River House, 52nd Street and East River, New York City
Ilargi: When the New York Times starts publishing articles on how bad the financial crisis really is, despite all the green recovery shooting stories sprouting from government circles and media such as, among others, the New York Times, I’m going to have to guess that it's official now.
It sort of makes one wonder how much longer media such as the New York Times will now be able to keep writing and printing articles that contradict what's being published in the New York Times. Or will it be spun as freedom of expression, but not the official point of view of the paper?
Can the editorial staff wash their hands clean of revered writers like Floyd Norris and Bob Herbert? Or should we perhaps look at this from another angle? Is the Times changing its stance on the entire Obama government politics? Is it going to give up the noble art of cheerleading? Is that the sound of a baton dropping?
Herbert’s piece is entitled: "No Recovery in Sight". Some quotes:
- There are now more than five unemployed workers for every job opening in the United States.
- Economists are currently spreading the word that the recession may end sometime this year, but the unemployment rate will continue to climb. That’s not a recovery. That’s mumbo jumbo.
- There were roughly seven million people officially counted as unemployed in November 2007, a month before the recession began. Now there are about 14 million.
- "By May 2009, [..] the total number of underutilized workers had increased dramatically from 15.63 million to 29.37 million — a rise of 13.7 million, or 88 percent. Nearly 30 million working-age individuals were underutilized in May 2009, the largest number in our nation’s history".
- Three-quarters of the workers let go over the past year were permanently displaced, as opposed to temporarily laid off. They won’t be going back to their jobs when economic conditions improve.
- Men accounted for nearly 80 percent of the loss in employment in this recession. [..] Workers under 30 have sustained nearly half the net job losses since November 2007.
- The first step in dealing with a crisis is to recognize that it exists. This is not a problem that will evaporate when the gross domestic product finally begins to creep into positive territory.
Those are serious points, and there's nothing green about them. They're also bordering on a direct attack on everything rosy that Obama and his administration have been claiming lately. They fall about 0.0001% short of painting the president as a liar.
Floyd Norris's "A Recession Measured by New-Home Sales", also in today's edition of the Times, has this:
- There have been bad housing markets before, but never in post-World War II history has the market for new homes suffered as badly as it has in this decline.
- At the peak of the housing boom in 2005, sales of both existing and new homes were running at twice the 1976 rate. This year, the sales rate for existing homes seems to have stabilized at about one-third higher than the 1976 rate. New-home sales also seem to have stabilized, but at about half the 1976 rate.
- ... new-home sales are now running at only about a quarter of peak levels, a fall far deeper than anything seen since the statistics began being collected in the 1960s.
- Of the 135,000 completed but unsold new homes at the end of May, nearly half had been sitting for a year or more. The median age of such homes was 11.5 months, an unprecedented figure.
For those among you who read websites like The Automatic Earth, there is nothing here that wasn't already known and obvious. The same is not true for the average reader of the New York Times. And that, when you come to think of it, is completely insane. After all, why do people read a paper? To find out what's going on, or to see confirmed that la-la land still exists?
These numbers don't suddenly come falling out of the sky in broad daylight. They merely depict an ongoing trend that is worsening fast. That last part is temporarily hidden behind a $13.8 trillion veil, but all that has achieved is for the worsening trendlines not to hit exponential territory. It hasn't stopped the numbers themselves from deteriorating.
And it should be clear that the next $13.8 trillion will be much harder to find. And that it won't be able to stop the deterioration either. It will at best halt the plunge in mid-air for another painfully expensive fleeting moment in time.
People have a right to know what's truly going on in their societies, rather than fall prey to the interests of politicians and financiers that are better served by hiding what's real. The situation is about to get a whole lot worse, and people deserve the right to make preparations for that as best they see fit.
The ongoing refusal to inform them of what's real and what is not, perpetrated by governments, media and industry, is a disgrace. It's not how a civilized society treats its citizens. Perhaps the New York Times today put a first step on the path to doing what needs to be done. Not that I'm not sceptical about it.
No Recovery in Sight
How do you put together a consumer economy that works when the consumers are out of work? One of the great stories you’ll be hearing over the next couple of years will be about the large number of Americans who were forced out of work in this recession and remained unable to find gainful employment after the recession ended. We’re basically in denial about this. There are now more than five unemployed workers for every job opening in the United States. The ranks of the poor are growing, welfare rolls are rising and young American men on a broad front are falling into an abyss of joblessness.
Some months ago, the Obama administration and various mainstream economists forecast a peak unemployment rate of roughly 8 percent this year. It has already reached 9.4 percent, and most analysts now expect it to hit 10 percent or higher. Economists are currently spreading the word that the recession may end sometime this year, but the unemployment rate will continue to climb. That’s not a recovery. That’s mumbo jumbo.
Why this rampant joblessness is not viewed as a crisis and approached with the sense of urgency and commitment that a crisis warrants, is beyond me. The Obama administration has committed a great deal of money to keep the economy from collapsing entirely, but that is not enough to cope with the scope of the jobless crisis. There were roughly seven million people officially counted as unemployed in November 2007, a month before the recession began. Now there are about 14 million. If you add to these unemployed individuals those who are working part time but would like to work full time, and those who want jobs but have become discouraged and stopped looking, you get an underutilization rate that is truly alarming.
"By May 2009," according to the Center for Labor Market Studies at Northeastern University in Boston, "the total number of underutilized workers had increased dramatically from 15.63 million to 29.37 million — a rise of 13.7 million, or 88 percent. Nearly 30 million working-age individuals were underutilized in May 2009, the largest number in our nation’s history. The overall labor underutilization rate in May 2009 had risen to 18.2 percent, its highest value in 26 years."
If it were true that the recession is approaching its end and that these startlingly high numbers were about to begin a steady and substantial decline, there would be much less reason for alarm. But while there is evidence the recession is easing, hardly anyone believes a big-time employment turnaround is in the offing. Three-quarters of the workers let go over the past year were permanently displaced, as opposed to temporarily laid off. They won’t be going back to their jobs when economic conditions improve. And many of those who were permanently displaced were in fields like construction and manufacturing in which the odds of finding work, even after a recovery takes hold, are not good.
Another startling aspect of this economic downturn is the toll it has taken on men, especially young men. Men accounted for nearly 80 percent of the loss in employment in this recession. As the labor market center reported, "The unemployment rate for males in April 2009 was 10 percent, versus only 7.2 percent for women, the largest absolute and relative gender gap in unemployment rates in the post-World War II period." Workers under 30 have sustained nearly half the net job losses since November 2007.
This is not a recipe for a strong economic recovery once the recession officially ends, or for a healthy society. Young males, especially, are being clobbered at an age when, typically, they would be thinking about getting married, setting up new households and starting families. Moreover, work habits and experience developed in one’s 20s often establish the foundation for decades of employment and earnings.
We’ve seen what happens when you rely on debt and inflated assets to keep the economy afloat. The economy can’t be re-established on a sound basis without aggressive efforts to put people back to work in jobs with decent wages. We also need to consider the suffering that is being endured by these high levels of joblessness, including the profound negative effect on the families of the unemployed. Lawrence Mishel, president of the Economic Policy Institute, warned about the consequences for children.
