Girl sitting alone in the Sea Grill in Washington, D.C. waiting for a pickup.
'I come in here pretty often, sometimes alone, mostly with another girl, we drink beer, and talk, and of course we keep our eyes open -- you'd be surprised at how often nice lonesome soldiers ask Sue, the waitress, to introduce them to us'
Ilargi: Tim Geithner apparently is going to pressure the EU to conduct stronger stress tests for its banks, in order to, in the words of the IMF, "...secure recovery and a return to self-sustaining growth". Is "self-sustaining growth" even more ridiculous than "sustainable growth"? What's wrong with people saying things like that? And how do they get in positions that allow them to make decisions, any decisions? Or is that kind of brain damage a prerequisite for the job? And by the way, if it is indeed a "return" to self-sustaining growth, we must have had it before. So what happened, it couldn't sustain itself?
Anyway, so the US, boasting the strength and the transparency (I kid you not) of its own stress tests, now demands Europeans test their banks in similar ways. And that is just plain, eh.. funny (I already used the word “ridiculous" above). Here's why:
However you look at it, it's curious (and that's the flattering variant) that on the same day that Elizabeth Warren -who, remember, works for the government- presents a new TARP review report which very clearly states that stress test assumptions used so far are way too rosy and more testing is urgently needed, Tim Geithner decides to let banks pay back TARP funds anyway. One arm of the government warns that the banks may well be much less healthy than generally presumed, and another arm says: go feck a deck, we don’t care what you say, we do what we want anyway. Say what you will, but that does not depict a well-functioning administration.
Elizabeth Warren heads a Congressional Oversight Panel, and it might be a sound idea for Congress to ask Geithner: what the feck is that all about? Warren has said a lot of the right things, but I'm not her biggest fan, for the simple reason that she's still there and lets herself -and the people she works with- be treated like that time and again.
Still, if we leave that aspect aside, what we have is one of the country's main experts on the subject saying that the US stress tests, which are being touted as the great example the world should follow, have so far utterly failed to function as intended. And we have the Treasury of the Secretary, the no.1 responsible party for them, completely ignoring that fact.
Geithner doesn't stop there. The head of the FDIC, Sheila Bair, gets the same sort of treatment, She has loudly clamored for changes at the top of Citigroup for weeks now, but Geithner ignores her and buys the country a 34% stake in Citi through a $58 billion stock swap, a deal worth perhaps some $36 billion (the amount in losses the bank had to make up for), as Citi's market cap stands at $18 billion), up from about $7 billion recently, and 34% of that is, no matter how you twist it, at the most $6 billion. I realize that's a simplistic take on it, but perhaps that's what is called for to make the new owners (you and you and you) understand.
Sheila Bair doesn't have the advantage of the full Congress standing behind her (HA!), the FDIC is part of the Treasury and Geithner is her boss who can do whatever the feck he wants with her advice. Which he does. Still, the fact that Timmy's master whisperer, Robert Rubin, is a Citi man, should in reality exclude him from making any decisions on the topic, in order to avoid conflict of interest issues. Yeah, I know, funny thing to say as well. Those considerations, ethical politics and all that, went out the White House windows long ago.
But that doesn't change the fact that it's ridiculous (there's that word again) that banks get to repay TARP funds, freeing them from oversight and bonus restrictions, as long as they, after those payments, still remain awash in other sources of taxpayer cash, not the least of which was thrown at them through the Bear Stearns and AIG bailouts. All this does is free up more potential conflicts of interest, and I think we can agree that there's no lack of that as things are right now.
Not surprisingly, the regulatory reforms both Obama and Geithner couldn't stop talking about since they grabbed power, are very simply not going to happen. If it ain't working, don't fix it. Use it to your advantage. The flaws of the present US financial regulatory system are very obvious. It doesn't exist other than in name.
TARP Watchdog: Repeat Bank Stress Tests 'Right Now'
The Congressionally-appointed panel overseeing the Troubled Asset Relief Program (TARP) recommends running again the stress tests on US banks, as economic conditions have worsened, its chair, Harvard University professor Elizabeth Warren, told CNBC Tuesday. "We actually make recommendations to do it all over again right now," Warren told "Squawk Box." "We've already blown past the worst-case scenario on unemployment," she added.
Under the tests, whose results were released in May, the Obama administration asked federal regulators to examine how financial institutions would hold up under two different economic scenarios as well as how much new capital they would need to raise to shore up their balance sheets. The tests concluded that ten banks — including some of the biggest, such as Citigroup, Bank of America and Wells Fargo — would need to raise almost $75 billion in capital; the firms were also required to present plans on how to do so by June 8. The government is prepared to loan money to those companies that are unable to raise capital from private sources.
The oversight panel's report noted that the unemployment rate is now 9.4 percent, with a 2008 average of 8.5 percent. "If the monthly rate continues to increase during the remainder of this year, it will likely exceed the 2009 average of 8.9 percent assumed under the more adverse scenario," the report said. The report will be presented in its final form to the Joint Economic Committee of Congress Tuesday.
Other reasons for concern are that the model used in the Treasury's stress tests stretches on less than two years, while many commercial mortgages are coming up in 2011, 2012 and 2013, Warren said. Although the Treasury has been more transparent on this than at any point in its history, more details are needed to boost transparency, she added. "They need to give us more information, when you've got more information, you've got confidence," Warren said.
Ten US banks to repay Tarp funds
The US Treasury said on Tuesday that it would allow 10 banks to repay government aid because they had raised sufficient capital. The Treasury will recoup $68bn, much more than it had originally expected, if the banks choose to return the full amounts that they received. The swift return of the funds is a sign that some stability has returned to a sector that was stricken last year and could restore confidence in US banks. “These repayments are an encouraging sign of financial repair, but we still have work to do,” said Tim Geithner, US Treasury secretary, said in a statement.
The Treasury did not reveal the names of the banks that are now eligible to begin the first wave of repayment. But people familiar with the matter said that the banks, all of which passed last month’s government stress tests, included JPMorgan, American Express and Goldman Sachs, plus Morgan Stanley, which had a capital shortfall. Northern Trust, BB&T, State Street, US Bancorp, Bank of New York Mellon and Capital One Financial will also make repayments. On Tuesday Morgan Stanley said it would be repaying its $10bn with “an attractive return for taxpayers.”
The move comes after weeks of negotiations between Wall Street executives and regulators over how much equity they needed to raise before they could begin paying back funds borrowed through the government’s Troubled Asset Relief Programme (Tarp). Wall Street chiefs disagreed with the authorities over whether the Federal Reserve had made it clear that an equity offering was a condition for inclusion in the first wave to repay government funds. Banks were also required to show that they could issue long-term debt that is not guaranteed by the US government.
Last month US authorities ordered 10 of the nation’s largest banks to add a total of $74.6bn in equity following the completion of stress tests, triggering a frenzy of activity as banks lined up to announce capital-raising plans. Banks have been working to repay the government quickly to free themselves of government involvement in matters such as hiring and executive pay. ”This is not a sign that our troubles are over; far from it,” Barack Obama, US president, said in prepared remarks on Tuesday. ”The financial crisis this administration inherited is still creating painful challenges for businesses and families alike. But it is a positive sign.”
Offerings last week by JPMorgan, which sold $5bn of shares, and American Express, which raised $500m, took many investors by surprise because the two were among the banks deemed not to need capital after last month’s tests. Jamie Dimon, JPMorgan’s chief executive, has said he did not believe the ability to tap capital markets should have been a relevant test for his bank. The Treasury announcement on Tuesday splits the banking sector between institutions that were qualified to repay Tarp funds and those, such as Citigroup and Bank of America, that are not yet ready. Citigroup on Monday confirmed it would launch a long-awaited $33bn capital raising this week in a move aimed at allaying investors’ fears over the offering and concerns over mounting regulatory pressure.
Some, such as the Congressional Oversight Panel, are more sceptical about the health of America’s banks. On Monday a Tarp oversight committee issued a report arguing that if banks continue to hold illiquid mortgage securities they should continued stress testing. However, separately on Monday, the Fed said that the 10 banks required to boost their capital buffers had successfully submitted capital raising plans in the event of the “more-adverse” scenario of a worsening economic downturn and that it would work with them to move their plans forward.
U.S. to Press Europe for Tougher Bank Stress Tests
The Obama administration wants Europeans to put their banks through more rigorous public stress tests to help ensure that the institutions survive if the economy slips from bad to worse. Treasury Secretary Timothy Geithner will likely discuss the issue in Italy later this week during closed-door meetings with finance ministers from the Group of Eight leading nations. The U.S. has an ally in the International Monetary Fund, which on Monday warned that economic recovery in the euro zone could be retarded by banks burdened with bad assets. "To secure recovery and a return to self-sustaining growth, policy makers need to take further decisive action, especially in the financial sector," the IMF said in a report.
Mr. Geithner could encounter resistance, however, from his European counterparts, many of whom argue that publicizing the weaknesses of individual banks increases the risk that they will fail. In May, the IMF called for European authorities to follow the U.S. in conducting stress tests. That same month, the Federal Reserve and other bank supervisors released the results of tests conducted on 19 major U.S. bank holding companies and concluded that 10 of them required a total of $75 billion to bolster their capital. The supervisors set a Monday deadline for regulators to approve their plans to raise fresh funds. Bank regulators from the 27-nation European Union said last month they will conduct confidential national stress tests for their banking sectors by September.
But they are aimed at ascertaining the financial system's resilience to shocks. They aren't being conducted on an individual bank level, and neither the standards used nor the results collected are to be made public. "They are doing it in their own way, but they're not doing it in the level of detail that we are," says Edwin M. Truman, a veteran U.S. economist who until recently advised Mr. Geithner on international issues. "They're certainly not in the same position we are in terms of disclosing results." Mr. Geithner believes "there is room for greater disclosure…and that's good for the system," says Mr. Truman. "We continually exchange views with other countries about what worked in our own country and what hasn't and why," says Andrew Williams, a Treasury spokesman.
France expects Mr. Geithner to press the stress-test issue at the finance ministers meeting in Lecce, Italy, even if the topic isn't formally on the agenda, according to a French finance-ministry official. Some euro-zone policy makers contend the bloc's different national markets and banking structures would make continent-wide stress tests impractical and less useful than in the U.S. But at a monthly gathering of euro-zone finance ministers in Luxembourg on Monday, some policy makers lobbied for pan-European measures of banking-sector weakness. "We need European Union-wide stress tests," Finnish Finance Minister Jyrki Katainen told reporters on the sidelines of the meeting. "We can't see a sustainable recovery until we have seen the end of this [banking] crisis."
Paris has urged more transparency in the banking system, but doesn't publish the results of its stress tests. Officials there have said they are satisfied with the tests already conducted on the country's top six banks. France would agree to conducting and publishing EU-wide stress tests provided that every European country were on board—and that all banks are subjected to one set of test criteria. "I'm totally for stress tests at the European scale, with results published on a country-by-country basis," European Central Bank board member Christian Noyer said at a French senate hearing last month. Germany has been skeptical. After the IMF suggested early last month that the EU might follow in U.S. footsteps, German Finance Minister Peer Steinbrück said EU-wide stress tests could undermine confidence in the region's banking system.
The U.K., Ireland and Switzerland have conducted stress tests on individual banks, but have released limited information on the standards used. Some bankers, including Stephen Green, chairman of U.K.-based HSBC PLC, have criticized the U.S. approach, saying that the public haggling between banks and the government over appropriate capital injections undermines confidence in the process. The IMF estimated in April that European banks would need another $600 billion to cover losses and rebuild capital by the end of next year, compared with $275 billion for U.S. banks.
In a speech in Montreal on Monday, IMF Managing Director Dominique Strauss-Kahn said bad assets on bank books constitute the biggest risk to an economic recovery. "You never recover until the cleansing" has been completed, he said, according to news reports. The finance ministers' meeting is one of several top-level gatherings to prepare for next month's G-8 summit in L'Aquila, Italy, to be attended by President Barack Obama and leaders from the U.K., France, Germany, Italy, Japan, Canada and Russia.
ECB Expects No Recovery Before 2010
The European Central Bank expects further financial-sector weakness could help keep the euro-zone economy from expanding before the middle of next year, a top policy maker said in an interview. ECB officials believe the euro-zone recession could weaken the 16-nation bloc's strained banking system, said Yves Mersch, who sits on the ECB's 22-member Governing Council. "That is the reason why we are also cautious about the gradual recovery path in our scenario."
Mr. Mersch, head of Luxembourg's central bank, is a lawyer and political scientist whose influence on ECB policy exceeds the tiny nation's importance in the euro zone's economy. In the interview, he said financial-sector weakness, which could push more European banks to fail, is "already penciled in" to policy makers' calculations. He suggested policy makers see their role shifting from actively shoring up the bloc's financial system and economy to monitoring the effect of measures they have taken. "But if the ceiling is falling on our head," he added, noting developments could turn out worse than the central bank expects, "we have to change."
Data out Tuesday suggest stabilization in the euro zone may be a ways off. German exports resumed their slide in April, falling 4.8% from March, when they rose for the first time in six months. Compared with April 2008, exports in Europe's largest economy slid 28.7% -- the worst drop since records began in 1950, according to the Federal Statistical Office. Analysts chalked up the severity of the export slide in part to technical effects, but Germany's industrial production also disappointed, falling 1.9% in April from March against economists' expectations of a 0.5% slide.
There also are signs that the downturn's intensity is weakening. Germany's economics ministry said in a statement that "the chances for a foreseeable bottoming-out of industrial production have improved," as the pace of the sector's slide slows. France's central bank Tuesday revised its forecast for the country's second-quarter output to a 0.5% fall from an earlier forecast of a 0.6% drop and said its business-sentiment indicator rose in May, though it remains well below its long-term average. The ECB expects the euro zone's first quarter -- when output contracted by an annualized rate of nearly 10% -- to mark the recession's trough, Mr. Mersch said. But he cautioned against overplaying recent signs of stabilization: "We are reaching the valley, but we have to walk through the valley."
European finance ministers, in Luxembourg on Tuesday for a regular monthly meeting, dealt a blow to the ECB's hopes of taking on a new banking-supervision role. The officials backed a recent European Union proposal for a unified regulatory body to replace the current patchwork of national supervisors. But they balked at the EU's proposal to put the ECB president in charge of a new body to monitor the buildup of financial risks across the 27-nation bloc, leaving open the option that another central-bank head could take the post. The U.K. -- Europe's financial center -- is wary of ceding supervisory power to the ECB. EU leaders will take up the negotiations at a Brussels summit next week.
