




CONCORD
COALITION
SUPPORTS BOWLES-SIMPSON
Erskine Bowles (left) and former Wyoming Sen. Alan
Simpson,
co-chairmen of President Obama's bipartisan deficit commission;
which states are breaking away from the slumping economy? Occupy. And then there is
former Gov.Corzine of New Jersey, who, among other things, will be
remembered for...not wearing his
seat belt. Sholuld that have been a warning about his
investment proclivities?

FOR
DEEP BACKGROUND, AND LATEST DEVELOPMENTS, TO GO
TO "FINANCIAL
CRISIS" SECTION OF THIS PAGE, CLICK
HERE
FINANCIAL
CRISIS
INQUIRY COMMITTEE (F.C.I.C.)
reports: Weston High School graduate on the F.C.I.C.!

LIVE IN CT? ELSEWHERE...WHAT ME WORRY?
http://www.pewcenteronthestates.org/report_detail.aspx?id=56044




A MAD MAGAZINE WORLD
Dodo
bird graphic makes Connecticut look
good, or at least not worst! For
exactly how bad, click here. So who was Guy Fawkes?

Midwestern
states: How are they doing? Long story
on Indiana here. From our files - Ohio city. Illinois story. And a thoughtful writer
here.

ILLUSTRATION OF WHAT THIS MEANS TO,
FOR EXAMPLE, WESTON, CONNECTICUT
Best explanation of the present
economic condition, in my opinion. Watch those transfers!
Last Three Democrats Named to Debt Committee
NYTIMES
By BRIAN KNOWLTON
August 11, 2011, 1:22 pm
Representative Nancy Pelosi, the House Democratic leader, on Thursday
announced her three appointees to the special Congressional committee
tasked with finding ways to reduce federal budget deficits, as a
Republican member of the newly formed panel expressed an openness to
consider possible tax increases.
Ms. Pelosi’s choices complete the 12-member panel, which is evenly
divided between the two parties and the two houses of Congress.
All three members named by Ms. Pelosi hold leading roles in the party:
Representative James E. Clyburn of South Carolina, the No. 3 House
Democrat; Representative Xavier Becerra of California, vice chairman of
the Democratic Caucus; and Representative Chris Van Hollen of Maryland,
the senior Democrat on the House Budget Committee.
Ms. Pelosi said in a statement that the committee “has a golden
opportunity to take its discussions to the higher ground of America’s
greatness and its values.”
Created as part of the agreement to raise the federal debt ceiling, the
panel is supposed to recommend ways to reduce federal budget deficits
by at least $1.2 trillion over 10 years. If the panel fails to do so by
its Nov. 23 deadline, or if its ideas are not enacted, the agreement
calls for the government to automatically cut spending across the board.
If even a single panel member crosses party lines to provide a majority
vote, the committee can forward its proposals to the floor of the House
and the Senate for up-or-down votes without amendments.
One Republican member of the committee, Representative Dave Camp of
Michigan, said Thursday that he would not rule out possible tax
increases –- a central point of contention in the recent debt talks and
something many economists contend will be a necessary element to any
successful bipartisan proposal.
“I don’t want to rule anything in or out,” Mr. Camp told Reuters. “I am
willing to discuss all issues that might help us reduce our short and
long-term debt and grow our economy.”
“Everything is on the table, until we as a group rule it out,” he said.
Ms. Pelosi, in her statement, described Mr. Clyburn as a consensus
builder with experience on the Appropriations Committee; Mr. Becerra as
a senior member of the Ways and Means Committee who “placed the
interests of America’s working families first”; and Mr. Van Hollen as a
Democratic leader in the deficit-reduction talks led by Vice President
Joseph R. Biden Jr.
The three Democratic members will join three House Republicans, Jeb
Hensarling of Texas and Mr. Camp and Fred Upton, both of Michigan, on
the committee. The Senate will be represented by three Republicans, Jon
Kyl of Arizona, Pat Toomey of Pennsylvania and Rob Portman of Ohio,
along with the Democrats Patty Murray of Washington, John Kerry of
Massachusetts and Max Baucus of Montana.
Morning Jay: How to Understand the Debt
Ceiling Battle
Weekly Standard
Jay Cost
July 15, 2011 6:00 AM
Contemporary journalism is much more
episodic than systematic, focusing on one-off events and the colorful
personalities involved rather than the long-term trends that brought
about the current situation. Beltway reporting on the current debt
ceiling battle has been no exception, relentlessly emphasizing the
personal dramas rather than the big picture. Combine this “episodic”
bias with a healthy dollop of liberalism, and it is darned near
impossible to get a sense from the media of what the heck is really
going on.
So, let’s sketch that out today: a
broad-based look at why this current fight is so messy and what the
prospects are for the future politics of deficit reduction.
It wasn’t always like this. Between
1947 and 1967 the federal budget deficit was negligible, equaling only
0.3 percent of GDP. Yet tax rates remained relatively low, having been
cut by Kennedy/Johnson, and social welfare spending increased
substantially, thanks to the Great Society. America was able to
bankroll conservative and liberal policies without running a deficit
because of the fantastic growth of the post-war economy, which more
than doubled during this period.
The happy times came to an end with
LBJ’s “guns and butter” policy of the mid-1960s, followed by the
stagflation of the 1970s. The new era would be characterized by "hard
choices and scarce resources." Economic constraints kept politicians
from cutting taxes and raising benefts. Instead, tough choices had to
be made between the two goals, making politics more and more like a
zero-sum game. This, in turn, contributed greatly to the increasing
partisanship that has come to define Washington politics, including the
persistent charge on both sides that the opposition is not acting in
good faith.
Jimmy Carter’s bind is particularly
helpful in understanding the political contours of the new era. Carter
was challenged by traditional liberal clients of the Democratic party
on his left, which demanded ever-greater shares of the national wealth.
Meanwhile, on his right he faced a tax revolt that caught fire with the
passage of Prop 13 in California in 1978. Additionally, Carter was
forced to increase military spending to deal with the resurgent Soviet
Union, which had invaded Afghanistan. Combine all of this with the need
for austerity policies to deal with runaway inflation, and you can
appreciate the policy squeeze of the late-1970s: Inflation had to be
stopped, but tax hikes were unpopular, benefit cuts were unpopular, and
military cuts were a non-starter.
The conservative triumph in the 1980
election led to the drastic tax cuts of 1981, but soon enough the
country found itself locked in a political stalemate on the issue of
the budget. The recession of the early 1980s gave the liberals the
upper hand and forced Reagan to raise taxes in 1982, 1984, and 1986 to
deal with the budget deficit, though he managed to keep the core of his
reforms in place. Since then, budgetary politics have followed a
predictable pattern: Large deficits develop occasionally and create
brutal, zero-sum political battles between those who want low taxes and
those who want high social welfare benefits.
In all of these instances, there has
been no clear political winner because there is no consensus in this
country on what to do about deficits. Put another way, it’s a pretty
sure bet that you can rally a majority coalition in opposition to any
proposal designed to deal seriously with the deficit, regardless
whether it emphasizes spending cuts or tax hikes. Thus, Bush suffered
for his deficit plan in 1992; Clinton suffered for his in 1994; and the
Republican Congress suffered for its in 1996.
High deficits usually follow a
recession, and seeing as how our last recession was the worst since the
Great Depression, it should come as no surprise that today’s deficit is
now substantially worse, and the politics over it are especially
vitriolic. As a point of comparison, the deficit as a share of GDP
averaged “just” 3.3 percent between 1988 and 1996, the period of our
last heated battles over the deficit. Last year, the deficit was 8.9
percent of GDP.
As if all this were not enough,
there is the added problem of runaway entitlement spending. Short-term
political calculations regularly create incentives for politicians to
increase entitlement benefits during good times. And so, nearly every
president since FDR has promoted some new, expansive social welfare
agenda. That goes for Democrats (Fair Deal, New Frontier, Great
Society) and Republicans (Nixon’s Family Assistance Plan and George W.
Bush’s prescription drug benefit program). The same calculations –
maximize the benefits today while minimizing the costs – have also led
politicians to underfund these programs systematically.
The result is a federal welfare
state that has grown much faster than the private economy in the last
50 years. The following chart makes that clear by comparing real
private sector GDP to real government transfer payments. Both numbers
are on a per capita basis and are indexed so that 1960 equals 1.
Thus, our deficit battle today is
not simply about getting taxes and discretionary spending to sync up
once again. It’s about dealing, for once and all, with the
irresponsibility of the last fifty years, when time and again
politicians in both parties have piled new obligations on to an
unsustainable welfare state, leaving the bills to come due long after
they have gone to meet their maker.
Just how bad will this conflict get?
It all depends on how well the economy does. If we suddenly generate
economic growth like we enjoyed in the 1960s or late 1990s, our deficit
problem will ease. If, on the other hand, growth remains stagnant, then
the debt ceiling battle will turn out to be merely one in a prolonged
series of bloody conflicts over spending and taxation. Given the recent
growth forecasts, there are more reasons to be pessimistic than
optimistic.
So, what we should see over time is
increased partisanship – as the zero-sum policy battles over the
deficit reinforce the ideological divide that separates Democrats from
Republicans. The GOP has long been the party of the “full dinner pail,”
beliving that mass prosperity comes from the promotion of capitalism,
meaning a tax structure that facilitates wealth creators. The Democrats
have long promoted a redistributionist ideology on behalf of the
“humble members of society” -- from Bryan to Wilson, FDR, LBJ, and now
Obama. As the deficit forces Washington D.C. either to raise taxes or
cut spending, those ideological lines will only grow sharper.
So, unfortunately we all should
expect things to get worse before they get better.
Revenge
of the Deficit Commission?
The looming entitlement crisis is
making some strange bedfellows.
Andrew Stiles, NATIONAL REVIEW ONLINE
March 24, 2011 4:00 A.M.
By rights, Obama’s deficit commission should be dead and gone.
Next month will mark the one-year anniversary of the first meeting of
the National Commission on Fiscal Responsibility and Reform, chaired by
former Clinton chief of staff Erskine Bowles and former senator Alan
Simpson (R., Wyo.). The deficit commission released a final report in
December of last year, but failed to garner the 14-of-18 supermajority
vote needed to mandate congressional action. Since then, President
Obama, who created the commission by executive order, has been content
to proceed as if it never existed, making only a perfunctory reference
in his State of the Union address — buried under some 70 paragraphs of
bloviation about Soviet spacecraft and “winning the future.”
Nonetheless, it looks like the commission is not done yet.
In the Senate, the four members who served on the commission, and
supported the final recommendations, have taken up where they left off.
Sens. Mike Crapo (R., Idaho), Tom Coburn (R., Okla.), Kent Conrad (D.,
N.D.), and Dick Durbin (D., Ill.) have teamed up with Saxby Chambliss
(R., Ga.) and Mark Warner (D., Va.) — together they are dubbed the
“Gang of Six” — not only to educate their fellow members on the ins and
outs of the debt crisis, but also to work behind closed doors in an
attempt to negotiate a grand compromise that would incorporate the
commission’s recommendations into a piece (or pieces) of legislation
that Congress could pass.
Just last week, Sens. Mike Johanns (R., Neb.) and Michael Bennett (D.,
Colo.) organized a letter to President Obama signed by 64 senators — 32
Democrats and 32 Republicans — seeking his engagement on a
“comprehensive deficit reduction package” that would include
“discretionary spending cuts, entitlement reform and tax reform.” A
small step, to be sure, but 64 was many more signatures than either
Johanns or Bennett had expected, and, as always in the Senate, anything
over 60 is significant.
Over on the House side, Budget Committee chairman Paul Ryan is
preparing a 2012 budget that will take the conversation to a whole new
level. Aides say it will be “one of the boldest fiscal documents in
history” and propose significant reform to programs including Medicare,
Medicaid, and Social Security, the primary drivers of the deficit. Ryan
has also been leading an effort to educate the members of his own
caucus, as well as the general public, on the need for entitlement
reform.
Meanwhile, the duo of Bowles and Simpson has returned to the political
scene, determined to “keep the heat” on politicians to support
meaningful action to reduce the deficit. On March 8, they launched
their “Moment of Truth Project,” borrowing from the title of their
commission’s final report, in an effort to build on the political
momentum gathering in Congress and ultimately achieve a meaningful
compromise. The two testified before the budget committees of both
chambers, urging lawmakers to act in order to avoid “the most
predictable economic crisis in history.”
“A lot of us sitting in this room didn’t see this last crisis as it
came upon us, but this one is really easy to see,” Bowles told senators
at the hearing. “This debt and these deficits that we are incurring on
an annual basis are like a cancer, and they are truly going to destroy
this country from within unless we have the common sense to do
something about it.” Bowles has expressed hope that in addition to the
“Gang of Six,” as many as 40 senators would ultimately support some
kind of broad deficit-reduction package — well short of the necessary
60, but perhaps enough to convince some holdouts to join the effort.
One thing to be said for the recent, and often rancorous, debate over
federal spending for the remainder of fiscal year 2011 — which has so
far focused on just 12 percent of the federal budget (Alan Simpson
memorably described it as “a sparrow belch in the midst of a typhoon”)
— is that it seems to have prompted more and more lawmakers to
acknowledge the fact that meaningful deficit reduction will not be
possible unless all aspects of the budget are on the table.
Liberal senators such as Chuck Schumer (D., N.Y.) and Majority Leader
Harry Reid (D., Nev.) have publicly called for a “reset” of current
budget negotiations to bring everything into consideration. House
Minority Whip Steny Hoyer (D., Md.), has been downright Ryanesque at
times during his weekly pen-and-pad sessions with reporters, using
giant placards and pie charts to explain how entitlement spending
contributes enormously to the national debt. And believe it or not,
House Minority Leader Nancy Pelosi (D., Calif.) actually said the
following about deficit reduction during a floor speech: “This is as
serious a debate [as] we can have in the Congress of the United States
because it affects our children and their future, because the deficits
have gotten so far out of hand.”
However, that rhetoric will only get them so far. Such pronouncements
by most Democrats merely prelude their insistence that any deal must
“include revenue” (that is, raise taxes) and “protect investments” in
(that is, spending on) research, infrastructure, education, and so on.
And when many on the left say “everything is on the table,” what they
actually mean is “everything but Social Security” — if not “everything
but entitlements” altogether. Indeed, the Democratic Congressional
Campaign Committee is already launching attack ads against Republican
congressmen accusing them of wanting to “CUT your hard-earned Social
Security and Medicare benefits.” Naturally, the AARP has been lobbying
heavily against significant changes to either program. If Democrats
refuse to budge on entitlements, or even just on Social Security,
Republicans will never sign on to a deal.
Similarly if Republicans are unwilling to accept any increase in
revenue — not necessarily through higher tax rates, but possibly
through the elimination of certain tax credits — many Democrats will
walk away. Grover Norquist, president of Americans for Tax Reform, has
been aggressively lobbying GOP senators to hold firm on taxes. ATR’s
“Taxpayer Protection Pledge” — a commitment to “vote against any effort
to raise the federal income tax on individuals or corporations” — has
been signed by all but seven Republican senators. Norquist has been
involved in a number of public flaps with Senators Coburn and Crapo
ever since they voted to support the commission’s recommendations
(deemed a violation of the pledge) and figures to be a prominent
influence as the negotiations proceed.
That said, there is enough evidence to suggest that lawmakers on both
sides may be willing to push for a compromise for the sake of what they
consider the greater good. Coburn and Crapo, for instance, have been
particularly defensive in response to Norquist’s criticism. “Our pledge
is to protect taxpayers, not special interests,” they wrote in a letter
to the ATR boss. “To do so we must analyze every aspect of the federal
budget, including the tax code.”
“We don’t have the time nor the opportunity to do it all my way,”
Coburn said recently on the Senate floor. “It’s going to be painful for
everybody; it’s going to mean some senators are going to lose their
jobs.” Even Paul Ryan, in a recent interview with the Associated Press,
indicated that he could accept a slight increase in taxes, provided it
was coupled with significant, fundamental spending reforms.
On the other side, moderate Democrats — such as Sens. Claire McCaskill
(Mo.), Bill Nelson (Fla.), and Rep. Chris Van Hollen (D., Md.), top
Democrats on the House Budget Committee — have suggested that Social
Security remain on the table. Obama himself has refused to take it off
the table, and both commission co-chairs are adamant that the program
be addressed to ensure its solvency.
“There are plenty of people in this city who hope and pray we don’t do
anything to Social Security,” Simpson said. “The word is solvency; it
doesn’t have anything to do with cutting out old ladies or old men,
torturing children, or throwing bed pans out of hospitals. It has to do
with taking a public system that people are truly dependent on and
making it solvent so it doesn’t go broke.” Bowles often points out that
if nothing is done to reform Social Security, then beginning in 2037,
recipients will receive an automatic 22 percent cut in their benefits.
“Some very difficult votes have to be made on both sides,” which will
inevitably include voting for cuts to the $700 billion defense budget
as well, Chambliss tells National Review Online. “We’re going to have
to rise to the occasion.”
Retiring lawmakers may be particularly susceptible to this call.
Senator Conrad, chairman of the Senate Budget Committee and a fiscally
conservative Democrat, says his decision not to seek another term in
2012 will give him greater flexibility to make politically difficult
decisions. That’s one reason that Republicans in both chambers view him
as one of the most critical players in the fight for meaningful budget
reform. In addition to Conrad, six other senators have announced their
intentions to retire at the end of the session.
“History is going to judge whether we have the courage, character, and
the vision to stand up for America’s future,” Senator Conrad said at
the official “Moment of Truth” launch event on Capitol Hill.. “And
those who take a walk, those who turn away, those who don’t have the
gumption to stand up are going to be judged very, very harshly.”
President Obama needs to decide which side of history he wants to be
on. Members of congress agree that nothing meaningful will ever come of
their negotiation as long as the president remains on the sidelines.
Conrad recently told a gaggle of reporters outside the Senate chamber
that considerable momentum was gathering behind “The Gang of Six” and
their efforts. However, the biggest challenge ahead would be to
publicize those efforts and educate the American people as to why they
are so important to the country’s future. One reporter suggested:
“Isn’t the president the best man for that job?”
“You think?” Conrad shot back, barely cracking a smile.
Washington’s Financial Disaster
NYTIMES
By FRANK PARTNOY
January 29, 2011
San Diego
THE long-awaited Financial Crisis Inquiry Commission report, finally
published on Thursday, was supposed to be the economic equivalent of
the 9/11 commission report. But instead of a lucid narrative explaining
what happened when the economy imploded in 2008, why, and who was to
blame, the report is a confusing and contradictory mess, part rehash,
part mishmash, as impenetrable as the collateralized debt obligations
at the core of the crisis.
The main reason so much time, money and ink were wasted — politics — is
apparent just from eyeballing the report, or really the three reports.
There is a 410-page volume signed by the commission’s six Democrats, a
leaner 10-pronged dissent from three of the four Republicans, and a
nearly 100-page dissent-from-the-dissent filed by Peter J. Wallison, a
fellow at the American Enterprise Institute. The primary volume
contains familiar vignettes on topics like deregulation, excess pay and
poor risk management, and is infused with populist rhetoric and an
anti-Wall Street tone. The dissent, which explores such root causes as
the housing bubble and excess debt, is less lively. And then there is
Mr. Wallison’s screed against the government’s subsidizing of mortgage
loans.
These documents resemble not an investigative trilogy but a
left-leaning essay collection, a right-leaning PowerPoint presentation
and a colorful far-right magazine. And the confusion only continued
during a press conference on Thursday in which the commissioners had
little to show and nothing to tell. There was certainly no Richard
Feynman dipping an O ring in ice water to show how the space shuttle
Challenger went down.
That we ended up with a political split is not entirely surprising,
given the structure and composition of the commission. Congress
shackled it by requiring bipartisan approval for subpoenas, yet also
appointed strongly partisan figures. It was only a matter of time
before the group fractured. When Republicans proposed removing the term
“Wall Street” from the report, saying it was too pejorative and
imprecise, the peace ended. And the public is still without a full
factual account.
For example, most experts say credit ratings and derivatives were
central to the crisis. Yet on these issues, the reports are like three
blind men feeling different parts of an elephant. The Democrats focused
on the credit rating agencies’ conflicts of interest; the Republicans
blamed investors for not looking beyond ratings. The Democrats stressed
the dangers of deregulated shadow markets; the Republicans blamed
contagion, the risk that the failure of one derivatives counterparty
could cause the other banks to topple. Mr. Wallison played down both
topics. None of these ideas is new. All are incomplete.
Another problem was the commission’s sprawling, ambiguous mission.
Congress required that it study 22 topics, but appropriated just $8
million for the job. The pressure to cover this wide turf was intense
and led to infighting and resignations. The 19 hearings themselves were
unfocused, more theater than investigation.
In the end, the commission was the opposite of Ferdinand Pecora’s
famous Congressional investigation in 1933. Pecora’s 10-day inquisition
of banking leaders was supposed to be this commission’s exemplar. But
Pecora, a former assistant district attorney from New York, was backed
by new evidence of widespread fraud and insider dealings, shocking
documents that the public had never seen or imagined. His fierce
cross-examination of Charles E. Mitchell, the head of National City
Bank, Citigroup’s predecessor, put a face on the crisis.
This commission’s investigation was spiritless and sometimes plain
wrong. Richard Fuld, the former head of Lehman Brothers, was thrown
softballs, like “Can you talk a bit about the risk management practices
at Lehman Brothers, and why you didn’t see this coming?” Other bankers
were scolded, as when Phil Angelides, the commission’s chairman,
admonished Lloyd Blankfein, the chief executive of Goldman Sachs, for
practices akin to “selling a car with faulty brakes and then buying an
insurance policy on the buyer of those cars.” But he couldn’t back up
this rebuke with new evidence.
The report then oversteps the facts in its demonization of Goldman,
claiming that Goldman “retained” $2.9 billion of the A.I.G. bailout
money as “proprietary trades.” Few dispute that Goldman, on behalf of
its clients, took both sides of trades and benefited from the A.I.G.
bailout. But a Goldman spokesman told me that the report’s assertion
was false and that these trades were neither proprietary nor a
windfall. The commission’s staff apparently didn’t consider Goldman’s
losing trades with other clients, because they were focused only on
deals with A.I.G. If they wanted to tar Mr. Blankfein, they should have
gotten their facts right.
Lawmakers would have been wiser to listen to Senator Richard Shelby of
Alabama, who in early 2009 proposed a bipartisan investigation by the
banking committee. That way seasoned prosecutors could have issued
subpoenas, cross-examined witnesses and developed cases. Instead, a few
months later, Congress opted for this commission, the last act of which
was to coyly recommend a few cases to prosecutors, who already have
been accumulating evidence the commissioners have never seen.
There is still hope. Few people remember that the early investigations
of the 1929 crash also failed due to political battles and ambiguous
missions. Ferdinand Pecora was Congress’s fourth chief counsel, not its
first, and he did not complete his work until five years after the
crisis. Congress should try again.
Frank Partnoy is a law professor at
the University of San Diego and the author of “The Match King: Ivar
Kreuger, the Financial Genius Behind a Century of Wall Street Scandals.”
Social Security fund now
seen to be empty by 2037
YAHOO
By STEPHEN OHLEMACHER, Associated Press
WASHINGTON – Sick and getting sicker, Social Security will run at a
deficit this year and keep on running in the red until its trust funds
are drained by about 2037, congressional budget experts said Wednesday
in bleaker-than-previous estimates.
The massive retirement program has been suffering from the effects of
the struggling economy for several years. It first went into deficit
last year but had been projected to post surpluses for a few more years
before permanently slipping into the red in 2016
This year alone, Social Security will pay out $45 billion more in
retirement, disability and survivors' benefits than it collects in
payroll taxes, the nonpartisan Congressional Budget Office said. That
figure nearly triples — to $130 billion — when the new one-year cut in
payroll taxes is included.
Congress has promised to replenish any lost revenue from the tax cut,
but that's hardly good news, either, adding to the federal budget
deficit. In another sobering estimate, the congressional office said
government red ink this year will increase to $1.5 trillion, the most
in U.S. history.
More than 54 million Americans receive Social Security benefits,
averaging $1,076 per month.
The outlook for the program has grown more sour as the nation has
struggled to recover from the worst economic crisis since Social
Security was enacted, during the Great Depression. In the short term,
Social Security is suffering from the weak economy that has payroll
taxes lagging and applications for benefits rising. In the long term,
Social Security will be strained by the growing number of baby boomers
retiring and applying for benefits.
The projected deficits add a sense of urgency to efforts to improve
Social Security's finances. For much of the past 30 years, the program
has run big surpluses, which the government has borrowed to spend on
other programs. Now that Social Security is running deficits, the
federal government will have to find money elsewhere to help pay for
benefits.
"So long as Social Security was running surpluses, policymakers could
put off the need to fix the program," said Andrew Biggs, a former
deputy commissioner at the Social Security Administration who is now a
resident scholar at the American Enterprise Institute. "Now that the
system is running deficits, it simply becomes clear that we need to act
on Social Security reform."
President Barack Obama said in his State of the Union address Tuesday
night that he wanted "a bipartisan solution to strengthen Social
Security for future generations."
The president however has not embraced recommendations from a debt
commission he appointed last year, including one that would gradually
increase the full retirement age, from 67 to 69, over the next 65 years.
But Obama did lay down some markers for making Social Security closer
to solvent.
"We must do it without putting at risk current retirees, the most
vulnerable, or people with disabilities, without slashing benefits for
future generations and without subjecting Americans' guaranteed
retirement income to the whims of the stock market," Obama said.
The program has been supported by a 6.2 percent payroll tax, paid by
both workers and employers. In December, Congress passed a one-year tax
cut for workers, to 4.2 percent. The lost revenue is to be repaid to
Social Security from general revenue funds, meaning it will add to the
growing national debt.
Social Security has built up a $2.5 trillion surplus since the
retirement program was last overhauled in the 1980s. Benefits will be
safe until that money runs out. That is projected to happen in 2037 —
unless Congress acts in the meantime. At that point, Social Security
would collect enough in payroll taxes to pay out about 78 percent of
benefits, according to the Social Security Administration.
The $2.5 trillion surplus, however, has been borrowed over the years by
the federal government and spent on other programs. In return, the
Treasury Department has issued bonds to Social Security, guaranteeing
repayment, with interest.
"Social Security taxes are not going to pay for the spending, so it's
got to come from somewhere else," said Eugene Steuerle, a former
Treasury official who is now a fellow at the Urban Institute. "We can
go through long arguments about whether its owed money by the trust
funds or not, but that doesn't alleviate the simple fact that it's got
to come from somewhere."
Social Security supporters are adamant that the program will be repaid,
just as the U.S. government repays others who invest in U.S. Treasury
bonds.
"Its' an IOU that is backed by Treasury bonds and the faith and credit
of the United States government," said Sen. Bernie Sanders, I-Vt. "It
is the same faith and credit that enables us to borrow from rich people
and from China and from other countries. As you well know, in the
history of this country, the United States has never defaulted on one
penny owed to a creditor."

