Ilargi: It looks like Tom Daschle will not be in Obama's cabinet. He "forgot" to pay taxes. Tim Geithner, who has even less of an excuse to forget his taxes, being the finance wizard he's supposed to be, has not -been- withdrawn. There have been times when politicians were forced to "draw their conclusions" much faster and for having committed lesser evils. It makes me wonder who in Washington has been approached for a post in the new administration and said Thanks, but No, thanks on account of closets as full of monsters as bank vaults are with "assets".
In times when moral standards are allowed to be interpreted with such great flexibility, societies tend to struggle. When enormous amounts of the people's money are spent, and huge claims are made on their willingness and ability to trust their leaders, it's invariably a bad idea for those leaders to come across as less than honest. If politicians don't draw their conclusions, their voters will. It's a fact as old as humanity.
And it's not only in politics that America is found badly wanting. There are more than a few people who make more money on their own every year than entire small towns, and who have been handed billions to rescue the companies they have led into abysmal losses. But few have any qualms about using the people's money to pay themselves and their friends more multimillion dollar bonuses, fly corporate jets, buy more jets, party at the Super Bowl, holds lavish retreats, redecorate their offices with carpets costly enough to buy a home, and so on.
We have seen so much of this behavior that the people as a whole no longer trust any of their "leaders". If not for their addiction to TV games, fake news shows, fake realities (whether it's a show or their very lives) and food without nutrients, the American people might not have been sitting still for so long. Now that tens of millions more among them are being driven into hunger, cold and despair, the people may rise, and demand, at the very least, accountability and justice. If leaders don't draw the conclusions that morality and the Constitution dictate, and if the justice system fails to hold these leaders against the light, the people will find more creative solutions.
Once it dawns on the people that America is broke (and it is, make no mistake, get out of that fake reality), that there no longer is an American dream to work on, that neither they nor their children will ever see anything remotely resembling a promised land, once they realize that the country is financially bankrupt, they may start to figure out that it's also morally bankrupt.
We know what we mean when we talk about the day the music died. Did the American Dream die 50 years after to the day?
Tough choices for America's hungry
As Walter Thomas knows, it's hard to look for a job when your stomach is rumbling. The 52-year-old from Washington, D.C., started skipping meals in early January when his savings account was running dry and his kitchen cabinets were almost empty. Thomas at first didn't want to turn to the United States' food safety net, the food stamp program, for help. But after being laid off in July from what seemed like a steady job in sales at a furniture store, Thomas swallowed his pride and applied for the monthly food aid. "It lets me think, 'OK, well, tomorrow I'll be able to eat. If nothing else, I'll be able to eat,' " he said.
With the national economy in meltdown, more Americans than ever are relying on the federal aid program to keep from going hungry. In October, more than one in 10 people -- about 31 million -- were using the food stamp program to get by, according to the U.S. Department of Agriculture. More recent numbers are not available, but advocates for the poor say the number of those in need of aid probably has increased since then. Stereotypes associated with food stamps abound, and recipients are often seen as prone to taking handouts, sometimes when they may not be needed. But the profile of hunger in America is multifaceted, as diverse as the nation itself, especially in these times of economic hardship. To get a better idea of what it's like to live on a food stamp budget, CNN correspondent Sean Callebs has decided to eat for a month on $176 and blog about the experience on CNN.com.
That's a situation many people, Thomas included, can relate to. Thomas, who said he had been working steadily since he was 13 years old, now receives $175 per month for food. That's about $5.83 per day -- less than $2 per meal. Not that Thomas is complaining. After getting his first payment, which is added to an inconspicuous debit card to reduce the stigma associated with the program, Thomas went straight to the grocery store. He was hungry and grateful. "It's definitely been a blessing to me," he said of the food stamp program, which, since October, has gone by the name Supplemental Nutrition Assistance Program, or SNAP. Advocates for the poor, as well as those on federal assistance, hope President Obama's economic stimulus plan will increase food stamp payments. The average family on food stamps would receive $79 more per month if the stimulus bill passes in the U.S. Senate this week, according to The New York Times.
There is some debate about whether giving people money to spend on groceries is a valid form of economic stimulus. Few are more hopeful the measure will pass than Crystal Sears, a 30-year-old mother in Germantown, Pennsylvania, who said she has been on food stamps for more than three years. Sears said she sometimes skips meals so her three children can eat. Even with federal assistance, she said, she sometimes has to make a meal for herself out of crackers or food scraps. She said she has been out of work for several years because all three of her children have medical conditions: Her 8-year-old son has a seizure disorder that requires frequent hospital visits and constant attention; her 2-year-old daughter was born with heart problems; and her 12-year-old daughter has scoliosis, a back condition that recently required two surgeries, she said.
Without much money, she's forced to make tough choices. "If the kids needed sneakers and their sneakers are getting too small, or if my water bill is past due, I'd opt not to pay it and risk them sending me a shut-off notice just so my children can eat," she said. Sometimes she chooses to buy more food instead of paying her gas bill to heat her home. When she does, the family sleeps huddled around their stove or an electric heater, she said. Her monthly food stamp payment is $489, she said. That's sometimes sufficient. But some months, she said, she doesn't receive full payments because of mix-ups with paperwork. Until recently, she said, she received about $250 per month, which she said was far from enough to feed her family of four.
The SNAP program is meant to supplement a person's food budget, not cover all food expenses, said Jean Daniel, a spokesperson for the USDA, which administers the program. Taking on part-time work would further complicate the application process, she said. Sears said she worked for seven years at a Salvation Army shelter before becoming unemployed. "For me, I've always been a helper. And my thing is I don't like to help people to enable them. I like to help people so they can help themselves in the long run," she said. Sears stretches her food budget by buying cheap and sometimes fatty meals. She said she doesn't like doing that but can't avoid it. With food prices high, she said, grocery shopping is stressful.
"We get like the mac and cheese, which is dehydrated cheese -- basically food that's no good for you health wise," she said. "Everything is high in sodium and trans fats ... and that's all we basically can afford. There's not enough assistance to eat healthy and maintain a healthy weight." Advocates for the hungry say many people on the food stamp program opt to buy less-healthy foods because they can't afford fresh fruits and vegetables on such a tight budget. Food stamp "benefits aren't really enough for a healthy diet," said Jim Weill, president of the nonprofit Food Research and Action Center. Sears said she is grateful for the help she does get.
Maribel Diaz, a 36-year-old mother of three boys in Los Angeles, California, said her $319-per-month payment isn't always enough. But she said she would starve herself before letting her boys go hungry. "You're bringing home less bags [of food] now, because the milk is almost $5 a gallon and the bread is $3 a loaf. ... A chicken is, like, now $8," Diaz said. "If you're really breaking it down, you're not bringing a lot of groceries home." All SNAP recipients are eligible for free nutritional counseling to help people stretch their food budgets, said Daniel, of the USDA. Advocates for the hungry find flaws in the way the program is set up, but they praise it for being a safety net the government can't take away during tough times. Unlike aid to soup kitchens, the food stamp program receives federal funding in times thick and thin, and has a $6 billion backup fund, Daniel said. "The money will be found so people are not turned away," Daniel said.
All of the benefits paid to participants come from the federal government. States split the program's administrative costs. Advocates see some flaws in SNAP but generally give it praise. "I say about food stamps what Winston Churchill said about democracy: 'It's the worst possible system except all the others,' " said Joel Berg, executive director of the New York Coalition Against Hunger. Berg said the program's benefits are too small and too difficult for people to obtain. But the food stamp program is somewhat successful, he said.
"The main purpose of the program is to wipe out Third World starvation in America, and it's worked," he said, adding that he's optimistic about improvements that could come as part of the economic stimulus plan. Thomas, the laid-off furniture worker in Washington, said he doesn't want people to feel sorry for him. After being let go from his store, he stopped at an employment center before going anywhere else. He said he faxed about 20 résumés to similar companies on that very day. None has resulted in a job yet, but Thomas said he has been to interviews for other types of work and hopes employment will come soon. For now, he's just happy to continue the job search without the pain of hunger nagging at his stomach.
More families move in together during housing crisis
Love isn't all that's keeping family together today. The bruising housing market is, too. Last year, Kanessa Tixe's dad had just finished building a three-family house when he lost his superintendent job in February. He wasn't sure how to make the $5,000-a-month mortgage on the new house in Queens, N.Y. So Tixe and her siblings decided to help out in an unusual way: They moved in. In December, her father moved into the first floor; her stepsister and husband moved into the second floor; and her stepbrother and Tixe took the third floor. The entire family has become roommates, banding together to pay rent and help their dad with the mortgage until he finds long-term tenants. "We're still living there now. Times are rough," says Tixe, 26, a publicist. "It's been very beneficial that we're all together. My stepbrother and I have a wonderful relationship now. We eat together for dinner, and I've become closer to my dad, too. This is an important time for family to help, the way the housing market is going. Our story is a testament to how families should come together to help with a mortgage."
The weak economy — which has brought surging foreclosures, sinking property values, vanishing home equity and mounting job losses — is playing a major role in family dynamics, pulling relatives under the same roof to pool their resources and aid relatives who've lost their homes. Siblings are moving in with one another to help pay the mortgage. Adult children who've lost homes to foreclosure are moving back home with Mom and Dad. Even spouses in the throes of divorce are putting off separating, living together in awkward cold wars because they can't sell their houses. That's in large part because those losing homes often have nowhere else to go. Many live paycheck to paycheck: Nearly 61% of local and state homeless coalitions are seeing an increase in homelessness since the foreclosure crisis began in 2007, according to an April 2008 study by the National Coalition for the Homeless. Only 5% said they hadn't seen an increase. The survey found that more than 76% of homeowners and renters who must move because of foreclosures are staying with family and friends.
Foreclosure filings surpassed 3 million in 2008, according to a recent report by RealtyTrac. The report also shows that one in 54 homes received at least one foreclosure filing during the year. "If you have someone you love, and they're in need, and they come to you and say, 'Can I stay with you awhile?" — of course, you'll say, 'Yes.' But there are risks," says Debra Yergen, author of Creating Job Security Resource Guide. "Maybe they have pets, maybe they go out to eat, and that causes friction. There are all kinds of family dynamics. That's not to say it's not worth it, but you have to think it through so that no one feels taken advantage of."
More families are living with relatives, based on the most recent statistics available. Nearly 3.5 million brothers or sisters are living in a sibling's house, according to 2007 Census Data, up from 3 million in 2000. And 3.6 million parents live with their adult children, up from 2.3 million. About 6.7 million householders live with other relatives, such as aunts or cousins, compared with 4.8 million in 2000. That year, the housing market was beginning its boom stretch, which lasted until late 2005. Some demographic groups are feeling the effects more than others, including younger first-time home buyers who purchased during the housing boom and older Americans hit by job losses and foreclosures who have less time to recover their financial footing. For example:
Older Americans who are losing their homes often lack the financial resources to buy another property. At the same time, adult children who had been helping pay for assisted living or other living arrangements for elderly parents are opting to bring their parents into their own homes because they can no longer afford the costs. "With the financial crunch, many adult children caregivers are having to bring Mom and Dad into their own home instead of the many other options," says Barbara McVicker, author of Stuck in the Middle: Shared Stories and Tips for Caregiving Your Elderly Parents. "Money is driving most of the decisions." Homeowners 50 and older have been significantly affected by the mortgage crisis, according to a 2008 analysis by the AARP. More than 684,000 homeowners 50 and over were delinquent, were in foreclosure, or lost their homes during the six months ended December 2007.
And some family members say they're living with a senior parent because they can't afford a home on their own. Younger buyers made up a large share of those who bought property during the housing boom. About 40% of home buyers in 2004-05 were first-time buyers, according to the National Association of Realtors. These buyers are also most likely now to owe more on their homes than they are worth, according to a Moody's Economy.com report on so-called underwater mortgages. Because they are unable to sell their homes, many are trapped in mortgages they can't afford — either because of adjustable-rate mortgages resetting to higher payments or because of recent job losses. So when foreclosures loom, these younger buyers can't just sell to get out of a bind. Instead, a larger number are going through the foreclosure and then moving back in with their parents.
"Many first-time home buyers bought homes they really couldn't afford using some of the riskier loan products (adjustable-rate loans with low teaser rates and 100% financing)," says Rick Sharga, senior vice president of RealtyTrac, in an e-mail. "These homes … were still very much overpriced, and the combination of increased mortgage payments and depreciating home values has hit this group of buyers exceptionally hard." And it's not just twentysomethings anymore: Even middle-age people are moving back in with their parents after a foreclosure. Colt Phipps, 40, of Scottsdale, Ariz., worked in the mortgage industry until his business failed because of the housing crisis. His home, which was worth nearly $1 million, was foreclosed upon. So Phipps and his fiancée moved in with his parents, going from their 5,000-square-foot house to a 1,400-square-foot house. He also brought his two Shar-Pei dogs along and does what he can to pay rent to help his parents with the mortgage. He is still looking for work, and his fiancée, formerly a loan processor, is now working at Home Depot.
"It's actually brought us closer together," Phipps says. "It's close quarters, but we have weekly meetings to discuss things like budget. We help out with what we can. You learn about what's important, what's really valuable. Things are not real value. It's family and the people you're around." While hard times can often strain marriages, the housing downturn may be curbing divorces. The American Academy of Matrimonial Lawyers also says it's seeing divorce rates fall. Overall, 37% of members said they see a decrease in divorce cases, according to a November report. Members responded that they typically see a drop in the number of divorce cases during national economic downturns, while only 19% cited an increase during these challenging times. That's partly because couples used to be able to divorce and easily sell their homes. But with home sales so anemic, couples are reluctantly staying together until the housing market turns around.
"It takes months and months to sell a home. … They can't afford another residence," says Michael Gora, a divorce lawyer in Boca Raton, Fla. "I've had consultations where people even back off of divorce because they realize the desperate financial straits they're in." The housing market is drawing some families together, but challenges include lifestyle differences, generational differences, depression, money squabbles and other issues when relatives huddle together for economic relief, says Nicholas Aretakis, a career coach and author of No More Ramen: The 20-Something's Real World Survival Guide. Moving in with relatives can be "demoralizing, humbling, dehumanizing — but a lot of people don't have a lot of choice," Aretakis says. "You lose that sense of independence, privacy and self-esteem," he says. "You lose somewhat of your identity."
Bailed Out Bank of America Sponsors Super Bowl Fun Fest
Despite a near collapse that required $45 billion in federal taxpayer bailout funds, Bank of America sponsored a five day carnival-like affair just outside the Super Bowl stadium this past week as President Obama decried wasteful spending on Wall St. The event, known as the NFL Experience, was 850,000 square feet of sports games and interactive entertainment attractions for football fans and was blanketed in Bank of America logos and marketing calls to sign up for football-themed banking products. The bank staunchly defended its sponsorship, saying it was a "business proposition" and part of its "growth strategy." Critics blasted the spending as a serious abuse of taxpayer money.
"The prominent sponsorship of the Super Bowl says to the American people we'll take your money and then we're going to go waste it," Tom Schatz, president of Citizens Against Government Waste, a watchdog group, told ABC News. Leading Congressional critic, Congressman Elijah Cummings, (D-MD), said, "They should know better, but obviously they don't." According to the Bank of America, the official bank of the NFL, its NFL partnerships and product tie-tins "generate significant revenue streams." The bank said it was legally required to fulfill its contract to be an NFL sponsor and that its NFL product sales had already increased since the Experience began Jan. 24.
The bank refused to tell ABC News how much it is spending as an NFL corporate sponsor, but insiders have put the figure at close to $10 million. The NFL Experience was on top of that and was inked last summer, according to the bank. The NFL said it was a "multi-million dollar" event and that it was also spending money to put on the event. A Super Bowl insider said the tents alone cost over $800,000. Tickets were available for purchase for between $12.50 and $18.50, with proceeds from ticket sales going to local youth initiatives. It was the 18th year for the "interactive fan festival" and the first that Bank of America has sponsored it.
Schatz said that deal or no deal, the event sponsorship should have been abdicated once the bank took billions in bailout funds. "The Super Bowl is a big deal, but it's a bigger deal that Bank of America is being bailed out by the America taxpayers," Schatz said. "This is an exceptional year and it's a time to say we're not going to do business as usual. We're going to say no, we're going to show some restraint, and we're going to cut back on something that really isn't absolutely necessary." GM, another NFL corporate sponsor and bailout recipient, said it scaled back this year and didn't send any executives to the big game or schedule dealer meetings around it. A GM spokesperson said that while the company was still providing a fleet of courtesy vehicles to the NFL for VIPs, only 200 were sent this year, down from 400 in 2008.
Earlier last week, Morgan Stanley, the bank that laid off 5,000 employees last year and took $10 billion in taxpayer bailout money, held a three-day conference for clients at the Breakers, a five-star oceanfront resort in Palm Beach, FL. Morgan Stanley would not say what the elegant gathering cost, but said it is an annual tradition and that its clients paid their own travel costs and got a discounted room rate of $400 a night. Congressman Cummings said that doesn't justify hosting such a lavish event when people on Main St. are struggling to make ends meet. "For most people on my block, that would be half of a mortgage payment, a monthly mortgage payment," he said.
Bonus War: Wall Street vs. Main Street
Last week in this space I blogged about compensation and a possible "class war" in the offing. Sadly, within days my prediction came true. The State of New York reported that Wall Street Banks were handing out $18 billion in bonus payments for 2008 performance – and all hell broke loose. Main Street America – not to mention Pennsylvania Avenue – doesn’t understand how executives and traders and brokers (oh my!) can get "rewarded" for performance during a year when their financial companies were requiring massive government bailouts to stay afloat and keep the entire system from crashing. Wall Street’s Masters of the Universe don’t understand why their critics don’t realize that their compensation is based on a "low base" with high rewards for driving profits in their area of responsibility, regardless how the company as a whole is doing.
