Tom’s Lunch and Delicatessen, 9th Street N.W.Washington, DC
Hot Dogs 5¢. Hamburgers 5¢.
Ilargi: This is today's second post. Navigate your way through posts and comment sections by clicking on the titles, either the ones on top or those in the blog archive in the right hand column.
Ilargi: I’ll keep it short today, I've already said a lot about the most important event to take place this week, the G20 meeting in the next 2 days. What I see are spin doctors all over the place. International organizations like the IMF, the World Bank and the OECD have been more or less simultaneously coming forward, in a well orchestrated move, to drive home points like praise the US dollar and call for much more European quantitative easing. The report issued today by the OECD is nothing short of scandalous, or maybe we should stay it would be if it didn't fit in so well with all the other agenda driven bugger.
All three organizations are still nothing but mouthpieces for the Wall Street controlled government of the US. And it's not that the other major countries had never noticed that. What is different, very different, this time, is that after 60 years the US is no longer the world’s main and only superpower. Having private businesses organized as faceless corporations, while granting them the same rights as flesh and blood people, culminating in the almost archetypical model of Mussolini's corporate fascism that we see today, is forcing it to its knees. In order to once again become the land of the free, America needs to go through the painful process of disarming its richest and most powerful institutions and individuals.
G20 statements will in all likelihood reflect little of that. Much of what will be in them has already been written and rewritten by lobbyists and spinners. Nevertheless, there is no denying that the balance of power has greatly shifted, more than we could have predicted even ten years ago. It's the end of an empire. I'm not anti-American, or anything like that, but I do think these are developments that will benefit the majority of people on the planet, even though it will be immensely hurtful for all to cruise through the next few decades, which will be characterized by darkness, hunger, disease and death. Along with the dictatorial powers of the utterly unproductive banking industry, something else will have to go: untouchable "leaders" negotiating in plush brightly lit backrooms about how they will spend the money of their people who have none. It's a dead model, but one that those who've come up on top will defend with their lives, or perhaps more accurately, yours.
One more thing: If you live in America, and you know you will get fired soon, this is the time to buy a Ford or a GM vehicle. You'll drive for free for a year, they’ll pay for you. That quite a leap: you couldn't even get a deal like that in Bulgaria in the 1960's. Once you realize how serious and nutty it has gotten, you might be less surprised that the American position in the world is being devalued so much. And how that happens.
Aggressive Action Sought to Combat Growth Slump
The world economy will shrink by 2.75% this year and some governments and central banks, especially in Europe, need to act more aggressively to counter the slump, the Organization for Economic Cooperation and Development warned. In a bleak report on the global outlook, the Paris-based intergovernment think tank said major economies, whose leaders will gather at the G-20 summit in London on Thursday, have done enough to prevent a repeat of the 1930s Great Depression. But, forecasting a weak recovery in growth in 2010, the group called on financially strong countries, such as Germany, to do more to stimulate their economies, and urged the European Central Bank to cut interest rates fast and stoke credit markets by buying bonds with newly created money.
The OECD's advice on Tuesday coincided with new data showing that inflation in the euro zone fell to 0.6% in March, half February's rate and the lowest level since official records began in 1996. Plunging inflation is likely to fuel debate about whether European countries risk slipping into deflation, even as some European officials warn that aggressive policies to support the economy, such as ballooning budget deficits and record-low central-bank interest rates, could cause high inflation in the medium term. In its twice-yearly report, the OECD said gross domestic product in its 30 mostly industrialized member countries will shrink by 4.3% this year and stagnate in 2010. Unemployment in OECD countries will soar to nearly 10% from 6% in 2008, the outlook said.
The U.S. economy is set to contract by 4% this year, the euro-currency zone by 4.1% and Japan by 6.6%, the OECD said. Those predictions are more pessimistic than its previous forecasts and gloomier than those of the International Monetary Fund and most private-sector economists. The OECD's report said the ECB should cut interest rates quickly in view of "growing disinflationary pressures" in the next couple of years. The euro zone's 0.6% inflation rate in March was the lowest in the 16 countries that share the currency since at least since 1960, according to Fortis Bank. Many economists and the ECB believe euro-zone inflation could turn negative in coming months -- partly because energy and food prices plunged from their peaks last summer before turning positive again this year. So far, few analysts or policy makers say European countries face a long period of declining prices akin to the wrenching deflation that troubled Japan earlier this decade.
Still, many economists believe the ECB is underestimating the deflationary threat that the economic crisis poses to the euro zone. "Even if the outlook is not for deflation as such, it is for very low inflation and it's a strong indicator that (the ECB) needs to do much more," says Nick Kounis, economist at Fortis in Amsterdam. The ECB has cut its key interest rate to 1.5% from 4.25% last October and is likely to cut it again on Thursday, perhaps to 1%. That would still be well above the near-zero rates in the U.S. and U.K. The ECB has also been reluctant so far to mimic other central banks by buying government or corporate debt with newly created money to support borrowing. But ECB officials have hinted they might soon take more aggressive steps to ease companies' financing woes, such as buying corporate bonds.
The OECD's report said Germany, Europe's biggest economy, faces a particularly sharp contraction of 5.3% this year, adding that "further temporary stimulus measures are needed and should be implemented quickly." Although Germany has enacted Europe's biggest fiscal stimulus, valued at €88 billion ($116.13 billion) over this year and next, the OECD added its voice to a chorus of critics who say Germany still has scope to do more. German unemployment rose to 8.1% in March from 8.0% in February, official data showed Tuesday. Germany's export-dependent economy, like Japan's, is hurting from the fall in world trade, which the OECD predicts will shrink by 13% this year. Japan's government said Tuesday it plans to draft a new fiscal stimulus package by mid-April. The OECD said Japan is set to slip back into deflation this year.
The OECD said most major emerging economies would bounce back next year, but warned that Russia would fare particularly badly in 2009, with GDP falling by 5.6%. Weak oil prices will hold back Russian GDP growth to only 0.7% in 2010, the report said. In contrast, China and India will grow by 6.3% and 4.3%, respectively, this year, while Brazil will suffer a small contraction before recovering strongly in 2010, the think tank said. In forecasts for other major economies, the OECD said the U.K. faces a contraction of 3.7% this year while French GDP will fall by 3.3%. The report warned that the U.K. has "only limited room for fiscal maneuver" due to the weak state of British public finances.
Transparency Is More Powerful Than Regulation
In 1933, newly elected president Franklin D. Roosevelt had to make a tough choice in dealing with the aftermath of the stock-market crash that wiped out much of the equity in American companies. Leading members of FDR's brain trust wanted federal regulators to get the power to make key decisions over markets, such as which companies deserved to be publicly traded. Today, many of President Barack Obama's advisers want unprecedented authority to oversee details of the credit markets, and how banks lend. FDR decided instead to side with advisers who argued for disclosure as the key operating principle of our markets. Helping markets function better, they reasoned, was a sounder safeguard than trusting regulators to decide.
Supreme Court Justice Louis Brandeis had made the point that "sunlight is the best disinfectant," and the Securities Act of 1933 mandated the information that public companies would have to share. One indicator that disclosure was more important than regulatory power is that it wasn't until the following year that the Securities and Exchange Commission (SEC) was created. What worked to restore confidence in the equity markets then can help to restore confidence in the debt markets now: more disclosure, aimed at making the terms of debt such as mortgages more transparent. Unlike the case of stocks, under current law no one in the chain of making, insuring and rating debt is required to disclose full terms to regulators or to the market. Instead, debt markets function based on best estimates, with mathematical models determining probabilities of cash flows and defaults.
Ever since the models failed due to an unpredicted bubble, the market has been paralyzed with uncertainty. There is still a wide gap between what banks think their bad debt might be worth and what the Treasury or private investors are willing to pay. It didn't get much attention, but earlier this month Congress got a lesson on the potential of better disclosure. "Today's financial crisis was driven in part by a lack of accurate, easily usable information to give investors what they need to make informed, responsible decisions," testified Mark Bolgiano, chief executive of a nonprofit technology and accounting consortium called XBRL US. "The value of toxic asset-backed securities remains a mystery because information on the underlying loans and ongoing viability of those loans and the securities themselves was not collected consistently and even if it had been, it would not have been in a usable, portable form."
XBRL sounds complicated, but eXtensible Business Reporting Language is simply a new technology language that allows data to be easily extracted, searched and analyzed. XBRL is already being used for some equity disclosures, tagging financial information into a globally consistent, computer-readable format. Philip Moyer, who runs the Edgar Online service that distributes SEC data, studied more than 500 mortgage-backed securities priced between 2006 and mid-2008. He found there were only 600 relevant data points needed to assess the risk of a mortgage, which is many fewer than the tens of thousands of factors used to report on stocks. "This crisis has proven that lack of transparency ultimately destroys a market," Mr. Moyers said.
The good news is that with the innovation of XBRL, tracking debt instruments is no longer a technological challenge. Instead, it's a political challenge. Regulators would need to define new disclosures robust enough that data can be collected and compared, even as credit instruments continue to be rolled into complex securities and their derivatives. Other factors would include tracking the institutions holding various positions and how much leverage is involved. Put another way: If bar codes can track down bad peanuts on store shelves, shouldn't we be able to use technology to track details of mortgages and other debt instruments?
Paul Wilkinson, a lawyer who worked with former SEC Chairman Chris Cox to support the development of XBRL, has set the goal of making debt markets as regularized as titling property or registering shares. "Thanks to XBRL, there is a means to achieve the goal of moving from pseudocapitalism based on speculation to real capitalism based on facts, and a world where willing buyers and sellers can make markets based on those facts," he said. This is an encouraging vision during these anxious times. But even with the country's long tradition of relying on disclosure, the discussion in Washington has focused almost exclusively on new powers for regulatory agencies.
FDR was no Milton Friedman, and neither was Brandeis, but they grasped what we seem to be forgetting, which is that markets are too complex for even the most powerful regulators to dictate. Better transparency is the surest way to make markets more efficient and less volatile. Market wisdom results when more people access better information. The global credit crisis was made possible by real-time markets powered by new technologies that enabled massive global trading and the creation of opaque securities. It would be fitting now to use another new technology, in the form of XBRL, to make the credit markets simpler, more transparent and better insulated against bubbles.
World Bank backs strong dollar, plans trade boost
The dollar will remain the world's dominant reserve currency and a strong U.S. currency is key to lifting the world out of economic and financial crisis, World Bank President Robert Zoellick said on Tuesday. Speaking at a newsmaker event at Thomson Reuters' London office, Zoellick announced a $50 billion programme to reverse a sharp drop in trade in the global crisis and urged G20 leaders to back the effort. The Organisation for Economic Co-operation and Development said on Tuesday that world trade was in free fall and should decline by 13.2 percent in 2009 as the economic crisis cuts demand across the globe.
Zoellick said the programme would include funding from governments, starting with contributions from Britain and the Netherlands, regional development banks and private-sector banks such as Standard Chartered, Standard Bank and Rabobank. He said it was an example of how multilateral institutions like the World Bank could be used to help fix problems related to the financial crisis. But he played down the chances of a dethroning of the dollar as the world's leading currency. "I think the dollar will remain the principal reserve currency. The question will be whether you have complementary measures," Zoellick said in an interview with Reuters.
China has provoked debate about the dollar's status as the world's main unit of exchange by suggesting the wider use of Special Drawing Rights (SDR) created by the International Monetary Fund as an international reserve asset. While those ideas were worth discussing, for instance to increase international liquidity, Zoellick said that did not change the importance of the dollar. "A dollar-based system and a strong dollar ... will be critical to pull us out of this hole. Over time, however, you will see discussions over the role of the dollar," he said.
