Casino theater playing the musical 'The Little Whopper, New York
Ilargi: There are a zillion stories these days about the alleged newly forming US dollar carry trade. They look to come from the same sources that claim a grandiose weakness in the greenback. I use the term “alleged” because me, I don't buy it. That is, not the story. The dollar, though, I might.
During the March to September rally we have just witnessed, the dollar has lost quite a bit of value. That makes me think that those who proclaim that same dollar is set to fall further, must also think that the stock markets will keep rising.
But this rally coincided with the most g-d-awful data in housing and employment. Or, to put it differently, it moved in the opposite direction from the real economy. Obviously, there were profits to be made from people losing their jobs and their homes. There's no denying that, and no reason to do so either.
Still, this would indicate that a deteriorating ground level economy can support rising stock markets for a prolonged period of time. Which, and I would think this is behemoth-sized evident, requires stretches of the imagination that no flexible material presently known to man could sustain.
Hence, if you would share my sincere and severe doubts about the rally continuing to go upward as we move forward, you would also have to question the idea of the US dollar continuing to slide. If the stock markets are going to go down, the money presently invested in them will have to move elsewhere. And despite all the pretty talk about increasing appetite for risk, investors getting out of stocks will be looking for less risk, not more. That is what we call a flight to safety, and the US dollar, it just so happens to happen, is the safest bet available.
What bets are there? Oil? Not in a declining economy where demand plunges. Gold? Too much manipulation. Euro? Too many unknowns, Eastern Europe first and most of all. Renminbi? There’s not nearly enough place in China for the amount of money looking for a haven, and what place there may be has plenty Chinese callers.
Now, if you can agree with me that the market rally just can't last on a foundation of rapidly rising numbers of foreclosures and workers thrown by the wayside, simply because Main Street's real economy losses will at some point overwhelm everything else, where would you see the dollar going?
There is still a huge amount of investment capital left, even as much of not most of it is as walking dead as the experts and analysts you can see every day on the beaming dead finance tubes discussing what the moment will be when we hit the real bottom. And start ascending to yet another heaven.
As long as government policies worldwide are geared towards hiding losses on festering toxicity, the remaining investment capital has the ability to push up or down whatever it chooses. And if that capital chooses to move away from a place where it feels itself getting itchy and nervous, it will look for calmer waters. Right now, that is the US dollar. It's not perfect by any means, but it is the least terribly ghastly of all options.
So, you still want to talk about that USD carry trade? It's a dud. There are stories about a UK pound carry trade as well. Not entirely the same tale, but that's not going to happen either, albeit for different reasons.
Japan's yen carry trade took place during a huge credit bubble in just about every country but Japan. Today, the only bubble left is China's, and that's about to blow up in 1.3 billion faces. A carry trade sounds nice, but the first requirement for such a trade is someone wanting to carry something. Such a situation doesn’t exist today. There's people with brazzillions of dollars and euro's etc. wanting to carry all sorts of stuff alright, but there's no stuff to be carried.
A carry trade is viable only in periods of growth, even if that growth is temporary, as well as fake and built on low interest rates, Corleone-style accounting standards and other fairy tale ingredients. But no carry trade can possibly ever take hold in a shrinking economy, not beyond a very short time. Carry trades are by definition international, and international trade is going to the dogs. Export numbers for Japan, China, the big exporters, are down, what is it, anywhere between 20% and 40%. Nothing there to trade, and certainly nothing to carry. Or, yes, there’s always something, of course, but it's not exactly a growth industry, is it now?
The whole carry trade topic did remind me of an old song, and listening to the lyrics it's impossible to escape the eerily striking similarity between the song's lyrics and the US economy. Or, for that matter, the entire American society.
Here's Shel Silverstein's Carry me Carrie, performed by Dr. Hook and the Medicine Show.
Second Street and Broadway
Sitting in a door way
Head held in his hands
Looked to all the world like he was praying
Foot wrapped in an old rag
Bottle in a brown bag
I saw him try to stand
Then I heard the words that he was saying
He said come on Carrie, carry me a little farther
Come on Carrie, carry me one more mile
I don't know where it's leading to
But I know I can make it if I lean on you
So come on Carrie, carry me a little
I carried you, now carry me a little
Come on Carrie, carry me a little while
Well he struggled to his feet
And staggered down the street
To the window of the five-and-dime
He stood and laughed a while at his reflection
And then I heard him shoutin'
Something about a mountain
He could surely climb, if she was only there to point the right direction
But she ain't no, no ain't no
He said come on Carrie, carry me a little farther
Come on Carrie, carry me one more mile
I don't know where it's leading to
But I know I can make it if I lean on you
So come on Carrie, carry me a little
I carried you, now carry me a little
Come on Carrie, carry me a little while......
US financial groups hit by surge in loan losses
The US financial sector’s losses on large loans exploded over the past year, exceeding the combined losses since 2001, with hedge funds and other members of the "shadow banking system" hit the hardest, official figures revealed on Thursday. Regulators’ annual review of "shared national credits" – loans larger than $20m shared by three or more federally regulated institutions – highlighted the toll taken by the crisis on financial groups outside the traditional banking sector.
More than one in three dollars lent by non-bank institutions such as hedge funds, securitisation vehicles and pension funds, went sour, according to the figures, compared with 11.5% for US banks. The results will increase fears that, in spite of a recovery in the shares and balance sheets of many banks, the epicentre of the crisis has moved to the hedge funds and investors that gorged on cheap credit in the run-up to the turmoil.
The importance of these non-bank institutions was underlined by the review’s finding that they held 47 per cent of problem loans, in spite of accounting for only 21.2% of the total loan pool. Overall, the US financial sector’s losses on loans in early 2009 reached a record of $53bn, almost triple the previous high in 2002. The number of loans edging into the danger zone has also surged. Some 15 per cent of the $2,900bn SNC portfolio was classified as "substandard" – the second of the four categories used by regulators – and worse, up from 5.8 per cent in 2008.
The pace at which loans got into serious trouble accelerated significantly. The dollar volume classed as "doubtful" or loss-making increased 14-fold over the past year to $110 billion. "Doubtful" loans are so weak that collection or liquidation is highly improbable. The review is conducted each year by the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. They look at a sample of banks’ and non-banks’ shared loans to check that they are marking them in the same way.
This review found that loans to media and telecommunications companies were proving the most troublesome, followed by the finance and insurance sector and real estate. The review said that underwriting standards had improved last year, but loans originated in the credit boom years before mid-2007 had continued to drag down the quality of the SNC portfolio. More than one fifth of the portfolio fell into "criticised assets" category, which includes loans that are potentially weak but not yet of serious concern. Some 40 per cent of that chunk was in the form of leveraged finance loans.
Loan Losses Triple-Slam The Banks
The latest Fed data shows that syndicated loan losses for major banks tripled in 2009 to $53 billion.
Furthermore, "Criticized Assets", ie. those assets which are rated as bad loans at risk of loss (Special mention, substandard, doubtful, or loss) rose 72% in a single year to a whopping $642 billion. The result is that 22.3% of the loans now held by institutions under federal supervision carry the Criticized designation (Shown in red below).
Clearly the bad loan situation remains extraordinary, with a mountain of bad debt in the system.
Guess your loss rate, multiply by $642 billion, and you can arrive at a very rough back-of-the-envelope estimate for future loan losses. This wouldn't even include potential further deterioration for other loan assets.
Please find the full Annual Nation Credits Review below.
This bank-engineered equity rally
The creatively-named Moonraker Fund Management is, we think, one of the first firms to say the below relatively explicitly.
The boutique investment house is “concerned” that banks may have been using their bailout money — and no doubt some of their quantitative easing-gained liquidity — to buy equities, thereby fuelling the summer rally. The danger, they say, is that this is a relatively “thin” rally — and one which is vulnerable if banks suddenly decide to pull out and crystallise their gains.
Here’s the Moonraker press release:September 24, 2009 - Moonraker Fund Management, the independent investment boutique, is concerned that banks may have been using their bailout money to buy equities, helping to fuel a rally that is vulnerable to a major correction if they consequently sell in thinly traded markets.
Instead of lending to businesses and homebuyers, banks may have been using some of their bailout money to buy stocks from an oversold base in March, Moonraker believes. The British Bankers’ Association’s own figures show that gross mortgage lending by the banks has fallen from a high of £21.5bn in June 2007 to £9.1bn in August 2009, while new term lending to small businesses was £796m in July, compared with around £900m last October.
Jeremy Charlesworth, Chief Investment Officer of Moonraker and manager of the Moonraker Commodities Fund and Global Opportunities Fund, commented: “Little of the bailout money given to banks seems to have been passed on to businesses or consumers. But it must have gone somewhere and it might have gone to the proprietary desks of the banks to punt the markets. Given all the calls for more transparency, it would be good if the banks could clarify this.
“The banks have every right to use the money they borrow in any way they choose. But it would be good to know how much of the bailout money has been used to buy equities. Clearly, someone has been buying, and given that it hasn’t been ordinary investors and the institutions that does just leave the banks.
“The banks’ balance sheets will certainly have benefited from their equity holdings. If they could sell these investments into a rising market then they would be in a better position to repay their debts. But there will be a problem if the public and institutions do not join the rally and the banks have to sell equities into a vacuum.”
As Moonraker notes at the start of the press release, there will also be a problem if small and/or institutional investors join the rally, only to find banks suddenly retreat from the stock market — a possibility which bank-slayer analyst Meredith Whitney warned of earlier this year.
We should also note that much of that bailout money has not necessarily been used to buy equities, but to boost banks’ capital — core Tier 1, for instance, is now at a five year high according to Barclays Capital.
Nevertheless, as Moonraker highlight, questions will remain about just who is buying this rally and by how much?
The Lowdown on Deflation
by Mr. Practical
Deflation is the contraction (reduction) of money and credit. It occurs when the economic system is carrying too much debt to be supported by the level of income generated by economic activity. It occurs because too much debt has been incurred to create unproductive assets that don’t generate income. Deflation is a corrective process, it’s simply the market (you and I) not being able to service debt, so we must forfeit.
Since central banks and accepted economic theory are all about creating debt to grow (artificially) economies, periods of inflation (creating money-debt and credit) last a long time: Debt is accumulated incrementally until there is too much of it. So people don’t really understand the tells of deflation.
For example, the things that drive currency movements are quite different. If we’re in an inflationary period (expanding credit) and we get a good economic number, people expect the value of the dollar to rise: A growing economy will attract investment so foreigners buy dollars to invest in US stocks. If you get a bad economic number on the margin, you’d expect the dollar to fall.
We just now saw a disappointing durable goods number. If we were in an inflationary period, you would see the dollar fall. The number actually made the DXY rise by 30 basis points. Why? In deflation, there’s too much debt. If the economy is slowing down, it makes it more difficult to pay back that debt and you would expect more to default. The more debt that forfeits, the more dollars are destroyed. The more dollars destroyed, the more they’re worth.
Central banks of countries with massive external debt (the US) are desperate to create inflation (keep credit from contracting), but the mechanism to do that is broken (because there’s too much debt). Always ask the question why something is happening rather than just observe patterns because patterns change depending on the environment. This is the difference between deductive (rational) logic and inductive (empirical) logic.
Everything You Ever Wanted To Know About The Coming China Collapse..
We've all heard the arguments for a China bubble in some shape or form, and may hold different views for or against. Regardless, it is constructive when someone brings together all major arguments for one side in one piece.
Here, courtesy of Pivot Capitol Managment, is the full case for a major China slowdown. Why:
- There's more debt in China than common figures suggest.
- Capital-expenditure driven growth is likely to collapse soon.
- The China urbanization driver is far weaker than proclaimed.
- GDP is full of wasteful spending.
Our favorite chart from the piece:
Now, the US government is giving out subprime loans
There are few references in life so common as that to the lessons of history. Those who know it are doomed to repeat it."
-- John Kenneth Galbraith in A Short History of Financial Euphoria
Once bitten, twice shy? Not if it's the government of the United States. In a bizarre piece of logic, the Barack Obama-led administration has been giving out subprime loans through the Federal Housing Administration (FHA), a government agency.
Prime home loans are the best part of the market, where only borrowers with good credit ratings get a home loan. Subprime home loans are the worst, typically involving borrowers with very bad credit history and who won't get a loan in the normal scheme of things. No reiterating how the shower of such loans opened the floodgates of the current financial crisis upon us. Why then is the US government giving out these loans again, and through a government agency? Experts say the idea may be to prop up the housing prices, which have gone on a free fall.
"It probably is to support the financing on the housing finance market and therefore housing prices generally, as well as supporting the home ownership aspirations of the lower socio-economic part of the society," says Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.
The US Federal Reserve has maintained interest rates at close to zero percent for some time now. Despite this, banks are not willing to lend. "The US government is desperately trying to inflate the economy and it wants to get credit flowing again in order to stabilise American housing. So, if the commercial banks are repairing their balance sheets and won't lend, then the US government has taken over this role of credit creation," says Puru Saxena, the founder and CEO of Puru Saxena Wealth Management and the editor and publisher ofMoney Matters, a monthly economic newsletter.
John Rubino, co-author of The Collapse of the Dollar and How to Profit From It, agrees: "The government is handing out newly printed paper currency to virtually anyone in an attempt to prevent a 1930s style crash." The subprime loans issued by FHA are converted into financial securities and sold to banks. Unlike the earlier batch of subprime securities, these come with a government guarantee. The FHA currently insures loans worth a whopping $560 billion.
Worryingly, these subprime loans from the FHA require a down-payment of just 3.5% of the value of the house being bought. This means just about anybody with a little bit of money lying around can take such a loan, irrespective of whether he or she in a position to repay. The result is for all to see. In a report released on June 18, the US Department of Housing and Urban Development, which oversees the FHA, had said the rate of default on these loans exceeded 7%. Also, more than 13% of these loans had been defaulted on by more than 30 days.
"Of course it is very risky," says Saxena. "However, politicians only care about the near-term outlook so that they can get re-elected. Who cares about the outcome 10 years from now? The bartenders are back again, giving more drugs to the addict so that the party can keep going. Needless to say, they don't care about the long-term health of the addict," he adds. "Subprime lending should be strictly private sector, buyer beware. No government guarantees," says Rubino. Experts feel these loans will lead to another crash in the days to come.
"I am sure it will lead to another epic bust in a few years time. When central banks start raising interest rates again, then we will see another massive crash," says Das. "It depends on the size and scale, but if it is government guaranteed, it will inflict losses on the government rather than on private bank balance sheets."
The irony is perhaps best expressed by Shah Gilani, a retired hedge fund manager and noted expert on the global credit crisis, in an article for DNA: "Perhaps our ultimate fate is that of the permanently punchdrunk veteran boxer who rues his decision to stay in the game, realising that he fought "one bout too many." If that's the case, that "one bout too many" could be Subprime Crisis II, arranged by the very market referees whose job it was to protect us from such beatings."
Housing Crash to Resume on 7 Million Foreclosures
The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group LP analysts said. The "huge shadow inventory," reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005, the analysts led by Laurie Goodman wrote today in a report. Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales, they said.
