The beguiling lass previously seen in the guise of Thisbe, now more exotically trimmed
Ilargi: Wells Fargo announced record profits yesterday, and still lost 5% of their share value at the end of the day. The most ridiculous analyst out there, Dick Bove (or is that Bové?), was on CNBC early in the morning singing the bank's praises, only to downgrade it to a sell advice a few hours later. If that last Bove Move was what drove the stock down, investors deserve all the losses that are coming to them. "“It’s definitely had an effect on the market,” said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. Bove “has a very good following and very long track record of consistency [..] “ " Oh, Bove's consistent alright, that part is true. He's consistently wrong when it counts.
My first thought when I saw that Wells Fargo had announced record profits was: "How is that legal?" You see, I had been reading Reggie Middleton's If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Part 4 - Wells Fargo on Monday.
Wells is one of 32 banks on Middleton's May 2008 Doo-Doo 32 list, alongside for instance Citi, JPMorgan Chase, BofA among others. And in his Monday post, Middleton explained in great detail why Wells Fargo is on that list, which he very diplomatically slash euphemistically calls "a list of institutions quite likely to hit the fan from an investor's perspective."
Middleton goes through a few categories where he finds Wells Fargo wanting:
- The risks posed by the housing crisis and arcane financing vehicles are drastically under-appreciated by the sell side...
- Write downs on investment securities along with other assets like MSR (Mortgage servicing rights) and mortgages held for sale will further erode the shareholder's wealth.
- Risk emanating from the massive derivative exposure.
By the time you're done with his analysis, let's just say Wells would not be a priority on your investment list, other than to short them into the curlies.
However. Wait a minute. There is a caveat the size of Alaska here. Because if a bank that is as deep in doo-doo as Wells is according to Middleton, can still report record profits, you might want to look, and very carefully, at the system that allows it to do so. People do business with Wells Fargo. They buy shares, they sign for mortgages and other loans, they deposit their savings. All these actions are based to a large extent on trust. And when a bank can paint rosy pictures toward the outside world while hiding who knows in toxicity, writedowns and losses, and get away with it, there is something very wrong with regards to the trust issue. The word fraud comes to mind.
The bank, of course, operates on a playing field whose boundaries are defined by the economic system it is part of, and of which the laws, rules and regulations are set, in the end, by the political system. In other words, Wells Fargo, and of course they’re not alone in this, can present a certain image of itself, which, to put it mildly, is not the whole picture, because the government of the country it's based in explicitly allows it to do that, even though the best interests of its citizens risk being trampled in the process.
Which leads me quite smoothly into what I really wanted to talk about.
I have mentioned a number of times in the past that the economic system we grew up in is finished. It's not the sort of thing that I have necessarily wanted to harp on too much and too often, because I realize that most people simply won't understand what I mean. But I think today might be a good time to re-visit the topic. If only because my statement is starting to find more proponents.
There's Joe Bageant, who says in Raising up dead horses :
The fiesta is over, the economy as we knew it is dead.And adds this, as funny as it is true:
[Obama's] economic team of free market billionaires and financial hotwires includes most of those who helped Bill Clinton sell the theory that Americans didn't need jobs. Actual labor, if you will remember, was for Asian sweatshops and Latin maquiladoras.As well as:
We, as a nation one third of whose population is functionally illiterate, were going to transmute ourselves into an information and transactional economy.
Ain't gonna sweat no mo' no mo' -- just drink wine and sing about Jesus all day.
The sharks are still running the only game in town and they have never had it better. To be sure, with the economic collapse some of the financial lords won't pile quite up as many millions this year. Others will however have a record year. All are still squatting in the tall cotton.
Paul Farrell at Marketwatch has this take: Death of the 'Soul of Capitalism':
America has lost its soul and collapse is inevitable.
Get it? The engine driving the great "American Economic Empire" for 233 years will collapse, a total disaster, a destiny we created.
"Wall Street America" went over to the dark side, got mega-greedy and took control of "Washington America." Their spoils of war included bailouts, bankruptcies, stimulus, nationalizations and $23.7 trillion new debt off-loaded to the Treasury, Fed and American people. Who's in power? Irrelevant. The "happy conspiracy" controls both parties, writes the laws to suit its needs, with absolute control of America's fiscal and monetary policies.
Even Ron Paul says that:
The [monetary] system will not be revived. We have to devise a new systemBut Ron Paul makes some twisted turns in his reasoning. Which, through no intent of his own, point to where the real problems lie. Paul claims that if no banks or other corporations were bailed out last year, "we could get back on our feet again" by now.
"Yes, there would have been a lot of bankruptcies, but it would all be over now; we’d be going back to work again".And that is very far from the truth.
(As an aside, I was thinking earlier that the government's implicit permission for Wells Fargo to present crooked and/or incomplete data is a subject that should be be put before the Supreme Court. Does the US government, from a legal point of view, have the right to endanger the financial welfare of its citizens by letting corporations omit data from their financial statements? I remembered that because I think Ron Paul's Audit the Fed initiative badly needs to go the same route: Ask the Supreme Court if Congress has the legal status to audit the Fed, and until you have the answer, stop talking about it.)
Back to where Paul misses the truth about the end of the economic system. Sure, not bailing out the broke banks would have been a start. It would, however, not have solved the problem, not even close. The libertarian class, of which Paul poses as a great defender, and to which Mike Shedlock is a proud subscriber, claims that the issue is not capitalism or the free market. (After all, these are their deities.) For them the trouble all starts -and ends- with government and its rules and regulations.
But that's precisely where the issue gets all mixed up. For one, the bail-outs are not the beginning of the sorrowful saga. And we don’t need to, though we could, return to the 1913 establishing of the Fed, or the 1933-1971 steps that took the US away from gold. There is enough in the last ten years to make a solid point.
Allowing investment banks and securities firms access to taxpayer deposits, ref: the 1999 Glass-Steagall repeal (Gramm-Leach-Bliley Act), and liberating the derivatives trade, ref: the 2000 Commodity Futures Modernization Act, are the two pieces of law that directly led to a situation in which banks were allowed both to 1) become as big as they are now (too big to fail) and 2) to leverage their bets as much as they have (which wiped out their capital).
And you don't really have to be all that smart to realize that both acts are de-regulatory, and made the markets more, not less, free. Now look around you and tell me what you see 10 years later. Not what the likes of Shedlock and Ron Paul envisioned, I’ll bet.
In other words, the free market system has failed America miserably. Well, at least in this instance, and that by itself should raise very grave doubts about that system.
And it's not all that hard either to see why that is. If you let market participants free to pursue what is in their best interests, without forcing them to give priority to society's best interests, they will eventually figure out that the best single investment they can possible make is to buy the government. That allows them to make the laws. Which is detrimental to the rest of society, and leads to the sort of mess we're in right now, which even libertarians concede is not desirable.
So you would have to prevent that from happening. For which you need laws and regulations to keep those market participants out of the government. Since free market guys and dolls don't want regulations, they have no solution to offer. Exit left, center stage.
Now you’ve already seen that the economic system we have is broken beyond repair. For those still in doubt, imagine another $50-$100 trillion in debt that needs to be serviced. The system can't do it, it can't even handle what's there now without fraudulent accounting and robbing the taxpayers of their future revenues.
Capitalism might or might not work only if and when you could keep corporations out of the government. If you can't, disaster is assured for everyone but the corporations. Since corporations are required by law to deliver the maximum return on their investments, and no return comes close to buying political power, it should be obvious that there's a glaring contradiction in the libertarian position of more freedom for corporations and less for government. In the present American situation, there is no party that benefits from a larger government as much as corporations do. After all, they control the government.
It looks like I'll have to revisit the issue; there's so much yet to say about it, and so much ideological resistance. To summarize for now:
Our economic, financial, capital, and credit system is done and gone. What you're looking at today is a corpse propped-up by the promise of future tax revenues from millions upon rapidly increasing millions of homeless and jobless Americans.
Unfortunately, that's just the beginning. Because the financial system has been allowed to infiltrate the political system to the degree in which it has (a full-scale take-over), America's political system is as bankrupt as its financial system is. It will take a long and hard time to replace.
PS: In Texas, someone who's well off financially may be said to be "Shitting in the tall cotton".
Ilargi: On a bit of a side note, you may have seen our new Fall Fund Drive as it appears these days in the left hand column. We are not very comfortable at all asking you for money, but at the same time we realize, and we think you should too, that without your donations there can and will be no Automatic Earth. Clicking the ads our pages display, on a regular basis, helps as well. I have always been, and remain, confident that you, our readers, have a pretty good understanding of the value The Automatic Earth represents to you. Still, evidently, you may have to be reminded from time to time of the role you yourself play in the continued existence of this site.
We're not talking about, nor asking for, large amounts of money. There are many thousands of people who read us every single day. It's easy to see that if every single one of them would donate a dime for every time they read us, and what's a dime these days, we'd be doing just fine, thank you. It’s, however, not just about the continuation of the present situation here that I think about. I would love to be able to expand on what we do, to involve more people, more opinions, a more diverse view from more places in the world. And that is unfortunately not possible right now. Along the same lines, we would like for Stoneleigh to be much more involved at TAE. Which also is not in the cards right now.
As you probably know, Stoneleigh and I are convinced that all of us are moving into a crucial phase in the development of our financial systems, our economy and indeed our societies. Which of course means we are about to enter a time when The Automatic Earth, in order to do what we set out to do, will be busier than ever. What we've done so far was just a dress rehearsal compared to what lies ahead. Inevitably that will take more from us, and we hope you will do more as well.
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Raising up dead horses
by Joe Bageant
When Barack Obama took office it seemed to some of us that his first job was to get the national silverware out of the pawn shop. Or at least maintain the world's confidence that it was possible for us to get out of debt. America is dead broke, the easy credit, phantom "growth" economy has been exposed for what it was. A credit scam. Even Hillary Clinton and Obama's best efforts have not coaxed much more dough out of foreign friends. But at least we again have a few friends abroad.
So now we must jackleg ourselves back into something resembling a productive activity. No matter how you cut it, things will not be as much fun as shopping and speculative "investing" were.
The fiesta is over, the economy as we knew it is dead.
The national money shamans have danced around the carcass of our dead horse economy, chanted the recovery chant and burned fiat currency like Indian sage, enshrouding the carcass in the sacred smoke of burning cash. And indeed, they have managed to prop up the carcass to appear life-like from a distance, if you squint through the smoke just right. But it still stinks here from the inside. Clearly at some point we must find a new horse to ride, and sure as god made little green apples one is broaching the horizon. And it looks exactly like the old horse.
Then too, what else did we expect? His economic team of free market billionaires and financial hotwires includes most of those who helped Bill Clinton sell the theory that Americans didn't need jobs. Actual labor, if you will remember, was for Asian sweatshops and Latin maquiladoras. We, as a nation one third of whose population is functionally illiterate, were going to transmute ourselves into an information and transactional economy. Ain't gonna sweat no mo' no mo' -- just drink wine and sing about Jesus all day.
Along with these economic hotwires came literally hundreds of K Street and Democratic lobbyists. Supposedly, every president is forced to hire these guys because no one else seems to have the connections or knows how to get a bill through Congress. Consequently, the current regime's definition of a recovery is more of the same as ever. A return of the mortgage market and credit to its former level -- the level that blew us out of the water in the first place. Ah, but we're gonna manage it better this time. There is no one-trick pony on earth equal to capitalism.
Somewhere in the smoking wreckage lie the solutions. The solutions we aren't allowed to discuss: adoption of a Wall Street securities speculation tax; repeal of the Taft-Hartley anti-union laws; ending corporate personhood; cutting the bloated vampire bleeding the economy, the military budget; full single payer health care insurance, not some "public option" that is neither fish nor fowl; taxation instead of credits for carbon pollution; reversal of inflammatory U.S. policy in the Middle East (as in, get the hell out, begin kicking the oil addiction and quit backing the spoiled murderous brat that is Israel.
Meanwhile we may all feel free to row ourselves to hell in the same hand basket. Except of course the elites, the top five percent or so among us. But 95 percent is close enough to be called democratic, so what the hell. The trivialized media, having internalized the system's values, will continue to act as rowing captain calling out the strokes. News gathering in America is its own special hell, and reduces its practitioners to banality and elite sycophancy. But Big Money calls the shots.
With luck we will see at least some reverse of the Bush regime's assault on habeas corpus, due process, privacy. Changing such laws doesn't much affect that one percent whose income is equal to the combined bottom 50 percent of Americans.
Beyond that, the big money is constitutionally protected. Our Constitution is first and foremost a property document protecting their money. In actual practice, our constitutional civil liberties, inspiring as they are in concept to people around the world, are mainly side action to make the institutionalization of the owning class more palatable. You can argue that may not have been the intent of the slave owning, rent collecting, upper class founding fathers. But you would be full of shit. We can keep on pretending to be independent, free to keep on living in those houses on which we still owe $300,000. But they own and control the money that comes through our hands. And they plan to keep on owning it and charging us to use it.
On the positive side, there has probably been no more fertile opportunity to improve U.S. international relations since post World War II. Bush, Cheney, Rumsfeld and Bolton were about as endearing as pederasts at a baby shower. And now that we have shot up half the planet, certainly there is no more globally attractive person to patch up the bullet holes than Barack Obama (yes, I know Bill Clinton's feelings are hurt by that). Awarding him the Nobel Peace Prize (again Bill Clinton's feeling are sorely wounded) was an invitation to rejoin the human race.
Of course, there are a significant number of Americans still who could not give a rat's ass about world opinion of the good ole USA. Nearly every damned one of my neighbors back in Virginia, in fact.
The sharks are still running the only game in town and they have never had it better. To be sure, with the economic collapse some of the financial lords won't pile quite up as many millions this year. Others will however have a record year. All are still squatting in the tall cotton.
Their grandfathers who so hated FDR's reforms must be chugging cognac in hell celebrating today's America. America's unions have been neutered and taught to beg. At long last we have established a permanent underclass and deindustrialized the country in favor of low wage service industries here and dirt cheap labor from abroad. We've managed to harden the education and income gap into something an American oligarch can take pride in. Hell, my bank card is issued by Prescott Bush's Union Bank and my most recent mortgage was held by J. P. Morgan's creation. My electricity is generated by Rockefeller's coal and energy holdings and my Exxon gasoline credit card is issued by a successor to Standard oil. The breakfast I eat comes from Archer Daniels Midland. So did my dog's breakfast. We are the very products and property of these people and their institutions.
