"Trinity Church and office buildings, New York City"
Rising heavenward at center, the twin slabs of the Equitable Building; at right, the pyramid-topped Bankers Trust tower.
Ilargi: To order Stoneleigh's video presentation of "A Century of Challenges", the lecture that's receiving rave reviews across Europe and North America,
or click the button on the right hand side just below the banner.
Ilargi: First today, an annnouncement for a conference in Michigan where Stoneleigh will be the keynote speaker, and which also presents Steve Keen and Joseph Tainter, among others. Not a bad group of speakers, if you ask me. If you want the 50% off early bird special, you’ll have to be quick, as in the next two days or so.
Below that, another contribution by Ashvin Pandurangi, whose work was featured here before in Debt Saturation and Peak Complexity.
2010 International Conference on the Future: Energy, Economy and Environment
Featuring Stoneleigh, Steve Keen and Joseph Tainter
Friday, Nov. 12 through Sunday, Nov 14, 2010 at the Prince Conference Center at Calvin College in Grand Rapids, Michigan.
Early bird registration is now open for those interested in saving 50% off the full registration rate. This year registration includes three full days of conference and four full meals. Go here to register
It was challenging coming up with a selection of speakers to extend beyond the topics of past conferences, but this year's selection is outstanding, and as with a great recipe, the combination of keynotes are much, much more than the individuals alone.
Nicole "Stoneleigh" Foss of Canada and The Automatic Earth will provide the critical keynote address, titled "A Century of Challenges", which analyzes the current national and global economic situation within the peak oil resource constraint frame. For the past year, Foss has been delivering this big picture talk throughout Europe and North America. We first heard of Foss in June of this year, and after listening to the audio of her presentation, began immediately to try to secure her to this year's conference.
We are extremely fortunate that Prof. Steve Keen of Australia will provide an in depth talk on the economy. Keen is author of the book Debunking Economics. He is winner of the Revere Prize for accurately predicting the economic downturn far in advance, with accurate timing, and by using a logical economic model. Keen will explain in easy-to-understand terms how the economy really works, and why mainstream economists were unable to project the downturn.
Foss and Keen both examine the economic phenomena of debt deflation, which Japan has experienced for over a decade, and which appears to be happening now to many nations, including the USA. This is a timely topic, and given the unfamiliarity that most have with deflation, the conference will examine it in depth, as to its ramifications for energy, economy, and environment.
Dr. Joe Tainter of Utah will provide a talk on the collapse of complex societies, based on his seminal book of the same title. Tainter examined dozens of collapses, and as the consequences of debt deflation can be severe, Tainter's talk will help to frame the realistic risks that our own civilization faces. Tainter is currently working on a book which examines the Gulf oil disaster and continues into examining the impacts of this civilization on the world.
Building on Tainter's historical analysis, David Korowicz of Ireland will take an in-depth look at the challenges of ever increasing complexity in this civilization, the impact of diminishing marginal returns, and the possibilities of tipping points in energy, economy, and environment. Korowicz's work is featured in the upcoming book "Fleeing Vesuvius", which is being compiled by FEASTA, the Foundation for the Economics of Sustainability.
Please go here to read more
Aaron Wissner, President, Local Future
The late, great Hunter S. Thompson captured the current sentiment of American society best when he wrote the following words 40 years ago, in his book Fear & Loathing in Las Vegas :
"You can turn your back on a person, but you can never turn your back on a drug, especially when it's waving a razor sharp hunting knife in your eye."
America has defined itself as a society of collective "drug people", pushers, addicts and associates, with our drug of choice being debt. We happily injected drugs worth 300% of our GDP straight into our veins, and made our international dealers filthy rich in the process. The constant influx of drugs into our bodies made us feel super-human, as we were instantaneously able to afford TVs, computers, cars and homes with the swipe of a card and the flick of a pen. Of course, as any regular drug user can attest, the human biological system becomes increasingly tolerant to the jolts of external chemicals and requires ever-larger doses to achieve the same effects.
The economy rapidly became saturated with debt, since economic actors needed to take on more and more debt to simply pay off previous debts and maintain their current level of activity. In 2007-08, the private debt servicing costs overwhelmed the "high" produced from this mostly unproductive debt, in the form of artificially elevated asset prices and revenue streams, and the national body had no more financial capacity to absorb additional drugs. With no more access to their drug of choice after a decades-long binge, the addicts began going through severe withdrawal. The drug-induced mentality of happiness, trust and tolerance was quickly replaced with collective feelings of sickness, fear and resentment.
Individual people who constantly abuse drugs face a deck deeply stacked against their survival and/or a stable existence, but there is always a distinct possibility that they can be "rehabilitated". With some strong support from family and friends, the addict can go into a "program", take the necessary medications, attend the required counseling, learn some discipline and then come out on the other side a healed creature. This recovery is especially likely when the drug consumed is relatively weak, the duration of addiction is relatively short and the addict's community is a strong source of support.
The dynamics become significantly less favorable in a society of millions of addicts, all feeding off of each others' addictions and desperation, without many voices of support or reason. In this environment it becomes much easier for addicts to deny that they even have a problem, let alone it needs to be fixed, and the disconnect between fantasy and reality persists despite the symptoms of societal sickness steadily worsening over time. These symptoms grow gradually more influential as the withdrawal continues, and they can also lead to sudden, acute episodes of collective discomfort.
Many addicts in this situation will simply refuse to face the harsh new reality and continue doing anything they can to find their next fix, especially when there is a friend or family member financially enabling them to get a few more hits from the local dealer. In the wake of peak financial activity in the private sector, the American government popped in and told its citizens "not to worry", because it would provide the temporary subsidies, tax credits or backstops that they needed to get another debt fix.
It also whispered to the dealers "not to worry", because it would keep their profitable drug trade going, seeing as how it supported such a significant percentage of the economy and the past promises made to a now restive population. American addicts continued a sporadic debt binge for some time, but on the whole they continued to be priced out of the saturated market. The struggling addicts eventually have to start fending for themselves, as the government's income is increasingly consumed by direct or indirect handouts, and it transforms into the "friend" who is giving up on the incorrigible addict. What's left is a society of fiendish, debt-starved addicts who, with increasingly little to lose, project their misfortunes onto others.
There is very little room for trust in the minds of addicts, since they feel betrayed in some way by all of the people who surround them. The addicts will simultaneously fear and resent dealers, friends, family, authority figures or even strangers, because these are the people who have exploited them, enabled them, ostracized them or are competing with them for survival. A drug dealer can be the addict's knight in shining armor when times are good and highs are cheap, but rotten crooks when the supply runs out and the sickness sets in. American individuals and small businesses now find themselves in the schizophrenic split-state of both depending on debt pushers to continue financing routine activities, and hating them for privatizing the gains of their drug trade, socializing the losses and continuing to operate in what appears to be good health.
It is unsurprising that more than twice as many debt addicts blame their creditors (51%) for the latest financial crisis than themselves (24%). . However, drug users typically hesitate to confront their dealers in any significant way because they respect the money, power and influence wielded by these dealers. They can cut off users' supply to more drugs or even harm/kill them or their families if they really start acting up. Major American banks may not execute their customers and their families, but they can certainly cut off access to additional debt or refuse to negotiate with struggling debtors and repossess much of their secured property. When the powerful dealers are largely untouchable, much of an addict's residual loathing is focused on the system at large and those who manage it.
Drug users typically acquire their destructive habits at an early age, aided in no small part by the central institutions they have relied on, such as their household, community, school or government. Once the joyous journey of drug-filled exploits has run its course, addicts are left with an empty life within a pitiless system. The American journey has been characterized by a federal government and central bank which has stopped at nothing to encourage the debt addictions of their citizens, all the while insinuating that the drugs were necessary for a normal and successful existence. Americans took this propaganda to heart, and now that the debt drugs have run out, they are actually left with the opposite of what they were promised.
The "tea party" movement epitomizes a strung-out population of addicts who have grown extremely tired of all the lies and unfulfilled promises, and are enraged at those who have so casually fueled their destructive habits for years on end. This movement has correctly identified the central government as a corrupt institution which puts on a public face of sympathy and compassion for the American addicts, while secretly dividing up the profits of the drug trade with dealers instead. Of course, the hellish fury of an addict scorned can express itself in many ways.
Some of the debt addicts get together in meetings and communicate their hatred of the "big, betraying brother" who constantly looms over them. They carry signs filled with anger, make rapacious rants or generally protest the fact that their share of the drugs is being diverted to others, but their unrest is mitigated by lingering flashbacks to a previous state of debt intoxication. Other addicts have realized that they can talk all day and never secure any more drugs or become healthy, so they attempt to join the dealer complex, where they will bring down the destructive debt trade from the inside and liberate their fellow addicts from the sickness.
Sadly, when these addicts successfully make the transition from the world of users to the world of dealers, they usually forget all about the plight of the addicted and sell out for a share of the profits. A few addicts eventually hit rock bottom, and give up all hope on a return to normalcy or a bearable existence. One such American addict decided that instead of protesting or running for political office, he would get behind the controls of an airplane and fly it straight into a Texan IRS building. [2.1].
It's hard to blame the bottomed-out debt addicts for expressing anger or even seeking revenge against the dealers or authority figures who worked to destroy their lives. The latter are especially contemptible when they constantly tell people to "stay away from drugs", but make it so damn easy for them to get some and even profit off of their addiction. Unfortunately, these institutions are the most inaccessible to the average addict, and so their fear and pain is more readily projected onto those that may actually care about them. There is, of course, the direct financial effect on the families of those who have been wiped out by a destructive debt addiction.
The debt servicing costs of Americans consumed an all time high of ~14% of income in 2007, and these costs have had devastating effects on families whose incomes have continued to stagnate, decrease or have altogether disappeared. . Families of the addicts may eventually lose their homes, cars and all the fancy things they have accumulated over years, returning to a state of frugal existence unexpected and long forgotten.
It is also the case that there is a high correlation between drug abuse and domestic violence (61% of domestic violence offenders also report substance abuse problems) . Could unserviceable debt be one of the destructive substances contributing to domestic violence in America? The National Domestic Violence Hotline reported a 21% increase in calls from September 2007 to September 2008, and 54% of these callers reported a change in their financial situation over the last year.
Women in the lowest income category experienced six times the rate of nonfatal domestic violence than those in the highest category between 2001-2005, and women are three times as likely to experience domestic violence if their male partners have experienced two or more periods of unemployment over five years. Although there are obviously many factors that affect rates of domestic violence, financial instability certainly seems to undermine the psychological stability of male addicts and may lead them to express their sickness through violent behavior. The Director of the Gender & Health Research Unit at South African Medical Research Council, Rachel Jewkes, has produced research suggesting that deteriorating finances leads men to feel that they have failed to live up to society's expectations of masculine success, and these men turn to misogyny, substance abuse and crime to fill the gap between expectations and reality. .