Bair's defeat and Beltway politics
The latest reports indicate support from Treasury Secretary Timothy Geithner has helped Citigroup Inc. CEO Vikram Pandit to fend off Sheila Bair's attempt to push him out of his job. According to Bloomberg Monday, the Treasury will complete an agreement to take a 34% stake in New York-based Citigroup, allowing the firm to complete an exchange of preferred shares for common stock announced three months ago. The $58 billion stock swap was reportedly held up as the Federal Deposit Insurance Corp. chairman pressed to have Pandit replaced with an individual with commercial banking, rather than investment banking experience.
Citing "people with knowledge of the Treasury Secretary's views," Bloomberg said Geithner insists that Pandit's turnaround plan be given time to work. The notion that Bair was trying to push out Pandit was first reported in the June 5 Wall Street Journal. Reports that she has been defeated only one business day later raises doubt about the veracity of the initial report of her meddling. Given that the Fed, not the FDIC, is Citi's primary regulator, it would be a breach of protocol for Bair to press hard for the ouster of an executive on the fringes of her jurisdiction. But a great way for her rivals to undermine her would be to leak news of her straying beyond her authority and then being slapped back.
She has ruffled plenty of feathers -- including Geithner's -- and there are quite a few who might like to tarnish her reputation. Bair made Geithner look bad in front of Congress earlier this year when she said mortgage foreclosure mitigation provisions being undertaken by Treasury were too timid. She also has been accused of a power grab for all but demanding that the FDIC be given the assignment if Congress allows regulators to seize and wind down failed nonbank financial firms. -
Regulators are opaque, too
So much for more transparency in the financial system. It’s hard for regulators to demand greater transparency from Wall Street banks when they can’t even live up to their own standard of greater disclosure. A case in point is the Treasury Department’s press release touting its decision to permit “10 of the largest U.S. financial institutions” to begin repaying $68 billion in federal bailout money. The only trouble is Treasury doesn’t name any of the banks that can begin repaying money to the Troubled Asset Relief Program.
Treasury, it appears, has left it up to each of the “10 of the largest U.S. financial institutions” to make their own announcements about their intentions to repay the TARP. And some, like Morgan Stanley, didn’t waste anytime putting out a PR trumpeting its plan to repay $10 billion in TARP money. Now it’s not like this list of banks is any big secret. For weeks now, it’s been well-known that Goldman Sachs, JPMorgan Chase, American Express, Bank of New York Mellon–to name a few–were itching to repay the bailout money. But this is a question of government accountability. If Treasury has made a decision to allow banks to repay TARP, it should tell us which banks it has given the all clear to. Why should it be left up to the banks to tell us? After all, isn’t it the taxpayers’ money that’s being passed around here.
Nor should Treasury officials pass on the names of the banks in so-called “background” sessions with favorite reporters. The best government is one that is run in the open–not in some closed-door Washington, D.C. conference room. This refusal on Treasury to do something as simple as print the names of the “10 of the largest U.S. financial institutions” is similar to the same kind of arrogance the NY Fed displayed during the early days of the goverment’s bailout of American International Group. The NY Fed, if you recall, refused to provide a list of the banks it was buying rotting CDOs from, in order to retire some $70 billion in credit default swaps that AIG had written on those securities backed by subprime mortgages.
At the time, the NY Fed claimed if it divulged the names of the banks selling CDOs to a Fed-sponsored entity called Maiden Lane III, the financial firms might be wary of doing business with the government. That argument sounded like a bunch of rubbish back then because the arrangement was beneficial to both the banks and AIG. But wait a minute. Who was the president of the NY Fed when Maiden Lane III was put together. That’s right Tim Geithner, the man who now runs Treasury. It’s hard to see how Geithner will have the courage to really reform the financial system when he still too willing to play footsie with Wall Street bankers and can’t even do what he preaches on the need for transparency.
Did The Government Reject Any Applications To Repay TARP?
The Treasury announcement today that 10 of the largest financial institutions participating in the TARP's Capital Purchase Program have met the requirements for repayment carefully avoided answering one important question: did any financial instituion fail to meet the requirements? This is an important question. There is already speculation that Wells Fargo may have asked to get out of the TARP and been rejected. After all, Wells Fargo has been very vocal about wanting out.
In fact, it's been widely reported that Wells never wanted to take TARP funds at all. Treasury Secretary Tim Geithner has shown a reckless disregard for the law when it comes to TARP repayment. He proposed various tests for TARP repayment, including the ability of a bank to borrow outside of explicit government guarantees and the ability to privately raise new capital. But the law actually prohibits such conditions, explicitly saying there should be no barrier to repayment.
Even now its unclear exactly what makes some institutions eligible to complete the repayment process and what makes some ineligible. The Treasury's failure to handle this matter transparently is problematic, although characteristic of the Obama administration's tactic of talking about transparently while keeping its cards very close to its vest. Shouldn't taxpayers be allowed to evaluate the government's criteria for TARP repayment? Shouldn't there be a public debate about the application of this criteria to various financial institutions?
Geithner Says SEC, Bank Regulators Key to Executive-Pay Limits
Treasury Secretary Timothy Geithner said federal bank regulators and the Securities and Exchange Commission will play key roles in the administration’s effort to change the way financial executives are paid. Geithner said the Obama administration is moving ahead with its guidelines on corporate compensation, part of a broader plan for an overhaul of financial regulation that will be announced next week. Changes are needed so bank executives aren’t enticed to take on too much risk, he said.
“As you’ll hear from us in the next few days, the SEC has some important responsibilities and obligations in this area and some tools and authorities they may seek in this area,” Geithner said in testimony today before a Senate Appropriations subcommittee. He said the SEC will be at the “core” of the effort, along with the Federal Reserve and other bank supervisors. The Treasury secretary reiterated his call for giving regulators new powers to manage the failure of a large firm. Geithner said a “council” of regulators “has a lot of merits,” adding that oversight authority won’t be concentrated in “one place.”
U.S. efforts to stabilize financial markets, while necessary to avoid a further crisis, could also encourage excessive risk-taking in the future unless financial regulation is modernized, Geithner said. The Treasury is moving ahead with new programs to help banks deal with legacy assets that continue to clog balance sheets, using a combination of public and private investment, Geithner said. Answering questions from lawmakers, he said the Treasury intends to press ahead with the components of the Public-Private Investment Program, even if bank demand is low.
“There is some concern in the market still about participation,” Geithner said, noting worries that the rules of the government programs could keep changing. Also, banks have found it easier to raise funds since regulators concluded their stress tests of how the institutions would respond to a range of economic scenarios. Geithner said the tests made it possible for banks to raise almost $90 billion through equity offerings and bond issuance. Earlier today, Geithner’s department approved 10 banks to buy back $68 billion of government shares issued as part of capital purchases under the $700 billion Troubled Asset Relief Program. In a separate statement, Geithner called the repayments “an encouraging sign of financial repair.”
The TARP appears to be big enough to pay for the administration’s financial rescue efforts, Geithner said in the hearing. He said that there are no plans to seek more money from Congress, and that he’s not sure whether the program will need to be extended into 2010. In his prepared testimony, Geithner urged other nations to join the U.S. in efforts to repair financial markets and spur a recovery, days before meeting counterparts from some of the world’s biggest economic powers. “Our financial-reform effort in the United States must be matched by similarly strong efforts elsewhere to succeed,” Geithner said. Geithner is scheduled to attend talks with finance ministers from the Group of Eight countries meeting in Lecce, Italy, on June 12-13.
“Recovery here depends on recovery abroad,” he said. “We are working closely with other major economies to put in place the fiscal stimulus and make the financial repairs necessary to ensure U.S. and global recovery.” The U.S. is experiencing early signs of economic improvement, while continuing to face “very substantial” challenges, Geithner said. He said house prices are declining at a slower rate than before, and he expects a surge in mortgage modifications once the administration’s homeowner assistance programs become established. Geithner said the U.S. will need to bring its budget deficits down once the immediate need for emergency spending programs has passed.
Finance Reforms Pared Back
The Obama administration is backing away from seeking a major reduction in the number of agencies overseeing financial markets, people familiar with the matter say, suggesting that the current alphabet-soup of regulators will remain mostly intact. Administration officials had suggested they might push for major regulatory consolidation in the wake of the financial crisis. But now they expect to call for most existing agencies to have broader powers to limit risk-taking by financial institutions, say the people familiar with the planning.
The administration, for example, is unlikely to call for merging the Commodity Futures Trading Commission and the Securities and Exchange Commission, an idea it had considered, these people say. It also isn't expected to call for the Federal Reserve, Federal Deposit Insurance Corp. or the Office of the Comptroller of the Currency to cede their primary authority to supervise banks, they say. Administration officials caution that no final decisions have been made, and the recommendations remain somewhat in flux.
The decision is partly practical and partly political. Key administration officials believe they can achieve many of their goals by overhauling rules, such as imposing tougher restrictions on how much capital banks must hold to cushion against losses. Officials worry that trying to start from scratch could ignite messy turf battles that might slow or even derail the entire process. Treasury officials have said they are willing to engage in political fights they view as a "necessity," rather than those they see as a "choice." Separately, at a meeting of Group of Eight economic officials in Italy this week, Treasury Secretary Timothy Geithner is likely to present the U.S. view that Europe should conduct more vigorous and transparent stress tests of their own banks. The Obama administration believes such tests conducted in the U.S. in recent months helped stabilize the financial system.
The revamping of Wall Street oversight, which the administration has said is vital to prevent another crisis, will nonetheless profoundly change the regulatory environment for finance. Assuming Congress enacts the administration's proposals, unregulated parts of Wall Street, such as certain large hedge funds, will be brought under Washington's umbrella for the first time. In addition, regulators will be given power to oversee systemic risks to the economy, and to take over large, failing financial institutions. The Federal Reserve will likely emerge stronger, gaining power to oversee companies, financial products and industry practices that might pose systemic risk.
The plan also appears to be good news for the Office of the Comptroller of the Currency and FDIC, which would gain power and retain most of their jurisdiction, and the CFTC, which has faced calls for its abolishment. What it means for the SEC is less clear. The administration may propose merging the beleaguered Office of Thrift Supervision with another agency. The OTS regulates savings and loans, and oversaw several of the biggest companies to fail or nearly collapse during the crisis. But sidestepping a major regulatory restructuring could spark criticism that the administration has missed a once-in-a-lifetime chance.
"It's not only an opportunity, they are avoiding a necessity," says Hal Scott, a professor at Harvard Law School. "I understand all these political forces -- they've been obstructing necessary change for decades. But we are in a very serious situation. The regulatory system has demonstrated its inability to function, and I really think its incumbent on somebody to do what's right." Just a few weeks ago, top administration officials hinted they would tackle a reorganization. "I personally believe we need to, and I think the president believes we need to have a much more simplified, consolidated oversight structure," Treasury Secretary Geithner said in May. "Our system now is too complex."
Rather than seeking additional consolidation, the administration's plan now appears to be focused on setting up new rules for containing risk. Government officials believe that if they fill gaps between agencies and eliminate overlaps, banks and other companies will be less able to shop for light oversight. "History shows that opportunities for real reform are often short-lived," Federal Reserve Governor Daniel Tarullo, who has close ties to the White House, said in a speech Monday. "Momentum can too easily be lost, and the return of better times too easily leads to complacency." U.S. officials have spent months trying to convince foreign officials they are serious about revamping supervision of financial markets. Even defenders of the current system concede it leaves room for bureaucratic fiefdoms of powerful regulators who clash and jockey for turf.
The White House and Treasury have spent months crafting an overhaul of financial-market rules, which Mr. Obama has said is a top priority. Senior officials, including Mr. Geithner and National Economic Council Director Lawrence Summers, have met with numerous experts, lawmakers, and policy makers, including former House Financial Services Committee Chairman James Leach and former Fed Chairman Paul Volcker. Mr. Geithner is scheduled to meet on Tuesday with Fed Chairman Ben Bernanke, Comptroller of the Currency John Dugan, and Federal Deposit Insurance Corp. Chairman Sheila Bair to discuss the effort.
Top lawmakers have already signaled there would be little political support for getting rid of multiple regulators and centralizing power. "There are a lot of other issues you want to talk about, it seems to me, before settling on a 'number' " of regulators, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said in an interview. "What are their functions?" House Financial Services Committee Chairman Barney Frank (D., Mass.) said Democrats also would push to create a regulator to protect consumers from risky financial products. He said lawmakers would focus more on the powers of regulators than on the regulatory structure.
The administration also is focusing on how to improve investor protection and insurance regulation, which is currently handled at the state level. A central component of the administration's plan could give the Federal Reserve more power to monitor systemic risk. To assuage political concerns that too much power might rest with the Fed, administration officials are considering the idea of allowing several agencies to serve as a kind of "systemic-risk council" that would operate in conjunction with the Fed. It is unclear how the Fed and this council would interact. Congress will have to approve many of the changes. Mr. Obama is scheduled to outline the plan on June 17.
What's Happening At Citigroup?
Of all the banks embroiled in the Troubled Asset Relief Program, Citigroup has to be the one that’s taken the brunt of the bad-mouthing. Even as investors have bid up shares in beleaguered rivals such as Bank of America and Wells Fargo, no one wants to admit that Citi might just go on to live another decade. While shares in most major financial services companies have soared lately, Citigroup is still stuck in the doldrums, hanging around the $3 level.
For sure, there’s been little PR effort at Citi. Having taken $45 billion of government bailout funds, the bank is now being criticized for having skirted Treasury Secretary Timothy Geithner’s guidelines on pay at banks, due this week. Earlier in the year, Citi paid London bankers Rachel Lord and Stefanos Bitzakidis over $3 million in guaranteed bonuses to move from Morgan Stanley. That has left taxpayers and government officials enraged, while Citi says that the sums were necessary to attract top talent.
“In this economy, I would imagine they would be able to recruit talent without having to pay huge bonuses,” Douglas Wigdor, a New York attorney who is representing five women suing Citi over their layoffs late last year, told Forbes.com. Three months behind schedule, Citi announced Monday that it would begin a $58 billion stock swap in order to replenish the bank with the $36 billion in losses it has assumed in the previous six months. That will give the U.S. Treasury Department a 34 percent stake in the bank.
