Seaford, Delaware. "This photo shows what was formerly a chicken coop, in which during the berry season the Arnao family live on Hitchen's farm. Seventeen children and five elders live here. Ten youngest children range in age from 3 to 13. On the day of the investigation no berries being picked on Hitchen's Farm. The family went over to the Truitt's farm to pick. Edward F. Brown, Investigator."
Ilargi: AIG is starting to be a very nice example of what sort of money, $50+ billion on $300 billion in contracts, we can expect will be lost on derivatives positions. Or is it? There are pretty strong indications that the AIG counterparties were "made whole" at 100% of the face value of their losing racetrack betting slips. Hey, if that's true, the sky is the limit, and not even the one here on earth. Try the one at HD 189733b.
Come to think of it, who leaked the counterparty info to the Wall Street Journal and Fortune Magazine? Two different lists, why is that? Is this an inside job meant to deflect attention, or is someone, make that two ones since there's two lists, getting sick of it all? Oh Sherlock, what a web we weave.
It's all sure to raise attention abroad. Banco Santander is on the list, the Spanish marvel that was supposed to be so smart. Been betting. And losing. Lots. Rabobank is there, the one Dutch bank that was said to still be healthy, unlike Fortis and ING. Betting, losing. But made whole by the US taxpayer, even if only the Dutch taxpayer benefits. Banks in Denmark, Germany, England, Canada, Switzerland. And the biggest prize: French freedom fries institution Société Générale, of Jerome Kerviel's $8.5 billion loss fame, which Fortune strongly suggests is the biggest recipient of US funds bar none.
If the Congressmen who last week demanded Mr. Kohn give them the list of AIG bail out banks were sincere, they will act as of tomorrow, and in a big way. If they don't act, they're just more pink noise. The risks involved are mammoth sized. And the story won't stay within national borders, obviously. Wonder what the press in Spain, Holland, Germany, France etc. will have on this one. At DK, bobswern had a lengthy historical AIG overview, I’ll put it at the bottom of this post.
Me, I think the entire system is so degraded you can hit any participant in this tragi-comedy over their heads with a solid stainless steel frying pan, and they'l tell you to please do it again. I often feel I’m watching a Looney Tunes version of the life of a cockroach family. In Hollywood terms: Nest, meet cuckoo. Wait, ain't cuckoos the ones who steal other bird's nests? Man, this gets better all the time. Hey, one thing is for sure: we won't have a boring week.
The New F***ing Citibank
The New F***ing Citibank - watch more funny videos
Broader Unemployment Rate Hits 14.8%If a half-percentage-point increase in unemployment rate isn’t ugly enough for you, there’s more from your government statisticians: almost a full percentage point jump in a broader measure of unemployment. The Labor Department reported today that its most comprehensive measure of joblessness hit 14.8% in February, from 13.9% in January. That’s just about 1 out of 7 Americans who are either unemployed and looking for a job, want a job but stopped looking, or part-timers who want full-time jobs. We’ve already blown through the prior high point of the data series, which the Bureau of Labor Statistics started in 1994.
An even broader (since discontinued) series hit 15% in late 1982, and we’re likely to fly right through that one next month. The 8.1% official unemployment rate, up from 7.6% in January, only counts people who are available for work and actively looked for a job in the prior four weeks. The 14.8% figure (known as the "U-6" by the BLS) includes everyone in the 8.1% figure, plus people who say they want a job and looked for work recently, along with people working part-time because they couldn’t get a full-time schedule.
How high can the U-6 go? Just looking at forecasts for the main unemployment rate, the broader measure would hit 17% by the end of next year. Some economists say 18% to 20% — 1 out of 5 people unemployed in some way — wouldn’t be terribly surprising. If employers aren’t hiring, job hunters would be more likely to give up hope and stop looking even if they do want jobs. After the 2001 recession, employers took roughly two years to resume meaningful hiring and competition was stiff for the jobs available. Anyone searching for a job during this recession is already aware of that grim reality.
Job Seekers Increasingly DesperateFor many of the recently unemployed, the opportunities seem very limited these days, and the fear is growing that their former jobs are gone for good. All that means that any job opening - however unlikely - is drawing a crowd, reports CBS News correspondent Priya David. The recent long lines in White Plains, N.Y., may have made you think of a sell-out concert. But these days the hottest show in town is a job fair. The Labor Department reports losses in almost every sector. Just last month, professional and business services lost 180,000 jobs. The manufacturing sector lost 168,000. Construction lost 104,000. And many of those jobs may be gone for good.
"In a recession, when you lose jobs and then regain jobs, the jobs don't reappear necessarily where they were -- in the same firms, the same occupations, the same locations," says Lawrence Mishel, president of the Economic Policy Institute. Mishel is among economists who predict that unemployment nationally could jump up another two points to more than 10 percent. As full time work melts away, thousands are turning to part-time jobs instead. New York's Rye Playland amusement park is deserted in the winter, but it's hiring right now for 1,200 summer jobs usually held by teenagers. This year it's drawing somewhat older and more diverse crowd of job seekers, like Leonard Mayer, who recently lost his teaching job at a community college.
"Every time I meet somebody, I ask them, 'How did you get your job?' or 'What leads have you followed?'" he says. "I've tried to get information by networking." "So many people are unemployed of all different ages, you know, which is amazing, for this type of work," said Anita Bowman, the mother of job seeker at the Playland job fair. "People are taking whatever they can get." It's a pattern being repeated across the nation - for four unemployed people, there's only one job open. Phyliss Burchfield is looking for a manufacturing job in Georgia. "I just take it one day at a time, put in applications, and just hope my phone starts ringing," she says.
But economists say the type of work she wants may not return, even if the economy recovers. "We may be disassembling our ability to be a manufacturing nation right now," Mishel says. "And I find that of great concern." The recession job search is like a game of musical chairs with few seats, leaving many Americans unemployed for a very long time.
Record 31.8 Million Americans Using Food StampsAs more and more families struggle to make ends meet, a growing number are now relying on food stamps to buy groceries. The latest tally shows a record 31.8 million Americans were receiving food stamps by the end of last year, according to a report by the Food Research and Action Center, a national nonprofit group. That’s over 700,000 more than November and nearly double the number in July 2000, when enrollment fell to its lowest point in decades. While most states saw increases of about two percent, the number of recipients shot up by 20 percent in as many as ten states, led by Idaho, Utah and Florida.
The food stamps program, which was recently renamed the Supplemental Nutrition Assistance Program, or SNAP, is expected to cost the government about $51 billion this year, up from $41 billion in 2008. The average household benefit is $225 a month. Individuals receive $115. Under the federal economic stimulus plan, family benefits will go up by 13 percent, or about $80 a month, in April. According to Feed America, more middle-class families are also turning to food banks, with numbers jumping by 30 percent in the past year.
G.O.P. Senators Say Some Big Banks Can Be Allowed to FailJohn McCain and Richard Shelby, two high-profile Republican senators, said on Sunday that the government should allow a number of the biggest American banks to fail. "Close them down, get them out of business," Mr. Shelby, the senior Republican on the Banking Committee, told ABC’s "This Week With George Stephanopoulos." "If they’re dead, they ought to be buried." While the Alabama senator did not say which banks to shutter, he suggested that Citigroup might be on that list, saying the bank has "always been a problem child."
Mr. McCain, appearing on "Fox News Sunday," echoed that sentiment without identifying any banks. Mr. McCain, who lost the presidential election last November, also accused the Treasury Department of avoiding the "hard decision" to let "these banks fail." Investor concern about the future of banks, including Citigroup, have been one issue weighing heavily on the stock market. Financial shares continue to be among the worst hit, despite the trillions that governments are spending to try and restore the system. Citigroup shares, for example, closed at $1.03 on Friday; two years ago, the stock was trading at $55 a share.
The Treasury department made its own news on Sunday, filling three of the top positions under Secretary Timothy F. Geithner. Alan B. Krueger was named as assistant secretary for economic policy; Davis S. Cohen was chosen as assistant secretary in the office of terrorism and financial intelligence, and Kim N. Wallace was named assistant secretary for legislative affairs. The announcements addressed growing concerns that even as the Treasury Department has worked furiously to craft bank bailouts over its first six weeks, the department still had left key positions unfilled.
The withdrawal last week of Annette Nazareth, Mr. Geithner’s prospective deputy and a former commissioner at the Securities and Exchange Commission, touched off questions about whether staffing problems might be slowing the administration’s response to the economic crisis. The position of deputy treasurer remains open. Robert Gibbs, the White House press secretary, played down the personnel matter. "We have tremendous confidence in Secretary Geithner," he said at a news conference on Thursday, "and we are working with the committees of jurisdiction in order to get nominees both up to Capitol Hill and through the process of getting them into government."
Pressed about the reason for delay, he said that nominees were being subjected to "a very rigorous process — and we’re doing it, with all involved, as quickly as we can." In response to the crisis in the banking system, the Treasury is pursuing a strategy that seeks to avoid either the failure or nationalization of the biggest banks. In declaring his support for closing giant financial institutions, Mr. Shelby pointedly disagreed with the position taken by Senator Lindsay Graham, a fellow Republican, who suggested two weeks ago, also on "This Week," that the banks may need to be nationalized.
Mr. Obama made clear in an interview published Sunday in The New York Times that he did not want any of the biggest banks to fail, saying his administration "would take more significant action to deal with those institutions." "But the point is that our commitment is to make sure that any actions we take to maintain stability in the system, begin to loosen up credit and lending once again so that businesses and consumers can borrow," he said. "And if they can, then you’re going to start seeing businesses invest once again and you’re going to see people hired once again, but it’s going to take some time." A member of his economic team also pleaded for patience on Sunday as Americans look for signs that the government’s massive spending efforts are having some positive effect on the credit markets and the economy.
"We should give it some time to work," Peter Orszag, director of the Office of Management and Budget said of last month’s $787 billion stimulus package. Speaking on "Face the Nation," he added that the money is only beginning to filter through the economy, and dismissed the need for a second jolt of government stimulus. Asked about funding for lawmakers’ pet projects that were tucked into the $410 billion omnibus spending bill, which is needed to fund day-to-day government operations, Mr. Orszag said that while the number of such earmarks had diminished over previous years, there were still too many. He bemoaned the process, which he said would change next year, when the Obama administration was in full control of the budget process. "We’re like a relief pitcher stepping into the ninth inning of a game," Mr. Orszag said. "We can’t just redo the whole game."
Senate Republicans joined with two Democrats late Thursday to temporarily block passage of the spending measure. The bill is expected to pass this week. "I think more and more Americans are against it," Mr. McCain said of the earmarks in the spending bill, which he strongly opposed. "I Twitter the top 10 pork barrel projects," he added, a reference to the messaging service. "We have gotten incredible response from it, now from local media people in the area where these earmarks take place. It’s really been a lot of fun." The three Treasury nominees announced Sunday will each face Senate confirmation.
Mr. Krueger, a longtime Princeton economics professor, was chief economist at the Labor Department under President Clinton. Mr. Krueger wrote a column on economics for The New York Times from 2000 to 2006 and is a contributor to Economix, a Times blog. Mr. Cohen was until recently a partner in the law firm of WilmerHale, working primarily on civil litigation, white-collar criminal defense, internal investigations and anti-money laundering counseling. And Mr. Wallace was previously a managing director at Barclays Capital. From 1989 to 1994 he served as a legislative aide to George Mitchell, who was then Senate majority leader.
Ilargi: Fortune published its own list of 15 AIG counterparties yesterday. It differs from the Wall Street Journal list in 4 places, so we now know the identity of 19 of the 25 gloabl financial institutions that have received US public money to cover their gambling losses.
Revealed: 15 AIG bailout counterpartiesA list obtained by Fortune includes the names of many foreign banks - as well as U.S. giants such as Goldman Sachs. Donald Kohn, vice chairman of the Federal Reserve, learned this week about blackmail, Senate style, when he refused to disclose the names of financial institutions benefiting from the bailout of American International Group. Testifying about AIG before the Senate Banking committee, Kohn respectfully resisted all of its attempts to extract the names. Several committee members grew frustrated and finally got to the point of threatening Kohn with no more dollars for the credit crisis - ever - if he didn't spill the information.
Said Sen. Jim Bunning, R-Ky., "You will get the biggest 'no' you ever got. I will do anything possible to stop you from wasting the taxpayers' money on a lost cause." Why so much fuss over these names? While the government has maintained that saving AIG was necessary to prevent an even wider catastrophe, senators contend the move has also bailed out counterparties who took unwise risks, so the legislators want to know who those companies are. While The Wall Street Journal Saturday reported many of the names of the 25 counterparties involved, FORTUNE has independently obtained a somewhat different group of 15 names, listed in an intriguing order (see below).
The information that riled the Senate committee this week concerns about $80 billion of credit default swaps - contracts that insure investors against losing principal and interest - that AIG wrote on super-senior tranches of collateralized debt obligations (CDOs) that were backed by mortgage securities, some of them subprime.
When AIG suffered rating downgrades, the resulting collateral calls on the credit default swaps proved ultimately to be much more than AIG could handle and became the main reason the company was bailed out - with government commitments that now exceed $150 billion.
The counterparties to the swaps were 25 financial institutions spread around the world. Many of them would have been vulnerable to a domino effect if they hadn't received, first, the collateral AIG paid them and, later, billions of dollars from the U.S. government that made the counterparties whole. In this whole disaster that began to play out last September, neither AIG nor the government has ever divulged the names of the counterparties - and that's what infuriates Bunning and other senators. Committee chairman Christopher Dodd, D-Conn., describes the counterparties as less than "innocent victims" who used AIG's rating (then AAA) to take "enormous, irresponsible risks." He complains, "It is not clear who we are rescuing."
The Fed's Kohn argued that he couldn't give out the names because the counterparties had entered into contracts with AIG not expecting their identity ever to be disclosed. Naming them, he said, might deter them from doing business with AIG again. In the end, however, Kohn said he would carry the committee's request back to the Fed and see what might be worked out. A reliable source, however, has given FORTUNE a list of 15 counterparties, with no dollar figures attached. The list contained the names in the following order. FORTUNE sought comment from all of the financial institutions and none said their inclusion on the list was inaccurate.• Société Générale (France)
• Goldman Sachs (GS, Fortune 500)
• Merrill Lynch International
• Deutsche Bank (Germany)
• Calyon, Crédit Agricole (France)
• UBS (Switzerland)
• Barclays (England)
• Coral Purchasing, DZ Bank (Germany)
• Bank of Montreal (Canada)
• Rabobank (the Netherlands)
• Royal Bank of Scotland
• Bank of America
• HSBC (England)
• Barclays Global Investors
What is the significance of the rank order of the list? Since it is not alphabetical, one possible interpretation is that the banks are listed in order of the amount of CDOs they insured with AIG. Goldman Sachs' No. 2 position fits several press reports that it was an important counterparty, perhaps having insured $20 billion of CDOs with AIG. Goldman has never confirmed that figure, but it has said that its "net" exposure to AIG - after collateral it received and hedging it did - was minimal. nIf indeed France's Société Générale ranks No. 1 by exposure, it's a distinction the bank certainly didn't need. Early last year, the company was staggered by the news that a rogue trader had lost $7.5 billion. Had a domino effect ensued from AIG's collapse, Société Générale would have been in an especially vulnerable position.
The Fed's Kohn admitted in the Senate hearings that paying off these counterparties in the course of the AIG rescue "will reduce their incentive to be careful in the future," which helps explain why the names have become such sought-after information in the political debate over "moral hazard." A transcript of Thursday's hearings that was done by Congressional Quarterly contains a typo that nicely describes the whole disastrous mess that AIG has turned out to be for U.S. taxpayers. The speaker was New York superintendent of insurance Eric Dinallo, and what he said was, "AIG is a microcosm of our regulatory regime." But the transcript says not "microcosm," but "microchasm." And that's what AIG has proved to be, a money pit of gaping proportions.
Here's the WSJ list again:
* Goldman Sachs
* Deutsche Bank
* Merrill Lynch
* Société Générale
* Royal Bank of Scotland
* Banco Santander
* Morgan Stanley
* Bank of America
* Lloyds Banking Group
A.I.G., Where Taxpayers’ Dollars Go to Die"Derivatives are dangerous." That simple sentence, written by Warren Buffett, begins an enlightening discussion in Berkshire Hathaway’s most recent annual report. Mr. Buffett’s views on derivatives, gleaned from his own unhappy encounters with them, should be required reading for all United States taxpayers.
Why? Because we own almost 80 percent of the American International Group, the giant insurer whose collapse was a direct result of derivatives it sold during the late, great credit boom.
A.I.G. nearly barreled off the cliff last September, when it couldn’t meet its obligations to customers who had bought a version of derivatives called credit default swaps. Such swaps are like insurance policies; bondholders buy them to protect themselves from default on various forms of debt. When A.I.G. couldn’t meet the wave of obligations it owed on the swaps last fall as Wall Street went into a tailspin, the Federal Reserve stepped in with an $85 billion loan to keep the hobbled insurer from going bankrupt; over all, the government has pledged a total of $160 billion to A.I.G. to help it meet its obligations and restructure operations. So is A.I.G. the taxpayer gift that keeps on taking? Sure looks that way.
And while no one can say with certainty whether more money will be needed, the sheer volume of derivatives engineered by a small London unit of A.I.G. suggests that taxpayers haven’t seen the bottom of this money pit. Some $440 billion in credit default swaps sat on the company’s books before it collapsed. Its biggest customers, European banks and United States investment banks, bought the swaps to insure against defaults on a variety of debt holdings, including pools of mortgages and corporate loans. Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined. Both of these "unthinkable" events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.
So, you see, the rescue of A.I.G. also involved a bailout of its many customers, none of whom the insurer or the government is willing to identify. Nevertheless, Edward M. Liddy, the chief executive of A.I.G., explained to investors last week that "the vast majority" of taxpayer funds "have passed through A.I.G. to other financial institutions" as the company unwound deals with its customers. On Wall Street, those customers are known as "counterparties," and Mr. Liddy wouldn’t provide details on who the counterparties were or how much they received. But a person briefed on the deals said A.I.G.’s former customers include Goldman Sachs, Merrill Lynch and two large French banks, Société Générale and Calyon. All the banks declined to comment.
