Greyhound bus, Washington, D.C.
Ilargi: New York Attorney General Andrew Cuomo today published a report entitled "'The Heads I Win, Tails You Lose' Bank Bonus Culture". The numbers tell their own story. In 2008:
- JPMorgan Chase: $25 billion in TARP funding,, earned $5.6 billion, paid $8.69 billion in bonuses
- Goldman Sachs: $10 billion in TARP funding, earned $2.3 billion, paid $4.8 billion in bonuses
- Morgan Stanley: $10 billion in TARP funding, earned $1.7 billion, paid $4.5 billion in bonuses
- Citigroup: $45 billion in TARP funding, lost $27.7 billion, paid $5.33 billion in bonuses
- BoA/Merrill Lynch: $45 billion in TARP funding, lost $23.6 billion, paid $6.9 billion in bonuses
In total, 4613 bankers and traders received bonuses of more than $1 million at these 5 financial institutions, all of which would in all probability have collapsed if not for taxpayer assistance. The TARP funding is by no means the only way they got access to the public trough. While some have returned TARP funds, the other types of funding, while there's no doubt they add up to a far higher total than the combined $135 billion in TARP funds, exist in a much more opaque territory. There are numbers available of what the banks received from the AIG bail-out; Goldman Sachs, for example, was handed $13 billion.
And while of course all the Wall Street smartheads would call it a distorted comparison, it IS fair to simply take bonuses minus earnings, and claim what you have left as the part of the bankers' million dollar+ bonuses paid directly out of the pockets of the millions of Americans who have lost their jobs while and since the bonuses were paid.
The exact amount of public funding received by the financials is not the only element in this ongoing tale that remains murky. Another is the true value of the often toxic paper, for instance Level 3 and off-balance sheet, that the banks still hold in their vaults.
What becomes ever more clear is that paying traders and bankers million dollar bonuses is ridiculous, and that it should be, if it isn't already, a criminal offence, if and when the source of the money is the American people. Who, in case you missed it, lost an estimated $20-30 trillion in wealth in 2008, and have kept on bleeding since.
President Obama recently claimed that when banks repaid TARP funding, he didn’t have much say over them anymore. Well, sir, the numbers released today are from before that time. Let's see you demand the return of that $30+ billion. If you don't, we'll have yet another indication whose side you are really on. Or would you like to make us believe that the TARP money was handed out without the stipulation that is wouldn't be used in this way, that you are once again powerless. If so, let's hear you say that, so we all know where we stand when the next bail-out arrives.
Bonus Report Says What We Already Know
The bailout bonus bonanza continued on Thursday as a public official issued an apparently damning report on 2008 payouts at the country's most troubled banks. New York Attorney General Andrew Cuomo released a study titled "'The Heads I Win, Tails You Lose' Bank Bonus Culture," blasting financial firms for paying bonuses that far exceeded profits for the entire year, when the banks were making money at all.
Most of the figures highlighted by Cuomo has been available for months in annual reports, though he provides additional details in an appendix of the report. Unsurprisingly, Citigroup and Bank of America's Merrill Lynch, two firms that remain in the crosshairs of the bonus debacle, got the brunt of Cuomo's criticism. He notes that Citi distributed $5.33 billion while Merrill paid out $3.6 billion in bonuses. Those two firms lost a combined $54 billion last year, and required government bailouts totaling $55 billion.
Executives at financial firms have argued that employees' bonuses should factor in the performance of their individual units, as well as that of the overall company. Others, as Cuomo notes, have maintained that they neither requested nor wanted bailout funds, but were pressed by regulators to accept them. Still, Cuomo says their arguments for outsized bonuses are groundless. "[E]ven a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks' financial performance," he writes in the report. JPMorgan Chase, Goldman Sachs and Morgan Stanley paid out bonuses that Cuomo calls "substantially greater" than the banks' net income as well.
JPMorgan earned $5.6 billion, paid $8.69 billion in bonuses and received $25 billion in TARP funding. Goldman earned $2.3 billion and paid out $4.8 billion in bonuses, while Morgan Stanley earned $1.7 billion and paid $4.5 billion in bonuses. Each of those two former investment banks received $10 billion in TARP funding.
Others, like State Street and Bank of New York Mellon, paid bonuses that Cuomo calls "more in line" with earnings. For example, State Street earned $1.8 billion, paid bonuses of $470 million and received $2 billion in TARP dollars.
Nearly 5,000 on Wall Street Got Million-Dollar Bonuses in ’08
The Wall Street millionaire club had nearly 5,000 members in 2008. At least 4,793 bankers and traders were paid more than $1 million in bonuses last year even as profits at the biggest banks dwindled and they accepted tens of billions of dollars of taxpayer money, according to a report released on Thursday by the New York attorney general’s office. Wall Street bonuses have come under intense scrutiny from lawmakers and regulators who say they believe that freewheeling pay practices contributed to the financial crisis.
Banks have long paid their executives bonuses to supplement smaller salaries, but governance experts say that the nine-figure payouts during Wall Street’s worst year in decades shows the link between pay and performance has been frayed. The House of Representatives is scheduled to vote on Friday, ahead of its August recess, on a compensation reform bill. The new rules call for a "say-on-pay" vote for all public companies and additional requirements that compensation committees be made up of independent directors, and would order regulators to restrict "inappropriate or imprudently risky" pay packages at larger banks.
Ever since public furor erupted last spring over bonuses at the troubled insurance giant American International Group, lawmakers have paid close attention to Wall Street pay. Both Congress and the Obama administration introduced tough pay guidelines for financial executives, and the Treasury Department created a position of a federal compensation czar to review pay packages at companies that received multiple bailouts. Kenneth Feinberg, who reviewed the payouts to victims of the terrorist attacks on Sept. 11, 2001, has recently been meeting with several Wall Street firms. The pay for the top 100 highest-compensated employees at the General Motors, Chrysler and five of the most deeply troubled financial companies must win his approval.
The figures released on Thursday by the New York attorney general, Andrew M. Cuomo, provided the most detailed accounting yet of Wall Street’s millionaire ranks. In the report, Mr. Cuomo said that 738 bankers and traders at Citigroup took home bonuses of $1 million or more in 2008 even as the bank posted a $27.7 billion loss. In all, Citigroup paid $5.33 billion in bonuses; it received $45 billion in bailout funds. Bank of America and Merrill Lynch, whose merger brought the combined company to the brink of collapse, paid 868 employees bonuses worth at least $1 million. Both banks, whose compensation packages are being reviewed by a federal pay czar, turned to the government twice for bailouts, receiving a total of $45 billion.
Merrill’s bonuses totaled $3.6 billion in a year that it lost $27.6 billion, the report said, while Bank of America paid $3.3 billion in bonuses on $4 billion in earnings. Wall Street’s more profitable firms were more generous, even though they also received government support. At Goldman Sachs, 953 bankers and traders took home bonuses worth at least $1 million last year, including 212 employees who received more than $3 million. The investment bank paid a total of $4.8 billion in bonuses last year, the report said, more than twice its earnings of $2.3 billion. The bank got $10 billion in bailout funds.
Morgan Stanley paid nearly 428 employees bonuses of at least $1 million, including 290 who received more than $2 million. Morgan Stanley, which earned $1.7 billion last year and received $10 billion in federal aid, paid $4.5 billion in bonuses. JPMorgan Chase paid 1,626 employees bonuses of more than $1 million in 2008 and received $25 billion in federal assistance. The bank earned $5.6 billion, while its bonuses totaled $8.69 billion.
Pinched States Wrestle With More Cuts
Pennsylvania state workers may go without paychecks. Georgia is mowing its highway shoulders less. And Arizona is planning to sell its House and Senate buildings. Just a few weeks after many states struggled to balance their budgets for the new fiscal year, plunging tax revenues are forcing more cuts. Dwindling taxes are also spurring ugly political fights in states such as Pennsylvania and North Carolina that haven't yet passed balanced budgets, as is required by law in all states except Vermont. Arizona officials announced a tentative budget deal late Wednesday.
At least 10 states already are projecting new budget gaps totaling more than $3 billion, on top of $139.2 billion in shortfalls legislators across the country had patched up before the fiscal year began July 1, according to the left-leaning Center on Budget and Policy Priorities. In addition, California adopted spending cuts and other measures this week to close its remaining $24 billion shortfall. Normally, states wouldn't be grappling with budget gaps until they begin planning for the next year's budget, said Elizabeth McNichol, a senior fellow at the Washington-based think tank.
But the recession has states closely watching revenues that continue to tumble, said Corina Eckl, director of the fiscal program for the National Conference of State Legislatures. "It's like falling down a flight of stairs," she said. "It hurts, but you are anxious to get to the bottom." They aren't there yet. Georgia said this month that revenue in June was down 15.7% compared with June 2008. For the full fiscal year that ended June 30, revenue was down 10.5%. Gov. Sonny Perdue, a Republican, said the state must cut $900 million from its current $18.6 billion budget, taking spending down to about 2005 levels.
He has ordered budget cuts and furloughed state workers. So mowing is less frequent, state agency phones are being answered more slowly and there is a backlog in processing some state income-tax refunds, said Bert Brantley, the governor's communications director. The governor is also asking local school districts to make teachers take unpaid time off on three days this year that would otherwise be used for planning. "We've done everything we could to protect education, but the numbers just don't work," Mr. Brantley said.
In Colorado, the latest estimate shows that tax revenues can't support currently budgeted general-fund spending of more than $7 billion this year. So Gov. Bill Ritter, a Democrat, plans to order $400 million in additional budget cuts next month, said his communications director, Evan Dreyer. Last week, the governor announced four dates this year that state offices will be closed, starting Sept. 8, as he and other workers take unpaid furlough days. An unusually large number of states failed to make their July 1 budget deadlines, experts said, and a handful of those are still struggling to reach agreements.
In Arizona, legislative leaders and Gov. Jan Brewer announced a plan to fill a $3.4 billion shortfall, in part by selling state-owned buildings -- including prisons, as well as the House and Senate buildings -- to investors, and then leasing back and eventually repurchasing the buildings over 20 years. The sale-leaseback deal could garner the state as much as $735 million. "I look at it as taking out a mortgage," said Arizona House Majority Leader John McComish, a Republican. "It's more like a loan using a state asset as collateral." Arizona voters will also get to weigh in on a temporary increase in the state sales tax.
In North Carolina, another state without a budget deal, Gov. Bev Perdue last week rejected a proposal by fellow Democrats in the Legislature to impose a temporary income-tax surcharge on all taxpayers, rather than just the wealthy, to cover a gap that has grown by $1.5 billion since March. "We've gone back to the drawing board," said her press secretary, Chrissy Pearson. In Pennsylvania, state workers are about to start moving from partial paychecks to no paychecks if a budget isn't passed by Friday.
Gov. Ed Rendell, a Democrat, said Wednesday that he will sign a stopgap measure as early as Monday while he wrestles with Republicans in the state Senate over whether to increase taxes. State revenues are unlikely to bounce back soon even if the national recession ends quickly, said Joseph Henchman, director of state projects of Washington-based The Tax Foundation, which tracks fiscal policies. As a result, he said, "I think we are more likely to see some broad-based tax increases" in the coming months.
States Look for Economic Relief Selling Government Buildings
It's the solution that no one wants: selling the buildings at the heart of Arizona's state legislature. But like other recession-battered states, the Grand Canyon state is desperate to close a huge budget gap -- and so the two, 50-year-old buildings home to Arizona's State Senate and House of Representatives grace the list of possible properties that the state could sell to help close a more than $3 billion budget gap next year.
"There are really no good options to get out of this mess that anyone's happy about," said Kevin McCarthy, a longtime Arizona resident and the president of the Arizona Tax Research Association (ATRA), a Phoenix-based finance policy group. "In a normal time period, as a taxpayer organization, it would be an understatement to say we'd be strongly opposed to something like this," McCarthy said. "But in Arizona these days, there's nothing normal." Arizona is one of at least a handful of states -- including California, Connecticut and Pennsylvania -- considering or moving forward with state property sales.
"States are having to make some extremely difficult decisions in light of continuing declining revenues," said Todd Haggerty, a research analyst with the National Conference of State Legislatures. "A lot of states are looking at their third or fourth of year of projected budget gaps. You can only cut so much before you have to start finding other sources of revenue." Connecticut is considering selling government properties as part of a larger effort to sell off state assets, including equipment, to bridge a projected $8.5 billion budget gap over the next two years.
"The governor has said that many of these properties are quite desirable and this is something she wishes she did not have to do," said Adam Liegeot, a spokesman for Connecticut Gov. Jody Rell. "But the fact is the state of Connecticut is having an $8.5 billion problem that both Republicans and Democrats must come together and address." In Arizona, the state governor's office says the state's two legislature buildings are at the bottom of the list of 32 properties, including prison and state fairgrounds, being considered for sales. But if the buildings are sold, there wouldn't actually be a major move involved: Phoenix residents shouldn't expect to see their local representatives carting cardboard boxes full of files and potted plants out of the buildings.
Instead, as first reported by the Arizona Republic, lawmakers are considering leasebacks of the properties; they would sell the properties but then continue to use them through lease agreements that would eventuallly result in the state regaining ownership of parcels. The initial sale of the properties could bring the state between $350 million and more than $700 million in new revenue, said Paul Senseman, a spokesman for Arizona Gov. Jan Brewer. The catch? ATRA's McCarthy says that back-of-the-envelope calculations show that the state could end up paying between $60 million and $70 million a year on the leases. Over a 20-year lease, that would add up to as much $1.4 billion.
Senseman said the government officials are aware that the proposal, which has bipartisan backing but has yet to receive formal approval, would ultimately end up costing the state money. "Gov. Brewer has stated that she is certainly not fond of one-time [funding] mechanisms, but she inherited a massive budget deficit when she became governor in January and has had to take very dramtic steps to deal with it," he said. The consequences of leasebacks -- a financing strategy that isn't uncommon among municipal governments -- aren't the only pratfalls facing states looking to sell properties. There's also the, ahem, awful real estate market, particularly in Arizona and California, which have seen some of the country's highest rates of foreclosure and plummeting real estate prices.
"We're in a fiscal crisis, but it might be shortsighted for them to be selling property now in one of the lowest points in the market, versus holding on to property when values increase and can appreciate," said Steve Geller, a California real estate lawyer. State officials, however, are more optimistic. Fred Aguiar, the secretary of the State and Consumer Services Agency, said the Golden State properties are unique enough to draw top bidders.
The state, which was grappling with a more than $20 billion budget shortfall, is planning to sell 11 properties, including the Ronald Reagan building in Los Angeles, the Civic Center in San Francisco and the Orange County Fairgrounds. (Other candidates for sale, including San Quentin State Prison and the Los Angeles Coliseum, were ultimately left off the state's list.) California Gov. Arnold Schwarzenegger signed a bill authorizing the sales on Monday.
The value of the combined properties, which house a total of 17 buildings on 8.1 million square feet, is estimated between $600 million and $1 billion, Aguiar said. "The state is more interested in getting out of the real estate business than remaining in the real estate business," Aguiar said. "Besides the cash, if it's an old building, the new landlord takes over the responsibility of maintaining the building."
Aguiar said that California, like Arizona, is looking to keep using the properties through leaseback agreements. Pennsylvania, in contrast, was ready to give up two of its properties for good. It has already sold its Philadelphia state office building for $25.2 million and plans to close a $4.6 million sale of its Pittsburgh state office building later this year. Employees from both buildings will move to leased space within their respective cities.
