Capitol Hill about the state of the economy.

"Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive, " Bernanke said, adding that the Securities and Exchange Commission probably will be looking into this matter as well.

"We'll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the U.S," Bernanke said.

The panel's chairman, Sen. Christopher Dodd, D-Conn., said he is troubled that this practice could worsen Greece's debt crisis.

"We have a situation in which major financial institutions are amplifying a public crisis for what would appear to be for private gain," Dodd said.

Dodd wondered whether there ought to be limits on the use of credit default swaps to prevent "the intentional creation of runs against governments."

On another topic, Bernanke said that the snowstorms and bad weather that have recently affected the country will likely have a short-term — but not permanent — impact on unemployment and layoffs. He said policymakers will "have to be careful about not overinterpreting" upcoming data.

Even though the economy is growing once again, senators on both side of the aisle worried about high unemployment — now at 9.7 percent — rising home foreclosures and difficulties people and businesses have in getting loans.

"The state of our economy as a whole may be improving, but if we're talking about the situation of ordinary American families, I think I can sum up this recovery in three words: not good enough," Dodd said.

Senators pressed Bernanke for ideas about what Congress can do to help out, especially in bringing down unemployment. The Senate on Wednesday approved a package aimed at generating jobs by giving companies a tax break for hiring the unemployed.  Bernanke shied away from providing recommendations but did say that if additional stimulus measures are approved, it would be "very constructive" to pair them with a plan on how the government intends to lower record-high deficits down the road.

On the economy, Bernanke repeated the message he delivered Wednesday to the House Financial Services Committee: that record low interest rates are still needed to make sure that the budding economic recovery is lasting and to help relieve high unemployment.  And, Bernanke again argued against Senate efforts to strip the Fed of its powers to regulate banks, saying such a move would be a "grave mistake."

Doing so, would deprive the Fed of information that factors into the setting of interest rates to influence overall economic activity, he said. Bernanke also argued that the Fed would lose insights into the health of not only individual banks but also of the entire banking system.

Dodd has wanted to rein in the Fed's power and remove it from overseeing banks as part of a broader legislative revamp of the nation's financial structure. That conflicts with the Obama administration's stance as well as the approach taken by House lawmakers in their financial overhaul bill.

Page last updated at 13:11 GMT, Wednesday, 3 March 2010

 Greece backs new round of tax rises and spending cuts
Demonstration by striking workers in Athens, 10 Feb 10
Greece has been hit by a wave of public sector strikes

The Greek government has approved a new package of tax rises and spending cuts to save 4.8bn euros ($6.5bn; £4.4bn) and ease its budget crisis.

The measures include a rise in sales and luxury taxes, a 30% cut in the holiday bonuses paid to civil servants, and a pensions freeze.

The EU had called for austerity measures amid fears that Greece's problems could undermine the eurozone.

PM George Papandreou has likened the budget crisis to a "wartime situation".

ANALYSIS
Malcolm Brabant
By Malcolm Brabant, BBC News, Athens
In a country with Byzantine financial practices, one of the more idiosyncratic traits of Greek employment law is the requirement that workers receive their annual remuneration in 14 segments.

The methods vary, but in principle, employees get a full month's extra wages at Christmas, an extra half month's salary to help during the summer holiday period, plus another half month's salary at Easter.

The bonuses carry great symbolic value in Greece, but the European Commission has urged the government to scrap them for civil servants.

Some of the cabinet have been reluctant to do so, not least because of strong opposition from trades unions. The unions fear that any reduction in the bonuses will not be just for the duration of the crisis but will be permanent.

The main civil service union has called a 24-hour strike on 16 March.

He told reporters: "These decisions are necessary for the survival of the country and the economy, so that Greece can exit the vortex of speculators and defamation, so that we can breathe and keep on fighting."

The socialist government has pledged to reduce Greece's budget deficit from 12.7% - more than four times the limit under eurozone rules - to 8.7% during 2010.

It is also seeking to reduce its 300bn euro ($419bn; £259bn) debt.

Correspondents say businesses in Greece are likely to react badly to further tax increases, as they see them as being counter-productive, discouraging consumer spending and contributing to a further downward spiral.

There have already been strikes by trades unions in protest against the government's cost-cutting plans.

And Panayiotis Vavouyios, head of the retired civil servants' association, said: "It is a very difficult day for us. These cuts will take us to the brink.

"Brussels is demanding cuts and the government is doing nothing to stop them. To make poor pensioners pay for this crisis is a disgrace."

The German government welcomed the additional Greek austerity measures, saying they were likely to inspire confidence in Athens.

European debt and deficit figures

Transport strikes lay bare Europe's malaise
YAHOO
By JAMEY KEATEN, Associated Press Writer
Feb. 23, 2010

PARIS – With economic recovery barely there and talk of austerity spreading, many European workers are pushing back.

French air traffic controllers walked off the job Tuesday just as Lufthansa pilots ended a strike and British Airways cabin crews voted to launch one of their own. Greek unions prepared to shut down much of their country Wednesday with wide-ranging strikes.

These workers — like those blockading the Athens stock market, and demonstrators angry at proposed delayed retirements in Spain — fear for their hard-earned comforts as European governments and companies tighten belts to stay solvent.

The walkouts are the latest signs of a broader unease about jobs and benefits, and what the future holds for a continent struggling to stay competitive on a global scale.

From Communist-backed protesters who blocked the Athens stock market Tuesday to labor unions angry at plans to require Spaniards to retire at 67 instead of 65, Europeans face the unsettling prospect of seeing some of the comforts and benefits won over the decades slip away.

Air traffic controllers walked off the job across France as a four-day strike began on Tuesday, testing the patience of would-be travelers and forcing the cancellation of hundreds of flights. Unions called the walkout to protest plans to integrate European air traffic control across six countries — which workers fear will lead to losses of jobs and civil servant benefits.

Workers and unions say they are digging in to protect the European social safety net from fraying and to keep austerity measures from sapping consumer demand and thus the economy.

"The dangers of pricing oneself out of a job have nowhere been more apparent than they are today," said Howard Wheeldon, a senior strategist at inter-dealer broker BGC Partners in London.

"The solution is ... for companies to be even more efficient and that of necessity means employing fewer staff," said Wheeldon. That's what managers at British Airways and Lufthansa are facing, he said.

Thousands of Lufthansa pilots resumed work Tuesday after suspending a strike over concerns that cheaper crews from the German carrier's smaller airlines in other countries could replace them one day. Big European carriers have been pummeled in recent years by high jet-fuel prices, competition from low-cost rivals and falling demand for first- and business-class tickets — where profit margins are higher.

"Cost pressure has always governed airlines," said Per-Ola Hellgren, an analyst at Germany's Landesbank Baden-Wuerttemberg. "The pressure is much greater than in the past. The conditions were never really great and now they're worse than ever."

While airline workers face market pressures, the air traffic controllers are subject to a government push for efficiencies at a time of high state deficits and lackluster economic conditions.

Eric Heraud, a spokesman for the French state-run civil aviation agency DGAC, suggested the controllers are acting out of fear.

"This strike is a little bit disproportionate," because the French government is committed to keeping workplace protections, he said. Heraud said labor unions representing controllers in the five partner nations — Belgium, Germany, Luxembourg, the Netherlands and Switzerland — all supported the integation plan.

The malaise about pending government cutbacks and efficiency-seeking extends beyond the air travel sector.

In Spain, labor unions have called protest rallies for Tuesday evening in Madrid, Barcelona, Valencia and other cities to protest a government plan to raise the retirement age from 65 to 67 age as part of an austerity package. Greek unions are calling a wide-ranging strike for Wednesday to protest austerity measures aimed at getting the country out of a government debt crisis. The action is expected to ground flights, reduce medical service and close schools and government offices, while some private sector unions will also stay off work.

Transport labor unions in the Czech Republic were meeting Tuesday to decide whether to go on strike to protest taxation of their workers' benefits. The unions want parliament to change a new law on value added tax that took effect this year.
Greek PM rules out bailout but urges EU solidarity
YAHOO
By PAN PYLAS and ELENA BECATOROS, Associated Press Writer
Feb. 19, 2010

LONDON – Greek Prime Minister George Papandreou told other European leaders Friday that Greece intended to solve its debt crisis on its own, as the government replaced the head of its debt management agency ahead of key moves to refinance its massive deficit.

The news that Petros Christodoulou, former head of asset management at the National Bank of Greece, will take over from Spyros Papanicolaou comes as financial markets continue to fret about the Greek government's ability to pay off its debt. Those worries have undermined confidence in the 16-country euro currency.

The Finance Ministry did not give a reason for the appointment in its announcement late Thursday.

Greece has taken a hammering in markets in recent months, after the new government sharply revised the budget deficit shortly after the elections to 12.7 percent of gross domestic product from a 3.7 percent forecast months earlier — sending Europe into a new phase of the financial crisis over mounting debts by Greece and several other euro-zone countries.

Spreads of Greek government bonds over the equivalent German benchmark bonds — a key indicator of the market's perception of a risk of default — have spiraled in recent weeks, and stood at 326 basis points on Friday afternoon. Papandreou reiterated in London that Greece's troubles were "our responsibility" and that Greece was not seeking a bailout. But he said Athens' woes affected all and that the country needed the support of its partners in the EU.

"Higher interest rates for us means higher interest rates for Europe....What we are simply saying is we'd like to borrow on the same terms as other countries in the European Union and the eurozone," Papandreou said at a conference of socialist leaders.

The Prime Minister would not be drawn onto whether Greece was preparing a multibillion euro bond issue next week as around euro20 billion of its debt needs to be refinanced in April and May. There is mounting speculation in the markets that Greece will begin looking to tap investors before the end of February to take advantage of improved market conditions — last month the spread over German bonds stood at around 400 basis points.

Papandreou repeated his view that the country was not looking for a bailout from its partners in the 16-country eurozone but "simply saying we have a program and we need support for this program." Papandreou's government has pledged to cut its budget deficit by four percentage points in this year alone.

Papandreou also met with British Prime Minister Gordon Brown and Spain's premier Jose Luis Rodriguez Zapatero, as well as Foreign Secretary David Miliband — in addition to being Prime Minister, Papandreou also holds the foreign affairs brief.

Zapatero, whose government is also facing pressure in the markets to bring down its budget deficit, gave Papandreou support and said deficits across Europe would come down once the recovery from recession was firmly established.

"Of course we are going to reduce the deficits.....we are not going to fall in the trap of the ideas of those who have created the financial crisis," he said.

"The large majority (of Greeks) has no responsibility for what has happened, and much less Papandreou's government..it deserves the trust of European institutions, of the markets and he has the trust of all the European governments," Zapatero added.

Back in Athens, Greek drivers lined up for gas at the few stations still open Friday as a customs strike against government austerity measures left many pumps running dry. The fuel shortage was the first serious consequence of growing labor protests against the government's emergency cuts, aimed at easing the debt crisis in Greece and shoring up market confidence.

Customs workers have extended their strike against salary freezes and bonus cuts through next Wednesday, when unions across Greece will hold a general strike that is set to bring the country to a standstill.

Athens has come under intense pressure by its European Union partners to bring its finances under control and explain the use of financial deals known as currency swaps and how they affected the country's debt and deficit figures.

Greece has announced a series of harsh austerity measures and says the swaps debt deal, made with U.S. investment bank Goldman Sachs, was above board and will be explained in a letter being sent by the finance minister to the European Union.

The EU's top economy official, Olli Rehn, gave the Greek government until Friday to supply answers on the use of the currency swaps.

"There will be a response. There is a letter by the Finance Minister," government spokesman Giorgos Petalotis said, adding it would "most likely" be sent on Friday.

EU officials said however that the letter had not been received by early Friday evening, and that once they received the letter, time would be needed to analyze its contents.

Earlier this week, European finance ministers warned Athens it would have to impose even tougher budget cuts if its current austerity program can't reduce the deficit to 8.7 percent this year. Athens has until March 16 to report back to the EU on its progress.

European Commission spokeswoman Amelia Torres said Rehn will visit Greece "before the middle of March." She did not elaborate, but the timing of the visit seemed designed to step up the pressure on Athens.
Bomb explodes outside a JP Morgan office

Last Updated: 3:04 PM, February 16, 2010
Posted: 1:48 PM, February 16, 2010

A bomb detonated Tuesday outside JP Morgan Chase & Co.’s offices in Athens, Reuters reported, citing a police source.

No injuries were reported.

It was a time-bomb at JP Morgan's offices in central Athens," a police official told Reuters. "The explosion damaged the outside door and smashed some windows."

A local newspaper reportedly received a warning call prior to the explosion, according to Reuters.

Greece's economic problems have roiled markets across the world in recent weeks, as concerns about its fiscal crisis casts doubt on the strength of the euro.
Greece faces deadline on swaps
YAHOO
By AOIFE WHITE, AP Business Writer
Feb. 16, 2010

BRUSSELS – Greece has only days to explain its use of complex financial deals that it used to mask debt and just a month to prove that its drastic budget cuts go far enough to reassure markets — and other EU governments reluctant to bail Athens out if it can't pay its bills.

The Greek crisis has plunged the 16 nations that use the euro into a crisis by breaking rules on debt and deficit that underpin Europe's currency union amid worries that its problems could be even bigger because its public finance figures cannot be trusted.

The EU's top economy official, Olli Rehn, said Tuesday that he wanted the Greek government to supply answers by Friday on how it used currency swaps and how that affected debt and deficit figures.

European Union finance ministers on Tuesday also gave Greece a deadline of March 16 to show that it can make big spending cuts to bring its deficit down from the EU's highest, 12.7 percent, to 8.7 percent this year.

They said in a statement that this was essential to "remove the risk of jeopardizing the proper functioning of economic and monetary union."

Eurozone nations — who have pledged to provide a financial bailout to Greece if needed — said they would demand new spending cuts, higher value-added taxes and fuel taxes and new taxes on luxury goods, including cars, if Greece can't make the deficit reductions it is promising.

Greece now has a month to show that it can make real savings from a freeze on public sector salaries, cuts to bonuses and stipends and promises to reform pensions and health care.

The government is facing opposition at home. Greek customs officials walked off the job Tuesday for a three-day strike which will hamper imports and exports.

But Greek Finance Minister George Papaconstantinou insisted that he is already ahead of schedule on swinging budget reductions and that public finances reported a slight surplus last month thanks to a one-off tax on large companies.

"It's a matter of credibility for the country," he told reporters. "The execution of the Greek budget for the month of January, based on preliminary figures, is going quite well. We have actually a surplus."

Greece says it isn't asking for financial help and won't need any — but it is facing a credibility crisis as a Feb. 1 report commissioned by the Greek finance ministry warns of "significant debt revisions" for 2009 statistics due to swaps, debt to suppliers and state-guaranteed loans that may default.

The report said some swaps are now "being done in order to transfer interest from the current year to the future, with long-term loss to the Greek state."

Rehn said "it is clear that a profound investigation must be done on this matter," promising that he would check to see if all rules were respected.

"If it turns out that there is such kind of securitization of swaps that are not in line with the rules of the time, then of course we would need to take action," he said.

The EU can take Greece to court, under threat of daily fines, to change its statistics methods. It is already threatening legal action for Greece's failure to report accurate public finance figures last year.

Papaconstantinou said Monday that such swaps were legal when Greece used them and that it is not using them now and will stick to EU statistics rules on new financing deals.

Papaconstantinou also said Greece was not alone among EU nations in using such deals. Rehn said he was not aware of similar problems with other countries but that "this has still to be verified."

Rehn also took a shot at the investment banks that advised Greece to mask debt. Reports in The New York Times and Germany's Der Spiegel said that Greece used U.S. financial institution Goldman Sachs to engage in the swaps. The bank did not comment when contacted last week.

"I think the banks themselves should also ask, not least after the financial crisis, if this has been in line with the code of ethics," he said.

Traders' fears that Greece might not make debt repayments increased Tuesday, with the spread of the Greek government bond widening to 3.35 percentage points against the benchmark German bond. The spread was below 3.00 points last week on hope of a detailed eurozone bailout plan.
EU Asks Greece to Explain Derivatives Reports
NYTIMES
By REUTERS
Filed at 10:02 a.m. ET
February 15, 2010

BRUSSELS (Reuters) - The European Union has asked Greece to explain reports that it engaged in derivatives trades with U.S. investment banks that may have allowed it to mask the size of its debt and deficit from EU authorities.

According to the New York Times, one contract in 2001 -- carried out just as Greece was joining Europe's monetary union -- involved Greece selling forward future lottery receipts and airport landing fees in exchange for cash to write down debts.

The deal was treated as a currency trade rather than a loan, according to the newspaper, allowing Greece to hide it from public view while meeting EU deficit limits.

Greece's finance minister, George Papaconstantinou, on Monday dismissed suggestions that his country may have played fast and loose with monetary rules, saying the transactions Greece took part in were permissible at the time.

"The kind of derivatives contracts reported by some newspapers were legal at that time," he told reporters in Brussels. "Greece was not the only country to use them... They were made illegal, (and) we have not used them since then."

The issue has become a focus of attention as Greece has now acknowledged that it has a budget deficit of nearly 13 percent of gross domestic product -- more than four times EU limits -- and a national debt equivalent to 120 percent of GDP.

The fiscal problems have led to pressure on Greek debt in bond markets and weakened the European single currency.

The European Commission, the EU's executive that is responsible for enforcing EU laws, said it had asked Greece to explain what contracts it had engaged in as Eurostat, the EU's statistics agency, had never been informed.

"I want to state that Eurostat was not aware of such transactions," Commission spokesman Amadeu Altafaj told a regular briefing on Monday.

"But I can tell you that Eurostat has indeed, following these reports, already requested the Greek authorities for an explanation by the end of February."

Asked if the derivatives trades that Greece is alleged to have conducted fell within EU budget rules, Altafaj said:

"We need the information on what kind of transactions took place, if they did (take place), and what was the effect on the government accounts of Greece... This is something that we don't have the information (on) yet and we have requested."

TRANSPARENCY

A senior Greek finance ministry official told Reuters that Greece's current debt financing operations were transparent and complied with Eurostat rules.

But Eurostat, which already has profound concerns about the reliability of Greek macroeconomic data, is likely to take a very hard look at exactly what transactions took place and when.

"This is why we are requesting more capacity for Eurostat to indeed to have more thorough and deeper view on these statistics. Reliable statistics are a key issue in management of public finances," Commission spokesman Altafaj said.

What Greece appears to have carried out, at least on one occasion, is a currency swap, which Altafaj said would have to be examined to see if it met EU rules.

"If this is legitimate in government management operations, which is one of the issues that is at stake, yes it is, it is legitimate, if, and I understand if, the underlying exchange rates and or interest rates of such swaps are calculated from the observed market rate, and this is something that we will have to assess based on the information we receive," he said.

At a meeting later on Monday, euro zone finance ministers are expected to exert more pressure on Greece to implement planned budget deficit cuts. EU leaders pledged last week to help Athens resolve its crisis if needed, but they are still hoping to avoid having to provide concrete aid.
Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis
NYTIMES
By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ
February 14, 2010

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.  As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.  It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.  In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.  Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.

The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.  A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.

While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.

“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.

“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.

Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.  Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting.

The tide of fear is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow.

For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.

Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.

But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.

“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”

In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.

These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed.  The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.

George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.  Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.

In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.

Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.

Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”

SEC looks at changes for 'dark pools'
YAHOO
By MARCY GORDON, AP Business Writer
October 21, 2009

WASHINGTON – Federal regulators considered tighter oversight Wednesday for so-called "dark pools," trading systems that don't publicly provide price quotes and compete with major stock exchanges.

The Securities and Exchange Commission was expected to propose new rules that would require more stock quotes in the "dark pool" systems to be publicly displayed.

The alternative trading systems, private networks matching buyers and sellers of large blocks of stocks, have grown explosively in recent years and now account for an estimated 7.2 percent of all share volume. SEC officials have identified them as a potential emerging risk to markets and investors.

The SEC initiative is the latest action by the agency seeking to bring tighter oversight to the markets amid questions about transparency and fairness on Wall Street. The SEC has floated a proposal restricting short-selling — or betting against a stock — in down markets.

Last month, the agency proposed banning "flash orders," which give traders a split-second edge in buying or selling stocks. A flash order refers to certain members of exchanges — often large institutions — buying and selling information about ongoing stock trades milliseconds before that information is made public.

Institutional investors like pension funds may use dark pools to sell big blocks of stock away from the public scrutiny of an exchange like the New York Stock Exchange or Nasdaq Stock Market that could drive the share price lower.

"Given the growth of dark pools, this lack of transparency could create a two-tiered market that deprives the public of information about stock prices," SEC Chairman Mary Schapiro said at the agency's public meeting Wednesday.

When investors place an order to buy or sell a stock on an exchange, the order is normally displayed for the public to view. With some dark pools, investors can signal their interest in buying or selling a stock but that indication of interest is communicated only to a group of market participants.

That means investors who operate within the dark pool have access to information about potential trades which other investors using public quotes do not, the SEC says.

The SEC proposal would require indications of interest to be treated like other stock quotes and subject to the same disclosure rules.

A 1999 SEC rule established a separate set of regulations for alternative trading systems, which have grown to 29 from 10 in 2002. Examples include: London-based Turquoise Trading Ltd., a European system established by Citigroup Inc., Goldman Sachs Group Inc., France's Societe Generale SA and other major banks; Toronto-based Alpha was set up by several major Canadian banks; and Liquidnet Inc. in New York.

NYSE chief executive Duncan Niederauer has asked the SEC to subject the alternative systems to a stricter set of regulations that is closer to the regime for the major exchanges. His proposed changes would go further than those being considered by the SEC.

"We are not against dark pools," Niederauer said Tuesday in a conference call with reporters. "We're in favor of competition; we'd just like it to be a level playing field."

Sen. Charles Schumer, D-N.Y., sent a letter to Schapiro asking the SEC commissioners to consider stricter regulations for the trading systems as well as establishment of a consolidated surveillance system for all markets, for which the alternative systems would contribute some of the cost.
NYSE chief urges changes for 'dark pools'
YAHOO
By MARCY GORDON, AP Business Writer
October 20, 2009

WASHINGTON – With federal regulators poised to propose changes for so-called "dark pools," the head of the New York Stock Exchange said tighter rules should be applied to the alternative trading systems that don't publicly provide price quotes and compete with traditional exchanges.

The Securities and Exchange Commission is expected to propose new rules on Wednesday that would require fuller display of information on trades, bids and offers for the "dark pool" systems.

NYSE CEO Duncan Niederauer and Sen. Charles Schumer, D-N.Y., have asked the SEC to subject the alternative systems to a stricter set of regulations that's closer to the regime for the major exchanges. Their proposed changes would go further than those being considered by the SEC.

"We are not against dark pools," Niederauer said Tuesday in a conference call with reporters. "We're in favor of competition; we'd just like it to be a level playing field."

The SEC initiative is the latest action by the agency seeking to bring tighter oversight to the markets amid questions about transparency and fairness on Wall Street. The SEC has floated a proposal restricting short-selling — or betting against a stock — in down markets.

Last month, the agency proposed banning "flash orders," which give traders a split-second edge in buying or selling stocks. A flash order refers to certain members of exchanges — often large institutions — buying and selling information about ongoing stock trades milliseconds before that information is made public.

The alternative trading systems have grown explosively, accounting for an estimated 7.2 percent of all share volume. SEC Chairman Mary Schapiro has identified them as a potential emerging risk to markets and investors, and asked agency staff earlier this year to examine ways of bringing greater transparency to them.

The systems are private networks matching buyers and sellers of large blocks of stocks. Institutional investors like pension funds may use them to sell big blocks of stock away from the public scrutiny of an exchange like the NYSE or Nasdaq Stock Market that could drive the share price lower.

"This lack of transparency has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially," Schapiro said in a speech in June. "For example, the lack of reliable information can prompt speculation and suspicion about the basis for market fluctuations."

Schumer sent a letter to Schapiro asking the SEC commissioners to consider stricter regulations for the trading systems as well as establishment of a consolidated surveillance system for all markets, for which the alternative systems would contribute some of the cost.

SEC approval would be required to set up a new alternative system or make changes in operations of an existing one.

"I respectfully ask that you consider the proposals ... to ensure that (alternative trading systems), while continuing to provide beneficial competition to registered exchanges that directly and indirectly benefits retail investors, do not undermine the fairness, transparency and integrity in our markets," Schumer wrote.

A 1999 SEC rule set up a separate set of regulations for alternative trading systems, which have grown to around 30 from 10 in 2002. A prominent ATS is Turquoise, a European system established by Citigroup Inc., Goldman Sachs Group Inc., France's Societe Generale SA and other major banks. The NYSE's Arca Europe also is an ATS.
Schumer jumps into dark pool debate ahead of SEC meet
YAHOO
By Jonathan Spicer
October 20, 2009

NEW YORK (Reuters) – U.S. Senator Charles Schumer on Tuesday jumped in to the debate over anonymous trading venues known as dark pools, calling for tough new regulations a day before the U.S. Securities and Exchange Commission meets to consider new rules.

Schumer, among the most vocal of lawmakers pressing for market structure reform, urged in a letter to SEC Chairman Mary Schapiro that the regulator adopt some of the most robust measures now on the table, and called for a new market-wide monitor.

He said the growth of dark pools, which now number more than 40, risks undermining fair and transparent markets, and that regulation has not kept pace. The private venues are used primarily to trade large blocks of stock, and have proliferated this decade as the marketplace went electronic.

"We want to keep them in existence ... but we want a much more level playing field, which is what we don't have right now," Schumer said on a media conference call, adding the fragmented market "compromises the ability of regulators to monitor and enforce such abuses as front running and market manipulation..."

Dark pools, the largest of which are run by banks such as Goldman Sachs (GS.N) and Credit Suisse (CSGN.VX), account for an estimated 10 to 15 percent of overall U.S. equity volume.

The SEC meets Wednesday to consider proposals for changes that are expected to shed more light on the venues, including requiring them to display more quotes and publicly reveal more data on volumes.

The industry also expects more clarity on whether actionable indications of interest, or IOIs, which dark pools and exchanges use to communicate, should be treated as quotes.

Schumer said all actionable IOIs should be treated as quotes, which would effectively kill them, and that the threshold beyond which dark pools must display quotes should be dropped from 5 percent to 1 percent.

He also called on the SEC to consider real-time reporting of dark pool trades to the consolidated tape -- a measure that many expect, but that some warn could hamper institutions' ability to execute big, complicated orders.

Schumer made a splash this summer when he called for the elimination of so-called flash orders, which some exchanges sent to specific market players before routing them to the wider market. The SEC last month proposed to ban flashes.

ANTICIPATING NEW RULES

NYSE Euronext (NYX.N), which runs the New York Stock Exchange and participated in Schumer's conference call, on Tuesday said it would begin next month offering a means by which dark pools and broker-dealers could report trading.

The service -- which effectively dusts off a so-called trade-reporting facility, or TRF, that has been mostly dormant for a year -- is backed by units of Goldman, Barclays PLC (BARC.L), UBS AG (UBSN.VX), Knight Capital (NITE.O), and by Getco, the big high-frequency market-maker.

All U.S. off-exchange trading is now printed on Nasdaq OMX's (NDAQ.O) TRF, which accounts for some 35 percent of overall volume. NYSE's rival TRF would standardize volume reporting, print it daily on its website -- and represents a way for the exchange to facilitate any new SEC rules.

Schumer said dark pools should face more robust start-up regulations, and should share the costs of providing market-wide surveillance -- an argument long held by NYSE Euronext CEO Duncan Niederauer, who was also on the call.

Schumer did not identify which body should act as monitor.

U.S. market surveillance is now shared by in-house teams at the trading venues, as well as the Financial Industry Regulatory Authority (FINRA). The SEC is the umbrella regulator and police for stock and options markets.

Key House Panel Votes to Regulate Derivatives
NYTIMES
By STEPHEN LABATON
October 16, 2009

WASHINGTON — A key House committee voted on Thursday to regulate, for the first time, trading in the arcane financial instruments known as derivatives, which have been linked to the financial crisis that shocked Wall Street and cut into the savings of millions of Americans.

The 43-to-26 vote by the Financial Services Committee was mostly along party lines and was a big step in President Obama’s proposed overhaul of rules covering the nation’s financial system.

The measure is part of a bill that will be debated by the House and Senate. Michael S. Barr, the assistant Treasury secretary for financial institutions, called the bill “absolutely essential to preserving a strong marketplace.”

One common derivative is the credit default swap, which has been cited repeatedly in the various examinations of the near-collapse of the financial system.

The day-to-day progress of the regulatory bill is being followed by a large cadre of people who hope to influence its contents as it makes it way toward final passage. Representatives from a surfeit of industries have descended on the Financial Services Committee.

The financial services industry alone has poured more than $220 million into lobbying in 2009, much of it in anticipation of this Congressional effort now beginning. As usual for major financial services legislation, lawmakers have heard an earful from small community banks and large Wall Street banks, as well as from insurance companies, credit card companies, credit unions, mutual funds and hedge funds.

But since virtually every imaginable company could be touched by the comprehensive legislation proposed by the Obama administration, the surprisingly broad array of lobbyists trooping to Capitol Hill also includes advocates for airlines, pawnbrokers, real estate developers, farmers, car dealers, manufacturers, retailers and energy and telephone companies. They want to make sure any new oversight of the financial system does not lead to tighter regulations of their businesses or make it more expensive for them to finance their operations or hedge their risks.

Other groups are lobbying over whether the rules should be changed to make it easier to sue corporations and their advisers and whether restrictions should be eased to enable shareholders to have a greater say in the election of directors and the pay of senior executives.

“The legislation proposes to regulate significant aspects of the economy, and any time you have that kind of legislation, it is bound to draw to Congress the interests of many — lawyers, labor unions, consumer groups and many companies,” said Steven A. Elmendorf, a former senior aide to the House Democratic leadership who represents several major financial institutions and groups.

Mr. Elmendorf suggested that the legislation could keep the lobbyists busy for many weeks since it is the subject of deliberations by at least four committees in the House and Senate, along with floor action in both chambers and then more meetings to reconcile competing bills.

“There will be a lot of opportunities and ways the bill can change,” he said. “This will be a long process.”

Gazing across a hearing room jammed with lobbyists and lawyers, Representative Barney Frank, Democrat of Massachusetts and the chairman of the House Financial Services Committee, made an observation on Wednesday about a proposed amendment that some lobbyists interpreted as a comment about the keen interest of their clients.

“Watching sausage being made and watching legislation being made isn’t always attractive,” Mr. Frank said.

Even though President Obama vowed to change the culture of corporate influence on Washington, the administration has contributed, albeit inadvertently, to making this a banner year for lobbyists. As the White House has awakened the alphabet soup of federal agencies from their deregulatory slumber of the previous eight years, lobbying shops have emerged to fight for their clients’ newfound interests.

In the case of financial overhaul legislation, the corporate interests have particular sway with moderate and conservative Democrats, whose votes are essential for the legislation to progress through Congress. So far the lobbyists have been moderately successful in influencing the contours of the legislation, judging by the ever-growing list of exemptions from tougher oversight of derivatives and from supervision by the proposed consumer financial protection agency.

The House Financial Services Committee, for instance, approved a provision on Wednesday that Mr. Frank said would exempt “the great majority” of businesses that use derivative instruments to hedge their business risks from trading such instruments through exchanges or clearinghouses. Senior officials at the Commodity Futures Trading Commission and the Securities and Exchange Commission have been critical of the exemptions, saying they would create too large a loophole for financial instruments that were unregulated and played a central role in the economic crisis.

On Wednesday, the administration announced its support for the exemptions. Mr. Barr, the assistant Treasury secretary, said in a telephone briefing with reporters that, while the administration did not propose the exemptions, they were “reasonable ones” that would still permit aggressive oversight because the legislation would impose supervision on the dealers of derivatives instruments.

The new consumer protection agency has become a particular magnet for lobbying efforts. Bankers have waged a multimillion-dollar campaign to kill the agency or at least to substantially weaken the powers the administration would like it to have. The United States Chamber of Commerce, which claims a membership of more than three million businesses, is conducting a $2 million advertising campaign against the agency. The campaign has gained enough political traction to prompt President Obama to publicly chastise it as misleading.

The chamber joined 17 other trade associations, including the Financial Services Roundtable and the Business Roundtable, in a letter sent this week to House members opposing the agency.

The administration has proposed that the new agency protect consumers from abusive or deceptive credit cards, mortgages and other loans. But responding to the concerns that the agency could try to exert its jurisdiction over an array of other industries that lend money, like retailers and car dealers, Mr. Frank has made clear his intention to exempt many other businesses from oversight as part of his effort to steer the measure through Congress.

The political obstacles to the creation of a consumer protection agency are formidable. In the last decade, banking and other interests that now oppose the agency’s creation contributed more than $77 million to the members of the House Financial Services Committee, according to the Center for Responsive Politics, a nonpartisan research organization that studies the influence of money on policy.

Two of the largest recipients of money from the financial sector over the period have been Mr. Frank, whose campaigns have received more than $3 million, and Representative Spencer Bachus of Alabama, the senior Republican on the committee and a leading critic of the administration’s plan.
SEC, CFTC Could Ban ‘Abusive Swaps’ Under Frank Bill
YAHOO
Dawn Kopecki
Fri Oct 2, 6:54 pm ET

Oct. 2 (Bloomberg) -- House Financial Services Committee Chairman Barney Frank would give regulators authority to ban “abusive swaps” under legislation to revamp oversight of the over-the-counter derivatives market

The Securities and Exchange Commission and Commodity Futures Trading Commission would be authorized to “prohibit transactions in any swap” that regulators determine “would be detrimental to the stability of a financial market or of participants in a financial market,” according to a 187-page draft measure released today by Frank.