"What does it mean," he asked, "when kids are under stress because there is no money in the household, or people have to move more, or are combining households, or lose their health insurance? I believe this is going to leave a permanent scar on a generation of kids." The first step in dealing with a crisis is to recognize that it exists. This is not a problem that will evaporate when the gross domestic product finally begins to creep into positive territory.
A Recession Measured by New-Home Sales
There have been bad housing markets before, but never in post-World War II history has the market for new homes suffered as badly as it has in this decline. That plunge raises questions about whether some homes built during the boom will ever be sold. It could also suggest that home builders have been slow to cut their prices enough to keep up with falling market prices.
For more than three decades, the sales volume of existing single-family homes and newly built houses tended to rise and fall by about the same percentage, as can be seen in the accompanying charts. To be sure, sales of new homes did tend to do a little worse during recessions, but the difference was small and short-lived.
The top chart shows sales volumes of both types of homes, compared with the sales pace for each in 1976. To avoid monthly gyrations caused by weather or other temporary factors, the figures use three-month moving averages of seasonally adjusted annual rates. At the peak of the housing boom in 2005, sales of both existing and new homes were running at twice the 1976 rate. This year, the sales rate for existing homes seems to have stabilized at about one-third higher than the 1976 rate. New-home sales also seem to have stabilized, but at about half the 1976 rate.
The second chart reflects the same data, but shows how far sales fell from peak levels during each downturn in the past. The plunge in sales of existing homes is severe but not unprecedented. But new-home sales are now running at only about a quarter of peak levels, a fall far deeper than anything seen since the statistics began being collected in the 1960s. New-home prices, while they have fallen sharply, do not appear to have declined as far as prices of existing homes. At the worst point this year, the median price of existing homes was off 29 percent from the peak, while the largest drop for new-home prices was 23 percent.
Median home price figures need to be used with caution, since there is no way to know how the median home sold in one month compares, in terms of size and location, to the median home sold in a different month. But in past recessions, new-home prices have tended to be weaker than existing-home prices, the opposite of what has happened in this cycle.
"Foreclosed homes are the supply that has to be worked off," said Robert Barbera, the chief economist of ITG, an investment advisory firm. He said the problem had worsened in recent months after the end of the foreclosure moratorium adopted by many lenders while they waited to see what the Obama administration would propose. Of the 135,000 completed but unsold new homes at the end of May, nearly half had been sitting for a year or more. The median age of such homes was 11.5 months, an unprecedented figure. It may be that builders will have to cut prices even more to sell some houses — houses that, in retrospect, probably should never have been built at all.
Is stimulus creating jobs? Yes but ...
House committee reports 21,000 actual highway and transit jobs created or saved. White House says number is in line with its 150,000 jobs estimate.
So just how many stimulus jobs have been created or saved so far? The figure remains elusive, but Congress provided one of the first peeks this week by reporting that stimulus has funded 21,000 highway and transit jobs as of May 31. The number, one of the first counts of actual stimulus-based employment, is based on state reports to the House Transportation and Infrastructure Committee. Thousands of indirect jobs -- such as the deli employee who prepares lunch for the construction crew or the workers who produce the steel needed for projects -- were also created or sustained.
The White House says the figure is in line with its projection that the $787 billion recovery act has created or saved 150,000 jobs in the administration's first 100 days. The 150,000 number, which includes direct and indirect positions, is an estimate based on the amount of stimulus funds spent. Each $92,000 of stimulus funds spent translates into one job, according to the White House formula. Congressional Republicans, who have blasted the recovery act as wasteful spending that won't create nearly the number of jobs promised, took issue with the figure.
Rep. John Mica, R-Fla., criticized the Obama administration for not reporting a specific number of jobs created or saved by stimulus-based infrastructure spending. Mica, the ranking Republican on the transportation committee, pointed out that only 21,000 positions have been produced, though the committee's Democrats have said that the $64.1 billion in infrastructure spending would create or sustain more than 1.8 million jobs. "This is pitiful that we can't get people working, we can't get the stimulus money out," Mica said. "People want jobs and they want them now."
In his weekly address, House Republican Leader John Boehner, R-Ohio, also slammed the administration for failing to stem the rising unemployment tide. The unemployment rate rose to 9.4%, its highest level in 26 years. It's expected to climb to 9.6% when the June numbers are released next Thursday. "All year long, Democrats here in Washington have made plenty of promises about putting Americans back to work, but I think the question is: Where are the jobs?" he said. "We all remember the trillion-dollar stimulus bill Democrats promised would be about jobs, jobs and jobs. And clearly all it's turned into is about spending, spending, and more spending."
The administration said that the 21,000 construction jobs figure meshes with the 150,000 figure. The White House is also taking into account the jobs created or saved by stimulus money spent on tax cuts and entitlements, such as Medicaid. Much of the initial stimulus funds spent went to states to help them cope with rising Medicaid rolls. "It's not just that we're paving I-57 in Illinois, how many jobs did that create?" Gavin said. "It's accounting for a much broader universe."
Testifying before the House committee Thursday, federal transportation officials updated their employment estimates. The Federal Transit Administration said that 19,000 jobs have been created or saved so far, and another 45,000 would be from the grants that are in progress. These figures are based on formulas.
Some 6,000 actual jobs have been created or saved by stimulus highway money, as of the end of May, according to the Federal Highway Administration. The agency estimates the 1,500 projects currently underway will ultimately create 50,000 positions. The agency's total $27.5 billion stimulus allocation is estimated to create or sustain 300,000 jobs by 2012.
"Federal agencies, states and their local partners have demonstrated that they can deliver transportation and infrastructure projects and create urgently needed employment in the tight timeframes set forth in the recovery act," said Rep. James Oberstar, D-Minn., who heads the transportation committee.
Five Banks Are Seized, Raising U.S. Failures This Year to 45
Five U.S. banks with total assets of about $1.04 billion were seized by regulators, pushing this year’s tally of failures to 45 as a recession drives up unemployment and home foreclosures. Community Bank of West Georgia, in Villa Rica, Georgia; Neighborhood Community Bank of Newnan, Georgia; Horizon Bank of Pine City, Minnesota; MetroPacific Bank of Irvine, California; and Mirae Bank of Los Angeles were closed yesterday by state regulators, according to statements from the Federal Deposit Insurance Corp. The FDIC was named receiver of the four banks.
Wilshire Bancorp’s Wilshire State Bank will take over all of Mirae’s $362 million in deposits, and will purchase $449 million of assets, the FDIC said in a statement. Sunwest Bank of Tustin, California, acquired most of MetroPacific’s $73 million in deposits and $80 million in assets, the FDIC said. Stearns Bank of St. Cloud, Minnesota, bought Horizon Bank’s $69.4 million of deposits. Stearns will purchase $84.4 million of Horizon’s assets, the FDIC said. The FDIC didn’t find a buyer for Community Bank of West Georgia, and said it will mail checks to reimburse insured depositors. The bank has deposits of $182.5 million. Charter Financial Corp.’s CharterBank will assume Neighborhood Community Bank’s $191.3 million of deposits and purchased some assets in a loss-share agreement with the FDIC, according to the agency.
"The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector," the FDIC said. "The agreement also is expected to minimize disruptions for loan customers."
