Somewhere in New York
Ilargi: Most of us probably lose sight, from time to time, of the importance of the US housing market to the American banking system, the US economy and, for good measure, the entire global economy. Still, it's virtually impossible to overestimate that importance. So when a good reason presents itself to return to the topic, we are well advised to do so, and recent developments more than justify it. Much more than.
In the past, I have repeatedly talked about the perverse role the US government plays in the domestic housing market, through government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which have total mortgage portfolio's of between $5 trillion and $6 trillion on their books, as well as an unknown amount and degree of "involvement" in mortgage-backed securities, and whose common and preferred equity were recently assessed as "worthless" by an analyst team at Keefe, Bruyette & Woods. Which of course only confirmed a poorly hidden secret.
The KBW analysts concluded that the only way to deal with Fannie and Freddie would be a bad bank construction. The government, however, as I’ve pointed out before, seems to be ahead of them. A rapidly growing share of mortgage loans are now processed through the Federal Housing Administration (FHA) and the Government National Mortgage Association (GNMA, a.k.a. Ginnie Mae).
Unlike Fannie and Freddie, these are full-blooded government-owned agencies. And that makes them even easier tools to manipulate the housing market. Ginnie Mae guarantees mortgage-backed securities backed by federally insured or guaranteed loans issued by the Federal Housing Administration. In other words, the government guarantees securities backed by loans issued by the government. These loans, however and of course, don't originate with the government.
Earlier this week, a story made the rounds of a 20-year old girl of Salvadorian origin who holds 3 jobs and bought a $155,000 home (and got a $34,000 "embellishment" extension on top of that) with an FHA-guaranteed loan with a 3.5% down payment. That story had subprime written all over it right from the start, and loudly begged the question what on earth moves the US government to move into (make that induce) subprime lending.
But that was just the first chapter of the tale. In chapter 2, we see that the damsel in distress didn't just see her loan guaranteed by the Obama administration. Crucially, she also qualifies for the $8000 tax credit for first time home-buyers.
Please pay attention. Now it gets interesting.
$8000 may not seem like a lot compared to the $155,000 purchase price. But that's not the way to look at it. You see, the government allows those who qualify for the credit to use it towards their down payment. And now the picture changes dramatically.
Remember, our protagonist needed to put down only 3.5% of her loan. 3.5% of $155,000 is $5425. Hence, she still has $2575 left on her $8000 credit. So she adds $34,000, which brings the total loan to $189,000. 3.5% of that is $6615. So even with the embellishments, she still has $1385 left.
In the end, if we focus only on the government involvement in this particular situation, she actually gets paid to get a mortgage loan for her home. In effect, she gets a 105% loan. Of course, if we look beyond government involvement, the mortgage lender which "approved" her will slap an avalanche of fees and bills on her, and she's still sure to be made to pay and bleed through the teeth.
But the principle has been established. The US government has silently and secretly entered a situation in which its presence is even far more perverting than it was before, when its involvement was channeled through Fannie and Freddie. One aspect of this change pertains to mortgage insurance, which takes on an entirely different shape now that the government effectively guarantees all money involved. There is still an insurance premium, but it can be smeared out over the course of the loan, and nobody cares much about it with the full weight of Washington behind it to begin with.
This is just one side of the home-buyer tax credit that should be reason for concern.
At 3.5% down, an $8000 tax credit potentially (and yes, I know this is a simplified version of reality) increases the amount a buyer can spend on a home by over $200,000. A sharp mind named Nemo at Self Evident says that this is bound to increase both the supply of homes on the market (since it allows buyers to spend -much- more, getting rid of -perceived- bottom prices) and the price per home. "Nemo" estimates the rise in prices could be as much as $100,000 per home. While we might discuss or even dispute that number, the principle is obvious and not disputable.
That principle is: the US government is busy actively raising home prices. And there we are back to what I've been saying about Fannie and Freddie for the longest time. While the reason given by Washington is that its involvement is driven by a desire to "stabilize" the markets, that is at best only part of the truth. What the White House and Capitol Hill are trying to do is "stabilizing" the markets at a level that they find acceptable. Which, if we recognize that their policies increase the number of homes on the market as well as their prices, evokes the image of a hamster on a flywheel. And that hamster WILL get tired at some point.
Who loses in this set-up? First, homebuyers, since they pay much more for their homes than if the government would stay out of the market. Then again, what obligations do the buyers really have? They get a home for free, more or less, and often with a non-recourse loan to boot. In the end, the by far biggest losers are the American taxpayers, who have to watch helplessly as their own chosen government shifts a fast increasing share of the losses of the housing market onto their tab, all solely for the benefit of the one and only party that stands to profit.
That is, the banks. Which can unload repossessed properties at much higher prices, given the tax credits. Which can keep properties and loans at greatly elevated prices on their books, which allows them to fool their shareholders and depositors into thinking they are far more healthy than they would be without government involvement. Who can use the artificially raised "values" on their books for highly leveraged financial wagers that if they pay off allow for multi-billion dollar bonuses, and if they don't can be channeled back to the taxpayers' account.
Why is this so important for the government? Why does Barney Frank proudly declare that the nation has a solemn commitment to those alleged "stable" housing prices?
Because without them, a huge chunk of America's 8000+ banks will be toast. More importantly, much of Tim Geithner's speed-dial list will be gone. He'll have no-one left to talk to before breakfast.
There are many of us who feel offended by the bank bail-outs and the bonuses paid with the bail-out money. But there is nothing that perverts America more than its government's housing policies. Take away Fannie, Freddie, Ginnie and the FHA, and you bankrupt the entire financial system with the stroke of a pen. The entire far too highly leveraged structure of loans, securities and derivatives in the end is based on the US housing market. That's why Obama and his people do what they do. Losing a million jobs a month is much less important than average home prices falling by $10,000 in that same month.
It's a lost battle, and they know it. But that means that they have nothing more to lose either, and they might as well transfer all the losses to you that they can get away with. Which is what is happening. While you discuss who does or does not stay on at reality TV shows, who gets vaccinated and who doesn't, who gets to fly a balloon and who stays at home, who should or should not be part of a health care system the government can't afford to implement anyway.
And I haven’t even touched on the home buyer tax credit fraud that lets infants, inmates and non-Americans cash in. Or the Nancy Pelosi proposal, sure to be voted in, that will extend the homebuyer tax credit to everybody who can fog a mirror, no questions asked, and make it $15,000 from the original $8000. Nor the fact that home sales have not, as claimed, increased by 9.4% in September, not even with all the credits in place.
There is no better and easier way to rob people blind than to make them think you're doing them a favor. Giving them an $8000 credit on a home priced at $250,000, that without that credit would cost them no more than $100,000, will be preferred over the cheaper home. Hey, it's free money. Isn't it?
The greatest theft in American history is not in the past. It's on ongoing operation. And it's run by your government.
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Pelosi Floats Tax Credit For All Home Buyers
Speaker Nancy Pelosi (D-Calif.) said Wednesday that the House not only plans to extend an $8,000 first-time home-buyer's tax credit -- it may be broadened to include all home purchases. "It might be expanded to anytime home buyers," Pelosi told reporters. The credit is scheduled to expire November 30th and has already cost the government roughly $10 billion. Expanding it to all homeowners would dramatically raise that cost. Some 1.4 million tax returns have so far been filed that take advantage of the credit.
The credit is refundable, which means that the government cuts a check to the homeowner. The program has repeatedly been ripped off and operates within an industry which helped bring about the financial collapse. The inspector general for the Internal Revenue Service recently reported that claims for at least 70,000 tax credit claims, adding up to $489 million, appeared to be fraudulent, Reuters reported. Also on Wednesday, Senate Majority Leader Harry Reid (D-Nev.) expressed support for moving forward with an extension of the credit, but focused on first-time home buyers.
Pelosi's comments came amid a call for more economic stimulus by prominent economists at a Capitol press conference. Alan Blinder, a former Fed vice chair, told reporters that the deficit must be brought under control, jobs and an economic recovery must come first. "Now is not the time," he said. Pelosi also said the leadership was considering a GOP-backed proposal, allowing greater tax write-offs for past losses -- known as "net operating loss carryback" -- and "other accelerated depreciation initiatives like that," Pelosi said.
The first-time home buyer tax credit is idiotic
Suppose one day the government decided to give $1 to every person who buys a screwdriver. What would happen?
The immediate effect would be to increase the price of all screwdrivers by $1. Why? If the going rate for screwdrivers is (say) $5, then that is what someone who actually needs a screwdriver is willing to pay. (Put another way, that is the “economic utility” of a screwdriver. Put yet another way, that is the “market clearing” price that balances screwdriver supply with screwdriver demand.) If you pay $6 for a screwdriver and get a $1 rebate, from your point of view that is identical to simply buying the screwdriver for $5; either way, you are parting with $5 and getting a screwdriver, which you do because $5 is the screwdriver’s economic value to you.
Any idiot can see that this hypothetical government policy is not a gift to screwdriver buyers; it is a gift to screwdriver sellers. That gift would be shared with buyers only to the extent that it encouraged the production of screwdrivers in excess of natural demand.
Which brings us to the first-time home buyer tax credit, where the government reimburses buyers 10% of the price of the house or $8000, whichever is smaller. By the screwdriver analogy, this should have the simple effect of increasing the price of every starter home by $8000, right?
Wrong. Nobody buys a starter home with cash. The tax credit does not add $8000 to someone’s capacity to buy a house; it adds $8000 to their capacity to make a down payment. Maybe they take out a loan with 20% down. Or maybe they get an FHA loan with 10%, 5% or even 3.5% down. So the tax credit increases their purchasing power by $40k (20% down) or $80k (10% down) or $160k (5% down) or more.
Thus the net effect is twofold:
- Increase the price of all starter homes by $100k or more
- Increase the supply of houses
Is the problem with the housing market too little supply? Because that is the only “problem” this tax credit is solving.
If you are considering participating in the frenzy, my advice is “don’t”. Sure, the $8000 will help with your down payment, but that is more than offset by the extra tens of thousands in debt you will incur by purchasing an overpriced house. (Plus there’s the general rule that “frenzy” is the antonym of “buying opportunity”.)
Why was this tax credit enacted? Here is a thought. Over the past several years, our banks made a large number of loans that could never be paid back and were secured by essentially worthless collateral (i.e., unnecessary houses). Once upon a time, if you were a bank, as soon as you realized a loan was never going to be paid back and the collateral was worthless, you had to recognize such on your books.
Now, thanks to the elimination of mark-to-market accounting, our banks can simply pretend that the loans will be paid back and/or that the collateral is worth a lot. Just one problem: Eventually the cash from a bad loan actually stops flowing. Then you must foreclose on the house and (gasp) try to sell it. Even “mark to management” accounting admits the truth at that point.
Enter the home buyer tax credit. First, banks can now offload their foreclosed properties at inflated prices. Second, they can issue fresh loans against those inflated prices, and they can pretend the new loans are worth something because they have not gone bad yet.
Like most of our government’s and central bank’s actions in the past two years, this is primarily a transfer of wealth from taxpayers to banks.
Bottom line: While the tax credit is in place, it is a good time to sell a house and a great time to be a bank. It is a bad time to buy a house and a terrible time to be a U.S. citizen.
Incidentally, the White House does not want the credit renewed. But that is irrelevant, since as near as I can tell Obama’s job description is “give speeches and sign whatever Pelosi and Reid cram through their respective chambers”. Too harsh? Read what Pelosi said yesterday. The tax credit will be renewed.
All that, and I did not even mention the fraud…
What I do not understand is why so many people seem to think this is a good idea. Has the world gone mad, or have I?
Existing Home Sales FALL in September 2009
by Barry Ritholtz
Existing Home Sales fell 5.4% last month, despite the nonsense you have read elsewhere.
NAR continues to bullshit America with their garbage data and spin, month after month, with few people calling them on it. Well, I’ve had it up to here with their garbage:.Big Rebound in Existing-Home Sales Shows First-Time Buyer Momentum
Existing-home sales bounced back strongly in September with first-time buyers driving much of the activity, marking five gains in the past six months, according to the National Association of Realtors
No, home sales did not rebound — that was purely the result of SEASONAL ADJUSTMENTS
As you can see on the NON SEASONALLY adjusted chart below, from August to September (Red Bar) Sales actually dropped. In prior years — 2005, 2006, 2007, and 2008 — there was always a big fall from August to September.
This year, the fall was more modest.
Why was this year so different? We have ZIRP (which will eventually go up) and a large 1st time buyers tax credit that is scheduled to expire. Hence, the unusual September activity that dos not reflect the traditional drop off.
