Produce stand of Gus Clesi & Bro, French Market, New Orleans
Ilargi: The monthly US unemployment rate, following from numbers published by the BLS so far in 2009, as measured using the increasingly contested U3 method, reads as follows:
- Jan 7.6%
- Feb 8.1%
- Mar 8.5%
- Apr 8.9%
- May 9.4%
The trend is very clear, to say the least.
Graphically, this is what unemployment looks like over the past ten years:
And this is the picture over the past 60 years:
The May number, obviously, is very close to being the highest since World War II. And, for all we know, perhaps longer.
Today, president Obama predicted that at the end of 2009, the 1982/83 record will have been broken. He says (U3) unemployment will reach 10%.
But if we go back to the trend established so far this year, that number doesn't just look unlikely, it looks outright unbelievable. I would venture that Obama is playing a risky game with his credibility. And I can't help wondering why he would want to do that at this phase in the "game". There are increasingly voices out there who quote the president's “audacity of hope" in a less than positive fashion. So perhaps this is the spinmeister team's double or nothing moment. Lift him over the summer and hope for the best?!
Realistically, though, even if the rate of growth were to come down, it doesn't seem possible to halt it at 10%. If it grows at 0.45% per month, as it has done to date, U3 will end the year at 12.55%. If it would grow at 0.1% per month, which seems highly improbable, it would still surpass Obama's 10%. You can all do any and all of the alternate scenarios yourself. Most likely, the rate will be well over 0.1% per month through the summer, in which case we'd have to see actual job growth in the fall?! From where, from what?
A number of items from today's news are waiting in the wings to influence the final unemployment tally for this year. First from yesterday:
- Lending by rescued US banks is still down.
- Corporate bond sales are failing in Europe; no doubt they will do so in the US as well as we go along.
- Compared to the same period last year, US housing starts are down 45.2%.
- Sure, May housing starts jumped 17.2% since April, to 532,000 units annually. And ground-breaking for multifamily units rose 61.7%. Numbers that made people feel good.
- But Fitch’s multifamily delinquency rate for commercial mortgage backed securities went to 4.55%, so not all is fine in that world. ”Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn.”
So why do they seem to build so many more of them all of a sudden? I think the annual numbers (”US housing starts are down 45.2%“) tell the real story. And, as per this graph, there's a lot of volatility:
- U.S. industrial output fell 1.1 percent in May, while the capacity utilization fell to 68.3%, the lowest level since at least 1967.
In short, pray tell, where are the jobs going to come from to keep unemployment at 10%? I don't see it. and I don't see the president, or anyone around him, explain in any sort of detail. Big words and grandiose visions, but awfully little to show for them from where I'm sitting. And what's more, the numbers don't add up.
PS: How can a democratic political system even consider handing over even more power, which, looking over the plans, would border on dictatorial in parts, to an institution such as the Federal Reserve that is so obviously operating outside of that same system, that hasn't been audited in forever and a year, and that might today, for all we know, be involved in who knows what sort of activities that actively undermine the interests of that same democratic system, which need not at all run parallel to those of the Fed's members? What's the idea, use a thief to catch a thief or something?
Ilargi: Two numbers, which I did not include above, keep popping into my head.
First, Obama's statement:
"The economy is going to turn around, but as you know, jobs are a lagging indicator and we’ve got to produce 150,000 jobs every month just to keep pace , just to flatten this out."
Second, the number that took us from April's 8.9% unemployment rate to May’s 9.4%: 787.000 new jobless.
I’m sorry, but that difference is just too large, no matter what. It's time for some realism.
According to Obama’s math, 1.050.000 jobs would need to be created in the next 7 months ”...just to flatten this out...". Following the rate at which unemployment increased from April to May, that many jobless would be added in just 6 weeks or so.
If the rate increase would continue the way it has so far this year, the number of newly unemployed would be 5 times higher than the number of jobs the president says need to be produced, leaving a hole of 4 million. It's not that hard to see this. And even if we suppose that the economy will turn around, claiming that 150.000 jobs created per month for the rest of the year will "flatten" anything out looks neither realistic nor convincing.
Unemployment in U.S. to Rise to 10% This Year, Recovery Soon, Obama Says
President Barack Obama said the U.S. unemployment rate will reach 10 percent this year, even as the economy begins to emerge from the recession. “You’re starting to see the engines of the economy turn,” Obama said today in an interview with Bloomberg Television at the White House. “It’s going to take a long time -- we had a huge de-leveraging that took place.” Obama said the jobless rate may keep rising even though the economy may start expanding “shortly” as confidence rebounds. The U.S. unemployment rate hasn’t been 10 percent or higher since 1983.
“What you’ve seen is that the pace of job loss has slowed,” the president said. “The economy is going to turn around, but as you know, jobs are a lagging indicator and we’ve got to produce 150,000 jobs every month just to keep pace, just to flatten this out.” The U.S. economy lost 345,000 jobs in May, the smallest loss since September and less than half the amount lost in January, reinforcing signs that the deepest recession in half a century is starting to abate. The unemployment rate rose to 9.4 percent, the highest since 1983.
Earlier today, Commerce Department figures showed U.S. housing starts jumped more than forecast in May and industrial production tumbled, reflecting an American economy still struggling to emerge from the slump. “I’m confident that if we take the steps that are necessary on health care, on energy, on education, if we get a strong financial regulatory system in place so that people have confidence in the markets again, that we will end up seeing recovery shortly,” Obama said.
The U.S. economy shrank at a 5.7 percent annual pace in the first quarter, capping its worst six-month performance in five decades and reflecting declines in housing, inventories and business investment. Growth will turn positive in the second half of the year, accelerating 0.5 percent from July through September and 1.9 percent in the final three months of this year, according to the median estimate in a Bloomberg survey of 62 economists. The unemployment rate is expected to rise to 10 percent in the final three months of 2009, according to the Bloomberg survey of economists.
Obama said Treasury yields are rising because investors have grown “more confident that we may have avoided the very worst scenarios” for the economy and financial markets. The 10-year Treasury note yield has increased 0.56 percentage point since May 14, and Treasury bears say yields will keep increasing as the government sells record amounts of debt to fund recovery programs. “People have a greater appetite for risk, which means that there’s going to be money flowing out of Treasuries and people are going to start putting money in other investments that provide higher yields,” he said. “That also means that yields on Treasuries are going to go up.”
Obama said it’s important for the U.S. to maintain fiscal discipline to ensure investors around the world keep buying U.S. government debt. “I am concerned about the long-term issue of our structural deficit and our long-term debt because if we don’t get a handle on that, then there’s no doubt that at some point, whether it’s the Chinese, the Koreans, the Japanese, and whoever else has been snatching up Treasuries are going to decide that this is too much of a risk,” he said. “That’s why it’s so important for us to get a handle on our long-term structural deficit,” he said.
Whistling Past the Economic Graveyard: The Audacity of Misplaced Hope
Is it possible to have too much hope? To be too optimistic? Yes, if that hope keeps you from facing -- and dealing with -- unpleasant realities. That seems to be what's happening regarding the financial institutions responsible for the economic meltdown.
Let's start with the banks' toxic assets. When Tim Geithner unveiled the Public Private Investment Program, he said that dealing with these assets was a "core" part of solving the financial crisis. But the banks would much rather keep pretending that their toxic assets are not that toxic, and worth much more than they really are -- a risky charade the relaxed mark-to-market rules allow them to continue to pull off. So, last week, the PPIP program was apparently scrapped. Does this mean that the toxic assets are no longer a "core" part of the problem? Or that hoping they're no longer part of the problem will somehow make them no longer part of the problem?
"Hope sustains life, but misplaced hope prolongs recessions." So says Jim Grant, publisher of the Grant's Interest Rate Observer newsletter, whom I interviewed last week on Squawk Box. Because of misplaced hope, Grant says, business people, homeowners -- and administrations -- often refuse to admit the truth and take the painful steps necessary to turn things around. On Wednesday, President Obama will lay out the details of his administration's plan to remake the financial regulatory system. Geithner and Larry Summers offered a sneak peak at the plan in an op-ed in today's Washington Post, proclaiming, "we must begin today to build the foundation for a stronger and safer system."
Among the proposals: "raising capital and liquidity requirements for all institutions"; "consolidated supervision by the Federal Reserve"; "robust reporting requirements on the issuers of asset-backed securities" including "strong oversight of 'over the counter' derivatives"; and providing "a stronger framework for consumer and investor protection across the board." The devil, of course, will be in the details. And on how much muscle Obama puts behind pushing these measures through and ensuring they become law without being watered down. Especially at a time when the latest stock market bubble has undermined the urgent push for reform, which seems to have given way to a push to move on to other things and leave that little financial kerfuffle behind us.
And investors seem anxious to do the same. Witness the "fierce rally" in the collateralized loan obligation market. CLOs are made up of sliced and diced assets (including high-risk and junk loans) -- and are kissing cousins to the collateralized-debt obligations (i.e. crap) at the heart of the financial meltdown. But according to analysts at Morgan Stanley there has recently been a "remarkable change" in investor sentiment towards these securities, including an "exuberance" for the lowest grade junk being sold.
In other words, we are right back to risky business as usual. No harm, no foul. Let's get back to the fun we were having before this whole worldwide economic collapse thing started happening. It puts a whole other spin on the audacity of hope. Too many in Washington -- and in the media continue to take the well-being of Wall Street as the proper gauge for the well-being of the rest of America. Yes, the Dow is up 33 percent since March. But another 345,000 jobs were lost in May, raising the number of the unemployed to 14.5 million, and the unemployment rate to 9.4 percent. Since the start of the recession in December 2007, unemployment has almost doubled.