Opaque financial products, including some derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Among the fallen companies are Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and insurer American International Group Inc., which has been surviving on government loans.

Frank’s legislation would require the most common and actively traded over-the-counter derivatives contracts to be bought and sold on exchanges or processed through a regulated trading platform.

‘Major’ Factor

“Lacking and lagging regulation of OTC derivatives was a major contributing factor to last year’s crisis, including the highly leveraged credit default swaps at AIG that prompted government intervention,” Representative Melissa Bean, an Illinois Democrat who serves on Frank’s committee, said in an e- mailed statement.

The legislation also would give the Treasury Department the final say if the SEC and CFTC couldn’t agree on joint regulations, including setting position limits or the treatment of products that are economically similar, such as stock options and stock futures. A three-page proposal released by Frank in July would have given that power to a new Financial Services Oversight Council.

Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Credit-default swaps are derivatives that were created primarily to protect lenders and bondholders from company defaults. Some lawmakers and regulators have said they may have been used to spread false rumors about financial companies to drive down stock prices.

U.S. Job Seekers Exceed Openings by Record Ratio
NYTIMES
By PETER S. GOODMAN
September 27, 2009

Despite signs that the economy has resumed growing, unemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse.

Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls.

“There’s too much uncertainty out there,” said Thomas A. Kochan, a labor economist at M.I.T.’s Sloan School of Management. “There’s not going to be an upsurge in job openings for quite a while, not until employers feel confident the economy is really growing.”

The dearth of jobs reflects the caution of many American businesses when no one knows what will emerge to propel the economy. With unemployment at 9.7 percent nationwide, the shortage of paychecks is both a cause and an effect of weak hiring.

In Milwaukee, Debbie Kransky has been without work since February, when she was laid off from a medical billing position — her second job loss in two years. She has exhausted her unemployment benefits, because her last job lasted for only a month.

Indeed, in a perverse quirk of the unemployment system, she would have qualified for continued benefits had she stayed jobless the whole two years, rather than taking a new position this year. But since her latest unemployment claim stemmed from a job that lasted mere weeks, she recently drew her final check of $340.

Ms. Kransky, 51, has run through her life savings of roughly $10,000. Her job search has garnered little besides anxiety.

“I’ve worked my entire life,” said Ms. Kransky, who lives alone in a one-bedroom apartment. “I’ve got October rent. After that, I don’t know. I’ve never lived month to month my entire life. I’m just so scared, I can’t even put it into words.”

Last week, Ms. Kransky was invited to an interview for a clerical job with a health insurance company. She drove her Jeep truck downtown and waited in the lobby of an office building for nearly an hour, but no one showed. Despondent, she drove home, down $10 in gasoline.

For years, the economy has been powered by consumers, who borrowed exuberantly against real estate and tapped burgeoning stock portfolios to spend in excess of their incomes. Those sources of easy money have mostly dried up. Consumption is now tempered by saving; optimism has been eclipsed by worry.

Meanwhile, some businesses are in a holding pattern as they await the financial consequences of the health care reforms being debated in Washington.

Even after companies regain an inclination to expand, they will probably not hire aggressively anytime soon. Experts say that so many businesses have pared back working hours for people on their payrolls, while eliminating temporary workers, that many can increase output simply by increasing the workload on existing employees.

“They have tons of room to increase work without hiring a single person,” said Heidi Shierholz, an economist at the Economic Policy Institute Economist. “For people who are out of work, we do not see signs of light at the end of the tunnel.”

Even typically hard-charging companies are showing caution.  During the technology bubble of the late 1990s and again this decade, Cisco Systems — which makes Internet equipment — expanded rapidly. As the sense takes hold that the recession has passed, Cisco is again envisioning double-digit rates of sales growth, with plans to move aggressively into new markets, like the business of operating large scale computer data servers.

Yet even as Cisco pursues such designs, the company’s chief executive, John T. Chambers, said in an interview Friday that he anticipated “slow hiring,” given concerns about the vigor of growth ahead. “We’ll be doing it selectively,” he said.

Two recent surveys of newspaper help-wanted advertisements and of employers’ inclinations to add workers were at their lowest levels on record, noted Andrew Tilton, a Goldman Sachs economist.  Job placement companies say their customers are not yet wiling to hire large numbers of temporary workers, usually a precursor to hiring full-timers.

“It’s going to take quite some time before we see robust job growth,” said Tig Gilliam, chief executive of Adecco North America, a major job placement and staffing company.

During the last recession, in 2001, the number of jobless people reached little more than double the number of full-time job openings, according to the Labor Department data. By the beginning of this year, job seekers outnumbered jobs four-to-one, with the ratio growing ever more lopsided in recent months.

Though layoffs have been both severe and prominent, the greatest source of distress is a predilection against hiring by many American businesses. From the beginning of the recession in December 2007 through July of this year, job openings declined 45 percent in the West and the South, 36 percent in the Midwest and 23 percent in the Northeast.

Shrinking job opportunities have assailed virtually every industry this year. Since the end of 2008, job openings have diminished 47 percent in manufacturing, 37 percent in construction and 22 percent in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21 percent this year. Despite the passage of a stimulus spending package aimed at shoring up state and local coffers, government job openings have diminished 17 percent this year.

In the suburbs of Chicago, Vicki Redican, 52, has been unemployed for almost two years, since she lost her $75,000-a-year job as a sales and marketing manager at a plastics company. College-educated, Ms. Redican first sought another management job. More recently, she has tried and failed to land a cashier’s position at a local grocery store, and a barista slot at a Starbucks coffee shop.

Substitute teaching assignments once helped her pay the bills. “Now, there are so many people substitute teaching that I can no longer get assignments,” she said.

“I’ve learned that I can’t look to tomorrow,” she said. “Every day, I try to do the best I can. I say to myself, ‘I don’t control this process.’ That’s the only way you can look at it. Otherwise, you’d have to go up on the roof and crack your head open.


INPUT-OUTPUT ECONOMICS, we think, supports this analysis - government jobs have little "multiplier" value

Does Aid to States Stimulate the Economy, or Votes?
NYTIMES
By Casey B. Mulligan (an economics professor at the University of Chicago)
August 26, 2009, 8:23 am


About one-third of the aid in the “stimulus” law is aimed at state and local governments. This allocation — largely intended to save the jobs of government employees, among other goals like providing more services for struggling families — vastly overstates the importance of state and local government in the national employment picture, and thereby diminishes the law’s potency as a stimulus to national employment.

If, as some of the experts say, it were the task of federal fiscal policy to put people back to work, you would think that stimulus spending would be allocated to the various sectors in rough proportion to the jobs that were lost, or might be lost.

Before this recession started, state and local government employment was only 14 percent of national employment and a lesser percentage of national payroll spending — far less than the one-third of the importance it was given in the stimulus law.

State and local governments are seeing declines in their revenues from income, sales and other taxes. Some of those governments have cut hours or the number of workdays for their employees. But lots of industries are seeing their revenues decline, and have reduced working hours, so these changes do not put state and local governments in a special position.
Source: Casey B. Mulligan, analysis of Bureau of Labor Statistics data

Although stimulus advocates insist that saving state and local government is the secret to an effective stimulus law, economists have known for a long time that state and local government employment is more stable than private-sector employment, even without special stimulus aid. The chart above shows how, by the time the stimulus law was being debated this January, the private sector had lost four million jobs during this recession, whereas state and local government employment had grown by 124,000. (Since then, state and local government has lost 14,000 jobs –- for a cumulative gain of 110,000 jobs –- while the private sector lost another 2.9 million.)

In the average month, over two million private-sector employees were let go, as compared to 96,000 state and local government employees. Of course, that was bad news for 96,000 families of state and local government employees, but I see no economic reason why their suffering would count 20 times as much as the suffering resulting from the private-sector layoffs.

For these reasons, an effective stimulus law would have allocated state and local government something from 4 percent (its share of layoffs) to 14 percent (its share of employment) of its funds.

Economic analysis does not support the extraordinary importance afforded state and local governments by the stimulus law, but political analysis might. In particular, patronage jobs are an important part of the political participation machine. Perhaps when members of Congress were talking about “saving jobs” as they authored the stimulus law, they were talking about 535 specific jobs — their own!

G.I.G.O.?
U.S. adds clerks to clear clunkers;  Volunteers include FAA
By William Ehart
Originally published 04:45 a.m., August 22, 2009, updated 01:21 p.m., August 22, 2009

The U.S. Transportation Department, billions of dollars behind in paying "cash-for-clunkers" rebates, has hired private contractors and solicited volunteers from the Federal Aviation Administration and its own executive ranks to work overtime to clear the backlog.

Employees of the FAA's air-traffic-control unit were asked to help, but the Transportation Department stressed Friday that essential safety personnel were not diverted from their duties.

A total of 1,200 workers, including about 300 contractors from Citigroup, the financial services giant, are now working seven days a week to review applications and reimburse auto dealers for rebates advanced to customers, officials said.

The department tripled its program staff to 1,100 last week, and recently added another 100 headquarters employees.

On Thursday, Transportation Secretary Ray LaHood said the program would stop taking applications Monday at 8 p.m. to provide an "orderly wind-down" and ease uncertainty about when funds would run out.

The National Automobile Dealers Association, which had endorsed the move, urged the Obama administration late Friday to extend the deadline because the program's Web site was crashing.

"Many dealers are working round-the-clock to submit their 'clunkers' applications to meet the administration's deadline," the group said. "Despite these efforts, computer issues may prevent some 'clunker' applications from being submitted in time, through no fault of the dealers."

From the start, the Car Allowance Rebate System, or CARS, proved too popular for its $1 billion budget and the several hundred employees assigned to the program.

Planners who expected to sell 250,000 cars in three months are now deluged with nearly twice that many applications seeking more than $2 billion in rebates after less than one month. Only 7 percent of the rebates have been paid, leaving many auto dealers out millions of dollars. Dealers were supposed to be repaid within 10 days.

Auto manufacturers have agreed to provide financial assistance to dealers until they are reimbursed.

Days after the program began, the Transportation Department had to seek additional funding. So many deals were in the pipeline, officials couldn't be sure when the original funding would be exhausted, and dealers were concerned they would be left holding the bag.

Congress approved $2 billion in additional funding on Aug. 7.

"We set up the program in 30 days, which was what Congress gave us," said Jill Zuckman, assistant to Mr. LaHood.

"No one anticipated that 250,000 cars would be sold in the first four days. It proved to be more than the people we had available could handle."

Dealers exacerbated the problem by making many thousands of deals before final program rules were posted on July 24, she said.

"Federal employees are pitching in, working nights and weekends to get this taken care of, but it's a two-way street. The [auto] dealers have to submit accurate and complete applications," she said.

John D. Porcari, deputy secretary of transportation and the former top transit official in Maryland, was training Friday to help process applications this weekend.

Mr. LaHood was out of town on business and missed the training session, Ms. Zuckman said.

One reason the department decided to wind down the program Monday is because it couldn't risk exceeding the program's $3 billion budget while Congress was in recess, she said.

White House spokesman Robert Gibbs told reporters Friday the administration would not seek additional funding for CARS when Congress returns.

The extra program workers are located mainly in Washington and at the Mike Monroney Aeronautical Center in Oklahoma City, which houses air traffic controllers as well as support personnel.

An FAA memo obtained by The Washington Times reads in part:

"We have been asked to provide volunteers to assist with this high-visibility program … employees may work during regular business hours (providing mission allows) and/or overtime.

"The [Air Traffic Organization] has been asked to provide a list of 100 employees to assist. They will be asked to attend a two-hour training course this afternoon. The task is expected to take 5 to 10 days."

But Ms. Zuckman said that only support personnel, such as in finance and operations, were asked to work on the clunkers program.

"Nobody is being ordered to do anything; we weren't asking air traffic controllers to leave their posts. We're using budget and accounting people primarily," she said.

"It was made clear that no core mission activities of the FAA are to be affected by this effort, especially as they could relate to air traffic operations."

A union spokeswoman confirmed the account Friday.

"Air traffic controllers are not being asked to do this," said Alex Caldwell, a spokeswoman for the National Air Traffic Controllers Association.

G.M. Says Volt Will Get Triple-Digit City Mileage
NYTIMES
By BILL VLASIC
August 12, 2009

WARREN, Mich. — General Motors said Tuesday that its Chevrolet Volt extended-range electric vehicle, scheduled for release in 2011, will achieve a fuel rating of 230 miles a gallon in city driving.

The rating is based on methodology drafted by the Environmental Protection Agency, and most other automakers have not revealed the mileage for the electric cars. Nissan, however, announced last week that its all-electric vehicle, the Leaf, which comes out in late 2010, would get 367 m.p.g., using the same E.P.A. standards.

Figures for highway driving and combined city and highway use have not been completed for the Volt, but G.M.’s chief executive, Fritz Henderson, told reporters and analysts at a briefing that the car is expected to get more than 100 miles a gallon in combined city and highway driving.

“Our Chevrolet Volt extended range electric vehicle will achieve unprecedented fuel economy,” Mr. Henderson said. “I’m confident that we will be in triple digits.”

The Volt can travel up to 40 miles on a single battery charge, at which point a small gasoline engine kicks in and powers the car and simultaneously recharges the battery. The battery can be charged in eight hours, at an off-peak cost of about 40 cents, Mr. Henderson said.

Nearly 8 of 10 Americans commute fewer than 40 miles a day, the company said in a statement, citing Department of Transportation data. The mileage calculation for the Volt essentially assumes that most drivers would stay within that range and not need the gasoline engine.

Mr. Henderson said the Volt would be a critical part of G.M.’s product strategy. “Having a car that gets triple-digit fuel economy will be a game changer for us,” he said. The car will go into production late next year.

But whether the Volt can live up to its billing has been a matter of debate. Some industry analysts note that General Motors has a poor track record of introducing green technology to the market.

G.M. is trying to persuade consumers to return to its showrooms after filing for bankruptcy on June 1 and emerging as a reorganized company with fewer brands, models and dealers.

Mr. Henderson and other G.M. executives met with groups of consumers on Monday to hear their thoughts on the company’s product lineup.

“We need to communicate what we have,” Mr. Henderson said. “The only way we’re going to make G.M. great again is to win in the market.”

The Volt is expected to be both a so-called halo car to draw consumers to the Chevrolet brand, and a technological foundation for future electric models.

The company has built about 30 Volts so far and is testing them in various conditions.

Interest has been building in the Volt since it was introduced at auto shows in recent years. But with G.M. now 60 percent government-owned, the car has become a symbol of the company’s rebirth after its 40-day trip through bankruptcy.

Mr. Henderson said most of G.M.’s new products would be either passenger cars or fuel-efficient crossover vehicles. While the company will still build trucks and large sport utilities, the bulk of its investments will go toward smaller vehicles.

“I think the fundamental premise of planning for higher fuel prices is the right premise,” he said.

Weekend Opinionator: Was the Car Rebate Plan a Clunker?
NYTIMES
By Tobin Harshaw
October 30, 2009, 8:17 pm

It’s not every day the White House comes out with a full frontal assault on a media organization. O.K., maybe it is. Still, when that organization is known primarily for helping consumers locate used Toyota Camrys, we can be forgiven for wondering if things have spun out of control.

This all started with a report on the federal Car Allowance Rebate System at Edmunds.com, the automotive Web site owner. “Cash for Clunkers cost taxpayers $24,000 per vehicle sold,” the study found. “Nearly 690,000 vehicles were sold during the Cash for Clunkers program … but Edmunds.com analysts calculated that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway, regardless of the existence of the program.” (At the link, there’s a nifty chart below containing the actual seasonally adjusted annual sales rates compared with Edmunds.com’s forecasted rate if the program had never existed.)

It’s understandable that those behind the rebate plan were not pleased. Nonetheless, the White House response — from Macon Phillips, its director of new media — had all the subtlety of a blunderbuss:
Busy Covering Car Sales on Mars, Edmunds.com Gets It Wrong (Again) on Cash for Clunkers

On the same day that we found out that motor vehicle output added 1.7% to economic growth in the third quarter – the largest contribution to quarterly growth in over a decade – Edmunds.com has released a faulty analysis suggesting that the Cash for Clunkers program had no meaningful impact on our economy or on overall auto sales. This is the latest of several critical “analyses” of the Cash for Clunkers program from Edmunds.com, which appear designed to grab headlines and get coverage on cable TV. Like many of their previous attempts, this latest claim doesn’t withstand even basic scrutiny.

Specifically, Phillips takes on two of the assumptions at Edmunds:
1. The Edmunds’ analysis rests on the assumption that the market for cars that didn’t qualify for Cash for Clunkers was completely unaffected by this program.

In other words, all the other cars were being sold on Mars, while the rest of the country was caught up in the excitement of the Cash for Clunkers program. This analysis ignores not only the price impacts that a program like Cash for Clunkers has on the rest of the vehicle market, but the reports from across the country that people were drawn into dealerships by the Cash for Clunkers program and ended up buying cars even though their old car was not eligible for the program …

2. Edmunds also ignores the beneficial impact that the program will have on 4th Quarter GDP because automakers have ramped up their production to rebuild their depleted inventories.

Major automakers including GM, Ford, Honda and Chrysler all increased their production through the end of the year as a result of this program, which will help boost growth beyond the third quarter. The actions of private market participants, who would not increase production if they didn’t think demand for their product would be there through the end of the year, is a far better indicator of market dynamics – and one that Edmunds.com conveniently ignores.

Most importantly, this program is helping boost our economy and create jobs now when we need it most. In a comprehensive report, the Council of Economic Advisers estimated that the Cash for Clunkers will create 70,000 jobs in the second half of 2009. The strength of recent auto sales data suggest that, if anything, this projection underestimates the actual impact of the program. CEA’s analysis is transparent and comprehensive, laying out all of its assumptions for the public to understand. Edmunds.com, on the other hand, is promoting a bombastic press release without any public access to their underlying analysis.

So put on your space suit and compare the two approaches yourself.

I’ll leave my Tang behind, thanks, but will investigate further. Edmunds, naturally, had a response:
Apparently, the $24,000 figure caught many by surprise. It shouldn’t have. The truth is that consumer incentive programs are always hugely expensive when calculated by incremental sales — always in the tens of thousands of dollars. Cash for Clunkers was no exception.

The White House claims that our analysis was based on car sales on Mars and that on Earth, the marketplace is connected. We agree the marketplace is connected. In fact, that is exactly the basis of our analysis.

It is also claimed we missed the possibility that Cash for Clunkers generated excitement and consumers bought vehicles even if they didn’t qualify for the program — a claim that has been widely supported by anecdote but by little analysis. It does, after all, seem a bit odd that masses of consumers would elect to buy a vehicle because of a program for which they don’t qualify — doubly so when you add in the fact that prices shot up during Cash for Clunkers, creating a disincentive to buy.

Finally, the White House claims that the increase in fourth-quarter production reported by the car manufacturers can be attributed to Cash for Clunkers. But here is a better reason: the economy is recovering accompanied by improved car sales. No manufacturer increases production — a decision with long-term consequences — based on the 30-day sales blip triggered by an event like Cash for Clunkers.

With all respect to the White House, Edmunds.com thinks that instead of shooting the messenger, government officials should take heart from the core message of the analysis: the fundamentals of the auto marketplace are improving faster than the current sales numbers suggest.

Isn’t this a piece of good news we can all cheer?

Good question. The answer: of course not! This is politics, after all. And Joe Weisenthal at The Business Insider thinks it’s bad politics, at that. “It is an odd, and we’d say regrettable, pattern of this White House that it lets itself get dragged down into fights with specific media outlets,” he writes. “Seriously, what’s the point of this? Clunkers is over. It just makes The White House look thin-skinned, though it’s great publicity for Edmunds. And yes, Clunkers massively distorted this morning’s GDP number … but we’re with Edmunds that it was a giant waste with little long-term benefit.”

Weisenthal’s thinking is clearly informed by his colleague Vincent Fernando, who brings to our attention a chart showing that the rosy economic growth figures released this week — GDP was up by 3.5 percent — were themselves distorted by Cash for Clunkers.
According to the Bureau of Economic Analysis (BEA), motor vehicle output spiked a seasonally-adjusted 157.6% quarter on quarter. This is completely unprecedented. Vehicle output is clearly going off a cliff next quarter. The question will be how low can the blue line below go.

Next quarter, we won’t just be returning to business as usual for auto output. Don’t forget that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into Q3. Thus Q4 is likely to be very weak since many people who planned to buy a car in Q4 probably took advantage of Clunkers and bought in Q3.

To put this into GDP terms, according to the BEA the spike you see below added 1.66% to the U.S. GDP growth figure reported. Thus without it, GDP growth would have been only 1.89% (3.5% - 1.66%) in Q3.

Now imagine if next quarter the blue line below goes down into negative territory as it did just two quarters ago. Next quarter, not only are we unlikely to get Q3’s boost, but motor vehicle output data could subtract from GDP as well. So watch out for the cliff…

Ed Morrissey at Hot Air thinks Edmunds let the White House off the hook when it came to the larger economic questions:
In fact, Edmunds actually avoided the argument made by some critics of the program, who said that most of the sales in the C4C program came at the expense of future sales. All Edmunds noted with their analysis was that about 5/6ths of the sales would have occurred without taxpayer subsidies, which made the cost of getting the other 1/6th into new cars a very expensive proposition. Instead of addressing that argument, the administration made arguments about Mars instead.

If the economy has begun to truly improve, of course car sales will increase over the disastrous performance of earlier this year. However, that relies on actual growth, not gimmicky and momentary incentives from the government, which makes the third quarter auto performance an unreliable indicator of longer-term health (and the same applies to new-home sales as well, another major contributor to Q3’s growth number). But even with actual growth, the 540,000 people who used taxpayer subsidies to buy last year’s models won’t be heading into showrooms for at least a couple of years to buy new models rolling off the line now or later.

The administration’s reaction once again reveals a very thin skin and a temperament perhaps suited to campaigning, but certainly not towards governing. When will the White House grow up?

Politico’s Josh Gerstein points out what he sees as a weakness in the White House’s argument:
The White House also complains that Edmunds.com is being opaque about its data.

However, some of the wording in Phillips’s post may also suffer from a degree of opacity. For example, when he talks about “the price impacts that a program like Cash for Clunkers has on the rest of the vehicle market,” I think he’s referring to the fact that demand driven by the program may have led some car buyers to pay more than they would have otherwise.

Of course, driving up car prices is a two way street. The Council on Economic Advisers analysis of the clunkers program notes that prices for and values of used cars may have gone up since so many were permanently taken out of the mark. That could benefit car owners, at least theoretically.

The Obama administration isn’t without its backers here. According to the Detroit News, they include Mike Jackson, the chief executive of AutoNation, the country’s largest car retailer:
While Edmunds is usually highly respected within the automotive industry for its accuracy and reliability, [Jackson] said, its analysis of the cash for clunkers program is “shoddy.”

“Simply put, they’ve misrepresented the facts, and the White House is completely justified in calling them out on it,” Jackson said, adding that it appears “Edmunds’ political views have tainted their usual rigorous approach to research.”

“I know from our sales at AutoNation just how significant the impact of the cash for clunkers promotion was in our dealerships, and our own internal figures indicate that the rate of increase was consistent with what other retailers, manufacturers and governmental agencies have been estimating,” he said.

“We believe that the incremental sales are over 500,000 new vehicles. Edmunds may not want to believe Ford or General Motors or Moody’s or the White House or any of the dozens of other reliable parties who saw significant sales increases as a direct and indirect result of the program, but that doesn’t make the increases any less real.”

The Wall Street Journal’s Evan Newmark, however, thinks its the government that’s playing fast and loose with numbers:
The White House would probably contend that it’s impossible to determine incremental sales — meaning each sale that only happened because of the government $3,500 to $4,500 subsidy. And that the sale of each and every car spurs economic activity well beyond the program’s $3 billion.

But isn’t it possible that the Edmunds.com analysis is actually understating the true costs to the taxpayer? What about the interest costs on the borrowed $3 billion? What about the cost of propping up GMAC so that it could underwrite cash-for-clunker loans?

That’s the catch with all this government intervention — lots of unforeseen consequences. And we never learn. The trillion dollar disasters with Fannie Mae and Freddie Mac haven’t stopped the government from tinkering with the housing market.

Speaking of unforeseen consequences, The Wall Street Journal editorial board highlights what it thinks is a whale of one:
We thought cash for clunkers was the ultimate waste of taxpayer money, but as usual we were too optimistic. Thanks to the federal tax credit to buy high-mileage cars that was part of President Obama’s stimulus plan, Uncle Sam is now paying Americans to buy that great necessity of modern life, the golf cart.

The federal credit provides from $4,200 to $5,500 for the purchase of an electric vehicle, and when it is combined with similar incentive plans in many states the tax credits can pay for nearly the entire cost of a golf cart. Even in states that don’t have their own tax rebate plans, the federal credit is generous enough to pay for half or even two-thirds of the average sticker price of a cart, which is typically in the range of $8,000 to $10,000. “The purchase of some models could be absolutely free,” Roger Gaddis of Ada Electric Cars in Oklahoma said earlier this year. “Is that about the coolest thing you’ve ever heard?”

Umm, not really — at least as far as Nick Loris of the Heritage Foundation is concerned:
The story speaks for itself for the most part but there are a few points to take away here. 1.) If you subsidize something enough, people will buy it. But that money has to come from somewhere – either from borrowing it or raising taxes. Edmunds.com reports that it cost $24,000 in taxpayer money for each car sold and is now in a back-and-forth with the White House. Edmunds claims cash for clunkers affected the timing of sales more than the volume of sales. 2.) We’re talking about breakdowns in a small scale government program here. Think of the loopholes in a much more complex, convoluted like a cap and trade program.

Nancy Scola at Personal Democracy Forum thinks the whole kerfuffle raises questions about the White House’s Web reaction team:
The White House new media operation is in some ways a strange hybrid. Organized in the White House hierarchy as part of the White House communications team, it seems to be using its innovative blog here as more or less the online component of the traditional White House press operation — albeit with a more bloggy, calling-folks out-by-name feel to it. Smart? Inappropriate? Inevitable, given the flattened way media works today where information flows from sources traditional and otherwise? You be the judge,…

Actually, Tom Burners at NewsBusters will be the judge, thank you very much:
We’re just going to have to get used the fact that we’re long past the point where we should expect dignity and stick-to-the-facts restraint from this White House. Going after its critics is something the previous Bush 43 & Co. should have done more, but on the rare occasions when it did, it conducted itself and framed its language appropriately.

Such is clearly not the case with the current bunch, which more and more looks like a collection of thin-skinned crybabies than the occupiers of the highest administrative perch in the land …

Clearly, it’s not enough for Phillips to dispute the Edmunds analysis, which is of course subject to scrutiny like any other. From a position of perceived power as a de facto administration spokesperson, the White House blogger clearly made it a point to ridicule and disparage Edmunds, sending a clear message to anyone else considering dissenting from what the White House considers the conventional wisdom that they will be subjected to similar treatment…

If something like this had come from Bush 43’s White House, the cries of “stifling dissent” from the establishment media would have been loud and long. Though others have picked up the story, their coverage is far more muted compared to what we would likely have seen just a year ago.

Truth be told, “something like this” did come from George W. Bush’s White House. Indeed, it appears that some Fox News conservatives thought the attack on NBC didn’t go far enough. But then, it’s also worth noting that some on the left bashed the Bush administration for the sort of heavy-handedness the Obama gang is now indulging in. The moral: if you’re going to get involved in these politicians vs. the media spats, just remember that everything you say will someday be held against you. Think of it as Quotes for Clunkers.
Rebates for ‘Clunkers’ Aid Ford Most as Car Sales Climb
NYTIMES
By NICK BUNKLEY
August 4, 2009

DETROIT — The government’s “cash for clunkers” program gave automakers a desperately needed sales boost in July, though their relief could be short-lived if the Senate does not vote to extend the trade-in program after it ran out of money within days of starting.

The Ford Motor Company said Monday that its United States sales rose 2.3 percent last month, marking the first year-over-year increase for any of the six largest carmakers since last August. Ford had not posted a monthly sales increase in nearly two years. Ford’s compact sedan, the Focus, was the most common selection by people who used the trade-in program, the government said Monday.

General Motors and Chrysler fared better than in recent months but did not benefit from the program as much as Ford, which heavily promoted the government-sponsored rebate program at its dealerships, in television ads and on its Web site. G.M. reported a 19 percent decline in July from a year ago, and Chrysler said sales fell 9 percent.

Honda’s sales fell 17 percent. Volkswagen reported a 0.7 percent increase. Over all, automakers said the new-vehicle selling rate rose in July to its highest level in 11 months. Through the first half of this year, sales were down 35 percent compared to the first half of 2008.

“I challenge anyone to show me a one-week program that has had as much benefit to the consumer and as much impact on the environment as this one has,” George Pipas, Ford’s chief sales analyst, said on a conference call Monday.

Ford said sales of seven of its models rose at least 60 percent last month. It sold 18 percent more cars and crossover vehicles than it did in July 2008, though sales of its trucks and sport utility vehicles fell 18 percent. The company did not say how many of its sales were made to people who turned in a vehicle to be scrapped under the program.

All three Detroit automakers said the flurry of demand in the final week of July left their inventories of unsold vehicles at the lowest levels in many years.

The government trade-in program, which began July 24, lets consumers give up an older, inefficient vehicle and receive a credit of up to $4,500 toward the purchase of a new vehicle with a higher fuel economy rating. Its unexpected popularity caused the program, formally known as the Car Allowance Rebate System, to quickly exhaust its initial budget of $1 billion, which was enough for about 200,000 people to take part.

The House of Representatives voted Friday to provide $2 billion more, and approval from the Senate is needed to extend the program. Many dealers are now unsure whether to continue taking trade-ins under the program, not knowing if the government will reimburse them.

Automakers welcomed the program at a time when high unemployment and low consumer confidence levels have pushed new-vehicle sales to their lowest level since the recession of the early 1980’s. Even if Congress allows the program to end suddenly, officials at G.M. say they are seeing more reasons for optimism in the months ahead, both in the latest economic data and in reports from their dealers.

“Clearly momentum is starting to build for a recovery, and we’re really starting to see car buyers return to the showrooms,” Michael C. DiGiovanni, G.M.’s chief sales analyst, said. “The bankruptcy talk and issues are clearly getting behind us.”

The Transportation Department said Monday afternoon that based on 80,500 cash-for-clunker applications — which officials believe is about a third of the total deals so far — average fuel economy of the new vehicles was 9.6 miles per gallon better than the old ones, 25.4 m.p.g. versus 15.8 m.p.g., an improvement of 60.8 percent. The improvement, the department pointed out, is much larger than the minimum required to be eligible for the government rebate: a gain of four miles per gallon for cars and two miles per gallon for trucks.

Part of the reason for the gain was that some people were turning in old trucks for new cars. So far, 83 percent of the “clunkers” were trucks or S.U.V.’s and 60 percent of the new vehicles were cars, the department said.

The department also said that Ford, G.M. and Chrysler supplied 47 percent of the new vehicles, slightly more than their overall share of the market, which is 45 percent. Four of the top 10 were also made by American companies, the department said. Of the remainder, it said, “preliminary analysis suggests that well over half of these new vehicles were manufactured in the United States.”

Lawmakers Say Have Accord on Derivatives Oversight
NYTIMES
By THE ASSOCIATED PRESS
Filed at 6:04 p.m. ET
July 30, 2009

WASHINGTON (AP) -- Two influential House lawmakers have announced an agreement on guidelines for legislation to impose broad new oversight on the financial instruments blamed for hastening the global economic crisis.

They say the House could vote in September on a bill to regulate derivatives, a crucial element of Congress' effort to overhaul the system of financial rules.

The legislative outline agreed to by Democratic Reps. Barney Frank, chairman of the House Financial Services Committee, and Collin Peterson, who heads the House Agriculture Committee, closely resembles the Obama administration's proposed plan for regulating derivatives.

Both proposals involve a new network of clearinghouses to provide transparency for trades in credit default swaps and other derivatives.

5 Directors Added to New G.M. Board
NYTIMES
By NICK BUNKLEY
July 24, 2009

DETROIT — General Motors filled out its new board on Thursday and announced a wave of management changes, including the retirements of several longtime executives and the elimination of some vice president jobs.

The Treasury Department named four more directors to represent its 60 percent stake in the automaker. They are Daniel F. Akerson, managing director of the private equity firm Carlyle Group; David Bonderman, co-founding partner of TPG Capital; Robert D. Krebs, retired chairman and chief executive of the Burlington Northern Santa Fe railroad; and Patricia F. Russo, former chief executive of the telecommunications company Alcatel-Lucent. The Treasury has appointed a total of 10 members to the new G.M. board.

Carol Stephenson, dean of the Richard Ivey School of Business at the University of Western Ontario, will represent the Canadian government, which owns 11.7 percent.

They will join eight others on the board, including the recently appointed chairman, Edward E. Whitacre Jr., and G.M.’s chief executive, Fritz Henderson. Each member who is not a G.M. employee will be paid a cash retainer of $200,000 a year. Mr. Whitacre will be paid at least $350,000.