Mark Hanson notes that on a NSA basis, Existing Home Sales actually dropped 5.2% — this was the second straight monthly drop on an NSA basis.
Mark adds:The NAR’s attempt to annualize seasonality never before seen has resulted in a headline very far off base . . . The fact is, Sept NSA sales were above last year’s 438k but below last month’s 498k coming in at 472k as shown below. In addition, sales prices fell. This pulled-forward demand sets up the slow season to be one of the slowest on record.
The tax credit effectively extended the purchase season which is why sales were even this strong. But when you consider the hundreds of billions spent to prop up the housing market, which only resulted in 34k additional sales over last September (one of the worst years on record for housing) and fewer sales YoY in CA, sales were really not that great. When organic sales go away suddenly for the season, which will happen in the near-term whether the tax credit is extended or not, it sets sales and prices up for the largest swings lower we have seen since all this began two years ago.
That’s precisely correct — the usual selling season was extended due to the tax credit.
courtesy of calculated risk
I am honestly unsure of whether the folks at the NAR are dumb as lawn furniture and make these misreperesntations honestly — or whether are justa nother group of disgusting spin doctors, willfuylly peddling lies because it helps their own agenda.
Those are pretty much the only options: Idiots or full of shit. (You decide).
Home sales hit 26-year high in September
Motivated first-time buyers racing toward the Nov. 30 deadline for an $8,000 tax credit propelled sales of previously owned homes in September to the highest monthly gain in 26 years. Sales rose 9.2 percent over the same month in 2008 and 9.4 percent from August, the National Association of Realtors reported yesterday. Since February, more than 340,000 qualified first-time buyers have taken advantage of the credit, which is retroactive to Jan. 1.
Recognizing how critical the tax credit has been to a market on life support since the end of the national real estate boom in 2006, the housing industry has been pressuring Congress to extend it for another year and make it available to all buyers except investors and second-home purchasers. "We are hopeful the tax credit will be extended and possibly expanded to more buyers, at least through the middle of next year, because the rising sales momentum needs to continue for a few additional quarters, until we reach a point of a self-sustaining recovery," said Lawrence Yun, chief economist for the Realtors' group. Economists agree that continuing the tax credit - estimated to cost the government an additional $1 billion - is key to a housing recovery, now forecast for the second half of 2010.
The Realtors' group report "raises almost as many questions as it answers," said Joel L. Naroff of Naroff Economic Advisers in Bucks County. "Clearly, the housing market is in much better shape than six months ago, when demand hit rock bottom. But aid from government incentives is disappearing, and how much demand will fall is somewhat unclear." Unless the tax credit is both extended and expanded, economist Patrick Newport of IHS Global Insight said, sales will take a hit and "house prices, which have stabilized recently, will start falling again." Newport says he expects the credit also will have boosted new-home sales when the September data are released by the Commerce Department on Wednesday.
Although the eight-county Philadelphia region also is benefiting from the credit for first-time buyers, September sales year-over-year were basically flat, data collected by Prudential Fox & Roach's HomExpert Market Report show. Sales rose 0.9 percent last month over September 2008. Median prices fell 4.1 percent in that time, to $207,275 from $216,120, reflecting the high percentage of first-timers looking to close deals on lower-priced homes ($350,000 and under) before the credit goes away. "The majority of my buyers are first-time buyers seeking the tax credit," said Murray Rubin, a Prudential Fox & Roach agent in Marlton. "Market activity is gaining momentum," he added.
Through September, fixed rates for 30-year mortgages ranged from 4.82 percent to slightly above 5 percent. On Thursday, Freddie Mac reported average 30-year fixed rates at 5 percent. The previous best monthly percentage gain in sales was in January 1983, as the country was easing out of a recession that had been accompanied by interest rates in the high teens, according to Hanley Wood Market Intelligence.
Last month, median prices nationally fell 8.1 percent year over year, not only reflecting the first-timers in the market but the huge volume of foreclosed houses in Sun Belt and Rust Belt states, where values have plummeted 30 percent to 50 percent from the 2006 peak. Foreclosure sales are a relatively small percentage of the Philadelphia region's market. Econsult Corp. vice president Kevin Gillen estimates that since the real estate boom ended, prices here have fallen only 12 percent.
August Home Price Decline Erases July Gain, FHFA Says
US home prices fell 0.3% on a seasonally adjusted basis from July to August, erasing the 0.3% gain between June and July, according to the Federal Housing Finance Agency’s (FHFA) monthly house price index. For the 12 months ending in August, U.S. prices fell 3.6% and the index is 10.7% below its April 2007 peak.
Regionally, the Pacific Census Division — Alaska, California, Hawaii, Oregon and Washington — experienced a 1.2% increase in seasonally adjusted prices from July to August, the greatest of the nine divisions. The South Atlantic division — Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia — experienced a 1.6% decrease in prices during the same period, the biggest loss in the country.
The Mountain division — Arizona, Colorado, Idaho, Nevada, New Mexico, Montana, Utah and Wyoming — experienced the greatest annual decrease in prices, 7.8% on a seasonally adjusted basis. The West South division — Arkansas, Louisiana, Oklahoma and Texas — experienced a 0.4% increase year-over-year, the only division to have an annual increase in prices. The FHFA monthly index is calculated using purchase prices of houses backed by mortgages sold to or guaranteed by Fannie Mae or Freddie Mac.
IRS Wrongly Gave Homebuyer Tax Credit to Resident Aliens, Minors: Watchdog
The Treasury Inspector General for Tax Administration (TIGTA) believes the Internal Revenue Service (IRS) may have paid out millions of dollars in first-time homebuyer tax credits to individuals not eligible to receive the $8,000 credit. Nearly $4m of incorrectly paid credits were due to both alleged fraud and filing errors on claims by 580 taxpayers less than 18 years old. The youngest of these was 4 years old, TIGTA head J. Russell George said in prepared testimony to the House Ways and Means Oversight subcommittee.
TIGTA also found 3,200 taxpayers with Individual Taxpayer Identification Numbers (ITIN) claiming the credits. ITINs are generally used to track income tax for resident aliens, in lieu of a social security number. While the legislation creating the tax credit does not specifically address resident alien eligibility, other laws prohibit aliens residing without authorization in the US from receiving most federal public benefits, George said. It is possible that as much as $20.8m in tax credits were paid to resident aliens ineligible for the credit.
As of August 22, 2009, more than 1.4m taxpayers claimed the tax credit for homes purchased in 2008 and 2009, representing total foregone tax revenue of about $10bn, according to estimates presented by Government Accountability Office (GAO) director of strategic issues James White. While the tax credit was created, the IRS created Form 5405, the documentation homebuyers must complete to claim the credit, and implemented checks on the claims system to detect those in excess of the maximum allowable credit or allowable amounts for those taxpayers with a gross income above the credit’s income limitations and claims filed without Form 5405.
But shortly after the IRS began administering the tax credit, the TIGTA office suggested additional fraud and error reporting measures, like requiring taxpayers submit a copy of their Department of Housing and Urban Development (HUD) Settlement Statement, known as the HUD-1 form. TIGTA also recommended verifying the information on Form 5405 and manually transcribing paper versions of Form 5405. The IRS rejected both proposals, saying requiring the HUD-1 form would be burdensome to taxpayers and may deter them from taking the credit. IRS also indicated the tax credit was approved too late to manually transcribe the paper Forms 5405.
As a result of the IRS’ decision to not implement the additional checks, George said, more than 19,300 electronically filed 2008 tax returns improperly claimed the tax credit for homes that had yet to be purchased at the time of the tax filing. He said more than $139m in erroneous claims were paid to these individuals. Linda Stiff, IRS deputy commissioner for services and enforcement, said in prepared testimony that when the tax credit was created, it came in the middle of an already hectic tax season and put a strain on the department. "It was important that the IRS implement and administer the [tax credit] in a way that did not disrupt the annual tax return filing process," she said.
Stiff added the IRS is pursuing fraud cases and already selected thousands of returns of individuals claiming the credit for civil examination. She also indicated that until the IRS can follow up with individuals with questionable returns, it is impossible to determine whether the claim is fraudulent or not. "We will vigorously pursue those who filed fraudulent claims for this credit, but we also will seek to respect the rights of taxpayers who claim a credit to which they are lawfully entitled," Stiff said. George said his office also identified nearly 74,000 fraudulent claims for the tax credit by individuals who did not qualify because they were not considered first-time homebuyers. These individuals claimed deductions of home mortgage interest, real estate taxes, deductible points and qualified mortgage insurance premiums on previous years’ tax returns, indicating they had owned a home within the past three years.
On the other hand, George said his office identified about 48,500 taxpayers who did not file claims for enough of the tax credit. These taxpayers claimed $7,500 (the credit value when the incentive became available in 2008) for the 2009 credit, when the maximum is $8,000. Unless these taxpayers bought $75,000 homes, they are entitled to higher tax credits, George said. The GAO and TIGTA recommended Congress consider granting the IRS additional authority to assess taxes to those with incorrect homebuyer tax credit information. It is a streamlined process for minor errors on tax returns that eliminate the need for full audits when borrowers make a simple mistake on tax returns. The IRS has "math error authority" on some matters, but Congress must grant it for specific items, like the tax credit.
Is The Housing Market About To Get Even Uglier?
Despite some tentative signs of recovery, the U.S. housing market remains vulnerable to further price drops—especially in areas where large numbers of mortgages are headed toward foreclosure over the next few years.
The Wall Street Journal's quarterly survey of housing-market data in 28 major metro areas shows sharp drops in the number of homes listed for sale across the country. But the potential supply of homes is far larger because banks are likely to acquire significant numbers of foreclosed homes in some areas, notably Las Vegas, Atlanta, Detroit, Phoenix, Miami and other parts of Florida, and Sacramento, Calif., over the next few years.
Sales of those homes may depress prices further. By contrast, metro areas with relatively low foreclosure and mortgage-delinquency rates include Boston, Denver, Minneapolis, San Francisco, Seattle, Raleigh, N.C., and Portland, Ore., making them less vulnerable. Homeowners and potential buyers have been whipsawed by conflicting signals about the state of the market in recent months. Ulani and Mike Thiessen found the market surprisingly hot when they went shopping for their first home in Las Vegas during the summer. With the help of Kim Kelly-Reed, an agent from One Source Realty & Management, the Thiessens finally bought a foreclosed house in September for about $136,000—but only after being outbid on three other houses.
"It's a crazy market out there," says Ms. Thiessen, who works for an electrical contractor. Despite a continuing surge in defaults, there is a shortage of well-preserved foreclosed homes on the market in Las Vegas, Sacramento and some other metro areas where first-time home buyers have been competing with investors for newly affordable properties. "Anything under $300,000 that is decent within hours has dozens of offers," says Michael Lyon, CEO of Lyon Real Estate in Sacramento.
The supply of foreclosed homes listed for sale has dwindled largely because of government-mandated efforts to save as many borrowers as possible from losing their homes. That campaign has gummed up the foreclosure process, slowing the flow of houses into bank ownership—but only temporarily. Over the next few years, housing analysts believe, millions of other homes are heading for bank ownership, but no one can say how long that will take or when a sudden torrent of bank-owned properties may swamp certain local markets.
Nearly 27% of first-lien home mortgages are at least 30 days overdue or in foreclosure in the Miami-Fort Lauderdale area, according to research firm LPS Applied Analytics in Denver. The rate is 23% in Las Vegas, but about 8% in Denver and Seattle. The national average is 12.4%, up from 5.2% at the end of 2006. Among the millions of homeowners whose fate remains undecided are Jill and Robert Loy, who live in Scottsdale, Ariz. They bought their home in 2004 for $630,000 but figure it is now worth only about $350,000, well below the $470,000 owed on their mortgage.
The couple fell behind on their loan payments last spring when Ms. Loy was temporarily jobless, and they have been trying to work out a modification of their loan terms with the company that collects payments on their mortgage, Colonial Savings FA of Fort Worth, Texas. A Colonial spokeswoman says the bank is trying to help the Loys.
The housing market is heading into the winter doldrums—when fewer people shop for real estate—after a summer marked by strong demand for low-end to midrange homes, spurred by a temporary federal tax credit for first-time buyers. How the market fares in the spring will depend largely on the state of the economy and the pace of foreclosures.
"The number of people receiving paychecks will drive the demand for houses and apartments," Jay Brinkmann, chief economist for the Mortgage Bankers Association, said Tuesday in testimony to the Senate Banking Committee, "and the recovery will begin when unemployment stops rising." For now, the market seems to be stabilizing, says Jeffrey Otteau, president of Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. But if the job market gets much worse and mortgage rates rise sharply, "that could be the tipping point" for another drop in prices.
