Auto races at Laurel, Maryland." The 1,5-mile wooden oval at Laurel Speedway.
Ilargi: Alright, I got nothing. Well, I do have Paul Krugman, and that doesn’t seem to make me happy. 'Cause Krugman just won't stop will he? The man who never recovered from his fake Nobel week nights spent on solid Stockholm aquavit, wants more stimulus. It looks to me like he always wants more stimulus. After the second one, he'll want a third, and so on. He's the stimulus monster.
Moreover, his analysis is just plain dead wrong. The problem with the present stimulus plan is not, as in NOT!, that it is too small. Nor is it that 3/4 of the money hasn't been spent.
Look, it's simple: the true problem is twofold.
- The money is taken from the wrong group of people.
- The money is given to the wrong group of people.
See? It’s a dead easy analysis. Nothing to do with size, nor with timing. Make the stimulus bigger, or get a second one, and what do you think will happen? Exactly, both sides of the twofold problem will become bigger problems.
Not only does the administration get every single step of the way gruesomely wrong, its critics do the same thing. They just get it wrong in different ways. What sort of future does that promise?
Alors, as I said, I have nothing. I’ll lift along on Mike Shedlock's excellent piece on unemployment numbers, Unemployment Claims: How Bad are the "Real" Numbers? Mish shines some much needed light (since the government categorically refuses to come clean and tell the truth) on what happens in the murky world of continuing jobless claims:
The continuing claims number that mainstream media focuses on is 6,883,000 as boxed in red above. However, that number ignores extended benefits from the Emergency Unemployment Compensation (EUC).
Turns out, if the 2.519.101 people covered under those extended benefits are added to the 6,883,000 number, we arrive at a total of 9.4 million.
And, as Mich remarks, even that's not all:
I am unsure how Federal Employees, Newly discharged Veterans, the Railroad Retirement Board, and especially the 346,559 Extended Benefit numbers fit into the EUC 2008 program, but I suspect all those numbers need to be added in as well, making the true count still higher.
And no, that’s still not the whole story; there's more to it than Mish covers today. In Looming crisis spells stimulus , Marie Cocco states:
President Barack Obama made everything perfectly muddy when he said in an ABC News interview that the seriousness of the downturn and how to attack it is "something we wrestle with constantly." Yet in the next breath, he expressed concern about the burgeoning deficit. But if anyone's looking for some clear voices, there are 650,000 of them just waiting to be heard. That is roughly the number of long-term unemployed who will begin losing their jobless benefits in September, according to the National Employment Law Project
.... the Labor Department says, the number of unemployed people out of work for 27 weeks or longer continues to grow, reaching 4.4 million last month. In June, three out of 10 jobless workers had been out of work for at least six months....
In other words, the continuing jobless claims by no means cover all unemployed Americans. There are millions of miserable people out there who simply fail to get counted. Or get counted in places we don’t know about. Or get counted in all sorts of different places, to spread the pain around so to say. Hundreds of thousands will soon not even be eligible for extended benefits. And for sure, as long as you can keep them hidden through creative number games, you can keep the real problem from the public a little longer. But since when is that the task of the government? What sort of government, other than maybe Kim-Yong-Il's, thinks it's a good way to spend their own time and their voters' money, trying to hide from people what happens in their communities and their nation? Or is it just me?
Looming crisis spells stimulus
When a virulent disease is ravaging you like a cancer, you don't want a cacophony of voices promoting different or contradictory cures. Yet that is what we're starting to hear about the economic crisis, not only from a politically divided -- and pretty scared -- capital, but from within the Obama administration itself. In just the past few days, Vice President Joe Biden has said the young administration misread the depth of the recession -- an honest account, since most private economists did as well. Laura Tyson, an outside economic adviser to the White House, said it's wise to start preparing another stimulus package.
Then President Barack Obama made everything perfectly muddy when he said in an ABC News interview that the seriousness of the downturn and how to attack it is "something we wrestle with constantly." Yet in the next breath, he expressed concern about the burgeoning deficit. But if anyone's looking for some clear voices, there are 650,000 of them just waiting to be heard. That is roughly the number of long-term unemployed who will begin losing their jobless benefits in September, according to the National Employment Law Project.
Remember, the recession didn't start last fall when the government bailed out AIG and the financial system froze. It began in December 2007 -- and 6.5 million jobs have been lost since then. Depending on which state and the sort of triggers that apply to benefits, hundreds of thousands of workers laid off early in the downturn are soon to be left without the basic sustenance of an unemployment check. Meanwhile, the Labor Department says, the number of unemployed people out of work for 27 weeks or longer continues to grow, reaching 4.4 million last month. In June, three out of 10 jobless workers had been out of work for at least six months, according to the department's data.
The stimulus package the president signed soon after taking office did provide extended benefits, and boosted weekly payments. But even that extension runs out on Dec. 26, and would not apply to all the unemployed. Does anyone really believe that a significant portion of the unemployed will have found new work by then? Hardly. Both private and government economists now predict that unemployment will continue to rise at least through the end of this year. "We can't ignore this moment when all these folks are running out (of benefits)," says Maurice Emsellem of the National Employment Law Project. "That needs to be a top priority, to help these workers."
Let's stop kidding ourselves. In no contemporary economic crisis -- not even those that unfolded on the Republicans' watch -- has Congress left the unemployed completely in the lurch. So some sort of spending package -- call it stimulus, call it stopgap emergency aid, whatever works -- is going to have to be passed. The unemployment emergency helps feed another crisis Congress is going to be forced to address: the state budget disasters unfolding around the country. So far, 42 states have cut budgets that already had been enacted for fiscal 2009, according to the National Governors Association. More and deeper cuts are expected next year.
Already, states have laid off and furloughed workers -- including, in some states, the very workers who process unemployment claims. Generally speaking, states are required to balance their budgets each year, a mandate that forces them to pull money out of the economy through spending reductions and tax hikes, counteracting the federal government's efforts to juice things up. "That is what happened during the Great Depression, we had states working against what the federal government was doing," says Heidi Shierholz, an economist with the Economic Policy Institute.
With red states and blue, Republican governors and Democrats, all struggling against the same relentless, recession-driven drops in tax revenue, an almost irresistible political coalition for more aid to states eventually will take shape. And with the fast-approaching September deadline for extending some unemployment benefits, there will likely emerge one of those must-pass measures that may or may not be called another stimulus bill. Any hot air expended trying to stop it serves no purpose but to fuel political fires. Remember, that is the whole point of those now huffing and puffing most heartily. They don't want to figure a way out of this morass; they just want to figure out a way to unseat those now in office.
Unemployment Claims: How Bad are the "Real" Numbers?
As noted in Continuing Claims Soar by 159,000 to New Record the record continuing claims number is dramatically understated by over 2.5 million. Charts of what is really happening are shown below but first let's recap the data as reported by the Department of Labor.
Here is a chart from Department of Labor Weekly Claims Report.
click on chart for sharper image
Emergency Unemployment Compensation
The continuing claims number that mainsteam media focuses on is 6,883,000 as boxed in red above. However, that number ignores extended benefits from the Emergency Unemployment Compensation (EUC) program.
Those on extended benefits are not counted in the continuing claims numbers.
Inquiring minds may wish to consider the Emergency Unemployment Compensation (EUC) PDF.EUC is a federal emergency extension that can provide up to 33 additional weeks of unemployment benefits. The first payable week was the week of July 6-12, 2008.Adding 2.519 million from the above chart to 6.883 million from the second chart the current real total (assuming nothing else is missing) the current number receiving unemployment benefits is 9.4 million.
The original extension passed in July 2008 paid up to 13 weeks of additional benefits. Effective November 23, 2008, we can pay up to 7 additional weeks of benefits.
Effective December 7, 2008, we can pay up to another 13 weeks of benefits.
I am unsure how Federal Employees, Newly discharged Veterans, the Railroad Retirement Borad, and especially the 346,559 Extended Benefit numbers fit into the EUC 2008 program, but I suspect all those numbers need to be added in as well, making the true count still higher.
With that backdrop, here are some custom created charts courtesy of Chris Puplava at Financial Sense, based on my request. The charts show the effect of the EUC program over time.
Continuing Claims + EUC Extended Benefits from 2000-2009
click on chart for sharper image
Note the dips in the EUC numbers and the corresponding dips in the total numbers. Compare to double extensions in emergency benefits:
"The original extension passed in July 2008 paid up to 13 weeks of additional benefits. Effective November 23, 2008, we can pay up to 7 additional weeks of benefits. Effective December 7, 2008, we can pay up to another 13 weeks of benefits."
Continuing Claims + EUC Extended Benefits from 1970-2009
click on chart for sharper image
Note how the combined claims is twice as bad as the recessions is 1975 and 1982. Also note how the reported headline numbers were understated in the last recession. This is how manipulated the reporting is.
Some might claim the numbers need to bee adjusted for population growth for a valid comparison. It's a reasonable request. Chris was only able to go back to 1980 so here is what the chart looks like.
Continuing Claims + EUC Extended Benefits from 1980-2009 Population Adjusted
click on chart for sharper image
On a percentage of population basis the 2001 recession was not quite as bad as the 1982 recession, whereas the current recession is 50% worse than the 1980 recession.
Furthermore, the jobs picture is even worse than it looks. The US consumer was nowhere near as leveraged to real estate in 1980 as now. Also note that boomers are heading into retirement now, undercapitalized and looking for jobs, in effect competing against their kids and grandkids for jobs.
Look at the average age of baggers in grocery stores or greeters at Walmart. These people are not working because they want to; they are working because they have to. Demand for jobs is at an all time high while the number of available jobs and the pay scales of those jobs have both collapsed. The employment situation is not only an unmitigated disaster, things are about to get even worse with pending state cutbacks.
Japan's wholesale prices mark record drop in June
Japan's domestic corporate goods price index, the nation's benchmark measure of wholesale prices, fell a record 6.6% in June from the year-ago period, the Bank of Japan said Friday. The result was a heavier drop than a 6.3% fall forecast in a survey of economist by Kyodo News and a 6.4% projection in a Reuters poll. It was also the largest on-year tumble on record.
From May, the index was down 0.3%. Export prices were down 12.8% on year in June, while import prices were 32.2% lower. "The slide in wholesale prices is highly likely to widen in July, August and September, exceeding 7% down the road," Tetsuro Sawano, senior fixed income strategist at Mitsubishi UFJ Securities, was quoted as saying in a Reuters report following the data. "Today's data would help the Bank of Japan reinforce its cautious stance on the economy." The Bank of Japan is slated to hold a policy meeting next week, and could extend some of its programs designed to add liquidity to the nation's financial markets.
