John Huggins. Said he's 14 years old, been doffing for 8 months in Guadalupe Valley Cotton Mills.
Gets a dollar a day now. Before, worked in other mill, since age six.
"They don't even bother to ask your age. Didn't ask mine. Easy 'nuff to git a job."
Ilargi: With all the attention for GM and Ford, most people would be inclined to think they are the biggest story in the US economy. But I'm looking at Circuit City, and the fall-out from its Chapter 11 filing yesterday. Circuit City managed to get a $1.1 billion temp loan to carry it over till after January 1. It is then suppsed to use the proceeds from the shopping season to pay off the loan.
Bit of a gamble, I'd say. They'll run into the same problems that keeps GM away from Chapter 11 in the first place: who'll buy your products if they fear you won't live to honor service contracts? Plus, once the loan is paid back, will Circuit City be a healthier company? More likely, they’ll be lucky to be back to square one.
But that's not the biggest issue: the company has over 700 stores in the US, and even more in Canada. Imagine all these branches close. That's a lot of empty spots in malls and shopping centers. That in turn drives down the rents. Plus, a whole lot more reatailers won’t be around much longer, if they even make it to Christmas.
So who were the biggest losers yesterday? Not GM, but the companies that own the malls, along with all the major investors in their commercial real estate holdings. It won't surprise you if I mention that they have financed most of their malls using the other malls as collateral. It's a great scheme in a rising market. In a falling one, not so much. Did I mention that European -pension- funds are large investors in US commercial real estate? Once CRE in America starts falling, it will be revealed as a Ponzi scheme. January 2009 may be a watershed month. With ice cold water.
Anyway, if you're still thinking about rescuing GM, you better be quick, the markets are speaking loud and clear. The company’s entire market cap is now $1.75 billion. They burn through more cash than that in one month. This may solve Bush and Obama’s quandary. It may also lead to the only sensible thing W. has done in 8 years, and the only measure that may salvage some of his legacy.
I sincerely hope, for Obama and for the nation, that they are performing a shadow play, that will end up in letting GM follow in the steps of the dino and the dodo. The "not on my watch" theme forces the demise of GM -and probably Chrysler- to take place in between presidencies. Now is that time. Obama cannot carry GM on his back for four years. He needs to deflect the blame for the bankruptcy. Now is the time. Yes you can.
The US government is bankrupting its economy with these wild bailouts of Paulson and Cheney cronies. It needs to focus on saving businesses that could still be saved. That does not include AIG, GM, Citigroup or even Goldman Sachs in its present form. Bailing out these firms doesn't just cost $100's of billions, it also drives down whatever confidence and trust in the US still exists around the world. And the US is like an old lady that pees in her pants and shakes too much to lift a fork to her mouth: utterly dependent on 24/7 assistance.
As I said before, it's the Treasuries and boonds market that they have to look at. There's no such thing as a limiless source of money, whether in printing presses or in helicopters, as long as the US depends on international bond markets to purchase its government-guaranteed paper. Don't forget that many parties around the globe are first of all looking with wary eyes at the developments in US domestic markets, and second, have huge issues at home.
The ruble is under heavy pressure to devaluate, and Russian stock markets dropped off a cliff. China’s $600 billion rescue plan has to be paid for somehow as well, and we see oil drop below $60 in US markets today, which is a good indication of how much faith the markets have in China’s grandiose plans. If that's how they see China, it's easy to figure out how they look at the US.
Fannie Mae just demanded another $100 billion. It has to stop. At this rate, that US federal government AAA rating may not even make it to Christmas either.
Strains mount on US bailout plans
The US Government's financial system rescue plan is under pressure as a growing array of companies signal the need for aid. Mortgage giant Fannie Mae said it was losing money so rapidly it might need a cash infusion from the Treasury Department by year's end. The company lost $29 billion in the third quarter. And, American Express obtained Federal Reserve approval to become a bank holding company, giving the credit card company access to cheap financing from the central bank.
Amex is the latest giant to make the conversion amid the financial crisis, a path also taken by Morgan Stanley and Goldman Sachs. The Fed said in a statement that it had approved the request swiftly because of "the unusual and exigent circumstances affecting the financial markets". General Motors, which has been lobbying heavily for government aid, said it might violate the terms of some of its debt by the end of the year if it could not steady its finances. That could cripple the auto maker's ability to continue operating. The chorus of calls for help could pressure the Bush administration to widen the scope of its $700 billion bailout plan, the Troubled Asset Relief Program, which was authorised in October. Treasury officials have refused so far to open TARP to US car makers, despite lobbying from Congress to do so.
The Treasury has committed all but $60 billion of the first $350 billion in funds granted by Congress under the TARP plan. That sum remains after accounting for Treasury's planned investments in the banking sector and Monday's additional $40 billion investment in troubled insurer American International Group. AIG was originally bailed out by the Federal Reserve in September, and Fannie Mae, along with its sister company Freddie Mac, was seized by the Government the same month. The rescue efforts were "evolving in ways that I don't think anyone anticipated", said Camden Fine, president and CEO of the trade group Independent Community Bankers of America.
"Things are just hitting them from every single direction, every day, and I don't think they know whether to spit or go blind."
The additional life jacket for AIG -- plus the thrashing from Detroit -- makes it increasingly likely that Treasury Secretary Henry Paulson will turn to Congress for the second half of its promised $700 billion. Treasury, which originally planned to dole out funds to banks and certain insurers, is considering widening the TARP program to other financial institutions. To have a meaningful impact, Mr Paulson would need access to more than the $60 billion remaining. The Treasury secretary is likely to face a hostile reception from legislators angry over Treasury's reluctance to aid the auto industry as well as its decision not to force banks receiving government assistance to lend out those funds.
On Monday, members of the Michigan congressional delegation drafted a letter to Mr Paulson asking him to "immediately" use his authority to help the auto industry. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid made a similar request over the weekend. Congress can reject the Bush administration's request for the next $US350 billion installment by issuing a resolution disapproving Treasury's plan. Mr Paulson plans to give an update on the TARP program later this week and is expected to focus on capital investments.
AIG's Losses Lead Insurers as Financials' Tally Nears $1 Trillion
American International Group Inc.'s losses from the collapsing mortgage market account for almost half the $123.6 billion inflicted on North American insurers, helping push the tally for the world's biggest financial firms toward the trillion-dollar mark. AIG, which posted a record third-quarter loss yesterday, accounts for $60.9 billion of the writedowns and credit losses. Bond insurer Ambac Financial Group Inc. is second among the insurers with $10.6 billion, and life insurer MetLife Inc. is third at $7.2 billion. The industry losses are three times as costly as Hurricane Katrina, the worst natural disaster in U.S. history.
The falling value of holdings tied to U.S. mortgages contributed to net losses at 15 of the 24 companies in the KBW Insurance Index in the third quarter, and prompted North American insurers to raise more than $83 billion to replenish capital. New York-based AIG helped increase the total of losses among financial companies worldwide to more than $919 billion. "We have a really big investment base, and if those assets continue to deteriorate in value, we could continue to suffer losses," AIG Chief Executive Officer Edward Liddy said in a Bloomberg Television interview yesterday. "We don't think that will happen, but you just never know what will happen in the marketplace."
AIG took writedowns on mortgage-backed securities and credit-default swaps, guarantees protecting investors from losses on fixed-income holdings. AIG got a new $150 billion government rescue package this week, supplanting its initial $85 billion bailout of less than two months ago. The Bloomberg tally of writedowns is available through the WDCI function, and now includes data for insurers. The figures for the industry include unrealized losses, which are watched by investors and ratings firms to gauge an insurer's financial strength and don't count against earnings.
The list includes 2,929 job cuts announced by North American insurers since midyear 2007. After Katrina in 2005, companies including Northbrook, Illinois-based Allstate Corp., the largest publicly traded U.S. home insurer, raised rates in disaster-prone areas, bolstering their balance sheets and stock prices. Now, insurers are stuck holding mortgage-related investments in a market where there are so few buyers that it's hard to know the value of those assets. The industry's tally excludes so-called mutual insurers, owned by their policyholders.
Irate Congressman Demands Resignation of AIG CEO
A leading critic of AIG today demanded the company's CEO resign in the wake of the disclosure of yet another "junket" at a resort spa. In a letter to AIG's CEO Edward Liddy, Congressman Elijah Cummings (D-Md.) said the decision to hold an event for independent financial advisors last week at a luxury Phoenix resort was "outrageous" given an earlier pledge by Liddy to curtail such events. Cummings wrote that AIG can begin to restore its trust with Congress "by accepting your resignation from the positions of chairman and chief executive officer."
Reporters for abc15.com (KNXV) caught top AIG executives on hidden camera at a secretive gathering last week at the luxurious Pointe Hilton Squaw Peak Resort in Phoenix. AIG instructed the hotel to make sure no company logos and signs were seen on the property, according to a company spokesman.
In his letter, Cummings questioned how the Phoenix event could have taken place given Liddy's earlier assurances that "not one cent of taxpayer dollars" would by used to pay for such events. The decision to hold the event while AIG was asking for billions of dollars more in federal loans was "even more shocking", wrote Cummings.
"Having received this assistance, which has been nothing less than a lifeline for AIG, you have decided to continue to hold corporate parties as if nothing has fundamentally changed with your business. An AIG spokesman has said that Cummings "was mistaken" about the nature of the Phoenix event. The spokesman said the meeting at the resort was for independent financial advisors and that most of the $343,000 cost would be paid by product sponsors.
Cummings asked Liddy to provide him with details on who the sponsors were and how much money they were providing, as well as an itemized list of expenses incurred by AIG. Cummings also requested a list of each of the 160 planned events that AIG said it had cancelled on or after October 30. "The American taxpayers who have prevented your firm from literally disappearing will judge your commitment to re-establishing their trust by your willingness to act in accordance with their expectations for the effective and efficient use of their money," Cummings wrote.
Meanwhile, leading government watchdog groups are also taking AIG to task over the Phoenix event. "AIG executives should be ashamed of themselves," said Tom Schatz, president of Citizens Against Government Waste. "Individuals across the country are on the precipice of financial ruin while AIG personnel still attend extravagant getaways at the taxpayers' expense."
The watchdog group Taxpayers for Common Sense also weighed in on on the controversy. "AIG officials are obviously sensitive to public perception. Just look at how they hid their sponsorship and logos," said Stephen Ellis, Vice President of Taxpayers for Common Sense. "But you're not just supposed to hide your actions, you're supposed to change your behavior. AIG has lined up at the taxpayer trough again and yet current leadership still seems intent on living the lavish life."
GM's Skid Accelerates as Credit Crisis, Slowing Sales Threaten Bankruptcy
General Motors Corp., burning cash as U.S. sales slide, is being pushed closer to bankruptcy as it waits to learn whether the auto industry will win a new round of government loans. Only federal aid can prevent a collapse by the largest U.S. automaker, analysts including Buckingham Research Group's Joseph Amaturo said yesterday as the shares plunged to a 59-year low. Reorganizing in court protection also may not be possible, because the credit crunch has dried up financing.
"Strategic bankruptcy is not an option for GM," said Mark Oline, a credit analyst with Fitch Inc. in Chicago. "This is an issue of operating or not operating." The prospect of a forced liquidation raises the stakes for GM's quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year's end. GM had $16.2 billion on hand as of Sept. 30, down from $21 billion at the end of June, and needs $11 billion to pay its monthly bills. "A bankruptcy wouldn't address our immediate liquidity concerns," said Renee Rashid-Merem, a spokeswoman for Detroit- based GM. "It's not an option for GM because it creates more problems than it solves."
GM's U.S. sales, which fell 21 percent last quarter and 45 percent in October, "would be devastated" by a bankruptcy filing, Chief Executive Officer Rick Wagoner said in a Nov. 7 Bloomberg Television interview. The "unimaginable consequence" of a bankruptcy "motivates us to really come up with cash in every way possible," he said. Wagoner, 55, is cutting jobs and shutting plants after almost $73 billion in losses since the end of 2004. He told trade publication Automotive News that GM needs an aid package before President-elect Barack Obama takes office in January. Investors may be concluding that GM won't succeed. The stock slid yesterday, chopping $600 million from GM's market value, to about $2.05 billion after Deutsche Bank AG said the shares may be worthless in a year.