Regulators have seized the most U.S. banks this year since 1993. The U.S. economy has shed about 6 million jobs since the recession began in December 2007. Foreclosure filings surpassed 300,000 for the third straight month in May, according to RealtyTrac Inc.
Members of U.S. House Financial Services Committee snapped up or dumped bank stocks as bottom fell out of market
As financial markets tumbled and the government worked to stave off panic by pumping billions of dollars into banks last fall, several members of Congress who oversee the banking industry were grabbing up or dumping bank stocks. Anticipating bargains or profits or just trying to unload before the bottom fell out, these members of the House Financial Services Committee or brokers on their behalf were buying and selling stocks including Bank of America and Citigroup -- some of the very corporations their committee would later rap for greed, a Plain Dealer examination of congressional stock market transactions shows.
Financial disclosure records show that some of these Financial Services Committee members, including Ohio Rep. Charlie Wilson, made bank stock trades on the same day the banks were getting a government bailout from a program Congress approved. The transactions may not have been illegal or against congressional rules, but securities attorneys and congressional watchdog groups say they raise flags about the appearance of conflicts of interest.
"I don't think that any of these people should be owning these types of financial instruments," said Brian Biggins, a Cleveland securities lawyer and former stock brokerage manager. "I'm not saying they shouldn't be in the stock market. But if they're on the banking committee and trading in these kinds of stocks, I don't think that's right." For example, Rep. Ginny Brown-Waite, a Florida Republican, bought Citigroup stock valued between $1,001 and $15,000 on Oct. 2, the day before the House passed the financial rescue bill and President George W. Bush signed it into law, records show. She opposed the bill.
Eleven days later, she bought $1,001 to $15,000 worth of Bank of America stock. It was on the same day that then-Treasury Secretary Henry Paulson told leading banks that he expected them to accept billions in bailout money to prevent a financial meltdown. Brown-Waite, who has since left the committee to join the tax-writing Ways and Means Committee, and her spokeswoman would not comment for this article. The precise value of her investments is not publicly known because financial disclosure reports provide only broad ranges, although some members include detailed brokerage reports.
Wilson, a Democrat from the eastern Ohio town of Bridgeport, sold between $15,001 and $50,000 worth of Huntington Bancshares stock on Nov. 14, the same day Huntington got $1.4 billion in bailout money from the federal Troubled Asset Relief Program, or TARP, records show. Wilson's transactions over the course of last autumn also included Bank of America and BB&T, both beneficiaries of the bank rescue program that Treasury implemented after congressional passage.
Wilson's spokeswoman said the congressman did not personally pick these trades because he leaves day-to-day investment decisions to a money manager who uses a proprietary model in selecting securities to buy or sell. "To be clear, Mr. Wilson doesn't know about the trades ahead of time or even as they're being made," said spokeswoman Hillary Wicai Viers. A spokesman for Rep. Carolyn McCarthy, a New York Democrat also on the Financial Services Committee, said she similarly leaves transactions solely to the discretion of account managers. McCarthy's trades included a $2,275 purchase of bailout recipient J.P. Morgan Chase while Congress was still hammering out its rescue bill.
Another member of the Financial Services Committee, Democratic Rep. Jackie Speier of California, said on a recent financial disclosure report that she bought up to $15,000 in Citigroup stock on Nov. 7. That was 10 days after the bank got a $25 billion bailout. Her office now says the report was filed in error, the transaction should have been listed as her husband's -- and she wishes he had not made it. "When I brought it up with her, she said it was Barry's purchase and she didn't know about it but she would have disagreed with it at the time had she known about it," Speier spokesman Mike Larsen said.
Her husband wasn't the only committee spouse trading on bank stocks.
The stockbroker husband of West Virginia's Shelley Moore Capito, a Republican, sold more than $100,000 in Citigroup stock in several transactions late last year. His brokerage firm was owned by Citigroup and his compensation included Citigroup stock. A Capito spokesman said the House Ethics Committee gave her verbal approval to join the committee despite her husband's job. Another committee member, Illinois Republican Judith Biggert, whose husband sold Wells Fargo stock while Congress was helping to shape the rescue bill, said she does not discuss stock transactions with her spouse.
"I wouldn't have the vaguest idea" why he sold at that time "because we don't discuss our stocks," said Biggert. "We have a financial group in Chicago, and they take care of all of that." Some of these stock sales enabled committee members or their families to cut losses before the market continued its slide. Other trades proved to be particularly ill-timed. Citigroup stock, for example, closed at $22.50 per share the day Brown-Waite bought it. Now it's hovering around $3.
Many details about the massive financial bailout last fall were widely known outside Capitol Hill. Yet members of the Financial Services Committee were privy to closed-door discussions, staff briefings and political horse-trading decisions between political parties, Congress and the White House. Banks lobbied Congress and the administration heavily. Banks that received bailout money spent $77 million on lobbying and $37 million on federal campaign contributions last year, according to the Center for Responsive Politics. The center found that the banks spending the heaviest got the biggest rescue packages.
There has been no direct evidence that this allowed members to engage in insider trading. But when lawmakers overseeing banks also buy and sell bank stocks, it can create "the appearance of a problem," said Anthony J. Hartman, a Cleveland securities attorney. "I do a lot of different types of litigation, and I just don't think anybody ought to be putting themselves in a situation where as an elected official, I can be suspect of what they are doing," Hartman said.
The issue of appearances is complicated, said Melanie Sloan, executive director of Citizens for Responsibility in Ethics in Washington, because "we can't say that because you're a member of Congress you can't buy or sell any stocks at all." But she added, "I do think it's more troubling on an oversight committee, particularly Financial Services."
Congressional finance reports available online
Want to see how members of Congress invest their money? It's easier than ever. Personal financial disclosure filings, which list assets, transactions, outside income and noncongressional travel reimbursements, are posted for House members on the House of Representatives clerk's Web site. A free private Web site called LegiStorm provides the same information, as well as the financial disclosure filings of U.S. senators. Government watchdog groups say the wide dissemination of these reports serves a vital public purpose in shedding light on Congress.
"I think that's the critical element, that there is knowledge that this information will go public, because that adds an important deterrent effect for members of Congress who are tempted to skirt the rules or act on what's insider information," said Sheila Krumholz, executive director of the Center for Responsive Politics. "And now in the midst of economic decline, citizens are understandably asking what members knew when and how they acted for their own personal portfolios -- whether they publicly professed faith in our financial institutions while privately seeking to offload their holdings in those same institutions."
State shutdowns loom as deadlines near
At least 19 states still have to approve their fiscal 2010 budgets before next Tuesday. If they don't, staffers might not be paid and services might shut down.
One week and counting. An unprecedented number of states have only days left to pass their fiscal 2010 budgets. At least 19 states are still hammering out their spending plans as the recession wreaks havoc with their finances and sparks fights between governors and lawmakers. If spending plans aren't approved, state workers may not receive their paychecks and some government offices may shut down. "A lot of states are coming down to the wire," said Todd Haggerty, research analyst for the National Conference of State Legislatures. "More than what's typical. The unprecedented economic situation is creating a lot of difficulty this year."