U.S. monthly trade gap smallest since 1999
The U.S. trade gap narrowed unexpectedly to $26 billion in May, the smallest since November 1999, as exports rose and domestic demand for foreign goods slumped, government data on Friday showed. The Commerce Department said exports increased 1.6 percent in May, while imports declined by 0.6 percent. Economists said the drop in imports signaled continued weakness in the recession-mired U.S. economy.
"The trade deficit report is another indicator that things are not improving as expected," said William Larkin, portfolio manager with Cabot Money Management in Boston. "There is growing pessimism about how quickly the U.S. will recover, which I think will be slower than people expect." Still, the stronger-than-anticipated export performance could bolster the contribution of trade to economic activity in the second quarter.
"If the real trade deficit in June remains unchanged, real net exports would add about two percentage points to GDP growth in the second quarter, everything else equal," Jay Bryson, global economist at Wells Fargo Securities, said in a note to clients. The U.S. economy plummeted at a 5.5 percent annual rate in the first three months of the year. Economists expect a much smaller decline in the second quarter, with growth resuming in the second half of the year.
Analysts polled by Reuters had expected the trade deficit to widen to $30.2 billion in May. The trade gap in April was revised to $28.8 billion. May's import level was the lowest since July 2004 and May marked the tenth straight month in which imports had declined, underscoring the weakness in the U.S. economy. Imports of automotive vehicles and parts slipped to $10.2 billion in May, the lowest level since March 1996, while auto exports were the lowest since July 1998.
The monthly deficit on goods trade with China grew to $17.5 billion from $16.8 billion in April and was the largest with any single country. But the U.S. trade deficit with other big trading partners declined, falling to $2.8 billion with the European Union in May, for the lowest reading since March 1999, and retreating to $1.9 billion with Japan, which was the lowest since February 1984. Imported oil cost $51.21 a barrel in May, up from $46.60 in April. The value of crude oil imports in May declined only slightly to $13.4 billion, despite a sharper decline in the quantity of oil imported, to 262 million barrels from 293 million in April, the Commerce Department said.
The increase in oil prices was a factoring driving import prices higher in June, Labor Department data showed. The Labor Department said import prices jumped 3.2 percent last month, the biggest jump since November 2007, while export prices were up 1.1 percent. Import prices have risen for four consecutive months, but are still down for the year ended in June, largely because of oil prices are well off record highs reached last year. Petroleum prices rose 20.3 percent in June, the largest monthly advance since April 1999. However, these prices are down 45.9 percent over the past 12 months.
Canada Has Record C$1.42 Billion Trade Deficit as Exports Fall
Canada’s trade deficit widened more than economists predicted to a record in May, when the country’s dollar appreciated at a record pace, as exports fell twice as fast as imports. Canada had a deficit of C$1.42 billion ($1.22 billion), the largest in records dating back to 1971, Statistics Canada said today in Ottawa. The figure was almost triple the C$500 million deficit expected in a survey of economists taken by Bloomberg News.
Canada’s run of trade surpluses dating back to 1976 ended in December as prices for crude oil plummeted, and as exports of lumber and cars to the U.S. plunged amid a housing slump and rising unemployment. Bank of Canada Governor Mark Carney has said the global economy will be slow to emerge from the worst slump since the Great Depression in the 1930s. Imports and exports both fell for a third straight time in May, a month where automobiles and energy accounted for more than half the declines.
Exports fell 6.9 percent to C$28.4 billion in May, and imports fell 3.5 percent to C$29.8 billion. Automobile exports fell 12 percent, led by a 33 percent drop in trucks as production of some models was halted, Statistics Canada said. Energy exports fell 11 percent. Canada’s trade surplus with the U.S. narrowed to C$1.48 billion in May, from C$2.62 billion in April. The Canadian dollar strengthened against the U.S. dollar at the fastest monthly pace on record in May, prompting the bank to say on June 4 that it could “fully offset” positive economic developments. Exports will fall 21 percent this year, the government’s export financing agency said yesterday.
Statistics Canada also increased its estimate of the April trade deficit to C$389 million from C$179 million. In a separate report, the statistics bureau said that new home prices fell for the eighth straight month in May, declining 0.1 percent. Economists surveyed by Bloomberg expected a 0.5 percent drop, based on the median of 12 estimates. From the year- earlier month, home prices fell 3.1 percent.
Bank of Wyoming Seized; 53rd U.S. Failure This Year
Bank of Wyoming in Thermopolis was closed by regulators, the 53rd lender to fail this year, amid rising unemployment and home foreclosures in the deepest recession in a quarter century. Bank of Wyoming, with $70 million of assets and $67 million of deposits, was closed by the state’s Department of Audit, Division of Banking and the Federal Deposit Insurance Corp. was named receiver, the FDIC said today in a statement. Central Bank & Trust in Lander, Wyoming, will assume the deposits and the failed bank’s only office.
“There is no need for customers to change their banking relationship to retain their deposit insurance coverage,” the FDIC said. Regulators have accelerated the pace of bank seizures this year, shuttering the most since 1992 and more than twice as many as last year. The recession has wiped out about 6.5 million U.S. jobs in the past two years, pushing unemployment in June to a 26-year high 9.5 percent, making it harder for consumers to pay their bills.
Central Bank will buy all of Bank of Wyoming’s deposits except for $8 million in brokered deposits, and agreed to purchase about $55 million of assets. Bank of Wyoming, the state’s first failed bank since 1991, will open as a branch of Central Bank “during normal business hours,” the FDIC said. The FDIC estimates closing Bank of Wyoming will cost the agency’s deposit insurance fund $27 million. The fund, supported by fees on insured banks, fell to $13 billion in the first quarter, the lowest since September 1993.
Banks Turn the Screws on California
Banks are refusing to cash IOUs issued by the state of California after July 10, putting pressure on the Golden State to resolve its budget crisis. Governor Arnold Schwarzenegger and state legislators are slugging it out over how to fix California's $26.3 billion budget gap. Now, some of the nation's biggest banks are sending them a message: You're on your own. The Republican governor and Democrat-controlled statehouse have been at an impasse for weeks, after the state's runaway spending collided spectacularly this year with its falling property, sales, and income tax revenues.
Legislators have offered up a tonic of steep spending cuts, new taxes, and fee hikes. Schwarzenegger says he wants more long-lasting reforms—such as cutting the length of time the jobless can collect welfare from five years to two. It's gotten so bad that even the press secretaries for the governor and state Assembly Speaker Karen Bass have taken verbal shots at each other. California missed its June 30 deadline to sign off on the new fiscal-year budget. On July 6 Fitch Ratings downgraded the state's general obligation bonds to a BBB rating, the lowest among the 50 states. "California's situation is a concern to everybody," says Maud Daudon, chief executive of Seattle-Northwest Securities, a municipal bond broker.
"It's a bellwether of the market, and if they don't find a way through this it has the potential for a tidal wave of change." Already, state Controller John Chiang's office has begun issuing IOU paper to thousands of state agencies, contractors, and municipal governments. The controller began issuing the IOUs on July 2. Some 92,000 of them have gone out since, totaling more than $350 million. Estimates are that $3 billion will be issued by the end of July. That flurry of paper, however, may just be the tool that forces politicians to reach an agreement.
Many of the state's banks and credit unions have been cashing the IOUs like checks. They have some incentive to do so, as the IOUs carry a 3.75% annual interest rate. But the interest and principal amounts aren't due to be paid until Oct. 2—and that's only if the cash-strapped state has the money. So after initially agreeing to cash the IOUs, some of the state's biggest banks are now saying no more. Bank of America, JPMorgan Chase, and Wells Fargo all say they won't accept the IOUs after July 10.
Banks have balance-sheet issues of their own these days. And the big lenders do not want to be perceived as an enabler of the Golden State's dysfunctional government. "The state of California, just like any household or business, must live within its means," says Julia Tunis Bernard, a spokeswoman for San Francisco-based Wells Fargo. "Banks can't be the solution to the budget problems."
With the big banks refusing to cash the state's paper, fears are that desperate IOU recipients will turn to other more expensive outlets such as check-cashing stores and third parties who offer to buy the paper at steep discounts. Already dozens of offers to purchase IOUs for 85¢ on the dollar are popping up on Craiglist.org. "If a bank will not honor an IOU then someone may need to rely on a third party," says Hallye Jordan, a spokeswoman for the state controller. She says federal regulators may step in "to prevent people from being gouged."
J.J. Feldman, an investment advisor in Los Angeles, says he posted an ad on Craiglist.org offering to buy IOUs at 85¢ on the dollar after hearing about them on the radio. He put the ad up on July 9 but so far hasn't had any offers. "I figure if someone needed the money fast I could buy $10,000 worth of a state tax refund," he says. Feldman says he made good money earlier in the year buying the bonds of distressed companies such as General Growth Properties and Hertz (HTZ). California, he says, is just another distressed issuer. "They've had their ratings lowered but they're not junk status, yet," he says.
The Securities and Exchange Commission has declared that the IOUs are municipal securities, meaning that only dealers authorized to trade in such paper can do so. In a statement, the agency also warned that "broker-dealers, as well as any potential secondary markets, should be aware that the requirements of the securities laws and the rules of the Municipal Securities Rulemaking Board apply to the IOUs." Other security steps may be taken.
The controller's office is expected to require a bill of sale for all who try to redeem an IOU that was not issued in their name. "It's going to be more painful for people who are trying to sell them for money," says Matt Fabian of Municipal Market Advisors, a research firm devoted to municipal bonds. "There are additional hoops to jump through to sell municipal securities. It would really be unfortunate for the people of California, and increase pressure on the state to get something done."
This is only the second time that California has had to issue IOUs since the Great Depression. The last time, in 1992, a budget compromise was reached, in part because banks refused to cash the paper. IOU recipients may not all be on the hook, however. One IOU being offered for sale on eBay (EBAY) already appears to have appreciated in value. Bidding on the $2 check—issued to cover a state tax refund—has already risen to $21. The auction ends July 16. "Hopefully this will never happen again," the eBay listing says. "This is a piece of history right here."
Influence Is All In The Bag For 'Government Sachs'
When I last wrote about Goldman Sachs in late March the most politically-connected and luckiest firm on Wall Street was in the middle of rigging the stock market -- again. "Something smells fishy in the market. And the aroma seems to be coming from Goldman Sachs," is the way I put it in that March 28 column. Well, a lot has changed in just the past few weeks. And I'd like to put it all together for you, and for the rest of the media should it choose to follow what is shaping up to be the most incredible financial story ever.