How much money has gone to counterparties since the company’s collapse? The person briefed on the deals put the figure at around $50 billion. Unfortunately, that is likely to rise. According to its most recent financial statements, A.I.G. had $302 billion in credit insurance commitments at the end of 2008. Of course, the company is not going to have to make good on all that insurance: the underlying securities are not all going to zero. But as the economy deteriorates, A.I.G.’s insurance bets certainly become more perilous. And because most of A.I.G.’s swaps are known as the "pay as you go type," collateral must be supplied when the underlying debt declines in value. Swap arrangements made by other insurers require payments only if a default occurs.
So the meter is constantly running at A.I.G. Just as quickly as taxpayer funds flow into the firm, chunks of it go right out the door to settle derivatives claims. A.I.G.’s insurance commitment stood at "only" $302 billion in part because the government has already voided $62 billion of the protection A.I.G. had written on pools of especially toxic securities. The underlying collateral on those contracts, valued at about $32 billion or so, now sits in a facility that the Federal Reserve Bank of New York oversees and which we, the taxpayers, own. In order to rip up those contracts, the taxpayers had to make A.I.G.’s counterparties whole by buying the debt that A.I.G. had insured and paying out — in cash — the remaining amount owed to the counterparties.
Of the $302 billion in insurance outstanding at A.I.G., about $235 billion was sold to foreign banks and covers prime home mortgages and corporate loans. The banks that bought this insurance did so to reduce the money they must set aside for regulatory capital requirements. A.I.G. also wrote $50 billion of insurance on pools of corporate loans. These contracts are performing O.K. for now, the company has said. But there’s yet another complication that will probably force A.I.G. to cough up cash more quickly than it otherwise might have had to. That’s because it didn’t simply write insurance protection on debt; it also entered into yet another derivative contract — known as an interest rate swap — with counterparties buying the protection.
The reason A.I.G. entered into the second contract was that banks feared they were also exposed to interest rate risks on the loans bundled into debt pools. Presto! A.I.G. was happy to remove that risk by writing another complicated swap. Now, however, A.I.G. not only has to meet collateral calls as the value of the debt it insured withers, but also has to post collateral related to the interest rate swaps. Another troubling aspect of these deals is how long it takes to untangle them when they go awry. Back to Mr. Buffett’s recent shareholder letter: when Berkshire acquired the insurance company General Re in 1998, he wrote, General Re had 23,218 derivatives contracts that it had struck with 884 counterparties.
Mr. Buffett wanted out from under the contracts and he began unwinding them. "Though we were under no pressure and were operating in benign markets as we exited," he said, "it took us five years and more than $400 million in losses to largely complete the task." When you look back with the benefit of hindsight, it is truly amazing how outsized A.I.G.’s insurance commitment was, at $440 billion. After all, in 2005, when A.I.G. put many of these swaps on its books, the market value of the entire company was around $200 billion. That means the geniuses at A.I.G. who wrote the insurance were willing to bet more than double their company’s value that defaults would not become problematic. That’s some throw of the dice. Too bad it came up snake eyes for taxpayers.
Europe banks silent on reported AIG bailout gainsEuropean banks declined to discuss a report that they were beneficiaries of the $173 billion bail-out of insurer AIG that has sparked political furor in the United States. Goldman Sachs, Morgan Stanley and a host of other U.S. and European banks had been paid roughly $50 billion since the Federal Reserve first extended aid to AIG, the Wall Street Journal reported on Friday. French banks Societe Generale and Calyon on Sunday declined to comment on the story, as did Deutsche Bank, Britain's Barclays and unlisted Dutch group Rabobank. Other banks mentioned in the Journal's article include HSBC , Wachovia, Merrill Lynch, Banco Santander and Royal Bank of Scotland.
Separately, French newspaper Le Parisien newspaper on Sunday said that SocGen might have got $4.8 billion from the bailout and Calyon $1.8 billion. The newspaper cited its own sources. AIG was heavily exposed to toxic assets, seen as the root cause of the credit crisis, through its London-based financial products unit, which guaranteed hundreds of billions of dollars worth of complex credit instruments. "They wrote a lot of insurance cover on default swaps for financial institutions all over the world," one market source told Reuters on Friday.
"It becomes a systemic issue at a certain point in time and there's already a lot of fragility in the system. So how much stress do you want to put it under?" The value of the assets guaranteed by AIG would plummet if the company became insolvent, with potentially a large impact for the banks that had bought the protection. The bailout enabled AIG to pay its counterparty banks for extra collateral, the Journal said, with Goldman Sachs and Deutsche bank each receiving $6 billion in payments between mid-September and December. Both Morgan Stanley and Goldman Sachs have earlier declined to comment to Reuters.
The U.S. Federal Reserve has refused to publicize a list of AIG's counterparties and what they have been paid since the bailout -- a move that has riled the U.S. Senate Banking Committee. Federal Reserve Vice Chairman Donald Kohn testified before that committee on Thursday, saying that revealing names risked jeopardizing AIG's continuing business. Senators are outraged by the lack of details about where the bailout money has gone, likening AIG's underwriting of credit default swaps as gambling with somebody else's money.
World's biggest banks to meet in LondonChief executives of leading Japanese, European and U.S. banks will meet in London to discuss the future of the financial system, the Nikkei newspaper reported, as the global financial crisis prompts a barrage of new regulatory proposals for the sector. The Japanese business daily said the British government would host the meeting on March 24, after a Group of 20 (G20) finance ministers meeting in London next weekend and ahead of a summit of G20 leaders there on April 2. The G20 summit of big developed and developing countries in London aims to put the world economy on a path to recovery with banks facing strong calls for new regulations ranging from increased supervision of the financial sector to limits on executive bonuses. Invitations to the meeting of bankers had been sent to leading institutions including JPMorgan Chase and HSBC, the newspaper said, without naming any sources.
Mitsubishi UFJ Financial Group president Nobuo Kuroyanagi would attend the meeting, which the paper said would discuss regulations to prevent further crises similar to the meltdown of the subprime mortgage market. The London summit will follow last November's G20 crisis meeting in Washington and aims to agree on coordinated actions to revive the global economy, regulate the financial sector and principles for reforming international financial institutions. In the lead up to the summit, European leaders have called for tighter global banking supervision while U.S. President Barack Obama has urged a sweeping overhaul of Wall Street regulations.
The European Commission's proposals range from tougher bank capital rules to streamlining supervision, more transparency in derivatives markets and proposals to penalise banks whose remuneration policies encourage excessive risk-taking. China said on Saturday it wanted a major say in talks about reworking the global financial order and there should be more power for developing countries in the International Monetary Fund and World Bank.
The Next Hit: Quick DefaultsThe last time the housing market was this bad, Congress set up the Federal Housing Administration to insure Depression-era mortgages that lenders wouldn't otherwise make. This decade's housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency's historic role in backing mortgages is more crucial now than at any time since its founding. With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans.
In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data. Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck. If a loan "is going into default immediately, it clearly suggests impropriety and fraudulent activity," said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA. The spike in quick defaults follows the pattern that preceded the collapse of the subprime market as some of the same flawed lending practices that contributed to the mortgage crisis are now eroding one of the main federal agencies charged with addressing it.
During the subprime lending boom, many mortgage brokers and small lenders milked the market for commissions and fees by making as many loans as possible with little regard for whether they could be repaid. Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves. And those once-robust reserves are showing signs of stress, raising the possibility that taxpayers may have to pick up the tab for the first time since the agency was established in 1934. More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.
The overall default rate on FHA loans is accelerating rapidly as well but not as dramatically as that of instant defaults. The agency's share of the mortgage market is up from 2 percent three years ago to nearly a third of the mortgages now made, its highest level in at least two decades, according to Inside Mortgage Finance, an industry trade publication. The FHA does not lend money directly. It provides mortgage insurance for borrowers working with FHA-approved lenders and uses the premiums to cover its losses. If the premiums are not enough, taxpayers could be on the hook. At the same time, Congress has substantially increased the amount a homeowner can borrow on an FHA loan in pricey areas, thrusting the agency into markets it was previously shut out of, such as California, where plunging home prices have made people more vulnerable to foreclosure.
Moreover, lawmakers last year put the FHA in charge of a program created to address the roots of the financial crisis by helping delinquent borrowers refinance into new mortgages. On top of all these strains, the agency now faces this swell of loans that default almost immediately. Under the FHA's own rules, there's a presumption of fraud or material misrepresentation if loans default after borrowers make no more than one payment. In those cases, the lenders are required by the FHA to investigate what went awry and notify the agency of any suspected fraud. But the agency's efforts at pursuing abusive lenders have been hamstrung. Once, about 130 HUD investigators teamed with FBI agents in an FHA fraud unit, but this office was dismantled in 2003 after the FHA's business dwindled in the housing boom. At the same time, the FHA office responsible for approving and policing new lenders has not expanded even as the number of active lenders doing business with the FHA more than doubled to 2,300 in the past two years.
Although the FHA insures mortgages issued by lenders, it leaves these companies to conduct their own business. If a lender writes a lot of bad loans, that's when the agency can eject it from the program. Experts in housing finance warn, however, that the FHA has inadequate staffing and technology to keep up. William Apgar, senior adviser to new HUD Secretary Shaun Donovan, agreed that early defaults are a worrisome sign that a lender is abusing FHA-backed loans. Malfeasance is of such concern to the Obama administration, he said, that Donovan's first meetings at HUD were about ramping up measures to combat fraud. "We have to make sure people don't scam the system and when they do, they are held accountable," Apgar said. For those still looking to write loans in volume, the only game in town is government-backed mortgages, mostly those guaranteed by the FHA.
But unlike with subprime business, lenders in the FHA program are asked to follow agency rules requiring borrowers to document their income, put up a modest down payment and commit to live in the homes. "With the onslaught of FHA lending that's going on right now, they're bringing in lenders who are not familiar with FHA guidelines," said David Hail, a vice president of Allied Home Mortgage of Houston, one of the nation's largest FHA partners. He said the lenders are "under pressure from their builders or buyers to get these loans done. They're approving loans that they should not be." The Palm Hill Condominiums project near West Palm Beach, Fla., exemplifies the problem. The two-story stucco apartments built 28 years ago on former Everglades swampland were converted to condominiums three years ago.
The complex had the same owner as an FHA-approved mortgage company Great Country Mortgage of Coral Gables, whose brokers pushed no-money-down, no-closing-cost loans to prospective buyers of the condos, according to Michael Tanner, who is identified on a company Web site as a senior loan officer. Many of the borrowers were first-time home buyers and were unable to keep up their payments. Tanner said he complained to his company that extending loans without any money down lured borrowers who either didn't understand or take seriously the payments they'd have to make. Great Country's owner, Hector Hernandez Jr., could not be reached for comment. Eighty percent of the Great Country loans at the project have defaulted, a dozen after no payment or one. With 64 percent of all its loans gone bad, Great Country has the highest default rate of any FHA lender, according to the agency's database. It also has the highest instant default rate.
In Reston, Access National Mortgage has watched its default rate climb in three years to 6 percent from 4 percent, and the firm has had more than three dozen FHA loans go into instant default, according to federal data. The lender is among a growing number that market FHA mortgages to borrowers through direct mail, telemarketing and the Internet, practices approved by the agency in 2005 as it tried to compete with the thriving subprime market. By the end of 2008, more than 5,200 of the agency's defaults were on loans promoted with these techniques, a sevenfold increase in one year, accord to the review of federal data. This includes, in particular, a small but rapidly growing percentage of loans that instantly defaulted. Dean Hackemer, president of Access National Mortgage, defended direct marketing, saying it increases competition among lenders and thus forces down interest rates for borrowers. He blamed his firm's rising defaults on a bleak economy that has cost some borrowers their jobs.
But he added that many of the lenders now running into trouble with FHA loans were previously selling subprime loans and related Alt-A mortgages, which required no documentation. Among FHA loans with instant defaults, the upward trend is especially pronounced in refinanced deals. The number of refinancings that defaulted after zero payments or one have more than quadrupled since then end of 2007 and now represent two-fifths of all instant defaults. The FHA is attractive to borrowers looking to refinance, in part because the agency allows for cash-out refinances, a practice Apgar called "particularly problematic." It has become rare among conventional lenders, who fear that borrowers will take the cash and walk away from the loan. The FHA also permits "streamlined" refinancing, in which established FHA borrowers get lower rates without verifying their income. The thinking is that borrowers who are on time should stay that way if their rate drops.
Karmen Carr, a housing finance consultant for the FHA, said some mortgage brokers have been known to game the system. They coax homeowners to refinance repeatedly even though it's a costly process for the borrower, she said. "The broker makes money on every transaction," said Carr, a former executive at mortgage financier Freddie Mac. "They're not going to turn away an application if they can get it through. There have been situations where people refinance and refinance to avoid making payments and the broker just keeps getting the fees. What do they care?" For one homeowner in Spotsylvania, Va., it took only a month to fall behind on a new FHA-backed mortgage after she took it out in November 2007. The homeowner, a retired federal worker who asked not to be named because she's embarrassed, said she soon refinanced into another FHA loan as a way of slightly delaying a subsequent payment.
Then, she refinanced again. Now, she's in default on that third loan, which she said requires two-thirds of her monthly income. Still, the mortgage pitches keep coming. "The mortgage broker just called me again to say rates have fallen, do I want to refinance?" she said in an interview last month. Some of the country's largest and most established lenders are so concerned about this new threat to the credit market that they are not waiting for the FHA to tighten its requirements. Instead, they are imposing new rules on the brokers they work with. Wells Fargo and Bank of America, for instance, now require higher credit scores on certain FHA loan transactions and better on-time payment history. "We have some self-preservation methods," said Joe Rogers, executive vice president at Wells Fargo.
These large lenders often buy home loans from smaller mortgage originators and in turn bundle them as securities, which they sell to investors. The lenders typically take a fee for servicing the loans, collecting monthly payments from borrowers. If too many loans default, the lender can suffer a loss because it must keep paying the investors until the loans go into foreclosure and the FHA pays the lender for the bad loan. That can take more than a year in some states and may not fully compensate the lender. Some experts who track FHA lending say the agency should not wait for lenders to take the lead on toughening the rules, especially given the mortgage industry's poor track record for policing subprime and other risky home loans. "Even if the market eventually gets these guys, they shouldn't have to wait for the market to do it," said Brian Chappelle, a former FHA official who is now a banking industry consultant. "The most frequent question I get asked by the groups I talk to is: 'Is FHA going to implode?' . . . They haven't seen HUD do anything significant in the past two years to tighten up its lending."
Recession on Track to Be Longest in Postwar PeriodFactory jobs disappeared. Inflation soared. Unemployment climbed to alarming levels. The hungry lined up at soup kitchens. It wasn't the Great Depression. It was the 1981-82 recession, widely considered America's worst since the depression. That painful time during Ronald Reagan's presidency is a grim marker of how bad things can get. Yet the current recession could slice deeper into the U.S. economy. If it lasts into April — as it almost surely will — this one will go on record as the longest in the postwar era. The 1981-82 and 1973-75 recessions each lasted 16 months.
Unemployment hasn't reached 1982 levels and the gross domestic product hasn't fallen quite as far. But the hurt from this recession is spread more widely and uncertainty about the country's economic health is worse today than it was in 1982. Back then, if someone asked if the nation was about to experience something as bad as the Great Depression, the answer was, "Quite clearly, `No,'" said Murray Weidenbaum, chairman of the Council of Economic Advisers in the Reagan White House. "You don't have that certainty today," he said. "It's not only that the downturn is sharp and widespread, but a lot of people worry that it's going to be a long-lasting, substantial downturn." For months, headlines have compared this recession with the one that began in July 1981 and ended in November 1982.
- In January, reports showed 207,000 manufacturing jobs vanished in the largest one-month drop since October 1982.
- Major automakers' U.S. sales extended their deep slump in February, putting the industry on track for its worst sales month in more than 27 years.
- Struggling homebuilders have just completed the worst year for new home sales since 1982.
- There are 12.5 million people out of work today, topping the number of jobless in 1982.
"I think most people think it is worse than 1982," said John Steele Gordon, a financial historian. "I don't think many people think it will be 1932 again. Let us pray. But it's probably going to be the worst postwar recession, certainly." The 1982 downturn was driven primarily by the desire to rid the economy of inflation. To battle a decade-long bout of high inflation, then-Federal Reserve Chairman Paul Volcker, now an economic adviser to President Barack Obama, pushed interest rates up to levels not seen since the Civil War. The approach tamed inflation, but not without suffering.
Hardest hit was the industrial Midwest; the Pacific Northwest, where the logging industry lagged from construction declines; and some states in the South, where the recession hit late. Frustrated workers fled to the Sunbelt to find work. In Michigan, which led the nation in jobless workers, newspapers offered idled auto workers free "job wanted" ads in the classified section. Mortgages carried double-digit interest rates. When the 1982 recession ended, the national jobless rate had hit 10.8 percent. Just like today, that recession led to political finger-pointing.
When the government reported a 10.1 percent jobless rate for September 1982, organized labor rallied across the street from the White House. A few protesters chained themselves to an entrance at the Labor Department. The U.S. Chamber of Commerce called it a national tragedy and blamed Democrats. Democrats called it a national tragedy and blamed Reagan. Even months after the recession officially ended, Reagan was greeted in Pittsburgh by signs that said: "We want jobs, Mr. Hoover" and "Reagan says his economic program is working — are you?" President Herbert Hoover's term is forever linked in history with the Great Depression.
Those not as badly hurt have fuzzy memories of the 1981-82 recession. Not Jim O'Connor of Pekin, Ill., who was president of United Auto Workers Local 974 when Caterpillar Tractor Co. was laying off workers in Peoria in the 1980s. Maybe time has soothed the sting O'Connor felt, but he contends the economic problems facing workers today are worse than during the recession he survived nearly three decades ago. "The days of walking out of one factory and walking into another one down the street are over," O'Connor said. He retired from Caterpillar in 2001 but thinks he might find part-time job to help pay his health insurance. "When I hired in at Caterpillar in 1968, we had numerous factories here. Almost all of that has left the country or moved South. The unions don't have any leverage anymore at the bargaining table. So these young people (today) aren't only out of work, you know. They weren't making a living wage when they lost their job," he said.