Some 46 states end their fiscal years on June 30 and all but one require balanced budgets be adopted. States are struggling to close shortfalls totaling $121 billion for fiscal 2010 as the recession decimates tax revenues. The budget battles have even landed some in court. In Arizona, Republican Gov. Jan Brewer has filed a lawsuit against the Republican-controlled legislature seeking to compel lawmakers to send her the budget it passed on June 4. The lawmakers are holding back until an agreement is reached because she has said she would veto it.
Leaders are at odds over how to contend with a deficit that exceeds $3 billion. The governor has proposed raising taxes, including hiking the sales tax by a percentage point, while the legislators are cutting spending. Brewer is hoping lawmakers will send her a budget before Arizona has to start shutting down non-essential state services. That would require some major changes since she does not support the current spending plans. "She doesn't think much of what's in them," said Paul Senseman, the governor's spokesman.
Arizona Senate President Bob Burns is also confident that the two sides will reach an agreement and avoid a government shut down. The two branches are meeting daily, a spokeswoman for Burns said. In some states, the leaders aren't even talking. Pennsylvania's governor and Senate Republicans, who have to close a $3.2 billion gap for the current year, are not negotiating on their budgets. "There's been no significant movement on the budget," said Chuck Ardo, press secretary for Gov. Ed Rendell, who is prepared to cancel his African safari in August if the budget isn't set.
The governor's $28.4 billion budget seeks to raise the personal income tax rate by half-a-percentage point and draining the commonwealth's $750 million rainy day fund. Senate Republicans' $27.3 billion plan looks to cut spending on areas such as education and community revitalization. Though the states has never passed a budget on time during Rendell's seven years in office, both sides agree this year is the worst standoff ever.
"It's hard to see how a meeting would be productive given the two very different points of view," said Erik Arneson, communications director for Senate Majority Leader Dominic Pileggi. "At this point, there's no support in our caucus for a tax increase." If states don't pass their budgets on time, one of three things usually happens, according to the National Conference of State Legislatures. Lawmakers can pass temporary appropriations measures to keep the doors open and bills paid. Some states have provisions that maintain funding for agencies and services even without a budget.
Sometimes, however, the government faces a shutdown. When Tennessee officials failed to pass a budget on time in 2002, classes stopped at public universities, drivers licenses were not issued and road construction ceased. Pennsylvania's Rendell has already said state workers would have to stay on the job without being paid if the budget isn't approved. Services will start to be affected if the budget standoff continues beyond its typical week's delay.
Even states that have passed budgets are struggling to close expanding deficits. California approved its budget in February, but lawmakers and the governor are now locking horns over how to solve a $24 billion shortfall before June 30. The legislature presented a budget proposal last week that includes $11.4 billion in cuts and $2 billion in revenue hikes, but Gov. Arnold Schwarzenegger dismissed it as a piecemeal approach full of gimmicks. If a budget isn't passed in coming days, California will run out of cash and be forced to start issuing IOUs, Controller John Chiang said on Wednesday. The state faced a similar situation in February, but at that time it had the option of withholding $3 billion in state tax refunds.
Now, it doesn't have that cushion. Also, the shortfall is now nearly five times as large, forcing the controller to withhold payments to local governments for social services, private contractors, state vendors, as well as income and corporate tax refunds. "Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Chiang said. "The state's $2.8 billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit freefall."
Global Economy Displays 'Convincing Signs' of Recovery, Financial Stability Board's Draghi Says
The world economy is showing "convincing signs of recovery," Mario Draghi, chairman of the newly created Financial Stability Board, said today after its first meeting. "We observe signs of improvement here and there," Draghi, who is also a member of the European Central Bank council and governor of the Bank of Italy, said in Basel, Switzerland. "Still, the fragilities of the economy and the financial system are there." The Basel-based board, which succeeds the Financial Stability Forum, will look at risks to financial markets and ensure that regulators in each country act upon them. Its members represent economies from Argentina to the United States and institutions such as the European Central Bank and the International Monetary Fund.
The global recession is showing signs of easing as financial markets thaw. Government reports this week showed that Europe’s manufacturing and service industries contracted at the slowest pace in nine months in June, while U.S. consumer spending rose in May. The Organization for Economic Cooperation and Development raised its forecast for the economy of its 30 member nations for the first time in two years this week.
The Financial Stability Board "noted signs of improvement in the global macroeconomic outlook and in some financial markets," Draghi said. "Banks have raised capital from the private sector, but the process of restructuring and strengthening bank balance sheets is not yet completed. Corporate bond markets continue to see strong primary issuance."
Financial institutions around the world have amassed losses of more than $1.4 trillion during the financial crisis, data compiled by Bloomberg show. In Europe, governments and central banks are on the hook for more than 3.7 trillion euros ($5.2 trillion) of guarantees and funding. UBS AG, the European bank with the biggest losses from the credit crisis, said on June 25 it expects a second-quarter loss. In response, governments and central banks are tightening banking rules to strengthen the global financial system. U.S. President Barack Obama this month proposed new rules to tighten oversight, while European leaders agreed on a sweeping overhaul of their regulations.
The Basel Committee on Banking Supervision, a member of the Financial Stability Board, will "make an integrated proposal to strengthen the capital and liquidity regime by end-2009," Draghi said, including requirements to address systemic risk. The Swiss National Bank on June 18 said UBS and Credit Suisse Group AG must increase the amount of capital they hold in relation to assets to withstand any further losses. The banks should aim for a so-called leverage ratio of at least 5 percent once the crisis is over, the SNB said, meaning the capital base should account for at least 5 percent of the balance sheet total. UBS’s ratio was 2.56 percent at the end of March.
Draghi said as a complement to the risk-weighted leverage ratios of the Basel 2 banking framework, regulators should consider a simpler figure. "Basel 2 is a very sophisticated way of determining a leverage ratio," he said. "In the end you come up with a leverage ratio but it’s the product of many different assessments of risk for different categories of assets under different markets conditions. What we are seeing is that markets have a simpler view. They want to look at some number."
Fed Documents Fuel Concerns About Expanding Central Bank's Role
Documents unearthed by congressional investigators reveal disagreements among senior Federal Reserve officials about how to handle Bank of America Corp.'s acquisition of Merrill Lynch, fueling concern on Capitol Hill over giving the central bank even more power to regulate the financial system. The glimpse inside the regulatory machinery provided by emails, memorandums and handwritten notes show a Fed that wrestled with how tough it should be on Bank of America, one of the biggest U.S. banks. It also shows Fed officials questioning more broadly their response to the financial crisis months earlier.
In December, Bank of America approached top U.S. officials about abandoning a deal, forged in the heat of the crisis, to buy investment bank Merrill Lynch. In the end, the government arranged a $20 billion rescue package for the bank to cover growing losses at Merrill. In between, the documents show areas of disagreement within some of the Fed's 12 regional reserve banks. The Federal Reserve Bank of Richmond, where supervision of Bank of America's parent company is based, pushed for a tougher approach than other regulators, emails suggest. Bank of America officials appealed more than once to the Fed's Washington headquarters to intervene.