Back in March I noted that the rally occurring in the stock market had the indisputable fingerprints of Goldman all over it. There were numbers to back it up. Despite the fact that regular investors seemed to be pulling their money out of the market or -- at best -- investing conservatively, stock prices were zooming. The reason was simple: Big investors were pouring money into equities. And Goldman Sachs was the biggest of the big.
According to the New York Stock Exchange figures for the week of April 13 that I quoted, Goldman executed twice as many big trades -- called "program" trades by the industry -- as any other firm. And, the bulk of the 1.234 billion shares bought by Goldman that week were paid for with the firm's own money. Of course, Goldman would have to be mighty confident that stock prices were going up to risk so much of its own capital. Or, perhaps, it knew stocks would be rising. This was the time, remember, when banks were trying to recapitalize by selling shares to the public. Goldman, you'll also recall, had turned itself into a bank holding company so it could take $10 billion in government money under the Troubled Asset Relief Program.
Goldman also sold billions worth of new stock to the public while all this was happening. How much harder would it have been for banks to sell stock to nervous investors if the market was swooning rather than booming? Goldman's sudden and inexplicable optimism about stocks was incredibly opportune for the banking industry in general, for Goldman in particular and -- here's where the conspiracy starts to unfold -- for the government. It's tough, however, to do what needs to be done to rescue the market when pesky journalists and annoying bloggers are looking over your shoulder.
So a couple weeks ago the NYSE suddenly announced that brokerage firms would no longer have to report their program trades. The new rule takes effect next week. Convenient! Wall Street and Washington have been playing footsie for decades. Back in the late 1980s, President Reagan determined that the stock market was so vital to the country that he signed an executive order creating the President's Working Group on Financial Markets. What the president wanted from this group was unclear, but the precipitous drop in stock prices in 1987 and 1989 had made everyone nervous.
Soon afterward, Robert Heller, a former Federal Reserve governor, came right out and proposed what the president was probably thinking -- the stock market should be rigged in times of impending disaster. But instead of going through all the trouble of buying actual stock, like firms do in program trades, Heller suggested a shortcut -- the purchase of stock index futures contracts. From that point on everyone suspected that Washington would jump in to calm the stock market whenever the waters got rough. Goldman has so many top executives who've moved into government that the company is now not-so-affectionately called Government Sachs.
Hank Paulson, the incompetent Treasury secretary during the last Bush Administration, was a former chairman of Goldman. Paulson almost slipped about the cozy relationship Washington had with Wall Street when he was being interviewed on TV and blurted out that it was part of his job to speak frequently with "market participants." No, it's not. Was he tipping information to Goldman during these conversations, like interest rate decisions? Was Goldman some sort of ex-officio government conduit? The clincher came last week in the most bizarre and unexpected twist to this unpredictable decades-long tale.
Federal prosecutors accused a guy named Sergey Aleynikov of stealing proprietary "black box" computer codes from Goldman. The agent in charge of the case said the following in court: "The bank (Goldman) has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate the market in unfair ways." What was Goldman doing with a program that could "ma nipulate the market in unfair ways"? The answer: It was using it to manipulate the market.
Goldman Sachs profit bonanza could stoke anger
Under normal circumstances, Goldman Sachs Group Inc might be afforded a moment of gloating as it struts toward what could be a banner earnings announcement just nine months after being roiled by Wall Street's worse crisis since the Great Depression. But these aren't ordinary times for the biggest U.S. investment bank, which lately has faced a torrent of unwanted publicity stemming from employee theft allegations and an unflattering spread in Rolling Stone magazine.
Now Goldman, expected to announced second-quarter earnings on Tuesday, finds itself in a no-win situation. If earnings are too good critics may lambaste it for ramping up risk too much and embracing a hedge fund-like model that could make it vulnerable to big market swings. If they fall short, investors may accuse the firm of failing to live up to its reputation for being more aggressive and intelligent than its rivals.
"They are between a rock and a hard place," said Walter Todd, a portfolio manager with Greenwood Capital Associates, which owns shares of rival Morgan Stanley. And, regardless of the results, critics may fall back on the old "Government Sachs" refrain, a nod to the number of former Goldman defectors now working in government, and claiming special treatment. From a public relations standpoint, Todd said that leaves Goldman asking questions familiar to the oil industry as it contended with windfall profit taxes amid spiking gas prices. "How well do they really want to do?" Todd asked.
Analysts polled by Thomson Reuters are expecting Goldman to report net income for common shareholders of $3.54 a share. That is down from a pro-forma $4.58 a year earlier, but would best a surprisingly strong first quarter in which Goldman reported net income of $3.39 per share. Strong trading income and improving equity underwriting markets are expected to bolster the results, offsetting a one-time charge of $425 million related to payback of loans Goldman took from the U.S. Treasury's Troubled Asset Relief Program, or TARP.
In a noisy second quarter, Goldman repaid $10 billion in TARP loans, while raising $8.9 billion in equity, debt and asset sales to win its way out of the government program. Getting the approval to exit TARP was considered a key step from getting out from under the thumb of the U.S. government, which has taken the industry to task for lavish compensation. If Goldman reports strong earnings, it will confront another public relations challenge in how it translates profits to compensation for employees. Last month, the Observer newspaper reported that Goldman employees in London were briefed on the company's performance and told to expect record bonuses if the year finished strongly. Goldman has denied such a briefing ever took place.
Banc of America Securities-Merrill Lynch analysts said in a research note this week that Goldman could set aside as much as $17.9 billion for compensation this year, more than the $10.9 billion last year, but still below the $20.19 billion set aside in 2007. Using Goldman's first-quarter headcount, that comes out to $642,000 per employee, based on the research estimates. "Does the strong earnings and the employee pay-out mean it is back to the future and that they are wheeling and dealing and engaging in higher risk activities, as was true just a few years ago?" said Lawrence White, a professor at New York University's Stern School of Business. "We don't really know."
To be sure, there is more than a touch of jealousy to the chorus of ill-will toward Goldman, which rivals have in recent years waited -- so far in vein -- to break its long earnings hot streak. The bank's defenders say Goldman is simply being upbraided for its success and argue that the firm has Wall Street's most sophisticated risk management procedures in place -- systems that put it in a stronger position than most rivals to ride out last fall's turmoil.
And the fact is that better-than-expected earnings would boost Goldman's share price, already up 73 percent so far this year, which would be good news for its investors and partners. "In the financial realm, they are smartest guys around," said Bill Hackney, chief investment officer of Atlanta Capital Management Co, which owns Goldman shares. "I doubt there's any behind the scenes conspiracy among Goldman executives to cause them to have an unfair advantage in the market. This harping is just sort of sour grapes."
Sour grapes or not, Goldman, despite the fact that the Treasury Department is no longer run by one of its former CEOs and that a retired Goldman chairman has been forced out of key post at the New York Federal Reserve, continues to raise hackles among many. A scathing article in Rolling Stone that accused the bank of having a key role in various market bubbles stretching back to the 1920s and stoked outrage on the Daily Kos and other blogs.
The arrest of one of its former employees earlier this week for allegedly stealing computer codes that were the key to hefty trading profits at the firm also stirred up chatter on various financial blogs where little love is lost for the firm. The case is not expected to impact earnings but the firm, famously publicity-averse, may have little chance of retreating from the spotlight anytime soon.
AIG bonuses: $235 million to go
Troubled insurer AIG has asked the government's 'pay czar' to review hundreds of millions more in bonus payments to employees of its most crippled division.
Bailed-out insurer AIG again found itself in the crosshairs of bonus rage on Friday over its plans to pay $2.4 million in executive bonuses next week. But the larger issue is how AIG will deal with its obligation to pay roughly $235 million still owed to employees of its crippled financial products division. The contentious issue of the bonuses resurfaced late Thursday after The Washington Post reported that AIG was seeking the government's consent to make a scheduled performance bonus payment of $2.4 million to 43 of its top-ranking executives.
But there's still the $235 million in retention bonuses owed to about 400 employees of AIG's Financial Products (FP) division that the company has to deal with. Public furor erupted in March when it was revealed that AIG had paid out $165 million of retention bonuses to those employees. AIG put the issue before Kenneth Feinberg, the Obama administration's pay czar. Feinberg is tasked with reviewing bonuses and retirement packages for the 100 highest-paid executives at AIG (AIG, Fortune 500), Citigroup, Bank of America, General Motors, GMAC, Chrysler and the now defunct Chrysler Financial.
A source close to the matter said Feinberg will be reviewing both the $2.4 million, as well as the much more controversial $235 million that is scheduled to be paid out to AIG-FP employees next year. AIG-FP is the division that wrote insurance contracts on shaky derivatives that were at the root of the company's near-collapse. In September, the government bailed out AIG with funds now worth up to $182 billion. The $165 million of bonus payments in March was the second installment of a larger, $454 million retention plan for the FP employees. The first -- $50 million -- was made in 2008, before the company was bailed out by the government.
After the uproar in March, FP employees returned about a third of their bonuses, and a dozen workers resigned. The reaction from the public and Congress consumed AIG, Treasury and Federal Reserve officials, and called into question what to do with the last payment that is scheduled to go out in 2010. Feinberg only has to review payments that were contracted beginning in 2009, so the $235 million in FP payments -- contracted in 2008 -- do not officially fall under his purview. Still, a source close to the matter said that AIG wants Feinberg to take a look at those bonuses to make sure the government is completely comfortable with the company's compensation plan.
Feinberg was also asked to review the $2.4 million in performance bonuses set to be paid out to 43 of AIG's top executives. That is part of a larger bonus pool of $121 million, the vast majority of which was paid out in March to the company's most senior executives. But with pressure mounting from Congress and the Obama administration, AIG restructured its bonus payments for the top 50 executives. The top seven AIG executives opted to forgo their bonuses. The other 43, set to receive $9.6 million in March, took home only half -- $4.8 million -- in March, and are set to receive $2.4 million July 15 and another $2.4 million Sept. 15.
Experts say asking Feinberg to review the bonuses takes the pressure off of AIG and turns Feinberg into a punching bag for criticism. Outgoing AIG Chief Executive Edward Liddy has said on many occasions that the public outrage about the bonuses has limited the company's ability to move forward with its plan to repay the government. "If you have the government OK the plan, it makes AIG look less like they're flushing taxpayer money down the toilet," said Julie Grandstaff, managing director of insurance consultant StanCorp Investment Advisers. "There's no way the poor guy who is reviewing all of this can win."
A Treasury spokesman would not comment directly on AIG's bonuses, but suggested Feinberg can review those payments and the FP bonuses if he chooses, even though they were contracted in 2008, saying, "Mr. Feinberg has broad authority to make sure that compensation at those [seven] firms strikes an appropriate balance." "Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives," the spokesman added.