Many drug addicts also vent their sickness by directing anger towards abstract groups of strangers around the world, since these groups are perceived as leading relatively "better" lives or posing an ephemeral threat to the addicts' chances of survival. After the attacks on 9/11, American addicts became enraged at a decentralized group of Muslim "terrorists", who had disrupted their comfortable existence at a time when they were just managing to "recover" from a debt-induced recession. The population expressed strong support for an invasion of Afghanistan and were also convinced by the Bush complex that Saddam Hussein's Iraq posed a major threat to national security.
As these wars progressed and the American economy took off in another debt bubble, however, the comfortably numb addicts began questioning the wisdom of these wars, which were costing unconscionable amounts of lives and money. Between 2003 and 2005, public support for the Iraq war fell from 69% to 45%, and by 2006, 44% of addicts believed acts of terrorism were "not too likely" or "not at all likely" to occur in their communities over the "next several weeks". . In stark contrast, during the ongoing debt deflation over the last year, the number of people who believed another terrorist attack is "very likely" to occur in the United States within the "next several months" increased by 14%, and "somewhat likely" over the "next several weeks" by 16%. . Recently, some American addicts have also become incensed about a relatively harmless plan to build a Mosque near Ground Zero, as they increasingly feel threatened by the general Muslim population.
Another large group of people targeted by American fiends has been the illegal Mexican population residing within the country. For many years, the flow of illegals from Mexico into American border states established a mutually beneficial geopolitical relationship, as the Mexican government kept social unrest in check and the economies of border states were supported by cheap labor and increased sales revenues. . Now, many American addicts feel that the illegals are acting as a drag on the economy and sucking up unskilled jobs at a time when broad U-6 unemployment measures 17%.
Studies show that public opinion on illegal immigration is more negative in states with relatively high unemployment rates. The border state of Arizona, facing massive pressure from addicts in a deflating economy, has decided to take matters into its own hands by giving local police significantly more discretion when stopping and questioning potential illegals. Polling data has shown that 60% of American addicts support this new law, even though the illegal population has actually dropped by almost 20% from 2007 to 2009. , 
This piece has focused on the American people's debt addictions, but there are many other inter-related addictions at play now. We have all been addicted to high standards of living, large returns on investments, appreciating assets, government entitlements, cheap oil and imperial hegemony. All of these things forged a level of systemic trust and confidence that is now quickly evaporating along with the drugs that fueled it. American addicts had surely made beasts of themselves, getting rid of "the pain of being a man", but are now forced to deal with the sober reality that has stewed and festered in the previously dark corners of their lives.
The politicians and pundits would like us to believe that we can restore our addictions and avoid the painful symptoms of withdrawal, but they are either ignorant of reality or lying and praying the addicts never figure out how sick they really are. Perhaps they are also blinded by their own addictions, as public debt burdens are becoming weighty and unmanageable. The individual debt addicts may be waving razor-sharp hunting knives in the societal eye, but then the strung-out government addicts are waving military hardware and atomic bombs. If Thompson were still alive today, he may have remarked that, with the right kind of eyes, we could stand on a steep hill and almost see the high water mark, where the wave finally broke and rolled back. One thing I know for sure is that I'm not going to turn my back on anyone, anytime soon.
**This piece is dedicated to the brilliantly insightful ideas and writings of Hunter S. Thompson:
"No explanation, no mix of words or music or memories can touch that sense of knowing that you were there and alive in that corner of time and the world. Whatever it meant ... "
by John Ellis
Mid-term elections are, generally speaking, a zero sum game. The out-of-power voters are highly motivated to vote, to express their exasperation with the in-crowd and send a message. The in-party's voters are disheartened and discouraged and therefore less likely to vote. Three percent more of the former and three percent less of the latter adds up to a six percent swing and some number of Congressional seats (usually around 20) changes hands.
What is unusual about the 2010 mid-term elections is that this "normal" turnout differential may be as much as 8 percent, which adds up to a 16-point swing, which puts a lot of otherwise safe Congressional seats in play. And in some cases the "swing" may go higher. Which is why the best political forecasters, like Charlie Cook and Stu Rothenberg, are predicting that roughly 50 seats will change hands in two weeks, leaving the GOP in control of the House and quite possibly the Senate as well.
This is, on paper, good news for President Obama. He's the president and commands attention by virtue of his job. His Administration can speak with one voice. And for all of his woes, Mr. Obama still enjoys relatively high esteem.
A GOP Congress, on the other hand, is a collection of many voices, not all of them sensible. The GOP's Congressional leadership is not what one might call formidable. It's not at all clear that they can deliver on whatever deals they might cut with the Administration. It's not at all clear that the base of the party will allow them to cut any deals at all.
To make matters more prickly, there is every reason to believe that the GOP's activist wing will interpret the mid-term results as a mandate, not as a by-product of turnout differential. Thus emboldened, the activist wing will likely promote ideas and legislative schemes that re-energize and re-unite the Democratic base. Once again joined in common cause, Democrats will begin to narrow the turnout differential, the political narrative will subtly change, Independents will begin to get nervous about GOP "extremism," and the terrain will likely shift back to the President's advantage.
This would be, in the normal cycle of things, the likeliest narrative for the next two years. It's what happened in 1974 (although President Ford fell short in the last week of the 1976 campaign) and it's what happened in 1994 (Clinton won easy re-election, although with less than 50% of the total vote).
The question on the table is: are these times normal? Or is something much more profound and much more unsettling going on? If you believe that the new normal is not normal at all, as I do, then "normal" narratives no longer apply.
What might be an alternative story line? One answer would be: increased volatility. A darker answer might be: political instability and unrest.
As a nation, we are struggling with overwhelming debt at every level of governance and across a vast swath of the electorate. There are at least (at the very least) 15 states and countless municipalities that are functionally bankrupt. The states that are bankrupt, by any real accounting, include New York, New Jersey, Massachusetts, Connecticut, Illinois, California, Nevada, Arizona, Colorado, Ohio, Wisconsin, Louisiana, Missouri, Oregon, Washington and Michigan. They can't (literally can not) meet their pension obligations. They won't be able to pay for their ever-rising health care costs. Education costs are eating up too much money (although this will abate somewhat as the echo boom generation matriculates) and virtually every state (and municipality) has huge bond obligations, the proceeds from which papered over previous shortfalls. Oh, and one other thing, the economies in all of those states are stagnant, at best.
Once the last infusions of stimulus money run dry, what remains is a vast desert of debt. The idea that an over-leveraged electorate can be called upon to make up the shortfall is a non-starter. They can't pay down their own debt and municipal debt and state debt and federal debt. The math simply doesn't work. They end up with no take home pay.
This is the real avalanche that is about to hit American democracy. The avalanche in two weeks results in Nancy Pelosi no longer being the Speaker of the House. The avalanche of debt that hits beginning in 2011 and keeps on coming will shake our political system to its foundation. That's the avalanche that matters.
President Obama can either get ahead of this avalanche by proposing a vast restructuring of government debt and obligations while aggressively promoting a venture-based economic growth agenda or he can be consumed by the rubble. The same holds true for the next Republican presidential nominee. He or she needs to be ahead of the avalanche to survive its inevitable onslaught.
It is unlikely that either President Obama or the future GOP nominee will even address the avalanche. So the narrative will write itself. It will make the autumn of 2008 look like a day at the beach.
The Perfect Storm
by Robert Reich
It’s a perfect storm. And I’m not talking about the impending dangers facing Democrats. I’m talking about the dangers facing our democracy.
First, income in America is now more concentrated in fewer hands than it’s been in 80 years. Almost a quarter of total income generated in the United States is going to the top 1 percent of Americans.
The top one-tenth of one percent of Americans now earn as much as the bottom 120 million of us. Who are these people? With the exception of a few entrepreneurs like Bill Gates, they’re top executives of big corporations and Wall Street, hedge-fund managers, and private equity managers. They include the Koch brothers, whose wealth increased by billions last year, and who are now funding tea party candidates across the nation.
Which gets us to the second part of the perfect storm. A relatively few Americans are buying our democracy as never before. And they’re doing it completely in secret.
Hundreds of millions of dollars are pouring into advertisements for and against candidates — without a trace of where the dollars are coming from. They’re laundered through a handful of groups. Fred Malek, whom you may remember as deputy director of Richard Nixon’s notorious Committee to Reelect the President (dubbed Creep in the Watergate scandal), is running one of them. Republican operative Karl Rove runs another. The U.S. Chamber of Commerce, a third.
The Supreme Court’s Citizens United vs. the Federal Election Commission made it possible. The Federal Election Commission says only 32 percent of groups paying for election ads are disclosing the names of their donors. By comparison, in the 2006 midterm, 97 percent disclosed; in 2008, almost half disclosed. We’re back to the late 19th century when the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. The public never knew who was bribing whom.
Just before it recessed the House passed a bill that would require that the names of all such donors be publicly disclosed. But it couldn’t get through the Senate. Every Republican voted against it. (To see how far the GOP has come, nearly ten years ago campaign disclosure was supported by 48 of 54 Republican senators.)
Here’s the third part of the perfect storm. Most Americans are in trouble. Their jobs, incomes, savings, and even homes are on the line. They need a government that’s working for them, not for the privileged and the powerful. Yet their state and local taxes are rising. And their services are being cut. Teachers and firefighters are being laid off. The roads and bridges they count on are crumbling, pipelines are leaking, schools are dilapidated, and public libraries are being shut.
There’s no jobs bill to speak of. No WPA to hire those who can’t find jobs in the private sector. Unemployment insurance doesn’t reach half of the unemployed.
Washington says nothing can be done. There’s no money left. No money? The marginal income tax rate on the very rich is the lowest it’s been in more than 80 years. Under President Dwight Eisenhower (who no one would have accused of being a radical) it was 91 percent. Now it’s 36 percent. Congress is even fighting over whether to end the temporary Bush tax cut for the rich and return them to the Clinton top tax of 39 percent.
Much of the income of the highest earners is treated as capital gains, anyway — subject to a 15 percent tax. The typical hedge-fund and private-equity manager paid only 17 percent last year. Their earnings were not exactly modest. The top 15 hedge-fund managers earned an average of $1 billion.
Congress won’t even return to the estate tax in place during the Clinton administration – which applied only to those in the top 2 percent of incomes. It won’t limit the tax deductions of the very rich, which include interest payments on multi-million dollar mortgages. (Yet Wall Street refuses to allow homeowners who can’t meet mortgage payments to include their primary residence in personal bankruptcy.)
There’s plenty of money to help stranded Americans, just not the political will to raise it. And at the rate secret money is flooding our political system, even less political will in the future.
The perfect storm: An unprecedented concentration of income and wealth at the top; a record amount of secret money flooding our democracy; and a public becoming increasingly angry and cynical about a government that’s raising its taxes, reducing its services, and unable to get it back to work. We’re losing our democracy to a different system. It’s called plutocracy.