There was another reason for Citi shareholders to be glum Monday, too: it marked the first day of trading with the bank being excluded from the Dow Jones Industrial Average. Last week, News Corp. announced that it was replacing Citi with Travellers Insurance, a bizarre move seemingly aimed as a shot at the bank rather than a compliment to the insurer. Citi’s prognosis is a far cry from rivals JP Morgan, Morgan Stanley and Goldman Sachs, which are all being given the go-ahead by Treasury today to pay back TARP funds.
Tough at the top … but juicy in the middle
Typically, Citi’s problems don’t begin and end with its balance sheet. For many, the financial chaos the bank is in is merely a reflection of the careless management practices of chief executive Vikram Pandit. Indeed, one of the reasons for the delay in the stock swap was Federal Deposit Insurance Corporation chairman Sheila Bair’s probing of Pandit’s suitability to lead Citi from here on. FDIC officials seem keen to depose Pandit, and many now say his fate will turn out similar to that of Bank of America’s Ken Lewis, who was ousted as chairman of the bank earlier in the year.
But a management crisis is the last thing Citi needs as it hangs by a thread of stability amid the turbulence of loans, debts, and criticisms no end. Fortunately for Citi, it’s not all that bad. The bank turned a profit in the first quarter (albeit dubiously), and the big hires with guaranteed bonus checks should pay off in terms of real performance. There’s already some sign that they are. Arguably, Citi’s new hires are beginning to have a notable impact on turning around the bank’s traditionally shy approach to doing business.
In fact, while Citi’s hiring policy might seem inappropriate in the current climate, the bank has acted much more competitively than rivals such as Morgan Stanley, which is doling out large basic salaries in order to compensate for lost bonuses. While Citi will be forced ultimately to incorporate similar uncompetitive schemes into its franchise, it has staved the inevitable off for as long as possible. In other words, while Vikram Pandit will probably lose his job, Citi will retain lots of incentivized, aggressive bankers in the middle of the organization who will keep the bank’s wheels turning faster than many think. In a recently cocksure environment, being underestimated may turn out to be Citigroup’s biggest advantage of all.
Citi Dangles Bonuses
Treasury Secretary Timothy Geithner is set to unveil his much-anticipated guidelines on investment banking pay this week. But he may be too late to influence the free-wheeling pay practices at Citigroup, which has been a big recipient of taxpayer funds worth $45 billion and counting. In a bid to attract talent, Citigroup has been paying traders in London guaranteed bonuses totaling millions of dollars.
Among the lucky recipients are Rachel Lord, an executive in Citi's equities group, and Stefanos Bitzakidis, who is listed on Bloomberg as global head of exotic equity derivatives. The two received a total of roughly $3 million in guaranteed bonuses to join Citigroup from Morgan Stanley this year, says a person familiar with the situation. They are among a number of traders in Citi's equities division who have received guarantees to join the firm in recent months. Lord and Bitzakidis could not be reached for comment via email and calls to their offices.
Critics say the guarantees paid by Citi underscore the problems with Wall Street pay practices. Many of the traders were hired months ago when the markets weren't as buoyant, raising questions about whether Citi really needed to dangle the bonuses to draw in the talent. Add in the fact that employment on Wall Street has been sliding over the past year, leaving the planet awash with out-of-work traders. "Paying retention bonuses in the face of unlawfully terminating women who were making money for the company and were highly qualified is completely outrageous," says Douglas Wigdor, a New York attorney who is representing five women suing Citi over their layoffs late last year.
Citi says that its November 2008 reduction in force in its municipal securities division was a continuation of last year's firm-wide restructuring program which was done "fairly and lawfully and was based on legitimate business reasons unrelated to gender.'' It said many of the allegations from the former employees are either "inaccurate or incomplete.'' Still Wigdor says he is surprised by the Citi payments. "In this economy, I would imagine they would be able to recruit talent without having to pay huge bonuses." Citi, of course, disagrees. "Retaining and attracting the best talent is important to the success of Citi and all its stakeholders," says a Citi spokesman in London. He says the firm continues to examine ways to ensure its "compensation practices support the long-term profitability of the company and keep us competitive in this very challenging market environment."
‘It’s time to enshrine Hank Paulson as national hero’ WTF?
By Evan Newmark
Hank Paulson is a national hero.
I said it last October and I’m sticking by it. And now, there’s actual evidence to back me up. The TARP bailout worked. The Wall Street crisis is over.
via Mean Street: It’s Time to Enshrine Hank Paulson as National Hero - Deal Journal - WSJ.
So here’s the letter I wrote to the Wall Street Journal after reading Evan Newmark’s paean to Hank Paulson last week:Dear WSJ,
Just out of curiosity — did Evan Newmark ever work for Goldman, Sachs? And if the answer to the question is yes, don’t you think that might have been a good fact to disclose before he fellated Hank Paulson in his “Mean Street” column?
I didn’t get an answer, which I guess is not surprising. But in the interim I found out that Newmark did, indeed, work for Goldman. I find it funny that a business journalist has to disclose if he’s invested in this or that stock, or short this or that security, before a newspaper will allow him to have an opinion about anything even distantly related to that company — but you don’t need to disclose anything if all you’re doing is kissing your former boss’s ass.
Can you imagine what a craven, bumlicking ass-goblin you’d have to be to get a job working for the Wall Street Journal, not mention up front that you used to be a Goldman, Sachs managing director, and then write a lengthy article calling your former boss a “national hero” — in the middle of a sweeping financial crisis, one in which half the world is in a panic and the unemployment rate just hit a 25-year high? Behavior like this, you usually don’t see it outside prison trusties who spend their evenings shining the guards’ boots. I can’t even think of a political press secretary who would sink that low. Hank Paulson, a hero? Are you fucking kidding us?
Exactly what part of Paulson’s record is heroic, Evan? The part where he called up SEC director William Donaldson in 2004 and quietly arranged to get the state to drop capital requirements for the country’s top five investment banks? You remember that business, right, Evan? Your hero Paulson met with Donaldson and got the rules changed so that Goldman and four other banks no longer had to abide by the old restrictions that forced banks to actually have a dollar or two on hand for every ten or so they lent out. After that, it was party time! Bear Stearns in just a few years had a debt-to-equity ration of 33-1! Lehman’s went to 32-1. By an amazing coincidence, both of these companies exploded just a few years after that meeting, and all of the rest of us, Evan, ended up footing the bill, thanks to a state-sponsored rescue of Bear and a much larger massive bailout of Wall Street in general, necessitated in large part by the damage caused by the chaos surrounding Lehman’s collapse.
Meanwhile your own Goldman, Sachs ended up with a 22:1 debt-to-equity ratio a few years following that meeting, a number that would have been much higher if one didn’t count the hedges Goldman bought through a company called AIG. Thanks in large part to Paulson’s leadership in his last years as head of Goldman, the company was so massively over-leveraged that it would have gone under if AIG — which owed Goldman billions when it went into its death spiral last September — had been allowed to collapse. But thanks to Hank Paulson, who heroically stepped in and gave AIG $80 billion the same weekend he allowed one of Goldman’s last key competitors, Lehman, to collapse, Goldman didn’t have to go without that money; $13 billion of the AIG bailout went straight to Goldman. So I guess we have Paulson to thank for the fact that he used about $13 billion of our taxpayer money to essentially bail out his own fuckups. I mean, that’s heroism if I’ve ever seen it. Audie Murphy has nothing on that. Sit your asses back down, Harriet Tubman, Thomas More, Gandhi and Jesus Christ. Hank Paulson is in the house!
Or maybe it was Paulson’s foresight in heading off the crisis before it happened that inspired you? Maybe it was the way Paulson pronounced the subprime fallout “contained” in 2007 and called the economy the “strongest in decades?” Or maybe it was the way he remained calm last July, saying that it was a “very manageable situation” and “our regulators are on top of it?” Remember how he said all that shit, Evan, just about six weeks before the world exploded? Remember that Henry Paulson was actually in charge of regulating the financial environment during the last years of the crisis and did nothing as his buddies on Wall Street built one gigantic mountain of leverage after another, gashing underwriting standards across the board, saddling the country with a generation of toxic assets that all of the rest of us will be paying for in taxes (instead of, for instance, a health care program, which we can now no longer afford) for the next fifty fucking years? Do you remember that part?
Or was it his non-intervention last summer when gas prices hit $4.50 a gallon thanks again to his old buddies at Goldman and Morgan Stanley, who juiced the commodities market with so much speculative cash that oil prices soared despite the fact that supply was up and demand was down all year? Do you remember that part? How about the way food prices soared thanks to the same commodities speculators? According to the World Food Program at the UN, about 100 million people joined the ranks of the hungry last year during the commodities spike.
Or maybe it was the way the Treasury Department refused to tell the Congress really anything at all about how it chose whom to give TARP money to; how when the Congressional Oversight Panel asked Paulson what criteria he was using to decide who gets bailout money and who doesn’t, he sent Congress back a copy of a TARP application form. Maybe it was that. Or maybe it was the way Paulson got a $200 million tax deferral thanks to an obscure rule that allows executives who join the government to defer taxes on their holdings. That means that not only did Paulson use billions of our money to bail out his own mistakes, he managed to use a loophole to get out of paying his fair share of that same bailout.
Even if it weren’t about five years too early to make any kind of judgment at all about whether or not TARP helped, the notion that Henry Paulson is a hero is complete and utter madness because TARP would never have been necessary if someone, anyone who wasn’t a greed-addled incompetent like Paulson had actually been regulating the economy in the last years of the Bush adminstration. If anyone besides Paulson had been running Goldman Sachs earlier in this decade — if a person with a serious brain injury had been in his place, for instance, or a horse, or a head of lettuce — we’d all be better off today, because there wouldn’t be so many toxic Goldman-underwritten mortgage-backed CDOs on the market. We, all of us, are paying the freight for assholes like Paulson, and like you, for that matter. And while we’re getting over it, slowly, you’re really not helping when you open your mouth and pat yourself on the back for all the good deeds you’ve done. Spare, us, okay? Just give it up.
Commercial Loans to Bear Brunt of Future US Bank Losses
McKinsey expects the US banking and securities industry to incur losses averaging $125 billion per quarter through 2010, with the bulk of it concentrated in commercial banking loans. McKinsey research estimates that total credit losses on US-originated debt from mid-2007 through the end of 2010 will probably be in the range of $2.5 trillion to $3 trillion, given the severity of the current recession. Some $1 trillion of these losses has already been realized, McKinsey says in a review of the banking industry.
“Since US banks hold about half of US-originated debt, the US banking and securities industry will incur about $750 billion to $1 trillion of the remaining $1.5 trillion to $2 trillion of projected losses on this debt, which includes residential mortgages, commercial mortgages, credit card losses, and high-yield/leveraged debt, McKinsey says. These numbers are in the same range as those of the US government, which calculated a $600 billion high-end estimate of credit losses for the 19 largest institutions.” Since the middle of 2007, the US banking and securities industry has absorbed some $490 billion of losses, or $80 billion per quarter.
If the industry incurs additional losses of $1 trillion in 2009 and 2010, the losses will be about $125 billion a quarter … these losses will be concentrated in commercial-banking loans. Importantly, many of these losses will be concentrated in the banks that the stress tests revealed to be undercapitalized, McKinsey says. The five most undercapitalized major banks under the stress tests were Bank of America Corp., Wells Fargo & Co., GMAC LLC, Citigroup Inc. and Morgan Stanley.
Jamie Dimon: A Great Operator But an Obstacle to Reform, Whalen Says
Jamie Dimon is a "great operator" who's done very well by JPMorgan shareholders but watch the hero-talk, says Chris Whalen, managing director of Institutional Risk Analytics. Most notably, Dimon's firm has been the chief obstacle to reform of the regulatory environment for banks generally, and derivatives specifically, Whalen says. This latter point is critical, he says, because JPMorgan is by far the biggest dealer in the over-the-counter derivatives market and thus has every incentive to maintain the unregulated status quo.
As regulators are "eventually forced to reform [the derivatives] market, that's really last big source of abnormal profits for JPMorgan," Whalen says. "Once the business model is eventually conformed, the profits are going to be gone and JP becomes a high-risk utility." The high-risk part comes in because JPMorgan is more exposed to commercial real estate and business lending than many of its competitors, says Whalen, who expects losses in both areas to rise dramatically in late 2009/early 2010. Therefore, it's in the firm's interest to forestall reform for as long as possible and JPMorgan is spending money "like there's no tomorrow" to lobby the "the cats and dog in Congress who are rented by the year," Whalen says.
Is JPMorgan a Bank or a Government-Funded Casino?
CNBC reported yesterday that up to nine banks will soon be allowed to pay back their TARP loans. JPMorgan has received some $25 billion from the TARP program, has petitioned the government to permit repayment, and will, in all likelihood, be among the banks permitted to do so. Yet, by a long stretch that is not the end of the government's involvement with JPMorgan. The government stood able and ready to assist the financial sector through probably the most difficult financial crisis since the Depression, and certainly JPMorgan was one of the main beneficiaries of those actions.
The $25 billion may no longer be needed now, but it was certainly crucial then to reestablish public confidence and trust in the system and each bank's viability. The ultimate aim was, and is, to permit these banks to function as banks, making it possible for JPMorgan and others to continue lending to business and consumers, unfreezing the credit markets and returning badly needed liquidity to the system. That was what was meant to be, but our banking institutions seem to have lost all ballast to what a bank is meant to be doing and its responsibility to its depositors and the public which in this instance helped it stay alive.
Just last week, a leading source of tanker operations info reported that the good people of JPMorgan hired the good ship, or better put, the VLCC Super Tanker 'Front Queen' for nine months, I repeat nine months, to carry 2 million barrels of heating oil for storage duty off Malta. One is compelled to question how many homes in California, in Michigan, or any where in the United States could have been saved from foreclosure, how many payrolls could have been met with the hundreds of millions poured into an oil trading gambit sitting off the coast of the far distant Mediterranean island of Malta. Is this why JPMorgan is rushing to repay its TARP monies so that its free wheeling ways of the past can proceed without the possibility of TARP constraints.
Our banks' propensity to risk other people's monies, while latching on to the public purse, seems to continue unabated. When a bank such as JPMorgan plays in the oil casino it does so with depositors monies which are guaranteed in part or in whole by our government's Federal Deposit Insurance Corporation. Is that what bank deposits are meant for? Is this a bank fulfilling its banking mandate? And this from a "bank" that has received an implicit guarantee from the government that in case of extremis the taxpayers will bail it out because the alternative would be unthinkable. The very least one can ask is that the bank act as a bank and not as a trading house, making casino like bets that if they go sour, the taxpayers would be expected to pick up the pieces.
