Now playing: Wheeler and Woolsey in "The Rainmakers"
Saint Charles Street. Liberty Theatre, New Orleans
Ilargi: We are now in the longest recession since the 1930's, and the US alone has pledged $12.8 trillion in rescues, bail-outs and stimulus plans. And that's by no means the worst of the news. That is that there is no end in sight, no recovery, no solution, nothing at all. Job losses in March were 742.000. I would make the bet that the US will lose over 10 million jobs in 2009.
Sure, there are murkily opaque stats popping up every now and then of "unexpected" rises in mortgage applications or home sales. But those are inevitable the result of one sort of market manipulation or another. In fact, they can be traced back to what is the best hidden, and probably the largest by far, bank bail-out. It goes by the moniker GSE's, behind which we find Fannie Mae and Freddie Mac. If the major banks couldn't sell their mortgage loans to these companies, which are fully funded with your money, no mortgages would be available at all in America. Fannie and Freddie will use at least $340 billion more in taxpayer money before the year is over. After which, they’ll come back for more. ANd they'll bet it, there is no plan B, and that suits the banks just fine.
There is no end in sight to this scheme. Late last year, they were ordered to buy up some $500 billion on mortgage loans per year. The banks close the loans, pocket a hefty fee, and then turn around and dump them on the people. The total combined portfolio's of Fannie and Freddie is now $5 trillion, and they're bleeding cash -your cash- like you wouldn't believe (well, maybe by now you would). Yes, AIG is a disaster, but not nearly as big. And the pattern that emerges should alarm you.
Where does the AIG bail-out cash go? To the major banks. Where do Fannie and Freddie's hundreds of billions end up? At the major banks. The world will tell the US this week that it's had enough of this circus. How much longer will the present bunch of clowns be allowed to remain on stage? The countries found siding with each other on the side of the G20 debate that calls for trillions more in "aid", the US, UK and Japan, are those with the deepest levels of debt and the highest levels of corruption and thievery. The other side is serving them notice that they are not completely lacking in functioning neurons. Obama and Gordon Brown will try to lay the blame with Russia, China, Germany and France, and the American media will feed that line to the public in staccato soundbites interspersed between American Idol and Dancing with the Stars. And it will serve to let the theft continue, all the way till you have nothing left at all. After that, watch out.
US Financial Rescue Nears GDP as Pledges Top $12.8 Trillion
The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s. New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation.
The nation’s gross domestic product was $14.2 trillion in 2008. President Barack Obama and Treasury Secretary Timothy Geithner met with the chief executives of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending. “The president and Treasury Secretary Geithner have said they will do what it takes,” Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said after the meeting. “If it is enough, that will be great. If it is not enough, they will have to do more.”
Commitments include a $500 billion line of credit to the FDIC from the government’s coffers that will enable the agency to guarantee as much as $2 trillion worth of debt for participants in the Term Asset-Backed Lending Facility and the Public-Private Investment Program. FDIC Chairman Sheila Bair warned that the insurance fund to protect customer deposits at U.S. banks could dry up because of bank failures. The combined commitment has increased by 73 percent since November, when Bloomberg first estimated the funding, loans and guarantees at $7.4 trillion.
“The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets,” said Dana Johnson, chief economist for Comerica Bank in Dallas. “Everything the Fed, the FDIC and the Treasury do doesn’t always work out right but back in October we came within an eyelash of having a truly horrible collapse of our financial system, said Johnson, a former Fed senior economist. “They used their creativity to help the worst-case scenario from unfolding and I’m awfully glad they did it.” Federal Reserve officials project the economy will keep shrinking until at least mid-year, which would mark the longest U.S. recession since the Great Depression.
U.S. Companies Reduced Payrolls by 742,000
Companies in the U.S. cut an estimated 742,000 workers in March, pointing to no relief in sight for the labor market amid the longest recession in seven decades, a private report based on payroll data showed today. The drop in the ADP Employer Services gauge was larger than economists forecast and the most since records began in 2001. February’s reading was revised to show cut of 706,000 workers, up from a previous estimate of 697,000.
Companies are slashing staff as tight credit conditions and shrinking household wealth cause sales to shrink. The Labor Department may report in two days that employers cut payrolls in March for a 15th consecutive month, putting jobs losses in the current downturn at more than 5 million, according to a Bloomberg survey. "The weakness is distributed across all components of the economy," Joel Prakken, chairman of Macroeconomic Advisers LLC in St. Louis, said in a conference call. "We are going to see several more months of serious bleeding before we see lesser job losses." The ADP report was forecast to show a decline of 663,000 jobs, according to the median estimate of 30 economists in a Bloomberg News survey. Projections were for decreases ranging from 525,000 to 750,000.
A government report April 3 may show payrolls at companies and government agencies shrank by 658,000 in March and unemployment rose to a 25-year high of 8.5 percent, according to a Bloomberg survey of economists. The ADP figures comprise only private employment and do not take into account hiring by government agencies. Macroeconomic Advisers LLC in St. Louis produces the report jointly with ADP. Another report today also reflected a weak labor market. Job cuts announced by U.S. employers nearly tripled in March from a year earlier, led by planned cutbacks at government agencies, pharmaceutical and aerospace and defense firms, Chicago-based placement firm Challenger, Gray & Christmas Inc. said.
Firing announcements rose by 181 percent from March 2008, to 150,411. Compared with the prior month, announcements fell for a second consecutive time, the first two-month decrease in job cuts since February-March 2007. Today’s ADP report showed a reduction of 327,000 workers in goods-producing industries including manufacturers and construction companies. Employment in manufacturing dropped by 206,000. Service providers cut 415,000 workers. Companies employing more than 499 workers shrank their workforces by 128,000 jobs. Medium-sized businesses, with 50 to 499 employees, cut 330,000 jobs and small companies decreased payrolls by 284,000. Industries cutting jobs ranged from automakers and high- tech companies to materials makers and service companies.
International Business Machines Corp., the world’s biggest computer-services provider, reduced as many as 5,000 jobs last week, according to a person familiar with the matter. That added to 4,000 cuts already made since the beginning of the year. "I don’t believe this is the end," said Lee Conrad, coordinator for an employees’ group pushing for union recognition. "We’re losing jobs at a record rate inside IBM." Tyson Foods Inc., the largest U.S-based meat producer, said March 27 it will close a processed meats plant in Oklahoma and cut 580 jobs to move production to other locations. The ADP report is based on data from 400,000 businesses with about 24 million workers on payrolls. ADP began keeping records in January 2001 and started publishing its numbers in 2006.
Manufacturing in U.S. Contracts as Recession Becomes Longest Since 1930s
Manufacturing in the U.S. contracted for a 14th straight month in March as factories kept on cutting production amid the economic downturn that this month becomes the longest since the Great Depression. The Institute for Supply Management’s factory index rose to 36.3 last month from 35.8 in February. Readings less than 50 signal a contraction. Factories continue to trim payrolls and scale back output and investment as the global recession and the housing and credit crises sap demand for their goods. While consumer spending showed signs of a rebound early this year, the now 17- month U.S. slump surpasses similar contractions in the 1970s and 1980s as the longest in more than seven decades.
"The pace of decline is slowing down, that’s important," David Wyss, chief economist with Standard & Poor’s in New York, said in a Bloomberg Television interview. "It is too early to look for a turnaround, but maybe it is time to start saying that things are not getting as bad as quickly as they were earlier." Economists forecast the institute’s manufacturing measure would increase to 36, according to the median of 74 projections. Estimates ranged from 30 to 39. The ISM’s gauge of new orders rose to 41.2 from 33.1 the prior month. The measure of export orders rose to 39 from 37.5 in February. The group’s employment index rose to 28.1 from 26.1, which was the lowest since record-keeping began in 1948.
The Labor Department is scheduled to release its March employment report on April 3. U.S. employers may have eliminated 660,000 jobs, a fourth straight month of more than 650,000 losses, according to the survey. Earlier today, ADP Employer Services said companies in the U.S. cut an estimated 742,000 workers in March, pointing to no relief in sight for the labor market. The ISM’s gauge of inventories fell to 32.2, the lowest since August 1982, from 37 in February. The group’s index of prices paid rose to 31 last month, from 29. Economists had estimated the measure rose to 33, according to the survey. Regional reports showed manufacturing contracting in March. The Institute for Supply Management-Chicago Inc. said yesterday that its business barometer decreased more than forecast to 31.4, the lowest since 1980. The Federal Reserve Bank of New York’s general economic index fell to minus 38.2 and the Philadelphia Fed’s gauge was minus 35.
Economists surveyed by Bloomberg last month said the U.S. recession that began in December 2007 will probably persist at least through the first half of this year, making it the longest downturn since 1933. The economy shrank at a 6.3 percent pace in the fourth quarter of 2008, the biggest contraction since 1982, and business investment fell at a 22 percent pace. Automakers have been among the hardest-hit manufacturers. The global recession is hurting manufacturers by squeezing their overseas customers. U.S. exports declined for a sixth straight month in January, the Commerce Department said March 13. Sales of automobiles, semiconductors, telecommunications gear and drilling equipment to overseas buyers all dropped.
National Semiconductor Corp., the maker of chips for the five largest mobile-phone makers, said it plans to cut more than 1,700 jobs, or about 25 percent of its workforce. "The worldwide recession has impacted National’s business as demand has fallen considerably," Chief Executive Officer Brian Halla said in a March 11 statement. Some reports on consumer spending point to an economy that remains in recession while no longer worsening. Purchases advanced 0.2 percent in February, the Commerce Department said last week, following a 1 percent increase in January. Home sales and durable goods orders also rose unexpectedly in February.
Fannie, Freddie Are Pressured as Homeowners Fall Behind
The rapid rise in the number of borrowers skipping their mortgage payments is putting renewed pressure on the financial reserves of Fannie Mae and Freddie Mac. The mortgage-finance companies were taken over by the government in September, making this one more concern that the Obama administration needs to tackle before year's end when analysts expect the two companies to run out of the government aid already earmarked. Fannie and Freddie, which own or guarantee nearly $5 trillion, or half, of the nation's mortgages, have seen their serious delinquency rates -- mortgage payments 90 days or more past due -- shoot to records in the past few months.
It isn't just the levels that are worrying but the speed at which homeowners are falling behind on their monthly payments. This week, Fannie reported that 2.77% of the single-family loans held in its $785 billion investment portfolio were delinquent in January. That's a 0.35 percentage point increase from the month before, the largest such increase since the company started tallying the data in 1998. This is more than double the 1.06% a year earlier. Freddie's level stands at 2.13%. CreditSights estimated last year that Freddie could face losses as high as $28 billion if the delinquency rate hits 4%, as the independent research firm expects over the next few years.
The companies already have burned through billions of dollars and have together drawn nearly $60 billion of the U.S. government's $400 billion credit line. Mortgage analysts expect the companies to draw the rest by year end. "This is a reminder that the administration has some unfinished business," said Paul Jacob, research director at Bank of Manhattan Capital, a Los Angeles-based start-up broker-dealer. "The current ownership and capital structure [at Fannie and Freddie] aren't sustainable," he said. Fannie and Freddie officials weren't available for comment.
While both companies offer a slew of programs to help these distressed homeowners, including the recent proposal on loan modifications, concerns still center on the extent of losses. "What we are seeing is that delinquency problems are catching up with prime borrowers," said John Sim, a mortgage strategist with J.P. Morgan Chase. "The overall decline in housing and unemployment is starting to affect everyone, and we are seeing the impact of it." The unemployment rate is at 8.1% and is expected to rise further. Meanwhile, a leading home-price index, the S&P/Case-Shiller posted a 19% year-over-year drop in values in January.
