April 28 2009 2: I used to be cruel to my woman

Ben Shahn Strawberry Girl October 1935
Child of strawberry picker. Hammond, Louisiana

Ilargi: The first possible slash probable US swine flu fatalities, the two largest banks that can't even pass a fluke stress test, carmakers that won't survive but may be propped up a while longer by government and unions, taking pension systems nationwide down the drain with them, a thousand cases that should have been taken to court already, and a thousand people indicted, healthcare systems crumbling before our eyes, it's all getting so much better all the time. The crisis will be over by Christmas. You think it will still keep getting better after that? As in perpetual growth?

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Getting Better

It's getting better all the time
I used to get mad at my school (No I can't complain)
The teachers who taught me weren't cool (No I can't complain)
You're holding me down (Oh), turning me round (Oh)
Filling me up with your rules (Foolish rules)
I've got to admit it's getting better (Better)
A little better all the time (It can't get more worse)
I have to admit it's getting better (Better)
It's getting better since you've been mine
Me used to be angry young man
Me hiding me head in the sand
You gave me the word, I finally heard
I'm doing the best that I can
I've got to admit it's getting better (Better)
A little better all the time (It can't get more worse)
I have to admit it's getting better (Better)
It's getting better since you've been mine
Getting so much better all the time
It's getting better all the time
Better, better, better
It's getting better all the time
Better, better, better
I used to be cruel to my woman
I beat her and kept her apart from the things that she loved
Man I was mean but I'm changing my scene
And I'm doing the best that I can (Ooh)
I admit it's getting better (Better)
A little better all the time (It can't get more worse)
Yes I admit it's getting better (Better)
It's getting better since you've been mine
Getting so much better all the time
It's getting better all the time
Better, better, better
It's getting better all the time
Better, better, better
Getting so much better all the time

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Bank of America May Need $70 Billion More Capital

Bank of America Corp., the biggest U.S. bank by assets, may need as much as $70 billion in capital, an analyst said. Separately, the largest U.S. pension fund plans to oppose the company’s board at tomorrow’s shareholder meeting. The bank, based in Charlotte, North Carolina, needs $60 billion to $70 billion, according to Friedman, Billings, Ramsey Group Inc. analyst Paul Miller, who cited stress tests performed by his firm. The California Public Employees’ Retirement System said it will vote against Chief Executive Officer Ken Lewis and all 18 board members at the annual meeting. Bank of America should consider converting preferred shares to common stock, including $27 billion in private hands "as soon as possible," Miller wrote in a note to clients today. Miller said his firm’s versions of the stress tests were "somewhat tougher" than those performed by U.S. regulators.

"Most major banks will find it very difficult to raise that kind of capital in today’s environment, and we believe the first line of defense would be to convert both private and TARP preferred to common equity," Miller said. FBR’s stress test included a 12 percent jobless rate, compared with about 10 percent used by the government test, Miller wrote. Bank of America is among 19 companies evaluating results of the formal U.S. stress tests. The lender, which sold $45 billion of preferred stock to the Treasury’s bank rescue fund, said this month that first-quarter profit more than tripled on gains from home refinancing. Lewis said he "absolutely" didn’t think the bank needed additional capital. Scott Silvestri, a Bank of America spokesman, didn’t return a call for comment today. Bank of America dropped 62 cents, or 7 percent, to $8.30 at 2:16 p.m. in New York Stock Exchange composite trading. It has fallen 78 percent in 12 months, fueling shareholder opposition to Lewis and directors at tomorrow’s annual meeting in Charlotte.

Lewis has come under fire also for not telling shareholders that New York-based Merrill Lynch & Co. had a fourth-quarter loss spiraling toward $15.8 billion before investors voted in December to approve Bank of America’s takeover of the brokerage. Calpers cited the Merrill Lynch disclosure issue and $3.6 billion in bonuses paid to executives of the brokerage before the deal was completed, in a statement today on the pension fund’s Web site. "The entire board failed in its duties to shareowners and should be removed," said Calpers Board President Rob Feckner in the statement. Calpers said it owns 22.7 million Bank of America shares. The vote at the shareholders meeting will cover Lewis’s re- election and a resolution on whether to split the dual role of chairman and CEO. Calpers along with the California State Teachers Retirement System, the second-largest U.S. fund, asked in March to lead investor lawsuits against Bank of America over its acquisition of Merrill Lynch.

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Days could be numbered for BofA and Citi CEOs

The chief executives of Bank of America Corp and Citigroup Inc may be shown the door if the U.S. government decides the $90 billion of capital it has already injected isn't enough to restore the banks' health. Kenneth Lewis and Vikram Pandit face renewed pressure after The Wall Street Journal said the banks may need to raise more capital based on the government's "stress tests" of large lenders, citing people familiar with the situation. Analysts and investors have expected a few large regional banks would need more capital, but the government's findings suggest the sector's capital shortfalls are deeper. They also suggest that Lewis' and Pandit's assessment about their banks' ability to weather a deep recession is wrong, cutting into their credibility as leaders and perhaps giving their boards reason to hunt for replacements. "I would guess both of them are gone by summer," said Charles Geisst, the author of "Wall Street: A History" and a finance professor at Manhattan College.

"They're caught between a rock and a hard place. They have to try paint a rosy picture for investors, but on the other hand, maybe what we need in the world is more forthright comments about the state of affairs at the banks, and they're not making those." Citigroup declined to comment on the stress test, but said it is making progress on streamlining its business. The bank may raise money without new government capital by augmenting a planned exchange of up to $52.5 billion of preferred stock into common stock, people familiar with but not authorized to speak about the matter said. Bank of America declined to comment. The bank is holding its annual meeting Wednesday in its Charlotte, North Carolina, hometown, and shareholders are to vote whether Lewis should stay on the board, or at least give up his job as chairman. Much of the opposition to Lewis' reelection focuses on the bank's troubled purchase of Merrill Lynch & Co. On Tuesday, the California Public Employees' Retirement System (CalPERS), the largest U.S. pension fund, said it opposes Lewis' reelection as a director.

While the 19 banks are not expected to "fail" the stress tests, investors may consider those ordered to raise capital within six months as having failed. Results had been due May 4 but now may be released later that week. Analysts and investors are split over whether Lewis' or Pandit's job is most in jeopardy. Pandit, who took over Citigroup in December 2007, inherited many of its problems, while Lewis is the architect of much of Bank of America, having been chief executive since 2001. "Lewis is in much more trouble than Pandit, because he was at the helm for so much of this, while Pandit came in late," said Ralph Cole, who invests $2 billion at Ferguson, Wellman Capital Management in Portland, Oregon. The government has already shown a willingness to oust chief executives of companies getting government aid, having replaced General Motors Corp's Rick Wagoner and American International Group Inc's Robert Willumstad -- the latter, after just three months in the job.

Walter Todd, a portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina, said that because the government has already shown a strong willingness to make changes at Citigroup, "there's a bigger case to be made for them being able to force the resignation of Vikram Pandit, but they can certainly force pressure on Ken Lewis." Since October, the government has injected $45 billion into each of Bank of America and Citigroup, and agreed to cover most losses on a respective $118 billion and $301 billion of troubled assets. Citigroup's preferred share exchange could leave taxpayers with a 36 percent stake. Pandit last week told shareholders at Citigroup's annual meeting that the bank would rebound and repay every dollar to the government, adding, "I intend to see this through." Lewis, meanwhile, has said his bank did not need half of the $20 billion of capital it took in a January bailout.