With peak oil, population pressure, vanishing world resources and global warming, we can never again be what we once were -- a civilization occupying a relative material paradise through a danse macabre of planetarily unsustainable growth. But no presidential candidate is going to run on the promise that "If we do everything just right, pull in our belts and sacrifice, we can at best be a second world nation in fifty years, providing we don't mind the lack of oxygen and a few cancers here and there." Better to hawk the myth of profitable pollution through carbon credits. Which Obama is doing.
We burn the grain supplies of starving nations in our vehicles. Skilled American construction workers now unemployed drive their big trucks into town and knock at my door asking to rake my leaves for ten bucks. There is nothing ironic in this to their minds. "Middle class" people making $150,000 a year will get a new tax break (as if we were all earning 150K). Energy prices are predicted to stabilize because we intend to burn the state of West Virginia in our power plants. The corpses of our young people are still being unloaded from cargo planes at Dover Delaware, but from two fronts now. Mortgage foreclosures are expected to double before they slacken. I cannot imagine debtors not getting at least temporary relief, if not decent jobs or affordable health care. Surely we will see more "change."
But never under any conditions will we be allowed to touch the real money, or get anywhere near it, much less redistribute it. Because, as a bookie friend once told me, "You got your common man living on hope, lottery tickets, or the dogs or the ponies, and you got operators. People who can see the whole game in play. They set the rules. Because they hold the money. That ain't never gonna change."
On the other hand national opinion changes almost hourly. But if the starting gate bell rang right now for the next presidential race, I'd have to put ten bucks on Obama to place. We cannot assume the Republican party will remain stupid. Assumptions don't work at all.
Remember what happened when we assumed the Democrats were capable of courage and leadership?
Death of the 'Soul of Capitalism'
by Paul Farrell
20 reasons America has lost its soul and collapse is inevitable
Jack Bogle published "The Battle for the Soul of Capitalism" four years ago. The battle's over. The sequel should be titled: "Capitalism Died a Lost Soul." Worse, we've lost "America's Soul." And worldwide the consequences will be catastrophic. That's why a man like Hong Kong's contrarian economist Marc Faber warns in his Doom, Boom & Gloom Report: "The future will be a total disaster, with a collapse of our capitalistic system as we know it today."
No, not just another meltdown, another bear market recession like the one recently triggered by Wall Street's "too-greedy-to-fail" banks. Faber is warning that the entire system of capitalism will collapse. Get it? The engine driving the great "American Economic Empire" for 233 years will collapse, a total disaster, a destiny we created. OK, deny it. But I'll bet you have a nagging feeling maybe he's right, the end may be near. I have for a long time: I wrote a column back in 1997: "Battling for the Soul of Wall Street." My interest in "The Soul" -- what Jung called the "collective unconscious" -- dates back to my Ph.D. dissertation: "Modern Man in Search of His Soul," a title borrowed from Jung's 1933 book, "Modern Man in Search of a Soul." This battle has been on my mind since my days at Morgan Stanley 30 years ago, witnessing the decline.
Has capitalism lost its soul? Guys like Bogle and Faber sense it. Read more about the soul in physicist Gary Zukav's "The Seat of the Soul," Thomas Moore's "Care of the Soul" and sacred texts. But for Wall Street and American capitalism, use your gut. You know something's very wrong: A year ago "too-greedy-to-fail" banks were insolvent, in a near-death experience. Now, magically they're back to business as usual, arrogant, pocketing outrageous bonuses while Main Street sacrifices, and unemployment and foreclosures continue rising as tight credit, inflation and skyrocketing Federal debt are killing taxpayers.
Yes, Wall Street has lost its moral compass. They created the mess, now, like vultures, they're capitalizing on the carcass. They have lost all sense of fiduciary duty, ethical responsibility and public obligation. Here are the Top 20 reasons American capitalism has lost its soul:
1. Collapse is now inevitable
Capitalism has been the engine driving America and the global economies for over two centuries. Faber predicts its collapse will trigger global "wars, massive government-debt defaults, and the impoverishment of large segments of Western society." Faber knows that capitalism is not working, capitalism has peaked, and the collapse of capitalism is "inevitable." When? He hesitates: "But what I don't know is whether this final collapse, which is inevitable, will occur tomorrow, or in five or 10 years, and whether it will occur with the Dow at 100,000 and gold at $50,000 per ounce or even confiscated, or with the Dow at 3,000 and gold at $1,000." But the end is inevitable, a historical imperative.
2. Nobody's planning for a 'Black Swan'
While the timing may be uncertain, the trigger is certain. Societies collapse because they fail to plan ahead, cannot act fast enough when a catastrophic crisis hits. Think "Black Swan" and read evolutionary biologist Jared Diamond's "Collapse: How Societies Choose to Fail or Succeed." A crisis hits. We act surprised. Shouldn't. But it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."
Warnings are everywhere. Why not prepare? Why sabotage our power, our future? Why set up an entire nation to fail? Diamond says: Unfortunately "one of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions." Sound familiar? "This type of decision-making is the opposite of the short-term reactive decision-making that too often characterizes our elected politicians," thus setting up the "inevitable" collapse. Remember, Greenspan, Bernanke, Bush, Paulson all missed the 2007-8 meltdown: It will happen again, in a bigger crisis.
3. Wall Street sacked Washington
Bogle warned of a growing three-part threat -- a "happy conspiracy" -- in "The Battle for the Soul of Capitalism:" "The business and ethical standards of corporate America, of investment America, and of mutual fund America have been gravely compromised." But since his book, "Wall Street America" went over to the dark side, got mega-greedy and took control of "Washington America." Their spoils of war included bailouts, bankruptcies, stimulus, nationalizations and $23.7 trillion new debt off-loaded to the Treasury, Fed and American people. Who's in power? Irrelevant. The "happy conspiracy" controls both parties, writes the laws to suit its needs, with absolute control of America's fiscal and monetary policies. Sorry Jack, but the "Battle for the Soul of Capitalism" really was lost.
4. When greed was legalized
Go see Michael Moore's documentary, "Capitalism: A Love Story." "Disaster Capitalism" author Naomi Klein recently interviewed Moore in The Nation magazine: "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."
Greed's OK, within limits, like the 10 Commandments. Yes, the soul can thrive around greed, if there are structures and restrictions to keep it from going out of control. But Moore warns: "Capitalism does the opposite of that. It not only doesn't really put any structure or restrictions on it. It encourages it, it rewards" greed, creating bigger, more frequent bubble/bust cycles. It happens because capitalism is now in "the hands of people whose only concern is their fiduciary responsibility to their shareholders or to their own pockets." Yes, greed was legalized in America, with Wall Street running Washington.
5. Triggering the end of our 'life cycle'
Like Diamond, Faber also sees the historical imperative: "Every successful society" grows "out of some kind of challenge." Today, the "life cycle" of capitalism is on the decline. He asks himself: "How are you so sure about this final collapse?" The answer: "Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline." Success makes us our own worst enemy.
Quoting 18th century Scottish historian Alexander Fraser Tytler: "The average life span of the world's greatest civilizations has been 200 years" progressing from "bondage to spiritual faith ... to great courage ... to liberty ... to abundance ... to selfishness ... to complacency ... to apathy ... to dependence and ... back into bondage!" Where is America in the cycle? "It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical 'society cycle.' ... The U.S. is somewhere between the phase where it moves 'from complacency to apathy' and 'from apathy to dependence.'" In short, America is a grumpy old man with hardening of the arteries. Our capitalism is near the tipping point, unprepared for a catastrophe, set up for collapse and rapid decline.
15 more clues capitalism lost its soul ... is a disaster waiting to happen
Much more evidence litters the battlefield:
- Wall Street wealth now calls the shots in Congress, the White House
- America's top 1% own more than 90% of America's wealth
- The average worker's income has declined in three decades while CEO compensation exploded over ten times
- The Fed is now the 'fourth branch of government' operating autonomously, secretly printing money at will
- Since Goldman and Morgan became bank holding companies, all banks are back gambling with taxpayer bailout money plus retail customer deposits
- Bill Gross warns of a "new normal" with slow growth, low earnings and stock prices
- While the White House's chief economist retorts with hype of a recovery unimpeded by the "new normal"
- Wall Street's high-frequency junkies make billions trading zombie stocks like AIG, FNMA, FMAC that have no fundamental value beyond a Treasury guarantee
- 401(k)s have lost 26.7% of their value in the past decade
- Oil and energy costs will skyrocket
- Foreign nations and sovereign funds have started dumping dollars, signaling the end of the dollar as the world's reserve currency
- In two years federal debt exploded from $11.2 to $23.7 trillion
- New financial reforms will do little to prevent the next meltdown
- The "forever war" between Western and Islamic fundamentalists will widen
- As will environmental threats and unfunded entitlements
"America Capitalism" is a "Lost Soul" ... we've lost our moral compass ... the coming collapse is the end of an "inevitable" historical cycle stalking all great empires to their graves. Downsize your lifestyle expectations, trust no one, not even media. Faber is uncertain about timing, we are not. There is a high probability of a crisis and collapse by 2012. The "Great Depression 2" is dead ahead. Unfortunately, there's absolutely nothing you can do to hide from this unfolding reality or prevent the rush of the historical imperative.
Jobless claims dent recovery hopes
Initial claims jump 11,000 to 531,000, much more than expected. Filings had fallen five of the past six weeks.
The number of first-time filers for unemployment insurance rose last week, snapping two weeks of significant declines, according to a government report issued Thursday. There were 531,000 initial jobless claims filed in the week ended Oct. 17, up 11,000 from an upwardly revised 520,000 the previous week, the Labor Department said in a weekly report. The week included the Columbus Day holiday. A consensus estimate of economists surveyed by Briefing.com expected 515,000 new claims.
"[The initial claims figure] is somewhat surprising," wrote Jim Baird analyst at Plante Moran Financial Advisors, in a research note. "Excess slack in the system and employers' hesitance to ramp up hiring appear likely to weigh on the labor markets for some time." The 4-week moving average of initial claims was 532,250, down 750 from the previous week's revised average of 533,000. New jobless claims had declined for five of the last six weeks, falling sharply in the first two weeks of October. Earlier this month, initial claims fell to their lowest level since January.
Continuing claims: The government said 5,923,000 people filed continuing claims in the week ended Oct. 10, the most recent data available. That was down 98,000 from the preceding week's ongoing claims, and would -- if not revised -- mark the first time since late March that continuing claims were below 6 million. The 4-week moving average for ongoing claims fell by 59,250 to 6,030,750, from the prior week's revised average of 6,090,000.
But the slide in continuing claims may signal that more filers are falling off those rolls and into extended benefits. Continuing claims reflect people filing each week after their initial claim until the end of their standard benefits, which usually last 26 weeks. The figures do not include those who have moved to state or federal extensions, nor people who have exhausted their benefits.
Unemployment benefits: As more and more unemployed Americans find themselves with expired benefits, Congress is wrestling with legislation that would extend their lifeline. The House has approved a jobless benefits extension, but the Senate has not yet voted on it. Earlier this month, Senate Democrats introduced a bill that would extend unemployment benefits by up to 14 weeks in every state. Those living in states with unemployment levels greater than 8.5% would receive a further six weeks. Currently, states with rates above 8% now offer up to 79 weeks of benefits. States with rates between 6% and 8% now offer up to 59 weeks, and all other states currently offer up to 46 weeks.
Wells Fargo Reports Record Profit on Limited Defaults
Wells Fargo & Co., the nation’s largest home lender, posted a record third-quarter profit by limiting loan defaults and wringing savings out of Wachovia Corp. Profit almost doubled to $3.24 billion, or 56 cents a diluted share, from $1.64 billion, or 49 cents, a year earlier, San Francisco-based Wells Fargo said today in a statement. The average estimate of 24 analysts surveyed by Bloomberg was 39 cents a share.
Mortgage rates are hovering near record lows and the bank predicted credit losses will peak in 2010. Last year’s takeover of Wachovia is adding to earnings and costs tied to the integration are “significantly less” than earlier estimates, Chief Executive Officer John Stumpf said in the statement. “Credit is still an issue for all banks, but Wells Fargo has more flexibility to manage,” Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC in New York, said before the results were released. “They are ahead of the curve in realizing credit losses and have strong unimpaired core earnings power.”
After paying preferred dividends, which includes a stake held by the U.S. Treasury Department, net income available to common shareholders was $2.64 billion. The bank gained 22 cents to $30.68 a share at 9:41 a.m. in New York Stock Exchange composite trading. The stock has gained 3.7 percent this year. The biggest investor is Warren Buffett’s Berkshire Hathaway Inc., with a 6.5 percent stake. Assets no longer collecting interest climbed 28 percent to $23.5 billion as of Sept. 30 from the second quarter, the company said. The cost of loans written off as uncollectible jumped about 17 percent from the second quarter to $5.1 billion, the company said.
“While the level of nonperforming assets and losses is expected to remain elevated for a period of time, we currently expect total credit losses to peak in 2010,” Chief Financial Officer Howard Atkins said in the statement. The bank predicted consumer losses will top out in the first half and gradually decline for the rest of 2010. Wells Fargo is the last of the four biggest banks to report earnings for the third quarter. JPMorgan Chase & Co., ranked second by assets, posted its highest profit since the subprime mortgage market collapsed in 2007. Citigroup Inc., the third- biggest, posted a $101 million profit after adding less to loan- loss reserves. Both are based in New York.
Bank of America Corp., the largest by deposits and assets, posted a $1 billion loss after a rise in consumer loan defaults. The company is based in Charlotte, North Carolina. Wells Fargo ranked third in deposits at midyear with $813.7 billion and fourth in assets with $1.28 trillion. Profit at Wells Fargo was boosted by selling less complex mortgages after competitors offering so-called exotic loans failed or scaled back, Kathleen Vaughan, the division head of wholesale lending, said in an Oct. 14 interview.