Given the important role the U.S. dollar plays in the global financial system, it is incumbent upon the United States to pursue sound economic, fiscal and monetary policies, he said. It would take more than a G20 summit to establish a new reserve currency, which requires functioning financial markets. "To create a reserve currency you need to have more than a summit or a meeting, you have to create financial markets where people feel comfortable moving in and out of the currency." If the Chinese yuan is to start playing a larger role, it will require full convertibility of its currency and greater transparency, he said. However, China's contribution to the debate was a healthy development showing its engagement in the international financial system.
The World Bank chief said the world economy faced a "dangerous year" and could stumble deeper into recession. "Everyone needs to approach this crisis with a healthy dose of humility because we've seen surprises, we still face high uncertainty," he said. "It remains a dangerous year in terms of downside risks." Zoellick said the Bank had revised down its growth forecast for the world economy in 2009 to -1.7 percent -- below the IMF's most recent forecasts but still well shy of a 4.3 percent contraction predicted on Tuesday by the OECD.
He said growth would continue in China, albeit at a lower level, and the United States should begin to show signs of recovery, seeding a broader upturn. "If the U.S. can follow through on its banking programme - there is a reasonable chance that you will start growth in the U.S first. Whether it is 2009 or 2010 is a little bit hard for me to tell," Zoellick said. The World Bank president said his priority at the G20 financial summit of the world's largest industrialised and developing countries on Thursday was to ensure that leaders not only debate reform and regulation, but also consider balanced global growth.
"It would be a big mistake if it were to become a summit of high finance without focusing on the poor," he said. He is pressing leaders to contribute 0.7 percent of their stimulus packages to a World Bank-run vulnerability fund for the poor. Investment in the poorest regions, such as Africa and Asia, to raise productivity will bear dividends by achieving more balanced economic development, he said. To this end, the World Bank is promoting a trade finance initiative.
Russia, China cooperate on new currency proposals
Russia and China are coordinating proposals on a new global currency that could replace the US dollar as a reserve currency to prevent a repeat of the global economic crisis, the Kremlin said on Monday. "We have received proposals from our colleagues in China, detailed proposals," President Dmitry Medvedev's top economic adviser Arkady Dvorkovich said. "Our positions are very similar. "We have similar positions on the development of the international financial architecture," he told reporters. Ahead of the Group of 20 summit in London later this week, the Kremlin has published a raft of proposals to overhaul the global economic order, including plans for a supra-national currency that could replace the US dollar.
China has come forward with similar ideas. US President Barack Obama has said he does not see why the dollar should be replaced and British Prime Minister Gordon Brown said the summit would have more immediate issues to discuss. "So far, not everybody is ready for that," acknowledged Dvorkovich. "We will insist on that at all levels." Medvedev has said the international community should have a say when the world's richest countries make decisions with global implications, as in the US financial crisis, sparked by the collapse of the market for subprime or higher risk mortgages. Moscow also understood however, that many countries were not ready to undertake additional "political obligations," said Dvorkovich, expressing hope that major economies would at least be open to consultations on the subject.
Dvorkovich said he hoped Russia and other major developing economies would also get an equal say and the attention they deserve during the G20 meeting. "We are hoping that our voice will be heard but I would like to stress that we do not have a desire to pit our voice against that of our partners," he said, referring to developing economies Brazil, India and China who join Russia in what is known collectively as 'BRIC.' "There will be no separate joint (BRIC) communique, nor should there be," Dvorkovich said. "This is the summit of the leaders of the G20 countries." Critics have suggested China and the United States, whose economies are closely intertwined, would likely steal the show by promoting their own agenda and turning the G20 forum into a 'G2' summit.
Dvorkovich said the US and China would have ample time to discuss bilateral issues on the summit's sidelines. Separately, Dvorkovich said Medvedev would meet Australian Prime Minister Kevin Rudd on April 1, just before the summit. Medvedev was also scheduled to meet US President Barack Obama, China's Hu Jintao and Britain's Brown that day.
Gordon Brown: Markets need 'family values'
Gordon Brown has called for banks and financial markets to adopt "family values" as world leaders gather in London for Thursday's G20 summit. US President Barack Obama arrived in the UK on Tuesday evening ahead of what has been billed as a potential turning point in tackling recession. The UK and US leaders talked during the president's flight, officials said. Earlier, addressing religious leaders, Mr Brown said markets must abide by common values such as fairness. Mr Brown, who met with the leaders of Indonesia and South Korea on Tuesday, has stressed the main aim of the summit - taking place in London's Docklands - must be to "clean up" the global banking system.
Mr Brown spoke to the president during his flight to "take stock" of their positions ahead of the summit and to identify "outstanding issues" which still needed work on. But officials are still arguing over the final wording of the communique the leaders will deliver at the end of the meeting amid signs of differences on certain issues. The Times says French President Nicolas Sarkozy has threatened to walk out if he fails in his demands for a worldwide financial regulator - an idea opposed by Britain and the US. Instead, countries are expected to agree greater cooperation among national regulators. However, ahead of the summit there has been progress on tougher regulation of tax havens and Mr Brown is holding a series of talks with world leaders arriving for the summit as efforts continue to agree concerted action.
Police search derelict buildings, drains and a harbour area at the summit venue In an address to religious leaders gathered at St Paul's Cathedral about the aims of the G20, Mr Brown said that "markets need morals". During his passage about families' values he said people did not encourage their children "to seek short-term gratification at the expense of long-term success". "And our task today is to bring financial markets into proper alignment with the values held by families and business people across the country." There was also a positive outlook for the summit given by President Obama in an interview with the Financial Times: "With respect to the stimulus, there is going to be an accord that G20 countries will do what is necessary to promote trade and growth. "The most important task for us all is to deliver a strong message of unity in the face of crisis."
Shadow chancellor George Osborne, for the Conservatives, said the UK government's entire economic strategy had fallen apart when Bank of England Governor Mervyn King said that "this country could not afford to borrow more for a second fiscal stimulus". But he said there was "common ground" on the G20 and welcomed the summit being held in London. On financial regulation, he told MPs the test would be whether the G20 "engages with the difficult issues or ducks them". But he said the UK government would have "more credibility" on bankers' bonuses and offshore tax havens if the prime minister had sacked Lord Myners, the City minister accused of signing off RBS bank boss Sir Fred Goodwin's £703,000 pension. The Trades Union Congress said the summit must make a "real difference" to people in the UK and that failure to agree a package to support growth and jobs could not be contemplated.
The G20 has prompted one of the biggest security operations ever mounted in the UK, with mass protests planned by anti-capitalist groups and the Stop the War Coalition among others. Mr Brown said no violence or intimidation would be tolerated from protesters and that police would act "very quickly" to protect people or property under threat. Mark Barrett, from the anarchist protest group G20 Meltdown, told the BBC its demonstrations, in the City of London on Wednesday and outside the summit on Thursday, would be peaceful. He said: "Tomorrow there will be a lovely party. That's what we've organised. "We really want the police to help us with that, because obviously they've got a big part to play in that, because sometimes things do go wrong, just in terms of the way the police act...
"We are going there with the intention of having a great party, so lets make it that." Scotland Yard is describing the G20 policing plan as one of the largest and most complicated public order operations it has ever devised. Some 84,000 police man hours have been allocated to the entirety of Operation Glencoe, the G20 security strategy. All police leave has been cancelled in London for Wednesday and Thursday. A number of Lib Dem MPs will attend a protest march in central London on Wednesday, the party has said, to observe how the high-profile demonstration is policed. David Howarth, the party's justice spokesman, said people's right to protest peacefully should be respected and there was no excuse for "heavy-handed or disproportionate" policing.
Six police forces are part of the £7.5m security plan. The Metropolitan Police is leading, but calling in colleagues from the City of London and British Transport Police. Outside of the M25 motorway, officers from Bedfordshire, Essex and Sussex will have roles in securing the arrival and transfer of delegations to their embassies and hotels. Inside the capital, police will co-ordinate the movement of these entourages and create a sterile environment at the ExCel centre, base for the talks in east London's Canning Town.
The G20 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the US and the EU.
Meredith Whitney on The Future of Nationalized Banks
Meredith Whitney is one of the few people in finance who, so far at least, has come out with her reputation enhanced, having foreseen Citigroup imploding as it did. Ms. Whitney, CEO of Meredith Whitney Advisory Group, a stock-research firm, talked to The Wall Street Journal's Thorold Barker. Here are edited excerpts of their conversation.
THOROLD BARKER: The government is now so embedded in the banks, whether it's through guaranteeing debt, ring fencing assets, TARP money. How are they going to get out of this now? Having got so deeply into all of these different aspects of the banks, are they going to be able to get out fully and allow these banks to function as purely private entities again?
MEREDITH WHITNEY: You've already started to see the workings of them getting out. For a lot of these banks, they're forced to deal with the fact that, if the economy is more stressed, what capital will I need? What assets will I sell? And you'll get a point where the banks will say, here's my plan, and I either need more capital or I don't. I would say the majority of banks will figure plans out themselves, and there will be a minority of banks that will have to stay on the government dole. But the banks, through this process, are going to be forced to find a solution fast and, I think, get off the government dole.
MR. BARKER: But are they going to be in a position to attract new, private capital? If you look back over the last six months, no one's raised significant capital -- actually, no one's raised debt at a significant level without government guarantees. If you look ahead, there's more regulation, higher capital ratios -- i.e., less leverage -- and more expensive debt when these guarantees go away. How are they actually going to get private money in, given that scenario?
MS. WHITNEY: Well, let's be specific here. I don't think private capital is going to go into the likes of the existing top 15 banks. Private capital, likely, will go after some of the subsets of these banks. So, for example, a Smith Barney transaction with Citigroup and Morgan Stanley -- that's a viable entity that will grow. Private capital, theoretically, would go after something like that.
MR. BARKER: If you look out five years from where we are now, what will the banking landscape look like?
MS. WHITNEY: It's almost you go back to go forward. The problem with a lot of these banks, to quote from last night, is that the biggest correlation between default and underwriting is distance. We've gotten so far away from knowing your borrower, knowing your lender, and knowing the regional stresses which your borrower is going through. So I think that you go back to very much a regional-type lending environment. And for many of the regional institutions, they're clean, they have not taken TARP capital, and I think that they will grow and they will consolidate. They will not be as big as the national entities -- the top, what was six banks -- but they'll be of a big enough scale.
And important to note, for any of these regional banks today, the biggest problem today is, the concentration of lending. Five banks control two-thirds of mortgage originations and two-thirds of credit-card loans outstanding and lines outstanding. So to disgorge that is what we have to do to get liquidity back in the system. For some of the smaller banks, even to make a difference in this environment, even if they wanted to, they would have to increase their origination capacity by a factor of eight to 10 times to equate the origination power of Bank of America. That's operationally impossible. We've got to maneuver a way for that to be operationally possible.
MR. BARKER: How does that work? How do you get the clean banks big enough to fill the hole in credit that exists?
MS. WHITNEY: I think that the government has sort of laid the groundwork with the stress test, to apply nonpunitive capital toward the healthy banks to enable them to go out and acquire, to gain critical scale.
MR. BARKER: Do you think the government needs to take a role in achieving that outcome? Having the regional banks, a little closer to their customers and having a bigger share of the pie, or can they do that by themselves?
MS. WHITNEY: There's nothing more important to that global economy, global market, than the U.S. consumer. We have got to focus on getting the U.S. consumer liquidity, empowering the U.S. consumers, small business, the local businesses, to grow. And in order to do that, we really have to supercharge the regional lenders; the government has to focus on that. And I think, what a great idea, when the strong banks pay back TARP capital, to reallocate some of that TARP capital to supercharging some of these regionals.