Both banks could bolster capital by selling assets. Bank of America is selling its First Republic Bank unit, while Citigroup is near a sale of Japanese investment banking and brokerage operations for more than $5.2 billion. But capital raising remains difficult, especially for troubled banks where the government can, and will, unilaterally assume more influence, and dilute existing shareholdings. Many lawyers and investors believe Lewis erred when, in testimony before New York Attorney General Andrew Cuomo, he appeared to suggest that Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson cajoled him into closing the Merrill merger and not disclosing Merrill losses, so as to protect the financial system. "The bank has to boot him as chairman, but that could put him at a more perilous position as CEO, because he would still be seen as baggage," said Michael Mullaney, who helps invest $9 billion at Fiduciary Trust Co in Boston.

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Paulson's 'Gift' to Lewis Delivered at Gunpoint

Oil and water don’t mix. Neither do business and politics, a truism becoming increasingly obvious with each new government initiative, or the exposure of fissures in the old ones, to save the financial system. The latest example of what happens when the business of government is business was last week’s release of testimony from Bank of America Chief Executive Officer Kenneth Lewis to New York Attorney General Andrew Cuomo. In it, Lewis says he was strong-armed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke to seal the deal to buy Merrill Lynch without telling his shareholders about the brokerage’s mounting fourth-quarter losses, which came to $15.4 billion. According to the letter Cuomo sent to Congress and regulators, Lewis wanted to invoke the "material adverse event" clause to back out of the merger, but the bazooka-toting Paulson told him to stay mum and threatened to give him and his board the boot.

Paulson said via a statement that while the words were his, the sentiment was "what he knew to be the Fed’s strong opposition to Bank of America" backing out of the deal. "No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure," said Fed spokeswoman Michelle Smith. Pop-quiz question: Does this threat strike you as something that the soft-spoken Bernanke would say? Or is it more in keeping with someone who told nine (now eight) banks they had to take money from the Troubled Asset Relief Program so the public couldn’t distinguish the good from the bad and then had the chutzpah to tell them how to use it? Right. Let’s move on.

So what’s a CEO like Lewis to do in this kind of situation? Quit, obviously. His first responsibility is to the owners of the company, the shareholders, not the federal authorities, even if one of them happens to be a regulator. When push came to shove, Lewis, like other bank CEOs, was happy to be paid to play. Once the government starts making decisions that affect a broader constituency, the results are predictable.
"When the government feels compelled to interject its will in a free transaction among adults, it’s a sign they have conflicting interests," says Michael Aronstein, president of Marketfield Asset Management in New York. "There’s as much evidence that it’s harmful as there is about smoking." Yet we keep doing both. It’s easy during a crisis to turn to government to solve the problem. But government isn’t some sphinx-like entity with a ready list of solutions. It has to fumble around like the rest of us. The only difference is, it’s using our money and we’re not parting with it voluntarily.

It’s been said that the way to eternal life is as a federal government program. And there’s some truth to it. When Rahm Emanuel, President Barack Obama’s chief of staff, said government should "never let a serious crisis go to waste," he wasn’t talking about shrinking the size of government. Examples abound of the failed results when government superimposes its own needs on those of the private sector. Take Fannie Mae and Freddie Mac, the mortgage finance agencies seized by the government in September to avert collapse. The two companies operated in that netherworld between public (a mission to promote affordable housing) and private (the companies were shareholder-owned). Congress closed its eyes to the growing risks as the companies lowered their lending standards (public mission) and increased the size of their balance sheets (private profits), aided by its funding advantage, as long as more folks got access to the American Dream. The dream turned into a nightmare, and taxpayers got stuck with the losses.

David Moffett, former CEO of Freddie Mac, resigned in March after six months on the job reportedly because the government was using the company to conduct economic policy -- buying mortgages no one else wanted -- instead of restoring it to good health. Moffett agreed to return as a consultant following the suicide of Chief Financial Officer David Kellermann last week. The Fed’s Term Asset-Backed Lending Facility, designed to increase lending to households and small businesses by financing the purchase of asset-backed securities, has gotten off to a slow start: The Fed extended $4.7 billion in loans in March and $1.7 billion in April. That has inauspicious implications for the Public-Private Investment Program, which will buy "legacy" assets (formerly "toxic" but renamed in a transparent PR campaign) and loans from banks. Recipients of TARP funds, like institutions participating in TALF and PPIP, are subject to compensation limits set by the government. That’s one reason investors are reluctant to participate. The other is the rules are evolving all the time (a nice way of saying, making it up as they go).

Last week, following a report by TARP’s inspector general suggesting asset managers might be subject to pay caps, Treasury was forced to qualify what parties would be affected. Compensation limits will apply only to those managers that have a "controlling" interest in the securities, Treasury said in an update to frequently asked questions on its Web site. (Controlling will be defined at a later date.) Which brings me to my final example. The other day a friend asked me what I was reading. I drew a blank. "I’m plowing through a host of FAQs on government Web sites," I said. If it takes that much time for the government to explain its businesses, it ought to get out of some of them.

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Stress Tests? No Big Deal After All

When the government first announced its plan to "stress test" the nation’s top 19 banks, it described the financial exam as an important part of instilling confidence in the market. The message was clear: The government — and Timothy F. Geithner, the secretary of the Treasury — were on the case. But now, less than a week before it makes the results of its all-important test public, the government appears to be backing away from how seriously investors and the public should take them. In the Federal Reserve’s 21-page white paper released on Friday, it described the tests as simply "what if" exercises. The goal, it went on, was to help regulators "gauge the extent of additional capital needs across a wide range of potential economic outcomes." Then it cautioned that if the test results mean a particular bank has to raise capital, that should not be considered "a measure of the current solvency or viability of the firm."

So after all that buildup, the results are meaningless? Bank stocks may have been on a tear lately, but the government is still concerned about the fragility of banks. And the new worry is that this latest effort to instill confidence may undermine it instead. When the stress test was first conceived, it was never clear whether the results would be made public. But within days of the government’s announcing the test, lawyers inside the banks started to point out that, ahem, this may be material information, which means by law they have to disclose it to shareholders. (The drama over whether the Treasury Department had prevented Bank of America from disclosing the problems at Merrill Lynch was an added nudge.) Now the results are going to be disclosed next Monday, though how much information will be made public is still hazy.

Some senior Wall Street bankers say they are beginning to worry that the results could cause a run on the weakest banks, no matter how forcefully the government cautions the public that the results have nothing to do with the viability of the bank. The broader sense of panic may have died down, but it’s not dead. "I don’t want to be alarmist, but I’m worried next Monday could feel like September all over again," said a chief executive I spoke with late last week who runs one of the 19 banks that underwent a stress test. In case you’ve forgotten, those September memories include Washington Mutual’s being taken over by the F.D.I.C. and sold to JPMorgan Chase on a Thursday night because the government worried that WaMu couldn’t make it until the weekend. The banks are being put through a battery of tests to see whether they will hold up under pressure under the worst-case economic situations over the next two years. (Chief executives have a hard time forecasting their business for the next quarter, so it will interesting to see how well the government does for two years.)