Helping to stoke speculation the housing slump has ended, an S&P/Case-Shiller index for 20 U.S. metropolitan areas showed the first month-over-month increases in values since 2006 in May and June, reducing the drop from the peak to 31 percent. Echoing other mortgage-bond analysts including those at Barclays Capital Inc., Amherst cautioned that a change in the mix of foreclosure and traditional sales over different parts of the year lifted prices in the period, as the distressed share shrank. "The favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in," they said.
The amount of pending foreclosed-home supply has been boosted by more borrowers going into default, fewer being able to catch up once they do, and longer time periods to seize properties because of issues such as loan-modification efforts and changes to state laws, the New York-based analysts wrote. Accounting for efforts to have more loans reworked to avert foreclosure makes "not much" of a difference in the shadow inventory, with optimistic assumptions leading to a 1 million reduction in the amount, they said. "And many of these borrowers would default later, if they remain in a negative equity position," they added.
Goodman is the former head of fixed-income research at UBS Securities LLC whose team there was top-ranked for non-agency mortgage debt in a 2008 poll of investors by Institutional Investor magazine. Amherst is a securities firm specializing in trading and advising investors on home-loan debt. The analysts didn’t forecast home prices. The Barclays analysts including Glenn Boyd, who earlier this year wrote that once it starts, the housing recovery will be dulled by a "pent- up supply" of homes from owners who have put off sales during the slump, this month predicted 8 percent further depreciation.
That’s better than the New York-based Barclays analysts’ previous forecast of 13 percent because of their view that recent data show that the end of the crash is "decidedly under way," they wrote in a Sept. 11 report. Foreclosed-home "supply should sap the strength of the recovery in all but the most optimistic of scenarios," they added.
GMAC’s Ally Unit to Buy Home Loans From Smaller Banks
GMAC Inc., the auto and home loan company that received two U.S. bailouts, formed a team to buy residential mortgages from community lenders, filling a void left by the collapse of Taylor Bean & Whitaker Co. GMAC hired the head of Taylor Bean’s correspondent community banking unit, Doug Miller, to run the new team, according to a statement today from the Detroit-based lender. Ten former employees of Ocala, Florida-based Taylor Bean are also joining GMAC, said Matt Detwiler, a GMAC senior vice president, in an interview today. The operation will be part of Ally Bank, GMAC’s online bank.
Taylor Bean’s collapse in August left hundreds of banks looking for a new place to sell their loans. Taylor Bean, the 12th-largest among U.S. mortgage firms, stopped lending in August and went bankrupt after regulators accused it of improper business practices. At least 2,000 people lost their jobs. The collapse of Taylor Bean "was a pretty big motivator for us," Detwiler said. "Smaller organizations are generally under-served." The program also will help local banks, savings banks and credit unions outsource some or all of their mortgage lending operations, the statement said.
GMAC has "no reason to believe that any member of our new sales team was involved in any wrongdoing" at Taylor Bean, spokeswoman Jeannine Bruin said. "We are pleased to have them join our firm." GMAC originated $25.9 billion in mortgages through independent or "correspondent" lenders and mortgage brokerage firms during the first half of 2009, according to a regulatory report. The company is the industry’s fifth-largest correspondent lender, Detwiler said.
Bruin declined to say how much money GMAC is committing; Taylor Bean handled $17 billion of loans, or 1.7 percent of the U.S. total, in the first half of this year, according to the industry newsletter Inside Mortgage Finance. Taylor Bean failed after it was expelled from the ranks of mortgage lenders approved to do business with government- sponsored mortgage companies; the government cited concerns about possible fraud. The firm’s implosion followed an attempt to lead an investor group that would pay $300 million for a controlling stake in Colonial BancGroup Inc., one of its lenders that also has since collapsed and been taken over by BB&T Corp.
GMAC reported its seventh loss in eight quarters in August, and has been selling assets since last year after surging defaults on subprime loans almost forced the mortgage unit into bankruptcy. GMAC formed Ally Bank earlier this year as an Internet bank offering competitive rates to attract deposits. GMAC averted collapse last year when the government declared the firm crucial to the auto industry, and has received $13.5 billion in government funds since converting into a bank holding company in December.
The Real Estate Drag on GE
In 2008, the first full year of the recession, General Electric's commercial real estate business made a $1.1 billion profit. Now, even with signs of the broader economy improving, analysts estimate it could be five years before the unit earns another cent.
Such is the nature of economic downturns for investors in office buildings, apartment complexes, and shopping centers. Commercial real estate tends to be the last industry to lose money and the last to recover. What's different now is that players such as GE that didn't take too many risks will find themselves stuck in the quagmire of excess space, falling rents, and tighter credit even after demand picks up. While rental rates and property values should turn around in 2011 and 2012, analysts figure GE's portfolio may suffer at least until 2014. "There is a dramatic lag effect," says C. Stephen Tusa Jr., an analyst at JPMorgan Chase. "They are going to take their lumps." He estimates GE's properties will lose $8 billion in value through 2012.
As one of the biggest real estate investors in the world, GE is a proxy for what ails the market. "If you were a dominant player, you've got problems," says Paul M. Fried, a managing director at investment bank Traxi. Like many, GE doubled its bets in the last two years of the boom as lending standards slipped. By the end of 2008 the company owned 3,200 properties and held the loans on an additional 4,800, altogether worth some $84 billion as of June—more than all but Wells Fargo and Bank of America, according to research firm SNL Financial.
Now GE is crashing along with the rest of the industry. Delinquent and bad loans climbed sharply to 2.9% in June from 0.4% in December. The weakness will weigh on the entire company. (The unit, which is currently losing money, accounted for 18% of profits at GE Capital in 2007.) To deal with losses and potential regulatory requirements, GE may have to raise $40 billion in additional capital, estimates Nicholas P. Heymann, an analyst at research firm Sterne, Agee & Leach. GE acknowledges the unit will lose money this year but says that it won't need extra capital.
GE's losses likely will continue long after commercial real estate stabilizes. Why? As old leases come up for renewal, GE and other owners are reluctantly locking in recession-era rents to fill vacant spaces. U.S. office rental rates, which hit $24.65 per square foot in 2008, will fall to $21.34 in 2011, estimates Victor Calanog, research director at Reis, a real estate data firm in New York. Players such as GE will be stuck with those low rates for a while since leases on office space run for 5 to 10 years. That means even when market rents start to rise, GE can't hike rates until current contracts end.
Meanwhile, the values on GE's properties continue to slide. It paid $2.2 billion for a set of office and other commercial buildings in Canada at the peak of the market. Among them: a 259,000-square-foot building in midtown Toronto whose vacancy rate is nearly 30%. The properties are worth about 25% less today.
GE can weather the storm better than its peers. "We are a real estate company, as opposed to a bank," says GE spokesman John Oliver. "We're better off in the sense that we're not afraid to have these assets on our books." For one thing, some 95% of its loans are first mortgages. When borrowers fall into foreclosure, the company recoups its money before others. GE also owns roughly 87% of its buildings outright, meaning it didn't rely on a partner or a mortgage to buy the property. By paying cash, GE confines its losses to the building's price decline—say, a 10% hit if the value falls 10%. Property owners that used debt to finance their purchases experience a greater loss.
The company, which bought properties on the cheap after the savings and loan crisis in the 1990s, also has a well-worn playbook for dealing with distressed properties. When it forecloses on a borrower, GE moves quickly to salvage the existing value from the property. It may renovate, update the amenities, or use local connections to drum up new occupants. "We take over assets ... and run them like a factory," Ronald R. Pressman, CEO of GE Capital Real Estate, said in a conference call with analysts this year.
GE is also redeploying its real estate specialists. Teams in 97 offices across the world, which previously focused on dealmaking, are now managing buildings and reworking loans for troubled borrowers. The company has been working to extend the terms on nearly two-thirds of the debt coming due this year. It allows GE to collect extra fees along the life of the loan while reducing the chances of default. But such measures will only do so much for GE. The bottom in the commercial market is still a few years away. And the broader economy is unpredictable; if the recession continues longer than expected, a recovery in real estate may be delayed. Says Christopher J. Panos, a lawyer with Craig & Macauley in Boston: "There are a lot of issues in commercial real estate portfolios that just haven't been dealt with."
Rich Uncle Is Picking Up the Borrowing Slack
The United States government is borrowing money like never before. The national debt rose by more than a third over a one-year period, far more than it ever did at any time since World War II. In the past, when the government became a heavy borrower, there was talk about crowding out private borrowers. But this time, interest rates have remained low and no one seems to be worried about that.
The reason is simple: Rather than crowding out the private sector, Uncle Sam is now standing in for it. Much of the government borrowing went to investments in financial institutions needed to keep them alive. Other hundreds of billions went to a variety of programs aimed at stimulating the private economy, including programs that effectively had the government pick up part of the cost for some home buyers and some auto buyers.
This week, the Federal Reserve published its quarterly report on debt levels in the economy. While Uncle Sam borrowed more, others borrowed less. The accompanying chart shows that total domestic debt — the amounts owed by individuals, governments and businesses — climbed just 3.7 percent from the second quarter of 2008 through the second quarter of this year. That is the smallest increase since the Fed started these calculations in the early 1950s.
Moreover, domestic debt declined in the second quarter, falling 0.3 percent to $50.8 trillion. The figures are not seasonally adjusted, making quarter-to-quarter comparisons risky, but it was the first such decline since the first quarter of 1954, when total debt was less than $500 billion. Over the 12-month period, nonfinancial businesses increased their debt by just 1.3 percent. Since that number is well below the interest rate most of those companies pay, it indicates that they paid back more in old loans than they took out in new ones.
Until this recession, the idea that American individuals would ever cut their overall debt levels seemed as likely as an August snowfall in Miami. But that was before the bottom fell out of the housing market, something that Florida condo developers had considered to be equally unlikely. Over the year, total household debt fell by 1.7 percent, and mortgage debt — the largest component of household debt — fell a bit more, at a 1.8 percent pace. This is the 10th recession since the Fed began collecting the numbers, but the first in which the amount of home mortgage debt fell. Some of that decline, of course, came from foreclosures that canceled debt and left lenders with big losses.
For most of the last two decades, the biggest increase in debt in America came from financial companies. Much of that debt came from financial innovation rather than actual economic activity. Once, a homeowner took out a mortgage, and household debt increased. But by early this decade, the mortgage could be used to secure a mortgage-backed security, and the mortgage-backed security could be used to secure a collateralized debt obligation. Those last two loans counted as financial obligations. There was no more real economic activity, but there was a lot more borrowing.
In some cases, the newly created financial debt was guaranteed only by the underlying assets — like the home mortgage. But other financial borrowing became the equivalent of government debt, at least as seen by the lenders. That was because the money was either borrowed by government-sponsored enterprises like Fannie Mae, or guaranteed by them or by government agencies. Such debts rose at a 10.2 percent rate over the last two decades.
Debt issued by financial companies without such guarantees rose even faster, at a 10.6 percent rate. By contrast, the debt of nonfinancial businesses climbed at a rate of 5.9 percent. Twenty years ago, nonfinancial businesses in the United States borrowed $1.70 for every dollar borrowed by the financial sector, government-guaranteed or not. Now the figure is 68 cents.
The Biggest Government Bailout Is Yet To Come - Itself.
by Heidi N. Moore
"If you've got me," Lois Lane once asked Superman as he flew to her rescue, "Who's got you?" We could point that same perplexed question at the U.S. government and its ranks of overwhelmed financial agencies, which are now in bigger danger than the nation's banks ever were.
It's no surprise that the $19 trillion stimulus spending spree would take a toll. While Wall Street is enjoying a giant, inexplicable bull-market rally on the back of seemingly infinite government support, the paint is chipping on the old house down in D.C. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke are scaling back emergency lending programs like a fashionista returning expensive dresses before the credit-card bill comes due. The official gloss for the government's stimulus scale-down is that good times are coming again and we don't need to keep supporting banks, money-market funds, and private equity firms with expensive programs. Geithner soothed that we are "back from the brink," and Bernanke declared that the "recession is over." But the bigger reason the Obama administration is pulling the baby bottle away from corporate America is that the overextended federal government is now starting the slow and ugly business of bailing itself out.
You can already see the signs of bailout strain on federal agencies. The Federal Housing Administration, which insures lenders writing new mortgages, is running low on cash and is below its congressionally mandated reserves. The Federal Deposit Insurance Corp., which is funded by bank fees and has been dolloping out money to failing banks, has also dipped below its legal reserves. The FDIC may actually need those banks to turn around and save it, and could even tap a Treasury bailout despite a year of protestations about its financial health. Geithner said he would slash the government's plan to buy toxic assets from banks by two-thirds, to a mere $30 billion from $100 billion. Meanwhile, Geithner is preparing to beg Congress for an increase on the debt ceiling—a limit on federal borrowing already set at $12 trillion—which we could hit as early as mid-October because we're spending so much on stimulus plans. That's quite a sketchy bill of health for a system that's allegedly "back from the brink."
Look deeper, however, and the government isn't really quitting its bailouts at all. It is just shifting strategy away from banks and financial services to a new set of quieter bailouts, centered on the housing and real estate markets in general and Fannie Mae and Freddie Mac in particular. In this way, the administration's actions are meshing with the wishes of House financial services committee Chairman Barney Frank, who said last year, "I want at least two years with President Obama and a solidly Democratic Senate so that we can get the federal government back in the housing business." Now it is, even to the point that the government is at risk of creating another mortgage bubble. We just have to see if the government can handle it.
The government has to concentrate all of its resources on keeping the housing and real estate markets stable because the government is now the single biggest investor in mortgage-backed securities. It bought more than 80 percent of all the mortgages issued by Fannie and Freddie. What this means is that if homeowners start to fall behind on those mortgages in even bigger numbers than the current 9.24 percent default rate, the government is in deep trouble, starting with the Federal Reserve. The Fed's own balance sheet—its financial holdings—has ballooned to $2.1 trillion from just $800 billion a year ago. One-third of the Fed's balance sheet is weighed down with $625 billion of troubled mortgage-backed securities, once floating around the market and now invited to stay in Uncle Sam's own accounts.
The government is aiding the housing market in several ways. One of the biggest is the Fed's own monetary policy, which keeps interest rates at zero and mortgage rates low. Another way is a series of plans and political pressure designed to help homeowners modify mortgages. And another is a $1.45 trillion Federal Reserve program designed to buy mortgage-backed securities, many issued by government-backed Fannie Mae and Freddie Mac. The Fed just agreed this week to start winding down this program, but consider this: Morgan Stanley’s (MS) trading desk believes the Fed is scaling back on Fannie and Freddie buys because there's so little paper left. And why is there so little paper left? Because the Fed has been, all year, the biggest buyer of Fannie's and Freddie's mortgage-backed securities; the ones the Fed hasn't bought have been snapped up by enterprising traders hoping to sell the Fannie and Freddie bonds back to the government at a fat profit.
The Fed is also extending and expanding its TALF program to $1 trillion, from the original $200 billion. TALF, which stands for Term Asset-Backed Securities Loan Facility, is little-known to most taxpayers—but it's a hero to banks and is widely credited with restarting the moribund credit markets, particularly for loans backed by credit cards and autos. The program offers cheap loans to investors to buy securities and is being expanded to accept commercial mortgage-backed securities as collateral. That's no coincidence. The Fed is clearly hoping to forestall the expected crash in a market in which $1.4 trillion of loans will be maturing in the next five years.