MR. BARKER: And going back to the big banks themselves, what changes need to be done in how they're run? For example, the idea of boards deciding on leverage ratios. How do you view some of these principles that were talked about upfront?
MS. WHITNEY: For starters, I think, they're very accessible to understand, so I like them very much. In terms of boards I'm of the opinion that so much of this is self-regulating. The leverage that a company takes on, the risk that a company takes on, how a board and a management steward shareholder capital -- ultimately gets decided on and voted on by the price of the stock. My bias is keep the government as far away from this as possible so you can have a fair trading market for the investors to decide. You have greater visibility, greater transparency, anything we can do to help the investors make the best decisions is in the best interest of everyone. But I think that the market has been pretty astute in terms of valuing who have been the active boards and who have been the inactive boards.
U.S. Bailouts So Far Total $2.98 Trillion, Official Says
A special inspector general overseeing government efforts to bail out portions of the private sector said Tuesday the U.S. so far has committed nearly $2.98 trillion toward stabilizing financial companies and rescuing domestic auto makers. The figure reflects spending on the U.S. Treasury's Troubled Asset Relief Program, as well as funding for various programs from the Federal Reserve and the Federal Deposit Insurance Corp., special inspector general Neil Barofsky planned to tell the Senate Finance Committee. It doesn't include costs for working-capital loans to General Motors Corp. and Chrysler LLC or a new government auto-warranty-guarantee program announced Monday.
Such a large commitment of funds in such a short time "will inevitably attract those seeking to profit criminally," Mr. Barofsky said in a testimony prepared for a committee hearing Tuesday. "If, by percentage terms, some of the estimates of fraud in recent government programs apply to the TARP programs, we are looking at the potential exposure of hundreds of billions of dollars in taxpayer money lost to fraud," he planned to tell lawmakers. In a separate report Tuesday, the Government Accountability Office said Treasury alone has announced plans for as much as $667.4 billion in TARP funds. The office, however, noted that all of those funds haven't yet been disbursed and estimated actual expenditures for programs announced thus far would likely reach $590.4 billion.
That estimate would leave the TARP with just $109.6 billion, less than the $134.5 billion Treasury said it estimated remained in the fund. In its report, the GAO said it remains difficult to assess the rescue program's effects and recommended the Treasury seek out concessions from employees of American International Group Inc. and the counterparties who have done business with the insurance giant. AIG, the recipient of $173 billion in federal aid, has become the subject of sharp criticism for paying out $165 million in employee bonuses after being rescued by the government and for payments it has made to banks with which it has done business. In his testimony, Mr. Barofsky said his office has initiated an investigation into AIG's bonus payments.
"We will be looking closely to ensure that the bonuses to AIG employees are not inconsistent with AIG's legal or contractual obligations," Mr. Barofsky said, adding that his office will "report to Congress the sequence of events which led to the approval of these payments by government officials." "I too am frustrated with these very substantial bonuses given at a time when AIG would have by now been in bankruptcy proceedings but for huge, repeated infusions of government money," his testimony said. Mr. Barofsky said his office, at the request of congressional leaders, also plans to investigate payments AIG made to its counterparties.
AIG crisis could be the tip of an insurance iceberg
When insurance giant American International Group Inc. imploded last fall, the firm's problems were quickly blamed not on its core insurance business but on an obscure operation that traded exotic mortgage securities. But as the economic crisis deepens, it has become clear that AIG's problems extend across most of its business lines, including its massive life insurance and retirement services operations, which reported a staggering $18-billion quarterly loss this month. The company's situation is emblematic of problems across the life insurance industry, which is suffering deep losses on investments that underlie policies for millions of American families.
So far, some of the biggest companies have suffered sharp drops in their stock prices, and many of them are asking for federal assistance. Industry conditions last year were the worst in memory and are expected to grow deeper this year amid credit rating downgrades, declining revenue and investment losses, according to credit rating firm A.M. Best Co. The worst-case scenario is that a second financial crisis is looming if these life insurance companies come under too much stress. "It was essentially a house of cards at AIG," said Donn Vickrey, a forensic accountant and co-founder of Gradient Analytics in Scottsdale, Ariz. "I would characterize other life insurers as suffering varying degrees of risk."
The financial problems, Vickrey said, may not be as serious as the disaster that swept over some parts of the banking industry, but insurers have not been subject to the same level of scrutiny as banks, and some experts say much remains unknown about their condition. When the life insurance industry ultimately stabilizes, the financial landscape will be different, along with the once-dominant AIG. Two key pieces of AIG's life insurance and retirement products operations are Los Angeles-based SunAmerica Inc., which sells retirement annuities, and Houston-based American General Life. Last fall, AIG tried to sell off its life insurance and retirement products units with the idea of preserving its core business of property and casualty insurance.
But by March 2, AIG retirement services chief Jay Wintrob wrote to employees in an internal message that the sales were more or less on the back burner. Wintrob is now considering a consolidation of SunAmerica and American General. Both operations say they are well capitalized and have many times the minimum required level of reserves to meet their obligations to their 17 million customers. Credit rating agencies have cut their assessments of the firms, though they remain well above levels that would indicate vulnerability. The companies' survival is due to a unique advantage: AIG is the only insurance company that is a major recipient of taxpayer bailout funds. The company has received commitments from the Treasury Department for $70 billion and lines of credit for tens of billions more.
"With the support and cooperation of the U.S. Treasury and Federal Reserve, AIG now has a new set of tools to reduce its debt, strengthen its capital base and enhance the value of its core business," Wintrob wrote in his message to employees. Without that lifeline, all of AIG's operations -- and the welfare of its customers -- could be in a lot more trouble, according to securities analysts, insurance industry experts and credit rating agencies. Other insurers are now asking the federal government for bailout packages, arguing that AIG has an unfair competitive advantage. The Treasury Department and various oversight boards are uncertain how much of the taxpayer assistance went to AIG's retirement and life insurance operations. But credit rating firms say that without that assistance, there would have been a substantial downgrade to AIG's ratings. Its current ratings reflect "our view that the U.S. Treasury and the Federal Reserve will continue their financial support of and commitment to AIG," said Kevin Ahern, an analyst who follows the company for Standard & Poor's Rating Services.
Ahern said the federal bailout of AIG kept the credit rating for AIG's holding company six notches higher than it would be otherwise, and without that support the company's credit would sink below investment grade. AIG's loss of $18 billion in its life insurance and retirement businesses in the fourth quarter was about the same amount that the company lost in its financial services operation, which was trading in credit default swaps and other risky instruments.
The losses for the retirement and life insurance operations came on the falling value of investments that were being furiously sold and marked down as the stock market collapsed last year. The company said that if not for those investment losses, the operations would have been profitable. SunAmerica, which has operations in Century City and Woodland Hills, sells variable annuities, which are retirement policies that provide a stream of payments, generally based on how well securities markets perform. The company has assets of $158 billion and nearly 6 million customers. But those policies often have embedded guarantees, meaning that benefits can only drop so low before the company has to take a hit, said Joseph Belth, a nationally known insurance expert and retired Indiana University professor.
"Different variables have different embedded guarantees," Belth said. "But they all have one thing in common: The company takes on a risk if there is a dramatic decline in the stock market. And they no doubt never dreamed of the kind of stock market collapse like we have had. "It seems to me that if AIG had not gotten the federal money, they would have had to declare bankruptcy," Belth said. Belth said in a bankruptcy, state regulators would continue to operate the subsidiaries and maintain existing insurance policies. Critics say the company brought some of its troubles on itself by engaging in risky securities practices. In some cases, it was betting against its own long-term interests.
"AIG investments were more aggressive, relative to other insurers, across all of their business, including life and casualty insurance," said Paul Newsome, an insurance analyst at investment banking firm Sandler O'Neill & Partners. In a statement, AIG disputed that, saying their products carry about the average amount of risk for the industry. "This claim is misleading and inaccurate," AIG spokesman John Pluhowski said. "The company has maintained a generally conservative, middle-of-the-road stance on living benefits for many years." But other analysts go much further in criticizing the company's practices. Overall, AIG made "the most egregious investment decisions I have ever seen," Vickrey said. "It was extremely high risk with very high levels of leverage and insufficient hedging."
AIG, along with others, began offering in recent years specialized variable annuities with guaranteed minimum death benefits, Vickrey said. The assumptions underlying these contracts turned out to be wildly optimistic, he said. As a result, AIG is on the hook to deliver guaranteed benefits despite the fact that, even if it had invested prudently, it would not have earned a sufficient return to make good on the obligation, he added. Sen. Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee, said AIG's life insurance companies also played a very risky game of lending out long-term securities and investing cash collateral for those loans in securities backed by subprime mortgages. When the mortgage market collapsed, AIG life insurance firms took a $21-billion loss, Shelby said at a Senate hearing this month. Only because those AIG life insurers were able to tap $17 billion in federal assistance were they able to meet policyholder claims, he said.
US federal pension insurer shifted to stocks
Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks. Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds. The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.
No statistics on the fund's subsequent performance were released. Nonetheless, analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy. "The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency. In addition, Peter Orszag, head of the White House Office of Management and Budget, has "serious concerns" about the agency, according to an Obama administration spokesman.
Last year, as director of the Congressional Budget Office, Orszag expressed alarm that the agency was "investing a greater share of its assets in risky securities," which he said would make it "more likely to experience a decline in the value of its portfolio during an economic downturn the point at which it is most likely to have to assume responsibility for a larger number of underfunded pension plans." However, Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20, dismissed such concerns. Millard, a former managing director of Lehman Brothers, said flatly that "the new investment policy is not riskier than the old one." He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Millard said.
He said he believed the new policy - which includes such potentially higher-growth investments as foreign stocks and private real estate - would lessen, but not eliminate, the possibility that a bailout is needed. Asked whether the strategy was a mistake, given the subsequent declines in stocks and real estate, Millard said, "Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it." But Bodie, the BU professor who advised the agency, questioned why a government entity that is supposed to be insuring pension funds should be investing in stocks and real estate at all. Bodie once likened the agency's strategy to a company that insures against hurricane damage and then invests the premiums in beachfront property.
Since he issued that warning, he said, the agency has gone even more aggressively into stocks, which he called "totally crazy." The agency's action has also been questioned by the Government Accountability Office, the investigative arm of Congress, which concluded that the strategy "will likely carry more risk" than projected by the agency. "We felt they weren't acknowledging the increased risk," said Barbara D. Bovbjerg, the GAO's director of Education, Workforce and Income Security Issues. Analysts also believe the strategy would not have been approved if the government had foreseen the precipitous decline in the stock market. Now, they warn about a "perfect storm" scenario in which the agency's fund plummets in value just as more companies go into bankruptcy and pass their pension responsibilities onto the insurance fund. Many analysts say it is inevitable that the agency will face significantly increased liabilities in coming months.
"The worst case scenario is coming to pass," said Mark Ruloff, a fellow at the Pension Finance Institute, an independent group that monitors pensions. He said the agency leaders "fail to realize that they are an insurer of pension plans and therefore should be investing differently than the risk their participants are taking." The Pension Benefit Guaranty Corporation may be little-known to most Americans, but it serves as a lifeline for the 1.3 million people who receive retirement checks from it, and the 44 million others whose plans are backed by the agency.
The agency was set up in 1974 out of concern that workers who had pensions at financially troubled or bankrupt companies would lose their retirement funds. The agency operates by assessing premiums on the private pension plans that they insure. It insures up to $54,000 annually for individuals who retire at 65. Despite its name, the agency does not necessarily guarantee the full value of a person's pension and is not backed by the full faith and credit of the government. Nonetheless, agency officials say that if the pension agency fails to meet its obligation, the government would come under intense political pressure to step in. That means taxpayers - including those who don't get pensions - could be asked to pay for a bailout.