Several of the new directors, including Mr. Whitacre, the former chairman of AT&T, have experience in the telecommunications industry but none have automotive backgrounds. The Obama administration wanted nearly a clean slate of directors to ensure that the company would move away from practices that led to its downfall and last month’s bankruptcy filing.

“The members of this new board of directors bring immense experience and diverse perspectives to the table, and that’s exactly what G.M. needs,” Mr. Whitacre said in a statement. “The collective expertise of the new B.O.D. is vital at this time as G.M. seeks to redefine itself as the vehicle design and customer care leader of the extremely competitive auto business.”

The Treasury, in a statement, said it was “grateful to Chairman Ed Whitacre and all these exceptionally distinguished individuals for being willing to serve this great American company at a critical juncture. We are confident that, under their guidance, G.M. can achieve great success in the years ahead.”

Meanwhile, G.M. said five top executives would retire, including the president of its North American operations, Troy Clarke. This month, Mr. Henderson assumed the responsibilities of Mr. Clarke, 54, who has been at G.M. for 36 years and was widely believed to be on his way to one of the company’s top jobs.

Also retiring by year’s end will be Gary Cowger, the group vice president for global manufacturing and labor relations; Ralph Szygenda, the chief information officer; Maureen Kempston Darkes, group vice president for Latin America, Africa and the Middle East; and Michael Grimaldi, a vice president and chief executive of G.M. Daewoo in South Korea.

Mark LaNeve, a G.M. North American vice president whose future at G.M. seemed in doubt after his marketing duties were reassigned this month to Vice Chairman Robert A. Lutz, will remain at G.M. as vice president of United States sales.

Other changes involve separating some sales and marketing jobs and changing vice president positions to nonexecutive managerial roles.

Bryan Nesbitt, G.M.’s vice president for design in North America, will be general manager of the Cadillac brand, and Ed Peper, who has been the head of Chevrolet, will be Cadillac’s general sales manager.

Obama’s Strategy to Reverse Manufacturing’s Fall
NYTIMES
By LOUIS UCHITELLE
July 21, 2009

If the Obama administration has a strategy for reviving manufacturing, Douglas Bartlett would like to know what it is.

Buffeted by foreign competition, Mr. Bartlett recently closed his printed circuit board factory, founded 57 years ago by his father, and laid off the remaining 87 workers. Last week, he auctioned off the machinery, and soon he will raze the factory itself in Cary, Ill.

“The property taxes are no longer affordable,” Mr. Bartlett said glumly, “so I am going to tear down the building and sit on the land, and hopefully sell it after the recession when land prices hopefully rise.”

Though manufacturing has long been in decline, the loss of factory jobs has been especially brutal of late, with nearly two million disappearing since the recession began in December 2007. Even a few chief executives, heading companies that have shifted plenty of production abroad, are beginning to express alarm.

“We must make a serious commitment to manufacturing and exports. This is a national imperative,” Jeffrey R. Immelt, chairman and chief executive of General Electric, said in a speech last month, while acknowledging that G.E. was enriched by its overseas operations too.

President Obama, agreeing in effect, has declared, “The fight for American manufacturing is the fight for America’s future.”

The United States ranks behind every industrial nation except France in the percentage of overall economic activity devoted to manufacturing — 13.9 percent, the World Bank reports, down 4 percentage points in a decade. The 19-month-old recession has contributed noticeably to this decline. Industrial production has fallen 17.3 percent, the sharpest drop during a recession since the 1930s.

So far, however, Mr. Obama’s administration has not come up with a formal plan to address the rapid decline. Instead, it has pursued ad hoc initiatives — bailing out General Motors and Chrysler, for example, and pushing green energy by supporting the manufacture of items like wind turbines and solar panels.

“We want to make sure that we grow a manufacturing base for renewable energy,” said Matthew Rogers, a senior adviser in the Energy Department, explaining that this is being accomplished in part by “accelerating loan guarantees from zero” in the Bush years.

Xunming Deng, a physicist and the chairman of the Xunlight Corporation, sees himself as a beneficiary of what he describes as the Obama administration’s more flexible loan guarantees. His factory in Toledo, Ohio, with 100 employees, is in the early stages of making solar panels, and Dr. Deng is already planning to quadruple the plant’s size. He has applied to the Energy Department for a $120 million loan guarantee. If he gets it, he will not have to pay the hefty fees charged for loan guarantees before Mr. Obama took office.

“Getting rid of that fee makes the loan guarantee very attractive and very helpful,” Dr. Deng said. “We can’t grow as fast without it.”

Beyond energy, the administration’s approach gradually outlines the elements of a manufacturing policy — what Lawrence H. Summers, director of the National Economic Council, described as “a number of things to support manufacturing.”

The auto bailout, for all its improvisations, served notice that the administration would probably rescue any giant manufacturer it deemed too big (or too iconic) to fail, and would help the suppliers of failing giants transition to other industries.

The Buy America clause in the stimulus package pointedly favors the purchase of American-made goods for infrastructure projects. The Commerce Department is adding $100 million, more than double the current outlay, to a program that helps American manufacturers operate more effectively. And trade agreements negotiated by the Bush administration — agreements that would make the United States more open to imported manufactured goods — have been allowed to languish in Congress.

“The administration’s policy is evolving in the right direction,” said Representative Sander M. Levin, Democrat of Michigan, who is particularly concerned about auto imports. “I think they have essentially shed the political chains that prevented government from having a role in manufacturing. They are working their way toward what makes sense.”

Not everyone agrees.

“Bush and Obama,” Mr. Bartlett said scornfully, “one is as bad as the other in terms of manufacturing policy.”

He acknowledged that the recession was the immediate reason for the demise of his family’s business. But what really did it in, he said in an interview, was the competition from less expensive Chinese circuit boards — less expensive, he argued, because the Chinese undervalue their currency and this administration, like the ones before it, lets them get away with it.

“Our orders went from $8 million at an annual rate to $4 million, which was not enough to make money,” he said.

Mr. Bartlett, who is co-chairman of an organization called the Fair Currency Coalition, said that Chinese competitors charged only $1 for each printed circuit board sold in this country, while he charged $1.40. Like many economists and government officials, he says he believes the Chinese currency is artificially undervalued. As a countermeasure, he said the Obama administration should impose a 40 percent tariff on imported Chinese goods.

“I can compete against Chinese entrepreneurs, and Chinese labor cost is not that big a factor,” he said, “but I cannot compete against the Chinese government’s manufacturing policies.”

Manufacturing has long been viewed as an essential pillar of a powerful economy. It generates millions of well-paid jobs for those with only a high school education, a huge segment of the population. No other sector contributes more to the nation’s overall productivity, economists say. And as manufacturing weakens, the country becomes ever more dependent on imports of merchandise, computers, machinery and the like — running up a trade deficit that in time could undermine the dollar and the nation’s capacity to sustain so many imports.

One tactic for strengthening the manufacturing sector, in the administration’s view, would be a shift in tax policy. The research and development tax credit, which is now subject to renewal by Congress, would be made permanent, encouraging much more R.& D. among manufacturers, a senior Commerce Department official argued. And foreign taxes paid on profits earned overseas would not be deductible in this country until the profits were repatriated, a restriction that might discourage locating factories abroad.

The goal is to arrest manufacturing’s dizzying decline. It “was the pillar on which we built the middle class,” said Thea Lee, policy director for the A.F.L.-C.I.O., “and it is hard to see how you rebuild the middle class without reviving manufacturing.”

Autos Lift Retail Sales as Inflation Perks Up
NYTIMES
By REUTERS
July 14, 2009
Filed at 9:13 a.m. ET

WASHINGTON (Reuters) - A jump in auto and gasoline sales boosted U.S. retailers in June, while a measure of inflation soared by twice as much as expected, bolstering hopes the economy was finally beginning a modest recovery.

Commerce Department data on Tuesday showed sales at U.S. retailers rose 0.6 percent from a month earlier, ahead of economists' expectations for a 0.4 percent advance.

A separate report from the Labor Department showed producer prices jumped 1.8 percent last month, far outstripping forecasts for a 0.9 percent gain.

U.S. stock index futures stayed in positive territory after the economic data, but U.S. government debt prices extended losses. The euro held on to slender gains vs dollar, but the dollar extended gains against the yen.

Excluding autos and parts, which recorded a 2.3 percent gain, retail sales were up a more modest 0.3 percent, short of analysts' expectations for a 0.5 percent advance.

"It's not horrible, but clearly there's not much of an acceleration," said Keith Hembre, chief economist at First American Funds in Minneapolis.

"That reflects the ongoing weakness in income levels. It looks like gas and vehicle sales were really the big driver, accounting for just about all of the overall increase."

Gasoline stations showed strong gains, helped by rising prices. The average price per gallon of gas rose to $2.68 in June from $2.32 in May, according to government data.

Excluding both autos and gasoline, sales were down 0.2 percent, the fourth consecutive monthly decline. Department stores and restaurants were among the laggards, suggesting that consumers remained reluctant to resume discretionary spending despite signs the recession may be drawing to a close.

The Producer Price Index, which measures prices received by farms, factories and refineries, recorded its steepest gain since November 2007, the Labor Department said.

Core prices, which strip out volatile food and energy costs, rose a much greater-than-expected 0.5 percent, boosted by car and truck sales. Analysts polled by Reuters were looking for a 0.1 percent increase in the core PPI.

Energy prices rose 6.6 percent as gasoline costs surged 18.5 percent. Both were the biggest rises since November 2007.

Light truck prices rose 3.4 percent, the largest gain since November 2006, while passenger car prices increased 2 percent, the steepest rise since September of that year.

Compared with the same period last year, however, producer prices fell 4.6 percent.

Consumer Loan Delinquencies Continue to Rise
NYTIMES
By THE ASSOCIATED PRESS
Filed at 10:02 a.m. ET
July 7, 2009

NEW YORK (AP) -- A banking group says consumer loan delinquencies rose to another record high in the first quarter.

The American Bankers Association says a continued rise in unemployment has been the main culprit for the continued rise in delinquencies.

The trade association said Tuesday the composite delinquency rate among eight types of closed-end installment loans rose to 3.23 percent. That is the highest recorded since the ABA began tracking the rate in the mid 1970s and tops the previous record of 3.22 percent set in the last quarter of 2008.

Aside from rising delinquencies among close-end loans, the ABA said credit card delinquencies also moved higher in the first quarter.

G.M. and Chrysler Liability Differences
NYTIMES
By Christopher Jensen
July 1, 2009, 8:30 am

As General Motors and Chrysler go through bankruptcy, the casual observer might think there would be some consistency in how consumers are treated. But when it comes to injuries or deaths caused by safety defects, current owners of G.M. vehicles are likely to get a much better deal.

There is something very wrong with that, said Norman Silber, a law professor at Hofstra University, where he teaches consumer law. “Justice is not supposed to be a lottery system,” he wrote in an e-mail message.

Last month, a bankruptcy judge granted Chrysler’s request that it not be held liable for product-liability suits filed by people who already owned a Chrysler, Dodge or Jeep. The argument was that it was unfair to burden the new company with such obligations.

According to Robert L. Nardelli, then-chief executive of Chrysler, the idea of a “get-out-of-court-free” card came up during talks between Fiat and the Treasury Department.

Consumer groups such as Public Citizen, the Center for Auto Safety, and Consumers for Auto Reliability and Safety were outraged and dismayed. Who was representing the rights of consumers in those chats? they wondered. Chrysler had abandoned and betrayed people who trusted the company and bought its vehicles.

That’s exactly the kind of negative image that G.M. does not want to project as it now goes through bankruptcy. A G.M. spokesman declined to discuss the matter, but in the last week G.M. has told a bankruptcy court in Manhattan that it is willing to accept responsibility for owners of current vehicles, who have accidents in the future and file product-liability suits.

The judge has yet to approve that plan, but assuming it goes through, here’s the kind of weirdness that could result, according to Mr. Silber.

“Think about Victim A, who is for instance crushed by the roof of a poorly designed Chrysler that she happens to be a passenger in,” he said. “She would probably find it impossible even to find a lawyer to represent her where there is no responsible party from whom to recover. Then, think about Victim B, crushed by the roof of a defective G.M. car, who as fate would have it, can recover damages.”

Mr. Silber said the situation with Chrysler “deserves revisitation — especially since both these companies are receiving subsidies” from taxpayers. But he admitted that he doesn’t see how that could happen.

What G.M. and Chrysler share is how they would treat people who have already had accidents and are either involved in suits or are preparing them. And that is basically to abandon them, consumer advocates said.

Chrysler got the okay to leave those people and their suits behind, forcing them to be satisfied with whatever money the old Chrysler has left to pay off creditors — virtually nothing.

“Unfortunately, General Motors is trying to do the same thing that the Chrysler bankruptcy did,” said Adina Rosenbaum, a lawyer for Public Citizen. That leaves hundreds of suits involving people who were badly injured or killed unable to bring claims against the new G.M., she said.

Mr. Silber said there was also an economic downside for current Chrysler, Dodge and Jeep owners. As more people become aware of the legal limitations on those vehicles, their value was likely to drop.

The one slightly positive aspect of this episode might be greater awareness of the need for a change in how bankruptcies are handled, he said.



New Obama Initiative Seeks Fix to Finance Regs
NYTIMES
By THE ASSOCIATED PRESS
Filed at 9:32 a.m. ET
June 17, 2009

WASHINGTON (AP) -- A new consumer protection agency highlights a financial system overhaul President Barack Obama plans to unveil Wednesday in effort to avert future economic crises like the one still wreaking havoc at home and around the globe.

Obama's sweeping change of business regulation also embraces new powers for the Federal Reserve and new rules that would reach into currently unregulated regions of the financial markets. An 85-page draft details an effort to change a regime that Obama's economic team maintained had become too porous for the innovations and intricacies of the today's financial markets.

With Congress already embroiled in health care legislation, Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year's end. The consumer agency would ride herd on credit and lending practices that largely went undetected as the economy was sliding into a deep recession.

Obama said Tuesday he will put forward ''a very strong set of regulatory measures that we think can prevent this kind of crisis from happening again.''

Christina Romer, who heads the Council of Economic Advisers, called it an ''appropriate balance'' and said the administration was ''not bulldozing the whole system.'' But House Republican Leader John Boehner said that it would have ''the federal government deciding what interest ought to be charged on credit cards'' and what financial products are available.

''I think it's just going to be too big of a foot on an industry that already is having financial problems,'' Boehner said in an appearance on ABC's ''Good Morning America'' Wednesday.

The financial sector and lawmakers from both parties concede the need for significant changes in the rules that govern the intricate and interconnected world of banking and investment. But the details of Obama's proposal already are facing resistance, signaling a tough sell for a president who is spending major political capital on his health care overhaul.

Under Obama's plan, the Fed would gain power to supervise holding companies and large financial institutions considered so big that their failure could undermine the nation's financial system. But even as it gains new powers, the Fed also would lose some banking authority to a new Consumer Financial Protection Agency.

Obama's proposal would require the Fed, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury approval before extending credit to institutions in ''unusual and exigent circumstances.''

The expanded Fed role and the new consumer regulator are likely to be the two main political flash points in the administration's proposal. Many bankers oppose a new consumer protection regulator and many lawmakers worry the Fed could become too powerful. Friction over those points could slow any major overhaul.

Besides having the Federal Reserve supervise ''systemically significant'' institutions, Obama will recommend a council of regulators, which would include the Fed, to monitor risk throughout the broader financial system. The arrangement is designed to prevent crashes like those that felled AIG and Lehman Brothers.

In conjunction with the Fed's authority over large financial institutions and the new consumer agency, Obama also will propose:

-- Additional protections for investors, including greater disclosure by hedge funds; regulation of credit default swaps and over-the-counter derivatives that previously operated outside of government oversight; and new conditions on brokers and originators of asset-backed securities.

-- A system for the orderly disposition of any troubled, interconnected firm whose failure poses a risk to the entire financial system, together with rules that insist that financial institutions hold more capital to avoid over-leveraging.

Obama's plan does not attempt major consolidation of turf-conscious regulatory agencies and does not inject itself into an ongoing debate over whether to bring some insurance companies under federal oversight.

''We don't want to tilt at windmills,'' Obama said on CNBC.

Obama's decision to create a consumer agency comes amid criticism that mortgage lenders and credit card companies have taken advantage of unwitting customers and saddled them with debt.

The new regulator would have the power to demand that customers have the option of simple financial products, to impose fines and to allow states to pass laws that are stricter than the federal standards. Consumer protections are now spread among various state and federal authorities, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission and banking regulators.

Financial lobbyists rallied against the new agency, saying it's impossible to separate bank regulation from oversight of the products they offer.

Democratic Sen. Christopher Dodd of Connecticut, chairman of the Senate Banking, Housing and Urban Affairs Committee, has advocated an alternative plan to strip the Fed of its regulatory role entirely and create a new consolidated bank regulator that would assume the roles that the Fed and Federal Deposit Insurance Corp. now play in helping regulate state-chartered banks.

Dodd, however, is a strong proponent of a consumer protection agency and is likely to champion that component of Obama's plan.

------

Associated Press writers Anne Flaherty, Dan Wagner and Jeannine Aversa contributed to this report.

On the Net:
Federal Reserve: www.federalreserve.gov
Securities and Exchange Commission: www.sec.gov
Federal Deposit Insurance Corp.: www.fdic.gov
Treasury Department: www.ustreas.gov
White House Council of Economic Advisers: http://www.whitehouse.gov/administration/eop/cea/
Financial Services Roundtable: http://www.fsround.org/
Federal Trade Commission: http://www.ftc.gov/
Treasury Lets 10 Big Banks Start to Repay Bailout Money
NYTIMES
By ERIC DASH
June 10, 2009

The Treasury Department cleared the way for 10 big banks on Tuesday to start repaying billions of dollars in taxpayer aid, a crucial step in easing the government’s grip after an unprecedented series of interventions.

JPMorgan Chase and Goldman Sachs were among the banks deemed strong enough by federal regulators to leave the Troubled Asset Relief Program, or TARP, after months of lobbying and strong performances on recent stress tests.

The 10 banks are expected to return about $68.3 billion to the Treasury Department, more than double the administration’s initial estimate of about $25 billion in funds to be returned this year.

The Treasury did not identify the banks, allowing them to come forward individually. They include American Express, Bank of New York Mellon, the BB&T Corporation, Capital One Financial, the State Street Corporation and US Bancorp. Along with JPMorgan and Goldman, they all passed the stress test and applied to return their TARP funds.

Another bank, Morgan Stanley, which needed to raise $1.8 billion after the stress test, also received permission, as did Northern Trust, a large custodial bank that did not undergo the stress test.

President Obama, in comments Tuesday, said that taxpayers “actually turned a profit” from the deal, but he also offered banks a warning.

“I also want to say: the return of these funds does not provide forgiveness for past excesses or permission for future misdeeds,” Mr. Obama said. “It is critical that as our country emerges from this period of crisis, that we learn its lessons; that those who seek reward do not take reckless risk; that short-term gains are not pursued without regard for long-term consequences.”

The $68.3 billion represents about a quarter of the TARP money given to banks. So far, 22 small community banks have been allowed to return $1.9 billion in government money.

Within the next few days, the big banks will be able to wire the money back to the Treasury Department. Still, they will not fully get out from under the government’s thumb until they rid themselves of warrants giving taxpayers a share of the potential upside on their investments.

Analysts say warrants for the 10 big banks could be worth as much as $4.6 billion. Treasury officials have not disclosed how they plan to value and sell them.

“These repayments are an encouraging sign of financial repair, but we still have work to do,” the Treasury secretary, Timothy F. Geithner, said in a statement.

The Obama administration hopes the accelerated payback will show that its financial recovery programs are working, even if the economy remains fragile. The move will also free up billions of dollars that can be redistributed to other troubled banks and companies without Treasury officials returning to Congress for more money.

Still, the plan is not without risks. The government is giving up $1.8 billion in annual interest payments while leaving its support programs in place, even for banks that repay. That means that taxpayers are giving up part of their upside while continuing to be on the hook for losses.

It could also cause a clear separation of the financial industry’s strongest and weakest players. Among the big banks not included in Tuesday’s action are Citigroup, Bank of America and Wells Fargo. Citigroup, which has accepted $45 billion in taxpayer aid, might not be able to exit the TARP program for years.

Banking executives have been lobbying to repay TARP money for months, hoping to free themselves from compensation and other restrictions as well as the additional scrutiny that came with accepting taxpayer money. They also hope the government’s seal of approval will give them a competitive edge and an added jolt to their share price, sustaining a recent rally.

“Everyone wants to get through this with enough capital, but there isn’t a bank C.E.O. or board member in the country that didn’t want to get out as fast as they can,” said Brian R. Sterling, an investment banker who specializes in financial institutions at Sandler O’Neill in New York. “It’s expensive. The rules change. And in some markets, the competitor down the street is putting up billboards saying ‘I’m not a bailout bank.’ ”

Yet even as they exit the program, banks remain tethered to the government by a series of programs that were introduced as the credit crisis worsened. The administration, for example, plans to introduce new compensation guidelines within the next week that would apply to a range of financial companies — including those that returned taxpayer money. TARP recipients, meanwhile, are bound by certain restrictions, like limits on temporary work visas known as H1-B’s, until they expunge the taxpayer warrants.

The TARP program was intended last fall as a long-term investment by the government to get the financial industry through the worst crisis since the Depression. As the financial system teetered, Treasury Secretary Henry M. Paulson Jr. called the heads of the nation’s largest banks to Washington in October and pressed them to accept the money — regardless of whether they thought they needed it. But when compensation and other restrictions were attached to calm political furor over Wall Street bonuses, healthier banks pushed to leave the program.

In a statement on Tuesday, Mr. Paulson said that he appreciated the participation of the banks in the program, which had helped stabilize the financial system.

The Federal Reserve announced last week that it planned to give the go-ahead to an “initial set” of banks that proved they were strong enough operate with less government support. Federal officials want to avoid the political embarrassment and financial risks of allowing a bank to exit the program only to see it return for more taxpayer aid if the economy worsens.

Banks had to show regulators their capital levels were high enough to withstand a severe recession, they could sell a sizable amount of common stock, and they could begin issuing billions of dollars of debt without the government’s backing.

Even after they repay the taxpayer money, the banks could face another showdown with federal officials over the value of warrants. To fully disentangle themselves from government, banks will have to either allow the Treasury to auction the warrants or buy them back. The government has nine years before it is required to sell them.

All told, buying back the warrants could cost the banks as much as $4.6 billion, according to an estimate by Linus Wilson, a finance professor at the University of Louisiana at Lafayette. Taxpayer warrants in JPMorgan Chase could be worth $1.7 billion, according to Professor Wilson’s estimates. Warrants in Goldman Sachs and Morgan Stanley could be worth well over $600 million each.

Regulators at the Fed, meanwhile, began analyzing the fund-raising plans on Monday for 10 other banks, which required additional capital after the stress test. As part of that process, regulators are looking closely at the banks’ risk management practices and executive team. Those reviews are expected to be completed in a few weeks.

These news conferences are art...a version of the Last Supper, or, as a movie, The Ten Commandments


In name and logo only???
GM to go green, cut execs, as it exits from bankruptcy 
DAY
By Tom Krisher 
Published on 7/9/2009

General Motors could literally turn green as it readies itself for major management and cultural changes that will coincide with its escape from bankruptcy protection.

People briefed on its plans say the company is looking into changing the background color of its corporate logo from blue to green in an effort to show consumers that it is leaner and greener, more focused on fuel efficiency and better able to make quick decisions.

Ed Welburn, GM's vice president of design, is leading a group that is studying name and logo changes, but no recommendation has been made, according to one of the people. Changing the background of the familiar square blue-and-white GM logo has been discussed, said the people, who requested anonymity because no decision has been reached.

What has been decided, though, is the need for management and cultural changes. New CEO Fritz Henderson is preparing to cut another 4,000 white-collar jobs, including 450 executive-level employees such as plant managers or engineering group heads.  Henderson, under pressure from the new GM's largest shareholder, the U.S. government, wants a more nimble company, one that can make decisions faster and is less bureaucratic than the GM of the past.

In the old GM, several committees often reviewed decisions, holding up new vehicles and making it slow to respond to market changes. Designs were often changed from bold to bland, with GM stamping out nondescript cars such as the old Chevrolet Malibu. With taxpayer dollars and its very existence on the line, GM can no longer afford to take too long.

So Henderson will thin executive ranks by 35 percent, from about 1,300 to 850 by the end of the year. Total U.S. salaried employment will drop by 6,150, or 21 percent, from 29,650 at the start of the year to 23,500 by the end.  The changes could be announced as soon as Friday after the courts clear the sale of GM's good assets to a new company largely owned by the U.S. and Canadian governments and the United Auto Workers union. They will flatten the automaker's organizational chart, eliminating work groups and shrinking the organization to match a smaller footprint, according to the people briefed on the plan.

The flatter organization will make it easier for Henderson to hold people accountable for their work, while focusing more on product development and customer service, one of the people said.  The new structure would be similar to one imposed on Chrysler Group LLC by Fiat CEO Sergio Marchionne, who now controls the company. Marchionne shed layers of management.  General Motors Corp. also could announce a subcompact car to be built at a Michigan factory, widely believed to be the four-seat Chevrolet Spark minicar now being sold in China.

GM for years had neglected its small cars, unable to make money on them because of high labor costs. Instead, it focused more on high-profit trucks and sport utility vehicles. Its current entries, such as the Korean-made Chevrolet Aveo subcompact and the U.S.-made Chevrolet Cobalt compact, have not sold as well as top-selling entries from Toyota and Honda.

The new GM, however, is betting that car buyers will shift to small as gas prices swing wildly, and it's trying to upgrade that class of vehicle. The company says lower labor costs and higher sales prices should yield more profits.  GM is also trying to go leaner by selling off its European Adam Opel GmbH unit, as well as Sweden's Saab, and the Hummer and Saturn brands. Pontiac is to be discontinued by the end of the year, leaving GM with only four brands - Chevrolet, Buick, Cadillac and GMC.

Steve Rattner, the head of the Obama administration's auto task force, told reporters earlier this week that GM must adjust to being smaller and less global.

”It would be natural as part of this overall downsizing of GM for there to be a change in the management structure to become a bit closer to the ground, a bit leaner and meaner,” he said Monday.

The U.S. government is expected to provide about $50 billion in aid to the automaker as it exits bankruptcy and tries to become profitable even in a depressed world auto sales market. That won't be easy for a company that has lost more than $80 billion in the past four years.

The cuts will help GM adjust to being a smaller company, but will not make it successful without forceful leadership to change the culture of bureaucratic committees making decisions too slowly, said Harlan Platt, a professor at Northeastern University in Boston who teaches corporate turnarounds.

GM simply must transform itself into a company that makes cars and trucks that people would love to own, Platt said.

”That's great,” he said of the cuts. “But if it doesn't end up with General Motors being transformed, then it's just another step on the way toward the ultimate demise of General Motors.”  
Owning G.M.
NYTIMES Editorial
June 1, 2009

The government is about to own a controlling stake in one of the largest car companies in the world, if, as is virtually certain, General Motors files for bankruptcy protection on Monday. If all goes according to plan, the American and Canadian governments will own nearly 75 percent of the company that emerges from the process — and could end up holding their stake for several years.

President Obama owes American taxpayers and voters a candid and detailed explanation of the government’s goals and the levers it intends to use to achieve them. He should make clear that the overarching objectives are to create a profitable company that makes cars that people want to buy, and that are more fuel-efficient.

In particular, he should be explicit about how the government will handle the conflicts between those goals, the administration’s perception of the public interest and the narrower goals of members of Congress.

Owning a car company like G.M. is likely to be politically trickier than it appears at first blush. The administration’s insistence that it has no intention of getting involved in the day-to-day decisions of General Motors is a reasonable response to concerns that the vagaries of the political process could run the company into the ground.

We agree that if taxpayers’ interests as shareholders are to be protected, G.M. cannot be micromanaged from Washington. Neither the Treasury nor members of Congress should decide which plants or dealerships are to be closed, how many workers are to be laid off or hired, what specific designs G.M. adopts and where it should make them. If the objective is to turn G.M. into a profitable carmaker as soon as possible so it can be sold back into private hands, it is a sound decision to let professionals run the company.

The government would still have the votes to appoint a majority of the members of the board, and should make certain that its appointees are dedicated to the big goals of profitability and fuel-efficiency.

Mr. Obama must tell the American people that these, indeed, are the overriding objectives. The decisions of G.M.’s new managers should not become entangled with the government’s other policy priorities — such as maximizing employment in the United States or reducing job losses in Michigan. And he should specify what is supposed to happen if the goals of profitability and fuel efficiency collide.

It was only March when the Obama administration let G.M. slide toward bankruptcy by denying it more taxpayer money, partly on the grounds that the company was too heavily dependent on S.U.V.’s., while its biggest stab at fuel economy, the Volt, was too expensive to work in the near future. Since then, a government task force has been deeply involved in all sorts of strategic decisions about the structure of the company’s operations.

It is not unimaginable that the government could have similar qualms about G.M.’s strategy in the future and may want to intervene again. The president should tell Americans what to expect if that time comes.
Bankrupt G.M. Says It Owes $172 Billion
NYTIMES
By DAVID E. SANGER, JEFF ZELENY and BILL VLASIC
This article was reported by David E. Sanger, Jeff Zeleny and Bill Vlasic, and written by Mr. Sanger.
June 2, 2009

Calling the federal government a reluctance shareholder, President Obama on Monday characterized the bankruptcy filing of General Motors as necessary to assure that the company remained a viable part of America in the years ahead.

President Obama said that the government had agreed to support G.M.’s reorganization because executives had worked tirelessly to produce a plan that met his demand for a leaner company focused on fuel-efficient vehicles.

General Motors filed for bankruptcy on Monday morning, submitting its reorganization papers to a federal clerk in Lower Manhattan.

The reorganization, Mr. Obama said, “will take a painful toll on many Americans who have relied on G.M.”

“I will not pretend the hard times are over,” Mr. Obama said, adding that the plant closings announced by the company would hurt many workers. But, he added, the reorganization was a “sacrifice” that America needed to make for the next generation and to assure that the country would “continue to make things.”

The new G.M., he said, will produce the high quality, fuel efficient cars of tomorrow.

The bankruptcy of a once-proud auto giant that helped to define the nation’s car culture and played a part in creating the American middle class immediately rippled across the country.

Auto workers braced for news about their jobs as G.M. said it would shutter plants in Michigan, Indiana, Ohio and Delaware, and plants in Tennessee and elsewhere in Michigan were put on standby. In financial markets, shares of foreign automakers and Ford surged ahead. And in Washington, President Obama planned to address G.M.’s bankruptcy in a speech around noon.

In its bankruptcy petition, G.M. said it had $82.3 billion in assets and $172.8 billion in debts. Its largest creditors were the Wilmington Trust Company, representing a group of bondholders holding $22.8 billion in debts, and affiliates of the United Auto Workers union, representing nearly $20.6 billion in employee obligations.

In a court affidavit, Fritz Henderson, G.M.’s chief executive, said that bankruptcy and a Treasury-sponsored sale of General Motors’ assets to a so-called “New G.M.” were the automaker’s only option to move forward. Failing that, he said, the company faced liquidation.

“There is no other sale, or even other potential purchasers, present or on the horizon,” Mr. Henderson said. In a bit of good news, G.M. said Monday that it planned to keep its international headquarters in downtown Detroit, rather than move to the suburbs. It said it responded to concerns by city officials fearful of losing the only one of the Detroit companies to be based in the Motor City.

The company was forced into the filing by President Obama, who is betting that by temporarily nationalizing the onetime icon of American capitalism, he can save at least a diminished automaker that is competitive.

With the filing, G.M. follows its crosstown rival Chrysler in bankruptcy. And G.M. hopes that it can move as swiftly. Chrysler, which sought court protection on April 30, could emerge in the next few days. A bankruptcy judge in New York gave approval on Sunday night for most of its assets to be acquired by Fiat, a decision that President Obama hailed on Monday morning.

“Chrysler has a new lease on life,” Mr. Obama said in a statement. “We said this process would be completed quickly and efficiently, and that’s exactly what has been accomplished today.”

The bankruptcy of General Motors culminates a remarkable four months of confrontation between Washington and Detroit that is expected to result in a drastic downsizing of the company. It also places the government in uncharted territory as a business owner, as it takes a majority ownership stake in the company during its restructuring.

The company’s Saturn unit, which G.M. began in 1990 to compete with foreign-made cars, also filed for bankruptcy on Monday. G.M. has said it will phase out the Saturn brand by 2012.

G.M.’s Saab unit is already under bankruptcy protection in Sweden. The German government last week picked Magna International, a Canadian car-parts maker, to buy G.M.’s Opel unit, which is based in Germany.

Reflecting the government’s extraordinary intervention in industry, aides say, Mr. Obama plans to tell the nation later Monday morning that he believes G.M. can be brought back from the brink of insolvency, even if the company looks almost nothing like the titan of old.

In his remarks on Monday, Mr. Obama spelled out a strategy in which a shrunken G.M. can make money even if new car sales remain at a sluggish 10 million a year in the United States and even if G.M., once the giant of the industry, drops below its current 20 percent market share in this country.

But to get there, American taxpayers will invest an additional $30 billion in the company, atop $20 billion already spent just to keep it solvent as the company bled cash as quickly as Washington could inject it. Whether that investment will ever be recovered is still an open question.

