Negro store near Jeanerette, Louisiana
Ilargi: Well, couldn't someone have warned me? In my head, it was carved in stone that January 28 '08 was our first day doing The Automatic Earth. Turns out, it was the 22nd. We missed our own anniversary. That will have to be rectified tonight, and with a vengeance.
To me, though, it feels like it's been way longer than just a year. That may have something to do with the fact that we were already doing the Oil Drum before TAE started, but somehow I think it’s primarily to do with the increasing intensity and the long hours that go into this work. There's a huge difference between what I thought would happen back in the day and what there is now. As Stoneleigh recently said, we must be a remarkable source of information for posterity. Our readership has grown enormously in the past 12 months. And that is a compliment for all you readers in my view. I realize full well that what I post here every day is not the easiest dinner to metabolize. And that that hurts our reader numbers enormously. People just happen to like bite-sized offerings, but that's not good for them. Having to chew is a good thing.
And I have often thought about other ways to present the material, but I get whistled back all the time. I don’t want this to be a site like so many others, that feed you a pre-fab opinion; I think I already provide more than enough of my views every day. In the end, it's about you, about your mind forming a picture of what you see going on around you. Since the main media, well paid reporters who have access to all the sources and all the people, incessantly fail to do what should be considered their jobs, you can't get the kind of information from them that would be sufficient.
We need to, every single day, dig through tons of garbage to find the morsels that count. It's a shame and a pity, but it's also very obviously the reality we live in. And there is no doubt in my mind that it's the main reason why what were once the best and best sold newspapers and TV news shows are being hit so badly in the present crisis. People may be suffering, but they would still be willing to pay for information that clues them in to what is really happening. The internet has many spots for ideas, opinions and ways to work that are independent, that don't have the political agenda's that kill off the multi-million established news organizations.
Sure, Rupert Murdoch still makes money, but it comes at the expense of both the readers and the journalists. The lowest common denominator works great, just look at politics, media, TV shows and the Billboard top 100, but there is a high price being paid for that. The best -as in most honest and open- musicians, reporters, thinkers and representatives are thrown overboard. And the world winds up with not even mediocrity, but something even way below that. It’s not the medium common denominator we're talking about, after all, it's the bottom feeders that rule our world. Still, when the bottom feeders are consistently wrong in what they say about matters that affect people directly, and the credit crunch certainly fits that bill, there will necessarily be a move away from them.
In the case of TAE, or more broadly financial blogs, people will always first tend to go to those sites that are run by investors and economists. Most of them will be satisfied with that, since reading them will unleash a sufficient amount of feel-good chemicals in their brains. And as you can see daily in what we post, economists, and anyone else with a degree in whatever field, can still be wrong in what they say a hundred times in a row, and still be asked for a 101'st opinion. Insight, people feel, comes from cramming thousands of pages of material written by other people into your head. The excuse for not getting it right even if you have that degree can be found in the media all the time: it could not be foreseen, and nobody foresaw it.
At TAE, we all know that that is nonsense. For a year now, and in the years before that, my dear friend Stoneleigh and yours truly have been living proof that much if not most of what has happened, and much of what is about to, could and can indeed be foreseen. Because thousands of people every day have come to understand that, we now have all you great people with us every day. And that is as much a tremendously proud feeling as it is a grand responsibility.
As for the next year: we haven't seen anything yet. The bankruptcies and lay-offs have yet to start. Our governments will continue to make the exact wrong decisions, because their focus is on the rear-view mirror, on going back to where we were, on the return of the perpetual growth economy. It will never come back. That record is not just skipping, it's been broken into a million little pieces, and there's no reserve copy. Nor is there a trillion dollar needle that will make us ever hear the song again.
The media we have, and the political systems, will not recognize this until it's far too late, until they will be wiped away and thrust way off the stage. We cannot prevent that phase from playing out first before we get to look at what we have left, and that is very tragic, and it will be the end for millions of us. It’s a part of the drama that has to be played out. We won't stop trying to restore what we once had until what we actually DO have hits us over our heads with a vengeance.
Yes, that is tragic. And it is because it is true. Tragedy only resides in reality. Dreams can be scary, but they're never tragic.
It's time for me to start that anniversary party with that foretold vengeance. Thanks for being here, and thanks for your past and future donations that make this joint possible. We have a journey ahead of us that will be harder than we can imagine today for many among us. At least, you don't have to do it on your own. That is our pledge, mine and Stoneleigh's. Look around you, get closer to the people around you, seek out those who need help now or will need it in the future. The nuclear family is no more, and neither is their abode, the McMansion. People need people.
Downturn Accelerates As It Circles The Globe
The world economy is deteriorating more quickly than leading economists predicted only weeks ago, with Britain yesterday becoming the latest nation to surprise analysts with the depth of its economic pain. Britain posted its worst quarterly contraction since 1980 on the heels of sharper than expected slowdowns reported from Germany to China to South Korea. The grim data, analysts said, underscores how the burst of the biggest credit bubble in history is seeping into the real economies around the world, silencing construction cranes, bankrupting businesses and throwing millions of people out of work.
"In just the past few days, we've had a big downward revision, we're seeing that an even bigger deceleration is on the way than we thought," said Simon Johnson, former chief economist at the International Monetary Fund and a senior fellow at the Peterson Institute for International Economics. The depth of the troubles, analysts say, indicates that nations may need to spend more than the billions of dollars already planned on stimulus packages to jump-start their economies, and that a global recovery could take longer, perhaps pushing into 2010. Analysts are particularly concerned about the slowdown in China and the recession in Europe. There is mounting concern about the stability of the euro and the British pound, which dropped to a 24-year low against the dollar yesterday.
Analysts are fretting about the possibility of a debt default in a euro-zone country that could send fresh shock waves through global financial markets. The problems in Europe now appear to be as bad if not worse than those in the United States. In the last quarter of 2008, the British economy shrank at an annualized rate of 6 percent. That is worse than economists expected, but also showed the British recession may be even harsher than the one in the United States, where analysts predict data expected next week will show the U.S. economy to have contracted between 5 and 5.5 percent in the last quarter of 2008.
The meltdown is altering high streets in Britain, where retail icon Woolworths shuttered the last of its 807 branches this month after 99 years in business. Marks & Spencer, sometimes described as the bellwether of Britain's retail sector, said this month that it would close 27 stores and cut more than 1,000 jobs. The average price of a house has plummeted to mid-2004 levels, according to Halifax, Britain's biggest mortgage lender. Car sales are at a 12-year low. The number of people out of work has climbed to nearly 2 million, a level not seen since 1997 when the Labor Party came to power.
In fact, the only sector to show growth in Britain was agriculture, which accounts for about 1 percent of the overall economy. "The question now is not how bad will 2009 be, but will we recover in 2010 and if we recover, will it only be anemic?" said Andrew Scott, professor of economics at the London Business School, adding that the housing bubble is bigger, consumer debt is higher and the speed of the slowdown faster than in previous recessions. Partial data released in recent days by Germany, Europe's single biggest economy, indicates its economy saw a major contraction in the last months of 2008, posting a 6 percent annualized drop, according to Howard Archer, chief Britain and European economist for IHS Global Insight in London.
That could get worse as problems mount in the European financial system. In recent days, major banks in Europe -- including the Royal Bank of Scotland -- reported surprisingly massive losses. European authorities are seen by some critics as falling behind the Americans in dealing with distress in the their financial sectors. Standard & Poor's has downgraded Greek and Spanish bonds and warned that others, including Ireland's, may be next. The sense that some European countries are now more risky has driven up the borrowing costs for even large nations in the region, including Italy. That has made it harder for those countries to raise the vast sums needed to launch major stimulus packages aimed at economic recoveries.
Also troubling are signs that China, once a rare light in the global economy, may not prove to be the pillar of strength in Asia that many analysts had hoped. Beijing announced this week that its economy grew by 6.8 percent in the fourth quarter of 2008 -- slower than the 7 percent analysts expected -- bringing total growth for 2008 to a seven-year low. Chinese data, however, are somewhat opaque, and analysts warned the slowdown there may be sharper than Beijing is willing to admit.
That is diminishing hopes for China as Asia's economic white knight, with its growth potentially propping up economies in the region. And as China grows at a far slower rate, it is importing fewer goods from neighbors, giving export-dependent nations in the region no way to pick up the slack from plummeting demand in the United States and Europe. Particularly hard hit is South Korea, which saw trade with China soar in recent years. But as China slows, and the United States, Europe and Japan sink into deep recessions, unsold goods are piling up at South Korea docks. This week, the government said the economy in the fourth quarter staged its sharpest drop since the Asian economic crisis swept across the country in 1998.
The U.S. Mega Bad Bank
Despite a full year of being in detox, the U.S. banking system is still lurching around in a hospital gown. What is working, and what is not, and how will the incoming Administration deal with one of the worst economic crises to hit the world’s largest superpower since the Great Depression? The markets need to clear, and clear out now, the bad assets acting like an anvil on bank balance sheets across the country, in order to stop this financial crisis–if we continue to prolong it with ad hoc government bailouts, we will soon look like our Pacific neighbor, Japan.
Forced mergers, forced shotgun weddings, forced liquidations, all must be on the table. Because all of the central bank’s liquidity and all of the Treasury’s bank capital injections can’t cure a bad bank asset. "If Treasury gives a bank capital and the value of troubled assets keeps falling, it’s like throwing money down a hole–eventually the bank is going to need another capital injection," says Michelle Girard, top economist at RBS Securities. Bank executives wasted all of last year defending the status quo. From Bear Stearns’ Alan Schwartz to Washington Mutual’s Kerry Killinger to Lehman Bros.’ Richard Fuld to Merrill Lynch’s John Thain, all covered up with a multitude of spins the severe troubles on their books, leaving it to the press and to analysts to do that painspotting for the government. All of them are now gone from their companies.
And the government’s plans have careened so badly from pillar to post, you have to put a GPS system on the thought processes down in Washington, D.C. to keep track of what is going on. Because following the government’s constant changes to its bailout plan is like trying to follow a mosquito in a tornado. The latest idea: Now there is talk of a massive, US mega-bad bank, an outsized trash compactor, a gigantic dumpster much like the one Sweden launched in the early ‘90s to take on its country’s bad bank assets–which means we could be taxed like Sweden to pay for this entity. A US Mega-Bad Bank that could get, say, $100 billion in TARP money, where it would then, ironically, lever that $100 billion up to $600 billion, with debt backed with FDIC guarantees, to start buying and taking off bank balance sheets $2.4 trillion worth of rotting loans and securities issued for pie-in-the-sky projects like empty strip malls, condos and townhouses on swamplands.
Borrowings to cure borrowings in a government-distorted housing system steered by Fannie Mae and Freddie Mac, both built on borrowings backed by the US taxpayer. Motion sickness? Me too. Meanwhile, the Bernie Madoff Ponzi scandal is tying up the FBI’s efforts to catch the throng of scamsters engaging in white collar street crime, mortgage frauds, as well as other Ponzi scams and crooked hedge funds. Because, sure enough, the SEC, it being an agency not populated with market cops but market crossing guards, doesn’t flush out frauds as they occur, neither do auditors–recessions do.
Where Are We Now? Despite the fact that the US government is now providing insurance on $428 billion in bad assets from Bear Stearns, AIG, Citigroup, and Bank of America, despite the Federal Reserve morphing into the world’s largest junk investor as it has taken on $75 billion in bad assets from Bear and AIG, with more coming from Citigroup and Bank of America, despite the Fed nearly tripling its balance sheet, the economy still faces an estimated $2.4 trillion in bad bank assets, now ticking time bombs. The top four banks hold $1.4 trillion in bad assets, out of a total of $2.4 trillion of potential rotten eggs for the entire bank sector. Because of these stinkers, some $2 trillion in market value in the S&P financial sector has been lost since May of 2007, with Citigroup losing 10 times as much, analysts’ estimates show. Each of the market values of Kraft Foods, UPS, Home Depot and PepsiCo surpass the market capitalizations of Citigroup and Bank of America-combined.
The Worst Two of All? In the last week of trading, Bank of America has lost more in market cap than the $24 billion it spent buying Merrill Lynch itself. The $45 billion BofA got in government capital injections is now nearly twice its $25 billion market cap. The government has had to invest twice in both Citigroup and Bank of America, as the two represent 40% of the assets in the sector, and are the two most levered up banks, from a tangible common equity perspective, says Goldman Sachs. Citigroup, the world’s biggest financial supermarket, has hung its fire sale shingle on about a third of its balance sheet, $600 billion, selling anything not screwed to the walls. With a gun to its head, Citi sold Smith Barney, the only one of its main units to post a profit in the third quarter. BofA is tenuously capitalized, says Friedman Billings Ramsey, going into 2009 with just $61.7 billion of pro forma tangible common equity supporting a colossal $2.4 trillion of tangible assets. What’s next?
Back to the Future So it’s back to the future time, a revival of TARP 1.0, a United States Mega Bad Bank, is now under serious debate in Washington, to take on this Kryptonite. That would be a return to the initial incarnation of TARP, which would have held a Dutch auction for these assets. The breakup of Citigroup could be a harbinger of what is to come. As Fox Business first reported starting in November, Citigroup has split into Citicorp and Citi Holdings, with Citicorp a return to its roots as a deposit taking bank, and Citi Holdings housing its bad assets. With this move, Citi may be positioning itself to unload a huge slug of the $895 billion in bad assets at Citi Holdings onto the US Mega Bad Bank.