GM, Ford Motor Co. and Chrysler LLC have asked for $50 billion in aid to weather the worst auto market in 17 years, people familiar with the discussions said. That would be in addition to $25 billion approved in September to help retool plants to build more fuel-efficient vehicles. "There's growing support in Washington, in Congress, to give government assistance to GM and the other automakers," said Bruce Zirinsky, co-chairman of the financial restructuring department of Cadwalader, Wickersham & Taft LLP in New York. "The question is going to be how that gets done and at what price to the shareholders and creditors."
Obama spoke with President George W. Bush about the urgency for an aid plan at a White House meeting yesterday, aides to the president-elect said. Earlier, the White House signaled its opposition to a proposal by House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada for Treasury Secretary Henry Paulson to tap the $700 billion bank-rescue package to aid automakers. Democratic lawmakers reject Paulson's arguments that he lacks authority to do so, Senator Carl Levin of Michigan said yesterday in an interview. Should Paulson continue to resist using funds from the financial bailout approach, Congress would craft language to help the automakers and add it to the stimulus plan to be considered next week, Levin said. Treasury spokeswoman Brookly McLaughlin referred questions to the White House.
Bill Ackman, manager of the Pershing Square Capital Management LP hedge fund in New York, said GM shouldn't take government money because "it has been hamstrung for years because it has too much debt and it has contracts that are uneconomic." Ackman, who said he doesn't have a position in GM securities, said yesterday on the Charlie Rose show the automaker should file for a so-called prepackaged bankruptcy with financing to keep operating while in court protection. That may be difficult. Those debtor-in-possession loans have "all but shut down," CreditSights Inc. said yesterday in a report. The loans, which are paid off when companies exit bankruptcy, aren't being made as lenders become more averse to risk, wrote Chris Taggert, a New York-based analyst.
GM would have no choice but to shut down, said Maryann Keller, an independent auto analyst and consultant based in Greenwich, Connecticut. A GM failure that stops production would cost 2.5 million jobs in the U.S. in the first year, according to the Ann Arbor, Michigan-based Center for Automotive Research. "In this world, you don't go Chapter 11 reorganization," Keller said in an interview. "You go Chapter 7 liquidation."
Ilargi: One day after I start calling US corporations like GM and AIG 'walking dead' and 'zombies', Bloomberg's Craig Torres and his interviewees do the same?! Anyway, needless to say, I heartily agree.
Revised AIG Terms Begin Treasury Transfusions to 'Zombie' Firms
The revised bailout of American International Group Inc. marks a new phase in the government's effort to shore up financial markets: It's the first time cash from the rescue fund Congress created last month has been committed to a failing company.
The Federal Reserve, which saved the insurer from collapse two months ago with an $85 billion loan, yesterday reduced that loan and offered lower rates, while the Treasury chipped in $40 billion from its bank-rescue fund to buy preferred shares. The new terms represent a departure for Secretary Henry Paulson, who until now has said he only wants to invest Treasury funds in "healthy" firms. Taxpayers are "keeping the zombie alive," said Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors and former director of research at the Atlanta Fed. "We keep getting deeper and deeper into these holes."
The shift is likely to vastly expand political demands for saving dying companies in the name of financial or economic stability. The administration of President-elect Barack Obama may soon have to consider credit or capital injections for other insurers, automakers, even retailers as the U.S. slides deeper into what could be the worst recession in a quarter-century. "Are you going to do General Motors and Ford, and, if you do those, are going to go on and do retailers?" said William Isaac, former chairman of the Federal Deposit Insurance Corp. and now chairman of the Secura Group LLC. " Where does it stop? That is a very difficult decision we are going to face as a country."
With the new bailout plan, the Treasury is conceding the initial rescue wasn't sufficient. It's investing funds from the so-called Troubled Asset Relief Program created by Congress to purchase preferred shares in a company that lost $24.5 billion in the third quarter, its fourth straight unprofitable quarter. Losses in the past year wiped out profit from 14 previous quarters. In addition to the Treasury's purchase of preferred stock, the Fed will lend AIG $60 billion, and create two new emergency loan units to finance up to $52.5 billion of the company's securities. Between loans and the capital injection, the government's $152.5 billion commitment is almost double the Fed's initial $85 billion loan.
The security of the government's collateral, the assets of the company itself, is likely improving because the Fed is removing distressed securities from the company's balance sheet and the government is now a direct stakeholder. "The way the loan was structured previously would have led to a liquidation of AIG, whether intended or not," said Dino Kos, a managing director at Portales Partners LLC, New York. "Obviously, they have changed course." The New York Fed gave the original loan in September to prevent widespread default against AIG creditors in the same week that Lehman Brothers Holdings Inc. collapsed.
In a statement yesterday, the Fed said the revised terms "establish a more durable capital structure and resolve liquidity issues," as well as "protect the interests of the U.S. government and taxpayers." The Treasury, in a separate statement, called AIG a "systemically important company." The insurer guaranteed about $372 billion of fixed-income investments as of Sept. 30. "This action was necessary to maintain the stability of our financial system," Neel Kashkari, the interim assistant secretary who heads the Treasury's office overseeing the bailout, said yesterday at a Securities Industry and Financial Markets Association conference in New York. Vincent Reinhart, resident scholar at the American Enterprise Institute and former director of the Monetary Affairs Division at the Fed Board, said yesterday's expansion of the AIG bailout shows that "no one knows the general principles" behind the Treasury's trouble-assets program.
First, Treasury said it would buy distressed assets. Then it began injecting capital directly into banks, and now, with AIG, into troubled financial institutions. "Now we are outside solvent institutions. If you don't have a design principle it is very difficult to draw lines," Reinhart said. When the Obama administration takes over the Treasury, the new leaders "can increase the size of these programs and the scope, and say we are only following logically the Paulson plan." Democratic congressional leaders urged Paulson in a Nov. 8 letter to use the rescue funds to lend to automakers, a sign that the package's scope may be broadened further.
Senator Carl Levin, Democrat of Michigan, said in an interview he believes the Treasury has the authority to use the bailout funds for that purpose. That could be made explicit by adding language to an economic-stimulus bill that will be considered when Congress returns next week for a post-election lame-duck session, he said. Shares of General Motors Corp. fell 23 percent yesterday after a Deutsche Bank AG analyst said the stock may be worthless in a year. The revised terms for AIG reduce the interest rate on the $60 billion Fed loan to the three-month London interbank offered rate plus 3 percentage points, from a previous spread of 8.5 percentage points.
The Fed also invoked emergency authority to set up two new emergency loan facilities, one to fund the purchase of residential mortgage-backed securities from AIG's portfolio, and a second to finance the purchase of hybrid credits that AIG wrote default insurance contracts against. In effect, the Fed is taking a direct role in unwinding a troubled insurance business of AIG. The capital injection into AIG will come from a $100 billion pool authorized by Congress for Treasury to use at its discretion, rather than the $250 billion allocated to purchase stakes in the country's banks, a Treasury official said. The government will get a 10 percent dividend for its preferred shares in the insurer, the Treasury official said.
"The Fed and Treasury are saying there should be no penalty for bad performance," said Walker Todd, a former Cleveland Fed attorney who is now a senior research fellow at the American Institute for Economic Research in Great Barrington, Massachusetts. "It creates the zombie finance phenomenon. The living dead keep on walking instead of taking a decent burial
GM says GMAC mortgage unit, partsmaker Delphi may not survive
Bad news kept piling up for General Motors Corp. on Monday as its shares plunged to their lowest point in 60 years and the company said in a government filing that the mortgage unit of its finance arm may not survive. GM also said that Delphi Corp., its former parts operation that was spun off as a separate company in 1999, may not be able to emerge from Chapter 11 bankruptcy protection. GM shares dropped $1, or 23 percent, to close at $3.36.
They earlier plummeted as low as $3.02 on increasing worries about accelerating cash burn and mounting losses. That marked the automaker's lowest share price since Dec. 2, 1946 when it hit $3, according to the Center for Research in Security Prices at the University of Chicago. The price is adjusted for splits and other changes. Before the markets opened Monday, Brian A. Johnson of Barclays Capital cut his rating on GM to "Underweight" from "Equal Weight" and slashed his price target for the Detroit-based automaker to $1 from $4. Johnson said that without additional funding, GM's gross cash will likely fall below minimum levels in the first quarter of next year.
The analyst also said that while additional government assistance will likely decrease the likelihood of a bankruptcy protection filing at the nation's largest automaker, it also would likely significantly dilute its equity. Separately, JPMorgan's Himanshu Patel said he expects GM to receive some form of federal aid, but advised investors to be cautious given the uncertainty. He added that he expects the automaker to end 2008 with $12.6 billion in cash on hand, just above midrange minimum cash and excluding government loans.
Both analysts said they expect the automaker's per-share losses for this year and next to be significantly larger than what was expected. Both slashed their estimates. Early in the afternoon, GM filed its quarterly report with the U.S. Securities and Exchange Commission that contained more bad news. The company said that the troubled mortgage industry and frozen credit markets have raised doubts that the mortgage business of its GMAC LLC financial arm can survive.
The filing says that the value of Residential Capital's mortgage loans have deteriorated due to weak housing prices, delinquencies and defaults. It is also having trouble raising capital. GM owns 49 percent of GMAC LLC, with the rest owned by Cerberus Capital Management LP. Market developments have so harmed Residential Capital, called ResCap, that there is "substantial doubt about ResCap's ability to continue as a going concern," GM said in the filing. The automaker also revealed that ResCap's deteriorating finances forced ResCap to shore up its standing with mortgage finance giant Fannie Mae, the largest U.S. buyer and backer of home loans.
ResCap said it posted an additional $200 million in collateral with Fannie Mae and sold off the rights to collect payments on $12.7 billion in loans, or 9 percent of the total amount it collects for Fannie Mae. Had ResCap not acted, Fannie Mae could have severely curtained its loan purchases from ResCap. GM also said in the filing that Delphi Corp., its former parts-making operation that was spun off in 1999, is unlikely to emerge from bankruptcy protection in the short term and may not be able to emerge at all.
GM's Best Option Is Bankruptcy Filing, Ackman Says
General Motors Corp., the biggest U.S. automaker, should file for bankruptcy rather than taking money from the government, hedge fund manager Bill Ackman said. "It has been hamstrung for years because it has too much debt and it has contracts that are uneconomic," Ackman, manager of the Pershing Square Capital Management LP hedge fund in New York, said on the Charlie Rose show yesterday. "The way to solve that problem is not to lend more money. They should do prepackaged bankruptcy."
GM is petitioning the U.S. government for aid after saying last week that it may not have enough cash to operate this year. A bankruptcy would leave bondholders in control of the company in exchange for forgiving some debts, Ackman said. The automaker dropped to its lowest level in 59 years yesterday after a Deutsche Bank AG analyst downgraded the shares and said they may be worthless in a year. The slump demonstrated mounting pessimism that a turnaround will succeed amid a global credit crisis and the worst sales market in at least 15 years. GM fell $1, or 23 percent, to $3.36 in New York Stock Exchange composite trading yesterday, its lowest close since June 17, 1949, according to Global Financial Data in Los Angeles. The shares have lost 86 percent of their value this year and were down 3 cents to $3.30 at 8:45 a.m. today in early New York trading. Ford Motor Co. dropped 9 cents to $1.93 yesterday.
A bankruptcy filing "would be a disaster far beyond General Motors and a sad chapter in American history," GM Chief Executive Officer Rick Wagoner said in a Bloomberg Television interview last week. GM said on Oct. 24 that bankruptcy "is not an option." GM's 8.375 percent bonds due in July 2033 traded at 25.75 cents on the dollar yesterday, less than half their price two months ago, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes yielded 32.5 percent. GM needs to reduce debt to a supportable level, Ackman said. "The `bankruptcy' word scares people but it's simply a system," said Ackman, who said he doesn't have a position in GM securities. A Chapter 11 bankruptcy filing enables a company to seek protection from creditors while still continuing to operate.
Ackman, 42, profited as a short seller when MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, plummeted this year over guarantees they issued on securities tied to subprime mortgages. In July Ackman said he had short positions in Fannie Mae and Freddie Mac, which were seized by U.S. regulators in September after $14.9 billion in net losses threatened to further disrupt the housing market. Last month Ackman said he bought a 9 percent stake in Wachovia Corp. GM, Ford and Chrysler LLC, owned by Cerberus Capital Management LP, may be moving closer to gaining federal aid. U.S. House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada wrote to Treasury Secretary Henry Paulson to urge that bank-bailout funds be opened up for loans to automakers.