Geithner denies US bid to weaken dollar
by Alan Beattie and Jonathan Wheatley - Financial Times
Finance ministers have tried to calm tensions in foreign exchange markets, with the US Treasury secretary denying that Washington is deliberately weakening the dollar and Brazil increasing blocks on inflows of capital. The interventions come amid concerns among policymakers that disputes over exchange rate policy could escalate into a full-blown currency war.
Speaking at a meeting in California on Monday, Tim Geithner, Treasury secretary, denied that the US was trying to devalue the dollar to boost its economy. "It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity and competitiveness," he said. "It is not a viable, feasible strategy and we will not engage in it."
On Monday Brazil announced it was again increasing a tax on foreign purchases of domestic bonds, intended to calm destabilising inflows. Guido Mantega, the finance minister who recently warned that the world could be in a "currency war", said a tax on fixed income investment by foreigners, which was increased from 2 per cent to 4 per cent on October 4, would be increased again to 6 per cent. In addition, collateral deposits required in such investments – also only in the case of foreigners – would be taxed at a new rate of 6 per cent instead of 0.38 per cent.
Some emerging market countries including Brazil have blamed the prospect of super-loose monetary policy in the US for putting upward pressure on their currencies. The Federal Reserve has recently signalled that it is moving towards "quantitative easing", or pushing more money out into the financial markets. Meanwhile the US continues to point at China’s intervention to hold down the renminbi as the source of significant current account imbalances.
The issues will be discussed by finance ministers and central bank governors from the G20 countries in a meeting this weekend in South Korea. But Brazil on Monday said that neither Mr Mantega nor Henrique Meirelles, central bank president, would be attending the meeting. Stephen Englander, head of foreign exchange strategy for the major currencies at Citi in New York, said the Brazilian intervention and decision to stay away from the G20 suggested it had little faith in multilateral solutions. "This undermines the view held in some quarters that, as long as countries can meet in the right formula, they can somehow make markets work together better," he said.
Mr Geithner on Monday used the emblematic expression "strong dollar" to describe the US stance – a term strongly associated with the Treasury under the presidency of Bill Clinton, when Washington was keen to emphasise that currency declines reflected the operation of free markets rather than an attempt to massage the dollar lower. Emerging market countries have taken a range of actions to offset the effect of Chinese intervention and US monetary policy.
This Administration Still Doesn't Have A Clue About The Foreclosure Crisis
by Bill Black - Benzinga
Sheila Bair, who has chaired the Federal Deposit Insurance Corporation (FDIC) since her appointment by President Bush on June 26, 2006, has been the only top federal banking regulator willing to upset the industry she regulates. Reuters reports on her less than vigorous reaction to the disclosure of endemic foreclosure fraud."We have been told that this is a process issue - that all of the information is in the file, the problem is the person who needed to sign the affidavit had not been looking at the file before they'd done so. So we need to independently verify that," Bair said.
"Foreclosure is a very serious thing and it should only being undertaken after loan modification efforts are not feasible. And that the files are fully documented."
In addition, Bair urged banks to do "rigorous internal analysis" about the range of possible risk exposures. "We need to get a full handle on all of these issues," she said. "If it turns out this is just a process issue then I don't anticipate the exposures to be significant.
"If it turns out to be something more fundamental then we'll have to deal with that. But I think we need to get all the information before we jump to any conclusions."
It does not appear that Ms. Bair, or any senior official in the Obama administration, has focused on the fact that it has been standard operating procedure, for several years, for lenders, CDO holders, and courts to "jump to any conclusion" necessary to foreclose on homes regardless of whether the loan was fraudulently induced by the lender and regardless of whether the entity foreclosing on the mortgage engaged in foreclosure fraud.
She also frames the problem euphemistically as limited to – "process" – instead of the known facts, which constitute fraud by the entities that are foreclosing. "We have been told this is a process issue." Ms. Bair's statement can only be truthful if the FDIC has only been talking to liars. Ms. Bair cannot have been talking to those representing the debtors. The banking regulators have failed to shake off the corrosive effects of the "reinventing government" movement, which instructed them to refer to the banks and S&Ls as their "customers."
But the even more important question is what she has been doing as a regulator for over four years. Admittedly, her predecessors emasculated the FDIC and she had to start form a deep hole. The FDIC lost over three-quarters of its staff (using "early outs" that often robbed it of its most productive employees). Worse, it tried to compensate for its grossly inadequate staff resources by adopting "lite" examinations in 2002. The FDIC called this travesty "MERIT" (Maximum Efficiency, Risk-Focused, Institution Targeted Examinations).
In a MERIT examination the examiners went to greatly reduced review if the bank reported that it did not have large numbers of bad loans. The result was that the FDIC's examiners heard no evil from the banks and saw far too little of the evil that came to dominate banks' nonprime residential loans and commercial real estate (CRE) loans. (Bair inherited MERIT. She finally killed it in early 2008.) As late as she was in killing MERIT, the community bankers were worse. Their trade association continued to push for the MERIT program after anyone sentient could tell it had proven disastrous.
Recall that we know empirically that the nonprime crisis was driven by millions of fraudulent and predatory home loans – making them the FDIC's highest priority – and Ms. Bair has had years to "get all the information" about such loans and prevent the frauds and predation. Throughout the developing nonprime mortgage crisis, the FDIC failed catastrophically to deal with this top priority (and as I explained in an earlier column, its secondary priority – commercial real estate).
The banking regulatory agencies and the Federal Housing Finance Agency (FHFA) (which is supposed to regulate Fannie, Freddie, and the Federal Home Loan Banks) have no excuse for not having "the information" about the state of nonprime residential loans. If, in late 2010, they do not have even the most basic information about the incidence of nonprime mortgage fraud by lenders and the state of underwriting and record keeping of key documents of such loans then the case for removing the head of each agency and changing the top agency supervisors is conclusive.
Here is the principle that President Obama promised Congress would govern our response to the financial crisis. He promised first that we would find the causes of the crisis and address them:"[I]t is only by understanding how we arrived at this moment that we'll be able to lift ourselves out of this predicament."
We would address the problems promptly:"Regulations -- regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn't afford from banks and lenders who pushed those bad loans anyway. And all the while, critical debates and difficult decisions were put off for some other time on some other day.
Well, that day of reckoning has arrived, and the time to take charge of our future is here."
Unfortunately, after this clarity the President's logic and policies started to become incoherent."But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. And with so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or even to each other."
Yes, large numbers of banks are insolvent because they hold so much fraudulent nonprime mortgage paper and CRE. The problem with "these banks" is bad assets, not that the insolvent banks lack "confidence" in the economy. This incoherence promptly infected his discussion of foreclosure:"[W]e have launched a housing plan that will help responsible families facing the threat of foreclosure lower their monthly payments and refinance their mortgages.
It's a plan that won't help speculators or that neighbor down the street who bought a house he could never hope to afford."
The problem is that the "neighbor down the street" is the problem. Liar's loans became the norm (Credit Suisse reported that they represented 49% of mortgage originations in 2006). Liar's loans were typically fraudulent. A borrower typically used the proceeds of a liar's loans to buy "a house he could never hope to afford." The lenders and their agents typically made or directed the false statements about income and occupation. (The lenders and the loan brokers knew the term sheets and the ratios to hit.) While the lenders and the agents typically took the lead in providing the lies that made liar's loans worthy of that name, this does not means that the borrowers were blameless. Many borrowers knew that the loan application contained false information and that they could not afford to purchase the home. We are talking about millions of homeowners, most with families.
But how are we to know that the borrowers knew the loans applications were false and that they could not afford to buy the home? We can infer a lender's fraudulent intent because it is financially sophisticated and has expertise in lending. An honest mortgage lender would not make liar's loans because not underwriting loans inherently produces intense "adverse selection" and means that the loans have a "negative expected value." In plain English, that means that mortgage lenders that make liar's loans will go broke. (As the recent settlement with Mozilo and other senior officers at Countrywide proved; elite bankers can be made wealthy by making fraudulent nonprime loans because doing so optimizes (fictional) reported income and the value of the senior officers' compensation. This is what George Akerlof and Paul Romer warned about in the title of their famous 1993 article – Looting: the Economics Underworld of Bankruptcy for Profit. The lender fails, the senior officers can get rich.)
We cannot make the same inferences about the borrowers' intent and knowledge. The policy issue is whether to foreclose on over 10 million people (counting family members) where we do not know what the borrower knew but we can infer that the lenders engaged in "fraud in the inducement." The economic and societal consequences of such mass foreclosures, and the moral issues posed by the lenders' "fraud in the inducement" are massive. The Obama and Bush administration have refused to deal with the pervasive role of lender fraud and the ambiguous role of borrower complicity in such frauds. This is contrary to Obama's critique of the policy failures that led to the financial crisis: "critical debates and difficult decisions were put off for some other time on some other day." True; and those failures continue.
President Obama was unwilling to use the "f" word (fraud) when describing the financial crisis, but he did promise:"It is time to put in place tough, new commonsense rules of the road so that our financial market rewards drive and innovation and punishes shortcuts and abuse."
The administration, however, has not punished the elite financial frauds that made the hundreds of billions of dollars of liar's loans that drove the crisis. Obama was willing to use the "f" word in one context: "[We] will root out the waste and fraud and abuse in our Medicare program…." President Obama could "root out the waste and fraud and abuse" in banking (which is vastly greater than Medicare fraud losses) without new rules or laws. He could appoint regulators and prosecutors that would find the facts and act against the elite frauds that drove the fraudulent nonprime mortgage crisis and the foreclosure fraud crisis.
What to do with the over ten million Americans who will lose their homes to foreclosure even though they were often fraudulently induced to purchase by their lenders is a far more difficult question. There is no perfectly just answer. The losses are so great that the public will have to bear much of the cost whatever we decide.
FBI Looking at Financial Industry's Foreclosure Mess
Big lenders are trying to move past the foreclosure-document mess, saying they're now confident their paperwork is accurate. Yet they face so much organized resistance that they can't just snap up their briefcases, declare the crisis over and move on.
Consider the opposition:
- Attorneys general in all 50 states are jointly investigating whether lenders violated state laws.
- Lawyers for evicted homeowners are preparing lawsuits against major lenders.
- State judges have signaled they will review the banks' foreclosure documents with skepticism.
- Lawmakers on Capitol Hill plan to hold hearings.
The document crisis, in other words, appears far from over.
Statements on Monday by Bank of America and GMAC Mortgage that they are resuming foreclosures in the 23 states that require a judge's approval brought a wave of denunciations from public officials Tuesday. Attorneys general and other officials said bank officials could face civil — and potentially criminal — charges for flouting court procedures in handling foreclosure documents.
