Movie starlet Marilyn Monroe, Hollywood
Ilargi: Yeah, Obama's peace prize. More than anything else, really, I think it's too ridiculous to waste words on. I also thought of Martin Luther King and his courage and grace; what perspective does Obama's award lend to Dr. King's? Absolute non-violence versus a decision to send 40,000 more troops into a desert, or not. I come away thinking that the biggest beneficiaries may be America's right wing wing nuts. Why award someone a prestigious prize when there's so obviously nothing much, if anything, he did to deserve it, when there's no there there?
That same feeling quite adequately describes my view of what Obama and his administration have done for the USA during the past 9 months, and "no there there" is the most positive notion I can muster. And I probably shouldn't try to muster anything, I should be frank and say that Obama is an unmitigated disaster for the people of the country in any way other than keeping their dreams and illusions from being recognized, just a little bit longer, for the walking dead they already are.
It's also what I came away with after watching Michael Moore's Capitalism: A Love Story. Moore is great when he depicts what those Americans go through who get stuck in, and fall through, the cracks of the final stages of a once promising society. Few people would be able to make a film about them as well as Moore can. But there is a point in the movie, about two-thirds in, where he lets his own dreams and illusions take over. Where he starts letting his hopes for the change that President Obama promised to bring take over from his observations of the real world, the real people that he has a unique connection with. And once the movie got to that point, that's precisely what I was thinking: there's no there there.
Stoneleigh wrote a review of Moore's film. Note: she wrote it before Obama’s peace prize was announced. Here goes:
For those who haven't seen Capitalism: A Love Story, I suggest that you do. There are many eye-opening moments, and much material that humanizes the crisis we are facing even as it reveals how dehumanizing our system has become.
The most egregious trespass on human dignity would have to be the practice of corporations taking out large life insurance policies on their staff, with the company named as beneficiary. Employees, particularly those who die young, can easily be worth more to their employers dead than alive, and employers are shown to complain (in writing) when employees are dying at an insufficient rate to provide the anticipated rate of return on 'investment'. Families, who may be left with no breadwinner and large medical bills receive nothing at all from these policies. To add insult to injury, the employees who are unknowingly providing a windfall benefit to their erstwhile employers are referred to derisively as 'dead peasants'. Michael Moore is absolutely right to shed light on such abhorrent occurrences.
Moore rightly compares this practice to being able to take out a fire insurance policy on one's neighbour's house, which then confers an incentive to burn it down for profit, or at least an incentive to do nothing to prevent it burning down. He could have taken this argument further in the segment in which he is trying, apparently in vain, to find someone who can explain to him what derivatives are. Credit default swaps have been widely used in the same way - as faux insurance contracts amounting to simple bets that something one does not own will fail. The same perverse incentives apply, but on a much grander scale - a scale that generates systemic risk.
When some parties have a direct incentive to cause others to fail, a firesale of assets can be precipitated that will revalue entire asset classes at a stroke. To make matters worse, counter-party risk is huge as these contracts were sold on with no regard for ability to pay out. As this is a market worth in excess of $60 trillion, Moore could have pointed to the very real risk (I would say inevitability) of a meltdown resulting from the very dynamic he identified. This would have strengthened his message considerably.
Moore paints a stark picture, casting some of his arguments in terms which could prove to be ill-advised. While I understand why he wanted to contrast religious support for and opposition to capitalism, I think he is playing with fire in doing so. There is already a strong Dominionist movement in the US and it would arguably take relatively little to ignite a fire-and-brimstone kind of opposition to many aspects of our modern society. While there are many abuses that clearly need to be strongly reined in, my concern is that a punitive and vengeful mood flavoured with fundamentalism could all too easily become a wide-ranging witch-hunt.
People are going to be extremely angry when they really wake up to what has been done to them, and some very dangerous people will be waiting to provide (often spurious) targets for a blame-game. This is in no one's interests, least of all the newly impoverished whose limited energies and resources would be much better spent looking after their families and loved ones.
I would like to point out to Mr Moore, who strongly advocates greater equality and wide-ranging economic rights for the US, that the US itself (along with the rest of the developed world) is seen by much of the world in exactly the same way that Americans are coming to see bankers - as predators who have unjustly enriched themselves through picking the pockets of others. The same wealth concentration dynamic that has allowed bankers access to pension funds as gambling money in rich countries has also systematically impoverished much of the world in order for the developed world to live a lifestyle that the kings of old would have envied (see the primer Entropy and Empire).
We the ordinary people of developed countries are both predators and prey, albeit unwittingly. If we are going to cast wealth accumulation as evil, as Moore does, then we need to understand how we ourselves are complicit in allowing other people to be victimized for our comfort, or for the status-enhancement of being in a position to be able to waste resources on pointless, gluttonous consumption.
One could argue that the principle of equality should be applied globally rather than merely domestically, but I doubt the viewers of Moore's film would be very happy with that prospect if they understood its implications. However, attempts to force an equal distribution of resources are in any case doomed to fail on any but the smallest scale (where the needs and abilities of each individual are know to all other individuals in the group). Noble ideals do not always work in practice.
Finally, Moore has a significant blindspot with regard to the current American administration. He paints Barack Obama as a socialist and a hero, apparently without recognizing that this administration says one thing, but does the exact opposite. Mr Obama, who appears to believe his own propaganda, has effectively been bought and paid for by Wall Street, and the revolving door between investment banking and the treasury department continues to turn. We are at or near the end of a long sucker rally that has clouded the judgement of the population with feel-good sentiment. That has allowed them to be comprehensively fleeced in their sleep, even as they dreamed of green shoots of recovery. They will be waking up soon, and they will realize that this administration has accelerated the practices of the old one. That will be a dangerous time indeed.
Ilargi: On a bit of a side note, you may have seen our new Fall Fund Drive as it appears these days in the left hand column. We are not very comfortable at all asking you for money, but at the same time we realize, and we think you should too, that without your donations there can and will be no Automatic Earth. Clicking the ads our pages display, on a regular basis, helps as well. I have always been, and remain, confident that you, our readers, have a pretty good understanding of the value The Automatic Earth represents to you. Still, evidently, you may have to be reminded from time to time of the role you yourself play in the continued existence of this site.
We're not talking about, nor asking for, large amounts of money. There are many thousands of people who read us every single day. It's easy to see that if every single one of them would donate a dime for every time they read us, and what's a dime these days, we'd be doing just fine, thank you. It’s, however, not just about the continuation of the present situation here that I think about. I would love to be able to expand on what we do, to involve more people, more opinions, a more diverse view from more places in the world. And that is unfortunately not possible right now. Along the same lines, we would like for Stoneleigh to be much more involved at TAE. Which also is not in the cards right now.
As you probably know, Stoneleigh and I are convinced that all of us are moving into a crucial phase in the development of our financial systems, our economy and indeed our societies. Which of course means we are about to enter a time when The Automatic Earth, in order to do what we set out to do, will be busier than ever. What we've done so far was just a dress rehearsal compared to what lies ahead. Inevitably that will take more from us, and we hope you will do more as well.
As for those among you who have donated to us, and those who will do so in the days and weeks and months to come, please know we are deeply grateful for and humbled by the confidence you have shown in what we do on a daily basis. And rest assured, you can have confidence in us too: we ain't done by a long shot. What you've seen to date was merely the prologue.