Mark Zandi, chief economist at Moody's Economy.com, predicts that average national home prices will bottom out in next year's third quarter, assuming that employment begins growing again in mid-2010. But prices in some metro areas still have a long way to fall, he believes. Prices in the second quarter of 2010 will be down about 30% from a year earlier in Miami, 27% in Orlando, Fla., 24% in Las Vegas and 23% in Phoenix, Moody's Economy.com forecasts.
Foreclosures and short sales (in which a home is offered for less than the mortgage balance) dominate the markets in some metro areas. Satish M. Mansukhani, a market strategist in New York, estimates that such "distressed" homes account for 79% of home listings in the Detroit area and 75% in Las Vegas, but just 16% in Houston and 7% in Boston.
One big question is how much more the federal government will do to prop up housing. Congress is debating whether to extend the tax credit for home buyers beyond Nov. 30. Meanwhile, the Federal Reserve is phasing out its massive purchases of mortgage-backed securities and plans to conclude the program by the end of March. Those purchases have helped keep interest rates on 30-year fixed-rate mortgages around 5%. Mr. Zandi says mortgage rates are likely to rise as much as one percentage point after the Fed ends that support. Analysts at Barclays Capital in New York forecast mortgage rates will be slightly over 6% by the end of March.
While supplies of moderately priced homes have shrunk, there is still a glut of high-priced houses in many areas, suggesting that prices on those properties may fall sharply as more owners default. In Sacramento, there are enough homes on the market at $600,000 and above to last more than 15 months at the recent rate of sales, compared with just 1.5 months for homes priced at $300,000 and below, according to Lyon Real Estate.
Home sellers will also face tougher competition from landlords, who generally have been cutting rents in the past year. The national apartment-vacancy rate in the third quarter was 7.8%, the highest in 23 years, according to Reis Inc., a New York research firm. It predicts "a few more quarters of distress, lower rents and higher vacancies." Apartment rents may face further downward pressure as investors buy foreclosed single-family homes and turn them into rental units, says Ryan Severino, an economist at Reis, who notes that there is little data on the number of houses being converted into rental properties.
Yes, Housing Recovery Is Still "Mother Of All Head-Fakes"
Whitney Tilson, Founder and Managing Partner, T2 Partners:
- The NAR's sales numbers this morning were a complete joke: Take a look at the numbers on a non-seasonal basis
- Yes, the housing recovery is still the mother of all head-fakes
- House prices will start falling again when the seasonal summer dboom ends (now), and they'll fall another 10%-15% before they bottom
- The continuation of the housing collapse will make the economic recovery "feeble, at best."
Ilargi: It’s when government officials deem it necessary to issue statements such as these that the little man inside starts to act up.
A Message from FDIC Chairman Sheila C. Bair
Citigroup, JP Morgan Chase, Wells Fargo and Others to Lose FDIC Debt Guarantees
Some of the nation’s largest financial companies, including Citigroup, GE Capital, JPMorgan Chase, Wells Fargo, Bank of America and others will no longer have certain debt guaranteed by the federal government through the FDIC’s Temporary Liquidity Guarantee Program as of October 31st. The FDIC voted on Tuesday to end the Temporary Liquidity Guarantee Program that is being used to guarantee certain debt issued by some of the nation’s largest banks, but also setup a 6-month safety net facility as part of the process. All five members of the FDIC’s panel of regulators voted to end the program as scheduled on October 31st.
New debt can be issued and guaranteed under the program up until the deadline. The deadline on the newly placed debt would expire no later than December 31st, 2012. FDIC Chairman, Sheila Bair, stated, "It should be clear that this is not a continuation of the program but an ending of the program." The program does leave open a 6-month safety-net feature for banks suffering from "market disruptions" beyond their control. Under the transitional facility, banks can have new debt guaranteed through April 30th, 2010 if the FDIC approves the guarantee.
During the month of September, the FDIC requested public comment about two different approaches to ending the program. One of the programs would let the program finish by the end of the month and the other would include a 6-month guarantee facility for some banks on a case-by-case basis. The FDIC established the Temporary Liquidity Guarantee Program last October in order to boost confidence in the banking industry, add more liquidity, and reduce the possibility of bank runs. The TLGP program places a government guarantee on some senior unsecured debt and mandatory convertible debt, as well as on banks’ transaction deposit accounts.
Regulators are hoping to phase out the program now that stress on the credit market has eased. FDIC officials are also want to avoid promoting reliance on government aid by the financial industry. As of October 14th, 2009, the FDIC had $309.4 billion in outstanding debt-guarantees.
Freddie Mac Sept portfolio up, delinquencies jump
Freddie Mac, the second-largest U.S. home funding company, said on Friday its mortgage investment portfolio grew by an annualized 7.3 percent rate in September, while delinquencies on loans it guarantees accelerated. The portfolio increased to $784.2 billion, for an annualized 3.4 percent decrease year to date, the McLean, Virginia-based company said in its monthly volume summary.
The portfolio size increased on a year-over-year basis. In September 2008, the portfolio was $736.9 billion. Freddie Mac in early August reported a surprising profit in the second quarter and indicated that it may not need additional federal aid, at least for now. Delinquencies, which increase stress on the company's capital, jumped to 3.33 percent of its book of business in September from 3.13 percent in August and 1.22 percent in September 2008.
The multifamily delinquency rate accelerated slightly in September to 0.11 percent from 0.10 percent in August. A year earlier it was 0.01 percent. Freddie Mac said refinance-loan purchase volume was $21.4 billion in September, down from August's $35.6 billion. Activity peaked earlier this year, with March's $52 billion its largest refinance month since 2003.
The net amount of mortgage-related investments portfolio mortgage purchase agreements entered into during the month of September totaled $4.6 billion, down from the $12.1 billion entered into during the month of August. The company's total mortgage portfolio increased at a 0.8 percent annualized rate in September to $2.243 trillion, for an annualized 2.1 percent increase year to date.
In early September 2008, the U.S. government seized control of Freddie Mac and its larger sibling, Fannie Mae, amid heightened worries about shrinking capital at the congressionally chartered companies. The current agreement with the U.S. Treasury has the retained portfolio at Fannie Mae and Freddie Mac capped at $900 billion until Dec. 31, when they are to start declining by 10 percent per year until they reach $250 billion.
The government has been relying heavily on Fannie Mae and Freddie Mac in its efforts to stimulate the battered U.S. housing market by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure. After the worst downturn since the Great Depression, the housing market has shown signs of stabilization. Home price declines have moderated in many regions of the country and, according to some indexes, prices in some regions have risen.
Freddie Mac’s Secrecy Pacts Face Court Test
One year after the government took over and bailed out Freddie Mac, the giant mortgage finance company, federal regulators are blocking former employees from revealing information to investors who are suing the company for fraud, lawyers for shareholders say. The Treasury has propped up Freddie Mac with more than $50 billion in taxpayer money since the company nearly collapsed more than a year ago, and officials warn that the company will probably need additional billions in the months ahead.
Federal prosecutors in Virginia and the Securities and Exchange Commission are already investigating whether the company misled investors about the risks it was taking with securities backed by subprime mortgages and no-document loans. But in a battle that will surface on Friday in a federal courtroom in New York, the company and its primary government overseer, the Federal Housing Finance Agency, are trying to enforce secrecy agreements that scores of former employees signed as a condition for receiving severance payments when they left the company.
In their class-action lawsuit against Freddie Mac, three big union-based pension funds charge that Freddie Mac executives defrauded investors by concealing the company’s exposure to high-risk mortgages, its mounting losses and its inadequate capital position. At the hearing on Friday, lawyers for shareholders will argue that Freddie Mac’s secrecy agreements amount to buying silence from willing witnesses who may have crucial information about what the company’s top executives knew at the time they were assuring investors that all was well. The lawyers will ask a judge to invalidate the restrictions, a move that Freddie Mac and federal regulators will say the court has no right to do.
“Federal dollars are being used to bribe people, to buy their silence,” said David George, a lawyer representing the pension funds in a class-action lawsuit. Under the secrecy provisions, former employees would be permitted to answer questions from government prosecutors and investigators in any criminal case or in a regulatory proceeding. But, barring a court order, the former employees are prohibited from cooperating with anyone involved in a civil lawsuit against Freddie Mac. Several former employees, who insisted on anonymity, confirmed that they were eager to talk with the shareholder group and said they might have valuable information.
“I would say more, but I don’t want somebody knocking on my door and asking for $50,000 back,” said one former employee who worked on Freddie Mac’s internal financial controls. “It’s almost like bribery; I felt that I was supposed to sign the agreement, take the money and keep all their secrets.” The severance deals were so strict, according to former employees, that they prohibited those who accepted them from saying almost anything about their old jobs or even about the secrecy pledges themselves.
“I was told that in volunteering to take a buyout, I couldn’t even talk about the agreement or it would be off the table,” said an 18-year veteran of Freddie Mac, who insisted on anonymity because of the restrictions. “I was told that you don’t talk about the terms of agreement, you don’t talk to the news media and you don’t talk to attorneys involved in lawsuits against the company.” Lawyers for pension funds that have filed a class-action lawsuit against the company say the secrecy provisions have already muzzled at least two dozen former employees with potentially important information. Spokesmen for both Freddie Mac and the Federal Housing Finance Agency said they could not comment on the case because it is in litigation.
In a legal brief filed in August, the Federal Housing Finance Agency refused to confirm that the secrecy pacts even existed, saying their existence was “hypothetical.” But if the restrictions did exist, the agency continued, neither shareholders nor the courts had any authority to interfere with them. Though secrecy provisions have become a common feature of corporate severance deals, legal experts said this appeared to be the first time that federal regulators have invoked them to thwart investors. And because Freddie Mac is now effectively owned by the government and is receiving a vast taxpayer bailout, the case has already raised alarms among some public officials.
Rob McCord, Pennsylvania’s state treasurer, said his state had lost millions of dollars on Freddie Mac shares that became almost worthless in 2008. Though Mr. McCord is not a party to the class-action lawsuit, he said Freddie Mac’s secrecy agreements were thwarting taxpayers as well as shareholders, and making it harder to prevent similar debacles in the future. “I would be greatly concerned if Freddie Mac, by conditioning departing employees’ severance payments on contractual gags, is preventing investors from learning what really happened,” Mr. McCord wrote in a letter on Wednesday to Freddie Mac and to many members of Congress.
He added, “Given that Freddie Mac is supported by tax dollars, the public has a right to hear from former employees.” The dispute highlights the conflicts that face federal policy makers as the government tries to rescue giant corporations ranging from Freddie Mac to the American International Group to General Motors. On one hand, the government has a responsibility to uncover fraud and other corporate misconduct, especially at companies being bailed out by taxpayers. At the same time, officials are trying to protect taxpayers by rehabilitating the companies as quickly as possible. Paying out money to shareholders, even if they were defrauded, increases the cost to taxpayers.
Freddie Mac and its sister company, Fannie Mae, are government-sponsored corporations that finance and guarantee trillions of dollars worth of home mortgages. Both companies became insolvent after the housing market and financial markets imploded, and both were taken over by the government in September 2008. Lawyers for shareholders, citing provisions obtained from former employees, said the secrecy provisions explicitly prohibit employees from voluntarily helping anybody trying to sue Freddie Mac.
Stephen Singer, a shareholder lawyer who has led class-action lawsuits against numerous subprime mortgage lenders, said the Freddie Mac restrictions could, if upheld in court, make it difficult for shareholders to sue companies for fraud and misrepresentation. “These restrictions are more sweeping than anything I’ve seen before,” said Mr. Singer, who is not involved with the Freddie Mac case. If they were upheld, he added, shareholders would find it much more difficult to sue corporations because courts will generally not force company executives to testify or to produce documents until after the shareholders have provided solid evidence of fraud and misrepresentation from voluntary witnesses, often former employees.
U.S. government is new 'dead man walking'
When so-called quantitative easing by central banks ends, the world economy may slip back into trouble, Canadian hedge fund manager Eric Sprott warned on Tuesday. Toronto-based Sprott called Citigroup, Fannie Mae, Freddie Mac, and General Motors "dead men walking" in late 2007. On Tuesday, he said the U.S. government is the new dead man walking, partly because it may struggle to keep borrowing enough money if the Federal Reserve stops buying Treasury bonds.