Currently, the agency owes more in pension obligations than it has in funds, with an $11 billion shortfall as of last Sept. 30. Moreover, the agency might soon be responsible for many more pension plans. Most of the nation's private pension plans suffered major losses in 2008 and, all together, are underfunded by as much as $500 billion, according to Bodie and other analysts. A wave of bankruptcies could mean that the agency would be left to cover more pensions than it could afford. In the early years of the George W. Bush presidency, the agency took a conservative investment approach under director Bradley N. Belt, who favored putting only between 15 and 25 percent of the fund into stocks. Belt said in an interview that he operated under "a more prudent risk management" style and said he "would have maintained the investment strategy we had in place." Belt left in 2006 and Millard arrived in 2007.
Under Millard's strategy, the pension agency was directed to invest 55 percent of its funds in stocks and real estate. That included 20 percent in US stocks, 19 percent in foreign stocks, 6 percent in what the agency's records term "emerging market" stocks, 5 percent in private real estate and 5 percent in private equity firms. Millard said he thought he had little choice but to seek a higher investment return in part because Congress had limited the agency's ability to charge higher premiums based on each plan's likelihood of drawing on the agency's funds. The agency's board - which consists of the secretaries of Treasury, Labor, and Commerce - approved the new investment strategy in a meeting in February 2008. But the board members have had only a limited role in the agency's operation, meeting only 20 times over the 28 years before 2008.
The board is also too small to meet basic standards of corporate governance, according to an analysis by the Government Accountability Office. "The whole model of having three sitting Cabinet secretaries with day jobs overseeing a $60 billion investment portfolio and occasionally owning significant percentages of large American companies is fundamentally flawed," said Belt, the former agency director. The Government Accountability Office is preparing a new review of the investment policy, but in the meantime it continues to place the agency on its list of federal programs at "high risk."
GM May Not Have Time for Bond Swap Outside Bankruptcy
General Motors Corp. bondholders doubt a debt exchange will succeed outside of bankruptcy because there isn’t enough time under the Obama administration’s 60-day deadline, according to a person familiar with the thinking of the committee representing creditors. A prepackaged bankruptcy is more likely to work in slashing Detroit-based GM’s debt, said the person, who declined to be identified because the discussions are private. The deadline is too tight to get enough bondholders to swap their debt for equity voluntarily, the person said. If GM proposes a deal that the bondholder committee supports, a prepackaged bankruptcy would be achievable, the person said.
While the panel doesn’t represent two-thirds of the $27.5 billion in bonds GM is trying to exchange, enough investors have indicated they’d back the committee’s decision to make a prepackaged bankruptcy attainable, the person said. GM is racing against the timetable set by President Barack Obama’s task force because the panel found insufficient progress toward viability in the three months since the biggest U.S. automaker received $13.4 billion in federal loans. “Our focus is on accelerating the speed of our operational restructuring and reducing liabilities and debt,” said Renee Rashid-Merem, a GM spokeswoman. “During the next 60 days, we will work aggressively on restructuring our financial obligations with bondholders, unions and other stakeholders.”
Bondholders have been reluctant to exchange their debt for about $9 billion in debt and equity as part of GM’s requirements to keep its U.S. aid. GM also hasn’t agreed with the United Auto Workers on how to shrink $20.4 billion in obligations to a union-run health-care fund. GM bondholders should accept some losses as the automakers struggle to lighten their debt load, said U.S. Senator Richard Shelby of Alabama, the top Republican on the Senate Banking Committee. Debt holders at Chrysler LLC, which also is being propped up with federal aid, should do the same, he added. “The bondholders are going to have to take a real haircut, otherwise they could wind up empty-handed, or close to it,” Shelby said in a Bloomberg Television interview.
“What they are betting on is that the taxpayer will continue to pump money year after year into General Motors and Chrysler.” GM must cut debt and improve cash flow, and likely will have to get rid of more jobs and plants, Chief Executive Officer Fritz Henderson said at his first news conference since succeeding Rick Wagoner, who left at the task force’s request. “We’ll get it done in court or we’ll get it done out of court,” Henderson said in Detroit. “But we will get the job done. GM fell 76 cents, or 28 percent, at 4:15 p.m. in New York Stock Exchange composite trading. It was the biggest drop since Oct. 8, pushing the shares’ decline to 46 percent in the past two days on concern that GM won’t be able to avert bankruptcy.
GM’s $3 billion of 8.375 percent notes due in July 2033 slid 3.9 cents to 12.1 cents on the dollar, yielding 68.6 percent, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. Credit-default swaps on GM bonds rose for a second day on concerns the automaker would be forced into court protection. The price climbed 2 percentage points to 83 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year for five years, meaning it would cost $8.3 million initially and $500,000 annually to protect $10 million of the automaker’s debt.
Please torch my car
by Willem Buiter
Am I the only one to think that tax incentives for new car purchases - cash for clunkers, in the words of Alan Blinder - are a daft idea? Even Obama has succumbed to this rot, despite an encouraging toughening of his general stance on government financial support for the US car industry (workers, shareholders and even unsecured creditors of GM and Chrysler have to take a larger haircut if more federal aid is to be forthcoming. Now let’s apply the unsecured creditors part of this logic to the banking sector also!). Fiscal incentives to induce automobile owners to trade in their jalopies and buy new cars have been introduced in many car producing countries, including Germany, France, Italy and Spain. A number of US states and Canadian provinces also have introduced such schemes.
The rationale is partly a general Keynesian demand stimulus, partly a sector-specific subsidy to workers, managers, share holders and creditors in the automobile industry and other industries that depend on them. If the programme is temporary and the cash incentive substantial, such programmes are bound to work. This artificial shortening of the economic life of a car seems nuts. It’s worse than getting paid to dig holes and fill them again. It’s like being paid to burn down your house to encourage the residential construction industry. In Iceland, where economic calamity has befallen a population that was until the autumn of 2008 among the richest in the world, people torch their SUVs for the insurance money. Iceland doesn’t produce any cars, let alone SUVs, so this does not do their GDP any good, but think of the global externalities! Perhaps the G20 could propose the world-wide legalisation and subsidisation of the willful destruction of consumer durables, residential property and infrastructure (schools, hospitals, prisons etc.) as a global stabilisation policy measure.
The most disingenuous argument for subsidising the early scrapping of cars and their replacement with new cars is the environmental one: new cars are likely to be less environmentally damaging than old cars. Save the environment - buy a shiny new energy-efficient car. Even if the new cars that are subsidised were just the most environment-friendly ones (hybrids, 80 miles per gallon marvels etc.) - which is not always the case - the production of these new vehicles is, when you put it through the appropriate global input-output matrix, an environmentally damaging affair, requiring lots of metals, plastics and energy. You have to weigh the environmental benefits from running a new car (a lower flow production of greenhouse gases, say) against the one-off environmental cost of a higher volume of car production. If the replacement incentive is sufficiently short-lived, there need not be any long run effect on the level of car production, and even little if any effect on the (undiscounted) cumumulative volume of car production.
A given cumulative volume of current and future car production would simply have its time-profile shifted from the future to the present. But if the scrapping subsidy were longer-lasting, cumulative car production would increase, resulting in greater environmental damage. The net balance of environmental benefits and costs is by no means obvious. Clearly, if car owners were incentivised to buy a new car every week, the environmental costs of producing the new cars with their very short economic lives would swamp the lower environmental running costs of these new cars. I’m not convinced of the environmental benefits of the cash-for-clunkers scheme. I would be a major beneficiary of the scheme should the UK decide to introduce one. I drive an 18-year old hooptie that has bits falling off all the time (it’s easy to stick them back on, however, with superglue, miracle putty and duct tape). These policies to promote accelerated obsolescence of consumer durables also leave a more generic bad taste. I’ll keep my old banger on the road as long as the laws of physics allow it.
Japan skeptical of US auto recovery
Turmoil in the U.S. auto industry was front page news in Japan on Tuesday, where the general reaction was a mixture of skepticism about the outlook for General Motors and Chrysler and concern about the fallout on homegrown brands. "No escape in site for the current crisis," read a headline in The Nikkei, the country's main business newspaper. Japan's large car manufacturers -- Toyota, Honda and Nissan -- are archrivals of GM, Ford and Chrysler, but they also depend on the U.S. market for a huge chunk of their sales. The U.S. is the world's largest vehicle market, and Japanese automakers have moved a considerable amount of their production there, where they share suppliers with American manufacturers. "The current 'automotive crisis' affects not just the U.S. market, but is also a direct blow to the world market," the Nikkei said.
President Barack Obama took a tough stance toward GM and Chrysler on Monday, rejecting their recovery plans and essentially giving them a choice to attempt another painful restructuring on their own or seek bankruptcy protection in court where a judge would do it for them. Obama is popular in Japan, and his moves to right his country's economy have been well-received so far. The president said he was committed to remaking America's automobile industry so it could pump out cleaner and more efficient vehicles -- but the feeling in Japan is that things will only get worse for U.S. carmakers. "Both GM and Chrysler lack a trump card, a 'sure seller' such as an environmentally friendly vehicle, and there is no clear recovery in sight" said the Mainichi newspaper. Analysts said the latest developments in the U.S. did not alter the big picture. "Actually this is not big news as far as the industry is concerned. There is no change in the fact that the U.S. government is going to have to provide relief," said Mamoru Kato, an automotive analyst at Tokai Tokyo Securities.
In stock trading Tuesday, Japanese investors showed a mixed reaction to the news. Toyota Motor Corp., a big rival of General Motors Corp. which also runs a manufacturing joint venture in California with GM, dipped 0.6 percent to 3,120 yen. Nissan Motor Co. fell 3.1 percent to 350 yen. Japan's No. 3 automaker had inked a deal to provide its cars for sale under the Chrysler brand and likewise sell cars made by Chrysler in a joint OEM, or "original equipment manufacture" agreement. But it has said it will review those plans as Chrysler appears to be nearing a deal with Italian automaker Fiat SpA. The U.S. government has said it's willing to provide another $6 billion in financing for Chrysler if it is able to finalize an alliance with Fiat or another company within 30 days. While Obama gave the automakers a choice, he said he didn't envision breaking up the two auto companies and selling them off to the point where they no longer exist. He also told auto buyers that the government was now standing behind GM and Chrysler service warranties and would provide tax incentives to new customers. "Obama is saying that the auto industry represents the spirit of America, so they're not going to let it just disappear," said Fumiyuki Nakanishi, a chief equity strategist at SMBC Friend Securities. "So basically, this means that Japanese and European automakers who will be competing with GM will really be competing with the U.S. government from now."
Japanese names like Toyota have aggressively made the U.S. a core part of their growth strategy. Now they often share the same parts manufacturers with their U.S. peers, leading to fears that a major collapse in the country could hurt operations there. Toyota President Katsuaki Watanabe said last week he was worried that GM could be forced to declare bankruptcy , and said he hoped the company could continue its operations. Other carmakers have taken a similar stance. But Kato, the automotive analyst, said Japanese manufacturers are more afraid of the negative fallout from tens of thousands of job cuts, and the ripple effect on the U.S. economy, then of losing key component manufacturers. "Japan's carmakers have known that U.S. makers are in trouble for some time. They have located other parts makers, who would be happy for the new business, and made contingency plans in case this happens," he said.
