Pool hall, Shasta County, California
Ilargi: The revolving doors between Washington and Wall Street are swinging like never before. Lawrence Summers and Robert Rubin are the finance powerhouses in the upcoming Obama administration. They were in the exact same place 10 years ago. This time, they bring along a protégé in Tim Geithner, who will be the fall guy if all goes wrong. And they know it will go wrong; they've seen it before. They're not dumb. They're just sick, not stupid. They know it will go wrong, because everything they've done so far has failed. Only, that's not what they see. They can't see it, because they are gambling addicts. And as you can find out in Gambling Anonymous meetings, the addicts are masters in distorting their own perception of reality. Rubin and Summers differ from most addicts in that they are in positions to control what is legal, which is quite close to what is real, and what is not.
The November 12, 1999 repeal of the Glass-Steagall Act (officially named the Banking Act of 1933), enforced through the signing into law of the Gramm-Leach-Bliley Act by Slick Billy Clinton, gave them access to depositors’ money, and thus made it legal to use people's savings for "investments". 9 years later, those savings were all gone. Today they have an even larger pool of dough: the money of all Americans, and all of their children. This is what you're looking at when you see Henry Paulson, Barney Frank, Ben Bernanke or Barack Obama talk about bail-outs and rescue plans. It's all about providing the world's most megalomaniac gamblers with cash for their addictions. There's nothing else, that’s all there is.
The banking industry had tried to get rid of Glass-Steagall for a decade, but, aside from minor changes in 1980 and 1982, it wouldn't be until Rubin and Summers were at the helm, as Treasury Secretary and Deputy Secretary, that they succeeded in pushing through the repeal. After setting up the procedure, Rubin left the government on July 1, 1999, and joined the newly formed Citigroup, leaving Summers as Treasury Secretary to execute the plan and have President Clinton sign the Gramm-Leach-Bliley Act into law.
Citigroup was put together in 1998 by combining Citibank and insurance slash finance company Travelers. The only way this combination made sense was for the Glass-Steagall Act to be gone, since the Act barred banks merging with insurers. Citi would have had to shed many valuable assets within the next 2-5 years to remain within the law. But then-CEO Sandy Weill stated at the time: "that over that time the legislation will change...we have had enough discussions to believe this will not be a problem“. In other words, the fix was in. The fact that Rubin joined the company months before Clinton signed Gramm-Leach-Bliley only serves to confirm that.
Because of these preparations, Citi was off to a flying start in the new "free world", as was Goldman Sachs, Rubin's longtime (1966-1992) employer before he joined the Clinton administration. At Goldman, one of Rubin's pupils was Henry Paulson, who would become Treasury Secretary under Bush 43. Larry Summers doesn't have a Goldman or Citi background. He, like Princeton’s Ben Bernanke, represents another piece of the power pie, having served for a long time at Harvard university and the World Bank. In that same vein, Rubin is presently co-chair for the Council on Foreign Relations.
Of course the Fed chairman during all this time was Alan Greenspan. In 2000, the trio of Rubin, Summers and Greenspan successfully argued for the deregulation of the derivatives trade. This enabled CIti and Goldman Sachs, as well as other major Wall Street players, to increase their bets and gambles manyfold. And let me repeat: it took just 9 years for them to burn through all customer deposits. And then some.
The real consequences of their actions will not be truly felt for a while to come, since they now put all their economic and political weight, again successfully, behind the persistent attempts to avoid putting fair value, mark-to-market prices on the respective banks’ gambling losses, also known as derivatives. The reason is clear: applying fair accounting value would not only expose the gentlemen as frauds and criminals, it would also immediately bankrupt most, if not all, of the most powerful Wall Street institutions.
Because of the revolving doors, and the political power these provide them with, the bankers that have incurred the hundreds of trillions of dollars worth of gambling losses, now have drilled into a new source of funds to quench their insatiable lust for more betting: taxpayers’ money. We should realize that the $1 or $2 trillion they have plundered so far from what belongs to the public, is by no means enough to cover the losses of the past. It's therefore inevitable to conclude that the new-found money will be used for more double or nothing wagers.
The fact that Rubin now leaves Citigroup, which will free time to take the reins of Obama’s finance squad, should be a clear sign for everyone that the gamblers are getting increasingly serious about coming for the public trough. It's also a sign that they are equally serious about keeping the toxic derivative papers in the vaults, and about keeping the vaults locked, until they have disappeared into the night.
Savings and deposits at Citigroup are long gone. Without public funds, Citi itself would be long gone. To understand what's going on, look at the behavior of anyone addicted to gambling, or heroin for that matter. That's where you can find the clues. If you see these people as financiers who sometimes make unfortunate honest mistakes, you’re way off. They are junkies in urgent need of treatment, and they're not getting it. And until they are stopped, they will bankrupt thousands of more Americans every single day, like any junk does to his or her mother, if given the chance.
Robert Rubin and Larry Summers are junkies, they are addicted to gambling on a level you never thought possible. Get them treatment ot show them the door, but whatever you do, don't give them your money. You'll never see it back. Ask any mom with an addicted child. Look, there is no law that prevents them from taking your money and spending it at the casino. They are the law. Obama guarantees it.
To bamboozle; deceive.
a. To depart in a hurry; abscond. "Your horse has absquatulated!"
b. To die.
Either you didn't like Rubin -- or you were him
How will people remember the Robert Rubin era at Citigroup? Right now, the smart money is on "a nightmare." For all of his supposed prowess in financial markets, the former Goldman Sachs Group Inc. banker and U.S. Treasury secretary presided over an era of scandal and then risk overload during his nine years as a director and consultant at the financial-services conglomerate. His tenure began with the tainted-research scandal that entwined analyst Jack Grubman and then-Chief Executive Sandy Weill. Then came the missteps that led to Citi's shutting down part of its Japanese banking unit in 2004.
It ends after a humiliating 18 months that has seen Citi oust Weill successor Charles Prince, take $83 billion in write-downs, raise $36 billion in investor cash, take $40 billion from taxpayers, and get the government to backstop more than $250 billion in risky assets on its balance sheet. Ultimately, Rubin had two excuses, neither of which made him look good: If he was simply a bystander, he wasn't worth the compensation he was being paid, and if he did have more responsibility, then he deserves some of the blame for the bank's dismal record and its 90% decline in stock price.
Rubin's near-decade at Citi was marked by personnel tumult. Ousted or reassigned executives during his career included such high-profile names as Prince, Weill, Michael Carpenter, Michael Klein, Sallie Krawcheck, Todd Thomson and Tom Maheras. Those faces came and went, but Rubin was a constant, and a top lieutenant to both Weill and Prince. He's been at Citigroup for nine years, earning about $15 million a year.
His defenders at Citigroup argue that Rubin was hired only as a rainmaker -- someone to act as a diplomat, using his relationships to win deals and business from important people and companies. But they forget that Rubin had a role in picking several top managers at Citi, including two CEOs. The current boss, Vikram Pandit, was handpicked by Rubin. If his defenders can't remember, they should ask Citi's shareholders. Every time they look at their portfolios, they're reminded.
Rubin Is Stepping Down at Citigroup
Robert E. Rubin, the former Treasury secretary who is an influential director and senior adviser at Citigroup, will step down after coming under fire for his role in the bank’s current troubles, the bank confirmed Friday. Since joining Citigroup in 1999 as an adviser to the bank’s senior executives, Mr. Rubin, 70, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has made one misstep after another.
When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent. “This is not a decision that I have come to lightly,” Mr. Rubin said in a statement from the bank. “But as I enter my 70’s and with all that is now in place at Citi, I believe the time has come for me to make these changes.”
Mr. Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration. As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues. In December, federal regulators approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank.
The complex plan calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. Under that plan, Citigroup agreed to certain executive compensation restrictions, which will be reviewed by regulators. Once the nation’s largest and mightiest financial company, Citigroup lost 86 percent of its value in the stock market in the last year as the bank confronted a crisis of confidence. With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.
Rubin Departs Citi on a Low Note
Robert Rubin arrived at Citigroup Inc. more than nine years ago as one of the world's savviest and most respected financial executives. After collecting $115 million in pay, he leaves with his star diminished. The former Treasury secretary was credited with helping control two big financial crises during his time in Washington: the Mexican peso devaluation and the Asian financial meltdown. But he acknowledges that he underestimated the scale of the current financial crisis. In his resignation letter to Citigroup Chief Executive Vikram Pandit, Mr. Rubin wrote that his "great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today."
Mr. Rubin, who most recently served as a Citigroup director and senior counselor, was also an economic adviser to Barack Obama's campaign. He wrote in his resignation letter that he wants "to intensify my engagement with public policy." Mr. Rubin has continually emphasized that he had no operating role at Citigroup and that others -- including former Fed Chairman Alan Greenspan -- also missed the warning signs of the crisis. He resigned from his senior counselor position as of Friday and said he would not stand for re-election to the board at Citigroup's annual meeting this spring.
Inside and outside the bank, Mr. Rubin is blamed by some for pushing Citigroup to rev up risk-taking as the housing and derivatives bubbles expanded -- a move that has saddled Citigroup with tens of billions of dollars in write-downs and necessitated a sweeping government bailout of the financial giant. Shareholders are irate that he has pocketed $115 million in pay since 1999. Citigroup's share price is down 70% since he came on board. In an interview with the Wall Street Journal in late November, Mr. Rubin, 70, defended the board's oversight of the company and his pay packages. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said. He did not receive a bonus in the past two years.
Mr. Rubin's stature and influence meant his fortunes were inextricably linked to those of Citigroup and its management team. Last year, he was the primary advocate of naming Mr. Pandit, a newcomer to Citigroup, to be the company's CEO. While other Citigroup directors harbored doubts about Mr. Pandit's qualifications, Mr. Rubin eventually persuaded his colleagues to endorse the former Morgan Stanley executive.
Mr. Rubin was hired at Citigroup after serving as President Clinton's Treasury secretary and immediately added stature to the firm, which had been cobbled together by former CEO Sandy Weill. Some executives at Citigroup prized his thick Rolodex and his deep knowledge of Wall Street. In his resignation letter, Mr. Rubin noted that he had planned to scale back his involvement with Citigroup six months ago, but Mr. Pandit convinced him to stay on board. "But now, as you and your team have made the tough decisions... and established yourselves, the time has come for me to reshape the structure of my life," Mr. Rubin wrote.
Plan to Jump-Start Economy With No Manual
The fresh evidence on Friday of the economy’s downward spiral focused even more attention on two questions: Is the stimulus package being pushed by President-elect Barack Obama big enough? And will the component parts being assembled by Congress provide the most bang for the buck? With the Federal Reserve having just about reached the limit of how much it can help the economy with cuts in the interest rate, Washington’s ability to end or at least limit the recession depends in large part on the effectiveness of the big package of additional spending and tax cuts that Mr. Obama has made the centerpiece of his agenda.
