Italian grocer in the First Avenue market at Tenth Street, New York City
Ilargi: 247.000 job lost. Some people say that's a good thing. It’s all uphill from here. 422.000 people just simply and completely stopped looking for work. In one single month. The number of long term (more than six months) unemployed rose by 584.000. In one single month. 4.970.000 people are now in the long term unemployed category. That is one out of every three unemployed, a higher percentage than since records began in 1948. By september, 500.000 won’t even be in that category anymore. They'll have exhausted all benefits, including the temporary extended ones. By Christmas, their number will be 1.500.000.
Consumer credit is down, consumer spending is down, while government spending and borrowing reaches new heights. $1.3 trillion in the first 10 months of the fiscal year. It was $400 billion in the entire past fiscal year. That is hardly a recipe for recovery, for job growth or for economic growth, the abstracted notions that everybody seems so hungry for. The government doesn't make money, the government takes money. Albeit some 17% less than a year ago.
Less income, more spending. Must sound familiar to many households. Government spending has nothing to do with recovery or growth, and neither is it just shifting chairs around on the deck. It constitutes spending today what it takes from tomorrow. The government uses your future tax revenue to buy your friend a car, and it uses your friend's future money as guarantee for your mortgage. You make your money flipping your friend's burgers, and he makes his money greeting you at WalMart.
Pardon me, but none of it looks all uphill from here from where I'm sitting. And that's without even beginning to address all the question marks that the 247.000 jobs lost number comes with.
US deficit climbs to $1.3 trillion
The US budget deficit reached 1.3 trillion dollars for the current fiscal year in July, official data showed, news set to fuel opposition to US President Barack Obama's ambitious health care and climate change proposals. The deficit for the first 10 months of fiscal year 2009, which began October 1, reached 1.3 trillion dollars, close to 880 billion dollars greater than the deficit recorded through July 2008, said the US Congressional Budget Office (CBO).
Outlays rose by almost 530 billion dollars, or 21 percent, and revenues fell by more than 350 billion dollars, or 17 percent, compared with the amounts recorded during the same period last year, the non-partisan CBO said. The new data was likely to stoke Republican opposition to Obama's plans to remake the US health care system and enact sweeping legislation to battle climate change, as well as fuel criticism of his handling of the economy.
Republicans have charged that the nearly 800-billion-dollar economic stimulus package Obama and his Democratic allies pushed through earlier this year only swells the deficit and has not paid off in jobs recovered. The president late Thursday declared America may be seeing the beginning of the end of its economic nightmare, and fired a blistering attack on his Republican critics. "The recession was years in the making, it didn't just start last month. That bank crisis didn't happen on my watch. Let's get the history straight," he said in a fiery and partisan speech reminiscent of his barnstorming 2008 election rhetoric.
The president argued that his mammoth 787-billion-dollar rescue plan and other emergency measures had stopped the economy's free-fall and cut the rate of job losses. "We may just be seeing the very beginnings of the end of this recession," he said. Obama cranked up his counter-attack as a new poll suggested voter patience may be wearing thin with his economic rescue effort, with his sky-high job approval rating slumping to 50 percent, the lowest since his inauguration.
The Quinnipiac University poll rating was a significant dip from the 57 percent Obama enjoyed on July 2, and followed a month of fierce battles of his economic rescue plans and signature healthcare reform. The White House is also bracing for new unemployment figures due Friday that analysts expect to show the jobless rate climbing to a 26-year high of 9.6 percent, ever closer to the politically perilous 10-percent mark.
'Lost Couple of Decades' Looming for U.S. Economy
The U.S. economy may be just as sluggish during the next 20 years as Japan’s economy was in the last 20, according to Comstock Partners, a money manager founded and run by Charles Minter. Stimulus programs and a surging money supply aren’t likely to "solve a problem of excess debt generation that resulted from greed and living way beyond our means," the firm wrote yesterday in an unsigned report on its Web site. "We could wind up with a lost couple of decades."
The CHART OF THE DAY shows U.S. total debt and gross domestic product since 1952, along with the ratio between them, based on data compiled by Bloomberg. The ratio rose in the first quarter to 372 percent even as household borrowing dropped for a second straight quarter, an unprecedented streak. The U.S. is headed for "a deleveraging period" in which the amount of so-called private debt, including consumer borrowing, collapses as government borrowing explodes, Comstock wrote.
Assuming that private borrowers pay down debt at the same pace as they did in Japan after its 1980s economic bubble burst, the savings rate will climb to about 10 percent in 2018, the report said. The estimate was made in a study by the Federal Reserve Bank of San Francisco that Comstock cited. It’s more than double the 4.6 percent rate for June. Citing the study in addition to its own research, Comstock wrote that reduced borrowing may curtail growth in U.S. consumer spending by 0.75 percentage point annually on average during the next nine years.
U.S. Payroll Losses Slow, Unemployment Rate Declines
The pace of U.S. job losses slowed more than forecast last month and the unemployment rate dropped for the first time since April 2008, the clearest signs yet that the worst recession since the Great Depression is easing. Payrolls fell by 247,000, after a 443,000 loss in June, the Labor Department said today in Washington. The jobless rate dropped to 9.4 percent from 9.5 percent. Stocks gained and Treasuries dropped after the report stoked optimism for a recovery in the second half. While the Obama administration’s fiscal stimulus efforts are projected to have a gathering impact on the economy, any rebound in hiring may be delayed as companies from Boeing Co. to Verizon Communications Inc. continue to cut costs.
"The American consumer is by no means out of the woods, but we are moving in the right direction," said Richard DeKaser, chief economist at Woodley Park Research in Washington, the only economist to correctly forecast the payroll and unemployment numbers. "We will see moderate growth in the second half and more of a pickup in 2010." The Standard & Poor’s 500 Stock Index rose 0.7 percent to 1,004.41 at 10:14 a.m. in New York. Yields on benchmark 10-year notes rose to 3.84 percent from 3.75 percent late yesterday. Revisions added 43,000 to payroll figures previously reported for June and May.
The latest numbers brought total jobs lost since the recession began in December 2007 to about 6.7 million, the biggest decline in any post-World War II economic slump. Payrolls were forecast to drop 325,000 after the 467,000 decline initially reported for June, according to the median of 82 estimates in a Bloomberg News survey. Predictions ranged from decreases of 150,000 to 460,000. Job losses peaked at 741,000 in January, the most since 1949.
The jobless rate was projected to rise to 9.6 percent, and forecasts ranged from 9.2 percent to 9.8 percent. A separate Bloomberg survey last month showed the rate may exceed 10 percent by early next year and average 9.8 percent for all of 2010. Along with projected further increases in unemployment, stagnant wages and falling home values mean a lack of consumer spending will likely curb an economic recovery, analysts say. Today’s report showed factory payrolls fell 52,000, the fewest in a year, after decreasing 131,000 in the prior month. Economists forecast a drop of 100,000.
That decline came even as 28,200 jobs were created in the automobile industry. The improvement reflected the return of workers at General Motors Co. and Chrysler Group LLC, both of which have exited bankruptcy. GM may have to cut more U.S. hourly jobs after an offer of buyouts and early retirements fell about 7,500 workers short of the reorganized automaker’s target. Payrolls at builders fell 76,000 after decreasing 86,000. Financial firms decreased payrolls by 13,000. Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 119,000 workers after losing 220,000 the month before. Retail payrolls decreased by 44,100. Government payrolls increased by 7,000 after falling 48,000 the prior month.
Today’s report also showed the average work week expanded to 33.1 hours in July from 33 hours in the prior month. Average weekly hours worked by production workers increased to 39.8 hours from 39.5 hours, while overtime held at 2.9 hours for a second month. That brought the average weekly earnings up to $614.34 from $611.49. Workers’ average hourly wages rose 3 cents, or 0.2 percent, to $18.56 from the prior month. Hourly earnings were 2.5 percent higher than July 2008. Economists surveyed by Bloomberg had forecast a 0.1 percent increase from the prior month and a 2.5 percent gain for the 12-month period.
Even so, economists predict consumer spending, which accounts for 70 percent of the economy, will be slow to gain speed. Wages and salaries fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department data issued this week. Companies like Verizon and Boeing are still looking to trim expenses through cutbacks in staff. New York-based telephone carrier Verizon last month said it plans to slash more than 8,000 jobs in the second half of the year.
Chicago-based Boeing, which is planning to eliminate about 10,000 workers, or 6 percent of its labor force, has agreed to allow some machinists to volunteer for a "layoff with benefits" to help mitigate job cuts, the International Association of Machinists and Aerospace Workers said on July 28. Emerson Electric Co., a maker of industrial equipment, will cut an additional 5,000 to 6,000 positions in the next few quarters, after it posted its third straight drop in quarterly earnings, the longest stretch since 2002. The St. Louis-based company has already eliminated 20,000 jobs. "Emerson is still seeing very difficult and challenging times around the world," Chief Executive Officer David Farr said on a conference call on Aug. 4.
Administration officials including Lawrence Summers, director of the White House National Economic Council, predict most new jobs under President Barack Obama’s stimulus program will come only in 2010. Less than 10 percent of the $787 billion plan goes to job creation this year, and the government still expects to save or create at least 3 million jobs, Summers said in an NBC television interview on Aug. 2. The unemployment rate may not peak until the second half of 2010, Treasury Secretary Timothy Geithner said on ABC last week, even as the economy shows signs of improvement. Another extension in unemployment benefits "is something that the administration and Congress are going to look very carefully at as we get closer to the end of this year," Geithner said.
Cloud over U.S. payrolls: job hunters take summer off
Better-than-expected July jobs numbers have numerous private economists heralding the end of the recession, but the Obama administration is taking a more guarded view because of a worrisome rise in long-term unemployment and a drop in labor force participation. Friday's jobs report and other recent data "reinforce our view that the U.S. recession ended in June, and we have raised our third-quarter 2009 growth forecast to 3.5 percent," wrote Christian Broda, a Barclays Capital economist in New York.
U.S. employers shed 247,000 jobs in July, far fewer than the 320,000 forecast and the 467,000 eliminated in June. The unemployment rate unexpectedly fell to 9.4 percent from 9.5 percent, the Labor Department said. Stocks rallied on the news, sending the benchmark Standard & Poor's 500 index to a 10-month high. Helping to drive the unemployment rate lower, however, was a decline in the labor force participation rate by 0.2 percentage points to 65 percent. About 422,000 people stopped looking for work.
Meanwhile, the number of long-term unemployed, defined as those jobless for more than six months, rose by 584,000 to a to a record 4.97 million. More than one-third of those counted as unemployed have now been without work for six months, the highest level since the government started keeping these statistics in 1948. "We believe this drop in joblessness will prove to be temporary. With the summer in full swing, we assume a larger than usual number of unemployed Americans decided to take a break from job hunting," said Bernard Baumohl, president of the Economic Outlook in Princeton Junction, New Jersey. "It's been a horrible labor market, so who could blame them?"
They will likely resume job searching in the autumn, lifting the unemployment rate higher, possibly above 10 percent. White House spokesman Robert Gibbs said on Thursday President Barack Obama believes the rate will top 10 percent. The U.S. Treasury's top economist said he thought forecasts that growth would resume this year were "plausible" but expressed concern about the long-term unemployed. Alan Krueger, assistant secretary for economic policy, said further actions to help this group may be considered. "The administration is constantly looking at how to get people back to work, how to lessen the pain of the recession," Krueger told a news briefing. He declined to provide a forecast on when and where the unemployment rate would peak.
In this economy, this is as close as it gets to "good news."
America lost 247,000 jobs in July, the Labor Department announced today. That blows all popular expectations out of the water: ADP’s guess on Wednesday of 371,000 lost jobs didn’t come close, and even the Street’s expectations of 325,000 was beaten handily. At an official 247,000 jobs, it’s the best monthly report since August 2008.