"The name ‘stress test’ implies a level of precision for predicting future losses and earnings that simply does not exist," Tom Brown, an analyst at Bankstocks.com, wrote. But increasingly those worst cases contemplated by the government — 10.3 percent unemployment, a 22 percent plunge in housing prices and the economy contracting by 3.3 percent — look less like doomsday and more like day-to-day realities. "They certainly are not the worst numbers that one could imagine," Joseph Stiglitz, the economist and Nobel Prize winner said Friday night on a Charlie Rose panel that I participated in. "Stress is stress. It’s not where the average is." So here’s the rub: If some banks can’t pass this test — which William Black, a former senior bank regulator during the S.& L. crisis, has called "a complete sham" and others have suggested is a whitewash — perhaps we have a larger problem. Maybe this test is going to show more failures than we thought. Any banks that actually might "fail" the test, and I put those words in quote marks for a reason, will be given six months to raise new capital on their own or accept capital from the government. But what private investor is going to invest in any of the failing banks, knowing full well that the government may end up coming in later on and diluting the investor’s stake?

This may end feeling a little bit like a replay of the government’s intervention in Fannie Mae and Freddie Mac. You’ll recall that Henry M. Paulson Jr., the former Treasury secretary, received temporary powers from Congress to take over Fannie and Freddie. At the time, he said he didn’t plan to use those powers, just the threat of them. "If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out," he said. But that authority to seize the two mortgage finance giants scared off any suitor that was considering making an investment. And since Mr. Geithner said in February that he planned "a new program of capital support" for those banks that need it, he’s had to rethink that position. Without support from Congress for more bailout money, he’s likely to run out of TARP money to the extent that he has floated the idea of swapping the government’s preferred shares for common shares. There’s nothing wrong with stress-testing the banks. The problem is when the results are ignored.

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Two L.A. County deaths possibly related to swine flu, coroner says

The Los Angeles County coroner's office is investigating two recent deaths that officials say could be related to the recent global swine flu outbreak. However, no tests have come back positive for the swine flu, and medical examiners have not officially determined what caused the deaths.
[..]
Updated at 9:30 a.m.: Coroner's spokesman Craig Harvey said his office would collect specimens from the deceased and send them to the county public health department, which would determine whether either person died from the swine flu. If so, the U.S. Centers for Disease Control and Prevention would be notified, Harvey said.] Coroner's spokesman Craig Harvey said Bellflower Medical Center reported the death of a 33-year Long Beach resident Monday afternoon from symptoms resembling swine flu. "It's that diagnosis that needs to be confirmed," Harvey said. "An autopsy will be performed to establish the cause of death."

The man was taken to the hospital Saturday, complaining of shortness of breath and lymphoma. Doctors later diagnosed the patient with pneumonia, Harvey said. The second case involves a 45-year-old man from La Mirada, whose death was reported Monday to the coroner's office. The man died April 22 at Coast Plaza Doctor's Hospital in Norwalk. Doctors said the man died of pneumonia but the L.A. County Health Department refused to accept the death certificate signed by the private doctor, Harvey said. The case was then referred to the coroner's office, which will conduct further investigation. If confirmed, the deaths would be the first reported in the United States from the swine flu.

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Justices Hear Arguments on Bank Regulation

The Supreme Court heard arguments on Tuesday in a case that could change the way big banks are regulated. In the case, Cuomo v. The Clearing House Association, federal and state regulators have squared off over which part of the government should serve as the nation’s watchdog for national banks. The case began four years ago, when Eliot Spitzer, New York’s attorney general at the time, questioned why some national banks seemed to be making a disproportionate number of high-interest home mortgage loans to black and Hispanic borrowers. Mr. Spitzer was attempting to enforce New York’s anti-discrimination laws, but he ran up against federal precedent that tended to leave regulation of national banks to the Treasury Department, and, specifically, the Office of the Comptroller of the Currency. A consortium of banks sued Mr. Spitzer, and so did the Office of the Comptroller of the Currency.

The banks and federal regulators argued that letting state officials regulate the banks would force the financial institutions to deal with a national patchwork of conflicting regulations. A federal district judge in 2005 and the United States Court of Appeals for the Second Circuit in 2007 ruled against New York and for federal regulation. The fight involves fundamental issues of federalism and consumer protection, and the court’s decision could open new powers of regulation to the states. Much has changed since Mr. Spitzer began his inquiry. For one thing, he is no longer attorney general; Andrew M. Cuomo has succeeded him. And, at the same time, the nation has been shaken by financial scandal and failure in ways that have led many to question the sagacity and effectiveness of the regulatory structure. A brief filed by the 49 other state attorneys general argues, "The recent (and continuing) fallout from the subprime lending debacle demonstrates the need for more oversight and consumer protection enforcement in the area of mortgage lending."

The Office of the Comptroller of the Currency, the brief states, "has no experience in enforcing state public protection laws, has a minimal track record in consumer protection, and has no accountability to the citizens of any State," and its effort to have exclusive regulatory authority over national banks was part of "a pre-emption agenda" in recent years to take "a wrecking ball" to pro-consumer regulatory efforts. James E. Tierney, director of the national state attorney general program at Columbia University law school, said the federal regulators’ job is to promote "bank fiscal soundness and not protection of consumers," and that battling fraud in mortgage lending is something that the state attorneys general have long excelled at. "They got it first," Mr. Tierney said, "and they got it right."

A brief filed by all previous Comptrollers of the Currency since 1973, however, takes a different view. The comptroller’s office, according to the brief, works quietly with banks to address consumer issues in a "prophylactic" way, and "uses the wide range of its supervisory powers in an effort to alert national banks of potential non-compliance that poses risks to consumers and to ensure that they are addressed as early as possible." The threat of action by the federal regulators, the comptrollers stated, is "a significant incentive for national banks to address any compliance issues before they become serious problems." And when such gentle measures fail, the comptrollers wrote, the agency "does not hesitate to take aggressive enforcement action against national banks." The role of the states, they argued, is to pass along information about "possible problems," leaving enforcement to the federal regulators. The justices will also hear a case on Tuesday, Forest Grove School District v. T.A., that deals with the question of whether parents can receive reimbursement for private school tuition if their children have never received special education services.

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U.S. toxic-asset plan stirs fears

The Obama administration's impending effort to buy about $1 trillion in toxic assets in partnership with private investors -- aimed at solving the most intractable part of the credit crisis -- is now generating widespread fear that it is vulnerable to manipulation and carries sharp risks for taxpayers. The program represents the biggest gamble yet in the federal bailout, but its still-hazy details have prompted bankers, economists, federal investigators and politicians to question whether it will solve the financial crisis. More than 400 written comments were recently submitted to the Treasury Department, many of them sharply negative. The program is trying to create an artificial market for assets that have no known value, something that has never been done before on this scale. The only way to accomplish that is for the government to accept a mountain of risk.

In the process, critics fear that the banking system could be further damaged and the program subjected to a boom in fraud. Nobel Prize-winning economist Joseph Stiglitz of Columbia University said the program violated so many laws of economics that it was little more than an "empty box." The toxic assets are a multitrillion-dollar collection of mortgage loans, commercial loans and a variety of complex debt securities, in which many borrowers have stopped making payments and the value of the underlying properties have tumbled. There is so much uncertainty about the value of those loans -- held both by banks and by big institutional investors -- that they have become a black hole in the financial system. Critics say the government's effort to engineer a solution is creating risks similar to the ones that created the financial crisis in the first place.

