Tipple Boy and Drivers. Maryland Coal Co. mine near Sand Lick, West Virginia. 'Boy with mule was afraid at first to be in the picture; another boy said he feared we might make him go to school.'
Ilargi: Another one today by Dan W. at Ashes Ashes . One minor point from me (by no means a criticism): Rome is an easy one, I’d like to see some more on the demise of empires like Inca, Maya, Babylon, Greece etc., compared to America.
DanW: When in Rome...:
The Fall of Rome, The Fall of America
The United States of America is history. Were I a betting man, I’d give us another ten to twenty years, max. And unlike the Roman Republic which took 500 years to implode (followed of course by 500 years give or take of dictatorship), we’ve managed it in less than 300 years: pretty impressive really. I know that many in academia find comparisons between the coming fall of the US and the fall of Rome rather trite, but having studied and taught history and economics for over twenty years, I find their objections---based more upon their elitist intellectualism than upon an honest comparison and evaluation of the two empires---obtuse and reactionary. Even a most cursory glimpse of the dynamics that doomed the Roman Empire to collapse---and that also portent the end of the American experiment---provides us with ample evidence as to the validity of the comparison.
Let’s take a look.
As we know, the Roman Republic was, from its incipience, a Republic ruled by the landed aristocracy. So too was the United States. It took over 200 years before the middle and working classes in Rome---the plebeians---were granted representation through elected officials (tribunes) who actually had certain veto powers in the Roman Senate and who could enact laws in the people’s assemblies. It took the United States less than a century before similar democratic reforms became reality. In Rome, the demands by the under classes that laws existed to curb the power of aristocratic judges found form in the “12 tables” of law. Interestingly, these reforms often came about through peaceful compromise, rather than through violence and coercion, as in its youth the Roman Republic enjoyed a deep and abiding loyalty and commitment to the commonwealth from its citizens. And I would argue that, save for a few significant hiccups along the way, the same can be said of the American Republic.
Between roughly 340 B.C. and 140 B.C., the Roman Republic expanded its wealth and territorial boundaries through a series of successful military campaigns and commercial ventures. Rome conquered Carthage, Macedonia (Greece), Syria and reached its arm of influence even into Egypt. Of course and as you know from studying history, these conquests helped create a class of super-wealthy Roman aristocrats and public officials who benefited from coercively favorable trade agreements with foreign lands, from the acquisition and exploitation of enormous estates and farms, and through the employment of slave labor at a cost far less than that demanded by the Roman citizen-worker. The Republican experiment was beginning to founder on the rocks of greed, wealth and over-indulgence. Hmmmm, sound familiar?
The American experiment with Democratic Republicanism, I would argue, began to decline in the mid to late 19th century when the founding fathers’ ideals of freedom became twisted by a growing class of millionaires; when the Enlightenment-borne ideal of freedom as fair play---a sense of a true commonwealth in which moral and ethical considerations trumped the virtues of unimpeded access to free markets and the accumulation of riches---was supplanted by the belief that personal industry and the unfettered ability of one to amass a fortune through his own hard work became the accepted belief-system of the evolving American experiment. I would also add that the profits created by the employment of slave labor in Roman times has been effectively emulated by American plutocrats in their exploitation of, in particular, foreign workers and foreign lands vis-à-vis the actions of such institutions as the IMF and through the creation of an American factory culture in the poorest of poor lands.
Well, as you know, the Roman virtues of hard work, self-discipline, patriotism, and loyalty to the ideals of the Republic vanished as the rich became richer on the backs of the poor. Small Roman farms were gobbled up by larger estates. Farmers and other members of the growing Roman underclass---unable to pay their debts because they simply couldn’t compete with the free slave labor being employed by the Roman proto-industrialists---moved to the cities, faced mass unemployment, and found themselves in utterly dire straits. Again, it should appear rather obvious that these dynamics are being played out in the current American iteration of the collapse of Rome. While the specific comparisons are clearly not exact replications of the Roman experience, the similarities remain pretty dramatic. American industry cannot compete with overseas production---"American" products made overseas--- that is more cost-effective. Cattle raised in deforested tracts of Brazilian rainforest are cheap, and the slaughterhouses in Brazil are not subject to U.S. workplace regulation. I could site many more examples, but you get the point. The American sense of loyalty and patriotism that was once guided the American identity has atrophied significantly. As the CEOs and CFOs of major industry have grown wealthy beyond the wildest fantasies of avarice, and while the American working class has grown increasingly impoverished, loyalty to the American Republican experiment has waned.
OK, so back to the history books. In response to the growing disparities in Roman society, in response to the ever-increasing socioeconomic desperation of the common Roman citizen, political divisions became increasingly militant and marked by violence and civil strife. Most members of the uber-wealthy aristocracy bitterly opposed any threats to their way of life, and, as you know, most of the Senate by 100 B.C. still remained firmly under the control of these fantastically wealthy kleptocrats. In opposition to these super-rich political leaders, a small but vocal cadre of political leaders who believed in the righteous cause of reform and help for the common Roman citizen emerged on the scene and led the commoners in violent revolts against the aristocracy. The Republican experiment was ending, and the era of dictatorship and Empire was born.
And so here we are, at the dawn of the collapse of the American Republic. And the United States will collapse, and soon. There can be little doubt:
Loyalty to the state has all but vanished as any trust in the system has been summarily destroyed through the actions of our wealth-obsessed leaders. Do you remember the Star Trek episode in which “the hippies” hijack the Enterprise in an attempt to try and find the mythical planet, Eden? Do you remember that the hippies, led by a brilliant but insane demagogue do, in fact, find Eden. And do you remember that Eden turns out not to be the paradise that the hijackers believed to would be: It turns out, instead, to be a terrible, tragic fraud; a poisonous world veiled by an extraordinary, breath-taking beauty: all of the exotic flora deadly to the touch, the fruits on the trees filled with deadly toxins rather than life-sustaining nectars. Nothing is as it appears. Everything that the crew formerly knew and believed becomes in an instant totally false, poisonous, corrosive. Trust in what once had been accepted as truth is shattered. To survive on the planet Eden is to forget everything you know and to begin anew: trust nothing and no one, lest ye die.
And now back to our world. For generations we have accepted as truth that we all need banks, and the loans provided by banks, to survive. We have, with nary a hint of doubt or a moment of protest, accepted as fact that a good credit rating is worth its weight in gold. We have marched toe-to-heel in a parade that has been choreographed by the plutocrats, marshaled by the aristocrats, and coordinated by the bureaucrats. For decades upon decades this has been our only reality, and we have come to trust it just as we trust that the apple into which we bite will be sweet and nourishing. But now, 2008, and in an instant, we have found our own Eden. The banks to which we once flocked, in which we placed out trust and our futures, that once appeared the pictures of health and good-living, have turned inside-out. We no longer recognize what we once did because the rotten underbelly has been exposed, the fetid intestines strewn on the floor at our feet. The smile of the carefully groomed bank manager, once trusted as benignly sincere, is now viewed with hostile contempt. He has become a thief, a toxin, a heartless zombie in an Armani suit.
We look at advertisements for credit ratings and we laugh and shake our heads, for we have come to realize that it is all a dance of death, a dance in which the ones who invariably end up dead first are the very ones who worshipped the false god of credit with the most fervent zeal. A report from Amazon.com of quarterly profits is greeted with knowing disdain: the short-sellers are out in force, trying to make one more buck before the truth comes out. The banks and the FED refuse to tell us what we already know. And hiding the truth from us only cements for us the fact that there is, in fact, no truth. Nothing is at it was. Nothing remains familiar. The entire landscape rots under a mist of contempt and lies and fraud and mistrust and disbelief. There is no solid ground upon which to stand. A rotten piece of meat cannot be reconstituted: it must be left to fester and vanish in a haze of maggots and bottom-feeding. Our global economic house of fraud has finally imploded. No one can be trusted. Our government is complicit in this hijacking. Our bankers, our mortgage agents, our investment managers, all part of the epic web of deceit that has brought us to our knees. After all of these years we have at last found Eden, and, of course, it has destroyed us. The United States of America will soon collapse under the weight of this treachery.
The myth of unlimited GDP growth has been exposed as pure fraud. The last decade of growth in the U.S. has been exposed as nothing other than a growth of debt---or more appropriately as a multi-trillion dollar tax burden that future generations of common Americans will have to service so that the rich can keep their mansions and yachts and skiing trips to the Alps---and all the while the wealthy have used the promise of growing national poverty to fund their extravagances. They have borrowed and bet and taken trillions in fictitious winnings from the casino, and they have used these false monies as collateral to fund their billion-dollar lifestyles, and they have left the rest of us to clean up after their Dionysian orgy of greed. In Rome, the same. In ancient Rome the heavy tax burden levied on the common citizen by the wealthy, as a way to further subsidize the grandiose lifestyles of the aristocracy, bred an army of militant citizens who took to the streets in rebellion.
The wars of our leaders---Vietnam, Iraq, Afghanistan, Nicaragua, Iran (?), Pakistan (?)---have been exposed as colonial ventures meant to feed the avarice of the American aristocracy rather than as just battles of our past that were viewed as righteous struggles in defense of liberty. In Rome, the wars of the Empire were increasingly fought by soldiers who fought for money and to try and escape the clutches of debt-servitude and poverty, not because they believed in the “country” for which they often made the supreme sacrifice. Today’s American wars are fought for oil, for increasing the IMF’s global influence vis-à-vis usury and resource exploitation, for increased access to raw materials---not for freedom and democracy as our transparently disingenuous leaders so gratuitously assert. And more and more, the courageous women and men who fight in these duplicitous wars do so not out of a deep and abiding loyalty to the leaders of our nation, but because they are poor and needed a way out. And by the thousands they are returning from war without legs, and without arms, and with terrible brain injuries, and the wealthy have no use for them anymore and as such their benefits are cut and their homes repossessed and they are cast aside.
The fall has been precipitous, and it is impossible to predict how it will play out. Catastrophic climate change, wars between nuclear superpowers, other new wars (Did you read about Israel and Gaza today?), Peak Oil. All of these variables and a thousand others make accurate predictions of how exactly the end of things will arrive is difficult. What is not, however, is this: the end of things is near. Five years, ten years, hard to say: but the American Republican experiment has been slaughtered on the alter of avarice---just as the Roman experiment was. The results will be cataclysmic. Of this there can be no doubt.
Ilargi: An almost humorous piece from the Washington Post pointing fingers at the EU for not accepting new accounting regulations. In reality, the US insists on keeping its own standards for now, which would put EU banks -and other companies- in a bind. On both sides of the pond, the story is simple: fair value accounting, the kind that doesn't allow mark-to-model or mark-to-whatever-suits-me, would bring many big firms down. Who'll be the first to blink? For now, all parties are happy not to comply.
Fair Value Accounting Standards Wilt Under Pressure
World leaders have vowed to help prevent future financial meltdowns by creating international accounting standards so all companies would play by the same rules, but the effort has instead been mired in loopholes and political pressures. In October, largely hidden from public view, the International Accounting Standards Board changed the rules so European banks could make their balance sheets look better. The action let the banks rewrite history, picking and choosing among their problem investments to essentially claim that some had been on a different set of books before the financial crisis started.
The results were dramatic. Deutsche Bank shifted $32 billion of troubled assets, turning a $970 million quarterly pretax loss into $120 million profit. And the securities markets were fooled, bidding Deutsche Bank's shares up nearly 19 percent on Oct. 30, the day it made the startling announcement that it had turned an unexpected profit. The change has had dramatic consequences within the cloistered world of accounting, shattering the credibility of the IASB -- the very body whose rules have been adopted by 113 countries and is supposed to become the global standard-setter, including for the United States, within a few years.
Sir David Tweedie, chairman of the IASB, acknowledged that the body needs more protection from political manipulation before it can claim that it has become the global gold standard. Tweedie said he nearly resigned over the rule change demanded by European politicians. "I was so frustrated by the whole thing," he said. "All the time when we are trying to build a global accounting system, and we are pretty close to it, and then suddenly out of left field this thing appears. It's just absolutely exasperating." U.S. standards have been set by the Financial Accounting Standards Board since 1973. "Right now, there is no credibility," said Robert Denham, chairman of the Financial Accounting Foundation, which oversees the FASB. "If we are going to have global accounting standards, my view is that is not going to work if the IASB is going to be jerked around by the European Commission. That is the very real risk that is posed by the EC coercion and the IASB's response."
The episode exposes how small, incremental changes in arcane accounting rules can affect billions of dollars in market value and corporate profitability. In turn, the money at risk raises the political stakes, as desperate companies begin to lobby political leaders to insist on changes that normally would come about only after a careful discussion and evaluation by experts. For years, there has been a disconnect between U.S. and international accounting rules. With the history of corporate litigation in the United States, U.S. standards tend to be exact and explicit, making it easier for companies to defend themselves in court. International rules rely on broad principles, giving companies greater leeway to make their own judgments. An extensive review of international accounting standards published last month by Moody's Investors Service found significant differences between two French companies on one key issue -- even though they used the same accounting firm.
Nevertheless, more than 110 countries have already adopted international rules since the IASB was established in 2001, with Japan, South Korea, India and Canada soon to make the switch. Tweedie expects that 150 countries will have adopted IASB rules within the next three years. The Securities and Exchange Commission on Nov. 14 adopted a plan to have all U.S. companies prepare their statements using international standards for fiscal years ending after Dec. 15, 2016. More than 100 of the largest companies would be permitted to adopt the rules as soon as next year. But the financial crisis demonstrated how vulnerable the fledgling system is to political pressure.
On Oct. 8, the leaders of France, Germany, Italy, Britain and the European Commission met in Paris to discuss the worldwide economic crisis. They issued a statement saying they were working together "within the European Union and with our international partners" to ensure the safety and stability of the worldwide banking system. But buried within the statement was a sentence warning that European banks should not face a competitive disadvantage with U.S. banks "in terms of accounting rules and their interpretation." The leaders added ominously: "This issue must be resolved by the end of the month."