Rahm Emanuel, chief of staff to President-elect Barack Obama , has said the U.S. auto industry is "essential" to the economy. While Emanuel stopped short of endorsing such a plan, the White House yesterday signaled its opposition, saying aid to the industry wasn't discussed during the debate on the banking bailout. Congress may take up automaker assistance when it returns next week. The government should ensure GM uses funds to retrain workers and shouldn't put money into the company if it will only be used to service existing debt, Ackman said. "The welders at GM could help on the infrastructure of the country," Ackman said. "That's a much better use of taxpayer money."
Obama asks Bush for help for auto industry
U.S. President-elect Barack Obama urged President George W. Bush to pass a second stimulus package to help the U.S. economy and asked him to use existing bailout measures to help the ailing auto industry, an aide said on Tuesday. A spokeswoman for Obama said the president-elect raised the issue in his meeting with Bush at the White House on Monday.
Spokesman Robert Gibbs said on the plane back from Washington after the meeting, Obama and Bush had discussed the "broad health" of the auto industry but the newly elected president did not specifically ask for help for one single American automaker. "Obama asked for a second stimulus and to use existing measures to help the auto industry," an aide said on Tuesday but gave no further details on what measures were available currently to help the carmakers or the specific provisions of a new economic stimulus plan.
The U.S. auto industry has asked for up to $25 billion in emergency loans in order to prevent the industry's collapse. U.S. auto sales are plunging and General Motors Corp, Chrysler LLC and Ford Motor Co, are burning through billions of dollars of cash monthly. Obama has acknowledged the gravity of the situation with the automakers and said last in a news conference on Friday that federal help for the distressed industry is a high priority of his transition team.
Top congressional Democrats asked Treasury Secretary Henry Paulson in a letter on Saturday to consider aid to the automakers through the financial bailout initiative that has so far covered banks and other financial services companies. The Bush administration has not dismissed outright the possibility of extending emergency assistance to the automakers. But public and private statements from administration officials indicated more clearly on Monday that they believe any new and substantial money for manufacturers would require legislative action.
Barack Obama must be careful not to throw good money after bad at Ford and GM
Another set of abysmal third-quarter results from Ford and General Motors should send a strong message to US lawmakers and president-elect Barack Obama: the situation at Detroit’s Big Three is so dire that giving them emergency cash will simply prolong their pain – and cost the federal government billions. The US should only offer support if domestic car makers undergo a wholesale restructuring under the cover of bankruptcy.
Sure, the credit crisis has hurt all car makers – even the likes of Toyota and BMW. But their problem is declining profits; Ford and GM not only lost money, but incinerated $14.6bn in three months. Ford, with some $19bn of cash and credit lines to draw on, should at least be able to sputter along for a while. But even if GM reverts to its cash-burn run-rate of the first six months of 2008, by the end of the year it will be perilously close to dipping into the cash it needs just to keep the factories open. With time running short, Washington politicians must be tempted simply to throw money at the problem – especially with Ford and GM pledging to find more costs to cut.
But both have a track record of being overly optimistic about car sales – even Friday’s more conservative assumptions could look too rosy quickly if economic woes continue or worsen. Add to any losses that may cause the fact that the Big Three each have to pay some $7bn into independent healthcare trusts at the start of 2010. But leaving them to wither and die is also not an option. The risk of bankruptcy cascading catastrophically throughout the entire US car industry is too high: if one of the Big Three goes, the others would probably follow. Suppliers would be severely hurt, which would then put even more pressure on US-based foreign manufacturers.
That’s why a well-planned pre-packaged bankruptcy reorganisation makes sense. GM, Ford and Chrysler could take the necessary steps to retool their operations, such as slashing brands and dealers. Meanwhile, the government could provide debtor-in-possession bankruptcy financing, guarantee warranties to quash any fears customers might have of buying vehicles from a bankrupt car maker and perhaps even cover some or all of any shortfalls in pensions and healthcare contributions. It’s hardly ideal. Jobs will be lost, and benefits may well be trimmed again.
But that will happen anyway. A properly engaged government plan would offer a better chance for getting the Big Three back on the road, as well as minimising the knock-on effects on the broader US car industry. That’s got to be better than simply throwing good money after bad.
General Motors shares plunge to 62-year low
The gloomy predicament facing General Motors got worse today as its shares plunged to a 62-year low following a Wall Street analyst's report which concluded that the company's stock was worthless. America's largest carmaker, which is struggling to cope with a financing freeze and a collapse in demand for vehicles, has been aggressively lobbying the US government for billions of dollars in aid to avert bankruptcy.
Rod Lache, a motor industry analyst at Deutsche Bank, today advised his clients to sell GM's stock and set a share price target of "zero". GM's shares duly slumped by $1 to close at $3.36, after falling at one point to $3.02 - their lowest level since 1946. "Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like," said Lache.
Deutsche warned that GM may not even have enough money to see it past the end of December. It said the motor manufacturer's US cash could drop to $5bn and that this could be "overwhelmed by payables coming due in early January". The US president-elect, Barack Obama, has indicated that he favours aid to Detroit's struggling motor industry to avert huge job losses and economic damage. The Michigan-based Centre for Automotive Research has estimated that as many as 2m jobs in the supply chain could be jeopardised if GM or rival Ford collapse.
But any bail-out is likely to come with strings which could undermine the value of shareholders' equity. Analysts at Barclays Capital said: "While further government assistance would decrease the likelihood of a GM bankruptcy, we believe any government assistance would likely significantly dilute GM's equity." GM pointed to further difficulties today by admitting in a regulatory filing that the mortgage operations of its GMAC finance arm may not survive.
After reporting a $2.5bn quarterly loss last week, GM's chief executive, Rick Wagoner, made it clear that he viewed a filing for protection against creditors as a potentially disastrous option: "You can't sell cars to people under those circumstances
UK mortgage market to plunge by 80% this year, more to come
The UK mortgage market will contract by 80 per cent this year, house prices will fall for another 12 months and the property sector will not stabilise until 2010, Nationwide said yesterday. Alongside financial results showing that pre-tax profits were up by 11 per cent to £374m, the UK's second biggest mortgage lender said it had handed out just £1bn worth of mortgages in the six months to September, less than a third of the £3.6bn in the same period of 2007.
Tony Prestedge, the group development director at Nationwide, said: "Our forecast is now for the total mortgage market to be valued at £18bn this year, compared with £90bn last year." The prognosis for 2009 is no more positive. Nationwide is expecting house prices – which are already £30,000 lower on average than last year – to continue to fall at a rate of between 1 and 1.5 per cent per month for the rest of the year and well into 2009. "So far we have experienced a price reduction of more than 14 per cent since the market peaked in August 2007, and we expect a similar fall over the next year. We believe, peak to trough, there will be falls of around 25 per cent and it will be into 2010 before we see a stabilisation of the market," Mr Prestedge said.
The latest figures from the Royal Institution of Chartered Surveyors (Rics), published today, are no more cheery. Average transactions fell again last month, from 11.5 to 10.9 per agency – the lowest figure since the survey began in 1978. London is the worst-affected area, with six sales per agency, compared with the North-east's average of 16. The sales-to-stock ratio also fell to 13.5 per cent in October, the lowest figure since December 1992, suggesting further price falls to come.
Both Rics and Nationwide support last week's 1.5 percent point interest rate cut from the Bank of England to try to unlock the stifled housing market. But it will be some months before the effects are felt. Mr Prestedge said: "There is a likely further contraction of the mortgage market next year, but the extent is hard to predict given both the base rate reduction and the Government's recapitalisation of the banking system, the benefits of which are still flowing through the system."
Homeowners are clearly starting to feel the strain. The proportion of Nationwide's mortgage accounts that are more than three months in arrears is 0.4 per cent – still low compared with an industry average of 1.33 per cent but higher than the mutual's 0.36 per cent level last April. The number of repossessions in the past six months is 300, more than double the 143 in the six months to September last year. The big concern was the effect of recessionary job losses, Mr Prestedge said.
And even with mortgage lenders passing on the Bank of England's interest rate reduction, the fundamentals of the current housing market – rising unemployment, concerns about recession, the expectation of further price falls – still tend towards sluggish activity for some time to come. Howard Archer, the chief UK economist at IHS Global Insight, said: "Faster rising unemployment will lead to a marked rise in the number of forced house sales and it will also reduce the number of potential house buyers. Meanwhile, credit conditions are still relatively tight; and it will take time for confidence to improve and mortgage lending to pick up significantly."
Although Nationwide's profits were up 11 per cent, underlying profits dropped by 18 per cent to £322m, primarily due to holding higher levels of liquidity and the increased cost of retail funding, the company said. The group has a tier-one ratio of 10 per cent and a strong balance sheet which includes £2.6bn of retail deposits received over the six-month period.
Circuit City bankruptcy roils US property investors
U.S. shopping center and mall property owners took a thumping on Monday as investors feared Circuit City Stores Inc's bankruptcy filing would usher in more failures and take property owners down with them. "What a lot of landlords should be worried about is if these guys do not succeed, they're going to have a lot of vacant space, so the best alternative for them is to consider a renegotiation where Circuit City would get better leases," Frank Conrad, a retired bankruptcy judge who is now a partner in the restructuring group at Weiser LLP in New York.
Fears that the drastic cutback by U.S. consumers will drive more stores out of business sent the benchmark MSCI U.S. REIT Index .RMZ down 9.3 percent. The Dow Jones industrial average .DJI fell less than 1 percent. "I am at the point where I'm lost as to what sort of statement the market is making," said RBC Capital Markets analyst Rich Moore, noting that Circuit City's bankruptcy wasn't a surprise to many investors.
Circuit City, the No. 2 U.S. consumer electronics retailer, arranged $1.1 billion of debtor-in-possession financing from existing lenders led by Bank of America that will allow it to continue operating under bankruptcy. But it requires the retailer to bring that down to $900 million by Dec. 29 and use proceeds from its holiday sales to repay other loans outstanding prior to the filing. "They're giving them enough liquidity to carry them through the retail season, and it remains to be seen if they will get through the next year," Conrad said.
Shares of Developers Diversified Realty Corp DDR.N, which has 50 Circuit City stores in its 720 shopping centers, saw its stock slide 24.6 percent to $61.01 on the New York Stock Exchange. The Cleveland, Ohio-based company derives about 1.7 percent of its annual revenue from Richmond, Virgina-based Circuit City. "They are taking the stock down 25 percent because they have exposure to 1.7 percent," Moore said. "If they have four tenants each with only 1.7 percent of base rent (investors) would take the stock to zero."
Kimco Realty Corp KIM.N, which has 19 Circuit City store tenants in its more than 1,900 properties, saw its shares lose 9.6 percent. Shares of Simon Property Group Inc SPG.N, the largest U.S. mall operator, fell 10.2 percent. It has 17 Circuit City stores in its malls and outlet centers, according to a U.S. Securities and Exchange Commission filing at the end of last year. "Traffic is down in malls throughout the United States and as a result, the landlords, depending upon how leveraged they are, may have to file bankruptcy themselves," Conrad said.
Before Circuit City sought Chapter 11 bankruptcy protection, retailers announced about 6,000 store closings so far this year. Under bankruptcy protection a retailer can break a lease with court consent; otherwise, rent is still due on a closed store. Many landlords may not be free to renegotiate leases because of constraints under their own covenants with lenders. The process is even more complicated because many of the mortgages obtained within the past three years have been sold off and are part of a pool of mortgages supporting commercial mortgage-backed securities (CMBS).
Borrowers are not able to ask the original lender to allow them to change the terms of a lease because the original lender no longer holds the mortgage. Instead, borrowers must deal with another layer of decision makers: a master servicer or asset manager who oversees the pool on behalf of bond investors and special servicers who handle problem loans. "It's not like they were dealing with a bank that they had done 10 to 20 different transactions with, and they go back and say, 'Look, I don't want to default on my loan,'" Frank Innaurato, managing director of analytical services for credit-ratings agency Realpoint LLC, said.
"There are more T's to cross and I's to dot," he said. "It is more complicated. The special servicer would do this if it's in best interest at the trust." CMBS delinquencies remained low at 0.45 percent last month, according to Fitch Ratings. Retailers accounted for 17.7 percent of delinquent loans in September. Realpoint said 278 Circuit City properties secure 281 CMBS loans with more than a $4 billion left on the property loan balance, across 181 CMBS transactions.
