Graf Zeppelin over the Capitol
Ilargi: The financial mess has now gotten to a point where Wall Street veterans are starting to speak out and question why the Obama administration does what it does, and how much longer it thinks it can continue doing it.
Sandy B. Lewis and William D. Cohan make clear in the New York Times that they have no confidence in the policies conducted so far, since they are based on deeply flawed assumptions about what is wrong in the first place, and the loudly promised and much touted transparency Obama couldn't stop talking about not so long ago is nowhere to be found. Lewis and Cohan pose a series of queries. They start off addressing the part the public has unwittingly been cast in:
- Why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid?
- ... what is the plan to get the American people out of all these equity stakes we now own and don’t want?
Soon, though, they move towards the more sinister part: the utter lack of openness surrounding all the trillions used to bail out broke banks and carmakers:
- As for those impossibly complex securities that caused so much of the trouble — among them derivatives, credit-default swaps and asset-backed securities — the S.E.C. should have the power to make public all the documentation surrounding these weapons of mass financial destruction, including all data about the current costs of buying and selling them and the cash flow underlying them.
- Why is the government still complicit in making the system ever less transparent, even when it comes to what should clearly be considered public information? For instance, it took more than a year for the Federal Reserve to disclose that it had agreed to pay BlackRock — the huge money manager that is 45 percent owned by Bank of America — and others $71 million in a no-bid contract to manage the $30 billion of toxic assets that JPMorgan did not want when it bought Bear Stearns in March 2008. And that is only one of the five contracts BlackRock has with the government as a result of this crisis — the nature of the other contracts remains secret.
- And what has become of the S.E.C.’s year-old investigation into who made short-dated, out-of-the-money bets in March 2008 hoping Bear Stearns would fail — bets that were suddenly worth millions of dollars when the company did collapse later that month? Why do we still not know why Mr. Paulson, Mr. Geithner and the Federal Reserve chairman, Ben Bernanke, allowed Lehman Brothers to file bankruptcy last Sept. 15 but then, a day later, saved A.I.G.?
- Or why last November this trio decided to absorb potential losses on $301 billion of Citigroup’s shaky assets, when conventional wisdom among insiders held that they were worth only $150 billion at best? Also, before Dick Fuld, Lehman Brothers’ chief executive, appeared before the House Committee on Oversight and Government Reform last October, it demanded from company executives boxes of documents about what happened at Lehman and why. Where are those documents?
Still, Lewis and Cohan, critical as they may be, refuse to put into words what should be evident: the present administration has no intention whatsoever of opening up any book, or investigate who did what on Wall Street. The few executives who have been forced out are simply those who fell out of favor, not the most inept or suspicious figures. Bernie Madoff will be victimized and hung out to dry, but the extent of his crime and the names inside his network will be kept secret. The same will be true of Tangelo Mozilo, who could potentially drag down with him scores of financiers and politicians, but won't be allowed to. In the end, Lewis and Cohan elect to lose themselves in what can only be called rhetorical propositions to provide clarity; rhetorical because they don't (re-) present a chance in hell.
- Why hasn’t President Obama insisted on public hearings over what happened during this financial crisis? [..] There may be a way to find out. There is much talk nowadays coming from top bankers [..] about seeing how quickly they can repay to the Treasury the TARP money Mr. Paulson forced on them. One precondition of their being allowed to repay the funds should be a requirement that each gives a public deposition and explains, under oath, what truly happened and why.
- We are in one of those "generational revolutions" that Jefferson said were as important as anything else to the proper functioning of our democracy. We can no longer pretend that our collective behavior as a nation for the past 25 years has been worthy of us as a people. Many of us hoped that Barack Obama’s election would redress the dire decline in our collective ethic. We are 139 days into his presidency, and while there is still plenty of hope that Mr. Obama will fulfill his mandate, his record on searching out the causes of the financial crisis has not been reassuring.
At least their conclusion there is spot on. Unfortunately, the next line is not:
- He must do what is necessary to restore the American people’s — and the world’s — faith in American capitalism and in our nation.
Sorry, guys, but that can and will never be restored, there's no going back, partly because it lost all credibility, partly because it lost its manufacturing base, and partly because it lost all of its money.
And even if, a decade or two from today, and after unspeakable hardship for most Americans, economic fundamentals could be restored to a degree, the nation would integrally lack the energy sources required to rebuild even a semblance of what it once was.
Michael Lewis has fewer ideals left; he seems content just calling a stone a -conflicted- stone:
- "...one of the things that's odd about the current situation is that the people who created the problem are so powerful in deciding what the solution to the problem is going to be. There is a great tradition on Wall Street of making a fortune, creating a mess, and then making a fortune cleaning it up. But to do it on this scale is breathtaking to me.
And it is amazing to me the degree to which, say, Goldman Sachs is intertwined with the Treasury, and how they're -- there don't seem to be any independent voices in the thick of the decision-making. The decision-making is all being done by people who one way or another might expect to make a lot of money from Goldman Sachs in the future...
So, on a grander scale, if I'm Tim Geithner and I'm the secretary of the treasury, what do you think he's going to do when he stops being secretary of the treasury? His natural next step is go work in the financial sector..."
Well, maybe "conflicted" is a term that doesn't even make it to the Capitol/Street revolving door vocabulary anymore, maybe it all does seem normal:
- ... the directors of the last three -- let's see, three of the last four or four of the last five directors of enforcement of the SEC work for big Wall Street banks now... And you can just assume, I think, that if you're a prominent person at the SEC, your exit strategy is to get a lot of money from a Wall Street firm. And nobody says anything about it. That's the amazing thing. It's not even thought scandalous. It's just thought normal. It's like a natural career -- a step in a financial career.
There will come a day, though it will come far, far too late, when the fact that this is not merely some financial crisis will be evident to many of us. That realization may well coincide with the one that spells out that if the only people capable of understanding and fixing a highly flawed system, mired in behavior on both sides of the line that defines criminal acts, are the ones that designed it, that whole system needs to be discarded. Which is the precise opposite of what we do now. In other words: we have a long way to go, and it won't be a pleasant ride.
The Economy Is Still at the Brink
Whether at a fund-raising dinner for wealthy supporters in Beverly Hills, or at an Air Force base in Nevada, or at Charlie Rose’s table in New York City, President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible. "It’s safe to say we have stepped back from the brink, that there is some calm that didn’t exist before," he told donors at the Beverly Hilton Hotel late last month.
Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we’ve learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy.
We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. But wishing for improvement and managing by the Dow’s swings are a fool’s game. (Disclosure: One of us, Mr. Lewis, was convicted on federal charges of stock manipulation in 1989, pardoned by President Bill Clinton in 2001 and had his lifetime trading ban overturned by the Securities and Exchange Commission in 2006; documents relating to the case can be found at sblewis.net.)
The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse. At another fund-raising event, for Senator Harry Reid, President Obama said: "We didn’t ask for the challenges that we face. But we are determined to answer the call to meet those challenges, to cast aside the old arguments and overcome the stubborn divisions and move forward as one people and one nation .... It will take time but I promise you, I promise you, I’ll always tell you the truth about the challenges we face."
Keeping that statement in mind — as well as an abiding faith in the importance of properly functioning capital markets — we have come up with a set of questions meant to challenge a popular president, with vast majorities in Congress, to find the flaws in the system, to figure out what’s being done to fix them and to get to the truth about the difficulties we face as we set out to restore the proper functioning of our markets and our standing in the world.
Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the "stress tests" of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.
Instead of hauling out the new drywall to cover up the existing studs, let’s seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors. As a start, the best-compensated executives at the top of these big banks, hedge funds and private-equity firms should be treated like general partners of yore. If a firm takes prudent risks that pay off, this top layer of management should be well compensated.
But if the risks these people take are imprudent and the losses grave, they should expect to lose their jobs. Instead of getting guaranteed salaries or huge bonuses, they should have the bulk of their net worth completely at risk for a long stretch of time — 10 years come to mind — for the decisions they make while in charge. This would go a long way toward re-aligning the interests of these firms with those of their shareholders and clients and the American people, who have been saddled with their risks and mistakes.
Why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid? Confidence will return only when jobs can be found and mortgage payments are made.
Even if Mr. Obama’s claim is true that his $780 billion stimulus package "saved or created" some 150,000 jobs, we seem a long way away from the point where those struggling to get by will feel like spending again. What happens when people buy a car once every 10 years instead of once every two or three, especially now that we taxpayers own such a big percentage of the American auto industry?
Instead of promising the imminent return of good times, why isn’t Mr. Obama talking more about the importance of living within our means and not spending money we don’t have on things we don’t need? We used to be a frugal nation. The president should be talking about kicking our addictions to easy credit, to quick fixes and to a culture of more is better (and Congress’s new credit-card legislation, while perhaps eliminating some of the worst aspects of that industry, certainly didn’t send the right message about personal finance).
Gas-guzzling S.U.V.’s, cigarette boats, no-income mortgages and private jets should be relegated to the junk heaps of history, or better yet, put in a museum dedicated to never forgetting the greed and avarice that led us so far astray.
Why is the morphine drip still in the veins of the financial system? These trillions in profligate federal spending are intended to make us feel better again even though feeling pain, and dealing with it responsibly, would be healthier in the long run. It is time to stop rescuing the banks that got us into this mess. If that means more bank failures on a grander scale or the dismemberment of Citigroup, so be it. Depositors will be protected — up to $250,000 per account — but shareholders, creditors and, sadly, many employees will, for the long-term health of the system, need to feel the market’s wrath.
Is there to be any limit on bailouts? We have now thrown money at the big banks, any number of regional ones, insurance companies, General Motors, Chrysler and state and local governments. Will we soon be bailing out Dartmouth, which just lost its AAA bond rating? Is there no room left for what the Austrian economist Joseph Schumpeter termed "creative destruction"? And what is the plan to get the American people out of all these equity stakes we now own and don’t want? Furthermore, for government leaders to decide who shall live and who shall die in an economic sense opens them up to legitimate charges of crony capitalism and favoritism. We will benefit in the long run from a return to market discipline.
Why has Mr. Obama surrounded himself largely with economic advisers who are theoreticians and academics — distinguished though they may be — but not those who have sat on a trading desk, made a market, managed a portfolio or set a spread? In our view, one of the ways out of this economic conundrum is to have experienced traders — not hothouse flowers — design incentives that will encourage the market to have buyers and sellers meet anew around the proper valuations of assets, not some artificial construct of a market propped up by a pliant Financial Accounting Standards Board or government-sponsored programs that appear to be virtually giving money away to hedge funds and private-equity firms so that they will buy assets they would not ordinarily buy. We’re not talking about putting the fox in charge of the henhouse, just putting people who know how markets function in the real world into the important seats in Washington.
Why isn’t the Obama administration working night and day to give the public a vastly increased amount of detailed information about what happens in financial markets? Ever since traders started disappearing from the floor of the New York Stock Exchange in the last decade of the 20th century, there has been less and less transparency about the price and volume of trades. The New York Stock Exchange really exists in name only, as computers execute a very large percentage of all trades, far away from any exchange.
As a result, there is little flow of information, and small investors are paying the price. The beneficiaries, no surprise, are the remains of the old Wall Street broker-dealers — now bank-holding companies like Goldman Sachs and Morgan Stanley — that can see in advance what their clients are interested in buying, and might trade the same stocks for their own accounts.
Incredibly, despite the events of last fall, nearly every one of Wall Street’s proprietary trading desks can still take huge risks and then, if they get into trouble, head to the Federal Reserve for short-term rescue financing. Here’s something that should change in terms of transparency. The most recent price that any stock traded for should be published online in real time for all to see. And the public should have access to a new type of electronic ticker that provides market information in language that all can understand, not just the insiders.
As for those impossibly complex securities that caused so much of the trouble — among them derivatives, credit-default swaps and asset-backed securities — the S.E.C. should have the power to make public all the documentation surrounding these weapons of mass financial destruction, including all data about the current costs of buying and selling them and the cash flow underlying them. We also need widely accessible, real-time reporting of all trades in the bond market. We bet Mike Bloomberg’s company could help design such a system for our benefit.
Why is the government still complicit in making the system ever less transparent, even when it comes to what should clearly be considered public information? For instance, it took more than a year for the Federal Reserve to disclose that it had agreed to pay BlackRock — the huge money manager that is 45 percent owned by Bank of America — and others $71 million in a no-bid contract to manage the $30 billion of toxic assets that JPMorgan did not want when it bought Bear Stearns in March 2008. And that is only one of the five contracts BlackRock has with the government as a result of this crisis — the nature of the other contracts remains secret.
Treasury Secretary Timothy Geithner has made much of financialstability.gov, the Treasury’s new Web site dedicated to "transparency, oversight and accountability." But look it over and try to find, for example, just one record of a bona fide credit-default swap, or the names of the hedge-fund and private-equity investors who have participated in the Term Asset-Backed Securities Loan Facility bonanza.
It was only a lawsuit filed by a watchdog group that convinced the Treasury to divulge details of former Secretary Henry Paulson’s October meeting with the chief executives of the 10 largest Wall Street firms to force them to take money from the Troubled Asset Relief Program. A lawsuit filed last November by Bloomberg News to force the Federal Reserve to reveal the details on more than $2 trillion in loans that went to banks including Citigroup and Goldman Sachs is still pending in federal court.
And what has become of the S.E.C.’s year-old investigation into who made short-dated, out-of-the-money bets in March 2008 hoping Bear Stearns would fail — bets that were suddenly worth millions of dollars when the company did collapse later that month? Why do we still not know why Mr. Paulson, Mr. Geithner and the Federal Reserve chairman, Ben Bernanke, allowed Lehman Brothers to file bankruptcy last Sept. 15 but then, a day later, saved A.I.G.?
Or why last November this trio decided to absorb potential losses on $301 billion of Citigroup’s shaky assets, when conventional wisdom among insiders held that they were worth only $150 billion at best? Also, before Dick Fuld, Lehman Brothers’ chief executive, appeared before the House Committee on Oversight and Government Reform last October, it demanded from company executives boxes of documents about what happened at Lehman and why. Where are those documents?
Why hasn’t President Obama insisted on public hearings over what happened during this financial crisis? Not a single top executive of a Wall Street securities firm responsible for causing the financial crisis has had the courage or the decency to step forward in front of the cameras and explain to the American people in his own words exactly how and why he allowed his firm to cause the crisis. Both Mr. Fuld and Alan Schwartz, the chief executive of Bear Stearns at the end, in their Congressional testimony blamed the proverbial once-in-a-century financial tsunami. Do they or any of their peers really think this is true?
There may be a way to find out. There is much talk nowadays coming from top bankers — Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorganChase, John Mack of Morgan Stanley and even Ken Lewis of Bank of America — about seeing how quickly they can repay to the Treasury the TARP money Mr. Paulson forced on them. One precondition of their being allowed to repay the funds should be a requirement that each gives a public deposition and explains, under oath, what truly happened and why.