Both sides have a point, but for the first time in a couple decades, Wall Street denizens are going to lose this one. The "eat what you kill" compensation system has been in place so long, it’s become an "entitlement." The majority of Wall Street bankers are under 45 and this is the only world they’ve ever known. They consider their base pay "a joke" – even though the average Wall Street base is considerably higher than the average American’s all-in salary. Several young bankers have been quoted the past couple days deriding the recently received 2008 bonus payments with descriptions such as: "I feel like I got a doorman’s tip, compared to what I got in previous years." At the possibility of not getting a bonus this time around, I heard one sentiment that went something like this: "If there’s no bonus, then I put in all those hours last year for nothing." Again, "nothing" is defined as approximately $200,000.
President Barack Obama Thursday called the compensation practices on Wall Street "shameful." Already one lawmaker in D.C. has proposed that annual compensation be capped at $400,000 for execs at companies receiving federal bailout assistance. Another proposal suggest that bailed-out companies give future bonuses in stock only with the condition that the stock cannot be converted to cash until all taxpayer-supported bailout money is repaid. And the government and taxpayers are just getting warmed up. It’s going to be a fascinating culture clash. A generation of bankers and execs accustomed to high pay, high rewards and luxurious perks squaring off against a White House, a Congress and millions of taxpayers who are deeply worried about the future and mightily p***ed off about the past.
Interestingly there are thousands of executives (and former execs) – many of whom visit this blog section – who share the worry and the anger. Some call these folks HENRY’s (high earner, not rich yet.) These are folks who have worked hard, climbed the corporate ladder, paid their dues and only get bonuses when their company has a good year, and only if they have had one too. Most of these folks have watched their bonus payments shrink or vanish in the past year or two; have had their base comp frozen or cut, are doing more work than a year ago because of headcount reductions around them; and have watched their benefits shrivel as their company cuts back on health care and 401k support. And speaking of 401k’s, they ain’t what they used to be either thanks in large part to the aforementioned collapse of the financial system.
So here’s the question for career execs like us: are we going to become collateral damage in the emerging class war in America? Are we going to get dragged (or thrown) under the bus with the Wall Street entitlement addicts whose firms caused this crisis in the first place? I don’t know about you, but I’m going to try to stand away from the curb and look both ways before crossing. It’s going to be a bumpy ride for all of us.
JPMorgan's Dimon defends pay for "tough jobs"
JPMorgan Chase & Co Chief Executive Jamie Dimon, weighing in on the firestorm over bonuses paid by banks who got taxpayer bailouts, defended paying staff for tough jobs. Many executives, including Dimon, whose bank has taken $25 billion from the U.S. government's Troubled Asset Relief Program (TARP), have said they will not seek a bonus for 2008 after the credit crisis that began more than a year ago spiraled into a global recession. "Are banks to blame? Well, of course," said Dimon, but he warned against just blaming banks and bankers, noting that other players in financial markets, including U.S. consumers, had borrowed more than they held in assets.
Dimon told delegates at a conference that if there is a tough job to do at a company, a manager wants to know he can persuade his best person to do that job. Referring to the theoretical tough job as "Vietnam," Dimon said he would want to support the person handling the role and be able to recognize that they have a difficult job. Dimon said any investigation into executive pay should take different situations into account, rather than tarring all bankers with the same brush. Dimon also noted that JPMorgan, along with other banks, paid most of its compensation to executives in stock and these executives have already seen their net worth plummet as the banks' share prices have fallen.
The KBW Bank index .BKX fell more than 50 percent in 2008, while JPMorgan's shares slid 27 percent. Dimon in December joined a raft of bank executives including Citigroup Inc's Chief Executive Vikram Pandit and Morgan Stanley's Chief Executive John Mack in saying that he will not seek a bonus for 2008. And executives at banks that received funds under the TARP agreed to follow rules limiting executive pay. Shares in JPMorgan are down 20 percent so far this year and were down 4.6 percent to $24.04 in late Tuesday morning trading from Monday's close.
The whole world is rioting, but why not America?
Explosive anger is spilling out onto the streets of Europe. The meltdown of the global economy is igniting massive social unrest in a region that has long been a symbol of political stability and social cohesion. It's not a new trend: A wave of upheaval is spreading from the poorer countries on the periphery of the global economy to the prosperous core. Over the past few years, a series of riots spread across what is patronizingly known as the Third World. Furious mobs have raged against skyrocketing food and energy prices, stagnating wages and unemployment in India, Senegal, Yemen, Indonesia, Morocco, Cameroon, Brazil, Panama, the Philippines, Egypt, Mexico and elsewhere. For the most part, those living in wealthier countries took little notice. But now, with the global economy crashing down around us, people in even the wealthiest nations are mad as hell and reacting violently to what they view as an inadequate response to their tumbling economies.
The Telegraph (UK) warned last month that protests over governments' handling of the crisis "are widespread and gathering pace," and "may spark a new revolution": A depression triggered in America is being played out in Europe with increasing violence, and other forms of social unrest are spreading. In Iceland, a government has fallen. Workers have marched in Zaragoza, as Spanish unemployment heads towards 20 percent. There have been riots and bloodshed in Greece, protests in Latvia, Lithuania, Hungary and Bulgaria. The police have suppressed public discontent in Russia and will be challenged again at large gatherings this weekend. Consider a snapshot of a single week of unrest, courtesy of the Guardian:
Greece: "There are many wellsprings of the serial protests rolling across Europe. In Athens, it was students and young people who suddenly mobilized to turn parts of the city into no-go areas. They were sick of the lack of jobs and prospects, the failings of the education system and seized with pessimism over their future. "This week it was the farmers' turn, rolling their tractors out to block the motorways, main road and border crossings across the Balkans to try to obtain better procurement prices for their produce."
Latvia: "The old Baltic trading city had seen nothing like it since the happy days of kicking out the Russians and overthrowing communism two decades ago. More than 10,000 people converged on the 13th century cathedral to show the Latvian government what they thought of its efforts at containing the economic crisis. The peaceful protest morphed into a late-night rampage as a minority headed for the parliament, battled with riot police and trashed parts of the old city. The following day, there were similar scenes in Vilnius, the Lithuanian capital next door."
France: "Burned-out cars, masked youths, smashed shop windows and more than a million striking workers. The scenes from France are familiar, but not so familiar to President Nicolas Sarkozy, confronting the first big wave of industrial unrest of his time in the Elysée Palace. "France, meanwhile, is moving into recession, and unemployment is going up. The latest jobless figures were to have been released yesterday, but were held back, apparently for fear of inflaming the protests."
Iceland: "Proud of its status as one of the world's most developed, most productive and most equal societies, Iceland is in the throes of what is, by its staid standards, a revolution. "Riot police in Reykjavik, the coolest of capitals. Building bonfires in front of the world's oldest parliament. The yogurt flying at the free market men who have run the country for decades and brought it to its knees."
Britain (via the Times of London): "Wildcat strikes flared at more than 19 sites across the country in response to claims that British tradesmen were being barred from construction jobs by contractors using cheaper foreign workers."
Russia (via Al-Jazeera): "Thousands of protesters have rallied across Russia to criticize the government's economic policies and its response to the global financial crisis. "Russian police forcefully broke up many of the anti-government protests on Saturday, arresting dozens of demonstrators."
At least in Western Europe, cries of "burn the shit down!" are being heard in countries with some of the highest standards of living in the world -- states with adequate social safety nets; countries where all citizens have access to decent health care and heavily subsidized educations. Places where minimum wages are also living wages, and a dignified retirement is in large part guaranteed.The far ends of the ideological spectrum appear to be gaining currency as the crisis develops, and people grow increasingly hostile toward the politics of the status quo. The Financial Times quotes Olivier Besancenot, a young leader of "France's extreme left," promising "to reinvent and re-establish the anti-capitalist project." "We want the established powers to be blown apart," Besancenot said. Europe's far right is gaining momentum, too, using the economy and populist outrage over immigration to gain a legitimacy it hasn't enjoyed in some time.
Notably absent from the list of countries where the economic crunch is rending the social fabric is the good ole US of A, a state with the greatest level of economic inequality in the wealthy world. Outside of a few scattered and quickly contained protests, the citizens of the U.S. -- a country born of revolution, but with an elite that's been terrified of that legacy since immediately after its founding -- have been calm, despite opinion polls showing that Americans are more dissatisfied with the direction in which the country has been headed since they began measuring such things. It's a baffling disconnect, considering that real wages for all but the top 10 percent of the economic pile haven't increased in 35 years. It's more bizarre still when you consider that while European governments have handled their own bailouts relatively transparently, the U.S. government has doled out close to $10 trillion in bailouts, loan guarantees and fiscal stimulus -- if there were a million-dollar bill, that would be a stack of 10 million of them -- with a stunning lack of oversight or accountability.
Even the congressional commission charged with overseeing key parts of the banking bailout can't get answers to basic questions like "who's getting what?" Americans are rightfully angry about that state of affairs, but with a few small exceptions, quietly so. Why? It depends on whom you ask. In a 2006 interview with Harper's, Barack Obama shared a subtle, but rather fundamental observation about America's political culture: "Since the founding," he said, "the American political tradition has been reformist, not revolutionary." If there is to be positive change, Obama has argued, it must be gradual; "brick by brick," as he put it in one of his final campaign speeches. Mark Ames, author of Going Postal: Rage, Murder, and Rebellion -- From Reagan's Workplaces to Clinton's Columbine and Beyond, argues that Americans have been beaten down to a degree that they're now a pacified population, largely willing to accept any economic outrage its elites impose on them. In a 2005 interview with AlterNet, Ames said the "slave mentality" is stronger in the U.S. than elsewhere, "in part because no other country on earth has so successfully crushed every internal rebellion."
Slaves in the Caribbean for example rebelled a lot more because their oppressors weren't as good at oppressing as Americans were. America has put down every rebellion, brutally, from the Whiskey Rebellion to the Confederate rebellion to the proletarian rebellions, Black Panthers, white militias ... you name it. This creates a powerful slave mentality, a sense that it's pointless to rebel. Anyone who has witnessed the brutal police riots that have become so common since the infamous "Battle in Seattle" protests against the World Trade Organization in 1999 can tell you there's some merit to the argument. It's also the case that European societies tend to be more homogenous than the mishmash of tribes we call the United States. Whereas Americans are divided by religion, region, ethnicity, urban-rural tensions and all the other trappings of the "culture wars," the primary split in most European countries is class. Thomas Frank argued eloquently in What's the Matter With Kansas that those wedge social issues that the American right nurtures with such care obscure the fundamental differences between the rich and poor, the powerful and the disenfranchised.
Indeed, any hint of discussion of economic inequality in the U.S. is shot down with cries of "class warfare" -- exactly what is playing out in the streets of much of the world today. As the crisis deepens, as virtually every analyst predicts it will, that may well change. As The Nation's Bill Greider told Democracy Now's Amy Goodman, "you can't do this to people year after year -- that is, upturn their lives, take away what they thought they had earned, and so forth and so on, without provoking rather intense political reactions. ... We're just, just beginning to see a few bubbles like that around this country. I don't say we're going to have riots, but I think ... people, out of their own distress and anger, will organize their own politics, and they will make themselves seen and heard around this country." Stay tuned.
From Washington to Wall Street
The Fast Money traders and Simon Johnson, of the Peterson Institute for International Economics, discuss Washington's plans to fix Wall Street.
Why We’re Going To Insure The Toxic Assets At Banks
Sometime next week Barack Obama’s administration is going to reveal its new financial rescue package. Although FDIC boss lady Sheila Bair favors creating a bad bank to buy assets, and that may well be part of the final plan, it will not be the preliminary focus. Instead, it seems very likely that at the heart of the Obama Bailout will be some form of insurance for troubled assets on the balance sheets of banks. The idea would be for the government to guarantee that it will make up for any shortfall in an asset's value beyond a certain level. If defaults tick up on mortgages and recovery rates stay low, the government would simply pay banks for the losses on the securities backed by those mortgage.
So why is the Obama administration leaning to insuring the assets instead of buying them directly? We’d guess that the program to purchase assets turned out to be horrifyingly expensive. Banks are unwilling to shed the assets at steep discounts. Many bankers still believe that a lot of their troubled portfolios will be worth more once the "market dislocation" clears up. That assumption that these debt linked securities will be worth far more than current market pricing indicates we’re calling the Dislocation Ideology. But even if they were willing to give up on this Dislocation Ideology, they wouldn’t sell their bad assets to the government at market prices because this would render them insolvent.
When the government got around to figuring out what it would cost to overpay enough for the troubled assets that banks would come clean, the number was almost certainly beyond anything they had contemplated. How big could that bill be? Senator Charles Schumer has said that the bad bank could cost $3 trillion to $4 trillion. We’ve heard estimates even higher. One banker we spoke to said the bad bank would have to be prepared to spend as much as $8 trillion. Insurance provides a much more politically palatable way of bailing out the banks. Politicians won’t have to spend a dime on day one. They’ll claim that much of the insurance will prove unnecessary because the asset values will recover.
We're sure someone will say that taxpayers could even make money on the insurance, if the premiums charged to banks wound up being higher than the pay outs on the insurance. The budget makers will come up with a rose-tinted estimate of eventually payouts, and that estimate will be based on the idea that the troubled assets will recover their value. The Dislocation Ideology will become the official policy of the United States. Of course, if the Dislocation Ideology is wrong, the final costs of the insurance could be as high as the bad bank’s price tag. But those costs won’t be visible for years, allowing policy makers to escape responsibility for them.
Plea for Obama to avoid "Bad Bank"
From a patrick.net reader
President Obama, First I'd like to congratulate you on both your Presidency and your exceptional Inaugural address. Your words, if supported by your actions, are very inspiring. Second, I implore you to reconsider your current actions with respect to the Stimulus Package and the "Bad Bank" solution you and your advisors are currently proposing.
With respect to the stimulus package, you seem to be taking the exact same approach that President Bush and Treasury Secretary Paulson took, by trying to rush through Congress a massive 650 page bill which no one has had the time to review and properly evaluate. You ran on a campaign of "change" and yet your actions are not living up to your words.By naming Timothy Geitner as Treasury Secretary and by cramming this package through Congress on a compressed timetable, you are using the exact same tactics President Bush used and in doing so, you too, are putting Corporate and Banking interests ahead of American Taxpayers.
There are some of us who actually understand that the Government of the United States has no money to spend, it only has the ability to dictate how our current and future tax dollars are spent and your actions Mr. President are about to sentence generations of U.S. Citizens to a lifetime of Debt servitude. The CBO has estimated the interest payments on the new debt you are issuing to finance this short term stimulus package will amount to more than $347,000,000,000 or 40% of the stimulus package, in additional public debt.
Given the looming demographic nightmare this country is facing, with under-funded Social Security, Medicare and Pension Funds, we simply do not have Trillions of Dollars to waste attempting to delay by 12-24 months an unavoidable economic contraction. As famed Austrian economist Ludwig Von Mises has stated "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." All of your proposed actions are unfortunately putting us on a collision course with the latter outcome.
With respect to the "Bad Bank" proposal, I know in my heart that you understand how immoral it is to stick the American Taxpayer with all of the bad loans booked, securitized and acquired by financial institutions during this fraud-driven credit bubble. I also believe in my heart that the American people will eventually wake up to this reality as well. The Bad Bank proposal simply finalizes the process of Privatizing Economic gains and Socializing Economic losses and does so with no potential upside to the American Taxpayer. At least in a temporary nationalization the taxpayer can recoup some of its losses when the re-organized financial institution is sold back into the private sector. By shifting these bad loans to the public sector, you are sentencing the citizens of this country to a future of debt slavery, simply to maintain the wealth and power of the current debt and equity holders of America's insolvent financial institutions.
President Obama, as you are well aware, we live in a world economy where nominal wages in the U.S. will continue to contract until global wage arbitrage has reached a point of equilibrium. The unfortunate truth is that, short of a move toward protectionism, we are still a long way from this equilibrium point. And while the loss in nominal wages is assured, this does not necessarily need to result in a massive downward adjustment in American living standards. Living standards will only suffer if you continue to pursue policies which prevent debt levels from contracting and prices from falling, as would occur in a truly free market economy. By pursuing policies that place an artificial floor under inflated asset prices and by supporting unsustainable public and private debt levels you are committing current and future citizens of this country to a life of debt servitude, where shrinking wages are further stretched by artificially high costs for shelter and other necessities. This will not only suppress discretionary income in a consumption based economy, but will also have a huge negative impact on workforce mobility and will unnecessarily delay any future recovery.
In your Inaugural Address you paid homage to our Founding Fathers. I personally found this very inspiring and would encourage you to both study and find inspiration in our Founding Fathers unified opposition toward Central Banks. While history does not repeat itself, it does closely resemble itself and beginning in Oct, 2007 (coincidentally the 100 year anniversary of the Banking Panic of 1907), America finds itself once again in a most uncomfortable and eerily familiar position. As a concerned citizen, I ask that you find strength and guidance in the actions and principles of past Presidents like Thomas Jefferson and Andrew Jackson. In doing so you may avoid adding to the failures of past President Woodrow Wilson, who when faced with similar circumstances committed a very grave error which lies at the root of our current problems.
What we need to do in the long run will hurt us in the short run
For the United States to prosper over the long run, we need to reduce the share of total output that households consume. We need to increase the proportion of income that households and governments save. We need to increase investment in new plants, equipment and technology. We need to become less dependent on imports of goods and of capital. East Asia is a mirror image of our nation. China, along with Taiwan, Korea and other nations, needs to increase the fraction of total output that goes to meet the needs and wants of households. They need to produce less for export and more for domestic consumption. They need to save less and invest less, both in new physical capital, like factories and office buildings but also in financial capital, like bonds issued in the United States and Europe.
Both the United States and East Asia are on self-harmful trajectories that they simply cannot maintain over the long run. The problem is that neither seems to know how to make necessary changes. In both cases existing policies stem from powerful domestic political considerations. Moreover, both regions now face the most threatening short-term economic dangers in decades. A deep, widespread recession, a new world depression, is a real possibility. With cruel irony, the adjustments that we inevitably must make in the long run would increase the short-run dangers of financial sector failures, falling output and rising unemployment. Both regions are in a quandary. Right now, the United States is suffering the hangover of a consumption binge that lasted more than a decade. Credit was cheap. Mortgages were easy to get. Financial assets like 401(k) plans grew in value, year after year. Ditto for housing values. The federal government increased spending in many categories but lowered taxes. Consumer prices rose little compared to preceding decades.