Circuit City's $1.1 Billion Bankruptcy Loan Buys It More Time
Circuit City Stores Inc., the consumer electronics chain that filed this year's biggest retail bankruptcy, arranged $1.1 billion in financing that gives the 59-year-old company another chance at survival. The seller of televisions and computers sought protection from creditors yesterday and won court approval for a Bank of America Corp. credit line that Circuit City said will help pay for its emergence from bankruptcy next year.
Suppliers cut off credit to the Richmond, Virginia-based retailer and demanded cash for shipments to almost 1,500 U.S. and Canadian stores on the eve of the holiday shopping season. That will give the chain "another lease on life," Chris Horvers, an analyst with J.P. Morgan Securities Inc., wrote in a note to clients yesterday. Circuit City said the loan, which comes from its current lenders, will pay salaries and buy merchandise while it restructures. The same banks backed Circuit City's existing $1.3 billion credit line. The chain obtained financing in the midst of a global credit crunch that has forced some companies to put off bankruptcy filings for lack of funding, said CreditSights Inc. analyst Chris Taggert. Circuit City's loan may not be a sign that that the crunch has eased, given that Bank of America and other lenders were largely repackaging existing credit lines, he said.
"This $1.1 billion isn't $1.1 billion of added liquidity, so the words aren't as good as the music," said Taggert.
The chain, which started in 1949 as a television store, owes $119 million to Hewlett-Packard Co., the world's largest maker of personal computers, and $116 million to Samsung Electronics Co., the top maker of flat-panel displays, according to the company's bankruptcy filing yesterday. Circuit City listed assets of $3.4 billion and debt of $2.32 billion in its Chapter 11 petition. The company said it is closing 155 stores and cut about 20 percent of its 43,000-employee workforce. It will attempt to shut more locations and find a buyer for a slimmed-down version of the chain, or remain as a stand-alone retailer, lawyers for the told the judge. The loan may be a signal that the company's banks expect it to emerge from bankruptcy next year as a stronger company, said Colin McGranahan, an analyst with Sanford C. Bernstein & Co., who said he was surprised Circuit City managed to secure the financing.
Improved lending conditions, the store closings and job cuts announced last week might have helped appease lenders, said McGranahan, who has followed the retail industry for 14 years. "The credit market generally is a lot healthier today than a week or two ago and certainly than it was four weeks ago," he said. Circuit City, the biggest electronics retailer in the U.S. until the mid-1990s, filed for bankruptcy before the holiday selling season, the source of most of its profit. The chain, plagued by older stores in less profitable areas, is losing market share to Best Buy Co. and Wal-Mart Stores Inc., while Amazon.com Inc. and other online retailers undercut it with lower prices.
Circuit City said it plans to file an outline of a reorganization plan with the court by March and hopes to exit bankruptcy in June. Even if Circuit City fails to attract a buyer or win support of suppliers in coming months, it's unlikely to shut down immediately, said Paul Traub, who has served as a consultant for bankrupt housewares retailer Linens 'n Things Inc. That company abandoned plans to reorganize and instead decided to liquidate this year. Traub said Circuit City doesn't have time to arrange a liquidation of its stores by the end of the year.
Management tried to sell the company in May after Blockbuster Inc. made a preliminary offer that was later withdrawn. The retailer fired higher-paid workers and opened smaller stores to cut costs. Until the shift, the company's strategy had been to sell in locations as large as 44,000 square feet. Huennekens also gave the company permission to honor gift cards and warranty programs.
Ilargi: Dear Meredith, please stay on topic. American Express lost 54%, the 4th biggest loss among Dow Jones Industrials. And now becoming a bank will save them? Let's first talk about how they managed to lose so much, shall we? Yes, you're right, it's consumers defaulting on the credit cards that is the biggest risk. And we both know these defaults are going to skyrocket, don't we? American Express has no future.
Bank holding company status to aid American Express' funding: Whitney
Getting approval to work as a bank holding company will afford American Express Co a more stable funding mix, Oppenheimer analyst Meredith Whitney said. "Whether institutions like it or not, the only prudent thing to do is assume a protracted worst-case funding scenario," said Whitney, who believes this was the strategy that influenced the company's decision to transform.
American Express said on Monday it won approval to become a bank holding company, in a step that could cut its borrowing costs and give it more access to government money. Whitney also said the transformation to a bank holding company would give American Express more optionality on its funding mix.
American Express, the fourth-largest U.S. credit card issuer, offered more credit to more customers even as the housing crisis began last year, and is paying the price as delinquencies rise. Adding to its difficulties, its main sources of funding have grown more expensive as secured and unsecured bond markets have shut down. Analyst Whitney, however, said her primary concern about American Express was consumer credit losses, and not funding.
"Our concerns for American Express and other consumer lending-related stocks continue to be worse-than-expected credit losses," she said in a note to clients. Whitney maintained her "perform" rating on the stock. The funding pressures are adding to the credit pressures that the company is already facing. The default rate among its credit-card clients in the United States almost doubled in the third quarter, from a year earlier.
American Express Gets Fed Approval to Convert to Bank
American Express Co. won Federal Reserve approval to convert to a commercial bank, gaining access to funds as credit losses build and sales of asset-backed bonds plummet. The Fed waived a 30-day waiting period on the application "in light of the unusual and exigent circumstances affecting the financial markets," according to a statement released today in Washington. Chairman Ben S. Bernanke and his colleagues unanimously voted for the action.
Credit-card holders failed to repay loans in the third quarter at almost twice the rate of a year earlier, New York- based American Express said last month. With defaults rising along with the unemployment rate, October marked the first month since 1993 that card companies were unable to sell bonds backed by customer payments. "That business has totally dried up," said Frederic Dickson, who helps oversee about $20 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. "If I were a shareholder, it wouldn't send a very warm and fuzzy message to me," he said today in a phone interview.
American Express, the largest U.S. credit-card company by purchases, joins former investment banks Goldman Sachs Group Inc. and Morgan Stanley, which were allowed by the Fed in September to become commercial banks. American Express has total consolidated assets of about $127 billion, the Fed said. The company already owns two bank units: American Express Centurion Bank, which operated as an industrial loan company under Federal Deposit Insurance Corp. supervision, and American Express Bank, which was regulated by the Office of Thrift Supervision. Each has assets of about $25 billion and controls deposits of about $7.2 billion, the Fed said. Centurion is being converted to a bank, the Fed order said.
In an Oct. 6 filing, American Express said that its bank units have access to the Fed's discount window and the company already had enough cash to last more than a year. The company has posted four straight quarterly profit declines and lost about half its market value this year as it set aside more for soured credit-card debt. American Express makes loans to consumers, exposing it to defaults fueled by more than 700,000 U.S. job losses this year, unlike Visa Inc., which just processes payments and said yesterday that quarterly adjusted profit doubled to $448 million.
"Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced," Chief Executive Officer Kenneth Chenault said in a statement today. "We will continue to build a larger deposit base to broaden our funding sources." American Express used the Fed's commercial paper facility for the first time on Oct. 29, joining a growing list of borrowers that have sold tens of billions of dollars of the short-term debt to the central bank as credit became more difficult to obtain. American Express fell $1.33, or 5.3 percent, to $23.98 at 4 p.m. on the New York Stock Exchange. It has tumbled 54 percent this year, the fourth-biggest decline in the Dow Jones Industrial Average.
Goldman Keeps Falling to 5-Year Low as Analysts Cut Views
Goldman Sachs Group Inc.'s stock fell Monday to a five-and-a-half-year low as analysts continue to paint a dismal picture of fourth-quarter results. Earlier Monday, the stock traded as low as $68.51, down 11.9% from Friday's closing price. The last time the stock price dropped below $70 was April 1, 2003. Shares rebounded a bit in afternoon trading and recently were off 10.3% at $69.73.
Financial stocks were largely trading down on Monday, but Goldman's stock was dropping more than most in the group. In afternoon activity, Goldman's bank holding company peer Morgan Stanley was also down 8.7% to $14.59. The past few weeks, analysts have revised and cut estimates for Goldman Sachs' fourth-quarter results due to its high exposure to the equity market. Barclays Capital analyst Roger Freeman on Monday became the latest to cut estimates, now projecting a loss of $2.50 a share from its prior estimate of a profit of $2.71.
"We are making this cut now because of the dramatic equity market declines to which we believe GS is the most exposed through its private equity business," Freeman wrote in a research report. "However, other asset classes including principal investments in real estate as well as legacy residential, commercial assets and leveraged loans are also likely subject to marks owing to recent illiquid markets and pressures from hedge funds deleveraging."
The past few weeks, Morgan Stanley analyst Patrick Pinschmidt changed estimates to forecast a loss of $1.09 a share for Goldman, UBS analyst Glenn Schorr changed Goldman's estimates to a loss of 40 cents from a gain of $1.40, and analyst Guy Moszkowski at Merrill Lynch expects Goldman to post a fourth-quarter loss of 49 cents a share.
The bank, which changed its status to a bank holding company in September, hasn't reported a loss in any quarter since going public almost 10 years ago.Goldman's stock has been particularly hard hit in the early days of November. The stock closed at $92.50 on Oct. 31. On Friday, the stock closed at $77.78. Shares have fallen more than 16% so far this month. The 52-week high for Goldman's stock was $240.05.
Bank of America assumes $16.6 billion in Countrywide debt
Bank of America Corp. said in a regulatory filing Monday it has assumed $16.6 billion in debt from previously acquired Countrywide Financial Corp. as it recently completed the transfer of certain assets. Bank of America is assuming the debt as it transferred on Friday nearly all of the assets of Countrywide Home Loans and some of Countrywide's other businesses and operations to Bank of America as part of the integration process, according to a filing with the Securities and Exchange Commission.
The Charlotte, N.C., bank completed its acquisition of Countrywide in July for about $2.5 billion in an all-stock deal. Countrywide was the nation's largest mortgage lender at the time of the acquisition. Earlier this year, Bank of America gave no assurances it would assume or guarantee the debt of Countrywide, causing some concern for Countrywide bondholders about potential default.
The assumption of $16.6 billion in debt as part of the integration process should alleviate those concerns. Countrywide, like most mortgage lenders, was hit hard by sharply rising defaults among mortgages since the middle of 2007. Shares of Bank of America fell 53 cents, or 2.6 percent, to $19.96 in midday trading
Kinder, Gentler Bailout May Not Solve AIG's Problems
American International Group's (AIG) chief executive, Edward Liddy, sounded confident Monday that the company's kinder, gentler bailout terms will help the company get back on track. Not everyone shares his rosy view. Competitors continue trying to poach customers and key employees in AIG's core insurance operations, and the new bailout won't solve the reputational hit that continues to bedevil the huge insurer.
The new $150 billion bailout plan from the government is aimed, among other things, at giving AIG more time to sell non-core businesses to pay off its loan from the federal government. It also reduces the interest cost of the loans, gives the government a $40 billion slug of AIG preferred stock paying a handsome 10% dividend (a rate banks have also been happy to pay for precious government capital), and sets up facilities for dealing with AIG's cash-sapping issues with credit-default swaps and its securities lending operations.
By extending the maturity of $60 billion in government loans as part of the bailout, the new loan terms seek to give AIG more time to sell non-core businesses at better prices. One rival - who of course stands to gain at AIG's expense - dismissed AIG's plans to right itself. Edmund Kelly, chairman and chief executive of Liberty Mutual, a commercial insurer, said during his company's earnings conference call Monday that AIG is focusing so much on its bailout that it is "doing some very stupid things in the market" regarding pricing in some areas.
"More than likely it is because the creditors committee who are managing the company are more concerned with the interference with the government and capital, and are paying little attention to actually what is going on in the trenches," Kelly said. Liberty Mutual competes with AIG in specialty casualty and large commercial accounts. An AIG spokesman didn't immediately return a phone call asking for comment. During AIG's earnings conference call, also on Monday, Liddy said the company was not cutting rates to keep business "despite the plans of certain competitors and despite competitors' attempts to restrict our access to business and to deprive customers of choice."
Liddy said during the conference call Monday and on a CNBC interview afterward that he planned to announce "several key dispositions" by the end of the year, with closings scheduled for "30, 60, 90 days later." Buyers are coming from the 75 to 100 potential buyers who have already contacted the company, and the sales will put the troubled insurer on track to pay back a $60 billion Treasury Department loan and restructure itself as a global property casualty insurer. An insurance consultant who has worked on acquisitions said that selling a complex insurance company is tricky and time consuming and he questioned whether Liddy could make substantial sales in such a short time.