In addition to revenue generated from the sales, the state will save millions in maintenance and upgrade costs for the two buildings, said Ed Myzlewicz, press secretary for the Pennsylvania Department of General Services. "It was clearly evident for us if we were to continue to run both these buildings it would be at an enormous cost to taxpayers," Myzlewicz said. "We began to compare business models, and it was clear to us it would be more economically feasible for us to lease space."
New weekly US jobless claims rise
The number of US workers claiming unemployment benefits rose last week, but remain below levels seen during the depths of the recession, raising optimism that the labour market could slowly be starting to heal.
New jobless claims rose by 25,000 to 584,000, official figures showed on Thursday. That increase was slightly more than economists expected, but the total number of Americans claiming benefits fell for the third week running. Continuing claims declined by 54,000 to 6.2m.
"Obviously claims are still high and pointing to substantial payroll losses, but things appear to be gradually improving," said Abiel Reinhart, an economist at JPMorgan Chase. The less volatile four-week average of first-time unemployment claims declined last week, dropping by 8,250 to 559,000. Economists noted that last week was the first in more than a month that jobless figures were not distorted by shifting shutdowns in the auto sector. Some warned, however, that the decline in continuing claims could be due to workers that have been unemployed for a long time falling off benefits payrolls. For the week ending July 18, the insured unemployment rate held steady at 4.7 per cent.
Analysts have been keeping a close watch on jobless claims ahead of next week’s non-farm payrolls report. In June, figures showed that the US economy shed another 467,000 jobs, pushing the unemployment rate to a 26-year high of 9.5 per cent. That is expected to climb to 9.6 per cent for July with another 340,000 jobs lost. States suffering the most from growing benefits claims included Florida, California and Michigan, which continues face job cuts from the car industry. Although the worst could be over for the labour market, the slow pace of improvement has caused fears that a labour market recovery could lag painfully behind the rest of the economy.
Rising unemployment is also a drag on the overall economy because it saps consumer spending, which represents nearly three-fourths of gross domestic product "The improvement is still unusually modest, leading to fears that the US economy is set for another jobless recovery," said Paul Ashworth, an economist at Capital Economics. "Even if GDP starts to expand again in the second half of this year, employment probably won’t start rising again until the end of 2009." In the first quarter the US economy contracted at an annualised rate of 5.5 per cent and analysts are expecting official figures to show on Friday that output fell by a more moderate 1.5 per cent in the second quarter.
Unemployed Over 26 Weeks
The DOL report this morning showed seasonally adjusted insured unemployment at 6.2 million, down from a peak of about 6.9 million. This raises the question (and frequent emails) of how many unemployed workers have exhausted their regular unemployment benefits (Note: most are still receiving extended benefits). The monthly BLS report provides data on workers unemployed for 27 or more weeks, and those workers have exhausted their regular unemployment benefits (and maybe even the extended benefits). So here is a graph ...
The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce. According to the BLS, there are almost 4.4 million workers who have been unemployed for more than 26 weeks (and still want a job). This is 2.8% of the civilian workforce. Notice the peak happens after a recession ends, and the of long term unemployed peaked about 18 months after the end of the last two recessions (because of the jobless recovery). This suggests that even if the current recession officially ended this month, the number of long term unemployed would probably continue to rise through the end of 2010.
Cash-for-clunkers program to be suspended
The U.S. government will suspend the popular cash-for-clunkers program after less than four days in business, telling Congress that the plan would burn through its $950-million budget by midnight, several sources told the Free Press. The Michigan delegation was holding an emergency meeting convened by Rep. John Dingell, D-Dearborn, to discuss their next steps. The U.S. Department of Transportation did not immediately comment on its plans for the program, or what would happen to deals in progress. The decision to suspend the plan came after auto dealers warned the government today that it was in danger of losing track of how many trades had actually been made.
The plan offering owners of old cars and trucks $3,500 or $4,500 toward a new, more efficient vehicle has proven wildly popular, with 22,782 trades certified by federal officials since Monday. But the National Highway Traffic Safety Administration told dealers Wednesday that a vast majority of transactions submitted were being rejected for incomplete or illegible paperwork. A survey of 2,000 dealers by the National Automobile Dealers Association, the results of which were obtained by the Free Press, found about 25,000 deals not yet approved by NHTSA, or about 13 trades per store. With 23,005 dealers asking to be part of the program, auto dealers may have already arranged the sale of more than the 250,000 vehicles that federal officials expected the plan to generate. Bill Golling, owner of Golling Chrysler-Jeep-Dodge in Bloomfield Hills, said his store had sold 80 vehicles already under the program.
"It’s working so well I’ve got people mad at me because I can’t take care of them," he said. Since the program was to run as long as there was money left in the $950-million pool, dealers have been concerned the fund could run dry before they were reimbursed for all their deals – which requires them to junk the clunker. "That’s something we’re watching very closely," said NHTSA spokesman Rae Tyson earlier today. "We need to make sure that there’s enough money in the system to cover the transactions that have already occurred. We certainly don’t want dealers to get stuck."
The plan was officially launched on Monday, but Congress allowed dealers to start taking trades after July 1. NHTSA requires dealers to get several pieces of information from buyers, including proof of insurance and registration, and disable clunkers by destroying its engine before applying for reimbursement. Joe Serra, owner of Serra Automotive Group in Grand Blanc, said the system for submitting deals simply didn’t work. "Their capacity to accept the applications is not adequate," Serra said. "Dealers are spending all day trying to submit the applications. … I have not spoken to one dealer that has received approval, and or has been funded, for even a single transaction."
Ken Czubay, Ford Motor Co.’s vice president of U.S. sales and marketing, said many Ford dealers are worried that they will be out thousands of dollars per car if they sell a vehicle to the consumer, disable the engine, and find out later the funding has been exhausted. "I think it was a well-intended program … and frankly the program at this very early stage has to be viewed as a huge success," Czubay said. "We are going to be working with the government to say, are we accomplishing all the things we want?"
Several Michigan lawmakers have vowed to press for more money for the program, which had originally been set for $4 billion. But Sen. Dianne Feinstein, D-Calif., has said she would block any additional money unless the program was changed to boost the gains in fuel economy between old and new models. Federal officials also said today that the government would honor any deal agreed to before changes made in a federal database of mileage figures last Friday. The U.S. Environmental Protection Agency updated its data on 30,000 old models, disqualifying 76 models that had previously met the program’s standards of getting no more than 18 m.p.g. Deals made after Friday would have to rely on the updated data – if they can get in.
The Health Care Bill Dies?
by Matt Taibbi
The AP reports that "after weeks of secretive talks, a bipartisan group in the Senate edged closer Monday to a health care compromise that omits two key Democratic priorities but incorporates provisions to slow the explosive rise in medical costs." The deal was likely to "exclude a requirement many congressional Democrats seek for large businesses to offer coverage to their workers" and a "provision for a government insurance option." The Wall Street Journal says that "individuals familiar with the negotiations suggested" Senate Finance Committee Chairman Max Baucus "would like to unveil a deal later this week. But unclear Monday was whether" ranking Republican Sen. Charles Grassley "would sign onto the deal and pave the way for committee action next week."
via USNews.com: Political Bulletin: Tuesday, July 28, 2009.
Well, as the French would say… Quelle surprise! It’s funny, earlier this summer I was watching the Federer-Roddick Wimbledon Final. Great match in a way, final set was 30 games long, one of the all-time epic battles. And yet, as I watched it, I thought to myself, "This has to be the least suspenseful epic sporting event of all time." Because there was never any doubt in my mind that Federer was going to win the match. I simply could not envision a scenario where anything else than a Federer victory could happen. I think I even turned it off at 7-7 in the final set, figuring I could catch Federer’s award ceremony later on.
It’s the same with this health care bill. Who among us did not know this would happen? It’s been clear from the start that the Democrats would make a great show of doing something real, then they would fold prematurely, ram through some piece-of-shit bill with some incremental/worthless change in it, and then in the end blame everything on Max Baucus and Bill Nelson, saying, "By golly, we tried our best!"
Make no mistake, this has nothing to do with Max Baucus, Bill Nelson, or anyone else. If the Obama administration wanted to pass a real health care bill, they would do what George Bush and Tom DeLay did in the first six-odd years of this decade whenever they wanted to pass some nightmare piece of legislation (ie the Prescription Drug Bill or CAFTA): they would take the recalcitrant legislators blocking their path into a back room at the Capitol, and beat them with rubber hoses until they changed their minds.
The reason a real health-care bill is not going to get passed is simple: because nobody in Washington really wants it. There is insufficient political will to get it done. It doesn’t matter that it’s an urgent national calamity, that it is plainly obvious to anyone with an IQ over 8 that our system could not possibly be worse and needs to be fixed very soon, and that, moreover, the only people opposing a real reform bill are a pitifully small number of executives in the insurance industry who stand to lose the chance for a fifth summer house if this thing passes.
It won’t get done, because that’s not the way our government works. Our government doesn’t exist to protect voters from interests, it exists to protect interests from voters. The situation we have here is an angry and desperate population that at long last has voted in a majority that it believes should be able to pass a health care bill. It expects something to be done. The task of the lawmakers on the Hill, at least as they see things, is to create the appearance of having done something. And that’s what they’re doing. Personally, I think they’re doing a lousy job even of that. I lauded Roddick for playing out the string with heart, and giving a good show. But these Democrats aren’t even pretending to give a shit, not really. I mean, they’re not even willing to give up their vacations.
This whole business, it was a litmus test for whether or not we even have a functioning government. Here we had a political majority in congress and a popular president armed with oodles of political capital and backed by the overwhelming sentiment of perhaps 150 million Americans, and this government could not bring itself to offend ten thousand insurance men in order to pass a bill that addresses an urgent emergency. What’s left? Third-party politics?
The details of the Senate Finance Committee’s hush-hush health talks aren’t fully known, but leaks suggest that one all-but-certain highlight will be new federally created health "cooperatives" to compete against private insurers. The onus is on Republican negotiators Chuck Grassley and Mike Enzi to explain why this isn’t merely the House "public option" in a better suit. North Dakota Democrat Kent Conrad floated the co-op concept last month, to attract Republicans who oppose President Obama’s state-run plan. According to Mr. Conrad, these nonprofits—modeled on local electricity or rural farm co-ops—fulfill the liberal goal of competing against private insurers, yet avoid "government control," since they will be member-owned. Presto, a Beltway splitting of the political baby.
And in theory, health-care co-ops needn’t be destructive. Blue Cross and Blue Shield began as nonprofit health insurers, and some state Blues still are. Organizations like the Group Health Cooperative of Puget Sound are consumer-owned and compete with private plans. But the Senate is talking about government-sponsored co-ops, and that means multiple devils are in the details. Mr. Conrad confirmed this week that the current plan is to have the feds provide $6 billion in start-up cash, then appoint an "interim" national board to set policies for a network of state or regional co-ops. Mr. Conrad said this new network could attract 12 million people, making it the third-largest health insurer in the country.
Here’s where the trouble starts. At least with the public option, Washington acknowledges that taxpayers are subsidizing public plans. With co-ops, the government role is more subtle, if nearly as corrosive. Start with Mr. Conrad’s $6 billion in "seed money," which is more than the total annual revenue of all but 20 of the nation’s private plans. This would provide a lower cost of capital than private firms and an implicit claim on any other money the co-ops need. The feds may also exempt co-ops from the taxes that private insurers pay, which average about 1.2% of premiums. This would let co-ops offer lower prices and poach customers with government-subsidized premiums.
The Senators may also exempt co-ops from the state mandates that now drive up the cost of private policies. We’ve long wanted the feds to let individuals or groups (such as the National Federation of Independent Business) form risk pools and buy insurance across state lines free of these costly requirements. But liberals have killed attempts at such Association Health Plans, which suggests their goal in exempting these "government-sponsored health enterprises" from state mandates is merely to give them another pricing edge.
Mr. Conrad suggests the federal board overseeing this network would be temporary, meaning at some point government appointees would be replaced by elected private directors. Mr. Grassley is said to be resisting federal control, but even if he succeeds for now, neither he nor Mr. Conrad can bind a future Congress. When was the last time government supervision became less onerous over time, especially in health care? All of which makes these co-ops sound a lot like a health-care Fannie Mae and Freddie Mac, which Congress created because there was supposedly no secondary mortgage market. The duo proceeded to use their government subsidy to dominate the market and drive out private competitors.
And all of this is before Congressional liberals get their hands on these co-ops. "We’re going to have some type of public option, call it ‘co-op,’ call it what you want," Senate Majority Leader Harry Reid said earlier this month. New York’s Chuck Schumer wants $10 billion to seed a single, nationwide co-op that will be governed by a federal board and have the authority to impose price controls. At the very least, liberals will demand to load up co-ops with the minimum-coverage mandates they’ve already included in the House and rival Senate legislation—from maternity care to government-funded abortion.
Messrs. Grassley and Enzi and Maine’s Olympia Snowe are under great pressure to agree to a deal, as Democrats grow more desperate to get political cover for reform that is sinking fast in the polls. The co-op idea might have begun as a benign proposal, but it is likely to become a mini-me public option. Senate Republicans can best serve the cause of bipartisan reform and fiscal sanity by opposing any form of new government health care, and urging Mr. Baucus to turn to the Plan B of helping the uninsured with tax credits.
Healthcare reform looms large in Texas
At Ben Taub General Hospital in the rich U.S. oil hub of Houston, 52 people wait in a holding room designed for 26, in beds crammed so close together that patients can touch one another. "They can't even go to a doctor, most of these people," because they lack health insurance, said Angela Siler Fisher, an associate medical director there. "We are their doctor." The Texas Medical Center -- which is the size of Chicago's downtown Loop and has its own distinct skyline -- draws patients from around the world to its private rooms and specialized, cutting-edge treatments.
Houston, the fourth-largest American city, is a case study in the extremes of the U.S. healthcare system. It boasts the immense medical center that offers top-notch care at its 13 hospitals, but also has a higher ratio of uninsured patients than any major U.S. city: about 30 percent. Cancer patients can get advanced radiation treatment, yet others need an emergency room just to fill a prescription. "We've got wonderful access to high-technology procedures -- the best around -- if you are insured," said Guy Clifton, neurosurgery professor at the University of Texas Health Science Center.
President Barack Obama's top domestic priority is to overhaul the U.S. healthcare system and expand coverage to most of the 46 million uninsured Americans. That would mean nearly 6 million Texans, including the one in six U.S. uninsured children who live there, could get health insurance for the first time if the plan is enacted. The president's $1 trillion healthcare reform bill faces opposition in Congress, as well as in Texas, which has the highest uninsured rate in the nation - about 25 percent. Polls show many Americans are skeptical it will succeed. While debate rages on, the problems remain.
In recent years, the emergency room at Ben Taub has become the safety net for the nearly one in three people -- or 1.7 million -- in the Houston area who lack health insurance. The hospital's holding room is where the "less sick" wait to see doctors. On any given day, patients could include diabetics waiting for dialysis, the mentally ill seeking psychiatric medicines and women with complications from pregnancy. The room is almost always packed. "You see this guy sitting in a gown in his boxers?" said Fisher, associate medical director of Ben Taub's emergency room. "That's the level of privacy."
Uninsured patients are a huge financial burden for the U.S. healthcare system. They accounted for nearly 20 percent of 120 million U.S. emergency room visits in 2006, the most recent year tracked by the U.S. government. While public emergency rooms are legally bound to care for critically ill patients, emergency treatment is expensive -- especially when you factor in ailments that could have been avoided with proper primary care.