By playing the oil game JPMorgan bilks taxpayers twice. First, it is in part their money being played against them, and second by causing them to pay more for their oil, gas and heating oil. The kind of transaction entered into by JPMorgan provides a phony market for oil in that had the physical product entered the marketplace and not been stored away, it would have weighed on the price of oil and heating oil, pushing prices down. It is exactly these moneyed players/speculators who are keeping up a gamed level to oil prices. It is not coincidence, nor certainly not the free hand of the market that has natural gas prices, a commodity that usually trades in tandem with oil, at the cheapest to oil prices since 1992, and with natural gas touching a six year low this April.
It is untenable that banks, whose responsibility it is to provide the liquidity needed by the economy to prosper, use depositors monies to delve into trading of all manner of ancillary risk laden products be it derivatives, "securitized" real estate and residential debt, credit default swaps and on to title shipping documents attaining to cargos of oil, heating oil and soon to be if not already, bananas. There is nothing wrong with a world-class bank helping in the financing of trade, and that is as it should be.
But here the determinants are the competence of the parties to the transaction and their business viability, a determination that banks normally are schooled to make. And in doing so, they provide a healthy measure of oversight to the viability of the trade in question. But when the bank itself becomes the principal, the abyss and the next financial crisis is not far around the corner. Are our banking regulators truly going to wake up to the profound dangers of the current construct of our banking institutions, or are they too closely aligned with the powers to be to change the ongoing risk fraught procedures in a meaningful way!?
Foreclosures are in their prime (not just subprime)
Banks made two major errors during the lending boom. One was passing out wonky mortgages to noncredit worthy borrowers. This caused the subprime debacle. The other was lending large amounts of money on properties selling for speculative prices. This allowed prices to rise beyond the means of the usual pool of buyers. This is the new "prime debacle". The mortgages appeared to be, and were rated prime. These so-called prime mortgages however, were just a different brand of wonky loans. Sure, they weren’t negative am or adjustable rates, and they were considered low risk because the buyer had a large down payment or a sufficient debt-to-income ratio.
However, with a poor economy, homeowners who bought at the top of the market are finding that they either have lost their employment and can no longer make their payments, or they have to move and cannot sell the home for anything near the purchase price Now they are falling into foreclosure at an alarming rate:The pace of prime borrowers going into foreclosure is accelerating, especially in states with mounting unemployment or property values that saw a big run-up during the housing boom. It’s a marked shift from earlier this year, when foreclosures were driven by defaults on subprime loans.
And it has major implications — ravaging the credit scores of borrowers who once had unblemished records and dragging down property values in more affluent neighborhoods.
It also threatens to undermine the housing recovery. "It’s definitely a concern," says Brian Bethune at IHS Global Insight. "(Unemployment) is a major driver of foreclosures, and it will frustrate the housing recovery process."
This is a chart that we posted last April of sales vs. listings in the Phoenix area. While home sales numbers are back at the levels of the boom, you can see the buyers either cannot or will not buy homes that require jumbo mortgages- homes that by their nature are traditional prime mortgages:
Risk averse lenders do not want to lend on properties with a high risk of losing value. Clearly these higher end properties are risky. Rising unemployment will remain a driver behind prime foreclosures, as will falling prices. Until unemployment starts to recover and the prices of upper end properties are more in line with wages, there will be no housing recovery. Expect the foreclosure statistics for prime mortgages to continue to deteriorate- we are nowhere near the bottom yet.
US employers' hiring plans stuck in negative territory
Employers' hiring plans for the third quarter didn't budge from their record-low second-quarter outlook, according to Manpower's latest Employment Outlook Survey. A net -2% percent of employers said they plan to hire in the upcoming third quarter, flat from the -2% who said they would hire in the second quarter, on a seasonally adjusted basis, according to the Milwaukee-based firm's survey of 28,000 U.S. companies. (The second-quarter outlook was revised down to -2% from -1%.) The survey's previous low point was in 1982, when a net 1% of firms planned to hire in the third quarter.
A year ago, a seasonally adjusted net 12% of firms said they would hire in the third quarter. The Manpower survey measures the percentage of firms planning to hire minus those intending layoffs. Manpower doesn't measure the number of jobs. The survey's margin of error is +/- 0.49%. "We are seeing some stabilization from an outlook perspective. To me, stabilization right now is pretty good news," said Jeffrey Joerres, chairman and chief executive of Manpower Inc. "For a while, every quarter seemed to have gotten worse and this one at least is leveling off."
Separately, the U.S. Labor Department said job losses moderated in May, with nonfarm payrolls shedding 345,000 jobs, the fewest jobs lost in eight months. The Manpower survey's seasonally adjusted figure smoothes out monthly fluctuations. Without that seasonal adjustment, the survey found a net 2% of firms intend to hire in the third quarter, up from 1% in the second quarter. Sixty-seven percent of firms plan no change in the third quarter -- a figure that has stayed constant now for three surveys. Another 5% of firms said they don't know what their plans are.
Looked at by industry, six sectors showed a negative hiring outlook for the third quarter, while employers in the "other services" category had a 0% hiring outlook. In January, Manpower changed its industry classifications; because of that change, it currently can't provide seasonally adjusted figures by industry. Firms in the leisure and hospitality industry were the most optimistic, with a net 18% planning to hire, while another four industries also had a positive employment outlook.
Companies in the construction and wholesale and retail trade categories showed the greatest improvement from the previous quarter, with a net 2% of construction firms planning to hire, up from -4% in the second quarter, and a net 9% of wholesale and retail trade firms intending to hire, up from 3%. For each industry, here are the figures for the net employment outlook for the third quarter, not seasonally adjusted, in order of most negative outlook first.
• Mining, -9%, flat from -9% for the second quarter
• Manufacturing, durable goods, -6%, about flat from -7%
• Education and health services, -4, down from 0%
• Government, -4%, down from -2%
• Information, -4%, about flat from -5%
• Transportation and utilities, -3%, about flat from -2%
• Manufacturing, nondurable goods, 0%, up from -4%
• Other services, 0%, about flat from 1%
• Construction, 2%, up from -4%
• Financial activities, 2%, flat from 2%
• Professional and business services, 8%, about flat from 9%
• Wholesale and retail trade, 9%, up from 3%
• Leisure and hospitality, 18%, up from 14%
Canadian Hiring Plans Drop to Lowest Since 1993
Canadian employers’ hiring intentions for the third quarter dropped to the lowest since the fourth quarter of 1993, with factories, mining and transportation companies the weakest, according to a survey by Manpower Inc. The net employment outlook, which subtracts the percentage of companies planning to cut jobs from the percentage that say they’ll hire, fell to a reading of negative 3 percent for the July to September period, the second straight decline. The figures are seasonally adjusted.
Hiring plans for factories dropped to the lowest since the survey began in 1978, falling to negative 20 percent for durable goods and negative 12 percent for non-durable goods. Hiring plans by mining companies fell to negative 2 percent, hitting the same level as transportation and public utilities, according to Milwaukee-based Manpower. “It’s a very downbeat survey -- the worst one I’ve seen in my time,” said Lori Rogers, vice president of operations at Manpower’s Canadian unit.
Still, 16 percent of employers plan to hire workers, Rogers said. The best job opportunities now are in government, and finance and real estate, she said. “Manufacturing is really awful,” she said. The results are still less severe than during the last recession in the early 1990s, when the overall index turned negative in 1992 and didn’t rise above zero until 1994. The survey of 1,900 employers has a margin of error of 2.2 percentage points, and was taken from April 16-29.
Inventories at U.S. Wholesalers Fall for Eighth Month
Inventories at U.S. wholesalers fell in April for the eighth straight month as distributors tried to cut excess supply apace with decreasing sales. The 1.4 percent decline in stockpiles was larger than forecast and followed a revised 1.8 percent decrease in March that was larger than previously estimated, the Commerce Department said today in Washington. Sales fell 0.4 percent to the lowest level since 2005. The economy shrank at a 5.7 percent annual pace in the first quarter, reflecting a record drawdown in inventories that may set the stage for a return to growth later this year. Companies including General Motors Corp. are among those still paring output to limit the glut of stocks.
“You probably won’t see a big hit to GDP in the second quarter from inventories,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Even though they’re falling quite sharply, they’re falling at a slower rate.” At the current sales pace, it would take 1.31 months for distributors to deplete the amount of goods on hand, compared with 1.32 months in March. The reading was as low as 1.1 months in June 2008. Inventories at wholesalers were forecast to drop 1.2 percent after an initially reported 1.6 percent decrease in March, according to the median estimate of 36 economists surveyed by Bloomberg News. Projections ranged from a decline of 1.7 percent to an increase of 1 percent.
Stocks and Treasuries rose after the U.S. Treasury’s announcement that it approved 10 banks to buy back $68 billion of government shares, reducing officials’ authority to intervene in everything from lending and hiring strategies to compensation policies. The Standard & Poor’s 500 Index gained 0.2 percent to 940.63 as of 10:09 a.m. in New York. Yields on the benchmark 10- year note fell to 3.85 percent from 3.88 percent late yesterday. Today’s inventories report showed stockpiles of durable goods, or those meant to last at least three years, fell 2.2 percent in April after a 2.6 decline in March. Durable sales decreased 1.9 percent. Auto inventories decreased 4.5 percent as sales plunged 7.8 percent, the most since November, today’s report showed. That pushed the industry’s inventory-to-sales ratio up to 2.09 months from 2.02 months in March.
The auto industry is at the forefront of inventory reductions. General Motors, which filed for bankruptcy protection last week, plans to idle 13 U.S. plants for as long as 9 weeks each to reduce inventory. Eight of its 15 U.S. vehicle assembly plants were operating last week. GM last month informed 1,100 “underperforming” U.S. dealers they would be terminated as the automaker starts shrinking its retail network. “We have been going through certainly a very systematic reduction process in our dealer inventories,” GM Chief Executive Officer Fritz Henderson said in a May 14 interview.
Professional equipment, such as computers, is among the industries getting a grip on oversupply. Stockpiles fell 1 percent as sales increased 0.9 percent, pushing the months supply down to the lowest level since November 2007. Texas Instruments Inc., the second-largest U.S. semiconductor maker, this week raised its second-quarter sales and profit forecasts because customers were replenishing inventories. Manufacturers of notebook computers and mobile- phone equipment were among the customers that increased orders the most, and demand in Asia was stronger than in the U.S. and Europe, the company said.
Stockpiles of non-durable goods such as fuels and grains were little changed after declining 0.5 percent in March. Sales of such items increased 0.8 percent. Wholesalers make up about 25 percent of all business stockpiles. Factory inventories, which account for about a third of the total, fell 1 percent in April, Commerce reported June 3. Retail stockpiles, which make up the rest, will be included in the June 11 business inventories report. Inventories shrank by a record $91.4 billion annual rate in the first quarter, subtracting 2.3 percentage points from gross domestic product. The world’s largest economy shrank at a 5.7 percent annual pace in the firs three months of the year. Recent reports show companies are cutting stockpiles. The Institute for Supply Management’s gauge of inventories at factories fell to 32.9 last month from 33.6 in April. Readings below 50 signal contraction.
Are canned goods safer than U.S. government bonds?
Is Campbell's Soup a better bet than U.S. government debt? No, we're not talking about stocking a bunker for survival. This is talk about safe investments. U.S. Treasuries, traditionally considered the safest of all investments because the debt is backed by full faith and credit of the U.S. government, is losing favor among derivatives traders to Campbell Soup Co, Microsoft Corp and Intel Corp as concerns over the government's massive deficits and costly bailouts mount.
Investors are apparently concerned that sovereign debt of the United States, the world's biggest economy, is more vulnerable to a huge sell-off than bonds of these three companies amid the most protracted economic downturn in decades, strategists said. Those concerns are reflected in the pricing of credit default swaps, which are used both to insure bonds against default and to place bets on the likelihood of default, of Treasuries and of the three companies.
The cost to insure debt of the United States with credit default swaps for five years was 43.7 basis points on Monday, versus just 27.4 basis points for Campbell Soup and 29.8 basis points for Intel Corp , according to data from CMA DataVision. Higher prices for credit default swaps, or CDS, reflect a greater perception of a risk of default. Microsoft's insurance costs were just 32.5 basis points on Friday when they last traded, according to CMA.
"Some of those names have better-looking balance sheets than any sovereign in the developed world, so I don't think it's totally irrational," said Jay Mueller, senior portfolio manager with Wells Capital Management, in Milwaukee, Wisconsin. However, "the sovereign CDS market is perhaps not as liquid and efficient as it is in a lot of corporate credits, so I wouldn't get too wrapped up in the specific quote level in the sovereign space," Mueller added.
Pricing in the nascent credit default swaps market for the U.S. sovereign, which did not trade actively until two years ago, could be sending a false signal that conflicts with its top credit rating's higher status than some corporate bonds. Even so, the relative explosion of U.S. government indebtedness compared with some major companies does give analysts some cause for concern. Intel, the world's largest chip maker, and Microsoft, the world's largest software company, both have minimal levels of debt, while Campbell Soup, the world's largest soup producer, has been reducing debt.
U.S. President Barack Obama forecast a $1.75 trillion deficit for 2009 in February, about 12.3 percent of gross domestic product, the most since World War Two. Campbell is rated A2 by Moody's Investors Service, five steps below the United States AAA rating. Microsoft is rated AAA while Intel's senior unsecured debt is rated A1, four steps below the United States. U.S. government bond insurance costs expressed via credit default swaps have widened from about 27 basis points just a month ago, according to CMA.
"It definitely reflects the concerns that people have over the trajectory of our budget deficit," said Mary Ann Hurley, senior Treasuries trader in Seattle at brokerage D.A. Davidson. "Do I think it reflects that we are closer to default on our debt? No. However I think there is some concern about how big the deficit will be (as a proportion) of GDP," she said. The large deficit ratio is still a big worry. Widening credit default swaps on highly rated governments such as the United States reflect the danger that foreign investors may balk at the low level of yields on offer and spark an acute government bond market sell-off, analysts say.
Since foreign investors hold about half the U.S. Treasuries outstanding, that outcome could also cause a major dollar crisis, adding to any inflationary pressures buffeting the economy. Though a default by the United States is viewed as highly unlikely, investors may have used credit default swaps for trading opportunities as concerns about budget deficits mounted. Foreign holders of U.S. Treasuries such as foreign banks and sovereign wealth funds also may be using credit default swaps to hedge their exposure to Treasuries, said Bob Bishop, senior portfolio manager at SCM Advisors in San Francisco.