U.S. states suffer "unbelievable" revenue shortages
The U.S. economy may be creeping toward recovery after the worst slowdown since the Great Depression, but many states see no end in sight to their diving tax revenues. Tax revenues used to pay teachers and fuel police cars continue to trail even the most pessimistic expectations, despite the cash from the economic stimulus plan pouring into state coffers. "It's crazy. It's really just unbelievable," said Scott Pattison, executive director of the National Association of State Budget Officers, and called the states' revenue situations "close to unprecedented."
Most states had been pessimistic in forecasting their tax revenues for the 2010 fiscal year, Pattison said. So far, collections have fallen below even those low targets. Lower tax revenues could lead to higher taxes or another sharp reduction in services if receipts do not show signs of improvement before year-end, as every state but Vermont is required by law to balance their budgets. That could mean fewer teachers, early prisoner releases and fewer highway repairs as residents battle soaring unemployment. States are coming off a terrible first quarter, which for most states began on July 1.
Among the worst cases is Indiana where revenue collections were 8 percent below forecast, or $254 million lower than expected, leading state budget officials to speculate revenue could fall $1 billion by the end of the fiscal year. Iowa cut its fiscal 2010 revenue estimate by 8.4 percent this week. That prompted Governor Chet Cutler on Thursday to order spending reductions of 10 percent across the board. "The fact is clear. Iowa has not spent too much; rather our revenue has fallen off by significant amounts as the result of the national economic recession," Culver said in a statement.
Last week, Mississippi Governor Haley Barbour said his state's September tax collections were 10 percent less than forecast. "It is likely that more spending cuts will be necessary in this fiscal year to ensure a balanced state budget," Barbour said.
In California, general fund revenues for the first three months of the fiscal year were $1.1 billion below estimates in its budget, State Controller John Chiang said on Friday. "While there are encouraging signs that California's economy is preparing for a comeback, the recession continues to drag state revenues down," he said in a statement.
But Oregon, which collected about $10 million below estimates for personal and corporate revenues for those two months, is seeing some hopeful signs. "It does appear that things are stabilizing somewhat," said Josh Harwood, a senior economist at the Oregon Office of Economic Analysis. Oregon is no longer seeing an erosion in personal income taxes, which provide the state with 80 percent to 90 percent of its general fund revenues in any year, he said.
For other states revenues are not only coming in below forecast, but have fallen steeply from the year ago period, when revenues were already depressed by the recession -- a sign of further fiscal distress for many states. Georgia on Friday reported its September revenue fell 16 percent, of $260 million, worse than the 14.2 percent shortfall for July, August and September from the year-earlier fiscal quarter. The state's net sales tax and use-tax revenue was off by more than 20 percent last month, according to the state revenue department. In the second quarter of calendar year 2009, total state revenue was down 18 percent compared with the period in 2008, according to the National Governors Association, which projects revenue will not return to pre-recession levels until 2014 or 2015.
The American Recovery and Reinvestment Act passed in February mitigated some states' financial pain by giving them more money for Medicaid, the health-care program for the poor run by states and partially funded by the federal government. The program can eat up large portions of states' budgets. The act also created a state fiscal stabilization fund and dedicated money to education. "If we didn't have that money, we would have been cutting more, which is hard to believe," Pattison said. States would like the Medicaid boost continued after the stimulus expires next year. "The states are very, very concerned about that cliff -- they're concerned about when this recovery money stops," Pattison said.
Many U.S. states finish fiscal first quarter in red
The first quarter of fiscal 2010, which for most states began on July 1, ended with bad fiscal news across the country. Since the housing downturn began in 2007, states have seen their sales taxes slip each quarter. Now, layoffs caused by the economic recession have forced down income tax revenue, as well. One bright spot has been Florida, which was hit earlier than most states and seems to be on the mend.
Here are some recent revenue reports from a sampling of states:
- Arizona: combined revenue for July and August totaled $1.097 billion, or $80.5 million below budget forecast, which called for a 0.9 percent increase overall, and off $356.6 million from a year earlier.
- California: revenue from July through August totaled $10.847 billion, or 1.3 percent below an expected target of $10.991 billion.
- Florida: tax receipts in August topped expectations by $32.6 million, the fifth straight month of better-than-forecast cash flow. Total sales tax collections were $1.5 billion, off $200 million from the year earlier, but more than $40 million more than previously estimated. In August, a state panel of economists reduced forecasts by a moderate $147 million. The year before, the panel had cut estimates by $1.1 billion.
- Georgia: 16 percent drop of $260 million in September revenue, a faster pace of decline than the 14.2 percent shortfall for July, August and September from the year-earlier fiscal quarter. Sales tax collections and individual income taxes, the two biggest revenue generators for the state, were off 14.2 percent or more in both September and the first quarter. Net sales tax and use tax revenue for September was off 22.4 percent.
- Illinois: a record $2.9 billion of unpaid bills for this time of the year as key tax collections sank by $588 million in the first quarter compared to the same period in fiscal 2009.
- Indiana: revenue collections were 8 percent, or $254 million, below forecast. State budget officials speculate revenue could fall a whopping $1 billion by the end of the fiscal year.
- Iowa: Fiscal 2010 revenue estimate cut by 8.4 percent, or nearly $415 million, this week, dropping anticipated general fund revenue to only $5.43 billion.
- Massachusetts: first-quarter revenue totaled $4.313 billion -$212 million below the year-to-date benchmark and $477 million, or 10 percent, below those of a year ago.
- Mississippi: September tax collections were $45 million, or 10 percent less than forecast. Fiscal first-quarter collections were $128 million, or 12 percent, below last year's quarterly revenues.
- New York: general fund tax revenue totaled $13.8 billion from the start of fiscal 2010 on April 1 through August -$238 million below projections and down $3.7 billion from the same period in fiscal 2009.
- Oregon: $763 million in personal and corporate income tax revenues in July and August combined, which is about $10 million below estimate for the two months. Oregon is no longer seeing an erosion in personal income taxes, which provide the state with 80 percent to 90 percent of general fund revenues in any year.
- Pennsylvania: so far this fiscal year the state has collected $5.3 billion, which is $140 million or 2.6 percent below estimates.
California state revenues already $1 billion below budget estimates
Just three months into the fiscal year, the state's total general fund revenues are already $1.1 billion below estimates made in the recently amended budget, Controller John Chiang said today. Chiang delivered the grim news in his monthly report covering California's cash balance, receipts and disbursements in September. He urged lawmakers to prepare for more tough decisions.
"Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10 weeks old," Chiang said in a statement. "While there are encouraging signs that California's economy is preparing for a comeback, the recession continues to drag state revenues down," Chiang added."I urge lawmakers and the governor to prepare for more difficult decisions ahead."
The state's three largest sources of revenue all came in below estimates in September. When adjusted to account for payments made in September that were previously delayed or issued as registered warrants in July and August, personal income tax revenues for the month were down $934 million, 17.3 percent below estimates, and corporate taxes were down $183 million, 10.5 percent below estimates. The state's sales tax revenues were down $99.8 million, 4.5 percent below the amended forecast.
The state began the fiscal year with an $11.9 billion cash deficit in the general fund, which grew to $16.2 billion by Sept. 30. The deficit is being covered with a combination of $7.3 billion of internal borrowing from special funds and $8.8 billion in short-term revenue anticipation notes, Chiang said.