Sprott's Canadian hedge fund, Sprott Hedge Fund LP, is up more than 400% since inception in 2000 as it rode a surge in gold prices and shares of gold miners and other raw materials companies. Bank bailouts and other dramatic efforts by central banks have stopped the world "going into the abyss," Sprott said during a presentation at the Value Investing Congress in New York. The "granddaddy" of all those bailout efforts is quantitative easing, in which central banks in the U.S. and the U.K. especially buy government bonds to keep interest rates low, Sprott said.
The U.S. government has raised roughly 200% more by selling bonds this year, versus last year, Sprott noted. Through the end of the second quarter of 2009, he said the only major buyers of these government bonds were central banks. "When quantitative easing ends, what's going to happen?" he added, noting that there are already two clues to answer that question. When the U.S. government's cash-for-clunkers program ended, car sales slumped. Meanwhile, as the end of the government's first-time homebuyer incentive approaches, recent data suggest weakness building again in the housing market, Sprott said.
Roughly 35% of all homes bought in the U.S. recently were purchased through the incentive program. If it is not extended, December home sales could slump 25%, Sprott estimated. Sprott remains concerned about banks and other financial institutions in the U.S., because he thinks they remain too leveraged. Banks leveraged roughly 20 to 1, have about 5% of equity supporting mostly paper assets. If those assets fall by more than 5%, the institutions are effectively bankrupt, Sprott said.
"The fundamental problem today is that the appropriate leverage ratio is certainly not 20 to 1," Sprott said, citing some of the bank failures this year in the U.S. To be seized by the Federal Deposit Insurance Corp., these banks have already lost their 5% equity cushion. But some of the largest bank failures this year, including Colonial Bank, Guaranty Financial, and Corus, involved write-downs of between 11% and 25%, Sprott noted.
Our Drunken Uncle
Spending: According to two separate Government Accountability Office scenarios, America's long-term fiscal outlook is "unsustainable." No surprise, since Uncle Sam is spending like a drunken sailor.
The GAO, Congress' in-house think tank, warns that in "little over 10 years, debt held by the public as a percent of GDP" will hit a record high, exceeding the debt-to-GDP ratio seen after World War II. Then it will "grow at a steady rate thereafter," according to the government forecasters.
"Social Security cash surpluses, which have been used to help finance other government activities, are projected to turn to cash deficits by 2016," the GAO warns.
The agency's fall update of its "Long-Term Fiscal Outlook" adds that "the Social Security trust fund will be exhausted in 2037, 4 years earlier than estimated last year." The Medicare trust fund's day of reckoning, meanwhile, "was also moved forward by 2 years to 2017."
The GAO used two simulations, an optimistic one making the assumption of historically lower-than-average nonentitlement spending and higher-than-average tax revenues, and a second model assuming that spending and revenues would keep to historical averages. But "both simulations show that the federal government is on an unsustainable fiscal path."
The non-optimistic simulation "shows persistent annual budget deficits in excess of 7% of GDP levels not seen since the aftermath of World War II." Under that scenario, "roughly 92 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2019."
Even if revenue remains constant at 20.2% of GDP higher than the historical average by 2030 there will be little room for "all other spending," which includes "national defense, homeland security, investment in highways and mass transit and alternative energy sources, plus smaller entitlement programs such as Supplemental Security Income, Temporary Assistance for Needy Families, and farm price supports."
It sounds like doomsday. But the politicians who run Washington are ignoring the dire warnings.
This week, House Speaker Nancy Pelosi is convening a gaggle of ideologically friendly economists with the aim of getting cover for yet another stimulus even though the last one of $787 billion made no discernible dent in unemployment, which threatens to reach double digits.
And Sen. Ben Cardin, D-Md., appearing on Fox News Wednesday, spoke for lots of his fellow liberals in blithely proposing a brand-new, massive entitlement in the form of a government-run health scheme, claiming that "a public option helps bring down the costs."
Also appearing on Fox Wednesday, Sen. Judd Gregg, R-N.H., after accusing Democrats on the Senate floor of a "Bernie Madoff approach to (health care) funding," warned that when disguised funding is tallied up, the true cost of Congress' proposed government health takeover even without the public option is $1.8 trillion.
Government spending is burning our children's futures to the ground, yet our "leaders" in Washington think it's time to spray the kerosene of still more spending on the fire.
Poof! Government Has Already Lost $20 Billion On GM Investment
In the newspaper business, reporters are often admonished not to " bury the lead." That’s another way of saying don’t take too long to get to the most newsworthy point of the article. Apparently Steve Rattner, a former New York Times reporter, veteran deal maker and Obama administration "car czar" forgot the rule when he published a first person account of his time as the auto czar in Fortune this week. At a speech sponsored by the Brookings Institution, Rattner estimated the government’s $50 billion investment in General Motors is now worth only about $30 billion, the Washington Post reported today.
Rattner said there’s "a good chance" the United States can recover the $30 billion invested in GM by the Obama administration earlier this year. But of the other roughly $20 billion previously lent to GM in the wanning days of the Bush Administration in 2008, he said, "I don’t think we are going to see [it] again." Rattner is careful to draw a distinction between the $20 billion doled to GM by the Bush administration and the $30 billion the Obama White House approved earlier this year. While the Bush administration gave the money with few strings attached, the Obama administration required a management shake up, including the ouster of CEO Rick Wagoner, and had the government take a 60% stake in the company.
But regardless of the distinctions between the two administrations, GM is struggling to sustain sales after the expiration of the "cash for clunkers" subsidies in early September. GM sold 156,673 units in September, down 45% from a year earlier and off 36% from August. For Rattner, at least, it’s not all about profits. He said the GM and Chrysler bailouts saved a million jobs and prevented unemployment in several states from hitting a shocking level of 20%. "We soon could not imagine this country without an automaker of the scale and scope of General Motors," Rattner said, according to the Post article. In Rattner’s view, that’s the dividend that the GM investment is paying right now to taxpayers.
Bank failures hit 106, only part of industry woes
The cascade of bank failures this year surpassed 100 on Friday, the most in nearly two decades. And the trouble in the banking system from bad loans and the recession goes even deeper than the number suggests. Dozens, perhaps hundreds, of other banks remain open even though they are as weak as many that have been shuttered. Regulators are seizing banks slowly and selectively -- partly to avoid inciting panic and partly because buyers for bad banks are hard to find. Going slow buys time. An economic recovery could save some banks that would otherwise go under. But if the recovery is slow and smaller banks' finances get even worse, it could wind up costing even more.
The bank failures, 106 in all, are the most in any year since 181 collapsed in 1992, at the end of the savings-and-loan crisis. On Friday, regulators took over three small Florida banks -- Partners Bank and Hillcrest Bank Florida, both of Naples, and Flagship National Bank in Bradenton -- along with American United Bank of Lawrenceville, Ga., Bank of Elmwood in Racine, Wis., Riverview Community Bank in Otsego, Minn., and First Dupage Bank in Westmont, Ill. When a bank fails, the Federal Deposit Insurance Corp. swoops in, usually on a Friday afternoon. It tries to sell off the bank's assets to buyers and cover its liabilities, primarily customer deposits. It taps the insurance fund to cover the rest.
Bank failures have cost the FDIC's fund that insures deposits an estimated $25 billion this year and are expected to cost $100 billion through 2013. To replenish the fund, the agency wants banks to pay in advance $45 billion in premiums that would have been due over the next three years. The FDIC won't say how deep a hole its deposit insurance fund is in. It can tap a credit line from the Treasury of up to a half-trillion dollars to cover the gap. The list of banks in trouble is getting longer. At the end of June, the FDIC had flagged 416 as being at risk of failure, up from 305 at the end of March and 252 at the beginning of the year. Yet the pace of actual bank failures appears to be slowing. The FDIC seized 24 banks in July, 11 in September and 11 in October.
If any bank poses an immediate danger to customers or the broader financial system, regulators close it immediately, bank supervisors said. The issue is murkier for troubled banks that might qualify to close but whose closings might still be postponed or even prevented. The FDIC's first priority, spokesman Andrew Gray said, is to maintain public confidence in the banking system. "As evidenced by the stability of insured deposits throughout last year, this mission has been a success," he said. He said public confidence isn't reason enough to delay a bank closing, because legally the decision to close rests with whoever chartered the bank -- a state or federal agency. But more than a dozen experts, including current and former regulators, bankers and lawyers, say the FDIC's mission to maintain public confidence in the banking system contributes to the go-slow approach.
"The FDIC was set up to create confidence and prevent bank runs," says Mark Williams, a former bank examiner for the Federal Reserve. Being too aggressive about bank closings "can be counter to the mission." Sarah Bloom Raskin, Maryland's top banking regulator, said: "Technically it's the states who decide, but in reality it's the FDIC calling you to say" when the bank will be closed.
Last fall, the financial turmoil was rooted in bad bets that the nation's biggest banks, like Citigroup Inc. and Bank of America Corp., had made on complicated, high-risk mortgage investments. Smaller banks have been undone by something more conventional -- real estate, construction and industrial loans that have soured as the recession has deepened. Defaults are up as developers abandon failing projects and landlords can't meet their loan payments. Small- and mid-sized banks hold lots of those loans and have been hurt more than big ones by the sinking commercial real estate market, especially in states like California, Georgia and Illinois. As defaults rise, these banks must set aside more money to cover losses. For the banks, this means mounting losses and shrinking reserves.
In a healthy economy, Williams said, the Fed and the FDIC would be inclined to close such weak banks. But these days, those agencies and other regulators prefer to hold off, hoping an economic recovery will eventually restore the health of some of the banks. But the recovery is expected to be slow. Americans remain hesitant to spend money because of job losses, flat wages, tight credit and high debt. Their cutbacks have triggered tens of thousands of business failures. Abandoned retail space in downtowns and suburban malls means no rental income for property owners. As landlords default on real estate loans, they weaken the banks that hold the loans.
The situation now is especially grave in Southern California, Georgia and Illinois, which have some of the highest home foreclosure rates. Twenty banks have closed in Georgia alone. Individual bank depositors aren't at risk when a bank fails. Their money is guaranteed up to $250,000 by the government. Ever conscious of maintaining public confidence, agency officials hammer this point in public statements. When weak banks are allowed to stay open, their growing losses potentially can drain the FDIC's deposit insurance fund faster, says Bert Ely, an independent banking consultant. Federal agencies aren't the only ones with an interest in slowing the pace of bank closings. State regulators with closer ties to local communities want to avoid the ripple effects when a town loses its main source of consumer and business credit, Williams said.
But finding buyers for wobbly banks has been tough. FDIC Chairman Sheila Bair acknowledged as much in testimony this month before a Senate panel. The FDIC has been offering to share buyers' losses on the assets being transferred, she said. "In the past several months investor interest has been low," she said in prepared testimony. In an effort to find more potential buyers, the FDIC has relaxed the rules for private-equity firms to buy banks. In the past, regulators had feared such a move would allow investors to protect themselves from the cost of bank failures, escaping serious consequences while drawing down the FDIC's fund.
An early success of the new strategy was a deal announced this month to sell assets from Corus Bank of Chicago to a group of private investors. But there still aren't enough buyers to absorb quickly all the assets held by at-risk banks. That's because there are so many weak and failing banks on the market -- and so few others strong enough to buy them. That's one reason it's hard to know how many more banks could be closed in coming months, said Daniel Alpert, Managing Partner of the New York investment bank Westwood Capital LLC. "How many banks will survive?" Alpert asked. "Loans are still deteriorating, but there are glimmers of hope in the economy. Ultimately, it's all about employment."
Rally fuelled by cheap money brings a sense of foreboding
by Gillian Tett
Earlier this month, I received a sobering e-mail from a senior, recently-retired banker. This particular man, a veteran of the credit world, had just chatted with ex-colleagues who are still in the markets – and was feeling deeply shocked. "Forget about the events of the past 12 months ... the punters are back punting as aggressively as ever," he wrote. "Highly leveraged short-term trades are back in vogue as players ... jostle to load up on everything from Reits [real estate investment trusts] and commercial property, commodities, emerging markets and regular stocks and bonds.
"Oh, I am sure the banks’ public relations people will talk about the subdued atmosphere in banking, but don’t you believe it," he continued bitterly, noting that when money is virtually free – or, at least, at 0.5 per cent – traders feel stupid if they don’t leverage up. "Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months," he added. He finished with a despairing question: "Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?"
I daresay this missive reflects some element of hyperbole. But I have quoted it at length because the question is becoming more critical. Six months ago, the financial system was in deep distress, reeling from a meltdown. Now despair and panic have been replaced not simply by relief – but, in some quarters, euphoria. Never mind the high-profile rally that has occurred in the equity markets; what is perhaps most stunning is the less visible rebound in debt and derivatives markets, as risk assets have displayed what Barclays describes as a "stellar performance".
