Galen Gough, the Miracle Strong Man, carries two tons at Fun Fest
Outside the State, War and Navy building in Washington, D.C.
Ilargi: Excuse me, but I had to laugh so loud when I saw the headlines today saying that Bush was pondering the bail-out and the fate of Detroit, and that he apparently flew to what's left of Baghdad to do it. Get some inspiration. He has a sense of humor, you got to give him that. Here's Stranded Wind on Detroit:
Stranded Wind: Detroit is doomed. The Big Three are going to shed most of their pension liabilities, burying the Pension Benefit Guarantee Corporation, resulting in another federal bailout. The direct job loss will be accompanied by much larger indirect losses at the 6000 suppliers that service the carmakers. Then there will be a spreading circle of economic disaster radiating from Michigan in a 600-mile radius. Two million jobs, more or less, will disappear by the end of the first quarter of 2009. And then there are the tens of thousands of dealerships and franchises nationwide, which will have to cut countless jobs, something that state laws dictate will cost the No-Longer-Big-3 billions of dollars.
Nothing Congress can do will stop it. Detroit is built for a nation buying at least 15 million new vehicles a year; sales in 2009 are projected to be half of that and they may well turn out to be overly optimistic. And it's worse than it appears, since it'll be the small, high mileage cars that get sold. The bulk of Detroit's profit margins in the past decade have come from SUVs and taking that out may mean the fifty percent reduction in sales includes a 75% reduction in gross margin on what is sold. View those vehicle sales as Detroit's currency – their pay is cut by more than half and oil depletion makes their individual 'coins' worth a quarter of what they were.
Detroit's eventual bankruptcy was assured in August of 2007 at the latest with the failure of the two Bear Stearns hedge funds and the attendant credit market seizure. Don't think the actions of Congress are meaningless, but we have to get honest about what is happening. The management of the Big Three and the UAW negotiated a 'job bank' during the good times. The companies didn't want skilled workers drifting away during a plant refurbishing or temporary downturn so union employees are in some cases kept on at 95% of their working salary when they're laid off.
That worked in a world of endless growth, but those days are finished. G.M. can't talk their way out of this formerly sensible business decision any more than they can talk their way out of their overhead associated with brand duplication or the massive number of dealerships they have. Ford and Chrysler are a little better but all three need freedom from old obligations if they're to continue in any fashion at all.
When Detroit fails it isn't just the Big Three, there are six thousand smaller suppliers failing in concert. The situation now is such that little vendors don't even want to ship finished work without prepayment so they're preemptively closing their doors. Being small enough to fail they do so now rather than feeding into the Big Three who will certainly declare bankruptcy anyway.
There are various numbers bandied around and we won't know until it actually happens, but the figure of two million jobs seems about right. There will be a concentrated punch, with perhaps half of the loss radiating from Detroit out as far as Wisconsin and Ohio, and the rest will be spread nationally as dealerships and franchises for dead brands are canceled. G.M. has 7,000 dealerships, Honda 1,500. the number of franchises is 4-5 times higher. That should give you some sense of how many of these evenly distributed dealership sales and service jobs will vanish.
Pensions in this country are insured by the Pension Benefit Guarantee Corporation, just as bank accounts are insured by the Federal Deposit Insurance Corporation. The FDIC has avoided insolvency thus far with the help of sketchy maneuvers from the Treasury designed to force mergers rather than permitting failures and clean ups. The PBGC, dealing with many real live people rather than a small number of virtual corporate persons, is in no position to order them around. G.M. pensioners who worked together for decades may very well start doubling up on housing with old friends, but this won't get the same glowing reporting that bank mergers receive in the financial press.
So, there are the facts of the matter. One can debate the size, or date, or order of execution, or agonize about the personal and political consequences, but nothing is going to stop it. We need a hard-eyed, grownup plan for what to do next. Oil prices are down now but that could be transient. The financial mess has clipped oil and gas exploration just like it got everything else. The break in exploration makes higher oil prices down the stretch a certain outcome but the Greater Depression, which we've just entered, makes the date at which this becomes obvious uncertain. This will drown out Ayn Rand’s free market dogma, permitting needed economic and social changes, but I worry that it won't happen in a timely fashion.
Building functional alternatives takes time … and oil. No utility scale wind turbine in this country went up without a whole lot of diesel powered construction equipment to install it. The same goes for any solar collector, hydroelectric dam, insulated house, or rail line. We're going back to the solar maximum of this planet over the next generation or three. How we conduct ourselves now determines whether we end with a lifestyle from 1940 … or one from 1490.
The age of Locke's infinite Earth, formally known as the Holocene, has drawn to a close. The age of contraction, waggishly entitled the Ohshitocene is here. Luckily there is a path forward to that solar maximum that may keep the lights on and the trains rolling. Trains, not cars. A century ago we had a rail system that would let you get to Milwaukee from the tip of Long Island and there were just two twenty mile taxi gaps in the nearly thousand mile journey. Despite their involvement in the destruction of our fine rail system ninety years ago Detroit is the only manufacturing center we have that might be repurposed to the Herculean task of rebuilding it.
Detroit can pretty easily switch to busses from automobiles. Rail stock will take a bit more work but it's doable, too. Don’t' forget that in World War II we completely dropped auto manufacture and cranked out 300,000 aircraft, 100,000 tanks and other fighting vehicles, and over 2,500 Liberty ships among the many other naval vessels built. We can do it … if we muster the political will to do so.
We can solve the problems we face, but doing so will change us beyond recognition. The hyper-individualism of navigating a single passenger SUV through winding streets conceived to evoke the feeling of a village, only to isolate on a deck in a back yard with a privacy fence is all but done. We'll be living, working, and playing closer to home, and that means living closer to others doing the same. Detroit is about to become a living laboratory for these changes and we should watch the lessons of this transition closely.
An earlier, unedited, version of this article entitled Detroit is doomed was published at DailyKos.
Ilargi: For the record, I don‘t share Stranded Wind’s vision of the rebuilding of the railway system. America doesn't have the money to do it. Even Obama's present infrastructure plans, which are small comapred to what would be needed, are nothing but yet another version of getting into debt in order to get out of debt. The US cannot print money at will. It needs to sell its debt abroad in the bond markets. These markets hold the financial fate of the nation in their hands. They are already contracting, and any massive additional debt issuance will be punished mercilessly.
British retailers fear collapse of lines of supply
Supermarkets draw up emergency plans to keep shelves full
Fears that scores of supermarket suppliers will go bust next year have led the country's major chains to draw up emergency plans to replace them, The Observer can reveal. Separately, on the high street, bailiffs are getting ready for their busiest Christmas ever, with a slew of retailers expected to go into administration.
Supermarket chain Asda, led by Andy Bond, is working on 'worst-case scenarios' across the board - combing its supplier base and examining alternatives to them. 'Suppliers are under a lot of pressure and there will be casualties,' said a senior executive at another store chain, which has already stepped in to pay troubled suppliers ahead of schedule. 'We need each other, it is not a zero-sum game.' The need for alternative supply lines has been brought into focus by the collapse of Woolworths and its distribution arm, EUK, which supplied the supermarkets as well as Zavvi, the former Virgin Megastores, with CDs. However, cracks have been showing in other areas, with milk processor Dairy Farmers of Britain in the midst of a restructuring that will see two dairies close and up to 640 jobs lost.
The damage a collapsed supplier can do is laid bare at Zavvi, which has been destabilised during the most important sales weeks of the year. It has been forced to suspend its website with former parent Virgin stumping up a £5m 'fighting fund' to keep shelves filled in the key trading days left between now and Christmas. But with no obvious successor to step into the void left by EUK, Zavvi faces a grim outlook in 2009. Tesco said it was supporting suppliers that needed extra help by giving an indication of future orders. 'The worst thing for a supermarket is for a supplier to go under, because you are left with a big hole and investing in a new one is a big deal,' said a Tesco spokesman.
Analysts say the supply of ready meals is vulnerable. Major players include the heavily indebted Premier Foods and Icelandic group Bakkavor. The latter has £140m trapped in collapsed Icelandic bank Kaupthing, although it says its UK operation, which supplies all the major grocers, is not affected. Relationships between supermarkets and suppliers are often tense at the best of times. Suppliers hoping for additional protection from the powerful supermarkets - who have been accused of making unreasonable demands in price negotiations - look set to be disappointed as the Competition Commission's plan to create an ombudsman looks doomed. Asda will not sign up to the scheme, so the matter looks set for referral to the government's business department in the new year.
The collapse of Woolworths has come to symbolise the dire state of the high street, where retailers are facing the worst trading conditions in a generation. And with a spate of administrations expected early in the new year, bailiffs are gearing up for a festive feeding frenzy around 'quarter day' - when even struggling retailers must find three months' rent - which falls on Christmas Day.
'We have had more instructions than ever before and I've been in this career for 21 years,' said Jon Dawkins, chief executive of bailiffs' firm Dawkins, whose clients include the Crown Estate, Transport for London, asset managers Prudential and Threadneedle, as well as all the major property agents. Landlords want to get their cash while retailers still have money in the tills after the Christmas rush - and before administrators are called in and cash is ringfenced for secured creditors.
'This city is on its last legs. I'm ready to go'
For the patrons of Miller's bar in Dearborn - home of Ford - the possibility that the once-mighty car industry may be about to collapse brings an air of resignation. Situated a few miles from the Ford River Rouge plant, the bar is frequented by workers past and present and they don't need much prompting to offer their gloomy prognosis on the crisis that is threatening to devastate the city.
"Just look around Detroit. Ask yourself, where are all the people?" says Bob Davidson, 61, a retired Ford manager. "We've lost half the population. When I was born, Detroit had almost two million people, now I think it's down to about 900,000." Stephen, 47, a Ford line worker, is concerned about his job. "I know that Ford is in a better position financially than GM and Chrysler, but I'm worried about my job three years from now," he says. "And I was hoping to be there long enough to collect a pension. Now I don't see that happening."
Jimmy's, also in Dearborn, was nearly empty at midday. One of the few customers, Pete, 30, was off work because of an arm injury sustained at Ford's factory. Nursing his whisky, he said: "How are we gonna stay competitive when all the foreign car companies already have smaller, more fuel-efficient cars? And they've been doing it for more than 10 years. Some of the best trucks in the world are American, but show me a decent hybrid that can compete with Toyota. We're playing catch up. "I think Toyotas are boring looking cars, but they make damn good cars, they last, they're number one. Putting 200,000 miles on a Toyota is no big deal. And they make that hybrid, the Prius. Americans who used to buy American are switching to the Japanese. It's the future, man."
In downtown Detroit, there are areas where every other home is either abandoned or in the final stages of collapse. In the shadow of the shiny cylindrical GM headquarters, homeless men sleep on the street, keeping warm by lying next to escaping steam from manholes. However, ask around about the future of Detroit, and you get opposing views. Dawn Wilson, a worker at a downtown Starbucks and a part-time artist, thinks it will rebound. "I can see a miracle happening here, but politicians need to find a way to bring in new blood, new people," she said. "Why can't we stop depending on the Big Three?" she asks referring to the carmakers.
"Let's do something new, make Detroit an art capital. We have a great art museum, and there are hipsters moving in. But it's not enough, we artists can't sustain the city alone, of course, but we can help." Asked how such a transformation could be accomplished, Wilson declares: "Sell us these abandoned buildings for a dollar, or let us live rent and tax free for 10, 20 years and you'll see what we can do. We'll fix it up. It will be good for the neighbourhood, good for the city." But at Cliff Bells, a recently renovated jazz club, Janice, 27, a legal secretary, is less hopeful. "This city is on its last legs. I'm from here but I'm ready to leave. My family lives here but I need to find a city that's alive, not dead and dying. When I was a kid, I loved this city. I don't know what to do now, maybe go back to school.
"I really gotta get out of here. I'm too young to be depressed."
U.S. automakers face consolidation
Washington is crafting a political solution for Detroit that avoids picking winners and losers and seeks to prevent a bankruptcy by any of the three U.S. automakers, but the reality is at least one of the companies may need to fold as part of an industry consolidation that brings production of cars in line with falling sales in the United States. The small loan package the administration is considering offering General Motors Corp. and Chrysler LLC to stay in business would only postpone the failure of one or the other -- or both -- for a few weeks, analysts say, while getting Congress and the White House entangled in what promises to be a messy and volatile future for the industry.
With automakers geared to produce more than 16 million vehicles a year but sales of cars falling to a 10.5-million rate in recent weeks, Michael Robinet, an analyst at CSM Worldwide consulting group, is one of many who say a major downsizing of the industry cannot be avoided. And he is not shy about saying which one of the companies needs to go. "Can we see Chrysler as a viable entity for five or six years?" he asked Detroit's Automotive Press Association recently. "I don't think anybody thinks that. ... A controlled wind-down of Chrysler is in everybody's interest," with the company broken up and money-making assets like the Jeep and minivan divisions sold off to more viable competitors, he said.
By many measures, GM is even closer to bankruptcy than Chrysler, which has the deep pockets of the Cerberus private equity firm that owns 80 percent of the company. The largest U.S. car manufacturer has been inching toward bankruptcy for weeks, exhausting its bank line of credit, canceling nonessential expenses such as promotional contracts, and leading the parade for a bailout from Washington. This week brought further telltale signs of the auto giant's impending demise, as GM slashed first-quarter production by 60 percent, and some GM suppliers fearful of bankruptcy started asking for payment ahead of time, while its faltering GMAC finance arm announced that it may have to abandon its quest to become eligible for a Treasury cash infusion.
"Washington has lost all common sense," said Olivier Garret, chief executive of Casey Research. "The best thing that could happen for the auto industry is for the Big Three to file for bankruptcy protection. ... As a former turnaround professional, I am convinced that the tools afforded by the bankruptcy courts would allow these companies to restructure dramatically, thus allowing them to renegotiate and drastically lower most of their liabilities." Easy-money loans and leases during the credit boom enabled the car companies to sell more than 16 million vehicles in 2006 and 2007, but as the credit crisis deepened this year, it killed off sales to customers with subprime credit ratings -- which made up nearly a quarter of total of sales in the boom years -- helping to deflate sales by 40 percent in the last year. With auto loans now more difficult to come by and requiring bigger down payments and other stiff terms, analysts say the market is likely to shrink significantly in the future.