California raises yield, cuts amount to draw bond buyers
California on Thursday raised the yields and slashed the size of a multi-billion dollar debt sale after investors responded more coolly to the debt offering than expected. State Treasurer Bill Lockyer's office said it sold $4.138 billion in general obligation bonds, down from $4.5 billion it originally planned to sell. The state raised the yields offered on the debt, which included taxable and tax-exempt bonds and $1.75 billion in Build America Bonds, after proportionally fewer retail investors placed orders than in its past sale.
It lifted yields on 20-year bonds, for instance, to 5% on Thursday, the final day of orders and the day institutional investors bid on the debt. On Tuesday, when it started taking orders from retail investors, the state had said it planned to offer those bonds for 4.63%. California was competing with a heavy volume of bonds for sale this week. And investors know that the Golden State's budget problems probably mean more debt issuance in the near future, potentially on better terms, one fund manager said.
"This was not good enough to make us jump up and down," said Matt Buscone, a portfolio manager at Breckinridge Capital Advisors, which manages more than $10 billion. The yield levels are "fair," he said, adding: "We'll be able to do it again so we'll take a pass at this sale." He said the firm bought California general-obligation bonds at its last sale in the spring, when long-term yields stood around 6%.
Households, which flocked to a recent sale of short-term California debt in September, had less appetite for this recent round of debt. Lockyer's office said retail investors bought $505.2 million in bonds, about one-third of the $1.55 billion offered them. At California's sale last month of revenue-anticipation notes, which mature in less than a year, the state said that it received orders for more debt than was sold. It offered the entire $8.8 billion to retail investors - and they sopped up about 75% of the issue.
"The market has become very inclement for issuers, including the state. Given the market forces arrayed against us, to get a $4 billion-plus deal done is a good thing," said Tom Dresslar, a spokesman for Lockyer's office. The state sold $1.31 billion in tax-exempt debt, in line with its original plan, but reduced the amount of taxable debt to $2.82 billion from $3.2 billion. California has the lowest credit ratings in the U.S. on its long-term debt, with its $75 billion in tax-supported debt rated Baa1 by Moody's Investors Service, BBB by Fitch Ratings and A by Standard & Poor's.
With lingering concerns about the state's budget and with other opportunities available in municipal bonds, "I don't know if institutional buyers will be willing to pay up at these levels," said Domenic Vonella, a municipal-bond analyst at Thomson Reuters. As part of the sale, the state also sold taxable bonds in the form of federally-subsidized Build America Bonds that have been extremely popular for both issuers and investors since the program was created in February.
Yields on the taxable debt ranged from 3.75% to 7.23%. The $1.75 billion in 30-year Build America Bonds were offered with yields about 3.2 percentage points over comparable Treasurys, the higher end of what was anticipated, according to Informa Global Markets. Last week, the state's Build America Bonds were trading at a spread of 2.65 points. A bigger gap indicates investors are demanding a higher yield in return for taking on the risk of holding the debt.
That compares to the average spread for comparable corporate debt of 2.31 percentage points, according to an index compiled by Bank of America's Merrill Lynch unit. Still, the spread the state had to pay is an improvement from when the state sold the Build America Bonds, for about 3.65 points above comparable Treasurys. For the $1.31 billion in tax-free bonds, yields ranged from 2.95% to 5%.
Kentucky state revenues plunge in first quarter
Receipts to the state General Fund dropped 9.8 percent in September, compared to September 2008, the Office of State Budget Director reported Friday. And after the first quarter of the 2009-10 fiscal year, which ends next June 30, General Fund revenue is down 5.6 percent from the same period in 2008-09. Expectations for revenue growth had already been low. The budget for the current fiscal year envisions that revenue will decline by 1.5 percent.
But through the first quarter, this year's revenue is on a downward path that Friday's report acknowledged will make it difficult to hit even that mark. The report stated said General Fund revenue can fall only 0.2 percent over the next nine months to meet the current budget's requirements. If revenue doesn’t meet expectations, spending must be cut or other adjustments have to be made. The report says revenue has been on a declining path for nine months because of the national economic recession's impact on Kentucky's economy.
"Tax collections have been weak in the major sources of revenue that support the operations of government," State Budget Director Mary Lassiter said in the report. "Sales and use taxes and income taxes comprise nearly 75 percent of our General Fund tax revenues and have been declining for an extended period of time." The team of economic experts, which makes official predictions about future state revenue, is scheduled to meet Monday to revise its outlook for the current year as well as make a forecast for the 2010-12 biennial state budget.
Georgia state revenues plummet 16 percent in September
Georgia’s revenue collections fell another 16 percent in September, compared to the same month a year ago, as the state’s three main sources of tax income continued to bottom out. It is the 10th consecutive month of declining revenues. For the fiscal year, which began July 1, state revenue is off 14.2 percent, compared to the first three months of the previous fiscal year. The biggest drop in September came in individual income tax collections, which were off 14.2 percent compared to September 2008. Corporate income taxes were down 13.2 percent and sales and use taxes were off 11.4 percent.
Hawaii sees tax revenues fall 9.7% during first 3 months of the fiscal year
State revenue collections fell 9.7 percent during the first three months of the fiscal year, the state Department of Taxation reported today, a more significant decline than estimated by the state Council on Revenues. The council had predicted a 1.5 percent decline for the fiscal year that ends next June. While there is time for a recovery, the state is in a deeper hole than expected. General excise and use taxes are down 11.8 percent through September. Hotel-room taxes are off 11.9 percent. Individual income taxes are down 6.7 percent. And corporate income taxes are down 27.3 percent.
Economists have predicted that the state's economy will improve and revenue collections will rebound next fiscal year. Gov. Linda Lingle and state lawmakers use the council's estimates when drafting the state's budget. The decline in actual revenue collections could prompt the governor and lawmakers to consider new revenue-generating ideas next session, such as the use of special funds like the state's hurricane relief fund or an increase in the general-excise tax. The lower revenue collections could also influence collective bargaining with public-sector labor unions
Missouri's budget woes continue
Governor Jay Nixon is planning more budget cuts, including eliminating more state jobs. State Budget Director Linda Luebbering confirmed the news this afternoon. She says they don't know yet how much money will be cut or how many state layoffs there will be. "We really need to work through the process of trying to find the best place to make these cuts...they're going to be difficult choices...none of it's easy, but we want to make sure (we're) making the best choices possible," Luebbering said.
An announcement on the budget and job cuts is expected in about two weeks. Luebbering also says the state this week borrowed $150 million from its budget reserve fund, also known as the rainy day fund, to pay for teacher salaries and other expenses. "We have payments to, for example, our Medicaid providers, the nursing homes, the hospitals, the doctors, and of course, just the normal operating of our correctional institutions," Luebbering said.
The latest dip into the fund brings the total amount borrowed this fiscal year to $350 million dollars, and the current remaining balance to around $170 million. State law requires that the money borrowed from the budget reserve fund must be paid back by May 15th, 2010.
Unprecedented Iowa budget cut: $565 million; layoffs ahead
Hundreds of layoffs are on the horizon for state employees, and the pink slips are likely to appear quickly. State government leaders were left reeling Thursday by Iowa Gov. Chet Culver's order to immediately whack an unprecedented $565 million from the state budget. "We will start cutting today," Culver said. The 10 percent across-the-board cut will mean a wide swath of Iowans - including the poor, unemployed, mentally ill and elderly - will feel the pinch of reduced state services.