Bank of America CEO "Ken [Lewis] may also raise his favorite perennial issue -- that is, is the Richmond supervisory team on the same page as the [Fed] Board," Fed governor Kevin Warsh wrote in an email Dec. 30 to Fed Chairman Ben Bernanke and other senior officials. "Richmond staff was on our call today, but prior to the call, it sounds like they may have threatened a little more than ideal..." On Jan. 10, Fed General Counsel Scott Alvarez wrote to Mr. Bernanke and others that Richmond Fed President Jeffrey Lacker was raising some issues over the final deal. Mr. Lacker wanted the entire Federal Open Market Committee to vote on any loan to Bank of America.
Mr. Bernanke responded at 2:01 a.m.: "Thanks. If we are nimble we can manage this." Whether or not Mr. Bernanke threatened Mr. Lewis's ouster over the rescue remains a source of contention. Mr. Lewis suggested in testimony to New York Attorney General Andrew Cuomo that the Fed chief did just that. Mr. Bernanke has denied making such a threat to Mr. Lewis. On Jan. 16, just days before government aid for the deal was supposed to be announced, Federal Reserve Bank of Boston president Eric Rosengren sent Mr. Bernanke an email saying that the Fed shouldn't dismiss too hastily the idea of tossing management at Bank of America.
Mr. Rosengren suggested such a shake up might be necessary, "particularly if we believe that existing management is a significant source of the problem." Mr. Bernanke, at a contentious hearing Thursday, defended the Fed against suggestions it had been too lenient with management. "The supervisory process is not a onetime thing. It's an ongoing process, and in an ongoing supervisory process, we have made demands of the Bank of America on terms of their board and management," he told Rep. Dennis Kucinich (D., Ohio).
The documents reveal Fed officials questioning the central bank's response to the financial crisis even before negotiations began on the effort to aid Bank of America's acquisition of Merrill Lynch. "At this point I have [the] sense that the hearts and minds war in Iraq was handled better than it has been in this crisis, particularly within the Fed system," wrote Meg McConnell, a top Federal Reserve Bank of New York official, on the day the House of Representatives voted down the Bush administration's first financial-rescue package, sending the Dow industrials down almost 800 points.
The Obama administration earlier this month proposed giving the Fed powers to oversee and examine the largest companies in the financial system. The disclosures could bolster the central bank's argument that it needs more power to manage future crises. One reason for the government's lurching response last year, officials say, was that it didn't have the needed tools. The Fed has been dealing with a steady stream of criticism from Republicans. Democrats have recently joined in, and the disclosures being aired through the congressional inquiry have put the central bank on the defensive.
Fading political will has let banks off the hook
In London, the adventure playground of the global financial system until the financial crisis struck, banks such as Barclays and Nomura are once again energetically hiring and poaching staff. As in New York, trading profits are up and bonuses are back. At government-controlled Royal Bank of Scotland, they are back with a vengeance. Many in Westminster feel the new £9.6m ($16m, €11m) pay package for Stephen Hester, chief executive since November, smacks of the pre-crisis era.
Certainly, the mood among financiers is suddenly more cheery. There is also a growing suspicion on both sides of the Atlantic that bankers, a lethal breed whose activities have pretty much throttled the global economy while causing government deficits to balloon, are going back to business as usual – a frightening prospect for taxpayers everywhere. What is so extraordinary about this new bankerly optimism is that it comes despite the financial crisis remaining unresolved after nearly two years of grief. The lack of trust in markets is such that central banks are still having to step into private bankers’ shoes to keep funds flowing.
For all the numerous initiatives by the authorities in the US and Europe, the value of much toxic paper in the system is still uncertain. Moves to soften mark-to-market accounting rules, which required assets to be written down to realistic values, have raised the risk of creating "zombie" banks that live on despite being insolvent. That was the syndrome that gave Japan its lost economic decade. Perhaps most worrying of all, it looks as though the political will to secure a strong regulatory response to the crisis is waning.
The Obama administration’s reform proposals last week shuffled institutional deckchairs and gave more power to the Federal Reserve despite its signal failure to do its regulatory stuff during the credit bubble. There were worthy plans for this and that. Yet the result of all the bail-outs and mergers is still a higher degree of concentration in banking, which does nothing to mitigate the systemic threat from outfits that are too big or too interconnected to fail. The likes of JPMorgan Chase and Goldman Sachs will continue to reap fat profits from opaque over-the-counter trade in credit default swaps and other derivatives.
The stronger banks, while preparing to release themselves, from government guarantees, are bent on pursuing business models that are not dramatically different from those they adopted before they foundered. In the UK, Mervyn King, governor of the Bank of England, has strongly urged that the casino element of the banking system be separated from the conventional borrowing and lending business that enjoys the benefit of deposit insurance and the Bank’s support as a lender of last resort.
Lord Turner, his counterpart at the Financial Services Authority, has a more nuanced position. In his recent review of the regulatory system, he said: "Serving the financial needs of today’s complex globally interconnected economy ... requires the existence of large complex banking institutions providing financial risk management products which can only be delivered off the platform of extensive market-making activities, which inevitably involve at least some position-taking."
He also questions whether it is realistic to think that high-risk trading activity could exist outside the utility-type banking sector and be subject to pure market discipline in a world of interconnected markets. Bear Stearns had no utility-type business but the US authorities still recognised that it posed a systemic threat when it ran into difficulty.
Alistair Darling, the UK chancellor of the exchequer, appears to be on Lord Turner’s side in this argument. He is also proposing to pass some of the Bank of England’s responsibility for financial stability to the FSA. The outcome is that re-regulation in the UK will fall short of radical. In the European Union, meanwhile, the regulatory response has been lopsided, directed as much at hedge funds and private equity firms, which posed little or no systemic threat in this crisis, as at banks. This no doubt reflects the perennial Franco-German desire to knock British finance.
Why is it that the bankers suddenly appear to be off the hook? One answer is that the monetary remedies for the financial crisis create the potential for trading profits by reducing the banks’ cost of funds. While this appears offensive to ordinary people, it is nonetheless desirable, because it recapitalises banks via the back door. But the less-than-draconian regulatory response represents a triumph of lobbying power, especially in the US where investment banks have been highly persuasive in Washington and have made full use of a deeply flawed campaign funding system.
In the UK, the government is still taken with the notion that Britain has a valuable comparative advantage in finance that should not be thrown away lightly, though the advantage seems questionable in the light of the damage finance has wrought on the economy. More generally, the complexity of the financial debacle is such that it has been hard for policymakers to find a firm response other than through changed regulatory architecture and the broad brush of capital adequacy requirements for banks.
There remains the possibility that, when the global economy and the banking system pick up, more swingeing capital requirements than expected will make banking more like a utility. But for the moment we are all saddled with huge public sector debts, courtesy of the bankers, while confronting what promises to be a very anaemic recovery. Against the background of unresolved global imbalances, there must be a possibility that with bankers once again at play, the financial system will return to chaos in the not too distant future.
Financial Regulation: Industry Objections Increasing
It wasn't so long ago—against the backdrop of the financial crisis and its aftershocks, amid a tide of popular anger—that financial-industry representatives took pains to acknowledge the need for financial reform, even in their own corners of the sector. That's beginning to change. While few are arguing against revamping regulation generally, lobbyists and industry trade groups are increasingly arguing that policymakers should tread lightly when it comes to their particular constituents. The ever more vocal objections began right around the time that the Obama Administration unveiled its omnibus proposal for financial regulation, on June 17.