A Pitched Battle for Turf Between the Bears and the Bulls
The bulls and the bears never agree. But what is remarkable is that the rift between these two Wall Street camps seems to be widening. This month, after the stock market staged one of its biggest rallies since the Depression, optimists like Douglas A. Kass, a prominent hedge fund manager, buzzed that the worst was over. Finally, after a 401(k)-busting, 7,722-point plunge in the Dow Jones industrial average, the stock market seemed to be escaping bear territory, the bulls argued. Investors who in recent weeks snapped up oil and technology stocks, as well as beaten-down financial shares like Citigroup, have made a lot of money, at least on paper.
They hope that some less-than-awful numbers from the housing and industrial sectors signal that the global recession is scraping bottom. To some, stocks are irresistibly cheap right now. The price-to-earnings ratio on the Standard & Poor’s 500-stock index is 12 to 13, lower than its historical average of closer to 17. But the bears are unbowed. Skeptics like Robert L. Rodriguez, another money manager, argue that the March gains were nothing more than a suckers’ rally — a brief respite before another, even bigger roar of the bear market. They point out that rallies have fizzled before. The S.& P. soared 24 percent between late November and early January, only to lose all those gains — and more — as it tumbled to a 12-year low on March 9.
The bears seemed to regain the upper hand on Monday. Wall Street opened to news that Morgan Stanley was advising investors to start selling again to lock in their recent profits, and it continued its spill as investors fretted about the management change at General Motors. The Dow slumped 254.16 points, or 3.3 percent, to 7,522.02. That followed a 1.9 percent decline on Friday. The broader S.& P. fell 3.5 percent, or 28.4 points, to 787.53, and oil fell while the price of safe-haven Treasury bonds rose, pushing the yields on the benchmark 10-year note down to 2.71 percent. With so much uncertainty — over the fate of banks and Detroit carmakers, over the entire economy — this tug of war is not over. Mr. Kass and Mr. Rodriguez make their cases below. They cannot both be right.
• • •
At the beginning of 2008, Mr. Kass, known as a short-seller, saw more trouble coming and bet against the stock market. But now, he says he thinks stocks have hit a definitive bottom, and he said he was buying. “I’ve been a bear for three years,” said Mr. Kass, general partner of Seabreeze Partners Management in Palm Beach, Fla. “This is a big change for me.” Mr. Kass said the March lows would not just represent the lowest points of the year, but “possibly a generational low.” Last week, he wrote a note, “Why the Bears Are Wrong,” that tallied a host of hopeful conditions in the economy and the financial system. He saw potential in the Obama administration’s plan to buy $500 billion to $1 trillion in troubled assets from banks using a blend of public and private money. If it works, the move could take the strain off the banks’ struggling balance sheets and loosen credit markets, Mr. Kass said.
Many analysts have said that financial companies, which plunged the markets into crisis, will be the ones to lead the way to higher ground, and Mr. Kass said he was cheered to see big banks leading the March rally. The S.& P. Financials Index rose 33 percent from March 9 through Monday, while the broader S.& P. 500 gained 16 percent. Commodity prices for metals and oil began to rise, signaling a hint of inflation and a chance that economic growth could find a foothold, he said. And he said he was encouraged by a bouquet of better-than-expected reports from the housing and retail sectors. Given the speed of the rally, however, Mr. Kass wrote a note on Friday saying that investors might seize the opportunity to raise cash and take profits.
But he said he was still convinced that “the U.S. stock market will rise to levels higher than most anticipate,” by as much as 25 percent by summer. Mr. Kass said he liked companies like Home Depot, Lowe’s, the Walt Disney Company and real estate investment trusts. Even optimistic investors warn that a recovery in stocks will not look like a steady climb, and they say that economic growth may be slow for some time. But as stocks have picked back up, Mr. Kass said, he has noticed a new concern among investors. “The fear of being out has begun to replace the fear of being in,” he said.
• • •
What optimists do not understand, says Mr. Rodriguez, chief executive of First Pacific Advisors, is that the United States is being profoundly reshaped by this recession. “We’ve crossed over into a new financial era,” he said. “You don’t know what the ground rules are. You don’t even know what the shape of the playing field is.” Economic growth may be stagnant for years, even after the economy hits bottom. Corporate profits may not bounce back. And the high hopes for recovery that have helped drive stocks higher this month may yet crumble. Stock markets rose 10 percent or more several times during the Depression, the early 1970s and other downturns, only to lose their momentum and give back months of gains.
As bearish experts warn, market bottoms come only when investors give up hope of ever seeing a bottom. “This rally that’s going on may prove ephemeral,” Mr. Rodriguez said. “I still think we have a very long, arduous journey ahead of us.” The Capital fund that Mr. Rodriguez manages for First Pacific, which is slightly lower for the year and down 42 percent since last March, is now making heavy bets on energy companies. He is betting oil prices will creep back to $100 a barrel or more as long-term production declines. As the recession drags on, American consumers, who powered the economy for decades, will rediscover the notion of thrift, Mr. Rodriguez said. The personal saving rate, which skidded to zero as Americans tapped their home equity to finance their lifestyles, rebounded to 4.2 percent in February, the government reported last week.
Historically, Americans have saved 6 to 8 percent of their income, and the more they pile into savings accounts, the less they will give to a range of corporations. Mr. Rodriguez said there were too many question marks around earnings to convince him that the recent market rally would stick. “The stock market will be very volatile, and corporate profitability will be very volatile,” Mr. Rodriguez said. “There are large segments of the United States economy that will never come back.”
Ilargi: Barry Ritholtz has graphs to go with the Case/Shiler housing report I posted this morning:
Case Shiller Index Falls 19%
The Case Shiller 20 city Home Price Index fell 18.97% y/o/y — the rate of decline is the most in this cycle. Both on a y/o/y and m/o/m basis, all 20 cities saw a decline. Phoenix, Vegas, SF, Miami and LA continue to lead the drop. The cities with the smallest y/o/y fall was Dallas, followed by Denver and Cleveland. As opposed to the FHFA HPI, Case Shiller does include homes backed by non conventional mortgages but is less geographically diverse. Due to high foreclosure rates, the cities with the biggest falls in price will likely be the first to hit bottom but that bottom hasn’t been seen yet.
January 2009 Year Over Year Prices
As of January 2009, prices have fallen back to 2003 levels . . .
January 2009 Prices Back to 2003 Levels
Metropolitan City Index
Double-digit unemployment looms, OECD tells G8
The global economic crisis will hit jobs hard, with unemployment set to reach double digits in many developing and advanced countries, the Organization for Economic Cooperation and Development (OECD) said on Sunday. "By the end of 2010 the unemployment rate could be approaching double digit figures in all G8 countries with the sole exception of Japan, as well as in the OECD area as a whole," the OECD forecast in a background paper to G8 labor and employment ministers gathering in Rome. In new projections to be issued on Tuesday the OECD will forecast growth in the 30-nation bloc will contract by 4.2 percent this year, the Paris-based body's general secretary, Angel Gurria, told reporters on Friday.
The OECD had earlier predicted a 0.4 percent contraction, in November. The paper released to reporters on Sunday projected that joblessness in the OECD area would increase in the three years to 2010 by more than it rose in the 10 years to the early 1980s, which included two oil shocks. It forecast the area's economy would stage "a rather muted recovery" in the first half of 2010 if a series of conditions are fulfilled. "Even this muted recovery rests on the assumption that tensions in financial markets dissipate toward the end of 2009, monetary and fiscal policies continue to be supportive and that growth will pick up in the non-OECD area," it said. The OECD urged G20 leaders meeting in London this week to "intervene quickly and effectively to avoid the financial crisis becoming a full-blown social crisis with scarring effects on vulnerable workers and low-income households."
In a separate document prepared for the Rome G8 "social summit," which runs until Tuesday, the International Labour Organization warned that global unemployment could rise by 50 million this year, after an increase of 11 million in 2008. John Evans, the leader of the trade unions in the OECD bloc, told reporters that workers' organizations should have formal representation at the London G20 to ensure that safeguarding employment is near the top of the agenda. "Workers are paying the price of the crisis and anger is going to mount unless we get clear answers," he said. The 30 nations which fund the OECD include the United States, Japan and the rich industrialized nations of Europe, while the narrower G8 is made up of the United States, Japan, Germany, Britain, France, Italy, Canada and Russia.
OECD urges ECB to start quantitative easing
The Organisation for Economic Co-operation and Development on Tuesday urged the European Central Bank to cut interest rates closer to zero and begin quantitative easing, as it forecast a deeper recession in Europe and Japan than in the US and UK. The call to the ECB to begin creating money in order to head off deflation comes after the central bank has been less aggressive in cutting interest rates than its American and British counterparts. While the Federal Reserve and the Bank of England have begun programmes of quantitative easing – increasing reserves in order to buy up government and corporate bonds – the ECB is still exploring expanding its range of monetary weapons to head off the recession. The Paris-based thinktank warned in its quarterly forecasts for advanced economies that “the growing disinflationary pressures anticipated during the next two years” implied that the “remaining scope for cutting policy rates should be used quickly and quantitative easing policies implemented”. Interest rates in the ECB currently stand at 1.5 per cent compared to 0.5 per cent in the UK and a range of between zero and 0.25 per cent in the US.
The call for further monetary stimulus in Europe came as the OECD forecast that advanced economies around the world will contract by 4.3 per cent in 2009 with little or no growth expected in 2010. The whole world economy will shrink by 2.7 per cent this year, the OECD forecasts, before rebounding to a growth rate of 1.2 per cent next year. “The downturn is the most severe and synchronised in post-war history,” the OECD said. The call for further monetary stimulus in Europe came as the OECD predicted that one in 10 workers in advanced economies will be without a job next year. Other figures out on Tuesday showed that Japan and Germany have seen sharp increases in unemployment. On Monday Angel Gurría, the head of the OECD, said that unemployment in the 30 advanced OECD countries would swell “by about 25m million people, by far the largest and most rapid increase in OECD unemployment in the postwar period”. However, while the downturn will leave no advanced economies unscathed, the OECD is forecasting that it will be less severe in the US and UK, where banking systems have proved more fragile.
While the US is expected to suffer a 4 per cent decline in GDP this year, followed by no growth in 2010, the eurozone is set to contract by 4.1 per cent in 2009 and 0.3 per cent next year. Within the eurozone, Germany is expected to see the worst recession, with a 5.3 per cent decline in GDP in 2009, with Italy suffering a drop of 4.3 per cent. By comparison the UK gets off relatively lightly with a 3.7 per cent drop in GDP in 2009 and a 0.2 per cent decline in 2010. Japan will suffer most of all with a 6.6 per cent decline this year and a further decline of 0.5 per cent next year. The OECD appeared to call for further fiscal stimulus in Europe, a demand that is likely to strike a jarring note with Germany and others, who say they want to see the effects of stimulus packages already in place before embarking on another round of spending. “Additional discretionary fiscal measures are also warranted in member countries that have sufficient budgetary scope,” the OECD said.
In the UK, the OECD warned that although further fiscal stimulus could be warranted if the recession gets much worse, there was not much scope for increased public spending or lower taxes due to the rapid deterioraiton in the public finances. “The room for additional fiscal manoeuvre to respond to worse-than-expected activity developments is therefore limited and new measures would need to be accompanied by detailed and credible fiscal consolidation plans, in order to ensure that confidence is not eroded,” the report said. “In this regard, the formulation of a strong and credible medium-term fiscal framework would be helpful.” The report shows world trade growth collapsed at a nearly 25 per cent annualised pace in the fourth quarter of last year, compared with an average of 8 per cent growth over the last 5 years. This was the sharpest contraction since records began in 1965. Inflation would slow sharply across developed economies this year, with some experiencing prolonged periods of falling prices. But it said that policy introduced so far would help the world avoid another Great Depression. “The Great Depression was deepened by terrible policy mistakes, ranging from contractionary monetary policy to beggar-thy-neighbour policies in the form of trade protection and competitive devaluations,” the report said. “In contrast, this recession has broadly elicited the right policy.”