The bank must contend with losses tied to Wachovia’s $89 billion of option-ARM loans, which have some of the industry’s highest default rates. Stumpf previously said the risks have been reduced. Option-ARMs let borrowers defer interest payments and add them to the loan’s principal; some have low initial rates that increase in later years. The loans can backfire in a recession if monthly payments and balances continue rising while the home price falls. That wipes out the owner’s equity and leaves no cushion for the bank in case of default.
Improved credit markets helped Wells Fargo raise $2 billion in a debt offering in September, the company’s first sale of bonds not backed by the Federal Deposit Insurance Corp. since the collapse of Lehman Brothers Holdings Inc. Like Bank of America and Citigroup, Wells Fargo hasn’t returned government bailout funds. The company had planned to repay the U.S. government’s $25 billion “shortly” and in a “shareholder-friendly way,” Stumpf said during a Sept. 1 Bloomberg Television interview.
Mortgage refinancing slowed in the most recent three months after propelling profit to a record in the second quarter. Total originations in the U.S. fell by about 9 percent to $500 billion in the third quarter, according to estimates from Inside Mortgage Finance publisher Guy Cecala. The lender accounted for 23.5 percent of all mortgages in the first half, according to Inside Mortgage Finance.
Ilargi: Bove in the morning:
Bove on Wells Fargo, Morgan Stanley Earnings
Ilargi: Bove a few hours later:
U.S. Stocks Erase Gains in Final Hour as Bove Downgrades Wells Fargo
U.S. stocks fell in the final hour of trading after analyst Dick Bove downgraded Wells Fargo & Co., erasing an earlier rally in financial shares spurred by better- than-estimated results at Morgan Stanley. Wells Fargo, the largest U.S. home lender this year, slid 3 percent after Bove cut the shares to “sell” and said earnings were boosted by hedging gains rather than improving business trends. Pfizer Inc. lost 1.7 percent to lead health-care shares to the steepest loss among 10 groups. The Standard & Poor’s 500 Index slipped 0.3 percent to 1,087.79 after rallying as much as 0.9 percent earlier.
Ilargi: Reggie Middleton's articles (even those that are free) are generally a bit too complex and specific to post at TAE. I merely lifted out a few of his main points here. If you are worried about your US bank(s), and you are willing to comb through the details, click on the article titles to find a host of links to his work.
If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Part 4 - Wells Fargo
by Reggie Middleton
Middleton's Doo-Doo 32, May 2008:Wells Fargo - Popular Inc - SunTrust - KeyCorp - Synovus Financial Corp - Marshall & Ilsley - Associated Banc - First Charter - M&T Bank Corp - Huntington Bancshares - BB&T Corp - JPMorgan Chase - U.S. Bancorp - Bank of America - Capital One - Nara Bancorp - Sandy Spring Bancorp - PNC - Harleysville National - CVB Financial - Glacier Bancorp - First Horizon - National City Corp - WAMU - Countrywide - Regions Financial Corp - Citigroup - Wachovia Corp - Zions Bancorp - TriCo Bancshares - Fifth Third Bancorp - Sovereign Bancorp
The risks posed by the housing crisis and arcane financing vehicles are drastically under-appreciated by the sell side...
Wells Fargo's high risk from its exposure to some of the hardest hit regions like California and Florida was further enlarged through the acquisition of Wachovia's ailing portfolio. The surge in NPAs pushed up the Texas ratio of the Bank to 29.9% as of June 2009 from 19.1% in December, 2008. Wells Fargo Eyles Test exceeded the allowance for loan losses by $3.7 billion or 6.3% of the tangible equity as of June 30, 2009 as against the excess allowance for loan losses over ET of $3.4 billion or 7.5% of the tangible equity in Dec 2008.
Further, Wells Fargo acquired Wachovia's impaired loan portfolio valued at $56 billion (as of June 2009) at a discount of 36.2% from principal balance outstanding. These loans are classified as SOP 03-3 loans and are not included in the non performing category since they were acquired at substantial discount and the bank expects to recover the fair value. Consequently, the related provisions for loan losses and charge offs on these loans are very low. However, Wells Fargo runs the risk of further deterioration in this portfolio which will necessitate increase in charge offs and provisions for these loans.
Write downs on investment securities along with other assets like MSR (Mortgage servicing rights) and mortgages held for sale will further erode the shareholder's wealth.
Wells Fargo carries about $43 billion of highly vulnerable privately issued mortgage backed securities (both RMBS and CMBS), out of which $34 billion are level 2 assets and $9 billion are level 3 assets (highly illiquid). Further, the Bank carries about $28 billion of other debt based assets consisting of asset backed securities collateralized by auto leases, corporate debt and collaterized debt obligations. Out of $28 billion, about $19 billion are level 3 assets while the remaining are level 2 assets.
Additionally, Wells Fargo carries $16 billion of MSR (Mortgage servicing rights or the retained interests in its loan securitization arrangements) and $40 billion of mortgages held for sale. While MSR completely falls under level 3 assets category, of the $40 billion of mortgages held for sale, about $4 billion are level 3 assets while the remaining are level 2 assets. We expect total write downs of about $11.0 billion till 2010 under our base case which amounts to about 19.0% of the tangible equity as of June 30, 2009.
Risk emanating from the massive derivative exposure.
Wells Fargo's huge derivative exposure further adds to the credit risk of Wells Fargo. The notional value of the derivative contracts of Wells Fargo as of June 30, 2009 was $3.7 trillion and the bank is exposed to the counterparty risk emanating from these contracts. As of June 30, 2009, the notional value of the credit protection sold was $105 billion with the fair value of these contracts pegged at $14 billion (carried in the balance sheet).
Out of this credit protection sold, about $46 billion of the contracts have underlying entities of below investment grade and have high risk of default. To hedge the credit risk, the bank has purchased credit protection on identical underlying entities of $34 billion (notional value) along with $74 billion of other credit protection purchased. Just in case the point has been lost amidst all of these words - it appears as if Wells Fargo is doing the AIG thing as well. Maybe not to the extent of AIG or even Bank of America, but they are not adequately protected from my perspective.
Wells Fargo and What May Lie Off Balance Sheet
Wells Fargo uses Special Purpose Entities (SPE) for various securitization activities wherein financial assets are transferred to an SPE and repackaged as securities and sold to investors. As of June 30, 2009 the carrying value of Qualified SPE's (QSPE) in the company's balance sheet stood at $37 bn (64% of tangible equity) while carrying value of unconsolidated variable interest entity (VIE) and consolidated VIE exposure stood at $4 bn and $1.8 bn, respectively.
In aggregate, carrying value emulating from QSPE and VIE exposure stood at $80 bn, or 137% of tangible equity as of June 30, 2009. It should be noted that WFC's acquisition of Wachovia brought with it a brokerage arm, not to mention a bevy of poorly performing assets. True commercial banks with investment, trading and brokerage arms are ones that I look to to have hidden skeleton's in the closets in the form of off balance sheet liabilities and hidden contingencies. Wells Fargo has apparently not proven me wrong.
Morgan Stanley bonus pool hits $3 billion despite 91% drop in profits
Investment bank Morgan Stanley has more than doubled the share of revenues it will hand out in pay and bonuses to its 62,000-strong army of bankers and brokers despite a 91pc drop in profits last quarter. The announcement has fuelled anger over bonuses in financial services sector, amid increasing anger about bankers' pay. Morgan Stanley disclosed that it has set aside $4.96bn (£3bn) for its compensation pool for the three months to September. Although fractionally lower than the $5.06bn it set aside in the same period last year, as a percentage of revenues it more than doubled, to 57.5pc in the third quarter this year to 27pc in the same period a year ago.
The figure is also significantly higher than the 43.3pc so-called accrual rate at rival investment bank Goldman Sachs for the third quarter, a period during which its profits almost quadrupled. The increase in the accrual rate – Morgan Stanley, like all banks, will not actually make any bonus payments until the year-end – came in spite of the fact the bank saw a slide in profits from $7.7bn in the three months to September last year to $757m in the same period this year, although last year's profits were inflated by a $9.7bn one-off gain.
With three months to go until the end of the year, Morgan Stanley has set aside $10.87bn for its 2009 compensation pot, only slightly behind the $11.26bn it paid out for the full-year last year. However, the average payout – based on a full-year estimate of a compensation pot in the region of $16bn – is likely to be more or less unchanged because of the approximately 16,000 staff it has taken on to its books through the Salomon Smith Barney joint-venture with Citigroup.
Colm Kelleher, chief financial officer, said that the bank's compensation costs rose as the bank continued to invest in "our people and our talent". He also said that stripping out the bank's "debt value adjustment" – which impacted revenues in the current quarter by $900bn because of the upturn in the bank's own credit spreads – the accrual ratio would have been 44.4pc for the quarter. The results were well-received by investors, given it delivered its first profit in four quarters from its strength in investment banking and fixed income. Shares in Morgan Stanley rose $2.12 to $34.74 on the results, which also highlighted the strength of the tie-up with Salomon Smith Barney, delivering a profit of $280m on sales of $3bn.
Elsewhere, Wells Fargo reported a quarterly profit of $3.2bn on gains from mortgage investments and community banking, in spite of setting aside $1bn to its reserves after booking $5.1bn of losses on defaulted mortgages. Meanwhile Bank of America announced it is to sell First Republic Bank to a consortium of investors led by private equity firms Colony Capital and General Atlantic for $1bn, as part of a focus to dispose of non-core assets. BoA inherited the private bank when it purchased Merrill Lynch, which itself bought First Republic for $1.8bn in 2007.
Ron Paul on CNN-Bailouts-Wall St Fraud
Barofsky addresses bailout's hidden costs
SigTARP Neil Barofsky, overseer of the $700 billion TARP program, says the cost to taxpayers will be a lot greater than the government is letting on.
The $700 billion bailout will ultimately cost taxpayers billions of dollars, but the government stands to lose much more than the money it's pouring into companies. Neil Barofsky, special inspector general for Treasury's financial sector rescue, wrote in a report released Wednesday that the bailout has several hidden costs. One is the hard cost of borrowing money to fund the rescues of banks and other companies. The others are, according to Barofsky, less tangible but no less important: The danger that comes with rewarding companies that took excessive risk, and the loss of the government's credibility with taxpayers.
"You can't just think of this program in terms of dollars and cents," Barofsky told CNNMoney. "We try to bring attention to these other costs, which have the potential to dwarf the monetary loss in dollars." To be sure, the monetary loss will likely be substantial: Barofsky cites the Congressional Budget Office estimates that the Troubled Asset Relief Program will ultimately cost taxpayers $159 billion. But Barofsky focuses his report, a quarterly update to Congress and the public, on what he identifies as the unseen costs and risks of TARP.
Cost of enormous debt
To fund the $467.1 billion that Treasury has spent so far on the bailout, the government has borrowed money by issuing debt in the form of Treasury bonds. It's unclear exactly how much the government had to borrow to pay for TARP. But according to Barofsky's report, the government paid for 46% of its expenditures in 2009 by issuing new debt, compared with the 10-year average of 9%.
Barofsky said that's okay for now, since the cost of funding through debt is very cheap because of historically low interest rates. But as the government's debt mounts through bailouts and stimulus, rates could go higher and the government's interest payments could get much more expensive. "Taking on new debt is an action that has implications for the true cost of the U.S. government's financial rescue initiatives," said Barofsky in the report. "This cost may have significant refinancing risk."
Cost of indulging bad behavior
Another hidden cost could come in the form of promoting bad behavior. After financial institutions threatened the stability of the economy by making irresponsible bets, the government responded by sending them massive infusions of capital. In addition, Treasury gave companies cheap loans to encourage them to buy risky assets like mortgage-backed securities that were a major cause of the credit crisis. The report also notes that "too big to fail" firms only got bigger because of TARP. All of these issues have set the stage for another large-scale bust unless serious effort is made on reforming regulation of the financial markets, the report said.
"With the potential of moral hazard and 'too big to fail,' the government could be setting itself up for an even more dangerous crisis in the future," Barofsky told CNNMoney. "The ways of addressing these issues are through meaningful regulatory reform." Barofsky, in the interview, wouldn't comment on which of the administration's regulatory reform plans he favors, but he said action needs to happen soon. In his report, he argued that the recent stock market rally has removed some of the urgency of dealing with the financial system's fundamental problems, but the cost of inaction could be even higher than the current bailout.
Cost of political distrust
Barofsky also said that the government's lack of transparency about the bailout could cost taxpayers in the long run, as a growing distrust of the government could impede its ability to enact important legislation. "I think we are already seeing the political costs of people losing trust and faith in their government, such as the palpable anger this summer in response to health care," Barofsky told CNNMoney. "It requires a certain amount of good will to support extremely important and expensive programs like bailouts."
Barofsky said Treasury's assurances to the public last year that it would only invest in healthy companies was undermined by the need to give additional, emergency bailouts to Citigroup and Bank of America. He also argued that Treasury's refusal to require TARP recipients to report on their use of taxpayer funds have both damaged the government's credibility and also the effectiveness of the bailout.
As a result, the report said that anger and cynicism about the bailout could be one of TARP's most "substantial, albeit unnecessary, costs." "The loss of confidence in the government could be one of the lasting legacies of this program," said Barofsky. "But if Treasury would adopt some pretty basic recommendations, it would at least address some of these suspicions."
The White House Readies a Stealth Stimulus
White House senior adviser Valerie Jarrett was adamant on Sunday, when asked if President Obama was considering a so-called second stimulus to deal with the rising unemployment rate. "I think it's too soon. It's premature to say, 'Is a second stimulus needed?' " she told David Gregory, the host of NBC's Meet the Press. But a moment later she said the White House was already looking at tax credits and other measures to further stimulate the economy. "There are a range of suggestions that are being considered right now by his economic team, and we'll see what we come forward with," she added.
On its face, the two comments sounded like a contradiction. But at the White House, there is no confusion. More stimulus is coming, but it just won't be called stimulus. Economic advisers, in concert with senior Democrats in the House and Senate, are planning additional piecemeal benefit extensions, tax breaks and other spending that could eventually add up to as much as $100 billion, say some outside experts. "The fact is that this is a word game. It isn't a discussion of the 'second stimulus,' " says Jennifer Psaki, a White House spokeswoman. "This needs to be an ongoing discussion between the President and his economic team about new ideas and ways to get people back to work." (Watch a video about the "Unemployment Olympics" in New York City.)
