Lining up at the Internal Revenue Service, checkbook in hand
Ilargi: The true nature and character of US government economic rescue missions to date can be distilled from one look at foreclosure numbers. They were down for a few months because the government pushed Fannie and Freddie, which it owns, as well as a number of friendly (nudge, nudge) banks to declare all sorts of moratoriums (moratoria).
These have more or less silently run out their time, and the number of foreclosures shot up by 24%. The green shoots and whatever other cheery terms the PR people come up with? They are no different from when foreclosure numbers were down because of the moratoriums: fake feel-good. The only green shoots in sight - and you need a Hubble type telescope to make them out in the first place - are there because public money has been poured into the system by the bucketloads.
Once those trillions of dollars in funding dry up, and they will, we’lll be right back on track, just like foreclosures now are, to rapidly declining trendlines across the entire spectrum. If anything of substance has been constructed with those trillions at all, which is highly questionable, it will evaporate in seconds against the backdrop of all the losses and the debt and the writedowns, the unemployment and lost pension reserves, along with plummeting tax revenues and fast rising bond issuance costs for all levels of government, in short all the misery that has remained temporarily hidden beneath the most expensive veil in the history of the world.
And that's when, finally, more people will start to realize that spending all their money on a flimsy veil was not some unfortumate and unforeseeable accident. It was the worst imaginable decision that could have been made, since that money will no longer be available to soothe the pain that will be as real as it is inevitable. When the true depth of the downfall becomes apparent, we will have to face it with empty hands and pockets.
The foreclosure moratorium made no sense, and neither does the rest of blindly-into-the-night measures. What's happening now with foreclosures will happen to the economy at large later this year. $12.8 trillion worth of moratoriums won't even last till Christmas.
There's of course always a chance that another $12.8 trillion could halt the plunge a few more months, but it's getting hard to see how it would be financed: the bond markets are set to have their say on the topic, and they won't do any smooth-talking. There's also the danger, as former GAO chief David Walker warned yesterday, that taxes at all levels will be raised; Walker spoke of doubling taxes. It will undoubtedly be attempted all over the place, but putting higher tax burdens on people who lose money hand over fist is nothing but a recipe for chaos, mayhem and ultimately anarchy.
The $12.8 trillion allocated so far, as well as every single additional dollar that is yet to be squandered, should serve, and should have served, to alleviate the probems that must result from underfunded societies. Failing to do so will accelerate us on our path downward towards a monumental accumulation of issues that will overwhelm the ties that bind us together. The fabric will fail, and the center will not hold.
US foreclosures up 24% in 1st quarter
The number of American households threatened with losing their homes grew 24 percent in the first three months of this year and is poised to rise further as major lenders restart foreclosures after a temporary break, according to data released Thursday. The big unknown for the coming months, however, is President Barack Obama's plan to help up to 9 million borrowers avoid foreclosure through refinanced mortgages or modified loans. The Obama administration expects its plans to make a big dent in the foreclosure crisis. But it remains to be seen whether the lending industry will fully embrace it, despite $75 billion in incentive payments.
The faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same time period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm. During the quarter, Ohio was the state with the seventh highest number of homes seeing foreclosure activity with about 31,600 receiving at least one filing, up 1 percent from a year earlier. In March, more than 340,000 properties were affected nationwide, up 17 percent from February and 46 percent from a year earlier. Ohio had 12,600 homes receiving foreclosure notices during the month, 12 percent more than during March 2008.
Foreclosures "came back with a vengeance" last month and are likely to keep rising, said Rick Sharga, RealtyTrac's senior vice president for marketing. Nearly 191,000 properties completed the foreclosure process and were repossessed by banks in the quarter. While the number was down 13 percent from the fourth quarter of last year, it is expected to rise through the summer and then possibly taper off. Fannie Mae and Freddie Mac, the big mortgage finance companies, together with many banks had temporarily halted foreclosures in advance of Obama's plan. Now armed with the details about which borrowers can qualify, the mortgage industry has begun foreclosing on ineligible borrowers.
The Treasury Department has signed contracts with six big loan servicing companies — including Citgroup, Wells Fargo and JPMorgan Chase. Many have already started processing loans as part of the government's "Making Home Affordable" plan. "We need to get the long-term solutions for these folks," Shaun Donovan, Obama's housing secretary, said in an interview. In the coming months, Donovan said, there are still likely to be increased foreclosures, especially from vacant houses, second homes and those owned by speculators. None of those properties will qualify for a loan modification. However, he remained optimistic that overall foreclosures could start to decrease this summer.
But even industry executives who emphatically support the plan emphasize that it's success isn't guaranteed. "The effectiveness of the plan overall obviously is going to depend on the level of industry participation," said Paul Koches, general counsel of Ocwen Financial, which collects loan payments on subprime loans. Many borrowers and consumer groups claim the modifications offered by the lending industry don't do enough to help cash-strapped homeowners, despite more than a year of public prodding from regulators. Fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent, data released last month show.
Plus, the lending industry has been swamped by the unprecedented wave of calls from distressed borrowers. "You can't wave a magic wand and make the loans suddenly modified," Sharga said. "They're all individual transactions." In RealtyTrac's report, Nevada, Arizona, California and Florida had the nation's top foreclosure rates. In Nevada, one in every 27 homes received a foreclosure filing, while the number was one in every 54 in Arizona. Rounding out the top 10 were Illinois, Michigan, Georgia, Idaho, Utah and Oregon.
Home Starts in U.S. Fall 10.8%; Building Permits Decline to a Record Low
U.S. builders broke ground on fewer homes in March and permits fell to a record low, as homebuilders sought to rein in inventory amid rising foreclosures. Housing starts fell 10.8 percent to an annual rate of 510,000, the Commerce Department said today in Washington. Building permits, a sign of future construction, fell 9 percent to 513,000. A glut of unsold properties is pulling home prices down across the U.S., prompting builders to scale back projects. President Barack Obama’s administration has pledged measures to reduce foreclosures and the Federal Reserve is buying mortgage securities to drive down home-loan rates and spur demand. “Buyers seem to be more interested in picking up bargain-basement prices in the existing-home market than in the new-home market,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. “Builders are justifiably cautious now with many indicators showing adverse conditions.”
A separate government report today showed that fewer Americans filed claims for unemployment insurance last week than economists had anticipated. Initial jobless claims dropped to 610,000 from 663,000 the week before, the Labor Department said. Stock-index futures extended gains and Treasuries remained lower after the figures. Futures on the Standard & Poor’s 500 Stock Index rose 0.7 percent to 854.80 as of 9:10 a.m. in New York, and benchmark 10-year note yields advanced to 2.79 percent from 2.77 percent late yesterday. Starts were projected to fall to a 540,000 annual pace from a 583,000 previously estimated pace the prior month, according to the median forecast of 72 economists surveyed by Bloomberg News. Estimates ranged from 500,000 to 608,000.
Permits were forecast to drop to a 549,000 annual rate, according to the survey median. Construction of single-family homes was unchanged at a 358,000 rate, today’s report showed. Work on multi-family homes, such as townhouses and apartment buildings, fell 29 percent to an annual rate of 152,000 after surging in February. The decrease in starts was led by a 26 percent drop in the West and a 17 percent decline in the South. Starts rose in the Midwest and Northeast. Home starts have plunged from a peak rate of 2.27 million in January 2006, which capped the biggest housing boom in six decades. Falling construction has weighed on economic growth and plunging home prices helped ignite the global credit crisis that led to what may become the worst recession in seven decades.
In a sign the housing slump may be nearing a bottom, the National Association of Home Builders/Wells Fargo’s confidence index rose this month to the highest level since October, the group said yesterday. Confidence rose to 14 from 9, as record- low mortgage rates and falling prices started to stir demand. Readings below 50 mean respondents view conditions as poor. Sales of both new and existing home rose in February from record lows. Still, rising unemployment continues to stifle demand as Americans shy away from big-ticket purchases. Job losses have totaled 5.1 million since the downturn began in December 2007, and economists surveyed by Bloomberg predict the jobless rate will reach 9.5 percent by the end of the year. With job losses mounting, foreclosure filings rose 24 percent in the first quarter from a year earlier, RealtyTrac Inc., a seller of default data, said today. Property values may fall further as foreclosures put even more homes back on the market. Home prices in 20 U.S. cities tracked by the S&P/Case- Shiller index have dropped 29 percent since their peak in July 2006.
Southern California house and condominium sales climbed 52 percent in March from a year earlier as buyers took advantage of prices 35 percent lower than the same period in 2008, MDA DataQuick, a San Diego-based research company, said yesterday. Homebuilders nevertheless continue to feel the pinch. Lennar Corp., the fourth-largest in the U.S., reported a wider first-quarter loss than a year earlier and falling orders. “Low consumer confidence, increased unemployment and growing foreclosure rates negatively impacted new homes sales in most of our markets,” Lennar Chief Executive Officer Stuart Miller said in a statement on March 31. “We continue to adjust our business to adapt to market conditions.”
U.S. Initial Jobless Claims Fall; Benefit Rolls at Record
The number of Americans applying for jobless benefits unexpectedly dropped last week to the lowest level in almost three months, signaling the job market may be starting to stabilize. Initial jobless claims decreased by 53,000 to 610,000 in the week ended April 11, the fewest since January, the Labor Department said today in Washington. Still, the total number of people collecting benefits jumped to a record 6.02 million a week earlier. “There’s a real possibility this could be a turning point,” said James O’Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. “We’ve seen some fading of weakness in consumer spending. The logical next step would be some fading of weakness in the labor market.”
Payroll reductions must begin to moderate in coming months to sustain the recent improvement in consumer spending and support an economic recovery later this year. Still, a rebound in hiring is unlikely as employers keep payrolls trim to cut costs until government measures gain traction. Another government report showed U.S. builders broke ground on fewer homes in March and permits fell to a record low. Housing starts dropped 10.8 percent to an annual rate of 510,000, Commerce Department figures showed. Building permits, a sign of future construction, fell 9 percent to 513,000. Stock-index futures extended gains and Treasuries remained lower after the reports. Futures on the Standard & Poor’s 500 Stock Index rose 0.6 percent to 853.60 at 8:33 a.m. in New York, and benchmark 10-year note yields were up 1 basis point at 2.78 percent.
Initial claims were projected to rise to 660,000, according to the median forecast of 37 economists in a Bloomberg News survey. Estimates ranged from 635,000 to 700,000. Claims for the prior week were revised up to 663,000 from an initially reported 654,000. The largest declines last week came in states that had previously reported increases in firings among automakers, a Labor Department spokesman said. In addition, the decrease came in a week that normally sees an increase in claims related to factors including school spring recess, augmenting the magnitude of the drop when the figures are adjusted for seasonal patterns, he said. The four-week moving average of initial claims, a less volatile measure, fell to 651,000 from 659,500.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, climbed to 4.5 percent in the week ended April 4, the highest since January 1983. These data are reported with a one-week lag. Thirty-six states and territories reported an increase in new claims for the week ended April 4, while 16 reported a decrease. Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows or falls. The economy has lost about 5.1 million jobs since the recession began in December 2007, making it the biggest employment slump of the post World War II era. Payrolls fell by 663,000 in March and the jobless rate climbed to 8.5 percent, the highest level since 1983.
Hallmark Cards Inc., the greeting-card maker, said it plans to cut 550 to 750 jobs, or as much as 8 percent of its U.S. workforce, because the recession will probably reduce sales further at the Kansas City, Missouri-based company. “Despite all the steps we have taken to date to avoid eliminating additional jobs, the state of the economy and its impact on our business require us to take further action,” Chief Executive Officer Donald J. Hall Jr. said in an April 14 statement. Still, there are some signs the economic downturn may be easing. The U.S. contraction slowed across several of the economy’s biggest regions last month, with some industries “stabilizing at a low level,” the Federal Reserve said yesterday in its Beige Book survey. Fed Chairman Ben S. Bernanke this week said there are signs the “sharp decline” in the economy is slowing, indicating a potential “first step” toward a recovery from the recession.
US housing data puts Obama's hopes on hold
The fledgling recovery in the US housing market appears to have stalled, reducing the chance of President Barack Obama's "glimmers of hope" turning into green shoots any time soon. Hopes of a recovery were also damped down as the US registered its first year-on-year fall in inflation for more than half a century in March, due to falls in energy prices. Recovery of the housing market is central to the recovery of the US economy, and the latest data puts paid to comments this week by President Obama that he saw "glimmers of hope" in the economy. His views were largely based on earlier housing surveys. The number of US citizens losing their homes leapt by 44pc last month, as banks pursued delinquent borrowers after federal mortgage lenders Fannie Mae and Freddie Mac lifted temporary bans on foreclosures.