The Iowa Constitution requires that the state budget be balanced. Culver had to make only a 7.1 percent cut to do that, or $415 million, but he instead chose to go deeper. Raising taxes isn't an option, he said. The decision came about 24 hours after a three-member panel of budget experts predicted that collections of taxes and fees will plunge between now and the end of the fiscal year in June. The Revenue Estimating Conference lowered its March prediction of $5.853 billion in tax and fee collections to $5.438 billion.
"The fact is clear," Culver said Thursday. "Iowa has not spent too much; rather our revenue has fallen off by significant amounts as the result of this national economic recession." Culver said no government office that gets money from the state's general fund will be spared. The exact number of layoffs is unclear, but it will "certainly be hundreds of state employees," he said. State workers - and that means everyone from corrections workers to school food service staff, state librarians, workers at the school for the blind, addictive disorder counselors, social workers, state attorney general's office staffers, auditors, state crime investigators and treasurer's staff - now face the uncertainty of possibly losing their jobs.
"I would assume there's a great deal of them sitting around on pins and needles," said Danny Homan, president of Council 61 of the American Federation of State, County and Municipal Employees, which represents about 20,000 state employees. "I think this will have the magnitude of a plant closing," Homan said. "This is the most devastating thing that could happen to the state of Iowa at this particular time.
FHA may be setting up repeat of housing bubble, lawmakers worry
The percentage of loans backed by the agency that are delinquent or in foreclosure hit nearly 8% at the end of June. Critics say borrowers don't have enough of a stake in keeping up with payments.
In the wake of the mortgage meltdown, the Federal Housing Administration has emerged as a pillar of the still wobbly housing market -- providing vital insurance that enables borrowers to qualify for loans with as little as 3.5% down. This year alone the agency has backed nearly 2 million mortgages worth at least $328 billion. It insured 21.5% of all new mortgages last year, up from fewer than 6% in 2007. Some lawmakers, however, worry that the FHA may be doing its job too well -- enabling too many people with shaky finances to get loans, and in effect setting up a potential repeat of the housing bubble fueled in part by no-questions-asked subprime loans.
Recent numbers appear to underscore those concerns. The percentage of FHA loans that are delinquent or in foreclosure climbed to nearly 8% at the end of June, from about 5.5% in early 2006, according to the Mortgage Bankers Assn. And in the weeks ahead, its reserves for loan losses are projected to slip below federally mandated limits. "It's not the least bit implausible to be concerned about the ever-deteriorating performance of the FHA portfolio," said UCLA finance professor Stuart Gabriel, director of the university's Ziman Center for Real Estate. "The jury is out as to whether the FHA is going to need a government infusion."
The real estate industry believes the FHA is vital to the housing market because its insurance enables people with modest incomes to buy homes -- people who otherwise would probably be turned away by banks. But because their initial investment is modest, critics believe, these borrowers have little incentive to stay in their homes if they are hit by a job loss or by another drop in home values. "You have to ask the question: Have we figured out what got us here in the first place and are we going to make sure we don't replicate that failed system?" Rep. Scott Garrett (R-N.J.) said. Those questions and others will be addressed today, when a congressional committee starts examining how the FHA's reserves for loan losses have dwindled so fast.
One proposed solution to the agency's troubles, backed by Garrett and others, is to raise the minimum down payment on FHA loans to 5%. Backers believe that will encourage borrowers to stay in their homes and not let them fall into foreclosure. But new FHA Commissioner David H. Stevens said such a move could threaten the nascent housing recovery. A person looking to buy a $300,000 house, for instance, would have to raise an additional $4,500 for the down payment. "All that's going to do is retard recovery," he said.
Stevens said the agency was making changes to reduce risk, such as lending to people with higher credit scores. And he insisted that the FHA, which has always been funded by mortgage insurance premiums, will not need a taxpayer bailout. But the FHA is straddling a difficult, and potentially perilous, line -- trying to prime a housing recovery without overextending itself so far that it requires an infusion of taxpayer money. "On the one hand, it's providing support to the housing market," Federal Reserve Chairman Ben S. Bernanke told lawmakers last week. "On the other hand, clearly, I think it's fair to say that given the low down payments, there's certainly greater risk of loss there, which would be ultimately borne by the taxpayer. . . . So I think that's a trade-off that Congress has to look at."
The FHA was created during the Great Depression to help revive the devastated real estate market at that time. In the decades since, it played a vital, though secondary, role in the real estate market by insuring mortgages from approved lenders for people who had steady work but could not afford a large down payment. The FHA program is funded by premiums paid by homeowners, and those premiums drop off after five years or when the remaining loan balance is 78% of the home's value.
When housing prices were soaring, almost anyone could get a subprime mortgage, and the FHA's importance was diminished. But with subprime lenders gone and banks hesitant to make loans with less than a 20% down payment, the FHA has become the only option for many home buyers. "With the collapse of subprime, suddenly they're more important than ever," said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington think tank. "I don't know that they're prepared to take on that burden."
Congress boosted the agency's business last year by more than doubling the limit on the maximum FHA-backed loan, to $729,750, in Los Angeles and other high-cost markets. Through Aug. 31 of this year, the FHA had insured nearly 1.8 million mortgages worth at least $328 billion, or nearly half the total of $675 billion worth of mortgages on its books -- putting it on pace for its busiest fiscal year, which ended last week. But the agency is also much more exposed to the volatile housing market. Experts worry that if home values start tumbling again, new FHA-insured mortgages would be underwater because of the low down payment.
Fraud by lenders is also a concern, according to an inspector general's report in June. The number of FHA-approved lenders shot up from 692 in 2006 to more than 3,300 last year, and the agency's business picked up in some markets, such as L.A., that were largely unfamiliar to it. Those factors, the report said, increased the risk of such lender abuse as fraudulent appraisals. Alarm bells went off last month when the FHA projected that its secondary reserve fund would fall below the congressionally mandated level of 2% of all mortgages on its books. The fund was at 6.4% at the end of September 2007.
In the FHA's defense, Stevens points out that it requires borrowers to document their incomes and insures only standard, 30-year fixed-rate mortgages. Raising the minimum down payment would be an overreaction based more on emotion than facts, he said. "No one's more risk-averse in FHA's history than me, but I do worry about people jumping to legislative solutions that are not based on factual information," he said.
Stevens touted changes he had made to reduce risk and rebuild the agency's reserves without a government infusion. He will appoint the agency's first chief risk officer and wants to require lenders to have at least $1 million in cash and other assets, up from $250,000, so they can cover more losses before they're passed on to the FHA. "We're not going to need a taxpayer bailout," he said. "It's a fact." David Kittle, chairman of the mortgage bankers group, said an increase in the minimum down payment would be "catastrophic" for the market.
"Why would you want to deter people further from buying homes when clearly you need to get homes off the market?" he said. Some members of Congress, however, believe the risk may be too high. "I'm concerned that the private market for loans with little or no money down has shifted directly onto the books of the federal government," said Rep. Ed Royce (R-Fullerton). "We need to make certain that taxpayers are not again on the hook for the failures of Washington."