Meanwhile, a federal law enforcement official says the FBI is in the initial stages of trying to determine whether the financial industry may have broken criminal laws in the mortgage foreclosure crisis. The law enforcement official says the question is whether some in the industry were acting with criminal intent or were simply overwhelmed by events in the wake of the housing market's collapse. The official spoke on condition of anonymity because the investigation is just getting under way.
Hundreds of judges around the country have the authority to penalize bank officials who violate their procedural rules. They could also force thousands of foreclosure cases to go to full trials rather than issue a quick ruling. Judges won't take well to banks that filed erroneous documents with their courts, said Indiana Attorney General Greg Zoeller. "There could be some serious consequences," including criminal charges, Zoeller said.
Even if there aren't, lawsuits are likely to continue for years, said Guy Cecala, publisher of trade publication Inside Mortgage Finance. "Some of these plaintiffs' attorneys clearly smell blood in the water," Cecala said.
Meanwhile, Bank of America and GMAC say they are not finding major mistakes in the documents they've reviewed so far and are able to fix any problems quickly. The banks' decisions came several weeks after they began halting some foreclosures. They froze those cases amid allegations that their employees signed but didn't read documents that may have contained errors.
State officials argue that the systems the banks used to process foreclosures were inherently flawed and likely remain so. They are vowing to push ahead in their investigations. "While they are telling us that they have fixed those problems, we can't just take their word for it," said Patrick Madigan, an assistant attorney general in Iowa who is spearheading the 50-state investigation. "We intend to independently verify whether the problems have been fixed."
Some judges say the document problems are persisting. Justice Arthur Schack of State Supreme Court in Brooklyn, who's gained national attention for throwing out flawed foreclosure cases, said he's still finding errors. In a stack of foreclosure cases sitting on his desk, he said he found flaws in most of them after a 10-minute once-over. "It's nice of Bank of America to issue a press release," Schack said. "But they'd better file all their paperwork and makes sure it's done correctly, because they're asking me to take someone's house away."
Florida has been the state most affected by the document mess. Officials there say they're skeptical that banks have managed to resolve their paperwork problems so fast. Chief Judge J.Thomas McGrady of Florida's 6th Judicial Circuit on Florida's Gulf coast, said judges in his circuit will scrutinize foreclosure documents, case by case. Peter Ticktin, a Florida plaintiffs' attorney, said, "Pragmatically, it is impossible" for the bank to fix documents so quickly.
Bank of America says it will begin next week to refile documents for more than 100,000 foreclosure cases. CEO Brian Moynihan said on a conference call Tuesday that employees who have reviewed the bank's documents have found no inaccurate information that "would affect the plain facts of the foreclosure." The federal government is also starting to get involved.
Housing and Urban Development Secretary Shaun Donovan, Treasury Secretary Timothy Geithner and other officials plan to meet on the issue Wednesday, but no announcements are planned.
Officials from the Federal Housing Administration, a government agency that guarantees home loans, have found clear disparities in how five major lenders have been responding to distressed homeowners after a four-month review of their practices, according to an administration official who declined to be named because the probe was not complete. The review was reported earlier by the Wall Street Journal. The official declined to name the lenders in question.
The government has the power to fine lenders not complying with FHA guidelines. The White House has said federal agencies are investigating the allegations of flawed foreclosure documents. But the Obama administration has rebuffed calls for a national halt to foreclosures. It says doing so could hurt the housing market by making it harder for buyers of foreclosed homes to complete their transactions.
Attention will shift next month to Capitol Hill, where House and Senate lawmakers have scheduled hearings. Rep.Maxine Waters, D-Calif., said Tuesday that she was "disappointed by Bank of America's rush to resume foreclosures after such a short review." Waters has introduced legislation that would bar lenders from foreclosing without offering homeowners any assistance.
Consumer advocates and some lawmakers, meanwhile, argue that banks need to do far more than refile and re-sign piles of flawed documents. They say the banks must correct the way they handle foreclosures and requests for aid from distressed homeowners. Those efforts have been widely criticized as inadequate.
Task force probing whether banks broke federal laws during home seizures
by Zachary A. Goldfarb - Washington Post
Federal investigators are exploring whether banks and other financial firms broke U.S. law when using fraudulent court documents to foreclose on people's homes, according to sources familiar with the effort. The criminal investigation, still in its early days, is focused on whether companies misled federal housing agencies that now insure a large share of U.S. home loans, and whether the firms committed wire or mail fraud in filing false paperwork.
Although prosecutors across the country previously opened a patchwork of inquiries, a broader federal effort targeting companies that improperly evicted people from their homes is only now taking shape. This comes at the same time that investors have begun to hold firms accountable for selling securities composed of mortgages that were improperly serviced.
As part of this reckoning, the Federal Reserve Bank of New York has joined with some of the country's largest investors in seeking to force Bank of America to buy back about $47 billion worth of troubled home loans packaged into bonds by Countrywide Financial, which is owned by the bank. Along with its partners, the New York Fed, which invested in some of these bonds during the rescue of the financial system, is raising the prospect that Bank of America could be sued unless losses are recouped.
In recent weeks, senior lawmakers have called for a federal probe into the use of flawed foreclosure documents and improper practices. But Obama administration officials offered few details about how they were proceeding. In addition to the probe, the administration is seeking to send the message that it will hold banks accountable for illegal foreclosures, despite deflecting calls by some lawmakers and consumer advocates for a national moratorium on home seizures until cases can be reviewed.
Members of President Obama's Financial Fraud Enforcement Task Force and other administration officials are scheduled to meet Wednesday to discuss the foreclosure crisis. That is to be followed by a White House news briefing led by Housing andUrban Development Secretary Shaun Donovan. "In more than 25 years dealing with major financial crisis issues, I have never seen this many agencies focused on a single issue," said Andrew Sandler, a lawyer who works on government investigations. "We are beginning to see signs of extensive governmental investigation that may also have criminal law implications."
Federal law enforcement officials usually have little authority to prosecute cases involving foreclosure law because they are largely in the states' domain. But according to sources familiar with the investigation, the federal government has both an interest and the grounds to prosecute the abuses because housing agencies under HUD, particularly the Federal Housing Administration and Ginnie Mae, play a major role in insuring U.S. home loans.
After reports surfaced in recent weeks that large banks filed court documents across the country that had not been properly prepared or reviewed, federal investigators want to determine whether similar paperwork was submitted to housing agencies to get insurance payouts, the source said. In some cases, bank employees have acknowledged signing documents without reviewing them. If similar filings were made to housing agencies, this could violate federal law, which makes it a crime to lie about substantive matters to the federal government.
Investigators are also looking at whether the transfer of mortgage and foreclosure documents through the mail and computer networks would allow the federal government to make a legal case on charges of mail and wire fraud. After what will probably be a lengthy investigation, the Justice Department could file a criminal or civil case if wrongdoing is ultimately found. This could be done in coordination with HUD's inspector general.
The investigation has yet to target a firm or person, sources said, but it could focus on banks, independent mortgage servicers, law firms and other companies involved in the foreclosure process. In an interview Tuesday, Donovan said HUD has been conducting a review of the largest banks for the past four months after finding "significant differences in the level of . . . actions to try to keep homeowners in their homes to try to make sure they remain current." Under FHA policy, mortgage companies are required to take steps to ensure that struggling borrowers can avoid foreclosure.
The FHA expects to wrap up the review in a few weeks, but the results will not immediately become public because the banks will have a chance to respond.
At the same time, Donovan said, HUD is working with other regulators to ensure that no crimes are committed in foreclosure practices. "We are working closely with others in the administration, as well as independent regulators and law enforcement agencies . . . in insuring that no one loses their home as a result of a mistake or criminal behavior," he said.
Separately, the Securities and Exchange Commission has opened an informal inquiry into possible wrongdoing related to foreclosures. Lawyers knowledgeable about securities law said the SEC would look to see whether banks had properly disclosed to shareholders the risks and processes associated with the foreclosures. "Whenever there are suggestions that there may have been any kinds of issues with respect to disclosure, misrepresentations or omissions, we are always looking at that kind of conduct," SEC Chairman Mary Schapiro said Tuesday.
Beyond investigations, federal agencies could take other action, including regulatory steps, to address misdeeds. The FHA and Ginnie Mae, which packages and sells FHA-backed mortgages, could require banks to change their practices and could impose financial penalties if firms violate the rules.
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, could file lawsuits if it finds that the giant mortgage companies were deceived by financial firms. Major banking regulators, which are reviewing how the banking industry carries out foreclosures, could order firms to change their practices. After freezing foreclosures in many states amid reports of improper foreclosures, some major banks are preparing to submit new paperwork and resume the process of seizing homes.
Chicago sheriff says no to enforcing foreclosures
Two of the largest U.S. mortgage servicers have said they will resume home foreclosures, but a big-city sheriff has news for them: he won't enforce their foreclosure evictions. The sheriff for Cook County, Illinois, which includes the city of Chicago, said on Tuesday he will not enforce foreclosure evictions for Bank of America Corp, JPMorgan Chase and Co. and GMAC Mortgage/Ally Financial until they prove those foreclosures were handled "properly and legally." Bank of America, the largest U.S. mortgage servicer, and GMAC, on Monday both announced rollbacks from their foreclosure moratoriums.
The announcement by Cook County Sheriff Thomas Dart comes after weeks of damaging accusations of shoddy paperwork that may have caused some people to be illegally evicted from their homes. "I can't possibly be expected to evict people from their homes when the banks themselves can't say for sure everything was done properly," Dart said in the statement. "I need some kind of assurance that we aren't evicting families based on fraudulent behavior by the banks. Until that happens, I can't in good conscience keep carrying out evictions involving these banks," he added.
Bank of America, GMAC and JPMorgan Chase along with their subsidiaries, make up around a third of the roughly 3,700 eviction orders filed at the Cook County sheriff's office, the statement said. The foreclosure controversy, which has drawn public outrage and sparked government probes, has threatened bank earnings and the health of the fragile housing market.
Two years ago Dart refused to carry out foreclosure evictions in cases where renters apparently had not been informed that they were about to be evicted from buildings in which their landlords had fallen into foreclosure. Some 20 Cook County sheriff's deputies execute around 14,000 foreclosure and rental eviction notices every year.
Bondholders Pick a Fight With Banks
by Ruth Simon - Wall Street Journal
As banks restart foreclosures they had suspended, bondholders are stepping up efforts to recoup losses on soured mortgage portfolios amid concern about sloppy mortgage servicing and underwriting practices. In a letter Monday, a group of institutional bond investors raised objections to the handling of 115 bond deals issued by affiliates of Countrywide Financial Corp., acquired by Bank of America Corp. in 2008.
