Grain elevators in Caldwell, Idaho
Ilargi: Yeah, I know, you thought you'd seen it all with Goldman and Citi and AIG. Well, try again. In today's earlier post, I quoted Lazard Asset Management's Ronald Temple, who "predicted" that US home prices will fall 22% to 27% from their January levels. And you know where that will hurt? No, not at the banks, not at Countrywide, what's wrong with you, pay attention, you been living under a rock? They've all unloaded every inch of risk and losses they could think of, and then some, unto the US taxpayer, with a kind and gentle helping hand at the White House. Know where the main part of the housing losses have been parked? Yup, you’re getting the hang: Fannie and Freddie.
Alors, garçons and fillettes, what will we have to do now that housing prices will fall another 22-27%? Mind you, my guess has always been more along the lines of 52%-57%, but what the heck, who cares about the details? What we will need to do, without further hesitation, is to re-organize Fan and Fred. Wait, did I mention that they have somewhere between $5 and $6 trillion "worth of loans" in their portfolio's? Want to know how profoundly lost they are in the very deep end of the pool of mortgage based securities and other fine creative finance instruments? I knew you didn't. After all, $5-$6 trillion is enough for one day, right? Say we’ll do that tomorrow, and I'll go walk the monster still impersonating an innocent puppy.
"Regulators seized Fannie and Freddie in September amid a rise in mortgage delinquencies that led to a combined net loss of $108.8 billion last year at the companies, the largest sources of financing for new U.S. home loans. The Treasury Department has injected $59.8 billion in emergency funds into the companies, including $46 billion issued two weeks ago."
It'll be so much fun. Look, it's not my money. Can I have a bit of fun as well every now and then? AIG is not the main vehicle for Wall Street, Fannie and Freddie are. I said months ago that both should be burned in effigy in a completely non-denominational way (thanks, Calvin), but I guess I'll have to just keeo wishing as your money keeps being slushed through them to more deserving parties. After all, what do you really deserve, and what would you need money for? I mean, you can eat at the dumpster, but you can't really expect your president to do so, can you? Or his buddies? It all works out the way the good book of your choice meant it, doesn't it?
I suggest you keep your faith, 'cause you sure as hell won't be keeping your money.
Say Goodbye to Fannie, Freddie as Housing Collapse Wrecks Profits, Status
Fannie Mae and Freddie Mac are under pressure from lawmakers to revamp their operations as the mortgage-finance companies tap more government money to survive. Among the options under discussion are combining the companies, breaking them up or reshaping their missions. "It’s highly unlikely that they would return to the way they used to be," said Ira Jersey, the head of U.S. interest rate strategy at RBC Capital Markets in New York. Regulators seized Fannie and Freddie in September amid a rise in mortgage delinquencies that led to a combined net loss of $108.8 billion last year at the companies, the largest sources of financing for new U.S. home loans. The Treasury Department has injected $59.8 billion in emergency funds into the companies, including $46 billion issued two weeks ago.
Executives at Washington-based Fannie have discussed internally the possibility of taking over McLean, Virginia-based Freddie’s operations, according to people familiar with the matter. A formal approach isn’t imminent, said the people, who asked not to be named because the discussions are private. The Treasury has agreed to give the two government- sponsored enterprises, or GSEs, as much as $400 billion through Dec. 31. That agreement probably will need to be extended by Congress before year-end, said Karen Shaw Petrou, a managing partner of Federal Financial Analytics Inc., a Washington-based research firm. "There will be a massive re-write of the GSEs into some new structure," though probably not this year, Petrou said.
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, is exploring ways to separate the companies’ private and public missions, said Steve Adamske, a Frank spokesman. A merger would be the quickest way for regulators to cut costs by reducing Fannie and Freddie’s combined 11,000-person workforce, shedding underperforming mortgage assets and reducing the bureaucracy of running two companies with identical functions, said Christopher Whalen, co-founder of Institutional Risk Analytics in Torrance, California. Substantial movement toward a merger may not come quickly. James Lockhart, who oversees the companies as director of the Federal Housing Finance Agency, has said they will remain under government control until the housing market recovers, and the Obama administration has ordered Fannie and Freddie to focus on helping homeowners meet their mortgage payments.
"It’s got to happen; we’re not going to put them back the way they were," Whalen said of a merger. "The only way we’re going to be able to manage them is if we squeeze every last ounce of savings out of the administrative side and just focus on trying to keep the loss number under control." Brian Faith, a Fannie spokesman, and Michael Cosgrove, a spokesman for Freddie, declined to comment on the possibility of a merger or other restructuring. Fannie, created by the government in 1938, and Freddie, formed in 1970 to be a competitor, ensure that banks have cash available to make loans by buying mortgages or guaranteeing securities they help create from the debt. Together they own or guarantee about 56 percent of all U.S. home loans.
Freddie has received $44.6 billion in federal aid, about three times as much as Fannie. Freddie’s tab at the Treasury will cost it at least $4.6 billion in annual interest payments, almost triple what Fannie owes. "With both of them as wards of the state, do you need two of them?" said Joshua Rosner, an analyst with Graham Fisher & Co. in New York. Lockhart’s agency put Fannie and Freddie under its control and forced out executives after examiners said the two may be at risk of failing, threatening further damage to the housing market. Top management of the companies remains in flux. Freddie Chief Executive Officer David Moffett unexpectedly quit last month. Fannie CEO Herb Allison emerged this week as the leading candidate to run the $700 billion U.S. bank-rescue program, according to a person familiar with the matter.
Under Frank’s plan, a government trust fund would assume the companies’ responsibilities to subsidize rental housing and a remaining company would continue to do business in the private mortgage market, according to Adamske, the lawmaker’s spokesman. He said it’s too soon to say what the final structure would look like. To make Frank’s proposal work, regulators may need to put one company into receivership, a process similar to bankruptcy, said Armando Falcon, who was Fannie and Freddie’s government supervisor from 1999 through mid-2005. The fastest way would be for "one to buy all the assets and assume all the liabilities of the other, place the rest of it into receivership and wind it down," he said.
The solution is to "break them up," said Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee. "One possibility that I’ve looked at is letting the Federal Home Loan Banks take over some of their obligations and operations." The Federal Home Loan Banks are 12 government-chartered cooperatives that lend money for mortgages at below-market rates to their membership of more than 8,100 thrifts, commercial banks, insurance companies and credit unions. Daniel Mudd, ousted as Fannie’s CEO after the government’s Sept. 6 takeover, said too much is being demanded of the companies, and that lawmakers should rethink the idea of shareholder-owned firms with public missions.
"We need to have a robust policy debate," Mudd, 50, said in an interview. "Do you want large companies to be focused exclusively on housing finance, albeit prone to produce the result -- just like we’ve seen recently -- that when the housing market goes down, there will be blood?" Falcon, now an industry consultant at Canonbury Advisors in Alexandria, Virginia, said a public-private hybrid doesn’t work. He has advised other nations to avoid following the Fannie and Freddie example in developing their secondary mortgage markets, he said. "There are just too many inherent risks in following the U.S. model," he said. "All that has been proven out."
White House: U.S. to release some stress test details
Government officials are likely to release the results of some of the stress tests it is conducting for the 19 largest financial institutions, according to a White House spokesman on Wednesday. "The Secretary and the Department of the Treasury have long recognized that transparency was important for taxpayers, important for the banks and important for the overall stability of the financial system," said White House spokesman Robert Gibbs. "And I think that's what you'll see." Gibbs declined to comment on what the results would be, however he said the tests would be completed - in a "systematic and coordinated" way -- around the beginning of May.
The stress tests are to determine if each bank has sufficient capital reserves to survive over the next couple years based on a series of hostile economic projections for that period. Those include a pessimistic scenario where the unemployment rate rises to 8.9% by the end of this year with home prices falling an additional 22% for the same period. Based on each stress test, Treasury and other bank regulators will decide if the government needs to provide additional capital to the banks. The results of the stress test are likely to vary widely with government officials preparing individualized funding options for the 19 banks, each with $100 billion or more in assets under management, as part of its Capital Assistance Program, or CAP. The tests are being conducted by the Treasury and the Office of the Comptroller of the Currency, where the large banks are registered.
However, it's unclear whether banks will have the option of ignoring the results. Regulatory observers argue that there are a wide variety of ways bank regulators could pressure banks to take government capital or do other things, even if they are opposed to the idea. Government officials are pressing banks not to disclose information about the stress tests in the next few weeks before they are complete. There is a worry that details will spill out during bank earnings season, which started this week. Treasury officials expect earnings season to be completed before the stress tests are finished. Nevertheless, many of the banks are expected to sign capital assistance program documents, whether they are seeking out immediate capital infusions or they plan to spend six months to raise capital before evaluating whether they want government funding.