Who Will Oversee the US Mega Bad Bank? Be mindful that the TARP program will be overseen by incoming Treasury Secretary Timothy Geithner, also the incoming boss of the IRS, who didn’t pay about $34,000 in self-employment taxes, who only paid his 2001 and 2002 self-employment taxes in November 2008 when he was tapped as nominee, and who wrongfully deducted as dependent care costs on his personal tax returns summer camp fees for his children. Geithner is a former New York Federal Reserve official who oversaw the Bear Stearns bailout, the government’s Emily Litella moment, who is criticized for not doing enough in the interim to stop another primary dealer, Lehman Bros., from collapsing, who lives by his own tax rules as he makes up the bank bailout rules as he goes along. An official who, with incoming Obama economic advisor Larry Summers–a self-made man who worships his own creator–will now oversee the rescue of the world’s biggest banking system.
Market Impact of the Mega Bad Bank Would a mega trash compactor trigger a bank stampede, would banks then dump assets en masse onto the US taxpayer, and would doing so in turn potentially create fresh new values for this landfill, or marks, and thus more writedowns? Would the US government then be forced to suspend mark-to-market accounting, a flawed bookkeeping methodology which even Enron used to inflate its profits, a methodology which has created colossal bank writedowns as it has forced banks to write down these assets as if they were selling them today in an iced-over market, even though many are not selling them?
The Problems with TARP The TARP capital injections, in the form of stock purchases in troubled banks, have acted as blood thinner to existing shareholders, as the banks have had to issue more shares, diluting existing investors, explains economist Ed Yardeni. There are more problems with the TAR-PIT. The Treasury said it would give money only to healthy banks to jump-start lending. But at least two-thirds of the 314 banks who got TARP money were already in violation of federal regulatory guidelines for lending because they blew out their construction, development and commercial real estate loans, says bank analyst Richard Suttmeier.
And watch this. According to the Wall Street Journal OneUnited Bank in Boston received $12 million in TARP money at the behest of Barney Frank, chairman of the House Financial Services Committee. However, Suttmeier says that OneUnited’s commercial real estate loan exposure is 2,005 times federal regulatory guidelines for capital requirements. Two thousand and five times. "The regulatory guideline is no more than 300% [of capital], and this ratio is the worst among all [of the] 8,384 FDIC insured financial institutions," Suttmeier says, adding that "a bank in Alpharetta, Georgia had a heavier concentration, but [it has] already been seized by the FDIC."
World’s Biggest Junk Investor: The Federal Reserve Meanwhile, the central bank’s balance sheet has surpassed $2 trillion, triple what it was a year and a half ago. The Fed has taken on a mountain of potentially bad paper assets that, stacked, could reach to outerspace. Among other things, the Fed $73 billion in assets from Bear Stearns and American International Group, warehousing them in off balance sheet vehicles much like Citigroup did and valuing them with the help of the credit rating agencies, who helped get us into this mess by rubberstamping as triple A all sorts of junk. The Fed also has given massive guarantees of almost $300 billion to Citigroup and Bank of America. What of all this monetary intervention? The Fed is now blowing out its balance sheet to fix a bursting credit bubble that the Fed helped create by keeping interest rates down too long. Inflation will be coming in the next five years. Remember this quote: Business expansions never die of old age–they are routinely murdered by the Federal Reserve.
Why Aren’t Banks Lending? Banks who have received $350 billion in TARP money are under attack for not lending enough money, notes economist Yardeni. But actually, the banks are lending. However, they are lending almost exclusively to the Fed, Yardeni notes-or they are lending to panicked companies who are drawing down on existing credit lines. Yardeni says: *As of January 14, depository institutions had $827.5 billion on deposit at the Federal Reserve Banks. That’s up $795.4 billion since September 10, the week just before Lehman died. It is up $555.6 billion since October 14, when the banks started to receive TARP money. *On January 7, commercial banks had a record $1.1 trillion in vault cash, cash items in process of collection, balances due from depository institutions, and balances due from Federal Reserve Banks.
*Since October 14, when TARP funds were first given as capital to nine major banks by the US Treasury, through January 7, cash held by banks rose $524.3 billion, while loans and leases fell $148 billion. So, why aren’t they lending it? Would you want to lend money in a deepening recession, and who do you trust now to pay those loans back, says Yardeni. All at a time when the banks have to roll over their own debt and pay interest on those liabilities, and when corporate borrowers are demanding cash to rollover their bonds, says Yardeni. And when new accounting rules take effect later this year, banks will be force to put back onto their balance sheets hundreds of billions of dollars in assets and liabilities now warehoused in off balance sheet vehicles. We are in a new year, 2009-can we expect more of the same that we saw in 2008? The answer, unfortunately, is yes.
Ilargi: The author of the article above is Elizabeth MacDonald. She's at FOX, not exactly a recommendation, but I think she's got great stuff.
There's no new motor to drive the economy
There's a piece of fashionable political nonsense you should be vaccinated against before the virus hits us: a whole vocabulary of ministerial happy thoughts to which you'd best learn to block your ears. The coming nonsense is that when this recession is over, countries such as Britain should seek and find our salvation in (in what will become a buzz phrase of 2009-10) a "new economic model".
Wrong. Actually we're just stuffed. We hit a tree. There is no replacement economic model for us to drive off in. We must bash out the dents, clear the broken glass, remove the bumper from the front wheel, and limp on as best we can. We should accommodate ourselves to that prospect. Instead, as our prosperity sinks, the politicians' rhetoric will go skyward. "New challenges", "a new vision", "post-millennial economy", "thinking outside the box"... how wearisome this inspirational PowerPoint pap becomes. Already I can hear that most unlikely exemplar of the next generation of economic thrust, Lord Mandelson, of Foy and Hartlepool, now in his sixth decade, fumbling through ermine for the right intergalactic techno-patter.
He will not be alone. "One thing is certain," the greying heralds of a new economic age will intone, hair tint running down their collars, "nothing will ever be the same again." Hear, hear! How this stuff resounds around the gilded screens and neo-Gothic tat of the Upper Chamber. Melancholy will be the spectacle of a range of middle-aged-to-elderly political throwbacks burbling about life changes and sea changes and gear changes and step changes for the British economy. "Post-recession Britain... new age... new economic dispensation... recalibrate... re-balance... blah, blah, blah." Oh boy, is this nonsense going to sound wise. The riff will be that Western economies like Britain's must reinvent themselves.
Behind the curve, and banging the table as ever, Gordon Brown has not yet latched on to the rhetoric of the "new economic model". He's still trying to kick life back into the old one. His reflexive response to calamity remains to try to get the wounded to their feet, and to pretend it hasn't happened. Yesterday on the Today programme he was still choking on words like "boom" and "bust". Like those pensioners one witnesses taking an unfortunate tumble while boarding a bus, his instincts, and those of much of the political class, have been to stand up again as fast as possible and carry on.
So the talk until recently has been about "kick-starting" the old economy, and Mr Brown's immediate promise was to get mortgage lending back to the levels of 2007. Hah! This mindless attempt to return to routine is an indication either of the absence of imagination, or of panic. I've seen a mule that had just broken one front leg scramble back on to three of its hooves, then begin trying to graze again, desperately reaching for the familiar, though the poor beast was doomed. But as it becomes apparent even to Mr Brown that there is to be no return to that golden decade of no hard choices and uninterrupted growth, he and his Cabinet will begin the search for something new in the Uplift Department to say.
Listen to Peter Mandelson already: this is how it will run. Although (the argument will concede) the old rust-belt industries of the 20th century had to go, Britain turned its back on industry rather too readily. We were bedazzled by financial services: fool's gold from the City. Now (the argument continues) we must square up to the fact that Man cannot live by leverage alone. We need (wait for it) a new economic model. First, we must (argh) "rebalance" our economy. Government must seek out (key words) "a new generation" of manufacturing strengths, a second-wave industrial renaissance.
What, then, are these strengths? Our talent (runs the argument) for (key word) "innovation"; an "IT" (key word) generation; the potential of our existing (key word) "high-tech" industries and (key words) "high added-value" economic activity; and our (key words) "genius for invention". Vital to all this will be (key words) "skills", "training" and "education". We should remind ourselves, too, of that inestimable resource available to our economy: English as a (key words) "world language". Nobody will quite say "white heat of the technological revolution", because Harold Wilson said that in the 1960s and it became a joke.
Nobody will quite say "picking winners" because 1960s and 1970s Labour governments tried to do just that, and ended up picking some deadbeat car factories. Nobody will quite say "fast-forwarding into the future at an ever-increasing pace" because Tony Blair has used those words and they sounded silly first time. So maybe somebody brainy could coin phrases such as "virtual manufacturing" or "the circuit-board economy"... And it will all be just so much hot air. What do people think India's growth is based on? Rice? What is it, precisely, that we do so much better than China?
The truth is that some parts of Britain's high-technology economy, and some of our services industry, are strong already and can remain strong. Where there is potential strength the market has invested already without any help from ministers. However recently the ministers may have discovered promising parts of the British economy located outside the Square Mile, investors and customers can sniff out quality for themselves, and do, and did, even as far afield as Birmingham. The non-City part of our economic landscape has not been held back by political inattention, and will not be significantly advanced by political patronage or speeches.
Politicians don't "rebalance" economies. Market forces do. This recession is not a failure of market economics. It is a reassertion of market economics after a decade in which we paid ourselves more than we were producing, and funded it precariously and temporarily by complicated credit instruments that it took a while for the market to rumble. Now a prosperity that always baffled ordinary citizens has collapsed. The collapse of confidence is not irrational; it's the correction to a long run of irrational confidence.
All that stuff about the emerging Asian giants wasn't just phrasemaking for party conference speeches. It was true. We're falling behind. We face a mountain of debt: the difference between the life we are able to sustain and the life we were enjoying. Politicians cannot do much to jack up the first. So it falls to them to arrange and explain a reduction in the second. The great task facing the next British government is to help the country to recognise and embrace its fate: that we should get poorer, and slip with as good a grace as possible into the world's second league. Yes, there is a rebalancing required: a rebalancing of popular expectation.
'Hold My Administration Accountable'
President Barack Obama asked the nation today to "hold my administration accountable" for the results of the economic stimulus package up for a House vote next week. Amid a familiar rundown of arguments for the proposed $825 billion stimulus package -- which has yet to receive the vote of a single Republican in the two committees that considered the legislation -- Obama inserted new language addressing skeptics. "I know that some are skeptical about the size and scale of this recovery plan," he said in a video address on the White House Web site. "I understand that skepticism, which is why this recovery plan must and will include unprecedented measures that will allow the American people to hold my Administration accountable for these results.
"We will launch an unprecedented effort to root out waste, inefficiency, and unnecessary spending in our government, and every American will be able to see how and where we spend taxpayer dollars by going to a new Web site called recovery.gov." In a bipartisan meeting with Democratic and Republican congressional leaders Friday, Obama stressed the urgency of swiftly passing the economic stimulus package for the good of the American people and as a matter of political expediency. "Look, we are all political animals here. If we don't do this, we may lose seats. I may not be re-elected," Obama said, according to a source in the meeting. "But none of that's going to matter if we don't pass this because the economy will be in a crisis and the American people will be hurting."
The president on Friday brought leaders of both parties into the Roosevelt room of the White House, hoping to gain support from GOP leadership and push the plan through. "I recognize that there are still some differences around the table and between the administration and members of Congress about, particularly, details on the plan," Obama said. "What I think unifies this group is a recognition that we are experiencing an unprecedented, perhaps, economic crisis that has to be dealt with, and dealt with rapidly." Obama expressed optimism that, thanks to Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif., Democrats were "on target" for their President's Day time frame for passage of the plan. In his address today, Obama said he would lift a "veil of secrecy" that has shrouded previous federal payouts to shore up the economy.
"We won't just throw money at our problems, we'll invest in what works," he said. "Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made public, and informed by independent experts whenever possible." House Republicans, who say they have barely been consulted on the stimulus package, came to Friday's meeting prepared. House Minority Whip Eric Cantor, R-Va., and House Republican Leader John Boehner, R-Ohio, brought handouts to the meeting to share their set of specific suggestions for the package being debated on Capitol Hill. Republican leaders would like to make changes to the tax cuts in the stimulus package, framing it as a way to pick up GOP votes. They also suggested making unemployment benefits tax-free, allowing tax deductions for small businesses equal to 20 percent of income, and allowing businesses to carry losses from one year to another.
After discussion of Cantor's ideas, Obama weighed in, saying "Eric, I don't see anything crazy here." On one of the issues, regarding whether the lowest individual tax rates should be cut from 15 percent to 10 percent and from 10 percent to 5 percent, Obama told Cantor that "on some of these issues we're just going to have ideological differences." But Obama added, "I won. So I think on that one, I trump you." Bipartisanship is not easy, but House Republicans came away thinking Obama was at least receptive to their ideas, although other Democrats appeared less receptive, sources said. Some Republicans publicly seemed like they wanted to cooperate with the new president. "Republicans will choose bipartisan solutions over partisan failures every single time," said Sen. Mitch McConnell, R-Ky. "I'm concerned about the size of the package, and I'm concerned about some of the spending that's in there," Boehner said. "At this point, we believe that spending nearly $1 trillion is really more than what we ought to be putting on the backs of our kids and their kids."