The company will also have to shed 21,000 union workers and close 12 to 20 factories, steps that most analysts thought could never be pushed through by a Democratic president allied with organized labor.

Forty percent of the company’s 6,000 dealers will close, the workers’ union will be forced to finance half of its $20 billion health care fund with stock of uncertain value in the restructured G.M..

G.M. will also lose its spot on the Dow Jones industrial average, a crucial stock-market gauge of 30 blue-chip stocks. The car maker had been a member of the closely watched stock index since 1925.

In press releases and public statements, General Motors tried to put the best face possible on its bankruptcy filing.

“We see the path to the future for G.M.,” Ray Young, G.M.’s chief financial officer, said at a briefing Monday morning. “This is a once in a lifetime opportunity to get our balance sheet healthy. I feel very blessed to have this opportunity. It’s a huge responsibility.”

Judge Robert E. Gerber of United States Bankruptcy Court in Manhattan will oversee the bankruptcy. He was appointed in 2000, and oversaw the bankruptcy of the cable company, Adelphia.

Before that, he was a partner in the Manhattan firm of Fried, Frank, Harris, Shriver & Jacobson, which he joined in 1971 after graduating for Columbia Law School. He specialized in securities and commercial litigation and, thereafter, bankruptcy litigation and counseling.

The company’s last steps toward bankruptcy took place over the weekend as a majority of G.M. bondholders agreed not to challenge the filing in court and to exchange their debt for stock.

To assist in the restructuring, the automaker is expected to hire the consulting firm Alix Partners, which has worked on several major bankruptcies, including those for Enron and Kmart. One of the firm’s partners, Al Koch, is expected to manage the liquidation of corporate assets that G.M. will shed during its Chapter 11 restructuring, people with knowledge of the bankruptcy strategy said.

Mr. Obama is taking several risks under the plan. None may be bigger than the decision that the United States government will take a 60 percent share of the stock in a new G.M., leaving taxpayers vulnerable if the overhaul is not successful. (Canada, for its part, is taking a 12 percent stake.)

But he argued on Monday that any alternative to his plan would be worse, and that a liquidation of G.M. — the only other real option — would send the unemployment rate soaring over 10 percent and would radiate damage throughout the economy.

Aware of the hardships the plan will impose on regions across the country that depend on auto production, the White House is dispatching a dozen Cabinet members and other officials across four states this week to reassure residents.

In his comments, the president insisted that once the government sets up new management and a board, it will remove itself from G.M.’s day-to-day operations. But even his aides anticipate intense pressure as the company’s managers are called to testify in Congress and face questions like why they decided to build new cars in Mexico and South Korea, rather than in Michigan or the South.

“Congress and many Americans are going to say, if we own it, why can’t we make these decisions?” one of Mr. Obama’s top economic aides said, “and it’s going to be a challenge to answer that.”

The White House argued that the government’s role should be limited primarily to the beginning of the process, but that it should then recede, becoming a passive investor, one seeking to sell its stake quickly.

At the same time, Mr. Obama has laid out goals for all the Detroit automakers that will presumably affect their major strategic decisions. He has urged them, for example, to build smaller cars with significantly better fuel efficiency. But under the new principles, the White House would be discouraged from getting involved in G.M’s decisions about when and where to build such a car, or how long to keep producing it if it sells poorly.

Six months ago, even the suggestion of such deep intervention into G.M.’s operations would have raised huge objections. But by the time the denouement came, the company seemed almost relieved. Robert Lutz, G.M.’s vice chairman, said that “for the first time in our history, the American auto industry has the ear of the administration. Their number one goal is to make us successful.”

Dollar Hits New Multimonth Low vs Euro, Pound, Yen
NYTIMES
By THE ASSOCIATED PRESS
May 22, 2009; Filed at 11:43 a.m. ET

NEW YORK (AP) -- The dollar kept falling Friday, notching fresh multimonth lows against the euro, pound and yen as a warning that Britain's debt level may result in its credit rating being cut ricocheted into worries about the massive U.S. deficit.

The 16-nation euro rose to $1.4015 in morning trading from $1.3889 in New York late Thursday -- its first time above $1.40 since Jan. 2.  The British pound rose to $1.5916 from $1.5890, peaking at $1.5945 earlier in the session, its highest point since Nov. 6.

Meanwhile, the dollar edged up to 94.51 Japanese yen from 94.23 yen -- after earlier falling to 93.82, its lowest point since Feb. 23.

On Thursday, Standard & Poor's said Britain may have its rating cut because of rising debt levels. Though the ratings agency reaffirmed the country's actual long-term credit rating at ''AAA,'' it said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis.

Because Britain is pursuing similar policies to the U.S. -- with both the Bank of England and the Federal Reserve injecting billions of dollars in their economies by buying assets from banks -- the move also weighed on U.S. assets and the dollar. Treasurys sold off Thursday, and continued to do so Friday.  S&P's announcement ''wound up creating more problems for the U.S. dollar than for the British pound,'' HSBC analysts said in a research note.

''The problem for the U.S. is particularly acute because of its reserve status,'' said UBS analyst Brian Kim in an e-mail to investors Friday. Major holders of U.S. debt, such as Middle Eastern sovereign funds and the Chinese government, have not been shy about calling the U.S. out for what it sees as policies that will trigger inflation, shrinking the value of their Treasury holdings.  The Fed in March said it planned to buy up billions in long-term Treasurys and $1.25 trillion in mortgage-backed securities, flooding the money supply.

''The dollar has weakened as dollar bears have now added concerns on U.S. credit ratings to their arsenal,'' Kim said.

Earlier this month, the Obama administration hiked its forecast for this year's federal deficit to $1.84 trillion. The deficit is approaching $1 trillion for the budget year that began Oct. 1.  Big deficits mean the government has to borrow more, which could put its credit rating at risk. They can also put upwards pressure on inflation, thus cutting the purchasing power of the dollar.

In other trading, the dollar fell to 1.1235 Canadian dollars from $1.1404 and slid to 1.0833 Swiss francs from 1.0936 francs late Thursday.

Treasury Said to Plan Second GMAC Bailout
NYTIMES
By EDMUND L. ANDREWS
May 21, 2009

WASHINGTON — The Treasury Department has decided to bail out GMAC, the former financing arm of General Motors, with $7.5 billion, according to people familiar with the discussions, which would bring its total federal assistance to more than $12 billion.

The deal is expected to close on Thursday and comes two weeks after federal regulators concluded from a stress test on GMAC that it needed an additional $11.5 billion in capital to weather a severe downturn in the economy.

GMAC continues to provide crucial financing for car sales by General Motors, and Treasury officials recognized that its survival was essential to the government’s broader attempt to rescue and restructure the automobile giant, according to the individuals who were briefed on the discussions and who spoke only on the condition that they not be identified.

General Motors and Chrysler are both in the midst of arduous efforts to shrink in size, wring more concessions from labor unions and rethink their fundamental business strategies.

GMAC received $5 billion in federal bailout money in December.

The company is reeling from the broader credit crisis and the recession, as well as from its losses from subprime mortgages. During the housing boom, GMAC acquired a major subprime lender and became one of the biggest players in that segment of the mortgage industry.

The Federal Reserve allowed it to convert to a bank holding company last year, a move that allowed it to apply for rescue help from the Troubled Asset Relief Program, or TARP.


Treasury Plans to Strengthen Regulation of Derivatives, Senator Says
NYTIMES
By THE ASSOCIATED PRESS
Filed at 2:35 p.m. ET
May 13, 2009

WASHINGTON (AP) -- Treasury Secretary Timothy Geithner will announce a plan on Wednesday to strengthen federal regulations governing over-the-counter derivatives, a class of financial instruments that includes the risky contracts that helped bring down AIG.

Sen. Christopher Dodd, a Connecticut Democrat who chairs the Senate Banking Committee, says he has been told that the administration will "really tighten down" on them. He said had not been told how and did not have further details.

Geithner was scheduled to brief reporters at 4 p.m. EDT.

Similar to previous story...
US to Borrow 46 Cents for Every Dollar Spent
By THE ASSOCIATED PRESS
Filed at 9:11 p.m. ET
May 11, 2009

WASHINGTON (AP) -- The government will have to borrow nearly 50 cents for every dollar it spends this year, exploding the record federal deficit past $1.8 trillion under new White House estimates. Budget office figures released Monday would add $89 billion to the 2009 red ink -- increasing it to more than four times last year's all-time high as the government hands out billions more than expected for people who have lost jobs and takes in less tax revenue from people and companies making less money.

The unprecedented deficit figures flow from the deep recession, the Wall Street bailout and the cost of President Barack Obama's economic stimulus bill -- as well as a seemingly embedded structural imbalance between what the government spends and what it takes in.

As the economy performs worse than expected, the deficit for the 2010 budget year beginning in October will worsen by $87 billion to $1.3 trillion, the White House says. The deterioration reflects lower tax revenues //**--and higher costs for bank failures, unemployment benefits and food stamps.

Just a few days ago, Obama touted an administration plan to cut $17 billion in wasteful or duplicative programs from the budget next year. The erosion in the deficit announced Monday is five times the size of those savings.

For the current year, the government would borrow 46 cents for every dollar it takes to run the government under the administration's plan. In 2010, it would borrow 35 cents for every dollar spent.

''The deficits ... are driven in large part by the economic crisis inherited by this administration,'' budget director Peter Orszag wrote in a blog entry on Monday.

The developments come as the White House completes the official release of its $3.6 trillion budget for 2010, adding detail to some of its tax proposals and ideas for producing health care savings. The White House budget is a recommendation to Congress that represents Obama's fiscal and policy vision for the next decade.

Annual deficits would never dip below $500 billion and would total $7.1 trillion over 2010-2019. Even those dismal figures rely on economic projections that are significantly more optimistic -- just a 1.2 percent decline in gross domestic product this year and a 3.2 percent growth rate for 2010 -- than those of private sector economists and the Congressional Budget Office.

As a percentage of the economy, the measure economists say is most important, the deficit would be 12.9 percent of GDP this year, the biggest since World War II. It would drop to 8.5 percent of GDP in 2010.

In the past three decades, deficits in the range of 4 percent of GDP have caused Congress and previous administrations to launch efforts to narrow the gap. The White House predicts deficits equaling 2.9 percent of the economy within four years.

Polling data suggest Americans are increasingly worried about mounting deficits and debt.

An AP-GfK poll last month gave Obama relatively poor grades on the deficit, with just 49 percent of respondents approving of the president's handling of the issue and 41 percent disapproving. By contrast, Obama's overall approval rating was 64 percent, with just 30 percent disapproving.

''Even using their February economic assumptions -- which now appear to be out of date and overly optimistic -- the administration never puts us on a stable path,'' said Marc Goldwein of the Committee for a Responsible Federal Budget, a bipartisan group that advocates budget discipline. ''The president ... understands the critical importance of fiscal discipline. Now we need to see some action.''

For the most part, Obama's updated budget tracks the 134-page outline he submitted to lawmakers in February. His budget remains a bold but contentious document that proposes higher taxes for the wealthy, a hotly contested effort to combat global warming and the first steps toward guaranteed health care for all.

Meanwhile, the congressional budget plan approved last month would not extend Obama's signature $400 tax credit for most workers -- $800 for couples -- after it expires at the end of next year.

Obama's ''cap-and-trade'' proposal to curb heat-trapping greenhouse gas emissions is also reeling from opposition from Democrats from coal-producing regions and states with concentrations of heavy industry. Under cap-and-trade, the government would auction permits to emit heat-trapping gases, with the costs being passed on to consumers via higher gasoline and electric bills.

Also new in Obama's budget details are several tax ''loophole'' closures and increased IRS tax compliance efforts to raise $58 billion over the next decade to help finance his health care measure. The money would make up for revenue losses stemming from lower-than-hoped estimates for his proposal to limit wealthier people's ability to maximize their itemized deductions.
White House: Budget Deficit to Top $1.8 Trillion
NYTIMES
By THE ASSOCIATED PRESS
Filed at 11:21 a.m. ET
May 11, 2009

WASHINGTON (AP) -- With the economy performing worse than hoped, revised White House figures point to deepening budget deficits, with the government borrowing almost 50 cents for every dollar it spends this year.

The deficit for the current budget year will rise by $89 billion to above $1.8 trillion -- about four times the record set just last year. The unprecedented red ink flows from the deep recession, the Wall Street bailout, the cost of President Barack Obama's economic stimulus bill, as well as a structural imbalance between what the government spends and what it takes in.

As the economy performs worse than expected, the deficit for the 2010 budget year beginning in October will worsen by $87 billion to $1.3 trillion, the White House says. The deterioration reflects lower tax revenues and higher costs for bank failures, unemployment benefits and food stamps.

For the current year, the government would borrow 46 cents for every dollar it takes to run the government under the administration's plan. In one of the few positive signs, the actual 2009 deficit is likely to be $250 billion less than predicted because Congress is unlikely to provide another $250 billion in financial bailout money.

The developments come as the White House completes the official release of its $3.6 trillion budget for 2010, adding detail to some of its tax proposals and ideas for producing health care savings. The White House budget is a recommendation to Congress that represents Obama's fiscal and policy vision for the next decade.

Annual deficits would never dip below $500 billion and would total $7.1 trillion over 2010-2019. Even those dismal figures rely on economic projections that are significantly more optimistic -- just a 1.2 percent decline in gross domestic product this year and a 3.2 percent growth rate for 2010 -- than those forecast by private sector economists and the Congressional Budget Office.

For the most part, Obama's updated budget tracks the 134-page outline he submitted to lawmakers in February. His budget remains a bold but contentious document that proposes higher taxes for the wealthy, a hotly contested effort to combat global warming and the first steps toward guaranteed health care for all.

Obama's Democratic allies controlling Congress have already made it clear that they will reject key elements of his plan. Already apparently dead is a plan to raise $267 billion over the next decade to pay for his health care initiative by curbing the ability of wealthier people to reduce their tax bills through deductions for mortgage interest, charitable contributions and state and local taxes.

And the congressional budget plan approved last month would not extend Obama's signature $400 tax credit for most workers -- $800 for couples -- after it expires at the end of next year.

Obama's remarkably controversial ''cap-and-trade'' proposal to curb heat-trapping greenhouse gas emissions is also reeling from opposition from Capitol Hill Democrats from coal-producing regions and states with concentrations of heavy industry. Under cap-and-trade, the government would auction permits to emit heat-trapping gases, with the costs being passed on to consumers via higher gasoline and electric bills.

Among the new proposals is a plan -- already on its way through Congress -- that would increase the Federal Deposit Insurance Corporation's borrowing authority from $30 billion to $100 billion in order to grant a two-year reprieve from higher deposit insurance premiums while the industry is struggling.

Also new are several tax ''loophole'' closures and increased IRS tax compliance efforts to raise $58 billion over the next decade to help finance Obama's health care measure. The money makes up for revenue losses stemming from lower-than-hoped estimates of his proposal to limit wealthier people's ability to maximize their itemized deductions.

The updated budget also would repeal an unintended tax windfall taken by paper companies that use a byproduct in the paper-making process as fuel to power their mills. The tax credits were never intended for paper companies, but now they could be worth more than $3 billion a year, according to a congressional estimate.

The budget would make permanent the expanded $2,500 tax credit for college expenses that was provided for two years in the just-passed economic stimulus bill. It also would renew most of the Bush tax cuts enacted in 2001 and 2003, and would permanently update the alternative minimum tax so that it would hit fewer middle- to upper-income taxpayers.

BANKRUPTCY: What lies ahead for Chrysler, GM 
DAY
By Stephen Manning 
Published on 5/29/2009

Washington - First it was Chrysler. Now General Motors looks like it's headed for bankruptcy court.

The nation's largest automaker is expected to file for Chapter 11 bankruptcy protection within days as part of a new government plan to create a leaner GM and erase the company's unsecured debt. Chrysler, meanwhile, is hoping to emerge soon from its own reorganization in bankruptcy court.

The automakers, two of America's most iconic companies, need court protection to cut debt and revamp operations free of creditors' clutches. That way, they hope, they'll emerge more competitive once the economy rebounds.

So what should you expect from a GM reorganization in bankruptcy court? Will it be different from Chrysler's? Does one company's case provide a roadmap to what might happen to the other?

Here are some questions and answers about Chrysler, GM and bankruptcy court:

Q: What are the two companies hoping to get out of reorganizing in bankruptcy court?

A: In short, a new life.

Keeping both companies alive is considered a top priority by the federal government since hundreds of thousands of jobs depend on the U.S. auto industry. So the federal government, which is loaning billions to both companies, hopes that a court-approved reorganization can keep Chrysler and GM from bleeding money and eventually remake them as strong players in the world auto market.

Q: How would a GM bankruptcy reorganization be different from Chrysler's?

A: The major difference is size.

As the nation's largest automaker, GM would be one of the nation's biggest bankruptcy protection filings ever. GM made twice as many autos as Chrysler did last year (3 million versus 1.5 million), employs 235,000 people compared with Chrysler's 54,000, and has plants and operations in many more countries.

GM, which sells GMC vans, Buicks, Chevrolets, Pontiacs and Cadillacs, also has far more brands than Chrysler, which sells under the Jeep, Dodge and Chrysler brand names. (Though GM has said it plans to eliminate the Pontiac brand.)

Q: So what is the significance of GM's size in a bankruptcy case?

A: It means unraveling GM will be much more complicated than reorganizing Chrysler.

GM operates worldwide, selling cars in 140 countries and owning overseas brands like the Sweden's Saab, Britain's Vauxhall and Germany's Opel.

Separate deals will likely have to be struck to resolve issues related to GM's overseas holdings, and the German government is already trying to shield Opel and its 25,000 workers from a possible GM bankruptcy. GM will also likely have to navigate the bankruptcy law of the countries where it has plants and other facilities as it works to restructure.

A clear illustration of the difference in scale between GM and Chrysler is how much money will be spent on lawyers, consultants and others who will work on the two cases. Lynn LoPucki, a UCLA law school professor who has studied fees from 102 large public bankruptcies, estimates that fees in the Chrysler case will reach around $573 million. That's a huge sum, but consider the estimate for GM: $1.9 billion.

Q: How will these cases play out?

A: Both companies owe a lot of money and have received about $25 billion in government loans. The bankruptcy court will determine how the creditors get paid and in what order.

For Chrysler, that means figuring out how to deal with $6.9 billion in debt. For GM, it's trickier. On Wednesday, GM failed to persuade holders of $27 billion in bonds - GM debt - to exchange them for a 10 percent equity stake. (In other words, ownership of a portion of GM.) The idea was that this would have improved the company's health by reducing its debt.

The U.S. Treasury came back with a plan to sweeten the deal Thursday. Whether or not the bondholders accept it, though, it's still a near certainty that GM will need to file for bankruptcy protection.

It will also be up to the courts to approve the automakers' restructuring plans. Chrysler seeks an alliance with the Italian automaker Fiat and big ownership stakes for the United Auto Workers union and the federal government. GM has proposed handing over ownership to the UAW and its debt holders, along with a whopping 70 percent share to the federal government.

Other parties also have a stake in the cases, including the auto parts suppliers who may be owed money, the network of dealers that rely on the automakers for their stock, and employees and retirees worried about their jobs and preserving their benefits.

Q: With Chrysler going first, does it provide a blueprint for GM?

A: It does in some ways. Chrysler hopes to zip through its case in just 30 days, near light speed for a bankruptcy case. If that works out, GM may look to try to do the same so that it can exit bankruptcy quickly. The Obama administration thinks GM can finish its case in between 60 to 90 days.

GM may look to the Chrysler case to figure out what court to file in. Chrysler has made rapid progress in a New York federal bankruptcy court, and could be finished within the next several weeks. If the case continues to go well, GM may file there, LoPucki said. If it doesn't, GM could go elsewhere, like Wilmington, Del. _ a jurisdiction that's known for handling big corporate bankruptcies.

One reason the Chrysler case has gone so smoothly is that there is already another company, Fiat, lined up to help it recover. In GM's case, there isn't such a deal. Some experts think the GM case will move more slowly as a result.

Q: What does bankruptcy mean for me if I own a GM or Chrysler or if am thinking about buying one?

A: Even though the companies face some big legal hurdles, you probably won't notice it much. Both are still selling cars, though they have announced plans to sharply cut back on the number of dealers they work with. And the U.S. government has pledged to back the warranties from both companies to reassure buyers.
May Day, May Day...
Chrysler Bankruptcy Plan Is Announced
NYTIMES
By MICHELINE MAYNARD
May 1, 2009

DETROIT — Chrysler, the third-largest American auto company, will seek bankruptcy protection and enter an alliance with the Italian automaker Fiat, the White House announced Thursday.

The bankruptcy case, which officials envisioned as a swift, “surgical” process, was set to be filed in United States Bankruptcy Court in New York. It marks the first time a major American car company has tried to restructure under bankruptcy protection since Studebaker in 1933.

“I have every confidence that Chrysler will emerge from this process stronger and more competitive,” President Obama said during a noontime appearance at the White House.

The president emphasized the speed with which the administration expects the bankruptcy process to be completed, saying that it would be “quick, official and controlled” and that the lives of those who work at Chrysler or live in communities where the company has its operations would not be disrupted.

Mr. Obama said the partnership with Fiat “will give Chrysler not only a chance to survive but to thrive in the global auto industry.” He said it was made possibly by the series of sacrifices by Chrysler stakeholders, such as the United Automobile Workers union, and said more sacrifices were in store.

But the president was pointedly critical of investment funds that rejected the government’s settlement offer, saying they hoped to benefit from the sacrifices of others while making none of their own. “I don’t stand with them,” he said in a stern tone.

A senior White House official said that the bankruptcy case would begin immediately, and that the government would provide debtor-in-possession financing in a range of $3 billion to $3.5 billion, so the company can continue to operate normally.

Once Chrysler restructures, the company would receive $4.5 billion in financing to restart its operations, for total American government support through the bankruptcy process and afterwards of up to $8 billion.

That is $2 billion more than Mr. Obama initially said the company would receive if it successfully reached a deal with Fiat.

Chrysler has already received $4.5 billion from the government, under a bailout plan put into effect by the Bush administration in late December, after Congress rejected legislation that would have provided federal aid.

The Canadian government also is expected to provide $1 for every $3 in American support, the official said, meaning Chrysler could receive another $2.6 billion.

Government officials estimated that the case could be as short as 30 to 60 days, although bankruptcy cases normally take much longer. The end result would be a new version of Chrysler that would emerge from bankruptcy without liabilities, such as debt and legal obligations, faced by the company now.

At the same time, Chrysler and Fiat signed an agreement that calls for Fiat to take part in running Chrysler. The Italian automaker will provide technical operations, and build at least one vehicle in a Chrysler plant. Fiat did not put up any financing as part of the agreement.

A new board will be appointed to run Chrysler that is expected to include representatives from both companies and the U.A.W. Chrysler’s chief executive, Robert L. Nardelli, is expected to leave the carmaker.

The bankruptcy filing could serve as a preview of what a filing by General Motors might look like. G.M., which like Chrysler received federal assistance last year, faces a June 1 deadline for its own restructuring.

President Obama had set a Thursday deadline for Chrysler to conclude a deal with Fiat, and to resolve issues with the United Automobile Workers union and its creditors.

On Wednesday, union members approved contract changes with Chrysler that will mean pay and benefit cuts, and their contract is expected to remain in effect during the bankruptcy. “No judge is going to override that kind of support,” the administration official said.

But Chrysler and the Treasury were unable to reach agreements with all the holders of $6.9 billion in company bonds. A number of investment funds balked at a government offer to pay $2.25 billion in cash for the debt, an offer that was sweetened after four major banks agreed to an earlier offer of $2 billion.

White House officials said the failure to reach agreement with lenders was the reason why President Obama decided Chrysler should go through the bankruptcy process.

However, dealing with the leaner Chrysler will also benefit Fiat.

White House officials said some of Chrysler’s 3,600 dealers in the United States are expected to close, and Chrysler Financial, the company’s lending arm, will cease providing loans for new Chrysler cars and trucks. Instead, GMAC, the financing arm partially owned by General Motors, will take over lending to Chrysler dealers.

The administration said it did not expect significant white or blue-collar job cuts as a result of the bankruptcy. Chrysler suppliers also can expect their contracts will be honored, although the company would have the right under bankruptcy protection to cancel them.

Last-minute efforts by the Treasury Department to win over resistant Chrysler debtholders failed Wednesday night, and the administration’s frustration was evident in President Obama’s remarks. .

But a group of Chrysler’s secured lenders asserted that the administration was skirting bankruptcy laws by forcing them to take a larger loss on their debt than other stakeholders in the company. They said their proposals to restructure Chrysler had been ignored by the government.

“The fact is, in this process and in its earnest effort to ensure the survival of Chrysler and the well-being of the company’s employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades,” the group, which calls itself the Committee of Non-TARP Lenders, said in a statement.

Members of the committee include units of Oppenheimer Funds, Perella Weinberg Partners’ Xerion Capital Fund and Stairway Capital Management. The funds emphasized that their investors are major pension funds, teachers’ unions and school endowments.

The lenders said they have been forced to negotiate through a group of big banks that have accepted government bailout money and are reticent to push back against the government’s proposal. They are particularly upset that the United Auto Workers will receive more for their debt even though the secured lenders should legally be paid before the union.

Many of the holdout lenders, primarily distressed-debt hedge funds who bought portions of Chrysler’s $6.9 billion of bank debt at a discount, are likely to argue that they have the first claim to the carmaker’s assets that were pledged for those loans, according to people briefed on the matter.

They argue that they would see greater recovery in a liquidation of the car giant, which they contend would yield about 65 cents on the dollar. The most recent plan proposed Wednesday by the Treasury Department and Chrysler’s four main bank lenders — JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — would have given the creditors about 33 cents on the dollar.

The four big banks own 70 percent of Chrysler’s secured debt.

As the talks with Fiat and the lenders entered the final hours, members of the United Automobile Workers union approved a historic deal in which the union would take a 55 percent stake in Chrysler. The stake would finance half of a new trust to administer retiree health care costs.


Deal to Sell Saturn to Penske Reported
NYTIMES
By MICHAEL J. de la MERCED and MICHELINE MAYNARD
June 6, 2009

General Motors has agreed to sell its Saturn brand to Roger Penske, a major auto dealer, and a deal is expected to be announced on Friday, a person with direct knowledge of the matter said.

The move is the latest by G.M. to sell off assets as it reorganizes itself in bankruptcy. Saturn, which was part of G.M.’s bankruptcy filing on Monday, had drawn 16 bidders over a months-long sales process, G.M. said earlier this week.

Under the terms of the deal, Mr. Penske, a former race car driver whose Penske Automotive Group is one of the largest dealerships in the country, will initially buy Saturn vehicles from G.M. But he is expected to eventually buy cars from other carmakers like Renault, through its Samsung Motors Unit in Korea.

Mr. Penske’s company, which owns 310 franchises around the world, already serves as the sole distributor of Daimler’s Smart line of small cars.

G.M. is seeking to use bankruptcy to pare itself down to a core group of brands, like Chevrolet and Cadillac, while shutting down or selling off others. Earlier this week, it agreed to sell its Hummer brand to a Chinese heavy machinery company and a stake in its Opel subsidiary to Canada’s Magna International.

G.M. announced months ago that it was seeking to divest Saturn, a 25-year-old subsidiary that initially focused on fuel-efficient cars to rival those of foreign carmakers. Saturn cost G.M. about $5 billion in the late 1980s, including factory and development costs for its small cars.

But the unit’s sales peaked at 286,000, and both G.M. and the United Auto Workers union soured on its management style. The U.A.W. proposed a spinoff of Saturn in the late 1990s, but G.M.’s board refused to consider the move.

To help sell the brand, G.M. turned to Steve Girsky, an auto analyst and adviser to the U.A.W.
As Detroit Is Remade, the U.A.W. Stands to Gain
NYTIMES
By MICHELINE MAYNARD and NICK BUNKLEY
April 30, 2009

DETROIT — In the devastating slump that has forced two of Detroit’s automakers to the brink of bankruptcy, the United Automobile Workers union stands to become one of the industry’s few winners.

According to restructuring plans proposed this week, the union will have more than half the stock in Chrysler and a third of General Motors, meaning it will have tremendous influence, with the government, in determining the future of the companies.  The United Automobile Workers union said Wednesday that its members ratified a cost-cutting deal with Chrysler by a 4-to-1 margin.

“Our members have responded by accepting an agreement that is painful for our active and retired workers, but which helps preserve U.S. manufacturing jobs and gives Chrysler a chance to survive,” Ron Gettelfinger, the union’s president, said in a statement.

The prospect of a big ownership stake for the U.A.W. in G.M. has angered holders of billions of dollars in bonds, who stand to get only a fraction of the restructured company. As for Chrysler, the banks, hedge funds and others that lent it money have been promised only cash, not stock.

“We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another,” a group of G.M. bondholders said in a statement this week.

The U.A.W. members at both automakers stand to lose some of their pay and benefits, but the cuts are not as deep as those faced by airline and steel workers when their companies went bankrupt. Under proposed deals devised by the Treasury Department, U.A.W. pensions and retiree health care benefits would largely be protected.  The U.A.W. has derived its leverage in part from the support of a Democratic president and Congress. But it also results from a long-term strategy to build support in Washington that stretches back more than 60 years.

“We have to fight both in the economic and political fields, because what you win on the picket lines, they take away in Washington if you don’t fight on that front,” Walter P. Reuther, the union’s best known president, said in 1947.

Mr. Reuther and every succeeding U.A.W. president invested significant amounts of time and money to pursue that goal.  In the last 20 years, the U.A.W. has donated more than $25.4 million to federal candidates, 99 percent of it to Democrats, according to OpenSecrets.org, a site that tracks campaign contributions.

The union ranks No. 16 on the group’s list of top 100 political donors, known as “heavy hitters.” The U.A.W. was well ahead of G.M., which gave $10 million in that period, ranking it 73rd. Chrysler and Ford Motor did not make the list.

Mr. Gettelfinger, the current president, has also been an effective, steel-nerved leader, and has managed to maintain the union’s importance in recent negotiations, even though the U.A.W. has lost nearly 200,000 members since he took office in 2003.  Mr. Gettelfinger’s influence stems in part from the fact that the U.A.W. represents nearly all the auto workers at the Detroit companies. (Workers at a few plants are represented by the I.U.E.) By contrast, airline workers are represented by multiple unions.

“The U.A.W. is so overwhelmingly dominant,” said Duane Woerth, former president of the Air Line Pilots Association. “You’re only talking to one union and that gives them more power.”

Mr. Woerth, whose union was involved in 22 bankruptcy cases involving big and small airlines during his tenure as its president, said the pressure that bondholders and other investors might put on the U.A.W. has been mitigated by Democrats’ support.  For example, the union has yet to complete a deal with G.M., which laid out an offer to its bondholders this week that would pay them about 41 cents on the dollar. In order for the deal to succeed, 90 percent must accept it, which analysts say is unlikely given bondholders’ criticism of the offer.

Only this week did the U.A.W. come to terms at Chrysler, facing a Thursday deadline set by the administration.  The tactics have won admiration from others in the labor movement, even those forced to grant concessions to bankrupt companies.

Robert Roach Jr., a general vice president of the International Association of Machinists and Aerospace Workers, said a successful outcome for the U.A.W. and the auto companies would benefit the economy, and in the process help his 650,000 members at major airlines, aircraft makers and other companies.

“We’re all in this,” Mr. Roach said. “The corporations, the federal government, the taxpayer, the cities and the states. If we are able to save these auto companies, that will be good for everybody.”

But many of the U.A.W. members who voted Wednesday on the Chrysler proposal were struggling to see the benefits of the cuts they were agreeing to.  The deal suspends cost-of-living pay increases, limits overtime pay and reduces paid time off. It also eliminates dental and vision benefits for retirees. 

It also provides for Fiat to begin building cars in at least one Chrysler plant.

“Either you vote for it or it’s bankruptcy,” said Bruce Clary, 58, who was an electrician at a Detroit engine plant until being laid off in January. “And it may be bankruptcy anyway.”

At Chrysler’s Jefferson North assembly plant nearby, the oldest auto plant still operating in Detroit, workers said the consequences of rejecting the deal would be far worse than the concessions that it would force.

“This was the best deal we could get,” said John Davis, who has worked at Chrysler for 33 years. “We did our part, and now the banks need to do their part.”

More "The Donald" behavior by White House?
Op-Ed Contributor: One Roadblock Too Many for G.M.
NYTIMES
By WILLIAM J. HOLSTEIN
March 31, 2009

PRESIDENT OBAMA’S stunning decision to demand that Rick Wagoner resign as chairman and chief executive of General Motors was based on the wrong set of premises and raises the prospect that the administration will intervene too deeply in the automaker, seriously jeopardizing a transformation effort that has come a long way in the right direction.

Mr. Obama cited a “failure of leadership” as a reason for forcing out Mr. Wagoner. While not every decision Mr. Wagoner has made was wise, over all he had been putting G.M. through a wrenching restructuring that tried to undo decades of management acquiescence to the United Auto Workers.

Mr. Obama indicated he did not believe G.M. had moved fast enough in facing up to global competition. But the company is coming close to achieving the cost structure of Toyota’s assembly plant in Georgetown, Ky. — largely because Mr. Wagoner and his team stripped thousands of dollars out of the cost of every vehicle. Fully one-half of the company’s unionized work force has been laid off or taken buyout packages, and the U.A.W. has agreed to a two-tier wage system in which new workers make only $15 an hour. Just a few years ago that would have been unimaginable.