At issue is an accounting standard known as fair value, or mark to market, in which companies disclose how much an asset could fetch on the open market. With the values of assets plummeting, banks were suddenly stuck with paper losses on assets they could no longer sell. With some critics saying the provision was forcing banks to take large write-downs, the SEC and FASB issued guidance in late September that companies could use their own internal models for assigning a value to assets -- in essence, a nod to the principles-based international rules.
But European officials smelled a rat. Under rare circumstances, U.S. companies are permitted to reclassify assets they were actively seeking to trade into long-term "loans," using an accounting rule that was considered weaker than the international equivalent. The international rules did not permit such transfers, and European officials feared that the new guidance was handing the Americans a competitive advantage. Shortly after the European leaders' statement, Commissioner Charlie McCreevy of the European Commission, who was in charge of the European Union internal market, signaled he would introduce legal changes, overriding the international rules.
McCreevy decided to exploit a loophole in the system -- that all accounting rules must be adopted as legislation by the E.U. So McCreevy was going to force the changes on the IASB by threatening to remove -- or carve out -- the existing regulation, leaving nothing in its place. "We made it clear what the IASB should accept," said Oliver Drewes, a spokesman for McCreevy. "There is always the right, and threat and the pressure, that one could go for a carve-out for European companies." Tweedie said the rulemaking body had only four days to act before McCreevy pushed through a change in the law, even though accounting changes of this magnitude would normally take months to achieve.
Unlike the U.S. board, the international board has no regulator like the SEC to help shield it from political pressure. So the IASB was at the mercy of the European Commission. "There had been pressure on him, I suspect, from some of the European leaders," Tweedie said, referring to McCreevy. "It was quite clear it was going to be pushed through and that would have been a disaster. We were faced with this hole being blown in the European accounting, and we just wanted to step in and control it." But the IASB bowed to demands to let the firms backdate the accounting shift to the beginning of July -- something not permitted under U.S. rules.
In a recent report, Moody's wrote that the backdating provision could distort a bank's earnings and capital position, since "it allows managements to 'cherry-pick' selected assets" and "distort their economic reality," making it more -- not less -- difficult to compare global bank performance. "The measure does not make much sense in the first place," said J.F. Tremblay, a Moody's vice president. "But the fact that a board can be influenced like that is not good news."
Treasuries Post Weekly Loss as Auctions Highlight Supply Issue
Treasuries lost for the first week since October after U.S. sales of a record $66 billion of two- and five-year notes focused attention on the nation’s funding requirements amid a deepening recession. The new securities drew historic low yields as the Treasury faces selling what it has estimated will be up to $2 trillion in debt this fiscal year. The U.S., strapped with a swelling budget deficit, needs to finance a bailout of the banking system and an economic stimulus plan that members of President-elect Barack Obama’s transition team said could cost $850 billion. "It has to do with the amount of Treasuries that are coming out going forward," said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc. "The question is where the demand is going to come from with these kinds of low yield levels."
The yield on the 30-year bond rose six basis points, or 0.06 percentage point, to 2.61 percent, according to BGCantor Market Data. It was the yield’s first weekly increase since the five days ended Oct. 31. The yield touched 2.5090 percent on Dec. 18, the lowest since regular sales of the security began in 1977. The price of the 4.5 percent bond due in May 2038 tumbled 1 1/2, or $15 per $1,000 face amount, to 138 18/32. The two-year note’s yield increased 15 basis points to 0.88 percent, its biggest jump since June. It touched 0.6044 percent on Dec. 17, the lowest since regular sales of the security began in 1975. The yield on the five-year note climbed 16 basis points to 1.51 percent. It touched 1.1852 percent on Dec. 17, the lowest since at least 1953, when records began.
The difference between the yields of Treasuries maturing in two years and 10 years narrowed 14 basis points on the week to 1.25 percentage points, the least in six months, from 2.62 percentage points on Nov. 13. The gap has shrunk as the Federal Reserve has said it will buy long-term fixed-income assets, possibly including Treasuries. The Treasury auctioned $28 billion of five-year notes on Dec. 23 at a yield of 1.539 percent and $38 billion of two- year notes the previous day at a yield of 0.922 percent. Both were record lows. The rising yields on Treasuries this week stemmed from "a little bit of supply overhang," said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank. The two-year Treasury note, with a yield about 65 basis points above the upper end of the Fed’s target rate range of zero to 0.25 percent, "looks pretty cheap, given where funds are and given the problems we’re still facing."
The U.S. said Dec. 10 it expects to sell between $1.5 trillion and $2 trillion in Treasuries in fiscal 2009. With the deepening slump and the "escalating size of the likely fiscal stimulus," the size of the nation’s budget deficit is headed toward more than $1 trillion, Edward McKelvey, a senior economist in New York at Goldman Sachs Group Inc., wrote in a Dec. 8 report to clients. Measures of risk to the financial system eased. The TED spread, the difference between what the government and banks pay to borrow for three months, fell for a fourth week. It declined one basis point to 1.48 percentage points, down from a record high of 4.64 percentage points Oct. 10. Trading volume was lighter than usual during the holiday week. Less than $18 billion in Treasuries changed hands yesterday, according to ICAP Plc, the world’s largest inter- dealer broker. That compares with the 10-day moving average of $135 billion.
The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to revised figures on Dec. 23 from the Commerce Department. Consumer spending fell the most in almost three decades. Discounts by retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Including fuel, sales tumbled as much as 8 percent. One of the Fed’s preferred gauges showed inflation at the lowest level since 2004. The SpendingPulse data service calculates its sales estimates based on MasterCard Inc. network transactions and adjusts for cash, checks and other payment forms. Purchase, N.Y.-based MasterCard is the world’s second-biggest credit-card company.
The core PCE index, a gauge of prices tied to consumer spending behavior, fell in November to 1.9 percent per year, a Commerce Department report showed on Dec. 24. That was the lowest since March 2004. "It’s safe to assume there’s no great shockers in any of the negative data," said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, one of the 17 primary dealers that trade with the Fed. "It’s bullish for Treasuries." U.S. government debt returned 14.3 percent in 2008, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The Standard & Poor’s 500 Index of stocks fell 41 percent, the worst year since 1931.
Ilargi: It's tragically funny to see how most economists are stuck in thinking patterns that they manage to make themselves believe are somehow proven, or even border on science, while none of that is even remotely true. These economists have nothing in their hands but a bundle of shaky theories and assumptions clad in lofty terms. They are a dangerous bunch, more now than ever before, since it’s their power that decides trillions of dollars of your money will be spent by governments. They have convinced each other that the origins of the Great Depression are now known, that Bernanke, being a "scholar" [sic] of that period, will not make the same mistakes. It's all a big pile of smelly nonsense. The assumptions of any fifth-grader are as valid as theirs.
Printing Money – and Its Price
Borrowing and spending beyond ordinary limits largely explains how Americans got into such economic trouble. For decades, businesses and consumers feasted relentlessly, as if gravity, arithmetic and the tyranny of debt had been defanged by financial engineering. Armed with credit cards and belief in a bountiful future, Americans brought home ceaseless volumes of iPods and cashmere sweaters, and never mind their declining incomes and winnowing savings. Banks lent staggering sums of money to homeowners with dubious credit, convinced that real estate prices could only go up. Government spent as it saw fit, secure that foreigners could always be counted on to finance American debt.
So it may seem perverse that in this new era of reckoning — with consumers finally tapped out, government coffers lean and banks paralyzed by fear — many economists have concluded that the appropriate medicine is a fresh dose of the very course that delivered the disarray: Spend without limit. Print money today, fret about the consequences tomorrow. Otherwise, invite a loss of jobs and business failures that could cripple the nation for years. Such thinking carries the moment as President-elect Barack Obama puts together plans to spend more than $700 billion on projects like building roads and classrooms to put people back to work. It is the philosophy behind the Federal Reserve’s decision to drop interest rates near zero — meaning that banks can essentially borrow money for free — while lending directly to financial institutions. This is the mentality that has propelled the Treasury to promise up to $950 billion to aid Wall Street, Detroit and perhaps other recipients.
But where does all this money come from? And how can a country that got itself in peril by borrowing and spending without limit now borrow and spend its way back to safety? In the case of the Fed, the money comes from its authority to print dollars from thin air. Since late August, the Fed has expanded its balance sheet from about $900 billion to more than $2.2 trillion, creating $1.3 trillion that did not exist to replace some of the trillions wiped out by falling house prices and vengeful stock markets. The Fed has taken troublesome assets off the hands of banks and simply credited them with having reserves they previously lacked. In the case of the Treasury, the money comes from the same wellspring that has been financing American debt for decades: Investors in the United States and around the world — not least, the central banks of China, Japan and Saudi Arabia, which have parked national savings in the safety of American government bonds.
Americans have gotten accustomed to treating this well as bottomless, even as anxiety grows that it could one day run dry with potentially devastating consequences. The value of outstanding American Treasury bills now reaches $10.6 trillion, a number sure to increase as dollars are spent building bridges, saving auto jobs and preventing the collapse of government-backed mortgage giants. Worry centers on the possibility that foreigners could come to doubt the American wherewithal to pay back such an extraordinary sum, prompting them to stop — or at least slow — their deposits of savings into the United States. That could send the dollar plummeting, making imported goods more expensive for American consumers and businesses. It would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home- and auto-buyers, for businesses and credit-card holders.
"We got into this mess to a considerable extent by overborrowing," said Martin N. Baily, a chairman of the Council of Economic Advisers under President Clinton and now a fellow at the Brookings Institution. "Now, we’re saying, ‘Well, O.K., let’s just borrow a bunch more, and that will help us get out of this mess.’ It’s like a drunk who says, ‘Give me a bottle of Scotch, and then I’ll be O.K. and I won’t have to drink anymore.’ Eventually, we have to get off this binge of borrowing." Some argue that the moment for sobriety is long overdue, and postponing it further only increases the ultimate costs. "Our government doesn’t have enough spare cash to bail out a lemonade stand," declared Peter Schiff president of Euro Pacific Capital, a Connecticut-based trading house. "Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover."
But most economists cast such thinking as recklessly extreme, akin to putting an obese person on a painful diet in the name of long-term health just as they are fighting off a potentially lethal infection. In the dominant view, now is no time for austerity — not with paychecks disappearing from the economy and gyrating markets wiping out retirement savings. Not with the financial system in virtual lockdown, and much of the world in a similar state of retrenchment, shrinking demand for American goods and services. Since the Great Depression, the conventional prescription for such times is to have the government step in and create demand by cycling its dollars through the economy, generating jobs and business opportunities. That such dollars must be borrowed is hardly ideal, adding to the long-term strains on the nation. But the immediate risks of not spending them could be grave.
"This is a dangerous situation," says Mr. Baily, essentially arguing that the drunk must be kept in Scotch a while longer, lest he burn down the neighborhood in the midst of a crisis. "The risks of things actually getting worse and us going into a really severe recession are high. We need to get more money out there now." Had the government worried more about limiting spending than about the potential collapse of the mortgage giants, Fannie Mae and Freddie Mac, it might have triggered precisely the dark scenario that consumes those who worry most about growing American debt, argues Brad Setser, an economist at the Council on Foreign Relations. China purchased a lot of Fannie and Freddie bonds with the understanding that they were backed by the American government. No bailout "would have been portrayed in China as defaulting on the Chinese people," Mr. Setser said. That would have increased the likelihood that China would start parking its savings somewhere other than the United States.
The most frequently voiced worry about the bailouts is that the Fed, by sending so much money sloshing through the system, risks generating a bad case of rising prices later on. That puts the onus on the Fed to reverse course and crimp economic activity by lifting interest rates and selling assets back to banks once growth resumes. But finding the appropriate point to act tends to be more art than science. The Fed might move too early and send the economy back into a tailspin. It might wait too long and let too much money generate inflation. "It’s a tricky business," says Allan H. Meltzer, an economist at Carnegie Mellon University, and a former economic adviser to President Reagan. "There’s no math model that tells us when to do it or how." But that, as most economists see it, is a worry for another day. Some policy makers are focused on staving off the opposite problem — deflation, or falling prices, as demand weakens to the point that goods pile up without buyers, sending prices down and reducing the incentive for businesses to invest.
That could shrink demand further and perhaps even deliver the sort of downward spiral that pinned Japan in the weeds of stagnant growth during the 1990s. "Those who claim that sharp increases in federal borrowing and the national debt would be ill advised at the present time, when the economy is weakening while deflation threatens, have failed to study Japan’s history," declared the economist John H. Makin in a report published by the conservative American Enterprise Institute — ordinarily, a staunch advocate for lean government. So back to the well Americans go, putting aside worries about debt, unleashing another wave of synthesized money in an effort to prevent deeper misery. "Right now," Mr. Setser says, "the risk is not doing enough."
There's No Pain-Free Cure for Recession
As recession fears cause the nation to embrace greater state control of the economy and unimaginable federal deficits, one searches in vain for debate worthy of the moment. Where there should be an historic clash of ideas, there is only blind resignation and an amorphous queasiness that we are simply sweeping the slouching beast under the rug. With faith in the free markets now taking a back seat to fear and expediency, nearly the entire political spectrum agrees that the federal government must spend whatever amount is necessary to stabilize the housing market, bail out financial firms, liquefy the credit markets, create jobs and make the recession as shallow and brief as possible. The few who maintain free-market views have been largely marginalized.
Taking the theories of economist John Maynard Keynes as gospel, our most highly respected contemporary economists imagine a complex world in which economics at the personal, corporate and municipal levels are governed by laws far different from those in effect at the national level. Individuals, companies or cities with heavy debt and shrinking revenues instinctively know that they must reduce spending, tighten their belts, pay down debt and live within their means. But it is axiomatic in Keynesianism that national governments can create and sustain economic activity by injecting printed money into the financial system. In their view, absent the stimuli of the New Deal and World War II, the Depression would never have ended. On a gut level, we have a hard time with this concept. There is a vague sense of smoke and mirrors, of something being magically created out of nothing. But economics, we are told, is complicated. It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.