Some of the spending in the House version of the bill includes $726 million for after school snack programs, $50 million in arts funding and $200 million to repair the National Mall, including grass maintenance -- leading some critics to question whether those outlays truly would be stimulative. When the bill passed the House Appropriations Committee on Wednesday, not one Republican voted for it. But the Obama team is pushing back. "There's no question that the president believes that the bill is stimulative," White House Press Secretary Gibbs said in a news conference Friday. "Our analysis of the legislation right now is that 75 percent of this money will be spent in the next 18 months to create jobs and to get people working and to get the economy moving again."
GOP leaders left today's meeting generally optimistic. Obama's tone and apparent willingness to work with members of Congress on expansions in small business tax cuts gave House Republicans the sense that he was committed to working together. Obama encouraged Republicans to be in touch with Larry Summers to develop a specific proposal. The Senate is slated to consider its own version of the stimulus package next week, so there's still ample room for negotiation on Capitol Hill. The Senate version is expected to spend less, and possibly cut taxes more than House Democrats are seeking. But Obama seemed to make clear that he is taking ownership of the stimulus package. Presidents for years have started their day with a daily intelligence briefing about the threats in the world. In a sign of the times, Obama is now including a daily economic briefing in his schedule.
Obama Signals Tough Restrictions on Banks in Rescue Package
President Barack Obama signaled that he would toughen restrictions on and oversight of banks as part of a fresh plan to aid the battered industry. Obama blasted the banks yesterday over reports that they’ve spent money renovating offices after receiving billions of dollars from the government and vowed they would be held accountable for any aid they receive in the future. The tough talk seemed designed to build support for a rescue plan that aides say Obama will roll out soon by reassuring lawmakers and voters that the administration will keep close tabs on money it hands out. Pressure for a plan is building after the Standard & Poor’s 500 Index fell for the third straight week, in part because of concerns about the health of the banks.
"They’re going to have to take some early action," said Michael Bleier, a partner at law firm Reed Smith in Pittsburgh and a former Federal Reserve lawyer. "Banks and the financial services industry have to have balance sheets that are strong." The administration’s economic team, which will meet with Obama today, has been working on a program to bolster the banks and get them lending again. People familiar with their thinking have said the plan is likely to include fresh capital injections into the banks and steps to clear bad assets off bank balance sheets. Lawrence Summers, who, as director of the White House’s National Economic Council, is playing a key role in putting together the bank-rescue package, canceled plans to attend the World Economic Forum next week in Davos, Switzerland. So too did Sheila Bair, chairman of the Federal Deposit Insurance Corp., whose agency guarantees bank depositors against loss.
White House press secretary Robert Gibbs said the president has directed his advisers to come up with new restrictions on the second half of the $700 billion financial-rescue plan, saying the money won’t go to "line the pockets of people" who’ve gotten financial assistance. "The American people need to be greatly assured that their hard-earned money is not going to the bonuses or the remodeling of an office at a bank that’s in trouble," Gibbs told reporters yesterday. The White House comments came after reports that John Thain, the former Merrill Lynch & Co. chief executive officer who was ousted this week, spent $1.2 million redecorating his downtown Manhattan office last year as the company was firing employees. Thain oversaw the sale of Merrill Lynch to Bank of America Corp. last month. Merrill’s $15.4 billion fourth-quarter loss forced Bank of America to seek additional aid from the U.S. government, which last week agreed to provide $20 billion in capital and $118 billion in asset guarantees.
Obama aides said banks that get additional aid will be prevented from using it to finance acquisitions and instead will be pressed to provide more credit to consumers and companies. The restrictions would follow principles already outlined to Congress by Summers and Timothy Geithner, Obama’s nominee for Treasury secretary, Gibbs said. Summers told Congress in a Jan. 15 letter that up to $100 billion of the remaining funds will be used to ease the housing crisis. He also promised the administration would restrict executive pay and dividends for financial institutions that get the money. "Those receiving exceptional assistance will be subject to tough but sensible conditions that limit executive compensation until taxpayer money is paid back, ban dividend payments beyond de minimis amounts, and put limits on stock buybacks and the acquisition of already financially strong companies," he wrote.
Senator Bill Nelson, a member of the Finance Committee, said he talked yesterday with Geithner and was told the administration would increase oversight of the TARP money. "I have received direct assurances today from the nominee for Treasury secretary that he will support disclosures and transparency including for money already spent," Nelson, a Florida Democrat, said yesterday. Nelson is co-sponsor of legislation that would require firms receiving the money to disclose how the funds are spent and bar companies from using the money to lobby or make political donations. The Obama administration has been cleared by Congress to tap the second half of the $700 billion fund to stabilize the financial system. Lawmakers criticized how former President George W. Bush’s administration used the fund, and demanded any further release of funds require greater accountability.
"The Congress is justifiably unhappy over the way the first $350 billion was handled," said Alan Blinder, a former Fed vice chairman who’s now a professor at Princeton University. Blinder, who briefed lawmakers earlier this week on the economic outlook, voiced doubts that the remaining $350 billion in the bailout fund would be enough to rescue the financial system and expressed concern that lawmakers would block any additional assistance given the unpopularity of the program. Blinder, along with Harvard University professor Martin Feldstein and Mark Zandi, chief economist at West Chester, Pennsylvania-based Moody’s Economy.com, painted what Senate Majority Leader Harry Reid described as a dark outlook for the economy in their meeting with lawmakers. "We have economic problems that have never been seen in this country or the world before," Reid, a Nevada Democrat, said on the Senate floor. Blinder forecast that the unemployment rate would rise to 9 percent from 7.2 percent, even with the $825 billion economic stimulus package that Obama is negotiating with Congress.
The Media's Role In The Financial Crisis
Our government's current operating principle seems to be bailing out people who were culpable in the financial meltdown. If so, journalists are surely entitled to billions of dollars. Why? Journalists were grossly deficient when it came to covering the reckless behavior, sleaze and willful ignorance of fundamental economics, much of which was reasonably obvious to anyone who was paying attention, that inflated the housing and credit bubbles of the past decade. Their frequent cheerleading for bad practices -- and near-total failure to warn us, repeatedly and relentlessly, of what was building -- made a bad situation worse. Journalists are notoriously thin-skinned, defensive about even legitimate criticism. But this lapse has been too blatant even for reporters to miss. Two-thirds of financial journalists in a recent survey said the news media "dropped the ball" in the period before the crisis became apparent. (Still, almost none of them assigned the press any responsibility for what has occurred.)
It's not as if this is the first time a big issue has had too little discussion while there was still time to fix the problem. Journalism has repeatedly failed to warn the public about huge, visible risks. The media's complicity in the Iraq War-mongering and 1990s stock bubble were the most infamous recent examples until the financial bust came along, but the willful blindness to reality was uncannily similar. To be fair, in these cases and in every other such foreseeable calamity, at least several journalists or news organizations stood out in retrospect for having seen what was coming. Almost alone among the Washington press corps, the Knight Ridder (now McClatchy) newspaper group's Washington Bureau asked the right questions as the Bush Administration herded the nation toward war. A few scattered stories in the media, including Fortune magazine and The New York Times business section, wondered about the stock and housing price bubbles, not to mention the implications of new financial policies and instruments that made the credit expansion so dangerous. And some commentators (including bloggers who did serious, if widely ignored, reporting) were firmly on the case.
But to say that the press was all over the housing/credit mess before it blew up, as the American Journalism Review argued recently, defies reality. The good journalism was overwhelmed by the happy-face, herd coverage, usually laced with quotes from people who stood to benefit from the bubble's continued inflation. We saw story after story about new cadres of home-loan borrowers, about people who "flipped" homes for big short-term profits, and about the way home values kept rising in unprecedented ways. We saw few cautionary tales about what happens when bubbles burst, how families can and economies can face ruin. It's probably no coincidence that most newspapers have weekly real estate pages or sections, the main purpose of which is to collect advertising for property sales.
And even when the reporting was solid, which was rare enough, news organizations didn't follow up in appropriate ways. If we can foresee a catastrophe, it's not enough to mention it once or twice and then move on. That common practice suggests an opportunity. When we can predict an inevitable calamity if we continue along the current path, we owe it to the public to do everything we can to encourage a change in that destructive behavior. In practice, this means activism. It means relentless campaigning to point out what's going wrong, and demanding corrective action from those who can do something about it. So in Florida, Arizona and California, among other epicenters of the housing bubble, newspapers might have told their readers -- including governmental officials -- the difficult truth. They could have explained, again and again, that the housing bubble would inevitably lead, at least locally, to personal financial disaster for many in their regions, not to mention fiscal woes for local and state governments. How many should have done this, given the media's at least partial reliance on advertising from those who profited from the bubbles? Any that cared to do their jobs.
Some plain-as-day woes don't present any financial conflicts. For example, the threat to New Orleans from hurricane-created flooding was clear long before Katrina, and the New Orleans Times-Picayune did run a series of articles warning of what might happen years before the hurricane struck. What it didn't do was follow up in the relentless kind of way that might have spurred local, state and federal action to prevent or mitigate the inevitable disaster. Californians are absurdly unprepared for the epic earthquake that everyone knows is coming. News organizations have warned about it, but haven't drilled home the message in sufficiently graphic ways of the havoc it will cause, and haven't campaigned enough for pre-quake mitigation that would save lives and treasure. Californians are especially practiced at pretending not to see what's visible in front of them. The state's fiscal crisis is far worse than most, in large part because the governor and state legislature -- with media winks and nods -- generated a torrent of new red ink, via borrowing, to cover new spending and earlier debts. The piper is now demanding his payment, and his price threatens to be ruinous. (Will this be our national fate in a few years?)
Journalists have an opportunity, right now, to ask questions we need answered -- and they should be asking again and again, and again. Taxpayers (or rather our children and grandchildren, who'll pay for this) are forking over $700 billion to bail out financial institutions, the first installment of trillions we're collectively spending to try to save American capitalism itself. Yet we aren't allowed to know how the money is being spent. This isn't merely opaque; it's the blackest of boxes, and occasional queries from journalists aren't helping to make it transparent. Congress is the most culpable party in this case; as usual, lawmakers have dodged their responsibility, but an insistent journalistic campaign wouldn't hurt and might actually help dislodge some facts.
Once upon a time, news people went on campaigns when they saw the need. Sometimes this led to yellow journalism, as when newspaper owners used their publications to stir up the populace in dangerous ways. At other times, however, old-fashioned press campaigns led to change for the better; back when editorial pages had more influence in communities, a few courageous newspaper editors in the South campaigned for school integration, and made an enormous difference. Journalistic activism -- precisely what we need despite most journalists' disdain for the idea -- won't save newspapers that are suffering from a perfect storm of dwindling leadership and advertising losses. But as Online Journalism Review's Robert Niles recently wrote, journalists should "accept the responsibility to demand action" based on what they learn when they do their jobs right. The media's collective irresponsibility has ill-served its audience. If journalists want to keep the audience they have, never mind build credibility for the future, they need to become the right kind of activists. More than ever, we need what they do, when they do it well.
Weak economies tempted to quit the euro face a fate worse than the current squeeze
It's easy to see why there's increasing chit-chat about the single European currency being blown apart by the economic crisis. Monetary policy in the eurozone is relatively tight. The same goes for fiscal policy in Germany, the largest and strongest economy. As a result, the euro has been relatively strong. Not surprisingly, the eurozone's weak economies - Spain, Ireland, Italy, Portugal and Greece - are hurting. In Spain, unemployment is already 13.9pc.
If only they could bring back the peseta, punt, lira, escudo and drachma, one might think. In the "good" old days, when these economies got into difficulty, they allowed their currencies to fall - giving local industry a breathing space. They weren't constrained by a one-size-fits-all monetary policy that seems best tailored to Germany's needs. Such thinking is seductive but fallacious. The eurozone's weak economies are drowning in debt. In Italy and Greece's case, the government's debt is hovering around 100pc of GDP. In Spain and Ireland, which had liquidity-fuelled property manias, there's debt in the private sector. And of course, there's the debt in the banks.
The lion's share of these debts are denominated in euros. They certainly aren't denominated in pesetas and punts. If any country quit the euro, its new currency would sink - perhaps something of the order of 30pc-50pc. Although that would give a fillip to exporters, the value of its debts when translated into the new devalued currency would soar. Governments, private-sector borrowers and banks would find "hard currency" debts virtually impossible to service. The end result would probably be bankruptcy - a fate far worse than the current squeeze. Politicians driven can, of course, make errors. But pulling out of the euro would be so crass the even populist politicians will surely avoid it.
Lights go out across Britain as recession hits home
Britain's days as the fastest growing economy in Europe were officially declared over yesterday as the deepest recession in a generation saw consumers turning off the lights and Poles returning home. While official figures showed the economy contracting at its fastest since 1980, National Grid said demand for electricity had fallen over Christmas at homes and factories across the land, and Poland confirmed that thousands of its citizens were coming home from Britain and Ireland.
