"U.S.S. Massachusetts in dry dock"
Ilargi: There are times when you read things that can only make you want to be silent and still, wondering what on earth people are thinking. This is one of those times; Emma Rowley reports in the UK Telegraph:
World needs $100 trillion more credit, says World Economic ForumThe world's expected economic growth will have to be supported by an extra $100 trillion (£63 trillion) in credit over the next decade, according to the World Economic Forum. This doubling of existing credit levels could be achieved without increasing the risk of a major crisis, said the report from the WEF ahead of its high-profile annual meeting in Davos.
But researchers warned that leaders must be wary of new credit "hotspots", where too much lending takes place, as the world emerges from a financial catastrophe blamed in large part "to the failure of the financial system to detect and constrain" these areas of unsustainable debt.
"Pockets of credit grew rapidly to excess – and brought the entire financial system to the brink of collapse," said the report, written in conjunction with consulting firm McKinsey. "Yet, credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential."
The global credit stock has already doubled in recent years, from $57 trillion to $109 trillion between 2000 and 2009, according to the report. The WEF said the continued demand for credit could be met "responsibly, sustainably – and with fewer crises". However, it cautioned that to achieve this goal, financial institutions, regulators, and policy makers need more robust indicators of unsustainable lending, risk, and credit shortages
Oooh boy! Where to start? Let’s try some back of the envelope first glance ruminations (don't pin me on details or exact numbers, I’m going for the general gist here). The "global credit stock" rose by $52 trillion in the past ten 10 years (2010 not included). That is about an entire one year's worth of global GDP. Now, let’s see: the world will soon count 7 billion inhabitants. Which means that, since 2000, credit rose by about $7000 per person, including children, pensioners and the many hundreds of millions who have to live on $1 a day or thereabouts. And that was on top of some $8000 pre-existing credit per capita.
And now, say the World Economic Forum and McKinsey, we need to play double or nothing (again), everything on either red or black. In the next decade, we must raise global credit to the tune of over $14,000 per capita. But not to worry:
The WEF said the continued demand for credit could be met "responsibly, sustainably – and with fewer crises".
Well, you must admit, it worked great in the past ten years, we're doing just spiffy. After all, there were only three million foreclosure filings last year in the US, where real unemployment is only 16% or so, and most of all, only a handful of people set themselves on fire so far in northern Africa in 2011. In other words: steady as she goes?!
Don't think so, WEF.
We already have an unmitigated debt disaster on our hands because of what has happened in the past, and that disaster will become much worse yet because clown schools like the WEF have a say in how to go forward. And what they say is: we need more debt. Much more. Twice as much, on top of what's already there. If you add $14,000 in debt for every person on the planet, on top of the $15,000 already in place, and you realize that most westerners are already in the hole for tens if not hundreds of thousands of dollars in personal and national debt, you end up with an insane picture.
Moreover, where has all the credit of the past decade gone anyway, and why do we "need" so much more of it? Well, for one thing, the US housing, mortgage and finance sector ate a huge chunk of it. As did those in Ireland, Spain, Britain and others (China?!).
These days, US home builders can’t get much of any credit anymore, and neither can wannabe home buyers. So home starts are falling fast, and the fact that permits were up in December needs to be taken with an ocean full of salt; a permit means zilch without available credit.
Here are a few numbers from Martin Crutsinger at the Associated Press:
December housing starts fall as 2nd worst year for building endsThe Commerce Department says builders started work at a seasonally adjusted annual rate of 529,000 new homes and apartments last month, a drop of 4.3% from November. Builders broke ground on a total of 587,600 homes in 2010, just barely better than the 554,000 started in 2009. Those are the two worst years on records dating back to 1959. In a healthy economy, builders start about one million units a year. They built twice as many in 2005, at the height of the housing boom. Since then the market has been in decline.
And even that might still be too rosy a picture, say Jeffrey Sparshott and Jamila Trindle in the Wall Street Journal:
US Home Construction Declines[..] Actual housing starts, without seasonal adjustments, fell to 34,300 in December.
Let's see. Home starts are down from 2 million in 2005 to half a million today, annualized. A "normal, healthy" year would see 1 million starts.
We get into the inflation vs deflation debate here, since mortgage loans are a major contributor to credit creation, or were, I should say. The way it works - or used to - is you go to a bank, ask for a mortgage loan, they press some keys, et voilà, there's another, let's say, $250,000 that just entered the economy that never existed before.
In the 2005 good days, this would have expanded "available" credit in the US by $500 billion a year (at $250,000 per mortgage). In a normal year, $250 billion. Today, maybe $125 billion. Those amounts may not mean all that much to you, what's a billion more or less. But remember that the bank could take these new debt obligations, and slice and dice them, turn them into mortgage backed securities, pocket the profits and use them to move on to more sophisticated derivative instruments like credit default swaps, CDO's etc.
Partly because of the vanishing reserve requirements in our fractional banking systems, they could then leverage themselves up to their eyeballs. Let's be real conservative and say that the prevalent leverage ratio was 20:1 (I'm seriously lowballing it here). That would have turned 2005's 2 million housing starts into a $10 trillion credit-based bonanza. In a "normal" year the result would be $5 trillion. And that's just housing starts, that's not even counting existing home sales. There was over $3 trillion in mortgage originations in 2005. There are other aspects, like for instance the fact that most people pay 3-4 times the actual amount of their loans before their homes are paid off, which greatly increased the amount of available gambling tokens for the banks.
And now a large part of that is gone. It's not just the 75% loss that got us from the 2 million 2005 starts to the 500,000 now, but the securitization model has changed drastically as well; Fannie and Freddie (and FHA/Ginnie Mae) buy close to 100% of new loans today, vs less than 40% in 2005. And they issue the MBS now, along with Ginnie Mae. So the banks didn't just suffer huge losses on their toxic paper, they've also seen their 'housing tap' largely shut down to a trickle. Of course they've found ways to involve themselves again through the backdoor, but provided the market has shrunk 75%, they would have to up their leverage ratio by 300%, to 80:1, just to play even.
So is it any wonder that Geithner and Bernanke throw trillions into the system, without inducing any growth? A blacker hole than this has never been spotted even by the Hubble telescope. And to date, fuzzy accounting may delay the day of reckoning process somewhat, but that only works to hide losses incurred in the past. No amount of accounting fraud can make up for the effects going forward of losing 75% of a market, in this case housing.
US housing inventories are at crazy levels, and nobody even knows any more how much shadow inventory there is. Is it 5 million, units, or 10, or 15 million? On top of that, robo-signing and other forms of fraudclosure are set to cause huge additional problems in the housing finance sector, forcing lenders to buy back large amounts of loans. How will they pay for this? Nobody knows that either. And what then happens to the securities that are supposedly backed by these limbo loans? Will they be forced to be marked to market? Totally unclear.
How many people will end up living for free in their homes in a suspended Wile E. limbo, waiting to see if their lenders can produce the legally required papers to foreclose on them? It could be hundreds of thousands. It could be millions. The infamous Ibanez case in Massachusetts was just a start. In Maryland, 10,000 foreclosures were halted in one fell swoop the other day. There's no doubt that we’ll see much more of this in 2011-2012.
Then there's the resets of ARM mortgages, set to peak in 2011. That will push tons of additional homeowners over the edge, and tons more properties on the market, provided the paperwork isn't all shoddy.
And all these factors combined will lead to one inevitable outcome: prices will keep falling. Which will further exacerbate all of the above developments. Which will cause prices to fall further. And so on and so forth. There is no economic recovery, there are only trillions of dollars in additional credit. Which have led to only a 16% unemployment rate, only 3 million foreclosure filings in 2010, and only a close to 30% drop in home prices (according to Case/Shiller).
And now the WEF calls for $100 trillion in extra credit until 2020:
"This doubling of existing credit levels could be achieved without increasing the risk of a major crisis..."
Come to think of it, maybe they’re right. That major crisis is cast in stone as it is, so there is already a 100% risk. And you can't increase that. Then again, the WEF plan will greatly worsen the effects of that crisis on Main Street. Still, incumbent politicians don't want to let the present zombie model go, no matter how dead it is. Because it's this model that ensures Wall Street keeps paying for election campaigns. Main Street's already too poor to do so. Main Street's debt deleveraging.
Here's Stoneleigh in an episode of the peak oil series from The Nation:
US Home Construction Declines
by Jeffrey Sparshott and Jamila Trindle - Wall Street Journal
Home construction in the U.S. fell to its lowest level in more than a year in December as builders cut back on new single-family homes, the latest sign of a moribund market. Housing starts fell 4.3% to a seasonally adjusted annual rate of 529,000 from an downwardly revised 553,000 a month earlier, the Commerce Department said Wednesday. However, building permits, a gauge of future construction, surged 16.7% to an annual rate of 635,000.
Economists surveyed by Dow Jones Newswires expected overall housing starts to fall slightly in December to a rate of 554,000 from the government's original estimate of 555,000 in November. The results were driven by a 9.0% drop in single-family home construction to a seasonally adjusted annual rate of 417,000. Construction of dwellings with five or more units, a volatile part of the market, rose 25.9% last month. Single-family homes, which represent more than 80% of all starts, rose a revised 5.8% in November.
Compared with December a year ago, new-home construction is down 8.2%. The construction industry has struggled to regain its footing since the financial crisis, and home builders remain pessimistic despite signs of improvement elsewhere in the economy. The National Association of Home Builders Tuesday said its housing market index remained flat at 16 in January. The seasonally-adjusted index, based on a survey of 420 builders, has held steady for three straight months.
Numbers above 50 mean more builders view conditions as good than as poor. The last time the home builders' confidence gauge was above 50 was April 2006. Home builders are competing with demand for previously owned homes and have been struggling to get credit to start projects, the association said. New-home construction this year peaked in April, but then fell sharply with the expiration of tax incentives for first-time purchases. Starts in November rose 3.8% from a month earlier, revised from an originally reported 3.9%% increase.
The Commerce Department data showed that regionally, housing starts in November fell 24.7% in the Northeast, 38.4% in the Midwest and 2.2% in the South. Construction rose 45.8% in the West. Actual housing starts, without seasonal adjustments, fell to 34,300 in December from an adjusted 40,800 in November. Lumber and commodities markets watch those numbers closely to gauge demand.
December housing starts fall as 2nd worst year for building ends
by Martin Crutsinger - AP
The Commerce Department says builders started work at a seasonally adjusted annual rate of 529,000 new homes and apartments last month, a drop of 4.3% from November. Builders broke ground on a total of 587,600 homes in 2010, just barely better than the 554,000 started in 2009. Those are the two worst years on records dating back to 1959. In a healthy economy, builders start about one million units a year. They built twice as many in 2005, at the height of the housing boom. Since then the market has been in decline.
Confidence Among U.S. Homebuilders Stagnates on Lack of Credit for Buyers
by Shobhana Chandra - Bloomberg
Confidence among U.S. homebuilders stagnated in January, reflecting a lack of credit that threatens to hold back construction this year.
The National Association of Home Builders/Wells Fargo sentiment index registered a reading of 16, the same as the past two months and less than the median forecast of economists surveyed by Bloomberg News, data from the Washington-based group showed today. Readings below 50 mean more respondents said conditions were poor. Developers Lennar Corp. and KB Home, which this month reported a fourth-quarter profit, are cutting costs as elevated unemployment limits demand and mounting foreclosures add to the supply of unsold properties. At the same time, sales are projected to recover from last year’s post tax-credit slump, helped by falling prices and low borrowing costs.
"Housing remains very weak," said Paul Dales, U.S. economist for Capital Economics Ltd. in Toronto, who had forecast the index would hold at 16. "There’s still excess supply and demand is weak, and that’s going to be the case for a while. It’s no surprise builders aren’t doing a lot of building and their confidence is low."
Stocks fluctuated between gains and losses, depressed by disappointing earnings at Citigroup Inc. and concern about Apple Inc.’s leadership. The Standard & Poor’s 500 Index was little changed at 1,293.82 at 10:24 a.m. in New York. Treasury securities fell, pushing the yield on the benchmark 10-year note up to 3.37 percent from 3.33 percent late yesterday.
The builder index was forecast to rise to 17 in January, according to the median of 45 projections. Estimates ranged from 15 to 18. The gauge, which was first published in January 1985, reached a record low of 8 in January 2009, and averaged 54 in the five years before the recession began in December 2007. Other reports today showed manufacturing is strengthening and investors continued to buy U.S. assets.
The Federal Reserve Bank of New York’s general economic index rose to 11.9 from a revised 9.9 in December. Readings greater than zero signal expansion in the so-called Empire State Index, which covers New York, northern New Jersey, and southern Connecticut. Net buying of long-term equities, notes and bonds totaled $85.1 billion in November, the most in three months and up from 28.9 billion in October, according to figures from the Treasury Department.
The builders group’s index of current single-family home sales held at 16 for a fourth straight month, today’s report showed. A measure of sales expectations for the next six months stayed at 25 for the third time. The gauge of buyer traffic increased to 12 from 11 in December. "Housing remains on the sidelines of a weak economic recovery," David Crowe, chief economist at NAHB, said in a statement. Problems obtaining financing for production and maintaining lines of credit "threaten to significantly slow the onset of a housing recovery."
The confidence survey asks builders to characterize current sales as "good," "fair" or "poor" and to gauge prospective buyers’ traffic. It also asks participants to gauge the outlook for the next six months. Builders in two of the four regions saw a drop in confidence this month. The index fell to 20 from 22 in the Northeast and decreased one point to 17 in the South. The gauge rose to 14 from 13 in the Midwest and climbed to 15 from 11 in the West.
KB Home, the Los Angeles-based builder that targets first- time buyers, said Jan. 7 it had a fourth-quarter profit, beating analysts’ estimates calling for a loss. Results were helped by reduced expenses as demand for new homes slumped. Lennar, the third-largest U.S. homebuilder by revenue, jumped to an eight-month high on Jan. 11 after reporting a fourth-quarter profit that beat analyst estimates on cost cuts and earnings from its distressed-investing unit. Even so, Miami- based Lennar is "cautious" in its outlook.
"We remain cautious about the immediate future," Stuart Miller, Lennar’s president and chief executive officer, said in a Jan. 11 conference call. "Shadow inventory and foreclosures will continue to impact individual markets on the supply side." A Commerce Department report due tomorrow may show builders began work on fewer houses last month, according to the median estimate in a Bloomberg survey.
Sales of existing homes have begun recovering from their July 2010 slump that pushed them to the weakest rate in a decade’s worth of record keeping. Purchases of previously owned houses rose 3.8 percent in December from November, the Bloomberg survey shows ahead of the National Association of Realtors’ report due Jan. 20. Purchases reached an almost three-year high pace in November 2009, the month the tax credit was originally due to expire. The incentive was subsequently extended.
Foreclosures remain a threat, discouraging construction and limiting prices. The number of homes receiving a foreclosure filing will climb about 20 percent in 2011, reaching a peak for the housing crisis, as unemployment remains high and banks resume seizures after a slowdown, RealtyTrac Inc. said this month.
Record Low Housing Completions in 2010
by Bill McBride - CalculatedRisk
This is a key story: there were a record low number of housing completions in 2010, breaking the record set in 2009. The total for single family, multi-family and manufactured homes (estimated) was 703 thousand units in 2010. That is about 17% below the 844 units completed in 2009 (including manufactured homes). The previous record low was 1.244 million in 1982.
As Tom Lawler noted, there will be record low number of multi-family units completed in 2011 - since it takes over a year on average to complete - and probably a record low number of total units. Note: Multi-family completions will be at a record low this year, but starts will increase.
This graph shows annual completions for 1 to 4 units, 5+ units and manufactured homes. In 2010, 1 to 4 unit completions were at a record low 506 thousand. This was just below the 534 thousand units completed in 2009. This is far below the previous record low of 712 thousand units in 1982. For 5+ units, completions were at 147 thousand units. This was just above the record low of 127 thousand in 1993 - and that record will be broken in 2011.
This doesn't include demolitions that were probably in the 200 to 300 thousand unit range. This suggest the excess supply was reduced in 2010, and will probably be significantly reduced in 2011. Of course this also depends on household formation - and that means jobs.
10,000 GMAC Foreclosures Stopped in Maryland
by David Dayen - FireDogLake
In a major ruling Friday, a coalition of nonprofit defense lawyers and consumer protection advocates in Maryland successfully got over 10,000 foreclosure cases managed by GMAC Mortgage tossed out, because affidavits in the cases were signed by Jeffrey Stephan, the infamous GMAC “robo-signer” who attested to the authenticity of foreclosure documents without any knowledge about them, as well as signing other false statements.
The University of Maryland Consumer Protection Clinic and Civil Justice, Inc., a nonprofit, filed the class action lawsuit, arguing that any case using Jeffrey Stephan as a signer was illegitimate and must be dismissed. In court Friday, GMAC agreed to dismiss every case in Maryland relying on a Stephan affidavit. They can refile foreclosure actions on the close to 10,000 homes, but only at their own expense, and subject to new Maryland regulations which require mandatory mediation between borrower and lender before moving to foreclosure. Civil Justice and the Consumer Protection Clinic also want any cases with affidavits from Xee Moua of Wells Fargo, who has also admitted to robo-signing, thrown out, but that case has not yet been settled.