Prominent economists like Mark Zandi at Economy.com, who has counseled the White House and also worked with the presidential campaign of John McCain, say there is little doubt what is going on. "Yes, I think it's a form of stimulus," said Zandi, who has always favored a second stimulus. "This is what I always thought would happen, policymakers would take it one step at a time."
In other words, the new stimulus efforts, which are still under discussion, are unlikely to be packaged into a single bill, which would be politically unpopular. An August Gallup poll, for instance, found that 65% of Americans opposed a "second stimulus" and 51% thought that the Federal Government "should spend less" than it is currently spending on stimulus. And that opposition is likely to grow after the announcement on Oct. 16 that the federal deficit for the fiscal year that just ended hit $1.4 trillion, which, at almost 10% of the total economy, represents the largest share since the end of World War II.
The exact content of this piecemeal, second effort is not yet known. The White House has so far declined to spell out its wishes. On Oct. 14, Obama announced his desire to give seniors onetime checks for $250 in lieu of any cost-of-living increase in Social Security checks this year. The checks, costing about $14 billion, would be paid for with an increase in payroll taxes for people with incomes over $250,000.
House and Senate leaders have also been discussing extending unemployment benefits another month or longer and a program, known as COBRA, that helps the newly unemployed pay to keep their employer-provided health insurance. Other measures on the table include an extension of the first-time-home-buyer tax credit, which is set to expire on Dec. 1 and has helped stabilize the housing market this year. The White House has said Obama supports extending all three programs, though it remains unclear whether they would be offset with other tax increases.
House Speaker Nancy Pelosi said recently that she may support a tax change, called a "loss carryback," that would allow money-losing companies to more quickly get tax refunds. Another provision under consideration would extend tax breaks that would allow companies to quickly write off the costs of new purchases. Though many of these provisions could be acted upon before the end of the year, another stimulus proposal to send more federal money to cash-strapped states in 2011 is likely to be put off another year. The February stimulus bill provided about two years of additional state funding.
Driving the call for more stimulus efforts is the unemployment rate, which now sits at 9.8%, and is expected to rise into next year, even though the recession may have already officially ended. Republicans, who have long been critical of the $787 billion stimulus that passed in February, are likely to support some, if not most of these new spending programs, in part because they are politically popular. Texas Republican John Cornyn, a vocal opponent of the February stimulus, said recently that he was in favor of some more federal spending efforts. "I think there are things we need to do to help people who need help," he said Oct. 4 on ABC's This Week.
Other Republicans, like economist Kevin Hassett, a former adviser to McCain's presidential campaign, say it might be better to focus on policy fixes that could have long-term impacts, not just short-term impacts. "You can have a stimulus every quarter from now until we go bankrupt," Hassett said. "But would that be good policy?"
Like it or not, here comes more stimulus
You won't see it all in one neat package. And you won't hear the White House call it stimulus. But there's a good chance lawmakers will decide to extend some of the stimulus measures included in the $787 billion economic recovery package passed in February and possibly create some new ones as well.
On Wednesday, House Democrats are convening a forum of economists to debate the state of the economy, with a specific focus on job creation. And lawmakers are convening hearings on Capitol Hill this week to discuss the economic outlook and the state of the housing market. A number of ideas on the table are lifeline measures, while some are flat-out incentives to spur economic activity. Here's a rundown of what's under consideration, estimates of what the provisions might cost and where they stand currently in the legislative process.
Unemployment benefits extension
By year-end, an estimated 1.3 million jobless workers will have run out of unemployment benefits, according to the National Employment Law Project. It's expected that lawmakers won't let that happen. The House has already approved an extension and the Senate has amended it but not yet voted on it. Both parties say they want to extend benefits but they disagree over how to pay for it and how to handle amendments to the bill.
In the Senate proposal, unemployment benefits would be extended by up to 14 weeks in every state and then another six weeks on top of that in states where the unemployment rate tops 8.5%. Currently, states with unemployment rates topping 8% now offer up to 79 weeks of unemployment benefits, said Chad Stone, chief economist of the liberal Center for Budget and Policy Priorities. States with unemployment rates between 6% and 8% now offer up to 59 weeks. And all other states currently offer up to 46 weeks.
Estimated cost: $2.4 billion. But Senate Democrats say the proposal would be paid for in full by extending an add-on tax for employers under the Federal Unemployment Tax Act. For the past 32 years, employers were required to pay an additional 0.2% on the first $7,000 of a worker's annual wages on top of the 0.6% they normally pay, said George Wentworth, a policy analyst for NELP. That surtax was supposed to expire this year. But lawmakers would extend it through June 30, 2011, to pay for the benefits extension. If they do, the Congressional Budget Office estimates such a move could reduce the deficit by $200 million over 10 years.
Cobra premium subsidy extension
The White House supports extending the federal subsidy now offered to unemployed workers who opt to continue their health insurance coverage from their former employers. Under the original provision passed under the economic recovery act, Uncle Sam agreed to pick up 65% of the cost of the Cobra premium for up to nine months for workers laid off between Sept. 1, 2008, and Dec. 31, 2009. That 65% comes close to replicating the share of the premium typically paid for by employers when a worker signs up for coverage. To date, a Cobra extension has not been attached to any proposed legislation.
Estimated cost: The original provision was estimated by the CBO to cost roughly $25 billion. Absent the exact parameters for an extension, however, it's too early to tell how much the provision would cost. There will likely be a cost to employers as well. The publication Business Insurance reported recently that companies typically pay out $1.50 in claims for every $1 collected in Cobra premiums.
Emergency payment to seniors
To compensate for the fact that there will be no cost-of-living adjustment made to Social Security benefits in 2010 due to a lack of inflation, President Obama has proposed sending a $250 economic relief payment to seniors, veterans and the disabled next year. It would be identical to the $250 emergency payment sent out earlier this year under the economic recovery law. Democratic leaders in the House and Senate have voiced their support for such a payment.
But others don't think it's a good idea. The Committee for a Responsible Federal Budget notes that the cost-of-living adjustment for 2009 was much higher than average -- 5.8% -- due to record energy prices. So "even holding Social Security benefits steady means they will have increased in value. There is no economic or moral justification for increasing them further," said CRFB president Maya MacGuineas in a statement. To date, a proposed emergency payment to seniors has not been attached to any legislation.
Estimated cost: The measure would cost $13 billion, according to White House estimates.
Homebuyer tax credit expansion
An estimated 1.4 million tax filers to date have taken advantage of a temporary first-time homebuyer tax credit aimed primarily at people making less than $75,000 ($150,000 for joint filers). An estimated 15% of them bought their home specifically because of the tax break. The latest iteration of that credit is worth $8,000, and it's scheduled to expire on Nov. 30. Many lawmakers want to extend that deadline, expand eligibility beyond first-time homebuyers and include those who make more than is allowed under the current rules.
Sen. Johnny Isakson, R-Ga., and Sen. Chris Dodd, D-Conn., co-sponsored an amendment to the unemployment extension bill that would extend the credit until the end of June 2010 and be available to single filers making up to $150,000 and joint filers making up to $300,000. The amendment may or may not remain attached to the unemployment bill -- which has been stalled due to political skirmishes between Democrats and Republicans. But Congress Daily reports that senators and aides "said both [measures] appear likely to clear the chamber in some form this fall." It's still not clear where the White House stands. At a Senate Banking hearing on Tuesday, Housing Secretary Shaun Donovan said "within a few weeks we'll have sufficient data to get to a conclusion on this."
Estimated cost:The Isakson-Dodd bill is estimated to cost $16.7 billion. Isakson said at the Senate Banking hearing that he'd be happy to look for ways to pay for it and Dodd concurred. Typically, if a measure is considered stimulus it is not something that lawmakers feel obligated to pay for by either reducing spending or raising revenue in other areas.
Jobs credit creation
Although no formal proposal has been made, there has been some talk of creating an employer tax credit for hiring new workers. The idea is to spur job creation and to do so in the face of forecasts for a 10% unemployment rate in 2010. But it's hard to do that without rewarding companies that were already planning to hire anyway, said Clint Stretch, managing principal for tax policy at Deloitte Tax. Consider two competitors who dealt with the downturn differently, Stretch said. One made deep cuts to its workforce and is ready to ramp up again, while the other cut costs but managed to do so without laying off too many people. In this instance, the first company benefits far more from the credit than its competitor.
A hiring credit was put in place during the Carter administration and the consensus among researchers is that two-thirds of the 2.1 million jobs created by the credit would have been created without it, according to a post on Tax Vox, a blog of the Tax Policy Center edited by Howard Gleckman. "Tim Bartik [of the W.E. Upjohn Institute for Employment Research] and John Bishop [of Cornell University] ... argue it nonetheless created 700,000 new jobs in a year - not bad, even if a lot of money was wasted. Others insist the research they used is flawed," Gleckman noted.
Estimated cost: Bartik and Bishop estimate that a job creation tax credit that refunds to employers 15% of new wage costs in 2010 and 10% in 2011 could create 5.1 million jobs at a cost of $27 billion, or $5,400 per new job created.
Obama to Expand Bailout to Small Businesses
President Obama said Wednesday small businesses on Main Street will have greater access to the government's $700 billion Wall Street financial rescue fund. Speaking at a small business in a Maryland suburb near Washington, Obama announced a package of initiatives designed to increase lending, including a request that Congress increase caps for existing Small Business Administration loans.
The new effort comes as the administration is under pressure from liberals to shift the massive bailout fund's spending away from big financial institutions and toward reducing foreclosures and creating jobs. But it also comes as Republicans press Obama to end the rescue program and use bank repayments to reduce the national debt. Obama said the Treasury Department intends to wind down and terminate bailout programs launched at the height of the financial crisis to stabilize Wall Street and aid the struggling auto industry.
The $218 billion Capital Purchase Program would effectively conclude at the end of the year. The program has been a central element of the bailout program, infusing banks with government money in exchange for preferred stock. The administration also plans to cap two programs at levels below initial projections. One program designed to rid big banks of their bad assets will spend $30 billion instead of $75 billion, and another that supports a Federal Reserve effort to ease bank credit will top off at $30 billion instead of $80 billion. An initiative aimed at banks -- the Capital Assistance Program -- had no applicants and will also end, the official said.
Congressional and industry officials said there were few details about the new small bank proposal, including how much of the bailout money would be used. But the American Bankers Association, in a letter to Treasury Secretary Timothy Geithner last month, recommended a $5 billion program for community banks that have not yet received assistance from the rescue fund. The program, as suggested by the association, would apply only to those banks with assets of less than $5 billion.
"Community banks feel like the government assistance efforts to date have left them on the sidelines," said Mark Tenhundfeld, a senior vice president at the bankers' association. The rescue fund, known as the Troubled Asset Relief Program, has about $320 billion still available to spend -- a combination of unallocated money and more than $70 billion in repayments from banks that received bailouts since late last year. The TARP is set to expire at the end of December, but the administration could extend it until October 2010. "Given that we are now well into October, it seems probable that there would need to be some extensions," Tenhundfeld said.
Sheila Bair, the chairman of the Federal Deposit Insurance Corp., generally defined community banks as those with less than $1 billion in assets. In testimony to Congress last week, she said those smaller banks have become especially vulnerable in the face of mounting losses and defaults in construction and commercial real estate loans.
Bair testified that she had been discussing TARP help for community banks with Treasury officials, a step welcomed by Democrats but criticized by Republicans. On Tuesday, Rep. Jeb Hensarling, a Texas Republican on the House Financial Services Committee, urged the administration to end the program at year's end. "I will strongly suggest to community bankers in my district that they reject an invitation from the Obama administration to participate in TARP," he said.
White House Forcing Bailed-Out Companies To Slash Compensation
The Obama administration plans to order companies that received huge government bailouts last year to sharply cut the compensation of their highest paid executives, according to a person familiar with the decision.
The seven companies that received the most assistance will have to cut the annual salaries of their 25 highest-paid executive by an average of about 90 percent from last year, said the person, who spoke on condition of anonymity because it has not been announced. This person said Wednesday that the Treasury Department will announce the deep pay cuts within the next few days.
Kenneth Feinberg, the special master at Treasury appointed by Obama to handle compensation issues at the seven firms getting exceptional assistance from the government's $700 billion financial bailout package, is making the pay decisions. The seven companies are: Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial. Total compensation for the top executives at the seven firms will decline, on average, by about 50 percent, according to the person familiar with the administration's decision.
At the financial products division of AIG, the giant insurance company which has received taxpayer assistance valued at more than $180 billion, no top executive will receive more than $200,000 in total compensation, the person familiar with Feinberg's plan said. The administration also will warn AIG that it must fulfill a commitment to significantly reduce the $198 million in bonuses promised to employees in its financial services division, the arm of the company whose risky trades caused its downfall. The pay restrictions for all seven companies will require any executive seeking more than $25,000 in special benefits -- things such as country club memberships, private planes and company cars -- to get permission for those perks from the government.
Feinberg's decisions on pay come after administration officials voiced sharp criticism in recent days of the plans of Wall Street firms to pay huge bonuses at a time when the country is still coping with rising unemployment and the effects of the recession. Obama senior adviser David Axelrod called the bonuses "offensive" on Sunday. "They ought to think through what they are doing and they ought to understand that a year ago a lot of these institutions were teetering on the brink and the United States government and taxpayers came to their defense," Axelrod said in an appearance on ABC's "This Week."
China's GDP grows nearly 9 percent last quarter
China's GDP increased 8.9 percent for the third quarter, moving closer toward the goal of 8 percent growth for the year. Growth for the first three quarters of the year is up 7.7 percent; economists says 8 percent growth is needed to keep current employment levels. The growth was in line with analyst expectations, although there are rising fears that the government's massive stimulus package may be inflating stock and property prices. The Chinese government spent $586 billion to bolster its economy.
"We have obtained obvious achievements and further strengthened the steady upturn trend of the economy. The overall situation of national economy is good," said Li Xiaochao, of the National Bureau of Statistics. "At present, it's a crucial stage for the national economy to realize stable growth," Li said. "Yet the basis of the economic recovery still needs to be consolidated, and the insufficient external demand is still severe with the arduous task of expanding domestic demand and adjusting the structures."