The bulk of loans held by Fannie and Freddie are mortgages made to borrowers with good credit, but roughly 10% are loans that have a riskier profile. These loans are seeing even higher delinquency rates. For example, interest-only loans, which make up 5% of Freddie's $822 billion investment portfolio, saw a delinquency rate of 7.6% at the end of last year. This is a rise of 5.56 percentage points from the end of 2007. Mr. Sim of J.P. Morgan says the Obama administration's Making Home Affordable mortgage program, launched earlier this year, is targeted at helping borrowers with Fannie and Freddie loans. This is expected to help some borrowers avoid default.
Further, Fannie and Freddie have suspended their foreclosure program for a couple of months to provide borrowers with more time to work through their loan modifications. This, however, also ends up increasing the delinquency rate as these loans tend to stay unpaid for longer than 90 days, the companies noted. Analysts, however, said this has only a small impact on the rising rate. What is certain is that as long as home prices continue to fall and the economy to worsen, delinquencies and defaults, even among borrowers with good credit, will increase.
Treasurys rose, lifted by quarter-end and month-end flows and weak economic data. The benchmark 10-year note was up 8/32, or $2.50 per $1,000 face value, at 100 17/32. Its yield fell to 2.688%, from 2.715% Monday, as yields move inversely to prices. The 30-year bond was up 21/32 to yield 3.562%. Treasurys were headed for their first monthly gains this year as the Fed's government-debt-purchase program and concern about banks and auto makers helped temper selling pressure from a sharp increase in supply.
Watchdogs: Treasury won't disclose bank bailout details
The massive programs designed to rescue the nation's financial sector are operating without adequate oversight, with vague goals and limited disclosure of their details to the taxpayers who are paying for them, government watchdogs told a Senate panel Tuesday. The Troubled Asset Relief Program, or TARP, was launched in the midst of last fall's collapse of the nation's banking system and is designed to get loans flowing to businesses and individuals. But "without a clearer explanation" about the program, "it is not possible to exercise meaningful oversight over Treasury's actions," said Elizabeth Warren, a Harvard Law School professor who leads a special congressional oversight panel monitoring the TARP program. Her comments came in a Senate Finance Committee hearing on the bailout program.
Noting that TARP passed Congress six months ago, Warren said that her group has repeatedly called on the Treasury Department to provide a clear strategy for the program - and that "the absence of such a vision hampers effective oversight." Although she has asked Treasury to explain its strategy, "Congress and the American public have no clear answer to that question." TARP is one of several programs the government has launched in recent months to help ailing institutions and even bolster healthy banks. Warren singled out one program, known as TALF, for involving "substantial downside risk and high costs for the American taxpayer" while offering big potential rewards for private interests. She said the public information about that program was "contradictory, promoting substantial confusion."
The Government Accountability Office shared some of the same concerns, saying in a new report that "Treasury continues to struggle with developing an effective overall communication strategy" for the TARP program. Beyond that, the GAO's report pointed out the difficulty in even measuring whether TARP is working. As of March 27, the Treasury Department had handed out more than $300 billion of the $700 billion in approved TARP funds, the GAO said. The majority of that money went to banks large and small around the country. And there are signs that credit is flowing from those banks; the GAO said that several hundred billion dollars in new loans were processed by the largest TARP recipients in December and January.
But crediting TARP for that is difficult, given the range of actions the government has taken since October. "Isolating the effect of TARP's activities continues to be difficult," the GAO's Gene Dodaro said in his prepared testimony. The Treasury Department, in a statement, said that "transparency and accountability are central to ensuring that taxpayer funds are spent wisely," and noted that the department is actively working to respond to the recommendations of GAO and other oversight bodies. Among other things, the department has hired more staff and expanded its survey on bank lending activities.
Iowa Sen. Charles Grassley, the panel's ranking Republican, described himself as "disappointed and frustrated" in the amount of information available about the program. "You can't measure effectiveness when you don't know what the goals and objectives of a program are, or how the program is being run," he said. Warren's oversight panel made news earlier this year with its report that Treasury's bailout programs had overpaid by an estimated $78 billion in its transactions with the nation's ailing financial institutions. She said that issue is still under investigation.
Global Trade Collapse Smacks Industrial Companies
World trade is declining at the fastest rate since the Great Depression, causing many industrial companies to struggle. The world's shipping lanes are less crowded and barge hulls are emptier. According to World Bank forecasts issued on Mar. 31, the volume of world trade in goods and services will drop 6.1% this year, the biggest decline in 80 years. The impact of this global trade collapse is being felt everywhere. Feeling the squeeze are not just shipping firms, but also paper mills to industrial firms to coal miners. For investors, the surprisingly rapid decline in trade is contributing to the recent sell-off in equities. Earnings estimates are being slashed at much-admired industrial firms. Companies once fashionable with investors are fighting the threat of bankruptcy. And, industries that once commanded peak prices from customers are now forced to slash production.
The most recent examples of industrial earnings in free fall come from Manitowoc and Ingersoll-Rand. While both companies are hurt by the U.S. slowdown, the two industrial conglomerates are also feeling the heat from abroad. Both spent years trying to exploit rapid growth and an infrastructure buildout in emerging economies. Now, Ingersoll-Rand warns that first-quarter revenues could fall 25% to 27% from a year ago. Also on Mar. 31, the maker of air conditioning and security systems slashed its dividend from 18¢ per share to 7¢, a move aimed at saving $140 million per year. One of Manitowoc's main products is construction cranes, and it benefited from rapid building in China, the Middle East, and elsewhere. On Mar. 30, Manitowoc warned first-quarter earnings could be less than half of analysts' consensus estimates.
"Global demand for the company's crane products has not stabilized and continues to decline further than previously anticipated due to the continuing global recession," the Wisconsin-based company said in a statement. The World Bank expects the world economy to shrink 1.7% in 2009. That's the first global decline in output since World War II. Adding to the stress on global trade is the credit crisis. R.W. Baird analyst Robert McCarthy notes the credit crisis directly hurt Manitowoc, with "reduced global credit availability…constraining new nonresidential building projects and driving crane order cancellations." Many analysts assumed the busy trade traffic of 2007 and early 2008 would continue into 2009 and beyond. Some of the unluckiest companies borrowed money based on those assumptions.
DryShips, a Greek shipping outfit that trades on the New York Stock Exchange, "took on way too much debt," says Dahlman Rose, head of research at Omar Nokta. At a time when ships were in hot demand, "they were buying a lot of ships at peak prices." On Mar. 30, DryShips' auditors said they doubted if the shipper could meet all its obligations to debtors. In response to its credit problems, DryShips has been issuing new equity shares, diluting current shareholders' stakes. A stock that traded above 100 last May, DryShips closed on Mar. 31 at 5.09. Though a wide variety of goods are shipped worldwide, a key factor for shippers is steel production. Huge quantities of coal and iron ore are transported to the world's steel mills, with those bulky raw materials making up about a third of dry trade around the world, Nokta says.
Other products—such as grain—are also frequently shipped, but their volumes are more consistent and thus don't affect the shipping industry so wildly. Last year, "steel prices were in free fall," mills slowed to a crawl, and suddenly large vessels that carry iron or coal were free for other goods, Nokta says. Shipping rates plunged. One source of hope? An annual adjustment to company contracts that set coal and iron ore commodity prices could help widen steel mill profit margins, he says. The global slowdown in trade ends up affecting a wide variety of industries beyond shipping and steel. A decline in world demand for cardboard boxes has slammed the paper industry, says Joshua Zaret, a Longbow Research analyst who covers International Paper, Packaging Corp. of America, and other paper producers. About 10% to 15% of the industry's U.S. production is typically exported, but the strong dollar and the weak economy have hurt cardboard prices around the world. "This is going to be a horrible year for exports," Zaret says, noting paper mills have cut way back on production.
"The industry has been turned on its head since September," Zaret adds. "At this point, it's hard to see a light at the end of the tunnel when exports remain so weak." The effect on U.S. investors and companies of the global trade slowdown is significant, even though "the U.S. doesn't export a whole lot," says John Brady, senior vice-president at MF Global. The slowdown of the service- and consumer-heavy U.S. economy has had ripple effects on countries like China and Germany, which are far more reliant on exports, Brady says. Asia has been most affected, followed by Europe, he says. "As global trade has slowed, unemployment has risen in other parts of the world," Brady says. That means that unless export-dependent countries can stimulate more homegrown demand, the world economy may face a deeper economic decline.
China Looks For Financial Freedom at G-20
China is usually content to keep in the background at diplomatic events. But, ahead of this week's G-20 summit in London, Beijing has been offering ideas for a radical shake up of the international financial system. Their primary concern: that inflation could wipe out the value of their foreign currency reserves. China has a clear goal at the G-20 summit in London. It wants to create a new international financial system and earn more say for itself and developing countries. "The summit should determine a clear goal, a timeline and the way to get there," demanded Chinese Vice Premier Wang Qishan shortly before his departure for Europe. The Chinese see the G-20 as a golden opportunity -- politically, to finally establish themselves as an important player on the international stage, and economically, to demand a bigger role for itself and other developing nations.
Just as in Mao's day, contemporary China sees itself as the voice for third-world victims of the West's "hegemonial powers." Where at previous conferences they were happy to stay in the background, this time China's officials will try to set the tone. The chairman of Beijing's central bank Zhou Xiachuan has already demanded a new international reserve currency under the supervision of the International Monetary Fund (IMF). Chinese officials say that the crisis requires "creative reforms to the existing international monetary system," with a reserve currency that's "stable" and that would be spent according to "concrete rules." When Zhou says that the current "acceptance of credit-based national currencies as major international reserve currencies," is a "rare special case in history" he is expressing his concern about the US dollar.
Until now, Special Drawing Rights have served as a sort of artificial currency, a standard measurement that was designed to ease the financial transactions between the IMF's 185 members. SDRs are defined in terms of a basket of major currencies, including the euro, the US dollar, the British pound and Japanese yen. Every day at noon London time, the SDR value is determined based on the exchange rates of the real currencies making up the basket. Zhou's recommendation reflects China's annoyance at the politicians and bankers on the other side of the Pacific who, from the Chinese perspective, were responsible for causing the global financial crisis and are now threatening to bring the entire developing world down with them. "They want out of this mess," said Benita Ferrero-Waldner, the European Union's Commissioner for External Relations, during a visit to Beijing earlier this week. "They are very concerned."
Nonetheless, China's own economic experts still estimate that the domestic economy is in relatively good shape. Realistic estimates peg the country's economic growth this year to about 6.5 percent -- quite robust, even if it falls short of the officially announced target of 8 percent growth. The debts produced by China's €460 billion ($610 billion) stimulus program amount to only to 3 percent of its gross domestic product (GDP.) Chinese officials are quick to point out that any country that's managed to build such a strong economic foundation for themselves is going to expect something in return for helping to bail out less solvent countries -- more sway, for example, in the IMF. "As the world's third largest economic power and possessor of the world's largest currency reserve, China has earned a more prominent place in financial organizations," says Yi Xianrong from the Chinese Academy for Social Sciences. The People's Republic of China is indeed underrepresented at the IMF. Currently, it only has 3.7 percent of the votes (by comparison, the EU has 32 percent and India has 1.5 percent.) The Chinese are also annoyed by the fact that the IMF charter codifies American dominance over the organization. With 17 percent of the votes, Washington can block any decision.
It's not yet clear what percentage of the votes at the IMF China would like to have. Nor is it clear which states are ready to sacrifice their own votes for China's sake, especially given the fact that China's own currency can't be freely exchanged on international markets. China's President Hu Jintao, during his first meeting with Barack Obama in London, will likely demand guarantees that China's investments in the United States will be free from meddling. "Of course, we are concerned about the safety of our assets," admitted Prime Minister Wen Jiabao at the beginning of March. Specifically, the Chinese are concerned that America's efforts to stimulate their own economy is going to cause massive inflation of the US dollar. The Chinese were not reassured when Washington announced its intention to buy "toxic assets" off the balance sheets of American banks. If the dollar loses value, Beijing's assets would correspondingly shrink. Over time, China's bankers have accumulated US treasury bills with a value of around $740 billion. That accounts for about 46 percent of its total currency reserves. That's how Beijing came over time to finance America's debts, though it sometimes seemed China had no choice. Chinese profits from exports to the US had to be invested somewhere.