Prof. Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the bailout, told CNNMoney.com that AIG's lack of comment spoke to a larger disconnect between the insurer and the American public. "If they're not commenting, that makes me very nervous, because what I would like to hear is 'no, that report is a mistake,'" Warren said. "Taxpayers are under enormous stress. There's going to be trouble over this."
AIG Seeks Clearance to Release Bonuses
American International Group Inc. is asking the Obama administration's new compensation czar whether it should pay previously agreed-to retention bonuses, including about $235 million pending for employees at the insurer's controversial financial products unit, according to people familiar with the matter. AIG asked Kenneth Feinberg to weigh in on the bonuses after the last round of multimillion dollar payments in March sparked an outpouring of public frustration amid the financial crisis. Before Mr. Feinberg was appointed, AIG had pledged to try to reduce the overall payments for this year's performance to a few hundred employees at the financial products unit by 30%.
It had also delayed a much smaller set of payments to 40 high-ranking AIG officials that it is set to begin paying next week -- payments for 2008 performance. Mr. Feinberg is expected to issue a decision on the 2008 payments although his primary job with regard to AIG will be to deal with compensation issues going forward, including whether to allow the company to pay bonuses slated for 2009. The aim of the current negotiations with Mr. Feinberg, according to the people familiar with the matter, is to come to an agreement that lets employees keep enough of the promised bonuses to serve as an effective incentive, but reduces the payments by enough to make them more palatable to the public.
"We have been giving a lot of thought to this," said an AIG official. "We don't want there to be any surprises." The request from AIG puts Mr. Feinberg and the government in a potentially sensitive position of either having to endorse ongoing payments of whatever amount, or trying to block them and risk setting in motion employee departures that could prove costly to AIG and potentially the broader financial system.
Dealing with AIG is expected to be one of the thorniest tasks for Mr. Feinberg, who has the power to set pay for the top executives and design compensation structures for the most highly compensated 100 employees at seven firms receiving the most aid from the government. The Obama administration was embarrassed in March after the original AIG bonuses were disclosed. The administration had been looking to rein in excessive pay, at one point proposing a salary cap for top executives.
President Barack Obama pledged to do all he could to recoup the money, but the administration concluded it couldn't stop the payments because they were contractual obligations. A firestorm ensued, with Congress attempting to tax Wall Street bonuses. More broadly, compensation has proved one of the most explosive issues amid the financial crisis, with companies scrambling to repay federal aid in part to avoid government scrutiny and control over their pay practices.
Any decision on AIG bonuses -- and payments to employees at other firms receiving bailout money -- will be scrutinized on Capitol Hill. Indeed, the administration tapped Mr. Feinberg in part to deflect some of the criticism. The pending $235 million in retention bonuses at AIG's financial products unit, whose woes were largely responsible for forcing AIG to the brink of bankruptcy court last year, are part of roughly $450 million in retention bonuses for that unit that AIG has previously disclosed. AIG agreed in early 2008 to make those payments, months before it received a government bailout. The first installment of those payments was made late last year, after the bailout.
The second installment came due in March, and it was the preparations to make those payments that set off the prior controversy. The next installment of payments to the financial products unit employees is not due to be paid for months. AIG has argued that it is obligated to make these payments, and that keeping employees in their jobs is crucial to avoiding additional losses on trades that the unit still has in place and is trying to wind down.
The government has said it stepped in to rescue AIG because it feared a collapse of the company could damage the broader financial system. In the bailout, the government has made up to $173 billion in aid available to AIG. In a statement, Treasury said: "Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives. That process is just beginning now, and Mr. Feinberg has begun consulting with those firms about their compensation plans."
TARP Recipients Fighting To Keep Charging Exorbitant Credit Card Fees
Undeterred by their sullied reputation, big banks and credit card companies are making a major play to protect a key source of profit: credit card swipe fees. Last year, the country's largest financial institutions -- including many banks that have received bailout funds -- raked in an estimated $48 billion from credit card swipe fees. That's an average of $400 per American household.
Every time a shopper swipes his card, the credit card-issuing banks charge retailers a percentage (usually between 2 and 5 percent) of the purchase. The charge was initially intended to cover the administrative costs of processing credit card payments. But even as technology has reduced those costs substantially, the amount of money generated by credit card swipe fees has continued to rise. Since 2001, revenue from "interchange fees" has gone up 120% in the United States.
Industry representatives claim that the purpose of the fee is to cover the costs and risks of credit card transactions, which have increased over the years. But critics say the system isn't fair. The banks themselves, after all, are responsible for the proliferation of credit cards. And because more people than ever are using plastic as a form of payment, merchants have been forced to raise the price of goods to compensate for the rise in associated swipe fees.
"If their risks have gone up exponentially, it's because they're issuing cards to everyone," said John Emling, senior vice president of government affairs at the Retail Industry Leaders Association. "The claim that they're somehow not responsible for the assumed risk is just a false claim." Legislative attempts to change the system have been met by a major lobbying and advertising pushback. Spearheading that effort has been the Electronic Payments Coalition. The coalition's membership reads like a who's who of bailed-out institutions, including Bank of America, Citigroup, Wells Fargo, Barclay's and JP Morgan Chase.
The main battle has revolved around an obscure but aptly named piece of legislation called the Credit Card Fair Fee Act. The Senate version of the bill will empower retailers to negotiate interchange fees with banks and credit card companies, with disagreements to be settled by a three-person, independent arbitration panel. The House version is much the same, and both would require better transparency measures for all transactions between banks, credit card companies and retailers.
Retailers, led by the Merchants Payments Coalition, have run what one official described as a "mid-six-figure" advertising campaign in support of the reform measures on the radio, the Internet and in print. They have been outspent by the EPC, which has paid $260,000 in lobbying already in 2009 and spent close to $500,000 dollars in 2008. The Coalition, which also includes MasterCard Worldwide and Visa Inc., has hired 10 former congressional staffers as lobbyists to push their legislative agenda, according to a review of public records. The EPC also has run a slew of ads in some of Washington D.C.'s most widely read websites, including Roll Call and Politico as well as on the radio. Days after being contacted for this story, the group began running ads on the Huffington Post as well.
The combined effort has been to protect the status quo, with the main argument being that if the fees were changed, the merchants would merely pocket the money rather than passing the savings on to consumers. In the context of the current economic crisis, it is an odd spectacle: The architects of the subprime mortgage crisis and the largest financial meltdown since the Great Depression -- many of whom are currently dependent on taxpayer funds -- have styled themselves as champions of consumer rights, protecting unsuspecting shoppers from predatory retailers.
"If I could sum up the debate," said Trish Wexler of the EPC, "the bottom line is that merchants don't want to pay their fair share. Instead, they want to shift that cost onto their customers." "Merchants should pay their share," echoed the ads. According to a statement issued by Visa, the legislation "would significantly and negatively impact consumers, especially those struggling in this time of economic uncertainty." Not everyone is buying it.
"It is a bizarre argument because it essentially says, 'let's keep ripping folks off because if we don't someone else will,'" added Rep. Peter Welch (D-Vt.). Welch is a cosponsor of the Credit Card Interchange Fees Act of 2009, which would significantly alter the credit card swipe fee process. As Welch sees it, the current system is unfairly tilted in favor of the bank and credit card companies. Interchange fees, he says, are unilaterally set by the credit card companies and not at a flat rate. High-end credit cards with reward programs, for instance, tend to have higher fees. Debit card and PIN transactions have lower associated rates, as do cards issued by credit unions.
Under the existing system, retailers are prohibited from charging customers different rates based on the form of payment they choose. That is why retailers say they are often forced to raise the prices of all their goods in order to keep up with interchange fees. "The person that pays cash is subsidizing the person who's getting rewards of frequent flyer miles," said Emling. This past year, Sen. Dick Durbin (D-Ill.), attempted to attach an amendment to the Credit CARD Act of 2009 that would have prohibited credit card companies from taking action against retailers who offered reduced prices to customers paying with cash, checks or debit cards instead of credit cards. It was ultimately removed from the bill.
Since then, Durbin, Welch and other lawmakers have sought to pass the measures as stand-alone legislation. The hope is that it will be considered at some point in the year ahead. In the interim, the debate is being reframed as a matter of transparency -- whether banks will give retailers the option of seeing the available rates. It's an effort to make the issue less objectionable, but many banks remain opposed. "The banks are fighting this tooth and nail," said Welch, "It is pretty stunning. Why would the banks be against transparency? Why? What do they fear... the fear is people might know what they are going to charge and say, you know what, I don't need this credit card."
Banks buying back TARP warrants at a discount, panel says
A panel that oversees a $700 billion bank bailout package said Friday that financial institutions buying out warrants they gave the government in exchange for capital injections are now buying back those stakes at well below their fair value.
The Congressional Oversight Panel, which is charged with overseeing the Troubled Asset Relief Program, or TARP, said in a report that a group of 11 small banks that have repurchased government warrants in exchange for taxpayer-funded assistance, have bought-out the stakes at 66% of their face value. The C.O.P., which employed three Harvard University valuation experts to conduct the analysis, said that taxpayers would have received $10 million more had the warrants been sold back to the banks at their face value.
The report argues that liquidity discounts are a key factor for why the warrants were purchased at such low prices. Should a similar discount be a major factor for warrant repurchases at larger institutions buying out government stakes, the shortfall to taxpayers could be as much as $2.1 billion, the report said. A group of 32 financial firms, including 10 large financial institutions, are paying back roughly $70.2 billion of TARP funds they've received. Banks that received financial assistance as part of TARP were required to give the government warrants for the future purchase of some of their common shares. Warrants are the right to buy shares of a company at a set price at some point in the future.
The panel employed three valuation experts from Harvard Business School -- Robert Merton, Daniel Bergstresser and Victoria Ivashina -- to conduct the review. The report said, however, that the Treasury may have other goals with the repurchases that supersede maximizing taxpayer returns. "Treasury has said that it wants to allow banks to operate again without TARP assistance as soon as they are strong enough to do so," it said.
The report said the C.O.P. is exploring the possibility that Treasury consider selling the TARP warrants in an open, public auction, as an alternative that could possibly give taxpayers a better valuation for the stakes. "This has the benefit of stopping any speculation about whether Treasury has been too tough or too easy on the banks that want to repurchase their own warrants. It also permits the banks to bid for their own warrants -- in direct competition with outsiders," the report said. The report also raises the question of whether banks should be repaying TARP funds at all at this stage in the economic recovery. The C.O.P.'s next report will examine this question.