Deficit reduction critical says IMF's Lipsky
YAHOO
8 January 2011
DENVER (Reuters) – A top IMF official warned on Saturday that the
United States must start down a budget deficit-cutting path relatively
soon or face crushing debt service costs as interest rates rise.
"Time's a-wasting," John Lipsky, first deputy managing director of the
International Monetary Fund, said in an address at the annual American
Economics Association conference. "It is critical to lay out the basis
for credible medium-term fiscal adjustment."
Lipsky praised recent steps by U.S. central bankers and politicians to
support a weak economic recovery with expansionary monetary and fiscal
policies. However, he said those steps make it less likely the United
States can meet goals of cutting its deficit in half.
Although near-term fiscal consolidation measures could crimp economic
growth and will be politically controversial, in the longer term they
will fuel stronger growth, he said.
The risk is that if the United States cannot soon trim its deficit,
doubts about the U.S. fiscal position could push longer-term interest
rates higher, Lipsky said.
BACON: Thinking the unthinkable about
the national debt
The Washington Times Online
Edition
8 Dec. 2010
James A. Bacon is author of the newly
released book "Boomergeddon" (Oaklea Press, 2010) and publishes a blog
by the same name.
America's budget debate suffers from a failure of imagination. Deficit
hawks warn that the federal budget is on an "unsustainable path," but
they don't spell out what will happen when the budget can no longer be
sustained. Their language tends to be vague and imprecise.
"America cannot be great if we go broke," opined Erskine Bowles and
Alan Simpson, co-chairmen of President Obama's deficit reform
commission, when they issued their controversial budget recommendations
last month. Going broke? What exactly does it mean for a government to
go broke? Countries don't file for bankruptcy. Does it mean running out
of money - even though the government will continue to bring in
trillions of dollars in tax revenue and the Federal Reserve can print
as much money as it wants?
Alice V. Rivlin and former Sen. Pete V. Domenici got a little more
specific in a report, "Restoring America's Future," they issued nearly
a month ago:
Federal spending is projected to rise substantially faster than
revenues, and the government will be forced to borrow ever-increasing
amounts. Federal debt will rise to unmanageable levels, which will push
interest rates up, endanger our prosperity and make us increasingly
vulnerable to the dictates of our creditors, including nations whose
interests may differ from ours.
Higher interest rates sound unpleasant, but we've had them before, and
we lived to tell the tale. As for being vulnerable to the "dictates" of
unnamed creditors (who sound suspiciously like the Chinese), what does
that mean? Could China command us to cut spending and raise taxes like
the European Union dishes out orders to Greece and Ireland? Don't be
vague - spell it out.
If Americans cannot imagine the unimaginable - just as they could not
conceive of Arab hijackers ramming planes into the World Trade Center -
we will never take the painful steps required to avert calamity.
Americans need to know the financial endgame they're trying to avoid.
Here is what the budget hawks are implying but not coming right out and
saying:
In the absence of budgetary reform, interest rates for U.S. Treasury
securities will rise as investors demand higher yields to compensate
for the higher risk of default. A crisis - call it "Boomergeddon" -
will be precipitated by the inability of the U.S. Treasury to finance
its multitrillion-dollar debt ($13.7 trillion today, more than $20
trillion by 2020). One day, the Treasury will hold an auction, and
there won't be any buyers. The Federal Reserve will step in as a buyer
of last resort, conjuring money from the ether to buy the bonds. The
injection of massive liquidity into the financial system will trigger
fears of hyperinflation, causing the dollar to plunge and interest
rates to rise.
If the resources of the European Union and International Monetary Fund
are stretched to rescue the finances of tiny Greece (external national
debt about $300 billion) and Ireland (about $120 billion), the United
States will be not only too big to fail but too big to bail out.
Government will be able to spend only what it can bring in through
taxes. About 40 percent of the budget, a sum equivalent to 9 percent to
10 percent of the gross domestic product, will go poof. Consider the
impact of such massive fiscal stimulus in reverse - "suckulus," if you
will. Absent emergency action by the government, the economy will
plunge into a depression roughly three times more acute than the
recession we just experienced.
Congress could cut spending programs or raise taxes, but that would
only aggravate the Keynesian contraction. The Treasury could repudiate
all or part of the national debt - most likely the debt owed to
foreigners, who can't vote or contribute to political campaigns - in
the hope of relieving the crushing interest obligations. But that would
trigger an Argentine-style capital flight, crippling the dollar and
driving interest rates higher. Alternatively, the Fed could cover the
spending shortfall by creating money. But that would ignite a
horrendous inflation, which would batter the dollar and send interest
rates into the stratosphere.
Adding to the financial chaos, politicians will intervene with policies
to salve the pain - protective tariffs, capital controls, wage-price
controls or some other imbecility - that will compound the economic
damage. Meanwhile, economic disruption will ricochet around the world,
prompting other governments to pursue beggar-thy-neighbor policies.
Such is the nightmare scenario if we fail to balance the budget.
Congress is running out of time for posturing, temporizing and blaming
the other guy. We have a window of opportunity of four or five years to
avert fiscal Armageddon. But if we can't paint a believable picture of
what that might entail, it may be impossible to motivate Americans to
make the sacrifices that need to be made.
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permission.
Panel
members split over deficit plan
Retirement-age raise; gas-tax
hike proposed in sweeping package
By Robert Schroeder, MarketWatch
Dec. 1, 2010, 11:24 a.m. EST
WASHINGTON (MarketWatch) — Members of a presidential panel charged with
tackling the U.S. budget deficit offered mixed opinions Wednesday about
a revised plan to save the country nearly $4 trillion by 2020, setting
the stage for a tough vote on the measure scheduled for Friday.
Members including former Federal Reserve Vice Chair Alice Rivlin and
Honeywell Inc. chief executive David Cote said they’ll vote for the
plan on Friday, but other members were non-committal at a public
meeting Wednesday and at least one member of Congress said she’d reject
it.
News Hub: Deficit Panel Unveils Controversial Plan
The president's bipartisan deficit reduction panel released its plan
today and will take a final vote on Friday as the panel's chiefs push
controversial proposals such as limiting the mortgage interest tax
deduction. John McKinnon discusses.
The plan, released by the National Commission on Fiscal Responsibility
and Reform, would gradually raise the retirement age to 69 by 2075;
recommends cuts to both Medicare and Medicaid; and suggests cutting
200,000 federal government jobs by 2020 as well as cutting defense
spending. Read the commission's report.
Passage of the plan requires approval of 14 of 18 commissioners but
that threshold may not be met. Passage of a plan would force a debate
in Congress.
So far Wednesday, none of the elected officials on the panel voiced
support for the plan. Rep. Jan Schakowsky, an Illinois Democrat, said
she would vote “no”, calling it “unconscionable” to make Medicare
beneficiaries pay more for health care.
Former Republican Sen. Alan Simpson and Erskine Bowles, a Democrat who
was President Bill Clinton’s chief of staff, were tapped by President
Barack Obama to head the 18-member panel.
“Debt denial has gone the way of the dodo bird,” Simpson said Wednesday
morning, at the opening of the meeting. The deficit hit nearly $1.3
trillion last year, the second-largest on record.
The plan, which cuts government spending more than a version released
in November by Bowles and Simpson, would also cap the popular
mortgage-interest deduction to loans less than $500,000, and tax
capital gains and dividends at normal rates. Gasoline taxes would be
gradually raised by 15 cents a gallon between 2013 and 2015.
Sen. Richard Durbin, a Democrat from Illinois, said that gradually
raising the retirement age was acceptable to him but like other members
said he didn’t support all the proposals in the 59-page document.
Rep. Jeb Hensarling, a Texas Republican, said that he’d like to see the
plan come to the House floor but didn’t indicate if he’d vote to
support it on Friday.
Let the States Go Bankrupt
It is a better outcome than
federal bailouts.
New York Post
Michael Barone
November 29, 2010
We won’t be able to say we weren’t warned. Continued huge
federal budget deficits will eventually mean huge increases in
government-borrowing costs, Erskine Bowles, co-chairman of Barack
Obama’s deficit-reduction commission, predicted this month. “The
markets will come. They will be swift, and they will be severe, and
this country will never be the same.”
Bowles is talking about what the business press calls bond-market
vigilantes. People with capital are currently willing to loan money to
the federal government, by buying U.S. bonds at low interest rates.
That’s because interest rates are generally low and because Treasury
bonds are regarded as the safest investment in the world. But
what if
they aren’t? What if investors suddenly perceive a higher risk and
demand a higher return? That’s what Bowles is talking about, and there
are signs it may be starting to happen. The Federal Reserve’s second
round of quantitative easing — QE2 — was intended to lower the interest
rate on long-term bonds. Instead, the rate has been going up.
The federal government still seems a long way from the disaster Bowles
envisions. But some state governments aren’t.
California governor Arnold Schwarzenegger came to Washington earlier
this year to get $7 billion for his state government, which resorted to
paying off vendors with scrip and delaying state-income-tax refunds.
Illinois seems to be in even worse shape. A recent credit rating showed
it weaker than Iceland and only slightly stronger than Iraq. It’s
no
mystery why these state governments — and those of New York and New
Jersey, as well — are in such bad fiscal shape. These are the parts of
America where the public-employee unions have been calling the shots,
insisting on expanded payrolls, ever higher pay, hugely generous fringe
benefits, and utterly unsustainable pension promises.
The prospect is that the bond market will quit financing California and
Illinois long before it quits financing the federal government. This
may already be happening. Earlier this month, California could sell
only $6 billion of $10 billion in revenue-anticipation notes it put on
the market. Individual investors have been selling off state and
local
municipal bonds this month. Meredith Whitney, the financial expert who
first spotted Citigroup’s overexposure to mortgage-backed securities,
is now predicting a sell-off in the municipal bond market.
So it’s entirely possible that some state government — California and
Illinois, facing $25 billion and $15 billion deficits, are likely
suspects — will be coming to Washington some time in the next two years
in search of a bailout. The Obama administration may be sympathetic.
It’s channeled stimulus money to states and TARP money to General
Motors and Chrysler in large part to bail out its labor-union allies.
But the Republican House is not likely to share that disposition, and
it’s hard to see how tapped-out state governments can get 60 votes in a
53–47 Democratic Senate.
How to avoid this scenario? University of Pennsylvania law professor
David Skeel, writing in The Weekly Standard, suggests that Congress
pass a law allowing states to go bankrupt. Skeel, a bankruptcy
expert,
notes that a Depression-era statute allows local governments to go into
bankruptcy. Some have done so: Orange County, Calif., in 1994, Vallejo,
Calif., in 2008. Others — perhaps a dozen small municipalities in
Michigan — are headed that way.
A state-bankruptcy law would not let creditors thrust a state into
bankruptcy — that would violate state sovereignty. But it would allow a
state government going into bankruptcy to force a “cram down,” imposing
a haircut on bondholders, and to rewrite its union contracts. The
threat of bankruptcy would put a powerful weapon in the hands of
governors and legislatures: They can tell their unions that they have
to accept cuts now or face a much more dire fate in bankruptcy court.
It’s not clear that governors like California’s Jerry Brown, who first
authorized public-employee unions in the 1970s, or Illinois’s Pat Quinn
will be eager to use such a threat against unions, which have been the
Democratic party’s longtime allies and financiers.
But the bond market could force their hand and seems already to be
pushing in that direction. And, as Bowles notes, when the markets come,
they will be swift and severe. The policy arguments for a bailout
of
California or Illinois public-employee-union members are incredibly
weak. If Congress allows state bankruptcies, it might prevent a crisis
that is plainly looming.
Liberal Groups to Propose Routes to
Smaller Deficit
NYTIMES
By JACKIE CALMES
November 28, 2010
WASHINGTON — As President Obama’s fiscal commission faces a deadline
this week for agreement on a plan to shrink the mounting national debt,
liberal organizations will unveil debt-reduction proposals of their own
in the next two days, seeking to sway the debate in favor of fewer
reductions in domestic spending, more cuts in the military and higher
taxes for the wealthy.
The proposals from two sets of liberal advocacy groups highlight the
deep ideological divides surrounding efforts to deal with the nation’s
budgetary imbalances, even as Mr. Obama’s bipartisan commission works
to finalize its recommendations by Wednesday — and struggles for a
formula that would get the backing of at least 14 of its 18 members,
the threshold for sending its proposal to Congress for a vote.
Inside the commission, expectations remain low that a supermajority can
agree on a plan, given most Republicans’ opposition to raising taxes
and most Democrats’ resistance to deep spending cuts and reducing
future retirees’ Social Security benefits.
Yet the panel’s proponents hope that agreement among even a bipartisan
minority can be the basis for future action to arrest the unsustainable
growth of government debt in coming years.
Over the holiday week, the commission’s staff revised the draft plan
from its chairmen — Alan K. Simpson, a former Senate Republican leader,
and Erskine B. Bowles, president of the University of North Carolina
system and a former chief of staff to President Bill Clinton — to
reflect contributions made at meetings this month by the rest of the
commission, six senior members of Congress from each party and four
business and union leaders.
Even if the commission fizzles, its chairmen’s plan and the
alternatives — about a half-dozen packages from centrists and
conservatives, and now the two from the liberal groups — have
demonstrated a rough consensus for all their differences: action is
needed once the economy recovers, and the fiscal problem cannot be
resolved by spending cuts or tax increases alone. Both military and
health care spending should be on the cutting table. So should “tax
expenditures,” the scores of popular but costly tax breaks for
individuals and corporations, including the mortgage-interest
deduction. And Social Security’s finances require a long-term fix.
Nothing of the sort is before the lame-duck session of Congress that
resumes this week. Instead, the parties and Mr. Obama are in effect
fighting over how much to add to the long-term debt: Democrats want to
extend the expiring Bush-era tax cuts except for rates in the highest
income brackets, at a projected 10-year cost of about $3 trillion,
while Republicans want to make all the tax rates permanent, which would
cost more than $4 trillion — roughly the same amount the Bowles-Simpson
plan would save in a decade.
And while Mr. Obama and Congressional Republicans agree that lawmakers
should not earmark spending for special projects, a ban would hardly
dent the projected annual deficits.
On Monday, the progressive policy organizations Demos, the Economic
Policy Institute and the Century Foundation will unveil a liberal
blueprint. Their report says that unlike the centrist plans, this
version “stabilizes debt as a share of the economy without demanding
draconian cuts to national investments or to vital safety net
programs.” It would, however, leave the debt at a higher level as a
share of the economy than the centrist plans.
On Tuesday, a separate coalition of liberal groups, economists and
labor leaders — the Citizens’ Commission on Jobs, Deficits and
America’s Economic Future — will release a similar outline.
Both plans are comparable to one recently proposed by Representative
Jan Schakowsky, a liberal Democrat from Illinois who is a member of the
Bowles-Simpson commission. Ms. Schakowsky opposed the chairmen’s draft
as too hard on the middle class.
The liberal plans’ differences with centrists and conservatives include
the following:
¶Timing. While other debt-reduction plans would take effect as
early as 2012, the progressives oppose any austerity measures until
perhaps 2015, once unemployment is at or below 6 percent.
¶Stimulus spending. Most of the plans call for immediate
additional stimulus measures, arguing that they will help create
tax-paying jobs and reduce spending for relief to the jobless. But the
liberals seek more spending in the short and long term: for now,
financing for unemployment assistance, public works projects and aid to
state and local governments to prevent continued layoffs of teachers
and other employees, and for years beyond, “pro-growth investments” in
areas like education, infrastructure, child care, rural broadband and
scientific research.
¶Military spending. All the plans would reduce projected spending
for the military, but the liberal plans would cut deeper.
¶Health care cost constraints. Congressional Republicans,
including Representative Paul D. Ryan of Wisconsin, who has a
comprehensive conservative plan, would repeal the new health care law.
Mr. Ryan would also privatize Medicare, Medicaid and Social Security in
the future. In contrast, the liberal and centrist plans would expand on
the new law’s long-term savings policies.
The liberal plans, however, would rely more on limiting payments to
doctors, hospitals and other care providers and less on increasing
out-of-pocket costs for beneficiaries, except for upper-income people.
The liberals also call for a public option to compete with private
insurers in new exchanges for consumers, and for the government to
negotiate with pharmaceutical companies for lower prescription-drug
prices.
¶Social Security. While centrist plans would raise payroll taxes
for the affluent and reduce benefits scheduled for many new retirees in
future decades, the progressive plans would only raise taxes to make
the program solvent until late in the century.
Liberals and centrists would raise the cap on taxable wages to cover 90
percent of all wage income; the level has slipped from that level in
recent years. If it applied in 2012, for example, workers would pay
Social Security taxes on income up to about $156,000 instead of
$113,700.
¶Taxes. The progressive plans rely heavily on higher revenues from
the rich and would reduce taxes for low-wage workers.
The centrist and liberal plans eventually would end the Bush tax rates,
restore estate taxes, and limit or eliminate tax breaks for
corporations and individuals — so-called tax expenditures — that cost
more than $1 trillion in revenues annually. The liberals would use the
revenues for deficit reduction and increased domestic spending;
centrists would use them to pare the deficit and to significantly lower
individual and corporate income tax rates.
The liberals also call for a surcharge on income above $1 million. They
would limit other tax breaks that benefit the affluent and tax capital
gains and dividends at higher ordinary income rates. The liberal plans
would impose a carbon tax to encourage clean energy and to raise
revenues, which would be split between deficit reduction and energy
rebates for consumers. They would also raise the federal gasoline tax
to replenish the federal highway trust fund.
Both liberal plans would impose a tax on financial transactions to
raise revenues and discourage speculation.
Unions Yield on Wage Scales to Preserve Jobs
NYTIMES
By LOUIS UCHITELLE
November 19, 2010
MILWAUKEE — Organized labor appears to be losing an important battle in
the Great Recession.
Even at manufacturing companies that are profitable, union workers are
reluctantly agreeing to tiered contracts that create two levels of pay.
In years past, two-tiered systems were used to drive down costs in hard
times, but mainly at companies already in trouble. And those
arrangements, at the insistence of the unions, were designed, in most
cases, to expire in a few years.
Now, the managers of some marquee companies are aiming to make this
concession permanent. If they are successful, their contracts could
become blueprints for other companies in other cities, extending a wage
system that would be a startling retreat for labor.
Though union officials said they could not readily supply data on the
practice, managers have been trying to achieve this for 30 years, with
limited results. The recent auto crisis brought a two-tier system to
General Motors and Chrysler. Delphi, the big parts maker, also has one
now. Caterpillar, back in 2006, signed such a contract with the United
Automobile Workers.
The arrangement was a fairly common means of shrinking labor costs in
the recession of the early 1980s. At the end of the contracts, however,
wages generally snapped back up to a single tier. At G.M., Chrysler,
Delphi and Caterpillar, the wages will not be snapping back.
Nor will that happen for workers at three big manufacturers here in
southeastern Wisconsin — where 15 percent of the work force is in
manufacturing, a bigger proportion than any other state. These
employers — Harley-Davidson, Mercury Marine and Kohler — have all but
succeeded in the last year or so in erecting two-tier systems that
could last well into a recovery.
“This is absolutely a surrender for labor,” said Mike Masik Sr., the
union leader at Harley-Davidson, the motorcycle maker, not even trying
to paper over the defeat. His union recently accepted a new contract
that freezes wages for existing workers for most of its seven years,
lowers pay for new hires, dilutes benefits and brings temporary workers
to the assembly line at even lower pay and no benefits whenever there
is a rise in demand for Harley’s roaring bikes.
When the proposal was put to a vote recently, Harley’s blue-collar
employees, most of whom belong to the powerful United Steelworkers,
approved it by a decisive 53 percent to 47 percent.
Just up the highway, Mercury Marine, which makes outboard motors and
marine engines, has a similar agreement with its factory workers. And
the Kohler Company, another manufacturing giant in southeastern
Wisconsin, famed for its gleaming bathroom fixtures, is negotiating a
contract using Harley’s pact as a template and, so far, getting much of
its way.
“The simple economic fact is that we overproduced and now we have to
burn off the excess,” Matthew S. Levatich, president and chief
operating officer of Harley-Davidson, said in an interview, speaking in
effect for all three manufacturers. “You could say,” he added, “that
the new contract is a recognition of this truth on the part of our
workers.”
Nowhere else in the country has quite so tough a contract emerged at
companies that are profitable, the A.F.L.-C.I.O. says.
“Management clearly has the upper hand in negotiations because of the
employment situation,” Milwaukee’s mayor, Tom Barrett, said.
Mr. Barrett ran as the Democratic candidate for governor in the Nov. 2
election, losing to Scott Walker, a Republican in a state that usually
votes Democratic. In interviews, several blue-collar workers said they
had voted Democratic in 2008 and switched to Republican this time —
mimicking the blue-collar political shift throughout the Midwest —
because the Obama administration, in their view, had failed so far to
help them.
The breakthrough labor agreements reflect this antipathy. They
capitalize on a particularly difficult set of circumstances for
blue-collar workers. In response to falling demand, the big
manufacturers here have cut production and laid off thousands of
employees. Many people lost jobs that had paid $22 an hour or more. Few
can get work that pays as well, if they can get steady work at all,
given an unemployment rate of nearly 8 percent in the area. That makes
holding a job a higher priority than holding the line on pay and
benefits, much less pushing for improvements, Mr. Masik said.
Increasing the pressure, Harley-Davidson and Mercury Marine, a unit of
the Brunswick Corporation, publicly declared that they would move
factory operations to lower-cost American cities — Stillwater, Okla.,
for example, or Kansas City, Mo. — if the unions failed to accept the
concessions set forth in remarkably similar contracts. One provision
denies laid-off or furloughed workers their old pay if they are called
back; they must return as second-tier employees, earning $5 to $15 an
hour less.
Mercury Marine’s nearly 900 hourly workers voted last fall to reject
such terms, but a few days later, they voted again and accepted them.
They reversed course after the company announced that its headquarters
factory, in nearby Fond du Lac, would be closed and operations
consolidated in Stillwater. The Stillwater factory is now being closed
instead.
Kohler officials have stopped just short of saying that they, too, will
go elsewhere. They declare that if their proposals are not accepted,
then “it would be very difficult and challenging for us to sustain
manufacturing operations” in Sheboygan County, including those in the
town of Kohler, 50 miles north of here, named for the family that
founded and still dominates the company.
The alternative for the workers is to strike, thus challenging the
companies in their stated determination to relocate — in effect,
calling their bluff. The International Association of Machinists at
Mercury Marine and the United Steelworkers at Harley-Davidson declined
to take that risk, and so has the U.A.W. at Kohler, so far.
The workers themselves are convinced, their union leaders say, that the
companies are prepared to move factories from the Milwaukee area, where
all three came to life decades ago.
“The company stuck to its agenda,” Mr. Masik said of the Harley
negotiations, his voice rising, “and we ended up accepting their
agenda.”
Harley-Davidson actually has two very similar new contracts, one with
the Machinists, who represent workers at an assembly plant in York,
Pa.; the other with the Steelworkers at an engine-and-transmission
factory in Greater Milwaukee. The York agreement, ratified last year
and now in effect, has shrunk the core work force there by more than
half, to nearly 800 full-timers, while adding 300 “casual” employees,
who are union members without benefits.
The Milwaukee agreement, recently ratified, will shrink the full-time
payroll to 900 from 1,250 today and more than 1,600 before the
recession. Up to 250 “casuals,” as in York, will be used to handle
surges in demand for Harley bikes. While hourly pay under the current
contract averages $31 an hour, that drops to $25 for the second tier,
which becomes the only tier once all the veterans have left or retired.
Casuals, in contrast, get $18.50 an hour.
The new Milwaukee contract kicks in when the current agreement expires
on March 31, 2012. The union balked at negotiating so far in advance,
Mr. Masik said, but conceded after the company insisted it would
otherwise use the intervening months to prepare to move operations
elsewhere, perhaps Kansas City. To guarantee support, Harley also
incorporated into the contract $12,000 bonuses for its steelworkers,
including those laid off.
Harley’s president said the recession left no choice but to reorganize.
Motorcycle sales are down 40 percent from their peak in 2006, Mr.
Levatich said. Cutting the core staff allows Harley to slow the line
during the winter months of lean demand and add “casuals” when demand
picks up in the spring and summer.
“What we are doing is not mean-spirited,” Mr. Levatich insisted. “We
have to retool if we want to survive. We should have started doing
this, in small steps, 20 years ago.”
Deficit Plan
Offers Chance for 'Bold Tax Reform': Rivlin
ECONOMY, DEFICIT-REDUCTION PROPOSAL, US DEFICIT PLAN, US ECONOMY,
SOCIAL SECURITY, TAXES, US SPENDING, SPENDING CUTS, TAX CUTS, TAX CODE
OVERHAUL, GAS TAX, FARM SUBSIDIES, HEALTH CARE COSTS
CNBC.com
15 Nov 2010 - 10:12 AM ET
The deficit-reduction commission's draft proposal "is a good start" and
offers a great chance for "bold tax reform", a member of the panel told
CNBC.
Former Fed vice-chairman and OMB director Alice Rivlin said the
existing tax code is "unnecessarily complicated, unfair," adding the
government could "raise more revenue with lower rates."
The commission draft includes three outlines of varying severity for
tax reform.
"I personally favor drastic reform of the income tax," she said, which
would include, "modifying or eliminating many of everybody's favorite
deductions."
Rivlin, now with The Brookings Institution and an economist by trade,
cited the home-mortgage-interest tax deduction as an example because it
"favors high income" people," and suggested a credit available to all
taxpayers should replace it. The commission plan to cut deficits
by $4 trillion within 10 years got a mixed reception last week from
lawmakers who will need to sign off on any final product.
It would cut spending and benefits and overhaul the tax code to reduce
the deficit to 2.2 percent of gross domestic product by 2015, a level
many economists consider sustainable. The deficit stood at 8.9 percent
of the economy in the last fiscal year.
To be considered for a vote in Congress, at least 14 members of the
18-member bipartisan commission would have to agree on a final product.
The draft proposal was released by the commission's co-chairmen, former
Republican Senator Alan Simpson and former Democratic White House
official Erskine Bowles. Rivlin acknowledged it would be a tough
process.
"You have to start with the idea there is no easy way to solve this
problem," she said. "Any proposal is full of things most people don't
like."
The proposals touch virtually every area of revenue and spending, from
the tax code to entitlements to the defense budget Rivlin also
weighed in on another hot-button issue, Social Security Insurance. The
retirement age to receive benefits is almost certainly likely to be
raised, as it has in the past, but some are calling for other changes,
such as income means testing.
"I'm not for major reform," she said. "Fix the benefit formula so it
less generous to people of the high end and add to the benefits of
lower income people."
Following is a summary of the proposal put forward.
Spending Cuts
The plan would cut discretionary spending, programs like defense and
law enforcement that are set by Congress each year, in fiscal 2012 back
to 2010 levels and impose 1 percent cuts in each of the next three
fiscal years.
In 2015, defense spending would be $100 billion lower and nondefense
spending also $100 billion lower than envisioned in the White House's
current budget scenario.
Perhaps the most viable defense spending cut would end a beleaguered
$13 billion-plus General Dynamics program to build a landing-craft
fleet for the U.S. Marine Corps. Pentagon strategists have questioned
the need for the mission itself and Defense Secretary Robert Gates has
questioned its relevance.
Cutting the Expeditionary Fighting Vehicle would save $650 million in
fiscal 2015, the co-chairmen said.
Gates has also ordered the military services and Defense Department
agencies to find $100 billion in overhead efficiencies from fiscal 2012
to 2016 — with those savings to be applied to modernizing the U.S.
arsenal. In the draft report, those savings could go to deficit
reduction instead, saving $28 billion in 2015.
Overhaul Tax Code
All of the $1.1 trillion exemptions currently in the tax code would be
eliminated, such as the mortgage-interest deduction and the
earned-income tax credit.
The corporate tax rate would be lowered from 35 percent to 26 percent,
and dividends and capital gains would be treated as ordinary income.
While Corporate America would love a break in the corporate tax rate,
which is currently among the highest in the world, it is unlikely to
agree to give up certain preferences the plan lays out, such as
changing a popular accounting method and cutting certain energy tax
breaks, without further concessions.
"One of our priorities is a lower corporate tax rate ... but some of
these base broadeners are just non-starters," said Dorothy Coleman,
vice president for tax and domestic economic policy at the National
Association for Manufacturers.
Such changes, including politically charged ones like the elimination
of the mortgage interest deduction, would have to be tackled wholesale,
as opposed to piecemeal, to win political support, lobbyists said.
When the Democrat-controlled Congress overhauled the tax code in 1986
under President Ronald Reagan, that was the approach taken.
Gas Tax
The gas tax, which has remained at 18.4 cents per gallon since the
early 1990s, would be raised by 15 cents beginning in 2013 to fund
transportation spending.
The Obama administration has refused to consider any hike with the
economy struggling, and the incoming chairman of the House
Transportation Committee has said an increase is off the table.
Reduce Health Care Costs
Doctors and other health providers would be paid less for seeing
patients under government programs like Medicare and Medicaid,
malpractice damages would be capped, and Medicare participants would
have to pay more costs while lower costs would be required for
brand-name drugs covered by government programs.
The call for boosting rebates that drug makers provide to the
government could gain traction, according to Ipsita Smolinkski, an
investor analyst in Washington. "The devil really is in the details.
Some of these are lightning rods, others are too poorly defined to know
what they mean."
Consumer Price Index
The consumer price index, which is used to calculate benefit increases,
would be revamped to better reflect the actual rate of inflation.
This could be an area of consensus, according to a lobbyist, because
"at the end of the day everybody pays a few extra dollars. ... The
reality of it is most people wouldn't notice."
Social Security
The retirement program would be revamped to ensure its long-term
stability, but separately from the deficit reduction effort.
The influential AARP seniors group and many Democrats blasted the
reliance on benefit cuts in the recommendations on Social Security, but
the group backs some of the principles embraced.
For example, the AARP has been open to discussions about raising the
cap above which income is taxed for Social Security and boosting the
retirement age, according to a spokeswoman.
That would have to be combined with less harsh cuts to benefits and
discussion about ensuring employment for older people, AARP said.
Farm Subsidies
Farm subsidies would be reduced by $3 billion per year. Trimming
billions in direct payments to farmers and other agriculture programs
is something that lawmakers have mulled for years and could gain
traction.
© 2010 CNBC.com
High
U.S. deficits could
spark bond crisis: Greenspan
YAHOO
14 November 2010
WASHINGTON (Reuters) – The United States must move to rein in its
massive budget deficits or it faces the risk of a bond market crisis,
former Federal Reserve Chairman Alan Greenspan said on Sunday.
"We've got to resolve this issue," Greenspan said of the ballooning
U.S. debt levels.
He spoke about the issue as a panel, chaired by former White House
chief of staff Erskine Bowles and former U.S. Senator Alan Simpson, is
due to deliver a report on debt and deficits by December 1.
A draft report made public last week offered a series of politically
tough tax and spending choices that would seek to reduce the debt by $4
trillion by 2020.
The report received a lukewarm reception from some politicians and
outright condemnation by others, including House of Representatives
Speaker Nancy Pelosi, who pronounced the ideas "simply unacceptable."
Greenspan, who spoke on NBC's "Meet the Press," said he believed
"something equivalent to what Bowles and Simpson put out is going to be
approved by Congress. But the only question is whether it is before or
after a crisis in the bond market."
He said the risk is that the deficit, which hit $1.3 trillion this
year, could spook the bond market. That would result in long-term
interest rates moving up rapidly and could lead to a double-dip
recession.
Deficit report favors 'do-nothing Congress'
Debt-to-GDP ratio benefits
from inaction
By David Sands, The Washington Times
7:47 p.m., Thursday, November 11, 2010
Buried inside the wide-ranging blueprint put out this week by the
respected co-chairmen of President Obama's bipartisan commission to
slash the federal deficit is a powerful argument for doing nothing.
The commission's recipe of tax increases, spending cuts, elimination of
popular tax breaks and reductions in Social Security and Medicare
benefits continued to roil Washington on Thursday, as both liberals and
conservatives condemned some of the painful steps contained in the
draft proposal to reduce federal red ink over the coming decades.
But the report, offered by Democrat Erskine Bowles and former Wyoming
Republican Sen. Alan Simpson, also demonstrates that Congress and Mr.
Obama can take a major chunk out of the deficit without passing a
single bill or issuing a single veto.
The report's scariest deficit scenario relies on a Congressional Budget
Office projection that under what it calls "current policy," the U.S.
government's debt will soar from the current 60 percent of GDP to 100
percent of GDP by 2023 and to twice the country's annual economic
output by the year 2035.
But "current policy" as defined by CBO does — in the sometimes
upside-down world of Washington — require action. It assumes that
Congress will pass and President Obama will sign a continuation of at
least some of the George W. Bush-era tax cuts set to expire; that
lawmakers will once again vote to ease the bite of the alternative
minimum tax (AMT); that Congress will block a scheduled increase in
estate tax rates; and that the government will continue to pass
so-called "doc fixes" to shield physicians from mandated cuts in the
payments they get under Medicare.
But if none of those actions are taken — what the CBO calls the
"current law" baseline — the deficit numbers look considerably brighter.
Total gridlock, in this scenario, would be a boon for the nation's
bottom line: The national debt-to-GDP ratio under "current law" would
only hit 80 percent in the year 2035, compared to 200 percent under the
"current policy" scenario. The national debt under the "do-nothing"
plan would actually be lower through 2018 than under the painful
deficit-reduction diet offered by Mr. Bowles and Mr. Simpson, although
their plan's savings rise considerably after that.
For once, however, doing nothing does not appear to be an option for
lawmakers.
House Republican chief John A. Boehner of Ohio, in line to be the next
speaker of the House, is insisting that the Bush tax cuts be preserved,
and Republicans and the White House are haggling simply over the form
of the extension.
Congress repeatedly has found ways to soften the bite of the AMT and
make the "doc fix," and is likely to do so again despite the results of
the midterm election.
And staying the course could be as difficult economically as it is
politically.
"Gridlock may look like a good way to reduce the deficit on paper, but
it would be a disaster for business planning, investment, personal
income and the things we need to have real economic growth," said Vin
Weber, a Washington lobbyist and former GOP congressman from Minnesota
who served on the House Appropriations Committee.
"That's really the last kind of policy you'd want to be laying on a
fragile economy like we have now."
© Copyright 2010 The Washington
Times, LLC. Click here for reprint permission.
























SYMPOSIUM ON INTERNATIONAL
RELATIONS:
LWVCT ED FUND FOCUS ON SUB-SAHARA AFRICA IN 1990's (PRINTS AVAILABLE)
The next Corzine Q’s
NYPOST
By CHARLES GASPARINO
Last Updated: 12:48 AM, December 14, 2011
Posted: 12:07 AM, December 14, 2011
By playing the fool in two high-profile hearings, Jon Corzine so far
has been able to deftly sidestep lawmakers’ questions about the
now-infamous implosion of MF Global, including the disappearance of a
whopping $1.2 billion in customer money that should have been kept safe
in brokerage accounts. But new questions are about to arise.
Specifically: How did Corzine manage to convince regulators that a
relatively small brokerage like MF Global was ready for big-time
status, both as a risk-taking hedge fund and (even more startling) as a
primary dealer of US government debt — a status that only a very few
firms are allowed?
The likely explanation involves Corzine’s long experience at the nexus
of politics and finance — as CEO of Goldman Sachs, then US senator and
New Jersey governor, and of course as a leading Obama fund-raiser. In
other words, crony capitalism.
Corzine is to appear before the House Financial Services Committee’s
Subcommittee on Oversight and Investigations tomorrow, and informed
sources tell me the panel is keenly interested in how Corzine (who’d
been out of the brokerage business for over a decade) managed to take
this firm from nothing to something almost overnight — that is, before
its spectacular demise last month.
Keep in mind that being a primary dealer — with the rare privilege to
underwrite US government debt sold at auction and then resell those
bonds to investors — is no small-fry position. The coveted assignment
is usually reserved for the biggest firms that are also considered the
market’s safest bets.
The New York Fed selects the best and most financially solid firms for
this task for obvious reasons: When markets become volatile, it wants
to make sure the firm buying government bonds can withstand the
volatility. In other words, the government wants to make sure its
primary dealers can take a punch and won’t implode at the slightest
turn of the markets.
Yet MF Global was anything but one of the market’s soundest outfits.
Not only did a simple disclosure of its of its European debt exposure
cause a severe cash-crunch, but the very fact that it lost more than $1
billion in customer funds during its final hours shows that (at
minimum) MF Global lacked basic and routine controls.
So how did all of this manage to evade regulators, despite all the new
rules promulgated in the aftermath of the 2008 financial crisis?
Well, William Dudley, who runs the New York Fed (which, again, selected
MF Global as a primary dealer), is just one of Corzine’s old Goldman
cronies to be found in the MF Global mess.
That the two worked together at Goldman doesn’t necessarily mean
Corzine got a break from an old colleague. In fact, Corzine has said
that he “never spoke” with Dudley about the primary dealer matter, at
least to the “best of my recollection.”
But committee members are skeptical, not just about Corzine’s “best
recollection,” but also because, according to a person close to the
subcommittee, “MF Global tried to get primary-dealer status prior to
Corzine . . . and once Corzine became CEO, MF Global got primary-dealer
status.”
That status gave MF Global greatly added legitimacy, bringing in
clients and letting CEO Corzine transform it into a risk-taking trading
shop — without, it seems, the most rudimentary controls to protect
customer cash.
Whose job was it to make sure those controls were in place? Certainly
at the top of the list is the Commodity Futures Trading Commission, run
by yet another Goldman alum, Gary Gensler.
The implosion of MF Global and the disappearance of customer cash may
well turn out to involve massive fraud and deception. But the firm’s
expansion to that point may involve something equally sinister but
completely legal: The ability to work the system, which seems to be
Corzine’s greatest feat.
Financial terrorism
suspected in 2008 economic crash; Pentagon study sees element
By Bill Gertz, The Washington Times
8:54 p.m., Monday, February 28, 2011
Evidence outlined in a Pentagon contractor report suggests that
financial subversion carried out by unknown parties, such as terrorists
or hostile nations, contributed to the 2008 economic crash by covertly
using vulnerabilities in the U.S. financial system.
The unclassified 2009 report "Economic Warfare: Risks and Responses" by
financial analyst Kevin D. Freeman, a copy of which was obtained by The
Washington Times, states that "a three-phased attack was planned and is
in the process against the United States economy."
While economic analysts and a final report from the federal
government's Financial Crisis Inquiry Commission blame the crash on
such economic factors as high-risk mortgage lending practices and poor
federal regulation and supervision, the Pentagon contractor adds a new
element: "outside forces," a factor the commission did not examine.
"There is sufficient justification to question whether outside forces
triggered, capitalized upon or magnified the economic difficulties of
2008," the report says, explaining that those domestic economic factors
would have caused a "normal downturn" but not the "near collapse" of
the global economic system that took place.
Suspects include financial enemies in Middle Eastern states, Islamic
terrorists, hostile members of the Chinese military, or government and
organized crime groups in Russia, Venezuela or Iran. Chinese military
officials publicly have suggested using economic warfare against the
U.S.
In an interview with The Times, Mr. Freeman said his report provided
enough theoretical evidence for an economic warfare attack that further
forensic study was warranted.
"The new battle space is the economy," he said. "We spend hundreds of
billions of dollars on weapons systems each year. But a relatively
small amount of money focused against our financial markets through
leveraged derivatives or cyber efforts can result in trillions of
dollars in losses. And, the perpetrators can remain undiscovered.
"This is the equivalent of box cutters on an airplane," Mr. Freeman
said.
Paul Bracken, a Yale University professor who has studied economic
warfare, said he saw "no convincing evidence that 'outside forces'
colluded to bring about the 2008 crisis."
"There were outside players in the market" for unregulated credit
default swaps, Mr. Bracken said in an e-mail. "Foreign banks and hedge
funds play the shorts all the time too. But suggestions of an organized
targeted attack for strategic reasons don't seem to me to be plausible."
Regardless of the report's findings, U.S. officials and outside
analysts said the Pentagon, the Treasury Department and U.S.
intelligence agencies are not aggressively studying the threats to the
United States posed by economic warfare and financial terrorism.
"Nobody wants to go there," one official said.
A copy of the report also was provided to the recently concluded
Financial Crisis Inquiry Commission, but the commission also declined
to address the possibility of economic warfare in its final report.
Officials, who spoke on the condition of anonymity, said senior
Pentagon policymakers, including Michael Vickers, an assistant defense
secretary in charge of special operations, blocked further study,
saying the Pentagon was not the appropriate agency to assess economic
warfare and financial terrorism risks.
Mr. Vickers declined to be interviewed but, through a spokesman, said
he did not say economic warfare was not an area for the Pentagon to
study, and that he did not block further study.
Mr. Vickers is awaiting Senate confirmation on his promotion to be
undersecretary of defense for intelligence.
Despite his skepticism of the report, Mr. Bracken agreed that financial
warfare needs to be studied, and he noted that the U.S. government is
only starting to address the issue.
"We are in an era like the 1950s where technological innovation is
transforming the tools of coercion and war," he said. "We tend not to
see this, and look at information warfare, financial warfare, precision
strike, [weapons of mass destruction], etc. as separate silos. It's
their parallel co-evolution that leads to interesting options, like
counter-elite targeting. And no one is really looking at this in an
overall 'systems' way. Diplomacy is way behind here."
Mr. Freeman wrote the report for the Pentagon's Irregular Warfare
Support Program, part of the Combating Terrorism Technical Support
Office, which examines unconventional warfare scenarios.
"The preponderance of evidence that cannot be easily dismissed demands
a thorough and immediate study be commenced," the report says.
"Ignoring the likelihood of this very real threat ensures a
catastrophic event."
The report concluded that the evidence of an attack is strong enough
that "financial terrorism may have cost the global economy as much as
$50 trillion."
Because of secrecy surrounding global banking and finance, finding the
exact identities of the attackers will be difficult.
But U.S. opponents in Russia who could wage economic warfare include
elements of the former KGB intelligence and political police who regard
the economy as a "logical extension of the Cold War," the report says.
Asked by The Times who he thought to be the most likely behind the
financial attacks, Mr. Freeman said: "Unfortunately, the two major
strategic threats, radical jihadists and the Chinese, are among the
best positioned in the economic battle space."
Also, the report lists as suspects advocates of Islamic law, who have
publicly called for opposition to capitalism as a way to promote what
they regard as the superiority of Islam.
Further Pentagon Low Intensity Conflict office research into possible
economic warfare or financial terrorism being behind the economic
collapse by the Pentagon's Special Operations and was blocked, Mr.
Freeman said.
The Pentagon report states that the evidence of financial subversion
revealed that the first two phases of an attack on the U.S. economy
took place from 2007 to 2009 and "based on recent global market
activity, it appears that the predicted Phase III may be underway right
now."
The report states that federal authorities must further investigate two
significant events in the months leading up to the financial crisis.
The first phase of the economic attack, the report said, was the
escalation of oil prices by speculators from 2007 to mid-2008 that
coincided with the housing finance crisis.
In the second phase, the stock market collapsed by what the report
called a "bear raid" from unidentified sources on Bear Stearns, Lehman
Brothers and other Wall Street firms.
"This produced a complete collapse in credit availability and almost
started a global depression," Mr. Freeman said.
The third phase is what Mr. Freeman states in the report was the main
source of the economic system's vulnerability. "We have taken on
massive public debt as the government was the only party who could
access capital markets in late 2008 and early 2009," he said, placing
the U.S. dollar's global reserve currency status at grave risk.
"This is the 'end game' if the goal is to destroy America," Mr. Freeman
said, noting that in his view China's military "has been advocating the
potential for an economic attack on the U.S. for 12 years or longer as
evidenced by the publication of the book Unrestricted Warfare in 1999."
Additional evidence provided by Mr. Freeman includes the statement in
2008 by Treasury Secretary Henry M. Paulson Jr. that the Russians had
approached the Chinese with a plan to dump its holdings of bonds by the
federally backed mortgage companies Fannie Mae and Freddie Mac.
Among the financial instruments that may have been used in the economic
warfare scenario are credit default swaps, unregulated and untraceable
contracts by which a buyer pays the seller a fee and in exchange is
paid off in a bond or a loan. The report said credit default swaps are
"ideal bear-raid tools" and "have the power to determine the financial
viability of companies."
Another economic warfare tool that was linked in the report to the 2008
crash is what is called "naked short-selling" of stock, defined as
short-selling financial shares without borrowing them.
The report said that 30 percent to 70 percent of the decline in stock
share values for two companies that were attacked, Bear Stearns and
Lehman Brothers, were results of failed trades from naked short-selling.
The collapse in September 2008 of Lehman Brothers, the fourth-largest
U.S. investment bank, was the most significant event in the crash,
causing an immediate credit freeze and stock market crash, the report
says.
In a section of who was behind the collapse, the report says
determining the actors is difficult because of banking and financial
trading secrecy.
"The reality of the situation today is that foreign-based hedge funds
perpetrating bear raid strategies could do so virtually unmonitored and
unregulated on behalf of enemies of the United States," the report says.
"Only recently have defense and intelligence agencies begun to consider
this very real possibility of what amounts to financial terrorism
and-or economic warfare."
As for Chinese involvement in economic sabotage, the decline in the
world economy may have hurt Beijing through a decline in purchases of
Chinese goods.
Treasury spokeswoman Marti Adams had no immediate comment on the report
but said her department's views on the causes of the economic crash
were well known.
© Copyright 2011 The Washington
Times, LLC. Click here for reprint permission.
--------------------------------------------------------------
THE
GLOBAL FINANCIAL CRISIS:
Bernanke says debt limit battle risks
crisis
YAHOO
By Pedro Nicolaci da Costa
14 June 2011
WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke warned on
Tuesday that a failure to lift the government's $14.3 trillion debt
ceiling risks a potentially disastrous loss of confidence in America's
creditworthiness.
Bernanke said in the absence of a quick resolution to the battle over
the debt limit, the United States could lose its prized AAA credit
rating, while the U.S. dollar's special status as a reserve currency
might be damaged.
"Even a short suspension of payments on principal or interest on the
Treasury's debt obligations could cause severe disruptions in financial
markets and the payments system," Bernanke said in remarks prepared for
delivery at an event sponsored by the Committee for a Responsible
Federal Budget.
Inaction could also "create fundamental doubts about the
creditworthiness of the United States, and damage the special role of
the dollar and Treasury securities in global markets in the long term,"
Bernanke added.
Vice President Joe Biden and top lawmakers, set to resume budget
negotiations on Tuesday, must work around a stark divide on taxes and
healthcare as they look for trillions of dollars in savings that would
give Congress the political cover to raise the debt ceiling before the
government runs out of money.
The Treasury Department has warned the government will begin defaulting
on its obligations -- whether debt payments or other bills coming due
-- if Congress does not increase the limit by August 2.
"We could actually have a reprise of a financial crisis, if we play
this too close to the line. So we're going be working hard over the
next month," President Barack Obama warned on Tuesday.
Bernanke also repeated his calls for a long-term budget plan. He said
that while a considerable portion of recent deficits was due to fallout
from the recession, which led to lower revenues and higher stimulus
spending, large "structural" budget issues remain.
Developing a plan now for how to reduce that debt load over time could
bolster economic activity today by keeping borrowing costs down and
boosting confidence, Bernanke argued.
"Maintaining the status quo is not an option," Bernanke said.
He urged the Congress and the administration to work together to come
up with ways to bring down the debt.
"I hope, though, that such a plan can be achieved in the near term
without resorting to brinkmanship," he said.
G.O.P. Stopgap May Avert Federal
Shutdown
NYTIMES
By CARL HULSE
February 25, 2011
WASHINGTON — The prospect of an imminent federal government shutdown
diminished Friday as House Republicans proposed a carefully calibrated
stopgap measure that Democrats said could be acceptable.
Under the proposal, the law now keeping the government open would be
extended two more weeks, until March 18, at the price of $4 billion in
new spending cuts. In the interim, House and Senate leaders would try
to negotiate a broader plan to finance the government at reduced levels
through Sept. 30.
While the measure, which will be considered by the House and Senate
next week, represents only a reprieve, it showed that both Republicans
and Democrats were interested in easing the political tensions around
the budget showdown.
As they adjust to the new power structure on Capitol Hill, both sides
have said they hope to avoid an impasse that could shutter federal
agencies. To make it harder for Democrats to object to the temporary
plan, Republican architects of the proposal tried to make the cuts
relatively painless.
They came up with the $4 billion by ending eight education,
transportation and other programs that President Obama had previously
sought to close down, a savings of almost $1.2 billion. They also
reclaimed nearly $2.8 billion set aside for earmarks in the current
budget; both the House and Senate have agreed to ban such pet projects.
“We hope the Senate is going to finally join us in these common-sense
cuts to keep the government open and not continue to play chicken,”
said Representative Eric Cantor, the Virginia Republican and majority
leader.
Senate Democrats indicated they would be willing to go along with the
proposal despite their insistence earlier this week that any temporary
measure should be free of spending reductions. They had portrayed such
a maneuver as a back-door way for House Republicans to begin enacting
$61 billion in cuts that have met objections in the Senate.
“We are encouraged to hear that Republicans are abandoning their
demands for extreme measures like cuts to border security, cancer
research and food safety inspectors,” said Jon Summers, a spokesman for
Senator Harry Reid of Nevada, the majority leader.
If approved, the measure would buy time for more talks on the depth of
spending cuts.
If the House and Senate do not reach a deal by March 18 under the
latest proposal, they will once again face the prospect of closing
federal agencies or be forced to enact another temporary extension.
Republicans said their willingness to fashion a measure that involved
relatively uncontroversial cuts and was free of the more ideologically
charged provisions included in the $61 billion plan showed that they
were sincere when they said their main interest was reducing spending,
not shutting down the government.
“This is to get the government moving forward but to cut spending in
government,” said Representative Kevin McCarthy of California, the No.
3 Republican. “I don’t see how Democrats can’t take these basic steps
toward reining in government while keeping our government operational.”
But Democrats said their efforts to raise the alarm about a possible
shutdown due to Republican demands for deep cuts in a variety of
federal agencies had paid off. They said Republicans instead chose to
advance a temporary measure with the same kind of spending trims that
Democrats had been advocating.
"They feared a government shutdown, and so they are adopting some of
our suggestions on what to cut," said Senator Charles E. Schumer of New
York, the No. 3 Democrat in the Senate.
The House is expected to approve the temporary measure on Tuesday,
leaving a few days for the Senate to act and send a measure to
President Obama before the current stopgap bill expires at midnight
Friday. The time frame leaves little opportunity for the Senate to
alter the measure and send it back to the House.
Senate Republicans said Democrats had few good options with the clock
ticking and encouraged them to accept the bill and move on to the
negotiations over the broader spending legislation as well as the
budget for 2012.
“By supporting the House bill, our friends on the other side of the
aisle will have the chance to ensure that the government remains
operational while we work with them to identify additional ways to
shrink Washington spending this year,” said Senator Mitch McConnell of
Kentucky, the Republican leader.
Striking a final deal will not be easy. Democrats contend that the $61
billion cut by the House in its marathon floor debate earlier this
month reaches far too deeply into essential federal programs and
strikes out at favored Obama administration initiatives like the new
health care law. Senate Democrats have begun assembling their own
package of cuts and expect to bring it forward next week as an
alternative to the Republican plan.
At the same time, the new House speaker, John A. Boehner of Ohio, has
little room for negotiation given the insistence by his rank and file,
including 87 newly elected Republicans, on standing firm on the $61
billion in reduced spending that has already cleared the House.
But both sides agree that federal agencies face some level of
significant spending cuts from the budgets they are currently operating
under, a result that could cause some disruptions.
Europe’s Piecemeal Failure
NYTIMES
By ALISTAIR DARLING
December 5, 2010
London
WHEN I look at events in Europe today, with Ireland getting bailed out
and talk of crises brewing elsewhere on the continent, I am reminded of
the weeks leading up to the banking crisis in 2008. As the credit
crunch began and banks found it increasingly difficult to get access to
funding, policy makers faced a choice: deal with the problem in a
piecemeal way, or address the root causes immediately. For too
long many policy makers opted to fudge their approach; they dealt with
the problem bank by bank and refused to recognize the system’s
fundamental flaws...long,
thoughtful article here.

Senator Dodd didn't run again because of this?
Countrywide CEO Mozilo settles with
SEC for $67.5M
YAHOO
By JACOB ADELMAN, Associated Press Writer
15 October 2010
LOS ANGELES – Countrywide Financial Corp. co-founder Angelo Mozilo and
two other former executives have agreed to pay tens of millions of
dollars to avoid a trial on civil fraud and insider trading charges, a
federal judge said in court Friday. Mozilo and the others were to
face trial on the Securities and Exchange
Commission's charges next week. Mozilo agreed to repay $45
million in ill-gotten profits and $22.5
million in civil penalties. Former Countrywide President David Sambol
will repay $5 million in profits and pay $520,000 in civil penalties,
and former Chief Financial Officer Eric P. Sieracki will pay $130,000
in civil penalties.
Sambol's attorney Walter Brown said in a statement after the hearing
that Bank of America Corp., which bought Countrywide in July 2008,
would pay his client's $5 million in ill-gotten profits.
The payment comes on top of $600 million that Bank of America agreed to
pay in August to end a class-action case filed by former shareholders
against Countrywide. Mozilo lawyer David Siegel did not return a
message asking whether the
former countrywide chairman's $45 million forfeiture would also be paid
by the bank.
Messages left with Charlotte, N.C.-based Bank of America were not
immediately returned. Under the settlement, the three men did not
admit wrongdoing.
"Mr. Sambol has agreed to settle the SEC lawsuit and put the matter
behind him for the benefit of his family and loved ones," Brown said in
the statement.
Sieracki's lawyer, Shirli Fabbri Weiss, said in a news release that all
fraud-based claims against her client had been dropped and that his
civil penalty was to settle fraud-based charges. An SEC spokesman
did not return a phone message. The SEC accused the men of
misleading shareholders about the quality of
the loans on Countrywide's books. The civil complaint also accused
Mozilo of acting on his inside knowledge of the company's precarious
state when he sold shares between November 2006 and October 2007 ahead
of its collapse, reaping more than $139 million.
Mozilo was not in court when the settlement was announced. The
former Countrywide chairman is the nation's highest-profile
defendant yet to face trial for risky business practices leading to the
housing collapse that sent the country into recession. In legal
filings, regulators portrayed the three defendants as engaging
in a single-minded pursuit of market dominance, even if it meant
knowingly taking disastrous risks. The company was a major player
in the market for high-risk subprime
mortgages and became the biggest U.S. mortgage lender overall before it
spiraled into disaster when the mortgage meltdown hit.
The settlement talks involving Mozilo were disclosed after U.S.
District Judge John F. Walter filed a notice Thursday for trial lawyers
to attend a status conference Friday.
Countrywide's lending practices are reportedly also the subject of a
criminal probe in Los Angeles. Thom Mrozek, a spokesman for the U.S.
attorney's office, declined to comment about the situation.
Countrywide was based in Calabasas, Calif.
Economic panel says recession ended in
June 2009
YAHOO
By JEANNINE AVERSA, AP Economics Write
20 September 2010
WASHINGTON – The longest recession the country has endured since the
Great Depression ended in June 2009, a group that dates the beginning
and end of recessions declared Monday. The National Bureau of
Economic Research, a panel of academic economists based in Cambridge,
Mass., said the recession lasted 18 months. It started in December 2007
and ended in June 2009. Previously the longest post World War II
downturns were those in 1973-1975 and in 1981-1982. Both of those
lasted 16 months.
The NBER decision makes official what many economists have believed for
some time, that the recession ended in the summer of 2009. But it won't
make much difference to most Americans — especially the nearly 15
million without jobs. Americans are coping with 9.6 percent
unemployment, scant wage gains, weak home values and the worst
foreclosure market in decades.
President Barack Obama saw little reason to celebrate the group's
finding that the recession had ended. Appearing at a town-hall
meeting sponsored by CNBC, Obama said times are still very hard for
people "who are struggling," including those who are out of work and
many others who are having difficulty paying their bills.
"The hole was so deep that a lot of people out there are still
hurting," the president said. It's going "to take more time to solve"
an economic problem that was years in the making, he added.
The economy started growing again in the July-to-September quarter of
2009, after a record four straight quarters of declines. Thus, the
April-to-June quarter of 2009, marked the last quarter when the economy
was shrinking. At that time, it contracted just 0.7 percent, after
suffering through much deeper declines. That factored into the NBER's
decision to pinpoint the end of the recession in June. Any future
downturn in the economy would now mark the start of a new recession,
not the continuation of the December 2007 recession, NBER said. That's
important because if the economy starts shrinking again, it could mark
the onset of a "double-dip" recession. For many economists, the last
time that happened was in 1981-82.
To make its determination, the NBER looks at figures that make up the
nation's gross domestic product, which measures the total value of
goods and services produced within the United States. It also reviews
incomes, employment and industrial activity. The economy lost 7.3
million jobs in the 2007-2009 recession, also the most in the post
World War II period.
The Great
Depression lasted much longer. The United States suffered through a
43-month recession that ended in 1933. Then, it slid back into
recession, which lasted for 13 months. That ended in 1938.
The NBER normally takes its time in declaring a recession has started
or ended. For instance, the NBER announced in December 2008 that
the recession had actually started one year earlier, in December 2007.
Similarly, it declared in July 2003 that the 2001 recession was over.
It actually ended 20 months earlier, in November 2001. Its
determination is of interest to economic historians — and political
leaders. Recessions that occur on their watch pose political
risks. In President George W. Bush's eight years in office, the
United States fell into two recessions. The first started in March 2001
and ended that November. The second one started in December 2007.
NBER's decision means little to ordinary Americans now muddling through
a sluggish economic recovery and a weak jobs market. Unemployment is
9.6 percent and has been stuck at high levels since the recession
ended. Many will continue to struggle.
Unemployment usually keeps rising well after a recession ends. Four
months after the 2007 downturn ended, unemployment spiked to 10.1
percent in October 2009, which was the highest in just over a
quarter-century. Some economists believe that marked the high point in
joblessness. But others think it could climb higher — perhaps hitting
10.3 percent by early next year.
After the 2001 recession, for instance, unemployment didn't peak until
June 2003 — 19 months later. Word of the recession's official end
comes just two months before Election Day. But the decision isn't
likely to play a big role in November's congressional and gubernatorial
elections.
Some Democrats might hail it as a sign of progress, but voters are
guided by gut reactions far more than economists' pronouncements.
With unemployment still hovering just below 10 percent, some Democrats
have urged Obama to stop boasting about any economic progress at all.
They fear it annoys people who feel things are not getting better for
themselves and their neighbors, and it makes politicians seem out of
touch with ordinary Americans' worries.

Source for this nice Hartford Courant graphic: Bureau of Economic Analysis, U.S.
Department of Commerce.