Even without national action, several U.S. states are moving toward universal health coverage on their own -- including Connecticut, Vermont, Maine and Massachusetts. But comprehensive coverage is unlikely to come to Texas without federal action. Texas Gov. Rick Perry opposes what he calls "Obamacare" as a federal intrusion on his state's right to set healthcare priorities. In the meantime, local officials have no choice but to seek their own solutions.
Houston's Harris County Hospital District -- which operates the largest public primary health care network in Texas -- has built community clinics to relieve pressure on its crowded emergency rooms. The clinics are open to the uninsured and others who can't foot the bill for their treatment. "We are already the model for health reform," said David Lopez, the district's chief executive officer. "Our incentive is to integrate to provide care at a reasonable cost."
The county is opening two new health clinics this year that will provide primary care to 137,000 people annually. The additions will bring the its facilities to 13 community healthcare centers, 13 clinics in homeless shelters and eight in public schools, in addition to three hospitals. In May, it opened the gleaming 66,000-square-foot (6,000 square meter) El Franco Lee Health Center in a densely populated area with a high percentage of Latinos and immigrants from China and Vietnam.
The center offers an array of services including prenatal, psychiatry, podiatry, dental care, optometry and radiology. "We're catching up with a lot of unmet demand," said center director Ricci Sanchez. "A lot of them were crowding the emergency rooms. A lot of them were not seeking care at all." Houston's economy has been resilient through the U.S. recession, with the help of record oil prices last year, a boon to energy companies like ConocoPhillips headquartered there.
But that prosperity has not trickled down to working class Texans or the illegal immigrants who make up about 8 percent of the state's workforce, according to the Pew Hispanic Center. Some Texans point to illegal immigrants -- Texas has the second-highest undocumented population next to California -- as the main reason behind crowded emergency rooms and soaring costs. But Lopez said the facts don't support that. He cited a study that found undocumented patients accounted for 10 percent of his hospital district's annual $1.1 billion budget.
Health officials blame soaring costs partly on the lack of primary care. The district pays $174 per patient visit in its clinics, versus $11,700 for an average 6-day hospital stay. "These clinics easily save our hospital system millions of dollars a year in costs," said John Martinez, a spokesman for the hospital district. Overall savings are hard to estimate but the health centers provide patients with a "medical home." "The cost of taking care of them is a lot more efficient than waiting for them to get sick and admitting them to the hospital," Martinez said.
In Ohio last week, Obama touted the Cleveland Clinic as a model for the kind of low-cost, high-quality care he wants to offer through his 10-year plan to create a government-run insurance program to compete with private insurers. Harris County's clinic-building effort is "exactly the right move," and statistics indicate that such efforts have spurred a decline in emergency room usage, said Clifton, who has studied the politics of health policy in Washington. "To make ERs work and primary care work you have to get them covered," he said. "But if we don't deal with cost, and we are not dealing with costs, this is going to end very badly."
Senate Probes Banks for Meltdown Fraud
A Senate panel has subpoenaed financial institutions, including Goldman Sachs Group Inc. and Deutsche Bank AG, seeking evidence of fraud in last year's mortgage-market meltdown, according to people familiar with the situation. The congressional investigation appears to focus on whether internal communications, such as email, show bankers had private doubts about whether mortgage-related securities they were putting together were as financially sound as their public pronouncements suggested. Collapsing values for many of those securities played a big role in precipitating last year's financial crisis.
According to people familiar with the matter, the Senate Permanent Subcommittee on Investigations also has issued a subpoena to Washington Mutual Inc., a Seattle thrift that was seized by regulators in last year's financial crisis and is now largely owned by J.P. Morgan Chase & Co. It appears likely that several other financial institutions also have received subpoenas. Subcommittee investigators declined to comment. A Goldman Sachs spokesman declined to comment on the subpoena. Deutsche Bank declined a request for comment.
J.P. Morgan Chase spokesman Thomas Kelly declined to comment on whether the firm, which acquired the banking assets of Washington Mutual last September, had received any subpoenas, saying only "we cooperate with government agencies." A subpoena from the subcommittee raises a number of factual questions and asks for various company correspondence, according to a person who reviewed it. The subpoenas are the latest in a series of moves by Congress to trace the roots of the financial crisis. Goldman has been a favorite target for criticism in Washington.
A House panel voted this week to allow regulators to bar banks from offering executive-pay plans that encourage too much risk. The move came after Goldman Sachs reported record profits for the second quarter and said it has set aside $11.4 billion during the first half of the year to compensate employees. Earlier this week, a bipartisan group of 10 members of Congress sent a letter to Federal Reserve Chairman Ben Bernanke, questioning whether Goldman Sachs is being too lightly regulated and too generously backed by taxpayers.
An idea for taxing high-value health insurance plans has even become known on Capitol Hill as the "Goldman Sachs tax," after criticisms of its executives' $40,000 health plans. A Goldman Sachs spokesman declined to comment on the criticisms from Congress. The subcommittee is headed by Sen. Carl Levin (D., Mich.), who has been a driving force behind many of its probes.
FDIC Poised to Split Banks to Lure Buyers
The Federal Deposit Insurance Corp., grappling with the worst banking crisis since the 1990s, is poised to start breaking failed financial institutions into good and bad pieces in an effort to drum up more interest from prospective buyers. The strategy, which is likely to begin soon, is aimed at selling the most distressed hunks of failed banks to private-equity firms and other types of investors who may be more willing than traditional banks to take a flier on bad assets. The traditional banks could then bid on the deposits, branches and other bits of the failed institution that are appealing.
"We want banks to participate in the resolution process, but we know it's a tough time for banks to participate in the resolution process," said Joseph Jiampietro, a senior adviser to FDIC Chairman Sheila Bair. He made the comments Wednesday during a presentation to a community-banking conference in New York sponsored by Keefe, Bruyette & Woods Inc., a boutique investment firm that specializes in financial services. Regulators have seized 64 banks this year as the credit crisis continues to wreak havoc on small institutions that have been hit hard by the collapse in housing prices and deteriorating commercial real estate. Although the banks are technically seized by other regulators, it is the FDIC's job to dispose of the assets in a cost-effective manner.
The FDIC has found buyers for most of the failed institutions, but many prospective bidders are leery of taking on bad loans from a shuttered bank. That remains the case despite the FDIC's efforts to encourage bidders by providing loss-sharing agreements in about 40 of this year's bank failures. Just last week, State Bank & Trust Co. of Pinehurst, Ga., entered into a loss-share transaction with the FDIC on about $1.7 billion of assets of Security Bank Corp., which owned six banks in Georgia that had a combined $2.8 billion in assets. But those types of deals aren't providing enough comfort to the FDIC, which wants to see a more-vibrant auction process.
"There are certain situations when assets are so distressed and make up a significant percentage of the balance sheet that strategic buyers are hesitant to participate in the process," said Mr. Jiampietro. Details of the FDIC's latest effort to generate more bidding interest still are being worked out, but "we hope this will have greater appeal to strategic buyers," said James Wigand, deputy director of the FDIC's division of resolutions and receiverships, who also spoke at the conference. The agency is considering several structures, including transferring the bad assets to a new entity established by the FDIC that will then be sold off. Another option, the FDIC officials said, is to allow traditional bidders to team up with buyers for the distressed assets.
Mr. Jiampietro said the FDIC is "pretty far along" in determining the best structure to entice bidders, and such a transaction could take place in the coming weeks. Sanford Brown, a banking-industry lawyer at Bracewell & Giuliani LLP in Dallas, said the new structure may give comfort to banks that like a failed bank's deposits and real estate, but are leery of taking on its loans. "There are relatively few bidders in a lot of these situations, and in some cases there is only one bidder," he said.
The strategy could provide an opportunity for private-equity firms that complain they are being hamstrung in their efforts to buy failed banks. This month, the FDIC proposed guidelines for private-equity investors that could make it more difficult for them to compete against traditional banks for failed institutions. Among other things, private-equity investors would be required to hold higher capital reserves than traditional banks. Although the proposals are aimed at deterring private-equity investors from buying and flipping failed banks, the firms contend that they would create an uneven playing field between private equity and traditional banks.
Unemployment spreads distress in U.S. home loans
Cities in the U.S. Sun Belt states of California, Florida, Nevada and Arizona dominated the record foreclosure spree in the first half of the year, but distress in other regions emerged as joblessness spread, RealtyTrac said on Thursday. Metro areas with populations of at least 200,000 in those four states accounted for 35 of the 50 highest foreclosure rates. Mortgages have failed the fastest in the areas with the greatest overbuilding, purchases by speculators and reliance on riskier loan products to improve affordability.
But the source of the mortgage trouble has swung from lax lending standards to unemployment. Some of the areas with the most severe foreclosure activity have started to show improvement as price cuts and first-time buyer tax credits lure purchasers. With the unemployment rate near a 26-year high and many employers cutting wages, more consumers in areas that were initially spared in the foreclosure explosion are now behind in their home loan payments.
More than 20 percent of areas with above-average foreclosure activity were in Oregon, Idaho, Utah, Arkansas, Illinois and South Carolina in the first half of the year. That shift points to growing unemployment more than to fallout from subprime and adjustable-rate loans, RealtyTrac said in its midyear metropolitan foreclosure market report. While total foreclosure activity kept rising, "some of the markets that had the highest saturation of foreclosures over the past few years have seen declining rates, while new markets like Provo, Utah, and Boise, Idaho, have seen large increases," James J. Saccacio, chief executive officer of RealtyTrac, said in a statement.
"As unemployment rates increase in different parts of the country, it's very likely that we'll see similar patterns develop elsewhere," he said. Home prices through May plunged more than 32 percent from their mid-2006 peak, with losses varying sharply depending on region, according to Standard & Poor's/Case-Shiller indexes. A rise in foreclosure properties pressure prices of other homes for sale. "As unemployment rises, we are seeing a change in the financial profile of the people seeking our help," Suzanne Boas, president of Consumer Credit Counseling Service of Greater Atlanta, said this week.
"We are serving an increasing number of people who work in professional services and skilled trades," she said. "These people have maintained solid incomes their entire lives, but are now in financial trouble and are reaching out for counseling to help avoid foreclosure." In June, 72 percent of homeowners who got foreclosure prevention counseling from the agency, which serves all 50 states, were either unemployed or reported a drop in income.
RealtyTrac this month reported a record 1.9 million foreclosure filings on more than 1.5 million properties in the first six months of this year. The pace picked up after various temporary freezes ended in March. The company forecasts 4 million filings for the year. Las Vegas, Nevada, had the highest metro foreclosure rate, with 7.45 percent, or one of every 13 households with a loan, getting at least one filing in the first half of the year. Filings include notice of default and auctions.
Cape Coral-Fort Myers area in Florida had the second highest rate and Merced, California was third. Both reported a slight decrease in foreclosure activity from the previous six months but a higher pace than the first half of 2008. Other metro areas in the top 10 were the California cities of Riverside-San Bernardino-Ontario, Stockton, Modesto, Bakersfield and Vallejo-Fairfield; the Phoenix metro area and Orlando, Florida, metro area.
Foreclosure activity rose in all but Stockton and Modesto from the prior six months and from the first half of 2008. Stockton had a 4 percent drop in the first half from the prior six months and a nearly 13 percent fall from the first half of 2008. Other hard-hit areas showed declining foreclosure activity in the first half, including Detroit and Cleveland, RealtyTrac said.
Foreclosures Spread As Unemployment Rises
The foreclosure crisis has entered a new phase. It’s spreading beyond the wreckage of the housing bubble to metro areas in Oregon, Idaho, Utah, Arkansas, Illinois, and South Carolina where unemployment is rising, according to RealtyTrac’s Midyear 2009 Metropolitan Foreclosure Market Report released this morning.
California, Florida, Nevada, and Arizona continue to have the highest foreclosure rates in the nation. But some parts of Michigan, Ohio, Indiana, and California are seeing improvement, the report said. "While some of the markets that had the highest saturation of foreclosures over the past few years have seen declining rates, new markets like Provo, Utah, and Boise, Idaho, have seen large increases," James J. Saccacio, chief executive officer of RealtyTrac said in a prepared statement. "As unemployment rates increase in different parts of the country, it’s very likely that we’ll see similar patterns develop elsewhere."
Unfortunately, the loan modifications being encouraged by the Obama Administration are being severely outpaced by new foreclosure starts. This graphic from the Center For Responsible Lending tells the story. The blue line represents the number of modifications. The yellow bars indicate the loans that are more than 60-days delinquent, and the red bars represent foreclosure starts.
Fannie, Freddie Won’t Repay All Aid, Lockhart Says
Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, won’t be able to repay all of the $84.9 billion in federal aid they have received since being seized by the government last year, their regulator said. "Some assets and senior preferreds will have to be left behind as they come out of conservatorship, and that means some of those losses will never be repaid," Federal Housing Finance Agency Director James Lockhart said at a speech in Washington today. "Their book is so large, it’s hard for me to see that they will be able to repay all of that."
Fannie Mae and Freddie Mac, which have posted $150 billion in losses going back to the third quarter of 2007, will continue losing money "for at least the next year or so," and won’t return to "strong profits" for another two to three years, Lockhart told reporters after his speech. "It’s hard to predict at this point," Lockhart said. He said Washington-based Fannie Mae and McLean, Virginia- based Freddie Mac have asked the Treasury "from time to time" to reduce their annual dividend obligations to the government, currently at 10 percent.
With Fannie Mae and Freddie Mac owning or guaranteeing almost half of the U.S. residential mortgage debt, the government seized the companies in September as losses mounted and pledged $100 billion for each to keep them afloat. In February, the government doubled its capital commitment for each company to $200 billion, which the Treasury makes through preferred stock purchases when the value of the companies’ assets drop below the amount owed on their obligations.
Fannie Mae was created in the 1930s under President Franklin D. Roosevelt’s "New Deal" plan to revive the economy. Freddie Mac was started in 1970. The companies were designed primarily to lower the cost of home ownership by buying mortgages from lenders, freeing up cash at banks to make more loans. They make money by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders. Fannie Mae and Freddie Mac shares, which were above $30 in March 2008, have been trading at less than $1 since December.
A Treasury report in June said the Obama administration "will engage in a wide-ranging process and seek public input to explore options regarding the future" of Fannie Mae and Freddie Mac and will deliver a report to Congress when the president gives his fiscal 2011 budget in February. Options considered by lawmakers include winding the companies down and liquidating assets or using Fannie Mae and Freddie Mac to provide insurance for covered bonds. Lockhart said in June that the size and credit quality of Fannie Mae and Freddie Mac’s $5.4 trillion in mortgage assets creates "substantial uncertainty" as to their future structure.
The End Of The Road For Commercial Real Estate
While the MSM is for the most part pretending that the crisis in real estate is over, we are really only starting to see the bigger problems in commercial real estate- and it sounds like the government is worried: [Hat tip Freedom's Phoenix]Last week a story which gained very little traction hit the financial newswires. The U.S. Treasury is working on an internal project informally called “Plan C” which seeks to deal with further problems in the economy before they occur. The anonymous report came out stating the administration is reluctant to commit any additional money especially to the level mentioned in the report. However this is a disturbing new development in our bailout nation since this is one of the first times that the U.S. Treasury will try to preemptively deal with a financial problem.