For the foreseeable future, China doesn't see a sensible alternative. "Except for US Treasuries, what can you hold?" asked Luo Ping, China's chief bank regulator, last month in New York. His tone was exasperated, an unusual flash of emotion from a Chinese government official. "Gold?" Ping continued. "You don't hold Japanese government bonds or UK bonds." US treasuries are the only choice available, he said, and not just for China. "We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do." Andy Xie, a Shanghai economics expert, agrees. "China is being held hostage," he says. "China is America's bank and America is in effect saying, 'You can't make any demands. If I go under, you won't get your money back.'" The IMF potentially offers a way out for China. Beijing is apparently ready to strengthen the institution and shore it up financially, following the example set by Japan's $100 billion contribution. China's Vice Prime Minister Wang said, "We support the plan to increase the IMF's means and, to that end, we will do our part to the best of our ability."
Hu Xiaolian, the deputy governor of China's Central Bank, recommended last week that IMF begin issuing bonds -- no doubt with the intention of one day investing China's foreign currency reserves in those securities rather than in US treasury bills. Central Bank chief Zhou knows that his idea for a new global currency would require "extraordinary political vision and courage." At the same time, experts caution not to take the suggestion all too seriously. Political observers in Beijing say that Zhou and his advisors are well aware that there is no practicable alternative to the dollar for the moment. "Reform has to be based on reality," says Yi Xianrong of the Academy for Social Sciences. "Our efforts should thus be based on the given international currency system, in which the dollar is dominant." Others in China are less pleased with their government's posturing ahead of the G-20 summit. Yu Yongding, president of the Institute for Global Economy and Politics at the Academy for Social Sciences says, "The rich countries already have our wallets in their sights. We have good reasons to avoid meeting their demands."
G20 leaders facing world trade 'emergency'
The G20 must create an emergency $50bn (£34.9bn) fund to reignite the flow of goods around the world, as international trade suffers the biggest collapse in the modern era, it has been warned. World trade is in "free fall" and will slump this year at the fastest rate since records began, according to a new report from the Organisation for Economic Co-operation and Development. Its report, which also forecast the biggest slide in global economic output since the Second World War and double-digit unemployment across the Western world, urged the world leaders congregating in London on Wednesday towards urgent action. World Bank president Robert Zoellick said the leaders, including Gordon Brown and President Barack Obama, must sign up to an urgent plan to provide financing for exporters and traders in the developing world. The calls came amid growing tension surrounding the G20 summit, as French President Nicolas Sarkozy threatened to walk out unless his proposals for a reconsideration of global capitalism were considered and fears grew that the leaders would be unable to agree on a common solution for the economic crisis. UK benchmark share prices leapt 4.3pc despite the bad news, taking back the losses they incurred on Monday.
The OECD predicted that world trade will shrink by 13.2pc in 2009. The forecast is worse than those from the World Trade Organisation and World Bank and indicates a faster and more widespread implosion of imports and exports than in any single year during the 1930s. Expressing exasperation, the OECD's chief economist Klaus Schmidt-Hebbel said: "The collapse of world trade growth cannot be explained by past relationships." The report said: "Even when global credit conditions are taken into account by means of a proxy it remains difficult to explain the collapse in trade." However, given that many economists blame the collapse in world trade during the 1930s for intensifying and perpetuating the Great Depression, the forecast and what it augurs is likely to climb towards the top of the G20 agenda. Speaking in London on Tuesday, Mr Zoellick said world leaders must help trade by offering credit to developing world exporters and stopping isolationist economic policies as a "first step" to prevent a social and humanitarian crisis. "We now estimate that an additional 200,000 to 400,000 babies will die this year because of the drop in growth," he said. "In London, Washington, and Paris people talk of bonuses or no bonuses. In parts of Africa, South Asia and Latin America, the struggle is for food or no food."
He also lashed out at countries including the UK for indulging in "creeping protectionism", with 17 out of the 20 members of the G20 having already enacted protectionist measures. In the bleakest set of forecasts in its history, the OECD predicted that the world economy would contract by 2?pc this year. Although the UK will not suffer the worst recession, thanks largely to the fall in the pound and the Bank of England's decision to cut interest rates sharply, economic output will nevertheless contract by 3.7pc this year and 0.2pc cent in 2010. This represents the biggest fall since the Second World War, but is smaller than those experienced by other economies, with Japan shrinking by 6.6pc, Germany by 5.3pc and Italy by 4.3pc in 2009. The forecasts were met with derision by Italian Prime Minister Silvio Berlusconi, who said: "First they did not see this coming, now they give new forecasts every other day. Shut up!" The OECD said that although the UK is hamstrung by the size of its government deficit, "if economic circumstances deteriorate significantly more than projected, further fiscal measures would be warranted. However, any additional fiscal stimulus should be accompanied by a stronger and more credible commitment to a robust fiscal consolidation once the recovery takes hold".
George Soros said the success of the G20 meeting was "hovering on a knife edge between success and failure" and would depend on a pledge to increase the global money supply to help poor countries. In a speech at the London School of Economics, the billionaire investor said the G20 should create about $250bn of the International Monetary Fund's Special Drawing Rates – international reserve assets which can be exchanged for major currencies – to make an impact. IMF member countries are allocated SDRs in proportion to their IMF quotas. "Rich countries that are able to print their own money and provide guarantees should re-allocate their allocations to the most vulnerable countries. It boils down to the international creation of money," Mr Soros said. "It would be a tremendous accomplishment for the G20, a practical achievement to move the world forward. The principle of doing it and endorsement from the G20 leaders would be the most one could expect [from the summit meeting]."
G20 walkout threat from Nicolas Sarkozy
Nicolas Sarkozy piled on the pressure before the G20 summit yesterday, threatening to walk out if his demands for tighter global financial regulation were not met. The French president will make several public statements today to emphasise to Britain and the US that unless the London conference produces a hard global rulebook on capitalism it will be worthless. Christine Lagarde, the French finance minister, issued her country's strongest warning yet to G20 leaders. Sarkozy was "very determined" and would "walk away" if he was not satisfied on regulation, she told the BBC. Sarkozy recently said: "If things don't advance in London there will be an empty chair. I'll get up and leave."
Xavier Musca, the president's financial sherpa, said Sarkozy wanted concrete results, not "agreement on nice sounding phrases that don't mean clear engagements". Asked if that meant Sarkozy could walk out, Musca said: "A basic rule with nuclear deterrence is that you do not say at what point you will use the weapon." José Manuel Barroso, the president of the European commission, warned against exaggerated expectations and suggested a further G20 summit this year would be useful. "We don't expect a miracle solution on 2 April," he said in Brussels. "This will most likely be a process." Angela Merkel, the German chancellor, who met Russia's president, Dmitry Medvedev, last night, has spoken of high hopes for deals to regulate hedge funds.
With Barack Obama making his maiden presidential visit to Europe, Sarkozy's warning was a reminder not only that the stakes are extraordinarily high but also that public posturing may influence the substance of difficult discussions. Battling unpopularity at home and increasingly angry protests over mass layoffs, Sarkozy is styling himself as the pioneer of a new "moral" capitalism. He is demanding a global financial market regulator, which goes further than the US or UK would like, and resisting the US call for more coordinated public spending to boost economies. He has rowed back on the free market rhetoric that brought him to power, appealing to traditional anti-capitalist feeling in France and blaming the crisis on "Anglo-Saxons".
Many countries believe the US bears much of the blame for the financial meltdown because of lax financial regulation. But Sarkozy's threat to walk out was seen as playing to his domestic audience while he privately engages with G20 plans. "We don't see it as a threat," said a British diplomat. "It's more of an indication that Sarkozy wants real results, as do we." The G20 summit will be the first time Sarkozy has met Barack Obama since the US election. French officials say the White House remains to be convinced by calls for international regulation. The two will also have a bilateral meeting on the sidelines of the Nato summit in Strasbourg on Friday. Barroso said the summit would focus on six areas: fiscal stimulus; tougher regulation of markets; improving global economic governance; combating protectionism and boosting global trade; concentrating on development aid; and tackling climate change. He said the US was closer to Europe on the issue of regulation than before.
Brown In Desperate Bid To Avert Crisis At G20 Summit
Gordon Brown was last night desperately calling world leaders to prevent a massive row engulfing the crunch G20 summit talks on the world economic crisis. The Prime Minister phoned Barack Obama in mid-flight in the hope of fine-tuning diplomacy for the summit. Mr Brown also called French President Nicolas Sarkozy yesterday to beg him not to flounce out of the gathering of world leaders at London’s Excel conference centre tomorrow. The French President threatened to wreck the summit if his demands for tougher financial regulation were ignored. He blamed the "Anglo Saxons" – Britain and America – for the world economic slump. Mr Brown’s spokesman said the PM had "a very constructive discussion" with the French President.
"We are looking forward to President Sarkozy playing a very full role in the meetings this week," he added. Mr Brown’s hopes of turning the summit into a diplomatic triumph that could revive his flagging premiership have all but evaporated over recent days. His plan for co-ordinated Government spending world-wide has been rejected by other leaders. His expectations were further undermined yesterday when EU President Jose Manuel Barroso, one of the G20 leaders, warned the world not to expect "miracles." He said: "The G20 will not end this crisis overnight. But it can and must make a difference." Mr Brown yesterday used a speech to call for "family values" to be put at the centre of the world banking system.
Speaking at St Paul’s Cathedral, he said: "You will find on Thursday at the G20 that for the first time ever the world economies will agree international rules for the remuneration of bankers. Every country will sign up to a set of rules that we and others will apply to the banking system." He added: "In our families, we raise our children to work hard and to do their best and do their bit. We don’t reward them for taking irresponsible risks that would put them or others in danger, and we don’t encourage them to seek short-term gratification at the expense of long-term success."
Brown's G-20 `Grand Bargain' Call Brings No Relief as Home Plans Unravel
UK Prime Minister Gordon Brown wants fellow leaders to sign up to his "grand bargain" to rescue the global economy. At home, many Britons are concluding his plan to reverse the recession is no bargain at all. Since December, Brown’s government has announced nine initiatives to help people keep their homes and businesses get loans under the slogan "real help now." Only three of the measures are fully operating. Lawmakers and lobby groups say others aren’t working as promised. Few of the leaders at the summit of the Group of 20 nations tomorrow in London are in worse political shape than Brown. Behind in opinion polls for more than a year, with an election at most 14 months away, the prime minister isn’t likely to get much of a bounce out of the eight-hour meeting.
"Brown is seeing his carefully orchestrated plans unravel by the minute," said Jon Moulton, founder of Alchemy Partners LLP, a venture capital fund. "Each leader is turning up with his own particular bag of problems, the U.K.’s perhaps being the biggest, so to expect them to unveil a bunch of silver bullets is just ridiculous." In the past month, the prime minister has visited Brussels, Washington, New York, Brasilia, Santiago and Strasbourg, France, to persuade fellow leaders that, as he said in February, "every part of the world must be part of the stimulus to the economy." Even before the summit, Brown scaled back his rhetoric. Talk of a "grand bargain" -- a term he started using Feb. 18 - - to raise spending and cut taxes while tightening market oversight was absent in speeches this week. His spokesman, Michael Ellam, said March 30 that the G-20 was "a process, not an event."