In Michigan, a City Pleads for a
Bankruptcy Option
NYTIMES
By MONICA DAVEY
December 27, 2010
HAMTRAMCK, Mich. — Leaders of this city met for more than seven hours
on a Saturday not long ago, searching for something to cut from a
budget that has already been cut, over and over.
This time they slashed money for boarding up abandoned houses — aside
from emergencies, like vagrants or obvious rats, said William J.
Cooper, the city manager. They shrank funds for trimming trees and
cutting grass on hundreds of lots that have been left to the city. And
Mr. Cooper is hoping that predictions of a ferocious snow season prove
false; once state road funds run out, the city has set nothing aside to
plow streets.
“We can make it until March 1 — maybe,” Mr. Cooper said of Hamtramck’s
ability to pay its bills. Beyond that? The political leaders of this
old working-class city beside Detroit are pleading with the state to
let them declare bankruptcy — a desperate move the state is not even
willing to admit as an option under the current circumstances.
“The state is concerned that if they say yes to one, if that door is
opened, they’ll have 30 more cities right behind us,” Mr. Cooper said,
as flurries fell outside his City Hall window. “But anything else is
just a stop gap. We’re going to continue to pursue bankruptcy until the
door is shut, locked, barricaded, bolted.”
Bankruptcy, increasingly common among corporations and individuals,
remains rare for municipalities. Local leaders who want to win
elections find it unappealing and often have other choices for solving
financial woes. Besides, states have a say in whether a municipality
may pursue bankruptcy at all, and they have every reason to avoid such
an outcome, not least of all for fear of a creating a ripple effect
that could cripple the municipal bond market and drive up the cost of
borrowing.
Yet with anemic property tax revenues and forecasts of more dire
financial times ahead, some experts and elected leaders fear more
localities may have to at least consider bankruptcy.
“There could be many cities in this position next year,” said Summer
Hallwood Minnick, director of state affairs for the Michigan Municipal
League, who added that in this state, cities have already struggled
with billions less than expected in state revenue sharing. “All our
communities have done is cut, cut, cut. They’re down to four-day
workweeks and the elimination of parks, senior centers, all of that. So
if there’s anything else that happens, they will be over the edge.”
This month, the authorities in Rhode Island said the City of Central
Falls could face bankruptcy if immediate, drastic changes — perhaps the
city’s annexation into a neighboring municipality — fail. Some leaders
in Harrisburg, Pa., which owes millions in debt payments tied to an
incinerator project, say bankruptcy may eventually be the only choice.
Only about 600 cities, counties, towns and special taxation districts
have filed for bankruptcy (known as Chapter 9 for these sorts of
entities) since 1937, said James E. Spiotto, a municipal bankruptcy
expert at Chapman & Cutler, a law firm in Chicago, and fewer than
250 in the last three decades. In part, it can be hard — even
impossible — to do: about half the states have statutes authorizing
such filings, but some of them set limits or require elaborate approval
processes. Other states have no specific provision allowing cities to
pursue bankruptcy, and at least one, Georgia, bans such moves.
So far, the financial misery of the past two years has not caused a
surge in bankruptcy applications; about 15 municipalities pursued
bankruptcy in the last two years. But if revenue forecasts continue as
predicted, 2011 might bring a rise in cities faced with such a fate.
Hamtramck (pronounced ham-TRAM-eck) did not anticipate its current
circumstances. Officials in Detroit, Hamtramck’s far larger next-door
neighbor, announced this year that they had for years overpaid
Hamtramck in a revenue sharing deal related to a General Motors Company
plant that sits smack on the border of the two cities. The dispute is
likely to be resolved, eventually, in court, but meanwhile, Detroit has
stopped paying $2 million a year, and Hamtramck is watching a growing
gap in its $18 million budget.
Here, the urgent search for services to cut has turned all attention to
a realm that is also emerging at the center of budget debates in cities
and states around the country: the costs of salaries, benefits and
pensions of public workers.
Mr. Cooper, the city manager, says that everything else that could be
cut already has been, while the city goes on spending 60 percent of its
total general fund to pay for its police and firefighting forces — 75
current police officers and firefighters and about 240 former workers
and spouses now on pensions. Mr. Cooper said that an entry-level police
officer costs the city about $75,000 a year in salary and benefits, and
yet repeated efforts to renegotiate contracts have failed. “They kind
of have the Cadillac plan,” Mr. Cooper said, “and we’d kind of like the
Chevy.”
The police and firefighters question whether the city’s bankruptcy talk
is really just a scare tactic for negotiation. Earlier discussions with
city officials, they say, have urged them to accept pay cuts, layoffs,
increased worker payments to pensions and even a suggestion that
officers might pay for a portion of their own bulletproof vests — all
this while the city has opted not to increase taxes.
“Nobody likes the police until you need them,” said Jon Bondra, the
incoming president of Hamtramck’s police union.
(Found, Mr. Cooper says, posted on the wall of the firefighters’
barracks: his name — crossed out — on a list of former city managers
and the word, “Next?”)
Hamtramck, all 2.1 square miles of it, is a gritty city, a proud one,
and a place “that can do more with less than anywhere on earth,” in the
view of Greg Kowalski, 60, who has lived here since childhood.
Immigrants have arrived in waves over time, leaving layers here like
sedimentary rock — from Germany, Poland, Bosnia, Albania, Bangladesh,
Yemen and more. Along Joseph Campau Street on a recent morning, a woman
in a burqa strolled past Stan’s Grocery, which boasts about its Polish
pierogi and kielbasa.
Hamtramck — once a community of more than 50,000 people but now less
than half of that — grew up around an enormous auto factory that John
and Horace Dodge built here a century ago. It remains a city woven
together by union history, a fact that makes the turmoil filtering out
from City Hall all the more pronounced.
“Look, if I was king of the world, I’d give them all a million
dollars,” Charles Sercombe, the editor of The Hamtramck Review, the
local newspaper, said of police officers and firefighters. “But this is
the new economy, welcome to it.” He noted that his own job is now part
time and he receives no health benefits.
Although Mr. Cooper says he believes bankruptcy, which could allow the
city to “start over” with its labor contracts, is the only solution,
the authorities in the state of Michigan have so far rejected the
city’s request that the governor issue an executive order allowing
Hamtramck to file for bankruptcy. An official from the state’s Treasury
Department said that no city in Michigan has gone through bankruptcy,
and that the governor has no such authority; the state has specific
provisions for authorizing a bankruptcy filing, including intervention
from an emergency financial manager and an emergency loan board. The
current administration, which will be departing later this week, has
urged Hamtramck to seek state assistance, including a possible
emergency loan. .
Rick Snyder, a Republican who is to be sworn in as governor of Michigan
on Saturday, said the circumstances in Hamtramck concerned him,
particularly for what it might bode elsewhere. “We could have a large
number of jurisdictions facing insolvency,” he said. “Major
reinvention” will be a necessity, he added, including taking a serious
look at the structure of local governments and the possibility, in some
places, of consolidation of services.
A new fear is bubbling up along the streets here: that Hamtramck, in so
much fiscal angst, may ultimately disappear (either through bankruptcy
or, simply, default), and wind up sharing services with or becoming a
part of Detroit, a place many here describe as painfully rundown and
unsafe.
“I’m not going to wait for two hours for a cop to show up,” said
Shannon Lowell, the co-owner of a coffee shop. “We’ve trimmed every bit
of fat. What else are we going to do? Borrow money from our dying
grandmother?”
Do you have a
problem with this? We do!
Let Treasury Rescue the States
NYTIMES
By CHRISTOPHER EDLEY Jr.
July 7, 2010
Berkeley, Calif.
HERE in California, where people tiresomely boast that the state’s
gross domestic product exceeds that of all but seven nations, I keep
expecting a ballot initiative demanding admission to the Group of 8
industrialized nations. I’d consider voting for it, too; then maybe
Washington would work as hard to synchronize its economic policy with
Sacramento as it does with Tokyo and Berlin. The lack of coordination
within the United States — and, equally important, the failure to
recognize the states as macroeconomic players — helps explain our
sluggish recovery.
To make matters worse, several states have country-sized G.D.P.’s, but
none has the macroeconomic tools of an independent country. Every state
except Vermont has some sort of balanced budget requirement that
prevents it from weathering a recession by running up big deficits to
keep teachers employed, students in college, welfare payments flowing
and construction humming. Nor can New York and California stimulate
their economies by, say, printing more currency. Instead, states are
managing huge budget crises with the only tools they have, cutting
spending and raising taxes — both of which undermine the federal
stimulus.
That’s why the best booster shot for this recovery and the next would
be to allow states to borrow from the Treasury during recessions. We
did this for Wall Street and Detroit, fending off disaster. It’s even
more important for states.
Here’s how this would work. States already receive regular federal
matching grants to help pay for Medicaid, welfare, highway construction
programs and more. For instance, the federal government pays a share of
state Medicaid costs, from 50 percent to more than 75 percent,
depending on a state’s wealth. The matching rates were temporarily
sweetened by last year’s stimulus.
But Congress should pass legislation that would allow a state to simply
get an “advance” on these future federal dollars expected from
entitlement programs. The advance could then be used for regional
stimulus, to continue state services and to hasten our recovery.
The Treasury Department, which writes the checks to the states, could
be assured of repayment (with interest) by simply cutting the federal
matching rate by the needed amount over, say, five years. Of course,
when Treasury eventually collected what it was owed, the state would
have to cut spending or find new revenue sources. But that would happen
after the recession, when both tasks would likely prove easier
economically and politically.
What would this cost the federal government? Nothing. There would be
zero risk of default, and a guarantee of full repayment plus interest
equal to what Treasury pays in the bond markets to borrow. Congress
would need only to appropriate the administrative costs of this
program, which would be minimal.
It seems clearer every day that there isn’t the political will for
another traditional federal stimulus package large enough to be
effective in a $14 trillion economy. This proposal, however, would
merely shift the timing of federal payments to states to help offset
economic swings. It would have the additional merit of finally forging
the federal-state partnership that has been missing since 1787, when
the Constitution created a federal government with sufficient
legislative authority to shape a nationwide economy out of separate
state economies.
Indeed, our best shot at devising United States economic policy may be
to give the states the role of creating and carrying out the economic
stimulus we so desperately need.
Christopher Edley Jr., the dean of
the University of California, Berkeley, School of Law, was a White
House budget official from 1993 to 1995.
The point of the day!
Senate votes to rein in
mortgage lenders
YAHOO
By JIM KUHNHENN, Associated Press Writer
12 May 2010
WASHINGTON – Taking aim at deceptive lending, the Senate on Wednesday
voted to ban mortgage brokers and loan officers from getting greater
pay for offering higher interest rates on loans, and to require that
borrowers prove they can repay their loans. The Senate, however,
rejected a measure that would have required homebuyers to make a
minimum downpayment of 5 percent on their loans. The votes were part of
the Senate's deliberations on a broad overhaul of financial regulations
designed to avoid a repeat of the crisis that struck Wall Street in
2008.
President Barack Obama weighed in on the Senate debate Wednesday,
criticizing efforts to exclude auto dealerships that offer car loans
from the oversight of a proposed consumer financial protection bureau.
Auto dealers — influential figures in their communities — have been
aggressively lobbying for an exemption from the law, and the amendment,
offered by Sen. Sam Brownback R-Kan., could win bipartisan backing.
"This amendment would carve out a special exemption for these lenders
that would allow them to inflate rates, insert hidden fees into the
fine print of paperwork, and include expensive add-ons that catch
purchasers by surprise," Obama said in a statement.
The administration has fiercely tried to protect the consumer
provisions of the bill. It has answered the political power of the auto
dealers with an appeal on behalf of the military, arguing that soldiers
and their families have been particularly targeted by deceptive
dealers. On Wednesday, Holly Petraeus, wife of U.S. Central Command
chief Gen. David Petraeus, made a plea for the bill's consumer
protections to apply to car buyers.
"It's a fact that military personnel love their cars," she said.
"Sadly, many of them end up paying far more for those cars than they
should." Petraeus, director of the Council of Better Business Bureau's
Military Line Program, said financial counselors at military
installations find many of their customers in financial trouble with
their auto payments, locked into loans of 15 percent or higher.
In a statement, Brownback argued auto dealers are already regulated by
the Federal Trade Commission and by local and state agencies. "If any
service member is the victim of predatory lending while trying to buy a
car," he said, "I encourage him or her to seek out local and state
authorities which already handle these investigations and can take care
of the problem."
The Senate unanimously approved an amendment Wednesday that made clear
that merchants and retailers that do not engage in a financial services
would not be policed by the proposed consumer protection bureau.
Critics had argued that the bill could affect small business owners
such as orthodontists, who allow patients to pay over time.
Separately, the Senate overwhelmingly voted to let the Federal Reserve
retain its supervision of smaller banks. The underlying regulation bill
would have given the central bank oversight only over the largest
financial institutions.
Regional Fed presidents have lobbied senators to allow them to continue
watching over smaller bank holding companies and state-chartered
community banks. Limiting the Fed's supervision only to bank holding
companies with assets of more than $50 billion — as proposed by Senate
Banking Chairman Christopher Dodd, D-Conn. — would have left many of
the Fed's 12 regional banks with few institutions under their
oversight. The lending-related measures attempted to respond to
one of the issues at the heart of the financial crisis — the abundance
of bad mortgage-backed securities that nearly toppled Wall Street and
knocked some of the nation's largest financial institutions to their
knees.
"Credit
was extended to people who couldn't pay their mortgages back, and those
were passed throughout the world," said Sen. Bob Corker, R-Tenn. "So we
had a systemic crisis, not only in this country, but around the world."
Senators voted 63-36 to amend an underlying financial regulation bill
to place restrictions on how mortgage brokers and bank loan officers
get compensated. The measure's lead sponsor, Sen. Jeff Merkley, D-Ore.,
argued that consumers were steered into higher rate mortgages that they
were unable to pay, resulting in foreclosures and toxic mortgage-backed
securities that poisoned the markets. Borrowers would have to
provide evidence of their income, either though tax returns, payroll
receipts or bank documents. That
provision seeks to eliminate so-called stated-income loans where
borrowers offered no proof of their ability to pay.
But the Senate voted 57-42 against a Republican amendment offered by
Corker that set tougher underwriting standards, including the
downpayment requirement. That measure also would have eliminated a
condition that mortgage lenders retain 5 percent of any mortgages they
resell in the securities market. Democrats opposed the Corker
plan, citing both their desire to have banks keep some of the risk of
the mortgages they write and their concern that the downpayment mandate
would hurt lower income families.
Mortgage brokers opposed Merkley's measure, arguing it would create a
two-tiered system separating mortgage brokers from bank lenders. They
noted that the amendment would permit banks to receive greater payments
from investors, such as large Wall Street firms, for bundled mortgages
with higher interest rates.
"It's
a legal incentivizing payment for those very loans that put the
industry in this mess," said Roy DeLoach, executive vice president of
the National Association of Mortgage Brokers.
Beware Of The Muni Bond Bubble: States And Cities Can Fail As Well
Investors.com
By NICOLE GELINAS
Posted 04/29/2010 06:15 PM ET
Greece and Spain both suffered S&P downgrades this week — Greece to
junk — as bondholders realized the obvious. The nations cannot raise
taxes and cut spending fast enough to pay their debt without killing
off economic recovery.
But nothing has shaken another massive debt market: American municipal
bonds.
You might think that investors would pause before pouring money into
obligations of muni debt, particularly obligations of California, New
York or Illinois. Like mid-2000s homeowners, state and local
governments spent boom years using illusory gains to justify
ever-higher spending and borrowing.
By 2008, state and local debt rose to $2.2 trillion — 49% higher, after
inflation, than in 2000. The biggest partners in profligacy also
promised more benefits to public workers in the future.
As the recession's severity became apparent, officials kept borrowing:
States have already borrowed another $15 billion for operating costs
over the past two years.
Yet gatekeepers consider municipal bonds low-risk. "We do not expect
that states will default on general-obligation debt, even under the
most stressed economic conditions," analysts at Moody's wrote in a
February 2010 report...full story here.







Congress extends
unemployment benefits for another 13 weeks.
"Irrational exuberance" gives way to bankruptcies - the Fed
now calls for beginning of "restoration of fiscal balance."
"Overseer" of slave bankers; HOW IS THE AMERICAN
ECONOMY LIKE A ROLLER
COASTER RIDE? . FED Chair. reappointed;
Government Motors to face off against Chrysler by fiat (pun intended)
and...the only
car company to NOT go under is...FORD!
AP IMPACT: Road projects don't help unemployment
YAHOO
By MATT APUZZO and BRETT J. BLACKLEDGE, Associated Press Writers
January 11, 2010
WASHINGTON – Ten months into President Barack Obama's first economic
stimulus plan, a surge in spending on roads and bridges has had no
effect on local unemployment and only barely helped the beleaguered
construction industry, an Associated Press analysis has found.
Spend a lot or spend nothing at all, it didn't matter, the AP analysis
showed: Local unemployment rates rose and fell regardless of how much
stimulus money Washington poured out for transportation, raising
questions about Obama's argument that more road money would address an
"urgent need to accelerate job growth."
Obama wants a second stimulus bill from Congress that relies in part on
more road and bridge spending, projects the president said are "at the
heart of our effort to accelerate job growth."
Construction spending would be a key part of the Jobs for Main Street
Act, a $75 billion second stimulus to revive the nation's lethargic
unemployment rate and improve the dismal job market for construction
workers. The House approved the bill 217-212 last month after House
Speaker Nancy Pelosi, D-Calif., worked the floor for an hour; the
Senate is expected to consider it later in January.
AP's analysis, which was reviewed by independent economists at five
universities, showed that strategy hasn't affected unemployment rates
so far. And there's concern it won't work the second time. For its
analysis, the AP examined the effects of road and bridge spending in
communities on local unemployment; it did not try to measure results of
the broader aid that also was in the first stimulus like tax cuts,
unemployment benefits or money for states.
"My bottom line is, I'd be skeptical about putting too much more money
into a second stimulus until we've seen broader effects from the first
stimulus," said Aaron Jackson, a Bentley University economist who
reviewed AP's analysis.
Even within the construction industry, which stood to benefit most from
transportation money, the AP's analysis found there was nearly no
connection between stimulus money and the number of construction
workers hired or fired since Congress passed the recovery program. The
effect was so small, one economist compared it to trying to move the
Empire State Building by pushing against it.
"As a policy tool for creating jobs, this doesn't seem to have much
bite," said Emory University economist Thomas Smith, who supported the
stimulus and reviewed AP's analysis. "In terms of creating jobs, it
doesn't seem like it's created very many. It may well be employing lots
of people but those two things are very different."
Transportation spending is too small of a pebble to quickly create
waves in the nation's $14 trillion economy. And starting a road
project, even one considered "shovel ready," can take many months,
meaning any modest effects of a second burst of transportation spending
are unlikely to be felt for some time.
"It would be unlikely that even $20 billion spent all at once would be
enough to move the needle of the huge decline we've seen, even in
construction, much less the economy. The job destruction is way too
big," said Kenneth D. Simonson, chief economist for the Associated
General Contractors of America.
Few counties, for example, received more road money per capita than
Marshall County, Tenn., about 90 minutes south of Nashville.
Obama's stimulus is paying the salaries of dozens of workers, but local
officials said the unemployment rate continues to rise and is expected
to top 20 percent soon. The new money for road projects isn't enough to
offset the thousands of local jobs lost from the closing of
manufacturing plants and automotive parts suppliers.
"The stimulus has not benefited the working-class people of Marshall
County at all," said Isaac Zimmerle, a local contractor who has seen
his construction business slowly dry up since 2008. That year, he built
30 homes. But prospects this year look grim.
Construction contractors like Zimmerle would seem to be in line to
benefit from the stimulus spending. But money for road construction
offers little relief to most contractors who don't work on
transportation projects, a niche that requires expensive, heavy
equipment that most residential and commercial builders don't own.
Residential and commercial building make up the bulk of the nation's
construction industry.
"The problem we're seeing is, unfortunately, when they put those
projects out to bid, there are only a handful of companies able to
compete for it," Zimmerle said.
The Obama administration has argued that it's unfair to count
construction jobs in any one county because workers travel between
counties for jobs. So, the AP looked at a much larger universe: The
more than 700 counties that got the most stimulus money per capita for
road construction, and the more than 700 counties that received no
money at all.
For its analysis, the AP reviewed Transportation Department data on
more than $21 billion in stimulus projects in every state and
Washington, D.C., and the Labor Department's monthly unemployment data.
Working with economists and statisticians, the AP performed statistical
tests to gauge the effect of transportation spending on employment
activity.
There was no difference in unemployment trends between the group of
counties that received the most stimulus money and the group that
received none, the analysis found.
Despite the disconnect, Congress is moving quickly to give Obama the
road money he requested. The Senate will soon consider a proposal that
would direct nearly $28 billion more on roads and bridges, programs
that are popular with politicians, lobbyists and voters. The overall
price tag on the bill, which also would pay for water projects, school
repairs and jobs for teachers, firefighters and police officers, would
be $75 billion.
"We have a ton of need for repairing our national infrastructure and a
ton of unemployed workers to do it. Marrying those two concepts strikes
me as good stimulus and good policy," White House economic adviser
Jared Bernstein said. "When you invest in this kind of infrastructure,
you're creating good jobs for people who need them."
Highway projects have been the public face of the president's recovery
efforts, providing the backdrop for news conferences with workers who
owe their paychecks to the stimulus. But those anecdotes have not added
up to a national trend and have not markedly improved the country's
broad employment picture.
The stimulus has produced jobs. A growing body of economic evidence
suggests that government programs, including Obama's $700 billion bank
bailout program and his $787 billion stimulus, have helped ease the
recession. A Rutgers University study on Friday, for instance, found
that all stimulus efforts have slowed the rise in unemployment in many
states.
But the 400-page stimulus law contains so many provisions — tax cuts,
unemployment benefits, food stamps, state aid, military spending —
economists agree that it's nearly impossible to determine what worked
best and replicate it. It's also impossible to quantify exactly what
effect the stimulus has had on job creation, although Obama points to
estimates that credit the recovery program for creating or saving 1.6
million jobs.
Politically, singling out transportation for another round of spending
is an easier sell than many of the other programs in the stimulus. The
money can be spent quickly and provides a tangible payoff. Even some
Republicans who have criticized the stimulus have said they want more
transportation spending.
Spending money on roads also ripples through the economy better than
other spending because it improves the nation's infrastructure, said
Bernstein, the White House economist.
But that's a policy argument, not a stimulus argument, said Daniel
Seiver, an economist at San Diego State University who reviewed AP's
analysis.
"Infrastructure spending does have a long-term payoff, but in terms of
an immediate impact on construction jobs it doesn't seem to be showing
up," Seiver said. "A program like this may be justified but it's not
going to have an immediate effect of putting people back to work."
Report:
10 states face looming
budget disasters
YAHOO
By JUDY LIN, Associated Press Writer
November 11, 2009
SACRAMENTO, Calif. – In Arizona, the budget has grown so gloomy that
lawmakers are considering mortgaging Capitol buildings. In Michigan,
state officials dealing with the nation's highest unemployment rate are
slashing spending on schools and health care.
Drastic financial remedies are no longer limited to California, where a
historic budget crisis earlier this year grew so bad that state
agencies issued IOUs to pay bills.
A study released Wednesday warned that at least nine other big states
are also barreling toward economic disaster, raising the likelihood of
higher taxes, more government layoffs and deep cuts in services.
The report by the Pew Center on the States found that Arizona, Florida,
Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and
Wisconsin are also at grave risk, although Wisconsin officials disputed
the findings. Double-digit budget gaps, rising unemployment, high
foreclosure rates and built-in budget constraints are the key reasons.
"While California often takes the spotlight, other states are facing
hardships just as daunting," said Susan Urahn, managing director of the
Washington, D.C.-based center. "Decisions these states make as they try
to navigate the recession will play a role in how quickly the entire
nation recovers."
The analysis, "Beyond California: States in Fiscal Peril," urged
lawmakers and governors in those states to take quick action to head
off a wider catastrophe. The 10 states account for more than one-third
of the nation's population and economic output, according to the report.
Historically, states have their worst tax revenue year soon after a
national recession ends. At the same time, higher joblessness and
underemployment mean more people need government-sponsored health care
and social safety-net programs, further taxing state services.
California leads the most vulnerable states identified by the report,
which describes it as having poor money-management practices. Since
February, California has made nearly $60 billion in budget adjustments
in the form of cuts to education and social service programs, temporary
tax hikes, one-time gimmicks and stimulus spending, according to the
Legislative Analyst's Office.
Many of those fixes are not expected to last. The state's temporary tax
increases will begin to expire at the end of 2010, while federal
stimulus spending will begin to run out a year after that.
Gov. Arnold Schwarzenegger estimates California will run a deficit of
$12.4 billion to $14.4 billion when he releases his next spending plan
in January. The governor warned that the toughest cuts are ahead.
"I think that we are not out of the woods yet," Schwarzenegger said
this week.
At the same time, the Legislature is hamstrung by requirements that
budget bills and tax increases be passed with a two-thirds majority, a
mandate that the report labeled "a recipe for gridlock."
The Pew report was based on data available as of July 31 and scored all
50 states based on revenue changes, unemployment, foreclosures and
budget requirements. It also gave them grades. California and Rhode
Island scored worst with D-pluses, then New Jersey and Illinois with
C-minuses.
In reviewing why some states are suffering more than others, Pew found
that the 10 states tend to rely heavily on one type of industry, have a
history of persistent budget shortfalls or face legal constraints
making it extra difficult to implement major changes, such as tax
increases.
Many require a supermajority vote for passing tax increases or budget
bills.
Wisconsin officials issued a statement late Wednesday saying the Pew
report was inaccurate. Wisconsin Department of Administration Secretary
Michael Morgan said the state has balanced its budget by cutting
spending and raising revenue. It projects a $270 million budget surplus
for the period ending July 1, 2011, Morgan said in his statement.
Several state legislatures have been unable to enact long-term fixes.
Instead, they asked voters or governors to make the call, or used
accounting gimmicks to put off the hard choices until later.
For example:
• Arizona lawmakers relied on one-time fixes to balance recent budgets
as the state's home foreclosure rate surpassed California's and the
nationwide average. Among the many ideas being explored by the state
are a plan to mortgage state buildings, then rent the property until
the state regains ownership at the end of the contract.
• Michigan, where two of the Detroit Three automakers filed for
bankruptcy protection this year, continues to offer tax incentives even
as they take a toll on the state's pocketbook, leading to declining tax
revenue. According to the Pew study, Michigan offered $6.3 billion more
in total tax exemptions, credits and deductions than it actually
collected in taxes in 2008.
• Illinois, which has run deficits every year since 2001, is facing an
$11.7 billion budget gap for its next fiscal year, beginning in July,
according to the Center on Budget and Policy Priorities. Pew's
Government Performance Project ranked Illinois behind only California
and Rhode Island for its lack of fiscal management on paying medical
bills and pension liabilities.
• With Florida facing a shrinking population for the first time since
World War II, Republican Gov. Charlie Crist and the GOP-controlled
Legislature balanced a $5.9 billion shortfall with cuts, federal
stimulus money and tax hikes, including a $1-a-pack tax increase on
cigarettes. But the future remains uncertain.
"Florida continues to face the same challenges as last year, including
a very austere budgetary environment," said Rep. David Rivera, a Miami
Republican who chairs both of the Florida House's two appropriations
councils.
U.S. unemployment
rate hits 10.2 percent
YAHOO
By Lucia Mutikani
WASHINGTON (Reuters) – The U.S. unemployment rate unexpectedly jumped
to 10.2 percent in October, breaching the politically sensitive
double-digit barrier for the first time in 26-1/2 years, even though
the pace of job losses slowed.
A Labor Department report showed on Friday that employers cut 190,000
jobs last month, more than the 175,000 markets had expected. Economists
had looked for the jobless rate to rise to only 9.9 percent from 9.8
percent the prior month.
The government revised job losses for August and September to show
91,000 fewer jobs lost than previously reported.
U.S. stock index futures turned negative on the data, while government
debt prices rose.
"The unemployment rate of 10.2 percent is problematic because it gives
a sense of urgency to Washington, D.C. Washington will be looking for
any increase in stimulus," said Tom Sowanick, co-president and chief
investment officer at Omnivest Group.
President Barack Obama has called job creation priority No. 1, but the
scope to take further steps to lift the economy is limited by record
budget deficits.
Mounting unemployment could pose problems for the Democrats who control
Congress as they head into congressional elections in November 2010.
This week, Republicans wrested control of two state governorships away
from Democrats in races where the weak economy figured prominently.
The labor market is being watched for signs whether the economic
recovery that started in the third quarter can be sustained without
government support. The economy grew at a 3.5 percent annualized rate
in the July-September period, probably ending the most painful U.S.
recession in 70 years.
Labor market sluggishness and weak wage growth suggest inflation is
unlikely to get out of hand anytime soon, giving the Federal Reserve
scope to maintain supportive policies.
The U.S. central bank on Wednesday held overnight interest rates close
to zero percent and said it would keep them extraordinarily low as long
as excess economic slack and a lack of inflation warning signs
prevailed.
"The Fed will stay on hold even longer with less likelihood of giving a
concrete answer to when and how to withdraw quantitative easing," said
Joseph Trevisani, senior market analyst at FX Solution in Saddler
River, New Jersey.
Payrolls have declined for 22 consecutive months now, throwing 7.3
million people out of work since December 2007, when the recession
started.
However, the pace of layoffs has slowed sharply from early this year,
when nearly three-quarters of a million jobs were lost in January. In
October, job losses were across almost all sectors, with education and
health services and professional and business services bucking the
trend.
Manufacturing employment fell 61,000 last month, while construction
industries payrolls dropped 62,000.
The service-providing sector cut 61,000 workers in October and
goods-producing industries slashed 129,000 positions. Education and
health services added 45,000 jobs, while government employment was flat.
The average workweek, which closely correlates with overall output and
gives clues on when firms will start hiring, was steady at 33 hours in
October. Average hourly earnings rose to $18.72 from $18.67 in
September.


Peter Orszag and Tim Geithner add it up - yup, it's
13! I guess Mr. Orszag of OMB had evens.
Orszag says he's leaving as budget head in July
YAHOO
By BEN FELLER, Associated Press Writer
22 June 2010
WASHINGTON – White House Budget Director Peter Orszag says he's
stepping down next month, positioning him to be the first high-profile
member of President Barack Obama's team to depart the administration.
Orszag confirmed his planned resignation in a brief interview with The
Associated Press on Tuesday. He said he views passage of last year's
economic recovery act as his most significant accomplishment.
White House Press Secretary Robert Gibbs said Tuesday that "a number of
very talented candidates" were being considered to replace Orszag.
"Peter has served alongside and within a valuable economic team that
has faced the greatest economic crisis any president has faced since
the great depression. It is an enormous task," Gibbs said.
As director of the Office of Management and Budget, Orszag holds
Cabinet-level rank and a pivotal role in shaping and defending how the
administration spends the public's money. He quickly emerged from a
bureaucratic post to become a camera friendly face of Obama's
government, often in front on plans to confront the deficit and to spur
the economy.
Speculation has for weeks held that Orszag would leave this year after
a grueling, nonstop sprint as the head of the budget agency and a key
adviser to Obama. During his tenure, Congress has passed the most
expensive economic stimulus program in U.S. history and a massive
health care reform law. Orszag has overseen Obama's first two budgets,
too. Gibbs said Orszag decided to leave before work began on a third.
Orszag, 41, came to Obama's government from the position of director of
the Congressional Budget Office, the agency charged with providing
nonpartisan analyses of economic issues to lawmakers. He served during
Bill Clinton's administration as an assistant to the president for
economic policy and a senior adviser at the National Economic Council.
The move comes as Obama continues to face the steep economic challenges
of reining in the deficit and rallying support for more stimulative
spending. The economic recovery is plodding along but unemployment
remains near 10 percent.
U.S. debt flirts with unlucky number
That's 13, as in $13 trillion
Washington Times
Wednesday, May 26, 2010
Stephen Dinan
News reports have jumped the gun in declaring it, lawmakers
and staffers on Capitol Hill are awaiting it with a morbid glee, and
some congressional aides suspect the government's slow-walking it.
It, in this case, is the nation's public debt, which has hovered just
short of $13 trillion for days now, according to the obscure Treasury
Department website that tracks this sort of thing.
The site updates every business day with the previous business day's
total debt, right down to the penny, and has been within reach of $13
trillion for this entire week. The figure for Tuesday - the most recent
available - stood at $12,995,779,490,444.52.
That's led some Republican congressional staffers to question whether
the clock hadn't stalled out just below the Big 13, though Treasury
says the site is being updated the same way it always has been.
Still, some private "debt clock" websites already have tolled the magic
number, which several press outlets have reported and lawmakers have
fired off statements on. One senator complained of "an unprecedented
level of irresponsibility" in hitting the milestone.
Joyce Harris, a spokeswoman for the Bureau of the Public Debt, said
she'd seen the press reports, but said they're based on private
estimates and, according to the government, we're not there just yet.
"It's not an official number," she said. "The number for the debt is
$12.995 trillion."
At that level, it amounts to more than $42,000 for every U.S. resident.
Part of the confusion is that Treasury only reports once a day, while
outside calculations estimate the rise by the second, based on formulas
that oftentimes go too high, too fast. They often have to reel those
numbers back in after Treasury reports the actual figure -and there are
even some days the debt drops, ever so slightly, because more old bills
or bonds are cashed than are issued.
Still, the number has been on a steady rise as of late.
Ed Hall's www.brillig.com/ debt_clock topped $13 trillion on Monday,
but he dropped his clockback below that figure Wednesday afternoon.
Meanwhile, USDebtClock.org topped $13 trillion on Wednesday, prompting
several news reports and statements from Congress.
The fascination with $13 trillion far outstrips the significance of
that particular number. But with Congress poised to pass bills spending
tens of billions of dollars this week, the debt has gotten wrapped up
in the debate.
The Republicans on the Joint Economic Committee are using their Twitter
feed to give daily updates, and said that since President Obama took
office, the debt has increased at a rate of $4.8 billion a day, or
nearly three times the daily average of the Bush administration.
The debt passed the $12 trillion mark less than 200 days ago, and if
the $13 trillion mark is hit in the next eight weeks, it will be the
second-fastest $1 trillion jump in history. The fastest trillion came
in late 2008 and early 2009, when the Wall Street bailout rapidly
ballooned the debt from $11 trillion to $12 trillion.
Earlier this year, Congress and Mr. Obama raised the country's debt
limit to $14.3 trillion, hoping it would to give the government enough
room to spend through the end of this year.
Total public debt includes two pots of money. One is normal government
debt held in the hands of consumers, such as Treasury bills and bonds,
while the other is intragovernmental holdings, or money one part of the
government borrows from another agency. That includes money borrowed
from the Social Security trust funds.
Some analysts said the key figure is not the total public debt, but the
debt held by the public, which stood at $8.478 trillion on Tuesday.
Rudy Penner, a former director of the Congressional Budget Office who
is now at the Urban Institute, said in many ways, the debt number is so
divorced from spending that it obfuscates the debate. He said the debt
debate should be coupled with the spending debate, so lawmakers can
couple the red ink with the policies that cause it.
Congress has yet to produce a budget this year for fiscal year 2011,
which begins Oct. 1, and Mr. Penner said that's a key failure that
should be getting more attention.
The Web page that tracks the debt can be reached from the
TreasuryDirect.gov site.
© Copyright 2010 The Washington Times, LLC. Click here for reprint
permission.
John Silvia (left) debates with fellow
economist Mark Perry (from our "across-the-pond" source, I-BBC).
Head-to-head: What next for US
economy?
I-BBC
Page last updated at 12:06 GMT, Thursday, 29 October 2009
Official data has
indicated that the US economy has come out of
recession, but analysts warn the continuing recovery will be slow.
Here we bring together two US economists with differing views
to discuss what is likely to happen next.
John
Silvia is chief economist at Wells Fargo in Charlotte, North Carolina.
He sees disappointment ahead for US workers and consumers, with a
long-term decline in living standards.
Mark Perry is professor
of economics at the University of Michigan-Flint and currently visiting
economist at the American Enterprise Institute in Washington. He is
more optimistic, expecting a resilient economy to produce job growth by
late 2010 and deliver low prices for consumers.
Some
fear US growth will fall when President Barack Obama's $787bn
(£480bn)
fiscal stimulus package comes to an end. What about the possibility of
a "double-dip" recession, with a return to economic contraction?
John Silvia: I do not see the case for a double-dip
or W-shaped recession/recovery.
Historically, the double dip of 1980-82 was driven by a sharp
change in monetary policy.
This
recovery is being led by federal spending and gradual recovery in
consumer spending and business investment. I do not expect the Obama
administration to make any drastic turn in fiscal policy.
In
addition, low inflation will stay and allow the Fed to maintain low
short-term rates, with only a limited decline in the balance sheet.
Mark Perry: I
think the recession ended in June and I also see no chance of a
double-dip recession. There will be strong growth in the third quarter
(3.5% to 4%) and fourth quarter (4% to 5%), with more moderate growth
in 2010, about 2.5% to 3%.
Without some kind of policy blunder, which is unlikely, there
will be no double-dip.
Most of the fiscal stimulus hits next year, which will help
economic growth.
We
will have a "jobless recovery" again through 2010, as we did following
the 1990-1991 and 2001 recessions. The unemployment rate is set to
remain at 9.8% to 10% through mid-2010, gradually coming down below
9.5% by the end of 2010.
There is only a moderate risk of inflation, which should stay
below 2% through next year.
Some
signs of consumer recovery are already evident. Air travel was up in
September and traffic volume has been up for several months in a row.
Strong global recovery in emerging markets such as China,
Brazil, India will help to support the US recovery.
John Silvia: Strong
growth in the second half of this year will give way to 2.4% growth in
2010, as we see the stimulus waning in the first half of next year. But
the jobless recovery will set up both economic and political conflicts.
The jobless recovery suggests disappointing gains in personal
income and spending, as many households realise that their standard of
living has been diminished.
At the same time, state and local
government budget constraints will continue to tighten as income and
sales tax revenues remain disappointing.
Again, the jobless
recovery and the Fed's caution suggests the weak housing market will
continue. Local governments face a two-year-plus period of minimum
gains in property tax revenues - and therefore an inability to deliver
on local education expectations.
Unemployment and large federal
deficits will mean Democratic losses in Congress of 30-plus seats in
the House of Representatives and three seats in the Senate in the 2010
mid-term elections.
On top of that, the dollar will continue to
decline and America's standard of living will continue to decline
relative to other nations.
Mark Perry: I think the dollar's decline will
stabilise before it can damage the economy and cause any decline in US
standards of living.
The
money supply has been flat this year for both M1 and M2, suggesting
that the decline in the dollar today results from monetary stimulus in
2008, but that ended almost a year ago.
Since early 2009, the
money supply has grown by only 1% to 2%, which will put a bottom on how
far the dollar can fall. Also, the strength in foreign currencies
relative to the dollar will help boost US exports - and make a positive
contribution to real GDP this year and next year.
The global
rebound and recovery will also help stimulate US exports and will help
the US economy in ways that didn't happen previously. Global strength
will help lift the US economy out of recession this year and next year.
Meanwhile, the stock market will continue to rise, because of
huge productivity gains from the reduction in labour force, along with
continued increases in output in the third and fourth quarters of 2009.
Corporate profits will also rise, boosting stocks.
The housing
market is coming back, with sales gains even now in places such as
Florida and California. With house prices rising, the housing market
will continue to improve, construction will pick up next year, and all
of this will offset some of the effects of the weak job growth.
Low
and stable interest rates moving forward, with low moderate inflation,
will help the housing market and keep corporate and consumer borrowing
costs low, providing momentum to growth.
John Silvia: I
agree on the forward momentum. My issue is that the pace will be
disappointing to a society and political class that has made
significant promises in health care and education that will not be
deliverable with just moderate growth.
Middle-income and low-income families will see their standard
of living below their expectations.
There
will be growth, yes, but not enough to keep voters happy. Attempts to
provide that standard of living depend on protectionism for jobs,
dollar depreciation and continued foreign financial support.
Mark Perry: Passing
health care legislation, at least the public option part, is looking
less and less likely to me, so that issue could be dead by the end of
the year.
With falling prices for just about everything
(clothing, food, air travel, housing, cell phone service, prescription
drugs etc and historically low interest rates for home and car
purchases), there has never been a better time to be a consumer in
America, and that will offset some of the income losses. Also, job
growth by end of 2010 will help boost confidence and incomes.
The
US economy is resilient, and that goes for workers, consumers and
companies. A strong economic recovery might surprise everybody.
Emerging
from a deep recession will make the economy leaner, more productive and
stronger, offsetting the headwinds mentioned by John.
Page last
updated at 14:31 GMT,
Thursday, 29 October 2009
US economy is
growing once again
The US economy grew at an annual pace of
3.5% between July and September, its first expansion in more than a
year.
The growth was helped by a substantial government spending
plan, including a scrappage scheme to boost car sales.
The official figures indicate recession has ended, but some
economists think there could be further setbacks.
The White House said it was "a welcome milestone", but
stressed it would be some time before the economy made a full recovery.
Compared
with the previous three months, the US economy grew by 0.9%. In the
same period, and on the same measure, the UK economy unexpectedly
stayed in recession after it shrank by 0.4%.
Global good news
BBC
chief economics correspondent Hugh Pym said the 3.5% annualised growth
rate was more than the 3.3% expected by most commentators.
 |
I've been out of work a
few months here or there but never like this 
Unemployed American Jon Polis
|
"The sheer scale of the stimulus in the US has made a big
difference, it was much bigger in percentage terms than that in the
UK," he said.
"That the US, the powerhouse of the world economy is growing
once again, is good news for the global economy has a whole."
It is the first time US economy has last expanded since the
second quarter of 2008, when it grew at an annual pace of 2.4%.
Official
confirmation of whether the US is in or out recession will come from
the National Bureau of Economic Research, the agency which considers a
number of factors in coming to its decision.
Numerous boosts
The figures from the Commerce Department showed that a number
of factors helped to lift the economy during the third quarter.
 |
This recovery is being
led by federal spending and gradual recovery in consumer spending and
business investment 
|
Spending on durable manufactured products soared at an
annualised
rate of 22.3%, the highest quarterly amount since 2001, led primarily
by the impact of the cash for clunkers scheme lifting car sales.
The housing market also improved, with spending on housing
products up 23.4%, its largest quarterly jump in 23 years.
Analysts said this big leap was sparked by the government's
$8,000 tax credit for first-time house buyers.
Meanwhile, total government spending was up 7.9%, as the
wider stimulus spending continued to take effect.
In addition, exports were also up strongly, increasing 21.4%,
the biggest rise since 1996.
'Distorted by stimulus'
 |
WHAT IS GDP?
Gross
Domestic Product, or GDP, measures the value of goods and services
produced in a country, reflecting the health of the economy in one
number.
The US uses a measure called annualised
GDP, which
takes the change over a three-month period and works out what the
annual change would be if it continued at that pace over a whole year.
This latest figure is the first estimate
for the
three-month period between July and September. It will be revised twice
in coming months.
|
"It's good to have the economy growing again," said Brian
Bethune, economist at IHS Global Insight.
"But we don't think that rate of growth is sustainable
because it is distorted by all the government stimulus.
"The challenge here is to get organic growth - growth that
isn't helped by fiscal steroids."
Analysts
cautious about the slow nature of the US economic recovery point to the
fact that the unemployment rate currently stands at 9.8%, and that the
labour market traditionally lags behind any wider economic recovery.
They
also highlight the fact that the big car firms have already reported a
sharp fall in September sales following the conclusion of the popular
$3bn cash for clunkers scheme at the end of August.
"You can
say that the recession is over, but it sure won't feel like that," said
Dean Baker, co-director of the Centre for Economic Policy Research.
"There is a lot of downward momentum that isn't going to go."
U.S. must live within its means:
Geithner
YAHOO
By Glenn Somerville and Walter Brandimarte
WASHINGTON (Reuters) – The United States must live within its means
once its economy recovers if it is to preserve global confidence in the
U.S. dollar's status, Treasury Secretary Timothy Geithner said on
Friday. The comments came as the Obama administration reported a
record U.S. budget deficit for the fiscal year ended September of $1.4
trillion. At 10 percent of gross domestic product, it was the biggest
U.S. fiscal shortfall since World War Two. Rescuing the economy
and some of the country's biggest banks from the worst recession since
the Great Depression took a toll on U.S. finances, and the White House
has forecast deficits of more than $1 trillion through fiscal 2011.
"Future deficits are too high, and the president is committed to
working with Congress to bring them down to a sustainable level as the
economy recovers," Geithner said in a statement accompanying the fiscal
data.
Separately, White House economic adviser Lawrence Summers said
financial firms that helped precipitate two years of economic crisis
are going to have to bow to stiffer oversight of their activities to
prevent it happening again. Geithner and other policymakers will
discuss the U.S. economic and budget outlook, and prospects for
financial regulatory reform, at the Reuters Washington Summit on
October 19-21.
FISCAL OUTLOOK AFFECTS U.S. DOLLAR
On Friday, Geithner said the U.S. dollar's status as a key reserve
currency carries special responsibilities that include keeping spending
under control, Geithner said earlier on Friday in an interview on CNBC
television.
"It is very important that Americans understand that we need to do
everything possible to sustain confidence in our ability to keep
inflation low and stable over time and to make sure we're getting our
fiscal house in order," Geithner said.
Developments over the past year, when many investors put their money
into U.S. Treasury securities and the dollar rose at times, showed
there was still a great deal of confidence in U.S. economic management.
"The world wanted to be in Treasuries, in the safest and most liquid
markets, and you saw the dollar rose when people were most concerned
about the future of the world," he said.
"That is a very important thing. It's not something you can count on.
It's something we can understand, and we can continue to foster, and
we're going to do that," Geithner added.
The administration has to be careful not to withdraw economic stimulus
too fast though, Geithner added. But he denied that the administration
was ready to consider a second economic stimulus program.
Geithner said access to credit in the overall economy has improved
dramatically but many small businesses that typically create many jobs
still face borrowing constraints. The Obama administration is
working on measures to help small businesses get easier access to
credit -- possibly by diverting some bank bailout funds to them -- but
hasn't yet announced a program to do so.
BANKING NEEDS TO CHANGE
Summers also argued for change to the banking system. After two
years of economic crisis and government rescue efforts, he said the
banks at the center of the credit debacle had a moral imperative to be
part of the solution.
"Financial institutions that have benefited from government support
can, should, and must use this moment to think about what they can do
for their country -- by accepting the necessary regulation to protect
the American people," Summers told an audience of financial market
participants. "Wall Street was no small part of the cause of the crisis
and Wall Street needs to be part of the solution."
Summers, chairman of the National Economic Council, suggested banks had
little choice in the matter.
"There is no financial institution that exists today that is not the
direct or indirect beneficiary of trillions of dollars of taxpayer
support," he said. "This has direct relevance on the changing nature of
the social compact between the financial sector and the broader
economy."
The Obama administration has been pressing for wide-ranging reforms in
U.S. financial regulations. It scored a victory on Thursday when a
House of Representatives' panel passed a bill to tighten regulation of
financial derivatives -- contracts derived from existing securities or
transactions that are blamed for amplifying the 2008 crisis. New,
tighter regulation doesn't mean, however, that financial firms will
never go bust again. In fact, Summers said that such firms must be able
to fail for market discipline to work. In addition to that,
though, profitability and prudence should be reconciled under any
framework of financial regulation.
"The financial system has to be safe for failure," said Summers.
Summers also said officials need to avoid prematurely withdrawing
measures meant to stimulate the economy after the worst recession in
decades, noting discussion of any "exit strategy" would be different on
Main Street than it would on Wall Street.
GDP Declines 1 Percent in 2Q,
Better
Than Expected
By THE ASSOCIATED PRESS
August 27, 2009
Filed at 10:01 a.m. ET
WASHINGTON (AP) -- The economy shrank at an annual rate of 1 percent in
the spring, a better-than-expected showing and more evidence that the
recession is drawing to a close.
Many analysts believe the economy is growing in the current quarter,
but they caution that any rebound will not be accompanied initially by
rising employment. Jobless claims figures released Thursday were better
than expected, but remain well above levels associated with a healthy
economy.
The Commerce Department's new estimate for the gross domestic product
was unchanged from the initial figure it released last month. The drop,
while representing a record fourth consecutive decline, was far smaller
than the previous two quarters. It also was stronger than the 1.5
percent decline that private economists expected.
The report Thursday found that businesses slashed their inventories
more than first reported and cut back more sharply on investment in new
plants and equipment. But those reductions were offset by revisions
that showed smaller dips in consumer spending, exports and housing
construction.
The 1 percent rate of decline in the April-June quarter followed
decreases of 6.4 percent in the first quarter and 5.4 percent in the
final three months of 2008, the sharpest back-to-back declines in a
half-century. The four straight quarterly declines in GDP, which
measures the country's total output of goods and services, mark the
first time that has occurred on government records that date to 1947.
The recession that began in December 2007 is the longest since World
War II, and the deepest in terms of the drop in the GDP, which is down
3.9 percent from its previous peak.
But economists are heartened that the decline slowed to 1 percent in
the spring. Many analysts think that the government's $787 billion
economic stimulus plan and the Cash for Clunkers program to boost car
purchases will lift GDP growth to around 2 percent in the current
July-September quarter.
However, the return to economic growth will not mean more jobs, at
least at first. Economists believe the unemployment rate, currently at
9.4 percent, will keep rising through the spring of next year.
The Labor Department said Thursday that first-time unemployment claims
fell to a seasonally-adjusted 570,000, from an upwardly revised 580,000
the previous week. The tally of those continuing to claim benefits
dropped to 6.13 million from 6.25 million, the lowest level since early
April. The weekly figures remain far above the roughly 325,000
that analysts say is consistent with a healthy economy. New claims last
fell below 300,000 in early 2007.
White House economic adviser Christina Romer said Tuesday the
unemployment rate is likely to keep rising and hit 10 percent this
year. That could discourage consumer spending and weaken any recovery.
The government makes three estimates of the economy's performance for
any given quarter. Each new GDP estimate is based on more complete
information. Economists had expected that the second look at GDP
for the spring would show the economy contracting at a 1.5 percent rate
because they believed companies had cut back more sharply on their
inventories.
While inventories were cut more than initially estimated, that weakness
was offset by upward revisions in other areas.
The government found that consumer spending, which accounts for about
70 percent of total economic activity, fell at an annual rate of 1
percent in second quarter, a slight improvement from the 1.2 percent
decline reported last month. Residential construction and exports also
were revised to show smaller declines.
Federal Reserve Chairman Ben Bernanke said last week the economy
appeared to be ''leveling out,'' and was likely to begin growing again
soon. President Barack Obama appointed Bernanke to another 4-year term
Tuesday.
The Cash for Clunkers program, which provides consumers rebates of up
to $4,500 for turning in old gas-guzzlers for fuel-efficient cars, has
helped spur activity in the auto and related industries. The economy
also has been helped by stabilization in the housing sector, as sales
of new and existing homes have risen for four straight months.
White House forecasts 10-year deficit
of $9T
New Haven REGISTER
By Associated Press
Wednesday, August 26, 2009
WASHINGTON — In a chilling forecast, the White House is predicting a
10-year federal deficit of $9 trillion — more than the sum of all
previous deficits since America’s founding. And it says by the next
decade’s end the national debt will equal three-quarters of the entire
U.S. economy.
But before President Barack Obama can do much about it, he’ll have to
weather recession aftershocks including unemployment that his advisers
said Tuesday is still heading for 10 percent.
Overall, White House and congressional budget analysts said in a brace
of new estimates that the economy will shrink by 2.5 to 2.8 percent
this year even as it begins to climb out of the recession.
Those estimates reflect this year’s deeper-than-expected economic
plunge.
The grim deficit news presents Obama with both immediate and
longer-term challenges. The still fragile economy cannot afford
deficit-fighting cures such as spending cuts or tax increases. But
nervous holders of U.S. debt, particularly foreign bondholders, could
demand interest rate increases that would quickly be felt in the
pocketbooks of American consumers.
The White House Office of Management and Budget indicated that the
president will have to struggle to meet his vow of cutting the deficit
in half in 2013 — a promise that earlier budget projections suggested
he could accomplish with ease.
“This recession was simply worse than the information that we and other
forecasters had back in last fall and early this winter,” said Obama
economic adviser Christina Romer.
The deficit numbers also could complicate Obama’s drive to persuade
Congress to enact a major overhaul of the health care system — one that
could cost $1 trillion or more over 10 years. Obama has said he doesn’t
want the measure to add to the deficit, but lawmakers have been unable
to agree on revenues that would cover the cost. What’s more, the
high unemployment is expected to last well into the congressional
election campaign next year, turning the contests into a referendum on
Obama’s economic policies.
“The alarm bells on our nation’s fiscal condition have now become a
siren,” said Senate Minority Leader Mitch McConnell of Kentucky. “If
anyone had any doubts that this burden on future generations is
unsustainable, they’re gone — spending, borrowing and debt are out of
control.”
Even supporters of Obama’s economic policies said the long-term outlook
places the federal government on an unsustainable path that will force
the president and Congress to consider politically unpopular measures,
including tax increases and cuts in government programs.
“The numbers today portend the biggest budget fight we’ve probably had
in decades in the United States,” said Stan Collender, a former
congressional budget official.
The summer analyses by the White House budget office and by the
Congressional Budget Office reached similarly bleak conclusions. The
CBO’s 10-year deficit figure was smaller — $7 trillion — but that is
because it assumes that all tax cuts put into place in the
administration of former President George W. Bush will expire on
schedule by 2011. Obama’s budget baseline, however, hews to his
proposal to keep the tax cuts in place for families earning less than
$250,000 a year.
Both budget offices see the national debt — the accumulation of annual
budget deficits — as more than doubling over the next decade. The
public national debt, made up of amounts the government owes to the
public, including foreign governments, stood Tuesday at a staggering
$7.4 trillion. White House budget officials predicted it would reach
$17.5 trillion in 2019, or 76.5 percent of the gross domestic product.
That would be the highest proportion in six decades.

