Dan W.: My niece Penelope has a staph infection. She lives in Houston. Yesterday she went to the hospital, where she will remain for a couple of days on a heavy dose of antibiotics. She should be just fine for Christmas. Had this happened 1 year from now, however, we'd in all likelihood be singing an entirely different version of the 12 Days of Christmas:
1. ON THE 1ST DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
NO MORE DOCTORS TO SEE
My niece's mom and dad will not have health insurance next year. There are virtually no new jobs available in Houston in which the employer includes health insurance. Penelope's parents are not rich. A pay-as-you-go system means no health care for Penelope. And the promise of city or state or even federally subsidized health care is a pipedream at best. The state has no money with which to pay physicians, HMOs, hospitals, clinics, etc. And none of these entities will accept "credit" as payment because everyone knows that promises to pay later will not be fulfilled. Contrary to what Mr. Obama hopes, subsidized health care, particularly in big cities like Houston, will soon disappear.
2. ON THE 2ND DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
A HOSPITAL-LESS CITY
The hospital in which Penelope is currently receiving treatment---and many other hospitals for that matter---may very well shut its doors: employees are being laid off, doctors and nurses are leaving the city in droves, and the hospital's profitability is falling. Most hospitals will soon be operating in the red, and as these are primarily for-profit operations, bankruptcy and failure and closings loom.
3. ON THE 3RD DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
NO MORE MAJOR SURGERY
Doctors are performing less surgery because insurance companies aren't covering these procedures. Additionally, companies that produce hospital equipment are finding markets tight and profits squeezed. Many hospitals cannot afford to purchase new surgical equipment, new CAT scan machines and other cutting-edge technologies.
4. ON THE 4th DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
A HOME-BASED QUARANTINE
Hospital expansion and renewal projects are on hold. Hospital overcrowding is fast becoming a reality in larger cities...cities like Houston. Patients are being "roomed" in hallways and converted waiting areas. Patients who should receive inpatient care are being sent home with medicine and a prayer. Many patients who are sent home have contracted secondary illnesses and conditions in the very hospitals in which they sought help. This trend will accelerate as more people, in an ever-declining spiral of drug-resistant bugs and hospital degradation, are sent home with compromised immune systems and while still highly contagious.
5. ON THE 5TH DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
Drug companies are cutting production of certain medicines in an effort to artificially boost profitability: the dime-a-dozen days of antibiotics may soon be yet another victim of the coming crisis.
6. ON THE 6TH DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
A LIFE WITHOUT ELECTRICITY
Houston is America's 4th most populous city. Its power demands place strains upon a weakened infrastructure. Particularly in the wake of Hurricane Ike, the state of the physical infrastructure in Houston and Galveston is fragile at best. Were the city to lose power for over a week, people in Penelope's situation would die. There would be no way to adequately treat the infection, because there would be no electricity with which to power her IV pump.
7. ON THE 7TH DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
RICE AND BEANS IF LUCKY
Within the next 3-6 months, food reserves will begin to diminish. Commodities like wheat and soy are not making it to market because the ships that used to carry these commodities are not moving: shipping has become unprofitable. Supermarket shelves are going to reflect this dynamic by spring of 2009. More and more people are going to need the support of the government and charitable agencies just to feed and cloth their families. Unfortunately, the government, in an effort to try and cut costs, is going to have to close many of the state-sponsored facilities that currently provide these services. There is simply no money available to support these projects. More people are going to be hungry in the months to come. Lack of proper nourishment will, of course, exacerbate the health care dilemma, and so the death spiral will tighten and accelerate.
8. ON THE 8TH DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
CHOLERA AND DYSENTERY
A few big thunderstorms this spring---for which Houston is famous---could lead to contamination of the water supply as pollutants in the storm run-off mix with other water sources. While in the past this meant boiling water and waiting for the contamination to clear, things are going to be very different, very soon. Lack of reliable power will mean significant degradation of water treatment processes. Additionally, no power means no stoves for many people, which means no way to decontaminate the water. The illnesses contracted by consuming contaminated water will place more pressures upon the crumbling health care system: outbreaks of Cryptosporidiosis, Shigella, E-Coli even Cholera and other diseases cannot be ruled out.
9. ON THE 9TH DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
AN OUTBREAK OF DENGUE AND WEST NILE V
As Houston is an oppressively hot and humid city, it is the home to an ever-expanding mosquito population. Cities and municipalities in and around Houston are quickly finding that their budgets will not support mosquito control operations. Cases of such diseases as West Nile Virus, Dengue Fever and St. Louis Encephalitis will explode in this environment.
10. ON THE 10TH DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
A METH INDUCED CRIME SPREE
Budgetary "contractions" will mean fewer police officers, fewer firefighters, fewer EMTs, etc. Crime rates will climb. Violent crime will increase, and there won't be enough doctors to treat the injured. Subsidized drug and alcohol addiction treatment programs will disappear altogether. More untreated addicts will mean more homelessness and an increase in drug-related crimes.
11. ON THE 11TH DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
A FAKE DIPLOMA FOR FREE
Budgetary constraints in poorer school districts will mean larger class sizes, fewer after school programs, fewer one-on-one programs for children with special needs. Because of these cuts, more children will slip "through the cracks" and dropout rates will increase. Schools that cannot meet certain criteria as spelled out under the No Child Left Behind Act will be sanctioned and have many of their federally-funded resources cut. Fewer high school graduates will simply exacerbate an unemployment rate that will hit close to 20% in cities like Houston by 2010.
12. ON THE 12TH DAY OF CHRISTMAS MY COUNTRY GAVE TO ME:
THE RISE OF THE REVOLUTIONARY
Despite the resilience and optimism of the American people, all of this cannot happen without an eventual breakdown in civil society. Hungry, homeless, poor and angry, people will revolt. But seriously, I honestly don't think people fully grasp the enormity of our plight. Our quadrillion dollar debt-mare is destroying our financial infrastructure at trans-light speed, and as what's left of the capital disappears, so to do the goods and services upon which we have all come to depend. God forbid that Penelope's staph infection is recurrent.
(The picture above is not my niece Penelope: the little girl is one of millions of Penelopes who have been sacrificed on the altar of greed by the men of Wall Street, Capitol Hill and let's not forget Main Street. )
Ilargi: Our friend Dan wrote the above story a few days ago on his Ashizashiz site. We're happy to publish it here.
The one good thing that might come out of the Hill refusal to let Americans pay to have cars produced that nobody wants to buy or drive, is an oops upside your head reality check. Being thrown out of a snuggly comfort zone into a freezing dark street, 2.00 am late December, in your underwear, no hat, no gloves, no overcoat. That sort of check. Perhaps Joe Six Pack (or is that Five Pack by now?) will start to understand a little more the depth of the doodoo he lives his life in. It's not going to be easy, and there's no good news anywhere to be seen. But it is all he has, it's his life. Mind you, Bush is trying to do a temporary TARP bail-out anyway, but that won't save a single job, it just makes sure he won't get all the blame. The cost to you: another $20 billion or so down the bottomless drain. Who's counting?
Still, what are the chances Joe will leave his delusions behind? There's not a single voice in the politico-mass media cabal who's not willing and eager to tell Joe the same-old-same-old lies and fairy tales of a bright future right around the corner. It's just about guaranteed that Joe and Jill will have no real clue what's been going on until they indeed get thrown out of their home on a pitch black winter's night, along with their scared-to-death kids. Maybe on Christmas Eve?
Wall St. bailout may be used for Big 3
The Bush administration said Friday that it will consider using the money set aside to help banks and Wall Street to rescue the auto industry. The statement -- a change in the administration's long-held position -- might be the last best chance to keep troubled automakers General Motors (GM, Fortune 500) and Chrysler LLC out of bankruptcy.
The defeat of a $14 billion bailout plan in the Senate late Thursday left the administration little choice but to tap the $700 billion bailout approved by Congress in October, the Troubled Asset Relief Program or TARP, according to White House Press Secretary Dana Perino. "Given the current weakened state of the U.S. economy, we will consider other options if necessary -- including use of the TARP program -- to prevent a collapse of troubled automakers," Perino said in a statement. "A precipitous collapse of this industry would have a severe impact on our economy, and it would be irresponsible to further weaken and destabilize our economy at this time."
The Treasury Department, which controls the TARP fund, also said it was looking at using the remaining money as stopgap help for the automakers. "Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," Treasury said in a statement Friday.
GM has warned that it needs $4 billion by the end of the month or else it will run out of the money it needs to continue to operate. It said it'll need an additional $6 billion in the first two months of 2009. Chrysler said it needs $4 billion early next year. Ford Motor (F, Fortune 500) has more cash on hand despite ongoing losses there as well. So it is not expected to tap into funds in the near term. But it has said it might need money later in 2009 if auto sales do not improve.
The Bush administration and congressional Democrats agreed earlier this week to use funds originally set aside to help the auto industry start producing more fuel efficient cars to fund $14 billion in loans. But while the measure passed the House Wednesday night, Republican opposition in the Senate kept it from winning the 60 votes it needed to bring the matter up for a vote.
The Bush administration on Thursday had threatened Senate Republican opponents of the measure that failure of the bill would leave the administration no choice but to release the TARP funds, congressional aides told CNN. After the vote Thursday night, several Democrats, including Senate Majority Leader Harry Reid, urged Treasury Secretary Henry Paulson to release the funds he controls as early as Friday.
Republican critics of a bailout have argued that the automakers should use the bankruptcy process to shed debt and provisions of its labor contracts the companies can no longer afford, the way companies in other troubled industries, such as airlines and steelmaking, have done in the past.
But the automakers argued that bankruptcy is not an option for them. They say consumers will not buy cars from a bankrupt automaker because of concerns about the warranties and the resale value of the cars if the company goes out of business. And they point out that companies that reorganize in bankruptcy get funding to continue operations, funding that the automakers would have trouble getting with the current credit squeeze and weak auto sales.
GM, Chrysler Survival Options Narrow After Vote Fails
General Motors Corp. may be in bankruptcy within weeks, followed shortly by Chrysler LLC, after the U.S. Senate rejected a $14 billion rescue plan and the companies’ options for survival dwindled. "I dread looking at Wall Street tomorrow," Senate Majority Leader Harry Reid said on the Senate floor in Washington last night. "It’s not going to be a pleasant sight." GM plunged as much as 39 percent in early U.S. trading today after the bailout plan was thwarted in the Senate on a procedural vote as talks failed in a dispute with Republicans over how quickly union wages should be cut. President George W. Bush must now decide whether to let the companies collapse or find another way to channel government funds. Minutes after the vote, he was pressed by House Speaker Nancy Pelosi and Reid to tap funds from the Treasury’s $700 billion bank-rescue fund.
The Bush administration, which warned of a million lost jobs if the industry imploded, will "evaluate our options in light of the breakdown in Congress," White House spokesman Tony Fratto said in a statement last night. The bill "was the best chance to avoid a disorderly bankruptcy" for the automakers. GM dropped $1.40, or 34 percent, to $2.72 at 7:18 a.m. before regular New York Stock Exchange composite trading. Standard & Poor’s 500 index futures sank 4.3 percent, indicating the benchmark for U.S. equities will extend yesterday’s 2.9 percent drop. The Senate vote was a repudiation of Bush, who personally lobbied for the bill. Only 10 Republicans in the Senate voted to move forward on the auto-rescue plan. Vice President-elect Joe Biden was one of 12 lawmakers who didn’t vote. President-elect Barack Obama, who resigned from the Senate last month, had also urged lawmakers yesterday to pass the measure. "We cannot simply stand by and watch this industry collapse," Obama said during a Chicago news conference.
GM Chief Executive Officer Rick Wagoner told Congress last week and has said repeatedly that the Detroit-based automaker is trying to avoid bankruptcy at all costs. Lead director George Fisher said last week that GM considered and rejected the option and it was "way down the list" of alternatives. Still, GM also has said it will lack the minimum $11 billion needed to pay bills by the end of this month, raising the prospect of bankruptcy should it fail to win a cash infusion. GM reported having $16.2 billion as of Sept. 30. An attempt to restructure GM in bankruptcy would end up as liquidation, because sales would plummet as buyers flock to solvent car companies, Wagoner has said. Chrysler has said it will run out of money early next year. It ended the third quarter with $6.1 billion in cash and needs at least $3 billion on hand to operate, Chief Executive Officer Robert Nardelli told Congress on Nov. 18.
Pressure was mounting on GM and Chrysler this week before the congressional failure as both faced demands from a small number of partsmakers for payments in advance because of the bankruptcy concerns, people familiar with the matter said. GM is "deeply disappointed that agreement could not be reached tonight in the Senate despite the best bipartisan efforts," according to a statement. "We will assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis." Chrysler spokeswoman Lori McTavish said the company is "obviously disappointed in what transpired in the Senate and will continue to pursue a workable solution to help ensure the future viability of the company." Ford Motor Co. Chief Executive Officer Alan Mulally said his company doesn’t need emergency U.S. loans, though he predicted last week that Ford could be dragged into bankruptcy by the failure of GM. Ford slid 49 cents, or 17 percent, in early U.S. trading to $2.41.
Pelosi and Reid have no plans to return until next year. Plunging markets may put pressure on Congress to return to Washington, "but there was lots of pressure on them now," said Gary Jacobson, a political scientist at the University of California, San Diego. Connecticut Democrat Christopher Dodd, who helped lead the negotiations, said the final unresolved issue in the Senate talks was a Republican demand that unionized autoworkers accept a reduction in wages next year, rather than later, to match wages of U.S. workers at foreign-owned companies, such as Toyota Motor Corp. Treasury Secretary Henry Paulson has committed all but $20 billion of the first $350 billion of bank-rescue funds from the Troubled Asset Relief Program. "I think that is where they go next," Senator John Thune, a South Dakota Republican, said in an interview before the impasse, referring to TARP funds. Treasury spokeswoman Jennifer Zuccarelli referred questions to the White House.
Another possibility is seeking cash from the Federal Reserve. While Fed Chairman Ben S. Bernanke hasn’t ruled out using emergency-lending authority to aid carmakers, he’s said he’s reluctant to do so without Congress also assisting the companies. "The Federal Reserve would be extremely reluctant to extend credit where Congress has actively considered providing assistance but, after due consideration, has decided not to act," Bernanke wrote in a Dec. 5 letter to Dodd, the Senate Banking Committee chairman. GM is reeling from almost $73 billion in losses since 2004 and a 22 percent plunge in U.S. sales this year. The automaker last month said it lost $4.2 billion in the third quarter. Chrysler has been battered by a 28 percent plunge in U.S. sales through November, the steepest drop among major automakers.
Job losses would total 2.5 million to 3.5 million from an automaker failure in 2009, including 1.4 million people in industries not directly tied to manufacturing, according to a Nov. 4 report from the Center for Automotive Research, which does studies for government agencies and companies. "This is going to be a very bad Christmas" for many people, Reid said on the Senate floor last night. The Senate failure came when a bid to cut off debate on the bill the House passed Dec. 10 fell short of the required 60 votes. The vote on ending the debate was 52 in favor, 35 against. Earlier last night, negotiations on an alternate bailout plan failed.
A plan offered by Tennessee Republican Senator Bob Corker, which served as a basis for a possible compromise yesterday, would have required automakers to offer bondholders 30 cents on the dollar. Automakers would also have had to persuade the United Auto Workers to take half of the $23 billion it’s owed for health care as GM stock instead, and eliminate a program in which UAW workers are paid not to work if there are no tasks for them. "We were about three words away from a deal," Corker said.
GM to cut 250,000 vehicles from 1Q production
General Motors Corp. says it will cut another 250,000 vehicles from its first-quarter production schedule by temporarily closing 21 factories across North America. The move affects most plants in the U.S., Canada and Mexico. Many will be shut down for the whole month of January. Spokesman Tony Sapienza said normal production would be around 750,000 cars and trucks for the quarter.
GM and nearly all automakers who sell in the U.S. are mired in the worst sales slump in 26 years. Cash-strapped GM is seeking government loans to stay in operation beyond the end of the year. The White House says it may tap the $700 billion Wall Street bailout fund to help GM and Chrysler stay in business after the Senate blocked a measure to provide $14 billion in immediate loans.
Auto Suppliers Share Anxiety Over a Bailout
With Congress failing to agree on a bailout for Detroit, the odds that General Motors and Chrysler will be insolvent by year’s end are growing rapidly. The companies have been warning that they would run out of money for some time, but crushing bills from their suppliers are coming due. It appeared unlikely that they could hold on until President-elect Barack Obama takes office next month, when he and a new Congress might be able to provide a lifeline, as a Congressional rescue this year looked increasingly unlikely. As a result, the hypotheticals about the domino effect of the companies’ troubles through the vast network of auto supplier firms — which employ more than twice as many workers as the carmakers — are becoming real.