Now banks are pushing hard to fend off a new accounting rule that would force them to put many off-balance-sheet assets back onto their books, and thrifts are fighting to keep the widely criticized Office of Thrift Supervision from being merged with other bank regulators. Hedge funds are calling for caution on rules that go beyond basic registration of the investment pools. The derivatives industry's supporters in Washington are warning that proposals to require increased transparency and more systematic markets for the complex financial instruments could drive up costs for a variety of financial and industrial companies.
And the U.S. Chamber of Commerce, which called consumer-protection improvements a key part of reform earlier this year, is fighting against the Administration's proposed Consumer Financial Protection Agency. It amounts to a kind of regulatory NIMBYism ("not in my backyard")—predictable, perhaps, once proposals for reform began to coalesce, starting with the Administration's 80-plus-page white paper. "I think the NIMBYism started once we had something to shoot at—before that, it wasn't really real," says Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents large financial companies. "Then once we have the legislative language, the real fights will begin."
That could be soon. Treasury Secretary Timothy Geithner has said the agency could propose legislative language to create the new Consumer Financial Protection Agency within a few days.
But Brian Gardner, a policy analyst for Keefe Bruyette & Woods in New York, said the new tack is to be expected—and is also driven by lessons from the push for health-care and energy legislation. "It's pretty natural that they start to try and figure out what's in their interest and how to mold it in ways that can either prevent harm or do something they can take advantage of," Gardner says. At the same time, he notes, "Washington is working quicker than people are used to, so I think people are getting attuned to working quicker."
For its part, the Chamber of Commerce says it's not opposing the idea of improving consumer protection. But the group says that creating another government agency is the wrong way to go about it. "That's precisely the type of patchwork quilt that got us into trouble in the first place," says Tom Quaadman, the group's executive director for financial reporting policy. A hedge fund industry official said fund managers are embracing registration—roughly three-quarters of funds have registered voluntarily—but remain wary of more extensive restrictions. Fund managers have had hundreds of meetings on Capitol Hill in recent months. "We're very supportive of what [the Administration is] trying to do, but the devil's in the details," says the official.
Of course, industry isn't alone in getting more vocal. Consumer and investor advocates, and political groups supporting Democratic proposals, are ratcheting up the volume as well. In an e-mail to news organizations and others, Americans United for Change—a group formed to fight Bush Administration policies that now throws its weight behind Obama's initiatives—blasted the Securities Industry & Financial Markets Assn. (SIMFA) after Bloomberg News reported the financial group was mounting a campaign against "populist" criticism of the industry. "What are they going to call their new PR campaign: The 'Thanks for the Bailout, Suckers—Now Quit Whining' Tour?" Tom McMahon, acting executive director of Americans United for Change, was quoted as saying in the e-mail.
SIFMA President Timothy Ryan told Bloomberg the group has advocated more government power to unwind financial firms that don't own banks: "This effort, which is not uncommon for a trade association, is designed to ensure our ideas for improved accountability, oversight, and transparency are heard by the widest possible audience." "It's a strategy to try to split people on Capitol Hill and try to confuse people," says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, a consumer advocacy organization in Washington that recently joined with dozens of others to form Americans for Financial Reform. "It's an attempt to blame it on the other guy—they're hoping to water down reform, deflect criticism of their industry."
Why is Citigroup still in business?
It’s been quite a week for Citi.
- Tuesday it walked into a feces storm of its own making by announcing it would raise salaries by 50% to offset cuts in bonuses.
To be fair to Citi, they are taking (well-deserved) crap for the entire industry on the salary issue. BofA, Morgan Stanley, UBS and others are also trying to dodge the bad PR when huge bonuses are awarded following huge losses. So now instead of bonuses for bad performance execs will just get a huge salary for bad performance. It’s all about retention – or so Citi would like us to believe. Quote from the NYT: "Citigroup executives are so eager to keep employees from fleeing, that in some cases, they are offering them guaranteed pay contracts."
Well, given that those contracts are being paid for with $45 billion of US taxpayer debt who can blame them. Citi is once again free to play with someone else’s money and are being just as responsible as they were the last time. BTW, the idea that these raises are going to the rank-and-file is absolute hogwash. As Alphaville notes, "the biggest increases will go to investment bankers and traders."
- Also on Tuesday, Citi temporarily stopped buying new loans after "discovering" it was missing property appraisals and documents showing borrowers’ incomes.
The discovery came in Citi’s correspondent division, which buys loans from banks and independent mortgage firms, and was responsible for about half of the bank’s $115 billion in mortgages last year. Two great quotes about this:And this from an analyst:
"There remain key areas that fall short of our quality- control process. We ask you to review your processes and join us in this effort to collectively address these areas of concern." — Brad Brunts, a managing director at the bank’s CitiMortgage division.
Not a good sign when you have to re-train people processing mortgages on the most basic elements of how to do their jobs. Are these some of the folks being offered those guaranteed contracts?
- Finally, today Japan ordered Citi to halt the marketing of all financial products to retail customers for a month because of bank "failed to implement sufficient measures aimed at preventing suspicious transactions, including money laundering."
This really takes the idea of not verifying income to a new level.
RealityFrame’s comment about the raises could really be applied to pretty much everything the bank touches: Anybody want to dispute that those banksters aren’t indeed the "best and the brightest"?
JPMorgan to charge 5% on card balance transfers, cash advances
JPMorgan Chase & Co. is raising some balance-transfer fees on credit cards to 5 percent, the highest among the nation's largest banks, citing increasing regulations and costs after the U.S. put new curbs on the industry. JPMorgan, the biggest credit-card issuer, disclosed the increase in a notice mailed to customers this month that referred to "new federal regulations." The New York-based lender starts charging more in August, just as the law designed to curb interest-rate increases, fees and marketing practices begins to take effect.
"In the current economic environment, our costs of doing business have been impacted by increased losses," JPMorgan spokesman Paul Hartwick said in an e-mailed statement. "We are increasing balance-transfer fees to reflect the increasing costs for these transactions." The notice didn't specify the current average fee for balance transfers. The credit-card law President Barack Obama signed May 22 prompted warnings from industry executives that they'd be forced to raise fees, curtail credit and restrict consumer rewards. Discover Financial Services Chief Executive Officer David Nelms said last week his credit-card company will pull back "dramatically" on balance transfers.
The rate increase at JPMorgan also affects cash advances, and fixed rates will become variable, the notice said. Hartwick declined to say how many customers are affected. The agreement says JPMorgan may choose to offer a lower transfer fee; Hartwick declined to elaborate on how customers might qualify. JPMorgan's 5 percent fee tops the 4 percent that Bank of America Corp. implemented June 1, citing increasing costs. Bank of America ranks third by cards outstanding, according to industry newsletter the Nilson Report.
"This is the highest balance-transfer fee in the industry," said Bill Hardekopf, chief executive officer of LowCards.com, a Birmingham, Alabama research firm. "It is setting a new precedent that I'm afraid other issuers may follow." The Credit Card Accountability Responsibility and Disclosure Act Obama signed requires issuers to apply payments to balances with the highest interest rates first and prohibits "universal default," a practice that increased rates on existing balances if cardholders missed payments to other lenders, even if their card accounts were up to date.