And with the economy facing what now seems sure to be the sharpest downturn since the 1930s, the financial system balky and the government facing towering budget deficits, economists and policy makers acknowledge that there is no playbook. “We have very few good examples to guide us,” said William G. Gale, a senior fellow at the Brookings Institution, the liberal-leaning research organization. “I don’t know of any convincing evidence that what has been proposed is going to be enough.” In part because Mr. Obama wants and needs bipartisan support, the package is being shaped by political as well as economic imperatives, complicating the process by putting competing ideological approaches into the mix.
It includes $300 billion in temporary tax cuts for individuals and businesses, in part to attract Republican support. It includes a big expansion of safety-net programs like unemployment insurance, which Democrats say makes both economic and social sense. It includes more money for highways, schools and other public infrastructure; more money for “green” energy projects; and more money to help state governments pay for health care and education. Republicans, as always, are advocating for more and broader tax cuts. But the evidence is ambiguous about whether tax cuts will really spur economic activity at a time when consumers and businesses alike are frozen in fear and reluctant to let go of their money.
The risk is that Mr. Obama and the Congress will weigh down their effort with measures that cost many billions of dollars but may not have much impact on economic activity. Tax breaks, for example, usually produce less than $1 of stimulus for every dollar they cost, economists say. Spending on public construction projects, like highways and bridges, produces the most economic activity — but there is a limit to how many projects are “shovel-ready,” and even those take time to generate jobs and ripple through the economy.
Christina Romer, whom Mr. Obama has designated to be his chief economist, concluded in research she helped write in 1994 that interest-rate policy is the most powerful force in economic recoveries and that fiscal stimulus generally acts too slowly to be of much help in pulling the economy out of recessions, though associates said she now supports a big stimulus package if policy makers roll it out early enough in the recession. The goal behind all those ideas is to jump-start economic activity by getting as much money as possible as quickly as possible into the hands of consumers and businesses, trying to make up for the falling demand in the private sector that is leading to higher unemployment.
And although the package includes a big dose of tax cuts, it represents a big departure from President Bush’s playbook by relying heavily on direct government spending. “This is not an intellectual exercise, and there’s no pride of authorship,” Mr. Obama told a news conference in Washington on Friday. “If members of Congress have good ideas, if they can identify a project for me that will create jobs in an efficient way — that does not hamper our ability to, over the long term, get control of our deficit; that is good for the economy — then I’m going to accept it.”
Mr. Obama’s aides said he did not intend to unveil a detailed formal proposal but rather to allow Congress to fill in the outline that he has proposed. Given the recent scale of the downturn — the nation lost 1.5 million jobs in the last three months of 2008, and economic output during those months shrank by 6 percent compared with same period in 2007 — economists were highly uncertain about whether the economic plan would provide enough firepower. Adam Posen, the deputy director of the Peterson Institute for International Economics in Washington, said Mr. Obama’s plan could provide just the right boost — if it was carried out properly.
But as the Federal Reserve has been learning for months now, the biggest obstacle to economic activity right now is not a shortage of money. The real obstacle is pervasive fear, which has made banks reluctant to lend and companies reluctant to invest in expansion. Alan J. Auerbach, an economist at the University of California, Berkeley, said the overall scale of the program looked “reasonable” at $800 billion over two years. “It’s much bigger than anything that’s been tried in my lifetime, but this is scarier than anything we’ve seen in my lifetime,” Professor Auerbach said. Left to their own devices, many Congressional Democrats would prefer to focus almost entirely on spending projects and avoid tax incentives.
“One thing we learned from the Depression is marginal, incentive changes don’t work very well when the economy is falling away from you very rapidly,” said Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee. “And that’s what’s occurring here.” But Republicans have been adamant about the need for tax breaks, and Mr. Obama has made it clear he would like to bring as many members on board as possible. Representative Paul D. Ryan, Republican of Wisconsin, said in an interview, “I really do believe that if you combine the evidence of history along with the psychological concerns about making investments in the economy today, the better bang for your buck is lower taxes that are certain and permanent and lasting.”
The Democratic plan would direct much of the stimulus money to low-income and middle-income families. That reflects both traditional Democratic concerns about helping lower-income households, as well as the view of economists who say that people with lower incomes are more likely to spend rather than save any money they receive from the government. Mark M. Zandi, chief economist at Moody’s Economy.com, a forecasting firm, told a forum of House Democrats this week that the “bang for the buck” — the additional economic activity generated by each dollar of fiscal stimulus — was highest for increases in food and unemployment benefits. Each dollar of additional money for food stamps yields $1.73 in additional economic activity, Mr. Zandi estimated, and each extra dollar in unemployment benefits yields about $1.63.
By contrast, Mr. Zandi estimated, most tax cuts produce less than a dollar for each dollar of stimulus, especially if the tax cuts are temporary, because people save at least some of their extra money. One of the few tax cuts that economists say can generate a positive bang for the buck is a reduction in payroll taxes for Social Security and Medicare. Mr. Obama wants to offer a tax credit of $500 for individuals, and up to $1,000 for families, which they would receive through a temporary reduction in payroll tax withholdings. The idea, known as the Making Work Pay credit, was part of Mr. Obama’s economic platform during the presidential campaign. As originally envisioned, it would have been available to households with annual incomes as high as $200,000.
But economists said the tax credit could have drawbacks as an economic stimulus measure, mainly because people usually save part of the money or use it to pay down debt. That makes good sense from an individual’s standpoint but does nothing to increase economic activity. Joel Slemrod, a professor of tax policy at the University of Michigan, said, “The research I’ve done on the 2001 and 2008 tax rebates suggests that the proportion of the rebates that went to spending was rather small, about one-third.” After Congress approved Mr. Bush’s tax rebate to individuals and families last spring, economic activity jumped fleetingly during the summer, and then stalled out again in the fall. Some Democratic officials were also skeptical. “It’s not that rebates don’t work under normal conditions,” said one senior Democratic aide in the Senate. “It’s that current conditions are not normal and are not favorable to rebates or broad tax relief.”
Ilargi: So tell me, someone: why aren't the main media all over this story? I would think this is the essence of the whole shebang.
Failure To Deal With Bad Loans May Extend Crisis-OECD
The failure of the U.S. and European governments to remove bad loans from banks before they are recapitalized may prolong the financial crisis, the Organization for Economic Cooperation and Development said Thursday. In its twice-yearly publication on trends in financial markets, the Paris-based think tank said past experience has demonstrated that three steps are needed to deal with a banking crisis. According to the OECD, the authorities first need to guarantee deposits in order to stop bank runs. Then they must cleanse the banks of bad loans, before recapitalizing the banks. The OECD said skipping the second step "is a potential risk for the recent decisions of the U.K., E.U. (European Union) and U.S."
In its original form, the U.S. government's Troubled Asset Relief Program was intended to separate good bank assets from bad. But following the U.K. government's decision to proceed straight to a recapitalization of its banks in mid-October, the U.S. government decided to use the funds allocated to the TARP to recapitalize U.S. banks. The OECD's analysis suggests that might have been a mistake. Looking back to Japan's banking crisis in the 1990s, the OECD said "the failure systematically to take step 2 above, i.e. removing the bad loans from the banks as a precondition for recapitalization, prolonged the crisis."
The OECD said if banks continue to hold bad loans during a recession, they will need even more capital, or will have to cut their lending even more dramatically. "The injections to make banks sound becomes a moving target, if loan problems worsen, further injections are required to avoid a credit crunch," the OECD said. Other European governments also followed the U.K.'s lead, a development that boosted Prime Minister Gordon Brown's standing among U.K. voters and led Paul Krugman, the U.S. economist who was recipient of last year's [ed: fake!] Nobel Prize, to suggest he had "saved the world financial system."
The U.K. government has recently indicated that it's considering further action to encourage an increase in bank lending, which remains at very low levels. Among the options being considered is the establishment of a "Bad Bank" that would take on the bad loans of U.K. banks. The U.K. government Thursday defended its decision to recapitalize the banks before removing bad assets, arguing it was essential at the time to ensure the stability of the financial system. "The government took a decision to make commercial investments in U.K. banks in order to stabilize their position and ensure wider financial stability," a spokesman for the U.K. Treasury said.
Will Defense Run the “Real” Stimulus Package?
In fiscal 1999, the Department of Defense was “missing” $2.3 trillion dollars. To put that amount of money in perspective, it is approximately 3X what President-elect Obama is proposing to spend to revitalize America. In fiscal 2000, the Department of Defense was “missing” $1.1 trillion, about 1.5X what President-elect Obama wants to invest in America. So between October 1998 and September 2000, the Department of Defense was “missing” $3.3 trillion. Because the amount of money disappearing is so enormous, years ago we started a archive of articles on the “missing money” to try to keep up with the trillions sliding out of the federal accounts.
From 1997 to March 2001, the Under Secretary of Defense (Comptroller) who served as the chief financial officer for the Department of Defense was William J. Lynn III. In that position, he was the chief financial officer for the Department of Defense and was the principal advisor to the Secretary and Deputy Secretary of Defense for all budgetary and fiscal matters. That means he was the person responsible to make sure no money went missing and that the Department of Defense published audited financial statements — which it failed to do in those years and every year since.
When Mr. Lynn left Defense in 2001, he joined DFI International and then in 2005 became the chief lobbyist for Raytheon. He was replaced at Defense by Dov Zakheim. Today, President Elect Obama nominated William J. Lynn III as the Deputy Secretary of Defense. The press release said, “Lynn brings decades of experience and expertise in reforming government spending and making the tough choices necessary to ensure that American tax dollars are spent wisely.”
Obama also nominated Robert Hale to Lynn’s former position, Under Secretary of Defense (Comptroller). From 1994 to 2001, Mr. Hale served as the Assistant Secretary of the Air Force (Financial Management and Comptroller). That means that Hale, same as Lynn, was in charge of the money when all the money disappeared. I guess the guys who got the last $3.3 trillion were pretty happy with Mr. Lynn and Mr. Hale and decided to bring them back. Which brings me to the question I keep asking, Where is the money and how do we get it back?
Geithner's Track Record Cuts Two Ways
A bid by President-elect Barack Obama to breathe new life into the financial-sector rescue will have to overcome concerns about the role of Timothy Geithner, the man he picked to be Treasury secretary, in engineering last year's unpopular series of bailouts. The incoming Obama administration intends to revamp the government's rescue efforts in both substance and style. On Thursday, Mr. Obama suggested his administration would expand the Bush administration's initiatives, including a "sweeping effort" to help homeowners in danger of foreclosure. Other moves could include renewed bids to recapitalize the banking system and spur consumer lending.