Such a public hearing would be meant only to offer a truthful assessment of the errors in judgment made at each firm and to promote understanding, so that we — somehow — can avoid repeating the same mistakes again. It would not be about indictments. These men should be offered use immunity from prosecution for their honest testimony, but only with a clear understanding that the failure to tell the truth at any point would result in serious legal consequences.
The hearing could be complemented by a truth-seeking commission established to hear the accounts of several people who have departed the scene, including, among others, Mr. Paulson, former Treasury Secretary Robert Rubin and former Wall Street chiefs like Mr. Fuld, Hank Greenberg of A.I.G., Sanford Weill of Citigroup, Jimmy Cayne of Bear Stearns and Stan O’Neal of Merrill Lynch. While far removed from their positions of authority, these men have tales to tell about how this crisis got started and why.
Why are we not looking to change our current civil and criminal racketeering statutes, which are playing a perverse role in investigations of the crisis? Statutes meant to give prosecutors extraordinary powers of seizure before an indictment is handed up, or to impose treble damages, are appropriately used to break up rings of criminal behavior like the Mafia or drug cartels.
But a few clever prosecutors could use such laws to bring charges against people or firms in the financial services industry whose pattern of bad behavior played important roles in the collapse. Such outright seizure of capital or assets through use of the racketeering statutes can do much harm by giving prosecutors an unnecessarily powerful role in our capital markets. There must be a way to keep what is good about the statutes and to make sure they are not used for ill in trying to get to the bottom of the financial meltdown.
We are in one of those "generational revolutions" that Jefferson said were as important as anything else to the proper functioning of our democracy. We can no longer pretend that our collective behavior as a nation for the past 25 years has been worthy of us as a people. Many of us hoped that Barack Obama’s election would redress the dire decline in our collective ethic. We are 139 days into his presidency, and while there is still plenty of hope that Mr. Obama will fulfill his mandate, his record on searching out the causes of the financial crisis has not been reassuring. He must do what is necessary to restore the American people’s — and the world’s — faith in American capitalism and in our nation. Answering our questions may help us get back on track. But time is wasting.
Sandy B. Lewis, an organic farmer, founded SB Lewis & Co., a brokerage house. William D. Cohan, a contributing editor at Fortune and former Wall Street banker, is the author of "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street."
Michael Lewis: Wall Street Made This Mess And Is Making Fortune Cleaning It Up
Michael Lewis, the former Salomon Brothers trader who wrote "Liar's Poker" about the excesses of Wall Street during the 1980s, delivered a devastating critique of the financial industry and of the government bailout today on CNN"s "Fareed Zakaria GPS."Lewis thinks that the government's rescue efforts have only served to postpone a "day of reckoning" for Wall Street:I think that we are in for another day of reckoning down the road. I just don't know when it is. I think that they haven't even properly evaluated the institutions.
They haven't been honest about what these institutions have on their books. They've had phony stress tests. So, we're in a kind of, I think, right now, in a period where there's a false sense that it's over, that the crisis is passed. I don't think the crisis is passed.
Watch the video in a new window (CNN still doesn’t understand embedding):
Part of the problem, Lewis argues, is that the architects of the bailout are too cozy with the banks which created the financial crisis in the first place, even speculating that Treasury Secretary Tim Geithner is already looking ahead to a cushy job in the private sector."...one of the things that's odd about the current situation is that the people who created the problem are so powerful in deciding what the solution to the problem is going to be. There is a great tradition on Wall Street of making a fortune, creating a mess, and then making a fortune cleaning it up. But to do it on this scale is breathtaking to me.
And it is amazing to me the degree to which, say, Goldman Sachs is intertwined with the Treasury, and how they're -- there don't seem to be any independent voices in the thick of the decision-making. The decision-making is all being done by people who one way or another might expect to make a lot of money from Goldman Sachs in the future...
So, on a grander scale, if I'm Tim Geithner and I'm the secretary of the treasury, what do you think he's going to do when he stops being secretary of the treasury? His natural next step is go work in the financial sector. I don't think he's actually thinking, "I've got to be nice to the people on Wall Street, because they're going to make me rich on the back end of it."
Further, he believes that regulation has been ineffective because the regulators are conflicted, expressing shock that this cozy connection is considered routine in Washington:But the directors of the last three -- let's see, three of the last four or four of the last five directors of enforcement of the SEC work for big Wall Street banks now...
And you can just assume, I think, that if you're a prominent person at the SEC, your exit strategy is to get a lot of money from a Wall Street firm. And nobody says anything about it. That's the amazing thing.
It's not even thought scandalous. It's just thought normal. It's like a natural career -- a step in a financial career.
Lewis believes that two principal causes of the crisis were that the ratings agencies were weak and that credit-default swaps were unregulated. But even if proper regulation is brought to bear on Wall Street, Lewis remains pessimistic. As "a natural cynic," he adds that really smart people in positions of privilege will find ways to get around the new rules."
Lewis expressed his shock at the scale of the current crisis, saying that when he wrote his book, he thought "it was the end of something," and he was determined to capture that era in print because he assumed that people 15 years later would hardly believe what had happened during that previous crisis. "And I turned out to be completely wrong."
In fact, it was just the beginning of a long era in Wall Street, culminating in the "point of madness," as Lewis describes it, describing his experience at Salomon Brothers where revenues were increasingly being generated by risk-taking and proprietary trading. Lewis described the internal logic at the big Wall Street firms, where top executives are pressured to make the riskiest moves because those are the ones that were generating the most money:The logic of it, internal to the Wall Street firms, is that if I'm the CEO of Citigroup or Merrill Lynch, and the vast majority of my revenues are coming out of this subprime mortgage machine, and I just shut it down, unless I'm incredibly lucky in the timing of it, it's going to look like I've just jettisoned my single most important business. My competitors are all going to be earning fantastic returns on their capital, and I'm going to be out of it. And I'll probably be out of a job.
Meanwhile, all the guys who are going along with it are getting paid huge sums of money at the end of every year. The efficient strategy for the individual trader was to ignore his reason and participate in the madness.
Land Mines Pockmark Road to Recovery
The stock market has erased almost all its losses for the year, yields on long-term government debt have returned to something like normal, and commodity prices have been surging -- all evidence that the worst of the economic crisis may have passed. But the road to recovery is far from smooth, or even assured. As investors ponder their next moves in this unusually unpredictable cycle, they are confronted with a confounding array of potential risks.
Last Friday, they got a taste. The government's announcement of the lowest job-loss numbers since September didn't much faze the stock market. But the market for U.S. Treasury debt had its worst day in nine months, driven by worries about inflation and higher interest rates. In today's jittery markets, good news on one front can have surprisingly bad effects elsewhere. At stake is the fragile confidence that's been restored in the financial system.
A jump in economic growth, for example, could send commodity prices sharply higher. On Friday, oil briefly traded above $70 a barrel, due partly to economic optimism. Worries about inflation would cause interest rates to rise, hurting the housing market. Higher commodity prices could also be a drag on economic recovery, pushing job losses higher and leading to more mortgage defaults. Many strategists and economists hold a relatively hopeful view: that a wave of government stimulus will hit the economy in time to unleash pent-up consumer and business demand, without stoking too much inflation. Such an outcome -- a classic "V-shaped" recovery marked by a quick bottoming out and a lasting rebound -- would enable stocks and other assets to keep rising in the second half of the year.
But the risks to that orderly scenario are high. It is possible that government stimulus could make the economy run too hot, fueling inflation that would force the government to slam the brakes on growth, creating a double-dip, or a "W-shaped," recovery. The spike in yields on Treasurys on Friday was driven by the view that the Federal Reserve would need to raise interest rates sooner than expected, possibly slowing the economy too fast, too soon.
It's also possible that the government stimulus will be ineffective at a time when households are staggering under the weight of debt and the loss of trillions of dollars in net worth. In that case, a sluggish recovery would be more likely. That could prevent inflation but make unemployment worse, in turn leading more people to fall behind on their mortgages, hurting the housing market and causing a new round of losses at banks. Here's a closer look at three broad scenarios -- certainly not the only possible ones -- for markets and the economy in the months to come.
Hefty government stimulus -- easy Federal Reserve monetary policy and $787 billion in government spending, tax breaks and other perks -- encourages consumers to spend and businesses to hire. This bolsters economic growth, keeps a lid on unemployment and finally ends the pain in the housing market. At the same time, the massive structural problems facing the economy, including burdensome debt on consumer and government balance sheets, keep just enough of a brake on growth to keep inflation in check.
Under this scenario, corporate profits and economic growth limp their way back to recovery through the second half of the year, setting up a stronger 2010. Stocks rise, though perhaps not by much. The consensus view among many strategists is that the broad Standard & Poor's 500-stock index will stagger its way to somewhere between 1000 and 1100 by the end of the year, a 17% gain from Friday's close. In such a sluggish recovery, the Fed can keep short-term interest rates low for longer without fearing inflation, even as commodity prices continue to rise.
The Fed might feel comfortable that long-term interest rates can drift higher. Yields on 10-year Treasury notes recently have risen to 3.86%. In the just-right scenario, they might not rise much higher. "I don't think that modestly higher rates, which is how I would characterize what we've seen so far, would be a bad thing," says Leo Grohowski, chief investment officer at BNY Mellon Wealth Management in New York. "It would help keep the lid on the serious inflation threat."
The massive liquidity being pumped into the market by the Fed and other central banks adds fuel to the recent rally in stocks, corporate bonds, commodities and other risky assets. The S&P 500 already is up 39% since March 9 and high-yield bonds are up 31%. Oil has doubled since February. "The market is very prone to liquidity floods, where money on the sideline floods in," says James Swanson, chief investment strategist at MFS Investment Management. "That's not a good beginning of a sustainable bull market."
Under the too-hot scenario, surging asset prices trigger worries about inflation, hurting the dollar and causing the interest rate on government debt to rise. That might force the Fed to buy more Treasurys to keep interest rates low -- yields move in the opposite direction of prices -- fueling more worries about higher inflation and a devalued dollar. A whiff of this potential outcome has haunted the market lately, contributing to the jump in Treasury yields and shaving more than 9% from the dollar's value against a basket of currencies since March 9.
"We're not inflating assets because of sound economic policy. We're inflating them by printing money," says David Joy, chief market strategist at RiverSource Investments in Minneapolis. "To some extent, it's an appropriate response because the private sector is flat on its back. But it's a dangerous path." Booms like these can be powerful, but can also end painfully. Despite being burned by two bubbles in the past decade, investors have eagerly jumped into risky assets recently.
Under this scenario, high debt levels, weak banks, and a terrible job market overwhelm government stimulus, keeping the recovery weak. "I've seen this movie before, in 2002," says David Rosenberg, chief economist and strategist at Gluskin Sheff, a Toronto-based investment-advisory firm for wealthy individuals. Back then, unemployment rose sharply, the recovery was anemic, and the stock market plumbed new lows. It was not until March 2003 that the market began a lasting recovery. The economic fundamentals are far worse this time around. Unemployment, already at 9.4%, could climb above 10% as businesses wait for a durable recovery.
Cautious companies might hold off on rebuilding their depleted inventories, short-circuiting one of the economy's healing forces. Home prices could fall further. That would keep the pressure on bank balance sheets, keeping credit tight. This pessimistic scenario is a recipe for retesting the stock market's March lows. In the longer run, it could also lead to deflation, in which prices tumble as consumers keep delaying purchases. Deflation can be long-lasting and have a chilling effect on stock markets.
Some Wonder If Bond Market Has Reached Its Tipping Point
A 27-year bull market in bonds is over and a brutal bear market is under way, says Tom Atteberry, co-manager of FPA New Income. That's bad news for bond investors, particularly those holding Treasurys and municipal IOUs. Atteberry, who spoke with us at the annual Morningstar Investment Conference in Chicago, says there is good reason to believe that the run-up in Treasury yields that began late last year will continue. Atteberry says he's seeing anecdotal evidence that Chinese investors, huge holders of Treasurys, are beginning to sell their government-bond stakes. "They are very, very nervous" about the Federal Reserve purchasing Treasury debt because of the move's potential for stoking inflation, one of the prime enemies of bond holders.
Municipal bonds' attractiveness as alternatives to Treasurys may be in trouble. Interest from muni bonds is free from federal taxes, and the sector historically has seen extremely low default rates. Thanks to those benefits, munis have historically offered about 80 percent of the yield of Treasurys. As munis were pummeled during the panic of 2008, they at one point offered twice the yield of Treasurys, making them even more attractive than usual. As long as munis offered a substantial yield cushion over Treasurys, they didn't necessarily stand to suffer from a rise in government-bond yields.
But as bond investors regained their appetite for risk in 2009, they pushed up muni prices -- and pushed down their yields -- to the point where that cushion has essentially disappeared. Another concern: Atteberry points to a recent increase in corporate-bond issuance as evidence that executives expect their borrowing costs to head higher. And, still concerned about the health of the U.S. economy, he is avoiding high-yield, or junk, bonds.
Bond Market to Obama: Oh No, You Can't...
While the long end of the US bond market has been selling off for several weeks now, with 10 year yields over 3.9% and approaching twice the levels seen at the peak of the depression / deflation hysteria, late last week 2 year bonds also began to slump dramatically. Yields surged 34 bps on Friday and the market is now implying a Fed rate hike by end 2009, and a series of quarter point moves every couple of months through 2010. This move, if sustained, has major implications across asset markets.
It would prove broadly dollar positive and commodity and equity negative. I wrote a couple of weeks ago that the Fed might be forced into a premature rate hike to defend its credibility, and the bond vigilantes are demanding a clear exit strategy from the emergency actions taken last Autumn. Bond markets globally are following suit; even German 10 years are above 3.7% and 2 years above 1.7%.
Is this just bond market 'normalization' after yields were pushed to unsustainable levels by a flight to safety in recent months, or does it represent a more sinister funding crunch? Globally, we have about $12trn in government bond issuance this year, and the heavy auction schedule, even through the usually quiet Summer season, makes the odds of a major auction failing uncomfortably high. It's notable in this context that only about $22bn of the $787bn Obama stimulus plan has been spent so far, and there must be a growing risk that the plan will have to be scaled back to reassure bond investors.
Given that the multiplier effect of government spending is only marginally positive at best, and the offsetting 'crowding out' impact it creates on private capital, that may be no bad thing. This avalanche of supply, competing with a surge in equity issuance and other private sector capital demand, is clearly one key issue driving higher yields. Another is rising medium-term inflation expectations, as reflected in commodity markets.
It's notable that foreign central banks from China to Brazil have avoided long duration US bonds in recent months, focusing their purchases at the short end. This, I think, clearly reflects a growing inflation risk premium being attached to US assets. Not only have CPI expectations, as reflected in the TIPS market (which I called as a bargain last December when implied inflation was zero) risen to about 2% annualized, but both Germany and China have openly criticized the risks inherent in Fed reflation policy, notably the experiment in quantitative easing to boost money supply.