Credit insurance costs on U.S. companies, meanwhile, have fallen amid signs in recent weeks that the worst of a recession may be past. "Certainly after the economic data we saw in May there was big reduction in the market's concern about credit risk," Bishop said. "We've seen a big move out of government bonds into corporate bonds so it's not surprising that CDS reflects that."
Yield rise threatens recovery
The surge in US and UK government bond yields threatens to complicate the efforts of central bankers to create a sustained economic recovery from a deep recession. Late on Monday in New York, the yield on the 10-year Treasury hit a seven-month high of 3.91 per cent, while the two-year yield climbed to 1.43 per cent, continuing the strong rises that took place on Friday after the latest US jobless data proved better than expected. In the UK, the yield on the 10-year gilt reached 3.91 per cent, its highest since February 5.
Yields have been climbing on both sides of the Atlantic in the past three months even though the Federal Reserve and the Bank of England have been engaged in quantitative easing programmes, involving regular purchases of government bonds and other fixed- income securities. The impact of this has been more than offset by massive fiscal spending in the US and UK, which has resulted in a surge of debt issuance. Financial markets are also fretting that the stimulus programmes will lead to higher inflation. The big fear is that higher yields will stall the recovery in the economy, creating a negative feedback loop, resulting in greater buying of government debt by central banks. “A major concern with many people is that the rise in rates will choke a recovery in the economy,” says Gerald Lucas, senior investment adviser at Deutsche Bank.
That risk looms larger after last week’s release of the US employment report for May showed a much slower pace of job losses. This nascent sign that the labour market may be stabilising provided rocket fuel for the bearish trend in yields. It heightened the belief that the US economy might be past the worst of its recession. Late in New York on Monday, the yield on the 10-year note was above 3.90 per cent, whereas it stood below 3 per cent when equities bottomed in March. Of greater concern, 30-year fixed mortgage coupons rose above 5 per cent on Monday, up from 3.86 per cent in late April.
This relentless rise has countered the impact from the Fed’s buying of mortgages and spells more pain for the US housing sector. Suddenly, financial markets have begun to anticipate US rate rises by the end of the year, with the yield on the policy sensitive two-year note jumping sharply on Friday. Since last November, this yield has largely been anchored below 1 per cent. Much will depend on the path of the actual economic recovery and many economists say bond yields have jumped the gun. “This sell-off is likely to be self-limiting,” says Steven Ricchiuto, chief economist at Mizuho Securities. “The long end of the curve is pricing in real yields and an inflation premium that is just not justified by the macro scenario of a protracted recession followed by a drawn out recovery.”
In the UK, John Wraith, head of sterling rates product development at RBC Capital Markets, says: “Expectations of a robust near-term economic recovery are getting ahead of themselves. Indebted consumers and demand-starved businesses are not ready to deal with higher interest rate costs yet.” But, having begun the process of quantitative easing, central banks are now being pushed by bond traders to increase their debt purchases and limit the rise in yields. “I would think they will at least double their purchases to $600bn,” says Tom di Galoma, head of US Rates Trading at Guggenheim Capital Markets. Ted Wieseman, economist at Morgan Stanley says that with the Fed still only cautiously optimistic about the recovery prospects of the economy, it could try and offset rising Treasury supply, through stepped up Treasury purchases. But, such a policy response threatens to exacerbate the fear in some quarters that QE will create inflation and risk sovereign debt downgrades in the future. In the US, traders are looking at 4 per cent marking the ceiling for 10-year Treasury notes as the Fed draws a line in the sand.
In the UK, the Bank of England is facing growing pressure to step up its quantitative easing programme after a sharp rise in government bond yields. Analysts also warn that the jump in yields could slow the UK’s nascent recovery as they force up swap rates, used to set fixed rate mortgages and corporate lending rates. Short-dated bond yields have seen the biggest jump in the past week after stronger than expected economic data. Two-year gilts have jumped almost 30 basis points to 1.34 per cent since last Wednesday. The rise is particularly significant for the UK market as many mortgages are fixed over this timespan. Steven Major, global head of fixed income research at HSBC, says: “The Bank of England will probably increase the size of the quantitative easing programme some time in the next few months, especially as their own projections are for inflation to undershoot the inflation target.”
Some analysts expect the Bank to increase the buy-back programme, which mainly involves gilts but also corporate bonds and commercial paper, from £125bn ($200bn) to £150bn at its July policy meeting. It would need to write a letter to the Treasury if it wants to buy more than £150bn. Mr Wraith adds: “We believe the Bank of England will look to increase QE in July. They have said they would err on the side of doing too much as it is easier to fight inflation than deflation.” All of which suggests bond markets could be for an extended period of volatility. “We can expect a period of high uncertainty with rates as they are whipsawed by mixed data and expectations for Fed policy,” says Mr Lucas.
Top Chinese banker Guo Shuqing calls for wider use of yuan
The head of China's second-largest bank has said the United States government should start issuing bonds in yuan, rather than dollars, in the latest indication of the increasing importance of the Chinese currency. Guo Shuqing, the chairman of state-controlled China Construction Bank (CCB), also said he is exploring the possibility of issuing loans to trading companies in yuan, allowing Chinese and foreign companies to settle their bills in yuan rather than in dollars. Mr Guo said the issuing of yuan bonds in Hong Kong and Shanghai would help to develop the debt markets in China and promote the yuan as a major international currency.
It was the first time the head of a major Chinese bank has called for the wider use of the yuan, although a chorus of senior government officials have already voiced their concerns about the stability of the dollar and have said the yuan should be used more widely. "I think the US government and the World Bank can consider the issuing of renminbi bonds," he said, asking for a "mutual cooperation" between the US and China to promote Chinese financial services. He said bond issuance could be relatively small, at between 1bn and 3bn yuan (£100m to £300m). HSBC and Standard Chartered have both said they are preparing to issue bonds denominated in yuan.
Mr Guo is a former head of China's foreign-exchange administration, which manages the country's $1.9 trillion foreign exchange reserves. He said he was confident the yuan would become a major currency in the medium-to-long term. Two months ago, before the G20 meeting in London, Zhou Xiaochuan, the head of the People's Bank of China, the central bank, published a personal paper proposing to replace the dollar as the international reserve currency. His call came after Wen Jiabao, the Chinese premier, asked the US to guarantee the safety of China's huge pile of US debt. In April, the Chinese government said traders in Shanghai, Shenzhen, Guangzhou, Zhuhai, Dongguan, Hong Kong, Macau, Yunan and Guangxi could start to settle their bills in yuan, rather than dollars, paving the way for the currency to become more fully convertible.
Obama's new stimulus plan same as the old
President Barack Obama is promising some exciting coming attractions for his stimulus plan. But it turns out they're just summer reruns. Obama promised Monday to ramp up spending from the $787 billion stimulus fund and create or save 600,000 jobs by the end of the summer. It was an effort to shift the focus away from persistently rising unemployment and beat back criticism that the money isn't flowing quickly enough.
Those promises aren't new. Stimulus spending had always been expected to rise sharply this summer, and the White House has been predicting that 600,000 job total for about a month. Obama faces souring public opinion over his handling of the economy, which has shed 1.6 million jobs since the stimulus was signed in February. That total has far overshadowed White House announcements estimating the effort has saved 150,000 jobs, a figure that is so murky it can never be verified. Monday's announcement sought to reposition Obama in the driver's seat of America's recovery. It portrayed the president as revving up the engine of the stimulus, but it was something federal agencies were already planning to do anyway.
Obama spoke about "modest progress" in the economy, citing fewer jobs lost last month than expected. He said he hopes to build on that in the months ahead with stimulus programs. "We've done more than ever, faster than ever, more responsibly than ever, to get the gears of the economy moving again," he said. But he acknowledged: "I'm not satisfied. We've got more work to do." And for the first time, the administration admitted the economic forecasts it used to sell the stimulus were overly optimistic. "At the time, our forecast seemed reasonable," said Vice President Joe Biden's top economic adviser, Jared Bernstein, explaining that the White House underestimated the scope of the recession. "Now, looking back, it was clearly too optimistic."
By this point, according to earlier White House economic models, the nation's unemployment rate should be on the decline. The forecasts White House advisers used to drum up support for the plan projected today's unemployment rate would be about 8 percent. Instead, it sits at 9.4 percent, the highest in more than 25 years. By any measure, spending $44 billion in four months — and with unprecedented transparency — is an uncharacteristic feat in Washington. But the expectations have been even higher, and restoring the economy has proven tougher than the administration expected. Several economists said Monday the economy is unlikely to see any boost from the stimulus before next year.
"It takes time to organize projects, to get the bids in, the funds out and the work started," said Nigel Gault, chief U.S. economist at IHS Global Insight. Obama's disapproval rating on the economy has risen from 30 percent in February to 42 percent, according to a Gallup poll completed May 31. Sensing weakness on a signature issue of Obama's presidency, congressional Republicans are renewing their criticisms that the stimulus plan has not shown results, only mounting debt.
"This is President Obama's economy, and his administration must provide results and specifics rather than vague descriptions of success that seem to change by the week," said House Republican Whip Eric Cantor of Virginia. "The administration looks dramatically out of touch as they highlight the creation of temporary summer employment in the face of job losses unseen in decades, record unemployment and massive deficits." Obama shot back at skeptics during Monday's Cabinet meeting. "Now, I know that there's some who, despite all evidence to the contrary, still don't believe in the necessity and promise of this recovery act," he said. "And I would suggest to them that they talk to the companies who, because of this plan, scrapped the idea of laying off employees and, in fact, decided to hire employees. Tell that to the Americans who received that unexpected call saying, 'Come back to work.'"
For 300 years Britain has outsourced mayhem. Finally it's coming home
by George Monbiot
Why now? It's not as if this is the first time Britain's representatives have been caught out. The history of governments in all countries is the history of scandal, as those who rise to the top are generally the most ambitious, ruthless and unscrupulous people politics can produce. Pushing their own interests to the limit, they teeter perennially on the brink of disgrace, except when they fly clean over the edge. So why does the current ballyhoo threaten to destroy not only the government but also our antediluvian political system?
The past 15 years have produced the cash-for-questions racket, the Hinduja and Ecclestone affairs, the lies and fabrications that led to the invasion of Iraq, the forced abandonment of the BAE corruption probe, the cash-for-honours caper and the cash-for-amendments scandal. By comparison to the outright subversion of the functions of government in some of these cases, the is small beer. Any one of them should have prompted the sweeping political reforms we are now debating. But they didn't. The expenses scandal, by contrast, could kill the Labour party. It might also force politicians of all parties to address our unjust voting system, the unelected Lords, the excessive power of the executive, the legalised blackmail used by the whips, and a score of further anachronisms and injustices. Why is it different?
I believe that the current political crisis has little to do with the expenses scandal, still less with Gordon Brown's leadership. It arises because our economic system can no longer extract wealth from other nations. For the past 300 years, the revolutions and reforms experienced by almost all other developed countries have been averted in Britain by foreign remittances. The social unrest that might have transformed our politics was instead outsourced to our colonies and unwilling trading partners. The rebellions in Ireland, India, China, the Caribbean, Egypt, South Africa, Malaya, Kenya, Iran and other places we subjugated were the price of political peace in Britain. After decolonisation, our plunder of other nations was sustained by the banks. Now, for the first time in three centuries, they can no longer deliver, and we must at last confront our problems.
There will probably never be a full account of the robbery this country organised, but there are a few snapshots. In his book Capitalism and Colonial Production, Hamza Alavi estimates that the resource flow from India to Britain between 1793 and 1803 was in the order of £2m a year, the equivalent of many billions today. The economic drain from India, he notes, "has not only been a major factor in India's impoverishment … it has also been a very significant factor in the industrial revolution in Britain". As Ralph Davis observes in The Industrial Revolution and British Overseas Trade, from the 1760s onwards India's wealth "bought the national debt back from the Dutch and others … leaving Britain nearly free from overseas indebtedness when it came to face the great French wars from 1793".
In France by contrast, as Eric Hobsbawm notes in The Age of Revolution, "the financial troubles of the monarchy brought matters to a head". In 1788 half of France's national expenditure was used to service its debt: the "American War and its debt broke the back of the monarchy". Even as the French were overthrowing the ancien regime, Britain's landed classes were able to strengthen their economic power, seizing common property from the country's poor by means of enclosure. Partly as a result of remittances from India and the Caribbean, the economy was booming and the state had the funds to ride out political crises.
Later, after smashing India's own industrial capacity, Britain forced that country to become a major export market for our manufactured goods, sustaining industrial employment here (and avoiding social unrest) long after our products and processes became uncompetitive. Colonial plunder permitted the British state to balance its resource deficits as well. For some 200 years a river of food flowed into this country from such places as Ireland, India and the Caribbean. In The Blood Never Dried, John Newsinger reveals that in 1748 Jamaica alone sent 17,400 tons of sugar to Britain; by 1815 this had risen to 73,800. It was all produced by stolen labour.
Just as grain was sucked out of Ireland at the height of its great famine, so Britain continued to drain India of food during its catastrophic hungers. In Late Victorian Holocausts, Mike Davis shows that between 1876 and 1877 wheat exports to the UK from India doubled as subsistence there collapsed, and several million died of starvation. In the North-Western provinces famine was wholly engineered by British policy, as good harvests were exported to offset poor English production in 1876 and 1877. Britain, in other words, outsourced famine as well as social unrest. There was terrible poverty in this country in the second half of the 19th century, but not mass starvation. The bad harvest of 1788 helped precipitate the French revolution, but the British state avoided such hazards. Others died on our behalf.
In the late 19th century, Davis shows, Britain's vast deficits with the United States, Germany and its white dominions were balanced by huge annual surpluses with India and (as a result of the opium trade) China. For a generation "the starving Indian and Chinese peasantries … braced the entire system of international settlements, allowing England's continued financial supremacy to temporarily co-exist with its relative industrial decline". Britain's trade surpluses with India allowed the City to become the world's financial capital.
Its role in British colonisation was not a passive one. The bankruptcy, and subsequent British takeover, of Egypt in 1882 was hastened by a loan from Rothschild's bank whose execution, Newsinger records, amounted to "fraud on a massive scale". Jardine Matheson, once the biggest narco-trafficking outfit in history (it dominated the Chinese opium trade), later formed a major investment bank, Jardine Fleming. It was taken over by JP Morgan Chase in 2000.