China accomplished spectacular growth for decades, largely fueled by exports to wealthier countries. But part of its export performance grew out of the Chinese government buying up dollars and euros to keep those currencies valuable compared with the Chinese currency. It used the dollars bought in this export promotion effort to buy Treasury bonds and other dollar-denominated securities. Recently, U.S. household consumption of goods and services neared 70 percent of total output compared to the low 60-percent range that prevailed from World War II until the 1980s. National savings, the amount by which household, business and government income exceeds spending, historically was in the 9 percent to 14 percent range. Recently it has been near zero. Households need to spend less and save more. They cannot continue to rely on net worth that stems from increasing values of financial assets and housing. They have to actually set aside part of their income.
Government needs to save. Given the unwillingness of Congress, under the control of either party, to cut spending, that means increased taxes. Moderated consumption by households coupled with an end to persistent government deficits is essential to a healthier U.S. economy in the long run. But it would hurt the economy right now as it balances on the brink of a historic recession. Money creation by the Federal Reserve along with sundry federal stimulus programs are intended precisely to boost household and business spending. In the long run, China needs to produce more things for its still-poor populace to meet their needs and wants. It has to let its currency increase in value, and let exporting abate. But to do so right now would increase urban unemployment and social tensions that the communist regime already finds threatening.
There is no easy way for our society to transition from debt-financed high consumption to moderate sustainable growth. There is no easy way for China to shift from a reliance on domestic austerity and currency-manipulated exports to greater production to meet its still-enormous domestic needs. Countries make difficult changes only when they have courageous political leaders. Barack Obama may have potential, but without bipartisan leadership in Congress, he can accomplish little. China's bureaucratic government is even less promising. Don't get your hopes too high
Beyond the age of leverage: new banks must arise
Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt. The US could end up running a deficit of more than 10 per cent of gross domestic product this year (adding the cost of the stimulus package to the Congressional Budget Office’s optimistic 8.3 per cent forecast). Today’s born-again Keynesians seem to have forgotten that their prescription of a deficit-financed fiscal stimulus stood the best chance of working in a more or less closed economy. But this is a globalised world, where unco-ordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth.
There is a better way to go but it is in the opposite direction. The aim must be not to increase debt but to reduce it. Two things must happen. First, banks that are de facto insolvent need to be restructured – a word that is preferable to the old-fashioned "nationalisation". Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalisation after losses have meaningfully been written down. Bond?holders may have to accept either a debt-for-equity swap or a 20 per cent "haircut" (a reduction in the value of their bonds) – a disappointment, no doubt, but nothing compared with the losses when Lehman went under.
There are precedents for such drastic action, notably the response to the Swedish banking crisis of the early 1990s. The critical point is to avoid the nightmare of a state-dominated financial sector. The last thing America needs is to have all its banks run like the rail company Amtrak or, worse, the Internal Revenue Service. State life-support for moribund dinosaur banks is an expedient designed to avert the disaster of a generalised banking extinction not a belated victory for socialism. It should not and must not impede the formation of new banks by the private sector. So recapitalisation must be a once-only event, with no enduring government guarantees or subsidies. There should be a clear timetable for "reprivatisation" within, say, 10 years.
The second step we need to take is a generalised conversion of American mortgages to lower interest rates and longer maturities. The idea of modifying mortgages appals legal purists as a violation of the sanctity of contract. But there are times when the public interest requires us to honour the rule of law in the breach. Repeatedly during the course of the 19th century governments changed the terms of bonds that they issued through a process known as "conversion". A bond with a 5 per cent coupon would simply be exchanged for one with a 3 per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatised as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment.
Another objection to such a procedure is that it would reward the im?prudent. But moral hazard only really matters if bad behaviour is likely to be repeated. I do not foresee anyone asking for or being given an option adjustable rate mortgage for many, many years. The issue, then, is simply one of fairness. One solution would be for the government-controlled mortgage lenders and guarantors, Fannie Mae and Freddie Mac, to offer all borrowers – including those on fixed rates – the same deal. Permanently lower monthly payments for a majority of US households would almost certainly do more to stimulate consumer confidence than all the provisions of the stimulus package, including the tax cuts. No doubt those who lose by such measures will not suffer in silence. But the benefits of macroeconomic stabilisation will surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities. Only a Great Restructuring can end the Great Repression. It needs to happen soon.
Obama predicts more bank failures
US President Barack Obama has warned that more US banks are likely to fail, as the full extent of their losses in the economic crisis becomes clear. Speaking to NBC News, Mr Obama said "some banks won't make it" but stressed that people's deposits would be safe. He has asked Treasury Secretary Timothy Geithner to draw up guidelines for banks receiving taxpayers' money. Meanwhile, he warned of a "difficult next few days" as the Senate begins to debate his $800bn (£567bn) rescue plan. In an interview with NBC, Mr Obama said it was likely the banks had not yet fully acknowledged the extent of their losses. "The banks, because of mismanagement, because of huge risk-taking, are now in a very vulnerable position," he said. "We can expect that we're going to have to do more to shore up the financial system." The president, who has been critical of bank executives receiving bonuses despite taking government bail-outs, also announced there would be new rules for such banks. "If a bank or a financial institution is getting relief then they've got to abide by certain conditions," he said.
The president made it clear he was taking responsibility for turning round the US economy before the next presidential election in 2012, saying he could expect only one term in office if it was not fixed in the next three years. The interview was short on details, with the president declining to comment on whether he planned to create a "bad bank" to buy toxic assets from other financial institutions. He said he did not want to pre-empt an announcement planned for next week. The president and Vice-President Joe Biden are due to meet congressional leaders later on Monday to encourage them to move forward on the $800bn economic stimulus package. Mr Obama said he was confident that Republicans would be able to support the final version of the legislation, although it passed in the House of Representatives without a single Republican vote. He acknowledged that the two parties were not agreed on all aspects of the plan. "But what we can't do is let very modest differences get in the way of the overall package moving forward quickly," he said.
It is unlikely that it will be able to pass the Senate without Republican support because the Democrats do not have the majority that they would need to vote down any potential delaying tactics. As debating began in the Senate, leader of the Republicans in the chamber, Mitch McConnell, signalled his intention to oppose the bill - saying that even members of Mr Obama's own party were not happy with the proposals. "There is considerable Democratic senatorial unrest about this package," he said. "I think there is a bipartisan feeling that this is not the way to get the economy moving. And hopefully we'll see that exhibited on various amendments where we may have some bipartisan success in modifying the bill." The Democrat leader in the Senate, Harry Reid, said he hoped the measures would be approved by the end of the week.
Mr Obama's comments came as fresh official data indicated the problems facing the wider US economy show no signs of lessening. The Treasury Department announced it would need to borrow $493bn in the first three months of this year. The figure is a record amount for the January-March period, but is smaller than the $569bn the government borrowed from October to December last year - which was the all-time high for any quarter. US consumer spending fell for a sixth consecutive month in December, according to the Commerce Department. Although the decline was expected, the 1% drop was worse than the 0.9% contraction predicted by analysts. Meanwhile, construction spending fell for a third month in a row in December, dropping 1.4%.
Goldman Says Buy Puts as U.S. Stocks May Resume Drop
nvestors should buy put options on the Standard & Poor’s 500 Index because the benchmark for U.S. stocks may fall back to the 11-year low it reached in November, Goldman Sachs Group Inc. said. "Dismal" fourth-quarter profits and forecasts from companies as well as waning investor confidence in President Barack Obama’s economic stimulus plan may drive the S&P 500 toward 752.44 in the next month, Goldman strategists said. For investors using a "put spread" strategy, the highest payoff would be generated through buying March 825 puts and selling March 745 puts, Krag "Buzz" Gregory and John Marshall wrote in a report distributed to clients today.
That trade would produce $1.85 in profit for every $1 invested should the S&P 500 drop to its November low, they said. The index slumped a third day, losing 0.1 percent to 825.44 today. "If the index continues to grind lower, put spreads look attractive given the current volatility landscape," the New York-based options strategists said. "Put spreads have higher payout ratios than outright put hedges given elevated volatility." The U.S. economy probably shrank this quarter at a faster rate than the 3.8 percent annual pace in the final three months of 2008, according to Goldman Sachs economists.
"Our U.S. economics team sees little evidence that the downward spiral is abating," the options strategists wrote. Selling options when using a put-spread strategy helps finance the transaction because the seller collects the premium paid by the buyer. Spreads also cap profits if the stock falls below the lower strike price. Puts give the right to sell a security for a certain amount, the strike, by a given date. The S&P 500 ended last year at 903.25, then slumped 8.6 percent to 825.88 last month for its worst January retreat as companies from Procter & Gamble Co. to Caterpillar Inc. and Allstate Corp. reported earnings that trailed estimates.
Fed extends special lending programs
The U.S. Federal Reserve extended liquidity facilities for domestic financial institutions and currency swap lines with 13 central banks on Tuesday to keep money flowing in a banking system shattered by the worst financial crisis since the Great Depression. "Continuing substantial strains in many financial markets" made the actions necessary, the Fed said in a statement. The Fed said it would extend, through Oct. 30, facilities providing loans and liquidity to the commercial paper and money markets. The U.S. central bank is also keeping open through that date facilities providing loans and Treasuries to primary dealers.
The Fed further said it is extending currency swap lines with Australia, Brazil, Canada, Denmark, England, the euro zone, South Korea, Mexico, New Zealand, Norway, Singapore, Sweden and Switzerland. Japan will consider the extension at its next policy meeting, the Fed said. The liquidity facilities - the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) - and the swap lines had been set to expire on April 30.
FDIC seeks to triple Treasury Dept borrowing power
The Federal Deposit Insurance Corp is seeking to more than triple its credit line with the U.S. Treasury Department to $100 billion, a move to give it more financial power to handle U.S. bank failures, the agency said on Monday. The FDIC and Congress are working to boost the agency's current $30 billion borrowing power in legislation being crafted by U.S. Rep. Barney Frank, chairman of the House Financial Services Committee. The move comes as the FDIC's deposit insurance fund has shrunk due to a significant uptick in bank failures over the past year. The insurance fund's value dropped 24 percent in the 2008 third quarter to $34.6 billion.
"We would maintain that it's prudent planning to have contingency plans in place," said FDIC spokesman Andrew Gray. The House bill being prepared by Frank would also make permanent Congress's October decision to temporarily increase deposit insurance to $250,000 per customer account. The increase was hurriedly adopted as a temporary way to increase confidence in the struggling U.S. banking system. Frank said the FDIC's desire to increase its borrowing power is a safeguard to ensure the agency can quickly pay out insured deposits when a bank fails and the FDIC is named as a receiver.
"They have no immediate need for it, but they just want to make sure they're not constrained in the decision by a lack of the insurance fund," Frank told reporters after meeting Treasury Secretary Timothy Geithner on Monday. "They don't want to say, 'We have to keep this bank open longer than it should because we don't have enough money.'" If the FDIC borrows funds through the Treasury Department, it would pay back the money through a special assessment on the banking industry. Frank's legislation is expected to be approved this week by the House Financial Services Committee. It would then go to the House floor with Democratic leaders setting a course for debate.
A total of 25 U.S. banks were seized by bank regulators in 2008, up from only three in 2007. So far this year, six banks have failed as the financial system grapples with mortgage securities and other distressed investments that weighed down balance sheets.
JPMorgan to serve as custodian of Fed program
JPMorgan Chase & Co. said Tuesday that it has been selected by the Federal Reserve to serve as custodian of the government's program to buy mortgage-backed securities. The program, which began on Jan. 5, will see the Federal Reserve buy up to $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae in an effort to improve conditions in the financial markets and help boost the mortgage and housing markets. The Federal Reserve also selected four investment managers, BlackRock Financial Management Inc., Goldman Sachs Asset Management LP, Pacific Investment Management Co. and Wellington Management Co. to assist with the program.
GM, Ford Say Sales Tumbled at Least 40%; Toyota Dives
General Motors Corp. and Ford Motor Co. said U.S. sales plummeted at least 40 percent in January and Toyota Motor Corp. dived by almost a third, dragging the world’s biggest auto market toward the worst month since 1982. The declines were 49 percent at GM, the largest U.S. automaker; 40 percent at Ford and 55 percent for Chrysler LLC. Toyota dropped 32 percent, Honda Motor Co. fell 28 percent and Nissan Motor Co. was down 30 percent. Today’s reports showed the toll of sinking confidence among car and truck buyers. GM, Ford and Chrysler said January deliveries may have tumbled to an annual rate of fewer than 10 million vehicles, after full-year sales averaged about 16 million this decade.
"In this downward spiral, as a company it’s hard to plan your business and as a consumer it’s hard to change your sentiment," said Joe Barker, an analyst at consulting firm CSM Worldwide Inc. in Northville, Michigan. "We’re all looking for some sense of stability in the sale rate." Weak consumer and business demand adds to the challenges facing GM and Chrysler as they work to restructure with the help of $17.4 billion in federal loans, and ratchets up pressure on Ford, which says it doesn’t need government aid. "If 20 percent to 30 percent retail declines persist, it would be more difficult" for Ford to avoid accepting U.S. loans, Standard & Poor’s equity analyst Efraim Levy in New York wrote in a report today. He rates Ford shares as "hold."
Light vehicles haven’t sold at an annual pace of fewer than 10 million units in any month since the 9.8 million rate posted in August 1982, according to Autodata Corp. of Woodcliff Lake, New Jersey. The last full year of fewer than 10 million sales was 1970, according to trade publication Automotive News. Hyundai Motor Co. was alone among large automakers with a gain, saying sales rose 14 percent. January’s industrywide sales rate may have slipped to fewer than 10 million vehicles, Chrysler President James Press said today in an interview. Ford also raised that prospect, and Michael DiGiovanni, the chief sales analyst at Detroit-based GM, estimated the rate at 9.8 million. December’s figure was 10.3 million and November’s was 10.2 million, the lowest in 26 years.
GM said January sales fell to 129,227 cars and trucks, including a 58 percent decline in cars and 43 percent drop in light trucks. The automaker said it will cut North American first-quarter production 57 percent to keep pace with flagging demand. Ford’s sales to non-business customers were in line with company expectations and retail demand "appears to be stabilizing," the Dearborn, Michigan-based automaker said in a statement. Ford initially released a tally that didn’t include Volvo, showing a 39 percent drop for its domestic brands. January had 26 selling days, 1 more than a year earlier. Some automakers release results adjusted for sales days, meaning the totals will be about 4 percent lower than unadjusted numbers. Bloomberg uses unadjusted figures.
Plummeting sales hamper efforts by GM and Chrysler to pare labor costs, cut debt, trim dealers and idle plants to reduce cash use and make a case to keep $17.4 billion in loans from the U.S. Treasury that kept them from slipping into bankruptcy. The companies face a Feb. 17 federal deadline for a progress report. GM and Auburn Hills, Michigan-based Chrysler are offering cash and vehicle vouchers to entice more factory workers to leave and ended a 25-year-old program that assured union employees most of their pay even when there weren’t any tasks for them to perform.
Buyers shunned showrooms last month as shrinking payrolls sent consumer confidence plunging to the lowest in 42 years of recordkeeping by the Conference Board. The Labor Department probably will say on Feb. 6 that January nonfarm job losses totaled 535,000, based on economists surveyed by Bloomberg. Tight credit also is damping sales, said George Pipas, Ford’s sales analyst. The Treasury Department provided a $6 billion bailout to GMAC LLC, the lender affiliated with GM, and $1.5 billion in loans to Chrysler Financial to help ease borrowing.
Car sales: From bad to worse
Consumers may have had an easier time getting car loans last month, but don't look for that to fuel a rebound in battered auto sales when automakers report their January sales Tuesday. Auto finance units GMAC and Chrysler Financial received $7.5 billion in federal loans between them since the waning days of December. That allowed them to make more attractive financing offers to a wider range of potential clients. But forecasts of a modest pickup in sales to consumers are being more than offset by a sharp plunge in purchases by rental car companies, which in a typical year can buy close to 3 million vehicles a year.
That means that the outlook for auto sales in January and through the first half of 2009 is likely to be even weaker than the industry was forecasting just a month ago. In fact, the big decline in rental car company purchases could lead to the worst month for auto sales since 1982, even worse than any of the months reported in the disastrous fourth quarter. Sales tracker Edmunds.com is forecasting that industrywide U.S. sales fell 30% in January. January is typically the start of the car buying season for rental car companies as they start gearing up for their busy summer months. But the rental car companies, hit by a sharp drop in demand and a weak market for selling their older vehicles, are in the process of pulling back on purchases.
Pat Farrell, a vice president at Enterprise Rental Car, said the company started trimming its purchases last summer as the slowdown in the economy became evident. The company, which also owns the National and Alamo brands, is the world's largest purchaser of cars -- it buys about 800,000 vehicles bought in a typical year. When Enterprise experienced an even sharper drop in demand in October, it further cut back on its orders, a pullback that took three months to implement and will be felt in its January sales numbers. Farrell would not disclose how much purchases were cut at the privately-held company, but he said it would be more than 10%. He said the company is holding onto vehicles about two months longer than normal to make up for the reduced purchases.
Richard Broome, senior vice president at Hertz, also pointed to a double-digit percentage drop in demand for its cars and the weak resale market as the reasons it is pulling back on new car purchases. "The million dollar question is what will demand be during the summer. At this point it's impossible to forecast that," said Broome. "We want to remain in the market and remain one of the U.S. automakers' biggest customers. But the market dynamics now are not favorable." So far this year, General Motors and Ford Motor have both trimmed their forecasts for 2009 sales from the depressed levels they were projecting in December when they submitted turnaround plans to Congress. GM executives specifically cited weak fleet sales and rental car company purchases when they discussed GM's lowered January sales forecast.