The issues with this Plan C is that it is setup to be a buffer on further deterioration in various loan categories but the big one is commercial real estate. The commercial real estate market is gigantic and many of those loans are still active:
What does this mean in terms of an economic recovery?The amount of maturing loans in commercial real estate will double in 2010 and will continue upward into 2010. The chart is very clear and this is only for debt in CMBS and not held by regional banks which is over $2 trillion. This is the next multi-trillion dollar bailout you have yet to hear about. In fact, while many are discussing a second half recovery higher up officials are already planning a bailout for the commercial real estate industry. The challenge with this bailout is you are asking a public with 26,000,000 unemployed and underemployed Americans to shoulder the debt of largely speculative plays. To many it is palatable to bailout the residential real estate market because the public can understand that (even if it may be wrong) or bailing out the 2 large U.S. automakers. Yet bailing out the commercial real estate market is going to be a political nightmare.
Here’s the conclusion reached by "mybudget360":
The end of the road has been reached for commercial real estate. Many regional banks jumped into the commercial real estate market since they had little chance of competing with big subprime and Alt-A mortgage factories like WaMu or Countrywide. Many regional banks saw this as a way to stay competitive in local regions across the country. This is a much more diverse problem and the tentacles of the commercial real estate bust will be felt in every state.
The solution that government has had for economic indigestion has been to reach for the "Alka-Seltzer"- to medicate with bailout bubbles. The Alka-Seltzer box is running low, and taxpayers and Congress aren’t going to want to pay for another box. The next bout of indigestion looks to be a bad one.
Housing Market Teeters Between Recovery, Relapse
The battered housing market appears to be on the mend, with sales climbing nationally and prices leveling off, even rising in some spots. But swelling unemployment and the related delinquencies and foreclosures threaten to upend these gains, industry experts said. "That's a huge cloud hanging over the housing market," said Guy Cecala, publisher of Inside Mortgage Finance. "We can no longer blame the problems on bad mortgage products. It's now about people losing their jobs, and that's an even tougher problem for the government to address."
For now, the pickup in home sales is largely driven by buyers rushing to take advantage of near-record-low interest rates, a recently enacted temporary tax credit for first-time home buyers and the rock-bottom prices in areas hit hard by foreclosures. As buyers snap up deals, the excess supply of homes is shrinking, which is helping stabilize prices. On Tuesday, the Standard & Poor's/Case-Shiller price index, a closely watched gauge, showed that single-family-home prices rose 0.5 percent from April to May, the first monthly increase since 2006.
Earlier this week, the federal government reported an 11 percent rise in new-home sales from May to June, the largest monthly gain in nine years. Sales of previously owned homes jumped for the third straight month, up 3.6 percent in June, the National Association of Realtors said. The national trend jibes with Washington area statistics also released this week. A study by Delta Associates found that more area homes were sold in the second quarter than a year earlier, and that on average they sold more quickly. The sales volume increased 7 percent during that period, while prices jumped in almost every local jurisdiction. The S&P/Case-Shiller index reported that area prices were up 1.3 percent in June from the previous month.
Whether these trends can be sustained depends on how large a share of future home sales are the result of foreclosures and other distressed sales, said Mark Zandi, chief economist at Moody's Economy.com. Foreclosures tend to drag down prices. But the share of foreclosures in total sales shrank in the spring and summer months, when home-buying activity is at its busiest, as more traditional sellers put their homes on the market. Foreclosures also abated during that period because, under government pressure, many lenders had temporarily halted foreclosure sales, further boosting prices. These lenders were waiting to learn more about new loan-modification programs aimed at helping distressed borrowers, including an effort by the Obama administration to help them by lowering their mortgage payments.
In June, 31 percent of transactions were distressed sales, compared with about 50 percent in the early months of this year, according to a survey of real estate agents by the National Association of Realtors. Foreclosure sales fell to about 239,000 in the second quarter from their peak of 263,000 in the middle of last year, according to data released Wednesday by Hope Now, an industry alliance. But now, the foreclosure moratoriums adopted by lenders have expired and foreclosure rates are expected to rise again through the rest of the year. Job losses are likely to exacerbate the problem.
"In all likelihood, the house price declines are not over," Zandi said. "They are going to re-intensify this winter. The distressed sales will pick up. " In Maryland, for example, auctions of foreclosed properties dipped last year after the state lengthened the foreclosure process to give borrowers more time to try to save their homes. But, according to data compiled by RealtyTrac, those auctions have started to rise again. Lawrence Yun, chief economist for the Realtors group, said rising joblessness assures that the number of foreclosures this year will be higher than it was last year, but that does not mean that prices will necessarily sink. "The prices will only go down if the foreclosures linger on the market," he said. "But I think buyers are feeling more confident, and the foreclosures won't linger."
For its part, the Federal Housing Administration is trying to lessen the blow. On Thursday, the agency plans to unveil a program designed to make it easier for borrowers to rework their loans and lower their monthly payments. The program, which would go into effect Aug. 15, will be modeled after the administration's Making Home Affordable plan but differ in some respects.
Many industry analysts are skeptical that the Obama administration's initiatives will make a significant dent in the foreclosure crisis. They do agree, however, that the housing market is closer to hitting bottom than it was at this time last year. Mike Larson, a Weiss Research analyst, said that when the market does recover, "I don't expect a big rebound like the past housing recoveries, where construction activity and sales come roaring back. . . . It's going to be a slow, gradual normalization of the housing market after a period of housing Armageddon."
Requiem for Ben Bernanke, and His "Second Great Depression"
by Byron W. King
"I was not going to be the Federal Reserve chairman who presided over the second Great Depression," declared Federal Reserve Chairman Ben Bernanke this past Sunday. Well, he sure had me fooled. My gut reaction to Mr. Bernanke's statement was to recall the famous words of former President Nixon, who said of the Vietnam conflict, "I'm not going to be the first American president to lose a war." And we know how that turned out. Poor Mr. Bernanke. Does he really not understand his fate? I'll grant that he was dealt a bad hand - a draw of pure, malevolent evil - by his incompetent predecessor at the Fed, Alan Greenspan. But when you volunteer to run the nation's central bank, you're asking for a seat at the table of history. When history deals, you play the cards that you're dealt. And sometimes history holds all the trumps, if not a few aces up its sleeve.
This past weekend Mr. Bernanke "appeared stoic at times," according to The Wall Street Journal, as he met with 190 people in a town hall-style forum at the Federal Reserve Bank of Kansas City. Over the course of an hour, at an event moderated by PBS correspondent Jim Lehrer, the Fed chairman answered 20 questions from attendees. The unusual setting allowed the former Princeton professor to speak outside of his usual comfort zone. The give-and-take in Missouri - aka "flyover country" to many Washingtonians - was far removed from Fed chief's normal, well-scripted congressional testimony, or his occasional academic presentations to roomfuls of big shot bankers and professional economists.
Continuing the Nixonian theme, the Kansas City forum was an opportunity to find out what Mr. Bernanke knew, and when did he know it. Mr. Bernanke defended himself and the Fed against suggestions that he was too eager to aid large financial institutions last fall and winter, while sacrificing the interests of small businesses and everyday American citizens. "It wasn't to help the big firms that we intervened," argued Mr. Bernanke as he discussed intervening to help the big firms - y'know, the financial firms that are supposedly too big to fail.
Using a Discovery Channel analogy, Mr. Bernanke said, "When the elephant falls down, all the grass gets crushed as well." Thus did he justify unprecedented levels of federal aid to the very Wall Street banking houses that contributed so mightily to the bubble economy of recent years. In essence, the Fed had to feed the beast and save the big guys to protect the little guys. But have the little guys really benefited? Mr. Bernanke claimed that he was "disgusted" by circumstances under which the Fed rode to the rescue of several large financial firms. "Nothing made me more frustrated," he said, "more angry, than having to intervene" when big banks were "taking wild bets that had forced these companies close to bankruptcy."
Then Mr. Bernanke argued - strangely - in favor of new laws to let financial firms other than banks fail WITHOUT going into bankruptcy. Huh? What's wrong with bankruptcy? It's been around since the days of the Roman Empire. I practiced bankruptcy law in my pre-Agora career as an attorney. (I'm a recovering attorney now.) I don't understand Mr. Bernanke's viewpoint at all. Why shouldn't big financial firms go bankrupt when they deserve it? OK, there's the usual canard: because it would be difficult or impossible for a bankruptcy court to "unwind" all the open trades in the sweatshops and boiler rooms of big outfits like AIG. I disagree.
Mr. Bernanke's comment makes me wonder how well he understands the intent (let alone the history and legal process) of bankruptcy. Or does the Fed boss just always default to handing out special deals to the big-money guys? Still, I have to give Mr. Bernanke credit for showing up to speak with a couple hundred informed citizens. The Fed certainly deserves the exposure.
According to a recent Gallup poll, a mere 30% of Americans believe that the Fed is doing a "good" or "excellent" job (down from 53% as recently as 2003). About 57% of Americans believe the Fed is doing a "fair" or "poor" job. Indeed, according to Gallup, the Fed is the least-trusted of nine government agencies. The Fed lags far behind on a list that includes agencies such as NASA and the FBI, as well as traditional bête noires such as the Central Intelligence Agency, the Internal Revenue Agency and the Food and Drug Administration.
Mr. Bernanke's tenure at the US central bank faces intense scrutiny, and not just from the serial bashing that he receives from the writers at Agora Financial. He has only six months left in his term as Fed chairman. Mr. Bernanke will soon learn whether President Obama will reappoint him to another four-year term or replace him with another Fed chairman wannabe. Does Mr. Bernanke really want to continue at the Fed? Why? If Mr. Bernanke doesn't want to preside "over the second Great Depression," as he claims, then he should get the hell out now and try to salvage some measure of his professional reputation - if not his old job and paycheck at Princeton. Or does Mr. Bernanke want to continue on the pathway of becoming the central bank equivalent of Gen. William Westmoreland?
The questioners in Kansas City were on the right track. They certainly raised better issues than we see in the softball questions Mr. Bernanke routinely receives from members of Congress and senators. Here's the key point. Mr. Bernanke and the Fed had a clear policy choice last fall. They could do a big bailout or not. The Fed chose to open Door No. 1 and bail out Wall Street. This was at the expense of Main Street, let alone the national balance sheet. But the "Second Great Depression" was not going to be stopped so easily. You don't just throw money at a Great Depression, especially money that you don't have. Mr. Bernanke ought to know this, based on his studies of the first Great Depression.
Instead of the bailout last fall, Mr. Bernanke and the Fed should've let the big guys fail. The Fed should've upset the whole stinking mess on the card table and reset the US monetary system. The Fed had the chance to make a statement and choose a new path, and to cast the money-changers out of the temple, so to speak. Mr. Bernanke and the Fed should've allowed the failed banks to go down. The Fed should've sent the bubble perps down the street to the US Bankruptcy Court in lower Manhattan, along with all their fraudulent paper such as MBSs, CDOs, SIVs, etc.
Would large-scale bankruptcies have been a shock to the US and world financial system? Of course. That's the idea. It would have been very ugly. But it would've helped to clean up the US economy for a couple of generations. Would Mr. Bernanke be despised by many people? Yep. Burned in effigy, a la Paul Volker? Yes, and it comes with the job. The Fed chairman should not try to be Mr. Popularity. By now, almost a year later, we'd have some semblance of financial finality. That's because bankruptcy courts have the legal power to void bad contracts and discharge unpayable debt. Instead, we still have the problem of bailed-out zombie banks with massive levels of unmarketable paper and unpayable debt on their books. Right now, the "dead banks walking" are doing little but sucking capital out of the system while the Fed tries to reinflate more bubbles.
Would finance and commerce have proceeded during a banking bankruptcy? Yes, because there's an entire economy out there, with hundreds of millions of people expressing needs and wants in the marketplace. If you believe in the basic idea of Capitalism, then you have to believe that we would have adapted, and learned new ways to meet the needs and wants absent the big, failed banks. And it's worth pointing out that plenty of people and companies do business while they're in bankruptcy court. There's nothing quite like the stroke of the pen of a federal judge to cut through the crap.
When Ben Bernanke says that he doesn't want to preside over the second Great Depression, he's missed a critical point. He's already there. Whether it was Pres. Nixon and his policies, mired in the rice paddies in Southeast Asia many decades past, or the current fever-swamps of the Potomac River, there are some bullets that have your name on them. You can't duck and dodge.
Right now, many years of monetary malpractice are roiling the American economy. To quote a famous Chicago preacher, "The chickens have come home to roost." The second Great Depression is happening, and it's happening on Mr. Bernanke's watch. Did he really expect to skate through a couple of terms as post-Greenspan Fed chairman and not get blown up? Sad to say, Mr. Bernanke bailed out the big banks. Now the damage is done. We're still in for that "Second Great Depression." And Mr. Bernanke will forever be associated with it.
Ben Bernanke could have been a heroic figure. He could have refused the bailout and repudiated several generations of bad monetary ideas. He could have launched a new movement - something like monetary perestroika in the US - and moved the country ahead into a future of increased productivity and financial solvency. Instead, Mr. Bernanke is just a bit actor in a historical tragedy. There's no armor against the arrows of fate. Mr. Bernanke has lost his chance. Perhaps he can take solace in the words of Robert Louis Stevenson from his classic "Requiem": "Home is the sailor, home from the sea."
Spindle Panic in a World of Lies
The recent allegations of trade secret theft and trafficking against former Goldman Sachs programmer Sergey Aleynikov raise important questions of corporate security and policy to handle a new generation of attempted economic disruption. According to a deposition given by FBI Agent Michael McSwain, Aleynikov, a former programmer at Goldman Sachs, is purported to have uploaded proprietary trading code from Goldman Sachs’ offices in New York to a server located in Germany.  Regardless of the outcome of the Goldman case, such a potential leak has wider implications for the future of corporate and national security. It is doubtful this was a mere prank. Recent history has shown that economic crime is seldom the product of the actions of a lone individual. 
I thought it was kind of cute when the radical feminist poet Kate Jennings discovered a Wall Street awash in spooks, but these two guys are getting on my nerves. Now we’re supposed to believe in EDoS, a new econo-terrorist exploit that involves revealing trade secrets.
like … You rang?
Over the last half year or so I’ve noticed massive losses to public service pension plans in CA (rating agency problems), QC (exposure to ABCP) and NM (I think that one was just dumb investments). If those anecdotes mean anything taken together, it’s the great sucking sound of the savings of America’s middle class disappearing down a hole.
Where did the money go? I would assert it went directly into recapitalizing the great banks that were insolvent as of 9/18 ‘08, the day we entered a command economy regime administered by a bunch of bank lobbyists, of all things.
Recall that the great bear rally we’re presently enjoying was touched off by a disingenuous leak in Europe of positive, but incomplete information about Citigroup’s profitability. I think that what’s keeping the S&P 500 floating in the air in much the same way that a brick doesn’t is systematic manipulation of the capital markets through HFT. And this has allowed the banks to sell common stock at grossly inflated prices.
EDoS my left ear. Plain old Mark 1 Mod 0 price discovery is about to demonstrate that what we’ve actually got here is fraudulent conveyance of wealth from the Baby Boom to the Bonus Banksters that’s as dumb as a bag of hammers, and as deep as the ocean.
But the joke is that the Teza founders all thought they were preparing to compete in a legitimate business sector. When Aleynikov was arrested on July 3rd, he waived his Miranda rights and cooperated with the FBI. This is not somebody who thought he was doing anything wrong.
Now astute Doomers may have noticed that I hid the word "disclosure" as an Easter Egg in my satire of an earlier (and less robust) attack on the presumption of Serge’s innocence. If, as I strongly suspect, the whole HFT enterprise is simply a key pillar holding up a close-coordinated systemic pyramid scam then the only point of this comedy would have been to nip Teza in the bud. There was a curiously blasé attitude on the subject of whether any material damage was done by the alleged crime, but on the other hand complex frauds just can’t tolerate fresh participants at a late stage.