I believe these ideas hold sway largely because they promise happy, pain-free solutions. They are the economic equivalent of miracle weight-loss programs that require no dieting or exercise. The theories permit economists to claim mystic wisdom, governments to pretend that they have the power to dispel hardship with the whir of a printing press, and voters to believe that they can have recovery without sacrifice. As a follower of the Austrian School of economics I believe that market forces apply equally to people and nations. The problems we face collectively are no different from those we face individually. Belt tightening is required by all, including government. Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn't have a surplus, then it must come from taxes. If taxes don't go up, then it must come from increased borrowing. If lenders won't lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value those already in circulation.
Something cannot be effortlessly created from nothing. Similarly, any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards. If we look at government market interventions through this pragmatic lens, what can we expect from the coming avalanche of federal activism? By borrowing more than it can ever pay back, the government will guarantee higher inflation for years to come, thereby diminishing the value of all that Americans have saved and acquired.
For now the inflationary tide is being held back by the countervailing pressures of bursting asset bubbles in real estate and stocks, forced liquidations in commodities, and troubled retailers slashing prices to unload excess inventory. But when the dust settles, trillions of new dollars will remain, chasing a diminished supply of goods. We will be left with 1970s-style stagflation, only with a much sharper contraction and significantly higher inflation. The good news is that economics is not all that complicated. The bad news is that our economy is broken and there is nothing the government can do to fix it. However, the free market does have a cure: it's called a recession, and it's not fun, easy or quick. But if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.
We need a moral vision as well as money to rebuild Britain
Could there be a greater corporate disaster in British history than the humbling of the Royal Bank of Scotland? Without £20bn of taxpayer support, the bank, with assets of £1.7 trillion, more than Britain's GDP, would now be bankrupt. Its mutation from bank to de facto giant hedge fund, cheerleader for casino capitalism with a portfolio of £500bn in derivatives and £100bn of takeovers in its wake, perfectly sums up our times. The financial wreckage it has induced explains why the wider economy is in such trouble. There were many other asinine banks, but RBS was leader of the pack. News that it had lent the hedge funds of the now disgraced American fraudster Bernie Madoff £400m with insufficient due diligence was symptomatic of the failure of every aspect of RBS's corporate strategy.
Sir Fred Goodwin, the now deposed CEO, and his team should be asked hard questions by both shareholders and the police. So should the outgoing management at sister Scottish bank HBOS, whose incompetence rivals Goodwin's. The former RBS chief has rightly been dubbed the world's worst banker by Slate magazine's Daniel Gross. For a decade, British banks had grown fat on what seemed an inexhaustible supply of cash from London's deep, wide market in money, succoured by savings from all over the world, and bet it on an increasingly complex and fantastical array of financial products hatched in the financial shadows. The first crack showed when Northern Rock could no longer borrow in the interbank market in the summer of 2007 because others doubted its creditworthiness. After five months of government dithering, it was nationalised. But over 2008, the cracks widened into a fissure, so that following the collapse of Lehman Brothers in September, only the finest names in world banking could tap the New York and London markets. Vast loans could not be refinanced, let alone new ones made and as property values tumbled, the collateral against which the loans had been secured evaporated.
It looked like 1929 all over again, except governments, especially in Britain and America, were determined not to repeat mistakes made following the Great Crash. The Bush administration had already put aside its ideological commitment to non-intervention in a range of responses, nationalising the US's two giant mortgage companies, Fannie Mae and Freddie Mac, then launching a $700bn programme to buy toxic loans and aggressively cutting interest rates. But still the system tottered. It was Gordon Brown who, over the weekend of 11-12 October, emerged as the world leader with a viable plan to head off what might have been the collapse of the western banking system. The response hatched in London - three pronged but centred on recapitalising the banks with taxpayers' money - became the model that the rest of the world copied. Brown sold it first to the Americans and then the Europeans.
It was a tour de force. It staved off immediate disaster. Brown's self-confidence, which had been wilting ever since he ducked calling an election a year earlier, suddenly revived. His government had a purpose: to manage Britain through the worst financial crisis since the 1930s. Labour's philosophy in favour of government activism, never wholly abandoned, was right for new times. It could not be clearer that markets were inefficient, made horrendous mistakes and needed governments; the philosophy that argued otherwise was bust. The public noticed and Labour's opinion poll ratings climbed out of the abyss.Yet he is travelling in uncharted waters. The International Monetary Fund has warned that recessions caused by financial crises are longer and deeper than others.
The banking system in Britain and elsewhere may be saved, but the interbank markets on which lending depends remain broken. Banks do not have cash, their capital is under pressure and their borrowers are distressed, hardly a recipe to increase bank lending to stimulate recovery. Germany, Japan and the US are predicting a grim recessionary year in 2009; the Treasury forecast of a mere 1% decline in British GDP seems incredible. The government's Plan A is that the combination of the fall in interest rates to 2%, the sharp fall in the pound and Brown and Darling's £20bn package - together with Barack Obama's stimulus package - will see off the worst of the recession. Critics, ranging from the Archbishop of Canterbury to the German finance minister, strongly differ. They say that lifting government borrowing to finance consumer spending only repeats the bad habits that got us into crisis, whose moral roots are unaddressed. It won't work.
These critics are wrong. The criticism of Brown and Darling should be not that they are Keynesian, it is that they are not radically Keynesian enough. They only understood the severity of the crisis too late, disbelieving that markets could make such enormous mistakes. They were too slow to nationalise Northern Rock. They should have introduced the package of schemes to make lending less risky not next month but last spring, as I and others argued. They have allowed the governor of the Bank of England to be too conservative and restrictive on the terms the Bank supplies cash. They have not urged police investigations into senior bankers, so vital for our collective sense that justice is being done, nor quickly introduced the tougher regulatory regime for which many seasoned bankers (privately) beg. They do not propose root-and-branch reform of the City. The terms of the bank rescue plan were far too penal. As a result, Britain is much less well placed than it should be.
At a secret meeting at Number 10 before Christmas, the prime minister, chancellor, governor of the Bank of England and head of the Financial Services Authority reviewed the prospects. London's interbank markets are short of up to a trillion pounds and remain crippled. Unless the Bank of England finds a trillion to plug the gap, the continuing failure of banks to lend could bring on a recession more acute than the America's. Measures that might have worked last year will now work much less effectively. Chances are being lost. As one official argued, Britain must go straight to so-called "helicopter money". Essentially, the government has to instruct the Bank of England to lend the banking system cash the Royal Mint has printed. The case was given a hearing, but ruled out. The risk of a calamitous run on sterling is too high. The cautious view was that printing money was a last-ditch measure; everything else must be tried first. The problem is that the chance of the current measures working hangs in the balance.
If the government moves to radical Keynesianism - reconstructing and restructuring the financial system - it is possible that it might avert the need for helicopter money. It needs to develop policies that will assure us all that capitalism will be arranged more fairly in future. That would be crucial to lifting depressed expectations. There are many civil servants and senior financiers who are desperate that we are still in mainstream Keynesianism, however well-intentioned and even aggressive it is. This is a time for outside-the-box thinking. For in one respect, the arguments made by the Archbishop of Canterbury are right. People everywhere are taking stock. The last decade and its values have ended in disaster, in potential depression. Everybody knows that we cannot go back. The bankers responsible must be held to account. Capitalism has to be done differently, both here and abroad. It has to be fairer. It has to comprehend that enterprise is a collective as much as an individual endeavour. It cannot just be based on "fairy money". Recovery will require radical Keynesianism. It also needs a moral vision.
Ilargi: Seeing how WaMu did business in the past 5 years, and knowing they were not the only one bending rules across the board, it's impossible not to get scared when you realize that a zillion Alt-A and Option ARM loans are due to reset over the next 2-3 years. Many people with these loans will want to re-finance, but for the vast majority that will simply never happen. If you're looking to refi, be extremely cautious. You risk sticking your neck in an even tighter noose. A few of today's articles, as well as Mr. Mortgage’s warnings in yesterday Debt Rattle, should make that abundantly clear. Remember that most US first mortgages are non-recourse loans, but not the second ones or the refinanced ones. So refinancing most often takes away the option to walk away from the loan. A refi ususally means the lender can go after you for other assets as well. That may not seem a problem yet, for many, as they mean to stay in the home anyway. Do consider, though, what the situation will be like if for instance you lose your job, or if the home value goes down another 25% or more. Be careful out there! What you see may not be what you get.
WaMu Built an Empire on Bad Loans
"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
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.’ " At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.
On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier. Interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers reveal the relentless pressure to churn out loans that produced such results. While that sample may not fully represent a bank with tens of thousands of people, it does reflect the views of employees in WaMu mortgage operations in California, Florida, Illinois and Texas. Their accounts are consistent with those of 89 other former employees who are confidential witnesses in a class action filed against WaMu in federal court in Seattle by former shareholders.
According to these accounts, pressure to keep lending emanated from the top, where executives profited from the swift expansion — not least, Kerry K. Killinger, who was WaMu’s chief executive from 1990 until he was forced out in September. Between 2001 and 2007, Mr. Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview. During Mr. Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.
WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors. "It was the Wild West," said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. "If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan."
JPMorgan Chase, which bought WaMu for $1.9 billion in September and received $25 billion a few weeks later as part of the taxpayer bailout of the financial services industry, declined to make former WaMu executives available for interviews. JPMorgan also declined to comment on WaMu’s operations before it bought the company. "It is a different era for our customers and for the company," a spokesman said. For those who placed their faith and money in WaMu, the bank’s implosion came as a shock. "I never had a clue about the amount of off-the-cliff activity that was going on at Washington Mutual, and I was in constant contact with the company," said Vincent Au, president of Avalon Partners, an investment firm. "There were people at WaMu that orchestrated nothing more than a sham or charade. These people broke every fundamental rule of running a company."
Some WaMu employees who worked for the bank during the boom now have regrets. "It was a disgrace," said Dana Zweibel, a former financial representative at a WaMu branch in Tampa, Fla. "We were giving loans to people that never should have had loans." If Ms. Zweibel doubted whether customers could pay, supervisors directed her to keep selling, she said. "We were told from up above that that’s not our concern," she said. "Our concern is just to write the loan." The ultimate supervisor at WaMu was Mr. Killinger, who joined the company in 1983 and became chief executive in 1990. He inherited a bank that was founded in 1889 and had survived the Depression and the savings and loan scandal of the 1980s. An investment analyst by training, he was attuned to Wall Street’s hunger for growth. Between late 1996 and early 2002, he transformed WaMu into the nation’s sixth-largest bank through a series of acquisitions.
A crucial deal came in 1999, with the purchase of Long Beach Financial, a California lender specializing in subprime mortgages, loans extended to borrowers with troubled credit. WaMu underscored its eagerness to lend with an advertising campaign introduced during the 2003 Academy Awards: "The Power of Yes." No mere advertising pitch, this was also the mantra inside the bank, underwriters said. "WaMu came out with that slogan, and that was what we had to live by," Ms. Zaback said. "We joked about it a lot." A file would get marked problematic and then somehow get approved. "We’d say: ‘O.K.! The power of yes.’ " Revenue at WaMu’s home-lending unit swelled from $707 million in 2002 to almost $2 billion the following year, when the "The Power of Yes" campaign started. Between 2000 and 2003, WaMu’s retail branches grew 70 percent, reaching 2,200 across 38 states, as the bank used an image of cheeky irreverence to attract new customers. In offbeat television ads, casually dressed WaMu employees ridiculed staid bankers in suits.
Branches were pushed to increase lending. "It was just disgusting," said Ms. Zweibel, the Tampa representative. "They wanted you to spend time, while you’re running teller transactions and opening checking accounts, selling people loans." Employees in Tampa who fell short were ordered to drive to a WaMu office in Sarasota, an hour away. There, they sat in a phone bank with 20 other people, calling customers to push home equity loans. "The regional manager would be over your shoulder, listening to every word," Ms. Zweibel recalled. "They treated us like we were in a sweatshop." On the other end of the country, at WaMu’s San Diego processing office, Ms. Zaback’s job was to take loan applications from branches in Southern California and make sure they passed muster. Most of the loans she said she handled merely required borrowers to provide an address and Social Security number, and to state their income and assets. She ran applications through WaMu’s computer system for approval. If she needed more information, she had to consult with a loan officer — which she described as an unpleasant experience. "They would be furious," Ms. Zaback said. "They would put it on you, that they weren’t going to get paid if you stood in the way."
On one loan application in 2005, a borrower identified himself as a gardener and listed his monthly income at $12,000, Ms. Zaback recalled. She could not verify his business license, so she took the file to her boss, Mr. Parsons. He used the mariachi singer as inspiration: a photo of the borrower’s truck emblazoned with the name of his landscaping business went into the file. Approved. Mr. Parsons, who worked for WaMu in San Diego from about 2002 through 2005, said his supervisors constantly praised his performance. "My numbers were through the roof," he said. On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000. The loan officer yelled at her, Ms. Zaback recalled. "She said, ‘We don’t call the bank to verify.’ " Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: "Too bad." Shortly thereafter, Mr. Parsons disappeared from the office. Ms. Zaback later learned of his arrest for burglary and drug possession.
The sheer workload at WaMu ensured that loan reviews were limited. Ms. Zaback’s office had 108 people, and several hundred new files a day. She was required to process at least 10 files daily. "I’d typically spend a maximum of 35 minutes per file," she said. "It was just disheartening. Just spit it out and get it done. That’s what they wanted us to do. Garbage in, and garbage out." WaMu’s boiler room culture flourished in Southern California, where housing prices rose so rapidly during the bubble that creative financing was needed to attract buyers. To that end, WaMu embraced so-called option ARMs, adjustable rate mortgages that enticed borrowers with a selection of low initial rates and allowed them to decide how much to pay each month. But people who opted for minimum payments were underpaying the interest due and adding to their principal, eventually causing loan payments to balloon. Customers were often left with the impression that low payments would continue long term, according to former WaMu sales agents.