The Fed buying government-backed mortgage bonds is a classic example of the government bailing itself out. The Federal Housing Administration got into the act, guaranteeing billions in Ginnie Mae bonds before it couldn't afford to keep up with demand from the banks. The FHA had quite a run, however, backing 23 percent of new loans in 2009, compared with 3 percent in 2006, according to AOL's Daily Finance. The Federal Home Loan Banks, a government-sponsored enterprise that helps banks make mortgage loans, has already lent so much that it is funding banks at a 10-year low. The end result has been some bizarre entrants into the federal mortgage game, offering no-money-down, fully financed mortgage loans to keep the money sluicing through the system at taxpayer expense. The U.S. Department of Agriculture, of all things, has boosted a $10.5 billion mortgage-lending program that was meant for farms but is now being used for three-bedroom colonials. What next? Will the Parks Department set up a mortgage desk?
And it's not just mortgages by which the government is trying to save itself. The U.S .government has auctioned $7 trillion of Treasuries this year alone to help fund the bailouts—$1 trillion more than it did in 2008. And who is buying all those Treasuries to help fund the bailout? The Federal Reserve, which owned $4.875 trillion of Treasuries as of March, making it the biggest holder of U.S. government debt. The Fed is also the biggest continuing buyer of Treasuries, snapping up 48 percent of the $339 billion in net new Treasuries sold as of the second quarter, according to the Wall Street Journal, and poised to dominate again as the Treasury auctions off a record $112 billion in bonds soon. In short, the Treasury is issuing bonds to fund the bailouts so the Fed can buy the bonds to fund the bailouts that the Fed helped create.
It's a toxic loop of government spending. It seems quaint that a year ago Congress was worried that a single $700 billion bank bailout would cause the government to implode. Now we are committed to trillions more, mostly in a housing market still on sketchy ground, which could turn against us any time. The government gets some credit for recognizing the danger now—and trying to pull back before it hits the debt ceiling in just three weeks. But its reductions are paltry compared with the size of its problem: the $1.4 trillion in upcoming maturing commercial mortgage loans and the trillions more in U.S. mortgages in record foreclosures. Pulling back all government stimulus would be a disaster for the markets, which have learned to seek comfort in Uncle Sam's arms. But many of these government programs were enacted hastily, work in opaque ways, and are still being badly accounted for. Perhaps we need a bailout czar.
Why the U.S. economy CAN'T "recover"
The U.S. propaganda-machine now reports on a daily basis that a “U.S. economic recovery” is underway – despite not one piece of evidence to support this “bold assertion” (shameless lie?).
Let's start with a definition of “recovery” suitable to the current, economic context: economic “recovery” means the economy is returning to (or “recovering”) a previous level of economic activity. In other words, with an economy which has shrunk by more than 10%, a “recovery” could only be occurring if the economy is already growing.
There is still absolutely no evidence that the U.S. economy is growing. Granted, the propagandists already know that the Treasury Department will report “economic growth” this quarter – regardless of what is actually happening in the real world. However, contrast this with the extremely cautious attitude of the same “experts” and “economists” when the U.S. economy started its collapse. Despite enormous volumes of evidence showing that the U.S. economy had started a serious collapse, these shameless shills refused to declare a “recession” had started for many months after that fact was obvious to the entire world.
When asked to justify their reluctance to apply the label of “recession” to this economic collapse (which is, in reality, a Greater Depression), the reply was the same: formally declaring a “recession” was something which was done in hindsight – after enough data had accumulated to justify that backward-looking prognosis.
What a surprising coincidence that these same U.S. market-pumpers see absolutely no reason to exercise any caution at all when declaring a “recovery” has begun!
One of the chief propaganda tools of these shills is the index of economic “leading indicators”. Even if I were to concede these “indicators” were a persuasive tool for predicting future economic activity (which I don't), this particular statistic only has relevance if the economy is operating within something close to normal parameters – which it isn't.
We have just spent a year watching the same buffoons who couldn't see this collapse coming telling us about all the “unprecedented” and “unconventional” measures that have been taken to attempt to resuscitate the global economy, in general, and the U.S. economy, in particular.
Why have they had to engage in so many “unconventional” measures (like 0%-1% interest rates around the world) to try to breathe life into the economy? Because the economy did not respond to traditional stimulus – as it always has in the past. If the economy isn't responding to stimulus in a predictable manner, how can these “experts” and “economists” know that the “leading indicators” they crow about are actually predictive of a “recovery”? Obviously they can't.
This becomes even more obvious when we look at some of these “indicators” individually. Rising stock prices are one of them. Gee, if stock prices are going up, that must mean that a “recovery” has started. After all, “bear-market rally” is a phrase which I just invented, this moment. Who cares that insiders have been dumping their own holdings at an accelerating rate for the last six months?
Another “indicator” is “consumer confidence”, or as I labeled it in a previous commentary (see “Time to rename U.S. Consumer Confidence index”) the “consumer gullibility” index. For the first six months of this year, the propaganda-machine deluged the world with report after report that “a U.S. economic recovery” was on the way. For the last three months, all we have heard is that the economy is “about to recover” and more recently “the recovery has already started”.
These propagandists couldn't justify continuing to take their pay-cheques if they hadn't managed to brainwash a large chunk of the population. Of more relevance, as I pointed out previously, it doesn't matter how “confident” Americans are if they have no jobs and no access to credit – to fuel this consumer economy. Currently, consumer credit is collapsing at the fastest rate in history (see “Record Plunge in U.S. Consumer Credit in July”). Is this something which would/could/should happen in a “recovering” economy?
“Housing starts” are another leading indicator. However, as I have repeated again and again, there is something seriously wrong with this number – as for nearly two years, “housing starts” have exceeded “new home sales” by anywhere from 50% to 100% every month. There are only two possibilities here: either this number has been grossly inflated (and thus is meaningless) or U.S. home-builders are simply accumulating more and more unsold inventory. Either way, this “leading indicator” has no merit.
However, the most persuasive means of showing that the U.S. economy is not recovering is to show that it cannot recover. For this, I will offer thanks to Steve Keen (and his “Debtwatch”blog) for two, extremely effective metaphors (not to mention the analysis behind it). These effectively point out that the Obama regime has not only failed to acknowledge the real problem with the U.S. economy, but also chose the least-effective form of “stimulus” available.
With respect to the latter point, Mr. Keen observes that there were several choices about which location in the “economic pipeline” Obama could choose to inject his stimulus. Under normal conditions (i.e. the “borrow-and-spend” paradigm, where “deficits don't matter”), stuffing money into the vaults of the banksters was the most-effective option – since these reckless gamblers have always lent-out at least $10 for every $1 they actually hold.
The problem is that this economic collapse was caused by providing the banksters with too much “easy money” and then allowing them to leverage that debt by an average of 30:1. Even the greedy banksters, themselves, know they have no choice but to de-leverage. Thus, when the Obama regime stuffed trillions into the vaults of the same banksters who caused all the problems – all the banksters did was “sit on” most of that money to reduce their leverage. Last I heard, the banksters had over $600 billion sitting in a “savings account” with the Federal Reserve – collecting 1% interest. Wow! That will sure “stimulate” the economy.
As Keen puts it, the Obama regime is using the wrong “pipe” in the economy. Because it was inevitable that the banksters would use any hand-outs to de-leverage, the “pipe” which pumps money from the banking system into the broader economy has effectively shrunk. This means no matter how much or how fast money is funneled to the banksters, the amount of “stimulus” which actually reaches the economy is now severely constrained. “Stimulus” dollars, says Keen, would have achieved a much greater effect by being provided to the debtors rather than the lenders, because those “pipes” in the economy had not “shrunk” by nearly as much (since neither U.S. businesses nor U.S. consumers were greedy and/or reckless enough to leverage themselves by 30:1).
Put another way, it was always completely obvious that any and every “stimulus dollar” given to the banksters would help only the banksters.
However, as both Keen and myself continue to reiterate regularly, the main problem with measures to fix the U.S. economy is that only the symptoms are being treated – not the “disease”. Keen equates the humungous U.S. debt-load with a “malignant tumor” - a perfect metaphor. It is something which is rapidly growing in size, and guaranteed to kill the patient unless removed.
Yet, instead of removing the tumor, the “cure” being pursued by the Obama regime is the equivalent of “tumor implants” - it is adding more tumors (i.e. more debt) to the (dying) patient, to try to improve the cosmetic appearance of the patient.
Just as transplanting tumors into a patient whom is already dying from a malignant tumor is obviously harmful, rather than beneficial, massive debt-injections into an economy literally drowning in debt can only increase problems rather than reduce them.
In response to this, the Obama regime, the Federal Reserve, and the propaganda-machine are all reading off of the same script: at some point in the distant future, the U.S. will actually start repaying all this new debt – so it's not a problem.
This is utter nonsense! The U.S. economy currently has a “structural deficit” in excess of $1 trillion per year – meaning that is the minimum amount of new debt the U.S. will incur with the economy operating at full capacity. This is about double the level of debt which officially constitutes a “debt crisis” - in an economy with real GDP of less than $11 trillion/year.
If the U.S. was actually serious about achieving a “balanced budget” the time to start is today, and not after trillions more in debt is piled on top of the existing $57 trillion in total public/private debt (not including $70 trillion, or so, in “unfunded liabilities”). The Obama regime, itself, claims it will add on another $9 trillion in debt – before it will (supposedly) achieve a balanced budget.
An economy which could not balance its budget during the peak of the recent bubble-based “economic boom” will supposedly be able to do so – after doubling the national debt. As if that proposition isn't ludicrous enough already, we have the historic pattern of the U.S. government only reporting half of the actual increase in the “national debt” when it reports its “official deficit” (see “Obama continues peddling fantasy-deficit numbers”). Thus, when Obama tells Americans he plans on heaping another $9 trillion of debt onto the shoulders of their children, what he really means is that another $18 trillion (or more) is on the way.
Forget about economics, this is all about arithmetic. Every additional dollar of debt heaped on top of the largest mountains of debt in the history of our species, permanently removes several pennies from the U.S. economy. It doesn't sound that bad – until you multiply that by a trillion. If an economy with a measly $11 trillion per year in GDP is permanently squandering over $2 trillion per year just paying interest on $57 trillion of debt, the best-case scenario is to simply “tread water” (i.e. just try to avoid any further shrinkage in the economy).
It is mathematically impossible for this debt-saturated economy to generate real economic growth through new debt. The propaganda-machine can churn out any fantasy-numbers it wants. In the real world, all we will see are more job-losses, more foreclosures, and more bankruptcies. Not much of a “recovery”.
Georgian Bank is 95th to fail this year
19th failure in Georgia, 8th biggest in US in 2009
Atlanta-based Georgian Bank was closed by state regulators Friday, according to the Federal Deposit Insurance Corporation, becoming the 95th to fail in the nation this year. Customers of Georgian Bank are protected. The FDIC, which has insured bank deposits since the Great Depression, currently covers customer accounts up to $250,000. First Citizens Bank and Trust Company, Inc., of Columbia, S.C., agreed to assume all of Georgian's $2 billion deposits and will purchase "essentially all" of its $2 billion in assets, the FDIC said. The five branches of Georgian Bank will reopen Monday as branches of First Citizens Bank.
"We view this transaction as a unique opportunity based on current developments in our industry," said Peter Bristow, president and chief operating officer for First Citizens, in a statement. The acquisition is part of First Citizens' "expansion strategy" in South Carolina and Georgia, he added. The FDIC said customers of the failed banks will be able to access their money over the weekend by writing checks or using ATMs or debit cards. Checks will continue to be processed, and borrowers should make their payments as usual.
The 95 banks that have failed so far this year, an average of more than 10 per month, is nearly four times the number of banks that failed in 2008. It's the highest tally since 1992, when 181 banks failed.
This year's failures have reduced the FDIC's insurance fund to $10.4 billion from $45 billion a year ago. However, the agency has said it has $42 billion available for bank rescues over the next 12 months. Friday's closure will cost the FDIC an estimated $892 million. The FDIC board is scheduled to meet Tuesday to discuss how to raise money to restock the fund, including the possibility of using its line of credit at the Treasury Department.
Rep. Alan Grayson: "Has the Federal Reserve Ever Tried to Manipulate the Stock Market?"
Rep. Alan Grayson asking Federal Reserve General Counsel Scott Alvarez about the Fed's independence.
Fed Weighs Naming Borrowers
The Federal Reserve, under pressure from Congress to be more transparent, is "giving serious consideration" to releasing the names of firms that receive loans from the central bank, a top Fed official said Friday. At a House hearing, Fed General Counsel Scott Alvarez struck a conciliatory tone when a top lawmaker indicated that he wanted more information revealed about the Fed's loans.
Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, said the central bank's loans and securities transactions should be disclosed, with a lag to avoid a short-term influence on financial markets. He said he wanted to include a provision to do so in coming legislation. "You don't have a right to go to a federal agency, borrow money [and] keep it secret forever," Mr. Frank said of financial institutions. "We don't want public entities buying and selling securities with nobody ever knowing," he said. "We want there to be publicity. We don't want there to be a market effect in the near term."
The Fed has long resisted identifying borrowers from its regular lending programs -- such as the discount window, which provides short-term loans to banks -- fearing disclosure could discourage use of the programs by firms that need support. But the central bank, after drawing attention for its rescues of American International Group and Bear Stearns, is trying to respond to lawmakers who want a more comprehensive accounting of who receives the Fed's money and under what conditions.
Asked if the Fed would work with Congress on establishing provisions for disclosure, Mr. Alvarez said, "We'd be happy to work with you on it." The hearing addressed the implications of a bill from Rep. Ron Paul (R., Texas) that would open more of the central bank's operations to audits by the Government Accountability Office, the investigative arm of Congress. The Fed's monetary-policy operations -- such as interest-rate decisions and loans to banks through its discount window -- are blocked by law from GAO review. The GAO audits most other central-bank operations, such as bank supervision and consumer regulation.
Top Fed officials strongly oppose repealing the GAO exclusions. They say audits directed by lawmakers would undermine markets' belief in the Fed's independence and raise concerns that monetary policy could be influenced by political considerations. "These concerns likely would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation," Mr. Alvarez said. Mr. Frank said lawmakers don't want to give "the impression that we are somehow in a formal way injecting Congress into the setting of monetary policy."
Still, several lawmakers pushed back against the Fed's suggestion that GAO reviews of monetary policy would hinder the Fed's effectiveness. "How many audits does the GAO perform?" Mr. Paul asked. "In any agencies of government, in the State Department, in the [Defense Department], nobody's ever charged the GAO for altering policy."
Fed set to fight further Congress scrutiny
The Federal Reserve will on Friday try to head off an attempt by lawmakers to conduct more thorough audits of the central bank in a bill that has the support of a majority in the House of Representatives. Scott Alvarez, general counsel of the Fed, will testify at a House financial services committee that extending Congress’s oversight could have a wide-ranging series of negative effects, from increasing inflation to depressing job creation.