The overall goal would be to present the package as a comprehensive approach rather than last year's incremental and shifting steps that critics said hampered efforts to combat the crisis. That grand ambition comports with Mr. Geithner's belief that because markets overreact during a financial crisis, policy makers must overreact, too. But as he prepares for his confirmation hearings -- which could come as soon as next week -- Mr. Geithner will have to convince Congress he is the right person to shape the refashioned response despite his ties to the ancien régime. This tension is complicating the Obama team's deliberations about when to ask for the second installment of the $700 billion rescue fund now that the first tranche has been fully committed.
Waiting until after the Jan. 20 presidential inauguration could unsettle markets. But asking current Treasury Secretary Henry Paulson to make the request could undermine the goal of breaking with the previous approach. Mr. Obama is interested in asking for the money before his inauguration but wants strong support in Congress and no decision has yet been made, according to people familiar with the matter. Before his nomination, Mr. Geithner was president of the Federal Reserve Bank of New York and a core member of the Bush administration's crisis team, alongside Mr. Paulson and Federal Reserve Chairman Ben Bernanke.
Mr. Geithner pushed for earlier, more aggressive action during the crisis, at one point clashing with Mr. Paulson on the government's response to troubled mortgage giants Fannie Mae and Freddie Mac. Mr. Geithner helped engineer the sale of investment bank Bear Stearns Cos. and was willing to consider a government rescue of Lehman Brothers, whose September bankruptcy filing wreaked havoc on markets. Indeed, Mr. Obama considered his nominee's ties to the current administration as he weighed whether to tap the 47-year-old as Treasury secretary. In the end, Mr. Geithner's knowledge of the current response, coupled with his ideas about how to resolve the crisis, helped persuade Mr. Obama to offer him the job.
"He's the guy who was issuing warnings about the need for greater regulation and oversight early," said Obama adviser David Axelrod. "He's a young, fresh, insightful thinker and someone who's devoted his life to public-policy issues around the financial system." Mr. Geithner is expected to be confirmed by the Senate. But he will need Congress's cooperation as he works to implement Mr. Obama's rescue plans. At the hearing, lawmakers are expected to press Mr. Geithner on what he would do differently to combat the crisis and whether he would impose tougher conditions on banks receiving federal money, according to congressional aides.Congress isn't eager to fund more bailouts. Mr. Obama is expected to request and receive the second half of the $700 billion financial-rescue fund approved in October. Obama officials want to combine an expected $800 billion economic-stimulus package with a substantial effort in the financial sector, envisioning both elements working in tandem to stem the crisis, transition aides say.
Those who know Mr. Geithner say he will want as much firepower as possible, believing governments need to respond forcefully or risk having to repair later damage when it is more expensive. "Tim and I share a sense...that you need to respond to these situations in very strong ways," said Lawrence Summers, Mr. Obama's pick to head the National Economic Council and a close friend of Mr. Geithner. Much of Mr. Geithner's predisposition toward action stems from his roles in past crises. He was part of a Treasury team that assembled $100 billion in rescue packages during the Asian crisis of the late 1990s. At the New York Fed, Mr. Geithner is fond of saying "hope is not a strategy." Last year, he helped craft some of the new Federal Reserve lending facilities that have opened the central bank's balance sheet in unprecedented ways. Earlier than many, he voiced a somewhat darker view than other policy makers. In congressional testimony in April, long before the damage to the economy was clear, Mr. Geithner warned the financial crisis could result in "severe and protracted damage to the financial system and, ultimately, to the economy as a whole."
Q4 results could test market's resilience
Investors aren't supposed to care about bad news anymore. At least that's what a lot of experts were saying as Wall Street rode an 18 percent rally in the Standard & Poor's 500 index since late November. Now, that faith is about to get tested. During the next three weeks, companies will close the books on 2008, releasing their results for the fourth quarter and full year. Conventional wisdom says the numbers will be dismal. Analysts are forecasting that earnings growth rates for the S&P 500 companies will fall 15.1 percent for the fourth-quarter and 11.1 percent for the year, according to Thomson Reuters. Those expectations are down sharply from only months ago. Per-share earnings for the companies in the S&P 500, excluding costs like write-offs, are expected to be $16.19 for the fourth quarter. That's well below the $23.18 forecast at the end of September.
But most of that has been anticipated by investors. What they want to know now -- and what may drive the market -- is what companies say about 2009. And that could be very bad news. "We're going to have a disastrous earnings reporting season," said Art Hogan, chief market strategist at Jefferies & Co. in Boston. "There's no historical comparison to the magnitude of how bad this earnings season is going to be." This week one marquee company after another warned business is even worse than expected:
- Wal-Mart Stores Inc. cut its fourth-quarter forecast after holiday sales fell short of what the nation's largest retailer had expected.
- Alcoa Inc., the world's third-largest aluminum maker, said it would cut 13,500 jobs, or 13 percent of its work force, and slash spending and production.
- Intel Corp. reduced its fourth-quarter revenue projection for the second time. The world's largest maker of computer chips said revenue will fall $500 million short of expectations.
- Time Warner Inc., parent of People magazine, CNN and the Warner Bros. film studio, said it will lose money this year, largely because of a $25 billion write-off on the value of cable, publishing and AOL assets.
So far, investors aren't panicking. The S&P 500 fell 4.5 percent for the week but months ago distressing news from corporate leaders would have sent stocks plummeting. But some experts warn that stocks could stumble if enough bad news saturates the market. Robert Doll, chief investment officer of global equities at BlackRock Inc. in New York, said fourth-quarter numbers "hardly matter" because companies are likely to cram as many losses as possible into these results. "There will be lots of attempts, I think, to do the write-offs necessary to clean the books for 2009," he said. This is a typical maneuver to make the results a year from now look better. Analysts and investors typically have a short memory and reward companies that show year-over-year profit growth, even if the starting point is distorted.
The numbers for the fourth quarter won't look good alongside any yard stick. Seven of 10 of the industry groups that make up the S&P 500 index are expected to post lower earnings from a year earlier. The only gains are expected in the consumer staples, health care and utilities industries. Wall Street expects earnings growth rates of 4 to 6 percent in these businesses because even in recessions consumers still need shampoo and toothpaste, they still get sick and still have to pay to power and heat their homes. Job cuts, a weak housing market and the 38.5 percent drop in the S&P 500 index in 2008 have forced many consumers to give up unnecessary purchases. That hurts most retailers, restaurants and hotel chains that depend on people wanting to spend extra money.
Earnings growth among consumer discretionary companies is seen falling 56 percent from the fourth quarter of 2007. Materials companies in businesses such as mining and steel making are also suffering from plunging commodity prices and slumping demand for raw materials because of the global economic slowdown. Earnings growth is expected to fall 69 percent. Wall Street knew the fourth quarter, which began in October, was going to be lousy. In September, the brokerage Lehman Brothers Holdings Inc. collapsed and the government bailed out insurer American International Group Inc. That essentially halted lending and the stock market plunged. Fearful consumers and businesses then became less willing to spend.
Al Goldman, chief market strategist at Wachovia Securities in St. Louis, expects the economy won't hit bottom until this summer and that earnings won't begin to improve until the end of 2009. But he said the poor numbers coming from companies also won't shock the stock market like the financial turmoil of the fall did. "Everybody expects them to be terrible and at least when they come out they're on the table and they're history," he said, referring to lackluster results. "Confidence is still razor thin and so it's not a one-way street, but basically the mood is improved."
Bush Prepares to Ask for Second Tranche of Bailout Funds
In a move being coordinated with the Obama transition team, senior Bush administration officials are preparing to ask lawmakers for the second half of the $700 billion financial rescue package, despite intense opposition in Congress, sources familiar with the matter said. The initiative, if it goes ahead, could create an unusual political straddle between the Bush and Obama administrations. If Congress were to vote down the measure, either President Bush or Obama might have to exercise a veto in order to get the money. While Obama officials prefer that current administration issue a veto, the White House is declining to address that question. Democratic Senate aides were notified in a meeting this afternoon that the request could come as soon as this weekend and that a vote could be held as soon as next week, congressional sources said.
Under the emergency rescue legislation approved by Congress in October, the administration must inform lawmakers that it wants access to the second installment of $350 billion. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury can begin to tap the funds. If Congress does turn down the request, the president could veto the resolution and then the Treasury could proceed. The plan now being crafted by the Bush administration is not finalized. By unsheathing the veto threat, the Bush administration could make it more likely that the Obama administration would get the rest of the rescue funds. Only if Congress overrides the veto would the money be blocked. A congressional source said advocates of the plan are now exploring whether there are enough votes in the Senate to sustain a veto.
"There have been discussions between the administration and the transition about how to proceed should the president-elect determine that he wants to have those funds available on January 20th," said Robert Gibbs, spokesman for the Obama transition team. "No final decisions have been made, but we want to be ready to act if needed." The effort could also assure unsettled financial markets that more help is on the way. In September, when current Treasury Secretary Henry M. Paulson Jr. presented the rescue proposal to Congress, the House at first voted down the plan. Global stock markets reacted by immediately plummeting. The initiative, known as the Troubled Asset Relief Program, eventually passed both chambers and was signed into law in October.
Bush officials committed nearly all of the first $350 billion to helping the financial system and bailing out individual firms, angering lawmakers on both sides of the aisle. Some were steamed that no help was forthcoming for struggling homeowners. Others were angry that the effort failed to stimulate lending. Government sources say a majority of lawmakers on Capitol Hill now do not support handing over more rescue funds to either administration. Paulson repeated in an interview this week that the TARP funds are needed and that he is committed to working with Obama's team to access the second $350 billion. Treasury officials are worried that if a financial firm teetered, they have no funds left to support such a company. Treasury Secretary nominee Timothy F. Geithner is working on ways to broaden the TARP to aid homeowners, small businesses, municipalities and other consumers.
Elizabeth Warren On Tracking Bailout Funds
This isn't rocket science. This isn't some strange thing we're asking for. If you're gonna take that much money from American taxpayers, you've gotta have the banks tell what they're going to do with it. We have to have some way of telling if its working. and if you don't have accountability, if you don't have metrics in place, you're really just kind of handing it out there and hoping for the best.
Treasury did not say: tell us what you're going to do with the money. Tell us how you used it. That just hasn't happened. There's no basic accountability in the system.
Paulson: More bank capital needed for recovery
Departing U.S. Treasury Secretary Henry Paulson said on Friday that continued capital injections for the U.S. financial system are needed to put the economy on a recovery path. Paulson, in an interview with Bloomberg Television, said he believes that the U.S. economy faces "significant challenges" and will need a major stimulus spending plan and a healing of its credit markets. "The financial system is going to be very important, until that is working the way it needs to work, it's going to be difficult to have a recovery," Paulson said.