Mr. Garret expects auto sales to range between 12 million and 15 million a year in the future. "If car sales decline dramatically, manufacturing capacity has to be reduced to match demand. This means that the less-productive plants would be shut down, employees laid off, and that the supply chain would have to adjust accordingly," he said. Instead, taxpayers are being asked to bail out the "losers" to prevent such a downsizing, he said. Congress' move to bail out the companies is motivated by worries that allowing the automakers to fall into bankruptcy will cause further massive disruptions in the fragile economy and financial markets. Legislators frequently cite estimates by the Center for Automotive Research, which receives some funding from Detroit, that the economy could lose 3 million jobs if all three companies failed at once - an unlikely scenario.
The consumer dream gears down
Detroit once drove the age of conspicuous consumption. But a half-century since the auto industry peaked, the city has become a postcard for the country's economic ills and its overleveraged spenders. In the soaring atrium entrance of the global headquarters of General Motors Corp., you've got your Christmas theme and you've got your auto theme. Christmas-wise, note the two majestic trees that rise, at a guess, 40 feet skyward. "Paid $300,000 for the two trees," says a maintenance worker, adding, "It's all re-rod inside of there." Three hundred thou seems a lot. "That was when everything was going good," Mr. Maintenance says. The twin trees, with their red star/red ball/red poinsettia adornments, sit adjacent to twin 2009 CXL FWD Buick Enclaves in gold mist metallic with cashmere cocoa accents. Note the leather "seating surfaces," the leather-wrapped steering wheels and the proudly branded Bose sound system. If you tag $7,315 (U.S.) in options – and, really, who could resist? – onto a base price of $36,440, you're looking at $43,755 worth of very big car. The ultimate Christmas gift, the ultimate consumer good.
There are no notes of corporate contrition on display. No whiff of the violation of the trust of the American consumer, a message GM suddenly seized upon this week as part of its apologia to the buying class, before the U.S. Senate failed to agree on a proposed bailout, before the auto maker was brought to its knees. Outside, the royal blue GM logo brands the top of the GM tower, the tallest of the five buildings that comprise the Renaissance Center, 700 feet of glass right on the Detroit River, "standing like a Buck Rogers monument over downtown." If you want to capture the tempo and mood swings of Detroit, it's a good idea to quote a little Elmore Leonard early in the tale. A Leonard character once said – for the record, it was Ordell Robbie in City Primeval: High Noon in Detroit – that if the GM tower fell over you could walk across it to Canada. There's no sign that it's going to fall over. Not literally.
Figuratively, General Motors stands for many things. The rise and threatened collapse of the American auto industry is the top-line story of the day. The rise and fall (and near rise and repeat descent) of Detroit is the sister drama, theatrically enhanced by the city's broad exposure to the foreclosure crisis. But the central theme is the way in which Detroit quintessentially tells the tale of the rise of the modern-day American consumer, whose expectations were born here and grew and grew and grew, fuelled by car culture and carports and fixings and trappings until those expectations became, well, bigger than Christmas. On the lower level of the "RenCen," as everyone calls the Renaissance Center, GM has prominently positioned a video screen of "GM Facts and Fiction." "Myth: With the largest work force in the auto industry, General Motors has far too many people working for it." "Fact: GM has cut its payroll drastically, by 45.8 per cent in the U.S. alone. In fact, GM is far from the largest employer in the industry. With 252,000 employees worldwide GM ranks fifth overall."
Here's a metaphor: Santa's green plush chair is positioned not alongside the usual elf-and-giant-candy-cane scene, but a cherry red Pontiac Solstice roadster convertible. GM thinks it might kill the Solstice. It is not known whether Santa has been informed. The twilight hour on Randolph Street doesn't offer the glitter of an urban downtown on the cusp of the Christmas season. Steven Ross is where he usually is, behind the counter of Serman's, the men's and boys' clothiers that the family has been running out of this location in downtown Detroit for 91 years. Mr. Ross is 62 and meticulously turned out in a charcoal grey shirt, grey wool vest, grey, black and white paisley tie, and a black beret. He's adjusting a rubber pricing stamp so he can firmly lay down the inky imprint of $125 on blue clothing tags. "Boys' suits," he says, explaining. "I just got in some black boys' suits to fill in stock."
In the Sixties this was where Motown came to shop. "All of the Four Tops," Mr. Ross says. "In the Sixties it was everybody." It's clear that while Mr. Ross is conservatively dressed, he mourns the demise of the Superfly years and is currently trying to console himself by talking up his inventory of flash, thousand-dollar Montee Holland suits with their asymmetrically cut vests, inverted jacket pleats and an extreme excitement of top stitching. In the time Mr. Ross has been on Randolph Street he has seen the closing, by his count, of 16 independent men's clothing stores. That's the story of Detroit that's well known. Less well known has been the modest migration of young professionals to condos in the downtown core and the sliver of renewed hope for the city before the housing crisis hit. Last fall, a grocery store opened downtown near to where Martha Reeves, ex of the Vandellas and currently a member of city council, lives. This is news. And the 1920s Book Cadillac Hotel on Washington Avenue has just reopened under the Westin banner after a $180-million renovation – "A big, stinking deal," city planner Helen-Marie Sharpley says. And Zaccaro's gourmet market has opened on Woodward, serving the new class of urban condo dwellers.
A $47-million neighbourhood stabilization plan has just been approved by city council, targeting neighbourhoods like Brightmoor and Herman Gardens. Abandoned, stripped, boarded-up, torched prewar bungalows dot a Monopoly board where there is no Park Place. "People who have lived in their houses 30, 40 years," Mr. Diggs says. "They're still taking care of their garden and everything and there's a burned-out hulk next door to them. That's a terrible thing." Council has been fighting over that $47-million. Mr. Diggs' department recommended directing half of that to demolition. Council approved $14-million, How far will that go? One block of Mettatel Street presents an ugly face to the world with more burned-out homes than occupied ones. Where's the hope in that?
Here's what you do not expect: Drive the stately historic neighbourhood of Boston Edison, once home to Henry Ford, S.S. Kresge, Horace Rackham (one of the original 12 shareholders in the Ford Motor Co.) and the Fisher brothers, whose Fisher Body Corp. was a major supplier of car bodies to the auto manufacturers and whose homes included an 11-bedroom Italian Renaissance mansion with a four-car garage and carriage house. What you do not expect to see is the encroachment of urban blight here too. Vacant properties. Boarded-up homes. A torching or two in the back. A "magnificent historic home" on Boston Boulevard is for sale. Beautiful woodwork, leaded glass throughout, 4,600 square feet. Asking $270,000. "There's a lot of potential," sighs city planner Ms. Sharpley. "That's all the city is, is potential."
Mr. Ross owns property downtown beyond Serman's – "We're investors," he says – and he believes that Detroit will be an exciting place again one day. From the vantage point of his cash register, Mr. Ross makes a number of societal observations. Time was, he used to sell 1,000 boys' suits for Easter in four weeks on the layaway plan. "They didn't have credit card debt and they knew how to manage their money. Twenty. Twenty-five. Ten dollars a week. They'd lay it away two months in advance," he says. "Now there's hardly any layaway business. Why? They don't even have the money for layaway." The consumer is tapped out. "It's a totally way blown out of proportion consumer-oriented society," Mr. Ross says. "People have no control. Consumers have no control …This credit card thing has almost destroyed our whole society."
The other day Mr. Ross caught notice of Ted Turner on David Letterman. "Save first, spend second," was Mr. Ross's takeaway from the interview. Mr. Turner was in fine form, excoriating the auto bailout, which he deemed a "rat hole," and sharing his views on what it would take to set the world right. "For the past 40 years we've equated how much we had with how happy we were. Advertising tells us you buy a big car, a new TV, you're going to be happier. But I really don't think we were happier … I think we're going to have to get to know our neighbours and maybe play bridge with them, you know, and you don't have to drive all the way across town." Traffic is down in downtown Detroit. Interim Mayor Kenneth Cockrel Jr. has launched a "Shop Detroit" initiative, with "Shop Detroit" dollars. Five bucks off every purchase of $25 or more. "The city is hurting on a lot of different levels," the Mayor tells council, his enormous frame barely contained within one of the pasty office chairs that surrounds council's modest board table, which itself is cordoned off from the public by a rather silly red rope. Councillor Kwame Kenyatta offers a sharper assessment: "There is a lack of understanding that the city is going through a crisis that it has never been in before." He's trumped by councillor JoAnn Watson: "It's not about Detroit. It's about this nation. We are connected by a heart valve to this nation."
About eight months ago, Steven Ross realized Serman's needed a new sales strategy. "You want to see what keeps me going?" he asks as he beetles off to a back room and beetles back, handing over a glossy store flyer. "This is what keeps me going. Read it. What does it say?" Buy One, Get Two Free. "Half off doesn't work any more, and buy one get one free doesn't work any more," Mr. Ross says. What kind of money is he making? "I'm doing okay. I sell them a couple pair of shoes. A shirt and a tie. I'm not losing money." The 1959 Cadillac Series 62 convertible, creamy white with cherry red interior, sits shiningly on display in the RenCen. "Let me take you up," says Tom, who appears to be the GM version of the Wal-Mart greeter. Visitors are cautioned to keep off the low-rise platform on which the Caddy sits but, Tom says, no one's about, so let's get a closer look. Note the chrome grillwork; the enormous, yet sexily slender, steering wheel; the rocket-fired tail fins. "This thing is 18 feet, 11 inches long," Tom says. "Five inches longer than the Suburban."
If any single item personified the expression of American consumerism, the Caddy is it, the ultimate byproduct, reminds Prof. Solomon, of the genius of Alfred Sloan. The General Motors visionary introduced the concept of market segmentation, which in turn introduced tiered pricing, which reinforced the underpinnings for a host of social expressions. "Upward mobility" and the vastly overused "aspirational" are two. When Detroit Mayor Coleman Young was criticized for touring his domain in a Cadillac convertible, he is said to have said: "Do you want the mayor of your city driving down Woodward in a Dodge Rambler?" The Caddy was the tops of the tops, and Prof. Solomon wonders, given the right-of-passage role the car has played in the life of the American male, whether it's going too far to suggest that America has been "potentially emasculated by the thought of General Motors going down the sewer." It may, yet.
The census records that 28 per cent of the metropolitan labour force in 1950 Detroit was deployed in motor vehicle manufacture. In Profile of a Metropolis, written in 1962, authors Robert Mowitz and Deil Wright noted that Detroit was the only major metropolitan area in the U.S. to have such a large percentage of its labour force devoted to a single product. The peak production year for the auto industry was 1955, round about the time that Detroit reached its population peak of 1.9 million. "[T]he prosperity that followed World War II provided the mass market with the income to satisfy the urge to own and drive automobiles," the authors wrote. Or the desire to own an ever flashier automobile, a larger home, a nicer fridge. This scene, commonplace in today's consumer culture, was freshly set by Sloan Wilson, who created the narrative template for consumer desire in The Man in the Gray Flannel Suit, published in 1955. Tom and Betsy Rath are forever fretting about the collapsing state of their car and plotting to break out of their little house on Greentree Avenue. "The biggest parties of all were moving-out parties, given by those who finally were able to buy a bigger house. Of course there were a few men in the area who had given up hope of rising in the world, and a few who had moved from worse surroundings and considered Greentree Avenue a desirable end of the road, but they and their families suffered a kind of social ostracism. On Greentree Avenue, contentment was an object of contempt."
Consumer spending rose between 1952 and 1955 to approximately 62 per cent of gross domestic product. Mathieu Savary, senior analyst at BCA Research in Montreal, notes that there wasn't much financial innovation in the 1950s. The banking industry, he says, "was still stifled by the heavy regulation following the Depression." The credit card was unknown. In Detroit in the Fifties, social mobility was marked not only by trading up but moving out. A traffic study conducted early in the decade forecast a 76-per-cent increase in vehicle traffic by 1980. In approving an extension of the Lodge Expressway, city burghers sealed a predictable migration to the suburbs, encouraging city dwellers to trade up and out, and, neatly, ensuring a homegrown market for the latest model car. A 1955 "Tu-Tone" Buick Century four-door Riviera hardtop – the Hot Rod Buick – could be purchased for a base price of $2,601. You too could be Broderick Crawford in Highway Patrol. By failing to establish an extensive and effective inner-city transportation system, Detroit made itself the very model of social destabilization. There are those who blame the auto industry for that.
The streetcars that used to clatter down Elmore Leonard's beloved Woodward Avenue to Jefferson, where GM's headquarters looms, are long gone. There is no subway. And the in-city buses don't link up to the out-city buses. In Profile of a Metropolis, a congressman wondered, prophetically: "Why speed the exodus from the city of the middle- and upper-income families?" What Detroit has is the People Mover. The 50-cent, one-way skytrain that passes by the RenCen and 12 other stops downtown runs a loop that traverses a distance of a mere 2.9 miles, an easy jog. It was meant to be the linchpin for a top-of-the-line transit system. Instead it connects to … nothing. Had Detroiters been the Jetsons this wouldn't have been a problem. There are sparkling silver reindeer to match the sparkling silver modern-art Christmas trees that decorate the makeup and perfume floor at Saks Fifth Avenue. Tom Ford's White Patchouli is spritzed on a wrist as an Ugg-wearing blonde laden with Nordstrom and Neiman Marcus bags does that bedroom slipper scurry past designer this and that.