General Motors and Chrysler, for example, owe their suppliers a total of roughly $10 billion for parts that have been delivered. G.M. has held off paying them for weeks, and Chrysler is paying in small increments. But the cash shortages at G.M. and Chrysler are getting more severe, according to their top executives and other officials. A bailout seemed unlikely Thursday afternoon, as Republican Congressional leaders indicated they would not agree to the plan offered by Democrats and the White House. And late Thursday, an alternate plan urged by Senator Bob Corker, Republican of Tennessee, fell apart. It would have required steep concessions by the United Auto Workers union and by creditors to General Motors and Chrysler. G.M. has said its cash reserves are falling by more than $2 billion a month, and the company has hired bankruptcy advisers, including Harvey R. Miller of the firm Weil Gotshal & Manges. Chrysler is a private company, but its sales are falling faster than any other company in the industry, and has acknowledged it will run out of money soon, too.
Many of their suppliers are teetering on the verge of bankruptcy themselves, and do not have the luxury of extending credit much longer. “I don’t think that suppliers will be able to get through the month without continued payments on their receivables,” said Neil De Koker, chief executive of the Original Equipment Suppliers Association in Troy, Mich., a trade group. When suppliers big and small start failing, the flow of parts to every automaker in the country will be disrupted because as suppliers typically sell their products to both American and foreign brands with plants in the United States. “There’s no question it will hit Toyota, Honda and Nissan too,” said John Casesa, principal in the auto consulting firm Casesa Shapiro Group. “Many of the small suppliers will simply liquidate because they don’t have the resources to go reorganize in Chapter 11 bankruptcy,” Mr. Casesa said. “They’ll just go away.”
It is the dire scene laid out at the first set of Congressional hearings on an auto bailout in mid-November by Ford’s chief executive, Alan R. Mulally. “Should one of our domestic competitors declare bankruptcy, the effect on Ford’s production operations would be felt within days, if not hours,” Mr. Mulally said. He has said his company has enough cash to last through 2009, even if the current sales environment for new vehicles — down 16 percent over all so far this year — continues. In years past, suppliers have often been able to assist a troubled automaker by extending payment periods to get through tough times. But by Mr. De Koker’s estimation, hundreds of suppliers no longer have that flexibility. They cannot borrow money in a frozen credit market, and they cannot buy raw materials without first being paid for parts they already shipped.
The Big Three, along with their foreign competitors, are what most people think make up the entire auto industry. But the car manufacturers are just the top of the pyramid. While G.M., Ford and Chrysler employ 239,000 people in the United States, the country’s 3,000 or so auto suppliers have more than 600,000 workers. Suppliers range from large, publicly held companies that make car seats and axles, to much smaller firms that provide clamps, hoses and stamped metal parts. Like the Big Three, most of the bigger suppliers have been restructuring their operations drastically to match the shrinking demand for new vehicles. For example, Dura Automotive Systems, which makes brake pedals, doors and glass parts, has cut 2,600 jobs in the last 60 days and consolidated seven corporate divisions into four, and cut travel expenses and subscriptions.
“We’re operating as if we don’t know where the bottom is,” said Timothy D. Leuliette, Dura’s chief executive. “It’s as if we are hungry all the time, and we don’t know where things are going.” Dura, a global company with sales of $1.8 billion, is in better shape than many other suppliers. Even so, Mr. Leuliette joined other supplier executives on a trip to Washington last week to knock on Congressional doors in support of federal aid to the automakers. “Most of the suppliers are not highly waged; they have no big pensions,” Mr. Leuliette said. “People affected by all this are just the average Joes. Washington has a myopic view of the auto industry. They just think of the Big Three and don’t think of us.” Suppliers make most of the 15,000 parts that go into a single car. More than 70 percent of a car’s value — from the seats to the chassis, from the electronics to the bumpers — are sold to the automakers by suppliers.
Since 2004, the supplier workforce has fallen by 23 percent from 783,000, according to the Original Equipment Suppliers Association. The thousands of auto suppliers operating today — most along a line stretching from Detroit down to Kentucky close to assembly plants — are expected to shrink by half, to around 1,500, over the next three years, according to estimates from Plante & Moran, a consulting firm in suburban Detroit. At Dura, tough times seem to be the order of the day. The company emerged from bankruptcy this year, which allowed it to cut $1.2 billion from its debt load and close 16 manufacturing facilities out of 48 worldwide. Still the company has been able to land $1 billion in new orders and still has around 13,000 employees worldwide — with foreign operations in Brazil, Europe, China, Japan and India. Some 27 percent of Dura’s revenues come from Ford, 9 percent from G.M. and 9 percent from Chrysler, according to the company’s federal filings. Volkswagen and Japanese automakers also represent a large portion of its business.
And, like others, Dura cannot get any bank to lend it money while it waits for payments from the Big Three, who are holding off paying their bills. “For suppliers there is no place to go, no place to hide,” Mr. Leuliette said. “The automakers are not paying, so we have to carry them. They are forcing the suppliers to loan money to Ford and G.M. Until G.M., Ford and Chrysler are viewed as financially stable, the worldwide spigot is turned off to suppliers.” Mr. Leuliette said that he has worked through five previous downturns in the auto industry, but the difference with this one is the lack of bank lending. “In a normal recession, we could have gone to the capital markets, but the capital markets are closed to us,” he added. The same is true for companies further down the supply chain like TNT-EDM, a precision tool and die shop in Plymouth, Mich., that provides parts used by larger suppliers like Dura.
“It’s like the dog chasing the tail,” said Tom Mullen, the company’s chief executive. “When G.M. isn’t paying the tier one guys, they are not paying us. It’s like a spoke on a hub that keeps falling off a bit. Normal course of business, we’d get paid in 35 to 45 days, 60 days max. Now, if you get paid in 120 days, you are doing good.” Mr. Mullen has seen his revenues fall from $15 million a year over the last few years to around $10 million, while saying that his plant has capacity to run at $20 million a year. He has held off investing the $1 million to $2 million he spends annually in new equipment and he has cut back on the hours of his 35 employees to avoid layoffs. “Everyone is stretched like a bungee cord,” he said. “We are waiting to hit the bottom of the river and waiting to be slingshot back up, hopefully.” “We still sell 80 percent to auto,” he added. “I’d love to sell that much to aerospace. But automotive, it’s in our blood."
Crashed auto rescue will cause an economic pile-up
Bankruptcy beckons for the Big Three. But even if General Motors, Ford and Chrysler find a last-minute solution to avoiding Chapter 11, the US Senate's refusal to sanction $14bn of auto aid will cause an economic pile-up. If the latest legislative snafu feels like a shock, it shouldn't do. It is easy to refuse help to companies that won't really help themselves. All three businesses are unviable in their present form. The carmakers and their unions boxed themselves into a financial corner by decades of inert management. And they have spent the last few months resisting the least bad remaining option: bankruptcy, or some facsimile thereof.
The worse options are still on the table. Top of list would be a forced liquidation of one or more of the companies. That would trigger a wave of failures among suppliers and dealers. At least this nightmare scenario could yet be avoided, if President Bush bows to pressure to divert rescue funds slated for the banks to the auto industry. That would give the Big Three's newly hired lawyers vital time to put together bankruptcy packages that would keep most of the assembly lines rolling. As Lehman showed, the world is better off without gargantuan liquidations. The collapse of the Wall Street broker made everyone in the financial markets much more cautious - even those not directly hurt by its demise. The sudden disappearance of Chrysler - a symbol of American life, and the most likely carmaker to fail - would bring the "Lehman trauma" to the broader economy.
For now, the outcome of the Senate's decision is pure political paralysis. This in itself will introduce a milder version of the dreaded economic trauma. The uncertainty of the situation will make anyone connected to the most important manufacturing industry in the US think twice about spending a dime. Grim headlines give already discouraged consumers new reasons to be gloomy. Nor is the damage confined to the US. Asian and European stock markets fell sharply on Friday, with carmakers down twice as much as the indices. It will be hard for rival carmakers to prosper when so many of the biggest players are in turmoil. After the Big Three pile-up is cleared away, the world auto industry should be healthier. That prospect may provide some comfort as the global recession deepens. But not much.
Forecast: Don't expect auto rebound
Weak auto sales are likely to continue through the first quarter of 2009, according to a new forecast from respected industry consultant J.D. Power and Associates. That could create further problems for the struggling U.S. automakers, even if they get the federal loans now being considered by Congress.
Tom Libby, senior director of industry analysis for J.D. Power & Associates, said his firm is now forecasting a seasonally adjusted annual sales rate of about 10.5 million vehicles for December and between 10.9 million and 11 million in the first quarter of next year. "Our position is there is no reason to believe that the first quarter of 2009 will be any better than the fourth quarter of 2008," said Libby.
The plan submitted to Congress last week by General Motors (GM, Fortune 500) forecasts significantly stronger sales in December and somewhat stronger first quarter sales than in Power's new estimates. GM's forecast calls for a seasonally adjusted annual sales rate of about 12.2 million in December for the industry and the company is predicting a little more than an 11 million sales rate for cars and light trucks in the first quarter of 2009.
The world's largest automaker suggested in its plan to Congress that it could need more money, and quickly, if sales are weaker than its forecasts. Its needs could rise to $15 billion by the end of March if its worst case scenario proves true, rather than the $10 billion that Congress is now considering loaning it over the next four months. GM CEO Rick Wagoner testified to Congress last week he believes his firm's forecast is sufficiently conservative to be realistic but that GM will still need $4 billion just this month.
GM's full-year forecast for 2009 is roughly in line with rival Ford Motor (F, Fortune 500). It is calling for sales of just under 12 million vehicles in 2009 while Ford is expecting just over 12 million sales in the period. Chrysler has the most conservative forecast. It is predicting car and light truck sales of 11.1 million for all of 2009.
Bernie Comes Out of the Closet
Not a year has gone by during the past fifteen years that I have not contemplated what Bernie Madoff did (or didn't do) to make his money. Seventy to one-hundred basis-points-a-month. Net. Net. Net. During tempests, earthquakes, panics and crashes - even during the closure of the exchange itself, Bernie apparently minted coin like few others. Even Renaissance and Shaw tripped occasionally. Not Bernie. Yet no one knew what he did. It was one of the best kept secrets in the world. Oh yeah sure split-strike conversions was the official line. But every skeptical arb trader knew this couldn't be true.
I never came across an ex-Madoff trader the way one meets ex-Shaw, ex-Moore Cap, or ex-Citadel employees. Resumes are sent and guys have done the rounds, even if they weren't unhappy. A spouse moves...whatever. Surely there must be disgruntled Madoffians somewhere. Were they ummm underground? I mean, literally? My friends (who were trying to do business with them years ago) who'd been to their office said it looked the bridge from the USS Enterprise (the Starship - The Next Generation version). Uh huh. He said it was a paperless office. No paper trails. Hmmmm. Violators were fired. Weird. No one transgressed.
Whatever he did, he came a long way from arbing the odd-lots that was the reputed foundation of his activities. I knew his shop from London where he was one of the few to make markets, and if my clients for whatever (mostly ill-advised) reason needed to trader instantly, Bernie would make a price. Not a good price, but a price. But one does so at their peril since the folk with material non-public information are more predisposed to want to trade outside hours, so the pick-off risk was huge. But he never complained.
Next thing I know, he's a supposed electronic market-maker at the center of the trading universe. Yet even Timber Hill has bad hair days. Volkswagen ord-pref days. Not Bernie. Is he arbing the exchange fee structure? Is he algorithmically scalping cause he's seeing the order flow before it gets to the exchange? Maybe. Profitably? Who knows? And then there are these investment funds - Fairfield Sentry and Kingate. Madoff-only feeders reputed to be $7bn each. Are they funding his market-making? Why does he need so much capital? What the f*ck f*ck f*cking f*ck could he be doing in the equity markets with that? They say they are doing these split strike conversions but I can't see how the numbers work. Nor can anyone else. The Wall Street Journal raises the red flags, but it's dismissed as hyperbole by jealous competitors. The thing is: there are lots of smart guys out there. Sixty of them near Stonybrook with Simons focuused on cracking the nut, I can understand. But there is no sign of such exactitude or intellectual firepower at Madoff.
In 2000, I advised a family-office on their alternative investments, and constructed a portfolio on their behalf. I had free reign. They had a sizable Madoff position. As a fiduciary - and a conservative one - coming on the heels of LTCM which also lacked transparency - I dug, asked every welll-connected equity-finance, prime-broker, electronic trader and HF allocator type I knew and it still didn't add up. I strongly suggested they dump it. One isn't being compensated sufficiently for not knowing, and something just isn't right here. Yeah maybe its OK, but I think it's not. But they liked it and they liked him. "He's always paid". "We've been with him a long time". Old school they were. Trusting. What the fuck did I know anyway?
Well it seemed the "split-strike conversions" were profit shifting bookkeeping tools. Money invested in the feeders did obtain split-strike conversion positions that had a "yield" but it seemed these were pre-arranged combinations that shifted return back to the investment vehicles. In the interim, Madoff presumably has use of the entire pool of capital, to do what he pleased, plus whatever that pool could command in terms of leverage. It could be in anything and everything. He could be doing mutual fund timing, or mutual-fund market impact trades. Option and index-option market impact trades or he could be at the center of a loan-sharking network across America earning 50%pa, and here he was passing a paltry 9% back to investors. Either he was crooked beyond belief or he was an evil contrapreneurial genius. Who would have have thought he was both??!!
Some crimes are too perfect. Some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff's ponzi. The people who were taken - like the Family Office and many other investors who in time will go public on their fleecing - wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn't make sense. It just didn't add up. Even Jim Simons earns it. There is no free lunch.
There is something fitting and just in the timing of this. It is emblematic of America since Reagan and the Great Leveraging. Something for nothing. Thank you Mr Laffer. But as a philosophy and modus operandi it is quite literally, bankrupt and without merit. And Laffer has since been proven to be full of shit. Now, Americans will have to confront this, the premise that greed is good and self-guiding and somehow omnisciently beneficial for it has had repurcussions down to the core of our society and values. "Sorry everyone....what you've been pursuing has all been a lie, a big ponzi, a rat-hole to nowhere....". Re-boot.
Why Sheila Bair wants to bail out consumers
Sheila Bair may now be a lightning rod, but at least she's finally getting some respect. For months, her agenda was a non-starter. Her proposals to try to turn distressed mortgages into performing loans through a loan modification program were getting absolutely no traction with either Federal Reserve chairman Ben Bernanke or Treasury Secretary Hank Paulson.
When the three of them testified before Congress last month, Bair, the chairman of the Federal Deposit Insurance Corp., got practically zero air time (one banker complained that every time it was her turn to talk, the TV cameras cut to a commercial). Bloggers dumped all over her, saying she was irrational, self-serving, arrogant and gave the private sector "a bad case of shingles." Just last week, Bloomberg News reported that Tim Geithner, Obama's pick to head Treasury, was trying to get rid of her.
Now though, she's Page One news and her ideas have to be reckoned with. Congress has introduced proposed legislation to launch a loan-modification program, similar to her proposal, to be paid for with money from Hank Paulson's Troubled Asset Relief Program (TARP).
This wasn't the only recent show of support for Bair. In a speech last week to a Fed conference on housing and mortgage markets, Bernanke vindicated her position when he called for more aggressive action to stop foreclosures. One of his recommendations: the very loan-refinancing program instituted by Bair at IndyMac, the failed California bank, in which government will share some risk if a lender refinances to reduce monthly payments and keep the loan performing.
Bair's staff, meanwhile, signed a petition on petitionsite.com singing her praises and asking Obama "that you please retain her as our leader." TV stock picker Jim Cramer joined in the chorus, saying: "Don't kick out Sheila Bair! She knows the numbers." If she's not a team player, blogged Cramer: "Thank Heavens!"
Her plan at IndyMac may be slow and imperfect, helping only 5,300 of more than 60,000 delinquent borrowers at IndyMac so far. But amid a lot of ambiguity and tortured explanations for all of Washington's various bailout efforts, she has been consistent and logical (not to mention courageous). She says the things nobody else wants to say, or explains matters that others would like to leave, well, ambiguous. Among her inconvenient truths:
1) You can't scapegoat the Community Reinvestment Act for this mess. That law, first passed in 1977, requires lenders to make loans in low-income neighborhoods if they want to do business there. But as she explained to the Consumer Federation of America last week, the CRA was a factor in only about one-fourth of the shaky, high-priced home loans made in the subprime go-go years of 2004-06.
2) Beware a political backlash if hedge funds and other investors try to stand in the way of mortgage modification efforts as if business were usual.
Business isn't usual. Already 1.6 million mortgages are more than 60 days delinquent and the FDIC expects an additional 3.8 million of those next year. Home prices have fallen nationally by an average of 21% since peaking in the first quarter of 2006, according to the S&P/Case Schiller Home Price Index.