Not Jackson Hole (Bryce Canyon), but note that the rocks are pointing
up! Oops! Read story above on estimated deficit!
Fed Chairman Says
American Economy Is Poised to Grow
NYTIMES
By EDMUND L. ANDREWS
August 22, 2009
JACKSON HOLE, Wyo. — Ben S. Bernanke, the chairman of the Federal
Reserve, offered his most hopeful assessment in more than a year on
Friday, asserting that “the prospects for a return to growth in the
near term appear good.”
In a much-awaited speech here to central bankers and economists from
around the world, Mr. Bernanke went beyond the Fed’s most recent
assessment that the nation’s economy was “leveling out” and that the
recession was ending.
Noting that short-term lending markets are functioning “more normally,”
that corporate bond issuance is strong and that other “previously
moribund” securitization markets are reviving, Mr. Bernanke said that
both the United States and other major countries were poised for growth.
In emphasizing not just the imminent end of the recession — the worst
since at least the early 1980s if not since the Great Depression — but
also the “good” chances of actual growth, Mr. Bernanke’s assessment was
in some ways surprising.
Despite encouraging signs on many fronts, American retailers have
reported unexpectedly weak sales in the last week — a sign that that
consumer spending could drag down economic growth in the months ahead.
And on Thursday, the Labor Department reported that new unemployment
claims jumped again.
The Fed chairman’s added hopefulness may have reflected the
unexpectedly good news from other parts of the world: Germany and Japan
both reported positive economic growth this week, an unexpected rebound
from their own recessions.
The Fed chairman cautioned that problems remained, and warned that
regulators would have to impose much tougher capital requirements on
major financial institutions to ensure that they can better withstand
the kind of cash crunch that crippled the global financial system last
fall.
“Strains persist in many financial markets across the globe,” Mr.
Bernanke said, speaking at the Fed’s annual symposium at this resort in
the Grand Tetons. “Financial institutions face significant additional
losses, and many businesses and households continue to experience
considerable difficulty gaining access to credit.”
Repeating the caution that Fed officials and most private forecasters
have expressed in recent weeks, Mr. Bernanke predicted that the
economic recovery “is likely to be relatively slow at first, with
unemployment declining only gradually from high levels.”

CIT provides funding for small and medium-sized firms
CIT shares rise as
company emerges from bankruptcy
YAHOO
December 10, 2009
NEW YORK (Reuters) – CIT Group Inc's new shares rose as much as 6
percent from opening levels in their debut on the New York Stock
Exchange on Thursday as the lender to small businesses emerged from one
of the largest bankruptcies in U.S. history.
CIT, one of the biggest financial sector victims of the credit crisis,
is also the only major firm in the sector to emerge from bankruptcy.
Others, such as Lehman Brothers, Washington Mutual and IndyMac have
been unable to continue on their own.
But the comeback may not be easy.
"In the space they are working, it is a tough time trying to secure
customers for a company that has gone bankrupt," said Robert Lutts,
president and chief investment officer at Cabot Money Management.
"Today, executives making decisions in the financial area are making
very low-risk decisions," Lutts said. "That means don't work with the
problem childs of the world, and I think that is going to mean a tough
sledding for CIT."
Hundreds of thousands of small and mid-sized businesses depend on CIT
for financing, and company lawyers had said the company needed to get
through bankruptcy quickly to avoid customer defections.
CIT's new stock was up 4.20 percent at $28.14 in mid-morning trading
after opening at $27.00. The stock rose as much as 6 percent to $28.63.
The more than 100-year-old lender filed for bankruptcy last month after
a debt exchange offer failed.
Earlier this week, it won approval from a New York bankruptcy judge for
a prepackaged reorganization plan.
CIT's reorganization plan will reduce its debt by about $10.5 billion
to about $55 billion and defer significant debt obligations for three
years.
Under the plan, holders of CIT's unsecured debt will receive new notes
representing 70 cents on the dollar of original debt, plus new common
stock.
The company had won support from bondholders for the plan substantially
in excess of the minimum amount required under U.S. bankruptcy law.
Common and preferred stockholders, including the U.S. government,
will be wiped out.
CIT bankruptcy reassigned
after recusal
YAHOO
November 2, 2009
NEW YORK (Reuters) – CIT Group Inc's bankruptcy case was reassigned on
Monday to U.S. Bankruptcy Judge Allan Gropper following the recusal of
Judge Robert Gerber, who had been assigned the case hours earlier.
A courtroom deputy for Gropper said Gerber recused himself from the
case. The deputy did not give a reason for the recusal. Gerber's
chambers had no immediate comment.
CIT, a source of financing to about one million small and mid-sized
businesses, filed for Chapter 11 protection from creditors on Sunday
after gathering support from most of its bondholders for its
"prepackaged" reorganization.
The bankruptcy filing, one of the five largest in U.S. history,
followed a failed debt exchange offer.
CIT said it hopes to emerge from bankruptcy by the end of the year and
reduce its debt by $10 billion. The New York-based company intends to
keep lending, and a quick reorganization is crucial if it expects to
retain most customers.
Gropper has been a bankruptcy judge since 2000. His cases have included
the reorganization of Northwest Airlines Corp, which later merged with
Delta Air Lines Inc, and the current proceedings for the giant mall
owner General Growth Properties Inc.
Before joining the bench, Gropper was a partner at White & Case,
where he was involved in many of the largest U.S. bankruptcies,
including Federated Department Stores and Texaco. He has degrees from
Yale University and Harvard Law School.
According to its bankruptcy petition, CIT had $71 billion of assets and
$64.9 billion of liabilities on June 30.
In morning trading, CIT shares fell 44 cents, or 61 percent, to 28
cents. The New York Stock Exchange said it would suspend trading in CIT
prior to Tuesday's market open.
The case is In re CIT Group Inc, US Bankruptcy Court, Southern District
of New York, Case No. 09-16565
CIT
Group files for US bankruptcy
I-BBC - Page last updated at 22:06
GMT, Sunday, 1 November 2009
The US lender, CIT Group, has filed for
bankruptcy protection, after a debt-exchange offer to bondholders
failed.
However,
the majority of bondholders have agreed a reorganisation plan that will
reduce CIT's debt by $10bn (£6bn) while allowing it to go on
operating.
The group's operating subsidiaries, including CIT Bank, were
not included in the bankruptcy filing in New York.
CIT Group suffered as the credit crisis left it unable to
fund itself, and the recession exposed it to many bad loans.
Under the reorganisation plan which has been approved by
bondholders, creditors will end up owning the company.
Most bondholders will also end up with new CIT debt worth
about 70%
of the face value of their old debt. Preferred shareholders, including
the US government, will get money only after other creditors are paid
back.
The government invested $2.33bn in CIT shares in December
2008 through the Troubled Asset Relief Programme (Tarp). It could have
lost more, however, had it not declined to give more aid this year.
"The
decision to proceed with our plan of reorganisation will allow CIT to
continue to provide funding to our small business and middle market
customers, two sectors that remain vitally important to the US
economy," said CIT's chairman and CEO, Jeffrey Peek, who will step down
by the end of the year.
CIT's bankruptcy protection filing,
showing $71bn in finance and leasing assets against total debt of
$64.9bn, is the fifth biggest in US corporate history.
Many
observers predict that if CIT is able to continue in business after
emerging from bankruptcy protection, it will not be able to make
anything like the same number of loans to small businesses.
That
could mean that thousands of companies which are looking to raise money
for investment will struggle to find the cash, the warn.
CIT
Group files for prepackaged bankruptcy
YAHOO
November 1, 2009
NEW YORK (Reuters) – CIT Group Inc, a century-old commercial lender,
filed for bankruptcy on Sunday, as the global credit crisis left it
unable to fund itself and the recession left it with too many bad loans.
CIT's creditors have already approved its reorganization plan. Analysts
have said that getting through bankruptcy is crucial for CIT if it
wishes to keep its customers, which include Dunkin' Donuts franchisees
and film production company Dark Castle Entertainment.
CIT's operating subsidiaries, including CIT Bank, are not included in
the bankruptcy filing, and expect to continue operating, the company
said in a statement.
CIT, which filed for bankruptcy protection in the Southern District of
New York, plans to reduce its total debt by about $10 billion in
bankruptcy.
Under the bankruptcy plan approved by bondholders, creditors will end
up owning the company. Most bondholders will also end up with new CIT
debt worth about 70 percent of the face value of their old debt.
Preferred shareholders, including the U.S. government, will get money
only after other creditors are paid back. Current common shareholders
will receive nothing.
The U.S. government invested $2.33 billion in CIT preferred shares in
December 2008 through the Troubled Asset Relief Program.
CIT financed itself mainly by borrowing from bond markets, which has
proven to be a flawed strategy as the credit crunch that began in 2007
has made it much more expensive for troubled companies to fund
themselves.
CIT near plan to turn over company to
bondholders: sources
YAHOO
By Paritosh Bansal and Walden Siew
Wed Sep 30, 1:38 am ET
NEW YORK (Reuters) – CIT Group Inc (CIT.N) is nearing a plan that
likely would hand the commercial lender over to its bondholders,
sources familiar with the matter said on Tuesday.
CIT was preparing an exchange offer that would eliminate up to 40
percent of its more than $30 billion in outstanding debt, said the
sources, who did not wish to be identified because they were not
authorized to make public comments about the deal.
The plan would offer bondholders new debt secured by CIT assets, as
well as nearly all of the equity in a restructured company, one source
said.
If not enough bondholders agreed to the plan, the company could seek to
restructure in bankruptcy court, the source said. This would result in
one of the largest Chapter 11 bankruptcy-court filings in U.S. history.
A second source said that while some bondholders supported the plan, a
majority was not yet on board.
CIT's board has yet to approve any course of action, the first source
said.
CIT spokesman Curt Ritter declined to comment.
Although CIT received $2.3 billion in December under the Troubled Asset
Relief Program (TARP), federal regulators this year declined further
requests by CIT for funds.
U.S. taxpayers are likely to see much of their investment wiped out
under a bankruptcy, but not under a successful exchange offer, the
first source said, adding that U.S. regulators had been frequently
briefed on the developments of the plan.
The lender to small and medium-sized businesses, as well as to
commercial real estate borrowers, has until October 1 to present a
restructuring plan to lenders.
CIT Group Wraps Debt Purchase,
Dodges Bankruptcy
NYTIMES
By THE ASSOCIATED PRESS
Filed at 9:52 a.m. ET
August 17, 2009
NEW YORK (AP) -- Commercial lender CIT Group Inc. said Monday its offer
to repurchase outstanding debt at a discount -- a crucial step to help
stave off bankruptcy -- was successful.
The embattled New York-based lender offered to buy $1 billion in debt
that was set to mature Monday. CIT warned that if not enough
bondholders were willing to sell the debt back to the company, it would
likely have to file for bankruptcy protection.
The company said nearly 60 percent of the debt was tendered for
purchase, barely topping the 58 percent minimum needed to complete the
offer. CIT is paying $875 for every $1,000 tendered as part of the
offer.
CIT will pay off the remaining notes that matured Monday but were not
tendered for purchase as part of the offer.
''The completion of this tender offer is another important milestone as
the company continues to make progress on the development and execution
of a comprehensive restructuring plan,'' CIT Group said in a statement.
At the same time that CIT received $3 billion in emergency funding last
month from its largest bondholders, it launched the offer to buy back
outstanding debt in an effort to ease a cash crunch that nearly forced
it out of business. CIT turned to and received funding from its
bondholders only after negotiations for a government-led bailout failed.
Some experts feared that if CIT collapsed it would deal a crippling
blow to an economy still bleeding hundreds of thousands of jobs a month
despite a nearly $800 billion federal stimulus program.
The retail sector would be hit especially hard. CIT serves as
short-term financier to about 2,000 vendors that supply merchandise to
300,000 stores, according to the National Retail Federation. Analysts
say 60 percent of the apparel industry depends on CIT for financing.
It could continue to struggle with liquidity issues as more debt is due
to mature next year.
Last week, CIT reached an agreement with the Federal Reserve Bank of
New York that puts the company under the oversight of federal
regulators. The agreement requires CIT to submit a plan for how it will
maintain sufficient cash. It must also provide budgets through the end
of 2010 that include details about how the company will meet current
and future capital requirements.
Shares of CIT fell 11 cents, or 7.8 percent, to $1.30 shortly after
Monday's market open.
CIT Delays
Report, Could Have to File For Bankruptcy
NYTIMES
By REUTERS
Filed at 7:50 a.m. ET
August 11, 2009
NEW YORK (Reuters) - Troubled lender CIT Group Inc <CIT.N> said
on Tuesday it has delayed filing its second-quarter report with
regulators and said if it could not complete its debt tender or arrange
other financing, it would file for bankruptcy.
CIT is still reviewing assets and businesses that it may sell as well
as the related valuation adjustments that must be included in the
quarterly report, it said in a filing with the U.S. Securities and
Exchange Commission.
New York-based CIT, which last month secured $3 billion in emergency
funding from bondholders, has been battling to restructure its debt and
avoid bankruptcy.
The company has launched a tender offer for its outstanding $1 billion
floating-rate notes due August 17. In a filing on Tuesday, it said if
this offer were successful, it would use the proceeds from its
emergency funding to complete the tender and make the payment on the
August 17 notes.
The 101-year-old lender had already postponed its results, originally
expected on July 23, while arranging the emergency funding. It said
last month it expected a second-quarter loss of more than $1.5 billion.
Shares in the company slipped slightly to $1.46 in premarket trading,
down from $1.48 on Monday.
More
on CIT here...in a NYTIMES editorial.
R.I.P., CIT?
NYTIMES
Floyd Norris, Notions on High and Low Finance
July 13, 2009, 6:15 pm
There is widespread speculation that the CIT Group, one of the largest
loan companies serving smaller businesses, could be forced into
bankruptcy soon. CIT became a bank, like everyone else, but it appears
that at least some people in the government view it as too unimportant
to save.
CIT is mounting a campaign claiming it is important, and could yet
succeed. Either way, the need for the government to make such a
decision demonstrates how far the financial system is from being fixed.
The company’s most recent 10-Q sets out its problem:
The Company’s business has been historically
dependent upon access to the debt capital markets for liquidity and
efficient funding, including the ability to issue unsecured term debt.
It can no longer issue such debt. In June, Standard & Poor’s and
Fitch cut the company’s bond rating to junk, and Moody’s followed this
week. It seems possible that the company will not last a full month
after it stopped being investment grade at all the rating agencies, and
perhaps not a week after it lost its last such rating. That sounds like
a commentary on the tardiness of the rating agencies, or the perils of
an industry so dependent on friendly credit markets.
That quarterly report said it would need to raise $10 billion by March
of next year, but now had access to just $6.4 billion — unless the
government came through with another bailout.
CIT is trying to shrink — by issuing few new loans — and to issue
secured credit. In other words, even if it does survive, it has no
plans to be much help to its customers.
If CIT does go under, the $2.3 billion it got from the TARP program
will have done no one any good.
Despite the slight opening of financial markets since the winter panic
eased, this country does not have a decently functioning financial
system. It is the Federal Reserve and the Treasury that decide which
financial companies stay in business, which is something you expect
from a centrally planned socialist economy, not from the great bastion
of the free enterprise system.
Many of the better-off banks were able to repay the TARP money to the
government, but they remain dependent on F.D.I.C.-guaranteed loans. CIT
would be O.K., at least in the short term, if it could get such loans.
There has been a lot of hand-wringing over the failure of the Obama
stimulus plan to get the economy moving, but where attention is really
needed is the failure to get the financial system going. That was never
going to be easy, but the worst possible decision was to allow the
banks to fudge their financial statements. The Obama administration did
not lift a finger to prevent Congress from demanding such a move, which
the Financial Accounting Standards Board made under duress.
It is not easy to be sure how much difference that made in financial
statements, although it clearly allowed some banks to pretend their
losses were less than they really were — at least as measured by market
values. The banks claim those market values are ridiculously low, but
they will not divulge exactly what assets they own, or where they value
them.
We are back to a situation where no one knows which balance sheet can
be trusted. In that climate, the easiest decision is to trust no one —
or at least no one without a credit line backed by Uncle Sam. Citi is
too important to fail, but CIT may not be.
What has been needed for a long time is a way to figure out how much
toxic assets are worth, and to get them off bank balance sheets and
into the hands of speculators with secure funding. Then the financial
institutions, with solid capital and believable balance sheets, could
go back to lending, both to the public and to each other. It is tragic
that has not happened.
26 years ago=1983...interest rates were in double-digits...
467,000 Jobs Lost in June, Far More Than Expected
NYTIMES
By JACK HEALY
July
3, 2009
The
pace of job losses quickened in June after falling sharply just a month
earlier, casting a shadow over the Obama administration’s attempts to
stanch months of stark declines in the labor market.
The American economy shed 467,000 jobs last month, and the unemployment
rate rose to 9.5 percent, its highest level in 26 years, the Labor
Department reported on Thursday. Job losses were widespread among the
construction, manufacturing and business and professional services
sectors.
Economists had expected 365,000 job losses for the month, and predicted
unemployment would reach 9.6 percent.
The latest figures highlight a somber new reality for workers,
economists said. As the recession enters its 20th month, private wages
and salaries are falling, working hours are dwindling and more people
are without work. In essence, economists say, months of deep, broad job
losses are effectively making unemployment a way of life for millions.
The number of people who have been unemployed for more than 27 weeks
has more than tripled since the recession began, to 4 million. The
median time people go without a job has increased to nearly four
months, from slightly more than two months at the outset of the
recession in December 2007.
“We have never seen a duration of that magnitude,” Lynn Reaser, vice
president for the National Association for Business Economics, said.
“There are a lot of ramifications. A lot of these people become
discouraged, and they drop out of the work force. It affects their
spending, their whole psychological frame of mind.”
In the Brownsville section of Brooklyn, Jeffrey Jones, 40, is feeling
the weight of eight months without work. He has not found anything
since losing his job as a cook at a senior center in October, and he
worries about paying rent and caring for his four children. His blood
pressure is up, and some nights he stays up and watches television to
distract himself from the worries that keep him from sleeping.
“I know I’m not supposed to be letting it stress me out,” he said. “The
way I’m going now, I won’t be able to make it too much longer. I can’t
go this long without doing something for my family.”
While the economy is no longer losing jobs at a pace of 600,000 each
month, businesses are still cutting positions and imposing pay cuts and
hiring freezes as the economy continues to contract. Consumers are
saving 6.9 percent of their disposable income, and spending remains
sluggish.
Even the White House has lowered its expectations for the job market,
and now says that unemployment will hit 10 percent. Many economists say
that job losses and unemployment will continue rising even after the
economy begins growing again.
“I don’t see any job growth outside of health, education and government
spending through the end of the year,” said John E. Silvia, chief
economist at Wachovia Corporation.” As more people hunt futilely for
jobs or give up their searches altogether, they burn through their
savings, fall behind on bills and mortgages, and eventually add to the
strains on already strapped aid programs, from government unemployment
insurance to private food pantries.
“There are going to be massive, massive numbers of people who are out
of work for long periods of time,” said Andrew Stettner, deputy
director for the National Employment Law Project. “It’s one of the most
important aspects of where the economy is right now.”
Although the number of people filing for unemployment insurance has
leveled off recently, more workers are falling back on safety nets
intended for the most troubled workers. More than 2.7 million people
received emergency or extended unemployment benefits in the first week
of June — the most recent period for which data was available —
compared with 2 million at the beginning of the year.
As months pass without a job offer, people cut back where they can,
turning off the cable, canceling vacations and shift their shopping
habits to lower priced retailers.
Some people give up looking for jobs and join the 800,000 discouraged
workers.
Others, like Domminique Werdlow, 37, of Houston, keep sending out
résumés and sifting through online job boards. Since she
lost her job as a customer-service trainer at Waste Management in
January, Ms. Werdlow said her car has been possessed and that she now
lives unemployment check to unemployment check.
“It’s not getting any better,” she said. “I really try to stay
positive. If I really start looking at it, I’d be very depressed.”
Judge denies GM retirees' request for
committee
DAY
By BREE FOWLER, AP Auto Writer
Posted on Jun 25, 2:34 PM EDT
NEW YORK (AP) -- A bankruptcy judge on Thursday ruled that a group
representing General Motors Corp.'s salaried retirees cannot form a
formal committee to negotiate with the automaker as it attempts to
reorganize and emerge from Chapter 11 as a new company.
U.S. Judge Robert Gerber said that since GM had the right to modify or
terminate the retirees' health care and life insurance benefits before
they filed for bankruptcy protection, the retirees can't challenge the
automaker's ability to do so now.
"While I do understand the importance of this to the retirees, I can't
grant the retirees rights that they don't have outside of bankruptcy,"
Gerber said in issuing his ruling.
As part of its restructuring plan, GM plans to continue to pay health
care and life insurance benefits for its 122,000 salaried retirees and
their surviving spouses, but those benefits are expected to be reduced
and the retirees will be forced to shoulder a larger share of their
health care costs.
Retired hourly workers whose benefits are dictated by contracts with
unions like the United Auto Workers are not affected.
Neil Goteiner, an attorney for the salaried retirees group, said that
given what's at stake for the retirees, the cost of a committee was
warranted.
"Your honor, this is truly a situation where you're dealing with widows
and orphans," Goteiner said. "It's grossly unfair. They should get a
chance to sit down and at least be the assistant captain of their fate."
But GM attorney Harvey Miller argued that the retirees shouldn't be
able to form a committee since GM has always had the right to modify
salaried retiree benefits and has done so in the past.
"There can still be discussions with GM and there is a group that
periodically has had discussions with GM," Miller said. "This would
simply add more costs."
Miller added that the formation of a committee could threaten to slow
down the sale of GM's assets to a new company. The sale needs to go
through as soon as possible if the company is to have any chance of
success, he said. As part of its plan to emerge from court
protection, GM plans to sell the bulk of its assets to a new company
that would be controlled by the U.S. government. In exchange for
up to $50 billion dollars in financing, the U.S. government will take a
60 percent ownership stake in the new company. The Canadian government
would get 12.5 percent.
The United Auto Workers union will get 17.5 percent, which it will use
to fund its retiree health care obligations, while GM's unsecured
bondholders would own the remaining 10 percent.
Earlier in Thursday's hearing, Gerber gave GM final approval to access
to its full $33.3 billion in bankruptcy financing. He had given
preliminary approval earlier this month for GM to use $15 billion of
the total. The billions in U.S. and Canadian government financing
is intended to keep the automaker going until it can emerge from
Chapter 11.
Also on Thursday, Gerber denied a request from an unofficial committee
of people with asbestos-related claims against GM to appoint a "tort
czar" that would oversee all future claims against the old GM, not just
those related to asbestos. The asbestos group had previously
filed a motion requesting formal committee status, but told the court
Thursday that it was no longer pursuing that. The group has one
representative on the case's unsecured creditors committee.

