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?

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?  And how about job and wealth creation, 2010?

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.  Conservative think tank article here.
Interesting article on what things are worth...



THE PULSE OF ECONOMIC DATA IN THE USA...confusing to us!  And economists, too!  How about trying new ideas for taxing?  Musical CEO GAME AT GOVERNMENT MOTORS - THE NEWEST GUY.  WHAT DOES CARLYLE GROUP HAVE TO DO WITH ANY OF THIS?

Model corruption
NYPOST
By MARK MODICA & HAL JOHN
Last Updated: 10:31 AM, August 13, 2010
Posted: 11:48 PM, August 12, 2010

General Motors plans an initial public offering as soon as today -- a first step in the government's effort to sell its ownership stake to private investors. The IPO comes on the heels of a much publicized plant tour by President Obama, who'll certainly hail the stock sale as proof he made a smart decision by bailing out the automaker with billions of taxpayer dollars.

But, to us, the IPO will be proof of something else: a White House that purposefully trampled the legal rights of investors -- many of whom, like us, are small savers -- to benefit its political supporters. Rather than a model of success and foresight, the GM episode is a model of corruption and cronyism.

Let's review the sordid history. Last year, the federal government bought a majority stake in GM for about $50 billion -- a sum equal to GM's market capitalization in 2000, when it was making record profits.

It should hardly be a surprise that the new GM, with so much money to work with (plus a special $16 billion tax benefit) would start inching into the black again. After all, Ford, without government help, has posted after-tax earnings of about $4.7 billion for the first half of this year -- more than twice GM's, even with the $1.3 billion second-quarter profit that "Government Motors" announced yesterday.

The bailout's announced goals required a more limited intervention than what Washington concocted. For example, a deal could have been brokered with strategic investors, as in a normal distressed sale, with GM's assets -- including its valuable Cadillac and Chevrolet brands and an expanding foothold in China -- passing from weak hands to strong.

But the fact that the administration mainly solicited advice from bankruptcy experts, rather than those in industry, is evidence that alternative solutions weren't considered.

Instead, politicians ran the company their way -- raining taxpayer money on key electoral states like Michigan and rewarding their staunch financial backers in the United Auto Workers union.

The devil, in this case, was in the details of the bankruptcy plan that the government pushed through:

Bondholders -- investors ranging from large institutions to retirees just scraping by, who loaned GM a total of $27 billion -- received just 10 percent of the company. By contrast, the government's $50 billion gave it about 61 percent.

And the union -- in return for the $20 billion that GM owed its health trust -- got a remarkable 17.5 percent of the stock plus $2.5 billion in cash plus $6.5 billion in preferred stock carrying a dividend of about 9 percent.

In other words, the UAW got three to four times as much as the bondholders for a smaller claim on GM's assets. The union even boasted to its members in May 2009 that it had made no concessions on pay, health care or pensions in the restructuring.

In effect, the government divided up GM's creditors into favored and unfavored groups, then gave a fat stake in the reorganized business to the favored (a k a longtime Democratic Party donors). On top of that, Washington also ordered the shutdown of 1,650 GM dealers and another 1,000 Chrysler dealers as part of its takeover.

In last month's audit, TARP's inspector general criticized the Treasury Department for that very decision. Treasury didn't show why the cuts were "either necessary for the sake of the companies' economic survival or prudent for the sake of the nation's economic recovery." The move "substantially contributed to the accelerated shuttering of thousands of small businesses."

Remember this as the president brags about recent gains in auto-industry jobs: Even though some plants have added union jobs, many in the dealerships have been lost.

But our main concern is what happens going forward. A terrible precedent has been set.

Small bondholders are essential to funding US industry. How eager will they be to invest their savings after seeing how the administration misappropriated the federal government's vast power and ignored long-standing bankruptcy law to reward its supporters at the expense of the less powerful?

We're pleased that GM is making a profit and, with the IPO, taxpayers should get some of our money back. But the government takeover of GM absolutely should not be framed as a success or, worse, as a model for the future. It was political bullying at its worst -- an arbitrary action befitting a banana republic, and deeply unfair to small investors who expected their lawmakers to play by the rules.

Mark Modica was a business manager at a now-closed Saturn dealership in Chalfont, Pa.; Hal John is an executive-search consul tant in Chesterfield, Mo. Both were steering committee members of Main Street Bondholders, a coali tion of small GM investors.

Mixed Messages on the Economy
Weekly Standard
BY Irwin M. Stelzer
July 24, 2010 12:00 AM

“The Economy Is Back,” trumpets the upper left  corner of the cover of Time magazine. “The Economy Stinks,” moans the lower right corner. More professionally, Federal Reserve Board chairman Ben Bernanke tells Congress that most of the participants on the Fed’s monetary policy committee view “uncertainty about the outlook for growth and unemployment as greater than normal.” Titans of industry are also confused. They can’t decide whether to give more weight to the good news than the bad, and so they are sitting on $2 trillion in cash that, because of low interest rates, is earning almost nothing. They can’t even seem to find acquisitions that are both strategically sensible and well-priced.

Then there are the expert policymakers. The Organisation for Economic Co-operation and Development (OECD) and the Bank for International Settlements (BIS) are suggesting you lose sleep worrying about the inflation that they think will inevitably result from a long period of low interest rates and excessive money creation. But the International Monetary Fund wants central banks to keep interest rates low to offset the fiscal tightening it is prescribing for most countries. And just in case you have sorted that out, along come some experts, several of them high Fed officials, warning that we are fighting the wrong war when we worry about inflation. It is deflation that is looming, witness hints that price levels are declining. This, they say, is what really should keep you awake at night, since once it takes hold, deflation is terribly difficult to root out of the system, as Japan painfully learned.

What many believe to be the best leading indicator of all -- share prices -- is of little help. Companies announce earnings that beat expectations, and the prices of their shares drop. No sooner have analysts chortled about a triple-digit jump in the averages than they are explaining the next day’s even larger triple-digit decline.

President Obama professes satisfaction at the fact that the private sector has created new jobs in each of the past six months, and then presses Congress to pass a second stimulus because, it seems, the jobs market is weak. Bernanke says that because “financial conditions … have become less supportive of economic growth in recent months” the jobs market is weak he will keep interest rates “very low,” and then announces that he and his colleagues expect economic growth this year to come in at what I would term a satisfactory rate at 3-3.5 percent, and an even better 3.5-4.5 percent rate in 2011 and 2012.     

Then there is Congress. Its members are upset that banks are not lending more freely to the small businesses that account for a large portion of job growth, but pass a massive regulation bill that will undoubtedly cut into bank profits and ability to lend. Congress wants businesses to invest, but refuses to cut back the debt-fuelled spending that everyone knows will result in higher taxes on small businessmen. Lest a few entrepreneurs fail to notice, the president announces that he plans to do just that, if he can get a few reluctant Democrats to go along with the repeal of the “Bush tax cuts for the rich.” And last week, after months of railing against imprudent mortgage lending to sub-prime borrowers, politicians permitted government-owned General Motors to spend $3.5 billion to buy AmeriCredit, a company that specializes in car loans to sub-prime credit risks and in the securitization of those loans.

So don’t feel badly if you are confused by the signals coming from the economy and the pundits. If Bernanke and his gaggle of expert economy-watchers are more uncertain than normal, and corporate chieftains don’t know what to make of conflicting signals, and policy wonks conjure up conflicting tales of danger, you have every right to be confused.     

To add to uncertainty, we are in a pre-election period that is unlikely to bring out the best in the political class. Partisanship trumps the public interest, and will until the new congress is sworn in after the new year. Indeed, since defeated members return to their seats and can vote between the November elections and the seating of the new members in January, even the constraint that now exists from the need to obtain democratic legitimacy will be removed.

So, what to make all of this? First, don’t look for a certain guide to the economic future. There is none. You would do as well in predicting the future to engage in the minute inspection of the entrails of a goose as to pore over recent economic data.

Second, concentrate on the bits that are more rather than less certain:

Ø  The housing sector, afflicted with an excessive inventory of unsold houses and potential buyers made nervous by a weak job market, is not likely to recover very soon.

Ø  The jobs market, even if the Fed’s growth forecast proves correct, will improve only slowly, and the long-term unemployed will find it especially difficult to find work, as will poorly educated teenagers and adults.

Ø  Even if businesses do use their spare cash to make acquisitions -- it should come as no surprise if the pace of such deals accelerates -- that won’t do much to create jobs, and might actually produce cost-cutting lay-offs.

Ø  Small-businesses are more rather than less likely to remain on the sidelines, waiting to determine the cost implications of health care “reform” and, if passed, an energy bill, and to see just what the tax-raisers have in mind for them.

 But not all of the things that are more rather than less certain are on the gloomy side of the ledger:

Ø  Corporate earnings are surprisingly robust, adding to the cash piles that will sooner or later be spent.

Ø  Another meltdown of the financial sector is not in the cards.

Ø  Growth in Asia and Latin America is likely although not certain: much depends on whether China’s economy slows, as some are predicting.

Ø  The jobs market is more rather than less likely to improve, albeit slowly.

Ø  Inflation remains tame, permitting the Fed to keep interest rates low for what Bernanke calls “an extended period.”

Most important of all, as The Economist so well puts it, “America still towers over rivals in scientific virtuosity, military power, the vitality of democracy and much else.” That is what will matter in the long run.


Paul Volcker's take (from terrific New Yorker magazine article) on the financial overhaul bill here.
Paulson Likes What He Sees in Overhaul
NYTIMES
By ANDREW ROSS SORKIN
July 12, 2010

“The one thing you’re not going to get me to do is speculate.”

That is what Henry M. Paulson Jr., the former secretary of the Treasury, told me when I called him last week and posed this question: If the Dodd-Frank Wall Street Reform and Consumer Protection Act had been in place during his tenure, would the financial crisis — and the ensuing recession — have happened?

Given that President Obama is expected to sign the bill into law soon — the deadline keeps slipping — it seemed timely to ask the central government actor during the panic of 2008 what he made of the legislation and whether he thought, in practice, it would help us avoid another crisis.

Mr. Paulson, who was speaking by phone from his longtime home in Barrington, Ill. — he recently put his home in Washington up for sale — was initially reluctant to weigh in. He said he had not read all 2,000 pages of the legislation. But as he began talking, despite his insistence that he didn’t want to answer my question, he did exactly that.

“We would have loved to have something like this for Lehman Brothers. There’s no doubt about it,” Mr. Paulson declared about midway into our conversation.

He was referring to a provision of the bill known as resolution authority, which would enable the government to unwind a failing investment bank or insurance company in an orderly way without forcing it into bankruptcy, thus avoiding the unintended consequences that a bankruptcy might create. Mr. Paulson had spoken publicly about the need for resolution authority in June 2008, three months before Lehman’s failure, but did not believe it was politically viable to ask Congress for such powers.