Like Reagan did then, Obama is dishing up hope. Trouble is, people can't visualize any reward they might get from making it through this recession, said William Niskanen, an economic adviser to Reagan. There's little hope of any gain from the pain. Falling housing and stock prices have undermined household wealth. People are worried about losing their jobs, their homes and their retirement savings all at a time when health care is weighing down income. "In the 1980s, it was clear to people that the inflation rate was going to come way down and it did," Niskanen said. "There was a sense that we were going through a tough time for a while as a price of getting inflation down and that things would come back up. Today, they can't see any gain from what's going on."
Consumer confidence is in free fall. Banks are in peril. The overall economy, as measured by the GDP, shrank at a 6.2 percent annual rate in final three months of last year, the worst drop since the first quarter of 1982. The unemployment rate, at 8.1 percent in February, hasn't reached the 10.8 percent reported in November 1982, but the recession is not over. It's not only blue-collar workers who are feeling the greatest anguish. Americans who are trapped in houses worth less than their mortgages are suffering. So, too, are people whose personal wealth is tied to the stock market. Personal wealth is dwindling in the U.S., and the effects of the financial meltdown have been felt around the world.
"This recession is broader, deeper and more complicated than virtually anything we have ever seen," Wachovia Corp. economist Mark Vitner said. "The whole evolution of the credit markets resulted in all sorts of complex financial instruments that are difficult to unwind. It's like trying to unscramble scrambled eggs. It just can't be done that easily. I don't know if it can be done at all." He said he sees fear in the eyes of his clients. "I've had people come up and hug me after a presentation, which is unusual," he said. "I haven't told them anything about how it's going to be better, but they just feel better having a better understanding of what's happening."
Obama's Homeowner Stability Plan: How Helpful Will It Be?Last Wednesday, February 18th, President Obama presented his Homeowner Affordability and Stability Act. The elements of this plan are worth contemplating as well as questioning. The key components of the Affordability and Stability Act are: (1) Providing access to low-cost refinancing for responsible homeowners suffering from falling home prices, (2) Create a $75 billion homeowner stability initiative to reach 3-to-4 million at-risk homeowners, (3) Supporting low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.
The first component is referring to the historic low mortgage rates that are giving many folks the opportunity to refinance their mortgages to lower monthly payments. However, some owners are not able to refinance due to current rules that make it difficult for borrowers to refinance if they owe more than 80% of the value of their home. The second component, a $75 Billion homeowner stability initiative to prevent foreclosures and help responsible families stay in their homes, is a comprehensive plan made up by the Treasury working with the Government Sponsored Enterprises (GSEs), FHA, and the FDIC. The strategy includes the following six features:1. A homeowner stability initiative to reach up to 3 to 4 million at-risk homeowners
2. Clear and consistent guidelines for loan modifications
3. Requiring that financial stability plan recipients gain guidance for loan modifications
4. Allowing judicial modifications of home mortgages during bankruptcy when a borrower has no other options
5. Requiring strong oversight through reporting and quarterly meetings with the Treasury, FDIC, Federal Reserve and HUD to monitor performance
6. Strengthening FHA programs and providing support for local communities
The third and final initiative deals with strengthening the GSEs by increasing their funding limits with funds already approved for this purpose in 2008. This will also provide forward looking hope for Fannie and Freddie. Let’s breakdown each section.
Since home prices have been falling it has grown harder for responsible homeowners to refinance at lower mortgage rates. Borrowers who took out conforming loans that were owned or guaranteed by either Fannie Mae or Freddie Mac will be able to refinance through the two institutions. The plan says that it will allow 4-to-5 million homeowners access to affordable refinancing. Aside from stating how many homeowners will be helped, this section only provides one example of how much a borrower can save if they are able to refinance to a lower rate.
The first concern is the fact that not every homeowner who is currently in foreclosure is a "responsible/honest/hard working individual." Let me first say that there is enough blame to go around and that I am not in any way solely attacking the homeowner, as some in power are attacking only our financial institutions. On that note, who is going to determine whether a borrower is responsible or not? A Responsible Homeowner Qualifying Subcommittee made up of industry experts and Sen. Chris Dodd (who should know all about reworking mortgages since his was overhauled by Angelo Mozzillo).
However, there are many irresponsible borrowers that this plan will end up helping, contrary to its pledge. Why should I help keep other borrowers in their homes, while I am trying to save to purchase my own home in a year? Why do my parents have to cut back on spending for themselves just so they can help Joe and Kathy Smith stay in their home? This plan says it is aimed at keeping people in their homes and keeping the "American Dream" of owning a home alive, but this is only the start of the redistribution policies the administration was promising in their campaign. Besides, maybe not everyone needs to own a home.
One of the most important points of the initiative comes from the first feature of the second key. Lenders can bring down monthly payments through principal reduction. By reducing the principal on negative equity mortgages, borrowers have an incentive to continue making payments as opposed to walking away. For example, a home was purchased with an $80,000 mortgage when the value of the property was $100,000. Due to the current recession, the value of the home has decreased to under $80,000. Now the borrower owes more than the house is worth. People who may not be as knowledgeable about the consequences associated with defaulting will simply walk away from the house. Then again, who can blame them; they are paying more than what the asset is worth.
The plan will provide a monthly balance reduction payment that goes straight towards reducing the principal balance on the mortgage loan. And as long as borrowers stay current with their payments they can receive a check for up to a $1,000 each year for five years just for paying on time (I bet my parents would love to have that offer). I thought that when you took on a debt you shouldn’t have to be paid or given an incentive to pay it back, but maybe I’m just old school. A big problem with the obsessive lending was the relaxing of qualifying ratio limits and approving loans with very large back-end ratios. The back-end ratio is the total amount of all your monthly debt divided by your gross income. Safe and standard back end ratios used to be in the 30%-40% range. Many borrowers during the housing boom were getting mortgages with back-end ratios of 50%, 60% and even 70%. There was no way they were going to be able to make all their payments.
The plan states that borrowers with very high back-end ratios, 55% or higher, qualify on the condition that they go through HUD-certified consumer counseling. This counseling can have long term effects by providing the proper education to people about the risks associated with taking out a mortgage. The language in the plan gets fairly interesting now. "Bring down rates so that a borrower’s monthly mortgage payment is no greater than 38% of their income." At first glance, this looks good. But this is not the back-end ratio, rather it is the front-end ratio. The front-end ratio is only the monthly mortgage payment divided by your monthly income. The current front-end ratio standard is 33%. So it is a good first step to reduce the front-end ratios to 38% with the intent of going down to 31%. However, the plan does not mention anything about the potential revised back-end ratio limits. If a borrower still has 10% or more in other debt payments, such as car payments or other loans, they may have a revised back-end ratio of 48% or higher. So, even after a borrower has refinanced to a lower rate and lower payment they may still not be able to afford it!
While reading through the plan I kept having moments of déjà vu. "Supporting Low Mortgage Rates by Strengthening Confidence in Fannie Mae and Freddie Mac." Maybe I’m wrong, but weren’t these two "backbones" of the mortgage market part of the reason we got into this mess? These pseudo-private companies with implicit government backing forced lower rates and accepted lower standards from borrowers so more people could "live the American dream." Now they are back at it, but with a different reason for the madness: saving the housing market. The plan states that it "will help 7-9 million families restructure or refinance their mortgages to avoid foreclosure.
Currently, a borrower cannot refinance a Fannie Mae loan if the loan-to-value ratio (LTV) at the time they want to refinance is greater than 80%. Therefore, the plan would allow borrowers to access the current low mortgage rates. The Treasury department is going to use approved funds to increase its funding commitment to Fannie and Freddie. They will also continue to purchase Fannie and Freddie mortgage-backed securities to "promote stability and liquidity in the marketplace." Basically, the government is propping up the mortgage market as apposed to the invisible hand conducting the market; in the process, the government is increasing our nation’s debt load. Sometimes people forget that there is no such thing as a free lunch, and that the money to buy the mortgage backed securities has to come from somewhere.
It will get pretty interesting when Japan and China stop buying our debt. Increasing the size of the mortgage portfolios at the GSEs by $50 billion to $900 billion is a scary prospect as well. We have already seen how well these two entities manage the assets on their books. The bad debt that they held previously and their mismanagement are the reasons their implicit guarantee by the government became explicit. As long as the invisible hand is not allowed to work, and we continue to put our faith in the two GSEs , it is going to be hard for our housing market to make a proper turn around. A recovery obviously needs to occur, because it isn’t the auto industry that makes a nation strong, it is a properly functioning and robust housing market.
Intercontinental to Clear Credit Swaps Next WeekThe U.S. Securities and Exchange Commission granted an exemption for Intercontinental Exchange Inc. to begin guaranteeing credit-default swaps. The company said it would begin clearing next week. The SEC exemption represented the last regulatory approval needed by Atlanta-based Intercontinental. Its larger competitor, CME Group Inc., hasn’t received an SEC exemption, and agency spokesman John Nester said he didn’t know when a decision would be made. U.S. and European regulators are developing separate plans to stabilize the derivatives market after American International Group Inc., once the world’s largest insurer, almost went bankrupt last year from its use of credit-default swaps. A clearinghouse, and changes to the contracts to standardize them, will probably boost activity, said Sivan Mahadevan, a derivatives strategist at Morgan Stanley in New York.
"Trading will be much easier," he said. "We’ll see new players come to the market because they’ll like the idea of this being a better and more traded product. We also feel like over time we’ll see the creation of different types of products." Intercontinental plans to begin backing trades in the $27 trillion market on March 9, according to a company statement today. CME Group spokesman Allan Schoenberg didn’t immediately respond to a request for comment. The SEC approval is the third government action granted to Intercontinental this week. On March 3, its proposed acquisition of Clearing Corp., a Chicago clearinghouse owned by eight of the largest dealers in the credit-default swap market, was approved by the Federal Trade Commission and the Justice Department. Yesterday the Federal Reserve Board, which will oversee the clearinghouse, granted a request to begin clearing.
Clearing Corp. shareholders including JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG, received $39 million in cash from Intercontinental in the acquisition, as well as the Clearing Corp.’s cash on hand and a 50-50 profit-sharing agreement with Intercontinental on the revenue generated from processing the swaps. The SEC exemption for Intercontinental Exchange but not CME Group is "regrettable at best, and an unfortunate example of bad government," said Commodity Futures Trading Commissioner Bart Chilton. "This represents a lack of coordinated, cooperative effort," Chilton said in an e-mail. "I had hoped and expected that the SEC would act so as not to disadvantage any market participant, not to create ‘regulatory arbitrage.’"
The SEC’s Nester said the proposal is "actively being considered." He declined to specifically comment directly on Chilton’s remarks. "For several months the SEC and our fellow regulators have worked closely with all of the firms wishing to establish central counterparties," Nester said. "We believe that CME should be in a position soon to provide us with the information necessary to allow the commission to take action on its exemptive requests." The SEC granted Intercontinental an exemption from rules that would have prevented the company from processing credit- default swaps. It gives the regulator time to review the exchange’s business to determine whether to make the changes permanent. Members of the Intercontinental clearinghouse will have to have a net worth of at least $5 billion and a credit rating of A or better to clear their credit-default swap trades. Intercontinental said in the statement today that all market participants such as hedge funds, banks or other institutions are open to become members of the clearinghouse as long as they meet these requirements.
A clearinghouse acts as the buyer to every seller and seller to every buyer, reducing the risk of a counterparty defaulting on a transaction. In the over-the-counter market, where credit- default swaps are currently traded, participants are exposed to each other in case of a default. A clearinghouse also provides one location for regulators to view traders’ positions and prices. Other proposals to clear credit-default swaps have been made by NYSE Euronext, Eurex AG and LCH.Clearnet Ltd. Only the NYSE effort is available now for clearing after starting on Dec. 22. As of Jan. 30, no swaps had been cleared by the NYSE’s London- based derivatives exchange, according to NYSE Chief Executive Officer Duncan Niederauer. Credit-default swaps are derivatives used to hedge against losses or to speculate on the ability of companies to repay their debt.
The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. Credit-swaps dealers have been working to revamp the terms and trading standards on which credit swaps trade in order to make them interchangeable, a necessity for clearinghouses. Those changes, which primarily impact contracts on individual companies rather than the indexes, include making permanent the ability of investors who buy the guarantees to settle the contracts in cash, rather than physically delivering the bonds or loans insured. The International Swaps and Derivatives Association said this week it will publish rules for that process on March 12. The changes "will have clear benefits by delivering further standardization for the clearinghouse," said Robert Pickel, the association’s chief executive officer.
All contracts also will start trading on a so-called fixed coupon, meaning there will be one standard annual premium rather than the varying premiums that are determined by current market value. That will require an upfront exchange of cash based on current pricing. "The corporate credit-default swap market is going through one of its most important structural shifts since its inception," Morgan Stanley strategists led by Mahadevan said in a note to clients today.
Wall Street Is Its Own Worst EnemyStocks seem cheap, but the lower they go, the more investors fear them.
U.S. stocks mustered a gain in the closing minutes of Friday's session, but it was difficult to drum up much to cheer about. The morning's monthly jobs report from the U.S. government portrayed a bleak labor market, and worries over the future of General Motors and America's major banks persist. Wall Street is a double-edged sword these days, trading at depressed levels that may represent a bottom, but rife with such uncertainty that investors are hesitant to jump back into the market. The S&P 500 and Dow Jones industrial average are at their worst levels since 1996 after weekly declines of 7.1% and 6.2%, respectively. The Nasdaq is at lows not seen since 2002, having lost 6.1% over five days.
On Friday stocks were mostly negative -- declines outnumbered gains on New York's exchanges -- but the S&P 500 managed to eke out a gain of 1 point, or 0.1%, to 683; and the Dow finished up 33 points, or 0.5%, to 6,627. The Nasdaq lost 6 points, or 0.4%, to 1,294. The root of the session's weakness was a soft jobs report from the Labor Department, which showed nonfarm payrolls shed 651,000 positions and unemployment climbed to 8.1% in February. Even worse, the government made sharp revisions to its data for the prior two months, indicating the labor market was weaker than previously thought.
The week ahead will not provide quite as many fireworks as the jobs figures, but data on wholesale inventories, import and export prices, and the University of Michigan's preliminary March reading on consumer sentiment are all on the agenda. It may be a busy time in the fixed-income markets, with the Treasury Department due to auction $63.0 billion in government debt. The flood begins with a three-year note auction Tuesday, followed by 10- and 30-year bonds Wednesday and Thursday. On Friday, the 10-year note yield, which moves opposite its price, climbed to 2.88%, from 2.82% as traders sold Treasury securities. The iShares Barclays 10-20 Year Treasury Bond Fund, which tracks a range of longer maturities, lost 61 cents, or 0.5%, to $114.02.
The future of General Motors will remain a hot topic, after a regulatory filing Thursday revealed the company's auditors have doubts about its ability to stay out of bankruptcy. On Friday, GM said it prefers to restructure without getting courts involved, but shares still tumbled 41 cents, or 22.0%, to $1.45. President Barack Obama is expected lift a federal ban on funding for embryonic stem cell research Monday, according to TradeTheNews.com, and the news had several biotech stocks surging late Friday. California-based Geron, among the leaders in the stem-cell field, rocketed 33.6% higher after-hours, adding $1.30, to $5.17, following a moderate 2.1% gain during the day.
Timothy Geithner, alone and working night and dayUS Treasury Secretary Timothy Geithner is practically alone on the job, working night and day to cope with the worst economic downturn in decades. Of the 15 key Treasury Department positions that require Senate confirmation, only one has been filled. Stuart Levey, a leftover from the previous administration, who as under secretary of the treasury for terrorism and financial intelligence, is not central to the crisis management however.
Unemployment figures which revealed Friday that 651,000 jobs were lost in February, showed the recession is running ever deeper, but Geithner, who started work in late January, has no deputy secretary, no under secretaries for international affairs and no deputy under secretaries. Annette Nazareth, who had been expected to be chosen as deputy secretary -- Geithner's top aide -- has withdrawn her name, the Wall Street Journal reported in its online edition, citing people familiar with the matter. The former Security Exchange Commission head "withdrew in large part because of the long vetting process" President Barack Obama has put in place to choose members of his government, the daily said.
Geithner's choice for undersecretary for international affairs, Caroline Atkinson, also took her name out of the running, only weeks ahead of the April 2, Group of 20 developed and developing nations summit in London. To help Geithner on international financial matters, Treasury has provisionally hired Ted Truman, an economist at the Peterson Institute of International Economics in Washington, according to a Treasury official. Truman was Geithner's assistant at Treasury when he served as under secretary for international affairs in the late 1990s.
The 47-year-old Geithner, a former head of the Federal Reserve Bank of New York, was involved with the economic recovery efforts by President George W. Bush, but some experts think his plate may be too full this time. President Barack Obama's chair of the Council of Economic Advisers, Christina Romer, told CNBC on Friday that Geithner "is putting together a team as fast as he can ... work is going on night and day." Paul Volcker, former Federal Reserve chairman and now head of the newly formed Economic Recovery Advisory Board, told a February 26 Congress hearing that it was "shameful" Geithner had no assistants. "He shouldn't be sitting there alone ... it really is an unfortunate situation."
At a Senate Finance Committee hearing Thursday, Senator Tom Carper told Geithner, "obviously, you need help," eliciting from the treasury secretary that he saw his family "less than I would like." Treasury spokesman Isaac Baker denied there were "vetting problems or delays in the process" for nominees at his department. "With more than 50 political appointees already hard at work, the department is ahead of staffing levels from previous administrations" in the same time frame, he said, highlighting the "unprecedented level of action to strengthen our economy" already taken by the Treasury Department.