In the corporate bond world, for example, spreads have collapsed for both risky and investment grade credit. Emerging market spreads have shrunk too. Meanwhile, publicly traded real estate markets (the EPRA index) have soared some 70 per cent, according to Barclays, helping to spark a surge in its overall measure of market risk appetite – a pattern that is reflected, even more dramatically, in similar metrics compiled by Goldman Sachs.
No doubt many brokers would like to attribute this to fundamentals. After all, last year’s crash in asset prices was so extreme that some rebound was almost inevitable. And recent macro-economic data have been quite encouraging, particularly when compared with what was seen a year earlier.
Yet, if you talk at length to traders – or senior bankers – it seems that few truly believe that fundamentals alone explain this pattern. Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home, because most banks simply do not want to use that cash to make loans. Hence, the fact that the prices of almost all risk assets are rallying – even as non-risky assets such as Treasuries bounce too.
Now, some western policymakers like to argue – or hope – that this striking rally could be beneficial, in a way, even if it is not initially based on fundamentals. After all, the argument goes, if markets rebound sharply, that should boost animal spirits in a way that could eventually seep through to the "real" economy. On this interpretation, the current rally could turn out to be akin to the firelighter that one uses to start a blaze in a pile of damp wood.
Yet, what worries me is that it is still very unclear that that pile of damp wood – aka the real economy – truly will catch fire, in a sustainable way, if the current stock of firelighters comes to an end. After all, much of the current economic rebound seems to reflect stimulus packages (and flattering year-on-year comparisons) that will end next year. And while there are still plenty of firelighters around – in the form of monetary stimulus and ultra low market rates – there seems to be a good chance of a future interest rate shock as central banks implement their exit strategies. Meanwhile, the securitisation sector could yet deliver another credit shock next year, since that is the one part of the financial system that has not started working yet – but where government support measures are supposed to stop next spring.
So I, like my e-mail correspondent, am growing uneasy. Perhaps, the optimistic "firelighter-igniting-the-damp-wood" scenario will yet come to play; but we will probably not really know whether the optimists are correct for at least another six months. In the meantime, it is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong.
Goldman Sachs Is Too Big to Tell It Straight
Repeat after me: Goldman Sachs is not too big to fail. Goldman Sachs is not too big to fail. Goldman Sachs is not too big to fail. Are you laughing yet? This might be funny, except that Goldman Sachs Group Inc. wants us to believe it’s true.
Let’s begin with the obvious: Of course Goldman is too big to fail, and of course the government would intervene to prevent Goldman from collapsing if it ever came to that. It’s probably the most important investment bank in the world. There’s a decent chance it could take down the world’s financial system if it ever blew up. It’s the very embodiment of what’s known in government parlance as a "systemically significant" financial institution.
Only two U.S. bank-holding companies, JPMorgan Chase & Co. and Bank of America Corp., held greater amounts of derivatives than Goldman as of June 30, according to the Office of the Comptroller of the Currency. Citigroup Inc., which would be dead already if it hadn’t been too big, was No. 5 on that list. Fannie Mae and Freddie Mac also used to say they didn’t have any federal guarantee. Not many people believed them either.
It was against this backdrop that Goldman’s chief financial officer, David Viniar, got on a conference call with reporters last week and said Goldman enjoys no government guarantee. Not even an implicit one, he said. Viniar’s remarks came after a reporter for the Daily Mail of London, Simon Duke, posed a perfectly reasonable question: "It seems fairly clear that, post-Lehman, that the U.S. Treasury’s not going to let any bulge-bracket firms go under," Duke began, according to an audio recording of the call. "How can you justify these levels of pay, when you effectively enjoy an implicit guarantee from the U.S. taxpayer?"
The pay Duke was referring to was the $16.7 billion that Goldman has accrued for employee-compensation expenses so far this year. Viniar responded by attacking his question’s premise. "We’ve heard many people say that, but we certainly don’t operate the company that way," Viniar said. "We operate as an independent financial institution that stands on our own two feet." He didn’t stop there. "If we felt that we had an implicit guarantee, we would not be holding nearly $170 billion of cash on our balance sheet. We would not have reduced our balance sheet by $400 billion." (Actually, the "cash" figure he cited also included certain securities that Goldman considers to be highly liquid.)
After Duke pressed him further, Viniar turned emphatic. "I don’t believe any of our bondholders think that we have a guarantee, and we don’t think we have a guarantee," he said. It’s as if last year’s bailouts of everything from the money-market industry to American International Group Inc. never even happened. Sure, it’s of some comfort that Goldman is down to a measly $882 billion of assets, or 13.5 times equity. And it’s nice to hear Viniar say Goldman is operating as if it had no federal safety net. To say Goldman doesn’t have one, though, is crazy talk.
Consider what former Federal Reserve Board Chairman Paul Volcker said in a July interview published last month by the Minneapolis Fed’s in-house magazine, the Region. "Think of the situation with Goldman Sachs," said Volcker, one of President Barack Obama’s economic advisers. "They’ve had government assistance. They were presumably deemed too big to fail. And at the same time, they have an enormous trading book. They’ve made a lot of money. There’s nothing wrong with making money, but I don’t want them to make money by taking those risks with the support of the taxpayer."
Likewise, here’s what Fed Chairman Ben Bernanke told the House Financial Services Committee in July, when asked to estimate how many systemically significant, too-big-to-fail companies there might be. "A very rough guess would be about 25," he said. While Bernanke didn’t name names, leaving Goldman off that list would make as much sense as a Top 25 college football poll that didn’t include Tim Tebow’s undefeated Florida Gators.
Last spring, Goldman was one of the 19 major banks the Fed picked to undergo its so-called stress tests. Under that program, the government expressly committed to provide additional capital to any bank on the list that needed it and couldn’t raise enough from other investors. That capital would have been convertible into common-equity shares, meaning the government in effect was setting a floor for the banks’ stock prices. True, Goldman passed the test, and in June it returned the $10 billion it received last year under the Treasury Department’s Troubled Asset Relief Program. Yet the point remains: Goldman had a federal safety net. It’s just about impossible to imagine the government wouldn’t provide another lifeline if needed.
Goldman’s bosses obviously are concerned about the criticism they’ve received over the bank’s massive profits and bonus pool this year. Many Americans believe Goldman would have died were it not for last year’s taxpayer bailouts of the banking industry. And a lot of them feel like Goldman owes the country a debt -- of gratitude, if nothing else. As long as Goldman keeps feeling the need to explain itself, the least it could do is ease up on the hubris. Goldman Sachs doesn’t have an implicit government guarantee? Give me a break.
Wall Street Steps Up Political Donations, Lobbying
Some of the biggest Wall Street firms are back in the political-spending game after hunkering down while they were getting government bailout funds. Goldman Sachs Group Inc., Bank of America Corp., Morgan Stanley and other large financial-services firms stepped up their political donations in September to members of Congress, for many the first time this year they have joined the fray.
Most Wall Street firms stopped making donations to lawmakers when they were receiving government funds, and many lawmakers stopped accepting them. But now that the companies have begun returning the bailout funds, they are making campaign donations again. At the same time, they are increasing their spending on lobbying after a yearlong slump. To be sure, the donations from Wall Street are far below levels of the comparable period four years ago -- the first year of President George W. Bush's second term -- when companies' finances and the overall economy were much healthier.
The renewed assault on Washington comes as the Capitol Hill debate begins on a broad overhaul of financial-services regulations that is strongly backed by President Barack Obama and opposed by large swaths of the finance industry. The spending could also heighten tensions with Mr. Obama, who as recently as Tuesday called on Wall Street to stop lobbying against the proposed regulations. Wall Street and the Obama administration are at loggerheads over a number of issues, including compensation. The Treasury's pay czar, Kenneth Feinberg, is expected in coming days to slash pay at firms receiving substantial government assistance, including Citigroup Inc. and Bank of America.
New fund-raising data show that Morgan Stanley's political action committee made a total of $110,000 in political contributions in September. The only other month this year the company made donations was July, when it gave $43,000. About 60% of the September donations went to Republicans, who generally support Wall Street's efforts to block the regulations proposed by Mr. Obama and congressional Democrats, a shift to the minority party from July.
Morgan Stanley's fund-raising arm in September donated $2,500 to Alabama's Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, and $5,000 to House Minority Leader John Boehner of Ohio. Half of Morgan Stanley's donations in September went to members of the House panel, which is crafting the financial-services overhaul. Mr. Bachus couldn't be reached. Mr. Boehner and Morgan Stanley declined to comment. Democrats received $43,000 from the company. Democratic Rep. Melissa Bean of Illinois received $5,000. Ms. Bean is considered a key swing vote on the financial-services panel and backs an effort to prevent state regulators from approving tougher consumer-protection rules than the federal legislation. Through a spokesman, Ms. Bean declined to comment.
Morgan Stanley also donated $5,000 to Majority Leader Steny Hoyer (D., Md.). Katie Grant, a spokeswoman for Mr. Hoyer, said it is his "policy to accept legal contributions and to pursue the policies he believes are in the best interests of our country irrespective of such contributions." The fund-raising arm of Bank of America donated $30,500 to Republicans in September and $13,500 to Democrats. The company gave a large amount in February, but otherwise has been quiet this year. Goldman Sachs made $37,500 in donations through its PACs in September, after donating $23,000 up until that month.
Records shows Goldman's PAC donated $22,500 to Democrats and $15,000 to Republicans in September. The company contributed $15,000 each to the Democratic and Republican parties, as well as $5,000 to Mr. Hoyer, the Democratic leader. A spokeswoman for Goldman Sachs declined to comment on the donations. J.P. Morgan Chase & Co. made nearly $50,000 in political donations through its PAC in September. The company's PAC made no donations from February through May, and only a small number of donations in June, July and August. Records show that the company's donations were split between Democrats and Republicans.
The company donated $2,000 to Alabama Sen. Richard Shelby, the senior Republican on the Senate Banking Committee. The company also donated $1,000 to Pennsylvania Rep. Paul Kanjorski, the No. 2 Democrat on the House financial-services panel. The lawmakers declined to comment. A J.P. Morgan spokeswoman declined to comment. The increase in spending by the big Wall Street firms comes amid an aggressive push by financial-services lobbyists on Capitol Hill to stop Mr. Obama's regulatory legislation as it winds its way through Congress.
The House Financial Services panel approved the first elements of the legislation this week and is expected to move to other parts next week. Mr. Obama has repeatedly called on Wall Street to support his overhaul plan, and he has complained about the industry's efforts to defeat the plan so soon after accepting government bailout funds. Separate lobbying records made public Wednesday show that several of the largest Wall Street firms have ramped up their lobbying efforts recently as Democrats advance their financial-services overhaul plan. Bank of America and Goldman Sachs each reported spending more on lobbyists in the three-month period ended Sept. 30 than in the previous quarter. Overall, most financial-services firms reported a decline in spending on lobbying, according to a Wall Street Journal analysis of the lobbying-disclosure forms.
Why curbing finance is hard to do
by Martin Wolf
About a month ago, I visited the aero engine factory of Rolls-Royce, in Derby. I was hugely impressed. Making jet engines able to work at extreme temperatures is an extraordinary achievement. Why does the financial industry not work this way? How might we bring the performance of finance close to that of other sophisticated businesses? This is, in its essence, the question Mervyn King, governor of the Bank of England, was addressing in his controversial speech this week. His answer: break up the banks into "utilities" and "casinos" The former would be safe. The latter would live and die in the market.
Both Alistair Darling, the UK's chancellor of the exchequer, and Gordon Brown, the prime minister, promptly slapped Mr King down , arguing that this division does not work: Northern Rock, a utility mortgage-lender, failed, while the collapse of Lehman Brothers, evidently a casino, led to the most expensive financial rescue yet. This, they argue, is a misdirected remedy: the distinction between utility and casino either cannot be drawn or, if it can, does not coincide with the distinction between what has to be safe and what need not be.
Yet it is evident why this distinction is appealing. If we define the utility parts of the financial system narrowly, as management of the payment system, it works like clockwork. It is in the management of risk (and the advice given to its clients) that the financial system fails. The limited liability businesses at the heart of our credit-based monetary system have a tendency to mismanage risk (and uncertainty), with devastating results.
Over time, the policy response has been to cushion their creditors from the consequences. But this effort to make the system safer has made it ever more dangerous. Today, as a result of this last crisis, we see, at the core of the system, behemoths whose creditors know they are too significant to fail. As Mr King, remarked, "the massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The 'too important to fail' problem is too important to ignore."