Ron Paul, the Texan Republican, has managed to attract 294 co-sponsors for his bill, which would direct the comptroller general to conduct a "detailed report" to Congress after auditing the Fed. His bill is the most visible sign of a growing movement in Congress to rein in the central bank, whether it is denying it new responsibility for regulating systemic risk, removing authority to protect consumers of financial products or lending to troubled banks under emergency powers.
Barney Frank, the chairman of the House financial services committee, has sought to find a middle ground, adding to oversight but stopping short of the sweeping audit that the Fed claims would lead to calamitous consequences. Friday’s hearing will also feature Thomas Woods, senior fellow at the Ludwig von Mises Institute, which espouses a similar libertarian philosophy to Mr Paul. In his prepared testimony, he says that the Fed’s charge that its independence would be compromised is a "red herring". "The bill is not designed to empower politicians to increase the money supply, choose interest-rate targets, or adopt any of the rest of the Fed’s central planning apparatus, all of which is better left to the free market than to the Fed or Congress," he says. "It seeks nothing more than to open the Fed’s books to public scrutiny."
But Mr Alvarez, in his testimony, warns that the mere perception of politicians having a hand in monetary policy could "cast a chill" on the board’s deliberations, "complicate and interfere" with communications between the Fed and markets and worry foreign governments whose currency swaps would be subject to audit by the Government Accountability Office, the congressional watchdog. In a busy schedule for congressional hearings that affect the Fed, Ben Bernanke is expected to have his renomination hearing as Fed chairman in the next few weeks.
Bank of America Rejects SEC Claims in Bonus Suit
Bank of America Corp formally denied U.S. Securities and Exchange Commission claims accusing it of misleading shareholders about bonuses it let Merrill Lynch & Co pay employees before the companies' January 1merger, and said it is seeking an order dismissing the regulator's complaint. The bank's response, in a Friday filing, was expected, and came 11 days after U.S. District Judge Jed Rakoff rejected its $33 million settlement with the SEC over the $3.6 billion of bonus awards.
Rakoff, who is still handling the case, was upset that the accord did not require disclosure of the names of executives and lawyers who vetted the bonuses and the decision not to disclose them, and yet left shareholders on the hook for a fine. He called the settlement a "contrivance" that violates "the most elementary notions of justice and morality." In its answer to the SEC's complaint, Bank of America maintained that the proxy statement for the merger did not contain false or misleading statements, or omit key facts. It also said it was not negligent in preparing the proxy statement.
SEC spokesman John Heine said: "As we alleged in our complaint, Bank of America did not provide investors with complete and accurate information about the bonuses to be paid by Merrill Lynch to employees." "We intend to prove in court that their disclosure failure violated the federal securities laws," said Heine. Earlier this week, Rakoff agreed to a schedule to bring the case to trial by March 1, 2010, one month later than he earlier had wanted. He called the March 1 date "firm and fixed."
Bank of America, based in Charlotte, North Carolina, faces many lawsuits and investigations by lawmakers and regulators over the Merrill merger, which made it the largest U.S. bank. New York Attorney General Andrew Cuomo has threatened to sue bank officers, perhaps including Chief Executive Kenneth Lewis. Ohio Attorney General Richard Cordray plans on Monday to update the status of a shareholder class-action lawsuit against the bank. Bank of America shares dropped 38 cents to $16.60 on the New York Stock Exchange on Friday. They traded at $33.74 before the Merrill purchase was announced on September 15, 2008.
Battle Brews Over Unused TARP Cash
The U.S. Treasury Department is discussing ways to keep in reserve some emergency bailout funds even if the Troubled Asset Relief Program isn't extended beyond the end of the year. Treasury Secretary Timothy Geithner may opt to extend the program, which expires on Dec. 31. But even if the program isn't extended, officials want to keep at least some of the money that has yet to be committed to any particular program on hand in case financial conditions worsen and the government is forced to step in. The decision of whether to extend TARP has become embroiled in a debate over the unpopularity of the $700 billion bailout and the nation's mounting fiscal woes.
Mr. Geithner hasn't yet determined whether to extend the government's TARP authority, Treasury officials said. Even if TARP is allowed to expire, the program won't technically end until the government's investments are repaid and the U.S. is no longer a shareholder in financial institutions. Treasury officials are discussing whether there is any way to preserve that money without extending TARP. While there is no plan to spend additional bailout funds, Treasury officials want the ability to respond in case financial conditions deteriorate.
Neal Wolin, Treasury's deputy secretary, said it was too early to make a decision on whether to extend TARP. "We will be looking at and making judgments about [extending TARP] in the weeks and months ahead," Mr. Wolin said in response to questions after a speech Thursday. As markets begin to stabilize and the economy shows signs of strength, some lawmakers are demanding the program cease and that any unused and repaid TARP funds go to pay down the nation's debt. Last week, a group of 39 Republican senators and one Democrat sent a letter to Mr. Geithner urging him to let TARP expire and to use returned bailout funds "for debt reduction." About $128 billion of the $700 billion remains uncommitted.
The U.S. is expected to hit its $12.1 trillion debt ceiling later this fall. Mr. Geithner has asked lawmakers to raise that limit so the government can continue borrowing money to fund its obligations. The debate has been complicated by the independent overseers of the bailout, who have questioned both the success of the program and whether taxpayers will ever recover their investments. At a hearing Thursday, the special inspector general for TARP said the program has improved market stability but fallen short on broad goals, such as spurring lending. "It is extremely unlikely that the taxpayer will see a full return on its TARP investment," Neil Barofsky told the Senate Banking Committee.
Treasury officials worry giving up the remaining funds could destabilize markets by removing a potential safety net and handicap government officials in the event that financial conditions worsen. "In this context, it is prudent to maintain capacity to address new developments," Herb Allison, the Treasury assistant secretary who heads TARP, told lawmakers on Thursday. Mr. Allison wouldn't say whether he believed the program should be extended. Some lawmakers remain skeptical about TARP and its effectiveness and say the program has the potential to turn into a permanent government subsidy if it isn't ended quickly.
"I share the concern with a lot of Americans that this is creeping into status quo and a much higher permanent level of government involvement in the market," Sen. David Vitter (R., La.) said at Thursday's hearing. To assuage concerns, government officials are taking steps to end some TARP programs no longer deemed necessary, such as a guarantee of money-market mutual funds, which expired last week. Treasury officials expect to allow an untapped program to funnel more money into banks to expire later this year.
Bullish Today, Marc Faber Is "Highly Confident" the Future Will Be Very Bleak
"The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society,"Marc Faber writes in the September issue of The Gloom, Boom & Doom Report.
A statement like that pretty much speaks for itself, but it's a bit more complicated than appears on first blush. Faber has been bullish -- especially on commodities and emerging market stocks -- for some time now and believes the current global recovery trade will last another two-to-three years, as discussed in more detail in a forthcoming clip. But he has major long-term concerns about the dollar's long-term viability given rising U.S. deficits, massive unfunded mandates and the fact "we have a money-printer at the Fed."
This combination will eventually lead to runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well, says Faber, who is "highly confident" in this grim prediction.
FDIC Is Broke, Taxpayers at Risk, Bair Muses
The FDIC’s insurance fund is going broke, and Sheila Bair is wondering aloud about how to replenish it. This means one thing for taxpayers: Watch your wallets.
Bair, the Federal Deposit Insurance Corp.’s chairman since 2006, says the agency has many options. One way to boost its coffers, now running low after a surge in bank failures, would be to charge banks higher premiums. It could make them pay future assessments in advance. Alternatively, the FDIC could borrow money from the banks it regulates. Or it could borrow from the Treasury, where it has a $500 billion line of credit.
"There’s a philosophical question about the Treasury credit line, whether that is there for losses that we know we will have, or whether it’s there for unexpected emergencies," Bair said Sept. 18 at a Georgetown University conference in Washington. "This is really a debate for Washington and for banks," she added. Far be it from me to intrude on this closed-circuit conversation. The question Bair posed should be a no-brainer. Borrowing taxpayer money to bail out the FDIC should be an option of last resort reserved for unforeseen emergencies. That the agency would consider this now underscores how dire its financial condition has become.
Whatever path it chooses, we shouldn’t lose sight of this: The FDIC has been mismanaged, and its credibility as a regulator is in tatters. Its insurance fund wouldn’t be in this position today if the agency had been run well. Bair’s comments last week reminded me of a year-old article by Bloomberg News reporter David Evans, who wrote that the FDIC soon could run out of money and might need a taxpayer bailout by the Treasury Department. Most revealing was the FDIC’s reaction. It flipped out.
The day the story ran, the agency released an open letter to Bloomberg from a spokesman, Andrew Gray. He said the piece "does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund." Gray said "the insurance fund is in a strong financial position to weather a significant upsurge in bank failures" and that he did not foresee "that taxpayers may have to foot the bill for a ‘bailout.’" He said the fund "is 100 percent industry backed," and "our ability to raise premiums essentially means that the capital of the entire banking industry -- that’s $1.3 trillion -- is available for support."
If needed, he said, the FDIC could borrow from the Treasury, noting that the funds by law would have to "be paid back from industry assessments." He stressed the FDIC had done this only once. It happened in the early 1990s, and the money was repaid with interest in less than two years. Gray told me this week that he stands by his earlier remarks. His notion that the FDIC could tap the capital of the entire banking industry still baffles me. While hypothetically this might be true, I doubt all $1.3 trillion would be available in any practical sense.
The FDIC said its insurance fund’s assets exceeded liabilities by $10.4 billion, a mere 0.22 percent of insured deposits, as of June 30. The liabilities included $32 billion of reserves the FDIC had set aside to cover bank failures that it believed were likely to occur during the next 12 months. As recently as March 31, 2008, the FDIC had earmarked just $583 million of reserves for future failures. This was after the rest of the financial world already knew we were in a crisis. By the end of 2008, it had boosted these reserves to $24 billion.
The balance-sheet reserves don’t capture all the insurance fund’s anticipated losses. In May, the FDIC said it was projecting $70 billion of losses during the next five years due to bank failures. The agency said it expects most of those collapses to occur in 2009 and 2010.
The FDIC’s problem is that it didn’t collect enough revenue over the years to cover today’s losses. The blame lies partly with Congress. Until the law was changed in 2006, the FDIC was barred from charging premiums to banks that it classified as well-capitalized and well-managed. Consequently, the vast majority of banks weren’t paying anything for deposit insurance. Of course, we now know it means nothing when the FDIC or any other regulator labels a bank "well-capitalized." Most banks that failed during this crisis were considered well- capitalized just before their failure. After the law changed, the FDIC still didn’t charge enough premiums.
So far this year, 94 banks have been shut, the fastest pace in almost two decades. Hundreds of others are in trouble. The FDIC said 416 banks were on its "problem" list, a 15-year high, as of June 30. That was up from 305 three months earlier. Regardless of the law’s requirements, if the FDIC starts tapping its credit line at the Treasury, there can be no assurance it would be able to pay back all the money through future assessments on banks.
That’s why it should be reluctant to borrow from taxpayers now, even though the banking industry whines that it can’t afford any short-term cost increases. At the rate it’s going, though, the FDIC may not have a choice much longer. Perhaps Bair and the FDIC someday might see fit to deliver a full account of how the agency managed to mess itself up this badly. The country deserves an explanation.
Homebuilders: Time to Short Again?
by Michael Shulman
Yesterday's existing home sales numbers - down
... and the new home sales number today - up less than one point
... and KB Homes (KBH) outlook - not so good, guys
... shook some people up, especially those unwilling to use third grade math or read a balance sheet.
Shorting the homebuilders made my subscribers a fortune and then took some of those gains away when irrationality, tax policy ad traders pushed the stocks up. And now, since all I recommend is puts, I avoid them due to volatility and outstanding short interest in many home building names. That being said, today's housing data may be the beginning of a readjustment on Wall Street - and as reality sinks in, the homebuilders should fall and a couple could - should - go bankrupt.
Where to start? How about some quotes that have been common on the Street for the past 25 years: "When new home starts fall below a million, they are at a bottom, cannot get worse." Housing starts have been at a half million and change for a long time. How about this one: "When inventories are above six months, the home builders will start to fall." Inventories are at nine and a half months, not including all the foreclosed homes not on the market, and the stocks have not really fallen. So, conflicting data based on historical norms.
And that is the thing to base your short position on: historical normals do not count any more (at least not any from the past twenty years, perhaps more). Here is why.
• Home prices have never fallen this far, or this fast, and I believe that they will continue to fall another 15%. Banking analyst Meredith Whitney and housing analyst Ivy Zelman are also still very bearish.
• Foreclosures have never been so high, and they are still climbing. Based on mortgage origination data they will not peak until the middle of 2011, and that means....
•Inventories will continue near all time highs and prices will continue to fall.
• Oh, did I mention, one third of all Americans would like to sell their house if they could get the right price. Makes sense - about one sixth of homeowners decide to sell every year and the market has been frozen for at least a year, more in many places.
• Combine all this with the tightest mortgage standards in living memory and you have the next chapter of home builder Armageddon.
Let's do this with some detail.
Inventory - Like all markets, the housing market for new homes is driven by the supply of new and existing homes and the demand for these homes. The supply of homes, despite two years of very low rates of home building, is still way above historical norms despite the headlines. Drops in inventory do not account for the number of homes yet to hit the market but already foreclosed or in the foreclosure process. The 3.6 million existing homes in inventory represents and 8.5 month supply. Add foreclosures being held off the market - my estimate is 600,000, minimum - and the 8.5 month supply increased to 10 months, near historical highs.
Foreclosures - The blow-dried experts on CNBC, with a coupe of exceptions, are all saying we are nearing a bottom - we must be, new home starts are so low! They have it backwards: New home starts are low because inventories show no sign of bottoming due to foreclosures, many of them of relatively new homes. Foreclosures are accelerating as moratoriums on foreclosures, resets, and unemployment hit home owners harder and harder.
To quote my favorite housing analyst, Ivy Zelman (on the CNBC blog Realty Check): "Over the past several months, we have witnessed many data points indicating stabilization and improvement in the housing market. While these data points are certainly a welcome reprieve after three long years into the housing downturn, we cannot help but focus on the elephant in the room - the ever-growing pent-up supply of foreclosures in-process... the next wave of foreclosures is not a myth, but is instead the key to the direction of the housing market over the next 6-12 months..... In total, foreclosures in-process are 88% higher than the year ago, led by prime non-jumbo (up 159%) and prime jumbo (up 152%) mortgages."
Actually, this is going to go on far longer than 6-12 months. According to Amherst Capital, seven million homes are going to be foreclosed on in the coming year or two - 16 months supply at the current rate of sale, not including all other homes to go up for sale. And if you trace mortgage originations by type of mortgage, geographic area, and classification - subprime, Alt-A, prime, etc - it is easy to see that foreclosures will not peak until the middle of 2011. Even if I am off by six months, that is a year longer than most optimists. Once a house is foreclosed on, it takes 3-12 months to get it on the market. Right now it is taking longer, but I am assuming this speeds up, so let's assume six months. That puts peak foreclosed homes into the market around the middle or end of 2011, and with 3-6 months to sell them you are looking for a market bottom in the first half of 2012 and inventories will not adjust until the end of that year. Maybe.