As he recalled those sleepless days in September, he suggested that had he had resolution authority, he would have been able to take over Lehman Brothers and the American International Group without the financial system crumbling. (Of course, there remains a running debate about why Mr. Paulson didn’t seek to have the government bail out Lehman Brothers; he says he didn’t have the powers.)

I followed up by asking whether he believed he would have used the power to take over Morgan Stanley and then, perhaps, even Goldman Sachs. Would he have taken them over, too?

He said that he believed that if the government had had the authority to take over Lehman and A.I.G., it would have stopped the panic endangering other firms.

“It’s hard to believe that winding down Lehman in an orderly way would have put more pressure on Morgan Stanley than what happened,” he said.

But Mr. Paulson said that even more than the resolution authority, he saw the legislation’s creation of a systemic risk council as perhaps the most important aspect of the bill and crucial to preventing the next crisis. The council would give the various parts of government insight into what was going on elsewhere and the power to shut firms down or change practices that might put the system at risk.

“Some things would hopefully have been identified earlier,” he said. While his critics have contended that regulators missed warning signs about impending problems, he said he had little visibility into certain businesses, like A.I.G., until it was too late.

“I doubt that there is any regulator that had all the information that would have allowed something like what was happening at the A.I.G. holding company to have occurred,” he said.

But to fully prevent the crisis of 2008, he said, the Dodd-Frank act would have needed to have been in place not just before September 2008, but years earlier. He suggested it would have had to have been in place even before he joined the administration in 2006 to have had any effect.

“We’d have needed the systemic risk regulator up and running by 2005 or so, to recognize the dangers of ever more lax underwriting and intervene,” he said. His critics might say that his suggestions are a bit too convenient, but Mr. Paulson earnestly said that he and the Bush administration were blindsided by the development of the market for collateralized debt obligations and the importance of “repos,” or repurchase agreements, that kept investment banks afloat, often literally on a overnight basis.

Still, he said he was frustrated that the legislation had focused little on policy, specifically housing policy. “The root causes of all this are housing policies — not just Fannie and Freddie,” he said, referring to the giant mortgage companies. “That hasn’t been dealt with.”

But he did not seem surprised by that development — or lack of. “There’s plenty of blame to go around — the banks, investors, rating agencies, regulators. But let’s not forget policy makers,” he said.

One policy that Mr. Paulson was not so sure of was the so-called Volcker rule, which would largely prohibit banks from investing with their own capital and being in the business of hedge funds and private equity.

“Proprietary trading during the crisis that I dealt with wasn’t what created the problems at WaMu or Countrywide or Wachovia or Lehman Brothers or A.I.G.,” he said. “We were dealing with another set of issues.”

In the end, though, Mr. Paulson said that regulation on its own would not be enough to prevent another crisis. No, that will come down to people.

“As I’ve thought about it, this is very people-driven,” he said. “A lot of this is about the people who have the responsibility for the regulation when there isn’t a crisis and the people who have the responsibility during a crisis. Unless you believe that the big financial institutions were intentionally trying to blow themselves up, they were unable to spot a number of the issues.”

He continued: “I think it is asking a lot for regulators to be perfect — because they won’t be. But what you have here is a mechanism that gives regulation a much greater chance to be successful.”

Economy adds 431K jobs but few in private sector
YAHOO
By JEANNINE AVERSA, AP Economics Writer
4 June 2010

WASHINGTON – A wave of census hiring lifted payrolls by 431,000 in May, but job creation by private companies grew at the slowest pace since the start of the year. The unemployment rate dipped to 9.7 percent as people gave up searching for work.

The Labor Department's new employment snapshot released Friday suggested that outside of the burst of hiring of temporary census workers by the federal government many private employers are wary of bulking up their work forces.  That indicates the economic recovery may not bring relief fast enough for millions of Americans who are unemployed.  Virtually all the job creation in May came from the hiring of 411,000 census workers. Such hiring peaked in May and will begin tailing off in June.

By contrast, hiring by private employers, the backbone of the economy, slowed sharply. They added just 41,000 jobs, down from 218,000 in April and the fewest since January.

"Although the economic outlook is improving, the recovery is still pretty tepid," said Paul Ashworth, senior U.S. economist at Capital Economics.

The weakness in private hiring rattled Wall Street before the market opened. Stock futures tumbled and bond prices rose, as investors sought the safety of U.S. Treasurys.  The unemployment rate, which is derived from a separate survey than the payroll figures, fell to 9.7 percent from 9.9 percent. The dip partly reflected 322,000 people leaving the labor force for a variety of reasons.  All told, 15 million people were unemployed in May.

Counting people who have given up looking for work and part-timers who would rather be working full time, the "underemployment" rate fell to 16.6 percent in May from 17.1 percent in April. That reflected fewer people forced into part-time work. Still, the high underemployment figure shows how difficult it is for jobseekers to find work.  The number of people out of work six months or longer reached 6.76 million in May, a new high. They made up 46 percent of all unemployed people, also a record high.

Employers across a range of industries last month added jobs at a slower pace — or cut them. Factories, professional and business services, leisure and hospitality companies, and education and health care firms all slowed hiring. Financial services, construction companies and retailers all pared jobs. Government, however, led the way in hiring, adding a whopping 390,000 positions last month.

Job gains in April were the same as first reported, while payrolls in March were slightly less — 208,000 versus 230,000.  The prospect of persistently high unemployment is likely to prevent consumers from going on the kinds of shopping sprees they typically do during early phases of recoveries. That's a key reason why this recovery isn't as energetic as those usually seen in the past.

Workers did see wages rise modestly last month.  Nationwide, average hourly earnings rose to $22.57, from $22.50 in April. However, inflation was nibbling into paychecks. Over the past 12 months, wages rose 1.9 percent, while inflation was up 2.2 percent.

The unemployment rate in October hit 10.1 percent, a 26-year high. Some analysts think it could go a bit higher and peak at 10.2 or 10.4 percent by June. However, that's lower than some forecasts earlier this year of 11 percent. 


About 125,000 new jobs are needed each month just to keep up with population growth and prevent the unemployment rate from rising.

Hiring isn't expected to be consistently strong enough to quickly drive down the unemployment rate this year. Economists think the rate will remain above 9 percent by the November midterm elections. That could make Democratic and Republican incumbents in Congress vulnerable.

Only 20 percent of Americans consider the economy in good condition, according to an Associated Press-GfK Poll conducted in mid-May.

Chrysler LLC said and Ford Motor Co. last month announced plans to hire as auto sales have risen. But others are still laying off workers. Hewlett-Packard Co. said this week it is cutting 9,000 jobs in its technology services division. And chocolate-maker Hershey Co. may cut 600 jobs.
Trade group says service sector grows in May
YAHOO
By ALAN ZIBEL, AP Business Writer
3 June 2010

WASHINGTON – The U.S. service sector expanded in May for the fifth consecutive month, suggesting the economy will add more jobs and strengthen.

The Institute for Supply Management, a trade group of purchasing executives, said Thursday that its service index was unchanged at 55.4 in May, the same level as April and March. A level above 50 indicates growth.

ISM also says its jobs measure increased, reversing 28 months of contraction. Employers "are now starting to feel a bit more confidence as far as bringing back some jobs," said Anthony Nieves, a Hilton Worldwide executive who serves as chairman of ISM's non-manufacturing business survey committee.

The service sector is key for the economy as it accounts for about 80 percent of U.S. jobs excluding farmworkers. It includes jobs in such areas as health care, retail and financial services. The service sector has lagged behind the much smaller manufacturing sector in the recovery. Some economist said the level of growth last month wasn't fast enough to help the sector catch up.

"This report was somewhat disappointing in that while continuing to show expansion, there is little upward momentum" in the economy apart from manufacturing, wrote James Marple, senior US economist with TD Bank.

ISM said its measure of business activity rose for the sixth consecutive month. A measure of new orders dipped but still indicated growth. New orders signal future business.

Sixteen of the 18 industries ISM surveys said they grew in May. They were led by arts and entertainment, real estate, the information sector, agriculture, and management and back-office support services companies. The two that shrank were education, health care and social services.

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.

EDITORIAL: Government Motors repayment fraud
The bankrupt automaker still isn't firing on all cylinders
Washington Times
April 23, 2010

General Motors lost $3.4 billion in the fourth quarter of 2009 and is still struggling to reorganize so the company can try to eke out a profit. This grim reality didn't stop GM from making hay last week for supposedly paying back a $6.7 billion government loan five years ahead of schedule. What was left unsaid was that the automaker used another kitty of taxpayer cash to pay off the earlier government loan. This is an accounting shell game, not progress.

Previously unreleased documents supplied to The Washington Times reveal that GM specifically used funds it received from the Troubled Asset Relief Program to pay off the government loan. According to Neil Barofsky, the special inspector general for TARP, $4.7 billion of $6.7 billion - 70 percent - of what GM paid back came from TARP money the company received. "The one thing a lot of people overlook with this is where they got the money to pay the loan," Mr. Barofsky told Fox News' Neil Cavuto on Wednesday. "It isn't from earnings." The numbers are based on a quarterly report Mr. Barofsky's office provided to Congress last week.

Jared Bernstein, chief economist and economic policy adviser to Vice President Joseph R. Biden Jr., disputes the special inspector general's findings. "That is not correct, I don't think that is correct," Mr. Bernstein told The Washington Times. "[General Motors] repaid with funds from their own cash accounts, from their own earnings." The cash used by GM to pay back the loan "is the property of General Motors, there is no question about that," he insisted. Some of the money used to pay off the loans may have originated from TARP funds, but "it is really hard to know," he equivocated, because the funds are mixed together and "it is like trying to put an omelet back together again."

The Treasury Department's press office also disagreed with Mr. Barofsky's characterization that GM paid off one credit line with another credit line. The watchdog, however, won't budge. When asked how to tell whether the $4.7 billion used to pay off the government loan came from TARP funds and not some other source, a spokesman for the Special Inspector General's Office explained: "We have a letter from General Motors requesting that they take the money out of escrow and pay the other debt down. And the money in the escrow was clearly TARP funding." That letter has been released by the Special Inspector General's Office.

Despite misleadingly rosy propaganda fed to the press, the sad saga of General Motors' transformation into Government Motors continues. As a ward of the state, GM has to do the bidding of its Washington masters and stay in lock step with the Democrats' claims about the company's condition. The truth is that GM's condition remains poor.