GM chief sales analyst Mike DiGiovanni told analysts late last month that a sharp drop in fleet sales could take the seasonally adjusted annual sales rate, or SAAR, below 10 million in January. The industry SAAR, which was at 15.3 million a year ago even as the recession started, hasn't fallen short of the 10 million benchmark since 1982. The only bright spot for the industry is that there could be a modest uptick in the sales of cars and trucks to consumers. "We're clearly seeing stabilization in the retail [sales] rate in the U.S. market," DiGiovanni said last month. But this slight uptick is not nearly enough to lead to a significant rebound in total sales any time soon, other experts say.
"As a rule right now, people are holding onto cars longer, whether it's consumers or rental car companies," said Jessica Caldwell, industry analyst. Edmunds.com The easier financing probably won't woo consumers back into dealerships either -- not as long as there's so much uncertainty about the economy and the job market. "You still have the economy crushing the consumer," said Bob Schnorbus, chief economist for J.D. Power & Associates. "If you have some easing of credit, maybe you're preventing a month-by-month spiraling downward. But at best we're looking for retail sales to be relatively flat."
GM, Chrysler Gain Momentum on Labor Cuts to Keep Aid
General Motors Corp. and Chrysler LLC, propped up by $17.4 billion in U.S. loans, are speeding up efforts to pare union payrolls and meet a Feb. 17 deadline to justify keeping the money. Buyouts are being offered to almost all their 91,600 United Auto Workers members to make room for new employees earning half of the $28 hourly wage of their predecessors. The UAW’s “jobs bank,” in which workers were paid when they didn’t have duties, ended at GM yesterday, a week after being halted at Chrysler. “With everything that has happened over the past 24 hours, it’s almost desperation pace,” Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan, said yesterday. “When you offer all of your hourly workers a buyout, that’s certainly a sign of a troubled organization.”
Bringing in lower-cost employees and unwinding programs such as the jobs bank moved Detroit-based GM and Chrysler closer to two hurdles they must clear to retain the federal aid. This month’s progress report sets the stage for a final deadline on March 31 to convince the Treasury the automakers can be viable. GM and Chrysler are among the automakers that will report January U.S. sales today, and may extend their streak of declines of at least 30 percent to a fourth straight month. “There are two forces that are propelling this,” said Harley Shaiken, labor relations professor at the University of California at Berkeley. “One is their desire to further reduce the workforce because of the collapse in sales. And second, they want to comply with that Feb. 17 deadline.”
While working on labor costs, GM also is in talks to pare $27.5 billion in unsecured debt to about $9.2 billion in a swap for equity, and it plans to shut dealers and reduce obligations to a union retiree health fund by 50 percent to $10.2 billion in a separate equity swap. A UAW official also said yesterday that the biggest U.S. automaker is in talks to sell a medium-duty truck unit to Japan’s Isuzu Motors Ltd. as it tries to unload assets including the AC Delco parts group and the Hummer and Saab brands. The Treasury Department set the loan terms under then- President George W. Bush in December, bailing out GM and No. 3 Chrysler after the companies said they would run out of operating funds as early as last month. The automakers say they oppose the idea of filing for bankruptcy.
UAW President Ron Gettelfinger has said the union will do its part to help find savings as long as other stakeholders accept concessions. The UAW agreed in 2007 to pay new employees half the wages of current workers -- a split the union resisted for most of the past seven decades -- and transfer liability for retiree health care to a union-run fund. GM Chief Executive Officer Rick Wagoner said he will work for $1 a year, and other executives agreed to pay cuts as the automaker also slashed benefits and eliminated jobs for salaried workers. “One of the things the automakers are trying to do is to send a message to all involved that everyone needs to participate in this,” Virag said. “Bondholders are trying to dig in their feet and say we can’t give any concessions. The message being portrayed is that everyone is going to have to make some concessions and share in the pain.”
GM fell 16 cents, or 5.5 percent, to $2.73 at 10:40 a.m. in New York Stock Exchange composite trading. GM’s 8.375 percent note due in July 2033 gained 0.25 cent to 15 cents on the dollar yesterday, yielding 55.7 percent, according to Trace, the bond- pricing service of the Financial Industry Regulatory Authority. GM confirmed the buyouts today without giving details, while Chrysler spokeswoman Shawn Morgan declined to go beyond a company statement yesterday confirming that all 26,800 of its U.S. hourly workers were eligible. UAW spokesman Roger Kerson didn’t return a phone call. The GM program covers about 62,000 workers willing to retire or quit and consists of a $25,000 voucher to buy a new auto and $20,000 in cash, said a UAW official, who didn’t want to be identified because the details are private.
GM is aiming the offers at about 22,000 U.S. union workers who are eligible to retire, company spokesman Tony Sapienza said in an interview. Chrysler is offering a $50,000 cash payment and a voucher for $25,000 to purchase a new vehicle for workers who are eligible to retire, said another UAW leader, who also didn’t want to be named because the specifics haven’t been announced. Workers not eligible for retirement are being offered $75,000 in cash plus a $25,000 voucher, the union leader said. CEO Robert Nardelli told employees last week that Auburn Hills, Michigan-based Chrysler wants to trim prices it pays for parts and reduce dealers’ margins on vehicle orders. Cerberus Capital Management LP’s Chrysler will try to cut debt “to levels that can be adequately supported by the company’s ongoing cash flow capabilities,” he said in an e-mail.
Ford Motor Co., which hasn’t sought emergency U.S. loans, doesn’t have a plan to offer additional buyouts at this time, spokeswoman Marcey Evans said yesterday. Ford said last week that its UAW jobs bank program is ending and announced a $14.6 billion annual loss, the biggest in its 105-year history. The jobs bank program started in 1984 as part of an agreement to help prevent firings of workers replaced by robots or other productivity improvements. “Abolishing the job bank doesn’t do much,” Virag said. “It’s more of a sign, the significance of it rather than the actual losing of it.”
Foreclosures dominate home sales
Real estate values around the nation have collapsed, and sales of foreclosed and "underwater" homes now dominate many housing markets, according to a report released Tuesday. The report, from Zillow.com, a real estate Web site, revealed that with foreclosures soaring, nearly 20% of the nation's home sales in 2008 were of bank-repossessed properties. Another 11% were short sales, in which homeowners owed more in mortgage debt than their homes were worth. Madera, Calif., had the highest percentage of these distressed sales: 54.6% of all transactions there were foreclosed homes, and another 3.4% were short sales. In Merced, Calif., 53.4% of sales were foreclosures and 4.8% were short sales. In nearby Stockton, 51.1% were foreclosures and 5.4% were short sales.
"As more markets turn down and markets that were already down go deeper, the pace at which value is being erased from the U.S. housing stock is rapidly increasing," said Stan Humphries, Zillow's vice president in charge of data and analytics. "More value [was] wiped out in the fourth quarter of 2008 than was eliminated in all of 2007," Humphries said. About $3.3 trillion in home equity was erased in 2008, with $1.4 trillion of that wipeout coming in the fourth quarter alone, according to Humphries. More than $6 trillion in value has been lost since the market peaked in 2005. Those equity losses have put many homeowners underwater, where they're extremely vulnerable to foreclosure. These owners can't tap home equity for the cash they need to pay bills when they run into rough financial patches, and they often find it impossible to refinance - lenders will not loan more than the property is worth.
In the United States, 17.6% of all homes are now underwater, according to Zillow, as are 41.2% of all mortgages for homes bought in the past five years. The worst-hit cities are in the once-booming Sun Belt. In Las Vegas, 61.4% of all homes are underwater. Because so many homes are worth less than their mortgage balances, an increasing number have to be sold short. But short sale transactions can take a long time to complete, because lenders have been having trouble keeping up with the flood of requests. "The speed of short sales is a function of the resources being allocated to them by lenders, and those resources are being stretched to the limit," Humphries said. That means lenders may not act on approving short sales for months. The deals cannot go forward without their approval, because the banks must agree to forgive the difference between what they're owed and what the sale brings in. As the time it takes to arrange short sales lengthens, they become harder to complete.
One example of how price declines can doom a short sale occurred recently in Phoenix. Curtis Johnson, a real estate broker there, worked with a health care worker whose hours were being cut and who could no longer afford her mortgage. She fell behind and decided to sell. Johnson was able to find a buyer willing to pay $183,000, and got an approval form the lender. The owner confidently moved out, got a new place and started a new life. But the lender folded and the mortgage went to a new servicer, who took six weeks to approve the deal. "Unfortunately, the buyers who were approved were no longer interested because the real estate market had dropped significantly," Johnson said. "They wrote a new offer, considerably lower then the first, and it was time to start over."
Two more offers eventually fell through before a new buyer was found and the owner's bank approved the price, this time at $163,000. On the day of that closing, however, the parties discovered that the buyer's lender had run out of funds and dropped out of the deal. The home went to foreclosure auction before another sale could be arranged. The house is now on the market for $139,900. "[The house is] listed for less than what would have been received had the bank been willing to work with us, and still has not yet sold," Johnson said.
Distressed sales like that depress the market for all homeowners. Regular sellers in cities dominated by foreclosures have to adjust their prices downward to compete. The percentage of homes sold for less than what their owners originally paid has leaped up in the past couple of years. In the United States as a whole, 34.6% of the sales made in 2008 were done at a loss. In Merced, 71.6% of all sales last year were for less than the seller paid. Stockton, Modesto and Las Vegas all had in excess of 68% of all homes being sold at a loss. Foreclosures beget more foreclosures by adding inventory to the market, which depresses prices, which increases foreclosures, according to Humphries. "The vicious cycle continues," he said.
U.S. Property Owners Lost $3.3 Trillion in Home Value Last Year, $1.4 Trillion in Q4
The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession, Zillow.com said. The median estimated home price declined 11.6 percent in 2008 to $192,119 and homeowners lost $1.4 trillion in value in the fourth quarter alone, the Seattle-based real estate data service said in a report today. "It’s like a runaway train gaining momentum," Stan Humphries, Zillow’s vice president of data and analytics, said in an interview. "It’s difficult to say when we’ll see a bottom to the housing market."
The U.S. economy shrank the most in the fourth quarter since 1982, contracting at a 3.8 percent annual pace, the Commerce Department said on Jan. 30. Record foreclosures have pushed down prices as unemployment rose. More than 2.3 million properties got a default or auction notice or were seized by lenders last year, according to RealtyTrac Inc., a seller of data on defaults. About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006 and last year’s decline was almost triple the $1.3 trillion lost in 2007, Zillow said. Values have dropped for eight straight quarters. They fell in Manhattan for the first time since Zillow began including the New York City borough in its records two years ago.
Manhattan’s estimated median price dropped 5.8 percent to $914,544. Seattle and Portland, Oregon, values tumbled 12.1 percent and 11.7 percent, respectively, the first time those cities dropped more than the national decline, Zillow said. More than 2.6 million U.S. jobs were cut in 2008 and the unemployment rate rose to 7.2 percent in December, the highest in almost 16 years, the Labor Department said. "A witch’s brew of economic insecurity, foreclosures and tightened lending standards are helping to keep hard-hit markets down and to widen the scope of markets showing declines," Humphries said in a statement accompanying the report. The number of homeowners with negative equity, or those who owed more on their homes than the property was worth, rose to 17.6 percent from 14.3 percent in the third quarter, Zillow said. The company began its quarterly reports in 2006.
"Negative equity will trigger new foreclosures, and that will add to inventory and depress prices," Humphries said. Almost 90 percent of the 161 metropolitan areas Zillow surveys showed values falling in the fourth quarter, including Rochester, New York and Winston-Salem, North Carolina, which had previously held up, Zillow said. The company compiles data from multiple listing services, county assessors and recorders, and information from its users. Estimated median prices tumbled 6.2 percent to $395,478 in the New York-Northern New Jersey-Long Island metropolitan area. They fell 21 percent to $410,692 in Los Angeles. Values dropped 26.8 percent to $182,483 in Las Vegas and decreased 22.3 percent to $179,847 in Phoenix, according to Zillow. Fayetteville, North Carolina, led the nine Zillow markets showing price increases, with a 6.9 percent gain to a median $112,737. Values in Yakima, Washington, advanced 6.2 percent to $134,545. Utica-Rome, New York, rose 5.3 percent to $107,595, according to Zillow.
What If The Real Estate Market Doesn’t Recover?
The real estate market has to recover eventually, doesn’t it? Maybe, maybe not. Blasphemy you say? It really depends on what your definition of "eventually" is. You would be hard pressed to find someone who doesn’t know that there was a stock market crash in 1929. That crash was one of the precursors to the Great Depression of the 1930s. But how many people would know that the stock market’s 1929 peak wouldn’t be reached again for almost 30 years? If you adjusted the peak for inflation that peak wasn’t reached again until the mid-1960s. That’s a pretty long "eventually."
There are many that feel that the housing market crash may lead to our next great depression. Certainly the politicians are scrambling to find a way to prevent that from happening. They are throwing everything at it that they can think of in the hope that something works. But surely we can’t compare the stock market crash to the housing collapse, can we? It is different isn’t it? Sure it’s different, but in many ways it’s very much the same.
- An overheated market where prices were bid up to irrational levels.
- Excessive use of leverage in the form of easy credit.
- Misguided Federal Reserve monetary policy
- A banking structure lacking oversight.
- Amateur investors lured into the market with the vision of easy money.
Stock market crash or real estate market collapse? Both, and a devastated economy followed.
Everyone wants to believe in a recovery. After all, people need to live somewhere and they will buy when renting is perceived as being more expensive that owning. Or will they? Maybe not. After the 1929 stock market crash many investors who were burned by the collapse never returned. What they did, however, was talk about how dangerous it was to invest in that manner and the scars were passed on to the younger generation. That younger generation didn’t touch the stock market either. That’s why it took three decades for stocks to reach their previous high point. How many people who lost homes to foreclosure are going to be eager to buy a house again? Many real estate investors lost a tremendous amount of money and dignity in the process and will look for safer ways to invest. It doesn’t matter how easy borrowing becomes if people don’t want the money.
What many of the former investors will do is talk about how risky real estate investing is. Will they pass this fear on to the next generation? Everyone has a theory of what the future of real estate will bring. For most people that theory is simply what they want to believe or what they hope will happen. As far as I’m concerned, investing for appreciation is a fool’s game. If prices rise, fantastic, but I’m not going to base investment decisions on something that may or may not happen. I will invest in real estate because I am able to get it significantly under current market value and/or it will provide good cash flow as a rental. For those who wish to speculate on appreciation I say good luck with that.
If Stupidity got us into this mess, then why can’t it get us out? – Will Rogers
The Ugly Truth: America's Economy is Not Coming Back
President Barack Obama and his economic team are being careful to couch all their talk about economic stimulus programs and bank bailout programs in warnings that the economic downturn is serious and that it will take considerable time to bounce back. I’m reminded of an experience I had with Chinese medicine when I was living in Shanghai back in 1992. I had come down with a nasty case of the flu while teaching journalism at Fudan University on a Fulbright Scholar program. A Chinese colleague suggested I go to the university clinic. When I told him there wasn’t much point since doctors couldn’t do much for the flu besides recommend fluids and bed rest, he said, "That’s Western doctors. You could go to the Chinese medicine doctors at the clinic. They can help you."
I figured, what the hell, and we went. The doctor inquired into the lurid details of my illness—how my bowel movements looked, the color of the mucus in my nose, etc. He didn’t really examine me physically. Then he prescribed an incredible number of pills and teas and sent me home with a huge bag of stuff, and instructions on the regimen for taking them through the course of each day. I followed the directions dutifully, and my colleague came by each day to check on my progress. By the fifth day, when I was still running a fever and feeling terrible, I told him I didn’t think the Chinese medicine was working. He replied confidently, "Chinese medicine takes a long time to work." I laughed at this. "Sure," I said. "But the flu only lasts a week or so, and now, when I get better, you’ll say it was the Chinese medicine, right?" He smiled and agreed. "Yes. You are right."
Obviously the Obama administration recognizes that it needs to keep the finger of blame for the current economic collapse squarely pointed at the Bush administration, which is certainly fair in large part (though the Clinton deregulation of the banking industry played a major part in the financial crisis and its enthusiastic promotion of globalization began the massive shift of jobs overseas that has left the nation’s productive capacity hollowed out). But it also seems to recognize that it cannot tell the bitter truth, which is that our national economy will never "bounce back" to where it was in 2007.
America, and individual Americans, have been living profligately for years in an unreal economy, propped up by easy credit which inflated the value of real estate to incredible levels, and which led people to spend way beyond their means. Ordinary middle-class working people have been encouraged to buy obscenely oversized homes at 5% down, or even no down payment. They have been lured into buying cars the size of trucks, one for each driving-aged member of the family (in our town, so many high school kids drive to school that the school ran out of parking spaces and the yellow school buses, largely empty on their runs, are referred to by the students as the "shame train," an embarrassment to be seen riding). They’ve installed individual back-yard swimming pools, unwilling to share the water with their neighbors in community pools. Boring faux ethnic restaurant franchises of all kinds have befouled the landscape, filling up with families too stressed out to cook, and willing to endure over-salted, over-priced and tasteless cuisine and tacky plastic décor night after night.
Now this is all crashing down. Property values are in free-fall. Car sales have fallen off a cliff. Joblessness is soaring (At present, it’s approaching an official rate of 8%, but if the methodology used in 1980, before the Reagan administration changed it to hide the depth of that era’s deep recession, were applied, it would be 17% today, or one in six workers). Eventually, the economic slide will hit bottom and begin its slow climb back, as all recessions do, but there will be no return to the days of $500,000 McMansion developments, three-car garages and a new car every two or three years for both parents plus a car for each highschooler. Not only will banks no longer be able to offer such credit to clients. People, having been burned, will not be willing to borrow so much. Company health care benefits, pension programs or 401(k) matching programs that were slashed during this downturn will not be restored when the economy picks up again.