Mr. Wagoner also encouraged G.M.’s adoption of Toyota’s lean manufacturing techniques and quality control. So much so that Buick tied with Jaguar for first place in the latest J. D. Power ranking of dependability, coming in ahead of Toyota and its Lexus brand.

By bringing in the auto industry veteran Robert Lutz as vice chairman for global product development, Mr. Wagoner was also responsible for a redesigned lineup of vehicles. The Cadillac CTS and Chevrolet Malibu both won car-of-the-year awards last year and the newly revived Camaro — which is hitting the roads just as Mr. Wagoner is being ousted — represents the high-water mark of revitalized American car design.

Mr. Wagoner also pushed the development of the lithium-ion battery that will power the Chevrolet Volt extended-range electric car when it appears in late 2010. Lithium-ion batteries represent a leapfrog over the nickel-metal-hydride batteries in the Toyota Prius. By investing $1 billion in lithium technology, Mr. Wagoner created the best opportunity for America to win a piece of a huge new “green” industry now dominated by non-American companies.

Mr. Obama has not only failed to understand these contributions, he has also deprived G.M. of Mr. Wagoner’s presence on the board. Much of Mr. Wagoner’s knowledge and experience could simply be lost. With Mr. Lutz also about to retire, the two executives most responsible for G.M.’s transformation are gone.

Mr. Obama decided that G.M.’s president, Frederick Henderson, should move up to take the chief executive’s job, which has been part of G.M.’s succession plan all along. But how does that represent fresh leadership? And is Mr. Henderson ready? He is known for being more aggressive in his business dealings than Mr. Wagoner was, and speaks the language of Wall Street. That may be useful in dealing with G.M.’s bondholders and the U.A.W. But Mr. Henderson does not yet command the loyalty inside the company that Mr. Wagoner did.

The long-term plan had been for him to serve as Mr. Wagoner’s lieutenant for a year or two more so he could build relationships with other top executives. Instead, he’s been handed a company that is reeling over how the Obama administration helped turn Mr. Wagoner into a scapegoat through its leaks to the news media.

Mr. Obama’s intervention does not stop there. His aides were quoted as saying they are going to remake the entire G.M. board. But deciding which director should go and which director should be added is far beyond the competence of any government. A new board may be the smart move in the case of a failed bank, where there are thousands of qualified and experienced financial executives to step in, but as one of the world’s largest manufacturers, G.M. faces vastly more complicated and specialized issues.

Mr. Obama also failed to end the bankruptcy talk that has hung over G.M. and hurt its sales. In his statement on Monday he admitted that “I know that when people even hear the word ‘bankruptcy’ it can be a bit unsettling.” He’s right — and that’s exactly why he shouldn’t have said it was a possibility. Rather, the president should have forcefully stated that he would keep G.M. out of Chapter 11 because the nation’s bankruptcy system may not be able to handle such large-scale industrial restructurings. To wit: Delphi, G.M.’s largest parts supplier, went into Chapter 11 bankruptcy in 2005 and has yet to emerge.

Add it all up and Mr. Henderson is taking over an organization in a state of shock. He will have to prove himself to all G.M.’s constituencies, but he could be distracted by a major shakeup of his board. Plus, the Damocles sword of bankruptcy will hang over his head. It is a supremely difficult situation, and may make it even more difficult for G.M. to sustain its transformation.

It may have been politically expedient for Mr. Obama to give Mr. Wagoner the pink slip. But politics in Washington have real world consequences. Before he goes too far, Mr. Obama should recognize the huge distance that G.M. has traveled and strike the right balance in respecting the role of the private sector. Unlike the insurance giant A.I.G. or Wall Street’s failed banks, General Motors consists of real factories where real people make real things. As it looks to micromanage an entire industry, let’s hope the administration doesn’t lose sight of the human side of things.

Much Bigger Deficits Seen in Budget Office Forecast
NYTIMES
By DAVID STOUT
March 21, 2009

WASHINGTON — President Obama’s budget proposals, if carried out, would produce a staggering $9.3 trillion in total deficits over the next decade, much more than the White House has predicted, the Congressional Budget Office said on Friday.

The office’s estimates of deficits in the fiscal years 2010 through 2019 “exceed those anticipated by the administration by $2.3 trillion.”

The deficits under the Obama plan would be $4.9 trillion more than the projected deficits if there were no changes in current laws and policies — what the nonpartisan budget office calls its baseline assumption.

The startling new figures have enormous implications, political as well as fiscal. They are certain to bring new expressions of alarm and dismay from deficit hawks on Capitol Hill, where the president’s $3.6 trillion budget proposal for the next fiscal year, which begins in October, has already stirred debate.

President Obama’s budget director, Peter R. Orszag, conceded in a news briefing on Friday that annual deficits of 4 to 5 percent of gross domestic product, as envisioned in the office’s report, are “ultimately not sustainable.”

But Mr. Orszag insisted that administration officials “remain confident” in what he called “the four key principles” of the president’s budget outline: health care reform, improvements in education, energy efficiency, and reducing the annual deficit in half by the end of the president’s first term from the extraordinary levels it has suddenly reached because of the bailout and stimulus spending this year.

Mr. Orszag said he was confident that those goals will all be accomplished in whatever budget resolution emerges after negotiations with Congress. Asked about recent statements by Senator Kent Conrad, the North Dakota Democrat who heads the Budget Committee, that the president’s spending plans might have to be adjusted downward, Mr. Orszag said it was always assumed that there would be negotiations. “It’s not like the process would have them just Xerox and vote on it,” he said.

As for the differences among various budget projections, Mr. Orszag attributed them in part to small percentages — such as divergent assumptions about the rate of economic growth — that, when applied to huge numbers, can produce eye-popping contrasts.

The new estimates will reignite the debate over whether the president’s spending plans are far too ambitious, given the state of the economy, or just what is needed to address systemic problems.

Senator Charles E. Grassley, Republican of Iowa and ranking minority member on the Finance Committee, as well as a senior member on the Budget panel, said Congress and the White House need to get the message that the new figures embody.

“People can afford only so much government spending, even for the worthiest-sounding causes,” he said in a statement.

The deficit is the year-by-year gap between what the government spends and the revenue it takes in. So even if annual deficits are cut, the overall national debt will continue to grow so long as there is no surplus. The debt now stands at around $11 trillion, with about $6.5 trillion owed to individuals, corporations and governments and other lenders, foreign or domestic, while about $4.3 trillion is owed to the funds for Social Security benefits, military and civil service pensions and other government programs.
Read about China, here.
Summers: 'Excess of Fear' Must Be Broken (as in  "we, the people, are not broke" - just the financial system)
NYTIMES
By THE ASSOCIATED PRESS
Filed at 11:04 a.m. ET
March 13, 2009

WASHINGTON (AP) -- President Barack Obama's top economic adviser says the crisis in the financial sector has led to an ''excess of fear'' that must be broken to reverse the economic downturn.

Lawrence Summers, the president's director of the National Economic Council, told a think tank gathering Friday that ''fear begets fear'' and that ''is the paradox at the heart of the financial crisis.''

He said an abundance of greed and an absence of fear precipitated the excesses that led to the meltdown that froze credit.

Summers said it was ''modestly encouraging'' that consumer spending appears to have stabilized after collapsing during the holiday season.

He spoke at the Brookings Institution.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) -- President Barack Obama is embracing a mantle of confidence-builder in chief. Whether he is meeting with his own economic advisers or worried business leaders, his message is meant to be calm and reassuring -- even in the wake of more bad economic news.

Obama will have another opportunity to assert his optimism after he meets Friday with Paul Volcker, the former Federal Reserve chairman who now guides the president's economic recovery advisory board. Volcker was preparing to brief Obama and his economic team on how the $787 billion stimulus package is working.

Speaking to a gathering of the nation's CEOs on Thursday, Obama defended his plans for pulling the economy out of a downward spiral, saying that his long-term view gives him reason to maintain optimism despite an uptick in unemployment and falling economic indicators.

''I've never bought into these Malthusian, woe, Chicken Little, the earth is falling. I tend to be pretty optimistic,'' said Obama, once a long-shot candidate for the White House. ''I wouldn't be here if I weren't pretty optimistic.''

The president boldly declared that the national crisis is ''not as bad as we think'' and that he has seen public opinion seesaw without logic.

''A smidgen of good news and suddenly everything is doing great. A little bit of bad news and 'Ooohh, we're down on the dumps,''' he said. ''And I am obviously an object of this constantly varying assessment.''

Obama disagreed with the choices.

''I don't think things are ever as good as they say, or ever as bad as they say,'' he added. ''Things two years ago were not as good as we thought because there were a lot of underlying weaknesses in the economy. They're not as bad as we think they are now.''

In Congress, Obama's budget plans were meeting resistance.

Sen. Kent Conrad, chairman of the Senate Budget Committee, called the track of future deficits ''unsustainable'' and singled out Obama's proposal for adding $634 billion in health care spending over the next 10 years.

''Some of us have a real pause about the notion of putting substantially more money into the health care system when we've already got a bloated system,'' said Conrad, D-N.D.

Richard Parsons, chairman of beleaguered Citigroup Inc., asked if Obama could offer some help in a national battle ''between confidence and fear.''

It was a similar question facing Obama's treasury secretary, Timothy Geithner, before Conrad's committee. Geithner encountered blunt questions about the administration's plans for shoring up the nation's banks. He reiterated the administration's goal to lay out a private-public partnership to make up to $1 trillion in financing available to help banks clear their books of toxic, mortgage-related assets that have led to a national credit freeze.

Geithner hinted more money might be required beyond the existing $700 billion financial rescue fund: ''We certainly can start with the resources we have.''

But Obama, to business leaders, said not all was lost.

''For all the, you know, angst that's been out there, you've got banking institutions that are still functioning and, lo and behold, making profits,'' Obama said.

Meanwhile, House Speaker Nancy Pelosi, D-Calif., played down talk that Democrats would consider a second economic stimulus bill.

The flurry of comments illustrated the complicated moving parts confronting Washington as the economy continues to decline, credit remains clogged and a new president advances broad and expensive initiatives. The money set aside to address those needs so far has been staggering -- $787 billion for an economic stimulus designed to save and create jobs, the $700 billion approved by Congress for the financial rescue package and hundreds of billions more through programs from the Federal Reserve Bank.

On top of that, Obama wants to overhaul health care, reduce greenhouse-gas pollution and undertake major changes in energy policy. He's projecting a federal deficit of $1.75 trillion this year, by far the largest in history, but says he can get it down to $533 billion by 2013.

''I am not choosing to address these additional challenges just because I feel like it, or because I'm a glutton for punishment,'' Obama told the Business Roundtable, a group of top business executives. ''I am doing so because they are fundamental to our economic growth and to ensuring that we don't have more crises like this in the future.''

A Rising Dollar Lifts the U.S. but Adds to the Crisis Abroad
NYTIMES
By PETER S. GOODMAN
March 9, 2009

As the world is seized with anxiety in the face of a spreading financial crisis, the one place having a considerably easier time attracting money is, perversely enough, the same place that started much of the trouble: the United States.

American investors are ditching foreign ventures and bringing their dollars home, entrusting them to the supposed bedrock safety of United States government bonds. And China continues to buy staggering quantities of American debt.

These actions are lifting the value of the dollar and providing the Obama administration with a crucial infusion of financing as it directs trillions of dollars toward rescuing banks and stimulating the economy, enabling the government to pay for these efforts without lifting interest rates.

And yet in a global economy crippled by a lack of confidence and capital, with lending and investment mechanisms dysfunctional from Milan to Manila, the tilt of money toward the United States appears to be exacerbating the crisis elsewhere.

The pursuit of capital suddenly seems like a zero sum game. A dollar invested by foreign central banks and investors in American government bonds is a dollar that is not available to Eastern European countries desperately seeking to refinance debt. It is a dollar that cannot reach Africa, where many countries are struggling with the loss of aid and foreign investment.

“Virtually all of the low-income countries are in very serious trouble,” said Eswar Prasad, a former official at the International Monetary Fund and a senior fellow at the Brookings Institution, the liberal-leaning research organization in Washington.

He went on: “This is the third wave of the financial crisis. Low-income countries are getting hit very hard. The flow of private capital to the emerging market has dried up.”

Private money invested in so-called emerging countries plunged from $928 billion in 2007 to $466 billion last year and is likely to fall to $165 billion this year, according to the Institute of International Finance.

Not that the United States is enjoying a great influx of money. Globally, investors are holding tight to cash and extracting it as quickly as they can from risky ventures.

In the United States, investments by foreigners have slowed markedly. But as Americans eschew foreign deals and keep their dollars at home, and as foreign central banks — especially China — buy Treasury bills, the United States is absorbing money that used to be scattered around the globe. And that is making money tighter elsewhere in the world.

The most immediate crisis appears to be in Eastern Europe, where investors borrowed exuberantly in foreign currencies — notably the euro and the Swiss franc — using those funds to build office towers and factories. Their debts are growing as their currencies decline in value, leading to bank losses and requiring government bailouts along with aid from the I.M.F..

Economists liken this episode to the financial crisis that assaulted much of Asia in the late 1990s. Then, as now, investors borrowed in foreign currencies. When investment left the region, local currencies plummeted, particularly in Thailand and Indonesia, setting off defaults and sowing job losses and poverty.

“Eastern Europe looks incredibly similar to Asia in the 1990s,” said Brad Setser, an economist at the Council on Foreign Relations in New York.

In one key regard, this crisis is more problematic: In the 1990s, the rest of the global economy was growing vigorously. Once danger abated, Asian countries were able to resume growth by selling goods to the United States, Europe, Japan and China.

Indeed, the very plunge in currencies that precipitated the crisis also provided a fix, making Thai, Malaysian, Indonesian and Korean goods that much cheaper on world markets.

This time, as many low-income countries again see their currencies fall, they are confronting a world beset by recession, in which demand for their products is weak and falling.

In a report released Sunday, the World Bank predicted that the global economy would shrink in 2009 for the first time in more than half a century and forecast that global trade would decline for the first time since the early 1980s.

“Depreciation isn’t enough now to offset the global contraction,” said Mr. Setser, noting that export powers like Japan, Korea, Taiwan and Brazil have had rapid declines in sales in recent months. “Everybody’s looking vulnerable. All commodity exporters are potentially subject to currency crises.”

Fears are growing that a much broader group of countries will plunge into trouble. Mr. Prasad’s list of potential danger zones includes Vietnam, the Philippines, Malaysia and Indonesia, as well as Pakistan and Ecuador.

In the Asian financial crisis, countries at the center of the storm were particularly vulnerable because the values of their currencies were mostly pegged to the dollar. Once central banks ran out of dollars to exchange for their own currencies, they lost their ability to influence the exchange rate. As a result, their currencies fell, turning already large debts into impossible debts.

Many more countries now allow their currencies to float with the whims of the market, removing this grim chain of events. Still, as economic activity slows and banks are stuck with larger losses, the damage could swell beyond the ability of governments to finance bailouts, said Kenneth S. Rogoff, a former chief economist at the I.M.F. and now a professor at Harvard.

“Debt collapses are going to wreak havoc with exchange rates,” Mr. Rogoff predicted. “A lot of countries in Europe are already on the brink of default.”

Only two years ago, many analysts were suggesting that the I.M.F. — created more than 60 years ago to rescue countries in financial distress — no longer had a clear reason to exist. Now, the fund is scrambling for contributions from developed nations to bolster its $350 billion war chest. Mr. Setser suggested it needed $1 trillion for all that might yet unfold.

Because worries are deeper nearly everywhere else, the United States and the dollar have essentially benefited from the worldwide panic. In the last year, the dollar has risen 13 percent against major foreign currencies after adjusting for inflation, according to Federal Reserve data. Foreign holdings of Treasury bills rose by $456 billion in 2008.

“It’s a huge safe haven effect,” said William R. Cline, a senior fellow at the Peterson Institute for International Economics in Washington. “The basic assumption that people are making is that the U.S. government will never default on its debt.”

As the dominant flavor of money used in business worldwide, the dollar has once again been affirmed as the global reserve currency.

Only last year, some analysts said that as the American economy sagged, foreign central banks would be reluctant to sink national savings into the dollar. That has been soundly debunked.

In ordinary times, the rise of the dollar would provoke American worries that it would crimp exports by making goods more expensive on world markets. But for American policy makers, what matters now is attracting enough buyers of American debt to finance the rescue plans, and if the dollar must rise along the way, that is a cost worth paying.

“The fact that we can still borrow at lower interest rates is saving us from much more severe adjustments,” Mr. Rogoff said. “We’re really still staring down an abyss.”

Op-Ed Columnist: The Inflection Is Near?
NYTIMES
By THOMAS L. FRIEDMAN
March 8, 2009

Sometimes the satirical newspaper The Onion is so right on, I can’t resist quoting from it. Consider this faux article from June 2005 about America’s addiction to Chinese exports:

FENGHUA, China — Chen Hsien, an employee of Fenghua Ningbo Plastic Works Ltd., a plastics factory that manufactures lightweight household items for Western markets, expressed his disbelief Monday over the “sheer amount of [garbage] Americans will buy. Often, when we’re assigned a new order for, say, ‘salad shooters,’ I will say to myself, ‘There’s no way that anyone will ever buy these.’ ... One month later, we will receive an order for the same product, but three times the quantity. How can anyone have a need for such useless [garbage]? I hear that Americans can buy anything they want, and I believe it, judging from the things I’ve made for them,” Chen said. “And I also hear that, when they no longer want an item, they simply throw it away. So wasteful and contemptible.”

Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: “No more.”

We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese ...

We can’t do this anymore.

“We created a way of raising standards of living that we can’t possibly pass on to our children,” said Joe Romm, a physicist and climate expert who writes the indispensable blog climateprogress.org. We have been getting rich by depleting all our natural stocks — water, hydrocarbons, forests, rivers, fish and arable land — and not by generating renewable flows.

“You can get this burst of wealth that we have created from this rapacious behavior,” added Romm. “But it has to collapse, unless adults stand up and say, ‘This is a Ponzi scheme. We have not generated real wealth, and we are destroying a livable climate ...’ Real wealth is something you can pass on in a way that others can enjoy.”

Over a billion people today suffer from water scarcity; deforestation in the tropics destroys an area the size of Greece every year — more than 25 million acres; more than half of the world’s fisheries are over-fished or fished at their limit.

“Just as a few lonely economists warned us we were living beyond our financial means and overdrawing our financial assets, scientists are warning us that we’re living beyond our ecological means and overdrawing our natural assets,” argues Glenn Prickett, senior vice president at Conservation International. But, he cautioned, as environmentalists have pointed out: “Mother Nature doesn’t do bailouts.”

One of those who has been warning me of this for a long time is Paul Gilding, the Australian environmental business expert. He has a name for this moment — when both Mother Nature and Father Greed have hit the wall at once — “The Great Disruption.”

“We are taking a system operating past its capacity and driving it faster and harder,” he wrote me. “No matter how wonderful the system is, the laws of physics and biology still apply.” We must have growth, but we must grow in a different way. For starters, economies need to transition to the concept of net-zero, whereby buildings, cars, factories and homes are designed not only to generate as much energy as they use but to be infinitely recyclable in as many parts as possible. Let’s grow by creating flows rather than plundering more stocks.

Gilding says he’s actually an optimist. So am I. People are already using this economic slowdown to retool and reorient economies. Germany, Britain, China and the U.S. have all used stimulus bills to make huge new investments in clean power. South Korea’s new national paradigm for development is called: “Low carbon, green growth.” Who knew? People are realizing we need more than incremental changes — and we’re seeing the first stirrings of growth in smarter, more efficient, more responsible ways.

In the meantime, says Gilding, take notes: “When we look back, 2008 will be a momentous year in human history. Our children and grandchildren will ask us, ‘What was it like? What were you doing when it started to fall apart? What did you think? What did you do?’ ” Often in the middle of something momentous, we can’t see its significance. But for me there is no doubt: 2008 will be the marker — the year when ‘The Great Disruption’ began.

Continuing Job Losses May Signal Broad Economic Shift
NYTIMES
By PETER S. GOODMAN and JACK HEALY
March 7, 2009

Another 651,000 jobs disappeared from the American economy in February, the government reported Friday, as the unemployment rate soared to 8.1 percent — its highest level since 1983.

The latest grim scorecard of contraction in the American workplace largely destroyed what hopes remained for an economic recovery in the first half of this year, and added to a growing sense that 2009 is probably a lost cause.

Most economists now assume that the American fortunes will not improve before near the end of the year, as the Obama administration’s $787 billion emergency spending program begins to wash through the economy.

“The current pace of decline is breathtaking,” said Robert Barbera, chief economist at the research and trading firm ITG. “We are now falling at a near record rate in the postwar period and there’s been no change in the violent downward trajectory.”

Indeed, the monthly snapshot of the national employment picture worsened an already abysmal picture as the government revised upward the number of jobs lost in December and January. The economy has now lost at least 650,000 jobs for three consecutive months, the worst decline in percentage terms over that length of time since 1975.

Since the recession began, the economy has eliminated roughly 4.4 million jobs, and more than half of those positions — some 2.6 million — disappeared in the last four months.

The acceleration has convinced some economists that, far from an ordinary downturn after which jobs will return, the contraction under way reflects a fundamental restructuring of the American economy. In crucial industries — particularly manufacturing, financial services and retail — many companies have opted to abandon whole areas of business.

“These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

For American policy makers, such a reality poses fundamental challenges to the traditional response to hard times. For decades, the government has reacted to economic downturns by handing out temporary unemployment insurance checks, relying upon the resumption of economic growth to deliver needed jobs. This time, argues Mr. Silvia, the government needs to put a much greater emphasis on retraining workers for careers in other industries.

In the auto industry, for example annual American car sales have dropped from some 17 million a year a few years ago to 9 million now. Even if sales increase to 10 or 12 million, that still leaves a lot of unneeded factories.

“That’s a lot of workers that are not coming back,” Mr. Silvia said. “That’s a lot of steel, a lot of rubber, a lot of suppliers that are not coming back. It’s really challenging to us as a society.”

President Obama responded to the figures by declaring that “this country has never responded to a crisis by sitting on the sidelines and hoping for the best” and asserting that government has a huge role to play in bringing out the best in the American people.

“I know that throughout our history we have met every great challenge with bold action and big ideas,” he told police academy graduates in Columbus, Ohio, on Friday. “That’s what’s fueled a shared and lasting prosperity.”

Mr. Obama cited the unemployment figures as further evidence that those who opposed “the very notion that government has a role in ending the cycle of job loss at the heart of this recession” are on the wrong side of history. (The president’s stimulus package was approved by the House with no support from minority Republicans, whose leader, Representative John A. Boehner, is from Ohio.)

In February, another 168,000 manufacturing jobs were eliminated, bringing losses over the last year to 1.2 million. In Michigan, where the troubles of the auto industry have been particularly traumatic, the unemployment rate is at 10.6 percent, the highest of any state.

“The people who do what I do in the Detroit area are a dime a dozen,” said Kim Allgeyer, 46, a machine toolmaker in Westland, Mich., who was laid off in January from a company that makes manufacturing assembly lines for the Detroit automakers. Since then, he has failed to find another full-time job, subsisting on day labor and one weeklong stint for contractors. He is thinking of moving to Louisiana or Mississippi to seek work as a shipbuilder.

“Who’s going to put me to work?” he asked. “Where’s the work at? It’s just a great big black hole.”

Much the same can be said for financial services, which gave up another 44,000 jobs in February. During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other exotic flavors of investments. That industry is unlikely to return to anything close to its former shape.

Retailers are shuttering stores as the era of easy money fueled by rising house prices and abundant credit gives way to a new period in which millions of households are being forced to confine their spending to their paychecks, limiting their trips to the mall. The economy lost 39,500 retail jobs in February, and has eliminated more than 500,000 in the last year.

The United States has been neglecting job training programs for decades, argues Andrew Stettner, deputy director of the National Employment Law Project in New York. In current dollars, the nation devoted the equivalent of $20 billion a year on job training in 1979, while spending only $6 billion last year.

The stimulus spending bill includes $4.5 billion in additional monies for job training. But under current programs, many of those eligible for training are given vouchers that cover only a semester or two at community colleges, while careers in growth industries like biotechnology and health care typically require two-year degree programs.

“We have to seriously look at fundamentally rebuilding the economy,” Mr. Stettner said. “You’ve got to use this moment to retrain for jobs.”

Friday’s report reinforced the degree to which the economy is being assailed at once by panic in the financial system, falling household spending power and plunging real estate prices, with growing numbers of companies resorting to wholesale layoffs after months of merely declining to hire.

“There’s been no place to hide,” said Stuart Hoffman, chief economist at PNC Financial in Pittsburgh. “Everybody in every industry has lost jobs or is feeling insecure about whether they’re going to keep their jobs or how their company’s going to do."

Some economists suggested the substantial increase in layoffs reflected the anxiety that has gripped the financial system since last fall when major Wall Street institutions failed, notably the giant investment bank Lehman Brothers. Borrowing costs have spiked for American companies, making even healthy businesses reluctant to expand and hire. Perhaps even more decisive, the collapse last fall has left many companies spooked.

“There was a huge increase in uncertainty and a huge hit to confidence which caused a large rethinking among businesses,” said Ethan Harris, co-head of United States economics research. “That caused a big downshift in employment.”

In similar crises, like the stock market crash of 1987 and the near collapse of the enormous hedge fund Long Term Capital Management in 1998, dysfunction continued to grip markets for about six months, Mr. Harris said, suggesting that this episode may be nearing its end.

But history also shows that when fear lifts, the economy returns not to normalcy but to wherever it was when the crisis began, Mr. Harris said. That means that even if order is restored to the financial system, the economy will still be staring at a recession.

And order cannot be restored, many economists say, until the Obama administration creates and executes a credible plan to remove the bad loans choking the balance sheets of financial institutions.

“The 800-pound gorilla is whether we face up to the bad loans in the financial system,” said Alan Levenson, chief economist at the trading firm T. Rowe Price in Baltimore.
In Revision, G.D.P. Shrank 6.2% at End of 2008
By THE ASSOCIATED PRESS
February 28, 2009

WASHINGTON (AP) — The government said Friday that the economy shrank at a staggering 6.2 percent pace at the end of 2008, the worst showing in a quarter-century. Consumers and businesses ratcheted back spending, plunging the country deeper into recession.

The Commerce Department figure shows the economy sinking much faster than the 3.8 percent annualized drop for the October-December quarter first estimated by the government last month.

It also was a considerably weaker performance than the 5.4 percent annualized decline economists expected.

Top Republicans Rip Into Obama Budget Plan
NYTIMES
By REUTERS
Filed at 2:32 p.m. ET
February 26, 2009

WASHINGTON (Reuters) - Congressional Republicans, having vowed to return to the conservative principle of limited government, denounced on Thursday President Barack Obama's $3.55 trillion budget as wasteful.

While Obama's fellow Democrats control Congress, he may need the support of fiscal conservatives in his own party, and possibly some moderate Republicans, to pass any budget.

"I have serious concerns with this budget, which demands hard-working American families and job creators turn over more of their hard-earned money to the government to pay for unprecedented spending increases," said Senate Republican Leader Mitch McConnell.

Obama's first budget proposal, for the 2010 fiscal year, includes steps to end the deepening recession while also enacting a bold agenda to expand healthcare, upgrade schools, move the U.S. toward energy independence and rollback tax cuts for the rich. It also foresees a whopping $1.75 trillion deficit for the 2009 fiscal year, but would reduce that to $533 billion by 2013.

"I think we just ought to admit we're broke. We can't continue to pile debt on the backs of our kids and grandkids," said House Republican Leader John Boehner.

Senator Judd Gregg, who recently withdrew as Obama's nominee to head the Commerce Department, citing differences over policy, offered a stinging rebuke of the president's budget plan.

"The budget outline shows a half-hearted attempt to reduce the trillion-dollar deficits we face, largely through more tax hikes that will only hurt the economy, when it should take this opportunity to exercise aggressive spending restraint," said Gregg, the top Republican on the Budget Committee.

BUSH-ERA DEFICITS

Republicans have long touted themselves as champions of limited government, but surrendered that claim in approving a series of big-deficit budgets during the administration of Obama's predecessor, Republican George W. Bush.

Republicans vow to return to their conservative principles as they seek to rebound from last November's election when Democrats won control of both the White House and Congress for the first time since 1992.

House Speaker Nancy Pelosi, a California Democrat, praised Obama's spending priorities, saying, "At long last a budget that is a statement of our national values."

Pelosi also tweaked Republicans for what she saw as their new found interest in limited government.

"Perhaps ... they (the Republicans) have amnesia," Pelosi said, noting that with Bush at the helm they turned budget surpluses into deficits, in part through significantly higher government spending.

Boehner acknowledged Republicans spent too much while they were in charge.

"But if you begin to look at what's happened over the last month and what's being proposed in this budget, the president is beginning to make President Bush look like a piker," Boehner said.

Obama and Republicans have promised to try to find common ground, but success may be elusive. Just three Republicans voted for his stimulus package earlier this month, and the party was able to force changes through their ability to stop the legislation with Senate procedural roadblocks.

"Republicans want to work with the president and Democrats in Congress on a responsible budget," Boehner said. "But this budget makes clear that the era of big government is back."

Budgets cannot be subject to such procedural hurdles, but Obama will likely need bipartisan support to win passage of resulting individual spending bills.
Obama Budget Sees $1.75 Trillion Deficit
NYTIMES
By JACKIE CALMES and ROBERT PEAR
February 27, 2009

President Obama’s budget proposal for 2010 projects a stunning deficit of $1.75 trillion for the current fiscal year, which began five months ago, reflecting a shortfall of more than $1 trillion as the fiscal year began, plus the costs of bank bailouts, the first wave of spending from the newly enacted stimulus plan and the continuing costs of the wars in Iraq and Afghanistan.

The administration, as it had announced, will try to cut that amount sharply by 2013, when Mr. Obama’s first term ends, to $533 billion, even as it escalates spending on crucial priorities.

“There are times when you can afford to redecorate your house,” Mr. Obama said on Thursday morning, “and there are times when you have to focus on rebuilding its foundation.”

His administration will attempt to close the large fiscal gap even while starting a major health-care initiative meant to substantially extend coverage; to do so, it foresees increasing taxes on the wealthiest Americans and using revenues from a new program: selling carbon credits to manufacturers as part of a cap-and-trade plan meant to slow climate change.

Further savings would come from such items as a proposal to phase out government payments to crop producers making more than $500,000. Additional revenues are posited from a tightening of tax-code enforcement.

The budget projects slightly lower spending on the Iraq and Afghanistan wars to $130 billion in the 2010 fiscal year, then a much larger drop beginning in the 2011 fiscal year, when Mr. Obama wants to withdraw combat forces from Iraq. The basic military budget in 2010 would be $534 billion in 2010, according to officials who described its outlines before the formal release of the proposal.

The deficit could grow this year if the economy worsens significantly and a new infusion of capital into distressed banks is ordered; the administration has estimated that this might call for adding $250 billion to the cost of the bailout already approved by Congress.

The new proposal for the coming fiscal year and beyond contains many ambitious and costly programs that would have to be approved by Congress, including some that Republicans and fiscal hawks are likely to oppose.

The tax proposal to help pay for health care, coming after recent years in which wealth has become more concentrated at the top of the income scale, introduces a politically volatile edge to the Congressional debate over Mr. Obama’s domestic priorities.

The president will also propose, in the 10-year budget he is to release Thursday, to use revenues from the centerpiece of his environmental policy — a plan under which companies must buy permits to exceed pollution emission caps — to pay for an extension of a two-year tax credit that benefits low-wage and middle-income people.

The combined effect of the two revenue-raising proposals, on top of Mr. Obama’s existing plan to roll back the Bush-era income tax reductions on households with income exceeding $250,000 a year, would be a pronounced move to redistribute wealth by reimposing a larger share of the tax burden on corporations and the most affluent taxpayers.

Administration officials said Mr. Obama would propose to reduce the value of itemized tax deductions for everyone in the top income tax bracket, 35 percent, and many of those in the 33 percent bracket — roughly speaking, starting at $250,000 in annual income for a married couple.

Under existing law, the tax benefit of itemizing deductions rises with a taxpayer’s marginal tax bracket (the bracket that applies to the last dollar of income). For example, $10,000 in itemized deductions reduces tax liability by $3,500 for someone in the 35 percent bracket.

Mr. Obama would allow a saving of only $2,800 — as if the person were in the 28 percent bracket.

The White House says it is unfair for high-income people to get a bigger tax break than middle-income people for claiming the same deductions or making the same charitable contributions.

The officials said the resulting increase in revenues, estimated at $318 billion over 10 years, would account for about half of a $634 billion “reserve fund” that Mr. Obama will set aside in his budget to address changes in the health care system. The other half would come from proposed cost savings in Medicare, Medicaid and other health programs.

In a document summarizing its proposals, the White House said it would finance coverage for the uninsured in part by “rebalancing the tax code so that the wealthiest pay more.”

Among the most challenging areas for reducing spending is in the Pentagon’s accounts, which have been running at record levels as the wars drag on, the military expands, and the costs of building new weapons escalates.