Obama Nominates Three for Assistant Treasury Secretary PostsPresident Barack Obama will make nominations for three assistant secretaries of the Treasury, where Secretary Timothy Geithner’s efforts to revive the economy have been hampered by vacancies in key posts. Alan Krueger is the choice for economic policy, the White House said in a statement. David Cohen will be assistant secretary for terrorist financing and Kim Wallace for legislative affairs. Each currently serves as counselor to Geithner. "With the leadership of these accomplished individuals and our whole economic team, I am absolutely confident that we will turn around this economy and seize this opportunity to secure a more prosperous future," Obama said in a statement released by the White House.
The nominations still leave Geithner without any Senate- confirmed staff at the most senior levels of deputy and undersecretary as he tries to flesh out plans to remove bad loans from banks’ balance sheets. Geithner’s effort to staff his department received a new blow last week with the withdrawals of two potential nominees. Former U.S. Securities and Exchange Commission member Annette Nazareth took herself out of the running to be Geithner’s deputy after concern about public scrutiny over her SEC work and frustration at the length of the selection process. International Monetary Fund official Caroline Atkinson pulled out of consideration for the Treasury’s top international job.
Krueger, the nominee for economic policy, is a professor of economics and public affairs at Princeton University. He previously served as chief economist at the Labor Department. Cohen until recently was a partner in the Washington law firm WilmerHale, where he focused on complex civil litigation, white-collar criminal defense and anti-money laundering counseling. He previously worked in Treasury as acting deputy general counsel and associate deputy general counsel. Wallace was a managing director at Barclays Capital and head of its Washington Research Group. Before that he was a managing director at Lehman Brothers Inc. Wallace also worked as a legislative aide specializing in fiscal policy for then-Senate Majority Leader George Mitchell and as an analyst on the Senate Budget Committee.
Geithner has brought in some high-level aides to work in posts that don’t require Senate confirmation, including Gene Sperling, a former head of the White House National Economic Council under Clinton, and Lee Sachs, a former Clinton Treasury official. During the administrations of Clinton and George W. Bush, some top Treasury positions went unfilled for months. The Treasury is aiming to publish more details on its $1 trillion plan to remove distressed mortgage assets from banks’ balance sheets within the next two weeks. Obama has also ordered his economy team to help form legislation to overhaul U.S. financial rules within weeks.
Is The US Treasury The Next Bear Stearns?Gap management. A very easy and straight-forward concept that has been butchered by countless firms, laid bare by the financial crisis. Funding long-dated assets with short-dated liabilities? A profitable strategy when everything is rosy, but potentially fatal when conditions turn negative. Consider Bear Stearns. Lehman Brothers. AIG. Washington Mutual. They all share the same underlying problem: assets with durations and liquidity characteristics out of step with how they are financed. Good banking, getting back to the basics, was all about gap management. Acknowledging the risks taken, quantifying the risks, and dynamically managing them based upon market conditions.
At some point the combination of greed, laziness and complexity caused managers of financial institutions to stray, sewing the seeds of the troubles we are encountering today. The US Government generally, and the US Treasury specifically, are being asked to spend our way out of the crisis. But once one gets over the ideological hurdle of bailing out busted constituencies - banks, finance companies, mortgage holders, assorted industries - to begin with (no mean feat), the question that must be asked is: how is the Government going to finance this largesse? And is it going to make the exact same mistakes as those institutions it is currently rescuing?
The actions being taken by the US Government do not only have near-term consequences; they are decisions that will stay with us for a long, long time, as will the debt associated with these decisions. And given the macroeconomic risks posed by the stimulus package, I think it makes sense to spend some time thinking about how all this spending will be paid for. Raising taxes? A bad idea from a policy perspective, as well as a shrinking well from which to tap due to the sharp downturn in our economy. Lower incomes. Smaller corporate profits. Fewer capital gains. All of these point to a sharp reduction in tax revenues, and the tax increases President Obama has in store will nary make a dent, and may well cost more than they generate over time. We could cut spending. One thing we can take away from the annual budget process is that true cuts, net reductions in spending, almost never stick. If this is where we are placing our hope we are living in fantasy-land. So the only other place money can come from is if we manufacture it. Sell Treasuries. Borrow and spend. The Great American Pastime.
But if we're going to do it, let's think about that old guidepost, gap management. The US has a tremendous amount of long-dated liabilities. Social Security. Medicare. Massive infrastructure spending as contemplated by the new stimulus bill. Near-term revenues (read: taxes), are going to be under pressure due to weak economic conditions. Treasury rates are near historic lows, due to both the economic downturn and a "flight to quality" as we are crumbling at a somewhat lesser pace than other developed and emerging economies. This makes it the perfect time for the Treasury to push the limit and issue as much long-dated paper as it can. Bring out a 40-year issue. Gauge demand for a 50-year and perhaps a 100-year issue, as News Corporation and Disney did in the late 1990s. This is akin to raising synthetic equity for the US Government, at a time when securing this kind of financing has never been cheaper. Even if we had to pay up due to abnormally long maturities, it will look dead cheap once inflation rears its ugly head (as it will) and the cost of rolling short-dated Treasury paper may well be in the double digits. Further, by issuing a slug of ultra long-dated paper we'll be better matching our obligations with our financing horizon. Hurrah!
Secretary Geithner, it is a no-brainer. Get your team working on a financing package that takes advantage of the US Treasury's current position as issuer-of-choice before inflation spikes, the dollar craters and rates skyrocket. And let's see you do a better job of gap management than those dope firms you are bailing out. It may cost you a little more to get this kind of a financing done but trust me, you'll thank me in the morning.
U.S. consumer credit rises $1.76 billion in January: FedU.S. consumer credit staged a surprise $1.76 billion increase in January, ending three straight months of steep declines, the Federal Reserve said on Friday. January overall consumer credit rose 0.82 percent to $2.564 trillion, the Fed said. Analysts polled by Reuters had forecast a $5.0 billion decline in consumer borrowing for January. The Fed also revised consumer credit drops for both December and November last year. It said the December decline was revised to $7.48 billion from a previously reported $6.6 billion fall. A previously reported record $11.04 billion drop for November was reduced to a $9.13 billion fall. The last time consumer credit fell for three straight months was in 1991. Credit markets locked up in the fourth quarter of last year as the system for securitizing asset-backed debt broke down.
The Federal Reserve this week launched a new program aimed at unfreezing consumer credit by making up to $200 billion in loans against asset-backed securities as collateral. The program is expected to grow in coming months to up to $1 trillion. January's consumer credit increase was helped by gains in both revolving credit, which comprises credit and charge cards, and non-revolving debt, which includes closed-end consumer loans for cars, boats, college educations, holidays and other uses. Revolving credit rose by $926.5 million to $962.32 billion, while non-revolving credit rose $830.2 million to $1.603 trillion, the Fed said.
Too Big Has Failed: Kansas City Fed president condemns rescue strategy for failing banksKansas City’s resident voice on the banking system prescribed a dramatic turnabout Friday in how Washington is dealing with the nation’s troubled big banks. Tom Hoenig, president of the Federal Reserve Bank of Kansas City, urged Washington to scrap its current capital-investing rescues of banks deemed too big to fail and prepare to "resolve" them the old-fashioned way. His remarks, to a private audience in Omaha, Neb., drew sharp reactions both in support and opposition. "I think it’s courageous of him to call for that, and he’s right on," said Allan Meltzer, monetary policy historian and professor of political economy at Carnegie Mellon University. But longtime Fed observer David Jones said acting on Hoenig’s recommendation would lead to a financial system "meltdown."
In a speech he titled "Too Big Has Failed," Hoenig urged Washington to declare insolvent banks to be insolvent, replace their managers and strip out the toxic assets weighing them down. Such steps would leave the government in control of clean banks it could sell to new owners, or operate as "bridge banks" until it could privatize their ownership again. Hoenig acknowledged his way would leave stockholders to "bear the full risk" of their investments but said it also would stop the festering that is driving up the ultimate cost to taxpayers. Moreover, he sees definitive intervention as a necessary step in curing the credit crisis. "Until these kinds of actions are taken, there is little chance to restore market confidence and get credit markets flowing," Hoenig said in his prepared text. "It’s not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery."
Meltzer said he supported Hoenig’s prescription and called the government’s current approach of infusing capital to shore up weak banks unsustainable. It also delays the cleanup and boosts the cost to taxpayers, he said. Meltzer also said cleaning up the large banks Hoenig’s way would cause some excitement but wouldn’t be disruptive — instead, it would be an important step forward. "I’ve known Tom for a long time, so I’m not surprised he thinks that. I praise him for saying it publicly," Meltzer said. "It’s not enough if someone like me says it. It’s important that someone like Hoenig say it." Meltzer said he hoped Hoenig’s address would lead others with similar convictions to speak up. Jones, a Wall Street economist, won’t be one of them.
He acknowledged that presidents of some other Federal Reserve banks probably agreed with Hoenig but added that they were wrong. "All I can say is, ‘Wow,’?" Jones said. "The speech bears little resemblance to the reality we’re facing." Jones said the financial aftershocks from the September failure of Lehman Brothers destroyed any argument that such institutions could be allowed to fail. "The system would melt down totally. We’d have a complete loss of confidence," Jones said. Jones echoed many of Hoenig’s points about the financial crisis but differed by saying it must be resolved within the existing institutions rather than by eliminating them. It’s not that the banks are too big to fail, Jones said, it’s that the crisis is too big.
In his remarks, Hoenig drew on lessons from the Reconstruction Finance Corp.’s handling of banks in the Great Depression, the Resolution Trust Corp.’s handling of the savings-and-loan crisis, the Federal Deposit Insurance Corp.’s handling of the 1984 failure of Continental Illinois, and Sweden’s intervention in its banking system in the 1990s. He saw each as importantly different from Washington’s current approach and evidence for resolving the current crisis as he suggested. "When examining previous financial crises … large institutions have been allowed to fail," Hoenig said. "There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been higher."
Indiana jobless fund could take decade to fixImagine racking up nearly $3 million in debt every day. That’s more than $100,000 an hour, or about $2,000 a minute. Indiana is diving deeper into debt as it struggles to pay jobless benefits from its bankrupt unemployment insurance fund, which is paying out hundreds of millions more than it collects in taxes from employers. The state is now on track to owe the federal government $1.2 billion by year’s end. The scope of the problem is so huge that even if lawmakers quickly agree on a way to rebalance the off-kilter fund, it could take years — or possibly a decade — for the account to repair itself. "As the situation grows steadily each day, it is a very realistic time frame to look at eight to ten years," said Rep. David Niezgodski, a Democrat from South Bend who chairs the House labor committee.
Like someone trying to dig out from credit card debt, Indiana’s first priority is to stop going further into the red, said Sen. Dennis Kruse, R-Auburn. The next step is to repay the money it owes, and then the state can start to build up savings to prepare for the next economic downturn. Fixing the fund within one or two years would require what some are calling impossible sacrifices — slashing jobless benefits or raising taxes on employers so high that it could drive some out of business. "It would shatter our economy," Niezgodski said. "It’s not feasible." Companies, which pay jobless taxes on a per-worker basis, could see their unemployment insurance taxes go up 300 percent or more if lawmakers demanded an immediate fix, said Kevin Brinegar, president of the Indiana Chamber of Commerce.
"To raise the kind of money it would take to fix it in one or two years would be devastating to employers and employees," Brinegar said. "This is a very delicate balance that we’re going to need to strike." Both Republicans and Democrats in the Statehouse say lawmakers must act during this legislative session to restore the account, which took in $579 million last year and paid out $986 million. The fund — kept separate from the state’s main checking account — is expected this year to distribute $900 million more than it collects. The problem gets worse as more people lose their jobs. Nearly 320,000 Indiana residents were looking for work in January — nearly twice as many as a year before. The unemployment rate rose to 9.2 percent in January, compared with 4.8 percent at that time last year.
Many think the only fix for the fund is some combination of raising employer taxes, tightening eligibility and cutting benefits. The state’s maximum benefits of $390 a week are already lower than all surrounding states except Michigan, and some lawmakers are wary of lowering the safety net for unemployed residents. Legislators are also trying to avoid hefty tax increases on employers that could force them to go out of business, costing the state even more jobs. No party wants to be alone in supporting politically unpopular proposals. Republican Gov. Mitch Daniels hasn’t offered a specific solution, and political bickering in the Democrat-controlled House stalled a plan there. The GOP-Senate has now taken up the issue.
Senate Minority Leader Vi Simpson said the Senate should pass a proposal quickly so the issue can move to a conference committee, where Republicans and Democrats from the House and Senate can seek a compromise that would draw votes from all sides. "We need to find a solution immediately," said Simpson, D-Bloomington. "Every minute we wait, we are going farther and farther in the hole." So far, Indiana owes the federal government about $470 million. The amount borrowed daily fluctuates depending on claims filed and taxes collected. But the predicted debt of $1.2 billion by the end of the year averages to about $3 million a day since the state started relying on the federal government in November.
"It’s basically a continual draw," said Marc Lotter, a spokesman for the Department of Workforce Development. "When we go to pay benefits every day, funds are withdrawn." Ten states are borrowing money from the federal government to pay unemployment claims. Michigan owes the most — $1.4 billion — followed by New York ($565 million), California ($473 million) and Indiana, according to Feb. 27 numbers from the Department of Workforce Development. Interest on the federal loans is considered paid thanks to the federal stimulus package. And some hope the federal loans might eventually be forgiven. But Indiana lawmakers know they need to fix the account’s structural imbalance, and they fear the federal government will step in if they don’t act soon.
"The federal government wants you to have a plan to get out of this mess," said Kruse, who heads the Senate labor committee. "As long as we have a plan that’s acceptable to the federal government by the end of session, that will be a big plus. I think that’s achievable." The legislative session ends April 29, and Indiana will likely be even further in debt by then. Kruse said the best fix for the system is a healthy economy, which would mean fewer people collecting benefits and more money coming into the account. "It’s our hope that that will happen sooner rather than later," he said.
Sarcramento struggles with spiraling homelessness problemSacramento has one of the highest foreclosure rates in the United States. As many as 50 people a week arrive at the tent city and the authorities estimate it is now home to more than 1,200 people. Now its homeless population hope an Oprah TV show about recession, foreclosures and homelessness will help them out of poverty. They hope the segment on the national talk show will prompt more donations and government help. Producers visited Sacramento in February to visit the homeless shelters.
"We're very glad that Oprah and her team have chosen to give this crisis a voice, because it is a crisis," Michele Steeb, executive director of St. John's Shelter, said. "Our turnaway numbers have risen from 20 women and children being turned away per day in 2007 to 80 in 2008 to our current number of 230 women and children being turned away a day. It is a crisis and it's only getting worse. We're so glad that she's giving the crisis a voice. We're honoured to be part of the discussion because it's an important discussion to have," she said.
The city and county of Sacramento have already received $34 million to help fight the effects of the foreclosure crisis but, in the meantime, hundreds of people have moved into the shelters. Authorities in Sacramento, where Governor Arnold Schwarzenegger has his office, are suffering as the state has a £30billion deficit and the tent city looks like becoming a permanent fixture. "I can't say tent cities are the answer to the homeless population in Sacramento," Kevin Johnson, Sacramento's mayor said, "but I think it's one of the many things that should be considered and looked at.'
How to fail to recover the economy
by Joseph StiglitzSome people thought that Barack Obama's election would turn everything around for America. Because it has not, even after the passage of a huge stimulus bill, the presentation of a new program to deal with the underlying housing problem, and several plans to stabilise the financial system, some are even beginning to blame Obama and his team. Obama, however, inherited an economy in freefall, and could not possibly have turned things around in the short time since his inauguration. President Bush seemed like a deer caught in the headlights – paralysed, unable to do almost anything – for months before he left office. It is a relief that the US finally has a president who can act, and what he has been doing will make a big difference.
Unfortunately, what he is doing is not enough. The stimulus package appears big – more than 2% of GDP per year – but one third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut. Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America's 50 states must maintain balanced budgets. The total shortfalls were estimated at $150bn a few months ago; now the number must be much larger – indeed, California alone faces a shortfall of $40bn.
Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth. Meanwhile, investment and exports are plummeting as well. America's automatic stabilisers – the progressivity of our tax systems, the strength of our welfare system – have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10% of GDP. In short, the stimulus will strengthen America's economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy.
The real failings in the Obama recovery program, however, lie not in the stimulus package but in its efforts to revive financial markets. America's failures provide important lessons to countries around the world, which are or will be facing increasing problems with their banks:
- • Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.
- • Governments do not like to admit the full costs of the problem, so they give the banking system just enough to survive, but not enough to return it to health.
- • Confidence is important, but it must rest on sound fundamentals. Policies must not be based on the fiction that good loans were made, and that the business acumen of financial market leaders and regulators will be validated once confidence is restored.
- • Bankers can be expected to act in their self-interest on the basis of incentives. Perverse incentives fuelled excessive risk-taking, and banks that are near collapse but are too big to fail will engage in even more of it. Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.
- • Socialising losses while privatising gains is more worrisome than the consequences of nationalising banks. American taxpayers are getting an increasingly bad deal. In the first round of cash infusions, they got about $0.67 in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value). But in the recent cash infusions, it is estimated that Americans are getting $0.25, or less, for every dollar. Bad terms mean a large national debt in the future. One reason we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks.
- • Don't confuse saving bankers and shareholders with saving banks. America could have saved its banks, but let the shareholders go, for far less than it has spent.
- • Trickle-down economics almost never works. Throwing money at banks hasn't helped homeowners: foreclosures continue to increase. Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150bn and hope that some of it might stick where it is important.
- • Lack of transparency got the US financial system into this trouble. Lack of transparency will not get it out. The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks' bad assets. But this will not establish "market prices," as the administration claims. With the government bearing losses, these are distorted prices. Bank losses have already occurred, and their gains must now come at taxpayers' expense. Bringing in hedge funds as third parties will simply increase the cost.
- • Better to be forward looking, focusing on reducing the risk of new loans and ensuring that funds create new lending capacity, than backward looking. Bygone are bygones. As a point of reference, $700bn provided to a new bank, leveraged 10 to 1, could have financed $7tn of new loans.
