Christmas in the Church of the Nativity in Bethlehem
Ilargi: For today's somewhat shortened Debt Rattle, I thought I’d graciously steal a line from Sharon Astyk’s take on Wallace Stevens’ Thirteen Ways of Looking at a Blackbird
I do not know which to prefer,
The beauty of inflections
Or the beauty of innuendoes,
The child singing
Or the silence after
As I look outside, the sun is shining, and the world looks normal, or at least that's how we often put it. Of course, we know when we reflect that it's not normal, that in many places in the world trouble is brewing. Then again, we might tell ourselves that even that is normal: there have always been trouble spots somewhere, mostly safely far away, throughout our lives. But still, today is different in some sense. It is one thing to see things happen in one's mind’s eye. It is quite another to see them unfold, come to fruition.
In the US, pre-Christmas retail visits dropped 24% from a year earlier. An incredible 83% of mortgage holders are trying to refinance. Oil prices dropped almost 10% yesterday, even as crude inventories were down. 586.000 people filed for jobless claims, the highest number in a generation. The private financial sector in Japan has called for its government to engage in a Marshall plan to help restart the US economy, complete with debt cancellation and massive infrastructure spending.
The US dollar is down 23% against the yen this year, and that must hurt if you have a lot of dollar denominated assets. Still, it looks like those who propose such a plan don't have an entirely clear picture of the state Japan itself is in. Japan relies on exports, and they are down 26%. the country is in no position to emulate the US effort to rebuild Europe 60 years ago. But maybe it’s merely a first step in a process to address the American government’s attempt to bring down its own dollar, an initial call for China, Russia and other debtholders to speak up. With both China and Russia also devaluing their currencies and the oil states reeling from hammered prices, Japan may find itself standing alone.
There is but one response in the world to the plunging economical situation, wherever it may occur: spending to get out of debt, gambling to pay for gambling losses. The human mind is a one-trick one-track pony, evolved to cheat and deceive itself, so it should not be too much of a surprise that we respond in this way. We're now all stuck in a double or nothing game, which is no different from the perpetual growth ideology we all grew up to believe in. It's merely its logical and inevitable conclusion.
If and when it turns out the dice come up nothing, we’ll find ourselves in the silence after the child has finished singing. And we all know what's next. After the silence comes the storm.
Visits to U.S. Retailers Fell 24% on Weekend Before Christmas
Customer visits to U.S. retailers fell 24 percent last weekend compared with a year earlier, the biggest drop on record, as deepened discounts failed to attract consumers. Retail sales declined 5.3 percent Dec. 19-21 because of inclement weather and a slowing U.S. economy, Chicago-based research firm ShopperTrak RCT Corp. said yesterday in a statement. U.S. consumers were working with smaller budgets for holiday gifts this year because of rising unemployment and declining home values. Macy’s Inc. and Saks Inc. offered discounts of as much as 70 percent to lure shoppers seeking bargains, and retailers’ profit margins may suffer as a result.
"We had that deep drop-off in consumer spending, which propelled the retailers to go into these very competitive pricing wars," said Marshal Cohen, chief industry analyst with Port Washington, New York-based NPD Group Inc. "It has a lot to do with the fact that you can get almost anything, anywhere, at any price." Customers have come to expect discounts, he said yesterday in an interview with Bloomberg Television. "The week after Christmas is going to be more crucial for retailers than ever," Scott Krugman, a spokesman for the National Retail Federation, a Washington-based trade group, said in a Bloomberg Television interview. "The Friday after Christmas, with the discounts we’re hearing about, is going to be like another Black Friday."
Traffic decreased 6.5 percent for the week through Dec. 20 from a year earlier, ShopperTrak said. The pre-Christmas weekend drop was the biggest since at least 2003. The company uses a sampling of more than 50,000 stores in shopping centers and malls to measure foot traffic, or count the number of customers that enter the locations.
ShopperTrak said Dec. 23 that U.S. customer traffic on Dec. 20, also known as "Super Saturday," fell 17 percent from the corresponding day a year earlier, Dec. 22, 2007. Foot traffic was hurt by the economy, unfavorable weather and a calendar shift, the research firm said. Sales for the day rose 0.5 percent. The Standard & Poor’s 500 Retailing Index has shed 34 percent this year, with only two of its 27 companies gaining. Macy’s Inc., the second-largest U.S. department store company, has plunged 66 percent.
Consumer spending, which accounts for two-thirds of the U.S. economy, dropped at a 3.8 percent annual pace in the third quarter, the biggest plunge since 1980, according to the Commerce Department. Customers have five fewer shopping days between Thanksgiving and Christmas this season. There may have been a slight boost in sales and traffic this week as people who waited until the last minute crammed their shopping into the days leading up to the holiday, ShopperTrak co-founder Bill Martin said.
Last week was the snowiest seven days before Christmas in more than a decade, according to Scott Bernhardt, operating chief of Planalytics Inc., a Wayne, Pennsylvania-based weather consulting firm. Sales at stores open at least a year may drop as much as 2 percent in November and December, more than the previously projected 1 percent decline, the International Council of Shopping Centers said yesterday. That would make it the worst Christmas sales season in at least 40 years, when the group started tracking data.
Last-minute shoppers can't save dismal Christmas
Last-minute shoppers headed to the nation's stores and malls on the day before Christmas, looking for the final items they needed and searching for good deals -- but for retailers, the season was essentially over long ago. Many merchants are already tallying up just how dismal their sales were in a season expected to be the worst in decades. "It's beyond the worst fears of retailers," said C. Britt Beemer, chairman of America's Research Group. A lot is at stake. The holiday shopping season accounts for as much as 40 percent of annual profits for many retailers, and the earnings outlook is growing more dire every week. Retailers' woes were good news for the dwindling numbers of shoppers who could afford to load up on deals. With mounds of inventory still left to sell, merchants are expected to deepen the discounts even more the day after Christmas. But if 75 percent off before Dec. 25 didn't make shoppers splurge, will even bigger deals do the trick amid mounting worries about layoffs and shrinking retirement funds?
Crowds were light early Wednesday at the Square One Mall in Saugus, Mass., a suburb north of Boston. Wander Caldas, a 50-year-old truck driver from Everett, Mass., said his wife had lost her job and wasn't working this year, so the family -- including his 12-year-old son -- had cut their Christmas spending. "We cut it like in half," Caldas said. "That's why I have to slow down." Caldas said his son wanted an iPhone and Sony PlayStation 3, but "it's not a good time. He'll have to wait." Barbara Rice came to Mondawmin Mall in Baltimore for some last-minute gifts and knew she'd find deals, saying she regularly saw "half off, 75 percent off." "I'm almost done," she said. "It's just the little leftover stuff I have to do today." Her daughter, Donyai Rice, wasn't planning on shopping when she got to the mall. However, she found a $60 Sony PlayStation2 video game system, a Nintendo Game Boy, a cell phone and shoes all on sale.
In Christmases past, the retail industry had relied on a surge before and after Christmas to help save the season. But the holiday period was virtually over before the Thanksgiving weekend ended as stores grapple with the most severe retrenchment in consumer spending in decades. Facing pressure from vendors and consumers who aren't spending, Circuit City Stores Inc. filed for bankruptcy protection last month. It plans to keep operating, but toy retailer KB Toys, which filed for bankruptcy protection earlier this month, has already begun to liquidate all of its stores and will shutter operations completely. Merchants desperate to pull in shoppers started deeply discounting holiday goods as soon as they hit stores starting in November. But except for a shopping binge on the day after Thanksgiving, Americans have remained tight-fisted. When they do buy, they are looking for small-ticket, more practical gifts.
Another worrisome sign is that people are taking advantage of deep discounts by buying items they will need in the future. Paige Wallington of Raleigh, N.C., who came out just before 8 a.m., said she needed to get items for family members before heading off to work. But she also found herself in the ornament section, where prices were up to 60 percent off. "Some for this Christmas, some for next," the 46-year-old collections officer said while eyeing a snow globe and carrying a few bags of clothing. "I'm shopping while I still have a job." Analysts have kept slashing their holiday estimates. Michael P. Niemira, chief economist at the International Council of Shopping Centers, now expects that sales at established stores for November and December will fall 1.5 percent to 2 percent -- making it the weakest holiday season since at least 1969, when the index began.
Excluding Wal-Mart Stores Inc., one of the few bright spots in retailing, same-store sales could be down as much as 7 percent for the holiday period. Same-store sales are sales at stores opened at least a year and are considered a key indicator of a retailer's health. Stores are expected to post an 18.8 percent decline in fourth-quarter profits, marking the seventh consecutive period of profit declines, according to Ken Perkins, president of research company RetailMetrics LLC. He expects profits to keep tumbling into the first quarter, with predictions so far of a 10.4 percent drop.