Back to Inventories - As foreclosures peak, then begin to decline, and prices firm, pent up demand to sell existing homes will hit the market. Remember that one third number? By 2011-2012 it will be 40% or more - four in ten Americans that own a home will want to sell it. This will add homes to inventories, depressing demand for new homes and home prices for five to ten years.
These inventories will face vastly reduced demand for homes across the United States due to an end to massive speculation in second homes, a slowdown in new household formation due to lingering unemployment, tightened credit standards and a much smaller shadow market for jumbo mortgages. The little blip up in home sales this past summer was due, in part, to the $8K tax credit you and I are providing to people. Some analysts estimate one third of demand these past four months has been due to this credit.
Speculators: In 2006, using Freddie and Fannie and third party data, more than 40% of mortgages were for subprime and/or second homes, most of them speculative. That market is gone for at least a decade, maybe more.
Credit Standards: At present, credit standards for mortgages other than those originated through the FHA - our money - are the toughest in a generation, perhaps more. And that is for conventional or conforming loans insured by those two paragons of financial management: Freddie Mac and Fannie Mae. The jumbo mortgage market has completely disappeared when the shadow banking market evaporated after Lehman collapsed. It ain't coming back any time soon.
A few days ago the world's most highly paid cry baby, John Stumpf, asked the Feds to leave him and his bank alone and he would figure out to how to pay them back, doggoneit. But, he told them, please use Fed and taxpayer money to buy jumbos because I need the mortgage origination fees... fast. I know a two times seven figure a year attorney who cannot get a home renovation loan. This tightening of credit will cut another 10%-20% from core demand for homes from the 2006 level.
Core Demand: Real demand - people that want to buy homes - is also shrinking as unemployment takes its toll on hopes and dreams, not to mention national income. Forget the affordability index that the real estate industry mouthpieces tout on TV. It is not just what you can afford based on government statistics, it is also what you can afford if you think you might lose your job, have your hours reduced, your commissions cut or your health insurance premiums increased. It is also based on what you can put down. And if you have less equity in your current house, have less ability to save because of the recession, well, the house you want is not as affordable as the real estate flacks are saying they are "RIGHT NOW!." I think reduced demand by customers is about 10% of the demand we saw in 2006 for homes.
Bottom line: Core demand for housing - new homes - by people who qualify for a mortgage will be less than half of peak demand in 2006 for 3-5 years.
Too much supply and too little demand means fewer new homes built and lower margins. Meredith Whitney says home prices will fall another 25% and she has been right about everything else, so why not now? Barclays says 13%. Split the difference and you get 19%, or the median home price falling to roughly $145K. That is a very low target for many home builders. In August, home prices for new homes fell 12% year over year.
The builders' problems can be found in operating earnings - or lack thereof - and their balance sheets.
Earnings: In the last quarter of published financial data, the seven largest publicly held home builders lost $1.2 billion, and that includes $376 million in tax rebates from Uncle Sam. Since they have all refinanced recently, it is hard to measure real cash flow from operations and after-interest expense. That being said, the long term debt is $16.72 billion and this should cost them at least $500 billion - perhaps more than twice that - in interest expense per year.
Balance Sheets: The balance sheets are much worse. They are, simply put, a wreck.
• The balance sheets of seven publicly held home builders shows $16.72 billion in long term against $5.4 billion in cash (cash plus AR minus AP). The current market cap is $13.96 billion, so these seven companies are worth, in the market, about $30 billion. As I mentioned, debt service will soon rise significantly - at current rates - and will rise again as rates rise. A good deal of this debt has been re-done recently but a good deal needs to be re-financed in the next 1-3 years.
• Many home builders are now carrying land on their books at the price they paid for it because this land is supposedly under development. Drive to a home site near you and take a look at what accounting driven development looks like - three people with the names Mo, Larry and Curly are working on a fence surrounding a 500 home site plot with two homes built and a model home that has no electricity. And they have been working on that fence for two years. I have seen this three summers in a row at the same home sites in North Myrtle Beach, in Ft. Myers, in Orlando. Someday this land has to be written down to its real value and the builders will not only take a hit on their balance sheet but stand a good chance of violating loan covenants.
• Since you and I as happy taxpayers love paying for greed and incompetence, Congress and the IRS obliged us by letting the home builders apply for tax rebates for taxes on profits they made during the boom. These rebates supplied vital cash in 2009 and are ending. No more free cash from illusory profits made by selling homes financed by mortgages we, as taxpayers, now also own!
• The bottom line: Many home builders are nearing a point in time where write downs and operating losses will lead to negative equity and to an end to liquidity. And home builders, like banks, need to borrow to build and to survive.
Of course, Wall Street traders have ignored most of this as green shoots (scallions to my mind) and momentum and technical indicators and flashing technical indicators have primed the Buy side of trades in home building stocks. Well, as Bob Zimmerman and now Will I Am sing, the Times They Are-A Changin'. It may be a good time to short the home builders.
Let's go back to the market cap plus long term debt number of $30 billion. Value analysts (and other people that think Winston Churchill is still alive) say this is a low price for their collective assets. Sure, right. These assets are being held at inflated values and no one knows what their current holdings are worth in the real world. These same analysts are ignoring the reality of not just a lack of current earnings but no earning power going forward ... not to mention a coming rise in interest payments, more write offs against current assets and falling demand for homes for a long time.
Which ones? Balance sheets and high end homes point out the first potential losers and/or bankruptcies. I measure balance sheet like the simpleton I am - long term debt divided by net cash. Hovnanian (HOV) has nine times long term debt to net cash, Pulte (PHM) 6 to 1, KB Homes (KBH) 5.5/1, Beazer (BZH) is at 3 to 1, DR Horton (DHI) at 2.5 to 1, Toll Brothers (TOL) at 2.2 to 1 and Lennar (LEN) at 1.8 to 1.
And Hovnanian has a focus on high end homes. Best place to go short (as in short term).
Other candidates: Companies who have lived and breathed in the starter market, which will be dominated by foreclosed homes in the coming 1-3 years. That puts Pulte and Beazer in harms way, medium and long term.
Longer term, the XHB, the home builders index (which does include building suppliers and like companies) should go down.
Declassified State Dept Data Highlights Global High-Level Arrangement To "Remain Masters Of Gold" By "The Reshuffle Club"
In the days before the development of the IMF's S.D.R., or Special Drawing Rights, which was a preliminary attempt at a international currency and a way for governments to push gold away as a primary form of wealth/asset equivalency, there were discussions on what the role of the international community would be i) with regard to promoting the SDR as a globally accepted "currency" and ii) and more relevantly, how to retain dominance over the critical gold market by not just the US (represented in this case by the Federal Reserve) but by its core international counterparties.
A recently declassified telegram to the Secretary of State sent in 1968, has some very distrubring revelations to gold "conspiracy theorists" who believe there could be an international arrangement to maintain a control over gold prices in the international arena. This is especially true as the G-20 meets currently in Pittsburgh behind closed doors. Could gold be one of the issues discussed?
We particularly bring readers' attention to paragraph 13 in the telegram below, which present some troubling revelations (emphasis ours):
If we want to have a chance to remain the masters of gold an international agreement on the rules of the game as outlined above seems to be a matter of urgency. We would fool ourselves in thinking that we have time enough to wait and see how the S.D.R.'s will develop. In fact, the challenge really seems to be to achieve by international agreement within a very short period of time what otherwise could only have been the outcome of a gradual development of many years.
Furthermore, apparently 41 years ago the Plunge Protection Team had a more affectionate name (paragraph 11)
Special attention has to be given to the extent of the membership of the reshuffle club. A simple and effective rule probably would be that countries with asset holdings that are higher in relation to their gold holdings than the relation that is obtained amongst reshuffling countries are free not to participate in the reshuffles. On the other hand, countries whose asset holdings are relatively low (and whose gold holdings, therefore, are relatively high) should be obliged to submit themselves to the reshuffles. Indeed, this obligation seems so essential that it would have to become part and parcel of the new reserve asset scheme.
Also notable is the following disclosure (paragraph 3):
It is unlikely that the international monetary system could stand one or two more speculative crises like we have had last November and December during which gold losses were more than $1600 million. This is so because the point may be reached at which the speculation would reinforce itself in a cumulative way. Apart from this it is uncertain that members of the pool would be willing to go on supporting the market for such big amounts.
Oh really? "Go on supporting" presumably means they currently are supporting it? With the push for Fed transparency, could this one point get some additional insight, since if over 40 years ago the Fed, and the members of the gold "Pool" were openly intervening in the gold market, one can only imagine what the situation is now, especially with hundreds of trillions of new assets having been built on top of the Gold core of the inverted liquidity triangle?
In a nutshell - gold as an asset class is critical as it lies at the foundation of the entire credit/liquidity inverse expansion pyramid as presented by John Exter:
Control the gold, and you control the entire monetary system. For some historical Zero Hedge observations on gold, liquidity, and the dollar interplay, please see here.
Entire declassified telegram presented below:
The CIA Chimes In On Gold Control; Highlights Historical Gold-To-Foreign Holdings Shortfunding
After yesterday we highlighted a declassified document by the Department of State, in which it was made clear just how critical it is for the US to remain "Masters of Gold", today we present a comparable memorandum from the same time period (December 1968) this time by the CIA, which presents comparable key high-level gold-related deliberations by the then-administration.
Some of the key points:
We lose influence in world affairs whenever:
- The dollar is weak in exchange markets
- There is a major outflow of gold; and/or
- We are obliged to pressure countries into holding dollars or giving us payments assistance
Our position can also be improved by action on the international monetary system itself to:
- Decrease vulnerability to confidence crises
- Increase world monetary reserves (liquidity); and
- Improve tools for adjusting payments surpluses and deficits
With $33 billion of foreign dollar holdings ($16 billion in official hands) and only $10.7 billion of gold in the U.S. reserve, the risk is clear. To contain these pressures our strategy is:
- To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other;
- To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down.
And here are the seeds for the need for a fiat currency: growing an economy when monetary supply (and, by implication, currency devaluation) is limited, can only pad the growth rate for the core economic entities so much.Increasing liquidity
Trade won't be able to grow, and the system will remain vulnerable to speculation unless there is regular growth in the international money supply.
Gold can't provide the needed increase: industrial and speculative demand is too high. U.S. payment deficits can't either: foreigners are unwilling to hold more dollars when we run large deficits and unable to increase net reserves by accumulating dollars when our deficits are small.
Our strategy is to supplement gold and dollars with a new international asset, Special Drawing Rights (SDR).
And, of course, if the SDR does not work, the fall back reserve currency can always just be printed in limitless amounts, thus allowing massive liquidity-based expansion in the trade system, which will further allow the U.S. to grow its trade deficit to record amounts. Just fast forward 41 years.
Indeed, this document was presented before the gold standard was officially abolished. However, in the very near future Zero Hedge will disclose documents that highlight how even in the post-1971 world, gold was still perceived with the same liquidity management and "strategic control" interest as ever before.
Goldman to benefit from new OTC derivatives rules: Citi
Goldman Sachs Group Inc expects to benefit from the new over-the-counter derivatives and commodity trading rules owing to its strong technology position, said a Citigroup analyst, who met with Goldman management, and raised his earnings outlook for the bank. "Standardized central clearing of OTC derivatives are likely to force a major electronification of derivatives trading, which may play to Goldman's advantage given their existing technology platform and expertise in high volume electronic trading," Citigroup analyst Keith Horowitz said.
Taming the over-the-counter (OTC) derivatives market -- a "shadow banking system" of enormous size now largely beyond government reach -- is a key part of a push for tighter government oversight of banks and capital markets under way now for six months. "Standardized" OTC derivatives would go through clearinghouses at regulated exchanges to reduce the risk of default. OTC derivatives are complex instruments whose value is based on an underlying asset.
Horowitz, who recently met with Goldman's Chief Financial Officer David Viniar, said the new rules, which could set mandatory minimum collateral and margin requirements, if enacted are expected to benefit the bank relative to its peers. Goldman has historically had among the most stringent collateral and margin terms versus more generous peers, who too often cut deals with easy credit terms to win business, said Horowitz, who also met Goldman's Chief Operating Officer Gary Cohn and investment banking head David Solomon.
"We are more optimistic on Goldman's long-term prospects and gained comfort that worst-case outcomes from regulatory reform are unlikely to materialize and structurally impair returns," Horowitz wrote in a note to clients. Global policymakers agree that the OTC derivatives market should be regulated after a type of derivative, credit default swaps, led to insurer American International Group's near collapse and $180 billion government bailout. The analyst raised his earnings estimate for Goldman by 20 cents to $4.20 a share for the third quarter, and by 25 cents to $5 a share for the fourth. He kept his "buy" rating and target of $215 on the stock. Goldman shares closed at $183.06 Thursday on the New York Stock Exchange.
The ghosts of AIG prosper
by Gillian Tett
Could another AIG-style disaster shake the financial markets again? It is not an entirely idle question. This month, there has been plenty of hand-wringing about the anniversary of the Lehman Brothers collapse. But behind the scenes the issue of AIG – and its links to the credit derivatives market – is currently provoking even more debate among some finance officials.
After all, when AIG imploded in September 2008, the potential losses on its credit derivatives contracts were so devastating for the system, because they were so concentrated, that the US government used tens of billions of dollars to honour the deals, benefiting groups such as Goldman Sachs, Société Générale and Barclays. And that money, remember, will not return to the Treasury’s purse (unlike the sums invested to boost bank capital, say).
Yet if that is startling, what is more striking is that a well-respected Fitch survey before the collapse of the credit bubble suggested that AIG was just the 20th largest credit default swap player in the sector, based on gross notional outstanding volumes. No wonder those billions of lossmaking contracts subsequently came as such a shock. So have the lessons from that episode been learnt, and implemented? Regulators and bankers will mull this over today in Brussels, as part of the European Commission’s efforts to garner feedback on forthcoming financial reforms (initiatives which echo the ongoing debates in Washington).
No doubt many participants will be at pains to stress how much progress has been made over the past year in response to the AIG shock. There is, for example, a push to put part of the CDS market onto centralised clearing platforms, to reduce the counterparty risk that proved so deadly with AIG. The sector has streamlined itself by tearing up – or cancelling – redundant contracts, halving the outstanding notional size of the CDS market.
A mechanism to settle CDS contracts after a default is functioning well. Some of the opacity in the sector is clearing. The reason why AIG ranked 20th in the industry tables three years ago, for example, was because most official data tracked gross CDS positions (ie all outstanding contracts added together), rather than the type of net risk, which AIG had in spades. Now – belatedly – regulators and banks are watching net data instead.
Yet, welcome as such progress is, the grim fact remains that the CDS sector still faces a peculiar contradiction. When credit derivatives were first developed 15 years ago, they were presented as products which would encourage the dispersion of credit risk, among banks, hedge funds, asset managers and companies. In practice, many corporate users have never really adopted the instruments on any scale. That is in stark contrast to the world of interest or currency swaps, where such instruments are very widely used.