China's economy has been picking up pace the first three quarters of the year, growing at 6.1 percent the first quarter and 7.9 percent the second quarter. Foreign trade has continued to drop, but its rate of decline is slowing. The total volue of imports and exports in September was down 10.1 percent compared to the same month last year, but up 14.2 percent from August.
Top China banker urges shift in stimulus
China needs an “urgent” tightening of monetary policy to prevent the huge stimulus measures introduced this year from inflating stock and property bubbles, one of the country’s leading bankers has warned. Qin Xiao – chairman of China Merchants Bank, the country’s sixth-biggest – says in Thursday’s Financial Times that the government should not be afraid of a “moderate slowdown” in the economy. “Monetary policy must not neglect asset-price movements,” he writes. “Therefore it is urgent that China shifts from a loose monetary policy stance to a neutral one.”
Mr Qin’s unusually frank warning comes ahead of the publication on Thursday of third-quarter gross domestic product figures that are expected to underline the rapid recovery in China’s economy, with analysts forecasting growth of nearly 9 per cent compared to last year. According to calculations by the Financial Times and independent economists, China’s stimulus measures could amount to 15-17 per cent of GDP this year if government-induced bank lending is taken into account – by far the largest among major economies.
The Chinese government has used its control over the banks to engineer a massive increase in lending this year, with new loans in the first nine months of the year 149 per cent higher than last year at Rmb8,650bn ($1,260bn). Much of this investment has gone into infrastructure projects. The M2 measure of money supply is up 29.3 per cent, year on year. The giant investment programme has polarised critics, with some predicting inflation and warning that excessive bank loans were causing sharp rises in share and property prices, while others have argued the lending binge would exacerbate over-capacity and encourage deflation.
The State Council, China’s cabinet, gave its first clear hint Wednesday evening that it was considering a tighter monetary policy when it said that policy should focus both on managing inflationary expectations as well as securing stable growth – the first time it has mentioned inflation since the global economic crisis hit China last year.
“This is the first thing you would expect the authorities to say before they begin to moderate policy,” said Stephen Green, economist at Standard Chartered in Shanghai. But any increases in interest rates or controls on lending were unlikely before Chinese New Year in February, he said. Tomo Kinoshita, an economist at Nomura International, said in a report on Wednesday that China risked creating an asset bubble similar to Japan’s in the 1980s if it continued with aggressive lending at the same time as deregulating its financial markets.
Volcker Fails to Sell a Bank Strategy
Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis. “The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.”
Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children. He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.
“I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.” Still, he does head the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser.
As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence (he is 6-foot-8) offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.
More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.
For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and Mr. Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said. Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.
The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses. Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.
“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.
The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.
Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail. On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.
Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal. “People say I’m old-fashioned and banks can no longer be separated from nonbank activity,” Mr. Volcker said, acknowledging criticism that he is nostalgic for an earlier era. “That argument,” he added ruefully, “brought us to where we are today.”
He may not be alone in his proposal, but he is nearly so. Most economists and policy makers argue that a global economy requires that America have big financial institutions to compete against others in Europe and Asia. An administration spokesman says the Obama proposal for reform would result in financial institutions that could fail without damaging the system.
Still, a handful side with Mr. Volcker, among them Joseph E. Stiglitz, a Nobel laureate in economics at Columbia and a former official in the Clinton administration. “We would have a cleaner, safer banking system,” Mr. Stiglitz said, adding that while he endorses Mr. Volcker’s proposal, the former Fed chairman is nevertheless embarked on a quixotic journey.
Alan Greenspan, the only other former Fed chairman still living, favored the repeal of Glass-Steagall a decade ago and, unlike Mr. Volcker, would not bring it back now. He declined to be interviewed for this article, but in response to e-mailed questions he cited two recent public statements in which he suggested that the nation’s largest financial institutions become smaller, so that none would be too big to fail, requiring a federal rescue.
Taking issue implicitly with the Volcker proposal to split commercial and investment banking, he has said: “No form of economic organization can fully contain bouts of destructive speculative euphoria.” For his part, Mr. Volcker is careful to explain that he supports 80 percent of the administration’s detailed plan for financial regulation, including much higher capital requirements and “guidelines” on pay. Wall Street compensation, he said in a recent television interview, “has gotten grotesquely large.”
Before the credit crisis, the big institutions earned most of their profits from proprietary trading, and those profits led to giant bonuses. Mr. Volcker argues that splitting commercial and investment banking would put a damper on both pay and risky trading practices. His disagreement with the Obama people on whether to restore some version of Glass-Steagall appears to have contributed to published reports that his influence in the administration is fading and that he is rarely if ever in the small Washington office assigned to him.
He operates from his own offices in New York, communicating with administration officials and other members of the advisory board mainly by telephone. (He does not use e-mail, although his support staff does.) He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern. So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.
Bank of England Governor King Suggests Splitting Up Largest Banks to Stem Risk
Bank of England Governor Mervyn King stepped up his call for governments to tackle the dangers posed by banks that are “too important to fail,” saying new capital rules won’t shield taxpayers from funding any future bailouts. “The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history,” he said in a speech in Edinburgh late yesterday. He indicated that one solution could be to split up banks and separate riskier activities from more stable businesses such as taking deposits.
Officials are debating how to rein in the world’s biggest banks after their near-collapse threatened to capsize the global economy. While King also said more stringent capital rules wouldn’t necessarily create a safety cushion large enough for banks to weather every crisis, his stance was at odds with that of Chancellor of the Exchequer Alistair Darling. “Capital requirements reduce, but not eliminate, the need for taxpayers to provide catastrophe insurance,” King said. He added it is “hard to see why” proposals such as those of former Federal Reserve Chairman Paul Volcker to separate proprietary trading from retail banking are “impractical.”
By contrast, Darling said yesterday focusing on capital rules may be enough to ward off future crises and is unswayed by arguments that banks should be broken up. “You regulate according to risk,” Darling said before King’s speech. “The greater the risk, the greater the capital requirement. I don’t think an arbitrary split would deal with the problem.” King gave no indication in his speech whether the bank will expand its bond-purchase program next month. In an article he wrote for Scotland’s Herald newspaper today, he said that interest rates are “extremely low,” and warned Britons to prepare for increases “at some point.”
The bank’s rate-setting Monetary Policy Committee lowered the benchmark rate to record low of 0.5 percent this year. King said in his article posted on the Herald’s Web site that “I do not know for how long interest rates will remain so low. But at some point they will return to more normal levels and it would be wise to take this into account in your financial planning.”
British Prime Minister Gordon Brown faces mounting criticism for bailing out the financial system with public money as the worst recession in a generation hammers tax receipts and strains public finances. King said in the Herald article that “we must rebalance our economy away from spending -- both public and private -- and towards saving and investment.” Brown in September said he’s working on a Business and Financial Services Bill that will “ban the old bonus systems.” It also will require banks to keep a “living will” that would allow regulators to wind them down in the event they go bankrupt.
“The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion,” said King yesterday. The opposition Conservatives used King’s remarks to criticize the government. “Mervyn King’s speech is powerful and persuasive,” finance spokesman George Osborne said. “His analysis of how the government’s system for regulating banks failed and how there has been ‘little real reform’ since is one I share.”
King said the U.K. banking system is “highly concentrated” and greater competition is needed to reduce the dependency of households and businesses on just four institutions. The government owns 70 percent of Royal Bank of Scotland Group Plc and 43 percent of Lloyds Banking Group Plc. Barclays Plc and HSBC Holdings Plc are the country’s other biggest banks. On the economy, King said activity is showing “encouraging” signs. The FTSE-100 Index has surged almost 50 percent since March and the Office for National Statistics will probably say on Oct. 23 that the country emerged from the worst recession since World War II in the third quarter.
Gross domestic product expanded 0.2 percent in the period, according to the median of 33 forecasts in a Bloomberg News survey. “It is likely that in the second half of this year, the U.K. economy will return to positive, if modest, growth,” King said. “Financial markets have improved, with banks finding it easier and less costly to access wholesale funding markets, and in time this should ease lending conditions to households and businesses.” The economy’s output is still “well below” the levels of a year earlier, King said. He said there should be no illusion that a return to sustainable growth will be “smooth and painless.”
King said that the path for consumer prices will stay “volatile” in the next year. While inflation will pick up, the drop in money supply will keep a lid on price increases until spending recovers, he said. In his article in the Herald, King said “weakness in the economy threatens to keep inflation below the 2 percent target,” helping explain why the bank implemented asset purchases “to provide an extra stimulus to the economy.” King said he’s traveling to Scotland this week as part of his regular efforts to get first-hand reports on business around the country.
Gordon Brown rebuffs Mervyn King's suggestion that banks need breaking up
Gordon Brown has rebuffed a suggestion from Mervyn King, the governor of the Bank of England, that big banks must be broken up to prevent another financial crisis. Mr Brown told MPs that "the difference between having a retail and investment bank is not the cause of the problem." The Prime Minister added that "the cause of the problem is that banks have been insufficiently regulated at a global level."
Mr Brown was responding to Mr King's fiercest attack yet on big banking in a speech he gave in Edinburgh last night. Mr King indicated the country's high street banks should be separated from their risky investment banking arms. "“It’s clear King’s not happy with where we are now,” Colin Ellis, an economist at Daiwa Securities told Bloomberg. “He said the regulatory structure was inadequate, and coming from the governor of the Bank of England that’s as damming as it could be."
The regulation of the financial system is again racing up the political agenda as banks on both sides of the Atlantic are poised to hand out billions of pounds in bonuses at the end of the year. Mr King told Scottish business leaders yesterday that it was insufficient to expect that in the future tighter regulations alone would be enough to prevent banks from generating financial crises. Governments in the UK and US have tacitly ruled out splitting up the biggest banks and opted instead to scrutinise them more actively.
In a speech in Edinburgh, the Governor said "It is in our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities. The case for a serious review of how the banking industry is structured and regulated is strong." George Osborne, the shadow chancellor, described Mr King's analysis as "powerful and persuasive”.
Mortgage modification schemes see ‘disappointing’ results
The results of programmes to modify the terms of home loans for struggling borrowers have thus far been disappointing, according to research from Fitch Ratings. While the number of home loans receiving modifications has risen in response to government schemes to encourage mortgage servicers to reduce borrowers’ payments, more than half of modified home loans fall back into arrears within months, said the rating agency.
Meanwhile, many borrowers with trial modification plans under the government’s programme are slow to complete documentation requirements or make the trial payments that would allow them to convert to a permanently modified loan. As of September 2009, approximately 10 per cent of all loans packaged into mortgage bonds – including 25 per cent of all subprime loans in such bonds – have been modified at least once. This is up from 3 per cent and 7 per cent, respectively, a year ago.
However, Fitch estimates that between 65 per cent and 75 per cent of modified home loans default again within 12 months. This figure includes loans that are modified for a second or third time. Around 11 per cent of all modified loans in mortgage bonds have been modified for a second time, Fitch said. Diane Pendley, managing director at Fitch said: “Ultimate modification performance or sustainability will still primarily hinge on whether the borrower wishes to keep the property, as well as having sufficient cash flow to make the modified payments.”
While the guidelines for the government’s mortgage modification programme were intended to ensure that borrowers had enough cash flow to make their new modified housing payments, recent evidence from mortgage servicers is showing that many borrowers are not keeping up with payments on trial modifications, the rating agency said. “Borrowers may still be unable, if their other debts are excessive, or unwilling to continue making payments on a home where they will see little or no timely possibility for equity return,” said Ms Pendley.
Modifications of home loans under the government’s “Making Home Affordable” scheme are finalised once all the borrowers’ documentation is complete and borrowers have made their payments for three months. The plan, which has been in place for six months, has thus far seen few such conversions, according to government statistics. As of September 1, only 1,711 of the over 360,000 loans placed on a trial modification had been converted to permanent status.
The secret Paulson-Goldman meeting
Andrew Ross Sorkin’s new book is out today, and breaks some pretty stunning news, dating from the end of June, 2008. At this point, we’re still months away from the now-famous but then-secret waiver, issued in mid-September, which allowed Hank Paulson to talk to Goldman Sachs; he’d promised not to do that when he moved from Goldman to Treasury.
But it turns out that Paulson just happened to be in Moscow at the same time that Goldman’s board of directors was having dinner there with Mikhail Gorbachev. (You know, as one does.) Take it away, Andrew:When Paulson learned that Goldman’s board would be in Moscow at the same time as him, he had [Treasury chief of staff] Jim Wilkinson organize a meeting with them. Nothing formal, purely social — for old times’ sake.
For fuck’s sake! Wilkinson thought. He and Treasury had had enough trouble trying to fend off all the Goldman Sachs conspiracy theories constantly being bandied about in Washington and on Wall Street. A private meeting with its board? In Moscow? For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink’s BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.
Anxious about the prospect of such a meeting, Wilkinson called to get approval from Treasury’s general counsel. Bob Hoyt, who wasn’t enamored of the “optics” of such a meeting, said that as long as it remained a “social event,” it wouldn’t run afoul of the ethics guidelines. Still, Wilkinson had told [Goldman chief of staff John] Rogers, “Let’s keep this quiet,” as the two coordinated the details. They agreed that Goldman’s directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the “social event” on his official calendar…
“Come on in,” a buoyant Paulson said as he greeted everyone, shaking hands and giving bear hugs to some. For the next hour, Paulson regaled his old friends with stories about his time in Treasury and his prognostications about the economy. They questioned him about the possibility of another bank blowing up, like Lehman, and he talked about the need for the government to have the power to wind down troubled firms, offering a preview of his upcoming speech.
How on earth did Paulson think this was OK? Goldman Sachs was a hugely powerful for-profit investment bank, and there he is, giving private chapter and verse on his opinions about the US and global economy, talking about internal Treasury matters, and previewing an upcoming (and surely market-moving) speech. All in secret, at a “social event” which somehow got kept off his official calendar. Oh, yes, and one other thing — the whole shebang took place in the Moscow Marriott Grand Hotel, in the context of Goldman directors joking about how all the Moscow hotels were surely bugged.