A survey by Foreclosures.com found that 175,199 homes were repossessed by lenders in March. In spite of major banks promising to work with troubled mortgage holders to keep them in their homes, almost 370,000 families have lost their homes so far this year. Mortgage applications also fell last week for the first time in more than a month, suggesting that even with borrowing costs at record lows, potential house buyers are staying out of the market. The bearish outlook was compounded by the Federal Reserve's Beige Book, which provides an assessment of regional economic activity. It said the US economy continued to weaken in March – albeit at a slower rate – and found that the housing market remains "depressed overall". President Obama's comments, which were backed by Fed chairman Ben Bernanke's talk of "tentative signs" of recovery, are at odds with those from Mike Duke, chief executive of Wal-Mart, America's largest retailer.
In a TV interview Mr Duke said the economy would not "just bounce out and come back" from recession, adding "there is still a lot of stress" among consumers. "It's not a V-shaped recession. This is one that is going to take a sustained change in the way families live." Further key housing data is expected later today when the US government releases the number of new houses being built. The figure jumped by 22pc in February, but Barclays Capital's Dean Maki is forecasting a 6pc fall for March. Economists played down the chances of the US entering deflation, in spite of the consumer price index falling 0.1pc fall in March, meaning consumer prices are now 0.4pc cheaper than a year ago, the first fall in the annual rate since August 1955. White House economic adviser Larry Summers warned that "concern about deflation in the nearer term can be entirely discounted." But many economists took solace in the fact that the core rate of inflation – stripping out food and fuel – rose by 0.2pc last month.
NYSE chief cautious over March rally
The March stock market rally that fuelled hopes of a broader economic recovery was deceptive because “real money” investors remained on the sidelines, according to the chief executive of NYSE Euronext, the world’s largest stock exchange. In rare comments about market movements, Duncan Niederauer said in an interview with the Financial Times that the rally was driven by short-term traders trying to take advantage of high volatility and not by large institutional or other long-term investors. Mr Niederauer suggested the high trading volumes and gains in leading indices did not necessarily reflect any real conviction that the worst of the economic crisis was over.
He said the volumes had been concentrated in a handful of stocks. In fact, he said volumes had held up well because of what he termed a “traders’ market” in which participants tried to take advantage of greater volatility without needing to take a view on, or believe in, the long-term prospects for recovery. He said: “The real money investors are still waiting. I think they’re waiting, they’re watching. They want to make sure that what we saw in March is real. And I think once they are convinced you will know it. The market will have a totally different tone to it.” He added that the rally had also been concentrated on a handful of stocks and that large institutions and long term investors were largely keeping their powder dry.
Mr Niederauer said he sensed that volumes, while relatively healthy, were below the levels which would indicate that investors had regained confidence in the fundamentals of the market. “I think we’re waiting for another rally, in my opinion, in around June and July,” he said. He said a summer rally would be a six to nine-month leading indicator of economic recovery and that by April 2010 the global economy would look much healthier. The benchmark S&P 500 index rose by 8.5 per cent in March, its best month since October 2002, leading some bulls to predict that the recovery had arrive
Let's Keep Big Banks from Ruining America Forever
The recent comments of many of the nation’s top banking executives are so consistently disingenuous that the subject of this article has been long overdue for some time now. On March 20, 2009, Citigroup CEO Vikram Pandit issued a memo to all Citigroup employees in which he stated,Our industry has recently seen a tide of negative sentiment rising in Washington, D.C. regarding compensation. Of course, some of it is warranted. But I take exception when there is a discussion about spreading the blame to each and every employee in the financial services industry. At our company, we removed the people responsible for Citi’s financial distress and acted fast to strengthen and streamline the business, and install new risk processes and new risk personnel. You have been invaluable in our collective efforts to put the company on solid footing… please rest assured that senior management and experts in Washington are focused on these developments and trying to address issues raised in the debate with clarity about the real facts.
I take great offense at Mr. Pandit’s willingness to remove all responsibility for this crisis from "each and every employee" in the financial services industry. What made America a great country in the past was each and every American citizen’s willingness to take personal responsibility for his or her mistakes instead of sloughing the blame onto someone else. What made America a great country in the past was the courageous transparency of American leaders to discuss the truth with her citizens, as painful as that truth may have been, not the cowardice of deception to dishonorably fool the masses into believing a picture of reality that is a lie.
Today, we have a global financial system that is morally bankrupt, shrouded in secrecy and devoid of transparency. Today, we have men in the financial industry that abuse their positions of authority to plant stories in the media that distort the truth so massively that they must continue to tell more lies to cover up past lies. In fact, the lies of the financial industry have become so repetitive and predictable, that one week before big US banks started to declare their earnings this season, I wrote an article here that stated Big Banks would announce surprisingly positive earning statements based upon Enron-style accounting tricks, and indeed they have.
And don’t expect any negative news when the US Treasury and the US Federal Reserve publicly announce the results of their "stress tests" on the 19 largest US banks by the end of this month. The "stress tests", most of which have now been completed, were such a joke that even the Federal Deposit Insurance Corporation called them pointless and devoid of credibility. The "real facts" will never be told by any of the men that have led us into the crisis for they have not the courage nor the moral character to do so. The "real facts" are that this crisis was triggered not by subprime mortgages, commercial paper, financial derivatives, collapsing stock or bond markets, but by a fraudulent monetary system. A fraudulent monetary system allows for massive distortions in capital markets that would be near impossible with the implementation of a sound monetary system.
Though the US Federal Reserve has instituted this fraudulent monetary system, the biggest enablers of this fraudulent monetary system are the Big Banks. So yes, each and every employee of the financial industry must be held accountable for their role in this crisis. Ignorance is an excuse only for the weak and morally repugnant, not the honorable. For three years now, I have predicted, in writing, every major step of this crisis, months, and sometimes years before they eventually unfolded. Since 2006, I have strongly advocated gold investments and silver investments as a way to create wealth during this crisis. My predictions have been remarkably accurate for more than three years now not because I have remarkable psychic skills. I have been able to do so only because I have understood that the origin of this crisis is a fraudulent monetary system enabled through the corrupt relationships that exist among Big Banks, Central Banks, and governments.
Every Big Bank in the US creates money out of thin air through a system called the fractional reserve system. In the US, the reserve ratio requirement (RRR) is NOT 10% as most Americans believe. It is in fact, effectively zero percent, a fact that all executives at big banks do not want you to know. This means that Big Banks can effectively create $100 million of loans for every $1 million of deposits they receive if they so desired. If you and I tried to execute the same business plan with our everyday businesses, you and I would be thrown in jail for fraud within two weeks. In essence, due to the fractional reserve banking system, every single dollar we deposit in a bank is effectively being devalued from the moment it leaves our hands. Considering that it takes us a minimum of several months to many years to withdraw and spend all of our savings, the money we withdraw from banks will always have less purchasing power than the money we originally deposited with them. Of course, other factors such as the monetary decisions of other major Central Banks affect the dollar’s worth, but in essence, the above statement, even its simplicity, still holds true. Since I extensively explained how devaluation of the US dollar happens in this article, I won’t repeat myself here.
In addition to the Big Banks, the US Federal Reserve, the biggest bank of all, also prints money out of thin air. When Central Banks and participating banks create money out of thin air, they impose a punitive tax upon all American citizens, willing or not, that they euphemistically repackage and re-label as "inflation." However, this is a tax that necessarily must be factored into one’s earning power every year. Let me explain. Consider if in 2006, you lived in California and earned a modest (for the state of California) $155,000 annual salary. From this figure, you had to deduct 33% for federal income tax and another approximate 10% for state & local income tax. Most Americans in this income bracket would believe that their net earnings for the year was 57% of their annual salary, or $88,350. However, most of us forget to compute one last very important calculation to determine our true net salary that year. In 2006, the true inflation rate in the US was about 10.5%. Since inflation decreases the purchasing power of your money, you must account for inflation as an "invisible tax" in your overall tax rate.
Thus, if you earned $155,000 in the state of California in 2006, your true tax was 33% + 10% + 10.5% = 53.5%. Consequently, your net earnings from your salary that year was barely over $72,000, certainly not $88,350 and certainly not $155,000. This is exactly why some years you may struggle to make ends meet even though you may be earning what you believe to be a very decent salary. It is for the very fact that Big Banks are bamboozling you out of your hard-earned money through a fraudulent monetary system. And you have the Big Banks, and in particular, the executives at the biggest banks in America, to thank for this dilemma. These are the "real facts" that men like Mr. Pandit do not want you to know. So will I ever be empathetic towards financial executives at Big Banks? When these financial executives run their companies with integrity instead of dishonor, when they are aboveboard instead of deceptive regarding their contributions towards this crisis, and when they engage all American citizens in an open debate regarding solutions instead of shrouding their meetings in secrecy, I will become empathetic. Until this occurs, then no, because frankly, financial executives at Big Banks are getting a free ride right now in proportion to their level of responsibility in creating our present monetary crisis.
So here are two simple steps every American must take to end the tyranny of Big Banks. While these steps are not perfect, they will succeed in changing the financial system in America if you truly desire real change.
(1) If you work for a Big Bank, start looking for another job and quit within six months. If you didn’t understand how the US Federal Reserve and big banks are destroying America, if you’ve read this article, you can not claim ignorance as a defense anymore. If you continue to work for a big bank, you are silently agreeing that moral repugnancy is okay. Quitting is not as difficult as it seems. I realized my mistake of working for a big US bank years ago and left to start my own independent company that could truly serve the interests of my clients. If I was still working for a Big Bank today, I would still consider myself part of the problem instead of part of the solution. If you want to remain in banking and don’t want to start your own firm, obtain a new job with a community bank. You have options other than to work for a Big Bank and contribute to America’s downfall.
(2) If you have large accounts, investment, savings, mortgages, or otherwise, at a Big Bank, withdraw all your assets, close your accounts out and give your business to a community bank. Yes, you will lose access to more competitive rates that a Big Bank can offer. Yes, closing your accounts will be a hassle. However, the consequences of doing nothing can devastate future generations of Americans. So consider these actions the greatest gift you can give your children and your grandchildren.
According to the FDIC, as of April 9, 2009, there are 8,256 FDIC-insured banks in the United States. Of these 8,000+ banks, perhaps taking action against the 20 biggest banks in America is all that is necessary to bring sweeping reform and change to the US financial industry. However, if all banks enable our fraudulent monetary system, you may ask, Why the Big Banks? Here’s the answer. While it is true that all banks serve as enablers of this monetary crisis, it was the specifically the Big Banks such as Goldman Sachs (GS) and Citigroup and the US Federal Reserve (as directed by Chairman and former JP Morgan director Alan Greenspan) that actively sought the repeal of the Glass Steagall Act (author’s note: For those of you unfamiliar with the Glass Steagall Act of 1933, it was an act loaded with provisions to specifically prevent the exact scenario we are suffering today). The Big Banks in the US lobbied to destroy the act and won this battle in 1999.
For those of you that understand the revolving door that exists among the US Treasury, the US Federal Reserve, JP Morgan, Goldman Sachs and Citigroup, it should be obvious to you why JP Morgan, Goldman Sachs, and Citigroup have all survived this crisis thus far. Seasoned gold and silver investors have often speculated that data seems to incriminate JP Morgan and HSBC US as the two Big Banks that consistently short the majority of gold/silver contracts in the futures markets. So to re-establish any semblance of free markets again in America, the Big Banks must be broken up.
According to a PBS Frontline interview, Charles Geisst, a professor of finance at Manhattan College in NYC, stated, "Certainly, Citigroup [and then CEO Sandy Weill] pushed for legislation to get rid of Glass-Steagall, pass what was called HR10 at the time, which became the Financial Services Modernization Act [of 1999]… In the year previous to the Financial Services Modernization Act, the thing that overruled Glass-Steagall, Citibank spent $100 million on lobbying and public relations…They spent a small fortune, a king’s ransom, if you will, getting rid of Glass-Steagall. In fact, when thrown in with other financial firms’ lobbying, it was closer to $200 million over the short period of time."