But at a more fundamental level, this story is about Open Source Software. Are we now to regard uploading from a corporate entity to a subversion host as an act of economic terrorism? Among other things, the OSS community itself serves as an emergent fount of truth (RMS wasn’t a left-wing radical for nothing ). There is getting to be much less tolerance for the stuff. Is OSS over?
Like Aurora’s virginity (don’t you just love the Freudian subtext in those classic Disney movies?) the present bubble in the capital markets is exquisitely sensitive to the pointy bits sticking out of certain productive tools. It would be just as dangerous to submit the bubble to the tender mercies of the discovery process in a criminal trial, but since the US still has a more-or-less working court system, the chances of that ever happening don’t look good.
But it doesn’t really matter. There’s already enough scrutiny directed at HFT that it won’t be able to hold price discovery at bay much longer.
Some Banks in Govt’s ‘Healthy Bank’ Bailout Are Struggling, Don't Pay Dividend
A growing number of small and midsize banks that received federal bailout money have stopped paying quarterly dividends to the government in order to conserve capital. The banks, reeling from bad loans, have sometimes been ordered by regulators to stop the payments as part of a rescue plan. At least 18 banks that received bailout funds are not paying dividends. They range in size from San Francisco-based UCBH Holdings, which received $299 million in taxpayer money and recently announced suspension of the government dividends as part of an "action plan" to strengthen the bank, to tiny community banks. Some have chosen to suspend dividends, while others have been prohibited from paying them by regulators.
The banks aren’t paying dividends only months after being blessed by regulators and the Treasury Department as "healthy." The money was distributed through the government’s primary bailout program. As then-Treasury Secretary Hank Paulson explained last October, the program was aimed at boosting the overall economy by investing in banks that "will deploy, not hoard, their capital." The Treasury has kept secret its criteria for accepting banks, saying only that those approved should prove themselves viable without the government investment. Banks in the program are selected for their ability to keep lending levels up, Treasury officials have said, and keep taxpayer risk at a minimum.
Yet shortly after receiving funds, two of the biggest recipients, Bank of America and Citigroup, which both received $25 billion through the program, were bailed out with even more taxpayer money. More recently, CIT Group, which received $2.3 billion late last year, has flirted with bankruptcy. The suspension of TARP dividends shows that some smaller banks in the program are struggling, too. It also calls into question whether all of the banks in the program really could have survived without the government investment. In the government’s haste to boost the banking sector, "there may have been decisions, where had there been more time and analysis, may have been made differently," said Karen Dorway, president of BauerFinancial, a research firm that studies the financial health of banks. The Treasury Department declined to comment on the dividend suspensions.
Regulators have intervened with a number of the troubled banks. California-based Pacific Capital Bancorp, which received $180.6 million, reached an agreement with its primary regulator in April to hatch a new plan to deal with its problem loans and boost its capital levels. The bank, which announced its intention earlier this year to lay off nearly a quarter of its employees, missed a dividend payment to the Treasury soon thereafter. In Wisconsin, Anchor Bancorp received $110 million from the Treasury in January. In June, regulators issued a cease-and-desist order requiring the bank to raise its capital levels and putting it under strict supervision. The bank has yet to make a dividend payment to the Treasury.
The problems extend to small community banks such as Pacific Coast National Bancorp of San Clemente, Calif. The bank received $4.1 million in January, but regulators later clamped down, forbidding it from increasing its loans above the amount on the bank’s balance sheet and ordering it to raise capital. The bank was in dire straits when it received the bailout funds in January, "significantly undercapitalized" under regulatory guidelines. But as a result of the aid, it ascended to merely "undercapitalized," according to its annual report. It is prohibited by state regulations from paying dividends.
Blue Valley Ban Corp of Kansas ($21.8 million) suspended dividend payments in May at the request of its regulator, said the bank’s CEO Bob Regnier. But he said the move was only cautionary as the bank deals with losses from construction loans and doesn’t mean the bank is pulling back on lending. "We’re still out there making every good loan that we can find, but it’s a more difficult economic environment." One bank is seeking even more TARP funds. Midwest Banc Holdings ($84.8 million) suspended dividends in May to retain cash and announced this week that, as part of a plan to reduce costs and raise capital, it was seeking up to $53 million more from the Treasury.
The Treasury has invested more than $200 billion in 653 companies through the program, and since the overwhelming majority of banks have paid dividends, the Treasury had collected $6.7 billion as of June, according to a Treasury report. The banks pay five percent annual interest on the investment. There is a consequence for banks missing too many dividend payments. After six quarterly non-payments, the Treasury gains the right to appoint two members to the bank’s board of directors, a fate some banks could face next year.
At least eight California banks have missed dividend payments because of state laws prohibiting payment of dividends unless certain earnings benchmarks are met. The rules are designed to ensure that banks pay dividends out of earnings, something that’s more difficult for younger banks. Fresno First Bank, a three year-old community bank, is among those eight, but Chief Financial Officer Steve Canfield said the bank expects to gain approval from state regulators to pay the dividends on the $2 million investment later this summer. The bank plans to use the TARP money primarily to fund the bank’s "very, very rapid" growth, he said. It wasn’t our intention to take the money and stiff the government."
Credit unions: Where the credit flowed too freely
Long known as lenders to the little guy, credit unions jumped into high-risk loans. Now almost half of them are losing money.
Thumper Pond was sinking. By March of 2006, 30 banks across the country had passed on the chance to rescue the Northwoods-themed resort from cost overruns and mismanagement. Then came the credit unions. More than a half dozen of them, originally founded by electricians, railway workers, state highway employees and others, wanted a piece of the indoor water park, hotel, spa and upscale houses being built in this tiny town of 451, about 90 minutes east of Fargo.
The $13.8 million loan deal was reached on the 18-hole golf course designed by two first-time developers, Verle Blaha and Jim Ahlfs, from Ottertail, who had never swung a golf club. Four years and millions of dollars in losses later, Thumper Pond is in foreclosure. Lead lender Spire Federal, the 75-year-old credit union founded by oil cooperative workers, is expected to sell it later this summer for a big loss.
In a different decade, the notion of a credit union investing in risky ventures like Thumper Pond would have been unthinkable, maybe even impossible. Like their banking rivals, however, some of this state's largest credit unions abandoned the conservative lending principles that long made them bastions of safety. They pursued bigger, riskier and more elaborate loan deals in markets far removed from their everyday customers. And they embraced the booming housing market with gusto, making some of the same exotic home loans that sank such giant institutions as Washington Mutual and Wachovia.
Losses on risky loans, from Twin Cities housing projects to out-of-state ethanol plants, are one reason why nearly half of the state's 156 credit unions lost money in the most recent quarter, compared to 35 percent of credit unions nationwide. Seven of Minnesota's credit unions are near or below capital levels the government deems adequate. And two were in such bad shape they had to be sold. Richard Lewandowski, a now-bankrupt real estate developer, said he doesn't remember credit union loan officers ever asking him how much he had borrowed on his projects. Three of Lewandowski's credit union-financed housing subdivisions -- in Palmer, Rush City and St. Cloud -- were abandoned after the housing market collapsed, leaving 150 vacant lots and millions of dollars in losses.
"That was one thing about the credit unions, they didn't ask many questions," Lewandowski said. "Some of us in the development business, we'd sometimes smile about it. ... They were hungry to do a deal, any deal, if it meant they could get in on the real estate boom."
Employees of the VA Medical Center founded Fort Snelling Federal Credit Union in 1947 as a place where they could cash their paychecks and save for a new home or car. By 2002, a credit union founded to promote thrift was allowing customers to borrow 125 percent of the value of their homes. When housing prices fell, "a lot of those people simply didn't pay," said George Savanick, 71, a retired physicist and former volunteer member of Fort Snelling's three-person supervisory committee, which analyzed a small sample of the credit union's loans each month. "And we were too small to absorb the losses."
Regulators arranged a sale of Fort Snelling in March once the credit union was close to collapse. Real Financial in Edina was also sold since late last year after loan losses wiped out most of its capital. Credit unions, nonprofit by law and owned by their depositors, champion themselves as the opposite of banks, a place where ordinary folks can get competitive loans. Two years ago, the Credit Union National Association, the industry's major trade group, even built an entire branding campaign, complete with pins, mugs and a YouTube video, around a small cardboard cutout of a smiley-faced man dubbed the "Little Guy."
But the forced sale of Fort Snelling and Real Financial are telling examples of how far most credit unions have traveled from their modest roots. Credit unions are larger and more sophisticated than they were just five years ago, thanks in part to legislative changes a decade ago that enabled them to expand beyond the tightly knit employee groups that had once defined them. Total assets are up 20 percent in five years, to an average of $90 million per credit union.
"It used to be that a credit union manager just wanted to serve the members of a particular group," said Jeff Schwalen, president and chief executive officer of Hiway Federal Credit Union in St. Paul. "But as they got further and further out in the community, the pressure to make bigger loans grew. ... And they started getting into areas where they didn't have expertise." The boring, old-fashioned consumer loans, particularly the bread-and-butter car loan, were vanishing, replaced by easy credit and zero percent interest loans from automakers.
But home equity loans were hot, and credit unions rode them hard by emphasizing the tax deductions on interest payments. They encouraged borrowers to roll other debts, such as credit cards, into home equity loans to maximize tax benefits and lower their borrowing costs. Credit unions tend to be more responsible because they hold onto most of the loans they make, rather than selling them to investors for a fee, said Mark Cummins, president and CEO of the Minnesota Credit Union Network, an industry trade group. They did not engage in some of the most extreme lending practices that took down hundreds of specialized mortgage brokers, such as issuing loans without verifying people's income. "The numbers reflect that credit unions are conservatively run," he said.
However, data suggest credit unions embraced, along with most other lenders, some riskier loans. In addition to "125 percent loans" such as those offered by Fort Snelling, some credit unions flogged adjustable-rate mortgages with low introductory rates, interest-only mortgages, and loans that allowed borrowers to set their own payments. About 20 of the state's largest credit unions reported holding interest-only and payment-option real estate loans on their books as of March 31. Together, these loans were worth $124 million. Nationwide, credit unions hold more than $17 billion of these nontraditional loans. Delinquencies and foreclosures on these loans now surpass subprime mortgages, according to First American CoreLogic, a market research firm.
"They were just like the banks," said Marvin Umholtz, a consultant to credit unions and a former lobbyist for the industry. "They were trying to help people take advantage of rising housing values. But they did it at just the wrong time and got burned." Today, the average credit union in Minnesota has 57 percent of its loans tied up in real estate, up from 43 percent in 2003. A former credit union regulator said portfolios used to get more thoroughly scrutinized if 25 percent of assets were in real estate. But that percentage has continued to climb, even as the housing market collapsed. "To have a real estate portfolio that large is like a ticking time bomb," said Bert Ely, a financial services consultant from Alexandria, Va.
Early in 2008, even as housing values were sliding, City-County Federal Credit Union in Brooklyn Center continued to book mortgages for 100 percent of the value of borrowers' houses. Now it's dealing with the aftermath. Real estate losses have wiped out nearly two-thirds of the capital at the state's fourth largest credit union, which has 64,000 members in a seven-county area stretching from Stillwater to Elk River.
So many of City-County's home loans have gone sour that the credit union now has the lowest amount of capital, as a percentage of its assets, of any credit union in the state and is classified as "significantly undercapitalized" by the National Credit Union Administration (NCUA), the federal agency that regulates and insures credit unions.
This spring, CEO Jon Seeman held a series of employee meetings at City-County's branches. At each stop, he compared the credit union's fate to that of an empty cup. "The only solution is to grow our way out of this," he said, "to gradually fill that cup with more profits." City-County has closed two of its nine branches to cut costs; even so, he estimates it will take at least four years for the credit union to replenish its capital to the regulatory minimums. "If I could go back in time and wipe away those 100 percent loan-to-value [home] loans, believe me, I would," said Seeman, who took over as CEO a year ago. "It's going to take some time to climb our way out of this."
Credit unions and their representatives insist that most of them have plenty of cash to ride out the housing crisis. In Minnesota, credit unions' capital, as a percentage of their assets, stood at 9.8 percent as of March 31. That's down from 10.6 percent a year ago, but still well above the 6 percent threshold regulators consider "adequately capitalized." In fact, credit unions could charge off every delinquent loan on their books -- an unlikely scenario -- and they would still have a capital ratio of 8.3 percent, according to the Minnesota Credit Union Network, the industry's trade group. In 1992, after the last severe recession, the aggregate amount of capital held by credit unions was just 6.6 percent, noted Crane Bennett, supervisory examiner for the NCUA in Minnesota and North Dakota.
"You have a couple of bad years, and that's what the capital is for, and you build that capital back up again," Bennett said. But as recently as a year ago, both Minnesota credit unions that were rescued from financial disaster were classified by regulators as "adequately capitalized," which raises questions about whether credit unions are identifying problem loans as quickly as they could or should.
Unlike banks, credit unions can't raise money by issuing stock. Their only cushion against losses is profits earned in better times, and those have been hit with a double punch of rising defaults and mounting costs associated with the government's bailout of the so-called "corporate" credit unions (see related story on A9). Four Minnesota credit unions -- City-County, Northcountry Cooperative, White Earth Reservation and Crow Wing Power -- have seen capital levels fall below levels deemed adequate by regulators. All told, 11 percent of all capital held by credit unions in this state has been wiped out since early 2007. "You can put a lot of money away in that cookie jar," said Dale Johnson, chief executive officer of TruStar Federal, a credit union in International Falls. "But if you're not minding the store, it can empty pretty quick."
When Matt Wohlers last year took over as chief executive officer of Teacher Federal Credit Union, recently renamed TruStone Financial, he was surprised to learn his credit union helped finance a hotel chain in Florida, a bookstore in Pennsylvania and a bankrupt ethanol plant in Rosholt, S.D. The Florida and Pennsylvania loans are still current, but TruStone's $1 million loan to the ethanol plant is more than six months past due. The ethanol deal was brought to TruStone by a so-called "credit union service organization," or CUSO, largely unregulated companies that provide services to credit unions and have become increasingly active in the commercial lending markets. In many cases, CUSOs arranged syndicated loans for commercial real estate projects far removed from where the credit unions actually operated.
Each of these loans seemed like a good idea at the time, Wohlers said. The ethanol loan was made at the height of the ethanol boom, when gas prices were still above $3 a gallon and new plants were sprouting all over the Midwest. But the plant filed for bankruptcy last year and is no longer operating; more than a dozen credit unions are trying to recover an estimated $20 million. "We sort of trusted that someone else had taken care of the due diligence" on the loan to the ethanol plant, Wohlers said. "But we don't know South Dakota. We brought nothing to the table -- nothing -- except money. And that's why we got burned."
The state's largest CUSO, CU Companies in New Brighton, also was involved in the Thumper Pond loan deal, bringing in a number of credit unions, including Hiway, Como Northtown, Soo Line, St. Paul Federal and Star Choice, the credit union of the Star Tribune. Spire Federal was the lead lender. With 62,000 members, it is the state's sixth largest credit union. About half of Spire's $485 million in loans are mortgages and lines of credit backed by residential real estate. Thumper Pond's developers said the credit unions did not seem concerned about cost overruns or the fact that seven Fergus Falls investors had backed out with "accounting concerns" the day before credit unions loaned nearly $14 million.