What's more, as this chart shows, over the past two decades, the top one percent of Americans has done very well in terms of wage growth. Things have not been nearly as good for everybody else. Are the reforms going to be sufficiently fundamental to avoid a repeat of the boom and bust cycles, in which only a select few enjoy the boom and everybody else pays for the bust?
"This Isn't What I Voted For"
On his HBO show Friday night, Bill Maher complained about President Obama's frequent public outings. He compared the president to Lindsay Lohan: in the papers a lot but not doing very much. "This is not what I voted for," Maher said, arguing that Obama has maintained his personal popularity but failed to make real progress on health care, banks, or climate change. "What he needs in his personality is a little George Bush ... What we need to do is to marry the good ideas that Barack Obama has with a little bit of that Bush swagger."
U.S. housing starts, permits jump in May
New U.S. housing starts and permits rebounded in May from record lows as ground-breaking for multifamily units surged after tumbling the prior month, a government report showed on Tuesday.The Commerce Department said housing starts jumped 17.2 percent to a seasonally adjusted annual rate of 532,000 units, from April's revised 454,000 units. Ground-breaking for multifamily units surged 61.7 percent. Multifamily unit starts fell 49.4 percent in April.
Compared to the same period last year, housing starts dived 45.2 percent. Analysts polled by Reuters had expected an annual rate of 490,000 units for May. New building permits, which give a sense of future home construction, rose 4.0 percent, the biggest advance since June last year, to 518,000 units in May. That compared to analysts' forecasts for 500,000 units. Compared to the same period a year-ago, building permits plummeted 47 percent.
U.S. industrial output tumbles 1.1 percent in May
U.S. industrial production slid a steeper-than-expected 1.1 percent in May from the prior month with output off sharply at factories, utilities and mines, a Federal Reserve report showed on Tuesday. Economists polled by Reuters were expecting a 0.9 percent decline after a revised 0.7 percent drop in April, initially reported as a 0.5 percent decrease. The data suggest that any slowdown in the pace of the recession that many economists have pointed to in recent weeks may be uneven. The capacity utilization rate for total industry, a measure of slack in the economy, fell to 68.3 percent, the lowest level on records dating back to 1967.
US CMBS Delinquency Rate Exceeds 2% for First Time
Large loan defaults coupled with declining performance on multifamily and retail properties resulted in a 29 basis point climb to 2.07% for U.S. CMBS delinquencies in May, according to the latest Fitch Ratings Loan Delinquency Index.This marks the highest percentage of delinquencies since Fitch began its Index in 2001.
Meanwhile, in the first of what will be monthly reports, Moody’s CMBS Delinquency Tracker for June (based on data through the end of May) records the aggregate rate of delinquencies among US CMBS conduit and fusion loans at 2.27%.Moody’s expects the aggregate rate to reach 4% to 5% by the end of this year. By comparison, the aggregate rate was at a low of 0.22% in late 2007.
Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed Fitch’s multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn.
Moody’s tracker shows multifamily delinquency rates rising most dramatically in recent months, to a level of 4.56% in May, from a low of 0.51% in August 2007. Its previous high had been 1.53%, recorded in March 2005. Fitch’s 60 days or more delinquency rate for retail properties is slightly higher than the index at 2.24%. This number is expected to climb. As consumer spending continues to tighten, retail properties will likely lose tenants to bankruptcy or store downsizing.
Many of the loans that are currently 30 days delinquent are likely to remain delinquent and be included in the Index in June. Moody’s says loans for retail properties have seen their delinquency rate nearly triple since the start of the year, reaching 2.47%, well surpassing its previous peak of 0.89% in August 2003. Loans backed by hotels have thus far withstood economic pressures and continue to slightly outperform Fitch’s Index with a 1.91% delinquency rate.
Possible reasons for the relative resilience include generally more sophisticated sponsorship and management teams; slightly lower leverage and shorter amortization schedules at issuance; and a reporting lag whereby many year-end audited financials have not yet been finalized. Fitch maintains its expectation that, as occupancy rates and revenues per available room (RevPAR) continue to decline, putting additional stress on borrowers’ operating margins, defaults could rise precipitously. Moody’s says the other two core property types – industrial and office — have seen more moderate increases in delinquencies in 2008 and 2009.
U.S. likely to lose AAA rating: Prechter
Technical analyst Robert Prechter on Monday said he sees the United States losing its top AAA credit rating by the end of 2010, as he stuck by a deeply bearish outlook on the U.S. economy and stock market. Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.
Fears about the long-term vulnerability of the prized U.S. credit rating came to the fore after Standard & Poor's in May lowered its outlook on Britain, threatening the UK's top AAA rating. That move raised fears that the United States could face a similar risk, with the hefty amounts of government debt issued in both countries to pay for financial rescues causing budget deficits to swell. Prechter, speaking at the Reuters Investment Outlook Summit in New York, said he sees investors' confidence in an economic rebound fading, a trend that will drag the S&P 500 stock index .SPX well below the March 6 intraday low of 666.79 by the end of this year or early next.
"There will be a leg down in stock prices, and it will affect all other areas," including corporate bonds and commodities, said Prechter, who is executive officer at research company Elliott Wave International, based in Gainesville, Georgia. Prechter, who is known for his bearish views, has repeatedly forecast a steep decline in stocks this year, even as the stock market has rebounded from 12-year lows set in March as optimism about an economic recovery has risen.
Despite the government and Federal Reserve's massive rescues for financial companies and securities markets, Prechter expects credit markets to clam up again as they did in the first phase of the global financial crisis and for the U.S. economy to sink into a depression. Although U.S. banks' recently passed government "stress tests" that assessed the adequacy of their capital levels to absorb losses and have been able to raise some capital in debt and equity markets, "the banking sector is in severe trouble," as more loans turn bad, he said.
The economy "is obviously heading toward a depression," despite the government's efforts to dodge one, said Prechter. Federal Reserve Chairman Ben Bernanke has not averted a re-run of the 1930s Great Depression, even though investors are becoming firmly convinced that the Fed has avoided disaster and that the economy has hit bottom. "It's the next leg down (in stocks) that will make it clear that these things are not true," Prechter said.
California Aid Request Spurned By U.S.
The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California. Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.
With an economy larger than Canada's or Brazil's, the state is too big to fail, California officials urge. "This matters for the U.S., not just for California," said U.S. Rep. Zoe Lofgren, who chairs the state's Democratic congressional delegation. "I can't speak for the president, but when you've got the 8th biggest economy in the world sitting as one of your 50 states, it's hard to see how the country recovers if that state does not." The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state's recession and further dragging down the national economy.
After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout. These policymakers continue to watch the situation closely and do not rule out helping the state if its condition significantly deteriorates, a senior administration official said. But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states, the official said. The official did not detail those conditions.
California is among several states that have asked for a bailout from the Treasury Department. A few have gotten some traction, notably Michigan, whose economy is among the country's weakest and is struggling to deal with the fallout from the bankruptcies of General Motors and Chrysler. To stave off mass layoffs, Treasury officials are considering helping the state's auto suppliers stay afloat and convert their businesses to support other industries. California Controller John Chiang, a Democrat, warned last week that the state was "less than 50 days away from a meltdown of state government."
While its fiscal crisis is severe, experts say the state is unlikely to default on what it owes, even if it runs out of cash. It can raise money through taxes and other means to assure repayment of its debt. Most likely are massive cuts in public services. "After June 15th, every day of inaction jeopardizes our state's solvency and our ability to pay schools and teachers and to keep hospitals and ERs open," Gov. Arnold Schwarzenegger (R) said Friday. Problems unique to California have made it hard for the state to find a way out of its crisis.
The state entered the downturn burdened with an inflexible budgeting apparatus, constrained by a state ballot initiative approved by voters in 1978 that severely limited property taxes in California. The signature example of "ballot box budgeting" left the Golden State inordinately reliant on the personal income tax, which accounts for half of revenue to Sacramento. California's budget is also heavily dependent on taxes paid on capital gains and stock options, which have been clobbered during the meltdown of financial markets. State budget analysts made their annual estimate of revenue a month before the crisis spiked in the fall and have been backpedaling ever since.
"Those revenue projections turned out to be wildly optimistic, but nobody was predicting the October collapse of the financial markets," said Michael Cohen, deputy analyst in the Legislative Analyst's Office.
Consider capital gains -- income from sales of stocks or other assets. In California, that income dropped to $52 billion in 2008 from $130 billion a year earlier. It is estimated to be $36 billion this year. By February, the shortfall was projected at $42 billion over two years. Lawmakers stared at the figure for weeks, stymied by the state constitution's requirement that the budget pass with two-thirds of the legislative vote and their own profound partisanship. The deadlock broke when a moderate Republican defied his caucus's pledge against any tax hike, but it didn't end there.
In April, budget analysts revised revenue projections downward by another $12 billion. And in May, voters overwhelmingly rejected the portions of the February deal that legally had to be put before them, taking $6 billion off the table. To close an annual gap now put at $24 billion, Schwarzenegger and leaders of the legislature's Democratic majority have put aside talk of tax increases to concentrate on cuts. Most dramatically, Schwarzenegger would eliminate the state's basic welfare program, which serves 1.3 million. Facing gridlock and few options other than severe cuts, California began to look to Washington for help. State Treasurer Bill Lockyer sent a letter to Geithner in mid-May, urging him to consider helping cash-strapped municipalities.