While the budget outline requests a small increase in basic defense spending, to $534 billion, the Obama administration has made it clear that it intends to shift some of the money from huge cold war-style weapons systems to smaller programs focused on fighting insurgents in Iraq and Afghanistan and new threats to the nation’s cybersecurity.

Internal debate over which programs to cut is still so intense that Defense Secretary Robert M. Gates has taken the unusual step of requiring even the members of the Joint Chiefs of Staff to sign agreements promising not to leak the details. But some clues have emerged, and defense consultants say it seems clear that expensive missile defense systems and parts of the Army’s vast modernization effort will be cut back. Some also say that plans for a new Navy destroyer are likely to be scrapped.

James McAleese, who advises defense companies, said he expects $2 billion to be slashed from the $9 billion that had been budgeted for the missile-defense programs, which Mr. Obama questioned during the presidential campaign. Mr. McAleese said the Army should be able to hold onto its financing for a network of robots and other sensors to provide troops with better combat intelligence. But, he said, the Army’s plans for new ground vehicles are likely to be curtailed or delayed, with the Obama administration opting instead to upgrade existing tanks and armored vehicles.

Mr. McAleese said a compromise could be struck over the future of one of the Pentagon’s marquee programs — the F-22, the world’s most expensive fighter jet. Now that the Air Force has dropped its requirement for 381 of the planes, Mr. McAleese and other analysts say the president could approve 60 more of the planes – at a cost of $9 billion -- over the next 3 years as a hedge against possible rivals like China, bringing the total to 243. But after Mr. Obama said in a speech this week that “we’re not paying for cold war-era weapons we don’t use,” Winslow T. Wheeler, another defense analyst, said that “could mean bad news for the F-22.”

On the environmental front, the administration is proposing a comprehensive overhaul of the approach to containing climate change.

Mr. Obama’s blueprint, which will project spending and revenues for the next decade, will flesh out the president’s thinking on his energy plans both to cap the emissions of gases, particularly carbon dioxide, that are blamed for climate change and to spur development of nonpolluting energy alternatives.

The budget will show the government beginning by 2012 to collect billions of dollars in revenues from selling permits to businesses that emit the polluting gases, assuming the president’s energy initiative becomes law as soon as this year, officials said.

Because utilities and other businesses would presumably pass on their costs to customers, Mr. Obama will propose to use most of the government’s revenues from the permits to finance an extension of the new “Making Work Pay” tax credit beyond the two years covered in the $787 billion economic recovery plan that was just enacted.

That tax relief, the administration will argue, will offset households’ higher costs for utilities and other products and services from businesses’ passing on their permit expenses.

That tax credit annually will provide $400 to low-wage and middle-income workers or $800 to couples; Mr. Obama would like to increase those figures to $500 and $1,000. The credit phases out for those with incomes above $75,000 a year and for couples with incomes of more than $150,000; no benefit would go to individuals with more than $100,000 income and couples with $200,000.

The tax credit will begin showing up in the form of lower withholding for eligible workers beginning April 1.

The remainder of the projected revenues from the permits will finance Mr. Obama’s campaign promise for $15 billion a year over 10 years to subsidize research and development of alternative energy sources, officials said. The stimulus package included a multibillion-dollar down payment to develop a national electricity grid to harness and distribute energy from such sources, including wind farms.

Behind the numbers in Mr. Obama’s first budget is one of the most far-reaching domestic agendas in years, and at a time when the president and Congress are already grappling with an economic crisis worse than any in decades. The environmental permits would not take effect until 2012, at which point the administration expects the economy to have recovered. Similarly, some of the tax increases would not take effect until 2011.

Democratic Congressional leaders promised to push the agenda, which parallels their own. “By the end of this year, I want to do something significant dealing with health care,” the Senate majority leader, Harry Reid of Nevada, told reporters.

The tax proposals, however, could galvanize Republican opposition and give conservatives a concrete target for taking on Mr. Obama, who despite his political strength could find some members of his own party reluctant to embrace tax increases.

Senator Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, who has been drafting a health plan, predicted in an interview that the Senate could pass legislation by its August recess. Mr. Baucus acknowledged that “there has to be revenue” to offset the costs of expanded coverage initially, but he did not endorse the proposal for limiting wealthy taxpayers’ deductions.

“There will be lots of options to pay it, not necessarily that one,” Mr. Baucus said.

He would not say what revenue options he would support. But he said tax increases of some kind would not prevent some Senate Republicans from aligning with Democrats to pass a health plan.

In the House, the Republican leader, Representative John A. Boehner of Ohio, telegraphed his side’s opposition to any tax increases.

“Everyone agrees that all Americans deserve access to affordable health care,” Mr. Boehner said in a statement, “but is increasing taxes during an economic recession, especially on small businesses, the right way to accomplish that goal?”

Mr. Boehner likewise criticized Mr. Obama’s cap-and-trade emissions permits proposal, saying, “Cap-and-trade is code for increasing taxes and killing American jobs, and that’s the last thing we need to do during these troubled economic times.”

To finance health care reform, administration officials suggested to senior aides in Congress on Wednesday that revenues could be raised by ending the policy of excluding the value of employer-provided health insurance from income taxes.

But the officials emphasized that the administration was not advocating that option, which not only is anathema to some in organized labor and business but also conflicts with Mr. Obama’s position in last fall’s presidential campaign.

The administration is proposing a number of other politically contentious ways of offsetting the costs of the health care initiative. Mr. Obama wants to require drug companies to give bigger discounts, or rebates, to Medicaid, the health program for low-income people.

Drug makers now must provide Medicaid with a discount equal to at least 15.1 percent of the average manufacturer price for a brand-name product. Mr. Obama wants to require discounts of at least 22.1 percent. Pharmaceutical companies have strenuously resisted such proposals in recent years.

Mr. Obama will also propose cutting Medicare payments to health insurance companies that provide comprehensive care to more than 10 million of the 44 million Medicare beneficiaries. He says he can save $175 billion over 10 years with a new competitive bidding system, under which payments to private Medicare Advantage plans would be based on an average of the bids they submit to Medicare.

Economic Scene: Like Having Medicare? Then Taxes Must Rise
NYTIMES
By DAVID LEONHARDT
February 25, 2009

Toward the end of Monday’s meetings on fiscal responsibility at the White House, Senator Kent Conrad stood up and produced a little bolt of honesty. “Revenue is the thing almost nobody wants to talk about,” said Mr. Conrad, the chairman of the Senate Budget Committee. “But I think if we’re going to be honest with each other, we’ve got to recognize that is part of a solution as well.”

Mr. Conrad’s frankness was delivered in the cryptic language of budget experts, and many people might have missed the point. So allow me to translate:

Your taxes are going up.

They will probably go up in the coming decade, and the increase will be permanent. For a half-century, federal taxes have remained fairly constant relative to the size of the American economy — equal to about 18 percent of gross domestic product. But the 18 percent era has to end soon.

It won’t end because President Obama is some radical tax and spender, either. It will end because of a basic economic reality.

Americans have made it clear that they want a certain kind of government, one that can field a strong military and also maintain popular programs like Medicare. Yet we are not paying nearly enough taxes to maintain those programs. Even major changes to the health care system — the single most important step for closing the budget gap — will not close it entirely. Taxes must rise, too.

This is a point on which serious Democrats and serious Republicans agree, even if they do so with euphemism. “We are on an unsustainable path,” says Peter Orszag, Mr. Obama’s budget director. Judd Gregg, the ranking Republican on the Senate Budget Committee, has said, “Revenues are going to have to go up.” Douglas Holtz-Eakin and Dan Crippen, budget experts who advised the McCain campaign, have quietly acknowledged the same.

Fortunately, the coming tax increase does not have to be economically ruinous. Despite all the scary stories you’ve heard, the evidence that higher taxes necessarily cripple an economy is somewhere between thin and nonexistent.

When over the past 60 years did the American economy grow fastest? The 1950s and 1960s, when the top marginal tax rate was a now-unthinkable 90 percent. And when over the past generation did the economy grow fastest? The late 1990s, when President Bill Clinton briefly took federal taxes to 20 percent of the G.D.P.

The real uncertainty is how, in the current political climate, Mr. Obama will manage to persuade people that taxes must go up. In his speech on Tuesday night, he didn’t even try. But he doesn’t have forever to do so.

Eventually, the foreign investors lending the federal government billions of dollars every week — to make up for the current gap between taxes and spending — will need a reason to believe that those loans will be repaid. Otherwise, they will begin demanding much higher interest rates. That could create a new financial crisis.

“Something that’s unsustainable, like a dysfunctional relationship, can go on longer than you expect,” Mr. Orszag has said, “and then end faster and messier than you think.”

•

In his new book, “The Tyranny of Dead Ideas,” Matt Miller nicely lays out the history of American taxes. He begins the story with Adolf Wagner, a 19th-century German economist who predicted that taxes would rise as societies became wealthier. The idea became known as Wagner’s Law.

“As people grew more affluent,” writes Mr. Miller, a journalist and a consultant for McKinsey & Company, “they’d want more of what only government could provide — a strong military, public order, good schools and assorted welfare benefits, services that private citizens would have trouble arranging for on their own.”

The tax increases to pay for these activities do bring a cost: they reduce people’s incentive to work. But history has shown that this cost isn’t enormous. Taxes rose sharply in the first half of the 20th century, starting from just a few percentage points of the G.D.P., and the country still prospered. So long as the government spends the money well, the benefits from taxes — security, education, health — can far outweigh the costs.

To be sure, the federal government is not currently spending its tax revenue very well. In particular, it’s wasting billions of dollars each year on health care that doesn’t make people healthier. Unless Medicare’s policies are changed, this waste will lead government spending to rise to 32 percent of the G.D.P. over the next three decades, from 20 percent in recent years.

But an overhaul of the health care system won’t be enough to bring that number down to the current level of taxes. That’s the whole point of Wagner’s Law. Over time, societies will spend more of their resources on services like medical care, since they can already afford basic material comforts. And these services are precisely the sort of service that fall to the government.

Think of it this way: A tax increase isn’t so much a barrier to a society becoming richer as it is a result of a society becoming richer.

To the extent that Mr. Obama has talked about raising taxes, he has focused on households that make at least $250,000 a year. And their taxes will certainly need to go up. In the last three decades, as the pretax income of the top 1 percent of earners has soared, their total federal tax rate has fallen to 31 percent, from 37 percent, according to the Congressional Budget Office.

But the problem can’t be solved just by taxing the rich. That top 1 percent pays only about one-quarter of federal taxes. Once the recession ends, taxes on the not-so-rich will need to rise, too.

There are many ways this could happen. Congress could pass a consumption tax, which would bring the side benefit of encouraging people to save more. Or it could raise tax rates. Or it could get rid of the various subsidies for housing, which create an incentive to overinvest in housing. (How’s that working out, by the way?)

But none of these ideas would be nearly as painless as the niceties of tax jargon sometimes imply. In the end, the ideas aren’t just about “tax simplification” or a “flatter, fairer system.” They’re about raising taxes.

So how will it happen? The best bet, I think, is a jujitsu strategy: someone will figure out how to convert weakness into strength.

We find ourselves facing long-term budget deficits largely because we don’t pay enough heed to the future. Paying less tax in 2009 is concrete. Leaving our children with a solvent government is less so.

But this same short-sightedness can be turned on itself. In 1981, President Ronald Reagan named Alan Greenspan to head a bipartisan commission charged with closing Social Security’s deficit. At the commission’s recommendation, Congress increased Social Security tax rates and raised the retirement age. The rub was that most of the changes didn’t take effect until future years. The last of them still haven’t taken effect.

Mr. Greenspan’s reputation isn’t what it used to be. But he was onto something here. Increasing tomorrow’s taxes is much easier than increasing today’s.

Why Can’t Cerberus Foot the Bill?
NYTIMES Editorial
February 23, 2009

When General Motors and Chrysler asked Washington for more money last week they took very different approaches. In exchange for an extra $17 billion from taxpayers — on top of the $13 billion it had gotten since December — G.M. said it would reduce costs by shuttering plants, cutting brands and slashing 47,000 jobs, about a fifth of its remaining work force.

For its $5.3 billion — on top of the $4.3 billion it has received since December — Chrysler offered little more than an assurance that it has already cut costs and accomplished most of what it had to do to become a valuable, viable company. It offered to trim production by a paltry 100,000 units — leaving it with capacity to make almost one million vehicles more than it will sell this year — on the questionable assumption that demand, and its market share, will bounce back next year.

Chrysler said the only reason it was back asking for more money so soon was that the car market was worse than it had expected two months ago.

This cavalier approach to the public purse raises a very big question. If Chrysler is really on track for a turnaround and all it needs is some financing to get over a bad patch in sales and debt markets, why doesn’t Cerberus Capital Management, which owns 80 percent of the company, put up the money itself? Why should taxpayers have to take the risk? That’s what private equity funds like Cerberus are supposed to do.

Cerberus and Daimler, which retained a stake in Chrysler, have promised to convert $2 billion in loans to Chrysler into equity, which should help reduce its debt. But Cerberus said giving fresh money would violate its fiduciary duty to investors, breaking company rules limiting how much it can commit to any given investment.

We suspect these rules would be more pliant if Cerberus deemed Chrysler to be a good deal.

It seems the secretive private-equity fund is willing to gamble on Chrysler’s survival with the taxpayer’s dime, but not its own.

Chrysler warns that if it doesn’t get more money from Washington it will have to declare bankruptcy.

Our argument for bailing out Detroit has been based on the notion that the collapse of the American carmakers would devastate an economy already reeling from huge job losses.

The case for saving Chrysler is certainly the weakest. It is the smallest of the Big Three, employing just more than 40,000 hourly workers. As President Obama and his aides consider whether to supply new funds, they should carefully weigh all of the arguments.

We do not minimize the personal suffering of Chrysler’s employees if the company goes under. We urge the White House to carefully analyze how wide the pain would spread. But we are somewhat skeptical about the claim in Chrysler’s brief to the Treasury that allowing it to go into bankruptcy could risk its liquidation, at the cost of hundreds of thousands and perhaps millions of jobs at Chrysler, its dealers and suppliers.

It also said a bankruptcy would cost the government more than this bailout. Given the state of the debt market, it said the government would likely end up providing the bulk of the so-called debtor-in-possession financing — an estimated $24 billion — which allows a company to remain in operation and pay its bills while it gets through an orderly bankruptcy.

Still, there may be other arguments for saying no to Chrysler. It might finally shake G.M., its creditors and the autoworkers’ union out of their complacency, forcing them to reach an agreement to reduce the beleaguered automaker’s liabilities. Saying no might even make Cerberus reconsider and put up some cash of its own.

ONE WAY TO UNDERSTAND AMERICAN POLITICS IS TO CHECK THE VIEW FROM ACROSS THE POND...
17 February 2009, I-BBC

Barack Obama at the House Democrats Conference in Williamsburg, Virginia
Mr Obama has made the stimulus plan his priority
Q&A: Obama stimulus plan
US President Barack Obama has signed into law a slimmed-down economic stimulus plan worth about $787bn (£548bn) aimed at boosting the US economy.

The signing came after weeks of political wrangling which saw the original bill altered by Congress.

Its passage into law followed warnings from the president that the US could face an economic disaster if radical action was not taken.

What is in the stimulus plan?

The stimulus plan includes a combination of measures designed to maximise its political support, including tax cuts, additional spending on infrastructure and aid to the US states, which are having their own budget difficulties.

Senate Majority Leader Harry Reid said the deal "bridged differences" between an $820bn House version of the bill and a different $838bn version approved by the Senate.

The earlier version approved by the House of Representatives, of which one-third was made up of tax cuts, included a $500 cut in income tax for individuals.

Another big portion was money to help states close their budget gaps and avoid laying off state employees, as well as helping them pay more benefits to the less well-off.

Finally, there were additional funds to invest in infrastructure projects, such as repairing roads and bridges, improving home insulation, and repairing classrooms.

The plan agreed by Senate negotiators has more tax cuts - about 36% of the package - and a smaller amount of aid to states, a Senate aide told Reuters news agency.

A "Buy American" clause which originally sought to ensure that only US iron, steel and manufactured goods were used in projects funded by the bill has been watered down, with a promise the US will respect its international trade obligations.

However, critics at home and overseas - including ministers in Europe, Brazil and China - continue to express strong concern that the provision may encourage protectionism and sour trade relations.

Why has such a big stimulus plan been proposed?

The US economy is entering its sharpest downturn since before World War II, according to many economists.

Supporters of the measures say that without the stimulus, the downturn that began at the end of 2007 could last well into 2010. The slump has already cost three million jobs.

President Obama has made passing the stimulus package his priority, saying that millions more jobs could be lost during the recession.

As US interest rates are already approaching zero, it is clear that other policies must be considered to revive the economy.

Why was the original plan delayed?

The plan was delayed by partisan wrangling between Democrats and Republicans in Congress, and differences between views in the House of Representatives and the Senate as to what should be in the bill.

The first version of the bill was passed in the House of Representatives without receiving a single vote from the Republican side. But it was then modified in the Senate, where the Democrats needed Republican support to get it through.

The Democrats have a majority, but they fell two votes short of the 60 required to ensure the Republicans could not block the bill with a filibuster.

To gain the support of moderate Republicans, Democrats had to accept a mixture with more tax cuts and less money to help states and local governments.

And the Senate added $35bn to stimulate house purchase and $11bn to reduce the cost of buying a car.

Who supported the revised stimulus plan?

It was backed by 246 Democrats in the House of Representatives. Seven Democrats and all 176 Republicans voted against.

The package received just three Republican votes in the Senate, but that was enough to under Congress rules to stop the Republican party using blocking tactics to delay the plan, and it passed 60-38.

Will it work?

According to the independent Congressional Budget Office (CBO), the stimulus package is likely to reduce the severity of the recession, although not eliminate its impact entirely.

The CBO also says that although only a portion of the stimulus will be spent in 2009, the bulk of the money will be spent by the end of 2010, when the effects of recession are still likely to be lingering.

But much will depend on the responses of individuals and government officials.

Tax cuts will be effective only if people spend rather than save the extra income they receive.

And infrastructure projects will need to be up and running quickly to make an impact on unemployment.

How will it be paid for?

The stimulus plan will be funded by borrowing money - pushing the US budget deficit, which is already projected to rise above $1 trillion this year.

A $569bn deficit was recorded for the first four months of the fiscal year that began last October, a record for that period, the Treasury Department said.

The government says that all the measures in the stimulus plan are temporary and it is committed in the long term to bringing the budget back into balance.

But if financial markets become sceptical of that commitment, they could push up the cost of government borrowing.

And future generations will have to pay the borrowing costs of the additional debt for many years to come.



UBS in Stamford, we think...upper right.

Settlement Reached in UBS Tax Case
NYTIMES
By LYNNLEY BROWNING
August 1, 2009

Switzerland and the United States reached an agreement in principle on Friday to settle out of court a closely watched case that seeks to force the Swiss banking giant UBS to turn over the names of wealthy American clients suspected of tax evasion, a lawyer for the government said.

Regarding the issues, “we expect to be able to resolve them in the coming week,” Stuart Gibson, a Justice Department prosecutor, said during a conference call with Judge Alan S. Gold of United States District Court in Miami. Mr. Gibson said a final deal would be reached by Aug. 7.

Judge Gold said that he would cancel a trial that was scheduled to begin Monday.

UBS and the Swiss government are battling efforts by the Justice Department to force it to disclose the names of 52,000 wealthy American UBS clients suspected of offshore tax evasion. In February, UBS paid $780 million to settle criminal charges that it helped wealthy Americans evade taxes on nearly $20 billion hidden in offshore accounts.

Secretary of State Hillary Rodham Clinton is scheduled to meet with the Swiss foreign minister, Micheline Calmy-Rey, in Washington on Friday to discuss the matter. The issue has unsettled the Swiss banking industry and escalated into a diplomatic incident between the two sides.
Swiss Vow to Block UBS From Providing Data to U.S.
NYTIMES
By DAVID JOLLY
July 9, 2009

PARIS — The Swiss government said Wednesday that it was prepared to seize U.B.S. client data rather than allow the bank to hand it over to the United States to settle a tax case.

U.B.S. has refused a demand from U.S. authorities that it turn over the names of 52,000 American clients, arguing that to do so would be illegal under Swiss banking secrecy laws and would open it to prosecution at home. The U.S. Justice Department in February sued U.B.S., saying it suspected the bank of helping wealthy Americans hide billions of dollars in secret offshore accounts.

“Switzerland makes it perfectly clear that Swiss law prohibits U.B.S. from complying with a possible order by the court in Miami to hand over the client information,” the Swiss Department of Justice and Police said Wednesday in a statement on its Web site, a day after it made a filing to the same effect in the U.S. District Court in Miami. Therefore, “all the necessary measures should be taken to prevent U.B.S. from handing over the information on the 52,000 account holders demanded in the U.S. civil proceeding,” it added.

The Swiss government will issue an order explicitly prohibiting U.B.S. from handing over client information “if circumstances require,” it said.

U.B.S., the largest Swiss bank, is under great pressure to reach an agreement. The bank has already paid $780 million and turned over the names of more than 250 clients to avoid prosecution on allegations that it defrauded the Internal Revenue Service. Its soured investments, many on American subprime mortgages, have cost it $53 billion in write-downs, sending it to taxpayers for a bailout. U.B.S. officials were not immediately available for comment Wednesday.

“On the one side you have the U.S. government wanting to get back some missing taxes and on the other you have a bank that is admitting some responsibility,” said Nicolas Michellod, an analyst in Zurich with Celent, a financial research firm. “Eventually, I’m sure we’ll see U.B.S. paying a fine.”

U.B.S. last month raised about $3.5 billion in new capital, and Mr. Michellod suggested the bank might have been provisioning for just such an eventuality.

Doris Leuthard, the Swiss economy minister, said Tuesday in Washington that U.B.S. had made mistakes and would have to “pay a price” to reach a deal.

The dispute, which has strained relations between the United States and Switzerland, takes place amid wider efforts by countries including France, Germany and the United States to increase transparency in tax havens like the Channel and Jersey Islands, Switzerland and Luxembourg.

Switzerland distinguishes between tax fraud and tax evasion, and does not consider tax evasion to be a crime.

The Swiss agreed in March to abide by Article 26 of the Organization for Economic Cooperation and Development’s tax convention, which requires national tax authorities to exchange information on request if there is probable cause to suspect tax evasion. But the government has also said that it “has no intention of relinquishing bank secrecy.”

In Paris, the O.E.C.D. said Wednesday that one of those countries, Luxembourg, had now "substantially implemented the internationally agreed standard" of transparency in the exchange of tax information. While Luxembourg's work is not finished, Angel Gurría, the organization's secretary general said, “The process is working and I look forward to other countries following the example that Luxembourg has set.”
US Steps Up Pressure on UBS in Bank Secrets Case
NYTIMES
By THE ASSOCIATED PRESS
Filed at 3:02 p.m. ETFebruary 19, 2009

WASHINGTON (AP) -- A government lawsuit Thursday seeks the identities of tens of thousands of possible U.S. tax cheats who hid billions of dollars in assets at the Swiss-based bank UBS AG. A defiant Swiss president pledged to maintain his country's bank secrecy laws.

In the suit filed in Miami, the Obama administration wants UBS to turn over information on as many as 52,000 U.S. customers who concealed their accounts from the U.S. government in violation of tax laws.

''At a time when millions of Americans are losing their jobs, their homes, and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civil and legal duty to pay taxes,'' the acting assistant attorney general, John DiCicco, said in a statement.

A deal announced Wednesday provides access to about 250 to 300 UBS customers who used Swiss bank secrecy laws to hide assets. To avoid prosecution, UBS agreed to pay $780 million. The bank's chairman, Peter Kurer, said UBS accepted ''full responsibility'' for helping its U.S. clients conceal assets from the Internal Revenue Service.

But that does not mean the bank is about to fork over information on thousands of accounts.

On Wednesday, the government claimed in court papers there were close to 20,000 U.S. clients who hid assets through the UBS program. A day later, the number had climbed to 52,000. U.S. officials offered no immediate explanation for the revised estimate, but it was another sign they are raising the pressure on the Swiss bank.

''This shows the big fight is yet to come,'' said George Clarke, a tax lawyer based in Washington who is not involved in the UBS case.

For one, UBS said that except for the 250 to 300 U.S. customers, it will fight to keep all others names private, arguing Swiss secrecy laws shield them.

Hours before the new suit, Switzerland's president, Hans-Rudolf Merz, said his country will not relent in defending its treasured tradition of confidential bank accounts.

''Banking secrecy, ladies and gentlemen, remains intact,'' Merz told reporters.

Merz said Swiss authorities handed over the files on the 250 to 300 American clients of who are suspected of tax fraud. The transfer took place in the middle of the night in the Swiss capital, Bern, just ahead of a U.S. deadline for Swiss cooperation, he said.

But U.S. officials want much more. According to Thursday's filing, the thousands of accounts in question held about $14.8 billion in assets in the past decade.

Merz, UBS and Switzerland's financial regulator insist that Thursday's handover was not a retreat from the principle of banking secrecy because it involved only a small number of files linked to tax fraud -- and not tax evasion.

Under a 75-year-old law, Swiss banking secrecy can only be lifted when individuals are deemed to have deliberately defrauded tax authorities, as opposed to failing to declare all assets. That is a distinction only Switzerland and other tax havens make.

Experts said the decision to bypass the courts and give up customers before exhausting all legal options seriously endangers a pillar of the banking industry that helped transform Switzerland into one of the world's richest countries.

Lawyers in Zurich, Switzerland, sued the head of Switzerland's financial services authority FINMA, which authorized the transfer of files.

It is now for a federal judge in Miami to decide whether U.S. courts can force a bank to violate Swiss bank secrecy laws and provide the account information.

According to U.S. officials, an acquisition in 2000 of a U.S. company brought UBS a host of new American clients. The bank then set about to evade new reporting requirements for those clients. To do so, UBS executives helped U.S. taxpayers open new accounts in the names of sham entities.

The clients, in turn, filed false tax returns that omitted the income they earned in their Swiss accounts, according to the court papers.

Newly Poor Swell Lines at Food Banks Nationwide
NYTIMES
By JULIE BOSMAN
February 20, 2009

MORRISTOWN, N.J. — Cindy Dreeszen and her husband live in one of the wealthiest counties in the United States. They have steady jobs, his at a movie theater and hers at a government office. Together, they earn about $55,000 a year.

But with a 17-month-old son, another baby on the way, and, as Ms. Dreeszen put it, “the cost of everything going up and up,” the couple went to a food pantry this month to ask for some free groceries.

“I didn’t think we’d even be allowed to come here,” said Ms. Dreeszen, 41, glancing around at the shelves of fruit, whole-wheat pasta and baby food. “This is totally something that I never expected to happen, to have to resort to this.”

Once a crutch for the most needy, food pantries have responded to the deepening recession by opening their doors to what one pantry organizer described as “the next layer of people,” a rapidly expanding group of child-care workers, nurse’s aides, real estate agents and secretaries who are facing a financial crisis for the first time. Over all, demand at food banks across the country increased by 30 percent in 2008 from the previous year, according to a survey by Feeding America, which distributes more than two billion pounds of food every year. And while pantries usually see a drop in demand after the holiday season, many in upscale suburbs this year are experiencing the opposite.

Here in Morris County (median household income, $82,173), the Interfaith Food Pantry added extra hours this month after seeing a 24 percent increase in customers and 45 percent increase in food distributed in November, December and January compared with the same period last year.

In Lake Forest, Ill., a wealthy Chicago suburb, a pantry in an Episcopal church that used to attract people from less affluent towns nearby has been flooded with people who have lost jobs. In Greenwich, Conn., one pantry organizer reported a “tremendous” increase in demand for food since December, with out-of-work landscapers and housekeepers as well as real estate professionals who have not made a sale in months filling the line.

And amid the million-dollar houses of Marin County, Calif., a pantry at the San Geronimo Valley Community Center last month changed its policy to allow people to stop by once a week instead of every other week, since there are so many new faces in line alongside the regulars.

“We’re seeing people who work at banks, for software firms, for marketing firms, and they’re all losing their jobs,” said Dave Cort, the executive director. “Here we are in big, fancy Marin County, but we have people who are standing in line with their eyes wide open, thinking, ‘Oh my God, I can’t believe I’m here.’ ”

The demand is not limited to pantries, which distribute groceries from food banks, supermarket surplus and individuals who donate through church or school can drives. The number of food-stamp recipients was up by 17 percent across New York State, and 12 percent in New Jersey, in November from a year before. When a mobile unit of the Essex County welfare office, as part of a pilot program to distribute food-stamp applications in other counties, stopped in Shop-Rite parking lots recently in Morris County, it was swamped.

“If one of our richest counties has people signing up for food stamps who have never signed up before, that indicates the depth of this problem with the lack of food,” said Kathleen DiChiara, executive director of Community FoodBank of New Jersey. “It’s the canary in the coal mine.”

Experts said that chronically poor people tend to adapt to the periods where money is scarce by asking for support from friends or tapping into social services, but that working-class people who suddenly lose jobs or homes often find themselves at sea, unsure how to navigate the system or ashamed to seek help.  It is those people who, over the last several months, have started arriving in growing numbers at food pantries, which are often the first tentative step for those whose incomes are too high to qualify for government assistance. (Many pantries have a no-questions policy, though they might determine how many bags of groceries a customer can receive by the number of people in their household.)

“These are people who never really had to ask for help before,” said Brenda Beavers, human services director for the Salvation Army in New Jersey, which dispenses emergency food supplies at 30 pantries throughout the state. “They were once givers and now they’re having to ask for assistance.”

In Morristown, Rosemary Gilmartin, executive director of the Interfaith Food Pantry, has over the last several months watched a steady stream of new faces pushing shopping carts among the cardboard boxes on metal shelves in a former nursing home. In 2008, the pantry gave away 620,000 pounds of food, a 24 percent increase from 2007.

Along with fresh apples and Nature’s Path Organic Soy Plus cereal, Ms. Gilmartin, who began volunteering at the pantry 13 years ago, gives children “Dora the Explorer” books. In the past few months, she has found herself fielding more inquiries about social service programs like the Earned Income Tax Credit from people who clearly had never before hovered this close to the poverty line.

“They look shellshocked,” she said. “I’ve had people walk back out and say, ‘I can’t do this.’ ”

She recalled one recent walk-in, a television sound engineer who lost his house to foreclosure. “His life just went reee-eeer,” Ms. Gilmartin said, twirling her finger in a downward circle.

Usually, the pantry distributes food at two locations several mornings a week, including most Saturdays, and on the first and third Wednesday evenings of the month. But this month, Ms. Gilmartin decided to also open on the second Wednesday because she has been having trouble accommodating everyone.  By 5:30 p.m. on that Wednesday, a half-hour before the pantry was to open, a line of nearly two dozen had formed. Once inside, people were escorted individually through the shelves of low-fat mozzarella cheese, dried beans and Pepperidge Farm chocolate chunk cookies, where a few paused — often reluctantly — to explain what had brought them.

“A deadbeat husband and a loss of a job,” said one woman in her 20s, who spoke on condition of anonymity because she did not want her friends to know she had been visiting the pantry. It was her second visit. The first time, she could barely get out of her car. “Let me put it this way — it took me a long time to come here,” the woman said as she added a bag of lentils to her cart. “I felt like a loser. I felt like a total lowlife.”

A woman wearing gold earrings and a red Vera Bradley bag over her shoulder, who is in her 50s and gave only her first name, Louise, said she had recently lost her job and has been struggling to pay her bills.

“I can understand why people would be embarrassed to come here,” she said, as she loaded her groceries into the trunk of her silver Chevy Malibu. “I guess I am a little embarrassed.”

Joan Verba, 53, said she had been coming up short financially since she quit her job as an accountant after her husband became ill with cancer. When her husband died, leaving her and a 14-year-old son, she put off plans to re-enter the work force.

“The job market is so bad right now,” she said. “My son eats 24-7. I just need this to supplement my food bills.”

Her mother, Carol Morrison, stood nearby. “I’m just here for moral support,” she said, inspecting the shelves. “And nosiness.”

TWO VIEWS OF THE SAME SUBJECT...

These glasses may be half full, half empty, three-quarters of either, but only one in six looks clear enough to drink!

The 'stimulus' for unemployment

By ALAN REYNOLDS
Last Updated: 1:45 AM, November 17, 2009
Posted: 12:56 AM, November 17, 2009

Why did the unemployment rate rise so rapidly -- from 7.2 per cent in January to 10.2 percent in October? It was clearly the administration's "stimulus" bill -- which in February provided $40 billion to greatly extend jobless benefits at no cost to the states.

As Larry Summers, the president's top assistant for economic policy, noted in July, "the unemployment rate over the recession has risen about 1 to 1.5 percentage points more than would normally be attributable to the contraction in GDP." And the rate has moved nearly a percentage point higher since then, even though GDP increased. Countries with much deeper declines in GDP, such as Germany and Sweden, have unemployment rates far below ours.

Summers knows why the US rate is so high. He explained it well in a 1995 paper co-authored with James Poterba of MIT: "Unemployment insurance lengthens unemployment spells."

That is: When the government pays people 50 to 60 percent of their previous wage to stay home for a year or more, many of them do just that.

And the stimulus bribed states to extend benefits -- which have now been stretched to an unprecedented 79 weeks in 28 states and to 46 to 72 weeks in the rest. Before mid-2008, by contrast, only a few states paid jobless benefits for even a month beyond the standard 26 weeks.