According to the government, the unemployment rate actually fell, from 9.5% to 9.4%. The Labor Department revised June and May job losses for the better, taking out roughly 43,000 job losses previously reported. The average hourly workweek inched up from a record low 33 hours in June to 33.1 hours. The number of workers seeking full-time employment but regretfully working part-time fell 2%. And thank heavens: The government is adding new jobs at a slower pace.
But of course, it’s all a matter of perspective:
- July was the 19th month in a row of net job losses
- Since the start of 2008, 6.7 million jobs have been lost
- A record 5 million people have been unemployed for more than 6 months
- The unemployed have been jobless for an average 25.1 weeks, a 61-year high
- And at the risk of belaboring the obvious, a quarter of a million lost jobs in one month is hardly worth celebrating.
Still, looking back, there’s a clear trend over the last six months -- the job market has stopped plunging into the abyss. "The recovery is on!" we heard a CNBC anchor rejoice.
But we want to look WAY back today. Since everything in this Great Rescission is so akin to the Great Depression, how do the unemployment rates compare?
Of course, this argument has a million more layers that we couldn’t possibly cover in our humble 5 Min.… like the method unemployment rates are calculated by now and then, the differences between the two downturns, etc. But you get the idea -- the same way this is no garden-variety recession, we don’t expect a quick-and-easy recovery.
U.S. Consumer Credit Fell 5th Straight Month in June
Consumer credit in the U.S. declined in June for a fifth straight month as banks maintained more restrictive lending terms and households remained reluctant to borrow money for major purchases. Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.
Stagnant wages and falling home values mean consumer spending, about 70 percent of the economy, will take time to recover even as the recession eases. Incomes fell the most in four years in June as one-time transfer payments from the Obama administration’s stimulus plan dried up, and Americans saved almost $125 billion more of their incomes in June than a year earlier. "This string of declining credit should continue as long as the economy eliminates workers at an elevated pace," said Richard Yamarone, director of economic research at Argus Research Corp. in New York. "We’re 20 months into the recession and the economy is still losing a quarter-of-a-million jobs per month."
Economists had forecast consumer credit would drop $5 billion in June, according to the median of 33 estimates in a Bloomberg News survey. Projections ranged from declines of $11.9 billion to $1 billion. The Fed initially reported that consumer credit decreased by $3.2 billion in May. Revolving debt, such as credit cards, fell by $5.25 billion in June, a record 10th straight drop, according to the Fed’s statistics. Non-revolving debt, including auto loans and mobile- home loans, declined by $5.04 billion. The Fed’s report doesn’t cover borrowing secured by real estate.
While the downturn abated in the second quarter as government stimulus programs started to kick in, the three-month period capped the worst retrenchment by consumers since 1980. Gross domestic product shrank at a better-than-forecast 1 percent annual pace after a 6.4 percent drop the prior three months, the Commerce Department figures showed last week. The economy was forecast to shrink at a 1.5 percent pace, according to the median estimate of 78 economists surveyed by Bloomberg.
Government spending rose at a 5.6 percent pace last quarter, the most since 2003, as President Barack Obama’s $787 billion stimulus program began to take effect. The funds are aimed at helping states retain workers, financing infrastructure projects and reducing tax payments. Consumer spending, meanwhile, fell at a 1.2 percent pace following a 0.6 percent increase in the prior quarter. Purchases slid 2 percent since the peak at the end of 2007 --the most since a 2.4 percent decline in the 1980 recession.
U.S. personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and erasing the previous month’s gain, figures from the Commerce Department showed Aug. 4 in Washington. Spending rose 0.4 percent in June as prices climbed. Adjusted for inflation, purchases fell 0.1 percent, the report showed. Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, the Commerce figures showed.
Decreasing pay is not the only hurdle for consumers. Plunging home prices and stocks reduced household net worth by a record $13.9 trillion from the third quarter of 2007 through this year’s first quarter, according to figures from the Fed. The pace of U.S. job losses slowed more than forecast last month and the unemployment rate dropped for the first time in more than a year, the Labor Department said today in Washington. Payrolls fell by 247,000, after a 443,000 loss in June, and the jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent, which was the highest in 26 years.
The White House warned the jobless rate is still likely to reach 10 percent, and with companies from Boeing Co. to Verizon Communications Inc. continuing to cut costs, any rebound in hiring may not come until 2010. "Consumers were still battening down the hatches in June trying to get out from under the mountain of debt that they had accumulated in the good times," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Credit-card defaults climbed to a record in June as more consumers fell behind on payments because of rising unemployment and bankruptcies, according to Fitch Ratings statistics released on July 31. Charge-offs, the cost of loans that card issuers have given up on collecting, rose to 10.79 percent last month, 64 percent higher than the same period last year, the Fitch Prime Credit Card Index showed. Fitch said the rate of increase "slowed significantly" from earlier this year, providing "a glimmer of hope that charge-offs may soon plateau" in coming months. Loans delinquent at least 60 days declined to 4.31 percent in June from 4.45 percent in the previous month, Fitch said.
MasterCard Inc., Visa Inc., Capital One Financial Corp., Discover Financial Services and American Express Co. cut marketing by $636.8 million in the latest quarter as rising U.S. unemployment contributed to record defaults and depressed consumer spending. Sales of cars and light trucks fell to a 9.7 million annual rate in June from a 9.9 million annual rate the month before, according to Woodcliff Lake, New Jersey-based industry research firm Autodata Corp. In July, sales rose to an 11.3 million pace, the highest since September, Autodata reported this week. That compares with February’s 9.1 million rate, which was the lowest since 1981. Auto sales will likely rebound further as a federal "cash-for- clunkers" program boosts demand for cars.
Keep shovelling that stimulus
by Joseph Stiglitz
The green shoots of economic recovery that many people spied this spring have turned brown, prompting concerns about whether the policy of jump-starting the U.S. economy through massive fiscal stimulus has failed. People are asking: Has Keynesian economics been proven wrong, now that it has been put to the test? The question, however, only makes sense if Keynesian economics had really been tried. Indeed, what is needed now is another dose of fiscal stimulus. If that doesn't happen, we can look forward to an even longer period in which the economy operates below capacity, with high unemployment.
The Obama administration seems surprised and disappointed with the high and still rising number of jobless. It should not be. This was predictable. The true measure of the success of the stimulus is not the actual level of unemployment, but what unemployment would have been without the stimulus. The Obama administration was always clear that it would create some three million jobs more than what would otherwise be the case. The problem is that the shock to the economy from the financial crisis was so bad, even Barack Obama's seemingly huge fiscal stimulus has not been enough.
But there is another problem: In the United States, only about a quarter of the almost $800-billion stimulus was designed to be spent this year. Getting it spent, even on "shovel ready" projects, has been slow going. Meanwhile, U.S. states are experiencing massive revenue shortfalls, exceeding $200-billion. Most face constitutional requirements to run balanced budgets, which means that such states are now either raising taxes or cutting expenditures – a negative stimulus that offsets at least some of the federal government's positive stimulus.
At the same time, almost one-third of the stimulus was devoted to tax cuts, which Keynesian economics correctly predicted would be relatively ineffective. Households, burdened with debt while their retirement savings wither and job prospects remain dim, have spent only a fraction of the tax cuts. In the U.S. and elsewhere, much attention was focused on fixing the banking system. This may be necessary to restore robust growth, but it is not sufficient. Banks will not lend if the economy is in the doldrums, and U.S. households will be particularly reluctant to borrow – at least in the profligate ways before the crisis. The almighty American consumer was the engine of global growth, but that engine will most likely continue to sputter even after the banks are repaired. In the interim, some form of government stimulus will be required.
Some worry about America's increasing national debt. But if a new stimulus is well designed, with much of the money spent on assets, the fiscal position and future growth can actually be made stronger. It is a mistake to look only at a country's liabilities, and ignore its assets. Of course, that is an argument against badly designed bank bailouts, like the one in America, which has cost U.S. taxpayers hundreds of billions of dollars, much of it never to be recovered.
The national debt has increased, with no offsetting asset placed on the government's balance sheet. But one should not confuse corporate welfare with a Keynesian stimulus. A few worry that this bout of government spending will result in inflation. The more immediate problem, however, remains deflation, given high unemployment and excess capacity. If the economy recovers more robustly than I anticipate, spending can be cancelled. Better yet, if much of the next round of stimulus is devoted to automatic stabilizers – such as compensating for the shortfall in state revenues – if the economy does recover, the spending will not occur. There is little downside risk.
Nevertheless, there is some concern that growing inflationary expectations might result in rising long-term interest rates, offsetting the benefits of the stimulus. Here, monetary authorities must be vigilant, and continue their "non-standard" interventions, managing both short-term and long-term interest rates. All policies entail risk. Not preparing for a second stimulus now risks a weaker economy – and the money not being there when it is needed. Stimulating an economy takes time, as the Obama administration's difficulties in spending what it has allocated show; the full effect of these efforts may take a half-year or more to be felt.
A weaker economy means more bankruptcies, more home foreclosures, more unemployment. Even putting aside the human suffering, this means, in turn, more problems for the financial system. And, as we have seen, a weaker financial system means a weaker economy, and possibly the need for more emergency money to save it from another catastrophe. If we try to save money now, we risk spending much more later. The Obama administration erred in asking for too small a stimulus, especially after making political compromises that caused the stimulus to be less effective than it could have been.
It made another mistake in designing a bank bailout that gave too much money, with too few restrictions, on too favourable terms to those who caused the economic mess in the first place – a policy that has dampened taxpayers' appetite for more spending. But that is politics. The economics is clear: The world needs all the advanced industrial countries to commit to another big round of real stimulus spending. This should be one of the central themes of the next G20 meeting in Pittsburgh next month.
2 Florida banks fail: 71 for the year
Two regional banks in Florida failed Friday, bringing the 2009 tally to 71, the Federal Deposit Insurance Corporation said. First State Bank, of Sarasota, and Community National Bank of Sarasota County, in Venice, closed their doors for the last time Friday. They mark the fifth and sixth closures in Florida this year. St. Cloud, Minn.-based Stearns Bank, N.A., will assume control of the assets of both banks, the FDIC said.
The failure of First State Bank -- which as of May 31 held assets worth $463 million and total deposits of $387 million -- will cost the Deposit Insurance Fund an estimated $116 million, according to the FDIC. Community National had total assets of $97 million and total deposits of approximately $93 million as of June 30 , and its closure will cost $24 million, the FDIC said.
In total, Friday's bank closures will cost the FDIC fund $140 million, bringing the cost for failed banks to $16.53 billion this year. That compares with $17.6 billion in all of 2008. The number of bank failures so far in 2009 has almost tripled last year's total of 25.
Why Banks Bought So Many Toxic Mortgage Bonds
Half of all subprime mortgage backed securities wound up on the balance sheets of banks. This fact surprises many people who think that the problem with securitization is that it let banks off-load risky loans onto investors. If that was the strategy, however, banks wouldn’t have wound up with such huge holdings of subprime securities. So why did banks snap up so many mortgage backed securities? Even banks that were originating mortgage loans preferred to securitize them, and then hold the securities. Why would they do that rather than just hold the loans?
The answer is that bank regulations encouraged them to own securities rather than loans. Under the international Basel capital requirements, a well-capitalized bank was required to hold $4 for every $100 in individual mortgages—a 4% reserve requirement. But if it held the securitized the AAA and AA tranches, the bank only had to hold $1.60 in capital. That’s a huge incentive to trade in a loan for a mortgage backed security. But the capital regulations did more than just create incentives to own mortgage backed securities. They allowed banks to dramatically increase their balance sheets. The lower reserve requirement allowed banks to buy even more securities than it could make loans. A bank with $4 billion in reserve could hold $100 billion in loans. But that same $4 billion could instead be used to invest in $250 billion worth of mortgage backed securities.