"We fully expect issuers to increase the cost of their fees to compensate for the loss of revenue that they expect once the regulations take effect," Hardekopf said in an interview. Barney Frank, chairman of the House Financial Services Committee, said Obama's proposed Consumer Financial Protection Agency would have jurisdiction over increases like the one JPMorgan is planning.
"What Chase is doing is strengthening the argument for the new entity," Frank said in an interview. Banks should be able to impose fees to cover their costs, not to create a "new profit center," he said. JPMorgan Chief Executive Officer Jamie Dimon said May 27 the card business was the "most challenged" and that the new rules could cost the bank about $500 million. The unit lost $547 million in the first quarter and isn't expected to turn a profit this year.
The bank wrote off 7.72 percent of card loans in the first quarter and said losses could approach 9 percent later in the year if unemployment continued to rise. Charge-offs typically track the jobless rate, which reached 9.4 percent in May. JPMorgan has about 159 million cards in circulation and more than $176 billion in managed loans, a regulatory filing shows. David Robertson, publisher of the Nilson Report in Carpinteria, California, said the lender is trying to see whether 5 percent is a "potential barrier" to entry for customers.
"If people will pay it, then once new rules encumbering issuers take effect, Chase will have an awareness of the role this fee can play in making up for lost revenue," Robertson said in an e-mail. Nelms, the head of Riverwoods, Illinois-based Discover, told analysts during a conference call the federal law would have "unintended consequences" for customers that might include fewer offers for balance transfers at discounted rates, and that the initial low "teaser" rate might last as little as six months. Some card issuers have been offering zero percent on balance transfers that last a year or more.
JPMorgan's investment banking gaining on Goldman
JPMorgan Chase & Co has snapped up market share for its investment banking unit and, amid the financial crisis, its large balance sheet may put it in a position to threaten Wall Street's dominant investment bank, Goldman Sachs Group Inc. Analysts largely expect the investment banking unit at the second-largest U.S. bank to again report strong second-quarter results, following record first-quarter revenue.
A retail giant with a reputation for conservative risk-taking, JPMorgan has survived the financial crisis and benefited from its acquisition of near-collapsed investment bank Bear Stearns Cos.
"JPMorgan can compete with, and beat, Goldman Sachs," said Dick Bove, a veteran banking analyst with Rochdale Securities.
With $2.1 trillion in assets, JPMorgan dwarfs Goldman, which has $925 billion, and also Morgan Stanley, the former investment bank traditionally seen as Goldman's closest rival, which has $1.1 trillion. The strength of its balance sheet could be an advantage, in particular since these banks this month returned billions to the U.S. government's bank bailout fund, known as the Troubled Asset Relief Program.
After TARP, "The cost of capital becomes key, and there JPMorgan has a clear competitive advantage," said George Ball, chairman of wealth and asset manager Sanders Morris Harris Group in Houston. JPMorgan's size means it can lend more to more clients, giving it a better chance to sell other services, Bove said. "JPMorgan comes to the game with massive capital backing and a huge customer list -- it's going to do the greater number of deals," he said.
JPMorgan has regularly ranked highly in global league tables for debt and equity underwriting but it has not always had as strong an advisory or proprietary trading effort. Yet in the first quarter, JPMorgan said trading revenue was $2.5 billion versus a negative $1.0 billion in the same period a year earlier. The bank has warned that trading revenues may be volatile, but analysts believe it may be on track to report second-quarter trading revenue similar to the first quarter's. "Trading results, while probably not as strong as the first quarter, will still be pretty strong," said Stuart Plesser, equity analyst at Standard & Poor's.
Over the same period, Goldman -- which has sometimes been accused of acting more like a hedge fund than a bank -- has seen its proprietary investing hamstrung by new capital requirements.
Goldman and Morgan Stanley converted to bank holding companies in the fall, after investment bank Lehman Brothers filed for bankruptcy, to reassure investors and gain access to Federal Reserve lending facilities. As bank holding companies, the former investment banks cannot leverage their balance sheets as they did in the past. "The banks and the two surviving brokerage firms are really now on a level playing field in terms of trading," said Brad Hintz, analyst at Sanford C. Bernstein in New York.
To be sure, Goldman's investment bank is expected to perform well in the second quarter. Analysts at FBR Capital Markets on Tuesday raised their second-quarter estimate for the company, citing likely gains from a favorable trading and capital markets environment. It is also possible -- although the bank has denied this -- that Goldman may seek to shed its bank holding company status.
JPMorgan's investment bank dominated the second quarter with global estimated second-quarter investment banking fees of $2 billion compared with $1.32 billion for Goldman Sachs, according to an exclusive tabulation by Thomson Reuters including income from merger and acquisition advisory activities, equity, debt and loan issuance. JPMorgan saw a drop of 14 percent in such fees from the year-earlier period, while Goldman suffered a 28 percent drop.
Certainly, while other competitors may face rising credit losses, or labor to repay government funds, there will be more than enough business for both banks to share. "It's not one of those situations where there's only one winner," said Hintz. But in the near term, JPMorgan's strength and size give it an edge when it comes to winning business in uncertain financial conditions. "From the standpoint of force majeure, Goldman can't match JPMorgan at all," said Bove.
Delinquencies on US Auto-backed Securities Jump 22%
Prime auto U.S. ABS delinquencies jumped 22% on a monthly basis in May, while net losses improved 17% in May over April clouding expectations for the coming summer months, according to Fitch Ratings. The improvement in net losses was mostly a result of seasonal patterns and losses remain near record high levels. Prime 60+ days delinquencies rose to 0.72% in May, up from 0.59% in April.
The increase in delinquencies last month was noticeably higher than previous years during this period. Delinquencies were 26% higher in May versus 2008 levels; they hit a record high of 0.87% in early 2009 but are back off of those levels. Despite historically high loss rates, the ratings of senior classes of notes continue to perform within expectations, with minimal negative rating actions issued in 2009 to date.
Fitch also says the European auto ABS sector experienced an increased number of negative factors during Q109, including a rise in delinquencies and net losses. The Fitch 60-180 Delinquency Index (Fitch DI) breached an historic peak in the first quarter, increasing to 1.5% (up 20 basis points compared with Q408). Since December 2007, the Fitch DI has increased by 50 basis points to 1.5% and is not expected to stabilise during the next quarter (Q209).
The Fitch Net Loss Index increased to 0.5% during Q109 (up 40 basis points compared with Q408), but remained within historic levels.The Fitch Excess Spread Index (Fitch ESI) was slightly lower during the first quarter of the year, and stood at 2.3% (down 20 basis points compared with Q408).
Angelo Mozilo: A Public Sector Creation
It was obvious back in 2005, when Countrywide CEO Angelo Mozilo was still riding high, that the man had some deep psychological issues, and that they informed his approach to banking. We previously spotlighted a NYT profile from then, which was all about the big fat chip on Mozilo's shoulder, and his disdain for establishment bankers that did things the old way. He didn't like, for example, how they did elitist, ivy-league stuff like denying loans to the proletariat.