Securities and banking officials argue that banks will need to disclose the results of the stress tests because they are required to do so by Securities and Exchange Commission transparency regulations. "Banks will have to disclose signing of those papers because it's a material agreement," said Alston & Bird LLP partner David Brown. John Olson, partner at Gibson Dunn & Crutcher LLP in Washington, said that given the public and investor interest in stress test results, he expects most of the 19 institutions to be under a great deal of pressure to publicly disclose how they did and what actions they are taking in response in an 8-K SEC Commission filing.
A 'Copper Standard' for the world's currency system?
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal. China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons. Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can. "China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said. The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass). While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank. John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944. The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees. If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March. While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc. One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits. The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis. Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".
Ilargi: 3 months ago, Geithner accused China of doing what he now says they do not. It gets better all the time.
China not manipulating its currency, U.S. Treasury says
The Chinese renminbi is undervalued, the U.S. Treasury said Wednesday, but China is not manipulating the value of its currency to gain an unfair trade advantage. Despite complaints from U.S. manufacturing and labor interests that Beijing has kept the value of its currency low to encourage its exports, the Treasury has never ruled against China officially in its semiannual currency report, which was released Wednesday. Treasury Secretary Timothy Geithner said the renminbi appreciated by 16.6% between June 2008 and February. The Chinese keep their currency undervalued by buying huge amounts of U.S. assets, including Treasurys, agency bonds, and corporate bonds. Recently, the Chinese have moved to rebalance their portfolio away from U.S. dollars.
Ilargi: There's a lot of talk about Goldman's disappearing December numbers, Floyd Norris at NYT, Yves Smith etc. Bit of an empty bag, it would seem.
A Closer Look at Goldman Sachs' Earnings
As you know, The Goldman Sachs Group, Incorporated became a bank holding company last year. As such, they became eligible to participate in the government rescue programs. They expanded their bank operation so they could foist the bulk of their assets on the back of the FDIC. Check the FDIC website, the assets of Goldman Sachs Bank USA have grown from $19.1 billion to $162.5 billion in just one year. Funding with deposits is much cheaper than funding with corporate debt.
Anyway, as a bank holding company, they are required to report earnings on a calendar year basis. They had formerly reported using a November fiscal year end. Their most recent annual report includes financials up to NOVEMBER 30, 2008.
Last night's release included the earnings for January, February and March of this year. Goldman reported earnings of $3.39 per share, easily besting estimates of $1.64 per share.
You may ask, what happened to December? It was not included in the previous quarter's release, nor in this release. Well, December appears at the end of the press release in its own little category.
What happened in December? I'm glad you asked. Goldman recorded a LOSS OF $2.15 per share. Add it together, and you come up with earnings of $1.24 for the four month total. I am not sure about how Wall Street analysts accounted for this, but it adds up to an earnings miss to me.
Here's the link to the Press release (PDF), please double check my understanding of the data. I would hate to bad mouth Goldman.
China's first quarter GDP probably lowest since 1992
China's annual gross domestic product growth in the first quarter was around 6%, down from 6.8% in the fourth quarter, a government researcher said on Wednesday. The comments give a clearer indication than an earlier report by the website of the official Shanghai Securities News, which said that growth in the first quarter was between 6.0% and 6.8%. Growth of around 6% would be the slowest since quarterly records began in 1992, and just below the pace of 6.3% expected by economists polled by Reuters. Asked what GDP was in the first quarter, Fan Jianping, director of the economic forecasting department of the State Information Centre, told reporters: "Around 6%."
The Shanghai Securities News website reported earlier that growth slipped to a record low in the first quarter, but that the quarter-on-quarter increase might point to a recovery. "China's annual GDP growth in the first quarter was higher than 6.0%, but lower than the 6.8% increase in the fourth quarter of 2008," the newspaper (cnstock.com) said without identifying its sources. Three sources familiar with government policy told Reuters that the first-quarter number was in fact in the low end of the range mentioned by the newspaper. The National Bureau of Statistics will announce GDP growth and other economic data for the first quarter at 0200 GMT on Thursday. Despite signs that economic activity is picking up, Fan said that it was too early to say the economy was about to recover.
"We do see some evidence pointing to an economic recovery, but we cannot confirm it as a clear and steady upward trend," Fan said. "We still need to watch more economic indicators in the coming months before we can make that judgment." Separately, the Shanghai Securities News website said that the State Council, or cabinet, would decide in a meeting on Wednesday whether to launch a new stimulus plan. Speculation has been rife in recent days that China might announce a new spending package focused on boosting consumption to follow up on the 4-trillion yuan (US$585-billion), two-year stimulus plan that it unveiled last November. The website cited Southwest Securities analyst Dong Xian'an as saying that annualised quarter-on-quarter growth was 6% in the first quarter, compared with 1% in the last three months of 2008. Last year's fourth quarter was the bottom for our economy and currently economic growth is evidently recovering, he said.
Fannie, Freddie Both Need CEOs
The likely departure of Herb Allison from Fannie Mae would leave both the mortgage titan and its main rival, Freddie Mac, scrambling to find new chief executive officers at a critical time in the government's efforts to revive the housing market. Mr. Allison is expected to be nominated to run the financial bailout efforts at the Treasury Department, according to people familiar with the matter. Freddie already is headed by an interim CEO, John Koskinen, in the wake of the abrupt resignation in early March of David Moffett, who held the post for just six months. Fannie and Freddie, the main providers of funding for home mortgages, are central figures in the Obama administration housing rescue plan, announced earlier this year. Under the plan, they're helping refinance loans for people with little or no equity in their homes, and seeking to revamp loans for others at risk of foreclosure.
The government seized control of the two companies in September, amid fears that their financial troubles would prevent them from maintaining a steady flow of money into home loans. Fannie and Freddie reported combined losses of about $108 billion for 2008. The two government-backed companies now are being kept alive by capital infusions from the Treasury. It isn't clear who would succeed Mr. Allison at Fannie. One possibility is that Michael J. Williams, a Fannie veteran who serves as chief operating officer, would temporarily take the CEO position as well. A Fannie spokesman declined to comment. The companies' regulator, the Federal Housing Finance Agency, or FHFA, also declined to comment. Finding successors for both CEO positions will be tricky. With the companies under government control, any CEO will have little autonomy and less scope for devising a long-term strategy. Compensation is likely to be meager by CEO standards. Any pay package totaling as much as $1 million a year likely would draw fire from the public and Congress.
Fannie and Freddie already are feeling political heat over their plan to pay about $210 million in retention bonuses to 7,600 employees over 18 months. The companies must seek approval from the FHFA for all major decisions, including hiring, firing and compensation of senior officials. Even speeches or interviews granted by executives are subject to the FHFA's veto. Mr. Moffett resigned partly because of frustration over the need to consult with regulators on all big decisions and to follow public-policy mandates that he didn't necessarily see as good for Freddie, according to people familiar with the decision. Freddie is beginning its search for a long-term successor for Mr. Moffett. It intends to hold a competitive "shootout" late this week and choose a search firm to find its new leader. Among the firms hoping to land the assignment are Korn/Ferry International, Heidrick & Struggles International Inc. and Russell Reynolds Associates Inc., according to people familiar with the situation.
Mr. Allison, who has described his post at Fannie as "a public-service job," has been working without any salary or bonus since he took the job in September, when the Treasury, working with the FHFA, appointed him at Fannie and Mr. Moffett at Freddie. Mr. Allison, 65 years old, spent most of his career at Merrill Lynch & Co. before heading TIAA-CREF, a retirement-fund manager for college employees. At Merrill, employees dubbed as "Herbies" a type of bonus he devised. He became head of investment banking in 1993 and later served as president, but resigned in July 1999. Mr. Allison had been told he wouldn't get the top job in the wake of a few missteps, including across-the-board job cuts in 1998 that had to be reversed when markets rebounded.
In 2002, he became CEO of TIAA-CREF. He sought to transform TIAA-CREF into a more diverse, full-service, financial-services provider. He also reduced the work force by 8%. Mr. Allison retired from TIAA-CREF in April 2008 and planned to do some writing. While on vacation on the Caribbean island of St. John, he got a phone call from then-Treasury Secretary Henry Paulson, asking him to head a government-sponsored company, which turned out to be Fannie. "I didn't have any time to deliberate, so I made a decision on the phone," Mr. Allison recalled in an interview months later. "I felt like saying no was not an option."
Anti-Obama Taxpayer Tea Parties steeped in insanity
The Web is buzzing with information about how to throw an anti-Obama Taxpayer Tea Party, something organizers hope will be held today from Santa Monica to South Carolina. But no need to burn up your bandwidth reading complicated instructions. Here's a simpler recipe: Go to a hobby store. Buy a scale model of a U.N. One-World-Government Black Helicopter and a tube of glue. Toss the model kit. Sniff the entire tube of glue. You're all set for the party. I can recall only a few outbreaks of such collective insanity as these tea parties in recent years. There was that time in the mid-1990s when a $19.95 video proving Bill Clinton was some sort of serial killer went viral. And then, a few years back, there was that chilling, televised midnight seance from the floor of the U.S. Congress aimed at reviving the long-brain-dead Terri Schiavo.