"A fiscal meltdown by California or any other large state or municipality would surely destabilize the U.S., if not worldwide, financial markets," Lockyer wrote. If the state were to default, it could shake bond markets and undermine investor confidence in a still-fragile financial system. Tom Dresslar, a spokesman for Lockyer, said California will not default on its general obligation debts. But by late July, the state conceivably could run out of money to operate, as revenue continues to deteriorate while costs keep mounting. "The problem is getting worse, certainly not getting better," he said.
In testimony before Congress, Geithner did not rule out aiding California. But he was far from enthusiastic about such a proposal, instead suggesting that Congress was better positioned to help the states -- and that states should balance their budgets. "A lot of the burden," Geithner said, "is going to be on them to lay out a path that gets their deficits down to the point where they're going to be able to fund themselves comfortably." Most members of California's congressional delegation have also been ambivalent about whether to press for federal help. State officials are "not expecting any help from the federal government," Dresslar said. "At this point, we're on our own."
Minnesota governor announces $2.7 billion in cuts, other savings
Gov. Tim Pawlenty today announced plans to cut $300 million from aid to local governments, $236 million from health and human services programs, $100 million from higher education and to defer nearly $1.8 billion in payments to K-12 schools as he made good his promise to unilaterally slash spending to balance the state's budget. Pawlenty's plans would eliminate the $2.7 billion shortfall left after the legislative session that ended last month. He emphasized that he had scaled back the size of the cuts considered, and that reductions were carefully targeted and not made across the board.
At a State Capitol news conference, Pawlenty said that state government must tighten its belt in hard times just as families and businesses do, and that the cuts he's making will help Minnesota become more competitive down the road. The alternative, he said, would be to "dramatically raise taxes" on residents and businesses, which he said would limit possibilities for the state's future growth. "The overall impact of these reductions will be to have state government live on about 96 or 97 percent of what it's living on right now," he said.
Pawlenty said nothing he was doing was new. The governor's unallotment authority has been on the books since the 1930s, he said, and has been used by Republican and Democratic governors alike. Deferring payments has been used in nearly every budget crisis in the state, he said. The reductions are weighted toward the second year of the 2010-11 biennial budget, to give legislators a chance to consider other options when they meet next year and to allow time to adjust to the cuts, he said. Expressing frustration with the Legislature's role this year, Pawlenty said that he had "proposed ... pleaded ... begged" legislators to change and slow down programs to reduce costs.
BRIC demands more clout, steers clear of dollar talk
The leaders of the world's biggest emerging markets demanded a greater say in the global financial system on Tuesday at their first summit, but steered clear of any assault on the U.S. dollar's dominance. The summit of Brazil, Russia, India and China (BRIC) ended with a short statement by Russian President Dmitry Medvedev and a communique which demanded more power for developing nations in international financial institutions and the United Nations.
But it did not mention two key Moscow initiatives -- a smaller role for the U.S. dollar and a supranational reserve currency. "We are committed to advance the reform of international financial institutions, so as to reflect changes in the world economy," a joint communique issued by the BRIC countries said. "The emerging and developing economies must have a greater voice and representation in international financial institutions," it said. "We also believe that there is a strong need for a stable, predictable and more diversified international monetary system."
In the run-up to the summit, the Kremlin said reserve currencies would be discussed and that the world needed more reserve currencies, including widened International Monetary Fund Special Drawing Rights (SDRs). But China -- which holds nearly $2 trillion in foreign currency reserves -- was silent, indicating little unity on any potential challenge to the greenback. Analysts say the BRIC four are united by strong economic growth in recent years but not much else. Their political standpoints and global priorities differ widely and diplomats question whether the forum can forge strong, united positions.
The U.S. dollar slid on Tuesday on Russia's comments, which came a day after Finance Minister Alexei Kudrin said the dollar's status as the world's main reserve currency would be unlikely to change in the near term. "The existing set of reserve currencies, including the U.S. dollar, have failed to perform their functions," President Dmitry Medvedev told a news conference in the Russian city of Yekaterinburg, ahead of the BRIC summit. "We will not do without additional reserve currencies," Medvedev said, adding that a new supranational reserve currency was also an option as the IMF's SDRs gained a bigger role.
The BRIC term was coined by Goldman Sachs economist Jim O'Neill in 2001 to describe the growing power of emerging market economies, but Tuesday's summit was an attempt to give the grouping a bigger voice in the world. "We talked about making the decision-making process on the most important international issues -- on the economic agenda, the international political agenda on security -- fairer," said Medvedev in his final statement after the meeting. "The BRIC summit must create the conditions for a fairer world order." The other presidents sat next to Medvedev as he made the final statement. They then departed without making any comments of their own after the summit.
BRIC countries account for 15 percent of the $60.7 trillion global economy but Goldman Sachs predicts that in 20 years time, the four countries could together dwarf the G7 and China's economy will overtake the United States in total size. Medvedev's chief economic aide, Arkady Dvorkovich, called on the IMF to expand the basket of SDRs to include the Chinese yuan, commodity currencies such as the rouble, Australian and Canadian dollars and gold.
The SDR is an international reserve asset allocated to member countries with its exchange rate determined by a basket of currencies, at the moment including dollar, euro, yen and sterling. A review of the basket is due in November 2010. "The world economy will grow ... In the future we are sure growth will resume. This growing pie should be divided in a fairer way. We are not talking about excluding the dollar but the share of other currencies should increase," Dvorkovich said before the meeting. BRIC leaders would discuss investing their reserves in each other's currencies, settling bilateral trade in domestic currencies and striking currency swap agreements, he said.
Chinese President Hu Jintao has remained silent on the Kremlin's currency ideas which could ultimately indicate more about the divisions of the BRIC club rather than its strength. The lack of mention of the dollar in the final statement appeared to underline again the differing positions among the BRIC nations about how to reform the world currency system. Russia has tended to be much more outspoken against U.S. dominance of the financial system than other BRIC nations, which favor a more cautious and diplomatic approach. China also has huge investments in U.S. Treasury bonds and vast reserves of U.S. dollars. The initial response from the developed world to Russia's initiative came from Japan where Finance Minister Kaoru Yosano reiterated his view that the dollar will remain the world's key reserve currency.
China cuts US Treasury bond holdings by $4.4 billion
According to the data posted on the web site of the US Department of Treasury, China holds US$763.5 billion in US Treasury bonds by end of April, down by US$4.4 billion from previous month's US$767.9 billion. This was the first time that China had decreased its US Treasury bond holdings this year. China has constantly bought US Treasury bonds over the years. The US Treasury data shows that from May 2008 to now, China has purchased about US$260 billion US Treasury bonds.
With the bond holdings going up, China has seen debate rage over this matter. Some say that considering the possibility of US dollar's further depreciation, China should be cautious in buying US Treasury bonds whereas others still believe that it is the choice investment with foreign exchange reserves to purchase the bonds from the US. In March, Hu Xiaolian, Administrator of the State Administration of Foreign Exchange (SAFE) said that US Treasury bonds play a very important part in China's investment with foreign exchange reserves.
China would continue buying the bonds based on its needs while keeping an eye on the fluctuation of property values, she added. In fact, China was not the only country that trimmed its US Treasury bond holdings in April. Japan, Russia, and Brazil, among many other countries and regions took the same action. Among the top five US Treasury holders, only Britain bought US$24.6 billion US bonds in April. But China still stays as the biggest US Treasury bond holder.
In addition, sources with SAFE revealed that China is looking to spend a maximum US$50 billion on the bonds issued by the International Monetary Fund (IMF) if reasonable returns could not cause an issue. Russia and Brazil are also eyeing the upcoming IMF bonds. Both of them are planning to get foreign exchanges by selling US Treasury bonds and use them to purchase IMF bonds.
Systemic banking risk within Congress' purview
The U.S. Congress probably has broad authority to empower regulators to take over big banks and other giant financial companies, even if shareholders and other creditors lose out, analysts said. The Obama administration is expected to propose on Wednesday the biggest regulatory overhaul of the industry since the 1930s, including giving the Federal Reserve power to oversee systemic risk in the economy in conjunction with an inter-agency council of regulators.
In extreme circumstances, such power could include seizing control of a bank or insurer whose failure could threaten the financial system. That could further upset investors already enraged by the government's directives to the auto industry. But analysts said Congress' legislative power would make it tough for financial companies' creditors upset over how their interests are treated to raise constitutional challenges.
"The answer is probably no," said Adam Pritchard, a law professor at the University of Michigan. "Legislators may make it clear that the systemic risk regulator's authority trumps other agencies. It is possible to avoid constitutional issues by allowing the president to select the head of the uber-risk regulator, subject to Senate approval." Reforms to the regulatory scheme are designed to repair the current patchwork of oversight and limit risk that companies can take. One goal is to reduce the chance that any one firm becomes so overextended that failure to intervene threatens financial and credit markets.
In the last 16 months, the government has provided broad support to several companies considered too important to fail, including Bear Stearns Cos, Fannie Mae, Freddie Mac, American International Group Inc, Citigroup Inc and Bank of America Corp. At the same time, the government's refusal to support another bank arguably fitting that definition, Lehman Brothers Holdings Inc, was a key trigger of a credit crisis from which the world is emerging only fitfully. Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley and Wells Fargo & Co are other companies often considered systemically important.
"Systemic risk was very much built into our financial system," Daniel Tarullo, who sits on the Fed board of governors, said on Monday. "As we learned during the course of the crisis, the universe of institutions whose potential failure was regarded as having systemic consequences extended well beyond banks." Recognizing the interconnected nature of the financial system argues in favor of a broad grant of regulatory power, according to Douglas Elliott, a fellow at the Brookings Institution in Washington, D.C.