This is sleazy in the extreme, and will only serve to heighten suspicions that Paulson’s Treasury was rigging the game in favor of Goldman all along. (It’s also a bit peculiar, to say the least, that the only two times Paulson met with private-sector boards he was out of the country, and arguably outside US jurisdiction.) Paulson didn’t have this meeting out of fear or necessity: in fact, he told the directors that although there might be tough times ahead, “I think we may come out of this by year’s end.” (Blankfein was skeptical.) There was nothing in the way of extenuating circumstances which could possibly justify the secret rendezvous. This is definitely a situation where Wilkinson should have pushed back and said no way — but it’s hard to say no to Hank Paulson. Whose reputation has now taken yet another serious lurch downwards.
How Paulson gave Goldman the Lehman heads-up
The secret Paulson-Goldman meeting wasn’t the only time that Hank Paulson treated his buddies at Goldman Sachs especially well while at Treasury. In fact, it wasn’t the only time he did so before he got the now-famous waiver. A bit further on in the Sorkin book, while Paulson is trying to work out what should be done with an imploding Lehman Brothers, we find this:If all that weren’t enough to deal with, [Lehman president Bart] McDade had just had a baffling conversation with [CEO Dick] Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman’s confidential numbers, courtesy of Goldman Sachs.
McDade, though never much of a Goldman conspiracy theorist, found Fuld’s report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman’s head of capital markets. “I’m following up at Hank’s request,” he began. After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and getting them to sign a confidentiality agreement. “This is coming directly from Paulson,” he explained.
In many ways, this is worse than Paulson’s meeting with Goldman’s board: in this case, Paulson is forcing Lehman to open its books fully to a direct competitor, for no obvious reason. And in this case it’s not at all obvious that Paulson got a sign off from Treasury’s general counsel before doing so.
I suspect this is what happens when you do all your business by phone rather than by email: you’re so comfortable with the fact that you’re not leaving any kind of paper trail, it becomes much easier to cross the line and abuse your position as the most powerful Treasury secretary in living memory to the benefit of your former firm. If the Moscow meeting wasn’t enough to precipitate some kind of Congressional investigation of Paulson, this should be.
Bernanke Told Bank of America Merrill Aid May Help Stock, E-Mail Shows
Bank of America Corp. signed off on its government-assisted purchase of Merrill Lynch & Co. after U.S. regulators said the deal might boost the shares, e-mails from two executives showed. Instead, the stock collapsed. “The chairman of the Federal Reserve indicated it would be structured in a manner such that BAC stock should go up when announced,” Chief Financial Officer Joe Price said in a Dec. 29 e-mail to executives of the Charlotte, North Carolina-based bank, including Chief Executive Officer Kenneth D. Lewis. Merrill, the world’s biggest broker, agreed to be acquired after more than $50 billion of losses and writedowns tied to the collapse of the subprime-mortgage market.
By Jan. 8, a week after the deal was completed and before details were disclosed, federal officials changed their view of the purchase, according to an e-mail from former Bank of America Treasurer Jeff Brown. Fed and Office of the Comptroller of the Currency officials “assign high probability the market will ‘attack us’ after learning of the ‘government assistance’ to us,” Brown said in a Jan. 8 e-mail to Price. Brown reminded the regulators that “1) they forced us into this position and 2) they had provided every assurance of a positive market response to any action from their chairman to our chairman. They just got silent.” The U.S. provided $20 billion in fresh capital and a $118 billion backstop on loans and mortgage-based securities to shore up the purchase. Michelle Smith, a Fed spokeswoman, didn’t have a comment.
The e-mails are among more than 1,000 pages of documents sent last week to the House Oversight Committee. Bloomberg News was provided a portion of what the committee received in its investigation of the Merrill acquisition. A hearing is scheduled Oct. 22 at which two Bank of America directors and former General Counsel Timothy Mayopoulos are to appear. “The strategic wisdom of the Bank of America-Merrill Lynch deal is now obvious to everyone,” bank spokesman Lawrence Di Rita said in an interview. “These documents and e-mails reveal the good faith deliberations among those who understood that first.”
Lewis told the committee June 11 that Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson pressed him to complete the deal in December after the bank had considered canceling the transaction amid Merrill’s mounting losses. Bank of America shares tumbled 47 percent in six trading days, from $13.54 on Jan. 8 to $7.18 on Jan. 16 when the company announced its first quarterly loss in 17 years and the $20 billion in U.S. aid to absorb potential Merrill losses. The bank also disclosed that Merrill posted a $15.8 billion fourth- quarter loss, leading to questions about Lewis’s failure to alert shareholders before the transaction was approved.
Bank of America provided documents to the committee Oct. 16 after agreeing to forgo its right to keep discussions with its lawyers confidential. The bank didn’t make the documents public. The documents include “talking points” prepared by the bank’s law firm to be used by Lewis for a conversation in late December with Paulson about Merrill’s worsening finances. The memo and Price’s notes suggest the bank consider lowering the price for Merrill if Bank of America couldn’t cancel the transaction. The deal took effect Jan. 1 without any repricing.
More documents citing internal bank discussions said that incoming Treasury Secretary Timothy Geithner, then president of the Federal Reserve Bank of New York, and incoming National Economic Council Director Lawrence Summers endorsed guarantees to the bank. “Ben also stated that Geithner and, in addition, Larry Summers, were both on board with the transaction,” according to “talking points” for a board meeting distributed Dec. 22 by Brian Moynihan, the bank’s general counsel. Geithner and Summers took office after President Barack Obama was inaugurated on Jan. 20.
The Obama administration said Summers had no position on the plan. “Summers received occasional briefings by Federal Reserve officials during the transition, but did not make, review, or approve decisions regarding financial institutions during that time,” White House spokesman Matthew Vogel said in an e-mailed statement. Moynihan’s Dec. 22 e-mail introducing the talking points said some characterizations of what Paulson and Bernanke said “are from our notes so we may not have the exact thoughts correctly stated but we tried to catch the gist of the conversations.”
The merger reflected a collaboration led by “Ken Lewis, Henry Paulson, Ben Bernanke, Timothy Geithner and Larry Summers,” said Kurt Bardella, spokesman for U.S. Representative Darrell Issa, top Republican on the panel. “As a result of this collaboration, the taxpayers ended up footing the bill so Bank of America didn’t have to absorb Merrill Lynch’s losses.” After being nominated as Treasury Secretary, Geithner “was recused from any issues involving individual banks, including Bank of America,” spokesman Andrew Williams said. “It was perfectly natural and appropriate that the incoming Treasury secretary would be kept apprised of key developments, but he was not making decisions for the government.”
Lewis, 62, said this month he plans to resign at the end of the year and a six-member committee is seeking his replacement. Bank finance executives Moynihan and Gregory Curl are internal candidates considered contenders to succeed Lewis, according to a person familiar with the matter. The bank has named Price as a potential successor. Brown left the bank and works for GMAC Inc. Shareholders stripped Lewis of his chairman’s title in April, and regulators directed the bank in May to overhaul its board and risk management. Bank of America shares have rebounded since January, closing at $17.16 yesterday in New York Stock Exchange composite trading. Revenue from Merrill has been essential to offset losses from Bank of America’s credit card and housing businesses, Lewis told analysts last week.
Safety Nets for the Rich
The headlines that ran side by side on the front page of Saturday’s New York Times summed up, inadvertently, the terrible fix that we’ve allowed our country to fall into. The lead headline, in the upper right-hand corner, said: “U.S. Deficit Rises to $1.4 Trillion; Biggest Since ’45.” The headline next to it said: “Bailout Helps Revive Banks, And Bonuses.”
We’ve spent the last few decades shoveling money at the rich like there was no tomorrow. We abandoned the poor, put an economic stranglehold on the middle class and all but bankrupted the federal government — while giving the banks and megacorporations and the rest of the swells at the top of the economic pyramid just about everything they’ve wanted. And we still don’t seem to have learned the proper lessons. We’ve allowed so many people to fall into the terrible abyss of unemployment that no one — not the Obama administration, not the labor unions and most certainly no one in the Republican Party — has a clue about how to put them back to work.
Meanwhile, Wall Street is living it up. I’m amazed at how passive the population has remained in the face of this sustained outrage. Even as tens of millions of working Americans are struggling to hang onto their jobs and keep a roof over their families’ heads, the wise guys of Wall Street are licking their fat-cat chops over yet another round of obscene multibillion-dollar bonuses — this time thanks to the bailout billions that were sent their way by Uncle Sam, with very little in the way of strings attached. Nevermind that the economy remains deeply troubled. As The Times pointed out on Saturday, much of Wall Street “is minting money.”
Call it déjà voodoo. I wrote a column that ran three days before Christmas in 2007 that focused on the deeply disturbing disconnect between Wall Streeters harvesting a record crop of bonuses — billions on top of billions — while working families were having a very hard time making ends meet. We would later learn that December 2007 was the very month that the Great Recession began. I wrote in that column: “Even as the Wall Streeters are high-fiving and ordering up record shipments of Champagne and caviar, the American dream is on life support.”
So we had an orgy of bonuses just as the recession was taking hold and now another orgy (with taxpayers as the enablers) that is nothing short of an arrogantly pointed finger in the eye of everyone who suffered, and continues to suffer, in this downturn. Whether P.T. Barnum actually said it or not, there is a sucker born every minute. American taxpayers might want to take a look in the mirror. If the epithet fits...
We need to make some fundamental changes in the way we do things in this country. The gamblers and con artists of the financial sector, the very same clowns who did so much to bring the economy down in the first place, are howling self-righteously over the prospect of regulations aimed at curbing the worst aspects of their excessively risky behavior and preventing them from causing yet another economic meltdown.
We should be going even further. We’ve institutionalized the idea that there are firms that are too big to fail and, therefore, “we, the people” are obliged to see that they don’t — even if that means bankrupting the national treasury and undermining the living standards of ordinary people. What sense does that make? If some company is too big to fail, then it’s too big to exist. Break it up.
Why should the general public have to constantly worry that a misstep by the high-wire artists at Goldman Sachs (to take the most obvious example) would put the entire economy in peril? These financial acrobats get the extraordinary benefits of their outlandish risk-taking — multimillion-dollar paychecks, homes the size of castles — but the public has to be there to absorb the worst of the pain when they take a terrible fall. Enough! Goldman Sachs is thriving while the combined rates of unemployment and underemployment are creeping toward a mind-boggling 20 percent. Two-thirds of all the income gains from the years 2002 to 2007 — two-thirds! — went to the top 1 percent of Americans.
We cannot continue transferring the nation’s wealth to those at the apex of the economic pyramid — which is what we have been doing for the past three decades or so — while hoping that someday, maybe, the benefits of that transfer will trickle down in the form of steady employment and improved living standards for the many millions of families struggling to make it from day to day. That money is never going to trickle down. It’s a fairy tale. We’re crazy to continue believing it.
Dollar hegemony for another century
by Ambrose Evans-Pritchard
Let me stick my neck out. The dollar will still be the world’s dominant reserve currency in 2030, sharing a degree of leadership in uneasy condominium with the Chinese yuan. It will then regain much of its hegemonic status as the 21st century unfolds. It may indeed end the century even stronger than it was at the start.
The aging crisis in Asia — and indeed the outright demographic implosion in Japan and China, not to mention China’s water crisis — will soon be obvious to everybody. Talk of Oriental supremacy will start to sound overblown at first, and then preposterous. Japan is about to go bankrupt. It is on the cusp of a fiscal crisis that will change perceptions of Asia dramatically. The IMF says gross public debt will reach 218pc of GDP this year. This is compounding very fast. It will be 246pc in 2014.
The Hatoyama government is spending as if there is no tomorrow. It plans to issue ¥50 trillion or $550bn in fresh bonds. I have no idea when this will spiral out of control. It could take another two or three years. It could start next week. Yes, I know that Japan has been borrowing merrily at ever lower rates for 20 years without the sky falling. The 10-year yield is 1.3pc. What happens when it rises to global levels of 3pc to 4pc? People made the same sort of arguments about the global boom before it suddenly tipped over.
This blog does not attempt market timing, nor does it offer investment advice. But I am absolutely certain that pundits consigning the dollar to its death have missed an even more dramatic currency and debt story in Japan. The yen will top ¥200 to the dollar before this is over. Jim O’Neill from Goldman Sachs has already begun to hint at this. Apologies to readers who feel confused about my view on the dollar. I have written a string of NEWS pieces over recent weeks quoting the currency experts and Asian officials slamming America, or exploring the dollar demise thesis.
People assume that I share these views. I do not. Furthermore, I suspect that at least some of China’s grumbling about the dollar slide over recent months has been a ruse to lower the yuan (pegged to the dollar of course) against the euro, yen, and even sterling. The goal is to protect export margins. (Surely premier Wen Jiabao knows that China’s $1.6 trillion or so invested in US bonds is a sunk cost. Forget about it. The holdings are the consequence of their own currency manipulation in the first place.)
The fact that Asian central banks are accumulating $600bn or more a year in reserves by running huge trade surpluses is proof enough that their (mostly rigged) currencies are undervalued by 30pc to 40pc against the West. To that extent, I agree entirely with HSBC currency guru David Bloom that this is untenable. If these countries continue to resist currency appreciation they will overheat and succumb to asset bubbles — if they haven’t already in China.
Where I am less sure is that this will necessarily be resolved by a falling dollar. The evidence so far is that Asia will put off the day of adjustment as long as possible because they are addicted to mercantilist export strategies — and export oligarchs control the political systems (bar Japan). In which case they will lose competitive edge the old-fashioned way, by wage inflation for year after year until the world comes back into alignment. If so, the dollar will not fall at all. It may rise.
Nor do I really agree that this is in essence a story of the two sick sisters: Britain and the US. They are certainly sick. But as readers know, I think much of Europe is equally sick — Spain, Italy, Greece, Ireland, the Baltics, are even sicker — even if the lag-times are longer. The IMF keeps telling us that Europe has failed to come clean on its bank losses. Germany’s BaFin regulator says the same thing. Are they wrong?
It all has echoes of the early 1930s when the Anglo-Saxons were crushed in the first two to three years, and the French bloc was crushed over the subsequent three years. What goes around, comes around.