And now this. Whip out your Lipton and don your tinfoil hat and join the protest against ... against ... against what exactly? The original Boston Tea Party was caffeinated by a very simple injustice: American Colonists refused to be taxed by a government that lacked any popular representation. That was remedied a few years later in a heroic struggle that stretched from Concord to Yorktown. So, if you'll excuse the mixed metaphor, what's the beef behind today's protests? The Obama administration is cutting taxes for all except the very richest of Americans. Reduced withholding is already showing up in millions of paychecks.
Then again, this rash of tea parties is being organized not only by the pseudo-journalists at Fox News (with Glenn Beck, Neil Cavuto and Sean Hannity actively stoking the flames) but also by FreedomWorks, a conservative lobbying outfit headed by former House Majority Leader Dick Armey. I suppose it was Armey's constitutional if morally dubious privilege to have built an entire political career out of defending the wealthy. But are common folks actually going to dump Earl Grey into Santa Monica Bay because they are outraged, simply infuriated, by the marginal tax rate rising 3% for millionaires?
Or maybe they'll do it for some other reason. The FreedomWorks site says the Tea Party movement began in reaction to President Obama's corporate bailouts and ensuing yawning budget deficits. These same conservatives, however, were mum when George W. Bush erased our budget surplus and put us deep in the red by drunken spending on a pointless war in Iraq and by, yes, granting massive tax rollbacks for the loaded country clubbers who fund the GOP (and Armey's FreedomWorks). Another bothersome detail: The bailouts were also initiated by Bush. Nobody I know is very pleased with the billions ladled out to teetering banks and corporations. Yet a clear majority of Americans are sophisticated enough to know that these bailouts are a necessary evil and are intended -- unlike the lollipop Bush tax cuts -- not for personal profit but rather as a radical, emergency measure to help Americans keep their jobs, their homes and their retirement.
And while way too many otherwise sane Republicans are actively pandering to the tea-bag battalions, some old-fashioned conservatives are calling out the Teabaggers for their silliness. Writing in Fortune magazine, conservative policy analyst Bruce Bartlett, who has a long anti-tax history, says: "The irony of these protests is that federal revenues as a share of the gross domestic product will be lower this year than any year since 1950. ... The truth is that the U.S. is a relatively low-tax country no matter how you slice the data." The Tea Party movement, more than anything else, is a rather garish display of a Republican right that seems to have lost not only the national elections but also any semblance of political bearings. Staying on this course, the GOP risks -- in the words of one pundit -- becoming "the Talk Radio Republican Party." Better put that kettle on, Marge. It's going to be a long and bizarre four years.
Bernanke's PR Push Rewrites Fed Script
Ben Bernanke became Federal Reserve chairman intent on making the central bank less personality-driven than it was under Alan Greenspan and Paul Volcker. But as he confronts an economic crisis that has pushed the Fed to shatter precedent and lend trillions of dollars, Mr. Bernanke is waging a public-relations offensive that casts him in the starring role. The latest example came Tuesday at Atlanta's Morehouse College, where Mr. Bernanke delivered what amounted to an Economics 101 lecture on the crisis. On a day when the government said U.S. retail sales had fallen a worse-than-expected 1.1% in March, Mr. Bernanke told students he's "fundamentally optimistic" about the economy's prospects. After his speech, he sat with undergraduates at a table and took questions with television cameras rolling.
The Fed chief's efforts to speak plainly to Americans come on the heels of a March interview with CBS television's "60 Minutes" and a February appearance at the National Press Club in Washington, where he took questions from a crowd of journalists. Mr. Bernanke long has wanted the world's most influential central bank to be more open about its thinking. But now that the Fed is coming under often-blistering attack from Congress and its responses to the crisis have been met with confusion by the public, Mr. Bernanke is taking his campaign for openness in directions he hadn't anticipated. Bank officials are currently discussing whether to hold regular news conferences, people familiar with the matter say, as the European Central Bank already does. Mr. Bernanke's National Press Club appearance was seen by some in the bank as a dry run and as evidence they could pull off such conferences without disrupting markets. A decision on the move hasn't been reached.
"I think it is important for the public to understand what is going on and to know that the government is trying to solve the problem," Mr. Bernanke said in an interview. "They should know we have a plan and a strategy." The public-relations campaign comes with Mr. Bernanke's own future in question. President Barack Obama must decide later this year whether to reappoint the Fed chairman. Mr. Bernanke's term ends Jan. 31, 2010, and White House economic adviser Lawrence Summers is widely seen as a contender for the post. The White House, in response to a Wall Street Journal question, offered Mr. Bernanke high grades. It said President Obama had enjoyed a "positive and productive" relationship with him, calling his advice on the crisis "invaluable" and his broader efforts "critical to the country."
Mr. Bernanke's turn as the nation's Professor-in-Chief is a stark contrast to the public roles of his predecessors. Mr. Greenspan and Mr. Volcker liked to keep financial markets and lawmakers guessing about their next moves, in part because they felt it gave them more flexibility. Disclosing little, they were scrutinized much. Mr. Volcker's cigar-chomping performances on Capitol Hill were seen as a metaphor for the smokescreens he threw up to questions about interest rates. Mr. Greenspan, who took over from Mr. Volcker in 1987, did one on-the-record TV interview shortly before that year's stock-market crash and never did another as chairman. He almost never took questions after speeches. He delighted in his ability to obfuscate.
"I spend a substantial amount of my time endeavoring to fend off questions and worry terribly that I might end up being too clear," he joked to a room full of economists more than a decade ago. Mr. Bernanke, a Princeton university economist who joined the government in 2002 as a Federal Reserve governor, was among the academics and economists who argued that markets operate more smoothly if participants understand central bankers' rules and processes. He advocated setting inflation targets to make the Fed's goals clear to all. He felt the Fed had become too driven by its chiefs' outsized personas. He was co-author of papers on the need for the central bank to depersonalize and explain itself. "You shouldn't be treating the central bank head as a semi-divine authority who then might turn out to be a false god," says one of Mr. Bernanke's co-authors, Adam Posen of the Peterson Institute for International Economics.
When Mr. Bernanke took over the Fed in February 2006, he promised more detailed and timely forecasts for its primary audience of traders, investors and the financial media. Such views would represent the collective opinion of the Fed's governors and regional bank presidents, playing down the persona of the chairman. But the financial crisis has forced Mr. Bernanke to explain the Fed to those well beyond the old circle of bond traders and professional Fed watchers -- efforts that are winning him some praise from advocates of a more open central bank. "The American public is seeing things happening that it doesn't like and doesn't understand and nobody is really explaining it to them," says Alan Blinder, a Princeton professor and former Fed vice chairman. "That was true in the Bush administration and it remains largely true in the Obama administration. The Fed is filling the void."
Fed officials have been struck by the public response to Mr. Bernanke's "60 Minutes" appearance, which took him to his home town of Dillon, S.C., to reminisce about his modest upbringing and to visit his childhood home, which a subsequent owner recently lost to foreclosure. Strangers have been coming up to him in airports and supermarkets to compliment him. One Fed employee approached him in the Fed's top-floor cafeteria after the television interview. She told him she was touched to learn his mother was reluctant to send him off to Harvard as a teen because he didn't have the proper clothes. Mr. Bernanke, who taught an introduction to economics class to Princeton freshmen, is known for lectures that are clear, not flashy.
The title of his Morehouse lecture, "Four Questions about the Financial Crisis," is an allusion to a ritual in the Jewish religion in which adults explain the Passover holiday to children. His questions: How did we get here? What's the Fed doing about it? Is there a threat of inflation? Why did the Fed bail out some large firms? Yet as Fed chairman, he has also stumbled in communicating some messages. Early in his tenure, an offhand cocktail-party comment to a CNBC television reporter became a market-moving event that made him look unsteady in the spotlight. More recently, Mr. Bernanke has confused some investors by thinking out loud about new policies. He suggested in December the Fed might begin buying Treasury bonds. Bond prices tumbled when the Fed backed away from the move in January. Then it followed through in March and announced a $300 billion program of purchases.
Meanwhile, the financial crisis has generated calls for yet more disclosure. The Fed used powers outlined under a Depression-era law -- permitting it to make loans to almost any institution in "unusual and exigent" circumstances -- to arrange the takeover of Bear Stearns Cos. in March 2008. It turned to the law several more times since, coming to the aid of American International Group Inc., a messy rescue that Mr. Bernanke himself has identified as the episode in the past 18 months about which he is most unhappy. U.S. lawmakers have since demanded that the often-secretive central bank disclose even more about which institutions are receiving Fed loans, what collateral it is taking in return and whom the recipients of Fed loans are in turn lending to.