The only reason the company has been able to pay off its government loan is because the Obama administration has given GM more money than it has been able to spend. Hence, proceeds from one loan are sitting around to be used to pay down another loan. That's hardly evidence that GM has been a good investment. To the contrary, the shell game makes clear that the Obama administration is wasting billions of taxpayer dollars on a carmaker that is careening toward a cliff.
GM pays back government loans from US, Canada
YAHOO
By TOM KRISHER, AP Auto Writer
21 April 2010

DETROIT – General Motors Co. has repaid $8.1 billion in loans it got from the U.S. and Canadian governments, a move its CEO says is a sign the automaker is on the road to recovery.

CEO Ed Whitacre announced the repayments Wednesday at GM's Fairfax Assembly Plant in Kansas City, Kan., where he said GM is investing $257 million in that factory and the Detroit-Hamtramck plant. He was to meet with top lawmakers in Washington on Wednesday afternoon.  The White House pointed to GM's repayment of the loan and Chrysler LLC's posting of an operating profit in the first quarter of 2010 as concrete signs that the bailout of the U.S. automakers was working.

In a report, the Obama administration noted the American auto industry lost more than 400,000 jobs in 2008 and analysts estimated another 1 million would have been lost had GM and Chrysler been liquidated. In the past nine months, the White House said automakers have added 45,000 jobs, the industry's strongest job growth in nearly a decade.

"This turnaround wasn't an accident of history," White House economic adviser Larry Summers said in a blog posting.

GM got a total of $52 billion from the U.S. government and $9.5 billion from the Canadian and Ontario governments as it went through bankruptcy protection last year. At first the entire amount of U.S. aid was considered a loan as the government tried to keep GM from going under and pulling the fragile economy into a depression.  But during bankruptcy, the U.S. government reduced the loan portion to $6.7 billion and converted the rest to company stock, while the Canadian government held $1.4 billion in loans. Those loans were repaid Tuesday, five years ahead of schedule.

The automaker hopes to begin repaying the remaining $45.3 billion to the U.S. government and $8.1 billion to Canada via a public stock offering, perhaps later this year. The U.S. government now owns 61 percent of the company and Canada owns roughly 12 percent.

"Nobody was happy that GM needed government loans — not the governments, not the taxpayers and, quite frankly, not the company," Whitacre wrote in an op-ed article that appeared on The Wall Street Journal's Web site Tuesday night. "We believe we can best thank the citizens of the U.S. and Canada by making sure that their investments are hard at work everyday, building high quality, fuel-efficient vehicles."

The quality of U.S. vehicles got a surprising vote of confidence in a new poll. An Associated Press-GfK survey finds that slightly more Americans now say the U.S. makes better-quality vehicles than Asia, with 38 percent saying U.S. cars are best and 33 percent preferring autos made by Asian companies.  In a December 2006 AP-AOL poll, 46 percent said Asian countries made superior cars, while just 29 percent preferred American vehicles, reflecting a perception of U.S. automotive inferiority that began taking hold about three decades ago.

GM's investments in the Kansas and Michigan factories will not create any new jobs, but will preserve jobs at both plants. Both will build the next generation of the popular midsize Chevrolet Malibu.

The Kansas plant, which employs 3,869 workers, also builds the midsize Buick LaCrosse luxury sedan. The Detroit-Hamtramck plant, which has 1,048 employees, now builds the Cadillac DTS and Buick Lucerne large sedans and is gearing up to make the Chevrolet Volt rechargeable electric car.  During the financial crisis that led to GM filing for bankruptcy protection last year, the automaker closed 14 factories and shed more than 65,000 blue-collar jobs in the U.S. through buyouts, early retirement offers and layoffs. The company now employs about 40,000 hourly workers in the U.S.

Even the preservation of jobs is good news for a nation with an unemployment rate close to 10 percent.

Employers nationwide in March added 162,000 jobs, the most in three years. But the pace of the economic recovery and job creation won't be robust enough to quickly drive down the unemployment rate. It's been stuck at 9.7 percent for three months, close to its highest levels since the 1980s.

GM had made about $2 billion in loan payments to the U.S. government and $384 million to Canada in December and March, and had promised to repay the full loans by June. But company officials said sales of newer models have improved GM's cash flow and allowed it to make the remaining $5.8 billion in payments early.  U.S. Treasury Secretary Timothy Geithner said in a statement that he's confident GM is on a path toward viability.

"This continued progress is a positive sign for our auto investment — not only more funds recovered for the taxpayer, but also countless jobs saved and the successful stabilization of a vital industry for our country," he said in a statement.

The Treasury Department said total repayments under the Troubled Asset Relief Program, or TARP, now stand at $186 billion, with less than $200 billion in bailout money outstanding.  The government still has $2.1 billion worth of GM preferred stock, plus its 61 percent share of common equity, the statement said.  GM officials say the company's public stock offering will take place when the markets and the company are ready. They will not predict how much of the remaining government debt will be repaid from the stock offering, but said it likely will take years for the governments to divest themselves fully.

The stock offering hinges on GM posting a profit, which Whitacre has said could come this year. GM lost $3.4 billion in the fourth quarter of 2009 on revenues of $32.3 billion.

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.”


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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!


BULLS & BEARS REVERSED?
No wonder there is a disconnect between EU and US markets/banks/culture!!!  Weston's "Sister City" is Trancoso, Portugal.

Moody’s Cuts Portugal’s Credit Rating
NYTIMES
By JAMES KANTER
July 13, 2010

BRUSSELS — Portugal’s credit rating was cut two notches Tuesday by Moody’s Investors Service, lending urgency to the discussions of E.U. finance ministers about how banks would be affected if a government were to default on its debts.  Moody’s said it was cutting Portugal’s sovereign bond ratings to A1 — still investment grade — from Aa2. It noted that the national debt had risen sharply relative to gross domestic product as a result of spending on economic stimulus measures, and it warned that weak growth would weigh on government finances for two or three more years.

The Portuguese Finance Minister Fernando Teixeira dos Santos said the downgrade, which followed cuts by other rating agencies, was expected.

“There is no point grieving over this,” Mr. Teixeira dos Santos was quoted as saying by The Associated Press in Lisbon. “We have to do what the markets demand, which is swiftly put our public finances in order.”

Meanwhile, officials in Brussels were discussing for a second day how many details to release from bank stress tests when the data are made public July 23. The tests are meant to reassure investors that a safety net of €750 billion, or nearly $1 trillion, will be enough to calm the debt crisis. But the results could also push banks to seek extra financing to increase the cushion against potential losses.

“The European banking sector is, over all, resilient,” Olli Rehn, the European commissioner for economic and monetary affairs, said Monday night. “At the same time, when we publish the stress tests we will have to prepare for any pockets of vulnerability.”

The euro fell slightly against the dollar Tuesday, partly on concerns about the results of the stress tests and warnings that more needed to be done to clarify how they were being conducted. But stocks rose, with the Stoxx Europe 600 index gaining 1.6 percent by early afternoon.  Countries in the European Union, along with the International Monetary Fund, created the superfund earlier this year to ease fears about mounting debt in Europe.

Some governments want the fund to be available for banks that fail their stress tests and that are unable to recapitalize in the markets.  Slovakia, however, has held up the formal activation of the fund. Its new government has sought negotiations on how much it will contribute.

Jean-Claude Juncker, head of the group of euro zone finance ministers, said that the issues raised by Slovakia could be resolved and that the fund would be “available without any doubt by the end of the month.”

Much of the concern in Europe has been about the Spanish banking sector, where the implosion of a housing bubble helped set off a deep recession and ensuing concern about the public finances.  But on Monday, the Fitch ratings agency said that even under extreme stress, Spain’s national fund for restructuring its banking sector would be more than adequate to cover potential losseson the domestic loan portfolio.

Mr. Rehn offered additional encouragement to Spain, saying that he expected “the same competent teamwork and resilience will be seen in the Spanish economy and its reforms” as had been displayed by the nation’s victorious soccer team Sunday night.  The stress tests on the health of 91 banks are being carried out by the Committee of European Banking Supervisors, which is made up of national regulators from across the European Union.

The list of banks includes most of the German Landesbanks, which have close ties to local governments, as well as numerous Spanish thrift institutions, or cajas.  Both categories are regarded as vulnerable, and investors and analysts have sought more detailed information on their holdings and liabilities.  The largest multinational banks in Europe will also be tested, including HSBC and Barclays in Britain, Deutsche Bank and Commerzbank in Germany, and Société Générale and BNP Paribas in France.

Banks in some Eastern European countries will be tested, including Poland, Slovenia and Hungary.



Caja Madrid said to ask for 3 billion euros of support
A string of downgrades hit the caja sector from S&P and Fitch
By Barbara Kollmeyer, MarketWatch
June 1, 2010, 10:03 a.m. EDT

MADRID (MarketWatch) -- The stream of negative news from Spain's savings bank sector continued on Tuesday, with a report that the second largest player, Caja Madrid, will tap the government for 3 billion euros ($3.6 billion) of rescue funds.

A spokesperson for Caja Madrid said the report that appeared in several Spanish newspapers saying it will ask for funds from the government's rescue fund was "speculation."

The savings bank said last Friday it was in talks to merge with several regional cajas -- Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia and Caja Rioja.

More bad news emerged for Caja Madrid when Standard & Poor's placed its A/A-1 long and short-term ratings on the savings bank on CreditWatch negative, saying it expects "pronounced pressure" on its operating profit this year and into 2011.

The negative status reflects the possibility of lowering counterparty credit ratings on Caja Madrid, though S&P said any downgrade is unlikely to exceed one notch. It's standalone credit profile and its hybrid securities could suffer a downgrade by one or more notches, warned the ratings agency.

S&P said Caja Madrid, Spain's fourth-largest banking group by total assets, will be closely monitored over the next 18 months to evaluate the magnitude of expected deterioration.

Downgraded on Tuesday was Spanish bank Banco Sabadell, the nation's sixth-largest group by total assets.

Fitch Ratings, who downgraded Spanish sovereign debt last Friday, cut its long-term debt rating on Sabadell to A from A+.

Fitch also downgraded Caja de Ahorros del Mediterraneo's long-term debt to BBB+ from A- with a negative outlook, and Banco de Valencia and Bancaja each to BBB from BBB+ with stable outlooks.

Caja de Ahorros del Mediterraneo is Spain's only publicly traded savings bank. Those shares (SIBE:ES:CAM) were down 0.2% in Madrid.

It wasn't all bad for Sabadell, whose shares were down 3.6% amid weaker Spanish and European markets overall from nearly the start of trading.

Fitch praised its "good domestic retail franchise, particularly with small to medium-sized enterprises, as well as its track record of sound pre-impairment operating profit, good cost efficiency and an improvement in regulatory capital."
Boxing in savings banks

Up until a couple of weeks ago, the term "caja", which literally means box or chest, was not such a familiar term with global investors, but many are now getting a crash course as news is rapidly spilling out from the sector.