Another way of looking at this is that banks were basically making money—turning $100 into $250—by flipping mortgages into securities. It looked like instant profits. Almost magical. And that extra capital could then be reinvested in search of more profits. This created a huge appetite for securitized mortgages. In fact, banks wanted more mortgages than they could possibly originate, which meant that banks needed independent mortgage companies to make loans that could be securitized. This lead to a dangerous dependence on mortgages made by outside lenders, which in turn meant that banks could not possibly know very much about the quality of the mortgages.
And they didn’t really want to know very much. Keep in mind that the banks got the benefit of this capital reserve arbitrage regardless of the quality of the mortgage, the documentation provided or the loan-to-value of the underlying mortgages. This made buying mortgage securities of any type—as long as they were rated high enough—look like a sure fire bet.
Fannie Has .9 Trillion in Troubled Loans - 8K
Fannie Mae’s 8k has an interesting slide. It is a look at their questionable assets. The slide is not easy to read. It can be found in the 2009 Second Quarter Supplement, on page 5. The report describes FNM’s exposure to problematic classes of mortgages on their book. That total comes to a whopping .9 Trillion. The total book of business is $2.7 Trillion, fully 32% of their book is troubled. The report muddles with the actual holdings, as there are overlaps in the descriptions. The actual numbers they provide include:
Negative Amortization Loans: $15b
Interest Only: $196B
Low Fico: $328B
Sub Prime: $8B
Those numbers add up to $1.2 trillion. What this means that 50% of the loans in the book are troubled for two reasons. For example, $25 billion are loans that have high LTV and a FICO score less than 620. (AKA a "stinker") What might this mean? Some trends are emerging on this. Based on private sector experience with these types of troubled loans one could expect that 50% of these borrowers will go into default. On the defaulted loans the losses will be about 50% of the outstanding loan balances. In other words, losses of 25% on the troubled book are reasonable assumptions. That would imply a loss over time on these loans of $225b. And that is just Fannie. The Administration has an estimate of $250b over four years for the full cost of cleaning up the Agencies. These numbers suggest it could be double that. No wonder Mr. Lockhart left.
Should the Fed Be Buying Fannie Debt?
Federal Reserve officials will be consumed next week in discussions of their far-reaching asset purchase program when they gather for their next policy meeting. Two parts of this program get most of the attention — $300 of purchases of U.S. Treasury securities and $1.25 trillion of purchases of mortgage backed securities. But the third prong of the plan — purchases of $200 billion worth of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks — merits more attention.
This is not a small change program, but it is difficult to see the benefits of the purchases. By purchasing debt issued by Fannie and Freddie, the Fed helps to reduce the cost of funding of the two mortgage giants. That provides much needed financial support to two cash-strapped firms critical to the financial system. But the firms have already been bailed out and are already controlled by the U.S. government, which has an 80% stake.
It isn’t obvious how the $200 billion in Fed purchases feed through to consumers. Fannie and Freddie aren’t growing their mortgage holdings much right now. Fannie’s mortgage holdings in June were $793 billion, up just 0.7% from the end of 2008. Fannie has been paring back its own borrowing, with total debt down to $846 billion in June from $883 billion at the end of 2008. Fed purchases of Fannie’s debt, in other words, aren’t leading the firm to go out and buy more mortgages to the benefit of households. It’s only cushioning the finances of a firm that’s the responsibility of the Treasury anyway.
Moreover, it’s not clear that the Fed will be able to hit its target of $200 billion in purchases this year. It is now just a little over $100 billion. One option for the Fed – buy fewer of Fannie and Freddie’s debt and more directly from the Treasury. Fed officials haven’t been enthralled with the Treasury purchase program. But it is a more direct way of benefiting the broader financial system than purchases of Fannie and Freddie debt. Or, given that the economy shows signs of healing, the Fed could also let the program quietly run its course short of its target amount.
Fannie and Freddie Mortgage-Bond Yields Rise for Fifth Day; Loan Rates May Climb
Yields on Fannie Mae and Freddie Mac mortgage securities soared, increasing for a fifth day and signaling that interest rates on new home loans will climb amid data showing refinancing last month was slower than forecast. Yields on Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds rose 0.11 percentage point to 4.83 percent as of 12:01 p.m. in New York, the highest since June 18 and up from 4.38 percent on July 31, according to data compiled by Bloomberg. Yields were driven up by higher benchmark Treasury rates after a report showed the U.S. lost fewer jobs in July.
The rise in mortgage rates from the record lows earlier this year has cut refinancing, contributing to a 21 percent drop in prepayments last month on Fannie Mae and Freddie Mac securities that was greater than JPMorgan Chase & Co. analysts forecast. A Mortgage Bankers Association index of refi applications has remained near 2,000 after rates moved down from recent highs, compared with the JPMorgan analysts’ projection of it reaching 3,000, a reflection of the difficulties for homeowners without the most-creditworthy profiles, they wrote in a report today.
The pace, which compares with a level more than three times higher earlier this year, "speaks to the inability of recent government policies to sustain the refinancing effort," the analysts led by Brian Ye in New York wrote.
The Obama administration announced July 1 that a loosening of rules for Fannie Mae and Freddie Mac intended to stoke more refinancing for borrowers with little or no home equity would be expanded to help individuals owing 125 percent of their homes’ values. That was up from the 105 percent limit announced Feb. 18, when President Barack Obama said the program might aid 4 million to 5 million homeowners.
Under the program, borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac who have loan-to-value ratios of 80 percent to 125 percent and aren’t delinquent can refinance without buying mortgage insurance, or paying for more insurance than they already have. Rates on loans between 105 percent and 125 percent may be higher than other loans because the debt won’t be allowed into typical Fannie Mae and Freddie Mac bonds.
Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac under the program also still charge upfront fees of as much as 2 percent of loan balances when borrowers have lower credit scores or home equity.
To keep home-financing costs low for refinancers and home buyers, the Federal Reserve is also buying as much as $1.25 trillion of mortgage bonds guaranteed by the government- supported companies or U.S. agency Ginnie Mae. Net purchases total $721 billion, the central bank said yesterday.
The average rate on a typical 30-year fixed-rate mortgage fell to 5.22 percent in the week ended Aug. 5, Freddie Mac said yesterday. The rate reached a low of 4.78 percent in April, before climbing to 5.59 percent in June and sparking concern that the Fed’s efforts to keep financing costs low might fail. The so-called constant prepayment rate, or CPR, for Fannie Mae’s 30-year, fixed-rate securities fell to 18.2 last month, while Freddie Mac speeds dropped to 19.3, JPMorgan said, based on data released yesterday. The measure represents the share of the debt that would be retired in a year at the current pace.
"Lending" a Helping Hand
Record debt auctions by the Treasury last week totaled $260 billion ($109 billion in Notes - not including the replacement of maturing securities in the Fed portfolio), including weak offerings of 2-year and 5-year Treasury Notes on Tuesday and Wednesday respectively. Indirect bids (some of which have traditionally been foreign official institutions) were unimpressive and fears began to circulate that the market was already saturated. Thus the surprise of many when the 7-year $28 billion auction on Thursday went well with plenty of participation by indirect bidders.
While questions still remain concerning the recent reclassification of bidders that comprise the indirect category, there is still the surprise of healthy demand for these longer dated issues and this is addressed below. On a related note, while foreign official institutions have been increasing their treasury purchases, I am skeptical that the buying was from these institutions as foreign purchasers (playing it more conservative w/respect to US debt) have been net sellers on the long end. Federal Reserve custodial holdings of treasuries surpassed the $2 trillion mark last week. However, much of this is due to foreign institutions selling their 1) Longer dated treasury debt and 2) Agency debt and MBSs, replacing these holdings with shorter term treasuries.
It is important for the longer dated auctions to provide the perception of success. Investors (especially foreign official institutions) are watching the results of these longer dated auctions closely. Continued weakness will place even more pressure on the Treasury and Federal Reserve. While the Federal Reserve has no authority to lend directly to the Treasury, it has certainly been providing indirect support. Since March 25th (commencement of the Treasury purchase program by the Fed), the Fed has purchased $229.207 billion in treasury securities from its primary dealer network.
More importantly, $94 billion of that debt was set to mature in about seven years or more (some of these securities were just shy of the 7-year mark ... but still quite relevant for our purposes). Meanwhile, the Treasury has auctioned $245 billion of 7-year, 10-year, and 30-year securities since the Treasury purchase program at the Fed commenced. Thus, the Fed has essentially supported 38.4% of the longer dated Treasury auctions during this time period. Is there any wonder that the 7-year auction last week went well? The Fed has been draining the supply of these securities in significant proportions on a consistent basis.
Looking at more recent activity, the Fed executed purchases of treasury securities totaling $12.99 billion maturing in about seven years or more. These purchases came on 7/21, 7/23, and 7/29, with nearly $7 billion on 7/21 coming in the form of treasuries with maturities of seven to eight years. With the 7-year debt auction on Thursday 7/30 being $28 billion, the Fed gave the market a nice head start soaking a substantial supply of longer term debt and specifically treasuries in the seven year maturity range. What is also clear is that the primary dealers purchasing the securities at auction are not holding these securities long before the Fed comes to the rescue. Let's take the 7-year 3.25% coupon Treasury Notes auctioned by the Treasury on 6/25/09 as an example.
$2.722 billion of this particular issue (CUSIP 912828KZ2) was purchased by the Fed on the day of issuance (6/30/09), with an additional $3.785 billion a mere three weeks later on 7/21/09. This is not atypical as there are many examples where the Fed executed large purchases of securities in close proximity to the actual auction of those securities . On the Fed calendar this week is the purchase of some longer dated treasury securities (Wednesday and Thursday), including some with maturities of seven to ten years. I would venture to say that a sizeable stake of these securities were auctioned by the Treasury in the last couple of months, maybe even last Thursday.
It makes you wonder if the Fed is not encouraging primary dealer participation in these auctions by making it abundantly clear that the Fed will absorb a sizeable portion of their inventory quickly, while still assuring dealer profits. This is about as close as it gets to the Fed lending directly to the Treasury, without actually doing it. Federal Reserve treasury security purchases can be found here .... [See link]
What happens when the $300 billion purchase program limit has been met? At the current rate of purchases, this will be sometime in early September. Will the Fed extend this program? A few possible outcomes ...
- The Fed does not extend the program and the Treasury continues its schedule of longer dated auctions (monthly and in consistent amounts for the 7-year, 10-year, and 30-year treasuries). Here, longer dated treasuries will fall and yields will rise, sans some unexpected reversal of investor sentiment with respect to these securities. The impact on the economy and particularly the housing market will be significant.
- The Fed does not extend the program and the Treasury cuts back on the volume of longer dated auctions, replacing them with securities of shorter duration. Here, the average maturity of outstanding Treasury debt will continue to decline, forcing the Treasury to roll over maturing debt more often. This is also much riskier for our economy in that investors will have more leverage over short term interest rates, which will also impact longer term interest rates over time.
- The Fed extends the program. Regardless of what the Treasury does, this additional debt monetization will result in more bank reserves created by the Fed and all other things being equal, an increased monetary base. Also, at some point, investors will shun these securities in larger numbers, driving longer term interest rates higher.
Revelation of the path chosen by the Federal Reserve and Treasury will not be long in coming.