Over the last 20 years, America has degenerated into a nation of consumers, with 72 percent of Gross Domestic Product (sic) now being accounted for by consumer spending—most of it going for things that are produced overseas and shipped here. That is not an economic model that is sustainable, and it is a model that has just suffered what is certainly a mortal blow. What we are now seeing is the beginning of an inevitable downward adjustment in American living standards to conform with our actual place in the world. As a nation of consumers, and not producers, with little to offer to the rest of the world except raw materials, food crops, military hardware and bad films (none of which industries employ many people), we are headed to a recovery that will not feel like a recovery at all. Eventually, productive capacity will be restored, as lowered US wages make it again profitable for some things to be made here at home again, but like people in the 1930s looking back at the Roaring 20s of yore, we are going to look back at the last two decades as some kind of dream.
It would be better if the new administration would be honest about this, because with honesty, we could have a recovery program that would actually address the real critical issues facing the country—the decline of our educational system, the irrationality of official promotion of home ownership that has led to the proliferation not just of suburbs but of exurbs, the over-reliance on the automobile for transportation, the unprecedented waste of resources, the pillaging of the environment, not to mention the decimation of the retirement system and the creation of a vast medical-industrial complex that is sucking the life-blood out of families and businesses alike.
With honesty, we could also confront the other big obstacle to national recovery—the nation’s obsession with militarism and foreign wars. The honest truth is that the US is technically bankrupt and in a state of chronic decline, and yet the nation persists in spending a trillion dollars a year on war and preparations for war, as though America were in mortal danger from foreign enemies. The truth is that we are not threatened by Communism, by drug lords, or by Muslim Jihadists in any serious way. Rather, we have become our own worst enemy. The administration could start by telling us all this straight up, but the problem is, most of us probably don’t want to hear it, which explains why we’re not hearing it. It also explains why we’re about to blow another trillion or so dollars on propping up failing banks, funding pointless highway and bridge construction, and blowing up illiterate peasants in remote places like Afghanistan and Pakistan.
Bailouts for Bunglers
Question: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash. Am I being unfair? I hope so. But right now that’s what seems to be happening. Just to be clear, I’m not talking about the Obama administration’s plan to support jobs and output with a large, temporary rise in federal spending, which is very much the right thing to do. I’m talking, instead, about the administration’s plans for a banking system rescue — plans that are shaping up as a classic exercise in "lemon socialism": taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.
When I read recent remarks on financial policy by top Obama administration officials, I feel as if I’ve entered a time warp — as if it’s still 2005, Alan Greenspan is still the Maestro, and bankers are still heroes of capitalism. "We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system," says Timothy Geithner, the Treasury secretary — as he prepares to put taxpayers on the hook for that system’s immense losses. Meanwhile, a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama’s top economic adviser, "think governments make poor bank managers" — as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.
And this prejudice in favor of private control, even when the government is putting up all the money, seems to be warping the administration’s response to the financial crisis. Now, something must be done to shore up the financial system. The chaos after Lehman Brothers failed showed that letting major financial institutions collapse can be very bad for the economy’s health. And a number of major institutions are dangerously close to the edge. So banks need more capital. In normal times, banks raise capital by selling stock to private investors, who receive a share in the bank’s ownership in return. You might think, then, that if banks currently can’t or won’t raise enough capital from private investors, the government should do what a private investor would: provide capital in return for partial ownership.
But bank stocks are worth so little these days — Citigroup and Bank of America have a combined market value of only $52 billion — that the ownership wouldn’t be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises. My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome. If news reports are right, the bank rescue plan will contain two main elements: government purchases of some troubled bank assets and guarantees against losses on other assets.
The guarantees would represent a big gift to bank stockholders; the purchases might not, if the price was fair — but prices would, The Financial Times reports, probably be based on "valuation models" rather than market prices, suggesting that the government would be making a big gift here, too. And in return for what is likely to be a huge subsidy to stockholders, taxpayers will get, well, nothing. Will there at least be limits on executive compensation, to prevent more of the rip-offs that have enraged the public? President Obama denounced Wall Street bonuses in his latest weekly address — but according to The Washington Post, "the administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid" because "harsh limits could discourage some firms from asking for aid." This suggests that Mr. Obama’s tough talk is just for show.
Meanwhile, Wall Street’s culture of excess seems to have been barely dented by the crisis. "Say I’m a banker and I created $30 million. I should get a part of that," one banker told The New York Times. And if you’re a banker and you destroyed $30 billion? Uncle Sam to the rescue! There’s more at stake here than fairness, although that matters too. Saving the economy is going to be very expensive: that $800 billion stimulus plan is probably just a down payment, and rescuing the financial system, even if it’s done right, is going to cost hundreds of billions more. We can’t afford to squander money giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership.
Europe Warns against 'Buy American' Clause
Washington is planning billions in subsidies for the ailing automobile industry, and the US Senate is debating a 'Buy American' provision in its economic stimulus package. The European Union fears the US is trying to seal off its market -- and is using its diplomatic arsenal in a bid to stop the move. The European Union is unhappy about a "Buy American" clause in the United States bailout program making its way through Senate this week that officials say reeks of protectionism and could threaten to spark renewed trade wars between the US and Europe. "President Obama has a major opportunity to give leadership to the world," said the EU's ambassador to Washington, John Bruton, on Monday. "If the first major piece of legislation that he signs is one that is seen as damaging to the economic interests of other countries in a way that is unnecessary and wasteful, then his capacity to give the sort of leadership the world needs at this time is considerably and unnecessarily reduced."
Last week, Congress prompted international concern that its planned bailout package would include protectionist measures that could seal the US market off from foreign competitors, including those in export-dependent Germany. Congress, controlled by President Barack Obama's Democratic Party, is calling for a provision that would only allow US steel and iron to be used in infrastructure projects planned in the $825 billion (€643.2 billion) bailout package. At issue is a sum of about $300 billion that would be invested in infrastructure projects in the coming years like sewage treatment plants, new railroads and bridges as well as the modernization of the US electrical grid, wind farms and solar panels. EU Ambassador Bruton, in a letter sent to top US politicians including Secretary of State Hillary Clinton, said that, if approved, the measure would set a "dangerous precedent." According to the Associated Press, which obtained a copy of the letter, Bruton wrote that the US and other countries had pledged not to resort to protectionism in dealing with the crisis at a meeting of world leaders in November. Failure to meet that obligation "risks entering into a spiral of protectionist measures around the globe that can only hurt our economies further." In Germany, the world's largest exporter, companies export goods worth some €70 billion to the US each year.
The Obama administration has not yet stated its official position on the "Buy American" clause, but Vice President Joe Biden said in an interview last week, "I think it's legitimate to have some portions of 'Buy American' in it." On Monday, however, the chairman of the conservative Republican Party in the Senate, Mitch McConnell, said he opposed the measures. "I don't think we ought to use a measure that is supposed to be timely, temporary and targeted to set off trade wars when the entire world is experiencing a downturn in the economy," McConnell said. "It's a bad idea to put it in a bill like this, which is supposed to be about jump-starting the economy." European steel manufacturers have already called on the European Commission to sue the US at the World Trade Organization if necessary. Bruton said that any "Buy American" clause would, at best, be legally questionable. And, in his letter, Bruton wrote: "Measures of this nature, if they breach WTO rules, are likely to be the subject of legal action. There is always the possibility of retaliatory measures to be taken."
On Monday, the US Senate began negotiating the economic stimulus package after Congress passed an €819 billion bill. In the Senate, however, that amount is expected to rise to up to €900 billion. In the Senate version, the "Buy American" clause goes even further, stating that funds from the stimulus package cannot be used "unless all of the iron, steel and manufactured goods used in the projects are produced in the United States." In both the House of Representatives and the Senate, the Republicans have broadly rejected the protectionist provisions. They have also criticized the package for not containing sufficient tax breaks. The Republicans believe the package, in its current form, won't have the immediate stimulus effect the Democrats are hoping for. White House spokesman Robert Gibbs denied those charges on Monday. He also said that President Obama would review the "Buy American" provisions, and that changes were likely in the Senate draft before it is put to a vote on Friday. Afterwards, the drafts of the House and Senate version must be reconciled before it goes to President Obama for his approval. Given the divisions over the measures, Obama himself has expressed readiness to compromise. Obama is seeking to implement the stimulus package by mid-February.
In Germany, industry insiders are viewing the draft legislation with skepticism. "The fact that this clause even came to be is a negative signal that worries us," said Sigrid Zirbel, regional director for America at the Federation of German Industry (BDI), who said she viewed the legislation as a "sign things are moving in the direction of protectionism." But she said any final conclusions would have to be drawn after the bill is finalized. On Friday, White House spokesman Gibbs said the Obama administration would review the "Buy American" provisions. "It understands all of the concerns that have been heard, not only in this room but in newspapers produced both up north and down south." German Chancellor Angela Merkel would likely welcome any shift in American thinking. She has warned against national subsidies and protectionism in the wake of the global economic and financial crisis. "I am very wary of seeing subsidies injected into the US auto industry," Merkel said last week. "Such periods must not last too long because they inevitably lead to a certain degree of distortion and, quite frankly, constitute protectionism." Merkel was also speaking out against comments made by the French government. On Friday, French Economics Minister Christine Lagarde described a little bit of protectionism during times of crisis as a "necessary evil."
Europe needs to resist the growing protectionist threat from within
Only two months ago the world watched in disbelief as unemployed youth in Greece took to the streets, crippling the government and bringing Athens to a standstill. But social and political tensions created by unemployment are slowly taking the foreground in much of Europe. From the wildcat strikes in Britain against the legal use of foreign labour, to French union calls for wage and job protection, the threat of local grievances fuelling nationalistic reactions is very real. Globalisation is under attack and industrial action is rising. In recessions, workers lose their jobs, benefits get cut, living standards drop and ends become harder to meet.
The benefits of free-market capitalism are easily forgotten and popular resentment is quick to spread. This time, the anger may be fuelled by the sight of European governments that have championed the wider benefits of free-market capitalism spending billions to bail out banks, but not workers. Protestors, more than ever, feel entitled to take to the streets. The strikes may not have caused the paralysis forecast by unions so far. A few hundred workers protesting in eastern England, or farmers in Greece blocking highways with their tractors, might seem like isolated incidents. But with unemployment likely to reach 10pc in much of Europe next year, the one million French union workers that took to the streets could easily turn into five million next time around. As the recession bites, the task of managing an increasing number of local grievances will not be trivial.
The tendency of copycat protests - launched in the name of worker solidarity - to morph into calls for protectionism around Europe should not be underestimated. So far Rome has been silent amid UK strikes which have Italian workers as their focus. But it is not hard to see the situation creating industrial tension in Italy too. The pressure is on the governments to appease rather than antagonise voters concerned about the prospects of unemployment. But this is no easy task. Raising the barriers through protectionist policies may be a tempting solution. But undermining the free movement of goods and services would be an explicit challenge to the very framework of the European project. Managing these strikes before they mushroom into something worse could be Europe's biggest challenge yet.
Goldman Sachs Says U.K. Is No 'Reykjavik-on-Thames'
Investors should be wary of betting the U.K. will have a currency crisis similar to that experienced in Iceland, according to Jim O’Neill, chief economist at Goldman Sachs Group Inc. "The pound is very cheap for the first time in our professional history," O’Neill said today at a foreign-exchange seminar in London. "You need to make sure that the U.K. is Reykjavik-on-Thames before you bet against the pound." Iceland’s krona slid 46 percent against the euro last year after the collapse of the banking system prompted investors to pull their holdings and forced the government to seek an International Monetary Fund bailout. The pound tumbled 23 percent versus Europe’s single currency over the same period. It’s 6 percent higher against the euro this year.
"The degree of financial stress in the U.K. has eased considerably," O’Neill said in an interview. "Its net external position is better than many of the Group of Seven nations." The pound will strengthen to 81 pence per euro in three months and to 78 pence per euro within 12 months, Goldman Sachs predicts. Against the dollar, it will rally to $1.60 in three months and $1.86 in 12 months, Goldman Sachs said. Much of the weakness of the U.K. economy and banking system has already been priced into the pound, Goldman Sachs analysts including O’Neill said in December. The dollar will weaken against the British currency as the U.S. trade deficit fails to shrink and the Federal Reserve buys Treasuries, stoking concern inflation will accelerate, the analysts said.
Former Bank of England policy maker Willem Buiter titled a Nov. 13 blog, "How likely is a sterling crisis or: is London really Reykjavik-on-Thames?" "In the worst case, we could see a run on the banks, on the public debt and on sterling all at the same time," Buiter wrote. "This is not the most likely outcome. But it is a distinct possibility." The pound tumbled 9 percent against the euro and 14 percent versus the dollar in the month before Buiter’s essay. Buiter’s outlook for the U.K. is "too pessimistic," O’Neill said today in an interview. The pound fell 0.5 percent to 90.45 pence per euro as of 3:30 p.m. in London, from 90.03 yesterday. It climbed 0.6 percent to $1.4353, rebounding from a decline to $1.4154. The median estimate of strategists surveyed by Bloomberg is for the pound to trade at $1.43 by the end of June, and $1.52 by year-end.
S&P forecasts 200 defaults
About 200 US junk-rated companies are likely to default this year, according to Standard & Poor’s, affecting almost $350bn worth of debt and adding impetus to alternatives to bankruptcy, such as distressed debt exchanges. About half of the 17 US defaults seen in December were a result of distressed exchanges, where a company offers lenders new securities of a lesser value than the debt they are owed, usually to cut interest costs or delay principal repayment. Debt exchanges are becoming an increasingly common way to restructure debt outside of bankruptcy in the US – they remain rare in Europe – as US companies struggle to refinance $500bn worth of bonds and more than $1,000bn worth of bank loans amid the credit crunch.
S&P said that there was a higher proportion of rated companies in the single-B category than ever before, with 800 business that make up one-third of all corporate ratings. "We expect nearly 200 speculative-grade companies to encounter some form of financial distress, leading to default in 2009," S&P said. "Currently, we have more than 180 companies rated B-minus or below with negative outlooks. That is where we expect many of the defaults will occur." The agency added that the 185 companies most at risk had about $341bn of debt outstanding. Outside the US, 61 junk-rated companies with another $56bn worth of debt are also seen as highly likely to default.
The sectors most at risk are retailers and restaurants, cars and car suppliers, gaming and lodging, media and entertainment, and newspaper and printing. Among the biggest companies at risk are Harrah’s Entertainment, Ford Motor and Claire’s Stores in the US and NXP and Ineos in Europe. The burgeoning interest in debt exchanges has not come entirely smoothly. Bondholders initially fought against such moves by GMAC, the financing arm of General Motors, and Realogy, a property brokerage, for example. However, S&P believes investors are likely to become increasingly receptive to exchange offers to improve the recoveries they are likely to make. A dearth of so-called debtor-in-possession financing, which helps companies manage their way through a bankruptcy or reorganisation, has increased the risk of highly costly liquidations.
Spain's downward spiral spooks bond investors
Spain lost almost 200,000 jobs in January in the worst one-month rise since records began, lifting the unemployment rate to 14.4pc and inflicting further damage on the credibility of the Spanish government. The ferocity of the downturn has led to a sharp jump in borrowing costs for the Spanish state, which lost its AAA credit rating from Standard & Poor's last month. A €7bn treasury auction of 10-year Spanish bond on Tuesday saw yields jump to 137 basis points above German Bunds, a post-EMU high. Foreign investors were conspicuously absent, leaving Spanish banks to soak up the debt. "This is a national emergency. The government is being overwhelmed by events," said Mariano Rajoy, the opposition leader. The mood has changed dramatically in recent weeks as debtors launch hunger strikes and one builder threatened to set himself on fire to protest the credit crunch.
Maravillas Rojo, the labour secretary, said four million people may be out of work by end of the year – up from 3.3m now. "We're suffering from a grave international financial crisis, lack of liquidity, and falling consumption," she said. Spain is losing jobs at three times the rate of the US, in proportionate terms. Over one million Spanish men under thirty are unemployed, leading to a surge in applications to join the armed forces. Three quarters of the army candidates are being turned away. Industry minister Miguel Sebastian has launched a "Made in Spain" drive, exhorting the nation to buy Spanish clothes and to take ski holidays in the Sierra Nevada instead of the Alps. He claimed that 120,000 jobs can be saved if every citizen spends €150 less this year on imports.
The campaign amounts to a partial boycott of foreign products and may breach EU law. It is the sort of protectionist reflex becoming visible daily in much of the world. Mr Sebastian blamed the banks for causing the crisis by tightening credit. "We're losing our patience," he said. But the banks themselves are coming under strain – even though they have held up better than Anglo-Saxon and German banks so far. Bad loans have reached 3.5pc and are expected to surpass the 8pc peak seen in the crunch of the early 1990s. "Banks have closed the tap," said Jesus Barcenas, Spain's small business leader. Finance minister Pedro Solbes says there is almost nothing Madrid can do to halt the downward spiral. "We have exhausted our margin for manoeuvre," he said.
While he has avoided blaming Spain's euro membership for the country's plight, there is no question that Spain's failure to adapt to the rigours of EMU is at the root of its structural crisis. S&P said euro membership had become part of the problem since it prevented the country resorting to aggressive monetary stimulus to counter the housing crash, or from devaluing to restore competitiveness. Spain has become trapped after letting wage costs rise faster than German and French costs for year after year, leading to a current account deficit of 10pc of GDP. The socialist government of Jose-Luis Zapatero has so far recoiled from imposing the necessary remedy of wage deflation. It may be forced to do so by the bond markets.
UK lenders borrow £185bn from Bank of England
The Bank of England has lent £185 billion to Britain’s banks under its special liquidity scheme, it revealed today. The scheme, under which banks and building societies were allowed to swap some of their illiquid assets for UK Treasury Bills, closed last Friday. Now the Bank has given details of the extent to which the scheme, launched on April 21 last year, has been used. Describing use of the scheme as having been “considerable”, the Bank said that 32 banks and building societies had accessed the scheme — accounting for more than four fifths of those able to do so. nThe Bank said that these banks and building societies had swapped assets worth some £287 billion in exchange for UK Treasury Bills, but said that its valuation of these securities, as of last Friday, was only £242 billion.