"There is a strong public interest in maintaining the health of banks and to the extent there is extra value, it does go back to the shareholders at the end," he said. "It doesn't seem to be an illegal or arbitrary taking of property." Aggrieved investors may disagree. For example, Washington Mutual Inc creditors have accused the Federal Deposit Insurance Corp in a lawsuit of improperly letting JPMorgan Chase & Co buy the thrift's assets at a fire-sale price. But this case may turn on how the FDIC exercised its authority to arrange asset sales, rather than having that authority in the first place.
There is growing sentiment for letting big companies fail. Tim Johnson, a South Dakota Democrat who sits on the Senate Banking Committee, said on Tuesday in the American Banker that, "we would be much better advised if we simply dismantled gigantic, troubled firms instead of bailing them out." He said this could involve a systemic risk council creating a "good bank/bad bank" model, where regulators try to sell troubled assets much as the FDIC does now, while shareholders and creditors bear losses, "as they should."
Congress, moreover, has broad authority to regulate interstate commerce, said Lawrence Kaplan, a counsel at Paul, Hastings, Janofsky & Walker LLP in Washington, D.C. and former Office of Thrift Supervision lawyer. "There is no legal impediment for Congress to take power from one agency and give it to another, or to create a new regulator," Kaplan said. "If a regulator took this authority without Congressional approval, that could be actionable."
A lesser approach would be to create conservatorships, similar to what the government did with mortgage companies Fannie Mae and Freddie Mac last September. "Creating a conservatorship arguably interferes with the rights of other creditors and shareholders, but I don't see much traction in that argument," Michigan law professor Pritchard said. "Seventy years ago, the New Deal Supreme Court basically told Congress it can do what it wants in this area."
New rules to expand Fed powers
Barack Obama will reveal plans on Wednesday for a system of US financial regulation that gives the Federal Reserve primary responsibility for averting and mitigating future financial crises. New systemic risk powers for the Fed will be accompanied by tougher capital requirements for banks – particularly the most important banks – and moves to strengthen the infrastructure of core financial markets. The US president also aims to curb excessive risk-taking through reform to securitisation markets and changes to compensation practices, including “say on pay” for shareholders and assessment by regulators of compensation-induced risks.
Mr Obama will announce plans to create a consumer protection regulator and is expected to propose scrapping the Office of Thrift Supervision, one of the nation’s bank regulators. But the administration will not attempt a more far-reaching consolidation of regulators due to the political difficulties involved. Instead, the plan proposes rule changes to limit the capacity of institutions to chose their regulator and focuses on substantive changes to incentives and constraints. Mr Obama will propose giving the Fed powers to address the build-up of risks that threaten the system as a whole, with a focus on core institutions and financial markets.
The Fed will retain supervision of the largest bank holding companies – which the Bush administration had proposed taking away – and may become sole regulator. The Fed will also directly supervise any non-bank financial firms that reach a size and complexity comparable to these banks. The US central bank is also likely to be given the final word on bank capital requirements, including a surcharge for the systemically important financial institutions. The president will propose the creation of a council of regulators, but the Fed will not need to seek the council’s approval to act against systemic risks.
Not all such systemic risk powers will be concentrated in the Fed. Mr Obama will propose giving the Federal Deposit Insurance Corporation special resolution powers to wind down important financial institutions. These powers will extend its capacity to manage the orderly failure of a complex financial firm, which policymakers hope will mitigate the moral hazard created by recent bail-outs. Nonetheless, the plan represents a big bet on the Fed and this is likely to prove controversial in Congress, with critics charging that the US central bank failed to exert its existing regulatory powers over banks and mortgage lending. The wider regulatory reform plan has already attracted criticism from bankers who say it will add to the cost of capital and critics who argue it does not go far enough.
So whatever happened to Paul Volcker?
As the details pile up about what Treasury will formally recommend on regulatory reform Wednesday, you do have to wonder what happened to Paul Volcker and his suggestion in February of a new kind of "Glass-Steagall-like" separation of financial institutions. Volcker, who heads up Obama's Economic Recovery Advisory Board, made the comments at a conference, setting off some discussion among the pundits. Then, silence.
Volcker himself hasn't been seen very much -- certainly not like Treasury's Tim Geithner and the seemingly irrepressible head of the Council of Economic Advisors, Larry Summers. A piece on The Huffington Post in May did report that Volcker is talking to the economics team in Treasury and advising Obama, but his office space in the Executive Office Building is empty and the HuffPo suggested that if he has an "office," it's that of CEA member Austen Goolsbee in the White House.
What does Volcker's disappearance mean? Who can tell? The most obvious speculation is that forces within the Treasury, or the White House effectively deep-sixed anything as fundamental as separating high-risk institutions to more traditional utility banks. In fact, that may well be part and parcel of the air of compromise and expedience that hangs over the entire reform process. With a few exceptions like the disappearing Office of Thrift Supervision, most of the lineup of regulators will remain the same. The Securities and Exchange Commission and the Commodity Futures Trading Commission will survive, a consumer products commission will be set up, and a council of regulators will sit over everything, like some regulatory board of directors.
It's still a little unclear how much power the Federal Reserve will accumulate, though it seems probable that it will get some role as a systemic overseer. This entire setup appears fragmented and inefficient, the worst of both worlds. It's also bound to be expensive. Why anyone thought that a council of regulators was a good idea beyond political expedience is beyond me. Nothing that's been leaked so far, however, involves any kind of fundamental alteration in the financial system itself.
A separation of financial institutions akin to Glass-Steagall had a number of complexities and difficulties, but it did try to wrestle with the management of risk question and the trade-off between safety and competitiveness. What we seem to be heading for is an intensely Balkanized regulatory apparatus attempting to supervise a financial system that has converged even more than before Bear Stearns Cos.' collapse. Even if the Fed does prove to be an effective systemic regulator -- and its record as a regulator is spotty at best -- how this council will operate in a crisis is a little scary. Half the folks on this council are currently engaged in desperate attempts to undermine each other, or are fighting over Vikram Pandit's future or on the oversight of derivatives.
Some dislike each other; others simply want to establish bureaucratic dominance. All this will only get worse as Congress, with its cast of intense self-interested characters, swings into action. Meanwhile, it would be good to hear what Volcker has to say, and to reveal what exactly happened to his interest in a return to a Glass-Steagall-like arrangement. After all, it's Volcker who famously urged the administration, "To take time to think this through. There is a temptation to act quickly."
Credit Bailout: Issuers Slashing Card Balances
The banks were bailed out last fall, the automobile companies last winter. For Edward McClelland, a writer in Chicago, deliverance finally arrived a few days ago. Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even. It’s a deal, the account representative immediately said, not even bothering to check with a supervisor. As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.
The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically. They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break. “Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.
Only a few creditors are willing to confirm the practice. Bank of America and American Express say they decide on a case-by-case basis whether to accept less than the full balance. Other card companies refuse to discuss the subject, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common. The shift comes as the financial services industry finds itself losing some of its legendary power. A credit card reform bill that makes it harder to raise rates on existing balances and prevents certain automatic fees flew through Congress and was signed by President Obama in late May. Borrowers still have a crushing amount of debt to deal with, however.
Revolving credit, a close approximation of credit card debt, totaled $939.6 billion in March. The Federal Reserve reported that 6.5 percent of credit card debt was at least 30 days past due in the first quarter, the highest percentage since it began tracking the number in 1991. The amount being written off was also at peak levels. After a balance has been delinquent for six months, regulations require the card company to reduce the value of the debt on its books to zero. If a borrower has not paid by this point, chances are he never will.
“The creditors would rather have a piece of something now instead of absolutely nothing down the road,” said Adam K. Levin, the founder of the consumer education Web site Credit.com.
Banks and credit card companies are discussing new programs that would, for the first time, allow credit counselors to invoke reductions of principal as a routine part of their strategy, said Jeffrey S. Tenenbaum, a lawyer for many counseling agencies. In the past, counselors could persuade card issuers to adjust interest rates and modify late fees, but the balance was untouchable. An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.
He was paying fitfully on his card, which was canceled for delinquency. In April, HSBC offered him full settlement at 20 percent off. He declined. A few weeks later, it agreed to let him pay half.
Traditionally, the creditors could play tough with any accounts that became delinquent because the cardholders had assets. The creditors could sue or place a lien on a cardholder’s house. As the recession grinds on, though, many cardholders have less to lose. Mr. McClelland, 42, is a renter. Since he is self-employed, he has no wages to garnish. But he did not want to feel like a deadbeat.
“Having this over and done with was appealing,” he said. He raised the agreed-upon $2,743 and sent it off electronically last week. He has spared himself the prospect of years of collection calls.
HSBC said it did not comment on individual cardholders and would not discuss its policy toward settlements. “Every customer situation is unique,” said a spokeswoman, Cindy Savio. The card companies, perhaps understandably, do not want to promote the idea that settlements have become merely a matter of asking nicely. The creditors also point out that a delinquency, like a foreclosure, destroys a credit record.
And there can be a Catch-22: those with the fewest assets are the likeliest to receive a settlement offer, but they are also the least able to come up with the cash for that final negotiated payment. Some creditors, though, are helpfully letting people stretch this out over months. Still, a line has been crossed, credit experts say. “Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.
During the boom, nonpayers were treated more harshly because, paradoxically, their debt was more valuable. Collection agencies were eager to buy bundles of old debt from the card companies for as much as 15 cents on the dollar. In a healthy economy, even the hopelessly indebted can pay something. In this recession, where collection agencies have little hope of collecting from the unemployed, that business model is suffering. Experts say 5 cents on the dollar is now the most a card company can hope to get for its past-due accounts.
