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?
- Breaking
News on our economic situation
- UNFUNDED
LIABILITIES NUMBER ONE FOR STATES?
- OBAMA
@100days on...as we say across the pond - click
here. U.S.A.'S bail-out tab as of February
2009 (NYTimes)
- CREDIT-DEFAULT
SWAPS TUTORIAL
- Regulation
by Congress of new instruments, such as
derivatives and credit-default swaps, in new bill (2010). Will the new approach mean no more "dark
pools?"
- How
about plain, ordinary delinquencies?
- INDUSTRIAL
RESTRUCTURING:
- Manufacturing
jobs: is anything "made in
America" anymore? How about
public employment?
- THE
BUDGET: How big is the deficit...soooooo big. And the economy is shrinking, too. Or is it? It is
just in our heads...
- STIMULUS: positive
or negative variety? TAXES GOING UP;
- Class warfare
beginning? Numbered accounts in
Switzerland under attack;
- Structure of
unemployment; how about UNDER-EMPLOYMENT?
Unemployment 1993-2009, U.S.A. and
Europe.
- Real Estate,
non-residential - more
specific tale of big time real estate developer here. housing story here;
- Other
sectors than "economics
101 (cars)",
which inspired this sub-page. Internationalization
of G.M.? How about "free trade" in a down
environment?
- About interest
rates:
(a view from across
the pond); inflation - big
hole in state income coming soon? "Transfers" from federal
to state budgets;
- "Meltdown
101"
and Supply and Demand 2008; 401k into 201k
problem, in NYTIMES.
- Ponzi schemes:
“' ...a
classic
case of overconfidence as a mask for underconfidence. It’s Freud 101.'”
LINKS to more - we are trying to show
how this matter links to other
parts of various threads of the story of the world economy, US
elections, etc.: Madoff here
and here.
- or
whenever...as
the world turns.





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
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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
Mr Whitacre will receive considerably
more than his predecessor
|
General Motors (GM) has said chief executive
Ed Whitacre will get an annual salary of $1.7m (£1.1m), plus
$7.3m in shares at a later date.
The pay package was approved by the US Treasury, which spent
billions of dollars bailing out the carmaker last year and now owns a
large stake in it.
GM also said Mr Whitacre's predecessor, Fritz Henderson, is
being paid $59,090 a month as an adviser.
Mr Whitacre took over as interim chief executive in December
last year.
Last month, he was officially confirmed in the position on a
permanent basis. He is also chairman of GM.
Mr Whitacre was appointed chairman by the US administration
last year, having previously run telecoms company AT&T.
His salary compares favourably with that of his predecessor.
In an agreement reached last October with the US government, Mr
Henderson's pay was cut by 25% to $950,000, about half of what he made
in 2008.
Collapsing sales during the economic downturn forced GM to
turn to the US government for aid, but this could not prevent it
entering bankruptcy protection in June last year.
It emerged from bankruptcy one month later, with the US
government owning a 62% stake in the company.
In total, GM received some $60bn in government loans.

AP Source: GM Chairman to
become permanent CEO
YAHOO
By TOM KRISHER, AP Auto Writer
January 25, 2010
DETROIT – General Motors Co.'s
chairman and interim chief executive, Ed Whitacre Jr., will become the
permanent CEO of the automaker, a person briefed on the matter said
Monday.
The announcement will be made at an
11:30 a.m. Eastern news conference at GM's downtown Detroit
headquarters, the person said.
The person, who asked not to be
identified because the announcement had not been made, said Whitacre
will say that he is taking the job for good, as well as give an update
on GM's business plan.
Whitacre, 68, is a former CEO of
telecommunications giant AT&T Inc.
He has been serving as interim CEO
since the board ousted former CEO Fritz Henderson on Dec. 1. GM had
hired a firm to conduct a global search for a successor.
Whitacre often says in a folksy
Texas drawl that he knows little about cars. But he's already shaken up
the company by hiring a new chief financial officer and transferring
the old one to China, firing the Chevrolet and Buick-GMC brand
managers, combining sales and marketing and consolidating control of
GM's core North American market under one executive.
He also seems impatient to spur the
plodding culture of GM, where decision by committee, an isolated upper
management and fear of risk produced mediocre cars for years.
He wants to increase GM's sales and
market share while shifting the company's focus to cars from trucks.
And he aims to repay $8.1 billion in U.S. and Canadian government loans
by the end of June.
Although GM had hired the search
firm, there were strong signs that Whitacre would take the job
permanently, or at least serve as CEO until the company is on solid
enough ground to sell stock to the public in an effort to repay its
government loans.