"We need to know where, who benefited, where this money went," Sen. Richard Shelby of Alabama, senior Republican on the Senate Banking Committee, said in March. "The Fed can be, and the Treasury can be, secretive for awhile, but not forever." Sen. Shelby and Sen. Christopher Dodd (D., Conn.), the committee's chairman, proposed a nonbinding resolution this month demanding that the Fed disclose broad information about those receiving its loans. The resolution passed 96-2. The Government Accountability Office, meanwhile, is pushing for authority to audit the Fed more closely. Mr. Bernanke is responding with stepped-up efforts to explain the Fed to Congress. The central bank has been hosting congressional staff in briefings on how the Fed works, and Mr. Bernanke has been popping in to introduce himself. The Fed chief is also scheduling more meetings with lawmakers, armed with handouts explaining how the Fed's balance sheet works.
In the weeks ahead, the Fed is likely to provide more information on the collateral it holds on loans to AIG, Bear Stearns and in some programs such as one meant to revive the commercial-paper market, say people familiar with the matter. That could include information on credit ratings of debt held as collateral and the geographical distribution of mortgages backing its loans. Mr. Obama met with Mr. Bernanke in the Fed chairman's office before the election. At the meeting, Mr. Obama emphasized his respect for the Fed's independence. But there have been awkward moments since. Friends and associates of the central bank chief were appalled in November when word leaked out of Mr. Obama's transition team that Mr. Summers could be a successor to Mr. Bernanke. "It was a terrible thing to start lame-ducking the chairman of the Fed a year before his term is over," says Mr. Blinder.
Still, Mr. Bernanke speaks frequently with Mr. Summers, Treasury Secretary Timothy Geithner and Christina Romer, the chairwoman of the White House Council of Economic Advisers, say people familiar with the conversations. He has a weekly lunch with Mr. Geithner -- a tradition for Treasury and Fed chiefs -- and he has joined White House economic advisers at two recent briefings with Mr. Obama. Friends say Mr. Bernanke isn't focused on his reappointment. Mr. Bernanke says his focus is on getting "the best possible outcome for the U.S. economy. Everything I do is with that in mind."
US Budget Cuts Bear Down on Parks
The dire economy could make it harder to enjoy the great outdoors. From Nevada to New York, state parks across the country are facing budget cuts -- in some cases steep ones -- just as they are anticipating another busy season. Officials in several states say there will be less money to employ workers to clear trail brush or repair footpaths. Restrooms will be shuttered. Some lakes and pools will be closed weekdays, or altogether. Some parks will have shorter seasons or curtailed hours, or bar the public from eating at certain picnic areas or sunbathing on certain beaches. The economic downturn has led to lower tax revenues for most states, and federal stimulus money can't be used to patch holes in state operating budgets.
"It's rare if a state is not having pretty serious problems," said Philip K. McKnelly, the executive director of the National Association of State Park Directors. He said many states expect their parks budgets will be cut 10% to 15% from the year before. The hits to state parks are unfolding a year after skyrocketing gas prices kept people close to home, leading to a record number of visitors at state trails, lakes and pools. This year, while gas prices are expected to be lower, families that are nervous about job losses and conserving money are expected to flock to state parks, where a day's outing is typically far cheaper than one at a private amusement park.
New York state's legislature recently approved a $172 million parks budget, $28 million less than in the current fiscal year. That has forced park officials to cut park hours and visitors' services from Niagara Falls on the Canadian border to Jones Beach on Long Island Sound. Georgia lawmakers, who have shaved millions of dollars from parks budgets in recent years, recently approved $17 million in appropriations for the fiscal year starting July 1, $10 million less than the current year's spending. State-run pools won't open this summer, said Kim Hatcher, a parks spokeswoman. The state will entertain proposals from private companies interested in running the golf courses and camp lodges.
Some Georgia residents in this down economy are balking at the higher costs that private companies charge at state parks. Louise Canady, a retired educator in Perry, Ga., said her 60-person family reunion this year will avoid Georgia Veterans Memorial State Park in Cordele and its privately run restaurant, and opt for a beach location instead. "I hate it because I liked the atmosphere at the park," she said. But "a young couple simply cannot fork over that kind of money." In Idaho, Gov. Butch Otter has proposed slashing funding for parks from $16 million to $7 million for the next fiscal year, which begins July 1. The state's park and recreation board will decide in May which services to cut. Among the possibilities: delaying maintenance, employing more volunteers instead of seasonal workers and even closing some of the 30 state parks.
The Nevada Legislature is expected to cut its state park budget by 21%, or $3.2 million, a move that will close two parks later this summer and seven others in the late fall and winter. The cuts won't affect the state's two most popular parks, the Lake Tahoe Nevada State Park and Valley of Fire State Park, which will stay open all year and remain fully staffed. In New York, Niagara Falls State Park will trim the hours and days it operates the visitor center and the Cave of the Winds tours. State parks on Long Island will cut programs, including a children's summer theater and a Shakespeare production. The state is trying to find businesses or other local sponsors that might pick up the tab.
Jones Beach State Park in Wantagh, Long Island, will open just one of its two swimming pools and bar visitors from 1.5 miles of beachfront -- more than one-sixth of its shoreline. Water activities took a bigger hit because lifeguard and maintenance costs are higher than other kinds of recreation, said Eileen Larrabee, a spokeswoman for New York state parks. Some residents worry that such a cut will discourage visitors, further draining the local economy. "I think it will make the rest of the beach more congested," said Moke McGowan, president of the Long Island Conventions and Visitors Bureau. "The experience won't be as enjoyable."
Schwarzenegger to Seek Obama Backing for Government Note Sales
California Governor Arnold Schwarzenegger and state finance officials plan to press the federal government to insure the short-term debt that local governments rely upon to pay their bills. California and its municipalities say they need to sell $15 billion of such obligations in the next several months. The officials want the federal government to provide guarantees that investors will be repaid if localities default on the notes they sell to fund day-to-day expenses as they await for tax receipts, according to a draft copy of the letter to be sent to President Barack Obama and members of Congress. "Currently, we have only limited access to the credit markets, and banks have shown little interest in enhancing government-issued debt in a declining market," the letter said.
States, cities and towns have struggled to arrange bank guarantees against their notes’ default. Without that insurance, lower-rated jurisdictions can’t sell their securities to money- market funds, a key buyer of short-term debt. The credit difficulties come amid declining tax revenue for local governments because of the economic recession. Widening budget gaps have pressured the credit ratings of California and other governments, which pushes up their interest costs as they seek to borrow funds to maintain operations. Besides Republican Schwarzenegger, those backing the plea for support from Washington are Treasurer Bill Lockyer and Controller John Chiang, both Democrats, as well as the California State Association of Counties and the League of California Cities. Text of the letter was provided to Bloomberg by Paul McIntosh, the executive director of the counties group.
Garin Casaleggio, a spokesman for Chiang, confirmed the proposed plan. H.D. Palmer, a spokesman for Schwarzenegger’s finance office, declined to comment, as did Tom Dresslar, a spokesman for Lockyer. The California officials say they would be willing to pay the federal government for the guarantees, just as they do banks. Moreover, they say it places the U.S. at little risk given a low probability of default. "This program would not require the federal government to spend or reserve significant capital because state and local governments rarely ever default on debt," according to the letter.
Municipal bonds secured by a pledge of taxes, such as city and state debt, had a cumulative default rate of 0.03 percent from 1986 to 2007, according to a March 2008 Standard & Poor’s review of the bonds it rates. McIntosh said the federal government’s support would help 40 municipalities that can’t participate in the California State Association of Counties note sale pool this year because of tightened credit standards. The arrangement is expected to total about $971 million and is being insured by U.S. Bancorp’s US Bank, according to the association. "The problems with the credit markets have put us in this position," McIntosh said.
Hedge Fund Executive Guilty of Securities Fraud
A hedge fund executive has pleaded guilty to securities fraud and is cooperating with New York State Attorney General Andrew M. Cuomo’s investigation of corruption at the state pension fund, according to court records unsealed in Manhattan on Tuesday. Barrett Wissman, a Dallas business associate of the Hunt family, is the first investment executive to be implicated in the inquiry and will pay $12 million over several years as part of a settlement under his felony plea, people with knowledge of the investigation said. Mr. Wissman has emerged as a central figure in the pension case, which is being jointly investigated by Mr. Cuomo’s office and the Securities and Exchange Commission.