"We are repeating all the mistakes that the mortgage guys made," Stiglitz said. "In the worst case, the national debt goes up by $1 trillion." Supporters of the program say that the economy would face bigger risks if nothing is done to solve the problem. The program, they say, represents a bold move by the government to unfreeze the financial markets. In the process, taxpayers could reap multibillion-dollar profits from the partnerships. Indeed, when the program was unveiled one month ago, it was met by such euphoria that the Dow Jones industrial average shot up 500 points in a day. The program, called the Public-Private Investment Program, is still being formed and basic answers about how it will work are being hammered out by officials at the Treasury Department, the Federal Deposit Insurance Corp. and the Federal Reserve.

The goal of the program is to create a market for the toxic assets that are now clogging the system. They sit on balance sheets, tying up funds and obscuring the condition of financial institutions. The loans and debt securities are not worthless. In some cases, individual loans within complex bundles have not gone bad. And even in the cases of loans that have gone bad, the underlying homes or other assets still have some value. But because nobody knows how to value these loans and debt securities, nobody is willing to trade them. If the program can help set prices for those assets and create markets for their sale, banks will more quickly regain healthy balance sheets and financial markets that trade in debt securities will regain their footing. The government hopes to jump-start a market. Private investors would be enticed to join and, by competing against one another, finally set a price for the assets.

The Bush administration last fall had planned to simply buy all the toxic assets on its own, but there were concerns that it would end up overpaying and it didn't have enough money. With private investors involved, there is the hope that their competition and desire for profit will ensure that prices aren't set too high. The government does not have to buy every bad asset, Treasury officials said, but simply get enough activity going so that buyers and sellers could begin to set prices on their own. There are two separate pieces to the program -- one operated by the FDIC to auction bundles of troubled bank loans and another operated by the Treasury Department to buy securities without auctions from hedge funds, investment firms and others. The money to operate these programs is coming from the $750-billion Troubled Asset Relief Program that was enacted last fall, along with additional lending by the Federal Reserve.

Under the Treasury plan, five so-called fund managers would raise a pool of private money, matched equally by the government. Then, the Fed would double that pool with loans or loan guarantees. Thus, the government would be putting up 75% of all the money. The fund managers would negotiate to buy the toxic securities based on an analysis of the investments and a bit of educated guessing. The FDIC program would rely on even more government-backed debt. A variety of partnership funds would be created with private investors kicking in 7.5% of the money and the government providing a matching 7.5%. The government would then provide the remaining 85% in loans or loan guarantees. The partnerships would bid against one another in an auction. Although the two plans address different parts of the credit crisis and use different methods, critics see many of the same vulnerabilities.

Stiglitz, along with others, believes the market will be far from perfect. Since the government is putting in so much more money, it would lead private investors to take on riskier investments. And the burden of that increased risk would fall almost entirely on the government, even though the government would share only half the potential profit. The FDIC has said that if it faces too many defaults, it may have to assess new fees -- which are already increasing -- on the entire banking industry, a scary prospect for smaller banks. Although the FDIC has downplayed the risk of such defaults, other experts are not so sure. "We are in an economic climate that is still filled with a tremendous amount of uncertainty," said Rodney K. Brown, the president of the California Bankers Assn. Brown said if the Treasury plan tanks and the FDIC has to increase insurance fees, it could saddle many small banks with losses.

Small banks are worried about such potential fees, said Jerry Cavanaugh, counsel to the Community Bankers Assn. of Illinois. "These megabanks are receiving the lion's share of the Treasury loot, while community banks are called upon to restore the FDIC's financial position through increased premiums and special assessments." Then, there is the criminal problem. The potential for manipulation, price fixing, collusion and other forms of fraud were outlined recently by special inspector general Neil Barofsky, who released a lengthy report that cited serious problems with the program. Barofsky said that collusion between investors or banks could result in kickbacks among bidders or sellers. For example, a bank could create a phony subsidiary to bid up the value of its own troubled loans. Or a network of banks could conspire to bid up one another's assets, kicking back profits to one another.

Other experts are not so sure the entire program will even help banks. If banks have to sell troubled loans at too low a price, it could force them to take additional losses. Aaron Deer, a bank analyst at financial research firm Sandler O'Neill & Partners, said one potential risk was that low prices for loans at one bank could force other banks to mark down the value of similar loans that they had no intention of selling. On the other hand, if the loans are offered at too high a price, private investors will see no profit. "We are hoping to hit somewhere in the middle," FDIC spokesman Andrew Williams said. Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents large financial institutions, said that though his group supports the program, its biggest challenge would be determining prices for the assets. He predicted a reluctance to participate if that is not clarified. Pressure for major changes in the program is growing. "We expect that Treasury, the Fed, the FDIC and other regulators will take their concerns into account and incorporate any additional necessary taxpayer protections as they refine these programs," Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said in a statement Friday.

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Wall Street's Crash Has Them Sleeping in Streets

It’s getting harder for Japan’s 127 million people to ignore the homeless out there. Their growing ranks are an extreme example of where Japan finds itself and why the nation’s recession is more serious than data suggest. Toshiro is as incongruous a sight as you will find in Asia’s wealthiest economy. The 51-year-old homeless man is perched outside a glitzy Louis Vuitton shop in downtown Osaka.
He’s hawking "The Big Issue Japan," a local version of the U.K. magazine that helps the down and out earn a living. The former shipping-industry worker is getting few nibbles from the well-to-do shelling out hundreds of dollars, or thousands, for the latest in French luxury. "These magazines are just 300 yen, but selling them is hard," says Toshiro, who declines to give his family name. "Everyone pretends I’m not here."

This city of 2.64 million people is 400 kilometers (250 miles) southwest of Tokyo. It claims to have brought down the number of homeless to 4,024 from 7,757 in 2003. Even a casual stroll through Osaka’s Airin district, with its shelters and soup kitchens, suggests the city is vastly undercounting the number of street dwellers. Expect a huge increase in new homeless, too. The 5 1/2-year economic recovery that ended in October 2007 has been eclipsed by big drops in exports and production. The fast-rising number of underemployed Japanese also is exposing flaws in the second-biggest economy. The move away from lifetime employment has left many with part-time contracts, a phenomenon that is hitting women especially hard. The bottom line is that wealthy Japan has a poverty problem. Japan has the highest proportion of jobless workers not receiving jobless benefits among industrialized countries, the International Labour Organization says. Across Japan, 77 percent of unemployed people don’t receive benefits, compared with 57 percent in the U.S. and 13 percent in Germany. There’s also a little-recognized fact about Japan’s recent recovery: Companies generally didn’t pass along profits to workers.

Wall Street’s woes played a big part. A new phrase has entered into the vernacular of Osaka’s homeless: "Lehman Shokku." As Bloomberg reporters Stuart Biggs and Masatsugu Horie wrote on April 9, almost 500,000 people have lost their jobs since the collapse of Lehman Brothers Holdings Inc. The resulting shock explains why Taro Aso recently unveiled his third stimulus package since becoming prime minister in September, the same month Lehman Brothers crashed. As of January, Japan officially had 15,759 homeless people. Given what has happened in Japan’s economy since January, these figures are all but irrelevant. I think Japan is undercounting its homeless problem on a nationwide basis. This creeping poverty challenge will seem almost quaint to officials in Washington or London facing much larger ones. Yet the growing ranks of the working poor are causing considerable soul searching in a nation that has long believed itself to be uniquely egalitarian.