British voters say by a margin of three-to-one that the prime minister should focus his efforts at home, according to a ComRes Ltd. survey completed on March 29. It found 58 percent of voters believe Brown has the wrong policies to get Britain out of recession, compared with 31 percent who supported him. "Politicians think that by standing next to someone like Barack Obama they can give themselves a sheen," said Steven Fielding, head of the Center for British Politics at Nottingham University. "But something has to be going right at home for that to happen, and it’s not." The U.K. economy may shrink 2.8 percent this year, the most in the Group of Seven nations, according to the International Monetary Fund. The budget deficit may touch 8.8 percent of gross domestic product, double the average in the euro area, the European Union forecasts.
"What Brown was originally trying to do was to get further fiscal stimulus from other countries so he wouldn’t be hammered by the markets," said Ben Read, senior economist at the Centre for Economics and Business Research, a London-based consultant. "The finances are in such a bad way that the U.K. doing it alone could have a damaging impact." That shortfall limits Brown’s maneuvering room. Two months ago, Brown urged G-20 nations to increase spending. Germany, France and Australia resisted. Then Bank of England Governor Mervyn King told lawmakers on March 24 that Britain’s deficit is so large ministers should "be cautious about going further" than the 20 billion-pound ($29 billion) stimulus Brown announced in November.
"While he was wandering around the world the governor of the Bank of England very publicly snipped up his credit card," David Cameron, leader of the Conservative opposition, said in Parliament in London today. "Once the talks are over Britain will still be left with the most appalling public finances." Banks also haven’t yet resumed lending at 2007 levels, which Brown demanded when he offered the first of 40 billion pounds in direct support to Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. Institutions are writing mortgages at a third of the pace of two years ago. That’s not the result Brown envisaged in December and January, when he had narrowed his gap with Conservatives in polls to a single percentage point. That bounce came with the nine programs under the "real help now" banner, channeling cash to small companies, homeowners and entrepreneurs.
Chancellor of the Exchequer Alistair Darling rejected criticism of the efforts when questioned yesterday in Parliament. "One hundred thousand businesses have already benefited from the extra time we have given them to pay taxes," he said. "We have also helped small companies by postponing the increase in corporation tax." Government departments say 1.2 billion pounds of the 15.4 billion pounds in promised support and loan guarantees have been released. A separate 50 billion-pound asset-backed securities program is still under negotiation. One of the support plans, called the Enterprise Finance Guarantee, has backed 145 million pounds of loans out of the 1.3 billion pounds pledged by March 2010. Regional Loan Transition Funds have given out more than half the 25 million pounds allocated to them.
Less successful have been the Capital for Enterprise Scheme, the Automotive Assistance Program and the Homeowner Mortgage Support Scheme, which have yet to release any cash. The Department for Business was unable to detail the status of its Working Capital Scheme. Another program giving incentives to companies to hire the long-term unemployed starts this month. Today, Brown told lawmakers the Working Capital Scheme had issued 1 billion pounds out of the 10 billion pounds allocated to it. The Department of Communities didn’t return calls to find out how much of the 200 million pounds promised for the Mortgage Rescue Scheme have been paid out. The help that actually trickles through is "not what they’re advertising," said David Foskett, a partner at London- based Copping Joyce, a property appraiser.
He fired one person and cut pay for others after a bank refused to extend an overdraft facility. He was told he must offer his home as collateral to obtain any government aid. "I’ve wasted an awful lot of time and effort finding out that the government aren’t going to help me," he said. The Homeowner Mortgage Support Scheme, announced on Dec. 3 as a 1 billion-pound plan allowing people to delay mortgage payments when their income drops, still isn’t working yet. The program’s Web site says it will be available in "spring 2009." "That’s what makes me angriest of all," said Peter Luff, a Conservative member of Parliament who leads a panel overseeing the business department. "It’s heartbreaking. I have constituents coming in who’ve been promised this program by the government, and it’s not there." Business lobbyists are no happier. "Around 120 small businesses a day are going under," said Stephen Alambritis, spokesman for Federation of Small Businesses. "All this money is being given to the banks, and the bank chief executives say they will help, but in the local branches the managers don’t want to know."
Aso lays bare G20 split on downturn
Taro Aso has dismissed Angela Merkel’s warnings about the risks of excessive public spending in the global downturn, saying Germany has failed to understand why strong fiscal action is vital for recovery. The Japanese prime minister’s remarks – made in an interview with the Financial Times – underline the wide differences among world leaders as they head to London for Thursday’s G20 meeting on the global slump. Ms Merkel, German chancellor, said last week that spending more public money as part of a co-ordinated stimulus risked creating an unsustainable recovery. However, Mr Aso said that what his country went through after its asset price bubble burst in the early 1990s made clear that fiscal stimulus played a critical role in restoring growth.
"Because of the experience of the past 15 years, we know what is necessary, whilst countries like the US and European countries may be facing this sort of situation for the first time," Mr Aso said. "I think there are countries that understand the importance of fiscal mobilisation and there are some other countries that do not – which is why, I believe, Germany has come up with their views." In a further sign of tensions ahead of Thursday’s summit, Nicolas Sarkozy, France’s president, has threatened to walk away from the negotiating table if his demands are not met. Mr Sarkozy reportedly told cabinet colleagues on Monday that there would be "an empty chair" – a reference to Charles de Gaulle’s seven-month boycott of the European Economic Community in 1965 – if he was not satisfied, although diplomats in Paris later downplayed his comments.
Ms Merkel has cited Germany’s heavy public debt as a reason for caution on spending, but Japan – which, along with Germany and China, has been accused of contributing to global economic imbalances by running structural trade surpluses – has record government liabilities equivalent to more than 170 per cent of GDP. Mr Aso said a Japanese stimulus package outlined on Tuesday would "mobilise all available means" to prevent the world’s second largest economy’s "floor" from "falling out". The prime minister, whose government is already implementing stimulus spending measures worth about Y12,000bn ($120bn), said it was too early to talk about the likely scale of the new package. However, ruling party politicians have suggested it include fiscal spending of about Y20,000bn.
Saying Japan was ready to "take the lead" in global efforts to address the slump, Mr Aso said Tokyo would provide more than $22bn in additional trade financing assistance and give global coverage to a trade insurance network it announced for the Asia-Pacific region last year. Japan would also offer Y500bn over the next three years in new overseas development aid for Asian countries suffering from the global downturn and stand by its pledge to double such aid for Africa by 2012, Mr Aso said. Mr Aso said he would push for stronger funding of the International Monetary Fund through an increase in its New Arrangements to Borrow, while also calling for the proceeds of sales of IMF gold to be used for assistance to the poorest countries and for a fresh allocation of Special Drawing Rights.
US, UK fiscal deficits cast shadow over recovery
The Organization for Economic Cooperation and Development forecast of a 2.7pc decline in global GDP is gloomy enough. However, its growth forecasts for the US, Britain and Japan are much worse than those countries’ own budget assumptions. That means their high fiscal deficits will be worse than forecast. The OECD’s forecast would make this the worst global recession since World War II. It expects growth to be strongly biased towards emerging markets, with India, China and Brazil doing relatively well while Europe, the US and Japan all suffered steep output falls.
Even though the OECD’s new projection is far worse than its previous forecasts and those of the International Monetary Fund, the continuing declines in world output and trade make it highly plausible. There is an additional downside risk, in that many countries based their current budget calculations on forecasts of milder recessions. For example the US Congressional Budget Office’s latest March update assumes a GDP decline of 1.5pc in 2009 and growth of 4.1pc in 2010, cumulatively 6.6 percentage points better than the OECD’s growth forecast of minus 4pc in 2009 and flat in 2010. This has a big effect on projected deficits. The 6.6 point gap between the CBO and OECD growth forecasts would increase the projected 2010 federal budget deficit by $284bn, to $1.7 trillion, or 12.4pc of GDP.
If the extra $284bn deficit repeats every year from 2011, with interest compounding – which would happen unless growth is faster than the CBO’s (optimistic) forecast – the cumulative deficit increase by 2019 would be over $3tr, taking the US debt/GDP ratio to around 100pc. Projected US deficits are already close to the maximum financeable without crowding out private investment or collapsing the dollar. The increased deficits in 2010 and thereafter greatly increase these dangers. Similarly Britain’s OECD forecasts are a cumulative 5.4% of GDP worse than its budget assumptions, while Japan’s OECD forecast of a cumulative 7.1pc GDP decline is especially unfavourable. Since both countries also forecast high fiscal deficits in 2010, their economic recoveries are correspondingly endangered. If the OECD forecasts are right, deficits, high interest rates and probably inflation will seriously damage the global economy.
US property prices down 29% from peak and still falling fast
US house prices have fallen 29pc from their peak and are still tumbling at the fastest rate on record, according the closely watched Case-Shiller index. The latest figures dash hopes that emergency action by the US Federal Reserve over the winter would at least slow the pace of decline. Prices dropped 19pc in the 20 largest cities in the year to January, with an accelerating downward lurch during the first weeks of 2009. There was a flicker of life last week when the National Association of Realtors reported a 5.1pc rise in sales of existing homes in February, a sign that overhang of foreclosed houses is slowly starting to clear – especially on the West Coast.
Anecdotal reports hint at a burst of sales in March, helped by an $8,000 tax credit for first-time buyers. Chris Whalen, from Institutional Risk Analytics, said the crisis is spreading from bubble zones such as Arizona and Florida into rock-solid neighbourhoods in the East. It is also climbing up the credit ladder. "Sub-prime has peaked in terms of loss rates but the problem now is prime property, and commercial real estate is falling off the table," he said. There is concern that delayed time bombs on Alt-A (one notch above sub-prime) and Option-ARM "teaser" mortgages offered in the final phase of the boom have yet to detonate.
The upward resets are heavily clustered in 2009 to 2010, although Fed policy should cushion the blow. The Fed began buying mortgage securities in November to force down borrowing costs. Rates on the standard 30-year home loan have dropped from 6.5pc to 4.93pc, helped further by the Fed's mass purchase of Treasury bonds – considered the "nuclear" option in the central bank arsenal. While this has led to a wave of refinancing at lower rates – potentially worth an extra $100bn (£70bn) in stimulus – the benefits have yet to reach those likely to default or face a distress sale because any homeowner nearing negative equity cannot refinance.
SMR Research says 22.4pc of all US homeowners with mortgages are underwater, in part because they extracted home equity to pay for cars and college fees during the bubble. California alone has 1.9m borrowers in negative equity. The Obama administration is pushing through a $75bn plan to slow foreclosures but is in a race against time as lay-offs accelerate. The OECD said on Tuesday that US unemployment would reach 10.5pc by the end of next year. The worst price falls over the past year have been in Phoenix (-34pc), Las Vegas (-33pc) and San Francisco (-31pc). Surprisingly, prices fell just 4.3pc in Detroit, the heart of America's blighted car industry. Phoenix prices have dropped 49pc since peaking in June 2006.
US Home Prices Low, But Still No Bargain
Forget low mortgage rates and the buyer's market. Real-estate prices still have a long way to fall.
Homeowners are watching anxiously for any signs of housing market stabilization. So, too, are all those who believe the market may hold the key to the economy. And yet the most recent data makes for more gloomy reading. The closely watched Case-Shiller index, which tracks prices across twenty major cities, shows that through January the crash was getting worse, not better. And yet, even after these declines, homes overall still may not be that cheap relative to wages. More on that later. The headline numbers are grim enough. January's Case-Shiller index showed a 19% slump from a year earlier. The usual suspects fared very badly: Phoenix was down a remarkable 35%. Las Vegas fell 32% and Miami 29%.
The crash has really spread, too. Minneapolis is down 20% and Chicago 16%. San Francisco, which had held up pretty well, has now turned in spectacular fashion. Prices there have fallen 32% in the past year, worse even than San Diego or Los Angeles. San Francisco prices fell 11% in the last three months alone, according to Case-Shiller. New York is down 10% over the last year, including a 4% decline in the last three months. That is still better than the average. Whether the market can withstand the crisis on Wall Street and widespread layoffs there remains to be seen. How much further will prices fall across the country? Nobody knows, of course. But history says the bigger the bubble, the bigger the crash.