Another factor undermining the card companies is the rise of debt settlement firms. These are profit-making companies that charge fees, nearly always in advance, to bargain with creditors on a consumer’s behalf. Settlement companies are under fire from regulators, who say they promise much and deliver little. But their ubiquitous ads, which make a settlement seem not only easy but also a moral victory over shamelessly gouging card companies, have done much to spread the idea. Although there are few independent statistics on the settlement industry, there is no doubt that some generous deals are being done.
Consider Bedros Alikcioglu, a gas station owner in Newport Beach, Calif. He owed $112,000 on four cards and was paying $3,000 a month in interest and late fees. “It was so hard to earn that money, and paying it to nowhere didn’t make sense anymore,” said Mr. Alikcioglu, 75. He signed up with a debt settlement company named Hope Financial, which negotiated deals with his creditors to settle for about 35 percent of his balance. Hope Financial is charging Mr. Alikcioglu about 12 percent of his original debt. “I did not want to leave the legacy of bankruptcy,” Mr. Alikcioglu said. “I am now at peace.”
Roubini says oil, gold look overpriced
Oil and gold are overvalued at current prices, which do not reflecting their market fundamentals, economist Nouriel Roubini said at the Reuters Investment Outlook Summit on Tuesday. Roubini, who is known for having predicted the financial crisis that rocked the global economy in the past two years, painted an economic backdrop of deflationary risks and warned that if oil keeps climbing toward the $100 level it would deal an "economic shock" similar to the one last seen in 2008.
The recent rally in oil, which sent prices to an eight-month high above $73 per barrel, was "too high too soon," Roubini told the Reuters Investment Outlook Summit in New York. U.S. crude oil reached a record high near $150 per barrel in July 2008 based on overly bullish global demand expectations, but prices have since more than halved with the global economic slowdown. Roubini, who is chairman of economics research firm RGE Monitor, said the current price of gold looks overextended as deflation is likely to outweigh any risks of inflation in the near term.
"For the next two years, deflationary pressure is going to be dominant, and it is going to become a time bomb down the line if and when we keep monetizing large deficits. It may be too soon to hedge with gold," he said. "Unless we have high inflation, or...other risks like depression, gold looks toppy," he said. Gold could spike again whenever there is rising risk aversion, he said, though noting that bullion prices had declined after the Lehman Brothers debacle in September last year.
JPMorgan, 17 More Banks Petition to Block MBIA Split
JPMorgan Chase & Co., Bank of America Corp., UBS AG and 15 more of the world’s largest financial companies filed a court petition against MBIA Inc. and New York’s insurance department in a second bid to block the biggest bond insurer’s split of its guarantee business. The so-called Article 78 petition, filed today in New York State Supreme Court in Manhattan, also names as respondents Eric Dinallo, the outgoing state insurance superintendent, and MBIA units. The case is intended to supplement a fraud lawsuit filed earlier by the banks, according to the petition.
The fraud suit, filed May 13, is “the appropriate avenue for obtaining the relief they seek,” Vince DiBlasi, a Sullivan & Cromwell LLP lawyer who represents the banks, said today in an e-mailed statement. MBIA stripped $5 billion of assets out of its MBIA Insurance Corp. division to fund a new unit amid “an ongoing financial crisis that has made it increasingly likely that MBIA Insurance will have to pay billions” of dollars to cover claims and won’t have enough, according to the banks’ earlier complaint.
“The MBIA policyholders made today’s Article 78 filing in order to preserve all of their potential challenges to MBIA’s fraudulent restructuring before the expiration of any statutes of limitations,” DiBlasi said. Kevin Brown, a spokesman for MBIA, declined to comment. David Neustadt, a spokesman for the state’s insurance department, didn’t immediately return a phone message.
GM's Law Firms Win Big Paydays
The prebankruptcy restructuring of General Motors Corp. has proven lucrative for some of the company's law firms. Weil, Gotshal & Manges LLP earned $54 million in fees and expenses in the six months leading up to the auto maker's June 1 bankruptcy filing, according to a recent court filing by Weil Gotshal. Much of the $54 million didn't relate strictly to GM's Chapter 11, according to a Weil lawyer. The firm's lawyers are billing GM at a rate of $355 to $950 per hour. Weil Gotshal is vying to serve as lead debtor's counsel to GM, but the firm hasn't yet received court approval.
Other GM law firms also have chalked up big paydays. Honigman Miller Schwartz and Cohn LLP was paid $15 million for one year of work leading up to the bankruptcy, and Jenner & Block LLP collected $11 million in prebankruptcy fees and expenses, according to court filings. Honigman Miller and Jenner & Block didn't return calls for comment. The two firms, like Weil, are awaiting court approval to represent GM during its bankruptcy. The economic downturn, which has led to a surge in bankruptcy filings, has been a boon to firms, including Weil Gotshal.
What’s the trouble now?
Survivor’s guide to navigation
by Mohamed El-Erian, PIMCO CEO
Most investment professionals I meet are no longer hesitant to talk of their experiences in 2008. The phenomenon is reminiscent of a group that, having survived a near-death experience, now feels the need (and has the confidence) to talk about it. This is understandable. Last year’s shocks have given way to a greater sense of stability in financial markets. Yet it would be wrong to conclude that we are returning to “business as usual.” The next few quarters will be about the aftershocks, driven not by a financial system in disarray but by the lagged reactions of the real economy, the political system, and the financial services industry itself.
At its most fundamental level, 2009 is about the interaction of three factors: the healing of financial markets; second-round economic and political effects; and partial reconfiguration of the longer term landscape. We face the challenge of navigating a bumpy journey to a “new normal.” The answers to four basic questions are key to successfully addressing this challenge.
First, how far will the balance shift from markets to governments? Industrial nations’ governments are getting more involved in modes of production, exchange and distribution – see the US, long committed to minimum state involvement. The drivers of more government involvement in markets are primarily non-commercial. Entry is dictated by a desire to offset market failures; and exit is often delayed by the lobbying of those favourably impacted by such interventions. The risk of the latter is higher when market interventions lack a clear notion of when and how governments will exit, as well as delays in addressing unintended consequences. Business leaders now need to design strategies that recognise a more influential public policy risk factor.
Second, how will governments finance their growing involvement in the economy? Markets are increasingly worried about the longer term cost of the rise in public sector borrowing. Given the huge numbers, policymakers must find a way to upgrade liability management approaches. They must also credibly signal their intention to return to longer term fiscal sustainability through the generation of meaningful primary budgetary surpluses. Neither is easy. Yet the impact is far from straightforward. For example, we also have the Federal Reserve buying Treasuries, agencies and mortgages in the secondary markets. This means that with the Treasury as seller, we have two non-commercial players on different sides of the bid/offer in benchmark markets that also influence the levered financing of other instruments further down the risk spectrum.
Third, to what extent will this alter the role of the US in the global economy? The US supplies two critical global public goods: the reserve currency and deep and predictable financial markets. The rent it collects has allowed the US to contain funding costs and gain macro-policy flexibility. The greater the questioning of these public goods, the more investors will reduce their large exposure to US assets. As such, the US may find it more difficult to operate like a large closed economy at a time when it has become a more open economy that is gradually losing its size advantage.
Fourth, how far will governments go in de-risking the financial system? The economic crisis of 2009, characterised by high and rising unemployment, is a result of the financial crisis of 2008. Expect even louder reactions from politicians, especially those facing elections in the next two years. The politically driven de-risking reduces the credit that lubricates economic activity. While limiting systemic risk, this lowers the potential rate of growth and fuels significant consolidation in the financial services sector. These four issues are consequential and call for a re-tooling of mindsets, institutions and approaches. Those who recognise this will fare better during a year that promises both the best and worst of times for businesses.
Obama's Homeowners' Bailout: Is It Really Making Home Affordable?
Many homeowners on the brink of foreclosure had been crossing their fingers hoping for a loan modification when President Obama announced his Making Home Affordable program, a government subsidized mortgage modification program that looked like their answer. But in practice, the "homeowners' bailout," intended to alleviate the burden of predatory lending rates, may only delay the inevitable for many who currently face foreclosure. When it was unveiled in March, the Obama administration's Making Home Affordable (MHA) plan was hailed as a step in the right direction. The $75 billion plan promised to help as many as 7 to 9 million homeowners with their mortgages, 4 to 5 million through loan modification.
The New York Times reported at the beginning of June that only 100,000 loan modifications have been offered, with even fewer approved -- while at the beginning of June, the number of homes foreclosed in 2009 alone surpassed one million. One loan servicer told the Huffington Post they have reached out to 49,000 homeowners who might qualify for a modification under the Obama plan, and have so far approved 1,300 such modifications. That's under 3% in the four months since the program was initiated, but they say that 75% of the borrowers who apply could eventually be approved. Homeowners testify that just getting the attention of loan servicers involves jumping through hoops and waiting for months on end. But those who have braved the bureaucratic red tape and managed to land a MHA loan modification say that these loans, too, bear scrutiny.
Loan servicers participating in the MHA program receive "Pay for Success" incentives: an up-front fee of $1,000 for each modification, and an additional fee of $1,000 a year as long as the borrower stays current on their payments, for up to three years. Under the terms of the program, a borrower's monthly payment is reduced to no more than 31% of their gross income, which can lower payments significantly. To get down to this 31% debt-to-income ratio, loan modifiers can cut interest rates as low as 2% and extend the term of the loan up to 40 years. But the rest of the debt? It doesn't vanish, and five years later, interest rates can start creeping up again. Many of the homes now in danger of foreclosure are worth significantly less than they were before the housing bubble burst -- so some homeowners are stuck paying off loans worth more than the value of their house.