The banks and building societies are able to keep the Treasury Bills — which can be easily sold to raise cash — for up to three years before they have to exchange them back for the original assets they put up under the scheme. The Bank said that most of the collateral it had received had been assets backed by residential mortgage-backed securities or residential mortgage covered bonds. It warned that should the value of these assets continue to fall, relative to the value of the Treasury Bills it has lent to the banks and building societies, it would continue to ask for extra "margin" payments. The banks and building societies are already having to take "haircuts" — a deduction from the market value of the securities they have put up to reflect the risk being taken on by the Bank.
The Bank said that the haircuts being charged to the borrowers, in the case of residential mortgage-backed securities or residential mortgage covered bonds, were 0.17p in the £1 in the case of bonds which had a maturity date of between 5 and 10 years and 0.22p in the £1 for those assets with a maturity date of between 10 and30 years. The Bank added: “The special liquidity scheme has served its purpose in relation to the overhang of illiquid assets on balance sheets up to the end of 2007. But financing conditions have remained difficult for banks and building societies and therefore further measures have been introduced by the Bank and HM Treasury to improve financing and credit conditions in the economy.” It said these included its discount window facility, introduced in October last year, which allows banks and building societies to borrow gilts against a wide range of collateral.
Canadian housing market in a deep freeze
Ward McAllister has been through five housing-market crashes since he finished university in 1982 and started working in development. But he and other B.C. developers have never seen anything quite like this one. "I wouldn't call this a crash. It's like a market freeze. It's like everything's been held in suspended animation." The public is refusing to buy and that has caused developers to put on the brakes. Mr. McAllister, who heads the company Ledingham McAllister, said he was at a gathering recently that included every major developer in town. He asked them how many projects they were starting in 2009. The answer was zero.
And no one is sure when the current cocoon state will end. At a recent Urban Development Institute event focused on forecasting the future, developers Rob Macdonald and Michael Audain were optimistic in their speeches to the anxious crowd of 1,100. They predicted the market in B.C. will return to something approaching normal this fall, although with a reduction from last year's peak prices. But others are less optimistic. "We don't think it's coming back any time soon," said David Negrin, the immediate past president of the UDI who heads the development arm of Aquilini Investments. "We don't see it coming back until at least after the Olympics." That's at least a year and a half from now.
So how do companies keep themselves going in the hibernation period? That's a question not just for developers, but for a vast industry. One in every 10 people works in the province's construction industry, everyone from the guy hired to pound nails to architects to truck drivers to the developers themselves. In September, the construction sector accounted for 235,000 jobs in the province. By November, it was down to 220,000. Some developers locally have joked that they're going to cope with the downturn by going to Phoenix or taking up a new hobby. In reality, most of them are trying to find a way to keep their companies busy, in order to keep their employees working, to prevent losing valuable staff and to continue making money.
Some, as reported in December, are taking a fresh look at the economics of building rental apartments. "It's an opportunity for developers to take advantage of the current low construction costs," said Brent Toderian, director of planning for Vancouver. "It's a good way to build low and sell high. They can rent for a few years and then, when the market picks up, sell." The UDI is going to hold a workshop in the spring to help its members figure out if building rental is feasible for them. Office space is something else that development companies are considering. Mr. Toderian said his department is starting to get inquiries about office projects in numbers that hadn't been seen in the past.
Still other developers are phoning the province's social-housing agency, BC Housing, to find out if the government might be interested in using some of their sites for future housing projects. "We are getting dozens of phone calls," said BC Housing CEO Shayne Ramsey. Federal and provincial governments have typically put money into extra social housing projects in the past when the private market has slowed. And yet other developers, especially the confident and well-financed ones, aren't necessarily looking to do anything immediate. Instead, they're planning to use the time to get ready for the next market upturn.
It can take one to two years to go through public consultations and city approvals, especially for a complex site. In hot markets, developers often bypass those more labour-intensive projects. But when markets slow down, developers with long-range ambitions and money will use the down time to go through the longer process. "The sophisticated developer recognizes that's the thing to do," Mr. Toderian said. "But it depends on whether they have the financing ability to do the planning work." Some, apparently, do, since Mr. Toderian reports that his department, which does the front-end work for building projects, is getting steady work. Development consultant Chuck Brook, who works all over the Lower Mainland, said times like this are actually the best for the kind of work he does.
Why these strikers may tear down the EU empire
Looks like today the British workers outside the Lindsey oil refinery in Lincolnshire have been twinned with the striking workers at the shipyards at Gdansk in 1980: and for any worker, there could be no greater honour. Gdansk was the moment when Polish workers stood against the Soviet empire and said there would be no more submission: 'On our knees before God, but on our own two feet before all men.' Their strike spread across Poland, and cracked the power of the quislings in Warsaw who did Moscow's work. The strike was the beginning of the end of the Soviet empire.
Today the strike in Lincolnshire has spread across Britain to contractors at the nuclear power plants Sellafield and Heysham, to Grangemough oil refinery and power stations at Longanet, Warrington and Staythorpe, to contractors at the South Hook LNG terminal in Milford Haven, and to Croyton oil refinery in Essex. Thousands have gone out. The strikes have gone wild cat. And all of it is right. For what else can British workers do when their own parliament has turned over the power to control Britains' borders and Britain's labour laws to the Brussels empire? There is no point in saying, 'The workers must obey the laws that govern employment.' The laws which now govern employment in this country are no longer legitimate. They are no longer the laws drawn up by British democracy.
They are the laws drawn up by the European Commission. They are laws to which a generation of Britain's politicians have signed up, giving away powers they had no right to give away. Britain's politicians signed up to these laws in Treaties most of them have never read, and if they did read them, they didn't believe every 'Europe without frontiers' clause would be enforced. Well, surprise: the rootless cosmopolitan euro-zealots all over the Continent (though mostly in France) and the career eurocrats in Brussels (mostly led by the French) who wrote the European treaties put this stuff in because they meant to see it enforced. But just listen to the whining of Peter Hain, the former work and pensions secretary who was part of Tony Blair's EU-pandering government, at the weekend. He told one paper that he thought something had gone 'badly wrong' with the way EU legislation was being enforced. What he means is it is actually being enforced. The only thing that is 'badly wrong' is that Britain should ever have agreed to it in the first place.
This is a strike like no other. What the strikers are demanding is the fundamental repudiation of the 'European Project.' Clearly they are doing it only through intuition, not through any grasp of the 80,000 pages of European law, but no matter. What they have grasped is that now the EU can indeed force a shipload of Italian and Portuguese workers onto any site in the United Kingdom and the democratically-elected parliament at Westminster which is supposed to be representing British workers (and British everyone else) will do, can do nothing about it. The Government has been exposed as quislings for the Brussels empire.
What is most satisfying about watching the Government's twisting in all this – beyond the fear and paralysis of Gordon Brown in the face of the strikers, and the way Peter Mandelson has been exposed as utterly out of touch with true British Labour gut instinct – is that the Government may have created for itself what could blow up into a crisis to match the liquidity crisis in the banks. This time it is not the bankers and the investors who have gone on strike, it is the workers. And there are lots more of them, and they know how to tear down a Government – and rip up some treaties. 'On one knee before The Queen, but on our own two feet before Brussels.' It doesn't quite have the same ring, but it's a start that could break an empire.
German retail sales disappoint
German shoppers failed to ride to the rescue of their country’s economy at the end of last year, official figures showed on Tuesday, setting back hopes that consumer spending could offset a slump in exports. Seasonally-adjusted retail sales fell by 0.2 per cent in December, the third consecutive monthly drop, according to the German federal statistics office. The fall appeared to dash hopes that Christmas sales would provide a glimmer of hope amid the gloom surrounding Europe’s largest economy. German exporters have been hit badly by tumbling global demand, and industrial orders collapsed late last year, in the wake of the banking crisis triggered by the failure of Lehman Brothers investment bank.
But German consumer confidence appeared to have been less affected. Unemployment has only recently started to rise and many German workers secured pay increases in 2008. At the same time, sharp falls in energy costs have boosted spending power. Earlier this week the Nuremberg-based GfK research group, expressed optimism that consumer would balance out the export downturn "to some extent, at least in the first half of the year". Consumer spending would rise this year by up to 0.5 per cent, it forecast. But GfK warned: "consumption will not completely replace exports as the engine of economic growth."
Economists cautioned that German retails sales figures are notoriously subject to future revision. "That being said, there is no indication in the hard numbers so far that the sharp decline in inflation is boosting spending in any meaningful way," said Dirk Schumacher, economist at Goldman Sachs in Frankfurt. The HDE German Retailers’ Association said it expected a "difficult year" for shop keepers, with revenues at best matching last year’s figures. In the run-up to Christmas, the association had still spoken of strong consumer demand. But Metro, Germany’s largest retailer, at the start of the year suggested that shoppers were spending quite selectively. While sales in the fourth quarter 2008 at its Real hypermarkets open for longer than a year rose 1.1 per cent in annual comparison, sales at its Media Markt consumer-electronics chain fell 1.7 per cent.
Germany's Big Banking Bailout
The German government wants to buy up large segments of the domestic banking sector. In addition to the partial nationalization of many ailing financial institutions, Berlin's plans include a complete takeover -- by expropriation, if necessary. Josef Ackermann, the CEO of Deutsche Bank, likes to come across as generous. A few days ago in Berlin, he said that he is by no means too proud to take advantage of the government bailout program for banks, and that all he wants is to see it benefit those banks that truly need it. "We are a long way from that," he said. But the competition is skeptical, especially when the industry leader is having trouble hiding the fact that it lost about €4 billion ($5.2 billion) in 2008. In addition, both competitors and politicians have noted with interest Ackermann's behind-the-scenes involvement in the development of a "bad bank," that is, a sort of government dumping ground for unmarketable, high-risk securities.
Industry insiders suspect that Deutsche Bank hopes to shift its own toxic waste into this new entity -- saving face in the process because, after all, everyone else will be doing the same thing. Ackermann is receiving support for the project from the Association of German Banks, in which Deutsche Bank exerts substantial influence. Last Monday Hugo Bänziger, the chief risk officer at Deutsche Bank, appeared before members of the conservative Christian Democratic Union's (CDU's) finance committee to promote the potential benefits of a "bad bank." But all of Ackermann's and Bänziger's efforts proved to be in vain. On Friday, a fundamentally different approach to solving the problems of German banks emerged at a meeting of the two members of the coalition government, the CDU and the Social Democratic Party (SPD). Instead of a single, government-run landfill for the banks' toxic securities, the new plan calls for a large number of privately held "bad banks." Contrary to the arrangement Ackermann and his allies comrades-in-arms envisioned, this would see the banks' shareholders being the ones who would primarily vouch for risks in the future rather than the government and taxpayers.
Nevertheless, the government is not abandoning all responsibility. Should the healthy parts of the banks lack equity, the government will provide the necessary funds. This would make it a major shareholder in the German banking sector, turning the federal government into a silent power in the skyscrapers of Frankfurt's banking district. The bailout program will be costly. The government will have to more than double the €80 billion ($104 billion) capital injection included in its first bank rescue package. Experts at the Finance Ministry anticipate that the stripped-down banks will require up to €200 billion in additional capital. It is a development that would have been unthinkable only a few months ago, but is now being surpassed by another of the government's rescue projects, as it discreetly prepares to nationalize the stricken lender Hypo Real Estate. Both programs may seem disconcerting for a market economy. And yet, in the state of the emergency brought on by the continuing financial crisis, they may be unavoidable. The German government is more likely to face criticism from economists for considering bailouts for individual companies, like ball-bearing maker Schaeffler-Conti or Airbus. But the bank bailout plan involving many small "bad banks" has received widespread support.
Unlike the Ackermann concept, under the new plan the government would not simply take on the banks' risks. Instead, that would be left up to shareholders. Chancellor Angela Merkel and Finance Minister Peer Steinbrück hope that this approach will generate more support with the public for the government's second bid to use taxpayer's money to rescue the banks. Most important, the federal government would not be acquiring the worthless parts of a bank, but instead would invest in its promising aspects. This also makes the proposal politically appealing. After the first bank bailout package, this is the government's second major attempt to stabilize the center of the ongoing economic and financial crisis, the banking world. It is still deeply shaken by the collapse of the US real estate market in 2007, when millions of mortgage loans lost their value. Since then, these toxic assets have crippled banks' ability to do business virtually everywhere in the world. Because the banks do not know how much of their old risk they can even write off anymore, they prefer not to assume any new risk. The consequences have been fatal. As the banks issue too few loans, companies lack the necessary funds for investment, causing the economy to slow down.
The amounts of money involved are already largely beyond the scope of human imagination. In Germany alone, the biggest 18 banks are carrying a volume of €305 billion ($397 billion) in toxic assets on their balance sheets, less than a quarter of which has already been written off. Further value adjustments seem unavoidable. The International Monetary Fund (IMF) estimates that worldwide losses could total $2.2 trillion (€1.7 trillion). No one has a formula for how best to recapitalize the banks and get credit flowing again. Great Britain, for example, is placing its hopes on a government insurance system under which the banks, in return for a fee, could insure themselves against further losses. The new US administration under President Barack Obama is doing what Ackermann would have liked to see happen in Germany: It plans to establish a giant, government-owned "bad back" for toxic loans. This American deposit fund would spend an additional $2 trillion (€1.54 trillion) to buy high-risk securities from lenders. The hope is that the banks, provided with fresh capital and freed of their toxic assets, could then devote themselves to their actual business: lending money to citizens and companies.
The government in Berlin does not consider either of the two Anglo-Saxon approaches to be suitable. The Germans see the British model as too costly and the American approach as inequitable. Why should the government buy up billions in worthless securities and take all risk off the hands of those responsible for the crisis in the first place, ask those behind the new bailout plan? They characterize the US and British plans as gifts for shareholders at the expense of taxpayers. For this reason, the German government prefers a different concept, which it hopes to implement within the next four weeks. The plan, conceived by staff at the Finance Ministry, amounts to a radical modification of the German banking industry. Hardly any of the ailing lenders will likely manage without government investment in the future. There are two possibilities for the disposal of bad loans. Either the securities are depreciated before being deposited into the special funds, or the "bad banks" receive large portions of the remaining equity to offset losses. Either way, the newly streamlined banks will lack capital to conduct their transactions.
This is where the government comes in. It provides the healthy banks with capital via its Special Fund for Financial Market Stabilization (Soffin). As a result, the government becomes a shareholder in many banks, initially through silent deposits. But if it comes to the aid of publicly traded banks, it soon finds itself forced, as in the case of Commerzbank, to acquire a blocking minority consisting of 25 percent plus one share. This is the only way it can prevent a buyer from simply clearing out the government's money. The concept makes sense for both the government and taxpayers. The government can hope that its investment will eventually pay off. Once the banking crisis has been weathered, its deposits are returned and it can resell its shares, possibly even at a profit. This, at least, was the Swedes' experience during their banking crisis in the 1990s. German government experts were inspired by the Swedish experiences when developing their own rescue plan. The establishment of "bad banks" within existing institutions also has a psychological effect, for employees and customers alike. Separating out the bad assets into a "bad bank" has a liberating effect on the healthy part of a bank. From then one, it can operate without the constant threat of further write-offs.
But the removal of their troubled assets also creates new challenges for banks. The risks are not decreased simply because they have been separated from the actual bank. The management of so-called troubled loans requires skills beyond those needed to issue ordinary loans, which merely require routine monitoring. Hardly anyone is more aware of this than Jan Kvarnström. A Swedish national, Kvarnström headed the Institutional Restructuring Unit, the "bad bank" with which Dresdner Bank overcame its troubles, from 2002 to 2005. The job description of a chief liquidator ranges from tough negotiations with delinquent borrowers to the receivership and subsequent forced sale of the securities. He handles a wide assortment of large and small assets. During the course of his career as a liquidator, Kvarnström has sold a bank in Chile, many forms of financial holdings in companies, real estate and a collection of guitars once owned by the Beatles. "All of this has nothing to do with the normal work of a banker," Kvarnström recalls. For this reason, he says, it makes sense "to concentrate the bad investments, together with the corresponding personnel, in a bad bank."
The drawback of the plan is that the money made available in the bank rescue package, €80 billion ($104 billion) will not be sufficient for government equity capital injections. Soffin's authority to issue credit must be augmented by about €120 billion ($169 billion). This would make it the largest shadow budget in the history of postwar Germany. Commerzbank, under CEO Martin Blessing, has already received €18 billion ($23.4 billion). The nationalization debate over ailing Hypo Real Estate is already burdening the Soffin budget. The bank needs at least €10 billion ($13 billion) in additional funds. But that isn't the extent of it, because the government will also be called upon to spend even more money to buy up at least 95 percent of the Munich-based lender. This is the second front in the government rescue concept: The takeover of Hypo Real Estate is intended to prevent a possible bankruptcy from leading to other bank failures, thereby bringing down large segments of the German financial market.
This scenario could materialize, as a result of Hypo Real Estate having gambled away funds for the purchase of long-term government bonds. To be able to afford the transactions, the bank took out short-term loans. As long as the interest rates on those loans were low enough, the business was profitable. But then loan terms deteriorated as a result of the financial market crisis. Since then, the bank has accumulated an uninterrupted series of losses, which could only be offset with a constant stream of new government loan guarantees. The government believes that it has only one option left to stop the downward spiral: to essentially nationalize Hypo Real Estate. This would allow the lender to take up new loans under the favorable terms of publicly owned financial institutions and turn a profit with most of its transactions. Only then would the previous liquidity injections of more than €90 billion ($117 billion) not be lost. To minimize conflicts with owners during the takeover, the government will pursue an escalation strategy. Its preferred method would be to acquire the bank with the consent of previous shareholders, through a simple takeover bid.
But the shareholders are not biting, leading government representatives to believe that they are holding out for a better offer. The shareholders know that the government has a strong interest in a takeover, and they want to be handsomely compensated in return, which the government wants to avoid. When the negotiations ended on Friday evening, no results had been achieved. As a next step, the government plans to amend the law on stock corporations and strengthen the rights of shareholders' meetings so that refractory minority shareholders can be booted out. It is also unlikely to shy away from expropriation of the lender's shareholders. A proposed expropriation law to be debated by the cabinet in the coming weeks reveals how serious the government is.