A pun on "mercy me" perchance? Or is that "crikey" across the
pond?
Goldman: Recession? What recession?
I-BBC
Robert Peston | 14:33 PM, Tuesday, 14 July 2009
I'm in a horrible rush, so have to keep my remarks on Goldman Sachs'
second quarter results brief.
I could say "crikey" and leave it at that.
But I will translate. Just a few months after Wall Street and the City
of London were in meltdown, Goldman has reported record net revenues
for a three-month period of $13.8bn, which is a breathtaking 47% higher
than those generated in the preceding three months and in the
equivalent period of last year.
It's boom time again, especially in the trading of credit and
currencies. And oh how Goldman's 29,400 staff have been rewarded.
Compensation for the three months was a handsome $6.65bn or $226,000
per employee. That brings remuneration per employee for the first
half
of the year to a none-too-cheap $384,000. And we're only halfway
through the year.
The media and political reaction to Goldman's bounceback will be
fascinating to observe. It's true that the investment bank has
consistently performed better than most of its rivals. But when
that
cataclysmic storm broke over the financial system last autumn, Goldman
- like the rest - had to turn to taxpayers for a crutch in the form of
guarantees for its debt, access to central-bank liquidity and capital.
It has recently declared that it can stand on its own feet again
without taxpayers to lean on.
But some may well ask whether taxpayers shouldn't have demanded a bit
more for their succour, given that Goldman is once again the world's
pre-eminent money-making machine.
Goldman's Cohen Sees Inflation
At Bay
NYTIMES
By REUTERS
Filed at 11:40 a.m. ET
June 15, 2009
NEW YORK (Reuters) - One of Wall Street's most influential strategists
said on Monday the U.S. Federal Reserve is unlikely to ratchet back
efforts to stimulate the economy soon, and that it was too early to
worry about inflation choking off what would likely be a fitful
recovery.
Abby Joseph Cohen, senior investment strategist at Goldman Sachs Group
Inc <GS.N>, said the U.S. central bank "would like to do as
little as possible for as long as possible" to let the economy regain
its footing, and allow businesses to rebuild inventories and invest
more.
Inflation fears are "spectacularly premature" in light of rising
unemployment and excess supply, Cohen said at the Reuters Investment
Outlook Summit in New York.
"We just don't see that inflation is going to rear its ugly head any
time soon. That doesn't mean we won't see some rebound in some prices,"
including in commodities, she said.
Cohen predicted a "dramatic surge" in U.S. corporate profits in the
third quarter and especially the fourth quarter from depressed
year-earlier levels.
She expects a slow economic recovery, with annualized growth in gross
domestic product of just 1 percent from July to December, in part
because consumers are saving more and providing less of a "spunk" to
activity.
Cohen is well known for correctly forecasting a bullish run for U.S.
stocks during the 1990s.
PRAISE FOR OBAMA
Having pushed benchmark interest rates to near zero, the Fed and the
Treasury Department have tried to stimulate economic activity in other
ways.
The central bank, for example, is aggressively buying mortgage
securities and other debt to add liquidity. Meanwhile, the Treasury has
pumped hundreds of billions of dollars to prop up banks and insurers.
"I don't see anything happening in the short run" to reduce the
stimulus, Cohen said. "These were intended to be transitional. (Until
policymakers) see that markets are moving normally, and the economy is
behaving normally, they're going to be reluctant to reverse what they
have done."
Cohen added, though: "We have to be very careful in terms of defining
what 'normal' is."
The strategist praised early efforts by the Obama administration to
stimulate the economy, including a focus on energy efficiency, and
trying to bolster the U.S. middle class, which has "fallen behind over
the last decade.
"They have been faced by a series of extraordinary problems, and in
general I think they have gone about it in a very good way," she said.
Cohen also praised Ben Bernanke, whose term as Fed chairman ends next
January.
"History is likely to show that he was an extraordinarily effective Fed
chairman," she said. "Financial markets have stabilized, and the
economy appears to be moving toward a stable position."
Six Flags Files for Bankruptcy
NYTIMES
June 13, 2009, 11:26 am
Six Flags, the big theme park operator, filed for bankruptcy in early
Saturday morning in Delaware after failing to reach an agreement with
lenders over a plan to reorganize its debt outside of court.
Six Flags became only the latest company to prove unable to cope with
its debt load at a time when previous solutions like refinancings are
largely unavailable. The theme park operator, which had $2.4 billion in
debt, faced nearly $300 million in payments to preferred stockholders
due in August.
But the company is hoping to make its ride through bankruptcy a short
one. In a statement, Six Flags said that it is seeking court approval
for a pre-negotiated restructuring plan, one that has the unanimous
approval of its lenders. That proposal would eliminate $1.8 billion in
debt and slice off the $300 million in preferred stock payments.
“The current management team inherited a $2.4 billion debt load that
cannot be sustained, particularly in these challenging financial
markets,” Mark Shapiro, Six Flags’s chief executive, said in a
statement. “As a result, we are cleaning up the past and positioning
the Company for future growth.”
In its bankruptcy filing, Six Flags said that 37 of its subsidiaries,
including parks like Great Adventure and Hurricane Harbor, had also
sought court protection. The parks will continue to operate normally,
but analysts have questioned whether attendance would fall off as some
consumers shun waiting in line for roller coasters at a bankrupt theme
park operator.
The filing is a blow to Dan Snyder, the owner of the Washington
Redskins, who took control of Six Flags in 2005 after waging a proxy
fight and holds about a 6 percent stake in the company. Mr. Snyder
sought to turn around the company, installing a new management team led
by Mr. Shapiro, and selling off underperforming parks.
He sought to clean up the remaining parks by banning smoking,
increasing security and having more costumed characters like Tweety to
roam around.
Other major investors in Six Flags include Bill Gates’s Cascade
Investment, which held an 11.1 percent stake, and the hedge fund
Renaissance Technologies, with a 5.5 percent stake.
Six Flags said in its statement that the filing comes despite a good
2008, in which the company cut its net loss to $135 million from $275
million a year ago. Its net loss for the first three months of 2009
narrowed nearly 7 percent from the same time in 2008, to $146.3
million.
But the company saw a 24 percent drop in revenue over the same period,
as it suffered from lower attendance and spending at its parks.
Because the credit markets remain largely frozen for troubled
companies, Six Flags was unable to refinance its massive debt load. The
moribund real estate market also precluded the company from selling off
property, like unused land in Maryland and New Jersey, to raise
additional cash.
Six Flags’s primary advisers are the investment bank Houlihan Lokey
Howard & Zukin and the law firm Paul Hastings Janofsky and Walker.
NYTIMES "Pay at the
Top" interactive...
Talking Business: Geithner’s
Plan on Pay Falls Short
NYTIMES
By JOE NOCERA
June 13, 2009
It was another one of those Timothy Geithner moments.
On Wednesday, the Treasury secretary held a roundtable discussion with
a group of about 20 government officials and outside experts; the
subject was executive compensation. Kenneth R. Feinberg, the Treasury
Department’s new “comp czar,” was there, as was Mary Schapiro, the new
chairman of the Securities and Exchange Commission; Daniel K. Tarullo,
the newest Federal Reserve governor; and Lucien Bebchuk, the Harvard
Law School professor who has turned his academic interest in executive
compensation into a crusade.
It was, I heard later, a terrific meeting — a spirited, high-level
give-and-take about what the government could do to better align the
interests of shareholders with that of top executives, to ensure pay
was linked to performance and to rid the system of the kind of
compensation incentives that caused so much excessive risk-taking and
helped bring about the financial crisis.
“The discussion was surprisingly substantive,” said Nell Minow, the
co-founder of the Corporate Library. “Geithner was very engaged in the
discussion and genuinely interested in what everyone had to say.”
When the meeting ended, the doors were flung open and the media was
invited in. Looking sternly into the cameras, Mr. Geithner read a
statement in which he described executive compensation as a
“contributing factor” to the crisis. Then he outlined a series of
tough-sounding principles, including a “re-examination” of such
egregious practices as golden parachutes, a need to align compensation
practices with “sound risk management” and the importance of having
compensation plans that “properly measure and reward performance.”
But then, as he so often does, he proceeded to follow these tough words
with actual proposals that were less than inspiring. The only
legislation his department planned to propose — indeed, the only
legislation he deemed necessary — were bills that called for
compensation committees to be made up of independent directors, along
with “say-on-pay” legislation, which would give shareholders the right
to vote on a company’s pay plan. That vote, however, would not be
binding.
“Finally,” he said, “I want to be clear on what we are not doing. We
are not capping pay. We are not setting forth precise prescriptions for
how companies should set compensation, which can often be
counterproductive. Instead, we will continue to work to develop
standards that reward innovation and prudent risk-taking, without
creating misaligned incentives.”
Later that afternoon, I called Ira Kay, who heads the executive
compensation practice at Watson Wyatt & Company, to ask him what he
thought of the government’s proposals. “I was relieved,” said Mr. Kay.
I’ll bet he was.
•
Until the financial crisis, most people, myself included, did not make
distinctions between different kinds of companies when it came to
executive compensation. It was just one big problem, revolving
primarily around the idea that there was something fundamentally wrong
about executives taking home giant, multimillion dollar pay packages
for mediocre performance or even outright failure — something, alas,
that happens with annoying regularity in corporate America.
But if the near collapse of the financial system has taught us
anything, it is that there should be a distinction. On the one hand,
there are companies whose executives can make awful mistakes, even
driving their corporations into bankruptcy, but whose actions have
little or no effect on the rest of us. Most companies fall under this
category.
And then there are those handful of companies — the too-big-to-fail
banks and other large financial institutions that pose systemic risk —
whose failure can wreak devastating havoc on the economy. For these
latter companies, getting compensation right isn’t just a matter of
fairness or improved corporate governance. It turns out to be
critically important if we are to prevent a repeat of the calamity that
has befallen us. But as difficult as it has been to overhaul executive
compensation overall, it is going to be even more difficult to take the
tougher measures that need to be taken with the banking system.
Let’s look first at the broader issue. In truth, for the first time in
my memory, I think there is a decent chance that the compensation games
will come to an end — though it won’t be by doing anything so radical
as trying to cap pay, something that simply doesn’t work. (Mr. Geithner
was right about that.)
Instead, it will be because boards have come under renewed pressure,
thanks to the financial crisis, to control executive pay. It is also
because, with the Democrats in charge, the issue is high on the agenda.
(On Thursday, the House Financial Services Committee held a hearing on
executive compensation.) Mr. Geithner’s two proposals will most likely
breeze into law — and will certainly make a difference on the margins.
Most important, though, it is because the re-energized S.E.C., under
Ms. Schapiro, is preparing a handful of new rules that will force
companies to do a great deal more to spell out their compensation
rationales, while making it easier for shareholders to express their
displeasure if they feel boards have been too generous. In particular,
the S.E.C. has begun laying the groundwork for a rule that will make it
easier for shareholders to nominate directors — something that is
tremendously difficult right now. Ms. Minow is among those who believe
that the ability to replace incumbent directors is likely to have the
biggest effect in reforming executive pay.
That’s the good news. The bad news is that for the banks, these
measures won’t be enough. Banks, as we all now know, are different.
Their deposits are insured by the government. When they run into
problems, they have access to the Federal Reserve’s discount window.
The government has a keen interest in the “safety and soundness” of
banks, which is why they are so heavily regulated. Even in good times,
taxpayers are at risk if a bank’s management makes too many risky bets.
In bad times, excessive risk-taking by bankers can bring down an
economy.
With the big banks, there is always a degree of moral hazard because
they simply can’t be allowed to fail the way other companies can.
Market discipline — or better corporate governance — just isn’t enough;
even when a bank’s management is aligned with shareholders, they aren’t
necessarily aligned with taxpayers. So it falls on the government to
find ways to change the compensation incentives that encouraged the
kind of crazy risk-taking that got us into so much trouble.
That is why, in his statement, Mr. Geithner stressed the importance of
coming up with a compensation system that accounted for risk — he was
speaking directly to the need to change the compensation system at
banks. But none of his proposed solutions dealt with that problem.
Neither he, nor anyone else in government, has yet figured out what to
do about it.
Most of the ideas so far have been aimed at forcing bankers to have
their bonuses paid in restricted stock that they could not cash in for
years — until it was clear that the profits they had generated were not
illusory. But to my mind, the problem really goes much deeper than
that.
For one thing, the culture of bankers and traders, unlike at most
nonbanks, rests on an “eat what you kill” mentality. That is why so
many executives at, say, Merrill Lynch, felt justified in demanding big
bonuses despite the firm’s huge losses. After all, they had made money
on their trades — so why should they be punished because others had
lost money for the firm?
For another thing, compensation at banks needs to be changed not just
at the top, but also deep in the ranks, at the level of individual
trader — or, indeed, anybody else who can put the firm’s capital at
risk. This also makes it more difficult, because you can’t fix the
problem with better corporate governance at the top. The changes have
to be more systemic than that.
There is a third problem: once banks and investment banks were allowed
to tear down walls between them, banking became a greedy profession.
Look at all those banks panting to give back their bailout billions —
in large part because they don’t want to have to deal with the
executive compensation restrictions. And unlike other companies, where
people glow with pride at the introduction of a new product, the key
moment in the life of a banker is when he finds out what his bonus is
for the year. None of this will be easy to change.
In his statement, Mr. Geithner stressed that the Federal Reserve was
working on this problem as part of its job supervising banks. I got the
strong sense this week that the Fed now views bank compensation as
something it will begin to look at much more closely — and will
eventually start regulating. The foolish and counterproductive
distinction between banks that still have bailout money (which have
onerous compensation rules) and those that gave it back (and thus have
no rules) will go away, as it should. All banks pose risks to
taxpayers, whether they still have bailout money or not. And all banks
should have the same set of compensation rules.
There is another potential source of new ideas, though: Mr. Feinberg. A
large part of his new job will be to determine the compensation for the
most highly paid executives at the seven companies, including General
Motors, Citigroup and American International Group, that have received
the most government aid. But another part of his task, he told me this
week, is to devise a compensation structure for all management ranks of
those companies, not just the biggest earners.
Mr. Feinberg is, above all else, a practical man who likes solving
problems, and he seemed to relish this latter aspect of his new role.
“If this job has any long-term impact,” he said, “maybe we can come up
with something that can serve as a model.”
Surely somebody needs to — and soon.
A $1.33
Trillion Drop in Net Worth in First Quarter
NYTIMES
By THE ASSOCIATED PRESS
June
12, 2009
WASHINGTON (AP) — American
households lost $1.33 trillion of their wealth in the first three
months as the recession took a bite out of stock portfolios and dragged
down home prices.
The Federal Reserve reported
Thursday that household net worth fell to $50.38 trillion in the
January-March quarter, the lowest level since the third quarter of
2004. The first-quarter figure marked a decline of 2.6 percent, or
$1.33 trillion, from the final quarter of 2008.
Net worth represents total assets
like homes and checking accounts, minus liabilities like mortgages and
credit card debt.
The damage to wealth in the first
quarter came from the sinking stock market. The value of Americans’
stock holdings dropped 5.8 percent from the final quarter of last year.
Another hit came from falling house
prices. The value of household real-estate holdings fell 2.4 percent.
Collectively, homeowners had 41.4 percent equity in their homes in the
first quarter. That was down from 42.9 percent in the fourth quarter.
The latest snapshot of Americans’
balance sheets was contained in the Fed’s quarterly report called the
flow of funds.
Despite the drop, the speed at which
net worth shrunk slowed to start the year. During the recession’s
deepest point in the October-December period, Americans’ net worth fell
8.6 percent, according to revised figures.
With wealth declining and
unemployment rising, there are questions about how consumers — the
lifeblood of the economy — will behave in the coming months.
If they continue to spend, even at a
subdued pace, the recession probably will end this year as predicted by
the Fed chairman, Ben S. Bernanke, and other economists. However, if
consumers hunker down and cut spending again, that could delay any
recovery. In the fourth quarter, Americans slashed spending at an
annualized rate of 4.3 percent, the most in 28 years.
Beyond Outrage, Wall Street Payouts
Fuel Connecticut's Economy, Tax Debate
The Hartford Courant
By ZEKE MILLER And ERIC GERSHON
August 2, 2009
Five months after the national flap over AIG, outrage over Wall Street
bonuses is back, and this time the stakes in Connecticut — for taxes
and for economic health — are much higher.
Nearly 5,000 employees working for the nine large banks that accepted
$175 billion in federal bailout money got million-dollar bonuses last
year. In all, the banks handed out $32.6 billion in "performance-based"
bonuses, New York Attorney General Andrew Cuomo disclosed Thursday in a
report.
The payouts renewed angry calls for government controls on bonuses and
prompted an immediate vote by the U.S. House for such controls — in a
bill that would also give shareholders the right to nonbinding votes on
executive pay.
In Connecticut, though, the debate takes on special meaning. It
provides fodder for Democrats in the General Assembly as they try to
push through a tax increase on the highest wage earners.
And even as the payments offend popular concepts of fairness, the
billions in broader Wall Street bonuses are a financial boon to the
state — much more than AIG's disputed $218 million paid to employees at
a Wilton-based office of the failed insurance giant.
There is no public data showing how much of the nine big banks' bonus
money went to Connecticut residents on the Fairfield County Gold Coast
and elsewhere. But by all accounts the figure is large, and it boosts
the state's coffers as well as its overall wealth.
"At minimum, we are talking $100 million for the state budget from
direct income tax, let alone indirect spending by those receiving
bonuses," said Peter Gioia, vice president for research at the
Connecticut Business and Industry Association. "That may upset some
people as taxpayers, but it should put a smile on people who own
businesses."
The $100 million estimate assumes that the nine banks paid out about $2
billion of the $36 billion to Connecticut residents, based on the
current state tax rate.
Whatever the right number, said Nicholas S. Perna, economic adviser for
Webster Bank, "If Mr. Cuomo had been successful in banning all bonuses,
the state budget would have been in even greater trouble."
Meanwhile, Democrats at the state Capitol have said for many months
that the state should fill its two-year, $8.6 billion budget gap by
increasing the tax on high-income residents.
"I think this makes it harder for Republicans to claim that raising
taxes by just $20 a week on those making $600,000 a year is excessive,"
said Senate President Pro Tem Donald E. Williams Jr.
What Is Fair?
As Gioia and Perna point out, the so-called multiplier effect of the
bonuses will help the state's economy as a whole, not just the few who
got the money, since it will diffuse throughout the entire economy as
it is spent.
But economic benefit is one thing and fairness is another.
"There ought to be some proportionality between executive bonuses and
the health of the overall economy," said Jon Green, director of
Connecticut Working Families. "Instead, Wall Street is content to
continue to encourage risky gambling with other people's money. Have we
learned nothing from the past year?"
Edward J. Deak, a professor of economics at Fairfield University, said
he sees "a culture of 'me first'" at these banks, promoted by federal
tax laws, that led to the large bonuses. Current law allows employers
to deduct only the first $1 million in salaries for any one person for
tax purposes, but leaves a loophole for performance-based pay, or
bonuses.
"In this system, performance becomes a subjective standard," Deak said,
"one that becomes looser and looser as more people want their share of
the growing bonus pool."
The banks and insurance companies subject to federal oversight under
the federal bailout program argue that they must be able to pay freely
in order to attract and retain talent. Pay expert Paul Hodgson, a
senior research associate at The Corporate Library, a private group,
takes aim at that notion.
"There has been a glut of bankers on the job market," he said, "and I
find it hard to believe that there are top performers looking to leave
their jobs if they don't get the same bonus as last year."
Spokesmen for three of the largest banks on the bailout list, Bank of
America, JPMorgan Chase and Citigroup, declined to comment for this
story. The bonus amounts for 2008 were in line with the amounts
paid in the past, said Jonathan Koppell, associate professor of
politics and management Yale School of Management.
"I think it's surprising they were not lower considering the
performance of the companies," Koppell said.
Fallout In Hartford
With seven-figure payouts to thousands of people, many, including key
policymakers, doubt that all those bonuses could really have been
earned.
"The government tried to help out the economy, by bailing these
companies out, and it is disturbing that they took advantage of
taxpayer generosity," said state House Speaker Christopher G. Donovan,
D- Meriden. "We obviously need more regulation of the private sector."
Donovan, like Williams in the state Senate, believes Cuomo's report
will advance the Democrats' argument for a tax hike on high earners —
an increase opposed by most Republicans, including Gov. M. Jodi Rell.
"Gov. Rell believes this type of misuse of taxpayers' dollars is
shameful. But this is a federal problem which requires a federal
solution," said Rell spokesman Adam Liegeot. "Raising the state's
income tax is not the answer. In fact, doing so would kill jobs in
Connecticut. Gov. Rell will not allow that to happen."
State Attorney General Richard Blumenthal said his office is
considering how it might obtain information about whether the bonuses
actually compensate individuals for their performance and whether the
recipients kept their jobs last year "by virtue of the government
bailouts."
Nonetheless, he said, "We're dealing with the lifeblood of the American
economy, so we're not going to simply start throwing grenades or making
accusations."
Copyright © 2009, The Hartford Courant
Obama Names Overseer to Set Pay at
Rescued Companies
NYTIMES
By STEPHEN LABATON
June 11, 2009
WASHINGTON—The Obama administration on Wednesday appointed a
compensation overseer with broad discretion to set the pay for 175 top
executives at seven of the nation’s largest companies, which have
received hundreds of billions of dollars in federal assistance to
survive.
The mandate given to the new compensation official, Kenneth R.
Feinberg, a well-known Washington lawyer, reflects the federal
government’s increasingly intrusive role in the corporate affairs of
deeply troubled companies. From his nondescript office in Room 1310 of
the Treasury building, Mr. Feinberg will set the salaries and bonuses
of some of the top financiers and industrialists in America, including
Kenneth D. Lewis, the chief executive of Bank of America; Vikram S.
Pandit, the head of Citigroup, and Fritz Henderson, the chief executive
of General Motors.
The compensation of executives at some companies receiving aid provoked
a firestorm of political outrage earlier this year. In revising a
previous proposal to set pay limits, the administration has decided to
take an approach that will leave the success or failure of the effort
to curtail high compensation at the assisted companies in the hands of
Mr. Feinberg. (Mr. Feinberg himself will not receive any government
compensation.)
The announcement by the Treasury secretary, Timothy F. Geithner, was
part of broader recommendations on executive pay that will affect all
publicly traded companies. Mr. Geithner called on Congress to adopt
“say on pay” legislation giving shareholders the ability to hold
non-binding votes on compensation levels. While in the Senate, Barack
Obama sponsored such legislation, which was opposed by many large
companies.
“This financial crisis had many significant causes, but executive
compensation practices were a contributing factor. Incentives for
short-term gains overwhelmed the checks and balances meant to mitigate
against the risk of excess leverage,” Mr. Geithner said. “By outlining
these principles now, we begin the process of bringing compensation
practices more tightly in line with the interests of shareholders and
reinforcing the stability of firms and the financial system.”
Mr. Geithner said the administration would seek legislation to give
more authority, and promote more independence, by the committees of
corporate boards that set compensation for top executives. The proposal
would be similar to a provision in the Sarbanes-Oxley law of 2002
responding to a spate of accounting scandals that gave more authority,
and imposed more exacting standards, on audit committees of corporate
boards.
The latest plan restricting executive compensation at troubled
institutions attempts to walk a fine line between satisfying public
demand for controlling excessive pay and not spooking Wall Street,
which the administration is hoping to rely on to help buy the troubled
mortgage-backed assets at weaker banks.
Mr. Geithner told reporters on Tuesday that financial institutions are
still worried about the “political risk” of becoming subject to greater
government regulation if they participate in the Public-Private
Investment program to buy toxic assets and relieve the balance sheets
of the most troubled banks.
Instead of deciding compensation levels himself, Mr. Geithner decided
to appoint Mr. Feinberg, a well-known mediator whose last high-profile
assignment was putting a financial value on the lives of victims of the
9/11 attack, to decide the pay for the top 25 executives at the
American International Group, Citibank, Chrysler, Chrysler Credit,
General Motors, GMAC and Bank of America.
For 80 other financial institutions that have received federal
assistance, Mr. Feinberg will develop the overall compensation
structure, but without setting the exact level of pay. For these 80
companies, the goal is to reduce excessive risk-taking by executives
whose compensation is tied to performance. Mr. Feinberg will also
determine whether it would be in the public interest to force any
executives at companies receiving assistance who might have been
overpaid to return some of that pay.
Mr. Feinberg became a nationally known figure after the Bush
administration assigned him to help settle possible lawsuits by the
families of victims of the terrorist attacks on Sept. 11. His job was
to put a value on the lives of the victims and offer government
settlements to avoid lawsuits. Mr. Feinberg met with many of the
families and spoke around the country about how intellectually
challenging and emotionally difficult the assignment became. He often
sought refuge by cloistering himself in a room in his home to listen to
his extensive opera collection.
Before that assignment, he was appointed by federal district judges to
help resolve several difficult product liability lawsuits. He played
central roles in resolving cases involving victims of asbestos, Agent
Orange and the Dalkon Shield, a birth control device that injured more
than 200,000 women. He was also one of three arbitrators who determined
the fair market value of the Zapruder film that captured the
assassination of President John F. Kennedy, resolving a dispute between
the heirs of Abraham Zapruder, who shot the footage, and the
government, which acquired the 26-second film.
The announcement is the third attempt by Washington to respond to
public outrage over high pay at companies receiving taxpayer
assistance. On Feb. 4, the administration announced a proposal to set a
$500,000 cap on cash compensation for the most senior executives at
troubled companies getting “exceptional assistance,” and restrictions
on cashing in on stock incentives.
That plan did little to quell outrage as details of bonuses were
disclosed at several major companies receiving federal assistance. Two
weeks after the Obama plan was announced, Congress approved a $787
billion economic stimulus bill that included more restrictions on the
pay of executives at institutions receiving aid. The provision,
inserted by Senator Christopher J. Dodd, the Connecticut Democrat, over
the objections of the administration, instructed Treasury to come up
with tougher rules for the five most senior officers and the 20
highest-paid employees at the most-troubled companies.
The legislation also barred top executives from receiving bonuses
exceeding a third of their annual pay. Moreover, any bonus would have
to be in the form of long-term incentives, like restricted stock, which
could not be cashed out until the company had repaid the government.
That legislation was the basis for the appointment of Mr. Feinberg.
Mr. Dodd recommended the appointment of Mr. Feinberg to Mr. Geithner
last month, a person briefed on that conversation said.
Editorial: Congress, the Banks and
Derivatives
NYTIMES
June 7, 2009
The Obama administration has made a serious proposal to regulate
derivatives — the multitrillion-dollar market in financial contracts
that malfunctioned so disastrously last year. The plan goes further
than many thought politically possible, especially in its call for
federal oversight of all large derivatives dealers. But it does not go
far enough.
Those dealers — including big banks like JPMorgan Chase, Goldman Sachs
and Morgan Stanley — trade derivatives mainly as one-to-one private
contracts, largely without any regulation. The plan would allow
regulators to impose rules on dealers and track their activities and
presumably put a timely halt to abuses. But it does not demand the full
transparency that would come from trading all derivatives on exchanges,
like stocks.
Exchange trading allows the market as a whole — investors, economists,
researchers — to see how derivatives are structured, priced and traded.
Such knowledge is the best defense against speculative excesses.
The plan would require that derivatives that are deemed “standardized”
— off-the-shelf contracts with mostly boilerplate language — be traded
through a central clearinghouse or on an exchange. But the plan would
also allow for “customized” derivatives — no one knows yet with
certainty what the difference would be — to continue to be traded
privately.
The danger of perpetuating a freewheeling market in customized
derivatives is real. The decision to rope them off looks like a sop to
the banks, which have fought against disclosure and transparency. They
know that customers who rely on derivatives — including investment
funds, major corporations and wealthy individuals — would likely pay
less if they could compare prices.
The question now is whether Congress will try to improve the plan.
Gretchen Morgenson and Don Van Natta Jr. reported in The Times last
week on the banks’ post-meltdown lobbying efforts. Lawmakers are being
pressed, and plied with contributions, to favor the lightest
regulations and the largest loopholes.
Senator Tom Harkin has introduced legislation that would require
exchange trading for derivatives. Representative Collin Peterson has
introduced a bill that would tighten the regulation of derivatives’
clearinghouses. He acknowledges that his bill is not as strong as he
would like but that Congressional politics left him no choice, telling
The Times, “The banks run the place.”
Fed Chief Calls for Plan to Curb Budget Deficits
NYTIMES
By JACK HEALY
June 4, 2009
The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that
the United States needed to develop a plan to restore fiscal balance,
even as the government racks up huge budget deficits as it tries to
spend its way out of the worst economic crisis since the Great
Depression.
In remarks to the House Budget Committee, Mr. Bernanke said that the
government must address the immediate problems of a crippling recession
that has erased trillions of dollars in household wealth, hobbled
people’s stock portfolios and raised unemployment to its highest levels
in a generation. Still, he said, the government needed to think about
putting its fiscal house back in order.
“Unless we demonstrate a strong commitment to fiscal sustainability in
the longer term, we will have neither financial stability nor healthy
economic growth,” he said in prepared remarks.
The deficit is expected to reach $1.8 trillion this year as the country
spends feverishly on financial bailouts, a sweeping stimulus package,
lending programs, rescues for the automobile industry and more. Those
are the highest budget deficit projections as a share of gross domestic
product since World War II.
President Obama has vowed to reduce the budget gap by half by the end
of his term, a promise made even as tax revenue is falling and the
administration is trying to cobble together a potentially costly
overhaul of the health care system. And the country faces trillions
more in Social Security and Medicare obligations as baby boomers retire
in coming years.
“Even as we take steps to address the recession and threats to
financial stability, maintaining the confidence of the financial
markets requires that we, as a nation, begin planning now for the
restoration of fiscal balance,” Mr. Bernanke said.
Lately, financial markets have started to quaver on worries about the
government’s spending plans, and how they are piling more obligations
onto the country’s $11 trillion national debt.
Investors in the bond markets, where the Treasury Department goes to
raise money to keep the government running, are getting skeptical about
the scale of Washington’s spending. The yields on Treasury notes have
risen to their highest points in five months as investors who thronged
to the safety of government debt begin to invest their money elsewhere.
“These increases appear to reflect concerns about large federal
deficits but also other causes, including greater optimism about the
economic outlook, a reversal of flight-to-quality flows, and technical
factors related to the hedging of mortgage holdings,” Mr. Bernanke said.
But Mr. Bernanke made no mention of whether the Fed would increase its
purchases of $300 billion worth of government securities. Such a move
could help to push down interest rates on longer-term Treasury notes,
but it could raise the prospects for inflation down the road.
The movement away from Treasuries, which rose to record prices at the
height of the credit crisis, is a good thing on some levels. It
suggests that investors are becoming more confident in riskier
investments like stocks and corporate bonds.
But rising interest rates on Treasury notes make it costlier for the
government to raise money. And higher yields on government debt can
also push up interest rates on mortgages and other loans, making
borrowing more expensive for consumers and homeowners.
In his testimony, Mr. Bernanke said that some corners of the
once-frozen financial markets were edging toward normal. Major banks
deemed in need of additional capital are raising money by issuing
billions in common stock and notes, and markets for short-term loans
among banks are functioning more smoothly, Mr. Bernanke said.
He noted that some financial institutions are weaning themselves off
government-backed loan programs as they seek to pay back the money they
took under the $700 billion financial bailout.
“It is encouraging that the private sector’s reliance on the Fed’s
programs has declined as market stresses have eased, an outcome that
was one of our key objectives when we designed our interventions,” he
said.
Mr. Bernanke again cited numerous flickers of stability and growth in
the economy and said that the economy’s swift declines were slowing and
predicted growth would resume later this year. But he swatted away any
hopes of a swift recovery, and said that the economy would probably to
heal slowly.
“We expect that the recovery will only gradually gain momentum and that
economic slack will diminish slowly,” he said in his remarks. “In
particular, businesses are likely to be cautious about hiring, and the
unemployment rate is likely to rise for a time, even after economic
growth resumes.”
New G.M. Plan Gets Support From Key Bondholders
NYTIMES
By MICHAEL J. de la MERCED and MICHELINE MAYNARD
May 29, 2009
A proposal by General Motors to let bondholders receive up to a 25
percent stake if they do not oppose its bankruptcy reorganization — a
bigger share than G.M. offered the autoworkers union — has received the
support of a group representing many of the company’s largest
debtholders.
In a regulatory filing, G.M. also set Saturday afternoon as the
deadline for other bondholders to support the plan. The company is
expected to seek bankruptcy protection by Monday, the deadline set by
the Obama administration.
“Unless a sufficient number of bondholders sign statements backing the
plan, the amount of stock and warrants for bondholders would be
“substantially reduced or eliminated,” G.M. said in the regulatory
filing. A person briefed on the matter said G.M. was seeking support
from investors holding about 50 percent of G.M.’s $27 billion in bond
debt. The plan already has the support of about 35 percent, according
to people briefed on the matter.
In a regulatory filing, G.M. filled in many of the details of how it
would look once it completed its reorganization plan, crafted under the
eye of the Treasury Department. It said the government, which will
provide bankruptcy financing of about $50 billion, initially would hold
72.5 percent of G.M., with the United Automobile Workers union
receiving 17.5 percent, and bondholders receiving 10 percent
But the percentages held by the bondholders and the union could
conceivably be larger because each are being offered warrants in the
new G.M., which would be created in bankruptcy.
Under the terms of the plan, bondholders would initially receive 10
percent. They could then exercise their warrants for an additional 7.5
percent when the new G.M. rises to about $15 billion in value. The
second set of warrants for the final 7.5 percent would be exercisable
when new G.M. rises to $30 billion in value.
The union would initially receive a 17.5 percent stake to finance a
health care trust for its retirees. It has also received warrants to
raise that holding to 20 percent — but as Thursday’s filing made clear,
those warrants are exercisable only if new G.M.’s value hits $75
billion.
Once the union and bondholders achieve their full stakes, the
government’s share would drop to 55 percent.
The hope is to create a new G.M. by late August, people with knowledge
of the matter said.
On Thursday, the committee representing holders of about 20 percent of
the bonds’ value, said they voted unanimously in favor of the proposal.
In a statement, the group said it “believes that when contrasted with
the alternative — uncertain and costly bankruptcy court litigation —
that it represents the best alternative for bondholders in the current
difficult and dire situation.”
Another group of bondholders, representing about 30 percent of G.M.’s
debt, is in talks with the Treasury, people with knowledge of the
discussions said.
Earlier this week, bondholders overwhelmingly rejected a debt exchange
offer that would have swapped their bonds for 10 percent of the
company’s equity. Bondholders rejected the initial offer because they
were upset that the U.A.W.’s health care trust, to which G.M. owes $20
billion, received a larger stake than the debt holders, who were owed
$27 billion.
Under the proposal, bondholders conceivably will outrank the health
care trust, once the warrants are exercised. Not only does that soothe
any ruffled feelings, but it will create good will with the lenders
G.M. will need to tap after it emerges from bankruptcy. On the other
hand, the union will hold debt and preferred stock that helps guarantee
its health care trust will be financed even if the new company falters.
G.M. and the Treasury are striving to resolve several issues before
G.M. files for protection. Last week, G.M. reached a deal with the
U.A.W. on contract concessions, while the company announced plans to
eliminate brands including Hummer, Saturn, Saab and Pontiac. It also
seeks to close dealerships and has announced plans to shut several
plants.
Thursday’s announcement came after German and American negotiators in
Berlin failed to agree on a crucial bridge loan to sustain Opel and the
rest of G.M.’s European operations in the event of a bankruptcy filing,
following a marathon negotiating session that stretched till nearly 5
a.m. Thursday.
Neither G.M. nor the Treasury Department are willing to invest
significant sums of money in the company’s European operations, which
they believe hold little value, people briefed on the matter said. G.M.
and Treasury officials believe that the company would not be
significantly hurt if Opel were forced into insolvency.
But officials did manage to narrow the field of potential suitors for
Opel to two companies — Fiat, the Italian automaker, and Magna, a
Canadian auto-parts giant. A Belgian private equity firm as well as a
Chinese automaker were knocked out of contention.
Where
this recession is reaching...
How Does the Current Crisis Compare to the
Great Depression?
By Price Fishback
A Guest Post at the "Freakonomics" blog on the NYTIMES
May 11, 2009
Over the past couple of decades, every time we have experienced a
slowdown in the American economy, the media mentioned the possibility
that this is the next Great Depression. Maybe this is a natural
response to the relative lack of downturns over the past 20 years.
After experiencing a downturn once every three to seven years for
nearly two centuries, the U.S. economy has been averaging a downturn
about once every nine or ten years since the early 1980’s. As declines
in the economy have become rarer, perhaps people have become more
sensitive to them.
In the 1920’s, Soviet economist Nikolai Kondratiev argued for the
existence of 40- to 60-year economic super-cycles. Since the Great
Depression ended nearly 70 years ago, maybe we are overdue for the next
one.
The events of the last year naturally have stimulated comparisons to
the Great Depression. Two years ago, few would have ever guessed that
there would be no pure major investment banks left on Wall Street. The
banking industry is struggling, as many financial institutions face
uncertainty about the values of their assets, particularly financial
instruments related to mortgages. The U.S. and most of the rest of the
world are in recession. Meanwhile, the stock market has lost roughly 40
percent of its value from the all-time peak it reached in late 2007.
How does this compare to the Great Depression? We won’t know the final
outcome of this recession for a while, but I can safely say that the
current situation is nowhere near as bad as the situation during the
1930’s. There may be surface similarities on some dimensions, but there
are far more differences than there are similarities.
Since the start of the recession in late 2007, the monthly unemployment
rate has risen from 4.9 percent to 7.6 percent in January 2009. Before
thinking about the Great Depression, realize that unemployment rates
have exceeded 7 percent in 139 months since World War II. This includes
32 months between 1974 and 1977, 76 months between 1980 and 1986, and
21 more between 1991 and 1993. The Great Depression was far more
disastrous. One year after the stock market crash of 1929, the
unemployment rate had risen from 2 percent to 10.8 percent. The next
year it was 16.8 percent. Then unemployment rates rose above 20 percent
for four straight years!
It does not end there. The unemployment rate exceeded 14 percent for
five more years until finally dropping below 10 percent again in 1941.
These rates include emergency workers, but these were people who were
working for their relief payments at hourly wages that were roughly
half the norm on other government projects. We treat people receiving
unemployment benefits today as unemployed, and all they are required to
do is seek work.
Do I sound like your grandparent talking about walking barefoot and
backward several miles through the snow to go to school? There’s more.
Real G.D.P. fell during the last two quarters, but real G.D.P. in the
fourth quarter of 2008 was almost identical to real G.D.P. in the
fourth quarter of 2007. Since World War II, there have been 28 quarters
where real G.D.P. was below the same quarter in the prior year. How
does this compare with the Great Depression? In 1930, Americans
produced 8.6 percent fewer final goods and services than in 1929, in
1931 15 percent less, and in 1932 and 1933 roughly 26 percent less than
in 1929. It is hard to conceptualize such a drop in G.D.P.
Consider this: the 1932 and 1933 figures would have been the equivalent
of shutting down all production of goods and services west of the
Mississippi River. Annual real G.D.P. did not reach its 1929 level
again until 1936. We are experiencing pain now, but the problems of the
Great Depression were several magnitudes greater.
Goldman Would Use Share Sale to Return Bailout
Money
NYTIMES
By LOUISE STORY
April 15, 2009
Six months after accepting a financial lifeline from Washington, a
newly profitable Goldman Sachs is pushing to return the billions of
taxpayer dollars that it received in an effort to extricate itself from
heightened government control. Goldman, which rode out the final,
tumultuous months of 2008 with the help of a federal rescue, reported
strong quarterly profits on Monday and said that it would seek to raise
money in the capital markets to repay the government.
If successful, Goldman would become the first major bank to return
funds received under the Troubled Asset Relief Program, or TARP. Such a
step would probably enable Goldman — long one of the most lucrative
places to work on Wall Street — to free itself from government-imposed
restrictions on compensation.
Many analysts welcomed the news as the latest in a series of signs that
the financial industry is stabilizing. But others warned of a looming
divide between a handful of banks like Goldman, which may be strong
enough to return their TARP money, and the many others that are too
weak to go without government funds. It is unclear how quickly
Goldman, which was also a beneficiary of a separate government rescue
of the American International Group, might be allowed to return the $10
billion it accepted last October.
In a conference call Tuesday morning, Goldman’s chief financial
officer, David A. Viniar, said Goldman never viewed the taxpayer money
as long-term capital.
“We view it as our duty to return the funds as long as we can do it
without negatively impacting our financial profile,” Mr. Viniar said.
While Goldman’s latest results bolster its case for untangling itself
from TARP, federal regulators are nonetheless concerned about the
health of the broader financial industry and the implications such a
move might have for other institutions. Goldman is not allowed to
return the money without the approval of the Treasury and the Federal
Reserve, which both declined to comment on Monday.
“The issue is
really, will the government give Goldman special dispensation to get
out first?” said Brad Hintz, an analyst at Sanford C. Bernstein.
“Goldman can walk the halls of Congress waving a check, but is it in
the best interest of the marketplace for them to pay it back?”
Goldman indicated in early February that it would seek to repay the
funds, and since then, several other banks have said they would like to
do the same. Not all banks, however, are likely to bounce back as
quickly as Goldman, despite expectations that other banks will report
strong results for the first quarter. Goldman announced profits
of $1.66 billion in the quarter or $3.39 a share, marking a strong
comeback from a loss in late 2008. Goldman’s profit was propelled by
record revenues of $6.56 billion in its fixed income, currency and
commodities unit, where mortgage and other credit instruments are
traded. Over all, Goldman’s revenues were $9.43 billion, up 13 percent
from the first quarter a year ago.
Mr. Viniar said Tuesday morning that the bank was able to generate much
of its revenues by trading “plain vanilla” investments. Margins were
higher-than usual, he said, in part because of the disappearance of
some of Goldman’s former competitors, like Bear Stearns and Lehman
Brothers.
“Many of our traditional competitors have retreated from the
marketplace,” Mr. Viniar said.
Goldman reported its results a day ahead of schedule, setting a
positive tone for a slew of other bank results expected in the coming
week. While several small banks have returned TARP money, Goldman so
far is alone among large institutions.
Last Tuesday, Lloyd C. Blankfein, Goldman’s chief executive, visited
Washington to speak before an industry conference, and to meet with
Treasury Secretary Timothy F. Geithner. Though rumors have swirled
about Goldman’s payback, it was only last week in that meeting that Mr.
Blankfein formally asked to return the money and detailed his plan to
raise more private capital. Goldman said on Monday that it would seek
to raise $5 billion by selling new common stock and use the proceeds,
along with other funds, to repay the government.
The amount Goldman owes will be higher than the $10 billion because of
warrants that the government was granted that must be valued by an
independent firm. Goldman said in a statement on Monday that returning
the TARP money depends on the results of a stress test that federal
bank examiners are in the process of evaluating for Goldman and other
big banks.
Goldman did not address the bonds that it issued with government
backing last fall.
While Goldman reported a strong first quarter, it also reported a loss
of $1 billion in the month of December, underscoring how quickly its
fortunes can change. That month was reported on its own because Goldman
is changing the timing of its fiscal year by a month, to match the
calendar year. The loss was in part related to write-downs on
high-yield bonds, as well as deterioration in real estate.
Goldman did not detail its reasons for wanting to return the TARP
money, but the bank’s chief financial officer, David A. Viniar,
addressed the topic at a conference in early February.
“We just think that operating our business without the government
capital would be an easier thing to do,” Mr. Viniar said. “We’d be
under less scrutiny, and under less pressure. Not that we’d be out of
the public eye; we’re still going to be in the public eye.”
Since then, the government added new requirements for companies that
accepted taxpayer money, including stronger rules about bonuses. In a
speech last week, Mr. Blankfein criticized one of the other new rules,
which centered on visas issued by banks for foreign workers. The
capital markets have been virtually dead for months, so it is unclear
how Goldman’s stock offering will fare. Only two companies — HSBC, the
big British bank, and Xstrata, a mining company — have issued more than
$5 billion in equity this year, without government backing, according
to Dealogic.
Some analysts were skeptical about Goldman’s intention to return the
money. “If you look at most of the conditions in place that forced TARP
onto the banks, those conditions have not changed,” said Roger Freeman,
an analyst with Barclays Capital. Since the end of November, Goldman
had reduced the number of its employees by more than 2,000, to 27,898,
according to the statement. In the last year, the bank has cut 4,000
jobs.
“Given the difficult market conditions, we are pleased with this
quarter’s performance,” Mr. Blankfein said in the release. “Our results
reflect the strength and diversity of our client franchise, the
resilience of our business model and the dedication and focus of our
people.”
Some Banks, Citing
Strings, Want to Return Aid
NYTIMES
By STEPHEN LABATON
March 11, 2009
WASHINGTON — The list of demands keeps getting longer.
Financial institutions that are getting government bailout funds have
been told to put off evictions and modify mortgages for distressed
homeowners. They must let shareholders vote on executive pay packages.
They must slash dividends, cancel employee training and morale-building
exercises, and withdraw job offers to foreign citizens.
As public outrage swells over the rapidly growing cost of bailing out
financial institutions, the Obama administration and lawmakers are
attaching more and more strings to rescue funds.
The conditions are necessary to prevent Wall Street executives from
paying lavish bonuses and buying corporate jets, some experts say, but
others say the conditions go beyond protecting taxpayers and border on
social engineering.
Some bankers say the conditions have become so onerous that they want
to return the bailout money. The list includes small banks like the TCF
Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette,
La., as well as giants like Goldman Sachs and Wells Fargo.
They say they plan to return the money as quickly as possible or as
soon as regulators set up a process to accept the refunds. On Tuesday,
Signature Bank of New York announced that because of new executive pay
restrictions in the economic stimulus package, it notified the Treasury
that it intended to return the $120 million it had received from the
government only three months ago.
Other institutions like Johnson Bank of Racine, Wis., initially
expressed interest in seeking bailout funds but have now changed their
minds. Bank executives told The Milwaukee Journal Sentinel that one
reason they rejected the government money was to avoid any disruption
in the bank’s role in the local community, including supporting the zoo
or opera company if they chose to.
One of the biggest concerns of the banks is that the program lets
Congress and the administration pile on new conditions at any time.
The demands to modify mortgages or forestall evictions are especially
onerous, some bank executives and experts say, because they could
prompt some institutions to take steps that could lead to greater
losses.
“We are taking an approach that wants the banks to help the economy and
whether it is ultimately good for a particular bank is secondary,” said
L. William Seidman, the former senior regulator during the savings and
loan bailout. “Weak banks are being asked to do things that will erode
their position.”
A senior Treasury official involved in the bailout effort said the
administration was carefully trying not to do anything that could harm
the banks and was giving financial incentives to modify mortgages. The
official said the restrictions were part of a larger effort to clean up
bank balance sheets and assist the economy.
“We’re having to take some very unpleasant actions when the
alternatives are so much worse,” said the official, who spoke on
condition of not being identified.
But a growing chorus of industry experts are warning that asking weak
banks to carry out the government’s economic and social policies could
increase the drain on the public purse. These experts say that the
financial assistance, while helpful in the short run, could force weak
banks to engage in lending practices that will lose even more money,
and that the government inevitably will become more heavily involved in
dictating how banks do business.
“I honestly believe the people in power pushing this policy see it as a
win-win — as something that is good for the banking industry and good
for homeowners and others,” said Douglas J. Elliott, a former
investment banker who is now an economics fellow at the Brookings
Institution. “But there is a slippery slope and there are potentially
significant negative consequences.”
Mr. Elliott says that by modifying loans, banks that are already
fragile could wind up losing more money.
“What gets us in real trouble,” he said, “is when we try to fudge
things and pretend that something is in the direct interest of both the
government and the financial institutions when it in fact costs the
banks money or increases their risk levels.”
Take Fannie Mae and Freddie Mac, the housing-finance companies that the
government now controls. In recent months, they have been told to spend
billions of dollars buying bundles of mortgages for which there are no
other buyers, and to let homeowners refinance their loans — even if
they have no equity.
Such commands are echoes of the 1990s, when Fannie and Freddie tried to
balance dueling mandates that required them to make a profit for their
shareholders and to serve a public mission of increasing homeownership.
In service of both shareholders and what they asserted was the public
good, they borrowed extensively in order to buy and hold mortgages in
their own investment portfolios. They purchased billions of dollars in
risky subprime mortgages.
As a consequence of having a public mandate, they also had a credit
line with the Treasury and their risky business strategies were viewed
by the markets as being guaranteed by the government.
To satisfy both mandates, the companies also faced fewer restrictions
and were allowed to take on more debt than other financial companies.
But when buyers began defaulting and home prices plunged, the companies
nearly collapsed and last fall were placed under government
conservatorship. Mr. Elliott said that some banks participating in the
bailout program are now in the same conflicting position that Fannie
Mae and Freddie Mac were in.
He and other experts also worry that, by relying on weak banks to carry
out the administration’s or Congress’s policies, officials are not
biting the bullet and shutting down weak banks that may be insolvent.
At the height of the savings and loan crisis in the 1980s and 1990s,
Congress and regulators adopted new rules known as “prompt corrective
action” that required the government to quickly close weak financial
institutions if they could not raise money to absorb mounting losses.
The rules were a response to a consensus that keeping weak institutions
open longer, under an earlier practice known as forbearance, damaged
healthy banks competing with the government-subsidized ones and
ultimately destabilized the banking system. By shutting weakened
institutions before their losses grew, prompt corrective action was
also seen as less costly to taxpayers and the deposit insurance fund.
Administration officials say that some of the banks at issue today are
simply too large to be seized by the government, making comparisons to
the savings and loan crisis less meaningful.
Moreover, they say, the public outrage over the growing cost of the
bailout makes it politically imperative that they exert greater control
over the way the money is being spent.
But by keeping weak banks operating, the markets continue to sink and
taxpayer costs are mounting, outside experts said. “The current policy
is likely to result in weaker banks,” Mr. Seidman said. “And keeping
insolvent banks in operation does not benefit the system.”
Some community bankers, whose institutions are stronger than the large
money center banks, agree.
C. R. Cloutier, the president of MidSouth Bank of Lafayette, La., and a
survivor of the savings and loan debacle, said that his institution
received $20 million from the rescue fund because he and his board
believed it was patriotic and would help them offer loans during a
recession.
But faced with what he says is an unwarranted stigma of participating
in the program, as well as the new restrictions on banks taking the
money, he is now considering whether to return the money, as other
institutions have sought to do.
“Two things you learn in the banking business,” Mr. Cloutier said. “The
first is, concentration is bad. We now have 64 percent of deposits in
eight institutions. The second rule is, your first loss is your best
loss. Get it over with. Don’t pump water in a dead fish.”
Op-Ed Columnist
Obama’s Ball and Chain
NYTIMES
By THOMAS L. FRIEDMAN
March 4, 2009
Two signs of the times: First, a banker friend remarked to me
that you know your bank is in trouble when its share price is less than
the cost of taking money out of one of its A.T.M.’s.
Second, go to Google and type in these four letters: m-e-r-e. Before
you go any further, Google will list the possible things or people
you’re searching for, and at the top of that list will be the name
“Meredith Whitney.” She comes up before “merengue” and “Meredith
Viera.” Who is Meredith Whitney? She is a banking analyst who became
famous for declaring last year, long before others, that Citigroup was
up to its neck in bad mortgages and would not likely survive in its
present form.
Do you know how many people have to be searching for you if all you
have to do is put in four letters and your name pops up first? A lot!
But I am not surprised. Our banking system is in so much trouble that
everyone is searching for the silver-bullet solution — and the person
who can describe it. Alas, there is no silver bullet.
I’m worried. We’ve just elected a talented young president with many
good instincts about how to propel our country forward, extend health
care to more people, make our tax code fairer and launch a green
industrial revolution. But do you know what I fear? I fear that his
whole first term could be eaten by Citigroup, A.I.G., Bank of America,
Merrill Lynch, and the whole housing/subprime credit bubble we inflated
these past 20 years.
I hope my fears are exaggerated. But ask yourself this: Why couldn’t
former Treasury Secretary Hank Paulson solve this problem? And why does
it seem as though his successor, Tim Geithner, won’t even look us in
the eye and spell out his strategy? Is it because they don’t get it?
No. It is because they know — like Roy Scheider in the movie “Jaws,”
when he first saw the great white shark — that “we’re gonna need a
bigger boat,” and they’re too afraid to tell us just how big.
This problem is more complicated than anything you can imagine. We are
coming off a 20-year credit binge. As a country, too many of us stopped
making money by making “stuff” and started making money from money —
consumers making money out of rising home prices and using the profits
to buy flat-screen TVs from China on their credit cards, and bankers
making money by creating complex securities and leverage so more and
more consumers could get in on the credit game.
When this huge bubble exploded, it created a crater so deep that we
can’t see the bottom — because that hole is the product of two
inter-related excesses. Some banks are in trouble because of the
subprime mortgage securities they have on their books that are now
worth only 20 cents on the dollar because of widespread defaults.
And many other banks — the ones that took on the most leverage like
Citigroup and Bank of America — are in trouble because of all the loans
on their books that can’t now be repaid, such as auto loans, commercial
real estate loans, credit card loans, corporate loans. Most of the big
banks have not marked down these loans yet because if they did, they
would be insolvent. The subprime toxic securities will take billions to
bail out; the loans could take trillions.
Climbing out of such a deep crater is going to be tricky. Any big step
we try to take could trigger other problems — the full dimensions of
which we don’t understand. We need to create a “bad bank” to buy and
hold the toxic mortgage assets or have the government buy the first
batch and create a market, but that would likely involve bailing out
banks that have behaved very recklessly. It is a price I’d pay to save
the system, but even doing that is very complicated. Buying securitized
toxic mortgages is not like buying a yacht off the books of a bankrupt
savings-and-loan.
Nationalizing Citigroup may sound good on paper, but putting Citigroup
into receivership could trigger all kinds of defaults on derivative
contracts that it has written. It may be inevitable, but we’d better
understand all of Citigroup’s counterparty risks so we don’t
inadvertently set off more falling dominos, à la Lehman Brothers.
At the moment, the Obama team seems to prefer a gradual attempt to
nurse these sick banks back to health with repeated blood transfusions
— $30 billion more to A.I.G. today, another $40 billion to Citigroup
tomorrow. And Lord only knows how much Bank of America will need after
its weekend fling with Merrill Lynch has left it with Toxic Asset
Disease. The Federal Reserve and the Treasury seem to be trying to give
these banks enough capital to survive the next two years, as they
de-leverage and de-risk their portfolios — and then hope for the best.
If they are right, the president (and the rest of us) will just have a
wrenching first year and then be able to gradually put the banking
crisis behind him.
For now, though, the banks still threaten to consume the Obama
presidency. Indeed, I’m sorry to report that if you just type two
letters into Google — “b-a” — the first thing that comes up is not
Barack Obama. It’s “Bank of America.” Barack Obama is third
Bernanke: Economy
Suffering 'Severe Contraction'
NYTIMES
By THE ASSOCIATED PRESS
Filed at 5:32 p.m. ET
February 24, 2009
WASHINGTON (AP) -- The economy is suffering a ''severe contraction,''
Federal Reserve Chairman Ben Bernanke told Congress on Tuesday. But he
planted a glimmer of hope that the recession might end this year if the
government managed to prop up the shaky banking system, and Wall Street
rallied.
Bernanke said the economy is likely to keep shrinking in the first six
months of this year after posting its worst slide in a quarter-century
at the end of 2008.
Bernanke said he hoped the recession will end this year, but that there
were significant risks to that forecast. Any economic turnaround will
hinge on the success of the Fed and the Obama administration in getting
credit and financial markets to operate more normally again.
''Only if that is the case, in my view there is a reasonable prospect
that the current recession will end in 2009 and that 2010 will be a
year of recovery,'' Bernanke told the Senate Banking Committee.
That -- along with the Fed chief's remarks that regulators don't intend
to nationalize banks -- was enough to buoy Wall Street. The Dow Jones
industrials added more than 236 points and the Standard & Poor's
500 index also rose, a day after both hit their lowest levels since
1997.
Among the risks to any recovery are if economic and financial troubles
in other countries turn out to be worse than anticipated, which would
hurt U.S. exports and further aggravate already fragile financial
conditions in the United States.
Another concern is that the Fed and other Washington policymakers won't
be able to break a vicious cycle where disappearing jobs, tanking home
values and shrinking nest eggs are forcing consumers to cut back
sharply, worsening the economy's tailspin. In turn, battered companies
lay off more people and cut back in other ways.
''To break that adverse feedback loop, it is essential that we continue
to complement fiscal stimulus with strong government action to
stabilize financial institutions and financial markets,'' Bernanke said.
In an effort to revive the economy, the Fed has slashed a key interest
rate to an all-time low and Obama recently signed a $787 billion
stimulus package of increased government spending and tax cuts.
In addition, Treasury Secretary Timothy Geithner has revamped a
controversial $700 billion bank bailout program to include steps to
partner with the private sector to buy rotten assets held by banks as
well as expand government ownership stakes in them -- all with the
hopes of freeing up lending. The Obama administration also will spend
$75 billion to stem home foreclosures.
Those and other bold steps -- including a soon-to-be-operational
program to boost the availability of consumer loans -- for autos,
education, credit cards and other things -- should over time provide
relief and promote an economic recovery, Bernanke said. That program is
''about to open,'' he told lawmakers, without providing an exact date.
Sen. Christopher Dodd, D-Conn., chairman of the panel, and other
senators suggested expanding that program overseen by the Fed and
Treasury, to help squeezed local governments. Radical actions by
the
government since last fall when the financial crisis intensified have
relieved some credit and financial strains, Bernanke said.
''Nevertheless, despite these favorable developments, significant
stresses persist in many markets,'' he said.
Although Bernanke didn't mention any financial institutions by name,
Citigroup Inc. -- the industry's troubled titan -- apparently is in
line for additional government help.
Sen. Bob Corker, R-Tenn., worried the government was ''creeping''
toward bank nationalization through a new option announced by the
administration Monday. The new plan allows the government to greatly
expand its ownership in a bank by converting preferred shares into
common shares.
''It is not nationalization,'' Bernanke said.
Looking ahead, Corker was skeptical about the effectiveness of
bank-rescue efforts saying he saw a continuation of ''sort of dead-man
walking, zombie bank.''
Critics worry the Fed's actions have the potential to put ever-more
taxpayers' dollars at risk and encourage ''moral hazard,'' where
companies feel more comfortable making high-stakes gambles because the
government will rescue them.
The public's anger over the government's bailout efforts is
understandable, the Fed chief said. ''A lot of this goes against
American values of self reliance and responsibility,'' Bernanke said.
Stress tests on the nation's biggest banks, which regulators will start
conducting Wednesday, are designed to give regulators a better idea of
how much additional capital and the type needed for banks to lend if
the crisis were to grow worse than anticipated, Bernanke said.
Regulators will assess banks' capital needs over a two-year horizon.
''The outcome of the stress test is not going to be fail or pass,'' he
said, stressing that the goal is to return banks to health -- not take
them over.
''We've always worked with banks to make sure that they're healthy and
stable, and we're going to work with them. I don't see any reason to
destroy the franchise value or to create the huge legal uncertainties
of trying to formally nationalize the bank when it just isn't
necessary,'' he said.
Separately Tuesday, the Fed issued a guidance letter that said banks
need to be careful when they decide to pay dividends to shareholders
that could raise ''safety and soundness concerns.''
The new guidance was intended for all banks the Fed regulates but was
particularly aimed at banks ''experiencing financial difficulties
and/or receiving public funds.'' The letter said the bank holding
company should inform the Fed if it is planning to pay a dividend that
exceeds earnings for a given quarter or that could effect's the bank's
capital position in an adverse way.
All the negative forces have battered consumers and businesses. ''The
economy is undergoing a severe contraction,'' Bernanke said.
The nation's unemployment rate is now at 7.6 percent, the highest in
more than 16 years, and it will climb higher -- even in the best-case
scenario that an economic recovery happens next year. The Fed
expects
the jobless rate to rise to close to 9 percent this year, and probably
remain above normal levels of around 5 percent into 2011. The
recession, which started in December 2007, already has killed a net
total of 3.6 million jobs.
Fed policymakers think that a ''full recovery'' of the economy is
likely to take more than two or three years, Bernanke said.
To brace the economy, many analysts predict the Fed will leave its key
rate at record lows through the rest of this year.
Debt
burden tests global investments
Washington Times
Patrice Hill
Thursday, January 15, 2009
President-elect Barack Obama will be testing the limits
of the global markets' ability to absorb U.S. government debt by piling
an $800 billion stimulus plan on top of more than $1 trillion in new
obligations already scheduled this year.
Wall Street analysts worry that China, Japan and other nations that
readily helped finance U.S. debt in the past won't have the willingness
or wherewithal to buy what will amount to three to four times the
previous yearly record of Treasury-issued debt of $455 billion. Some
analysts predict a calamity such as the failure of a U.S. bond auction,
which could drive interest rates sharply higher just as the economy is
struggling to recover.
Others are less worried, but evidence is mounting that the debt burden
could rise to unmanageable levels. The mere mention by Mr. Obama in a
news conference last week that the U.S. could run deficits exceeding $1
trillion for several years sent a shudder through the Treasury bond
market, where those deficits must be financed, sending interest rates
temporarily higher.
A bond auction failed last week in Germany, which has comparatively
little debt to finance, raising concerns about whether the United
States faces similar problems on a much larger scale. Wall Street
rating agencies Moody's and Standard & Poor's Corp. said they are
closely watching the surge in debt and the willingness of foreign
investors to finance it.
"Fiscal risk has noticeably increased," said S&P analyst Nikola G.
Swann, while "the country's exposure to a change in international
investors' willingness to add to their portfolio of U.S. dollar assets
grows with each year."
On Thursday, the Senate Budget Committee will hold a hearing on the
so-called debt bubble and is expected to ask a panel of economists
about the ability of world markets to finance the growing U.S.
obligations.
"In a world where you are running a deficit profile of staggering
proportions, it all comes down to the confidence of foreign investors,"
said Alex Jurshevski, a strategist at Recovery Partners who expects the
Treasury to borrow as much as $2 trillion more this fiscal year to
finance its bank bailout program as well as budget deficits that are
burgeoning as a result of the recession and the massive stimulus Mr.
Obama is planning.
A flight to safe-haven Treasury bills since the fall has made it easy
thus far for the nation to finance its increased debts, but analysts
say that trend is abnormal and should not be taken for granted.
Moreover, when as much as $2 trillion in new debt in the next year is
combined with $4.3 trillion of outstanding debt that is coming due and
must be rolled over, Treasury will have to find buyers for $6.3
trillion of debt, Mr. Jurshevski said.
"This is unparalleled," and will test the "entente cordiale" the United
States has with China, Japan and other Asian and oil-producing nations
that in the past have purchased about half of outstanding U.S. debt in
a tacit exchange for U.S. consumers buying their products, Mr.
Jurshevski said. The unstated agreement has enabled the U.S. to run
gigantic budget and trade deficits with little consequence because the
financing has been readily available.
China, the largest holder of U.S. debt, has invested about $1 trillion
of its foreign reserves in U.S. bonds, but the yearly addition to its
reserves from export earnings is expected to drop to $177 billion this
year from a high of $415 billion last year. That leaves the Asian giant
with much less money to invest at a time when new U.S. debt is
potentially quadrupling. With its economy deteriorating fast, China
also has a massive stimulus program as well as social welfare and
unemployment programs to finance at home.
Oil-exporting states like Russia and Qatar that were brimming with
surplus revenues as oil hit a record high of $147 a barrel in July also
have seen their economic fortunes and revenues nose-dive in the past
six months as the price of oil fell to as low as $30 per barrel.
As the financial reversal set in during the second half of last year,
China, the oil states and other foreign investors started selling off
some of their U.S. holdings of Fannie Mae's and other mortgage and
corporate bonds, in a move that helped precipitate the September U.S.
financial crash. The Treasury temporarily benefited as those investors
- along with investors fleeing stricken stock and commodity markets -
parked their money in T-bills and other short-term debt instruments
that are considered the equivalent of "cash" on Wall Street.
But now that the surplus nations are also in severe economic downturns
with critical needs to fund at home, Mr. Jurshevski questions whether
they will be able or willing to take on exponentially more U.S. debt -
particularly at the near-zero yields that Treasury instruments are
offering. He thinks that some attempted auctions of U.S. debt will fail
to find buyers, and that will force up interest rates across the board
as the Treasury ups the ante to attract investors.
Ian Campbell, an analyst with Breakingviews.com, said the failure of a
German 10-year bond auction on Jan. 7 should serve as a warning to the
United States and Britain, which also is heaping unprecedented amounts
of debt into the markets in an effort to revive its economy and banking
system. Germany was unable to find buyers for one-third of its bond
issue, even though its budget is close to balance.
"The U.K. and U.S. have deficit-spent, consumed and imported their way
into trouble, and now are planning an ill-afforded government spending
and tax cut binge to get them out of it," driving their public debt to
post-World War II highs well over 8 percent of economic output, Mr.
Campbell said. "Are investors ready to take it?"
Moody's Investors Service this week said the difficulty Germany and a
few other European governments have had issuing bonds shows that heavy
borrowing plans on both sides of the Atlantic will test the limits of
the debt markets.
"Issuance of government debt and government-guaranteed debt at all
levels of the rating scale is rapidly swelling," said Arnaud Mares,
Moody's senior vice president. "The proposition that the highest-rated
governments are totally immune to liquidity risk is being put to the
test."
After the German auction failure, Moody's suggested that governments
may have to offer a mix of more short-term debt versus long-term debt
to satisfy investors' appetites for instruments where they can put
their money for a few months while they wait out the turmoil in global
stock markets. But Mr. Jurshevski said the skewing of fast-rising
government debt toward short-term bills that must be rolled over every
few months poses dangers in itself.
The only alternative for the U.S. if investors balk at buying Treasury
bonds, analysts say, may be for the Federal Reserve to buy the debt - a
prospect recently raised by Fed Chairman Ben S. Bernanke. The central
bank would finance its purchases of U.S. debt by printing money. But
that would scare off foreign investors even more, analysts say, as the
flood of dollars into the economy and markets raises the risk of
setting off inflation once the economy recovers.
Some economists say that Americans will start saving more and
purchasing more of their own bonds, enabling the U.S. to finance its
own deficits after depending heavily on foreigners for decades. The
paltry U.S. savings rate recently has ticked up from near zero to about
2.8 percent.
Richard Berner, chief economist at Morgan Stanley, said he expects the
savings rate to surge to 6 percent this year, but ironically that would
occur only as a result of Americans saving a substantial share of the
$300 billion tax cut Mr. Obama is planning.
Peter Schiff, president of Euro Pacific Capital, said he expects the
Fed to absorb all the debt, creating a big inflation problem for the
U.S. in the long run. The mere suggestion by Mr. Bernanke that the Fed
will buy U.S. debt has set off a speculative frenzy, with investors
snapping up Treasuries and hoping to sell them to the Fed in the
future, he said.
Mr. Schiff faulted Mr. Obama for not telling the public of the dangers
of so much borrowing, while touting the benefits of the stimulus
legislation.
"The truth is that the only way out of this mess is less government,
more savings and increased production. Obama's plan will prevent all
three," he said. "He intends to force-feed more consumer spending and
debt into an economy already suffering from an excess of both."
Op-Ed Contributors
The End of the Financial World as We Know It
NYTIMES
By MICHAEL LEWIS and DAVID EINHORN
January 4, 2009
AMERICANS enter the New Year in a strange new role: financial lunatics.
We’ve been viewed by the wider world with mistrust and suspicion on
other matters, but on the subject of money even our harshest critics
have been inclined to believe that we knew what we were doing. They
watched our investment bankers and emulated them: for a long time now
half the planet’s college graduates seemed to want nothing more out of
life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired
not merely a national but a global crisis of confidence. Good God, the
world seems to be saying, if they don’t know what they are doing with
money, who does?
Incredibly, intelligent people the world over remain willing to lend us
money and even listen to our advice; they appear not to have realized
the full extent of our madness. We have at least a brief chance to cure
ourselves. But first we need to ask: of what? Read the two article
op-ed here.
AUTHORS:
Michael Lewis, a contributing editor
at Vanity Fair and the author of “Liar’s Poker,” is writing a book
about the collapse of Wall Street. David Einhorn is the president of
Greenlight Capital, a hedge fund, and the author of “Fooling Some of
the People All of the Time.” Investment accounts managed by Greenlight
may have a position (long or short) in the securities discussed in this
article.
The Reckoning: By
Saying Yes, WaMu Built Empire on Shaky Loans
NYTIMES
By PETER S. GOODMAN and GRETCHEN MORGENSON
December 28, 2008
“We hope to do to this industry what Wal-Mart did to
theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home
Depot did to their industry. And I think if we’ve done our job, five
years from now you’re not going to call us a bank.”
— Kerry K. Killinger, chief executive of Washington Mutual, 2003
SAN DIEGO — As a supervisor at a Washington Mutual mortgage processing
center, John D. Parsons was accustomed to seeing baby sitters claiming
salaries worthy of college presidents, and schoolteachers with incomes
rivaling stockbrokers’. He rarely questioned them. A real estate frenzy
was under way and WaMu, as his bank was known, was all about saying yes.
Yet even by WaMu’s relaxed standards, one mortgage four years ago
raised eyebrows. The borrower was claiming a six-figure income and an
unusual profession: mariachi singer. Mr. Parsons could not verify
the singer’s income, so he had him photographed in front of his home
dressed in his mariachi outfit. The photo went into a WaMu file.
Approved.
“I’d lie if I said every piece of documentation was properly signed and
dated,” said Mr. Parsons, speaking through wire-reinforced glass at a
California prison near here, where he is serving 16 months for theft
after his fourth arrest — all involving drugs.
While Mr. Parsons, whose incarceration is not related to his work for
WaMu, oversaw a team screening mortgage applications, he was snorting
methamphetamine daily, he said.
“In our world, it was tolerated,” said Sherri Zaback, who worked for
Mr. Parsons and recalls seeing drug paraphernalia on his desk.
“Everybody said, ‘He gets the job done...’ ” Full story here.
Bernanke’s How-To on Rate Increase
Lacks a When
NYTIMES
By SEWELL CHAN
February 11, 2010
WASHINGTON — “At some point.” “At the appropriate time.” “When the time
comes.”
On Wednesday, the Federal Reserve’s chairman, Ben S. Bernanke, outlined
a strategy — but not a timetable — for scaling back the extraordinary
measures it began taking in 2007 to prop up the economy as financial
markets teetered on collapse.
The Federal Reserve has eased borrowing by lowering short-term interest
rates to nearly zero and built up a $2.2 trillion balance sheet by
scooping up assets like mortgage-backed securities and vast sums of
Treasury bonds and notes.
Eventually, to avoid inflation, both actions will have to be reined in.
But Mr. Bernanke, in a 10-page statement, provided few hints as to how
long that period will be.
“Although at present the U.S. economy continues to require the support
of highly accommodative monetary policies, at some point the Federal
Reserve will need to tighten financial conditions by raising short-term
interest rates and reducing the quantity of bank reserves outstanding,”
he wrote. “We have spent considerable effort in developing the tools we
will need to remove policy accommodation, and we are fully confident
that at the appropriate time we will be able to do so effectively.”
However, Mr. Bernanke did provide new details of a major concern: how,
as the recovery proceeds, to gradually shrink the balance sheet, which
along with a vast array of assets also includes $1.1 trillion that
banks are holding with the Fed.
Mr. Bernanke suggested that a new policy tool — the interest rate on
excess reserves, which the Fed began paying in October 2008 — would be
a vital part of the Fed’s strategy.
Increasing that interest rate, he said, will have the effect of pushing
up other short-term interest rates, including the benchmark fed funds
rate — the rate at which banks lend to each overnight.
It is even possible, Mr. Bernanke said, that the Fed “could for a time
use the interest rate paid on reserves, in combination with targets for
reserve quantities,” to communicate its policy stance to the markets.
Since 1994, the fed funds rate has been the much-watched centerpiece of
statements by the Federal Open Market Committee, the Fed’s crucial
policy-making arm.
For days, economists have been trying to forecast what Mr. Bernanke
would say about the sequence of steps and the combination of tools the
Fed will use to tighten credit. On that subject, Mr. Bernanke offered
only hints of his thinking.
“One possible sequence would involve the Federal Reserve continuing to
test its tools for draining reserves on a limited basis, in order to
further ensure preparedness and to give market participants a period of
time to become familiar with their operation,” he wrote. “As the time
for the removal of policy accommodation draws near, those operations
could be scaled up to drain more significant volumes of reserve
balances to provide tighter control over short-term interest rates. The
actual firming of policy would then be implemented through an increase
in the interest rate paid on reserves.”
But Mr. Bernanke suggested that “if economic and financial developments
were to require a more rapid exit from the current highly accommodative
policy” — that is, if fears emerge about inflation — the Fed “could
increase the interest rate paid on reserves at about the same time it
commences significant draining operations.”
Along with raising the interest rate on reserves, Mr. Bernanke
discussed three other options for draining reserves. The first involves
reverse repurchase agreements, in which the Fed would sell securities
from its portfolio with an agreement to repurchase them at a later date.
The second involves term deposits — similar to certificates of deposit
— to banks. That would convert part of the banks’ reserves into
deposits that could not be used for short-term liquidity needs and
would not be counted as reserves.
A third tool involves redeeming or selling securities. That strategy
could carry risk, as the Fed’s large portfolio of mortgage-backed
securities is helping to prop up the housing market and keep
mortgage-interest rates low.
Mr. Bernanke did note that the balance sheet would shrink a bit on its
own, over time, as assets like mortgage-backed securities and debt
guaranteed by Fannie Mae and Freddie Mac are prepaid or mature. “In the
long run, the Federal Reserve anticipates that its balance sheet will
shrink toward more historically normal levels and that most or all of
its security holdings will be Treasury securities,” he wrote.
Mr. Bernanke also reviewed the controversial lending assistance it
extended to “help avoid the disorderly failure” of Bear Stearns, which
was sold to JPMorgan Chase, and the American International Group, which
was bailed out by the government. Mr. Bernanke said that the credit
extended under those arrangements totaled about $116 billion, or about
5 percent of the balance sheet.
“These loans were made with great reluctance under extreme conditions
and in the absence of an appropriate alternative legal framework,” he
said, emphasizing that he did not believe that the loans would result
in any losses to taxpayers.
As part of its special lending programs to inject liquidity into the
market, the Fed modified its discount window — its traditional program
for direct lending to banks — to make terms more generous and to make
nonbanks eligible for borrowing. That effort is winding down, and Mr.
Bernanke said that “before long, we expect to consider a modest
increase in the spread” between the discount rate — the rate at which
the Fed directly lends to banks — and the fed funds rate. He emphasized
the change “should not be interpreted as signaling any change in the
outlook for monetary policy.”
Mr. Benanke’s statement was prepared for a House committee hearing that
had been scheduled for Wednesday but was postponed because of snow. Mr.
Bernanke decided to release the statement anyway.
Also on Wednesday, the president of the Federal Reserve Bank of Dallas,
Richard W. Fisher, said in a speech that Fed officials had been
“constantly discussing internally the ways and means to shrink our
balance sheet back to historical norms,” trying both to minimize
disruptions to the credit market while avoiding inflationary pressures.
Mr. Fisher focused on the federal deficit, saying that the government’s
borrowing relied on foreign savings and the instability in countries
like Greece. “We cannot count forever on the largess or the misfortune
of others to mask our own imbalances here at home — for fiscal
profligacy in Washington today hinders our ability to address fiscal
challenges tomorrow,” he said.
Mr. Fisher echoed fears expressed by Mr. Bernanke over a proposal in
Congress that would subject the central bank’s monetary policy to
audits by the Government Accountability Office, a move that the Fed
believes would jeopardize its independence.
“As bad as the situation is, I know one thing that would make it worse,
and that is if the Congress took the easy way out by turning to the Fed
to simply print our legislators’ way out of their misery, devaluing the
debt they have incurred through their spendthrift ways,” Mr. Fisher
warned.
Greenspan: U.S. recovery "extremely
unbalanced"
YAHOO
By David Lawder
Feb. 23, 2010
WASHINGTON (Reuters) – Former Federal Reserve Chairman Alan Greenspan
said on Tuesday the U.S. economic recovery was "extremely unbalanced,"
driven largely by high earners benefiting from recovering stock markets
and large corporations.
Small businesses and the jobless are still suffering from the aftermath
of a credit crunch that was "by far the greatest financial crisis,
globally, ever" -- including the 1930s Great Depression, said Greenspan
in an address to a Credit Union National Association conference.
"It's really an extraordinarily unbalanced system because we're dealing
with small businesses who are doing badly, small banks in trouble, and
of course there is an extraordinarily large proportion of the
unemployed in this country who have been out of work for more than six
months and many more than a year," said Greenspan, who headed the Fed
from 1987 to 2006.
With both housing starts and auto sales "dead in the water," he said he
thought it would be difficult to make the case that the economy is
poised for a strong rebound.
Greenspan did see signs pointing toward a modest recovery in job
creation, saying that staffing levels at U.S. firms, which were deeply
cut, remain below what is sustainable in the long run. But unemployment
rate could still remain stubbornly high.
"The reason why the unemployment rate is going to be sticky is that as
soon as employment starts picking up, a lot of the people who have not
been seeking jobs are going to come back into the labor force, and they
will keep the official unemployment rate in the 9 percent area,
something like that," Greenspan said.
He also said it was important for U.S. policy makers to prevent
perceived expectations of inflation that could push up yields on
long-term U.S. Treasury securities, which would raise mortgage interest
rates and prevent a recovery in the housing market.
The 10-year Treasury yield is the "one statistic that I watch every
morning and every afternoon," he said.
Mr.
"Irrational Exuberance" himself...
Greenspan says Fed balance sheet an
inflation risk
YAHOO
October 2, 2009
WASHINGTON (Reuters) – Former Federal Reserve Chairman Alan Greenspan
said on Friday that the Fed risks igniting a burst of inflation if it
does not withdraw its extensive support for the economy at the right
moment.
"You cannot afford to get behind the curve on reining in this
extraordinary amount of liquidity because that will create an enormous
inflation down the road," Greenspan said at a forum hosted by The
Atlantic magazine, the Aspen Institute and the Newseum.
In its battle against the worst financial crisis in 70 years, the Fed
has chopped interest rates to zero and flooded the financial system
with hundreds of billions of dollars in the process. In so doing, it
has more than doubled the size of its balance sheet to over $2 trillion.
The Fed has said that with high unemployment and a record level of
factory idleness, none of the pressures that would ignite inflation is
on the horizon. A government report on Friday that showed a
weaker-than-expected job market in September is likely to provide
additional support for that view.
Greenspan said the economy is "undergoing a disinflationary process,"
and stressed that the Fed faces no urgent need at the moment to unwind
its monetary stimulus.
Still, his comments echo concerns raised by some policymakers who worry
that delays in shrinking the Fed's bloated balance sheet will tempt
fate and recommend action sooner rather than later.
"It's critically important the Fed's doubling of its balance sheet be
reversed," Greenspan said. "If you allow it to sit and fester, it would
create a serious problem.
Greenspan chaired the Fed from 1987 until his retirement in 2006.
Hailed by many as a sage during his Fed tenure for a long period of
prosperity, his legacy has been called into question over the long
period of ultra-low interest rates and the Fed's hands-off approach to
overseeing the financial industry before the global economic crisis.
NY Labor Union Chief to Chair New York Fed
NYTIMES
By THE ASSOCIATED PRESS
August 24, 2009; Filed at 1:42 p.m. ET
WASHINGTON (AP) -- The Federal Reserve Bank of New York has named a top
state labor union official its chairman, the bank announced Monday.
Denis M. Hughes, president of the New York State AFL-CIO, has been
deputy chairman since January 2007. He became acting chairman in May
after the surprise resignation of Stephen Friedman. News reports had
raised questions about Friedman's ties to Goldman Sachs Group Inc.
Hughes, 59, has been a director of the New York Fed since January 2004.
The Fed's Board of Governors appointed him chairman for the remainder
of this year.
The board also designated Lee Bollinger, president of Columbia
University, as vice chairman of the New York Fed for the remainder of
2009. Bollinger, 63, has been a director since January 2007, and was
reappointed for a three-year term beginning Jan. 1, 2010.
On
Washington: U.S. Budget Is
Scrutinized by a Big Creditor
NYTIMES
By DAVID E. SANGER
July 29, 2009
No sooner had President Obama greeted nearly 200 of the bankers,
bureaucrats and policymakers who could make or break his economic plans
on Monday than they started grilling his economic team with the hardest
questions about his economic strategy.
How long are these huge deficits sustainable, they wanted to know. How
long do you keep stimulating the economy, and when do you break for the
exits? If the dollar nosedives compared other major currencies, what’s
the administration’s Plan B?
The questions were mostly asked in Chinese — by a delegation from
Beijing that, diplomatic niceties aside, has come to check in on the
investment of more than $1.5 trillion that China has made in United
States government-issued securities.
“We are concerned about the security of our financial assets,” China’s
assistant finance minister, Zhu Guangyao, said with uncharacteristic
bluntness during a briefing for reporters covering the “U.S.-China
Strategic and Economic Dialogue” on Monday.
It was a comment that underscored how much the global financial crisis
has changed the subtle balance of power in meetings of “the G-2,” the
shorthand now used to describe sessions between the world’s largest
economy and its fastest-rising economic power. Gone, probably forever,
are the days when American delegations would show up in Beijing with
advice about how the Chinese could become a “responsible stakeholder”
in the world — the phrase coined by the Bush administration. The
demands that the Chinese let their currency appreciate, clean up their
banks or get rid of the subsidies for state-owned enterprises have been
toned down.
You do not talk to your biggest creditor that way — especially when you
have a record-sized loan application pending.
Throughout the two-day conference, which ends Tuesday, the subtext has
been that Mr. Obama must persuade more than just Blue Dog Democrats,
moderate Republicans and skeptical economists that he has a plausible
long-term plan to bring down a record-breaking federal deficit. He also
has to convince the occupants of the Great Hall of the People, whom he
needed to show up at this week’s $200 billion Treasury auction, and the
many auctions that will follow.
They will show up — but the lingering question for the next few years
is how often, and how enthusiastically they will bid.
There is little real danger, despite the periodic warnings from
cable-television doomsayers, that the Chinese will sell off their huge
holdings in American debt. As one senior Chinese official involved in
the country’s investment strategy put it several weeks ago, “As the
biggest holder of Treasuries, we would suffer the most from starting a
panic.” The euro and the yen do not seem especially attractive —
China’s most expensive import is oil, and oil is still priced in
dollars.
But domestic pressure is growing on the Chinese government to proceed
with care. One of the first big investments by China’s state-run
sovereign wealth fund was a $3 billon stake in the Blackstone Group;
when it went sour two years ago, the Chinese press printed angry
screeds about how the government had gambled and lost the country’s
assets.
When Fannie Mae went into freefall last year, Chinese officials were on
the phone to the United States Treasury, demanding an explanation about
how their investment in the mortgage agency’s bonds would be protected.
There were no threats made about the future of Chinese investments in
the United States, but the message was clear. Ultimately, China was
protected when the Bush administration took over control of the housing
lender in September, one of the government’s first steps to try to halt
a broader financial implosion.
Now, with the immediate crisis past, China’s questions have taken a
different turn. The sessions yesterday — attended by the Treasury
secretary, Timothy Geithner; by the chairman of the Federal Reserve,
Ben Bernanke; and by the director of the National Economic Council,
Lawrence H. Summers — were dominated by questions about how quickly the
United States could halt the huge deficit spending.
“I think there were serious questions about what the economic outlook
is, what our plans are for withdrawing some of the stimulus — you know,
when we think the right time to do that is, to bring our fiscal deficit
down to a sustainable level,” the Treasury’s coordinator for China
affairs, David Loevinger, said on Monday evening.
The administration, Mr. Loevinger said, brought along Peter Orszag, the
budget director, to make the case to the Chinese. He “was very clear —
and he was also backed up by Summers on this — that the fiscal stimulus
we’ve put in place was necessary and it’s the right thing and it’s
designed to extend through 2011, but it’s not sustainable at the
current rate and that we’re committed by the end of the Obama
administration to bring it down to a sustainable level,” he said.
Even five years ago, it would have been hard to imagine any
administration trotting out its budget director to justify fiscal
strategy to the Chinese. But as Mr. Obama said, slightly amending a
phrase that once was commonly used to describe the United States-Japan
relationship, the interchange between the America and China now is as
“important as any bilateral relationship in the world.”
Mr. Obama has a big agenda for it — joint action on global warming, on
containing North Korea and Iran, on nudging the Chinese away from their
neuralgic views of Taiwan and Tibet. So far the Chinese have insisted
that they have no plans to use their financial leverage to influence
American policy — just as Mr. Obama has said he will not use the
government’s role as the majority shareholder in General Motors to
dictate what kind of cars the company makes.
Skeptics abound on both pledges. Financial crises can change the
balance of power as surely as wars do — but it may be a few years
before we know how that power is employed.
SEC
Top Examiner Lori Richards to
Leave Agency
By REUTERS
Filed at 3:44 p.m. ET
July 8, 2009
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission's
top inspector and examiner, Lori Richards, plans to leave the agency
August 7, the SEC said on Wednesday.
Richards, director of the compliance inspections and examinations unit
since it was created in 1995, leaves after a controversial year in
which her division and the SEC enforcement unit were accused of failing
to spot Bernard Madoff's $65 billion investment fraud.
The division was created under former Chairman Arthur Levitt and has
been criticized for being unable to respond effectively to the changes
on Wall Street.
Richards has spent more than two decades at the SEC in various
capacities including administrator for the agency's enforcement program
in Los Angeles and senior adviser to Levitt.
Richards, who will be taking some time to explore "new opportunities,"
said she first started talking about leaving in May but wanted to stay
to implement changes to her division.
Those changes include improving the tools available to examiners to
detect fraud and improving surveillance and risk-based targeting, as
well as examiners' training and expertise in fraud detection, among
other things.
When asked whether any of the criticism played a part in her decision
to leave, Richards said: "Absolutely not."
"I have been focused for 14 years on making the exam program as
vigorous as it could possibly be to provide oversight of the securities
industry," Richards said in an interview.
The division's associate director and chief counsel John Walsh will
serve as its acting director when Richards leaves.
Friedman Resigns as Chairman of New
York Fed
NYTIMES
May 7, 2009, 5:57 pm
Stephen Friedman, the chairman of the New York Federal Reserve Board,
abruptly resigned on Thursday, days after questions arose about his
ties to Goldman Sachs.
Mr. Friedman was chairman of the New York Fed at the same time he was a
member of Goldman’s board. He also had a substantial stake in the firm
as the Fed was crafting a solution to keep Wall Street banks afloat.
Denis M. Hughes, deputy chair of the board, will take over as the
interim chairman, the New York Fed said in a statement. (Read Mr.
Friedman’s letter after the jump.)
Because the New York Fed approved a request by Goldman to become a bank
holding company, the chairman’s involvement in Goldman was a violation
of Fed policy, The Wall Street Journal said in an article earlier this
week.
The New York Fed asked for a waiver, which, after about two and a half
months, the Fed granted, the newspaper said. During that time, Mr.
Friedman bought 37,300 more Goldman shares in December, which have
since risen $1.7 million in value.
In his resignation letter, Mr. Friedman said his public service on the
board was being characterized as “improper” despite his compliance with
the rules. “The Federal Reserve System has important work to do and
does not need this distraction,” he said.
“With respect to Steve’s purchases of Goldman shares in December of
2008 and January of 2009, which have been the object of some attention
lately, it is my view that these purchases did not violate any Federal
Reserve statute, rule or policy,” Thomas C. Baxter, the general counsel
of the New York Fed, said in a statement. “I enjoyed working with
Steve, and will miss his contributions in the boardroom.”
Many voices
on these matters