Of course, the only real solution to this monetary crisis is to re-instate a monetary system backed by gold and silver. However, until that time comes, the intermediate step to take is to withdraw all support from all Big Banks and re-direct your support to your local community banks. I guarantee you that if we fail to act now, we will find ourselves in a predicament two to three years from now where it will be too late to take action for your actions will no longer have an effect. We have arrived at a tipping point right now and the simple actions above can help save our country and restore it to greatness. No matter your nationality or where you live, the greatest gift you could give every citizen of this world is to take the two steps above and to ensure everyone you know also takes the above two steps.
We still have much to learn from past US Presidents John F. Kennedy and Thomas Jefferson. John F. Kennedy once stated, "The very word secrecy is repugnant in a free and open society". Thomas Jefferson once stated, "The government is best that governs least" and "When governments fear people, there is liberty. When the people fear the government, there is tyranny." If we consider how the statements of these great US Presidents apply to our situation today, we will realize that never has secrecy in the US financial sector been greater and transparency less; never has our government governed more; and never have government and Central Banks feared us less.
Consider the $700+ trillion derivatives markets that nobody can seem to properly explain because they are unregulated and opaque, other than the fact that a good percent of this market is destined to blow up. And who do you think invented financial derivative products like Credit Default Swaps that are wreaking so much havoc on the financial system today? The Big Banks. Consider the fact that organizations like the Gold Anti-Trust Action Committee petitioned the US Federal Reserve Board and the US Treasury in 2008 for information regarding US gold swaps, but were denied information under the grounds that the disclosure of this information "would harm certain proprietary interests." This secrecy regarding the US gold reserves and the secrecy of our $700+ trillion derivatives market is the very secrecy that President Kennedy referred to as "repugnant in a free and open society." This should serve as a wake up call to us all.
Today, we find ourselves in a state of inertia that is induced by a fear created only by the fact that we have been dearly misinformed about the origins of this crisis. Our ignorance, in turn, is maintained by the secrecy and massive misinformation campaigns propagated by bankers. A misinformed, ignorant populace will remain in a state of inertia but an informed populace can create powerful change. The fact that we have been in a state of inertia for decades has created this obscene situation we face today. However, just as the law of inertia states that a body at rest is likely to stay at rest, the law of acceleration states that force equals mass times acceleration. Thus if we sincerely desire change, we must also seize the personal responsibility to inform all of our friends, our neighbors, and our co-workers about our fraudulent monetary system and the steps that can be taken to dissolve it.
We can consequently then generate mass and acceleration. A body set in motion is likely to stay in motion. This is how we can defeat the Big Banks. America has been in state of inertia not because we are stupid as the Big Bankers think of us. America has been in state of inertia not because we are lazy or uninspired. It has been a long time since the world has looked to America as the shining beacon of freedom and justice, but this is our opportunity, and ours alone, to seize. I am writing this article because I believe in the intelligence, the courage, the leadership, the diversity and the resilience of all Americans. And I do believe you will act upon reading this article.
If you believe that my views need be challenged, I agree, because in any free and open society, open debate and transparency is what leads to the best solution. But whatever you do, ACT. Merely pass this article on to your neighbor to open up a discourse then, for a debate about this is better than no debate at all. Also consider this article from a former IMF economist, Simon Johnson, called "The Quiet Coup." Please take the time to follow this link and read that article as well. For those of you that have followed my writings for quite some time, you may be surprised that I am recommending an article from a former IMF employee, but trust me, it is an article well worth reading.
Perhaps if we take the small actions I suggest, the small community banks will morph into big banking giants, and we’ll have the same problems all over again. Perhaps, but if we all mobilize and place enough pressure on Congress to pass a Glass Steagall Act II by the time we finish taking the steps above, it will not. The only thing we know for certain is that if we do nothing, we will have sentenced not only ourselves but also future generations of Americans to a very bleak future. However, if we take action now, we can guarantee one thing. We the people will serve notice to the banks that we, and not they, are in control of our inalienable rights of life, liberty and the pursuit of happiness. America’s greatness is rooted in the strength of her citizenry, not her government and certainly not her corrupt banks. As the state of New Hampshire motto goes, "Live Free or Die."
America’s fate is not in its hands
Amid the gloom, flickers of light. Barack Obama says he has seen “glimmers of hope” for the economy. Lawrence Summers, director of the White House National Economic Council, said “the sense of a ball falling off a table” is passing. Less evocatively, Ben Bernanke, chairman of the US Federal Reserve, said this week that “recently we have seen tentative signs that the sharp decline in economic activity may be slowing”. They are right: the descent is less rapid. But a truly sustainable recovery remains a distant prospect. Last autumn, after the implosion of Lehman Brothers, the US economy came to a sudden stop. During the last three months of 2008, household consumption – which, until mid-2008, had been rising for 17 consecutive years – fell by 1.1 per cent. Output fell by 1.6 per cent, industrial production by 5.6 per cent and non-farm employment by 2m. However, recent retail and confidence indices suggest that the pace of decline may be easing.
This was to be expected. The potent stimulant of falling energy prices has been feeding into the US economy for some months. Credit conditions have stopped tightening as fears that further systemically important institutions might collapse have cleared. What is more, the rate at which production was scaled down in late 2008 outstripped the decline in final demand. Production levels in some sectors will need to rise to fulfil even the current sickly demand. Given the abruptness of the fourth-quarter contraction, this inventory cycle rebound may be quite strong. In addition, US public policy has been ultra-stimulative. A year ago, the Federal Reserve – rightly – started to administer an enormous monetary loosening that is now in full swing, moving from 3 per cent interest rates to quantitative easing within a year. Although its effects are yet to feed in, Congress has also pushed through a fiscal stimulus. Much of the rest of the world is in a similar position; the rapid fall in production and demand at the end of 2008 was global. A rebound in production as inventories are restocked may be similarly ubiquitous. Stimulant policy measures are also being undertaken around the world; states are undertaking monetary loosening and record-breaking fiscal expansions. Governments are working hard to halt the slide.
The problem is that while these forces are helping to prevent a repeat of the Great Contraction – the unremitting US economic collapse that lasted from 1929 to 1933 – it is still not clear from where new demand will emerge to permit a sustainable, long-term recovery. The US household sector, usually a reliable source of demand, is over-leveraged. Already drowning in debt, US households’ total liabilities have increased by 2.5 per cent to $14,242bn since mid-2007. Their assets, however, have fallen in value by 16 per cent to $65,719bn. Household savings rates usually soar as consumers brace themselves for recessionary headwinds. But US consumers might well spend even less than is usual as they deleverage themselves. Meanwhile, world demand remains weak. Outside China, few of the structural surplus countries seem to grasp the need to turn themselves from dedicated mercantilists into mass consumers. They should; if the US import-and-consume business model is dead, so too is the export-and-save strategy used in Germany and Japan.
If neither the US citizen nor foreign customers increase their final demand soon, Uncle Sam will need to keep it propped up with continued expansionary policy. The Obama administration’s pledge to halve the budget deficit by the end of the president’s first term suggests they are assuming it will not come to this. If it does, however, they will have little choice. While the ultimate fate of the US is outside its control, there is much that the government must still do. No matter where sustainable demand eventually comes from, a functioning financial sector is an absolute necessity. It must be adequately capitalised, and believed to be adequately capitalised. When the Treasury releases the results of its “stress tests”, it must give enough information to reassure investors that the process was not a rigged rubber-stamping exercise. The US government should battle to support demand, to keep people in their homes and workers in their jobs. As exhausted inventories are replenished, there might soon be spells of growth. But, without increased final demand from other parts of the world and a working banking system, there will not be sustainable growth. Few governments in surplus countries seem to understand this reality. Increasing demand is not an onerous duty. Consuming more is hardly a chore. But, still, we are waiting.
Wells Fargo’s Profit Looks Too Good to Be True
Wells Fargo & Co. stunned the world last week by proclaiming it had just finished its most profitable quarter ever. This will go down as the moment when lots of investors decided it was safe again to place blind faith in a big bank’s earnings. What sent Wells shares soaring on April 9 was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion. Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care. Dig below the surface of Wells’s numbers, though, and there are reasons to be wary. Here are four gimmicks to look out for when the company releases its first-quarter results on April 22:
Gimmick No. 1: Cookie-jar reserves.
Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books -- the effect of which I’ll explain in a moment. First, a quick tutorial: Loan-loss allowances are the reserves lenders set up on their balance sheets in anticipation of future credit losses. The expenses that lenders record to boost their loan-loss allowances are called provisions. As loans are written off, lenders record charge-offs, reducing their allowance.
Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself. (Think of a child raiding a cookie jar.) The upshot is that Wells could get by with reduced provisions until the $7.5 billion is used up, boosting net income. Another quirk: The reserve was related to $352.2 billion of Wachovia loans for which Wells was not forecasting any future credit losses, according to Wells’s annual report.
All this may help explain Wells’s surprisingly small loan losses. For the first quarter, Wells said net charge-offs were $3.3 billion, compared with $6.1 billion at Wells and Wachovia combined for the fourth quarter. Provisions were $4.6 billion, bringing Wells’s allowance to $23 billion, as of March 31. Wells, which completed its purchase of Wachovia on Dec. 31, wouldn’t have been allowed to carry over the allowance had it completed the acquisition a day later. On Jan. 1, new rules by the Financial Accounting Standards Board took effect prohibiting such transfers. A Wells spokeswoman, Janis Smith, declined to comment.
Gimmick No. 2: Cooked capital.
The most closely watched measure of a bank’s capital these days is a bare-bones metric called tangible common equity. While the term doesn’t have a standardized definition under generally accepted accounting principles, it typically means a company’s shareholder equity, excluding preferred stock and intangible assets, such as goodwill leftover from past acquisitions. Measured this way, Wells had $13.5 billion of tangible common equity as of Dec. 31, or 1.1 percent of tangible assets. Yet in a March 6 press release, Wells said its year-end tangible common equity was $36 billion. Wells didn’t say how it arrived at that figure. Nor could I figure out from the disclosures in Wells’s annual report how it got a number so high.
Investors shouldn’t have to guess. Under a Securities and Exchange Commission rule called Regulation G, companies that release non-GAAP financial measures are required to disclose “a reconciliation of the disclosed non-GAAP financial measure to the most directly comparable GAAP financial measure.” (The rule applies to press releases, as well as formal SEC filings.) That way, anyone can see how the numbers were calculated. Wells didn’t do this in its March 6 release. A spokeswoman, Julia Tunis Bernard, declined to tell me the math Wells used. Silly me -- I thought the SEC’s rules apply to Wells Fargo, too.
Gimmick No. 3: Otherworldly assets.
Look at Wells’s Dec. 31 balance sheet, and you’ll see a $109.8 billion line item called “other assets.” What’s in that number? For that breakdown, you need to go to a footnote in Wells’s financial statements. And here’s where it gets comical. The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say. Neither would Bernard. Talk about a black box. That $44.2 billion is more than Wells’s tangible common equity, even using the bank’s dodgy number. And we don’t have a clue what’s in there.
Gimmick No. 4: Buried losses.
How quickly investors forget. One week before Wells’s earnings news, the FASB caved to pressure by the banking industry and passed new rules that let companies ignore large, long-term losses on the debt securities they own when reporting net income. Wells didn’t say what its first-quarter earnings would have been without the rule change, which companies can apply to their latest quarterly results. As of Dec. 31, though, Wells had $12.2 billion of gross losses on securities held for sale that weren’t included in earnings. Of those, $4.2 billion were on securities that had been worth less than their cost for more than a year.
The bottom line: Net income isn’t necessarily income. And it means nothing without complete financial statements. Investors should have learned this lesson by now.
Dimon Says JPMorgan Eager to Repay 'Scarlet Letter' TARP
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, who today reported first-quarter profit that beat analysts’ expectations, said his firm could repay U.S. government rescue funds “tomorrow.” Dimon, calling money received through the Troubled Asset Relief Program “a scarlet letter” and “the TARP baby,” said on a conference call today that the New York-based bank is awaiting guidance from the U.S. Treasury Department. “We could pay it back tomorrow,” he said. The 53-year-old CEO took $25 billion in U.S. government rescue funds last year. He’s fared better than most of his rivals in guiding the company through the financial crisis, taking $33.3 billion in writedowns, losses and credit provisions through the fourth quarter. That compares with $88.3 billion at New York-based Citigroup Inc. and $55.9 billion at Merrill Lynch & Co., now part of Bank of America Corp., the biggest U.S. bank.