Mr King raises the right issue. He is justified in doing so, even if it makes politicians uncomfortable. Indeed, he is justified, becauseit makes politicians uncomfortable. I agree with him, too, that the two alternatives are either to make institutions that are "too important to fail" too good to do so or to be able to fail any institution, even in a crisis. If we do not achieve one of these, further crises are inevitable. Yet I remain unpersuaded that the structural solution - the separation of utility from casino finance - is workable, as I pointed out in a column on the "narrow banking" proposal of my colleague, John Kay. Indeed, Mr King himself is well aware of the difficulties.
First, the border between utility and casino banking is impossible to draw. For Mr Kay, the utility is the payment system and protection of deposits. This would leave all lending - including to households and businesses - inside the casino. For those in the US who hark back to the Glass-Steagall Act, the distinction is between commercial and riskier investment banking.
Mr Kay's distinction is clear, but problematic. If we followed him, all risk management would become unregulated. It is inconceivable that governments would, or could, leave them so. If we moved back to a Glass-Steagall distinction (itself never accepted in continental Europe), we would need to draw a line. But where? Why would lending to households and business be good, but securitising those loans bad? Why would hedging be good, but speculating bad and how might one draw the line between them? Mr King counters that prudential regulation already draws such distinctions. I would respond that regulation has made a mess in doing so. Furthermore, these are not distinctions between businesses.
This is not to argue that there is no way of making finance safe. There is. But it would be far more radical: deposits would be 100 per cent reserve backed; and the liabilities of other investment vehicles would be adjusted for the market value of their assets at all times. Banking would disappear.
Short of such radicalism, we must approach the task in a more subtle manner. First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.
If we did all this, the world of finance would be duller and safer. It would still not have the reliability of jet engines. So long as we allow people to make leveraged bets on the future, breakdowns will occur. The division of finance into utility and casino cannot solve this problem. Only the end of leverage would do so. Do we want that? I doubt it.
7,000 unemployed Americans lose their benefits lifeline every day
Another day, another 7,000 people run out of unemployment benefits. One month after the House passed a bill extending unemployment benefits, the issue is still being debated in the Senate. Democratic leaders in the Senate introduced a bill two weeks ago to lengthen benefits in all states by 14 weeks. Those that live in states with unemployment greater than 8.5% would receive an additional six weeks.
Senate Republicans want to add several amendments, including one that would pay for the extra benefits with stimulus funds rather than by extending a federal unemployment tax. While leaders in both parties are trying to negotiate a compromise, Senate Democrats Wednesday took a step to bring the bill to the floor as early as the end of next week. If it passes, the Senate legislation must then be reconciled with the House version, which extends benefits by 13 weeks in high-unemployment states.
Meanwhile, the bickering has cost people like Crystal Jordan of Dolton, Ill., their benefits. The single mother of three ran out in late September. She is one of the 1.3 million people set to lose their benefits before year's end if Congress doesn't act, according to the National Employment Law Project, an advocacy group. In October alone, more than 200,000 people will fall off the rolls. Lawmakers twice lengthened the time people can receive checks to as much as 79 weeks, depending on the state.
Jordan lost her administrative support job in the spring of 2008. She had never been unemployed before and hasn't been able to find work since, despite sending out 10 resumes a day. Jordan is also finishing her bachelor's degree in business management. She hopes that will give her the edge she needs to find a job in 2010. The $1,000 check she received every two weeks allowed her to pay the rent and feed her family. Now, she doesn't know how she'll cover next month's bills. "I am fearful we will all end up on the street because I can't find a job and have no income," Jordan said. "Everyone's household is extremely tight at the moment so I cannot lean on friends or family for any support."
More Americans than ever before are in Jordan's situation. More than one in three people who are unemployed have been out of work for at least six months, according to the law project. The unemployment rate hit a 26-year high of 9.8% in September. "We're talking about people who've been unemployed for well over a year," said Judy Conti, federal advocacy coordinator at the law project. "If they had savings, it's gone. This is their last lifeline." Gregg Rock, a business strategy consultant, drained his savings after joining the ranks of the unemployed in summer 2008. He was forced to move back to his mother's home in Huntington, N.Y., for the first time in more than 20 years.
With so many people looking for work, Rock feels his best chance is land a new job is through networking. But it costs him $18 just to trek into Manhattan, not to mention $4 for a cup of coffee at Starbucks, where he often meets people who he hopes will lead him to a job. Rock's benefits ran out last week. Now, he says, he'll be forced to drive a cab at night or take a bartending job just to earn enough to keep job hunting. "Unemployment is what allows you to afford to be out there networking," Rock said.
Slump Prods Firms to Seek New Compact With Workers
The deep recession appears to be drawing to a close, but not its effect on the workplace. Since the downturn began, thousands of employers have cut pay, increased workers' share of health-care costs or reduced the employer contribution to retirement plans. Two-thirds of big companies that cut health-care benefits don't plan to restore them to pre-recession levels, they recently told consulting firm Watson Wyatt. When the firm asked companies that have trimmed retirement benefits when they expect to restore them, fewer than half said they would do so within a year, and 8% said they didn't expect to ever.
Changes like these are reshaping employment in America, injecting uncertainty and delivering the jolting news that pay can go down as well as up. The changes are eroding two pillars of the late-20th-century employment relationship: employer-subsidized retirement benefits and employer-paid health care. Even as Congress wrestles with how to extend health insurance to more Americans, and considers putting pressure on employers to offer coverage, some companies feel they have no choice but to pull back -- dropping health plans or weighing such a move.
One reason: Although employers pay a smaller percentage of health costs, their dollar outlays continue to rise rapidly, as medical costs do. Employers that offer health insurance spend an average of $6,700 per employee on it this year, nearly twice as much as in 2001, according to consulting firm Hewitt Associates. Some shifts in the employer-employee relationship have been building for years, but the recession, by making companies acutely cost-conscious, has accelerated them. "I think we've entered into a fundamentally new era," says David Lewin, of the Anderson School of Management at the University of California, Los Angeles. He describes employers as "leery of long-term commitments," including both benefits and pay increases.
Bonnie Templeton is living in the new era. The information-technology specialist in Loveland, Colo., went to work for a small sign company last year in a job that pays about $42,000, just over half what she earned in her previous job at a university. Her new employer doesn't offer a traditional health-care plan covering most expenses. It has a high-deductible plan, under which she must pay the first $3,000 of her medical bills each year. Most bills after that are covered, but Ms. Templeton also owes a $75 monthly premium. "You really are covering your own expenses," she says.
Like most private-sector employers today, hers doesn't offer a pension such as the one her 89-year-old father collects via Exxon Mobil Corp. There's a 401(k) plan, enabling workers to set aside some pay tax-deferred, sometimes partly or fully matched by the employer. These accounts have the advantage of portability. Workers don't lose what they have accrued if they leave after a few years, as can happen with a pension.
Ms. Templeton hasn't had her job long enough to qualify for the 401(k). In any case, she says, with her reduced pay, she couldn't afford to contribute. Her husband lost his job as a technical writer in March. Large employers began shouldering retirement and health care after World War II, partly to retain talent in an era of ample opportunity. Corporate giants in industries like steel and autos led the way, and could pass the costs on to customers, says Mr. Lewin at UCLA. In the 1970s and 1980s, amid rising foreign competition and recessions, the same companies took the lead in paring this system.
At Ford Motor Co., salaried workers hired after 2003 no longer get pensions. Instead, Ford contributes to retirement accounts they manage. They are eligible for 401(k) accounts, but Ford has frequently suspended its matching contributions, most recently on Jan. 1. In all, Ford has contributed in 2? of the past eight years. "I don't think anyone really counts on" the company's 401(k) contributions, says Charles Lambreth, a 49-year-old Ford manager who handles parts marketing and sales to dealers in Texas.
Ford says it made the switch to self-managed accounts for the portability. Younger employees "don't think of a career with one company anymore," a spokeswoman for the auto maker said. Last year, Ford dropped a no-deductible health plan in which Mr. Lambreth, his wife and two children were enrolled. Now, each family member must meet a $400 deductible before insurance kicks in. After that, the Lambreths pay 20% of most bills.
Such changes helped Ford cut its health-care costs for U.S. employees to $800 million in 2008 from $1.3 billion in 2006. During a stretch when employers' per-worker health-care costs rose about 10%, Ford held per-worker spending roughly flat. Ford says it offers multiple plans for varying needs and has been adding coverage for preventive care. Mr. Lambreth says the benefit-plan changes are necessary in a brutal time for auto makers. But he has changed the way he regards his employer. "I don't look for protection from the company any more," he says. In today's weak economy, reducing benefit costs can make it possible for employers to minimize job cuts.
At a small rubber-stamp maker called Hero Arts Inc., CEO Aaron Leventhal called his 100 employees together in July last year, asking for cost-cut suggestions so he could avoid layoffs. Someone suggested stopping company 401(k) contributions. Hero Arts, in Richmond, Calif., did so, saving around $10,000 a month -- and everyone's job. Mr. Leventhal says Hero Arts is on track to restore contributions next year. Autodesk Inc., in San Rafael, Calif., faced the same hard choice, but went the other way.
"One of the things employers struggle with," says Autodesk personnel chief Jan Becker, "is you get a whole group of employees who say, 'I'll take cuts rather than have others lose jobs.' But others say: 'I won't work here if it's not nurturing.' You have to balance. You don't want to make this place so draconian that they say, 'I don't want to stay here.' "
Autodesk laid off about 15% of its work force earlier this year, and Ms. Becker says most won't be replaced. Those who remain got no salary increase. Executives had their pay cut 5% to 10%, and directors 2%. The software maker, which is in the business of helping firms be more efficient, is applying the same principle to itself. It eliminated 70 software testers by automating tasks, and created a Web site so people could perform scheduling tasks previously assigned to the training group.
Autodesk also is among employers that have given some workers unpaid furloughs, in its case of three weeks. This strategy has reached into traditionally stable government jobs. More than 20 state governments have required workers to take unpaid time off this year. Going further, 16% of big companies have taken the previously rare step of reducing pay, for at least some, according to the Watson Wyatt survey; 61% have frozen pay. More than half of 638 chief financial officers surveyed by a Duke University professor, John Graham, said they expected their companies to employ fewer people in 2012 than in 2007.
In some cases, employers keep workers, but not on the payroll. Last December, staffing company Spherion Corp. laid off Roberta Marcantonio, a 14-year veteran who sold franchises to local operators. It brought her back as a contractor paid by commission. "We didn't need the fixed costs, because of the recession," says Spherion's chief executive, Roy Krause. "But we needed the skills when she was able to sell something." Ms. Marcantonio, 52, still sometimes works at Spherion's suburban Atlanta offices. She is glad for the work, but losing her six-figure salary hurts. If the economy improves, "I could be back to where I was, maybe in the third year," she says.
She is keeping her health insurance, under a law that lets ex-employees buy the coverage for a time. But she pays the whole $850 monthly premium; Spherion used to pay more than half. Some labor-market watchers think such situations could grow more common as companies tap temporary or contract workers to hold down overhead. Mr. Krause says clients are wary of hiring back permanent workers because they want to keep labor costs flexible.
A sign of that attitude turned up in a Hewitt survey of 1,156 employers. This year, it showed, they set aside 12% of their payroll for "variable pay," such as performance awards, up from 6.4% in 1994. Routine pay increases for salaried employees averaged 1.8%, the least since Hewitt began tracking the data in the 1970s. "The overall trend is 'travel light' by companies, because the new normal is constant change," says Edward Lawler III, a professor at the University of Southern California's Marshall School of Business.
This can mean eliminating programs. The percentage of employers offering health-care benefits is 60% this year, down from 63% in 2008 and 69% in 2000, according to the Kaiser Family Foundation. In a survey by Hewitt last winter, 19% of large employers said they planned to move away from directly sponsoring health-care benefits over the next five years. In the meantime, workers' share of health costs is headed up. For next year, 63% of employers that offer health coverage plan to increase employees' share of the expense, according to a survey of 1,500 employers by another consulting firm, Mercer.
One vehicle is the high-deductible plan. Twelve percent of employers offer such a plan today, up from 4% in 2005, the Kaiser Family Foundation says. Centerstate Banks Inc. in Davenport, Fla., began offering one last year. Employees pay the first $3,000 of medical expenses for family coverage and $400 mont hly premiums for coverage above that. To encourage switching to this from a costlier traditional plan, the bank covered $1,000 of the employees' $3,000 deductible last year and this year. It says that more than 75% of employees switched, and that its health-insurance expense fell 27% in the second quarter from a year earlier.