The increasing number of "Internet cafe refugees" has become a high-profile social problem that belies government denials about a growing gap between rich and poor. Untold numbers of young workers with no fixed address are simply living in 24-hour cyber cafes. One of U.S. President Ronald Reagan’s legacies was a steep increase in the number of homeless in America. Here in Japan, Junichiro Koizumi also has much to answer for. The former prime minister’s free-market policies cut state pensions, increased health-insurance premiums and allowed companies to pay workers less. Koizumi’s tenure exacerbated the effects of the recession. That may sound hyperbolic considering Japan’s 4.4 percent jobless rate. Even if it approaches 6 percent in 2010, as many expect, it would still be comparatively low. Both the U.S. and euro-area economies currently face 8.5 percent jobless rates. Japanese data mask the severity of the problem. The jobless rate tends to be lower because there are fewer women in the workforce. Also, men tend to have long-term work contracts and are loath to accept anything less. Fewer people looking for work in any given month will mean a lower jobless rate.

The fabled salary man is becoming an endangered species. One reason: Japanese companies are suddenly acting American. In the past, Panasonic Corp. and Toyota Motor Corp. avoided mass layoffs. Now, they think nothing of firing thousands to cut costs. That is sending shockwaves through the nation and preventing households from saving less and spending more. Companies are trying to avoid massive staff cuts with work- sharing arrangements, involving fewer working hours. Yet that, too, could hit consumption and, like layoffs, have fiscal implications. Even before the recent 15.4 trillion yen ($157 billion) spending plan, the Organization for Economic Cooperation and Development predicted Japan’s public debt would approach 200 percent of gross domestic product in 2010. Expect even more spending and more debt this year and next. To see how bad Japan’s recession is getting, you could weed through mountains of statistics on employment, production and business sentiment. Or you could just walk the streets of Japan’s major cities and see who is sleeping there.

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Hospitals cutting services, staff amid recession

Ailing from the recession, many U.S. hospitals have had to begin making painful cuts to patient services and laying off staff, as previous cost-cutting hasn't been enough, an industry survey found. In previous recessions the health care industry has held up well, but this time hospitals and other health care businesses are hurting. Besieged by financial pressures including more needy and uninsured people, hospitals now are making tough decisions that affect their patients and communities. The American Hospital Association found 22 percent of hospitals that responded to its March survey have reduced services since the economic crisis began in September. Those services range from outpatient clinics and behavioral health programs to patient education and home health care after discharge.

University Medical Center of Southern Nevada had to close its mammography center and started phasing out outpatient cancer treatment in November, said spokesman Rick Plummer. The decision was made right after Nevada's legislature, squeezed because high unemployment and foreclosure rates have slashed tax revenue, cut about $30 million from the Las Vegas safety-net hospital's charity care and Medicaid funding. "It's a domino effect," Plummer said. "We had to make some difficult choices." He said that women can get mammograms at plenty of other places, but it's tougher for patients getting chemotherapy and other lengthy cancer treatments. "Very few other community providers stepped up to the plate," Plummer said, so some patients without health insurance but not poor enough for Medicaid have had trouble getting care. Some have had to make long drives for treatment or even move.

Meanwhile, nine of 10 hospitals said they cut expenses in the first quarter, with eight in 10 cutting administrative spending. Other strategies include eliminating jobs, selling assets, reducing overtime, cutting staff hours, freezing salaries, cutting benefits and reducing supply costs. In addition, some hospitals are considering mergers to reduce costs. Just under half the hospitals have cut staff, and the number resorting to mass layoffs - 50 or more employees at once - is up. And while total employment at hospitals grew somewhat in 2008, even as millions of jobs were lost in other industries, hospital employment grew by only 0.1 percent each in January and February and was flat in March. That's according to the federal Bureau of Labor Statistics.

For the first quarter of this year, 43 percent of hospitals said they expected to lose money, up from 26 percent in the first three months of last year. About one in three hospitals saw a drop in the ratio of income to what they must pay creditors. Declines in such measures of financial health can lead creditors to demand immediate repayment of loans. Meanwhile, many hospitals are seeing increased interest expenses, insurers taking longer to pay their bills, more difficulty or inability to borrow money and other problems. That's led more than three-fourths of hospitals to delay, stop or scale back building projects or upgrades to medical or information technology. The survey was sent to all 4,946 community hospitals in the country, and 1,078, or 22 percent, responded. Data was collected from March 5 through March 27. The hospital association said the respondents generally represented all types of hospitals, such as urban, suburban and rural.

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As Goes GM’s Pension, So Goes Yours?

Yesterday, General Motors said it was cutting another 21,000 jobs, getting rid of its Pontiac brand, and begging Washington to take a 50 percent equity stake. Meanwhile, Chrysler reached an agreement with United Auto Workers negotiators on Sunday but is still struggling to work out deals with Fiat and other investor groups. Now, the fact that these two major automakers are on the brink of failure is hardly news. But even if the companies manage to survive, there’s a major question that needs to be answered, and its implications could extend out to many Americans, even those who don’t work for the companies …

What Will Happen to the Automakers’ Pension Plans?
According to mainstream news reports, Washington is already bracing for an outright failure of these plans. And rightfully so! What remains unclear is whether these plans would be allowed to fail in the "regular" way — i.e. by turning themselves over to the Pension Benefit Guaranty Corporation. The PBGC is the quasi-governmental agency that insures defined benefit pension plans. Unfortunately, there are three problems with going the PBGC route:
First, when the PBGC takes over a plan, it is only allowed to pay out benefits up to a certain cap. For 2008, the maximum guaranteed amount was $51,750 a year ($4,312.50 per month). That number applies to workers who begin receiving payments at age 65 or older. Anyone younger would see even lower amounts. So many autoworkers — even those who already retired — can expect to receive sharply lower benefits than they were promised or are currently receiving.
Second, unlike Social Security, PBGC payments do not have cost-of-living adjustments. That means they remain static even if inflation soars. Over time, that will prove disastrous for just about any recipient.
Third, the PBGC itself has been wrestling with underfunding. In fact, it’s been running a deficit for most of this decade!



Imagine what the failure of even just one major automaker’s plan would do to the PBGC. Remember, the Chrysler plan currently has a quarter of a million participants and GM’s plan for hourly workers covers another half a million! Not only would a plan failure of that magnitude create a logistical nightmare, but it would certainly put a further strain on the PBGC’s resources in two important ways:

#1. It would suck tons of money out of the PBGC.
#2. It would mean far less money going into the PBGC for other plan failures.

Let me clarify that second point a bit more. The PBGC funds its kitty by collecting money from all the companies that operate pension plans. That money is then put away to help mitigate losses down the line. With the loss of a major pension plan such as Chrysler’s or GM’s, the PBGC would get squeezed from both sides! Sure, the companies still have sizeable assets in their own pension reserves. And by some estimates, they might be able to survive by reducing the benefits they’ve promised along with other minor modifications. But even if the failures don’t completely cripple the PBGC, they could still sound the death knell for the entire defined benefit pension plan system as we know it. After all, the availability of these plans has already been in steady decline. A failed automaker plan would likely open the floodgates for other major American companies to cancel their plans.

Many are certainly itching to do so. This would give them the out they need. They could cite competitive reasons. They could say things like, "Look what happened to the automakers. If we don’t cancel our plans or reduce our promised benefits, we’re going to suffer the same fate." And in doing so, they would look far less culpable. It would be hard for anyone in Washington to hold them to a different standard. No less than The New York Times echoed that sentiment yesterday, saying, "The demise of the bellwether auto plans might set a template for other companies seeking to cut costs and stay competitive."
The end result could be a spiraling series of abandoned pension plans, and a potential catastrophe for the PBGC and anyone relying on it.