Given the likely anemic nature of a recovery, it seems a bit early for bondholders to panic about an imminent tightening move, but if this sell-off doesn't stabilize soon (and technically the 10 year looks poised to test 4%), it will certainly act to undermine the euphoria apparent in emerging markets and commodities, and curtail the Obama administration's more ambitious spending plans.
'Fierce Rally' Under Way for Leveraged Loan CDOs
A "remarkable change" in investor sentiment has doubled the price of some collateralized loan obligation securities in the past month, according to Morgan Stanley analysts. CLOs are a type of collateralized debt obligation that pool high-yield, high-risk, or junk, loans and slice them into securities of varying risk and return. Pieces graded AA, the third-highest level of investment grade, rose to 47 cents on the dollar from 23 cents in the past month, Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a June 5 report. Securities ranked A have gained 13 cents to 23 cents since the end of last month, the report said.
Ares Management LLC and Boston-based Sankaty Advisors LLC are among investors that started bidding on CLO securities in late April and the first week of May. Prices for portions with A ratings had dropped 90 percent since the financial crisis began in 2007 even as the loans packaged in them had regained some of their value. The S&P/LSTA U.S. Leveraged Loan 100, an index of loans rated below investment grade, rose 12 cents from Dec. 31 to 73.6 cents on the dollar on May 1. Loans have since increased in value to 79 cents. "The continuing rally in underlying leveraged loans has been a major driver of this change in investor sentiment," on CLOs, the analysts wrote in the report. A "fierce rally" is under way, they wrote.
The top-rated CLO bonds have risen to 77 cents on the dollar from 71 cents in May, the report said. High-yield, high- risk loans are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. Investors bought CLOs because they had higher returns than similarly rated securities. As cash flowed into these funds, they bought almost two-thirds of the funded loans that financed the record $616 billion of leveraged buyouts in the first half of 2007, S&P LCD data show.
The CLO market began to tumble in July 2007 when losses on subprime-mortgage securities caused investors to flee from structured finance. That left banks stuck with more than $230 billion of debt backing buyouts they couldn’t easily sell and led to a collapse in leveraged loan prices to a record low of 59 cents on the dollar in December from above face value, according to the S&P/LSTA index. Ares, a Los Angeles-based investment firm with $29 billion in assets under management, sought to buy 22 pieces of CLOs with a face value of as much as $767.6 million on May 6.
Boston-based Sankaty, the debt investment arm of Bain Capital LLC, offered to buy as much as $949 million of its own CLOs and those of other managers including Minneapolis-based RiverSource Investments LLC, Eaton Vance Corp. and Deutsche Asset Management Inc. at the end of April. CLOs are still facing pressure from downgrades of the underlying loans, which are typically used to finance buyouts. The loan funds have limits on assets rated CCC, the eighth- highest junk rating by S&P, and similar ratings by Moody’s. If a portfolio has too many of these assets, it will trip certain tests it needs to meet.
The percentage of assets in CLOs graded CCC "continues to increase," the analysts wrote. More than half of U.S. CLOs are failing the junior over-collateralization test, they said. The rally in the securities may be close to over as rating companies downgrade the CLO debt, the analysts wrote. "We are more comfortable with the rally in the AAA tranches than we are with the exuberance lower down the capital structure," the analysts wrote.
Why Home Prices May Keep Falling
by Robert Shiller
Home prices in the United States have been falling for nearly three years, and the decline may well continue for some time. Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their "more adverse" forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.
Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter. But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.
There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years. Why does this happen? One could easily believe that people are a little slower to sell their homes than, say, their stocks. But years slower? Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.
Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect. Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.
In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn. This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.
Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now. On the other hand, an elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so.
It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again. As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011. All of these people could be made to change their plans if a sharp improvement in the economy got their attention.
The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price. For this reason, not all economists agree that home price declines are really predictable. Ray Fair, my colleague at Yale, for one, warns that any trend up or down may suddenly be reversed if there is an economic "regime change" — a shift big enough to make people change their thinking.
But market changes that big don’t occur every day. And when they do, there is a coordination problem: people won’t all change their views about homeownership at once. Some will focus on recent price declines, which may seem to belie any improvement in the economy, reinforcing negative attitudes about the housing market. Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.
Bernanke Conundrum Threatens Housing on Mortgage Rate
The biggest price swings in Treasury bonds this year are undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing rates and pull the economy out of the worst recession in five decades. The yield on the benchmark 10-year Treasury note rose to 3.90 percent last week as volatility in government bonds hit a six-month high, according to Merrill Lynch & Co.’s MOVE Index of options prices. Thirty-year fixed-rate mortgages jumped to 5.45 percent from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.
Government bond yields, consumer rates and price swings are increasing as the Fed fails to say if it will extend the $1.75 trillion policy of buying Treasuries and mortgage bonds through so-called quantitative easing, traders say. The daily range of the 10-year Treasury yield has averaged 12 basis points since March 18, when the plan was announced, up from 8.6 basis points since 2002, according to data compiled by Bloomberg.
"Volatility has increased dramatically and it seems to get more each day," said Thomas Roth, head of U.S. government-bond trading in New York at Dresdner Kleinwort, one of the 16 primary dealers of U.S. government securities that trade with the Fed. "A lot of that has to do with uncertainty about whether the Fed will increase purchases of Treasuries. The market is looking for some change in the Fed’s plan." The rise in borrowing costs in the face of record low interest rates, Fed purchases and a contracting economy is the opposite of the challenge Bernanke’s predecessor, Alan Greenspan, confronted when he led the Fed.
In February 2005, Greenspan said in the text of his testimony to the Senate Banking Committee that a decline in long-term bond yields after six rate increases was a "conundrum." At the time, he was trying to keep the economy from overheating and sparking inflation. Now, Bernanke may be facing his own. "The Fed is stuck in a very difficult place," said Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $7.5 billion. "You can’t have it both ways. You can’t say I’m going to stimulate my way out of this problem with trillions of dollars in borrowing and keep rates low by buying through the other. I don’t think that is perceived by anyone as sound policy."
The yield on the benchmark 3.125 percent 10-year Treasury due May 2019 ended last week at 3.83 percent, up from the low this year of 2.14 percent on Jan. 15, according to BGCantor Market Data. Last week’s 37-basis-point surge equaled the most since the increase of 37 basis points, or 0.37 percentage point, in the period ended July 17, 2003. The yield fell 3 basis points today to 3.8 percent at 8:22 a.m. in New York.
Bernanke and other Fed officials say the improved economic outlook and rising federal budget deficit are the catalysts for higher borrowing rates, and see no need to increase purchases of bonds. Plus, the Fed has succeeded in shrinking the gap between 10-year Treasury yields and 30-year mortgage rates to 1.77 percentage points from 3.37 percentage points in December. "To the extent yields are going up because the economic outlook is brighter, the answer would be, don’t do anything," Federal Reserve Bank of New York President William Dudley said in a transcript of an interview with the Economist last week.
U.S. payrolls fell by 345,000 last month, the least in eight months, the Labor Department said June 5. The economy will likely expand 0.5 percent in the third quarter, according to the median forecast of 63 economists surveyed by Bloomberg. The deficit should reach $1.85 trillion in the fiscal year ending Sept. 30 from last year’s $455 billion, according to the Congressional Budget Office. Goldman Sachs Group Inc., another primary dealer, estimates that the U.S. may borrow a record $3.25 trillion this fiscal year, almost four times the $892 billion in 2008.
While rising, 10-year yields are below the average of 6.49 percent over the past 25 years, and will likely remain below 4 percent through at least the third quarter of 2010, according to the median estimate of 50 economists surveyed by Bloomberg. The Fed’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show. Higher rates may deepen the two-year housing slump that helped trigger the recession and sideline consumers planning to refinance or buy their first home. The median sale price for a U.S. home dropped in April to $170,000, down 26 percent from a record $230,000 in July 2006, according to the National Association of Realtors.
The number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, largely on cheaper financing costs, according to the realtors group. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan fell 16 percent to 658.7 in the week ended May 29 as borrowing rates climbed. "The more rates go up, the more we need home prices to go down to equalize consumers’ payments," said Donald Rissmiller, chief economist at New York-based Strategas Research Partners. "It’s those payments that have brought about a level of stability" in home sales, he said.
Rising volatility, which exposes investors to bigger potential losses, risks pushing up rates on everything from mortgages to corporate bonds. Norfolk Southern Corp., the fourth-largest U.S. railroad, sold $500 million of 5.9 percent debt on May 27. The coupon was higher than on the $500 million of 5.75 percent notes due in 2016 that the Norfolk, Virginia- based issued in January.
"When the Treasury market is moving around a lot more it becomes more risky to step in," said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, another primary dealer. Outside of Dudley’s remarks, the Fed has largely refrained from public statements about bond purchases. Traders find that confusing from Bernanke, a former economics professor at Princeton University who published research on central bank transparency and pushed for greater openness at the Fed. "The big question is what the Fed does. Do they increase quantitative easing?" Caron said. "Do they buy more Treasuries or mortgages? That is why there is a lot more uncertainty."
Investors are reining in the average maturity of their Treasury holdings to guard against higher yields. That may increase costs for the government, which intends to extend the average maturity of its debt after committing $12.8 trillion to thaw frozen credit markets and snap the longest economic slump since the 1930s. The Treasury will sell $65 billion in notes and bonds this week. Over the past month, money managers overseeing about $100 billion shortened the durations of their portfolios, according to Stone & McCarthy Research Associates in Skillman, New Jersey.
Duration, a reflection of how long the debt will be outstanding, dropped to 100.9 percent of benchmark indexes in the week ended June 2, the lowest in almost four months and down from 102 percent in the week ended May 5. The ratio was as high as 103.7 percent in the period ended March 10. Shorter-term Treasuries, whose lower duration means price swings are smaller relative to longer-maturity debt for the same change in yield, have performed better this year with the Fed keeping its target rate for overnight loans between banks at a range of zero to 0.25 percent. Two-year notes have lost 0.4 percent, including reinvested interest, compared with losses of 11.5 percent on 10-year securities and 27.9 percent for 30-year bonds, according to Merrill Lynch index data.
The Fed probably won’t make any adjustments to the size of the Treasury purchase program before its next policy meeting on June 23-24, in part to avoid reinforcing perceptions policy is reacting to swings in yields, according to Jim Bianco, president of Chicago-based Bianco Research LLC. "The Fed wants to operate in predictable ways," Bianco said. "They are also trying to not just look arbitrary, which makes people think ‘I can’t ever go to the bathroom because there could be a press release that the Fed changed the buybacks.’ That’s been a real concern: ‘Wow, I just went to the bathroom and lost $2 million dollars.’"
Mortgage-Bond Yields Jump to Highest Since Fed’s Buying Plan
Yields on Fannie Mae and Freddie Mac mortgage securities climbed to their highest since Nov. 24, the day before the Federal Reserve announced plans to buy the bonds to drive down interest rates on new home loans. Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds rose 0.12 percentage point to 5.02 percent as of 3:23 p.m. in New York, according to data compiled by Bloomberg. That’s the highest since Nov. 24 and up from 3.94 percent on May 20, Bloomberg data show.
Yields on the securities rose faster than rates on benchmark Treasuries today because the U.S. central bank hasn’t taken action in response to soaring home-financing costs, which the Fed has been influencing through debt purchases in order to stabilize the housing market, said Walt Schmidt, a mortgage-bond strategist at FTN Financial in Chicago. "The fact that the Fed has not come in and supported the ‘national mortgage rate,’ that has gotten the market spooked," Schmidt said in a telephone interview today.
The difference between yields on the Fannie Mae bonds and 10-year Treasuries widened 0.05 percentage point today to 1.12 percentage points, Bloomberg data show. The gap, which grew to as much as 2.38 percentage points last year, contracted to 0.70 percentage point on May 22, the lowest since 1992. Last week, the Fed said it bought a net $25.8 billion of Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds in the week ended June 3, compared with a weekly average of $24.1 billion since the initiative began in January.
The Fed initially said on Nov. 25 that it would buy $500 billion of so-called agency mortgage securities, before announcing in March that it would expand the program to $1.25 trillion, as well as buy $300 billion of Treasuries. The average rate on a typical 30-year mortgage jumped back to 5.29 percent in the week ended June 4, the highest since December and up from a record low of 4.78 percent in April, according to McLean, Virginia-based Freddie Mac.
Citigroup Gains Geithner Backing as Pandit Bucks Bair
Citigroup Inc. is poised to start a $58 billion stock swap that was held up while Federal Deposit Insurance Corp. Chairman Sheila Bair questioned Chief Executive Officer Vikram Pandit’s leadership and the bank awaited regulatory approvals, people close to the bank said. The U.S. Treasury Department signaled last week it would complete an agreement to take a 34 percent stake in New York- based Citigroup, clearing the firm to proceed with an exchange of preferred stock for common that was announced three months ago, people familiar with the matter said. The bank said today it will start the offer this week.
Citigroup is counting on the transaction to replenish an equity base eroded by $36 billion of net losses during the past six quarters. Last week’s encounter with Bair underscores the scrutiny Pandit, 52, faces as the former Morgan Stanley banker steers Citigroup toward partial government ownership to shore up its finances. Treasury Secretary Timothy Geithner has indicated he thinks Pandit’s turnaround plan should be given time to work, according to people with knowledge of his views.
"This is not about Pandit himself," said Joshua Rosner, managing director at New York research firm Graham Fisher & Co. "Sheila Bair appears to be the only prudential regulator in Washington who has any understanding of the need to force the disgorgement of troubled assets from troubled institutions. You can’t have a healthy banking institution without doing that." A person familiar with the FDIC said the situation is being driven by Citigroup’s need to address its woes, not a feud between Bair and Pandit.
"The FDIC has absolutely not delayed efforts of Citigroup to bring an exchange offer to market," said Andrew Gray, an FDIC spokesman. "The FDIC strongly supports efforts of all banks to raise additional capital where possible, and improve the quality of their capital structures." Citigroup spokesman Jon Diat declined to comment when asked about the matter yesterday. In a statement today, Citigroup said it expects to begin the exchange offer "later this week." The bank said it "appreciates the cooperation and support it has received from federal banking regulations," and said reports that regulators had delayed the offer were "entirely incorrect."
Citigroup shares fell 7 percent last week to $3.46, erasing two weeks of gains. The stock is now hovering where it was in mid-February, just before it began a two-week slump that forced Pandit to seek a rescue from Geithner. The stock rose 1 cent to $3.47 as of 2:25 p.m. in New York Stock Exchange composite trading. Bair’s objections threatened to upend progress Citigroup had made in obtaining approval for the exchange, people close to Citigroup said. They came after a Citigroup filing last week with the Securities and Exchange Commission that responded to most of that agency’s queries about disclosures required in advance of the offer.