"Investors will have to take some losses here," she said at a Fortune 500 Forum in Washington last week. "The system broke down in a lot of different places. A lot of these very sophisticated hedge funds and investors didn't look at the mortgages underlying these securitizations. If they had, they would have seen the high LTVs (loan to value ratios), the lack of documentation, the steep payment resets. To now say, 'Oh gee, we didn't know' ...I think that's a bit problematic. There is plenty of blame to go around and plenty of losses to go around and everybody is going to have to take a little."
3) Bankers and regulators must win back what Bair constantly refers to as "the public's trust." When so much of the bailout activity has been driven by politics, ideology or myopic vision (in other words, what's good for Wall Street must be good for the rest of us), Bair has kept her eye on the ball.
She's a pragmatist, aiming to prevent a deflationary spiral in housing prices that, along with accelerating job losses, will further devastate consumers, who are just as critical to a healthy economy as strong banks. Ironically, she's a Republican who has taken on the role of populist to restore confidence in the system. "I'm a capitalist. I believe in markets," she told an American Banker awards gathering last week.
But as FDIC chair, she knows only too well that public trust and consumer confidence are the economy's life support. She's a lot less worried about whether some undeserving types take advantage of her mortgage refinancing programs than about saving the economy and protecting the FDIC. Because if the FDIC looks shaky, then all bets are off.
From the beginning of the crisis, she has been more focused on consumers than have Paulson, Bernanke or Geithner, which is important considering that consumer spending has been the major growth engine of the economy. Foreclosures depress home prices, sometimes beyond any reasonable level, aggravating consumer distress even further.
"We're going into this self-reinforcing cycle," she told the Fortune conference last week. "We really need to do a lot more." Her plan may be a torturous way to address the problem. Investors are filing lawsuits. Redefault rates can be high, though Bair believes that can be controlled by refinancing in such a way as to make the loan truly sustainable.
But at least by speaking out loudly and courageously, Bair has thrust the corrosive issue of foreclosure to center stage. From an economic standpoint, just a 3% reduction in defaults will preserve $500 billion in homeowner equity, she says, and result in $40 billion to $50 billion in the consumer spending that's so critical right now. Not only would that help the economy, it would lessen the drag on the banking system and relieve the stress on the FDIC.
And Bair is a mother bear about the FDIC. That has got her into hot water with the other regulators, who are more focused on stabilizing institutions like Citigroup (C, Fortune 500) and AIG (AIG, Fortune 500). They didn't like it when she reversed her position on a Citi-Wachovia merger in late September when Wells Fargo (WFC, Fortune 500) came in with a deal that alleviated the need for government help.
When Citi required a capital infusion last month, she stood firm about limiting the FDIC's exposure, according to a person knowledgeable with the negotiations, and attached some conditions, for example requiring Citi to modify troubled mortgages along the lines of IndyMac's program. Her vigilance is less about ego than it is about protecting the FDIC and all that it stands for. Created by Congress in 1933 to restore public confidence in the nation's banking system, the agency is funded not by the government but by fees from the bank whose deposits it insures. So it's not a bottomless pit.
As its list of problem banks swelled to 171 by the end of third quarter, up from 90 in the first quarter, its deposit-insurance fund fell to $34.6 billion, down from $52.8 billion. The agency has lines of credit with Treasury that it can tap if it ever came to that. But that wouldn't exactly induce more confidence. No wonder Bair doesn't want to be a spendthrift. So Bair may look like a troublemaker when she stands up to the boys at Fed and Treasury. But that's because she's got different opinions and a willingness to stand behind them. If that gives some people a bad case of shingles, maybe the conflict is worth it.
Look what happened when Brooksley Born, former head of the Commodities Futures Trading Commission, tried to raise alarm bells about unregulated derivatives a decade ago. She was run out of town and we are all very much worse off for it.
Ilargi: I’m very surprised that Bloomberg hasn't gotten much more support on the disclosure issue, that they have to fight this one standing alone.
Fed Refuses to Disclose Recipients of $2 Trillion in Lending
The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral. Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression. The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.
"If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know," said Carlos Mendez, who oversees about $14 billion at New York-based ICP Capital LLC. Bloomberg News is a unit of New York-based Bloomberg LP. The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP. Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.
Congress is demanding more transparency from the Fed and Treasury on the bailout efforts, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had "been bamboozled." In its response to Bloomberg’s request, the Fed said the U.S. is facing "an unprecedented crisis" when the "loss in confidence in and between financial institutions can occur with lightning speed and devastating effects." The Fed supplied copies of three e-mails in response to a request that it disclose the identities of those supplying data on collateral as well as their contracts.
While the senders and recipients of the messages were revealed, the contents were erased except for two phrases identifying a vendor as "IDC." One of the e-mails’ subject lines refers to "Interactive Data -- Auction Rate Security Advisory May 1, 2008." Brian Willinsky, a spokesman for Bedford, Massachusetts- based Interactive Data Corp., a seller of fixed-income securities information, declined to comment. "Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure," Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, said in a letter e-mailed to Bloomberg News. "In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information," she wrote.
New York-based Citigroup Inc., which is shrinking its global workforce of 352,000 through asset sales and job cuts, is among the nine biggest banks receiving $125 billion in capital from the TARP since it was signed into law Oct. 3. More than 170 regional lenders are seeking an additional $74 billion. Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. The Freedom of Information Act requires federal agencies to make government documents available to the press and the public. The suit, filed in New York, doesn’t seek money damages.
"There has to be something they can tell the public because we have a right to know what they are doing," said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press. "It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed." The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. Borrowers include the now-bankrupt Lehman Brothers Holdings Inc., Citigroup and New York-based JPMorgan Chase & Co., the country’s biggest bank by assets.
Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group, said in an interview last month. "Americans don’t want to get blindsided anymore," Mendez said in an interview. "They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now." The Bloomberg lawsuit said that the collateral lists "are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression."
In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank’s customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said. "I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system," Johnson said. The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
Switzerland may have to print money to stave off deflation
The Swiss National Bank has cut interest rates to 0.5pc and opened the door for emergency stimulus, becoming the first country in Europe to flirt with zero policy rates. South Korea cut to 3pc and Taiwan cut to 2pc, the lowest in 30 years. Both countries are facing a collapse in exports to China and traditional markets in the West. Thomas Jordan, a board member of the SNB, said the bank was mulling extreme measures to stabilise the financial system and cushion the economy as it falls into recession next year. "We could engage in quantitative easing and we could intervene in foreign exchange markets or we could buy up bonds and try to influence long-term interest rates. All these options are open and we're not limited in any way in choosing from among these instruments," he said. Quantitative easing is the tool pioneered by the Bank of Japan to stave off deflation. It is tantamount to printing money.
David Bloom, currency chief at HSBC, said the shift in policy was breathtaking. "The SNB are the hard men of central banking; they are even harder than European Central Bank. What they are saying is that inflation is no longer a problem, it's the solution. They want stimulus any way they can get it." The banking sector makes up 20pc of Swiss GDP, leaving the country extremely exposed to the credit crisis. The liabilities of Credit Suisse and UBS are equal to seven times national GDP. This has echoes of the situation in Iceland before the country collapsed, although Swiss banks have a much better mix of assets. "The crucial difference is that the Swiss own half a trillion dollars of external assets. They have a current account surplus of 16pc of GDP. This is their ace in the hole. If push ever comes to shove, the Swiss taxpayers have the money to pay," said Mr Bloom.
Switzerland, Sweden, Britain, and Canada are all now following the US Federal Reserve in taking revolutionary action to head off a slump next year, while the ECB has moved with much greater caution. It is unclear whether this reflects a rift in doctrinal policy, or whether the ECB is less able to respond to crises because of its treaty-bound institutional structure. The ECB's chief theorist, Lorenzo Bini-Smaghi, said it was hazardous for central banks to cut rates too low and risk using up ammunition.
German MPs say bank bail-out is failing
Germany’s €500bn ($670bn) rescue package to shore up its banking sector has failed to breath new life into the embattled sector and should be modified urgently if lasting damage to the economy is to be avoided, the parliamentarians who oversee the funds warned on Friday. In a private letter to Peer Steinbrück, finance minister, the MPs said the €400bn fund set up in October by the government to guarantee bank debt had not led to a satisfying resumption of inter-bank lending and that German banks were not providing companies with sufficient credit as a result.
In addition to the €400bn fund, the bail-out also includes €80bn for capital injections and €20bn for the purchase of so-called “toxic assets”. “Although there is demand for the €400bn in guarantees and we can expect that this amount will have been used up in the not too distant future, there is serious concern that the expected revival of the inter-bank lending market will not take place,” Albert Rupprecht, chairman of parliament’s financial markets committee, wrote.
Writing on behalf of the nine-strong group of MPs mandated to oversee the government’s rescue effort, Mr Rupprecht said there was a danger that the €400bn in guarantees would be used by a small number of institutions “while others continue to mistrust the inter-bank lending market.” It would be “unthinkable”, Mr Rupprecht said, if parliament “were to realise, within a few weeks, that the hastily adopted measures have missed their goals and the funds have been exhausted.”
The dramatic appeal will add pressure on Angela Merkel, chancellor, to reconsider the architecture of her government’s financial market stabilisation fund amid evidence that banks are reining in lending to even healthy companies. Ms Merkel is known to be highly concerned about the situation after receiving reports in recent weeks from companies in sectors ranging from shipbuilding to carmaking and wind parks, complaining about the fact that large long-term investments are being put on hold due to the scarcity of credit.
The issue is now likely to come up at a meeting at the chancellery on Sunday where Ms Merkel will discuss the state of the economy with Mr Steinbrück, Michael Glos, economics minister, Olaf Scholz, labour minister, and leading members of the ruling coalition, as well as business representatives and economists. The evening meeting has been billed as an exchange of views ahead of a gathering of coalition leaders on January 5 that will discuss possible additional steps to support the economy. In addition to the bank rescue package, the government has adopted a €12bn, two-year fiscal stimulus programme that many economists and foreign leaders have criticised as too modest. Yet as Mr Rupprecht’s letter suggests, it seems increasingly likely that Ms Merkel will have to move before then to ensure the resumption of lending by German banks. Although small- and mid-sized companies are still able to obtain day-to-day financing from savings and co-operative banks, which have been little affected by the financial turmoil, lending for larger projects has in effect dried up.
In his letter, Mr Rupprecht urges Mr Steinbrück to consider setting up a central clearing house for inter-bank lending, whereby banks would lend to a central, government-managed body, which would in turn provide short-term financing to other banks. The Bundesbank, which co-manages the stabilisation fund with the finance ministry, is known to be working on such a proposal. “As I have learned through many talks with representatives of various institutions, such a clearing house could be an efficient instrument to help revive the inter-bank refinancing market,” Mr Rupprecht wrote. “Under certain circumstances, it could also encourage lending to companies.” Mr Rupprecht urged Mr Steinbrück to attend the next meeting of the parliamentary financial markets committee on December 19 and make proposals for the modification of the rescue fund.
The Anger of Finance Minister Steinbrück
German Finance Minister Peer Steinbrück blasted Britain's tax cuts earlier this week, triggering a brief trans-Channel spat. Despite his undiplomatic tone, many in Germany agree with their finance minister. Still, commentators warn his criticism may do more to harm Germany than help it. The art of denial is one of those weapons that every successful politician keeps close at hand, to be quickly pulled out when necessary. Sometimes, the denial works even when everyone knows it's a lie (see Reagan, Ronald: "I can't recall").
Other times, the denial is so tortured that it backfires (see Clinton, Bill: "It all depends on what the meaning of the word 'is' is"). This week, though, relations within the European Union are so obviously strained that nobody is even trying to pretend otherwise. Of particular note is the frosty tone currently prevailing between Berlin and London. Prime Minister Gordon Brown kicked things off at the beginning of the week by failing to invite German Chancellor Angela Merkel to his pre-EU summit gathering with French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso on Monday.
But it reached a whole new level on Thursday. In an interview with Newsweek magazine, German Finance Minister Peer Steinbrück said, in reference to Britain's sales tax (VAT) cut, "are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain's debt to a level that will take a whole generation to work off." He also said, in apparent reference to London, "the same people who would never touch deficit spending are now tossing around billions." The response from Downing Street was swift. BBC quoted an insider saying that Germany was "out of step" and Brown himself told LBC radio that "I don't really want to get involved in what is clearly internal German politics." In Berlin, Steinbrück's Finance Ministry elected to dust off the denial weapon, saying unconvincingly "the point was not to criticize our British friends." But elsewhere in the German capital, politicians rushed to support Steinbrück, a Social Democrat.
Steffen Kampeter, a parliamentarian from Merkel's conservative Christian Democrats and a budget expert, told SPIEGEL ONLINE, "I completely agree with Steinbrück's analysis." In reference to EU demands that Germany do more to address the growing economic crisis, he said "the British are expecting that we help them out of the muck. But we certainly weren't expecting that they share their profits from the financial market boom with us." Social Democrat budget expert Carsten Schneider also backed party colleague. "The British and Brown were good when it came to bailing out the banks. But I think the sales tax cut is counter-productive," he told SPIEGEL ONLINE. He says he fears the measure is just a waste of money and that it won't have much of a positive economic effect. Not all in Germany were impressed by Steinmeier's comments. The head of the parliamentary budgetary committee, Otto Fricke of the business-friendly Free Democrats, told the Rheinische Post that Steinbrück should concentrate on problems in Germany rather than hampering foreign relations. Never ones to stay out of such a debate, German commentators have their say on Friday.
The center-left daily Süddeutsche Zeitung writes: "Like everyone, Steinbrück has human weaknesses, even if it currently seems that he is super-human. A finance minister who saves the German finance system almost single-handedly?! Look at how I have cleaned up the mess you made, he seems to be saying. Steinbrück would like a bit of recognition. Instead, he has been pushed into the defensive because he doesn't want to play the same multi-billion euro game when it comes to economic stimulus. ... That has made him angry -- and sometimes he explodes. Steinbrück is right to question the effects of (the British tax cuts). Nobody knows if such stimulus measures really work -- especially given that nobody knows yet how the crisis will develop further. Only one thing is sure: as opposed to the bank guarantees which will hopefully not have to be written off, economic stimulus money is gone. The expenses from today are the debts of tomorrow -- but thinking it terms of generations is unpopular these days. Steinbrück is on the right path, but he shouldn't scare off the partners that he needs. His mistake is not what he is doing, rather it is what he is saying."
Conservative Die Welt writes: "What seemed in recent weeks like German failure and cowardice in the face of the economic crisis, now seems -- given the catastrophic forecasts raining down from economic think tanks and politicians -- like perseverance. Merkel at the moment is focused more on Germany than on stabilizing a Europe that looks rudderless. The only thing certain when it comes to the European Union is the multi-billion euro price tag any stimulus program would carry. In such a situation, Merkel is happy to play the role of " Madame Non. But what is her steady hand doing at home? Here too she is keeping her wallet firmly in her pocket. The number of voices calling for an economic stimulus package, though, is multiplying. The Social Democrats are slowly coming around to the tax cut idea and calls from within the conservative camp are getting louder. It will take awhile before Germany makes a move. But the next crisis summit will come."
The financial daily Handelsblatt writes:
"The pessimistic forecasts from Germany's economic think tanks have made it more or less official that the country is sliding into a deep recession -- resulting in the fact that very few continue to doubt that a stimulus package is necessary. Still, the German government is resisting such a package at the European Union in Brussels this week and will continue to deny the necessity of economic stimulus until next year. ... In addition, Steinbrück insults his British colleagues. The logic behind Berlin's phobia of economic stimulus policies is easily explained. Germany is very strong in exports, but domestic consumption has traditionally been weak. As such, the economy is more dependent on economic stimulus packages abroad than at home. The strategy, thus far successful, has been that of doing everything to make the export sector competitive. That explains why automotive industry subsidies are a serious consideration. ... The same logic can be used when looking at tax cuts, because it has the potential to make production cheaper. But any expenditures that 'only' stimulate consumption weaken competitiveness. But at the moment, such thinking isn't just harming Europe, but also Germany. The others will do less for economic stimulus if Germany doesn't go along. And the packages they do assemble will be designed to help German industry as little as possible."
Fed: Screw the Federal Debt Cap
The Fed announced today that it would start issuing its own bonds, rather than going through the treasury. It's hard to be sure of the exact number, but I'm guessing somewhere in the area of 4 or 5 trillion dollars worth, unless it wants to just print money. Before this, the Fed was having the Treasury issue debt for it, but unfortunately, that money is restricted by the Federal debt ceiling, and getting Congress to increase that debt ceiling by a few more trillion would be politically explosive.
As I noted October 8th, when the Fed started buying up short term commercial paper, the Fed is steadily moving towards becoming a national bank. The bottom line is that banks are pulling back on lending. When the Fed or the Treasury gives them money, instead of using it to lend to business and consumers, they horde it or use it to pay down their losses. They have been increasing interest rates on credit cards, pulling or reducing lines of credits to businesses and just generally lending less and less, even as a huge flood of money gushes from the government into the bottomless pit of their greed and need.