Merchants can't even count on gift card sales, which have been well below last year, to boost profits and sales. In the past, gift cards had lifted post-Christmas season as shoppers went back to the stores to redeem the plastic on discounted and regular-priced merchandise. That's because shoppers find they get better value by buying discounted merchandise. Consumers are also fearful of buying gift cards from retailers that may go bankrupt. Karen MacDonald, a spokeswoman at Taubman Centers Inc., which operates 24 malls in 11 states, said that gift card sales have been tracking anywhere from single-digit declines to double-digit declines this season, a worrisome sign.
Gift cards "certainly drive business the week after Christmas," she said. "I think there were so many good deals out there that many people made that their gift of choice." Maureen Kapnis, a restaurant owner in Salem, Mass. who was shopping Wednesday for some final small gifts for her family and friends at the Square One Mall, said that worries about store bankruptcies stopped her from buying many gift cards. She bought only a mall gift card. "I did not do businesses," Kapnis said. "I was scared they were going to go under. In general, I played it safe. I went with the mall card."
Initial jobless claims rise to a 26-year peak
The number of Americans filing first-time claims for unemployment insurance rose last week to a 26-year high, indicating employers are stepping up job cuts as the recession deepens. The 586,000 claims - up from 556,000 the previous week - were more than forecast and the most since November 1982, the Labor Department said yesterday. The four-week moving average of claims, a less volatile measure, also was the highest since 1982. Both figures have been touching new highs in recent weeks.
"This level is consistent with pretty significant declines in payrolls," said James O'Sullivan, a senior economist at UBS Securities L.L.C., of Stamford, Conn. "The economy is still deteriorating, and I don't think there will be a quick turnaround." Employers have cut 1.9 million jobs since the recession began last December, and the unemployment rate has risen from 5.0 percent to 6.7 percent. Initial claims for benefits, those filed by workers just laid off, are a sign that the jobless rate will continue to rise in coming months. They had been projected to increase to 558,000 last week, according to the median of 32 forecasts in a Bloomberg News survey.
In Pennsylvania, new claims in the week that ended Dec. 13 - one week behind the national figures released yesterday - fell 12,438, which state officials attributed to fewer claims in the construction, service and transportation industries. New Jersey's new claims that week dropped 2,388 because of fewer layoffs in the trade, service, transportation and warehousing industries and in manufacturing. Compared with a year earlier, new claims were still up more than 14,000 in Pennsylvania and up more than 4,000 in New Jersey. Economists consider jobless claims a timely, if volatile, indicator of the health of the labor markets and broader economy. A year ago, initial claims nationwide stood at 353,000.
Japan Should Scrap U.S. Debt; Dollar May Plummet, Mikuni Says
Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co. The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes "drastic measures" to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said. "It’s difficult for the U.S. to borrow its way out of this problem," Mikuni, 69, said in an interview with Bloomberg Television broadcast today. "Japan can help by extending debt cancellations."
The U.S. budget deficit may swell to at least $1 trillion this fiscal year as policy makers flood the country with $8.5 trillion through 23 different programs to combat the worst recession since the Great Depression. Japan is the world’s second-biggest foreign holder of Treasuries after China. The U.S. government needs to spend on infrastructure to maintain job creation as it will take a long time for banks to recover from $1 trillion in credit-market losses worldwide, Mikuni said. The U.S. also needs to launch public works projects as the Federal Reserve’s interest rate cut to a range of zero to 0.25 percent on Dec. 16. won’t stimulate consumer spending because households are paying down debt, he said.
U.S. President-elect Barack Obama wants to create 3 million jobs over the next two years, more than the 2.5 million jobs originally planned, an aide said on Dec. 20. Obama takes office on Jan. 20. Japan should also invest in U.S. roads and bridges to support personal spending and secure demand for its goods as a global recession crimps trade, Mikuni said. Japan’s exports fell 26.7 percent in November from a year earlier, the Finance Ministry said on Dec. 22. That was the biggest decline on record as shipments of cars and electronics collapsed. Combining debt waivers with infrastructure spending would be similar to the Marshall Plan that helped Europe rebuild after the destruction of World War II, Mikuni said.
"U.S. households simply won’t have the same access to credit that they’ve enjoyed in the past," he said. "Their demand for all products, including imports, will suffer unless something is done." The plan was named after George Marshall, the U.S. secretary of state at the time, and provided more than $13 billion in grants and loans to European countries to support their import of U.S. goods and the rebuilding of their industries The Japanese government could use a new Marshall Plan as a chance to shrink its $976.9 billion in foreign-exchange reserves, the world’s second-largest after China’s, and help reduce global economic imbalances, Mikuni said.
The amount of foreign assets held by the Japanese government and the private sector total around $7 trillion, Mikuni said. Japan will also have to accept that a stronger yen is good for the country in order to reduce excessive trade surpluses and deficits, he said. The yen has appreciated 23 percent versus the dollar this year, the most since 1987, as the credit crisis prompted investors to flee riskier assets and repay loans in the Japanese currency. "Japan’s economic model has been dependent on external demand since the Meiji Period" that began in 1868, Mikuni said. "The model where the U.S. relies on overseas borrowing to fuel its property market is over. A strong yen will spur Japanese domestic spending and reduce import prices, thereby increasing purchasing power."
Oil sheds 9.3%, prices near $35 on more dour economic news
Crude prices tumbled Wednesday following a raft of bad economic news and growing stockpiles of unused gasoline that suggested demand for energy has continued to erode. Light, sweet crude for February delivery fell $3.63 to settle at $35.35 in a shortened day of trading. Prices fell as low as $35.13 just before the market closed for the holiday. It was the ninth straight day that crude has fallen. Investors expecting more evidence of slowing U.S. energy demand got a bit of a surprise as the Energy Department reported crude inventories dropped last week. But Americans continue to cut back on driving amid the worst recession in a generation, leading to growing stockpiles of gasoline and eroding demand for motor fuel. Gasoline futures plummeted below 80 cents a gallon. "I don't see anything out of this report that's really going to change this downward move," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "Things are going to remain under downside pressure through the balance of this year and probably into the new year."
A steady stream of dismal U.S. economic and corporate data during the past few months has hammered investor confidence and sent oil prices reeling 74 percent since July. More bad news emerged Wednesday with consumer spending falling for a fifth straight month in November, the longest weak stretch in a half century, while incomes declined under the weight of massive job layoffs. Separately, new claims for unemployment benefits rose more than expected last week, as layoffs spread throughout the economy, more evidence the labor market is weakening as the recession deepens. The Labor Department reported initial requests for jobless benefits rose to a seasonally adjusted 586,000 in the week ending Dec. 20, from an upwardly revised figure of 556,000 the previous week. That's much more than the 560,000 economists had expected.
Manufacturers are slashing energy use as well. Orders at U.S. factories for big-ticket manufactured goods fell again in November, reflecting further setbacks in the battered auto industry and a big drop in demand for commercial aircraft. For the week ended Dec. 19 crude inventories fell by 3.1 million barrels, or 1 percent, to 318.2 million barrels, which is 9.1 percent above year-ago levels, the Energy Department's Energy Information Administration said in its weekly report. Analysts had expected a boost of 1.5 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos. Gasoline inventories rose by 3.3 million barrels, or 1.6 percent, to 207.3 million barrels, which is 2.4 percent below year-ago levels. Analysts expected stockpiles of the motor fuel to rise by 900,000 barrels.
Demand for gasoline over the four weeks ended Dec. 19 was 2.7 percent lower than a year earlier, averaging nearly 9 million barrels a day. At the pump, retail gas prices fell less than a penny overnight to a new national average of $1.655 a gallon Wednesday, and remain well below the year-ago average of $2.972 a gallon, according to AAA and the Oil Price Information Service. In a separate weekly report, the EIA said natural gas storage levels in the U.S. tumbled last week but remain 3.4 percent above the five-year average for this time of year. The EIA said natural gas inventories held in underground storage in the lower 48 states slipped by 147 billion cubic feet to about 3.02 trillion cubic feet. Analysts had expected a drop of between 142 billion and 147 billion cubic feet.
Oil traders so far have brushed off attempts by OPEC to boost prices through production cuts. The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, said last week it would slash production by 2.2 million barrels a day, its largest single cutback ever. The most recent round of cuts would reduce OPEC production by more than 2 million barrels per day. OPEC may meet in Kuwait City on Jan. 19 to discuss further production cuts. The group's next official meeting is March 15 in Vienna.