Dimon said the bank, which bought about $34 billion in mortgage-backed and asset-backed securities in the quarter, doesn’t expect to participate as either a buyer or seller in the Treasury’s Public-Private Investment Program, known as PPIP. “We learned our lesson” about borrowing from the government, said Dimon, who expects PPIP to benefit the financial system as a whole. The Treasury plans to start PPIP “as soon as possible,” spokesman Andrew Williams said in a statement today. “We’ve been encouraged by the interest from both investors and financial institutions who wish to participate in creating a market for these legacy assets,” he said.
Dimon has said previously that he’s eager to repay the government funds “as soon as is prudent.” Such a move would free the bank from compensation restrictions and other oversight that was tied to the bailout money. Goldman Sachs Group Inc. raised $5 billion this week in a share sale in order to help pay back the $10 billion it took from the government. Some analysts remain skeptical that banks will repay the funds any time soon. “It may be a back-half of 2009 event or probably into 2010, only because it sends the message of, ‘why is this bank OK, why can’t the other banks return the funds?’” William Fitzpatrick, an equity analyst at Optique Capital Management in Racine, Wisconsin, said in an interview on Bloomberg Television. The firm holds about 400,000 shares of JPMorgan.
JPMorgan’s Tier 1 capital ratio, which measures assets on a risk-adjusted basis, would be 9.2 percent excluding the TARP money, JPMorgan said in reporting earnings today. It’s currently 11.3 percent including the government funds. Dimon said on the conference call that the firm doesn’t need to raise capital to repay the funds. “It may not be entirely up to us,” he said. “I don’t think we need it.” Shares of JPMorgan rose 3 percent to $33.54 as of 10 a.m. in New York Stock Exchange composite trading. The stock was up 3 percent in the year through yesterday.
General Growth Files for Chapter 11 Protection in Biggest U.S. Real Estate Bankruptcy
General Growth Properties Inc., the second-largest U.S. shopping-mall owner, filed for bankruptcy after failing to refinance more than $27 billion of debt, most of it racked up through acquisitions. General Growth, which owns more than 200 shopping malls in the U.S., sought Chapter 11 protection in U.S. Bankruptcy Court in New York. The company listed $29.5 billion in total assets and debts of about $27.3 billion, making it the largest real estate bankruptcy in U.S. history. "While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11," Chief Executive Officer Adam Metz said in a statement today.
The filing lists Eurohypo AG, a unit of Commerzbank AG, as General Growth’s largest unsecured creditor with claims totaling $2.6 billion under two loans. Noteholders are owed about $4 billion in total. Much of the company’s debt can be traced to its $11.3 billion purchase of commercial-property developer Rouse Co. in 2004. The Chicago-based company lost 81 percent of its market value in six months after saying repeatedly it may have to file for bankruptcy. General Growth closed at $1.05 in New York Stock Exchange composite trading yesterday, valuing the company at $329 million. The shares traded as high as $67 in March 2007. Rouse and 165 other units were also included in the bankruptcy. General Growth said several properties that are part of joint ventures weren’t included.
The company on March 23 said that a deadline for bondholders to agree to new terms for $2.25 billion in debt expired without the minimum number of holders accepting the agreement. The company said on March 30 it was continuing to negotiate with creditors. Standard & Poor’s in November removed General Growth from the Standard & Poor’s 500 Index, saying the mall owner’s stock- market value of about $128 million at the time ranked it last in the index. Two weeks later, William Ackman’s Pershing Square Capital Management LP bought a 20 percent interest through shares and swaps. The hedge-fund manager has since boosted its General Growth stake, and now owns about a quarter of the company, Ackman said on March 16.
Pershing Square agreed to provide General Growth with $375 million in bankruptcy financing to help run the company during the Chapter 11 process, today’s statement said. General Growth’s history stretches back to 1954, when brothers Matthew and Martin Bucksbaum expanded their family’s grocery business by building the Town and Country Center in Cedar Rapids, Iowa, one of the Midwest’s first regional shopping malls. General Growth became the No. 2 U.S. mall owner in 1989 when it bought the assets of Center Cos., and in 1993 raised about $300 million in an initial public offering. For the first time in its history, General Growth in October was turned over to someone outside the family when it replaced CEO John Bucksbaum, Matthew’s son, with Metz. John Bucksbaum replaced his father as chairman last year, and remains in that position. Martin Bucksbaum died in 1995.
John Bucksbaum’s removal as CEO followed the October departure of Chief Financial Officer Bernard Freibaum after he sold 2.95 million shares to meet margin calls. An affiliate of a Bucksbaum family trust had loaned Freibaum $90 million to pay margin debt. Bucksbaum’s failure to disclose the loan violated company policy, a review by General Growth’s independent directors found. Only Simon Property Group Inc., based in Indianapolis, owns more U.S. malls than General Growth. Marcia Goldstein of Weil Gotshal & Manges LLP and James Sprayregen of Kirkland & Ellis LLP are the lawyers representing General Growth in the bankruptcy. The company also hired turnaround firm AlixPartners LLP and investment bank Miller Buckfire & Co., court papers show.
Europe Industrial Output Drops 18.4%, Most on Record
Industrial production in Europe contracted by the most on record in February as the deepening global recession curtailed demand for manufactured goods around the world. Output in the euro region fell 18.4 percent from the year- earlier month, the biggest drop since the data series began in 1986, after a revised 16 percent decline in January, the European Union’s statistics office in Luxembourg said today. Economists expected production to fall 18 percent in February, according to the median of 16 estimates in a Bloomberg survey. Inflation slowed in March to 0.6 percent, a record low, the office said in a separate report.
Factories across the 16-nation euro zone are cutting output and firing workers as companies cope with the worst global slump in 60 years. China’s economy, the world’s third-largest, grew at the slowest pace in almost a decade in the first quarter, the government said today. The Organization for Economic Cooperation and Development said last week that its data indicate the world economy is in a "deep slowdown." "Demand for euro-zone exports is falling through the floor," said Dominic Bryant, an economist at BNP Paribas in London. "We expect the European Central Bank to cut rates to 1 percent and that will be their floor in the near term as they are going to announce other measures" to spur lending and revive growth.
The European economy may shrink as much as 4.1 percent this year, the OECD forecast on March 31. All 30 economies in the OECD, which doesn’t include China, will be in a recession by year end, the Paris-based organization said. The euro extended declines against the dollar after the data’s release. The single currency fell to $1.3156 at 10:25 a.m. in London, down 0.5 percent on the day. ASML Holding NV, Europe’s largest maker of semiconductor equipment, yesterday reported a first-quarter loss as sales plunged 80 percent. In December, the Veldhoven, Netherlands- based company said it would cut about 1,000 jobs and temporarily shut production facilities in the first and second quarters.
Rohwedder AG, a Bermatingen, Germany-based maker of robots and testing equipment, said on April 14 that its full-year loss widened because of the "the enormous repercussions of the global economic crisis" on investments in the automotive and telecommunications industries. Falling industrial output adds to pressure on the ECB to use more unconventional measures to revive the credit markets and boost the economy as it runs out of room to reduce interest rates. The Frankfurt-based central bank has cut the benchmark rate to a record low of 1.25 percent and ECB President Jean- Claude Trichet signaled another quarter-percentage-point cut is likely next month.
ECB council member Axel Weber said yesterday he is against lowering the key rate below 1 percent and would prefer not to buy corporate debt, suggesting policy makers are split over how to haul Europe out of the recession. Council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus have both indicated they may support cutting the benchmark below 1 percent and purchasing debt securities. Orphanides said in an April 11 interview that the ECB may have to continue easing monetary policy beyond next month because "the risk of deflation had increased somewhat in the past few months."
Today’s report confirmed that inflation in March slowed to 0.6 percent, the lowest rate since the euro-area data were first compiled in 1996. The ECB, which aims to keep the inflation rate just below 2 percent, last month predicted annual price gains would average 0.4 percent this year and 1 percent in 2010. The data "are a stark reminder that the downward trend in euro-zone inflation is firmly established," said Martin van Vliet, an economist at ING Groep NV in Amsterdam. "Further unconventional policy easing by the ECB is needed to counter the threat of a prolonged period of below-target inflation."
European car sales tumble
Car sales in Europe tumbled again in the first quarter of 2009, putting further pressure on cash-burning manufacturers, and fell in March for the 11th month in a straight row. The ACEA European car makers association, which counts all European manufacturers as members, including the Opel/Vauxhall unit of General Motors Corp, which is fighting for survival, said car sales fell 17.2 percent in the first quarter of 2009. The March decline was less steep, however, as car registrations fell 9 percent in March compared with a year ago.
In western Europe, March sales fell 8 percent to 1.43 million cars, despite a 39.9 percent increase in Germany, the region's biggest market, where a government incentive scheme was put in place in January. Similar schemes providing cash benefits to scrap old cars and buy new, less-polluting cars, also pulled French sales up 8 percent, and there was a 0.2 percent rise in Italy. But British sales dropped 30.5 percent in what would normally be a strong month, as a reflection of overall lack of confidence in the economy, AEA said. Likewise in Spain, where sales plunged 38.7 percent. In Europe, Volkswagen remained the biggest-selling group, but first-quarter registrations fell 9.4 percent to 714,453 units. PSA Peugeot Citroen's fell 19.2 percent to 433,422 units.
U.S. Regulators to Detail Stress-Test Methods Ahead of Results
The Federal Reserve and other regulators conducting stress tests on the 19 biggest U.S. banks will disclose how they carried out the examinations before any results are released, people familiar with the process said. The regulators plan to publish a paper on their methods within the next two weeks, ahead of the release of results by early May, in an effort to bolster credibility in the process. "The more markers or sign posts you can put on the path, the more helpful it will be," said R. Scott Siefers, managing director at Sandler O’Neill Partners L.P., a New York research firm specializing in bank stocks. "There are a lot of questions in investors’ minds."
Procedures for releasing information on specific firms, which will expose weaker banks and boost confidence in stronger ones, are still under discussion. Bank regulators may also encourage each of the 19 firms to release an individual statement on the results of its own stress test, according to another person familiar with the matter. The Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Office of Thrift Supervision are using the tests to determine whether the top 19 banks have enough capital to cover loan losses during the next two years if the economy shrinks, unemployment surges and housing prices keep declining.
The Fed, the nation’s primary regulator of bank holding companies, is leading the analysis on how much capital banks might need. Fed Chairman Ben S. Bernanke and the Fed Board met yesterday to discuss the government’s bank-support program. While the tests are a central element of the administration’s financial-industry rescue, top U.S. Treasury officials aren’t participating in the reviews in order to maintain the independence of the regulators. The Treasury also won’t be a contributor to the white paper. The economy has worsened since the Treasury first announced the tests in February, raising questions about whether the baseline scenario regulators are applying to bank portfolios is rigorous enough.
The baseline forecast projected a 2 percent economic contraction and an 8.4 percent jobless rate in 2009, followed by 2.1 percent growth and 8.8 percent unemployment in 2010. An "alternative more adverse" scenario had a 3.3 percent contraction in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth and 10.3 percent jobless in 2010. Economic output fell at a 5 percent annual pace in the first quarter, according to the median estimate in a Bloomberg News survey. The unemployment rate rose to 8.5 percent in March, a 25-year high, and the amount of industrial capacity in use fell to a record low of 69.3 percent. "There is a sense that the worst case is becoming the base case," said Siefers. "People are starting to view double-digit unemployment as a foregone conclusion."
Still, there are early signs of a strengthening banking sector. Goldman Sachs Group Inc. said April 13 earnings for the first quarter were $1.81 billion, or $3.39 a share, after a surge in trading revenue. The results were better than analysts’ expectations of $1.64 and the New York-based firm sold $5 billion in stock to help repay government capital injections. Wells Fargo & Co. said April 9 it would report net income of $3 billion, 50 percent more than the previous year’s period. The San Francisco-based bank said it closed $100 billion of mortgages in the quarter with an equal amount waiting to be finished, a signal that banking business is picking up.
JPMorgan Chase & Co. reports earnings today and Citigroup Inc. may report as soon as tomorrow. Bank of America Corp., Wells Fargo and Morgan Stanley are scheduled to announce results next week. The tests are designed to mesh with the administration’s effort to remove distressed mortgage assets from banks’ balance sheets, which have hampered lending to consumers and businesses. Officials aim to have the first purchases of the toxic assets by private investors financed by the government within weeks of the conclusion of the capital-need assessments. The Treasury estimates it has about $135 billion left in the financial-rescue fund enacted in October.