We lost our colonies, but the plunder has continued by other means. As Joseph Stiglitz shows in Globalisation and its Discontents, the capital liberalisation forced on Asian economies by the IMF permitted northern traders to loot hundreds of billions of dollars, precipitating the Asian financial crisis of 1997-98. Poorer nations have also been strong-armed into a series of amazingly one-sided treaties and commitments, such as trade-related investment measures, bilateral investment agreements and the EU's economic partnership agreements. If you have ever wondered how a small, densely populated country which produces very little supports itself, I would urge you to study these asymmetric arrangements.
But now, as John Lanchester demonstrates in a fascinating essay in the London Review of Books, the City could be fatally wounded. The nation that relied on financial services may take generations to recover from their collapse. The great British adventure – three centuries spent pillaging the labour, wealth and resources of other countries – is over. We cannot accept this, and seek gleeful revenge on a government that can no longer insulate us from reality.
On the march
by Gillian Tett
Samuel Cole was fed up. Some of the world’s largest investment banks were, in the view of the chief operating officer at BlueMountain Capital, playing foul in the credit derivatives market in which his New York hedge fund sought to make its money. Far from being chastened by their near-death experience in the financial crisis, he seethed, Wall Street’s finest were displaying a stubborn unwillingness to reform trading practices. So Mr Cole fired off an e-mail last week to more than 100 bankers, investors and regulators, in which he argued that many of the banks that sold those sorts of securities were “not seriously engaged in working with the buy side” – the asset managers who invested in them. Banks needed to co-operate in reforming trading practices to create a more balanced and transparent market.
“The dealer community may be filibustering to protect its oligopoly,” he wrote – echoing the sentiments of many hedge fund managers, who worry that harsh regulatory intervention could kill off the sector. The banks deny being recalcitrant. But as regulators step up their efforts to reform banking, the angry e-mail is just one sign of a new set of strains building in the financial system between those who sell financial products and the asset managers who buy them – mostly on behalf of clients. The fight, which extends well beyond trading in credit derivatives, could potentially affect far more than just financiers. If the structure of capital markets changes, it could reduce the fees that the financial industry takes from customers that include many of the world’s biggest companies.
The hedge fund’s criticism adds to pressure from regulators and politicians for a better way to run the so-called over-the-counter markets, where deals take place away from any recognised exchange. During the credit boom, it was clear who had the upper hand. In the City of London and on Wall Street it had long been taken for granted that the world’s largest investment banks dominated the financial markets. These “sell side” institutions had vast resources and tended to structure activity in ways that were most profitable for them, at the expense of investors buying the products. Asset managers – pension funds, mutual funds, hedge funds and the like – often appeared to have little incentive or ability to challenge this status quo. Now, however, that power balance between buy and sell sides is starting to shift.
Wracked by losses incurred in the crisis, and under attack from their own investors for tolerating the dominance of banks, asset managers are starting to take on the establishment. “The wealth destruction that has occurred has been enormous, although it will probably only become [fully] visible in the next few years, when people go to get their pension and discover it is much less than they thought,” says Hans-Jörg Rudloff, the chairman of Barclays Capital who also heads the International Capital Markets Association (Icma), a financial industry lobbying group. “The end result of that wealth destruction is that investors are looking more closely at what is being bought, how markets are working – they are questioning many things.”
Another factor behind the power shift is liquidity, or the ease with which investors can trade assets. That is seldom a problem with shares in big companies that change hands in large numbers daily on a public stock exchange – where buyers and sellers have equal clout. But when securities are only thinly traded on an exchange (as is the case with some smaller companies), investment banks can wield more power, since they use their own money to make markets in such stocks. And when assets are traded via private deals in the so-called over-the-counter sector, the banks that act as brokers in the transaction have enormous power at their disposal, since they not only organise trades but also have exclusive access to information about the prices and volumes that are being achieved. That over-the-counter set-up prevailed in particular for many derivatives and the more complex credit products that were the hot products of the boom years. Opacity enabled the broker banks to charge high fees and organise trades to suit them.
Asset managers tacitly accepted this, since brokers made markets and thus enabled others to trade. Moreover, in the days of the credit boom, banks were willing to provide hedge funds with the loans they needed to make ever bigger bets in search of the best rewards. “There was a lot of competition among the dealers, which resulted in tight bid/offer spreads and good liquidity,” says Rohan Douglas of Quantifi, a provider of credit market analysis. Now, however, many banks are so short of capital that they are no longer willing to make loans to investors, or even to act as marketmakers. “Instead of being liquidity providers, the dealers have become liquidity users,” says the chairman of one large investment bank. That has made it even more expensive for asset managers to trade – and some parts of the market have frozen up. The climate has changed “and, now, what’s good for banks – as they are constrained in the amount of capital available for trading – is not necessarily good for investors,” says Mr Douglas.
Hence the tensions between the buy and sell sides – which are prompting some investors to seek ways to cut out the middleman. “These days we are seeing lots of corporate [bond] issuers coming to us directly when they want to raise money, not using a broker,” says an executive at a Middle Eastern sovereign wealth fund. The collapse of liquidity is also prompting a wider rethink of the market structure. Politicians on both sides of the Atlantic are backing a drive to make over-the-counter trading more transparent and egalitarian or move many of those dealings on to an exchange. They are being egged on by securities exchanges, which scent an opportunity. The future structure of the $27,000bn (£16,900bn, €19,500bn) credit derivatives market – the subject of the angry e-mail from the Park Avenue-based BlueMountain – is one case in point. Until now, it has been dominated by a small coterie of banks. But Tim Geithner, US Treasury secretary, is demanding that activity should move to a central clearing platform, to reduce “counterparty risk” – the danger that a trade will collapse if one party defaults.
Some politicians and regulators want to go further and place all activity on an exchange. Other battlefronts are opening up. The European Commission is pushing for more price transparency in privately traded company bonds. Investors in structured credit – the packages of debt sliced and diced by investment bankers – are demanding the same. America’s mortgage bond market is immersed in a separate collection of fights, because efforts to restructure delinquent home loans are pitching the interests of investors against those of the banks. “There is a natural tension between all stakeholders – dealers, investors and, uniquely today, governments – that has been aggravated recently due to the extreme economic and market pressures on all participants,” says Tim Ryan, head of Sifma, an industry grouping that tries to represent both banks and investors. “We see the tension up close as we strive for consensus among our members,” he adds, noting that this jostling “has been most pronounced in mortgage modifications, industrial restructurings, equity shorting and derivative markets.”
Or as Armins Rusis of Markit, a data provider, notes: “Some markets will continue to be as they are now, typically with a few big marketmaking dealers trading with many smaller dealers and investors. But some may shift completely.” How many of these battles will be won by investors remains unclear. Brokers and large banks have in the past been adept at fighting off challenges. “The buy side is very fractured – there are big differences between all the different types of institutions, between those serving retail clients and others,” says Robert Parker of Credit Suisse Asset Management and head of an investor lobbying group within Mr Rudloff’s Icma. Yet Mr Parker’s creation of the investor group last year is itself evidence of a mobilisation by buy-side interests. Moreover, politicians and regulators appear to be supporting their cause. In the US, William Dudley, president of the New York Federal Reserve, is trying to give investors a louder voice.
The Fed used to garner almost all of its market feedback from the sell side – groups such as JPMorgan Chase, Citigroup, Goldman Sachs or Merrill Lynch. But in recent months the New York Fed has started including asset managers in advisory committees and created an informal advisory group of hedge fund, private equity and asset managers. “Our aim in this is not to disenfranchise the dealers but to enfranchise the buy side. We want the whole market to be part of the decision-making process,” says Mr Dudley. Whether the “whole market” can be corralled into making collective decisions remains unclear: though groups such as Sifma and the Fed itself stress that it is in everyone’s interest to co-operate, the turf wars are likely to grow more rather than less intense.
“All over the place, there are fights going on about who will control the system. It’s ugly,” observes one Wall Street financier. Yet some see all this as healthy in the long run. “This crisis has been terrible, but it has been good in a way because it is making us rethink things about how the market is run,” says Sandrine Guerin, deputy chief executive of Credit Foncier, the French financial group. “It could make a better system in the future – or so I hope,” she adds. It is an aspiration that millions of savers will share, after two years of brutal losses.
California stops funds for recent contracts
California govenor Arnold Schwarzenegger, facing a state budget gap of $24.3bn, on Monday ordered a halt to funding for state contracts on everything from pencils to office space. His order applies to all contracts signed since March 1, excluding those for public safety, and bars new contracts. Projects funded by bonds and federal stimulus dollars are also exempt. The state is expecting the move to generate savings of $1.35bn, said Amanda Fulkerson, a spokeswoman for California’s State and Consumer Services Agency, which oversees the state’s contracting and purchases.
California’s state agencies and departments on average spend about $9bn each year on goods and services. In the current fiscal year, California entered into 36,498 contracts for goods and services from a variety of companies, including law firms, fuel and computer software providers and consultants of various kinds. The state’s revenues have plummeted during the economic recession, forcing state officials to consider drastic spending cuts, including to services and supplies, to balance the state’s books, said Fulkerson. ”We have to look across the board for savings,” she said. ”The state controller has been very honest with us in talking about the state running out of cash in two weeks.”
Mr Schwarzenegger said the state would be tightfisted in its financial crisis -- and beyond. ”With today’s action, every state agency and department will scrutinize how every penny is spent on contracts to make sure the state is getting the best deal for every taxpayer dollar,” Mr Schwarzenegger said in a statement. Mr Schwarzenegger, a Republican, has ruled out tax increases to help fill California’s budget shortfall, and the Democrat-led legislature is bracing to slash spending ahead of the July 1 start of the state’s next fiscal year.
Mr Schwarzenegger also wants to restrain future state spending. His order directs state departments to submit to the Department of Finance plans to cut their future spending on contracts and purchases by at least 15 percent no later than 30 days after the state’s 2009-2010 budget becomes law. ”Regardless of the fiscal situation, they need to dial back,” said Schwarzenegger spokesman Aaron McLear. ”From our standpoint, every California household and business is cutting spending as much as possible. We need to do the same in state government.” Mr Schwarzenegger’s order comes amid rising concern over California’s finances on Wall Street, which has given the state the lowest general obligation debt rating of any U.S. state.
”It’s a reflection of the difficulty the state is in,” said Emily Raimes, a senior at Moody’s Investors Service. ”At this point everyone is anticipating big cuts,” Ms Raimes added. ”It’s just a matter of what the legislature can agree to cut and by how much.” Fitch Ratings last month warned it may lower California’s ’A’ long-term general obligation debt rating, which would likely push the state’s borrowing costs up. Fitch revised its rating outlook on California to negative from stable, noting in a statement that it has growing concerns about the state’s budget gap and its dwindling cash. Fitch also said the state’s numerous fiscal and cash-flow challenges through the coming budget year are key credit concerns.
Most California lawmakers take full pay despite state shortfall
Nothing in California law says legislators have to sink with the ship of state – and a forced pay cut this year is unconstitutional, so sacrifice is a person-by-person decision. Most say no, state records show. Four of every five lawmakers are accepting full pay of $116,208 in a year of multibillion-dollar deficit, major program cuts and mandatory salary reductions for state workers. Larry Gerston, a political science professor at San Jose State University, said voters want lawmakers to look in the mirror as they tackle a $24.3 billion shortfall.
"The perception is that legislators aren't doing their job," Gerston said. "Right or wrong, that's the perception. So take it one step further: If you're not doing your job, why am I paying you?" The Senate and Assembly are committed to reducing their operating expenses through June 2010, but they have no control over pay of their elected members, which is set by an independent commission. Besides salary, lawmakers are entitled to about $35,000 annually in tax-free per diem for living expenses, plus use of a leased vehicle, with gasoline and maintenance. Seventeen legislators have rejected the car and six have turned down per diem.
Mark DiCamillo, Field Poll director, said lawmakers' record-low approval rating of 14 percent is due largely to public anger over the budget mess, not to lawmakers' decisions about sharing pain. But voters undoubtedly would applaud a voluntary pay cut, he said. "I think those are the kinds of measures that the public expects in this situation, with such a huge deficit," DiCamillo said. California's legislators are the nation's highest paid but make considerably less than many top officials of large cities, counties and school districts, records show. Upon leaving office, legislators receive no pension or health benefits.
"The dirty little secret is, we're not fat cats," said Assemblyman Tom Berryhill, R-Modesto, who notes that lawmakers must maintain two residences and contends that cutting pay could discourage low- and modest-income residents from seeking office. Jaime Regalado, director of the Pat Brown Institute of Public Affairs at California State University, Los Angeles, said the $116,208 salary is reasonable and that state lawmakers should not be made scapegoats for a national recession. "When you go after a set of people that I think work very hard in almost impossible conditions, you're not going after the real problem," Regalado said. "Where does it end?"
Voter passage of Proposition 112 nearly two decades ago created an independent panel of gubernatorial appointees to set salaries for lawmakers and constitutional officers. The commission voted last month to impose an 18 percent pay cut, which would drop legislators' salaries by $20,917 annually – from $116,208 to $95,291. But there's a catch: California's constitution allows state officeholders' salaries to rise – but not fall – in the middle of their terms, so the pay cut cannot be imposed until December 2010 for 100 lawmakers and 2012 for 20 others.
Commission Chairman Chuck Murray said the panel will act June 19 on whether to trim lawmakers' fringe benefits as well, perhaps by capping them as a percentage of salary, he said. Murray said the commission has no control over per diem but is seeking a legal opinion on whether it can cut medical, dental and vision benefits as well as other perks of the job, such as the vehicle subsidy. Not yet resolved is whether cutting fringe benefits is subject to the same prohibition on taking effect in midterm, he said. Murray said targeting legislators for pay cuts is not punitive. "Absolutely not. But we don't have the money. There's nothing there."
Three legislators immediately cut their salaries by the 18 percent approved by the pay commission – Assemblyman Mike Eng, D-Monterey Park; Sen. Abel Maldonado, R-Santa Maria; and Sen. Alan Lowenthal, D-Long Beach. Twenty-one other legislators have docked their pay by up to 10 percent, many of them by rejecting a 3 percent pay increase two years ago and retaining that commitment.
US warns on Chrysler liquidation risk
The US government and Fiat have warned that Chrysler could go out of business as soon as next week if the Supreme Court does not quickly reject an attempt by three Indiana pension funds to block the bankrupt carmaker’s restructuring. The warnings are contained in filings submitted in the wake of the court’s decision on Monday to delay an alliance between Fiat and a “new” Chrysler while the judges consider whether to hear the pension funds’ case.