The investor actions, which seek to have certain loans be repurchased among other things, come as Bank of America on Monday took steps to defuse claims that its foreclosure troubles are deep-seated. The bank on Monday said it was restarting the foreclosure of more than 100,000 homes. The letter, to Bank of New York Mellon Corp. and Bank of America, cited Bank of America's "failure to observe and perform, in material respects" its duties as the servicer for the bond deals. The failure to properly handle the loans "has materially affected the rights" of bondholders, the letter said.
The institutional investors, who include mutual-fund managers, government-related entities, insurance companies and investment partnerships, are seeking to have loans that didn't meet underwriting requirements repurchased and to be compensated for losses due to inadequate mortgage servicing, says Kathy Patrick, an attorney with Gibbs & Bruns, a Houston law firm representing the investors.
The group says it holds roughly $16.5 billion—or more than 25%—of the $47 billion in outstanding mortgage-backed securities from these deals. "We are reviewing the letter," said a BNY Mellon spokesman. "It appears to be directed to Countrywide and does not ask BNY Mellon to take any action. We will continue to perform our duties as trustee." A Bank of America spokesman declined to comment.
As mortgage servicer, Bank of America is responsible for collecting loan payments and working with troubled borrowers. BNY Mellon, the bond trustee, is charged with administering the securitizations, or bond trusts, for the benefit of investors. Investors say they are concerned both about servicing and violations of representations and warranties made when the loans were packaged into bonds.
Monday's action lays the groundwork for what could be one of the first lawsuits by mortgage-bond investors seeking to enforce their contract rights, including loan buybacks, in response to the current foreclosure crisis. Investors have mounted other challenges based on alleged violations of securities laws. On Monday, the Association of Mortgage Investors stepped up efforts to pressure banks by calling on state attorneys general to expand their investigation of mortgage-servicing practices to include violations dating back to the time when loans were packaged into securities.
Analysts are trying to tally up the costs of loan buybacks and foreclosure moratoria. In a report issued Friday, Barclays Capital said the current crisis could delay foreclosures by three to six months. Longer timelines could reduce yields on some bonds by as much as one percentage point, it said, and "drastically" reduce cash flows to some bond holders in the next few months. In a separate report issued Friday, J.P. Morgan Chase & Co. bond analysts estimated that future losses from repurchases of loans that didn't meet sellers' promises could total $55 billion to $120 billion.
Even before the recent furor over "robo-signers"—back-office employees who approved hundreds of foreclosure documents daily without reviewing them—bond investors were raising concerns about servicer practices. In August, a smaller group of investors in some Countrywide deals sent BNY Mellon instructions to investigate whether certain mortgages didn't meet representations made at the time the loans were packaged into securities. The group demanded that some loans be repurchased. But the August letter, a BNY Mellon spokesman says, "did not comply with multiple requirements for giving direction to BNY Mellon in its role as trustee."
Recent disclosures of sloppy servicing practices follow questions about whether the processes for conveying loans to the bond trust were properly followed. Together, they "have exacerbated investor concerns and created delays and added costs that hurt investors," Ms. Patrick says. Bond investors have been slow to press their claims, in part because of how the contracts for bond deals, known as pooling and servicing agreements, are written. Typically, these contracts require that bondholders gather 25% of the voting rights in the trust before they can enforce the contracts themselves. These provisions are intended to ensure that the action being requested will benefit bondholders as a group, rather than any one bondholder or subset of holders.
Earlier this month, a New York state justice dismissed a lawsuit by investors who argued they shouldn't bear any of the cost of an $8.4 billion settlement between state attorneys general and Countrywide Financial. The judge said the investors hadn't satisfied terms set out in the pooling and servicing agreements. The Oct. 18 investor letter formally notifies BNY Mellon and Bank of America that investors believe that Bank of America has failed to meet its obligations as a mortgage servicer. The two companies then have 60 days to address the issues, says Ms. Patrick.
If the problems aren't resolved, that would trigger an "event of default" under the agreement, Ms. Patrick says, which would allow an investor to file a lawsuit against both companies. Investors "aren't trying to halt loan modifications for troubled borrowers," she added.
The move is one of a number investor actions seeking to recoup losses. In a separate action, a group of investors in 2,300 mortgage securities worth $500 billion this summer sent a letter to trust departments of several large banks expressing concerns about how loans are being handled. David Grais, a New York securities lawyer, recently announced plans to hold a conference on "Robosigners and Other Servicing Failures." Mr. Grais represents Federal Home Loan Banks in San Francisco and Seattle that have sued Wall Street banks, seeking to force them to buy back mortgage-backed bonds. Similar lawsuits were filed last week by Federal Home Loan Banks in Chicago and Indianapolis.
But the time to pursue some of these claims is running out, Mr. Grais says. Under New York contract law, investors generally have six years from the time of a securitization to put back loans that violate representations and warranties, Mr. Grais says. State securities law generally gives investors one to four years after they discover a legal violation to put back bonds that weren't accurately described in disclosure documents. "If people don't throw their hat in the ring, they are out of luck," Mr. Grais says.
Bank of America Sued by Chicago Home Loan Bank Over Subprime Mortgages
by Andrew M. Harris - Bloomberg
Federal Home Loan Bank of Chicago sued lenders including Bank of America Corp. claiming their failure to disclose relaxed subprime mortgage underwriting standards, led it to unknowingly buy risky mortgage-backed securities. The lawsuit was filed an Illinois state court in Chicago by the congressionally chartered wholesale bank, which describes itself on its website as one of 12 regional U.S. institutions serving smaller retail home lenders.
Bank of America and the other defendant commercial banks, including Citigroup Inc., Goldman Sachs Group Inc. and Wells Fargo & Co., sold it more than $3.3 billion in residential mortgage-backed securities, according to the complaint. "The defendants did not tell the bank the truth about the loans that comprised the mortgage pools," underlying the securities, the Federal Home Loan Bank alleged. While it believed it was acquiring "safe" securities, "in fact the bank purchased a toxic stew of doomed mortgage loans," according to the complaint.
U.S. Securities and Exchange Commission members on Oct. 13 voted 4-1 to consider a requirement that Wall Street underwriters scrutinize mortgages and other debt that is bundled for the sale of bonds. The federal Dodd-Frank law enacted in July required the SEC to propose the rule after banks were faulted for selling debt to investors without concern for whether the underlying loans would go bad.
"During the financial crisis, investors in the securitization market suffered significant losses," SEC Chairman Mary Schapiro said. In response, lawmakers and regulators are seeking to "provide investors with better information about the loans backing" securities. The SEC, which hasn’t announced specific rules on how the reviews must be conducted, is planning to solicit public comment on the matter.
The Federal Home Loan Bank of Chicago, claiming mortgage originators abandoned good underwriting and appraisal standards and engaged in predatory lending, is seeking a court order voiding its purchase of the securities and directing the defendants to repay it their value plus 10 percent annual interest.
"We have not yet had an opportunity to review the lawsuit filed today by the Federal Home Loan Bank of Chicago and are unable to address the specifics of its allegations," said Tom Goyda, a spokesman for San Francisco-based Wells Fargo, in an e- mailed statement.
Bank of America Will 'Defend' Shareholders in Mortgage Buybacks
by David Mildenberg, Erik Schatzker and Andrew Frye - Bloomberg
Bank of America Corp. will "defend our shareholders" by disputing any unjustified demands that it repurchase defective mortgages, Chief Executive Officer Brian T. Moynihan said in an interview. Most claims "don’t have the defects that people allege," Moynihan said on Bloomberg Television today, referring to so- called putbacks, in which guarantors or investors in mortgage- backed securities ask to return bad loans. "We end up restoring them, and they go back in the pools."
Bank of America, the largest U.S. lender, said as it reported third-quarter results today that mortgage investors were pushing the company to repurchase almost $13 billion of loans whose standards were challenged. Shares of the Charlotte, North Carolina-based company declined 9.1 percent last week, reaching their lowest in more than a year, amid scrutiny of foreclosures and speculation that investors may force lenders to buy back faulty loans.
The cost of buying back mortgages that didn’t meet investors’ standards declined about 30 percent to $872 million from $1.25 billion in the second quarter. The company expects a cost averaging $500 million each quarter for "the next couple of years or so" tied to faulty loans, a Bank of America executive said on a conference call with analysts. The sum of outstanding claims submitted by investors jumped 71 percent to $12.9 billion from $7.5 billion as of last year’s third quarter.
The bank said yesterday it will start resubmitting foreclosure affidavits in 102,000 cases in which judgment is pending. Under pressure from lawmakers and state officials, bankers had been delaying action until they could answer allegations that filings were marred by so-called robo-signing, in which employees vouched for the accuracy of court filings without personally checking loan records. Bank of America’s suspension had included all 50 states as it reviewed documents.
"Our initial assessment findings show the basis for our foreclosure decisions is accurate," Dan Frahm, a company spokesman, said yesterday. Bank of America was criticized by community groups and the Service Employees International Union for restarting the process. The company hasn’t spent enough time on its review, the SEIU said in a joint statement with PICO National Network, National People’s Action, Northwest Federation of Community Organizations and Alliance of Californians for Community Empowerment.
Ohio Attorney General Richard Cordray said the bank may have mishandled tens of thousands of cases. "They tell us that they have fixed the problem in a matter of weeks," Cordray said in a statement. "We’re certainly not going to take their word for it." The lender will deal with home seizures and repurchase demands "into 2012," Moynihan said. "You have to tie this into the larger process, which is getting the housing market and foreclosures through the system," he said.
Bank of America today reported a $7.3 billion loss after taking a goodwill charge of $10.4 billion in the wake of new restrictions enacted this year for card payments and consumer accounts. Revenue net of interest expense rose 2 percent from a year earlier to $27 billion, the company said. Litigation costs and professional fees helped boost non-interest expenses 3 percent. The company slipped 26 cents to $12.08 in New York Stock Exchange composite trading at 1:55 p.m.
Putbacks, rather than faulty foreclosures, are more likely to prove costly for banks, said Meredith Whitney, founder of Meredith Whitney Advisory Group, in an interview yesterday at a conference in Naples, Florida. "Robo-signing is just a blip," she said. "That’s nothing to worry about. The second issue, the putbacks, isn’t a blip."
Bank of America sold more than $1 trillion in loans from 2004 to 2008 to government-sponsored entities, such as Fannie Mae and Freddie Mac, Moynihan said in today’s interview. About 1.5 percent are later debated. Of every three contested loans, the bank typically takes one back, the GSEs don’t pursue one, "and the other one we fight about and solve," he said. As a result, "there’s a long pattern you’re seeing go through" the bank’s earnings, he said. "This is not pleasant, and we would like to get through it. We’re going to defend our shareholders."
Investors and insurers submitted clams in the quarter for $4.06 billion of loans, according to a slide presentation on the company’s website. Bank of America approved repurchase of $975 million, and $1.37 billion in claims were rescinded. That leaves about $1.7 billion in outstanding claims from the three-month period, on top of the $11.2 billion as of the second quarter.