Charles Dumas from Lombard Street Research says Washington must be chuckling as the weak dollar gives it time to rebuild America’s industrial core. The “inflationistas” — ie, those convinced that the dollar is being debauched despite the fact that core inflation in the US is falling and that the M3 money supply is contracting — are playing straight into the hands of the United States.
Nobel Laureate Gary Becker told me a few weeks ago that America’ spectacular gains in productivity – growing at a trend rate of 2.25pc to 2.5pc — is laying the foundation for a much stronger US recovery in the long-term than most people seem to realize. Compare that with 0pc to 1pc for the eurozone. In Italy it is negative. The UN expects America to add roughly 100m people by 2050, keeping its age balance in relatively good shape through a mix of immigration and a healthy fertility rate — now 2.12 live births per woman, still above replacement level. This compares to: Taiwan (1.13), Korea (1.2), Japan (1.22), Ukraine (1.25), Poland (1.27), Spain (1.3), Italy (1.3), Russia (1.4), Germany (1.41), China (1.77), Britain (1.96), and France (1.98). Some of this data may be slightly out of date, but the picture remains valid.
Professor Becker said a collapsing birth rate is extremely hard to reverse, and the cultural effects are insidious. Old societies are status quo. They are slow to embrace new technologies. Young minds are the source of hi-tech invention. The EU is fully aware of the danger. “What is at risk in the medium to long run is nothing less than the sustainability of the society Europe has built and the viability of its civilisation,” said an EU report (initially suppressed) by former Dutch premier Wim Kok as long ago as 2004. Nothing has been done since despite endless warnings from the Commission.
China’s work force will peak in absolute terms in six years, and then go into sharp decline. I have no idea how people square this with claims that China will soon replace the US as world hegemon. The stark reality is that China will hit a Japanese-style demographic crunch before it becomes rich. Sheer size will give it weight. But mastery?
Of course, if the US were stupid enough to enact the 10-year spending plans projected by the White House — with a deficit of $1.9 trillion in 2019 on Congressional Budget Office estimates — the country will be ruined. I do not think America has so far lost its senses that it will commit suicide in this fashion. In any case, the bond markets will react long before we get there. They will force a change in policy. That change will imply higher US savings, and less import growth. The export surplus powers that live off America’s market are going to take it on the chin.
At the end of the day, America is a unified nation forged by wars, under the rule of law, with a (largely) unifying language and patriotic creed, and one of the oldest and most deeply-rooted democracies in the world. As the Supreme Court demonstrated during Watergate, it can break presidents who violate the law.
It is often stated that a currency reflects the strength of an economy over time. Actually, it reflects the strength of a society. Who really thinks that Europe’s old-aged home is a better bet than America, even if they can hold the euro together as the gap widens further between Germania and Club Med? Or thinks that China’s half-reformed Communist regime is ready for global leadership. Remember the little girl in a red dress with pigtails who `lip-synched’ the opening ceremony of the Beijing Olympics? Believe what you will.
Homes: About to get much cheaper
If you thought home prices were bottoming out, you may be wrong. They're expected to head a lot lower. Home values are predicted to drop in 342 out of 381 markets during the next year, according to a new forecast of real estate prices. Overall, the national median home price is predicted to drop 11.3% by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6%.
In the past, Fiserv anticipated the rapid decline in home-sale prices over the past few years -- though it underestimated the scope. Mark Zandi, chief economist with Moody's Economy.com, agreed with Fiserv's current assessments. "I think more price declines are coming because the foreclosure crisis is not over," he said. In fact, those areas with high concentrations of foreclosure sales will experience the steepest drops, according to Fiserv. Miami, for example, is expected to be the biggest loser. Prices are forecast to plunge 29.9% by next June -- after having already fallen a whopping 48% during the past three years.
If Fiserv's forecast holds, Miami real median home price will tumble to $142,000 by June 2011. In Orlando, Fla., the second-worst performing market, Fiserv anticipates a 27% price collapse by June 2010, followed by a less severe drop the following year. In Hanford, Calif., prices are estimated to drop 26.9% and continue falling 9.5% in 2011; in Naples, Fla., they're expected to fall 26.8% and then flatten out.
Other notable losers include Las Vegas, where prices have already fallen 54.6% and are expected to lose another 23.9% by June 2010. In Phoenix values have already collapsed by 54% and could fall another 23.4%. In both cities, Fiserv anticipates the losses to continue into 2011, but they will be less than 5%.
The latest forecast is at odds with the past few months of the S&P/Case-Shiller Home Price index. That report has given hope that most housing markets may have already stabilized because the composite index of 20 cities rose in May, June and July. Nationally, it found that home prices have gained 3.6%. Brad Hunter, chief economist for Metrostudy, which provides housing market information to the industry, however, expects a change in fortunes, however. "I'm afraid Case-Shiller may be just a temporary reprieve," he said.
He pointed out that the tax credit for first-time home buyers helped support prices during the three months of Case-Shiller gains. By the end of November, the credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, according to estimates by the National Association of Realtors. But the market assistance ends when the credit expires on Dec. 1.
Hunter also sees a new wave of foreclosure problems coming from higher priced loans and prime mortgages. He expects a high failure rate for option ARM loans that were issued to prime customers so they could buy homes in bubble markets, such as California and Florida. In those areas, prices for even modest homes had skyrocketed.
A handful of metro areas will buck the trend, according to Fiserv. Six markets will remain flat, and 33 will actually post gains. The biggest winner will be the Kennewick, Wash., metro area, where home prices have ramped up 8.9% over the past three years and are expected to increase another 3.4% by June 2010. Fairbanks, Alaska, prices are anticipated to rise 2.5%, while Anchorage will climb 2.1%. Elmira, N.Y., prices may inch up 1.8%.
The nation's biggest metro area, New York City, will underperform the nation as a whole over the next two years, according to Fiserv. Prices, which have already fallen 21.7% to a median of $375,000, are expected to fall 17.4% by June 2011. Home values in the nation's second largest city, Los Angeles, have fallen 43.3% since June 2006 to a median of $313,000. They are expected to dive another 20.2% over by June 2010, and then start to climb in 2011. Chicago prices, which have fallen 25.2% to $227,000, will drop only 4.1% over the next 12 months and then starting to climb.
The Detroit metro area now has the dubious distinction of having the lowest home prices in the country. Prices have dropped 51.7% to a median of $50,000. They're expected to fall another 9.1% and then stabilize.
Euro at $1.50 is 'disaster' for Europe
France has given its clearest indication to date that the surging euro is a threat to Europe's fragile recovery and will not be tolerated for much longer. "The euro at $1.50 is a disaster for the European economy and industry," said Henri Guaino, right-hand man of President Nicolas Sarkozy. The currency has risen 15pc in trade-weighted terms since March, equivalent to six quarter of a percentage-point rises in interest rates. It briefly flirted with $1.50 against the dollar on Tuesday before falling back on intervention fears.
What concerns European policymakers most is the lockstep rise against China's yuan. Beijing has clamped the yuan firmly to the weak dollar for over a year, quietly benefiting from the export advantages. It accumulated $68bn (£41bn) in reserves in September alone as a side-effect of holding down the currency. Fresh reserves are mostly being invested in eurozone bonds, pushing the euro higher.
French finance minister Christine Lagarde said it was intolerable that Europe should "pay the price" for a dysfunctional link between the US and China. "We want a strong dollar, and we have reiterated it again in the strongest manner," she said after this week's Eurogroup meeting. China's trade surplus with the EU reached €169bn (£154bn) last year. Europe and Japan are now the last two blocs standing as everybody else lets their currencies fall, or takes active measures to hold down the exchange rate -- with "beggar-thy-neighbour" echoes of the 1930s.
Brazil has become the latest country to intervene, resorting to controls to cap the real after its 42pc rise against the dollar since March. It is imposing a 2pc tax on flows into bond and equity markets. Finance minister Guido Mantega said the move was to head off an asset bubble. Critics called it a "desperate move" that would distort markets. Hans Redeker, currency chief at BNP Paribas, said the strong real is "eating away" at Brazil's manufacturing base. "They are not willing to take any more of the adjustment burden as long as China and other surplus countries do nothing," he said.
Switzerland is openly intervening to hold down the franc in order to stave off deflation. Canada and New Zealand have talked down their currencies. Britain and Sweden have opted for stealth devaluations. Korea, Thailand, Taiwan, the Philippines, Indonesia and Russia have all been buying dollars to stem their currencies' rises. The effect is to perpetuate the imbalances that led to the credit bubble from 2004-2007 and ultimately caused the financial crisis. Reserve accumulation fuels asset booms because it creates a wash of liquidity and drives down global bond yields. Asia clearly needs to sharply revalue against the West to right the system.
Professor Michel Aglietta from Paris University says the euro is 40pc above its purchasing parity of level $1.07 (a low estimate), citing it as the reason why Peugeot and Renault have shifted annual production of one million cars to Eastern Europe since 2004. Airbus is moving plants offshore, building A320 jets in China. It is relying heavily on US contractors for its A350 jet. Fabrice Bregier, Airbus chief financial officer, said the current exchange rate is "becoming very difficult for all industrial companies which have their costs in euros. We can only appeal to monetary authorities to see to it that there is stability in exchange rates."
The European Central Bank could take some of the steam out of the euro by signalling a less hawkish policy. It may be pressured into doing so. EU ministers have the final say on exchange rate under Maastricht, though they have never used this power – publicly. What is missing is a unified front of EU governments. Italy has been remarkably quiescent, given its export slide. Germany has a higher pain threshold for a strong currency after gaining competitiveness by squeezing wages. But there are limits even in Berlin. The IWK institute says the danger point for German exporters is $1.45.
Jean-Claude Trichet, ECB president, has stepped up his rhetoric against "disorderly" currency moves, warning that authorities on "both sides of the Atlantic" were monitoring the markets. He made an unscheduled appearance on Monday to drive home the point. The body language is changing.
My post last week about the 20-year-old woman who just bought a home has prompted a lively discussion and more questions. It also prompted the young woman to respond. So, here’s more on it:
Here’s the link to the original post, On the flip side. It includes my radio interview with Denise Tejada, now 21, and the original Youth Radio piece about her and her 22-year-old brother. They both recently bought homes in the San Francisco Bay area. Her family immigrated from El Salvador. They are US citizens.
Denise got an FHA loan to buy her home for $155,000. She took out a second loan (called a 203-K loan) to refurbish the place. The total loan amount is about $183,000. She says, “In total, I gave the bank $5,087 + $1,500 which were all deposit and closing costs.”
So her “down payment” was no more than 4% of the value of the home when she bought it. She will get all of that back and then some with the first-time home buyer tax credit. However, as one commenter pointed out, she will have to stay in the home for three years to keep the credit.
Denise’s fulltime job covers her $1328 a month mortgage payment which includes insurance and taxes. Her two part-time jobs cover her living expenses. She makes $2470 a month. 54% of her income goes to service the mortgage. Here’s what she says about that:… I’m left with $1,142 per/month, which is plenty for me. I have two credit cards—that I barely touch—a cable bill, gas, food, and utilities. I’m not scraping to get by.
During a time when so many people are losing jobs, of course, I think about what would happen if I lost one of mine. However, I honestly think I am prepared. I have some options. I could find renters for my two additional bedrooms. I’m young and able-bodied and ready to work, so I could probably still get work that other people don’t want. For instance, I could clean floors, windows, etc. I don’t want to be someone that depends on the government to sustain me financially. I was brought up with a work ethic of working hard until the end. If I was really strained financially, I know my family would be there to support me.
She’s gotten plenty of feedback, including this comment:Denise, this is going to sound harsh, but copy this post and file it away on your computer. I fully expect you to be foreclosed on before 2012. And the reason why I’m not giving a shorter timeline is that I’m assuming that you’re going to get several credit cards and max those out as you play the credit juggling game…
First, there is a HUGE housing glut in this country. The country is currently experiencing negative household formation which makes the housing oversupply even worse. Based on this statistic alone, housing prices will continue to fall until an equilibrium is reached - by my ballpark estimates, that’ll be 2014 or so.
Denise says with the fix-up, her home has increased in value by $100,000. I have serious doubts she could sell it for $250,000 now or anytime soon. But beyond the valuation issue, she doesn’t seem to be in fantasy land:I came to this country to achieve the American Dream. I’m an immigrant and I know the value of hard work and making good, honest choices. I didn’t buy this house on a whim. Buying a house is a risk for anyone, and as a young buyer, I’ve been challenged all along the way. With hard work and sound decisions, I’m planning to prove my doubters wrong.
Still, the issue for a lot of people is not only the fact that she’s chosen to do this instead of going to college - at least for now - but also, the government is subsidizing her choice. Clusterstock’s John Carney picked up the story and wrote this:The Tejada family obviously has a very strong worth ethic and a savings ethic as well. Unfortunately, something appears to have gone haywire when it comes to homes. The children were encouraged to work and save but then to spend their savings on homes and to be completely unafraid of massive amounts of debt. This is, in short, a living breathing example of the ideology of home ownership at work.
We wish the Tejada’s nothing but the best of luck. We hope she really can keep paying her mortgages and that she somehow makes money on her house. But it is outrageous that the FHA is guaranteeing her loans, putting the taxpayer on the hook for her precarious financial situation.
In Hawaii, school's out for recession
At a time when President Barack Obama is pushing for more time in the classroom, his home state has created the nation's shortest school year under a new union contract that closes schools on most Fridays for the remainder of the academic calendar. The deal whacks 17 days from the school year for budget-cutting reasons and has education advocates incensed that Hawaii is drastically cutting the academic calendar at a time when it already ranks near the bottom in national educational achievement.
While many school districts have laid off or furloughed teachers, reduced pay and planning days and otherwise cut costs, Hawaii's 171,000 public schools students now find themselves with only 163 instructional days, compared with 180 in most districts in the U.S. "The 16-year-old in me is pretty excited that I'll be able to chill on those days," said Mark Aoki, a junior at Roosevelt High in Honolulu. "But overall within me, what I truly believe is that we'll regret this."