Blaha, the co-developer, said Spire was more interested in selling the $150,000 housing lots that surrounded the resort than in the resort itself. "I think the credit union was very gullible," said Blaha. So far, just 10 of the 100 lots have been sold. On a recent weekday afternoon, about a dozen children and older women were sliding down Thumper Pond's winding three-story water slides and paddling through its canal in rubber tubes. But nearby, the 160-seat Red Pine Restaurant was empty, and the spa and gift shop were close
Countrywide Alumni Seek Profits From Housing Collapse
PennyMac Mortgage Investment Trust, which plans to raise $400 million in a stock offering today, is betting that the people who helped create the housing crisis will know how to profit from the cleanup. Chief Executive Officer Stanford L. Kurland, 57, was president and chief operating officer of Countrywide Financial Corp., the loan originator whose co-founder, Angelo Mozilo, was sued by the Securities and Exchange Commission. Ten other senior officials also worked at Countrywide, whose subprime loans have suffered from a 39 percent delinquency rate, according to data compiled by Bloomberg. PennyMac hopes to make money buying mortgages from failed banks and redoing the terms.
"People who are critical of Wall Street will find with justification things to criticize here," said Stanley Nabi, who oversees $7.5 billion as vice chairman of Silvercrest Asset Management Group in New York. "They’re going to say, ‘Look, these are the people who created this crisis, and now they’re buying this paper on the cheap.’" PennyMac operates in a growing market. More than 1.5 million properties received a default notice or were seized in the U.S. during the first six months of 2009, a record, according to RealtyTrac Inc., which sells mortgage data. Backed by BlackRock Inc. and Highfields Capital Management LP, PennyMac plans to charge fees similar to those at hedge funds as it tries to rehabilitate loans.
Rising default rates at Countrywide drove its shares down 91 percent through March 2008, prompting a sale to Bank of America Corp., based in Charlotte, North Carolina. Mozilo, who co-founded Countrywide in 1969, was sued in June by the SEC for allegedly hiding the company’s deteriorating finances. Kurland quit Countrywide in September 2006, ending a 27- year career with the largest U.S. mortgage lender. Once considered Mozilo’s likely successor, Kurland was replaced by David Sambol, one of two top Countrywide executives who the SEC sued along with Mozilo. No one at PennyMac was a target of the lawsuit.
Ray Johnson, a spokeswoman at PennyMac, declined to comment, citing regulatory restrictions prior to initial public offerings. The company cut the size of the deal, scheduled for completion after the close of trading today, from $750 million on July 16 when it announced plans to sell shares for $20 each. They will trade under the "PMT" stock symbol. The real-estate investment trust says it will buy loans from lenders who failed as well as mortgage companies and insurers. In January, it purchased $558 million of mortgages that the Federal Deposit Insurance Corp. acquired last year after First National Bank of Nevada failed.
The collapse of the U.S. mortgage market has caused more than $1.5 trillion in losses at financial institutions worldwide and prompted the FDIC to close 64 U.S. banks this year, the most since 1992. PennyMac’s investments may return 15 percent to 25 percent a year, said Evan Gentry, the founder and chief executive officer of G8 Capital, a private buyer of distressed loans and real estate based in Ladera Ranch, California. Two of Gentry’s funds use a similar strategy.
"New mortgage REITs look more desirable than at any time I can remember," said Dean Frankel, a money manager at Urdang Securities Management who met with PennyMac officials on July 22 to discuss the offering. Urdang, a unit of Bank of New York Mellon Corp. in Plymouth Meeting, Pennsylvania, manages $1.5 billion of real-estate investments. "While we don’t generally invest in mortgage REITs, we are taking a hard look," he said. A Bloomberg index of mortgage REITs plunged 76 percent in 2007 and 2008 and fell 23 percent this year through March 5. It then surged 37 percent, trailing the gain in the Standard & Poor’s 500 Index by more than 5 percentage points.
PennyMac executives plan to charge a management fee equal to 1.5 percent of shareholders’ equity plus an incentive fee that’s one-fifth of profits above a certain level. It would be the first REIT since 2007 to succeed in charging an incentive fee, which are standard among hedge funds. While American Bethesda, Maryland-based Capital Agency Corp. and Cypress Sharpridge Investments Inc. of New York tried to, they scrapped those provisions prior to their IPOs in May 2008 and June 2009, respectively.
At least six other mortgage-related IPOs are pending, five of which also aim to collect incentive fees. New York-based Sutherland Asset Management Corp. amended its prospectus yesterday to remove one. Investors may agree with PennyMac that its connection with Countrywide is an asset, said Matthew Howlett, who analyzes real-estate securities at Fox-Pitt Kelton Inc. in New York. PennyMac’s offices in Calabasas, California, are less than five miles from Countrywide’s.
"They understand the reasons a lot of these borrowers ended up defaulting," he said. "They’re uniquely positioned to identify and correct them, and that can be enormously profitable in this environment given the prices." PennyMac’s strategy may rely too heavily on the assumption that investor appetite for mortgage-related assets will recover, said Terry Wakefield. He is a consultant to the residential loan industry who helped design Fannie Mae’s mortgage-backed securities business in 1981 and later traded the derivatives at Salomon Brothers Inc.
High default rates on restructured loans may also deter investors, Wakefield said. About 53 percent of mortgages modified in the first quarter of 2008 were 30 or more days delinquent after six months, and 63 percent were in default after a year, according to a June 30 report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. "The big issue in PennyMac’s world is: Where are they going to sell those loans, assuming they’ve been effectively modified?" Wakefield said. "I don’t know a lot of people standing in line to buy those assets."
Goldman Says Curbing Speculators May Disrupt Energy Markets
Goldman Sachs Group Inc., the bank that makes the most money from commodities, fixed-income and currency trading, said attempts to curb speculation may be "disruptive" to energy markets. "The role that is played by non-traditional participants such as index investors and other financial participants often has been mischaracterized," Don Casturo, a Goldman Sachs managing director, said today at a Commodity Futures Trading Commission hearing in Washington.
The testimony was part of the second day of hearings on excessive market speculation and how to respond. CFTC Chairman Gary Gensler, a former Goldman Sachs employee, said today the commission "is hearing support" for position limits in energy markets after crude oil futures rose to a record $147.27 a barrel in 2008 on the New York Mercantile Exchange. "It’s more a question of how than whether," to establish new limits, he said. Gensler has been chairman of the commission since May and was a former managing director at Goldman Sachs, which set a Wall Street earnings record in the second quarter.
Blythe Masters, head of the global commodities group at New York-based JPMorgan Chase & Co., said the CFTC should set "a speculative position limit" that looks at individual entities’ net positions, instead of regulating the banks that facilitate trading. She said putting limits on the "end user" would capture trading across all markets, including over-the-counter. Restricting the size of aggregators like JPMorgan will drive investors to other markets and investments, Masters said. "This is not a threat that if you do this, we will go there," she said. "It’s a prediction."
Casturo agreed that banks should be excluded from strict limits while acting on behalf of customers. Such a distinction may exempt index funds and exchange-traded products from limits, applying those limits instead to the investor in the funds. "They believe it’s appropriate to set position limits, but they’d like to be exempt from them," Gensler told reporters after the meeting. "There may be a difference of view on that." Masters also said standardized OTC derivatives contracts "between systemically significant financial institutions" should be required to go through a regulated clearinghouse.
Goldman Sachs and Morgan Stanley are the dominant banks in trading commodities. The two New York-based banks accounted for half of the $15 billion of revenue that the world’s 10 largest banks generated from commodities in 2007, according to an estimate from Ethan Ravage, a financial-services industry consultant in San Francisco. Goldman Sachs doesn’t disclose how much of its revenue comes from commodities.
The business is part of its fixed- income, currencies and commodities division that generated a record $6.8 billion in the second quarter of 2009. Gensler worked at Goldman Sachs for 18 years, leaving the company after becoming co-head of finance. In 1997, he joined the U.S. Treasury Department under Robert Rubin, another former Goldman Sachs employee.
Casturo said increased participation in commodity markets by financial investors has helped liquidity and improved price discovery. "Some of the courses of action that have been proposed not only will fail to address the perceived harms but also will have unintended consequences that may be disruptive to liquidity and the markets generally," said Casturo, who is responsible for risk management at Goldman Sachs’s commodity index business.
Tyson Slocum, the director of energy programs for consumer advocacy group Public Citizen, said today that financial firms like Goldman Sachs and JPMorgan are simply "taking full advantage of the lack of regulatory oversight over their operations to maximize market power and control information." Slocum called for aggregate position limits across all energy markets, and recommended the agency use emergency powers to require all standardized over-the-counter contracts clear through a CFTC-regulated exchange.
Position limits "will be a reality," Slocum said in a Bloomberg Television interview before entering the hearing. Gensler said there was a consensus that limits are needed, leaving the commission to answer three questions: What the limits will be, who will set and monitor the limits, and who will be exempt from limits and under what conditions. Any position limits would have to "consider producer and consumer hedge ratios, the size of the physical commodity market and size of the futures market," Casturo said.
Gensler also rejected comments by Henry Jarecki, chairman of Gresham Investment Management, that the commission may be acting just to be seen as regulating when commodity prices rise. Jarecki likened the agency’s action to a doctor that gives his patient "large and colorful" pills to be seen as fighting a disease. "This isn’t political," Gensler said. The chairman said the commission so far has heard "a very real need to consider the over-the-counter derivatives marketplace to bring reform to that marketplace." The agency would need new authority to expand its oversight of OTC markets. "It gives me personally a renewed vigor to work with Congress to get that done," Gensler said. The final day of hearings will take place Aug. 5.
British savers drain £2.3bn from building societies
Biggest drawdown of cash in history
The difficulties facing building societies were highlighted today with figures released showing they suffered the biggest monthly outflow of savings for 54 years in June — and warnings of continued withdrawals as unemployment forces savers to dip into their nest eggs. The unprecedented £2.3bn withdrawn from the sector — the largest monthly fall since data was first collected in 1955 — could have implications for the mortgage market, where lending is increasingly being dominated by the banks.
Building societies tend to be more reliant on savers to support their mortgage lending than banks. The sudden reversal of fortunes for building societies — which enjoyed a boom in savings after the collapse of Northern Rock two years ago — came as the Office of Fair Trading appeared to suggest it should be easier to set up banks to bolster competition. The OFT's Financial Services Plan — prompted by last year's prebudget report — said it would "ensure public decisions to deal with the current economic crisis do not harm competition in the long-term detriment to customers".
After warning of competition concerns — overruled by the government — when Lloyds Bank rescued HBOS at the height of the banking crisis, the OFT said it would "work with the government to identify actions it can take to promote competition and choice in the banking sector. This includes measures to promote entry into the banking market." The enlarged Lloyds Banking Group, in which the taxpayer has a 43% stake, has a 35% share of current accounts.
The OFT also urged the government to withdraw from its investments in banks — Lloyds, Royal Bank of Scotland and Northern Rock — by considering "ways of ensuring there are a number of players within banking, so that no one firm or set of firms is dominant in the market". Experts said the withdrawal of savings from building societies might indicate a return of confidence in the banking sector — which is able to offer more competitive interest rates for savers.
The British Bankers' Association noted a sharp rise in savings at banks in June, and this month National Savings & Investments attributed a £1bn withdrawal of funds from its products in the past three months to a restoration in confidence in banks. However, the Building Societies Association, which represents all 53 organisations, insisted this was not a crisis for a sector which has endured high profile collapses and a cut to credit ratings.
Brian Morris, head of savings policy, said: "With rising unemployment, subdued income growth and the official Bank Rate at an historic low, it is very difficult to attract retail savings. In addition, there is evidence households are looking to take advantage of low interest rates to pay off debt rather than save. These conditions are expected to persist into 2010."
Analysts say the overall trend is for a rise in savings after a small dip in the first quarter of 2009. Andrew Hagger of price comparison website moneynet.co.uk said he was surprised by the level of outflows from building societies, which continue to dominate his best-buy tables.
He noted that the largest society, Nationwide, is not making it into the tables, which helps to account for some of the decline. But as the banking crisis has turned into a recession, the government's focus has been on lending. Alistair Darling summoned bankers to the Treasury on Monday to express his concern about a shortage of funding for small businesses, which appeared to be supported by Bank of England data today showing UK companies paid off more bank loans than they were granted for the first time in 10 years.
Howard Archer, economist at IHS Global Insight, said: "This suggests banks are still reticent in their lending to companies." The Bank data also highlighted an increase in housing activity with mortgages approved for house purchases rising to its highest level in more than a year in June to 47,584. But experts noted this was more than half the levels recorded before the credit crisis.
However, building societies appeared to be losing out as more customers were paying back loans than taking out new ones in June. The BSA said net mortgage lending was a negative £511m in June. One of the beneficiaries appears to Abbey, owned by Spain's Santander, which revealed its net lending was £2bn in the first half — more than the entire market as more of its customers stayed and it won new customers. Its figures come as the rest of high street banks prepare to report their half year numbers next week.
IMF delays Iceland payment
The International Monetary Fund has delayed handing over the second tranche of Iceland's emergency bail-out loan. It is thought to be linked to the political row over compensation for Britain's Icesave customers, as opposition grows in Iceland to the terms of a loan from Britain to help the country cover the liability.
Iceland had to turn to the IMF for bail-out last October, when its three biggest banks, Kaupthing, Landsbanki and Glitnir failed. A diplomatic dispute between Iceland and Britain ensued over compensation for UK customers of Icesave, Landsbanki's internet bank. Earlier this year, Britain agreed to compensate 300,000 UK savers with Landsbanki's Icesave, lending Iceland £2.1bn to cover the first €22,000 (£18,800) in each account.
However, over the last month, it has appeared increasingly unlikely that Iceland's politicians will accept punitive interest rates of 5.5pc attached to the British and Dutch loans. Polls in Reykjavik show that a parliamentary bill needed to approve the loan does not have the support needed to be passed. It is possible that a failure to pass the bill could topple a second Icelandic government in less than six months. A vote on the bill is not expected at least until the assembly reconvenes next week.
Islamic Finance Key to Asian Revival, Kuwait Finance House Says
Islamic finance will play a central role in reviving Asian economies as investors look to emerging markets to deliver higher returns than the U.S. and Europe, according to Kuwait Finance House. Demand for investments backed by tangible assets like power plants and property grew after banks outside of Asia were hit hardest by the global financial crisis, Baljeet Grewal, managing director of the second-biggest Islamic bank’s research unit, said in a phone interview from Kuala Lumpur yesterday.
"Islamic finance is no longer on the periphery and so any crisis which impacts the global economy will of course impact it," Grewal said. "However, we believe there will be an Islamic finance-led recovery driven by sukuk issuance and a move to Islamic deposits, which we already saw when some of the large American banks went down." Sales of Islamic bonds, also known as sukuk, increased from $144 million in January to $1.9 billion in March and $2.3 billion this month, according to data compiled by Bloomberg. Indonesia, which offered dollar sukuk for the first time in April, received bids for seven times the amount it sought and Malaysia said yesterday it would introduce a trading platform to make it easier for companies to buy and sell commodities like palm oil and rice that are used to back Islamic loans.
Islamic finance, which bans the payment of interest and stipulates agreements be based on the transfer of goods or services, will expand in Asia’s emerging markets because they have stronger growth prospects than the U.S. and European economies and larger Muslim populations, Grewal said. Petroliam Nasional Bhd., Malaysia’s state oil company, is meeting today with investors in Kuala Lumpur about a possible sale of both conventional and Islamic dollar bonds and will hold further meetings in the Middle East, Europe and the U.S. next month, a person familiar with its plans said yesterday.