This was not the plan of GMAC and other banks caught using robo-signers last year. They hoped to undergo a pause in proceedings, run a quick “double-check” and then issue substitute documents in the same cases. That would have been a much more rapid solution for the banks and would have resulted in many more foreclosures. Now GMAC has to go back and basically file the entire case all over again, meaning they have to give notice of foreclosure to the borrower, engage the borrower in modification options, and basically run through the whole process from the beginning. They cannot use the shortcut solution, thanks to the class action suit filed. GMAC’s dismissal of every foreclosure in Maryland shows their doubts they would have won the class action.
The Consumer Protection Clinic at the U. of Maryland is a class taught by Peter Holland. Rather than just read and lecture about foreclosure fraud and consumer protection law, Holland has the class join motions, prepare cross-examinations and legitimately get involved in the cases. It reminds me of the class of Alan Dershowitz depicted in the film Reversal of Fortune, or the Medill Innocence Project investigating wrongful convictions at Northwestern. Given the national scope of foreclosure fraud, you can imagine classes like this springing up all over the country.
As I said, this doesn’t mean that GMAC cannot refile foreclosures in these cases. But they have to spend a lot of time and money to go back to the beginning and redo every case, and must adhere to Maryland law of allowing mediation. Maryland is a judicial foreclosure state which has produced some of the better rulings during this crisis. But we’re starting to see challenges even in non-judicial foreclosure states, like Massachusetts, where the Ibanez case has thrown every foreclosure in the state into turmoil. The rates of moving properties through foreclosure have dropped dramatically, in all 50 states, by an average of 50%. It just seems inevitable that lawyers in other states will follow the Maryland action and attempt to get everything which used a robo-signer thrown out.
And if the Ibanez case, which questions the right for banks to foreclose at all, can be broadly applied, those rates will drop even further. And Georgetown Law Professor Adam Levitin thinks may be the case.In Ibanez, the Massachusetts Supreme Judicial Court noted that PSA was insufficient to serve as an assignment of the loan because what was presented as the affiliated loan schedule:
“did not include property addresses, names of mortgagors, or any number that corresponds to the loan number or servicing number on the LaRace mortgage. Wells Fargo contends that a loan with the LaRace property’s zip code and city is the LaRace mortgage loan because the payment history and loan amount matches the LaRace loan.”
So how do other PSAs fare under the Ibanez metric? I’ve been looking at them, and it seems that there are lots of RMBS deals where the schedules in the PSAs are possibly insufficient to meet the Ibanez standard. And that means that there are lots of RMBS trusts that might not be able to successfully foreclose in Massachusetts or maybe in any other title theory state.
Read the whole post from Levitin for the explanation. Here’s a list of title theory states. There are about 30 of them, including the sand states of California, Arizona and Nevada. Jamie Dimon and his banker buddies may be saying in public that they aren’t worried about the consequences from future foreclosure fraud cases and repurchases, but in private, they must be going nuts over this.
World needs $100 trillion more credit, says World Economic Forum
by Emma Rowley - Telegraph
The world's expected economic growth will have to be supported by an extra $100 trillion (£63 trillion) in credit over the next decade, according to the World Economic Forum. This doubling of existing credit levels could be achieved without increasing the risk of a major crisis, said the report from the WEF ahead of its high-profile annual meeting in Davos.
But researchers warned that leaders must be wary of new credit "hotspots", where too much lending takes place, as the world emerges from a financial catastrophe blamed in large part "to the failure of the financial system to detect and constrain" these areas of unsustainable debt.
"Pockets of credit grew rapidly to excess – and brought the entire financial system to the brink of collapse," said the report, written in conjunction with consulting firm McKinsey. "Yet, credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential."
The global credit stock has already doubled in recent years, from $57 trillion to $109 trillion between 2000 and 2009, according to the report. The WEF said the continued demand for credit could be met "responsibly, sustainably – and with fewer crises". However, it cautioned that to achieve this goal, financial institutions, regulators, and policy makers need more robust indicators of unsustainable lending, risk, and credit shortages.
2011 Financial Meltdown Fast Approaching
by James West - Financial Sense
Despite the best efforts by the American mainstream financial media, the eager PR division of the United States Dollar Ponzi Scheme, to paint the rosiest of rosy pictures for blindly optimistic readers, the stubborn image of a debt-swollen jobless behemoth economy slowly toppling persists. No matter how much U.S. departmental data is primped, polished, and primed, no amount of lipstick is going to transform this fat pig into a princess.
This week's top harbinger headline points to the fact that the United States is once again bumping its fat head on the ceiling of its spectacularly stratospheric debt ceiling of $14.3 TRILLION dollars. That means an act of congress is once again necessary to lift that limit. The alternative is either a) a revaluation of the U.S. Dollar to reflect the depreciation inherent in Quantitative Sleazing as part of a debt restructuring, or b) default.
Default? Could It Be?
Never, according to bright-eyed Harvard educated economists and Forexperts."The likelihood of a restructuring of US sovereign debt is zero," says MF global currency and fixed income analyst Jessica Hoversen. "As for a downgrade, while it's theoretically possible, it is still extraordinarily unlikely."
Well that's one opinion.
The U.S. Is Smoking Crack
The rate at which U.S. debt is growing is well beyond what it could repay, even if the economy were to start growing at 10% per year. That's because the rate of U.S. debt growth in the last 3 years is well over that figure, and since 2002, the debt has more than doubled. This is the mathematical certainty that is assiduously kept out the press by accommodating editorial boards. Lets try to sift through the contradictory headlines and see if we can't discern something a little more reminiscent of reality.
First off, the United States Federal Reserve, apparently a private corporation whose self-declared mandate is to be "the central bank of the United States, that provides the nation with a safe, flexible, and stable monetary and financial system", has been "buying" Treasury bills, the source of U.S. monetary supply, at the rate of, on average, $75 Billion a month.
But that process has resulted in the Fed being exposed in no insignificant way to major losses from credit exposure. But Ben Bernanke, the Fed's embattled leader, suggested last week that the risks were minimal, because "if the liabilities on the Fed's balance sheet were to exceed its assets, it would only be so because of rising interest rates in the context of a thriving economy." Huh? What kind of pie-in-the-sky theoretical postulation is that?
According to a Reuters article earlier today:"..the Fed's newfangled policy steps and the potential for credit losses raises, for some experts, the prospect that the Treasury may actually be forced to 'recapitalize' the Fed — economist-speak for what others might call a bail-out."
Bottom line: The Fed, who capitalizes the treasury by buying treasury bills, now needs to be 'recapitalized' by the treasury, who will now write cheques to the Fed, so it can continue to write cheques to the Treasury. This is no oversimplification – this is reality.
The Fed is broke, and so is the Treasury. The ability of the Fed to 'stimulate' the economy in such a condition does not exist. If the only way to inject capital into the asset-stimulating portion of the economy is to encumber the current account of the same economy with an exponentially greater quantity of debt, the result can only be, at some point, default.
Somebody needs to stand up and admit that these two lines, debt growth and economic recovery, are permanently divergent, and the economist-generated stipulation that they can one day cross in a self-fulfilling prophetic law of delusional economic prophecy is preposterous. That is one of the events that is pushing the U.S. towards financial annihalation. That will be the primary catalyist in triggering the 2011 financial crisis.
China Is Smoking Opium
Even after the horrible catastrophe of the 2008 financial meltdown, exacerbated by opportunistic banks attacking each other in a global cartel-induced moment of weakness, China emerged as the economic juggernaut that was indestructible. Why, even for 2011, the International Monetary Fund pegs China's growth at 10.5%.
But just as the U.S. puffs and puffs away at its crack pipe burning U.S. dollars, the drug of choice and path to ruin for the United States economy, so China deeply inhales at regular intervals its own pipe carved from jade and stuffed full of smouldering yuan. In fact, China is so confident in the unassailable virtue of its centralist and therefore free-of-political-interference monetary policy that it positions itself increasingly as global economic grandfather. It generously subscribes to the debt auctions of economically hobbled nations like Greece and Portugal, Ireland and Spain, while doling out paternal advice and admonishments to the U.S. and Europe.
But just how sound is China's future? No at all sound, if Mark Harte of Corriente Advisors in the United States is to be believed. He is the American hedge fund manager who made millions predicting the sub-prime crisis and the European sovereign debt crisis. His new fund is betting that China's economic machine may be showing signs of seizing up, and he's definitely not alone.
Last week, Lombard Street Research put out a note warning of China's "already dangerously home-grown inflation". Corriente Advisors stated,"We expect the economic fallout from a slowdown of China's unsustainable levels of credit and growth to be as extraordinary as China's economic outperformance over the past decade."
Whole cities are vacant in areas of China, built on credit that has yet to be repaid, and in the expectation that the massive migration of rural residents to gleaming new cities would continue. But house prices remain out-of-reach for most Chinese, averaging 22 times disposable income in Beijing alone. According to one analyst, Chinese banks have lent US$1.7 trillion to local state entities that are not themselves commercially viable, and who have use inflated land and real estate values as collateral.
Sound familiar? These are the exact conditions that existed in the United States real estate market just before the bubble burst in 2008. If China growth were to slow to just 5%, commodity prices for coal, copper, steel and cement would plummet by as much as 20%, according to one study.
Gold is now under fresh assault by the biggest banks who successfully lobbied for the defeat of position limits in both the gold and silver derivative markets. Now free to build up the huge short positions against gold and silver that have to date been the source of most of the negative pressure on those monetary metals' prices since 2000, the prices of both have descended to new monthly lows.
Dow's Doubters Say Market Is on Borrowed Time
by Jonathan Cheng - Wall Street Journal
As U.S. stocks notched their seventh winning week in a row on Friday, unease was growing among some investors and analysts who study the market's patterns to predict where it is going next. The Standard & Poor's 500-stock index hasn't seen such a long stretch of weekly gains in nearly four years. For the Dow Jones Industrial Average, it has been nine months. The latest leg of the rally has vaulted the S&P 500 8.7% higher, while the Dow is just 213 points below 12000—and up 78% from its financial-crisis low in March 2009.
The seven-week surge is a sign that many investors are betting that the crisis is basically over. Fears of a double-dip recession have faded, the Federal Reserve is gorging on Treasury securities, and paychecks were helped by the tax-cut extension passed by Congress in December. Companies on the whole have turned in strong earnings; Friday's gains were fueled by an unexpectedly big profit jump at J.P. Morgan Chase.
Yet some technical analysts who've crunched the same numbers and eyeballed their charts conclude that the overall market has gone too far. Despite all the good news, they worry too many investors are shrugging off the latest debt scare in Europe, rising global interest rates and worries about a potential meltdown in the municipal-bond market. Another trigger could come from the latest earnings season, now in full swing. Some are concerned that heightened expectations could leave investors open to disappointment about companies' views about their future business prospects, triggering a broader decline.
The market is rallying "as if propelled by some mysterious force," says Mark Arbeter, the lead technical analyst for Standard & Poor's, who reckons the market is showing signs of fatigue for the first time in nine months. A stumble could claw back about half of the S&P 500's four-month, 23% rally, he says. Mr. Arbeter and other analysts point to several technical indicators that portend the return of gravity to the market. In many respects, they say, the recent run-up bears many of the same hallmarks as the market did last March and April. That was the last time the Dow had a seven-week rally. But the jaunt came to a screeching halt because of the onset of renewed worries about Greece's debt woes and the May 6 "flash crash."
One widely circulated observation last week noted that the S&P 500 hasn't closed below its 10-day moving average in more than 30 trading sessions. The moving average softens out volatile daily market movements and is used by analysts and strategists to judge momentum and emerging trends.
Chris Verrone, head of technical analysis at Strategas Research Partners, counts only about a dozen similar instances in the past six decades. The most recent until now: a 42-session streak that ended with the Greek debt crisis last April. The S&P 500 then slid 8.8% in just two weeks. Mr. Verrone fears a repeat this time around, pointing to a host of other "leading indicators" that have reversed course recently, including the Australian dollar and Indian stocks. Their record-setting gains have leveled off. "When all these start to align, it's a sign that the rally is getting long in the tooth," Mr. Verrone says, predicting a short-term correction of 5% or 6% before the market resumes its bull run. "We're on borrowed time."
Skeptics also complain that the stock market's roll has been generally unremarkable on a daily basis. Since Nov. 30, the daily trading range of the S&P 500 has been just 0.76%, the narrowest since May 2007. No single day has seen a decline of more than 0.6%. The lack of big, triple-digit-gain days for the Dow could mean that many investors aren't overly confident.
Meanwhile, trading volumes on the New York Stock Exchange remain relatively low. Since late November, volumes have reached last year's daily average just 10 times in 34 sessions. Even the optimism of investors—and their complacency about the market's current run—are sell signals, according to some technical analysts. The Chicago Board Options Exchange's Volatility Index, the "fear gauge" known as the VIX, closed on Friday at 15.46, lower than in April and near its lowest level in three years. The VIX has fallen 34.3% since the beginning of the rally in late November.
The American Association of Individual Investors' weekly survey has registered above-average bullishness for 19 straight weeks, the longest such stretch since 2004. For years, some investors have looked to the AAII survey as a compelling contrarian signal. An ebullient reading often is a clue that the market is due for a fall.
The VIX can be a contrary indicator, too, reflecting the prices investors are willing to pay for portfolio insurance on the S&P 500. The VIX tends to drop when stocks rise and investors grow less anxious. The last two times the VIX was trading around these levels, the market headed for a tumble—once in April during the Greek debt crisis, and before that in the fall of 2007, just ahead of the subprime crisis woes.
"The ultimate high tick [on the stock market] usually comes when hardly anyone cares, and our client base is the least engaged in the market as I've ever seen," says Christopher W. Dieterich, technical trading strategist at FBN Securities. "They're monitoring it, but they don't seem to be terribly involved. That's usually how a top feels."
But even if the market is stretched based on some historically compelling measurements, it could keep barreling higher. Many analysts still consider stock valuations to be trading at relatively low levels. And with fourth-quarter earnings off to a positive start, market strategists are confident that American corporations will continue to surprise investors with their resilience. Jeffrey Rubin, head of research at Birinyi Associates, isn't concerned about overexuberance in the market yet, citing the S&P 500's 50-day moving average. For 94 consecutive trading sessions, the S&P 500 has exceeded its 50-day moving average, the first time such a string has happened in five years.
That would typically be a negative signal, as Mr. Rubin acknowledges. However, according to his calculations, the S&P 500 has managed to tack on an average of 3.5% in the three months that follow such long runs. "We are not at extreme levels," he says. "The market has the ability to go higher."
New Debt Crisis Striking RIGHT NOW!
by Martin Weiss - Money and Markets
Martin here with an urgent update on the new debt crisis we’ve been warning you about so persistently day after day — the collapse of the tax-free bond market.
This crisis is no longer something you hear about strictly from us and a handful of others; it has now burst into the headlines with the sweeping force of a giant tsunami.
This crisis is no longer just a forecast. It’s happening right now — and it’s accelerating.
And even if you’ve never owned muni bonds in your life, their demise is absolutely not something you can ignore. Here’s why …
FIRST and foremost, every state and local government in the United States is directly impacted, whether financially weak or strong.
Look at the chart above. That’s the muni bond ETF — the S&P National AMT-Free Municipal Bond Fund (MUB). It holds major bellwether tax-free issues, such as the State of California, the North Texas Thruway Authority, and the Puerto Rico Sale Tax Financing Corporation. Nevertheless, it is suffering one of the worst price crashes in the history of municipal bonds.
Lesser municipal bonds, especially the tens of thousands that are issued by unrated local authorities, are not only sinking more dramatically … they’re almost impossible to sell due to the sheer lack of buyers.
And regardless of ratings, ALL state and local governments are now being forced to pay sharply higher borrowing costs. As the
Wall Street Journal explained late last week …“With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. …
“[Last week] A New Jersey agency was forced to cut the size of a bond issue by about 40 percent because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil.”
SECOND, other government bonds are also vulnerable to the fear contagion!
Investors are naturally asking: If America’s biggest cities and states are in such deep trouble, what about Fannie Mae and Freddie Mac? What about the U.S. Treasury?
Indeed, if you map out the world of government debts — both local and federal — you’ll see, quite vividly, how vulnerable they are to contagion …
The muni bond market is $2.9 trillion and already collapsing.
The market for U.S. government agencies — including Fannie Mae and Freddie Mac — is $7.6 trillion … and more than half of it would already be dead if not for massive bailouts with taxpayer funds.
Foreign sovereign debts outstanding are over $25 trillion, with a growing list of countries either on the brink of bankruptcy or on a collision course with future financial ruin.
Even the fundamental quality of U.S. Treasury debts, totaling $9 trillion, is now being openly questioned.
In the past, this was something you heard exclusively from long-time Jeremiahs and deficit hawks. Now, however, you’re hearing louder warnings from many more voices — even Pollyanna rating agencies like Standard & Poor’s and Moody’s, which just issued a whole new round of warnings about the U.S. government’s triple-A rating.
Needless to say, not all local and federal government debts are shaky. But you’d be very hard-pressed to argue that municipal bonds are an “isolated disaster zone.”
Quite the contrary, as I’ve just shown, every other major category of government debt is vulnerable to the fear contagion.
Nor would it be accurate to say that this new debt disaster is just “a canary in the coal mine that may or may not explode someday.”
We’re already far beyond that preliminary stage, with up to 100 major cities and states that could default on their debts this year. Thousands of smaller issuers are in even worse shape.
THIRD, the crisis is already impacting the U.S. economy.
Despite pockets of strength, the Main Street recovery is bogged down in most major regions — because of massive cutbacks by state and local governments.
Similarly, on the unemployment front, despite widespread predictions of improvement, the most recent jobs data has also been disappointing — again, because of the massive layoffs by state and local governments.