National Grid said it was cutting its forecast for electricity consumption this year because of the recession. The thousands of people being laid off each week and the hundreds of firms cutting production are reducing demand. Industry has suffered most in this recession and made the biggest contribution to the slump in national output, which fell by a worse-than-expected 1.5% in the fourth quarter of last year compared to the third - or around 6% on an annualised basis.
As the economy had contracted by 0.6% in the July to September period, Britain now meets the most common definition of a recession - two consecutive quarters of shrinkage. But some analysts say the country fell into recession last April. Financial markets took fright at the sheer speed of the economy's contraction, which outpaced anything seen in the recession of the early 1990s. The pound slumped to a fresh, 23-year low against the dollar of just $1.35 - a far cry from the peak of $2.11 seen last summer - and to an all-time low against the yen.
The FTSE 100 share index fell below the key 4,000 level after the news, although it later recovered to end little changed. "These figures are the final nail in the coffin for Gordon Brown's claim to have 'ended boom and bust'. The UK economy is most definitely bust at the moment," said Charles Davis at the Centre for Economics and Business Research. "It is not just that the UK has entered recession; it is the size of the contraction ... The economy is set for the steepest contraction in the post-war era in 2009."
Brown admitted the government had not seen what was coming: "What we did not see, nobody saw, was the possibility of markets' failure. "We are fighting this global recession with every weapon at our disposal. We need other countries to work with us and we are asking them to agree with us a common set of measures." He criticised David Cameron for having suggested Britain might need to go to the IMF for help in financing its bail-out of the creaking banking system. But Cameron insisted he was right to warn that the country faced the prospect of an IMF loan for the first time since 1976. "I think it's right to warn about that, I think it's a responsible thing to do," Cameron said.
He and the shadow chancellor, George Osborne, mocked Brown's claims last summer that the economy was better placed than in the past to withstand recession and would grow in spite of the credit crunch. But TUC chief Brendan Barber blamed bankers and previous Tory governments for the economic mess: "This recession is not bad luck or an inevitable swing of the pendulum. Its cause is irresponsible behaviour by banks and financial institutions taking advantage of the deregulation started by Mrs Thatcher and president Reagan, and continued to a greater or lesser extent ever since."
Unemployment was this week reported to have jumped to nearly two million, and analysts say it would be much higher were it not for workers from countries such as Poland returning home. Poland's treasury minister Aleksander Grad told the Guardian that the economy there, unlike Britain's, would avoid recession. Poland's banks had been regulated tightly and had not got into the toxic derivative products that have brought down banks around the world, said Grad.
National Grid said weekly peak electricity demand would fall by 600-1,000 megawatts, the equivalent of a large power plant, over the next year. The drop will ease the strain on power stations, some of which are facing closure because of age or environmental rules. It will also reduce CO2 emissions.
Britain on the brink of an economic depression, say experts
Britain is heading for economic depression for the first time since the 1930s, economists have warned. Families must brace themselves for a slump of far greater severity and longevity than the recessions of the 1980s and 1990s, they warned. They said the current crisis will be of a scale to rival the biggest peace-time crisis in modern history — the Great Depression.The warning was delivered by economists and politicians after the Office for National Statistics revealed that the economy shrank by 1.5 per cent in the final three months of 2008 alone.
The contraction follows a 0.6 per cent fall in gross domestic product (GDP) — the most comprehensive measure of Britain’s wealth generation — during the previous three months. This means Britain fulfils the criteria for a technical recession — two successive quarters of negative output. The news sent the pound sliding to its lowest level since 1985. Sterling dropped more than three quarters of a cent to $1.3688 as investors speculated that the Bank of England may be forced to cut interest rates towards zero in response to the recession.
John McFall, the Labour chairman of the Treasury select committee, sounded a more optimistic note. He said: "We know that 2009 is going to be really tough for many people. There is a determination in Britain and across Europe to keep people in work, to avoid unemployment, so people’s contribution will not be lost." Confirmation that the economy has entered recession capped a week in which Gordon Brown was forced to announce a new £350?billion bank rescue plan. Unemployment has almost reached two million. President Barack Obama discussed the financial crisis with the Prime Minister on the telephone yesterday, his first call to a European leader.
The fall in GDP is the sharpest since 1980, when Britain was mired in its most severe post-war recession. The news is an embarrassment for Mr Brown, who pledged as Chancellor not to return Britain to "boom and bust". Britain is likely to suffer more than other economies due to its heavy reliance on the financial services sector, which has all but imploded in the wake of the economic crisis, experts said. Others raised the spectre of an outright economic depression, often defined by experts as a peak-to-trough economic contraction of 10 per cent. Aside from the demobilisation periods following the First and Second World Wars, this kind of contraction has never taken place — not even in the 1930s’ Great Depression.
Roger Bootle, the managing director of Capital Economics, said: "I think there’s a very good chance this recession will be the worst since the 1930s. I suspect the economy could shrink by 6 per cent from last year to the end of next year — and that might not be the end. The plight facing Britain is uncannily similar to the 1930s, since prices of many assets —from shares to house prices — are falling at record rates, but the value of the debt against which they are held remains unchanged. This "debt deflation" is among the most painful of all economic phenomena, since it means the amount families owe increases each year even if they borrow no more.
Albert Edwards, a strategist at Société Générale, likened the British economy to a Ponzi scheme — a fraudulent debt mountain like that allegedly used by the New York hedge fund manager Bernard Madoff. "What I find amazing is that people aren’t really nailing Gordon Brown and [Bank of England Governor] Mervyn King for this," he said. "At least in the US they had the excuse of the arrival of sub-prime — a new sector of the market. We didn’t really have anything similar but we ended up with a bigger national Ponzi scheme than the US."
Speculation grows that Barclays will be bailed out as investors 'throw in the towel'
Shares in Barclays plunged again yesterday amid mounting speculation that the Government is preparing to take a stake in the undersiege bank. They tumbled 8p to 51.2p, falling for the ninth consecutive trading session, completing a run that has seen Barclays lose nearly three quarters of its stock market value in just 12 days. The latest fall came hours after John Varley, the chief executive, made a fresh attempt to prop up confidence in his bank.
He told Cantos, the online financial broadcaster: "The Financial Services Authority, acting on behalf of the tripartite authorities [the FSA, the Treasury and the Bank of England], ensures that they understand very intimately what’s going on in terms of the way in which the business is being run and that they have good disclosure and good transparency relating to our balance sheet. "That’s an obligation that we take with deadly seriousness because, if we were not honouring that obligation, believe me, we would not be allowed to do business, simple as that."
Mr Varley also emphasised that, if Barclays took part in the Treasury’s planned asset guarantee scheme, it would prefer to pay cash to use the facility rather than issue shares to the Government. But analysts and investors now believe there is a strong possibility of at least partial nationalisation of Barclays. The Times has learnt that Mr Varley has held talks with the Treasury in the past 48 hours after being asked to provide further reassurance over the bank’s financial position. Sources close to Barclays said: "This was a normal meeting to discuss a range of issues, not least the Government’s new stimulus package. The notion that John was summoned or that this was a crisis meeting is nonsense."
With rumours circulating in the City that Mr Varley would have to step down in the event of the Government taking a stake in the bank, Whitehall insiders last night played down suggestions that the Treasury had any immediate intention of intervening. However, sources said that it could "plausibly" be the case that the Barclays board might "see a problem that needed to be fixed". But traders and analysts said that the market appeared to have lost confidence in Mr Varley. Manoj Ladwa, a derivatives broker at ETX Capital, added: "Investors are throwing in the towel on the banking sector, and Barclays in particular." Sandy Chen of Panmure Gordon – one of the bank’s sternest critics in the analyst community – said: "Barclays has a very similar business model to RBS and so the read-across from the RBS figures is what has hit Barclays shares."
Mr Chen said that, to regain trust, the bank needed to "mark to market" the value of some assets on its balance sheet – in other words, show them in the books at their current market price. Barclays has been reluctant to do this, arguing it plans to hold many of its toxic investments to maturity. Despite speculation that the expiry of the ban on short-selling of financial shares was responsible for the recent collapse in Barclays’ price, the tripartite authorities are said to be satisfied that the fall was a result of traditional fund managers selling stock. Philip Hammond, Shadow Chief Secretary to the Treasury, told The Times: "The Government’s plan is too late and too lacking in detail to reassure the markets."
Just how big is Britain's toxic debt?
An army of accountants is combing through the books, trying to establish just how much the toxic assets of the bailed-out banks are actually worth. At stake, says the Government, is the future of Britain's economy.
Before he was unceremoniously fired as chief executive of Royal Bank of Scotland, Sir Fred Goodwin often said that he had turned the 280-year-old institution into "a sausage machine". RBS, like other banks, was buying and selling pre-packaged parcels of debt, which started out as mortgages and loans but were put through a corporate mincer and wrapped into packages containing small pieces of hundreds, if not thousands, of loans. Rather like sausages, no one could be entirely sure what was in them – but as long as they paid a decent rate of interest and the bonuses kept flowing, no one cared. As we all now know, those parcels had been bulked up with sub-prime loans, which became effectively worthless "toxic assets" when the US housing market crashed.
Confirmation yesterday that the bankers' avarice has officially plunged Britain into recession added to the growing bewilderment as to exactly why we are on the hook for almost £1 trillion in bail-outs and guarantees. No one even knows exactly how many of these toxic assets British banks are holding, and how much more it might cost the taxpayer to get out of this unholy mess – which is why an army of accountants is about to begin the daunting, if not downright impossible, task of tracking down and putting a value on all the debts of all the banks in which the taxpayer has taken a stake.
In effect, to borrow Sir Fred's analogy, the Government-appointed debt hunters will be carrying out the accounting equivalent of dissecting all of those sausages and turning the constituent parts back into pigs. It will be a laborious, thankless task which is likely to take at least six months. But according to the Government, nothing less than the future of Britain's economy depends on it. The reason all the rescue packages have failed is that no one has yet calculated the full extent of these toxic assets – and nothing spooks the City so much as uncertainty. Lord Myners, the minister organising the hunt, says his sleuths will have to deal with "well over a billion items of individual data for each bank".
The desperate need for some hard and fast facts was underlined on Monday, when the value of banking shares collapsed, despite the announcement of a raft of new measures. Gordon Brown is said to have been taken aback by the City's panicked reaction to RBS's announcement of a £28 billion loss, the largest in British corporate history. Experts say the losses reveal the markets' fear of more bad news to come. Despite the Government pledging £954 billion so far – or £31,800 per taxpayer – some analysts believe another £200 billion in insurance may be needed to protect the banks fully against future losses. But no one is willing to predict that it won't be more, just as no one can be sure that our children, or even our grandchildren, won't still be paying off the debts the nation is accruing, as this economic black hole swallows a seemingly limitless amount of our money.
In other words, until the number-crunching is done, there is no prospect of an end to the crisis. "The problem is that we don't really know just where these bad assets are, and the banks are not going to 'fess up," explains Peter Spencer, professor of economics at York University. "As things stand, it is a near-bottomless pit, and no one knows how smelly the stuff at the bottom is." The Prime Minister is pinning his hopes on the Asset Protection Scheme, announced this week, which will assess the exact extent of the toxic assets (currently estimated at £200-350 billion). The theory goes that once the banks know the worst-case scenario, and are insured against it by the taxpayer, they will be able to start lending again.
But the Government-appointed investigators, drawn mainly from Goldman Sachs, Credit Suisse and Deutsche Bank, will be entering uncharted waters when they set up shop in the offices of banks such as RBS. Few people on the planet understand the complexities of such opaque instruments as collateralised debt obligations (the technical term for those minced-up sausages of debt, of which £2 trillion were traded in 2006, £188 billion of it in the UK). In some cases they were dreamed up by real-life rocket scientists, poached by Wall Street from Nasa's labs in California.
Until as recently as 2000, British banks lent only as much money as they held on deposit. But the availability of cheap financing on the money markets enabled banks such as Northern Rock to lend up to seven times the amount in their coffers. Rather than holding on to people's mortgages, the banks packaged them up with other loans and sold them on to investors, who could repackage and sell them on again and again. Unpicking these bundles of debt may involve tracking down and valuing the assets on which they are based – such as houses or commercial properties, or even part-shares of them.
Nor will the vastly complex, and vastly expensive, hunt be confined to Britain. To pick just one example, RBS acquired 26 other companies during Sir Fred's eight-year reign, leaving it with £250 billion of foreign loans in the more than 50 countries where it has offices. These include Vietnam, Columbia, Uzbekistan and Pakistan, where RBS is the second-largest foreign bank – there are even seven branches in Kazakhstan, all of which are now 70 per cent owned by the British taxpayer. Many of those loans will be sound, but the investigators must sniff out those that are not. "It will be a very intensive job and we will need to get professional support," one Treasury source says. "It's complicated, but if you didn't have these complicated problems, there wouldn't be a crisis in the first place."
But how could the banks lose control to such an extent? "Greed is part of the answer," says Vince Cable, the Liberal Democrat Treasury spokesman. "We have had a bonus culture in which profits were the only motivating factor, and bankers were getting enormous bonuses on the back of very highly leveraged deals. It's also the case that even some of the bosses didn't understand the things they were trading in, because they had become so complicated. The banking regulators knew this and should have put a stop to it, but they didn't."