Mr. Wissman received millions of dollars in fees as an intermediary between the pension fund and other investment firms. Such fees are not illegal, but often raise concerns about conflicts of interest and would be illegal if used to generate kickbacks to public officials. Prosecutors suggest that Mr. Wissman did little for the money other than trade on his access to the state officials. Mr. Wissman’s cooperation could be problematic for the Carlyle Group, the prominent private equity firm, whose activities are also being scrutinized for possible civil violations along with a number of other investment firms. Mr. Wissman was paid $5 million for helping to arrange a $500 million investment of state pension money in an energy fund run by Carlyle and another private equity firm, Riverstone Capital.
Mr. Wissman was also a managing director for HFV Asset Management, which manages money for the Hunts, the wealthy Texas oil family that owns the Kansas City Chiefs football team. An investment fund managed by HFV has been mentioned in court filings related to the investigation, but the Hunts themselves have not been implicated in the case. The records unsealed on Tuesday revealed that Mr. Wissman pleaded guilty March 31 to a felony securities fraud charge and a related misdemeanor, both under the Martin Act, a state securities law that gives the attorney general broad prosecutorial powers.
"From 2004 to 2007, Mr. Wissman acted as a finder in connection with certain investments that were presented to the New York State Common Retirement Fund," said William A. Brewer III, a lawyer for Mr. Wissman, in a statement. "Mr. Wissman acknowledges that he has pled guilty to Martin Act violations. He takes full responsibility for his conduct and is cooperating in the ongoing investigation by the New York attorney general’s office. As such, he declines to make any further statement." A spokesman for Mr. Cuomo’s office had no comment Tuesday. Last month, Mr. Cuomo’s office brought a 123-count indictment against two aides to the former state comptroller, Alan G. Hevesi, accusing them of selling access to the state’s $122 billion pension fund and reaping millions of dollars for themselves. The two aides are Hank Morris, who was Mr. Hevesi’s top political consultant, and David Loglisci, who was the chief investment officer of the pension fund.
The S.E.C. brought a parallel action against the two aides, accusing them of violating several securities laws. Lawyers for Mr. Morris and Mr. Loglisci have adamantly denied wrongdoing on the part of their clients. One of the steps Mr. Wissman took to curry favor was investing $100,000 in a film called "Chooch" that was produced by Mr. Loglisci, according to court filings. Mr. Hevesi resigned in late 2006 after pleading guilty to an unrelated felony. The Carlyle Group had no immediate comment on Mr. Wissman’s role in the case. Carlyle manages $1.5 billion of the state’s pension assets. On Monday, Christopher Ullman, a spokesman for the firm, said Carlyle was cooperating fully in what it called "an industrywide investigation" and had done nothing improper. Mr. Wissman’s involvement with Carlyle began because he was longtime friends with Mr. Loglisci, who was himself a friend of a top Riverstone executive, David Leuschen, according to court filings and people with knowledge of the investigation.
Riverstone, which operated the energy investment fund along with Carlyle, denied any wrongdoing in a statement Monday. Mr. Wissman is described as having played a major role in encouraging the state pension fund to expand into hedge funds. The S.E.C. complaint brought against the Hevesi aides last month said that a hedge fund manager affiliated with HFV, then identified only as "Individual A," paid Mr. Morris "in exchange for causing the Retirement Fund to expand its investment portfolio to include hedge funds" and to make the Hunt fund one of the first to attract state money. The latest court filings make clear that "Individual A" is Mr. Wissman. Mr. Wissman’s guilty plea is specifically related to his role in facilitating pension investments for Access Capital, a European company that markets a so-called fund of funds — an investment fund that invests in a variety of private equity firms.
According to new court filings released on Tuesday, Mr. Wissman helped Access win more than $500 million worth of business from the New York State pension fund and was rewarded with $1.5 million in fees. But according to the felony complaint, he misrepresented to Access how he was getting the business. While he told the company he would not share his fees with a third party, he did just that, court records say. He was paid $2.4 million and "then secretly transmitted approximately 33 percent of that amount, more than $790,000" to two firms affiliated with Mr. Morris, according to the S.E.C. complaint. According to the court records unsealed Tuesday, Mr. Wissman "engaged in fraud, deception, concealment" and "made material false representations and statements with intent to deceive and defraud."
Solution to Japan's Jobless Problem: Send City Workers Back to the Land
Kenji Oshima lost his job in February at a seat-belt factory. So he applied for a highly competitive job-training program in an area he felt had more potential: farming. The 35-year-old, dressed in his old factory uniform, spent a recent morning in a remote village three hours from Tokyo. He was digging an irrigation ditch around a rice paddy, contemplating which tool was more effective, a hoe or a shovel. "I know it's a hard life" compared with his former job as a bookkeeper, Mr. Oshima said. "But I want to become a farmer and use my own hands to do everything, from sowing seeds to shipping boxes." He hopes to soon rent land nearby to start farming full time.
As the global financial crisis sinks Japan into its worst recession since World War II and hundreds of thousands of jobs are slashed in factories and offices, farming has emerged as a promising new career track. "Agriculture Will Save Japan," blared a headline for a business weekly magazine. Farmer's Kitchen, a popular new Tokyo restaurant, plasters its walls with posters of hunky farmers who supply the eatery with organic vegetables. Seeing agriculture as one of the few industries that could generate jobs right now, the government has earmarked $10 million to send 900 people to job-training programs in farming, forestry and fishing. Japan's unemployment rate was 4.4% in February, up from 3.9% a year earlier, but still lower than the U.S. or Europe. Some economists expect the figure to rise to a record 8% or so within the next couple of years.
Policy makers are hoping newly unemployed young people will help revive Japan's dwindling farming population, where two in three full-time farmers are 65 or older. Of Japan's total population, 6% work in agriculture, most doing so only part time, down from about 20% three decades ago. "If they can't find young workers over the next several years, Japan's agriculture will disappear," says Kazumasa Iwata, a government economist and former deputy governor of the Bank of Japan. Mr. Oshima and eight other young prospects, including a software engineer and a former teacher, snared spots in a 10-day state-funded program after beating out 110 other applicants and writing passionate essays about their interest in farming.
But life in the sticks is no vacation. The nine trainees in Masutomi, a mountain village with 650 residents, were housed in an abandoned inn with a single bathroom with no shower or flush toilet. With no mirror in sight, one trainee struggled to put in his contact lenses. They huddled around a single kerosene heater in the kitchen when the temperature dipped below zero. "On my first day, I went to sleep feeling cold and woke up feeling cold," said Mami Hinataze, a 23-year-old woman from a Tokyo suburb who worked at a cafe until recently. Later, Ms. Hinataze learned to use six layers of covers to keep warm at night. Then there was the grueling workload, which included setting up a greenhouse and collecting chicken droppings from a poultry farmer to use as fertilizer. One afternoon, the trainees tackled weed-picking with enthusiasm, competing to see who could dig up the largest clump. But soon, the conversation turned to a nearby hot spring they all wished they could visit to ease their achy muscles.
"It's kind of tiring, I mean mentally, to get covered with dirt," said Hironari Ota, a 25-year-old who used to work at an online retailer. Mr. Ota, the son of a Tokyo pawnshop owner, said he still wasn't sure he wanted to become a full-time farmer, but liked the idea of having a job that didn't require handling money. "What I really want is to go live in the woods by myself," he said, revealing that he had brought with him a translated copy of Henry David Thoreau's book "Walden," about simple life in a wood cabin. Despite the popularity of the training programs and of the government's longer, one-year farm internships, many young people end up returning to cities, unable to adjust to life in the countryside. Last year, Fukiko Oshiro, a farmer in western Okayama prefecture, hired five workers from cities like Osaka, including a couple of former salesmen, to work at her nursery and fruit farm. She says she has already lost three of them.
"These young people think it's their right to come and impose on us," says Ms. Oshiro as she surveyed her busy farm stand recently. "They have no idea how much work we put in to teach them." Since the beginning of the year, says Ms. Oshiro, her farm has received a flood of résumés from people affected by the recession, including some let go from a nearby assembly plant of Mitsubishi Motors Corp. While Ms. Oshiro needs more workers for her expanding farm, she doesn't have high expectations for these applicants. "At least people who came before were interested in agriculture," the 49-year-old says. "These new applicants are coming because they have no other choice."
The Masutomi trainees soon discovered that farm life left no time for soaking in a hot tub. After the day of weed picking, they spent the evening around a kitchen table sorting out last year's crop of beans. Yuichiro Oguro, a young local farmer who served as their instructor, came to share his experience of settling in a small village where traditional values and old-fashioned customs still rule. As an employee of a nonprofit group that works with the government, corporations and families, Mr. Oguro also plays host to groups from cities coming to experience country life for anywhere from a few hours to a year. After spending several years traveling around the world by bicycle, Mr. Oguro says he came to Masutomi four years ago to join his wife, a former aid worker who started organic farming. To persuade villagers to rent their land to him, Mr. Oguro said he joined a volunteer fire squad, attended local funerals and wooed the village elders by accompanying them to "hostess bars" where women entertain male customers.