Paulson said he has developed plans to recommend to his successor, Treasury Secretary nominee Timothy Geithner, to continue investments in financial institutions from the second half of the $700 billion Troubled Asset Relief Program. "I believe that the main focus of the TARP is going to need to add capital to the financial system," he said. Paulson said he previously resisted the idea of using TARP funds to help prevent foreclosure because direct investments in bank equity capital would provide "maximum bang for the buck" in terms of stabilizing the financial system.
"When I look at what we've done with the TARP authorities after receiving them with the benefit of 20/20 hindsight, I'm absolutely convinced they are the right things," he said. He added that the Treasury will need to seek new authorities beyond TARP to ensure a sound financial system, such as a system for allowing large non-bank financial institutions to fail in an orderly manner. Such a system exists for bank holding companies to be taken over by the Federal Deposit Insurance Corp., but other firms face disorderly bankruptcies, he said.
Can't help, won't help: why rate cuts won't make our banks lend more
Apologies if you are eating breakfast, but just imagine, for a moment, that you are the chief executive of a British bank. Capital is in short supply, yet you are expected to hold more of it than prior to the financial crisis. The value of your assets is still falling. When you are, in due course, forced to write down these losses, you will be required to stump up even more capital. So what do you do? There are two obvious strategies. First, hold on to as much capital as you can, by lending as little new money as possible, and try to grab some of it back by recalling loans whenever companies breach the terms of their borrowing; secondly, make as much money as you can when you do lend, so that you can rebuild a cushion to help you cope when you are hit by the next wave of writedowns.
Of course, you can't really come clean about what you are doing, because you are already in the doghouse for having helped drag the economy into recession. Also, you have more than likely just received a slug of taxpayers' money, and part of the deal you made with the Government was that in exchange for that help you would make sure that you carried on lending to companies and consumers, much as before. The point is not that bankers are behaving badly, though they do seem to be doing the exact opposite of what the Government wants and damaging the economy in the process. The point is that they are behaving rationally, from their own narrow perspective. For anyone running a business in hard times, self-preservation becomes the top priority. It is naive to expect otherwise. The banks are in survival mode and yesterday's half-point cut in interest rates to an all-time low of 1.5pc will not change that.
Will the cut help businesses which have run into difficulty even though interest rates are already pretty low? There are several reasons why companies can find themselves facing the financial firing squad. Firstly, they may have breached banking covenants, as a result of a decline in the business's performance. Lower interest rates may make this less likely to happen, but if the company's revenues have plummeted, further rate reductions from already low levels are unlikely to make much difference. Secondly, companies may need to refinance their debt, but find it impossible to persuade their banks to hand over the cash, even if they have previously serviced their interest payments satisfactorily. In this case, lower interest rates are not the issue. Finally, the value of the business may have collapsed so that it is worth substantially less than its debt, in which case the size of the debt, not the level of rates, is the main problem.
There is one silver lining for businesses: if a company breaches its covenants, but is still able to service its debt, though not to repay it in full, banks have a vested interest in allowing it to try to trade its way out of the mess. In these cases, covenants are likely to be renegotiated. But in sorting out which companies to back and which to let sink, the banks are thinking about their balance sheets, not the broader needs of the economy. As for those banks which didn't need to raise additional capital – notably HSBC – any additional lending is unlikely to bridge the gap left by the disappeared and the disabled.
Does this mean that the Government's injection of £37bn of capital to bail out Royal Bank of Scotland, Lloyds TSB and HBOS was a failure? Since it didn't get banks lending again, it hardly ranks as an unqualified success. But that is probably the wrong measure, even though it is the one stated by the Government and accepted by the banks. The bail-out prevented a total collapse of the financial system, which was probably only days away. Compared with the state the economy would be in if that had happened, the current state of affairs is a bed of roses. As failures go, the recapitalisation was pretty successful.
However, while the financial system has not collapsed and lower interest rates are helping some businesses and consumers, banks are still part of the problem. They have strong incentives to hoard cash – not least, that it makes sense to repay preference shares from the Government that are costing them dearly, before cranking up lending again. There are several possible solutions, including state lending to companies in tandem with banks and the creation of a "toxic" government-backed bank to buy up distressed assets. Without some sort of additional help, it seems likely that some banks will need more capital – RBS, already 60pc state-owned, does not look far from nationalisation. After all, the £37bn injected so far is roughly half some City estimates of the amount needed to recapitalise the system – and that number must be rising as asset prices fall.
Downturn escalates on both sides of the Atlantic
A dismal week for the world economy was rounded off yesterday with news that in 2008 the US suffered the most job losses since the Second World War, and UK manufacturing suffered its biggest slump in 28 years. The world's biggest economy lost 524,000 jobs last month, bringing the total for the year to 2.6m – the most in a single year since 1945 when almost 2.8m jobs were lost. The US national unemployment rate jumped sharply from a revised rate of 6.8pc in November to 7.2pc by the end of December, the highest in 15 years. Most parts of the economy were affected, with 273,000 positions lost in the service sector, 149,000 in manufacturing, and 101,000 in construction. There was more gloom yesterday after the aerospace company Boeing said it would cut 4,500 jobs from its commercial plane division, which employs more than 67,500. Although the figures were largely in line with economists' expectations, they still hit US equity markets, with the Dow Jones Industrial Average down as much as 151 points, or 1.7pc, as investors began to appreciate the extent of the problems within the labour market.
Analysts are particularly concerned by pace at which job losses have risen in recent months, with 1.9m of the 2.6m coming in the final four months of the year. "The unemployment rate is rising about as fast as we've ever seen it rise," said Kevin Logan at Dresdner Kleinwort. President-Elect Barack Obama described the situation as "dismal". As the downturn tightens its grip on both sides of the Atlantic, figures from the Office for National Statistics showed that UK manufacturing activity fell in November at its fastest annual pace since 1981, with production down 7.4pc. On a monthly basis, output fell by 2.9pc in November, the biggest fall since the Queen's Golden Jubilee celebrations in June 2002, when figures were distorted by early factory shutdowns in celebration. Stripping that out, it was the sharpest monthly drop since 1984, and worse than even the most pessimistic of forecasts. Taking an average, economists predicted a 0.6pc fall for November.
The figures suggest that the economy shrank more than already feared in the final quarter of 2008. It contracted by 0.6pc in the third quarter of 2008, and economists had been expecting a fall of about 1pc in the fourth quarter, data for which are due later this month. However, many said that the fall was likely to be bigger after yesterday's figures, which Howard Archer at IHS Global Insight described as "breathtakingly awful". The National Institute of Economic and Social Research estimated that gross domestic product fell by 1.5pc in the fourth quarter, while the Ernst & Young ITEM Club said there was now "downside risk" to its prediction that it had fallen by 1.2pc. Benjamin Williamson, economist at the Centre for Economics and Business Research, said the manufacturing sector was "in free fall", and predicted more interest rate cuts to follow Thursday's 0.5 percentage point reduction to an all-time low of 1.5pc. However, he added that future reductions to the bank rate would have increasingly smaller effect.
Federal Home Loan Banks may see impairment on $76.2 billion MBS: Moody's
The Federal Home Loan Banks, one of the largest providers of funding for U.S. mortgages, face the potential for substantial accounting impairments on their $76.2 billion private-label mortgage-backed securities portfolio, Moody's Investors Service said in a recent report. Under a worst-case scenario, only four of 12 FHLBanks' capital would remain above regulatory minimums and while that is not necessarily probable, it suggests that the amount of loss "could be material to the banks' capital bases," the report said. Moody's, however, said that the worst-case-scenario is "unlikely." Based on market prices in the third quarter of 2008, the banks' total private-label MBS portfolio was valued at $62.7 billion, thus representing a $13.5 billion unrealized loss, according to the report.
In the short term, U.S. GAAP accounting rules may require the FHLBanks to account for securities in their portfolio as "other than temporary impairments," or OTTI, according to Senior Vice President Brian Harris, the author of the report. "If these unrealized losses are deemed OTTI," he said, "the FHLBanks' capital levels would be significantly affected -- an issue that is likely to become far more evident during the next two quarters." "The impact could have important ramifications -- both in terms of more limited, more expensive access to the capital markets and of heightened regulatory supervision due to the breach of regulatory capital minimums," he said. But the FHLBanks' lending activities are so important that the regulators would probably not reduce individual banks' lending activities even if they were to incur substantial OTTI charges, he said.
"The principal conclusion was the FHLBanks have the ability and intent to hold these securities to maturity, and the expected economic loss was modest and could be absorbed by each FHLBank at current capital levels," Mike Ciota, FHLB spokesman, said in an e-mail. The system of 12 regional FHLB banks has become more important to the housing market since the credit crunch shriveled up other sources of funds for mortgage lenders. Congress established the Federal Home Loan Bank System back in 1932, to fill a dire need for a stable source of funds for residential mortgages. The Great Depression had undermined the existing banking system, and with it, Americans who had recently purchased -- or wanted to purchase -- homes. Rising loan defaults and surging foreclosures has taken a toll on the entire U.S. financial system, with few companies spared.
Wall Street Is Big Donor to Inauguration
President-elect Barack Obama has banned corporations and big donors from funding his Jan. 20 inauguration. But 90% of donations received so far have been raised by well-heeled fund-raisers, including Wall Street executives whose companies have received billions of dollars in federal bailout money. A total of 207 fund-raisers have collected $24.8 million of the $27.3 million in contributions disclosed by Mr. Obama through Thursday, according to an analysis by nonpartisan campaign finance group Public Citizen. Wall Street employees, as a group, have been the biggest single source of these private donations, according to the analysis. Much of their donations -- $5.7 million total -- has been channeled through financial-services executives who each have bundled together donations worth hundreds of thousands of dollars.
Traditionally, taxpayers have footed a small portion of the bill for the ceremonies and parties that accompany presidential inaugurations, with private donations covering the rest. For Mr. Obama's inauguration, which is estimated to cost $50 million, Congress has approved about $10 million in taxpayer money to bankroll events. There are few rules on who is allowed to donate or how much they can donate, though Mr. Obama has voluntarily limited individual donations to $50,000. But the preponderance of large donors and the fact that so many come from an industry receiving government handouts comes as the president-elect has sought to keep his inauguration free of special interests.
A spokeswoman for the inauguration, Linda Douglass, said the Obama organization has taken unprecedented measures to ensure transparency and limit influence, banning direct corporate donations, limiting bundled totals to $300,000 and making donors' names public. "We have the broadest restrictions on fund raising that have been applied to any inaugural in history," she said. In 2004, President George W. Bush solicited money from individuals, lobbyists, businesses and political action committees, and limited donations to $250,000 each. A report by the nonpartisan Public Citizen found that about 90% of the roughly $40 million that he raised came from corporations.