It wasn't just the executives who failed to understand what was going on – the Prime Minister and his team were equally clueless. Treasury officials who began going through the books of RBS when the Government took a majority share last year were horrified at the way the bank had been run, as it borrowed more and more money to fund more ambitious deals, such its share of the £49 billion takeover of Dutch bank ABN-Amro in 2007. The previously lionised Sir Fred has now been labelled "the world's worst banker", with growing calls for him to be stripped of his knighthood.
Although the Financial Services Authority insists that there is no evidence he broke any rules, many investors who have lost money believe he was less than candid about the state of the bank's finances and recklessly overstretched himself in the battle for ABN-Amro. In America, RBS's subsidiaries are already the subject of two separate investigations. The Securities and Exchange Commission and New York's attorney general are both looking into the exposure of RBS-owned companies to the sub-prime mortgage crisis. Although he has said he is "angry" with Sir Fred, Mr Brown refused to be drawn this week on what action, if any, should be taken against his former friend, who was a valued adviser during his time as Chancellor.
Nor has anyone at the Treasury offered an estimate of how much it will cost to work out the value of the toxic assets. Yet many of the country's leading economists believe that there is an alternative to the scheme: to nationalise the entire banking system to restore confidence, and take control of lending once and for all. George Magnus, chief economic adviser to UBS Investment Bank, and the man credited with being the first to predict the current global recession, says: "There is a danger that a few months down the line further measures will be needed to shore up the banks. It would be cleaner, neater and cheaper just to call a spade a spade and take them into public ownership.
"That would enable the Government to set up a 'bad bank' that could take on these toxic assets and hold on to them for 50 years if necessary, until their value rose and the taxpayer saw a return. "In the meantime, once the crisis is over, they could refloat the banks, as they did in Sweden in 1992. I just don't understand the hang-up the Government has with nationalisation." Professor Tim Congdon, a former adviser to the Treasury, agrees. "The idea of having these civil servants poring over the banks' books is barmy. There are much simpler solutions, such as the Government borrowing from the banks to increase the amount of money in the system." One thing all sides are agreed on is the need for a return to old-fashioned banking, preferably without so much as a rocket scientist – or sausage machine – in sight.
Call for state bailout of ailing UK pension funds after deficit climbs to £194.5bn
The Government was under pressure to shore up Britain’s pensions industry last night as a powerful lobby group for the retirement industry warned that up to 1,000 schemes are poised to shut their doors to new members. As tumbling investment markets threatened to spark another pensions crisis, the National Association of Pension Funds (NAPF) called on the state to underwrite the Pensions Protection Fund (PPF), set up three years ago to pay pensions if companies collapse.
The NAPF joins the CBI, the employers lobby group, in warning that ballooning shortfalls in company schemes could worsen the recession for British businesses and a string of corporate collapses could stretch the PPF to breaking point. The call for action came on the day that Britain was officially declared to be in recession and blue-chip stocks tumbled below 4,000 at one point, further eroding the ability of schemes to meet retirement obligations. Next week, a leading rating agency is expected to warn that it could be forced to cut companies’ credit ratings if the state of their pension schemes deteriorates further.
The NAPF speaks for 1,200 pension funds. In a survey of final salary schemes, it found that more than half were considering excluding new members and one in four were exploring scrapping their offering for existing staff as well. Joanne Segars, chief executive of the NAPF, said that "bold action" was needed. She likened the case for intervention in pension schemes to the bail-out of the banking sector. "Exceptional times call for exceptional measures and new thinking," Ms Segars said.
The PPF, created in 2005, monitors 7,800 final salary pension schemes, which recorded a deficit at the end of December of £194.5 billion. It funds itself through an annual levy to pension funds and has argued that it is not under pressure. Partha Dasgupta, the outgoing chief executive, has regularly pointed said its liabilities to funds are over the long term and that, typically, the funds that apply for help are small.
But last week, Nortel, the telecoms group, threatened to add as much as £1 billion to the PPF’s burden as it called in administrators in the UK. Ernst & Young has less than a week to apply to the PPF for protection for Nortel’s pensioners. It could also try to offload Nortel’s pension arrangements to a specialist insurer such as Paternoster or Pension Corporation. Ernst & Young said last week that it had notified the PPF and pension regulators about the Nortel administration but was not in a position to comment about the size of the deficit.
The NAPF said yesterday that over the past five months, companies have become increasingly willing to dilute their pension obligations. It also said that workers’ confidence in pensions had evaporated over the past year. In a further echo of the approach taken by the CBI, the NAPF also called on the Pensions Regulator to give companies the flexibility to try to sort out their scheme deficits. It said that companies should be allowed to tinker with retirement ages for their workforce and it also asked the Government to issue more long-dated debt for schemes to buy so that they could better match their assets with their liabilities.
Economists hit back at Jim Rogers claims London is 'finished'
Economists at the Royal Bank of Scotland have hit back at veteran investor Jim Rogers over his claims that "the City of London is finished". In an open letter to Mr Rogers, David Simmonds and Ross Walker criticised what they described as his "Armageddon-esque vision of Britain", and said that his argument "lacks rigour". They added that although the UK financial sector faces "profound difficulties", to say the UK has "gone to the dogs" was an exaggeration.
Mr Rogers, co-founder of the Quantum Fund with George Soros, this week said the UK had lost its appeal because North Sea oil and London's standing as a major financial centre – its most attractive assets – were in decline. He urged investors to "sell any sterling you might have". It appeared that Mr Rogers' comments also angered the Prime Minister, who told the BBC yesterday: "If you think we are going to build our policy around the comments of a few speculators who want to make money out of Britain then you are very, very wrong. The decisions we take about the future of the economy are based on what is right for Britain."
Mr Rogers was unaware of the RBS letter when the Daily Telegraph contacted him, but he responded by saying: "There's nothing to debate. If they object to my comments and think the pound is going up they should buy the pound. If they think the City of London is going up they should buy the City of London. If they think the UK is going up they should buy the UK. I can't prove I'm right but the markets will tell us in five years."
UK City Minister Lord Myners attacks bankers for greed and arrogance
A furious onslaught on banking’s "masters of the universe" has been unleashed by Gordon Brown’s City Minister.
Too many top bankers fail to realise they are grossly over-rewarded and have no sense of society, Lord Myners says in an interview with The Times. With figures yesterday pointing to a longer and deeper recession than feared, lasting into 2010, Lord Myners says that banks have been mismanaged and delivers the strongest attack so far on those responsible. He also reveals that the banking system was close to collapse before the first bailout was announced.
"We were very close on Friday, October 10. There were two or three hours when things felt very bad, nervous and fragile. Major depositors were trying to withdraw — and willing to pay penalties for early withdrawal — from a number of large banks." Lord Myners says that there will have to be fundamental changes in the way that banks operate and that "the golden days of huge bonuses in the investment banking arms are gone". He calls on banking boards and shareholders to stamp on reckless behaviour of bosses and adds that if people have committed crimes they should be prosecuted.
Lord Myners says: "I have met more masters of the universe than I would like to, people who were grossly over-rewarded and did not recognise that. Some of that is pretty unpalatable. "They are people who have no sense of the broader society around them. There is quite a lot of annoyance and much of that is justified. Let us be quite clear: there has been mismanagement of our banks." The 1.5 per cent fall in national income between October and December, announced yesterday, was the biggest decline experienced since 1980, when Britain was fighting soaring unemployment and inflation at the beginning of the Thatcher era.
The statistics led to dire predictions of the worst drop in growth in a calendar year since the Second World War. Lord Myners’ attack comes days after Gordon Brown vented his anger at Sir Fred Goodwin, the former Royal Bank of Scotland chief executive, and the "irresponsible risks" taken by the bank. Barclays chief executive John Varley was last night under extreme pressure after shares in the bank fell for a ninth day running. Barclays has lost 73 per cent of its stock market value during the last 12 trading sessions and an increasing number of City analysts believe he may be forced to quit.
Credit card industry faces tough 2009
Quarterly results from Capital One Financial suggest the credit card industry faces a tough 2009 as more borrowers struggle to repay debt and cut spending. Capital One, one of the largest card issuers, reported a $1.4 billion fourth-quarter net loss late Thursday as it set aside another $1 billion to cover higher charge-offs this year. The fourth-quarter charge-off rate in the U.S. card business was 7.08%, up from 6.13% during the third quarter. That's expected to jump to roughly 8.1% in the first quarter of 2009, up from the mid-7% range Capital One previously forecast. Credit-card companies are being hit as falling house prices, the financial crisis and surging unemployment limit the ability of some customers to pay back debt racked up on their cards.
Capital One said it expects the U.S. unemployment rate to reach 8.7% by the end of 2009 from 7.2% currently and that, on average, home prices will fall another 10% this year. "From a credit perspective, 2009 is literally and figuratively a write-off," Richard Shane, an analyst at Jefferies & Co., wrote in a note to investors on Friday. "We view the entire industry embarking on a path of permanently lower equity returns." Capital One shares slumped 12% to close at $19.32 on Friday, the lowest level in more than a decade. Shares of American Express, a leading rival, slipped six cents to close at $16, the lowest level in more than 12 years.
In addition to more bad debt, companies in the industry have struggled to securitize the credit card loans they originate. That's forced them to fund the loans on their balance sheets instead, which requires more provisions up front, Shane explained. Tighter regulations on the credit card industry are also limiting the strategies issuers usually use to improve returns, he added. Meanwhile, some borrowers who are still able to pay their credit card bills are now spending less. Growth in Capital One's U.S. Card business was weaker than usual in the fourth quarter because of lackluster holiday spending.
"Revenue opportunities are less than we previously assumed," John Stilmar, an analyst at SunTrust Robinson Humphrey, wrote in a note to clients on Friday. He downgraded Capital One shares to reduce from neutral. American Express was cut to sell from hold by Stuart Plesser, an analyst and Standard & Poor's Equity Research. He also slashed his target price on the shares to $14 from $20. "Charge-offs for credit cards have picked up significantly," Plesser said. "We also note that credit is starting to deteriorate for more credit-worthy customers," he added. That's an area American Express has traditionally focused on. American Express is scheduled to report fourth-quarter results on Monday.
Freddie Seeks Up to $35 Billion From U.S.; Fannie May Follow
Freddie Mac, the mortgage-finance company under federal control, needs as much as $35 billion more in federal aid, and Fannie Mae may soon ask the U.S. Treasury Department for rescue funds as well. Freddie, which took $13.8 billion from Treasury in November, said in a securities filing yesterday that its fourth- quarter operating losses will again drive its net worth below zero. The McLean, Virginia-based company also said it settled a dispute over Washington Mutual loans with JPMorgan Chase & Co.
The request for funds comes as the Treasury faces increasing demands from U.S. financial companies, including Bank of America and Citigroup Inc., that are coping with the fallout from a slumping housing market and a deep recession that’s driving foreclosures to record levels. Treasury officials pledged in September as much as $100 billion to Fannie and Freddie each to ensure their solvency. "Their losses are going to be much higher than anyone anticipated," said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. "The more and more that people are digging into these portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime." Alt-A loans were made to borrowers with little or no income verification or to those with credit scores slightly above subprime.
Freddie and Washington-based Fannie are the largest sources of mortgage money in the U.S., owning or guaranteeing a combined $5.2 trillion of the $12 trillion home-loan market. The companies have posted five consecutive quarters of losses totaling $68.4 billion combined. The Federal Housing Finance Administration seized their operations in September amid concern from regulators that the government-sponsored enterprises may fail in the worst housing slump since the Great Depression. Fannie, which hasn’t yet drawn on the Treasury backup funds, said in November that it may do so after it reports fourth-quarter results next month. Fannie also said at that time that $100 billion may not be enough to keep it afloat. Treasury agreed to pump money into the companies if the value of their assets drops below what they owe on their obligations.
"Given that they have $4.5 trillion of risk out there, $100 billion is a drop in the bucket," Miller said. "Given the fact that their risk profile on these loans is greater than they led everyone to believe, greater than $100 billion in losses on each institution would not surprise me." Stefanie Mullin, a Federal Housing Finance Agency spokeswoman, declined to comment. FHFA Director James Lockhart, who regulates the companies, said in an interview this week that one or both companies may request federal aid after they report fourth-quarter earnings next month. "They will be reporting numbers in mid-to-late February and, yes, I think everybody would expect that there would be a draw on Treasury," Lockhart said.
Spokesmen Brian Faith at Fannie, Sharon McHale at Freddie and Thomas Kelly at JPMorgan declined to comment. Freddie’s settlement with JPMorgan, which took over WaMu’s assets after the thrift collapsed in September, will allow the New York-based bank to retain WaMu’s mortgage-servicing contracts, according to the filing. In exchange, JPMorgan will assume WaMu’s obligations to repurchase any bad home loans that the thrift sold to Freddie with "recourse." JPMorgan will make a "one-time" payment to cover other loans that WaMu would have been required to buy back because the mortgages failed to meet promises made to Freddie about their quality, according to the filing. The filing didn’t specify how much JPMorgan is paying Freddie.