In California, Gov. Jerry Brown is set to propose that local redevelopment agencies be eliminated; that social service benefits, shrunk; parks, shuttered; Medi-Cal plans, greatly reduced.
In Indiana, Gov. Mitch Daniels will slash higher education spending and eliminate some Medicaid services.
New Mexico is so desperate for cash, it’s finding a way to grab money from its untouchable “Permanent Fund” — money the state’s constitution requires NEVER be spent.
In Idaho, after two years of painful spending cuts, officials are now saying they’ve run out of debt solutions. There are simply no more savings or stimulus funds to rely on.
Nevada is already delinquent on millions in payments to school districts, and nobody has any idea when — or if —those payments will ever be made. School superintendents are now warning that the entire educational system is in danger of collapse.
Illinois is cutting massively, but is still up to six months behind on its payments to contractors and service providers — a de-facto default of another kind.
Texas legislators are making plans to cancel road projects … drastically reduce health services for the indigent … revamp county and municipal jail standards … eliminate red-light cameras … and much more.
In New York, Gov. Andrew Cuomo declared the state in crisis last Wednesday, proposing to freeze state workers’ wages for one year and trim 600 state agencies, including Medicaid.
The list goes on and on. In sum …
The Day of Reckoning is here, NOW!
This crisis is real. There’s no delaying it — no papering it over with phony-baloney accounting tricks.
Moreover, it’s only a matter of time until news of the first defaults explodes into the headlines — and then, it could be too late for you to protect your wealth.
Big banks running an oligopoly, says Virgin Money chief
by Harry Wilson - Telegraph
Britain’s banks were accused of running an "oligopoly" by the chief executive of Virgin Money, as she said the market for retail banking could benefit from the break up of the country’s largest lenders. Jayne-Anne Gadhia, chief executive of Virgin Money, told a meeting of the Treasury Select Committee that the UK’s five biggest lenders had an "effective oligopoly" and said more needed to be done to improve competition. "The consumer has not got much of a look in. The problem is that effectively with the oligopoly it was very difficult to get scale," said Ms Gadhia.
Under repeated questioning from the MPs, Ms Gadhia declined to call for the forced separation of banks, but admitted that some form of break-up of the branch networks of the largest lenders could be good for customers. The hearings also marked the first public appearance of Santander UK’s new chief executive, Ana Patricia Botín, who took over the running of the bank last month.
Ms Botín's appointment made her the first female chief executive of a major UK bank, and in her testimony to the Committee she gave a bullish outlook for her business, describing Santander as a "challenger" bank.
Asked about Santander’s poor customer services scores, Ms Botín said the bank had work to do and had hired 1,000 new staff to help it handle customer complaints. She said she expected the bank would in time be able to deal with all complaints within 48 hours.
The issue of bonuses did not dominate today’s hearings in the same way that it did last week’s questioning of Barclays chief executive Bob Diamond . Ms Botín said she had been paid €1.78m (£1.5m) last year in her job as chief executive of Spanish bank Banesto, but said Santander did not pay large bonuses to its staff.
Pension pledges have left UK and US 'insolvent'
by Philip Aldrick - Telegraph
The world's most advanced economies, including Britain and the US, would be insolvent if they accounted properly for the pension and health pledges made to their aging populations, an authoritative report has warned. More painful austerity measures, of higher taxes and further spending cuts, will be necessary in the years ahead "to cover the gap between expected future liabilities and expected future income", the World Economic Forum said in its Global Risks 2011 report.
"Age-related liabilities dwarf short-term issues such as the cost of fiscal stimulus [in the recession]," the report added. It estimated that the undisclosed cost of age-related spending in the UK is roughly 3.5 times the size of the UK economy – or around £5 trillion. Daniel Hofmann, chief economist at Zurich Financial Services and a co-author of the report, said: "Under a proper accounting framework, most advanced economies would be fiscally insolvent... In the absence of far-reaching structural corrections, there will be a high risk of sovereign defaults."
The UK economy is "close to unsustainable", he said, due to its mix of high public debt and deficit. The US finances, though, would already be "no longer sustainable" were the dollar not the world's reserve currency, he added. Christian Mumenthaler, chief marketing officer at Swiss Re and a co-author, said cultural changes would be necessary. People will have to work longer, pay more towards age-related care and receive less in old age. In the European Union, 16pc of the population is currently above 65. Within 40 years, it will be 28pc, he added.
Pressures on governments come just as "the world is in no position to face major, new shocks", the report warned. "The financial crisis has reduced global economic resilience." One of the world's most pressing concerns is income and wealth inequality, the Forum said ahead of its annual meeting in the Swiss ski resort of Davos. "The benefits of globalisation seem disproportionately spread – a minority have harvested a disproportionate amount of the fruits... There is evidence of economic disparity within countries growing," the report said.
"There are signs of resurgent nationalism and populism as well as social fragmentation." Water, food and energy security is identified as another major risk. "Both population growth and increasing meat consumption will have a tremendous impact on resource needs," the report said. Demand for food is expected to leap 50pc by 2030, by 30pc for water, and by 40pc for energy.
The myth of 'American exceptionalism' implodes
by Richard Wolff - Guardian
Until the 1970s, US capitalism shared its spoils with American workers. But since 2008, it has made them pay for its failures
One aspect of "American exceptionalism" was always economic. US workers, so the story went, enjoyed a rising level of real wages that afforded their families a rising standard of living. Ever harder work paid off in rising consumption. The rich got richer faster than the middle and poor, but almost no one got poorer. Nearly all citizens felt "middle class". A profitable US capitalism kept running ahead of labour supply. So, it kept raising wages to attract waves of immigration and to retain employees, across the 19th century until the 1970s.
Then everything changed. Real wages stopped rising, as US capitalists redirected their investments to produce and employ abroad, while replacing millions of workers in the US with computers. The US women's liberation moved millions of US adult women to seek paid employment. US capitalism no longer faced a shortage of labour.
US employers took advantage of the changed situation: they stopped raising wages. When basic labour scarcity became labour excess, not only real wages, but eventually benefits, too, would stop rising. Over the last 30 years, the vast majority of US workers have, in fact, gotten poorer, when you sum up flat real wages, reduced benefits (pensions, medical insurance, etc), reduced public services and raised tax burdens. In economic terms, American "exceptionalism" began to die in the 1970s.
The rich, however, have got much richer since the 1970s, as every measure of US income and wealth inequality attests. The explanation is simple: while workers' average real wages stayed flat, their productivity rose (the goods and services that an average hour's labour provided to employers). More and better machines (including computers), better education, and harder and faster labour effort raised productivity since the 1970s.
While workers delivered more and more value to employers, those employers paid workers no more. The employers reaped all the benefits of rising productivity: rising profits, rising salaries and bonuses to managers, rising dividends to shareholders, and rising payments to the professionals who serve employers (lawyers, architects, consultants, etc).
Since the 1970s, most US workers postponed facing up to what capitalism had come to mean for them. They sent more family members to do more hours of paid labour, and they borrowed huge amounts. By exhausting themselves, stressing family life to the breaking point in many households, and by taking on unsustainable levels of debt, the US working class delayed the end of American exceptionalism – until the global crisis hit in 2007. By then, their buying power could no longer grow: rising unemployment kept wages flat, no more hours of work, nor more borrowing, were possible.
Reckoning time had arrived. A US capitalism built on expanding mass consumption lost its foundation. The richest 10-15% – those cashing in on employers' good fortune from no longer-rising wages – helped bring on the crisis by speculating wildly and unsuccessfully in all sorts of new financial instruments (asset-backed securities, credit default swaps, etc). The richest also contributed to the crisis by using their money to shift US politics to the right, rendering government regulation and oversight inadequate to anticipate or moderate the crisis or even to react properly once it hit.
Indeed, the rich have so far been able to use the crisis to widen still further the gulf separating themselves from the rest, to finally bury American exceptionalism. First, they utilised both parties' dependence on their financial support to make sure there would be no mass federal hiring programme for the unemployed (as FDR used between 1934 and 1940). The absence of such a programme guaranteed that real wages would not rise and, with job benefits, would likely fall – as they indeed have done. Second, the rich made sure that the prime focus of government response to the crisis would benefit banks, large corporations and the stock markets. These have more or less "recovered".
Third, the current drive for government budget austerity – especially focused on the 50 states and the thousands of municipalities – forces the mass of people to pick up the costs for the government's unjustly imbalanced response to the crisis. The trillions spent to save the banks and selected other corporations (AIG, GM, Fannie Mae, Freddie Mac, etc) were mostly borrowed because the government dared not tax the corporations and the richest citizens to raise the needed rescue funds.
Indeed, a good part of what the government borrowed came precisely from those funds left in the hands of corporations and the rich, because they had not been taxed to overcome the crisis. With sharply enlarged debts, all levels of government face the pressure of needing to take too much from current tax revenues to pay interest on debts, leaving too little to sustain public services. So, they demand the people pay more taxes and suffer reduced public services, so that government can reduce its debt burden.
For example, California's new governor proposes to continue for five more years the massive, broad-based tax increases begun during the crisis and also to cut state services for the poor (reduced Medicaid funding) and the middle class(reduced budgets for community colleges, state colleges, and the university system). The governor admits that California's budget faces sky-high interest costs and reduced federal government assistance just when the crisis increases demands for public services.
The governor does not admit his fear to tax the state's huge corporate and private individual wealth. So, he announces an "austerity programme", as if no alternative existed. Indeed, a major support for austerity comes from the large corporations and wealthiest Californians, who hold the state's bonds and want reassurances that the interest on those bonds will be paid.
California's austerity programme parallels similar programmes in many other states, in thousands of municipalities, and at the federal level (for example, social security). Together, they reinforce falling real wages, falling benefits, falling government services and rising taxes. In the US, capitalism has stopped "delivering the goods", as it so long boasted. The reality of ever-deeper economic division clashes with expectations built up when wages rose over the century before the 1970s. US capitalism now brings long-term painful decline for its working class, the end of "American exceptionalism" and rising social, cultural and political tensions.
A Word of Advice to Financial Authorities
by Bill Bonner - Daily Reckoning
Markets were closed in the USA [Monday]. But the world didn't stop turning. And we didn't stop reckoning with it.
What we are reckoning with is the breakdown so big hardly anyone notices it. The model of a political economy set up in response to the industrial revolution is now worn out. Exhausted. Headed for the trash heap of history.
We're not in the habit of giving advice here in The Daily Reckoning. Sure, we warned readers about the biggest threats to their finances in 30 years - the bubbles in tech stocks and then in housing. And sure, we urged them to buy what turned out to be the best investment they could have made - gold.
And yes, we criticized governments for doing all the wrong things. But urging them to do the right things would be both futile and earnest. Futility doesn't bother us. But we can't stand earnestness. Left unchecked it leads right to world improvement...and thence to Hell.
Still, in the spirit of civic betterment, today exceptionally, we offer a bit of advice to financial authorities all over the world. In a word:
When you have more debt than you can pay, it is always best to own up...default...hang your head...say you're sorry...promise not to do it again..and go about your business. And do it as soon as possible.
Whence cometh this august advice? From the pages of history - recent...and not so recent.
In the second half of the 19th century, the Arab states borrowed heavily from Europeans. The Ottoman Empire was an anachronism. The modern state had already been developed by Napoleon and Bismarck. Meanwhile, in America, the War Between the States sealed the fate of the founding fathers' republic. The limited government of Jefferson became the runaway military government of Lincoln...and later the all- powerful social welfare state of Franklin Roosevelt.
Back in the Old World, in the 19th century, modern technology gave Europeans a huge advantage over their neighbors. The Ottomans - who governed from the Balkans to Morocco - were being left behind. Their economies were less productive, so they lacked the tax base needed to sustain modern armies. So, they brought in European entrepreneurs and European capital to build railroads, canals and other improvements.
Then, as now, declining economies were supported by more dynamic ones.
"China's lending hits new heights," says a headline at The Financial Times today. China has the most dynamic economy in the world...with $2.8 trillion in reserves, most of it in dollars. It is lending money all over the world. It is America's biggest creditor. And now it is helping wobbly European nations go deeper into debt too.
Foreign money comes at a cost. When the Ottomans couldn't pay, they tried austerity...and then borrowed more. The natives grew restless under the austerity measures. The debt grew larger too...as more and more money was needed to support previous borrowing.
Soon, there was no way out. Backed by better armies, the Europeans foreclosed. France's general Bugeaud laid waste to Algeria's fertile plains. Later, France found a pretext to invade Tunisia. Italy took Libya. Britain invaded Egypt. Soon, Europeans were in control of all of North Africa...and much of the Levant.
Lesson # 1 - don't borrow from foreigners.
Lesson #2 - if you get into trouble, don't borrow more from the foreigners. Default.
And we return to our theme...
Next, it was the Europeans' turn to be the borrowers. They got into a nasty, pointless war in 1914. The French borrowed from the English. The English borrowed from the Americans. The Germans couldn't borrow, so they printed money.
Then, when the war was over...everybody waited to get paid. The Americans waited for the English to pay. The English waited for the French. And the French waited for the Germans. The Huns were supposed to pay reparations, but they were broke...so they printed more money. In the end, after many disasters, no one got paid...neither the Americans, nor the English, nor the French. Instead, they all suffered a worldwide depression and then another worldwide war.
Same lessons: if you can't pay; don't try; don't pretend. Default.
And now the European states are in debt again. Not because of war, because of the social welfare system...aging populations...and bank debt. They cannot pay. So they try austerity measures and borrow more. The Chinese and Japanese are the latest benefactors.
In the US...the problem is similar. The government runs at a loss. Debt mounts up. The states implement austerity efforts; they have no choice. The central government, like Germany, prints money.
Now, both America and Europe are the Old World. Their social welfare model is failing. It was developed as a response to the needs of the nation state in the early days of the industrial revolution. It was suited to an era with expanding populations, fast-growing wealth, large pools of factory labor and almost unlimited resources. Governments needed to keep the urban masses under control. It was no good to provide them with security, insist that they obey the laws, and let it go at that.
The politician that promised only a dollar's worth of benefit for a dollar's worth of taxes was soon replaced by one who promised to give back $1.20...or $1.50. In theory, this made perfect sense. Once government became recognized as the servant of the people, rather than their master, the people had a right to get their moneys' worth.
And then, why would anyone willingly submit to the authority of a government if it delivered no more than the citizen could get on his own? Why allow yourself to be forced to pay into the government's social security program, for example, if it paid out no better than a private plan? Or, if the government's health care system delivers no more or better service than you can get from private plans, what's the point?
The promise of government's social welfare projects was that they would take money from the few rich and the many as yet unborn in order to give it to poor and middle class voters. That is, voters thought they could get something for nothing. And, for a very long time, governments could deliver. They simply relied on the next wealthier, larger generation to make good on promises made to the previous one.
It worked for 150 years. But now the next generations are often smaller. And maybe poorer. The old live longer. And there are more of them. The rich are too few to pay the bills. The rate of growth has slowed down. The return on additional inputs of debt have turned negative, while trillions in unpaid debt and commitments comes due.
Again, governments in the Old World have borrowed and promised too much. But rather than default honestly and openly, (forcing the people who lent imprudently to take the losses) they try to put the burden of the losses onto the innocent citizen...and the unenlightened investor.
He will pay higher taxes. He will get less in services. His money...his savings...his pension - all will be devalued by inflation. If he has stocks...they too will likely be sold off in the financial crises to come.
But let's look at another, more recent example. Iceland.
You may remember, two years ago Iceland was a mess. Its banks had borrowed, lent, and speculated recklessly. Iceland's feds squirmed and winced. At first, the government decided it would do what Ireland was doing. It would rescue the banks...that is, it would bail out the banks' lenders with public funds.
But when the public caught on to what was going on, a referendum was held. Voters rejected the bailout as if they were voting against sin itself. More than 90% of voters cast ballots against a taxpayer bailout. We were impressed. We wrote about it. The "Patsy Revolt of 2009" we called it.
Unable to stick the voters with the losses, the government left the banks to default.
Was this the end of the world? Did Iceland slip below the North Atlantic waves...joining the Titanic on the chilly, dark bottom of the sea? Did commerce break down? Did the Icelandic money become worthless? Was this the "end of time"...the apocalypse forecast in the Bible?
"Iceland is doing better than anyone could have hoped," reports Bloomberg. Inflation fell from 18% down to 5% last year. The cost of insuring Icelandic debt fell to less than a third of the price in early 2009. Unemployment is barely 6%.
"Thanks to its rescue plan," says the IMF, "the recession in Iceland has been less deep than expected and not worse than in the other countries deeply affected."
How did they achieve this? Are the Icelanders smarter than the Europeans?
Not exactly. They tried the typical dead-end solution. The trouble was, no one would lend Iceland more money. And once the public revolted, after realizing that it would be left holding the bag, the Icelandic feds had no choice. They had exhausted all the bad ideas. They were forced to go with a good one.
The foreign debt was consolidated into a few banks...which then went broke. The remaining banks were left intact, ready to keep the country's financial machinery in business.
Lesson learned: got too much debt? Default quickly. Make it clean. Make it fast. Make it work.
There. That's all the advice we're going to give today. Any European or American government that would like more details could contact us on our mobile phone...if we had one.
SEC faces budget crackdown
by Tom Braithwaite and Kara Scannell - Financial Times
The US Securities and Exchange Commission is facing a budget squeeze from the Republican-controlled House of Representatives, which officials say is hampering efforts to improve its enforcement division. Scott Garrett, a Republican from New Jersey who chairs the subcommittee overseeing the SEC and also sits on the budget committee, said that he was not in favour of granting the regulator the big budget increase that it – and leading Democrats – say is necessary to fulfil its expanded duties and to invest in extra staff and on new technology.