The funds, which hold $42m of Chrysler’s $6.9bn in secured debt, contend that an offer to pay them 29 cents on the dollar violates their creditor rights. A United Auto Workers union healthcare trust - a more junior, unsecured creditor - would receive far more favourable treatment under the restructuring, including a 55 per cent equity stake. Chrysler’s other secured creditors have accepted the debt-exchange offer under pressure from the Obama administration’s automotive task force to consider the broader economic and social implications. But several have expressed sympathy for the Indiana funds’ position.
The Indiana funds also maintain that the government has acted unlawfully in using the Troubled Assets Relief Programme (Tarp), meant for financial institutions, to bail out carmakers. Fiat raised doubts in its filing whether it would be willing to extend its deal with Chrysler beyond the June 15 expiry date, given the continuing erosion in Chrysler’s value. Chrysler’s plants have been closed since it sought Chapter 11 protection on April 30. With revenues at a virtual standstill, the company is bleeding $100m in cash a day.
“Chrysler could well be forced into liquidation if the sale transaction is not completed on or before June 15”, Fiat said. In addition, the US solicitor-general raised the possibility that the US government many not be willing to continue funding Chrysler much longer. “If the closing is delayed by more than approximately ten days, a sufficient amount of the current commitment of debtor-in-possession financing from the US will have been consumed as to require the government either to increase its overall funding to the detriment of taxpayers, or to abandon its role in the transaction”.
Fiat added that “as opposed to the purely monetary interests being pursued by the Indiana pensioners, there are literally thousands of others who will be irreparably harmed if the sale transaction is not completed and Chrysler goes into liquidation”. The deal’s supporters have pointed to the threat not only to Chrysler’s 55,000 employees, but to its 2,400 dealers and hundreds of parts suppliers. The court has not disclosed when its decision will be announced, but it is widely expected within the next few days.
Closing day comes, and Chrysler dealers aren't happy
Colleen McDonald calls Chrysler "the devil" as she laments losing two Chrysler auto dealership franchises in suburban Detroit, two weeks after being notified by General Motors that her Chevrolet store is being terminated.
Livonia Chrysler Jeep and Century Dodge in Taylor are closing Tuesday, victims of Chrysler's Chapter 11 bankruptcy reorganization that allowed the automaker to get rid of 789 dealership contracts in one fell swoop, cutting its network to 2,400. Some closed already. Another 300 or so are waiting, with little hope, for the results of a bankruptcy court hearing Tuesday on their petitions for relief. But practically speaking, all are out of business today. They'll get no more sales incentive or warranty help from the automaker, no factory financing and no more cars and trucks.
"I have a Chrysler-Dodge-Jeep dealership with no cars. I can't go forward with this business plan," says Howard Sellz, who has been in the car business 44 years and runs Big Valley Dodge — now just three acres of empty lots in the Los Angeles suburb of Van Nuys. His office is filled with decades of photos showing him with famous customers and friends such as Jay Leno, Chuck Connors, Sandy Koufax and Frank Sinatra. He started liquidating March 4, got a series of franchise extensions, but that halted when Chrysler filed for Chapter 11 protection April 30.
Car buyers who've come out on the wrong end of a negotiation with a dealer might be quietly saying that some had it coming. But the impact goes well beyond the person who holds the franchise agreement with the automaker. An auto dealership averages 50 direct employees, according to the National Automobile Dealers Association (NADA) trade group. That's about 40,000 jobs at the 789 Chrysler dealerships closing, though some find jobs at their other dealerships or with the used car operations that some exiting Chrysler dealers plan to start. An average auto dealership pays $2.5 million in annual salaries, NADA says, plus millions more for services, such as companies that supply and clean mechanics' uniforms, and taxes and fees.
"State and local governments will lose millions of dollars in auto sales tax revenue that is essential for economic recovery," says NADA Chairman John McEleney, arguing dealer cuts are too fast. To ease the way out, Chrysler says it will redistribute inventories from dealers closing Tuesday to surviving dealers. Payments from the new seller and Chrysler will cover the vehicle, it says, though Chrysler will charge the old dealer $350 per vehicle to ship them. "They'll be made whole, other than the $350," Steven Landry, Chrysler executive vice president of North American sales and service told trade publication Automotive News. Nonetheless, terminated dealers are sore. McDonald says she sold a lot of vehicles, did what Chrysler asked and kept her customers satisfied — to no avail.
GM, also now in bankruptcy reorganization, has told 1,100 dealers, including McDonald, it will not renew their franchises. But it's giving them until October 2010, when the contracts expire, to wonder. She decided also to close her Holiday Chevrolet in Farmington Hills, Mich., and not wait for the ax. The three dealerships are — were — her livelihood. Her family has been in the business 30 years. She doesn't know what to do next, unsure what business to start in a recession. But she's sure of one thing: If Chrysler relented, she'd refuse: "I won't do business with the devil."
McDonald's frustration and anger are repeated across the U.S. As sales of new vehicles have collapsed, Chrysler and GM say they can't afford to spread their supplies of cars and trucks to so many dealers. They say, with urging from the federal auto task force guiding both through Chapter 11, that fewer dealers mean healthier dealers. They'll compete against Ford or Toyota showrooms, instead of other Chrysler dealers, for instance, battling to sell the same Jeep Wrangler, Dodge Ram or Chrysler minivan. Under Chapter 11 protection, the companies have wide latitude to essentially tear up contracts without regard to state franchise laws shielding dealers. Chrysler says it's cutting dealers that sell too few new vehicles or are too close to better-performing Chrysler stores.
But some being closed rattle off top ratings from the automaker year after year and say they cooperated by buying more cars from Chrysler in February in the company's unsuccessful attempt to stay out of bankruptcy court. Automakers book revenue when they sell vehicles to dealers, not when customers buy them. Sellz, for example, says he did exactly what Chrysler asked, even selling his Subaru franchise and buying a Jeep franchise to meet the automaker's goal of putting all Chrysler brands under one roof. Now, Subaru sales are down just 2% year-to-date in an industry down 37%, according to industry tracker Autodata. The 2,400 Chrysler dealers who'll continue generally see the cuts as painful but necessary — and perhaps not as unjust or inexplicable as the terminated dealers say.
"Of the 789, 44% were dualed (have agreements to sell other automakers' vehicles), so they have other franchises that will continue," says Chuck Eddy, who runs Bob & Chuck Eddy Chrysler Dodge Jeep in Youngstown, Ohio. Eddy, who represents Chrysler dealers at NADA, didn't lose his franchise. "Of the 789 total, 658 sell more used cars than new," Eddy notes. "Anybody will tell you that if (a dealer) is selling more used than new, he's not selling enough new cars, not paying enough attention to new" — even though used typically is more profitable. "You do it right, you make some money on new, a lot of money on used," he says. Eddy says he averages close to two new cars for every used he sells.
Maybe as disgruntled as terminated dealers were weekend shoppers looking for give-away prices. Denise Capurso, a real estate agent from La Crescenta, Calif., was a no-sale at Star Chrysler Jeep in Glendale, Calif. — on Chrysler's hit list — after a salesman told her she couldn't buy a vehicle for half-price. The lease ends on her Volvo this month, and she was a serious shopper. "I was hoping to find deeply discounted cars, and they are offering $2,000 (discounts)," she grumbles. "I was expecting to find a giant sign saying, 'Going out of business.'" Dismayed, she went across the street to the Volkswagen dealer.
Steve and Kristin Shin of Cerritos, Calif., have a baby on the way and were weekend shoppers looking for a drastic deal on a Chrysler minivan. They'd been considering Honda and Toyota minvians, but stopped at Star hoping, unsuccessfully, for a huge discount. "There was an expectation there is a fire sale. We haven't had a fire," general manager Doug Swaim says. Star owner Steve Bussjaeger says the influx of "vulture" buyers looking for a steal was "somewhat disheartening and frustrating." Still, using a classic tent sale approach, Bussjaeger figures he'll find buyers at reasonable prices or come up with other dealers to buy his remaining stock of 100 vehicles. "I'll take a substantial loss on every vehicle, but it's not going to kill me," he says.
He was doing such a good job of putting on a normal face that some customers were unaware the dealer was closing as they browsed the lot. "It's probably a good time to buy," says Don McIntyre, a retired city manager from Pasadena who came to check out a Jeep Liberty with his wife, Nancy. "We're not looking for an amazing deal. We're looking for a fair deal. We're not desperate." Like Livonia's McDonald, Bussjaeger feels his good deeds are being punished. Star has been a Chrysler "five-star dealer" for more than nine years, an elite group whose sales, service, facilities and other factors put them at the top of Chrysler's internal rankings. Star also met its sales goals, he says. "Chrysler just walked in and said, 'We're going to take it away from you,' " Bussjaeger says. "I've done everything they've asked."
Rick Schaub, owner of Montrose Dodge in Germantown, Md., says his dealership had virtually no weekend sales even though it seems widely known that Tuesday is his last day. "The people coming in think they can get a car for $3,000 or something like that," he says. His dealership has about $200,000 worth of Dodge replacement parts, and he says Chrysler was willing to take back only $4,000 worth. He still has about 30 vehicles to get rid of before he switches to used car sales and repair work. "I feel fortunate that I'm going now, quite honestly, because I don't give Chrysler long," he says. "They don't have much of a chance of survival, and the guys who are left are being forced to dig their graves deeper by investing in their dealerships."
Jeff Sellz, son of the Big Valley Dodge owner, who was making a lunch run in a shiny black Dodge Charger, says, "We've already been to hell and back" as a Chrysler dealer, and it's time to move on: "We can't wait to get started." Winding down the business is a lengthy process. McDonald says she and her husband are facing issues they never considered: canceling advertisements in the Yellow Pages, terminating uniform contracts, calling the folks who empty their dumpsters to cancel and withdrawing plans for a billboard. She says it could take months to get everything done.
Rising deficits threaten Asian ratings
Standard & Poor’s has sounded the alarm over the creditworthiness of some Asian countries, saying they are at risk of debt downgrades even if the global economy stabilises. The credit rating agency said on Tuesday that sovereign debt ratings were coming under pressure because of huge economic and financial rescue packages announced by governments that have led to spiralling budget deficits. Recent fiscal measures to fight recession and stabilise banking systems would weigh on the public finances of several Asian economies, S&P said. Rising national debts would put credit ratings under strain.
“The worst of the economic dislocation in Asia-Pacific appears to be over, if recent indicators are to be believed, but fiscal deterioration resulting from stimulus and banking sector support measures will continue to put pressure on a number of sovereign ratings in the medium term,” said S&P. The agency’s comments follow its recent decision to lower outlooks on India and Taiwan from “stable” to “negative”, a move that reflected the “fiscal deterioration associated with providing support for their respective economies”. Political unrest in Fiji, Sri Lanka and Thailand were also “important reasons for negative actions on sovereign ratings”, S&P said.
Its warning came as Fitch cut Malaysia’s long-term local currency rating from A-plus to A on worries over its growing budget deficit. Analysts estimated that the country’s budget deficit this year could be nearly 5 per cent of gross domestic product after it introduced M$67bn (US$19bn) in stimulus spending since November. Philippine bond yields are also rising on fears of a bigger budget deficit as officials suggest they may have to return to the overseas debt market and tap concessional loans from multilateral lending agencies.
Margarito Teves, the finance secretary, has said lower tax revenues from a weak economy could force the government to raise its deficit target for a third time this year from $4.2bn. But S&P said some countries, such as Australia, China and Hong Kong, could assume higher debt without a materially adverse impact on creditworthiness because of the relative strength of their balance sheets. S&P also warned that the number of corporate defaults in the region this year could exceed those encountered in the 1997-98 Asian financial crisis. “In the next year or so, corporate defaults will likely rise” as “pressures will mount on banking systems in the region,” said Kim Eng Tan, an S&P analyst.
Tim Geithner Asks For A Bigger Treasury Budget
by Tim Geithner
Here's the highlight on financial regulation:
"In the next few weeks, we will outline a comprehensive plan of reform that will include systemic risk regulations to ensure that no large and interconnected firm or market can take on so much risk that its failure could destabilize the entire financial system. The plan calls for bolstering consumer and investor protections. And it will streamline our out-of-date regulatory structure so that our regulatory system matches the size, shape and speed of our modern financial system. Together, these changes will help prevent another crisis of the magnitude that we have just lived through."
The full speech below:
Chairman Durbin, Ranking Member Collins, members of the Subcommittee, I appreciate the opportunity to testify before you for the first time as Treasury Secretary on the President's Fiscal Year 2010 Budget request for the Department of the Treasury. While we see some initial signs of economic improvement and the financial system is beginning to heal, our country faces very substantial economic and financial challenges. President Obama and his Administration are working to meet these challenges by getting Americans back to work and getting our economy to grow again; by restoring fiscal discipline to ensure a sustained recovery, and by making the long-neglected investments in health care, energy and education needed to enhance America's global competitiveness and produce more balanced, sustainable growth over the long-term.
Treasury's Key Priorities
To achieve these goals, we are repairing and reforming our financial system so that it works for, not against, a recovery that serves all Americans. To restore growth and meet our fiscal goals, we are redesigning and bolstering enforcement of our tax code so that it is both fairer and more efficient. To advance our interests globally, we are working with other nations to promote economic recovery and financial repair, and to ensure more open markets for U.S. business. And to protect the country, we are deploying all of the tools at our disposal to exclude terrorists, proliferators, and other illicit actors from the international financial stage, and thereby secure our financial system and combat threats to our security.
The Fiscal Year 2010 Budget that you have before you will allow Treasury to pursue these core missions assigned to the Department by the President and the Congress. The $13.4 billion request includes a $676 million, or 5.3 percent, increase over enacted 2009 levels. Of this increase, $14 million would go to bolstering the staffs of our Domestic Finance and Tax Policy offices, which are at the epicenter of Administration efforts to support rigorous analysis and implementation of revenue policy and to redesign and improve our tax policies and tax code. Some $137 million would be devoted to more than doubling our Community Development Financial Institutions (CDFI) Fund to ensure that the benefits of our financial repairs reach beyond our major banks and businesses to help economically distressed communities. These communities were underserved by our financial system even before the current crisis, and have been deeply hurt by the job losses and business failures that the crisis has spawned.