Britain will escape with shallower recession than rivals, OECD predicts
The world is facing the “deepest and most synchronised recession in our lifetimes” but Britain will escape with one of the shallowest recessions in the rich world, the OECD, the West’s leading economic institution has said. Governments must take further drastic action to prevent it from tipping into a full-blown depression, but Gordon Brown and President Barack Obama’s aspiration of a co-ordinated set of economic rescue measures is unrealistic, the Organisation for Economic Co-operation and Development said. The institution’s new forecasts come ahead of the G20 summit in London later this week. Despite predicting that Britain faces its worst year since the Second World War, a record peacetime budget deficit and the biggest unemployment toll since the 1980s, with one in ten workers out of a job, the OECD said the UK would fare better than most of its international counterparts. It said the US, Japan, Germany and Italy would all shrink faster than Britain this year.
The OECD’s forecasts shed light on how vicious and how widespread has been the economic devastation wrought by the financial crisis, and bring into focus the challenge facing the world leaders descending on London this week for the G20 summit. Its chief economist Klaus Schmidt-Hebbel said that the world economy would contract by 2? pc this year - the first contraction since the Second World War. However, largely as a result of the Bank of England’s decision to cut interest rates sharply to just above zero and the fall in the pound since last year, the UK will contract less than most of its counterparts. The prediction will cause some surprise, since the International Monetary Fund recently predicted that the UK will suffer more than most other nations, because of the poor state of its public finances and its reliance on the financial sector. The OECD said that economic output in the UK will contract by 3.7pc this year and by 0.2pc in 2010 - the sharpest fall since the years immediately following the Second World War. However, the US will shrink by 4pc this year, while economies highly reliant on exports will fare even worse, with Japan shrinking by 6.6pc and Germany by 5.3pc.
Neither is the UK’s government deficit next year likely to be the worst in the world. Although the government shortfall will be significant at 10.5pc of gross domestic product, America’s deficit will mount to 11.9pc of GDP as President Obama pumps extra cash into his economy. Nevertheless, the OECD said the outlook for jobs is extremely poor, with unemployment likely to exceed 10pc by the end of next year for the first time since 1987. The prediction means that although the economy may recover some of its poise by early next year, the “feelgood factor” is unlikely to return for some time. In comments that will come as a blow for Gordon Brown, the Paris-based institution attacked the system of financial regulation he created in 1997 by creating the Financial Services Authority and removing regulation from the Bank of England. It said of the UK: “The financial crisis highlighted significant weaknesses in the regulation of the financial sector”.
It also warned that the outlook could conceivably be even worse, saying: “Conditions in the financial sector may take longer to normalise than assumed and public debt may rise even higher than expected, both of which constitute substantial risks to the outlook. “House prices may also continue to decline further than projected, resulting in greater numbers of mortgagees holding negative equity and requiring even larger household balance sheet adjustments, thereby restraining consumption for longer.” Neither does the Government have much more room to stimulate the economy with tax breaks or public spending, the institution added. Any tax cuts must be prefaced with explanations of how this money would be paid back later, the report said. However, the institution poured cold water on dying hopes that the summit will prove an opportunity for leaders to come up with a co-ordinated scheme to cut taxes and spend more to stimulate their economies. Some, including US Treasury Secretary Tim Geithner, had hoped to use the summit to devise an agreement to devote a certain amount of cash to a new so-called fiscal stimulus package. The OECD report said that although “there is a role for international co-ordination to achieve the right amount of stimulus”, in fact “explicit fiscal coordination is unlikely to be achieved”.
US Recession To Deepen In '09; Tepid '10 Recovery: OECD
The U.S. recession is likely to be much deeper than the White House expects, pushing the unemployment rate into double-digits next year, according to projections released Tuesday by the Organization for Economic Cooperation and Development. Against that backdrop, the OECD urged Federal Reserve officials to hold official interest rates near zero through 2010 and consider expanding their balance sheet through additional purchases of Treasury and agency securities. Meanwhile, more public cash infusions into big financial institutions will probably be needed, the OECD said, and in some cases temporary nationalization might even be required.
The Paris-based policy and research organization - whose members comprise major industrial economies including the U.S. as well as large developing ones - said the U.S. Treasury's recently unveiled troubled-asset plan "should be helpful in resolving the financial crisis." Still, "it is essential that its implementation proceeds swiftly and that the Administration stand ready to take more decisive action if required," the OECD said in its interim report on the U.S. economy. The U.S. should "make it clear that it will not hesitate to restructure systemically important but fragile financial institutions, even if that entails taking control of them, putting them into receivership, removing bad assets, and recapitalizing the remaining 'good bank' with public funds," the OECD said.
The OECD also appears to see deflation as more of a risk than many at the Fed, who have downplayed its chances of gripping the U.S economy. "Deflation is a distinct possibility at some point," the OECD said. And to guard against that risk and support the economy, "the scale of quantitative easing operations may have to be expanded further with additional purchases of longer-term US Treasurys and agency securities," it said. On March 18, the Fed announced it would buy up to $300 billion in longer-term Treasurys over the next six months and raised the size of its agency and agency-backed mortgage backed securities purchase programs by a combined $850 billion to $1.45 trillion.
When the economic recovery has "firmed up," the Fed should "promptly" reduce the size of its balance sheet in order to keep inflation in check, the OECD said. Similarly, fiscal policymakers should focus on the nation's long-term finances once the recovery is "firmly" in place, the OECD said. In fact, fiscal consolidation should be "more ambitious" than what the White House has laid out in its budget, the OECD said. Meanwhile, the OECD expects the U.S. to undergo an even deeper recession, and weaker recovery, than the White House assumes in its budget. Gross domestic product should contract 4% this year from 2008, the OECD said, a much sharper contraction than the 1.2% slide the White House used in crafting its budget.
The OECD expects GDP to be flat next year, versus the White House's 3.2% growth forecast. If the OECD is correct, then the U.S. budget deficit could be even higher than the White House estimate of $1.75 trillion in fiscal year 2009 and $1.17 trillion in 2010, issued a little more than a month ago. The U.S. unemployment rate should hit 10.5% by the end of next year, the OECD said. In contrast, the White House sees it averaging just 7.9% next year. The jobless rate was 8.1% in February, and economists expect it to jump to 8.5% when March data are released Friday.
OECD Slashes Russia's 2009 GDP Forecast To -5.6% From +2.3%
The Organization for Economic Cooperation and Development said Tuesday it has severely slashed its forecast for Russia's gross domestic product to a 5.6% contraction this year due to the global economic flagging, erosion of domestic demand and declining output. Previously, the OECD forecast 2.3% GDP growth. The new projection is the bleakest yet issued by an international organization. Monday, the World Bank said it sees the once buoyant Russian economy declining by 4.5% this year. The Russian government still sticks to its official forecast of a 2.2% annual fall in GDP in 2009. The country's economy grew by 5.6% last year, but recorded a massive GDP contraction of 8.8% in January and 7.3% in February.
The main shock to the economy came from the plunge of the oil prices - the locomotive of Russia's economic well-being - which sapped domestic demand and aggravated capital outflows, the OECD said in its twice-yearly economic outlook. "Even though policy responses are providing considerable support to the economy, the combination of extremely large adverse external shocks and certain domestic vulnerabilities (notably fragile confidence in banks and the currency) make a quick return to strong growth unlikely," the OECD said in its report. While praising some of the policy responses, the OECD also warned of the risk of turning to protectionism by the government. "There has been an unwelcome tendency to resort to protectionist measures including an increase in tariffs on imported second-hand cars, subsidies to domestic enterprises, and preferential public procurement practices," the organization said.
The OECD also called on Russian authorities to ensure a speedy consolidation in the banking sector, by liquidating smaller insolvent banks. An acceleration in shifting to inflation targeting by "increasing the degree of exchange-rate flexibility and giving more weight to inflation objectives," would enhance the country's monetary policy, the organization said. The OECD also said inflation pressures should ease due to falling money supply and expected lower food prices. The OECD said the country might see a slight economic recovery of around 0.7% GDP growth in 2010, but the process will be chiefly dictated by trends in oil prices.
Eurozone inflation plunges to record low
Eurozone inflation has fallen to a record low, strengthening the case for further European Central Bank action to boost the economy of the 16-country bloc and head off any risk of deflation. The annual rate of eurozone price increases fell more than expected, from 1.2 per cent in February to just 0.6 per cent in March, according to an initial estimate on Tuesday by Eurostat, the European Union’s statistical unit. That was the lowest since comparable records began in the early 1990s. Some economists calculated that it was the lowest seen in continental Europe for half a century. It also pointed to substantial undershooting of the ECB's target of an annual inflation rate "below but close" to 2 per cent. Oil prices accounted for much of the fall but economists said the weakness of the eurozone economy almost certainly added significantly to the downward pressure on prices. Eurostat gave no details. Spain earlier this week became the first eurozone country to report a negative annual inflation rate.
The ECB is braced for the overall eurozone inflation rate to turn negative in coming months, and the unexpected weakness of the eurozone data could heighten fears that the region will enter a deflationary phase. The ECB sees full-blown deflation – sustained and general falls in prices that wreak substantial economic damage – remaining a remote risk, largely because of rigidities in the eurozone economy. Jean-Claude Trichet, ECB president, told the European Parliament on Monday that neither the ECB nor other international institutions considered the risk of eurozone deflation to be “elevated and substantiated”. But he added that “we have to remain permanently alert”. The danger the ECB faces is that negative inflation rates fuel expectations about future trends in prices that become deflationary. A European Commission report this week showed that the rate of price increases expected by eurozone consumers for the next 12 months was the weakest since its survey began in 1985.
The ECB is widely expected to cut its main policy interest rate by a further half percentage point to 1 per cent at its meeting on Thursday. So far its “non-standard” actions to combat the recession have focused on so-called “enhanced credit support” – the ECB’s answer to quantitative easing – by which it is flooding the banking sector with unlimited amounts of liquidity at low interest rates. But the ECB is activity considering further steps, including the possible purchase of private sector debt. “The ECB’s work will not be finished with the rate cut expected on Thursday,” said Rainer Guntermann, economist at Commerzbank in Frankfurt. The Organisation for Economic Co-operation and Development on Tuesday urged the ECB to cut interest rates closer to zero and begin quantitative easing, as it forecast a deeper recession in Europe and Japan than in the US and UK. The Paris-based think-tank warned in its quarterly forecasts for advanced economies that “the growing disinflationary pressures anticipated during the next two years” implied that the “remaining scope for cutting policy rates should be used quickly and quantitative easing policies implemented”.
G20 deal will cost Britain global financial power
Gordon Brown will diminish Britain's international role in global financial institutions by increasing European Union representation, as the price for an agreement at the G20 summit. Joaquin Almunia, the European commissioner for economic and monetary affairs, told The Daily Telegraph that in future the EU would have "one voice" in reformed institutions such as the International Monetary Fund (IMF). "For me the most important thing is to have one European voice and position on these bodies," he said. The Spanish EU commissioner predicted that the Prime Minister would achieve a major success by increasing the IMF's resources to more than $500bn (£353bn) at the summit later this week. But, Mr Almunia stressed, in return China and other developing countries would demand a "voice and representation" that entail more reforms to allow greater redistribution of IMF quotas and votes.