The MHA program also gives banks the option of reducing the principal, and provides incentives for them to do so. But it seems, instead, that banks modifying loans are not interested in write-downs, even for houses that are underwater (worth less than the owners' loan balance). This leads to MHA loans that may not be tenable for the long term. Take Richard and Pamela Zombeck of Boston, MA, whose foreclosure story was featured on the Huffington Post in February. The Zombecks were given the runaround from their loan servicer for upwards of seven months and were at the end of the line, headed toward foreclosure unless they got a break.
In September 2006, the Zombecks had bought their first home in a suburb north of Boston for $360,000. A close friend who worked as a realtor recommended they apply for a zero down mortgage: "Why would you throw money at a loan when you can get 100 percent financing?" she advised them. Their two loans averaged less than 8% for the first year and would steadily increase to as high as 12% over the two years after that. Their friends in the real estate and banking industries promised them that the housing market was only going up, and they would be able to refinance in a year or two for a lower-interest mortgage. Taking this advice, the Zombecks applied to refinance in May 2008. Their bank drew up a contract for a 5.8% principled interest loan, but decided to rewrite the terms at the last minute in response to a falling stock market and an uptick in foreclosures.
Weeks later, in early July, Pamela was laid off from her job as an event planner at Harvard University in the publishing department. "I thought I'd have that job forever," she said. "Then Harvard closed the entire office."
With things crashing down around them, and with only one income, the Zombecks turned to Second Chance Legal Services, a firm that promised to help them through the woolly details of loan modification. Second Chance convinced Richard and Pamela that they didn't have the know-how to negotiate with their loan servicer, Ocwen, and charged them $3,500 up-front.
Second Chance was later served two cease and desist orders from California officials and was accused of fraud -- exploiting homeowners already on the edge of foreclosure. In December, the Zombecks refused the loan modification that Ocwen finally offered. It was more of the same: their interest would almost double after two years from 7.44 to 13%. They would be back in the same sinking boat in two years.
Then the Obama administration announced their MHA program, meant to help people in exactly the Zombecks' situation. But it took them months to get Ocwen to approve a MHA loan modification. At first, they were denied the modification "due to insufficient disposable income." At the same time, the Zombecks were offered an in-house modification for the 2nd lien loan that included an adjustable interest rate, a 30-year interest-only term and no reduction in principal -- with extra fees added on. Pamela questioned their logic: "So we don't have enough money to pay a lower interest rate payment, but we have enough money to pay a higher interest rate payment? Makes sense, right?"
At the Zombecks' request, Ocwen reassessed their situation and offered them a government-program modification. With the Home Affordable loan modification, their interest is down to 5.125% for the first five years, and will increase after that to 5.290%. But they don't think this loan is realistic for their financial situation. According to Pamela, even though Ocwen reduced their interest, their principal is the same as before -- which means if they make full payments on time for the duration of the loan term, they'll still owe a one-time balloon payment of $250,000. "We just can't afford it," says Pamela.
When the Zombecks were sold their original mortgage, they were told that rising housing prices would ensure they could refinance before their payments increased beyond their means. The logic of the Home Affordable modification they recently received rests on a similar assumption. If the housing market doesn't rise substantially, the Zombecks will continue paying interest on a house that's significantly underwater. Pamela says, "I'd like to see someone who the [MHA program] has worked out for."
Record Corporate Bond Sales Fail to Ease Cash Gap, Moody’s Says
As many as 14 percent of investment grade European companies will be unable to meet their cash requirements in the next 12 months even as bond issuance is at record levels, according to Moody’s Investors Service. For high-risk, high-yield companies the situation is worse, with as many as 20 percent failing to have sufficient cash to meet outflows, the New York-based ratings firm said in a report today. “Despite significant bond issuance volumes since the beginning of the year, liquidity remains fragile for corporate issuers,” said Jean-Michel Carayon, a corporate finance analyst at Moody’s in Paris.
European companies have sold more than 640 billion euros ($886 billion) of bonds this year to meet refinancing needs as the credit crisis forces banks to crimp lending. Borrowers have about $650 billion of debt maturing in the next 12 months and Moody’s said that “as the global financial crisis continues, the availability of reliable external funding continues to be a question mark.” Almost half of sub-investment grade borrowers are in danger of breaching terms of their debt agreements, the report said, with 17 percent of investment grade companies at peril.
“Economic prospects are expected to remain weak at least for the remainder of 2009,” said Moody’s analyst Sabine Renner. “While a continuation of recent bond market activity helps mitigate -- at least to some extent -- liquidity pressures stemming from bank market stress and cash flow shortfalls, uncertainty will remain elevated.” High-yield debt is graded below Baa3 by Moody’s and BBB- at Standard & Poor’s.
ECB warning on banks rattles global markets
The European Central Bank has given its starkest warning to date on growing strains in the eurozone credit markets. It said it is expecting fresh bank writedowns to hit $283bn (£173bn) by the end of next year. "Policy-makers and market participants will have to be especially alert in the period ahead. The credit cycle has not yet reached a trough," said the ECB's Financial Stability Report. "The deterioration in the macro-financial environment has continued to test the shock-absorption capacity of the euro-area financial system.
Prospects for a significant turnaround in the short term are not promising," it said. In a ghastly day for Europe's lenders, Moody's downgraded 25 Spanish banks as rising defaults eat into reserves. "The extra cushion that banks had built up over the years against such risks is becoming increasingly thin. Unless some supportive measures are taken by third parties – by owners, or likely by the government – some banks' capital cushions will soon be affected by asset impairments," it said. Moody's also put UBS on downgrade review.
In Germany, the bank-rescue fund Soffin said deep recession was leading to a "massive sharpening" of bank losses on risk assets, endangering the capital base of the financial sector. Fears that Europe may set off yet another credit crisis triggered a sharp retreat from "reflation trades" across the globe, with funds scrambling to take profits on equities and commodities after the exuberant bull run since March. US crude dropped $2 a barrel to $70. The Dow industrials dived 200 points on opening, eventually closing down 187 at 8.612, while Frankfurt's DAX fell 3.5pc.
The euro slumped to a three-week low of $1.3772 against the dollar, breaking down through key support levels. The single currency was already under pressure after the BRIC quartet of Brazil, Russia, India and China played down suggestions that their summit today would see an attack on the dollar's reserve status. Instead there appears to be a co-ordinated effort to talk up the dollar. Hans Redeker, currency chief at BNP Paribas, said Europe's banks missed a chance to rebuild their capital reserves during the credit thaw. "US banks have raised $85bn since the stress tests, while Europe's banks have raised just $7.5bn. This is going to go pear-shaped in coming months as people lose confidence in the whole crisis management of Europe," he said.
The ECB's report said eurozone bank losses would reach $649bn by late 2010: split between $218bn on securities, largely written down already; and $431bn on loans, where the real damage lies. The banks have written down $150bn of loan losses so far. The report said accounting rules were lax in some countries and there may be "under-reporting". There is a risk that "write-off rates could increase by more than currently anticipated". Among the dangers is a "downward spiral" as the recession and credit losses feed on each other, further falls in commercial property prices (already down 11pc), and spill-over effects from Eastern Europe.
The report is likely to put pressure on Germany to come clean on its banking debacle by agreeing to public stress tests. France's finance minister, Christine Lagarde, favours transparent tests across the EU, but Berlin seems determined to buy time until after the elections in September. The ECB advised banks to take advantage of state support quickly to protect themselves from "contagion risks". "There is no room for complacency," it said.
Spanish house sales suffer record fall
Spanish home sales fell a record 47.6 per cent in April compared with the same month last year, suggesting that Spain’s housing market remains crippled by the economic crisis, according to official figures released on Tuesday. Home sale transactions have been declining for 16 months, but the April reduction was the sharpest year-on-year fall so far. Home sales had previously fallen by 24 per cent in March and 38 per cent in February year-on-year.
Spain grew faster than its European neighbours for more than a decade, largely because of a bubble in housing construction that has now burst, leaving the economy in deep recession and more than 4m people without jobs. Unemployment in turn has contributed to the continuing fall in house prices. The government of José Luis Rodríguez Zapatero, the Socialist prime minister, is struggling to develop a “new economic model” that would depend less on bricks and mortar and more on new technologies and renewable energy. April transactions were not only below April 2008 but also down on March this year, implying that Spaniards are delaying their home purchases and expecting further price falls.
BBVA, Spain’s second biggest bank, earlier this month predicted that home prices would fall about 10 per cent this year and a further 12 per cent in 2010. The bank said prices overall would fall about 30 per cent from their peak and forecast that the stock of surplus housing would start to decline next year and would reach the 2005 level only in 2012. Between 2001 and 2007, Spain built nearly a third of new homes within the European Union.
Spain’s property market crash has undermined the profitability of the country’s banks and cajas, the unlisted regional savings bank, most of which depended heavily on mortgages to homebuyers and loans to property developers. Elena Salgado, finance minister, has predicted that the economy will shrink by 3.6 per cent this year and a further 0.3 per cent in 2010. Spain’s unemployment rate of 17.4 per cent is the highest in the EU and is expected by some economists to rise to about 20 per cent before it begins to fall again.
Don't Bank On A British Recovery
Paul Krugman is one of the few people who are bullish on Britain. The Nobel-prize winning economist said the U.K. economy currently looked like "one of the best in Europe" in an interview with the Observer, and said the Labor government's forecasts of a recovery early next year--widely seen as too idealistic--may well be accurate. Yet most economists and businesses are still gloomy about the outlook for the U.K.