"You have to learn to fit in," said Mr. Oguro, a goateed 30-year-old whom some trainees describe as a skinny version of Ichiro Suzuki of the Seattle Mariners. The trainees soon had their first taste of a close-knit community. A neighbor living across the valley spotted a light in their house well past 11 p.m. He took the trouble of driving by the next morning to deliver a message: Farmers need a good night's sleep to stay strong.
UBS sees $1.75B Q1 loss, to cut 8,700 jobs
UBS AG, Switzerland's largest bank, said Wednesday it expects a first quarter loss of nearly 2 billion Swiss francs ($1.75 billion) and announced plans to cut 8,700 jobs worldwide by the end of next year. The job cuts will hit the United States and Switzerland particularly hard because that is where the bank has its largest payrolls, a bank spokesman said. The bank said clients have continued to withdraw their money from the bank in the wake of its decision to cooperate more closely with foreign authorities over tax evasion. The company, which has been hard-hit by subprime-related losses, said it will "adapt its size to the changed market conditions and lower levels of business." It said it expects cost savings of 3.5 to 4 billion francs by the end of 2010 compared to 2008 levels.
In prepared remarks for the annual shareholders meeting, new Chief Executive Oswald Gruebel said the bank knows where it has to set to work. "It will be a long road back to success without any quick fixes," said Gruebel. "Rather, we will move forward step by step in a rigorous and disciplined manner." Gruebel said the bank plans to cut 2,500 jobs in Switzerland, where more than one-third of the global staff is based. Spokesman Serge Steiner gave no breakdown by country but said the impact on the U.S. employees would also be heavy because that is another major center of UBS operations. The bank says 38 percent of its employees are in the Western Hemisphere. The areas to suffer the most cuts will be the so-called mid- and back offices -- mostly support jobs without direct customer contact, said Steiner. Overall, UBS expects to cut its workforce to 67,500 in 2010 from 76,200 in 50 countries at the end of March.
The bank, which already has suffered billions of dollars of losses over the past two years and received a bailout from the Swiss government, said it "estimates that it will report a loss attributable to shareholders of almost 2 billion francs in first quarter 2009." It said the shortfall is due mostly to losses of about 3.9 billion francs on previously disclosed bad investments, credit loss expenses and adjustment in values of toxic assets. The company's share price plunged as much as 8.7 percent in early trading on the Zurich exchange, before recovering somewhat to fall only 0.8 percent to 13.16 francs ($11.46). UBS said its wealth management and Swiss bank division recorded an outflow of net new money totaling 23 billion francs. That occurred mainly after the announcement of a settlement with U.S. authorities over their investigation into UBS's alleged assistance to wealthy Americans seeking to avoid paying U.S. taxes.
At the same time it said its wealth management Americas unit recorded net new money of around 16 billion francs. The bank said it still expects to have a tier 1 capital ratio of about 10 percent at the end of the first quarter, and that it would continue to reduce risks and was conducting a review to decide which high-risk and unpromising businesses it will exit. UBS has been in a showdown with Washington over wealthy American tax evaders. It has provided U.S. investigators the bank details of up to 300 wealthy Americans suspected of tax fraud, but has refused to identify about 50,000 more U.S. account holders Washington wants. The Swiss bank has previously announced a $780 million fine and restitution package agreed with U.S. authorities to settle the tax evasion investigation. Full first-quarter results and other details about the bank's plans will be released May 5, it said.
Harder-Edged Warnings About Britain’s Economy
In the dank gloom of the factory that he and his fellow workers had just occupied, John Horscroft recalled a time 30 years ago when strikes and industrial unrest in Britain were an everyday occurrence. "It feels like those days again," said Mr. Horscroft, who with 226 colleagues was laid off when a car parts factory in North London was shut down last month after its American parent company, Visteon, put three British plants into bankruptcy protection. "We are all together now, fighting for a cause." As job losses accumulate here, along with the government’s debt burden as it tries to fight the ravages of recession, Mr. Horscroft’s nostalgia has been joined by harder-edged warnings — from no less a critic than former Prime Minister Margaret Thatcher — that Britain’s deteriorating public finances might require the government to seek aid from the International Monetary Fund, just as it did back in 1976 when the country’s economy was on its knees.
As remote as that possibility might be, it underscores the financial bind Britain is in and represents another humbling comedown for a country that once had ambitions to overtake New York City as the world’s financial capital. Speculation that Britain may once again seek monetary fund assistance — and become the first major western European country to do so in this financial crisis — rests upon a crucial, uncertain assumption: that the combination of its steep debt and wounded banking sector will put too much pressure on the already wobbly pound. The numbers are worrisome. Britain’s budget deficit is 11 percent of its gross domestic product, compared with 13 percent forecast for the United States this year. Analysts say that without severe spending cuts and tax increases, government debt will jump to 80 percent of the overall economy in the coming years, from today’s level of about 40 percent, a ratio that approaches that of troubled economies like Greece and Italy.
So far, investors have been willing to finance Britain’s debt at relatively low interest rates, unlike in countries like Hungary and Latvia, whose reserves have been drained, leading them to turn to the I.M.F. for support. Last month a failed British government bond auction in London sparked some fear, but subsequent debt sales have been successful. That could change, according to Simon Johnson, the former chief economist of the I.M.F., if those now holding British assets lose confidence in the government’s ability to pay its debts and start abandoning the pound in droves, as they did in 1976. In contrast to some of its troubled European partners like Ireland, Spain and Greece, Britain did not adopt the euro and is thus more vulnerable to a run on its currency. If the situation worsens, turning to the monetary fund may be the best alternative, Mr. Johnson said.
"If you have a budget problem and a banking problem, the bottom line is that you need to make adjustments," he said. "And an I.M.F. loan can make Britain’s life easier, not harder. They may have to do it." Mr. Johnson’s views are decidedly in the minority here, and even he considers the likelihood that Britain will face such a situation to be remote. Still, he and the financier George Soros, who made $1 billion betting against the pound in 1992 and who has also cautioned about the possibility of a monetary fund bailout, have attracted considerable attention. Their views signal a growing fear that Britain, like some other countries that spent and borrowed from abroad with abandon, may be hit with a bill that it would have trouble handling. Ireland has a deficit of 10 percent of G.D.P. and a banking system that is in worse shape. Greece has the largest current account deficit in Europe at 12 percent of G.D.P. But Britain is the only one with its own currency to defend.
The British scoff at the idea that they may need help from the I.M.F. At the Group of 20 summit meeting two weeks ago, Prime Minister Gordon Brown said his Labor government had no plans to seek such assistance. The 1976 agreement with the monetary fund was not only seen as a national embarrassment, it remained a symbol of a country that, under various Labor governments, effectively lost control of the economy to militant trade unions, resulting in spiraling debt and rampant work stoppages that brought down Britain. So it is no wonder that Mr. Brown would reject any comparison to Britain in 1976. Kathleen Burk, a historian at University College London, one of the authors of an account of the crisis in "Goodbye, Great Britain," argued that the economic situation today might well be dire but it bore little similarity to the Britain of that period when, as she recalled, even the gravediggers were on strike.
And while Mr. Horscroft and his fellow Visteon workers may look wistfully to the days of nationwide worker revolts, the numbers tell a different story. In January, the British economy lost seven days to work stoppages compared with a combined 2,966 lost employee-days in the same month 30 years ago, according to the Office for National Statistics. Still, Britain’s situation is likely to get worse before it gets better. "It is not that debt of 80 percent of G.D.P. is unsustainable," said Gemma Tetlow, an economist at the Institute for Fiscal Studies, a nonpartisan research group based in London. "It is that without fiscal adjustments, the debt could grow indefinitely to 100 percent and beyond. And the evidence suggests that the higher your debt," she added, "the more your borrowing costs increase."
As the lesson of Britain’s crisis in 1976 demonstrates, good intentions are not enough to offset a loss of international investor confidence. Before the 1976 agreement, the Labor government of Prime Minister James Callaghan had already taken difficult steps to curb public wages and bring down the deficit, which at 5 percent of G.D.P. was about half of what Britain’s current gap is. But for foreign investors fed up with years of government excess, that was not enough and they unloaded their sterling holdings, starting the run on the currency that would drive Labor into the arms of the monetary fund. At the time, Mr. Callaghan delivered an assessment of Britain’s finances that resonates today. "We have been living on borrowed time," he said. "We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that that option no longer exists."
Later this month, Mr. Brown’s government is expected to present an especially austere budget to avoid turning to the I.M.F. like Mr. Callaghan did. "This would destroy the Labor Party," said Ms. Burk, the historian. "It is one thing if you are Hungary or Zambia. But the idea that the United Kingdom is so weak that it cannot support itself without going to the I.M.F. would be system-shaking."