"Any exit from the TARP system implicates an important policy question: If the banks give up federal support prematurely, will the economy suffer as a result? The panel has not reached a consensus on whether it is wise policy to release banks from the TARP program at this time, but our June report on the bank stress tests raised key questions about whether we know enough about the banks' overall health," the report said. Harvard Law School professor Elizabeth Warren chairs the panel, which has five members including AFL-CIO General Council Damon Silvers; Rep. Jeb Hensarling, R-Tex.; and former GOP senator John Sununu.
The C.O.P. report also urged the Treasury to make the process for repayments as transparent as possible.
"As always, it is critical that Treasury make the process -- the reason for its decisions, the way it arrives at its figures, and the exit strategy from or future use of the TARP -- absolutely transparent. If it fails to do so, the credibility of the decisions it makes and its stewardship of the TARP will be in jeopardy," the report said. As of June 30, the Treasury has received roughly $6.7 billion in dividend payments from TARP-funded financial institutions, according to a GAO report Thursday. The dividend funds have been allocated to pay down the national debt, but legislation under consideration on Capitol Hill would use some of the revenues from those funds to help revitalize neighborhoods and create affordable housing.
White House Ponders Bernanke's Future
As the White House begins to ponder whether to reappoint or replace Ben Bernanke when his term expires in January, the Federal Reserve chairman's standing on Wall Street is on the rise while attacks on him from Congress mount. Treasury Secretary Timothy Geithner is expected to play a key role in advising President Barack Obama on whether to reappoint Mr. Bernanke. Mr. Geithner has worked closely both with Mr. Bernanke and with the leading alternative for the powerful post -- Lawrence Summers, the former Treasury secretary, who is currently the president's top economic adviser.
Before making a decision later this year, the White House also is expected to look at other economists, including Roger Ferguson and Alan Blinder, former Fed vice chairmen; Janet Yellen, president of the San Francisco Federal Reserve Bank; and Christina Romer, chairman of Mr. Obama's Council of Economic Advisers. Mr. Bernanke's reputation on Wall Street has ebbed and flowed. But a Wall Street Journal survey conducted this week of 46 private-sector economists found that 43 endorsed his reappointment. "Bernanke's leadership during this financial crisis was outstanding, but not flawless," said Scott Anderson of Wells Fargo & Co., one of those surveyed. "But given human limitations and the limitations of economic and financial knowledge he deserves another tour of duty."
Some saw benefits to continuity. "Don't change horses in midstream," said David Wyss of Standard & Poor's. Others cited the alternatives: "Stated differently: Don't appoint Summers," said Nicholas Perna of Perna Associates. The White House isn't rushing to decide on reappointing Mr. Bernanke, who hasn't sent any signal that he wants to leave the post. The Intrade online wagering Web site puts 60% odds on reappointment. But a bad turn in the economy could prompt Mr. Obama to seek a new helmsman of his own choosing, or new embarrassing revelations about Mr. Bernanke's handling of the financial crisis could alter the picture before the president makes a decision.
For now, the White House is concentrating on finding new members for the Fed board. Two of the seven seats are vacant. Two sitting governors -- Kevin Warsh, 39 years old, and Donald Kohn, 66 -- are widely believed to be eyeing the exits. The White House is seeking at least one candidate with financial-market experience, a tough task at a time when likely choices are tainted by Wall Street ties. Waiting to decide on Mr. Bernanke has its costs. "The uncertainty about Mr. Bernanke being reappointed has helped to stoke some of the inflation concerns because it does add to the risk that monetary policy gets politicized," said Michael Feroli, a J.P. Morgan Chase economist.
Mr. Bernanke has come under tough questioning on Capitol Hill, and new powers that the Obama administration proposes to give the Fed have intensified congressional scrutiny of the central bank. "If these new powers are going to be granted to the Fed, then maybe a professor of economics will never again be the best choice for the Fed chairman," said Darrell Issa (R., Calif.). Rep. Brad Sherman (D., Calif.) accuses the Fed of "a Wall Street mentality." Regarding Mr. Bernanke, he said, "Of those who are infected...better than average," but he said he would prefer a Fed chairman with "populist Democratic values."
Still, Mr. Bernanke has influential admirers -- including Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, and Rep. Carolyn Maloney (D., N.Y.), chairman of the Joint Economic Committee. Ms. Maloney, who backs Mr. Bernanke's reappointment, said, "He's basically an academic working in a nonpartisan way to save the economy." Mr. Bernanke would need to be confirmed by the Senate if reappointed for a second four-year term. Both the chairman of the Senate Banking Committee, Christopher Dodd (D., Conn.), and the panel's senior Republican, Richard Shelby of Alabama, have been critical of the Bernanke Fed.
Mr. Bernanke's chief rival, Mr. Summers, is widely regarded as one of the sharpest economists of their generation. But his blunt, domineering style makes some bristle and could be greeted with trepidation at the Fed. Mr. Summers also could meet resistance on Capitol Hill. He was forced out of his job as president of Harvard University, in part because of tense relations with the faculty and comments about women. Antipathy toward Wall Street could also be a factor. Mr. Summers raked in $5.2 million from hedge fund D.E. Shaw in the year before he joined the White House and was an advocate of financial deregulation in the 1990s.
For those and other reasons, other names are surfacing. Among them is Ms. Yellen, who was an adviser in the Clinton White House and Fed governor during the tenure of former Chairman Alan Greenspan. She has strong academic credentials and fans inside the administration, but is in the dovish wing of the Fed. "I think the predominant risk is that inflation will be too low, not too high, over the next several years," she said in a recent speech. That image could unsettle financial markets -- whose opinions matter to presidents picking a Fed chairman. Ms. Yellen declined to comment Wednesday.
Another candidate is Mr. Ferguson, who was Mr. Greenspan's loyal deputy and is now chief executive of financial-services firm TIAA-CREF and a member of the President's Economic Recovery Advisory Board. "Ben Bernanke has led the Fed well during this crisis and, in my view, well deserves to be renominated," he said in response to an inquiry. "I am eager to continue leading TIAA-CREF, but honored to be mentioned in this regard." Mr. Blinder, now a Princeton economist, said, "I don't want to engage in rumors about myself or anybody else, except to say I didn't spread any of those rumors." Ms. Romer, who was a University of California at Berkeley professor, declined to comment.
White House Eyes Bailout Funds to Aid Small Firms
The Obama administration is developing an initiative to take money from the $700 billion rescue program for the banking system and make it available to millions of small businesses, which officials say are essential to any economic recovery because they employ so many people, according to sources familiar with the plan. The effort would represent a striking shift from the rescue program's original mandate, since it would direct billions of bailout dollars toward a plan that aims more at saving jobs than at righting the financial system. Some economists estimate that small businesses, defined as firms with fewer than 500 workers, employ most of the country's workforce.
A proposal being floated by senior Treasury Department officials calls for using the bailout funds to expand an existing government program that helps small companies borrow from banks at low rates to keep their businesses going, the sources said. These "working-capital" loans would come with few restrictions and could be used to buy inventory, hold on to employees and pay off short-term debt. The initiative would bulk up the Small Business Administration's most popular lending program, called 7(a). Lines of credit for small companies could greatly increase in size. If a firm failed despite receiving this help, the government would cover most of the losses on the federal loan, perhaps as much as 90 percent. Lines of credit act like the credit cards for companies -- short-term, revolving debt used to pay a variety of immediate expenses.
The scope of the Troubled Assets Relief Program, or TARP, has been expanded several times already, first to save General Motors and Chrysler and then to help life insurers. In both cases, government officials argued that emergency assistance was critical for preventing economic upheaval. Making the bailout funds available to millions of small businesses would be a far more dramatic expansion. "Small business is the backbone of American jobs and innovation," said Matthew Vogel, a White House spokesman. "We are deeply committed to continuing to work every single day to devise and implement policies that will help small businesses through these challenging economic times."
He added, "This concept, among many others, has been raised in discussions on small business, but certainly no proposals are imminent." Administration officials said discussions are in the early stages and that no plan is expected before the fall. Concepts now on the table may evolve or be scrapped altogether, they said. No dollar figure has been set. But discussions about the plan have reached the highest levels of the government. In a meeting at the White House last week, Treasury Secretary Timothy F. Geithner expressed support for the proposal, but National Economic Council Director Lawrence H. Summers was more skeptical. Neither has made up his mind, officials said.
"[Summers] has supported every small-business idea we have implemented so far," said Gene Sperling, a counselor to Geithner who has been coordinating small-business issues at the Treasury. "When we have a brainstorming session on new ideas, Larry, as always, asks the toughest questions in the room." The debate over the proposal has centered on whether taxpayers would be protected and whether banks that make these loans to small firms would lower their lending standards if the government promises to cover loans that go bad, according to participants present or briefed on the discussions. They spoke on the condition of anonymity because the conversations were considered private.
Administration officials want to prevent small businesses from closing and adding their workers to the growing ranks of the unemployed. Some officials say small companies are key to reversing the soaring unemployment rate, which has hit 9.5 percent, the highest since the early 1980s. Small businesses employ 60 percent to 80 percent of all workers, according to some economists, though others say those figures are too high.
Aiding small businesses could be a gamble because they have a poorer record than large corporations when repaying loans; it would be the riskiest government investment so far under the bailout plan. Officials are trying to design the program to exclude companies that are likely to fail even if they received federal aid, people with knowledge of the discussions said. Some administration officials hoped to present several proposals to President Obama last week. But the meeting has been put on hold indefinitely while the Treasury conducts a deeper analysis of the problems afflicting small companies.
The administration has carried out several other programs to help small businesses through the $787 billion economic stimulus package passed by Congress in February. That measure doubled the SBA's budget to help it spark new lending. Since the bill passed, $6 billion worth of small-business loans have gone out the door, said Karen Mills, the administrator of the SBA. "If we are going to move out of this recession and into recovery, it's going to be small businesses that leads us," Mills said. She added that her appointment to the NEC, the council led by Summers, is a sign that the administration has made this sector a priority.
The Treasury is working on a separate $15 billion effort, announced in March, to provide more credit for small businesses by aiding the financial firms that package SBA loans together and turn them into securities. The administration is considering purchasing these securitized loans as a way of helping lenders, but conditions in the TARP program that require aid recipients to surrender ownership stakes and submit to executive pay restrictions have discouraged participation.
Rep. Nydia M. Velázquez (D-N.Y.), chair of the House Committee on Small Business, expressed concern over the administration's plans to use bailout funds to help small firms but said she had not yet been briefed on the details. "The Committee has long recognized that a shortage of capital is the fundamental problem facing entrepreneurs right now," she said. "While it is promising to hear the administration acknowledges the importance of addressing small businesses' capital needs, it is critical that these efforts build on existing programs, and not needlessly duplicate them, undercut them or create additional red tape."