That pattern has left the CDS market marked by striking levels of circularity, since a limited pool of large financial players dominate much activity. In some respects, this sense of concentration has actually risen – not fallen – in the last year, because hedge funds and other players (including AIG) have been forced out of the sector. The Banque de France, for example, calculates that the 10 largest dealers now account for 90 per cent of trading volume (it was below 75 per cent in 2004). In the US, JPMorgan Chase alone now apparently represents 30 per cent of the US market. This is similar – ironically – to its share a decade ago when it first pioneered the CDS world.
Now, if all these dealers are handling these risks sensibly, and trades are centrally cleared, there may be no reason to worry. But, as the European Central Bank recently observed in a fascinating report, regulators are finding it tough to assess whether the net risks are being handled sensibly, since there is a paucity of detailed counterparty data.* Every bank likes to say it has programmes to monitor net risks. That is probably true: AIG, after all, was a terrible shock.
Irrespective of that, the fact is that not everything in the market today looks rational. (The ECB notes, as one example, that European banks have recently become net sellers of credit protection on their sovereign debt. That, it points out, is tantamount to "wrong way risk" – or plain nuts – given that those banks are implicitly government-backed.) And while regulators keep prodding banks to become more transparent in relation to counterparty risks, many are still dragging their feet on data provision – and the question of how many deals are actually placed on clearing platforms. No wonder western finance leaders keep muttering that the "too big to fail" problem remains; one year on, the ghost of AIG refuses to die away.
Credit Suisse Group Selling $1 Billion Lehman Claim
Credit Suisse Group AG, Switzerland’s second-largest bank, is trying to sell a $1 billion claim it holds against bankrupt Lehman Brothers Holdings Inc., people familiar with the matter said. Hedge funds and private-equity firms are among the potential buyers, according to the people, who asked not to be identified because the transaction is private. The claim is tied to about 20,000 derivative contracts to which Lehman was a counterparty, one of the people said.
Lehman creditors including UBS AG and the New York Giants football team filed more than 16,000 claims against the collapsed bank before a court-imposed deadline earlier this week. Creditors of a bankrupt company have to wait until after a bankruptcy plan is confirmed by the court to receive distributions, so some sell their claims to get paid faster. "The trading volume of Lehman claims has steadily increased over the last six months," said Christopher Moon, head of bankruptcy claims at SecondMarket Inc., which buys and sells claims against failed companies. "Market levels for Lehman claims have also increased steadily, with pricing for claims against certain debtor entities up significantly since the beginning of this year."
Morgan Stanley last week sold a $1.3 billion Lehman claim to several different investors for 38 cents on the dollar, the people familiar with the matter said. Lehman claims are currently selling for around 40 cents on the dollar, they said. "The timing to recovery is a big factor here," said Matthew Hamilton, a principle at Fulcrum Capital, a hedge fund and broker-dealer that specializes in bankruptcy claims and other illiquid debt. "These are financial players who are going to have a pretty good sense for what the ultimate recoveries might look like."
Hamilton said some industry analysts say the bankruptcy will take about six years to be fully resolved. Lehman claims are trading in a wide range, with so-called Lehman Brothers Special Financing Inc. claims trading at around 38 to 39 cents and Lehman Brothers International Europe at around 9 to 11 cents without guarantees from the holding company. New York-based hedge-fund firms Elliott Management Corp., King Street Capital Management LP and Paulson & Co. said in July in court papers that they hold about $13 billion in claims against Lehman. Silver Point Capital LP has also been purchasing claims, according to court documents.
Credit Suisse in August agreed to buy a $423 million claim from Citadel Investment Group, the hedge fund run by Kenneth C. Griffin, according to a filing with the New York Bankruptcy Court. Lehman filed the largest bankruptcy in U.S. history in September 2008 when the collapse of the mortgage market left what was then the fourth-largest U.S. investment bank unable to pay its debts. The company listed assets of $639 billion.
Euro-Zone Private Sector Lending Cools Sharply
Lending to the euro-zone private sector cooled sharply in August, indicating that financing constraints for companies and households pose a threat to the area's economic recovery. The annual growth rate of private-sector loans slowed to a new record low of 0.1% in August from a revised rate of 0.7% in July, data from the European Central Bank showed Friday. This rate may turn negative in September, economists warned, as insufficient access to funds could seriously hurt business and trade in the euro zone, undermining a much-hoped-for economic recovery.
"Nothing here to change our view that the euro-zone recovery looks set to be weak by historical standards," said Ben May, a European economist at Capital Economics in London. The ECB data showed that the annual growth rate of loans to non-financial companies decreased sharply, to 0.7% in August from 1.6% in July. Loans to euro-zone households fell at an annual rate of 0.2% in August after being flat in July. Euro-zone financial institutions have already come under fire from politicians and business leaders. Banks aren't passing on the funds they have received on very generous terms from the ECB, they argue. Some ECB officials have also voiced their disapproval with banks' tight lending policies.
The annual growth rate of broad M3 money supply declined to 2.5% in August from 3.0% in July - the lowest M3 growth rate since the creation of the single currency. M3 comprises currency in circulation, overnight, short-term deposits and debt securities of up to two years, repurchase agreements and money market fund shares. The three-month moving average for M3, which irons out some of the monthly fluctuations, meanwhile fell to 3.0% in the period June-August, from 3.4% in the preceding three-month period.
That is below the central bank's 4.5% reference value for the three-month average, which it considers to be in line with maintaining price stability, or an inflation rate of just below 2% over the medium term. "With the latest money and credit figures suggesting medium-term inflation pressures are virtually nonexistent, the ECB looks set to follow the example of the Federal Reserve and keep rates exceptionally low for an extended period," said Martin van Vliet, an economist at ING Bank. "The ECB is unlikely to start raising interest rates until broad money and private sector credit growth have decisively turned the corner, which we do not expect to occur before mid-2010," he said. ECB data showed that the annual M1 growth rate rose to 13.6% in August from 12.1% in July. M1 comprises notes, coins in circulation and overnight deposits.
Eurozone bank lending picks up
Eurozone bank lending has shown tentative signs of recovering, with companies returning to borrowing for the first time since January, according to European Central Bank figures. Lending to business in the 16-country region went into reverse at the start of 2009 as the economic crisis deepened, with companies on balance repaying debt. But the latest figures showed that lending restarted in August – although at an extremely modest level. Some €3bn extra was borrowed last month, seasonally-adjusted, compared with €22bn that was repaid in July. The data suggested bank lending had at least stabilised, raising the possibility that it could pick-up in coming months. The European Central Bank has flooded the banking system with liquidity – for instance by pumping in €442bn in one-year loans in June – in the hope that it would rebuild banks confidence about lending to the real economy.
The ECB argues, however, that business borrowing to fund investment is unlikely to pick-up until late in the recovery cycle, and remains cautious about the strength of the recovery. "The big picture over recent months is that the ECB has been running a super accommodative money supply but this has not fed into stronger lending, mostly because of the weak state of the economy," said Nick Kounis, European economist at Fortis bank in Amsterdam. The ECB sees no evidence of a general "credit crunch" and the slowdown in lending as largely demand-led. But it remains worried that restrictions on lending imposed by a weakened banking sector could restrict credit needed to oil the wheels of an economic recovery. The latest ECB money and credit data also showed a modest monthly pick up in bank lending to households. But borrowing remains subdued compared with a year ago. Lending to business in August was up just 0.7 per cent on an annual basis. Lending to households was down 0.2 per cent.
Adding to evidence of a recovery underway in the eurozone, Germany’s GfK consumer research organisation reported its consumer sentiment indicator was expected to rise in October to a 16-month high. Separately, France’s Insee statistical office reported an improvement in French consumer confidence. The ECB, meanwhile, is likely to be impressed by a further acceleration in M1, the narrow money supply measure, which comprises currency in circulation and overnight deposits. M1 is regarded by the ECB as offering a good indicator of turning points in the eurozone economic cycle. In August, it was growing at an annual rate of 13.6 per cent – the fastest in a decade.
Spain tips into depression
Spain is sliding into a full-blown economic depression with unemployment approaching levels not seen since the Second Republic of the 1930s and little chance of recovery until well into the next decade, according to a clutch of reports over recent days. The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP. The grim forecast is starkly at odds with claims by premier Jose Luis Zapatero, who still says Spain's recession will be milder than elsewhere in Europe.
RR de Acuña said the overhang of unsold properties on the market, or still being built, has reached 1,623,000 . This dwarfs annual demand of 218,000, and will take six or seven years to clear. The group said Spain's unemployment will peak at around 25pc, comparable to the worst chapter of the Great Depression. Spanish workers typically receive 50pc to 60pc of their former pay for eighteen months after losing their job. Then the guillotine falls. Spain's parliament has rushed through a law guaranteeing €420 a month for long-term unemployed, but this will not prevent a social crisis if the slump drags on.
Separately, UBS said unemployment will reach 4.8m and may go as high as 5.4m if the job purge in the service sector gathers pace. There is the growing risk of a "Lost Decade" akin to Japan's malaise after the Nikkei bubble. Roberto Ruiz, the bank's Spain strategist, said salaries must fall by 10pc in real terms to regain lost competitiveness, replicating the sort of wage squeeze seen in Germany after reunification. There is no sign yet that either Spanish trade unions or the Zapatero government are ready for such draconian measures. Talks between the unions and Spain's industry federation (CEOE) broke down in acrimony in July.
Mr Ruiz said the construction sector will shrink from 18pc of GDP at the peak of the boom to around 5pc, making it unlikely that there will be any significant recovery before 2012. Even then growth will be "slow, weak, and fragile". The Spanish government can do little to cushion the downturn. "The room for manouvre in fiscal policy has been exhausted," said Mr Ruiz. The rocketing cost of jobless benefits has added 3pc of GDP to the budget deficit. Mr Zapatero has ordered all ministries to cut 8pc of discretionary spending to help plug the gap left by collapsing tax revenues. The axe is likely to fall on research and big projects such as high-speed railways.
The root cause of Spain's trouble is that it joined monetary union before its economy was ready. EMU halved Spanish interest rates almost overnight. Real rates were minus 2pc for much of this decade. Combined private and corporate debt reached 230pc of GDP, funded by French and German savings. The credit boom masked a steady decline in productivity over the last decade. Spain's unit labour costs have risen by about 30pc compared to Germany. The Bank of Spain made heroic efforts to counter the effects of the bubble by forcing banks to put aside extra reserves, known as dynamic provisioning, but the sheer scale of the problem has washed over the defences.
Spain no longer has the escape valve of devaluation to claw back market share. It cannot resort to emergency monetary stimulus – as Switzerland, Britain, the US, and Japan are doing to prevent the onset of debt deflation. Prices are already falling at a rate of 1.2pc. Jamie Dannhauser from Lombard Street Research said Spain is bearing the full brunt of the European Central Bank's restrictive monetary policy, which has caused private sector credit in the eurozone to shrink over the last six months. The latest ECB data shows that 60pc of Spanish firms have seen access to credit fall so far this year. Most say they have been denied their full request for loans or credit lines.
Mr Dannhauser said Spain faces the same sort of boom-bust headache as Britain. The big difference is that Spain cannot let the exchange rate take the strain. "It is going to be very hard for them to sort this out in a currency union." For the time being, an odd calm prevails across the Iberian peninsular. There are no street riots, even though youth unemployment has reached 38pc. It is hard to imagine anything like the bloody uprising by Asturian miners in 1934, the last time so many people were without jobs.
Local communities have started to issue scrip currency known as "moneda social", based on reflation experiments tried by Austrian cantons in 1932 and more recently by Argentina. Yet few blame the crisis on the effects of the euro. There is a near total backing for EMU, in contrast to France and Germany where a small but vocal minority has never accepted the wisdom of Europe's one-size-fits-all system. Membership of the EU and the euro is inextracably linked in Spain's collective mind to the country's re-emergence as a modern, dynamic European power after the stultifying isolation of the Franco dictatorship. It would take a major trauma to test that bond.
UK car production falls 31.5% as fears grow over car scrappage scheme
A pick-up in new car production driven by the launch of the scrappage scheme ended in August, sparking concerns for the health of the industry when the Government's £300m programme ends. One industry analyst claimed the incentive plan, which encourages consumers to scrap an old car for a new model, could run out of funding as early as next week and called on the Government to extend the scheme. UK car production fell 31.5pc in August, ending a run of three consecutive months when the decline caused by the financial crisis eased.
The scrappage scheme had helped to turn a 56.5pc year-on-year drop into a 23.7pc decline by July by boosting consumer demand for new cars. However, production fell back again in August, which is a traditionally quiet month, as scrappage schemes across Europe began to end. Nonetheless, the success of the UK scheme means that the proportion of cars being built in the UK for the domestic market has risen to a four-and-a-half-year high of 33.8pc. However, Paul Everitt, the Society of Motor Manufacturers and Traders chief executive, said the recovery in the market is "extremely fragile".
Car makers have cut jobs and shifts as sales have slumped and further jobs are under threat at Vauxhall after a deal between General Motors and Magna. Jaguar Land Rover, which employs 14,500 people in the UK, yesterday announced plants to close one of its sites in the Midlands. Lord Mandelson, the Business Secretary, yesterday warned the UK manufacturing could be a "loser" from foreign ownership in light of the Vauxhall situation and Kraft's approach to Cadbury. "I am keeping a weather eye on this area," he added. Mr Everitt, who also called for the scrappage scheme to be extended, said: "Underlying demand remains weak and the recovery is still extremely fragile."
The Government's plan runs until 300,000 cars have been registered or the end of February. As of September 13, some 215,740 vehicles had been registered under the scheme and, with September being the busiest month of the year as new registrations are launched, David Raistrick, the UK manufacturing leader at Deloitte, warned it could end imminently and at the "wrong time" for the industry. Meanwhile, Renault shares slid 2pc in France yesterday as the company continued to suffer the fallout from the "fake crash" saga in Formula One. ING, the Dutch financial group, was the main sponsor for Renault's F1 team but it has demanded that its emblem be taken off the car. Spanish insurer Mutua Madrileña has done the same, claiming that its "good name" could be threatened by association with the Renault team.
Cayman Islands resists taxing demands as it sinks deeper into crisis
The Cayman Islands leader, William McKeeva Bush, was today forced to postpone his annual budget as the British overseas territory's debt crisis worsens. The situation prompted financial leaders of the Caribbean territory to launch a blistering attack on the British Foreign & Commonwealth Office (FCO) minister, Chris Bryant, for demanding the tax haven introduces an employee tax to ward off disaster.
This month, the Guardian revealed the Caribbean tax haven was forced to ask the Foreign Office permission to borrow £278m from banks to repair huge deficits. The FCO refused, advising the island's authorities to impose property or payroll taxes. Talks are continuing over a £30m emergency loan package. If the money does not arrive soon, the island's government admits it will not be able to pay its civil servants. Anthony Travers, chairman of the Cayman Islands Financial Services Association and its stock exchange, argued: "The move from an indirect to a direct system of taxation is a seismic shift which has not been thought through and which is not justified on the facts."
The territory is the capital of the world's hedge fund industry, which has assets of $2.3tn (£1.4tn) parked in the island according to figures last year, and it is the world's fifth biggest banking centre. Its GDP places it as the world's 12th richest jurisdiction, despite a population of only 51,900. Despite its huge wealth, the overseas territory is strongly resisting pressure to levy taxes to escape a black hole caused by the cost of a large public infrastructure programme and dwindling licence fees from the financial institutions.