Those "professionals" in the market continue to be wrong-footed. Early last year I wrote that even though prices in Florida and California had collapsed, those markets were still overvalued. Naturally I was on the receiving end of lots of angry emails from real estate brokers who told me I was an idiot (or worse). Events since then have borne out my analysis. (Incidentally: During the bubble, did a single broker ever complain to a media outlet that reporters were being "too optimistic" about house prices, or were "talking the market up" during a dangerous mania?) House prices nationwide have now fallen about 30% from their 2006 peak. At these levels the contrarian, inevitably, starts to wonder if they have fallen far enough.
Certainly there are great deals out there. It is a buyer's market. The aggressive and opportunistic can probably find the worthwhile bargains. But for the market overall the picture isn't as hopeful as you'd like. Even today, prices overall have only reverted to levels seen in late 2003. Yet by that stage the bubble was already well inflated. You would expect a crash of this scale to retrace its steps much further. To find pre-bubble prices you have to go back to about 2000 – when values overall were about a third lower than they are today. It's true that mortgage rates, now at 4.5% to 5%, are currently very low. But relying just on that is far too simplistic. Rates were also low from 2003 through 2005 – as many pointed out, disastrously, at the time.
Is there a bullish scenario for house prices? Sure. If all the government spending to turn around the economy reignites inflation in a year or two—as some predict—house prices could begin climbing again. But if the current price deflation continues, look for house prices to keep dropping. Over the long term, average home prices have tended to track average earnings. And by this measure the market may have much further to fall. I looked at Case-Shiller's index back to 1987 and compared it to federal data on average earnings. The result, rebased to 100 in January 1987, can be seen here. And it's alarming. By this (admittedly very simple) measure, today's home prices are actually more expensive, in relation to average earnings, than at the peak of the 1989 property bubble. Equally noteworthy is that when the last property bubble burst, it took about eight years before the market showed really strong signs of revival. This bubble was far, far bigger.
Potential GM bankruptcy plan includes company split
A possible bankruptcy plan being discussed for General Motors (GM.N) includes quickly forming a new company of the automaker's most profitable parts, while a group of other units would remain under bankruptcy protection for a longer period, a source familiar with the plans told Reuters on Tuesday. GM also would seek to have a new deal in place with the United Auto Workers union prior to any bankruptcy filing, the source said. GM warned earlier on Tuesday that there is a rising chance it could file for bankruptcy by June, as the company has 60 days to reach deeper concessions with bondholders and unions after its previous restructuring plan was rejected by the U.S. government as insufficient.
While the automakers would still prefer to avoid bankruptcy, advisers to both GM and Chrysler LLC have been working to prepare for potential bankruptcy filings that would aim to preserve, or sell off, the best parts of the companies. Under the plans being considered, GM would seek to quickly move its most profitable units into a new company separate from its other units in the early days of the bankruptcy filing, said the source who asked to remain anonymous because the person was not authorized to speak to the media. The aim would be to show consumers, taxpayers, and the government that the new GM can survive and compete in the autos sector as a viable company, the source said.
Old components of the company not included in the new GM, such as Saturn and Hummer, would remain in bankruptcy over a longer period of time to be sold or wound down, said the source. During a transition period, the new GM would have to coordinate with the old GM for some time and share certain operational activities, like accounting and insurance, the source said. GM has recently made progress on its negotiations with the United Auto Workers, winning deep concessions on healthcare and entry-level wages, but negotiations are ongoing over the fate of its obligations to 775,000 retirees. As part of the negotiations to reduce or eliminate certain retiree benefits, the union is likely to seek some compensation, which could include a stake in the new GM, cash from a sale of the new GM, or any other source of funds, the source said. Bondholders, a key constituency in the GM restructuring have said they were braced for a reduced offer of "pennies on the dollar" for about $28 billion in GM debt.
Nassim Taleb and Arianna Huffington, Sitting in a CNBC Tree
Asia’s Economic Woes Deepen as Japan Business Sentiment Tumbles
Asia’s economic slump deepened in March as Japanese business confidence plunged to a record low, Chinese manufacturing shrank and South Korean exports fell for a fifth month. The Bank of Japan’s Tankan index of sentiment among large manufacturers slid more than forecast to minus 58, the lowest since the survey began in 1974. The CLSA China Purchasing Managers’ Index stayed below 50, the threshold for a contraction, for an eighth month. "Japan’s probably front-running things that are in store for Asia as a whole," said Jan Lambregts, head of Asian research at Rabobank International in Hong Kong. "Asian economies continue to be export-dependent as a whole and that’s a situation that can’t be changed overnight."
Asian economies excluding Japan will expand at the slowest pace in 11 years in 2009 as the global recession weakens trade and stimulus plans take time to revive growth, the Asian Development Bank said yesterday. "We can’t rule out the possibility that we’ll have to cut our projections further," Masahiro Kawai, dean of the ADB Institute in Tokyo, said in an interview today. Recoveries in the U.S. and Europe "are crucial for Asia, as is a pickup in domestic demand within the region," he said. South Korean exports declined 21.2 percent from a year earlier, faster than February’s revised 18.3 percent slide, the government said today. Hyundai Heavy Industries Co., the world’s largest shipbuilder, said last week orders in the first two months of this year fell 85 percent.
Central banks across Asia have lowered interest rates to stimulate demand, and governments are pumping more than $700 billion in spending, tax cuts and cash handouts into their economies to kick-start local consumer and business spending. South Korean President Lee Myung Bak unveiled a 17.7 trillion won ($13.4 billion) spending package last week to revive a nation on the brink of its first recession since the Asian financial crisis more than a decade ago. Japanese Prime Minister Taro Aso, facing an election this year, is under pressure to prepare a stimulus plan that will alleviate the pain for households and businesses. Company executives said they have too many workers, the Tankan survey showed, signaling unemployment already at a three-year high is likely to rise further. Exporters from Nissan Motor Corp. to Panasonic Corp. have already slashed thousands of jobs.
"We will see more job cuts," said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. "The huge excesses of labor, equipment and inventories indicate Japan’s recession will continue for a while." Aso, speaking to reporters yesterday before going to the Group of 20 summit in London, said he will compile his third stimulus package by mid-April, without giving details of its size. His 10 trillion yen ($102 billion) in extra spending since taking office in September is dwarfed by China’s 4 trillion yuan ($585 billion) package. Chinese President Hu Jintao said the nation’s stimulus has "begun to take effect," giving the government confidence that the economy can maintain steady and rapid growth.
Still, the drop in the purchasing index showed the danger of companies increasing orders for products in anticipation of, rather than in response to, government projects, said Eric Fishwick, head of economic research at CLSA in Hong Kong. "Although China’s proactive monetary and fiscal policies are yielding positive results, the country’s economic recovery is still in first gear," Jing Ulrich, chairwoman of China equities at JPMorgan, wrote in a report today. Asia excluding Japan will grow 3.4 percent this year, less than half of a September estimate of 7.2 percent, the ADB said yesterday. The lender expects Thailand, Malaysia and Singapore to contract. South Korea, Taiwan and Hong Kong will also shrink. "Across the region, factory closures and job losses are rising, weighing on consumer sentiment and forcing households to cut back on spending," the ADB said.
Taiwan’s Hon Hai Precision Industry Co., the world’s largest contract maker of electronics, cut 116,000 people from its workforce during the fourth quarter of 2008 as profit fell, according to company filings released yesterday. Other statistics today also pointed to a deeper slowdown across Asia and the Pacific. Thailand’s consumer prices declined for a third month in March as the deepening global recession weakened demand. In Australia, retail sales fell in February for the first time in five months and manufacturing shrank for a 10th month in March. New Zealand’s business confidence was the second-worst on record in March as companies remained pessimistic about consumer spending, profits and hiring, an ANZ National Bank Ltd. survey showed yesterday.
Toyota, Nissan Lead 32% Plunge in Japan Auto Sales
Toyota Motor Corp. and Nissan Motor Co. led a 32 percent drop in Japan’s auto sales to the lowest level in 35 years as economic recession exacerbates slumping domestic demand. Vehicle sales, excluding minicars, fell to 323,063 vehicles in March, the Tokyo-based Japan Automobile Dealers Association said in a statement today. Toyota, Japan’s largest automaker, sold 135,700 vehicles excluding its Lexus-brand cars, down 32 percent. Sales at Nissan, the country’s third-biggest, fell 34 percent to 59,292.
The Japanese auto market, already hurt by a shrinking population, may contract further this fiscal year, as rising unemployment and falling wages deter car purchases. Wages in Japan fell at the fastest pace in the past five years and the jobless rate jumped to 4.4 percent in February, the highest in three years, the government said yesterday. "We’re in a bottom zone," said Edwin Merner, president of Tokyo-based Atlantis Investment Research Corp., which manages $3.1 billion. "Auto sales will recover, but buying will be selective."
Including minicars, vehicle sales fell 25 percent to 546,098 vehicles last month, according to figures released today by the dealers’ association and Japan Mini Vehicles Association. For the year ended yesterday, industrywide sales including minicars dropped 12 percent to 4.7 million. That’s the lowest figure since 1977 when the automakers sold 4.23 million vehicles. "The trend may continue for a while because of the deepening recession," said Yasuhiro Matsumoto, a senior analyst at Shinsei Securities Co. in Tokyo. "The best thing the automakers can hope for is to maintain their share in this shrinking market."
Japan’s vehicle sales may fall 8.5 percent to 4.3 million vehicles this fiscal year, the Japan Automobile Manufacturers Association said last week. In response to falling vehicle demand, the government today began to cut or exempt taxes on some fuel-efficient autos to help spur demand in the world’s third-largest auto market. The auto group expects the measure to boost overall sales by 310,000 vehicles. "The severity of the slump in the industry is intensifying," Takeshi Fushimi, a director of the Tokyo-based auto dealers’ association, told reporters in Tokyo today. "We need measures to restore confidence among consumers."
Honda Motor Co., Japan’s second-largest automaker, sold 67,211 vehicles including minicars last month, down 25 percent. Mazda Motor Corp., a Ford Motor Co. affiliate, sold 23,647 vehicles, down 32 percent. Nissan’s sales fell 28 percent including minicars. Suzuki Motor Co., Japan’s second-largest minicar maker, sold more minicars than Daihatsu Motor Co. for the first time in 15 months in March. Sales at Suzuki fell 7.3 percent to 73,700 vehicles. Daihatsu, the nation’s largest minicar maker, sold 13 percent fewer minicars to 72,291. Japanese carmakers sold 1.81 million minicars last fiscal year, down 4.4 percent. Minicars accounted for 38.4 percent of the total, compared with 35.6 percent a year ago.
Japan’s slump in auto demand mirrors that of the U.S., the world’s largest auto market, where General Motors Corp. and Chrysler LLC probably dragged the U.S. auto market to a third straight monthly contraction in March. Vehicles in the U.S. likely sold at a seasonally adjusted annual rate of 8.8 million last month, the average estimate of 8 analysts surveyed by Bloomberg. It was 15.1 million a year ago. Toyota rose 4.8 percent to 3,270 yen at the 3 p.m. close of Tokyo Stock Exchange trading. Nissan rose 10 percent to 385 yen. Honda rose 6.7 percent to 2,470 yen.
China isn't quite ready to take on the world
China is on the warpath - in rhetoric. Its usually anodyne politicians have lately delivered a slew of acid criticisms of the way the West runs its house. Premier Wen Jiabao questioned profligate US spending habits, and warned America not to scramble his $2 trillion nest-egg. Zhou Xiaochuan, governor of China's central bank, suggested the dollar should be replaced as the lingua franca of global finance. As President Hu Jintao jets into London's G20 meeting to duke it out with other heads of state, China may seem readier than ever to take on the world.