Where's the recession? Oh, here it is. For the first time ever, Saks has launched a no-money-down, no-interest-for-12-months promotion on purchases of at least $2,000. "We've done promotions before where we've had maybe a six-month, no payment, no interest [offer], but it's always been on jewellery," says Kim Nye, the store's vice-president and general manager. Ms. Nye rattles off a quick list of high-end designers. Armani. Burberry. Ralph Lauren. "Name any of them," she says. "Chanel's on sale now." This week the store is offering an additional 50 per cent off on items already reduced by 40 per cent, taking that $1,000 cashmere sweater down to 300 bucks. "Everything has a cadence of markdown," Ms. Nye says. "It's just that the markdown cadence has escalated." This particular Saks anchors one half of the Somerset Collection in Troy, Mich., a 20-minute drive from the centre of Detroit. The word "mall" is far too un-luxe a word to capture the full fabulousness of what is on display. Gucci. Louis Vuitton. Tiffany & Co. Pick your retailer.
The Hervé Léger by Max Azria collection is here and nowhere else in the Midwest. "It lifts you, it tucks you, it's amazing," says a bushy-tailed sales clerk of the famous Léger "bandage" dresses, which look like an elegant version of the kind of tensor swaddling one would self-apply after a nasty sprain. The cream bandage wedding dress, priced at nine grand, will not be going on sale. Saks was built as a standalone store in 1967, eventually joined by its luxury brethren to serve the prophesied migration of the upper classes to Royal Oak and Birmingham and Troy, an economic runnel into which all good fortune poured as consumers became increasingly defined as much by what they drove as where they shopped. In a report released last week, Mathieu Savary at BCA Research sets the inflection point for consumer spending at 1980. Prior to that date, spending as a percentage of U.S. gross domestic product bobbled around the 62-per-cent mark. Since 1980, that ratio has shot up to 70 per cent. "[T]he U.S. economy has become increasingly consumer spending-driven," Mr. Savary wrote. "As a result, the rest of the world economy has become highly geared toward serving the American consumer."
The rise in spending, you will not be surprised to hear, has been built on leverage. No-money-down houses. Free cars. At first. Prof. Solomon parses the now-fashionable observation that the new economic order will, or has, given birth to a chastened consumer, less focused on the material. Hmmm. "I don't think people are going to become agrarian nomads any time soon," he says. Yet we may well have changed. "We will always find something to compare ourselves to," he says. "But it may not be a glittery luxury good." Like a car. Downtown observers of the Detroit scene cast a jaundiced eye upon the latest round of bad news. "We're facing losing one of our major industries," says planning director Douglass Diggs. "You become like the coal mine town and the coal mine shuts down." That chapter is not being written. Not yet. "The auto industry pretty much built the middle class in America," Mr. Diggs says. "We've got to keep the wheels turning somehow."
Fewer wheels. Yesterday, a desperate GM announced it would slash production by a third in the first quarter of next year. At the Motown Cafe, Simon Sinishtaj notes that he is seeing his regulars less regularly. "Where you been?" "Oh, I've been packing my lunch." That kind of thing. Of course, it's the regular folk who are paying the first, highest price, the final tally for which is not yet known. Speaking of the auto companies. "The CEOs and the big top dogs," wonders Mr. Sinishtaj, darting back and forth in front of the pass-through window. "How much do you think they do?" He's 28, and he's been thinking. "You know Americans. We're so used to living good. Eating out. Spending." It's a want-to-much society, he says. "Don't you ever think of that?" The 100-dollar sneakers. He talks about those. And the $275 that some "salon" is charging for a bottle of Grey Goose. "What do they give you? A big tall glass of orange juice and a big, tall glass of cranberry juice for your mixture for a fifth of Grey Goose that you can buy for forty bucks." It's the appearance of wealth. Like a new automobile. "It's telling people, look, I made it. I got the nice car." He hears the pawn shops are booming. There's a very fashionable sign hanging on the front door of the cafe. "Cash only."
Thousands of British stores hang in the balance
The fate of thousands of struggling high street stores will turn on how wide cash-strapped shoppers are prepared to open their purses this weekend and next - some of the busiest days in the retail calender. Preparations for the critical trading spell came as Strategy Retail, the 51-store group that includes the home decorating chain Fads, was tonight forced into administration. The group, which employs 350 staff, blamed "current trading conditions". Other retail casualties in recent months include Woolworths, MFI, The Pier, SCS Upholstery, Rosebys, Ilva and Floors-2-Go.
Meanwhile it emerged that Zavvi, formerly Virgin Megastore, has been consulting a restructuring team from Ernst & Young. The team is believed to be advising on all options but could take over as administrators if trading difficulties worsen. Latest customer traffic figures show a rush of pre-Christmas sales promotions, offering unprecedented discounts, has failed to draw in the hoped-for crowds. Shopper numbers, excluding food stores, were down between 6% and 7% in the first four days of this week, according to data tracker firms Experian and Synovate. Tim Denison, of Synovate, predicted this weekend would see year-on-year declines steepen slightly, edging up to 7% as the impact of early and deep discounting begins to wane. "Shoppers expect the discounts to keep coming. We are in this lull between the starting whistle and the final push." He is predicting shopper numbers by the end of the month will be down 7.3% on last year, having fallen 6.6% for November.
Adding to retailers' woes is the looming quarterly rental payment deadline, which this year falls on Christmas Eve. Together with monthly wage bills, rent is the highest fixed cost outgoing for most retailers and quarterly deadlines often trigger a wave of insolvency proceedings. Neil Saunders of retail consultancy Verdict Research believes things will only get worse on the high street in the new year as shoppers realise the higher cost and lower availability of credit means they can no longer spend beyond their means. "The consumer is unprepared for this downturn, most are in an incredibly weak position to deal with it and there is simply no wriggle room in household budgets," Saunders said. Verdict estimates slower consumer spending and rising costs could wipe £3.6bn off the collective profits of leading retailers for 2009.
Today John Lewis, often regarded as a barometer of the high street, said sales were still sinking. For the week to December 6, sales at its department stores were down 6.6%. Next week analysts suggest there could be more bad news when the Mike Ashley-controlled sports clothing chain Sports Direct publishes its half-year figures. Philip Dorgan, at Panmure Gordon, estimates underlying pre-tax profits will be £20m, more than half the £52m 12 months earlier and a quarter of the half-year profits in 2006. Heavily indebted Sports Direct may be forced to write down the carrying value of stakes it holds in rivals Blacks Leisure, JD Sports and JJB, all of which have seen their share prices dive in recent months. Strain on the group's balance sheet was likely to force management to cut the dividend, Dorgan said.
Struggling Zavvi, which has seen trading disrupted by the collapse of Woolworths' CD and DVD wholesaling business Entertainment UK (EUK), has reportedly been thrown a lifeline in recent days by Richard Branson's Virgin Group, which stepped in to underwrite about 60 days of credit. Zavvi is believed to owe EUK £106m. In a statement, the firms said: "Zavvi would like to reassure customers that it is dealing direct with suppliers to ensure that the right product is available in its stores for Christmas." Meanwhile, administrators from Deloitte overseeing EUK, today said 700 workers had been made redundant at the wholesaler's head office and distribution centres in Middlesex as it became clear the business is unlikely to be sold as a going concern. "Whilst we will continue to consider offers we will now focus on realising value from the company's assets," said joint administrator Dan Butters.
US cost of living probably fell most in six decades
The cost of living in the U.S. probably fell in November by the most in six decades, while slumps in manufacturing and homebuilding worsened, sending the economy deeper into a recession, economists said before reports this week. Consumer prices probably dropped 1.2 percent last month, the most since records began in 1947, according to the median estimate in a Bloomberg News survey. Builders broke ground on the fewest houses in almost a half century and factory output continued to slide. Costs of oil and other raw materials plummeted last month as the credit crisis caused consumers to slash spending, prompting automakers to plead for a bailout. Tumbling sales have retailers cutting prices, setting the stage for the Federal Reserve this week to lower its key rate target to its lowest level ever.
"We’re going to have weak demand through most of 2009," said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. "It’s going to be a long and severe recession." The Labor Department’s consumer-price report is due Dec. 16. Fuel, auto and building-material costs probably dropped last month, economists said, as consumer spending dipped. A freefall in crude oil costs is feeding through to prices at the pump. A gallon of regular gasoline at the pump plunged 32 percent last month to $2.11, according to AAA. "We had a bubble in oil, the bubble has burst," David Wyss, chief economist at Standard & Poor’s in New York, said in an interview with Bloomberg Television. "One thing recessions are really good at is bringing down inflation."
Core prices, which exclude food and energy, rose 0.1 percent last month after a 0.1 percent drop the prior month, according to the survey median. The recession, already a year long, will continue to slow inflation. Consumer prices will probably rise just 0.7 percent in the 12 months ended in September 2009, the smallest year-over- year gain since 1962, according to economists surveyed last week by Bloomberg News. Consumer spending will fall at a 4 percent annual pace in the current quarter, the most since 1980, and drop 1 percent for all of 2009, the economists forecast. Weak spending, exacerbated by the worst credit crisis in seven decades, pushed car sales in November to their lowest level since 1982, underscoring calls for a government bailout for General Motors Corp. and Chrysler LLC.
"Sales are at depression levels," Mike Jackson, chief executive officer at AutoNation Inc., the largest car dealer in the U.S., said in a Bloomberg Television interview from Fort Lauderdale, Florida, last week. "What’s needed is a restoration of credit" and a "stimulus package for the economy, including incentives for the auto industry and a bridge loan" for the automakers. Cutbacks in auto production probably pushed down manufacturing output last month, economists said a report from the Fed tomorrow may show. Overall industrial production, which includes factories, mines and utilities, fell 0.9 percent in November, according to economists surveyed. A report from the New York Fed the same day may show manufacturing in the state contracted in December at the fastest pace since records began in 2001. A similar report from the Philadelphia Fed on Dec. 18 may show regional activity shrank for a 12th time in 13 months.
The Fed on Dec. 16 is forecast to cut its overnight lending rate by a half percentage point to 0.5 percent, according to economists surveyed. The Fed, struggling to shore up credit markets and arrest the freefall in economic data, has slashed rates from 4.25 percent in December 2007, while using a host of unconventional methods to pump added cash into money markets. The housing recession that triggered the credit crisis and the ensuing recession show no signs of abating. New-home starts in November dropped to a 730,000 annual pace, the lowest level since records began in 1959, the Commerce Department is forecast to report the day of the Fed decision.
"More needs to be done" to stop the cascade of foreclosures that is deepening the housing crisis, Fed Chairman Ben S. Bernanke said in a speech in Washington on Dec. 4. "Policy initiatives to reduce the number of preventable foreclosures should be high on the agenda." A gauge of the economy’s course will point to continued weakness, economists project a private report on Dec. 18 will show. The New York-based Conference Board’s index of leading economic indicators probably fell 0.4 percent in November after declining 0.8 percent in October.
Ilargi: And there goes another $5 trillion. Inflation, anyone? Many countries have laws that dictate companies have to fork over when their pension plans drop below certain levels. Many will not be able to.
Credit crunch costs pension funds $5 trillion in 2008
The 2008 crash has wiped a total of $5 trillion (£3.3 trillion) off the value of private pension funds in rich countries since the beginning of the year, according to Paris-based think-tank the Organisation for Economic Co-operation and Development. Among the 28 major economies covered in the study, Ireland's workers have been worst-hit. The value of their retirement savings has fallen by more than 30 per cent on average since the beginning of the year, once inflation is taken into account.
Almost half of the total $5 trillion loss was sustained by US investors, who have also been watching the value of their homes slide for more than two years. The UK's pension funds have been less severely affected, but the OECD calculates that the average pension has still declined by more than 15 per cent, or $300bn, since January - and it warns that the final outcome may turn out to be worse once losses on hard-to-value assets such as property are totted up.
The countries least affected by the stock market sell-off have been those where pension funds are most conservatively invested, such as Greece. Sharp declines in the value of pensions risk undermining public confidence in saving for retirement, just as many developed countries gear up to tackle the so-called demographic time-bomb.
• The UK's biggest pension buyout was completed yesterday in a £1bn deal to hive off the Thorn Pension Fund to the Pension Insurance Corporation, run by former private equity player Edmund Truell. More than 15,000 members will have benefits moved. PIC is to pay lump sums to a further 10,000 members with small pensions, though some in the industry want City regulators to lay down firm guidelines on the terms by which they are conducted to safeguard employees. The Pension Corporation was slammed by a review panel for failing to identify possible conflicts of interest in its takeover of Telent, the rump of the former Marconi telecoms empire, to gain control of its pension fund. Truell appealed unsuccessfully against a ruling that independent trustees should be appointed.
US consumer spending to ebb more than investors see
Consumer consumption, long an engine of the U.S. economy, is poised to contract the most since World War Two and may impede a fast recovery that many equity investors are counting on. U.S. stocks have rallied about 17 percent since sliding to 11-year lows in late November on the belief the worst of the deepest post-war bear market on record may be over. But unlike every recession since the Depression, a boost in consumer spending -- primed by a lowering of interest rates -- will not lead to a sharp recovery, several investors at this week's Reuters Investment Outlook Summit 2009 said.
After a buying binge that pushed consumer spending to five times the rate of economic growth for this decade, the American consumer is tapped out and needs to shore up finances. "I don't see fast growth in the United States for several years," said John Taylor, chairman and chief investment officer of hedge fund FX Concepts Inc, which oversees $14 billion in assets. "People need to get their personal finances back in order," he said. The United States is in the early stages of a structural shift in which slower consumer spending will dramatically reduce its impact on gross domestic product, Taylor said. "We have to take the consumption sector from 71 to 72 percent (of GDP) to 67 to 68 percent," he said.