Bair, 55, who has a say in Citigroup’s fate because of her agency’s role as guarantor of part of the company’s $298 billion in deposits, was pushing for change because she didn’t think management had enough commercial-banking experience to get the lender out of its distressed financial condition, the people said. Her concern was driven partly by analysis by the bank’s primary regulators, which include the Office of the Comptroller of the Currency and the Federal Reserve, a person briefed on the matter said. Geithner has indicated he thinks replacing top management now might be destabilizing, the people familiar with his views said. Geithner plans to sign the agreement as soon as this week, people familiar with the agency said.
The FDIC guarantees $34.6 billion of the bank’s long-term debt and $30 billion of short-term debt, filings show. The FDIC also was one of several agencies, including Treasury and the Fed, to participate in an insurance policy on $301 billion of Citigroup’s distressed assets. Managers at banks that received federal aid are under pressure to examine the roles played by directors and top executives. Bank of America Corp., the recipient of a $45 billion government infusion, named two ex-regulators and two former bankers as directors on June 5, remaking the board five weeks after shareholders ousted Chief Executive Officer Kenneth Lewis as chairman.
"Regulation has become highly politicized," said Gary Townsend, chief executive officer of Hill-Townsend Capital in Chevy Chase, Maryland. "Citi and Bank of America with their management, and through bad luck perhaps in the case of Bank of America, ended up with the government between the balance sheets with them. How you get that slumber-mate out and away is the true strategic issue for both companies as we go through 2009 and into 2010."
Pandit, who took over Citigroup in December 2007 following the ouster of Charles O. "Chuck" Prince, mostly hewed to Prince’s business strategy for the first half of 2008 and predicted the credit crisis was closer to the end than the beginning. As markets worsened, he announced a plan to eliminate a seventh of the bank’s 350,000-employee workforce through asset sales and job cuts. He put some of the bank’s longest-held businesses up for sale in January, including the CitiFinancial consumer-finance and Primerica insurance units.
"Management must be allowed to do its job," Rochdale Securities analyst Richard Bove in Lutz, Florida, said in a June 5 note to investors. Pandit "took over his current position at one of the worst points in Citigroup’s history," Bove wrote. "He is making no mistakes in his turnaround of this company and he has placed it back on the path of recovery with the substantial aid of the U.S. banking regulators."
The pace of Citigroup’s exchange plan have frustrated investors who bought preferred stock in anticipation of profiting when the exchange closes, according to CRT Capital LLC analyst Kevin Starke. Many such investors have sold borrowed shares in anticipation of paying them back after the conversion. Any delays increase the cost of financing the trades. Under Citigroup’s plan, as much as $25 billion, or about half, of the Treasury’s preferred stake in the bank will be converted into common stock. More than 17 billion shares may be issued to the government and other preferred holders, diluting existing stockholders by about 76 percent.
Even if Citigroup proceeds this week, the offer may not be completed until late July or mid-August, Sanford C. Bernstein & Co. analyst John McDonald wrote in a note last week. Once the exchange offer is formally extended, the bank will keep it open for at least 20 business days, according to last week’s filing. "We plan to launch this as quickly as we can," Citigroup Chief Financial Officer Edward "Ned" Kelly said on a May 7 conference call with analysts.
Ilargi: Whenever Krugman's in Europe, he finds strange concoctions to drink.
"Nobel" Laureate Krugman Says Recession to End 'This Summer'
The U.S. economy probably will emerge from the recession by September, Nobel Prize-winning economist Paul Krugman said. "I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer," he said in a lecture today at the London School of Economics. "Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing."
The National Bureau of Economic Research, based in Cambridge, Massachusetts, is the official arbiter of U.S. recessions and expansions. Last week, Robert Hall, the head of the NBER’s business-cycle-dating committee, said it’s "way too early" to say the contraction is over. The U.S. has been in a recession since December 2007, and the NBER may take months to decide when a trough has been reached.
Even with a recovery, "almost surely unemployment will keep rising for a long time and there’s a lot of reason to think that the world economy is going to stay depressed for an extended period," Krugman said. The U.S. Federal Reserve’s efforts to lend to and provide financing for banks -- measures that have swelled the central bank’s balance sheet -- have helped to stabilize markets, Krugman said. "A lot of the spreads in the markets have come down" and "the acute financial stuff seems to have come to a halt," he said.
Ilargi: Eh... Excuse my cynical self, but isn't this something that should already be known? Why the separate announcement? I remember a February promise of 3.5 million jobs iover two years. 150.000 so far in 4 months ain't going to do that trick.
Obama promises more than 600,000 stimulus jobs
President Barack Obama promised Monday to deliver more than 600,000 jobs through his $787 billion stimulus plan this summer, with federal agencies pumping billions into public works projects, schools and summer youth programs. Obama is ramping up his stimulus program this week even as his advisers are ramping down expectations about when the spending plan will affect a continuing rise in the nation's unemployment.
Many of the stimulus plans that Obama announced Monday already were in the works, including hundreds of maintenance projects at military bases, about 1,600 state road and airport improvements, and federal money states budgeted for 135,000 teachers, principals and school support staff. The administration had always viewed the summer as a peak for stimulus spending, as better weather permitted more public works construction and federal agencies had processed requests from states and others. But Obama now promises an accelerated pace of federal spending over the next few months to boost the economy and produce jobs.
"We have a long way to go on our road to recovery but we are going the right way," Obama said in a written statement prepared for his public announcement of the additional summer stimulus activity. "Our measure of progress is the progress the American people see in their own lives. And until that progress is steady and solid, we're going to keep moving forward. We will not grow complacent or rest. Surely and steadily, we will turn this economy around," the statement said.
The announcement comes days after the government reported that the number of unemployed continues to rise; the unemployment rate now sits at 9.4 percent, the highest in more than 25 years. Hundreds of thousands of Americans continue to lose jobs each month, although fewer jobs were lost last month than expected. Just how much of an impact Obama's recovery program had on the pace of job losses is up for debate. Obama has claimed as many as 150,000 jobs saved or created by his stimulus plan so far, even as government reports have shown the economy has lost more than 1.6 million jobs since Congress approved funding for the program in February.
Republicans remain critical of the stimulus spending, slamming it as a big government program that ultimately will do little for recovery. With only a fraction of the federal money actually spent thus far, it's premature to give the stimulus plan credit for economic trends, congressional Republicans said last week. "I think the economy is just as likely to begin to recover on its own, wholly aside from this, before much of this has an impact. So I'm very skeptical that this massive sort of spending binge that we've engaged in is going to have much of an impact," said Senate Minority Leader Mitch McConnell, R-Ky.
Obama initially offered his stimulus plan as a way to put people back to work, a promise that 3.5 million jobs would be saved or created. The administration's predictions that unemployment would rise no higher than 8 percent already have been shattered, leaving Obama's advisers to caution that job growth takes time, even as recovery spending intensifies. Federal agencies will release billions of stimulus dollars to states in the coming months.
Health and Human Services will provide funding for 1,129 health centers to provide expanded service for 300,000 patients; Interior will begin improvements on 107 national parks; Veterans Affairs will start work on 90 medical centers in 38 states; the Justice Department will fund 5,000 law enforcement jobs; the Agriculture Department will begin 200 new rural waste and water system projects; and the Environmental Protection Agency will begin or accelerate the cleanup of 20 Superfund sites.
At the same time federal money for these projects is released, the nation's unemployment rate likely will continue to increase, said Austan Goolsbee, a member of the White House Council of Economic Advisers. "I don't think there's any question it's going to be a rough patch not just in the immediate term, but for a little bit of time," Goolsbee said Sunday, "because you've got to turn the economy around, and jobs and job growth tend to come after you turn the economy around. So it's likely going to be a little higher."
Obama senior adviser David Axelrod argues that the stimulus program is working and points to fewer jobs lost in May than the month before as a hopeful sign of economic recovery. Improvements in unemployment numbers naturally come later, he said. "It's going to take some time for these unemployment numbers to turn around, for the momentum to completely stop and turn in the other direction," Axelrod said. "It feels as if we're moving and the stimulus package now is not nearly done, it's just really at its beginnings." Goolsbee spoke on "Fox News Sunday;" Axelrod was interviewed on CNN's "State of the Union."
Stimulus Funds Spent to Keep Sun Belt Cool
The federal government is spending $5 billion in stimulus money to weatherize homes across the country. That is almost as much as it has spent on weatherization since the program was created in the 1970s to cut heating bills and conserve oil for low-income people. But this year, there is a twist. An unusually large share of the money will be spent not on keeping cold air out but on keeping cold air in.
As a result of a political compromise with Sun Belt lawmakers last decade, the enormous expansion of the weatherization program will invoke a rarely used formula that will devote 31 percent of the money, nearly double the old share of 16 percent, to help states in hot climates, like Florida, save on air-conditioning. Many environmentalists say cutting electricity use for cooling is just as worthwhile as reducing the use of oil or gas for heating. But there are substantial questions about whether it is the most efficient way to save energy.
The nation spends twice as much on heating as on cooling, according to the federal Energy Information Administration, and it consumes more energy heating homes than cooling them. When it comes to emissions of heat-trapping gases, the department found, home heating is responsible for emitting twice as much carbon dioxide as home cooling. And a 2005 survey of home energy use by the agency found that the average household in New England spent $1,188 a year on heating, while the average household in Florida spent $597 on air-conditioning.
Repeated questions have been raised about the effectiveness of weatherization in hot-climate states. The Oak Ridge National Laboratory in Tennessee, which evaluates the program for the Energy Department, released a study last year questioning the program’s results in Texas, which will get $327 million in weatherization money from the stimulus law. The laboratory found that insulating homes did not save a significant amount of money on cooling, a finding it said was consistent with previous studies.
Steven Nadel, executive director of the American Council for an Energy-Efficient Economy, a nonprofit group that favors weatherization, said the spending formula reflected the tension in balancing national goals with regional interests. "If you were doing it on a national basis," Mr. Nadel said, "you’d do the most cost-effective jobs first, which would mean doing a lot in places like the Dakotas and Minnesota." Gil Sperling, the program manager at the Office of Weatherization and Intergovernmental Affairs at the Energy Department, said more studies of weatherization in hot climates were needed to take into account recent technological advances.
"While the Department of Energy is gathering the latest data about the savings in cold-weather and warm-weather states," Mr. Sperling said, "this program has a proven track record of saving money, saving energy and creating jobs across the country." The stimulus money is being divided according to a formula devised in 1995 after members of Congress from the hot states complained that they received too little money through the weatherization program. The formula has been used just twice, since it is invoked only in the rare years that the program financing exceeds a threshold, now set at $233 million.
J. Bennett Johnston, a former Democratic senator from Louisiana who pushed for the new formula at the time, said more people were dying from extreme heat than extreme cold. "This was not so much an energy saving proposal; it was more of an equity proposal, one that gave attention to public health," Mr. Johnston said, adding that it would save energy. Now, the formula favoring hot states is being used just as the government makes its biggest investment in weatherization.
So while all states will get more money for weatherization than ever before, and cold states will still get a majority of the money, the share going to cold states will be smaller than usual. In the past, cold states received two-thirds of the weatherization money; now they will take just over half. This is one of several examples where the stimulus law relies on existing Congressional formulas to divide billions of dollars. Doing so made it hard to direct the spending but avoided messy fights in Congress over how to divide the money.
As Florida’s weatherization money climbs to $176 million over the next couple of years, from $5 million this year, the scene that played out recently at Jessica Langston’s double-wide mobile home in Crawfordville is likely to become more common. A large truck, parked by a palm tree in the front yard, was pumping fiberglass insulation into small holes bored in the corrugated metal roof. Glaziers were sticking tinted film to the windows to dull the sun’s heat. And cool air was streaming through the floor vents, much stronger now that the metal ducts beneath the floor had been sealed tight and the air-conditioner unit outside had been serviced.
"Before, it would just be hot, unbearably hot," said Ms. Langston, 27, who had covered the windows with tin foil and taped a leaky window shut when she moved in last summer, pregnant with her third daughter. Her monthly electricity bills can top $400. Officials here say that the program has cut electricity use and costs. A review of the utility bills of nine Floridians whose homes were recently weatherized showed varied savings. A couple of bills were halved, with monthly savings of up to $178; most customers saved $13 to $44 a month, and one customer saw her electric bill rise as she consumed more electricity after her house had been weatherized.
Norm Gampel, who manages the program for the Florida Department of Community Affairs, said new training tailored to Sun Belt states had helped. Florida workers now use infrared cameras to pinpoint leaks, along with blower doors, large fans that suck the air out of a house to measure how airtight it is. There is no doubt that the program will have its intended effect of putting people to work: nine people worked on Ms. Langston’s house.
Robin Dias, the weatherization coordinator here for Wakulla County, said that he was preparing to expand to six crews, from two, to handle the additional work and that he was having no trouble finding workers since the housing market went bust. "When everything was going so good, I couldn’t hardly get nobody," Mr. Dias said. "But since the drop — oh man, I’ve got a list of contractors." Mr. Gampel said he was convinced that with the increased financing, the program would prove its worth in hot states. "This is our chance to shine," he said. "Or, we’re in the spotlight, however you want to look at it."
Chrysler Fiat Sale Delayed by U.S. Justice Ginsburg
Chrysler LLC’s planned asset sale to a group led by Italy’s Fiat SpA was delayed by Justice Ruth Bader Ginsburg while the U.S. Supreme Court considers a request for a longer postponement that might scuttle the deal. Moments after her order was issued, Fiat Chief Executive Officer Sergio Marchionne said in a telephone interview that the company will "never" walk away from the deal. The company previously set a June 15 deadline for completion.
A federal appeals court in New York last week allowed the sale, while putting its decision on hold until 4 p.m. today to let opponents including Indiana pension funds seek Supreme Court intervention. Ginsburg’s one-sentence order today said the bankruptcy court orders allowing the sale "are stayed pending further order" of the Supreme Court. That language leaves open the possibility that the justices might clear the deal to go forward in the next several days. Chrysler said in court papers that the sale is necessary to stanch losses of $100 million a day. Chrysler said the sale, which would transfer its Jeep, Chrysler and Dodge brands, would help save 38,500 jobs, plus those of workers at its suppliers.
The pension funds sought a stay that would last until the full nine-member court decided whether to hear their appeal. The funds said in court papers they would suffer "irreparable harm" should the sale go forward. Chrysler said the sort of stay sought by the funds "will, in practical effect, kill the Fiat sale and lead to a liquidation." The Obama administration is supporting the automaker at the Supreme Court.
The stay will probably be brief, said Dewey & LeBoeuf LLP partner Martin Bienenstock, who has advised General Motors Corp. and Chrysler Financial Corp. on restructuring. "Once the Supreme Court is able to review the certiorari petitions and responses, I doubt the court will maintain the stay," he said. "Certiorari" refers to the process of seeking Supreme Court review of a case. "Pending further information from the Court, we have no comment at this time," said Lori McTavish, vice president of public relations for Chrysler, in a e-mail. The Indiana pension funds hold $42.5 million of $6.9 billion in Chrysler secured loans.