In their assessments, regulators will look at off-balance- sheet commitments, earnings projections, risks of the banks’ business activities and the composition and quality of their capital, according to the Treasury. The exams will help provide a ranking of the financial health of "one institution relative to another," Frederic Mishkin, a Columbia University economist and former Fed governor, said in a Bloomberg television interview. "That can be very useful if government then decides it needs to take steps to deal with weak institutions."
TARP Cash Isn't Moving Forward
The largest bank recipients of U.S. government aid are offering less credit to businesses and consumers, the Treasury Department said Wednesday, reflecting and exacerbating the tenuous state of the current economic environment. In a monthly snapshot of lending by the 21 largest banks receiving Troubled Asset Relief Program funds, the Treasury said credit being offered fell 2.2% across all commercial-lending and consumer-lending categories in February, compared with the prior month. Particularly problematic: continued deterioration in commercial real estate and general business lending, as well as the credit being made available for student and auto loans. The lone bright spot remained home loans, with consumers eager to take advantage of record-low interest rates to refinance their mortgages.
The Treasury said 16 of the 18 banks surveyed increased mortgage originations in February, resulting in a 35% increase in mortgage lending from January levels. The February decline in lending adds to pressure on the Obama administration's efforts to restart the still-fragile credit markets. The Treasury has committed $95 billion in TARP funds for new programs to boost consumer and business lending, though they are either just getting started or are still in the development phase. The report suggests that jawboning by federal officials for banks to use TARP funds to boost lending is having a limited effect.
The Treasury blamed the decrease on the broader economic weakness, including low consumer confidence, high unemployment and a decrease in U.S. exports. It also said lending would have been lower absent the nearly $200 billion in capital injections the government has provided to about 550 banks. Banks' diminished appetites for lending are forcing businesses and consumers alike to curb their spending, which risks prolonging the U.S. economic recession. Dan Carl, who owns a handful of businesses including several car dealerships in Michigan, said Fifth Third Bancorp, Cincinnati, refused to renew some of his company's credit lines when they came due earlier this month. On other loans, Fifth Third raised interest rates and demanded Mr. Carl's firm put up additional collateral.
The lack of affordable credit was one factor prompting Mr. Carl's company to recently lay off 20% of the work force and close at least one dealership. Lenders such as Fifth Third are punishing "the good customers to make up for the banks' mistakes," he said. Fifth Third received $3.45 billion through TARP. It made $634 million of new commercial and industrial loans in February, down from $785 million in January and $1.3 billion in December, according to the bank's filing with the Treasury Department. "Demand for Small Business credit is still relatively stable but showing signs of weakening as application volume is starting to slow," Fifth Third said in its filing.
Fifth Third spokeswoman Stephanie Honan said the bank won't comment on specific customers. In reviewing loans, she said, Fifth Third considers overall economic conditions and "any changes to the customer's business environment." Overall, she said, the bank tries "to balance our commitment to our customers with safe and responsible lending practices." The banking industry's lending pullback was particularly severe with consumer credit. In February, according to the Treasury report, originations of new U.S. credit-card accounts fell 2.7%. That number likely understates the magnitude of the retrenchment. Many banks have been slashing borrowing limits on cards, especially for customers who rarely approach their limits.
By reducing the credit lines, the banks can free up space on their balance sheets. But the move risks infuriating consumers. Bank of America Corp., which received $45 billion through TARP and has the industry's largest U.S. card portfolio, said in its submission to the Treasury that credit-card loan balances and new account originations declined in February "due to continued reduction of exposure on long term inactive customers and line reductions on high risk accounts." Bank of America recently informed longtime customer James S. Jensen that the interest rate on his credit card would leap into the double-digits, even though he had never been late on a payment.
"I could borrow on the street for less than this," says Mr. Jensen, a 61-year-old vice president at Navistar Truck Group in Warrenville, Ill. Mr. Jensen says he is canceling his Bank of America card as a result. Bank of America spokeswoman Betty Riess said the Charlotte, N.C., bank is "taking a more aggressive look at accounts to control risk given the current environment."
A Deflated Fed Battles to Keep Prices Up
In 2002, Ben Bernanke gave a speech titled "Deflation: Making Sure 'It' Doesn't Happen Here." Now it's happened. On Wednesday, the Labor Department reported that in March the consumer-price index slipped 0.4% below its year-earlier level, the first decline in over 50 years. The "core" CPI, which excludes food and energy prices, was up 1.8%, but it is possible that even people who don't drive or eat could see price declines in the months to come. Up until the financial crisis hit, much of the world was focused on filling U.S. consumers' widening maw. But now consumers are on a diet, and it is hard to imagine them returning to their spendthrift ways anytime soon. That leaves anyone in the business of selling goods and services to Americans in a bind. To stay afloat, they will all compete harder for the sales that are left. Stiffer competition makes for lower prices.
Amid continuing credit woes, a protracted spell of deflation would be particularly unwelcome. Falling prices would make it tougher for borrowers to pay off debt, leading to even more defaults and even tougher lending standards. Mr. Bernanke knows this, and is fighting back. One of the deflation-fighting measures the Federal Reserve chief outlined in his 2002 speech was that the government could ramp up spending or lower taxes, and the Fed could buy the Treasurys issued to finance such moves. In practice, that is like printing money and handing it out to households, and it is pretty much what is happening now. When the fight is between falling prices and the Fed, it is hard to predict which will prevail. But it isn't hard to predict that the outcome will be messy.
Bernanke Frets as Variable Notes Strip Taxpayers in N.Y., Texas
Houston’s deputy controller, James Moncur, figured last May the fourth-largest U.S. city escaped the unraveling credit markets by refinancing some of its $1.8 billion of auction-rate bonds. Instead, Houston wound up paying 15 percent interest on the new securities, not the money-market rates city officials had anticipated. The so-called variable-rate demand notes backfired when investors fled the market in October, forcing the bank that had guaranteed the bonds, Brussels-based Dexia SA, to buy them. "This was like round two of the great financial crisis of 2008," Moncur, 56, said. "We were under the impression we had taken care of the problem."
The $479 billion market for the securities, whose rates are typically reset by banks every day or week, is turning into a quagmire for local officials who embraced a financing strategy they didn’t fully understand. Federal Reserve Chairman Ben S. Bernanke said last month that U.S. taxpayers may wind up as the buyers of last resort for the debt, known as VRDNs. "A large volume" of variable-rate demand notes were forced back to banks and "exposed the vulnerabilities of the VRDN market, raising questions about the desirability of its continuation as a significant vehicle for municipal finance," Bernanke said in a March 31 letter to Representative James Moran, a Virginia Democrat.
VRDNs, like auction-rate bonds, offer borrowers short-term interest costs on longer-term debt because rates on the notes are reset at regular intervals. Auction-rate securities fell apart in February 2008 when bankers who had provided support for two decades abandoned the market, stranding investors with notes they couldn’t sell and borrowers with annualized interest as high as 20 percent. Dozens of local governments sold VRDNs to pay off their auction-rate obligations. Lower-rated borrowers in the variable- rate market are required to have a guarantor, called a credit facility provider, who promises to buy bonds investors don’t want. Interest rates are set by banks at a level they expect investors will accept.
The market lost favor among municipalities this year as costs to guarantee the bonds increased and issuers incurred unexpected charges to get out of their privately negotiated transactions. Sales of tax-exempt debt with variable interest rates plummeted 55 percent to $9.6 billion in the first three months of the year, according to data compiled by Bloomberg. New issues dropped even as the average weekly rate on the securities fell below 1 percent, to as low as 0.48 percent on Feb. 4. Houston agreed to pay the 15 percent annual rate for 60 days, Moncur said. Harris County, Texas, later bought $118 million of the city’s taxable VRDNs and the rate is currently 6.9 percent, he said. Houston is the Harris County seat.
Banks, reeling from almost $1.3 trillion in credit market losses since the start of 2007, raised the cost for providing guarantees as much as 10-fold, Concord, Massachusetts-based Municipal Market Advisors said in January. Some borrowers that want to refinance VRDNs are stuck since the bonds are "often paired with interest-rate swaps that would be quite costly to unwind because many of the swaps are now underwater," Bernanke said.
Municipalities use swaps -- private agreements in which a borrower and another party agree to exchange interest rates -- to create fixed-rate obligations by joining them with variable- rate debt. If the arrangements go awry, issuers have to pay fees to terminate the contracts. The New York State Dormitory Authority wound up paying bankers $26.8 million to get out of $390 million of VRDNs last month, after Dexia increased the fees for its letter of credit to 0.5 percent from 0.27 percent and interest rates on the bonds rose as high as 8.48 percent, according to public disclosures. Besides the cancellation fee, the dormitory authority paid $2.76 million to underwriters led by Goldman Sachs Group Inc. to sell about $500 million of new bonds.
As with all variable-rate notes and swaps, terms of the sale were set in negotiations with underwriters, not through competitive bidding. When fees from the new debt are added to interest, the total financing cost was 6.11 percent, according to Marc Violette, a Dormitory Authority spokesman. The yield on the Bond Buyer 20 index of interest costs on 20-year general obligation bonds averaged 4.96 percent for the past year. The new dormitory bonds, like the old, were backed by state appropriations and financed the construction of mental health facilities. Borrowers in the $2.69 trillion market for state and local government debt increased swap agreements while abandoning sales of bonds through competitive bidding.
Competitive sales reduce interest costs on municipal debt from 0.17 percentage point to 0.48 percentage point, according to a study by Mark D. Robbins, an associate professor at the University of Connecticut in West Hartford, and Bill Simonsen, a professor at the institution. The survey, titled "Persistent Underwriter Use and the Cost of Borrowing," was published in the winter 2008 issue of the Municipal Finance Journal. VRDN fees may increase because banks don’t want to risk being forced to buy bonds that investors shun, said Michael Marz, vice chairman of First Southwest Co. in Dallas, the third- largest financial adviser to state and local governments. Most variable-rate debt requires a bank guarantee to be eligible for sale to money market funds, and banks are only willing to back the highest-rated credits, said George Friedlander, a municipal market analyst at Citigroup Inc., in an April 3 report.
Local governments with credit ratings above A- can obtain letters of credit, while those with lower grades are struggling, said Michael Decker, co-chief executive officer of Alexandria, Virginia-based Regional Bond Dealers Association, which represents about 20 securities dealers and underwriters, most based outside New York. Mendocino County, California, was rejected for a $26 million loan in a pool of borrowers seeking short-term funding for operating expenses because its rating was too low for the bank backing the debt, said Shari Schapmire, the county treasurer. Mendocino, which has an A- rating from Standard & Poor’s, may have to pay $750,000 more to get the money on its own, which may force officials to trim some of the government’s 1,400 workers, she said.
Variable-rate borrowers "are experiencing substantial increases" in costs, said Bernanke in his letter. The market for municipal variable-rate debt "appears to be under more stress" because investors have been putting their bonds back to the guarantor bank, he said. State and local governments have asked the U.S. government to provide guarantees for VRDNs as costs of bank assurances rise. U.S. Representative Barney Frank’s Financial Services Committee is writing legislation to help create a new backstop. Houston’s decision to convert to variable-rate debt has drawn criticism from Councilman Peter Brown, who said officials shouldn’t have agreed to floating-rate debt with a 15 percent penalty rate, given the turmoil in financial markets. "The city ended up holding the bag," said Brown, who is running for mayor. "We should have been smarter so we were not put into this position."
New Jersey Pension System Deficit Rises to $34.4 Billion
The funding deficit of New Jersey’s public pension system climbed to $34.4 billion as of June 30, from $28.4 billion in mid-2007. The pensions were 72.6 percent funded as of June 30. That compares to a funded ratio in June 2007 of 76 percent, according to state Treasury Department officials.New Jersey’s largest pension fund, the Public Employees’ Retirement System, had an unfunded liability of $10.82 billion as of June 30, up from $9.07 billion as of mid-2007. That combines state and local systems. The state PERS had a funded ratio of 65.6 percent, compared with 68.8 percent in June 2007. The state has less money than it owes for anticipated pension obligations because of investment losses earlier this decade, a lowering of the retirement eligibility age and a failure by past governors to make annual contributions.