Kuwait Finance House Research forecasts Islamic assets under management globally will grow between 12 and 15 percent to as much as $1.1 trillion this year, compared with 23.5 percent growth in 2008. The deceleration is due mainly to a correction in property prices, Grewal said. The economy of Indonesia, where around 200 million people, or 86 percent of the population, are Muslim, is forecast to grow at 5.5 percent in 2010, according to nine economists surveyed by Bloomberg, compared with 0.6 percent for France, home to some 5 million Muslims, the most among western European nations.
Islamic banking assets in Indonesia increased by 35 percent a year from 2004 to 2008, to 2.2 percent of the country’s total banking assets, Kuwait Finance House Research said. Bank Indonesia, the central bank, forecast 15 percent of the nation’s total banking assets will be structured in accordance with Muslim laws by 2015. Sales of Islamic bonds plunged to $13.9 billion in 2008 from a record $31 billion a year earlier, according to Bloomberg data. In 2004, $5.8 billion Islamic bonds were sold compared with $2.2 billion in 2000.
Investors shouldn’t be discouraged by some recent high- profile defaults, Grewal said. In May, Investment Dar Co., the owner of half of luxury carmaker Aston Martin Lagonda Ltd., missed a payment on $100 million of debt, becoming the first company in the Persian Gulf to default on Islamic bonds. "Sukuk have defaulted largely because of the fall in real estate prices which impacted ratings and prompted subsequent downgrades, but sukuk raised against infrastructure assets like power and water, they are still extremely strong," Grewal said. "If you benchmark the risk of sukuk default and conventional bond default there’s no argument Islamic bonds have been the safer alternative."
Banks Reopen Global Casino
Investment banks, of all things, are making serious money again, thanks in part to government aid. Ironically, they are benefiting from the crisis they helped to create. As profits go up, so do salaries -- only this time, it's the taxpayers who are shouldering the risks.
Anshu Jain, 46, listened stoically and silently to the remarks of shareholders at the annual meeting of Deutsche Bank at the end of May. Many were troubled by the fact that the bank had reported its biggest ever loss in 2008, €3.9 billion ($5.6 billion), for which Jain, as its top investment banker, was responsible. Deutsche Bank, like all major investment banks, took great risks in the boom years, speculating with securities that we now call toxic, because they have poisoned bank balance sheets.
While many shareholders at the annual meeting discussed the causes and effects of the financial crisis, and while politicians around the globe debated the introduction of stricter regulations to impose tighter limits on the risky activities of investment bankers, Jain saw the crisis as an opportunity. His first step was to get customer accounts back into the game, followed by a return to speculative investment in proprietary trading. "What we will see is five to six formidable global players in investment banking," the normally reserved banker told the British trade publication Euromoney in early May. "Sales and trading will continue to drive the lion's share of profits."
Apparently speculation has worked out for Deutsche Bank. Thanks to Jain's good timing, CEO Josef Ackermann was able on Tuesday to announce a profit figure in the billions for the first half of the year. The bank has also apparently set aside billions in reserves to pay bonuses to its investment bankers. The casino is open again, worldwide. Many investment banks are raking in massive profits once again, driving up risks and attracting talent with high salaries. It's as if nothing had happened, and as if it hadn't been precisely this type of behavior that brought the financial system to the brink of collapse last fall and then plunged the world economy into its worst crisis since World War II.
The collapse of the financial system was averted, but only through colossal public spending, as governments bolstered ailing banks with loan guarantees and equity injections and central banks pumped billions in liquidity into the markets. But now that the worst seems to be over, banks are back to behaving the same way they did before the crisis. Even worse, thanks to government guarantees for the financial sector and cheap money from central banks, it has never been easier for banks to make money.
Money-Making Opportunities Amidst the Crisis
"The taxpayer is paying for the chips in the casino," the head of the German operations of an international investment bank says quite openly, but anonymously nevertheless. "It doesn't get any better." The government, he says, provided guarantees for banks like Munich's Hypo Real Estate, whose securities are now being traded on the market at a huge discount. Investment banks, for their part, have bought the securities with money they borrowed from central banks at ridiculously low rates.
According to the anonymous bank executive, these investment banks, as well as hedge funds and major investors, expected that governments, in the wake of the Lehman Brothers bankruptcy in September, would ultimately bail out all major banks. Indeed, rates for bank bonds soon began rising again, and the first aggressive players in the market collected exorbitant profits. "Unfortunately, the bad bonds of the bankruptcy candidates are now sold out," says the bank executive.
The biggest beneficiary of the crisis has been US investment bank Goldman Sachs, which posted record earnings of $13.8 billion (€9.7 billion) in the second quarter. Its traders used money from the US government and the Federal Reserve Bank to speculate, behaving as if the bank were a gigantic hedge fund. Profits from proprietary trading almost doubled over the previous year, while earnings rose by a whopping 186 percent in the bank's bond, commodities and foreign currency speculation businesses. And Goldman CEO Lloyd Blankfein's appetite for risk is still growing. Value at risk (VaR), a measure of the risk of loss on a single day of trading, rose to $245 million -- the highest VaR in the bank's history.
The fact that Goldman Sachs was downgraded to an ordinary commercial bank in the course of the crisis, thereby losing a number of the privileges of an investment bank, doesn't seem to have harmed the hedge fund mentality. The bankers promptly set aside billions for their Christmas bonuses. What's good for Goldman Sachs "is bad for America," economics Nobel laureate Paul Krugman wrote in the New York Times, and noted that " Wall Street's bad habits ... have not gone away."
Even the pro-business Wall Street Journal sharply criticized the " Goldmans of the world," arguing that the bank "enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong." Most alarmingly, the classic investment banks are paying little or no heed to the actual business of banking, at least as seen from the German perspective: lending. The reason is clear: Risks are often higher in the lending segment, while profit margins are smaller.
A Boom in Corporate Bonds
Because no one can compel the banks to lend money, companies are being forced to resort to issuing bonds to raise cash. Bond issues, in turn, are a prime -- risk-free -- money-maker for investment banks. It is a deep irony that the current crisis, which began in the capital markets, is now strengthening the capital markets once again. The volume of bond issues, at any rate, has exploded. In continental Europe alone, companies -- not including banks -- have borrowed $318 billion in the first six months of this year. This represents a roughly 50-percent increase over the average of the last three years.
A boom has begun in bond trading that hasn't been seen since the 1980s. The crisis has made the bond market attractive again, causing demand to rise and prices to fluctuate -- the key ingredients to making money. But only a few banks are able to join the game, while other banks that are still struggling to fill the holes in their balance sheets are left out in the cold. This second group of banks includes Germany's troubled state-owned banks and recently merged Commerzbank/Dresdner Bank, which is no longer able or willing to participate in the current game of Monopoly.
"Their employees are biding their time, and they have absolutely no motivation whatsoever. They're just waiting to get jobs somewhere else," says one banker. But most of these people will find themselves waiting a long time -- because the winners in this crisis, banks like Goldman Sachs, JP Morgan Chase and Deutsche Bank, though hiring again, are only interested in hiring the cream of the crop. Besides, they have also taken to poaching each other's employees with promises of higher compensation.
"What we see now is the separation of the chaff from the wheat," says a senior investment banker. Even in the crisis, the fastest and the cleverest have managed to find ways to make money, while others haven't even understood what the rules of the game are yet. When the prices of the bonds and loans of financial institutions, and later industrial corporations, declined by several percentage points at the beginning of the crisis, employees at Goldman, JP Morgan and Deutsche Bank foresaw the coming landslide and quickly sold these debt securities en masse, taking the resulting losses, though small at the time, in stride.
Distressed Debt Securities
But a few state-owned banks decided to snap up what they considered to be bargains, when the debt securities were being traded at 90 cents on the euro. "They thought that was cheap," says a London trader. But today the bonds, and particularly the loans, are still priced well below the rates the state-owned banks were paying at the time.
To discover just how far they have fallen, employees of the banks on the losing end of the equation need only check their e-mail messages. At Merrill Lynch, an investment bank that saved itself when the government facilitated its acquisition by Bank of America, the "Distressed Credit Sales Team" sends out its list of offers of the day in an email every morning. The list is a sort of bargain table for distressed loans, which appears on the screen when the recipients of the e-mails open the attached file.
The cheapest distressed debt securities include those of German automotive suppliers. One of these securities is listed as "Schefenacker Sr TL 7.00-10.00." Translation: Merrill is offering to pay 7 cents per euro of principal for the auto supplier's prime collateralized bullet loans. The indicated selling price is 10 cents per euro. For prime loans of Edscha, another auto supplier, the investment bankers are prepared to pay 25 cents on the euro, with a selling price of 35 cents. This corresponds to a profit of up to 50 percent.
"These are certainly comfortable profit margins," says a trader, "and they are only possible because it is no longer 13 to 15 banks that compete for each trade, but only four or five." The banks that are most active in the business are Goldman Sachs, JP Morgan, Merrill Lynch and Morgan Stanley.
The banks that are actually issuing new loans are the losers in the current equation. Their margins are significantly lower and their risks higher. But the investment banks, which have specialized in the trading of existing loans, have access to the same cheap refinancing through the central banks. In other words, they are making money by simply turning over existing money. Many of the banks that were highly active in lending money to companies in the past are being pressured by banking regulators to reduce their credit portfolios. This results in so-called fire sales, at which the major banks' traders in high-risk loans can snap up attractive bargains.
Warding Off Efforts to Tighten Regulations
The investment banks have even returned to the kinds of transactions that played a key role in bringing down the system. JP Morgan, for example, is reporting record earnings once again. In the 1990s, the New York financial group developed credit default swaps (CDS), the form of derivative security that turned explosive in the world economy last year. Nevertheless, in March JP Morgan still held derivatives worth $81 trillion, making it the major player in the market.
The investment banks continue to earn handsome profits by helping their major customers with over-the-counter derivative deals, which are still virtually unregulated. JP Morgan Chase CEO Jamie Dimon has aggressively fended off all of Washington's attempts to regulate these explosive products.
Never again could a single financial institution be allowed to become so big that its failure could bring down entire markets -- that was the central lesson learned from the collapse of Citigroup and AIG. These were institutions that were considered "too big to fail." Today, such concerns are hardly relevant on Wall Street. JP Morgan is considered a healthy company that has its $81 trillion in derivatives under control. According to the business magazine Forbes, "Wall Street learned nothing."
Financial products like collateralized debt obligations (CDOs), treated as ticking time bombs until recently, are in demand once again, and the process of collateralization, frowned upon since the financial crisis erupted, is back. As if nothing had happened, Morgan Stanley is packaging ("securitizing") downgraded CDOs into new securities, some of which are expected to receive the coveted AAA rating from Moody's.
"People say that derivative products are out of fashion. But we are constantly making more of them, with higher profit margins," says Deutsche Bank's Jain, noting that the complex products are doing especially well. Particularly in times of crisis, he says, nervous customers want to hedge again all possible types of currency or interest rate risks. But not all investment banks are successful. Bank of America, the largest financial company in the United States, reported a 24 percent decline in profits over the previous quarter. John Mack, the CEO of Morgan Stanley, even had to report a loss, and Citigroup is struggling with massive loan defaults.
An Oligopoly of Large Investment Banks
On the whole, however, the days of humility are over, replaced by a new motto: We're somebody again. The survivors of the crisis see the thinned out field of competitors as a historic opportunity, and they are taking advantage of it. "Right now, (Goldman is) one of only a few people on the beach, so they're getting all the girls," New York finance professor and former Goldman partner Roy Smith told the Wall Street Journal.
Deutsche Bank has also become part of an oligopoly of large investment banks that has politicians in the major industrialized nations intimidated. The institution is an important player in the issue of bonds and has been the top player in worldwide foreign currency trading, a market in which it now holds a 21-percent share. Even Jain believes that the bank can hardly do better than that, probably because customers will still want an alternative in the future.
Getting Rich off the Taxpayers
Commerzbank is among those banks that can no longer compete on most playing fields. To some extent, this was intentional. After acquiring Dresdner Bank early in the year, the bank is systematically reducing its risks. But Commerzbank, Germany's second-largest bank, is also losing more and more of the specialists it needs for the more profitable aspects of its business. "Someone who doesn't pay more than €500,000 will have trouble remaining competitive in investment banking," says Tim Zühlke, a partner at Indigo Headhunters. He is referring to the cap on executive compensation that the federal government pushed through at Commerzbank.
In many cases, salaries are rising rapidly once again. Even ailing Citigroup plans to increase salaries by 50 percent this year to offset low bonuses, despite the fact that the US government made bailout funds in the double-digit billions available to the bank. Other banks, including UBS and Morgan Stanley, are also giving their employees hefty pay raises, sometimes ranging from 30 to 60 percent.
According to an estimate by the consulting firm Johnson Associates, salaries throughout the banking industry are expected to rise by 20 to 30 percent on average this year. Bankers at Goldman, unless something unexpected happens, can expect to earn an average income of $770,000 this year -- the highest average annual compensation in the bank's history. Just a few months ago, Wall Street's CEOs were sitting contritely in hearings at the US Congress, quietly enduring the politicians' fury.
But now the bankers, after regaining their self-confidence, are unscrupulously campaigning against the government's plans to impose more regulation on the industry. At the most recent hearings, industry representatives loudly sang the praises of the White House's intentions. "Change is necessary," said a man from the American Bankers Association. "CBA supports the goals of transparency, simplicity, fairness, responsibility," his counterpart from the Consumer Bankers Association vowed.
Nevertheless, the people on Wall Street have a low opinion of the government's specific measures. They are not even prepared to tolerate tighter regulation of credit default swaps, which were partly responsible for the massive problems in the financial markets. Together with partners, JP Morgan and Goldman Sachs formed a lobbying group, the CDS Dealers Consortium, specifically to prevent decisive government intervention.
The image of Wall Street bankers is unlikely to change from greedy to responsible anytime soon, even if the return of old habits is unsettling to some in the industry. "A few years ago, the investment banks got rich on their customers' money," says a former high-flier in the industry. "When that resource became too small, they fell back on their shareholders' money. Now they've reached the biggest pool the world can offer: taxpayers' money."
Ilargi: Both Michael Moore and The Road. Promising.
Moore's credit crunch film tops bill in Venice
Michael Moore's documentary on the global financial crisis, "Capitalism: A Love Story", will vie for the top prize at this year's Venice film festival. The Oscar winner's is one of six U.S. movies in the main competition at the world's oldest film festival, a sign U.S. film-making is back in business after last year's problems, according to organizers. "It seemed that the writers' strike, the financial difficulties had slammed the brakes on the most creative part of American cinema, but the selection has never been so great," said festival director Marco Mueller as he unveiled the program of the Sept 2-12 event.
Also up for the Golden Lion are Werner Herzog's remake of "Bad Lieutenant", former Gucci designer Tom Ford's directorial debut "A Single Man" and John Hillcoat's "The Road", an adaptation of Cormac McCarthy's bestseller starring Viggo Mortensen and Charlize Theron. One title among the 24 films in the official contest has yet to be unveiled. Highlights out of competition include Steven Soderbergh's "The Informant!", with Matt Damon as the whistle-blower in an agri-business powerhouse, and Joe Dante's 3-D horror "The Hole".