Morgan Stanley estimates the slowdown in real consumption will be a negative 1.6 percent in the 12 months ended June 30, 2009, a post-World War Two record. World growth, at 1.7 percent, will be the weakest rate since 1991, the bank said. Growth in consumer spending over the next several years will be about 1 to 1 1/2 percentage points less than the 3.5 percent clip during the decade ending 2007, it said. That slowdown could lead to a slow and long recovery, and change the outlook for capital markets in the years to come, especially retail and other consumer-oriented securities. Investors do not appreciate yet how long the downturn in the U.S. retail industry may last, said Shawn Kravetz, president of Boston-based hedge fund Esplanade Capital LLC. "We don't think that people have fully factored in this general level of malignancy going on for a year, 18 months, maybe two years," he said at the summit.
The consumer recession will be so "deep and brutal" the U.S. retail industry could lose one out of every 10 stores in coming years, Kravetz said. Consumers, businesses and investors all are rushing to reduce risk amid a broad deleveraging, said Mohamed El-Erian, co-chief of fixed-income powerhouse Pacific Investment Management Co in Newport Beach, California. Investors pushing a rally in equity markets after stocks slumped in November to lows last seen in 1997 may be too optimistic as more bottoms are likely, El-Erian said. "It puzzles me that people feel confident to declare the bottom," said El-Erian, famous for resisting the herd after he bet in 2002 that president-elect Luiz Inacio Lula da Silva would not lead Brazil into a bond default as Argentina had. "What we're looking at is a very bumpy journey that will continue well into 2009. We're looking at multiple bottoms."
The level of debt to gross domestic product is running at rates last seen during the depths of the Great Depression, said Tom Atteberry, a partner and fixed-income manager at First Pacific Advisors of Los Angeles. Consumer spending has ramped up this decade to almost 72 percent of GDP from about 66 percent at the beginning of the decade, he said. As a percentage of GDP, private debt has soared to close to 250 percent last year from about 10 percent in 1952, according to Ned Davis Research. After paying food, energy, debt service, health care and taxes, the American consumer has little left, Atteberry said. "This person is starting to get very, very stressed, and their ability to pay off is virtually impossible," he said. "There are only two ways to repair the balance sheet; sell the asset and pay down the debt, or you're going to spend less than you earn. There is no third choice," Atteberry said. "We see this recession lasting into 2010."
Bernie Madoff's alleged $50bn fraud may be just a foretaste of what's to come
First come the losses and the stupidities committed by bankers working for their own self-interest. Then come the rogue traders, who are unable to 'fess up on market bets gone wrong. The last to arrive is the "bezzle". That was economist JK Galbraith's word for the outright frauds built up when markets are good. These can be kept hidden for as long as the lies hold up. But the truth will out.
The first big outing in the current financial crisis is an alleged scam that may cost investors as much as $50bn. It was committed, according to a US criminal indictment, by a highly respected member of the financial community, a one-time Nasdaq executive and a legendary trader in New York. Bernard Madoff is accused of orchestrating a multi-year fraud in which generous returns were manufactured for sophisticated investors. The technique was the usual Ponzi scheme. Old investors were paid off by the new funds lured into to Madoff's art-laden New York headquarters.
Losses of $50bn would probably make Madoff the biggest single fraudster in history. But in fairness, such an accomplishment shouldn't come as a great surprise. In Galbraith's model of a speculative cycle, good times spawn the excess and corruption which eventually bring them to end. The last good times were especially profitable, fertilising the ground for especially large frauds. But the first frauds to be discovered are usually the not the largest. Madoff's alleged billions could only be a foretaste of what receding markets will eventually expose.
Madoff Said to Have Escaped SEC Inspectors Until 'Tragedy' Reached Victims
Bernard Madoff’s investment advisory business, alleged to be a Ponzi scheme that cost investors $50 billion, was never inspected by U.S. regulators after he subjected it to oversight two years ago, people familiar with the case said. The Securities and Exchange Commission hasn’t examined Madoff’s books since he registered the unit with the agency in September 2006, two people said, declining to be identified because the reviews aren’t public. The SEC tries to inspect advisers at least every five years and to scrutinize newly registered firms in their first year, former agency officials and securities lawyers said.
Madoff, 70, who had advised the SEC how to regulate markets and donated regularly to politicians, was arrested Dec. 11 and charged with operating what he told his sons was a long-running Ponzi scheme in the New York-based firm’s business advising rich people, hedge funds and institutions. His ability to avoid detection may fuel debate about the SEC’s effectiveness and the adequacy of its resources for policing money managers. "Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered," said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC. "It’s hard to imagine a fraud of this alleged size not being accompanied by significant and pervasive compliance problems." Madoff is scheduled to appear in federal court in Manhattan on Dec. 19 at noon for a hearing in the SEC case, according to his lawyer, Ira "Ike" Sorkin, of Dickstein Shapiro LLP in New York.
"This is a tragedy," said Sorkin, a former U.S. prosecutor and SEC enforcement lawyer. "We are going to fight through these events and try to minimize the losses as much as possible." The SEC’s Office of Compliance Inspections and Examinations deploys teams from Washington and 11 regional offices to scout for fraud and gauge brokerages and investment managers’ adherence to securities laws. Its roster of full-time employees peaked at 880 in fiscal 2006, according to agency budget requests. The regulator expects to have 796 full-time workers in its inspections office for the fiscal year ending next September. Madoff also operated a brokerage, and the SEC’s inspectors examined it in 2005, finding three violations of so-called best- execution rules, which require that customer trades be made at the most advantageous prices, agency spokesman John Nester said in a statement. The regulator’s enforcement division completed an investigation involving the company last year without bringing a claim, Nester said.
The SEC opened that inquiry after tipsters and press reports said Madoff’s purported investment returns may have resulted from front running, in which traders buy shares for their own account before filling customers’ orders, a person familiar with the inquiry said. The agency found no evidence that the brokerage did anything improper, the person said. More than a decade earlier, in 1992, Madoff faced regulatory scrutiny as part of a lawsuit the SEC brought against two Florida accountants, whom it accused of raising $441 million while selling unregistered securities over three decades, according to SEC statements and a press report at the time. Madoff told the Wall Street Journal at the time that he had managed the funds unaware they had been raised illegally. The SEC determined that the investors’ money was all accounted for, and didn’t accuse him of wrongdoing, according to the report.
Sixteen years later, on Dec. 11, the SEC and U.S. prosecutors announced in federal court in Manhattan that Madoff had confessed. His advisory business was "all just one big lie," Madoff had allegedly said. The business had been insolvent for years, with losses of more than $50 billion, according to the SEC’s account of his statement. Madoff delivered the confession to his sons, Mark and Andrew, who turned him in, according to Martin Flumenbaum, a lawyer representing the brothers. On the morning of Madoff’s arrest, more than a dozen SEC inspectors assembled at his office in Manhattan and have since worked overtime to untangle the mess. The agency still hasn’t determined the extent of the damage or whether others participated in the fraud, according to a person familiar with the review.
Such a large Ponzi scheme -- in which early investors are paid with money raised from subsequent victims -- should prompt lawmakers to review how the U.S. polices brokerages, wealth managers and unregistered advisers, such as hedge funds, said James Cox, a securities law professor at Duke University in Durham, North Carolina. "There are just so many people out there who are and aren’t registered that it really just overwhelms the system," Cox said. "There is no easy way to expand the regulatory net unless we’re willing to put the might of the federal budget behind it to carry out more inspections."
Barry Barbash, a former head of the SEC’s investment management division, said the agency has tried to focus its inspections on money managers who pose the biggest risks. The regulator uses criteria such as which securities a firm is buying and who its clients are, said Barbash, a partner at Willkie Farr & Gallagher LLP in Washington. "Given the state of SEC resources and given the way that they go about determining whether an inspection is necessary, it wouldn’t surprise me that a newly registered firm wasn’t inspected," Barbash said. Any suspicions about Madoff may have been dampened because of his association with industry groups, watchdogs and politicians. He sat on a committee of academics, regulators and executives formed in 2000 by former SEC Chairman Arthur Levitt to advise the agency on new stock-market rules in response to the growth of electronic trading. Madoff has led the trading committee at the Securities Industry Association, Wall Street’s biggest trade group, and served as chairman of the Nasdaq Stock Market.
Since 2000, he has given at least $100,000 to the Democratic Senatorial Campaign Committee and more than $23,000 to the party’s candidates, including Senator Charles Schumer of New York and Senator Frank Lautenberg of New Jersey, who leads a charitable foundation that invested with Madoff. "You can see where people would pull the shades down over their eyes in terms of recognizing what could be one of the great frauds of our time," Levitt said in a Bloomberg Television interview. "I’ve known him for nearly 35 years, and I’m absolutely astonished." Levitt is a senior adviser to the Carlyle Group and a board member of Bloomberg LP, the parent of Bloomberg News.
Ilargi: A little CNBC video, with some reasonable points being made, though nothing spectacular. I want to post it in order to repeat what I have said a few times before here, and what I don't see anybody picking up on. Everywhere I look I see people attributing the fall in oil prices to the decline in demand, and the retreat from investors out of the stock. My take is that they all ignore a third factor, which is likely crucial: as demand falls, supply increases.
Oil producing countries have seen an incredible loss in revenues in the 2nd half of 2008. This will, of necessity, cause many among them to produce all they can, at basically whatever price they can get, just to make up for at least some part of the downfall. Many oil producing countries have volatile domestic political situations, and many fear for their grip on power if money stops flowing in. OPEC is an institution that cannot continue to function in economically hard times, the members will choose to take care of themselves instead of adhering to negotiated production cuts. They can talk the smooth talk at the meetings, but they know they need to sell more, not less. Any Saudi attempt to pressure the others into cutting will backfire.
Oil may crash to $10 a barrel
OPEC divisions again on display heading to Algeria
OPEC, the oil-producing group that consumers worldwide love to hate, is fine tuning its strategy heading into a meeting this week in Algeria, determined that its fourth attempt in as many months to reverse plummeting crude oil prices will succeed. Working against the Organization of Petroleum Exporting Countries is its own past ? a history pockmarked with the rival priorities of its 13 member states and major policy blunders in times of economic crises. One only need to look back two weeks when the group met in Cairo and postponed a decision on production cuts until Wednesday's meeting in Oran, Algeria, sending crude prices tumbling down to $40, the lowest level since 2004.
OPEC members' fractious relationships have made it difficult to control supply, and thus price, in both good times and bad, said Edward Chow, senior fellow at the Washington-based Center for Strategic and International Studies' Energy Security program. "The experience in the last 20 years suggests that they will have a hard time" defending a price floor, he said, noting the group had similar problems when crude rocketed to nearly $150 a barrel in July. "They've been riding the roller coaster rather than managing supply," Chow added. David Kirsch, oil analyst with Washington-based consultancy PFC Energy, said Saudi Arabia, the group's largest producer and de facto leader, may have allowed crude to tumble as a warning to other members of what's in store should they fail to adhere to production cuts immediately. "Definitely, they were playing a game of chicken going into Cairo," said Kirsch. "I don't think they're doing that any more."
The crude futures market is now in what oil traders call a "contango", where oil delivered in the next few weeks is cheaper than in the following months. Much like shoppers rushing to buy sale items at the store, crude consumers have been stocking up. With demand hitting 25-year lows, the economies of oil producing countries are under extreme stress and OPEC must slash output to reverse the contango trend. Cooperation from non-OPEC nations like Russia may help, though it remains unclear whether Moscow will offer anything more than moral support. Its production is already on the decline and the oil giant may already be in recession. OPEC President Chakib Khelil said the best way to get a reaction from the oil market was to "surprise" it, suggesting a cut even larger than the expected 1.5 million to 2 million barrels per day.
That strategy has backfired before, however, leaving the impression that OPEC is turning the screws when the global economy is at its weakest. The other half of OPEC's strategy is selling a concept that has rarely been received well by Western nations: a "fair" price for oil, rather than what the market is willing to pay. Saudi King Abdullah has put a fair price tag at about $75. It is not only OPEC that thinks depressed oil prices may be setting the globe up for another price shock when the economy rebounds, the Paris-based International Energy Agency and U.S. Department of Energy are among the believers. The reasoning, largely, is that crude at such low levels can lead to a massive pullback on investment in new projects and supply sources. But OPEC members also have some very personal reasons for wanting high prices.
Oil revenues provide up to 90 percent of overseas revenues for some members, and lower prices, along with cutting production, would reduce petrodollar revenues. That could force some to cut spending in key social services crucial to maintaining stability in their countries. Iran's hardline president acknowledged for the first time earlier this month that tumbling oil prices will force sharp cuts in spending. Tehran has been among the most vocal supporters of higher crude prices, and one of the countries cited by analysts as being somewhat lax with its quotas. "Certainly, they got it wrong last meeting," said Rob Laughlin, senior oil analyst with London-based brokers MF Global. "There was some internal ... dissatisfaction with some members not adhering to quotas, and that OPEC should be cutting as a cartel."
While the group may have been more true to its goals in recent weeks, a panicked market has undermined those efforts. A research report by Barclays Capital said OPEC output has fallen by 1.7 million barrels per day since August. "We do not believe that the current demand-focused nature of sentiment has made any real account yet of either falling OPEC output or the developing weakness of non-OPEC supply," said the report. As the only OPEC member with any meaningful spare output capacity, the task of balancing volatile oil markets traditionally falls on Saudi Arabia's shoulders. Too often, it has found itself cutting production while others cheated. OPEC's credibility, and its ability to influence prices, has paid the price. "When demand slows down, OPEC becomes at its weakest because they are going to have to lower the production ceiling," said Muhammed-Ali Zainy, senior energy economist with the London-based Centre for Global Energy Studies. "Each country would want to reduce the least possible, especially the little countries and those in need of money."
In the mid-1980s, non-OPEC oil production was rapidly increasing, outstripping demand and pushing down prices even as the group tried to offset the slide with production cuts. But fed up with some members blatantly disregarded quotas, Saudi Arabia struck deals with refiners and ramped up its own production. Crude prices tumbled to $10 a barrel, devastating the economies of oil producing countries. The market eventually rebounded, but the Saudis could wield the same cudgel this week in Algeria. "If Saudi Arabia sticks to its quota and sees the others are cheating, (the other members) are going to be punished in the same way they were punished in the mid-1980s," said Zainy.