The value of the pension system’s assets dropped to $56.3 billion as of February, from more than $82 billion as of June 2007, after losses on investments. Governor Jon Corzine, a first-term Democrat seeking re- election in November, has tried to slow the deficit’s growth by making regular pension payments. His administration has contributed about $3 billion into the system since he took office, compared with $3.2 billion contributed in the previous 14 years, according to the treasurer’s office. Corzine’s administration also has enacted pension and benefit changes that are projected to reduce costs to the systems by more than $6 billion over the next 10 years. These include raising the retirement age and requiring newly appointed and elected officials to enroll in a less costly, defined- contribution plan, treasury spokesman Tom Vincz said.
Around the U.S., many state plans are experiencing increases in unfunded liability, Vincz said. A recent report from Wilshire Consulting showed that 59 other state retirement systems reporting actuarial data from fiscal 2007 to fiscal 2008 had sharply reduced funding ratios, with the average state ratio falling by 11 percentage points, from 88 percent to 77 percent, he said. "All of this said, there are multiple factors that influence the liabilities of the system, not the least of which is investment returns, which have not kept pace with rising liabilities," Vincz said in an e-mail.
Corzine, the former chairman of Goldman, Sachs & Co., last month proposed reducing the state’s annual pension payment by $500 million, to $400 million, to help close a $7 billion state budget deficit for fiscal 2010, which begins July 1. The governor signed legislation allowing cash-strapped municipalities and school districts to defer half of their $1.1 billion in pension contributions due this month. The funding gap for the teachers’ and the police and firefighters’ funds also increased between 2007 and 2008, reports released this month show. The overall state pension system operates on behalf of more than 700,000 current and retired employees.
Investors Seek Proof of GE's Deep Pockets
When General Electric reports earnings Friday morning, investors are likely to focus on whether the conglomerate has enough of a cash cushion to absorb losses in future quarters without raising additional equity. Analysts differ on how vulnerable GE is to cash woes, but most agree it is the area to monitor. Goldman Sachs research shows GE's loan loss reserves are at 2%, compared with 3% for U.S. banks. Customer progress payments -- deposits customers make on future orders -- started to diminish in the second half of 2008 to $2.9 billion, down 37% from $4.6 billion in 2007, and Goldman predicts further declines.
GE has raised capital and paid off debt in the past six months, and has more tools left in its corporate finance toolbox. It spent six hours in March presenting details of its risk-reduction efforts to investors. "We don't see a need where we would have to raise external capital," said Chief Financial Officer Keith Sherin during the investor meeting. He noted GE can still raise debt at the parent level, largely through a federal-government program that guarantees banks' bonds, and can cut costs further or sell assets if need be. The company said in March it would earn money in the first quarter and indicated 2009 earnings in GE Capital, its financial services unit, could be $2.5 billion instead of $5 billion as it had earlier predicted.
GE is banking on its industrial units to help it through recession-related losses at GE Capital. Investors will be looking at how well GE's industrial-products sales and orders are holding up in the recession. According to Thomson Reuters estimates, analysts expect earnings to be 21 cents a share compared with 44 cents a share last year, when GE missed earnings estimates significantl
Don’t set Goldman Sachs free, Mr Geithner
Should Tim Geithner let Lloyd Blankfein escape? Mr Blankfein, the chairman and chief executive of Goldman Sachs, is eager for his institution to become the first big bank to shake off the stifling embrace of the US government. Mr Geithner, the US Treasury secretary, must decide whether to let him. Mr Blankfein’s argument is seductive: it is Goldman’s “duty” to pay back the $10bn in taxpayer money it took last autumn when its future – and that of the global financial system – looked dicey. Goldman seems to be doing fine now: this week, it reported unexpectedly robust first-quarter earnings of $1.8bn. It has spent recent weeks attempting to turn its repayment into a fait accompli. First, Mr Blankfein made a contrite speech assuring investors – to the irritation of its rivals – that Goldman was sadder and wiser and would buckle down to pay reform. Then he raised $5bn in capital from those investors to wave in front of the Treasury secretary.
But Mr Geithner should take his time. Not only is the future of Goldman and other taxpayer-backed banks unclear, given the unstable US economy, but Goldman wants to escape the burdens of political control while retaining the benefits of public backing. That does not seem like a good deal for the taxpayer. There are obvious political risks in letting Goldman roam free while other banks remain bound by the troubled asset relief programme (Tarp). It would exacerbate suspicions that Goldman, with its long history of producing Treasury secretaries, gets special treatment. These were not soothed by the decision to pay off all Goldman’s credit default swaps with American International Group, now controlled by the state.
The bigger danger is the long-term precedent it would set. Goldman wants to bolt before Congress or Mr Geithner, who still operates as a one-man band while the nomination process for his senior staff meanders along, has the chance to change fundamentally how it operates. So far, it has faced mildly irritating limits on how much it can pay staff but nothing on the scale of the 1933 Glass-Steagall Act, which imposed structural reforms on Wall Street after the excesses of the Jazz Age. It would never acknowledge it, but its political campaign is going just fine. This week’s results illustrated this. Goldman has reduced its leverage ratio sharply – its assets are now only 14 times capital, compared with 26 times at the end of 2007. Yet its fixed income and currencies trading desks have exploited the wide spreads caused by market disarray to make more money than ever.
Goldman has plenty of capital and a cash pile of $164bn, which it keeps stuck in short-term Treasury bonds in case of future turmoil. Not only does it show no sign of being in danger any more, but it has abundant resources to exploit the weakness of others by buying distressed debt and discounted private equity stakes. Mr Blankfein criticised Wall Street’s past pay practices as “self-serving and greedy” but Goldman is still putting aside 50 per cent of revenues – $4.7bn in the first quarter – for the bonus pool. Inside, it may feel “humbled”, as Mr Blankfein said, but it looks like the same old bank. The same, that is, except for one thing – Goldman is now backed by the US government. That is why Mr Blankfein wants to repay the Tarp money. Once it has repaid the $10bn, Goldman hopes to go back to paying employees what it wants, buying and selling more or less what it fancies and operating as before.
He is peddling an illusion. Even if Goldman repays the equity, the world has changed irrevocably because it is a government-backed enterprise. That will formally be true for a year at least. As well as the preferred shares it took from the Tarp, it has raised another $28bn in bonds backed by the Federal Deposit Insurance Corporation and intends to carry on using the FDIC’s balance sheet. More fundamentally, we now know unambiguously that Goldman is a “systemically important financial firm”. In other words, Goldman is too big to fail and would be bailed out by the US government if its balance sheet failed. That privilege should come with weighty conditions.
Note that Goldman’s status is a choice, not a tag it has unwillingly been given. It could avoid this by shrinking itself into an institution like a private equity group or a merchant bank, which can take all the risks it desires because its partners lose everything if it fails. Goldman does not want to do that because it likes having the engine of its capital markets division and equities operations alongside its advisory and fund management arms. It calculates, probably correctly, that the pay-obsessed Congress is not sufficiently serious to put a new Glass-Steagall Act in its way. But there is no clarity yet that Goldman or other Wall Street banks will be forced to pay an appropriate levy for government backing. Unless it is high, they have no incentive to be truly independent.
There is no need to look back far to observe how pernicious a combination of private ownership, implicit public backing and inadequate regulation can be. This produced the Fannie Mae and Freddie Mac fiascos. If Mr Geithner cannot think of a sound structural reform to limit the size of Wall Street banks, he must at least make regulatory restrictions bite. He has talked of capping their leverage and their latitude to indulge in proprietary trading but not defined what this means in practice. He ought to keep Goldman on the leash until he has set out the price it must pay for its newfound privileges. If he lets Mr Blankfein dash straight back to business as usual, Goldman will have won again.
SEC Puts Ratings Firms on Notice
Securities and Exchange Commission Chairman Mary Schapiro said the agency has "more to do" in regulating credit-rating firms, adding fuel to a debate that includes ideas such as changing the way firms are paid. Ms. Schapiro on Wednesday said the performance of rating firms in mortgage-backed securities has "shaken investor confidence to its core." She was referring to criticism that firms gave overly optimistic ratings to mortgage-backed debt and were slow to make downgrades when defaults by homeowners rose. U.S. regulators and lawmakers are considering a range of ideas to get tougher.
Many of them focus on changing the system under which the top ratings firms -- including Moody's Corp., McGraw-Hill Cos.' Standard and Poor's and Fimalac SA's Fitch Ratings -- receive fees from the issuers they rate. The SEC passed some rules in December, including banning analysts who help negotiate fees from rating debt, but the range of opinions about further action remains wide. The SEC held a roundtable Wednesday where much of the attention was focused on ways to minimize potential conflicts of interest. Critics say the pay structure leads companies to shop their business to the firms that will furnish the highest rating. The so-called issuer-paid model accounts for 98% of ratings. Other credit-rating firms are paid by investors who subscribe to the rating service.
A recent 10-month SEC study found that rating firms put profits ahead of quality when determining ratings for mortgage-backed securities. At the roundtable, some participants suggested all firms should switch to the investor-paid model, while at least one person suggested fees be paid out of the rated bonds' interest payments. Ms. Schapiro said during her confirmation hearing in January she was evaluating the idea of an independent oversight body focused on credit ratings, akin to the Financial Accounting Standards Board, which sets accounting standards. Other ideas include having stock exchanges assess fees on trades that could form a pot to pay for ratings.
Wednesday, Ms. Schapiro posed the idea of taking a page from a settlement earlier this decade to resolve conflicts of interest in investment banking and research. The settlement required investment banks to distribute independent research along with the firm's own research. Lawmakers are also studying changes. Sen. Jack Reed (D., R.I.), chairman of a Senate banking subcommittee, is considering legislation that would make it easier for investors to bring class-action lawsuits against rating firms if they misrepresented the risks of securities they assessed. Sen. Charles Schumer (D., N.Y.) is considering introducing a bill that would require credit-rating firms to separate their consulting business from the ratings business, an aide said.
World Trade Center Won’t Be Back ‘Til 2037
It will be nearly 40 years after 9/11 before the World Trade Center rises again. Ground Zero’s owners have proposed indefinitely postponing the construction of two of three skyscrapers planned by developer Larry Silverstein. Real estate magnate Cushman & Wakefield drafted a report for the Port Authority of New York and New Jersey on Silverstein's plan for his three towers. It predicts that one tower may not be built until 2037, according to the Daily News. And the 1,776-foot Freedom tower – the heart of the reconstruction – won’t have occupants until 2019.
The study paints a bleak picture of the future of Ground Zero – one beleaguered by delays, costs and contentious talks that blanket the legacy of the site in a bureaucratic shroud.
Officials familiar with ongoing talks with Silverstein and the Port Authority say the agency has agreed to back financing for one of three planned Silverstein towers. Silverstein wants financial backing for two towers.But the Port Authority, which calls the study a “market-driven analysis” rather than a proposal, according to the Daily News, says the real estate market conditions should determine when the other two towers are built.
Given the current economic crisis and real estate meltdown, it’s a wonder whether the towers will be built at all. "The Port Authority's obligation is to rebuild the site in the public interest based on the economic reality today," Port Authority spokeswoman Candace McAdams told the Daily News. "That starts with keeping the memorial and the other public infrastructure on the time line and budget we've committed to. It extends to building the right amount of office space to meet what is now a very different market downtown."
Silverstein’s camp purports some optimism. "The Port Authority's position seems to be based on a totally pessimistic attitude about New York's economic future," Janno Lieber, director of Silverstein's World Trade Center redevelopment effort, told the Daily News. "Our view is that New York will bounce back strongly over the next five years while we are building these buildings." Well, Ms. Lieber, we certainly hope you’re right.
Raffles Hotel put on market as Prince Alwaleed attempts to stop wealth draining away
A byword for colonial grandeur, and a favourite watering hole of such literary luminaries as Somerset Maugham, Joseph Conrad and Rudyard Kipling, Raffles Hotel, home to the Singapore Sling cocktail, has been put up for sale for up to $450 million (£300 million). Apparently, the hotel's owner, Prince Alwaleed of Saudi Arabia, is feeling the pinch. The Times understands that Fairmont Raffles Hotels International, in which the Prince's Kingdom Holding Company (KHC) has a controlling stake, is seeking buyers for its remaining hotel assets, despite the depressed state of the property market, and it is understood he may even be prepared to sell his stake in the company itself.