Financial-executive donors to the Obama inauguration include an executive from Lehman Brothers Holdings Inc., which declared bankruptcy last fall. The executive has bundled at least $115,000 in donations so far for the inaugural, according to records made public by the Obama organization. Other bundlers from the financial sector include executives from Citigroup Inc. and Goldman Sachs Group Inc., two New York-based institutions that have accepted billions of dollars each in rescue money from the federal government. The analysis shows that Lou Susman, a Chicago-based managing director for Citigroup, bundled $265,000 in inaugural donations for Mr. Obama, including $50,000 donated personally and $50,000 more from the firm's employees.
Goldman provided at least $175,000 in donations, primary through bundling activities by Jennifer Scully and Bruce Heyman, two banking executives there. Ms. Scully raised $100,000, but didn't make any large donations personally; Mr. Heyman bundled $50,000 in donations, including a $10,000 contribution he made himself. Another Goldman executive, David Heller, donated $25,000. Spokesmen for the two companies declined comment. A total of 2,036 donors accounted for the $27.3 million raised so far. But 378 people who each contributed the maximum $50,000 allowed by Mr. Obama accounted for nearly 70% of the money, for a total of $18.9 million. Another 223 donors gave between $25,000 and $50,000. Among the companies with the most prolific bundlers: Employees of movie-production companies DreamWorks Animation SKG Inc. and DreamWorks SKG have brought in a total of $225,000. Employees of Microsoft Corp. or the Bill and Melinda Gates Foundation ranked second with $200,000 in total donations.
Agency Raises Concerns About Car Makers' Pensions
The government agency that protects pensions for Americans is raising fresh concerns about the repercussions if one or more of the U.S. auto makers were to collapse, saying 1.3 million workers and retirees could see their pensions slashed if that were to happen. The head of the U.S. Pension Benefit Guaranty Corp. acknowledged in an interview that General Motors Corp., Ford Motor Co., and Chrysler LLC have well funded pensions according to the standard accounting rules applied by the Securities and Exchange Commission. But by the PBGC's measures, the pension funds of Detroit's Big Three would be underfunded by as much as $41 billion if one or more of the auto makers went under and killed their pension plans, PBGC Director Charles E. F. Millard said.
"An awful lot of people seem to think these plans are well funded or overfunded," Mr. Millard said in an interview. "Each of these plans is significantly underfunded [and] in three years I don't want people coming back and saying, 'How come the PBGC never told us that?'" This concern adds fodder to an ongoing debate over what the government's role should be in helping the struggling auto makers from collapsing as the trio face a difficult road in 2009. Some people argue a bailout for Detroit would be a good use of taxpayer money, and that holding back financial aid would result in a collapse, and force the government to spend billions shoring up the companies pension plans.
Mr. Millard estimates that the three auto makers only have enough money in their pension funds to cover only 76% of the pension obligations they have made, if they terminate the pension plans. GM's plan is estimated to be $20 billion, or about 20% underfunded, while Chrysler's plan is 34% underfunded, leading to a $9 billion-plus shortfall, the agency said. Ford's funded ratio is not publicly available, but the company's pension plans are likely running at a $12 billion deficit. About $13 billion of the estimated $41 billion shortfall would be covered by the PBGC, Jeffrey Speicher, an agency spokesman, said. The remainder represents benefits that PBGC could not pay because of limits set by Congress, and those benefits would be lost by employees and retirees.
If all three companies were to terminate their plans, the PBGC's current deficit would double, as would the number of people receive pensions from the agency. GM spokeswoman Julie Gibson said the auto maker is in compliance with pension accounting, its pension are adequately funded and it doesn't have any near-term funding obligations. The company could make more contributions to its pension plans in coming years, but it also holds various credits with the Internal Revenue Service that could help fund the pension plans. The auto maker will report an update on its pension status when it releases annual report filing in coming months. When GM last gave a year-end update on its pension funds, the funds covered more than 400,000 retirees and were overfunded by $18.8 billion. But in November, GM said its plan for hourly workers was underfunded by $500 million because of restructuring expenses. Its plan for salaried employees remains overfunded by at least $500 million.
GM, like its rivals, have relied on the pension funds to help cushion its restructuring costs, and that has contributed to a quick deterioration in the health of the funds. "In regards to our pension plans, we take our obligations very seriously, managing our plans with integrity and prudence even during difficult times," Ford spokesman Bill Collins said. The auto maker's most-recent numbers suggest its U.S. plans 103% funded, or carrying a $1.3 billion surplus with $45.8 billion in plan. Mr. Collins said Ford will update its funding status when it releases its annual report. A Chrysler spokeswoman did not return phone calls. The PBGC steps in to take over failed pension plans, and protects the retirement savings of almost 44 million Americans. Because it is charged with insuring pensions in the event that a business or organization terminates pension plans, the PBGC monitors not only the SEC's accounting requirements, but also attempts to estimate how well-funded the plans would be if they were terminated in a liquidation or some other restructuring.
In recent months, as the cash reserves of GM, Ford and Chrysler have been drained due to slow auto sales and heavy restructuring obligations, concerns over the viability of these auto makers has skyrocketed.
The White House last month issued a $17.4 billion loan package to GM and Chrysler, but that money is only expected to last until the end of March. At that point, if the two car companies can prove they are on the path to sustainability, they may be able to successfully argue for more funding or be able to tell the government that they have stabilized to the point where they don't need government funding.
What Big Three? Ford Motor Adopts a Scrappy Image
In declining a federal bailout, CEO Alan Mulally gambled that cash—and new models such as the Fusion Hybrid—can help Ford outlast its rivals. When Ford Motor Chief Executive Alan Mulally decided not to ask for a government bailout, it wasn't just because Ford is in better financial shape than its Detroit rivals. Company insiders say the overarching goal was to separate Ford in the public mind from General Motors and Chrysler. As the crisis afflicting the auto industry has deepened, Mulally & Co. have gone out of their way to convince car buyers that Ford is stronger, greener, and more technologically advanced than those other guys. Executive Chairman William C. Ford Jr. sees an advantage if "people view us as a company that pulled itself up by its own bootstraps."
Mulally's go-it-alone strategy is risky because if he doesn't manage to transcend the "Made in Detroit" label and sell a lot more cars, he might find himself in the position of asking the feds for money later this year. What's more, Mulally's bid to prove to consumers that his company is healthier than its Detroit rivals could make the United Auto Workers less keen to give Ford the concessions it badly needs. Still, there's no question Ford could use an image boost, and Job One is making that happen. On Dec. 19, Fox News (NWS) reported that Ford was talking to Chrysler about a possible merger. The last thing Mulally wanted was to be linked to a company many believe is a goner; Ford's PR team hit the phones faster than the Mustang GT500 does the quarter-mile. Mulally brusquely slapped down talk of a merger: "We haven't even been thinking about it, let alone discussing it," he told BusinessWeek at the time.
As the year came to a close, all eyes were on GM's near-death experience as it waited for the government to provide bridge loans. Then Ford changed the conversation by talking up the hybrid version of its Fusion sedan. Before long the blogosphere was full of breathless commentary about a car that beats Toyota Motor's (TM) Camry hybrid by seven miles per gallon and outpaces GM's Chevy Malibu hybrid by 15. Never mind that hybrid sales have tanked along with gas prices—and that the new Fusion costs $3,300 more than a comparable conventional model; talk of it cast a halo over Ford. The company also has been trumpeting a computerized key that prevents teens from driving without seat belts and limits speed and stereo volume. "Toyota has shown that unique technology creates enormous goodwill around a brand," says Steve Wilhite, president of Jumpstart Automotive Media, a Web marketing firm. "Ford has embraced that strategy with success."
At a time when GM's and Chrysler's financing arms have been hard-pressed to make loans to potential buyers, Ford has been using television, online, and radio ads to remind the world that it has money to lend. And executives have been falling over themselves to promote Ford's kudos from Consumer Reports, which this month noted that of eight new Detroit cars it recommends, six are Fords or Ford brands. Is the PR offensive paying off? Ford says it is. In a dismal fourth quarter, it notes, only Ford, Honda (HMC), and Toyota increased their market share among the top six carmakers. Ford surveys, says a company insider, show that when consumers are asked about Ford as part of the Big Three or the Detroit Three, they "express pessimism, concern, and lack of confidence." But when the questions center on Ford alone, this person says, confidence shoots up—"and not just by a couple of points."
Ford's audience isn't only consumers, of course. Mulally's request for a credit line rather than loans has left lawmakers and the union believing Ford is stronger than its rivals. To a degree, that's true, partly because two years ago, Mulally raised $23 billion in new money and credit lines. But Ford also has $26 billion of debt—$19 billion of it unsecured—and for six months has been burning through cash as fast as GM. Mulally is understandably eager to retain Ford's independence by paying its creditors in full. But GM, in exchange for federal help, likely will swap equity for debt and may emerge with a stronger balance sheet. By taking the high road, Ford could find itself at a competitive disadvantage.
European industry slashes output
Industry across Europe has slashed production in the wake of the global economic downturn, which also brought a fresh bout of bad news on employment in the US on Friday. Germany, the UK, France and Spain all reported industrial output had slumped in November, with some year-on-year falls running into double digits. The sharp declines show how the focus of the global economic crisis has shifted since the September collapse of Lehman Brothers, the investment bank. “What we have seen in the past three months is an extreme downturn,” said Robert Barrie, European economist at Credit Suisse. “German manufacturing orders have fallen more in the past year than UK house prices.”
Across the Atlantic, figures showed the US economy lost more than half a million jobs in December for the second month running, taking the total of jobs lost in 2008 to 2.6m – the worst year for job losses since 1945. The US jobless rate, which hit a low of 4.4 per cent before the credit crisis, jumped to 7.2 per cent, its highest in 16 years. And Boeing said on Friday it planned to cut 4,500 workers in its commercial aircraft unit this year. President-elect Barack Obama said data showed the US jobs market was “dire” and “deteriorating” and urged swift passage of his proposed near-$800bn fiscal stimulus by Congress. Meanwhile, revisions showed job losses in October and November were larger than originally reported. Goldman Sachs said it was “another terrible employment report, although not perhaps as bad as some in the market had feared”. The slump in European industrial production almost certainly reflected attempts by companies to reduce inventories in the face of tumbling sales, especially in the auto sector, said economists.
As a result, gross domestic product in the 16-country eurozone could have contracted by as much as 1 per cent in the fourth quarter of last year, which would be by far the worst in any three months since the euro was launched in 1999. But the last quarter of 2008 could prove to have been the worst point of the recession, said Peter Vanden Houte, European economist at ING in Brussels. “You can’t reduce inventories for ever,” he said. Weak orders data pointed to further falls in production, but the rate at which GDP is contracting could gradually slow during this year, he said. UK industrial production fell by 2.7 per cent in the three months to November, compared with a 1.3 per cent fall in the previous three months. German industrial output fell by 3.1 per cent in November alone, while France reported a 2.4 per cent slide in the same month. Elsewhere, Spain reported November’s production at factories and mines was 15.1 per cent lower than a year before.