"We’re going to say the federal budget is under a time of constraint, so everybody is being asked to cut back," he told the Financial Times. "The whole House has been asked to cut back by 5 per cent." SEC officials said that without investment in technology, the agency could not deal better with market issues such as last May’s "flash crash" or improve the enforcement division that missed the Madoff multibillion-dollar fraud.
Enforcement officials have postponed taking testimony in some probes because of budget constraints restricting travel they said. Congress last month failed to agree a 2011 budget and is funding the government through short-term "continuing resolutions", which have frozen SEC funding at its 2010 level of $1bn. The Dodd-Frank financial reform act authorised Congress to double the SEC’s budget by 2015.
Congressional Democrats have been pushing for a 12-18 per cent increase in the SEC’s budget and have accused Republicans of trying to derail Dodd-Frank. Mary Schapiro, chairwoman, said she needed 800 more staff to write and police new rules, including on derivatives, risk management and investor protection. Meanwhile, due to the funding shortfall, SEC officials cannot replace most employees who leave. Offers to carry out external recruitment have now been frozen unless they are approved by Ms Schapiro’s office, officials say.
Lawmakers next need to address the budget before the end of March, but Mr Garrett said the staffing issue was a false argument as the SEC would not be able to hire staff in time to help with Dodd-Frank, given the July deadline for many rules. Congressional Democrats believe that they might be able to inject a budget increase into a continuing resolution because Republicans will be afraid of accusations of doing Wall Street’s bidding by defunding the agencies.
Cash restraints curb SEC inquiries
by Kara Scannell - Financial Times
US securities regulators say they are failing to follow up on tips about potential wrongdoing and postponing examinations of money managers and brokers who are far from their offices because of a worsening budget shortfall. The budget squeeze followed a congressional stalemate on funding last year. Now, as House Republicans threaten to cut the Securities and Exchange Commission budget, officials warn that their oversight responsibilities will be stretched thinner and the regulator’s enforcement of securities laws may be threatened.
The SEC said the funding squeeze was "having a significant impact" on its core job even before the addition of new responsibilities to oversee hedge funds, credit rating agencies and exotic derivative products. It said things would "only get worse the longer we operate under the budget shortfall". Funding constraints have forced enforcement lawyers to ask some potential defendants to travel to the SEC offices for interviews. When the defence has objected, the SEC has resorted to taking testimony over the phone or postponed the deposition. There are also insufficient investigators to follow up on some complaints
In some cases, the SEC reduced the number of staff members who could participate in an interview even when it could benefit the probe if others, such as accountants, were involved. They also delayed at least one investigative overseas trip for several weeks because of the budget, another official said. The agency touted its creation of specialised units to get ahead of potentially disruptive market areas, focusing on structured products and hedge fund advisers. Some specific positions planned for those units, such as industry experts, will no longer be filled, officials said.
Examiners, who are often the first line of defence against fraud, are not allowed to travel to inspect investment advisers or brokers outside their local area, leaving potentially hundreds of money managers without oversight, officials said. The lack of "troops hurts the programme", said Stephen Crimmins, a former SEC enforcement lawyer, about the budget restrictions. "To have strong capital markets we need to have clean capital markets and for that you need to pay the people who take care of the machinery," he said. He said investor confidence eroded when the public perception was that the SEC did not have a handle on the markets it regulated and complex cases were not pursued. "If the enforcement division had the resources it needed it would be able to do a lot more of the labour intensive cases," Mr Crimmins said.
The cuts are affecting the SEC beyond enforcement. It is receiving more market data than before but does not have the money to buy computer software or hire employees to analyse the information, officials said. Under the continuing funding resolution, officials cannot replace every employee who leaves the agency with a new recruit. Managers need to rank each potential recruit on a scale of importance and justify why the position is essential.
The SEC has said it would need to move staff from current assignments to fill new positions required under Dodd-Frank, including a new office for whistleblower complaints and regulating credit rating firms. The New York office, a hub with oversight of hedge fund managers and Wall Street firms, has been operating without a head of information technology, an official said. Given the importance of that position, officials hope that it will be filled.
The same office intended to hire someone to be head of market intelligence, a new position, to field tips and complaints and work with the main office based in Washington. That plan has been scrapped and the responsibilities will be parcelled out to existing staff, the official said. Officials said they were making do with what they had but if House lawmakers reduce the agency’s budget the cuts will begin to be felt more deeply and could derail investigations. The enforcement division has suspended an effort to create a forensics laboratory that it hoped would recreate data from computer hard drives, BlackBerrys and other devices.
SEC may review asset-backed securities standard
by Sarah N. Lynch and Rachelle Younglai - Reuters
U.S. regulators are mulling rules requiring asset-backed securities issuers to conduct a more thorough review of underlying assets to better inform investors, according to a person familiar with the matter. The Securities and Exchange Commission is set to adopt new rules on Thursday designed to make sure investors know the quality of the assets after those linked to toxic mortgages led the United States into a deep financial crisis. The rules were required under the Dodd-Frank Wall Street reform law.
The SEC had proposed rules in October requiring banks and other asset-backed securities issuers to review underlying assets and publicly disclose the findings of the review. But the rules did not have a minimum standard of review, an issue that raised concerns for Commissioner Luis Aguilar, a Democrat. A draft of the final rule now includes a minimum standard requiring issuers to do an appropriate and reasonable review to ensure information is accurate, according to the source, who spoke anonymously because the rule has not been made public. The person stressed the rule could still be changed before commissioners decide to adopt it.
A "reasonable review" could entail making sure the reviewer has the proper background and qualifications. It could also mean ensuring the person has actually looked at a large enough sample of the assets underlying the complex securities. When the SEC first proposed the rule, Aguilar, as well as Chairman Mary Schapiro and Democratic Commissioner Elisse Walter, questioned whether it should include a standard.
"It appears to me that this rule is essentially an endorsement of the 'anything goes' approach of the past," Aguilar said at the time before voting against the proposal. Walter voted to propose the rule, but had concerns it did not provide a clearer review standard. "I understand that there are various levels and types of reviews that may be performed in a securitization," she said then. "Yet, what is not clear to me is what level or type of review will, in fact, be performed if our rules do not require any standard for that review."
SEC Keeping Close Tabs on BofA's Wikileaks Situation
by Charlie Gasparino - FOX
The Securities and Exchange Commission is keeping a close eye on Bank of America’s Wikileaks dilemma to determine whether anything that the info-leaking website might release should have already been turned over to regulators who have conducted numerous investigations into the bank’s activities, FOX Business Network has learned.
Wikileaks founder Julian Assange who has stirred up controversy releasing confidential documents and emails on government activities, has recently stated that he has a large batch of confidential documents that could lead to problems for a major bank, and in at least one interview he has identified that bank to be BofA. People at Bank of America are treating the possibility of a Wikileak document dump seriously; as first reported by FOX Business, the nation’s largest bank has set up a war room and assembled a S.W.A.T. team of lawyers and company officials to deal with the matter if it should arise.
The SEC, Wall Street’s top cop, is treating the matter seriously as well, FOX Business has learned. If and when the document dump occurs, senior SEC officials will be examining the material to determine if BofA failed to include the emails and other documents in demands for information the commission has made as part of its many investigations into BofA activities.
Bank of America has been the subject of several high-profile probes by the commission, including issues surrounding its CountryWide Financial subsidiary, and its ill-fated purchase of Merrill Lynch during the dark days of the financial crisis in 2008. CountryWide, which was the largest issuer of so-called subprime mortgages, has been accused of issuing mortgages to people with little if any documentation of work history or means to repay the loans.
If BofA purposely failed to turn over documents involving an investigation, the bank could face possible criminal charges of obstructing justice. So far, BofA has said that despite all the talk about it being a target, it has no evidence that Assange’s organization has documents involving the bank.
Citigroup 46% Gain Masks Flawed Mortgages Freddie Mac Calls Not Acceptable
by Bob Ivry and Bradley Keoun - Bloomberg
As Vikram Pandit celebrates his first full-year profit as head of Citigroup Inc., an old nemesis clouds the bank’s future: defective mortgages.
Three years after bad home loans helped trigger the recession and six weeks after the government cashed in the last of its $45 billion Citigroup investment, the New York-based bank is still selling mortgages that violate quality standards, according to an internal Freddie Mac review obtained by Bloomberg.
Fifteen percent of the performing loans Citigroup sold to the government-owned mortgage-finance company in the second half of 2009 and the first half of 2010 had such flaws as missing appraisals or insurance documents or income miscalculations, according to the review of 375 mortgages. The target for defects should be about 5 percent, said Tim Rood, a former executive with Freddie’s sister agency, Fannie Mae, and now managing director at Washington-based advisory firm Collingwood Group LLC.
Pandit, Citigroup’s chief executive officer since December 2007, faces $100 million in payouts on the loans if customers demand refunds for mortgages that stop paying, according to Paul J. Miller of FBR Capital Markets in Arlington, Virginia. Miller based his estimate on the numbers in the Freddie Mac memo. Underwriting gaps that led to failed mortgages contributed to $83.7 billion in credit losses since 2007 for Citigroup and to the government takeover of the mortgage-finance business.
"What you hear from the banks is it’s overwhelmingly mortgages that were originated in ‘05, ‘06, ‘07 and a bit into ’08 that are getting put back to the banks," said Chris Kotowski, an analyst for New York-based Oppenheimer & Co. "In 2010, if Freddie still finds 15 percent of performing mortgages had flaws, that’s a surprising statistic. I assume thoughtful investors will be surprised."
Payouts totaling $100 million would represent about a third of a cent per share for the bank. Freddie Mac’s findings suggest "that Citigroup is having significant problems with internal systems and controls" in its mortgage pipeline, said Christopher Whalen of Torrance, California-based Institutional Risk Analytics.
Sanjiv Das, New York-based chief executive officer of CitiMortgage Inc., the Citigroup unit that originates loans and buys them from smaller lenders, declined to comment on the Freddie Mac findings. He said the bank’s own quality control reviews show an improvement in underwriting that "is one of the most outstanding stories in our business." Freddie Mac has no published standard for defect levels. "My own information based on our defect rates tells me we are doing a fantastic job," Das said.
Citigroup’s net income in the fourth quarter was $1.31 billion, or 4 cents a share, compared with a $7.58 billion loss, or 33 cents, in the same period in 2009, the bank said today. Eight analysts had predicted in a Bloomberg survey that Citigroup would report 7 cents profit per share. It marks the first full-year profit for the bank since 2006. Shares have risen 46 percent in the last year through Jan. 14.
In Freddie Mac’s review of Citigroup’s performing loans -- those on which borrowers were still paying -- the portion rated as "Not Acceptable Quality" fell to 9 percent in the third quarter’s sample from 32 percent in the fourth quarter of 2009, according to the Freddie Mac memo. The average defect rate in the 12 months through Sept. 30 was 15 percent.
"The percentage of acceptable quality loans should be in the high 90s," said D. Keith Johnson, former president of Shelton, Connecticut-based Clayton Holdings LLC, which evaluates mortgage quality. "There’s a strategic process flaw. How can a report that shows exception rates this high not cause concerns?"
Mortgages reviewed in the third quarter were underwritten between February and May of 2010, according to the memo. Among the defects listed for them: a missing appraisal, missing documentation to verify payment on deferred student loans and missing proof of flood insurance. Two loans were deficient because of their "eligibility," according to the memo: One where the "maximum loan amount was exceeded," and another that was underwritten as a regular refinancing when in fact it was a "construction to permanent financing loan."
Mortgage buyers such as McLean, Virginia-based Freddie Mac, which packages the loans into securities for sale to investors, can ask for their money back if they find that Citigroup or other originators sold them mortgages that failed to meet underwriting standards.
Citigroup sold $15.5 billion in mortgages to Freddie Mac and $31 billion to Fannie Mae last year, according to Inside Mortgage Finance, an industry newsletter based in Bethesda, Maryland. Brad German, a Freddie Mac spokesman, declined to comment on how many of the defects cited in the review might lead to repurchase requests or how Citigroup’s results compared with other lenders.
"I would expect Citi as far as performance would be in the middle of the pack," said Chris Gamaitoni, vice president of Compass Point Research & Trading LLC in Washington, who has tracked buyback claims. "I wouldn’t see them as being unusual."
On Jan. 3, Bank of America Corp., the biggest U.S. lender, announced it paid $1.28 billion to Freddie Mac to extinguish $1 billion of repurchase requests. The agreement also covered all outstanding and potential buyback claims on $127 billion in loans sold by Countrywide Financial Corp., now owned by Bank of America, the Charlotte, North Carolina-based lender said in a presentation on its website. The bank said it also paid $1.52 billion to Fannie Mae to settle disputes on $3.1 billion in loans, or about 49 cents on the dollar.
In a Jan. 7 letter, four Democratic members of Congress asked the Federal Housing Finance Agency, the agency that oversees Freddie Mac, for "detailed information" on how the settlement with Bank of America "represented the best possible recovery of funds available to taxpayers." "We should be paying attention to how FHFA treats claims Fannie and Freddie have that reduce taxpayer liability and are pursuing claims as aggressively as they can to limit taxpayer exposure," Representative Brad Miller of North Carolina, who signed the letter, said in a phone interview.
Citigroup should expect to reimburse buyers between $2.2 billion and $4.3 billion for defective mortgages originated from 2005 to 2008, according to an Oct. 26 report by Credit Suisse Group AG analysts Moshe Orenbuch and Jill Glaser. Up to $1.9 billion of that will be for loans bought by government-sponsored enterprises such as Freddie Mac and Fannie Mae, they said.
Banks also face putback claims from insurers and investors. Citigroup was the fourth-largest U.S. lender in 2006 to subprime borrowers, according to Inside Mortgage Finance. After housing prices quit rising that year, delinquencies among such borrowers, who have bad or incomplete credit histories, more than doubled by 2009, according to the Washington-based Mortgage Bankers Association.
Citigroup received $45 billion in investments from the U.S. government in 2008 and $301 billion in asset guarantees, making the bank the biggest recipient of U.S. taxpayer bailout support. The investment has been paid back and the guarantees canceled. Last week, the government, which still owns warrants to buy 465 million of the bank’s shares, announced a plan to auction them off before the end of March.
Plans for Freddie Mac
Freddie Mac, created by Congress to boost U.S. homeownership by buying mortgages, was seized in September 2008 because of increasing loan-related losses. The U.S. government retains a 79.9 percent share of the company. The Treasury Department will announce plans for the mortgage finance company this month.
Freddie Mac has posted five straight quarterly losses and has received $63 billion in aid from the U.S. since September 2008. Freddie and Fannie Mae, which the government also seized, have gotten more than $148 billion in taxpayer aid and returned $14.6 billion in dividends. "Freddie seems like they’re being more vigilant about nipping problems in the bud with recent vintage loans," said Robert M. Siegel, a partner with Miami-based Bilzin Sumberg Baena Price & Axelrod LLP who represents smaller lenders in buyback litigation.
Citigroup said it set aside $952 million as of Sept. 30 to cover buybacks, up from $295 million a year earlier, according to the bank’s regulatory filings. Repurchase requests from Citigroup mortgage buyers increased to 2,054 in the third quarter from 1,779 claims in the third quarter of 2009, Citigroup filings show. Citigroup was the sixth-largest seller of home loans to Freddie Mac in 2010, behind San Francisco-based Wells Fargo & Co., Bank of America, New York-based JPMorgan Chase & Co., Minneapolis-based US Bancorp and Ally Financial Inc., based in Detroit, according to Inside Mortgage Finance.
Citi's Feud With Meredith Whitney Continues, As Bank Tells Clients To Ignore Her Media Hype
by Joe Weisenthal - Business Insider
Meredith Whitney made her name by (correctly) trashing Citigroup.
Well, now she's at her own shop, and attempting to make a second "career call" with her predictions of muni bond doom. We've covered it pretty extensively, and a key thing is that while many people agree with her about stresses in this market (and even more defaults), very few see the outright doom scenario that Whitney does. Add Citigroup (and analyst George Friedlander) to the list of her opposers. In a note that was put out Friday, the firm specifically calls out media-borne hype, and claims that the selloff is the result of a feedback loop.
Here's how the feedback loop works:
- Muni bonds start to fall in Novemer due to fears over the expiry of the Build America Bond program, and thus the rush to increase issuance under this program (government backstops for munis). Also rising Treasury yields took away luster from munis.
- Then it became clear that BABs were dead. More muni selling.
- Then the doom and gloom reports really started hitting the media. That lead to selling of bond funds.
- Meanwhile, the market was already vulnerable due to a thin investor base.
- The selloff, then has lead to more selloff fears, and bond redemption issues, etc.
The bottom line, says Citi, this panic selling isn't justified by the actual likelihood of default.
In the meantime, Citi sees huge opportunities in areas like:
- State GOs rated AA- or better;
- Essential service revenue bonds rated A1/A+ or better;
- Other well-secured revenue bonds, such as AA3/AA- or better hospitals; and
- Any solidly rated strongly secured GO issues or Revenue Bonds— whose price comes under pressure because of a supply/demand imbalance, rather than as a result of bona fide changes in credit condition.