Obama Seeks to Give SEC Clout to Ban Wall Street Pay Practices, Wrongdoers
The Obama administration is seeking to give the U.S. Securities and Exchange Commission power to prohibit pay practices at brokerages and investment advisers and broader authority to bar individuals from work in the industry. The Treasury Department today sent Congress legislation that would let the SEC ban “sales practices, conflicts of interest and compensation schemes” deemed harmful to investors. The measure lets the agency remove individuals who violate rules from all aspects of the industry, rather than a specific segment such as selling securities or managing money.
President Barack Obama’s SEC proposal is part of the overhaul of financial regulations in response to the worst economic crisis since the Great Depression. Lawmakers have vilified securities firms for selling investors unsuitable products and basing pay on how many transactions bankers execute without regard to whether deals succeed in the long term. “The SEC would be given broad authority to define those kinds of” pay arrangements it deems inappropriate, Michael Barr, assistant Treasury secretary for financial institutions, told reporters in a briefing.
Types of compensation practices the SEC may deem improper might include banks paying brokers more to sell “in-house” investment products, rather than those offered by competitors, he said. “There has always been a concern that because these people are acting in an advisory capacity, they might be operating under pay practices that are in their interest, not those of their clients,” said Mark Borges, a principal at Compensia Inc., a San Francisco-area pay consultant.
The proposal, which Congress must approve, also would give the SEC authority to impose a so-called fiduciary duty on brokerages offering investment advice. The stipulation requires firms and their employees to put clients’ interests before personal motivations, such as fees. SEC Chairman Mary Schapiro, in a statement, said “applying tough standards that require financial professionals to put investors first will provide us with needed tools to better safeguard investors.” The Obama plan targets mandatory arbitration agreements, granting the SEC power to prohibit them in contracts consumers sign with brokers, investment advisers and those who sell municipal bonds.
Mandatory arbitration bars customers from suing financial professionals in court. The measure gives the SEC authority to reward whistle blowers who give the agency tips about those violating all securities laws. The SEC currently has power to pay individuals who provide the agency with tips on insider-trading violations. Under the legislation, the SEC would use fines it collects from enforcement actions to reward whisteblowers for information that results in “significant financial awards.”
Geithner testifies on over-the-counter derivatives
The following are highlights from the U.S. House Financial Services and House Agriculture committees' joint hearing on Friday on the Obama administration's proposal to regulate over-the-counter derivatives with Treasury Secretary Timothy Geithner.
GEITHNER ON CONTROLLING OIL PRICE VOLATILITY: "I think what the CFTC chairman proposed the other day ... is a prudent approach to policy, is to look for ways to limit volatility. It's very hard to not look at the last two years of pattern in the global energy markets, even though there's been such enormous shifts in confidence about the strength or weakness of the global economy, not to believe we've seen a level of volatility that has been damaging, fundamentally, to the capacity of business to manage risk and damaging to confidence. I think it is worth trying to see whether you can limit that risk through better disclosure -- hard to do, a lot of people have tried it. If you're going to do that effectively you're going to have to do that in a common approach to where oil and other commodities are traded globally."
GEITHNER ON EFFECTIVENESS OF STIMULUS: "The stimulus package is on its expected path in terms of the rate of putting money in the pockets of taxpayers, to provide substantial forms of assistance to states to reduce the risk of their being forced to fire tens of thousands of teachers, workers, firemen, and there are very substantial investments in infrastructure projects that have already started to take effect and will have their maximum impact on he economy in the second half of the year. My own sense is, and I think this is the consensus of broad-based economists, that there have been substantial improvements in arresting what was the worst recession globally we've seen in generations."
GEITHNER ON DEFINING STANDARDIZED CONTRACTS: "I don't think we have made a financial judgment as to what extent we want to define those attributes of standardized contracts in statute or in regulation. My suspicion is that we'll lay out road principles in statutes and have them defined with more clarity in regulation. The important thing is that we move to standardize on the central clearing and we establish comprehensive enforcement authority, comprehensive transparency, comprehensive reporting, and sufficiently conservative margin and capital requirements across the entire market."
GEITHNER ON URGENCY OF REFORM: "It's not surprising that we're having this debate. It's the typical pattern of the past. As the crisis starts to recede, the impetus to reform begins to fade in the face of the complexity of the task and opposition by the economic and institutional interests that are affected. It's not surprising because the reforms proposed by the president, and the reforms that your two committees are discussing, would substantially alter the ability of financial institutions to choose their regulator, to shape the content of future regulation and to continue the financial practices that were lucrative for parts of the industry for a time but that ultimately proved so damaging. But this is why we have to act and why we need to deliver very substantial change."
GEITHNER ON DANGER OF CURRENT REGULATION OF OTC DERIVATIVES: "Under our existing regulatory system, some types of financial institutions were allowed to sell large amounts of protection against certain risks without adequate capital to back those commitments. The most conspicuous and most damaging examples of this were the monoline insurance companies and AIG. These firms and others sold huge amounts of credit protection on mortgage-backed securities and other more complex real-estate related securities without the capacity to meet their obligations in an economic downturn."
GEITHNER ON OBJECTIVES TO REGULATE MARKET: "In designing its proposed reforms for the OTC derivative markets, the Administration has attempted to achieve four broad objectives: * Preventing activities in the OTC derivative markets from posing risk to the stability of the financial system; * Promoting efficiency and transparency of the OTC derivative markets; * Preventing market manipulation, fraud, and other abuses; and * Protecting consumers and investors by ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties."
FDIC gearing up for bank closures
The Federal Deposit Insurance Corp. is gearing up to handle a large number of bank failures expected as a result of bad mortgages, both in residential and commercial real estate, an economist said Tuesday. “They know they’re going to take down a large number of banks and they can’t do it until they’re staffed up,” said Mark Dotzour, chief economist and director of research for the Real Estate Center at Texas A&M University.
Dotzour expects federal regulators to establish an agency, similar to the Resolution Trust Corp. that disposed of assets belonging to insolvent S&Ls in the late 1980s and early 1990s. “Once they start to sell [foreclosed real estate], we’ll find out what the market really is,” Dotzour told attendees at an economic summit hosted by a handful of real estate groups in Tampa, Fla.
Dotzour blamed federal intervention for the lack of commercial real estate investment activity in recent months, as well as the failure of businesses to make major decisions. “Nobody knows what to do so they’re doing nothing,” Dotzour said at the luncheon meeting at the Intercontinental Tampa. Government, in its quest to help the economy, is causing harm by propping up failing companies and regularly changing rules, he said.
“No one can predict what the government will do,” Dotzour said. “People are frozen. It’s not that they don’t want to invest in the future, the rules are unclear,” he said. He jokingly called the Federal Reserve “inksters” for routinely printing money to bail out big business, including banks that are still not making many loans. The government’s role in a capitalistic society, he said, “is to make the rules and get off the dance floor.”
Businesses and individuals that can’t pay their bills should resolve their problems in bankruptcy court, not with money from the government, he said. It’s a process that has worked for decades, for generations. “Everyone has a lesson to learn here, including you and me,” he said. “We have to live within our means.” Dotzour expects foreclosure rates to continue to climb, real estate prices to fall more and cap rates to rise to at least 9 percent before leveling off.
In 2010 and 2011, interest rates will begin to rise, as will inflation. Once investors realize the market is at bottom, deals will begin to flow again, he said. In the meantime, he compared the bad loans that remain on banks’ books to a smelly cat litter box and the feds keep throwing more litter on top to mask the smell. But they’ll eventually have to remove the organic material to fix the problem.
When Will The Recovery Begin? Never.
The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.
Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually. That's where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market. Personally, I don't buy into either camp. In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.
Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water -- owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.
Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can't be built on replacements. Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.
My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.
The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.
The Stimulus Trap
As soon as the Obama administration-in-waiting announced its stimulus plan — this was before Inauguration Day — some of us worried that the plan would prove inadequate. And we also worried that it might be hard, as a political matter, to come back for another round. Unfortunately, those worries have proved justified. The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration’s economic stewardship.
There’s now a real risk that President Obama will find himself caught in a political-economic trap. I’ll talk about that trap, and how he can escape it, in a moment. First, however, let me step back and ask how concerned citizens should be reacting to the disappointing economic news. Should we be patient and give the Obama plan time to work? Should we call for bigger, bolder actions? Or should we declare the plan a failure and demand that the administration call the whole thing off?
Before you answer, consider what happens in normal times. When there’s an ordinary, garden-variety recession, the job of fighting that recession is assigned to the Federal Reserve. The Fed responds by cutting interest rates in an incremental fashion. Reducing rates a bit at a time, it keeps cutting until the economy turns around. At times it pauses to assess the effects of its work; if the economy is still weak, the cutting resumes.
During the last recession, the Fed repeatedly cut rates as the slump deepened — 11 times over the course of 2001. Then, amid early signs of recovery, it paused, giving the rate cuts time to work. When it became clear that the economy still wasn’t growing fast enough to create jobs, more rate cuts followed. Normally, then, we expect policy makers to respond to bad job numbers with a combination of patience and resolve. They should give existing policies time to work, but they should also consider making those policies stronger.
And that’s what the Obama administration should be doing right now with its fiscal stimulus. (It’s important to remember that the stimulus was necessary because the Fed, having cut rates all the way to zero, has run out of ammunition to fight this slump.) That is, policy makers should stay calm in the face of disappointing early results, recognizing that the plan will take time to deliver its full benefit. But they should also be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough.
Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.
Hence the danger that the Obama administration will find itself caught in a political-economic trap, in which the very weakness of the economy undermines the administration’s ability to respond effectively.
As I said, I was afraid this would happen. But that’s water under the bridge. The question is what the president and his economic team should do now. It’s perfectly O.K. for the administration to defend what it’s done so far. It’s fine to have Vice President Joseph Biden touring the country, highlighting the many good things the stimulus money is doing.
It’s also reasonable for administration economists to call for patience, and point out, correctly, that the stimulus was never expected to have its full impact this summer, or even this year. But there’s a difference between defending what you’ve done so far and being defensive. It was disturbing when President Obama walked back Mr. Biden’s admission that the administration “misread” the economy, declaring that “there’s nothing we would have done differently.” There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor’s inability to admit mistakes. And that’s an attitude neither Mr. Obama nor the country can afford.
What Mr. Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he’s trying to steer the country through a severe economic storm, and that some course adjustments — including, quite possibly, another round of stimulus — may be necessary. What he needs, in short, is to do for economic policy what he’s already done for race relations and foreign policy — talk to Americans like adults.
Obama's Cap and Trade Carbon Emissions Bill - A Stealth Scheme to License Pollution and Fraud
On May 15, HR 2454: American Clean Energy and Security Act of 2009 (ACESA) was introduced in the House purportedly "To create clean energy jobs, achieve energy independence, reduce global warming pollution and transition to a clean energy economy."