Spain has 45 savings banks and an increasing number are now in merger talks -- ailing from the collapse of the housing market -- amid some estimates that the country has 30% more bank branches than it needs.

Pressure to merge and restructure has come from the International Monetary Fund and the Spanish government.

The government has set up a Fund for Orderly Bank Restructuring, or FROB, to speed along this process, and given the savings banks until June 30 to ask for the money they need.

The fund has a total value of €99 billion and is funded with €9 billion of capital and up to €90 billion of government-backed debt.

And concerns over cajas have added to pressure on Spanish stocks, over fears that caja bailouts will cost the government much more than it anticipates, at a time when it's struggling to bring down a budget deficit from 11.2% in 2009 to 3% in 2013 -- a requirement under euro-area membership.

After relatively light losses in the prior session with key U.S. and U.K. markets closed, Spanish stocks were sinking again Tuesday.

The IBEX-35 (SIBE:XX:IBEX) was down 2.6%, reflecting some of the biggest losses among European exchanges. See Europe Markets

Some of the losses are a hangover from last Friday after Fitch became the second major ratings agency to downgrade Spanish sovereign debt -- to AA+ from AAA.

Standard & Poor's cut Spain's debt rating back in April and other agencies have been expected to follow, with Moody's the last to keep its Spain rating at AAA.

Fitch believes that Spain's 20%-plus unemployment rate, the legacy of its construction boom and a high level of indebtedness, will weigh on private consumption and investment in the medium term, complicating matters for the government, which last week got its austerity measures passed in parliament by a single vote.

Fitch said the FROB fund should be enough to cover expected losses from Spain's banking sector, "using very conservative non-performing loss and loss-given default ratios, and assuming no pre-impairment operating profit nor support from existing shareholders."

The caja sector, it noted, is "more exposed to the real estate and construction sectors, which could weigh more heavily on its asset quality. Furthermore, the restructuring of this sector is progressing slowly, which could intensify constraints on the supply of credit and affect the pace of economic recovery for the country."

Greece Approves Pension Overhaul Despite Protests
NYTIMES
By LANDON THOMAS Jr. and NIKI KITSANTONIS
July 8, 2010

ATHENS — The Greek government took a major step forward in overhauling its debt-plagued economy by forcing through, in principle, a pension bill that would dramatically cut the cost of Greece’s welfare state by increasing the retirement age and slashing benefits.

For Prime Minister George Papandreou, who commands a seven member majority in his country’s fractious parliament, the bill’s many provisions represent the beginning of end of the cradle-to-grave state compact that his father put in place in the early 1980s.

The plan was approved in principle by a vote of 159-137 late Wednesday. Individual provisions were to be voted on Thursday before a final vote on the whole package.

Three months into an historic bail program worth 110 billion euros — about $140 billion or half of Greece’s annual gross domestic product — the government has so far exceeded the deficit cutting benchmarks set by the International Monetary Fund. Government officials here see the bill’s passage as further evidence for still-skeptical international investors that Greece is committed to pushing through painful reform measures.

“This is our passport out of hell,” said Yannis Stournaras an Athens-based economist who has advised past Socialist governments. “It represents the toughest challenge for Papandreou and goes to the very heart of his party. No politician has ever been able to do this.”

Greece’s generous pension system has allowed many employees to retire before they turn 50 and earn the right to rich payouts calculated on the basis of bonus-laden salaries. The bill would unify the retirement age at 65 years of age for both men and women and would reduce payouts by calculating salaries on lifetime income as opposed to a worker’s highest, most recent pay.

It would also make it easier for Greek companies to fire workers.

Athens was to a large extent shut down Thursday as public sector workers gathered in protest before the parliament building in Syntagma square. According to police estimates, the numbers were between 5,000 and 10,000 and despite a few challenges by hooded youths carrying sticks and axes, riot police with gas masks and shields seemed to be in control of the situation.

“Nobody expected this — this is worse than the occupation under the Germans,” said Nikos Stathas, 60, a plumber who is just retiring now. He says he has just got his pension, but he is worried about his children and grandchildren. “This will demolish their retirement,” he added.

Such strong sentiments aside, by most accounts protests have been relatively restrained since three people was killed in an attack on a bank in May — a sign perhaps that Greeks, while angry and unhappy at the sacrifices forced upon them, understand that they face little other choice than to tighten their belt.

Mr. Papandreou, a life-long Socialist, has managed to keep control of his party despite protests among influential advisers like his economy minister, Louka Katseli.

A team from the I.M.F. and the European Union is due in Athens next month to examine the government’s progress, before the next 9 billion euro tranche is to be released.

Mr. Stournaras pointed out that the Greek economy performed better than expected in the first quarter, sustained by a surprisingly robust showing for private consumption, which was up by 1.5 percent.

A sharp cutback in public investment caused growth to decline by 2.5 percent for the quarter, but Mr. Stournaras expects the economy to shrink by less than the I.M.F. estimate of 4 percent and he forecasts a budget deficit this year of about 7 percent.

According to a presentation by the government’s debt management agency, sharp decreases in public sector wages and investment, plus an increase in taxes have driven the improved deficit picture.

"The government's popularity is holding up very well," said Paul Mylonas, chief economist at the National Bank of Greece. "But after several years of reform, adjustment fatigue may set in if light does not appear at the end of the tunnel."

Indeed, senior government officials concede that they have yet to win back the confidence of foreign bond investors, many of whom believe that some form of a debt restructuring is inevitable, as the 10 percent-plus yields on the government’s long term debt show.

“No one in Greece is looking at a debt restructuring. It’s just not going to happen,” said Petros Christodoulou, the head of the debt management agency insisted last month at an investor conference in London.

Still, doubts abound that the economy can survive the dramatic public sector retrenchment and continue to generate needed tax revenues to make a dent in a debt that even within three years will still be at around 120 percent of G.D.P.
Greek unions call new strike over pension reform
Yahoo
12 May 2010

ATHENS, Greece – Greek labor unions announced a new general strike to protest pension reforms next week, as government officials waited Wednesday for the first installment of a euro110 billion ($140 billion) rescue package designed to stave off bankruptcy.

Greece's two main public and private sector unions set a walkout for May 20 — a day after Greece must repay some euro9 billion ($11.4 billion) in expiring debt, using loans from its eurozone partners and the International Monetary Fund.

The Mediterranean country's acute debt problems, resulting from years of overspending and falsified accounts, battered global markets and weakened the euro. In response, the European Union and the IMF threw together a euro750 billion ($952.35 billion) standby package early Monday to prevent the debt crisis from spreading and protect the common euro currency. That package came in addition to the billions already pledged to Greece.

On Wednesday, EU officials also advocated unprecedented scrutiny of countries' spending plans even before they go to their respective parliaments for approval, and serious financial penalties for countries that break the rules.

Greek finance ministry officials said a first installment of the international rescue package — euro5.5 billion ($6.98 billion) from the IMF — was due later Wednesday. Athens also expects euro14.5 billion ($18.4 bllion) requested from the European Union to arrive just before the May 19 deadline.

Next week's strike will cancel flights, ferry and rail services, leave hospitals on emergency staff and close schools and public services. There will also be demonstrations in major Greek cities, raising fears of further street violence.

During riots in Athens last week, three workers died as a bank was torched by demonstrators. Some 100,000 people took to the streets to protest austerity measures the center-left Socialist government took to secure the international bailout.

Unions say those earning low wages will suffer disproportionately from the proposed increase in retirement ages and pension cuts. The reforms follow public service pay cuts and consumer tax increases that the government says will save euro30 billion ($40 billion) over the next three years and bring the budget deficit under the EU ceiling of 3 percent of annual national output — compared to Greece's current 13.6 percent.

Giannis Panagopoulos, head of the GSEE private sector union, said further strikes would follow next week's walkout.

"To the unfair and anti-social fiscal measures announced by the government, there comes now to be added an equally unfair draft law on the social security system," Panagopoulos said.

GSEE and the ADEDY civil servant union already planned protests in central Athens later Wednesday.

The country's borrowing costs declined further Wednesday, with the yield difference between Greek and benchmark German 10-year bonds at 4.45 percentage points in afternoon trading — down from a record 10 points last week.

Stocks on the Athens stock exchange gained slightly, with the benchmark general index closing 0.8 percent up at 1,749.59 points.
Greece, Debt and a Lesson
NYTIMES
By DAVID LEONHARDT
May 11, 2010

It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.

Yet in the back of your mind comes a nagging question: how different, really, is the United States?

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

We have not figured out the kind of government we want. We’re in favor of Medicare, Social Security, good schools, wide highways, a strong military — and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and this country.

Many people, including some who claim to be outraged by the deficit, still haven’t acknowledged the disconnect. Just last weekend, Tea Party members helped deny Senator Robert Bennett, the Utah Republican, his party’s nomination for his re-election campaign, in part because he had co-sponsored a health reform plan with a Democratic senator. Economists generally think the plan would have done more to reduce Medicare spending than the bill that passed. So, whatever its intentions, the Tea Party effectively punished Mr. Bennett for not being a big enough fan of big government.

Or consider the different fates of two parts of President Obama’s agenda. Mr. Obama has unrealistically said that taxes do not need to rise on households making less than $250,000, and this position has come to be seen as an ironclad vow. He has also called for billions of dollars in sensible cuts to agribusiness subsidies, tax loopholes and the like. The news media and Congress have largely ignored these proposals.

The message seems clear: woe unto the politician — in Washington, Athens or London — who tries to go beyond platitudes and show some actual fiscal restraint.

This situation obviously can’t continue, as Robert Greenstein, perhaps the leading liberal budget expert, points out. Mr. Greenstein’s politics make him sympathetic to the worry that all the deficit talk will become an excuse to pull back on stimulus spending while unemployment remains high or to gut social programs. But he also knows the numbers well enough to understand that our Greece moment, whether it takes the form of a crisis or not, is coming.

“Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ ” Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. “But the bottom line is, there really is no avoiding the hard choices.”

•

For Greece and possibly other European countries, change will come from the outside. The countries lending the money for the Greek bailout — chiefly Germany — are demanding big cuts to the welfare state. Greek citizens will soon have a harder time retiring in their 40s.

Here in the United States, we’re likely to have the chance to solve our problems before our lenders demand it. Those lenders continue see the American economy as a safe haven, thanks to our history of strong economic growth and political flexibility.

It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. In the wake of the early 1990s recession, for example, almost no one imagined that the budget would show a surplus by the end of the decade.

But the main issue isn’t the near-term deficit — the one created by the recession, the wars in Iraq and Afghanistan, the Bush tax cuts and the Obama stimulus. The main issue is the long-term deficit.

As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt.

As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs).

Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.

This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear.

Democrats have more of a strategy — raising taxes on the rich and using health reform to reduce the growth of Medicare spending — but it is not nearly sufficient.