End of the oil sands' building frenzy?
Canadians have grown accustomed to the flow of multi-billion oil sands investments from all corners of the Earth, turning Canada's currency into a petro-dollar and pumping economic prosperity. But as the sector struggles with its first downturn since the rush started 11 years ago, there's increasing discussion this is not a short-term pullback, but the end of the oil sands' building frenzy. The economic crisis and collapse in oil prices have pushed the sector to the brink, resulting in the delay of some $40-billion in new projects, taking 800,000 barrels a day of expected production growth -- about half of what had been expected -- off the table, according to CIBC World Markets.
Meanwhile, existing projects are close to losing money at today's oil prices. According to a recent Merrill Lynch report, many oil sands projects need US$38 a barrel oil to break even. Oil prices settled at US$46.28 a barrel on Friday, keeping projects in the black for now, but curtailing developers' ability to fund expansion. Industry watchers say companies that scaled back won't be rushing to jump back in, even if oil prices recover above US$90, the level many say is required to build new projects. Other problems would have to be resolved: mounting costs, tight financing and, of course, environmental challenges. The oil sands' poor image could lead to even tougher environmental legislation.
The implications of a no-growth period for the oil sands are grim, not just for Alberta, but the entire country. The oil sands boom has been Canada's economic engine over the past decade. The country's rise as a major global oil producer would stall and the United States would see its energy security options reduced. The effects of those cancellations are already being felt. Contracts are being cancelled. Construction jobs in Fort McMurray are drying up. The construction industry slashed its workforce requirements estimate by half for 2010 -- to 22,000 from 44,000 jobs -- in what was to be a peak building year. Workers in Calgary are being sent home.
Oil sands pioneer Jim Carter is clearly concerned for the sector's future. The mining engineer and former president and chief operating officer of Syncrude Canada Ltd., who retired in May, 2007, after nearly three decades in the business, sees two possible scenarios unfolding. With a much-needed break from years of explosive growth, he says the oil sands would have the opportunity to "recalibrate" -- get inflation under control, lower everyone's expectations and integrate technologies to improve environmental performance. The other is that development of the oil sands stalls.
Bob Dunbar, president of Strategy West, a Calgary oil sands consulting firm, says the risk of a no-growth period in the oil sands is high. "If we have a prolonged financial economic crisis, then I think this industry is coming to a halt, other than startup and completion of projects that are already underway," says Mr. Dunbar, who was one of the oil sands' first regulators three decades ago with the Alberta government. He sees oil sands production growing to 2-million barrels a day, from the current 1.3-million barrels a day, as projects under construction are completed by 2010-2011. Then, the pipeline dries up. The industry's goal was to produce about 3.5-million barrels a day by 2015.
Not even a short-lived financial crisis greatly improves the picture, he adds. Growth may resume, but at a more moderate pace. "A lot of people in the industry will have received pretty serious body blows, and a lot of people are really going to lose the capability to turn around quickly." It's not easy to restart projects that take years to plan and build, including obtaining regulatory approvals, assembling huge work forces and manufacturing complex pieces. Those best positioned, he says, would be the developers that have well-established operations. Those at earlier stages would be looking at a long road back. He also points to U.S. president-elect Barack Obama as another possible impediment to growth. Canada's "dirty oil" could be in for a rougher ride if he takes a harder line on greenhouse gas emissions.
Peter Tertzakian, chief energy economist at ARC Financial Corp. and author of the best-seller "A Thousand Barrels a Second" says the oil sands frenzy of the last few years is history. He says growth will moderate significantly from earlier projections. "Companies, when they make their investment decisions going forward, will weigh all the issues, including the cost inflation that arises from aggressive overinvestment in a province that only has three million people, in a remote area that has got a lot of environmental baggage." Those deciding whether to expand in the business will be more sensitive to the potential for an oil crash, one of the lessons of the financial crisis, Mr. Tertzakian says. And they will also be thinking harder about whether they want to be in a business with such a poor image.
"The environmental lobby has done a marvelous job of disadvantaging the oil sands from an environmental perspective," Mr. Tertzakian says. "That is the reality. It's damaged goods and it is a high-cost producer." There is no question a slowdown in the oil sands would take the edge off Canada's economic growth, Mr. Tertzakian says. "Is that a bad thing? Maybe not, because the country was becoming excessively concentrated on resources." While the Alberta government would be among the biggest losers if the oil sands stall, that possibility was not discussed in a provincial energy strategy announced Thursday. The strategy assumes growth will continue.
Alberta Energy Minister Mel Knight played up the silver lining of a slowdown in lowering costs and easing labour shortages. "There are a number of issues, the global economic picture is one of the largest ones," Mr. Knight said. "We are certainly feeling that the price of the commodity is not conducive to any new investment at this point. But one of the major problems now, besides the economic issue, is the situation around regulatory uncertainty. They are looking for some alignment with respect to emissions regulations." Mr. Knight acknowleges that if Alberta's projected revenue stream from the oil sands deteriorates, the provincial budget would be adjusted. The attitude adjustment would have to include bringing back some of the conditions that kicked off the oil sands frenzy 11 years ago. When Suncor announced its $2.2-billion Millennium expansion in 1997, and Syncrude followed with a $6-billion plan, the reaction in the markets and elsewhere was exuberance. At Suncor, executives ran a betting pool over how much the stock would rise. CEO Rick George bet $1. The stock jumped $7.
Canada's oil sands production at the time was about 300,000 b/d. Suncor had started its plant in 1967, Syncrude opened in 1978 and Imperial Oil Ltd.'s thermal operation at Cold Lake started in 1985. The new investments were made possible by major changes: After years of trying, Suncor and Syncrude improved costs and productivity by adopting new technologies and phasing out bucketwheels and conveyor belts that were prone to breaking down in favour of trucks and shovels, the method that remains in use today. Operating costs came down from as much as S$40 a barrel to about $11 to $12. Another change was convincing the investment community of the oil sands' potential; so little was known of the deposits that talk about their size was met with disbelief. The most significant change, however, was an improvement in fiscal terms, the outcome of the 1995 National Oil Sands Task Force. The initiative pulled together all levels of government, as well as developers, trade unions and suppliers, and got them to buy into the benefits of working together at a time of weak employment and economic growth.
"Because that process engaged so many people, it enabled us to set the table for success," Mr. Carter says. "And we began to see the investment happening. It made believers even out of those who might not have been." Alberta, under Premier Ralph Klein, agreed to a generic royalty regime that reduced payments substantially, to a minimum 1% before project payout and 25% of net revenue after payout. The federal government, under Liberal Prime Minister Jean Chretien and Natural Resources Minister Anne McLellan, pitched in with a fast write-off of capital investment through the Accelerated Capital Cost Allowance. As it turned out, the task force underestimated how much spending would pour into oil sands development -- $21-billion to $25-billion over 25 years. Before oil prices collapsed, the oil sands were on course for $150-billion in spending. But those diverse interests splintered in the ensuing years as oil prices soared and the oil sands became a target of oil multi-nationals shut out from other basins by governments nationalizing their oil industries.
The federal government, under Tory Prime Minister Stephen Harper, cancelled the Accelerated Capital Cost Allowance in 2007. The Alberta government, under Premier Ed Stelmach, is increasing oil sands royalties next month to a base rate of 1% when the oil price is $55 a barrel and 9% when oil is at $120 a barrel or higher. The post-payout rate starts at 25% when oil is at $55, increasing to 40% when oil is at $120 or higher. Both levels of government have added further costs to mitigate greenhouse gas emissions. And more environmental costs are coming as the industry installs technology to capture and store carbon and clean up its tailings ponds. Meanwhile, labour costs have skyrocketed, both as a result of union agreements and competition between developers for scarce staff. Service providers, from engineering firms to labour camp builders, have also increased their prices.
The result is that the cost of adding a barrel of capacity has risen from the $20,000 estimated by Suncor in 1997, to $180,000 this summer for Petro-Canada's Fort Hills project. Petro-Canada has cancelled part of the project and put the rest on hold, while trying to renegotiate contracts. Mr. Carter is confident the sector is resilient enough that it will find an affordable way to reduce its environmental footprint. As the chairman of the Carbon Capture Council of Alberta, a team from industry and academia assembled by the province to guide carbon capture and storage projects with the help of $2-billion in provincial funding, Mr. Carter is keen to help the oil sands continue. Still, he sees how fragile it all is. "Sometimes things are taken for granted after they have been so strong for so long," Mr. Carter says.
"We need to remember that this is expensive oil."
AIG Said to Offer Retention Payment to Bigger Group of Workers
American International Group Inc., the insurer under fire for paying 168 executives not to quit after a government takeover, is giving retention awards to at least 2,000 more employees, according to a person familiar with the matter. The "retention bonus" equals as much as a year’s salary and recipients were ordered to keep the payment secret, said the person, who declined to be named because the plan was labeled confidential. Awards were offered to as much as 10 percent of staff at businesses that are for sale, including plane-leasing and insurance units in the U.S. and overseas, the person said. AIG said in September that 130 executives will get awards, just days after the New York-based firm got a government rescue package that now totals $152.5 billion.
AIG Chief Executive Officer Edward Liddy told Congress last week the payments will go to 168 people, with some getting as much as $4 million. "If it has the money to give these disguised bonuses to thousands of its employees, then I think it is time for Mr. Liddy to write a check to the federal government repaying the money it took," said Representative Elijah Cummings, a Maryland Democrat, in a statement yesterday. Nicholas Ashooh, an AIG spokesman, said life insurance unit chiefs were allowed to give retention awards to as much as 10 percent of their staffs, and selected "closer to 7 or 8 percent" of workers. There are about 37,000 employees in AIG life units around the world, Ashooh said. A typical payment is equal to about six months of salary, he said.
"It’s not a senior executive program, it’s for the employees running the businesses day to day, around the world," Ashooh said yesterday. "We want to maintain the value of the businesses so we get the most value and repay the government." Ashooh said there "may be" retention programs for other AIG subsidiaries that are for sale. The insurer’s plane-leasing unit isn’t part of the life insurance program, Ashooh said. Units that AIG is trying to sell employ about 70,000 people, which means that as many as 7,000 could receive payments, the person said. Cummings said he felt deceived by the company. "Liddy told me in writing that his company was awarding 168 retention payments," he said. "There is no way around that figure. I cannot imagine Mr. Liddy accidentally overlooking a few thousand employees targeted to receive these funds." Liddy is trying to sell AIG businesses to repay loans included in the government rescue which entitles the U.S. to a 79.9 percent stake. He said in a letter last week to Cummings that payments to executives are to help maintain the value of units for sale.
The insurer requires recipients to keep the payments confidential, according to a contract obtained by Bloomberg News. Exceptions included financial and legal advisers, as well as immediate family. If awardees tell other outsiders about the existence of the program, they will forfeit future payments, the contract says. "All of our efforts with respect to our retention program have been made in the light of day," Liddy said in the Dec. 5 letter to Cummings, who serves on the House Committee on Oversight and Government Reform. Cummings has criticized the retention pay, saying AIG misled taxpayers who now own most of the company and that it’s unnecessary to give so much cash to retain people when job markets are weak. U.S. finance companies have announced 220,506 job cuts this year through November, placement firm Challenger Grey & Christmas Inc. said in a Dec. 3 report. Assistant Treasury Secretary Neel Kashkari, who supervises the U.S. financial rescue program, has called some of AIG’s bonuses "excessive for a failing institution."
In one instance, an AIG manager of an overseas unit told his superior that the payments weren’t needed because employees were unlikely to leave, the person said. The manager was overruled, said the person. Most of the managers will get the first installment this month or in January and must stay through 2009 or early 2010 to get the full amount, the person said. The 168 managers in the first round get awards of 100 percent to 300 percent of their annual salaries, the person said. Those payments were approved by an AIG compensation committee two days after the company’s Sept. 16 bailout, the insurer has said. That rescue included an $85 billion loan that saved AIG from bankruptcy, shortly after the government allowed investment bank Lehman Brothers Holdings Inc. to fail. The insurer’s rescue package was expanded last month after continuing losses from credit-default swaps, the contracts protecting against losses on mortgage bonds, and other bets made on U.S. housing. The company has posted four straight quarterly losses totaling about $43 billion. AIG, under pressure from lawmakers to limit executive compensation, said on Nov. 25 that Liddy, 62, will receive $1 in salary through 2009. The company said it will freeze salaries and forgo 2008 bonuses for seven top leaders.
Ilargi: Wow, I didn't know it was that bad already. These are not offical rates, this is the man in the street discounting the future of an entire currency.
Pound slips below euro on Britain's high streets
The government is facing a growing backlash over its rescue package for the economy after the pound slumped to below parity with the euro on British high streets and at airports for the first time since the single European currency was launched a decade ago. Sterling's decline to a value of less than a euro, after commission charges, is seen by economists and opposition politicians as a pivotal 'psychological moment' - and evidence of declining faith in the British economy on global currency markets.
Last night, as skiing operators and other holiday companies across the UK reported customers shunning expensive trips in favour of cut-price deals, Currency Exchange on London's Oxford Street was selling euros for as little as €1.0532 to the pound. After commission and a handling fee, however, €18 cost The Observer £19.61, an exchange rate of €0.918 to the pound. Tourists at Birmingham, Liverpool and Luton airports were also getting less than €1 to the pound after sterling tumbled in value every day last week. Customers changing £200 at Birmingham and Liverpool were last night receiving just €197.13 from Travelex counters, while those at the ICE bureau de change at Luton took away €199.63 - an exchange rate of €0.986 to the pound at Birmingham and Liverpool and €0.998 at Luton.