Many retailers report September sales declines
A late Labor Day and delayed school openings offered some relief to merchants in September, helping to boost sales above Wall Street expectations. But spending still remains tepid as consumers focused on necessities amid job worries and tight credit. Still, most stores posted sales declines -- though smaller than in recent months -- even as their figures are compared with last September when business plummeted as the financial meltdown ballooned. As stores announced their results Thursday, J.C. Penney Co., Macy's Inc., and teen retailer Wet Seal Inc. reported smaller-than-expected declines in sales at stores open at least a year. The measure is considered a key indicator of a retailer's health.
Limited Brands Inc., which runs Victoria's Secret and Bath & Body Works, and accessories chain The Buckle Inc. both posted increases for the month. According to a preliminary tally by Thomson Reuters, nine stores beat Wall Street estimates, while four retailers' results missed expecations. Industry worries remain high heading into the holiday shopping season because shoppers, who were afraid to buy a year ago, are now grappling with rising job losses, reduced hours or unavailable credit. The unemployment rate is now 9.8 percent, up from around 7 percent last holiday season.
Credit also remains tight. A report released Wednesday by the Federal Reserve, shows that consumers reduced their borrowing for the seventh straight month in August as households cut spending and banks reduced credit card limits. "Consumers remain under pressure on multiple fronts," said Ken Perkins, president of retail research firm Retail Metrics. "I don't think consumer spending is going to see a substantial uptick. Shoppers are concerned about rebuilding their balance sheets." In this climate, purveyors of fashion and nondiscretionary items continue to struggle with sluggish sales, while low-price stores benefit from shoppers switching to cheaper stores and brands.
Still, the tone was better in Thursday's reports, as several merchants including J.C. Penney, American Eagle Outfitters Inc. and TJX Cos. raising their profit outlook based on their better-than-expected performance. Macy's had a 2.3 percent decline, less than the 4.6 percent drop that analysts surveyed by Thomson Reuters had projected. Penney had a 1.4 percent decline for September, lower than the 3.5 percent decline Wall Street estimated. TJX enjoyed a 7 percent gain, surpassing the 4.1 percent estimate. Gap Inc., dragged down by sluggish sales at its namesake stores and Banana Republic, posted a 1 percent sales decline, a bit worse than the 0.4 percent dip that analysts had expected. Its lower-price Old Navy division continued to shine, posting a 13 percent gain in sales at stores opened at least a year.
Limited Brands reported that sales in stores open at least a year rose 1 percent in September; that was better than the 2.4 percent slide that analysts had predicted. Among teen retailers, American Eagle reported flat sales, beating estimates for a 4.1 percent decrease. Buckle Inc. said its sales at stores open at least a year rose 5.1 percent, a bit lower than the 5.8 percent gain that Wall Street anticipated. Wet Seal had a 4.5 percent decline, but analysts had expected a 7.8 percent drop for September.
Consumer Credit Collapse
Hoping for a consumer-led recovery? Don't hold your breath. The latest data from the Federal Reserve shows that the year-over-year decline in total consumer credit is collapsing at an accelerating rate. God forbid consumers go back to living within their means.
Roubini says housing market hasn't bottomed
U.S. housing prices may still fall more than 10 percent, killing an incipient recovery, as demand from first-time home buyers fades, leading economist Nouriel Roubini said on Thursday. Roubini, one of the few economists who accurately predicted the magnitude of the financial crisis, said massive losses in commercial real estate loans will add to the problem, forcing banks to raise more capital. "
The stress is moving from residential mortgages that are still in deep trouble, to commercial real estate, where they are just starting to recognize that they're going to have massive, massive losses," Roubini of RGE Global Monitor told reporters after a presentation for a World Economic Forum report on the global financial system. U.S. home prices rose for the third straight month in July, raising hopes the market is stabilizing after a three-year plunge.
A first-time buyer credit of $8,000, which is set to end on November 30, has jump-started housing activity this year and has helped reduce a massive inventory of unsold homes. While the number of unsold houses may have bottomed out, prices are poised to fall further, increasing pressure on the economy again, Roubini said. One of the main risks next year may be from losses on some $2 trillion in outstanding commercial real estate loans, the economist predicted. "Half of this is in medium-sized and smaller banks, and even in the larger ones.
Most of these losses are not recognized because they're keeping the loans at face value on their books," he said, forecasting that U.S. and U.K. banks will need to raise more capital when those writedowns are made. Still, Roubini sees a greater chance of a U-shaped economic recovery in developed economies, with a 20 percent to 25 percent chance of a double-dip. "If it's a U-shaped recovery, China, Asia, and emerging markets will do fine. If there is a double dip, the consequences will be severe for everybody."
Deficit Complicates Push on Jobs
Democratic leaders pressed President Barack Obama on Wednesday to extend more elements of the existing economic-stimulus package, and to possibly add tax cuts that were rejected the first time around, despite a record budget deficit that is giving some lawmakers pause. On Wednesday, the Congressional Budget Office estimated that the federal deficit for fiscal 2009 will be $1.4 trillion. That is somewhat better than the nearly $1.6 trillion the CBO projected in August, but much of the change stems from different accounting treatments for losses at Fannie Mae and Freddie Mac, the mortgage companies the government took over last year.
The figure remains the largest budget deficit, measured as a percentage of gross domestic product, since World War II. That so far isn't stopping Democratic leaders discussing further stimulus measures. Worried that the economy isn't creating jobs, House Speaker Nancy Pelosi (D., Calif.) and Senate Majority Leader Harry Reid (D., Nev.) went to the White House for a hastily planned meeting. White House economists had already embraced extending enhanced unemployment-insurance benefits and subsidies for the purchase of health insurance under Cobra. Both of those measures are currently set to expire Dec. 31.
After the meeting, Mr. Reid made it clear he also wants an extension of a generous tax credit for first-time homebuyers, something the White House was leaning against as too expensive for the number of jobs it might create. "Nevada leads the nation in home foreclosures," said Reid spokesman Jim Manley. The congressional leaders also advocated tax credits for employers who hire new workers. Mr. Obama campaigned on that proposal, but it was dropped in February amid concerns that employers could fire workers, then rehire them to claim the credit. The national unemployment rate is currently 9.8%.
Democrats could also move more quickly on a highway and transportation bill that wasn't supposed to get passed until next year. A sudden movement toward a new jobs bill could open Democrats to Republican charges that the $787 billion stimulus approved in February isn't working. White House officials have said new efforts under consideration shouldn't be considered a second stimulus. "If it looks like a duck, quacks like a duck, isn't it a duck?" asked Antonia Ferrier, spokeswoman for House Minority Leader John Boehner (R., Ohio).
House Democratic Caucus Chairman John Larson is pressing to move on a highway and infrastructure bill before December, add in extensions of stimulus measures and include spending on energy-independence projects. The highway bill alone would create six million jobs, he said. Democratic leaders, however, will likely face unease among many of their more fiscally conservative members about any new big spending programs, given the nation's record deficit. The 2009 deficit equals about 9.9% of GDP, up from 3.2% in 2008, the CBO said. Big factors include a huge falloff in tax receipts and the financial-sector bailouts. The stimulus measure has cost the government nearly $200 billion so far, the CBO said.
"I think we're doing quite a bit" already through existing stimulus legislation, Rep. John Spratt (D., S.C.), the chairman of the House Budget Committee, said in a recent interview. "I think we should not lose sight of the deficit, and the extra effort it's going to take to keep the deficit going down to a supportable level in the future." Rep. Chris Van Hollen of Maryland, the head of the Democratic House campaign committee, said last week that a second stimulus package was unlikely absent a rapid deterioration in the employment picture. The next two to three months will be important to that decision, he added.