In the meantime, he said key AIG employees are being wooed by rivals. "That stops me from buying the company," said Andy Barile, an insurance and reinsurance consultant in Rancho Santa Fe, Calif. "I can take the top three people and start them in their own business instead." Given Liddy's background as a former chief executive of Allstate Corp. (ALL) the largest personal lines insurer, Barile suggested that might be a quick sale for Liddy. "Why hasn't he sold it yet?" Barile said.
Barile suggested that other property/casualty companies, which Liddy has called core, might attract buyers despite AIG's unwillingness to sell. So many questions remain unsettled that it is uncertain that AIG will be able to quickly execute its plan to keep its commercial property/casualty business and sell off the rest, keeping some interest in its international life insurance business. AIG might need to go back for more than the expanded $150 billion bailout if losses continue to grow and if its insurance businesses continue to underperform, said analyst Donn Vickrey of Gradient Analytics Monday. "At the end of the day, they will have to sell off a big chunk of their property/ casualty businesses" to raise the capital they will need to retire their loans, Vickrey said.
The federal government's newly revised AIG bailout rewrites the original plan put in place five weeks ago by relaxing the terms on the insurer, allowing AIG to sell some of its subprime mortgage exposure to the government and participate in federal equity investments. The interest rate on the federal loan extended to AIG has been eased to the London interbank offered rate plus 3%, from Libor plus 8.5%. The loan's term was also extended to five years from two. In addition, the New York Federal Reserve will lend $30 billion to a new facility - toward which AIG will also contribute $5 billion - to buy up to $70 billion in collateralized debt obligations that AIG insured through credit- default swaps.
AIG insured many billions of CDOs, securities that combined various types of loans, of which sliced-and-diced portions were sold. The CDOs' tumbling values were the primary source of AIG's woes and pushed the company to the brink of bankruptcy. The New York Fed will also lend up to $22.5 billion to an entity, and AIG will contribute $1 billion, that will buy residential mortgage-backed securities from AIG's securities lending portfolio. This purchase will relieve AIG of the need to post collateral on the portfolio. Meanwhile, AIG reported a third-quarter net loss of $24.47 billion, or $9.05 a share, compared with year-earlier net income of $3.09 billion, or $1.19 a share. Excluding capital losses, the red ink amounted to $9.24 billion, or $3.42 a share.
Insurance credit ratings agency A.M. Best affirmed AIG's financial strength and issuer ratings Monday and removed the company's ratings from review, giving a stamp of approval to the plan. A Nikkei report Monday said that the planned sale of three AIG Japanese life insurance companies has been held up by weakened finances of would-be buyers. Life insurers have been hard-hit by their own investments in financial services companies and real estate holdings. On Monday, Fitch Ratings slashed its ratings on American International Group Inc.'s (AIG) consumer-finance and credit-insurance unit, saying its long-term support from the insurance giant is in question as the business will likely be sold as part of AIG's streamlining
Wall Street jobs axe threatens 70,000
The financial industry is bracing for a fresh round of job cuts as Wall Street banks slash costs to cushion the blow of further market turbulence and deepening economic woes in 2009. Executives and analysts say the redundancies - to be finalised this month as banks prepare next year's budgets - could top 70,000 among US groups alone and add to the estimated 150,000 jobs already lost by the financial sector worldwide.
The job losses are expected to be concentrated in the investment banking and trading businesses that have been hit hard by the near-freeze in capital markets and the collapse in takeover and financing activity The continued shrinking of the banking industry will deepen the economic plight of financial centres such as New York, London and Hong Kong by reducing tax revenues and putting pressure on the local housing market.
"The fourth quarter is going to be very disruptive," Meredith Whitney, analyst at Oppenheimer, said in a video interview with the Financial Times. "For many of the capital markets intensive players, you're going to have resizing of anywhere from 25 to 30 per cent of their workforce. But if you think about it, from the peak, revenues are down more than that."
Goldman Sachs, which has fared better than many rivals during the downturn, last week began a planned 10 per cent reduction in its 32,500-strong global workforce. That cut is part of the expected fourth-quarter cull. Most other US banks have already announced cuts. Citigroup is in the midst of scrapping 23,000 jobs,Merrill Lynch has lost an estimated 5,700 - nearly 9 per cent of staff - while Morgan Stanley has made 4,400 workers redundant, according to Bloomberg data.
These redundancies came on top of the estimated 23,000 jobs lost after the collapses of Bear Stearns and Lehman Brothers. But bankers say more is to come as the industry's revenues continue to fall in the fourth quarter and show little sign of improving in 2009. A senior executive predicted that, based on his company's own estimates, the next round of redundancies among US-based firms could reach 70,000.
A recent study by the Federal Reserve concluded that New York city alone could lose between 55,000 and 78,000 financial jobs over the next few years. Most banks declined to comment on their redundancy plans, saying they had yet to be finalised. Analysts said the more likely candidates for further cuts included Merrill Lynch, which is about to be bought by Bank of America, Citigroup, and securities groups such as Morgan Stanley and Goldman Sachs, which are reliant on capital markets activity.
Merrill CEO says economic environment recalls 1929
Merrill Lynch & Co Chief Executive John Thain said he did not expect the global economy to recover quickly from the credit crisis and that the environment more closely resembled 1929, the advent of the Great Depression, than recent slowdowns. Speaking Tuesday at a financial services conference sponsored by his bank, Thain said credit remained constricted and asset prices generally were still falling, following the housing market collapse and a crisis of confidence.
These led to market-shaking events, including the bankruptcy of Lehman Brothers Holdings Inc , and Merrill's own decision to quickly sell itself to Bank of America Corp for $50 billion. "We are going to be in a very difficult economic environment for a significant period of time," Thain said. He said the U.S. economy "is contracting very rapidly," creating uncertainty "at least over the next few quarters." Thain nevertheless said market conditions for financial services companies were improving.
As an example, he said Merrill recently issued some three-month commercial paper, which companies typically use to fund day-to-day operations, when for a time it had been able only to issue overnight paper. Commercial paper markets had seized up following Lehman's September 15 bankruptcy, which led to a run on some money market funds that buy the short-term debt.
"I'm cautiously optimistic that things are starting to get better in financial services," Thain said.
"Although things are starting to improve, this is going to be a long process, and this is not going to get better quickly," he added. "It is not like '87, it is not like '98, it is not like 2001." For Merrill, he said, the outlook is not all bleak as its merger combines Bank of America's strengths in retail banking, corporate lending and Treasury services with Merrill's strengths in wealth management, investment banking, and sales and trading. "We're in a good space to weather this economic storm," he said. The merger is expected to close by year-end. Bank of America and Merrill shareholders are scheduled to vote on the transaction on December 5.
Federal mortgage rescue plan due
The Bush administration is set to unveil on Tuesday a potentially extensive new program to modify mortgages and help at-risk homeowners and stabilize the battered real estate market. The plan centers on Fannie Mae and Freddie Mac, which between them own or back about $5 trillion in loans. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages. While a number of major banks, including Citigroup, JPMorgan Chase and Bank of America , have announced loan modifications programs in recent weeks, they hold only a fraction of the nation's mortgages compared with Fannie and Freddie.
Despite calls from members of Congress and some housing advocates for the government to take a more direct role in preventing foreclosures, federal agencies have been slow to present their own plans to modify the loans of millions of homeowners at risk. Sheila Bair, the chairman of the Federal Deposit Insurance Corp. whose agency took over home lender IndyMac in July, testified to the Senate Banking Committee on Oct. 23 that her agency was was working "closely and creatively" with the Treasury Department on a mortgage rescue plan but revealed few details.
She said suggested the government would establish standards for loan modifications and provide guarantees for loans meeting those standards so that "unaffordable loans could be converted into loans that are sustainable over the long term."
But in the three weeks since then there has been little in the way of new direct federal help for homeowners, even as the government pumped nearly $50 billion into regional banks and reworked the bailout of American International Group, while pressure mounted from Congress to help the nation's automakers and state and local governments. Most of the mortgage modification programs announced by banks so far try to cap the payments of homeowners at risk of losing their homes at a level they can afford, typically about 34% to 40% of their income, through lower interest rates, longer repayment schedules or reductions in loan balances. There are reports that the Fannie-Freddie plan will cap payment at the 38% level, though those details could not be confirmed ahead of the meeting.
Representatives of another major bank, Wells Fargo, are also set to attend a 2 p.m. ET briefing by the Federal Housing Finance Agency, the government regulator of Fannie and Freddie. It is clearly in the interest of the mortgage finance firms as well as banks to take steps to halt foreclosures. The market is already flooded with far more new and existing homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures in the future.
Moody's Economy.com forecasts that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale, and another 1.9 million are projected to lose their homes in 2009. On Monday, Fannie reported a $29 billion loss in the third quarter. The company also reported sharp increases in loan default rates and the amount it is setting aside for future loan losses.
Citi, Fannie, Freddie to Halt Some Foreclosures, Redo Mortgages
Citigroup Inc. and mortgage companies Fannie Mae and Freddie Mac plan to cut home-loan payments for hundreds of thousands of borrowers facing foreclosures, following similar moves by the nation's biggest banks. Citigroup, the fourth-largest U.S. bank by market value, will reach out to about 500,000 homeowners with $20 billion in mortgages during the next six months, the New York-based company said in a statement today. Fannie Mae and Freddie Mac will reduce principal or interest rates on some loans and extend the terms of others, people briefed on the matter said.
Congress has been urging financial-services companies to work with borrowers after foreclosures rose to the highest on record in the third quarter. JPMorgan Chase & Co., the biggest U.S. bank, said last month it would stop foreclosures on some loans as it works to make payments easier on $110 billion of problem mortgages, while Bank of America Corp. said it has modified 226,000 loans this year. "If housing doesn't get stabilized, it's really going to continue to bleed the economy," said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, and Bloomberg's most-accurate economic forecaster for 2008.
Citigroup said it's helped about 370,000 people with $35 billion in mortgages avoid foreclosure since 2007. The bank is trying to help customers stay in their homes, Sanjiv Das, chief executive officer of the mortgage unit, said in the statement. The company's stock fell 21 cents to $11 in New York trading before the official open on the New York Stock Exchange. Citigroup has lost money on its mortgage holdings for six straight quarters, the company said on an Oct. 16 conference call. It restructured more than 120,000 loans, including granting extensions, during the first half of 2008, Chief Financial Officer Gary Crittenden said on the call.
A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on during the third quarter, the most since records began in January 2005, data compiled by RealtyTrac Inc. in Irvine, California, show. Citigroup said it's "focusing particularly on borrowers in areas that are likely to face extreme economic distress." Home prices in 20 metropolitan areas fell in July at the fastest pace on record, and sales of previously owned homes in August were 32 percent below the peak of September 2005. Citigroup plans to reach out to loan holders who live in their homes and have "sufficient income for affordable mortgage payments," the statement said. The bank will extend a moratorium on foreclosures to those who meet these criteria.
Details of the Fannie Mae and Freddie Mac plan, which won't include money from the Treasury's $700 billion bank rescue package, are still being finalized, the people familiar with the matter said. An announcement could come as soon as today. The House Financial Services Committee has scheduled a hearing tomorrow on loan modifications. The Federal Housing Finance Agency, which seized control of Fannie and Freddie in September, has signed off on the program and the Treasury has been tracking its progress and is involved in the discussions, the people said. President-elect Barack Obama, in his first news conference last week, called on the Treasury and other government agencies to "use the substantial authority that they already have to help families avoid foreclosure and stay in their homes."
Federal Deposit Insurance Corp. Chairman Sheila Bair has proposed a plan to guarantee mortgages to help stem foreclosures, according to two congressional aides briefed on the matter. Her idea is to use as much as $50 billion of the $700 billion financial-services industry bailout package approved by lawmakers. The JPMorgan program is designed to assist 400,000 families with $70 billion in loans in the next two years. An additional 250,000 families with $40 billion in mortgages have already been helped under existing loan-modification programs.
Bank of America, based in Charlotte, North Carolina, announced two plans this year to help reduce customers' payments by as much as $11 billion. In total, they will cover more than $120 billion in unpaid balances. Countrywide Financial Corp., the mortgage lender acquired by Bank of America, agreed in October to help about 400,000 customers facing foreclosure or having problems paying their loans as part of settlement with 14 states over fraud complaints.