Tories and Liberal Democrats laid the blame for the pound's collapse firmly at the door of Gordon Brown. Philip Hammond, shadow Chief Secretary to the Treasury, said the Prime Minister's decision in the pre-Budget report to let borrowing soar to fund £20bn of tax cuts had severely damaged - rather than boosted - economic confidence and people's willingness to spend. 'Hundreds of thousands of Britons find themselves grounded as the pound falls below one euro in value,' he said. 'This is the currency market's verdict on Gordon Brown's economic plans and his decision to go on a borrowing binge.'
Vince Cable, the Liberal Democrat Treasury spokesman and deputy leader, said that while the immediate cause of sterling's fall had been the rapid drop in interest rates from 4.5 per cent to 2 per cent since last month - and the expectation that they would drop further - the reason the cuts had been necessary was the result of the government's failure. 'Behind it all is a sense that we are a weak economy with a much bigger housing bubble than other countries, and Brown failed to do anything to address that.' Cable argued that sterling's vulnerability strengthened the case in the medium to long term for the UK to be 'locked into a bigger currency block' - meaning entry into the euro.
The case for euro entry was also put by leading economist and commentator Will Hutton. 'The pound buying less than a euro is an important psychological moment. Britain first doubted the euro would be launched, then whether it would survive, then whether it would ever become a serious currency,' said Hutton. 'Even today people are rushing to pronounce its death warrant. Now it is plainly the world's second currency after the dollar. As the pound becomes more volatile and less valuable, the euro will be seen increasingly as a safe haven - a zone in which both British industry and the City of London would flourish. The question is not if Britain will join, but when - and how many working lives and businesses will be wrecked by ideological opposition before it does.'
New opinion polls today suggest Brown is not sustaining his 'bounce' of recent weeks. A ComRes poll for the Independent on Sunday showed Labour on 36 per cent, still behind the Tories on 37 per cent - the same figures as in a survey for the daily Independent 10 days ago. The poll also showed 52 per cent agreeing that the recent fall in the value of the pound was evidence that 'Gordon Brown's economic plans probably won't work', against 39 per cent who disagreed. A YouGov survey for the Sunday Times showed the standing of the parties virtually unchanged from a similar poll last month. The Tories increased their lead from 5 per cent to 6 per cent, putting the Tories on 41 per cent (unchanged), Labour on 35 per cent (down 1 per cent) and the Liberal Democrats on 15 per cent (up 1 per cent).
Both Tories and Liberal Democrats are determined to maintain the pressure on Brown, following his slip of the tongue at Prime Minister's Questions in the Commons last Wednesday in which he claimed to have 'saved the world' from economic collapse. The Conservatives dug up a quote from Brown's time as shadow Chancellor when he said 'a weak currency is a sign of a weak economy, which is the sign of a weak government'. Labour ministers have fired back, claiming the Tories have no answers to the economic crisis and are a 'do-nothing party'.
The Treasury last night refused to comment on sterling's fall and said there was no prospect of entering the euro in the near future. Official rates showed the pound was worth €1.11 yesterday. At its high point against the euro in May 2000, a pound was worth €1.746. The pound has fallen 17 per cent against the euro this year as the Bank of England has cut rates from a peak of 5.75 per cent to a more-than-50-year low of 2 per cent. Interest rates in the eurozone remain higher at 2.5 per cent, despite a 0.75 per cent cut by the European Central Bank last week.
China to Raise Money Supply 17% in 2009, Boost Loans
China aims to increase its money supply 17 percent in 2009 and encourage lending to boost domestic consumption and buoy growth in the world’s fourth-largest economy. M2, the broadest measure, including cash and all deposits, will increase 17 percent, the State Council said in a statement on its Web site. The government will also suspend the issue of three-year central-bank notes and aims to increase total financial-institution lending by 4 trillion yuan ($584 billion) next year, the statement said. The People’s Bank of China is taking measures to boost liquidity and bank lending that the economy needs to sustain growth amid a global recession. The government last month announced 4 trillion yuan of spending through 2010 to spur more investment by municipalities and enterprises.
"Policy at the moment is generally being focused on boosting liquidity in the banking sector and making sure that is lent to fund investment in infrastructure projects," Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong, said today. Money supply gained 15 percent in October from a year earlier. China cut interest rates by the most in 11 years last month and has lowered the proportion of deposits that lenders must set aside as reserves. It has also scrapped temporary loan controls and sold fewer bills to try to boost liquidity. China will boost policy-directed bank loans over the 2008 level of 100 billion yuan and will aim to increase total lending by financial institutions by 4 trillion yuan, said the statement, dated Dec. 8 and posted on the Web site late yesterday. One-year and three-month central bank notes will be issued less frequently, the statement said.
The government will encourage the expansion and development of corporate bonds, short-term financing bonds and medium-term notes, the statement said. Preference will be given to the issuance of bonds that fund infrastructure, post-earthquake construction and environmental protection, it said. Banks should "give lending support to companies with relatively sound fundamentals, relatively good credit records, who are competitive, who have a market, who have orders but are having temporary operating or financial difficulties," the statement said. The government told banks to lend more to support areas in line with those promoted by government policy, including infrastructure, rural development, high technology and environmental technology. It also advised them to limit lending to processors and other industries that are big energy consumers.
"Commercial banks and other financial institutions should continue to deepen reforms of all kinds, improve management, internal controls and risk-prevention systems," the statement said. "They should manage a balance between using finance to boost economic growth and guarding against financial risk; they should avoid being blindly reluctant to lend during an economic downturn." The statement also said new futures for commodities, including products including steel and grain, should be introduced to meet the needs of economic development.
The government will "take effective measures to stabilize the stock market," the State Council statement said. Mainland China’s benchmark CSI 300 Index has lost 63 percent this year, making it the second-worst performer in Asia. China will "increase flexibility" for lowering lending rates and also increase flexibility in foreign-exchange rates as it aims to maintain a "stable, balanced" yuan exchange rate, the statement said.
Financial journalists charged with telling readers too much
At the start of the decade, when US energy giant Enron collapsed after reporting fraudulent profits, and a string of smaller rivals including phone company WorldCom followed suit, financial journalists were criticised for failing to uncover the extent of their deceit. Now, as the world's biggest banks struggle to stay afloat, crippled by the most serious financial crisis since the 1930s, business reporters are being attacked for a different reason, accused by some, including a powerful group of MPs, of destabilising the economy by revealing the extent of the problems at Britain's biggest banks. Rather than telling their readers too little, as they were in the wake of Enron, journalists are now charged with telling them too much.
The Treasury select committee, chaired by Labour MP John McFall, announced last week that it would investigate the part journalism has played in the current banking crisis - as part of a wider inquiry into how the saga unfolded - examining 'the role of the media in financial stability and whether journalists should operate under any form of reporting restrictions during banking crises'. It will hear evidence from media organisations, including the BBC and major newspaper groups, in the new year. In truth, the power of the press means it is unlikely new rules will be introduced, but whenever politicians talk about imposing limitations on the media, however quietly, protests from news organisations inevitably follow.
Jeremy Hillman, editor of the BBC's business and economics unit, describes the idea as 'the most spectacular case of shooting the messenger you can imagine. It would be a huge mistake at this time more than any other in our recent history. The public has an absolute right to know about weaknesses and structural problems at Britain's banks. 'Why shouldn't the average person have access to the same information as those in the know? How many senior bankers invested in Northern Rock in the months before its nationalisation? Not very many, I expect.'
The problem is that, like most financial institutions, banks cannot function unless their customers are convinced their savings are safe. Revealing the extent of their vulnerability can prompt a crisis of confidence, and ultimately a corporate collapse, while keeping that information private could avert a run on a bank. News blackouts are not uncommon in criminal cases, and the police often co-operate with the media when lives are at stake. At a time of national economic crisis, when fresh revelations about the scale of the banks' problems can cause widespread stock market panic and undermine faith in the banking system, there may be a case for introducing similar arrangements in the financial sphere.
The sight earlier this year of hundreds of customers queuing outside Northern Rock, desperate to withdraw their savings, was a dramatic reminder of the power of the media, prompting calls from politicians, and some newspapers, for an investigation into how Robert Peston, the BBC business editor widely credited with breaking the story of Northern Rock's talks with the government, was able to reveal that delicate negotiations were taking place. The BBC has been forced to defend Peston, whose coverage of the credit crunch has been widely praised, but the dilemma he faced when reporting the Northern Rock story will be familiar to every other financial journalist. In theory, every business story could potentially have a dramatic, and immediate, effect on the fortunes of publicly quoted companies simply because their shares can be bought and sold.
Share prices can move dramatically on the back of innuendo and speculation, and unscrupulous investors can make money by 'shorting' shares and attempting to drive down their value by planting rumours on internet chat rooms or in the pages of the financial press in an effort to make a quick buck. No reputable journalist would repeat those claims without checking them first, but for market columns and chat rooms, reporting rumours is part of the job. The Press Complaints Commission, the newspaper industry's self-regulation body, also has a voluntary code of practice that includes detailed instructions on how financial journalists should conduct themselves.
After the 'City Slickers' scandal, when two Daily Mirror journalists, James Hipwell and Anil Bhoyrul, were convicted of conspiracy to breach the Financial Services Act by ramping shares they owned in the pages of the paper, the PCC strengthened its code of conduct, drawing up new guidelines for financial journalists about what they could and couldn't write. They state that journalists should declare shareholdings that are relevant, and avoid writing about companies they invest in wherever possible.
The BBC's Hillman says: 'Our journalistic [criteria] are: 'Is it true? Would our audience be interested in it? And is it crucial information? If so, we publish [or broadcast]. 'Who has the right to censor what we're doing and who would benefit?' he adds. The answer, Hillman says, is often the same institutions who were able to conceal the extent of their exposure to the American sub-prime market from regulators and governments for so long. Responsible reporting could prevent that from happening again, and placing obstacles in the path of journalists would ultimately do the public a disservice.
Ilargi: 70% of Athens’ 18-25 year olds are without a job. This is not about thugs, this is full-blown European economic mayhem.
In Athens, middle-class rioters are buying rocks. This chaos isn't over
How much tear gas can a nation take? How many stones can it collect? To ask such questions of an EU member state that is supposed to be as sophisticated as it is modern might seem far-fetched, even silly. To ask them four years after that country basked in the glory of staging one of the most successful Olympic Games might be considered absurd. But yesterday, as Greece entered a second week of pitched battles between rock-throwing protesters and riot police - with security forces turning to Israel and Germany to replenish depleted reserves of toxic gases to contain the angry crowds - such questions did not seem foolish. Or, I'm sad to say, remotely absurd.
Athens is in a mess and it's not just the rubble or burned-out buildings or charred cars and firebombed rubbish bins and smashed pavements that now stand as testimony to unrest not seen since the collapse of military rule in 1974. Twenty-two years after I moved to Greece I have looked into eyes full of anger and despair. At night, as marauding mobs of Molotov-cocktail wielding youths have run through the city's ancient streets, I have closed the shutters of the windows to my home. My friends have done the same. Those of us who live here - who have seen how frayed the fabric of public order can become - now know, in no uncertain terms, that the orgy of violence that has gripped this beautiful land masks a deeper malaise. It is a sickness that starts not so much at the top but at the bottom of Greek society, in the ranks of its troubled youth.
For many these are a lost generation, raised in an education system that is undeniably shambolic and hit by whopping levels of unemployment (70 per cent among the 18-25s) in a country where joblessness this month jumped to 7.4 per cent. If they can find work remuneration rarely rises above €700 (this is, after all, the self-styled €700 generation), never mind the number of qualifications it took to get the job. Often polyglot PhD holders will be serving tourists at tables in resorts. One in five Greeks lives beneath the poverty line. Exposed to the ills of Greek society as never before, they have also become increasingly frustrated witnesses of allegations of corruption implicating senior conservative government officials and a series of scandals that have so far cost four ministers their jobs.
With these grievances in mind, young people (who would not normally see themselves as revolutionaries and are a far-cry from the 'extremists' Prime Minister Costas Karamanlis says are behind the disturbances) have begun stockpiling stones, rocks and crushed marble slabs from Salonika in the north to the resort islands of Corfu and Crete in the south. They have also started selling them on - at three stones a euro - to other protesters whose parents may live in Hollywood-style opulence, or indeed on the breadline, but who are bonded by a common desire to hurl them at that hated symbol of authority: the police. The ferocity of the riots has numbed Greeks. Yet I write this knowing that the protests are not going to end soon. Greece's children have been startled by their own success - and by reports of copycat attacks across Europe - and almost unanimously they believe they are on a winner.
'It's like a smouldering fire,' says Yiannis Yiatrakis who preferred to leave his study of abstract mathematics to take to the streets of Athens last week. 'The flames may die down but the coals will simmer. One little thing, and you'll see it will ignite again. Ours is a future without work, without hope. Our grievances are so big, so many. Only a very strong government can stop the rot.' So how did it come to this? How did a country more usually associated with sun-kissed beaches and the good life erupt into a spasm of destruction that has shaken it to the core? How could an entire generation - most of whom were not even born when I arrived here - go unnoticed and yet nurture such burning rage? And who is to blame? Greek society, the state, or a political system running on empty that no longer inspires confidence or trust?
Like so many, I was forced to ask all these questions last week as I walked through scarred streets that in more ways than one have become their battlefield. My hope is that those in power, the crooked politicians, the corrupt judiciary, the scandal-ridden church, will ultimately tour the same routes. It began with one death, one bullet, fired in anger by a hot-headed policemen in the heart of Athens' edgy Exarchia district on last Saturday. At the time most Greeks - including those who are compelled financially to live with their parents into their late thirties - were sitting in front of their TV sets or were out at their local tavernas. No one thought they would wake up to a revolt in the streets. But the death of Alexandros Grigoropoulos, a tousled-haired teenager from the rich northern suburbs was the match that lit the inferno. If the killing had happened in any of the capital's wealthy satellite suburbs, the reaction might well have been more subdued.