Chrysler dealers scramble to unload vehicles
Peter J. Walsh, the owner of Walsh Dodge in Jersey City, N.J., started out selling used cars in his hometown 28 years ago after the birth of his daughter. He slowly built his business, and felt as if he'd finally made it when he earned his Chrysler shingle in 2000. But on Tuesday, Walsh Dodge will lose that shingle — as will 788 other dealers across the country. Auburn Hills, Mich.-based Chrysler has asked a bankruptcy court for permission to terminate the franchise agreements of about 25 percent of its dealers. Chrysler needs to cut costs, and claims current sales levels don't justify a network of 3,189 dealers.
For Walsh and the others on the "hit list," the last days of selling Dodge, Jeep and Chrysler vehicles have been filled with quick sales at deep discounts, along with sad goodbyes from longtime customers and feelings of dismay and anger toward the automaker they worked with for years. "It is what it is. It's just a tough situation," Walsh said, speaking inside his dealership Saturday morning. "It's been difficult mentally the past couple of months, but we'll be OK. I don't feel as bad for myself as I do for the young guys with families that work for me." Chrysler maintains that the franchises singled out for termination were chosen because they weren't profitable, didn't have all of the automaker's three brands under one roof, or were located too close to another Chrysler dealer.
But the dealers argued in court that a smaller dealer base won't save the company any substantial money. They say the dealers cover their own costs, paying for everything from the vehicles on their lots to employees, advertising and tools. Walsh said that while Chrysler's products were good, its dealer support was always poor — too focused on the automaker's own short-term needs. And while he might have been underperforming some of Chrysler's sales criteria, Walsh claims some of that was the automaker's fault, pointing to its insistence that he sell more pickup trucks — a vehicle unsuited to the densely populated urban strip he serves across the Hudson River from New York City.
"How many Dodge pickups can I sell in Jersey City? It's not Waco, Texas," Walsh said. A court hearing that began Thursday in New York with testimony from over a dozen dealers is scheduled to continue with legal arguments on Tuesday. U.S. Judge Arthur Gonzalez is expected to rule after the arguments conclude. Steven Landry, Chrysler's executive vice president of North American sales, said Tuesday's deadline remains fixed. Dealers can sell the vehicles after that date, but they won't be able to offer Chrysler sales incentives, making it tough for them to compete. "We won't be changing any dealers on the list. We won't be changing the date," he said.
Landry said Chrysler had commitments for the inventory of 42,000 vehicles on the lots of the affected dealers. Dealers have sold 16,000 vehicles to customers since the May 14 announcement and Landry said the remaining 26,000 cars and trucks would be purchased by remaining dealers. Chuck Eddy, a Youngstown, Ohio, dealer who was among those chosen to remain with Chrysler, said dealers have quickly bought up the inventory of those going out of business and are preparing for the transition. "I have no fire sale going on. There's no dealer in my town who was terminated having a fire sale," Eddy said. "People are buying the car for the true value."
At the Viva Chrysler, Jeep, Dodge in El Paso, Texas, finance manager Jay Welsh said news of financial trouble with Chrysler and the upcoming terminations of other dealerships has done little to deter new car buyers. The dealership, which sells all three of Chrysler's brands and escaped termination, sold between 55 and 65 cars a month in April and May, compared with an average of about 25 cars a month in January, February and March, he said. A few buyers have questioned the viability of warranties, while others have been looking for "fire sale" prices that the dealership has yet to offer, he said.
But other dealers said they moved quickly after finding out they were losing their franchise agreements, hoping to keep their losses to a minimum. By late last week, Dale Horn, owner of a Chrysler-Dodge-Jeep dealership in Malvern, Ark., had sold 30 of the 35 cars and trucks he had when the company told him that his franchise would be yanked. Horn said that in exchange for its help unloading the vehicles, Chrysler wanted him to sign papers allowing it to shop the inventory "at a figure less than it cost me." Instead, he decided to try to sell it all himself, taking losses on all but a few, while making tiny profits on the others.
"In essence, I paid people to take some of my cars," he said. "It's just not a pleasant deal. If I'm as small as I am, having the problems that I'm having, I feel so bad for the guys that have got 200 in inventory, or 300," he said. At other dealers, longtime customers have showed up to both buy a car and say goodbye. Janet Reuther Schopp, dealer and general manager at Reuther Chrysler Jeep in suburban St. Louis, said former customers and people she'd never seen before came in to help whittle down her already scaled-back inventory of 125 vehicles. "It was a huge show of respect for us," said Schopp, who continues a family business her father started 50 years ago. "They thought it was the right thing to do."
A neighbor sent her niece in to buy. Her attorney bought two cars for himself and his wife. A stranger who lost his job made a point of driving out of his way to buy at Reuther and a Boeing employee in St. Louis bought a car from her on principle. Nearly all of them paid full price. Mike Lobb, general manager of Dave Croft Motors, in Collinsville, Ill., outside St. Louis, will try to survive by selling used cars and running a service center, but still held out hope Saturday that a reprieve might come from Chrysler or the bankruptcy court. Croft, which normally has 350 new cars on the lot, is down to 100 vehicles. Eighty of his sales in the last three weeks have been to longtime customers.
Walsh, the Jersey City dealer, said he has about 14 vehicles left, which he expects to be redistributed to other Chrysler dealers. He said he's glad he didn't take more vehicles when Chrysler officials were pushing dealers to help save the company by boosting their inventories this year. For Walsh, who plans to keep selling used cars, the move marks the end of Chrysler's slow painful demise for him. He had to reduce his work force from 30 people to 14 during the past year. And his sales of new and used vehicles have declined a third from their peak of 1,500 units a year in 2000, he said. "My employees have been with me an average of seven years — they're all local people — and it puts a hole in my heart when they come in here and I have to tell them I'm letting them go," Walsh said.
GM timebomb shows gravity of pension challenge
In the thunderous collapse of General Motors last week, one detail seems to have gone almost unnoticed. The old GM's US pension fund, with its near-$100bn (£63bn) of liabilities, is being transferred lock, stock and barrel to the new entity. As a direct result, the new GM could be bankrupt again in a very few years. From a UK perspective, this insouciance seems curious. But the US is somewhat behind the game in grasping the scale of the corporate pensions crisis.
The key moves which flush that crisis into the open - the marking of deficits to market, their inclusion on balance sheets, and the official requirement that they should be made good - are all now in place in the US. But they still have the force of novelty. The UK, by contrast, was an early mover, and last week's closure of final- salary schemes by big corporations such as BP and Barclays was correspondingly big news. Depressingly, though, there are other indications - which I shall come to - that radical UK attempts to address the crisis are running into the sand. But first, back to GM. Much of the detail here I owe to the independent UK consultant John Ralfe. His thesis can be briefly stated.
GM's US fund is, of course, in deficit, but the company has made no contributions since 2003. Back then, it put in $18.5bn, which it raised through a bond issue. Since this counted as a pre-payment, GM is not obliged to pay any more for the next year or two. However, it will then have to start plugging the gap, under the new rules set down by the Pension Protection Act of 2006. This, Mr Ralfe calculates, would involve diverting $1bn to $2bn annually from operating cash flows. If GM cannot do that, bang it goes again. At that point, the fund would be taken over by the official Pension Benefit Guarantee Corporation (PBGC).
Why did that not happen this time round? Because, Mr Ralfe suggests, of the legal terms under which the PBGC operates. Its maximum annual payment is $54,000 for a 65-year-old, but only $20,000 for a 50-year-old. And in Detroit, it is commonplace for car workers to retire on full pension at 50. The PBGC has calculated that if it took over all the auto industry's pensions, members would lose 40 per cent on average. A 50-year-old GM pensioner with a $54,000 annual entitlement, Mr Ralfe reckons, would lose 60 per cent. Add that all up, and GM's annual $9bn pension bill would be cut by $3.5bn.
And so, in an exercise which has inflicted various degrees of loss on GM's shareholders and bondholders, the 670,000 members of the pension fund are protected. Anything else, it seems, would be politically impossible. The snag is, of course, that if new GM goes bust a few years from now, the bill to the PBGC will have gone up to the tune of the $3.5bn a year that would otherwise have been saved. When we put that in the context of a GM fund with assets of $91bn at the last count, it is not trivial. Nor is it trivial in the context of the PBGC, which - as I have written in this column before - is seriously underfunded, and has just reported a deficit of $33.5bn for the year to March. The whole problem, in short, has not been addressed, just kicked down the road.
The nagging question that remains is whether the whole system or corporate pensions can be rescued. Increasingly, the external risks and volatility of these schemes cannot be afforded by the companies themselves. And the official rescue schemes set up in both the US and UK are nowhere near big enough to shoulder the burden. For a while, it seemed that a promising alternative had been found in the UK, in the form of pension buy-out firms. A number were launched from 2006 onwards, pulling in capital from the big investing institutions to take pension schemes off companies' hands. This infusion of capital, if sustainable, could have had a galvanising effect. But at least one of those new firms, it appears, is now in effect closed to new business.
Dawid Konotey-Ahulu, an ex-Merrill Lynch banker and founder of pension consultants Redington, points out that when the model was launched, the weather was very different. Now, he argues, its viability is in question. It is not that these firms are in any sense at risk. Rather, the cost of buy-outs has risen sharply in today's more demanding conditions, and institutional capital seems to have dried up. The conclusion is depressing but unavoidable. Some countries are only now confronting the pensions crisis, while those who did so earlier have yet to solve it. Where are those innovative investment bankers when you need them?
GM Bankruptcy May Turn on $13 Million in Donations
Automobile dealers have been among the biggest contributors to U.S. political campaigns over the past decade, surpassing all but two groups in donations. That $13 million investment may be paying off as the dealers get a lot of attention on Capitol Hill. Congress has held hearings on the planned shutdown of thousands of dealerships and is debating ways to provide relief to the businesses. Almost a quarter of the members of the House of Representatives signed letters to President Barack Obama and his auto task force questioning plans to close the dealerships.
The lawmakers’ involvement may disrupt plans by General Motors Corp. and Chrysler LLC to emerge from bankruptcy with a leaner dealer network. "The intention of bankruptcy is for companies to streamline their operations," said Maryann Keller, an auto analyst and president of Maryann Keller & Associates, based in Stamford, Connecticut. "If Congress does something that says, ‘No, you can’t terminate contracts that you believe are to your detriment,’ of course it threatens them."
Executives of Detroit-based GM, which is to shrink its dealerships to as few as 3,500 from 6,000, and Auburn Hills, Michigan-based Chrysler, which plans to shut 789, said the reductions are crucial to their viability. Fritz Henderson, chief executive officer of GM, told the Senate Commerce Committee on June 3 that the cuts were about "creating a healthy, stronger and profitable dealer network." Chrysler President and Vice Chairman Jim Press told the panel his network "is not viable and not profitable."
Obama has pledged to allow the automakers to make their own decisions on restructuring. As a result, the National Automobile Dealers Association -- whose members are in all 435 U.S. congressional districts --is asking its more than 17,000 dealers to help it delay, if not scale back, the closings. Almost 200 dealers visited their lawmakers in Washington last month, and the association has asked its members to recruit their workers to contact local representatives. The McLean, Virginia-based group estimates that on average each dealership has 52 sales people and support staff, and the dealers are often the largest employers in many small towns.
The association’s political action committee has donated more money to federal candidates in the last 10 years than all but two PACs, according to the Center for Responsive Politics, a Washington research group. It gave more than $13 million from 1999 through 2008, behind only the National Association of Realtors and International Brotherhood of Electrical Workers. "When an organized industry with a history of generous giving to members of Congress appeals for help, those members aren’t likely to turn them down cold," said Rogan Kersh, associate dean at New York University’s Robert F. Wagner Graduate School of Public Service.
Lawmakers responded by sending letters to Obama and his task force urging a review of the planned closures. Signing the letters were 104 House members -- 83 of whom received PAC donations from the dealers’ association for their 2008 or 2010 races. These included Republicans Chris Lee, who drafted one letter with Democrat Dan Maffei, both of New York, and Steven LaTourette, who wrote the other letter with Democrat Dennis Kucinich, both of Ohio. Maffei and Kucinich got no money from the trade group, according to the center’s data.
LaTourette, who received the maximum $10,000 donation for his 2008 re-election, said donations had nothing to do with lawmakers’ support for the dealers. "Auto dealers happen to be part of the fabric of every small community I represent," he said. Lawmakers say GM and Chrysler should at least give dealers more time to wind down their businesses, especially when the automakers have gotten billions of dollars in federal aid. "I don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave local dealers and their customers to fend for themselves," said Senate Commerce Committee Chairman Jay Rockefeller, a West Virginia Democrat.
Dealers say they’re not a financial drain on automakers. "We purchase the parts, we purchase the vehicles," said Roger Burdick, who with his brothers owns 20 dealerships near Syracuse, New York. "We carry all the costs ourselves." Jack Fitzgerald, who owns dealerships in Florida, Maryland and Pennsylvania and is scheduled to lose Chrysler and Jeep franchises, asked his customers to join the fight. Visitors to his Web site are met with a plea for help. "If you’re going to rise again in Detroit, you have got to serve the people who are riding around in your cars," Fitzgerald said.
Senator Bob Corker, a Tennessee Republican, has introduced legislation to require GM and Chrysler to use federal aid to buy unsold cars and parts from shuttered dealers and give them 180 days to close. Hearings and letters may be enough to slow the process, said Representative Ron Klein, a Florida Democrat. "Sometimes, Congress’s power is not passing legislation," said Klein, who signed one of the letters and got money from the dealers’ group. "It is creating a very high profile of an issue."
GM and Chrysler have said that they need fewer dealers so that the remaining retail locations will get more business and be able to invest in their operations. U.S. sales at Toyota Motor Corp. and Honda Motor Co. dealerships each averaged more than 1,100 sales in 2008, almost three times as many as at GM and Chrysler stores, according to consulting firm Grand Thornton. Average new-auto revenue was $14.3 million for GM dealers and $12.8 million for Chrysler last year, compared with $40.9 million for Toyota, based on data from auto-research company Edmunds.com. Dealers also make money on used vehicles, parts and service.
Doubts mount over US toxic asset plan
The controversial US toxic asset clean-up plan, aimed at clearing bad loans from US banks’ books to enable them to raise capital and lend freely, has fallen behind schedule, and may never be fully implemented. The plan has fallen prey to concerns from potential investors and regulators and waning interest from the banks themselves. Investors fear that Congress may set caps on pay while regulators are beginning to doubt whether the plan is really necessary.
Last week, the Federal Deposit Insurance Corporation, which was supposed to provide finance for investors to purchase bubble-era bank loans, postponed plans for a pilot sale, saying it was less urgent than had been thought. "The timing just is not right," an FDIC official told the Financial Times. He said the FDIC still wanted to test a mechanism for loan auctions but might hold it in reserve rather than activating it for general use. Officials say the need for these facilities has waned, and add that several banks have raised billions of dollars in share capital even with toxic assets on their books.