Ah, if only he'd been a little more establishment... But it turns out Mozilo was probably even more messed up than we thought. In a fresh New Yorker profile on Mozilo, Connie Bruck (not surprisingly) connects his anti-establishment attitude to his permanently looking like a tangerine:"The new company [Countrywide] sent Mozilo first to Virginia Beach and then to Orlando. He had never lived outside the Bronx, and years later he told friends that it had been difficult to be a darkskinned Italian-American in these communities. In Virginia Beach, the local club where businesspeople congregated refused to admit him, and in Orlando he had trouble selling mortgages until he met a group of Jewish homebuilders who couldn’t get financing.
As his sister, Lori, told me, "Angelo said, ‘Nobody wants to work with you. Nobody wants to work with me. Let’s do it together.’ He was always this Italian guy people didn’t want to accept." She went on, "When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus."
After Countrywide was dinged in 1992 for having a mediocre track record of lending to minorities, Mozilo started a manic drive to completely eliminate the homeownership gap.Countrywide opened new offices in inner-city areas, created counselling centers, and loosened some lending standards, to include borrowers with less than pristine credit histories. Between 1993 and 1994, the company’s loans to African-American borrowers rose three hundred and twenty-five per cent, and to Hispanics they increased a hundred and sixty-three per cent. In 1994, Countrywide became the first mortgage lender to sign a fair-lending agreement with the Department of Housing and Urban Development.
"Countrywide went from close to the bottom in lending to minorities to near the top," Gnaizda said. "I remember Mozilo telling me, ‘I don’t want to narrow the gap in lending to minorities, I want to end it.’ " Eventually, subprime loans became too attractive a business for Countrywide to resist. In September, 1996, it created a new subsidiary for these loans, called Full Spectrum Lending; if the loans performed poorly, the Countrywide brand would not be tarnished.
"It was a careful entry, considered closely by those at the top of the company," a former high-level Countrywide executive recalled. "We sat together and asked each other, ‘Would you make this loan with your money?’ " To offset the credit risk posed by subprime lending, the company required borrowers to make a substantial equity investment, ranging from fifteen to thirty-five per cent. . ."
Now, Barry Ritholtz, who originally plucked out both of the above chunks from the article concludes that this all shows: "It was the Private sector that saw a profit opportunity and went for it. They made the loans. The government’s role was to provide rhetoric">
What doesn't make sense, here, is this desire to make it so black-and-white, to say it's just the private sector, and that the public sector had no role. Hello, Countrywide was funded by Fannie Mae and Freddie Mac. In that 2005 NYT profile, he lashed out at efforts to reform the GSEs, since without their funding, there would be no way for him to compete with more conservative rivals like Wells Fargo. We asked Barry about this, and his response was that Fannie and Freddie were odd, private enterprises, not entitled to the full faith and credit of the United States, but that by being connected, they did end up with a full bailout.
But we disagree. For one thing, they were established by the government. Second, there was an ongoing discussion about what kind of backstop they had from the government, and obviously many people assumed that the implicit guarantee would be explicit in a crisis, which explains their ability to gain cheap financing. It just doesn't fly to say that Fannie Mae and Freddie Mac were private sector manifestations, and since you can't have Mozilo without them, there's no good reason to make such a black-and-white distinction of what's the government's fault and what's the private sector's fault.
There's plenty of blame to go all around. That being said, there's no doubt private sector greed played a huge role in this mess. But greed is a constant. People didn't just decide to one day get more greedy. And greed (even excessive greed) is dandy, if the ultimate blowup only hurts the greedy person. What really makes financial sector greed so odious (as opposed to the greed of, say, your local auto mechanic) is the ability to loot the taxpayer. And Fannie and Freddie were the ultimate taxpayer looting vehicles.Just think about all the avenues:
- Investors in their debt were able to get juiced yields, even though the government would bail them out.
- Countless politicians, cronies and hacks made millions working for them, in stupid patronage jobs.
- Common shareholders profited for years, even though the GSEs were supposed to be serving a public mission
- Dastardly lenders like Countrywide and Lehman were able to flourish, flushing their crap assets onto the public ledger via these institutions.
These were gigantic, taxpayer-looting machines, and they've been bailed out to the tune of $400 billion (potentially). If you insist that they were purely private institutions, then that does get the government off the hook to some extent. But otherwise, it's impossible to divorce the greed of the private sector from the enablers on the public side.
China, Cleverly Dumping US Dollars
China is dumping dollars, but far more cleverly than you might think.
Immobilienblasen has noticed a rather curious tendency for China to overpay in "China Inc." Deal Premiums. What exactly is that all about?
Well, imagine you had a bunch of money... err... US dollars for example. You've also got a bunch more of these US dollars coming in daily. You don't believe they will hold their value. So you don't really want them. That is quite a problem.
The first trick is to get rid of them... without actually seeming to get rid of them. The second trick is to get rid of them in such as way as to not destroy their value.... yet.
The single best way to do this of course is to use your US dollars to buy hard assets. This looks "normal". It isn't nearly as obvious as "diversifying" your currency reserves. China is doing exactly that. The "China recovery" story is nothing of the sort. The Chinese demand for commodities is not a function of economic growth but rather a function of hoarding. There are Consequences to this Phantom Commodity Bull Market which will become apparent soon enough.
China has been buying into oil with size and at a premium. This has analysts puzzled:
"Sinopec’s offer is equivalent to $34 a barrel of proved reserves and $14 a barrel of proved and probable reserves. The African transaction average in 2007, when the average crude price is similar to current prices, was $14.40 a barrel for proved reserves and $9.90 for proved and probable reserves, respectively. On a proved basis, the 2007 average suggests $3.1 billion total value for the deal. Therefore, $7.2 billion implies a 135% premium."
But when it becomes obvious to investors the world over that a US dollar devaluation is the only possible way to manage the kind of debt burden the US has accumulated, those premiums will vanish instantly. Oil quoted in US dollars could easily make new highs beyond $147 in such a scenario. China will not only have safe guarded the wealth of its citizens by owning oil fields, but will also have increased the global political power of the country thru the acquisition these strategic assets.
While the US empire has stumbled and is desperately trying to avoid a faceplant, the Chinese have taken the opportunity to break out into a sprint. Even in a best case scenario where the US pulls off a miraculous recovery, valuable ground will have been lost and the global balance of power will never again be the same.
China Reiterates Call for New World Reserve Currency (Update4): "China’s central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar.
“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review released today. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.
The restatement of Governor Zhou Xiaochuan’s proposal in March added to speculation that China will diversify its currency reserves, the world’s largest at more than $1.95 trillion. Chinese investors, the biggest foreign owners of U.S. Treasuries, reduced holdings by $4.4 billion in April to $763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings by $23.7 billion to a record.
“Zhou Xiaochuan sees the current international financial system is flawed, putting too much emphasis on the dollar as a reserve currency,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong.
President Barack Obama needs the support of China as the U.S. tries to spend its way out of recession. The Dollar Index that measures the currency’s performance against six trading partners fell as much as 0.8 percent to 79.779 at 1:11 p.m. in London. U.S. Treasuries were little changed with the 10-year yield at 3.53 percent."