The fall of benchmark crude on the Nymex has been paralleled by steep declines in Brent futures traded on London's ICE exchange. Trader and analyst Stephen Schork noted that Brent crude has dropped "in 79 of the last 123 sessions ... by a total of $108.05 a barrel" -- a 73 percentage point loss. On Wednesday, February Brent crude slumped $3.75 to settle at $36.61 a barrel on the ICE Futures exchange. In other Nymex trading, gasoline futures tumbled by 6.3 cents to settle at 79.27 cents a gallon. Heating oil plunged 12.8 cents to settle at $1.1983 a gallon while natural gas for January rose 17.3 cents to settle at $5.91 per 1,000 cubic feet.
U.S. MBA’s Mortgage Applications Index Jumped 48% Last Week
Mortgage applications in the U.S. jumped 48 percent last week as the lowest borrowing costs in five years promoted a surge in refinancing. The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan rose to 1,245.4, the highest since 2003, from 841.4 a week earlier. The group’s refinancing gauge rose 63 percent and purchases gained 11 percent.
The average rate on a 30-year fixed mortgage dropped to the second-lowest level on record, giving owners an opportunity to lower monthly payments. Even with the increase in purchase applications, the gauge was still close to an eight-year low, indicating the slump in sales is likely to persist into 2009. "People have been out shopping for refinancing," Leif Thomsen, Chief Executive Officer of Mortgage Master Inc., a Walpole, Massachusetts-based mortgage company, said in an interview before the report. The company has hired 50 people recently to handle the increase in refinancing, he said. "If we were relying just on the purchase applications, it would be dismal."
The MBA’s refinancing index climbed to 6,758.6 last week, from 4,156 a week earlier. The purchase gauge rose to 316.5, from 286.1. The 248.5 reading in the middle of last was the lowest since the December 2000. Reports yesterday showed the housing recession intensified. Sales of single-family homes in the U.S. dropped in November by the most in almost twenty years and resale prices had the biggest decline since record keeping began in 1968, according to data from the Commerce Department and the National Association of Realtors.
President-elect Barack Obama plans an unprecedented economic stimulus to restore growth, and pledged on Dec. 13 to limit foreclosures. One tenth of U.S. families who own a home are in financial distress, Obama said. "We need desperately to get this economy moving," Vice President-elect Joseph Biden, who is leading the incoming administration’s initiative to bolster the middle class, told reporters before a meeting with Obama’s economic advisers yesterday. Transition officials are "getting very close" to an agreement with lawmakers on the size of the stimulus, Biden said.
The average rate on a 30-year fixed-rate loan dropped to 5.04 percent last week, the lowest in more than five years, from 5.18 percent a week earlier. At the current rate, monthly borrowing costs for each $100,000 of a loan would be about $539.27, almost $100 less than in mid July. The share of homeowners seeking to refinance a loan jumped to a record 83.2 percent from 76.9 percent a week earlier. Today’s report also showed the average rate on a 15-year fixed mortgage decreased to 4.91 percent from 4.93 percent. The rate on a one-year adjustable loan fell to 6.36 percent from 6.63 percent.
Lennar Corp., the largest U.S. homebuilder by revenue, reported its seventh straight quarterly loss on Dec. 18. New orders fell 46 percent in the fiscal fourth quarter from a year earlier and the cancellation rate for projects was 32 percent. The Washington-based Mortgage Bankers Association’s loan survey, compiled every week since 1990, covers about half of all U.S. retail residential mortgage originations.
With Fed's Help, AIG Unloads $16 Billion in Credit Default Swaps
American International Group retired $16 billion in credit default swaps, the contracts that almost caused the company's collapse, after buying the underlying securities with help from the Federal Reserve. The fund created by the Fed and AIG to protect the insurer's customers from losses has now purchased collateralized debt obligations with a face value of about $62.1 billion, the firm said in a statement.
The purchases bring AIG closer to winding down the financial products unit that triggered the worst of AIG's losses. The business guaranteed more than $70 billion in securities created by pools of different kinds of debt, including subprime mortgages, that plunged in value. The federal government committed $150 billion to bail out AIG and prevent losses at investment banks that bought protection on fixed-income securities from the insurer.
The fund, called Maiden Lane III, paid about $6.7 billion to the investors for the securities in the latest purchases. The counterparties were also able to keep more than $9 billion that AIG had posted in collateral, reimbursing them at face value for the assets. AIG "continues to analyze" ways to retire another $12.3 billion in contracts it sold, the company said.
AIG had to post collateral to investment banks including Goldman Sachs Group that purchased protection through swaps, pushing the insurer to the brink of bankruptcy in September. The government extended an $85 billion loan that month, and the bailout expanded to about $150 billion in November after the Fed created funds to limit losses tied to swaps and the firm's securities-lending program.
The Federal Reserve Bank of New York will provide as much as $30 billion to the fund retiring the swaps, with AIG contributing $5 billion. Write-downs on AIG's swaps and mortgage-backed securities led to four straight quarterly losses totaling about $43 billion. Shares of AIG climbed 1 cent to close at $1.56 yesterday. The stock has plunged 97 percent this year.
Wall Street Santa rally small comfort after grim year
Wall Street entered the Christmas holiday in subdued mood on Wednesday, posting a modest Santa Claus rally, as investors digested more gloomy data on the economy and, with just four trading days left in 2008, began to take stock of a torrid year. The crisis that started in the US subprime mortgage market spread this year to become a global economic and financial disaster. Governments around the world were forced to bailout some of the most recognisable names in the financial world as the credit markets seized-up and several high-profile companies including Bear Stearns and Lehman Brothers disappeared into history. The S&P is down more than 40 per cent so far this year, its worst fall since the Great Depression. Most analysts expect that the more than year-long recession will get worse before it gets better and investors are bracing themselves for more pain in 2009.
Bright spots have been few and far between. Even the consumer staples sector is down by almost a fifth this year. The financial sector in particular has been decimated with the S&P Financials index down almost 60 per cent so far this year. Citigroup shares have lost 77 per cent, Morgan Stanley 72 per cent and Goldman Sachs 65 per cent over the course of a year that has redefined the fundamentals of the global financial markets. US automakers also plunged this year after it emerged that General Motors and Chrysler were insufficiently capitalised to make it through the year without government bailout funds.
In spite of last week’s deal for a $17.4 bridge loan for the two, GM fell 87 per cent year to date. The troubled automaker staged a modest recovery on Wednesday, rising 8.3 per cent to $3.25, but has fallen 27.6 per cent so far this week. By the close in New York on Wednesday, the S&P 500 index was 0.6 per cent higher at 868.15 while the Nasdaq Composite Index was 0.2 per cent higher at 1,524.90. The Dow Jones Industrial Average was 0.6 per cent higher at 8,468.48. All three remain in negative territory for the week. Stocks fell amid thin volume in the previous session after a government report showed that the economy contracted 0.5 per cent in the third quarter, in line with expectations and separate reports showing declines in sales of new and existing homes.
Prices for US crude oil futures, which have been in free fall since the dour economic outlook pushed them from their July peak of $147.27, fell another 9.3 per cent to $35.35 in Wednesday trading. The dollar, which had shown resilience earlier this year, rallying 22.6 per cent from July until its November peak as investors deleveraged, has since fallen almost 8 percent. And the holiday-shortened session began on Wednesday with investors digesting more disappointing employment data. New jobless claims last week jumped by 30,000 to 586,000, the highest level since 1982, according to a Labor Department report released on Wednesday. "This strongly suggests another large payroll decline," said Abiel Reinhart, an analyst at JPMorgan Chase. The latest numbers cap a grim year of job losses: the nonfarm unemployment rate jumped to 6.7 per cent in November, as the economy shed almost 2 million jobs since January. Wary consumers are clutching tighter to their disposable income, saving 2.8 per cent compared to 2.4 per cent in October and a negative savings rate of 0.1 percent in January, the Commerce Department said on Wednesday.
But in a rare bright note, falling prices, particularly in the energy sector, left consumer spending up 0.6 per cent after adjusting for inflation, the first such increase in six months and disposable income rose by 1 per cent in November. "Declining prices mean that consumers are spending less and buying more, while also increasing savings," John Ryding and Conrad DeQuadros, economists at RDQ Economics, wrote in a research note. "This is a win-win situation for the US consumer." Before adjusting for falling prices, personal spending slipped by 0.6 per cent in November, after dropping a record 1 per cent the month before. Disposable income fell 0.1 per cent before adjusting for inflation.
Meanwhile, new orders placed for durable goods declined by 1 per cent in November defying economists’ forecasts of a 3 per cent drop, but orders are still on track for their biggest quarterly decline ever after falling 8.4 percent in October, according to economists at RDQ Economics. "With all other evidence pointing to sharp contraction in manufacturing around the world," said Nigel Gault, chief US economist at IHS Global Insight. "Companies are probably revising down their capital spending plans as quickly as they are shedding labour." The Chicago Board Options Exchange’s Vix index, known as Wall Street’s fear gauge, fell 1.8 per cent to 44.22. The index has shown signs, in recent days, of trending broadly downwards, and is significantly below October’s highs which approached 90. The US stock market will remain closed on Thursday for Christmas. The markets will reopen for a full session on Friday.