Ruble Devaluation Concern Triggers 10% Plunge in Russian Stocks
Russia's ruble fell the most in two months and stocks tumbled after the central bank said it may scale back its defense of the currency as officials grapple with the worst financial crisis since the 1998 devaluation. The ruble slumped 1 percent against a basket of dollars and euros after central bank chairman Sergey Ignatiev said the currency has a "tendency toward weakening," during a televised press conference yesterday. Russia's Micex Index plunged 10 percent, the biggest decline worldwide today.
"They're going to move the line in the sand back a little bit, where they hope they can defend it," while resisting a formal devaluation that would erode confidence in ruble deposits, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said in an interview today. "If people start to lose confidence in the banking system, we could have a massive run on the banks as we saw twice in the nineties, and then the game is up." Fitch Ratings yesterday followed Standard & Poor's in warning of a possible Russian downgrade after the central bank used 19 percent of its currency reserves to stem a 16 percent slide in the ruble against the dollar since the start of August. Financial turmoil has forced the country's largest oil and steel producers to seek tax breaks, while the defense industry is failing to meet government orders.
Russia, the world's second-largest oil producer, is suffering among the worst losses in financial markets as the global economic slowdown crimps demand for its exports. Russian stocks fell 67 percent this year, compared with a 42 percent slide in the MSCI World Index of developed nations. Crude fell as much as 3.4 percent in New York today, extending its decline to 59 percent from a July record, on speculation the International Energy Agency may lower its 2009 oil-demand forecast. Urals crude, Russia's main export blend of oil, has slumped 61 percent to $54.70.
If oil falls below a "psychologically important" $50 a barrel, pressure on the ruble will intensify, Weafer said.
The ruble, which Bank Rossii manages to limit the effect of fluctuations on the competitiveness of exports, slid as much as 1.3 percent against the dollar and 1 percent versus the euro. "This has put fear into the market," said Lars Christensen, head of emerging-market research at Danske Bank A/S in Cophenhagen. "It may lead to domestic Russian players leaving the ruble, triggering panic-selling." The central bank has a policy of not commenting on its day- to-day actions in the currency market and didn't immediately respond to questions faxed to the press department.
Troika Dialog, Russia's oldest investment bank, said last week the decline in oil may drive the ruble as much as 30 percent lower against the basket that the central bank uses to peg the currency. Igor Yurgens, head of the Institute of Contemporary Development, which advises President Dmitry Medvedev, told Ekho Moskvy radio station today that the government won't allow a "significant" depreciation. OAO Severstal and Evraz Group SA led five steelmakers pushing for government support including tax breaks, Vedomosti reported last month. Oil companies are also discussing tax breaks with the government, Interfax reported today, citing Energy Minister Sergei Shmatko.
Deputy Prime Minister Sergei Ivanov said on state TV today that defense companies are facing difficulties in meeting orders from the government because of the global credit crunch. OAO Magnitogorsk Iron & Steel said today it cut fourth- quarter spending by 40 percent. Goldman Sachs Group Inc. economist Rory MacFarquhar in Moscow warned today that Russia faces a current account deficit. The country had a current-account surplus of $91.2 billion in the first nine months of this year.
Banco Santander stuns the markets with $9.5 billion rights issue
Banco Santander is to raise €7.2bn (£5.8bn) in fresh capital and foreswear further expansion in a shock move that raises fresh questions about the underlying health of the Spanish financial system The rights issue comes a week after the bank – which owns Abbey in the UK – signalled that it had no need for fresh capital. "This is very surprising: they had given no indication of this," said Silvia Verde, an analyst at Inverseguros in Madrid.
There is no pressing need to roll over debts. The dividend will be maintained. Emilio Botin, Santander's chief executive, said the move was aimed at boosting the bank's core capital ratio to 7pc to meet its own "self-imposed" guidelines after a wave of acquisitions in Britain, Latin America, and the US. "Banco Santander has always had a very clear approach to capital strength. This is a magnificent opportunity for shareholders," he said. The bank said it had shelved a series of planned asset sales until prices recovered to "acceptable levels".
The rights issue comes as the economic outlook in Spain continues to darken. Housing minister Beatriz Corredor said yesterday that property prices had fallen "at least 15pc" over the last year. "It is a reality that we cannot deny," she said. Spain's premier, Jose Luis Zapatero, called in the heads Santander, BBVA, and the country's leading "Caja" lenders on Monday to frame a response to the crisis following the government's pledge to guarantee €100bn guarantee of bank debt.
Santander has been Europe's rising star, dodging fallout from the sub-prime debacle in the US. Now the Continent's most valuable bank, it has seemed impervious to the crisis despite its high-risk adventures in the UK mortgage market, taking over Abbey, Alliance & Leicester, and now Sovereign Bancorp in the US as well. Analysts said Santander is almost certainly battening down the hatches, expecting trouble in its core markets – including a sudden downturn in Latin America as investors pull their money out of emerging markets.
Fitch Ratings began to downgrade a clutch of Santander mortgage securities worth more than €4bn earlier this summer, warning that the bank's internal analysis points to a 35pc crash in Spanish house prices. A large bloc of the securities is still stuck on Santander's books. Fitch said the securities had been "sliced and diced" in the same way as US sub-prime bonds. They were based on mortgages that often exceeded 95pc or even 100pc of the house value. The arrears rate on the more recent vintages have reached 7pc to 8pc. Optimists note that Santander still has no trouble raising fresh capital in the market place. That is no mean feat at a time when a large number of banks in the Western world are being supported by taxpayers.
Santander's capital raising puts pressure on the stubborn few
They say Spain is different, but its biggest bank may not be so different after all. Like many of its European peers, Santander has pulled a u-turn on capital. Days after chief executive Alfredo Saenz said the bank didn’t need more capital, Santander is raising 7.2bn euro (£5.9bn) with a deeply discounted rights issue. The about-face reflects the increasing nervousness of investors about the bank’s capitalisation. Santander’s core Tier 1 capital ratio stood at 6.3pc at the end of September, but was due to drop below 6pc as the bank absorbed its recent glut of acquisitions.
Santander could have boosted capital organically with profits over time. That may have been adequate by yesterday’s standards, particularly for a retail bank with minimal exposure to toxic subprime housing assets. But the goalposts have moved, and Santander woke up late to the sentiment shift. The rights issue will take the ratio up to a more comfortable 7pc. Turnabouts can dent confidence, and make investors suspicious. Santander insists it doesn’t have skeletons rattling about in its closet. Nor is it planning any further acquisitions, it says. But shareholders are now likely to be more sceptical about taking what management says at face value.
Santander is issuing the shares at a 46pc discount. Still, the bank looks a cut above its peers. It isn’t tapping the state for the capital. The company’s dividend looks safe through 2009. Its do-it-yourself approach is also on more shareholder-friendly terms than other banks that found capital in the markets. Credit Suisse diluted existing shareholders and issued expensive preference shares to investors from the Middle East. Barclays did the same at an even steeper price.
What’s more, by finally relenting on the market’s demand that it raise more capital, Santander has piled the pressure on other refuseniks. Deutsche Bank, BBVA and Italian institutions seem increasingly stubborn by holding out. Like Santander, they all claim to be different. But toughing it out is looking less an option.
Sweden seizes Carnegie in first bank bail-out
Sweden's government is to seize control of Carnegie after the 200-year-old investment bank took "exceptional risks" with client money and breached trading rules. Mats Odell, the financial markets minister, said the state had opted to save Carnegie by providing a 5bn Kronor (£450m) state loan rather than let it go bankrupt in order prevent a fire-sale of assets and to shore up the financial system at a delicate moment.
"Carnegie is important: there could be significant problems for households and companies if we jeopardise the stability of the financial system," he said. It is the first Swedish bank to require a bail-out since the credit crisis began, but there are mounting concerns over the health of Swedbank, SEB, and other lenders with heavy exposure to the Baltic states. Swedish banks have lent the equivalent of 25pc of the country's GDP to Eastern Europe.
The debt office said it had revoked Carnegie's trading licence and ousted the entire board, "We break them on the wheel," said Gabriel Stein, a Swedish economist at Lombard Street Research. "If we put up taxpayers money, justice must be done: shareholders and management lose. It is not like the half-way house in Britain." Carnegie's stock was suspended on the Stockholm bourse. Shareholders have already lost 90pc over the last year and are unlikely to recover much.
The bank, which employs 1,100 staff in Scandinavia and Britain, will now be run by the authorities on behalf of clients and Swedish society. The state is providing a £410m loan to help Carnegie weather the crisis. The bank was founded by the Scotsman David Carnegie in the Napoleonic era and financed the emergence of Gothenburg as a major industrial hub. It was fined last year for inflating profits. The last straw was an illegal loan of billion kronor loan (£90m) to a single client, and withholding the information. "The bank has seriously mishandled itself, " said the financial inspectorate.
New York Transit Agency Faces $1.2 Billion Deficit
The agency that runs New York City's subways, buses and commuter trains will need to raise fares or dramatically cut services to close a $1.2 billion budget gap next year, officials said Monday. The Metropolitan Transportation Authority didn't give specifics on cuts or fare hikes, but executive director Elliot Sander said "they will be very, very significant."
"Whatever that mix that we come up with, in terms of fare and toll increases and service reductions, there's no question that they would have an impact, significantly, on our customers and on the functioning of that region," Mr. Sander said after an agency finance board meeting. Last summer, the agency said it would likely need to raise subway and bus fares and bridge tolls 8% next year to raise more money.
The agency didn't specify how the increases would be divided among city subways and buses -- which cost $2 for a one-way ride -- its suburban rail lines and agency-run bridges and tunnels. Bridge and tunnel cash tolls currently range from $2.50 to $10; monthly passes on the Metro North and Long Island lines can cost over $300, depending on routes. The deficit is $300 million larger than a projected gap announced over the summer, a change attributed to plunging revenue from real estate and corporate taxes. Mr. Sander also blamed rising interest rates on borrowing for the agency's capital projects, such as an East Side subway line.
The agency will release a budget proposal next month, and is awaiting the results of a state commission appointed by Gov. David Paterson to evaluate MTA finances. Mr. Sander said decisions on fare hikes or service cuts wouldn't be made until the state budget and the commission's work is complete. The commission headed by former MTA Chairman Richard Ravitch is considering tolling motorists on four city-run bridges, including the Brooklyn Bridge, as a way to raise money. That recommendation would have to be approved by the state Legislature.
In a statement Monday, the governor said: "Addressing the fiscal challenges facing the MTA and the state over the next several years will require shared sacrifice, difficult choices and cooperation from all funding partners." More than 8.5 million riders use the MTA's subways, buses and suburban rail lines on an average weekday.
US Postal Service Looks To Cut 40,000 Jobs In First Layoff In History
"We lost 2 billion dollars and like any other business we have to stay afloat." And to keep from sinking, the United States Postal Service is considering cutting thousands of jobs nationwide. Lavelle Pepper with the post office in Shreveport says they too are feeling the affects of the same disease hitting the country... a struggling economy. "We employ about 685,000 people. If we do layoffs it would include clerks, carriers, mail handlers across all crafts."
Pepper says the postal service is looking to eliminate 40,000 jobs nationwide. There's not an exact number on how many of those could be from the Ark-La-Tex. Pepper says workers who are not part of union with six or less years of service would likely be the first on the chopping block. "We've identified 16 thousand people that are not covered under contract. We'll see what those numbers add up to."
The postal service is also offering early retirement packages to workers over the age of 50 who have more than 20 years on the job. But according to pepper it may not be enough. "The preliminary numbers look like it's not going to be enough and we may have to do something else." But despite what may happen, Pepper says customers will not feel the pain they're going through. "The general public when it takes place won't se any decrease in service.. They largely won't know about it."
Ilargi: After saying he would never touch derivatives, Buffett is exposed as a two-bit two-faced double-fork-tongued rattlesnake, happy to snatch the last penny from the hands of the gullible. That's how you become the richest man in the world. Yeah, the Sage got nice apples for sale, Obama.
Warren Buffett can teach the world a thing or two about derivatives
Despite his warnings against them, Warren Buffett doesn’t completely shun derivatives. He’s sold billions of dollars of them through his Berkshire Hathaway investment group. And with markets in a mess, he’s taking paper losses. But Berkshire has a huge financial cushion. That and Buffett’s management of investor expectations offer lessons for other mark-to-market sufferers.