"Banks have been able to raise capital without having to sell bad assets through the LLP [limited liability partnership], which reflects renewed investor confidence in our banking system," Sheila Bair, chairman of the FDIC, said last week. Treasury secretary Tim Geithner’s plan involved creating government sponsored marketplaces for investors to buy bubble-era assets from the banks with the help of loans from the Federal Reserve and the FDIC. Some experts, including the International Monetary Fund, worry that a failure to rid banks of bad assets could inhibit lending. The problem may be acute for small regional banks that have not yet taken substantial writedowns on their loan books.
The Federal Reserve – which was to provide loans to investors to buy bubble-era securities – has only confirmed it will finance bubble-era commercial mortgage-backed securities. But it has run into problems on securities backed by residential mortgages where the value of the underlying loans is difficult to measure. "We have not made a final decision on whether it is doable and, if it is doable, whether it is worth the cost," William Dudley, president of the Federal Reserve Bank of New York, said on Friday.
U.S. Will Let Some Banks Repay Aid
The Obama administration plans to announce as soon as today that some of the nation's largest banks can repay billions in federal aid, but some officials caution that the show of progress is being underwritten by multiple layers of less visible government support. Through cheap loans, debt guarantees and a promise that big banks will not be allowed to fail, these officials say the government has created an artificial environment in which profits and stock prices have rebounded, helping banks in recent weeks to raise about $50 billion from private investors.
The money allows the strongest banks to return federal aid provided at the peak of the fall financial crisis, but few banks have expressed eagerness for the government to end the other forms of support, creating concern that these programs will be habit-forming and more difficult to terminate. As a result, independent experts warn that the government's relationship with the industry is entering a precarious new phase. As with mortgage giants Fannie Mae and Freddie Mac, the government will no longer share in the banks' profits, but it still stands ready to absorb losses.
"It's good from an individual investor point of view, it's great for the banks, but from a system point of view it's very dangerous," said Simon Johnson, a Massachusetts Institute of Technology professor and former chief economist at the International Monetary Fund. The Treasury Department has invested about $200 billion in more than 600 banks under its financial rescue program, to patch problems, facilitate mergers and provide support for new lending. In recent months, more banks have sought permission to return the money, to avoid restrictions such as limits on executive pay and to show renewed strength.
The administration has allowed about 20 smaller banks to do so. It now plans to announce a list of large banks that can join them. J.P. Morgan Chase, Goldman Sachs and American Express are among the firms that expect to be on it. Officials say they now are confident that the strongest banks no longer need the money, and they want to provide those banks with a public vote of confidence. The officials caution, however, that repayments should not be seen as evidence of economic recovery. Consumer demand remains weak. Unemployment continues to rise. It is still highly likely that the economy will contract during the second quarter.
Banks are recovering more quickly than the overall economy thanks to an array of targeted government rescue programs. The Federal Reserve has made more than $1 trillion in emergency loans. The Federal Deposit Insurance Corp. is helping banks borrow money by promising to repay investors if a bank defaults. And the administration has insisted that it will not allow large banks to fail, for fear of the collateral damage. Treasury officials say these efforts were critical to limit the number of bank failures and the scale of the financial crisis. In allowing banks to return one form of government support, the direct investments, the administration has sought multiple assurances that the companies will not regret the decision.
Regulators conducted stress tests on 19 of the largest banks to determine whether they had sufficient capital reserves to absorb likely losses. The nine banks that passed then were required to raise additional money from private investors. Banks also were required to issue debt to private investors, without a government guarantee of repayment, to show that they can raise more money if necessary. But allowing repayments is still a gamble, said Douglas Elliott, a finance specialist at the Brookings Institution.
"The fact that the regulators feel good enough to take the money back is clearly more confirmation that they're feeling good about things. But they could be wrong," Elliott said. "There's still a lot of potential for this to turn out to be a significantly worse problem than it appears to be at the moment." The government also is foregoing billions of dollars in revenue. The investments were structured as five-year loans that paid an annual interest rate of 5 percent. J.P. Morgan, for example, which accepted $25 billion, would have paid the government up to $1.25 billion a year.
Still, almost no prominent voices have raised opposition to the repayments. Congress is eager to pull away from an unpopular program, and the administration is eager to show that its strategy has worked. Even critics such as Johnson say the government's focus now should turn to long-term changes, such as limitations on executive compensation for all banks. The repayments are viewed by some administration officials as vindicating a decision made last year by then-Treasury Secretary Henry M. Paulson Jr.; Federal Reserve Chairman Ben S. Bernanke; and Treasury Secretary Timothy F. Geithner, who was then president of the Federal Reserve Bank of New York.
After Congress allocated $700 billion to purchase banks' troubled assets, that group instead decided to invest the money directly in banks. At the time, officials believed that stabilizing the banks was a critical first step, but it still might be necessary for the government to help banks sell devalued mortgage loans, mortgage-related securities and other toxic assets. In particular, officials warned that private investors would not return until banks scrubbed their balance sheets.
Officials acknowledge that the investments have succeeded in part because of the wide range of other federal programs bolstering the banks. But they increasingly believe that additional efforts may not be necessary. The government has shelved a plan to finance the investor purchases of mortgage loans, and officials are working with less urgency on a plan to finance the purchase of securities. The administration's view of these programs has shifted, officials said. Rather than critical steps, they are now regarded as insurance in case banks fall back into trouble.
Feds refuse to buy troubled assets with TARP
Sometimes the best investment is the one you didn't make. That's the case with one of the biggest investment pools in the country: the $700 billion Troubled Assets Relief Program, which Congress authorized last October to help combat the financial meltdown. The smartest thing the Treasury has done is to not buy troubled assets with the money. Instead, it has used most of it to buy preferred stock in banks to shore up their capital.
There was lots of yowling when the Treasury wisely changed its mind in November - critics yelled "bait and switch" because the pre-Obama Congress would never have approved a plan for the government to buy ownership stakes in banks. But forgoing asset purchases has turned out to be the right decision. TARP certainly hasn't been run perfectly. Among other things, the Treasury has lavished subsidies on nonbanks like GM and AIG, and used its TARP status to tell banks how to run their business and pay their staff. But this is trivial stuff compared to the problems we'd have had if the Treasury had tried to buy troubled assets from banks and insurance companies at a price both fair to taxpayers and high enough not to bankrupt the sellers.
How do I know this about a program that was never launched? By looking at the problems the Federal Deposit Insurance Corp., Federal Reserve, and Treasury have run into in the course of trying to set up a public-private investment program to buy troubled assets. PPIP (pronounced PEE-pip - do you expect good taste from the government?) would avoid the problem of the Treasury putting a fair price on assets of institutions it's trying to help. But even without this problem, the program is having so much difficulty getting started that it may not appear for months, if ever.
The FDIC's program, involving whole loans, is on hold. The Fed-Treasury program, involving mortgage-backed securities, is moving far more slowly than expected. The idea is to give public investors like the Treasury and state pension funds a chance to profit from private investors' expertise. In return for a chance to buy assets at steep discounts with generous financing made available by Uncle Sam, the private investors will let the Treasury et al. match their investment dollar for dollar.
It's a nifty concept - you let private capital set the price, and public entities invest alongside and get 50% of the profits. To be sure, the government would be taking most of the risk because it would be on the hook for both the loans (up to 85% of the assets' purchase price) and up to half the capital (another 7.5%). But the private investors would have to suffer a total wipeout before the loans cost the government anything - giving the public buyers a serious incentive not to overpay. The government, by contrast, would have had no such constraints.
The program has bogged down over questions such as whether to let banks that have gotten bailouts play this game (talk about double-dipping!), whether pay and perks of private investors would be capped, and whether it's right to let Wall Street, which made fortunes while creating this mess, make additional fortunes cleaning it up. Sure, it would be nice if banks and insurance companies got to unload hinky real-estate-related loans and mortgage-backed securities at reasonable prices, whatever "reasonable" means. But it might not be the end of the world if the institutions held these assets for a few years to see how things played out. For many of us, the best investment we ever made was the one we never made, such as not bottom fishing for GM or Lehman common stock. For Uncle Sam, the best investment was not buying troubled assets on his own. And that's the bottom line.
Medvedev Questions Dollar as World Currency, Open to Yuan Swaps
Russian President Dmitry Medvedev questioned the U.S. dollar’s future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. Russia may consider ruble-yuan swaps. The dollar "is not in a spectacular position, let’s be frank, and its prospects cause various questions as do the prospects for the global currency system,’’ Medvedev, who today hosts an international economic forum in St. Petersburg, said in an interview published by the Moscow-based Kommersant newspaper.
Regarding the global financial system, "therefore our task is to make it more mobile and at the same time more balanced.’’ Medvedev is expected to reiterate his call for creating a new world currency at the forum today in his keynote address on the first lessons of the global crisis. Russia’s president has called for creating regional reserve currencies as part of the drive to address the global financial crisis. Russia’s proposals for the Group of 20 meeting in London in April included the creation of a supranational currency. It is too early to be fully optimistic that the global financial crisis is easing, he said in the interview. The most dramatic scenarios for a collapse haven’t occurred, he said.
A new world currency may be on the agenda when Medvedev meets counterparts from Brazil, India and China on June 16 at a summit in the Ural Mountains city of Yekaterinburg, the Kremlin said this month. "This idea has potential, even though some of my G-20 colleagues aren’t actively discussing it at the moment,’’ Medvedev told Kommersant. "However, for example, in the opinion of our Chinese colleagues it is quite a possible step. The most important thing is not to walk away from discussions on this topic.’’ Turning the ruble into a reserve currency is still a possibility, especially if some of Russia’s partners start making payments for their oil and gas in rubles, Medvedev said. Russia might consider setting up ruble-yuan swap positions similar to the recent accord suggested between China and Brazil, he said.
Madoff Whistleblower Markopolos Blasts SEC
Chartered financial analyst Harry Markopolos spent 10 years unsuccessfully trying to convince the Securities & Exchange Commission to investigate Bernie Madoff. Now that Madoff's $65 billion Ponzi scheme has been revealed as the biggest fraud in U.S. investing history, Markopolos is pushing for dramatic changes at the SEC, which oversees the brokerage and investment industries. "The SEC was nonfunctional, captive to the industry," Markopolos told a dinner gathering of investment professionals at Boston College on June 4. "It was not going to take on anybody big or powerful."
The agency has too many lawyers on staff and not enough people with a background in trading or financial analysis, Markopolos argued. Amid a hail of criticism he directed at the agency, the reclusive whistleblower went out of his way to praise the SEC's new chairwoman, Mary Schapiro, who he met with in February. "The woman's on fire—she has changed that agency," Markopolos said. "I'm really impressed." Schapiro took over the SEC in January. Previously, she ran the securities industry's self-oversight group, called the Financial Industry Regulatory Authority. Earlier, she served as a commissioner on the SEC from 1988 until 1994, when she was appointed to head the Commodity Futures Trading Commission, where she served for two years.
Much of Markopolos's speech consisted of critiquing the conduct of SEC officials from 1999, when he first looked into Madoff's seemingly amazing investing results, until the end of 2008, when the scheme came unglued of its own accord. Correcting a quote attributed to him after the scandal broke, Markopolos said he never said the SEC "roars like a lion and bites like a flea. I'd never give the SEC that much credit," he quipped. "The SEC roars like a mouse, not a lion."
Markopolos first began looking into Madoff's investing record in 1999 when executives at his employer, Rampart Investment Management in Boston, asked him if the strategy could be duplicated. Markopolos says he became immediately suspicious because Madoff never reported losing money in any month. "I knew it was a fraud in about five minutes," he said. Further investigation showed that Madoff's claimed options trading exceeded by as much as 65 times the entire volume of the contracts he said he used.
While he failed to persuade regulators to investigate Madoff, Markopolos said he increasingly came to fear for his life. Though he had not received any threats from Madoff or any other parties, his nervousness reached the point where he was checking his car for bombs. "If this gets out to Bernie Madoff, my life expectancy isn't very long," he said, explaining his state of mind at the time. "He'd have many billions of reasons why he doesn't want me around."
Madoff, a former chairman of the Nasdaq, turned himself in to federal authorities in December 2008, admitting that his investment fund was a fraud. In March he pled guilty to 11 counts of fraud and other violations of securities laws. A sentencing hearing is set for June 16. The vast majority of the missing $65 billion will never be recovered, largely because it doesn't exist, Markopolos explained to the Boston College audience. The figure represents the total amount Madoff told his investors they had invested in his fund by 2008.
But Markopolos says the number is vastly inflated because it reflects decades of fictional compound investment returns. As in any Ponzi scheme, new money deposited in the fund mostly went back out to any prior investors who were making withdrawals. The scheme broke down last December because Madoff didn't have enough money remaining to cover $7 billion of requested withdrawals. During his speech, Markopolos praised another whistleblower who was sitting in the audience, Peter Scannell, who helped blow the lid off the mutual fund industry's market-timing scandal in 2003. After the speech, the two shook hands and sat down for a private chat.
BRICs Add $60 Billion Reserves as Zhou Derides Dollar
The BRICs are buying dollars at the fastest pace since before credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the U.S. currency. Brazil, Russia, India and China increased foreign reserves by more than $60 billion in May to limit currency gains as the first global recession since World War II restricted exports, data compiled by central banks and strategists show.
Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July. While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world’s reserve currency. Russia is proposing the BRICs consider creating a new unit of exchange when they meet in Yekaterinburg on June 16. China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries.
"Foreign central banks do not want to see their currencies relentlessly strengthen," said Daniel Tenengauzer, head of foreign-exchange and emerging-market debt strategy at Banc of America-Merrill Lynch in New York. "Such a move would dampen an already-weak outlook outside the U.S. and potentially risk even more capital-markets chaos if the dollar appeared to be heading toward a disorderly decline." The U.S. currency rallied in Asia today, gaining 1.3 percent against the Indian rupee to 47.74. Russia’s ruble fell 1.8 percent to 31.42 per dollar in London trading, while the yuan’s 12-month offshore forward contract, an agreement to buy an asset in the future, fell 0.5 percent to 6.731.
International reserve assets excluding gold held by the BRICs, an acronym coined by Goldman Sachs Group Inc. Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, total $2.8 trillion, a 7.8 percent increase from a year ago and 42 percent of the world’s total, data compiled by Bloomberg show. The real, ruble, and rupee strengthened and the Dollar Index posted its biggest decline in 24 years last month as signs the global recession may be easing spurred investors to seek higher-yielding alternatives to the U.S. currency. A net $26.1 billion has flowed into emerging-market equity funds this year, EPFR Global, which tracks $11 trillion worldwide, said June 4.