The Worst Predictions About 2008
Just about everybody got wrong-footed by 2008, but some people's mistakes were truly spectacular. Here are some of the worst predictions that were made about 2008. Savor them—a crop like this doesn't come along every year.
- "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" —Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008. At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.
- AIG (AIG) "could have huge gains in the second quarter." —Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008. AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.
- "I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They're not in danger of going under…I think they are in good shape going forward." —Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008. Two months later, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.
- "The market is in the process of correcting itself." —President George W. Bush, in a Mar. 14, 2008 speech. For the rest of the year, the market kept correcting…and correcting…and correcting.
- "No! No! No! Bear Stearns is not in trouble." —Jim Cramer, CNBC commentator, Mar. 11, 2008. Five days later, JPMorgan Chase took over Bear Stearns with government help, nearly wiping out shareholders.
- "Existing-Home Sales to Trend Up in 2008" —Headline of a National Association of Realtors press release, Dec. 9, 2007. On Dec. 23, 2008, the group said November sales were running at an annual rate of 4.5 million—down 11% from a year earlier—in the worst housing slump since the Depression.
- "I think you'll see [oil prices at] $150 a barrel by the end of the year" —T. Boone Pickens, June 20, 2008. Oil was then around $135 a barrel. By late December it was below $40.
- "I expect there will be some failures. … I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system." —Ben Bernanke, Federal Reserve chairman, Feb. 28, 2008. In September, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup needed an even bigger rescue in November.
- "In today's regulatory environment, it's virtually impossible to violate rules." —Bernard Madoff, money manager, Oct. 20, 2007. About a year later, Madoff—who once headed the Nasdaq Stock Market—told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.
- A Bound Man: Why We Are Excited About Obama and Why He Can't Win, the title of a book by conservative commentator Shelby Steele, published on Dec. 4, 2007. Mr. Steele, meet President-elect Barack Obama.
GMAC Granted Bank Status as U.S. Seeks to Save GM
GMAC LLC won Federal Reserve approval to become a bank holding company, enabling the auto lender to tap U.S. financial industry bailout programs and help keep General Motors Corp. in business. The Fed is using emergency powers to grant Detroit-based GMAC’s request because of the "unusual and exigent circumstances affecting the financial markets," according to a statement from the central bank today. To comply with rules about who can own a bank, GMAC’s majority owner Cerberus Capital Management LP agreed to distribute its stake to its investors and minority owner GM will cede all control.
The Fed order said the plan "would benefit the public by strengthening GMAC’s ability to fund the purchases of vehicles manufactured by GM." Saving GMAC may improve the chances of salvaging GM, which received $9.4 billion in U.S. loans this month to stave off collapse at least until January. The package didn’t include support for GMAC, which finances about 75 percent of the inventory at GM dealers. The lender also served as a major source of loans to GM car buyers until it was frozen out of credit markets after losses totaling $7.9 billion.
GMAC’s survival "is critical to the future of the dealers," said Kimberly Rodriguez, principal of Grant Thornton’s automotive practice, in a Dec. 19 statement on the bailouts for GM and Chrysler LLC. The lending arms of automakers "need to be able to finance GM and Chrysler dealers, and support vehicle financing to customers in order for the parent auto companies to be viable." GM owned all of GMAC until it sold a 51 percent stake in GMAC in 2006 to a group led by Cerberus, the New York-based private equity firm. As part of today’s agreement, GM will reduce its ownership in GMAC to less than 10 percent and transfer what remains to an independent trust, which will dispose of the stakes within three years.
Cerberus funds that hold GMAC stakes will distribute them to their investors, the Fed said. Cerberus’s voting control will be cut to less than 15 percent, or 33 percent of GMAC’s total equity. None of the recipients will have more than 5 percent of the votes or 7.5 percent of the total equity. The Fed also required Cerberus employees and consultants to stop providing services or acting as "dual employees" of GMAC. "This was a Fed decision, and we really don’t have a comment on it -- they made the decision based on their standards," said Tony Fratto, a White House spokesman, in an e-mailed statement.
"We’re clearly very pleased," said GMAC spokeswoman Gina Proia. "We think this is a significant positive step in GMAC’s history." Cerberus spokesman Peter Duda declined to comment and a Treasury spokesman wasn’t immediately available. GM spokesman Greg Martin said the Detroit-based automaker was pleased with the Fed announcement, without elaborating. "Investors will view it positively," said Martin Fridson, the chief executive officer of investment firm Fridson Investment Advisors in New York. "Presumably that would put off the threat about GMAC filing for bankruptcy in the near term."
GMAC’s request was approved even though the lender didn’t satisfy the capital requirements laid out when it applied to become a bank in November. GMAC, which is also the parent of mortgage lender Residential Capital LLC, said it needed three- quarters of investors that held $38 billion in bonds to exchange the notes as part of a plan to reduce debt. As of Dec. 17, holders of 58 percent of eligible notes had tendered. Investors including Pacific Investment Management Co. balked because the terms would have locked in losses on the existing debt. Pimco runs the world’s biggest bond fund, managed by Bill Gross.
The Fed and GMAC didn’t say what will happen to the mortgage unit, known as ResCap, which also faced speculation about bankruptcy. GMAC has said the debt swap was needed to meet demands from the Fed. Proia said the Fed was aware of the status of the swap before the application was approved, and the company still plans to try to raise $2 billion of additional capital. "They’ve obviously been modifying the rules as they’ve gone along to deal with the exceptional circumstances," Fridson said.
GMAC joins more than 190 regional banks, commercial lenders, insurers and credit-card issuers seeking funding from the Treasury’s bailout plan for financial firms. American Express Co., the biggest U.S. card company by sales, and commercial lender CIT Group Inc. received capital infusions yesterday after previously being granted bank status. The lender has been unable to raise cash by selling bonds backed by auto loans since May. The gap, or spread, on auto asset-backed debt relative to benchmark interest rates has soared to record highs as concerns mount that cash-strapped households will be unable to pay bills.
The Fed’s action "will help bring additional liquidity to dealerships and help ensure consumers are able to get financing for vehicle purchases," said Paul Taylor, chief economist for the National Automobile Dealers Association, a trade group representing more than 19,000 U.S. dealerships. The change may also make it easier for GMAC to apply for a government capital injection through the $700 billion financial bailout fund. Treasury Secretary Henry Paulson allocated $250 billion for buying stakes in banks. Proia said there’s no guarantee that GMAC will get any funding from the Troubled Asset Relief Program.
Other benefits of bank status include deposit insurance up to $250,000 per account from the Federal Deposit Insurance Corp. The FDIC also has a program insuring the debt issued by banks up to three years; American Express is among the beneficiaries. Today’s decision is part of an effort unprecedented since the Great Depression by the Fed to support credit markets. Chairman Ben S. Bernanke has said one lesson learned from the 1930s is to prevent mass failures of financial companies.
Top-rated auto loan-backed securities maturing in three years are trading at about 600 basis points more than the London interbank offered rate, or Libor, according to JPMorgan Chase & Co. data. The debt was trading at 90 basis points more than Libor in January, the data show. GMAC’s $5.5 billion of 6.875 percent notes due in September 2011 rose 2.25 cents, or 5.2 percent, to 45.25 cents on the dollar today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 42.9 percent.
Automakers Race to Slash Costs, Comply With Bailout
With a $13.4 billion federal bailout in hand, General Motors Corp. (GM) and Chrysler LLC now face an even more daunting task—a Mar. 31 deadline to cut payroll, trim expenses, restructure debt, or face involuntary bankruptcy. President George W. Bush announced the loans last Friday. The funds come from the Troubled Asset Relief Program (TARP), and in turn the automakers grant senior warrants to the U.S. Treasury. The warrants essentially ensure a profit should the companies recover, and guarantee seniority over other debt should the automakers declare bankruptcy.
The federal lifeline keeps the companies in business until well after President-elect Barack Obama’s inauguration. Ford Motor Co., believed to be the most financially sound of the "Big Three," has so far declined to take emergency government funding. On Friday, Obama applauded the efforts to "save this critical industry." In last week’s deal, Chrysler would receive $4 billion in funding by Dec. 29. GM would receive $4 billion by Dec. 29, followed by another $5.4 billion by Jan. 16, and a $4 billion check contingent on the planned expansion of TARP—to bring the total bailout to $17.4 billion—by Feb. 17.