What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.

Much of this may be unpleasant. But by no means will it doom us to reduced living standards or even slow economic growth. We can still afford to spend more on Medicare — even more per person — than we do today, and more on education, the military and other areas, too. We just can’t afford the unrealistic promises that the government has made. We need to make choices.

“It’s not a matter of whether we have the resources to solve our problems,” as Alan Krueger, the chief economist at the Treasury Department, says. “It’s a matter of political will.”

For now at least, our elected officials are hardly the only ones who lack that will.


EU Seeks Mechanism to Contain Greek Debt Crisis
NYTIMES
By REUTERS
May 9, 2010
Filed at 9:56 a.m. ET

BRUSSELS (Reuters) - European Union finance ministers called for strong action to ensure stability before they met on Sunday to discuss ways of ring-fencing Greece's debt crisis to stop it spreading to countries like Portugal and Spain.  The European Commission will ask the ministers to extend an aid mechanism for non-euro zone countries to nations in the single-currency bloc to safeguard euro zone financial stability, EU sources said.  The Commission will also ask the extraordinary meeting of ministers to raise the existing amount available under the mechanism, called the balance-of-payments facility, by 60 billion euros ($80.5 billion). The maximum available now is 50 billion euros.

"We are going to defend the euro... we have to give more stability to our guarantee," Spanish Economy Minister Elena Salgado told reporters before the Brussels talks.

Ministers of France, Finland and other countries also stressed the need to defend the euro currency.

"I think it is important that we do everything we can to stabilize the markets, to show that we are coming through one of the difficult periods, and that we are prepared to do what is necessary to ensure that we have that stability," British finance minister Alistair Darling told reporters.

Financial markets have been pounding euro zone countries with high deficits or debts as well as low economic growth, threatening to force Portugal, Spain and Ireland into a position where, like Greece, they would need to seek financial aid.  An EU summit on Friday approved 110 billion euros ($147 billion) in emergency EU/IMF loans to Greece over three years to help it over a budget crisis in exchange for austerity measures so sharp that they have already caused violent protests.

Economists estimate that if Portugal, Ireland and Spain eventually come to require similar three-year bailouts, the total cost could be some 500 billion euros.  The EU sources said the 60 billion top-up under the aid mechanism would be used as base capital, or collateral, for borrowing on the markets, which would allow the Commission to raise up to 10 times that amount.  The 60 billion top-up would be guaranteed by all 27 members of the European Union and the loans, if paid out to an EU member, would carry conditions set by the International Monetary Fund, one EU source said.

As an additional measure for euro zone countries only, the Commission will propose a separate mechanism of intergovernmental loans, the source said.

MARKET TURMOIL

The leaders of the 16 countries that use the single currency, who have been accused of heightening market uncertainty through lack of action, agreed last week to speed budget cuts and ensure deficit targets are met this year.

"The euro zone is going through the worst crisis since its creation," French President Nicolas Sarkozy said after Friday's euro zone summit in Brussels.

Fears that a euro zone debt crisis could rock banks and the global economy like the September 2008 collapse of U.S. bank Lehman Brothers swept through markets last week, pushing global stocks to around a three-month low.  Last week's euro zone summit asked for a European Stabilisation mechanism to be ready before markets open on Monday.  Some economists said the move was welcome news, but it would cure the symptoms, rather than the disease.

"By putting in place additional safeguards for the euro area financial system, governments finally appear to be rising to the challenge of the sovereign debt crisis," Morgan Stanley said in a research note to clients.

"But, like the measures taken before - for the benefit of Greece - a stabilisation fund is just buying time for distressed borrowers," the bank said.

It added: "The fiscal policy action taken in these countries during this "extra time" is essential. If yet another rescue mechanism isn't followed by aggressive austerity measures, the problem just continues to fester - and could eventually spread even wider."

Greek parliament votes in favour of austerity measures
Page last updated at 16:17 GMT, Thursday, 6 May 2010 17:17 UK
George Papandreou
Prime Minister George Papandreou said violence was not a solution

Greece's parliament has voted in favour of the hefty cuts and reforms proposed by the government to address the country's financial crisis.

With 172 of 300 votes in favour, one report said a second vote would have to be passed for the bill to become law.

The vote comes a day after three bank workers died in a petrol bomb attack as demonstrations over the planned austerity measures turned violent.

The finance minister said the measures were the only way to avoid bankruptcy.

But as the vote was held demonstrators gathered outside parliament to protest against the measures.

The deaths have shocked many in Greece. Bank workers have gone on strike in anger at the loss of their colleagues. 

Mourners paid their tributes outside the bank where the three workers were killed

Prime Minister George Papandreou said violence was "not a solution".

"The future of Greece is at stake. The economy, democracy and social cohesion are being put to the test," he said in parliament ahead of the vote.

'Avoid bankruptcy'

Greek finance minister George Papaconstantinou has warned Greece is two weeks away from defaulting on part of its debt; bonds worth 8.5bn euros ($12bn; £7.2bn) fall due on 19 May.

GREEK AUSTERITY MEASURES
Public sector pay frozen until 2014
Public sector salary bonuses - equivalent to two months' extra pay - scrapped or capped
Public sector allowances cut by 20%
State pensions frozen or cut; contribution period up from 37 to 40 years
Average retirement age up from 61 to 63; early retirement restricted
VAT increased from 19% to 23%
Taxes on fuel, alcohol and tobacco up 10%
One-off tax on profits, plus new gambling, property and green taxes

"The state's coffers don't have that money," he told parliament earlier. "Because today... the country can't borrow it from the international market.

"And because the only way for the country to avoid bankruptcy and suspension of payments is to take the money from our European partners and the International Monetary Fund."

But in order to receive the 110bn euro ($142bn; £95bn) bail-out, Greece must agree to a three-year austerity programme, he said.

The measures include wage freezes, pension cuts and tax rises.

The aim is to achieve fresh budget cuts of 30bn ($38bn; £25bn) euros over three years, with the goal of cutting Greece's public deficit to less than 3% of GDP by 2014. It currently stands at 13.6%.

'Fair demands'

Wednesday's deaths - the first such fatalities in protests in nearly 20 years in Greece - have shocked many people in Greece.


What went wrong in Greece?

An old drachma note and a euro note
Greece's economic reforms that led to it abandoning the drachma as its currency in favour of the euro in 2002 made it easier for the country to borrow money.
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The Marfin bank branch where the two women - one pregnant - and a man died has become the focus for grieving, with a steady stream of flowers being placed at the front door by people paying their respects, the BBC's Duncan Kennedy in Athens reports.

Shops and businesses have been clearing up after the riots. Many are boarded up, others are burnt out shells, he adds.

Bank workers took to the streets on Thursday to demonstrate their outrage at the deaths.

President Karolos Papoulias has warned Greece is on the "brink of the abyss".

"We are all responsible so that it does not take the step into the void," he said in a statement.

However, unions have been undeterred by Wednesday's events, urging members to continue demonstrating.

The GSEE private sector union condemned the "fires, blind violence, vandalism", but added: "We are determined to pursue and extend our struggle to meet our fair demands."



E.U. Official Vents Frustration Over Ratings Agencies
NYTIMES
By JAMES KANTER
May 5, 2010

BRUSSELS — The European Union’s financial services commissioner, Michel Barnier, vented his frustration with U.S.-based credit ratings agencies Wednesday as Moody’s Investors Service put Portugal on review for another possible downgrade that could make it more difficult for the country to service its debt.

Mr. Barnier was briefing reporters ahead of his first official visit to the United States, where he was to meet the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Timothy F. Geithner. He will also meet with Wall Street titans like Lloyd C. Blankfein, the chief executive of Goldman Sachs, and Jamie Dimon, the chief executive of JPMorgan Chase.

Mr. Barnier complained that there were too few debt rating agencies, and he suggested that they were overly dominated by U.S. owners.

“There are not enough ratings agencies, not enough competition, and not enough diversity,” he said. “Why should there not be an agency that is more European than those that exist today?”

A decision by Standard & Poor’s, also based in the United States, to downgrade Greece’s debt to junk status last month enraged E.U. officials, who questioned whether the ratings agencies were accurately assessing how likely it was that countries in the euro zone would default on their sovereign debts.

Mr. Barnier said it was “an open question” whether such an alternative agency should be run by the private sector or by a public body.

During his trip, Mr. Barnier will quiz Mr. Blankfein on controversial financial transactions like credit default swaps as part of efforts to gather data before deciding whether or not to ban certain practices in Europe, E.U. officials said.

Another thorny issue for Mr. Barnier is regulation of hedge funds. In March, Mr. Geithner warned Mr. Barnier in a letter not to pass a law on hedge funds “that would discriminate against U.S. firms and deny them the access to the E.U. market that the currently have.”

Mr. Barnier said Wednesday he would use his visit to Washington to establish a closer working relationship with Mr. Geithner and to reassure him that he was doing everything he could to pass a law that would be nondiscriminatory. But Mr. Barnier said that he would explain to Mr. Geithner that the final decision on legislation would be up to E.U. governments and the European Parliament.

Mr. Barnier may also deliver that message to top players in the private equity industry, like Henry Kravis, a co-founder of Kohlberg Kravis & Roberts, at a dinner Sunday in New York.

On Monday in Brussels, a powerful committee in the European Parliament is expected to hold a preliminary vote on the proposed law on hedge funds, which could include rules that would raise the bar for access of foreign funds and fund managers to the E.U. market.

Op-Ed Contributor
For Greece’s Economy, Geography Was Destiny
NYTIMES
By ROBERT D. KAPLAN
April 25, 2010

Stockbridge, Mass.

THE debt crisis that caused Greece to ask for an international bailout on Friday has been attributed to many things, all economic: Greece’s budget deficits, its lack of transparency and its over-the-top corruption, symbolized by the words “fakelaki,” for envelopes containing bribes, and “rousfeti,” political favors. But there is a deeper cause for the Greek crisis that no one dares mention because it implies an acceptance of fate: geography.

Greece is where the historically underdeveloped worlds of the Mediterranean and the Balkans overlap, and this has huge implications for its politics and economy. For northern Europe to include a country like Greece in its currency union is a demonstration of how truly ambitious the European project has been all along. Too ambitious, perhaps, many Germans and other Northern Europeans are now thinking.

That Europe’s problem economies — Greece, Italy, Spain and Portugal — are all in the south is no accident. Mediterranean societies, despite their innovations in politics (Athenian democracy and the Roman Republic) were, in the words of the 20th-century French historian Fernand Braudel, defined by “traditionalism and rigidity.”

The relatively poor quality of Mediterranean soils favored large holdings that were, perforce, under the control of the wealthy. This contributed to an inflexible social order, in which middle classes developed much later than in northern Europe, and which led to economic and political pathologies like statism and autocracy. It’s no surprise that for the last half-century Greek politics have been dominated by two families, the Karamanlises and the Papandreous.