The era of believing that something can be created out of nothing should be over. Short-sighted responses by politicians – who hope to get by with a deal that is small enough to please taxpayers and large enough to please the banks – will only prolong the problem. An impasse is looming. More money will be needed, but Americans are in no mood to provide it – certainly not on the terms that have been seen so far. The well of money may be running dry, and so, too, may be America's legendary optimism and hope.
Bankruptcy's global onslaughtIt's a frightening world out there: Chinese factories by the thousands lock their doors, and their owners disappear into the night. Russia's once-mighty resource giants scamper to restructure crippling debt and avoid going under. Ukraine and Latvia teeter on Iceland-like insolvency. Financial institutions just about everywhere seize up and are shut down or nationalized. On just one day late last month, a Danish bank collapsed, a Japanese finance company went bankrupt and two German states were forced to pour almost $4 billion into a crippled lender to keep it afloat. With even the most muscular economies staggering, financial failure and corporate crashes are becoming increasingly common in nearly every locale. "The situation is the same everywhere," says Alexander Rymko, the Moscow-based lawyer who heads the Russian banking practice at Lovells LLP. "We expect a lot of bankruptcies."
What's perhaps less obvious is that cross-border components will figure prominently in a huge number of these collapses, whether through investments, creditors, subsidiaries, assets or a combination of all of the above. "Everything we're touching is cross-border," says Peter Spratt, London-based crisis management leader at PricewaterhouseCoopers LLP. "It's an inevitability of globalization." Legal practitioners and restructuring experts are gearing up for a global onslaught of insolvencies and bankruptcies unprecedented in terms of scope, size and reach. What's more frightening, the worst may be yet to come. "We're at the fairly early stages of actual restructurings, and that's before we even begin to see the quantum of insolvencies," says Spratt. Across Europe, he adds, "I'm personally surprised that the number of restructurings is not higher than they are." But Spratt warns that insolvencies tend to lag the economy by up to two years. Since the recovery is not expected to begin at least until 2010, the insolvency wave will be breaking for years to come. It will inevitably spill across borders.
The biggest response so far has been to put off the reckoning, according to interviews with professionals, coupled with a survey of published bailouts, restructurings and insolvencies. Leave aside for the moment the U.S. and Britain and their multitrillion-dollar efforts. Governments elsewhere have sunk hundreds of billions of dollars into bailouts, most of which are structured as short-term loans. How much longer that's possible is another question. Governments are becoming harder-pressed to keep writing checks as corporations falter. Private banks will have more and more trouble shuffling bad loans. All the while, the speed of these collapses will accelerate. "Formal proceedings will become more important," says Philipp von Randow, a Frankfurt-based Latham & Watkins LLP restructuring partner. "There's less time for out-of-court restructurings."
Crosscurrents will flow in every conceivable direction. Consider the high-profile bankruptcy of SsangYong Motor Co. in January. This marked the second time the South Korean auto manufacturer has gone bust in the past decade. SsangYong, which has been 51% owned by China's Shanghai Automotive Industry Corp. since 2004, went into an odd kind of court receivership in January. Once it defaulted on its debt, a South Korean court "set aside the rights of the majority shareholder, ejected it from management and appointed alternative managers," in this case some Korean SsangYong employees. They will attempt to "salvage some of the company," says Hank Morris, director of Seoul-based business advisory firm Industrial Research & Consulting Ltd. This isn't liquidation, Morris stresses, but a chance at restructuring, during which time debts are frozen. Shareholders aren't wiped out, just sent packing. Eventually, the court must determine whether a slimmed-down SsangYong can survive. If it doesn't, Morris warns, many of the vehicle maker's suppliers will go down with it.
So from São Paulo to Shanghai, Moscow to Manhattan, lawyers and other restructuring advisers are gearing up for a mammoth insolvency wave. And that raises a second frightening issue: Is the world ready? Are various legal regimes around the world sufficiently well equipped and prepared to handle the rush? The answer is neither simple nor uniform. Obviously, some countries have systems better enabled than others. But practitioners in 10 different jurisdictions unanimously draw a hard line between the regulations on the books and their application. "Just because laws allow for it doesn't mean it's going to happen," warns Karen Ostad, a New York-based partner at Morrison & Foerster LLP, with long experience in cross-border restructurings. Of the once-supercharged Bric countries, China, Russia and Brazil all have relatively new bankruptcy or restructuring laws. The fourth, India, is debating one. Other countries have signed on to a model United Nations insolvency code to some degree or other.
The Cayman Islands, for example, just enacted an insolvency law that contains substantial cross-border provisions, says Jeremy Walton, a Caymans-based partner and global head of the fund disputes team at the law firm Appleby. "It's going to help people going forward," Walton believes. The European Union is buoyed by both 2002 regulations establishing a blueprint for multinational bankruptcies and a European Court of Justice decision in 2006 involving a subsidiary of failed Italian food giant Parmalat Finanziaria SpA. They make cross-border cases easier to be filed and heard in a single jurisdiction, the so-called center of main interests. Actual practice, however, can be another story. Practitioners warn that coordinated insolvencies may be more the exception. "For every [Comi] used, probably 100 can't make the case," says Simon Granger, the London-based senior managing director of corporate finance and a restructuring specialist at FTI Consulting Inc.
Even within national borders, everything from culture and domestic politics to the state of judicial expertise and local government pressure can create a laborious bankruptcy process. Often, the situation on the ground can be at best messy and at worst an unworkable environment for insolvencies. Add multiple jurisdictions to this mix and it begins to look a lot less settled. "Everyone anticipates more jockeying," says Katherine Ashton, a London-based partner at Debevoise & Plimpton LLP who specializes in restructuring. Finally, the complexity and scope of today's insolvency can be mind-boggling. Take the Madoff scandal and other Ponzi schemes. Walton believes that "massive insolvencies with zero assets will be causing real problems in the future," in which liquidators must train their sights primarily on those responsible for the fraud.
All that said, legislators have shown they can react quickly and rewrite laws to make them more responsive -- if the crisis is serious enough. "The United States isn't alone at looking at extraordinary measures for dealing with the situation," says von Randow. Ostad cites Iceland, which had to nationalize its insolvent banks in the early days of the crisis. "They created laws, where before they didn't have them or need them," she says. With its major banks failed and its national coffers depleted, Iceland was a situation in extremis. Yet other measures have occurred as well under less dramatic circumstances. Two weeks before the meltdown, Italy passed changes to its bankruptcy law tailored to the bailout of Alitalia Cia. Aeree Italiana SpA but useful in separating bad assets from good. As the financial world imploded, both Germany and France rushed out legislation that makes restructuring less hidebound. In France, "the government wants to facilitate pre-insolvency restructuring," says Antoine d'Ornano, Paris-based international counsel for Debevoise.
Paris enhanced 2005 legislation that created mechanisms for restructuring debt. These regulations, in effect since Feb. 15, make it easier for management to obtain a kind of court-ordered time-out. "When the debtor goes to court, it forces creditors to come to the table," says d'Ornano, who explains the process: The regulations provide for a court-blessed arrangement, commonly called safeguards. These enable management to stay in place, something akin to a debtor-in-possession but without formal bankruptcy. Debtor and creditors can draft a workout with the help of a court-approved administrator who monitors and assists the process. Banks can extend repayments or make new loans with superpriority over existing debt, all new concepts in France. Safeguards are available for six months, with two six-month extensions possible. At the end of the process, the court decides whether to approve the new arrangement. Germany has already eased the strict conditions under which directors must declare insolvency. It is poised to modernize its antiquated bondholder law. And it may enact even more sweeping measures.
According to local press reports, the government is considering a law that would enable an official administrator to step in, assume on behalf of the government the liabilities of a corporation or bank and try to restructure. During this period, equity holders would have no say in the operations. But if the turnaround is successful, the government would hand back the company to its previous owners, minus restructuring costs. "It's breathtaking what thoughts are pondered," von Randow says. This is a global crisis in every sense of the word. Financial woes in one country can have severe and unexpected repercussions in another. According to Austria's finance minister, Austrian banks alone have loaned €230 billion ($290 billion) to Eastern Europe, equal to 70% of the country's GDP. (Austrian and Swiss banks flooded the region with money. Thanks to these banks, more than half of Poland's mortgages alone are in Swiss francs, a bout of cross-border insanity that defies imagination.) Moody's Investors Service is finally getting around to at least threatening to downgrade these banks.
The belief that Western European banks will withdraw lending in Eastern Europe in turn leads to a fear that not only Eastern European corporations will be squeezed, but nations themselves will experience even worse current account deficits. That puts even more pressure on lending, both corporate and sovereign. Already, there is widespread belief that unless the International Monetary Fund bails it out, Ukraine could default on its sovereign debt as early as this month. Latvia's debt is already rated as junk. Bulgaria's current account deficit is a staggering 21.5%. This kind of negative feedback loop can wreak havoc on borrowers, no matter how solid they appear. "If sovereign debt defaults, any company within that country has enormous problems," Ashton says. So far, the default response from both governments and private institutions is to avoid formal bankruptcy whenever possible. However, that implies the ability of banks and other financial institutions to lend more or on better terms. That in turn presupposes liquidity, which remains in short supply.
Ashton explains the dilemma: "Two different elements are at war with each other. No one wants to go into bankruptcy, and creditors want the highest return. On the other hand, creditors don't have a lot of leeway. There's no more credit." Confusion and misstep bedevil both government and private-sector efforts. No country is immune. Witness Washington's stumbling, ad hoc approach to wounded U.S. banks, its dramatic shifts on the bailout terms of insurance giant American International Group Inc. and the widespread condemnation of the Bush administration's refusal to bail out Lehman Brothers Holdings Inc., which stands, by far, as the biggest bankruptcy of this cycle. "In good economies, nations have time to think about laws and social politics. In bad times, they just react," Ostad says. It would also be a mistake to view cross-border bankruptcy as anywhere near unitary or even convergent. The world doesn't operate under the fundamentals of Chapter 11, despite what Americans may want to believe. DIP financing in Europe is unheard of. Equitable subordination differs from country to country. Insolvency committees have different standings.
Among insolvency regimes, fundamental differences remain in approach, priority and desired outcome. In Brazil formal bankruptcy is a long, slow death sentence to be avoided at all costs. Yet, as Eduardo Salomão Neto, the São Paulo-based senior partner at Levy & Salomão Advogados, explains, nonliquidation reorganization became an option in Brazil only about three years ago. "The last option is to put a company into bankruptcy," he says. "A bankruptcy procedure, properly litigated in Brazil, may take 10 years or more." So far, at least, Brazil has escaped relatively unscathed in the global meltdown, although Salomão reports several midsized companies have filed for reorganization since the end of last year. But with such severe bankruptcy regulations, only those companies with absolutely no alternative take the plunge. In August, the large agribusiness Agrenco Ltd., formally declared bankruptcy. But that came after its chairman and COO were arrested on money-laundering charges. Agrenco parent Agrenco Holding BV is based in Bermuda, but most operations are in Brazil.
The differences of approach to the institution of bankruptcy are evident even within the European Union, whose regulations supposedly demand mutual recognition of laws and authority. "On one end of the spectrum, there's a coordinated pan-European process," says Granger. "At the same time, there's a lot more scope for a process that's fragmented and adversarial." Debevoise's Paris-based d'Ornano cites conflicts between where he sits and where his colleague Ashton resides across the English Channel: In the U.K., he says, insolvency administrations tilt toward creditors and liquidation of assets, whereas in France, the end game focuses on "maintaining employment levels." Or take another neighbor, Germany. It continues to have strict rules governing when a company is forced to declare insolvency, with directors criminally liable for lapses in judgment. At the other end of the process, equity holders must approve any debt-for-equity swap, giving them the rights to scuttle a restructuring.
Western European jurisdictions have refined their insolvency regimes in the past decade and made great progress, von Randow says. But there remains "a very interesting divergence among these jurisdictions." In normal times, the whole process of cross-border insolvencies could play out over years of court hearings and be measured, methodical and sometimes excruciatingly boring. (The European Court of Justice decision involving Parmalat subsidiary Eurofood IFSC Ltd. came more than two years after the bankruptcy itself.) Likewise, company executives, directors and their restructuring advisers might have months to plot strategy before deciding what route to take. But these are not normal times. Von Randow frames the issue in medical terms. In the past, "patients were sick, but we had ample time. Now the patients come in and they're about to die. Time is running out much faster." Return for a moment to Lehman, the bankruptcy widely held responsible for triggering the current financial meltdown. Lehman filed for Chapter 11 on Sept. 15, 2008. Almost simultaneously, the U.K. subsidiary went into receivership and a U.K. receiver assumed control. Other administrators seized operations in Hong Kong and Japan.
With hundreds of thousands of clients at risk and with billions of dollars of business evaporating by the day, a U.S. bankruptcy court judge approved the sale of Lehman's North American investment bank operations and real estate to Barclays plc a scant four days later. At the time, Judge James Peck and others in that packed downtown Manhattan courtroom praised the speed and collaboration among authorities, not only within the U.S. but overseas as well. Six months later, some revisionist history may be in order. While U.S. operations were kept open for the week, receivers by law had to immediately shut down U.K. operations. The U.S. has separate bankruptcy provisions for a broker-dealer; Britain doesn't. Billions of dollars got stuck. Jurisdictional disputes remain. "Local creditors have competing interests," says Granger, whose firm represents unsecured creditors. Lehman's empire stretched around the globe. Asset sales elsewhere are nowhere near resolution.
The Lehman bankruptcy gives some idea of just how difficult cross-border insolvency can be today. Ashton describes typical financial complexities: Imagine a German company, she begins. Its syndicated loans are formulated under English law, its high-yield debt under U.S. law. "A German court could be asked to apply U.S. law and British laws," with creditors. "God knows where," she says. Then, there are issues involving joint ventures. Andrew Bolton, who heads Appleby's restructuring practice, describes a hypothetical scenario: Russian and Brazilian companies come together to form a joint venture, incorporated in the Caymans, to own a pipeline in Kazakhstan. Or take your average multinational concern. The very concept of a center of main interests assumes a strict hierarchy between an all-powerful head office and its dependent subsidiaries. Instead, what Granger terms a "matrix" of cross-border relationships is often at work, with everything from shared production plants to global stakeholders.
He cites the hypothetical case of a British holding company with subsidiaries in Germany, France and Italy. "If the German subsidiary is independently run, has a German lender, German suppliers and German business, it's going to be very hard to convince the German court that the insolvency shouldn't be in Germany," he says. European insolvency regulations have so far "failed to provide a way a group could be brought under control," adds Neil Cooper, a London-based corporate recovery group partner at restructuring advisory group Zolfo Cooper. He suggests the EU will eventually tackle the notion of substantive consolidation of groups when insolvent, possibly crafting some kind of "huge pot of assets and liabilities that can then be separated." But even principles enshrined in laws common from one jurisdiction to another aren't necessarily guaranteed. In a landmark September 2007 case, U.S. Bankruptcy Judge Burton Lifland blocked an effort by two Bear Stearns Cos. hedge funds to file for insolvency in the Cayman Islands, where they were incorporated, and have the U.S. courts recognize the insolvency.
Lifland denied the so-called Chapter 15 filing. He ruled that despite their Cayman registration, the center of main interests was in the U.S., which is where their operations, management and customers were. "We never envisioned a case that wouldn't be recognized in the country of incorporation," says Cooper, who helped draft the United Nations model law on cross-border insolvency. That decision and what it represents leaves legal advisers scrambling for alternatives. Walton and Bolton describe efforts in the Caymans and other offshore domiciles favored by hedge funds and other investment vehicles, many in serious trouble: a U.S. Chapter 7 filing alongside a Caymans filing and administrator; a Chapter 11 filing immediately preceded by a Caymans filing; preparation for an insolvency filing in the Caymans by asset transfer; or the appointment of a chief restructuring officer.
Walton calls the typical hedge fund "a paradigm of cross-border" relationships, with investors, investments and operations spread every which way. "If you can't have a unitary cross-border proceeding for a hedge fund, you really are in difficulties," he says. While Walton and Bolton say the Caymans are well equipped to handle cross-border insolvencies, other jurisdictions appear far less prepared. Take Russia. Flush with sky-high natural resource prices, major Russian corporations went on spending sprees in mid-decade, buying domestic competitors and foreign trophies. These companies owe a total of $400 billion in foreign debt, according to the head of Russia's Regional Bank Association. Although the loans may have been used to fund offshore acquisitions, much of this debt is held by the Russian operating and production companies themselves, and the debt is secured by shares. Russian corporate defaults are so far just a trickle; Debtwire estimated between 20 and 30. Most are relatively modest. Russia's largest baby food manufacturer, Nutritek Group, defaulted on a $50 million bond in December and has an additional $100 million payment due in two bonds by June. The company said it would hold a rights issue to pay down its debt.
Why these numbers are small is obvious: By some estimates, Russian banks loaned more than $15 billion to Russian corporations to avoid default and repay foreign debt. One Russian state bank, Vnesheconombank, or VEB, alone has provided almost $11 billion, according to Reuters. The biggest single bailout came in November, when VEB gave UC Rusal a $4.5 billion, one-year loan, which the company used to retire syndicated foreign debt in danger of default. The money had been used to acquire a 25% stake of Russia's mining giant, OJSC MMC Norilsk Nickel. Rusal, controlled by Russian oligarch Oleg Deripaska, is the world's largest aluminum company. Deripaska is desperately trying to restructure more than $14 billion in debt, much of it used to acquire offshore assets in countries from Australia to Nigeria. Aluminum, meanwhile, has plummeted from a high of $33,000 a ton in February 2008 to $9,400. Foreign banks holding about half that debt are now negotiating with Deripaska, who wants an extension on repayment, with rates tied to aluminum prices.