The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee 6.4 percent. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed. The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, lost 6.4 percent last month, the biggest decline since March 1985. It rose 0.9 percent today. Russian President Dmitry Medvedev proposed on June 5 that nations use a mix of regional reserve currencies to reduce reliance on the dollar. The subject may be on the agenda when he meets his counterparts in the Ural Mountains city of Yekaterinburg, the Kremlin said this month.
China’s central bank Governor Zhou Xiaochuan suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March. His Indian counterpart Duvvuri Subbarao hasn’t commented on that plan. IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take such a "revolutionary" step over time. Last month, China, the biggest importer of soybeans and iron-ore, and Brazil, whose main exports include soy, metals and petroleum, began studying a proposal to move away from the dollar and use yuan and reais instead.
"What we are seeing is a public expression of discontent over the dollar, yet nobody knows what needs to be done specifically," said Elina Ribakova, the chief economist in Moscow for Citigroup Inc. Brazil, the only country to break down its dollar purchases, acquired $2.8 billion of the greenback in May, Russia bought at least $17 billion of foreign currencies, while India’s reserves rose by $10.6 billion, central bank data show. China may have purchased $30 billion in foreign exchange last month, Hong Kong- based research company SJS Markets Ltd. estimates.
At the end of 2008 the dollar accounted for 64 percent of central bank reserves, up from 62.8 percent in June 2008, according to the IMF in Washington. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold. Federal Reserve holdings of Treasuries on behalf of central banks and institutions rose by $68.8 billion, or 3.3 percent, in May, the third most on record, Bloomberg data show. About 51 percent of the $6.36 trillion in marketable Treasuries are held outside America, up from 35 percent in 2000. China is the biggest foreign owner of Treasuries, increasing its holdings to $768 billion as of March from $60 billion in 2000.
A steeper dollar decline would hurt BRIC exports, devalue their reserves and worsen the global credit crisis, said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment banking arm of Credit Agricole SA. "It would be shooting yourself in the foot to sell U.S. assets and move away from dollars too quickly," said Kotecha. "As much as we are seeing in terms of rhetoric, the central banks have so much exposure they will be very careful." Intervention, where central banks buy or sell currencies to influence exchange rates, may help bolster the dollar, he said. The median estimate of analysts surveyed by Bloomberg is for the real to fall 7 percent to 2.1 per dollar by year-end, while the rupee will drop 0.6 percent to 48. The yen is forecast to weaken 4.4 percent.
"The dollar will stabilize against its major trading partners around the turn of the quarter," said Michael Shaoul, chief executive officer at New York-based institutional brokerage Oscar Gruss & Son Inc., who called the emerging-market rally in February. "It got stronger than was warranted during the crisis and weakened rapidly during the recovery." Investors abandoned emerging markets after the September bankruptcy of Lehman Brothers Holdings Inc. eliminated demand for all by the safest, most easily traded assets, such as Treasuries. The MSCI EM Index tumbled 54.5 percent last year. A shortage of the U.S. currency forced central banks to pump reserves into their economies. The Dollar Index rose 18 percent between June 30 and March 31.
Asian central banks, excluding China, ran down foreign- exchange reserves by more than $300 billion in the 12 months ended April 30, according to London-based HSBC Holdings Plc. Russia’s slid by $213 billion in the eight months ended March 31, central bank data show. Brazil’s reserves dropped $5.7 billion in the six months ended Feb. 27. Emerging-market central banks are buying dollars as stronger currencies threaten exports while the global economy contracts. The IMF estimates the world’s gross domestic product will shrink 1.3 percent this year. Trade worldwide will plunge 9 percent, the most since World War II, the World Trade Organization said in March.
Brazil’s $1.3 trillion economy, Latin America’s largest, may drop 0.73 percent in 2009, the biggest contraction in 19 years, according to the median forecast in a May 29 central bank survey. Russia’s economy will contract at least 6 percent, Medvedev said this month. China’s exports, which account for 60 percent of its GDP, slumped 22.6 percent in April from a year earlier, according to the government. "There might be a risk-appetite reversal which could mean some temporary dollar strength," said Peter Eerdmans, head of emerging-market bonds in London at Investec Asset Management Ltd., which manages $700 million in developing-nation debt. "We have taken profits on some of our emerging-market positions."
Brazil’s central bank President Henrique Meirelles said last month foreign currency flows are creating a "very favorable" condition for policy makers to boost reserves. "Given the breadth and depth of the U.S. economy in relation to the world economy, it is unlikely the dollar will be displaced as the principal reserve currency anytime soon," said Nikhil Srinivasan, who overseas $20 billion of assets as chief investment officer for Asia and the Middle East at Munich-based Allianz SE, Europe’s biggest insurer.
World airlines seen losing $9 billion this year
The world's airlines will collectively lose $9 billion in 2009 with revenues to shrink by $80 billion from a year ago, as the economic crisis saps air travel and cargo demand, a key industry body warned Monday. The International Air Transport Association said the revised loss estimate was nearly double the $4.7 billion it forecast in March, reflecting a "rapidly deteriorating revenue environment."
Although there has been growing signs of a bottoming out of the recession, IATA said the industry was severely hit in the first quarter with 50 major airlines reporting losses of more than $3 billion. Weak consumer confident, high business inventories and rising oil prices pose headwinds for future recovery, it said. Revenues are expected to decline by an unprecedented 15 percent from a year ago to $448 billion this year, and the weakness will persist into 2010, it said. "There is no modern precedent for today's economic meltdown. The ground has shifted. Our industry has been shaken. This is the most difficult situation that the industry has faced," said IATA Chief Executive Giovanni Bisignani.
IATA, which represents 230 airlines worldwide, also raised its forecast loss for last year to $10.4 billion, from $8.5 billion previously. It said passenger traffic for 2009 is expected to contract by 8 percent from a year ago to 2.06 billion travelers. Cargo demand will decline by 17 percent. IATA expects the industry fuel bill to shrink by $59 billion, or 36 percent, to $106 billion this year, accounting for 23 percent of operating costs with an average oil price of $56 a barrel. But crude oil prices have rallied in recent weeks, breaching the $70 a barrel level on Friday on hopes of economic recovery.
IATA said carriers in all regions were expected to report losses, with Asia-Pacific to be the hardest hit amid a sharp slowdown in its three key markets -- Japan, China and India. The region's carriers are expected to post losses of $3.3 billion, worse than the previous forecast of $1.7 billion but better than the $3.9 billion losses last year. North American carriers are expected to lose $1 billion, far better than its $5.1 billion losses in 2008, thanks to early capacity cuts and limited hedging by U.S. carriers.
Despite strong traffic, Middle East carriers will see losses deepen to $1.5 billion as the region's intercontinental hubs are vulnerable to recessionary impacts in Europe and Asia. A collapse for demand in premium services in all major markets will see European airlines lose $1.8 billion. Latin American carriers are expected to lose $900 million and African airlines $500 million. Bisignani urged governments to avoid protectionist policies and reiterated his call for more liberalization to bolster the global airline industry.
"Protectionism is the enemy of global prosperity...we cannot manage in these unprecedented times with one hand tied behind our back. Airlines need the same commercial freedoms that every other industry takes for granted -- access to global markets and capital," he said. IATA also called for a major reshaping of the air transport value chain to simplify business and cut costs to help airlines survive the global crisis.
OECD claims major economies are ‘close to low point’
Most of the world’s big economies are close to emerging from recession, according to data published on Monday by the Organisation for Economic Co-operation and Development that pointed to a possible recovery by the end of the year. The Paris-based organisation reported in its latest monthly analysis of forward-looking indicators that a "possible trough" had been reached in April in more developed countries that make up almost three quarters of the world’s gross domestic product. The composite index for 30 economies rose 0.5 points in April, the second monthly rise in a row, after falling for the previous 21 months.
The index seeks to identify turning points in the cycle about six months in advance. The OECD said its overall measure of advanced member countries – ranging from the eurozone and the UK to the US, Mexico and Japan – now pointed to "recovery" instead of the "strong slowdown" they had been suffering since last August. "It is still too early to assess whether it is a temporary or a more durable turning point," the organisation said. But the data "point to a reduced pace of deterioration in most of the OECD economies with stronger signals of a possible trough in Canada, France, Italy and the United Kingdom".
The improved global outlook came amid evidence that the US jobs market strengthened in May for the first time in 16 months. The Conference Board said its employment trends index moved up to 89.9 last month from 89.7 in April. This follows data last week that showed the US shed far fewer jobs than expected in May. "The moderation of the last two months is certainly a sign that the decline in job losses is real and signals that the worst is over," said Gad Levanon, economist at the Conference Board.
Twenty-two out of the 30 OECD countries saw a rise in forward-looking measures of activity. The US saw its first improvement in the outlook since July 2007, while Germany and Japan both among the worst hit economies in the developed world, saw an improvement in their outlook for the first time since early last year. China had seen a "possible trough", though India, Brazil and Russia were still facing a sharp slowdown, the OECD said. The OECD measure is based on data such as share price moves, inventory levels and consumer and business confidence in its member nations.
Ilargi: Münchau at the FT is losing it. No more critical thinking, but instead a set of preconceived notions against which the world is measured. which results in a warped scenario in which the biggest debtors can be made to walk victorious into a bright sunny future. Where he veers off the track should be obvious.
Down and out for the long term in Germany
by Wolfgang Münchau
Let me attempt, perhaps foolhardily, to map out a scenario of how the global economic crisis could evolve in continental Europe. Even if we assume a recovery elsewhere, Europe’s economy may be stuck at low growth for some time. To understand why, it is perhaps best to look at sectoral balances for households, companies and the public sector. The current account can be expressed as the difference between national savings and investments. Of the world’s 10 largest economies, the US, the UK and Spain used to run the largest current account deficits before the crisis. The US household sector has been shifting from a negative savings rate before the crisis to a positive rate of 4 per cent of disposable income now. The US corporate sector used to have a large negative savings rate, but this has almost disappeared. So far, the increase in net savings in the US private sector has been balanced by increased borrowing from the US government.
I am making three assumptions: the first is that the return to a positive US household savings rate is permanent – even under a scenario of a strong economic recovery. US households will take time to repair their balance sheets after the housing and credit disaster. Second, I also expect US companies not to return to the high level of borrowings that prevailed before the crisis. Third, I expect the US government to reduce its deficit after 2010. The recent rise in long-term bond yields should serve as a reminder that deficits cannot go on rising forever.
Taking all three factors together, the US will shift from a strongly negative current account balance towards neutrality, perhaps even a small surplus for a short period. I expect similar shifts in the UK and Spain at different magnitudes. Among countries with large current account surpluses, the three biggest are China, Japan and Germany. I am focusing on Germany here. The German household sector will maintain its high savings rate. The German government increased its deficit during the crisis, but is now looking for a quick fiscal exit strategy. The Bundestag has recently voted through a constitutional balanced-budget clause, which requires cuts in the deficit almost right away. Japan will probably maintain its larger fiscal deficit for longer, but if we take Germany, China and Japan together, we will not see a sufficient and sustained fiscal expansion to compensate for the sectoral shifts elsewhere.
Global current account surpluses and deficits add up to zero. So if everybody is saving more, who will be dissaving? It will have to be the corporate sector in the countries with large net exports. So if the US, the UK and Spain are heading for a more balanced current account in the future, so will the surplus countries. The current account balance can also be expressed as the sum of the trade balance, net earnings on foreign assets, and unilateral financial transfers. In several countries, including the US and Germany, the gap between exports and imports serves as a good proxy for the current account. A fall in the trade deficit in the US, UK and Spain implies a fall in the combined trade surplus elsewhere. And as some of the shifts in the US and the UK are likely to be structural, this will have long-term effects on others. In particular, it means the export model on which Germany, China and Japan rely, could suffer a cardiac arrest.
What about the argument that a large part of German exports goes to the rest of the eurozone? This is true, but there are imbalances within the eurozone too. Spain has been running a current account deficit of close to 10 per cent of gross domestic product. As that comes down, so will Germany’s equally unsustainable intra-eurozone surplus. Through what mechanism will this export-sector meltdown come about? My guess is that in Europe it will happen through a violent increase in the euro’s exchange rate against the US dollar, and possibly the pound and other free-floating currencies.
Exchange rate devaluation would greatly help the US and others to reduce their current account deficits, but it will impair the economic recovery in countries with large trade surpluses and free-floating exchange rates. Last week’s remarks by Angela Merkel, who criticised the Federal Reserve and other central banks for running inflationary policies, sharpened investor perceptions of transatlantic policy divergence and decoupling. Many investors are now starting to bet on a strong appreciation of the euro – the last thing Ms Merkel wants.
Neither Germany nor Japan is politically equipped to deal with an exchange rate shock. China may continue to manage its exchange rate, but the Europeans are much less likely to intervene in foreign exchange markets. For the time being, the governments of the classic export nations cling on to their export-based economic model, the model they know best. Their only strategy, if you call it that, is to hope for a miraculous bail-out from the US consumer – which is not going to happen this time. If my predictions prove correct, Germany will be down and out for a long time with a huge and still unresolved banking crisis, an overshooting exchange rate and lower net exports, presided over by politicians who panic about domestic inflation. This will not end well.
S&P Downgrades Ireland's Debt Rating
The debt rating of crisis-stricken Ireland was downgraded Monday by Standard & Poor's for the second time this year amid mounting worries over the cost of the government's bailout of the banking system. The credit-ratings agency said that it has lowered its long-term sovereign credit rating to double-A from double-A-plus and that the country's outlook remains negative. Though the new rating is still relatively strong, it could mean the country may have to pay higher interest rates to borrow money on bond markets as investors may demand more insurance on Irish government bonds in exchange for risking their money.
"We have lowered the long-term rating on Ireland because we believe that the fiscal costs to the government of supporting the Irish banking system will be significantly higher than what we had expected when we last lowered the rating in March 2009, and, consequently, that the net general government debt burden will also be significantly higher over the medium term," Standard & Poor's credit analyst David Beers said. S&P's downgrade comes after the nationalized Anglo Irish Bank reported a €3.8 billion ($5.31 billion) half-year loss and the government formed a new "bad bank" -- the National Assets Management Agency -- to buy an estimated €90 billion in defaulting loans from Irish banks.
S&P said the rating could be lowered again if asset quality in the Irish banking system deteriorates at a faster pace than expected and if, as a result of its support for the sector or due to an even more pronounced downturn in economic growth, the government's fiscal performance weakens further than it currently assumes. "Conversely, the outlook could be revised to stable if the Irish banking sector stabilizes more quickly and at a lower fiscal cost to the government than we now think likely," Mr. Beers said. Rival credit rating agencies Moody's and Fitch have also downgraded the country's debt in recent months amid concerns that Ireland's banks have been hit especially hard by a crash in the housing market and the deep recession.