Hotel industry sources believe that the Prince, dubbed the Warren Buffett of the Gulf, is looking at a range of disposals in response to the sharp fall in value of some of his biggest investments. KHC has seen a big drop in the value of its investments in companies including Songbird Estates, the majority owner of Canary Wharf, Euro Disney and News Corporation, parent company of The Times. Kingdom Hotel Investments, a small London-listed vehicle in which he has a 55 per cent stake, has lost more than two thirds of its value in the past 12 months. But it is his 3.9 per cent stake in Citigroup, long seen as a bellwether of his fortunes, that has caused the biggest hole in his wealth, falling from more than $50 a share two years ago to less than $4. In October he sought to stabilise the situation by upping his holding to 5 per cent, but the shares have continued to fall.
According to Fortune, the Prince's wealth has fallen from $21 billion to about $13 billion over the past year, putting him 22nd in the magazine's list of the world's top billionaires, although the Prince himself claimed the figure understated his riches. But industry insiders insist that the Prince is keen to raise funds by selling parts of his huge hotel empire. While his 45 per cent holding in Four Seasons, the luxury operator, is said to be sacrosanct, there are strong rumours that he may be willing to entertain offers for his 33 per cent stake in Mövenpick Hotels, the Swiss chain. Some say that, for the right price, he would even consider selling The Savoy, in London, which is due to reopen at the end of the year after a £100 million refurbishment.
“He's having a very challenging time,” one analyst, who is intimately acquainted with the Prince's affairs, said. “He's definitely a seller rather than a buyer. He'd sell just about anything at the right price, although finding buyers able to fund such deals is the challenge.” Fairmont Raffles, created from the merger three years ago of the Fairmont and Raffles groups, is a joint venture with Colony Capital, the US investment firm that once co-owned The Savoy. The group has 123 hotels under the Fairmont, Raffles, Swissôtel and Delta brands. Since the merger, the group has focused on becoming an operating company by selling most of its assets under sale and manage-back deals, including the Fairmont Banff Springs, in the Rocky Mountains, and the Fairmont Acapulco Princess, in Mexico.
Property industry sources said that the group was now becoming “more flexible” on price in an attempt to shift its remaining assets, including Raffles itself, which is tipped to fetch between $350 million and $450 million. Other assets for sale include the Fairmont Copley Plaza, in Boston, and the Fairmont Hotel Vier Jahreszeiten, in Hamburg, although the sale of the latter has been hampered by the huge investment required. KHC could not be reached for comment.
Alistair Darling poised to slash spending and raise taxes in Budget
Alistair Darling is considering fierce public spending curbs and deferred tax rises to convince the markets that Britain will emerge eventually from its massive debt.
The Chancellor is likely to predict in next Wednesday’s Budget that the economic recovery will start around the turn of the year. But he will have to decide within days how far to go in highlighting deferred spending economies and tax rises after 2011 and how much to save up for the Pre-Budget Report in November. The Government’s borrowing isexpected to balloon to almost £175 billion a year in each of the next two years as the recession triggers a surge in public spending and a slump in tax payments.
The scale of the Treasury’s slide into the red, expected to be confirmed by the Budget, is set to push the deficit to as much as 12 per cent of GDP — a level not seen since the Second World War and far above an 8 per cent peak reached after the 1990s recession under the Conservatives. The latest Treasury survey of City economists’ forecasts, released yesterday, shows an average prediction that public borrowing will hit £160 billion in 2009-10 (compared with the Chancellor’s £118 billion projection last autumn) and rise to £167 billion in 2010-11.
Mr Darling is expected also to focus on environmental measures as part of the recovery. Today, as the Cabinet meets in Glasgow, ministers will say that discounts as high as £5,000 could be made available to help buyers of electric cars. Gordon Brown has said that there should be a roadside network of charging points for cars and incentives for carmakers. Treasury insiders say that while the Chancellor is determined to show that his "direction of travel" is towards balancing the books over several years, he will not want to do anything to jeopardise the recovery. Most economists believe that the public finances cannot be restored to health without big spending cuts, tax rises or both.
One Treasury insider said: "There are two fiscal events each year with the Budget and Pre-Budget Report and we can use each to make adjustments. There has to be clawback — we know that. The key judgment is when to announce it." The extent of these — on top of those already announced, such as the new top rate of income tax of 45 per cent for people earning more than £150,000 — will be determined in discussions between Mr Darling and Mr Brown. Most of the focus after the last PBR was on future tax rises. But Mr Darling slashed the growth in spending after 2012 from an already painful 1.8 per cent to 1.2 per cent. He could go even farther to show his seriousness about setting the finances straight once the shocks to the world economic system have calmed. That will mean cuts of billions from planned programmes.
Mr Darling will make a drastic revision of his growth and borrowing forecasts from the PBR, arguing that the downturn has been far worse than experts expected. He will admit that his hopes last November that growth might resume by the middle of this year have been dashed and he is likely to say that the economy will contract overall by about 3 per cent this year, the worst performance since the Second World War. The City forecasts that the economy will shrink by 3.7 per cent this year and grow by just 0.3 per cent in 2010.
Here's 5,000 pounds - go and buy an electric car
Motorists will be offered up to 5,000 pounds from 2011 to encourage them to buy electric or hybrid cars to promote low-carbon transport over the next five years under a new government plan. Business Secretary Peter Mandelson and Transport Secretary Geoff Hoon announced the initiative in Scotland as part of a 250 million pound scheme to cut emissions and at the same time help the struggling motor industry. "Cutting road transport CO2 emissions is a key element to tackling climate change," said Hoon. "Less than 0.1 percent of the UK's 26 million cars are electric, so there is a huge untapped potential to reduce emissions.
"The scale of incentives we're announcing today will mean that an electric car is a real option for motorists." Drivers will receive between 2,000 and 5,000 pounds towards buying their first electric and plug-in hybrid cars when they hit the showrooms in 2011. Electric cars cost an average of 12,000 pounds, but go up to over 80,000 pounds for high-performance models. The plan also sets aside 20 million pounds for charging points and infrastructure to develop a network of what the government calls "electric car cities". Last week, London Mayor Boris Johnson announced a plan to introduce thousands of charging points across the capital.
A national demonstration project will be rolled out, giving some 200 motorists in the UK the opportunity to drive a cutting-edge car and give feedback to the industry. "We want the British motor industry to be a leader in the low carbon future, and government must direct and support this, through what I call new industrial activism," Mandelson said. The two ministers were planning later on Thursday to drive a new Mini-E electric vehicle in Dunfermline in Scotland in a demonstration of the technology available.
Nine UK building societies have credit ratings downgraded
Nine of Britain’s biggest building societies, including Nationwide, have had their credit ratings downgraded in anticipation of further pain to come in the UK housing market. Marjan Riggi, Moody’s lead analyst for UK mortgage lenders, said that the action had been taken after stress-testing scenarios that incorporated a peak-to-trough decline in house prices of 40 per cent. Some building societies have been downgraded by three notches, making it more expensive for them to raise funding in the wholesale markets.
As well as Nationwide, Moody’s downgraded Chelsea Building Society, West Bromwich, Principality, Newcastle, Skipton, Yorkshire, Norwich & Peterborough and Coventry. Some are considering challenging their ratings with Moody’s. At the same time, there are signs that the cost of borrowing for homeowners may have bottomed out, with Barclays set to increase the cost of fixed-rate mortgages despite the Bank of England leaving interest rates unchanged this month. Other lenders are expected to follow suit. Barclays is pulling a 3.99 per cent four-year fixed-rate deal for borrowers with a 40 per cent deposit, from tomorrow. It is also increasing the costs of its three- and five-year fixes by up to 0.4 percentage points.
Woolwich, the mortgage arm of Barclays, blamed the decision on a rise in the cost of longer-term wholesale borrowing, which banks use to fund new mortgage lending. The bank is the first big lender to increase rates since the cost of borrowing hit a historically low level at the beginning of February. Brokers see this as evidence that mortgage rates have no further to fall. Melanie Bien, of Savills Private Finance, said: “It was only a matter of time before lenders starting edging up their longer-term fixes. Borrowers who have been trying to time the bottom of the market in terms of mortgage rates may be wise to secure a longer-term fix now.”
V or W? The China Economy Question
Economists are roundly cheerful about China's worst quarterly economic performance in nearly 20 years. The 6.1% year-to-year GDP growth in the first quarter -- way down from the double-digit growth levels of recent years -- does belie some encouraging signs for the economy. Manufacturing output, up 8.3% year-to-year in March, is growing at a healthy clip again. A range of indicators, from rebounding car sales to faster fixed asset investment growth, all look positive. In sum, a belief that the last three months represents the trough of China's slowdown has taken hold, with credit due to last autumn's $586 billion fiscal stimulus and a massive surge in lending from state-owned banks, mainly to state-owned enterprises.
Now the debate among economists is becoming more alphabetical. Is this recovery V-shaped, with China set to return quickly to the high-level growth of recent years? Or is it more W-shaped, as a government spending-led recovery this year peters out and China's longer term structural issues resurface? The risk in Beijing's spending-and-lending stimulus measures is of an eventual, large misallocation of resources. That the state-owned sector is driving the current recovery is clear. There are two purchasing managers' indices in China: The one that reflects activity among state-owned enterprises is now in positive territory, while the private sector-weighted index -- calculated by CLSA Asia Pacific Markets -- is still contracting.
Optimists argue Beijing's stimulus spending via state companies will have a multiplier effect on the rest of the economy. But the danger of crowding out potentially more efficient private-sector activity is high. In the absence of helpful external factors -- namely a resumption of Western demand for Chinese exports -- the government pump will continue to be the only thing preventing China's V-shaped recovery from turning W-shaped. China's fiscal strength will give it leeway to keep money flowing into state enterprises and projects if need be -- Stimulus II, so to speak. But reliance on government spending isn't a long-term alternative.
East Europe’s Recession to Deepen, Cause Downgrades, Fitch Says
Emerging Europe, the region hardest hit by the global economic crisis, will see its recession deepen before the outlook improves, which may lead to credit rating downgrades in about half the countries, Fitch Ratings said. "There’s further to go," Edward Parker, head of emerging Europe ratings at Fitch in an interview in London yesterday. "Real economic activity is still falling quite rapidly. This year will be by far the deepest recession since the early years of transition" from Communism to market economy two decades ago. The worldwide credit drought, which has left banks with more than $2 trillion in losses and writedowns, is taking its toll on emerging markets by cutting access to credit and investment.
A reliance on exports and a consumption-fuelled credit boom have left eastern Europe among the most vulnerable to the worst global economic slump since World War II. The region’s gross domestic product will shrink by 3.1 percent, the ratings company predicted last month. The contraction compares with GDP growth of 4 percent last year and an average pace of 6.8 percent in the five years through 2007. Fitch is forecasting a return to growth next year, at a 1.4 percent rate, which will be "a very weak recovery," Parker said. "It’s not going to feel like much of a recovery," he said. "We’re still going to see rising unemployment, pressure on bank balance sheets and public finances and some political pressures stemming from that."
Ten emerging European countries of the 21 Fitch rates risk being downgraded within about a year, Parker said. Russia, Hungary, Ukraine, Kazakhstan, Romania, Serbia and Georgia as well as the three Baltic nations of Latvia, Estonia, Lithuania, all have negative outlooks, which signals the company is more likely than not to cut their grade. "We have 10 countries, half the countries in the region, on negative outlooks or rating watch negative and none on positive outlook," said Parker. "That is a clear signal how we see the direction of creditworthiness in the region." The likelihood that an outlook is followed by a rating change in the same direction has historically been about 60 percent at Fitch, typically within a year, Parker said. The global economic crisis may raise those odds, he added.
"In the current environment where things are changing quite rapidly and there’s quite a bit of momentum in rating changes if anything the follow through may be higher than the historical average," he said. Fitch is assessing balance of payment trends, the ability of countries to refinance external debt, economic policy responses to the hardships and success in attracting international aid when deciding on rating cuts, Parker said. The ability of countries that have received bailouts from the International Monetary Fund to stick with the conditions, such as spending cuts, will also determine the credit grades.