Whether the Kremlin can continue to rescue Rusal and others isn't certain. Dependent on oil and gas revenue, the country's reserve fund is plummeting. Meanwhile, the central bank is hemorrhaging dollars as it desperately tries to prop up the value of the ruble. "The government has already indicated it is not going to bail out any more companies," says Rymko, the Lovells lawyer. He predicts bigger Russian banks will merge while small and medium-sized banks will be allowed to fail. "I believe the government is wise enough not to spend all its reserve funds to support commercial companies," adds Dmitri Nikiforov, a Moscow-based Debevoise partner. "I think there will be major insolvencies in the near future, probably this year." Nikiforov, however, warns that debt structures can be "chaotic." Russian banks are notoriously reluctant to share information with others and would rather negotiate "sweetheart deals behind the backs" of their competitors. "There's a huge behavioral aspect to Russian restructurings," he says. "It's an entirely different world."
What happens when the current trickle becomes a flood? History indicates the Russian bankruptcy system won't be capable of handling cases or acting as an impartial arbiter. In the 1990s, bankruptcy became a favored tool to seize control of companies, with late payments and minuscule debts used as leverage to put even healthy companies into insolvency and assets sold to favored buyers at a fraction of their cost. The Russian Duma changed the insolvency law in 2002. On paper, at least, it promised a more structured, orderly process. That was strengthened in January, when amendments to the law took effect. Most importantly, they increased a secured creditor's ability to gain pledged assets. No one, however, suggests Russia has a working bankruptcy system. The one major company to go bankrupt since the 2002 law was OAO NK Yukos, the oil and gas giant whose controlling shareholder, Mikhail Khodorkovsky, ran afoul of then-President Vladimir Putin. Khodorkovsky has been locked up for the past six years on fraud and tax evasion charges. The 2006 Yukos bankruptcy itself was a sham, with no mechanism for the company to discharge debts. It really harked back to the days of forced control change. "The entire legal regime was manipulated," says Nikiforov. "It was entirely artificial."
Last October, a Dutch court validated that view in a case that revolved around the Russian bankruptcy administrator's attempts to seize offshore assets held by Yukos subsidiaries based in the Netherlands. The court ruled that the Russian bankruptcy lacked due process. The administrator has appealed. Robert van Galen, Amsterdam-based head of restructuring and insolvency for Dutch law firm NautaDutilh NV, represented the old Yukos shareholders in the case. He believes it's the first time in Europe a bankruptcy wasn't recognized because of due process or human rights violations. According to van Galen, the case is an important precedent, because judgments in one European Union country tend to be recognized in others.
Just as big a gap is visible in China, whose new bankruptcy law is barely 18 months old. It followed years of preparation and generated good reviews when it was enacted. Actual bankruptcy cases, however, are few and far between and will likely stay that way, says Steven Dickinson, a Shanghai-based lawyer for Harris & Moure PLLC. "At first, the code looks OK and includes a very American-style reorganization," he says. However, "on closer reading, everything has to be done by the courts," which lack the manpower and the experience to carry out the supervision. "I've gone into court and asked, 'Where is the staff to do this?' The answer is, 'We're not going to do any.' " The obstacles facing China in implementing its new bankruptcy code are formidable. Judges aren't trained; many are recent university graduates. Support staff is nonexistent. "It's still a very slow process," says Helena Huang, a Hong Kong-based restructuring group partner at Kirkland & Ellis International LLP, who is generally more upbeat than Dickinson. "It's not going to happen overnight."
Since the crisis began, China's biggest bankruptcy is Sanlu Group, responsible for the tainted milk that killed at least six infants and sickened thousands of others. The bankruptcy followed the convictions of top executives, including two who were ordered executed. "This was political, not a business decision," Dickinson says. Instead, China's approach to bankruptcy is akin to that of Japan in the 1990s: Let the banks handle it. So far, Chinese banks haven't foreclosed on the companies. Neither do they seize assets and attempt to auction them off. Instead, much as did their Japanese counterparts, they quietly arrange for a change in ownership, sometimes assuming control themselves. "Cross-border insolvencies can be really complicated," says Timothy DeSieno, a New York-based restructuring partner at Bingham McCutchen LLP with wide experience in insolvencies around the world. "It's really a case-by-case exercise." Now we're about to find out what that means.
Emerging Nations Face $700 Billion Funding Gap, World Bank SaysDeveloping nations face a shortfall of as much as $700 billion to pay for their imports and service their debts this year as the global economy falters and foreign investors withdraw, the World Bank said. The global economy is likely to shrink for the first time since World War II, with growth at least 5 percentage points below potential, the Washington-based agency said in a report published today ahead of a March 14 meeting of Group of 20 finance ministers. The contraction will squeeze finances in developing nations, which are likely to face a shortfall of at least $270 billion, the bank said.
"We need to react in real time to a growing crisis that is hurting people in developing countries," said World Bank President Robert Zoellick in a statement. Action is needed by governments and multilateral lenders "to avoid social and political unrest." World trade is forecast to record its fastest decline in 80 years, with East Asia suffering the sharpest fall, the bank said. Global industrial production is expected to be as much as 15 percent lower than in 2008. The World Bank said that a surge of debt issuance by rich nations risks "crowding out many developing country borrowers, both private and public." Emerging nations that can access capital markets will be forced to pay higher rates of interest.
The report said that 94 out of 116 developing countries had experienced a slowdown in economic growth, with poverty increasing in 43. The result, the bank said, would be growing dependence on foreign aid. Justin Lin, the bank’s chief economist, said that developed nations should funnel part of their stimulus spending to poorer countries where it would be more effective at boosting demand. Channeling infrastructure investment to the developing would can have a "bigger bang for the buck," he said.
Canadian Union OKs Sweeping Concessions With GMThe Canadian Auto Workers union agreed Sunday to sweeping concessions with General Motors Corp, a move that clears the way for the struggling auto maker secure loans from the Canadian government. The CAW was left with few options after GM warned it might cease operations in Canada without union givebacks. The Canadian government said it wouldn't consider giving state aid until the union agreed to concessions. The new deal freezes wages for active workers and pension payments for retirees. Workers will get less time off and forgo cost-of-living pay increases. In addition, retirees for the first time will make co-payments for health care.
A majority of GM's 10,000 hourly workers in Canada must ratify the deal. A vote is expected this week. "There is no joy on our side of the bargaining table," CAW President Ken Lewenza said Sunday at a news conference. "This is the furthest thing we wanted to do, but the alternatives are worse." The concessions come as GM, subsiding on $13.4 billion in U.S. government loans, negotiates deeper concessions with the United Auto Workers in the U.S. GM has said it needs at least $6 billion in aid from other governments this year in addition to up to $16.6 billion in additional aid it's requesting from the U.S. Without the cash, the auto maker said it could be forced into bankruptcy as soon as this spring.
The CAW said its deal is contingent on a GM commitment to continue building vehicles in Canada as well as on the auto maker receiving the Canadian loans. Canada's auto industry has lost its competitive edge to U.S. workers represented by United Auto Workers as the UAW has agreed to concessions that have reduced GM's labor cost in the U.S. The weakening U.S. dollar also has lowered the cost of business for GM at home. "We had to keep pace to make sure there were no reasons to move work from our plants to the United States," Lewenza said. "This will cause real hardships to are members and their families." GM said in a statement that the labor deal will make its Canadian operations more competitive and help the company execute its global viability plan. "The agreement marks a positive further step in GM Canada's restructuring plan," the statement said.
Britain: the spectre of four million unemployedOne of Labour's proudest boasts over the past decade was its creation of a "flexible labour market", but in hard times that can mean firms are able to reduce the size of their workforce relatively easily. Unemployment has already reached almost two million, but official figures to be published later this month are expected to confirm it is still rising sharply. Suddenly, a government accustomed to near-full employment is being forced to tackle mass joblessness.
Danny Gabay, of consultancy Fathom, has analysed past downturns and points out that while economic output usually hits the bottom approximately a year after the onset of recession, employment does not hit a trough until three years or more - and tends not to recover to its pre-recession peak for the best part of a decade. Using this past experience of how firms tend to behave, he predicts that unemployment could top out at four million. Apart from creating enormous human misery for the millions of laid-off workers and their families - and a formidable practical challenge for the Department for Work and Pensions, which has already had to increase staffing levels in Jobcentres - that could set up a damaging vicious circle.
Job losses are a key cause of mortgage default, and rising unemployment would leave hundreds of thousands more people unable to make their repayments. That could drive house prices down yet further, bearing down on the value of the toxic assets sitting on banks' balance sheets - or in the case of Royal Bank of Scotland, largely underwritten by the Treasury. With house prices still falling, the banks are likely to continue to be reluctant to lend, starving firms and households of credit and leading to even more potential job losses.
And not only will workers left without a job be forced to tighten their belts severely, depressing demand right across the economy, but the very fear of unemployment, as consumers watch their friends, neighbours and family members being turned out of work, can lead to a much more widespread drop in confidence, exacerbating the downturn. There would also be longer-term economic consequences from such high levels of unemployment. The TUC found that 30% of people who lost their jobs during the last recession ended up unemployed for more than 12 months. Even when they do find another job, it may involve lower skill-levels, so that the experience they had gained is lost to the economy.
It can take many years to recover from periods of unemployment. Research by analysts including monetary policy committee member Danny Blanchflower, shows time spent without a job can have a "scarring" effect, that can last throughout workers' careers. As he said in January: "Sustained unemployment while young, especially of long duration, has particularly nasty effects... a range of evidence indicates those that suffer youth unemployment have lower incomes and poorer labour market experiences years later." For the economy as a whole, and for the unlucky staff themselves, unemployment is devastating.
Bank of England's £150bn injection may not work, economists warnEconomists have warned that the attempt by the Bank of England to revive Britain's fortunes by injecting up to £150bn into the economy is a high-risk strategy that might not work. The concern centres on whether the banks will be prepared to lend the extra money sloshing around the economy to businesses and consumers, or whether they will choose to hoard the cash. The programme's success will be judged by the extent that it boosts the supply of money and credit, the lack of which the Governor, Mervyn King, has described as the biggest single threat to the economy.
Fathom Consulting, set up by a group of former Bank of England economists, described the Bank's plans to buy Government debt and other assets with newly created money as "a step into the dark". In a note it said: "It is very possible that the UK economy will have shrunk by between 5pc and 7pc in total by the time this recession is over. "Is that really the sort of environment where banks are willing to expand lending? In such a nasty environment, earning 0pc on one's cash balances may be preferable to potentially earning much less by lending the money out. The crisp new bills could then simply end up gathering dust in bank vaults."
The economists conclude that the impact of the initial £75bn injection over the next three months is "likely to be modest".
The Bank will officially embark on the process, known as quantitative easing, on Wednesday by purchasing £2bn of gilts at an auction. Analysts warned that if the programme fails to improve conditions almost immediately, the markets may suffer another crisis of confidence. Stephen Lewis at Monument Securities said: "The danger is that the authorities have set the bar of success too high. In claiming that quantitative easing will turn on the credit taps, they run the risk of despair setting in if it fails to generate a revival of bank lending."
Analysts have also suggested that despite being a big number, £150bn might not be enough to have sufficient effect, and the Bank may have to seek authorisation from the Chancellor to extend the programme. Jonathan Loynes at Capital Economics said: "Even if bank lending and broad money growth increase, this may not translate into a significant rise in economic activity if firms decide not to spend the extra money. "The upshot is that, while Thursday's adoption of quantitative easing is a welcome step, for now it does not alter our view that the economy will contract sharply this year, and perhaps further next year."
Icelanders knit crafty response to global crisisAlong Laugavegur, Reykjavik's main shopping lane, one crafts store is thriving in spite of the economic crisis. Well, not in spite of it – because of it. Yarns, threads, needles, and fabric scraps are flying off the shelves at Nalin. The shop already ran out of the Danish materials it usually carries and is now running on locally manufactured wool products. The financial crisis has dealt Iceland a devastating blow: unemployment is soaring, the króna has collapsed, and banks have been nationalized. In January, the island nation's government buckled under the protests of citizens, who say a measure of prudence might have prevented the economy from overinflating.
Icelanders are hardly sitting idle as their country is slammed by the global financial hurricane. In cutting-edge Reykjavik, many are turning to arts and crafts, both to save money and to make it. "Those who can't afford to buy presents are making them on their own, and those who can afford them are mostly buying handmade Icelandic items because of the import limitations," says Nalin's owner, Helga Jona. Take Hildur Yeoman. Before the banking crisis, she could make do with her salary as a sales assistant at Trilogia, a clothing store and gallery. Nowadays, the 20-something makes frequent trips across the street to Nalin to buy supplies for her line of crocheted purses that she sells. Ms. Yeoman also sells self-illustrated greeting cards.
Trilogia specialized in high-end British, French, and Spanish designer pieces. Until lately, it carried little Icelandic work. But because the government has prohibited the depositing of money in foreign accounts – the only imports allowed are necessity items, such as food – the store has been forced to stop ordering merchandise from abroad. Knitting to the rescue? Local designers, often one-person brands, have come to the rescue. Trilogia now features necklaces from Arora Eir, headpieces from Thelma Design, rouched bags from Hidden Goods, and bow scarves from Gudbjorg Jakobsd. "The well-to-do ladies are still going to shop for exclusive Christmas, birthday, or Valentine's Day presents. It's just that those who used to buy Alexander McQueen are now buying Thelma," Ms. Yeoman says, referring to the big-money British designer, Mr. McQueen, who commands up to $300 for a belt or a scarf and up to $1,200 for a necklace.
The local one-of-a-kind accessories cost less than $150 each. Some craftspeople have arts and design training, while others have non artistic day jobs and just happened to have paid attention when their grandmothers taught them how to knit those ubiquitous rose-patterned wool sweaters. Boas Hallgrimsson is one of the latter. In his free time, the young schoolteacher runs a design community in a loft in the capital's hip 101 District. He sets up small shows for independent bands; his wife, Inga, does illustrations. They are joined by Jette Jonkers, a clothing designer; Myrra, a photographer; and Aron, a painter. All are regular citizens still fortunate enough to be employed: by day, they do their Clark Kent jobs, but after 5 p.m., they slip into their studios and become artistic Supermen.
Not far from the loft is more evidence of Icelanders' creative response to the crisis: the design shop Verslunin Herdubreid. Construction activity here has dropped 80 percent following the onset of the economic collapse in October. Architects Johann Sigurdsson and Elin Gunnlaugsdottir saw no sense in maintaining their architectural practice. So, they moved the white elephant to the basement and opened the Verslunin Herdubreid design shop in their firm's storefront. The architects then contacted a few friends and artistic collectives, who filled the space with clothes, crocheted accessories, indie books, volcano-shaped chocolates, and wire teddy bears. Three weeks later, Verslunin Herdubreid opened. Bryndis Sveinbjornsdottir, Hildur Jonsdottir, and Ottar Nordfjord – fashion designer, graphic designer, and illustrator, respectively – all answered the call.
How were they able to find so many handicrafts from creative sons and "dottirs" in only three weeks? For Mr. Sigurdsson, the store's co-owner, it's a jack-of-all-trades effect. "We're only 150,000 people here in Reykjavik, so that means each one of us has to know how to do everything," he says. "And we really think we can do anything – arts and design included. Hey, that attitude is what got us into this financial problem. And it's probably what will get us out of it." At another loft a few blocks away, actress Helga Braga was selling almost every item in her closet, from Dolce & Gabbana to top Icelandic designers. "My husband, a carpenter, was laid off," says Ms. Braga, a fashion aficionado and former talk-show host. "This is one of the few ways I can get some extra money."
Elections for a new prime minister are scheduled for May and the new caretaker government has put an emphasis on maintaining Iceland's legendary social welfare. But some retailers doubt things will improve much for a while. "At least there's a silver lining," says Sara Eysosdottir, owner and head designer of the psychedelic clothing store Naked Ape. "Because of the exchange rate, more foreigners are coming here, and they're buying what we've got in the stores: local design. "And in a sense, the financial collapse has gotten young people busy," Ms. Eysosdottir says. "They have realized that they can't just be on Facebook all day; that if they want to survive, they're going to have to use their creativity and start making things to sell."
Hundreds of foreclosed homes auctioned in New York CityHundreds of houses -- some with starting bids as low as $1,000 -- went to the highest bidder at an auction of foreclosed homes on Sunday. The auction was only the second New York City sale run by Irvine, Calif.-based Real Estate Disposition Corp., or REDC. "We don't see as many properties going to foreclosure or being sold in New York City as we do in other parts of the country that have been hit a lot harder," said company Chairman Robert Friedman. "It just seems like other areas were overbuilt more." About 1,000 people attended the auction at the Jacob K. Javits Convention Center, and more bid on line. A fast-talking auctioneer described some homes as fixer-uppers with problems including mold, water damage and vandalism. "Financing is, is, is available!" he added.
Sunday's sale featured more than 350 condos, single-family houses and duplexes in the New York metropolitan area and Pennsylvania. REDC holds auctions of foreclosed properties around the country; auctions are scheduled later this month in locations including Georgia, Colorado, Puerto Rico, Minnesota and Michigan. A handful of protesters picketed in front of the Javits Center, chanting "Evictions are a crime! It could be your house next!" "I'm in bankruptcy and hoping to save my home," said protester Sharon Black, of Baltimore. "These folks are profiting off the people's misery." But REDC spokesman Rick Weinberg said the auctions help stimulate the economy by putting people in vacant houses.
"Their problem is with the foreclosure crisis in general," Weinberg said. "We are part of the solution, not the problem." Inside the auction, winning bidders were escorted to a back room to work out the financing on their new homes. Tami Burgess paid $340,000 for a house in Yonkers that she said she'd had her eye on since last October. "I'm excited," she said. "I have a lot of work to do on the house." Ed Bates paid just $115,000 for a house in Nyack. He felt no qualm about buying a foreclosed home. "It's really not taking someone's home for the simple reason that it's vacant," he said. "If somebody was in there and I had to get them out, chances are I wouldn't have purchased the house. I feel sad for them, but still, that's the way the world is."