Thank Goodness We Fixed The Debt Problem
Remember last year, when the world almost ended because we had accumulated a mountain of debt much higher than anything in the history of the nation? Well, thank goodness that's over. Here's a chart from Ned Davis showing total debt-to-GDP from 1925 through March 31 2009:
Cities Turn to State for Pension Relief
City officials from around the state say their communities can no longer afford to cover the benefits of retired police officers and firefighters, so they are asking the state Legislature for help. Specifically, they want state lawmakers to redirect a portion of state surcharges on insurance premiums to helping cities cover their retirement pension obligations. They also want to enroll new hires in new pension plans that help them save money.
If nothing changes, cities such as Huntington could have fewer police officers and firefighters on the streets as they are forced to cut back staffs because of increasing pension obligations. The city’s last six police and fire department retirees will likely draw $1.5 million each in pension benefits over the course of their retirements, even though each person made less than $900,000 during his or her career, according to Deputy Mayor Tom Bell said. "What happened here is we just can’t afford to dedicate that amount of money" to pensions, Bell said.
Huntington is in the worst shape, but other cities around the state also are struggling to cover their pensions. Collectively, city governments are facing $700 million in unfunded liability thanks to what officials say are the generous benefits paid out of the firefighters and police officers. The West Virginia Municipal League, which represents the state’s cities, wants state lawmakers to meet in special session either in August or September to consider municipal pension reforms.
"The benefit package was a package that was designed by the Legislature back in a time when cities were flourishing and they had larger populations," said Lisa Dooley, executive director of the League. "The economy was doing well, and there was expected to be growth in the cities." But cities such as Charleston have been losing their populations in recent years. There is a possibility that after the 2010 census, no city in West Virginia will have a population of more than 50,000, a rarity among states.
State requirements also help drive up the cost of covering pensions. For example, police and firefighters can retire with full benefits at age 50, the reasoning being both lines of work often involve physical activities that become more stressful the older people get. But people now live much longer than they used to, so it is not uncommon for retirees to live more than three decades past their retirements, Bell said. "The problem is the state couldn’t add enough money to pay for these lucrative pension benefits," he said. "What we have to do is close that to new hires and adopt a more conservative pension plan."
The so-called "Huntington plan" would let cities do just that. It also would give them a 40-year re-amortization of their existing pension debts, meaning they would pay back the debts at higher rates but have more time to do it.
In addition, cities want lawmakers to redirect one-tenth of 1 percent of a state surcharge placed on property casualty insurance premiums to paying for the pensions. The money was directed to the state’s Teacher Retirement System in the 1990s. So far city officials have had little luck getting a pension reform bill passed the Legislature. Gov. Joe Manchin would need to call lawmakers into special session if they are to take up the issue before the end of the year. While Manchin has indicated he would consider that option, the governor’s office has not said whether he would actually do that.
Baltic Dry Index Has Worst Week Since October as Chinese Demand Slows
The Baltic Dry Index, a measure of shipping costs for commodities, had its worst week since October as Chinese demand for shipments of coal and iron ore slowed. The index tracking transportation costs on international trade routes today slid 135 points, or 4.6 percent, to 2,772 points, according to the Baltic Exchange. That took its weekly drop to 17 percent, the most since the end of October. "The Chinese have backed off and it’s starting to show in the number of shipments this month," Gavin Durrell, a Cape Town-based official at Island View Shipping SA, Africa’s biggest commodities shipping line, said by phone today. "Iron ore and coal seem to be slowing down."
China’s record coal and iron ore imports in the first half helped the index to advance as much as fivefold this year, reversing some of the record 92 percent collapse in 2008. Demand rose after the country’s government announced a 4 trillion yuan ($586 billion) stimulus package. Daily rental rates for every class of ship tracked by the bourse declined today, led by a 5.6 percent slump to $20,880 for panamaxes, ships designed to navigate the Panama Canal. Capesizes, ships most commonly used to haul about 170,000 metric tons of iron ore around South Africa’s Cape of Good Hope or Chile’s Cape Horn, lost 5.2 percent to $45,428 a day. Smaller supramaxes fell 5 percent to $19,242 a day and handysize ships lost 2 percent to $12,051 a day.
Rates are declining as Chinese steelmakers delay imports while they negotiate annual iron ore prices with producers such as Rio Tinto Group, BHP Billiton Ltd. and Vale SA, Durrell said. "I don’t think they will come back until they agree," he said. The drop reflects a wider slide in demand for raw materials that will likely push prices for metals, commodities and energy lower, Eugen Weinberg, a senior commodity analyst at Commerzbank AG in Frankfurt, said by phone yesterday. The Baltic Dry Index has slumped 35 percent from this year’s high on June 3. The Standard & Poor’s GSCI Index of 24 commodities has climbed 7 percent over the same period.
Derivatives betting on the Baltic Exchange’s future assessments fell for a third day, indicating the declining spot market is causing traders’ future expectations to deteriorate. October-to-December forward freight agreements, or FFAs, for capesizes lost 4.7 percent to $36,750 a day, according to prices from Imarex ASA, a broker of the accords. That implies traders expect the market to drop 19 percent by year-end. Panamax contracts fell 1 percent to $17,625 a day, implying a 16 percent decline.
FDIC Faulted for Oversight of Failed Washington, Georgia Banks
U.S. bank regulators failed to take timely action to limit losses on commercial real-estate loans that led to the collapse of Bank of Clark County in Washington state and Community Bank in Georgia, an agency watchdog said. The Federal Deposit Insurance Corp. could have exercised "greater supervisory concern" after examiners found weaknesses in each bank’s loan portfolio, the agency’s inspector general said today in separate reports.
The banks collapsed because of rapid growth in land acquisition, development and construction loans, funded through wholesale sources, including brokered deposits, the Washington- based FDIC said. Regulators have closed 69 banks so far this year, after seizing 25 last year. "The bank’s management did not establish and implement sound risk management practices and controls to mitigate risks in the loan portfolio," the inspector general said in its report on oversight of Community Bank, which was closed Nov. 21.
Vancouver, Washington-based Bank of Clark County managers were told by regulators about rising concentrations of risky loans before the real-estate market collapsed, and actions recommended by the FDIC and a state regulator were insufficient to prevent the bank’s collapse on Jan. 16, the report showed. Regulators have said high concentrations of commercial real-estate loans led to bank failures in recent months, as more loans fail amid the housing crisis.
The liquidity pipes remain clogged
by Gillian Tett
A decade ago, I was working as a reporter in Tokyo when I was asked to investigate the impact of Japanese-style quantitative easing. Back then, the Bank of Japan was pouring gazillions of yen into the money markets and politicians were angrily exhorting the Japanese banks to lend. Indeed, at one point, the Tokyo government even created quotas, which stipulated that banks should make a certain level of loans to worthy small enterprises to combat a pernicious credit crunch.
But, when I examined what the Japanese banks were actually doing, the results were almost comical. In public the banks claimed they were lending to small enterprises; in reality some were only meeting the targets by lending to subsidiaries of Toyota. Faced with a political order to lend, in other words, Japanese banks were ducking round the rules – and the liquidity was notably not ending up where politicians (or central bankers) had hoped.
Sound familiar? I am increasingly tempted to think so. In the last six months, European and US central banks have poured dizzying sums into the money markets and politicians have put pressure on the banks to lend. Last week, for example, Alistair Darling, UK chancellor declared his readiness to "get tough" with banks that were failing to lend. On Thursday, the Bank of England triggered surprise by announcing an expansion of its quantitative easing scheme.
But as I look at these endeavours, what springs to my mind is a vision of a plumber trying to force water into a domestic waterflow system whose pipes are badly clogged, if not broken. To be sure, liquidity is entering the banking pipes. Some is also trickling out at the end: banks still seem willing to lend to big, reputable companies (the Western equivalent of Toyota, as it were.) However, numerous small or risky corporate ventures in the west currently complain that they cannot get loans. Consumers are facing rising borrowing charges too. Thus, in the West, as in Japan a decade ago, the liquidity is still not necessarily flowing to those who need it most. Those pipes remain clogged, even as water is forced in.
That, in turn, raises a fascinating question for investors and policy makers: where will all that "backflow" of unusued liquidity, as it were, go? Right now, some seems to be sitting in a quasi stagnant pool, deposited into reserve acounts with central banks. Much also seems to be leaking into the government bond markets, or moving directly there (as in the case of the British central bank’s direct purchase of gilts). That is helping to keep long-term yields low, echoing the pattern seen previously in Japan.
However, the backflow may now be creating other side effects. Right now, most banks seem unwilling to use spare liquidity to engage in activity that regulators or shareholders might deem risky, in the lending or capital markets arena. At a meeting of securities analysts in New York this week, for example, there was discussion about the fact that Wall Street banks will not even use their spare funds to take short trading positions in the US treasury market anymore, for fear that this looks too "risky."
But, while banks sit on their hands in some arenas, in other corners of the markets, a feeding frenzy is breaking out. Last month, for example, there was an extraordinary scramble to buy €1bn bonds issued by Deutsche Postbank, with some $9.2bn of its offers received in just 10 minutes. (Ironically, it seems that many investors now consider bank debt to be one of the safest instruments on the planet, since the governments can ill afford to let large banks collapse.)
This week an equally crazed scramble erupted when EADS, the giant aerospace group, sold bonds. That was doubly remarkable since normally August is an utterly dead market; indeed, so extraordinary that some bankers are already using the "b" word – bubble – in relation to these seemingly safe, vanilla assets.
Perhaps that is no bad thing. If government bond yields remain low, and companies such as EADS find it easy to raise cash, that?should support recovery. At any rate, it may do no harm. That, at least, appears to be one finding of a fascinating paper from the International Monetary Fund this month. This suggests that while there is little evidence that quantitative easing has eased UK credit conditions yet, there is also little sign of harm. But the longer that the banking pipes remain partly or fully clogged and the governments keep pouring water into the system, the more that investors and policy makers need to watch what this liquidity "backflow" might do; and not just in the gilts market, but other, less obvious corners of the global asset markets too.
Stitch in Time
by Bill Bonner
At least something good has come out of the economic crisis; it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don't deserve the beating they're getting in the press - with snide remarks and sarcastic comments; they deserve better. A beating with sticks!
Even Alan Greenspan admitted he had "found a flaw" in his own thinking. We will have to imagine the giggles from the back of the room - if anyone had been awake. If was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn't seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you'd hope he'd be a gentleman about it and hang himself.
Meanwhile, the queen of England visited the London School of Economics and had a question: why weren't economists on top of this thing?
They replied to this question last month. In a three-page letter, they avoided the simple truth - that their trade was no more reliable than fortune telling and marriage counseling. The letter claimed that a "psychology of denial" prevented government and financial eyes from seeing the catastrophe in front of them. It was "a failure of the collective imagination of many bright people", they said. In fact, it was the exact opposite - imagination run wild. Economists imagined a world without yesterday or tomorrow...a world in which you could run up debts forever and never have to pay them back.
Last week, Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America's biggest creditor that the public sector wouldn't continue to run huge deficits - practically an outright lie. But it's one thing to stiff the Chinese; it's another to stiff time.
Adjusted for inflation, the US consumer's earnings barely rose from the '70s. By some measures, he had actually less disposable spending power in 2007 than he had in 1973. And now his income is going down. The June number reflected the biggest drop in income in 4 years. Salaries and wages fell 0.4% in June...the 9th drop in the last 10 months. How is it possible for him to spend more?
We pose the familiar question only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future, and into Never Never Land. Consumers spent money they hadn't earned yet...thus bringing forward purchases that should have been made years later. The accumulated effect of this was to add $35 trillion in extra spending to the world economy - from America alone - over the course of the great credit expansion, 1945- 2007. That's why we have a depression now - because consumers already spent what they would normally be spending now.