What This Could Mean for You …
According to a survey conducted by the Employee Benefit Research Institute in 2006, 61 percent of workers anticipated receiving income from a pension in retirement. So the idea of a collapse in defined benefit pension plans clearly affects a lot of people! While I am not trying to make this out to be an end-of-the-world scenario, I certainly think the risks at many plans are a lot larger than people realize. Heck, I have a defined benefit plan from a previous employer. And the way things are going, I’m certainly not counting on it. If you are lucky enough to have access to such a plan, great! But you should not completely rely on yours, either. Instead, do your best to prepare in other parts of your life. Bump up your personal savings rate a little more. Keep your own private retirement portfolio in a diversified mix of solid investments like dividends stocks and select bonds. And consider ways to cut the amount of money you’ll need in retirement, too. Because as the Social Security and corporate pension debacles prove, we clearly cannot rely on government or private programs to take care of us in our golden years .

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Union set to own 55% of Chrysler

The United Auto Workers’ union will own 55 per cent of Chrysler and Italy’s Fiat will eventually own 35 per cent of the carmaker after a balance sheet restructuring, with remaining stock split between Chrysler’s secured lenders and the US federal government, according to a UAW document sent to members on Tuesday. This came amid some signs that the ailing US carmaker, Fiat, the unions, and Chrysler’s creditors were inching toward agreements that would allow America’s smallest domestic carmaker to avoid a bankruptcy filing ahead of a Thursday deadline. The UAW document, which outlines modifications to the union’s 2007 labour contract with Chrysler and an addendum to its healthcare agreement, said Fiat’s investment in the carmaker’s operations and new US jobs would exceed $8bn. Two Fiat executives told the Financial Times on Tuesday that they expected the Italian carmaker to sign a partnership with Chrysler on April 30, the US government’s deadline to agree on a restructuring deal with the union and creditors and agree an alliance with Fiat.

The Italian group has said that it will invest know-how and equipment, but no cash into its partnership with Chrysler. Bob Nardelli, the US carmaker’s chief executive, said in a video presentation last month that the technology to be provided by Fiat was worth $8bn to $10bn. The UAW agreement was approved by the union’s leadership on Monday and sent for ratification on Tuesday to the union’s local representatives, where it must secure majority approval. Under the agreement, Chrysler would cut by half its contribution to the employee healthcare fund to contributing a note with a principal amount of $4.587bn. The UAW’s healthcare fund would have the right to name a member of Chrysler’s board and receive 55 per cent of shares in the transformed company. A US Treasury-led task force overseeing the restructuring of Chrysler and General Motors is still working to close differences with holders of Chrysler’s $6.9bn first-lien debt, led by JP Morgan, to swap most of their loans for equity in Chrysler.

On Monday evening Germany’s Daimler, Chrysler and private equity group Cerberus – the carmaker’s majority owners – announced a deal that would see Daimler dispose of its 19.9 per cent shareholding and pay $600m into Chrysler’s pension plans over the next three years. Daimler also agreed to forgive repayment of previous loans extended to Chrysler, and said the payments – to be made in 2009 to 2011, would have a $700m impact on its second-quarter earnings. Referring to the agreement with the German group in an email to Chrysler employees sent on Tuesday morning, Mr Nardelli said: "This agreement facilitates our proposed alliance with Fiat and represents another step on our road to meeting US government requirements by the April 30 deadline."

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GM to force more than 1,000 dealers to close

General Motors Corp. told its dealers Tuesday that it will force 1,000 to 1,200 underperforming locations to close their doors as the automaker tries to thin dealer ranks to make the remaining outlets more profitable. GM told the dealers about the plan in a video conference, according to a dealer who spoke on condition of anonymity because the video conference was private. It is part of the company's plan announced Monday to cut more than 2,600 dealers by 2010. The company expects to lose 500 Hummer and Saturn dealers when those brands close or are sold, and it expects 400 dealers to close voluntarily. Another 500 would be consolidated into other dealerships, according to the dealer. GM said Monday that it also would eliminate its Pontiac brand, but there are only 27 dealers that sell just Pontiacs, according to the National Automobile Dealers Association. Most Pontiac dealers also sell Buick and GMC vehicles at the same location.

Company spokeswoman Susan Garontakos confirmed the numbers and said GM is in the process of deciding which dealers to keep based on their sales performance, capitalization, potential profitability, size, image and customer satisfaction scores. After that, she said, the company will go market by market and determine which dealerships are not meeting the terms of their franchise agreements. "There's a lot of things that we have to consider, but we'll have talks with those dealers that show or haven't demonstrated that they have maintained a good performance," Garontakos said. John McEleney, chairman of the NADA, said in a written statement that GM must treat all of its dealers fairly and those that close should be compensated. "It's not out of any fault of their own that these dealers are being forced to close their businesses," McEleney said.

He said many details were unknown about how the dealerships will be closed, but "137,330 dealership employees will lose their jobs, and state and local governments will lose an estimated $1.7 billion in sales tax revenue that would have been used for economic development in communities around the country." GM announced Monday it plans to reduce dealerships by 42 percent from 2008 to 2010, cutting them from 6,246 to 3,605. GM is living on $15.4 billion in government loans and faces a June 1 government deadline to complete restructuring moves, win concessions from its unions and cut its debt. If it fails to meet the deadline, it will go into Chapter 11 bankruptcy protection. GM has decided to scrap its Pontiac brand and either sell or close Hummer, Saturn and Saab. It will focus on four core brands: Chevrolet, Cadillac, GMC and Buick.

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This Just In! GM's 2010 Car Line!

Word comes today that GM has offered the Government a majority stake in the Company as part of its restructuring plan. This was both expected and widely reported. What is less well known, however, is the creation of a new line of GM cars that has been designed, in large part, to sell the concept of Federal ownership to lawmakers. This blog has been leaked a highly confidential draft of this plan, and it is my pleasure to share the bare outlines with you today. New cars now being prepped for the assembly line of the new General Motors include:
The Senator: Heavy in the beam, with a brilliant white canopy, this limousine sucks up gas and oil like a tank but is expected to come with a lot of attractive perks and, if well-maintained, a long life-span.
The Congressman: Long and low-to-the-ground, this slightly cheesy but attractive sedan has a tendency to blow a lot of exhaust and is clearly meant to be traded in for a new model every couple of years.
The House Republican: A lot tougher than it appears given its light weight and manoeuverability, and capable of converting from a conservative brougham into a revolutionary coupe in the wink of an eye.
The Lobbyist: Small, fast, and very expensive, this car is designed to outlive many of its owners.
The Timmy Gee: This classy, two-door vehicle comes only in gray and is equipped with a set of well-disguised flame throwers that extinguish any extraneous life forms in their path when fully activated. Most reliable when fully garaged in an affluent suburb.
The SEC Cruiser: An SUV that only operates in rescue mode, and even then only when jump started by another more powerful vehicle.
The Barackmobile: The ultimate luxury car in the GM line. How it will operate is still shrouded in mystery, but the firm has put all its hopes into it and believes that, in the end, it just might be the answer to its current difficulties.