Switching to the high-deductible plan changed how workers approach health care, says the bank's chief financial officer, James Antal. "If Suzie has a cold, you don't run to the doctor all the time thinking it's free, because it's not," he says. The recession also has led some firms to reverse past moves to sweeten their 401(k) plans. Employees have long been paying a rising share of the cost of their future retirement, as traditional pension plans dwindle. In 1980, employees contributed about 11% of the cost, according to the Labor Department. By 2006, their share was 48%. Just 20% of workers now are covered by traditional pensions, the department says.
One effect of the trend is to heighten uncertainty, because employers can readily suspend their contributions to 401(k) plans. This year, hundreds did, including some nonprofits. They include AARP, the advocacy group for people over 50. A spokesman for AARP said it hasn't decided when it might resume matching contributions. Some employers that suspended contributions had previously enhanced them, when closing or freezing pension plans. Unisys Corp. froze pension benefits in 2006, and raised its maximum contribution to 401(k) accounts to 6% of workers' pay from 2%. Last December, the computer maker said it wouldn't match any employee contributions in 2009, to save costs. A spokesman said Unisys hasn't decided whether or when to restore contributions.
Phil Erickson, a longtime employee, says he and colleagues understand Unisys needed to reduce costs in tough times. In his mind, the cuts underscore how the workplace is changing. "When I started, the idea was you went into a company [and] lifetime employment was the norm. You expected to rely on a company pension plan when you're done and be pretty well taken care of," says Mr. Erickson, a consulting software engineer who is 53. Mr. Erickson recently became a certified financial planner, and now he is taking evening classes toward an M.B.A. Now, he says, "You've got to look out for yourself, take care of yourself."
New York Delays $959 Million Payment to Pension Fund
New York state, facing a $3.1 billion deficit and a cash squeeze, deferred a September payment to its $116.5 billion pension fund, forfeiting more than it would have cost to borrow the needed funds, Bloomberg data show. By delaying the $959.1 million payment, which isn’t legally required until March 1, the state sacrificed an 8 percent annualized discount equal to $6.1 million a month, said Matt Anderson, a spokesman for the Division of the Budget. "We have been paying in September for at least the past four years and received a discount for the early payments," Anderson said. The installment will be paid before March, he said.
While New York is capable of selling short-term notes for less than the cost of the 8 percent discount, "we want to instead work together with the Legislature and enact a responsible deficit reduction plan that does not require state borrowing," Anderson said in an interview today. The delayed payment causes no harm to the pension fund that covers 1.05 million workers and retirees, "though it isn’t the sort of thing you want to see year after year," said Comptroller Thomas DiNapoli, the plan’s sole trustee. The fund has assets equal to 100 percent of its liabilities, as calculated by actuaries, he said.
New York, the third-largest U.S. state by population, has a AA rating from Standard & Poor’s for bonds backed by its general obligation pledge. States with lower debt ratings have covered cash shortages by borrowing at costs of less than 2 percent. Illinois, whose bond rating of AA- by S&P is one level below New York’s and three from the highest, borrowed $1.25 billion in August, at costs ranging from 0.77 percent for a seven-month issue to 1.14 percent for notes due in 10 months. California sold $5.98 billion of nine-month notes Sept. 21 that yielded 1.5 percent, even after its bond ranking was cut to A, the lowest of any state. Illinois and California notes are rated SP-1, the second highest level.
With falling tax revenue squeezing budgets and creating cash shortages in states across the U.S., short-term note sales totaled $61.1 billion this year, up 26 percent from the same period a year ago, according to Bloomberg data. New York isn’t planning any note sale or bank borrowing, Budget Director Robert Megna said Oct. 15. The state weaned itself from annual note sales in 1995 by issuing $4.7 billion of long-term bonds to pay for accumulated deficits of previous years, according to reports by the Local Government Assistance Corp. and rating companies.
The state has the power to sell short-term notes to cover its cash needs, Lieutenant Governor Richard Ravitch said Oct. 21. Such temporary borrowing would be different from selling bonds to finance budget deficits, a practice he said allowed the state to maintain high spending and contributed to the current budget squeeze. Benjamin Asher, senior managing director of New York-based Public Resources Advisory Group, the state’s financial adviser, didn’t return voice mail and e-mail messages requesting comment. The $3.1 billion deficit for the fiscal year ending March 31 is based on Budget Division projections that will be updated at the end of this month, Anderson said. DiNapoli said Oct. 14 that the gap may be $4.1 billion, based on trends in tax collections and spending.
"This budget has simply not held together," DiNapoli said in a statement accompanying his office’s September cash report. Spending promises made in April, when lawmakers passed a record $133.5 billion spending plan, "are not sustainable in the face of falling revenue," he said. New York was hard-hit by the credit crunch and firings on Wall Street, where banks and securities firms reported losses of $42.6 billion in 2008 and year-end employee bonuses fell 44 percent, according a January report by DiNapoli’s office. By December, the state’s cash balance could be "a little over $2 billion," Paterson said, or less than the $5.1 billion of payments due that month for property tax rebates and aid to school districts, counties and cities.
To close the budget deficit for the current fiscal year, Paterson proposed a plan last week for $1.8 billion of spending cuts and $1.2 billion in actions that would produce revenue this year, though not in later years. The plan would require $2 billion of spending cuts next year. New York’s budget, updated in July, called for $133.5 billion of spending, including federal aid, up 9.8 percent from a year earlier. Spending of state-only funds was projected at $86 billion, up 3.4 percent. "If no corrective action is taken, we will have to begin to make difficult choices about which payments to delay," Megna said in a statement Oct. 21. Anderson said the state wouldn’t default on its debt.
Pension Funds to Buy Gold as Insurance
Pension funds will increase gold holdings to acquire "financial insurance," pushing prices higher as currencies drop, according to Shayne McGuire, director of global research at the Teacher Retirement System of Texas. "I think the largest institutions like our own are realizing that we barely own any," McGuire said in an interview in Hong Kong. "The same thing applies to most of the pension funds which manage trillions of dollars in world wealth."
Record government debt and interest rates close to zero percent are pushing gold higher for a ninth straight year as investors seek to protect their wealth against the prospect of rising inflation and currency debasement. Teacher Retirement, backed by $95 billion in assets, has launched its first internally managed gold fund, worth $250 million, invested in precious metals, mining stocks and exchange-traded funds. McGuire is the portfolio manager of this new fund.
The fund is "a reflection of our interest in gold," said McGuire, the author of "Buy Gold Now" published in March 2008 that correctly predicted the metal will rally. "That’s mostly because of diversification" that benefits our overall portfolio. Gold represents only 0.4 percent of total global financial assets valued at around $200 trillion in 2007, McGuire said, adding the future focus for the metal was investment demand. "The interest in the gold sector continues to be strong," said Stephen Goodman, investment banker with New York-based Casimir Capital L.P. "We are pleased to connect a growing number of institutional investors globally with opportunities."
Gold for immediate delivery climbed to a record $1,070.80 an ounce on Oct. 14 and traded at $1,059.25 at 4:42 p.m. in Singapore. It has risen 47 percent in the past year. Gold for December delivery in New York traded at $1,059.70. McGuire said it’s "difficult to estimate how quickly it will rise," and saw "significant upside" in the next two to three years. The U.S. Dollar Index, which measures the currency against those of six major trading partners, has fallen 7.5 percent this year as President Barack Obama increased the nation’s marketable debt 22 percent to $7.01 trillion to revive growth.
Financial institutions worldwide have reported credit losses and writedowns of about $1.62 trillion since the start of 2007, when the credit crisis began. Group of 20 governments have pledged about $11.9 trillion to ease credit and revive economic growth, according to the International Monetary Fund.
"I don’t think the question really is what is gold worth but what are currencies not worth," McGuire, 43, said yesterday. "Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing," he said. Owning gold today is "financial insurance," he said. McGuire, with 15 years of international financial experience, has worked for the seventh-largest pension fund in the U.S. since 2001. He had managed a $2 billion European equity portfolio and was ranked among the best Latin American analysts by Institutional Investor in 1995 and 1996, he said. Teacher Retirement has nearly 1.3 million public education and higher education employees and retirees participating in the system, according to its Web site.
Call to end middle class benefits
Benefits for the middle classes should be taken away to avoid higher taxes, a centre-right think tank has suggested. Reform says payments including maternity pay, child benefit, the winter fuel allowance and TV licences for the elderly could be scrapped. It says the UK spends £31bn a year on such benefits, equivalent to an extra 8 pence on the basic rate of income tax.
In a report, it also argues that flexible savings accounts should be set up to replace pension contributions. Chancellor Alistair Darling has predicted that public borrowing will reach a record £175bn next year. Reform says while times are hard, the leanest welfare system focused on the most needy, is all the UK can afford. It defines middle class as a household where the total income equates to at least £15,000 a year for each adult and £5,000 per child. The message is provocative and reignites the long running debate about the scope of the state, says BBC social affairs correspondent Sue Littlemore.
In its report, The end of entitlement, Reform suggests the "middle classes are being bribed with their own tax money". It says there is a political consensus for limited aspects of welfare reform but to deliver real benefits the UK needs a radical plan. Reform says recent proposals by the Conservatives did "not go far enough" as they promised to keep many middle class benefits in place. In his conference speech, shadow chancellor George Osborne was wrong to pledge to keep winter fuel payments, free TV licences for the over-75s and child benefit for middle class families, it says.
Reform argues his plan to means test child trust funds and abolish tax credits for people on an annual income of more than £50,000 would only save £700m a year. At the same time, the welfare system also has to improve for the poorest, the report says. Reform says rules on social enterprises and other organisations providing welfare-to-work services are too tight for them to make a real difference to the unemployed.
Director of Reform Andrew Haldenby said: "The middle classes need to read the small print of the welfare state." "They may think that benefits and subsidised higher education are a good deal. In fact they will cost an extra 8p on the basic rate of income tax in the next Parliament because of the hole in the public finances."
Kuwaiti Politicians Feud Over $21 Billion Consumer Debt Bailout
Lawmakers in Kuwait, which is richer per capita than Germany, are demanding a government bailout of all consumer loans, threatening to reignite a power struggle that’s already shut down the assembly twice in 18 months. At least half of the 50 elected lawmakers say they’ll back a plan for the government to buy all 6 billion dinars ($21 billion) of bank loans taken by Kuwaiti citizens to pay for homes, cars, holidays and other purchases, write off interest payments and reschedule the rest. The government opposes the bailout. Parliament convenes next week after a four-month break.
"It’s my right as a citizen to enjoy the wealth and resources of my country," said Essa al-Malki, a 32-year-old teacher of philosophy and psychology, who took out a 15-year 23,000 dinar loan in 2000 and supports the plan. The row dominated the local media during parliament’s recess, signaling a fresh dispute between Kuwait’s government, appointed by the emir, and elected lawmakers who are seeking broader powers and have blocked key investment programs in the past. Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah last dissolved parliament in March saying relations with the legislature were "ruined."
Kuwaitis stepped up borrowing as a decade-long oil boom through 2008 fuelled growth. The emirate’s economic output per capita was about $46,000 in 2008, more than Germany or the U.K., according to International Monetary Fund data. Kuwait has a restrictive citizenship regime, with one-third of its 3.4 million residents holding citizenship. The bailout plan will only apply to Kuwaiti citizens. Repayment problems escalated in 2006 as the central bank raised interest rates as high as 6.25 percent to curb inflation. Legislators have criticized the government and central bank for failing to regulate lending properly.
"I will not hesitate to use any constitutional tool to pass a bill for purchasing and rescheduling citizens’ consumer loans," lawmaker Daifallah Bu Ramiah said in a phone interview. Bu Ramiah said at least 100,000 Kuwaiti borrowers face legal charges after falling behind on debt repayments. The government says that’s exaggerated. A total of 278,000 Kuwaitis held consumer loans at the end of last year, according to Kuwait-based Al-Shall Economic Consultants. There’s no official data on defaults. It’s "not very sensible" for the state to shoulder all the debt burden, Finance Minister Mustafa al-Shimali told state news agency KUNA on Oct. 10. He said the government may instead expand a 500 million dinar "defaulters fund" already set up to help Kuwaitis unable to repay loans.
That’s the solution favored by banks, said Abdul Majeed al- Shatti, chairman of the Kuwait Banking Association, and also of the country’s second-biggest publicly traded lender, Commercial Bank of Kuwait SAK. While government purchase of the loans would bring some benefits for banks it would also create "moral hazard," al- Shatti said in a phone interview. "It’ll affect the role of the private sector in the economy because you’re distorting market conditions." He declined to discuss his own bank’s loans. The plan could also create "a dangerous precedent with regional reverberation," as other Gulf countries face rising defaults, said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh.