'Citi Weekend' Shows Too-Big-to-Fail Endures
by Simon Johnson - Bloomberg
Democrats like to say that the Dodd- Frank financial overhaul legislation ended the problem of too big to fail because large failing financial institutions can now be wound down in an orderly manner. Republicans, including those now running the House Financial Services Committee, dispute that the Dodd-Frank resolution framework is workable and insist that if big banks get into trouble on their watch that they will be allowed to go bankrupt.
Last week’s report by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, suggests that the views of both sides are likely at odds with future financial realities. The report, titled "Extraordinary Financial Assistance Provided to Citigroup Inc.," focuses on the "Citi weekend" in November 2008 when the bank received additional financial assistance from the government -- just weeks after the U.S. had injected capital into all the big banks in the first wave of TARP bailouts. The report reveals fresh details about who made the key decisions and on what basis.
The most interesting quotes are from Tim Geithner, who was both president of the Federal Reserve Bank of New York and President Barack Obama’s pick as Treasury Secretary (his nomination, announced that Monday, was leaked to the market the previous Friday.) Geithner is refreshingly frank that too big to fail hasn’t necessarily been ended.
‘Just Don’t Know’
"In the future we may have to do exceptional things again if we face a shock that large," he said, according to the report. "You just don’t know what’s systemic and what’s not until you know the nature of the shock." Dodd-Frank supposedly gives any administration better tools but if you look closely at the details -- highlighted in the Treasury letter attached to the report -- you see most of the emphasis is on the resolution authority that allows the government to close financial institutions.
But this doesn’t apply to our largest global banks; there is nothing in the Dodd-Frank authority that applies to the overseas operations of a Citigroup, JPMorgan Chase or Goldman Sachs. So if a big global bank were to fail, it would set off a scramble for assets today just like it did when Lehman Brothers collapsed in September 2008 -- or would have if Citigroup had gone under the following November.
This is also a major problem for the "just let ‘em go bankrupt" philosophy. There is no framework for cross-border bankruptcy, in the sense of clear rules about who gets compensated with what kind of assets. The courts can presumably sort it out, but it would take many years and cost billions of dollars in legal and other fees. As a result, if a large bank is on the brink of failing, everyone will assume the worst around the world and run for the doors.
Barofsky’s report points out that government decision making on the Citigroup bailout was ad hoc and largely motivated by "gut instinct" about what the consequences might be. Then- Treasury Secretary Henry Paulson was characteristically blunt at the time: "If Citi isn’t systemic, I don’t know what is." Sheila Bair, head of the Federal Deposit Insurance Corp., and other FDIC officials deferred to the judgment of Geithner and his team.
In a crisis there are no objective criteria, thus no way to know the full consequences; just a great deal of fear about what the failure of a large financial institution would do. Size isn’t paramount, but it does matter a lot. If someone tells you that Earth is about to be hit by a meteor, and also tells you its density, impact velocity and impact angle, you then should have one question: How big is it?
In this scenario, bigger isn’t better; it’s worse. It’s the same with banks -- as seen during the Citigroup weekend. The bank was huge. It was very highly leveraged. It was profoundly global. There was no legal authority that could handle orderly resolution. All of this is still true today, as the report makes clear.
Or perhaps the situation is worse. "The government’s actions with respect to Citigroup undoubtedly contributed to the increased moral hazard that has been a direct byproduct of TARP," Barofsky wrote. As of last January, a senior New York Fed official still viewed Citigroup as too big to fail, and told the special inspector general that if history repeats itself, there is "no question we would do it again (with) a similar or different program," according to the report.
Or we could also make the biggest banks smaller -- ideally, small enough to fail. This was the proposal of the Brown-Kaufman amendment to Dodd-Frank, which died on the Senate floor, largely because of opposition from Geithner and the Treasury Department. So we’ll do nothing, it seems, except let these massive banks become bigger and even less well managed.
Until next time, the people who run the country will again face the same choice as in November 2008: provide an unsavory bailout for management, shareholders and creditors that rewards failure and stupidity, or run the risk of causing a second Great Depression. If the big banks get large enough, we’ll become like Ireland today -- saving those institutions will ruin us fiscally, destroy the dollar as a haven currency, and end financial life as we know it.
Trillion-Dollar Banks Could Get Bigger Under Financial Overhaul Law
by Shahien Nasiripour - Huffington Post
The nation's four biggest banks can grow even bigger, with the potential to add at least another trillion dollars onto their balance sheets before they even reach the limits imposed by the Obama administration, according to an administration study released Tuesday.
Dodd-Frank, the 2010 law overhauling financial regulations, calls for regulators to impose a ten percent cap on individual financial firms' liabilities relative to the entire system. The rule is intended to prevent lenders from becoming so large that their collapse would threaten the health of the broader financial system. Firms that hit that cap are not supposed to be able to grow through mergers or acquisitions, and banks that wish to get that big by gobbling up a competitor shouldn't be allowed to.
But the report, issued by the council of regulators that is supposed to keep watch for breakdowns in the financial system, calculates the formula in such a way that it leaves the largest U.S. lenders with plenty of room to grow. For example, JPMorgan Chase, the nation's second-biggest bank by assets, can merge with U.S. Bancorp, the 10th-biggest lender, and still fall comfortably under the limit.
"I said the banks won," said Simon Johnson, a former chief economist at the International Monetary Fund who now teaches at the M.I.T. Sloan School of Management and is a HuffPost contributing business editor. "It just tells you what the Treasury wants, and what they're telling you is they're going to cook it to let these banks expand." Treasury Secretary Timothy Geithner heads the Financial Stability Oversight Council, which produced the study and accompanying recommendations. They're intended to guide regulators as they craft the rules that will attempt to restrain the growing concentration in the nation's financial system.
The big four banks, which collectively hold about $7.7 trillion in assets, or just about half of the entire banking system, originate and service roughly three out of every five home mortgages; hold about 35 percent of all deposits; and control about 44 percent of all credit card purchases, according to the council. Just nine years ago, it took 15 banks to control half of the assets in the nation's banking system, according to the Federal Reserve.
In its study, the council said that limiting concentration will make the financial system more stable, efficient and competitive, and reduce implicit subsidy large firms receive when the market perceives them as too big to fail. "Over the long run," the study states, "the concentration limit can be expected to enhance the competitiveness of U.S. financial markets by preventing the increased dominance of those markets by a very small number of firms."
It's unclear which firms will actually be limited by it, though. Using the study's calculations, JPMorgan, Citigroup and Wells Fargo -- the second-, third- and fourth-largest U.S. banks -- could all acquire huge lenders like U.S. Bancorp, PNC Financial Services, Capital One Financial, and SunTrust Banks, the 10th-, 11th-, 13th- and 15-biggest banks. Even Bank of America, which comes closest to the 10 percent ratio at 9.2 percent, could acquire a firm like Fifth Third Bancorp, one of the biggest lenders in the Midwest.
The reason why JPMorgan, Citigroup and others don't yet meet the 10 percent threshold is because of the way their liabilities are calculated. Rather than taking their assets and deducting their capital, the formula calls for regulators to compensate for the relative riskiness of those assets, called risk-weighting. For example, because Treasuries are judged to be safe, they have a low risk-weighting. Complex financial instruments like certain derivatives, though, have a higher risk-weighting.
Bank of America has $2.34 trillion in assets, according to the most recent quarterly data filed with the Federal Reserve. But its risk-weighted assets total just $1.48 trillion, or 37 percent lower. And big banks could get even bigger. The council has the authority to designate certain financial firms that aren't banks as systemically important, meaning their failure could pose a risk to the entire financial system. For example, AIG would have been one such firm, regulators say.
Once the liabilities of these firms are added in, the pool of assets the banks would be judged by grows larger. According to the study, JPMorgan has about 7.1 percent of the system's liabilities. Once AIG-like firms are added, JPMorgan's ratio could shrink, enabling the lender to acquire its slightly smaller competitors. "When you're in charge of writing the rules you get what you want," said Johnson, who's been critical of the administration's approach to ending Too Big To Fail. "This is what Treasury wants, and they want to give the bankers everything."
Johnson is among a group of finance experts who's advocated for the break-up of the nation's largest lenders. Others include Thomas Hoenig, president of the Federal Reserve Bank of Kansas City; James Bullard, president of the St. Louis Fed; and Richard Fisher, president of the Dallas Fed. A measure that would have forced the country's financial behemoths to shrink failed in the Senate last year. Instead, the administration pushed for this concentration limit.
But while size is important, it's not the only factor, said John H. Cochrane, a finance professor at the University of Chicago Booth School of Business. To Cochrane, size and other risk factors could be offset if banks simply held more capital to guard against losses. Banks typically have about $1 in capital for every $10 they lend out or invest. For the biggest banks, it's usually just $0.50.
"Even with 10 percent of the system's assets, with their extreme leverage, that sounds pretty dangerous to me," Cochrane said. "Banks need lots more capital -- way more than they have now." The council's study confidently says that over time megabanks will be constricted from expanding through mergers and acquisitions. And once the final rules are written, regulators could take a tougher line. For now, the limits don't apply to firms like JPMorgan Chase.
Goldman Sachs shuns the BRICs for Wall Street
by Ambrose Evans-Pritchard - Telegraph
Goldman Sachs has issued a short-term alert on China and India as inflation rears its ugly head, advising clients to rotate into Wall Street and Old World bourses as a safer bet over coming months.
"We're not as tactically positive on the BRICs as we have been," said Tim Moe, the bank's chief Asia-Pacific strategist, referring to the quartet of Brazil, Russia, India, and China. "To be frank, we may have held on too long to our overweight position in China last year. We have decided that discretion is the better part of valour and have tactically reduced our weight. Asia is not in the sweet part of the cycle. The longer-term picture of Asia outperforming the US is taking a breather," he said, speaking at a Goldman conference in London.
The cooling ardour for China is significant shift for the bank that invented the term BRICs and has been the cheerleader of the emerging market story over the past decade. India is an even bigger worry, with yawning twin deficits, and overheating visible on all fronts. The nation's central bank warned this week of "surging inflation". "India's current account deficit is running at a record pace of 4.1pc of GDP and it is 100pc funded by short-term portfolio flows, which cannot be relied on indefinitely," said Mr Moe, describing Mumbai's bourse as "crowded".
Goldman insists that the longer-term super-boom remains healthy in both the BRICs and a broader group of countries, or "N-11", led by South Korea, Indonesia, the Philippines, Turkey and Egypt. Pension funds and insurers in the rich countries have invested just 6.5pc of their $60 trillion (£38 trillion) of combined wealth in new markets, leaving them vastly misaligned against the geography of world growth. "We are only in the first innings of an undeniable structural story over the next two decades," said Mr Moe.
Japan's state-run GPIF, the world's biggest pension fund with $1.4 trillion in assets, is only now acquiring a change in its mandate allowing it to venture outside the mature economies. First, however, China must extricate itself from a credit boom. Mr Moe said the outcome is hard to judge since Beijing is resorting to opaque instruments to fight inflation – 5.1pc and rising – rather than relying on transparent instruments of interest rate rises and currency appreciation.
Goldman expects China to rebound strongly in the second half of the year, distancing itself from the ultra-bearish views of those such as hedge fund star Jim Chanos betting that Beijing will prove unable to engineer a soft landing from its property bubble. The surprise for 2011 will be a torrid recovery in the US, with growth of 3.4pc to 3.8pc, as the country confounds critics and averts a post-bubble "Lost Decade". Surging earnings will push the S&P 500 index of US stocks to 1500 by the end of the year.
Even Japan will outshine China, pulling out of its deflation trap, with earnings growth of 23pc this year and 22pc in 2012. Kathy Matsui, Goldman's Tokyo strategist, said Japanese equities may be the best way to play the Pacific growth story since the average price-to-book ratio is 1.0, compared to 1.9 for China and the rest of emerging Asia. She said Japanese companies are sitting on a "Mount Fuji" of cash reserves worth $867bn to be unleashed on share buy-backs, dividends and a takeover blitz once the deflation danger recedes.
Jeff Currie, Goldman's commodity guru, said global equities will beat resources for the next few months. Gold may yet push yet higher to $1,650 an ounce before peaking but vertigo sets in at these giddy levels. "Gold is pricing sovereign default risk but we see the macro-environment on a much more solid footing," he said. Mr Currie told clients to remain "long gold" until the US Federal Reserve winds down quantitative easing and prepares for a tightening cycle. There is a near-perfect correlation over time between negative real interest rates and rising gold prices.
With real rates near minus 1pc in Europe, minus 2pc in the US and minus 3pc in the UK, a wash of global liquidity is fuelling the bullion boom – along with purchases by the central banks of China, India, and Russia – but watch out when the worm turns. The moment that OECD central banks start to raise rates in earnest could switch the process into rapid reverse. Mr Currie has compiled a chart of real gold prices based of Bank of England records dating back to 1260, when Pope Alexander IV was cranking up the Inquisition and Henry III was trying to reverse the Magna Carta in England.
It shows that prices are the highest they have been at any time for the last 440 years, other than a brief episode in the early 1720s, and the parabolic spike of 1980, which collapsed abruptly. The "Soviet bloc" of CCCP – crude, copper, cotton, and platinum – offers a more enticing balance of risk and reward. "All of these commodities are supply-constrained. The world can't produce enough of them, and nor can China." Mr Currie said.
Goldman shares drop as profits fall 52%
by Alan Rappeport - Financial Times
Goldman Sachs on Wednesday reported a 52 per cent drop in fourth quarter profits as the bank’s performance was held back by lower revenues in its investment banking and fixed income businesses. Net income at Goldman was $2.39bn, or $3.79 a share, down from $4.8bn or $8.20 a share in the same period a year ago. The results were slightly stronger than Wall Street analysts’ expectations but Goldman’s shares slipped by 2.6 per cent to $170.15 in pre-market trading in New York.
Total revenues were also off at Goldman, declining by 10 per cent from the fourth quarter of 2009 to $8.6bn. For the year the bank generated $39.6bn of revenues and $8.35bn in net earnings. "Market and economic conditions for much of 2010 were difficult, but the firm’s performance benefited from the strength of our global client franchise and the focus and commitment of our people," Lloyd Blankfein, Goldman’s chief executive, said in a statement. "Looking ahead, we are seeing signs of growth and more economic activity and we are well-positioned to help our clients expand their businesses, manage their risks and invest in the future."
The results cap one of the more tumultuous years in Goldman’s long history. The bank has weathered a public furore, Securities and Exchange Commission charges against its and sweeping regulatory reforms that promise to effect profound changes on Wall Street. Investment banking revenues fell 10 per cent to $1.51bn in the final three months of last year and Goldman pointed to an industry-wide decline in merger activity. The bank also said that concerns about European sovereign debt risk and uncertainty over regulatory reform dented its fixed income business, where revenues were off by 48 per cent to $1.63bn. Goldman paid $15.38bn in total compensation expenses in 2010, a 5 per cent decline from the prior year. The ratio of compensation and benefits to net revenues was 39.3 per cent.
The results come as Goldman unexpectedly scrapped an offer to its wealthy clients in the US to participate in a $1.5bn investment in Facebook, limiting it to foreign investors because the high level of publicity generated by the plan threatened to put it in breach of US securities laws. The US bank has been especially conscious of its image since last July when it agreed to pay $550m to settle Securities and Exchange Commission charges that it misled investors in a structured product.
Last week Goldman sought to address criticism that it put its own interests ahead of its clients by introducing a 39-step "self-improvement" plan that overhauls its financial reporting structure and adds new layers of oversight. Separately, Wells Fargo said its fourth quarter net income surged by 21 per cent to a record $3.4bn, or 61 cents a share. That was in line with analysts’ expectations and revenues were up 12 per cent to $21.5bn. Goldman and Wells Fargo are the second and third big US banks to report earnings. On Tuesday Citigroup recorded its first annual profit since 2007 but missed analysts estimates in the fourth quarter. Last week JPMorgan Chase said its fourth quarter net income jumped 47 per cent.
Goldman Sachs: We're blaming you for Facebook mess, but we know it was us
by Dan Primack - Fortune
Goldman Sachs had to pull its offer of Facebook shares to U.S. clients, because it may have fallen afoul of an SEC rule that the SEC rarely enforces.
Goldman Sachs suffered a major embarassment yesterday, when it withdrew its offer of up to $1.5 billion in Facebook shares to wealthy U.S. clients. Here is how it explained the decision, in what doubles as Goldman's first public comment on the Facebook offering:Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law. We regret the consequences of this decision, but Goldman Sachs believes this is the most prudent path to take.
The law to which Goldman seems to be referring is Regulation D, which involves various qualifications to meet SEC exemptions for registration of securities. More specifically, the following section:Neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following: (1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and (2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
Please note what the regulation doesn't say: "If your offering gets lots of media attention, then it is illegal." In fact, every single media outlet in the world could discuss an offering, and that offering could remain compliant with Regulation D. So long as the original source of the information was not the issuer, or anyone acting on the issuer's behalf. Goldman's attempt to blame the media was a sloppy redirect, aimed at obscuring the fact that either Goldman or one of its agents spilled the Facebook beans to the New York Times. Or at least that Goldman strongly suspects that's what happened.
Kudos to John Carney for being the first to point this out:Goldman Sachs is full of malarkey when it cites intense media scrutiny as the reason for withdrawing its offering to US clients. In fact, it was media scrutiny that prompted Goldman to tell its US clients about the offering.