Time always gets even. Now, it is the past that is doing the reaching. The automobile bought in 2006...the house bought in 2005...the vacation taken in 1999 - the ghosts of yesteryear spending reach for Americans' paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back - ever. They reached so far the poor ghosts are disappointed. Lenders realized that they'd never get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five - Bear, Lehman, Goldman, JPMorgan and Merrill - only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.
From one scam to another...from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus.
What are they thinking? Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future. (Setting aside 'quantitative easing'...or Zimbabwe-style stimulus...an even bigger fraud.)
The purest illustration of how this works is in the popular 'cash for clunkers' programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn't expect 2010 to ever arrive...as if they thought they could stop the sun and the seasons...and the Chinese...forever. Like moths in amber, their wings will never tatter...nor will their faith flag. The dollar will always be strong. US bonds will always be in demand. And the future will never arrive.
But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011...and then 2012...all the way to the end of time.
Central banks to lower gold sales ceiling
Gold bulls were given a psychological boost yesterday as European central banks announced a lower ceiling than expected for their bullion sales over the next five years, reducing their annual quota by 20 per cent to 400 tonnes. The lower ceiling is a fresh sign that the "anti-gold" climate that was prevalent among central banks throughout the 1990s and in the early part of the current decade seems to be fading away. Bullion prices hit a 23-year low in 1999 after the Bank of England revealed it was selling a large chunk of its gold holdings.
Although other factors, such as jewellery demand, investors’ buying patterns or mine production are more important for prices, the official sector activity usually has an important psychological impact on the bullion market. In a joint statement, the European central banks said their gold sales "will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2009, immediately after the end of the previous agreement".
They went on: "Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes." The new agreement will also "accommodate" the International Monetary Fund’s plan to sell 403 tonnes of gold from its reserves. Jonathan Spall, a director at Barclays Capital’s commodities desk and expert on gold, says: "All in all [it is] mildly positive for gold – with the stress on mild." John Reade, a precious metals strategist at UBS in London, agrees, saying the lower ceiling is a "small positive" for the market, noting the signatories of the Central Bank Gold Agreement "have not used the full ceiling for the past couple of years".
At the same time, the Swiss National Bank, one of the top 10 holders of the metal, said it had no plans to sell gold soon. The bank was a big seller earlier this decade and in the 1990s. In London, spot gold surged on news of the lower ceiling to $963 a troy ounce, near a two-month high. But later it pared gains to trade at $958. Since the Lehman Brothers collapse last September, gold prices have gone up, rising almost 13 per cent in the past 12 months. Bullion hit a record high of $1,034 an ounce in March 2008. Investors, from hedge funds and rich individuals to pension funds and retail investors, have piled into gold, buying bullion-backed exchange-traded funds, futures and even bullion coins and bars.
The market will pore over central bankers’ speeches for any sign of selling, but most bullion traders struggle to say who will fill the 2,000 tonnes over the next five years. Setting aside 400 tonnes from the IMF, with Switzerland excluding itself, only the European Central Bank and Banque de France appear candidates for meaningful sales. The Bundesbank has yet to follow other European central banks that have sold gold over the past decade, and analysts believe the German central bank is unlikely to dispose of its bullion holdings now.
Banca d’Italia has not sold either, but now the Italian government is pressing it to pay a special capital tax over the increase in the value of the central bank’s gold holdings. Banca d’Italia opposes the measure and Jean-Claude Trichet, ECB president, this week stepped up his opposition to the tax plan. "We have an unambiguously negative opinion," he said in Frankfurt. The ECB argues the measure would undermine the principle of central bank independence. Without sales from Germany and Italy, most analysts and traders believe the 400-tonnes quota will not be fulfilled in any year. Indeed, the CBGA signatories have not satisfied their annual 500-tonnes current quota in the past two years.
GFMS, the London-based precious metals consultancy, estimates that central banks’ gold net selling – including banks outside the CBGA – fell in the first half to 39 tonnes, down 73 per cent from the same period last year, and it forecasts that it will total 140 tonnes this year, the lowest since the trough of 130 tonnes in 1994. The consultancy says the "anti-gold" climate seems to have ended. China shocked the bullion market earlier this year when it announced a significant increase in its gold reserves, from 600 tonnes in 2003 to 1,054 tonnes. "Although the official sector remains a net seller overall, sentiment ... has shifted to one considering the metal to remain an important reserve asset," GFMS argues.
Key Lawmaker Received Countrywide Loans
A powerful House Democrat who has turned down a Republican's call to subpoena records of a mortgage program at Countrywide Financial Corp. received two home loans from the lender. Some information in the lawmaker's mortgage documents raises the possibility they were made through the program, which provided loans to public figures and other favored borrowers often at lower interest rates or with lower origination fees than were available to the general public.
The loans were made to Rep. Edolphus Towns of New York, who heads the House Oversight and Government Reform committee. The panel's ranking Republican, California Rep. Darrell Issa, has been pushing to have the committee subpoena mortgage records showing who received loans through Countrywide's VIP program -- operated under former Chief Executive Angelo Mozilo and known within the company as "Friends of Angelo." The mortgage documents on the loans to Mr. Towns contain a Countrywide address and branch number that correspond to the VIP program.
A spokesman for Bank of America Corp., which last year purchased Countrywide after the mortgage lender suffered severe financial problems with the downturn in the real-estate market, said the bank couldn't comment on dealings with individual customers. Mr. Mozilo couldn't be reached for comment. Mr. Issa said that based on his staff's investigation, he believes the names of many VIP loan recipients aren't publicly available. But Mr. Towns has turned down the Republican request to subpoena the records from Bank of America.
Through a spokeswoman, Mr. Towns said there were other government investigations of Countrywide under way, including a Justice Department criminal probe. The Senate Ethics committee is also investigating because two Democratic senators, Chris Dodd of Connecticut and Kent Conrad of North Dakota, received loans through the VIP program. Both men have denied wrongdoing and said they never asked for favorable loan terms from Countrywide. Some Republican government figures also received VIP loans from Countrywide.
The spokeswoman for Mr. Towns, a 26-year congressional veteran, said his decision not to subpoena the VIP records "has nothing to do with his mortgages." If the mortgages came through the VIP program, "it was without his knowledge," and he doesn't believe he received any special benefits from Countrywide, she said. "As far as he knew, he was just getting a loan as a regular person." The congressman, who wasn't a committee chairman when he received the Countrywide loans, first heard of the VIP program last year from press reports, she said. Mr. Towns's spokeswoman added that in response to questions from The Wall Street Journal, the lawmaker's staff researched his interest rates. "From what we've seen, it doesn't look like he got a better rate" than was available to the general public, she said.
The initial interest rates on two five-year, adjustable-rate Countrywide loans Mr. Towns and his wife took in September 2003 were 4.5% and 4.625%, according to the mortgage documents. Around the time of those loans, the average rates nationally on such loans ranged from about 4.7% to about 5.3%, according to HSH Associates, a Pompton Plains, N.J., publisher of mortgage-rate data. It was possible for very creditworthy borrowers to qualify for a better-than-average rate without having participated in the VIP program. If Mr. Towns's loans did go through the VIP unit, it is also possible his application was routed through that operation without his knowledge.
Public records show Mr. Towns took out a Countrywide loan in 1997 to purchase a home in Lutz, Fla., and then refinanced the property in September 2003 with a mortgage of more than $180,000 from the lender. Also in September 2003, the Townses took out a Countrywide loan of roughly $190,000 on their Brooklyn home, the records show. This loan was paid off in 2005 when the couple obtained a $411,000 loan through another company. The mortgage documents on the Florida refinancing and the Brooklyn loan from 2003 both show they were prepared at Countrywide's Branch 850. In June, Republican House staffers interviewed Robert Feinberg, who worked on the VIP operation from 2000 to 2004. According to a transcript, Mr. Feinberg said each Countrywide branch office had a numeric designation; "850" signified the VIP operation. That number "was always your clue. That's the designation as a VIP because that's the VIP processing unit, 850," he said.
Elana Goldstein, an attorney for Mr. Feinberg at Salerno & Associates, reiterated that he told House investigators that 850 was the designation for the VIP unit. Both Towns mortgages also list an address for a Countrywide loan-processing center at 1515 Walnut Grove Ave., Room 850, in Rosemead, Calif. Business cards for the Countrywide VIP operation show the same address. In his June House interview, Mr. Feinberg said non-VIP loans were also handled at that Rosemead location. Mr. Towns's Florida mortgage showed the paperwork was prepared by Silva Momjian in the Rosemead office. A Journal article last year identified Ms. Momjian as having done the paperwork on some VIP loans. Ms. Momjian couldn't be reached for comment. She declined to comment last year
Canada July Jobs Loss Triple Economists’ Forecasts
Canada lost three times as many jobs as economists expected last month, led by construction and tourism-related businesses, signaling the country’s recovery from a recession may be slow. Employment fell by 44,500, the third straight decline, Statistics Canada said today in Ottawa. The jobless rate remained at an 11-year high of 8.6 percent as the labor force shrank. Economists surveyed by Bloomberg predicted a job loss of 15,000 and unemployment at 8.8 percent.
Prime Minister Stephen Harper and Bank of Canada Governor Mark Carney have said the country’s job market will continue to worsen this year, even as Canada’s first recession since 1992 is expected to ease. The central bank cut its key interest rate to a record low 0.25 percent and the government predicts a record budget deficit as they act to revive the economy. "Labor markets are a lagging indicator of activity, so I wouldn’t abandon hope the economy is emerging from recession," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "But there’s a little more doubt about that view now."
Canada’s dollar weakened 0.1 percent to C$1.0792 per U.S. dollar at 9:12 a.m. in Toronto from C$1.0777 yesterday. Earlier this week it reached C$1.0633, the strongest since Oct. 2. Construction employment fell by 17,800 in July, while accommodation and food service companies fired 22,200 workers. Information, culture and recreation employment declined by 10,600. The job losses were concentrated in the full-time, private- sector jobs that economists focus on as a measure of the labor market’s strength.
Full-time employment fell by 29,100 positions, Statistics Canada said, while part-time jobs decreased 15,400. The number of employees at private companies fell by 74,900, while government employment dropped 4,400 and self-employment rose by 34,800. The self-employment gain "underscores the lack of opportunity in the formal job market," Charmaine Buskas, senior economics strategist at TD Securities in Toronto, wrote in a note to clients. "This is a categorically weak report and is a sharp contrast to the Bank of Canada’s recently released upward revisions" for economic growth. The central bank said last month that output will expand at a 1.3 percent annualized pace in the July-September period, which would mark the end of a recession that started in the fourth quarter of last year.
Governor Carney said July 23 the country’s stronger dollar is threatening the recovery and he is watching it closely. That was two days after he kept the benchmark rate at 0.25 percent and repeated he intends to keep it there through the second quarter of 2010 unless the inflation outlook shifts. Manufacturers have been among the hardest hit by the recession and a stronger currency. The bankruptcies of Chrysler Group LLC and General Motors Corp. led to slower production, dealership closures and shuttered parts suppliers. Manufacturing employment fell by another 6,500 in July, bringing the total loss since October to 218,000, or 11 percent, Statistics Canada said.
"Depending on what happens in the market, we’ll continue to adjust it if we think it’s necessary," said Neil Manning, chief executive officer of Wajax Income Fund, which has cut payrolls by 15 percent, according to a transcript of an Aug. 5 conference call. The Mississauga, Ontario-based company sells parts and equipment to industrial companies. Unemployment will average 9.3 percent in the fourth quarter, according to a separate Bloomberg News economist survey. That suggests joblessness may reach a lower peak than the 12.1 percent rate set in November 1992.