"It is obvious that they are not adequately represented. The governance of the IMF, and other international financial institutions, still reflect, to some extent, the way the world was organised many decades ago," he said. Currently, European countries are over-represented on the IMF's ruling bodies, a situation that will change as developing economies in Asia and Latin America are given a greater say. While Britain, France or Germany would not lose their votes or place at the IMF's top table they would, Mr Almunia insisted, be required by the EU to "present the same things and positions". "A Europe with a consolidated representation will have more influence," he said. Mr Almunia admitted that some countries, such as Britain, might have to be pushed into merging national votes into a collective EU position during talks on the issue in Brussels this spring. "Some will not adapt to this on their own initiative, they will need to receive pressure," he said.
Another key element of the reforms proposed by Mr Brown will further increase the EU's role on the international financial stage. Plans to give the Financial Stability Forum (FSF) "formal status" and to extend it from the G7 to G20, will include a "full membership" for the European Commission. The FSF, a body including central banks, national supervisory authorities and treasury departments, is to be given a powerful new job of improving the functioning of markets and reducing the spread of financial shocks. Mark Francois, Conservative spokesman on Europe, said he will be tabling questions in the House of Commons to seek urgent answers. "Losing our independent voice at the IMF to the EU would be a totally unacceptable loss of national sovereignty." he said.
Detroit's Fate Sealed in West Wing
Inside a windowless, ornate room Thursday just across from the Oval Office, President Barack Obama and a group of senior economic advisers began the job of remaking the American automobile industry. The first order of business: Oust General Motors Corp. Chief Executive Rick Wagoner. It "wasn't the hardest decision," said one government official. Steven Rattner, a former investment banker who is heading the administration's auto restructuring; chief economic adviser Lawrence Summers; and Treasury Secretary Timothy Geithner were among those gathered around the polished wood table of the Roosevelt Room in the White House's West Wing. They were there to decide under what conditions the government would continue to prop up once-powerful Detroit car companies GM and Chrysler LLC.
In the post-World War II boom, they were at the pinnacle of a quintessentially American industry. At Thursday's meeting, once the Obama administration concluded the pair were running out of money, their effective dismantling began. Beyond seeking Mr. Wagoner's resignation, the officials also gave failing grades to GM and Chrysler for the restructuring plans they submitted to the government Feb. 17. They also set a deadline -- one month for Chrysler, two months for GM -- after which the government might force a bankruptcy restructuring of both companies and break up two of America's business icons. Many of GM's problems didn't start during Mr. Wagoner's term, and most predate the economic downturn that sent car sales slumping, such as union contracts and the costs of paying for retiree health care. GM made a bad situation worse with huge bets on trucks and SUVs that piled up on dealer lots amid soaring gas prices last year.
Interviews with government officials and others familiar with the matter show Mr. Wagoner scrambling to build support for GM across the globe, but unable to overcome the fact that he was at the helm during the company's deepest slide. On March 16, Mr. Wagoner and GM's chief operating officer, Frederick "Fritz" Henderson, were in Washington trying to make the case that they should receive more government aid. GM had already received $17.4 billion in loans. At the German embassy, the two men discussed the plight of Opel, the core of GM's European unit, with the German economics minister, Karl-Theodor zu Guttenberg. The following day, they were back at the Treasury, trying to make the case that GM's recovery plan would work. Late in the afternoon, the two executives hurried to the airport and boarded a Northwest flight bound for Detroit. It was a far cry from the days when they flew the corporate jets GM operated out of its own small terminal at the Detroit airport.
They settled into the last row in first class, Mr. Henderson taking the window and Mr. Wagoner the aisle. As the Airbus 319 lifted off, Mr. Henderson occupied himself with the day's newspaper, Mr. Wagoner with reports. The two men said little to each other throughout the one-hour-and-36-minute flight. When the plane touched down, they left the plane, and with little more than a wave to his COO, Mr. Wagoner walked off with his security guard. At the curb, Mr. Wagoner climbed into a black Cadillac Escalade SUV and rode off. The White House meeting at which Mr. Wagoner's fate was decided came five days before a March 31 deadline when the administration was set to rule on the viability of the companies. The auto team prepared briefs for Mr. Obama on his options, as well as viability reports on both companies. The car team wanted an executive who could accelerate the changes it desired. Mr. Wagoner didn't have any support within the group. "This is Obama, and symbols of change are important," said one person familiar with the situation.
A much harder decision was what to do with Chrysler. A conclusion that the company wasn't viable could lead to 40,000 workers losing their jobs. To combat that threat, the government is negotiating with Chrysler and Italian car maker Fiat SpA for an agreement that Fiat will continue to make cars in the U.S. if it buys Chrysler, according to an official of the Obama administration. After the Thursday meeting at the White House, Mr. Rattner asked Mr. Wagoner and Mr. Henderson to come see him the next day. Mr. Rattner broke the news to Mr. Wagoner at his office at the Treasury, according to an administration official. Afterward, Mr. Rattner met with Mr. Henderson, and told him he would take over as GM's CEO.
"On Friday I was in Washington for a meeting with administration officials," Mr. Wagoner said in a statement released by GM early Monday morning. "In the course of that meeting, they requested that I 'step aside' as CEO of GM, and so I have." Once word started to trickle out that a White House decision on the auto makers' fate was imminent, GM officials and some Michigan lawmakers began making calls. Michigan's Democratic governor, Jennifer Granholm, called the White House to ask for a meeting with Mr. Obama. Told she'd need to come in by Friday, which wasn't possible, she had a personal phone call with the president and urged him to consider the communities that could suffer.
Mr. Wagoner told GM's board Friday evening that he was asked to step down and informed directors the administration wanted a majority of them to resign, according to two GM officials. Several volunteered to quit over the weekend. Other GM officials speculated that they would also be asked to resign. Also expected to be on the chopping block is GM's Washington office, where the company's in-house lobbyists work. On Sunday, the Obama administration lined up conference calls with key lawmakers. Mr. Obama made one call himself to some of the Michigan delegation, including U.S. Sen. Carl Levin and his brother, Rep. Sander Levin, and Michigan Sen. Debbie Stabenow. He told them that he planned to put some administration staff into the Detroit companies, according to one person familiar with the situation.
White House economic adviser Mr. Summers led a conference call at 8:30 p.m. Sunday with lawmakers who had expressed strong interest in the auto bailout. At one point during the call, Mr. Summers told lawmakers the administration was pushing for the Fiat-Chrysler deal to include "building an energy-efficient vehicle in this country," Sen. Bob Corker said. Sen. Corker, a Republican from Tennessee, said he told Mr. Rattner on Monday that he was alarmed that the administration would dictate what kind of vehicles would be constructed. "Deciding what vehicles and plants will survive is setting industrial policy," the senator said. Others, who depend on GM and Chrysler emerging healthy from this process, are more positive. Michael J. Jackson, chief executive of car retailer AutoNation Inc., praised the task force Monday for taking bold steps. "I think they nailed it," he said.
America's Backdoor Layoffs
Underemployed freelancers and involuntary part-timers are hidden casualties of the deepening recession. The latest Labor Dept. job-loss figures came out Friday, Mar. 27, and they were predictably grim: Seven states now have unemployment rates of 10% or higher. And next Friday, Apr. 3, economists expect the federal government to report that another 650,000 jobs disappeared nationwide in March. But the official statistics don't record the misery of people like Lauren Bender. Bender is a 47-year-old Manhattan resident who has worked on and off developing investment tools for Charles Schwab (SCHW) over the past eight years. That job provided about 90% of Bender's income, which she says kept her "very well compensated." But starting last summer, Charles Schwab has pulled the plug on the three projects she was planning to complete, and her income from the company has dried up.
Now, Bender is looking for other work to meet her monthly mortgage payments of about $3,400 for an apartment she bought two years ago. As a self-employed contractor, Bender is not only ineligible for unemployment benefits; she doesn't even get counted in the government's unemployment statistics. "It's scary to think that I'm completely not tracked and have no access to benefits," says Bender. "And it's scary as hell to think that I'm at risk of falling through the cracks." Because the methods to gather unemployment haven't kept pace with changes in the workforce, self-employed or freelance workers aren't counted as laid off even if they lose most of their income. Over the past decade or so, many companies staffed up using more such outside workers to cut their costs for health-care and retirement benefits and to give them more flexibility to expand or contract with business. That flexibility, of course, means that assignments or pay are now shrinking for many of those people.
It isn't just freelancers who fall beneath the radar of mainstream unemployment figures. Those referred to as "involuntary" part-time workers are also missing from the headlines. This category includes those who would like to work full time but are working fewer hours because their work has been cut back or because they have been unable to find full-time jobs. While these workers haven't been laid off per se, they are losing a big part of their pay. In February, the number of people classified as working part time for economic reasons rose by 787,000, reaching 8.6 million. The number of such workers has risen by 3.7 million in the past year, almost doubling. "The numbers are astounding," says Beth Schulman, an economic analyst with the Russell Sage Foundation. "These workers—often at the lower end of the pay scale— are losing hours, income, and benefits. That only worsens the recession."
The Government Accountability Office says freelancers make up about 10% of the workforce, and advocates are campaigning for them to get counted—and to receive assistance when they lose work. "The [Bureau of Labor Statistics] hasn't adapted to the realities of the modern workforce," says Sara Horowitz, founder of Freelancers Union, a 96,000-member organization of contract workers founded in 2003. "It's a disgrace that we don't have a true picture of what's going on in the workforce." Horowitz says the government should develop better measures of counting contract workers, perhaps by identifying the number of contractor tax filings with the IRS each year. New York City is a hotbed of freelance activity, with thousands of workers doing jobs for financial, media, technology, arts, and other industries. On Mar. 23, New York City Mayor Michael Bloomberg announced that in partnership with Freelancers Union, he'll seek a new federal unemployment benefit for freelancers, who make up more than 15% of the city's workforce.
"Freelancers…lack any safety net to fall back on during hard times," Bloomberg said. "If a company lays you off, you can collect unemployment. But if you're a freelancer and you lose all your clients, good luck. That's not healthy for workers and their families—and it's not healthy for our economy." The proposed "Unemployment Protection Fund" would require the federal or state government to match about $300 for every $1,000 a Freelancers Union member voluntarily paid into a fund that could be drawn upon during lean times when work is scarce. Of course, the recession cuts both ways for part-timers and freelancers. While some companies trim freelancers and contractors first, others are looking to freelancers to fill in for full-time workers that have been laid off. Horowitz says the ranks of Freelancers Union members have grown 55% from the end of 2007 to the end of 2008, from 61,800 to 95,854. Among the biggest increases were members in retail and engineering, where participation nearly doubled or tripled in Freelancers Union from January 2008 to January 2009. But incomes are falling: The percentage of Freelance Union members making less than $25,000 grew from 15% to 27% during that time.
Marc-Arthur Baralla, a Brooklyn-based videographer, had been making about $3,000 per month filming corporate conferences for New York-based Wall Street Media. In mid-December, the firm told him it could no longer use his freelance services. Baralla is now working at a restaurant waiting tables three days a week and looking to start his own videography company. He's currently pulling in about $1,500 per month, half what he made before. "I'm finding some video work, but clients don't want to pay as much—or not at all in some cases," says Baralla. The IT sector—in which many employers have shifted to hiring freelancers in recent years—isn't much easier. Tom Williams of Westchester, N.Y., has been an independent contractor for 15 years, managing technology for the asset management divisions of large banks. He says his hourly rate has shrunk about 20% since the financial crisis hit last year, to $90 per hour. One client, a global bank, insisted on cutting his hourly rate by 10% two weeks after its contract with him had begun. Williams managed to negotiate the reduction down to 5%. He says he fears for his job security—no surprise, given the state of things in finance these days. "I have enough savings for a few months," says Williams. He adds that he has large commitments, including two teenage daughters and an ex-wife, to whom he pays alimony. "I'm still keeping busy, but that could change at any time."