So: lending less money, and charging higher interest rates for it. Not what the economy needs going into a huge recession, and completely frustrating Fed monetary policy. Rate cuts are not being passed on to most businesses and consumers. There are two ways to get through this.
The first, which I've repeatedly suggested, is to nationalize some banks that are failing (like, oh, Citigroup) and use them to lend directly to businesses, consumers and on the overnight bank loan markets at rates the Fed and FDIC set. Other banks can either match rates, or lose customers. And even banks do need customers.
The second option is one the Fed seems to be backing into haphazardly. If banks won't lend, the Fed can. Given the way the Fed has moved to prop up consumer debt markets, by buying up packaged consumer loans, it's debt facilities to banks and so on, the Fed has already started down the road.
But what they're finding is that buying and lending on the secondary markets isn't working. Sure, lenders will take the money, but they won't pass on the low rates to consumers, or even necessarily pass on the money. So while buying short term paper has stopped the market from collapsing entirely, it has only slowed the contraction and has not led to improved credit at lower rates.
Which means the next logical step is to just bypass the banks entirely and start letting businesses have Fed lines of credits. And as my friend Stirling and I were joking the other night, hey, why not start issuing Fed credit cards at prime +10%. The Fed will make lots of money, consumers will no longer be gouged by banks, and there'll be credit. Get some card stamping machines, and set up a customer service department, and soon, you too can argue directly with the Fed about whether they should charge you for that hotel room you say you never slept in.
Sound far fetched? Probably it is, which is why the new administration will have to fail to clear the financial crisis by other means before finally backing into it. But hey, how cool would it be to have a Platinum Fed Card. "For everything else, there's the Fed. When you need credit, why go to other banks, go to the only bank allowed to print money."
Most US jobless claims in a generation
New claims for jobless benefits surged last week and came in worse than expectations that were already gloomy — and economists say the figures would get even worse without an auto industry bailout. Initial applications for unemployment benefits rose to a seasonally adjusted 573,000, the Labor Department said Thursday. That was nearly 50,000 more than economists were expecting and up from a revised 515,000 the week before. The last time so many Americans filed new jobless claims in a single week was in 1982, although the labor force has grown by about half since then.
Adding more damage to the already ravaged labor market, Bank of America said it expected to cut as many as 35,000 jobs over the next three years, including some from investment bank Merrill Lynch, which it agreed to buy in September. Separately, the U.S. trade deficit rose unexpectedly in October, partly because of dampened demand for American exports. The gap was $57.2 billion in October, up from $56.6 billion in September. Analysts had been expecting a decline because of falling oil prices. The numbers came as legislation to provide a $14 billion bailout to the auto industry ran into rising resistance from Senate Republicans. Both President-elect Barack Obama and a spokeswoman for President George W. Bush cited the jobless claims numbers in support of the bill.
In unusually stark terms, White House spokeswoman Dana Perino said the economy is so weak right now it "cannot sustain" a collapse of the auto industry. And in Chicago, Obama said an industry shutdown would have a "devastating ripple effect" on the already staggering economy. The reports, along with investor concerns about the auto bailout bill's future, sent stock markets falling. The Dow Jones industrial average finished down almost 200 points, closing at 8,565. General Motors Corp. and Chrysler LLC executives have said they could run out of cash within weeks without government help. Ford Motor Co., which would also be eligible for federal aid under the bill, has said it has enough cash to make it through 2009.
Automakers and their extensive network of suppliers support about 3 million jobs, and many economists say the bankruptcy of one or more of the Detroit Three would make the unemployment numbers even worse. It "would have a significant impact at a very bad time," said Laurence Meyer, president of Macroeconomic Advisers and a former member of the Federal Reserve Board. Besides Bank of America's announcement, more layoffs in other industries were announced Thursday. Tool maker Stanley Works said it plans to cut 2,000 jobs and close three manufacturing facilities. Sara Lee Corp., known for food brands such as Jimmy Dean and Hillshire Farm, said it will cut 700 jobs as it outsources parts of its business.
Still, food companies will likely fare better over the next few months than other employers because consumers will buy food and other staples even in a recession, said Madeline Schnapp, director of macroeconomic research at Trimtabs Investment Research. Most Americans expect the jobs situation to get even worse, according to a poll released Thursday by the Pew Research Center for the People & the Press. Sixty-three percent think unemployment will increase next year, and 73 percent plan to cut back on holiday gifts this year, according to the poll. The four-week average of new jobless claims, which smooths out fluctuations, is now a seasonally adjusted 540,500. That's the highest since December 1982, when the economy was emerging from a deep recession.
The number of people continuing to claim jobless benefits also jumped much more than expected, increasing by 338,000 to 4.4 million, the department said. Economists had expected a small increase to 4.1 million. That figure also indicates that workers are having a harder time finding a job and leaving the unemployment rolls, economists said. As a proportion of the work force, the number of people continuing to receive benefits is the highest since August 1992, when the U.S. was recovering from a relatively mild recession. Economists consider jobless claims a timely, if volatile, indicator of the health of the labor markets and broader economy. A year ago, initial claims stood at 337,000.
The Labor Department said last week that employers cut a net total of 533,000 jobs in November, and the unemployment rate reached 6.7 percent, a 15-year high. And the latest jobless claims figures indicate that the December report could be just as bad or worse, Abiel Reinhart, an analyst at JPMorgan Chase Bank, wrote in a client note. Companies have eliminated a net total of 1.9 million jobs this year, and some economists project the total cuts could reach 3 million by the spring of 2010. Several large U.S. employers announced layoffs this week, including Dow Chemical Co., 3M Co., Anheuser-Busch InBev, National Public Radio and the National Football League.
Senate approves bear-market pension relief
The Senate unanimously approved legislation on Thursday to help company pension plans and retirees that have been hard hit by the financial crisis. Under the bill, generally healthy multi-employer pension plans hurt by the decline in the stock market would not have to make drastic pension plan contribution increases and worker benefit cutbacks that many companies had feared. Multi-employer pension plans cover workers from more than one company, which, unlike traditional single-employer plans, allows workers to move from job to job and still contribute to the plan. Large companies with pension plans have seen the value of their plan assets plummet, confronting the companies with heavy funding obligations for 2009 under existing pension law.
Since the beginning of 2008, the benchmark Dow Jones Industrial Average stock index has fallen to about 8,500 from over 13,000, hammering many pension fund portfolios. In addition, under the legislation, people aged 70-1/2 or older would not have to take distributions from their retirement plans as required under current law. This would allow savings to stay put and prevent a bear-market tax hit. "This is important funding relief for families, seniors and firms that needed to get done ... The measures in this bill will allow folks to avoid being saddled with a tax hit that wouldn't exist under normal market conditions," said Montana Democratic Sen. Max Baucus in a statement.
Study Finds White-Collar Unemployment Spreading
Well-paid professionals like lawyers and architects are joining the rapidly expanding unemployment rolls in New York City, according to a new unemployment study. The report, released by the Fiscal Policy Institute, shows that the effects of the financial crisis have spread well beyond Wall Street to other white-collar jobs, as well as construction, retail and service jobs. The number of white-collar workers outside the financial industry receiving unemployment checks has increased by more than 40 percent and the number of college graduates collecting benefits is up by 50 percent in the city since last year, the report shows.
In other dire news for the New York economy, the city comptroller forecast on Thursday that Wall Street's cash bonuses will drop at least 50 percent to their lowest level since 2002, which could have grave consequences for city tax receipts. The comptroller’s chief economist recently explained in an interview how the city's fortunes have changed so dramatically. A report today put the national unemployment rate at its highest level in 26 years. Although the nation has been losing jobs since the start of this year, New York City’s job market remained strong into the summer, according to the report, which is based on data compiled by the federal and state Labor Departments. As recently as July, the number of new claims for unemployment benefits in the city was only about 10 percent higher than it had been a year earlier. But unemployment claims have been rising rapidly, portending an “upsurge” in the city’s unemployment rate in coming months, said James Parrott, the institute’s chief economist and author of the report.
According to the state’s figures, the city has lost about 10,000 jobs since employment peaked in August. A report on the condition of the job market in the city and state in November is due to be released next week. Most forecasts of the effects of the financial crisis project that the city will lose more than 150,000 jobs during this recession. The report estimates that job losses will average about 10,000 a month from November 2008 through the end of 2009. The layoffs are following a traditional recessionary pattern by radiating out from the big financial companies to other professional services and to lower-paying businesses like retailing, according to the report, which is based on a breakdown of the latest data available from the state labor department.
The number of unemployment beneficiaries who worked in professional, technical and scientific services was 6,428 in October, up 42 percent from October 2007. That total — which includes the fields of law, accounting, consulting and engineering — exceeded the 5,935 beneficiaries who worked in finance and insurance, the report shows. The number of blue-collar beneficiaries was up 50 percent, driven by a jump in laid-off construction workers. Mr. Parrott said that the figures understate how severe the unemployment situation is because many laid-off workers have not yet started collecting checks and many others do not qualify for benefits. In October, fewer than one-third of the 225,000 unemployed residents of New York City were collecting benefits, he said.
Fury Builds Over Crisis at Banks
The Wall Street backlash is under way. If it grows strong enough, it could end with some bankers facing criminal trials. As with most searches for scapegoats, the process will not be entirely fair. But efforts by the big banks to point the finger of blame elsewhere — to Fannie Mae for guaranteeing bad loans, or to the accountants for forcing the banks to admit they owned assets that were not worth much anymore — seem to be failing at the same time public anger is growing. One precipitating event is the failure of the huge bank bailouts to do much for the economy. “Lenders who receive public funds should use those funds to lend,” said Christopher Dodd, the Senate Banking Committee chairman. He complained that banks are “hoarding capital” and buying other banks, rather than lending it.
The Bush administration had good reason not to impose strong restrictions on the recipients of bailout money; it had to find a way to recapitalize the banking system without putting a stigma on those that took the money. Strict requirements on how the money could be used would have scared away too many healthy institutions. But the bankers should have known that there was a risk of backlash. Few Americans ever dreamed of making what most investment bankers took for granted. In a year when red ink is flowing, why should there be any bonuses at all for executives? Talk of the need to keep valued executives does not play well when those are the same executives who got the banks into this mess.
A functioning banking system is necessary for a modern economy to grow, but it is not sufficient. The bank bailout was not intended to rescue the economy, but that fact was not exactly emphasized by advocates. Washington took longer than it should have to realize the depth of the economic troubles, treating this as an American credit crisis rather than the worldwide recession it was fast becoming. The bailout was the only action in town, and people not unreasonably assumed it was supposed to make life on Main Street better. It hasn’t, and that has roused resentments. If public pressure rises to prosecute one or more bankers, there is the not-unimportant question of what charges could be proved. The bosses at Tyco stole from the company, and those at Enron put out false financial statements that violated accounting rules. WorldCom lied about the nature of its spending, and thus turned losses into profits.
In this mess, on the other hand, there is every indication that many top bankers did not understand the risks they were taking, and were stunned when the losses materialized. That may have been stupid — another reason to think bonuses are inappropriate — but stupidity is not a crime. As a federal judge wrote this month in considering claims against Countrywide Financial’s officers and directors, “the federal securities laws do not create liability for poor business judgment or failed operations.” But that same opinion, by Judge Mariana Pfaelzer in Los Angeles, offers a road map for any prosecutor who wants to make such a case, even if there is no proof that company executives knew their financial statements understated the losses and risks they were facing. The Countrywide complaint, she wrote, presents “the extraordinary case where a company’s essential operations are so at odds with the company’s public statements that many statements that would not be actionable in the vast majority of cases” can form the basis of a complaint. “For example,” she wrote, “descriptions such as ‘high quality’ are generally not actionable; they are vague and subjective puffery not capable of being material as a matter of law.”
But in this case, she said, the complaint claims “Countrywide’s practices so departed from its public statements that even ‘high quality’ became materially false and misleading; and that to apply the puffery rule to such allegations would deny that ‘high quality’ has any meaning.” It should be noted that the judge’s opinion did not find Countrywide had violated securities laws. She just kept alive a suit claiming that the company’s executives had acted illegally when they falsely claimed to be following tough underwriting standards in making mortgage loans. She was not making new law. Responding to the last banking crisis, the United States Court of Appeals for the Third Circuit rejected a bank’s puffery defense that had been accepted by a lower court judge. “If a defendant represents that its lending practices are ‘conservative’ and that its collateralization is ‘adequate,’ the securities laws are clearly implicated if it nevertheless intentionally or recklessly omits certain facts contradicting these representations,” the court wrote. “By addressing the quality of a particular management practice, a defendant declares the subject of its representation to be material to the reasonable shareholder, and thus is bound to speak truthfully.”
That opinion was written about what a bank said in 1990, shortly before its loan losses went through the roof and its stock price went through the floor. But it has a 2008 ring to it. All these cases were civil cases brought by private parties. So far it is not clear that the Securities and Exchange Commission would bring a civil case on such routine-sounding puffery as claiming that lending practices are conservative and cautious, let alone that the Justice Department would file a criminal case with no more evidence of misconduct than that. But if the anger against Wall Street grows large enough, that could change. The executives may not have understood how badly they were hurting their banks, but perhaps it can be proved they knew, or should have known, that claims of disciplined and high-quality lending practices were woefully wrong.
HBOS takes £8bn write-down as UK economy weakens
HBOS sent another wave of panic through the banking industry this morning after revealing that its bad debts will top £8bn this year, wiping out more than half the £15.5bn of emergency capital raised by the lender so far. Shares across the sector tumbled, with HBOS crashing 20pc and Lloyds TSB 17pc as HBOS investors gathered in Birmingham and voted on its merger with Lloyds TSB. Preliminary indications show they voted overwhelmingly in favour. Royal Bank of Scotland was off 17pc and Barclays 13pc by early afternoon, while analysts at Dresdner Kleinwort said “more capital increases [are] virtually inevitable” on top of the £50bn being injected into Britain’s eight largest banks. HBOS revealed that bad debts on mortgages, credit cards and corporate lending – plus writedowns on “toxic” debts – had reached £8bn in the first 11 months of the year. The figure is a £3.2bn increase since September alone.
Collins Stewart described the announcement as a “profits warning”, adding “we have very little confidence as book values continue to be impaired monthly”. HBOS’s corporate lending book bore the brunt of the damage. Bad debts in the division have rocketed from £500m in June to £3.3bn and the value of its equity investments, a pioneering partnership approach to lending that now looks to have been a disaster, has crashed from a £100m profit to an £800m loss in the same period. The bank warned that problems in the division will “continue to impact results in the short to medium term” and that “investment valuations are expected to remain under significant pressure in our private equity and joint venture businesses”.
The £8bn of losses will eat into the £15.5bn of capital the bank is raising this year – £4bn that has already been collected from a rights issue and £11.5bn from the taxpayer. Collins Stewart reckons the sharp deterioration in the quality of the corporate loan book, which took the market by surprise today, will “delay profitability of standalone HBOS by another year to 2010 at least”. Bad debts in the mortgage book have more than tripled in the five months since June, from £200m to £700m. For the same period, impairments on credit cards and other unsecured lending have doubled to £1bn. HBOS warned: “In light of the worsening economic climate, trends in retail impairment charges are likely to come under further pressure.” The “toxic” credit portfolio increased writedowns from £1.1bn to £2.2bn in the five months.
The poor numbers will add weight to Lord Stevenson’s suggestion last month that without the Lloyds merger HBOS would face full nationalisation. Shareholders are expected to vote the merger through at today’s meeting, despite attempts by Scottish nationalists to break the deal up and preserve independence for HBOS’s Scottish unit, Bank of Scotland. HBOS added that margins were under increasing pressure after the Bank of England cut the base rate by two and a half percentage points in the last two months to 2pc. Lower interest margins “will impact on HBOS capital ratios”, it warned, raising the spectre of another call on the taxpayer for more support. In addition, the bank has estimated that baling out UK savers at Bradford & Bingley and the Icelandic banks will cost it £200m since the lion’s share of the burden will fall on the industry. However, the bank said: “Through the injection of capital and liquidity facilitated by the Government, HBOS remains confident in its ability to navigate through this difficult period, as it becomes part of the enlarged Lloyds Banking Group.”
Bear deal tougher than expected, Dimon says
J.P. Morgan Chase Chief Executive Jamie Dimon told CNBC on Thursday that integrating the acquisition of brokerage firm Bear Stearns has been harder than expected because of market turmoil. Bigger investment banks Goldman Sachs and Morgan Stanley are unlikely to merge, he added during the interview. J.P. Morgan acquired Bear Stearns in March, possibly saving the struggling brokerage firm from bankruptcy. The government agreed to guarantee some of Bear's assets as part of the deal. However, Dimon said on Thursday that reducing the risk of the remaining assets on Bear's balance sheet has been more expensive than anticipated because of the collapse in equity and credit markets.