Companies have kept announcing cutbacks. General Electric Co. said Aug. 4 it would move the work of a 160-worker light bulb plant in Oakville, Ontario, to other locations because of declining sales. Kruger Inc. said July 31 it will curb production at three Quebec paper mills, affecting about 680 workers, for periods of between one week and three weeks. Liberal Party Leader Michael Ignatieff indicated in a July 29 CTV News interview he may seek to topple Harper’s government after Parliament returns in September because it hasn’t done enough to help the unemployed. Eighty-six percent of Canadians say the country is still in a recession or depression, according to an EKOS telephone poll of 2,468 people taken July 29-Aug. 4. The poll is accurate within 2 percentage points, 19 times out of 20.
Russia Beats California in Bond Market as Credit-Default Swaps Favor BRICs
Investor demand for emerging-market bonds is driving the cost of insuring against debt defaults below industrialized governments for the first time. Credit-default swap prices from Turkey to Indonesia are falling as bonds rise amid signs that their economies are recovering faster than developed nations. As the U.S. and U.K. borrow record amounts to fund bank bailouts and stimulus, Brazil, Russia, India and China have $3 trillion in reserves, up 19 percent from January 2008 and now 43 percent of the worldwide total, data compiled by Bloomberg show.
The annual cost of protecting holdings in Turkey’s bonds fell by half to $200,000 per $10 million for five years, or 200 basis points, sinking below New York City swaps for two weeks starting July 22, Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day. Brazil swaps just had their biggest four-month slide ever. For China, protection is near the cheapest in a year. Eleven years after Russia defaulted, investors want less to insure its debt than California’s.
"This would have been impossible to imagine a year ago," said Dmitry Sentchoukov, an emerging-market credit strategist at Dresdner Kleinwort in London. "Now it’s clear emerging economies are going to outperform the Group of Seven in growth, and that makes investors comfortable with the idea that developing countries can be priced richer than developed."
Swaps pay the buyer the amount protected in exchange for the defaulted debt’s market value or the bond itself if the borrower reneges. Created to protect lenders, the contracts also are used by hedge funds and insurance companies that don’t hold the underlying bonds to speculate on swings in the market’s perception of debtors’ creditworthiness. The average cost of swaps for sovereign debt from 45 developing countries has declined to 314 basis points, the lowest since October, from 785 basis points five months ago, data compiled by Bloomberg show. Emerging-market bond funds held almost $49 billion on July 31, the most since October, after their biggest weekly cash influx in a year. They’ve attracted more deposits than withdrawals every week since April 13, following eight months of declines, said EPFR Global, a Cambridge, Massachusetts, researcher.
"CDS spreads have come in because there are a lot less worries about default," said Paul McNamara, who invests in swaps while overseeing $2 billion in emerging-market debt at Augustus Asset Managers in London. His funds have received $500 million in new investments this year, he said in a phone interview.
Increased government and consumer spending are mitigating the economic downturn in emerging markets amid the worst global recession since World War II. Manufacturing in China expanded in July to the highest in a year, spurred by a $585 billion government stimulus package and a record $1 trillion of new bank loans in the first half. The country’s 4.25 percent bonds due 2013 rose to a one-year high of 105 cents on the dollar last month from October’s record low 97 cents. China swaps cost 66 basis points, down from 297 on Oct. 24. That’s cheaper than Greece and Ireland and within 9 points of Austria, Italy and Spain.
Consumer spending in Indonesia accounts for about two- thirds of the economy, which expanded 4.4 percent in the first quarter, the fastest pace in Southeast Asia. Indonesia’s 2014 dollar bonds sold in March climbed to a record 121.5 cents on Aug 4. Default swaps on the country’s debt fell below 200 basis points for the first time since January 2008 this week, dropping to 197 on Aug. 3. They were at 207 basis points yesterday.
Emerging economies probably will expand 1.5 percent this year and 4.7 percent in 2010, the International Monetary Fund forecast July 8. Developed economies likely will shrink 3.8 percent in 2009 and grow 0.6 percent next year, the IMF said. The U.S. is in its worst downturn since the 1930s with consumer spending, 70 percent of gross domestic product, dropping at a 1.2 percent pace in the second quarter.
Developing economies have been able to draw on reserves accumulated before the credit crunch started in 2007 to shield their economies. Russia spent about $49 billion from its Reserve Fund as of July 31 and will empty the stockpile by the end of 2010 to plug an estimated budget shortfall equivalent to as much as 9.4 percent of GDP, according to the government. Turkey, the world’s 17th largest economy, has $67 billion in foreign reserves, more than the U.S.’s $41.9 billion, Bloomberg data show.
In the West, governments are selling debt to fill budget gaps and fund bank bailouts. California has sold nearly $14 billion of general obligation bonds this year, up from $8.18 billion during all of 2008. The most populous U.S. state cut spending, raised taxes and issued IOUs as it battled with $60 billion in deficits over the past two fiscal years. Swaps on California have risen more than three-fold in the past year as its credit rating was lowered two levels to Baa1 by Moody’s, the same level as Russia, which reneged on $40 billion of sovereign debt payments in 1998. Russian default swaps are near a 10-month low of 255 basis points, about 20 basis points less than contracts linked to California. The former Soviet state’s 7.5 percent, 2030 dollar bonds are at a 2 1/2-month high of 101.74 cents on the dollar.
"If California is issuing their own dummy currency in the form of IOUs, that’s not a good sign," said Augustus’ McNamara. Russia has an "extremely low" debt-to-GDP ratio of about 10 percent which is attractive to "any type of bond investor," said Luis Costa, an emerging-market debt analyst at Commerzbank in London. "For as long as U.S. municipal and state governments are in trouble, I think this trend will continue." By comparison, the U.S.’s $11.2 trillion of debt is about 79 percent of its $14.1 trillion in GDP, Bloomberg data show.
Issuance of Treasuries by the U.S., which has spent more than $300 billion to prop up its banks, may total $446 billion this quarter, up 30 percent from the prior three months, according to a Securities Industry and Financial Markets Association survey published July 30. The extra yield investors demand to own developing country bonds over similar-maturity U.S. Treasuries dropped to near a one-year low of 3.41 percentage points this week, from 6.95 in March, JPMorgan Chase & Co. indexes show. "This trend of lower sovereign spreads will continue," said Richard House, who manages $1.1 billion in emerging-market debt at Threadneedle Asset Management in London. "Balance sheets are so strong now and most governments don’t need to sell debt in the external markets."
Even as investors buy up developing economies’ debt, the countries still pay more to borrow on international markets. Investors on average demand an extra 112 basis points in yield over Treasuries to own China’s debt, two basis points less than Ireland’s 1.10 percentage-point spread, Merrill Lynch & Co. Inc. indexes show. Credit-default swaps on China cost less than half the 143 basis points for Ireland, which contracted a record annual 8.5 percent in the first quarter as the bursting of a decade-long property boom drove unemployment to a 13-year high, forced the government to raise taxes and cut spending and left banks nursing billions of euros in souring loans.
The cost of protecting against a default by Turkey plunged below New York City’s for two weeks before climbing back above yesterday. The country is negotiating a new IMF loan accord to add to the equivalent of about $49 billion in assistance it has received since 1984. Turkey increased its 2009 budget deficit forecast to $33 billion in April. The government is attempting to end a 25-year conflict with Kurdish rebels that has cost almost 40,000 lives and spread into neighboring Iraq.
Swaps for New York increased more than three-fold in the past year. The world’s financial capital, rated nine levels higher than Turkey by Moody’s Investor’s Service at Aa3, faces unemployment close to 10 percent and reduced tax revenue from Wall Street firms. New York City Mayor Michael Bloomberg is founder and majority owner of Bloomberg News parent Bloomberg LP. As emerging-market bonds rally and swaps plummet, stocks from those economies are leading a climb in global equities.
The MSCI Emerging Market Index has added 51 percent this year, compared to a 15 percent increase in the MSCI World Index of developed stocks. McNamara of Augustus Asset Management said he has reduced his investments in credit-default swaps this year because they are less liquid than bonds and have higher capital requirements and regulatory risks. "They have lost their competitive advantage to bonds," he said.
You Do Not Have Health Insurance
by James Kwak
Right now, it appears that the biggest barrier to health care reform is people who think that it will hurt them. According to a New York Times poll, "69 percent of respondents in the poll said they were concerned that the quality of their own care would decline if the government created a program that covers everyone." Since most Americans currently have health insurance, they see reform as a poverty program – something that helps poor people and hurts them. If that’s what you think, then this post is for you.
You do not have health insurance. Let me repeat that. You do not have health insurance. (Unless you are over 65, in which case you do have health insurance. I’ll come back to that later.) The point of insurance is to protect you against unlikely but damaging events. You are generally happy to pay premiums in all the years that nothing goes wrong (your house doesn’t burn down), because in exchange your insurer promises to be there in the one year that things do go wrong (your house burns down). That’s why, when shopping for insurance, you are supposed to look for a company that is financially sound – so they will be there when you need them.
If, like most people, your health coverage is through your employer or your spouse’s employer, that is not what you have. At some point in the future, you will get sick and need expensive health care. What are some of the things that could happen between now and then?
- Your company could drop its health plan. According to the U.S. Census Bureau (see Table HIA-1), the percentage of the population covered by employer-based health insurance has fallen every year since 2000, from 64.2% to 59.3%.*
- You could lose your job. I don’t think I need to tell anyone what the unemployment rate is these days.**
- You could voluntarily leave your job, for example because you have to move to take care of an elderly relative.
- You could get divorced from the spouse you depend on for health coverage.
For all of these reasons, you can’t count on your health insurer being there when you need it. That’s not insurance; that’s employer-subsidized health care for the duration of your employment.
Once you lose your employer-based coverage, for whatever reason, you’re in the individual market, where, you may be surprised to find, you have no right to affordable health insurance. An insurer can refuse to insure you or can charge you a premium you can’t afford because of your medical history. That’s the way a free market works: an insurer would be crazy to charge you less than the expected cost of your medical care (unless they can make it up on their healthy customers, which they can’t in the individual market).
In honor of the financial crisis, let’s also point out that all of these risks are correlated: being sick increases your chances of losing your job (and, probably, getting divorced); losing your job reduces your ability to afford health insurance, either through COBRA or in the individual market; if your employer drops its health plan, that’s either because health care is getting more expensive (meaning harder for you to afford individually) or the economy is in bad shape (making it harder for you to get a job that does offer health coverage).
In addition, there is the problem that even if you are nominally covered when you do get sick, your insurer could rescind your policy, or you may find out, as Karen Tumulty’s brother did, that your insurance doesn’t cover the treatment you need. But while important, this is a second-order problem. The first-order problem is that as long as your health insurance depends on your job, your health is only insured insofar as your job is insured – and your job isn’t insured.
The basic solution is very simple. In Paul Krugman’s words: "regulation of insurers, so that they can’t cherry-pick only the healthy, and subsidies, so that all Americans can afford insurance." I know that there are lots of details that consume people who know health care better than I do, and I know those details are important. But as an individual who is worried about his or her own health insurance (and that is the point of this post), that’s what you want. You want to know that if you lose your job, you won’t be shut out because you’re too sick,*** and you won’t be shut out because you’re too poor.
But we won’t get there as long as people remain convinced that health care reform is for poor people. It’s for everyone – everyone, that is, who isn’t independently wealthy or over the age of 65. Because all of us could lose our jobs. (Have I repeated that point enough?)
Now, I admit that if you are over 65, health care reform is not for you, because you are in the one group in our society that enjoys true health insurance – insurance that you cannot lose, that is paid for by taxes, and that is effectively guaranteed by the government. So maybe there’s nothing in it for you, except perhaps an improvement to the prescription drug component of Medicare. But I cannot believe that, as the only people who have reliable health insurance, you would oppose health care reform that would provide reliable insurance for the rest of us.