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Attorneys unlikely to share pain in GM bankruptcy

A General Motors bankruptcy promises plenty of pain for bondholders, workers, dealers and shareholders, but lawyers are likely to reap $1 billion in fees, charging Uncle Sam as much as $1,000 an hour. Unlike most court cases, legal fees in bankruptcies must be disclosed and approved by a judge because the money is paid from the estate of the company that filed for Chapter 11. Creditors can challenge the fees, which eat into what they hope to recover. Unique to the case of General Motors Corp or Chrysler, the government would most likely provide the funds that essentially would pay the legal fees for the automakers, as well as the fees for counsel for bondholders, employees and any party the court recognizes by granting them "committee" status. GM is scrambling to restructure by the June 1 deadline set by Washington The government could use its role as bankruptcy lender to clamp down on costs.

"It's certainly not going to be the wild wild west of fees charged in a case like Lehman," said Scott Stuart, a partner with claims agent Donlin Recano and a former U.S. Trustee. Weil, Gotshal & Manges LLP asked a judge to approve $55.1 million in fees this month for less than four months work in ongoing the bankruptcy of Lehman Brothers Holding Inc. Chapter 11 filings generate eye-popping legal bills. Enron Corp generated hundreds of millions of dollars for the lawyers in the case and legal bills paid by GM's estate are forecast to reach $1.2 billion, according to Lynn LoPucki, a UCLA law professor and prominent critic of U.S. bankruptcy practices. The costs stem from the litigious nature of bankruptcy, with battles sometimes waged over nearly every aspect of a case and the time pressures. Attorneys often bill more than 10 hours a day in the rush to preserve the value of a company. Weil's fee application emphasized those conditions.

"As Lehman's employees rushed out of Lehman's offices with boxes and suitcases filled with their belongings, WGM attorneys rushed in," said the firm's fee application, which included 12 employees billing more than $1,000 an hour. "I have a broad range of meaningful compensation. I would need to be convinced that's where the market is now," Kevin Carey, the chief judge on Delaware's bankruptcy court told a recent panel discussion on the subject of $1,000 an hour fees. Courts have a couple tools to contain costs. Audit firms are used to review the detailed fee and expense applications and look for breaches of guidelines. "When a firm jumps into bankruptcy it's an 'Oh my god!' situation. It's very expensive in the beginning," said Patrick Woods, executive vice president of Legal Cost Control, a fee auditor. "Everyone duplicates each others work." Audits typically reduce fees for things such as overcharging for paperwork and for firms sending several attorneys to attend the same meeting. Woods said 10 percent or more of the bills submitted in a bankruptcy may be stricken for falling outside guidelines.

Courts can also appoint committees that include creditors to oversee legal bills and set guidelines, although with limited success. "There are significantly higher fees in cases with fee committees and fee examiners," said LoPucki, which he attributes to cost of employing a fee examiner and the disputes it can generate. The court appointed a fee committee in the bankruptcy of auto parts maker Delphi Corp. The group eventually cut fees by a few percent, but raised doubts about the purpose of such oversight. "The fee committee now questions whether the cost of the fee committee -- in both time and money -- outweighs any benefit to the estate," said a report from the panel. There are some examples of success in reining in fees. The fee committee in the bankruptcy of Adelphia Committee Corp cut costs by about 10 percent, which John Marquess, president of Legal Cost Control, attributed to the leadership of the U.S. trustee leading the committee. The panel was "dedicated through process and wasn't easy. It's a lot of work."

The government could also set budgets for a bankruptcy if it were providing the financing for the case, as it is expected to do. However, budgeting has had limited success, particularly in more complicated cases.
Perhaps unsurprisingly, few bankruptcy attorneys expect fees to be an issue in a filing by an automaker, despite the role of taxpayer money. "Do I believe there will be a public outcry? No. I hope not. They are providing good and valuable services," said Fred Caruso, a vice president of Development Specialists Inc, who provided financial advice to the fee examiner in the bankruptcy of Collins and Aikman, a manufacturer of auto parts. "It's very difficult in large cases to determine what is an appropriate rate," Kevin Gross, a judge on Delaware's bankruptcy court, told a recent panel discussion. One member of a fee committee put it more cynically: "Lawyers don't like to object to other lawyers fees."

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Spain Rains Down On Its Banks

Pity Spain's beleaguered banking sector. As healthy revenues on bond sales have helped banks such as Deutsche Bank bounce back from credit market write-downs, BBVA is struggling to contend with the collapsing Spanish economy, which probably means that its outlook will continue to deteriorate, as will its rival Santander. During the first quarter of 2009, profits fell 36.0% to 1.2 billion euros ($1.6 billion), as the proportion of bad loans as a total of the bank's portfolio rose to 2.8%, from 1.1% a year ago, during the quarter, led by Spain where the figure rose to 3.2%. It appears to have been led by a sharp increase in bad loans to the private sector, where bad loans rose to 6.9 billion euros ($9.0 billion), from 1.8 billion euros ($2.4 billion) earlier, 3.7% of the total loan book for the sector. In Mexico, the nonperforming loans rose to 3.6%, from 3.2% at the end of the year, while it rose to 3.9% in the United States.

However, its the situation in Spain that most worries investors. "My main concern is the state of the Spanish economy and how much worse the nonperforming loans can get given rising unemployment and the state of the Spanish property sector," said Andrea Williams, of Royal London Asset Management, an investor in BBVA. Bad loans across Spain have been rising rapidly, driven by soaring unemployment which jumped to 4.0 million, or 17.4% of the workforce, the National Statistics Institute said last Friday. The figure was up from 13.9% in the final quarter of 2008, signaling the rising pace of distress. The International Monetary Fund is forecasting that the Spanish economy will shrink by 3.0% this year.

Like Ireland, it is the struggles of the Spanish property sector that have sent the economy into freefall. House prices fell by 6.8% year on year in Spain in the first quarter, compared with a year-on-year decline of 3.2% in the previous quarter. Spain could face problems with its response to the crisis too: Joacquin Almunia, the E.U. Economic and Monetary Affairs Commissioner, warned that the country could take longer to bounce back from recession than the rest of Europe, because it was in need of reforms to the labor market and education to cut its dependence on the property sector. He also advised Spain to work toward correcting its "fiscal deficit" and "withdrawing" stimulus to help it meet its commitments to the E.U., similar to the views of the IMF. BBVA and its larger rival Banco Santander, which reports its results on Wednesday, had remained relatively unscathed in the early days of the crisis, when bank write-downs largely came from their exposure to U.S. subprime loans and similar toxic assets, with Santander even snapping up new assets in the United Kingdom.

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Why Is Germany So Calm?

The French are kidnapping managers and taking to the streets in protest against the global downturn. But their neighbors in Germany seem curiously unmoved by the economic nosedive -- at least for now. Arne Brecht has a problem, the kind of problem only a radical leftist in Berlin's bohemian Friedrichshain district can have. In one of the hippest neighborhoods in the German capital, where there is a bar or restaurant on every corner, Brecht is having trouble finding a café where he can give an interview. Brecht, 21, is in his fourth semester of his history degree at Berlin's Humboldt University. He has been a member of a group called the Berlin Antifascist Revolutionary Campaign (ARAB) for some time. He rejects capitalism, welcomes radical action like the torching of vehicles belonging to the German military (currently something of a trend in Berlin) and is looking forward to "Revolutionary May 1," traditionally a day of riots in the German capital and elsewhere. He has also spent a lot of time studying Marx and Engels. A man like Brecht refuses to meet in just any café. But "Liberación" and "Zielona Góra," two leftist establishments, both happen to be closed on this particular day. The only remaining alternative is a place called "Kuchenrausch" ("Cake Bliss") -- a name that doesn't exactly appeal to a revolutionary. Brecht insists on sitting at a table where there is no waiter service.