For WaMu, variable-rate loans — option ARMs, in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands. WaMu’s adjustable-rate mortgages expanded from about one-fourth of new home loans in 2003 to 70 percent by 2006. In 2005 and 2006 — when WaMu pushed option ARMs most aggressively — Mr. Killinger received pay of $19 million and $24 million respectively. WaMu’s retail mortgage office in Downey, Calif., specialized in selling option ARMs to Latino customers who spoke little English and depended on advice from real estate brokers, according to a former sales agent who requested anonymity because he was still in the mortgage business. According to that agent, WaMu turned real estate agents into a pipeline for loan applications by enabling them to collect "referral fees" for clients who became WaMu borrowers. Buyers were typically oblivious to agents’ fees, the agent said, and agents rarely explained the loan terms. "Their Realtor was their trusted friend," the agent said. "The Realtors would sell them on a minimum payment, and that was an outright lie."
According to the agent, the strategy was the brainchild of Thomas Ramirez, who oversaw a sales team of about 20 agents at the Downey branch during the first half of this decade, and now works for Wells Fargo. Mr. Ramirez confirmed that he and his team enabled real estate agents to collect commissions, but he maintained that the fees were fully disclosed. "I don’t think the bank would have let us do the program if it was bad," Mr. Ramirez said. Mr. Ramirez’s team sold nearly $1 billion worth of loans in 2004, he said. His performance made him a perennial member of WaMu’s President’s Club, which brought big bonuses and recognition at an awards ceremony typically hosted by Mr. Killinger in tropical venues like Hawaii. Mr. Ramirez’s success prompted WaMu to populate a neighboring building in Downey with loan processors, underwriters and appraisers who worked for him. The fees proved so enticing that real estate agents arrived in Downey from all over Southern California, bearing six and seven loan applications at a time, the former agent said. WaMu banned referral fees in 2006, fearing they could be construed as illegal payments from the bank to agents. But the bank allowed Mr. Ramirez’s team to continue using the referral fees, the agent said.
By 2005, the word was out that WaMu would accept applications with a mere statement of the borrower’s income and assets — often with no documentation required — so long as credit scores were adequate, according to Ms. Zaback and other underwriters. "We had a flier that said, ‘A thin file is a good file,’ " recalled Michele Culbertson, a wholesale sales agent with WaMu. Martine Lado, an agent in the Irvine, Calif., office, said she coached brokers to leave parts of applications blank to avoid prompting verification if the borrower’s job or income was sketchy. "We were looking for people who understood how to do loans at WaMu," Ms. Lado said. Top producers became heroes. Craig Clark, called the "king of the option ARM" by colleagues, closed loans totaling about $1 billion in 2005, according to four of his former coworkers, a tally he amassed in part by challenging anyone who doubted him. "He was a bulldozer when it came to getting his stuff done," said Lisa Alvarez, who worked in the Irvine office from 2003 to 2006. Christine Crocker, who managed WaMu’s wholesale underwriting division in Irvine, recalled one mortgage to an elderly couple from a broker on Mr. Clark’s team. With a fixed income of about $3,200 a month, the couple needed a fixed-rate loan. But their broker earned a commission of three percentage points by arranging an option ARM for them, and did so by listing their income as $7,000 a month. Soon, their payment jumped from roughly $1,000 a month to about $3,000, causing them to fall behind. Mr. Clark, who now works for JPMorgan, referred calls to a company spokesman, who provided no further details.
In 2006, WaMu slowed option ARM lending. But earlier, ill-considered loans had already begun hurting its results. In 2007, it recorded a $67 million loss and shut down its subprime lending unit. By the time shareholders joined WaMu for its annual meeting in Seattle last April, WaMu had posted a first-quarter loss of $1.14 billion and increased its loan loss reserve to $3.5 billion. Its stock had lost more than half its value in the previous two months. Anger was in the air. Some shareholders were irate that Mr. Killinger and other executives were excluding mortgage losses from the computation of their bonuses. Others were enraged that WaMu turned down an $8-a-share takeover bid from JPMorgan. "Calm down and have a little faith," Mr. Killinger told the crowd. "We will get through this." WaMu asked shareholders to approve a $7 billion investment by Texas Pacific Group, a private equity firm, and other unnamed investors. David Bonderman, a founder of Texas Pacific and a former WaMu director, declined to comment. Hostile shareholders argued that the deal would dilute their holdings, but Mr. Killinger forced it through, saying WaMu desperately needed new capital.
Weeks later, with WaMu in tatters, directors stripped Mr. Killinger of his board chairmanship. And the bank began including mortgage losses when calculating executive bonuses. In September, Mr. Killinger was forced to retire. Later that month, with WaMu buckling under roughly $180 billion in mortgage-related loans, regulators seized the bank and sold it to JPMorgan for $1.9 billion, a fraction of the $40 billion valuation the stock market gave WaMu at its peak. Billions that investors had plowed into WaMu were wiped out, as were prospects for many of the bank’s 50,000 employees. But Mr. Killinger still had his millions, rankling laid-off workers and shareholders alike. "Kerry has made over $100 million over his tenure based on the aggressiveness that sunk the company," said Mr. Au, the money manager. "How does he justify taking that money?" In June, Mr. Au sent an e-mail message to the company asking executives to return some of their pay. He says he has not heard back.
A Mortgage Paper Trail Often Leads to Nowhere
With home prices in free fall and mortgage delinquencies mounting, pressure to modify troubled loans is ratcheting up. But lawyers who represent candidates for modifications say the programs are hobbled by the complexity of securitization pools that hold the loans, as well as uncertainty about who actually owns the notes underlying the mortgages. Problems often emerge because these notes — which are written promises to repay the full amount of a mortgage — weren’t recorded properly when they were bundled by Wall Street into pools or were subsequently transferred to other holders.
How can a loan be modified, these lawyers ask, if the lender cannot prove that it actually owns the note? More and more judges are asking the same thing about lenders trying to foreclose on borrowers. And here is another hurdle: Most loan servicers — the folks responsible for handling all the paperwork surrounding monthly mortgage payments — aren’t set up to handle all of the details involved in a modification. Loan servicing operations are intended to receive borrowers’ payments; producing loan histories and verifying that payments were received or junk fees were not applied is considerably more labor intensive. This cuts into profits.
"These servicers are not staffed up and they don’t have a chance in the world to do the stuff they are supposed to do," said April Charney, a consumer lawyer at Jacksonville Legal Aid. Many servicers continue to stonewall troubled borrowers who ask for a history of their loan payments and fees, she said. "This is your biggest, hugest expense — your home — and when you ask for a life-of-loan history your servicer tells you to get lost," she said. "And when you ask for a list of charges in the loan history that’s not going to happen." So even if loan modifications were to rise rapidly, it is unclear that borrowers can trust what lenders tell them about what they owe.
Consider a federal bankruptcy court case in Colorado. It involves two borrowers who got into trouble on their loan but agreed, under a bankruptcy plan, to make revised mortgage payments to get back on track. The lender in the case is Wells Fargo, and last Monday the judge overseeing the matter took a tough stance on the bank’s recordkeeping and billing practices. In June 2004, Brandon M. Burrier and Denon A. Burrier received a $183,126 loan for a property in Arvada, Colo. The note was later transferred to Wells Fargo, court filings show. The Burriers fell behind on their loan and in February 2007, they filed a Chapter 13 bankruptcy, agreeing to pay $12,000 that Wells Fargo said they owed. Chapter 13 bankruptcies allow debtors to retain their property and work out a repayment plan based on their income and the level of their indebtedness.
The Burriers’ payment plan was confirmed by the bankruptcy court in August 2007; last December, a second plan requiring higher payments was approved by the court. Two months later, Wells Fargo told the court that the Burriers had failed to make four of their payments and that it should be allowed to begin foreclosure proceedings. The Burriers denied that they had missed payments, but in April, to keep their home, they agreed to make double payments to cover the ones Wells Fargo claimed they had missed. If the borrowers could prove that the mortgage checks were submitted, Wells Fargo said, their account would be credited and they would no longer have to make up the payments. The proof required by Wells Fargo and approved by the court was "valid, accurate and true copies" of the front and back of the checks the borrowers sent in.
Last August, the parties were back in court, with Wells Fargo stating that the borrowers had failed to comply with the deal. Ms. Burrier testified that she had asked her local bank repeatedly for proof of the payments made to Wells Fargo, but had had no luck. The payments to Wells Fargo were processed electronically, she learned, and that meant it did not return the checks to her bank. The borrowers did produce bank statements showing that the checks Wells said were missing were actually cashed by "WFHM," an entity that they assumed was Wells Fargo Home Mortgage. But Tara E. Gaschler, the lawyer representing the borrowers, said that Wells Fargo continued to maintain that it hadn’t received the money.
The bank flew in an expert to testify that all checks received by Wells Fargo from borrowers in Chapter 13 cases were processed by hand, Ms. Gaschler said. "Even when presented with bank statements, they told the court there must be some mistake," she added. Finally, Wells Fargo demanded that the Burriers provide the routing number of the account at Wells Fargo that their money went into. If they could not, the bank said, they would have to keep making extra payments. But Sidney B. Brooks, the judge overseeing the case, was clearly dismayed by the bank’s performance.
In his opinion, he fumed that Wells Fargo had asked the borrowers for canceled checks as proof of payment, even though such checks were often not available. Wells Fargo’s request for canceled checks was especially troubling, the judge said, given that the bank was a proponent of the 2003 law that allowed banks to stop returning canceled checks to customers. The only institution that could have the original checks is Wells Fargo, he concluded. "The payments have, evidently, been lost in a black hole of the creditor’s organization or through accounting mismanagement," the judge wrote.
"This is a major lender/mortgage loan servicer where the left hand does not know what the right hand is doing — the collection department does not know what the check processing and accounting departments are doing." Because this is not the first time the judge has encountered problems in Wells Fargo’s operations, he is considering sanctions on the bank. "This dispute might portend a widespread abuse of collection practices or creditor overreaching," he wrote, "demanding of debtors what it, the creditor itself, is unable to provide: accurate and reliable record keeping and billing practices."
A spokesman for Wells Fargo said: "We are currently reviewing the court’s opinion to determine whether or not an appeal is appropriate. The Burrier case is quite factually specific, and we disagree with the court’s conclusions. We are confident that our payment processing practices are accurate and sound." Ms. Gaschler says that this kind of dispute is becoming more common in her practice and that borrowers wind up losing too often. "A lot of times clients don’t keep canceled checks or maybe their bank account was closed and they can’t go and get the proof," she said.
"The bank gets that extra money for as long as the debtor can keep it up and when they can’t they are pushed out of their homes." While judges are starting to see how flawed loan servicers’ systems can be, those rushing to modify loans may not be as aware of the problems. In the interests of fairness, modification programs should require life-of-loan histories from servicers and a justification of each entry. New loans, especially ones backed by taxpayers, are no place to bury dubious fees or extra borrower payments to cover those that were allegedly, but not actually, missed.
The Refinancing Dilemma
Many homeowners who have watched interest rates plunge over the last month or so have undoubtedly felt pangs of mortgage envy. It’s a perfectly natural emotion when lenders start to dangle 4.9 percent rates for 30-year, fixed-rate loans without extra fees for buying down that rate. These offers, which were common in recent weeks, started the phones ringing at the offices of mortgage brokers. But for many homeowners, deciding whether to refinance their mortgages can be confusing, especially if they have had the loan long enough to start significantly diminishing their debt.
Because the typical mortgage only lasts for about five or six years before the homeowner sells the home or refinances the loan, lenders collect much of the mortgage interest during those years. Once a loan gets beyond five or six years old, homeowners can start seeing the overall debt drop at a faster pace. So if a homeowner has reached that point, does it make sense to start a new 30-year loan, and face another five years where you’ll make heavier interest payments? The answer, as is so often the case with financial decisions, depends on individual circumstances. If retirement or tuition payment plans involve the liquidation of a home, it may make sense not to take out a new loan.
But in other cases, the monthly savings from a cheaper mortgage could be critical — "especially in this economy," said Richard E. Austin, a financial adviser with Lincoln Financial Advisors. Mr. Austin, who is based in Rye Brook, N.Y., noted that someone who five years ago borrowed $220,000 on a 30-year, fixed-rate mortgage at 5.5 percent would have reduced the loan principal to only $203,500, despite having made nearly $75,000 in payments during that time. From this point forward, the principal would shrink more quickly, but if the borrower could reduce the interest rate to, say, 5 percent, the monthly mortgage payment would drop by $157, to $1,092. Assuming it costs $3,000 to close that new loan, it would take just 27 months to recoup the costs if the borrower is in the 28 percent tax bracket.
If a homeowner planned on keeping the new loan for 27 months or longer, a refinance could well make sense, Mr. Austin and other mortgage advisers said. The federal government has floated the idea of engineering a 4.5 percent mortgage rate, by promising to buy mortgages at those rates, but that proposal was only targeted at loans made for a home purchase, not a refinance. Mortgage rates in late December were at their lowest level since at least 1971, when Freddie Mac began tracking these loans. Closing costs vary widely in the New York area. Borrowers in Manhattan, for instance, face much higher mortgage taxes than those in the suburbs, so the financial calculus of a refinance decision shifts accordingly.
Mr. Austin, who is also a tax lawyer, said another frequently overlooked factor could help reduce the cost of a refinancing. If the new bank agreed to essentially absorb the old loan — albeit with new terms — the homeowner might not face a mortgage origination tax on the new loan. So when shopping for the new loan, he said, borrowers should ask if the lender will perform a "consolidation and assignment" with the old loan. Be sure to ask, or the lender may not offer it. For those averse to the idea of starting the 30-year clock anew, Mr. Austin suggests splitting the monthly payment — making half at the middle of the month and saving the other half for the actual due date. That strategy, he said, can take years off the new loan’s payoff term.