GM owes the U.S. government $52
billion that it used to survive and emerge from bankruptcy protection
last year.
At his first meeting with GM's top
executives after being named chairman last summer, Whitacre candidly
said he likes to be in charge.
"I don't know how to be a chairman
and not a CEO," a person at the meeting remembers Whitacre saying.
But he also has told employees and
reporters that he would rely heavily on former Wall Street analyst
Stephen Girsky and Vice Chairman Bob Lutz for advice in running the
company.
Whitacre didn't realize how hard it
would be to run the company as an interim CEO, and decided to take the
job himself, said Gerald Meyers, a former chairman of American Motors
Corp. who now teaches at the University of Michigan.
Having an interim CEO paralyzes the
organization because workers tend to lie low to wait for the permanent
boss, Meyers said.
"Therefore, his demands and requests
and requirements are watered down a lot," Meyers said. "He realized if
he's not going to run the joint, he shouldn't be there. So he finally
stepped up."
Jeffrey Sonnenfeld, a professor at
the Yale School of Management, said it was no secret that Whitacre
wanted the CEO job when Henderson was ousted. He said it would have
been difficult for anyone to take the post with Whitacre managing as
chairman.
"The only surprise is that he wasn't
transparent about his plans in the beginning. Why didn't he just assume
command then?" Sonnenfeld asked. "His ambitions were clear from the
beginning when he pulled the rug from beneath an extremely competent
CEO."
Henderson, Sonnenfeld said, was
leading a "remarkably, breathtakingly successful turnaround," yet was
relieved of his command.
Whitacre, he said, retired too young
and was looking for ways to spend his free time. Whitacre has said he
was passing time using a bulldozer to clear brush at his Texas ranch.
Meyers, who knows Whitacre, said the
move eliminates confusion among GM's ranks. And just because Whitacre
is dropping interim from his title doesn't mean the search for a new
CEO has ended.
"He doesn't have to stay forever —
but that's always the case," Meyers said. "Now it's indefinite. It
would be embarassing, two weeks from now, for him not be CEO. A decent
amount of time is going to go by."
Earlier this month the GM board
hired Microsoft Corp. CFO Chris Liddell to take the same post at GM,
and Whitacre said Liddell would be a candidate to take the CEO post
permanently.
Whitacre was chairman and chief
executive of AT&T and its predecessor companies from 1990 to 2007.
During his tenure, he led the company through several acquisitions and
sales.
Whitacre also sits on the boards of
Exxon Mobil Corp. and the railroad company Burlington Northern Santa Fe
Corp.
In a wide-ranging talk with
reporters at GM's Detroit headquarters earlier this month, Whitacre
predicted that GM would be profitable this year, although he said that
was dependent on the economy and other factors.
A full-year profit for GM, which
left bankruptcy protection in July, would be the company's first since
2004 when it made $2.7 billion. It has posted more than $88 billion in
losses since then.
Are you surprised?
GMAC to get $3.5 billion in added
aid from government: report
Wed Dec 30, 2009 2:51 am
ET
NEW YORK (Reuters) – GMAC Financial
Services is close to getting about $3.5 billion in added aid from the
U.S. government, on top of the $12.5 billion already received since
December 2008, the Wall Street Journal reported.
The announcement is expected within
days and will coincide with GMAC taking additional steps to absorb
losses related to its mortgage operations, the Journal reported, citing
people familiar with the situation.
One person told the Journal that the
measure has been crafted to return the company to profitability in the
first quarter of 2010.
The new capital will likely allow
GMAC to avert placing its ailing mortgage unit, Residential Capital
LLC, or ResCap, into bankruptcy, the Journal reported, citing these
people.
"As we have previously stated, GMAC
has been conducting a strategic review of its business and evaluating
options to address the challenges at ResCap and the mortgage
operations," said GMAC spokeswoman Gina Proia in an email statement.
"Critical objectives in the process
would be to take actions that position GMAC for improved financial
performance and to repay the U.S. government," she said.
GMAC did not detail any specific
actions.
Payback Time: Many See the
VAT Option as a Cure for Deficits
NYTIMES
By CATHERINE RAMPELL
December 11, 2009
Runaway federal deficits have thrust
a politically unsavory savior into the spotlight: a nationwide tax on
goods and services.
Members of Congress, like their
constituents, are squeamish about such ideas, instead suggesting
spending cuts or higher taxes on the rich. But with a lack of political
will to do the former, and a practical ceiling to how much revenue can
be milked from the latter, economists across the political spectrum say
a consumption tax may be inevitable once the economy fully recovers.