There are good reasons for the newfound confidence. China was last into the financial crisis, and should be first out. Growth is still positive. Banks are well capitalised and light on toxic derivatives. Electricity production, manufacturers' sentiment and heavy industrial orders are already ticking up as Beijing firmly guides the economy. Consumption, while relatively small, has held up, and there are signs the "wealth effect" is returning, notably in enhanced stock market performance. But don't be deceived. While China has avoided some of problems that beset wealthier nations, it isn't ready to lead the way into a new world order. At home, battles remain, unemployment being the most worrisome. Officials have said 20m migrant workers are out of work as falling global trade asphyxiates China's exports.
The true figure is probably higher. Urban unemployment is nudging 10pc, according to the Chinese Academy of Social Sciences. Some idle hands present a risk to civil stability - especially since inequality between city and rural communities has been replaced by inequality within them. The putative solution, a fiscal stimulus of Rmb4 trillion ($585bn), poses its own threats. Bad debts are likely to pile up on bank balance sheets, as the government mandates increased lending. Some Rmb2.7 trillion ($395bn) of new loans were doled out in January and February. Industries such as aluminium and microchips are already dealing with overcapacity. The stimulus may help the underemployed for a while, but when it ends, domestic consumption, the main pillar of a stable economy, won't take up all the slack right away.
China's athletic growth rates were probably due for some moderation, global crisis or not. The country has undergone three previous bursts of energy since its 1978 experiment with capitalism began, each fuelled by a different steroid - first rural reform, then the introduction of market economics, and latterly accession to the World Trade Organisation. After each sprint, a slump followed. In 1989, GDP growth fell from 11pc to 4pc. Another deus ex machina is not in sight. Still, China has a case for rejecting some complaints from G20 countries. China is getting rich fast, but GDP per capita still lags Armenia and El Salvador. Yet the US and Europe demand it behave like a fully developed nation. Developing economies might need different rules when it comes to protecting nascent industries or the environment. Or foreign exchange rates - a big bone of contention.
Acting tough on the global stage - especially when there is a good case - could be the most effective way to play to the crowds back home and smooth over the domestic tensions that could threaten China's considerable 30-year achievements. The urban and rural, state-owned and private, developed and developing, autonomous and federal sit uncomfortably together. Regional politics create another fault line, as local governments, tasked with deploying stimulus capital, fight to preserve jobs and factories in their own regions first. A divided China is still in no position to dictate terms to its global peers.
One day, the China century may begin in earnest. The country could eventually unseat the US as the world's foremost consumer. But how will it get there? The financial crisis has probably put paid to most hopes that China would follow the path America laid down. Instead, it's likely to pick and choose - pairing market economics with national protectionism, for example, or Western corporate governance structures with state control. Even more than the US, China may want to supply most of its own needs, be they compact cars or luxury handbags. When that happens, other nations will have to adjust accordingly. Even if there is throw-down at the G20, that day hasn't yet arrived.
The G-20's Funny Money
The IMF has a plan to create cash and pass it all over the world.
If the G-20 leaders meeting in London this week have one goal, it is to find a way to reflate the global economy with the least political cost. As bad luck would have it, the International Monetary Fund is standing by to help. A hint of what's in store came from Japanese Prime Minister Taro Aso earlier this week when he said that he will propose an increase in "special drawing rights," or SDRs, at the IMF. If the term "SDR" sounds vaguely familiar, perhaps that's because it was the subject of a short-lived proposal last week from the head of the People's Bank of China to create a new global reserve currency that could replace the U.S. dollar. Treasury Secretary Tim Geithner may have been caught off guard when he said that he would entertain the idea. When his comment sent the dollar plummeting, Mr. Geithner quickly backtracked.
But Mr. Aso's reference to SDRs is something altogether different. He is proposing a massive expansion in foreign aid, which we will explain below. What is important to understand is that the plan means hundreds of billions of dollars in handouts going to emerging market countries with no strings attached: All governments qualify, including those that lock political dissidents in dungeons and steal from their own people. Treasury is widely believed to support the SDR expansion, despite the fact that it will increase, yet again, costs for American taxpayers and the debt burden of future generations and will reward dictators the world over.
SDRs are nothing more than a fancy term for allocated credits divvied out by the IMF to member countries. The SDR pool at the fund traces its roots back to the gold standard when it was used as a liquidity tool for balance-of-payments shortfalls. These "international reserves" would continually circulate from deficit to surplus countries. Today, under fiat currencies, SDRs are like bits of paper printed by IMF officials in the basement. They have no value but can be exchanged for subsidized loans to nonreserve currency countries. As the fund explains, "The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members." The current exchange rate per SDR is about $1.50.
When a country decides it wants to spend an SDR, it alerts the fund, which then takes the bits of paper it created to the country that has the real money and exchanges them. For example, if Bananalandia wants dollars, its SDR account is debited, and America's SDR account is credited. The U.S. then issues debt to raise the dollars to give to Bananalandia. The rate at which countries borrow is a weighted average of the lowest rates in the dollar, euro, yen and pound sterling. In practice, the "loans" are almost never retired. Since 1970, the Fund has allocated 21.4 billion SDRs (almost $32 billion at the current dollar rate). But in 1997 the IMF board passed a resolution to double the number of SDRs. In 12 years it has failed to get the 85% of total votes at the Fund to approve that resolution.
The reason was easy to understand: The U.S. has 16.8% of the votes and the cost to U.S. taxpayers of SDRs is already substantial. In a 2004 paper for Congress's Joint Economic Committee, Carnegie Mellon economist Adam Lerrick explained that SDRs cost U.S. taxpayers $330 million per year. With the U.S. "contribution" to the 1997 resolution total U.S. exposure would be about $12 billion. Mr. Lerrick estimated that the total cost of this proposed expansion to U.S. taxpayers could reach $750 million annually. With this in mind and given the lack of conditionality for what amounts to foreign aid, Congress refused to approve the IMF proposal.
Mr. Aso of Japan didn't specify amounts he will endorse in London. But Ted Truman, a former assistant secretary of the Treasury under Bill Clinton who is now advising Mr. Geithner, is calling for "an immediate, one-time allocation of $250 billion" in SDRs. He says his goal is to put into action the "many well-intentioned pledges to adopt expansionary policies, avoid protectionism, stabilize and reform the financial system, mobilize the IMF and multilateral development banks to help the weakest countries, and combat poverty" that will come out of the London meeting. Wow, free money can certainly do magical things. As for getting this through Congress, Mr. Truman adds that the Treasury Secretary "can vote for an SDR allocation of up to $250 billion, or somewhat larger, as long as he consults with key members of the U.S. Congress 90 days before he casts his vote. Thus, the actual allocation could occur by mid-summer, much sooner than most other crisis-mitigation measures would begin to take effect." We're told by others that this is, at best, an "unusual interpretation" of U.S. law.
Since IMF financing is "off-budget," meaning that it doesn't show up as an annual U.S. expenditure, all this is an off-the-books future liability. But no one should mistake this as charity for the deserving poor. As we wrote in an editorial in 2004, a doubling of SDR credits would make Iran eligible for a total of $465 million, Syria $90 million, Robert Mugabe's Zimbabwe $115 million, Sudan $100 million, Venezuela $840 million and Burma $80 million. If Americans decide they want to give more to the neediest, there are honest ways to do it. But to simply blanket the world with conjured dollars and ask already-stretched American taxpayers to pay for it is bad economic policy and even worse governance.
S&P fears debt crisis for Europe's companies
Standard & Poor's has warned that it may prove "extremely difficult" for European companies to roll over €565bn (£524bn) of rated corporate debt coming due by the end of the next year, raising the risk of a default crisis on low-grade bonds. The agency said the deluge of bond issuance by governments struggling to cover deficits may "overwhelm investors" at some point this year The rating agency said car manufacturers have already "burned through" much of their cash reserve, leaving them "glaringly exposed to the downturn".
Oil and gas, utilities, and telecoms are all likely to face difficulty refinancing their debts. Europe has been caught off guard by the sudden collapse of industrial production since September. The OECD club of rich states expects Germany's economy to contract by 5.3pc this year, and Russia's 5.6pc, with "risks skewed to the downside". S&P fears that A and BBB rated companies may be shut out of the credit markets, with mounting danger if the recession drags on into next year. "We believe there is a real risk that the gradual pick-up in activity expected from the end of this year could quickly peter out. This would transform a "V" shaped recession into a "W" shaped one, where two episodes of declining output are separated by a short uptick in growth."
The agency said the deluge of bond issuance by governments struggling to cover deficits may "overwhelm investors" at some point this year and lead to a sharp spike in long-term bonds rates, perhaps by 75 basis points. This would cause a cascade effect across the spectrum of corporate debt. The sudden slide in currencies across Eastern Europe has twisted the knife deeper for companies with euro and dollar debts, especially those geared to home sales. Russian companies rated by S&P must roll over €58bn by the end of next year. They raised debt abroad because the Moscow bourse lacks a developed bond market. The problem is that so many borrowed on short maturities, betting that the oil boom would continue. Projects have since come an abrupt halt across Russia. Developer Mirax has stopped construction on its 98-floor Federation Tower, billed as Europe's highest. The half-built skyscraper stands as a monument to recession on the Moscow skyline.
Obama's Poor Tax
"I can make a firm pledge . . . no family making less than $250,000 a year will see any form of tax increase." Remember that? It was Barack Obama, campaigning to become president last Sept. 12 in Dover, N.H. Indeed, he promised repeatedly that 95% of American families would get a tax cut. So it's especially fitting that he chose April Fools Day to implement his first tax increase -- which will fall mostly on individuals and families who do not make anywhere near $250,000 per year. Early in February, the president signed a law to triple the federal excise tax on cigarettes -- which will jump from 39 cents per pack to $1.01 today. His administration projects this tax hike will bring in at least $38 billion over the next five years. If you don't smoke, maybe you don't care. Maybe you even think a higher "sin tax" is a good thing. But health issues aren't the only concern here. There are also questions of fairness, federalism, macroeconomic impact, and crime.
The fairness issue is particularly troubling. According to the Centers for Disease Control and Prevention, only one in five Americans smokes, so the excise targets a minority -- and over half of all smokers are low income, and one of four are officially classified as poor. Mr. Obama prefers to tout his tax cuts for low-income households. But his "stimulative" Make Work Pay tax cut gets dribbled out at $8-$10 a week. A pack-a-day smoker will pay half of that back in higher cigarette taxes. Smokers getting welfare, unemployment or disability checks instead of paychecks won't get as much in tax cuts, but they will still pay the whole cigarette tax increase. Anyone concerned about widening income inequality should have second thoughts about this distribution of the tax burden.
We should also note how this tax increase affects state finances. State governments rely on their own cigarette excise taxes for hefty revenue streams. In 2008, according to the National Tax Foundation, state governments took in $15.4 billion in cigarette taxes. Hard-hit Michigan, Pennsylvania, and California each took in over $1 billion; New York and Texas took in $1.5 billion each. Higher taxes discourage cigarette sales. Nobel economist Gary Becker pegs the long-run price elasticity of demand for cigarettes at 0.8 -- i.e., a 10% increase in price causes an 8% decline in unit sales. The Obama tax hike translates into a 13.3% increase in the average pack price. That implies a 10.6% decline in unit sales -- which the National Tax Foundation has calculated adds up to a $1 billion overall revenue loss for hard-pressed states.
Because Southern states have low tax rates (most less than 40 cents per pack), the federal tax hike raises their cigarette prices by a larger percentage and thus cuts deeper into their unit sales. New York, by contrast, has the highest state taxes ($2.75 a pack) and prices, so it gets hit less in percentage terms. The Tax Foundation estimates a 12.6% revenue loss for South Carolina this coming fiscal year, and a 6.7% loss for New York. None of this is good for the economy. Consumers and state governments are already having a tough time making ends meet. Burdening them with a new $38 billion tax and a $1 billion cut in revenues isn't going to help create jobs. Estimates by the National Association of Tobacco Outlets of the job losses in cigarette manufacturing and distribution alone exceed 100,000.