S&P expects a third of Europe's junk bonds to default
A third all of junk bonds in Britain and Europe are likely to default over the course of this crisis as the debt-driven excesses of buy-out boom come back to haunt, according to a new report by Standard & Poor's. "The downturn in the real estate and construction sectors, the sharp rise in unemployment, reduced consumption and investment, and the liquidity squeeze have converged," said the rating agency. S&P has downgraded its forecast sharply, warning that 30pc to 35pc of all sub-investment grade companies (BB+ or lower) will file for bankruptcy, miss payments, or face forced restructuring between now and the end of 2011. This compares with a default-rate of 23pc from peak to trough after the dotcom bust earlier this decade. Companies took advantage of the credit bubble to refinance at super-cheap rates and stretch their loan maturities.
While this bought valuable time, a crunch looms nevertheless in 2010 and 2011 as they struggle to roll over debts at a much higher cost – if possible at all – in a hostile market. "Refinancing may be very difficult to arrange," said the report, citing property, commodities, hotels, and the car industry as the most vulnerable. Utilities and telecoms are more sheltered. America has led the surge in global defaults because they are a year or so ahead in the cycle, but Europe is at last catching up. A Deutsche Bank report predicted that half of Europe's high-yield market would ultimately default. The top casualty so far is Dutch-based LyondellBassell, the world's third biggest chemical group, which defaulted in December on debts of $18.9bn, stemming mostly from a leveraged buy-out by Russian-American tycoon Len Blavatnik in 2007.
Europe's Left cites the Lyondell purchase as a textbook case of 'moral abuse' by private equity firms using debt-leverage to take over companies with little regard for the long-term interests of "stakeholders", essentially the workforce and local community. The company is slashing 30pc of its staff and closing 10 plants to stay afloat. What infuriates critics is that firms being taken-over are saddled with the debt, and therefore pay the price if it all goes wrong. Ieke Van den Burg, a Socialist MEP from the Netherlands, said draconian legislation at EU-wide level is needed to restrict such practices. "These buy-outs are not acceptable. Companies are not just an investment tool for private-equity trying to turn a profit without caring about the long-run. They are part of the real economy," she said.
Britain is the headquarters of the Europe's private equity industry so it is no surprise that 13 of 33 companies that defaulted in the region last year were UK firms, most of them the result of leveraged buy-outs using new-fangled debt instruments such as collateralized loan obligations (CLOs). However, defaults tend to show up sooner in Britain because the legal machinery makes it easier for creditors to work out an arrangement with a company in distress that may be classified as a breach of loan terms but still benefits both sides. Under Europe's more rigid system, companies tend to struggle on until the bitter end. This creates a cliff-edge effect of mass defaults late in cycle of a downturn. S&P said defaults began to surge in the fourth quarter of last year when 22 companies failed, more than in the last four years combined. It fears defaults may reach 112 this year and the same again in 2010, reaching 29.4pc of all low-grade companies that it rates in Europe over just two years.
Bundesbank president makes case against market intervention
Direct intervention in financial markets is not the top priority for the European Central Bank, a leading ECB policymaker has argued, highlighting the bank’s reluctance to follow emergency steps taken by US and UK monetary authorities. Axel Weber, German Bundesbank president, said exceptional steps taken by the ECB were lowering market interest rates noticeably – sometimes faster than in the US. The ECB should remain focused on working through the banking system, which plays a greater role in providing finance to the economy, Mr Weber maintained. Other possibilities – including the outright purchase of corporate or government debt – should "stand lower" in the priority list.
Earlier this month, the ECB’s 22-strong governing council shelved until next month decisions on a possible package of "non-standard" measures to combat the eurozone’s recession, the worst to hit continental Europe since the second world war. Mr Weber’s comments in a speech in Hamburg suggested a significant lobby within the council remains opposed to radical new steps. The US Federal Reserve and Bank of England have embarked on "quantitative" or "credit easing" programmes that side-step the banking system. Since October, the ECB has slashed its main policy rate by 300 basis points to 1.25 per cent, a historic low. Its extra emergency measures have focused on so-called "enhanced credit support" by which the ECB supplies unlimited amounts of liquidity to the banking system at a fixed interest rate. Mr Weber argued that the maximum period over which such liquidity is provided could be extended beyond the current six months maximum.
But the Bundesbank president stressed that market interest rates were responding to the ECB’s actions, with 12-month rates lower in the eurozone than in the US, even though the ECB’s official policy rate was higher than that of the US Fed. Bundesbank research showed that 75-80 per cent of the interest rate cuts unveiled by the ECB had been passed on to the short-term corporate credit market – which was a "typical reaction pattern". Likely to have strengthened Mr Weber’s convictions has been a sharp fall recently in the use of the ECB’s "deposit facility". After the collapse in Lehman Brothers last September, banks took advantage of the ECB’s unlimited liquidity provision, but, rather than lending to others, simply parked the funds back overnight at the ECB – sending use of the deposit facility soaring to more than €300bn in January. But this week, the daily use has fallen to around €22bn.
The sharp decline showed banks "need this comfort blanket less," said Julian Callow, European economist at Barclays Capital. Mr Weber repeated his opposition to cutting the ECB’s main policy rate below 1 per cent, which he feared would create damaging economic distortions, and saw no room for cutting further the deposit facility rate – which has become an important benchmark for market interest rates and is currently just 0.25 per cent. The Bundesbank president also expressed satisfaction that the G20 summit of world leaders in London earlier this month had not pushed for further fiscal stimulus programmes in industrialised countries. Germany had already taken considerable steps in boosting government spending, he argued, but the main effects had yet to be felt. Stressing the importance of long-term fiscal sustainability, he argued Germany played an important role as an "anchor of trust" within the European Union.
Yushchenko backs measures to get Ukraine IMF loan
Ukraine's president on Wednesday backed anti-crisis measures ordered by his political rival, Prime Minister Yulia Tymoshenko, who circumvented the feuding parliament in order to meet conditions for receiving more loan money from the International Monetary Fund. President Viktor Yushchenko's approval of the measures wasn't officially required, but his support indicates that the reforms won't be bogged down in further disputes. That offers hope for a prompt transfer of a $1.9 billion installment of a $16.4 billion IMF loan to rescue an economy devastated by the global credit crunch. Tymoshenko on Tuesday adopted a package of reforms which are normally the realm of parliament, after lawmakers failed to pass the bills for months because of bitter infighting. The reforms are aimed at trimming government spending and include increasing pension fund payments for businesses and raising electricity and heating bills for well-off consumers.
The IMF wants Ukraine to run a budget deficit not exceeding 3 percent of economic output. Yushchenko said he viewed the government's decision "solely positively," although he said that some of the reforms may need to be adjusted. Tymoshenko's move, however, prompted outrage in parliament. Inna Bogoslovskaya, of the opposition Party of Regions, called the move "a usurpation of power." Meanwhile, speaking at a government meeting, Tymoshenko noted "modest trends" of economic revival, saying the industrial output was shrinking less than in previous months. Industrial production contracted by 30.4 percent in the first three months of this year, compared to the same period last year, according to official statistics published Wednesday, but March output rose by 8.3 percent compared to February figures.
Green Shoots over Thin Ice
In recent weeks, the financial markets have taken enormous hope from economic data that has outpaced depressed expectations – generally only slightly, but uniformly enough to encourage investors that the "green shoots" of recovery are in place. Careful. We've seen a nice bounce to clear an oversold condition, coupled with the very ordinary "ebb and flow" of economic data that periodically offers intermittent relief even in the worst economic downturns. What we haven't seen to any real extent is "revulsion." Quite to the contrary, investors have frantically bid up the worst credits – distressed financials, homebuilders, and heavily leveraged cyclicals, while the percentage of bullish investment advisors has quickly surged above the percentage of bearish advisors.
As veteran market observer Richard Russell noted following a tribute Saturday evening, "one question that was asked repeatedly was ‘What is the difference between investors' sentiment now and that which existed at the 1974 bottom?' My answer was that there is a lot of complacency today. In fact, many leading analysts are already saying that ‘this is a new bull market.' … At the 1974 bottom, the sentiment was the opposite -- people and funds were black-bearish. Nobody talked about ‘the danger of missing this advance.' In fact, when I turned bullish in late-1974 I received hate-letters and angry notes saying that ‘Russell, you have lost your mind,' and ‘Russell, why don't you hang it up and find a business that you're fitted for.' I mean people were furious that I had turned bullish, pretty much the opposite of sentiment today. Actually, I'm surprised to see how quickly analysts and investors are willing to turn bullish today."
That's not to rule out the possibility that the final low of the bear market is behind us (though I doubt it). What I do see as unlikely is a "V" bottom where stocks will now proceed to durably recover their losses without (at least) a very difficult and extended sideways period that take stocks back to levels that compete with the prior lows. Historically, advances of the size we've observed have only "stuck" when the major indices had already advanced past their 200-day moving averages by the time stocks were about 20% off the lows.