"We know we have much work in front of us to accomplish our plan," GM said in a statement. "It is our intention to continue to be transparent as we execute our plan, and we will provide regular updates on our progress." The emergency funding comes with a list of strict terms GM and Chrysler must implement by Mar. 13, 2009. In addition to issuing non-voting preferred stock to the U.S. Treasury, the automakers receiving aid must agree to executive pay cuts, withhold stock dividends, cease using private jets, grant the U.S. government veto power over any transaction above $100 million, and open up their financial statements. If the automakers can’t meet the deadline, Treasury could call the loans and send the firms into bankruptcy.
In the event of a bankruptcy the government warrants would become senior to almost all other debt, and another provision in the loan stipulated that 50 percent of GM and Chrysler’s payments to United Auto Workers (UAW) employee retirement funds be paid in stock. In another mandate for the UAW, union labor contracts must be remade by Dec. 31 to reflect those at the U.S. plants of foreign automakers, which are non-union. "We intend to be accountable for this loan, including meeting the specific requirements set forth by the government, and will continue to implement our plan for long-term viability," said Bob Nardelli, Chrysler LLC CEO, in a statement.
GM and Chrysler already announced significant production cuts in the near future to save cash. On Dec. 12 GM announced first quarter production cuts in light of a 41 percent decline in November auto sales at the company. In a company announcement, GM said it would temporarily shut 30 percent of its North American assembly volume, removing 250,000 vehicles from production. In an even more drastic measure, Chrysler suspended all U.S. car production as of last Friday until Jan. 19. "due to the continued lack of consumer credit for the American car buyer and the resulting dramatic impact it has had on overall sales in the United States," the company said.
As the automakers scramble to renegotiate worker contracts and outstanding debt, the UAW has expressed concern over concessions its workers must make in the near future. "While we appreciate that President Bush has taken the emergency action needed to help America's auto companies weather the current financial crisis, we are disappointed that he has added unfair conditions singling out workers," UAW President Ron Gettelfinger said in a statement.
"Big Three" management and the UAW have sparred for years concerning employee wages, retirement benefits, and healthcare costs. The union recently agreed to new contracts to bring employee compensation more in line with that of foreign automakers operating in the United States. "No one enjoys a crisis but sometimes it is the best opportunity to bring real reform," said U.S. Senate Banking Committee member Sen. Bob Corker (R-Tenn.), a vocal critic of the current bailout, in a press release. But given the struggling economy, even with more loans, it is too early to tell if the automakers can survive the recession.
Chrysler Plans to Slash Costs
Chrysler LLC is working on a crash plan to slash costs further in a bid to show the federal government the company can be viable by March, senior executives told dealers in a Web cast this week. The auto maker, which is getting $4 billion in emergency loans, aims to submit a restructuring plan that shows how Chrysler plans to shrink its operations in response to the steep decline in auto sales in the last six months, the executives said, according to a person who watched the presentation.
"We have to size down for the industry we have," Vice Chairman Jim Press said in the Web cast, this person said. Under the terms of the loan program unveiled by President Bush last week, Chrysler has to show it can be viable by March to keep the money it gets to that point and qualify for additional loans. Mr. Press added that means a "massive reduction" in fixed costs. "We have to make concessions from the whole organization to make this loan work," he said, according to the person who saw the web cast.
Chrysler has already slashed costs and last month cut its salaried workforce by 25%. But Mr. Press said further belt tightening is necessary because the dramatic slowing of U.S. auto sales has taken a heavy toll on the company's finances. The slowdown in sales in the second half cost Chrysler $7.6 billion in business and caused the company to "run short of cash," Mr. Press said. In the last few months U.S. new-vehicle sales have run at an annualized pace of 11 million vehicles, a large drop from the year-ago pace of 16 million.
YRC Points to Shipping Slump
Trucking company YRC Worldwide Inc. said volumes have slumped in the first two months of the fourth quarter, mirroring comments made by fellow shippers, as the company disclosed ongoing talks to ease terms on credit lines and the cancellation of a $150 million tender offer. Like firms in other industries that have been warning of substantial, and sudden drops, in demand in recent months, shippers have also been reporting woes in recent weeks. And because they are considered a barometer of economic health, it makes the current downturn particularly worrisome. The autumn months ordinarily bring a surge in preholiday shipping.
YRC said Wednesday that per-day tonnage for its national segment was down 12% in October and November from a year earlier, with the regional business seeing an 11% drop when adjusted for network changes that took place early this year. Absent that, the drop is 21%. The company added it has been seeing pricing pressures, a factor Standard & Poor's Ratings Service used in cutting its credit rating on YRC further into junk territory after the company reported weaker-than-expected third-quarter results.
The company also said it is discussing with its lenders on easing the terms of its credit lines related to the amount of earnings needed compared to debt to remain in compliance. YRC hopes to complete the talks in a month and said a change would help YRC's liquidity, as will the integration its two largest brands -- Yellow Transportation and Roadway -- that will be completed in early spring, earlier than expected. The tender offer for up to $150 million in notes was pulled because one condition -- ratification of wage cuts by union workers -- hadn't taken place by midnight, the tender's deadline. YRC expects the contract amendment to be approved around year-end.
Dutch pension funds feeling the pinch
The credit crisis has led pension funds to put on the emergency brakes. Many of the larger funds have recently decided to freeze payouts. Banks have been bailed out, insurers saved and small Icesave depositors compensated. That leaves the pension funds. Pensions are a collective asset. Almost everyone in work has to contribute to a corporate pension scheme. At the end of September there was 623 billion euros in the national pension piggy bank. How much of it is left is anybody’s guess, experts say, but as much as 60 billion euros could have evaporated. In a reaction to the losses, big pension funds, like the ones for civil servants and teachers, health care workers and metal sector workers, have decided not to increase pensions in line with wages or with inflation.
The funds have until April 1 to come up with a rescue plan but want financial regulator - the Dutch central bank - to postpone the deadline. The funds are deploying their usual negotiating tactics. They are keeping a large margin, trying to prevent panic while remaining positive throughout. "We are going to pay out as normal and on time as we always have," says Elco Brinkman, chairman of the Netherland’s biggest pension fund ABP. Pension funds have received a double whammy this year. Not only have investments - with the exception of government bonds - catastrophically diminished in value but interest rates have gone down as well. Lower interest rates mean that pension funds have to save up money for longer in order to be able to meet future pension commitments. This double-edged sword sees investment value diminish and financial commitments grow. The funding ratios of nearly all pension funds have now plummeted to under the 105 percent legal norm which means pension funds are having to face some stark choices: waive indexation, put up premiums or dismantle pension plans.
The pension crisis will hit spending power all around, if not now then soon. Pensioners’ incomes will not keep up with inflation although the basic state pension may increase slightly. The pension build-up of millions of employees will be temporarily put on hold. That means that if this loss of pension is not compensated for during the coming years, future pensioners will end up poorer as a result. Indexation is not a right but is dependent on the individual position of each pension fund. Putting up premiums could be another way out of the pension crisis but employers - who pay an estimated two thirds out of a total of 24 billion euros worth of pension premiums - would be less than happy about that. Dismantling future pension schemes are a third possibility but here employees would object. The final option is to sit tight and wait for better times. It would be the practical thing to do seeing that pension funds have many long term commitments and there are not many people who are capable of predicting at a glance the effects these measures would have on this many pension funds.
The last pension crisis, from 2001 to 2003, gave the Dutch pension world some experience of crisis management. In that downturn, the stock market fall was more gradual and this time around we are faced with a much more acute financial crisis. Lack of trust is also paired to lower interest rates. The banks were rescued to safeguard the average saver’s deposits and it has not come to that yet for pension funds. The amount of money needed would be prohibitive. The pension funds need between 50 to 60 billion euros. The government has so far spent over 30 billion euros to bail out banks and insurers. Moreover, state support would not be compatible with pension fund ideology. Pensions, like wages, should remain firmly in the domain of employers and employees. Traditionally, the cabinet has no direct involvement with them. It seems the first steps towards a rescue plan have been made. The central bank is looking into the interest rate pension funds are using to calculate their commitments. According to the central bank the crisis has caused the usual average interest rate to become "distorted". A slightly higher interest rate would give the pension funds some much-needed breathing space in the short term but would not undo the freeze on pensions.
Russia Lets Ruble Slip Further
Russia's central bank Monday let the ruble depreciate for the sixth time this month, but the decision surprised some traders because it pushed the Russian currency to its lowest level against the U.S. dollar since January 2006. In early trading, the ruble slipped against the euro-dollar basket by 30 kopecks to 33.45. The move brought the ruble's losses against the basket to almost 14% since its Aug. 4 peak and to 9% since Nov. 11, when the central bank began the series of mini-devaluations.