Smugglers and counterfeiters won't lose their jobs, though. Both the General Accounting Office (GAO) and the Alcohol, Tobacco, and Firearms (ATF) agency have concluded that the multibillion-dollar cigarette-smuggling business grows with every excise tax increase. The ATF and GAO also believe that cigarette-smuggling is a form of cash laundering and profits for both organized crime and terrorist organizations. Clearly, we were fools to believe that if we weren't wealthy, Mr. Obama wasn't going to raise our taxes. We'll be even bigger fools if we acquiesce to further tax increases of this kind.
The Real Geithner Plan, a ‘Nuclear Option’
The Obama administration last week proposed draft legislation for a "resolution authority" that would effectively permit the government to liquidate or restructure large systemic financial institutions. If passed by Congress, these powers would allow the governments to treat nonbank financial institutions more like regulated deposit-taking banks. This authority offers a clear path to recapitalize institutions without using taxpayer money and therefore avoiding some dimensions of moral hazard but, if implemented poorly, the existence of this "nuclear option" can cause panic in financial markets and substantially delay recovery. This fear may be with us already — despite all of the material and moral support already on the table, the market is pricing in the highest ever risk of default for Citigroup senior debt, i.e., about a one in three chance over the next five years. (See the credit-default spreads for major banks.)
Imagine what happens when these powers are passed. The U.S. Treasury and FDIC would immediately have the tools need to walk into America’s largest financial institutions, such as Citibank or Bank of America, and liquidate them, or rewrite their contracts and capital structures. Such powers are clearly useful: if the banks are undercapitalized, and private money is not available, then the government could force creditors to swap claims into equity, thus instantly recapitalizing the banks while avoiding use of taxpayer funds. With such steps, the problem of moral hazard, where creditors to banks are bailed out by taxpayers, would at once be forgotten. Shareholders in banks would lose through dilution, some (unsecured?) creditors would lose with debt-equity swaps, while the nation would be better off having a well-capitalized banking system. The banks would remain private but now be controlled by (ex)creditors.
However, today these powers don’t exist, and none of us know exactly how this authority would be used if it ever lands on Mr. Geithner’s desk. We’ll now have a healthy debate in Congress and then see revised versions passed and signed into law. But as this debate proceeds, creditors and shareholders in all such institutions will be nervous. We’ll be giving the Treasury a "nuclear option" and no one can be sure who is safe. A natural reaction by clients and investors of these banks will be to edge towards the exit immediately and to stay away until the dust has settled. It won’t matter whether institutions are solvent: Due to the uncertainty and risk of losses, investors and clients may run. We’ve seen repeated waves of such panics over the last year, and we can live through them, but each successive one hurts the institutions we are trying to save and delays recovery.
What should the administration do to prevent the panics that can ensue from this legislation? First, if they plan to use it soon, they need to pass this legislation quickly. There is good logic behind requiring creditors to bear part of the cost of restructuring, but we can’t afford to have this hanging over credit markets for months to come. Second, once passed, the new authority should be used. There is no point in incurring the political and financial costs of passing this legislation now unless it is really needed.
Third, as in any major crisis, the aim should be to use this weapon once and decisively. If the government first hits one "weak" institution then another, and piecemeal restructures the sector, then investors and creditors will constantly "game" the system. This will drive down share and debt prices, forcing the government into action, gradually moving down the chain of institutions. We’ve seen this with successive panics at Bear Stearns, Lehman, AIG, Citigroup, etc. The most solvent institutions today could be made insolvent through higher credit costs brought on by the uncertainty, and the recession will be deeper.
To be decisive, the government needs to implement this authority on large scale at once. For example, they could use a very rigorous stress test to triage institutions (i.e., more serious than the current stress test). Those that would be clearly insolvent in the face of a severe recession can be intervened over a weekend. The government could force a debt-equity swap to recapitalize the institutions, and then reopen them the following Monday as highly capitalized entities. While not all creditors with the same seniority would be treated equally — this would be a major difference and potential advantage relative to bankruptcy — the benefits of rapid actions can be justified for the economy as a whole. The institutions that are solvent, but require more capital, could be given a short timeframe to raise funds in private markets. If they cannot raise funds, the government could still intervene. With a gun to their head, there is no doubt they will find new capital, at very low share prices, that will ensure they are highly solvent.
This route to recapitalization would not be pleasant. Bank shareholders and creditors will cry foul. There will be several months of turmoil in markets, and there will be substantial disruption since bond holders and some creditors may be required to take losses when they receive equity. It will also send shockwaves to other undercapitalized institutions around the world, and could lead to their share and debt prices falling in anticipation that other governments will follow America’s example. However, it is surely better than doing nothing, or too little, and waiting to see what happens. America needs a well capitalized financial system to restore confidence in general and the flow of credit in particular. Given there is little chance of new funding for banks from Congress, there is no easy path to recapitalize banks. Creditors probably do have to pay — this legislation will simplify and help manage that process. Let’s hope the Treasury understands how to use the weapon it is seeking.
Fortis Sale Hits Snag On Huge Loss
The planned sale of Fortis Bank to BNP Paribas SA of France hit another snag Tuesday, as a Belgian court ruled recent investors as ineligible to vote on the deal. The decision was the second time a court has intervened on the side of shareholders opposed to the Belgian government's deal with BNP. It came hours after holding company Fortis NV announced a €28 billion ($37 billion) loss in 2008. The loss was mainly due to write-downs after the Belgian government effectively nationalized Fortis NV's Fortis Bank unit in October. The Belgian government's agreement to sell Fortis Bank to BNP has already been blocked twice by shareholders, toppling a Belgian prime minister in the process.
Shareholders initially rebelled because the deal valued each share at roughly €1, down from €14 per share a year ago. They successfully sued to force the government to let them vote on the BNP sale. When they got their vote in February, they blocked an offer valuing their shares at just under €3. Since then, the Belgian government, BNP and Fortis NV have renegotiated the bank's sale to value Fortis shares at slightly more than €3, setting the stage for another shareholder vote on April 8. On Tuesday, retail shareholders opposed to the latest deal won a second court ruling. This time, the Belgian court blocked a decision by the Fortis board to allow shareholders who bought shares cheap since October to vote next week. These shareholders control 5% of the company and were expected to vote for the sale, as they would make a profit.
Fortis officials say they still have enough votes to win on April 8, even without the new investors. Fortis and BNP have recruited some of the big institutions that skipped the February meeting to show up this time and vote yes, Fortis officials say. Ping An Insurance (Group) Co. of China, Fortis NV's biggest shareholder, with 5% of the company, will issue a statement this week, a representative said. "There was a consensus building that [the vote on April 8] would be a guaranteed 'yes'," says Dirk Peeters, an analyst for KBC Bank. "Now it's not so clear." Fortis NV CEO Karel De Boeck promised "a new start for Fortis, shareholders permitting."
Financial Terrorism and You
Can we just drop the pretense and start calling the bank bailout what it is: Financial terrorism. Terrorism can be defined as achieving one’s aims through fear. And it sure seems to me that bankers and their friends in government are extorting money from the taxpayers (you and me) with a threatening "or else" that goes something like this: "Give us the money or the entire financial system will implode." And as we fork over the extortion money, these corporate gangsters put us on the hook for trillions of dollars MORE.
For example, AIG posted the largest quarterly loss in American corporate history — $61.7 billion — for the final three months of last year. That means the company lost more than $27 million every hour. That’s $465,000 a minute, or $7,750 a second. As a result of its losses, AIG has been awarded hundreds of billions of taxpayer dollars. Otherwise, we’re told, the company’s collapse could devastate the economy. And that’s just ONE of the companies robbing you of your hard-earned money under the pretext of "fixing" the problem. In fact, one of the ways we know this is financial terrorism is that the steps being taken to "fix" the problem aren’t fixing a single thing.
The Roots of the Crisis Go Back to 1999 Glass-Steagall was passed after the Great Depression, the last time outrageous financial chicanery brought our country to its knees economically. This law placed a barrier between everyday banking, such as lending and deposit-taking, and riskier areas, such as derivatives trading. But the law was repealed in 1999, thanks to lobbying by the very companies we’re bailing out now. And the effort was midwifed by Phil Gramm, a laissez-faire-lovin’ Republican senator from Texas who co-authored the Gramm-Leach-Bliley Act that repealed many key provisions of Glass-Steagall.
Gramm quit the Senate to go work for UBS AG, one of the beneficiaries of the repeal. I believe that kind of thing — passing a law to help a future employer — should be illegal. We can only be thankful that Gramm didn’t go on to higher office — he was an advisor to McCain’s Presidential campaign and probably would have ended up as Treasury Secretary had McCain won. But this isn’t just a Republican problem. Oh, if it were only that simple. You see, there were shady characters on both sides of the political aisle in this terrorism caper. Instead of Gramm, we got Tim Geithner as Treasury Secretary. He’s a protégé of Robert Rubin, former co-CEO of Goldman Sachs and one-time Treasury secretary in the Clinton administration, who went on to work for Citigroup after whole-heartedly supporting the Glass-Steagall repeal. Due to the current financial crisis, Citigroup lost $27.7 billion last year and has needed $45 billion in government funds to stay afloat.
But Wait, It Gets Better! Clinton had more than one Treasury Secretary. And the last one was Lawrence Summers. At the time Glass-Steagall was repealed, Summers said:"Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century. This historic legislation will better enable American companies to compete in the new economy."
Good thing Summers isn’t around anymore, eh? After making such a colossal mistake, he wouldn’t dare to show his face. Oh wait — would you believe he is now the Director of the White House’s National Economic Council? In other words, one of the persons who got us into this mess is now in charge of fixing it! Isn’t that like hiring an arsonist to put out your house fire? And people wonder why I’m pessimistic. You may have heard Washington officials say on TV: "No one could have foreseen what would happen." Except that someone did foresee EXACTLY what was going to happen. When Glass-Steagall was up for discussion, Senator Byron Dorgan (D-North Dakota) made an impassioned speech on the floor of the Senate, asking his colleagues NOT to repeal the regulation. He said:"I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that which is true in the 1930’s is true in 2010. I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."
Only eight senators opposed the Gramm-Leach-Bliley repeal of Glass-Steagall:
* Richard Shelby (R-AL)
* Barbara Boxer (D-CA)
* Richard Bryan (D-NV)
* Byron Dorgan (D-ND)
* Russell Feingold (D-WI)
* Tom Harkin (D-IA)
* Barbara Mikulski (D-MD)
* Paul Wellstone (D-MN)
If your senator was around in 1999, and he or she isn’t on that list, you can be fairly certain that your senator does the bidding of the Wall Street banksters, not you. While Wellstone is dead, I find it interesting that none of these other, prescient senators have been tapped by President Obama to fix the crisis. Instead, all roads to high-level White House financial appointments seem to lead through Goldman Sachs.
The Goldman Fix Is in … The original plan to bail out AIG was dreamed up last fall at a meeting run by then-Treasury Secretary Hank Paulson. Paulson had been CEO of Goldman Sachs before becoming Treasury Secretary. Also attending the meeting was Lloyd Blankenfein, the current CEO of Goldman Sachs and Tim Geithner, then head of the New York Fed. AIG was not allowed to fail — remember Geithner has taken both bankruptcy and nationalization off the table. So AIG’s trading counterparties are being paid 100 cents on the dollar.
Much of the $170 billion bailout AIG has received has gone to pay off obligations to Wall Street banks, such as Goldman Sachs. Goldman has maintained that it got no bailout money from the Treasury, apart from the $25 billion it was "forced" to take. But in fact, it received at least $13 billion through AIG! It’s almost as if Goldman knew that the money would be coming. Along with Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank and Barclays are all recipients of AIG’s payments to its former trading partners. Former New York Attorney General Elliot Spitzer — who knows a thing about financial shenanigans — recently wrote:"The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation."