"The cost of de-risking... in this market has been more expensive," he said on CNBC. "It's been painful." That's part of the reason why the remaining big investment banks, Goldman and Morgan Stanley, are unlikely to merge with each other, or with another large financial institution, Dimon added. Reducing a combined balance sheet of roughly $500 billion in assets in a short space of time could create losses of $25 billion to $30 billion in a market like this, he explained. Dimon also said that roughly 30% of the mortgages J.P. Morgan has modified end up re-defaulting. That compares to statistics from the Office of the Comptroller of the Currency, which found that 56% of home loans modified in the first quarter and second quarter of 2008 re-defaulted after six months. After eight months, 58% of borrowers had re-defaulted.
J.P. Morgan re-assesses borrowers' income and the value of their homes each time the bank modifies a mortgage. A 50% rate of default may still be okay, but higher industry levels of re-defaults are probably driven by "sloppy" re-appraisals, Dimon explained. J.P. Morgan isn't planning to reduce the principal due on mortgages, but the bank is cutting interest rates on home loans to try to help borrowers avoid foreclosure, Dimon told CNBC. One of the best ways to stop house prices falling more would be to lower interest rates on mortgages. If rates were brought down to 4.5%, Americans would be able to buy a lot more of the homes, Dimon said.
FDIC braces for tough banking climate in 2009
Hardly a day goes by without an announcement from a big company taking an axe to its payroll. But guess who won't be laying off people anytime soon? The Federal Deposit Insurance Corporation. Faced with what the likelihood of even more bank failures in 2009, the nation's top banking regulator has ramped up its hiring in recent weeks.Over the next three months, the agency plans to add about 125 new employees, according to a FDIC spokesman. The majority of those positions are aimed at dealing with struggling or failed institutions in Western states. Nearly all of those workers will be headquartered out of Irvine, Calif. Last month, the FDIC announced it had signed a three-year lease on a 200,000 square-foot building there, representing its first temporary satellite office in more than a decade.
"[The FDIC is] fully expecting, over the course of the next 12 to 18 months, [that] there is going to be a rash of failures," said Nick Ketcha Jr., a former director of supervision at the FDIC who now serves as a managing director at the New Jersey-based financial services consulting firm FinPro. Bank failures have climbed in recent months as the industry continues to grapple with a myriad of problems, including rising mortgage delinquencies and a deterioration in the quality of banks' credit card portfolios. Twenty-three banks have failed so far this year. The most recent collapse was First Georgia Community Bank, which was placed into receivership by the FDIC last Friday. With the economy in a full-blown recession that shows no sign of relenting, industry observers are bracing for more failures to follow as hard-hit banks try to keep up with loan losses.
John Douglas, a partner at the law firm Paul Hastings and former general counsel at the FDIC who served during the height of the savings and loan crisis of the late 1980s and early 1990s, warned that easily 200 banks, if not more, could fail in the next two years. The FDIC has hinted at more failures as well. It estimates that the deposit insurance fund, which is used to cover deposits when a bank fails, will suffer about $40 billion in losses through 2013. Last summer's collapse of the California-based mortgage lender IndyMac wiped out $8.9 billion from the fund. Experts are quick to point out, however, that the number of failures are unlikely to approach the more than 1,000 institutions that failed during the S&L crisis. What is distinctly different this time around is that banks were better capitalized and did not to hold many mortgages on their books, instead selling them to entities like government-controlled mortgage financing firms Freddie Mac and Fannie Mae. "Nowadays a lot of the exposure is spread out in a lot of different places," said Douglas. "That's good and bad, but at least for the banking industry that's on the good side."
Of the more than 8,400 banks that the FDIC covers, only a small fraction are currently on the agency's watch list for potential failure. There were 171 institutions on its so-called 'problem bank' list as of the end of the third quarter . That is the highest level since 1995. In the second quarter, 117 banks were on the list. But many have wondered whether the problem list is an accurate picture of the health of the nation's banking sector. A survey of nearly 1,300 chief financial officers released Wednesday by Duke University revealed that 75% had fundamental concerns about the health of the financial institutions they do business with and that more banks should be on the problem list. "CFOs' concerns suggest this is at best a low-ball number, and at worst highly unrepresentative of the health of American financial institutions," said Campbell Harvey, a professor of finance at Duke's Fuqua School of Business. The FDIC has maintained in recent quarters that it expects the number to climb and pointed out that the problem bank list is a lagging indicator. At the same time, most banks on the problem list never actually reach the point of collapse. "The problem bank list is not a barometer of the health of the banking industry," the agency said in a statement.
Still, it looks like "resolution or receivership specialists", workers who are well-versed in bank failure procedures, are at the top of the FDIC's wish-list for hires. Such positions typically last for two years or more, and come with a salary of as much as $156,000, according to postings on the FDIC Web site. A "resolution and closings manager" is eligible for of annual salary of nearly $178,000. With the banking and financial industry continuing to hemorrhage jobs at an alarming rate, there is a deep pool of talent for the FDIC to draw from. But experts note that in all likelihood, many of the available jobs at the agency will go to former or existing FDIC employees or employees of failed institutions.
If the latest hiring trend bears out, the banking regulator could boast more than 5,000 workers by early next year. At last count, the agency's workforce numbered just over 4,600. It remains unclear, however, just how much the FDIC wants to expand beyond that level. The agency said there are no plans at this time to open any other temporary locations around the country to cope with future failures. Typically, all failed bank activity is handled out of the FDIC's Dallas regional office. At the same time, there is no indication how big of a budget the agency is requesting for 2009. Last year, the FDIC had an annual budget of nearly $1.2 billion. Its board is scheduled to vote on the matter later this month.
AIG slashing prices, but may burn taxpayers
American International Group Inc is slashing prices to win new business, industry insiders say, raising concerns that taxpayers could again be left to pick up the tab. AIG, once the world's biggest insurer by market value, was rescued by the U.S. government in September as the cost of meeting counterparty obligations on bad mortgage bets left it close to bankruptcy. In the wake of its federal bailout, which last month swelled to more than $150 billion, industry executives say AIG has been rashly lowering prices, and at a time when market fundamentals show insurance rates need to rise.
"AIG has intensified its effort to increase its market share, or at least preserve it," said Edmund Kelly, chief executive of Boston-based rival Liberty Mutual. "I think it's fair to say they're doing some very stupid things in the market," Kelly told investors on a quarterly conference call last month. "If (AIG units) are not reined in, it could be very destabilizing for the market." The New York-based insurer denies it is cutting prices. But in one example of its aggressive rate-cutting, a unit of its commercial insurance divisioagreed to provide coverage for the Las Vegas McCarran International Airport at a price 60 percent below what was charged for the same policy a year earlier. Last year the airport paid $3.54 million to a consortium of seven insurers led by Travelers Group for a property, boiler and machinery insurance policy worth $1.7 billion, an airport spokesman said.
This year the airport got its coverage from Lexington Insurance Co, a large AIG unit, for just $1.4 million. The insurer agreed to take on the airport coverage with one other insurer, compared with the seven that had been on the program the prior year, leaving fewer carriers to shoulder any potential losses. By selling policies for less while taking on more risk, AIG is raising the chances that it will be hit by large losses. It also makes it harder for other insurers to sell policies that are priced high enough to cover potential losses. "Cutting rates at a time when rates should be strengthening is a quick way to going out of business," AIG's former chief executive, Maurice "Hank" Greenberg, a frequent critic of the company's management, told Reuters.
Greenberg, who left AIG in 2005 and now runs several private insurance and investment firms, said there is little cross-over between his business and AIG, but where there is, his staff say AIG is beating down the market. "In some classes that we do compete in, they are cutting rates to hold on to business," Greenberg said in an interview. The rate cuts come even as many analysts say deep investment losses and rising claims from a range of events, including hurricanes and lawsuits against financial executives, mean insurers are now widely expected to start charging more for many types of coverage when policies are renewed throughout 2009. "Rate increases are necessary to make the returns commensurate with risk," said Jeanne Hollister, managing principal of consulting firm Towers Perrin's Americas property-casualty insurance practice.
For AIG to fight the trend could potentially weaken its own business as well as rivals. "AIG has the money to do things that it could not do without it," said Thom Bradshaw, an insurance wholesaler in Monticello, Indiana. "With $150 billion of taxpayer money we could all be more aggressive, but a) it is irresponsible and b) it is unfair" to the rest of the industry, he added. To be sure, it is possible for insurers to sometimes use modeling techniques and other risk tools to price policies more competitively, but critics says in many cases AIG is simply driving down prices to win business. When losses lead to an insurance company's collapse, rivals often have to foot the bill through insurer-funded guaranty funds formed by many U.S. states and some countries.
Cliff Gallant, an insurance analyst with Keefe, Bruyette & Woods in New York, noted that AIG's insurance units are highly rated and not at risk of collapse. But if that changed, "it would cause considerable strain on the industry," Gallant said. It is also possible that the U.S. government, as AIG's majority owner, would feel obliged to step in with more financial support for the insurance subsidiaries if underwriting losses become a problem. About $15 billion of a $60 billion government loan to AIG had already been consumed by its insurance units as of November 5, according to the company's latest quarterly filing. "One way or another, I don't see how it is avoidable: The amount that the government will ultimately apply to AIG will exceed the amount that it has provided so far," said Donn Vickrey, an analyst with research firm Gradient Analytics.
Retail Spending Hits a Weak Spot in November
Wholesale prices and retail spending continued to decline in November amid a recession that is already the longest in a quarter-century. The drop in wholesale prices, the fourth consecutive monthly drop, raised new fears that they will keep on declining and lead to a dangerous bout of deflation. And the decline in retail spending, the fifth consecutive drop, was a stretch of weakness never before seen on the government's retail sales records.
The Commerce Department said that retail sales dropped by 1.8 percent last month. The decline, which was slightly less than the 1.9 percent dip that had been expected. The weakness was led by a 2.8 percent fall in auto sales, a decline that had been expected given that automakers already had reported that November was their worst sales month in more than 26 years.
The Senate failed to overcome a threatened filibuster by Republicans late Thursday to provide $14 billion in bridge loans to struggling Detroit automakers. General Motors Corporation and Chrysler have said they could run out of cash within weeks and are now hoping that the White House will relent and provide a lifeline from the $700 billion financial bailout package, something the Bush administration has repeatedly said it would not do.
Excluding the big drop in auto sales, retail sales would have fallen by 1.6 percent in November, a decline that was roughly in line with analysts' estimates. Consumers have been cutting back on their spending in the face of falling home prices, a plunging stock market and rising job losses. Analysts are forecasting that the recession will not end until next summer, making the current downturn the longest in the post World War II period. The record is now held by the 1973-75 recession and the 1981-82 downturn, both of which lasted for 16 months.
The retail sales report said that sales at hardware stores fell 1.2 percent, while sales at gasoline stations were down 14.7 percent, a drop heavily influenced by the big decline in prices at the pump since record highs above $4 a gallon in the summer. Sales at department stores and general merchandise stores actually showed an increase of 1.2 percent in November. That performance was a surprise given that the many of the nation's big retail chains had reported poor sales results last month. However, retailing giant Wal-Mart Stores did announce a 3.4 percent gain in same-store sales in November, surpassing analysts' expectations.
In the second report, the Producer Price Index, which tracks costs of goods before they reach consumers, fell 2.2 percent last month as prices for gasoline and other energy prices retreated, the Labor Department reported Friday. That followed a record 2.8 percent plunge in wholesale prices in October. Smaller price declined were logged in August and September. November's price drop was larger than the 2 percent decline economists were forecasting.
Falling prices might sound like a gift at first — at least for buyers. But a prolonged, widespread decline would do serious economic damage, dragging down incomes, clobbering home prices even more and shrinking corporate profits. Stripping out energy and food prices, which can swing widely from month to month, the "core" rate of inflation nudged up 0.1 percent in November. That matched economists' expectations. Core inflation, which had gone up a brisk 0.4 percent in the prior three months, has calmed down considerably.
Just a few months ago, worries were running rampant about inflation getting out of control as energy prices soared to record highs and food and other commodity prices marched steadily upward. Now with the economy in recession and other countries coping with their own slowdowns, demand has cooled for energy products and other things, forcing prices to retreat. The turnaround underscores just how quickly economic conditions can change.
With the economy sinking deeper into recession, the Federal Reserve is widely expected to slice its key interest rate — now at 1 percent — by at least half a percentage point on Dec. 16. Lower rates are aimed at enticing consumers and businesses to boost spending, which would spur economic activity. The bracing impact, however, of the Fed's rate reductions have been blunted somewhat by a severe credit crisis that has made banks clutch cash, rather than more freely lending money to customers. The credit clog has badly hurt the economy.
Cutting rates also is a way to fend off deflationary forces from taking hold. In November, energy prices fell 11.2 percent, following an even bigger 12.8 percent drop in October. That reflected a record 25.7 percent plunge in gasoline prices, as well as sharp declines in the costs of home heating oil and liquefied petroleum gas, such as propane. Food prices, meanwhile, were flat in November, after edging down 0.2 percent in October. Falling prices for pork and eggs helped to temper rising prices for beef and veal, and vegetables. Elsewhere in the report, prices for passenger cars dropped 0.6 percent and prices for light trucks dipped 0.1 percent in November.
Dollar hits 13-year low versus yen
The U.S. dollar tumbled to a 13-year low versus the Japanese yen Friday and fell against most major currencies after a $14 billion loan package for the auto industry collapsed in the U.S. Senate. The dollar dropped as far as 88.38 yen in Asian trade, according to FactSet. Dealers said the dollar sank as low as 88.10 yen on some platforms, its lowest level since August 1995. "It's a risk-appetite trade. There isn't much risk appetite, and when that happens the yen tends to go up," said Russell Jones, head of fixed-income and currency strategy research at RBC Capital Markets.
The greenback subsequently trimmed losses but remains significantly lower at 90.26 yen, down from 91.64 yen in North American trade late Thursday. Dealers said fears Japanese authorities could intervene to stem the yen's tide prompted short-covering on dollar/yen trades. Asian stock indexes tumbled, underscoring high levels of risk aversion. The yen has rallied amid global financial and economic turmoil as traders steer clear of riskier assets denominated in higher-yielding currencies. "If the bearishness in the equity market continues into next week I think the dollar/yen will test 85," said Masafumi Yamamoto, a foreign-exchange strategist with Royal Bank of Scotland in Tokyo. But with the Japanese economy also in recession, the yen's strength increasingly raises the prospect of intervention by the Bank of Japan, analysts warned.
Remarks by Japanese officials, however, appeared ambiguous about the possibility of near-term action. Finance Minister Shoichi Nakagawa played down the prospect of near-term intervention, news reports said, saying "for now, we aren't considering such a move." "Of course, if the foreign-exchange market moves become more volatile, we are going to consider what we should do," Nakagawa said. Strategists at KBC Bank in Brussels said ongoing deterioration of the global financial and economic picture would likely continue to bolster the yen. While they're reluctant to add to yen exposure at current levels, selling dollar/yen on upticks "still looks the most valuable approach," they wrote. The dollar was mixed against most other major counterparts Friday.
The dollar index, a measure of the greenback against a trade-weighted basket of six currencies, traded at 83.89, little changed from its level late Thursday. The euro traded at $1.3367 versus the dollar, up slightly from $1.3314. The British pound slipped to $1.4972 from $1.5003. The dollar has retreated nearly 5% from its autumn peak. The greenback had rallied sharply since summer as global financial turmoil sparked liquidation, repatriation and safe-haven flows. Like the yen, the dollar has tended to rise in line with risk aversion levels and fall when risk appetite has revived. But the dollar's recent performance, including a sharp selloff Thursday despite the lack of a convincing equity rally, has raised questions about the durability of that pattern.
Thursday's euro rally raised the possibility that foreign-exchange markets were "responding to a change in sentiment toward the greenback," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange. But RBC's Jones said the dollar still appears capable of benefiting from rises in risk aversion. "It's maybe not as strong as it was, but it's still a dominant theme," he said. There are questions, however, about how long the pattern can hold up. "At some stage the markets will wake up to the difficulties the U.S. economy is having and the prospect of things like quantitative easing (by the Federal Reserve), and the dollar's going to reverse course," Jones said. "But I don't think it feels like we're there yet."
The British pound, meanwhile, set yet another new all-time low versus the euro. The euro traded as high as 89.40 pence, according to FactSet, and was recently seen at 89.35. The single currency debuted nearly a decade ago. A move to 90.20 pence versus the euro would be the equivalent of sterling's historic low against the former German D-mark, said strategists at BNP Paribas. The euro would be likely to "run out of steam" near that area, however, as the single currency "becomes exposed to the deteriorating picture in Europe, which will be amplified by the lack of a coordinated and coherent policy response" by European leaders, they wrote.
South Korea, China, Japan Agree on Currency Swaps for Stability
South Korea agreed on bilateral currency swap accords with Japan and China in an effort to ensure financial stability in Asia.