“We have to start paying our bills
eventually,” said Charles E. McLure, a tax economist who worked in the
Reagan administration. “This strikes me as the best and most obvious
way of doing it.”
The favored route of economists is
known as a value-added tax, which is a tax on goods and services that
is collected at every step along the production chain, from raw
material to a consumer’s shopping bag. Similar to a sales tax, it
generally results in consumers paying more for the things they buy. The
revenues could be used to pay for health care or other social programs,
or just to pay down existing debt.
Like universal health care, every
other industrialized country in the world already has a value-added tax
(as do about 100 emerging countries). And also like universal health
care, this once-taboo policy option has recently been invoked, at times
begrudgingly, by many prominent Washingtonians, including the House
speaker, Nancy Pelosi; John Podesta, who was co-chairman of President
Obama’s transition team; and two former Federal Reserve chairmen, Alan
Greenspan and Paul A. Volcker
Introducing such a tax would
probably require an overhaul of the entire federal tax code, no small
order, and something the government last did in 1986. At the time the
goal was to simplify the tax system, to raise money more efficiently
and with fewer headaches for taxpayers.
Since then, federal spending has
ballooned, while the government’s ability to raise taxes has become
increasingly inefficient. Consider the page length of the tax code and
tax regulations, which has expanded by more than 70 percent, according
to Thomson Reuters Tax and Accounting. (There are more words crammed
onto each page, too.)
The tax system is now a compendium
of lobbied-for ifs, ands and buts. As the tax code has been embellished
and then Swiss-cheesed, the portion of Americans footing the nation’s
income tax bill has shrunk.
“There are many more deductions and
credits, which can often encourage inefficient behavior such as tax
shelters,” said Leonard E. Burman, a public affairs professor at
Syracuse University, about the changes to the tax system since the 1986
reform. “The ideal tax system has a broad base — few deductions or
exemptions — and low rates.”
Most of the rest of the
industrialized world — including, most recently, Australia — has
already taken this lesson to heart by imposing value-added taxes.
Unlike income taxes, which are often front-loaded on the rich, then
subsequently diluted, a value-added tax is paid by almost everybody.
That broad base is one of its major advantages, and why the
International Monetary Fund frequently recommends it to countries that
need to raise money quickly.
What is good for economic purposes,
however, can be bad politics, especially since Mr. Obama pledged not to
raise taxes on the bottom 95 percent of Americans. (And many
Republicans have pledged not to raise taxes on the bottom 100 percent
of Americans.)
The value-added tax is also the
darling of many economists for its bounce-a-quarter-off-its-abs
efficiency. Its administrative costs to the government are generally
low. It is also considered less of a drag on the economy over the long
run than raising income taxes, which discourage people from saving
money and thereby making capital available to businesses.
To understand why a value-added tax
is considered so efficient, you have to understand how it usually works.
Imagine the production of a new
dress, in three steps:
¶A fabric store sells a tailor
enough silk to make one dress, at a total price of $10 before taxes;
¶The tailor sews a dress and
sells it to Macy’s for $30 before taxes;
¶Macy’s then sells the dress to
a shopper for $50, before taxes.
Let’s say the value-added tax is 10
percent. The government will collect some tax revenue in each step of
the production process, from roll of fabric to cocktail-party
scene-stealer, but each business in the chain gets credit for the tax
already paid by other suppliers.
When selling the cloth to the
tailor, the fabric store adds a tax of 10 percent, or $1 on the $10 of
supplies the tailor purchases. The tailor pays the fabric store $11,
and the store remits $1 to the government.
When the tailor sells his dress to
Macy’s, he calculates the value-added tax as $3, or 10 percent of his
$30 pretax price. Macy’s pays the tailor $33.
But instead of sending the full $3
to the government, the tailor gets to subtract the $1 of taxes he had
already paid to the fabric store. So he sends $2 to the government.
When Macy’s sells the dress to a
shopper, it adds another 10 percent, so the shopper pays $55, or $50
plus $5 in tax. That would be in addition to any state or local sales
taxes consumers have to pay, depending on the locale.
Macy’s checks to see how much the
previous companies in the supply chain — the fabric store and the
tailor — have already paid the government in value-added taxes, and
subtracts that from the $5. Macy’s ends up remitting just $2 to the
government.
The government receives $5 total, or
10 percent of the final purchase price, but from three different
businesses.
Although more complicated,
value-added taxes are considered better than equivalent sales taxes —
where the tax is levied only when the consumer buys a product — for two
main reasons.
First, if a single business evades
the value-added tax, the government does not lose a large portion of
money, because it will collect taxes at other stages of production.
Since companies usually get credit
for taxes already paid by their suppliers, companies will pressure
other businesses in the production chain to prove they paid their
taxes. That means the system is somewhat self-policing.