Exarchia, however, is Athens' answer to Harlem (without the racial component). It is here that anarchists, artists, addicts, radical leftists, students and their teachers rub shoulders in streets crammed with bars and cafes that are covered with the graffiti of dissent. It is Athens's hub of political ferment; a backdrop of tensions between anti-establishment groups and the police. Within an hour of the boy's death thousands of protesters had gathered in Exarchia's lawless central square screaming, 'cops, pigs, murderers,' and wanting revenge. At first, it is true, the assortment of self-styled anarchists who have long colonised Exarchia piggy-backed on the tragedy, seeing it as the perfect opportunity to live out their nihilistic goals of wreaking havoc. But then middle-class kids - children had got good degrees at universities in Britain but back in Greece were unable to find work in a system that thrives on graft, cronyism and nepotism - joined the protests and very quickly it became glaringly clear that this was their moment, too.
Theirs was a frustration not only born of pent-up anger but outrage at the way ministers in the scandal-tainted conservative government have also enriched themselves in their five short years in power. Now the million-dollar question is whether protests that started so spontaneously can morph into a more organised movement of civil unrest. What is certain is that Karamanlis's handling of the disturbances will go down as a case study of what not to do in a crisis. Seemingly disoriented and removed, the government's popularity has dropped dramatically over the past week. Even diehard conservatives have called me to say they'll be jumping ship. So far, Karamanlis has roundly rejected demands that he call early elections which means Greece will be saddled with a lame-duck government (the New Democrats are anyway hampered by a razor-thin one-seat majority in the 200-member parliament) for several months yet. With daily demonstrations planned in the weeks ahead Greek youth are not going to give in easily. Far from calming spirits, the tear gas that has been used so liberally against them has only stoked their ire.
A fragile democracy
From the bitter civil war that raged between 1946 and 1949 to the 1967-74 military dictatorship, Greece's postwar history has been more tumultuous than most. The defeat of the communist EAM party with the help of British and US forces in 1949 led to decades of authoritarian right-wing rule. Thousands of leftwingers were imprisoned or sent to labour camps. The right-left divide was later reinforced on 21 April 1967 when in a coup a group of US-backed junior officers, known as the Colonels, seized power.
In a spontaneous uprising on 17 November 1973, students at Athens Polytechnic rebelled against the regime, leading to the Colonels' fall in July 1974. The restoration of democracy under the late Konstantinos Karamanlis laid the foundations for a reconciliation between left and right under Andreas Papandreou, who introduced socialist government to Greece in 1981.
HUD Pick Foresaw Subprime Crisis In '04
Barack Obama's pick for HUD -- former New York City Housing Commissioner Shaun Donovan -- was one of the earliest public officials to foresee the magnitude and destructive capacity of the subprime crisis. In the middle of 2004, I sat down with Donovan (I was at Newsday at the time) for a chat about Mayor Michael Bloomberg's initiative to tackle the shortage of low- and middle-income housing in the city.
To my surprise, Donovan brushed aside my questions about the city's initiatives and began taking at length about the coming "flood of foreclosures" he anticipated among highly leveraged apartment buildings purchased by recent immigrants -- and a looming subprime crisis for one- and two-family homeowners in up-and-coming neighborhoods in southeast Queens and central Brooklyn. I left the meeting a little shaken: At the time housing prices in previously depressed parts of the city were booming and the city had been able to sell off almost of all its once-massive stock of foreclosed properties to private owners and investors. The future looked bright to almost everyone -- but not to Donovan, who was planning for the looming disaster.
Bloomberg's housing program has received mixed marks from advocates, but Donovan is extremely well regarded among groups that have often clashed with City Hall, in part, because he's focused on improving conditions in rental housing at a time when many officials spurned such initiatives. And, unlike many Clinton-era housing officials, the 42-year-old financing expert never subscribed to the prevailing (and deeply misguided) belief that low-income homeownership was the panacea for all the nation's housing ills.
Bush sneaks through host of laws to undermine Obama
After spending eight years at the helm of one of the most ideologically driven administrations in American history, George W. Bush is ending his presidency in characteristically aggressive fashion, with a swath of controversial measures designed to reward supporters and enrage opponents. By the time he vacates the White House, he will have issued a record number of so-called 'midnight regulations' - so called because of the stealthy way they appear on the rule books - to undermine the administration of Barack Obama, many of which could take years to undo.
Dozens of new rules have already been introduced which critics say will diminish worker safety, pollute the environment, promote gun use and curtail abortion rights. Many rules promote the interests of large industries, such as coal mining or energy, which have energetically supported Bush during his two terms as president. More are expected this week. America's attention is focused on the fate of the beleaguered car industry, still seeking backing in Washington for a multi-billion-dollar bail-out. But behind the scenes, the 'midnight' rules are being rushed through with little fanfare and minimal media attention. None of them would be likely to appeal to the incoming Obama team. The regulations cover a vast policy area, ranging from healthcare to car safety to civil liberties. Many are focused on the environment and seek to ease regulations that limit pollution or restrict harmful industrial practices, such as dumping strip-mining waste.
The Bush moves have outraged many watchdog groups. 'The regulations we have seen so far have been pretty bad,' said Matt Madia, a regulatory policy analyst at OMB Watch. 'The effects of all this are going to be severe.' Bush can pass the rules because of a loophole in US law allowing him to put last-minute regulations into the Code of Federal Regulations, rules that have the same force as law. He can carry out many of his political aims without needing to force new laws through Congress. Outgoing presidents often use the loophole in their last weeks in office, but Bush has done this far more than Bill Clinton or his father, George Bush sr. He is on track to issue more 'midnight regulations' than any other previous president.
Many of these are radical and appear to pay off big business allies of the Republican party. One rule will make it easier for coal companies to dump debris from strip mining into valleys and streams. The process is part of an environmentally damaging technique known as 'mountain-top removal mining'. It involves literally removing the top of a mountain to excavate a coal seam and pouring the debris into a valley, which is then filled up with rock. The new rule will make that dumping easier. Another midnight regulation will allow power companies to build coal-fired power stations nearer to national parks. Yet another regulation will allow coal-fired stations to increase their emissions without installing new anti-pollution equipment.
The Environmental Defence Fund has called the moves a 'fire sale of epic size for coal'. Other environmental groups agree. 'The only motivation for some of these rules is to benefit the business interests that the Bush administration has served,' said Ed Hopkins, a director of environmental quality at the Sierra Club. A case in point would seem to be a rule that opens up millions of acres of land to oil shale extraction, which environmental groups say is highly pollutant. There is a long list of other new regulations that have gone onto the books. One lengthens the number of hours that truck drivers can drive without rest. Another surrenders government control of rerouting the rail transport of hazardous materials around densely populated areas and gives it to the rail companies.
One more chips away at the protection of endangered species. Gun control is also weakened by allowing loaded and concealed guns to be carried in national parks. Abortion rights are hit by allowing healthcare workers to cite religious or moral grounds for opting out of carrying out certain medical procedures. A common theme is shifting regulation of industry from government to the industries themselves, essentially promoting self-regulation. One rule transfers assessment of the impact of ocean-fishing away from federal inspectors to advisory groups linked to the fishing industry. Another allows factory farms to self-regulate disposal of pollutant run-off.
The White House denies it is sabotaging the new administration. It says many of the moves have been openly flagged for months. The spate of rules is going to be hard for Obama to quickly overcome. By issuing them early in the 'lame duck' period of office, the Bush administration has mostly dodged 30- or 60-day time limits that would have made undoing them relatively straightforward. Obama's team will have to go through a more lengthy process of reversing them, as it is forced to open them to a period of public consulting. That means that undoing the damage could take months or even years, especially if corporations go to the courts to prevent changes. At the same time, the Obama team will have a huge agenda on its plate as it inherits the economic crisis. Nevertheless, anti-midnight regulation groups are lobbying Obama's transition team to make sure Bush's new rules are changed as soon as possible. 'They are aware of this. The transition team has a list of things they want to undo,' said Madia.
Bush's midnight regulations will:
• Make it easier for coal companies to dump waste from strip-mining into valleys and streams.
• Ease the building of coal-fired power stations nearer to national parks.
• Allow people to carry loaded and concealed weapons in national parks.
• Open up millions of acres to mining for oil shale.
• Allow healthcare workers to opt out of giving treatment for religious or moral reasons, thus weakening abortion rights.
• Hurt road safety by allowing truck drivers to stay at the wheel for 11 consecutive hours.
Final Days Fire Sale
Imagine if President Bush, on his last day in office, invited his friends to lift the Lincoln portrait from the White House Dining Room, take the 18th- century furniture from the Map Room and — for good measure — poison the Rose Garden on the way out. In essence, he is doing the same thing this month with land that belongs to every American — the magical redrock country of the Southwest. Well before it was a bumper sticker and a chant at Sarah Palin rallies, "drill, baby, drill" became the overriding mission of the political hacks who oversee more than 200 million acres of public land for Bush. At a frantic pace, they have opened up to oil and gas leasing canyons of golden slickrock, mesas once known only to hunters and pronghorn antelope, and little hideaways near the open-aired art galleries of the Anasazi.
Take what you want, they said — and get while the getting is good. It was a plunderfest that produced a gangster culture, with dozens of high-level Interior Department employees exchanging sex, cocaine and gifts with the industry they were supposed to be doing arms-length business with, according to a scathing and quickly forgotten report this year by the agency’s inspector general. At the time of the report, with gas reaching $4 a gallon, many people shrugged and said we need the oil — drill, baby, drill. Now gas is selling for a pittance, but that hasn’t stopped the fire sale. Everything must go!
On Election Day, the Bush administration announced it would open 360,000 acres of public land in Utah to oil and gas leasing, including about 100,000 acres near Arches and Canyonlands National Parks, and Dinosaur National Monument. As with the $700 billion bailout that Bush insisted had to be given to the very bankers, insurance companies and other tassel-loafed failures who got us into the economic meltdown, the president now wants every dead-ender in the energy business to have one last treat. Solitude and ageless stone may not be commodities as easily quantified as a couple of thousand barrels of oil. But to the American inheritance, they are the equivalent of those first-edition Audubon books and presidential portraits in the White House.
The administration never even consulted with the parks before announcing they would have oil and gas rigs on their borders. The giveaways went far beyond public land. For the coal industry, the parting gift was a federal rule that makes it easier to dump mining waste into streams. Anyone who has spent time in Appalachia of late has seen the handiwork — entire mountaintops lopped off in an end-of-days rush for a dirty fossil fuel. On Thursday, Bush handed out another goodie: a rule that largely frees federal agencies from having to consult independent biologists before constructing something that could lead to the extinction of birds, fish or other endangered species.
Following a storm of outrage by park officials and the incoming Obama team, the government has now backed off from some of the more egregious sales in the Southwest. But on the upcoming Friday before Christmas, it will still auction off more than 150,000 acres near some of the most stunning scenery in the world. In a concession, officials promised that oil and gas operations would be camouflaged — the rigs and drills painted a desert red so that visitors to the wildlands of Utah would not have industrial clutter marring their sunset picture.
It would be one thing if we needed the fuel. Of nearly 9,000 oil and gas permits approved on public land in Utah, barely a third of them have been drilled. The way this game works is that oil companies buy the leasing rights — in some case for as little as $2.50 an acre — then wait for Saudi Arabia to force another oil price spike. Then they drill. And the impact on price or domestic supply? Nothing. Even if all the accessible oil and gas were taken from federal land in Utah, it would have zero impact on prices, according to several studies.
But the loss is incalculable — "geologic architecture that has inspired our American character," and places where "the curvature of the earth is not only seen but felt," as the ever-lyrical Terry Tempest Williams wrote in a recent essay in The Los Angeles Times. So why do it? Because they still can. The only urgency is Jan. 20. Eight years ago, in an act of frat-boy vandalism during their departure from the White House, members of Bill Clinton’s staff ripped W’s off computer keyboards and glued shut some shelves. If only Bush could revert to his college character type, and leave us with such a benign exit mark.
A Champion of Wall St. Reaps the Benefits
As the financial crisis jolted the nation in September, Senator Charles E. Schumer was consumed. He traded telephone calls with bankers, then became one of the first officials to promote a Wall Street bailout. He spent hours in closed-door briefings and a weekend helping Congressional leaders nail down details of the $700 billion rescue package. The next day, Mr. Schumer appeared at a breakfast fund-raiser in Midtown Manhattan for Senate Democrats. Addressing Henry R. Kravis, the buyout billionaire, and about 20 other finance industry executives, he warned that a bailout would be a hard sell on Capitol Hill. Then he offered some reassurance: The businessmen could count on the Democrats to help steer the nation through the financial turmoil. "We are not going to be a bunch of crazy, anti-business liberals," one executive said, summarizing Mr. Schumer’s remarks. "We are going to be effective, moderate advocates for sound economic policies, good responsible stewards you can trust." The message clearly resonated. The next week, executives at firms represented at the breakfast sent in more than $135,000 in campaign donations.
Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer of an industry that is his hometown’s most important business. An exceptional fund raiser — a "jackhammer," someone who knows him says, for whom " ‘no’ is the first step to ‘yes,’ " — Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent. That money helped the Democrats gain power in Congress, elevated Mr. Schumer’s standing in his party and increased the industry’s clout in the capital. But in building support, he has embraced the industry’s free-market, deregulatory agenda more than almost any other Democrat in Congress, even backing some measures now blamed for contributing to the financial crisis. Surely other lawmakers took the lead on efforts like deregulating the complicated financial instruments called derivatives, which are widely seen as catalysts to the crisis. But in a somewhat less visible way, Mr. Schumer, a member of the Banking and Finance Committees, repeatedly took other steps to protect industry players from government oversight and tougher rules, a review of his record shows. Over the years, he has also helped save financial institutions billions of dollars in higher taxes or fees. He succeeded in limiting efforts to regulate credit-rating agencies, for example, sponsored legislation that cut fees paid by Wall Street firms to finance government oversight, pushed to allow banks to have lower capital reserves and called for the revision of regulations to make corporations’ balance sheets more transparent.