South Korea and Japan will increase an existing won-yen arrangement to $20 billion from $3 billion in place since May 2005, according to statements by the central banks of both countries today. China and South Korea will sign an accord worth 38 trillion won ($28 billion), the People's Bank of China said.
South Korean President Lee Myung Bak has pursued the swap arrangements to secure access to funds and prevent a repeat of the 1997 currency crisis that caused a run on the won and required a $57 billion bailout from the International Monetary Fund. The won rose 7.5 percent against the dollar this week, completing the best weekly gain since the end of October, partly in anticipation of today's announcements. "This is a big achievement for South Korea to help stabilize its currency and maintain its external credibility," said Chun Chong Woo, an economist at Standard Chartered First Bank Korea Ltd. in Seoul. "Still, it won't have much impact on the markets today because it was already anticipated."
South Korea's Kospi stock index has risen 14 percent since a $30 billion swap line was agreed with the U.S. Federal Reserve on Oct. 30, suggesting that the arrangement reassured investors that South Korea would be able to service its debt. Before then the index had lost almost half its value this year. The won has gained almost 4 percent versus the dollar since the U.S. deal. The South Korea's currency fell 1 percent to 1,372.5 per dollar as of 3 p.m. close in Seoul. The agreement with Japan will only be effective until the end of April next year, the Bank of Japan said. South Korea already has an agreement that give it access to $10 billion from the Bank of Japan in dollars in times of crisis.
The accord with China gives South Korea access to 38 trillion won worth of yuan at any time for the next three years. A previous deal with China under which the Korean central bank can get as much as $4 billion worth of yuan or U.S. dollars during times of crisis still stands. South Korea's foreign-exchange reserves fell for an eighth month to the lowest level in almost four years in November. Fitch Ratings last month cut its outlook for the nation's credit rating to negative from stable, signaling that shrinking reserves may pose a threat to the economy's stability. "Korea has already experienced what it can be like when it runs out of reserves and how bad the downside can be for the economy," said Robert Subbaraman, chief economist at Nomura International Ltd. in Hong Kong. "Korea has been quite proactive in trying to secure greater cooperation in the region."
President Lee meets Japan's Prime Minister Taro Aso and China's Premier Wen Jiabao in Fukuoka, Japan, tomorrow to discuss the global financial crisis. The central banks of China, South Korea and Japan this week announced an agreement to meet in 2009, starting regular consultations to ensure currency stability in Asia. Finance ministers from 13 Asian nations, including South Korea, Japan and China, agreed in May to create a pool of at least $80 billion in foreign-exchange reserves to be tapped to protect their currencies. "This cooperation is kind of a regional self-rescue," said Ding Zhijie, deputy dean of finance at Beijing's University of International Business and Economics.
Sovereign Wealth Funds Taste Bitter Losses
So far this year, the funds have seen declines of an estimated 18 percent to 25 percent of their assets, which could lead to closer scrutiny in the future. Not long ago the Western world was obsessed with sovereign wealth funds, those fast-growing pools of nationally owned assets fueled by oil money and trade surpluses. The fear was that they and their sometimes controversial owners would gobble up vast troves of trophy assets in the US and elsewhere. But, after a brutal fall in the markets, that threat suddenly looks a lot less real. While the funds are cagey about saying what they actually own -- and what they have lost -- it's certain that they, like many other investors, have suffered big hits to their portfolios. They also have clearly lost firepower -- and possibly some of their appetite for acquisitions.
One fund that does disclose its performance, Norway's $300 billion Government Pension Fund-Global, reported a negative 7.7 percent return against an international currency basket in the third quarter through September. That was the worst performance in the 18-year history of the fund, which invests Norway's oil revenues. And it doesn't include the likely further drubbings in October and November. Stephen Jen, an economist at Morgan Stanley in London, estimates that the world's sovereign wealth funds have seen declines in their holdings of 18 percent to 25 percent for this year. He thinks the total losses are somewhere between $500 billion and $700 billion, bringing the funds' total value down to between $2.3 trillion and $2.5 trillion. Jen thinks these losses will make waves. "You don't lose 25 percent of your assets without consequences," he says.
The reverberations will undoubtedly include closer scrutiny by the funds' boards over how they have been managing their assets. Coupled with other financial problems such as steep drops in local stock markets and the possible need for bailouts of local companies and banks, at least some of the funds have come under pressure to use their assets more for domestic purposes than for foreign investment. "The average Kuwaiti or Abu Dhabian can't get a mortgage or a car loan (because of the credit squeeze). They wonder why (the funds) are bailing out the Citigroups of this world," says one banker in the Persian Gulf region. Already the Kuwait Investment Authority, the country's stash for future generations, is being asked by the Kuwaiti government to pump money into the local stock market, which has fallen sharply along with others around the world. Angry local investors have protested their fate, calling for the government to do something to bail them out. One group of investors even succeeded in persuading a court to halt trading temporarily on the Kuwait exchange.
Indeed, losses look to have been particularly steep in the Persian Gulf region, where oil and money are pretty much the sum total of the assets held by the various states in the area. Analysts think that paper losses may have been particularly large at the Abu Dhabi Investment Authority (ADIA), which is considered the world's largest sovereign wealth fund. Some analysts think ADIA has about $450 billion under management, but others say it could have more than double that amount. While ADIA won't disclose its total assets or precise allocations, officials at the fund, which is a sophisticated investor knowledgeable about the whole gamut of asset classes, earlier this year provided visiting BusinessWeek reporters with documents showing that the fund's benchmarks called for having 55 percent to 71 percent of its portfolio invested in equities and a further 12 percent to 28 percent in so-called alternatives: real estate, hedge funds, and private equity. Brad Setser, a geoeconomics fellow at the Council on Foreign Relations in New York who pegs ADIA's total holdings at the low end, figures the fund has notched around $150 billion in losses.
If ADIA's portfolio is in the trillion-dollar range, as some knowledgeable people estimate, the losses would have been even larger. There is some suggestion that ADIA may have trimmed its equity positions below stated minimums as market turmoil increased. ADIA also may have received $40 billion to $50 billion of new cash during the year, cushioning the decline of existing investments. Setser figures the KIA, which is more conservatively managed than ADIA, may have lost 30 percent of its $250 billion stash, while gaining $50 billion in new oil money. If it was already heavily invested in local stocks, the damage could run higher. Potential losses at the other big Gulf sovereign wealth fund, the Qatar Investment Authority (QIA), are harder to figure because the QIA is so opaque. It is also probably the most aggressive and unpredictable of funds. For instance, while most counterparts have shied away from banks—having taken big and embarrassing losses on earlier investments in outfits such as Citigroup and Merrill Lynch -- the QIA recently pumped money into Britain's Barclays, an innovative institution that carries a high risk profile.
In recent months the QIA and its Managing Director Sheikh Hamad bin Jassim al Thani have invested a total of about $6.4 billion in Barclays, with a further $2.2 billion possible if they exercise warrants they have received. That would bring their total ownership to 12.7 percent of the big British financial institution. Bankers say the QIA also has taken steep losses on a high-end real estate project in London. Meanwhile, the QIA's 15 percent stake in the London Stock Exchange, now worth about $363 million, also has fallen sharply in value since it was acquired last year. The LSE's share price is down close to 70 percent in sterling terms over the last year. Dubai, which has more than 20 percent of the LSE, also has seen its investment wither.
Using leverage, Dubai went on an acquisition spree of financial institutions at what turns out to have been the top of the market. For instance, at the same time Dubai acquired its LSE stake last fall it also bought just under 20 percent of NASDAQ OMX Group. Dubai now faces the need to refinance about $4 billion in acquisition finance in a much tougher market. Dubai is hunkering down and trying to figure out how to manage its hefty debt obligations over the next couple of years. With the once red-hot real estate market having turned stone-cold, the United Arab Emirates federal government already has stepped in to rescue Tamweel and Amlak Financial, two Dubai mortgage companies that one banker said were the UAE's equivalent to Washington Mutual and failed British mortgage lender Northern Rock.
The UAE federal government is largely financed by Abu Dhabi's oil wealth, but Dubai is hoping largely to manage its problems on its own. There are already rumors of capital injections from its wealthy neighbor. Certainly if Dubai needs money, Abu Dhabi is where the cash will come from. At the end of the day there is sufficient capital in ADIA and other Abu Dhabi institutions to pay for the worst-case financial scenarios in the UAE. But doing so may not be comfortable. "It's an interesting question whether Abu Dhabi has sufficient liquid assets to cover all of the emirates' needs next year if oil prices remain low," Setser says.
Setser thinks that the high allocation to equities at ADIA and other funds is now open to question. His reasoning: Oil prices tend to be correlated with equities. Both generally rise in response to increasing global economic growth and, as is happening now, fall when the world economy shudders. "They need to have some assets that hold value when oil falls," Setser says. The big winners of the moment look to be the Saudis, who as far as is known, have largely eschewed risky investments for the safety of government bonds and other conservative instruments.
Long derided for propping up the US budget deficit in exchange for low returns, the Saudis now look well-positioned to maintain their own huge domestic development plans. Will other funds radically change their behavior? It's too early to tell. Some are clearly eyeing the opportunities offered by distressed assets in the West and elsewhere. The sovereign wealth funds are also able to take a long view, with a decades-long horizon to smooth out any current losses. That said, caution is likely to prevail for some time. As one banker put it, what had been $300 million in commitments to new funds may now be cut to $100 million.
UBS Freezes $6 Billion Property Fund
Swiss bank UBS said on Friday it had frozen a $6 billion real estate fund as it could not keep up with redemption requests from wealth management clients. The Jersey-based UBS Wealth Management Global Property Fund will be closed until the end of 2009. "Due to the strained liquidity situation in the market as a whole and the longer process for selling real estate, the fund can no longer handle all redemption requests without forcing remaining investors to suffer losses from emergency sales," a spokeswoman for UBS said, confirming a report in Swiss newspaper Neue Zuercher Zeitung.
"In such a situation it is a fund manager's responsibility to temporarily suspend the fund in the best interest for all investors," she said. UBS, Switzerland's biggest bank, reported 49 billion Swiss franc ($41.38 billion) of client money outflows in the third quarter but said subsequently the pace of outflows has slowed. The fund was closed to retail investors but offered to wealth management clients with assets under management starting from as little as 100,000 Swiss francs, the Swiss newspaper reported. Investors who had a wealth management investment mandate would typically invest between 2 and 7 percent of their assets in the fund.
Nortel closer to NYSE delisting
Battered Nortel Networks Corp. [NT-T]has moved a step closer toward seeing its stock delisted from the New York Stock Exchange's big board, although the company is contemplating a possible share consolidation to fix the problem. The fallen Toronto-based technology star said Thursday that it received a notice from the premier North American bourse earlier in the day saying it has six months to get the average price of its stock back above the $1 (U.S.)-a-share minimum the NYSE requires. It is just the latest blow for the company, which is reportedly contemplating either a bankruptcy filing or breaking itself up and selling the pieces.
Nortel said it was sent the notice because its shares have closed at an average less than the minimum in the 30 consecutive trading days ending Dec. 9. It issued the statement as the shares were changing hands at 49 cents on the U.S. exchange, down 1 cent from Wednesday's finish. Nortel also said that it plans to notify the exchange within the "required 10-business-day period" that it plans to "cure the deficiency."
It added that it "may consider" proposing to shareholders at its annual meeting next spring that it consolidate the shares. At current prices it would take just over two Nortel shares to meet the minimum requirement. The company has a total of about 500 million shares outstanding. Its share price has vapourized since the tech stock collapse early this decade and a succession of legal, strategic and restructuring woes. This year alone, it is already down more than 97 per cent. The Globe and Mail reported a month ago that Nortel was at risk of being delisted from the NYSE.
China’s Economic Slowdown Is Deepening, Officials Say
China’s economic slowdown is deepening, with overcapacity in almost all industries, and won’t bottom out until after the first quarter of next year, two senior officials said today. "The international financial crisis is having a severe domestic impact," Li Yizhong, head of the Ministry of Industry and Information Technology, said at a press briefing in Beijing. "We don’t think we’ve bottomed out yet, and the impact will broaden further in December." Exports fell for the first time in seven years last month, imports plunged and manufacturing contracted by a record as the global recession pushed the world’s fourth-biggest economy into a slump. The slowdown will deepen before a 4 trillion yuan ($585 billion) stimulus package kicks in from the second quarter of next year, Liu He, a senior economic policy official, said at a conference in Beijing.
Stocks fell the most in three weeks after the cautions and the weakest retail-sales figures in nine months. The CSI 300 Index declined 4.2 percent. China will support nine industries, including steel, telecommunications and automotive by cutting taxes, offering subsidies for technological upgrades and helping smaller companies get credit, Li, the industry minister, said. China’s industrial-production growth cooled in October to 8.2 percent, the weakest pace in seven years. Li echoed a warning from Fan Gang, an adviser to the People’s Bank of China, that the November number, due to be released Dec. 15, will be worse. China may help steelmakers hurt by weaker demand for automobiles and electric appliances by purchasing steel stockpiles, offering subsidies for plant upgrades and increasing export-tax rebates, Li said. "Just about every industry" has overcapacity, he said.
China’s growth has slowed for five quarters. The economy expanded 9 percent in the third quarter, the least in five years. The World Bank forecasts the economy will expand 7.5 percent next year, which would be the slowest pace in almost two decades. Policy makers shouldn’t use the nation’s exchange rate to boost exports, David Dollar, the World Bank’s country director for China, said today. Exports are falling "because of shrinking global demand and the exchange rate is not the problem," he said at a conference in Beijing. The yuan closed at 6.8427 against the dollar for its biggest weekly advance since August, a 0.6 percent gain. China’s slowdown will deepen in the first quarter of next year as companies run down inventory, said Liu, vice minister of the Central Leading Group on Financial and Economic Affairs.
"China’s economy may grow at a rather low level in the first quarter," he said. "Many companies were overoptimistic about the economic cycle, so they built up a lot of inventory and now they have to digest that." The government said this week that sustaining growth will be its top priority in 2009. The central bank cut the key lending rate by the most in 11 years on Nov. 26, two weeks after Premier Wen Jiabao announced the stimulus package and the nation adopted a "moderately loose" monetary policy.
As Exports Fall, Asia Races Against Clock
Changing the export model upon which Asia has built its economic success is no overnight job. Unfortunately, an overnight solution is what the region needs. Fiscal stimulus packages are in train across the region, to try to insulate economies from the rest of the world's downturn. In Korea, the government is giving the economy an $11 billion boost; Taiwan has even provided its people with shopping vouchers. The extent of the problem was crystallized by China's trade figures released this week. Exports fell for the first time in seven years, by 2.2%. Worse, for China's Asian neighbors, is that its imports collapsed by nearly 18%.
China is the center of Asia's supply chain, importing electronics and machinery parts for assembly, and exporting them as finished goods to richer nations. The Asian Development Bank estimates 61% of Asian exports are ultimately consumed in the U.S., Japan and Europe -- many of these pass through China. When China's exports fall off, so do its imports from Asia. To illustrate how fast this is happening: Chinese imports from Korea and Taiwan slumped 26% and 30%, respectively, during November. The export slowdown is already affecting them and others: Combined growth in the eight largest economies in East Asia, excluding China and Japan, halved in the third-quarter from year-ago levels.
What Asian countries need to do is find a replacement for the wanton Western consumer, preferably by stoking consumer demand at home: hence the Taiwanese shopping vouchers. But so far, the only consumers flashing their cash appear to be governments, with their ramped-up spending plans. That's needed, but fiscal spending can take time to fully feed through: The project of increasing Asian consumer demand will take even longer. Meanwhile, the export slowdown's already gripped and policy makers are left racing against the clock to fuel growth from within their own economies.
Easier said than done.
India Industrial Output Falls for 1st Time Since 1993
India’s industrial production unexpectedly fell for the first time in 15 years, putting pressure on policy makers to add to interest rate and tax cuts to shield the weakening economy from a global recession. Output at factories, utilities and mines dropped 0.4 percent in October from a year earlier after a revised 5.45 percent gain in September, the Central Statistical Organization said in New Delhi today. Economists expected an increase of 2.1 percent. India last recorded a decline in output in April 1993. Waning exports and weaker domestic demand are damping growth in India, where investor confidence has also been shaken by terror attacks in Mumbai last month that killed 163 people. Central bank Governor Duvvuri Subbarao said after the assault that the economic slowdown may be deeper than earlier estimated.
"The industrial sector and indeed the economy as a whole has been softening for some time," said HSBC Group Plc’s Singapore-based Robert Prior-Wandesforde, one of only two of the 24 economists surveyed by Bloomberg News who predicted a contraction in production. "The situation is deteriorating more rapidly now." India’s 10-year bonds extended gains, pushing yields to the lowest level in more than four years. The yield on the 8.24 percent note due April 2018 fell 6 basis points to 6.14 percent as of 1:25 p.m. in Mumbai, from 6.20 percent immediately before the report. The benchmark share index declined 1.2 percent.