The central bank engineers the weakening by widening the ruble's trading band against the basket, which consists of 55% dollars and 45% euros. On Monday, the ruble fell hard against the dollar and the euro simultaneously, a break with the central bank's recent pattern of intervention. "Today's depreciation was a surprise, it doesn't usually happen when the dollar has strengthened against the euro overnight," said Ilya Kolpukov, a currency trader at Moscow's Trust Investment Bank.
Russians, who saw their currency go into free fall in August 1998, are particularly sensitive to changes in the ruble-dollar exchange rate. Recently the central bank has only let the ruble weaken against the euro-dollar basket on mornings after the euro has risen against the dollar, meaning that the depreciation has gone unnoticed by many Russians who watch the dollar rate and pay little attention to the euro rate. But Russian companies now want dollars instead of rubles, and this supply of the local currency suggests the central bank will let the ruble weaken further.
Ilargi: UK home prices will fall much more than 10% in 2009, there is no bottom in sight anywhere, and the The Royal Institution of Chartered Surveyors should be disbanded and its forecasts subjected to legal scrutiny.
House prices 'to fall 10 per cent next year before picking up'
House prices will fall 10 per cent next year, but sales are expected to finally pick up as buyers looking for a bargain return to the market, it has been predicted. The Royal Institution of Chartered Surveyors (RICS) forecast further double digit house price falls during the next 12 months due to the mortgage lending market remaining "effectively closed" and the worsening economic climate. But it added there could be a 10 per cent increase in sales next year, saying transaction activity was now "bumping along the bottom". It said the key to turning buyer enquiries into sales would be the availability of mortgages.
The forecast comes as it was revealed the number of mortgages approved for people buying a new home plunging more than 60 per cent in November compared to a year earlier. A mere 17,773 loans were approved for house purchase in November, down from 20,767 in the previous month and 60.7 per cent less than in November last year, according to the British Bankers' Association. And there has been a steep decline in the number of people remortgaging, with just 29,798 loans approved for people switching to a new deal in November, compared to 52,452 during the previous month.
Economists warned, however, it will take time for confidence to return to the housing market. Howard Archer, an economist at Global Insight, said: "The outlook for the housing market remains bleak. Even if the government measures to tackle the financial crisis work on a sustained basis, it will clearly take time for confidence to improve and mortgage lending to pick up significantly." Seema Shah, an economist at Capital Economics, said: "The plunge in mortgage approvals, to a new record low, offers little hope of a rapid end to the housing market correction. With the economic downturn swiftly gathering pace and unemployment rising rapidly, 2009 promises to be an even tougher year for the housing market than 2008."
Capital Economics expects the Bank of England to cut interest rates to 0 per cent next year. The BBA said net mortgage lending - which strips out redemptions and repayments - reached £2.9 billion in November, down from £3.3 billion in October. David Dooks, BBA statistics director, said: "People remain concerned about the impacts of the rapidly slowing economy on their personal finances."
Pound Loses More Ground to Euro
The pound extended its decline against the euro and reversed early gains against the dollar as the bleak economic outlook dimmed the allure of the currency amid thin trade Wednesday. The pound has been hammered against the euro over the past couple of weeks, hitting a record low of £0.9553 last week on concern that the U.K. economy was in worse shape than that the euro zone's. Speculation that the Bank of England will cut interest rates more aggressively than the European Central Bank further pressured the pound.
Light trade ahead of the Christmas holiday may have exaggerated currency price moves, traders said. Wednesday, the euro hit a session high of £0.9536 and recently traded at £0.9535. The pound was down to $1.4684 from $1.4749 late Tuesday, after earlier rising to as high as $1.4801 amid broad dollar weakness. The pound also lost ground against the yen. The euro traded at $1.3957 from $1.3972 late Tuesday, while the dollar fetched ¥90.68 from ¥90.88. The euro was at ¥126.54 from ¥126.91 and the dollar traded at 1.0787 Swiss francs from 1.0879 Swiss francs.
"The pound has been weak over the past couple of weeks and the weakness will persist near term," said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. "But it was very, very quiet in the currency market." Although Mr. Osborne said the recent decline against the euro may have been excessive, light and illiquid holiday trading at year end may add to the momentum of selling, propelling the euro to parity with the pound in the next few weeks. Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, said the euro is likely to reach parity with the sterling during January, as fundamentals in the U.K. work against the currency. "The euro's advance has gained momentum and parity is the inevitable path," he said.
Market for Corporate Jets Goes Into Free-Fall
Maybe General Motors should throw in a fleet of Cadillacs. The automaker is dumping its corporate jets into what some participants say is the worst market they have ever seen. Just seven months ago, hundreds of mega-millionaires, including Ralph Lauren and David Geffen, were elbowing one another in the lineup to buy a $60 million Gulfstream G650, which was not expected to hit runways until 2012. It did not matter that $500,000 had to be wired to Gulfstream’s account at a Midwest branch of JPMorgan Chase at exactly 12:01 a.m. on April 15, or that bidders who secured a place in the waiting line could not sell their rights if they changed their minds, according to one bidder.
Some eager moguls even tried to improve their chances of getting a jet quicker by opening accounts at Chase’s Midwest office. Among high-ticket status symbols, "me and my brand new jet" was it. But that was another era — before the credit crisis and before billions of dollars in corporate and individual wealth were lost. "The jet market stinks," said Richard Santulli, the chief executive of Netjets, the private jet company owned by Berkshire Hathaway, the holding company led by Warren E. Buffett. To control costs, companies including Citigroup and Time Warner are selling their jets. Alcatel-Lucent has allowed leases on two jets to expire without renewing them and has put its third jet up for sale.
And the public relations fiasco that engulfed the chief executives of Detroit’s automakers when they flew to Washington on company planes to seek a government bailout has underscored how inappropriate such travel can seem in this recession. General Motors, which leases seven planes, put the majority of them on the market before the government said it must do so as a condition of government assistance. The automaker has also closed its air transportation services unit, which had 49 employees. "We could not justify an in-house aircraft operation," a G.M. spokesman, Tom Wilkinson, said. "We are negotiating to transfer the remaining planes to another operator. Ford too has shut down its flight department."
Jet brokers, who normally have a worldwide clientele, say the market has constricted abroad in recent months as well. "Our inventory is up dramatically, and demand is way down," said Josh Messinger, of J. Messinger Corporate Jet Sales, a jet broker. "The decline is particularly pronounced for those who bought more recently because prices had soared so much." "I spent a week in Dubai, and the front page of the paper there had articles every day about their economy having issues due to real estate issues," he said. Mr. Santulli said that the Russians had been big buyers of jets. "But the fall of the Russian stock market has had a huge impact," he said. "The Indian stock market stinks, and the dollar has gotten stronger, which hurts airplane sales."
Because jets are priced in dollars, they become more expensive for foreigners as the dollar gets stronger. Among jets, the large-cabin, long-range segment of the market is suffering the most, said Bill Quinn, director of aircraft sales and acquisitions at Cerretani Aviation, based in Boulder, Colo. That includes planes from Gulfstream, Bombardier and Falcon. Carrying costs are high. A Gulfstream G550 costs about $47 million. Though expenses can vary by state, one mogul’s business manager estimated that annual costs run about $1.3 million, including $500,000 for property tax and $400,000 for pilots and stewards. Typical operating costs are more than $2,000 an hour in the air, he said.
The corporate side of the business is particularly vulnerable because of public scrutiny. "They are not going to do employee layoffs and keep the jets," said Mary Hevener, a tax adviser who specializes in executive compensation at Morgan Lewis & Bockius. Besides, Congress stripped away the deductibility of personal travel for executives in 2004 by allowing companies to deduct from taxes only the rough amount of a first-class ticket, far less than private jet travel costs. Corporate chiefs concerned about public scrutiny are more inclined to look for alternatives than to return to the airlines. Some are examining whether they should take delivery of planes already ordered. One company had been looking to upgrade its two planes. "Now they are weighing whether or not to buy new planes or keep what they have," Mr. Quinn said.
Some are downsizing. "Some of these guys just move the deck chairs around," he said. "They get rid of the big planes and go to fractional ownership, or they go to charter, or they come back into the marketplace with a leased plane," he said. But every part of the private jet industry has been affected. Netjets lets people buy a fractional ownership in planes, and it sells Marquis jet cards that give customers access to the fleet in 25-hour increments. Those businesses, too, are seeing a slowdown. "People have lost a lot of money, and are careful about how they spend it," Mr. Santulli said.
"I have never seen it like this," said Mike Silvestri, the chief executive of Flight Options, which sells shares in jets as well as plans that cover a fixed number of hours a year of private jet use. "Customers are just not flying as much." Some customers are stretching out the hours bought for a single year over a longer period. Flight Options has laid off 134 people, including 104 pilots, and hopes it will be able to bring them back. Mr. Santulli said that the jet market usually picks up three months after the stock market has reached a bottom. There is no indication of an uptick yet.