So here’s where an administration’s spokesperson says on TV: "Well, it’s a mess, but we’re doing our best to fix it." Are they? Let’s look at the track record (in both the Bush and Obama administrations) …
- No serious attempt at re-regulation. You’d think the first order of business would be to reinstate Glass-Steagall. The Obama Administration hasn’t done that. In fact, while Secretary Geithner recently proposed "sweeping" changes to Federal regulation of the financial system, Glass-Steagall wasn’t part of the package.
- Goldman Sachs’ unprecedented access to the corridors of power in D.C. continues. Another former Goldman Sachs employee, Gary Gensler, has been nominated to head the Commodity Futures Trading Commission.
- Not even a token attempt at justice. Where are the indictments? Why aren’t we seeing Wall Street executives frog-marched to the paddy wagons? And don’t tell me about Bernie Madoff — he was a rogue operator who turned himself in, not the head of one of the major Wall Street banks that have ripped us off through systematic pillaging. Indeed, everything I see tells me that our government is a willing co-conspirator with the robber barons.
- The looting continues. In just one example, Citibank and Bank of America are now using the TARP funds they received not to extend more loans as they were supposed to, but to buy up more of the toxic debt they’re supposed to be getting rid of! Why? Because they know that, under Geithner’s plan, they will be able to sell the toxic debt at a substantial profit as the government props up the market for those troubled assets. These banksters are speculating with the same taxpayer money that was supposed to pull them back from the abyss.
- The threats continue. In the Bush administration, Treasury Secretary Paulson was able to get his original bailout package passed by Congress in a very simple manner. According to Representative Paul Kanjorski, the Capital Markets Subcommittee Chair, Paulson told them, with a great sense of urgency, that there was an electronic run on the banks. And if Congress didn’t go along with Paulson’s rescue plan, Kanjorski recalled being told, "It would have been the end of our economic system and our political system as we know it."
Well, it’s déjà vu all over again. Geithner recently told the House Committee on Financial Services: "The U.S. Government does not have the legal means today to manage the orderly restructuring of a large, complex, non-bank financial institution that poses a threat to the stability of our financial system."
Geithner could be sincere, in which case, we are in a very dire situation indeed. I’m just not sure he’s the right man to reform the system, because I can’t tell whose side he’s on. After all, last week, the Obama administration urged the U.S. Supreme Court to stop New York and other states from enforcing their fair-lending and other consumer-protection laws against federally chartered banks, including JPMorgan Chase and Wells Fargo & Co. This is the same position that the Bush administration had and a slap in the face for consumer and civil-rights groups. Our government is going to have to choose whose side it is on. It’s a choice that — if not correct — could bring this country to the brink of anarchy.
Could We Go the Way of Argentina? Desmond Lachman — former chief strategist for emerging markets at Salomon Smith Barney and a long-time official with the IMF — recently wrote in The Washington Post that comparing the economic crisis in the U.S. to Japan’s "lost decade" was wrong. Instead, he said a better comparison is to Argentina, Russia, Thailand, and other countries that collapsed both economically and politically, weighed down by their own corruption. He wrote:"Watching Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae — among the largest campaign contributors to Congress — made me wonder if the differences between the United States and the Asian economies were only a matter of degree."
From what we’ve seen so far, the only response to the catastrophic collapse of major American financial institutions is to try and reinflate the balloon with our tax dollars. There is no serious attempt at reform. And without that, there can be no real recovery. And Lachman’s words could come back to haunt us.
Crop Cutbacks by Farmers Spell Higher Food Prices
The Agriculture Department said farmers intend to idle millions of acres of land this spring as they cut production of most of the nation's major crops, including corn, wheat and cotton, and plant far fewer acres of soybeans than widely anticipated. The retreat by recession-battered farmers -- the broadest in two decades -- is helping to set the stage for more volatility in prices of the crops used for everything from packaged food and biofuels to fattening livestock. The nation's major food brands were battered last year by gyrating crop prices in part because several companies made bad hedging decisions.
In a sign of what food executives fear is to come, crop futures prices leapt Tuesday on worries that any weather problems this summer could result in supply disruptions next year. In trading at the Chicago Board of Trade on Tuesday, the soybean futures contract for May delivery soared 47.50 cents to settle at $9.52 a bushel. The corn contract for May delivery jumped 18.5 cents a bushel to settle at $4.0475 and the May wheat contract rose 20.25 cents a bushel to settle at $5.3275.
"Volatility is back," said Michael Swanson, a Wells Fargo & Co. agricultural economist. For consumers, the cutbacks mean the food inflation rate isn't likely to fall back to the benign levels of earlier this decade. The USDA is forecasting food inflation of 3% to 4% this year. While down from last year's 5.5%, it is higher than the 2.4% of 2005 and 2006. Based on its survey of 86,000 farmers in early March, the USDA said it expects growers to plant 58.6 million acres of wheat, down 7% from last year, and 85 million acres of corn, down 1% from last year. Cotton acreage is expected to fall 7% to 8.81 million acres, the lowest level since 1983.
Commodity analysts had expected the report to show farmers moving away from these high-cost crops to make room in their fields for soybeans, which don't require expensive nitrogen fertilizer. According to the government's Prospective Plantings report, farmers intend to plant a record 76 million acres of soybeans this year, but that is up only 0.4% from last year, not the 5% increase expected by analysts. Many U.S. crop farmers had the most profitable years of their careers in 2007 and 2008. But they are retrenching because of soaring costs of fertilizer and seed as well as signs that the recession is slowing demand for their crops and land.
The USDA said farmers intend to plant the nation's 21 biggest crops on 7.8 million fewer acres than last year, the biggest one-year drop since 1987, when the farm belt was mired in a debt crisis. The retreat is most dramatic in states like North Dakota, where farmers intend to plant 1.4 million fewer acres, and in Texas, where farmers could idle one million acres. Many growers still have time to change their plans for the growing season, which begins in mid-April across much of the farm belt. The USDA will survey farmers about actual plantings in June.
Lock 'Em Up
Jailing kids is a proud American tradition.
At first glance, the news from Luzerne County, in northeastern Pennsylvania, is not good. In what is known locally as the "kids for cash" scandal, two judges have pleaded guilty to accepting $2.6 million in kickbacks from a for-profit juvenile correctional facility -- a privately owned jail for kids, essentially. And here is what the judges delivered, according to the charges of the U.S. Attorney overseeing the case: In 2003 one of them, Judge Michael Conahan, who had authority over such expenses, defunded the county-owned detention center, channeling kids sentenced to detention to the private jail -- along with the public's money. For good measure, the feds charge, Mr. Conahan also agreed to send the private facility $1.3 million per year in public funds.
Over the succeeding years, the private jail, along with a second lockup-for-profit that had opened in another part of the state, won tens of millions of dollars in Luzerne County contracts, allegedly with the two judges' help. What has drawn the media's attention, though, is the remarkable strictness of the judges' judging. Mr. Conahan's alleged partner in the scheme, Judge Mark Ciavarella Jr., reportedly sent kids to the private detention centers when probation officers didn't think it was a good idea; he sent kids there when their crimes were nonviolent; he sent kids there when their crimes were insignificant. It was as though he was determined to keep those private prisons filled with children at all times. According to news stories, offenses as small as swiping a jar of nutmeg or throwing a piece of steak at an adult were enough to merit a trip to the hoosegow.
Over the years Mr. Ciavarella racked up a truly awesome score: He sent kids to detention instead of other options at twice the state average, according to the New York Times. He tried a prodigious number of cases in which the accused child had no lawyer -- here, says the Times, the judge's numbers were fully 10 times the state average. And he did it fast, sometimes rendering a verdict "in the neighborhood of a minute-and-a-half to three minutes," according to the judge tasked with reconsidering Mr. Ciavarella's work. My question is, what have the Luzerne County judges done that deviates in the least from our American political traditions? These jurists have merely taken to heart the unvarying message of 40 years' worth of election results -- that more people, many more, need to go to jail -- and have come up with an entrepreneurial solution to the problem.
We the people say it loud and clear every Election Day, in high-crime periods as well as peaceful stretches: More of our population needs to be behind bars. We love retribution so much we make hits of TV shows in which society's ne'er-do-wells come in for lectures not only by stern, righteous judges, but by tattooed, mulletted bounty hunters as well. And over the years we have embraced all sorts of instruments ensuring that more people got locked up for longer and longer stretches: Three strikes laws, mandatory sentencing laws, zero-tolerance policies. Maybe they aren't "fair," but they've helped to make the U.S. number one in percentage of population in the clink -- in fact, as Virginia Democratic Sen. Jim Webb pointed out in Parade magazine on Sunday, America has an amazing 25% of the world's prisoners.
Taking this path has not always been easy. In the 1990s, when we started to realize that child crooks were "superpredators" who needed to go to prison along with everyone else, some were unwilling to act. Others stepped up. "We've got to quit coddling these violent kids like nothing is going on," said Sen. Orrin Hatch (R., Utah) in 1996. "Getting some of these do-gooder liberals to do what is right is real tough. We'd all like to rehabilitate these kids, but by gosh we are in a different age." But taking law and order to the next level in this different age required money, by gosh. Privatizing bits of the prison industry was a step in the right direction, but what we didn't have -- until recently -- were proper instruments for incentivizing the judiciary. That's what the "kids for cash" judges were apparently experimenting with.
Today the do-gooders revile those efforts as "kickbacks," but before long we will see them as legitimate tools of justice. Our laws governing lobbying and campaign contributions have struck the right balance between the wishes of the people and those of private industry, so why are we so quick to doubt that the same great results can be achieved by putting the government's justice-dealing branch on the same market-based course? The public will get to see their neighbors' kids go to jail, the judge who sends them there will be able to afford a nice condo in Florida, and the company that satisfies the public's desire for punishment will make a handsome profit. It will be a win-win result for everyone.
U.S. Plans 'Virtual Fence' to Assess Canada Border
The U.S. government is moving a "virtual fence" to the border with Canada, testing technology aimed at detecting terrorists and drug traffickers. The Department of Homeland Security announced Tuesday $30 million for a series of remote-camera towers at 16 sites near Detroit and Buffalo, N.Y. That includes $10 million already spent on technology and $20 million in work for Boeing Co., which also has been trying to develop a reliable virtual-fence for the U.S. border with Mexico. The results of the initial rollout are expected to help answer questions about the usefulness of the technology and the danger the U.S. faces along the 4,000-mile border with its northern neighbor. Officials said they will use the information to decide how much of the total $8 billion in virtual-fence spending should be dedicated to the northern border.
As of earlier this year, Boeing had received nearly $1 billion for border-technology work focused on the Southwest U.S. That project has faced numerous hurdles, technical and otherwise. The Government Accountability Office, an independent investigative agency, has cited delays and cost increases. "We recognize that there's a vulnerability [in the north]," said Mark Borkowski, who heads the project for the government. He said the key question facing policy makers is whether that vulnerability is being exploited "in a way that presents a serious risk." The government's main security concern along the border with Canada is the possibility that terrorists could slip undetected into the U.S. There are also concerns about drug trafficking and human trafficking. "We don't think there's a flood, but there may be a trickle," Mr. Borkowski said, adding that the $30 million project will "help us get a much clearer sense of what's going on."
Each technological outpost typically will include two sophisticated daytime cameras and two night-vision cameras. The cameras will point in each direction, giving agents and analysts a wide view of activity on both sides of the border. Eleven of the northern outposts will be installed in the Detroit area, largely along the banks of the St. Clair River and the adjoining Lake St. Clair, which is just a few miles northeast of Detroit. The waterways separate Michigan from the Canadian province of Ontario. Five others are planned for the banks of the Niagara River in New York. Officials expect the work to be done by the end of the year.