Mortgage investors were aware that lenders increased business by accepting lower down payments and making funds more available to homebuyers who had inferior credit scores or submitted less documentation than usually required, Chief Financial Officer Charles Noski said on the call. In cases where risks were disclosed, Bank of America shouldn’t be forced to reimburse investors for loans that lost value, he said. "If you think about people who come back and say, ‘I bought a Chevy Vega, but I want it to be a Mercedes with a 12- cylender,’ we’re not putting up with that," Moynihan said in the call.
Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said. The bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service the loans properly, their lawyer said yesterday in a statement that didn’t name the firms.
Foreclosure cases reviewed so far affect seizures in 23 states that require judicial action before a home is seized, according to Bank of America. Foreclosure sales will be delayed in the remaining 27 until a state-by-state review is completed, Frahm said yesterday. Fewer than 30,000 foreclosure sales will have been delayed during the review period, Bank of America said. Costs stemming from the delays are "grossly distorted," Barbara Desoer, president of the home lending unit, said in an interview last week. Bank of America said it has 1,000 people working on its foreclosure review.
N.Y. Fed joins cry for mortgage buybacks
by Jia Lynn Yang and Steven Mufson - Washington Post
The Federal Reserve Bank of New York has joined a group of investors demanding that Bank of America buy back billions of dollars worth of mortgage securities that are plagued with shoddy documentation and lending standards, according to people familiar with the matter. Some of the most powerful investment groups in the country as well as the New York arm of the central bank are accusing one of Bank of America's major mortgage divisions of cutting corners when it was issuing mortgages during the housing boom and as it has been foreclosing on struggling borrowers during the bust.
If Bank of America refuses to comply, these investors could end up suing, a person familiar with the matter said. The demand from the New York Fed and other investors sets up an unusual and high-stakes confrontation, pitting an arm of the federal government against the country's biggest bank. It also illustrates conflicting policy priorities, because it could put the Fed at odds with a bank the Treasury Department has been helping through the financial crisis over the past two years.
With this new confrontation, the government finds itself in the awkward position of being an unhappy private investor pressing for its rights to be enforced. The New York Fed holds roughly $16 billion of mortgage securities that it acquired after it bailed out American International Group. On Tuesday, Bank of America dismissed concerns that investors will drag the bank into court for years with costly lawsuits. "We don't see the issues that people [are] worried about, quite frankly," chief executive Brian Moynihan said in a conference call Tuesday as the bank reported a $7.3 billion third-quarter loss.
But against a backdrop of accusations that banks did not properly foreclosure on homes, a growing number of bondholders are ramping up attempts to recoup their losses from mortgage securities they bought from banks. These securities plummeted in value as home prices dropped and a massive wave of borrowers fell behind on their payments. Attorneys for the group of investors say that affiliates of Countrywide Financial, which was bought by Bank of America in 2008, failed to service 115 pools of loans as promised after the investors bought a large swath of $47 billion worth of mortgage loans.
These investors, which also include Blackrock, Prudential, MetLife and Pimco, argue the banks have not kept accurate paperwork on the loans that were sold, a charge being investigated across the nation as details have emerged that banks may have taken shortcuts to save money and time. These concerns have prodded a handful of banks, including Bank of America, to temporarily halt foreclosure sales.
The big investment firms - which manage funds from endowments, pension funds and others - say they have also been upset that Treasury and the banks have been too quick to restructure mortgages, which hurts investors. Yet the department has left largely untouched consumer debt and home equity loans owed to the same big banks at the heart of the lending and foreclosure debacles, according to a senior executive at one of the investment companies.
Now that new document problems have emerged, one senior executive said, investors are able to allege that Countrywide didn't even own the mortgages it sold and was in violation of local real estate laws. As a result, he said, Bank of America is responsible for repurchasing the securities from investors. Investors' fear, he said, was that "the politicians creating noise about mom and apple pie and the servicing industry will agree to all sorts of things to do right by the borrower, and the person who pays the ultimate cost is the investor."
Headlines about flawed foreclosures have added momentum for the small group of investors who have been threatening legal action for years against the banks. "We've signed up many new investors," said Tal Franklin, a lawyer. Courts are hashing out the complex legal questions surrounding the way judges review foreclosures. On Tuesday, an emergency measure approved by Maryland's highest court empowered judges to bring in outside experts to review questionable papers.
Pimco, NY Fed Said to Seek BofA Repurchase of Mortgages
by Jody Shenn - Bloomberg
Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said.
A group of bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service loans properly, their lawyer said yesterday in a statement that didn’t name the firms. The New York Fed acquired mortgage debt through its 2008 rescues of Bear Stearns Cos. and American International Group Inc.
Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group, which has since expanded. Countrywide’s servicing failures, including insufficient record keeping, may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer at Gibbs & Bruns LLP.
"We now are in a position where we have to start a clock ticking," Patrick, who is based in Houston, said today in a telephone interview. If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide in default on its servicing contracts, Patrick said.
In its role as a mortgage seller, Countrywide should face more repurchase demands no matter what, Patrick said. The requests may come directly from bondholders or from the loan servicing arm of Countrywide itself or from Bank of New York, which acts as trustee. Patrick represents investors who own at least 25 percent of so-called voting rights in the deals and stand to recover "many billions of dollars," Patrick said.
MetLife Inc., the biggest U.S. life insurer, is part of the group Gibbs & Bruns is representing, said the people, who declined to be identified because the discussions aren’t public. TCW Group Inc., the manager of $110 billion in assets, expects to join BlackRock, the world’s largest money manager, and Pimco, which runs the biggest bond fund, in the group, the people said.
The investors are among those who want lenders to buy back home mortgages that they say were marketed with misstatements about quality. One problem can be faulty appraisals that overvalued homes. That matter is separate from an investigation by 50 state attorneys general into whether loan servicers may have improperly foreclosed on homes.
Most Common Claim
While failing to include documents needed for foreclosures violates so-called representations and warranties by mortgage sellers, it probably won’t be the most common issue discovered if investors can access loan files, Isaac Gradman, a San Francisco-based consultant, said yesterday. "It’s surprising that it took this foreclosure crisis to bring the issue to people’s attention but people are starting to get it," said Gradman, formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin. He represented mortgage insurer PMI Group Inc. in a settled lawsuit over similar issues against General Electric Co. and its defunct mortgage unit.
Countrywide hasn’t met its contractual obligations as a servicer also because it hasn’t asked for loan repurchases and is taking too long with foreclosures, Patrick said. The delays stem from missing documents, process mistakes and insufficient staffing to evaluate borrowers for loan modifications, she said. If Countrywide doesn’t correct the servicing problems within a few months, her clients could have the right to pursue legal action against Bank of America, Bank of New York or both, she said. "None of the bondholders are opposed to modifications for deserving borrowers, but you’ve got to get it done" in a timely fashion, she added.
"The letter states a demand directed to Countrywide to cure the defaults," said Kevin Heine, a spokesman for BNY Mellon. "It does not ask BNY Mellon to take any action. BNY Mellon will continue to perform its duties as trustee." Charlotte, North Carolina-based Bank of America will "defend our shareholders" by disputing any unjustified demands it buy back defective mortgages, Chief Executive Officer Brian T. Moynihan said today.
Most claims "don’t have the defects that people allege," Moynihan said on Bloomberg Television, referring to so-called put-backs, in which guarantors or investors in mortgage-backed securities ask for the return of bad loans. "We end up restoring them, and they go back in the pools."
In August, Jack Gutt, another spokesman, said the institution was involved in "multiple efforts related to exercising our rights as investors," which would "support our primary goal of maximizing the value of these portfolios on behalf of the American taxpayer." "We continue to review and assess the letter, and have a number of question about its content, including whether these investors have standing to bring these claims," Bank of America Chief Financial Officer Charles H. Noski said today on a conference call with analysts. "We continue to believe the servicer is in compliance with the servicing obligations."
The letter covered 115 separate mortgage securitizations, with $105 billion in original balances, from "eight investors purportedly owning interests in these transactions," Noski said. Banks’ costs from repurchasing mortgages in securities without government backing may total as much as $179.2 billion, Compass Point Research and Trading LLC analyst Chris Gamaitoni estimated in August, including expenses related to lawsuits against bond underwriters.
JPMorgan Chase & Co. analysts said in an Oct. 15 report the costs may reach $80 billion, reduced in part by the difficulty investors have getting trustees to act and a typical requirement that misstatements about loan quality must be "material." Losses on the mortgages packaged into bonds come amid "persistently high unemployment and other economic trends, diminishing the likelihood that any loan defect, should one exist at all, was the cause of the loan’s default," Noski said.
Bank of America said in an August securities filing it had been dealing with a "very limited" number of requests to repurchase bad loans out of securities other than from bond guarantors. Capital One Financial Corp. Chief Financial Officer Gary Perlin said on a conference call today it has "seen virtually no repurchase activity from" home loans it sold into uninsured bonds from 2005 through 2008.
Mortgage-bond contracts are explicit in requiring repurchases of loans when their quality fails to match sellers’ promises, said Scott Simon, Pimco’s head of mortgage bonds. The contracts also call for trustees and servicers to ask lenders to take back debt under those circumstances, he said. "They’re contractually required to enforce the reps and warranties," Simon said today in a telephone interview.
The initiative covered by the letter sent to Bank of America and BNY Mellon yesterday is separate from the effort coordinated through Dallas lawyer Talcott Franklin, Patrick said. That firm is coordinating action for a larger group of mortgage-bond investors holding more than $500 billion of the debt. Participants in that so-called RMBS Investor Clearing House include BlackRock, Pimco, Fortress Investment Group LLC, Fannie Mae and Federal Home Loan Banks, people familiar with the matter said last month. MetLife isn’t part of that group, Calagna said.
Membership in the clearing house has risen to 110 from 65, during the last two weeks, said Bill Frey, head of Greenwich, Connecticut-based securities firm Greenwich Financial Services LLC. Frey this month lost a lawsuit against BofA seeking to force the bank to purchase any modified loans out of bonds.
Mortgage Buybacks May Cost Lenders as Much as $120 Billion, JPMorgan Says
by Jody Shenn - Bloomberg
Forced repurchases of soured U.S. mortgages may be the "biggest issue facing banks" even as errors in the foreclosure process draw attention to other industry risks, according to JPMorgan Chase & Co. analysts. Future losses from repurchases of home loans whose quality failed to meet sellers’ promises will likely total $55 billion to $120 billion, or potentially $10 billion to $25 billion for the next five years, the New York-based mortgage-bond analysts led by John Sim and Ed Reardon wrote in a Oct. 15 report.
While a "firestorm of news" sparked by some loan servicers’ decisions to halt action on defaulted loans is drawing renewed attention to banks’ mortgage-repurchase risks, the foreclosure issues themselves are mostly "process-oriented problems that can be fixed," the analysts wrote. "Putback risk may be the biggest issue facing banks," the analysts wrote, referring to items such as faulty appraisals that can be used to force lenders to repurchase mortgages under sales contracts. The analysts declined to comment beyond the report.