George Clooney, star of last year's opening film by the Coen brothers, will be back on the Lido in Grant Heslov's satirical drama "The Men Who Stare at Goats". Italy and France will also loom large over Venice with four films each in the main lineup, including Jaco van Dormael's "Mr Nobody" and Giuseppe Tornatore's epic drama "Baaria", the first Italian movie to open the festival in two decades. The heavy U.S. presence promises a steady flow of Hollywood stars on the Lido red carpet, unlike last year, and there will be a career award for John Lasseter and his fellow Pixar directors for their animation blockbusters. To mark the award, new 3D versions of Toy Story and Toy Story 2 will screen at the festival.
Foreign Investors Snap Up African Farmland
Governments and investment funds are buying up farmland in Africa and Asia to grow food -- a profitable business, with a growing global population and rapidly rising prices. The high-stakes game of real-life Monopoly is leading to a modern colonialism to which many poor countries submit out of necessity.
Every crisis has its winners. A group of them is sitting in the Stuyvesant Room at the Marriott Hotel in New York. The conference room, where the shades are drawn and the lights are dimmed, is filled with men from Iowa, Sao Paulo and Sydney -- corn farmers, big landowners and fund managers. Each of them has paid $1,995 (€1,395) to attend Global AgInvesting 2009, the first investors' conference on the emerging worldwide market in farmland.
A man from the Organization for Economic Cooperation and Development (OECD) gives the first presentation. Colorful graphs travel up and down his PowerPoint charts. Some are headed downward as the year 2050 approaches. They represent the farmland that is disappearing as a result of climate change, soil desolation, urbanization and the shortage of water. The other lines, which point sharply upward, represent demand for meat and biofuel, food prices and population growth. There is a growing gap between these two sets of lines. It represents hunger.
According to most prognoses, there could be 9.1 billion people living on earth in 2050, about two billion more than today. In the coming 20 years alone, worldwide demand for food is expected to rise by 50 percent. "These are pessimistic prospects," says the OECD man. He looks serious and even a little sad, as he describes the future of the world. But for the audience in the Stuyvesant Room, mostly men and a handful of women, all of this is good news and the mood is buoyant. How could it be any different? After all, hunger is their business. The combination of more people and less land makes food a safe investment, with annual returns of 20 to 30 percent, rare in the current economic climate.
These are not Wall Street experts, nor are they people who shoot money across the continents like billiard balls. On the contrary, these are extremely conservative investors who buy or lease land to grow wheat or raise cattle. But land is scarce and expensive in Europe and the United States. Solving the problem means developing new land, which is only available in Africa, Asia and South America. This combination of factors has triggered a high-stakes game of real-life Monopoly, in which investment funds, banks and governments are engaged in a race for access to the world's arable land.
'The Final Frontier for Finding Alpha'
Susan Payne, a red-haired British woman, is the CEO of the largest land fund in southern Africa, which currently includes 150,000 hectares (370,000 acres), mainly in South Africa, Zambia and Mozambique. Payne hopes to raise half a billion euros from investors. She talks about fighting hunger, but the headings on her PowerPoint slides, embellished with photos of soybean fields at sunset, tell a different story. One such heading refers to "Africa -- the last frontier for finding alpha." The word alpha signifies an investment for which the return is greater than the risk. Africa is alpha country.
That's because land, which is extremely fertile in some regions, is inexpensive on the impoverished continent. Payne's land fund pays $350-500 per hectare ($140-200 per acre) in Zambia, about a tenth the price of land in Argentina or the United States. For a small farmer in Africa, the average yield per hectare has remained unchanged in 40 years. With a little fertilizer and additional irrigation, yields could quadruple -- and so could profits.
These are perfect conditions for investors. Susan Payne sees it that way, and so do her investors. In fact, there has been so much demand for this type of investment that Payne recently had to establish a new sub-fund. A great deal of capital is currently available. It is the second year of the global economic crisis, and investors are seeking sound and safe investments, which is why the audience in New York includes not only hedge fund managers and agriculture industry executives, but also the representatives of large pension funds and the chief financial officers of five universities, including Harvard.
Thousands of investment funds, from small to large, have recently begun applying the most basic formula in the world: Man must eat. US investment management company BlackRock, for example, has established a $200 million agriculture fund, and has earmarked $30 million for the acquisition of farmland. Renaissance Capital, a Russian investment company, has acquired more than 100,000 hectares in Ukraine. Deutsche Bank and Goldman Sachs have invested their money in pig breeding operations and chicken farms in China, investments that include the legal rights to farmland.
Food is becoming the new oil. Worldwide grain reserves dropped to a historic low at the beginning of 2008, and the ensuing price explosion marked a turning point, just as the oil crisis did in the 1970s. There were bread riots around the world, and 25 countries, including some of the biggest grain exporters, imposed restrictions on food exports. Then came the second crisis of 2008, the economic crisis. Two fears -- the fear of hunger and the fear of uncertainty -- converged, triggering what some are already calling a second generation of colonialism.
A Win-Win Situation?
What is different about this colonialism is that countries are readily allowing themselves to be conquered. The Ethiopian prime minister said that his government is "eager" to provide access to hundreds of thousands of hectares of farmland. The Turkish agriculture minister announced: "Choose and take what you want." In the midst of a war against the Taliban, the Pakistani government staged a road show in Dubai, seeking to entice sheikhs with tax breaks and exemptions from labor laws.
All these efforts have two hopes in common. One is the hope of poor nations to achieve the development and modernization of their ailing agricultural sectors. The other is the world's hope that foreign investors in Africa and Asia will be able to produce enough food for a planet soon to be populated by 9.1 billion people; that they will bring along all the things that poor countries have lacked until now, including technology, capital and knowledge, modern seed and fertilizer; and that these investors will be able to not only double crop yields but, in many parts of Africa, increase them tenfold. Previous estimates had in fact forecast a decline in production capacity by 3 to 4 percent in 2080, as compared with the year 2000.
If the investors are successful, they could achieve what development agencies have been unable to do in the past few decades: reduce the hunger that now afflicts more people than ever, namely one billion worldwide. In the best case scenario this could be a win-win situation with profit for the investors and development for the poor.
It is not just bankers and speculators, but also governments that are acquiring land in other countries, seeking to reduce their dependence on the world market and imports. China is home to 20 percent of the world's population, but it has only 9 percent of the world's arable land. Japan is the world's largest corn importer, and South Korea is the second-largest. The Persian Gulf States import 60 percent of their food, while their natural water reserves are sufficient to support only another 30 years of agriculture.
Modern-Day Land Grab
But what happens in a globalized world when colonies arise once again? What if, for example, Saudi Arabia acquires parts of Pakistan's Punjab region or Russian investors buy up half of Ukraine? And what happens when famine strikes these countries? Will the wealthy foreigners install electric fences around their fields and will armed guards escort crop shipments out of the country? Pakistan has already announced plans to deploy 100,000 members of its security forces to protect foreign-owned fields.
Because of the political sensitivity of the modern-day land grab, it is often only the country's head of state who knows the details. In some cases, however, provincial governors have already auctioned off land to the highest bidder, as in the case of Laos and Cambodia, where even the governments no longer know how much of their territory they still own.
No one is sure exactly how much land is at stake. The number cited by the International Food Policy Research Institute (IFPRI) is 30 million hectares, but this estimate is impossible to verify. Even United Nations organizations has to resort to citing newspaper reports, while the World Bank is trying to convince countries to pay closer attention to the fine print on agreements.
Klaus Deininger, an economist specializing in land policy at the World Bank, estimates that 10 to 30 percent of available arable land could be up for grabs, although only a fraction of the potential number of lease and sale agreements have been signed. "There was a huge jump in 2008, when plans and applications in many countries more than doubled, in some cases tripled."
In Mozambique, says Deininger, foreign demand is more than double the existing cultivated farmland, and the government has already allocated four million hectares to investors, half of them from abroad. The most spectacular deals are not being made by private investors, however, but by governments and the funds and conglomerates they promote:
- The Sudanese government has leased 1.5 million hectares of prime farmland to the Gulf States, Egypt and South Korea for 99 years. Paradoxically, Sudan is also the world's largest recipient of foreign aid, with 5.6 million of its citizens dependent on food deliveries.
- Kuwait has leased 130,000 hectares of rice fields in Cambodia.
- Egypt plans to grow wheat and corn on 840,000 hectares in Uganda.
- The president of the Democratic Republic of Congo has offered to lease 10 million hectares to the South Africans.
Saudi Arabia is one of the biggest and most aggressive buyers of land. This spring, the king attended a ceremony where he took delivery of the first export rice harvest, produced exclusively for the kingdom in hunger-stricken Ethiopia. Saudi Arabia spends $800 million a year promoting foreign companies that cultivate "strategic field crops" like rice, wheat, barley and corn, which it then imports. Ironically, the country was the world's sixth-largest wheat exporter in the 1990s. But water is scarce and the desert nation aims to preserve its reserves. Exporting food also means exporting water.
'The Investor Needs a Weak State'
Rich nations are exchanging money, oil and infrastructure for food, water and animal feed. At first glance, this seems to present a solution for many problems, says Jean-Philippe Audinet of the International Fund for Agricultural Development (IFAD). In principle, he is pleased about the agricultural investments, and says he fought for them for years. "What was bad was the period when markets were being flooded with cheap food products."
But many of the countries where land is being snapped up -- Kazakhstan and Pakistan, for example -- suffer from water shortages. Sub-Saharan Africa has adequate natural water reserves, but the only country in the region currently producing a food surplus is South Africa. Most countries, on the other hand, are importers and, with rapidly growing populations, will likely be even more dependent on food imports in the future. Can such countries truly become important food producers?
Audinet, the IFAD expert, knows the risks. "The way these agreements are structured can harm the country and the farmers in the long term, robbing them of their most important asset: land." Olivier De Schutter, the UN Special Rapporteur on the right to food, warns: "Because the countries in Africa are competing for investors, they are undercutting each other." Some contracts, says De Schutter, are barely three pages long -- for hundreds of thousands of hectares of land. These types of agreements stipulate what products are to be cultivated, the location and the purchase or lease price, but they include no environmental standards. They also lack the necessary investment regulations and the stipulation that jobs must be created, says De Schutter.
Some agree to build schools and pave roads, but even when investors live up to their promises, the benefits to the host governments and local farmers are often short-lived. In the long term, however, they must suffer the consequences of over-fertilizing, deforestation, over-consumption of water, reduction of ecological diversity and the loss of local species. To boost harvests and achieve annual returns of 20 percent or more, the foreign large landowners must operate their farms on an industrial scale. And when the soil becomes depleted after a few years, many investors simply move on. Land is so cheap that they are not forced to value sustainable farming practices.
Rejecting the Old Model
Because of these risks Audinet and De Schutter, like most experts, favor contract farming instead of land acquisition. In other words, the foreign investors provide the technology and capital, while the local farmers own or lease the land and supply rice or wheat at fixed prices. This is the classic, tried-and-tested model, but it is not what the new investors want. They want control, ownership, high returns and, most of all, security -- objectives rarely compatible with the interests of thousands of small farmers.
Senegal has decided in favor of contract farming and against large-scale land sales, but it happens to be a stable democracy. This cannot be said of many of the countries where land acquisition is taking place. "When food becomes scarce, the investor needs a weak state that does not force him to abide by any rules," says Philippe Heilberg, an American businessman. A state that permits grain exports despite famines at home, that is consumed by corruption or deeply in debt, ruled by a dictatorship, racked by civil war, or sends millions of workers abroad and is dependent on these workers receiving visas and jobs.
Heilberg has found such a nation: South Sudan, which is in fact a pre-nation, autonomous but not independent. The 44-year-old American, son of a coffee merchant and the founder of the investment firm Jarch Capital, is now the largest land leaseholder in South Sudan, where he leases 400,000 hectares of prime farmland in Mayom County.
The mere mention of the words South Sudan conjures up images of civil war, refugees and famine, not of a place where one would consider growing tomatoes. But Heilberg raves that his project will be more beneficial to people than the UN, and that he will create jobs and produce food. And he is adamant that Paulino Matip, from whom he has leased the land for 50 years, not be referred to as a warlord, but as a "former warlord" or "deputy army chief."
Heilberg neglects to mention that the rebels led by Matip are suspected of having committed war crimes. Instead of buying stocks, the former banker is now speculating on the political future of South Sudan, which he insists will be an independent country in 10 years, at which point land will be far more expensive than it is today.
Land acquisition is already a step further along in western Kenya, home to Erastas Dildo, 33, the kind of person the New York investors would probably characterize as a risk factor: a small farmer who owns three hectares of land. It is fertile land, where the corn turns bright green and grows two meters (6.5 feet) tall, where the cattle are as fat as hippos and the tomato plants bend under the weight of their tomatoes. The nearby Yala River flows into Lake Victoria. There are three small brick houses on the property. Erastas harvests his corn twice a year, and vegetables and tomatoes grow year-round. One hectare produces €3,600 worth of corn a year, a lot of money by Kenyan standards.
'They Drove Out 400 Families'
But things changed when Erastas was contacted by Dominion Farms, a US agricultural producer that established a colony in the Yala delta, where it has leased 3,600 hectares of land for 45 years, at the ludicrous rate of €12,000 a year. Dominion, which plans to grow rice, vegetables and corn on the land, wants to include Erastas Dildo's three hectares in its venture.
The Dominion representatives offered to pay him about 10 cents per square meter. Erastas turned them down, and now they are making life difficult for the farmer. Their most effective weapon is a dam they have built. When Erastas tried to harvest his corn last year, it was under water. "They are playing with the water level to get rid of us," he says. And when that doesn't work, says Erastas, Dominion sends in bulldozers, thugs and sometimes even the police.
Under its contract, Dominion has agreed to renovate "at least one school and one medical facility" in each of the two local districts. "They drove out 400 families instead," says Gondi Olima of the organization Friends of the Yala Swamp. According to Olima, at first the Dominion venture created new jobs, as day laborers were hired to clear the site with machetes, but then the company brought in more and more equipment. "Now they have so many machines that workers are no longer needed," says Olima.
Dominion Farms denies the farmers' accusations and points out that it has already built eight classrooms, donated gateposts and awarded educational scholarships to 16 children, as well as providing beds and electricity for a hospital ward. Perhaps Erastas and his family will be forced to make way for the development soon, as is already happening in many other places. The World Bank estimates that only 2 to 10 percent of the land in Africa is formally owned or leased, and most of that is in cities. A family may have lived on or occupied a piece of land for decades, but it often has no proof of ownership.
Hunt for Land Continues
Nevertheless, the land is almost never left unused. The poor, in particular, live off the land, where they collect fruits, herbs or firewood and graze their livestock. According to a joint study by several UN organizations, land grabs are often justified by defining the land as "fallow." As a result, according to the report, land grabs have the potential to dispossess farmers on a large scale. In many countries, there may be enough arable land available for everyone, but the quality is not uniform -- and the investors want the best land. That, as it happens, is the land where farmers usually live.
Because more than 50 percent of Africans are small farmers, large-scale land acquisition could be disastrous for the population. Those who lose their fields lose everything. The fact that the large investors can substantially improve harvests with their modern agricultural technology is of little use to Africans who, once they have lost their land and livelihoods, cannot afford to buy the new farms' products. The World Bank and others are now developing a code of conduct for investors. A declaration of intent had been planned for the July G-8 summit in L'Aquila, Italy, but the heads of state in attendance could not agree on binding standards.
And so the hunt for land continues. Dominion has secured another 3,200 hectares, and Philippe Heilberg is in the process of leasing an additional 600,000 hectares in South Sudan. Back in New York, in the Stuyvesant Room, one of the speakers is reciting numbers to illustrate how fast the global population is growing: By 154 people per minute, 9,240 per hour or 221,760 per day. And each one of them wants to eat.