Rates Boost Refinancing's Appeal
Lured by low mortgage rates, many homeowners have been rushing to refinance. Interest is growing for good reason: Eligible borrowers can lock in rates that haven't been this attractive in decades. "With interest rates hovering around 5% for conforming-loan amounts, homeowners should begin to seriously consider refinancing into a new fixed-rate mortgage, especially if they currently have an adjustable-rate mortgage," says Lisa Weaver, president of Certitude Financial Group, based in Columbia, Mo. And don't drag your feet, she adds. Rates on jumbo mortgages are still high, she says, but the national average rate on a 30-year fixed-rate conforming mortgage is the lowest in at least 37 years, according to mortgage giant Freddie Mac.
The conforming-loan limit in 2009 will remain $417,000 for most areas of the contiguous U.S., although in designated high-cost markets it will be as much as $625,500. The high-cost limits were temporarily raised to nearly $730,000 by economic-stimulus legislation passed early this year. "Don't sit back and say 'I'm going to wait for something to happen and for rates to go even lower,' " says Greg Gwizdz, national retail sales manager for Wells Fargo Home Mortgage. If you're able to refinance into a mortgage that will be better for your finances, don't pass up the opportunity, he advises. Below are other points to consider before refinancing:
1 Figure your home's value.
Before starting the refinancing process, call a real-estate agent or look online at sites such as Zillow.com to get an estimate of what your home could be worth, says Scott Everett, founder and president of Dallas-based Supreme Lending. If you're "drastically upside down" on your mortgage -- meaning that you owe a lot more than your home is now worth -- the possibility of refinancing might end right there. To get a better idea on a home's value, borrowers might ask their mortgage company if the appraiser it works with could give a ballpark estimate before they start the process, says David Adamo, chief executive of Luxury Mortgage in Stamford, Conn. But that's still just an estimate until an appraiser comes out to your home, he points out.
2 Prepare for a screening.
Lending standards are probably a lot stricter than they were the last time you applied for a mortgage. Expect a thorough and frank discussion of your finances with a mortgage banker or broker before the application is even filled out. Lenders are asking would-be borrowers to document their income and assets thoroughly. In general, many lenders also want FICO credit scores of at least 660 or 680 for conventional conforming mortgages; requirements are lower for loans backed by the Federal Housing Administration, Mr. Gwizdz says. Among those who might have a particularly tough time getting a mortgage today are self-employed homeowners who don't have two years of income documentation -- even if they have the income to support the mortgage, Mr. Adamo says. The availability of "stated income" mortgages, which don't require borrowers to fully document their income, is limited, he adds.
3 Calculate your savings.
The old rule of thumb was that your rate should drop two percentage points for a refinance to be worth it, but that doesn't always apply anymore, Mr. Adamo says. If you can recoup the closing costs of the new mortgage in the first 12 months -- and can save three-quarters of a percentage point on your interest rate every year thereafter -- it's probably economically justifiable to refinance, he says. Sometimes you could be better off refinancing even if you don't get a better rate, Mr. Gwizdz points out. If you have an adjustable-rate mortgage that resets in a year, but you can get a fixed-rate mortgage at the same rate, it's probably a good idea to refinance now if you plan on being in the home for years to come, he says. Mr. Gwizdz also cautions people about refinancing into mortgages that extend the life of the loan; doing so may bring monthly payments down, but will probably make the loan more expensive in the long term. "However, for homeowners that must have the lowest payment possible, it may be the right choice when combined with a lower fixed-rate product," Ms. Weaver says.
4 Don't expect to cash out.
Tapping home equity through a cash-out refinance is much more difficult these days because of stringent credit standards and loan-to-value requirements, Ms. Weaver says. According to Freddie Mac, the share of refinances with a cash-out component was 63% over the first three quarters of 2008, the lowest level since 2004. Cash-out refinance mortgages have loan amounts at least 5% higher than the paid-off mortgage balances. "The combination of declining home values and tighter underwriting standards have reduced the amount of equity that can be extracted by homeowners this year," says Frank Nothaft, Freddie Mac's chief economist.
1/3 of Banks Will Disappear Next Year
Number of new houses in Britain to plummet
The number of new homes built in Britain next year will fall below 80,000, according to senior government housing officials. If the dire prediction is borne out, 2009 will be one of the worst years for the house-building industry for a century, and will exacerbate Britain's housing crisis. This year is likely to see a total of 120,000 new homes built - the lowest figure since 1924 and 140,000 below the official government target. As the crisis escalates, pressure will mount on Gordon Brown's fiscal stimulus plan to mitigate the effects of the downturn with extra investment in housing, principally through the newly formed superquango, the Homes and Communities Agency (HCA), led by Sir Bob Kerslake.
The HCA has £17bn to spend over the next three years. Regional directors are evaluating to which housing projects to give priority. Sources within the HCA say it will either invest directly in a major housing scheme by taking an equity stake, help to push a project forward by paying for the infrastructure, or work in partnership with developers. Lack of development finance means the government has become the most important agent in the UK housing market. There are still no signs of distressed housebuilders selling land to pay off their debts. It is thought that if housebuilders added in the price of the incentives they have been using to encourage the public to buy new homes, the real extent of house price falls could be far steeper than otherwise indicated.
Housebuilders are offering to pay stamp duty, legal fees and moving costs to sell homes as mortgage finance disappears. Barratt says that despite the slowdown it is selling about 230 homes per week. Despite this, Barratt and Taylor Wimpey, two of the country's biggest quoted housebuilders, face an uphill battle to survive. Both are labouring under multi-billion-pound debt burdens. Barratt this month sold £46m of industrial property assets to pay off debt. Taylor Wimpey needs to refinance its £1.9bn debt burden. It said it would breach its interest-cover covenants in January, but added that it expected to reach a deferral agreement with lenders before the end of the year.
Most analysts predict that both firms will eventually be owned by banks after debt-for-equity swaps. The future of Crest Nicholson, which is owned jointly by HBOS and Sir Tom Hunter, is equally uncertain now that Peter Cummings, the HBOS property executive who waived through the £750m deal, will leave the bank in the new year. It is unclear how Lloyds TSB will view the extensive property assets that it has now inherited through its acquisition of HBOS.
Demand for oil will fall by largest margin in 25 years
Global demand for oil in 2009 will fall by the largest amount for 25 years, according to the chief energy economist of Deutsche Bank.
Adam Sieminski said oil prices could hit a low of $30 a barrel next year, a fall of a quarter from today's price, because of the sickly global economy. He forecast an average price of $47.5 for the whole year for oil traded in New York. Deutsche Bank predicts global demand will contract by 1 per cent, or 1 million barrels a day, three times the fall seen this year and the biggest since 1983. Sieminski is predicting much lower prices than most other analysts and even Opec or the International Energy Agency (IEA). He said that other forecasts underestimate how much the global downturn would reduce demand for oil. The IEA forecasts that global demand for oil will rise by 400,000 barrels per day next year, but is expected to slash its numbers next month after the IMF revises down its economic growth projections for 2009.
Citigroup is forecasting an average of $65 per barrel next year. Barclays Capital is predicting $76, although it said there was a greater risk that prices would undershoot rather than exceed this figure. Dresdner Kleinwort forecasts $84.50. Oil prices averaged just under $100 in 2008 as soaring prices in the first half - they hit a record $147 in July - countered the recent slump. If Sieminski is right about lower prices next year, it is good news for motorists in particular. Households should also see lower utility bills as gas prices are index-linked to the cost of oil. A continued slump in oil and gas prices, however, could make the cost of using alternatives to fossil fuels to generate electricity, such as wind farms or nuclear power, uneconomic. This will make meeting Britain's climate change targets even harder.
Hospitals ill from more bad debt, credit troubles
Gainesville's first community hospital has been on life support since the Shands Healthcare system in northern Florida bought it a dozen years ago. Now, because of the recession, the plug is being pulled on 80-year-old, money-losing Shands AGH. Next fall, its eight-hospital not-for-profit parent company will shut the 220-bed hospital and shift staff and patients to a newer, bigger teaching hospital nearby as part of an effort to save $65 million over three years across the system.Like many U.S. hospitals, Shands is being squeezed by tight credit, higher borrowing costs, investment losses and a jump in patients -- many recently unemployed or otherwise underinsured -- not paying their bills. All that has begun to trigger more hospital closings -- from impoverished Newark, N.J., to wealthy Beverly Hills, Calif. -- as well as layoffs, other cost-cutting and scrapping or delaying building projects.
More closings and mergers are on the way, industry consultants predict. "They'll get swallowed up by somebody else, if they need to exist, and if they don't, they'll just close," said Tuck Crocker, vice president of the health care practice at management consultant BearingPoint. Most endangered are rural hospitals and urban ones in areas with excess hospital beds and a lot of poor, uninsured patients. Hospitals, which employ 5 million people, are reporting that donations and investment returns are down, patient visits are flat and profitable diagnostic procedures and elective surgeries are declining as people with inadequate insurance delay care. But those patients are turning up later at ERs, seriously ill, making it tough for hospitals to lay off nurses and doctors. All those problems are aggravating long-standing stresses: stingy reimbursements from commercial insurers, even-lower payments that generally don't cover costs for Medicare and Medicaid patients, and high labor and technology costs.
Hospital executives and consultants say the growing number of people with high-deductible health plans is boosting unpaid patient bills. Many worry health reform efforts by the Obama administration could bring cuts in Medicare reimbursements, and many cash-strapped states already have begun cutting payments for poor people covered by Medicaid. In the past few months, patients and insurers have been paying hospital bills more slowly. As a result, some think hospitals will start demanding up-front payments for elective procedures. In November, Moody's Investors Service changed its 12- to 18-month outlook from "stable" to "negative" for nonprofit and for-profit hospitals, citing "prospects of a protracted recession," bad debt and the credit crunch. "Looking forward, the cost of borrowing will likely be higher -- and may be nonexistent for lower-rated hospitals," Moody's noted, a problem because hospitals borrow for everything from expansions and equipment to payroll and supplies.
Since October, there's been "a dramatic slowdown" in plans for new wings and building upgrades, with many delayed indefinitely, said Paul Keckley of the Deloitte Center for Health Solutions. "It probably means we won't have as many new things in the hospital," he predicted. Tim Goldfarb, CEO of Gainesville-based Shands Healthcare, said his system, Florida's second-largest provider of charity care, this year has seen bad debt jump 20 percent from patients with no insurance. "We write them off," Goldfarb said. "It's a burden that we cannot carry any longer." Florida started cutting Medicaid reimbursements two years ago, when its economy started to slow, Goldfarb said. He fears another huge cut next year. Shands already has paid off variable-rate bonds to avoid higher interest rates, deferred roughly $25 million in equipment purchases, shifted management meetings to church halls and adopted employee suggestions to save millions more.
Goldfarb believes closing Shands AGH will save nearly $100 million over seven years, mainly by avoiding costly renovations, but some administrative jobs will go. Around the country, while some hospitals still are doing well, closings and bankruptcies seem to be picking up. In New Jersey, where 47 percent of hospitals posted losses in 2007, five of the 79 acute-care hospitals closed this year, and a sixth may close soon. In Hawaii, nearly every hospital is in trouble, with two filing for bankruptcy and one nearly closing recently. All over, hospitals are cutting costs by outsourcing services like housekeeping and security and trimming staff through layoffs, hiring freezes and attrition. Most are trying not to touch patient care jobs -- nurses, pharmacists, therapists and X-ray technicians -- as those already have staff shortages. "The last thing we can do is skinny down our staffing right where we need it the most," said Mike Killian, marketing vice president for the three Beaumont Hospitals in suburban Detroit. There, auto industry job losses and other factors now equal fewer patients with commercial insurance. The system expects a $22 million loss, its first in at least 40 years, Killian said.
So Beaumont this fall announced a $60 million restructuring program that includes 4-10 percent pay cuts for doctors and managers, reducing overtime for some employees and eliminating 500 jobs, 200 already vacant, mostly outside of patient care. Rich Umbdenstock, chief executive of the American Hospital Association, said some of the hardest-hit hospitals began reducing staffing and services as early as last spring and more will follow. He expects some to eliminate services -- money-losers such as behavioral health treatment, or those with high operating costs such as burn units -- rather than weaken their entire operation. An association survey of more than 700 hospitals found two-thirds have seen elective procedures and overall admissions fall since July, and half have seen moderate or significant jumps in nonpaying patients.
An industry database on more than 550 hospitals found their third-quarter investment results amounted to a combined loss of $832 million, down from a $396 million gain a year earlier. During the quarter, those hospitals paid 15 percent more in borrowing costs and swung to a 1.6 percent average loss, from an average 6.1 percent profit margin a year ago. "They're having serious problems getting the capital they need for needed renovations and upgrading their facilities," said Mike Rock, a lobbyist at AHA, which is seeking increased federal reimbursements from Medicaid and Medicare. At Exempla Healthcare, with three hospitals in Denver and its suburbs, Chief Executive Jeff Selberg said there's usually a 5-7 percent annual profit margin, but this year investment losses wiped that out. He's scaled back a $200 million plan to upgrade facilities, information technology and clinical equipment and may halt construction of a new maternity unit and operating rooms at one hospital. Selberg has seen a slight increase in bad debt and expects more problems. "We feel like the wave is coming, but it hasn't hit yet, and we don't know how big this wave is going to be," he said.
California Bond Yields Rise to Four-Year High on Budget Impasse
California’s fiscal crisis pushed yields on tax-backed debt to a four-year high as the state struggles with a $42 billion budget deficit. Bonds due in 10 years yield about 53 basis points, or 0.53 percentage point, more than general obligation bonds rated A+, the most since early 2004, according Bloomberg municipal bond yield indexes. California has approval to sell $53 billion of bonds for public works projects. The nation’s most-populous state will run out of money to pay bills as soon as February unless lawmakers end an impasse over how to close the funding gap. California has the second- lowest credit ratings in the country because of perennial fiscal shortfalls and legislative gridlock. "The spreads have widened and investors are getting much more compensation for California bonds," said Paul Brennan, who oversees about $12 billion in municipal-bond funds for Nuveen Asset Management in Chicago. "There’s still a lot of ups and downs to come unless there’s some dramatic budget agreement that could change all that."