Speculation over mortgage issues helped drive down bank stocks last week after attorneys general from all 50 states said they had jointly opened an investigation into whether lenders and mortgage companies falsified documents in foreclosure proceedings. Home-loan servicers including Ally Financial Inc., Bank of America Corp. and JPMorgan, which manage outstanding mortgages, had earlier suspended some foreclosures or evictions while they review paperwork.
JPMorgan analysts said mortgage repurchase costs stem from $2 trillion of loans that have defaulted or are likely to go bad, among the $6 trillion of U.S. mortgages and home-equity debt originated from 2005 through 2007. The defaults will create about $1.1 trillion of losses for banks, government-supported Fannie Mae and Freddie Mac, bond investors and insurers.
Losses from forced repurchases may total $23 billion to $35 billion for loans sold to or insured by government-backed companies; $40 billion to $80 billion for so-called non-agency mortgages that aren’t backed by Fannie Mae, Freddie Mac or other government agencies, and $20 billion to $31 billion for home- equity loans, they said. Banks have already realized or reserved for a portion of the losses, the analysts wrote.
Investors in non-agency debt may only recoup 5 percent of losses in part because of difficulties convincing bond trustees to ask banks to repurchase bad loans and the necessity of proving misstatements under the securities contracts are material, they said. For agency mortgages, the figure will be 10 percent, they said.
Compass Point Research and Trading LLC’s Chris Gamaitoni estimated in August that lenders may suffer as much as $179.2 billion in losses tied to soured mortgages they will be forced to repurchase from mortgage-bond insurers and investors. Earlier this year he predicted $28 billion for agency loans.
Last week, Mike Mayo, an analyst at Credit Agricole Securities USA in New York, estimated a cost of $20 billion for repurchases when including government-supported Fannie Mae and Freddie Mac. Goldman Sachs Group Inc.’s Richard Ramsden said a worst-case scenario would be $84 billion, while Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said it could cost the banks as much as $91 billion. With foreclosure documents, some items are easy to resolve or don’t need fixing, the JPMorgan analysts wrote.
Mortgage bonds qualify as so-called real-estate mortgage investment trusts for tax purposes even when the debt is transferred to the securities with its endorsements left blank, they said. Servicers are able to work around legal challenges related to the Mortgage Electronic Registration System by taking loans out of the system and putting it into their name or that of the debt’s owner before pursuing a foreclosure, they said.
Foreclosure delays created by the issues will damage senior-ranked non-agency mortgage securities, costing as much as 4 cents on the dollar for certain bonds if postponements take six months, according to the analysts.
British budget cuts to include nearly 500,000 job losses
by Rebecca Omonira-Oyekanmi - Washington Post
The British government on Wednesday announced historic spending cuts, aimed at reducing the country's deficit, that will cost the public sector half a million jobs. The measures announced by Chancellor of the Exchequer George Osborne will span four years and include an average cut of 19 percent in central government departments' budgets, an $11 billion reduction in welfare spending and an increase in the pension-eligibility age to 66. The government acknowledged that 490,000 public-sector jobs would be lost over the four years as result of the cuts.
Only the budgets for schools, the National Health Service and overseas aid were spared. Education spending is actually set to increase slightly by nearly $5 billion, despite the government scrapping a multi-billion-dollar school-buildings program. The Defense Ministry must find savings of about 8 percent, compared with the 19 percent average, but is facing a loss of 42,000 jobs over the next five years.
Even the queen will not be exempt from cuts. The civil list - spending on the royal family - will be frozen next year and then drop by 14 percent in 2012-13. However, Osborne said, a temporary grant of about $1.6 million will be put aside to pay for the queen's diamond jubilee in 2012. Announcing the plan in the House of Commons, Osborne said: "Today's the day when Britain steps back from the brink. The decisions we have taken today bring sanity to our public finances and stability to our economy.
The cuts "deal decisively with the largest budget deficit this House of Commons has ever had to face outside of wartime," he said. The opposition Labor Party said the cuts reflected ideology more than necessity. "Today is the day that abstract figures and spreadsheets turn into people's jobs and people's futures," the party's treasury spokesman, Alan Johnson, said. The plan will be subject to a vote in Parliament, but because the coalition government has a majority, it is assumed that it will be passed.
Responding to popular anger about a government bailout of the country's banks, Osborne also promised to "extract the maximum sustainable tax revenues from financial services." Details of a new regulatory system for the financial sector will be revealed next year. The government has already come under fire for not continuing the Labor Party's tax on bank bonuses and for its welfare reform plans, which include ending universal child benefits enjoyed in Britain for decades.
On Tuesday, Osborne's response to the criticism was: "We're all in this together." "Fairness . . . means that across the entire deficit reduction plan, those with the broadest shoulders should bear the greatest burden," he said. "Those with the most should pay the most, including our banks. We neither want to let banks off making their fair contribution, nor do we want to drive them abroad." On public-sector job losses, which come in addition to a two-year pay freeze and pension reforms, the chancellor said: "Yes, there will be some redundancies. . . . That is unavoidable when the country has run out of money."
Mervyn King warns Britain must 'sober' up to work off economic hangover
by Larry Elliott - Guardian
Mervyn King warned the public last night that a decade of sobering up was in prospect as Britain worked off the economic hangover caused by the financial crisis and recession of the past three years. On the eve of George Osborne's spending review, the Bank of England governor said the coalition's attempts to balance its books would need to be matched by individuals saving more and by a worldwide "grand bargain" to secure better-balanced growth between countries.
King told a gathering of business leaders in Wolverhampton that there might be a need for further action from the Bank of England to boost the economy in the event that sluggish growth heightened the risk of inflation falling below its official 2% target. The remarks are likely to be seen by the City as a hint that the governor is gradually warming to the idea of a resumption of Threadneedle Street's quantitative easing (QE) programme, which creates electronic money by buying government bonds from banks.
Osborne has given the Bank the go-ahead for more QE in the event that the economy continues to sag – a risk highlighted today by one of the UK's leading economic forecasting groups. The National Institute of Economic and Social Research said two years of falling real incomes would put the brakes on growth and result in the government failing to meet its tough targets for cutting the deficit during the current parliament. NIESR said it expected growth of 1.6% in both 2010 and 2011, but said consumers faced "the dismal prospect of two successive years when real disposable income falls, by 0.8% in 2010 and 0.6% in 2011".
King said last night that he had coined the expression "the nice decade" on a previous visit to speak to the Black Country chamber of commerce, referring to the non-inflationary consistent expansion during the period up to 2003. But he said: "The next decade will not be nice. History suggests that after a financial crisis the hangover lasts for a while. So the next decade is likely to be a sober decade – a decade of savings, orderly budgets, and equitable rebalancing."
The governor added that the determination of the leading developed and developing nations of the G20 to work together had ebbed away since the financial crisis was at its worst in late 2008. Countries had to realise, he said, that the alternative to working together to ensure a high level of global demand would be a return to the protectionism of the 1930s. "A sober decade may not be fun but it is necessary for our economic health."
The Bank has left the base rate at 0.5% for the past 20 months and capped QE at £200bn in February. King admitted the nine-strong monetary policy committee was split on what to do next but ready to boost the supply of money if required. "The key question is whether the current inflation rate signals that inflation will persist above target. The MPC is conscious that the continuing high level of inflation poses the risk that inflation expectations may move up. And it may be some while before inflation returns to target," he said.
"But at present, there is also a risk – at least as large – that once the temporary upward influences on inflation dissipate, the influence of spare capacity in the economy will push inflation below the target. Consistent with that possibility, a range of other indicators – growth in broad money, pay, and the pressure of demand on supply, that together are likely to be a more reliable guide to inflationary pressure looking ahead – all remain extremely subdued. So not only can monetary policy play a role in smoothing the rebalancing process, it needs to do so if the outlook for inflation is to remain in line with the 2% target in the medium term."
Both King and Osborne are keen to see the UK rebalance towards manufacturing, investment and exports, although yesterday's snapshot of industry from the CBI showed growth in output and orders both weaker in the latest quarter. Business optimism also waned. Ian McCafferty, the CBI's chief economic adviser, said the employers' organisation expected the dip to be temporary. "The recovery in the manufacturing sector is well grounded and looks set to continue, despite a soft patch last quarter, when production growth slowed as firms had expected. Over the next three months, firms predict a strong rise in output driven by predictions of firmer export orders growth, while support from stockbuilding fades."
British workers must pay £1,200 more tax to 'hit cuts target'
by Philip Aldrick - Telegraph
Workers face an extra £1,200 tax bill within four years because George Osborne’s spending cuts will only deliver half deliver the savings he expects, the National Institute of Economic and Social Research (NIESR) has warned. The prediction from the highly-regarded economic forecaster will come as a blow to the Chancellor, who today outlines how the Coalition expects to reduce public spending by £83bn a year from 2014/2015. Deep cuts to the police, justice and business departments as well as the welfare bill are expected.
Speaking on the eve of the Comprehensive Spending Review, Ray Barrell, NIESR’s acting director, said: "They are very unlikely to achieve the scale of cuts they are looking for. Taxes will have to rise by the end of the parliament ... Plan B is very simple. You put up income tax by 2pc of GDP." He added that 2pc of GDP equates to "about £36bn" – roughly £1,200 for every working person in the UK. The current income tax bill is £150bn, equivalent to £5,000 per working adult.
Mr Barrell cautioned that taxes may have to rise still further if the Chancellor is to meet his "fiscal mandate" of eliminating the country’s £109bn structural deficit – the annual spending that will be left once the economy has fully recovered – by 2015/2016. On NIESR’s forecasts, the Chancellor will miss the target by £26.6bn, though the official prediction from the Office for Budget Responsibility is that he will hit his mandate a year early. Mr Barrell said: "The political reality is that they won’t be able to hit the [spending cut] projections ... We estimate they will get a half to two-thirds of what they are after ... There there will have to be a reaction to that."
NIESR’s prediction of more pain for households came as Mervyn King, Governor of the Bank of England, declared an end to the "nice [non-inflationary consistently expansionary] decade" and coined a new acronym, saying "the next decade is likely to be a sober decade – a decade of savings, orderly budgets, and equitable rebalancing". "The path for the economy will be bumpy," he told the Black Country Chamber of Commerce last night. "The next decade will not be nice. History suggests that after a financial crisis the hangover lasts for a while ... A sober decade may not be fun but it is necessary for our economic health."
NIESR added that households will feel the squeeze this year and next as incomes fail to keep pace with inflation, falling 0.8pc in real terms this year and 0.6pc in 2011. The institute expects the economy to grow by 1.6pc in 2010 and 2011, and by 2pc in 2012. It is not forecasting a double-dip recession, but said there is a one-in-five chance of further contraction.