A total of $332 million would be devoted to new Internal Revenue Service (IRS) enforcement efforts, including $128.1 million to add nearly 800 new IRS employees to combat offshore tax evasion and improve compliance with U.S. international tax laws by businesses and high-income individuals. Another $130 million would go to bolster the security of the IRS information technology, improve the efficiency of its business systems and upgrade its fraud detection capabilities. Although not directly under the jurisdiction of this Subcommittee, our Budget also includes funds to meet our international obligations to help us in mounting a global response to the crisis and in creating mutually reinforcing growth around the world. As we seek these additional funds to respond to our nation's troubles, we have cut back on some programs that are either ineffective or that we believe can be safely delayed.
For example, while the Earned Income Tax Credit (EITC) continues to be one of the most effective anti-poverty programs that the Federal government administers, the Advanced EITC, a related program which provides benefits in advance of filing a tax return, has been prone to exceptionally high levels of error and low use by those eligible for it. Accordingly, our Budget proposes to end this latter program for savings next fiscal year of $125 million.
Similarly, even as we seek to increase capital investment for the IRS, our Budget would reduce the Department-wide capital investment account by 65 percent for a savings of $17 million. The Treasury Budget would reduce the number of international economic attachés from 20 to 16, saving $2 million next fiscal year. It would absorb a portion of our non-pay inflation through more efficient use of contracting and other cutbacks, saving $18 million. It would take advantage of the growth of efficient electronic filing of tax returns to reduce the IRS processing budget by $8 million next fiscal year.
Given we have had control over the budget for fewer than five months, the reductions that I have just described represent a first attempt to do more with less. As we begin work on the Budget for Fiscal Year 2011, Treasury has prepared itself for a more rigorous assessment of its spending. I have already issued guidance to Treasury senior staff that says, in part: "To afford any new investments, we will have to take new approaches to solving old problems. I expect each bureau and policy office to identify opportunities for innovation that will transform how Treasury fulfills its missions in order to both improve performance and reduce cost."
In addition, the President has announced his intention to nominate Dan Tangherlini to be our Assistant Secretary for Management and Budget. Consistent with the President's mandate, I will look to Mr. Tangherlini to scour the Treasury's budget for efficiencies and cost savings. He comes to the job with an impressive track record of working on budget, management and performance issues with District of Columbia Mayor Adrian Fenty, and I am convinced that he will bring the same results-oriented approach to the federal government.
Repairing and Reforming the Financial System
The President has assigned the Treasury to repair key sectors of our economy so that they help revive growth and produce broadly shared prosperity. The Treasury has been working to repair and reform every major element of our financial system, and to fill gaps in the system so that it benefits all Americans. Last month, federal banking supervisors announced results of the stress tests that we asked them to conduct on our 19 largest financial institutions. The aim of these assessments was to ensure that these institutions have sufficient capital buffers to absorb the losses that they could suffer under worse-than-expected economic conditions and continue to make the loans necessary to sustain recovery.
The clarity and transparency provided by the tests has helped improve market confidence in the banks, making it possible for them to collectively raise nearly $90 billion through private equity offerings, bond issuances without government guarantees and sales of business units. On housing, Treasury is working with HUD to bolster our housing markets by helping to drive down mortgage interest rates and by assisting responsible homeowners to refinance into more affordable mortgages or modify their at-risk loans to avoid preventable foreclosures. In terms of the non-bank financial sector, Treasury is working to revive critically important securitization markets for both new and old asset-backed securities.
We have begun to boost new consumer and business lending by re-starting the markets for asset-backed securities that financed almost half of all lending in this country before the crisis. There were more securities of this type issued the four months after we launched our effort than in the preceding nine. Additionally, Treasury is about to join with private investors in seeking to restart the markets for legacy mortgage loans and securities that are now stuck on bank balance sheets, keeping these institutions from making new loans to families and businesses. As we have made repairs to the financial system, we have understood that repair alone is not enough. We must also reform the system so that it is less prone to crises of the dimensions that we now face.
In the next few weeks, we will outline a comprehensive plan of reform that will include systemic risk regulations to ensure that no large and interconnected firm or market can take on so much risk that its failure could destabilize the entire financial system. The plan calls for bolstering consumer and investor protections. And it will streamline our out-of-date regulatory structure so that our regulatory system matches the size, shape and speed of our modern financial system. Together, these changes will help prevent another crisis of the magnitude that we have just lived through, and give the government new tools to better cope with similar problems should they occur in the future.
In addition to the financial system, Treasury is helping to ensure that the nation has a viable auto industry in the future. We are working with General Motors and Chrysler to make sure these companies make the changes necessary to again prosper. As President Obama has said "we cannot…must not…and will not let our auto industry simply vanish." The resources for administering key elements of both our financial and auto repair efforts were authorized by the Emergency Economic Stabilization Act. These activities are being handled by our Office of Financial Stability (OFS), which is focused on ensuring that TARP funds serve the public purpose of economic and financial stabilization; that they are fulfilling this purpose in ways that protect taxpayers; and that we can provide a clear account to the Congress and the American people about the effectiveness of the funds' use.
In order to administer TARP and ensure compliance by TARP recipients, OFS has had to quickly assemble a substantial staff. OFS staffing levels, which were at 88 when I arrived in office, had risen to approximately 165 by the end of last month and are expected to rise to 225 by next fiscal year. The office's budget for next fiscal year will total $262 million, a 6 percent decline from the current fiscal year's $279 million. The change is largely due to a decline in estimated spending on contracts as part of the program's initial start-up. While TARP is proving effective at improving the immediate stability of the financial system, the scope of the issues that this Administration and this Department face extend beyond TARP to include striking the delicate balance between intervention and allowing market participants latitude to operate; devising a new financial regulatory structure for the future; and working through the tough problems of what form our government-sponsored enterprises, Fannie Mae and Freddie Mac, should take as we emerge from this difficult period.
All of these issues fall to Treasury's Office of Domestic Finance, which, together with OFS, is having to operate on new policy terrain, tackling problems that the country has not faced in generations and for which we have few guideposts in our immediate past. That is why the workload of the Office Domestic Finance has already expanded greatly, and is all but certain to expand still further. And it is why we are seeking to modestly increase its size and bolster its expertise in several critical areas. Our Budget requests an additional $8.7 million for the office to add 26 full-time equivalent (FTE) positions to the staff. This represents a 26 percent increase from the office's current fiscal year staffing of 101.
The additional funds will be used to create two new Deputy Assistant Secretary positions, one for housing finance, small business and consumer issues, and a second for capital markets. These two new officials will lead teams that will perform the economic and institutional research necessary to ensure that we understand all of the policy options in each of these areas and choose the most effective ones for solving our problems. As we seek additional funds for Treasury, we must also seek them for the front-line institutions that will sustain our economic recovery and ensure that its benefits are broadly shared.
Our Budget would more than double the resources of the Community Development Financial Institutions (CDFI) Fund to $243.6 million. The fund's mandate is to help low-income, economically distressed communities that were poorly served by our financial system even in economic good times, and – although they had nothing to do with causing current conditions –have been significantly hurt by the economic and financial fallout of the crisis that we now face. The $136.6 million, or 128 percent increase in funding, would allow this program to support financial institutions in making job-creating investments and in providing access to capital in communities that are often considered too risky for mainstream financial institutions to serve. By targeting lenders and borrowers in these communities, the Fund would help some of our most vulnerable populations weather the crisis and benefit once recovery is underway.
The aim of the fund is to make sure that we provide distressed communities with more than simply government grants and aid. We must also build the capacity of their local financial institutions to ensure that capital is flowing to homebuyers and businesses so that they can finance their own economic futures. Since its inception in 1994, the fund has directed nearly $1 billion to distressed communities, and allocated $19.5 billion in tax credits through its New Markets Tax Credit program. Financial institutions funded through the CDFI program make loans to small businesses and micro-enterprises and take equity positions in them. They provide mortgages to low-income homebuyers, and finance developers of low-income housing and community facilities, such as charter schools, health clinics and child care centers.
One example can be seen right here in the Anacostia neighborhood of Washington, DC. City First Bank – a local CDFI – and Charter Schools Development Corporation partnered to provide a $13.3 million New Markets Tax Credit for the Thurgood Marshall Academy, the city's first charter school focused on law, serving 360 students in grades nine through twelve and achieving a 100 percent college acceptance rate for its first three graduating classes. Historically, the CDFI program has been heavily oversubscribed and has had to turn away qualified applicants. For example, in the current fiscal year, the program for CDFI financial and technical assistance awards is budgeted at $55 million, but it expects to receive applications for more than $500 million in funding.
Redesigning the Tax System for Fairness and Efficiency
The President has asked Treasury to redesign and bolster enforcement of our tax code so that it supports growth, sets the stage for our return to a sustainable fiscal path, and accomplishes these goals in a manner that is fair, efficient and supportive of our society's broadest goals. To make good on the President's assignment, our Budget requests a modest increase in funding for Treasury's Office of Tax Policy and more substantial increases to expand IRS enforcement activities and to improve its information technology. Treasury has moved quickly in implementing the more than 30 tax provisions of the President's economic recovery plan. Treasury also has played an integral role in designing the tax provisions of the President's Fiscal 2010 Budget, and it will play a similar role in implementing these.
The President has made clear that he will not seek any major revenue increases until 2011 when the recovery should be firmly in place. He has, however, been equally clear that once recovery is underway, we must get our fiscal house in order or risk having government borrowing crowd out productive private investment. Treasury and the White House will work with Congress to make the tax changes that are necessary to reduce deficits and to do so in a manner that is fair to all Americans. As part of our efforts to make sure that the tax system is working for recovery and is operating fairly, we have designed new policies to curb the use of off-shore tax havens, close the international tax gap, remove tax incentives for companies to shift jobs overseas, and replace these incentives with ones that encourage creation of jobs at home.
Our tax work on the recovery plan, the Fiscal Year 2010 Budget, and these international tax issues are just the beginning of an ambitious agenda for this Administration. On health care, the President has made clear that the road to fiscal discipline and to solvency for Medicare and Social Security runs through overall health care reform. Although much of the cost of the President's reform plan will be covered by savings from the system, we will need to design programs to cover some of the costs in ways that are fair to all Americans and do not harm the economy. Treasury is deeply involved in this effort and in the related work to expand coverage and improve our health care system in other important ways.
On retirement and economic security, Treasury and, in particular, the Office of Tax Policy, is taking the lead in developing and actively working with Congress to flesh out the initiatives proposed in the President's budget to help enhance retirement security and savings for the half of working Americans who have no retirement provisions beyond Social Security. These proposals would make it easier for people to save for their own retirement, either through their workplaces or on their own, and would move us toward universal retirement savings coverage. On climate change, Treasury is already working closely with Congress to design the auction mechanisms that will be needed to implement the Administration's greenhouse gas cap-and-trade program.
Our Office of Tax Policy has been deeply involved in all of these issues from the outset of the Administration. Like our Office of Domestic Finance, its workload already has substantially increased and is certain to grow as the health reform, retirement security and climate change debates get underway in earnest. At the moment, the Office of Tax Policy's career staff includes 30 lawyers and 44 economists as well as support staff for an overall staffing level of 93. This is lower than its usual complement of over 100 professionals.
Our Fiscal Year 2010 Budget would increase the office budget by $4.9 million to add 15 full-time equivalent (FTE) positions in order to increase overall staffing to 108, and would therefore represent a return to historical norms. The additional staff is needed to perform analysis and revenue estimates for new policy proposals, conduct research for, among other things, congressionally mandated studies, and develop regulations and guidance for new legislation. The vast majority of the new funds that we request in this Budget are for improving the enforcement efforts and the information technology of the IRS.
As I have said, $332 million would go to new IRS enforcement efforts, including $128.1 million to improve international tax compliance. The balance of these funds would be used to support three critical programs: 755 employees to increase examinations of tax returns for businesses and high-income individuals; 300 employees to expand the IRS document matching program, which compares tax returns to other forms such as W-2s and 1099s; and an additional 491 employees to improve collection operations and build two new IRS automated collection center sites.
Turning to IT, our Budget requests a $90 million increase in funding to protect taxpayers' personal records from the increasing number and sophistication of Internet-based attacks. With these funds, the agency will deploy state-of-the-art, automated tools to improve record access management, risk assessment and system auditing. This effort would address concerns noted in the past by both the Government Accountability Office and the Treasury Inspector General for Tax Administration. Our Budget also requests an additional $18 million for systems to help the IRS return review program detect noncompliance and fraudulent refunds, and a $22 million increase to continue modernizing the agency's core taxpayer account database and modernized the e-File web-based platform.
Reengaging with the World on Economic Issues
The President assigned Treasury to ensure that this country reengages with the world, not just on issues of war and peace, but also on the current crisis, and on issues crucial to our common economic futures. This is a global crisis. Recovery here depends on recovery abroad. We are working closely with other major economies to put in place the fiscal stimulus and make the financial repairs necessary to ensure U.S. and global recovery. The U.S. is seeking to mobilize the financial resources of the better-off nations to help the emerging and developing economies that have been especially hard-hit by this crisis. We are doing this for more than simply humanitarian reasons; as recently as last fall, these economies accounted for fully 42 percent of all U.S. exports.
Last month, the President and leaders of the other G-20 nations agreed on the need to make more than $1 trillion in financial resources available to support global growth and trade. Those funds include our commitment of up to $100 billion for an expanded New Arrangements to Borrow, a permanent back-up mechanism that provides the International Monetary Fund with supplemental resources to help emerging markets and developing nations weather the crisis. As part of our effort to rekindle global growth for the sake of our own recovery, we are seeking to meet our past and present financial commitments to the multilateral development banks that help emerging and developing countries.
Although the funds to do this are not directly within the purview of your Subcommittee, I mention them to illustrate how Treasury's entire budget is tailored to let us fulfill the missions that the President has set out for us. Our budget request includes $2.5 billion for international programs, most of which would serve to meet our past and present commitments to the multilateral development banks. Our financial reform effort in the United States must be matched by similarly strong efforts elsewhere in order to succeed.
Before I end, let me say a word about the Department's staff. I have the honor of leading a team of smart and dedicated individuals who are working to make our government more effective and our society fairer, who are following a long tradition of debating policies fearlessly on their merits, doing what is right and not what is expedient, and drawing on the best ideas and expertise that are available. They are performing an incalculable service to our country in these challenging times, and I am immensely grateful to them.
The Department of the Treasury is responsible for promoting the nation's economic prosperity and protecting its financial security. We advance our interests around the world through the strength not only of our economy but of our ideas. This President and Treasury have already begun the hard work of recovery and reform. Our Fiscal Year 2010 Budget will allow us to pursue these critical goals, and deliver the balanced and sustainable growth that the American people seek and deserve.