* This doesn’t necessarily mean that all those people lost employer-based health coverage because their employers dropped their plans; some of it could be that the employee contributions were increased to the point where they couldn’t afford it anymore. 1.1 percentage points of the shift is due to people becoming eligible for Medicare or military health plans.
** If you lose your job, or you get divorced from a spouse through whom you get health coverage, you are eligible for continued coverage under COBRA. However: (a) this only necessarily applies if your employer has 20 or more employees; (b) you have to pay the full, unsubsidized cost of your health plan, which can be particularly difficult after losing your job; and (c) it only lasts for eighteen months.
*** I said earlier that insurers can’t charge premiums that are less than the expected cost of your care unless they can make it up on the healthy customers, and they can’t in the individual market. But if all insurers are prohibited from doing medical underwriting (pricing based on healthiness), then they will all have to overcharge the healthy customers, and the system could work. This is still a tricky issue – and single-payer (like Medicare) would be much simpler – but it can be made to work even in a competitive market.
Update: A couple of small things. and one big thing:
First, I called rescission a "second-order" problem, which was probably surprising, given that my post on it got over 100,000 page views (thanks to the Huffington Post). I meant "second-order" not to mean that it isn’t important, but that it is logically subsequent to the question of whether you have health insurance in the first place, and this post is about whether you can count on having health insurance in the first place.
Second, J.D. points out in the comments that there is a problem with COBRA I didn’t mention: If you relocate to an area where your employer doesn’t have a plan, then you can’t count on it at all.
Third, a few people said that it was the fault of the administration (or the Democrats generally) that health care reform is framed as a "poverty program." There’s something to that point, but I don’t think it’s quite right (and I didn’t put it right in the first paragraph above). I think it is a poverty program – but the vast majority of us are, actually, poor. The combination of job loss and serious illness could wipe out almost anyone (under the age of 65 – actually, anyone over 65 as well, since Medicare doesn’t cover extended nursing home care), and we all suffer serious economic insecurity because of it.
The political problem is that the median American doesn’t identify as poor (although he probably thinks he needs more money) and thinks that poverty programs are for "other people." I think that middle-class and upper-class people should support poverty programs for other people, but that’s an unnecessary discussion. My point here is that the vast majority of us are poor, when it comes to health care, and therefore we should get behind reform out of self-interest.
BNP $1.4 Billion Bonus Pool Is Dwarfed by Goldman, Morgan Stanley Payouts
BNP Paribas SA’s 1 billion-euro ($1.4 billion) bonus pool is sparking criticism from French politicians even though it’s dwarfed by payouts at the biggest U.S. investment banks. New York-based Goldman Sachs Group Inc. set aside $11.4 billion for compensation and benefits in the first half, or 49 percent of revenue, while Morgan Stanley will pay 71 percent of revenue, company reports show. France’s largest bank spent 46 percent of investment-banking revenue on all the unit’s costs, from salaries to computers and phones.
French President Nicolas Sarkozy called today for strict supervision of bankers’ pay to ensure it complies with rules laid down by the Group of 20 countries, and plans to meet with banking officials on Aug. 25. For French banks, the risk is that higher-paying competitors will lure away talent, said Shaun Springer, the head of London-based Square Mile Services Ltd., a firm that advises banks on remuneration and salary issues. "The political pressure on French banks to rein in pay is much greater than in the U.K. and in the U.S.," Springer said. "This is a problem that’s leading to a far wider pay gap between the world’s top payers, including Goldman, and the rest of the field."
The French state pumped 10.5 billion euros into the country’s six largest consumer banks, including BNP Paribas and Societe Generale SA, in December by purchasing subordinated debt securities. In January, the government made the same amount available in a second round of funding. In exchange, banks agreed to boost lending. Bank of France Governor Christian Noyer, who met with top bankers today, said the BNP bonus plan "does seem to conform to the G-20 criteria, but we will check." Finance Minister Christine Lagarde said on Europe 1 radio that international rules are needed to ensure bonuses don’t encourage excessive risk-taking, and to prevent traders from avoiding limits by moving to countries with weaker regulations.
At BNP Paribas, which didn’t disclose total compensation costs, the 1 billion euros set aside for variable pay at the investment bank amounted to 14 percent of the unit’s revenue. BNP Paribas Chief Executive Officer Baudouin Prot said the bank will apply the G-20 rules, and "we really hope that the key countries, the United States, U.K. as in continental Europe, will make sure the key players play by the same rules." Prot, 58, spoke in a Bloomberg Television interview on Aug. 4. The G-20 agreed April 2 on "principles for sound compensation practices" to avoid "perverse incentives" that contributed to the financial crisis. The principles include adjusting compensation to better take into account risks, deferring a portion of bonus payouts, and linking the size of the bonus pool to the firm’s overall performance.
In the U.S., criticism of Wall Street pay was reignited last week after New York Attorney General Andrew Cuomo reported that nine banks getting U.S. aid paid $32.6 billion in bonuses last year. The average ratio of compensation to revenue at Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.’s investment bank was 49 percent in the first half. At Societe Generale, France’s second-largest bank, CEO Frederic Oudea, 46, said in an interview with France 2 television today that the same rules on bonuses should be applied internationally. He declined to give a figure for bonuses in the first half. The investment-banking division had a 426 million-euro loss in the first six months.
If Obama Loses Jon Stewart, He’s Lost America
July 15th, 2009 - a day that shall live in comedic infamy. The Obama administration’s first direct hit from reliably friendly allies. Former Saturday Night Live star, now stand up comic Dana Carvey was the guest on the new Tonight Show with Conan O’Brien. When O’Brien asked Carvey his opinion of Obama, Carvey trotted out some fresh material. "I’m worried. The economy just had a heart attack, but Barack just wants to work on the knee," Carvey riffed. "Should we do CPR?
No, we’re gonna fix this knee. We can do CPR when it’s efficient and cost effective, but right now we’re going to work on the meniscus. "Carvey concluded the bit suggesting George W. Bush would have used an economic "crash cart." "Tax cuts for everybody - CLEAR!" The audience roared. Were they laughing at Carvey’s "dumb guy" Bush impression, or was it the excitement of more money in their pockets as an economic remedy? No matter the audience response. Carvey saw fit to address economic policy in his comedy. That’s telling.
At the same hour, on the same day - The Daily Show’s Jon Stewart opened fire. "Last night, Obama threw out the first pitch at the All Star game. He even played short-stop for a time," Stewart said. "There’s nothing he can’t do…except create jobs." Ouch. The audience laughed tepidly. It was as though they couldn’t believe what they’d heard, and Stewart moved past the line quickly.
During the same show, Stewart went on to skewer the healthcare reform fight in Washington. Initially mocking Republicans for sounding the alarm on Obama’s ultimate desire for a "single payer" system, the joke took an unexpected turn. "…that’s just a Republican scare tactic. The Democrats are not proposing a government takeover of health insurance. And they’re certainly not trying to "Trojan horse" us into some European or Canadian-style single payer system," said Stewart. With that, Stewart played some grainy campaign video from 2008 in which Obama told a cheering crowd, "I happen to be a proponent of single-payer health care." The next shot is a dumbfounded Stewart back at the desk as he coldly confessed, "Wow. That Communist sounded a lot like our President."
Since this watershed event in comedy, the Daily Show has taken on a new tone. A day after President Obama declared Cambridge cops "acted stupidly" in the arrest of his friend "Skip" Gates, Stewart took it head on. "Now, I wasn’t at the press conference last night, and I don’t have all the facts. But I think it’s fair to say that Obama handled that question…oh, what’s the word I’m looking for? Stupidly?"
In another segment of the same show, Stewart playfully cheered as Nancy Pelosi and President Obama suggested increased taxes on the wealthiest Americans to pay for health care reform. He pretended to be surprised when he was "informed" in his earpiece that he, in fact was wealthy. "Oh, so they’re coming for me…ok," Stewart said sheepishly. Remember, Stewarts’s a New York-based millionaire. Theirs is the highest taxation in the country, and President Obama and New York want more from him. Is Stewart sensitive to that? Again, economics and federal budgets as punch lines? You’ve got your answer.
Last week’s Daily Show also featured a montage of the President refuting criticisms of his health care plan. After the string of presidential rebuttals Stewart concluded, "You know a sales pitch is in trouble when it starts with "Look, you’ve got to trust me. We’re not going to kill your grandparents."
The impression shouldn’t be left that comedy’s liberal leanings are absent. The bias for this president is still deeply entrenched in comedy writers. But writers and performers are also wealthy, privately insured, and often well educated. They have lost much of their own wealth in the markets while beginning to realize the finest doctors and insurers who serve them are growing nervous. Comedians have families and friends in medicine, finance, and industry. Reality is setting in. The truth of the nation’s growing pessimism and skepticism in Washington is at historic highs and on display every day.
Comedians’ choice is clear. Continue to cheer and cover for a president in whom they emotionally invested so much. Or realize the investment just didn’t pay off as they’d hoped and get back to the honesty in their craft. Never have there been so few jokes directed at a President who deserves so many. Jon Stewart was just voted "America’s most trusted" by the online readers at Time Magazine after Walter Cronkite passed away. He led the likes of Couric, Williams, and Gibson - all network news anchors who "play it straight." Meanwhile, Gallup polling reports Obama’s job approval among likely voters age 18 to 29 and 30 to 49 has dropped 6 percent in the last month.
Obama is losing Jon Stewart. The question is: Can Obama get him back?
Bankers Beat Odds in Toxic Pay Plan
Credit Suisse Group's novel plan to pay bankers with a brew of its own toxic bonds and corporate loans has gotten off to an unexpectedly strong start, which could put further political pressure on other Wall Street firms to change how they pay their employees. Late Wednesday, the bank told 2,000 of its top bankers that a $5 billion fund of soured mortgages and bonds -- which it granted as a big portion of 2008 pay -- had returned 17% since January, according to people familiar with the matter.
The returns registered well below the 75% increase in Credit Suisse shares over the same period, and the 30% uptick in the benchmark Merrill Lynch high-yield bond index. But the fund still outperformed major stock indices, as well as initial expectations of bankers inside and outside the Swiss bank. Many were originally skeptical of the plan, with one decrying what he called the "eat your own cooking" plan as unfair to employees who didn't contribute to the bank's 2008 net loss.
Investment banks usually pay their employees around the end of the year in a combination of cash and stock. But banks are increasingly desperate to pay employees without triggering outrage in Washington and other capitals. Credit Suisse has taken perhaps the most aggressive approach. Starting at the end of 2008, the bank took a significant portion of the annual bonus pool and switched it from stock to shares in a fund made up primarily of distressed assets. In essence, this means the performance of bets these bankers were originally involved in structuring will help determine whether their 2008 compensation turns into big money or big losses down the road.
Credit Suisse has said one of the reasons it decided on the pay plan was to show regulators in the U.S. and Europe it took the financial crisis seriously. Paul Calello, Credit Suisse's investment banking chief, says using the fund as part of the firm's compensation plan is "thoughtful and responsible." Mr. Calello, who turned down a bonus for 2008, declined to comment on the fund's performance. It is unclear whether other banks will follow Credit Suisse's lead. Several banks reached Thursday said they have looked at the idea, but no major companies have publicly committed to it. Other Wall Street executives and analysts said the idea could make sense for large commercial banks that still have heavy exposure to commercial real estate or areas of the bond market that haven't bounced back.
Wall Street firms have "stayed on the sidelines to see how effective" Credit Suisse's plan is, says Gary Goldstein, president of executive recruiting firm Whitney Group. "I think you'll see some plans like this at the end of the year." Credit Suisse got into many of the toxic assets in the fund during the bull market, when it looked like highly leveraged companies would still be able to pay off their loans. When the markets soured, the bank wasn't able to sell as many of the loans to investors, so it had to hold onto them and take on greater risk.