It is also no accident that the budding European super-state of our era is concentrated in Europe’s medieval core, with Charlemagne’s capital city, Aix-la-Chapelle (now Aachen, Germany), still at its geographic center — close by the European Union power nexus of Brussels, The Hague, Maastricht in Holland and Strasbourg, France. This stretch of land, the spinal column of Old World civilization, is Europe’s richest sea and land interface.

The Low Countries, with their openness to the great ocean and wealth of protected rivers and waterways inland, were ideal for trade, movement and consequent political development. The loess soil is dark and productive, even as the forests provided a natural defense. European antiquity was defined by the geographic hold of the Mediterranean, but as Rome lost its hinterlands, history moved north.

It is not only the division between north and south that bedevils Europe. In the fourth century, the Roman Empire split into western and eastern halves, with dueling capitals at Rome and Constantinople. Rome’s western empire gave way to Charlemagne’s kingdom and the Vatican: Western Europe, that is. The eastern empire, Byzantium, was populated mainly by Greek-speaking Orthodox Christians, and then by Muslims after the Ottoman capture of Constantinople in 1453.

The Carpathian Mountains, which run northeast of the former Yugoslavia and divide Romania into two parts, partly reinforced this boundary between Rome and Byzantium, and later between the prosperous Hapsburg Empire in Vienna and the poorer Turkish Empire in Constantinople. Greece is far more the child of Byzantine and Turkish despotism than of Periclean Athens.

In antiquity Greece was the beneficiary of geography, the antechamber of the Near East — the place where the heartless systems of Egypt and Mesopotamia could be softened and humanized, leading to the invention of the West, so to speak. But in today’s Europe, Greece finds itself at the wrong, “orientalized” end of things. Yes, it is far more stable and prosperous than places like Bulgaria and Kosovo, but only because it was spared the ravages of Soviet-style communism.

To see just how much geography and old empires shape today’s Europe, look at how former Communist Eastern Europe has turned out: the countries in the north, heirs to Prussian and Hapsburg traditions — Poland, the Czech Republic and Hungary — have performed much better economically than the heirs to Byzantium and Ottoman Turkey: Romania, Bulgaria, Albania and Greece. And the parts of the former Yugoslavia that were under Hapsburg influence, Slovenia and Croatia, have surged ahead of their more Turkish neighbors, Serbia, Kosovo and Macedonia. The breakup of Yugoslavia in 1991, at least initially, mirrored the divisions between Rome and Byzantium.

The Greek debt crisis is the biggest challenge since those Yugoslav secessions to Europe’s attempt at overcoming its geographical and historical divisions. Whereas in the early decades of the cold war the European enterprise had to heal only the long-time rift between France and Germany, now it is a matter of Carolingian and Prussian Europe — Brussels and Berlin — incorporating the far-flung Mediterranean and Balkan peripheries.

And it is precisely because Europe, for the first time in history, faces no outside threat to its security that it may fall prey to the narcissism of its internal contradictions. That the European Union’s northern powers aren’t willing to bail Greece out entirely by themselves, but are relying on the International Monetary Fund to kick in up to $20 billion, shows that there are limits to how far they will go toward the dream of a unified supercontinent.

Still, just as geography has divided Europe, it also unites it. For example, a lowland corridor from the Atlantic to the Black Sea has allowed travelers for centuries to cross the length of Europe with speed and comfort, contributing to Europe’s cohesion and sense of itself. The Danube, as the Italian scholar Claudio Magris rhapsodizes, “draws German culture, with its dream of an Odyssey of the spirit, towards the east, mingling it with other cultures in countless hybrid metamorphoses.” Central Europe, cleft from the West during the cold war, is the continent’s universal joint: a fact that puts the responsibility for surmounting the politics of historical division squarely on the shoulders of a united Germany.

Germans should realize that Greece, with only 11 million people, nevertheless remains the ultimate register of Europe’s health. It is the only part of the Balkans accessible on several seaboards to the Mediterranean, is roughly equidistant from Brussels and Moscow, and is as close to Russia culturally as to Europe by virtue of its Eastern Orthodox Christianity. In a century that will likely see a resurgent Russia put pressure on Europe, especially on the former Soviet satellite states in the east, the state of politics in Athens will say much about the success or failure of the European project.

The good news is that northern Europeans know this, and will not let Greece fail. Indeed, to let Greece drift politically eastward would forfeit any hope of a big and inclusive Europe — geographically, politically and culturally — in favor of a small and petty one, Charlemagne’s empire pretending to be Rome.





European situation, according to a New York Times graphic...
Greece Calls for Activation of Financial Rescue Package
NYTIMES
By NIKI KITSANTONIS and MATTHEW SALTMARSH
April 23, 2010

ATHENS — Describing his country’s economy as “a sinking ship,” the Greek prime minister formally requested an international bailout on Friday, an unprecedented step that will test the bonds of the European Union.  In a nationally televised address, Prime Minister George Papandreou said two waves of austerity measures introduced by the government over the past few months had failed to convince the markets that Greece would get its finances under control or be able to avert defaulting on a mountain of debt.

“Now there is the risk of the sacrifices of the Greek people being lost as rates of borrowing continue to rise,” he said, speaking from the Aegean island of Kastellorizo.

“The time has come for us to ask our partners in the E.U. to activate the mechanism we formulated together,” he said, referring to an emergency aid package arranged two weeks ago. The plan foresees up to €30 billion, or $40 billion, in loans from Greece’s euro-zone partners, as well as up to €15 billion from the International Monetary Fund.

The activation of the E.U.-I.M.F. rescue plan, Mr. Papandreou said, “will send a strong message to the markets that the E.U. is not playing their game and will not leave its currency at risk.”

The announcement means that money from the I.M.F. can be expedited once the board of the fund has approved the terms. The fund is expected to provide €12 billion, according to E.U. officials.

“We are prepared to move expeditiously on this request,” Dominique Strauss-Kahn, the I.M.F. managing director, said in a statement issued in Washington.

The loans pledged by Greece’s euro-zone partners are still awaiting approval by legislators in some of the countries. French lawmakers, for example, will discuss France’s 21 percent contribution early next month.  In Germany, the bailout has proved to be politically unpopular and could face legal challenges before the country’s Constitutional Court.  The Finance Ministry in Berlin said that the E.U. and I.M.F. must first agree that the aid is needed as a last resort. But he said the German government is “ready to act” to clear the way in parliament.

“We in Germany are pledged to solidarity and we will show it,” Mr. Offer told reporters. “We’re doing this to stabilize the euro, which means it’s also in our own national interest.”

The European Commission, the European Central Bank and the I.M.F. have been holding talks in Athens to finalize the terms of the aid package, which were expected to be completed next week.  But even with those talks moving ahead investors have been worrying about the country’s financing needs in coming months and years.  Greece needs to raises around €10 billion in May to cover redemptions, coupon payments and its primary government deficit, according to investors.

The yield on benchmark 10-year Greek government bonds fell to 8.1 percent Friday after the reports, having touched fresh record Thursday close to 9 percent. The euro rose against the dollar after briefly touching the lowest point in a year early in the day.  The Athens composite share index gained almost 4 percent around midday, with shares in Greek banks surging after their recent sharp declines.

In his address, Mr. Papandreou did not confirm on widespread speculation in Athens that the release of the loans for Greece would be dependent on additional austerity measures. The two previous packages have already amounted to about 6 percent of gross domestic product.

Describing Greece's dire economic situation as “a sinking ship” his Socialist administration inherited from the outgoing conservatives last October, Mr. Papandreou said the rescue mechanism would “allow us to rebuild our ship with strong and resilient materials.”

On Thursday the European Union revised higher its estimate of the country’s 2009 budget deficit — meaning that austerity measures being negotiated with the I.M.F. and euro-zone countries might have to bite deeper.  Eurostat, the European Union’s statistics agency based in Luxembourg, raised its estimate of the country’s budget deficit for 2009 to 13.6 percent of gross domestic product, from the recent Greek government prediction of 12.9 percent.

The Greek Finance Ministry said in a statement that the announcement by Eurostat did not alter its goal of reducing the deficit by at least four percentage points of G.D.P. in 2010, as laid down in the Greek stability and growth program, which it forwarded to the European Commission for scrutiny.

Meanwhile, Moody's Investors Service, the ratings agency, downgraded the government bond ratings of Greece to A3 from A2 and placed them on review for further possible downgrade in view of the “significant risk that debt may only stabilize at a higher and more costly level than previously estimated.”

Even with the decline in yields Friday, investors expect a higher return for holding Greek 10-year debt than equivalent bonds issued by the Philippines and India.


Greece hit by strikes, riots over austerity plan
YAHOO
By ELENA BECATOROS, Associated Press Writer
March 11, 2010

ATHENS, Greece – Serious street clashes erupted between rioting youths and police in central Athens Thursday as some 30,000 people demonstrated during a nationwide strike against the cash-strapped government's austerity measures.

Hundreds of masked and hooded youths punched and kicked motorcycle police, knocking several off their bikes, as riot police responded with volleys of tear gas and stun grenades.

The violence spread after the end of the march to a nearby square, where police faced off with stone-throwing anarchists and suffocating clouds of tear gas sent patrons scurrying from open-air cafes.

Police say 12 suspected rioters were detained and two officers were injured.

Rioters used sledge hammers to smash the glass fronts of more than a dozen shops, banks, jewelers and a cinema. Youths also set fire to rubbish bins and a car, smashed bus stops, and chopped blocks off marble balustrades and building facades to use as projectiles.

Thursday's strike — the second in a week — brought the country to a virtual standstill, grounding all flights and bringing public transport to a halt. State hospitals were left with emergency staff only and all news broadcasts were suspended as workers walked off the job for 24 hours to protest spending cuts and tax hikes designed to tackle the country's debt crisis.

Riot police made heavy use of tear gas during the start-and-stop clashes throughout the demonstration, including outside Parliament. Strikers and protesters banged drums and chanted slogans such as "no sacrifice for plutocracy," and "real jobs, higher pay." People draped banners from apartment buildings reading: "No more sacrifices, war against war."

The demonstrators included hundreds of black-clad anarchists in crash helmets and ski masks, who repeatedly taunted and attacked riot police with stones and petrol bombs, at one point spraying officers with brown paint. Shopkeepers along the demonstration route hastily rolled down their shutters, while a few blocks away, people sat at outdoor restaurants, nonchalantly continuing their meals.

Tear gas wafted through the city center's streets, sending businessmen in suits scurrying for cover, their eyes streaming.

Minor clashes also broke out in the northern city of Thessaloniki, where about 14,000 people marched through the center.