First, he keeps that cushion plumped up. Berkshire has written derivatives on stocks and bonds with an underlying value of nearly $50bn. That’s much higher than the derivatives’ market value, which fell an estimated $1bn in the third quarter, contributing to a 77pc decline in Berkshire’s profits compared with a year earlier. But Buffett’s company still made a profit, even with the markets in disarray. So although the final profit or loss on the derivatives won’t be known for years, he appears to have scaled his exposure so that paper losses along the way are highly unlikely to put a big hole in Berkshire’s balance sheet, undermining its other businesses.
Second, it helps that Berkshire doesn’t borrow much. The company doesn’t have to post collateral on its derivative positions – provided, among other things, it doesn’t lose its strong credit rating. With little leverage, there’s enough of a buffer that even much bigger paper losses won’t trigger that. American International Group, for one, found out the hard way that a vulnerable credit rating plus huge mark-to-market losses can quickly lead to downgrades and a life-threatening outflow of hard cash.
Third, Buffett has always told shareholders to look beyond quarterly earnings and to keep in mind the somewhat artificial accounting effects at work on both the upside and downside. He has even, once in a while, hinted that he thought Berkshire’s stock was over-valued. By contrast, Wall Street bosses who paid themselves handsomely based on paper gains on the way up have zero credibility when they try to excuse mark-to-market losses. It’s just possible Buffett will still end up losing a lot of real money on his derivatives. But others could learn from his skills in setting the stage so that investors aren’t scared off by paper losses along the way.
Goldman Sachs urged bets against California bonds it helped sell
Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds. The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California's deepening financial misery. In Sacramento, officials said they were concerned that Goldman's strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers.
"It could exaggerate people's worries about our credit," said Paul Rosenstiel, head of the public finance division of the treasurer's office. Such worries would tend to drive down the price of California bonds. That, in turn, would drive up the interest rate the state and its municipalities pay to borrow money. An increase of a single percentage point on a $1-billion bond issue would cost taxpayers an additional $10 million a year in interest.
That's especially troublesome at a time of severe budget turmoil and tight credit. Gov. Arnold Schwarzenegger has warned that the state could run out of cash as early as February. Some experts said the investment bank's actions, while not illegal, might be inappropriate. "That's not a good way to do business," said Geoffrey M. Heal, professor of public policy and business responsibility at Columbia University. "They've got a conflict of interest and they're acting against the interest of their customers. . . . You act in the interests of your clients. You don't screw them, to put it bluntly."
Goldman declined to discuss the details of its trading strategy. "We continue to support our clients and underwrite transactions," spokesman Michael DuVally said in an e-mail response to written questions on Oct. 28. He said Goldman "as a firm" was no longer giving the trading advice to clients. He declined to elaborate. Goldman's strategy was embodied in a 58-page report presented to institutional investors in September. The document, stamped "Proprietary and Confidential," was obtained by ProPublica, a New York-based nonprofit organization specializing in investigative reporting. This article was reported jointly by ProPublica and the Los Angeles Times.
Goldman stood to profit from several aspects of California's borrowing, which involves the sale of bonds to investors. First, it collected millions of dollars in fees for bringing the bonds to market and finding buyers. Then it marketed a financial instrument known as a credit default swap that is essentially an insurance policy against a bond default. The bond investor buying the instrument pays a fee in exchange for a promise of a full refund of the bond's face value should a state such as California abruptly refuse to pay back what it owes. Such defaults are extremely rare -- California, for example, has never defaulted -- but the swaps' prices rise as states or municipalities slide into tough times economically.
Goldman, according to sources familiar with municipal bond trading, has been a leading dealer in municipal credit default swaps. The New York-based firm was trying to expand that niche market into one with broader appeal to major investors. The company also is an important underwriter of California municipal securities. Over the last five years, it has earned about $25 million in underwriting fees from California issues. The 58-page document advised big investors how they could profit from -- or hedge against losses in -- financial markets that had become extremely volatile and unpredictable. The firm advised "shorting" -- that is, betting on a price decline -- in markets for corporate junk bonds, European banks, the euro and British pound currencies, and U.S. municipal bonds.
Several large states, including California, faced "worsening fiscal outlooks," the report said. It cited the recent bankruptcy of the Bay Area city of Vallejo as evidence of the "worsening fundamentals of municipal finances." Meanwhile, muni bond insurers were suffering credit downgrades, it noted, which undermined the quality, and therefore the prices, of the bonds they had insured. And the credit crunch was forcing big investors such as hedge funds to dump their muni bond portfolios, driving down the bonds' prices. Goldman recommended making the short bets via credit default swaps, a market in which it played a major role.
These instruments are designed to allow investors and speculators to hedge, or insure against, the risk that bond issuers or other debtors might default on their obligations. In their customary form, they are contracts that require their sellers -- in this case Goldman Sachs -- to buy back from a swap holder a defaulted bond at 100 cents on the dollar, thus insuring against any loss. In that way, the swaps could be beneficial to the market, encouraging risk-averse investors to buy more municipal bonds. But like derivative securities in general, they can be dangerous to hold. That's because they are often highly leveraged. A small investment can buy coverage on bonds worth much more. If defaults rise to unexpected levels, the swap sellers could be hard-pressed to make good on their promises.
The perils of the credit default swap market were brought home this year, when they were instrumental in the collapse of Lehman Bros. Holdings, American International Group and Bear Stearns. Lehman and AIG were rumored to owe far more than they could pay on swaps they had sold. Meanwhile, the prices of default swaps on the three firms soared, signaling to investors that the firms might be in trouble. Investigations continue into whether those swaps may have been manipulated to undermine confidence in the firms and drive them out of business.
"By encouraging people to buy swaps, you're pushing up the price of those and making it more expensive to insure against the default on the bond that you're buying," Heal said. "The fact that such coverage has gone up in price will signal to the investor that the riskiness of the bond has increased, even if that's not true. Even if the underlying financial situation of the state has not, in fact, changed." Indeed, what some traders found perplexing about the push for a market in municipal credit default swaps was that muni defaults almost never happen.
Goldman was a leader in the effort to build up the market for the muni swaps. In May, when the financial information firm Markit introduced a municipal CDS index to give swap traders a benchmark to set prices, Goldman was listed as one of the seven dealers participating in the rollout. For some time before that, Lockyer told The Times, Goldman had "regularly urged" California to trade in the municipal swaps itself, ostensibly to hedge the state's risks as a bond issuer. Lockyer refused.
The trading strategy that Goldman pitched to institutional investors was apparently crafted in the spring and summer. The company may have hoped to parlay the swaps market into more activity in municipal bond trading, which is traditionally light because muni investors tend to hold the bonds to maturity. Theoretically, the swaps index could lure speculators into the muni market, a development that would create much more fluctuation in daily prices, which in turn would generate revenue for trading desks at Goldman and other investment firms.
Lockyer and Rosenstiel said they became aware of the introduction of the muni swaps index but had not detected an effect on trading or pricing of California bonds. But they also said the market was so complex, and the conditions affecting municipal bond prices so numerous, that it might be difficult to identify any specific cause for a given price change in California debt issues. "The existence of the credit default swap market in muni bonds has the potential to hurt muni issuers," Rosenstiel said, "but it also has the potential to help muni issuers, and I don't think we have enough experience to know which is which."
He acknowledged that it was not unusual for a full-service investment firm such as Goldman Sachs to have to navigate among potential conflicts of interest. "Investment banks bring issuers and investors together," he said. "Securities law has recognized the potential for a conflict of interest in playing both roles." Under the law, the solution is for the parts of the firm dealing with either side to be isolated from each other so that information does not improperly flow between them to benefit one set of clients more than another. There is no evidence that the wall was breached in this case. Assuming such protection was in place, Lockyer said that fear of market manipulation was unfounded.
Still, Heal said he was surprised by Goldman's actions. "Goldman Sachs has a reputation as behaving in a responsible manner . . . and I don't think this is consistent with their traditions," he said. "States are going to have to cut back on education, social services, a whole range of things because of the lack of credit. This is not just a Wall Street thing. This is going to affect the lives of less affluent people in the states that are affected." In any case, there are signs that the muni swap index has been a bust. Tom Graff, managing director of Baltimore-based Cavanaugh Capital Management, said that by the end of August the index had failed to attract much business. It was destined "for oblivion," he said, in part because muni defaults were so rare.
AIG: As American as a money pit
American International Group has become a money pit for the U.S. government. The new $150 billion bailout of the insurance giant is bigger, and looks easier on AIG, than its previous two Federal Reserve facilities worth $123 billion in aggregate. The package is better defined than before, but the increased potential burden on U.S. taxpayers is embarrassing for both the Fed and the Treasury Department. It underlines the need for regulation that catches any group that's too big to fail.
In structural terms, AIG's Bailout 2.0 looks like an improvement. It aims to solve AIG's main problem - the cash bleeding from its $400 billion credit default swap portfolio - by unwinding the worst of the instruments completely in a kind of "bad bank" separate from AIG's insurance businesses. It is doing something similar with a collection of dodgy mortgage-backed securities. In addition, the Treasury will invest $40 billion in preferred securities under its Troubled Asset Relief Program, and the New York Fed will replace its existing $85 billion credit facility with a new $60 billion loan with a much lower interest rate.
This should all help keep AIG afloat while also bringing an end to the cash calls that have caused a massive outflow. It should also buy the insurance giant time to sell some of its assets. However, the plan amounts to burdening taxpayers with all of AIG's losses while still leaving shareholders and even management with a slice of any upside. That seems too generous, but the Fed's earlier idea of protecting taxpayers was always wishful thinking. AIG's size and market significance meant it had the government over a barrel. The insurer's finance operations had grown far too big to fail, while operating in large part in the cracks between different regulators' territories.
If the Fed and the Treasury have now done enough to stabilize the situation, that offsets some of the embarrassment of having to bail out their own initial bailout. Longer-term U.S. financial regulations need to capture any company that becomes so significant to the financial system. Rewriting the currently inadequate rule book is an important task for President-elect Barack Obama. AIG makes for a persuasive Exhibit A. -
The credit crunch is surely no laughing matter. But it is starting to look like someone's version of a twisted joke. The sorrows of bank failures and job cuts just took turns that even the best Hollywood minds would struggle to manufacture. Take the weekend news about Franklin Bank. The U.S. Federal Deposit Insurance Corp. seized the failing Houston-based bank, with $3.7 billion of deposits and 46 branches. It was handed over to a competitor, the aptly named Prosperity Bank. No big deal? Franklin was small and number 19 on the list of collapsed banks in the current housing downturn. But there's more. Franklin was started less than a decade ago by its chairman, a certain Lewis Ranieri.
For those with some institutional memory - or a copy of the book "Liar's Poker" on the shelf - this is significant. You see, Ranieri is for all intents and purposes the godfather of the mortgage bond market. In the late 1970s, Ranieri ran the trading desk at Salomon Brothers that created the securitization business, which begat the asset-backed market, which gave birth to the collateralized debt obligation, which ushered forth today's financial Armageddon. So it is a tad ironic that the bank that Lew built was felled by the housing crunch. Back on Ranieri's old stomping ground, Wall Street, there was another truth-is-better-than-fiction story Monday. Goldman Sachs - the temple of investment banking - let go about 10 percent of its 33,000 employees this week.
Again, what's the big deal? The whole industry sheds jobs in fallow periods. But among Goldman's casualties was one William Tanona. Unlike Ranieri, Tanona probably won't merit even a footnote in financial history books. Yet his departure is perhaps even more telling than the demise of Ranieri's Texan banking business. Tanona was a research analyst specializing in, well, investment banks. The lesson: Goldman no longer deems covering practitioners of the industry it leads to be a worthwhile endeavor. Irony often ties tragedy with farce. The stories of Ranieri and Tanona are historical ironies. You don't know whether to laugh or cry.
Europe's leaders can seize this opportunity to fill the leadership gap
By Joseph Stiglitz
America's sub-prime mortgage crisis has translated into a global financial crisis, embracing developed and developing countries. The leaders of the G-20 meet next weekend in Washington to figure out where to go from here. Even were President Bush not a lame duck, it is hard to see how he would have much credibility. This is not only a crisis that wears the "made in America" label, it is a result of the deregulatory philosophy and economic policies that he has pursued for eight years. But the absence of leadership from the US gives others an opportunity to step in to fill the gap.
France and the UK have recognised this as a new "Bretton Woods moment." This is their chance to push not only for the new regulations needed to restore confidence now and prevent this kind of global financial crisis from happening again, but also for a new global financial order. These reforms are necessary if we are to make financial market globalisation work, or at least work much better than it has been. Clearly, we need a new, strong, global regulatory system. Wall Street tell us that light regulation encourages innovation but the financial innovation that we have seen in recent years has mostly been directed at regulatory, accounting, and tax arbitrage, figuring out ways to deceive investors about the true value of the company, or to get around regulations designed to ensure that banks act in a prudent way.