There's a reason for that. During a true bottoming process, favorable market internals are typically "recruited" even as the market is moving down or sideways. Investors work through the ebb-and-flow of information through repeated cycles of enthusiasm and disappointment. To expect the disappointments to quickly come to an end and to be replaced by clarity is to expect something that is not characteristic of historical experience.
As Russell noted, "When the tide reverses and turns bullish, there are usually many phenomena that appear. It is usual to see some sort of non-confirmation in the Averages (we saw that at the 1974 bottom). It is usual to see Lowry's Selling Pressure decline substantially prior to the actual bottom (Lowry's Selling Pressure declined very reluctantly prior to the March 9 low, and this alone makes me suspicious). Normally, once the tide reverses the stock market starts up carefully in a slow persistent plodding rise." Very simply, new bull markets are generally not widely heralded, and investors should be awfully suspicious when there is a consensus that "the bottom is in." As I noted back in December, in Recognition, Fear and Revulsion (before the market took a plunge to fresh lows over the next two months):
"Strong intermittent advances are typical during bear markets, and can often achieve gains of 20% as we've seen in recent weeks, and sometimes substantially more. But the very existence of bear market rallies can be a problem for investors, because they clear the way for fresh weakness. The scariest declines in bear markets are typically the ones when investors think they are making progress and recovering their losses, only to see stocks go into a new free-fall.
"That cycle of decline, followed by hope, followed by fresh losses, is really what ultimately puts a final low in place. The final decline of a bear market tends to be based on "revulsion" – a growing impatience among investors who conclude that stocks are simply bad investments, that the economy will continue to languish, and that nothing will work to help it recover. Revulsion is not based so much on fear or panic, but instead on despair and disillusionment. In a very real sense, investors abandon stocks at the end of a bear market because stocks have repeatedly proved themselves to be unreliable and disappointing."
Could the final low of the bear market be in place? Sure. But even if that were the case, it does not follow that the markets will recover their lost ground quickly, and it is particularly dangerous to believe that the major indices will not meaningfully retest (if not substantially break below) the prior lows. On the basis of market action, one of the features of the recent advance that has me concerned is the unimpressive, waning trading volume that we've observed. A strong advance on heavy trading volume is a measure of determined sponsorship in the face of disagreement. A strong advance on waning volume is probably a short-squeeze – forced purchases in the face of sellers who have temporarily backed off. Moreover, stocks are currently overbought to the same extent that they were near the end of the bear market rallies we observed during the 2000-2002 decline.
As the brilliant Dow Theorist William Peter Hamilton wrote a century ago, in 1909, "One of the platitudes most constantly quoted in Wall Street is to the effect that one should never sell a dull market short. That advice is probably right oftener than it is wrong, but it is always wrong in an extended bear swing [i.e. an overbought bear market rally]. In such a swing the tendency is to become dull on rallies and active on declines." In short, I would be more impressed with market action here if we were observing stronger trading volume with an established core of improved market internals. A good retest in the major averages, coupled with quiet strengthening of market internals, would be more characteristic of a durable "bottoming process." My opinion (which we don't invest on and neither should you) is that we're not even close to completing a bottoming process. Frankly, we can't rule out that the final low is in place either. So as usual, we'll evaluate the evidence as it emerges.
Thus far, we've got a strong rally off the recent trough, with uninspiring sponsorship but good breadth, reasonable but not strikingly attractive valuations, and an overhang of increasingly distressed mortgage and non-residential debt that looks like Armageddon Part II in the offing, because we are doing nothing to restructure it. In my view, the recent advance looks not like a garden of "green shoots," but very much like a short-squeeze off of an oversold trough. It would be convenient if such bounces could be predicted in advance, but as we observed last year, the market can become very persistently oversold during bear markets, and even an "oversold" decline can go much deeper until the oversold condition is abruptly cleared.
Fundamentally, my view is that the U.S. economy is on very thin ice, and that by focusing on the bailout of corporate bondholders rather than the restructuring of debt, we are courting the risk of a far deeper downturn. Last year, I didn't think it was conceivable that policy-makers would attempt to address this problem by making lenders whole with public funds. This is an ethical abomination, putting the public in the position of absorbing the losses that should properly be borne by those who provided capital to these institutions. It is not sustainable. What it does is place the public in the position of losing first, but it will not, and cannot prevent the ultimate failure of the debt – for the simple reason that without restructuring, the debt can't be serviced.
It is true that insurers, pension funds, and other entities own part of the debt of these financial institutions, but they certainly do not own all of it, and to the extent that it is in the public interest to use public funds to reimburse the losses of various entities, that can and should be part of the political process. But to broadly immunize every bondholder of these institutions with public funds is repulsive. Even the bondholders of Bear Stearns can expect to get 100% of their principal back, with interest. Aside from the abuse of the public trust inherent in these bailouts, it is also offensive to anybody who devotes a significant portion of their income to charity, because there are so many better uses for trillions of dollars.
Think about it. Two of the wealthiest people on Earth, Warren Buffett and Bill Gates, after lifetimes of work, will be able to commit a combined total of less than $100 billion to charity if they give everything they have. That figure is dwarfed next to the sums being allocated to protect corporate bondholders from taking a "haircut" on distressed debt, or swapping a portion of it for equity – both perfectly appropriate ways of compartmentalizing the losses of these financial institutions, without public funds, and without receivership or "nationalization." Congress needs to quickly legislate the ability to take receivership of non-bank financial institutions, including bank holding companies. The use of credit default swaps should be restricted to bona-fide hedging only. Of course, restructuring mortgage debt by swapping principal for a claim on future appreciation (with the Treasury administering a "conduit fund" to collect, aggregate and disburse those claims) would be one of the best ways of minimizing the need for these bailouts in the first place.
Echoing the concerns I've noted in recent quarters, Alan Abelson of Barron's shared some research this week that estimates probable losses of financial companies from mortgage and non-residential loans at $2.1 to $3.8 trillion, less than half of what has been realized to date. These figures are much in line with my own estimates, and exclude additional loan losses to non-financial companies (witness General Motors). Though existing home sales were up recently, the report notes that 45% of them were distressed sales. The report concludes, correctly I believe, that the U.S. is "in the middle innings of an enormous wave of defaults, foreclosures, and auctions." Until we observe large-scale restructuring of mortgage debt and the debt obligations of major financial institutions, we will be applying trillion dollar band-aids while the underlying cancer metastasizes. The longer we wait to restructure debt, to swap debt for equity, and to expect those who made the loans bear the losses as well, the more we risk allowing this downturn to become uncontrollable and unfathomably costly to the public.
As Harvard historian Niall Ferguson observed last week, "Only somebody who studies financial history could say, as I was trying to say, ‘Look, something as big as the liquidity crisis of 1914 or as big as the banking crisis of 1931 is imminent.' We don't really have a great many options here. If we stay the present course, you're going to see the tailspin continue. To be effective, a large-scale restructuring of household indebtedness would need to be mandatory. The Great Depression was initially a U.S. financial crisis. But what made it a depression was its global contagion, and then the breakdown of trade and the retreat into protectionism. All of that can happen. All of that is in fact happening with terrifying speed."
Whatever green shoots are out there rest over a patch of thin ice.
1,500 farmers commit mass suicide in India
Over 1,500 farmers in an Indian state committed suicide after being driven to debt by crop failure, it was reported today. The agricultural state of Chattisgarh was hit by falling water levels. "The water level has gone down below 250 feet here. It used to be at 40 feet a few years ago," Shatrughan Sahu, a villager in one of the districts, told Down To Earth magazine "Most of the farmers here are indebted and only God can save the ones who do not have a bore well." Mr Sahu lives in a district that recorded 206 farmer suicides last year.
Police records for the district add that many deaths occur due to debt and economic distress. In another village nearby, Beturam Sahu, who owned two acres of land was among those who committed suicide. His crop is yet to be harvested, but his son Lakhnu left to take up a job as a manual labourer. His family must repay a debt of £400 and the crop this year is poor. "The crop is so bad this year that we will not even be able to save any seeds," said Lakhnu's friend Santosh. "There were no rains at all." "That's why Lakhnu left even before harvesting the crop. There is nothing left to harvest in his land this time. He is worried how he will repay these loans."
Bharatendu Prakash, from the Organic Farming Association of India, told the Press Association: "Farmers' suicides are increasing due to a vicious circle created by money lenders. They lure farmers to take money but when the crops fail, they are left with no option other than death." Mr Prakash added that the government ought to take up the cause of the poor farmers just as they fight for a strong economy. "Development should be for all. The government blames us for being against development. Forest area is depleting and dams are constructed without proper planning. All this contributes to dipping water levels. Farmers should be taken into consideration when planning policies," he said.