Gordon Brown preparing new taxpayer-backed bank rescue package
Gordon Brown is preparing to unveil a new bank rescue package which will lead to taxpayers underwriting billions of pounds in bank loans to homebuyers and businesses. The Prime Minister and Alistair Darling, the Chancellor, are to act on warnings that more Government support to encourage lending is now necessary to avert an even more serious recession developing. Banks will be offered tens of billions of pounds in taxpayer guarantees or funding which it is hoped will prompt them to begin lending at “normal levels” again. Small businesses have complained that they are struggling to obtain credit and mortgages are being tightly rationed.
Ministers are also in discussion with banks over longer-term plans which may see the banks transfer bad debts to a new state-owned “toxic” bank. The scheme, being negotiated by Baroness Vadera, a business minister, would be introduced in a co-ordinated effort with other countries if further intervention is required later in the year. Further money may also be invested directly in banks if the next bailout package is not sufficient. Mr Brown is under intense pressure to announce further measures to help banks. The Conservatives will next week propose changes to the Banking Bill, currently being debated in the House of Lords, to set up a National Loan Guarantee Scheme. Treasury officials are currently developing two different schemes to boost bank lending. The first, recommended in an official review carried out by Sir James Crosby, would allow banks to effectively swap new loans for Government bonds.
This scheme was initially intended to help banks offer new mortgage lending. However, it is now understood it could be used for business lending. The Government is also considering guaranteeing individual loans to businesses. Although such schemes are already available for small businesses, the scope of the programmes would be dramatically increased. Officials are working out ways of ensuring that banks still face some risk from lending to prevent them making reckless loan decisions. Sources close to the discussions say that a variety of schemes are expected to be announced later this month, based on the two alternative packages. One well-placed source said: “The principle has been established that the Government needs to underwrite new bank lending. There is now a practical issue as to how you construct these things. Which route is the best for supporting new lending? There will be a variety of measures.”
The source added that there was also an issue about so-called “toxic debts” in the banking system. Officials are studying a scheme used in Sweden several years ago to help banks remove bad loans from their books. “The international context is quite important on all this stuff but anything in this area is down the line,” said a source. An influential Labour backbencher yesterday called for a new state bank to offer loans directly to businesses if necessary. John McFall, chairman of the Treasury Select Committee and an ally of the Prime Minister said: “The situation, with private banks freezing up credit, is so serious that consideration should be given to the establishment of a state bank in order to deliver government lending targets.” Two former Bank of England economists yesterday said that the Government should consider using money to buy up housing to kick-start the economy. George Osborne, the shadow Chancellor, claimed yesterday that ten businesses a day were going bankrupt as a result of their failure to obtain credit. “Every day that Gordon Brown dithers, he is putting at risk people’s jobs and livelihoods and futures,” he said. “That’s why we need action and action now.”
Brown poised to face down Heathrow opposition
Gordon Brown is poised to face down Cabinet opposition and back the building of a third runway at Heathrow. On Monday, a powerful coalition of business groups and unions will urge Mr Brown to publicly announce the go-ahead for the airport’s expansion. The decision had originally been expected before Christmas but was delayed until the New Year. The Prime Minister is expected to make the final decision this weekend after last-minute lobbying from Cabinet ministers. An announcement could be made as early as next week. More than 50 Labour MPs and several Cabinet ministers are opposed to the new runway but Mr Brown is understood to be in favour. Crucially, the Prime Minister is backed by Lord Mandelson, the Business Secretary who has made it known that he strongly sides with business on the issue.
Mr Brown believes that large infrastructure projects are crucial to boosting employment in Britain during the recession. The Conservatives are opposed to the third runway and Labour believes that the issue is an important “dividing line” between the parties. The go-ahead will be tied to the airport meeting legally-binding commitments on pollution and noise. Future promises to build new high-speed rail links may also be made to win over Labour opposition. Among those who have questioned the plans are Ed Miliband, the Energy and Climate Change Secretary, Harriet Harman, the Labour deputy leader, and Hilary Benn, the Environment Secretary. Their opposition has infuriated some other ministers who claim it is a “London Labour faction” that is trying to block the expansion. However, ministers are unlikely to resign in protest at a decision to allow the third runway. On Monday, Mr Brown will be able to point to what he sees as an unanswerable case from the business community – including the CBI, the British Chambers of Commerce, London First, the TUC and individual unions.
A CBI survey of business opinion recently found that nine of 10 companies in London or areas close to Heathrow said the airport was ‘vital’ or ‘very important.’ Eight five per cent said a third runway was either ‘important’ or ‘very important’ to their business. Labour MPs are expected to try and force a vote on the plans in the House of Commons, but Mr Brown has the power to approve the project without MPs backing if necessary. Geoff Hoon, the Transport Secretary, has pointed out that there are tens of thousands of jobs dependent on Heathrow and if it began to lose its role as a major hub that employment would be threatened. He would ensure that all climate change emissions targets are fulfilled. Mr Brown will present the decision as vital for the country in keeping Heathrow as one of the world’s key international airports. If expansion was not agreed then it could slip behind other European airports as a vital “hub” he will say. Last weekend Mr Brown announced he planned to create 100,000 jobs and many of those are likely to be in the construction industry helped by projects like Heathrow.
Berlin Moves toward 50 Billion Euro Package
First Merkel said Germany didn't need a new economic stimulus package. Then she said there would be no tax cuts. But on Friday, her party presented its proposal for a 50 billion euro plan, complete with lower taxes. And it comes not a moment too soon. Germany's first economic stimulus package didn't go well. Announced with great fanfare by Chancellor Angela Merkel last autumn, the plan was quickly shredded by economists and politicians alike for not being ambitious enough. Merkel's European colleagues rapidly isolated her. Now, though, Berlin is trying again. On Monday, Merkel's conservatives are meeting with their Social Democratic coalition partners to hammer out the details on what is expected to be a €50 billion collection of measures aimed at jumpstarting Germany's suddenly moribund economy. For weeks, the two sides have been bickering in the press about how best to boost business.
On Friday, Merkel's Christian Democrats (CDU) presented their ideas. And as expected, it is heavy on infrastructure investments and also includes tax reductions and a cut to public health insurance contributions. Furthermore, the CDU expressed its support for a fund to provide German companies with liquidity should they run into refinancing difficulties. An amount wasn't proposed, but earlier this week, numerous reports indicated the fund could total as much as €100 billion. Merkel's government had for months resisted calls for a second stimulus package, saying Berlin would take a closer look at the German economy this spring. But signs that 2009 will be a difficult one for the economy have mounted. Just on Thursday, it was revealed that German exports, a major pillar of the country's economic health, had plunged in November. The Federal Statistical Office said that November exports were a hefty 10.6 percent lower than in October and 11.8 percent lower than in the same month in 2007.
The plunge in exports likely means that Germany's economy has shrunk for three consecutive quarters. Fourth quarter statistics are not yet available, but the country's economy entered recession in November, generally defined as two successive quarters of negative growth, after poor second and third quarter showings. Most economists in Germany anticipate 2009 shrinkage of at least 2 percent. Earlier this week, unemployment in Germany ticked upwards after years of steady decline. Still, politicians are divided as to how best to turn the economy around. Merkel spent months resisting calls from the Christian Social Union (CSU), the Bavarian sister party to the chanceller's CDU, for tax cuts before giving in. Recently, the SPD said it too might be willing to support limited tax cuts. The CDU proposal is to increase the minimum taxable income from the existing level of €7,664 to €8,004. The conservatives said they would not back an SPD proposal to increase taxes for the country's top earners to compensate. Both the SPD and CDU agree that the lion's share of any new package will go toward infrastructure projects like new roads and refurbished schools.
Many politicians from both sides of the aisle have said this week that they expect the second stimulus package to be quickly agreed to with final passage likely to come in February. That, though, may not be the end of calls for government action. On Friday, new criticism was voiced of Berlin's €500 billion bank bailout plan, passed in October, for not being accessible enough. Gerhard Stratthaus, who is the co-head of the bailout fund, told the Financial Times Deutschland that the strict rules imposed on banks which use the fund have made many shy away from the government help. He says that there are many German banks that could use the help, but they haven't asked for it because of the conditions imposed by the bailout plan. Others say that the bailout package has done nothing to encourage banks to begin lending to each other again. In other words, even if Berlin manages to push through a second stimulus package, its work may not yet be done.
Commerzbank Bailout Deal to Be 'A Painful Birth'
For the first time in modern history, the German government is bailing out a private consumer bank -- Germany's second largest. Although most commentators see the move to rescue Commerzbank as both prudent and inevitable, many of them don't like the principle or the precedent. The announcement by Commerzbank on Thursday that it would receive a €10 billion ($13.6 billion) government bailout has sent shivers down the spines of many -- but for different reasons. Some worry about what it says about Germany's larger economic position when such a large institution is forced to ask the government for help. Others worry that the action could signal an end to the era of limited government intervention in business and banking, which many partially credit for Germany's postwar economic success.
The funds being used to bailout the bank come from the Special Fund for Financial Market Stabilization (Soffin), the German agency set up to make $480 billion available to the country's financial institutions rocked by the global finance crisis. In return, the government will acquire 25 percent of the bank plus one share, which gives it veto power on some major company decisions. The move marks the first time in the history of postwar Germany that a private bank has been partially (or wholly) nationalized. It was brought about by liquidity problems the bank faced in the wake of its decision to purchase Dresdner Bank from insurance giant Allianz. Without help, the government reasoned, that deal might fall through and throw all three companies into deeper financial turmoil. On Friday, some critics on the left of the political spectrum criticized the government intervention, saying it didn't go far enough.
Friday, on Germany's leading news program "Tagesthemen," Renate Künast, the leader of the Green Party's parliamentary group, and Ulrich Maurer, a leading parliamentary official for the Left Party, said that the state should have used more funds to take an even larger ownership share in the bank. However, Franz Münterfering of the center-left Social Democrats, the junior partner in Chancellor Angela Merkel's government coalition, defended the state's action as being necessary to bring "stability to the whole situation" and tried to ease worries by saying that the government would "in no way seek to exert influence over business activities." German commentators expressed general skepticism of the agreement on Friday, but they see the alternative -- a possible Commerzbank insolvency -- as the greater evil.
Right-leaning Die Welt writes:
"For the first time in the history of the Federal Republic, a major private bank has been partially nationalized. There are no longer any doubts: The global economic crisis has Germany in its grip as well. Despite its former positions, the government is now in a rush to push through its economic stimulus package in the belief that any delay will lower the chances of successfully boosting demand. … At the same time, there is a growing danger that the cacophony of voices clamoring in favor of the rescue package will lead us to lose a feel for the appropriate measure of things and that proven guard rails of economic policy will be torn down without due consideration. For decades, the widespread renunciation of an active role for the state in economic activities has been one of the pillars of Germany's economic success.