Republicans, meanwhile, have their own wish list. In a letter to Mr. Obama Wednesday, House Republicans sought more business tax breaks as a way to boost job creation. Republicans say they hope to work with the White House toward a bipartisan jobs plan, but the language of their letter is blunt. For example, it terms the February stimulus "unsuccessful," and urges Democrats to drop their "job killing" health-care measures. GOP proposals include a tax deduction for small businesses equal to 20% of their income, letting small businesses band together in associations to buy health insurance more cheaply, curbing civil lawsuits and lowering individual income-tax rates. Mr. Manley, the Reid spokesman, dismissed those as old conservative ideas that aren't likely to attract much Democratic support.
Carl Icahn Warns Of A Bloodbath!
Britain overtakes US as top financial centre
The United Kingdom has overtaken the United States to take the top spot in a ranking of the world’s leading financial centres. The ranking, compiled by the World Economic Forum (WEF), places the UK at the top of a leader board of 55 of the world’s largest financially-focussed countries. The US, which had previously held the top spot, slipped to third, behind second-placed Australia. The poll will fuel the ongoing debate as to whether London or New York is the best place to do business for financial communities, amid recent reports that a growing number of hedge funds are moving to New York due to lighter regulation.
The ranking came in spite of the distinct problems in the UK’s financial services industry has suffered in the last 12 months at the hands of the global financial crisis, problems that have seen significant parts of the banking sector nationalised as the centre-piece of a barrage of government interventions into the financial industry. As a result, the UK’s overall score in the poll – which is based on a score of 1 to 7 – fell by 0.55 points to 5.28, still above the US's, which fell 0.73 to 5.12. The rankings are based on more than 120 different variables looking at the size and breadth of capital markets, institutional environments and financial stability.
Among the most significant fallers in the overall rankings were France and Germany, who fell out of the top 10 altogether, while second-place Australia, up from 11th last year, and Singapore, rising from 10th to 4th, were among the biggest winners. However, the report, penned by the organisers of the annual WEF leadership conference in Davos each year, does show that from a stability perspective, the UK lags behind the rest of the world, ranked 37 out of 55, just one spot ahead of the US at 38. "The UK and the US may still show leadership in the rankings, but their significant drops in score show increasing weakness and imply their leadership may be in jeopardy," said Kevin Steinberg, chief executive of WEF USA.
Overall, the report showed signs of weakness among many established global financial centres as a result of the recent crisis, while at the same time developing countries demonstrated relative financial stability. From a pure stability standpoint – which was topped by Norway and Switzerland - Chile came in third, while Malaysia, Brazil and Mexico were all in the top 15 rankings. Professor Nouriel Roubini, the well-known economist who was the leading academic involved in compiling the study, commented: "The change in scores does demonstrate the implications of the downturn on our assessment of the long-term development of financial systems."
US trade gap narrows on drop in crude imports
The U.S. trade gap unexpectedly narrowed in August to $30.7 billion on a big drop in imports of crude oil, the Commerce Department reported Friday. The trade gap is the difference between exports and imports of goods and services. After a big increase in trade in July, volumes dropped back in August, a sign of fits and starts in the U.S. and global economic recoveries.
Imports fell by $913 million, or 0.6%, to $158.9 billion in August, as imports of crude oil fell by $1.28 billion. Read the full report. Exports rose by $228 million, or 0.2%, to $128.2 billion, the highest since December. Exports were led by autos, metals and soybeans. Exports of capital goods fell to the lowest level in four years, as shipments of civilian aircraft dropped by $1.3 billion. Imports and exports were boosted by increased trade in autos and auto parts to the highest level this year.
The July trade deficit was revised lower to $31.9 billion from $32 billion, based on more complete data. Economists surveyed by MarketWatch expected to the trade gap to widen to $33.6 billion in August, based on higher prices for crude oil. See Economic Calendar. The price of imported crude oil rose $2.27 to an average of $64.75 a barrel, the highest since November. But the volume of imported crude dropped to 8.7 million barrels a day from 9.6 million in July. After adjusting for inflation, real seasonally adjusted imports of petroleum fell 10.2% to a 10-year low.
After adjusting for price changes, the trade gap in August narrowed by 2.7%, a positive for U.S. gross domestic product. Economists currently expect U.S. GDP to rise at an annual rate of 3.5% in the third quarter, which would be the first increase in a year. Despite August's improvement, most economists think trade will be a small drag on growth in the third quarter. "Looking forward into next year, we expect that real net exports will provide a modest boost to the economy," wrote Jay Bryson, global economist for Wells Fargo Securities. "Recoveries in the rest of the world will boost exports while sluggish growth in U.S. domestic demand should hold back growth in imports."
Inflation-adjusted imports fell 1.9% in August, while real exports fell 1.5%. Global trade collapsed a year ago when the global financial crisis hit, and is now slowly recovering. In the first eight months of 2009, real (inflation-adjusted) exports are down 18.2% compared with the same period a year ago. Real imports are down 19.6%. Compared with last August, real exports are down 19.5%, and real imports are down 18%.
Imports from China, Canada and Mexico rose on a not-seasonally adjusted basis. Exports to the European Union fell to a three-year low. Exports of goods were unchanged at $86.8 billion. Exports of services rose 0.5% to $41.4 billion. Imports of goods fell 0.6% to $128.7 billion. Imports of services fell 0.3% to $30.2 billion. Real exports of capital goods fell 4.2%, while real imports of capital goods dropped 0.3%.
Real exports of industrial supplies were flat, while real imports fell 6%. Real exports of consumer goods fell 1.4%, while real imports fell 1.9%. Real exports of autos and auto parts rose 7.3%, while real imports rose 8.5%. Real exports of foods and feeds rose 1.2%, while real imports fell 3.9%.
Fed Is Split Over Timing of Rate Rise
Fissures are developing among policy makers at the Federal Reserve as they debate how and when to start raising the benchmark interest rate from its current level just above zero. With Fed officials forecasting that unemployment will average 9.8 percent in 2010, nobody appears to be arguing that monetary policy should be tightened anytime soon. The central bank’s official mantra continues to be that the overnight federal funds rate will remain "exceptionally low" for "an extended period."
But Fed officials have hinted at new disagreement in recent weeks. The arguments go beyond the traditional split between hawks, who worry that easy money will stoke inflation, and doves, who contend that unemployment is the top problem. The more devilish debates are about how fast to act once the decision has been made, and how to carry it out. Beyond raising the overnight federal funds rate, the Fed also has to unwind $2 trillion in special programs that prop up paralyzed banks and credit markets.
Where Ben S. Bernanke, the Fed chairman, stands in the emerging argument is a question mark. At a conference held by the Fed on Thursday evening, he assured economists that the central bank had a detailed list of tools to reverse course but offered no new hint of when he planned to begin his exit strategy. "When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration," Mr. Bernanke promised.
Any move to tighten monetary policy over the next year or so could set the stage for a clash between the Fed and the White House. The Obama administration has been outspoken in saying it does not want a quick end to stimulus policies, whether fiscal or monetary. Policy makers are haunted by the results of previous miscalculations. Mr. Bernanke and others have warned that the central bank should not repeat its error in 1937, when it raised interest rates too early and helped extend the Depression for several years.