When you subsidize something, you get more of it. Extending unemployment benefits from 26 to 79 weeks was guaranteed to leave many more people unemployed for many more months.  And longer unemployment translates to higher unemployment rates -- because the relatively small numbers of newly unemployed are added to stubbornly large numbers of those who lost their jobs more than six months ago.

Until benefits are about to run out, many of the long-term unemployed are in no rush to make serious efforts to find another job -- or to accept job offers that may involve a long commute, relocation or disappointing salary and benefits.

(Incidentally, the "mercy" of longer benefits does no long-term favors: The literature is quite clear that a prolonged period on unemployment tends to depress income for years after you finally go back to work.)

The median length of unemployment hovered around 10 weeks for six months before February's "stimulus" plan. Since half the unemployed found jobs within 10 weeks, more than half of those counted among the unemployed in one month would no longer be included three months later. In other words, more frequent turnover among the unemployed held down monthly unemployment.

But after February, with jobless benefits stretched out to 46 to 79 weeks, the median duration of unemployment nearly doubled, reaching 18.7 weeks by October.  The unemployment rate has not been rising because of growing numbers of newly jobless people. Indeed, initial claims for unemployment benefits are way down. And the number of unfilled private job openings increased by 9.3 percent from the end of April to the end of September.

The unemployment rate has been rising because unprecedented numbers of those who became unemployed six to 19 months ago are remaining "on the dole" until their benefits are nearly exhausted.

Summers isn't the only administration economist who understands this very well. Assistant Secretary of the Treasury for Economic Policy Alan Krueger co-authored a 2002 survey of the topic with Bruce Meyer of the University of Chicago. They found that "unemployment insurance and worker's compensation insurance . . . tend to increase the length of time employees spend out of work." Last August, Krueger and Andreus Miller of Princeton also found that "job search increases sharply [from 20 minutes a week to 70] in the weeks prior to benefit exhaustion."

Similarly, Meyer found "the probability of leaving unemployment rises dramatically just prior to when benefits lapse." In other words: If you extend benefits to 79 weeks, many people won't find an acceptable job offer until the 76th or 78th week.

Meyer and Lawrence Katz of Harvard estimated that "a one-week increase in potential benefit duration increases the average duration of the unemployment spells . . . by 0.16 to 0.20 weeks." Apply that formula to the 20-to-53-week extension we've seen, and you get an average of three to ten more weeks spent on unemployment. And, sure enough, the average unemployment spell has risen by seven weeks this year -- to nearly 27 weeks by October.

Katz also found that extended benefits, by making it easier for workers to wait and see whether they get their old jobs back, also makes it easier for employers to delay recalling laid-off workers. Just before unemployment benefits run out, Katz found "large positive jumps in both the recall rate and new job finding rate."

The White House recently made the mysterious claim of having "saved" 640,329 jobs, at a cost of only $531,250 per job ($340 billion).

In reality, the evidence is overwhelming that the February stimulus bill has added at least two percentage points to the unemployment rate. If Congress and the White House hadn't tried so hard to stimulate long-term unemployment, the US unemployment rate would now be about 8 percent and falling rather than more than 10 percent and -- rising.

Job Losses Are Scarier Now
NYTIMES
Floyd Norris
February 9, 2009, 2:49 pm

I’ve been looking at the unemployment numbers that came out Friday, and a couple of things stand out.  Even though unemployment is rising rapidly — meaning there are a lot of people losing their jobs — long-term unemployment is also up a lot. Here are a couple of comparisons to illustrate that.

Highest overall unemployment rate in each downturn:
Current: 7.6%
2001-03: 6.3%
1990-92: 7.8%
1980-82: 10.8%
1973-75: 9.0%

Highest rate of unemployment for more than 15 weeks, as percentage of labor force:
Current: 3.0%
2001-03: 2.5%
1990-92: 2.9%
1980-82: 4.2%
1973-75: 3.1%

Over all, the jobless rate is below the early-1990s peak, but the rate of longer-term unemployment is higher.

Here is another interesting change in the nature of unemployment. In the early recessions of the post-World War II period, a much larger proportion of the unemployed were laid off from jobs that they could expect to get back when the economy recovered. Now, that proportion is down sharply.

But the percentage of unemployed who lost jobs, with no expectation of retaining the old job, is at the highest level since the government started collecting that data in 1967. It is reasonable to think those people are more worried, and less willing to spend, than are those who feel sure it is just a matter of time before they get back to their old jobs.

Here’s the current breakdown of the unemployed, by cause:

Lost job, other than layoff, 48.5%
Layoff, 12.6%
Left job voluntarily, 8.0%
Returning to labor force, 24.1%
New to labor force, 6.8%

(It is worth noting that the word layoff is used in its traditional sense — a temporary job loss until business improves. Many companies now use the word layoff to mean any firing, or at least any firing that is not for cause. Those “laid off” workers are counted in these numbers as “other than layoff.”)

The cyclical peak for the proportion of unemployed who lost their jobs for reasons other than layoffs were:

2001-03: 43.6%
1991-92: 44.9%
1980-82: 43.2%
1973-75: 36.3%

This is a secular change in the economy, and one that helps to explain why consumer fears can be much greater than they were when the overall unemployment rate was higher.

US income gap widens as poor take hit in recession
YAHOO
Published on 9/29/2009

WASHINGTON (AP) _ The recession has hit middle-income and poor families hardest, widening the economic gap between the richest and poorest Americans as rippling job layoffs ravaged household budgets.

The wealthiest 10 percent of Americans - those making more than $138,000 each year - earned 11.4 times the roughly $12,000 made by those living near or below the poverty line in 2008, according to newly released census figures. That ratio was an increase from 11.2 in 2007 and the previous high of 11.22 in 2003.

Household income declined across all groups, but at sharper percentage levels for middle-income and poor Americans. Median income fell last year from $52,163 to $50,303, wiping out a decade's worth of gains to hit the lowest level since 1997.

Poverty jumped sharply to 13.2 percent, an 11-year high.

"No one should be surprised at the increased disparity," said Richard Freeman, an economist at Harvard University. "Unemployment hurts normal workers who do not have the golden parachutes the folks at the top have."  Read full story, based upon Census "rolling survey" here.
Obama's salary cap for bailout executives could affect few; $500,000 limit not retroactive to companies that already have funds 
DAY
By Ben Feller     
Published on 2/5/2009 
 
Washington - Assailing out-of-touch corporate pay and perks, President Barack Obama on Wednesday slammed a salary cap on top executives from companies that want bailouts - but it's a limit that could end up thinning the wallets of only a small number of people.

Obama's action comes as many Americans, while hanging on for economic life, have watched Wall Street high-flyers receive big-dollar bonuses even as their firms draw public help for survival. The outcry has grown with each report of a bailed-out company that plans to buy a jet or hold a Las Vegas retreat.

The president aimed for a target - extravagant corporate behavior on the public dime - that fit the mood of the day. His $500,000 salary limit on executives from a limited number of companies was part of a broader assault on what he called a “reckless culture” that has helped wreck the economy.

”We don't disparage wealth. We don't begrudge anybody for achieving success. And we believe that success should be rewarded,” Obama said. “But what gets people upset - and rightfully so - are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers.”

Top business leaders often receive annual packages worth several million dollars, so a $500,000 compensation cap is striking.

Yet in practical terms, the intervention into the corporate world is also limited.

The compensation cap covers distressed companies seeking special bailouts but would not apply retroactively to those that already have received them. What's more, consultants on executive pay say the cap will probably apply only to a few executives - not big-time traders, brokers and salespeople who routinely earn whopping pay packages. And there are sure to be efforts to exploit loopholes as the new rules start to take hold.

Had the salary cap been in place when the $700 billion bailout program began, it probably would have applied only to executives at five companies that have received so-called exceptional help: Chrysler LLC, General Motors Corp., American International Group Inc., Bank of America Corp. and Citigroup Inc.

Going forward, the compensation cap would also apply to other banks that receive more broadly available aid - but they could get around it by disclosing their plans and involving shareholders in the decision. Some 360 companies have received such aid. The cap does not apply to them retroactively, either.

By taking on executive pay and other corporate spending - including lofty severance packages - Obama sought to get his White House back on track with an issue that resonates with the public.

His move came one day after the withdrawal of the nomination of Tom Daschle, his friend and choice to head the Health and Human Services Department. Daschle got tripped up over, among other things, overlooking the taxes he owed for the personal use of a car and driver that was paid for by a company he did consulting work for - the kind of problem that elicits no sympathy from the public.

Obama's new plan is broad.

Beyond imposing tighter rules on companies that get emergency bailouts, it also requires more openness and limits for healthy banks that tap into public money to expand lending. And it envisions broad reforms in how employees are paid at any public financial institution, even ones that don't get federal help.

The new treasury secretary, Timothy Geithner - confirmed last week despite controversy over his own tax problems - said the raft of new policies is intended to restore the public's trust.

”There is a deep sense across this country that those who were not responsible for this crisis are bearing a greater burden than those who were,” he said in announcing the details with Obama.

The half-million-dollar salary cap would apply to institutions that negotiate agreements with the Treasury Department for “exceptional assistance.” That means those companies that get their own specialized help, beyond what is generally available through other financial shore-up programs.

Such firms could pay senior executives more than $500,000 only by using stock that could not be sold until the government gets paid back. Administration aides said trying to impose the salary cap retroactively would pose both legal and practical problems.

As for a bigger category of generally healthy institutions that get federal help, they would also face the $500,000 limit for senior executives. But in their case, the cap can be waived with full public disclosure and a nonbinding shareholder vote.

Timothy J. Bartl, vice president and general counsel for the Center On Executive Compensation, said the president's actions involve a special situation given the government's role bailing out troubled institutions. “We do not view it as something that ought to be extended beyond this circumstance,” he said.

On Capitol Hill, some lawmakers had been pushing for even stricter caps.

The executive-pay limits are a first step, to be followed by the unveiling next week of a sweeping new framework for spending what remains of the $700 billion bailout fund that Congress created last year.

Obama chose blunt language, chiding a “culture of narrow self-interest,” golden parachute severance packages that “we've all read about with disgust,” and the “reckless culture and quarter-by-quarter mentality” that he said has wreaked havoc. He has been particularly angered by a report last week that employees on Wall Street received more than $18 billion in bonuses last year while their eroding financial sector got a massive bailout from taxpayers.

The firms getting “exceptional assistance” from the government would face stronger rules on employing deceptive practices; stricter limits on golden parachutes; more disclosure on their salary plans and a requirement that their boards adopt policies on luxury spending items.

The other firms getting public aid will face a version of those same rules.

The administration also will propose long-term compensation ideas even for companies that don't receive government assistance, Obama said. Among the ideas will be requiring top executives at financial institutions to hold stock for several years before they can cash out. 

G.M. and Chrysler Are Closing Jobs Banks
NYTIMES
By NICK BUNKLEY
January 29, 2009 - day ahead again.

DETROIT — The era when factory workers who lost their jobs could still collect nearly their full salary will be over by next week at General Motors and Chrysler, the two automakers that have borrowed billions of dollars from the federal government to avoid bankruptcy.

G.M. on Wednesday said that it would eliminate its jobs bank, a program often held up by critics as a symbol of Detroit’s inefficiency, as of next Monday. Chrysler ended its jobs bank last Monday.

The United Automobile Workers union agreed to let the carmakers terminate the programs as one of several concessions offered by its leadership to help win support for the so-called bridge loans. The union also said it would delay required payments into a new retiree health care trust and has begun talks with the companies about other ways to cut costs in its labor agreements.

G.M. said about 1,600 of its workers are currently in the jobs bank. They will officially be laid off and begin collecting about 72 percent of their full-time pay, through a combination of state unemployment benefits and supplemental benefits from G.M.

“This was a valuable tool to have a work force standing by that was familiar with how to work in a factory environment,” a G.M. spokesman, Tony Sapienza, said Wednesday. “Unfortunately that business model wasn’t sustainable over the long term. As part of the bridge loan requirements we’re being required to look at our severance policies and adopt something closer to what’s customary out in the workplace.”

Traditionally, G.M. workers in the jobs bank collected nearly their full, regular pay, as long as they reported to their plant or another designated location or they performed volunteer work each workday. But last month, G.M. cut the pay rate to 85 percent and allowed workers to stay home.

The Ford Motor Company has not announced changes to its jobs bank. Ford is the only Detroit automaker not to borrow money from the government, asserting that it is healthier than its competitors.

As recently as December, the U.A.W. said there were nearly 1,500 workers in Ford’s jobs bank and roughly 700 in the program at Chrysler.

In 2005, before several rounds of buyout and early retirement programs thinned its ranks, G.M.’s jobs bank covered about 5,000 workers, costing the company about $500 million a year, according to analysts’ estimates. Foreign-based automakers, like Toyota and Honda, have no such provisions.

Under the terms of their loans, G.M. and Chrysler have until Feb. 17 to negotiate cost reductions with the union. They must submit plans demonstrating their future viability by March 31 to avoid being forced into bankruptcy.

The U.A.W.’s president, Ron Gettelfinger, said last week that he thought there would be a plan by the February deadline, though he would like to have more time for discussions with the companies. He also said the union should be able to roll back concessions that it makes now once the companies are profitable again and can pay off their debt to the government..

“If there’s an entrance, there should be an exit,” Mr. Gettelfinger said. “We don’t want to make sacrifices that we can never recoup, if the companies can recoup.”

But it is unclear whether the jobs banks could ever return.
Detroit Calls Emissions Proposals Too Strict
NYTIMES
By NICK BUNKLEY
January 27, 2009

DETROIT — Automakers said Monday that they were working toward President Obama’s goal of reducing fuel consumption, but rapid imposition of stricter emissions standards could force them to drastically cut production of larger, more profitable vehicles, adding to their financial duress.

Mr. Obama ordered the government on Monday to reconsider whether California and other states could regulate vehicle emissions to help control greenhouse gas emissions, a reversal of a position taken by the Bush administration.

The announcement came as General Motors and Chrysler are borrowing billions of dollars from the government to avoid bankruptcy, and as Toyotaprepares to report its first operating loss in 70 years. Shortly after the president spoke, General Motors said it would cut 2,000 jobs at plants in Michigan and Ohio because of slow sales.

The California regulations, if enacted today, “would basically kill the industry,” said David E. Cole, chairman of the Center for Automotive Research, an independent research organization in Ann Arbor, Mich. “It would have a devastating effect on everybody, and not just the domestics.”

But Mr. Cole said he thought major modifications to the proposed standards were likely and that action was still “a long ways off,” giving the carmakers more time to overcome their financial problems and develop the technologies needed to sell a full lineup of compliant vehicles.

Right now, carmakers say they would be able to sell only their smallest, most fuel-efficient cars — models like the Toyota Prius, a hybrid whose sales have fallen sharply since gas prices began dropping last fall — because once-popular vehicles like pickup trucks made by Ford and G.M. are not efficient enough.

“I want clean air and clean water just like the next guy,” said Erich Merkle, an independent automotive analyst in Grand Rapids, Mich. “But in the real world, there would be consumer outrage with the fact that they’re limited to maybe two vehicles and there’s nothing there that would meet their family’s needs.”

Environmental advocates who have long challenged the automakers’ opposition to the proposed California standards say such regulations will help the companies produce vehicles that consumers want.

Failing to invest in reducing emissions and increasing efficiency will only prolong Detroit’s problems, said David Doniger, climate policy director for the Natural Resources Defense Council.

“I think this is the pathway to their survival,” Mr. Doniger said. “If carmakers are going to survive in a world of volatile oil prices and global warming, they have to be making more efficient vehicles. When the economy comes back and people start buying cars again, they’re going to expect that gas prices are going to go up, and they’re not going to want the gas hogs that they used to want. Consumers’ tastes have changed in terms of what’s cool.”

One concern automakers have with states regulating tailpipe emissions is that keeping up with a hodgepodge of standards would be difficult. They expressed support Monday for the ideal of cutting emissions but want their engineers to be concerned with meeting just one set of requirements nationally.

The Alliance of Automobile Manufacturers, which represents 11 carmakers, said it favored “a nationwide program that bridges state and federal concerns and moves all stakeholders forward, and we are ready to work with the administration on developing a national approach,” in a statement from the group’s chief executive, Dave McCurdy.

G.M., the only Detroit automaker to issue its own response Monday, said it was “working aggressively on the products and the advance technologies that match the nation’s and consumers’ priorities to save energy and reduce emissions.” But the company also emphasized the need for “a comprehensive policy discussion that takes into account the development pace of new technologies, alternative fuels and market and economic factors.”

Automakers are operating in the worst market since the early 1980s. New vehicle sales fell nearly 19 percent in 2008 and are universally expected to be even lower in 2009.

Representative John D. Dingell, Democrat of Michigan, who has long been one of the Detroit automakers’ strongest allies in Washington, praised the president’s attitude toward global warmingand expressed hope that the administration would act only after studying the effect that “setting a patchwork of different emission standards” would have.

“President Obama and I both share the goal of energy independence and a cleaner environment for our children and grandchildren,” Mr. Dingell said in a statement. “We have a unique opportunity in history to address the issue of global climate change and we must take bold and balanced action.”

Mr. Cole, the Center for Automotive research chairman, said he believed Congress would ensure Detroit would be able to live with any new standards.

Micro and macro economics!

Killing two birds with one stone department:  which would you rather have in a winter emergency? (Photos: Toyota (top); Daniel Steger/OpenPhoto.net)

Prius: It’s Not Just a Car, It’s an Emergency Generator
NYTIMES
By Kate Galbraith
December 23, 2008, 9:58 am

The Prius has a new use, and it does not involve driving. The Harvard Press — which serves the Massachusetts town of Harvard as opposed to the university — reported that the car’s battery helped keep the lights on for some locals during the recent ice storms.

The newspaper reports that John Sweeney, a resident who lost power, “ran his refrigerator, freezer, TV, woodstove fan, and several lights through his Prius, for three days, on roughly five gallons of gas.”

Said Mr. Sweeney, in an e-mail message to The Press: “When it looked like we were going to be without power for awhile, I dug out an inverter (which takes 12v DC and creates 120v AC from it) and wired it into our Prius.”

According to the newspaper, “the device allowed the engine to run every half hour, automatically charging the car battery and indirectly supplying the required power.”

In fact, this development, which comes at a tough time for Toyota, which makes the Prius, may not be not as strange as it sounds. Mr. Sweeney’s tinkering is along the lines of the “smart grid” technology that many utility executives and other experts say lies in our future. The idea is that the battery of an electric car — a plug-in, in most smart-grid scenarios — can feed power to the electricity grid when the grid needs it.

Even President-elect Barack Obama has endorsed this idea, as seen toward the end of this YouTube clip in which he said: “We’re going to have to have a smart grid if we want to use plug-in hybrids — then we want to be able to have ordinary consumers sell back the electricity that’s generated.”

Mr. Sweeney, out of necessity, got there first.
Downturn Will Test Obama’s Vision for an Energy-Efficient Auto Industry
NYTIMES
By MICHELINE MAYNARD
December 21, 2008

DETROIT — President-elect Barack Obama leveled a stern warning at General Motors and Chrysler last week after the federal government promised them billions to help them survive: “The auto companies must not squander this chance to reform bad management practices.”

Once he takes office, the bailout will give him a tool to prod the industry to change, but it will also test his resolve as he pushes it in new directions.  Mr. Obama, after all, has been thinking out loud about the future of the American automobile industry for years, well before his presidential campaign began. He co-sponsored two bills in 2006, during his second year as a United States senator — one to raise fuel economy standards, and the other to encourage the use of alternative fuels.  His writings and speeches on the auto industry suggest a keen interest in finding ways, including new technology, to improve the fuel efficiency of the cars and trucks that Americans drive.

But with Detroit in a fragile financial state, it is unclear how many compromises he will have to make in pursuing his agenda for the auto industry, as he juggles other priorities like providing a stimulus program for the broader economy. The United Automobile Workers union, which backed Mr. Obama, will want a say in the changes he envisions for the automakers.  And the car companies, which have long lead times to develop products, will need sales of big trucks and sport utility vehicles, which may pick up again as gas prices fall, to bring in much-needed revenue.

By all accounts, Mr. Obama’s personal interest in the industry stems from his interest in environmental issues, and he has a ready resource about how the industry operates in Martin Nesbitt, a close friend who worked in financial planning at G.M.  Mr. Obama delivered his clearest prescription to the automobile industry in May 2007, when he appeared at Cobo Convention Center in downtown Detroit before an audience of 2,000 auto industry executives.  In a speech to the Economic Club of Detroit, Mr. Obama said the Big Three had done little to lessen the nation’s dependence on foreign oil and needed to improve their vehicles’ fuel efficiency.

“The auto industry’s refusal to act for so long has left it mired in a predicament for which there is no easy way out,” Mr. Obama said.

He added, “For years, while foreign competitors were investing in more fuel-efficient technology for their vehicles, American automakers were spending their time investing in bigger, faster cars. And whenever an attempt was made to raise our fuel efficiency standards, the auto companies would lobby furiously against it.”

He suggested initiatives similar to the legislation he had introduced in Congress, and which he emphasized in his campaign. They included a 4 percent annual increase in the Corporate Average Fuel Economy standards, equal to about one mile per gallon a year, and incentives for the companies to develop more fuel-efficient cars.  Mr. Obama said he would provide up to $3 billion to Detroit auto companies and their suppliers to retool their factories in order to produce smaller, more fuel-efficient vehicles. Still, with gasoline prices falling again, it is unclear whether consumer demand will shift so dramatically to small cars.

Congress later included up to $25 billion for the companies for the retooling. General Motors and Chrysler initially tried to tap that money for their depleted cash reserves, before receiving assistance from the Bush administration.  Environmentalists say the speech in Detroit was a sign of commitment to prodding the auto companies to build more fuel-efficient vehicles.

“I think he gets it,” said Daniel Becker, director of the Safe Climate Campaign for the Center for Auto Safety, a Washington consumer advocacy group. “The speech at Econ Club was a brave one, but a thoughtful one.”

Mr. Obama, who received standing ovations at the beginning and conclusion of his speech, said he wanted to be blunt with the Detroit companies on their home turf.

“I’m making this proposal here today because I don’t believe in making proposals in California and giving a different speech in Michigan,” he said. His goal was “not to destroy the industry, but to help bring it into the 21st century,” he said.

A year earlier, in his 2006 book, “The Audacity of Hope,” Mr. Obama wrote that “fuel-efficient cars and alternative fuels like E85, a fuel formulated with 85% ethanol, represent the future of the auto industry. It is a future American car companies can attain if we start making some tough choices now.”

He also did not spare the U.A.W. from criticism.

“For years,” Mr. Obama wrote, “U.S. automakers and the U.A.W. have resisted higher fuel-efficiency standards because retooling costs money, and Detroit is already struggling under huge retiree health-care costs and stiff competition.”

With Detroit in crisis, there is little room for hesitation after Mr. Obama reaches office.  His Treasury Department will have to assess whether the union and the companies have met the requirements of the loans given them by the Bush administration, which legal experts say Mr. Obama could easily amend.  But he also has said that he wants to protect American jobs.

Soon after President Bush finished announcing the terms of the $17.4 billion in assistance for the auto companies on Friday, the U.A.W. union was calling on Mr. Obama, for whom they rallied support in important Midwestern states, to revise it.  They wanted him to discard a requirement that auto workers agree to wage and benefit concessions that would bring their compensation in line with that paid nonunion workers.

Mr. Obama was advised in the bailout discussions by a former Federal Reserve chairman, Paul A. Volcker, who was at the Fed when Congress approved assistance to Chrysler in 1979; Austan Goolsbee, a professor of economics at the University of Chicago; and Joshua Steiner, a former Treasury official with a background in restructuring.

Brian Johnson, a veteran industry analyst with Barclays Capital, said the outgoing Treasury secretary, Henry M. Paulson Jr., had “tied up this money with some string.” He added that the “U.A.W. is going to request it to be untied, and the question is whether Obama will untie the string.”

On Friday, Mr. Obama reiterated in a statement that all parties in the industry should have to give up something so the auto companies could revive and change.

“There are going to be some painful steps that have to be taken,” he said later at a news conference.

No matter the steps Mr. Obama takes, he is likely to seek a range of opinions. That is what happened in June 2006, when he invited a group of environmental leaders to meet with him to discuss legislation that would increase fuel economy.  At the time, none at the meeting knew that Mr. Obama planned a presidential bid, said Mr. Becker, who was then representing the Sierra Club.  He said that Mr. Obama told them: “If you guys think this is helpful, then I want to go ahead and push this. But if you don’t think it’s helpful, I’ll drop it. I don’t have to do this.”

Nonetheless, Mr. Becker, a longtime critic of Detroit’s environmental policies, said he did not believe that Mr. Obama would force the car companies to submit to drastic measures.

“I don’t think they need to be afraid of Obama. He’s not going to say ‘by next Tuesday, everything has to be 40 miles per gallon,’ ” Mr. Becker said. “But in 10 years? Maybe.”

Bush Approves $17.4 Billion Auto Bailout
NYTIMES
By DAVID M. HERSZENHORN and DAVID E. SANGER
December 20, 2008 - this is the 19th guys...

WASHINGTON — President Bush on Friday announced $13.4 billion in emergency loans to prevent the collapse of General Motors and Chrysler, and another $4 billion available for the hobbled automakers in February with the entire bailout conditioned on the companies undertaking sweeping reorganizations to show that they can return to profitability.

The loans, as G.M. and Chrysler teeter on the brink of insolvency, essentially throws the companies a lifeline from the taxpayers that will keep them afloat until March 31. At that point, the Obama administration will determine if the automakers are meeting the conditions of the loans and will continue to receive government aid or must repay the loans and face bankruptcy proceedings.

Mr. Bush made his announcement a week after Senate Republicans blocked legislation to aid the automakers that had been negotiated by the White House and Congressional Democrats, and the loan package announced by the president includes roughly the identical requirements in that bill, which had been approved by the House.

Mr. Bush, in a televised speech before the opening of the markets, said that under other circumstances he would have let the companies fail, as punishment for bad business decisions. But given the economic downturn, he said the government had no choice but to step in.

“These are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action” Mr. Bush said.

He said that bankruptcy was not a workable alternative. “Chapter 11 is unlikely to work for the American automakers at this time,” Mr. Bush said, noting that consumers would be unlikely to purchase cars from a bankrupt manufacturer.

The loan deal also requires the companies to quickly reduce their debt by two-thirds, mostly through debt-for-equity swaps, and to reach an agreement with the United Auto Workers union to cut wages and benefits so they are competitive with those of employees of foreign-based automakers working in the United States.

The debt reduction and the cuts in wages were central components of proposal by Senator Bob Corker, Republican of Tennessee, who tried to salvage the bailout legislation.

Those talks had deadlocked on a demand by Republicans that the wage cuts take effect by a set date in 2009, while the union had pressed for a deadline in 2011 after its current contract expires.

The plan announced on Friday by Mr. Bush offered a compromise between those positions, by making the requirements non-binding, allowing the automakers to reach different arrangements with the union, provided that they explain how those alternative plans will keep them on a path toward financial viability.

To gain access to the emergency loans, G.M. and Chrysler must agree to a range of concessions, including limits on executive pay and the elimination of their private corporate jets.

Under the plan, Mr. Bush essentially handed off to President-elect Barack Obama what will become one of the first, most difficult calls of his presidency: a political and economic judgment about whether G.M. and Chrysler are financially viable. Ford is not seeking immediate government help.

If, by March 30, the two companies cannot meet that standard — and clearly they could not meet it today — the $13.5 billion in Treasury loans would be “called” for immediate repayment, with the government placed in priority, ahead of all other creditors.

To avoid that fate, the companies will need to complete negotiations with the unions, the creditors, the suppliers and the dealers by March 30. Any judgment on the accords they reach with those groups will inevitably be both economic and political.

Mr. Obama and his economic team will have to make a convincing, public case that the wage cuts, plant closings and creditor agreements so change the landscape of the industry that the carmakers can turn profitable in short order.

But Mr. Obama will be under tremendous political pressure as well, because if his new team concludes that the automakers have not struck the right deals, it would mean a move to bankruptcy court, and likely widespread layoffs that would ripple far beyond the companies themselves.

Mr. Obama was elected partly with the enthusiastic support of the unions, who liked his talk of protecting jobs by renegotiating trade agreements. Now, in his first months, he will be asking them to give back gains they have negotiated over decades.

Because the bailout legislation failed in Congress, senior administration officials said that the loan package would essentially take the form of a contract between the government and the automakers. Officials said they expected those contract agreements would be signed by the end of the day.

In recent days, G.M. and Chrysler have found themselves in an increasingly precarious financial position, with some industry experts predicting that they could not survive through the month without government aid.

Both companies had enlisted teams of bankruptcy lawyers to prepare for a collapse. And they have announced drastic cutbacks, including an extension of the normal holiday-season idling of factories, with some operations to be suspended for a month or more.

Other automakers, including Honda and Ford, have announced cutbacks in production as the entire industry deals with the economic downturn and a plunging demand for cars among consumers.

Ford, which is in better financial condition that G.M. and Chrysler, has said that it does not intend to tap the emergency government aid.

While the legislation that failed in Congress would have provided $14 billion in federally subsidized loans using money that had already been appropriated to help the automakers retool to make advanced fuel efficient vehicles, the loans announced by Mr. Bush will be financed by the Treasury’s $700 billion financial system stabilization program.

The additional $4 billion in loans available for the auto industry in February will be contingent on Congress releasing to the Treasury the second half of that bailout fund. The Treasury has not yet requested the second $350 billion.

And while the legislation would have created a new position within the executive branch to oversee the automakers, a so-called “car czar” Mr. Bush said on Friday that while he remains in office, the emergency loan program will be supervised by the Treasury secretary, Henry M. Paulson Jr.

In a statement, G.M. reacted with a mixture of gratitude and relief.

“We appreciate the president extending a financial bridge at this most critical time for the U.S. auto industry and our nation’s economy,” Greg Martin, a company spokesman, said. “This action helps to preserve many jobs, and supports the continued operation of G.M. and the many suppliers, dealers and small businesses across the country that depend on us.”

In his statement, Mr. Martin said that the emergency loans would allow G.M. “to accelerate the completion of our aggressive restructuring plan for long-term sustainable success.” He added: “It will lead to a leaner, stronger General Motors.”

In a statement to employees, Robert Nardelli, the chief executive of Chrysler, said the company would hold up its end of the bargain.

“As outlined in our submission to Congress, we intend to be accountable for this loan, including meeting the specific requirements set forth by the government, and will continue to implement our plan for long-term viability,” Mr. Nardelli said. “The receipt of this loan means Chrysler can continue to pursue its vision to build the fuel-efficient, high-quality cars and trucks people want to buy, will enjoy driving and will want to buy again.”

Both G.M. and Chrysler stock rose sharply after the opening and Mr. Bush’s announcement helped send the broader markets higher as well.

But some critics of a taxpayer-financed rescue of the auto industry have warned that the money will just be wasted on companies who are suffering not because of the recent economic downturn but because of decades of failed business decisions.

A number of Republican Senators who had opposed the auto rescue legislation wrote to Mr. Bush in recent days urging him not to tap the Treasury’s financial stabilization program to help G.M. and Chrysler.

Free for all or free trade?
South Korea Trade Fight Gets Ugly
NYTIMES
By MARTIN FACKLER
December 19, 2008

TOKYO — The parliamentary battle over a contentious free trade deal in South Korea led to a confrontation on Thursday in which opposition lawmakers used a sledgehammer to knock down the doors of a blockaded room in which a committee was discussing the agreement.

Television footage showed fire extinguishers being sprayed at the opposition lawmakers trying to get into the room . At least one person was shown bleeding from the face.

The members of the opposition Democratic Party were trying to stop the trade agreement with the United States from advancing to the floor of parliament for a final vote. The governing party has been seeking to ratify the trade pact by year’s end, saying it would improve South Korea’s competitiveness and ties with the United States. Opponents say it will hurt South Korean farmers.

Violent clashes in the South Korean parliament, called the National Assembly, are not unheard of, reflecting the nation’s feisty brand of democracy. The trade agreement with the United States has been a particularly thorny issue, after massive demonstrations in Seoul earlier this year against the import of American beef.

Thursday’s assault came after the opposition party had threatened to block the deal by using physical force if necessary. Fearing an attack, members of the foreign affairs committee, under control of the governing Grand National Party, had barricaded themselves inside the room as they met.

Security guards and aides from the governing party stood outside the barricaded doors, where scuffles broke out when a dozen opposition lawmakers showed up. The opposition lawmakers then used at least one sledgehammer and crowbars to tear through the doors, only to be thwarted by piles of furniture thrown up as a second line of defense.

The mayhem failed to prevent the pact from being formally introduced to the committee, a step in the process of bringing it to a full parliamentary vote.

The deal to lower tariffs and other trade barriers was signed last year by negotiators from South Korea and the United States, but cannot take effect until ratified by lawmakers in both nations.

The pact faces stiff opposition in United States Congress, where many fear it could disadvantage struggling American automakers.

MALL PALL: link to really long NYTIMES article
F.I.R.E. sale?  Finance, Insurance and Real Estate gloomy...other sectors?  Skyscrapers coming down in price in 2009...
General Growth Properties Files for Bankruptcy in 2009, follow-up story here.
This is the firm that bought Harbor Place and South Street Seaport (South Street Seaport - some wonderful restaurants  in this row - or at least there were when I worked downtown a zillion years ago!)- and other major Rouse projects.