Brecht is probably one of the most radical history students registered at Humboldt University. As an adolescent, he spent a lot of time reading about the low wages of workers in Asia, the destruction of the environment and how corporations rake in billions in profits. Brecht has a low opinion of demonstrations, which he regards as mere requests to the government. If they were effective, they would be banned, he reasons. He also rejects the government -- all governments, in fact. And he is opposed to capital. As far as Arne Brecht is concerned, the time is ripe for radical change. He shares at least some of his views with Oskar Lafontaine, the fiery chairman of Germany's far-left Left Party. "When French workers are angry, they lock up their managers," Lafontaine told WDR public radio last Friday. "I would like to see that happen here, too, so that they notice there is anger out there and that people are worried about their livelihoods." Lafontaine's words marked the climax of a week of irresponsible rhetoric in Germany. Michael Sommer, the chairman of the German Confederation of Trade Unions (DGB), had earlier warned of the possibility of "social unrest" if the crisis worsens. Gesine Schwan, who is the center-left Social Democratic Party's candidate for German president, even went so far as to characterize the crisis as a "threat to democracy."

Despite such comments, things have been relatively quiet on German streets until now. The only significant protests were expressed at two larger rallies leading up to the London G-20 summit. About 20,000 people attended a rally in Berlin, while an event in Frankfurt attracted a somewhat smaller crowd. The people who took to the streets in Frankfurt and Berlin included men carrying red flags, jokesters carrying signs intended for the bankers in their office towers that read "Jump you fuckers," labor union members, opponents of globalization and critics of capitalism. In other words, the usual suspects. Despite the crisis, the masses stayed home. Bernd Riexinger wants that to change, and he has big plans to make it happen. He is interested in getting the masses involved and he wants to see a general strike. Riexinger, the district head of German service workers union Ver.di in Stuttgart, has always been a leftist crusader. In late March, he was standing in front of Frankfurt's landmark Bockenheimer Warte tower, wearing a black leather jacket, to launch a demonstration against the crisis. Microphone in hand, Riexinger tried to make his point as concisely as possible: "We will not pay for your crisis." It was time for those who had profited from 20 years of neoliberal policies to pay for their mistakes. It sounded straightforward enough. There was a crisis, there were those who had brought it about, and there were ways for people to stand up for themselves.

Riexinger, a member of the Left Party's regional organization in the state of Baden-Württemberg, is part of the left wing of his union. He has been trying for years to disabuse Ver.di members in the Stuttgart area of what he calls their "resignation mentality." But confrontation does not come easily to people. Germans like harmony. They may not like their bosses, but the standard approach is to keep quiet about it. Although the German penchant for consensus makes for reasonably pleasant interpersonal relationships, it is of little use to a true labor activist. "I'm beginning to sense a diffuse mixture of fear and anger, but the situation isn't clear yet," says Riexinger. Germany, it seems, is not easily aroused. But Riexinger is a persistent man, and he does what he has always done: fight. It doesn't seem to bother him that general strikes are banned in Germany, where the traditional role of labor unions is to negotiate labor contracts, not become involved in politics. "We should get rid of the taboo in this country," says Riexinger, who publicly called for a general strike at the Frankfurt demonstration. He says that he wants to prepare for the strike "in stages," which means convincing Ver.di first, then the DGB confederation, followed by other left-leaning groups. "Once we have reached critical mass, no one will take legal steps against the strikers." The country's trade unions have a combined membership of 6.5 million people. If they all took to the streets, Germany would be brought to a standstill.

Riexinger has many supporters, including political celebrities like Lafontaine, who spoke out in favor of lifting the ban on general strikes on Friday, and activists such as Christina Kaindl, one of the organizers of the Berlin demonstration against the economic crisis. Kaindl believes that Riexinger's plan for a general strike this fall could come to fruition. Riexinger says that he often hears other Ver.di members say that German unions ought to follow the French example. France is to labor organizers what the UK was to investment bankers: a land of unlimited possibilities. Experts with the International Monetary Fund (IMF) estimate that the French economy will shrink by 3 percent this year, or about half as much as the projection for Germany. Nevertheless, the French weekly newspaper Courrier International writes that a "touch of revolt" is taking hold throughout the country. Former Prime Minister Dominique de Villepin even believes that France is on the eve of a "revolution." The signs include plant occupations, wildcat strikes and workers taking managers hostage.

In early March, the manager of a Sony plant was held against his will, and 10 days later workers held an executive of the pharmaceutical company 3M hostage. Workers occupied a plant owned by US construction equipment manufacturer Caterpillar in the western city of Grenoble and detained the entire management team, while directors at chemical producer Scapa, transportation company FM Logistic and Peugeot-Citroën supplier Faurecia were subjected to similar treatment. The management of automotive supplier Molex were held hostage in their offices for about 26 hours. "The conflicts in France are undoubtedly more frequent and intense," says Claude-Emmanuel Triomphe, who studies trends in working conditions and employment for the industry association ASTREES. According to Triomphe, it is precisely because French unions are more poorly represented in the private sector than in most other industrialized countries that worker frustration is manifesting itself in spontaneous radicalization at the lowest levels of society. "Violence is, to a certain extent, the weapon of the weak," says Triomphe. But why are the weak in Germany so silent?

Jörg Schindler, the owner of a law firm with offices in Berlin and the eastern German city of Wittenberg, is opposed to violence, and yet he understands the rage of the underprivileged. He often represents the recipients of benefits under the controversial welfare program known as Hartz IV, which has long been the target of criticism by the German left. About a year ago, Schindler co-founded the leftist magazine "Prager Frühling" ("Prague Spring") in Berlin. It was intended as a forum for the proponents of leftist ideas, the logic being that the best ideas would eventually prevail. Those ideas would then be proposed to the general public. In other words, competition, a capitalist method, would be used to seek an alternative to capitalism. "We were taken by surprise," says Schindler. "Our aim was to criticize neoliberalism, but then, suddenly, everything fell apart. Now we are lacking a theoretical framework." Schindler believes that the left needs more time to come up with ideas, before it can tell citizens what to write on their protest banners. Another reason for the relative calm in Germany could be the fact that the weak are not as weak as some might assume. The country has a strong social safety net, so that the impact of the crisis has not been as severe for many.

Companies have been able to keep their employees by reducing their working hours, while retirees will receive bigger pension supplements this year than they have received in a long time. In other words, citizens still have money -- but how long can it last? "One reason that we are only seeing small protests is that politicians will not reveal the true cost of the crisis until after the parliamentary elections," says Elmar Altvater, a former professor of political economics at the Otto Suhr Institute at the Free University of Berlin. Altvater spent much of his career writing leftist books, and in 2005 he published a book titled: "The End of Capitalism as We Know It. A Radical Critique of Capitalism." According to Altvater, Germans are in for a rude awakening shortly after September's national election. Perhaps there will be a new wave of cost-cutting welfare reforms, like those which spawned the unpopular Hartz IV scheme. After all, the money the government is spending today will eventually have to come from somewhere, says Altvater. Will the post-election revelations trigger major protests or even violence? It will partly depend whether even more politicians or trade unions threaten to stir up the masses.

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