In a Down Time Everywhere Else, K Street Lobbying Business Bustles
Last month, just before Valentine's Day, business at Holland & Knight was so slow that the law firm laid off more than 240 lawyers and staff, victims of the economic downturn that has dented Washington's reputation for being recession-proof. But one area of the multi-service firm was thriving. Rich Gold, head of the firm's public policy and regulation practice, was hiring more than a dozen lobbyists, bringing his federal lobbying team to about 70, every one of them scrambling to stay on top of provisions and changes in the mammoth economic recovery package that was barreling through Congress. They were handling about 240 clients, including 50 new ones, all eager to win a portion of the stimulus that President Obama wanted passed.
"On the legal side of things, we've done our share of downsizing because of the economy, because of reduced demand," said Gold, the firm's chief lobbyist. "But on the policy side . . . we're picking up a couple clients a week at this point." Put another way, Main Street's gloom has been K Street's boon. The $787 billion stimulus package -- along with an ambitious new federal budget, bank bailouts and the beginning of a regulatory overhaul -- has succeeded in stimulating the economy along Washington's avenue of influence. In the months since the November election, more than 2,000 cities, companies and associations have hired lobbyists to help them push their agendas on Capitol Hill and at the White House, easily outpacing such numbers after the previous two elections, according to disclosure records. Nearly every industry and every corner of the country has an issue, especially with so much money at stake.
Energy? "The issues in the stimulus package were enormous for our business," said Carol Grant, senior vice president at First Wind, a small wind-energy firm. The company recently hired its first lobbyist -- as well as a public relations firm -- because, as Grant put it, if ever there were a time to plug into the business of the nation's capital, "this is the year." Local infrastructure projects? "We decided we needed eyes and ears in Washington," said Ed Tinker, city manager of Glenpool, Okla., population 10,000. The city hired Capitol Hill Consulting Group, which employs former Oklahoma Rep. Bill Brewster (D), for $10,000 a month to help it win grants for education and infrastructure improvements. "There are dollars up there that could come to our community that we weren't aware of," Tinker said. "It's worked out real fine for us. Having that guy on the ground in Washington is going to keep us in the loop."
Interviews with lobbyists and public relations firms in the capital reveal a cautious optimism. Though as an industry firms are not expecting another record year of fees -- last year, lobbying clients paid K Street an unprecedented $3.2 billion, according to the Center for Responsive Politics -- some are planning for modest growth. Others are aiming to keep pace with last year. "Flat is the new up," said Gold, a former senior counselor to Carol Browner, a Clinton administration Environmental Protection Agency administrator. Still, there are signs of recession in the lobbying world. Clients are comparison-shopping. Some lobbying firms are shaving their monthly retainer from, say, $35,000 to $25,000 to hold on to long-term clients. Some trade associations have cut their dues in recognition that companies are hurting. Annual meetings have been canceled. Some Republican lobbying firms are being dropped, and firms that focus on only a narrow set of issues are becoming an endangered species, veteran lobbyists said.
Nonetheless, as the industry readies to report its first-quarter figures -- the recent uptick in business will probably not appear until the second quarter -- the global economic turmoil and the motivated new administration have kept the phones ringing on K Street. "It's like, kiss the wife and kids goodbye," said John Shaw, a lobbyist with the Portland Cement Association, which has a significant stake in $30 billion worth of highway money in the recently passed stimulus legislation, as well as a major transportation-funding bill this fall. "I'll see you in a year, honey." Some of the busiest firms are well-connected Democratic firms that do the new hot thing: lobbying hitched to strategic communications. At Glover Park Group, founded by former Clinton White House spokesman Joe Lockhart, among others, lobbying fees rose 27 percent last year. And that is only about one-fifth of the firm's income. From a handful of operatives, the shop has grown to 120, occupying a full floor in a spiffy new downtown office.
One of Glover Park's new clients is the Pharmaceutical Research and Manufacturers Association, which over the years has struggled with an industry image of profiteering at the expense of consumer health. It hired Glover Park to do strategic counseling, including polling and research, so it knows before talking to lawmakers what seniors are thinking. "Not only do they help us with messaging, in some cases they help us deliver the message," said Ken Johnson, PhRMA's senior vice president for communications. PhRMA is bracing for a momentous year, as health-care reform is high on Obama's agenda. But it is doing so with a flat budget, chief executive Billy Tauzin said. "We froze a number of positions," he said, noting that the staff is smaller than it was last year by at least five slots. "We did not lay people off. We simply did not fill positions for the time being in order to make room for all other priorities." Those priorities include lobbying, strategic communications and public relations. "We're busy as bees out here," he said. "Making honey."
Japan outlines new stimulus move
Taro Aso on Tuesday instructed his ministers to compile a new economic stimulus package “as soon as possible before mid-April” in addition to a longer-term programme for growth. “The Japanese economy is still in a critical situation,” Mr Aso said. “I would like to make utmost efforts (to stimulate the economy) based on bold thinking,” he said. The new stimulus package, which came just ahead of Mr Aso’s departure to join world leaders at the G20 summit in London on Wednesday, will have three main priorities: to ensure that the Japanese economy does not deteriorate further, to maintain jobs and boost Japan’s future growth potential, Mr Aso said. The additional stimulus package comes as government figures showed unemployment rose to a three-year high of 4.4 per cent and the number of new jobs created sank to a 6-year low. Meanwhile, household spending fell 3.5 per cent year-on-year, a 12th consecutive monthly decline.
Japan’s Financial Services Agency is to inspect banks and credit associations to ensure they are extending loans to keep liquidity flowing to companies in need, Reuters reported on Tuesday. Japan has already committed Y12,000bn in fiscal spending to revive the ailing economy and Mr Aso said the execution of those measures would be frontloaded as much as possible. The prime minister failed to indicate how much more spending the new measures would entail, saying only that the cost of the package would depend on the details. With the new package, Japan’s fiscal spending to combat the adverse effects of the global crisis, is likely to comfortably exceed the 2 per cent of GDP recommended by the IMF. The new economic stimulus measures come as the Organisation for Economic Cooperation and Development warned that “the unemployment rate is likely to rise above 5.5 per cent and deflation may become entrenched.” The OECD urged the Bank of Japan to keep the benchmark interest rate near zero and increase liquidity and recommended the Japanese government reform the tax system to promote growth.
The Nikkei stock average closed moderately lower amid concerns about the future outlook following nervousness in the US market over the fate of the car and banking industries. Meanwhile, the ruling Liberal Democratic Party yesterday decided to submit legislation that would allow the use of public funds to buy exchange traded funds and real estate investment trusts, in a desperate bid to bolster Japan’s sagging markets. Mr Aso said further that the government was considering measures to channel Japan’s Y1,400,000bn in household financial assets, much of which is held by the elderly, towards consumption. The government is also working on a long-term growth programme that would bring the public and private sectors together to create new jobs and stimulate demand, Mr Aso said. The programme will aim to stimulate growth by channelling Japan’s strength in environmental technology, animation, fashion and popular music to revenue-generating businesses. Japan will also use its financial resources, including overseas development aid, to stimulate growth in Asia, Mr Aso said. “It is important to look beyond Japan’s borders and think about Asian growth as a whole,” he said. “I would like Japan to use its technology to lead a low-carbon revolution,” Mr Aso said.
'Germans Aren't Feeling the Economic Crisis Yet'
German demonstrations about the economic crisis at the weekend were low-key and didn't draw the massive crowds one might expect given the scale of the recession facing Europe's largest economy. That's because ordinary Germans have not yet felt the crisis, write media commentators. Tens of thousands of people marched in capital cities across Europe on Saturday to protest the economic crisis and demand that world leaders act on poverty, jobs and climate change ahead of the G-20 summit in London on Thursday. In London, protestors chanted "tax the rich, make them pay" as they marched, waving banners that read "People before Profit."
In Germany, an estimated 30,000 to 40,000 people took to the streets in Berlin, Frankfurt and other cities, but most of the protestors were trade unionists and left-wing activists. The broad mass of people stayed at home or went shopping. That's because Germans haven't felt the full force of the economic crisis yet, despite foreboding economic statistics. At present, many people are still resorting to putting workers on short-time rather than laying them off, and parts of the auto industry -- which accounts for one in five jobs in Germany, is being shored up by the so-called scrapping bonus -- a €2,500 tax-free payment for people who scrap their old vehicles when buying a new car.
Center-left Frankfurter Rundschau writes:
"Half a year after the collapse of Lehman the sense of horror about the reckless behavior on financial markets and in the banking sector remains strong, and hasn't been alleviated by the shameless cashing-in of many top players. Not everyone has lost out, and some are even getting well paid for their failure. Given the impact on society it's astonishing that the storm of protest hasn't been more evident on the streets."
Left-wing Die Tageszeitung writes:
"Despite the increasingly dramatic figures from the financial and the real economy, people aren't yet feeling the impact in their everyday lives. In addition, the origins of the crisis are as complicated as the proposed solutions, which makes it harder to come up with simple slogans and to motivate people. Still, the fact that visible protests have taken place is a signal in and of itself."
Conservative Frankfurter Allgemeine Zeitung writes:
"Several tens of thousands of people demonstrated for a fairer world economy over the weekend -- not peacefully everywhere. That's likely to mark the start of a turbulent G-20 summit in London. Security forces in London have been advising bankers to go to work without wearing ties this week. Even though the anger is understandable, things shouldn't go that far in a democratic state. It's OK for greedy bankers to feel uncomfortable in their golf clubs or when they're out shopping. But they mustn't be physically threatened. People who demand decency must behave decently. That applies to both sides."
Ukraine economy ‘shrank by up to 30%’
Ukraine’s economy shrank by 25-30 per cent year on year in the first two months of 2009, but concerted measures to tackle the financial crisis can restore growth, President Viktor Yushchenko said on Tuesday. Growth in the ex-Soviet state, hit by shrinking markets for its steel and chemical exports, stood at 5.8 per cent of gross domestic product in the same period of 2008. ”We were ill-prepared to confront the crisis and its first blow was painful and difficult...,” Mr Yushchenko told parliament in his state of the nation annual address. ”The consequence of this was a slowdown in GDP growth in 2008 to 2.1 per cent... and a destructive fall of 25-30 per cent according to figures from January-February 2009.” He said he was quoting the figures despite ”determined efforts to conceal them”.
The State Statistics Committee has stopped publishing monthly GDP growth rates and now releases them only quarterly, three months after the event. ”Before the crisis, [annual] growth rates in the Ukrainian economy stood at 6.5-7.0 per cent. I believe, I am certain that this indicator will be restored,” the president told deputies in his 45-minute address. ”We have lost our foreign markets and 60 per cent of Ukrainian exports. All our foreign currency earnings depended on these markets as did the jobs of nearly 2m people in steel, chemicals and related sectors.”
Parliament was due to consider several pieces of legislation intended to restore the flow credits from a $16.4bn International Monetary Fund loan. The fund suspended the credits in a disagreement over the implementation of a reform programme. Mr Yushchenko said the first step to taken was an immediate alteration of the 2009 budget to reduce expenditure and measures to support the banking system. ”We must review the 2009 budget immediately and fundamentally,” he said. ”We must reduce all unproductive expenditure and once and for all live within our means.” Differences with the IMF have also focused on the size of the 2009 budget deficit. The fund initially insisted on a deficit-free budget, but now says it can accept a deficit if the government can finance it.