Fears of a Greek default have undermined the euro for all 16 countries that share it, putting the Greek government under intense European Union pressure to quickly show fiscal improvement.

It has announced an additional euro4,8 billion ($65.33 billion) in savings through public sector salary cuts, hiring and pension freezes and consumer tax hikes to deal with its ballooning deficit, but the measures have led to a new wave of labor discontent.

The cutbacks, added to a previous euro11.2 billion ($15.24 billion) austerity plan, seek to reduce the country's budget deficit from 12.7 percent of annual output to 8.7 percent this year. The long-term target is to bring overspending below the EU ceiling of 3 percent of GDP in 2012.

The new plan sparked a wave of strikes and protests from labor unions whose reaction to the initial austerity measures had been muted. Thursday's strike shut down all public services and schools, leaving ferries tied up at port and suspending all news broadcasts for the day. However, some private bank branches were open despite calls from the bank employees' union to participate in the strike.

While their colleagues clashed with groups of protesters, some police joined the demonstration.

About 200 uniformed police, coast guard and fire brigade officers, who cannot go on strike but can hold protests, gathered at a square in the center of the city shortly before the marches got under way.

"The police and other security forces have been particularly hard hit by the new measures because our salaries are very low," said Yiannis Fanariotis, general secretary of one police association. He said the average policeman made about euro1,000-euro1,200 ($1,360-$1,635) a month if weekend and night shifts were included.

Joining the protest "doesn't feel strange, because we are working people like everybody else and we are all shouting out for our rights," he said.

The government says the tough cuts are its only way to dig Greece out of a crisis that has hammered the common European currency and alarmed international markets — inflating the loan-dependent country's borrowing costs.

But unions say ordinary Greeks are being called to pay a disproportionate price for past fiscal mismanagement.

"They are trying to make workers pay the price for this crisis," said Yiannis Panagopoulos, leader of Greece's largest union, the GSEE.

"These measures will not be effective and will throw the economy into deep freeze."

A general strike last Friday was marred by violence during a large protest march. Riot police used tear gas and baton charges against rock-throwing protesters, who smashed banks and storefronts, while left-wing protesters roughed up Panagopoulos as he was addressing a rally.

The labor unrest could spark fears that the government will have trouble in implementing its new measures.

Greece insists it doesn't need a bailout, and its European partners are reluctant to fund one. But it has called for European and international support for its program, saying that unless it receives that support and the cost for it to borrow on the market falls, it might have to appeal to the International Monetary Fund for help.

On Wednesday night, Deputy Prime Minister Theodore Pangalos said Greece could bypass the costly process of borrowing from edgy markets by urging international institutions to buy its bonds at a set interest rate.

"We want, if there is an unjustified speculative attack against Greek bonds, to know that one of these institutions that have the substantial means to absorb such market products will come and say 'look here, I am buying Greek bonds at this price, with this interest rate,'" Pangalos told private Mega TV.

He did not say which institutions he was referring to, or elaborate on the interest rate.

Markets think some kind of rescue would be organized if default looms. Speculation has focused on possible guarantees for Greek bonds or help from state-owned banks in other eurozone countries.

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.”


Goldman case likely to unleash torrent of lawsuits
YAHOO
By DANIEL WAGNER, AP Business Writer
17 April 2010

WASHINGTON – The fraud charges against Goldman Sachs & Co. that rocked financial markets Friday are no slam dunk, as hazy evidence and strategic pitfalls could easily trip up government lawyers. Yet that hardly matters, experts say, because the allegations will kick off a new era of litigation that could entangle Goldman and other banks for years to come.

The charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages. In a complaint filed Friday, the Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.

Goldman said the charges are "unfounded in law and fact." In a written response to the charges, the bank said it had provided "extensive disclosure" to investors and that the largest investor had selected the portfolio — not the hedge fund client. Goldman said it lost $90 million on the deal.

That doesn't contradict the SEC complaint, which says the largest investor selected the mortgage investments from a list provided by the hedge fund. And the fact that Goldman lost money has no impact on the fraud charges.

The charges will unleash a torrent of lawsuits, and likely signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.

"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."

Among the legal action expected in the coming months:

• Class-action suits by Goldman shareholders who believe Goldman alleged misconduct made their stakes less valuable could come as early as Monday. Such suits are common when companies are accused of wrongdoing. Goldman shares fell almost 13 percent Friday as the bank lost $12.5 billion in market capitalization.

• Suits by investors who believe Goldman sold them on deals that were doomed to fail. The investors in the transaction at the heart of the SEC case could sue first, followed by others who believe their losses were similar.

• Possible criminal charges, if the SEC's civil case reveals evidence that meets the higher standard of "proof beyond a reasonable doubt." Experts said it's unlikely the company as a whole will face criminal charges, but evidence could emerge that would expose the Goldman executive named in the SEC complaint, 31-year-old Fabrice Tourre, to criminal prosecution.

• Charges by regulators about other mortgage investments at Goldman and elsewhere. SEC enforcement chief Robert Khuzami told reporters Friday the agency is racking up evidence on other deals in the overheated market that preceded the financial crisis.

Already the case has provoked legal questions from foreign governments, according to published reports. That's because the financial crisis forced many countries to bail out banks that lost money on investments arranged by Goldman.

German regulators are considering legal action against Goldman, newspaper Welt am Sonntag reported, quoting a spokesman for Chancellor Angela Merkel.

The charges would be on behalf of IKB Deutsche Industriebank AG — an early victim of the financial crisis that was rescued by the state-owned KfW development bank among others. IKB invested in the deal regulators are targeting.

The flurry of legal activity is likely to proceed separately from the SEC's case against Goldman, which experts said faces numerous pitfalls.

To prove its fraud case against Goldman, the government must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions.

The government's greatest challenge, experts said, will be boiling the case down to a simple matter of fraud. The issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the government's claims.

"If you wanted to go after Goldman with a complaint that wouldn't stick, this would be perfect," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. "If you look at these products, almost all of them look like hoaxes because of the junk inside."

Legal experts pointed to the paucity of evidence in the government's lawsuit, which contains short excerpts from e-mails but lacks key information about what the various investors knew and what actions they took.

The quality of the evidence was not clear from the complaint, said Jacob Frenkel, a former SEC enforcement lawyer now with Shulman, Rogers, Gandal, Pordy & Ecker PA.

Frenkel said there's been an uptick in "cases where the government chooses select excerpts from e-mails as the basis for its allegations only to find the balance of the text or other e-mails prove otherwise."

For example, prosecutors last fall tried unsuccessfully to use a series of e-mails to convict two Bear Stearns hedge fund executives. They wanted to convince jurors that there was behind-the-scenes alarm at the hedge funds as investments in complex securities tied to mortgages began to slide.

The jurors were not swayed. After the verdict, some jurors told reporters they found the evidence against the two executives flimsy and contradictory. Others suggested the pair were being blamed for market forces beyond their control.

Goldman already has advanced a similar argument. "Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities" were in the investment pool, the bank said in a written response to the charges Friday.

That's part of a time-honored tradition of defusing accusations by bringing in details that may or may not be relevant, said James Cohen, a professor at Fordham University School of Law.

"Traditionally it's in the interest of the party that has Goldman's role to muddy the waters — it's rarely in their interest to have the picture as sharp as HDTV," Cohen said.

Several legal experts suggested Goldman and the SEC had reached an impasse over a settlement before the charges were announced. They speculated that Goldman was unwilling to admit that it allowed the hedge fund to create a portfolio of securities that was designed to fail because that admission could do irreparable harm to Goldman's reputation.

"Goldman could've easily paid a fine already," said John Coffee, a securities law professor at Columbia University. "So I don't think it's money they're fighting over."

The case has been assigned to U.S. District Judge Barbara Jones of New York. Jones is the federal judge who five years ago presided over the $11 billion criminal fraud case that toppled WorldCom Corp. and sent its former CEO Bernard Ebbers to prison for 25 years.

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.



E.U. and U.S. regulators at odds over derivatives
DAY
By STEVENSON JACOBS AP Business Writer
Article published Mar 14, 2010

To European officials, financial derivatives are dangerous weapons that worsened Greece's debt crisis and should be curbed.  To Wall Street, they're tools that reduce risk and generate profits and should be left alone.

Now, regulators on both sides of the Atlantic are trying to figure out who's right and what to do about it. At stake are billions in profits that banks say would be threatened by too much regulation. Yet supporters of tougher rules say the global financial system is at risk as long as derivatives remain largely unregulated.

Derivatives are instruments whose value depends on an underlying asset, such as mortgages or stocks. They can help hedge risks. But derivatives can also produce steep losses, or huge profits, if the value of their underlying asset sinks.

European officials say some derivatives are too harmful to be left alone. They warn they may ban some credit default swaps, a type of derivative that insures debt. In a visit to Washington this week, Greece's prime minister argued that speculators were using the swaps to bet against his country's debt. He said this has escalated Greece's borrowing costs, making it harder to dig out of its debt crisis.

The European Commission on Tuesday threatened to ban speculative trading of credit default swaps by investors who don't actually own a country's underlying debt. These are called "naked" trades. German Chancellor Angela Merkel called on the U.S. to curb such trades.  But U.S. regulators have resisted such calls. They favor only regulating the products, not curtailing them.

Coordination of any derivatives regulation is vital. Unless rules in the United States and Europe are synchronized, global traders inevitably would shift to wherever the most lenient rules exist.
The regulatory conflict comes days before the expected unveiling of a bill to overhaul the U.S. financial system. Sen. Christopher Dodd, D-Conn., the Banking Committee chairman overseeing the legislation, wants more transparency in derivatives markets.

His bill is expected to require most derivatives trades to pass through clearinghouses so transactions would be done more openly. Such transactions are now largely traded among financial institutions with little transparency or regulatory oversight. Critics say this can lead to abusive and dangerous behavior.

Speaking in New York this past week, Gary Gensler, head of the U.S. Commodity Futures Trading Commission, renewed his call for regulating the $600 trillion global financial derivatives market. But he stopped short of endorsing Europe's call for trading curbs.

Whatever rules Congress proposes, Gensler said "there should be no such exemption for" credit default swaps. The swaps account for an estimated $60 trillion of the derivatives trade.
The banking industry says it supports making derivatives less secretive but has lobbied against strict bans.

In a September speech in Germany, CEO Lloyd Blankfein of Goldman Sachs, one of Wall Street's biggest derivatives players, embraced the idea of clearinghouses. He said they would "reduce bilateral credit risk, increase liquidity and enhance the level of transparency through enforced margin requirements and verified and recorded trades."

But he warned against overregulating credit default swaps. He said the swaps "worked as they were intended to" during the financial crisis.

"If we simply ban customized derivatives to satisfy the perception that everything associated with these markets is bad, we run the risk of limiting ... business investment and, ultimately, economic growth," Blankfein said.