China influence to grow faster than most expect: Soros
Financier George Soros said on Sunday that China's global influence is set to grow faster than most people expect, with its isolation from the global financial system and a heavy state role in banking aiding a relatively swift economic recovery. He reiterated his cautious views regarding the surge in global stock markets, although he said it may have further to go given liquidity in the markets and that many investors are still sitting on the sidelines.
"In many ways, Chinese banking has benefited from being isolated from the rest of the world and is in better shape than the international banking system," he told an audience at Shanghai's Fudan University. China's extensive capital controls have helped to shield its financial institutions from the worst of the global financial crisis. "The influence of the state is also greater. So when the government says 'lend', banks lend," Soros added. "This puts China in a better position to recover from the recession and that is in fact what has happened."
New loans by Chinese banks surged to record levels in the first quarter, spurring optimism over recovery prospects for the world's third-largest economy. "China is going to be a positive force in the world and the market, and as a consequence, its power and influence are likely to grow. Personally, I believe it's going to grow faster than most people currently expect," Soros said. He acknowledged that some doubts remain over China's economic recovery, however, noting data such as a continued fall in electricity consumption.
He also noted that China's aggressive 4 trillion yuan ($586 billion) economic stimulus program, announced last year, had bolstered the economy. "If that program proves inadequate, it is in a position to apply additional stimulus. China is also in a position to foster a revival of its exports by extending credit and investing abroad," he said. He reiterated his view that because China's economy is only one-quarter the size of the U.S. economy, it cannot replace the American consumer as the motor of the global economy, so global growth will be slower than in the past.
He sounded a more upbeat note for China's asset markets than for global markets overall, where he remained wary. "I'm pretty cautious. Even though I've said prices are cheap, I'm not so optimistic as to put all my money into stocks or assets because I think that the outlook is fairly uncertain. "I do, however, think that the Chinese economy is a promising economy. I think here it is more a matter of finding the right assets rather than saying that I'm not interested in investing."
Asked if the recent climb in global stock markets was a bear market rally, he said: "It may have further to go because there is a lot of liquidity, a lot of investors are on the sidelines. If the market keeps on going up, more of them may decide to join in. You never know how far the rally goes." "But I certainly don't think we are at the beginning of a big bull market worldwide."
IMF tells Europe to come clean on bank losses
The International Monetary Fund has called on eurozone governments to take urgent steps to clean up the banking system as losses mount, and advised the European Central Bank to prepare "all unconventional options" in case the crisis deepens. "To restore confidence, you need total disclosure of possible losses," said Dominique Strauss-Kahn, the IMF's managing director. "Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets. There are lots of things that still have to be disclosed," he said, adding that credit mechanism remained jammed.
The latest IMF report said the chance to raise fresh bank equity while optimism lasts should be "seized without delay" and demanded a "comprehensive review to assess capital needs and viability." "Stresses persist, conditions for access to bank lending are tight, funding costs remain high. Sizeable losses lie ahead as the recession unfolds. The financial sector is hamstrung in fulfilling its vital intermediation role." The IMF says eurozone banks will need to raise a further $375bn (£235bn), compared to $250bn for US banks, and has called for a stress-test along the lines of the US Treasury probe. There are widespread concerns that Germany in particular is hiding bank problems until after the September elections, using its "bad bank" scheme to keep "zombie institutions" alive.
The eurozone is not yet out of the woods, and risks sliding into a deeper downturn. "Adverse feedback loops between the financial and real sectors could trigger a protracted deflation," said the fund. Separately, Standard & Poor's cut Ireland's sovereign debt rating to AA on fears that its bank rescues will cost €20bn (£17bn) to €25bn and push the national debt above the danger level of 100pc of GDP. "The rating could be lowered again if asset quality in the Irish banking system deteriorates at a faster pace [or if] the average maturity of the government's debt shortens materially for a sustained period." The euro fell sharply, although analysts said Ireland's troubles may ultimately pose a greater risk for sterling for contagion reasons.
S&P has threatened to strip Britain of its AAA rating unless London gets a grip on spending. Austria is also in the firing line as concerns grow over bank exposure to Eastern Europe. Ireland's woes are compounded by the crushing defeat of the premier Brian Cowen's Fianna Fail, which lost all its seats in the EU elections. In Spain, the government announced a €9bn fund to rescue banks hit by the property crash. PriceWaterhouseCoopers said the sum fell far short of what is needed, fearing that Spain's banks will need at least €25bn and perhaps as much as €75bn in fresh capital. Non-performing loans will reach 7pc to 8pc, double the level in March.
Protests against Putin sweep Russia as factories go broke
Russia's prime minister, Vladimir Putin, is facing the most sustained and serious grassroots protests against his leadership for almost a decade, with demonstrations that began in the far east now spreading rapidly across provincial Russia. Over the past five months car drivers in the towns of Vladivostok and Khabarovsk, on Russia's Pacific coast, have staged a series of largely unreported rallies, following a Kremlin decision in December to raise import duties on secondhand Japanese cars.
The sale and servicing of Japanese vehicles is a major business, and Putin's diktat has unleashed a wave of protests. Instead of persuading locals to buy box-like Ladas, it has stoked resentment against Moscow, some nine time zones and 3,800 miles (6,100km) away. "They are a bunch of arseholes," Roma Butov said unapologetically, standing in the afternoon sunshine next to a row of unsold Nissans. Asked what he thought of Russia's leaders, he said: "Putin is bad. [President Dmitry] Medvedev is bad. We don't like them in the far east." Butov, 33, and his brother Stas, 25, are car-dealers in Khabarovsk, not far from the Chinese border. Their dusty compound at the edge of town is filled with secondhand models from Japan, including saloons, off-roaders and a bright red fire engine. Here everyone drives a Japanese vehicle.
Putin's new import law was designed to boost Russia's struggling car industry, which has been severely battered by the global economic crisis. It doesn't appear to have worked. In the meantime, factories in other parts of Russia have gone bust, leading to rising unemployment, plummeting living standards and a 9.5% slump in Russia's GDP in the first quarter of this year.
An uprising that began in Vladivostok is now spreading to European Russia. Last Tuesday some 500 people in the small town of Pikalyovo blocked the federal highway to St Petersburg, 170 miles (270km) away, after their local cement factory shut down, leaving 2,500 people out of work.
Two other plants in the town have also closed. The protesters have demanded their unpaid salaries, and have barracked the mayor, telling him they have no money to buy food. They have refused to pay utility bills, prompting the authorities to turn off their hot water. Demonstrators then took to the streets, shouting: "Work, work." Putin visited Pikalyovo on Thursday and administered an unprecedented dressing-down to the oligarch Oleg Deripaska, throwing a pen at him and telling him to sign a contract to resume production at his BaselCement factory in the town. He also announced the government would provide £850,000 to meet the unpaid wages of local workers. "
You have made thousands of people hostages to your ambitions, your lack of professionalism - or maybe simply your trivial greed," a fuming Putin told Deripaska and other local factory owners. But Deripaska had had little choice but to shut his factory, since Russia's construction industry has now virtually collapsed. Across Russia's unhappy provinces, Putin is facing the most significant civic unrest since he became president in 2000. Over the past decade ordinary Russians have been content to put up with less freedom in return for greater prosperity. Now, however, the social contract of the Putin era is unravelling, and disgruntled Russians are taking to the streets, as they did in the 1990s, rediscovering their taste for protest.
The events of last week in Pikalyovo also set a dangerous precedent for Russia's other 500 to 700 mono-towns - all dependent on a single industry for their survival. When their factories go bust, residents have no money to buy food. Seemingly, the only answer is to demonstrate - raising the spectre of a wave of instability and social unrest across the world's biggest country. Most embarrassingly for the Kremlin, the latest demonstrations took place just down the road from the St Petersburg Economic Forum, an annual global event designed to showcase Russia's economic might and its re-emergence as a global power. But after almost a decade of high oil prices - until last summer - Russia has done little to invest in infrastructure, or to help its backward, poverty-stricken regions.
The uprisings began last December when thousands gathered in Vladivostok, demonstrating against the new law on car imports. To crush the protest, and sceptical as to whether the local militia would do the job, the Kremlin flew in special riot police from Moscow. The police arrested dozens of demonstrators and even beat up a Japanese photographer. In Khabarovsk, around 2,000 drivers staged their own noisy protest, driving in convoy with flashing lights to the railway station. Protesters dragged a Russian-made Zhiguli car to their meeting, decorating it with the slogan: "A present from Putin". They signed it, then dumped it outside the offices of United Russia, Putin's party.
Among locals, resentment against Moscow is building. "There is no democracy in Russia. They promise a lot. But they don't listen," Butov said. He added: "Medvedev isn't my president. He's never in the far east." The Kremlin's intransigence could provoke a major backlash, he predicted: "In the next few years there could be a war between the east and west of Russia." The protests have carried on, with demonstrators regularly taking to the streets in Vladivostok, including last month. Russians in the far east all own right-hand-drive vehicles, which are cheaper to import than the left-hand-drive models used and manufactured in European Russia.
Until recently, the Kremlin had been relatively successful at concealing the scale of the protests, imposing a virtual media blackout. But the demonstrations have become more difficult to ignore. In April Kommersant newspaper reported that angry motorists had called for Medvedev and Putin to be blasted into space, while others waved a banner with the playful slogan: "Putler kaputt!", apparently comparing Putin, Russia's prime minister since last year, to Hitler. The authorities were not amused and launched an investigation.
"Russians are a very forbearing people," Yuri Efimenko, a historian and social activist in Khabarovsk said, sitting in a cafe close to the town's Amur river, which forms part of the border between Russia and China. "There isn't love towards the Kremlin, but there used to be respect. Now that's gone," he said. He added: "People have become more sceptical towards central power." According to Efimenko, there is little danger Russia will have a revolution. Instead of wanting to overthrow the Kremlin, most Russians want Putin to turn up personally and solve their problems - an age-old model in which Putin plays the role of benevolent tsar.
Analysts believe there is little possibility of an Orange Revolution in Russia, or much appetite for western-style reform. The big winner from the protests are the siloviki - the hardline military-intelligence faction, who advocate more state control of business, and want to get rid of the Kremlin's remaining liberals. The big loser is Medvedev, the hapless president, who may be turfed out of the presidency when his term expires in 2012.
In the meantime, Putin has been promoting Russia's indigenous car industry. Last week he took to the wheel of his Soviet-era Volga Gaz-21 car, giving Russia's patriarch a lift. He also gave a £505m loan to help AvtoVAZ, a struggling Russian car factory on the Volga. The Butov brothers, however, have a unanimous view of Russian-made cars. "They are crap," Roma said. He recalled how last month Khabarovsk officials gave a free Lada to a war veteran, to celebrate the annual Victory Day on 9 May. "The veteran drove it for a mile. Then it broke down. He came to me and asked if he could swap it for a Japanese model."
Europe swings Right as depression deepens
The establisment Left had been crushed across most of Europe, just as it was in the early 1930s. We have seen the ultimate crisis of capitalism -- what Marxist-historian Eric Hobsbawm calls the "dramatic equivalent of the collapse of the Soviet Union" -- yet socialists have completely failed to reap any gain from the seeming vindication of their views. It is not clear why a chunk of the blue-collar working base has swung almost overnight from Left to Right, but clearly we are seeing the delayed detonation of two political time-bombs: rising unemployment and the growth of immigrant enclaves that resist assimilation.
Note that Right-wing incumbents in France (Sarkozy) and Italy (Berlusconi), survived the European elections unscathed. Left-wing incumbents in Germany, Austria, the Netherlands, Spain, Portugal, Hungary, Poland, Denmark, and of course Britain were either slaughtered, or badly mauled. The Dutch Labour party that has dominated national politics for the last half century fell behind the anti-immigrant movement of Geert Wilders (banned from entering Britain). It serves them right for the staggeringly stupid decision to force through the European Constitution (renamed Lisbon) after it had already been rejected by their own voters by a fat margin in the 2005 referendum.
The Portuguese Socialists face Siberian exile after seeing a 18pc drop in their vote. The slow drip-drip of debt-deflation for a boom-bust Club Med state, trapped in the eurozone with an overvalued exchange rate (viz core Europe, and the world), has suddenly turned into a torrent. The country is already in deflation (-0.6pc in April). It has been suffering its own version of Japanese perma-slump for half a decade. Portugal's opposition is calling for an immediate vote of no censure, while the Government clings to constitutional fig-leaves to hide its naked legitimacy. "O Governo está na sua plenitude de funções," said the chief spokesman. You can guess what that means. Not long for this world, surely.
In Germany and Austria, the Social Democrats suffered their worst defeats since World War Two. I don't say that with pleasure. A vibrant labour-SPD movement is vital for German political stability. It was the peeling away of Socialist support during the Bruning deflation of the Depression years -- so like today's Weber-Trichet deflation -- that led to the catastrophic election of July 1932, when the Nazis and Communists took half the Reichstag seats. This will not happen again, thankfully, because there is no Bolshevik threat luring business into a Faustian pact with Fascists. But the picture is not benign either. Unemployment in Germany may reach 5m by the end of 2010, according to the five 'wise men' , even if recovery comes on schedule.
But as readers know, I still fear that this depression is quietly deepening. The savings rate is rocketing in the deficit states of the US, UK, Spain, et al, as the "sinners" belatedly tighten their belts, but their fall in consumption is not being matched by an offsetting rise among the surplus "saints" states, China, Japan, Germany-Netherlands, which all points to an implosion in world demand. Yes, the West is printing money. But that is a harder to trick to pull off than Friedman and Bernanke ever realized. And core Europe is not really printing anyway beyond its chump-change dallying in the covered bond market.
In Ireland -- now crucifixion laboratory for the EMU, and downgraded again today to AA by S&P -- the ruling Fianna Fail lost every single in the European Parliament. It is the party's worst defeat since the creation of the Republic. Premier Brian Cowen cannot be long for this world either. As for Gordon Brown, I can only say that having derided UKIP as fringe losers, his attempt to cling top office after UKIP trounced him is quite astonishing. I find it odd that the press continue to talk about a leadership change as if Labour could possible keep going for another year, with yet another unelected prime minister, and with its authority reduced to tatters. This Parliament ought to be dissolved immediately. An election ought to be called this week.
It is shocking that Westminster's inbred family still cannot see the writing on the wall. If this sorry saga goes on much longer, we may have to conjure up some sort of medieval impeachment process. (My colleague Phil Johnston says no such mechanism exists. Pity) So, we may lose three or four governments in Europe in coming days or weeks -- or even worse, they may survive. The drama is unfolding as I feared. Half way through the depression, we are facing the exactly the sort of political disintegration that occurs in times of profound economic rupture.
Remember, the dangerous phase in the Great Depression was Stage II, after the collapse of the collapse of Austria's Credit-Anstalt in mid-1931 set off a disastrous chain-reaction that Autumn (until then, most people thought they faced no more than a bad recession, like today). Don't count on the political fabric of Europe holding together if our green shoots shrivel and die in the credit drought of the long hot rainless summer that lies ahead.