The "weakest credits" in the region are Moldova, at B-, the sixth lowest junk rating, Ukraine, one step higher at B, and Georgia, one further at B+, said Parker. The assessment reflects that they are among the poorest countries in the region with weaker governmental institutions and more vulnerable to sharp declines in capital inflows, he said. The "strongest credits" are the Czech Republic and Slovakia, at A+, the fifth-highest investment grade, and Poland, two steps lower at A-, Parker said. Slovakia’s euro-region membership makes it a "safe harbor," while the Czech Republic and Poland are better placed than other east European countries to withstand "global shocks" because of their lower deficits, credible exchange rates and a lack of previous fast credit expansion, he said.
Most recently, Fitch cut the credit ratings for Estonia, Latvia and Lithuania on April 8, citing deteriorating economic prospects. Latvia’s economy will contract 12 percent this year, while the Estonian and Lithuanian economies will shrink 10 percent, Fitch estimates. "It is very rare for countries to go through that kind of savage economic adjustment," said Parker. "That will place strains on the macroeconomic policy framework and budgets and increase political pressures that governments face."
Dresden Job Losses Leave It Reeling as East German Boom Fades
Stefan Slesazeck arrived in Dresden in 1995 as the city in formerly communist eastern Germany started to flourish under capitalism. Now the boom has gone bust, and he says it’s time to go. The 33-year-old electronics developer at computer-chip maker Qimonda AG is one of about 3,000 employees in the technology industry around the capital of Saxony losing their jobs as Dresden’s economic turnaround begins to unravel. "Everybody here will be gone," said Slesazeck, as he marched through freezing rain with 1,500 other workers to protest the cuts that will force many of them to move elsewhere. "Then I’ll be unemployed," he said.
Dresden became the model of revival after the Berlin Wall fell, luring technology companies including Infineon AG, Advanced Micro Devices Inc. and Qimonda, which employ 44,000 people after investing 12 billion euros ($15.8 billion). Now, the city is more an emblem of how the poorer eastern regions of Europe’s biggest economy are struggling to cope with the financial crisis and rise of far-right extremism. Unemployment in Dresden, which was below 10 percent last year, may climb to 15 percent as jobs disappear, according to Dirk Hilbert, the deputy mayor in charge of the city’s economy.
"In the most critical scenario, the absolute worst-case scenario, we’d see the end of microelectronic production in the next five years," Hilbert said in a March 19 interview. That’s left the city of 500,000, which was destroyed by Allied incendiary bombs in World War II and first revived by subsidies under communism, asking for assistance, either from the state of Saxony or the federal government. Hilbert said such support for what locals call "Silicon Saxony" should include the purchase of a stake in Munich-based Qimonda, which filed for insolvency on Jan. 23 because of slumping prices for memory chips.
That call was echoed by the protesters alongside Slesazeck, as they whistled and chanted for state help in the March 19 demonstration through Dresden. "I’ll have to find another job, and in the current situation that won’t be easy," said Ronny Mueller, a 30-year- old Qimonda systems manager who was on the march. As joblessness increases, so is the kind of disaffection that’s blighted eastern Germany since the demise of communism. Some 6,000 members of neo-Nazi groups marked the 64th anniversary of Dresden’s destruction in February with one of the biggest anti-immigrant protests in Germany since reunification.
The number of reported crimes against foreigners in Saxony rose 55 percent last year, and anti-Semitic incidents almost doubled, according to the state’s interior ministry. The demonstration, organized by an eastern German youth group known as Junge Landsmannschaft Ostdeutschland, involved black-clothed skinheads waving black-white-and-red flags, the symbol of the old German empire adopted by nationalists. Ines Kosch, who helps young people find work, says they are finding it more difficult to get jobs and that she notices rising anti-immigrant sentiment. "When you’re in a bad social situation, it’s easier to pretend these things about certain other groups of people," Kosch said in an interview at a job center in east Dresden. "There is a latent aggression."
Neo-Nazi parties have never won seats in the federal parliament and the revamped East German communists, now called the Left Party, haven’t picked up support amid the economic crisis, opinion polls show. Chancellor Angela Merkel’s Christian Democrats are still leading her Social Democratic coalition partner in eastern regions as well as nationwide in the polls ahead of Sept. 27 elections. The only way to stave off the rising tide of extremism is to stanch the loss of jobs, said Willi Eisele, the local head of the IG Metall electrical and engineering labor union.
"There’s a great danger that this region will be brought down to its very economic foundations," Eisele said as he chain-smoked in his office surrounded by red socialist flags. Much depends on Qimonda, which halted production at its Dresden factory and began insolvency proceedings on April 1. About 1,850 of its employees, or 93 percent of those given the opportunity, opted to move to a temporary company that will pay them a proportion of their salaries and retrain them. Dresden is the last volume manufacturing plant for dynamic random access memory, or DRAM, chips in Europe. If no buyer is found, Qimonda’s assets and patents will be sold off, meaning that chips could be manufactured elsewhere. Then comes the domino effect, Eisele predicted.
At Munich-based Infineon’s plant on the hills above Dresden, 1,800 employees worked to turn silicon wafers into logic chips for mobile phones, cars and passports. Since February, management has scaled back production as much as 30 percent to adjust to demand. Diana Heuer, the plant spokeswoman, said workers returned to full shifts during April because of an increase in orders. "We hope this situation can continue, but after that we can’t say for certain," she said. For Slesazeck, who has worked at Qimonda for seven years, it’s too late. "I would like to stay in Dresden," he said, marching in view of the Frauenkirche cathedral. "The city could really have a future if it wants it."
Would Jesus take a bailout?
Confronted with the once-in-a-century opportunity to remake the financial system, the reformers in Washington have a choice: Succumb to the temptation of serving financial supermarkets or lift up community banks and street-level economies. Enter Reverend Billy Talen, the New York-based street preacher, performer and activist who -- along with his flock, the Church of Life After Shopping -- believes government has a moral obligation to support communities before big banks. "I've been trying to drive people out of their institutions," Reverend Billy says. "Their institutions aren't working."
It's hard to imagine Timothy Geithner taking advice from an iconoclast dressed in a white suit, clerical collar and Elvis-inspired hair, but the Reverend Billy may be on to something.
In place of a system where big banks and corporations enter neighborhoods only to profit from them, Reverend Billy wants to empower small banks and credit unions that hold a stake in the communities they serve by offering incentives and making it harder for big finance to undercut local business. It's hard to argue against the system he envisions.
Think for a moment about what community finance could mean for the nation: Neighborhood banks would lend to local businesses. Profits could stay in the community. Simply knowing who your customers are and living near them could bring common sense -- the most basic and sound form of risk management -- back to banking.
Sure, it sounds kind of dreamy, but such systems are already in place in the neighborhoods large and small. Small businesses thrive, but they are often at the mercy of big banks who giveth and taketh credit according to shifts in economic cycles. "The Wall Street experience is parallel and equal to the destruction of neighborhoods through chain stores," Reverend Billy says. Basic economics are on the Reverend's side. For every dollar spent at a chain store, studies show only 50 cents stays in that community. By contrast, 90 cents of every dollar spent at a local business remains in the local economy. "It's a little reductive, but people recognize there's a truth in it," Reverend Billy says. "Neighborhoods are economic powerhouses."
Despite his anticorporate stance, Reverend Billy, whose father is a small-town bank chairman, isn't bashing Wall Street right now. (However, he's previously led some disruptive and amusing protests against corporate retailers such as Wal-Mart Stores Inc. and Walt Disney Co.) The painful fallout of the financial meltdown has led him and his followers to preach centered calm over rage. "There's not a Puritan attitude about it, there's a practical attitude about it," Reverend Billy says. "People want to know what they can do for their friends and for themselves. We're trying to help each other; share money, share energy, share homes." It's unlikely that sharing is on the business plan at Citigroup Inc. or Goldman Sachs Group Inc., companies that Reverend Billy excoriates in his sermons. He says the steel and mirrored-glass buildings that house major banks are designed hide what happens inside.
Though colorful, Reverend Billy is no longer a fringe figure. Since he began preaching on the street corners in Times Square a decade ago, Reverend Billy and his anticonsumerism message have gained mainstream attention, thanks in part to his book and a world tour with the church's 40-member choir. "Preaching is the landscape between talking and singing," Reverend Billy says. "It's like finding a saxophone in your chest." His breakthrough came in 2007 with the release of "What Would Jesus Buy?", a documentary about church efforts to promote a shopping-free Christmas. This year, he's running for New York City mayor on the Green Party ticket, campaigning on a community-first platform. Candidate Billy wants to end the city's reliance on what industries susceptible to bubbles and busts: Tourism, Wall Street and real estate.
"Neighborhoods vulnerable to the bubble economies are the ones hurting right now," he says. Let's be blunt. Scaling down the financial system and our economic lives is a tall order. And Reverend Billy, as much entertainer as clergyman, is an imperfect messenger. He's not a serious leader in the vein of Al Franken or Arnold Schwarzenegger. Reverend Billy knows he faces long odds both in his mayoral run and his effort to change a system built around spending and credit speculation, but there are signs of hope. His audience was growing before the financial crisis, and things have only gained momentum since. Later this month, he'll speak at the Yale Divinity School. "People qualify their report of pain by saying 'we're spending more time with our family and that's changing our lives,'" Reverend Billy says.
"'Whatever we do next I'm not going back completely to the way I was doing things before,' they say." The leaders we've chosen to undertake financial reform are threatening to take us back to where we were by propping up banks and companies that nearly brought down the economy and cost taxpayers trillions. It's clear the bailout policies of the current and former administrations that the financial system of the future will closely resemble the one that gambled away our prosperity. Still, the current situation is not without hints of progress -- legislators want to limit banks' ability to raise interest rates, and this week, outcry from consumers and government officials forced Bank of America to ice plans to raise overdraft fees. Maybe someone in Washington is getting religion after all.
Motors? What Motors?
Redemption in Rebranding
The American Society of Newspaper Editors has voted to drop "paper" from its name to reflect the industry's shift online. --Associated Press, April 6
Even the government had to admit, it was a bold counterstroke. Rick Wagoner's return to the helm of General Motors Corp. -- now without the "Motors" -- took the president's auto team by surprise. But what could they say? They had forced his ouster because he couldn't make a big car company work. They had no evidence he couldn't make any sort of company work. And what sort of company might that be? This is where the tenacious Mr. Wagoner showed his genius "It's just a general sort of company," he announced, with a boyish grin, at a packed news conference last week to mark the debut of General Corp.
"Pliers, frozen dumplings, knickknacks. Polo mallets. That sort of company." Here a piston fell out of his sleeve and clattered on the floor, raising eyebrows, but Mr. Wagoner recovered quickly. "Remember the sundries store on the corner your ma sent you to with a dime on a sweet spring morning in your youth?" he said. "Think of it that way." Asked whether the sweet sundries store carried $16 billion in unfunded pension obligations, Mr. Wagoner offered the reporter a discount on hamsters.
"It's a classic renewal play," Diane Brenner, director of redemptive branding for Omnicom Group, told me. "Andersen became Accenture. Why can't General Motors become General? You have to hand it to them, replacing all the carburetors with pineapples overnight. Have you seen what the shares are doing today?" I guess she's right. Certainly it is no more curious than Wednesday's launch of Just MGM (not into stressing the Mirage part) or the removal of bad associations from the Financial Accounting Standards Board, now just the Board, or Thursday's midnight rebranding of North Korea as FunWorld.
Or the rebirth of Bank of America as America. Ken Lewis, chairman and CEO of America, explained it to me over breakfast Friday at the Charlotte Marriott. "The takeaway is we're no longer a bank," he said. "We're America, united and proud. Weathering the crisis as one." I had to figure the Feds would be watching him like a hawk, holding him to the company's new charter. One wrong move and he'd be on the perp walk faster than you could say Long-Term Asset-Backed Securities Lending Facility.
"No more commercial lending?" I asked.
"No sir," he said levelly.
"Wasn't a good fit," he said, tearing apart a croissant.
"No more taking deposits?" "Deposits?"
"So what will America do?" I asked.
"Persevere and triumph, as she has always done," Mr. Lewis responded, rising magisterially to return to the office.
He had left me with some questions, along with the check, but it all seemed clear enough when I got back to New York and visited the Park Avenue South branch of America. The atmosphere was at once festive and defiant, celebrating a great brand in the face of a grim challenge. Red-white-and-blue bunting festooned the newly constructed aisles, neatly stocked with flags, lawn care products, Treasury bonds and Bud. Each price label bore the company's motto, "America: It's Not Just a Bank. In Fact, It's Not a Bank." Within the frozen-food cases, trembling tellers suggested a transformation still under way.