"Since the financial meltdown, people have been asking, ‘Where was Congress? Why didn’t they see this coming? Why didn’t they provide better oversight?’ " said Barbara Roper, director of investor protection for the Consumer Federation of America. "And the answer for some, including Senator Schumer, is that they were actually too busy pursuing a deregulatory agenda. Their focus was on how we have to lighten up regulation on Wall Street." In recent weeks, Mr. Schumer has worked closely with the Bush administration to try to mitigate the damage to New York’s financial institutions. And as members of Congress and President-elect Barack Obama have called for new regulations to prevent future upheavals, Mr. Schumer has endorsed the need for reforms while still trying to make them palatable for Wall Street. Calling himself "an almost obsessive defender of New York jobs," Mr. Schumer has often talked of the need to avoid excessive regulation of an industry that is increasingly threatened by global competition. At the same time, Mr. Schumer has cast himself as a populist who looks out for the middle class. In an interview, Mr. Schumer said that until the recent market turmoil, he did not fully appreciate how much risk Wall Street had assumed and how much damage its practices could inflict on ordinary Americans. "It is a learning process, no question about it, an evolution," he said, adding that he now believed investors and average consumers must be better protected. But he defended his record.
"Wall Street and Main Street are tied together," he said. "Often times, they are not in conflict. When they are in conflict, I tend to side with Main Street." While Mr. Schumer has taken some pro-consumer stances, his critics fault him for tilting too far toward Wall Street in balancing his responsibilities. "He is serving the parochial interest of a very small group of financial people, bankers, investment bankers, fund managers, private equity firms, rather than serving the general public," said John C. Bogle, the founder and former chairman of the Vanguard Group, the giant mutual fund house. "It has hurt the American investor first and the average American taxpayer."Brash and brainy (perfect SATs and double Harvard degrees), Chuck Schumer, now 58, learned early in his career how to talk to the financiers and chief executives who would become a vital constituency for him. Though he did not grow up in that world — his father owned a small exterminating business in Brooklyn — he quickly showed a keen grasp of complex financial issues. And, recognizing how central Wall Street is to the city’s economy, he committed himself to keeping it strong. "So much of what happens in this town is because we are the world financial center," Mr. Schumer said at City Hall in January 2007. "It helps support our museums, it provides the tax base for schools and health care. If we lose being the financial center, the rest goes down the drain."
Soon after arriving in Congress in 1981, Mr. Schumer snared a seat on the Financial Services Committee, which he viewed as the best way to help New York. While reliably liberal on many social issues, he established himself as a pragmatic Democrat willing to align with powerful business interests. Mr. Schumer’s political rise — he moved in 1999 to the Senate, where he now has a party leadership post — paralleled Wall Street’s growing influence in Washington. As more Americans invested in the markets and financial institutions had a greater global reach, the industry came to rival the manufacturing sector as a driving force of the United States economy. And in the 1990s, Democratic officials developed close links to a new generation of Wall Street leaders — labeled "New Moneycrats" by one author — who shared a free-market agenda. Mr. Schumer became a magnet for campaign donations from wealthy industry executives, including Jamie Dimon, now the chief executive of JP Morgan Chase; John J. Mack, the chief executive at Morgan Stanley; and Charles O. Prince III, the former chief executive of Citigroup. And he was not at all reluctant to ask them for more. Donors describe the Schumer pitch as unusually aggressive: He calls repeatedly to suggest breakfast or dinner, coffee or cocktails.
He enlists intermediaries to invite prospects to events and recruits several senators to tag along. And he presses for the maximum contribution — "I need you to max out," he is known to say — then follows up by asking that a donor’s spouse and four or five friends write checks, too. "He was probably the kid that sold the most candy in grade school," said Julie Domenick, a Democratic lobbyist who has given to the senatorial campaign committee. "He is not shy." Mr. Schumer, in the interview, acknowledged his full-speed-ahead approach. "Any job I do, I work hard at and I try to succeed at," he said. As a result, he has collected over his career more in campaign contributions from the securities and investment industry than any of his peers in Congress, with the exception of Senator John F. Kerry of Massachusetts, the Democratic nominee for president in 2004, according to the Center for Responsive Politics, which analyzed federal data. (By 2005, Mr. Schumer had so much cash in reserve that he shut down his fund-raising efforts.) In the last two-year election cycle, he helped raise more than $120 million for the Democrats’ Senate campaign committee, drawing nearly four times as much money from Wall Street as the National Republican Senatorial Committee. Donors often mention his "pro-business message" and record of addressing their concerns. John A. Kanas, the former chief executive of North Fork Bank, said: "He would solicit my opinion, listen to my advice and he appeared to take it into consideration."
Lee A. Pickard, a lawyer representing clients including the Bank of New York, whose employees have been significant donors to Mr. Schumer and other Senate Democrats, turned to Mr. Schumer last year to successfully beat back a regulatory initiative by the Securities and Exchange Commission. "If you get Chuck Schumer on your side, you are O.K.," he said. That may help explain why some of the wealthiest financiers in Manhattan attended the Sept. 22 breakfast hosted by Mr. Kravis at his office overlooking Central Park. A Republican with long ties to the Bush family, Mr. Kravis spent much of this year trying to help Senator John McCain, the eventual Republican nominee for president. But last year, Mr. Kravis had gone to Capitol Hill to oppose a proposal that would have more than doubled taxes for executives at hedge funds and private equity firms like his, costing them up to $25 billion over 10 years. Mr. Schumer had said publicly he would support the measure only if it also applied to executives at energy, venture capital and real estate partnerships, and he introduced alternative legislation that would do just that.
His position was identical to that of lobbyists for a group paid by Mr. Kravis and other finance industry executives. The Schumer bill, called a "poison pill" by the leading Republican advocate of the tax increase, went nowhere after provoking opposition from an array of industries. At the breakfast meeting, Mr. Schumer, accompanied by fellow Senate Democrats Kent Conrad of North Dakota and Maria Cantwell of Washington, assessed the political landscape as debate over the bailout was beginning. "On the right, you have those who view any government intervention as a threat to free markets," one executive recalled Mr. Schumer explaining. "On the left, you have people who choose to view this as a government handout to the rich. In the middle, you have everyone who knows and takes the Treasury secretary seriously and recognizes that if something is not done here, we could be staring into an abyss." Within days, the businessmen sent off their checks to the Senate campaign committee.
To Christopher Cox, the Republican chairman of the Securities and Exchange Commission, the need for action was obvious in the spring of 2006. His agency, which would later be criticized for a 2004 ruling that let banks pile up debt, had grown deeply concerned about lack of oversight of the nation’s largest credit-rating agencies, like Standard & Poor's and Moody's Investors Service. Linchpins of the financial system, their ratings are vital to safeguarding investors by evaluating the risks of bonds and other debt. After the collapse of Enron and WorldCom, which had repeatedly been awarded favorable ratings, the agencies had agreed to meet voluntary standards. But the S.E.C. concluded that those agreements were inadequate, so Mr. Cox urged Congress to give his agency oversight powers. "Without additional legislative authority, the S.E.C. will not be able to regulate in a thoroughgoing way," he told the Senate banking committee at an April 2006 hearing. The plan drew broad, bipartisan support on Capitol Hill.
But executives at the credit-rating agencies soon began pressing Mr. Schumer and other allies in Congress to block the proposal or at least limit its reach, according to current and former employees. "They knew Schumer would support them," said one former Moody's executive, who asked not to be named because he still works in the industry. "He was their go-to guy," the executive said. While the Manhattan-based agencies were not significant campaign donors to Mr. Schumer or the Senate campaign committee, their lobbyists and many of their clients were. At that time, revenues for the agencies were skyrocketing. The housing market was robust, and Wall Street investment firms were paying the agencies to rate various mortgage-backed securities after first advising the firms — and also collecting fees — on how to package them to get high credit ratings.
It was an obvious conflict of interest, financial experts now say. Despite their high ratings, many of those securities, based on risky loans, would prove worthless, roiling markets and threatening financial institutions worldwide. But Mr. Schumer argued that the companies voluntarily met requirements to eliminate such possible conflicts. He suggested that regulators simply encourage competition and disclosure of agencies’ ratings methods. There was perhaps no need for an intrusive new law, he said in the spring of 2006. "They’ve implemented their codes of conduct," Mr. Schumer told Mr. Cox at a Senate hearing. "They’re making good-faith efforts." Mr. Schumer could not stop the legislation from passing, but he managed to get the measure amended so that it explicitly prohibited the S.E.C. from regulating the procedures and methods the agencies use to determine ratings. Richard Y. Roberts, a former S.E.C. commissioner, said the amendment Mr. Schumer won was troubling, adding that it could block the S.E.C. from punishing a credit-rating agency that consistently issued unreliable ratings.
Sean J. Egan, managing director of a small Pennsylvania agency, Egan-Jones Ratings, and a proponent of the tougher regulations, was more blunt. "The bill was eviscerated," he said. "You have stripped away basic safeguards for the investors." At times in Congress, Mr. Schumer has teamed up with Republicans, like former Senator Phil Gramm of Texas, who aggressively promoted a free-market agenda. Mr. Schumer pushed for the Gramm-Leach-Bliley law, passed in November 1999, which knocked down the walls between investment banks and commercial banks and allowed financial supermarkets to flourish. The law also weakened regulatory oversight by fracturing it among different agencies. In 2001, Mr. Schumer and Mr. Gramm jointly proposed legislation that would cut fees paid by Wall Street firms and others to the S.E.C. in half, or by $14 billion, over the coming decade. Their proposal included some extra funds for salaries of commission employees. But with trading volumes high, Mr. Schumer argued, the government was collecting far too much money from those fees and using it to subsidize other government operations. "It is a tax, an unintended but very real tax, on all sorts of investors," he said at the time.
But some Democrats, pointing to the recent corporate accounting scandals, argued that the S.E.C. budget should be doubled or tripled so it could more effectively combat fraud that could lead to a major economic collapse. "We are making a tragic mistake," Representative John J. LaFalce, Democrat of New York, warned in arguing for a much smaller reduction in the S.E.C. fees. "We give the industry what it asks for unwittingly." Mr. Schumer’s argument prevailed, and the fee cut passed overwhelmingly. Some consumer advocates laud Mr. Schumer for his stances on consumer finance issues, including combating high interest rates on credit cards, challenging predatory lending practices and advocating legislation to allow bankruptcy courts to force banks to accept lower interest rates so that families facing foreclosure could stay in their homes. "He is a strong advocate for families and homeowners to make sure they are not taken advantage of," said Eric Stein, senior vice president at the Center for Responsible Lending, a nonprofit group that combats abusive lending practices. But those efforts mostly affect commercial banks and mortgage lending operations around the country and in New York, not the securities and investment businesses concentrated in Manhattan.
"He built his career in large part based on his ties to Wall Street," said Christopher Whalen, managing director of Institutional Risk Analytics, which advises investors on the regulatory system. "And he has given the Street what it wanted." Mr. Schumer, though, has a surprising defender in Alfonse M. D'Amato, the onetime Republican senator he ousted. "Don’t take someone to task simply because a group has supported him politically and now he supports legislation that helps them," Mr. D’Amato said. "The question is, is the legislation good or bad? With Chuck, it is clear he tries to do what is best for the state and city as a whole." For Mr. Schumer, Wall Street’s crisis has been especially painful to watch. "It is horrible, just awful," he said in the interview. "And it affects everybody." And he has already begun identifying those he faults for the devastation. Subprime lenders top the list, but he has lashed out with particular fury at the credit-rating industry, which he once defended but now says misled him and the investing public.
"The work at these ratings firms was severely compromised, and the companies were some of the biggest contributors to the current financial crisis," Mr. Schumer said earlier this month in response to an S.E.C. move that same day to tighten control over the agencies. "The lesson from this is that the three major firms’ stranglehold on the ratings industry must be loosened." Mr. Schumer has also blamed the Bush administration for its push to ease rules. "After eight years of deregulatory zeal by the Bush administration, an attitude of ‘the market can do no wrong’ has led it down a short path to economic recession," Mr. Schumer said on the Senate floor in September. He has not assigned responsibility to himself or fellow Democrats, saying he had no way of knowing of the misdeeds going on on Wall Street. "I wish I was omniscient," he said. "I’m not." Since the economy began to fall apart, Mr. Schumer has joined others in calling for new regulations to combat abuses. He has proposed tougher rules for credit-rating agencies, even changing the way they are paid so they are compensated by investors, not by the companies they are evaluating. He has said he is open to imposing regulations on hedge funds, which currently operate with limited government oversight.
And while he previously succeeded in limiting consumers’ rights to sue financial institutions, he says he now favors offering that remedy in certain circumstances. But he is also warning that any new rules must be carefully crafted so they don’t impose excessive burdens. "You need to provide safety and security to investors in order to attract them to the markets," Mr. Schumer told Wall Street executives in a speech last month. "On the other hand, you must be sure that regulation does not snuff out the entrepreneurial vigor and financial innovation that drives economic growth and makes financial institutions successful and profitable." And he is seeking some regulatory concessions for some Wall Street supporters. He has proposed, for example, that the government lift a cap on how big the giant banks can get, an issue important to institutions like JPMorgan Chase. Lifting the cap would allow the biggest banks to absorb weaker ones, but it would also limit competition and increase the risks to the financial system posed by failure of one of the giants.
Mr. Schumer is also calling for the adoption of European-style regulations that impose far fewer rules and instead require banks to meet certain performance standards, a system institutions generally prefer but some banking experts criticize as not rigorous enough. In recent weeks, Mr. Schumer has listened to Wall Street leaders for advice on what should come next. At a dinner at Morgan Stanley’s headquarters the night before the presidential election, John Mack, the chief executive, and a dozen top hedge fund officials talked with Mr. Schumer about possible changes affecting their industry. "People feel like he is going to be fair and reasonable," said one Morgan Stanley executive, who asked not to be identified because the session was private. "He is mindful that this is a very big part of his constituency — Wall Street."