Bernanke’s
Exit Dilemma: Does anyone really believe the Fed will contract
the money supply as the economy starts to show growth?
The Wall Street Journal
By GEORGE MELLOAN
AUGUST 4, 2009, 12:41 A.M. ET
Federal Reserve Chairman Ben Bernanke assured readers of this page
(“The Fed’s Exit Strategy,” July 21) that he has the tools to prevent
the huge reserves he’s pumped into the banks from generating an
inflation that would abort an economic recovery.
But does the Fed have the guts to use those tools? Will it risk censure
from Congress and the Obama administration if it tightens money at the
crucial juncture when inflationary omens accompany a reviving economy?
Mr. Bernanke signaled the probable choice by writing that “economic
conditions are not likely to warrant tighter monetary policy for an
extended period.”
The Fed’s past record of judging when and how to use its tools for
regulating the money supply is not impressive, particularly in times of
economic distress. Its financing of large federal deficits in the
mid-1970s sent inflation up to an annual rate approaching 15% before
Jimmy Carter repented in October 1979 and installed Paul Volcker at the
Fed with orders to kill the monster.
More recently, the Fed’s continued easing of interest rates during the
2003 economic recovery created the credit bubble that collapsed last
year with such devastation.
The Fed’s difficulties in getting money policy right stretch back to
its creation in 1913. In 1930 it starved the banks, creating a string
of failures that worsened the effects of the 1929 stock market crash.
In 1937, it starved them again, contributing to a prolongation of the
Depression that had been manufactured in Washington by the clumsy
taxation and interventionist policies of Herbert Hoover and FDR.
To be sure, the Fed has had its good years. It financed the 20-year
period of low-inflation growth and prosperity that began in 1983 when
the Reagan tax cuts became fully effective.
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melloan
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melloan
melloan
But because of its often self-contradictory double mandate to promote
both monetary stability and full employment—plus the rap it has taken
from economists like Mr. Bernanke for stinginess in the 1930s—it often
overreacts to recessions with excessive generosity. With its
federal-funds interest rate target at near zero, the spigots are now
wide open. And as Mr. Bernanke promises, they will likely remain that
way for an “extended period.”
Quite apart from the question of the Fed’s will, there is another large
issue. Mr. Bernanke’s assurances to the contrary, there can be doubts
about whether his tools are really adequate to deal with the powerful
inflationary pressures the politicians are in the midst of creating in
the form of a mountainous and rising federal deficit.
Mr. Bernanke showed that he is well aware of that danger when, in his
semiannual report to Congress on July 21, he pleaded with that body to
bring the deficit under control. The federal budget deficit is
projected at an incredible $1.8 trillion for the fiscal year ending
Sept. 30, almost half of proposed federal spending. The Treasury’s
financing needs will be even higher than that when you count in the
various “investments” the government has made in auto, housing and
other dubious ventures.
But the day after he issued that plea, President Barack Obama was
pleading with the American people to support his nationalized health
plan. This plan would yet add hundreds of billions more to the deficit.
The Fed has been financing a significant part of the government’s
profligacy, and it is riding a runaway horse. Even if it has the means
to cope with present financing needs, will it be able to do so when,
and if, the economy actually recovers and it has to finance both a
recovery and a spending-crazed government?
Martin Hutchinson, a former merchant banker who blogs as “Prudent
Bear,” wrote in May that the German Weimar Republic was monetizing 50%
of government expenditure when it brought on the ruinous hyperinflation
that destroyed the mark in the early 1920s. The Fed in May 2009 had
monetized 15% of federal expenditures over the preceding six
months—well short of the rate that destroyed the German economy, but
not negligible.
The Treasury (and Congress) has been depending on the Fed’s massive
buying of Treasury bonds to keep the government’s financing costs
within reasonable bounds—as weakening international demand puts
downward pressure on bond prices and upward pressure on the interest
rate the Treasury must pay. The yield on the 10-year Treasury bond is
below where it was a few weeks ago but well above early this year when
investors world-wide were seeking the safety of U.S. Treasurys. Even
massive Fed support hasn’t been enough to prevent slippage in bond
prices this year.
The Fed has more than doubled the size of its balance sheet in the last
year to over $2 trillion. As of July 30, it held $695 billion in
Treasurys, up $216 billion from a year earlier. In addition, it has
added nearly half a trillion of mortgage-backed securities it purchased
to keep Fannie Mae and Freddie Mac, now wards of the government, afloat.
Adjusted reserve balances of member banks exploded in late 2008,
soaring to $950 billion from $100 billion in four months as the Fed has
pumped liquidity into the banking system. They peaked at nearly $1
trillion in May. The reserves provide banks with a shield against runs
but they also are high-octane fuel for bank lending, which means they
can touch off another credit bubble, and the accompanying inflation,
when credit demand picks up again.
In his Journal op-ed, Mr. Bernanke listed ways he can keep this monster
in check. The Fed can pay interest on the bank reserves it holds. This
would lessen the incentive of banks to find private borrowers and keep
some reserves out of the credit stream, damping inflation potential.
But the net effect would be to add still more liquidity to the system,
which would run counter to the longer-term goal of mopping up liquidity.
He said that the Fed could also sell securities to the banks with an
agreement to repurchase them, but these “reverse repos” would only mop
up liquidity temporarily.
The standard way for the Fed to soak up liquidity, mentioned last on
Mr. Bernanke’s list, is to sell Treasurys to the banks. That would draw
down bank reserves and reduce their inflationary potential. Under the
Basel I international banking rules, Treasurys are zero-risk
investments and don’t have to be matched at 8% of their value with
additional capital, as does private lending.
With the huge volume of Treasury financing coming down the road, the
Fed will have plenty of bonds to sell (it already has, in fact). But
the Fed buys Treasurys primarily by creating new money, or in other
words by inflating the money supply. Will it have the nerve or even the
capacity to “sterilize” inflation by reselling the bonds to soak up
bank liquidity? Again, there are those political pressures. Will the
Fed’s admittedly bright money managers be able to strike a balance
between warding off inflation and leaving the banks with sufficient
liquidity to finance an economic recovery?
As to that huge volume of mortgage-backed securities the Fed is now
holding, what is to be done with them? They are “toxic,” which is why
the Fed bought them as a means of keeping Fannie and Freddie solvent.
They are “guaranteed” by Fannie and Freddie, which means they now are
guaranteed by the U.S. Treasury. So they are yet another liability to
add to all the other liabilities being piled on the Treasury. The Fed
already has financed them once; will it have to finance them again when
they come up for redemption?
In short, there are very good reasons to doubt that the Fed can cope
with the political problems of avoiding inflation. The technical
problems don’t look very easy either.
Mr. Melloan is a former deputy editor of the Journal editorial page.
His book, “The Great Money Binge,” will be published in November by
Simon & Schuster.
Copyright 2009 Dow Jones &
Company, Inc. All Rights Reserved
Cash-Strapped States Turn to Furloughs
NYTIMES
By KATHARINE Q. SEELYE
April 24, 2009
Gay marriages were supposed to start in Iowa this Friday. But because
of a crimped state budget, court employees will be on mandatory
furlough that day and the courts will be closed. Gay couples cannot
start filing for their marriage licenses until Monday.
As they try to cope with gaping budget deficits, at least 15 states
from every region — including Alabama and Georgia; California,
Washington and Arizona; and New York, New Hampshire and Massachusetts —
are in various stages of considering or implementing furloughs.
“This may very well be the most widespread use, or consideration of
use, at least since the emergence of the post-World War II economic
boom,” Robert Bruno, professor of labor relations at the University of
Illinois, Chicago, said of furloughs.
But furloughs can be problematic for states in a way they may not be
for a private company, where demand for a product has dropped.
Government services remain in even greater demand in a weak economy.
Furloughs often mean fewer workers handling a larger load. For
instance, there are already signs of disability claims piling up in
seven states.
“The word ‘furlough’ sounds nice and fluffy, like, ‘This isn’t painful,
we aren’t doing layoffs,’ ” said Hetty Rosenstein, director of the
largest state-worker union in New Jersey, where an appeals court last
week upheld a plan to make state workers take two furlough days by June
30, the end of the fiscal year, and 12 more in the next fiscal year.
“But,” Ms. Rosenstein added, “furloughs are fundamentally a cut in pay.
And furloughs are a cut in service. If you don’t have people working,
the work isn’t going to magically get done.”
The longest state furloughs so far appear to be 24 days in Alabama, the
same number proposed in Minnesota.
Private companies, too, are increasingly turning to furloughs as they
try to ride out the recession; a Watson Wyatt survey released this week
found that 17 percent of 141 companies surveyed had imposed furloughs
in April, up from 11 percent in February.
But with state and local governments, furloughs can affect critical
services like police and fire protection, prison guard duty and
hospital care. States and local governments have to select which
workers they furlough, which can undermine the idea that furloughs
spread the pain equally.
For the most part, it is too soon to judge the impact of furloughs on
the delivery of public services, but there are early signs of a ripple
effect.
One stark example has been in the Social Security Administration, a
program paid for by the federal government but administered by state
workers. Officials said earlier this month that in seven states, 2,700
of those workers had been furloughed, further delaying the processing
of tens of thousands of disability claims, which already take an
average of 488 days to resolve.
In California, services in several counties were already curbed due to
layoffs before the state instituted furloughs for the first time in its
history in February, when it ordered 90 percent of its 238,000
employees to take off two days of unpaid leave per month.
Now, at the Orange County Social Services Agency, Herman Martinez, an
eligibility specialist and president of the local unit of the American
Federation of State, County and Municipal Employees, said the agency
cannot keep up with applications for public assistance, which have only
grown in the economic downturn. “It’s a whole can of worms for us to
try to service the most needy and vulnerable clients,” Mr. Martinez
said.
In Iowa, furloughs have delayed the start of gay marriages by only one
business day but they have also reduced the time that the public has
access to the courts. All courts are closed every other Friday through
June, which means clerks are falling behind in their case loads. To
help them make up for lost time, their offices are closed to the public
early on Tuesdays and Thursdays.
“That gives them an opportunity to catch up with paperwork, but it
further limits access of the public to the court,” said Steve Davis, a
spokesman for the state’s Supreme Court.
Furloughs allow companies and agencies to keep valued employees, are
easier and faster to implement than layoffs and are not as
demoralizing, analysts say. Workers often accept them because they are
presented as the only alternative to layoffs, although some unions
resist.
In New Jersey, the state worker unions are angry that they did not have
the chance to negotiate the furlough package, which was imposed
unilaterally, as it was in California.
“Conditions have gotten so hard that employees who would have been less
inclined to accept furloughs have a sense that there’s a permanent
economic restructuring going on, something deeper and more lasting, and
that means employees have fewer options,” said Mr. Bruno, the
labor-relations professor. “The power has shifted to the employer, and
employees are more desperate.” While employees often worry that
furloughs will not actually prevent layoffs, some have been able to
negotiate better job security. In Connecticut, state union leaders have
tentatively agreed to unpaid furloughs as part of a package that would
guarantee no layoffs for two years. In New York, Gov. David A. Paterson
has said that if the state employee unions do not agree to proposed
furloughs and pay cuts, he will lay off some 9,000 of the state’s
200,000 workers.
Utah has found an alternative to furloughs. State workers there have
been on a mandatory four-day work-week since August as a way to cut
energy costs. Salaries have not been cut because offices are open an
hour earlier and close an hour later.
“We’re just repacking how we do the 40 hours,” said Jeff Herring,
Utah’s executive director of human resources. But he said the move had
reduced costs in many ways; overtime payments and absenteeism are down,
for example, and online services have been expanded, which has cut the
waiting time at places like the Department of Motor Vehicles. Employee
morale is up, internal surveys say. But the energy savings has not been
as great as anticipated.
President Obama’s stimulus package could eventually relieve some of the
pressure on state budgets. But for now, states are relying more on
furloughs, though their long-term value is still being assessed.
“Furloughs can save you money and help you avoid layoffs, at least
initially,” said Alan Ehrenhalt, editor of Governing magazine. “But
employees do lose income, services are disrupted, and it turns out you
can’t really close all the things on Friday you thought you could, so
the savings aren’t as great. And you’re not solving any long-term
problem.”
Democrats
Try Trickle-Down Economics: Growing government won't stimulate the real
economy.
Wall Street Journal
By KARL ROVE
Feb. 5, 2009
As a presidential candidate, Barack Obama attacked "trickle
down economics" as "bankrupt" and an "old, discredited" philosophy that
"didn't work." He was wrong. Even worse, though, is that he and
congressional Democrats are embracing a Democratic version of
trickle-down economics that won't work.
It's embodied in the House-passed "stimulus" bill, H.R. 1, whose deeply
flawed assumption is that spending $1 trillion to grow government will
trickle down to help people who lost jobs. The Democrats' spending is
horribly mismatched with industries that have suffered job loss.
Since December 2007, Americans lost 791,000 jobs in manufacturing,
681,000 jobs in professional and business services, 632,000 jobs in
construction, 522,000 jobs in retail, 167,000 jobs in hospitality, and
576,000 jobs in the rest of the service industry. It would be logical
for policy makers to focus on job creation in these sectors.
Instead, Democrats want to spend $88 billion to increase the federal
share of Medicaid. What American will be hired by a small business,
factory, retail shop, hotel, restaurant or service company because of
this spending? The answer is very few.
In H.R. 1, there's $41 billion set aside for school districts, $1.5
billion for university research grants, $2 billion for Energy
Department labs, and $3 billion for the National Science Foundation.
Yet education is one of the few sectors that added jobs last year.
There's also $4 billion for health programs like obesity control and
smoking cessation, $2 billion for the National Institutes of Health,
$462 million for the Centers for Disease Control, and $900 million for
pandemic flu preparations. Health care also added jobs last year.
It is not surprising that the stimulus package is laden with new
spending programs. Congressional appropriators, not job creators, wrote
H.R. 1. Much of it is spending Democrats couldn't get approved in the
normal course of affairs. And it should not shock Americans that
Democratic appropriators would funnel tax dollars to the Association of
Community Organizations for Reform Now, unions and other liberal
special interests. Putting budgets of political allies above the
budgets of struggling families is apparently the new Democratic
trickle-down economics.
Mr. Obama has only his own lack of engagement and leadership to blame.
He outsourced the drafting of the bill to House Appropriations
Committee Chairman David Obey through inaction. He refused to get his
administration's hands dirty in crafting the legislation by laying out
a detailed plan in December. Then saying he looked forward to Congress
passing a bill for him to sign on Inauguration Day was an invitation
for liberal spenders to roll him. They did.
The package's size is disturbing. The federal government's
discretionary, nonsecurity spending was $391 billion in fiscal 2008 and
$393 billion was requested for this fiscal year. H.R. 1 contains $317
billion in additional fiscal 2009 discretionary nonsecurity spending.
If passed, this 81% increase would be history's largest.
Nor will Democrats treat this additional spending as a one-time
expense. They'll simply start next year's budget writing with a new
baseline of $712 billion for the federal government's discretionary
domestic budget, nearly doubling it in just a year. This is only part
of the Democrats' spending damage. In H.R. 1, they also add $308
billion in new "mandatory" spending (for entitlement programs), which
would help produce a 25% increase in 2009, the largest increase in
mandatory spending in more than three decades.
And later...http://www.nytimes.com/2009/02/04/business/04pay.html?scp=1&sq=limit%20on%20salaries&st=cse
Obama Calls Wall Street Bonuses
‘Shameful’
NYTIMES
By SHERYL GAY STOLBERG
January 30, 2009
WASHINGTON — President Obama fired a warning shot at Wall Street on
Thursday, branding bankers “shameful” for giving themselves $18.4
billion in bonuses as the economy was spinning out of control and the
government was spending billions to bail out many of the nation’s most
prominent financial firms.
Speaking from the Oval Office with Treasury Secretary Timothy F.
Geithner by his side, Mr. Obama lashed out at the industry over a
report, compiled by the New York State comptroller, Thomas P. DiNapoli,
which found that over all, financial executives received the same level
of bonuses as they had in 2004, when times were more flush.
It was a pointed and unusual flash of anger — if a premeditated one —
from the president, and it suggested that he intended to use his
platform to take a hard line against excesses in executive compensation.
“That is the height of irresponsibility,” Mr. Obama said angrily. “It
is shameful, and part of what we’re going to need is for folks on Wall
Street who are asking for help to show some restraint and show some
discipline and show some sense of responsibility.
“The American people understand that we’ve got a big hole that we’ve
got to dig ourselves out of, but they don’t like the idea that people
are digging a bigger hole even as they’re being asked to fill it up,”
Mr. Obama said, adding that “there will be time for them to make
profits and there will be time for them to make bonuses. Now is not
that time.”
News of the report, and Mr. Obama’s remarks, came a day after the
president met privately at the White House with business leaders,
including Richard D. Parsons, the new chairman of the board of
Citigroup. This week, Citigroup, which received an infusion of taxpayer
money last year, canceled its plans, at the administration’s urging, to
buy a $50 million business jet.
Mr. Obama did not spare the company in his remarks on Thursday,
although he did not mention Citi by name. “Secretary Geithner already
had to pull back on one institution that had gone forward with a
multimillion-dollar plane it purchased at the same time as they are
receiving TARP money,” he said, using the acronym for the government’s
$700 billion Troubled Assets Relief Program, intended to rescue shaky
financial firms. “We shouldn’t have to do that, because they should
know better.”
Mr. DiNapoli’s report was compiled based on the annual December-January
bonus season, mostly through personal income tax collections. In an
interview published on Thursday, he said it was unclear if banks had
used taxpayer money for bonuses.
“The issue of transparency is a significant one,” Mr. DiNapoli said in
the interview, “and there needs to be an accounting about whether there
was any taxpayer money used to pay bonuses or to pay for corporate jets
or dividends or anything else.”
Earlier Thursday, the White House press secretary, Robert Gibbs, said
Mr. Obama had a one-word reaction to the report: “Outrageous.” He
announced in advance that Mr. Obama would put forth his views in
person, which he did at the end of a meeting with Mr. Geithner.