The nine paragraphs of draft legislation would define the conditions for the government's compulsory takeover of a company. Because the German constitution bans nationalization without compensation, the draft legislation also contains compensation rules for the former owners of a nationalized company. The compulsory nature of these measures has left a sour taste in the mouths of federal government experts. Because the constitution expressly protects private property, the German government hopes never to have to apply its emergency legislation. According to ministry officials, the purpose of the plan is to provide a credible threat of nationalization to encourage shareholders to negotiate. Members of the Grand Coalition already joke that the bank rescue program now apparently follows the logic of the Cold War: "You have to threaten with a nuclear bomb so that you will never have to use it."
Insurance companies brake exports
Insurance companies are increasingly refusing export credit insurance, putting a further brake on Danish exports. Danish exports are already suffering from reduced demand as a result of the financial crisis, resulting in reduced investment and increasing unemployment. Another brake on exports, however, has developed in the form of increasing difficulty in getting export credit insurance to safeguard against non-payment for goods that have been sent abroad. Premiums up The two largest export credit insurance companies in Denmark are now refusing many more applications than six months ago and have increased premiums for those it accepts. Even the national Export Credit Fund, which offers insurance for more risky and long-term projects, has become increasingly reticent as a result of the financial crisis.
"The crisis has meant that there is a much greater risk that companies cannot recoup payment for their exports. Our losses have doubled over the past 12 months, so we have to safeguard our business by saying no to more applicants than previously," says export credit insurance company Euler Hermes CEO Peter Hecht-Hansen. Euler Hermes currently rejects some 15 percent of applications, compared to just eight percent a year ago. The company has also increased premiums by some 20 percent. Euler Hermes competitor Atradius is in a similar situation. "We currently issue some 7-8 percent fewer policies than six months ago and that figure is likely to increase in the coming months. And we have increased our premiums on some policies by about 30 percent. This is necessary if we are to have a good business," says Atradius Nordic CEO Jørgen Lund Lavesen.
Japan and Australia unveil new schemes to kick-start economies
The Bank of Japan is to buy 1tn yen (£7.9bn) of shares owned by struggling banks in an attempt to encourage them to lend and drag the world's second-biggest economy out of recession. Australia, meanwhile, slashed interest rates by 100 basis points to a record low of 3.25% and boosted its stimulus package to more than A$42bn (£18.8bn). In a move not seen since the end of Japan's last recession four years ago, the central bank will buy up shares in troubled financial institutions through to April next year and hold on to them until the end of March 2012.
Massive losses on the stock exchange have forced some of the country's biggest banks to cut earnings forecasts and rein in lending just as corporate borrowers go in search of extra cash towards the end of the financial year. The central bank has responded by lowering interest rates to just above zero and buying up corporate debt from banks. The latest move is designed to thaw the lending freeze and prevent the economy from tumbling over the edge of the abyss, officials said. The bank's governor, Masaaki Shira?kawa, told reporters: "While Japanese financial institutions have reduced their stockholdings since the early 2000s, their third-quarter financial statements have reported massive realised and unrealised losses. This measure is intended as a safety net to stabilise financial markets. It is always advisable to prepare for the worst-case scenario."
A disastrous year for the Nikkei benchmark index has hit the balance sheets of the biggest banks, such as Mizuho Financial Group, which last week reported net losses of ¥50.6bn for the April-December period and slashed its full-year net profit forecast by 60%. During the BoJ's last share-buying effort, which ended in 2004, its ¥2tn purchase of shares in commercial banks was credited with shoring up lenders saddled with bad debts after another Nikkei meltdown. Analysts welcomed today's decision, but were still concerned about the state of the commercial banks' balance sheets.
"I think in the short term it's definitely a positive," said Kristine Li at KBC Securities in Tokyo. "It takes some pressure from the rapidly falling market and the impact on their earnings as well as their capital. "As of September, the major banks had ¥13tn in stocks. ¥1tn takes some pressure off, but it may not be enough to solve the whole problem." The Australian government said it would spend A$42bn on schools, housing and infrastructure and make cash payments to low and middle-income earners. Kevin Rudd, the prime minister, said: "This plan today, as part of a broad strategy on which we embarked last year, provides a basis to see Australia through this economic crisis."
Irish 'social partnership' crumbles over cuts to spending
Ireland's government will press ahead today with plans to cut €2bn (£1.8bn) from public spending after talks with the country's trade union movement broke down in the early hours of this morning. The collapse of the Republic's "social partnership" between government, unions and employers is a significant turning point in the Irish economy. Ireland's unprecedented wealth during the Celtic Tiger boom years was based partly on the success of national wage agreements between the "social partners" during the early 1990s. "Social partnership" and with it relative industrial peace alongside Ireland's decision to cut capital taxation were seen as a major factor in attracting foreign multinational investment into Ireland through the 1990s.
Just before 4am today the talks in Dublin on a new national economic recovery plan ended without agreement. Taoiseach Brian Cowen said he regretted it was not possible for the trade unions to agree to proposals put forward by his government to reduce the public service payroll bill. He said the Fianna Fáil-led coalition would consider their next move at a cabinet meeting this morning. Cowen said he would take "the necessary decisions in respect of the fiscal adjustments" which it had sought. The sticking point was the terms over a graduated pension levy which the Irish government tried to impose as part of a programme to save €2bn this year.
The proposals would have involved a levy ranging from 3% to just under 10%, averaging at around 7%. The levy would have come into effect for people earning above €15,000 a year. But the Irish Congress of Trade Unions said public sector staff in the mid salary ranges of €40,000 to €60,000 would have to pay between 6.9% and 7.9% more in pension contributions. This would have involved deductions of between €2,250 for staff on €40,000 to €4,750 for those on €60,000. ICTU claimed staff on €100,000 a year would have faced deductions of €8,750 as part of the pension levy proposals. General secretary David Begg said the talks process had "run out of road". He said that while some progress had been made this had not been enough to build a platform on which an agreement could be made.
Beggs said the levy proposals would have proved very onerous, particularly for workers concentrated in the low to middle income groups. "We felt that what was set out in the proposals was more than the traffic could bear," he said. Ireland's deputy prime minister and minister for enterprise and employment Mary Coughlan said the government would move to bring matters to a close. She said she did not think the collapse of the talks heralded the end of social partnership. "We can all appreciate that people are finding it difficult to bring their own people with them," she said. Coughlan said it would be inappropriate for her to apportion blame for the breakdown of the talks. She said "people were not in a position to go as far as anticipated or expected".
Ruble Falls to 11-Year Low as Speculators Push to Break Target
The ruble slumped to its weakest level against the dollar in 11 years as investors speculated Russia will be forced to give up its currency defense after draining reserves. The ruble lost as much as 1.7 percent to 36.3550 per dollar, nearing the weakest end of a trading range widened by the central bank less than two weeks ago. Bank Rossii Chairman Sergey Ignatiev pledged on Jan. 22 to use reserves to keep the currency at a level of 41 against a basket of dollars and euros, which translated to 36 per dollar. Based on current euro-dollar rates, the ruble would need to fall to 36.45 per dollar to break the band, according to Merrill Lynch & Co. A central bank spokesman declined to comment.
"The pace of the move to the target is definitely going to be a source of concern to the central bank," said Martin Blum, head of emerging-market economics and currency strategy at UniCredit SpA in Vienna. "Global risk appetite is continuing to deteriorate so the pressures on the ruble will continue." The ruble slumped 35 percent against the dollar since August as a 63 percent drop in Urals crude oil prices and the worst global economic crisis since the Great Depression spurred investors to withdraw about $290 billion from the country, according to BNP Paribas SA. Bank Rossii expanded its trading range for the ruble 20 times since mid-November before switching policy to let "market" forces help determine the exchange rate within a widened limit. The new trading band would only be extended should oil, Russia’s biggest export earner, fall to $30 a barrel and stay there "for a long time," Ignatiev said at the time.
Prime Minister Vladimir Putin said in a Jan. 25 interview with Bloomberg Television that Russia had set itself apart from other countries by using reserves so as not to "crush the national currency overnight," avoiding a repeat of the crisis a decade ago when the ruble plunged as much as 29 percent in a day as the government defaulted on $40 billion of debt. The central bank raised its benchmark one-day and seven-day interest rates through loan auctions on Jan. 30 to make borrowing money to speculate on the ruble more expensive. Bank Rossii lent 7.7 trillion rubles ($213 billion) to Russian banks in so-called repo auctions last month, aiding the ruble’s depreciation as lenders converted the funds into foreign currency, according to UniCredit and ING Groep NV.
Russia reduced its foreign-currency reserves, the world’s third-largest, by more than a third to $386.5 billion since August as it sold dollars and euros to stem the ruble’s depreciation. The central bank, which was offering foreign currency from Jan. 28 to 30, is yet to be seen making offers on the market today, said Evgeny Nadorshin, senior economist at Trust Investment Bank, citing the Moscow-based lender’s currency traders. The ruble was 0.9 percent weaker at 36.0393 per dollar and 0.5 percent lower against the basket at 40.4777, which is 1.3 percent away from the target limit of 41, as of 1:09 p.m. in Moscow. It dropped 0.3 percent to 45.9030 per euro. Russia manages the ruble against a basket made up of about 55 percent dollars and the rest euros to limit currency swings that disadvantage Russian exporters. The basket rate is calculated by multiplying the ruble’s rate to the dollar by 0.55, the euro rate by 0.45, then adding them together.
The dollar’s strength accelerated the ruble’s depreciation against the U.S. currency. The dollar gained against all 16 major currencies tracked by Bloomberg today, except for the Mexican peso and Japan’s yen, climbing 0.5 percent to 1.2745 per euro. The 41 target to the basket and the 36 per dollar level were based on an exchange rate of 1.3 per euro, Ignatiev said Jan 22. Based on the dollar at 1.2750 per euro now, the ruble’s threshold against the U.S. currency is about 36.45 per dollar, said Yulia Tsepliaeva, chief economist in Moscow at Merrill Lynch. "Ultimately, if capital flight is sustained they would have to let the ruble band move again or shift to a free float," said UniCredit’s Blum said. "But I assume they’ll try to hold it for a little while just to maintain their credibility."
Though the ruble is now the only legal tender in Russia, many mortgages, loans and rental payments are still denominated in dollars. Russians gauge the health of the economy based on the fate of the dollar-ruble rate and so it is important that the trading range is maintained, Arkady Dvorkovich, President Dmitry Medvedev’s economic adviser, said in an interview from the World Economic Forum in Davos, Switzerland, last week. "They put a line in the snow, which was ridiculous given commodity prices are still falling," said James Fenkner, managing partner at Moscow’s Red Star Asset Management, which is shorting Russian financial stocks until the devaluation is completed. "The ruble will be beaten down over the next couple of months." A short position is a wager an asset or holding will decline.
Urals crude fell 2.9 percent to $44.24 a barrel last week, below the $70 average required to balance Russia’s current 2009 budget. Putin has demanded this year’s budget be revised to take account of an Economy Ministry forecast for oil to trade at an average $41 a barrel. Finance Minister Alexei Kudrin said last week Russia will probably have growth near "zero" this year. Along with increasing interest rates, Russia is "probably days away" from instituting some kind of controls on transfers of currency out of the country, Fenkner said. "They’re going to really reign in money supply," he added.
Russia in outer darkness
In outer space, as everyone knows, the absence of the force of gravity produces the appearance of weightlessness. Everything floats away. The markets have decided that Russia is now without gravity; its equities are without weight, and at risk of floating away. Late last year, the RTS, the principal stock market index, starting decoupling from the price of the principal Russian export, oil, as the latter started to plummet. The emerging market investment funds, which have also moved with oil and Russia's other exportable commodities, also decoupled from commodity prices and the RTS. Since the start of January, the RTS and the oil marker have been in negative correlation. That means that even if the oil price goes up, Russian share prices go down. This is the equivalent of outer space. It is no surprise, therefore, that everyone in the Russian market is gasping for an oxygen mask and a safety belt.
President Dmitry Medvedev and Prime Minister Vladimir Putin believe they are the constitutionally elected heads of government and imagine their government is the air supply and safety-belt of the state. Those officials aligned with them - Deputy Prime Minister Igor Shuvalov with Medvedev, Deputy Prime Minister Igor Sechin with Putin - like to think that, although elected by no one to nothing, they too are the safety belts, and pilots, of the state. Watch them closely - the more carefully Shuvalov brushes at his coiffure and Sechin draws his face into a scowl, the more you can be certain they think they are in charge of Russia's mass, motion, weight, air supply.
Without a banking and state audit system accountable to parliament, without a parliament accountable to the voters, and with regional governors and mayors appointed, not elected, where else can the force of gravity be located? If not with them, then all of Russia has indeed decoupled, and equity is in danger of valuelessness. That is what these oscillating lines on the dials of the national control-panel mean: In fact, once decoupling commences, there is no telling what the control-panel indicates for Russia's pilot enterprises - the dominant exporters and producers of value, such as Gazprom (gas and oil), Rosneft (oil), Norilsk Nickel (nickel, copper platinum group metals), Rusal (aluminum), Evraz (steel), Metalloinvest (iron ore), Polyus (gold), Uralkali (potash). That is because their public reports do not reveal the full extent of their debt; their shareholder stakes, pledges, and obligations; their margins; cashflow, and free cash; the ownership of their assets; their future.
Brokerage analysts, who try to measure these indicators, and issue buy/sell recommendations to the investment market, are now, more than ever, navigating by their own book - and shooting in the dark. So are the principal enterprise owners and stakeholders, the so-called oligarchs. Each of them has now proposed to each of the senior government officials a plan calculated to cancel or refinance his debts with state money but leave him in just as much control as before. This is the reason the market has been confused by as many state takeover or consolidation plans as there are oligarchs with billion-dollar obligations they can't meet. The evidence available from documents and inside sources close to the oligarchs themselves raises the following questions, and also answers them.
Why did Vladimir Potanin, controlling shareholder of Norilsk Nickel, place in a Monday morning newspaper on January 12 a scheme for merging Norilsk Nickel with steelmakers Evraz and Mechel, iron-ore miner Metalloinvest, and potash miner Uralkali, and vesting the lot in a new state company, in which Russian Technologies, the arms export-based state holding, would hold a 25% stake? There can be no claim of stakeholder and management coordination, or raw material supply and production cost synergies, because Potanin didn't consult the others, or come up with an integrated value scheme. The simple driver of Potanin's plan was to create so much debt for the state to absorb, that he and the Norilsk Nickel group would be left to retain control of itself, and reduce the state shareholding in the scheme to 25%. The controlling stakeholders of the companies Potanin proposed to merge into the new state company have subsequently issued their refusals to go along. Each has his own plan.
Why did Oleg Deripaska, in a letter to Medvedev on January 20, invite the Kremlin to accept a US$45 billion valuation for Rusal, and issue $6 billion in state loans to cover part of Rusal's debt, in return for an issue of 15% non-voting shares in Rusal, and a promise to pay the state dividends - if and when aluminum prices rise enough for Rusal to declare a profit? Again, the answer is that Deripaska wants a bailout with minimum loss of control for himself. Asked why the Norilsk Nickel consolidation plan didn't have room for Deripaska's Rusal, Norilsk Nickel's chief executive, Vladimir Strzhalkovsky, has responded that he isn't seeking a merger with Rusal because the aluminum company has too much debt. As it stands, the proposal from Potanin would pool $28 billion of debt to $60 billion in sales, according to Interros, Potanin's holding company.
Just a little memory is required to see this as a reprise of the very first state bailout, which made Potanin and the other oligarchs what they became and what they are today. In 1995-96 that was called loans-for-shares. It was the scheme by which the state treasury loaned the oligarchs money for cut-price privatization of the control stakes of the natural resource assets they incorporated as their own. Having leveraged these shareholdings in the dozen years that followed, in order to create even larger conglomerates inside Russia and parallel asset empires in safe-havens abroad, and having squirreled away billions of dollars in personal dividends, they have come back to the government with a request to play the same game all over again.
According to one oligarch, he is disappointed to find there is no government where he expects to find it, only bitter rivals at each others' throats. What he means is that it was much easier, and also cheaper, when he had to deal with president Boris Yeltsin. A lesser known, but oligarch-sized figure, Vyacheslav Kantor, controlling shareholder of Acron, a fertilizer producer and exporter, submitted his plan to Putin and Sechin just before they appeared for an inspection of his Novgorod factory on January 25. Kantor's scheme puts himself in control of a state-financed company that would take over mining licenses Kantor has borrowed to buy and develop, but which he cannot afford any longer. He is asking for a bailout of $700 million of debt, and a credit line from a state bank of up to $2 billion for his mining undertakings. In this Acron scheme, the state equity stake in exchange would be a non-controlling one.
Other schemes that have been tabled at Sechin's office in the mineral fertilizer sector indicate the creation of a state company to consolidate existing state stakes in phosphate and potash companies, and impose a fine on Uralkali, owned by Dmitry Rybolovlev, which would oblige him to give up his stake in his company. Alisher Usmanov, the controlling shareholder of the Metalloinvest group, said he is opposed to the mega-merger of Potanin, because it under-values his own assets, and dilutes his control. Usmanov said on January 28 that one option he prefers is a scheme of merger between Norilsk Nickel and Metalloinvest without a significant stake stake. Alternatively, to absorb his own debts, he offers a scheme incorporating Metalloinvest, Norilsk Nickel, and steelmaker and coal-miner Mechel, plus diamond-miner Alrosa. Announcing the obvious, Usmanov has said: "If the Russian government would participate in this merger and restructure the debts of the companies everybody would win from it."
A frank admission from one oligarch headquarters: "This global [state] company would be impossible to manage, it is true. But the reasoning here is that this is a measure only for the crisis period. Later, each of the companies would be able to buy back their shares from the state, and separate again." The presumption of all these plans is that, if and when global demand recovers, commodity prices revive, export revenues grow, share prices pick up, and the international capital markets can accommodate Russian debt financing needs again, the oligarchs would borrow abroad to buy out the state - and resume the same unconstrained control of their enterprises as they enjoyed before all the trouble began. That's a big if; the when may be a long time coming.