"I have canvassed senior business players in Cayman and they have indicated that at the first sign of a payroll tax they will have to consider their options," said Travers. "I believe this will inevitably lead to job losses and it will affect both the highly paid and more junior members of staff and lead not to a revenue increase, but a decrease." Travers added that the City of London would be hit by any change. "The FCO's sniping at hedge funds plays right into the hands of EU legislators who are desperately trying to curb the success of the City of London and, in particular, the hedge fund industry. In short, if the FCO attack the Caymans, they damage London."
Cayman Islands leaders are furious the islands and other tax havens have been blamed by G20 world leaders for helping to bring about the financial crisis. But campaigners argue so-called "secrecy jurisdictions" were central to creating financial instability that exacerbated the crash.
Difficulties in the Caymans come at the same time as Switzerland has been taken off the OECD's "grey list" for signing its 12th information-sharing agreement with another country. Switzerland was promoted to the "white list" as G20 world leaders in Pittsburgh vowed to deploy sanctions against countries not complying with OECD tax protocols. There are 22 tax havens on its grey list. In two weeks, the task of assessing how each country complies with anti-tax evasion measures will begin, with each OECD country being subjected to a peer review. Further pressure on the UK's tax havens is likely to come next week at a meeting of Commonwealth finance ministers.
The Long Slog: Out of Work, Out of Hope
As Bill Jacobs hunted fruitlessly for work nine months after his layoff, it dawned on him that those nine months might, themselves, be part of his problem. One clue was the conversation the computer specialist had with a job recruiter this summer. "The first question was, 'When did you get laid off?' The next one was, 'How come you haven't had a job since then?'" Nearly 15 million Americans are jobless, and the number is widely expected to remain high even as the economy slowly begins to recover. Part of the problem many of the unemployed face: the very fact that they have been out of work a long time.
About five million of the jobless are what economists class as "long-term unemployed," people who have been out of work for 27 weeks or more. As challenging as it is for anyone to find a good job in this economy, it can be even harder for people out of work a long time. Skills atrophy. Demoralization sets in and can become permanent. Some potential employers shy away. Discouraged, some workers who have spent many months on the sidelines simply fade out of the work force, applying for union pensions or Social Security benefits they didn't intend to take until much later, or trying to get in on other government programs such as Social Security disability benefits.
The probability that a laid-off worker will find a job grows smaller the longer people have been out of work, according to studies in the 1980s by economists Lawrence Katz of Harvard University and Bruce Meyer of the University of Chicago. "Someone unemployed for six months is much less likely to find a job in the next month than someone unemployed for one month," Mr. Katz says. The problem today: The proportion of the unemployed who have been out of work for over 26 weeks, at one-third, is the highest since World War II. Mr. Katz, Mr. Meyer and other researchers also have found that wages the laid-off can expect when they do find a new job also tend to be lower the longer they were without work.
Scott Thompson has an on-the-ground view of their prospects. He is president of Lexicon Staffing, a technology recruiting firm in Portland, Ore. Employers he deals with don't ever explicitly say they are less interested in people who have been out of work for an extended period, "but their actions tell me exactly that," Mr. Thompson says. "We will send two or three candidates for a job. More often than not, the guy who has recent experience up to last month is the guy that gets the interview." A growing number of long-out-of-work adults facing these odds appear to be giving up. The labor-force participation rate -- the proportion of working-age people who either have jobs or are actively looking for one -- was 65.5% in August. That was the lowest in 22 years, according to the Labor Department.
Increasing numbers are filing for Social Security disability, available to people who can show they have a medical condition that is likely to keep them out of work for at least a year. While the program's rolls were already rising before the recession, as baby boomers aged, the pace of applications sped up with the economy's downturn. The Social Security Administration received 1.9 million applications for disability benefits in the first eight months of this year, up 23% from a year earlier.
"Having a very severe recession is going to cause a lot of people who would have stayed in the labor force to apply for disability," says David Autor, an economist at the Massachusetts Institute of Technology. "It's a one-way ticket out of the work force and into public assistance."
Paul Harrison worked for years manufacturing cables for oil rigs, working in the Tulsa, Okla., area. Early this spring, he was laid off. Since then, he has applied without success to big nationwide retailers, a burger-and-ice-cream place and a host of other employers, nearly always for jobs that would have paid much less than the roughly $60,000 a year he earned before. As the family's finances deteriorated, his wife's car was repossessed. The couple pawned an exercise machine for $200. They haven't gone to see a 2-year-old granddaughter since July 4 because of the cost of gasoline to drive the 85 miles to where she lives.
Many mornings, Mr. Harrison goes around collecting cans and scrap metal to sell to recycling centers. He says pride compels him to continue applying for jobs. "I can't see myself not working," he says through tears. "I feel emotionally hurt to not be able to provide for my family after doing it for so long." Years of lifting during his former manufacturing job left Mr. Harrison with two ruptured and bulging spinal discs, which required surgery last year. His employer accommodated him for a time, keeping him on but with a 50-pound limit on what he could lift on the job.
Recently, Mr. Harrison applied for Social Security disability, which pays recipients an average of about $1,000 a month and puts them on a path to become eligible for Medicare before they are 65. He is 57. Given his back problems, his age and the difficulty of his job search, if he gets into the disability program, he says, "that would be retirement for me."
One thing this kind of move affects is federal spending. Last year, the Social Security Administration paid out about $106 billion in disability benefits, equal to nearly 4% of the federal budget. The payout was up about a third from four years earlier. The agency projects it will receive roughly a million more disability applications from 2009 through 2011 than it would have without the recession, says Stephen Goss, its chief actuary. If acceptance rates stay the same, this would add roughly 500,000 more people to the rolls by the end of 2011.
So far, much of the government's response to long-term unemployment has been to extend jobless benefits, a support that keeps workers off the streets but can lead some to languish in unemployment instead of searching for work as if it were a full-time job. The federal government extended the standard 26 weeks of benefits by 20 weeks, and to as much as a total of 79 weeks for some workers in high-unemployment states.
Phillip Lawrence, a Maine electrician who has been out of work for 15 months, has had his final extension, and is running out of options. Mr. Lawrence spent most of his career at a paper mill in Brewer, Maine. He was working at a boatyard for $16 an hour when he was laid off in June 2008. Like Mr. Harrison in Oklahoma, he has applied for jobs with retailers, as well as hospitals and schools, trying for work in heating, plumbing or other trades.
Through much of Maine, health care has replaced manufacturing as the dominant industry. "You look for work and it all has to do with medical," he says. At 59, he feels too young to retire but too old to learn a new skill. "At my age, I can't see going back to school for four years," he says. Mr. Lawrence receives $340 a week in unemployment benefits and also has some home-equity cash he took out in a refinancing last year. He saves on expenses by heating his home with wood. To keep busy, he does projects like renovating a bathroom and building a new porch. "Just trying to keep my sanity," he says.
If he were to retire, Mr. Lawrence could collect $340 a month in a union pension, but he would incur a penalty for collecting it early. The money from his home refinancing "is the only thing keeping me going right now," he says. Says Mr. Katz, the Harvard labor economist: "The big worry is even after the economy recovers, we are going to see a huge group of individuals who are disconnected from the labor market." Retraining is the remedy being tried by many states, such as California, where the unemployment rate is 12.2%. "If you're unemployed, at this point the likelihood is that you may be unemployed for a significant period of time," says Geneva Robinson, a division chief for the state's Employment Development Department. "We're trying to encourage them to get training so that when the labor market does come back, they'll be prepared."
In Michigan -- jobless rate 15.2% -- a state-supported nonprofit organization has started a peer-to-peer networking program, which pays laid-off and retired workers to call up old colleagues and prod them to make use of state education and training services. "It's not part of people's nature to take advantage unless there is someone pushing them," says John Kreucher, who manages the program for Human Resources Development Inc., the nonprofit. "There is just so much inertia built in. It's easier to sit home rather than go out and pull things together for themselves. They need mentoring, and [the mentors] can't be bureaucrats."
In a shuttered General Motors metal-stamping plant in Grand Rapids the other day, Jerry Brower and Gary Haskell, both once employees at the plant but now paid by the nonprofit, sat at desks calling other laid-off workers to coax them to keep applying for jobs or to sign up for retraining programs. "You get your tractor running?" Mr. Haskell began one phone call to a former colleague, before segueing into: "The last time I called, you were interested in getting some training..."
To get through to other laid-off workers, he talks about things like fishing, in the voice of an old friend. One program he pushes is called "No Worker Left Behind," which helps eligible workers with community-college tuition and other training. "We don't want anybody opting out for the easy way," Mr. Haskell said. "You put a bug in their ear." Long-unemployed people who do find jobs often spend years working to get back to their old wages. In the early 1990s, Tom Stillman lost a good job at a Duluth, Minn., tool company. He spent a year out of work, eventually finding a job at an outdoor-equipment retailer, where he still works.
It took Mr. Stillman about 12 years to get his inflation-adjusted compensation back to what he had in his final year at the tool company. "That's where you're losing money. When you start off [in a new job] you're making a lot less," says Mr. Stillman, 57. He is far from impoverished. But after the uncertainty of a year-long layoff and spending over a decade climbing back up the financial ladder, he says his expectations have been diminished. When he finally retires, it will probably be in the same two-bedroom house he and his wife bought in 1977. Back then, they called it a starter home.
by George Monbiot
It was revolting, monstrous, inhumane – and scarcely different from what happens in Africa almost every day. The oil trading company Trafigura has just agreed to pay compensation to 31,000 people in Cote d’Ivoire, after the Guardian and the BBC’s Newsnight obtained emails sent by its traders(1). They reveal that Trafigura knew that the oil slops it sent there in 2006 were contaminated with toxic waste(2). But the Ivorian contractor it employed to pump out the hold of its tanker dumped them around inhabited areas in the capital city and the countryside.
Tens of thousands of people fell ill and 15 died(3). It is one of the world’s worst cases of chemical exposure since the gas leak at the Union Carbide factory in Bhopal. But in all other respects the Trafigura case is unremarkable. It’s just another instance of the rich world’s global fly-tipping.
On the day that the Guardian published the company’s emails, it also carried a story about a shipwreck discovered in 480 metres of water off the Italian coast(4). Detectives found the ship after a tip-off from a mafioso. It appears to have been carrying drums of nuclear waste when the mafia used explosives to scuttle it. The informant, Francesco Fonti, said that his clan had been paid £100,000 to get rid of it. What makes this story interesting is that the waste appears to be Norwegian. Norway is famous for its tough environmental laws, but a shipload of nuclear waste doesn’t go missing without someone high up looking the other way.
Italian prosecutors are investigating the scuttling of a further 41 ships. But most of them weren’t sunk, like Fonti’s vessel, off the coast of Italy; they were lost off the coast of Somalia. When the great tsunami of 2004 struck the Somali coast, it dumped and smashed open thousands of barrels on the beaches and in villages up to 10km inland(5). According to the United Nations, they contained clinical waste from western hospitals, heavy metals, other chemical junk and nuclear waste.
People started suffering from unusual skin infections, bleeding at the mouth, acute respiratory infections and abdominal haemorrhages(5a). The barrels had been dumped in the sea, a UN spokesman said, for one obvious reason: it cost European companies around $2.50 a tonne to dispose of the waste this way, while dealing with them properly would have cost "something like $1000 a tonne."(6) On the seabed off Somalia lies Europe’s picture of Dorian Grey: the skeleton in the closet of the languid new world we have made.
The only people who have sought physically to stop this dumping are Somali pirates. Most of them take to the seas only for blood and booty; but some have formed coastal patrols to stop over-fishing and illegal dumping by foreign fleets(7,8,9). Some of the vessels being protected from pirates by Combined Task Force 151 – the rich world’s policing operation in the Gulf of Aden – have come to fish illegally or dump toxic waste. The warships make no attempt to stop them.
The law couldn’t be clearer: the Basel convention, supported by European directives, forbids EU or OECD nations from dumping hazardous wastes in poorer countries(10,11,12). But without enforcement the law is useless. So, for example, while all our dead electronic equipment is supposed to be recycled by licensed companies at home, according to Consumers International around 6.6 million tonnes of it leaves the European Union illegally every year(13).
Much of it lands in West Africa. An investigation by the Mail on Sunday found computers which once belonged to the National Health Service being broken up and burnt by children on Ghanaian rubbish dumps(14). They were trying to extract copper and aluminium by burning off the plastics, with the result that they were inhaling lead, cadmium, dioxins, furans and brominated flame retardants(15). Tests in another of the world’s great flytips - Guiyu in China - show that 80% of the children of that city have dangerous levels of lead in their blood(16).
In February, working with Sky News and the Independent, Greenpeace placed a satellite tracking device in a dead television and left it at a recycling centre in Basingstoke run by Hampshire County Council(17,18). It passed through the hands of the council’s recycling company, then found its way first to Tilbury docks then to Lagos, where the journalists bought it back from a street market. Under EU law, used electronic equipment can be exported only if it’s still working, but Greenpeace had made sure the TV was unusable. A black market run by criminal gangs is dumping our electronic waste on the poor, but since the European directive banning this practice was incorporated into British law in January 2007, the Environment Agency hasn’t made a single prosecution(19). Dump your telly over a hedge and you can expect big trouble. Dump 10,000 in Nigeria and you can expect to get away with it.
If the mafia were to establish itself as an effective force in this country, it would do so by way of the waste disposal industry. All over the world the cosa nostra, yakuza, triads, bratva and the rest make much of their fortune by disposing of our uncomfortable truths. It suits all the rich nations – even, it seems, the government of Norway - not to ask too many questions, as long as the waste goes to faraway countries of which we know little. Only when the mobs make the mistake of dumping it off their own coasts does the state start to get huffy.
The Trafigura story is a metaphor for corporate capitalism. The effort of all enterprises is to keep the profits and dump the costs on someone else. Price risks are dumped on farmers, health and safety risks are dumped on sub-contractors, insolvency risks are dumped on creditors, social and economic risks are dumped on the state, toxic waste is dumped on the poor, greenhouse gases are dumped on everyone.
Another story that broke on the same day was the shifting, by Barclays, of £7bn of residential mortgage assets and collateralised debt obligations to a fund in the Cayman Islands(20). These were universally described by the media as toxic assets. Some traders also call them toxic waste. Everyone understands the metaphor even if they haven’t thought it through: the banks seek to dump their liabilities while clinging onto their assets. Perhaps it comes as no surprise to find that Trafigura also runs a hedge fund, or that Lord Strathclyde, leader of the Conservatives in the House of Lords, is a director(21).
That party, like New Labour, advocates the continuing deregulation of business. The Trafigura case, like the financial crisis, suggests that in business there are people ruthless enough to shut their eyes to almost anything if they think they can make money. Business without regulation is scarcely distinguishable from organised crime. Regulation without strict enforcement is an open invitation to mess with people’s lives. Tedious directives, state power and bureaucratic snooping – the interference that everyone professes to hate - are all that stand between civilisation and corporate hell.