Geithner Delay Slows Assembly of Crisis Team
The delay in confirming Timothy Geithner as President Barack Obama's Treasury secretary is slowing the administration's ability to assemble a team to help tackle the worst financial crisis in decades. Mr. Geithner has in mind several people to serve in top roles at Treasury, including some who served in the Clinton administration, but won't have his team officially in place until after he is confirmed. The Senate is expected to approve Mr. Geithner's nomination Monday after a delay spurred in part by concerns over his personal tax history. The interregnum isn't unusual during a hand-over. But it comes as the banking system takes another lurch downward, sowing concern on Wall Street, where lobbyists and bankers are unsure whom to contact.
"Sometimes the phone just rings and rings," said one financial-industry lobbyist. Among those being mentioned as possible candidates for deputy Treasury secretary, according to people familiar with the matter, are Ralph Schlosstein, a co-founder of the hedge-fund firm BlackRock Inc., and Annette Nazareth, a former member of the Securities and Exchange Commission. Mr. Schlosstein, who left BlackRock last year, has given thousands in campaign contributions to Democrats over the years. Ms. Nazareth, now a partner at the law firm Davis, Polk & Wardell, knows Mr. Geithner well from her days on Wall Street and overseeing market regulation at the SEC. Among those being mentioned for a top job, according to people familiar with the matter, is Lee Sachs, a former assistant Treasury secretary during the Clinton administration, who has been coordinating the Obama team's Treasury transition. Mr. Sachs could be tapped as undersecretary for domestic finance, a role in which he would help fashion the government's response to the financial crisis.
Mr. Geithner has already asked Stuart Levey, who is running Treasury pending Mr. Geithner's confirmation, to continue overseeing the department's financial-counterterrorism efforts. Mr. Levey has been a key architect of sanctions against Iran. His retention suggests the Obama administration may continue Bush administration policy in that arena. Another likely holdover, according to people familiar with the matter, is Steven Shafran, a former Goldman Sachs executive and top adviser to former Treasury Secretary Henry Paulson, who helped craft many of the department's past responses to the financial crisis. He is expected to remain as an adviser. Mr. Geithner has tapped Stephanie Cutter, a senior adviser on the Obama campaign and formerly a deputy White House communications director in the Clinton administration, as a counselor. Gene Sperling, formerly an economic adviser to Mr. Clinton, will join Treasury as a counselor for domestic economic policy. Many of the top positions at Treasury require Senate confirmation.
Once Mr. Geithner is confirmed, many of his staff are expected to work in advisory roles pending confirmation. Until then, much of the heavy lifting is being done by career staff. To help get through the transition, the Obama team has asked some of Mr. Paulson's staff to remain temporarily, including Neel Kashkari, who oversees the $700 billion Troubled Asset Relief Program. Mr. Geithner has been quietly assembling some staff, including Kim Wallace, a former political analyst with Lehman Bros. and Barclays, to serve as Treasury's head of legislative affairs. Mr. Wallace, a onetime legislative assistant to former Sen. George Mitchell (D., Me.), will be Mr. Geithner's chief liaison with Capitol Hill. Mark Patterson, a former lobbyist with Goldman Sachs and onetime policy director for former Sen. Tom Daschle (D., S.D.), will serve as Mr. Geithner's chief of staff.
Geithner's China Bash
Timothy Geithner's tax oversights drew most of the media attention at his confirmation hearing, but the biggest news is the Treasury Secretary-designate's testimony Thursday that he'll ratchet up one of the Bush Administration's worst habits: China currency bashing. In a written submission to the Senate Finance Committee, Mr. Geithner said the Obama Administration "believes that China is manipulating its currency." He says he wants Treasury to make "the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth." The dollar promptly fell and gold jumped $40 on the news. We're not sure what Mr. Geithner means by "market exchange rates," given that the supply of any modern currency is set by a monopoly known as the central bank.
When Mr. Geithner says China is "manipulating" its currency, what investors around the world hear is that he really wants Beijing to restrain the number of yuan in circulation and increase its value vis-a-vis the dollar. That's a call for a dollar devaluation to help U.S. exporters. This would seem to be an especially crazy time to undermine the dollar, given that the Treasury will have to issue some $2 trillion to $3 trillion in new dollar debt in the next couple of years. A stronger yuan would also contribute to Chinese deflation and slower growth, which would only mean a deeper world recession. Even the Bush Treasury never formally declared China to be a currency "manipulator" in its periodic reports to Congress. If the Obama Treasury is now going to take that step, hold on to those gold bars. We're in for an even scarier ride than the Fun Slide of the last few months.
China Rebuts Geithner, Denies Currency Manipulation
China’s commerce ministry said the country hasn’t manipulated the value of its currency to promote exports and that accusations of government tampering in foreign exchange will fuel U.S. protectionism. "China will keep its currency stable and will not depreciate the currency to support exports," said a ministry spokesman who couldn’t be identified under ministry rules. The official statement today followed comments released on Jan. 22 by Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, that Obama believes China is "manipulating its currency." Clashes over the yuan’s value threaten to stoke tension between two of the world’s biggest economies and undermine cooperation to counter the global recession. China limited appreciation of the yuan against the dollar in July 2008 after the currency rose 21 percent against the dollar following the end of a fixed exchange rate three years earlier.
"China has never tried to gain advantage in international trade by manipulating its currency," the commerce ministry official said. "This kind of wrong accusation against China on exchange rate issues will intensify protectionism within the U.S., and it will not help resolve the problem." People’s Bank of China Vice Governor Su Ning echoed the commerce ministry comments in an article published by the official Xinhua News Agency today that called Geithner’s allegations "untrue and misleading." An official in the central bank’s press office declined to comment further. Geithner’s remarks on manipulation were a shift from policy pursued by the Bush administration, which stopped short of using the term in criticizing China’s exchange-rate management. Some U.S. lawmakers are seeking measures to punish trading partners perceived to have undervalued exchange rates. "China will first protect its interest before addressing concerns from other economies," said Sherman Chan, a Sydney, Australia-based economist at Moody’s Economy.com. "The optimal strategy for China is to keep its currency steady."
Geithner made the remarks in written responses to questions from Senate Finance Committee members that were posted on the panel’s Web site. The committee voted 18-5 to approve the nomination of Geithner, 47, who is the president of the Federal Reserve Bank of New York. Senator Richard Durbin of Illinois, the second-ranking Senate Democrat, said the chamber will start debating Geithner’s nomination at 4 p.m. Washington time on Jan. 26 and will vote at about 6 p.m. "Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency," Geithner said. "The question is how and when to broach the subject in order to do more good than harm." Obama’s team will "forge an integrated strategy on how best to achieve currency realignment in the current economic environment."
The new U.S. administration will also press China to "adopt a more aggressive stimulus package" to boost its domestic economy, Geithner said. A worsening slowdown in China’s economy, the world’s third biggest, may encourage policy makers to limit gains in the currency to help exporters as factories close, throwing millions of people out of work. "China should be expecting a very tough relationship with the new administration," according to Frank Gong, China strategist at JPMorgan Chase & Co. "China will be a natural scapegoat for the problems in the U.S." Gong doesn’t expect China to devalue its currency because the drop in exports is related to a decline in demand, not the price of goods. "China can’t increase exports by making them cheaper because there is no demand," he said, adding that a devaluation may prompt similar moves around Asia, heightening the risk of trade war.
The ministry statement isn’t the first time the Chinese government has responded to comments on its currency from Obama. In October, a letter from Obama, released by a U.S. textile industry group, linked China’s trade surplus with "manipulation" of the yuan’s value. "The yuan exchange rate is not the cause of the U.S. trade deficit," Chinese Foreign Ministry Spokeswoman Jiang Yu said at the time. "I hope the U.S. can expand its exports to China and reduce barriers to trade and investment." Geithner’s comments also stoked concern that demand from China, the largest foreign investor in U.S. government debt, may wane. China held about $682 billion of Treasuries as of November, and overtook Japan as the biggest overseas owner of the debt last year.
Treasury distributes another $1.5B to 39 banks
The government said Thursday it has distributed an additional $1.5 billion to 39 banks as part of the $700 billion financial rescue program. The latest capital infusions, which were made on Jan. 16, bring the total amount used to buy bank stock to $193.8 billion. Nearly 300 banks in 43 states and Puerto Rico have received support through the program. The outgoing Bush administration also spent an additional $20 billion last week to provide support to Bank of America and $1.5 billion to bolster Chrysler's auto financing arm. Those payments brought the Bush administration's total bailout program spending to $299.6 billion. The government plans to devote $250 billion of the program's first $350 billion to making direct purchases of bank stock as a way of bolstering banks' resources and lending.
The latest injections of money ranged from $400 million provided to the First BanCorp of San Juan, Puerto Rico, to $1.75 million for the Community Bank of the Bay in Oakland. The government is required to publicly disclose its disbursements through the $700 billion rescue program within two business days after the payments are made. The additional $20 billion for Bank of America is not counted as part of the $250 billion "Capital Purchase Program." Instead, this money was provided through the "Targeted Investment Program," which also has provided $20 billion to troubled Citigroup. The new report also included the $1.5 billion provided to Chrysler Financial Services, the auto financing arm of Chrysler. The loans provided to Chrysler, General Motors, and GMAC, General Motor's auto financing arm, now total $20.8 billion. All of the activity on Jan. 16 occurred on the last full business day for the Bush administration because Monday was a federal holiday.
Former Treasury Secretary Henry Paulson and other Bush political appointees left office at noon on Tuesday when President Barack Obama took office. The Senate last week turned back an attempt to deny the Obama administration access to the second $350 billion from the bailout fund. However, Obama's economic team has stressed that it plans to overhaul operation of the program to heed widespread complaints from lawmakers about how the Bush administration managed it. Obama's team has pledged to devote more resources to preventing mortgage foreclosures and to demand greater accountability from banks who receive the funds. Many lawmakers have complained that even with the billions of dollars disbursed, the goal of the program to boost bank lending to deal with a severe credit crunch has not been achieved.
Regulators close 1st Centennial Bank in California
California regulators closed the Redlands-based bank and appointed the Federal Deposit Insurance Corp. as receiver. 1st Centennial had assets of $803.3 million and deposits of $676.9 million as of Jan. 9. The FDIC said 1st Centennial's insured deposits will be assumed by First California Bank, based in Westlake Village, Calif. Its six branches will reopen Monday as offices of First California. The agency said patrons of 1st Centennial will continue to have full access to their deposits. Regular deposit accounts are insured up to $250,000. First California also will buy about $293 million of the failed bank's assets; the FDIC will retain the rest for eventual sale.
The FDIC estimated that the resolution of 1st Centennial will cost the federal deposit insurance fund $227 million. 1st Centennial was the third federally insured bank to fail and be shuttered by regulators this year amid the pressures of tumbling home prices, rising mortgage foreclosures and tighter credit. It's expected that many more banks won't survive this year's continued economic tumult, and some may have to merge with other institutions. Twenty-five U.S. banks succumbed last year, far more than those that failed in the previous five years combined. Only three failed in 2007. Regulators in November closed two big thrifts -- Downey Savings and Loan Association and PFF Bank & Trust -- based in Southern California, an area of the country that's been battered by the mortgage and housing crises.
Since October, the Treasury Department has been using most of the first half of the $700 billion federal bailout fund to buy stock in banks and other financial institutions, with the idea that cash injections will spur banks to get lending again. Last week, the government extended a new multibillion-dollar lifeline to the country's biggest bank by assets, Bank of America Corp., providing an additional $20 billion in support from the bailout fund on top of the $25 billion it previously received. The Treasury, the Federal Reserve and the FDIC also agreed to participate in a program to provide guarantees against losses on about $118 billion in various types of loans and securities backed by the bank's residential and commercial real estate loans.
High-level officials in Washington are trying to find the best way to prod banks into lending more money, reaching for a solution 18 months after the most severe credit crisis in decades sent investors fleeing. U.S. officials have been discussing the notion of establishing a new government-backed bank to remove bad loans and other toxic assets from banks' balance sheets. In theory, with those assets gone, banks would be freer to make more loans. This week the House voiced bipartisan anger over the bailout program, demanding more prudent spending of the remaining $350 billion with tighter oversight. President Barack Obama said Friday that any legislation governing the use of the second half of the money must include new measures to ensure accountability and transparency.
Seattle-based thrift Washington Mutual Inc. failed in late September, the biggest bank collapse in U.S. history. It had $307 billion in assets. The FDIC estimates that through 2013, there will be about $40 billion in losses to the deposit insurance fund, including an $8.9 billion loss from the failure of IndyMac Bank last July. The agency has raised insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $34.6 billion, below the minimum target level set by Congress and the lowest level since 2003. The FDIC has in place a program to guarantee as much as $1.4 trillion in U.S. banks' debt for more than three years as part of the government's financial rescue plan. Under the program, which is meant to thaw the freeze in bank-to-bank lending, the FDIC is providing temporary insurance for loans between banks, guaranteeing the new debt in the event of payment default by the borrowing bank. Of the roughly 8,500 federally insured banks and thrifts, the FDIC had 171 on its confidential list of troubled institutions as of Sept. 30 -- a nearly 50 percent jump from the second quarter and the highest tally since late 1995.
Australia Won’t 'Hesitate' to Boost Economy, Treasurer Says
Australia’s government won’t hesitate to stimulate the economy further should the need arise amid the global recession, Treasurer Wayne Swan said. Swan, speaking to the New York investment community, said the government could add to some A$45 billion ($29 billion) in stimulus already announced should economic conditions worsen. "We will not hesitate to take whatever further action is necessary to support growth and jobs," Swan, 54, said in speech notes received via e-mail. "Major financial institutions, some of which have withstood world wars and the Great Depression, have either collapsed or been bailed out."