The cuts come as Obama, who graduated from a top private high school in Hawaii, says U.S. students are at a disadvantage with other students around the world because they spend too little time in school. He wants schools to add time to classes, to stay open late and to let kids in on weekends so they have a safe place to go. He declared recently that "the challenges of a new century demand more time in the classroom." The deal in Hawaii and has parents and education authorities up in arms, including families now scrambling to find day care for the off days. Parents of special-needs students are considering suing the state, and advocates believe the plan will have a "disparate impact" on poor families, ethnic communities and single parents.
"It's just not enough time for the kids to learn," said Valerie Sonoda, president of the Hawaii State Parent Teacher Student Association. "I'm getting hundreds of calls and e-mails. They all have the same underlying concern, and that is the educational hours of the kids."
The new contract, approved by 81 percent of voting teachers, stipulates 17 furlough Fridays during which schools will be closed, with the first happening Oct. 23. The teachers accepted a concurrent pay reduction of about 8 percent, but teacher vacation, nine paid holidays and six teacher planning days are left untouched. The new agreement also guarantees no layoffs for two years and postpones the implementation of random drug testing for teachers.
Teachers probably wouldn't have voted for the contract if they had to work the same amount for less pay, paving the way for the shorter school year, said Hawaii State Teachers Association President Wil Okabe. He also said the state couldn't get the necessary savings if teacher furlough days were scheduled for holidays — or workdays with schools kept open.
Hawaii has the nation's only statewide school district, meaning that state government pays directly for education instead of self-supporting local school districts. More than a quarter of the state's general budget goes to the state Department of Education. When Republican Gov. Linda Lingle attempted to balance the budget, she withheld 14 percent from estimated salaries, or $227 million, this year from the public school system. Hawaii Schools Superintendent Pat Hamamoto acknowledges that learning time will be lost and students will suffer, but she says schools will try to increase their efforts during the remaining school days to cram in as much teaching as they can.
"If we're trying to say education is the most important thing, then we should be supporting it," said Superintendent Pat Hamamoto. The cuts are occurring in a Hawaii public education system that's already ranked 47th in the nation in eighth-grade reading and math, according to 2007 National Assessment of Educational Progress test scores. "The less time spent on a task, the less likely it is that you're going to achieve," said Jack Jennings, president of the Washington-based Center on Education Policy. "Instructional time is usually the last thing to go in these budget crises."
Meanwhile, a record number of schools this year failed to meet progress goals under the federal No Child Left Behind law. Only 34 percent of schools met their "adequate yearly progress" goals this year. Two-third of schools missed the benchmarks. This was the second year of dramatic increases in the number of schools failing to meet the federal goals. But state test score results have inched up. About 65 percent of students are proficient in reading, compared with 39 percent when testing began in 2002. Likewise, 44 percent of students demonstrated proficiency in math, more than double the 19 percent in 2002.
At least 25 states have made cuts to K-12 education, according to the Center on Budget and Policy Priorities. School districts in states including California, Florida, New Mexico are forcing teachers to take unpaid days off, but most of those furloughs are not on school days and they're usually limited to fewer than five days annually. And none of those local school district furloughs are on the scale of Hawaii's, which employs 13,000 teachers. At 163 school days, Hawaii's school year ranks behind every other state. Most states provide students with 180 days of school, while 10 other states offer less than 180 days, according to the Education Commission of the States.
New York State Could Issue IOUs Before Year's End
If lawmakers fail to make major cuts, according to the state budget office, New York could essentially issue IOUs to local school districts, municipal governments, and non-for-profits that rely on state aid and reimbursements. The state is running a deficit of three billion dollars in 2009. Governor David Paterson's office said that, if state lawmakers fail to cut the budget by that amount before the end of the year, the state will have to decide which bills it will not pay. "In all my years of government I have never seen anything this bad," State Senator George Maziarz (R-Wheatfield) said. "And it's only going to get worse."
According to both the budget office and the office of State Comptroller Thomas DiNapoli, local districts which carry out state-mandated services will be the last to get paid. The budget office says payments could be delayed by weeks, or even months, depending on how long it takes lawmakers to make the cuts. The Governor's office says Mr. Patterson will fight any attempted by the legislature to borrow money to pay its bills for fear it would negatively harm the state's credit rating and its ability to borrow in the future.
This likely will force many of those local districts to borrow the money while they wait for a check from the state. According to Erie County's Budget Director, county taxpayers could pay as much as an extra $150,000 in interest on the borrowed money. All of these state budget problems stem from both the financial meltdown on Wall Street and the fact that the April budget, in hindsight, was not balanced. "Let's go back to Albany and solve the problem," Assemblyman Sam Hoyt (D-Buffalo) said. Hoyt, who voted against the budget, is calling on Governor Paterson to call lawmakers back to Albany for a special session. So far, Paterson has declined to do do.
REPORTER: Why should we have any confidence that the state legislature can make any cuts before the end of the year to avoid this?
HOYT: Because it's a crisis of the likes we've never seen before. The problem has become so bad, a New York Times editorial is suggesting state voters get rid of all incumbents next year.
REPORTER: Given what's happened over the last several years in Albany, why should we vote for any incumbents?
MAZIARZ: Aaron, next year -- it's going to be a historic year in the state of New York -- 2010... And that's a good question I think a lot of people are going to be asking. And they should hold their incumbents accountable. But go back...
REPORTER: Including you?
MAZIARZ: Including me. But go back and look at what we said in January and February of this year. That's when he and others criticized a budget that may have sown the seeds for a year-end crisis.
Twenty-Two Reasons Why this Recession is Different and Why it Will Endure
I find it surprising that I'm now getting inquiries from readers, asking if "we've reached bottom" in the current economic recession, and asking if the time has come to start buying stocks or residential real estate.It seems that the talking heads of mainstream media are using some sort of voodoo. How can anyone think that we've hit bottom, and an economic recovery is in progress? To dispel themyths from the CNBC Cheering Section, please consider the following. (And note that I've provided references for each assertion, just so you know that I'm not talking out of my
- A broken global credit market that has not fully recovered. See: After Lehman, U.S. firms adjust to new face of credit
- Lack of transparency in Mortgage-Backed Securities and other re-packaged debt instruments. See: Geithner Blames Lack of Transparency for OTC Derivatives Hit on Market.
- The increasing Federal debt, which is growing at an unprecedented rate. See: The National Debt Clock.
- Mountains of consumer and corporate debt. See: Observations on the US Debt.
- The Federal budget deficit. See: Federal Deficit Hits All-Time High of $1.42 Trillion.
- Ever-expanding bailouts. (I call this The MOAB.) See: As More Companies Seek Aid, 'Where Do You Stop?'
- Monetization of the National Debt. See: Fed Could Expand MBS Purchases. (Can you spell Oroborus?):
- The destruction of the American consumer economy. (It had beenartificially credit-driven). See:A Year After The Crisis, The Consumer Economy Is Dead.
- Chronic unemployment, possibly much higher than officially reported. See: Alternate Data at ShadowStats.
- More than $500 Billion USDin hedge funds that have borrowed short and lent long. See: Assets invested in hedge funds increase by $100bn
- A double wave of residential mortgage rate resets. See: this chart ofscheduled mortgage interest rate resets.
- Continued down-ratcheting of house prices. See: HousingPricesWill Continueto Fall, Especially in California
- The under-reported "shadow inventory" of foreclosed houses. See: The "Shadow" Foreclosure Inventory
- The very likely collapse of commercial real estate ("the other shoe to drop".) See: Is a commercial real estate bust inevitable?
- A huge crisis lurking in over-the-counter derivatives. See my analysis published in 2006 and the dozens of articles on the Derivative Dribble Blog.
- Under-funded pensions. See:Almost half of top unions have under funded pension plans.
- A coming wave of municipal bond and municipal bond hedge fund failures. See: The Failureof LeveragedMunicipalBond HedgeFunds.
- Increasing numbers of bank failures. See: FDIC: Bank Failures to Cost Around $100 Billion.
- Insurance company collapses--some, like AIG, were foolish enough to insure more than a trillion dollars in derivative contracts. See: AIG: Is the Risk Systemic?
- Worsening state, county, andcity budget crises. See: State prepares for shutdown as budget deadline looms, and this article from a liberal site: Predicting Worse Ahead from America's Economic Crisis.
- Loss of faith in the US Dollar, on the FOREX. See: Dollar's reserve currency status in focus as G-7 finance ministers meet.
- The coming mass currency inflation, following some asset deflation. See: Which is more likely in 2010: Deflation or inflation?
Back in the Fall of 2008, I started hearing from consulting clients with notes of fear in their voices. They realized that something is horribly wrong with the economy, but they could notproperly isolate and articulate the problem. In my estimation, the "something wrong" that they sensed is nothing short of a monumental shift in the economic climate.
America will continue in recession. Most economic recessions are simply a product of the business cycle. These recessions are relatively mild and they often last just 12 to 24 months. The economic engine just readjusts and everything soon gets back to normal. But the recession that began in 2008 is something radically different, and it won't be short-lived. The current slow down was triggered by a collapse in the global credit market. For decades, the global credit market grew and grew, in an enormous debt spiral. Our neighbors to the south saw trouble coming decades ago, because their economies were at the time more debt-dependent than our own. As far back as the mid-1980s, their newspapers featured political cartoons that portrayed an enormous, insatiable monster that was invariably captioned "La Dueda"--"The Debt". Our cousins in Latin America saw it coming first, but the dark side of the debt nemesis will soon be clear to everyone.
The Federal governments's debt, just by itself is cause for concern. As an old gunsmithing friend mine, the late Chuck Brumley, was fond of saying: “If your outgo exceeds your income your upkeep will be your downfall." Several decades of profligate spending by the US Congress are finally starting to take their toll. Just because their friend Helicopter Ben has a high-speed printing press does mean that they can continue to spend moneylike drunken sailors in definitely.(On second thought, I should apologize for impugning the reputation of drunken sailors. They are actually much more conservative with their funds than congressmen.)
Because modern banking in the western world is based on interest charges that create continuously compounding debt, credit cannot continue to
grow indefinitely. At some point the excesses of malinvestment become so great that the entire system collapses. This is what we are now witnessing: a banking panic that is spreading uncontrollably as wave after wave of ugly debt gets destroyed by margin calls and subsequent business failures.
Some economists are fixated on reading charted histories--and unrealistically expect that by doing so that the can reliably predict future market moves. Although they are working from a flawed premise at the micro level, the chartists do have some things right on the macro level:
There are major economic "seasons" and even climate changes. The most vocal chartists like Robert Prechterhold to what is called the Elliot Wave Theory. And the big bad nasty in this school of thought is a Kondratieff Winter. This "K-Winter" is an economic depression phase that the world has not fully experienced since the 1930s. An economic winter does not end until after the foundations of industry and consumer demand are rebuilt. This can be a painful process, often culminating with war on a grand scale. (It was no coincidence thatthe Second World of the early 1940s was an outgrowth of the Great Depression of the 1930s.)
The US Federal Reserve and the other central banks are furiously pumping liquidity to the best of their ability, but in the long run they will not be successful. At best, dumping billions in cash on the economy will delay a depression by perhaps a year or two. But inevitably, a K-Winter depression will come. And the longer that it is delayed, then the worse the depression will be. Further inflating the debt bubble will only make matters worse.
"Big Picture" Implications
As I've mentioned before, hedge funds are presently most at risk in the unfolding liquidity crisis, because they use lots of leverage in lending funds that they themselves have borrowed. They borrow short and lend long, and effectively use debt compounded upon debt.
Even more alarming is the scale of global derivatives trading, particularly for credit default swaps (CDSes). Derivatives are a relatively new phenomenon, so most derivatives contract holdersare only just now experiencing their first major recession. Thus, it is difficult to predict what will happen in a genuine K-Winter phase. In a perfect world, derivatives are a nicely balanced mechanism, where there are parties and counterparties, and every derivatives contract equation balances out to have a neat "zero" at its conclusion. But we don't live in a perfect world: Companies go bankrupt. Contracts get breached. Counterparties disappear and disappoint. We have not yetexperienced afull scale "blow up" of derivatives, but I predict that if and when it happens, it will be spectacular. The pinch in CDSes (a form of derivative contract) in 2008 was just a faintforeshadowing of what we'd experience in a a full-blown derivatives collapse.
The scale of derivatives trading is monumental, and the vast majority of the population is blissfully ignorant of both its scale and the implications of a derivatives crisis. There are presently about $500 trillion of derivatives contracts in play. That is many times the size of the gross product of the global economy, but the average man on the street has no idea what is going on. It won't be until after the giant derivatives casino implodes that the Generally Dumb Public (GDP) awakens and asks, "What the heck happened?" Since the credit market began to collapse in the summer of 2008, the number of new derivatives contracts has dropped precipitously. But whether the aggregate derivative market is $400 trillion versus $500 trillion, when a crisis occurs there will undoubtedly be some very deep drama.
The next decade will likely be characterized by successive waves of inflation and deflation, and perhaps some of both simultaneously, at different levels. Countless corporations, and perhaps a few currencies or even governments will go under as this tumult plays out. (Take note of the recent vote of no confidence in Latvia.) The current low interest rates will soon be replaced by double-digit rates, much like we saw in the late 1970s. The dollar will lose value in foreign exchange, and may collapse completely. The Mother of All Bailouts (MOAB) will inevitably result in mass inflation. The bull markets in silver and gold will surge ahead, propelled by economic and currency instability. (Investors will be desperate to find a safe haven, when currencies and equities are falling apart.)
Mitigating the Risks
Be ready to "winter over" the coming K Winter depression. That will require: 1.) Prayer. 2.) Friends and /or relatives that you can count on (a "retreat group"). 3.) A deep larder, and 4.) An effective means of self defense with proper training. (For each of those four factors, see the hundreds of archived articles and letters at SurvivalBlog.com for details.)
Since additional large-scale layoffs seem likely, it would also be wise to have a second income from a recession-proof home-based business.
In the event of a "worst case" (grid down) economic collapse, it would be prudent to have a self-sufficient retreat in a rural area that is well-removed from major population centers. Get the majority of your funds out of anything that is dollar-denominated, and into tangibles, as soon as possible. The very best tangible that you can buy is a stout house on a piece of productive farm land. It will not only preserve your wealth, but living there may very well save your life.