To some foes of big government,
though, the efficiency of the tax is also its fatal flaw. Conservatives
worry that it enables the government to raise money with such little
effort that it will encourage Washington to spend even more.
On the other hand, liberals are wary
of value-added taxes because they are regressive. Poor people spend a
higher portion of their income buying things than the rich, meaning
lower-income people would be disproportionately hurt.
That is why countries often make
other major changes to their tax code at the same time.
In Australia, the government imposed
a value-added tax in the middle of an overhaul of the system in 2000,
which included making the income tax system more progressive. “Many
countries with VATs have income taxes that start out at higher income
thresholds,” said James Poterba, an economics professor at M.I.T.
Combining a broad-based VAT with a steeply progressive income tax, he
said, avoids affecting the poor too much.
But just as the income tax has been
hollowed out by countless loopholes, so could a value-added tax. Many
European countries, for example, have counteracted the regressive
qualities of the tax by exempting broad categories of goods, like
groceries and children’s clothing.
This always creates problems,
economists say. Companies are tempted to mislabel their products so
they can avoid the tax.
“What really is the difference
between prepared food versus nonprepared food?” said Alan J. Auerbach,
an economics professor at the University of California, Berkeley. “You
start having to split hairs, and that can become quite complicated.”
Besides cheating the government of
revenue, this sort of behavior also distorts what people choose to buy,
causing a drag on economic development, Mr. Auerbach said.
Moreover, in some industries — like
financial services — it is difficult to evaluate how much value is
added because of the way they make their money.
The solution in many places, like
New Zealand, is to exempt the financial services industry. But that
might not go over well in a country whose federal debt has recently
swelled precisely because of a major banking crisis.
Such political hurdles, along with a
still-tentative economic recovery, make a consumption tax — or a tax
increase of any kind — unlikely in the immediate future. But with
economists like Kenneth Rogoff of Harvard predicting that federal tax
revenues will need to rise by 20 to 30 percent in the next few years,
politicians may hold their noses and decide this tax is the least worst
option.
“Of course, we want to take down the
health care cost, that’s one part of it,” Ms. Pelosi told Charlie Rose
of PBS. “But in the scheme of things, I think it’s fair to look at a
value-added tax as well.”
Click
below to follow this Global Business story...
Dubai debt fears hammer stocks
YAHOO
By Jeremy Gaunt, European Investment Correspondent
November 26, 2009
LONDON (Reuters) – Debt problems in
Dubai hit financial markets across the board on Thursday, sinking
global stocks, helping lift safe-haven bonds and taking the dollar up
from a 14-year low against the yen.
Gold climbed to a new record high
but fell back as the dollar rose.
Banking stocks came under pressure
because of potential exposure to any bad debt in the Gulf, as did
shares in European car companies, some of which are part-owned by
sovereign wealth funds from the region.
Markets were also trading without
much input from the United States, where it was the Thanksgiving
holiday.
Dubai said on Wednesday it wanted
creditors of Dubai World and property group Nakheel to agree a debt
standstill as it restructures Dubai World, the conglomerate that
spearheaded the emirate's breakneck growth.
The announcement triggered
widespread concern about the once-booming Gulf region's financial
health, although some investors differentiated between leveraged Dubai
and other more solidly wealthy emirates and countries in the region.
But the worries fed directly into a
general nervousness in financial markets about the real state of the
world economy at a time when investors are also seeking to lock in 2009
profits.
"The Dubai story is weighing heavily
on stock markets and people are looking to safe havens so there's some
flight to quality again," said Charles Berry, a bond trader at LBBW.
Others, such as Royal Bank of
Scotland, said Dubai's bombshell meant investors would now have to
"re-appraise the quality of sovereign support for state-owned entities
in the region."
Dubai sought to ease some concerns
about international port operator DP World (DPW.DI), saying its debt
was not included in the restructuring.
But markets stayed nervous and the
cost of insuring debt through credit default swaps around the Gulf rose.

GM to end Hummer after sale to Chinese buyer fails
By DAN
STRUMPF, AP Auto Writer
Feb. 24, 2010
DETROIT – General Motors Co. said Wednesday it will shut down Hummer
after its bid to sell the brand to a Chinese company collapsed.
Heavy equipment maker Sichuan Tengzhong Heavy Industrial Machines Co.
pulled out of the deal for Hummer, known for its hulking,
military-style SUVs, because it was unable to get clearance from
Chinese regulators within the proposed deal timeframe, the manufacturer
said in a separate statement.
GM said it will continue to honor existing Hummer warranties.