The main lobbying group for derivatives has also rejected calls for banning certain credit default swaps. It says the amount invested in the swaps cannot destabilize Greece because it represents only a small fraction of the country's outstanding debt.  Investors hold $406 billion worth of outstanding Greek bonds, according to Citigroup. But they hold only $9 billion in insurance against that debt through credit default swaps.  Given the relatively small amount of swap bets, "it is difficult to conclude (they're) dictating price levels," the International Swaps & Derivatives Association said in a statement.

After the 2008 collapse of Lehman Brothers, then the largest clearinghouse for swaps, EU regulators demanded banks set up clearinghouses for trades in Europe. So far, three EU-based clearinghouses are operational: ICE Clear, Eurex Clearing and LCH. Clearnet SA.

Speaking this week, Gensler said U.S. authorities are "working well" with overseas regulators.

"I'm optimistic we'll end up at roughly the same spot," he said.

Yet already there are signs that not even regulators within Europe agree on how dangerous derivatives really are. Germany's Merkel is calling for a ban on speculative credit default swaps. Yet her country's market regulator, BaFin, said this week it's found no evidence of an upswing in such trades on Greek government bonds.

A major cause of the rise in credit default swap rates has been growing demand for hedging against Greek risk, according to BaFin. It said data released by the U.S. Depository Trust & Clearing Corp. "do not point to massive speculative activities."

The Federal Reserve is investigating how Goldman Sachs and other banks are using the swaps and other derivatives. The Securities and Exchange Commission is examining the issue, too.  The securities industry says that blaming the products for Greece's problems is akin to shooting the messenger. The price of the swaps reflects merely the perceived risk of buying Greece's debt, it says.

A year ago, credit-default swap investors had to pay $250,000 to insure $10 million of Greek debt, according to CMA Datavision. By last month, the cost surged to a record $420,000. As of this past Wednesday, the rate had fallen to less than $300,000 after Greece announced a $6.5 billion austerity package. Still, that's about 10 times the cost of insuring $10 million of U.S. debt.

Regulator faults Wall Street banks on derivatives
YAHOO
By MARCY GORDON, AP Business Writer
March 11, 2010

WASHINGTON – Wall Street banks are seeking exemptions to proposed new financial derivatives rules that could shield more than half the trades that should be subject to disclosure, a federal regulator said Thursday.

The chairman of the Commodity Futures Trading Commission, Gary Gensler, criticized Wall Street's stance on proposed new oversight for the shadowy $600 trillion derivatives market. Derivatives have been blamed for hastening the 2008 financial crisis.

Gensler told a financial industry gathering that Wall Street has not been "enthusiastic" about the proposed new regulations now before Congress.

His comments came as the leaders of France, Germany and Greece called for a clampdown on the kind of speculative trading in derivatives blamed for worsening Greece's debt crisis and undermining the European currency recently.

Gensler, in several speeches in recent days, has been renewing his call for new regulation aimed at bringing transparency to, and prevent manipulation in, the sprawling global derivatives market. At his address Thursday to the meeting of the Futures Industry Association in Boca Raton, Fla., he also got in some mild barbs at Wall Street.

Billions in trading profits for the big investment banks could be threatened by new rules for derivatives, which passed the House in December as part of the overhaul of financial regulation and is now before the Senate. Many in the financial industry have indicated support for requiring derivatives trades to go through clearinghouses, "that is, as long as it only applies sometimes," Gensler said.

"Wall Street appears to be aligning themselves with corporate end users in an effort to exempt customer transactions from central clearing," he said. Though only about 9 percent of derivatives trades involve companies that use them to hedge against risk, "Wall Street seems to be making the case" that banks using them in financial transactions also should be exempt, Gensler said.

Such an exception, he warns, could leave 60 percent of the derivatives trades that rightfully should go through clearinghouses without price transparency.

"Let there be no mistake: Wall Street has not been enthusiastic about this reform," Gensler said in the text of his speech. "After the worst crisis in 80 years, though, we need real reform that protects the American public."

The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

Companies of all kinds use derivatives to hedge against risks — airlines ensuring against spikes in fuel prices, for example. A potent coalition of nearly 200 companies that use derivatives — including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. — has lobbied Congress to make the case that legislative proposals to regulate derivatives could severely increase costs for corporate America.

Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of the worldwide derivatives market. The collapse of the swaps nearly toppled American International Group Inc. in the fall of 2008, prompting the government to support the insurance conglomerate with about $180 billion in aid. The swaps have come under heightened scrutiny in recent days against the backdrop of the Greek financial crisis, with Greek officials blaming speculators' use of them to bet against Greece's debt for hiking the country's borrowing costs.

In Europe Thursday, French President Nicolas Sarkozy, German Chancellor Angela Merkel and the leaders of Greece and Luxembourg called for a crackdown on credit default swaps and asked European Commission President Jose Manuel Barroso to launch an investigation into their role in the trading of government bonds in European nations.

The leaders also called for mandatory reporting of all derivatives trading in Europe and said the EU should consider banning speculative trading in credit default swaps.

Gensler, in an address in New York on Tuesday, said that imposing new oversight on derivatives would "greatly reduce" the risk posed by credit default swaps, although "additional reforms ... should be considered to address the unique characteristics" of the swaps.

If Congress decides to exempt from the new rules some derivatives transactions used by companies to hedge against risk, he said, "there should be no such exemption for" credit default swaps, which are conducted almost entirely between financial institutions.

"The recent chill winds blowing through Europe, including press reports that Greece used derivatives to help mask its fiscal health, are reminders of the pressing need for comprehensive regulation," Gensler said in his speech Thursday to the futures industry gathering.
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

State and local gov't workers' job security fades
YAHOO
By CHRISTOPHER LEONARD and CHRISTOPHER S. RUGABER, AP Business Writers
3 July 2010

For years, most people who worked for state or local governments accepted a fact of life: Their pay wasn't great. The job security was.  Now that's gone, too.  States and municipalities are facing gaping budget gaps. Many have responded by slashing services, raising taxes and, for the first time in decades, making deep job cuts.  And public employees should brace themselves: Some economists say the job cuts could worsen in the second half of the year.

Those government layoffs make it harder to reduce the national unemployment rate, now 9.5 percent. The rate did fall slightly in June because more than a half-million out-of-work Americans gave up their job searches. Once people stop seeking work, they're no longer counted as unemployed.  The economy is already under pressure from weak consumer spending, sinking stock prices, a European debt crisis and a teetering real estate market.

"It's certainly a drag on economic growth in our outlook," Mark Vitner, an economist at Wells Fargo, said of the loss of public-sector jobs.

It's also a burden for residents. As state and municipal employees are cut, so are services. It takes longer to register a car, see a school nurse or travel to work by bus.  In California, state-run Department of Motor Vehicle offices have been closed on selected furlough Fridays to cut costs.  In New York City, a new budget will close up to 30 senior centers, shutter a 24-hour homeless center in Manhattan and eliminate nurses at schools with fewer than 300 students.

In Atlanta, the metro transit agency shut 40 bus lines and closed restrooms in June. Even so, 300 employees might lose their jobs to close a $69 million budget gap.  Julie Bussgang used to have assistants to help her keep order in her kindergarten classroom in Albany, Calif. Last year, those assistants were cut. Bussgang was left on her own.

"I've had kids calling for help from the bathroom, and I was alone with 24 kids," she says. "We got through far less of the curriculum than we did in the previous year. Everything took longer."

State and local governments cut 95,000 jobs in the first half of the year even as the economy slowly recovered. Private employers, by contrast, added 593,000 jobs in that time. It's the first time the public sector has cut jobs while the private sector has added jobs since 1981, said Marisa Di Natale, a director at Moody's Economy.com.

In the second half of the year, 152,000 more local and state government employees will be laid off, estimates Nigel Gault, an economist at IHS Global Insight.  Counting companies that work with state governments, a total of 900,000 jobs could be lost to states' budget shortfalls, according to the Center on Budget and Policy Priorities, a think tank in Washington.

From teachers and probation officers to recreation workers and transportation specialists, public employees who never imagined their jobs could be in jeopardy are discovering they are.  They are people like 24-year-old Brianna Clegg, who had never hesitated to take on school loans in pursuit of her teaching certificate.

"I was always hearing, 'There's a huge need for teachers.'"

Yet as California's budget crisis mounted last year, thousands of teaching jobs were slashed. One was Clegg's job teaching fourth grade in Stockton, Calif.  When she sought another position, she made a grim discovery: In a state in which roughly 26,000 teachers have been laid off, openings existed for 39 teachers. Clegg wasn't among the fortunate few.

Across the country, the trouble stems from shrinking state income and sales tax revenue, a consequence of the recession. Total state revenue dropped 11 percent from fiscal year 2008, when the recession began, to fiscal 2010, according to the National Association of State Budget Officers.

Compounding the problem, Democrats in Congress have failed to come up with the votes to spend about $50 billion to help states pay for Medicaid programs and avoid teacher layoffs. Governors made a plea for the money to help them avoid layoffs. Kansas Gov. Mark Parkinson said his state might have to lay off 3,600 teachers.

Senate Republicans have argued that the nation can't afford further spending in light of record-high budget deficits.

Until recently, state governments had been able to paper over some of their funding shortfalls with money from last year's $787 billion federal stimulus package. Now that's drying up. As a new fiscal year begins this month in most states, they're struggling to balance their budgets, as required by every state but Vermont.  So they're cutting services and laying off employees.

"We do expect more layoffs to come," Vitner said. "State and local governments are having to make the cuts they didn't have to make a year ago."

Hardest hit have been states — like California, Arizona and Nevada — whose housing markets had overheated and then deflated, said Brian Sigritz of the National Association of State Budget Officers. But budget crises have spread nearly everywhere. About 46 states face total budget gaps of at least $112 billion this year, the Center on Budget and Policy Priorities says.

At least 26 states have cut jobs this year to try to close budget deficits. Five others have imposed temporary layoffs. Their tight budgets have led many states to shift more spending burdens to localities, adding to budget problems in many cities.  For every worker who's been laid off, many others worry that they're next. The sense of long-term security that once attached itself to a state or local government job is gone.

One of them is Daryl Seaman, who was so confident in his job security just a year ago that he built a new home for his family. As a probation officer for Madison County, Ill., he didn't think his job would ever be in jeopardy.  Twelve months later, Seaman has been demoted because of county budget cuts. He finds himself obsessing with co-workers over the next round of layoffs that could claim their jobs.

"Everybody is panicking," Seaman says.

Seaman's wife teaches in a district that has laid off some teachers with less seniority. With two teenage daughters to support, they're saving everything they can.

"We're just afraid to spend any money," Seaman says.
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