At the same time, officials at the Fed are acutely aware that it has been widely blamed for contributing to the housing bubble and the financial collapse by keeping the cost of borrowing too low for too long after the recession of 2001. One hint of the discord came Tuesday, in a speech by Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City. Though he stopped short of calling for immediate rate increases, Mr. Hoenig made it clear that he was getting impatient.
"My experience tells me that we will need to remove our very accommodative policy sooner rather than later," he told an audience of business executives. "Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy." Mr. Hoenig is not currently a voting member of the Fed’s policy committee, on which the regional Fed presidents hold rotating seats, but he presents his views at all meetings. And he is not alone.
Richard Fisher, president of the Federal Reserve Bank of Dallas, sent a similar message in a speech on Sept. 29. "That wind-down process needs to begin as soon as there are convincing signs that economic growth is gaining traction," he told a business group. Other Fed officials with similar views include Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond; Charles I. Plosser, president of the Philadelphia Fed; and Kevin M. Warsh, an influential Fed governor.
By contrast, some top Fed officials in Washington and New York have repeatedly emphasized that the economy is still extremely weak and that unemployment, already at its highest level since the early 1980s, will probably climb above 10 percent and remain high for several years. "The turnaround is certainly welcome, but it shouldn’t be overstated," Daniel K. Tarullo, a Fed governor, said on Thursday in an address to a civic group in Phoenix. "The employment situation continues to be dismal."
William C. Dudley, president of the New York Fed, presented a detailed case that seemed aimed at responding to those calling for a quick end to low rates. "Some observers are concerned that this expansion will ultimately prove to be inflationary," he told an audience at the Corporate Law Center at Fordham University. "This concern is not well founded." Mr. Dudley noted that unemployment among working-age men was 10.3 percent — higher than in any other downturn since World War II.
On top of that, he said consumers were reeling from the "wealth shock" caused by the collapse in home prices and by losses to their stock portfolios. That could cause people to increase their saving rate, meaning less consumer spending in the short run. Finally, Mr. Dudley cautioned that banks faced another wave of losses from loans tied to commercial real estate. Beyond the disagreements about the relative dangers of rising prices versus rising joblessness, Fed officials are grappling with how to decide on the need for higher interest rates.
Mr. Bernanke and other officials want to see evidence that the economic recovery is self-sustaining, strong enough to generate jobs without the crutch of extremely low interest rates. But Mr. Warsh, as a Fed governor, has begun arguing that the central bank cannot afford to wait for irrefutable evidence of a solid expansion. Mr. Warsh recently argued that the Fed should take at least some of its cue from stock prices and other financial indicators, which turn around earlier and more quickly than the underlying economy. "If policy makers insist on waiting until the level of real activity has plainly and substantially returned to normal," he warned in a speech on Sept. 25, "they will have almost certainly waited too long."
Mr. Warsh and some other Fed officials also argue that when the time does come to change gears, the central bank may have to raise rates almost as fast as it slashed them when the crisis began. It remains unclear whether Mr. Bernanke agrees with that idea, though he and other Fed officials have emphasized that they have planned carefully for the Fed’s exit strategy and have all the tools in place to reduce the special support programs quickly.
34 banks don't pay their quarterly TARP dividends
The U.S. taxpayers' investments in smaller banks are increasingly at risk. In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury's judgment in approving these banks as "healthy," a necessary step for them to get TARP funding.
"The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial. The Treasury Department says it cannot force an institution to pay dividends. "For some banks, it may be prudent to exercise their right not to pay dividends in a particular month, and we respect their right to do so," says Meg Reilly, a Treasury spokeswoman. "To draw any broader conclusions about the state of the banking sector from one month is highly premature and speculative."
However, a lot of smaller banks are already under stress. Weighed down by foreclosures and delinquencies, 98 banks have failed so far this year, vs. 25 for all of last year. Besides insurer American International Group and lender CIT Group, most of the other non-payers are smaller institutions that received $400 million or less in TARP funds. Top Republican on the House Financial Services Committee, Rep. Spencer Bachus, R-Ala., says: "We must ensure taxpayers are repaid."
Some say Treasury might have been too hasty in approving some banks for TARP funds. "Perhaps the Treasury made assumptions that were a little bit too rosy," says Walter Todd, who invests in banks at Greenwood Capital. "My question is also whether the Treasury is staffed adequately to handle this tremendous undertaking." Treasury has given $365 billion to 700 institutions from TARP. AIG, to which the government has pledged $180 billion, has accumulated $1.6 billion in unpaid dividends. And CIT, which received $2.3 billion from TARP, said in a regulatory filing that it is restructuring its debt and seeking approval from bondholders for a pre-packaged bankruptcy. If that happened, it would wipe out the entire government investment.
Elizabeth Warren: Serious Questions Remain About Obama's Loan Relief Plan
The Obama administration's effort to help homeowners avoid foreclosure may not achieve its goal of helping 3 million to 4 million borrowers and may simply delay mortgage defaults for many, a government watchdog group says. The Congressional Oversight Panel, charged with making regular assessments of the $700 billion financial rescue fund enacted last year, said the Treasury Department should consider whether to improve the current $50 billion program or adopt new programs to meet an expected rise in foreclosures fed by increased unemployment. The panel's report is scheduled to be made public Friday.
It comes a day after the Treasury said its mortgage relief effort has helped 500,000 homeowners and that it was still on track to help up to 4 million homeowners within three years. "We've put significant pressure on servicers to ramp up their efforts," said Housing Secretary Shaun Donovan. "We're holding them to higher performance standards." But the oversight panel, chaired by Harvard law professor Elizabeth Warren, concluded that the foreclosure crisis has now moved beyond the subprime mortgage market that ensnared many homeowners, particularly low-income families. The program, the report states, was not designed to deal with foreclosures caused by unemployment.
"Serious concerns remain about the program's scope, scale and permanence," Warren told reporters in a conference call. "In particular it isn't clear that 500,000 modifications will be enough to put a serious dent in the foreclosure crisis or to dampen the impact of foreclosure on the broader economy." Foreclosures, the report said, are now stalking families who took out conventional, fixed-rate mortgages and put down payments of 10 to 20 percent on homes that would have been within their means in a normal market.
Treasury's program, known as the Home Affordable Modification Program, "is targeted at the housing crisis as it existed six months ago, rather than as it exists right now," the report says. Treasury spokeswoman Meg Reilly said Thursday that while the mortgage relief program is available to the jobless, "we continue to study further ways to help unemployed homeowners." The oversight panel accepted the report by a vote of 3-2, with the committee's two Republican members voting against it.
Rep. Jeb Hensarling, R-Texas, one of the two dissenters, described the foreclosure mitigation program as a failure and rejected suggestions in the report that the program should be expanded. "Regardless of whether one believes foreclosure mitigation can truly work, taxpayers who are struggling to pay their own mortgage should not be forced to bail out their neighbors through such an inefficient and transparency-deficient program," he said.
The majority's report, however, said that rather than abandon the program, Treasury should improve it. Rising foreclosures, the report asserted, could have devastating effects not only on families, but also on local communities and the economy in general. The benefits of avoiding foreclosure would likely outweigh the cost to taxpayers, the report said. The report's underlying theme was that foreclosures were bound to take a turn for the worse and that Treasury did not appear prepared to confront a rise in defaults.