In late 2008, the bank decided to create a fund for senior employees that would help move some of these assets off its own balance sheet and into a bonus pool. In the meantime, the bank and its employees could wait out the bear market while those loans recovered in value or were written off. For now, Credit Suisse may have been a beneficiary of good market timing. The fund assets, which include debt of a Japanese shopping center, a mining company and a U.S. supermarket chain, could still take a turn for the worse before employees are paid. The employees who got the fund can't cash out of the shares for at least five years. The pressure to perform rests with Jonathan McHardy, a 47-year-old New Zealand native and rugby fan who until this year helped run the firm's bond division.
Working with a team of 13 people in New York, Tokyo and Europe, Mr. McHardy runs a portfolio of $5 billion in bruised and reduced Credit Suisse assets. About $640 million of those assets now reside in the portfolios of his colleagues, who were granted an average of $320,000 each in a mix of corporate debt and real-estate securities. Some traders received 75% of their bonuses or more in the fund. "As soon as you're looking after people's money, you get a lot more input," said Mr. McHardy from his fourth-floor offices in Credit Suisse's Manhattan skyscraper, where he and his team are kept separate from other traders.
He says colleagues seek him out to discuss what is officially called the Partner Asset Facility. At two meetings in January, employees peppered Credit Suisse executives and Mr. McHardy with questions and concerns about whether the deal was fair. "Some said quite loudly to me that this thing is going to be worth nothing," Mr. McHardy recalled. He responded that such an outcome was "unlikely" because Credit Suisse had already marked the assets down aggressively to 65-cents-on the dollar, on average. Still, some employees said in interviews that they preferred to get stock instead of a fund that they couldn't track.
Some bankers took their concerns last fall to Mr. Calello, the investment banking chief, with one telling him that he feared the program would be viewed as "complicated, unfair and punitive," according to people familiar with the matter. Credit Suisse executives explained that employees would need to sacrifice some of their compensation because of the bank's 2008 losses, according to these people. Other bankers say they're more optimistic about the fund's potential payout since Mr. McHardy took it over early this year. Credit Suisse also recently distributed to employees the fund's first interest payments.
Early in the year, Credit Suisse looked at selling parts of the fund to institutional investors, but found no interest, according to people familiar with the process. Around the office, Mr. McHardy still gets "informal" questions about whether he's using the market rebound as an opportunity to sell some assets. The gains have come from the sale of a few assets, as well as repayment from some bonds. But he hasn't sold much, saying the goal is to "maximize long-term value." He listens to all the comments, but "it's not a democracy," he adds.
Credit Suisse officials have told employees they won't need a sequel to the program in 2009, since the company has aggressively shed a lot of its beaten-down assets and produced two strong quarters of earnings so far this year, according to people familiar with the matter. But the pressure will stay on Mr. McHardy for a while. Many Credit Suisse employees hope that they'll get a cash bonus next year, since big-ticket purchases such as new homes or private-school tuition were made difficult or impossible by the bonus in toxic assets. (Mr. McHardy usually calls them "illiquid" assets.)
At his wedding in July, Mr. McHardy received a gift from a colleague that underscored his colleagues' state of mind. Sean Brady, a Credit Suisse official who helped design the fund, gave Mr. McHardy a picture he'd taken of an F-18 fighter jet set to take off from a U.S. aircraft carrier. Mr. Brady doctored the photograph so Mr. McHardy's name appeared on the pilot's uniform. The fund's name was painted in big block letters on the side of the jet. Mr. Brady told Mr. McHardy that if the fund makes enough money over its eight-year lifespan, "I'll give you a photo of the plane landing."
China warns of 'grave' jobs situation
China Tuesday warned of a "grave" situation in the jobs market with millions of graduates and migrant workers yet to find work as companies continue to struggle with the effects of the global slump. The comments come as Beijing struggles to keep a lid on joblessness, which it sees as necessary to stop social unrest. "China's current employment situation is still grave and the pressure for job creation remains large," said Wang Yadong, a senior official at the Ministry of Human Resources and Social Security's employment section.
"To make things worse, the impact of the international financial crisis has not yet bottomed out and a lot of companies are still facing business difficulties, posing big unemployment risks," he told reporters. Wang said around 147 million migrant workers had moved to cities for jobs by June but more than four million had yet to find one. Moreover, three million university graduates, including those who had left last year, were still unemployed, he said.
China's urban registered unemployment rate stood at 4.3 percent in the second quarter, unchanged from the first three months and up from 4.2 percent at the end of 2008, Wang said. Wang added that the government aimed to keep the rate below 4.6 percent this year. However, the actual jobless figure may be much bigger than the official rate, which does not include migrant workers and university graduates.
Chinese authorities fear that rising unemployment could provoke unrest in the country, and have already taken a number of measures to try and tackle the problem, including ordering state-run firms to ease up on job cuts. Despite the measures, the government has scaled down its ambitions, targeting the creation of nine million jobs this year, one million fewer than last year, officials have said. China's economy grew by 6.1 percent in the first quarter, and 7.9 percent in the second, but the government says it needs at least eight percent growth to keep unemployment at bay.
TARP cop cites bailout lobbying
A government investigator overseeing the $700 billion bailout reported on Thursday that outsiders, including some lawmakers, lobbied regulators on behalf of banks seeking money. "I am writing on behalf of one of my constituents to express my support of their application for assistance and support under the Troubled Asset Relief Program," one lawmaker wrote, according to audit report by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program.
Barofsky found 56 instances in which outside parties contacted regulators. Of those 56 firms, 16 got bailouts. And three of those 16 companies did not meet standard bailout criteria, but received money after regulators found "mitigating factors" justifying help, according to Barofsky. The inspector general's report did not disclose the names of the banks examined or the people, including lawmakers, who lobbied on their behalf. Barofsky said he found no evidence that bailouts were granted because of outside lobbying.
"SIGTARP did not identify any instances of external pressure having undue influence during the application review process," Barofsky wrote. Still, the report calls on regulators to do more to shine a light on the issue. Treasury Department staffers told the IG's office that they had received calls from those lobbying for bailout applicants but they didn't document the calls. The report recommends that Treasury provide a more detailed and cleaner accounting of how each bailout decision maker votes. It also said Treasury and other regulators must maintain better records of talks they have with outside parties trying to lobby about bailouts. Earlier this year, several news reports said that Reps. Barney Frank, D-Mass., and Maxine Waters, D-Calif., reached out to regulators about bailouts for banks.
The 1929 Dow and Now: A Tale of Two Rallies
Is there a precedent for the current S&P 500 rally — one that reversed and headed lower? Yes. Here is an overlay of the 1929 Dow and today's S&P 500. The first Dow interim low is aligned with the S&P 500 March 9th closing low. This chart is not intended as a forecast. Let's call it an interesting observation of an eerie resemblance. We'll keep this matchup on our chart radar.
Economists Lead the Way to Calamity
Goldman gets a hidden bailout...Wall Street uses bailout money for bonuses...Cash for Clunkers...nationalizing GM...quantitative easing...Geithner lies to the Chinese... Crackpot ideas! Corruption! What next? But the most breathtaking scene is the one no one seems to notice... Perhaps it is because we have our head in the clouds...so far above the surface of everyday life that we can look down and see what is happening...
..or perhaps because you have to be a connoisseur of absurdity to appreciate it...
..strange...bizarre...almost surreal...even when you see it, you don't quite believe it...
First, the voters ruined themselves...now it's the government's turn!
The US federal government is digging its own grave...bankrupting itself with its eyes wide shut. And it's not alone... Look back a little more than 100 years ago, and you'll see that something similar happened. Europe went to war. No one knew why. No one knew what he stood to gain. But whether he was a kraut, a frog or a Tommy...he kept at it for four years - until every major government of Europe was broke. Most of them collapsed completely. All of them were broke. Germany and Russia, with the added burdens of war reparations on the one hand, and Bolshevism and civil war on the other, forgot their manners. Both were soon butchering their own people.
In the Great War the generals led the way to calamity. Now it is economists... Some observers think the economy is recovering already. Others think it is not. If it is not recovering, it is because it didn't get enough stimulus, they say. If it is recovering, it's because the stimulus has worked. "Fewer layoffs expected as recession winds down," says a headline this morning from one of the wire services. The Dow fell 25 points yesterday...but it's still in bear market rally mode. With a little luck, it could go to 10,500. (Of course, it can do whatever it wants...we're just guessing, based on the experience of other major crash/depression episodes in history.)
Oil trades at just under $72 this morning. Gold is at $960.It is "business as usual at Goldman," says a news report. Which is to say, big bonuses for the bankers. The top eight US banks got more than $170 in bailout money last year. They paid about 20% out in bonuses. But now the press and the politicians are on their case. It looks like they might have to ease up on the bonuses...at least until the heat is off. The news is mixed. German factory orders are up...but the Bank of England says the recession is worse than expected; it says it will continue buying bonds.
Americans are raising chickens in their backyards again...even in places like Brooklyn. But the latest headlines tell us that requests for unemployment benefits are running below expectations. The housing market is supposed to be stabilizing...but new waves of defaults, resets and foreclosures are coming. Half America's mortgages will be underwater by 2011, says a Reuters report. And Deutschebank warned that construction loans were starting to go bad too.
But the big story? Stimulus! Here is the International Herald Tribune on Monday: "More Stimulus is Needed to Spark a Strong Recovery," is the headline. According to the IHT, stimulus is working. And it will work even better if there were more of it.
Once underway, the WWI generals used the same sort of logic. If they were winning, it was because they put so many resources into the campaign. If things were going against them, they called for more men...more guns...more ammunition. Of course, once a war has begun, it is hard not to want to win it. One hundred years later, it seems obvious the combatants should have called the whole thing off. They could have spared themselves a lot of misery. But that's not the way history works. She may be absurd, but she rarely does things by half measures. Once called to action, soldiers fought to win...even at the cost of their own lives.
And now the world's central banks, Treasuries, and legislatures are at war. With economic strategists egging them on, they have declared war on all that they find unholy about capitalism - deflation, bear markets, and the down swing of the business cycle. John Maynard Keynes, that much-revered strategist from the Depression Era, tells them this is a fight they can win. And they believe it! Of course, these are the same people who saw nothing to worry about in 2006...the same people who have no idea what is going on - and have the track record to prove it!
Can you really fix a debt-saturated economy by pouring on more debt? We know the answer, don't we? When you borrow money you take something away from the future and bring it into the present. That is not a bad thing...if you are doing it to increase your future output. In that case, you'll be able to pay back the loan with your extra earnings. But if you borrow from the future only to consume, the future waits for you...like Shylock waiting for his pound of flesh...
The future caught up with American consumers in 2007. But the feds learned nothing...and soon it will be a ton of flesh the future will want. "Life seemed much more simple when I was growing up," said mother, reflecting back on her youth during WWII. "People were so much more modest. I had a job at Bergstrom Air Base in Texas...[she was in the WACs]; we would show movies to the soldiers who were going overseas. Some of the movies reminded them not to talk to people about where they were going... 'Loose lips sink ships' was the phrase.
"And there were some awful movies such as 'Kill or Be Killed'...it showed them that they had to be on-guard...and they couldn't hesitate. Of course, it is an awful thought - that you had to kill someone before he killed you. And then there were the movies about social diseases...I don't remember what we called them then...but these were training films that warned the boys that they might catch a disease overseas if they weren't careful. But we weren't allowed to show those movies...we weren't even allowed to see them. "To tell you the truth, it was so long ago I can't remember very accurately. And it was such a different world; I can barely believe it existed. It seems unbelievable now...I can barely believe I lived through it."