Recession Knocks Some Tenants Out Of Malls, Opens Doors To Others
By RINKER BUCK, The Hartford Courant
February 21, 2010

AVON —

Route 44 between New Hartford and Avon, the commercial Nile of the Farmington Valley, is in the midst of a drought.

Along the 7-mile stretch of upscale malls, retail stores and furniture stores, there are now more than 40 empty storefronts, transforming a road that once expressed Connecticut's prosperity into one that symbolizes an evolving New England economy.

While the blight of store closings and business abandonments along Route 44 seem to have struck smaller, local businesses harder, even the owners of larger malls that house big national brands say that a few, early signs of recovery are being masked by the psychological impact of the recession.

"It's a tenants' market right now, and when you are dealing with big, national name-brand tenants, they are not at all bashful about asking for expensive changes before they lease space," said Sharon Maddern, director of leasing at David Adam Realty in Westport, which owns the Avon Marketplace on Route 44, just east of the Simsbury line.

"In this environment, it can take nine months to reach a signed lease with a tenant, and then even more time to make changes before someone moves in," she said. "To shoppers driving into the parking lot, this looks like a vacancy that you can't rent."

Avon Marketplace's recent experience typifies this effect. Over the past year, the mall has lost a string of tenants that include Gap Inc.'s troubled Banana Republic, the Sharper Image, Bath and Body Works and Express, creating a long row of vacancies that runs west from the Orvis store. In fact, Maddern said, most of this space already has been rented for a new Ulta cosmetics store and another large national tenant that she can't name yet. But with Ulta not even scheduled to move in until August, the impression of shuttered stores remains.

This is one impact of recession-era economics that most worries retail economists. Closed stores attract less traffic to a mall parking lot and convey to consumers a gloomy message about the economy, discouraging shopping. But the Orvis store anchoring the corner of the mall doesn't seem to have been affected.

"When [Banana Republic, Sharper Image and Express] were gone, I thought we weren't going to do well," said Orvis store manager Dean Tsantilis. "I thought we might be next. But then we did very well in the fourth quarter."

Bucking A Trend

But Orvis was bucking what is clearly a regional and national trend. Since the fall of 2007, when economists generally agree the present recession began, shopping center vacancy rates in the Hartford area have grown from just above 7 percent to almost 9 percent today, according to the CoStar group of Bethesda, Md., which compiles national statistics on commercial real estate. This compares with a national shopping center vacancy rate that rose from 8.3 percent in 2007 to almost 11 percent at the end of December 2009, CoStar says.

Connecticut's slightly lower vacancy rate is easy to explain, said Mark Hickey, a real estate economist with PPR Research in Boston, part of the CoStar group.

"The Northeast is generally better off in vacancy rates because we simply don't have the room to build," Hickey said. "The national rates are much worse because in states like Florida or Arizona, there's a lot of room to expand, and building starts are often based on optimistic population projections of people moving in from New York and California. They overbuilt, so now they have higher vacancy rates.

"Unlike the Southwest or the Southeast, where the retail market is in intensive care, the market in Hartford will get out of the recession with only a few wounds to lick."

Recession Is Helpful

That seems to be the attitude at The Shoppes at Farmington Valley mall in Canton where, despite four vacancies, managers say the shopping center is 96 percent occupied.

"This may sound weird, but what's happening with the national economy will actually end up helping shopping centers like The Shoppes," said Brian Sierra, a vice president at WS development in Chestnut Hill, Mass., which owns the complex.

"The tenants that we lost during the recession tend to be weaker, more vulnerable players who were more subject to an economic downturn. Now we're re-leasing to stronger tenants — Feng, J. Crew and Sephora — who have the staying power to outlast a recession."

Local retailers with a strong specialty edge may enjoy the same advantage.

"Our business certainly isn't what it was three years ago, but we'll definitely survive," said Peter Scott, co-owner of The Perfect Toy along Route 44 in Avon. "There's certainly a psychological effect along Route 44 as people see all of the vacant space. But my personal opinion is that retail space along Route 44 was over-expanded to begin with. The recession is just weeding out a lot of weaker retailers."

And the recession may be changing the mix along Route 44 in ways that economists and experienced commercial retail players say will eventually help the Farmington Valley.

"No one is expecting a fast recovery, but there is one clear change we'll probably see soon," said Michael Goman, a commercial real estate adviser who helped develop the Simsbury Commons mall along Route 44. "There are a lot of strong retailers in other parts of the country who would love to get into this market, but always thought they couldn't because New England is perceived as an expensive place to rent.

"But with rentals dropping because of vacancies, we're going to attract a lot of California and Midwest chains that have never been here before," he said. "It will mean a lot more choice for shoppers."

That possibility isn't lost on other developers.

"I'll be spending the first week of March in California, just meeting with prospective new tenant after prospective new tenant," said WS Development's Sierra. "A lot of these shopping centers could look different a year from now. Outside of the Northeast, there's a lot of awareness that the recession spells opportunity for expanding retailers."

•Courant staff writer Melissa Traynor and news information specialist Cristina Bachetti contributed to this story.

Copyright © 2010, The Hartford Courant

General Growth shares rise in Big Board return
YAHOO
March 5, 2010

NEW YORK (Reuters) – Shares of General Growth Properties (GGP.N) rose on Friday, their first day back on the New York Stock Exchange, even as the U.S. mall owner operates under bankruptcy protection.

Shares of the real estate investment trust were up 2.3 percent to $14 in late morning trade. The shares had hit a high of $14.40 earlier in the session.

The shares have not yet returned to the S&P 500 index or the benchmark MSCI U.S. REIT Index (.RMZ), which was up 1.3percent.

Although rare, General Growth is not alone as having its shares trade on the Big Board while operating under Chapter 11 bankruptcy protection.

A representative of the exchange did not know how many of the approximately 2,425 companies trading on the New York Stock Exchange were in chapter 11.

But there are a handful of companies, such as W.R. Grace that have continued to trade on the Big Board after filing for bankruptcy. However, unlike those companies, General Growth had been delisted after its April filing and has now returned.

To be listed on the Big Board, a company has to reach certain parameters, such as valuation.

By market cap value, General Growth is over $4 billion, making it the 15th-largest publicly traded REIT. Before General Growth's re-entry, 128 REITs traded on the NYSE, according to the National Association of Real Estate Investment Trusts.

About half of General Growth's shares are owned by hedge fund manager William Ackman of Pershing Square Capital Management and by Chairman John Bucksbaum and his family or family's trust.

Among the institutional owners are Morgan Stanley (MS.N), Fidelity Management & Research and Norges Bank, according to Thomson Reuters data.
General Growth Properties to relist shares on NYSE
YAHOO
March 2, 2010

CHICAGO – General Growth Properties Inc., which last year filed the largest U.S. real estate bankruptcy case in history, said Tuesday that it applied to relist its shares on the New York Stock Exchange.

General Growth said its shares will start trading on the NYSE on Friday under the ticker symbol "GGP." General Growth shares currently trade over the counter.

Last month General Growth received a $10 billion takeover bid from rival Simon Property Group Inc., which controls some 382 properties worldwide.

General Growth rebuffed the unsolicited offer from Simon as being too low. The company then turned to Canada's Brookfield Asset Management Inc. and reached a deal that will speed its exit from bankruptcy protection. Speculation had swirled for weeks that General Growth might turn to Brookfield, which has been looking to expand its slate of U.S. retail properties and last year acquired an undisclosed stake in the company.

General Growth, the second-largest shopping mall operator in the U.S., filed for bankruptcy last April after it expanded aggressively during the real estate boom. The company amassed $27 billion in debt, but was left unable to refinance its short-term loans after financing dried up.

General Growth owns or runs more than 200 shopping malls in 43 states. It also has ownership in planned community developments and commercial office buildings.
CT connection...
Simon Property offers $10B deal for General Growth; Crystal Mall owner makes hostile bid for bankrupt giant
DAY
The Associated Press
Article published Feb 17, 2010

The nation's largest shopping mall owner, Simon Property Group, made a $10 billion hostile bid Tuesday to acquire its ailing rival, General Growth Properties.  The deal would allow General Growth, the No. 2 owner of shopping centers, to emerge from Chapter 11 bankruptcy protection.

Locally, Simon operates the Crystal Mall in Waterford and the upscale Clinton Crossings outlet mall in Clinton. Simon Property Group is based in Indianapolis.

General Growth filed for bankruptcy last year after buckling under the weight of billions in debt it racked up during a massive expansion effort fueled by cheap credit. General Growth's best known centers include the Glendale Galleria in Southern California and the South Street Seaport in Manhattan.

The offer would fully repay $7 billion to General Growth's unsecured creditors and $3 billion to shareholders.

Stockholders would get $6 a share in cash and $3 a share in other assets. The offer, however, might be amended so shareholders could receive Simon stock instead of cash.
Simon made the public offer after General Growth executives failed to make a "substantive response" Simon's overtures.

"Simon's offer provides the best possible outcome for all General Growth stakeholders," said David Simon, chairman and CEO, in a statement.

Though the official committee for General Growth's unsecured creditors has backed the deal, stockholders appeared to be looking for a sweeter offer from Simon or one of its competitors.
Chicago-based General Growth had no comment.

Simon, unlike many of its competitors, has been able to weather the economic downturn thanks in part to its higher rents.  The Indianapolis-based company popularized the so-called lifestyle center mall design that turned malls into veritable neighborhood-like communities.  The company owns more than 380 properties, including the Houston Galleria and the Fashion Valley Mall in San Diego.

Earlier this month, Simon reported a decline in fourth-quarter results, in part due to a one-time charge. But it still managed to beat Wall Street forecasts and its revenue held steady.
Simon Properties offers General Growth $10B buyout
YAHOO
Feb. 16, 2010

INDIANAPOLIS – Mall owner Simon Property Group said Tuesday that it made a $10 billion offer to acquire its ailing rival, General Growth Properties.

The real estate company said its bid totals $7 billion to creditors and about $3 billion to General Growth shareholders. Simon also said its offer might be amended so shareholders could receive Simon stock instead of cash.

The offer amounts to $9 per share for the Chicago real estate company, which filed for Chapter 11 bankruptcy protection last year. Parts of its plan to restructure $10.25 billion in debt related to 103 properties were approved in December.

Simon submitted its offer to the nation's second-largest mall owner Feb. 8. But it made the offer public Tuesday, claiming it had not yet received a "substantive response" from executives.

A spokesman for General Growth, which owns or manages more than 200 U.S. malls, had no immediate comment on the deal.

Simon, the nation's largest mall owner, is based in Indianapolis and owns more than 380 properties.

Its shares rose 23 cents in premarket trading to $72.23.

Big US Towers Going Cheap in Distressed Market
NYTIMES
By THE ASSOCIATED PRESS
Filed at 3:22 p.m. ET
May 20, 2009

NEW YORK (AP) -- The 40-story skyscraper sits on a prime corner in the country's wealthiest commercial market, steps from the Museum of Modern Art and a few blocks from Rockefeller Center and Central Park.

It recently sold for $100,000.

The 1330 Avenue of the Americas building -- which sold for close to $500 million three years ago -- was auctioned last month for the minimum to a Canadian pension fund unit after owner Harry Macklowe defaulted on a $130 million loan.

A month before that, the John Hancock Tower -- Boston's tallest skyscraper -- sold at auction for just over $20 million. The 33-story Equitable Building in downtown Atlanta is set to go up for auction next month; its owners owe more than $50 million to the bank and have only half of the building leased.

Loan defaults in the worst commercial real estate market in decades have created tens of billions worth of distressed properties across the nation, sometimes forcing cut-rate auctions of landmark skyscrapers. Developers are falling behind on mortgages as tenants leave and can find no financing to cover payments, analysts say.

So they are selling skyscrapers at a drastic discount, with the condition that the new buyer take on the enormous amounts of debt connected to the properties.

''Just imagine in a residential market, if there weren't 80 percent loans available for everyone. If everyone had to buy their houses in cash, the values of houses would plummet everywhere,'' said Dan Fasulo, a managing director at Real Capital Analytics. ''That's happening on a massive scale on the commercial side.''

The Hancock Tower and the Sixth Avenue building are the first of a wave of foreclosures and auctions expected in the next year that will slash sale values of formerly prime real estate, analysts say.

''This is a train wreck that's coming in the large office towers,'' said Matthew Haines, chairman of the Propertyshark.com real estate Web site.

Real Capital Analytics, which tracks commercial real estate transactions, counted over $86 billion worth of distressed properties in the country as of April, over $6 billion in Manhattan.

In New York City, addresses in ''serious jeopardy,'' Fasulo says, include a 23-story Moinian Group skyscraper across from the New York Public Library that sold for $160 million two years ago, and an office building a few blocks away on Fifth Avenue that Moinian and Goldman Sachs' Whitehall group bought two years ago.

Several construction sites that have shut down are also facing foreclosure threats without new financing, like a hotel-condo project with a Robert De Niro-backed Nobu restaurant under construction in lower Manhattan.

Many of the towers that are likely to go up for sale were bought at inflated prices during the boom three to five years ago and could lose over half their value at sale, analysts said.

Macklowe bought the Sixth Avenue building in 2006 for $498 million, taking out $130 million in short-term financing known as mezzanine loans that bridged the gap between the equity side and the debt side.

The loan was sold to Cadim, Canada's largest pension fund, and transferred to the subsidiary Otera Capital. Otera took over the loan and the tower's $240 million mortgage. The building, in the middle of the country's most lucrative commercial district, is two-thirds leased; its most prominent tenant is the Financial Times newspaper, sporting a pink `FT' logo on its rooftop.

''We had some confidence that the building is a good building, and with patience we would be OK,'' said Marie Giguera, an Otera vice president.

Macklowe Properties didn't return calls for comment.

The Hancock Tower lost half its market value after its auction in March from former owner Broadway Partners, a partnership of Normandy Real Estate Partners and Five Mile Capital Partners.

The 60-story tower was bought in 2006 by Broadway Partners, which invested billions into office towers around the country in the past few years. The company often relied on financing from now-bankrupt Lehman Bros.

Normandy and Five Mile -- which had stakes in some of Broadway Partners' debt -- took on $640 million in debt, valuing the building at $660 million.

The building sold at a far steeper discount than the average drop in commercial prices in the Boston area, said David Geltner, research director at the Massachusetts Institute of Technology Center for Real Estate.

The center said last week that commercial property sales in the first quarter fell by 6 percent from the end of last year, and were down 21 percent down from the same period a year ago. And on Wednesday, the National Association of Realtors said its index of commercial brokerage activity fell almost 13 percent from a year ago.

Sales volume is ''historically low. It has never been this low. It has never even been half this low,'' Geltner said.

The only major property sales that are likely in the next several months, analysts say, are distressed properties with delinquent loans.

''No healthy owner in their right mind would try to sell a property in this environment,'' said Fasulo. He said devalued sales of skyscrapers represent ''a trickle right now. It will turn into a flood over the next 12 months.''

General Growth Properties Files for Bankruptcy
NYTIMES
Michael J. de la Merced
April 16, 2009, 2:34 am

Update | 6:50 a.m. General Growth Properties, one of the largest mall operators in the nation, filed for bankruptcy early Thursday morning in one of the biggest commercial real estate collapses in United States history.

Despite bargaining for months with its creditors, General Growth faced increasing pressure to handle its more than $25 billion in debt, largely in the form of short-term mortgages that will come due by next year. The company has been severely wounded by the recession, which has wreaked havoc upon the retailers who inhabit its more than 200 malls in 44 states. Many stores have shuttered, depriving mall operators like General Growth of revenue.

The filing by the Chicago-based company, made in federal bankruptcy court in Manhattan, included most of the company’s malls, which will continue to operate. General Growth’s reorganization efforts will likely focus on selling off properties. It has already suspended its stock dividend, cut its workforce by 20 percent and stopped virtually all new development.

“Our operational model is sound,” Thomas H. Nolan Jr., the company’s president and chief operating officer, said on a conference call early Thursday morning, citing “the unprecedented disruption in the real estate financing markets and the need to extend maturing debt” as the reason the company filed.

“We made extensive efforts to modify existing maturing debt outstide of bankruptcy,” he added.

What began as a crisis in residential real estate has since seeped into the commercial real estate market, as landlords of retail and office space face rising numbers of vacancies. Analysts expect many of these companies to struggle as the recession forces steep cuts in consumer spending and employment rolls.

As the second-biggest operator of malls in the nation, behind only the Simon Property Group, General Growth’s troubles have been closely watched by the real estate and retail industry for months. Founded in 1954 and grown through a series of acquisitions — topped by a $12.6 billion deal for the Rouse Company in 2004 — the company’s huge retail presence has served as a barometer for the ails bedeviling the American retail market.

As more stores have closed, mall vacancies are at their highest point in almost a decade, according to Reis, a research company, which said the vacancy rate at the end of 2008 was 7.1 percent, compared with 5.8 percent at the end of 2007.

That has left many of the roughly 1,500 malls in the United States groping for a solution — any solution — to their woes. Some have converted retail space into office space. Still others have drastically lowered rents for prized tenants, willing to cut deals to simply keep earning revenue. Some have simply gone dark.

Shares in General Growth, which closed on Wednesday at $1.05, have fallen 97 percent over the past 12 months.

General Growth’s filing also marks a humbling of the Bucksbaum family, which grew the company from a family grocery business in Marshalltown, Iowa into a powerhouse of retail shopping in the Midwest. It still holds about a 25 percent stake in the company, and John Bucksbaum, an avid cyclist, remains its chairman after having served as its chief executive.

Few analysts dispute the quality of General Growth’s malls, which include the Ala Moana Center in Honolulu, Water Tower Place in Chicago and the Grand Canal Shoppes at the Venetian in Las Vegas. But its undoing was the mounting pile of short-term mortgages the operator used to expand. That financing strategy was devised by its longtime chief financial officer, Bernard Freibaum, who was dismissed last October.

Since then, the mall owner has pleaded with holders of $2.25 billion in bonds to hold off on demanding payment as it sought to reorganize its debt outside of a bankruptcy filing. But bondholders grew increasingly impatient as bond maturities continued to mount and denied General Growth an abstention from payments for the rest of the year.

The company said in its statement that it has secured a commitment for $375 million in bankruptcy financing from Pershing Square Capital Management, the hedge fund that owns more than 25 percent of the company through its holdings of shares and swap contracts. That financing must be approved by a bankruptcy court judge.

William A. Ackman, the head of Pershing Square, told Bloomberg Television last month that he foresaw an “imminent” bankruptcy filing by the company.

Among the companies listed as General Growth’s 100 largest unsecured creditors are Eurohypo, a unit of Germany’s Commerzbank that holds $2.6 billion worth of loans; Wilmington Trust and the Bank of New York Mellon representing several classes of bonds; casinos including Mandalay Bay and the Venetian; and an assortment of retailers like Sephora, Guess?, Borders and Macys.

In its bankruptcy filing, General Growth said that it sought permission to retain a bevy of advisers, including the investment bank Miller Buckfire, the turnaround consulting firm AlixPartners and the law firms Weil, Gotshal & Manges and Kirkland & Ellis. The document was signed by Marcia L. Goldstein, the chair of Weil’s well-known bankruptcy practice.
Sam Zell’s Empire, Underwater in a Big Way
NYTIMES
By CHARLES V. BAGLI
February 7, 2009

It was, for a brief shining moment, the real estate deal of the century.

In 2007, Sam Zell, the billionaire Chicago investor, sold a portfolio of 573 properties he had assembled over three decades, Equity Office Properties Trust, to the Blackstone Group for $39 billion. It was the largest private equity deal in history, but Blackstone did not stop there: it immediately flipped hundreds of the buildings for $27 billion.

Today, the wreckage of those purchases is strewn across the country, from Southern California to Austin, Tex., to Chicago to New York. Many of the 16 companies that bought Equity Office buildings are now stuck with punishing debt, properties whose values are plummeting and millions of feet of office space they cannot fill.

Few deals better exemplify the excesses of the commercial real estate boom than the dismemberment of the Equity Office empire, and fewer still better underscore their bitter consequences.

Buyers purchased buildings at what, in retrospect, were vastly inflated prices. Lenders provided lavish, even excessive, financing based on unrealistic expectations of rising rents. And now that values are tumbling, vacancy rates are rising and credit has become impossibly tight, many on both sides are struggling against default, foreclosure or bankruptcy.

The impact could ripple beyond the companies that bought Equity Office buildings and the investment banks that financed them. If the owners cannot make their loan payments, it could create a financial crisis for the pension funds, hedge funds and insurance companies that hold securities based on Equity Office mortgages.

The list of Equity Office buyers reads like a Who’s Who in American real estate. In Stamford, Conn., RFR Properties, a partnership headed by Michael Fuchs and Aby Rosen, who owns Manhattan landmarks like Lever House and the Seagram Building, spent $850 million to buy seven Equity Office buildings that analysts say are now worth less than their mortgages.

In Los Angeles, the founder of Maguire Properties, one of the largest commercial landlords in Southern California, was forced to step down last year as the company struggled with crushing debt from buying 24 Equity Office buildings.

And in New York, the real estate mogul Harry B. Macklowe lost seven Equity Office towers he bought from Blackstone, along with much of his empire, after he was unable to refinance the $7 billion in short-term, high-interest debt he used to buy them.

“Those who bought from Blackstone have not fared well at all,” said Michael Knott, a real estate analyst at Green Street Advisors. “Blackstone was a huge winner at the time, although the value of what they still hold has fallen probably 20 percent.”

Mr. Zell, who became chairman and chief executive of the Tribune Company after selling Equity Office, amassed his supersize real estate portfolio over many years. But the deal to sell the properties to Blackstone, the big private equity firm run by Stephen A. Schwarzman, occurred with lightning speed and what one executive who participated in the transaction called, “short-form due diligence.”

Blackstone’s purchase of Equity Office in February 2007 began a series of other record-breaking deals in Stamford; San Francisco; Portland, Ore.; Orange County, Calif., and Chicago, as Blackstone quickly sold about 70 percent of the portfolio to 16 other companies. The company still owns 105 Equity Office properties.

“These were aggressive acquisitions under the best of circumstances,” said Paul E. Adornato, a senior real estate analyst at BMO Capital Markets.

The buyers found lenders only too willing to finance as much as 90 percent or more of the purchase price, even as profit margins shrank, on a bet that rents and values would continue to rise. The investment banks, including Morgan Stanley, Wachovia, Goldman Sachs, Bear Stearns and Lehman Brothers, in turn collected their fees as they packaged the loans as securities and sold them to investors.

“It certainly defined a period of time where debt was readily available in large quantities at low prices,” said Robert S. Underhill, who heads the capital transaction group at Shorenstein Properties L.L.C.

Not everyone who bought Equity Office buildings is in dire shape.

After looking at Blackstone’s Equity Office portfolio in many cities, Shorenstein settled on Portland, where it bought 46 buildings for $1.1 billion. It was the one place where price, initial returns and potential for growth made the most sense, Mr. Underhill said.

But elsewhere, problems with Equity Office properties have spread like a virus, weakening and even paralyzing major real estate developers.

In Stamford, the crisis on Wall Street and the consolidation of financial services has weakened the market, undermining the RFR Properties’ effort to raise rents at its seven Equity Office buildings by 15 percent. The purchase price of $850 million, roughly $515 a square foot, was close to a record for Stamford.

RFR’s Equity Office buildings are now worth less than its mortgages, said Dan Fasulo, a managing director of Real Capital Analytics, a real estate research firm. But the company has not defaulted on its loans.

“Some of the rents they projected won’t come to fruition for many years,” Mr. Fasulo said.

RFR Properties did not return calls seeking comment.

The market has declined drastically in Chicago as well, and the vacancy rate is climbing at some Equity Office buildings owned by the real estate giant Tishman Speyer, brokers say. The company, which controls Rockefeller Center and properties in China, India and Brazil, bought six Equity Office buildings in Chicago for $1.7 billion. The company almost immediately tried to sell three of its new buildings, but received acceptable offers for only one, which sold for $145 million in 2007. Tishman declined to comment.

In New York, Mr. Macklowe made a characteristically aggressive gamble when he bought seven Midtown buildings from Blackstone for more than $6 billion, doubling the size of his real estate empire. He put down a mere $50 million, while lining up $7 billion in short-term financing from Deutsche Bank and the Fortress Investment Group for the acquisition.

But after the rollicking real estate boom came to an end, Mr. Macklowe was unable to get permanent financing. He narrowly avoided personal bankruptcy and was forced to turn over the seven towers and other properties, including his jewel, the General Motors building, to lenders.

Deutsche Bank recently sold two of the Macklowe buildings in New York to Shorenstein Properties for an average of $818 a square foot, or 25 percent less than the $1,100 a square foot that Mr. Macklowe paid. Real estate brokers say two other buildings from that portfolio will probably sell for a discount of at least 60 percent.

Mr. Macklowe’s company, Macklowe Properties, declined to comment.

In Los Angeles, Maguire Properties was already laboring under heavy debts when the company paid Blackstone $2.87 billion for 24 buildings, 22 of them in Orange County, the center of the subprime mortgage industry. From the beginning, the loan payments for the Equity Office buildings exceeded the monthly revenue from the properties, according to the company’s regulatory filings.

The company’s vow to raise rents by 25 percent at its newly acquired buildings dissolved quickly as the vacancy rate in Orange County swelled to 16 percent, from 7 percent in 2006, making it harder to make mortgage payments. Maguire sold a number of its Equity Office buildings, some at a loss, and the board forced its chairman and founder, Robert F. Maguire III, to step down.

“It was the straw that broke the camel’s back in terms of what it did for their operating results and their balance sheet,” said Mr. Knott of Green Street Advisors.

In Austin, when the Thomas Properties Group formed a partnership with the California teachers’ pension fund and Lehman Brothers, which was also a lender in the deal, to buy 10 Equity Office buildings downtown and in the surrounding suburbs for $1.15 billion, it instantly became the biggest commercial landlord in town.

Like many of the other deals, it was highly leveraged and dependent on rising rents. The problem is that rents are now declining in Austin, particularly in suburban areas, where vacancy rates have climbed to 14.4 percent as several new buildings are coming on line without tenants.

In November, Thomas filed a motion in the Lehman bankruptcy case saying it would “run out of cash” in January. On behalf of the partnership, Thomas asked the court to compel Lehman to make good on its commitment to provide a $100 million revolving loan, or allow the partnership to raise new financing elsewhere. The money, it said, was to lease, maintain and market the buildings.

Without additional financing, the motion said, there could be a series of defaults “leading to the threat of foreclosures and bankruptcy.”

The motion has been postponed, but the partnership did make an $18 million property tax payment that was due last month in Austin “in cooperation” with Lehman. The partnership is still facing significant liquidity problems.

“They’re going to face a difficult road because the buildings in the suburbs are getting more and more vacant,” said Volney Campbell, co-managing partner of HPI Corporate Services in Austin, a real estate company.

“It was the largest single transaction that’s ever occurred in Austin. Considering where we are now, it will stay that way for a while.”
General Growth to Sell Retail Centers in 3 Cities
NYTIMES
By THE ASSOCIATED PRESS
Filed at 5:14 p.m. ET
December 19, 2008

WASHINGTON (AP) -- A troubled mall operator is putting prominent retail centers in Boston, New York and Baltimore up for sale in a desperate attempt to shore up its finances.

Chicago-based General Growth Properties Inc. has hired a New York-based commercial real estate firm to put the well-known retail centers up for sale.  New York brokerage DTZ Rockwood LLC said Thursday it has been retained to sell off New York's South Street Seaport, Boston's Faneuil Hall Marketplace and Baltimore's Harborplace & The Gallery, all three of which are prominent tourist destinations.

The three properties combined generated about $300 million in retail sales for the year ending Sept. 30, according to DTZ's marketing materials, which bill the properties as an ''unprecedented investment opportunity.''

All three locations were developed by the Maryland-based Rouse Co. as part of major urban renewal efforts in the 1970s and 1980s. General Growth took over all of Rouse's assets as part of a $7.2 billion acquisition in 2004.  The potential sale, however, comes at a time when there are few buyers for real estate of any kind. Plus, with the U.S. economy sinking, rents and vacancies at shopping centers and office buildings are expected to suffer next year.

Worse still, about $36 billion of commercial real estate debt will expire next year, and about $55 billion of debt on average will roll over annually by 2012.

All three properties are at or near their cities' waterfronts and were developed by James Rouse, who gained widespread acclaim for leading urban development efforts. Rouse, who died in 1996, also developed the planned city of Columbia, Md.  General Growth, the country's second-largest mall owner is saddled with huge amounts of debt it took on during the real-estate market's boom years when it aggressively bought up assets. Refinancing that debt has proven difficult amid a global credit crunch.

Analysts are unsure whether new managers, installed in late October, will be able to keep the company afloat as the recession drags on and U.S. retailers struggle. The company last month ousted its chief executive, president and chief financial officer and hired law firm Sidley Austin as an adviser.

On Wednesday, General Growth received another extension on $900 million in loans for two Las Vegas properties.  Lenders agreed to place the loans in forbearance until Feb. 12 as the Chicago company looks to sell some of its assets or raise fresh capital to help pay upcoming debt maturities.  The mortgages cover two Las Vegas malls, Fashion Show and Palazzo. The company is also trying to sell its Las Vegas locations. It had received a two-week extension on the loans for the Las Vegas properties earlier this month. Lenders for a separate senior credit agreement inked in 2006 agreed to extend that deal until Jan. 30.

General Growth has a stake in more than 200 shopping malls in 44 states.  The company's stock has lost more than 95 percent of its value in the past six months. Its shares rose 14 cents, or 8.7 percent, to $1.75 on Thursday, then dropped 14 cents to $1.61 in aftermarket trading.

Meanwhile, casualties among retailers are rising. Circuit City Stores Inc. and KB Toys Inc. have filed for Chapter 11 bankruptcy protection in recent weeks.

Richard D. Hastings, a strategist with Global Hunter Securities, expects total retail sales will fall as much as 8 percent for the November through January period. ''Consumer demand is much less than most of us understood even in September,'' said Hastings, who says the spending malaise is unlikely to hit bottom until the second half of 2010.  Michael P. Niemira, chief economist at the International Council of Shopping Centers, expects sales at stores open at least a year will fall as much as 1 percent for the November and December period, but fears the decline could even be steeper. That would be the worst performance for the holidays since at least 1969 when the index began.

The only holiday period that came even close was 2002, which posted a meager 0.5 percent gain.
Real Estate

As Vacant Office Space Grows, So Does Lenders’ Crisis
NYTIMES
By CHARLES V. BAGLI
January 5, 2009

Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market “since the wrenching 1991-1992 industry depression.”

Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year.

The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults.

The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.

Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. “Each one by itself is not significant,” he said, “but the cumulative effect will put tremendous stress on the financial sector.”

Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.

Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.

Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.

Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.

Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.

By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.

Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.

“The economic recession is so widespread that we believe virtually every market in the country will see a rise in vacancy rates of between 2 and 5 percentage points by mid-2009,” said Bill Goade, chief executive of CresaPartners, which advises corporations on leasing and buying office space.

There is no relief in sight for Orange County, where subprime lenders and title companies once dominated the market but are now shedding space because their business has dried up, and big banks are now shrinking because of a wave of mergers. The vacancy rate has soared from 7 percent at the end of 2006 to 18 percent, a rate that the Tampa area should match this month, local real estate brokers say.

In New York, where rents had risen the highest as financial companies gobbled up office space, vacancy rates are floating above 10 percent for the first time in years.

What looked like the worst possible case a few weeks ago for Chicago now appears to be the most likely outcome, said Bill Rogers, a managing director at Jones Lang LaSalle, a real estate broker. The vacancy rate, which was fairly stable at 10 percent, is now rising quickly and could hit 17 percent in 2009, he said. “A lot of companies are trying to shed excess space ahead of what is expected to be a worse market in 2009,” Mr. Rogers said.

Newmark Knight Frank, a real estate broker, expects the vacancy rate in Dallas to rise to 19 percent this year, from 16.3 percent.

Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt.

Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. As a result, the vacancy rate is 11 percent and rising.

“I see a wave of troubled assets coming out of Texas in the near future,” said Dan Fasulo, managing director of Real Capital Analytics, a real estate research firm.

Effective rents, after free rent and other landlord concessions, have already started to fall and are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts.

That is making it all the more difficult for owners, who projected ever-rising rents when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due.

Without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders.

Among commercial properties, the most troubled have been hotels and shopping centers, where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.

The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. In recent weeks, a group led by the New York developer William Rudin has pleaded with Treasury Secretary Henry M. Paulson Jr., Senator Charles E. Schumer, Democrat of New York, and others to have the government include commercial real estate in a new $200 billion program intended to spur lending.

Mr. DeBoer, the roundtable’s leader, said building owners are by and large making their loan payments. It is the refinancing that is worrisome.

Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, Mr. DeBoer said.

Where possible, owners are trying to extend loans. A lender might agree to extend the term on a 10-year commercial mortgage, for example, if the borrower remains current on payments and can make an equity payment to compensate for the decline in the building’s value.

Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure, according to a report by Real Capital Analytics.

New York, the biggest market by far, leads the pack with 268 troubled properties valued at $12 billion. But there are 19 more cities, including Atlanta, Denver and Seattle, with more than $1 billion worth of distressed commercial properties.

Analysts are especially concerned about buildings like 666 Fif