Instruments were created that were so complex that not even their creators knew their full implications. They didn't help manage risk; they created risk. Meanwhile, financial markets didn't engage in the kind of innovation that would have enabled our economy to manage the risks which it faces better. They didn't create products that would help ordinary Americans stay in their home in the face of changes in interest rates or other economic circumstances. In Europe, they have resisted innovations, like the Danish mortgage bonds which have proven so successful in that country for more than two hundred years. They resisted innovations, like GDP bonds, which help countries and investors handle the risks associated with economic volatility.
When I was in the Council of Economic Advisers, I pushed for inflation indexed bonds, of the kind that Britain has long had. Many on Wall Street opposed it - they were worried that these bonds would not be traded over and over again, but instead people would hold them to retirement. They were more worried about their commissions than the well-being and security ofpensioners. (America eventually did issue the bonds, over that opposition.) Good regulation will encourage good innovation - creative energy might be devoted to addressing society's needs, rather than to figuring out how to exploit loopholes, or taking advantage of ill-informed borrowers. Regulatory harmonisation would be helpful to all market participants, and institutions from countries who don't comply with basic standards should be treated as pariahs Good financial institutions should not be allowed to deal with them.
Regulation begins with transparency and disclosure, but goes much further. The complaint about banks' compensation schemes is not just the level of pay, but the form, designed to encourage short sighted behaviour that was excessively risky, that encouraged bad accounting - putting too much off the balance sheet, to drive up reported profits, stock prices, and hence the value of stock options. Conflicts of interest have been pervasive - from rating agencies paid by those whose products they rate, to mortgage companies that owned their own appraisal companies. Commercial banks and pension funds, entrusted to care conservatively with assets of others, should not be allowed to gamble with other people's money.
But that is what they have been doing, and taxpayers are now being asked to pick up the tab. These institutions need to be ring-fenced, not allowed either to gamble (which means that derivatives can only be purchased when they can be explicitly related to reducing a specific risk exposure) or to be exposed to risks from those that do. They should, for instance, not be allowed to lend extensively to unregulated non-transparent hedge funds. There will need to be deeper reforms in the global financial system, of the kind suggested three quarters of a century ago by John Maynard Keynes. The dollar-based reserve system is inherently unstable, and is already fraying. But a euro-dollar, or a euro-dollar-yen system is likely to be even more unstable.
We need a global reserve currency, based on a market basket of currencies, to reflect the multi-polar world of today. Such a system would help prevent a recurrence of the dangerously large deficit the US has had for the last 25 years. The global financial system is unbalanced in other ways and if we don't restore the balance we will have continued global financial instability. Currently, emerging markets are hostages to the vagaries of the markets. But when the market decides they are too risky, money flows out and, more often than not, they call in the IMF which makes them cut spending, reduce deficits and raise interest rates. These policies make the resulting downturn worse. No wonder then that developing countries are viewed as risky; it is a self-fulfilling prophecy. That is why, strange as it seems, money is leaving developing countries, that didn't cause the current problems, and going to the US, which did. It is an unjust world, and Europe's leaders should do what they can to correct the situation.
That means dealing with the IMF and the World Bank. It is at times like these that we recognise the importance of such multilateral institutions. But the IMF did nothing to prevent the crisis, and may not even have the resources necessary to help the poorest countries. But given its flawed governance and its lack of credibility, why should those with pools of liquid capital, in Asia or the Middle East, provide more funding to the IMF, rather than work directly together with the developing countries? It is clear that reforms in governance are imperative, but in the past, such reforms have been too little, too late.
Ten years ago, at the time of the Asian financial crisis, there was much discussion of the necessity of reform to the global financial architecture. Little - too little, it is now evident - was done. It is imperative that we not just respond adequately to the current crisis, but that we begin the process of the long run reforms that will be necessary if we are to have for a more stable and more prosperous global economy. This is a Bretton Woods moment. I hope Europe's leaders seize the moment. Much will depend on it.
Oil dips below $60
The price for a barrel of crude oil fell below the psychologically important $60 level Tuesday morning as enthusiasm for China's massive economic stimulus plan faded and global stock markets tumbled. Light, sweet crude for December delivery was down $2.67 at $59.74 a barrel in New York. On Monday, oil rose $1.37 to settle at $62.41 a barrel. The price of oil has fallen about 60% from July's all-time high above $147 a barrel on fears that global economic weakness will continue to undermine demand for gasoline and other petroleum products.
Demand concerns were briefly tempered Tuesday after the Chinese government announced a $586 billion plan to boost economic activity in one of the world's key consumers of oil. But investors now appear less optimistic about the plan, which will take time to implement, as the outlook for global economic growth remains cloudy. "Yesterday's trade rebounded sharply higher at the open based on the Chinese stimulus package," said Tom Pawlicki, oil industry analyst at MF Global in Chicago. "In our opinion, however, the rally was too enthusiastic for the news."
Pawlicki points out that the package will provide "only" $14.6 billion in the current quarter, with the remaining amount disbursed over the next two years. He added that the plan's spending on housing and infrastructure may not provide the desired economic effect. "The problem is that there is already a housing glut in China, and the infrastructure will likely rebuild the earthquake devastated area in Sichuan rather than create much new expansion," Pawlicki said.
The oil market is also being pressured by falling stock prices worldwide. Stocks opened lower in the United States. The Dow Jones industrial average lost nearly 2% in the first few minuets of trade. Major indexes in Europe were all lower in morning trading. Britain's FTSE 100 was down 3%, and France's CAC-40 was 4% lower. The DAX in Germany was down 3.6% as well. The declines in Europe followed a slump in Asia, where Japan's benchmark Nikkei index dropped 3%. In Seoul, the KOSPI fell about 2%, while Hong Kong's Hang Seng index shed 4.8%. Oil traders have closely tracked world stock markets to assess the severity of what many economists say is a looming global recession. As a result, oil prices often fall when stock prices retreat.
Markets in the United States have been under pressure as rising unemployment, anemic consumer spending and weak corporate results threaten to tip the nation into a deep recession. Last week, the U.S. Labor Department reported that the economy has lost 1.2 million jobs so far this year. As the job market deteriorates, many American households have cut back on spending. Auto sales fell to a 25-year low in October as tight credit conditions and the weak economy kept consumers out of showrooms. At the same time, retail sales declined a larger-than-expected 0.7% in October, prompting concerns about the all-important holiday gift-buying period.
This reluctance to spend has a ripple effect on the broader economy, since consumer spending makes up more than 70% of U.S. gross domestic product. In the third quarter, GDP declined at an annual rate of 0.3%, according to estimates released by the Bureau of Economic Analysis. That came after an increase of 2.8% in second-quarter GDP. Many economists are predicting GDP will shrink again in the fourth quarter. Two consecutive quarters of declining GDP is one of the classic definitions of a recession.
Retail gas prices fell for the 55th day in a row. The national average price for a gallon of regular gasoline came down another 2 cents overnight to $2.220, according to a daily survey by the American Automobile Association. Tuesday's national average is down 46%, or $1.89, from the record high price of $4.114 that AAA reported on July 17
"Investing" in AIG et al
Today I am white-hot mad over AIG, and I need to vent. Yves Smith has done a beautiful job of describing the ridiculous awfulness of today's "restructuring". More importantly, she uses words with the appropriate intensity and valence: "banana republic", "looting", "Mussolini-Style Corporatism". For so many years, Milton Friedman passionately argued that there is a relationship between economics and political life. In particular, he believed capitalism to be uniquely compatible with a free society.
What kind of society is compatible with an economy managed by a cadre of large, politically connected firms whose operations and those of the state are intimately connected, and which cannot be permitted to fail since that would bring "chaos"? Friedman would have remembered. "Mussolini-style corporatism" can't be quarantined at the corner of Liberty Street and Maiden Lane. Trillion dollar bail-outs represent claims on scarce resources. If times get hard, the idea of scarcity will become a lot less abstract. The state will be called upon to enforce "property rights", including rights to the property that the state is right now giving away (and which in turn are being given away to the truly deserving). First there are economic emergency measures. Later there may be emergency measures of a different sort. Mixing my libertarians, there is more than one road to serfdom.
It is so odd, how we are becoming inured to these sums, $150 billion for AIG, $140B in tax breaks to encourage consolidation into bigger and more dangerous banks, the hundreds of billions in equity infusions under the modified TARP plan, etc. The Fed's balance sheet has expanded by more than a trillion dollars over the course of several weeks, almost all of which is used to offer one form or another of covert subsidy to financial firms. A bit hyperbolically, I thought, I once compared the scale of the Fed's interventions to the direct cost of the Iraq War. Now that seems quaint. The scale of the government's response to the financial crisis now completely dwarfs the direct costs of that war, as well as any plausible estimates of the indirect (financial) costs. (Obviously, the real costs of war are not financial, and run much deeper than our economic problems. I hope the comparison doesn't seem flip.)
Of course, we are constantly told, all of this is an "investment", no money has been spent, the taxpayer may even turn a profit. That's an argument that sounds reasonable only until you give it a moment's thought. Nearly all "government spending" (outside of entitlement transfers) is investment. When we build schools, run head start programs, buy fighter jets, and fund our court system, that is not "consumption". We don't do those things because we enjoy them, but because they create ongoing payoffs that we believe outweigh the opportunity cost of our funds. When a firm purchases inventory, when it installs new machinery or operates a research lab, we don't claim that it has "consumed" its wealth. Investment is something we do in the real world. Financial claims are only faint, imperfect echoes of real investment. There is a bitter irony in the fact that, precisely when bankers have profoundly debauched the value of paper claims, taxpayers are being told that they are not spending, they are investing, when they buy unmarketable securities. Of course it would be "spending" to build a power grid or an airport.
Now, perhaps the government is a very poor investor. But do we have reason to believe that it is more skilled or less corrupt when it invests in financial claims rather than real projects? I find the case for a 16% real return on early childhood education far more compelling than the case for 5% nominal coupon on Goldman preferred stock. It is likely that taxpayers will turn a paper profit on their paper claims against financial institutions. But that's not because they are good "investments". It's making these investments good is now a constraint on government action. The Fed cannot behave in ways that would compromise the value of the trash on its balance sheet. Once AIG was too big to fail, it cannot fail, no matter how big the black hole grows. Once GM enters the penumbra, very soon now, it also must not fail. Of course, we will not count this terrible loss of policy freedom as a cost.
That cost may be quite large. A commonly held view is that yes, the Fed's interventions are extraordinarily expansionary, and yes that could lead to inflation sometime far in the future. But for now we have D-leveraging, D-flation, D-pression to worry about. The Fed retains its traditional tools to fight inflation with, when the time comes. It will be able to sell Treasury bonds for cash and "mop up" all this "liquidity" it has "injected" into "the system". But wait. The Fed doesn't hold very many Treasury securities any more (see Kady Liang). It would have to sell off some of the other stuff. Maybe we get lucky, and by the time we need to fight inflation, all those "money good" CDOs turn marketable again. Maybe not, though, and then the Fed will have little choice but to tolerate a great inflation or watch its own balance sheet implode. When the inflation comes, bright investment bankers will have already converted the bonuses we paid them into real property. It will be ordinary savers, and especially workers without bargaining power, who will be stiffed with the bill.
I think either a great inflation or a catastrophic deflation are pretty much unavoidable. It's the distributional effects that have me white hot with rage. We are sowing the seeds of inflation by making those most deserving of catastrophe whole, while doing nothing for those whose wages may soon achieve purchasing power parity with the emerging world. I'm actually cool with inflation — hey, all my money's in gold. A sharp inflation would be a kind of large-scale Chapter 11, a systemic debt-to-equity cramdown, debtholders get their claims devalued but the firm's nation's economic life goes on.
However, inflation is a wealth transfer, and we should be conscious of from whom and to whom. For every dollar of Federal largesse that goes into the Wall Street bonus pool, three dollars should go into extremely generous unemployment benefits, paid sabbaticals for workers to return to school and retool, anything and everything to give people bargaining power to negotiate higher wages without all the hassle a union. Let's pass the "Take this job and shove it act of 2009". Because the only thing worse than a great inflation with a wage/price spiral is a great inflation without one.