In cases of emergency such as this, this rule must be broken in order to secure one of Germany's largest banks. But, by all means, such actions must be restricted to only certain times and be followed by strict self-restraint when it comes to the state exerting influence over business activities. Calls for creating a giant (government) umbrella to protect the entire economy like the one used to protect the banks, however, only shows that politicians have completely overestimated their own abilities and failed to learn from their own mistakes. It's not the state's job to rescue individual companies. It is much more responsible for creating the circumstances under which as many businesses as possible can survive."
The center-right Frankfurter Allgemeine Zeitung writes:
"It's only natural that many banks didn't perform well during the fourth quarter of 2008. But even in a general business environment as bad as this, the reports coming from Commerzbank are still unsettling. The situation points to two things: First, Commerzbank will now be using tax money to finance its takeover (of Dresdner Bank) because it no longer has anywhere near the means it needs to pay for it by itself. … With its generous support, the state is showing that it won't let this takeover fall through because the issue really concerns the survival of one of the two biggest banks in Germany. Second, Commerzbank acquired Dresdner Bank despite the fact the bank's risk of loss had been grossly underestimated -- even after months of auditing. ... It will take a long time to integrate the two banks, and it's not going to happen without a certain degree of pain. On top of that, Commerzbank has paid too high a price for the state's support. But the good thing is that the customers of both banks won't have to worry about their money. It's the state's protective shield that will let them sleep in peace."
The business daily Handelsblatt writes:
"Billions in state assistance, a supervisory board with two seats reserved for the government, an ownership structure that allows no decisions to be made without Berlin's blessing. There is no doubt that, if the names 'Bundesbank,' 'Landesbank' and 'Berliner Bank' had not already been taken, Commerzbank head Martin Blessing would have been able to make Thursday evening's crowning touch the renaming of his institution into something with a more governmental feel to it. … In any case, a painful birth will be followed by difficult first steps in life. And Commerzbank will be burdened by inherited difficulties. … What remains is the realization that Commerzbank still has a functioning business model. That alone distinguishes it from some other banks in Germany bearing a governmental name."
The center-left Süddeutsche Zeitung writes:
"Six months ago, it would have been inconceivable that one of Germany's largest credit institutions would be partially nationalized. Six months ago, no one would have imagined it possible that the federal government would use many billions to rescue the country's largest bank merger. But that is exactly what happened Thursday. … In doing so, Germans have been forced to see more clearly than ever just how bad things are for the country's banks. One institution is tottering after the other: first BayernLB and Hypo Real Estate, and now HSH Nordbank and Commerzbank. This shakiness has prompted the government to take control over a whole line of institutions. And as things stand, still more German banks might have to be completely or partially nationalized as well. The financial crisis has put pressure on the government, which always shied away from such actions, to break this economic policy taboo, too."
Saudi official says global oil demand could fall 45 percent
Oil demand could fall 45 percent due to the global financial crisis, but investments should be increased to ensure supplies are maintained, a senior Saudi government official said in remarks published on Thursday. Majid al-Munif, an adviser to Saudi Arabia's oil minister, said the global financial crisis may cut oil demand by 23 percent to 45 percent, pan-Arab Al-Hayat reported, citing remarks made at a conference on Wednesday.
World oil demand fell by 50,000 barrels per day in 2008, and 450,000 bpd this year, the United States Energy Information Administration said in a report in December. Cooling demand was led by a 1.2 million bpd contraction in top consumer the United States in 2008, and a further 200,000 bpd drop this year. The last time world petroleum demand fell was in 1983, part of four years of straight declines in oil consumption that began in 1980, the agency said.
The weak economy and lower oil demand has already caused U.S. crude oil prices to sink more than $100 from a record $147 a barrel in July -- a slump that has forced OPEC to take 4.2 million bpd of oil off the market in an attempt to reduce bulging global crude inventories and stabilise oil prices. OPEC has long stressed the need to keep oil prices stable to ensure long-term investment in the energy industry. Last month Saudi Arabia's oil minister Ali Al-Naimi said the kingdom will continue to invest in upstream and downstream energy projects despite the world economic crisis, but the kingdom's mega projects would not be enough on their own to meet the world's energy needs.
Ilargi: It's obvious that Bernie Madoff did not act alone: the damage done is far too great. But can the prosecutors prove it? How smart are the Madoff brothers? Why has Bernie taken all the blame? Did the family plan this course way ahead?
Madoff Brother, at Arm's Length?
As the No. 2 executive at Bernard L. Madoff Investment Securities LLC, Peter Madoff worked side by side with his older brother Bernard for nearly 40 years. Outside the office they skied together, including on one 2004 trip with a broker working at the firm's office who recruited investors for Bernard Madoff's advisory business. With Peter long viewed as an heir apparent, the brothers tried to avoid flying together. Now, they are keeping their distance. Bernard Madoff has told prosecutors he acted alone in bilking investors out of $50 billion over several decades. Peter Madoff has stopped coming into the office and isn't talking publicly about his role at the securities firm, where he headed trading operations.
In a firm defined by family ties, Bernard, 70 years old, and Peter, 63, were especially close. With an office a few feet from his brother, Peter helped create innovative electronic-trading systems on which much of Madoff Securities' success and reputation was built. For the past two decades, Peter ran the day-to-day trading operations of what the firm described as its core business. "Peter was very savvy on the technology front," says Edward Nicoll, who was a trading client of Madoff Securities as a co-founder of Waterhouse Securities Inc. "At every stage he automated Madoff's operation and that gave them a trading advantage."
No information has surfaced to suggest that Peter knew of or participated in the alleged fraud. Though he was chief compliance officer, his operational duties as head of trading formally were separate from the investment-advisory business at the heart of the alleged Ponzi scheme. Neither Peter nor his lawyer, Rusty Wing, responded to requests for comment. Investigators, investors and lawyers involved in the case are questioning how Bernard could have orchestrated such a massive scam over so many years on his own. They are scrutinizing whether there was a role played in the alleged scheme by others with close ties to Bernard over the years, including Peter and other family members, according to people familiar with the probe. It isn't clear if Peter has been asked to cooperate with the continuing investigation being conducted by the Securities and Exchange Commission and the Manhattan U.S. attorney's office. Investigators didn't return calls for comment.
Peter was the first employee Bernard told last month that the alleged scheme was unraveling—a day before Bernard told his sons, Mark and Andrew, according to a person familiar with accounts of the events. Peter, along with Bernard's wife, Ruth, co-signed for Bernard's $10 million bail. Peter's office was just off Madoff Securities' main trading floor on the 19th floor of the firm's headquarters building. The investment-advisory business at the center of the government probe was sequestered on the 17th floor in an area known as "the cage" because it had once housed securities stored by the firm. Peter helped create the computer system through which clients could trade with the firm in the late 1970s and early '80s, at a time when most transactions were still done over the phone. The computer systems supporting the firm's trading operation were separate from those for Bernard Madoff's advisory business on the 17th floor; it isn't clear whether Peter had direct knowledge of that network.
For many years, there were individuals who marketed Bernard's advisory business housed within Peter's domain near the trading floor, according to current and former employees. These included Alvin J. "Sonny" Delaire Jr., who worked for years near the trading desk Peter supervised, but whose job was to solicit clients for Bernard Madoff's advisory business, according to a Madoff investor and documents reviewed by The Wall Street Journal. Mr. Delaire initially was registered as an employee of Madoff Securities and later as a broker for Cohmad Securities, a small brokerage house, according to his regulatory records. Cohmad was a joint partnership between Bernard and a longtime friend, Maurice "Sonny" Cohn, according to people close to the firm. Though technically a brokerage firm, Cohmad acted as an important recruiter of clients for Bernard's advisory business, according to clients and people familiar with the operation. While Mr. Delaire worked for Cohmad, a 1996 letter from Mr. Delaire to a prospective client reviewed by the Journal was written on Madoff stationery.
On one occasion, Peter spent time outside the office with Mr. Delaire. In 2004, Peter traveled to Switzerland for a weeklong ski trip as part of an industry gathering of Wall Street traders; Madoff Securities was a sponsor of the event. According to a roster of the trip, Mr. Delaire was a member of a ski team of which Peter was a co-captain along with his brother. Also on the team was Mr. Delaire's wife, Peter's wife, Bernard and his wife. Mr. Delaire declined to comment. The Massachusetts Secretary of State has subpoenaed Cohmad, seeking details of its relationship with Madoff Securities. Peter also had a connection with an investor who lost money in the alleged Ponzi scheme. Jerome Reisman, a lawyer in Garden City, N.Y., says Peter served as co-executor to an estate of a client who had an investment account with Madoff Securities. Mr. Reisman said the client died in 2005 and the estate may now have lost more than $10 million. "We believe Peter was very much involved" with the client, Mr. Reisman said.
Peter received a degree from New York's Fordham Law School in 1970 and was soon splitting time between work at his brother's firm and helping raise a newborn daughter with his wife, Marion, according to former classmate Donald Rasher. Mr. Rasher, who now works as a government lawyer, recalls stopping by Bernard Madoff's office on the way to New York Knicks basketball games he attended with Peter. At the time, Bernard's fledgling trading firm occupied a niche outside the established players on Wall Street. Most stock trading was done through the members-only club of the New York Stock Exchange floor. Madoff Securities wasn't a member of the exchange; instead, it was a "Third Market" trading company, buying and selling stocks not listed on the NYSE. In the late 1980s, as Bernard devoted more time to big-picture market-structure issues and traveling, Peter took over the day-to-day management of the trading desk. In the late 1990s, Bernard's sons, Mark and Andrew, took over direct responsibility for the trading operation but continued to report to Peter, who increasingly began taking on the role of "Mr. Outside," managing client relationships and handling regulatory issues.
Peter "admired his brother greatly" but is "equally as bright…and quite capable on his own," says Joseph Hardiman, former head of the Nasdaq Stock Market and friends with the Madoffs. Though affable and down-to-earth, Peter could be a fierce adversary and defender of the firm's business interests, associates say. "There was no persuading Peter that his way wasn't the best," says Christopher Keith, who sold a technology business to Madoff in the late 1990s and disagreed with Peter about how the technology should be used to increase Madoff Securities' trading business. Peter was a central player at the National Stock Exchange, a regional marketplace in which Madoff Securities has had a significant stake over the years. After the exchange learned it was going to lose Instinet Group Inc.'s trading business in 2005 with the Instinet unit's announced sale to Nasdaq, Peter, a director at the National exchange for more than 25 years, helped push through sweeter terms for National for the remaining months of their contract. The negotiations were "very contentious," recalls Mr. Nicoll, then Instinet CEO.