Putin has responded ambiguously in a lengthy interview on January 25: "First, there are no final decisions here. Second, what you're speaking about was suggested by the owners of these companies. But you know that if you get two poor people together, it won't be a richer family. So it all depends on the specifics. Where there can be any positive synergy from consolidation - say, when one party has mineral resources, the second has financial possibilities, and the third has access to the markets - it will be in demand. You don't need a lot of brains to combine debts with debts, and it won't bring any results. That's why we'll keep a balanced, careful approach to this problem. Once again, the main goal here is to increase competitiveness."
But the same day Putin also said he favored Kantor and his plan: "The owners of this enterprise [Kantor's Acron] not only keep jobs in quite difficult conditions, they also develop the social sphere. Owners of the enterprise are not poor people. If those who deal with real production also have a feeling of social responsibility, we will support such people." Then in Davos, on January 28, Putin declared: "Excessive intervention in economic activity and blind faith in the state's omnipotence is another possible mistake. True, the state's increased role in times of crisis is a natural reaction to market regulation setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent."
"The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation. In the 20th century, the Soviet Union made the state's role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly, and I am sure nobody wants to see it repeated. Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, has been eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state." As clear as this looks, its application is anything but. Hence, the dislocation between what Russians say, and what the market does.
Sechin has been quoted by Interfax as saying that the decision on the consolidation plans is up to the shareholders. If that were believable, Rybolovlev of Uralkali would be relieved that he will be deciding the future of the potash miner, not Sechin. But at Uralkali headquarters in Moscow, and in Geneva where Rybolovlev is based, it is the state shareholder, and Sechin's fiat, which are expected to decide. This is why Uralkali's share price is at a substantial discount to its peers, at home and abroad; and why its downward trajectory is disconnected from the potash commodity price. Deputy Prime Minister Shuvalov has said: "We see that many enterprises that we work with, and their shareholders, have started to feel that the state will save them no matter what. Against this background, they have begun to think ... that the state will help them no matter, help them to refinance their foreign debts and give them special programs to buy their production. We have nothing like this in our plans. Just because the enterprise is important and has several tens of thousands of workers, we do not simply intend to give out resources and wait for them to come for more later. The shareholders and heads of these enterprises must for themselves look at their own personal responsibility."
Those oligarchs who are uncomfortable with state takeover risk, and think they can refinance from the same international banks, to which they are already mortgaged, are now trying to escape. One of them, Igor Zyuzin, owner of Mechel, is well aware that he's on others' hit-lists. He and Alexei Mordashov, controlling shareholder of steelmaker Severstal, are reported by bank analysts and industry sources as having decided to pull back last month's applications for state bank loans. Since they don't admit to lodging their application; the state bank won't say if applications have been lodged; and no one will acknowledge whether the state bank said yes or no to Zyuzin and Mordashov, there is no way of gauging whether Zyuzin and Mordashov are today more or less desperate. The international markets are in two minds - Severstal's share price is up 10% over the past four weeks; Mechel's is down 21%.
If Putin means what he was saying in Davos, this is exactly what should be happening for the greater benefit of all. "The constant temptation of nestling close to the sources of state well-being is perfectly understandable," the prime minister told the Davos audience. "But at the same time, these sources are not inexhaustible, nor are they cure-alls." But Putin will not return to Moscow to tell parliament which of the oligarch enterprises will be saved by state financial guarantees, budget funds, or state bank cash. Nor will state auditors and valuers be allowed to testify to parliament on the terms of the new round of loans-for-shares. These are state secrets. And the funny thing about state secrets is that in the marketplace, outside the state, they perform like heavily discounted promissory notes.
In due course, the market will get Putin's message from the enterprise shareholders. It will discount the value of what they say. In the meantime, the market will apply the outer-space discount. That deals with the risk of not being able to anticipate anything at all. Uncertainty and fear are now making Russian assets worth less than they were during the last two national crises - in 1991, when the Soviet system collapsed; and in 1998, when the Treasury and the banking system defaulted.
Bank of Japan to Buy 1 Trillion Yen in Shares Owned by Lenders
The Bank of Japan will buy 1 trillion yen ($11.1 billion) of shares owned by financial institutions to shore up their capital, which has been ravaged by the global stock-market rout. The central bank will purchase stocks until April 2010, resuming a program it ended more than four years ago, it said in a statement after Governor Masaaki Shirakawa and his policy colleagues met in Tokyo today. The bank will hold the shares until at least March 2012. "This is a good move," said Jesper Koll, chief executive officer at Tokyo-based hedge fund adviser TRJ Tantallon Research Japan. "It frees the banks to focus on their main business, assessing credit risks rather than riding the fortunes of the stock market."
The Nikkei 225 Stock Average’s record decline has forced Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. to cut earnings forecasts and restricted their ability to lend. Policy makers worldwide are trying to keep their economies afloat as the global recession deepens. Australia’s central bank cut interest rates to the lowest in 45 years today and the government pledged additional spending. The Nikkei climbed as much as 2.7 percent after the announcement before sliding 0.6 percent to 7,825.51 at the close in Tokyo. Japan’s benchmark stock average lost a record 42 percent in 2008 and has dropped a further 11.7 percent this year. Australia’s benchmark S&P/ASX 200 stock index rose 0.3 percent and the MSCI Asia Pacific Index gained 0.5 percent.
"This measure aims to act as a safety net to stabilize the financial markets," Governor Shirakawa said at a press briefing in Tokyo. "It’s always appropriate to prepare for the worst factors and the worst-case scenario." Shirakawa added that the plan isn’t necessarily focused on boosting the stock market. Rather, he said, the central bank is concerned that banks will become reluctant to lend toward the fiscal year end, when companies settle accounts, out of fear that declining stock values will deplete their capital. The bank will start the purchases after getting the government’s approval. "The Bank of Japan wants to improve banks’ balance sheets, which would make it easier for them to lend more money to companies," said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo, who used to work at the central bank.
In Australia, Governor Glenn Stevens lowered the overnight cash rate target to by one percentage point to 3.25 percent and Treasurer Wayne Swan said the government will spend A$42 billion ($27 billion) for households and on infrastructure. "Such a proactive approach from governments and central banks is the only hope we have of avoiding Armageddon," said Prasad Patkar, who helps manage $800 million at Platypus Asset Management in Sydney. The U.S. government is considering guarantees for home loans modified by their servicers, seeking to stem the record surge of foreclosures that’s hammering property values. The proposal is aimed at shielding lenders from default after they loosen loan terms for struggling borrowers. The Bank of Japan has already reduced interest rates to 0.1 percent and is buying corporate debt from lenders to encourage them to extend credit and prevent a deeper recession. Today’s move comes less than two weeks after the bank said it will buy up to 3 trillion yen of commercial paper and consider purchasing corporate bonds to channel funds to companies.
"The timing is quite a big surprise," said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. "My understanding is the result of the outright purchase of the CP probably wasn’t exactly as the BOJ wanted. So they thought they needed to introduce a new measure earlier than expected." The central bank said it will buy stocks of companies with a credit rating of BBB- and higher. To be eligible, banks will need stockholdings exceeding 500 billion yen and a "capital adequacy ratio based on international standards," it said. The bank will only buy up to 250 billion in stocks from each lender. Japan’s six biggest banks hold about 11 trillion yen of shares by book value, and plans to buy less than a tenth of that amount would do little to strengthen their finances, Dai-Ichi Life’s Kumano said.
"The measure will contribute to stabilizing the financial system, and we’ll consider it carefully," said Masako Shiono, a spokeswoman for Mizuho. Sumitomo Mitsui Financial Group Inc. spokeswoman Chika Togawa said the bank may get involved "under certain circumstances, while taking into account the will of share issuers." Mitsubishi UFJ spokesman Tomohiro Kato declined to comment. Mizuho, Japan’s second-largest bank by revenue, last week reported a loss of 145.1 billion yen in the third quarter ended Dec. 31, after booking 204.9 billion in losses on shareholdings. Mitsubishi UFJ, the country’s largest lender, said last month it expects to book 288 billion yen in losses on domestic equities. "It doesn’t really solve the fundamental problem; the fundamental problem is how much the earnings are being damaged," said Diane Lin, Sydney-based portfolio manager at Pengana Capital, which oversees about $1.9 billion. "Last week was a total shock to us."
A collapse in global demand is prompting Japanese manufacturers to forecast losses, cut production and fire workers. Hitachi Ltd. last week projected a record 700 billion yen annual loss and said it may eliminate 7,000 jobs. Shirakawa said the central bank’s previous share-buying program helped to stabilize the financial system. The bank bought shares in 2002 to 2004, when it pledged to purchase up to 3 trillion yen in equities as the stock market plunged to a 20- year low and banks were laden with bad debts. The bank started selling those shares in October 2007. It stopped the sales the following October, after the collapse of Lehman Brothers Holdings Inc. sparked the global market rout and sent the Nikkei below its 2003 bottom to 7,162.90. The bank held 1.27 trillion yen in shares as of Jan. 31. The government earlier this decade also bought shares owned by banks, and in December said it will allocate 20 trillion yen for a possible resumption of purchases. The opposition- controlled upper house has yet to approve the proposal.
Thai Banks Seek $1.54 Billion in Aid to Boost Lending
Thailand’s banks are seeking a 54 billion baht ($1.54 billion) state aid package designed to help them restart lending to businesses and lift the economy out of a probable recession. The Thai Bankers’ Association asked the government to provide 50 billion baht for loans to exporters and 4 billion baht to recapitalize the state-run Small Business Credit Guarantee Corp., Secretary-General Twatchai Yongkittikul said in a phone interview from Bangkok today. "Given the current economic situation, banks are quite careful in extending more loans, particularly to small businesses," said Twatchai, whose association represents lenders including Bangkok Bank Pcl, Siam Commercial Bank Pcl and Kasikornbank Pcl. "In order to help banks become more confident, this credit guarantee scheme would be very helpful."
Loan guarantees for exporters and small businesses are "absolutely essential," Prime Minister Abhisit Vejjajiva said on Jan. 31. Southeast Asia’s second-largest economy may grow no more than 2 percent this year as exports and investment decline, according to government forecasts. Exports, which make up 70 percent of gross domestic product, may shrink as much as 8.5 percent this year, the first drop since 2001, according to the Thai central bank. The Thai Bankers’ Association submitted its proposals to the government at the end of January and has yet to hear back, Twatchai said. The Small Business Credit Guarantee Corp., which guarantees part of companies’ borrowings that exceed the value of their collateral, has "very limited" capacity left, he said.
Finance Minister Korn Chatikavanij will ask the Cabinet tomorrow to approve a 12 billion baht plan to boost capital at three state financial institutions, he told reporters in Bangkok today. The Small Business Credit Guarantee Corp. and the Export- Import Bank of Thailand would get 5 billion baht each under the proposal and the Small and Medium Enterprise Development Bank of Thailand would get 2 billion baht, he said. "Small businesses are having problems seeking sources of funding," Korn said, without mentioning the banks’ request for funds. "The government plans to provide loan guarantees for them to reduce risks among banks." In addition, Korn said he will ask the Cabinet to approve a 200 billion baht short-term loan facility for state enterprises. The credit line will be guaranteed by the ministry and offered to state enterprises such as Thai Airways International Pcl, the nation’s largest airline, to help them secure bank loans.
"Loan guarantees may work in the short term, but in the longer term the government will need something else to restore the functionality of the banking system," Isara Ordeedolchest, an economist at KTB Securities Ltd. in Bangkok, said in a phone interview today. "Bankers have to be confident in the economy, so I’d also like to see the government spend on medium-sized investment projects like roads in rural areas and irrigation systems." The Bank of Thailand has said it may continue easing monetary policy after cutting its benchmark interest rate to 2 percent in two reductions totaling 1.75 percentage points since Dec. 3. Central Bank Governor Tarisa Watanagase on Jan. 28 said a government lending guarantee would help ease credit markets frozen since Lehman Brothers Holdings Inc. collapsed in September.
Banks have stopped short of fully passing on the rate cuts, lowering loan and deposit rates by only as much as 0.5 percentage point. Lending this year may expand by less than half the 13 percent pace posted in 2008 by Bangkok Bank, the nation’s largest, according to the Thai Bankers’ Association. The banks asked the Finance Ministry to provide low-interest funds that they could use to provide loans to small businesses, Twatchai said. The lenders would bear all the risk and reimburse the state when their loans are repaid by borrowers, he said. "We obviously cannot have a big-scale program," Prime Minister Abhisit said about a loan guarantee scheme in a Jan. 31 interview at the World Economic Forum in Davos, Switzerland. "We will talk with the banks as to how much they think is needed and how much they can actually handle on their own."
German Real Estate Tops Investment List
With European property prices tumbling as the recession bites, Germany is emerging as the place to invest. A survey of real estate experts found that German cities are less risky in these troubled times -- with Munich emerging as the safest bet in Europe. As economies in Europe hit the doldrums, property markets are also feeling the pinch. With real estate markets from Ireland to Spain turning from boom to bust, Germany is emerging as property investors' new safe bet. A survey of real estate industry experts released on Monday finds that conditions across Europe look set to get gloomier in 2009. However, some cities are less risky than others when it comes to buying real estate. And in these troubling times, the wealthy Bavarian capital Munich is looking like a good place to buy. The report "Emerging Trends in Real Estate Europe, 2009" published by PricewaterhouseCoopers (PwC) and the Urban Land Institute asked over 500 industry experts about their forecasts for 27 cities in 2009. While prospects were deemed to have fallen across the board, the survey found that Munich and Hamburg were the top tips for property investment. In fact four German cities, the others being Berlin and Frankfurt, are included in the report's list of Top 10 cities.
According to the report, Germany was seen as "less volatile with more long-term investors." "The German real estate market is becoming more attractive in the crisis," Helmut Trappmann, head of real estate at PwC, told reporters in Frankfurt on Monday. "Acceptable returns make the risks considerably lower here then in the boom regions in earlier years." The survey respondents ranked Munich as top of the league due to a number of favorable economic factors: The city has seen a decline in unemployment, its population is growing fast and it is also experiencing a hike in consumer spending. Munich is also regarded as having a diverse economic base which makes investment there less risky. In contrast, Frankfurt, the capital of Germany's financial sector, is expected to be affected by the banking crisis and fell back from seventh to 10th place in the list. The biggest slide was Moscow which fell from the top spot in 2008 to sixth place. London has, meanwhile, emerged as a more attractive investment opportunity due to the falling prices there. It has leaped from 15th on the list in 2008 to fifth for 2009. One of the biggest problems facing property investors is the short supply of capital. Although plummeting prices could provide attractive bargains, banks are proving highly reluctant to lend. John Forbes, a real estate executive with PwC, told reporters that 2009 would be a tough year for investors. "For those who bought at the top of the market it could be a struggle for survival, particularly if banks become more aggressive in dealing with covenant breaches."
Oil hovers above $40 after more grim economic news
Oil prices stabilized Tuesday, with benchmark crude trading just above $40 a barrel after grim U.S. economic news weighed on the market overnight. But expectations were that prices could face new downward pressure as traders look to indicators, such as the stock market's performance, for signs of the depth of the global recession. Light, sweet crude for March delivery rose 50 cents to $40.58 a barrel by midday in Europe in electronic trading on the New York Mercantile Exchange. It had settled at $40.08 overnight on a reported drop in personal consumption and total construction spending in the U.S. Uncertainty about the details of America's $819 billion stimulus proposal, still up for debate in the U.S. Senate, also sidelined investors. Oil prices have fallen about 72 percent since peaking at $147.27 a barrel in mid July as a financial crisis in the U.S. sub-prime mortgage sector mushroomed into the worst world economic slowdown in decades. "I think the world is underestimating the power of this recession," said Christoffer Moltke-Leth, head of sales trading for Saxo Capital in Singapore. "It's still unfolding. It could be really, really ugly."
Moltke-Leth said he expects oil to fall to as low as $28 a barrel by the end of March, as the U.S. -- the world's largest crude consumer -- is roiled by new indications of economic downturn. In the latest such news, the Commerce Department reported Monday that personal consumption spending fell 1 percent in December, a sixth consecutive drop. Total construction spending dropped 1.4 percent in December, worse than the 1.2 percent decline economists expected. Retailer Macy's Inc. was the latest company to announce mass layoffs, saying Monday it would slash 7,000 jobs, or 4 percent of its work force, less than a month after announcing it would close 11 stores. Recent comments from OPEC leaders that the group may cut production soon may have helped stem a steeper price slide. The Organization of Petroleum Exporting Countries has pledged to reduce output by 4.2 million barrels since September, and Moltke-Leth spoke of "a lot of chatter from OPEC about having to cut further." "I don't see it happening," he said. "They need the cash, so it's hard for OPEC to credibly talk the market higher."
Crude inventories in the U.S. have soared as drivers cut back on spending. A report Tuesday by the American Petroleum Institute, the industry's trade association, is expected to show that oil stocks rose 2.9 million barrels last week, according to the average of estimates in a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos. U.S. Energy Department's Energy Information Administration reports its inventory data on Wednesday. The data is expected to show that US crude inventories rose by 2.5 million barrels in the week ending January 30, according to a Thomson Reuters poll of analysts. Oil stocks have grown more than 20 million barrels in the last four weeks, evidence the U.S.'s worst recession for more than 25 years may be deepening as consumer demand dries up. Crude supply may further increase as Iraq has extended its registration deadline for bidding on 11 new gas and oil fields. Iraqi officials say they want to add about 4.5 million barrels a day to the current 2.4 million barrels per day capacity over the next four to six years. Iraq has at least 115 billion barrels in reserves. In other Nymex trading, gasoline futures remained steady at $1.17 a gallon, while heating oil rose 1 cent to $1.35 a gallon. Natural gas for February delivery gained 2 cents to $4.58 per 1,000 cubic feet. In London, the March Brent contract rose 21 cents to $44.03 on the ICE Futures exchange.