Sustainable growth is a long way a way, argues the Confederation of British Industry, the voice of British business. Though the organization is predicting a mild recovery next year--0.3% and 0.5% growth in the first two quarters of 2010--"we still have some way to go before the UK economy is truly out of the woods," the organization's chief economic advisor, Ian McCafferty, said Monday. "Consumers… will still face tough times as high saving and lower income eat in to their ability to spend."
The CBI has hinted that the 125 billion pounds ($204.4 billion) of quantitative easing pledged by the Bank of England--through the purchase of corporate and public sector debt--may not be enough, and that the central bank may even have to go beyond the 150 billion pounds ($245.4 billion) that it has been authorized to purchase. The organization has also taken issue with the government's approach to the car industry, arguing that it has not done enough to support the sector's access to finance.
An even more gloomy view is taken by Hans Redeker, the London-based head of FX Strategy at BNP Paribas, who believes that Britain's quantitative-easing program is just a means of "saving the pain for later." The country must yet face its elephant in the room: the highly-leveraged consumer. As the public and private sector de-leverage after the recession, private household debt will have to come off its highs, dampening domestic consumer demand hugely.
The British government and central bank are hoping that by the time that happens, there will be a revival of international demand. But lower domestic demand means lower investment in the financial sector as well as the real economy. "The U.K. is definitely not the best place to be positioned at the moment," remarked Redeker, who remains bearish on the pound, and expects another fall in the currency's value this August.
In the past couple of weeks, a dribble of data has given the beleaguered government of Gordon Brown some respite, suggesting that the U.K. may finally be seeing signs of recovery. Last week Britain's National Institute of Economic and Social Research said GDP growth of 0.1% in May and 0.2.% in April pointed to an emerging "picture of stabilization." House prices rose 1.1% in April, according to government figures released last Wednesday, while the rate of decline in the manufacturing sector has slowed to a 12-month low, according to the PMI Index released at the start of June.
This has been seen--by some at least--as a vindication of Brown's policy which has been to go into spending overdrive to offer fiscal stimulus to the economy, but drag the government budget deficit to a whopping 90 billion pounds ($147.2 billion) for the year. Monday's data contributed to a sharp rally in sterling, which hit its highest level this year against the euro on Friday. The pound rose 0.6%, to 1.181 euros on Monday, from 1.174 euros on Friday, though it slipped 0.6% to $1.635, from $1.644 on Friday, after comments by Russia's finance minister gave the greenback a boost.
UK 'real' inflation falls to minus 10%
The real cost of living for British families has fallen by 10pc since this time last year, according to figures compiled for The Telegraph. While the official rate of inflation is now 2.2pc on the Government's preferred measure, the CPI, and minus 1.1pc on its old scale, the RPI, it has fallen deeply into negative territory on the most recent Real Cost of Living Index (RCLI), which stands at minus 10.3pc. The dramatic fall in the cost of a typical family's weekly essentials has been driven by sharp declines in mortgage costs since last year, while petrol and diesel are also much cheaper than a year ago.
According to the RCLI, the average weekly mortgage bill is now £178.56, a fall of £54.65 or 23pc from last year's £233.21. The price of unleaded petrol has fallen by 15.4p or 13pc from 116.9p a year ago to 101.5p, while the cost of diesel has declined even more steeply, falling by 26.2p or 20pc from 130.3p to 104.1p. Overall, household costs, which cover utilities, council tax and insurance, are 17pc lower than a year ago, while transport costs have fallen by 16pc. These falls were partly offset by a 9pc rise in food prices, adding £2.94 to the cost of a typical basket of essentials, which now costs £35.20. Some foods rose sharply in price – six tomatoes cost 38pc more than last year – while others fell; a whole cucumber is 16pc cheaper than a year ago.
New gloomy predictions for the Dutch economy
The Dutch economic policy bureau CBP predicts an unprecedented budget shortfall of 6.7 percent of GDP and a redoubling of unemployment. In forecasts published on Tuesday, the CPB said its pessimistic outlook is a result of shrinking world trade and because consumers are spending less and saving more. The CPB is the main economical data supplier to the government. The Dutch economic contraction for 2009 is estimated at 4.75 percent and next year's unemployment is predicted at 9.5 percent of the labour force - 730,000 are expected to be out of work in 2010.
In March, the policy bureau predicted a contraction of 3.5 percent this year and unemployment of almost 9 percent in 2010. The budget deficit estimate is the highest since the CPB started collecting data in 1970. Director Coen Teulings said on Tuesday that the bigger shortfall is no reason for the government to change its anti-crisis measures. "The important thing is that in the long run, beyond 2011, government finances improve again," Teulings said. Finance minister Wouter Bos, in a reaction on Tuesday, called the numbers "alarming" but also said the government does not intend to change its policies every time new figures are released.
The national debt will grow to 66 percent of GDP next year. Both that and the deficit will exceed the limits set by the eurozone countries. The open Dutch economy has been hit hard by the plunge of international trade - estimated at 15 percent next year. Dutch exports are expected to be down 17.25 percent in 2009, with imports down 14 percent. But the steepest fall took place in December, January and February, according to Teulings. "We are counting on a relatively limited contraction in the rest of the year." The CPB sees light at the end of the tunnel.
The stock exchanges have stabilised and American financial markets are recovering faster than the European ones - something Teulings says could be a consequence of the fragmented supervisory institutions in Europa. Despite the recession, purchasing power is still up in the Netherlands, 1.75 percent to be precise. Next year, however, the CPB expects it to be down 0.5 percent, mostly because of higher social security contributions. Teulings is less pessimistic than the Dutch central bank, which last week said the economy would contract by 5.4 percent this year. He expects world trade to pick up sooner and faster. The CPB also paints an optimistic picture when it comes to consumer spending.
Japan 'may be over worst of recession'
Japan may be over the worst of the recession, the country's central bank said today, after rising exports and production fuelled optimism that the world's second biggest economy could return to growth during the current quarter. The Bank of Japan raised its assessment of the economy for the second month in a row, but warned that it was too early to wind down extraordinary measures to support lenders and ease corporate debt.
The BoJ, which kept interest rates at just 0.1% after a two-day meeting, said the economy had "begun to stop worsening" and expected to see more signs that it is levelling out in the coming months. "Japan's economic conditions, after deteriorating significantly, have begun to stop worsening," the bank said. "Domestic private demand has continued to weaken against the background of declining corporate profits and the worsening employment and income situation. On the other hand, exports and production have begun to turn upward and public investment has also increased." The bank added that the economy was "likely to show clearer evidence of levelling out over time," but said financial conditions "remained tight".
Despite the encouraging news out of Tokyo, markets across Asia fell after poor manufacturing figures from the US dented hopes of a quick exit from the global recession. Investor confidence was also shaken by an IMF report warning that the worst of the US economic crisis may still lie ahead. The Nikkei benchmark index fell 286.79, or 2.9%, to close at 9752.88 in Tokyo - its biggest fall in almost three months - while indices in Hong Kong and South Korea were down 3% and 0.9%.
The BoJ's guarded optimism was echoed by the finance minister, Kaoru Yosano, at a meeting of G8 finance ministers at the weekend. "The economy is in recession but the pace of decline is slowing," he said. "That's a very cautious statement. Signs of stabilisation, that's also an expression with a question mark." The central bank's report comes amid a mixed picture for Japan's export-dependent economy. Last week the government said the economy had shrunk less than initially thought during the first quarter of this year, but the contraction was still the biggest on record, at an annualised 14.2%.
Factory output, on the other hand, rose 5.9% in April, the biggest gain since 1953, signalling a modest rise in demand for exports. The bank said it remained wary of poor demand and other downside risks. Wholesale prices fell 5.4% in May from a year earlier, fuelling fears of a return to deflation, while households continue to bear the brunt of job cuts, which took unemployment to a seven-year high of 5% in April.
Analysts warned against making too much of the BoJ's slightly upbeat assessment. "Although there has been some optimism on the economy after strong industrial output data, the BoJ is maintaining a very pessimistic view on the economy," Junko Nishioka, chief economist at RBS Securities in Tokyo, told Reuters. "It said the economy has begun to stop worsening, but it didn't say it has stopped worsening.
Town's Friendly Bank Left Nasty Mess
Larry Seastrom, the founder of New Frontier Bank, made it a mantra to invest in his community. That paid off big time, both for the bank and for this fast-growing college town on the broad plains of northeast Colorado. Founded a decade ago in a double-wide trailer, New Frontier hit $1 billion in assets in July of 2006 and, in a burst of growth, doubled to $2 billion in just 18 months. Then, just as quickly, it collapsed. The bank had adopted the classic model of small-town banks nationwide, making business loans to entrepreneurs and developers and farmers -- in short, to neighbors. But it had lent so recklessly, with so few controls, that despite the assets on the books, it was little more than "a financial mirage," says Fred Joseph, Colorado's acting banking commissioner.
Fully 35% of New Frontier's loan portfolio was delinquent at the end of the first quarter of this year, compared with an average rate of less than 4% at Colorado's other state-chartered banks. Mr. Seastrom says his bank was strong. He blames the high delinquency rate on a crash in milk prices, which crippled dairy farmers, and on the downturn in commercial real estate. If he had been given time to modify the loans to let borrowers ride out the recession, he says, he could have saved the bank. But on April 10, fearing further losses, state regulators shut down New Frontier. Two months later, the community that counted the bank a partner in growth is struggling to come to grips with its loss.