Earlier
photo, in flusher times, of Rubin and Greenspan...and
in 2009, Greenspan and
Geithner (pictured at right, replace his photo for Rubin) on
evaluation of the situation.
Talking Business...New York and London: Twins in Finance and Folly
NYTIMES
By JOE NOCERA
May 9, 2009
London
I can’t tell you how many times I heard the words “Glass-Steagall” here
this week.
“Should we have a new Glass-Steagall?” asked Liam Halligan, the chief
economist with Prosperity Capital Management, a London-based asset
manager, who also writes a weekly column for The Telegraph. He felt
very strongly that the answer was yes.
“We’ll see a Glass-Steagall-like environment,” predicted Michael
Spencer, the billionaire founder of ICAP, a large interdealer broker
whose headquarters is in the City of London.
“We need to bring back Glass-Steagall,” said Terry Smith, the chief
executive of Tullett Prebon, another big interdealer broker.
Every time I heard the phrase, it caught me up short. Glass-Steagall,
of course, was an American law passed during the Depression to separate
investment banking and commercial banking. It was dismantled 66 years
later, in 1999, because it was viewed by the American political
establishment, starting with Treasury Secretary Robert Rubin, as an
outmoded relic of an earlier age. Glass-Steagall never existed in
Britain.
And it wasn’t just Glass-Steagall that kept coming up in conversations
here. Londoners were conversant with the ins and outs of the stress
tests and President Obama’s recovery plan. They knew that
Representative Barney Frank was busy reining in bonuses. They had
opinions on how Timothy F. Geithner, the Treasury secretary, was doing.
No matter how much I pressed people to talk about how London was
dealing with the financial crisis, they kept turning the conversation
back to America. What kind of regulations were likely to emerge? Was
the American banking system going to shrink? And so on.
All of which served as a useful reminder that, for all the talk in
recent years about whether the City of London was “overtaking” Wall
Street as the world’s financial capital, they have really become one
and the same. All the big financial institutions operate in both places
— with surprisingly little distinction between what the London office
does and what the United States office does. The financial products
unit of the American International Group traded credit-default swaps in
both Wilton, Conn., and London, for instance.
Hedge funds are as large a part of the financial world in the City of
London as they are on Wall Street. Banks in London chased the same
deals, hired the same traders and followed the same business practices
as their American competitors. “The right way of thinking about New
York and London is that they are Siamese twins,” said Martin Wolf, the
economics columnist for The Financial Times. “They were the same
institutions doing the same things with the same set of regulations.”
Which is why it is only natural that Londoners would be closely
tracking America’s response to the crisis — and thinking about whether
old laws like Glass-Steagall should be revived. Because it turns out
that, having hitched its wagon to Wall Street more than a decade ago,
the City of London cannot afford to untether itself. It simply has too
much at stake.
•
I had heard, before coming here, that the mood in London was darker
than it is in New York, but I didn’t really find that to be the case.
Like us, Londoners are starting to wonder, ever so cautiously, whether
the worst is over. People talked about consuming less conspicuously and
saving more. Although plenty of financial executives have lost their
jobs, I also met a man named Michael Tory, who went down with the ship
at Lehman Brothers in London and has now co-founded a new advisory
business, Ondra Partners.
“There has been a profound inversion,” he said. “People have lost faith
in the large firms, and now any start-up is viewed as lower risk.”
Well, maybe. Certainly, he was as optimistic as anyone I’ve met in
finance this year. And there was still a lot of deal-making in the air.
Whereas American anger is mostly reserved for the banking industry, the
British are primarily angry at their politicians. People are
dumbfounded at the risks their banks took, and stunned that some of
them have needed huge government bailouts — unlike with us, bank
failure is almost completely foreign to their experience.
But they also feel the path to ruin was paved by the country’s
regulators. These days, the reputation of the former chancellor of the
Exchequer, Gordon Brown, who presided over the bubble when Tony Blair
was prime minister, is as tattered as that of Alan Greenspan, the
former Federal Reserve chairman. The difference is that Mr. Greenspan
is retired — while Mr. Brown is the current prime minister.
“Since 1997, the City has been a metaphor for New Labor,” said Philip
Augar, author of “Chasing Alpha,” a book that chronicles the events
that led to the financial crisis in London. (Labor took power in 1997.)
At the time, he said, the asset management business was struggling,
mired in a series of scandals, and there was fear in the City that Mr.
Blair’s Labor Party would make things worse. But that didn’t happen.
“Gordon Brown instituted a lot of pro-City policies,” Mr. Augar said.
“He cut the capital gains tax. He combined about nine different
regulators into the F.S.A.” — the Financial Services Authority — “which
adopted something it called ‘proportional regulation.’ ” Mr. Brown
himself had a more apt phrase: “light touch regulation,” he called it.
In other words, he consciously aligned regulation in Britain with the
free-market, deregulatory approach being promoted by Mr. Greenspan and
Mr. Rubin.
Mr. Augar says he believes that the regulatory environment helped bring
about the “Americanization” of the City of London, and that it was
ultimately ruinous. All the big American investment banks raced to
London — which they saw as a place to do business not just in Britain
but all over the Continent. After the abolition of Glass-Steagall, the
commercial banks came roaring in as well.
British banking had for hundreds of years been a safe, even stodgy
business — even during the Depression, banks remained relatively
healthy. But in their desire to compete with the American invaders,
banks like the Royal Bank of Scotland transformed themselves into
turbo-charged, high-growth institutions, just like our own. They traded
mortgage-backed securities, made unwise loans, did deals for the deal’s
sake and not necessarily for the sake of the client, and used
credit-default swaps to lower regulatory capital requirements to absurd
levels. Finance became the dog instead of the tail.
Needless to say, not everyone agrees with Mr. Augar’s thesis. A number
of people pointed, in particular, to the Royal Bank of Scotland, which,
in addition to its poor lending, did itself in by buying the Dutch bank
giant ABN Amro at the very peak of the market. “Was Royal Bank of
Scotland buying ABN an example of the American disease?” asked Alan
Gemes, the global head of financial services for the consulting firm
Booz & Company. “No. American banks and U.K. banks fell prey to the
same problem.”
But I would argue that, even if there weren’t any Americans on the
premises, the Royal Bank of Scotland did indeed get caught up in the
Americans’ game. The ABN Amro deal sounds to me just like the Bank of
America-Merrill Lynch deal. Had the ethos of the City of London not
changed so drastically, it would never have made so foolish a deal.
Now, of course, Britain is paying the price. The Royal Bank of Scotland
has been partly nationalized, and the government has spent billions of
pounds propping up the banking system. The country is drowning in debt.
Mr. Brown’s Labor government is running large deficits in an effort to
stimulate the economy.
If that, too, sounds like the response of the Obama administration to
the financial crisis, it is indeed quite similar. Here’s the big
difference. New York is a big city in a big country, and our national
banks, as big as they are, are much smaller as a percentage of gross
domestic product. London is a big city in a small country, and during
the bubble, its banks became truly immense, outsize really, given the
size of the country they operated in.
•
Royal Bank of Scotland grew from a regional Scottish bank to the
largest bank in the world by assets — some $3.8 trillion. Citigroup’s
assets, by comparison, were a “mere” $2.2 trillion — and for that
matter, the gross domestic product of all of Britain itself is only
$2.1 trillion. The big banks combined probably had five times the asset
base of the country’s G.D.P.
So everything the government does in response to the crisis has larger
potential consequences — a greater likelihood of inflation down the
line, and a far higher level of debt as a percentage of G.D.P. Because
the City of London was such an outsize source of tax revenue, the
subsequent hit to the tax rolls has been worse. British taxpayers are
much more likely to be paying for generations to atone for the sins of
light-touch regulation. No wonder Mr. Brown is in so much political
trouble.
Which brings me back to Glass-Steagall. In any banking crisis, said Mr.
Gemes, the Booz & Company consultant, banks revert to being
national institutions rather than international ones. In the United
States, the political focus, for instance, is on persuading banks to
start lending to American companies. In London, the big British banks
have all tempered their once grandiose ambitions, at least for now.
But Glass-Steagall? It is highly unlikely that Britain would ever take
such a drastic step. Just a few days ago, Barclays reported profits
that were almost entirely attributable to its new investment banking
division — the one it bought from the ashes of Lehman Brothers.
Besides, although no one will say this out loud, Britain can’t regulate
unilaterally anymore — it is simply too dependent on American
institutions. Its regulatory response will be to mimic whatever the
Obama administration decides to do.
“If regulation is transformed in London it is because of what the U.S.
does,” Mr. Wolf said. “The U.S. will say, ‘You are to follow us.’ We
now have no regulatory autonomy.”
It’s tough being a Siamese twin.
Rubin
Is Stepping Down at Citigroup
NYTIMES
By ERIC DASH
January 10, 2009 - a day ahead
Robert E. Rubin, the former Treasury secretary who is an influential
director and senior adviser at Citigroup, will step down after coming
under fire for his role in the bank’s current troubles, the bank
confirmed Friday.
Since joining Citigroup in 1999 as an adviser to the bank’s senior
executives, Mr. Rubin, 70, who is an economic adviser on the transition
team of President-elect Barack Obama, has sat atop a bank that has made
one misstep after another.
When he was Treasury secretary during the Clinton administration, Mr.
Rubin helped loosen Depression-era banking regulations that made the
creation of Citigroup possible. During the same period he helped beat
back tighter oversight of exotic financial products, a development he
had previously said he was helpless to prevent.
“This is not a decision that I have come to lightly,” Mr. Rubin said in
a statement from the bank. “But as I enter my 70’s and with all that is
now in place at Citi, I believe the time has come for me to make these
changes.”
Mr. Rubin has moved seamlessly between Wall Street and Washington.
After making his millions as a trader and an executive at Goldman
Sachs, he joined the Clinton administration.
As chairman of Citigroup’s executive committee, Mr. Rubin was the
bank’s resident sage, advising top executives and serving on the board
while, he insisted repeatedly, steering clear of daily management
issues.
In December, federal regulators approved a radical plan to stabilize
Citigroup in an arrangement in which the government could soak up
billions of dollars in losses at the struggling bank.
The complex plan calls for the government to back about $306 billion in
loans and securities and directly invest about $20 billion in the
company. Under that plan, Citigroup agreed to certain executive
compensation restrictions, which will be reviewed by regulators.
Once the nation’s largest and mightiest financial company, Citigroup
lost 86 percent of its value in the stock market in the last year as
the bank confronted a crisis of confidence.
With more than $2 trillion in assets and operations in more than 100
countries, Citigroup is so large and interconnected that its troubles
could spill over into other institutions. Citigroup is widely viewed,
both in Washington and on Wall Street, as too big to be allowed to
fail.
Biden
Defends Expanded Recovery Plan
NYTIMES
By JACKIE CALMES and BRIAN KNOWLTON
December 22, 2008
WASHINGTON — Vice President-elect Joseph R. Biden Jr. defended on
Sunday plans for an expanded economic recovery plan against charges it
would unwisely inflate the national deficit, saying bluntly that the
incoming administration’s first and most urgent goal was “keeping the
economy from absolutely tanking.”
Faced with worsening forecasts for the economy, President-elect Barack
Obama is expanding his economic recovery program and will seek to
create or save 3 million jobs in the next two years, up from a goal of
2.5 million jobs set just last month, several advisers to Mr. Obama
said Saturday.
Mr. Obama and Mr. Biden had spoken during the presidential campaign of
a stimulus plan worth perhaps $150 billion to $200 billion. Now, Mr.
Biden confirmed: “There’s going to be real significant investment,
whether it’s $600 billion, or more or $700 billion. The clear notion
is, it’s a number no one thought about a year ago.”
What had changed, he said on ABC’s “This Week,” was that “the economy
is in much worse shape than we thought.” He said that economists of all
stripes agreed that “the scope of this package has to be bold; it has
to be big.”
Yet, even Mr. Obama’s more ambitious goal would not fully offset as
many as 4 million jobs that some economists are projecting might be
lost in the coming year, according to the information he received from
advisers in the past week. That job loss would be double the total this
year and could push the nation’s unemployment rate past 9 percent if
nothing were done.
The new job target was set after a meeting last Tuesday in which
Christina D. Romer, who is Mr. Obama’s choice to lead his Council of
Economic Advisers, presented information about previous recessions to
establish that the current downturn was likely to be “more severe than
anything we’ve experienced in the past half-century,” according to an
Obama official familiar with the meeting.
Officials said they were working on a plan big enough to stimulate the
economy but not so big to provoke major opposition in Congress. Mr.
Obama’s advisers have projected that the multifaceted economic plan
would cost $675 billion to $775 billion. It would be the largest
stimulus package in memory and would most likely grow as it made its
way through Congress, although Mr. Obama has secured Democratic
leaders’ agreement to ban spending on pork-barrel projects.
Mr. Biden said, as Mr. Obama has before, that the plan will aim not
just to create jobs, but to do so in ways that will benefit the country
over the long term. Examples, he said, would be inbuilding a “smart”
nationwide electric grid that makes it easier to transmit wind- and
solar-generated energy; or in transferring medical data from paper to
electronic form, with near-term costs but long-term savings.
For now, the vice president-elect said, the urgent goal was “to stem
this bleeding” in jobs; the fast-rising deficit would be dealt with
later.
The message from Mr. Obama was that “there was not going to be any
spending money for the sake of spending money,” said Lawrence H.
Summers, who will be the senior economic adviser in the White House.
Mark Zandi, chief economist of Moody’s Economy.com, who was an adviser
to Senator John McCain’s presidential campaign, said, “My advice is,
err on the side of too big a package rather than too little.” In an
interview, Mr. Zandi, who lately has advised Democratic leaders in
Congress, also said he would probably soon raise his own recommendation
of a $600 billion stimulus.
Besides new spending, the Obama plan would provide tax relief for
low-wage and middle-income workers of roughly $150 billion, Democrats
familiar with the proposal said. The government would probably reduce
the withholding of income or payroll taxes so that most workers
received larger paychecks as soon as possible in 2009, an Obama adviser
said.
The sorts of jobs Mr. Obama would propose to create involve
construction work on roads, mass transit projects, weatherization of
government buildings and installation of information technology in
medical facilities, among others.
The outlines for Mr. Obama’s emerging plan, which he is developing in
consultation with Congress, including some Republicans, were mostly
settled last Tuesday when he met for four hours with economic and
policy advisers. Mr. Obama and his family left Saturday for a two-week
vacation in Hawaii, his native state, but the advisers will take his
guidance — including instructions to be “bolder,” according to one —
and complete a draft in time for his return on Jan. 2.
The new Congress convenes on Jan. 6. The House and Senate, with larger
Democratic majorities, will work to pass a bill for Mr. Obama to sign
shortly after his inauguration, on Jan. 20.
The Obama blueprint covers five main areas of spending and tax breaks:
health, education, infrastructure, energy, and support for the poor and
the unemployed.
Mr. Summers said the president-elect set short- and long-term themes in
choosing the plan’s components: “Creating jobs for people who need
them, and doing things that need to be done to lay the foundation for
an economy that works for middle-class families.”
At the meeting on Tuesday, Ms. Romer also laid out recommendations from
private sector analysts and liberal to conservative economists for a
government stimulus that ranged from $800 billion to $1.3 trillion over
two years. Those consulted included Martin Feldstein, a conservative
economist and longtime Republican presidential adviser, who is at the
low end, and Lawrence B. Lindsey, a Federal Reserve governor and Bush
administration economist, who has recommended up to $1 trillion.
Even before the election, Mr. Feldstein was publicly arguing that
whoever was elected should immediately begin working with Congress on a
big spending package. Since then, Mr. Feldstein has also been revising
his assessment upward as the economy weakened further. “Without
action,” he wrote in an e-mail exchange, “the economy will continue to
decline rapidly.”
Many decisions about the details have not been made, or are tentative
pending consultations with Congress. Several hundred billion dollars
could go to states and cities to finance public works and subsidize
their health and education programs so that local governments do not
have to raise taxes and cut essential programs, steps that would be
counterproductive economically.
The Obama team has a list of $136 billion in infrastructure projects
from the National Governors Association that consists mostly of transit
construction but also includes port expansions and renewable energy
programs. For education, besides money to build and renovate schools,
Mr. Obama will call for money to train more teachers, expand early
childhood education and provide more college tuition aid.
Federal money to local governments would come with a “use it or lose
it” clause under Mr. Obama’s plans, advisers say. The president-elect
will also propose to direct some money to public and private
partnerships for major projects like a national energy grid intended to
harness alternative energy sources such as wind power.
For those “most vulnerable” because of the recession, as the Obama team
describes the needy and jobless population, the president-elect will
propose expanding the length of unemployment compensation, as well as
food aid and additional support.
With millions more Americans losing their health care coverage, either
through job losses or because they can no longer afford to pay for
insurance, Mr. Obama will propose major new spending to subsidize
states’ share of Medicaid and their children’s health programs, and to
expand health care coverage for those who lose insurance from their
employers.
Mr. Obama plans a down payment on his campaign promise to help pay for
hospitals and other medical providers to computerize their health
records to save billions in paperwork and administrative costs. He
might also propose subsidies to train more nurses, both to create jobs
now and address a looming shortage in the health professions.
Mr. Obama has spoken in recent days with the Senate majority leader,
Harry Reid, and the House speaker, Nancy Pelosi. Last week, Mr. Reid’s
office sent an e-mail message to senators saying that in conversations
with the Obama transition team, “we have communicated our willingness
to work within these parameters as closely as possible and urge all
offices to do the same.”

2007 hearing before Senate Committee - Countrywide second from
left.
June 5, 2009
S.E.C. Accuses Countrywide’s Ex-Chief of Fraud
NYTIMES
By THE ASSOCIATED PRESS
WASHINGTON — The government is charging Angelo R. Mozilo, the former
chief executive of the mortgage lender Countrywide Financial, and two
other company executives with civil fraud. The Securities and
Exchange Commission said Thursday afternoon that its case also accused
Mr. Mozilo of illegal insider trading. Countrywide was a major player
in the subprime mortgage market, the collapse of which in 2007 touched
off the financial crisis that has gripped the United States and global
economies.
Mr. Mozilo is the highest-profile person to face formal charges from
the federal government in the wake of the crisis. Mr. Mozilo has
denied any wrongdoing. His lawyer did not immediately return an e-mail
message seeking comment Thursday afternoon. Civil fraud charges
were also filed against Countrywide’s former chief operating officer,
David Sambol, and the former chief financial officer, Eric Sieracki.
Paul Kranhold, a spokesman for Mr. Sambol, declined to comment because
he had not seen the charges yet. An e-mail message to Mr. Sieracki’s
lawyer, Shirli Fabbri Weiss, was not immediately returned.
The S.E.C. and federal prosecutors have undertaken wide-ranging
investigations of companies across the financial services industry,
touching on mortgage lenders, the Wall Street investment banks that
bundled home mortgages into securities sold to investors and other
market players. The S.E.C.’s scrutiny of Mr. Mozilo’s stock sales
began in the fall of 2007 with an informal inquiry.
The filing of the agency’s civil lawsuit in federal court in Los
Angeles is a striking turn for Mr. Mozilo, the man who 40 years ago
co-founded what grew into the nation’s largest mortgage lender. He
moved the company in 1969 to suburban Los Angeles from New York,
guiding Countrywide through numerous boom-and-bust housing
cycles. After the mortgage crisis hit, the Calabasas,
Calif.-based Countrywide was forced to cut thousands of jobs and saw
its shares plummet. Its downward spiral ended in it being bought by
Bank of America last July for about $2.5 billion. Countrywide itself is
the target of multiple lawsuits related to the mortgage meltdown.
Mr. Mozilo’s influence stretched from the California real estate market
through the corridors of power in Washington.
The Democrats were roiled a year ago by revelations that Senator
Christopher J. Dodd, the Connecticut Democrat who is chairman of the
Senate Banking Committee, and Senator Kent Conrad, the North Dakota
Democrat who is chairman of the Budget Committee, obtained mortgages at
favorable rates through a V.I.P. program dispensed by Countrywide for
so-called "friends of Angelo."
Mr. Dodd insisted that the controversy over the two loans he received
did not compromise his ability to lead Congress’s efforts to address
the effects of the subprime mortgage meltdown.
Mr. Mozilo sold about $130 million in Countrywide stock in the first
half of 2007 through a prearranged 10b5-1 trading plan. These plans,
popular among corporate executives, allow a company insider to set up a
program in advance for such transactions and proceed with them even if
he or she comes into possession of significant nonpublic information.
North Carolina’s state treasurer, who asked the S.E.C. in 2007 to
investigate Mr. Mozilo’s stock sales, raised questions about changes
made to Mr. Mozilo’s plan in the months before the company’s stock
plunged, which allowed Mr. Mozilo to significantly increase his sales
of Countrywide shares.
Mr. Mozilo had sold company shares through prior arrangements since
2004; the pace of his sales began to quicken in October 2006 when he
put a new plan into effect. Mr. Mozilo has said that he did so to
reduce his stake in Countrywide and diversify his personal investments
in an orderly fashion before his retirement, which was slated for
December 2009.
Inept
Handling Of Conflicts Leave Dodd
Politically Exposed
DAY
By Morgan McGinley
Published on 12/14/2008
For the first time in his Senate career, Christopher J. Dodd, the
senior Democratic senator from Connecticut, is politically vulnerable.
In part, that's because both the Senate Ethics Committee and the Public
Integrity unit of the Justice Department are looking into mortgage
loans he got from Countrywide Financial.
The Justice Department investigation is broader. It seeks details not
just of Dodd's loans but also of other loans made under Countrywide's
VIP program meant to seek better loan terms for FOAs (Friends Of
Angelo, a reference to then-Countrywide company Chairman Angelo
Mozillo). NBC news has reported that the program made mortgage loans to
a variety of politically powerful Washington insiders over a number of
years.
Dodd, who is cooperating with the Senate investigation, says he got
market interest rates from Countrywide that were available from other
mortgage companies, that he did not know he was getting any special
treatment and has not met Mozillo . He was just remortgaging because
industry-wide rates had fallen, he says. But the pertinent question for
Dodd, the Senate banking committee chairman and longtime member, is why
in the world he would go for a loan to one of the largest brokers in
the country, a firm selling mortgages to Fannie Mae and Freddie Mac,
businesses that come under the scrutiny of Dodd's committee?
Why didn't Dodd go to The Savings Institute in his hometown of
Willimantic, or either of the local banks in Norwich, where he started
his political career, or even smaller shoreline banks whose business is
not directly subject to the powerful role of his Senate committee?
And now that he is the subject of an ethics probe, why doesn't
Connecticut's senior senator make available to the public and the media
all the documents relating to his loans from Countrywide? His excuse -
that he is awaiting completion of the Senate Ethics Committee probe -
is a lame one that damages him politically. Dodd's handling of
the matter has involved bad political judgment. The senator
uncharacteristically displays a political tin ear on this issue and he
is paying dearly for his handling of the matter.
First, he denied that he had sought or knew he was getting any
favorable treatment. A week later, he said he knew he was part of
Countrywide's VIP program, but said he thought the arrangement was
“more of a courtesy.”
But Robert Feinberg, a former loan officer for Countrywide in charge of
the company's VIP program, told The Wall Street Journal that he spoke
directly to Dodd and to his wife, indicatating to them that they were
getting a special deal because they were “Friends of Angelo.” Feinberg
said Dodd and his wife got a “float down.” This means that even after
allegedly getting a premium rate, the rate was reduced again without
any additional charge because rates had fallen between the time of the
negotiation and the closing.
Dodd has denied that he and his wife had spoken with Feinberg about
special treatment on the re-mortgaging.
Approval ratings sink
Dodd, for many years the state's most popular politician, saw his
approval rating fall to 51 percent in a Quinnipiac Poll last July. This
is the lowest rating ever for Dodd. Further, 59 percent of those polled
said Dodd's loans from Countrywide deserve more investigation.
Connecticut Democrats say they have fielded a lot of questions from the
public about Dodd's housing loans. Dodd's political exposure is
all the more visible because he has been in the middle of the
congressional group negotiating the bailouts for Wall Street and the
rescue plan for Detroit's automakers. Dodd's efforts to try to
get relief for average Americans on mortgages that were punitive was a
welcomed act, one that failed because of a lack of support from the
Bush administration.
And Dodd may be right on another count, the possible loss of much of
the United States' industrial base if Congress fails to help the
automobile companies. But regardless of the conclusions reached
by the ethics committee or the Justice Department, any political
opponent is certain to resurrect the question of the loans. The
other thing hurting Dodd is that he has received about $13 million in
campaign contributions from financial organizations over the length of
his Senate career, including $6 million in the past several years.
These contributions are legal under the federal rules for campaign
donations, but they could be politically damaging because the public
asks: what is the Senate banking committee chairman doing getting all
this money from financial institutions? The public gets it: the
campaign contribution system involves an inherent conflict of interest
between an elected official's duties and the taking of money from
businesses the politician is regulating.
Eighteen of Dodd's top 20 contributors have been financial
institutions. Dodd himself, questioned by The Hartford Courant about
this potential conflict of interest, said:
”It's an ugly system and I hate it. I never have, nor would I ever let
a campaign contribution affect what I care about. What I champion, how
I vote, how I hold hearings. Ever!”
The investigations now going on may entirely clear Dodd, whose Senate
record has been free of any similar controversy. But what will
remain are his poor judgment regarding loans from Countrywide and his
willingness to take huge amounts of money from an industry his
committee regulates.
Tribune Files for Bankruptcy
NYTIMES
December 8, 2008, 1:55 pm
The Tribune Company filed for bankruptcy protection in a federal court
in Delaware on Monday, as the owner of The Los Angeles Times, The
Chicago Tribune and the Chicago Cubs baseball team struggled to cope
with rising debt and falling ad revenue.
Tribune, which was acquired last year by billionaire real estate
investor Samuel Zell, had hired bankruptcy advisers like Lazard and the
law firm Sidley Austin in recent weeks as it negotiated with creditors
over debt covenants. (Read the bankruptcy petition here.)
It is only the latest — and biggest — sign of duress for the newspaper
industry yet. Several newspaper companies have struggled to cope with
declining revenues and mounting debt woes. Tribune has pared back the
newsrooms of many of its papers, and it sold off Newsday to
Cablevision’s Dolan family earlier this year. It is unclear what
Tribune’s filing means for other newspaper publishers on the brink.
In a court filing, Tribune said it had nearly $13 billion in debt,
compared to $7.6 billion in assets. Most of that debt was taken on when
Mr. Zell acquired the company — a deal he struck using mostly borrowed
money. All of the now privately held company’s equity is owned by an
employee stock-ownership plan.
Tribune has sought to ameliorate its woes by selling off assets like
the Chicago Cubs, but the company still faces a looming debt crunch.
While Tribune must contend with hefty interest payments over the next
year, its most pressing problem was a maintenance covenant on some of
its debt that limits the company’s borrowings to no more than nine
times earnings before interest, depreciation and amortization.
Even if the company continues to make interest payments, failure to
maintain that level of debt means technical default — which does not
always lead to a bankruptcy filing, though in Tribune it apparently
did. Other newspaper publishers have halted making interest payments on
their debt, but have yet to file.
The top creditors listed by Tribune in its court filing include big
banks like JPMorgan Chase, Merrill Lynch and Deutsche Bank. JPMorgan
listed some of the firms it had syndicated its debt to as well; that
list comprises private investment firms like Kohlberg Kravis Roberts’s
KKR Financial, Highland Capital Management and Davidson Kempner Capital
Management.
A CreditSights analyst, Jake Newman, wrote in a research report
published last month that Tribune avoided technical default in the
third quarter partially through some accounting adjustments. “We think
the company will have difficulty meetings its year-end covenant
compliance,” Mr. Newman wrote.
Tribune hired Lazard several weeks ago to assess its options, these
people said. It also hired Sidley, a longtime outside adviser to
Tribune that has a well-respected bankruptcy practice as well.
In its filing Monday, Tribune also said that it has retained Alvarez
& Marsal, a restructuring adviser, as a consultant. Alvarez &
Marsal is also advising Lehman Brothers, the collapsed investment bank
whose filing was the largest corporate bankruptcy in American history.
Tribune’s problems have long been reflected in the price of its bonds.
Tribune bonds maturing Aug. 15, 2010 with a 4.88 percent coupon traded
at $13.25 on Friday, suggesting severe levels of distress.
–Michael J. de la Merced
The
Employment Crash
NYTIMES Editorial
December 7, 2008
The headline numbers in the employment report for November were worse
than dreadful — and they did not reflect the true extent of the weak
and worsening outlook for American jobs.
Employers axed 533,000 jobs last month, the worst monthly loss since
December 1974, bringing the number of lost jobs in the last year to 1.9
million. Worse, two-thirds of the losses were in the past three months,
a sign of an intensifying downturn and of more job cuts ahead.
The unemployment rate for November — which rose to 6.7 percent, or 10.3
million people — also understates the weakness in the job market.
Job loss in a recession is related to the number of jobs created while
the economy was expanding. Job creation during the Bush-era business
cycle was the weakest since the end of World War II, so there are
simply not as many workers to lay off as in past downturns. Instead,
workers’ hours have been cut, sharply increasing the number of people
working part time who want full-time jobs. Involuntary part-timers and
out-of-work people who are discouraged from job hunting because their
prospects are dim are measured in the underemployment rate, which at
12.5 percent is now the highest since the government started keeping
track in 1994.
Joblessness and the threat of joblessness will depress already dismal
consumer spending, which in turn will depress business investment,
leading to higher unemployment. Rising unemployment will also fuel more
foreclosures, which will further destabilize the financial system and
reinforce economic weakness.
One in 10 borrowers in America were either delinquent or in foreclosure
in the third quarter, according to the Mortgage Bankers Association, a
stunning tally that does not even reflect the drag of rising
unemployment in October and November. Unemployment among 25- to
34-year-olds, which includes most first-time homebuyers, is rising
fast. Yet, rather than attack foreclosures directly, the Bush
administration’s latest economic rescue proposal is to try to spur home
buying by reducing mortgage rates. Good luck.
The political reality is that any serious response to unemployment and
foreclosures will probably not occur until the Obama administration
takes over. Members of Congress should be working now on another round
of economic stimulus, consisting of bolstered unemployment compensation
and food stamps and aid to states and localities, including money for
creating jobs by rebuilding the nation’s infrastructure. An
anti-foreclosure plan to rework troubled mortgages en masse is long
overdue and should also be passed, either as part of the stimulus or as
a stand-alone measure.
Beyond stimulus, President-elect Barack Obama will need a larger
recovery plan that puts employment, rising wages and savings at the
center of the agenda. The selection of a strong labor secretary, whose
input will be as valued as that of Mr. Obama’s Wall-Street-oriented
economic advisers, is crucial. The work force needs a champion who has
the president’s full attention.
Consumers
saving up for Xmas?
Consumers Unexpectedly Trimmed
Borrowing in Oct.
By THE ASSOCIATED PRESS
Filed at 3:01 p.m. ET
December 5, 2008
WASHINGTON (AP) -- U.S. consumers unexpectedly cut back on their
borrowing in October as the economy sunk deeper into recession.
The Federal Reserve says consumer credit fell at an annual rate of 1.6
percent in October. That compares with a 3.1 percent growth rate logged
in September, and marks the deepest cutback since August.
Economists expected consumers to boost their borrowing by around $2
billion in October from the previous month. Instead, consumer debt
dropped by $3.5 billion to $2.58 trillion.
The Fed's measure of consumer borrowing does not include any debt
secured by real estate, such as mortgage or home equity loans.