In fact, it's to let corporate polluters reap huge windfall profits by charging consumers more for energy and fuel as well as create a new bubble through carbon trading derivatives speculation. It does nothing to address environmental issues, yet on June 26 the House narrowly passed (229 - 212) and sent it to the Senate to be debated and voted on. More on that below.
On March 31, Energy and Commerce Committee Chairman Henry Waxman and Energy and Environment Subcommittee Chairman Edward Markey released a "discussion draft" of the proposed legislation and falsely claimed:
-- it's "a comprehensive approach to America's energy policy that charts a new course towards a clean energy economy;" it will
-- create millions of clean energy jobs....that can't be shipped overseas;
-- put America on the path to energy independence;
-- reduce our dependence on foreign oil;
-- save money by the billions;
-- unleash energy investment by the trillions;
-- cut global warming pollution;
-- strengthen our economy;" and
-- make "America the world leader in new clean energy and energy efficiency technologies."
Strong-arm pressure, threats and bribes got the bill through the House. Forty-four Democrats opposed it. Eight Republicans backed it. Over 1200 pages long, few if any lawmakers read it.
After passage, Chairman Markey said:"It's been an incredible six months to go from a point where no one believed we could pass this legislation to a point now where we can begin to say that we are going to send President Obama to Copenhagen in December as the leader of the world on climate change."
Speaker Pelosi praised the bill as "transformational legislation which takes us into the future" and added that after passage she took congratulatory calls from Obama, Senate Majority Leader Harry Reid and Al Gore. The former vice-president has long-standing ties to Goldman Sachs (GS), and in 2004 he and David Blood, CEO of GS's asset management division until 2003, co-founded Generation Investment Management LLC, a firm likely to profit greatly from cap and trade schemes.
In a prepared June 25 statement ahead of the House vote, Obama said:"Right now, the House of Representatives is moving toward a vote of historic proportions on a piece of legislation that will open the door to a new, clean energy economy."
After citing the same false claims as Waxman and Markey, he called the legislation "balanced and sensible" and "urge(d) every member of Congress - Democrats and Republicans - to come together and support" it.
Polluters love it. So does Wall Street and corporate-friendly environmental groups like the Environmental Defense Fund. The opposition, however, includes Greenpeace, Friends of the Earth and Public Citizen.
In a joint May 13 press release, they were "extremely troubled (about) compromises to the already flawed American Clean Energy & Security Act."
It contains enough loopholes to make its claimed performance standards worthless, one of which prohibits the EPA from using the Clean Air Act to regulate future greenhouse gas emissions. That alone means they'll proliferate beyond what new technology reduces on its own, and only then if it's profitable to do it.
On June 23, Friends of the Earth president Brent Blackwelder said:"Corporate polluters including Shell and Duke Energy helped write this bill, and the result is that we're left with legislation that fails to come anywhere close to solving the climate crisis. Worse, the bill eliminates preexisting EPA authority to address global warming - that means it's actually a step backward."
A June 25 Greenpeace press release stated:"As it comes to the floor, the Waxman-Markey bill sets emission reduction targets far lower than science demands, then undermines even those targets with massive offsets. The giveaways and preferences in the bill will actually spur a new generation of nuclear and coal-fired power plants to the detriment of real energy solutions."
On June 27, Public Citizen (PC) called the bill "a new legal right to pollute (that) gives away 85 percent of (its) credits to polluters. (It) will not solve our climate crisis but will enrich already powerful oil, coal and nuclear power companies." PC wants polluters to cut their emissions 80% below 1990 levels by 2050 and pay for credits, not get them free. It also cited the American Wind Energy Association saying that the renewable standard will deliver "effectively zero" new ones.
PC wants consumers protected, not charged a "carbon tax....The bill doesn't, but should, provide money to help homeowners pay for such things as weatherization or to receive rebates for rooftop solar." Its main "consumer protection provision distributes free pollution allowances to electric and natural gas utilities (on the assumption) that the 50 different state utility commissions will redirect all that money back to consumers." In fact, HR 2454 is a thinly-veiled scheme to let companies profit from polluted air, in part financed by a consumer "carbon tax."
Big Coal gets a waiver until 2025. Agribusiness is exempt altogether even though it's responsible for up to one-fourth of greenhouse gas emissions. The nuclear industry will benefit hugely from the free allowances provision. A leaked memo had Exelon, the nation's largest nuclear power company, bragging that it will reap a $1 - $1.5 billion annual windfall.
Overall, carbon trading is a scam, first promoted in the 1980s under Reagan. Clinton made it a key provision of the 1997 Kyoto Protocol. He signed it in 1998, but it was never ratified. As of February 2009, 183 nations did both, but independent scientists call it "miserable failure" needing to be scrapped and replaced by a meaningful alternative.
ACESA is about profits, not environmental remediation. Its emissions reduction targets are so weak, they effectively license pollution by creating a new profit center to do it.
The Next Bubble
Wall Street also will reap a huge bonanza through carbon trading derivatives speculation exploiting what Commodity Futures Trading commissioner Bart Chilton believes will be a $2 trillion market - "the biggest of any (commodities) derivatives product in the next five years." Others see a future annual market potential of up to $10 trillion based on these schemes:
-- government-issued cap and trading carbon allowance permits to let polluters emit a designated amount of greenhouse gases; those exceeding the limit can buy rights for more from companies below their limit;
-- carbon offsets that let companies emit excess greenhouse gases provided they invest in projects purportedly cutting them elsewhere, either domestically or abroad; they can also fulfill their obligation by stretching out investments for up to 40 years - far enough ahead to avoid them altogether; and
-- besides trading allowances and offsets, polluters and Wall Street can play the derivatives game, including with futures contracts for a designated number of allowances at an agreed on price for a specified date.
According to Robert Shapiro, former Undersecretary of Commerce in the Clinton administration: "We are on the verge of creating a new trillion dollar market (through) financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market" and all others that inflated bubbles that burst. If cap and trade becomes law, this market will explode so Wall Street is pressuring senators to pass it.
According to the Center of Public Integrity (CPI), around "880 total businesses and groups....reported they were seeking to influence climate change policy" as addressed in HR 2454. Representing 770 of them are "an estimated 2340 lobbyists," a 300% increase in the past five years, or more than "four climate lobbyists for every member of Congress."
In 2003, Wall Street employed none on climate issues. CPI says it now has 130 representing the usual players like Goldman Sachs, JP Morgan Chase, Citigroup and others, and why so is simple - to create a huge new revenue stream to make up for ones lost with perhaps others in the wings, thus far not revealed. Waxman - Markey delivered splendidly, setting the stage for another bubble if HR 2454 becomes law with huge pressure now on senators to assure it.
Warning: Cap and Trade Bubble Ahead
On July 1, Catherine Austin Fitts' Solari.com blog headlined "The Next Really Scary Bubble" in stating:"If you think the housing and credit bubble diminished your financial security and your community, or the bailouts, or the rising gas prices did as well, hold on to your hat" for what's coming. "Carbon trading is gearing up to make the housing and derivative bubbles look like target practice."
She quoted Rep. Geoff Davis calling it "a scam," Rep. Devin Nunes saying it's a "massive transfer of wealth" from the public to polluters and Wall Street, Rep. James Sensenbrenner stating "Carbon markets can and will be manipulated using the same Wall Street sleights of hand that brought us the financial crisis," and Dennis Kuchinich citing "The best description to date (to) be found in Matt Taibbi's....'The Great American Bubble Machine: From tech stocks to high gas prices, Goldman Sachs (GS) has engineered every major market manipulation since the Great Depression - and they are about to do it again.' "
Taibbi calls GS the "world's most powerful investment bank....a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." It operates by positioning itself "in the middle of (every) speculative bubble, selling investments they know are crap."
They control Washington and profit by extracting "vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that (lets it) rewrite the rules in exchange for the relative pennies (it)throws (back as) political patronage."
When inflated bubbles burst "leaving millions of ordinary (people) broke and starving, they begin the entire process over again (inflating new bubbles and) lending us back our own money at interest...." They've been at this since the 1920s and are "preparing to do it again (with) what may be the biggest and most audacious bubble yet" - a new cap and trade derivatives scam written into HR 2454 with GS positioned to profit most from it. Taibbi calls its market edge a position of "supreme privilege (and) explicit advantage" ahead of all others on the Street.
Contributing $4,452,585 to Democrats in 2008 (around $1 million to Obama) was mere pocket change for what it can reap from scams like cap and trade disguised as an environmental plan. The scheme was devised. GS helped write it. The House passed it and sent it to the Senate. Unless stopped, it will transfer more of our wealth to corporate polluters and Wall Street on top of all they've stolen so far from derivatives fraud and the imploded housing and other bubbles. And Goldman will lead the way finding new ways to do it until there's nothing left to extract.
Markets mayhem puts spin on statistics
International trade is the greatest casualty of this economic crisis, and nowhere is this more visible than in the large Asian exporting nations. As consumers stopped buying durable manufactured goods last year, some countries’ exports were cut in half. For the past half year, official export statistics have seemed to rub in the bad news, with every monthly release suggesting continued steep falls in exports across Asia. When China’s latest export figures are published on Friday, they will no doubt show yet another year-on-year double-digit percentage fall.
But there is more to the official trade statistics than meets the eye. Year-on-year changes in exports – which is how many statistics offices present their updates and what newspapers usually report – do tell a depressing story. Until the end of last year, Chinese exports came in every month 20-30 per cent higher than a year earlier. Then, in the last two months of 2008, year-on-year growth was approximately zero – and in January it plunged to -15 per cent and has stayed around -20 per cent since.
You might interpret those figures as saying that Chinese exports stagnated at the end of 2008, went over a cliff in January and have been tumbling ever since. But you would be wrong. In fact exports peaked in July 2008, at $137bn (€98bn, £85.5bn). They stayed close to this level until October, and the big tumble happened in the months just after the Lehman Brothers bankruptcy paralysed markets. The world’s other largest exporters – Japan, Germany and South Korea – show similar patterns.
Interestingly, the contractions had more or less finished by the beginning of 2009. Since then, exports have been bumping along at the levels of the middle of the decade – stagnant, to be sure, but not falling. Indeed Korean and Chinese exports are already up from their midwinter nadir by a double-digit percentage. In most months of 2009 China exported goods worth about $90bn. Of the four top exporters, only Germany’s sales have continued falling, but even that at a much slower pace than half a year ago.