Had the source been a legitimate third party, then Goldman would have been in the clear. In fact, I'd even argue that the bank could have confirmed existence of the offering to reports, even though it chose not to do so (acknowledging something a reporter already knows -- granted you don't provide new information -- does not constitute solicitation or advertising, no matter what over-cautious lawyers might tell you). But let me go a step further: I still am not sure Goldman violated Regulation D, even if the leak did come from within. Check out this passage from yesterday's New York Times:Goldman had not been planning to initiate the offering that night, but it sped up the process after The Times called the firm seeking comment, according to an executive who spoke on the condition of anonymity because he was not authorized to speak. That night, a Goldman spokesman declined to comment. Late that night, before the report was published, executives in Goldman's private wealth-management unit e-mailed their clients about the offering, people who received the e-mail said.
In other words, Goldman's high-net-worth clients already knew of the Facebook offering before the rest of us did. Assuming that Goldman did not expand the offering beyond that known universe of investors, then it still could be in the clear. If someone like me learned about the offering via public notice , it's irrelevant since I didn't have an opportunity to invest (see similar discussion vis-a-vis the Kleiner Perkins sFund announcement). The only reason I hedge a bit here is that the SEC might be able to prove that the leaker couldn't have known that Goldman would get word out to its investors before the New York Times published its story.
Either way, one thing is clear: Violations of Regulation D are rarely pursued by the SEC. I've reported on hundreds of active private placements, and never once has the relevant issuer been charged (even though, in some cases, the leaker has been fairly obvious). In fact, some private equity firms even distribute press releases when they have a "first close" on a new fund. Pretty sure that's industry jargon for: "We raised some money, but are looking to raise more." Hmmm.... Maybe Goldman Sachs was right. The media attention didn't cause it to (possibly) violate SEC rules. But it did get the SEC to pay special attention...
Study Points to Windfall for Goldman Partners
by Susanne Craig and Eric Dash - New York Times
Goldman Sachs executives have long been among the most richly paid on Wall Street in the best of times. They are now poised to reap a windfall that was sown in the dark days of the financial crisis in 2008. Nearly 36 million stock options were granted to employees in December 2008 — 10 times the amount issued the previous year — when the stock was trading at $78.78. Since those uncertain days, Goldman’s business has roared back and its share price has more than doubled, closing on Tuesday at nearly $175.
The options grant is among the many details that emerge from a study of regulatory filings and internal partnership documents by The New York Times and Footnoted.com, a division of Morningstar that scrutinizes corporate disclosures. These filings provide a much fuller picture of both Goldman’s compensation and its elite partnership of 475 people who run the firm.
At the center of Goldman’s lucrative compensation program is the partnership. Unlike other Wall Street firms, Goldman retained a partnership system when it became a publicly traded company in 1999. Goldman’s partners are its highest executives and its biggest stars. Yet while Goldman is required to report compensation for its top officers, it releases very little information about this broader group, remaining tightlipped about even basic information like who is currently a partner.
The documents illustrate just how much wealth the partnership owns and has cashed out over the years. Goldman has almost 860 current and former partners, the documents show. In the last 12 years, they have cashed out more than $20 billion in Goldman shares and currently hold more than $10 billion in Goldman stock.
All Wall Street firms dole out stock to reward their employees. But the reporting of who gets what and who sells is limited to the firm’s top officers. The Goldman filings provide a window into how broad and how lucrative stock-based compensation can be.
The 2008 stock option grant came at a time when the firm’s financial performance took a hit and its top executives were not paid bonuses. The grant, much of it awarded to partners, gave options that could be exercised in one-third installments in January 2010, January 2011 and January 2012. The shares cannot be sold or transferred until January 2014. The award has already helped increase the partners’ stake in Goldman to 11.2 percent, from 8.7 percent. And as additional options vest, the partners’ control of the firm will most likely increase.
In addition to the cumulative stock sales and stock ownership, the filings show an inner circle that is chiefly male — 87 percent of the current partners are men — and shed light on how much each partner has cashed out over the years. The analysis, which examined nearly 5,000 pages of regulatory filings, was a joint effort by The Times and the Footnoted.com senior reporter Theo Francis.
With Goldman set to report earnings on Wednesday, the newest class of inductees will get their first glimpse into the privileges of partnership, as the firm begins to notify its more than 35,000 employees about their year-end bonuses. Goldman is on track to pay out $17.5 billion in compensation for last year. While that is down from the record $20.19 billion in 2007, it’s up more than a billion from 2009.
The documents also show what shares partners sold before they became officers and were required to make disclosures. Lloyd C. Blankfein, Goldman’s chief executive, for example, has cashed in a total of $93.8 million in shares since 1999, a number that captures both known stock sales since he became an officer at Goldman, and sales not individually reported since before he was required to disclose such transactions.
In the eight years since becoming a senior executive in 2002, Mr. Blankfein has sold $42.5 million, roughly 45 percent of the total over the years. As of August, Mr. Blankfein and his family owned 2.03 million shares worth about $355 million if they had been cashed out on Jan. 14.
Over all for the partnership, the stock sales amount to around $24 million on average for each partner since the 1999 initial public offering — a conservative estimate since the documents do not capture every sale by a Goldman partner, or shares sold as part of the public offering. Pay packages also include cash salaries and bonuses, and this analysis does not include the billions of dollars Goldman has paid in those categories.
Goldman’s stock has returned nearly 175 percent since the close of its May 1999 initial public offering. The Standard & Poor’s 500-stock index over the same period has lost almost 2.9 percent. But the gains of Goldman employees from stock options since the financial collapse have been particularly striking. In December 2008, just three months after the bankruptcy of Lehman Brothers brought the financial system to the brink, Goldman awarded the nearly 36 million stock options.
The number approved by Goldman’s board dwarfed not only the previous year’s grant of 3.5 million options, but also exceed the entire amount of options previously outstanding. The December 2008 options grant was disclosed as required, but received scant attention at the time. While the partners cannot sell new stock when they exercise the options for another few years, and thus cannot yet lock in their gains, the increased value nonetheless indicates how much they stand to gain when they can.
Because of fierce criticism of Wall Street pay after the financial crisis, most firms have shifted pay practices toward greater stock-based pay — like options and stock grants that cannot be sold for a period, linking the employee’s performance to that of the firm and discouraging reckless risk taking. But neither Morgan Stanley nor JPMorgan Chase, Goldman’s two biggest rivals, made similar moves to increase sharply the number of options granted while their shares were depressed, according to analysts. And much of Goldman’s options grant went to its partners. Citigroup did issue a number of options during the crisis, but the total issue represented just 1 percent of the shares outstanding, compared with 7 percent at Goldman.
The partnership system is a vestige of Goldman’s days as a private firm. Most Wall Street firms shed their partnerships after going public. But Goldman, one of the last big investment banks to sell shares to the public, created a hybrid model, as an incentive for employees. Goldman releases the names of the new partners, but keeps the full membership list close to the vest.
It’s a formidable group. The members are typically the firm’s most senior executives, including Mr. Blankfein and chief operating officer Gary D. Cohn. Among the alumni are powerful figures in government and finance like former Treasury Secretaries Henry M. Paulson Jr. and Robert E. Rubin, the former governor of New Jersey Jon Corzine, as well as William C. Dudley, the president of the Federal Reserve Bank of New York.
The club is also heavily male. When Goldman went public, only 6 percent of the partners were women, including the senior economist Abby Joseph Cohen. That percentage has risen to a little more than twice that today. As a group, the partners have considerable sway at the company, not only in the day-to-day operations but also in the long-term vision.
Employees have often been large shareholders at investment banks. What’s different about the Goldman partnership is that they vote as a block, giving them an unusual amount of influence on key decisions at the firm’s annual meetings, from board selection to shareholder proposals on pay. The group casts secret ballots ahead of time to decide their position, according to the filings.
To ensure they maintain a significant stake, the partnership typically asks members to hold on to 25 percent of the shares they receive after joining the group. The figure rises to 75 percent for senior officers. A three-person committee that represents the partnership shareholders (its members are Mr. Blankfein, Mr. Cohn and the chief financial officer, David A. Viniar) can decide to waive the limits for partners in certain circumstances.
The club has gotten even more selective as the company has grown. In 2000, Goldman announced 110 new partners, about 0.5 percent of employees. Last year, Goldman tapped 110 executives, just 0.33 percent of the staff. The partnership is purged as new blood comes in. Every two years, roughly 70 executives leave the club, by choice or because they are no longer pulling their weight. The average tenure is around seven years.
Of the original class of 221 executives formed after the firm’s I.P.O. in 1999, only 39 remain. Within five years of the I.P.O., almost 60 percent of the original partners were gone. The handful of survivors dominate the top ranks, including Mr. Blankfein, Mr. Cohn and Mr. Viniar. Most partners who have left, like Mr. Paulson and Mr. Dudley, go on to big jobs elsewhere. "It is a very Darwinian, survival-of-the-fittest firm," said one former Goldman partner.
Poorest families' standard of living 'will continue to fall'
by Tom Bawden - Guardian
About seven million of Britain's poorest people will see their spending power fall by a tenth over the next decade because the prices of essentials such as food, fuel and clothing are rising much faster than inflation, according to new research.
With inflation figures tomorrow expected to show another rise in the cost of living, research for the Joseph Rowntree Foundation shows that these households, where typically nobody is employed, have already seen their spending power reduced by about 10% in the past 10 years. This means that by 2020 they will be nearly a fifth worse off than they were in 2000, if, as expected, pricing trends continue.
Donald Hirsch, head of income studies at Loughborough University's centre for research in social policy, who conducted the research, said: "This really shows how world factors are affecting the standard of living in the UK as rising global demand for food, cotton and other commodities pushes up prices of basic necessities." Tomorrow's inflation figure is expected to put the rise in the cost of living at 3.4% in December on the consumer price index (CPI) measure, way above the Bank of England's target of 2% and further evidence for hawks on the bank's monetary policy committee, who believe that interest rates must be raised before prices spiral out of control.
The wider retail price index (RPI), which includes housing costs such as mortgage interest, is forecast to rise to 4.8%. There is mounting concern that fuel prices in particular need to be curbed as oil nears $100 a barrel. David Cameron has spoken out in recent weeks about the need to tackle inflation.
Hirsch's latest research suggests that the last decade's jump in the basic cost of living will continue, or even accelerate, in the next 10 years, with increasing price volatility as the rising value of commodities prompts hedge funds and other speculators to funnel more money into basic raw materials. This means that while the prices of wheat, cotton and other basic commodities is growing substantially over time, in the short term they will see-saw with increasing magnitude and frequency.
"All the talk about recent VAT increases [of 2.5 percentage points] is a storm in a teacup compared to some of the price rises we're seeing elsewhere, where the long-term trend is almost certain to be up, and quite seriously," added Hirsch. "I wouldn't be surprised if the gas price doubled again in the next decade after tripling in the past 10 years."
The persistent growth in basic household expenses such as council tax, water, public transport and, more recently, energy and food, means that the cost of buying the basics – known as the minimum income standard (MIS) – increased by 38% in the 10 years to April 2010. Over the same period the RPI, to which benefits are tied, rose by 31%, leaving those relying on the state significantly out of pocket.
But the poorest households – so-called workless families comprised of single people and couples, with or without children – are to set to lose out at an accelerating speed from April, when their benefits will be tied to the CPI rather than the RPI. The CPI has consistently grown by less than the RPI, increasing by only 23% in the 10 years to April 2010, and this trend is expected to continue.
Rhian Beynon, head of policy and campaigns at Family Action, a charity helping disadvantaged families, said: "This could be the decade of despair for the poor families we work with, and they will certainly face desperate choices as income shrinks and price rises impact on parents' ability to support their children … These price rises could break them." Although those relying exclusively on state benefits will be hit the hardest, millions of other people in the UK who have limited disposable income will see their standard of living reduced. The poorest pensioners are a particularly vulnerable group, Hirsch warns.
This is because, although private pensions have increased in importance, 60% of pensioners – or nearly eight million people – still get more than half of their income from the state, which in April will begin linking pensions to CPI rather than RPI, in line with changes to unemployment benefits. None of these people are included in the seven million "workless" families, which only covers people of working age.
The issue of the rising cost of living has gained momentum in recent weeks. The soaring cost of sugar, grain and oilseed drove world food prices to a record in December, surpassing the levels seen in 2008, when price rises sparked riots around the world. The Food and Agriculture Organisation index, which tracks the prices of a basket of cereals, oilseeds, dairy, meat and sugar, hit a record 215 points last month, up from 206 in November, to break the 213.5 high registered in June 2008. It shows a dramatic rise in food prices for the decade, since the Rome-based UN agency's index stood at only 90 in 2000 and did not break through the 100 mark until 2004.
Meanwhile, the price of cotton jumped by 54.8% last year, prompting the British high-street retailer Next to increase its clothing prices by 8%, while copper rose by 20% and soya beans by 32%. In addition, UK rail fares increased by an average of 6.2% this month, confirming the network as the priciest in Europe. Against this backdrop, a 10% decline in spending power over the next decade for those people on benefits may sound like an underestimate. However, Hirsch points out that there is a lot of fluctuation in some key prices, meaning that some years they can go down considerably, as well as up.
For example, while oil is at a historically high level and rising in price, its present cost of just under $100 a barrel is still well below the $145 peak it hit in July 2008 on a wave of big buying by international speculators. Furthermore, Hirsch says, we tend to forget about the things that get cheaper, such as manufactured goods, many of which have gone down considerably. Finally, a CPI-linked rise in benefits will mitigate much of the increase in the prices of the MIS.
The Joseph Rowntree Foundation's minimum income standard is similar to the government's official poverty line, but requires more cash because it is concerned with the spending needed to make people feel part of society and so includes expenses such as mobile phones and a one-week domestic holiday a year. The poverty line is defined as 60% of median income – about £119 a week, after tax and excluding housing costs, and £288 for a couple with two children. The minimum income standard is slightly higher, at £175 and £403, respectively. To satisfy the minimum income standard, a single person needs a pre-tax salary of £14,400, while the couple with children would need £29,200.
Budget Worries Push Governors to Same Mind-Set
by Monica Davey - New York Times
The dismal fiscal situation in many states is forcing governors, despite their party affiliation, toward a consensus on what medicine is needed going forward. The prescription? Slash spending. Avoid tax increases. Tear up regulations that might drive away business and jobs. Shrink government, even if that means tackling the thorny issues of public employees and their pensions.
In years past, new governors have introduced themselves in inaugural remarks filled with cheery, soaring hopes; plans for expansions to education, health care and social services; and the outlines of new, ambitious local projects. But an examination of more than two dozen opening addresses of incoming governors in recent days shows that such upbeat visions were often eclipsed by worries about jobs, money and budget gaps. Those speeches are the best indication thus far of the intentions of this class of 37 governors — 26 new and the others re-elected.
"The rhetoric has grown very similar," said Scott D. Pattison, executive director of the nonpartisan National Association of State Budget Officers. "A lot of times, you can’t tell if it’s a Republican or Democrat, a conservative or a liberal."
In Wisconsin, the new Republican governor, Scott Walker, says that any prospect of a tax increase is off the table, and that he wants to "right-size" state government, meaning, he says, that it would provide "only the essential services our citizens need and taxpayers can afford."
In California, the new Democratic governor, Jerry Brown, lists as one of his guiding principles (second only to his tenet to "speak the truth") support for new taxes only if voters want them. And he says it is time to examine the state’s system of public pensions — an increasingly vitriolic political issue in states around the country — to ensure that they are "fair to the workers and fair to the taxpayers." Without question, this emerging consensus comes in a wide range of degrees. Exceptions have also emerged.
Here in Illinois, a state that has wrestled with some of the most dire financial circumstances in the country, including some $8 billion in unpaid bills to social services agencies and others and a desperately underfinanced pension system, Gov. Patrick J. Quinn, a Democrat, pledged after renewing his oath of office simply to "stabilize our budget." Three days later, on Thursday, he did the reverse of what so many governors are urging, and signed a 66 percent increase in the state’s income tax rate.
And in Minnesota, where Gov. Mark Dayton, another Democrat, faces a $6.2 billion deficit and a Legislature controlled by Republicans, he has advocated for a tax increase on the wealthy. After being sworn in this month, Mr. Dayton told the crowd, "To those who sincerely believe the state budget can be balanced with no tax increase — including no forced property tax increase — I say, if you can do so without destroying our schools, hospitals and public safety, please send me your bill, so I can sign it immediately."
Otherwise, Mr. Dayton said, he hoped his colleagues would work with him on "this challenging, complicated and essential" budget process. Though public remarks in the moments after being sworn into office may be the first signal of a governor’s true intentions, actual policies can be another matter entirely. Those can depend, not least of all, on the decisions of legislatures. And governors of all political stripes have a tendency to talk tough in their early days.
The difference now, experts say, is that the financial circumstances leave little room to do nothing, and governors will soon be tested on their words — as early as in the next few weeks, when many of them must propose budgets for next year. Some states seem better off (North Dakota) and others worse (California), but the shared, essential problem in many states is simple: not enough money coming in to pay for all that is going out.
While state revenues — shrunken as a result of the recession — are finally starting to improve somewhat, federal stimulus money that had propped up state budgets is vanishing and costs are rising, all of which has left state leaders bracing for what is next. For now, states have budget gaps of $26 billion, by some estimates, and foresee shortfalls of at least $82 billion as they look to next year’s budgets.
This class of governors arrives in a wave of Republican victories in the 2010 elections for state legislatures and governorships, a trend that may be affecting everyone’s approach. Even in states where the fiscal struggles have been less pronounced, new governors are sounding warnings and talking, again and again, of waste, frugality, simplicity, shared sacrifice and painful choices.