Provisions for bad loans in the United Arab Emirates, the Arab world’s second-biggest economy, jumped 44 percent in August from a year earlier to $7.2 billion. Banks in Bahrain, where two Saudi-owned lenders were taken over by authorities this year after defaulting, face a rise in non-performing loans, Moody’s Investors Service said Aug. 17. Kuwaiti lawmakers who support the bailout point to the government’s willingness to spend money abroad, such as a proposed $25 billion investment in Iraq to solve a dispute over war damages. Kuwait is owed the money by Iraq, which invaded in 1990, and may invest it back into that country.
"The government does nothing better than offering large financial aid to other countries, yet strictly refuses to purchase and reschedule loans of its citizens," lawmaker Musallam al-Barrack said. Many bailout supporters come from tribal areas where living standards are lower than in the city, and have been pushing for more handouts and subsidies on top of a program of government jobs and welfare. Kuwait’s government can veto legislation passed by the parliament. The assembly can override that with a majority of two-thirds in a vote that includes the government’s 16 ministers.
Investments blocked by government-parliament standoffs include Project Kuwait, a plan to bring international oil companies to develop fields in the country’s north. Lawmakers also opposed a joint venture with Midland, Michigan-based Dow Chemical Co., scrapped last December, and a planned fourth oil refinery that was put on hold in March. Kuwait is the sixth-biggest OPEC producer. Its benchmark stock index slumped 30 percent in the past year. Failure to resolve the loans dispute will delay needed investments and exacerbate social tensions, said Hajjaj Bu Khudour, an independent Kuwaiti economist. "If we leave it, it will continue to cause disagreement and government resignations and dissolutions of parliament," he said. "The cost of that to Kuwait’s development could be billions."
Irish Bar Values Plunge 40% as Pub Culture Mirrors Economy Bust
Dublin’s Thomas Read Group grew into a chain of more than 20 pubs as Ireland’s economy boomed in the mid 1990s. After real estate prices collapsed and drinkers stayed at home, the bars are being sold off.
A receiver, who has the power to sell assets to recover debt, is seeking buyers for nine of the city’s most fashionable hostelries. The bars on the block include Ron Black’s, home to the Champagne Bar during the boom, and the Harbourmaster in Dublin’s financial district, minutes walk from Citigroup Inc. and JPMorgan Chase & Co. offices.
"The sale of the Thomas Read pubs will be an acid test for the market," said John Ryan, director of hotels and licensed premises sales at CB Richard Ellis Group Inc. in Dublin. In a country famed for its pub culture, the industry is mirroring the rise and fall of Irish fortunes. Pubs surged in value as Ireland transformed into one of Europe’s richest countries from among its poorest, with developers snapping up buildings to refurbish and cater to free- spending Irish drinkers or convert into apartments.
Property brokers now estimate prices for pubs have sunk as much as 40 percent as Ireland suffered the worst collapse in its modern history. The benchmark ISEQ stock index has lost 48 percent over the past 18 months, with pub supplier C&C Group Plc, the maker of Magners cider, dropping 37 percent. "At the height of the Celtic Tiger, it was a different process entirely -- there would be full auction rooms with any sort of a decent pub," said Aidan Heffernan, an auctioneer at Dublin-based Sherry Fitzgerald Group. "The day is fast coming to an end when we would have 15 or 16 pubs in a town."
Heffernan last month sold the Royal Denn pub in Athboy, a medieval town 40 miles (64 kilometers) northwest of Dublin, for 470,000 euros ($702,000). Six years ago, the owners rejected a 750,000-euro offer as too low, he said. The sale of the Thomas Read pubs and one restaurant will be a better gauge of the collapse of the market, said Ryan. Only one Dublin bar so far was sold publicly this year, he said. Six changed hands last year, less than 1 percent of the total number of pubs, dropping from 4.8 percent in 2006 when more people wanted to get into the trade, according to Morrissey’s, the auctioneer handling the sale of Thomas Read. Bill Morrissey, who is overseeing the sale, told broadcaster RTE that he received more than 30 "solid" expressions of interest.
Thomas Read, which started life as one pub in 1991, sought protection from creditors in November last year. It controlled 13 bars and restaurants in Dublin and another eight bars at the city’s airport, the company said. After it failed to find an investor, a receiver was appointed in March on behalf of ACC Bank, the Irish unit of Dutch lender Rabobank NV, according to documents lodged at the Companies Registration Office in Dublin. The documents don’t say how much ACC is owed. The problems for bars are not confined to Ireland. London- based Regent Inns Plc, the owner of the Walkabout pub chain, was put into administration on Oct. 20.
In Ireland, sales are tumbling as unemployment edges beyond 12 percent and taxes rise. That’s amplifying a trend toward drinking at home, started by a 2004 ban on smoking in public places. Bar takings fell 13 percent in August from a year before, according to Ireland’s statistics office. "The bar trade here is incredibly challenging," said Andrew Richards, head of the Irish unit of Britvic Plc, which sells fruit juices and sodas to pubs. "People are much more mindful of their spending than in the past."
At least 4,800 pub jobs were cut in the past year, the Vintners Federation of Ireland said in an August report. Demand for bars as sites for homes is also evaporating. In 2006, a developer paid about 12 million euros for a north Dublin bar to turn into apartments overlooking Dublin Bay. The site is still idle awaiting work to start. Three years on, home prices are down 25 percent and the government is creating an asset management agency to purge lenders of souring property. That’s leaving realtors looking for any signs of life in the market. "If they sell and make satisfactory prices, it will be a big boost," Ryan said of the Thomas Read sale. "The boy meet girl thing is always there, and Irish people like to go out."
Does banking contribute to the good of society?
The whole of economic life is a mixture of creative and distributive activities. Some of what we "earn" derives from what is created out of nothing and adds to the total available for all to enjoy; but some of it merely takes what would otherwise be available to others and therefore comes at their expense. Successful societies maximise the creative and minimise the distributive. Societies where everyone can only achieve gains at the expense of others are by definition impoverished. They are also usually intensely violent.
This distinction between creative and distributive activities applies in today's society. Consider the doctor tending to a patient or the midwife helping to deliver a baby. Everything they do is creative rather than distributive. Interestingly, the same is not true of teachers. They are further along the spectrum toward distributive gains. Some of what they do is about advancing the interests and life chances of their charges against those of other teachers.
Or consider the marketing executive for a washing powder manufacturer. Her job is pretty much purely distributive. It is to do her best to ensure that her company sells more washing powder than its rivals. If she succeeds, the rewards will be greater for her and her company. But her success will be mirrored by other companies doing badly. Her contribution is purely distributive. Most jobs are a mixture of the creative and distributive. And society needs a mixture. But do the financial markets do too much of the distributive?
A leading British journalist recently decried the widespread condemnation of bankers' and hedge fund executives' high remuneration on the grounds that these people, it said, were "the wealth creators". The article argued that we should be praising, and even aping, such people rather than criticising them, and thereby concentrating on the distribution rather than the creation of wealth. This completely misses the point. We shouldn't be mesmerised by the millions of pounds squirreled into some private corner or other. The question is, what has the process that generated this money contributed to the common weal?
Much of what goes on in financial markets belongs right at the purely distributive end. The gains to one party reflect the losses to another, and the vast fees and charges racked up in the process end up being paid by Joe Public, since even if he is not directly involved in the deals, he is indirectly through the costs and charges that he pays for goods and services.
Even what the great investors do belongs at the distributive end of the spectrum. The genius of the great speculative investors is to see what others do not, or to see it earlier. That's all. This is a skill; of that I have no doubt. But so also is the ability to stand on tip-toe, balancing on one leg, while holding a pot of Earl Grey tea above your head, and pouring the contents into a cup on the ground, without spillage. I am not convinced, though, of the social worth of such a skill, still less of the wisdom of encouraging society's brightest and the best to try to perfect it.
This distinction between creative and distributive goes some way to explaining why the financial sector has become so large in relation to GDP – and why those working in it get paid so much. Even when a certain sort of financial activity is purely distributive, the returns to the winning parties are so enormous that the activity is immensely seductive – and the professionals who appear to be responsible for securing these gains are highly sought after and highly rewarded.
Meanwhile, the professionals who are "responsible" for the corresponding losses do not suffer commensurately. The worst they can suffer is not to be paid at all, which would scarcely offset the winners' rewards. In practice, even those working for "the losers" usually get a fair bit more than nothing. And we need to consider the identity of the investors who are making a lower return to make it possible for hedge funds and their like to make a higher return. They are the investors in slow-moving and restricted institutions such as pension funds and insurance companies, or central banks whose market activities are dictated by some objective of public policy, rather than private gain.
Yet there are reasons why we should want such institutions to be this way. Pensioners do not want their pension funds to be run like hedge funds – or their insurance companies, or their central banks. So we have allowed, and even encouraged, a system to develop in which clever people make huge amounts of money out of institutions that, for reasons of public policy, we constrain in a way that allows scope for such profits to be made. Is that clever or what?
Perhaps the greatest problems are caused by the interaction between financial markets and the real economy. There, time horizons are longer, price adjustments are more sluggish, and motivations less single-mindedly selfish. And so much the better – for them and for us. But how are they able to withstand the onrush of supercharged greed that floods out at them from the financial markets? If we think that it is right and proper – and economically advantageous – that some parts of the economic system should not be organised like investment banks, then we should make sure that they are protected from those parts of the system that are organised like investment banks.
Farmers sell wives to pay debts in rural India
The cattle slowly drag the old-fashioned plow as a bone-thin farmer walks behind, encouraging them to move faster with a series of yelps. It is a scene from times of old, but still the way many farmers operate in rural India, where the harvest often determines feast or famine. The region is called Bundelkhand, spanning the two northern Indian states of Uttar Pradesh and Madhya Pradesh. It is here that drought, debt and desperation have pushed people to extremes.
To survive the bad years, some farmers say they turn to the "Paisawalla" -- Hindi for the rich man who lends money. Farmers say the loans from these unofficial lenders usually come with very high interest. When the interest mounts up, lenders demand payment. Some farmers work as bonded laborers for a lifetime to pay off their debts. Others here say because of years of little rain and bad harvests they are forced to give money lenders whatever they ask for. Sometimes that includes their wives.
"It happens sometimes when somebody borrows money," says a farmer's wife who did not want to be identified. She should know, considering what police say she told them. She said a rich man bought her from her husband. "He did buy me," she says. "That's why he told me he bought me." For 30 days she says the man forced her to live with him. When her case drew public attention, she retracted her police report and her husband took her back. Ranjana Kumari with India's Center for Social Research says the exploitation of women is common in the region. And, she says, there is little support for women in India who have the courage to file a case with authorities.
"Nobody's going to support or help them," Kumari says. "If a family decides not to help them, the system is already not so sensitized towards them, whether it is police, judiciary, whether the legal system. So the women themselves tend to withdraw these cases." In another village, another story involving another farmer, and money lender. "I sold my water engine and land and gave back his 30,000 rupees," the farmer says, describing his $600 loan payment. The farmer, whom CNN is not identifying to protect his wife and children, says the lender then asked him to send his wife to help with chores while the lender's wife was sick. The farmer says he complied, and his children -- including his daughter -- went too.
But the mother never returned. The farmer says he believes she was stolen from him. The daughter says the lender sold her mother to another man. State authorities say they have investigated the matter and found that the mother denies she was sold and has simply gone to live with a lover. The daughter says that's not true, and claims that she and her father were told to keep quiet by some of the village leaders. During CNN's interview with the family, officials with the state magistrate's office barged into the farmer's home and began videotaping. An Indian government report completed in 1998 says the region is prone to what it calls "atrocities," including the buying and selling of women. However no one can say just how common these kinds of incidents are.
Social workers say this isn't just about poverty, but also an indication of the low social status of women in poverty-stricken areas such as Bundelkhand. "Those women are very vulnerable to all kinds of physical and sexual exploitation." Kumari says. "Also there is much higher level of violence against women in that area." The government and charities have been trying to help but the status of women and girls, often illiterate and seen as a financial burden, remains low. Nevertheless, attitudes are slowly beginning to change, Kumari says. A farmer's wife in yet another village in the region said she was sold by her own parents 14 years ago.
"My mother and father got 10,000 rupees (about $200)," she says. "That's why they sold me." She says she was 12 years old at the time her husband bought her. She never considered going to authorities because she says she had no where else to go. She accepted it as her destiny. But now she has a daughter of her own and her perspective has changed. Would she allow her daughter to be sold? She looked up and shook her head firmly. "No," she said, "I would not want this for her. Let her marry however she wants."