The worldwide financial crisis is curbing industrial output across Asia as recessions in the U.S. and Europe crimp demand for the region’s products. India’s exports fell for the first time in seven years in October. China’s industrial production growth is likely to drop to 5 percent in November, the weakest pace since Bloomberg data began in 1999, according to the government. Production in South Korea declined for the first time in 13 months in October. Tata Motors Ltd., India’s biggest truckmaker, in November stopped production at a commercial vehicle factory for the second time in a month, shutting its Jamshedpur plant in eastern India for five days. India’s central bank on Dec. 6 lowered its benchmark repurchase rate to 6.5 percent from 7.5 percent, the third cut since October. The next day the government announced a $4 billion stimulus package. The government may announce more fiscal measures to boost demand next week, Trade Minister Kamal Nath said yesterday.
"We doubt the interest rate and tax cuts will be sufficient to quickly reverse slumping growth," said Sonal Varma, an economist at Nomura International Plc in Mumbai. "Both domestic and export demand have slowed sharply due to the ongoing credit crisis, a global recession, sharp declines in asset prices and falling consumer and business confidence." Manufacturing, which accounts for about 80 percent of India’s total output, dropped 1.2 percent in October from 5.6 percent in September and consumer-goods production declined 2.3 percent in October from 7.2 percent in the previous month, according to today’s report. Electricity output rose 4.4 percent and mining grew 2.8 percent. India’s passenger-car sales declined 19 percent last month, the most in more than five years, as tighter lending by banks and a slowing economy hurt demand. Sales fell to 83,059 from 103,031 a year earlier, according to the Society of Indian Automobile Manufacturers.
Industrial production rose 4.1 percent in the seven months from April to October from a year earlier, less than half the 9.9 percent pace of the same period in 2007, today’s report said. Concern over companies cutting production and losing profits has seen the benchmark Bombay Stock Exchange Sensitive Index decline 53 percent this year. Overseas investors have sold $13 billion of Indian shares this year, compared with $17.2 billion of share purchases in 2007. Weaker production and exports may hurt India’s economic expansion. South Asia’s biggest economy may grow 7.5 percent in the year to March 31 from 9 percent or more annually in the previous three years, according to the central bank. India’s economy expanded 7.6 percent in the three months to Sept. 30 from a year earlier, the slowest pace since 2004. "The worst is yet to be seen," said Sherman Chan, an economist with Moody’s Economy.com in Sydney. "Losing support from external orders, India will unlikely see a rebound in manufacturing output any time soon."
FDA: Ban on Animal Antibiotics Called Off
The Food and Drug Administration said it would continue to allow the widespread use of a class of powerful antibiotics in food-producing animals, making a last-minute reversal after refering to the practice as a public-health risk in July. The agency's bid this summer to ban many uses of cephalosporin drugs in cows, swine, chickens and other animals came under fire from the industry, reports The Wall Street Journal. Agriculture groups and animal-drug makers, including Pfizer Inc., said the antibiotics are needed to prevent many infectious diseases in animals. Public-health officials and the American Medical Association are worried that excessive use of antibiotics - including in animals - can promote resistance and produce strains of bacteria that threaten human life. Cephalosporins treat respiratory diseases in cattle and swine but are also often given "off-label" for uses not approved by the FDA to poultry or more generally in livestock for non-approved infectious diseases.
On July 3, the FDA announced a planned crackdown on off-label uses in animals, citing "the importance of cephalosporin drugs for treating disease in humans." That position was reiterated in September by the FDA's director of veterinary drugs, Steven Vaughn Groups such as the Animal Population Health Institute, the Kansas Health Department and the National Turkey Federation, objected to the proposed ban. The American Veterinary Medical Association complained to the FDA that the data on the human impact it used to support the ban were flawed. On November 25, five days before the ban was to take effect, the FDA quietly revoked it with a notice in the Federal Register. The FDA's statement said the agency received many comments and needed more time to review them. A spokeswoman said the agency still could impose restrictions later.
In light of last night's decision in Washington not to bail out the automakers (at least immediately), GM is considering bankruptcy. Meanwhile Bank of America is cutting 35,000 jobs, the BCE takeover is pie-eyed, US retail sales have crashed five months in a row, stock markets are eviscerating and our finance minister said this morning Canada "could be devastated" if we allow fear to becone panic.
I wrote the post below for my political blog yesterday. The point is not to blame Ottawa for the global mess, but rather to lament politicians in power thought so little of citizens that they did not inform us of what they knew, so we could all make correct choices. I thought it might add to the discussion ongoing here. File it under 'devastated.' — Garth
For most of this year, Canadians have been shielded from the truth about the economy. This should bother you. It should enrage you. It's information you should have known. We were told the banks were the strongest in the world, and yet Ottawa found it necessary to give them a $75 billion bailout. Also telling is the fact three of the Big Six – including our largest bank, RBC – are out flogging new stock right now to raise more money, despite a terrible environment on Bay Street.
We were told there'd be no deficit. But there is already. Now the prime minister calls red ink "essential," and the Parliamentary Budget Officer says we could have a shortfall of up to $14 billion. We were told there'd be no recession here. "This is not the United States," Mr. Harper said pointedly during the election. But now there is, of course. The central bank made that official on Monday. We were told the value of our homes would keep on rising, that the US real estate meltdown would pass us by. The Canadian Real Estate Association said this, and bank economists, Canada Mortgage and Housing and most urban real estate boards.
But real estate sales have fallen as much as 70% in major cities, and average prices have plunged up to $175,000 in Vancouver, $56,000 in Calgary and $45,000 in Toronto. Buyers are staying home as sellers flood the market, ensuring more price drops. We were told the economy was strong and would stay in positive growth, boding well for jobs. And yet last month we lost more than 70,000 in a single four-week period. The central bank slashed interest rates to the lowest point since the 1950s in panicked reaction, and the car companies teetered on the brink of collapse.
We were told Canadians were safe, and our households were far less indebted than those to the south. And yet today the Bank of Canada is raising the awful spectre of widespread anguish, as more and more families face losing their homes. "With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth, and record high debt-to-income ratios, a severe economic downturn could result in a substantial increase in default rates on household debt," the bank says. If this happens, it adds, so much for Canada's 'strong' banks. "Should this scenario materialize, the banking sector would suffer significant losses from the rising vulnerability in the household sector."
Could this be why the Royal, TD and Scotia have been selling stock in a bid to raise cash for the coming storm? More importantly, why has this information been kept from Canadians for the past critical months? Wouldn't a warning have helped us all give more attention to personal debt levels, to paying off mortgages or, especially, to avoid walking into new debt at absolutely the worst time?
Well, I may not be sympathetic to the current government for many reasons, but I'd say this fits a pattern:
* Bring in zero down payments and 40-year mortgages at the wrong time, turning a good housing market into an unsustainable bubble.
* Cut the GST, rather than income tax, in order to encourage consumer spending, despite rapidly rising debt and a national savings rate of nothing.
* Run a federal election campaign on purpose before the economy falters badly, then lie to voters about what to expect.
* Take $75 billion in ultra-safe government securities which were backing our currency and use that to buy high-ratio mortgages from the banks, without disclosing this to Parliament.
* Bring in an economic statement that cuts spending when every other government in the world is scrambling to try and prevent deflation and a collapse.
* Shut Parliament.
Cavalier, out-of-touch, uncaring, dishonest. It underscores one reality: You're on your own. This economy's in very bad shape and there's worse to come. Doing nothing is a choice you no longer have.
Credit crisis diary: City streets are paved with... er, urine
As if they didn't have enough to cope with in the credit crunch, the denizens of the City of London have been plagued by weekend invasions of revellers after licensing laws were relaxed to allow premises to open later. Irate financial institutions and residents bombarded the City of London Corporation with complaints after finding all manner of unsavoury detritus in their doorways. The corporation was forced to deploy extra street cleaners at the weekend and to ban urinating in public, which had escaped being classed as an offence before. Many argue that the City metaphorically did something very nasty on its own doorstep in the boom years, but at least there's less chance of someone literally doing it now.
After the year they have had, those City investment bankers who have kept their jobs are trying to cut their losses and flee the office as quickly as they can, rather than stay around discussing remuneration for next year and realising how small their bonuses will be. And with the mergers and acquisitions and IPO markets completely dead at the moment, they may get a rare chance to use the cover of a proper extended Christmas break with their families or out on the slopes. As one very senior London-based financier said after a discussion on how little business there is for his ilk at the moment: "From next week, we're all away. I just wish 2008 would end quickly!"
Talk about redemption pressure! According to one rumour doing the rounds in dealing roomsyesterday, a disgruntled investor visited his hedge fund manager at about dinner time at his homethe other night. In the spirit of client service, the unnamed manager asked the investor inside when, unable to contain his anger, the visitor pulled out a gun and asked to be compensated for his losses. It is unclear what happened next (though we assume the hedgie survived), but one trader had a word of advice for the future: replace your risk manager with a bodyguard. The latter will probably prove more useful in the current climate.
A Mortgage Broker In Amish Country
Americans have been hearing for months now about the devastating problems facing U.S. financial institutions. But in at least one corner of the country, the banking system is doing just fine. In the Old Order Amish community of Lancaster County, Penn., most people use credit only when they buy a farm. They live within their means, and borrow from people who expect to get paid back. For many Amish here, their first major piece of property is a horse and buggy. One day this year, hundreds Amish men clumped around an auctioneer. Calling through a portable loudspeaker, he moved among dozens of buggies lined up in a muddy field. Each buggy has a big sign in the window announcing it as a brand-new 2008 model. Amish teenagers kick the tires and check out all the new extras, like the fiberglass wind screen and retractable cup holders carved out of maple wood. One young man tells me a typical Amish kid gets his first buggy at 16 or 17. I ask whether your father buys it for you. "Yeah, dad buys it," he says.
The scene, in many ways, could be from any ordinary automobile auction. One major difference is that Amish people don't take out a buggy loan. In fact, most Amish don't have much debt at all. They don't use credit cards, instead paying for everything with cash or check. About the only time the Amish use credit is when they buy a farm. Such a large purchase requires bargaining, and means working with a banker. There are no Amish bankers, no Amish-owned banks, so they turn to local banks for help. In this community, one banker stands above all others: Bill O'Brien. O'Brien says 95 percent of his customers at the Hometowne Heritage Bank are Amish. As the head of agricultural lending, he's responsible for about $100 million in loans. O'Brien, who's not Amish himself, meets with his Amish customers only face-to-face. He's something of a Santa Claus, with a big beard and a belly laugh. He loves telling the jokes he hears from his Amish customers, even if outsiders don't get the punchline. " 'Well,' she says, 'you don't get out a two-row corn picker for a little nubbin,' " he says, rolling out a joke that I think is supposed to be dirty.
In most banks, a man who wants to buy a farm but has no credit history, no FICO score and not even a driver's license would be unlikely bet. But O'Brien is used to this. "I'll find out who his dad was," he says. "I'm also interested in who his wife's father was. It takes a team to make a farm go." O'Brien says the Amish are less risky debtors than people with access to all the tools of modern banking. The Amish live well within their means — no splurging on iPods or HDTVs, no dinners out that they really can't afford. The Amish think that missing a payment brings shame — not just on them, but on their whole family, their whole community. "We've never lost any money on an Amish deal," he says. "So, I'll stretch my neck more for with them than maybe I will somewhere else."
O'Brien has been doing this work for 20 years. He's made countless thousands of loans — with no problems. This year, he says, one guy was a few days late on one month's mortgage payment. Everyone else paid on time, every time. But it's not as if O'Brien's work is easy. He puts 1,000 miles on his car — every week. His customers are not into Internet banking. No, O'Brien has to go and talk to them, on their farms. He takes me to the top of a hill, from which we can see dozens of farms below. I ask him how many of these are clients. "Every house," he tells me.
O'Brien knows which farms are doing well and which are struggling. He has to. When you lend to the Amish, you're making a loan that you're going to keep. You can't sell that loan to some other investor. That's because Amish loans can't be securitized — they can't be turned into a mortgage-backed security or a collateralized debt obligation — like all of those subprime loans that have caused so much trouble. You can't do that for an odd legal reason. Homes that don't have electric power don't qualify for securitization. Neither do homes without traditional insurance. Amish homes are unmodernized, and the Amish use their own kind of insurance.
"It's our loans," O'Brien says. "We write them. We have to service them. I haven't had that experience where you just pass it along." This old-fashioned system works. In this year of financial crisis, of storied old banks collapsing in hours, Hometowne Heritage has had its best year ever. And with the total collapse of securitization and all those fancy financial tools, it's tempting to say: Hey, when it comes to buying a house, we're all Amish now.
'Pay option' loans could swell defaults
Some time after Sharren McGarry went to work as a mortgage consultant at Wachovia’s Stuart, Fla., branch in July 2007, she and her colleagues were directed to market a mortgage called the "Pick A Pay" loan. Sales commissions on the product were double the rates for conventional mortgages, and she was required to make sure nearly half the loans she sold were "Pick A Pay," she said. These "pay option" adjustable-rate mortgages gave borrowers a choice of payments each month. They also carried a feature that came as a nasty surprise to some borrowers, called "negative amortization." If the homeowner opted to pay less than the full monthly amount, the difference was tacked onto the principal. When the loan automatically "recasted" in five or 10 years, the owner would be locked into a new, much higher, set monthly payment. While McGarry balked at selling these pay-option ARMs, other lenders and mortgage brokers were happy to sell the loans and pocket the higher commissions.
Now, as the housing recession deepens, a coming wave of payment shocks threatens to bring another surge in defaults and foreclosures as these mortgages "recast" to higher monthly payments over the next two years. "The next wave (of foreclosures) is coming next year and in 2010, and that is primarily due to these pay-option ARMS and the five-year, adjustable-rate hybrid ARMS that are coming up for reset," said William Longbrake, retired vice chairman of Washington Mutual. The giant Seattle-based bank, which collapsed this year under the weight of its bad mortgage loans, was one of the biggest originators of pay-option ARMs during the lending boom. The next wave may be even more difficult to handle than the last one. "It’s going to get tougher to modify loans as these option ARMs come into their resets," Federal Deposit Insurance Corp. Chairwoman Sheila Bair told msnbc.com this week. "Those are more difficult than the subprime and traditional adjustable rates to modify because there is such a huge payment differential when they reset."
With 16 years of experience in the mortgage business, McGarry didn’t believe the "pay option" loan was a good deal for most of her customers, so she didn’t promote it. "I looked at it and I thought: I’m 60 years old. If I were in these peoples’ situation 10 years from now, where would I be?" she said. "Do I want to be in a position that 10 years from now I can’t make this higher payment and I’m forced to make this payment and be forced out of my home? So I wouldn’t do it." Her job description included a requirement that she meet a monthly quota of Pick A Pay mortgages, something she said wasn’t spelled out when she was hired. Still, she said, she continued to steer her customers to conventional loans, even though her manager "frequently reminded me that my job requirement was that I do 45 percent of my volume in the Pick A Pay loan."
In June 2008, her manager wrote a "Corrective Action and Counseling" warning, saying she wasn’t meeting the bank’s "expectation of production." McGarry soon left Wachovia after finding a job with another mortgage company. On June 30, the bank stopped selling mortgages with negative amortization. In October Wachovia, suffering from heavy mortgage-related losses, agreed to be acquired by Wells Fargo. A spokesman for Wachovia said that generally the bank doesn't comment on internal marketing policies. But he said commissions on Pick A Pay mortgages were higher because the loans were more complicated and required more work to originate. He also noted that when Wachovia's Pick A Pay loans recast, the payment increase is capped for any given year, which helps ease borrowers' burden of meeting a higher payment.
The first wave of home foreclosures that hit in late 2006 and early 2007 followed the resetting of subprime adjustable mortgages with two- and three-year "teaser rates" written during the height of the lending boom earlier in the decade. But pay-option ARMs — which often don't "recast" for five years — have a longer fuse. Unless defused by aggressive public and private foreclosure prevention programs, the bulk of these loans will explode to higher payments in 2009 and 2010. The scope of the problem was highlighted in September in a study by Fitch Ratings, one of the bond rating agencies that assesses the risk of defaults on mortgage-backed investments. Of the $200 billion in option ARMs outstanding, Fitch estimates that some $29 billion will recast in 2009 and another $67 billion in 2010. That could cause delinquencies on these loans to more than double, Fitch said.
To make matters worse, only 17 percent of option ARMs written from 2004 to 2007 required full documentation. Many of the borrowers who took out these loans also took out a second mortgage, which means they likely have little or no equity in their home, according to the report. That means many could owe more than their house is worth when the loan recasts to unaffordable payments. Heavy losses from investments backed by pay option ARMs were a major cause of the demise of Wachovia and Washington Mutual, one of the largest originators of option ARMs during the height of the lending bubble. (Washington Mutual was seized by the FDIC in September, which arranged for the sale of its assets to JPMorgan Chase. Wachovia was acquired in October by Wells Fargo, which outbid Citibank after it arranged a deal with the FDIC to acquire Wachovia.)