"Some of our sister states and some cities within them face the very real possibility of bankruptcy because of their mountains of deficits and debt," said Dennis Daugaard, the newly inaugurated Republican governor of South Dakota, who has asked departments in his state to cut spending by 10 percent and has announced that he would cut his own annual salary to $98,000 from the $115,331 his predecessor collected. "They have promised their citizens something for nothing," Mr. Daugaard said of other states during his inauguration in Pierre this month, "and created a society where everyone wants to be carried and no one wants to pull their own weight."
Governors appeared to be girding residents for a rocky road ahead — a path they seemed to sense residents may not yet grasp, given headlines of improvements in other parts of the economy. Many called for bipartisanship in their efforts (the words "Republican" and "Democrat" are not mentioned in the Maine Constitution, reported Gov. Paul R. LePage, a Republican), and alluded to past moments of crisis (hurricanes, yellow fever outbreaks, even a "dark day" in 1780 when daytime skies were said to mysteriously appear nightlike in New England) as rallying points for the current gloom.
In his speech, Rick Scott, the new Republican governor of Florida, called for eliminating a business tax and reducing property taxes. He dubbed taxation, regulation and litigation "the axis of unemployment." And he issued a warning: "No job — public or private — should be immune from accountability."
On the other side of the country, and in the other major political party, John Kitzhaber, the new governor of Oregon, elaborately described the state, which needs to bridge a projected budget deficit of $3.5 billion, as an old house in need of an overhaul. "There are too many rooms, and they aren’t the right size," Mr. Kitzhaber said. "There’s no insulation, and the windows are drafty. And the cost of keeping this house is more than the family can afford. The roof needs to be replaced, and the siding is falling off."
In New York, Gov. Andrew M. Cuomo, another Democrat, sounded a similar call. "We must right-size the state government for today," said Mr. Cuomo, who added that New York had no future if it intended to be "the tax capital of the nation."
Eurozone tensions rise amid bailouts
by Ian Traynor - Guardian
Angela Merkel was locked in talks about the euro crisis when the phone rang in the gleaming chancellery in Berlin. The Portuguese prime minister, José Sócrates, was on the line from Lisbon with a plea for help. Portugal is tipped to be the third of 17 eurozone countries to collapse under the weight of its sovereign debt, needing a German-led bailout. Sócrates sounded desperate and eager to please, according to witnesses. He asked Merkel what he should do, promised to do anything she wanted, with one big exception. He would not ask for money – for a eurozone bailout with extremely tight strings attached.
According to accounts circulating in Berlin, Merkel left Sócrates to wait while she sought the views of her high-powered visitors – Dominique Strauss-Kahn, the French head of the International Monetary Fund, and Giulio Tremonti, the highly regarded Italian foreign minister who has recently been lobbying for the introduction of "Eurobonds" as part of a solution to the year-long crisis. Merkel asked Strauss-Kahn about Sócrates' dilemma. The German-speaking IMF chief was dismissive. The Portuguese plea was pointless, he said, because Sócrates would not follow any advice he was given.
The exchange, which occurred last week in Berlin, highlights what a senior German official describes as "Europe's big communication problem". In the midst of one of the EU's worst ever crises, its leaders seem to have a problem talking to one another. The level of trust between key policymakers and decision-takers is very low, hugely complicating the quest for a way out of the euro's existential challenge.
In Brussels this week, EU finance ministers wrestled with the latest political dispute over the euro: how to reconfigure the €750bn (£630bn) rescue fund set up last May. The meetings were deadlocked, with the European commission leading calls for a prompt increase in how much the fund can lend countries in distress, while Germany led the reluctant camp, arguing there was no need to rush either to top up the fund or to extend its lending activities.
The economic fundamentals in the eurozone are heading in contradictory directions: Germany and northern Europe emerging strong from recession, while southern Europe is locked into a vicious cycle of debt and deflation. This and the sovereign debt troubles of half a dozen countries have put the euro at risk. But the perils are compounded by the frictions between the political leaders charged with settling the crisis. The same day last week that Sócrates was being brushed off by Berlin, José Manuel Barroso, commission president, announced in Brussels that the euro rescue fund had to be reinforced.
Publicly, Merkel and her finance minister, Wolfgang Schäuble, described Barroso's intervention as "unnecessary". Privately, the chancellor's office told Barroso to shut up, that the €440bn guaranteed by eurozone governments was none of his business since it was not his money. The sniping has been going on for the past year. Greece's bailout in May was preceded by ugly exchanges about second world war reparations. In November, when Ireland was humiliated, Dublin complained bitterly about being bullied by the EU's big powers. It is now the turn of Portugal and Spain to feel the pain and pressure.
Olli Rehn, EU commissioner for monetary affairs, warned today of "complacency" among member states that refuse to re-model and increase the rescue fund. Germany, again, was the target of the discreet jibe. But the German government is not particularly concerned about Portugal, viewing its economy as too small to have a major impact on the fate of the euro. It took the same view on Ireland and Greece. Between them, the three countries account for less than 5% of the EU's €12tn gross domestic product.
The primary concern for the core euro countries is international investor confidence in the single currency. It is the waning trust, particularly in the US, in the eurozone's rescue measures, rather than Portugal's plight, which is driving the pressure from the European Central Bank and the European commission for a more ambitious and more flexible bailout instrument.
Klaus Regling, the German official who manages the eurozone's main bailout fund, the €440bn European Financial Stability Facility, has spent much of his seven months in charge touring the bond and financial markets in the US and the far east to gauge investor sentiment. Senior officials say he is worried by what he has found. Key fund managers, especially in the US, have signalled that they fear the euro's days are numbered, that they are unimpressed by Europe's response to the crisis, and that they are divesting.
"The markets don't trust the package. Some Americans give the euro only a few years," said a senior EU official. After challenging the Germans to react more quickly and decisively – and being told to keep quiet – Barroso is to go to Berlin next week ahead of an EU summit in a fortnight.
EU Pledges Tougher Stress Tests, Seeks Bonus Curbs
by Ben Moshinsky and Jim Brunsden - Bloomberg
Europe’s next wave of bank stress tests will be tougher than exams last year, taking sovereign- debt risk and liquidity into account, the region’s financial- services chief said. "We need more stringent and more reliable tests," European Union Financial Services Commissioner Michel Barnier told reporters following a meeting of EU finance ministers in Brussels today. "There was a general agreement that they should be marked by total transparency taking into account sovereign risk."
Ministers from the 27-nation EU and European Commission officials are seeking ways to bolster confidence in the bloc’s financial industry as the sovereign-debt crisis prompted austerity measures from Greece to Ireland. Barnier said banks should show moderation in awarding bonuses while other parts of society are "suffering."
The 2010 stress tests were criticized as not stringent enough after they indicated lenders in the 27-nation region were shown to need 3.5 billion euros ($4.7 billion) of new capital, about a 10th of the lowest analyst estimate. The tests didn’t include an assessment of how banks would cope with a sovereign default. Last year’s round included 91 lenders. Those left out included Anglo Irish Bank Corp., whose collapse during the financial crisis contributed to Ireland seeking an international bail-out in November.
It is the German government’s "clear position" that more banks should be included, and that the tests should cover liquidity, German Finance Minister Wolfgang Schaeuble said. "What will or won’t be published is another question because we need to keep in mind what the repercussions on investor behavior and member countries might be," Schaeuble said.
The "big problem" of the last round of stress tests "was their coverage," Karel Lannoo, chief executive officer of the Centre for European Policy Studies, said in a telephone interview. "Only 50 percent" of the EU’s banks were examined, he said. Authorities "will have to investigate whether or not we need to improve" how sovereign risk is assessed compared with prior tests, Barnier said.
Tests on banks’ liquidity should be carried out "in parallel" to those on lenders’ capital, Barnier said. "This needs to be done in a serious fashion." European regulators are scheduled to complete a new wave of stress tests on lenders’ capital in the first half of this year. The London-based European Banking Authority will also conduct a review on "areas of vulnerability in relation to liquidity risk," the agency has said. The "methodology and approach taken" in this year’s tests will "build on that used in the 2010 stress test," the EBA said.
The criteria for the next round of tests will be worked out "by March," Gergely Polner, spokesman for the Hungarian government, which currently holds the EU’s rotating presidency, said in an interview. The tests will be carried out "by the summer." "Ideas on the table to make the tests more stringent include testing liquidity, looking at the banking book not only the trading book" and taking into account the "risk of government bonds losing their value," Polner said.
Greater transparency in stress tests can be achieved by having "the same criteria in the U.S. and in Europe," Belgian Finance Minister Didier Reynders told reporters today. Reynders said he sought a "common view" with the International Monetary Fund on the tests. "We’re currently designing the methodology and then the tests will be conducted with more rigor," Olli Rehn, the EU’s Economic and Monetary Affairs Commissioner, said yesterday.
On bonuses, Barnier said banks in Europe should be wary of big payouts at a time when others are feeling pain. "Society is suffering," Barnier told reporters, referring to budget cuts in countries such as Greece and Ireland. "At this current time, banks can’t lose sight of the fact that they’re part of this society and part of the economy," Barnier said. "Banks and their shareholders have responsibilities. Banks need to react in a moderate way."
European Union regulators approved laws to curb incentives for excessive risk-taking last year, imposing limits on cash payouts and the size of bankers’ bonuses. The rules allow bankers to receive about 25 percent of their bonuses in immediate cash payouts and require the rest to be deferred or held in shares for a minimum of three years.
Fianna Fáiled: Ireland Prints 25% of its GDP in German Euro’s
by Jack H. Barnes
The Celtic Tiger has been on the economic ropes since the crash of 2008. In the first hours of the crisis, the US Federal Reserve provided emergency funding to Irish banks, pouring 10’s of Billions of US dollars into the Irish Banking system, providing funds as needed. These funding events helped stabilize the banks, during the winter of 08-09."The scale of AIB’s borrowing from the scheme is enormous given its relatively small size in the US. Barclays Bank, which bought Lehman’s US operations out of bankruptcy, borrowed $232bn (€174 bn) from the Fed scheme."
AIB’s biggest single loan — $3.3bn (€2.48bn) — was borrowed from the Fed on July 2, 2009.
The ECB setup a unique Sovereign bond carry with Irish banks, allowing support for their financing needs via deposits of Irish Sovereign bonds held as collateral. This mechanize broke down in the fall of 2010 as liquidity dried up beyond the capacity of the ECB to help out.
The Washington Post has a great graphic that shows Europe’s Financial contagion as cross holdings through both Banking and through Trade . The implications are clear, the cross holdings are significant.
The ECB is reported to have provided up to 130+ Billion Euros in direct support to the Irish banks, by allowing the banks to park Irish Sovereign debt at the ECB for collateral. This has driven up the internal leverage of the ECB enough that it needed to be recapitalized with new funds in December 2010.
The fact that the ECB needed to be recapitalized just as the impact from the Irish bailout of November hit home to the political leaders, though the real context of it was missed by the main stream media. The EU appears to have been caught in a situation that it could not contain the Irish funding needs, while needing to recapitalize the ECB Balance sheet to continue operations."The capital increase was deemed appropriate in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk," the E.C.B. said in a statement.
Ireland Central Bank was allowed, with or with out permission, to print up up new Euros without new sovereign debt issued behind them. By December of 2010, the EU appears to have been more worried about the appearance of the ECB balance sheet as a whole, than of rogue individual activity by its member states.
Publicly, the EU core nations agreed that the ECB was great candidate for recapitalization due to the support it has been providing the PIIGS. In hindsight, the attention of the market moving to Portugal or Spain was a misdirection of where the real attention needed to be, and that is Ireland still.
The bail out of Ireland, funded currently from their own retirement savings, has not been ratified by their government. The ECB has not started to poured funds from the Stabilization fund into Ireland yet, as they await ratification of the bailout.
The bailout, like a ticking time bomb has not been ratified yet, and if Fianna Fail’s 1 vote coalition collapses before the vote, all bets are off as to it ever being passed.
The current party in power, Fianna Fáil has been in charge of the country for 53 of its 84+ years of official existence. A series of No Confidence votes has been called on its leadership of the nation. The first vote is tomorrow, when an internal vote for leadership of the party is expected to be held.
A second vote of No Confidence has been called in the Parliament meeting that is scheduled for next week. While the coalition is expected to hold together through both votes, it is possible that the Irish bail-out will be held up by a collapse of the current caretaker coalition in Parliament. If this happens, all bets are off concerning ratification or even continuation of the bail out.
The above is all said, to preface what is next.
The Irish Central Bank has crossed the Rubicon in European Union currency terms. They have printed up about 25% of their GDP in electronic credits, and stuffed those credits into their banks. These deposits, if you will, do not have new debt issued behind them.
This is a form of hyperinflation if you will, at least in context that a Central Bank, with no actual printing press, or a functioning bond market, has now electronically printed up new currency units for their banks without issuing debt behind these actions.
While this has happened before in history, it has not happened in the Euro currency project officially before today. This act is going to move the monetary policy of the union, to the individual capitals. The capacity to print electronic credits, with out the creation of cash currency or debt, is a new wrinkle in the economic landscape.
The implications and ramifications will take a while to appear, but "Mark" my words, Germany both as a people, and as a political organization will notice this event. The German people now find themselves captured in a currency where neighbors who are in political and financial stress, have the capacity to print up German Euros on demand. This is Germany’s worse nightmare as both a nation and a people. I dare say, you could not design a more frightening prospect for the "United German States", than to find their currency diluted on demand by reckless neighbors.
In the coming weeks, and I say that because thing rarely happen quickly in life, Europe is going to have a Sovereign crisis of epic size. They will have to decide what happens next, and do so rather quickly.
- Is Ireland going to be punished by the EU for printing on demand?
- Can Ireland stay on the Euro, if Germany stays?
- Can Ireland escape the bailout clauses?
- Can the EU survive Ireland leaving?
- Is the EU going to join the US domestic form of economic unity?
- Euro Bonds?
- European Elected President?
- Euro Treasury Minister?
- Is Germany willing to be held hostage to foreign printing presses?
- How will Germany publicly respond to this?
- How will CDS markets respond to the BUND now?
- Are all Euros equal?
If Ireland can get away with this printing operation, let’s consider some of the ramifications of their actions when scaled to other economies of larger size. The Irish have printed up the equivalent of 25% of their GDP. If we accept that GDP is equal across economies, their actions are the equivalent of…
- Germany with a GDP of $3.3 Trillion printing up $850 Billion dollars worth of new currency units, and shoving them into Landesbanks to recapitalize their loans.
- United States with a GDP of $14 Trillion printing up 3.5 Trillion in new currencies and depositing into our To Big To Fails.
EU politicians have known about Ireland’s decision to print currency for weeks now. They have had time to consider their response to Ireland’s dilution of the Euro. I do not expect an initial reaction in the currency markets, as this kind of event takes time to be absorbed by all stakeholders in the Euro.
The Celtic Tiger has made their move and resorted to naked currency printing, to support its banks. The next move belongs to Europe and it’s going to be interesting to see how this plays out in the public arena’s. We know who is first, what CB will be second?
Who is the heir to Ireland's debt?
by Stephen Kinsella - Guardian
My father used to introduce me to people as "the heir to the family debt". It's a pretty good description for Ireland today. Ireland has a very large level of debt, as well as a large growth rate of debt, this year and next. Of course that is not a good thing. What are the prospects for us paying down that debt?
Europe has a set of rules supposed to stop member states' spending from getting out of hand. These rules say that no government can borrow more than 3% of its economic output in any given year.
This year, when you add in the cost of bailing out our banks, Ireland will borrow 32% of its output. So we're breaking the rules in a big way. That's OK, up to a point, because almost everyone else in Europe is also breaking those rules in these difficult times.
Another rule Ireland is breaking is a rule about debt sustainability. Roughly, over the medium term, if your country's real rate of economic growth is greater than its real rate of debt servicing, then it will be able to pay down the debt. If it can't, then you must at some point restructure your debt.
Who are the heirs to this mess?
So I asked myself a question: who will pay down this debt? Who are the heirs to this mess? The private sector will pay down this debt, if it can, via increased productivity at the firm level, leading to higher profits, and more taxes, which will be used to pay off the debt. And what is happening in the private sector?
It is experiencing large slumps in consumer confidence, restrained demand, and large levels of (presumably forced) saving (more about this in a later post). Also, the economy is shedding workers. And what is happening to the level of debt, year on year? It is rising.
Private sector worker given €108,000 debt
I decided to eyeball the relationship between the numbers of people employed in the private sector in the Irish economy, and the general government deficit — the standard debt level measurement. I should say that Ireland has other debts in the system, so the green line below could have been a fair bit steeper. But all caveats aside, here's what we see for the last six years:
The green line shows the massive increase in debt that each private sector worker is now responsible for.
For example, the green line shows that in 2010 there will be roughly €108,000 (£90,000) owed by each private sector worker employed in that year.
The red line is the number of private sector workers - clearly there are fewer people working in productive parts of the economy to service this debt. So it makes the job of servicing the debt harder again - fewer workers and businesses working harder to pay more taxes to pay off debt levels increasing at an increasing rate.
Not a pretty picture, but a good tonic to the "we have turned a corner" stuff we've been hearing of late.
Now nothing in this suggests that Ireland won't be able to sustain its debt levels. The other part of the rough and ready debt sustainability calculation is rates of growth (or lack thereof). In a previous post I took issue with the Irish government's growth projections.
The EU's projections for Irish economic output growth are more pessimistic, as are the IMF's. The most pessimistic projections I've seen are by Ernst and Young. If readers know of others, I'm happy to update the post later with attribution.