Click
above for side comment, then below for our expanation of why the world
is worried - who's going to
buy their STUFF if the US consumer can't or won't?
A Shopping Guernica Captures the Moment
NYTIMES
By PETER S. GOODMAN
November 30, 2008
From the Great Depression, we remember the bread lines. From the oil
shocks of the 1970s, we recall lines of cars snaking from gas stations.
And from our current moment, we may come to remember scenes like the
one at a Long Island Wal-Mart in the dawn after Thanksgiving, when
2,000 frantic shoppers trampled to death an employee who stood between
them and the bargains within.
It was a tragedy, yet it did not feel like an accident. All those
people were there, lined up in the cold and darkness, because of
sophisticated marketing forces that have produced this day now called
Black Friday. They were engaging in early-morning shopping as contact
sport. American business has long excelled at creating a sense of
shortage amid abundance, an anxiety that one must act now or miss out.
This year, that anxiety comes with special intensity for everyone
involved — for shoppers, fully cognizant of the immense strains on the
economy, which has made bargains more crucial than ever; for the
stores, now grappling with what could be among the weakest holiday
seasons on record; and for policy makers around the planet, grappling
with how to substitute for the suddenly beleaguered American consumer,
whose proclivities for new gadgets and clothing has long been the
engine of economic growth from Guangzhou to Guatemala City.
For decades, Americans have been effectively programmed to shop. China,
Japan and other foreign powers have provided the wherewithal to
purchase their goods by buying staggering quantities of American debt.
Financial institutions have scattered credit card offers as if they
were takeout menus and turned our houses into A.T.M.’s. Hollywood and
Madison Avenue have excelled at persuading us that the holiday season
is a time to spend lavishly or risk being found insufficiently
appreciative of our loved ones.
After 9/11, President Bush dispatched Americans to the malls as a
patriotic act. When the economy faltered early this year, the
government gave out tax rebate checks and told people to spend. In a
sense, those Chinese-made flat-screen televisions sitting inside
Wal-Mart have become American comfort food.
And yet the ability to spend is constricting rapidly. Credit card
limits are getting cut. Millions of Americans now owe the bank more
than the value of their homes, making further borrowing impossible. The
banks themselves are hunkered down, just hoping to survive.
Live within our means and save: This new commandment has entered the
conversation, colliding with the deeply embedded imperative to spend.
And yet much of the distress is less the product of extravagance than
the result of the fact that in many households the means are nowhere
near enough for traditional middle-class lives.
Wages for most Americans have fallen in real terms over the last eight
years. Pensions have been turned into 401(k) plans that have just
relinquished half their value to an angry market. Health benefits have
been downgraded or eliminated altogether. Working hours are being
slashed, and full-time workers are having to settle for jobs through
temp agencies.
Indeed, this was the situation for the unfortunate man who found
himself working at the Valley Stream Wal-Mart at 5 a.m. Friday, a temp
at a company emblematic of low wages and weak benefits, earning his
dollars by trying to police an unruly crowd worried about missing out.
In a sense, the American economy has become a kind of piñata —
lots of treats in there, but no guarantee that you will get any, making
people prone to frenzy and sending some home bruised.
It seemed fitting then, in a tragic way, that the holiday season began
with violence fueled by desperation; with a mob making a frantic reach
for things they wanted badly, knowing they might go home empty-handed.
All Fall
Down
NYTIMES
By THOMAS L. FRIEDMAN
November 26, 2008
I spent Sunday afternoon brooding over a great piece of Times reporting
by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t
the right word. The front-page article, entitled “Citigroup Pays for a
Rush to Risk,” actually left me totally disgusted.
Why? Because in searing detail it exposed — using Citigroup as Exhibit
A — how some of our country’s best-paid bankers were overrated dopes
who had no idea what they were selling, or greedy cynics who did know
and turned a blind eye. But it wasn’t only the bankers. This financial
meltdown involved a broad national breakdown in personal
responsibility, government regulation and financial ethics.
So many people were in on it: People who had no business buying a home,
with nothing down and nothing to pay for two years; people who had no
business pushing such mortgages, but made fortunes doing so; people who
had no business bundling those loans into securities and selling them
to third parties, as if they were AAA bonds, but made fortunes doing
so; people who had no business rating those loans as AAA, but made a
fortunes doing so; and people who had no business buying those bonds
and putting them on their balance sheets so they could earn a little
better yield, but made fortunes doing so.
Citigroup was involved in, and made money from, almost every link in
that chain. And the bank’s executives, including, sad to see, the
former Treasury Secretary Robert Rubin, were clueless about the
reckless financial instruments they were creating, or were so ensnared
by the cronyism between the bank’s risk managers and risk takers (and
so bought off by their bonuses) that they had no interest in stopping
it.
These are the people whom taxpayers bailed out on Monday to the tune of
what could be more than $300 billion. We probably had no choice. Just
letting Citigroup melt down could have been catastrophic. But when the
government throws together a bailout that could end up being hundreds
of billions of dollars in 48 hours, you can bet there will be
unintended consequences — many, many, many.
Also check out Michael Lewis’s superb essay, “The End of Wall Street’s
Boom,” on Portfolio.com. Lewis, who first chronicled Wall Street’s
excesses in “Liar’s Poker,” profiles some of the decent people on Wall
Street who tried to expose the credit binge — including Meredith
Whitney, a little known banking analyst who declared, over a year ago,
that “Citigroup had so mismanaged its affairs that it would need to
slash its dividend or go bust,” wrote Lewis.
“This woman wasn’t saying that Wall Street bankers were corrupt,” he
added. “She was saying they were stupid. Her message was clear. If you
want to know what these Wall Street firms are really worth, take a hard
look at the crappy assets they bought with huge sums of borrowed money,
and imagine what they’d fetch in a fire sale... For better than a year
now, Whitney has responded to the claims by bankers and brokers that
they had put their problems behind them with this write-down or that
capital raise with a claim of her own: You’re wrong. You’re still not
facing up to how badly you have mismanaged your business.”
Lewis also tracked down Steve Eisman, the hedge fund investor who early
on saw through the subprime mortgages and shorted the companies engaged
in them, like Long Beach Financial, owned by Washington Mutual.
“Long Beach Financial,” wrote Lewis, “was moving money out the door as
fast as it could, few questions asked, in loans built to self-destruct.
It specialized in asking homeowners with bad credit and no proof of
income to put no money down and defer interest payments for as long as
possible. In Bakersfield, Calif., a Mexican strawberry picker with an
income of $14,000 and no English was lent every penny he needed to buy
a house for $720,000.”
Lewis continued: Eisman knew that subprime lenders could be
disreputable. “What he underestimated was the total unabashed
complicity of the upper class of American capitalism... ‘We always
asked the same question,’ says Eisman. ‘Where are the rating agencies
in all of this? And I’d always get the same reaction. It was a smirk.’
He called Standard & Poor’s and asked what would happen to default
rates if real estate prices fell. The man at S.& P. couldn’t say;
its model for home prices had no ability to accept a negative number.
‘They were just assuming home prices would keep going up,’ Eisman says.”
That’s how we got here — a near total breakdown of responsibility at
every link in our financial chain, and now we either bail out the
people who brought us here or risk a total systemic crash. These are
the wages of our sins. I used to say our kids will pay dearly for this.
But actually, it’s our problem. For the next few years we’re all going
to be working harder for less money and fewer government services — if
we’re lucky.
Economy
Faces ‘Significant
Weakness,’ Fed Says
NYTIMES
By THE ASSOCIATED PRESS
November 20, 2008
WASHINGTON (AP) — The
Federal Reserve on Wednesday sharply lowered its projection for
economic activity this year and next, and signaled that additional
interest rate reductions may be needed to help combat the worst
financial crisis in more than a half-century.
With the economy forecast to lose traction, or even jolt into reverse,
unemployment will move higher, the Fed predicted.
Facing the likelihood of “significant weakness” in the economy, some
Fed officials suggested “additional policy easing could well be
appropriate at future meetings,” according to documents from the Fed’s
most recent deliberations on interest rate policy at the end of October.
At that Oct. 29 session, the Fed lowered rates to 1 percent, a level
seen only once before in the last half-century. Many economists predict
the Fed will lower rates again at its last meeting of the year on Dec.
16, to help brace the sinking economy.
Even while hinting that another rate reduction could be forthcoming,
Fed officials worried that the effectiveness of previous rate cuts “may
have been diminished by the financial dislocations, suggesting that
further policy action might have limited efficacy in promoting a
recovery in economic growth,” the documents said.
To help ease financial turmoil and spur banks to lend money more freely
again to customers, the Fed has taken a series of other unprecedented
steps, including offering short-term cash loans and buying mounds of
short-term debt that companies rely on to pay day-to-day expenses like
payrolls and supplies.
Under its new economic forecast, the Fed now believes gross domestic
product could be flat or grow by 0.3 percent this year. G.D.P. could
actually shrink or expand by 1.1 percent next year. Both sets of
projections are lower than the Fed’s forecasts delivered to Congress in
July.
G.D.P. is the value of all goods and services produced within the
United States and is the best measure of the country’s economic health.
These forecasts are based on what the Fed calls its “central
tendencies,” which exclude the highest three forecasts and the lowest
three forecasts made by Fed officials. The Fed also gives a range of
all forecasts that showed some Fed officials projecting a 0.3 percent
dip this year, followed by a deeper 1 percent contraction next year.
The prospects for weaker economic activity will push up unemployment.
The Fed projected that the national unemployment rate will rise to 6.3
percent to 6.5 percent this year. The rate in October was 6.5 percent,
and last year the rate averaged 4.6 percent.
Next year, the Fed expects the jobless rate to climb to be 7.1 percent
to 7.6 percent — also higher than its summer forecast.
Inflation, meanwhile, is expected to be lower this year and next
compared with the Fed’s previous forecast. A global economic slowdown
is sapping demand for energy, food and other commodities, driving down
prices and reducing inflation risks.
Lawmakers Told More Is Needed to Aid Economy
By BRIAN KNOWLTON and JOHN H. CUSHMAN Jr.
November 19, 2008
Top financial officials warned Congress on Tuesday that the economy
continued to need urgent attention, with the credit markets remaining
tight, millions of homeowners sliding toward foreclosure and the
government’s relief payments unlikely to flow into the markets for a
few more months.
Ben S. Bernanke, chairman of the Federal Reserve, described signs of
only modest improvement in the credit markets, warning that “overall,
credit conditions are still far from normal, with risk spreads
remaining very elevated.”
And, in a statement prepared for a hearing Tuesday morning before the
House Committee on Financial Services, he strongly urged banks to
improve the flow of loans to their most creditworthy borrowers.
“There are some signs that credit markets, while still quite strained,
are improving,” Mr. Bernanke said. He pointed to some technical
improvements: banks were charging one another less for short-term
lending; money market mutual funds and the commercial paper market were
stabilizing.
But now that banks’ access to capital had improved, he said, they must
ease their grip on lending. “It is imperative that all banking
organizations and their regulators work together to ensure that the
needs of creditworthy borrowers are met in a manner consistent with
safety and soundness,” Mr. Bernanke said.
At the same hearing, Sheila C. Bair, chairman of the Federal Deposit
Insurance Corporation, said she planned to continue her campaign to get
relief into the hands of troubled homeowners.
She said a program that her agency had proposed to the Treasury
Department would modify mortgages and ease repayment terms, which could
prevent “as many as 1.5 million avoidable foreclosures by the end of
2009.”
But, in her statement, she also projected a gloomy picture for
foreclosures, saying that over the next two years, four million to five
million mortgage loans will enter foreclosure if nothing is done.
That means that even with the approach she advocates, delinquencies
would continue at about the same rate as in the last year or two.
Appearing along with Ms. Bair and Mr. Bernanke, Treasury Secretary
Henry M. Paulson Jr. said in his prepared testimony that the Bush
administration decided this week to defer reaching much more deeply
into the $700 billion in bailout funds approved by Congress in October
until the next administration takes over Jan. 20.
“If we have learned anything throughout this year,” Mr. Paulson said,
“we have learned that this financial crisis is unpredictable and
difficult to counteract.”
Having spent most of the money provided by Congress, which split the
October package into two equal parts and told the Treasury to come back
for renewed permission to spend the second half, Mr. Paulson said it
would be “only prudent” to reserve the remainder until next year, in
the interest of maintaining “not only our flexibility but that of the
next administration.
Some lawmakers have suggested that some money might be diverted to the
auto industry, an idea that Mr. Paulson has not supported.
Bailout
to Nowhere
NYTIMES
By DAVID BROOKS
Published: November 14, 2008
Not so long ago, corporate giants with names like PanAm, ITT and
Montgomery Ward roamed the earth. They faded and were replaced by new
companies with names like Microsoft, Southwest Airlines and Target. The
U.S. became famous for this pattern of decay and new growth. Over time,
American government built a bigger safety net so workers could survive
the vicissitudes of this creative destruction — with unemployment
insurance and soon, one hopes, health care security. But the government
has generally not interfered in the dynamic process itself, which is
the source of the country’s prosperity.
But this, apparently, is about to change. Democrats from Barack Obama
to Nancy Pelosi want to grant immortality to General Motors, Chrysler
and Ford. They have decided to follow an earlier $25 billion loan with
a $50 billion bailout, which would inevitably be followed by more
billions later, because if these companies are not permitted to go
bankrupt now, they never will be.
This is a different sort of endeavor than the $750 billion bailout of
Wall Street. That money was used to save the financial system itself.
It was used to save the capital markets on which the process of
creative destruction depends.
Granting immortality to Detroit’s Big Three does not enhance creative
destruction. It retards it. It crosses a line, a bright line. It is not
about saving a system; there will still be cars made and sold in
America. It is about saving politically powerful corporations. A
Detroit bailout would set a precedent for every single politically
connected corporation in America. There already is a long line of
lobbyists bidding for federal money. If Detroit gets money, then
everyone would have a case. After all, are the employees of Circuit
City or the newspaper industry inferior to the employees of Chrysler?
It is all a reminder that the biggest threat to a healthy economy is
not the socialists of campaign lore. It’s C.E.O.’s. It’s politically
powerful crony capitalists who use their influence to create a stagnant
corporate welfare state...full
article here.
U.S.
jobless rate soars again
CT POST
By ASSOCIATED PRESS
Article Last Updated: 11/07/2008
08:48:38 AM EST
WASHINGTON - The nation's
unemployment rate bolted to a 14-year high of 6.5 percent in October as
another 240,000 jobs were cut, the government reported this morning. It
was stark proof the economy is almost certainly in a recession.
The new snapshot, released by the
Labor Department, shows the crucial jobs market deteriorating at an
alarmingly rapid pace.
The jobless rate zoomed to 6.5
percent in October from 6.1 percent in September, matching the
unemployment rate in March 1994. Employers have cut jobs each month
this year.
Unemployment has now surpassed the
high seen after the last recession in 2001. The jobless rate peaked at
6.3 percent in June 2003.
Employers got rid of 240,000 jobs in
October, marking the 10th straight month of payroll reductions.
Job losses in August and September
turned out to be much deeper. Employers cut 127,000 positions in
August, compared with 73,000 previously reported. A whopping 284,000
jobs were axed last month, compared with the 159,000 jobs first
reported.
So far this year, a staggering 1.2
million jobs have disappeared.
But Have We Learned Enough?
NYTIMES
By N. GREGORY MANKIW
Published: October 25, 2008
LIKE most economists, those at the International Monetary Fund are
lowering their growth forecasts. The financial turmoil gripping Wall
Street will probably spill over onto every other street in America.
Most likely, current job losses are only the tip of an ugly iceberg.
But when Olivier Blanchard, the I.M.F.’s chief economist, was asked
about the possibility of the world sinking into another Great
Depression, he reassuringly replied that the chance was “nearly nil.”
He added, “We’ve learned a few things in 80 years.”
Yes, we have. But have we learned what caused the Depression of the
1930s? Most important, have we learned enough to avoid doing the same
thing again?
The Depression began, to a large extent, as a garden-variety downturn.
The 1920s were a boom decade, and as it came to a close the Federal
Reserve tried to rein in what might have been called the irrational
exuberance of the era.
In 1928, the Fed maneuvered to drive up interest rates. So
interest-sensitive sectors like construction slowed.
But things took a bad turn after the crash of October 1929. Lower stock
prices made households poorer and discouraged consumer spending, which
then made up three-quarters of the economy. (Today it’s about
two-thirds.)
According to the economic historian Christina D. Romer, a professor at
the University of California, Berkeley, the great volatility of stock
prices at the time also increased consumers’ feelings of uncertainty,
inducing them to put off purchases until the uncertainty was resolved.
Spending on consumer durable goods like autos dropped precipitously in
1930. Next came a series of bank panics. From 1930 to 1933, more
than 9,000 banks were shuttered, imposing losses on depositors and
shareholders of about $2.5 billion. As a share of the economy, that
would be the equivalent of $340 billion today.
The banking panics put downward pressure on economic activity in two
ways. First, they put fear into the hearts of depositors. Many people
concluded that cash in their mattresses was wiser than accounts at
local banks. As they withdrew their funds, the banking system’s
normal lending and money creation went into reverse. The money supply
collapsed, resulting in a 24 percent drop in the consumer price index
from 1929 to 1933. This deflation pushed up the real burden of
households’ debts.
Second, the disappearance of so many banks made credit hard to come by.
Small businesses often rely on established relationships with local
bankers when they need loans, either to tide them over in tough times
or for business expansion. With so many of those relationships
interrupted at the same time, the economy’s ability to channel
financial resources toward their best use was seriously impaired.
Together, these forces proved cataclysmic. Unemployment, which had been
3 percent in 1929, rose to 25 percent in 1933. Even during the worst
recession since then, in 1982, the United States economy did not
experience half that level of unemployment.
Policy makers in the 1930s responded vigorously as the situation
deteriorated. But like a doctor facing a patient with a new disease and
strange symptoms, they often acted in ways that, with the benefit of
hindsight, appeared counterproductive. Probably the most
important source of recovery after 1933 was monetary expansion, eased
by President Franklin D. Roosevelt’s decision to abandon the gold
standard and devalue the dollar. From 1933 to 1937, the money supply
rose, stopping the deflation. Production in the economy grew about 10
percent a year, three times its normal rate.
Less successful were various market interventions. According to a study
by the economists Harold L. Cole and Lee E. Ohanian, both of the
University of California, Los Angeles, and the Federal Reserve Bank of
Minneapolis, President Roosevelt made things worse when he encouraged
the formation of cartels through the National Industrial Recovery Act
of 1933. Similarly, they argue, the National Labor Relations Act of
1935 strengthened organized labor but weakened the recovery by impeding
market forces.
LOOKING back at these events, it’s hard to avoid seeing parallels to
the current situation. Today, as then, uncertainty has consumers
spooked. By some measures, stock market volatility in recent days has
reached levels not seen since the 1930s. With volatility spiking, the
University of Michigan’s survey reading of consumer sentiment has been
plunging.
Deflation across the economy is not a problem (yet), but deflation in
the housing market is the source of many of our present difficulties.
With so many homeowners owing more on their mortgages than their houses
are worth, default is an unfortunate but often rational choice.
Widespread foreclosures, however, only perpetuate the downward spiral
of housing prices, further defaults and additional losses at financial
institutions.
The Fed and the Treasury Department, intent on avoiding the early
policy inaction that let the Depression unfold, have been working hard
to keep credit flowing. But the financial situation they face is,
arguably, more difficult than that of the 1930s. Then, the problem was
largely a crisis of confidence and a shortage of liquidity. Today, the
problem may be more a shortage of solvency, which is harder to solve.
What’s next? Perhaps the most troubling study of the 1930s economy was
written in 1988 by the economists Kathryn Dominguez, Ray Fair and
Matthew Shapiro; it was called “Forecasting the Depression: Harvard
Versus Yale.” (Mr. Fair is an economics professor at Yale; Ms.
Dominguez and Mr. Shapiro are at the University of Michigan.)
The three researchers show that the leading economists at the time, at
competing forecasting services run by Harvard and Yale, were caught
completely by surprise by the severity and length of the Great
Depression. What’s worse, despite many advances in the tools of
economic analysis, modern economists armed with the data from the time
would not have forecast much better. In other words, even if another
Depression were around the corner, you shouldn’t expect much advance
warning from the economics profession.
Let me be clear: Like Mr. Blanchard at the I.M.F., I am not predicting
another Great Depression. We have indeed learned a lot over the last 80
years. But you should take that economic forecast, like all others,
with more than a single grain of salt.
Stocks fall on belief global recession is
at hand
DAY
By TIM PARADIS, AP Business Writer
Posted on Oct 24, 3:40 PM EDT
NEW YORK (AP) -- Wall Street joined world stock markets
in a pullback Friday, with the Dow Jones industrials dropping 175
points and all the major indexes falling more than 2 percent. The
growing belief that a punishing economic recession is at hand had
investors abandoning stocks.
While the market came off its worst lows of the day, the final hour of
trading remains a crucial period, with many inventors trying to square
away their positions at the last minutes. In the past few weeks, some
of the market's worst volatility has come in the last 30 minutes of the
session.
The pullback on Wall Street wasn't as steep as some observers had
feared though the pace of selling at times accelerated. Massive
declines occurred overseas Friday after another round of grim corporate
news stirred fears about global economies. Investors also grew nervous
after U.S. stock futures - the bets traders place on where the market
will go - fell so sharply that selling halts were imposed.
But the session began and then progressed with more orderly selling
than in other drops in the past month, including two that slashed more
than 700 from the Dow industrials in a single day. Still, investors'
anxiety was clear Friday. The limits on futures and gyrations in
everything from gold to the dollar underscored the fear and uncertainty
that has gripped markets since the mid-September bankruptcy of
investment bank Lehman Brothers Holdings Inc. and the subsequent
freeze-up in the world's credit markets.
The urgency to resuscitate lending since then was aimed at avoiding
some of the problems that have nonetheless spread around the world. A
profit warning Friday from electronics maker Sony sent its shares
tumbling in Japan and offered only the latest example that companies
are girding for a slowing economy and a pullback among consumers
worried about falling home prices and losses on their investments.
And in Germany, Daimler's stock fell sharply after the automaker
reported lower third-quarter earnings and abandoned its 2008 profit and
revenue forecast. That followed news in the U.S. late Thursday from
Microsoft Corp., which issued a weaker-than-expected forecast for its
fiscal second quarter, pointing to the economy.
"People have been saying that we're in a recession. This is the
realization," said Scott Fullman, director of derivatives investment
strategy for WJB Capital Group in New York.
It is clear that many investors are convinced the world economy is
headed for a severe downturn even as governments have raced to
jump-start credit markets on the hope that a return of more normal
lending levels by banks and other financial houses will fan economic
activity.
But some say the recent pullbacks have been set off by forced selling,
keeping some bargain-seeking traders from entering the market.
"There's nothing new going on," said Scott Bleier, president of market
advisory service CreateCapital.com. "This is all about the unwinding of
massive leverage."
Bleier attributed the declines to margin calls and investors in hedge
funds and mutual funds cashing out. A margin call occurs when investors
are forced to sell holdings, like stock, to raise cash at the demands
of brokers.
"Market participants' fear is not that the economy is slowing," he
said. "The fear is there is an endless supply of things for sale,
regardless of price."
Steve Gross, principal at alternative investment and advisory firm
Penso Capital Markets, said most large hedge funds have already slashed
their positions. Instead, he sees a lack of demand.
"There are no buyers at all," he said.
Fearing more carnage in world equity markets, big hedge funds and other
institutional investors have been pulling out their money en masse.
Meanwhile, some individual investors who have seen their holdings
decimated in recent weeks have been yanking money from the market, even
as many market observers say it is wiser to wait out the market's
decline.
Jason Weisberg, a New York Stock Exchange trader for Seaport
Securities, contends the selling has been overdone.
"Technically we're way oversold," he said. "We have these downdrafts on
very light volume. But all that being said, historically speaking this
is all unprecedented."
In the final half-hour of trading, the Dow fell 175.78, or 2.02
percent, to 8,515.47 after falling 504 in the early going and trading
down more than 400 at times. Still, the blue chips remained above the
8,000 level; at its recent low of Oct. 10, the Dow traded as low as
7,882.51. The Dow hasn't closed below that level since March 31, 2003,
when it ended at 7,992.13.
Broader stock indicators also fell. The S&P 500 index declined
18.52, or 2.04 percent, to 889.59, and the Nasdaq composite index fell
33.84, or 2.11 percent, to 1,570.07.
The Russell 2000 index of smaller companies fell 12.97, or 2.65
percent, to 476.95.
Declining issues outpaced advancers by about 4 to 1 on the New York
Stock Exchange, where volume came to 1.17 billion shares.
Friday was the 79th anniversary of the day that, according to many
market historians, the October 1929 stock market crash began. Selling
began on Thursday, Oct. 24, and accelerated the following week on the
days that have since become known as Black Monday and Black Tuesday,
Oct 28 and 29.
At its lows Friday, the Dow was down 42 percent from its Oct. 9, 2007,
record close of 14,164.53, while the S&P 500 was off 46 percent
from its peak of a year ago. The Nasdaq was down 48 percent.
"We've moved from credit market concerns to economic concerns and
people really don't know what the impact on the economy is going to be,
they don't know the full impact. The market abhors uncertainty," said
Ben Halliburton, chief investment officer of Tradition Capital
Management in Summit, N.J.
Demand for U.S. Treasurys remained high as investors sought safe places
to put their money. The three-month bill, regarded as the safest asset
around, fell to 0.85 percent from 0.94 percent late Thursday.
There were signs that credit markets continue to thaw but are doing so
more slowly amid growing economic fears. The rate on three-month loans
in dollars - a key bank-to-bank lending benchmark known as the London
Interbank Offered Rate, or Libor - fell to 3.52 percent from 3.54
percent on Thursday.
The rates have fallen steadily for 10 days as confidence in the banking
industry has been helped by government rescue measures. However, the
improvements were smaller Friday on concerns about the health of the
global economy.
The yield on the benchmark 10-year Treasury note, which moves opposite
its price, rose to 3.71 from 3.66 percent late Thursday.
Gold futures briefly fell to their lowest level in 21 months Friday as
the dollar strengthened and the drop in the world's stock markets led
investors to sell commodities to offset massive losses in equities.
Gold regained much of what it lost later in the day though prices
remain down by about 20 percent since the start of the month.
Ordinarily, gold is seen as a safe-haven investment during market
upheavals.
The dollar has risen as a safety holding despite fears about the U.S.
economy. Investors appear more worried about the stability of emerging
markets. That's hurting the euro, for example, because in Europe
Iceland, Hungary, Ukraine and Belarus are all in talks with the
International Monetary Fund to discuss possible loans. Investors are
pulling money out of countries in Latin America and Asia amid worries
about vulnerable countries.
Other commodities declined. Light, sweet crude fell $4.21 to $63.63 on
the New York Mercantile Exchange. The sell-off, another sign that
investors fear a severe recession, came despite OPEC's announcement
that it will cut production by 1.5 million barrels a day in a bid to
shore up sagging prices.
The pullback in global markets comes ahead of a planned meeting next
week of the Federal Reserve's interest rate committee. Policymakers are
scheduled to announced a decision on interest rates on Wednesday.
Investors had been bracing for a rocky start on Wall Street after
futures contracts for the Dow and the S&P 500 fell so low they
triggered "circuit breakers," which froze selling until the market's
9:30 a.m. EDT open. That slide raised the possibility that these
emergency breaks intended to prevent panic selling could be triggered
during the regular session - something that hasn't happened since 1997.
But the Dow's decline was well short of the 10 percent, or 1,100-point,
decline that would be needed to halt trading.
The panicky feeling ahead of the opening bell Friday came after Japan's
Nikkei stock average fell a staggering 9.60 percent. In Europe,
Germany's benchmark DAX index lost 4.96 percent, France's CAC40 dropped
3.54 percent while Britain's FTSE 100 sank 5 percent after the
government said its gross domestic product fell 0.5 percent in the
third quarter, putting the country on the brink of recession.
Hong Kong's Hang Seng index fell 8.3 percent. Markets in India,
Thailand, Indonesia and the Philippines were also down sharply as
investors bailed from emerging markets to cut their exposure to risky
assets and meet redemption needs at home. Stocks fell so sharply in
Russia that the two main exchanges closed early.



Alan Greenspan and John Snow
testify
- there are a lot of
lines from
"Casablanca" that apply here...Bernie Madoff center:
how did he
do it? How about India?
What We Don’t Know Will Hurt Us
NYTIMES
By FRANK RICH
February 22, 2009
AND so on the 29th day of his
presidency, Barack Obama signed the stimulus bill. But the earth did
not move. The Dow Jones fell almost 300 points. G.M. and Chrysler
together asked taxpayers for another $21.6 billion and announced
another 50,000 layoffs. The latest alleged mini-Madoff, R. Allen
Stanford, was accused of an $8 billion fraud with 50,000 victims.
“I don’t want to pretend that today marks the end of our economic
problems,” the president said on Tuesday at the signing ceremony in
Denver. He added, hopefully: “But today does mark the beginning of the
end.”
Does it?
No one knows, of course, but a bigger question may be whether we really
want to know. One of the most persistent cultural tics of the early
21st century is Americans’ reluctance to absorb, let alone prepare for,
bad news. We are plugged into more information sources than anyone
could have imagined even 15 years ago. The cruel ambush of 9/11
supposedly “changed everything,” slapping us back to reality. Yet we
are constantly shocked, shocked by the foreseeable. Obama’s toughest
political problem may not be coping with the increasingly marginalized
G.O.P. but with an America-in-denial that must hear warning signs
repeatedly, for months and sometimes years, before believing the wolf
is actually at the door.
This phenomenon could be seen in two TV exposés of the mortgage
crisis broadcast on the eve of the stimulus signing. On Sunday, “60
Minutes” focused on the tawdry lending practices of Golden West
Financial, built by Herb and Marion Sandler. On Monday, the CNBC
documentary “House of Cards” served up another tranche of the subprime
culture, typified by the now defunct company Quick Loan Funding and its
huckster-in-chief, Daniel Sadek. Both reports were superbly done, but
both could have been reruns.
The Sandlers and Sadek have been recurrently whipped at length in print
and on television, as far back as 2007 in Sadek’s case (by Bloomberg);
the Sandlers were even vilified in a “Saturday Night Live” sketch last
October. But still the larger message may not be entirely sinking in.
“House of Cards” was littered with come-on commercials, including one
hawking “risk-free” foreign-currency trading — yet another variation on
Quick Loan Funding, promising credulous Americans something for
nothing.
This cultural pattern of denial is hardly limited to the economic
crisis. Anyone with eyes could have seen that Sammy Sosa and Mark
McGwire resembled Macy’s parade balloons in their 1998 home-run derby,
but it took years for many fans (not to mention Major League Baseball)
to accept the sorry truth. It wasn’t until the Joseph Wilson-Valerie
Plame saga caught fire in summer 2003, months after “Mission
Accomplished,” that we began to confront the reality that we had gone
to war in Iraq over imaginary W.M.D. Weapons inspectors and even some
journalists (especially at Knight-Ridder newspapers) had been telling
us exactly that for almost a year.
The writer Mark Danner, who early on chronicled the Bush
administration’s practice of torture for The New York Review of Books,
reminded me last week that that story first began to emerge in December
2002. That’s when The Washington Post reported on the “stress and
duress” tactics used to interrogate terrorism suspects. But while
similar reports followed, the notion that torture was official American
policy didn’t start to sink in until after the Abu Ghraib photos
emerged in April 2004. Torture wasn’t routinely called “torture” in
Beltway debate until late 2005, when John McCain began to press for
legislation banning it.
Steroids, torture, lies from the White House, civil war in Iraq, even
recession: that’s just a partial glossary of the bad-news vocabulary
that some of the country, sometimes in tandem with a passive news
media, resisted for months on end before bowing to the obvious or the
inevitable. “The needle,” as Danner put it, gets “stuck in the groove.”
For all the gloomy headlines we’ve absorbed since the fall, we still
can’t quite accept the full depth of our economic abyss either. Nicole
Gelinas, a financial analyst at the conservative Manhattan Institute,
sees denial at play over a wide swath of America, reaching from the
loftiest economic strata of Wall Street to the foreclosure-decimated
boom developments in the Sun Belt.
When we spoke last week, she talked of would-be bankers who, upon
graduating, plan “to travel in Asia and teach English for a year” and
then pick up where they left off. Such graduates are dreaming, Gelinas
says, because the over-the-top Wall Street money culture of the credit
bubble isn’t coming back for a very long time, if ever. As she
observes, it took decades after the Great Depression — until the 1980s
— for Wall Street to fully reclaim its old swagger. Not until then was
there “a new group of people without massive psychological scarring”
from the 1929 crash.
In states like Nevada, Florida and Arizona, Gelinas sees “huge
neighborhoods that will become ghettos” as half their populations lose
or abandon their homes, with an attendant collapse of public services
and social order. “It will be like after Katrina,” she says, “but it’s
no longer just the Lower Ninth Ward’s problem.” Writing in the current
issue of The Atlantic, the urban theorist Richard Florida suggests we
could be seeing “the end of a whole way of life.” The link between the
American dream and home ownership, fostered by years of bipartisan
public policy, may be irreparably broken.
Pity our new president. As he rolls out one recovery package after
another, he can’t know for sure what will work. If he tells the whole
story of what might be around the corner, he risks instilling fear
itself among Americans who are already panicked. (Half the country,
according to a new Associated Press poll, now fears unemployment.) But
if the president airbrushes the picture too much, the country could be
as angry about ensuing calamities as it was when the Bush
administration’s repeated assertion of “success” in Iraq proved a sham.
Managing America’s future shock is a task that will call for every last
ounce of Obama’s brains, temperament and oratorical gifts.
The difficulty of walking this fine line can be seen in the drama
surrounding the latest forbidden word to creep around the shadows for
months before finally leaping into the open: nationalization. Until he
started hedging a little last weekend, the president has pointedly said
that nationalizing banks, while fine for Sweden, wouldn’t do in
America, with its “different” (i.e., non-socialistic) culture and
traditions. But the word nationalization, once mostly whispered by
liberal economists, is now even being tossed around by Lindsey Graham
and Alan Greenspan. It’s a clear indication that no one has a better
idea.
The Obama White House may come up with euphemisms for nationalization
(temporary receivership, anyone?). But whatever it’s called, what will
it mean? The reason why the White House has been punting on the new
installment of the bank rescue is not that the much-maligned Treasury
secretary, Timothy Geithner, is incapable of getting his act together.
What’s slowing the works are the huge political questions at stake,
many of them with consequences potentially as toxic as the banks’
assets.
Will Obama concede aloud that some of our “too big to fail” banks have,
in essence, already failed? If so, what will he do about it? What will
it cost? And, most important, who will pay? No one knows the sum of the
American banks’ losses, but the economist Nouriel Roubini, who has
gotten much right about this crash, puts it at $1.8 trillion. That
doesn’t count any defaults still to come on what had been considered
“good” mortgages and myriad other debt, whether from auto loans or
credit cards.
Americans are right to wonder why there has been scant punishment for
the management and boards of bailed-out banks that recklessly sliced
and diced all this debt into worthless gambling chips. They are also
right to wonder why there is still little transparency in how TARP
funds have been spent by these teetering institutions. If a CNBC
commentator can stir up a populist dust storm by ranting that Obama’s
new mortgage program (priced at $75 billion to $275 billion) is
“promoting bad behavior,” imagine the tornado that would greet an even
bigger bank bailout on top of the $700 billion already down the TARP
drain.
Nationalization would likely mean wiping out the big banks’ managements
and shareholders. It’s because that reckoning has mostly been avoided
so far that those bankers may be the Americans in the greatest denial
of all. Wall Street’s last barons still seem to believe that they can
hang on to their old culture by scuttling corporate jets, rejecting
bonuses or sounding contrite in public. Ask the former Citigroup wise
man Robert Rubin how that strategy worked out.
We are now waiting to learn if Obama’s economic team, much of it drawn
from the Wonderful World of Citi and Goldman Sachs, will have the will
to make its own former cohort face the truth. But at a certain point,
as in every other turn of our culture of denial, outside events will
force the recognition of harsh realities. Nationalization,
unmentionable only yesterday, has entered common usage not least
because an even scarier word — depression — is next on America’s list
to avoid.
Greenspan Says He Was Mystified by
Subprime Market
NYTIMES "Dealbook"
February 12, 2009, 7:50 am
Alan Greenspan, the former chairman of the Federal Reserve, told CNBC
in a documentary to be shown Thursday night that he did not fully
understand the scope of the subprime mortgage market until well into
2005 and could not make sense of the complex derivative products
created out of mortgages.
“So everybody in retrospect now knows that that boom was developing
under the markets for quite a period of time, but nobody knew it,” Mr.
Greenspan told CNBC’s David Faber. “In 2004, there was just no credible
information on that. It wasn’t until we got well into 2005 that the
first inklings that that was developing was emerging,” he said.
Mr. Greenspan’s critics have argued that the former Fed chairman
expanded the money supply well beyond the growth in the nation’s gross
domestic product by keeping interest rates too low for too long.
The Fed’s “easy money” policy created an excess of cash that inflated
equity and asset prices, leading to both the technology bubble of the
late 1990s and the housing bubble in this decade.
While Mr. Greenspan acknowledges that he could have done something to
avert the housing crisis, he contends his hands were tied.
“If we tried to suppress the expansion of the subprime market, do you
think that would have gone over very well with the Congress?” Mr.
Greenspan said. “When it looked as though we were dealing with a major
increase in home ownership, which is of unquestioned value to this
society — would we have been able to do that? I doubt it.”
Mr. Greenspan said that if he had taken steps to prevent the crisis,
the outcome would have been painful.
“We could have basically clamped down on the American economy,
generated a 10 percent unemployment rate,” he said. “And I will
guarantee we would not have had a housing boom, a stock market boom or
indeed a particularly good economy either.”
Mr. Greenspan also lays the blame on the ratings agencies and the
people that trusted their judgment for the proliferation of the
mortgage derivatives that were a major part of the current financial
crisis.
“What we have created in this world is an aura around the credit rating
agencies about certification from them is the Good Housekeeping Seal of
Approval, ” Mr. Greenspan said. “I will tell you the record of a lot of
the forecasters of ratings have not been distinguished. They never
were.”
The interview is part of a two-hour documentary, “House of Cards,” to
be shown on CNBC on Thursday at 8 p.m. and 12 a.m. Eastern time.
–Cyrus Sanati
In India, Crisis Pairs With Fraud
NYTIMES
By JOE NOCERA
January 10, 2009
“It is with deep regret, and tremendous burden that I am carrying on my
conscience, that I would like to bring the following facts to your
notice.”
Thus begins, in calm but painful fashion, one of the most extraordinary
corporate confessions ever written, a letter sent Wednesday from B.
Ramalinga Raju, the founder and chairman of Satyam Computer Services,
to the company’s board. Among the startling facts Mr. Raju proceeds to
disclose is that most of the cash on the company’s balance sheet does
not exist, that Satyam’s revenue has been overstated for years, and
that its real profit for the quarter that ended Sept. 30 was only $12.5
million — rather than the $136 million the company had reported to
investors. Mr. Raju, in other words, had been cooking the books.
Satyam is a company I had been reading a lot about in the business
papers during my recent trip to India. Mr. Raju, 54, founded the
company 21 years ago, and turned it into what appeared to be one of
India’s glittering technology success stories, a consulting and
outsourcing powerhouse that rivaled the likes of Infosys and WiPro,
with 53,000 employees, and 185 Fortune 500 companies among its roster
of clients. Mr. Raju himself was a much-admired chief executive who won
awards for entrepreneurship and established philanthropies to help
Indians who lived in rural poverty.
When I was in India, however, Mr. Raju was grabbing headlines for a
less exalted reason. He had tried to push through a deal to buy two
companies in which he held ownership interests — Maytas Infra and
Maytas Properties, which were run by his sons. (Maytas is Satyam
spelled backward.) Satyam’s directors had rubber-stamped the deal — but
to the surprise of the Indian business community, accustomed to seeing
such inside deals go through, Satyam’s shareholders revolted.
Institutional investors denounced Mr. Raju for seeking to buy
infrastructure and real estate companies that were far afield from
technology outsourcing. Indian mutual fund managers complained
anonymously in the business pages that Mr. Raju was using shareholders’
money to give himself and his sons a rich and undeserved payday. The
board was raked over the coals in the press for approving the deal. The
stock was pummeled.
And lo and behold, the investor backlash succeeded: Mr. Raju beat a
hasty retreat and withdrew the offer to buy the two companies. Even
after the deal fell through, it remained big news, and everyone I
interviewed had an opinion about it. Some thought it gave India a black
eye, because it exposed the country’s lackadaisical attitude toward
corporate governance. Others thought it would ultimately be good for
India, because it showed all Indian investors that they did not have to
roll over every time a corporate executive tried to pull a fast one. No
one, however, realized the truth. As Mr. Raju put it in his letter,
“The aborted Maytas acquisition deal was the last attempt to fill the
fictitious assets with real ones.” When the deal fell through, the jig
was up.
And thus came the final bit of proof — as if one was needed — that the
credit crisis had hit India. Here in the United States, the
extraordinary Ponzi scheme that Bernard L. Madoff is accused of running
was exposed when the credit crisis caused his investors to seek
wholesale redemptions — money he did not have. The credit crisis also
helped bring Mr. Raju’s fraud to light. He had been keeping the company
afloat by borrowing against his Satyam shares. But when the Indian
stock market crashed last fall — and Mr. Raju could not meet the margin
calls — his lenders began selling his shares. He made his confession
because he no longer had any means to funnel money into the company.
Any halfway decent financial crisis has to have its signature fraud,
and thanks to Mr. Raju, India now has one.
•
Every bubble develops its own mythology — its variation of that old
mantra, “It’s different this time.” In the United States, during the
housing bubble, the mythology was that we could build an economy out of
endless debt, and no harm would come because the foundation upon which
that debt was built — the price of housing — was indestructible.
India had a different mythology. It was called “decoupling.” The Indian
economy, so the theory went, had become decoupled from the American
economy, so that even if our economy ran into trouble, theirs would
continue humming along. Indeed, India might even find itself in a
position to take advantage of our troubles, by selling us more
outsourcing services that would lower corporations’ overhead costs.
In the United States, we tend to think of Indian business as one giant
outsourcing operation. But Indian economists are quick to point out
that outsourcing is a much smaller part of the economy than we in the
West realize: less than 10 percent. In fact, unlike China, which had
built its economy around low-cost exports — and was thus obviously
vulnerable to an economic downturn in the West — only 22 percent of
India’s overall economy is export-related. India has been growing at a
rate of 9 to 10 percent a year not so much because of its exports but
because it has a thriving domestic economy, with a newly emergent
middle class.
As India took comfort in the decoupling theory, it became easy to
overlook the signs that a bubble was forming. The stock market was
rising rapidly, and those new members of the middle class were jumping
in with both feet.
The mutual fund industry went from $5 billion in assets to around $40
billion almost overnight. The price of real estate was skyrocketing.
Companies were growing at a breakneck pace of 50 to 60 percent a year.
Foreign investment was pouring into the country. And some Indian
companies were piling up debt — like the Tata Group, which borrowed
money last year to make its triumphant purchase of Jaguar and Land
Rover for $2.3 billion. The deal was struck around the time Bear
Stearns was collapsing — proof, surely, that decoupling was real.
Perhaps if we had just lived through a stock market bubble, rather than
a credit bubble, the decoupling theory might have held up. Stock market
bubbles tend to be self-contained. But as we have learned, credit is
different. When a credit bubble bursts it becomes a contagion that
jumps oceans and national borders, spreading from bank to bank,
institution to institution, even person to person, until the entire
financial system is bereft of confidence. No country, it turns out, is
immune, no matter how robust its domestic economy.
Starting early last year, the Indian stock market began a slow and
steady decline. Foreign investors started pulling out, as they sold off
liquid Indian securities to raise cash for their own needs. For the
same reason, all that foreign capital that had flowed into the country
suddenly began to dry up. Banks, seeing the liquidity crisis spread
across the Western world, started preserving their own capital — and
thus loans became increasingly difficult to come by. Sure enough, the
Indian domestic economy slowed down.
Then came the Lehman Brothers bankruptcy — and like everywhere in the
world, for the next six weeks, business in India came to a near
standstill.
“When liquidity dries up, it doesn’t matter where you are,” said
Jamshid Pandole, a managing partner of Inspire Capital Management, a
hedge fund firm that invests in the Indian market. Icici Bank, the
country’s largest privately held bank, actually had a short-lived run
on the bank when it disclosed that it had a small amount of Lehman
Brothers bonds in its portfolio.
And now? India’s stock market is down 60 percent from its highs. The
country is woefully short of the capital it needs to meet its growth
expectations, which have been reduced to 5 percent this year, instead
of the 9 percent that had become routine.
“It’s still growth,” said Neeraj Bhargava, the chief executive of WNS,
a rapidly expanding outsourcing company based in Mumbai. “But for us, 5
percent practically feels like a recession.”
In New Delhi, a huge airport construction project is stalled because
the developer cannot get the funds he needs to finish it. Tata, which
is struggling under its debt load, has asked the British government for
a £1 billion loan to tide over troubled Jaguar. The stock of all
the big technology consulting companies — most of whom had Wall Street
firms as clients — has been hammered, and their profits are dropping,
as a result of the credit crisis.
And decoupling? Nobody believes in it anymore. “Decoupling is a myth,”
said Anand G. Mahindra, vice chairman and managing director of Mahindra
& Mahindra, a conglomerate that is one of the country’s biggest
companies. He should know. Mahindra & Mahindra is perhaps best
known in India as a manufacturer of cars and trucks, mainly for the
domestic economy. Last month, the company cut production and
temporarily shut some plants because demand for vehicles had fallen off
significantly.
And, of course, there is Mr. Raju and the Satyam fraud. In many ways,
the Satyam scandal is having the same effect in India that the Madoff
scandal is having here. Mr. Madoff was an important, highly respected
figure on Wall Street, just as Mr. Raju was an important, highly
respected figure in the Indian business world.
They were the last people anyone suspected of committing huge fraud. To
have it then turn out that the two frauds went on for years, under the
noses of regulators and accountants, made them all the more shocking.
They will both wind up causing immense pain and suffering. Many people
who trusted Mr. Madoff have lost everything, while it seems a sure bet
that many of the 53,000 Satyam employees will wind up jobless.
Of course, it is also true that thanks to Mr. Madoff, the hedge fund
industry will never be the same. Regulation that the country has long
needed, but which the fund industry fought off, will surely be enacted
in the next year or so, allowing regulators to more closely track hedge
funds, to prevent a recurrence.
And it seems pretty likely that the Satyam scandal will have a similar
effect in India. In their aftermath, financial crises generally lead to
new, tougher rules that protect investors, and sniff out fraud. If that
turns out to be one final way India is coupled with America, it will
not be such a bad thing.
Talking Business: How India Avoided a
Crisis
NYTIMES
By JOE NOCERA
December 20, 2008
MUMBAI
“What has taken a number of us by surprise is the lack of adequate
supervision and regulation,” Rana Kapoor was saying the other day.
“This was despite the fact that Enron had happened and you passed
Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a
more controlled economy but ....” He smiled sweetly as his voice
trailed off, as if to take the sting off his comments. But they stung
nonetheless.
Mr. Kapoor is an Indian banker, a former longtime Bank of America
executive with a Rutgers M.B.A. who, along with his business partner
and brother-in-law, Ashok Kapur, was granted government permission four
years ago to start a private bank, which they called Yes Bank. In the
United States, Yes Bank is the kind of name a go-go banker might give
to, say, a high-flying mortgage lender in the middle of a bubble. (You
can even imagine the slogan: “Yes is part of our name!”) But Yes Bank
is not exactly the Washington Mutual of India. One news release it
hands out to reporters who come calling is an excerpt from a 2007
survey by The Financial Express: “#1 on Credit Quality amongst 56 Banks
in India,” reads the headline.
I arrived in Mumbai three weeks after the terrorist attacks that killed
200 people — including, tragically, Yes Bank’s co-founder Mr. Kapur,
who had served as the company’s nonexecutive chairman and was gunned
down while having dinner at the Oberoi Hotel. (His wife and two dinner
companions miraculously escaped.)
My hope in traveling to Mumbai was to learn about the current state of
Indian business in the wake of both the credit crisis and the attacks.
But in my first few days in this grand, sprawling, chaotic city, what I
mainly heard, especially talking to bankers, was about America, not
India. How could we have brought so much trouble on ourselves, and the
rest of the world, by acting in such an obviously foolhardy manner?
Didn’t we understand that you can’t lend money to people who lack the
means to pay it back? The questions were asked with a sense of
bewilderment — and an occasional hint of scorn. Like most Americans, I
didn’t have any good answers. It was a bubble, I would respond with a
sheepish shrug, as if that were an adequate explanation. It isn’t, of
course.
“In India, we never had a