Since the housing bubble began to deflate in 2006, roughly 3 million homes have been lost to foreclosure. Over the next two years, another 3.6 million are expected to lose their homes, according to Moody’s Economy.com chief economist Mark Zandi. Many of the most problematic loans — those sold with a two- or three-year low "teaser" rates — have already reset to higher levels. Those resets have been a major force in the first wave of foreclosures, which rose from 953,000 in 2006 to nearly 1.8 million last year and are on track to hit 3.1 million this year, according to First American CoreLogic, which tracks real estate data. And the pace of foreclosures is still climbing. More than 259,000 U.S. homes received at least one foreclosure-related notice in November, up 28 percent from the same month last year, according to RealtyTrac. Though the pace dropped slightly from the previous month, there are indications "that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months," said RealtyTrac CEO James Saccacio.
Mortgage delinquencies — homeowners who have fallen behind but not yet been hit with foreclosure — are also on the rise, according to the latest quarterly survey from the Mortgage Bankers Association. A record one in 10 American households with mortgages was overdue on payments or in foreclosure as of the end of September. The impact is being felt unevenly across the country. Foreclosures are clustered in states that saw the biggest expansion in lending and home building. In Nevada, one in every 74 homes was hit with a foreclosure filing last month. Arizona saw one in every 149 housing units receive a foreclosure filing, and in Florida it was one in every 157 homes. California, Colorado, Georgia, Michigan, New Jersey, Illinois and Ohio have also been hard hit. "In the neighborhoods that have concentrations of subprime loans you already have concerns about crashing neighborhoods with too many vacant houses and crime rises," said Longbrake. "The same thing will be true for these option ARMs. They are concentrated in particular neighborhoods and particular locales around the country."
Developed in the late 1980s, pay-option ARMs were written at first only for borrowers who showed they could afford the full monthly payment. But during the height of the lending boom, underwriting standards were lowered to qualify borrowers who could only afford the minimum payment, according to Longbrake. McGarry says she was encouraged to promote the idea that with a Pick A Pay loan the borrower could pay less than the full monthly payment and set aside the difference for savings or investment. The pitch included sales literature comparing two brothers. One took the Pick A Pay loan, made the minimum payment and put money in the bank. The second brother got a conforming loan. Five years later, both brothers needed to pay their children’s college tuition. "(The brother with the conforming loan) didn’t have the money in the bank," said McGarry. "And the brother that had the pay-option ARM could go to the bank and withdraw the money and didn’t have to refinance his mortgage. That’s how they sold it."
McGarry said the sales pitch downplayed the impact of negative amortization. When the loan principal swells to a set threshold — typically between 110 and 125 percent of the original loan amount — the mortgage automatically "recasts" to a higher, set monthly payment that many borrowers would have a hard time keeping up with. Fitch estimates that the average potential payment increase would be 63 percent, or about $1,053 a month — on top of the current average payment of $1,672. The impact on the millions of American families losing their homes is devastating. But the foreclosure fallout is being felt around the world. As the U.S. slides deeper into recession, foreclosures are the root cause of a downward spiral that threatens to prolong and widen the economic impact: As the pace of foreclosures rises, the glut of homes on the market pushes home prices lower. That erodes home equity for all homeowners, draining consumer spending power and further weakening the economy. The overhang of unsold homes also depresses the home building industry, one of the major engines of growth in a healthy economy. As home values decline, investors and lenders holding bonds backed by mortgages book steeper losses. Banks holding mortgage-backed investments hoard cash, creating a credit squeeze that acts as a bigger drag on the economy.
The resulting pullback in consumer and business spending brings more layoffs. Those layoffs put additional homeowners at risk of defaulting on their mortgages, and the cycle repeats. "Foreclosures are going to mount and the negative self-reinforcing cycle will accelerate," said Zandi. "It's already happening, but it will accelerate in a lot more parts of the country." As pay-option ARMs put more homeowners under pressure, other forces are combining to increase the risk of mortgage defaults. As of the end of September, the drop in home prices had left roughly one in five borrowers stuck with a mortgage bigger than their house is worth, according to First American CoreLogic. In a normal market, homeowners who suffer a financial setback can tap some of the equity in their home or sell their home and move on. "That’s a big issue," said Mark Fleming, First American CoreLogic’s chief economist. "As equity is being destroyed in the housing markets, more and more people are being pushed into a negative equity position. That means that they’re not going to have the option for sale or refinance if they hit hard times."
"Negative equity" is also a major roadblock in negotiations between lenders and homeowners trying to modify their loan terms. After over a year of debate in Congress, and private efforts by lenders, no one has come up with the solution to the thorniest part of the problem: Who should take the hit for the trillions of dollars of home equity lost since the credit bubble burst? "(Customers) keep calling and saying ‘With this bailout, this isn’t helping me at all,’" said McGarry, who is now working with clients trying modify or refinance their loans. "It really and truly is not helping them. If their lender will not agree to settle for less than they owe — even though those lenders are on the list of lenders that will work with you — they still are not working with (the borrower)." It’s a monumental undertaking that was never anticipated when servicers took on the task of managing these mortgage portfolios. These companies are already struggling to keep up with the volume of calls, and defaults are projected to keep rising. They’re also swamped with calls from desperate homeowners who are falling behind on their monthly payments.
"We have never seen anything this large before; we make 5 million phone calls a month to reach out to borrowers," said Tom Morano, CEO of Residential Capital, the loan servicing unit of GMAC. "The volume of calls that’s coming in is much higher than it has ever been, and everybody is struggling with that." Now, as the spiral of falling home prices is exacerbated by rising unemployment, millions of homeowners who were on a solid financial footing when they signed their loan face the prospect of a job loss that would put them at risk of foreclosure. Some servicers say that’s the biggest wild card in projecting how many more Americans will lose their homes. "The concern I have is if we have an economy where unemployment gets to 8 or 9 percent," said Morano. "If that happens the amount of delinquencies is going to be staggering." With the latest monthly data showing more than half a million jobs were lost in November, some economists now believe the jobless rate could rise from the current 6.7 percent to top 10 percent by the end of next year.
The Best and the Brightest Have Led America Off a Cliff
by Chris Hedges
The multiple failures that beset the country, from our mismanaged economy to our shredded constitutional rights to our lack of universal health care to our imperial debacles in the Middle East, can be laid at the feet of our elite universities. Harvard, Yale, Princeton and Stanford, along with most other elite schools, do a poor job educating students to think. They focus instead, through the filter of standardized tests, enrichment activities, advanced-placement classes, high-priced tutors, swanky private schools and blind deference to all authority, on creating hordes of competent systems managers. The collapse of the country runs in a direct line from the manicured quadrangles and halls in places like Cambridge, Mass., Princeton, N.J., and New Haven, Conn., to the financial and political centers of power.
The nation’s elite universities disdain honest intellectual inquiry, which is by its nature distrustful of authority, fiercely independent and often subversive. They organize learning around minutely specialized disciplines, narrow answers and rigid structures that are designed to produce certain answers. The established corporate hierarchies these institutions service -- economic, political and social -- come with clear parameters, such as the primacy of an unfettered free market, and with a highly specialized vocabulary. This vocabulary, a sign of the "specialist" and of course the elitist, thwarts universal understanding. It keeps the uninitiated from asking unpleasant questions. It destroys the search for the common good. It dices disciplines, faculty, students and, finally, experts into tiny, specialized fragments. It allows students and faculty to retreat into these self-imposed fiefdoms and neglect the most-pressing moral, political and cultural questions. Those who defy the system -- people like Ralph Nader -- are branded as irrational and irrelevant. These elite universities have banished self-criticism. They refuse to question a self-justifying system. Organization, technology, self-advancement and information systems are the only things that matter.
"Political silence, total silence," said Chris Hebdon, a Berkeley undergraduate. He went on to describe how various student groups gather at Sproul Plaza, the center of student activity at the University of California, Berkeley. These groups set up tables to recruit and inform other students, a practice know as "tabling." "Students table for Darfur, no one tables for Iraq. Tables on Sproul Plaza are ethnically fragmented, explicitly pre-professional (The Asian American Pre-Law or Business or Pre-Medicine Association). Never have I seen a table on globalization or corporatization. Students are as distracted and specialized and atomized as most of their professors. It’s vertical integration gone cultural. And never, never is it cutting-edge. Berkeley loves the slogan 'excellence through diversity,' which is a farce of course if one checks our admissions stats (most years we have only one or two entering Native Americans), but few recognize multiculturalism’s silent partner -- fragmentation into little markets. Our Sproul Plaza shows that so well -- the same place Mario Savio once stood on top of a police car is filled with tens of tables for the pre-corporate, the ethnic, the useless cynics, the recreational groups, etc."
I sat a few months ago with a former classmate from Harvard Divinity School who is now a theology professor. When I asked her what she was teaching, she unleashed a torrent of obscure academic code words. I did not understand, even with three years of seminary, what she was talking about. You can see this absurd retreat into specialized, impenetrable verbal enclaves in every graduate department across the country. The more these universities churn out these stunted men and women, the more we are flooded with a peculiar breed of specialist. This specialist blindly services tiny parts of a corporate power structure he or she has never been taught to question and looks down on the rest of us with thinly veiled contempt.
I was sent to boarding school on a scholarship at the age of 10. By the time I had finished eight years in New England prep schools and another eight at Colgate and Harvard, I had a pretty good understanding of the game. I have also taught at Columbia, New York University and Princeton. These institutions, no matter how mediocre you are, feed students with the comforting self-delusion that they are there because they are not only the best but they deserve the best. You can see this attitude on display in every word uttered by George W. Bush. Here is a man with severely limited intellectual capacity and no moral core. He, along with Lewis "Scooter" Libby, who attended my boarding school and went on to Yale, is an example of the legions of self-centered mediocrities churned out by places like Andover, Yale and Harvard. Bush was, like the rest of his caste, propelled forward by his money and his connections. That is the real purpose of these well-endowed schools -- to perpetuate their own.
"There’s a certain kind of student at these schools who falls in love with the mystique and prestige of his own education," said Elyse Graham, whom I taught at Princeton and who is now doing graduate work at Yale. "This is the guy who treats his time at Princeton as a scavenger hunt for Princetoniana and Princeton nostalgia: How many famous professors can I collect? And so on. And he comes away not only with all these props for his sense of being elect, but also with the smoothness that seems to indicate wide learning; college socializes you, so you learn to present even trite ideas well." These institutions cater to their students like high-end resorts.
My prep school -- remember this is a high school -- recently built a $26 million gym. Not that it didn’t have a gym; it had a fine one, with an Olympic pool. But it needed to upgrade its facilities to compete for the elite boys and girls being wooed by other schools. While public schools crumble, while public universities are slashed and degraded, while these elite institutions become unaffordable even for the middle class, the privileged retreat further into their opulent, gated communities. Harvard lost $8 billion of its endowment over the past four months, which raises the question of how smart these people are, but it still has $30 billion. Schools like Yale, Stanford and Princeton are not far behind. Those on the inside are told they are there because they are better than others. Most believe it.
The people I loved most, my working-class family in Maine, did not go to college. They were plumbers, post office clerks and mill workers. Most of the men were military veterans. They lived frugal and hard lives. They were indulgent of my incessant book reading and incompetence with tools, even my distaste for deer hunting, and they were a steady reminder that just because I had been blessed with an opportunity that was denied to them, I was not better or more intelligent. If you are poor, you have to work after high school or, in the case of my grandfather, before you are able to finish high school. College is not an option. No one takes care of you. You have to do that for yourself. This is the most important difference between them and the elites.
The elite schools, which trumpet their diversity, base this diversity on race and ethnicity, rarely on class. The admissions process, as well as the staggering tuition costs, precludes most of the poor and working class. When my son got his SAT scores back last year, we were surprised to find that his critical reading score was lower than his math score. He dislikes math. He is an avid and perceptive reader. And so we did what many educated, middle-class families do. We hired an expensive tutor from the Princeton Review, who taught him the tricks and techniques of taking standardized tests. The tutor told him things like "stop thinking about whether the passage is true. You are wasting test time thinking about the ideas. Just spit back what they tell you." His reading score went up 130 points. Was he smarter? Was he a better reader? Did he become more intelligent? Is reading and answering multiple-choice questions while someone holds a stopwatch over you even an effective measure of intelligence? What about those families that do not have a few thousand dollars to hire a tutor? What chance do they have?
These universities, because of their incessant reliance on standardized tests and the demand for perfect grades, fill their classrooms with large numbers of drones. I have taught gifted and engaged students who used these institutions to expand the life of the mind, who asked the big questions and who cherished what these schools had to offer. But they were always a marginalized and dispirited minority. The bulk of their classmates, most of whom headed off to Wall Street or corporate firms when they graduated, starting at $120,000 a year, did prodigious amounts of work and faithfully regurgitated information. They received perfect grades in both tedious, boring classes and stimulating ones, not that they could tell the difference. They may have known the plot and salient details of Joseph Conrad’s Heart of Darkness, but they were unable to tell you why the story was important. Their professors, fearful of being branded political and not wanting to upset the legions of wealthy donors and administrative overlords who rule such institutions, did not draw the obvious parallels with Iraq and American empire. They did not use Conrad’s story, as it was meant to be used, to examine our own imperial darkness. And so, even in the anemic world of liberal arts, what is taught exists in a moral void.
"The existence of multiple forms of intelligence has become a commonplace, but however much elite universities like to sprinkle their incoming classes with a few actors or violinists, they select for and develop one form of intelligence: the analytic," William Deresiewicz, who taught English at Yale, wrote in The American Scholar. "While this is broadly true of all universities, elite schools, precisely because their students (and faculty, and administrators) possess this one form of intelligence to such a high degree, are more apt to ignore the value of others. One naturally prizes what one most possesses and what most makes for one’s advantages. But social intelligence and emotional intelligence and creative ability, to name just three other forms, are not distributed preferentially among the educational elite."
Intelligence is morally neutral. It is no more virtuous than athletic prowess. It can be used to further the rape of the working class by corporations and the mechanisms of repression and war, or it can be used to fight these forces. But if you determine worth by wealth, as these institutions invariably do, then fighting the system is inherently devalued. The unstated ethic of these elite institutions is to make as much money as you can to sustain the elitist system. College presidents are not voices for the common good and the protection of intellectual integrity, but obsequious fundraisers. They shower honorary degrees and trusteeships on hedge-fund managers and Wall Street titans whose lives are usually examples of moral squalor and unchecked greed. The message to the students is clear. But grabbing what you can, as John Ruskin said, isn’t any less wicked when you grab it with the power of your brains than with the power of your fists.
Most of these students are afraid to take risks. They cower before authority. They have been taught from a young age by zealous parents, schools and institutional authorities what constitutes failure and success. They are socialized to obey. They obsess over grades and seek to please professors, even if what their professors teach is fatuous. The point is to get ahead. Challenging authority is not a career advancer. Freshmen arrive on elite campuses and begin to network their way into the elite eating clubs, test into the elite academic programs and lobby for elite summer internships. By the time they graduate, they are superbly conditioned to work 10 or 12 hours a day, electronically moving large sums of money around.
"The system forgot to teach them, along the way to the prestige admissions and the lucrative jobs, that the most important achievements can’t be measured by a letter or a number or a name," Deresiewicz wrote. "It forgot that the true purpose of education is to make minds, not careers." "Only a small minority have seen their education as part of a larger intellectual journey, have approached the work of the mind with a pilgrim soul," he went on. "These few have tended to feel like freaks, not least because they get so little support from the university itself. Places like Yale, as one of them put it to me, are not conducive to searchers. Places like Yale are simply not set up to help students ask the big questions. I don’t think there ever was a golden age of intellectualism in the American university, but in the 19th century, students might at least have had a chance to hear such questions raised in chapel or in the literary societies and debating clubs that flourished on campus."
Barack Obama is a product of this elitist system. So are his degree-laden cabinet members. They come out of Harvard, Yale, Wellesley and Princeton. Their friends and classmates made huge fortunes on Wall Street and in powerful law firms. They go to the same class reunions. They belong to the same clubs. They speak the same easy language of privilege and comfort and entitlement. They are endowed with an unbridled self-confidence and blind belief in a decaying political and financial system that has nurtured and empowered them.
These elites, and the corporate system they serve, have ruined the country. These elite cannot solve our problems. They have been trained to find "solutions," such as the trillion-dollar bailout of banks and financial firms, that sustain the system. They will feed the beast until it dies. Don’t expect them to save us. They don’t know how. And when it all collapses, when our rotten financial system with its trillions in worthless assets implodes, and our imperial wars end in humiliation and defeat, they will be exposed as being as helpless, and as stupid, as the rest of us.