Bush Cancels Pardon After Campaign Donation Disclosed
President George W. Bush withdrew a pardon he granted a day earlier to a New York real-estate developer after the White House learned his father made the maximum $28,500 donation to the Republican National Committee months earlier. Isaac Robert Toussie of Brooklyn, one of 19 people pardoned yesterday, pleaded guilty in 2001 to using false documents to get federally insured mortgages and in 2002 to mail fraud for selling land to Suffolk County at twice its appraised value. He was sentenced in September 2003 to five months in jail, five months of home detention and a $10,000 fine.
"There were some details that weren’t presented to the president when he considered the pardon," spokesman Tony Fratto said today in an interview. "The biggest piece of news was the political contributions by his father, which we weren’t aware of until we heard it from reporters." His father, Robert Toussie, also of Brooklyn, contributed $28,500 to the Republican National Committee on April 25 and the maximum $2,300 to Senator John McCain’s presidential campaign five days later. In October, he made $2,300 donations to two Republican U.S. senators in close races, Norm Coleman of Minnesota and Gordon Smith of Oregon. The Center for Responsive Politics, a Washington-based research group, has no records of any earlier donations by Robert Toussie.
In a follow-up interview, Fratto said, "Political contributions had absolutely nothing to do with the president’s consideration" of the pardon request. "Neither he, nor the White House counsel’s office, in making the recommendation, were aware of any political contributions." Kermit Roosevelt, a law professor at the University of Pennsylvania and an expert of the presidential clemency process, said in an e-mail that rescinding a pardon is "extremely rare" and that he was not aware of such revocations in the past. "Because the pardon power is constrained only by executive discretion, the president usually takes care to get it right before making the decision," Roosevelt said.
Bush’s predecessor, President Bill Clinton, was criticized for his last-minute pardon of fugitive financier Marc Rich before he left office in 2001. Rich’s former wife, Denise, had contributed between $250,000 and $500,000 to Clinton’s foundation. White House spokeswoman Dana Perino said in a statement that Bush ordered the Justice Department’s pardon attorney "not to execute and deliver a grant of clemency to Mr. Toussie." The pardon attorney hadn’t initially reviewed the request because it came less than five years after Toussie’s sentence ended, Perino said. "The president believes that the pardon attorney should have an opportunity to review this case before a decision on clemency is made," Perino said.
Henry Mazurek, a New York lawyer who has represented Isaac Toussie, didn’t immediately respond to a voice mail message left after business hours. A contact number for Toussie couldn’t be located. Fratto said the pardon request was made both to White House Counsel Fred Fielding and the Justice Department. He said it was "not unusual for petitions" for pardons to be brought to the counsel’s office. Toussie’s pardon application was filed by his lawyers in August with the Justice Department and then was presented to Fielding’s office by the lawyers earlier this month, Fratto said. Calls to Fielding’s office after business hours were not immediately returned and Fratto said he wasn’t available for comment.
Fielding directly reviewed the pardon application "because he’s involved in every single pardon," Fratto said. "Fred makes the pardon recommendations to the president." Fratto also said one of Toussie’s lawyers was Brad Berenson, a former associate counsel in the White House counsel’s office during Bush’s first term. The Toussies were sued by the buyers of about 250 homes who claim they were steered to overpriced homes and were misled about their mortgage obligations, said Peter Seidman, a lawyer with Milberg LLP in New York who represents the plaintiffs.
"It’s the type of practice that got us into the trouble that we’re in now," Seidman said. "I am glad that someone in the White House woke up and realized that this kind of conduct is intolerable." The lawsuit accused the Toussies of incorrectly advertising that their project was sponsored by the National Association for the Advancement of Colored People and black celebrities including Maya Angelou and Whoopi Goldberg.
Looking Back, Bush and Cheney Reveal Different Views
President Bush and Vice President Dick Cheney have been unusually talkative in recent weeks, sharing candid thoughts in a string of exit interviews. But after eight years of a tight partnership that gave Mr. Cheney powerful influence inside the White House, the two are sounding strikingly different notes as they leave office, especially on one of the most fundamental issues of their tenure: their aggressive response to the Sept. 11 terrorist attacks.
Mr. Bush defends his decisions as necessary to keep the nation safe, yet sounds reflective, even chastened. He has expressed regrets about not achieving an overhaul of immigration laws and not changing the partisan tone in Washington. And the man who got tangled up in a question about whether he had made any mistakes — he could not come up with one in 2004 — recently told ABC News that he was "unprepared for war," and that "the biggest regret of all the presidency has to have been the intelligence failure in Iraq."
Mr. Cheney, by contrast, is unbowed, defiant to the end. He called the Supreme Court "wrong" for overturning Bush policies on detainees at Guantánamo Bay; criticized his successor, Vice President-elect Joseph R. Biden Jr.; and defended the harsh interrogation technique called waterboarding, considered by many legal authorities to be torture. "I feel very good about what we did," the vice president told The Washington Times, adding, "If I was faced with those circumstances again, I’d do exactly the same thing."
The difference in tone, friends and advisers say, reflects a split over Mr. Bush’s second-term foreign policy, which Mr. Cheney resisted as too dovish. It also reveals their divergent approaches to post-White House life. Mr. Bush, who is planning a public policy center in Dallas, is trying to shape his legacy by offering historians a glimpse of his thinking, while Mr. Cheney, primarily concerned about the terrorist threat, is setting the stage for a new role as a standard-bearer for conservatives on national security.
"The president’s interviews are about creating a basis for historians to evaluate the context of his decisions differently, with more input from him," said Wayne Berman, who has advised Mr. Bush and is a longtime friend of Mr. Cheney. "Cheney is living in the moment of, ‘There’s a serious ongoing threat,’ and I believe he sees himself more in a Churchill-like role, as the sentinel issuing the call for vigilance." Mr. Bush and Mr. Cheney still have lunch together once a week, administration officials say, and the vice president remains the president’s staunchest defender. But while Mr. Cheney has been "loyal to a fault," said John R. Bolton, the former ambassador to the United Nations whose views often reflect those of the vice president, he is also "increasingly in a beleaguered position."
In the first term, Mr. Cheney, backed by his close ally, Donald H. Rumsfeld, who was then the defense secretary, was ascendant, and his views about the aggressive use of executive authority and military might held great sway. But after Mr. Bush fired Mr. Rumsfeld in 2006 — the only presidential decision Mr. Cheney has publicly disagreed with — the vice president took a back seat to Secretary of State Condoleezza Rice, who pushed the president to pursue greater diplomacy with two countries he once called "rogue nations," Iran and North Korea.
"Our ability to explain what we’ve been doing in the national security field for eight years has been wholly inadequate," Mr. Bolton said, "and part of that is because too many high officials in the administration were embarrassed by the decisions. Cheney has never been embarrassed by it, and now, in the last months, he is freer to make the kind of forceful and emphatic case for it that others were unwilling to make."
Mr. Bush and Mr. Cheney appear to be giving more interviews than their recent predecessors. Dan Quayle, the last vice president not to seek the presidency while in office, gave three exit interviews; Mr. Cheney has so far given four. President Ronald Reagan gave five interviews during his last two months in office; President Bill Clinton gave seven. Mr. Bush has already given 10, to outlets as varied as Real Clear Politics, the Pentagon Channel, an Arabic television channel and a sportswriter for The Washington Post; the White House says more are to come.
Historians say presidents, especially those who serve two terms, often grow reflective at the end of their tenure. "They tend to be exhausted, they’re worn out, they’re trying to make some sense of their administrations, and there’s a natural tendency for them to want to give their own perspective," said Jay Winik, who got to know Mr. Bush and Mr. Cheney after they read his book, "April 1865," an account of the closing month of the Civil War.
Never the introspective type, Mr. Bush has been freely answering "how do you feel" queries, which he once routinely dismissed as "goo-goo questions," said his first press secretary, Ari Fleischer. He has also used his interviews to reveal his softer side. He has spoken of "my relationship with the Good Lord," joked about his wife’s cooking and spotlighted social programs he regards as achievements, like education reform and his global plan to fight AIDS.
If he has criticisms of President-elect Barack Obama, Mr. Bush has not shared them; rather, he has hewed to the Bush family credo of graciousness in departure or defeat. ("I think he’s discovered his inner Bush," Mr. Berman, the adviser, said.) He also opened the door to a possible role for himself in the Obama presidency, citing his own decision to ask his father, the first President Bush, and Mr. Clinton to spearhead a fund-raising effort for tsunami victims.