Since October, Australia’s government has announced almost A$45 billion in aid for families, pensioners, bond markets, home buyers, and extra spending on schools and roads. Reserve Bank of Australia Governor Glenn Stevens, meanwhile, has embarked on the biggest round of interest-rate cuts in almost two decades. Australia’s "strong balance sheet" and positive net worth position have given the government and central bank "more room" than most countries to adjust settings, Swan said. The government’s recent spending boost came after credit markets froze following the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15, prompting governments and central banks around the world to bail out financial institutions and try to revive growth.
Australia’s biggest trading partners of China and Japan are suffering as the global recession pummels exports. China, which accounts for a fifth of global growth, expanded at its weakest pace in seven years in the fourth quarter; Japan’s first recession since 2001 is deepening. Australia’s economy expanded at its weakest pace in eight years in the third quarter. The unemployment rate rose to 4.5 percent in December, the highest in almost two years, as mining companies, airlines, and automakers fired full-time workers, adding to signs the economy faces its first recession since 1991.
The nation’s economy is not immune to the global financial crisis, but is nonetheless well-placed to weather it, Swan said. "The appreciation of the Australian dollar is helping provide a substantial stimulus to the domestic economy," Swan said. "Australia’s housing market also has positive characteristics." The government, in its latest forecast, said the economy will grow 2 percent in the year ending June 30, 2009. The central bank in November lowered its 2008 economic growth forecast to 1.5 percent from 2 percent.
Price Waterhouse Auditors Arrested in India in Satyam Inquiry
Indian police arrested two employees from the affiliate of PricewaterhouseCoopers LLP who audited Satyam Computer Services Ltd., the software exporter at the center of the nation’s largest fraud inquiry. Srinivas Talluri and S. Gopalakrishnan were remanded to judicial custody on charges of "conspiracy and co- participation," A. Shivanarayana, additional director general of police in Andhra Pradesh state, said from the province’s capital Hyderabad, where Satyam is based. Price Waterhouse said in an e- mailed statement it didn’t know why the two were detained. Seven years after the implosion of Enron Corp. led to the dissolution of accounting firm Arthur Andersen LLP, the Satyam case has put PricewaterhouseCoopers LLP in the spotlight. Indian police, fraud squad, markets regulator and accounting body have started investigations after Satyam founder Ramalinga Raju said Jan. 7 that he had fabricated $1 billion of assets.
"Over the last fortnight, the firm has fully cooperated in all inquiries and has provided the documents called for by the Indian authorities," Price Waterhouse said in the statement from New Delhi. "We greatly regret that two Price Waterhouse partners have been detained today for further questioning." The auditing firm said Jan. 15 its reports could no longer be relied on after former chairman Raju said he’d fudged the accounts. The Institute of Chartered Accountants of India, a statutory body which oversees auditors, will report on its investigation into Price Waterhouse on Feb. 11. Prosecutors allege Satyam padded employee numbers to siphon off cash and forged documents to support fake bank deposits.
Satyam had about 33 billion rupees ($674 million) of "fictitious and non-existent" accounts, public prosecutor K. Ajay Kumar told a hearing for the company’s arrested founder Ramalinga Raju on Jan. 22. The Hyderabad-based company had about 40,000 employees, short of the 53,000 claimed by Satyam, he said. India’s biggest corporate fraud investigation is being led by teams from the Andhra Pradesh state police’s criminal investigation department, the markets regulator, the independent accounting body and the government’s serious fraud office. Satyam’s state-appointed board has almost arranged funds to help tide over a cash crunch till the end of March, the Hyderabad-based company said yesterday. The board has hired KPMG and Deloitte Touche Tohmatsu to restate the accounts.
Satyam is struggling to raise cash to pay salaries after its founder Raju said he had falsified accounts for several years. The provider is also battling to ward off customers from joining State Farm Mutual Automobile Insurance Co. in canceling contracts. Price Waterhouse has offices in nine Indian cities, according to the firm’s Web site. The Indian operation is a separate legal identity from PricewaterhouseCoopers International Ltd., according to the Web site. The auditor’s clients include Maruti Suzuki India Ltd., maker of half the cars in the country, and the local units of Colgate-Palmolive Co., the world’s largest toothpaste maker. PricewaterhouseCoopers LLP has a "vigorous global network" allowing member firms to "operate simultaneously as the most local and the most global of businesses," the firm says on its Web site. The site also includes a disclaimer that each member firm "is a separate and independent legal entity."
How America Embraced Lemon Socialism
The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two.
It gets worse. While Washington debates TARP II, the Federal Reserve Board continues to buy or guarantee or provide loans for a vast and growing pile of questionable financial and corporate assets, much of which are likely to be worth far less than the Fed has paid or guaranteed or accepted as collateral. We're talking big money here -- so far over $2.4 trillion. (The entire TARP -- parts I and II -- in combination with the proposed stimulus package come to just over $1.5 trillion.)
Taxpayers are on the hook for this Fed bailout money, too, of course. We have to pay the interest on the ever-growing debt used to make these payments or guarantees and loans. Yet while TARP II and the upcoming stimulus package are receiving a great deal of attention, this much larger public commitment by the Fed is not. That's partly because the media doesn't much of understand it, but also because the Fed is doing it in secret, using provisions of its charter never before utilized, and avoiding discussion before the full Board of Governors for fear such meetings would be subject to the Freedom of Information Act.
Put it all together and at this rate, the government -- that is, taxpayers -- will own much of the housing, auto, and financial sectors of the economy, those sectors that are failing fastest. Consider too that the government already finances much of the aerospace industry, which is still doing reasonably well but depends on a foreign policy that itself has been a dismal failure. And a large portion of the pharmaceutical industry and health care sector (through the Medicare and Medicaid, the Medicare drug benefit, and support of basic research). These are in bad shape as well, and it seems likely the Obama administration will try to reorganize much of them.
What's left? Most of high-tech, entertainment, hospitality, retail, and commodities. So far, at least, we taxpayers are not propping them up. And when the economy turns up -- perhaps as soon as next year, most likely later -- these sectors have a good chance of rebounding. But the others -- the ones the government is coming to own or manage -- are less likely to rebound as quickly, if ever. If anyone has a good argument for why the shareholders of these losers should not be cleaned out first, and their creditors and executives and directors second -- before taxpayers get stuck with the astonishingly-large bill -- I would like to hear it. It's called Lemon Socialism. Taxpayers support the lemons. Capitalism is reserved for the winners.
Ilargi: No, socialism it ain't, Robert Reich. Think Benito. I’m getting a bit tired of talking about that, so here's Dmitry Orlov's take:
That Bastion of American Socialism
Over the past few months the American mainstream chatter has experienced a sudden spike in the gratuitous use of the term "Socialist." It was prompted by the attempts of the federal government to resuscitate insolvent financial institutions. These attempts included offers of guarantees to their clients, injections of large sums of borrowed public money, and granting them access to almost-free credit that was magically summoned ex nihilo by the Federal Reserve. To some observers, these attempts looked like an emergency nationalization of the finance sector was underway, prompting them to cry "Socialism!" Their cries were not as strident as one would expect, bereft of the usual disdain that normally accompanies the use of this term. Rather, it was proffered with a wan smile, because the commentators could find nothing better to say – nothing that would actually make sense of the situation.
Not a single comment on this matter could be heard from any of the numerous socialist parties, either opposition or government, from around the globe, who correctly surmised that this had nothing to do with their political discipline, because in the US "socialism" is commonly used as a pejorative term, with willful ignorance and breathtaking inaccuracy, to foolishly dismiss any number of alternative notions of how society might be organized. What this new, untraditional use of the term lacks in venom, it more than makes up for in malapropism, for there is nothing remotely socialist to Henry Paulson's "no banker left behind" bail-out strategy, or to Ben Bernanke's "buy one – get one free" deal on the US Dollar (offered only to well-connected friends) or to any of the other measures, either attempted or considered, to slow the collapse of the US economy.
A nationalization of the private sector can indeed be called socialist, but only when it is carried out by a socialist government. In absence of this key ingredient, a perfect melding of government and private business is, in fact, the gold standard of fascism. But nobody is crying "Fascism!" over what has been happening in the US. Not only would this seem ridiculously theatrical, but, the trouble is, we here in the US have traditionally liked fascists. We had liked Mussolini well enough, until he allied with Hitler, whom we only eventually grew to dislike once he started hindering transatlantic trade. We liked Spain's Franco well enough too. We liked Chile's Pinochet after having a hand in bumping off his Socialist predecessor Allende (on September 11, 1973; on the same date some years later, I was very briefly seized with the odd notion that the Chileans had finally exacted their revenge). In general, a business-friendly fascist generalissimo or president-for-life with no ties to Hitler is someone we could almost always work with. So much for political honesty.
As a practical matter, failing at capitalism does not automatically make you socialist, no more than failing at marriage automatically make you gay. Even if desperation makes you randy for anything that is warm-blooded and doesn't bite, the happily gay lifestyle is not automatically there for the taking. There are the matters of grooming, and manners, and interior decoration to consider, and these take work, just like anything else. Speaking of work, building socialism certainly takes a great deal of work, a lot of which tends to be unpaid, voluntary labor, and so desperation certainly helps to inspire the effort, but it cannot be the only ingredient. It also takes intelligence, because, as Douglas Adams once astutely observed, "people are a problem."
Ilargi: And here's Orlov's latest:
Perestroika 2.0 Beta
Congratulations, everyone, we have a new president: a fresh new face, a capable, optimistic, inspiring figure, ushering in a new era of responsibility, ready to confront the many serious challenges that face the nation; in short, we have us a Gorbachev. I don't know about you, but I find the parallel rather obvious. Obama wishes to save the economy, and to inspire us with words such as "We will harness the sun and the winds and the soil to fuel our cars and run our factories." [Inauguration speech] At the same time, he cautions us that "We will not apologize for our way of life, nor will we waver in its defense" -- an echo of Dick Cheney's "The American way of life is non-negotiable." And so we descend from the nonexistent but wonderfully evocative "clean coal" to the more pedestrian "Put a little dirt in your gas tank!"
But these are all euphemisms: the reality is that it is either fossil fuels, which are running out while simultaneously destabilizing the planet's climate and poisoning the biosphere, or the end of industrial civilization, or (most likely) both, happening in that order. According to the latest International Energy Agency projections, the half-life of industrial civilization can be capped at about 17 years: it's all downhill from here. All industrial countries will be forced to rapidly deindustrialize on this time scale, but the one that has spent the last century building an infrastructure that has no future -- based on little houses interconnected by cars, with all of its associated moribund, unmaintainable systems -- is virtually guaranteed to fall the hardest. An American's two greatest enemies are his house and his car. But try telling that to most Americans, and you will get ridicule, consternation, and disbelief. Thus, the problem has no political solution. Tragically, Obama happens to be a politician.
"Whenever we confront a problem for which no political solution exists, the inevitable result is an uncomfortable impasse filled with awkward, self-censored chatter. During the Soviet establishment’s fast slide toward dissolution, Gorbachev’s glasnost campaign unleashed a torrent of words. In a sort of nation-wide talking cure, many previously taboo subjects could be broached in public, and many important problems could suddenly be discussed. An important caveat still applied: the problems always had to be cast as "specific difficulties," or "singular problems" and never as a small piece within the larger mosaic of obvious system-wide failure. The spell was really only broken by Yeltsin, when, in the aftermath of the failed putsch, he forcefully affixed the prefix "former" to the term "Soviet Union." At that point, old, pro-Soviet, now irrelevant standards of patriotic thought and behavior suddenly became ridiculous — the domain of half-crazed, destitute pensioners, parading with portraits of Lenin and Stalin. By then, fear of political reprisals had already faded into history, but old habits die hard, and it took years for people’s thinking to catch up with the new, post-imperial reality. It was not an easy transition, and many remained embittered for life.
"In today’s America, it is also quite possible to talk about separate difficulties and singular problems, provided they are kept separate and singular and served up under a patriotic sauce with a dash of optimism on top. It is quite possible to refer to depressed areas, to the growing underclass and even to human rights abuses. It is, however, not allowable to refer to America as a chronically depressed country, an increasingly lower-class and impoverished country or a country that fails to take care of its citizens and often abuses them. Yes, there are prisons where heroin addicts are strapped to a chair while they go through withdrawal, a treatment so effective that some of them have to be carried out in body bags later, but that, you see, is a specific difficulty, a singular problem, if you will. But, no no no, we are a decent, freedom-loving country in spite of such little problems. We just have a slight problem with the way we all treat each other... and others. We did recently invade a country that had posed no threat to us and caused about a half a million civilian deaths there, but no no no, we are a freedom-loving country! That is just a specific difficulty with our foreign policy, not a true reflection of our national character (which is to squirm when presented with unpleasant facts and to roll our eyes when someone draws general conclusions from them based on a preponderance of evidence).