The key issue is the slope of the blue line in the figure above relative to the slope of the level of domestic output. I plot that relationship in the figure below. I plot the ratio of government debt to private sector worker, same as last time, and Ireland's GNP per private sector worker.
Economic growth v debt growth
This orange line is one way to see whether the economy can grow its way out of its problems, as it represents domestic output per private sector worker - or put more roughly, the Irish part of the Irish economy. Readers should remember that Ireland's massive multinational sector distorts our gross domestic product statistics.
In the figure below, I've assumed that gross national product per private sector worker will stay roughly around the same level as last year (i.e. near zero growth), as per a range of forecasts.
We see the level of debt rising relative to the number of people available to pay it down at an alarming rate, and we see the growth of the domestic economy going nowhere.
We can see that the key is 2011: if things worsen significantly, the Irish economy is toast. If things recover, we may yet scrape through. Let me stress right away that those two lines diverging does not prove anything. The Irish economy may still get onto a sustainable path for its debt.
These charts simply provide a cautionary tale to excessive "we can get out of this" rhetoric. Of course there are good things going on in the Irish economy, but I'll leave it to the very smart Ronan Lyons to explain those to you.
Ireland Wields Stick Forcing Bank Bondholders to Accept Pain: Euro Credit
by Finbarr Flynn - Bloomberg
Irish Finance Minister Brian Lenihan is about to inflict more pain on bank investors. Unless they take it, analysts say worse may follow. Junior bondholders in Dublin-based Allied Irish Banks Plc will decide this week on an offer to buy back more than $5 billion of subordinated debt at 30 percent of face value. Analysts at BNP Paribas SA recommend investors accept the package or risk getting "the stick" after the government passed laws allowing it to reduce payments to bondholders.
"The draconian powers granted to the Irish finance minister in December are a game-changer for subordinated bondholders in Irish banks," said Ivan Zubo, a London-based credit analyst at BNP Paribas. "Clearly, there is a risk that the more drastic powers could be used if Allied Irish needs more capital in the future."
Costs to insure the subordinated debt of Allied Irish, the country’s second-biggest bank, was 63.5 percent upfront and 5 percent a year as of Jan. 14, meaning it cost 6.35 million euros ($8.5 million) in advance and 500,000 euros annually to protect 10 million euros of debt for five years, CMA prices in London show. That compares with 21.7 percent upfront three months ago.
Ireland is taking control of Allied Irish, making it the fourth lender seized by the state as bad debts threaten to topple the country’s financial system. Lenihan said on Jan. 12 in parliament that after Allied Irish bondholders take "whatever pain is inflicted upon them," it will have a "material bearing" on the cost of saving the bank.
European leaders and regulators worldwide are considering steps that would force bondholders to share a larger proportion of costs from any future banking bailouts. European Union leaders agreed last month to set up a permanent crisis resolution system to start in 2013. After German Chancellor Angela Merkel called on bondholders to share the burden, the European Commission proposed Jan. 6 that bank regulators be allowed to write down senior debt before relying on the taxpayer to save a failing lender.
Senior bondholders aren’t currently at risk, including those holding Irish debt. "The debate has definitely changed," said Hank Calenti, a credit analyst at Societe Generale SA in London. "It used to be about whether the subordinated bondholders would have to pay; now it’s about whether the seniors will be hit."
The extra yield investors demand to hold Irish 10-year bonds rather than German securities of similar maturity has narrowed to 578 basis points from a euro-era record of 680 points on Nov. 30, two days after the scale of bank losses forced Ireland to accept an international bailout. The spread over German debt is still more than nine times the average of the past decade, Bloomberg data show.
The Irish rescue package agreed with the EU and the International Monetary Fund includes as much as 35 billion euros of aid for the banks. Central Bank Governor Patrick Honohan said before the bailout was inked that total loan losses at the country’s lenders, including foreign-owned banks, total at least 85 billion euros. The government is taking a 92.8 percent stake in Allied Irish after injecting 3.7 billion euros into the lender last month. The state already took control of Anglo Irish Bank Corp., Irish Nationwide Building Society and EBS Building Society.
Ireland introduced laws last month allowing it to force junior bank bondholders to share losses. The new legislation allows Lenihan to issue orders to change interest and principal payments to bondholders and suspend their rights to payment. The Irish government "has shown its willingness to enforce losses," Alexander Plenk, a Munich-based analyst at UniCredit SpA said in a Jan. 14 note to clients, urging debt holders to accept Allied Irish’s offer. "We recommend accepting the offer, as a second offer will be made under worse conditions."
The central bank will review the banks’ capital again in March. That process may result in more loan-related losses and encourage the state to compel junior bondholders to take additional hits, according to Ciaran Callaghan, an analyst at NCB Stockbrokers in Dublin.
Anglo Irish, nationalized in 2009, offered in October to pay bondholders who refused to swap their securities 1 cent per 1,000-euro on the face amount of their subordinated notes. More than 90 percent of the bondholders of the notes due 2014 and 2016 agreed to swap 766.5 million euros in notes at an 80 percent discount, the Dublin-based bank said last month.
Fitch Ratings said Jan. 13 that Allied Irish’s buyback isn’t "coercive." However, if not enough investors accept the offer, "there will be a higher likelihood that a coercive debt exchange will take place or losses will be forced onto subordinated debt holders by other legislative means," the rating company said. "The authorities are holding a big stick," said Calenti. "It’s not as onerous as the Anglo stick, but it’s just as threatening. If you don’t take part in the buyback, you’re probably not going to get a whole lot more."
Up to half of Americans under 65 have preexisting medical conditions
by Amy Goldstein - Washington Post
As many as 129 million Americans under age 65 have medical problems that are red flags for health insurers, according to an analysis that marks the government's first attempt to quantify the number of people at risk of being rejected by insurance companies or paying more for coverage. The secretary of health and human services released the study on Tuesday, hours before the House began considering a Republican bill that would repeal the new law to overhaul the health-care system.
A vote is expected Wednesday. With their new majority, House Republicans are widely expected to have enough votes to pass the repeal measure. The prospects are more remote in the Senate, where Democrats remain in control, and Senate Majority Leader Harry Reid (D-Nev.) has said he would not bring up the bill for a vote. The report is part of the Obama administration's salesmanship to convince the public of the advantages of the law, which contains insurance protections for people with preexisting medical conditions.
The House's new GOP leaders plan to begin debate Tuesday on a bill that would repeal the health-care law in its entirety. The vote is set to conclude on Wednesday. Republicans immediately disparaged the analysis as "public relations." An insurance industry spokesman acknowledged that sick people can have trouble buying insurance on their own but said the analysis overstates the problem. The study found that one-fifth to one-half of non-elderly people in the United States have ailments that trigger rejection or higher prices in the individual insurance market. They range from cancer to chronic illnesses such as heart disease, asthma and high blood pressure.
The smaller estimate, by Health and Human Services Department researchers, is based on the number of Americans whose medical problems would make them eligible for states' high-risk pools - special coverage for people denied insurance because of their medical history. The researchers arrived at the larger figure by adding in other ailments that major insurers consider a basis to charge customers higher prices or to exclude coverage for some of the care they need.
Using those two definitions, the study took 2008 findings, the most recent available, from a large federal survey of medical expenditures to figure out how many people had reported that they were bothered by those health problems, had visited a doctor for them or had been at least temporarily disabled because of them. The study is laced with reminders about provisions of the 2010 Patient Protection and Affordable Care Act - as the health-care law is formally known - that are designed to eliminate insurance problems for such people.
The most significant is scheduled to take effect in 2014, when the law will, for the first time, forbid insurers to charge sick patients more or reject sick applicants. Last year, two smaller changes took effect: a rule that insurers cannot reject sick children, and temporary subsidies until 2014 for a federal high-risk pool and new state ones. In their early months, the pools have not proved popular. "Americans living with pre-existing conditions are being freed from discrimination in order to get the health coverage they need," HHS Secretary Kathleen Sebelius said in a statement. Repealing the law, she argued, would leave such people unprotected.
Told about the new analysis, Robert Zirkelbach, a spokesman for America's Health Insurance Plans, the industry's main lobbying group, said: "Look, we've long supported reforming the individual insurance market so that everybody can have access to health-care coverage, regardless of their preexisting medical conditions. But this report exaggerates the number of people who are impacted." Most of the Americans included in the figures, Zirkelbach said, currently have insurance. They would be at risk, he said, only if they needed to change coverage and buy it on their own. People who get insurance through their jobs are guaranteed coverage, he noted.
A Republican House aide, speaking about the report on condition of anonymity because it had not yet been made public, said, "When a new analysis is released on the eve of a vote in Congress, it's hard to view it as anything but politics and public relations." "Defenders of this law are setting up a false choice by implying we must choose between [the law] in its entirety or no benefits at all for individuals with preexisting conditions," the aide said. "Republicans have consistently advocated for coverage options for individuals with preexisting conditions."
Leading Republicans, including the party's 2008 presidential nominee, Sen. John McCain (Ariz.), have been proponents of high-risk insurance pools. It is less clear what the GOP position is on the part of the law that will end insurers' ability to deny coverage or charge more if people are sick. A GOP alternative last year to the Democratic legislation was silent on the issue. Another Democratic analysis, released last fall by Rep. Henry A. Waxman (D-Calif.), then the chairman of the House Energy and Commerce Committee, said that between 2007 and 2009, the nation's four largest private health insurers denied coverage to about 650,000 people based on their medical history.
The new report says that, of those Americans who are uninsured, 17 percent to 46 percent have medical conditions, depending on the definition used. Such health problems, the study found, are especially common among adults ages 55 to 64 - a group long recognized as a problem spot in the health-care system, because people of that age tend to have higher medical expenses but do not yet qualify for Medicare, the large federal insurance program for the elderly.
In Corrupt Global Food System, Farmland Is the New Gold
by Stephen Leahy - IPS
Famine-hollowed farmers watch trucks loaded with grain grown on their ancestral lands heading for the nearest port, destined to fill richer bellies in foreign lands. This scene has become all too common since the 2008 food crisis.
Food prices are even higher now in many countries, sparking another cycle of hunger riots in the Middle East and South Asia last weekend. While bad weather gets the blame for rising prices, the instant price hikes of recent times are largely due to market speculation in a corrupt global food system.
The 2008 food crisis awoke much of the world's investment community to the profitable reality that hungry people will do almost anything, even sell their own children, in order to eat. And with the global financial crisis, food and farmland became the "new gold" for some of the biggest investors, experts agree.
In 2010, wheat futures rose 47 percent, U.S. corn was up more than 50 percent, and soybeans rose 34 percent.
On Wednesday, U.S.-based Cargill, the world's largest agricultural commodities trader, announced a tripling of profits. The firm generated 1.49 billion dollars in three months between September and November 2010. Meanwhile, U.S. Treasury Bills pay a return of less than one percent.
"We have set up a global food system that supports speculation. And with [such] markets, we can't get speculators out of the food business," said Lester Brown, an agricultural policy expert and founder of the Washington- based Earth Policy Institute. "Farmland is better gold than gold for speculators," Brown told IPS.
Growing concern over access to food is also creating a new geopolitics around food security, with many countries buying up farmland and banning the export of food, he said. World leaders have utterly failed to address the simple fact that while there is enough food, a billion people, living in every country in the world, simply can't afford to buy it, said Anuradha Mittal of the Oakland Institute, a U.S.-based policy think tank on social, economic and environmental issues.
"Why were a billion hungry with a record wheat harvest in 2008?" Mittal told IPS. And how is it there are one billion people who are overweight, with 300 million of those considered medically obese? The global food system is designed to generate profits not feed people, and nothing has changed since 2008, she said. "There has been no focus on how to achieve food security or on regulating the food trade," Mittal noted.
Instead, the World Bank, World Trade Organisation and other multilateral organisations are pushing for more production and more trade liberalisation, she said. That approach is exactly how Africa became unable to feed itself after being previously food secure. "Africans have become share-croppers, exporting coffee, cotton, flowers and now food while going hungry," Mittal said.
Under the guise of investing in agriculture, huge amounts of money are being offered to debt-ridden countries in exchange for long-term leases to their foodlands. "Our research shows that the most fertile lands are being secured. There are huge issues around governance and corruption in this land grabbing," said Mittal.
More than 100 billion dollars has been invested in buying farmland since 2008, mainly in Africa by foreign companies and foreign-state owned industries, according to GRAIN, a small international non-profit organisation that works to support small farmers. This massive investment hasn't yet translated into more food availability, says Lester Brown. Often times, buying land is just the first step. Major investments are also needed in farming infrastructure like roads, vehicles, storage capacity, mechanical services for equipment, irrigation and so on.
"I haven't seen a big increase in grain production anywhere. Right now it looks like a lot of land speculation," he said. Brown has long documented the fact that yields of rice, wheat and other grains have not been increasing in many countries while demand has escalated. China, he notes, now imports 70 percent of its soy and is expected to begin to use its plentiful cash reserves to buy large quantities of wheat and corn in the near future.
And with the U.S. converting 30 percent of its corn crop into ethanol to 'feed' its cars and trucks, food supplies will be tight for some years, he predicts. With the decline in traditional equity stocks along with collapse of housing and commercial real estate markets, billions of investment dollars are being mobilised to buy farmland and food commodities. It's not just Wall Street looking for big returns, it's also private and public pension funds in Europe and North America as well, said Devlin Kuyek of GRAIN.
Investors from Saudi Arabia have leased large tracts in land in Ethiopia, Senegal, Mali and other African countries amounting to several hundred thousand hectares. "How can African countries hope to have food security by signing long-term leases to foreign interests?" Kuyek told IPS. When South Korea's Daewoo Logistics tried to buy 1.3 million hectares, or one-third, of Madagascar's farmland in 2008, violent protests erupted and the government was toppled. South Korea still has at least a million hectares in long- term leases elsewhere and China 2.1 million ha, mainly in Southeast Asia.
Some of the leases are for 99 years at a one dollar a hectare, but local people "are not eligible for the deals being promoted in countries where millions of people remain dependent on food aid", said Howard Buffett, a U.S. farmer and philanthropist whose father is Warren Buffett, the well- known billionaire investor.
Howard Buffet reports being offered land deals where African governments promise to provide 70 percent of the financing, all utilities, and a 98-year lease requiring no payments for four years.
The last thing Africa needs are policies that "enable foreign investors to grow and export food for their own people to the detriment of the local population" writes Buffet in the introduction to the 2010 Oakland Institute report, "(Mis)investment in Agriculture".
Buffet's foundation has a research farm in South Africa and says investments are needed, but in terms of seeds, inputs, improved extension services, education on conservation techniques and generally assisting local farmers. Investing in land grabs will simply fuel conflict over land and water, he concluded. Shockingly, about 70 percent of the billion hungry people in the world are farmers, herders and other food producers who could feed themselves if they had access to land, markets and a little bit of credit, said GRAIN's Kuyek.
"That well-understood reality has been ignored for years," he said. "These land grabs are just wrong: morally and socially wrong."
As Food Demand Rises, Salvation Army Donations Drop
by Laura Bassett - Huffington Post
Due to high numbers of unemployed and underemployed families, more people showed up at Salvation Army programs across the country looking for food in 2010, but nearly two-thirds of those programs saw a decrease in food and money donations.
According to an internal survey conducted in the fourth quarter of 2010, 94 percent of Salvation Army food service programs reported some level of increase in requests for food assistance over the previous year. The Salvation Army is one of the largest social-service organizations in the world, and is the largest direct provider of social services in many cities throughout the United States.
The report shows a marked increase in new clients, ranging from middle class families to the working poor, as well as younger generations looking for work. "Here in Minnesota we have the new poor, the working poor, the underemployed, the unemployed -- it's a dynamic shift in the population of people coming in," said Major Darryl Leedom, the Salvation Army's regional commander for Minneapolis and St. Paul, Minn. "Many of those individuals have already exhausted their savings and financial support from friends and family, so it took them a while before they found it necessary to come in for food assistance."
Leedom told HuffPost the new families he sees coming in are often surprised and embarrassed to find themselves in the position of asking for help. "They're a little bit ashamed -- no one likes to think they need something as basic as food," he said. "They'll say, 'I've never had to do this before, we've never walked by one of those red kettles without putting money in.' And we say, 'Our role is to embrace, empower, encourage, equip. We hope there's a day you wont need to come to us, but for right now, let's journey though this together.'"
Nationwide, monetary and food donations to Salvation Army food programs from government, public and private donors were all down in 2010. More than a third of programs surveyed said their funding decreased by as much as 50 percent and that their food stocks were running low to dangerously low.
Leedom said this lack of funds and supplies has forced each local program to be more creative about acquiring food. "In 2009, through contributions from grocery stores, etc., 850,000 pounds of food were distributed, which is huge. We were able to beef that up through some other food-salvage efforts to over 953,000 pounds in 2010, despite a shortfall in finances, by pushing up our in-kind support," he said. "That means that before something expires, a grocery store will call us, and we pick up the items and then haul them to our neighborhood centers."
Salvation Army Commissioner William Roberts wrote in the report that he expects this high demand for food to continue into 2011, especially during the winter months, and he hopes people will dig deep and donate. "To meet this demand in 2011, The Salvation Army is calling upon donors and other supporters everywhere to continue volunteering or giving back -- either to The Salvation Army or another charity -- to help ensure that not a single American goes hungry," Roberts wrote.
Donors and volunteers can learn more about giving to The Salvation Army by visiting www.SalvationArmyUSA.org or by calling 1-800-SAL-ARMY.