Naomi Klein Interviews Michael Moore on the Perils of Capitalism
Editors Note: On Sept. 17, in the midst of the publicity blitz for his cinematic takedown of the capitalist order, filmmaker Michael Moore talked with Nation columnist Naomi Klein by phone about the film, the roots of our economic crisis and the promise and peril of the present political moment. Listen to a podcast of the full conversation here. Following is an edited transcript of their conversation.
Naomi Klein: So, the film is wonderful. Congratulations. It is, as many people have already heard, an unapologetic call for a revolt against capitalist madness. But the week it premiered, a very different kind of revolt was in the news: the so-called tea parties, seemingly a passionate defense of capitalism and against social programs.
Meanwhile, we are not seeing too many signs of the hordes storming Wall Street.
Personally, I'm hoping that your film is going to be the wake-up call and the catalyst for all of that changing. But I'm just wondering how you're coping with this odd turn of events, these revolts for capitalism led by Glenn Beck.
Michael Moore: I don't know if they're so much revolts in favor of capitalism as they are being fueled by a couple of different agendas, one being the fact that a number of Americans still haven't come to grips with the fact that there's an African American who is their leader. And I don't think they like that.
NK: Do you see that as the main driving force for the tea parties?
MM: I think it's one of the forces -- but I think there's a number of agendas at work here. The other agenda is the corporate agenda. The health care companies and other corporate concerns are helping to pull together what seems like a spontaneous outpouring of citizen anger.
But the third part of this is -- and this is what I really have always admired about the right wing -- they are organized, they are dedicated, they are up at the crack of dawn fighting their fight. And on our side, I don't really see that kind of commitment.
When they were showing up at the town-hall meetings in August -- those meetings are open to everyone. So where are the people from our side? And then I thought, wow, it's August. You ever try to organize anything on the left in August?
NK: Wasn't part of it also, though, that the left, or progressives, or whatever you want to call them, have been in something of a state of disarray with regard to the Obama administration -- that most people favor universal health care, but they couldn't rally behind it because it wasn't on the table?
MM: Yes. And that's why [President Barack] Obama keeps turning around and looking for the millions behind him, supporting him, and there's nobody even standing there, because he chose to take a half measure instead of the full measure that needed to happen. Had he taken the full measure -- true single-payer, universal health care -- I think he'd have millions out there backing him up.
NK: Now that [Montana Democrat Sen. Max] Baucus' plan is going down in flames, do you think there's another window to put universal health care on the table?
MM: Yes. And we need people to articulate the message and get out in front of this and lead it. You know, there's close to a hundred Democrats in Congress who had already signed on as co-signers to [Michigan Democratic Congressman] John Conyers' bill.
Obama, I think, realizes now that whatever he thought he was trying to do with bipartisanship or holding up the olive branch, that the other side has no interest in anything other than the total destruction of anything he has stood for or was going to try and do.
So if [New York Democratic Congressman Anthony] Weiner or any of the other members of Congress want to step forward, now would be the time. And I certainly would be out there. I am out there.
I mean, I would use this time right now to really rally people, because I think the majority of the country wants this.
NK: Coming back to Wall Street, I want to talk a little bit more about this strange moment that we're in, where the rage that was directed at Wall Street, what was being directed at AIG executives when people were showing up in their driveways -- I don't know what happened to that.
My fear was always that this huge anger that you show in the film, the kind of uprising in the face of the bailout, which forced Congress to vote against it that first time, that if that anger wasn't continuously directed at the most powerful people in society, at the elites, at the people who had created the disaster and channeled into a real project for changing the system, then it could easily be redirected at the most vulnerable people in society; I mean immigrants, or channeled into racist rage.
And what I'm trying to sort out now is, is it the same rage or do you think these are totally different streams of American culture -- have the people who were angry at AIG turned their rage on Obama and on the idea of health reform?
MM: I don't think that is what has happened. I'm not so sure they're the same people.
In fact, I can tell you from my travels across the country while making the film, and even in the last few weeks, there is something else that's simmering beneath the surface.
You can't avoid the anger boiling over at some point when you have 1 in 8 mortgages in delinquency or foreclosure, where there's a foreclosure filing once every 7.5 seconds, and the unemployment rate keeps growing. That will have its own tipping point.
And the scary thing about that is that historically, at times when that has happened, the right has been able to successfully manipulate those who have been beaten down and use their rage to support what they used to call fascism.
Where has it gone since the crash? It's a year later. I think that people felt like they got it out of their system when they voted for Obama six weeks later and that he was going to ride into town and do the right thing. And he's kind of sauntered into town promising to do the right thing but not accomplishing a whole heck of a lot.
Now, that's not to say that I'm not really happy with a number of things I've seen him do.
To hear a president of the United States admit that we overthrew a democratically elected government in Iran, that's one of the things on my list I thought I'd never hear in my lifetime. So there have been those moments.
And maybe I'm just a bit too optimistic here, but he was raised by a single mother and grandparents, and he did not grow up with money. And when he was fortunate enough to be able to go to Harvard and graduate from there, he didn't then go and do something where he could become rich; he decides to go work in the inner city of Chicago.
Oh, and he decides to change his name back to what it was on the birth certificate -- Barack. Not exactly the move of somebody who's trying to become a politician. So he's shown us, I think, in his lifetime many things about where his heart is, and he slipped up during the campaign and told Joe the Plumber that he believed in spreading the wealth.
And I think that those things that he believes in are still there. Now, it's kind of up to him.
If he's going to listen to the Rubins and the Geithners and the Summerses, you and I lose. And a lot of people who have gotten involved, many of them for the first time, won't get involved again.
He will have done more to destroy what needs to happen in this country in terms of people participating in their democracy. So I hope he understands the burden that he's carrying and does the right thing.
NK: Well, I want to push you a little bit on this, because I understand what you're saying about the way he's lived his life and certainly the character he appears to have. But he is the person who appointed Summers and Geithner, who you're very appropriately hard on in the film.
And one year later, he hasn't reined in Wall Street. He reappointed [Fed Chairman Ben] Bernanke. He's not just appointed Summers but has given him an unprecedented degree of power for a mere economic adviser.
MM: And meets with him every morning.
NK: Exactly. So what I worry about is this idea that we're always psychoanalyzing Obama, and the feeling I often hear from people is that he's being duped by these guys. But these are his choices, and so why not judge him on his actions and really say, "This is on him, not on them"?
MM: I agree. I don't think he is being duped by them; I think he's smarter than all of them.
When he first appointed them, I had just finished interviewing a bank robber who didn't make it into the film, but he is a bank robber who is hired by the big banks to advise them on how to avoid bank robberies.
So in order to not sink into a deep, dark pit of despair, I said to myself that night, That's what Obama's doing. Who better to fix the mess than the people who created it? He's bringing them in to clean up their own mess. Yeah, yeah. That's it. That's it. Just keep repeating it: "There's no place like home, there's no place like home ..."
NK: And now it turns out they were just being brought in to keep stealing.
MM: Right. So now it's on him.
NK: All right. Let's talk about the film some more.
I saw you on [Jay] Leno, and I was struck that one of his first questions to you was this objection -- that it's greed that's evil, not capitalism. And this is something that I hear a lot -- this idea that greed or corruption is somehow an aberration from the logic of capitalism rather than the engine and the centerpiece of capitalism.
And I think that that's probably something you're already hearing about the terrific sequence in the film about those corrupt Pennsylvania judges who were sending kids to private prison and getting kickbacks. I think people would say, "That's not capitalism, that's corruption."
Why is it so hard to see the connection, and how are you responding to this?
MM: Well, people want to believe that it's not the economic system that's at the core of all this. You know, it's just a few bad eggs. But the fact of the matter is that, as I said to Jay, capitalism is the legalization of this greed.
Greed has been with human beings forever. We have a number of things in our species that you would call the dark side, and greed is one of them. If you don't put certain structures in place or restrictions on those parts of our being that come from that dark place, then it gets out of control.
Capitalism does the opposite of that. It not only doesn't really put any structure or restriction on it. It encourages it, it rewards it.
I'm asked this question every day, because people are pretty stunned at the end of the movie to hear me say that it should just be eliminated altogether. And they're like, "Well, what's wrong with making money? Why can't I open a shoe store?"
And I realized that [because] we no longer teach economics in high school, they don't really understand what any of it means.
The point is that when you have capitalism, capitalism encourages you to think of ways to make money or to make more money. And the judges never could have gotten the kickbacks had the county not privatized the juvenile hall.
But because there's been this big push in the past 20 or 30 years to privatize government services, take it out of our hands, put it in the hands of people whose only concern is their fiduciary responsibility to their shareholders or to their own pockets, it has messed everything up.
NK: The thing that I found most exciting in the film is that you make a very convincing pitch for democratically run workplaces as the alternative to this kind of loot-and-leave capitalism.
So I'm just wondering, as you're traveling around, are you seeing any momentum out there for this idea?
MM: People love this part of the film. I've been kind of surprised, because I thought people aren't maybe going to understand this or it seems too hippie-dippy -- but it really has resonated in the audiences that I've seen it with.
But, of course, I've pitched it as a patriotic thing to do. So if you believe in democracy, democracy can't be being able to vote every two or four years. It has to be every part of every day of your life.
We've changed relationships and institutions around quite considerably because we've decided democracy is a better way to do it. Two hundred years ago, you had to ask a woman's father for permission to marry her, and then once the marriage happened, the man was calling all the shots. And legally, women couldn't own property and things like that.
Thanks to the women's movement of the '60s and '70s, this idea was introduced to that relationship -- that both people are equal and both people should have a say. And I think we're better off as a result of introducing democracy into an institution like marriage.
But we spend eight to 10 to 12 hours of our daily lives at work, where we have no say.
I think when anthropologists dig us up 400 years from now -- if we make it that far -- they're going to say, "Look at these people back then. They thought they were free. They called themselves a democracy, but they spent 10 hours of every day in a totalitarian situation, and they allowed the richest 1 percent to have more financial wealth than the bottom 95 percent combined."
Truly they're going to laugh at us the way we laugh at people 150 years ago who put leeches on people's bodies to cure them.
NK: It is one of those ideas that keeps coming up. At various points in history it's been an enormously popular idea. It is actually what people wanted in the former Soviet Union instead of the Wild West sort of mafia capitalism that they ended up with. And what people wanted in Poland in 1989 when they voted for Solidarity was for their state-owned companies to be turned into democratically run workplaces, not to be privatized and looted.
But one of the biggest barriers I've found in my research around worker cooperatives is not just government and companies being resistant to it but actually unions as well. Obviously there are exceptions, like the union in your film, United Electrical Workers, which was really open to the idea of the Republic Windows & Doors factory being turned into a cooperative, if that's what the workers wanted.
But in most cases, particularly with larger unions, they have their script, and when a factory is being closed down, their job is to get a big payout -- as big a payout as they can, as big a severance package as they can for the workers. And they have a dynamic that is in place, which is that the powerful ones, the decision makers, are the owners.
You had your U.S. premiere at the AFL-CIO convention. How are you finding labor leadership in relation to this idea? Are they open to it, or are you hearing, "Well, this isn't really workable"? Because, I know you've also written about the idea that some of the auto plant factories or auto parts factories that are being closed down could be turned into factories producing subway cars, for instance. The unions would need to champion that idea for it to work.
MM: I sat there in the theater the other night with about 1,500 delegates of the AFL-CIO convention, and I was a little nervous as we got near that part of the film, and I was worried that it was going to get a little quiet in there.
Just the opposite. They cheered it. A couple people shouted out, "Right on!" "Absolutely!"
I think that unions at this point have been so beaten down, they're open to some new thinking and some new ideas. And I was very encouraged to see that.
The next day at the convention, the AFL-CIO passed a resolution supporting single-payer health care. I thought, "Wow," you know? Things are changing.
NK: Coming back to what we were talking about a little earlier, about people's inability to understand basic economic theory: In your film, you have this great scene where you can't get anybody, no matter how educated they are, to explain what a derivative is.
So it isn't just about basic education. It's that complexity is being used as a weapon against democratic control over the economy. This was [Alan] Greenspan's argument -- that derivatives were so complicated that lawmakers couldn't regulate them.
It's almost as if there needs to be a movement toward simplicity in economics or in financial affairs, which is something that Elizabeth Warren, the chief bailout watchdog for Congress, has been talking about in terms of the need to simplify people's relationships with lenders.
So I'm wondering what you think about that.
Also, this isn't really much of a question, but isn't Elizabeth Warren sort of incredible? She's kind of like the anti-Summers. It's enough to give you hope, that she exists.
MM: Absolutely. And can I suggest a presidential ticket for 2016 or 2012 if Obama fails us? [Ohio Democratic Congresswoman] Marcy Kaptur and Elizabeth Warren.
NK: I love it. They really are the heroes of your film. I would vote for that.
I was thinking about what to call this piece, and what I'm going to suggest to my editor is "America's Teacher," because the film is this incredible piece of old-style popular education.
One of the things that my colleague at The Nation Bill Greider talks about is that we don't do this kind of popular education anymore, that unions used to have budgets to do this kind of thing for their members, to just unpack economic theory and what's going on in the world and make it accessible.
I know you see yourself as an entertainer, but I'm wondering, do you also see yourself as a teacher?
MM: I'm honored that you would use such a term. I like teachers.
New York Governor Paterson hints he might not run in 2010 after all, for the sake of the party; wife attacks Obama
Embattled Gov. Paterson for the first time Wednesday opened the door to not running for election next year - while his wife attacked President Obama for trying to drive him from office. "I think if I got to a point where I thought my candidacy was hurting my party, obviously it would be rather self-absorbed to go forward," Paterson said at a Syracuse luncheon. Paterson has been under pressure from some Democrats and union leaders in New York and most recently the White House to drop his plans to run. Paterson said he still plans to run - for now.
"I didn't say that anybody would have to convince me [to step aside]," he said. "I don't think anyone who is clearly hurting their party would [run] when it is going to make the party lose." The Daily News reported Sunday that White House political director Patrick Gaspard told Paterson on Sept. 14 the administration preferred he not run. Paterson said he is not aware that state Attorney General Andrew Cuomo, whom many Democrats want to run for governor, played a role in the White House involvement.
"I'm sure it didn't bother him," he quipped before saying some of Cuomo's team "certainly did" play a role. A Cuomo spokesman denied involvement. The White House fears Paterson's weak poll numbers will jeopardize other Democrats on the ticket and pave the way for former Republican Mayor Rudy Giuliani to run for governor. Paterson said that even if he was thinking of dropping out of the race, he wouldn't announce it now as he tries to get the Legislature to make budget cuts.
"I need all the political strength that I can muster to try and get this Legislature back to balance the budget," he said. Paterson, who became governor in March 2008 when Eliot Spitzer resigned amid a prostitution scandal, said he never planned to be governor. "I did not sign up for this," he said. "I wanted to be lieutenant governor. I had this grand plan that Hillary Clinton [would] become President [and] the governor would appoint me to the Senate."
Meanwhile, Paterson's wife, Michelle, told WNBC-TV she is disappointed that Obama intervened and believes her husband can rebound. "I have never heard of a President asking a sitting governor not to run for reelection," she said. "I thought it was very unusual and very unfair." She told Fox 5 Obama should "stay out of New York politics."