"We are disappointed that the deal with Tengzhong could not be
completed," said John Smith, GM vice president of corporate planning
and alliances. "GM will now work closely with Hummer employees, dealers
and suppliers to wind down the business in an orderly and responsible
manner."
GM has been trying to sell the loss-making brand for the last year and
found a suitor in Tengzhong, but resistance from Chinese regulators
created difficulties from the start.
As recently as Tuesday, private investors were trying to set up an
offshore entity in a last-minute effort to complete the acquisition
ahead of a Feb. 28 deadline. That plan, along with other options, was
unsuccessful, according to a person close to the situation. The person
declined to be identified in order to speak more freely.
"There's no way forward with that," this person said. "We're out of
time."
Hummer, which traces its origins to the Humvee military vehicle built
by AM General LLC in South Bend, Ind., acquired a devoted following
among SUV lovers who were drawn to the off-road ready vehicles. But the
vehicles drew scorn from environmentalists and sales never recovered
after gasoline prices spiked above $4 a gallon in the summer of 2008.
The H3, the most fuel-efficient vehicle in Hummer's lineup, averages
about 16 mpg. The vehicles are built at GM's factory in Shreveport, La.
GM sold just over 9,000 Hummers in 2009, down two-thirds from 27,000
the year before.
Hummer is the second brand after Saturn that GM has failed to sell as part of its
restructuring. GM sold Swedish brand Saab to Dutch carmaker Spyker Cars
NV earlier this year. Pontiac is being discontinued.
GM is focusing its efforts on its four remaining brands: Chevrolet,
GMC, Cadillac and Buick.
GM, Tengzhong reach Hummer deal
YAHOO
By Matt Andrejczak, MarketWatch
Oct. 9, 2009, 2:17 p.m. EDT
SAN FRANCISCO (MarketWatch) --
General Motors Co. said Friday it has clinched a definitive agreement
to sell its Hummer brand to Chinese firm Sichuan Tengzhong Heavy
Industrial Machinery Corp.
The deal, which still needs to be
approved by regulators in the U.S. and China, is expected to preserve
more than 3,000 sales and manufacturing jobs in the U.S.
Tengzhong will acquire ownership of
the Hummer brand, trademarks, and assume existing dealer network
agreements. GM will continue to manufacture the military-styled sports
utility vehicle until June 2011, with an optional one-year extension.
The purchase price was not
disclosed. Tengzhong will acquire Hummer through an investment entity,
in which it will hold an 80% stake. Private entrepreneur Suolang Duoji
from China's Sichuan Province will own the remaining 20%.
When GM made its quick trip through
bankruptcy this summer, the auto maker indicated that Hummer could
fetch $500 million or more. Before the sale was officially announced,
Reuters and Bloomberg, citing sources familiar with the deal, said
Hummer would sell for about $150 million.
Tengzhong said in June that it had
struck a preliminary deal to take over Hummer, the civilian version of
a vehicle built for U.S. military use. Tengzhong makes heavy trucks and
industrial equipment.
The state of Michigan has offered
tax breaks for Hummer to build its headquarters, design and engineering
facility in the Detroit suburb of Southfield.
The H2 Hummer is assembled in
Indiana, while the H3 is made in Louisiana.
The outsized SUV hit hard times when
fuel prices began to escalate and the economy cratered. Hummer's
smallest model gets only 16 miles per gallon in combined city and
highway driving. Sales took a big hit when gasoline prices topped $4 a
gallon and came under renewed pressure as the economy tumbled into
recession.
Through September, GM had sold only
8,193 Hummers in the U.S. this year, down 64% from the same period last
year. In September, only 426 Hummers were sold nationwide, according to
Autodata Corp.
Design changes are afoot to make the
Hummer more fuel-efficient.
Hummer said it will offer an
alternative fuel powertrain in every model and add E85 FlexFuel
capability in the 2010 H3 and H3T models. The SUV maker also said it's
working to get certified for a diesel H3 to be sold outside North
America.
"Backed by a privately owned and
well-capitalized company, we are going to be able to focus on providing
customers with more efficient models that deliver Hummer's promise of
authentic, purpose-built design and engineering," Hummer CEO James
Taylor said in a prepared statement.
As part of its restructuring, GM
slimmed down to focus on the Chevrolet, GMC, Buick, and Cadillac
brands. Saturn and Hummer are among the four brands GM planned to
eliminate or sell.
Last week, GM's deal to sell its Saturn
brand to Penske Automotive Group fell apart when Penske failed to
line up a replacement manufacturer. GM now plans to shut down the brand.




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



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
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.
|
|
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


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
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
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.
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