Peter was an "active participant" as director, one of 15 on the board, says Joseph Rizzello, president of the National Stock Exchange, formerly called the Cincinnati Stock Exchange. He was "vocal" in many settings, including in recent work as a board member on the brokerage industry's trade group pushing for lower market-data fees charged by exchanges, Mr. Rizzello says. Amid the scandal, Peter is expected to leave National exchange's board in coming weeks, according to people familiar with the matter. The exchange and Madoff Securities' trustee are also expected to discuss how to handle the firm's 11% stake in the exchange. Despite Peter's heavy workload at Madoff Securities, Bernard was the sole owner of the company, according to records the firm has provided to regulators. There was no formal succession plan at the company, but employees for years say they assumed that Peter would be in charge should something happen to Bernard.
For more than a decade, Peter has owned a home valued at about $1.7 million in Old Westbury, on Long Island. He also has a home in Palm Beach, Fla., valued at $4.2 million, according to public records. There, he has entertained associates, according to a person who attended parties there. A vintage-car buff, Peter recently bought an old Aston Martin. It isn't clear whether Peter had any of his money invested with the Madoff advisory business, or how much he was paid. Peter at times participated in typical trading-room antics, once winning a contest by eating dozens of White Castle hamburgers. Dapper, he often wore expensive suits and sometimes a bowtie, according to former employees. At the office, Peter enforced Bernard's preference for black-and-gray décor. A few years back, a new trader at Madoff Securities was surprised when Peter scolded him for using a blue pen at the firm. "We don't use blue pens," a former employee recalls Peter telling the trader. Only black would do.
Like Bernard, whose sons worked at the firm, Peter's children were part of the fabric of Madoff Securities. His son Roger would occasionally accompany his dad to work while in elementary school, making the early-morning drive to work on the Long Island Expressway in a Porsche 911. Roger, who died in 2006 after a long battle with leukemia, described his father in a book "as an entrepreneur and always looking for new ideas." Peter's daughter, who also attended Fordham Law, went on to join the family business. She worked primarily as a compliance lawyer at Madoff Securities' market-making arm at the time of her uncle's arrest.
At about 9 a.m. on Dec. 11, Peter gathered the employees of Madoff Securities to break the news that Bernard had been arrested, according to people who were in attendance. In separate meetings on the both the 18th and 19th floors of the building in New York where the firm is based, Peter then asked stunned employees to keep the news to themselves. In the initial days after Bernard's arrest, Peter was the only senior Madoff at the firm that continued to go into the office. He spent time talking with investigators and later encouraged employees to be cooperative, according to co-workers. Peter stopped showing up in the office sometime before Christmas, employees say.
Where Ezra Merkin Lost His Way
Last fall, the celebrated money manager J. Ezra Merkin told a room full of value investors that he was "in the business of buying broken promises." Now, some clients are accusing him of selling broken promises. Mr. Merkin, who runs Gabriel Capital Group in New York, is sometimes called "Ezra the Wise" after the Biblical prophet. He has been revered for his ability to ferret out value in the bombed-out stocks and distressed bonds that only a follower of the great Benjamin Graham could love. He contributed an insightful chapter on bankruptcy investing to the new edition of Mr. Graham and David Dodd's classic 1940 book, "Security Analysis." So value investors were stunned when Mr. Merkin revealed a month ago that he had lost $2.4 billion in the alleged Ponzi scheme run by Bernard L. Madoff. "How the h- an incredibly intelligent guy like Ezra got hornswoggled into this is utterly beyond me," says Bruce Greenwald, a professor at Columbia Business School.
"In retrospect," says Mr. Merkin's attorney, Andrew Levander, "Madoff brazenly fooled Mr. Merkin and many others. The experience has been a source of terrible consternation and sadness for Mr. Merkin, and obviously for his investors, too." At a panel sponsored by Columbia last fall, Mr. Merkin expounded on the value in complex mortgage securities, the ups and downs of auto loans, and the pitfalls of commercial real estate and credit-card securities. "Since we've had the mother of all parties," he joked, "we might have the mother of all cleanups." Mr. Merkin sounded like someone who still spent every waking hour ransacking the markets for bargains.
Indeed, the offering document for Mr. Merkin's Ascot Partners LP states that he "intends...to adopt a selective approach in evaluating potential investment situations, generally concentrating on relatively fewer transactions that he can follow more closely. [Mr. Merkin] is expected to engage in hedging and short sales." That sounds like just what a great value investor should do: Scour the markets for reward and avoid risk. Instead, it seems, Mr. Merkin was earning a lot of money for doing very little. According to a letter he sent clients on Dec. 11, Mr. Merkin delegated "substantially all" of Ascot's $1.8 billion to Bernie Madoff. Roughly 25% of the assets in Mr. Merkin's Ariel Fund Ltd. and Gabriel Capital LP were also meted out to Madoff. (Ariel Fund Ltd. has no connection to the Ariel mutual funds of Chicago.) How did Mr. Merkin end up in this mess?
Some think that as an honest person himself, Mr. Merkin simply believed that Bernie Madoff was equally trustworthy. Paul Isaac of Cadogan Management, a hedge-fund research firm, cites "Hotel California risk" -- the danger that years of profits can trap a manager in a position even if he wants out. Or Mr. Merkin's success may have gone to his head, dulling his eye for detail. Or, perhaps, the money itself went to Mr. Merkin's head. After all, Mr. Merkin still collected full fees on the assets he had given to Bernie Madoff. In Ascot alone, Mr. Merkin's deferred fees (which he is now unlikely to receive) exceeded $320 million by the end of 2007.
Mr. Merkin also charged full freight as a philanthropist. The UJA/Federation of New York had put $10.5 million of its endowment in Mr. Merkin's Ariel fund before he joined the UJA investment committee in 1999. After the committee waived a conflict-of-interest rule, the money stayed in Ariel (earning fees for Mr. Merkin) until 2005, when UJA revisited the rule and sold the fund. As chairman of the investment committee at Yeshiva University, Mr. Merkin put about $15 million of the school's endowment into Ascot. He thus captured a 1.5% annual fee for himself, even though Yeshiva could have given its money directly to Bernie Madoff -- who was later treasurer of the university's board -- for nothing. Although Mr. Merkin was also a donor to Yeshiva, the arrangement strikes many as highly unusual.
"What was in his mind to charge that fee?" asks a financier familiar with the Yeshiva investment. " How in the world could he justify that?" Now, sadly, Mr. Merkin seems to have become the latest testament to the emotional struggle even the greatest investors must undertake to resist temptation. Of all the seductions that can lead a value investor to stray from the true path, perhaps the worst is simply making too much money.
Puritans versus spendthrifts: recession’s culture war
Sexual intercourse began in 1963, according to the English poet, Philip Larkin – around the same time as the US historian, David Tucker, pinpoints the death of America’s love affair with thrift. In the affluent society created by the postwar boom, instant gratification replaced the deferred variety, and consumption eclipsed frugality as the spirit of the age. Today saving is back in vogue, as western economies struggle to recover from the after-effects of spending supercharged by excessive borrowing. However, the task facing the world’s leaders is to persuade terrified consumers to spend like there is no tomorrow – and that a return to thrift would make matters much worse.In theory, it should not be too difficult to persuade people to spend. As Professor Tucker put it in his book on the decline of thrift, humanity in its first 2m years of hunter-gathering was less thrifty than squirrels and ants when it came to hoarding food for the bad times.
Once humans invented agriculture, they learnt the value of saving seeds for planting and surplus food for the winter. But when they moved into towns and cities, they developed a love for luxury, waste and extravagance that even religious asceticism struggled to curb. The heirs of the original Puritans in the New World kept faith with frugality, however – none more so than Benjamin Franklin, whose pamphlet, The Way to Wealth, exalted thrift. “If you would be wealthy,” he advised, “think of saving as well as getting ... What maintains one vice would bring up two children.” Max Weber, the pioneer of sociology, attributed the rise of capitalism to such Protestant sentiments, which abhorred wasteful spending but urged believers to follow their secular vocations zealously. A hardworking and thrifty person would be of value to the community and to God.
Yet consumption of luxuries always breaks through whenever the consequences of such ethical behaviour lift life above survival. Only when the economy slips into recessions do free-spending consumers remember the virtues of thrift and rebuild their savings safety nets. It took the economic insights of John Maynard Keynes to realise that such retrenchment could be disastrous for the economy as a whole – however rational it might seem to the individuals. Writing during the Great Depression, Keynes described this as the paradox of thrift – the more people saved, the more demand for goods and services fell. In a 1931 BBC radio talk, he said the urge to save more than usual at times of recession was “utterly harmful and misguided”. When there was a surplus of labour, saving merely added to it – creating a vicious spiral of increasing unemployment.
“Therefore, O patriotic housewives,” he urged, “sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised ... Lay in a stock of household linen, of sheets and blankets to satisfy all your needs. And have the added joy that you are increasing employment, adding to the wealth of the country because you are setting on foot useful activities, bringing a chance and a hope to Lancashire, Yorkshire and Belfast.” Today’s finance ministers could not put the case for spending more eloquently and there will be some who will respond. They include Generation Y, people born since the early 1980s who have been more susceptible to instant gratification than their parents and grandparents. Debt for them is a way of life that starts at university and continues when they climb on to the housing ladder. These Net Geners – who include my own children – have no memory of past recessions that would prompt them to curb their spending.
They are also disinclined to be held back by the attitudes of their baby-boomer parents who built their lives on work and self-denial. Those at the bottom of the social pyramid are also less inclined to worry about deferring gratification, since shortage of cash makes tomorrow’s needs seem like a foreign country. Poverty campaigners often argue that the best way to give the economy a quick boost is to cut taxes or raise benefits for this group, who will spend the money immediately. The middle classes, in contrast, will use any additional finance at times such as this to reduce debt and build up savings against the increased likelihood of a rainy day – justifying Keynes’s fears. They are also likely to reason, justifiably, that when asset prices are falling, money held back now will buy more later. Older people will also be unwilling to spend liberally, with memories of previous recessions and fears about their pensions when stock markets have fallen sharply.
Those who rely on savings to top up their pensions will in any case be feeling cash-strapped as interest rates plummet towards zero. Since it is the older generation and the middle classes who are best off, exhortations to consume more for the greater good are unlikely to be enough. Keynes recognised that as well, which was why he concluded that government spending was the solution to the paradox of thrift. Some countries have understandable cultural problems with printing money to finance economic activity. But US president-elect Barack Obama and the UK’s Gordon Brown are both drawing up the sort of ambitious public infrastructure programmes that are needed to put the economy right. In the present circumstances, it is governments, not consumers, that will provide the instant gratification needed to boost the economy.