Mr Barrell said he "absolutely agrees with the [Chancellor’s] budget deficit target" but added that the scale of spending cuts may be "excessive" and raising taxes instead could be preferable. Under Mr Osborne, four-fifths of the fiscal consolidation will come from spending cuts. Mr Barrell said the optimum split would be three-fiths cuts, and two-fifths tax rises – the same balance advocated by the new Shadow Chancellor, Alan Johnson.
If the economy weakens, the Government "should undertake a temporary fiscal stimulus" by introducing a "temporary national insurance holiday or tax rebates," Mr Barrell added. He said the £36bn of extra tax to cut the deficit need not come exclusively from income taxes. Benefits cuts, savings from public sector pensions, or increases in other direct taxes – such as national insurance or stamp duty – could help raise the funds.
Prices Squeeze Main Street
by James R. Hagerty - Wall Street Journal
Some U.S. retailers are caught between frugal consumers and escalating costs. Inflation on consumer items is so low that the Federal Reserve sees a risk of deflation, a spiral of falling prices and wages. But the prices of some commodities, driven by demand from China and other hot economies, have been rising fast.
Keith Butcher, president of Purcell Tire & Rubber Co. in Potosi, Mo., is one of those feeling the heat. As a tire dealer with stores in eight states, he is paying more for tires from such manufacturers as Goodyear Tire & Rubber Co. But Mr. Butcher can't pass all of the higher costs on to consumers. Purcell's customers, like most Americans, are pinching pennies as they fret about the weak economy and scarce jobs. Some are moving to obscure brands from premium ones; others are letting tires get perilously bald. "It's the grand squeeze," said Mr. Butcher. Tire dealers have had to slash expenses for such things as store maintenance and advertising, while laying off some workers, to adjust to smaller profits on each sale.
As of September, prices charged by car-tire manufacturers to retailers and other distributors were 18% higher than three years earlier, according to the U.S. producer price index released last week. Not all of that jump has reached consumers, which is good news for them. The consumer price index for tires was up about 11% in the same period. Part of the difference is being absorbed by wholesale distributors and retailers, who are accepting lower markups. Technical differences in the price indexes also explain part of the gap.
The pattern is similar in some other industries, as manufacturers and commodity producers raise prices faster than retailers mark up their goods. In September, the producer price index for all finished goods was up 4% from a year earlier, while the consumer price index for urban areas was up 1.1%. Jewelry and apparel were two other areas where manufacturers raised prices more than retailers did. People can easily put off spending on jewelry and clothing, making it hard for stores to raise prices on such items when the economy is weak.
The producer and consumer indexes never move exactly in synch. The producer price index is heavily influenced by changes in commodity prices, while the consumer index has a greater element of labor costs. Allen Sinai, chief economist of Decision Economics Inc. in Boston, said that middlemen, including distributors and retailers, could absorb some of the higher prices, because they have become more efficient. Slashing costs "is a way of life now," he said, which helps explain why U.S. consumer-price inflation has remained so low.
In the case of tires, wholesale prices have risen swiftly mainly because of higher costs for rubber, steel and carbon black, said Saul Ludwig, a managing director of Northcoast Research in Cleveland. U.S. tariffs on Chinese tire imports also played a small role in pushing up prices, Mr. Ludwig said. In addition, U.S. inventories of tires are unusually low, because manufacturers slashed production and don't have excess products to unload at knockdown prices, which means tire dealers have less bargaining power.
Goodyear imposed price increases of as much as 6% on Oct. 1. Meanwhile, Cooper Tire & Rubber Co. has announced an increase of as much as 6.5% starting Nov. 1. Consumers are pushing back. "I'm getting people screaming at me," because a set of tires now often costs $400 to $1,000, depending on the vehicle, said Daniel Schreck, president of Main Street Tire in Bismarck, N.D. More customers are choosing less expensive store brands rather than Goodyear or Cooper, tire dealers say.
At Conrad's Tire Express in Cleveland, store manager Josh Jenkins said Mastercraft had been a good seller lately. Mr. Jenkins said that when his sales people explained to customers that Mastercraft was made by Cooper, "that just reels them in." A set of four Mastercrafts typically costs $85 to $100 less than a similar set of tires with a better-known brand, said John Turk, CEO of the Conrad's chain.
Robert Kellogg, owner of Warren Tire Service Center Inc., with 14 stores in upstate New York, has lowered repair and building maintenance by 10% by having employees do work once outsourced, such as mowing lawns, cleaning stores and repairing equipment. To cut utility bills, Warren Tire installed more efficient lighting. Mr. Kellogg also set up a daily delivery service to each store, cutting truck mileage by 10%; before, each store manager dispatched trucks to fetch needed supplies.
Wholesale distributors, who buy from manufacturers and sell to dealerships too small to buy directly from producers, also have become leaner. Jim Mayfield, the president of Del-Nat Tire Corp. in Memphis, Tenn., said that he had reduced staff about 10% in the past two years. Del-Nat Tire also arranged for more tires to be shipped directly from factories to dealers, rather than first to Del-Nat's warehouse.
It is folly to place all our trust in the Fed
by Joseph Stiglitz - Financial Times
In certain circles, it has become fashionable to argue that monetary policy is a superior instrument to fiscal policy – more predictable, faster, without the adverse long-term consequences brought on by greater indebtedness. Indeed, some advocates wax so enthusiastic that they support recent drives for austerity in many European countries, arguing that if there are untoward effects they can be undone by monetary policy. Whatever the merits of this position in general, it is nonsense in current economic circumstances.
A quarter-century ago proponents of monetary policy argued, with equal fervour, in favour of monetarism: the most reliable intervention in the economy was to maintain a steady rate of growth in the money supply. Few would hold that now, as the velocity of circulation turned out to be less constant than the monetarists anticipated. Countries seduced by apparent certainties of monetarism found themselves in a highly uncertain world.
Traditionally, monetary authorities focus policy around setting the short-term government interest rate. But, leaving aside the fact that with interest rates near zero there is little room for manoeuvre, the impact on the real economy of changes in the interest rate remains highly uncertain. The fundamental reason should be obvious: what matters for most companies (or consumers) is not the nominal interest rate but the availability of funds and the terms that borrowers have to pay. Those variables are not determined by the central bank. The US Federal Reserve may make funds available to banks at close to zero interest rates, but if the banks make those funds available to small and medium-sized enterprises at all, it is at a much higher rate.
Indeed, in the last US recession, the Fed’s lowering interest rates did stimulate the economy, but in a way that was disastrous in the long term. Companies did not respond to low rates by increasing investment. Monetary policy (accompanied by inadequate regulation) stimulated the economy largely by inflating a housing bubble, which fuelled a consumption boom.
It should be obvious that monetary policy has not worked to get the economy out of its current doldrums. The best that can be said is that it prevented matters from getting worse. So monetary authorities have turned to quantitative easing. Even most advocates of monetary policy agree the impact of this is uncertain. What they seldom note, though, are the potential long-term costs. The Fed has bought more than a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers – precisely the reason why no one in the private sector is interested. The government may pretend that it has not experienced a capital loss because, unlike banks, it does not have to use mark-to-market accounting. But no one should be fooled.
By contrast, if we extend unemployment benefits we know, not perfectly but with some degree of precision, how much of that money will be spent. Doubters of the effectiveness of fiscal policy worry that such spending will simply crowd out other spending, as government borrowing forces interest rates up. There may be times when such crowding out occurs – but this is not one. Interest rates remain at record low levels. Besides, anyone who believes in the power of monetary economics must believe that monetary authorities can undo these effects. (There are other, even less convincing arguments: that taxpayers offset future liabilities by reducing consumption. It would have been nice if this had happened when the Bush tax cuts of 2001 and 2003 were enacted; instead, the savings rate fell ever lower until it reached zero.)
A final argument invoked by critics of fiscal policy is that it is unfair to future generations. But monetary policy can have intergenerational effects every bit as bad. There are many countries where loose monetary policy has stimulated the economy through debt-financed consumption. This is, of course, how monetary policy "worked" in the past decade in the US. By contrast, fiscal policy can be targeted on investments in education, technology and infrastructure.
Even if government debt is increased, the assets on the other side of the balance sheet are increased commensurately. Indeed, the historical record makes clear that returns on these investments far, far exceed the government’s cost of capital. When, as now, there is excess capacity in the private sector, such public investments increase output and tax revenues in both the short term and the long. If markets were rational, such investments would even lead a country’s cost of borrowing to fall.
Given the complexity of the economic system, the difficulties in predicting how expectations will be altered, and the pervasive irrationalities in the market, there is no way the impact of any economic policy could be ascertained with certainty. There may be some circumstances in which the effect of monetary policy can be accurately gauged. But recessions of this depth come only once every 75 years. What is true in normal times may be of little relevance now, especially as central banks engage in unusual measures such as QE. To pursue austerity in the hope that monetary policy can reliably be used to undo any untoward effects, is, in short, sheer folly.
Annual cost of lost nature put at $4.5 trillion
by Fiona Harvey - Financial Times
The annual cost of damaging the natural environment exceeds that of the financial crisis and the world recession, according to a new study that aims to put a price tag on nature. The Economics of Ecosystems and Biodiversity report, compiled by the UN, puts the economic penalty of damage to “natural capital” – such as forests, wetlands, grasslands and marine habitats – at between $2,000bn and $4,500bn a year. The report was published on Wednesday at the 10th meeting of signatories to the UN Convention on Biological Diversity.
These costs are not considered when countries calculate their GDP, nor when companies compile accounts. This helps to perpetuate the destruction of habitats and species, the study’s authors said. Pavan Sukhdev, a former banker who led the study, said it had “documented not only the multi-trillion-dollar importance to the global economy of the natural world, but the kinds of policy shifts and smart market mechanisms that can embed fresh thinking”. The good news was that “many communities and countries are already seeing the potential of incorporating the value of nature into decision-making”.
Mr Sukhdev called for “a new era in which the value of nature’s services is made visible and becomes an explicit part of policy and business decision-making”. The report cites examples of how damage to ecosystems causes economic penalties. Overfishing is costing $50bn a year in lost economic opportunities. The value of insect pollination globally was put at about €153bn ($211bn) in 2005, while coral reefs – nurseries for many fish species – were estimated to provide between $30bn and $172bn a year in economic benefits.
Safeguarding natural systems could lead to huge rewards, the authors said. New York had saved $6.5bn by investing in maintaining the natural watershed of the Catskill mountains, which helps to purify the city’s drinking water. If the ecosystem was not adequately maintained, the only alternative would be an expensive man-made filtration plant. At the meeting in Nagoya, Japan, governments also discussed ways to limit the global loss of biodiversity. Some countries are calling for tougher targets to halt the rapid extinction of species.