The plight of young, uninsured AmericansThey're generally healthy and have a long life ahead of them. The health insurance industry even calls them 'the young invincibles.' So, what's the problem? Young adults, ages 19 to 29, are the largest age group of uninsured people across the country. For Maryland resident Bree Honey, all she can do for her chronic back pain right now is to exercise at the gym where she works and take Tylenol PM instead of other medicine she needs. "I'm definitely working out right, to try and keep my strength up and to help my immune system right now. ... It's the best thing I can do for myself," Honey said.
Why? She has to put all her money toward expensive drugs for her depression -- without health insurance. "I am buying my own prescription drugs by myself. ... And I have to pay for that out of pocket every single month. So it's very difficult on me," she said. At 20, she's too old to be covered by her parents' policy since she's no longer in school. She makes too much to qualify for public health care, but she can't afford private insurance -- and doesn't yet qualify for coverage at her new job. "I'm just a struggling student right out of college, trying to make my way. And I can't--I don't have the money right now for insurance," Honey said. "If there's some way that the government could get me, or get everyone, just a minimal coverage ... I would even pay for it out of my taxes if I had to."
Many other 20-somethings early in their careers don't have jobs that offer health benefits. "Only about one-half of all young adults who are working are offered coverage through an employer, compared to about 75 percent of adults who are offered coverage through an employer, over age 30," said Sara Collins with the nonpartisan health care group, Commonwealth Fund. And it's a common problem. According to the latest date from the Census Bureau, in 2007, there were an estimated 13.2 million uninsured young adults. It's the fastest growing group of the 46 million uninsured Americans today.
Other uninsured rates, according to the data:
• Children under 19: 11 percent
• Ages 30-35: 23 percent
• Ages 36-49: 17 percent
• Ages 50-64: 13 percent.
Reducing the number of uninsured young adults is a top priority for President Obama. "Health care reform is no longer just a moral imperative, it is a fiscal imperative," Obama said at a health summit at the White House last week. But what can young people do? Collins says first check with your state: About 25 percent have increased the age of dependency. "New Jersey extended the age of eligibility to age 30, most states are clustered around increasing that age to about 24 ... So this is a big help to young adults who had coverage under their parents health insurance plan and lose that coverage," Collins said. As for Bree Honey, she'll just keep working out and hoping for the best. But it's never far from her mind. "I'm strapped. I feel like I'm almost like a prisoner in my apartment right now. I can't get sick. I have to worry about if I'm going to get hurt," she said.
Cybersecurity director resigns amid turf battlesThe head of the nation's cybersecurity center has resigned amid persistent turf battles and confusion over the control and protection of the country's vast computer networks and systems. Rod Beckstrom's decision to step down as director of the National Cybersecurity Center comes as the White House is conducting a broad 60-day review of how well the government is using technology to protect everything from classified national security data to key financial systems and air traffic control. In a blunt letter to Homeland Security secretary Janet Napolitano, Beckstrom complained about a shortage of money for the center and a clash over whether the National Security Agency should control cyber efforts. The role of the NSA in protecting domestic computer networks has triggered debate, particularly among privacy and civil liberties groups who oppose giving such control to U.S. spy agencies.
Intelligence officials argue, however, that they must be involved in order to adequately defend the country and its networks. Beckstrom's letter was dated Thursday, and said his resignation would be effective March 13. Homeland Security Department spokeswoman Amy Kudwa said the department is working with other federal agencies, specifically the NSA, to protect civilian networks, and is reaching out to the private sector to find additional ways to improve cybersecurity. President Barack Obama last month ordered a 60-day review of the nation's cybersecurity, and put former Bush administration aide Melissa Hathaway in charge of the effort. Hathaway has been meeting with industry leaders, Capitol Hill staff and other experts, seeking guidance on what the federal government's role should be in protecting information networks against an attack.
She also is asking for recommendations on how officials should define and report cyber incidents and attacks; how the government should structure its cyber oversight and how the nation can increase security without stifling innovation. As a candidate, Obama criticized Bush's cybersecurity efforts, and suggested that — as president — he would have a cyber adviser who would report directly to him. It was not known whether that is still the plan. On Thursday, Obama named a federal chief information officer, Vivek Kundra, to work in the White House. Kundra is to have a role in overseeing the ability of computer systems to speak to each other and the security for the federal government's vast information databanks.
Monsanto's Uphill Battle in GermanyBusiness is booming worldwide for US biotech giant Monsanto but in Germany the company has encountered fierce resistance. A colorful alliance of beekeepers, anti-capitalism protestors and conservative politicians are in the process of chasing the global market leader out of the country.
When Karl Heinz Bablok wants to relax and get away from his job at the BMW plant, he hops on his bike and cycles out to Kaisheim, a quiet town in Germany's southwestern Swabia region. It doesn't take Bablok long to reach his destination, sitting in the middle of a meadow: an apiary, made of rough-cut boards, which he made himself. Bablok, an amateur beekeeper and skilled handyman, spends much of his free time here, repairing the apiary in the winter and making honey in the summer. The apiary is where Bablok's recharges his batteries, the place he goes to store up the energy he needs for everyday life and for his job at the BMW plant's training workshops. The apiary was supposed to be a very private place -- far away from work and, most of all, far away from the public.
But the apiary and the honey he produces there are no longer private. His honey is now at the center of a dispute being staged in German courts, and observed and influenced by both politicians and the media. And it has drawn Bablok, a man who just wanted his peace and quiet, into one of Germany's major ideological debates -- a battle that has been waged for years in the courts, in the political arena and in the fields, with words, scientific studies and sometimes fists. On one side of the battle are the genetic engineering companies, and in particular US corporation Monsanto, the world's largest producer of seeds, which practically holds a monopoly on genetically modified (GM) plants. Monsanto produces the only modified plant approved for use in commercial farming in Germany, a corn variety that is used for animal feed. The primary benefit of the plant, called MON 810, is that it produces a toxin that allows it to fight off one of its enemies, the voracious larvae of a moth.
On the other side stand Monsanto's many adversaries, a heterogeneous alliance that brings together organic farmers, anti-capitalism activists, churches and politicians with the conservative Christian Social Union, the Bavarian sister party to Chancellor Angela Merkel's Christian Democrats. The dispute between the two camps revolves around the opportunities and risks involved in green genetic engineering. It's about companies that are playing God and about fundamental questions like: What should man be permitted to do? What can science do? And should we be allowed to do things just because we can? The dispute is also about freedom and its limitations, the freedom to carry out research, and the freedom of consumers, farmers, beekeepers and a corporation. Where does one side's freedom end and the other's begin, and who draws the boundaries?
Bablok became part of the controversy because some of his bee colonies were collecting pollen from fields where the Bavarian State Research Center for Agriculture was growing GM corn for research purposes. The bees carried the pollen back to their hives and Bablok, who knew that the GM cornfields were nearby, had samples tested to ensure that his honey was clean. But the laboratory found that up to 7 percent of the pollen was from GM plants. When the case became public, a district court in the Bavarian city of Augsburg ordered Bablok to stop selling, or even giving away, his honey. As a result, he became Germany's first beekeeper who delivered his honey to a waste incineration facility. Now Bablok is suing the Bavarian State Research Center for Agriculture to recover his costs and his lost sales, which he says amount to about €10,000.
The suit is complicated and has already passed through two courts. A third court is due to hear it soon and both sides are seeking a judgment establishing a principle. The case is about more than just Bablok's costs and the purity of German honey. In fact, the future of green genetic engineering in Germany is at stake. A victory for Bablok would further discredit MON 810. In the public's perception, it would transform the plant into a hazard for human beings. Bablok, sitting in his kitchen, is an easygoing man given to long pauses between sentences. File folders are arranged on the table in front of him containing motions filed by his attorneys from Berlin, people who are familiar with the material. A beekeepers' association is helping to pay their fees. The folders also contain the motions filed by the opposing parties' lawyers. They are being represented by the law firm of Freshfields Bruckhaus Deringer. With its 2,500 attorneys, the firm is about as global as Monsanto.
The documents are extensive, weighty and complicated. The core issue revolves around whether Bablok's genetically modified honey is subject to the licensing regulations set down by European Union food law. The attorneys for the Bavarian State Research Center for Agriculture say no. Bablok's lawyers say yes. The question is so important because Monsanto's corn can only emerge from the case unscathed if the judges rule that Bablok's honey is not subject to the food licensing regulations. Although the loss of sales has affected Bablok, it has not spoiled beekeeping for him. He will set up his hives again this year, just in other locations. He is also trying to forge an alliance of beekeepers in the region. His plan -- his revenge -- is to make Kaisheim and the surrounding area bee-free, so that there will be no bees to pollinate plants in the area.
Nowadays Bablok follows the case from afar. He says that the matter is now "in the hands of the thinking people," the attorneys from Berlin. As a factory worker, he says, he has long since given up trying to understand their arguments. Monsanto's German headquarters are located in a business park in Düsseldorf. Only two postcard-sized brass plates at the entrance of a high-rise building, which are easy to overlook, identify the offices. Monsanto is known for its efforts to avoid the public. Ursula Lüttmer-Ouazane greets us in a conference room with her firm handshake. A resolute woman, she is in charge of Monsanto's operations in northern Europe, including Germany. Her career began with an agricultural apprenticeship and she never attended a university. The challenges of rising to the top in a male-dominated industry are reflected in the lines in her face.
Lüttmer-Ouazane has been in the business for 30 years. She began working for Monsanto 10 years ago, after stints with some of the major players in the industry, including BASF, Novartis and Syngenta. Lüttmer-Ouazane has never romanticized agriculture, which she regards as applied chemistry. Monsanto's annual report lies on the table in front of Lüttmer-Ouazane. These are good times for the group, globally speaking. Last year Monsanto doubled its profits to about $2 billion (€1.6 billion). The food crisis in the spring of 2008 drove its stock up to an all-time high of $142 a share. New GM plants boosted sales in South America, leading Monsanto CEO Hugh Grant to announce ambitious goals, which included doubling profits once again by 2012. Grant sees great potential in developing countries, where Monsanto is pinning its hopes on a draught-resistant variety of corn that it plans to begin selling soon.
Europe and Germany were assigned the roles of prestige markets in the company's business plan. For the critics of genetic engineering, this is not just about hundreds of thousands of hectares planted with corn, rape, soy or cotton, but about making headway in the fields in general. When Lüttmer-Ouazane started working for Monsanto 10 years ago, her goal was to see 40,000 hectares (99,000 acres) cultivated with Monsanto's MON 810 corn by 2009. It did not seem to be such an unattainable goal, representing as it did only about 1 percent of all land planted with corn in Germany. And yet Monsanto ended up falling well short of that goal.
While GM corn is grown on about 30 million hectares (74 million acres) in the United States, Canada and Argentina, and about an additional 3 million hectares (7.4 million acres) in South Africa, Brazil and the Philippines, only about 4,000 hectares (9,900 acres) of GM corn were registered by German farmers with the Federal Office of Consumer Protection and Food Safety. Lüttmer-Ouazane miscalculated -- in many respects. She had hoped to find substantial supporters among Germany's politicians, but found very few. Only members of the pro-business Free Democrats or the Federal Ministry for Education and Research occasionally speak out in favor of promoting green genetic engineering. It has almost been a replay of familiar arguments from previous debates, for example about the phasing out of nuclear energy or about proposals to build the Transrapid high-speed train in Germany. Proponents argue that green genetic engineering is also a key technology, and that it plays an important role in demonstrating Germany's future viability. But these are weak arguments that just come across as vague speculation about the future.
The vast majority of politicians remained unconvinced. They saw no reason to support a company that uses a highly controversial technology to create a product rejected by the majority of Germans. Lobbying work, which can be successful and reliable in markets like the United States, did not produce the desired results in Germany. Many organizations in both Berlin and the states were engaged to help generate a greater acceptance for green genetic engineering: Organizations like InnoPlanta in the eastern state of Saxony-Anhalt, the German Crop Protection and Fertilizer Industries Association in Frankfurt am Main and Europabio in Brussels. Their members have attempted to find a sympathetic ear for the cause among members of parliament.
In January 2007, representatives of the major political parties gathered at the state parliament in the eastern state of Brandenburg to hear a group of US experts explain the benefits of green genetic engineering to them. The main speaker was American genetic corn farmer Don Thompson, while his wife, Jill Long Thompson, a former Under Secretary of Agriculture, was available to address possible "legislative issues." But lobbyists for green genetic engineering cannot claim any real successes. "We expressed our views on the issue when the Genetic Engineering Law was written," says Lüttmer-Ouazane, "but we cannot be satisfied with the outcome."
(Eds:On Jan. 25, 2008 the German parliament, the Bundestag, voted in favor of an amendment to the Genetic Engineering Law. In the future, fields of GM and conventional corn would have to be separated by a distance of at least 150 meters. In the case of organic corn that minimum distance doubles to 300 meters. The law's liability provisions continued to stipulate that farmers who plant GM crops are liable for loss of income suffered by neighboring conventional farmers as a result of the GM presence.)
According to Lüttmer-Ouazane, the liability rules impose a one-sided burden on farmers willing to give green genetic engineering a chance. These farmers are faced with considerable bureaucratic red tape, says Lüttmer-Ouazane, and the required spacing between GM corn and conventional or organic corn is too large. Lüttmer-Ouazane is no friend of Berlin's political machinery and its results. But the politicians are not her only problem. She also encounters adversaries in places that do not look like centers of political resistance. A few weeks ago, Michael Grolm was standing on a tower high above Tonndorf in the eastern state of Thuringia, and high above the castle where he lives. Reaching Grolm requires walking up wooden steps that are crooked and worn from the previous generations that have climbed up to the top of this tower. Made of rough-cut stones, the tower is so old that is was depicted in paintings dating back to the Renaissance. The castle was first mentioned in writings from the 13th century and it is a protected landmark today. And, with its moat and its walls, it is also a bastion against change.
About 60 men, women and children live there. Three years ago, they formed a cooperative and purchased the castle, which was empty at the time. Now an alternative cultural center is taking shape there, including an ecological Ark. For Grolm, this demonstrates that old ways have a right to exist, and that they do not have to be watered down to make way for something new. There is probably no other place that suits him as well as this castle community. Grolm has been living here since the project began, and he plans to stay forever. He has even picked out his gravesite -- in a back meadow filled with scattered fruit trees. "Over there," says Grolm, pointing from the tower to a spot outside the castle walls. "There is still some neglected grassland over there, extremely rich in species that are hard to find nowadays. All you have to do is throw some chemical fertilizer on it and it's finished." The meadow orchards are adjacent to the grassland and in the summer, Grolm places a few beehives among the trees.
Grolm, like Karl Heinz Bablok, is a beekeeper. But it's more than a hobby for him -- it' his profession. The fruits of his labor can be inspected on a table in the castle, where Grolm discusses the individual varieties the way a vintner talks about his wine. "Here we have white pine honey from the Black Forest, which is malty and delicately aromatic. And this is sweet chestnut honey from the Palatinate, tart, slightly bitter." Grolm loves his profession. He also loves nature, the way God created it, and he devotes a great deal of energy to fighting the version of nature developed by Monsanto. Grolm is the spokesman, co-founder and front man of Gendreck Weg! (Chuck Out Genetic Muck!), an initiative, founded five years ago at his kitchen table, for opponents of genetic engineering who want to do more than argue and stage protests. The group gives ordinary citizens the chance to get involved in activism, filling a gap in the network of non-profit organizations. Lüttmer-Ouazane rolls her eyes when she hears Grolm's name.
Grolm and his friends organize events they call "field liberations." They travel to fields where MON 810 or GM research plants are growing, and pull them out of the ground. The events are public and are announced ahead of time on the Internet. The arrival of the police is expected and is not perceived as being overly disruptive to the event. Grolm can be counted as one of the fundamentalists when it comes to adversaries of Monsanto. He wants to transform Germany into a genetic engineering-free zone and goes further advocating the abandonment of all industrial agriculture, or agro-business. Grolm is a romantic: "We certainly still have farmers who work their fields with horses and plows," he says.
In the dining room of the castle, Grolm and a fellow combatant describe a vision of a future in which an inhuman corporation controls the world food supply. They talk about residual risks, patents on life (or bio-patents) and the release and irretrievability of manmade organisms. They paint a picture of a ghastly world in which living is no longer worthwhile. Their concept of the enemy is so all-encompassing that after listening to them for a while one begins to feel that they are not talking about a company that is fighting, albeit with morally dubious methods, for what it believes to be its rights, but about a demon. Grolm is fighting against this demon and for a better world. He is a known entity among the opponents of genetic engineering, and has become the poster child of the movement. Indeed, many opponents of Monsanto idolize Grolm. In the fall of 2008, the readers of the left-leaning newspaper Die Tageszeitung awarded him their "Panther Prize," an honor for civil courage.
The field liberations usually begin by setting up a tent camp near the GM field, followed by a demonstration and, at some point, the culmination of the event -- a sprint into the field. The field liberators lead the charge and the police are usually not far behind, rapidly closing in on the activists. Sometimes helicopters circle overhead, creating scenes reminiscent of the protests at the construction site of Germany's Brokdorf nuclear power plant in the mid-1970s -- and of the exciting, heady days of the anti-nuclear power movement. Grolm has based his group's actions on that movement and its strategies, once again employing the concept of peer groups whose members keep an eye out for each other, and providing nonviolent resistance training before every field liberation. However, a new element in the modern-day campaign is the activists' well-organized cooperation with the media.
Gendreck Weg! cameramen run alongside the field liberators, documenting the liberation of each field. The most experienced of the activists can even look at the camera and deliver what amount to lectures while running in a crouched position from plant to plant. The videos are then broadcast on the Internet, on sites such as cinerebelde.org, a hub in the network of anti-globalization activists that provides "images of a world in struggle." The field liberations usually end in arrests. If the cases go to trial, the judges usually sentence the offenders to nothing more than a fine. The fines, and court costs, are paid with the proceeds from a donations account. The field liberators are doing well, both financially and morally. They see themselves on the morally superior side of the argument, and they are not deterred by convictions. In fact, they see them as badges of honor. Grolm expects to spend a few days in jail soon because he refused to pay a fine. He says he is looking forward to it, pointing out that it will turn into yet another happening, complete with scores of tractors, banners, food provided by local supporters and inspiring tales of recent coups. Grolm's group has much to celebrate.