New Frontier's failure is expected to set off a cascade of bankruptcies and foreclosures across several counties. Companies that relied on the bank for financing are cutting staff and curtailing payments to suppliers. Many business owners who borrowed from New Frontier and are rushing to find fresh credit have been told by bank after bank that they don't qualify -- either their business plans are naive or their collateral worthless. The message, some borrowers say, is that much of the growth that New Frontier financed was a mistake. "It's really ugly," says Loyal Gallatin, a contractor who took out a New Frontier loan to build two luxury homes that he says he now can't sell. He says he's applied to 13 banks but can't find anyone to take over the loans.
Nationwide, nearly three dozen small and midsize banks have failed this year. Another 80 are under pressure to raise more capital. Treasury Secretary Timothy Geithner recently announced that he intends to extend bailout funds to more community banks. He will have significant sums at his disposal, given last week's announcement that financial giants such as J.P. Morgan Chase & Co. and Morgan Stanley plan to return billions in bailout money to the Treasury. But some industry advocates say small banks need more than cash handouts. Many community bankers say regulators are pressing them to write down the value of certain assets, such as construction loans.
That pressure applies to all banks -- part of an effort to ensure financial balance sheets are realistic -- but small banks feel the impact more keenly because their loan portfolios tend to be less diversified. The American Bankers Association says it will raise the issue at an upcoming meeting with Treasury officials. John Vazquez could use help from a bank of any size. The mayor of a small town near Greeley, Mr. Vazquez had a line of credit from New Frontier to make payroll at his engineering firm between contracts. With his credit now cut off, he's let his three employees go and closed up shop.
In a separate deal, he took out a loan from New Frontier four years ago to buy a 40-acre lot by the freeway. Mr. Vazquez had planned to roll the $5.6 million balance, due this month, into a new loan to build a charter school on the land. But New Frontier is gone. And though he's applied to banks across Colorado and Wyoming, Mr. Vazquez says he can't find another loan officer excited about his vision. He expects to lose his land, just as he lost his company. But he doesn't blame New Frontier. What regulators call risky loans, he calls faith in the community. "At community banks it's not all about performance and projections," Mr. Vazquez says. "It's about belief in the individual, the guy you sit next to in church."
That support for New Frontier is not uncommon in the area. If the bank "was remiss in anything," read a recent letter in the Greeley Tribune, "it was only in its zealous attempts to help its neighbors and business community prosper and grow." Not everyone is so charitable. Tina Gasner took out a $260,000 loan from New Frontier two years ago to fulfill her dream of running a restaurant based on family recipes like Awesome Artichoke Dip Pizza. She says the loan officer raved about her business plan -- but she now believes she had too little cash on hand to weather a downturn and too little collateral to justify so much debt. "I'm an accountant," Ms. Gasner says. "I'm not stupid. But you're in a place of trust when you approach a bank, when they're saying, 'This is a good plan, you'll make a profit.' That's why I went forward."
Among other complaints, Ms. Gasner says New Frontier improperly counted equipment she was leasing for her restaurant as collateral to back her loan. Bank officials deny that. Since New Frontier closed, Ms. Gasner has applied at 10 other banks to refinance the loan. All have turned her down, she says. She's laid off 16 of her 26 employees and has fallen behind on her home and business loans. New Frontier was chartered a few weeks before Christmas 1998 in Greeley, a city of 90,000 surrounded by agrarian landscapes in bright hues: red barns, green fields, yellow hay, brown cows. Mr. Seastrom built a headquarters with a grand glass-walled atrium. He hired a much-loved former radio broadcaster as a front-door greeter, started a social club for older customers and was known to give generously to nonprofits.
There was free cappuccino in the lobby and popcorn on Fridays. Every month, the bank threw a party with door prizes. The bank was such a social hub that couples held wedding receptions on the patio. New Frontier also stood out for the high interest rates it paid on certificates of deposit. That attracted big investments from out-of-town brokerage houses. Mr. Seastrom says this was a good strategy for a community bank: Bring in money from wealthy New York City investors and put it to work growing businesses in small-town Colorado.
But the Federal Deposit Insurance Corp. considers these investments -- which at times accounted for 70% of New Frontier's total deposits -- "hot money," because big investors tend to take out deposits faster than local customers loyal to their hometown bank. The FDIC ordered New Frontier to stop relying on such accounts. Mr. Seastrom said he did that, though brokered investments continued to account for a significant portion of all deposits. They also helped fuel New Frontier's business lending, leading to meteoric growth and favorable press in magazines such as Fortune and American Banker.
In an interview, Mr. Seastrom says all loans met strict underwriting standards and were fully documented. But he acknowledges taking risks other banks wouldn't. That was a point of pride at New Frontier. "We tried to help people," he says. "We tried to find a way to do things." For example, he says, the bank didn't automatically turn away applicants with shaky credit scores or recent bankruptcies. Mr. Seastrom let small businessmen take out loans against assets that other bankers considered marginal, such as tables and chairs.
"They had looser credit requirements than virtually any other bank in town," says Bill Kurtz, who runs six Wells Fargo branches in the area. Because of this, he says, he and other bankers used New Frontier as a kind of safety valve. If customers fell behind on their payments, the bankers would urge them to go to New Frontier to take out a second loan -- and use that money to pay off the first bank. Mr. Seastrom of New Frontier says he wasn't aware of this practice. Leroy Leavitt, chief executive of New West Bank in Greeley, says he has reviewed dozens of loan documents from New Frontier and says in 80% of the cases, the customer "borrowed more than they could ever hope to repay."
Another sign of New Frontier's aggressive policy: its loan-to-deposit ratio. The national average for FDIC-insured institutions was 85% last year, meaning banks carried 85 cents in loans for every dollar in deposits. New Frontier routinely had a 95% to 105% ratio because, says Mr. Seastrom, "we felt like we could manage it." In recent years, New Frontier moved aggressively into agricultural lending, a volatile market. With the bank's help, local dairies expanded rapidly. New Frontier also financed dairies in Texas, Florida and elsewhere. "They made you feel like they trusted you," says Laura Teague, who runs a cattle feedlot in Fort Morgan, Colo., about 50 miles east of Greeley. With her husband, Gary, she has expanded the business by 30% in the past five years, thanks to more than $50 million in credit from New Frontier.
Mr. Teague says the couple's business is profitable and he believes other banks will take over the loans. But other borrowers say they've had no such luck. As of June 8, only 14% of New Frontier's more than 4,200 loans had been paid off, says the FDIC. The FDIC is giving borrowers several more weeks to pay off their loans or transfer them to other financial institutions. Then the government will likely bundle any loans still on the books at New Frontier and conduct an online auction, selling them to the highest bidder. Most borrowers who are current on their loans will see little change after the auction, tentatively planned for August. They will simply mail their payments to the new owners of their loans.
But borrowers who are in default because of late payments or other violations of their loan documents could have difficulties. Investors who buy defaulted loans can demand payment in full, settle for partial payment, or seize the collateral, which in many cases would liquidate the business. Since more than a third of New Frontier's loans were in default at the end of March -- and others have defaulted since -- hundreds of borrowers could face ruin. "That's a very real threat," says Jim Docheff, a dairy farmer who has defaulted on his New Frontier loan. "The possibility is hanging over my head."
Many of those affected might well have gone under anyway, but the bank's collapse will compress the failures into a short window. That, in turn, will be a blow to the failed firms' suppliers and landlords, and to the banks that hold their loans. Already, trucker Roger Hill has felt the impact. He delivers hay to dairies and feedlots, many of which were financed by New Frontier. With their lines of credit gone and their loans uncertain, many of these companies are ordering less and delaying payments. Mr. Hill says he may have to sell his trucks to pay his bills. The liquidation will cost the FDIC an estimated $670 million. The bank's executives -- and many of its borrowers -- argue that it would have been cheaper and less disruptive to shore up New Frontier with bailout funds.
But to access bailout funds, banks generally need a positive recommendation from their state or federal regulators. And New Frontier could not have gotten that, says Mr. Joseph, Colorado's top regulator. The bank, he says, was too unstable. To this day, says Mr. Seastrom, he can't bear to drive past any of New Frontier's three branches -- or the farms and restaurants and strip malls he helped finance. Again and again, he returns to the comment by Mr. Joseph that New Frontier was little more than a mirage. "How can it be a mirage," says Mr. Seastrom, "if you're helping the community?"
Phoenix crop circle may predict end of the world
Crop circle experts believe the latest pattern to be discovered, a phoenix rising from the flames in Wiltshire, may give a warning about the end of the world. The 400-foot design was discovered in a barley field in Yatesbury near Devizes and depicts the mythical phoenix reborn as it rises from the ashes. Investigators claim more formations are referencing the possibility of a cataclysmic event occurring on December 21, 2012, which coincides with the end of the ancient Mayan calendar.
The Mayans believed civilisation exists within a series of earth cycles of 144,000 days each with the 13th expiring in December 2012, resulting in Armageddon. Crop circle enthusiast Karen Alexander, from Gosport, Hants, said: "The phoenix is a mythical creature which symbolises rebirth and a new era in many cultures across the world. "Within the crop circle community many believe the designs are constantly referring to December 21 and its aftermath. "This could be interpreted as the human race or earth rising again after a monumental event.
"The patterns are becoming more intricate with every find and it is exciting to think how they are going to evolve by the time we get to 2012." Recent crop circles have included giant jelly-fish and one image discovered in Wiltshire in June which experts dubbed the most 'mind boggling' they had ever come across. The formation, measuring 150ft in diameter, is apparently a coded image representing the first 10 digits, 3.141592654, of pi.
How to spend $13.9 trillion