California general-obligation bonds maturing in 2038, with a stated interest rate of 5.25 percent, traded at 81.9 cents on the dollar to yield about 6.66 percent, according to the Municipal Securities Rulemaking Board. That’s 1.57 percentage points more than three months ago. Lawmakers have been deadlocked over how to fix the budget since November, when Governor Arnold Schwarzenegger called them into a special session. The only proposal to reach his desk is an $18 billion package of tax increases and spending cuts that he vowed to veto. Schwarzenegger, a Republican, ordered state workers to take two days of unpaid leave each month and all departments to cut employee costs by as much as 10 percent. The impasse forced a state panel Dec. 18 to cut funding for $3.8 billion of construction on schools, roads and other public works, a decision officials said might cost tens of thousands of jobs.
"Until we have solved our budget crisis and until the financial community sees that we are getting our act together, there’s no confidence out there in us, and no one is going to buy our bonds," Schwarzenegger told reporters Dec. 21 in Los Angeles. The decision will shut down or delay work on dozens of projects, including veterans’ homes, prisons, schools and rural outposts that fight wildfires, according to a list from state officials. California, the biggest borrower in the U.S. municipal market, is rated A+ by Standard & Poor’s and Fitch Ratings, the fifth-highest grade, and an equivalent A1 at Moody’s Investors Service. Standard & Poor’s on Dec. 10 said it may lower the rating on the tax-backed debt. A cut would make it more expensive to issue debt California voters have approved, including $38 billion championed by Schwarzenegger in 2006 for public works. "Right now, Wall Street is believing that California is a place you should not invest in, and until these things get fixed investors are going to stay away," Treasurer Bill Lockyer said.
The financial crisis, which has caused banks to hoard cash and investors to move money into havens, is forcing California and other states to pay higher borrowing costs just as the worst recession since at least the 1980s is hammering tax collections. Municipal bonds have dropped 5.2 percent this year, marking the worst year since a 6.3 percent drop in 1999, according to Merrill Lynch & Co.’s indexes. Yields on even the highest-rated general obligation bonds, debt paid for by general taxes of state and local governments, due in 30 years rose to as high as 6 percent in October in the wake of Lehman Brothers Holdings Inc. bankruptcy on Sept. 15, according to Municipal Market Advisors. The 30-year index declined to 5.54 percent this week, still more than a percentage point higher than 2007’s average of 4.55 percent. For California, the problems have been worse than elsewhere. Lawmakers have produced on on-time budget just three times in the past 15 years. The current $143 billion spending plan was the tardiest when Schwarzenegger signed it Sept. 23, following an impasse over how to fix what was then a $15 billion shortfall. "California bonds are trading in their own world," said Matt Fabian, managing director at Municipal Market Advisors.
Holiday Thoughts about Three Especially Vulnerable Groups
I try to be optimistic -- especially this time of year when the days are short and cold, when almost everybody things everyone else is having a better time than they are, and now that we're in the worst economic downturn in almost anyone's memory. Yet I also try to be realistic about the effects of this Mini-Depression. At least three distinct groups are especially vulnerable, each quite differently:
1. The poor and near poor, with family incomes typically under $20,000 a year. Their connections to the labor force are tenuous at best, often involving part-time and temporary jobs. They're also the first to be let go during downturns. Not surprising, this recession is taking a toll, and about to take a larger one. Few in this group qualify for unemployment insurance, and an increasing number have exhausted the five-year maximum for temporary welfare assistance. To the extent they're getting by, they're moving in with relatives. The media have missed this story almost entirely.
2. Middle and lower-middle class households whose breadwinners are within five years of being eligible for Social Security. Many are in danger of losing jobs and a large number are already working fewer hours. They're cutting back on all discretionary purchases. But their biggest problem is that both their savings and the value of their homes have shrunk dramatically, and probably won't bounce back before they planned to retire. Social Security will cover about 40 percent of their pre-retirement earnings. So many are now planning to work well beyond age 65. This will be a particular challenge for blue-collar workers whose earnings have depended largely on physical labor. Their bodies may not last.
3. Middle and lower-middle class retirees. Most are dependent on income from savings, which has declined sharply. They're cutting expenses where they can, but they're running out of resources. To the extent they can turn to their children for help, they are doing so. That means a large and growing cohort of middle-income people between the ages of 35 and 65 have begun subsidizing their parents, even though they and their immediate families are under financial stress. Here's another untold story.
Other Americans are in distress but these three groups are particularly worrisome, and in the years ahead it seems likely they'll be in worse shape than they are today. If this is to be avoided, these three groups will need distinct public policies crafted to their particular needs. More on this to come.
Ilargi: Here's a bunch of fools feeling real smart right now, but setting themselves up for group visits with pitchforks and torches. Your names are in the papers, eggheads. You steal large amounts from your own neighbors, as they get poorer all the time, and they know where you live.
Double dipping rises despite outrage
This year some of Florida's public officials are giving a whole new meaning to the phrase "home for the holidays.'' It's a new crop of double dippers, taking advantage of a loophole in state law that allows them to "retire'' by taking 30 days off and return to work in their old jobs with a salary and a pension. Many also collect a lump-sum "retirement'' payment that can reach hundreds of thousands of dollars. At least 25 of those spending December at home were re-elected in November — sheriffs, property appraisers, court clerks and tax collectors, six circuit judges and one state attorney. None announced their "retirement'' plans before voters cast their ballots, and most have not made any public announcement of the resignation letters they have written to Gov. Charlie Crist. Earlier this year when the St. Petersburg Times began looking at double- and even triple-dippers, the state retirement system had about 8,000 members collecting paychecks and pensions at the same time. By June that number had risen to 9,397, and it's still growing.
The double-dippers include at least 220 elected officials, an increase of about 40 since last year. An additional 175 are in high-paid senior management positions, up from 146 last year. The remaining 9,022 are regular employees who work for state or local government. Their salaries are substantially lower. The newcomers include the state's longest serving sheriff, David Harvey of Wakulla County; North Florida State Attorney Willie Meggs; Broward Circuit Judge Melvin B. Grossman; and Lee County Property Appraiser Kenneth Wilkinson, who worked hard to pass Save Our Homes, a constitutional amendment that limits the property taxes Floridians pay. A candidate who lost to Wilkinson is considering a court challenge that would question the legality of resigning and returning to office in the face of a constitutional provision that declares the office vacant when an official resigns. In Broward County, teacher union officials are calling for an investigation of school superintendent Jim Notter for authorizing the rehire of 36 highly paid administrators who will return as double-dippers.
Notter said he allowed administrators to return after retiring only in critical situations when the safety and security of students is at stake. He said 14 of the 36 administrators who have been allowed to double-dip were administrators who returned to the classroom as teachers. Meggs said he simply changed his mind about plans to retire. "It's my cotton-picking money,'' he said of deciding to collect a lump sum benefit of $519,995, his $153,139 annual salary and a monthly pension of $7,749. Meggs says he tried to work as a volunteer without pay for 30 days, but state retirement officials said he could not be in the office. He is spending December clearing land and starting work on a new house. Baker County Sheriff Joey Dobson is getting $311,173 in a lump sum payment and will collect an annual salary of $128,000 and a monthly pension of $5,699. He said he searched for alternatives to taking December off and returning in January, but he said state retirement officials told him it was his only option.
"I have worked for 35 years, but I'm not a wealthy man,'' Dobson said. "I sure didn't want to do it, I hate to be out of the office.'' Meggs and Wakulla Sheriff Harvey both note that the state isn't out any money when it comes to elected officials because taxpayers would have to pay the salary of replacements if they retired. They said the 30-day vacation is required by the state's retirement law. The 30-day hiatus is also required by federal tax laws. "You do what you have to do, you would be stupid not to do it,'' Harvey said. Meggs was unopposed when he sought re-election this year. Harvey won by 57 votes. "Just call me landslide,'' Harvey joked. Not everyone is laughing. When the Times first reported on the number of public officials collecting both a salary and a pension, hundreds of outraged citizens called and wrote the newspaper and their legislators demanding changes. Bills to ban or limit double-dipping were introduced during last year's legislative session but none won approval. Lawmakers promise to try again this year. "I understand while it may be legal now, it might not be legal after next session,'' Gov. Crist said when asked about the increasing numbers of officials taking advantage of the law.
Some elected officials who submitted resignations for the last 30 days of the year asked the governor to appoint their top lieutenants to their positions for the month of December. Crist refused. "The governor is not going to participate in this because he opposes the practice,'' said Jason Gonzalez, the governor's general counsel. Instead, some who submitted temporary resignations got local judges to appoint a temporary replacement, relying on obscure state laws that allow temporary appointments. Crist wants to help legislators change the law, noting the largesse is conspicuous in these hard times, when public and private employees face pay cuts and layoffs and the state's unemployment rates are spiraling upward. Sen. Mike Fasano, R-Port Richey, and Rep. Robert Schenck, R-Spring Hill, plan to introduce bills that would limit the number of state officials who can take advantage of the law. "At a minimum we have to stop the elected and appointed officials,'' Fasano said. "We have to stop it, it's out of control.''
He said the answer may be eliminating state pensions and shifting to a defined compensation program similar to the way private businesses operate. The state created the Deferred Retirement Option Program in 1998 to encourage highly paid, long-term employees to retire and make way for others who would make less. Under DROP, public employees who are 62 or have at least 30 years of service retire but continue working for up to five years while their retirement benefits are deposited in a special account. The state pays all of the employee's retirement benefit and guarantees 6.5 percent interest on the DROP accounts plus a 3 percent cost-of-living increase. Until the law was changed, members of the Florida Retirement System who signed up for DROP were required to leave the state payroll at the end of five years or forfeit the lump-sum benefit. Lawmakers wrote the loophole into the law in 2001 to help a fellow legislator who, on top of his legislative salary, wanted to collect his lump-sum retirement benefit and his school board pension. Sponsors say they never intended to extend the practice to allow elected officials to "retire'' and return to the same jobs collecting both a pension and a salary.
But lawmakers trying to fix the loophole have run into problems because many fellow lawmakers are among the double- and triple-dippers.
"It's kind of sad because DROP was never intended to help all these people making high salaries stick around,'' Fasano said. Last year, when law?makers began considering bills that would have banned double-dipping, Circuit Judge Hugh D. Hayes of Naples suggested that they first appoint a committee to study the issue and wait until 2009 before taking action.Re-elected without opposition in November, Hayes collected $349,723 in a lump sum and will return to the bench in January collecting a $9,259 monthly pension along with his annual salary of $145,080. Hayes did not return a call; a spokesman said the judge decided to double-dip because it is legal.
It's difficult to determine how much double-dipping costs taxpayers. The $13-million in salaries for elected officials would be spent on others making the same salary, but the $16-million spent on salaries for renewed members of the state pension fund would be substantially lower if veteran senior management employees were replaced by younger, lower-paid employees. Police unions have vehemently opposed double-dipping, saying it's generally approved for top management and stops rank-and-file members of an organization from being promoted. The practice has become so widespread that the double-dippers include school board members in 44 of Florida's 67 counties, 14 sheriffs, 11 circuit clerks, three state attorneys, four public defenders, 24 judges, county commissioners from 21 counties, eight property appraisers, seven tax collectors, two elections supervisors and officials from 26 towns and cities. The chancellor of the community college system, Willis N. Holcombe, and several community college presidents are among the double-dippers. Holcombe collected $189,370 in a lump sum in 2007 and began collecting a pension of $8,500 a month to go with his annual salary of $190,000. Miami Dade Community College president Eduardo Padron collected $893,286 in a lump-sum retirement benefit in 2006 and began collecting $14,631 a month in retirement pay in addition to his annual salary of $441,538.
Other double-dipping college presidents include Edwin R. Massey at Indian River State College in Fort Pierce and James R. Richburg at Northwest Florida State College. Massey collected more than $585,000 in a lump sum last June and now collects a monthly pension of $9,823 plus his annual salary of $286,470. Richburg, who has been in the news for his controversial dealings with House Speaker Ray Sansom, got a lump sum of $553,228 in 2007 and started collecting a monthly pension of $8,803 in addition to his $228,000 annual salary. Double-dipping has sparked controversy at the University of Florida's Medical School. In a letter to the university's board of trustees, Dr. Bruce Kone says his objection to double-dipping among highly paid medical school employees is among the reasons he was fired as dean last May. Kone says the university made deals with some faculty members to pay them during the mandatory 30-day hiatus and had allowed its three highest-paid doctors to start double-dipping. "This rehiring culture prevented any succession planning in senior positions and led to a dysfunctional, inbred and top-heavy administration and faculty,'' Kone said in his Oct. 22 letter to the trustees. University officials would not comment on Kone's accusations but released a copy of a 2005 letter saying faculty members who want to return after retiring have to apply for the positions like anyone else.
GM Sues for Access to Parts for Camaro
General Motors Corp. is suing a bankrupt parts supplier in an effort to recoup parts and equipment it needs to build the new Chevrolet Camaro muscle car -- and avoid another potentially costly setback. The auto maker, struggling to stay afloat amid a crippling liquidity crisis, said it stands to lose millions of dollars if the parts and tooling aren't returned immediately by Cadence Innovation LLC, of Troy, Mich. Without the equipment, GM says, production could be interrupted at several assembly plants, with a ripple effect hitting suppliers and dealers. The damages, GM said in a bankruptcy-court filing, "would be substantial, but difficult, if not impossible to calculate." Cadence, which makes consoles, door panels and other parts, filed for Chapter 11 bankruptcy in August and entered liquidation proceedings earlier this month.
GM, in a court filing on Wednesday, said it wants the parts and tooling returned immediately so it can have a new supplier in place by Jan. 12. "Even one day's disruption in supply of certain component parts could cause a shutdown of GM assembly operations, disrupting not only GM's business, but the operations of countless suppliers, dealers, customers and other stakeholders," the auto maker said in the lawsuit filing with U.S. Bankruptcy Court in Delaware. A lawyer for Cadence declined to comment on the case. Access to company-owned equipment is an ongoing battle for auto makers when suppliers file for Chapter 11 bankruptcy protection.