So we fell off a cliff late last year, but have mostly been crawling flat or upward for almost six months. This may not be the best of news, but it suggests the worst is over. And it seems a whole lot better than suggested by a look at year-on-year changes, which can exhibit a worsening pattern even when exports are actually growing – if they are growing at a slower pace than the year before.
In normal times there is good reason to concentrate on year-on-year changes. Monthly figures are noisy: exports always jump around from one month to the next for reasons unrelated to the general trend. China’s exports, for example, regularly dip in January and February, around the Chinese new year. It would be a mistake to interpret that as reversals of the country’s astounding export growth. Year-on-year figures display the economically significant information in the data – the continuing upward trend – by removing seasonal variations.
But we are not in normal times where monthly changes in exports are just insignificant disturbances around a stable trend. Last year’s disruption to global markets caused the trend itself to change dramatically. In such a fast-changing environment, year-on-year changes at best obscure what is happening in the economy, and at worst misrepresent what is going on as something else. It is better then to look at monthly change or level figures, as long as one adjusts them for historical seasonal variation.
Those awaiting Friday’s statistics’ release should take heed. They should also be prepared for the end of the summer, when it will be a year since exports collapsed. If nothing changes until then, we may see year-on-year figures suddenly improve in October. But this will only be because the basis of comparison – exports one year ago – worsens, even if current export levels show only anaemic growth. Year-on-year figures will look better, not because they tell us something new, but because they stop telling us something old. So before cheering at news of a strong upswing in exports, take a closer look at those numbers.
Euro Falls on Report IMF Discussing Aid to At Least 10 East Europe Nations
The euro fell, heading for its worst week against the yen in two months, after Handelsblatt reported the International Monetary Fund is discussing aid programs with at least 10 Eastern European governments.
Europe’s currency weakened versus 12 of its 16 major counterparts after the German newspaper cited unidentified IMF officials as saying the countries applying for loans for the first time included Bulgaria, Croatia and Macedonia.
The yen and the dollar rose against most major currencies as U.S. stock futures fell, boosting demand for safer assets. South Korea’s won completed its biggest weekly loss in four months as demand for emerging-market assets declined. “There are lingering worries over the financial health of eastern and central European countries,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “Investors are still risk averse, so they’re likely to sell the euro and buy the yen and dollar as safe-haven currencies.”
The euro declined to 129.09 yen as of 7:58 a.m. in London from 130.36 yesterday in New York, set for a 3.8 percent loss this week, the biggest since the period ended May 15. Europe’s currency dropped to $1.3947 from $1.4020. Japan’s currency rose to 92.64 per dollar from 92.99. The won fell 0.3 percent to 1,282.50 per dollar. The Nikkei 225 Stock Average trimmed its advance to close little changed after earlier rising as much as 0.9 percent. Futures on the Standard & Poor’s 500 Index declined 0.3 percent.
The euro headed for a second weekly loss against the dollar after Finance Minister Peer Steinbrueck said yesterday Germany’s regional state banks are the “biggest systemic risk” to the nation’s financial industry. Ukraine, Serbia, Romania, Belarus and Latvia aim for faster payment of IMF funds or an increase of existing loans, Handelsblatt also reported, citing the IMF officials. “People are still cautious about the sustainability of a recovery,” said Takao Yahata, senior manager of foreign exchange and financial-products trading in Tokyo at Mitsubishi UFJ Trust and Banking Corp., a unit of Japan’s largest publicly traded lender by assets. “As risk-aversion resurfaced, buying- back of the yen against higher-yielding currencies may continue.”
Losses in the euro accelerated after so-called stop-loss orders on investors’ positions on the currency were activated around $1.40, said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. A stop-loss order is an automatic instruction to sell or buy a currency should it reach a particular level. The yen headed for a fourth week of gains against the Australian dollar on signs Japanese investors are losing appetite for overseas assets.
Nikko Asset Management Co. said it collected 4.9 billion yen ($52.7 million) in new funds for three high-income sovereign funds, investing in the Brazilian real, South Africa’s rand and Turkish lira, which launched today, compared with the pre- registered amount of 300 billion. “Individual investors are not 100 percent certain about the prospect of the global recovery, which if continued, should have favored the currencies of resource-rich nations,” said Morio Okayasu, chief analyst at Monex FX Inc., a unit of Japan’s third-largest online broker.
The yen earlier pared its weekly gain against the dollar after Japanese Economy Minister Yoshimasa Hayashi said the government will closely watch the stock market and the appreciation of the yen. “If the yen’s rise and stock declines last a long time, there are concerns they may have a negative impact on both exporter and overall sentiment,” Hayashi told reporters today. A stronger yen may squeeze corporate profits of exporters and hurt households by eroding their wages, Japan’s Vice Finance Minister Kazuyuki Sugimoto said at a press conference in Tokyo yesterday said.
“As the ongoing recovery is still fragile, we can’t rule out the possibility of the Bank of Japan intervening in the market to prevent the appreciation of the yen if the currency breaches 90 per dollar,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co. South Korea’s won led Asian currencies lower as sliding stock markets and concern about the pace of the global economic recovery damped appetite for riskier assets.
The Bloomberg-JPMorgan Asia Dollar Index, which tracks Asia’s 10 most-traded currencies excluding the yen, was poised for a sixth weekly decline in seven. The Kospi share index dropped as foreign investors sold more local shares than they bought, exchange data show. “The dominant theme is still risk, growth is a secondary issue,” said Julian Wee, a Singapore-based economist at IDEAglobal. “The market’s paring back its optimism and Korea is vulnerable.” The won fell 1.3 percent this week, the largest decline since the period ended Feb. 27.
New York Times could make online charging decision 'within weeks'
New York Times looking at $60 a year subscription fee for online news
The New York Times could reportedly take the decision to start charging for online news "within three to four weeks". Readers who subscribe to the print version of the New York Times could be charged $30 a year to gain access to its website, whereas nonsubscribers could be charged $60 a year, according to the Financial Times. These prices are based on a monthly subscription model which would see nonsubscribers paying $5 a month, and print subscribers being charged a discounted rate of $2.50 a month, the FT reported.
The figures are estimates based on results from a survey conducted by The New York Times to find out how much its readers would be willing to pay for online content. A source "familiar" with the New York Times has said a decision to charge could be made within the next three or four weeks.
As revenues from print advertising continue to fall in tandem with newspapers' readership figures in the US and UK, and consumers increasingly turn to the internet to seek out news, moving to an online pay system would put the New York Times at the forefront of attempts by the industry to find alternative business models. In 2007, the New York Times scrapped an experiment to charge readers access to its archive and columnists. Despite attracting 200,000 subscribers the resulting revenues were too low for the model to be sustainable.
The New York Times's latest plans are indicative of a wider urgency for the industry to adopt new business models, particularly for digital content. In May, Rupert Murdoch said that he expects News Corporation will begin to charge for access to its newspapers' online content within a year. When asked if fees would be introduced to British newspaper websites such as the Times, the Sun and the News of the World, he said: "We're absolutely looking at that."
Ilargi: One more time: QE doesn’t work.
Bank of England indicates an end to quantitative easing
London's money markets were left shuddering yesterday after the Bank of England gave its first firm indication that it is considering bringing an end to its radical programme of quantitative easing (QE). The Monetary Policy Committee voted not to increase the scale of its programme, in which it is buying massive amounts of Government debt with newly-created money. City economists had expected that with the MPC already close to meeting its £125bn QE target, it would extend the programme to the Treasury-endorsed ceiling of £150bn.
However, the MPC instead voted to leave both QE and its 0.5pc interest rate unchanged. The Bank then confirmed that it would trim the size of the impending reverse auctions in which it buys government bonds to ensure it does not meet the target ahead of the next MPC meeting. The decision caused one of the biggest leaps in government bond yields since the programme began in March. The benchmark 10-year gilt yield leapt by almost a fifth of a percentage point as traders abandoned UK government debt, fearing that the Bank may soon abandon its purchases of them altogether. The yield was at 3.8pc by the end of the day, while the pound rose by almost one and a half cents against the dollar, closing at $1.6235.
In a statement accompanying the decision, the Bank said it: "expects that the announced programme will take another month to complete. The Committee will review the scale of the programme again at its August meeting, alongside its latest inflation projections." Although economists said it was rational for the Bank to re-examine the scheme in the light of their new Inflation Report projections, they said the mere fact that it had stopped short of renewing the scheme indicated that it may soon close it.
Michael Saunders of Citigroup said: "If it was already blindingly obvious to the Committee that they will need to extend QE at the August meeting, then they would surely have used some or all of the final £25bn of the £150bn authorised by the Chancellor, hence continuing QE up to the August meeting and getting in as much stimulus as quickly as possible. The fact that they have not done so implies the MPC are in considerable doubt as to whether they will need to extend QE at the August meeting."
It is understood that senior Bank policymakers have come to the increasing conclusion that although deep-seated deflation was a significant threat earlier this year, the weight of monetary stimulus pumped into the economy through interest rate cuts, QE and sterling's depreciation will serve to prevent a deflation trap. The decision underlines the likelihood that at some point in the coming year attention will turn instead to so-called exit strategies from QE, which could involve selling off some of the gilts or raising borrowing costs. However, Dominic Bryant of BNP Paribas said: "Ultimately, having played a good game since March when QE was announced, the Bank has scored an own goal at its July meeting. It disappointed expectations... it has also increased uncertainty about the level of the Bank's commitment to QE generally."
Prices charged by UK manufacturers unexpectedly falls in June
The prices Britain's manufacturers charged for their goods fell unexpectedly in June, underlining the pricing pressure on a key part of the economy. Producer output prices fell 0.2pc in May, pushing them 1.2pc lower than a year earlier - the biggest annual fall in prices since December 2001. Economists had predicted a 0.3pc rise in June. The drop mainly reflected falls in chemical product prices, which fell 3pc in June according to the Office for National Statistics, and was partly offset by a 3.9pc rise in petrol product rises. "June's retreat in producer prices reinforces belief that consumer price inflation is headed down significantly further over the coming months," said Howard Archer, chief UK economist at IHS Global Insight.
The Consumer Prices Index, which is the Government's preferred measure of inflation, is currently 2.2pc and ONS data published next week are expected to show a further fall. Input prices, which manufacturers pay for their raw materials, rose by 1.5pc in June, almost twice as much as the 0.8pc increase expected and mainly reflecting oil price rises. Prices were down 11pc in the year to June however. "The data reinforce belief that the Bank of England could yet very well increase its quantitative easing programme in August, particularly if the economic and lending data disappoint over the coming month," said Mr Archer. On Thursday the Bank's MPC voted to leave interest rates unchanged at 0.5pc, and did not raise its commitment to QE above the £125bn it had already pledged to spend.