"President-elect Obama, I am confident, will call upon presidents to take on a mission," Mr. Bush told C-Span. "I will be happy to do it, particularly if I agree with the mission." Mr. Cheney has been less diplomatic. Like Mr. Bush, he has praised Mr. Obama for keeping Robert M. Gates as defense secretary. But on "Fox News Sunday" this week, Mr. Cheney shot back at Mr. Biden for calling him "the most dangerous vice president in history." And asked by The Washington Times for his advice for Mr. Obama, Mr. Cheney talked of the importance of personnel decisions, then volunteered, "Senator Clinton as secretary of state — I would never pick her to be my secretary of state."
Both men say they look forward to private life. For Mr. Cheney, who has served in four Republican administrations, transitions are nothing new. "It’s not my first time at the rodeo," he told The Washington Times. Mr. Bush, who became Texas governor 14 years ago, told ABC News that he was eager to "live life without the limelight." Yet both will have more to say. Mr. Cheney is likely to write a book. Mr. Bush is contemplating a farewell address, and says he will definitely write a book, to give Americans, as he told The Washington Times, "one man’s point of view that happened to be in the center of it all."
Is the Bush administration criminally liable for its lawlessness?
Whatever its other legacies, the Bush administration will be remembered for its contemptible disregard for the law in the post-9/11 war on terrorism. From the wiretapping of Americans without a court order to the waterboarding of suspected terrorists to the refusal to abide by the requirements of the Geneva Convention, many of the administration's policies can fairly be described as lawless.
But were they also criminal? Should officials, including Vice President Dick Cheney and former Defense Secretary Donald H. Rumsfeld, be put on trial, either in a court of law or in a forum like South Africa's Truth and Reconciliation Commission? As the Bush administration nears its end, calls for such a reckoning are coming from civil libertarians and some supporters of President-elect Barack Obama. Some even argue that President Bush should be indicted.
This editorial page has been uncompromising in its criticism of the Bush administration's flouting of international and domestic law. The administration was wrong to evade courts in seeking warrantless surveillance of Americans, wrong to establish the Guantanamo Bay detention center, heinous in its acceptance of torture. But we are wary of either the criminal prosecution of administration officials or some South-Africa-style process.
The former model is reminiscent of the Watergate scandal, in which several officials -- including President Nixon -- broke identifiable criminal statutes by obstructing the investigation of a burglary motivated by partisan politics. From there, of course, Watergate expanded into a web of criminal violations, from break-ins to the use of the IRS to punish political enemies of the Nixon White House. It's conceivable that individuals in the Bush administration violated criminal law. But if they did so as part of a post- 9/11 response to terrorism, it would be all but impossible to prosecute them successfully.
Besides, the scandal of the Bush administration wasn't a matter of individual, politically motivated violations of law. Rather, it was a systemic failure to take seriously the spirit as well as the letter of this country's commitment to the humane treatment of prisoners or the privacy rights of Americans secured by the Foreign Intelligence Surveillance Act, or FISA.
That's a failure in which Congress must share culpability with the administration. It was the administration that, with the help of compliant legal counsel, rationalized the use of "enhanced" interrogation techniques such as waterboarding, sleep deprivation, humiliation and the use of dogs to intimidate prisoners of war and suspected terrorists. But, as the vice president argued recently, Congress at first either acquiesced in, or offered muted objections to, the administration's policies. That the failures were collective rather than individual makes them no less appalling, but it does suggest that a criminal prosecution will not remedy them.
Likewise, it was the administration that arrogated to itself the power to create a bargain-basement judicial system to try detainees at Guantanamo Bay, Cuba, a policy that fortunately was nullified by the U.S. Supreme Court. But it was Congress, once it took responsibility for establishing procedures for military commissions, that voted to strip from detainees the right to challenge their confinement by seeking the ancient writ of habeas corpus. Here too it was left to the Supreme Court to uphold timeless principles of justice. These lapses, however, tell only part of the story. This country's system of checks and balances -- which we would define broadly to include a free press -- responded, albeit belatedly, to some of the administration's excesses. This is why the analogy to the apartheid regime in South Africa is fatally flawed.
In enacting anti-torture provisions in the 2005 Detainee Treatment Act, Congress seemed to have ended waterboarding, though it wrongly perpetuated a double standard under which the CIA could use harsher interrogation methods than the armed services. After the New York Times exposed the National Security Agency's secret surveillance program, Congress passed a new version of FISA that, while imperfect, reined in spying on Americans and increased judicial oversight. Those actions may not have gone far enough, but they suggest a system of accountability, however imperfect.
Even within the Bush administration, political appointees such as former Atty. Gen. John Ashcroft and FBI Director Robert S. Mueller III pushed back against the administration's most blatant attempts to circumvent the law. Support for the rule of law also came from courageous Justice Department lawyers such as Jack Goldsmith, who rescinded a torture-friendly legal opinion supplied by a predecessor.
The Bush administration's lawlessness calls for a serious reckoning, one that already has begun with a scathing report by the Senate Armed Services Committee about the role played by Rumsfeld and other officials in the spread of abusive interrogation techniques. That's welcome and appropriate -- and a vindication of American institutions designed to investigate the misconduct of public officials. Further congressional investigation of the administration's spying program is also in order. But as enticing as many find the idea of putting Rumsfeld or Cheney in the dock, neither a show trial nor a truth commission would be the right way to expunge or atone for the abuses of this administration. Thankfully, those who sanctioned them will soon be history.
Ilargi: Of course, we can't help combining this research with yesterday's piece on our propensity for deceit.
Our unconscious brain makes the best decisions possible
Neuroscientists Daniel Kahneman and Amos Tversky received a 2002 Nobel Prize for their 1979 research that argued humans rarely make rational decisions. Since then, this has become conventional wisdom among cognition researchers Contrary to Kahnneman and Tversky's research, Alex Pouget, associate professor of brain and cognitive sciences at the University of Rochester, has shown that people do indeed make optimal decisions—but only when their unconscious brain makes the choice.
"A lot of the early work in this field was on conscious decision making, but most of the decisions you make aren't based on conscious reasoning," says Pouget. "You don't consciously decide to stop at a red light or steer around an obstacle in the road. Once we started looking at the decisions our brains make without our knowledge, we found that they almost always reach the right decision, given the information they had to work with." Pouget says that Kahneman's approach was to tell a subject that there was a certain percent chance that one of two choices in a test was "right." This meant a person had to consciously compute the percentages to get a right answer—something few people could do accurately.
Pouget has been demonstrating for years that certain aspects of human cognition are carried out with surprising accuracy. He has employed what he describes as a very simple unconscious-decision test. A series of dots appears on a computer screen, most of which are moving in random directions. A controlled number of these dots are purposely moving uniformly in the same direction, and the test subject simply has to say whether he believes those dots are moving to the left or right. The longer the subject watches the dots, the more evidence he accumulates and the more sure he becomes of the dots' motion.
Subjects in this test performed exactly as if their brains were subconsciously gathering information before reaching a confidence threshold, which was then reported to the conscious mind as a definite, sure answer. The subjects, however, were never aware of the complex computations going on, instead they simply "realized" suddenly that the dots were moving in one direction or another. The characteristics of the underlying computation fit with Pouget's extensive earlier work that suggested the human brain is wired naturally to perform calculations of this kind.
"We've been developing and strengthening this hypothesis for years—how the brain represents probability distributions," says Pouget. "We knew the results of this kind of test fit perfectly with our ideas, but we had to devise a way to see the neurons in action. We wanted to see if, in fact, humans are really good decision makers after all, just not quite so good at doing it consciously. Kahneman explicitly told his subjects what the chances were, but we let people's unconscious mind work it out. It's weird, but people rarely make optimal decisions when they are told the percentages up front."
Pouget analyzed the data from a test performed in the laboratory of Michael Shadlen, a professor of physiology and biophysics at the University of Washington. Shadlen's team watched the activity of a pair of neurons that normally respond to the sight of things moving to the left or right. For instance, when the test consisted of a few dots moving to the right within the jumble of other random dots, the neuron coding for "rightward movement" would occasionally fire. As the test continued, the neuron would fire more and more frequently until it reached a certain threshold, triggering a flurry of activity in the brain and a response from the subject of "rightward."
Pouget says a probabilistic decision-making system like this has several advantages. The most important is that it allows us to reach a reasonable decision in a reasonable amount of time. If we had to wait until we're 99 percent sure before we make a decision, Pouget says, then we would waste time accumulating data unnecessarily. If we only required a 51 percent certainty, then we might reach a decision before enough data has been collected. Another main advantage is that when we finally reach a decision, we have a sense of how certain we are of it—say, 60 percent or 90 percent—depending on where the triggering threshold has been set. Pouget is now investigating how the brain sets this threshold for each decision, since it does not appear to have the same threshold for each kind of question it encounters.