Chrysler LLC sought and was denied access to equipment when Plastech Corp. filed for bankruptcy earlier this year. Auto makers provide suppliers with special machinery to build exclusive parts for their vehicles. The suppliers use the machines in their plants but traditionally sign agreements dictating that ownership of the machines belongs to the auto makers. GM can ill afford another costly glitch as it scrambles to reduce costs and restructure its money-losing operations. GM last week was granted access to $9.4 billion in federal aid that the company said it needed to survive into 2009. Even with the injection, GM is running perilously low on cash it needs to run the business.
Stocks of luxury retailers like Saks, Tiffany take big falls
Luxury stocks now know how the other half lives. Shares of companies that cater to the upper crust, including Tiffany, Saks, Morton's, Sotheby's and Wynn Resorts, are getting the silver spoons taken out of their mouths by investors worried that even the super rich are closing their wallets. In a year when stocks in general, measured by the Standard & Poor's 500 index, are down 41%, the luxury players are down even more. Saks' stock is down 81%, Sotheby's, 79%, and Tiffany's, 51%. That's quite a change from a year ago, when luxury companies were viewed as being immune from the downturn because their customers didn't have subprime loans. But now, the wealthiest consumers are beginning to feel the pressure as their portfolios shrivel and jobs in the financial sector vanish in a reverse wealth effect. "Higher-income consumers are worried about their wealth and income," says David Schick, a Tiffany analyst at Stifel Nicolaus. And wealth and income are "two reasons why consumers are comfortable buying large-ticket items."
Companies that serve well-heeled investors are feeling pain because of:
- Stock market losses. Spending on luxury goods tends to move with the stock market, says Jeff Mintz of Wedbush Morgan. He follows True Religion, which sells jeans costing $200 and up. Its shares, which were up 49% for 2008 in September, now are down 46% for the year.
- Implosion of the financial industry. Highly paid members of New York's financial industry were big contributors to the luxury segment, including Tiffany's, Schick says. Many of those jobs have been eliminated.
- Uncertainty of when things will improve. Wynn Resorts has long been the bright spot among casino operators in Las Vegas. Shares of Wynn hit record highs in October 2007, even as investors dumped shares of its rivals. Now, though, Wynn's shares are down 61% for 2008, which, while better than the 80%-plus losses of rivals, is a sign the luxury segment is getting hit, too, says Jeffrey Logsdon of BMO Capital. "Everyone is feeling it," he says. High-end consumers are postponing Vegas trips, spending less if they go or canceling plans completely, he says. Analysts don't expect the rich to get comfortable with spending freely for some time. "We understand how bad things are," Schick says. "We just don't know how long it stays bad."
The expert on gullibility who got suckered by Bernard Madoff
It was the year of the unwise, the swindled, the innocent and the terminally stupid. But the financial catastrophe of 2008 brought a peculiar kind of pain and embarrassment to one self-designated expert, a University of Colorado developmental psychologist named Stephen Greenspan. He's written an authoritative, 224-page book, Annals of Gullibility: Why We Get Duped and How to Avoid It. Unfortunately, he can't take much authorial pleasure from the publishing of his work this month. Something truly mortifying happened between the checking of the page proofs and the appearance of the book: Greenspan discovered that he had allowed Bernard Madoff, the now infamous Wall Street broker, to steal a good-sized chunk of Greenspan's retirement savings. Moreover, Madoff did it with a Ponzi scheme, precisely the sort of criminality that Greenspan tries to warn us against.
Greenspan's publishers advertise his book as a psychologist's groundbreaking look at gullibility in everything from politics and religion to personal finance and private relationships. If Annals of Gullibility ever goes to a second edition, it will also have to include a preface describing the author's firsthand experience. How did it happen? Greenspan has issued his own explanation, getting his version out before anyone else beats him to it. On Tuesday, he published on skeptic.com an article, Fooled by Ponzi (and Madoff ): How Bernard Madoff Made Off with My Money. It demonstrates that even an ancient and notorious scam can be revived by a con man who knows how to bring it up to date.
In 1920, Charles Ponzi stole money from his investors in Boston while convincing them they were growing rich. He promised to pay wonderfully high interest and in fact did pay it for a while, thereby attracting more customers. But the interest paid to old investors came from the deposits of new investors, there being no other source of funds. The system was bound to crash when investors grew suspicious and asked for their money. Few people would be fooled by Ponzi today. His promise of sensationally high interest would identify him as a crook. Bernard Madoff knew that. He promised nothing more than steady growth -- as Greenspan says, "high enough to be attractive but not so high as to arouse suspicion." He must have also sensed that any fund controlling truly gigantic sums (US$50-billion is the figure mentioned in his case) might be suspect on that ground alone. So he created funds under many different names.
Investors often had no idea they were dealing with Madoff--Greenspan can't remember hearing of him. Big investors, including some major charities, knew about Madoff but respected his record as a hedge-fund manager, his former presidency of NASDAQ and his many philanthropies. The scheme fell apart only because many clients, their other enterprises hit by the general financial crisis, needed immediate cash. When Madoff failed to deliver, he was exposed. Greenspan's research shows that schemes depending upon gullibility need the help of what he calls a "social feedback loop," what others call "word of mouth." If many investors make profits from a fund and tell others, the investment seems safe and desirable.
That's what happened to Greenspan. Visiting his sister in Florida, he met a close friend of hers who was recruiting customers for the Rye Prime Bond Fund. Greenspan learned it was part of the Tremont family of funds, itself a subsidiary of Mass Mutual Life, an insurance giant. He liked and trusted this agent. Apparently, the agent had put all of his own assets in the fund; he said he had even refinanced his house in order to invest more in Rye Prime. Greenspan's sister and brother-in-law were investors, along with many of their friends. They happily reported they had seen their money grow over several years. Their experience "convinced me that I would be foolish not to take advantage of this opportunity." His belief was so firm that when a skeptical and financially knowledgeable friend back in Colorado warned him against the investment, Greenspan put it down to knee-jerk cynicism. He was truly suckered.
His decision, he says now, "reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance." Greenspan mentions that he's not related to Alan Greenspan, the former genius who ran U. S. fiscal policy for years. That Greenspan will go down in history as The Man Who Didn't See It Coming. Stephen, on the other hand, will be known as The Gullibility Expert Who Forgot to Read His Own Book.
Madoff probe focuses on tax havens
The hunt for funds allegedly cheated out of investors by Bernard Madoff, who faces fraud charges in New York, has turned to offshore tax havens where investigators believe he may have salted away hundreds of millions of dollars. Stephen Harbeck, chief executive of America's Securities Investor Protection Corporation (Sipc) and official receiver of Madoff's now defunct brokerage business, said the hunt for funds was likely to spread all over the world. "We will trace funds wherever the trail goes," he said on the steps of the US Bankruptcy Court for the Southern District of New York.
Sources close to the investigation said forensic accountants examining Madoff's books believed he had regularly sent large sums of money to offshore accounts in the Caribbean and Europe. "There are accounts at New York Mellon Bank that we have been looking at that appear to have sent and received money from offshore locations," a senior source said. Tracking down the money investors entrusted to Madoff is likely to be one of the longest and most complicated financial investigations on record. Harbeck said investigators were dealing with a "highly complex hybrid fraud", adding each individual investment account operated by Madoff could be its own self-contained fraud. "But it is still too early to say with any certainty what was going on inside Madoff's business."
The scandal took a chilling turn last week when Rene-Thierry Magon de la Villehuchet, the co-founder of a firm that lost millions investing with Madoff, was found dead in his New York apartment. Access International Advisors - Magon de La Villehuchet's firm - is understood to have lost $1.5bn in the Madoff affair. On the same day a New York judge ruled that Madoff's investors would receive no more than $100,000 in cash compensation, no matter how much they lost. The ruling was included in a series of court orders made on 23 December by US bankruptcy judge Burton Lifland.
For the biggest losers in the Madoff scandal, the compensation is a drop in the ocean. Fairfield Greenwich, the investment firm run by Madoff chum Walter Noel, lost $7.5bn in the fraud while womenswear magnate and Madoff mentor Carl Shapiro lost $545m of his personal fortune. Claims for compensation will be restricted to those investors who can prove they sent money to Madoff in the 12 months prior to his arrest on 11 December. Judge Lifland invited Madoff investors to attend a meeting at the US Bankruptcy Court on 18 February.
Madoff's Victims to Review His Wallet
Investors looking to recoup some of the $50 billion they lost in Bernard Madoff's alleged Ponzi scheme may get a better idea what the New York financial adviser has left when he is forced to reveal his assets to regulators this week. Madoff, 70, must provide a detailed list of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings to the Securities and Exchange Commission by New Year's Eve, a federal judge ruled earlier this month. Madoff's foreign business units were given until Jan. 26 to provide a similar accounting.
The list is to include all assets held for his "direct or indirect benefit," U.S. District Judge Louis Stanton in Manhattan wrote in his order in the SEC lawsuit. It must describe "the source, amount, disposition and current location of each of the items listed." A catalog of Madoff's assets may reveal targets for angry investors, including hedge funds and charities seeking the return of their funds. New York-based Bernard L. Madoff Investment Securities began liquidating after his Dec. 11 arrest for securities fraud. Madoff, under house arrest in his Manhattan apartment, faces as much as 10 years in prison and a $5 million fine if convicted.
Several investors have filed suits against Madoff and his firm following FBI allegations that he admitted the business was "one big lie." Investment firms that did business with Madoff also have been sued. Federal prosecutors allege Madoff engaged in a classic Ponzi scheme in which he would pay off old investors with the money of new investors. His lawyer, Ira Sorkin, didn't return a call Friday seeking comment, although he said previously that his client is cooperating with the government. Madoff, who hasn't formally responded to the securities fraud charge, is due in court Jan. 12, unless he is indicted before then. Prosecutors and defense lawyers also may agree to postpone the court date.
Madoff Disaster-Recovery Kit Up for Auction at EBay
A Bernard Madoff disaster-recovery kit is among the items up for auction on EBay Inc.’s Web site as sellers look to turn a quick buck after the money manager was accused of masterminding a $50 billion Ponzi scheme. A flashlight and backpack, as well as the employee emergency kit, are among items on EBay carrying insignia of Bernard L. Madoff Investment Securities LLC. Bids for the flashlight, currently at $100, began last week for $20. "Own this notorious piece of Wall Street history," wrote "emom1013," who is auctioning a black fleece vest bearing the logo of the New York-based investment firm. Bidding on the item, which the seller claims was among those given to Madoff’s employees as a holiday gift last year, climbed to $103 from $50 in three days.
Madoff, 70, was arrested Dec. 11 after telling his two sons and federal investigators that he had been using money from new investors to pay off old ones in what may be the biggest such swindle in history. A Madoff-branded tote bag, beach chair and opera glasses are being auctioned by "smoothgriffon," who claims to know Madoff, describing him as a "refined man but behind the scenes a con man." Bidding on the items increased to $128 from $50 within five days. "Madoff didn’t spare any expenses when it came to gifts for their clients that did a great deal of business with them," the seller of a Madoff jacket said. It has drawn one $75 bid. If brand owners dispute authenticity of an item, EBay will investigate and take the posting down, Jose Mallabo, an EBay spokesman, said. "If an item breaks our offensive items policy or the intellectual property rights of an owner, we’ll investigate it," he said in an e-mailed statement.
Some entrepreneurs are hawking original merchandise. T- shirts with a picture of Madoff framed by the slogan "Trust Me" are selling on EBay for $27.95. Another shirt, for $34.99, matches Madoff’s image with the words "Weekend at Bernie’s," a reference to the 1989 movie. Internet domain names are also for sale on EBay. "BernieMadoff.com," going for $10,000, hasn’t received any bids. "Madoffscrewedus.com" is selling for $39.99 and also hasn’t drawn any offers. San Jose, California-based EBay has emerged as a destination for collectors of U.S. corporate memorabilia. After Lehman Brothers Holdings Inc.’s bankruptcy in September, former employees put water bottles, caps and T-shirts up for auction. Almost seven years after Enron Corp.’s bankruptcy, shirts and coffee mugs with the defunct energy-trading company’s logo are still for sale on EBay.
Downturn Ends Building Boom in New York
Nearly $5 billion in development projects in New York City have been delayed or canceled because of the economic crisis, an extraordinary body blow to an industry that last year provided 130,000 unionized jobs, according to numbers tracked by a local trade group. The setbacks for development — perhaps the single greatest economic force in the city over the last two decades — are likely to mean, in the words of one researcher, that the landscape of New York will be virtually unchanged for two years. "There’s no way to finance a project," said the researcher, Stephen R. Blank of the Urban Land Institute, a nonprofit group. Charles Blaichman is not about to argue with that assessment. Looking south from the eighth floor of a half-finished office tower on 14th Street on a recent day, Mr. Blaichman pointed to buildings he had developed in the meatpacking district. But when he turned north to the blocks along the High Line, once among the most sought-after areas for development, he surveyed a landscape of frustration: the planned sites of three luxury hotels, all stalled by recession.
Several indicators show that developers nationwide have also been affected by the tighter lending markets. The growth rate for construction and land development loans shrunk drastically this year — to 0.08 percent through September, compared with 11.3 percent for all of 2007 and 25.7 percent in 2006, according to data tracked by the Federal Deposit Insurance Corporation. And developers who have loans are missing payments. The percentage of loans in default nationwide jumped to 7.3 percent through September 2008, compared with 1 percent in 2007, according to data tracked by Reis Inc., a New York-based real estate research company. New York’s development world is rife with such stories as developers who have been busy for years are killing projects or scrambling to avoid default because of the credit crunch. Mr. Blaichman, who has built two dozen projects in the past 20 years, is struggling to borrow money: $370 million for the three hotels, which include a venture with Jay-Z, the hip-hop mogul. A year ago, it would have seemed a reasonable amount for Mr. Blaichman. Not now. "Even the banks who want to give us money can’t," he said.