Last year, the Nürtingen-Geislingen University of Economics and Environment discontinued its field trials of GM corn after its fields were destroyed. Other organizations, such as the Max Planck Institute for Molecular Plant Physiology, based in Potsdam near Berlin, and the Leibniz Institute of Plant Genetics in Gatersleben in central Germany, are not risking field trials at the moment. In 2008, the Federal Office of Consumer Protection and Food Safety's site register listed 39 field trials. This year, only one has been listed to date. For Lüttmer-Ouazane at Monsanto, Grolm and his cohorts pose as much of a problem as the members of parliament in Berlin. The politicians have forced her and Monsanto, she claims, into a narrow legal framework and robbed them of their freedom of movement, while Grolm's campaigns deprive Monsanto of its customer base and its key argument in the struggle with its opponents: that a growing number of German farmers want, need and use GM corn. Lüttmer-Ouazane describes the few farmers who buy her corn, in the face of all opposition, as "true heroes."
There are not many of them. One is Reinhard Dennerlein, a man with a sturdy build and a defiant attitude. Standing on his farm in the Bavarian town of Kitzingen, between his house and farm buildings, Dennerlein says he doesn't like to be called a hero, though he isn't overly fond of the term "farmer," either.
"Farmers," says Dennerlein, wrinkling his brow, "have always been at the very bottom of society, trampled on for centuries by everyone else." He is not a farmer, he says, but an agricultural entrepreneur who specializes in fattening hogs. Dennerlein, who has 2,000 hogs in his stalls, agrees with Lüttmer-Ouazane's definition of agriculture as being mainly applied chemistry. The equation that makes sense to him is that the right substance, applied at the right time and in correct amounts, guarantees the desired hog. Dennerlein has little patience for romantics like Grolm, or for consumers who complain about factory farming but are unwilling to pay more than €1.99 ($2.50) for a pork cutlet.
"Sustainability," says Dennerlein, "is when a company operates in the black." And turning a profit, he says, requires strict cost control and the best and most consistent starting material possible. This is why he buys his piglets from a factory farm in the Netherlands instead of from regional suppliers. They arrive on trucks, 620 piglets per shipment, and Dennerlein fattens them with his own corn. It was a moth which led him to grow MON 810 for the first time last year. Like many farmers in the area around Kitzingen, Dennerlein has been waging a longstanding war against the European corn borer moth. In 2006, the moths descended upon the cornfields and laid their eggs. The resulting larvae ate their way into the plants and destroyed about 40 percent of the harvest, despite the use of pesticides. 2007 was a better year, but still not a good one, prompting Dennerlein to sow MON 810 seed in 2008.
As required by law, Dennerlein had his planned use of the GM seed recorded in the site register of the Federal Office of Consumer Protection, which is open to the public and viewable online. A short time later, activist Michael Grolm appeared on Dennerlein's farm, wearing his beekeeper's outfit. After a friendly greeting, Grolm introduced himself and informed Dennerlein that he was about to receive a visit -- by Gendreck Weg! -- and that the group planned to liberate his fields. It was nothing personal, Grolm said, and no one would be harmed. Dennerlein disagreed, noting that he would most certainly be harmed, economically speaking. "But what can you do against these people?" he says, shrugging his shoulders, pointing that he cannot exactly transform his farm into a high-security zone.
The field liberators came at night. Dennerlein says that they uprooted the wrong plants, not the genetically modified ones, and that he harvested his GM corn in October: "10 tons per hectare -- flawless." Dennerlein also knows exactly how much money he saves by using MON 810. It is an important number, perhaps even the most important number of all for him. It appears at the bottom of his balance sheet, and it describes the direct benefit that MON 810 provides, perhaps its only real benefit. It is a number that should correspond to the scope and intensity of the conflict, a number meant to impress. The number is 43. Dennerlein saves €43 ($54) per hectare. That is the amount he saves on pesticides because MON 810 is a more reliable killer. Dennerlein calls this number his palpable savings: €43. It may seem like a lot of money for Dennerlein, but it is not exactly a strong argument for green genetic engineering.
Dennerlein is a tenacious man. He refuses to allow a handful of environmental activists to dictate to him what he can and cannot grow on his land. This is why he intends to sow MON 810 once again this year, but it's now highly uncertain if he will actually be able to go ahead with his plan. In fact, it is quite possible that Dennerlein will plant nothing and that Lüttmer-Ouazane will have to write "not a single hectare planted with MON 810" in her report to Monsanto's US headquarters. A few weeks ago, the farmer and the executive acquired a new adversary. Germany's Agriculture and Consumer Protection Minister Ilse Aigner recently told the Berliner Zeitung newspaper that the government was looking into banning Monsanto's GM corn. She noted that green genetic engineering "has so far not yielded tangible benefits for the people," and that consumers are opposed to genetically modified plants and farmers don't want them. Aigner is having staff in her ministry look into whether the government can revoke the license for the cultivation of MON 810, because the GM corn not only decimates the European corn borer moth, but other, beneficial, insects as well.
If Aigner prevails against opposition from German Education and Research Minister Annette Schavan, the outcome of her staff's efforts could look something like this: Monsanto would be subject to new requirements, and the license for MON 810 would be temporarily revoked prior to this year's seeding and not renewed until after elections to the European Parliament in June. This could provide a boost to Aigner's party, the CSU, if she could portray it as a success ahead of the elections. For now Dennerlein, the hog farmer and MON 810 fan, is not taking such reports seriously. He has a low opinion of politicians, noting: "They suffer from the constant pressure to raise their profile. What can you do?" Bablok, the amateur beekeeper, hopes for the best: for himself, for his bees and for his lawsuit. Michael Grolm, the field liberator, says that he will not believe the minister until she has actually announced a ban. And Monsanto? It says that it wants to have a conversation, for now.
Wall St. Bailout: Is A Massive Scandal About To Unfold?Are facts concerning details of the current Wall Street bailout--past, present and future--about to unfold in a manner which may very well undermine President Obama's first term unless he acts immediately to staunch the damage created, and the damage about to be created, by the missteps of both (former) Bush Treasury Secretary Henry Paulson, as well as (current) Obama Treasury Secretary Tim Geithner? This is the indication being gauged by this diarist given deeper dives into press coverage concerning two bailout-related matters of note swirling around the media over the past 72 hours, namely:
1.) AIG counterparty overpayments during the last 16 weeks of the Bush Administration, which are far more extensive and generous than the already-massive $50 billion being reported over the past 24 hours, and
2.) an effort--apparently well underway--to absurdly contort the FDIC's mission statement, to the point where the feds are going to provide a stealthy cash bonanza (up to $2 trillion in loans and guarantees/backstops), at taxpayer expense, to the grossly underregulated hedge fund industry--which if you read the Prudent Bear, below, looks at this as something of a free-for-all--as well as to some sovereign funds, under the guise of a federal program that had (up until now) absolutely nothing to do with the hedge fund industry, whatsover.
Reports have been circulating, based upon leaks to the media over the past 24 hours, that:
1.) AIG ("Bad Bank" #1): $50 billion of the $173 billion forked over to AIG, since September, has been doled out to a handful of Wall Street heavy-hitters--a/k/a the "couterparties" that paid AIG to insure their toxic paper--to support their so-called insurance claims, backed by the good faith of AIG; folks who happened to make a pantload of money writing insurance policies on these Credit Default Swaps and Commercial Debt Obligations over the past few years.
We have Ms. Morgenson in the NY Times telling us the counterparties' sweetheart deals are "likely to increase" in terms of sheer numbers of billions of taxpayer dollars. But, it's the additional documentation ("NEW INFO") below Morgenson's quote which is most troublesome...it's not $50 billion...it's already $80 billion...and these same firms are receiving 100 cents on the dollar for this toxic paper, too!
Gretchen Morgenson tells us in Sunday's NY Times: "A.I.G., Where Taxpayers' Dollars Go to Die."...Mr. Liddy [AIG's CEO] wouldn't provide details on who the counterparties were or how much they received. But a person briefed on the deals said A.I.G.'s former customers include Goldman Sachs, Merrill Lynch and two large French banks, Société Générale and Calyon.
All the banks declined to comment.
How much money has gone to counterparties since the company's collapse? The person briefed on the deals put the figure at around $50 billion.
Unfortunately, that is likely to rise.
Diarist provides bold emphasis.
NEW INFO: It's already a LOT more than $50 billion, which was reported as "the number" in the past 24 hours; it's at least $80 billion and growing, or almost half of all the funds sent to AIG to date...and growing; perhaps much more if not MOST of the funds dished out to AIG to date all going to the same usual suspects...
The facts are we may just be scratching the surface on the AIG matter. It's going to--and already is--getting much more out-of-hand than originally reported, and virtually all of those funds has gone to the same 20-25 firms (and that's only as of late December '08); and, perhaps even more outrageous, it appears that a trend had developed early on with regard to these toxic debt purchases, whereby the recipients (that same list of 25+/- firms) of the Treasury Department's and the Federal Reserve's largesse were profiting to the tune of 100% on the actual value of the paper being purchased. They're doing this by allowing the counterparties to KEEP the collateral, on top of receiving the payments!!! (See story link and quote, immediately below.) In other words, the Fed was overpaying these firms to the tune of full face value, 100 cents on the dollar, on paper that was only worth from 20 cents to 60 cents on the dollar in the marketplace!
We know this because there've been reports on this dating back more than two months: "AIG Becomes the Fed's Vehicle to Buy Toxic Assets.""With Fed's Help, AIG Unloads $16 Billion in Credit Default Swaps" reports that American International Group (AIG) retired another $16B face value of credit default swaps for $6.7B by purchasing the underlying securities and canceling the contracts. The insured (counterparties) were able to keep the more than $9B in collateral that AIG posted. The counterparties were taken out at par. So far, the Fed's Maiden Lane III special purchase fund has purchased $62.1B face value of CDOs from AIG's counterparties. The Fed has committed to purchase up to $70B face value of CDOs from AIG's counterparties at roughly 50% of par. Each time the Fed is allowing the counterparties to keep all collateral.
Why has the Fed completely removed the risk of AIG as a counterparty in CDS transactions? Perhaps the Fed views moral hazard as a foreword looking constraint and AIG is just trying to unwind past regrettable activities. More likely the Fed is viewing AIG as a conduit to funnel capital into favored financial institutions. By forcing counterparties to sell the underlying CDO securities in order to receive full recovery, the Fed is liquidating toxic assets and preventing pure speculators from participating. But by paying close to par, when posted collateral is included, the benefit of price discovery is missing.
AIG told shareholders that the Fed would negotiate the CDO purchases on AIG's behalf and AIG's participation in any price appreciation would be limited. The implication was that the Fed would use its strength to be an advocate for AIG. Quite the opposite turned out to be true. Instead the Fed used its strength to force a weakened AIG to make whole its stronger counter parties.
Here, we have Fortune Magazine, via InsuranceNewsNet, from January '09, referencing $80 billion--not $50 billion--going to these same usual suspects: "...around 25 financial institutions...." AIG: The Company That Came To Dinner -- A Fortune Profile."
...Today FP [AIG's London CDS'/CDO issuer] has around $2 trillion of derivatives, not a big book in this world (J.P. Morgan Chase has more than $80 trillion) but one known to be loaded with particularly complex and long-dated contracts. The most infamous among these derivatives are the $80 billion of credit default swaps described above, for which the counterparties were around 25 financial institutions in the U.S. and at least seven other countries. All of the counterparties, of course, were wrung out by the credit crisis and vulnerable to a domino effect if AIG went under. Liddy proves himself a master at understatement in describing the threat to the counterparties: "That would have backed up into their capital adequacy and could have caused a problem."...
2.) FDIC ("Bad Bank" #2): The Treasury Department is currently in the process of providing a $500 billion infusion (along with another $1.5 trillion government guarantee to the hedge fund industry) into the Federal Deposit Insurance Corporation. And, while some naive speculation in the MSM is focused upon a handful of large bank defaults with regard to how this money is going to be spent, the reality is that it's apparently the stealthiest way for the government to actually provision that "Bad Bank" that everyone's been hearing about. (Some have said that the first bad bank was, in effect, AIG. But, based upon the sheer magnitude of Geithner's plans--already on record in a few stories--for this massive FDIC scam, the AIG mess pales in comparison.) You see, Geithner's stated plans call for "private investment" (i.e.: hedge funds and sovereign funds) to buy up as much as another $2 trillion in toxic debt; but here's the scam: the government is going to insure 100% of all investor's funds via the FDIC, under something they're calling, a "Temporary Liquidity Guarantee Program," basically eliminating all risk in the deall for these hedge fund investors! (NOTE: I blogged a few days ago about part of this FDIC story, "Outrage: FDIC insures bank investors' risk with our money."
NEW INFO: The FDIC plan is already in motion; and, it looks like it's all about a massive loan and guarantee program for hedge funds and sovereign funds; this is NOT about putting a big bank into formal receivership, IMHO; apparently, it's about circumventing the spin on TARP! "FDIC Bill Dodges a New TARP Fight."
FDIC Bill Dodges a New TARP Fight
A three-page bill designed to bolster the Federal Deposit Insurance Corp. could let the Obama administration sidestep a huge political problem: securing more financial firepower without opening a debate over the Troubled Asset Relief Program.
"Clearly, it is a backdoor way to avoid the restrictions that could potentially come by means of TARP," said Rep. Scott Garrett, a New Jersey Republican who sits on the House Financial Services Committee.
Democrats might try attaching the measure to a separate bill already moving through Congress that would allow bankruptcy judges to alter the terms of mortgages that are in foreclosure...
On the one hand, the article puts forth the notion that they're merely getting ready to put a large bank into receivership, but this is belied by comments to the contrary elsewhere in the story, such as in the opening paragraph, above, and here:
The Obama administration has suggested it wouldn't allow any of the 19 U.S. banks with more than $100 billion of assets to fail.
And, just in case you were wondering how the industry was looking at this, here's a couple of selections from this past week's editions of the Wall Street Journal, by way of the Prudent Bear stock market website, where I can't help but think of the word "bonanza" applying to the language here:
March 4 - Wall Street Journal (Liz Rappaport and Jon Hilsenrath): "The U.S. launched a program to finance up to $1 trillion in new lending to consumers and businesses, in an ambitious attempt to jump-start credit for everything from car loans to equipment leases. The Federal Reserve and the Treasury Department hope to revive the moribund market for so-called securitized lending, which until last year was central to providing consumer and business loans. Starting March 17, large investors -- including hedge funds and private-equity firms -- can obtain cheap credit from the Fed and use the money to buy newly issued securities backed by such loans."
March 3 - Wall Street Journal: "If you missed the first hedge-fund boom, now may be the time to put up your shingle. Looking at the terms of the Federal Reserve's new Term Asset-Backed Securities Loan Facility, investors using it should be able to generate hefty returns with little risk. The TALF effectively turns the Fed into a generous prime brokerage. The central bank lends money for up to three years to investment firms to buy bonds backed by assets like auto or credit-card loans. The Fed needs to lure investors back into the market for these asset-backed securities, or ABS, where new issuance has almost disappeared."
And, just so we're clear folks, the "shadow banking system" (hedge funds, etc.) is comprised of a what could be described as little more than a bunch of sophisticated compulsive gamblers living in a world where, for the most part, they package what they want, sell it as they feel like selling it, and reap massive revenues from the commissions on it. It's comprised of folks like these guys:
John Paulson, Paulson & Co., (not to be confused with former Treasury Secretary Henry Paulson) the person widely considered to have almost single-handedly short sold the British banking sector down the tubes in 2008. In 2009, he's looking for distressed debt...and he knows just where to find it, too! (Oh, yes, having Alan Greenspan on your payroll doesn't hurt when it comes time to spinning things so the market rolls over and begs precisely when you want it to, as well.) Much of what you'd want to know about Mr. Paulson is here: "John Paulson's Funds Shine in the Gloom."
Stanford Kurland, Angelo Mozillo's number two guy at Countrywide, now leading the surge buying up the very foreclosures he helped to create. Read about it here: "Ex-Leaders of Countrywide Profit From Bad Loans."
Yep, meet the new leaders of our banking system...same (or as worse) as the old bankers...but perhaps a lot more ruthless.
1.) AIG: Almost all of the $173 billion that's passed through AIG may be going to these 20-25 key Wall Street "players." It's not the $50 billion that's been widely reported in the past 24 hours. We know it is at least $80 billion...and growing. And, these good ole' boys are getting 100 cents on the dollar on assets that are only worth between 20 cents and 60 cents on the dollar now.
2.) FDIC: It appears that the primary reason the FDIC's sole mission is being contorted is to: a.) provide a massive handout to the hedge fund and sovereign fund sectors, b.) avoid the negative spin that would occur if this was labelled for what it actually is, a bad bank and a massive extension of TARP, c.) and a situation where much more control of our nation's traditional banking services are being put in the hands of a grossly underregulated hedge fund industry cowboys...the exact opposite of the much more intensive regulation which is, both, so desperately needed and for which so many are clamoring as I write this. (In reality, we're turning over the keys to the car to the very "drivers" that got us into this mess in the first place.)
There are going to be tens of millions more pissed-off Americans once (or if they're ever) they're made aware of the extent of these outrageous actions by our government, in conjunction with a privatized NY Fed and a Federal Reserve Board that doesn't even release the minutes of its Open Market Committee meetings until four or five years after they occur. And, President Obama's window of opportunity to keep the narrative focused on his efforts to clean-up eight years of a country gone wild due to god-awful mismanagement by the Bush administration, will quickly be supplanted with much more negative criticism directed towards him, however unjustified it might be. And, that's due to the reality that Tim Geithner comes from many years at the New York Federal Reserve, working in an environment that was only monitored by the federal government, but totally controlled by (in this instance, the very Wall Street entities that actually are receiving most of the bailout funds now, and with whom Geithner was so close, to the point where, technically, they were paying his salary) the private banks doing business in it.
Yes, it's no wonder that "56% of the Public Favors Bank Nationalization."