Many housing advocates have been disappointed with the plan's progress and say that getting a loan modification is still a battle. Most lenders, they say, are still unwilling to reduce a borrower's principal balance, a key concern in areas like California, Florida and Nevada where prices have been cut in half in some areas. "It's not working fast enough and it's not working broadly enough," said Kevin Stein, associate director of the California Reinvestment Coalition, based in San Francisco. "There are no obvious consequences to the servicers for not doing what they're supposed to be doing."
Lenders have their own criticisms. Since the report card released by the government excludes modifications made outside the government guidelines, some say they're not getting enough credit. "The American public has a right to know that there are other modifications that are being done that are equally as compelling," said Teri Schrettenbrunner, a Wells Fargo spokeswoman. To speed up the application process, the Treasury Department on Thursday launched a round of changes, including standardized forms.
At the end of last month, about 16 percent of those eligible were enrolled in the program. Offers had been extended to nearly 770,000 homeowners, or about one in four eligible borrowers. Nearly all the borrowers who have signed up so far are in an initial three-month trial phase. They are supposed to be extended for five years if the homeowners make their payments on time and return the necessary documents. "While reaching half a million trial modifications nearly a month ahead of schedule is an important milestone, we recognize that the next challenge is converting borrowers from trial to permanent modifications," Reilly said.
Dangers of silo thinking
by Gillian Tett
When Larry McDonald, a former bond trader at Lehman Brothers, recently wrote an exposé of that broker’s collapse, it seems that his main intention was to reveal the extraordinary folly and ineptitude of the former Lehman bosses. In practice, though, his colourful tale also highlights – almost inadvertantly – another crucial problem that haunts the modern financial world: the curse of silos. For, as McDonald narrates, several years before the Lehman collapse in the autumn of 2008, its own fixed income department was already so alarmed by the American real estate market that they were hunting for ways to go "short".
However, while one department of Lehmans was exceedingly bearish, other departments, such as the mortgage securitisation team, were so aggressively bullish that they were increasing their exposure - and the different departments were in such rivalry that they barely knew what the other was doing, with disastrous consequences. It is a saga that raises a wider moral, not just for bankers, but investors too. In recent months, vats of ink have been spilt to explain all the macro-economic and regulatory reasons for the financial crash.
But one issue that has received less attention is the trend towards fragmentation in the financial industry, not just in a structural sense (ie departments that do not talk), but a mental sense too (ie financiers operating in a tunnel vision). This fragmentation fuelled many of the recent failures of public policy. Just look at how the activitivies of groups such as AIG "fell through the cracks" because there were numerous competing regulatory bodies in the US. Look too at how British policymakers tried to separate out the conduct of monetary policy (managed by the Bank of England) from financial regulation (handled by the FSA) with equally disastrous effect.
However, the problem of fragmentation has also been central to the disaster in private-sector institutions. Lehman Brothers was certainly not the only bank marked by internal tribalism. Institutions such as UBS, Merrill Lynch or Citi demonstrated similar problems. And this sense of fragmentation has not just hampered information flows around banks, but has also prevented information flowing across the market too. That, in turn, has fuelled a sense of tunnel vision among some investors with equally dismal results.
Back in the years of the credit boom, for example, many equity investors were only dimly aware of what was happening in the credit default swap world. Similarly, those corporate treasurers who were pouring cash into money market funds often had only a hazy idea about events in the structured credit world. Complex credit was considered a silo, that was best left to the "geeks" – or, at least, those who were experts in that field.
But the financial crisis has highlighted with painful clarity just how dangerous such tunnel vision can be. And the good news is that some financiers, investors and policy makers are belatedly trying to combat it.
The hot new fad among regulators, for example, is macro-prudential surveillance (a posh word for proactive regulation that tries to join up all the dots.) Investment banks are scurrying to beef up their risk management functions, and stressing the importance of holistic oversight. Meanwhile, a host of asset managers are champions of lateral thought, and are trying to understand what is happening in seemingly disconnected silos – be that in the Chinese auto industry, carbon trading markets or CDS.
The bad news is that the curse of silos will not be easy to beat. For one bizarre paradox of the modern age is that while techology is integrating the world in some senses (say, via the internet), it is simultaneously creating fragmentation too (with people in one mental silo tending to only talk to each other, even on the internet.) And as innovation speeds up, this is creating a plethora of activities that are only understood by "experts" in a silo – be that in finance, or numerous other fields.
That pattern implies that there is now a big need for "cultural translators", who can explain what is happening in those silos to everyone else. But the cadre of cultural translators in today’s world is pitifully small (and may even be shrinking, as institutions like the media or rating agencies find their business model under threat). Therein lies one of the essential challenges for investors today: namely how to understand the micro-details of the silos, and see how all the macro-pieces add up. And that is a challenge that is likely to intensify, not diminish, in the coming years, precisely because we now live in an era where both interconnections and tribalism hold sway.
Bulk-Shipping Lines Must Cancel 50% of New Vessel Orders
Bulk-shipping lines need to cancel half of the new vessels they have on order to ease a capacity glut and revive freight rates, according to shipbroker R.S. Platou ASA. "If half the orderbook is never built, then we can keep the market fairly balanced," Bjorn Bodding, a senior analyst at Platou, said today at a conference in Singapore. Even axing a third wouldn’t be enough to help rates recover before 2012, he added.
Bulk-shipping rates have tumbled 78 percent from a record last year as growth in the global fleet outpaces China’s demand for iron ore and coal shipments. The glut could worsen as commodity companies, such as Noble Group Ltd., build up their fleets. "What worries me even more than the existing orderbook is seeing people ordering or about to order more tonnage," said Andreas Sohmen-Pao, chief executive officer of ship operator BW Maritime. "That’s stretching out the problem further."
Noble Group, a Hong Kong-based supplier of raw materials, ordered five bulk carriers worth about $320 million in August. Vale SA, the world’s biggest iron-ore producer, plans to order 11 large bulk carriers, South Korean News agency Yonhap said on Oct. 7. China Cosco Holdings Co., the world’s largest dry-bulk ship operator, canceled eight vessels in July after slumping to two straight losses on plunging rates. Commodity carriers with a capacity of 291 million deadweight tons are on order worldwide, according to Drewry Shipping Consultants Ltd. That’s equivalent to 66 percent of the existing fleet.
A rebound in freight rates since April has encouraged shipping lines to grow their fleets, even as rates remain near breakeven levels. The Baltic Dry Index, a measure of commodity- shipping costs, has risen to 2,647 yesterday from 1,463 on April 8. With the index above 2,000 points, a portion of the more expensive vessels on order can be run profitably, according to DBS Vickers Securities analysts Chong Wee Lee and Ho Pei Hwa.
"This has led to resurgence in vessel deliveries and reduced demolition activities, thereby aggravating the industry’s oversupply," the analysts wrote in an Oct. 5 report. Dry-bulk ship deliveries increased 35 percent in the four months ended August from the preceding four months, they said. Scrapping fell 61 percent.
Shipping rates have also been boosted this year by government economic stimulus plans, including a 4 trillion yuan ($586 billion) package in China. Demand for iron ore and freight rates may begin to fall once these plans are completed, said Keith Denholm, director of PCL (Shipping) Pte. "The levels that we are seeing today are just not sustainable," he said. "The question now is whether the private sector is going to be able to stand on its two feet without the assistance of the government stimulus packages."