The long-term impact is potentially immense, experts said. Construction generated more than $30 billion in economic activity in New York last year, said Louis J. Coletti, the chief executive of the Building Trades Employers’ Association. The $5 billion in canceled or delayed projects tracked by Mr. Coletti’s association include all types of construction: luxury high-rise buildings, office renovations for major banks and new hospital wings. Mr. Coletti’s association, which represents 27 contractor groups, is talking to the trade unions about accepting wage cuts or freezes. So far there is no deal. Not surprisingly, unemployment in the construction industry is soaring: in October, it was up by more than 50 percent from the same period last year, labor statistics show. Experience does not seem to matter. Over the past 15 years, Josh Guberman, 48, developed 28 condo buildings in Brooklyn and Manhattan, many of them purchased by well-paid bankers. He is cutting back to one project in 2009. Donald Capoccia, 53, who has built roughly 4,500 condos and moderate-income housing units in all five boroughs, took the day after Thanksgiving off, for the first time in 20 years, because business was so slow. He is shifting his attention to projects like housing for the elderly on Staten Island, which the government seems willing to finance.
Some of their better known and even wealthier counterparts are facing the same problems. In August, Deutsche Bank started foreclosure proceedings against William S. Macklowe over his planned project at the former Drake Hotel on Park Avenue. Kent M. Swig, Mr. Macklowe’s son-in-law, recently shut down the sales office for a condo tower planned for 25 Broad Street after his lender, Lehman Brothers, declared bankruptcy in September. Several commercial and residential brokers said they were spending nearly half their days advising developers who are trying to find new uses for sites they fear will not be profitable. "That rug has been pulled out from under their feet," said David Johnson, a real estate broker with Eastern Consolidated who was involved with selling the site for the proposed hotel to Mr. Blaichman, Jay-Z and their business partners for $66 million, which included the property and adjoining air rights. Mr. Johnson said that because many banks are not lending, the only option for many developers is to take on debt from less traditional lenders like foreign investors or private equity firms that charge interest rates as high as 20 percent.
That doesn’t mean that all construction in New York will grind to a halt immediately. Mr. Guberman is moving forward with one condo tower at 87th Street and Broadway that awaits approval for a loan; he expects it will attract buyers even in a slowing economy. Mr. Capoccia is trying to finish selling units at a Downtown Brooklyn condominium project, and is slowly moving ahead on applying for permits for an East Village project.
Mr. Blaichman, 54, is keeping busy with four buildings financed before the slowdown. He has found fashion and advertising firms to rent space in his tower at 450 West 14th Street and buyers for two downtown condo buildings. He recently rented a Lower East Side building to the School of Visual Arts as a dorm. Mr. Blaichman had success in Greenwich Village and the meatpacking district, where he developed the private club SoHo House, the restaurant Spice Market and the Theory store. He had similar hopes for the area along the High Line, where he bought properties last year when they were fetching record prices.
An art collector, he considered the area destined for growth because of its many galleries and its proximity to the park being built on elevated railroad tracks that have given the area its name. The park, which extends 1.45 miles from Gansevoort Street to 34th Street, is expected to be completed in the spring. Other developers have shown that buyers will pay high prices to be in the area. Condo projects designed by well-known architects like Jean Nouvel and Annabelle Selldorf have been eagerly anticipated. In recent months, buyers have paid $2 million for a two-bedroom unit and $3 million for a three-bedroom at Ms. Selldorf’s project, according to Streeteasy.com, a real estate Web site. "It’s one of the greatest stretches of undeveloped areas," Mr. Blaichman said. "I still think it’s going to take off." In August 2007, Mr. Blaichman bought the site and air rights of a former Time Warner Cable warehouse. He thought the neighborhood needed its first full-service five-star hotel, in contrast to the many boutique hotels sprouting up downtown. So with his partners, Jay-Z and Abram and Scott Shnay, he envisioned a hotel with a pool, gym, spa and multiple restaurants under a brand called J Hotels. But since his mortgage brokers started shopping in late summer for roughly $200 million in financing, they have only one serious prospect for a lender.
For now, he is seeking an extension on the mortgage — monthly payments are to begin in the coming months — and trying to rent the warehouse. (He currently has no income from the property.) It is perhaps small comfort that his fellow developers are having as many problems getting loans. Shaya Boymelgreen had banks "pull back" recently on financing for a 107-unit rental tower the developer is building at 500 West 23rd Street, according to Sara Mirski, managing director of development for Boymelgreen Developers. The half-finished project looked abandoned on two recent visits, but Ms. Mirski said that construction will continue. Banks have "invited" the developer to reapply for a loan next year and have offered interim bridge loans for up to $30 million. Mr. Blaichman cuts a more mellow figure than many other developers do. He avoids the real estate social scene, tries to turn his cellphone off after 6 p.m. and plays folk guitar in his spare time.
For now, Mr. Blaichman seems stoic about his plight. At a diner, he polished off a Swiss-cheese omelet and calmly noted that he had no near-term way to pay off his debts. He exercises several times a week and tells his three children to curb their shopping even as he regularly presses his mortgage bankers for answers. "I sleep pretty well," Mr. Blaichman said. "There’s nothing you can do in the middle of the night that will help your projects." But even when the lending market improves — in months, or years — restarting large-scale projects will not be a quick process. A freeze in development, in fact, could continue well after the recession ends. Mr. Blank of the Urban Land Institute said he has taken to giving the following advice to real estate executives: "We told them to take up golf."
On the 12th Day of Christmas my true love gave to me: The Red Sox
Newspapers are foundering these days, some laying off employees at alarming rates, others just folding outright. One in Detroit recently ceased home delivery in order to cut costs. Before the stock market meltdown, it was not uncommon for publishing companies to have investments elsewhere, like the Tribune Company in Chicago who filed for bankruptcy protection earlier this month. Owning some magazines, a tabloid or two in other cities or having a professional sports franchise under their corporate banner was par for the course. While the Cubs are not part of the Trib’s Chapter 11 reorganization, owner Sam Zell is looking to sell them to the highest bidder or anyone who is willing to take on the Boys in Blue. He just wants out from under.
In the Big Apple, The New York Times is also looking to divest themselves from sports ownership although you could have knocked me over with a feather when I realized the team they have with the For Sale sign was not in their city - or state for that matter. If there was ever a rivalry between teams it is the Red Sox and Yankees, the most storied and arguable the best of the lot. For the life of me I cannot understand how the paper with the tag line "All the News That's Fit to Print," has a 17.5% stake in ….. gasp ….. the BoSox. They are the second largest investor in New England Sports Ventures (NESV). The New York Times Company also owns The Boston Globe.
I realize there could have been a connection between the Times Company and billionaire hedge fund manager John Henry from Wall Street but how can Gotham’s so-called paper of record buy in with the "enemy?" After all, it covers both the Yankees and Mets (they too, have a history with Boston from the 1986 World Series – remember Billy Buckner?). I lived in New York for a long time and was never much of a Yankees’ fan; nevertheless, there is just something about this that sends a chill up my spine. An unholy marriage if you will. Even if I had a rich dead uncle, I would rather buy an Arena Football franchise than get involved in this.
The Times, valued by Barclays at $166 million, is facing an estimated $400 million shortfall this spring and the sale of their share in NESV, which includes the Red Sox, Fenway Park, NESN (New Englland Sports Network) and The Globe, could fetch about half that and soften the blow. In these uncertain economic times the entire value is unknown with the newspaper alone being valued by Barclays at just $20 million. Just a few years ago some believed the price tag could have been as high as $600 million except the downturn in advertising and readers make the former a more realistic figure. Even at the deflated number, finding a buyer may still be difficult.
There is growing speculation that Ruppert Murdoch’s News Corporation Limited could jump into the bidding war because they are considering the shutdown of the Globe’s chief competitor, The Herald, along with seven other dailies and fifteen weeklies allegedly freeing up the necessary capital. However, Fox Entertainment Group , a News Corp subsidiary, had a previous foray into the baseball world. It was short lived when they sold the Los Angeles Dodgers to Frank McCourt and his group less than five years after buying out the O’Mally family. From the "You cannot make this stuff up" department, McCourt was a Boston real estate developer when he got the Dem Bums. Business sure does work in mysterious ways.
Without gay men, the hierarchy of the Catholic church would collapse
The Pope had a chance to calm fears. Instead, he promoted them. Over the past few months, the Vatican has been quietly canvassing Lord Guthrie, the former head of the armed forces, John Studzinski, the millionaire philanthropist, and a handful of other influential British Catholics on who should succeed Cardinal Cormac Murphy-O'Connor upon his imminent retirement. From the telephone conversations and one-on-one meetings, it is clear what Pope Benedict XVI expects of the man who will lead Britain's more than four million Catholics: courage, patience, PR nous and an unshakable respect for liturgical tradition. As of last week, we also know one quality the Pope is not seeking in prospective candidates: tolerance towards lesbians and gays.
In his Christmas address to Vatican staff, Benedict XVI inveighed against the harm done by "gender theory" (he likened it to the threat to the planet caused by the destruction of the rainforest), which teaches that the distinction between male and female is down to cultural rather than biological influence. Most of the faithful billion-plus Catholics who pay close attention to every word the Pope utters must have drawn a blank: gender theory, perhaps a familiar concept to some Ivy Leaguers, is unknown in the favelas of Rio de Janeiro and the slums of Calcutta. The media, however, quickly bridged the knowledge gap and interpreted the papal message as a coded attack on homosexuals. Gender theory questions the patriarchy and sex-based discrimination; its critics, ergo, must support both.
Such flawed logic is perhaps inconceivable to Benedict XVI, a powerful intellect and brilliant theologian. Yet he must have known that to raise the issue of sexual identity was to provoke yet another examination of Catholic teaching on homosexuality. Gay men and women have for millenniums filled the ranks of the church's holy orders, schools and administration; they have celebrated the Catholic vision in music, paintings and writing. Catholic teaching might condemn sodomy as the sin that cries to the heavens for vengeance, yet Catholic parishes, universities and seminaries would grind to a halt if gays were banned. Church rules might forbid same-sex unions, yet Christ's first and foremost commandment was to love one another. These contradictions present a tremendous challenge to gay Catholics (lay and ordained) who must somehow fit into a community that views their proclivity as an abomination, and to heterosexual Catholics who wonder how to stay loyal to an intolerant church. It is just the kind of challenge a bold and sophisticated theologian such as Benedict XVI could wrestle with. It is a challenge echoed in every corner of the complex Catholic edifice.
The church offers certainties, but trades in questioning; it holds up virgin births, eternal life and resurrection as unquestionable truths, yet inspires great scholars like Cardinal Newman to pronounce that theology is constantly evolving. Papal infallibility was only introduced 200 years ago, clerical celibacy was unknown among the first Christians and the state of limbo was dumped only last year. No wonder that supporters of women's and gays' ordination, both banned by the church today, hope that Catholic teaching will change. While critics see in these contradictions nothing but a towering hypocrisy, Catholics - indeed all non-evangelical Christians - believe that these conflicting messages inspire the questioning and prayer that constitute life's journey. Rowan Williams, the Archbishop of Canterbury, put it beautifully in his Christmas message when he said that to step into a church is to find a place and silence that make questioning possible. The doubts of questions, as well as the certainty of answers, are the twin pillars of faith. Those who only see the first are tormented and lose heart; those who see only the second risk an odious fundamentalism.
Many Catholics, as they grapple with these dilemmas and await theological enlightenment, adapt church teachings to their own circumstances. Thus, they get a divorce, despite the Vatican's ban, and practise contraception, ignoring Rome's teachings. The constant infraction of such rules makes for a theological evolution of sorts. I remember, when I was editing the Catholic Herald, discussing the pill with a wise, elderly priest: "I haven't heard anyone confessing to using birth control in the past 20 years," he told me. It didn't mean that Catholics had stopped using contraception - they had simply stopped regarding it as a sin. Bishops and diocesan information officers around the globe have spent a great deal of time over the past few days in damage control. They point out that the Pope never even mentioned the word homosexuality in his address. This is literally true, but smacks of casuistry.
As a sophisticated public figure, Benedict cannot ignore the consequences of raising, even in the most indirect fashion, the subject of sex. The one "S" word in an address of more than 5,000 can hijack the entire message. Yes, this is a sad indictment of our salacious times, but just as in Regensburg two years ago, when Benedict's Muslim audience saw a slight in his quoting a Byzantine emperor's description of Islam's flaws, the western liberal audience last week pounced on the implied attack on homosexuals as unnatural. The papacy cannot be reduced to a PR exercise, but no missionary can afford to ignore the basic rules of presentation. Even if Benedict XVI never meant to tackle the issue of homosexuality, the timing of the message was spectacularly ill-judged. The world is slumping into an economic downturn that has humbled even financial giants. Millions risk losing their jobs and their homes. For the first time in decades, consumerism seems shaken. Even the most unthinking, bling-crazed WAG must be wondering if there isn't more to life than shopping at Prada and hanging out at Bijou. People in the developed world, infatuated with the here and now, cocksure about the benefits of high-maintenance capitalism, now find themselves having to embrace the same humility and openness that people in the undeveloped world have long adopted as norm.
Here was a golden opportunity for a church leader to invite the frightened, the curious and the confused to sample a different way of life. The Pope could have explained a set of values that have seen out recessions, depressions, bear and bull markets. He could have welcomed outsiders to come and feel for themselves the warmth of a community that believes everyone deserves love - and forgiveness. Instead, Benedict XVI issued a message that could be, and was, boiled down to a finger-wagging warning against a vulnerable minority. Many Catholics, even among his most devoted disciples, must be issuing a moan of exasperation, none more so than the candidates to succeed Cardinal Murphy-O'Connor. These men stand to inherit a position that propels them to the centre of public life in an overwhelmingly secular society that will treat them with suspicion, if not downright hostility. Given the make-up of today's Catholic church, at least some of these men are bound to be gay; given their candidature, their service to the church cannot be doubted. As the personification of this apparent contradiction, the future cardinal will need to tread carefully. And, it would seem, without much help from his boss.