"When it comes to collapse mitigation, there is no one who will undertake an organized effort to make the collapse survivable, to save what can be saved and to avert the catastrophes that can still be averted. We will all do our best to delay or avert the collapse, possibly bringing it on sooner and making it worse. Constitutionally incapable of conceiving of a future that does not include the system that sustains our public personae, we will prattle on about a bright future for the country for as long as there is enough electricity to power the video camera that is pointed at us. Gorbachev’s perestroika is an example of just such an effort at self-delusion: he gave speeches that ran to several hours, devoted to mystical entities such as the "socialist marketplace." He only paused to drink water — copious amounts of it, it seemed — causing people to wonder whether there was a chamber pot inside his podium.
"There are few grounds for optimism when it comes to organizing a timely and successful effort at collapse mitigation. Nevertheless, miracles do happen. For instance, in spite of inadequate preparation, in the aftermath of the Soviet collapse, none of the high-grade nuclear fissile material has ended up in the hands of terrorists, and although there were a few reports of radiation leaks, nothing happened that approached the scale of the Chernobyl catastrophe. In other ways, the miserable experience had by all was mitigated by the very nature of the Soviet system, as I described in Chapter 3. No such automatic windfalls are due the United States; here, collapse preparation, if any, is likely to be the result of an overdue, haphazardly organized and hasty effort." [Reinventing Collapse, pp. 108-110]
I sincerely hope that Obama manages to do better for himself than Gorbachev. History can be mean to do-gooders. On that fateful day when Gorbachev lost his job, his wife suffered a stroke, and he, since that day, hasn't been able to wipe that deer-in-the-headlights look off his face. Trying to solve problems that have no solution is a fine thing to try to do. Even if it is utterly futile, it makes for great drama. But I hope, for his sake, that Obama doesn't give up any of his hobbies. should he still have any.
Citigroup Raises $12 Billion in FDIC-Backed Bond Sale
Citigroup Inc. sold $12 billion of notes guaranteed by the Federal Deposit Insurance Corp. as Chief Executive Officer Vikram Pandit tries to bolster capital and save the bank from insolvency. The sale is the biggest offering of debt backed by the FDIC since banks began using the government’s Temporary Liquidity Guarantee Program on Nov. 25, according to data compiled by Bloomberg. The offering by Citigroup and its Citigroup Funding unit surpasses GE Capital Corp.’s $10 billion sale on Jan. 5. Dwindling capital and a sinking stock price have already forced Pandit to take $45 billion in cash from the U.S. government and abandon the bank’s decade-old strategy of selling multiple financial services under one roof. Citigroup returned to the FDIC program for the first time since Dec. 4 as $42.2 billion of debt matures this year, Bloomberg data show.
"A lot of it is to refinance existing debt maturities," said Joe Scott, a banking industry analyst at Fitch Ratings in New York. "It helps them maintain adequate liquidity, and it’s part of maintaining the viability of a very systemically important institution." Pandit said last week he would split Citigroup in two and shed assets to rebuild the New York-based bank’s capital base on the heels of an $8.29 billion fourth-quarter net loss. Citigroup issued $7.5 billion of 2.125 percent fixed-rate notes due in April 2012 that priced to yield 105.75 basis points more than comparable U.S. Treasuries, Bloomberg data show. The bank sold the notes at a discount of 99.806 cents on the dollar to yield 2.19 percent, the data show.
The sale also included $4.5 billion raised by Citigroup Funding that was split among $2.25 billion of 18-month floating- rate notes that pay 10 basis points more than the three-month London interbank offered rate; $350 million of 3.25-year notes that float 45 basis points above one-month Libor; and $1.9 billion of 3.25-year notes that float 33 basis points above three-month Libor, Bloomberg data show. A basis point is 0.01 percentage point. Three-month Libor, a borrowing benchmark, is currently set at 1.17 percent; one-month Libor is set at 0.4 percent.
Bonds guaranteed through the FDIC program are rated a top Aaa by Moody’s Investors Service and AAA by Standard & Poor’s. Today’s sale makes Citigroup the fourth-biggest issuer of FDIC-backed bonds. Citigroup has raised $17.75 billion through the program, including its previous offering on Dec. 4, when the bank sold $250 million of floating-rate notes in a reopening of debt, Bloomberg data show. GE Capital is the biggest user of the government’s debt guarantee program so far, raising $20.9 billion. Bank of America Corp. is the second-biggest borrower with $19.9 billion, followed by JPMorgan Chase & Co. at $17.9 billion, Bloomberg data show.
Flood of foreclosures: It's worse than you think
Housing might be in worse shape than we think. There is probably even more excess housing inventory gumming up the market than current statistics indicate, thanks to a wave of foreclosures that has yet to hit the market. The problem: Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale. The volume of this so-called 'ghost inventory' could be substantial enough to depress already steeply falling prices when it does go on the market. "That's not good news," said Pat Newport, an analyst with IHS Global Insight. "[Excess] inventory is the biggest problem in housing these days, and it leads to lower housing prices, which leads to more foreclosures."
RealtyTrac, the online marketer of foreclosed properties, recently discovered that it has far more foreclosed properties listed in its database, which the company compiles using courthouse records, than there are listed in the multiple listing services (MLS) maintained by real estate agents. RealtyTrac looked at listings in four states, California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database. The scope of the problem isn't clear, but it could be huge considering that RealtyTrac has a total of 1.5 million bank-owned properties on its site. "Many properties that should be listed on the MLS are not listed on the MLS," said Lawrence Yun, chief economist for the National Association of Realtors (NAR).
The National Association of Realtors calculates official housing inventory statistics using data from the multiple listing services. By that measure, there were 4.2 million existing homes for sale in November, an 11.2-month supply at the current sales pace, up from a 10.3-month supply in October. But now it seems quite possible that these figures, which are already at record highs, are underestimating the situation. And if that's the case, it could take much longer for the housing market recovery than analysts currently expect. Until supply can be brought down to a more normalized level of six to seven months, home prices will continue to come under pressure, according to Yun. "It could be a worse problem than we think," he said.
L.J. Jennings, a real estate broker with Pyramid Real Estate and Investments in Oakland, Calif., sees plenty of evidence that it is. "There are a number of properties in my area that have actually been taken back by the banks, but have not hit the market yet," he said. "Once a bank repossesses a property, in some cases, it can take more than six months to hit the market." He cites a handful of examples offhand, including a single-family home in Richmond seized in early October, a condo in San Ramon taken back the same month and a four-family building in Oakland that was repossessed in July. "Either lenders are overwhelmed and can't get these properties back on sale quickly" said RealtyTrac spokesman Rick Sharga, "or they're deliberately slowing down."
The chief problem is probably system overload: Lenders are just not prepared to handle the sheer numbers of foreclosures that they have on their books. Banks took back about 860,000 in 2008 - more than twice the number in 2007 - according to RealtyTrac. Before the housing crisis hit, it took only about a month to get a bank-owned foreclosure on the market. Lenders still insist they try to act as swiftly as possible. According to Tom Kelly, a spokesman for Chase Mortgage, their goal is to cut their losses on these homes, which are expensive to maintain, as fast as possible. But banks might hold back listings in areas where they already have lots of homes for sale in order to avoid flooding the market, according to Michael Youngblood, a financial analyst and founder of Five Bridges Capital, an asset management company. "If lenders have a significant number of properties in a limited area, they may want to stagger putting them back on the market," he said.
Eve Alexander, a real estate broker with Buyers Broker of Florida in Orlando, attributes the delays to the general malaise that's overtaken the lending industry as it's imploded. "I think banks are dragging their rears about doing just about everything," she said. "They have so much going on, and there's so much red tape and the people don't care, nothing gets done." There are also batches of bank-owned homes that don't appear on the multiple listing services because lenders are trying to sell them via bulk and auction sales to investors as well as individuals, according to John Mechem, public affairs director for the Mortgage Bankers Association. He adds that it's also taking much longer to get many foreclosed homes in decent enough shape to put on the market.
Bank-owned properties are in worse condition than ever because the foreclosure process is taking longer than ever. As much as a year can pass between the time a borrower first misses a payment and the final auction sale, according to Youngblood. During that time, houses often deteriorate because owners have neither the money nor the incentive to maintain them. Some disgruntled homeowners may even deliberately damage homes before they leave. "According to our servicing folks, it's taking more time for lenders to get properties in saleable condition," said Mechem. The phenomenon of a growing ghost inventory doesn't promise to get better anytime soon, as long as the rate of foreclosures continues to ravage the market. There were more than 3.1 million foreclosure filings in 2008, according to RealtyTrac. Said Sharga: "I don't see how we can avoid another 3 million in 2009."
Obama: Quit Listening to Rush Limbaugh if You Want to Get Things Done
President Obama warned Republicans on Capitol Hill today that they need to quit listening to radio king Rush Limbaugh if they want to get along with Democrats and the new administration. "You can't just listen to Rush Limbaugh and get things done," he told top GOP leaders, whom he had invited to the White House to discuss his nearly $1 trillion stimulus package. One White House official confirmed the comment but said he was simply trying to make a larger point about bipartisan efforts.
"There are big things that unify Republicans and Democrats," the official said. "We shouldn't let partisan politics derail what are very important things that need to get done." That wasn't Obama's only jab at Republicans today. While discussing the stimulus package with top lawmakers in the White House's Roosevelt Room, President Obama shot down a critic with a simple message. "I won," he said, according to aides who were briefed on the meeting. "I will trump you on that." The response was to the objection by Rep. Eric Cantor (R-Va.) to the president's proposal to increase benefits for low-income workers who don't owe federal income taxes.
Prescient Young Blogger Did What S. Korea Couldn't -- Foresee Global Financial Crisis
As a financial blogger named Minerva, Park Dae-sung was the dark prophet of market decline in South Korea. In this education-obsessed country, where academic credentials are often taken as a measure of human value, he was also something of an idiot savant. He had no degree in economics. He had no professional experience in finance. He was not a wealthy investor. He had been a so-so student who studied communications at a so-so junior college in a backwater town south of Seoul. Thirty-one years old and single, he spent much of his time alone in his room. As his father noted, "He can't even get a job." But he knew a global economic smack-down when he saw one.
Minerva saw it coming last fall, far earlier and with far more acuity than the South Korean government, which his blog has humiliated and angered. Besides getting mad, the government got even. In a move widely perceived by the public as a chilling echo of the 1970s, when a military dictatorship ruled South Korea, the government detained Park this month, invoking a seldom-used telecommunications law that charges him with harming the public by spreading "false rumors." Yet Minerva (no one knew him as Park until police raided his house Jan. 7) made his reputation by spreading rumors that turned out to be all too true. He predicted the collapse of Lehman Brothers five days before it happened. He predicted a sharp decline in the value of South Korea's currency a few days before the won imploded against the dollar.
By the time he was taken away from his computer in handcuffs, he was a cyber-sensation. His blog had garnered more than 40 million page views (there are 48 million people in this well-wired country). He was lionized in the South Korean news media as the "online oracle" and the "Internet president of the economy." Although Park has told authorities he is Minerva, claims have emerged here that Minerva might be a few people. Several economic and financial experts have said they wrote online postings under the name. Prosecutors, though, have declined to investigate, saying they have irrefutable electronic evidence that Minerva is Park. Before police sniffed him out in his bedroom, then-Finance Minister Kang Man-soo publicly demanded that Minerva step out of the shadows for a "face-to-face, down-to-earth talk" with him. (Kang was fired this week, another victim of the lousy economy.)
While Minerva was forecasting doom, government officials spent much of the early autumn inaccurately forecasting moderate market disruption and continued growth. They groused a lot about unpatriotic market speculators. President Lee Myung-bak, whom Minerva's blog mocked and insulted, warned in early October that currency traders must stop "greedily pursuing private interests" when their nation is in trouble. Lee, who marks his first anniversary in office next month, has had a memorably awful year. Before the economy tanked in the fall, his leadership was weakened by months of street protests against his decision to import U.S. beef. The public was, for a time, thrown into a panic by media and online reports that American beef would spread mad cow disease.
The detention of Park has further undermined Lee's popularity, according to Hwang Sang-min, a professor of psychology at Yonsei University in Seoul. In recent weeks, Lee's approval ratings have fallen into the mid-teens, according to newspaper polls. "Legal niceties aside, the public thinks Minerva was arrested by the president because he could not tolerate a challenge to this authority," said Hwang, author of several books on South Korean popular culture. "The arrest weakens the authority of the government." Even the legal niceties of Park's arrest seem shaky. Prosecutors claim that one of his postings is clearly false. The government issued an emergency order Dec. 29, Minerva wrote, urging top banks to stop buying dollars. The government has denied issuing the order, but a number of currency traders have told the South Korean media that the government did urge banks that day to refrain from buying dollars.
Park's detention has also upset civil liberties groups. They say it is a worrisome symptom of an immature democratic culture. "His crime was to have a large following and to make the government look bad," said Song Ho-chang, an attorney with Lawyers for a Democratic Society. "If a court does find Minerva guilty, everyone will be afraid to express an opinion online." Lee's government tried last year to use the "false rumors" communications law against anti-U.S. beef activists who had used cellphone messages to recruit protesters for street demonstrations. A judge dismissed the charges. Park is expected to face trial within a month or two. He has told his attorney, Park Chan-jong, that he is bewildered by his sudden celebrity and frightened by the prospect of imprisonment. "I feel quite lost right now," his attorney quoted Park as saying. "It is scary that I can only talk to you with my handcuffs on."