Semmes Motor Co., Krogmann & Sons truck, Washington, D.C.
Ilargi: While today’s Case/Shiller Index numbers (home prices rose slightly from July to August, even as they're still down 11.3% compared to August 2008) are interpreted as positive by the obvious suspects, what I see in it is a fast growing unmitigated disaster for Americans across the board.
A 1% increase in prices is not exceptional in any way, as we can see in this Mark Hanson graph::
What the graph also shows is that an estimated 4 million homes will still be sold in 2009, and that is not good news, unless you're trying to offload unwanted properties and/or your income depends on loan transaction fees of one kind or another. If you’re a buyer, you pay too much for the home. If you're a taxpayer, you get stuck with guarantees for loans and securities based on home prices that are too high.
How much too high? Goldman Sachs said recently that the homebuyer tax credit, modification programs and foreclosure moratoria pushed US housing prices up by 5%. While that looks to be a very low estimate in itself, it doesn't really matter, because it pales in comparison to the price increases caused by the ever more extreme presence of the government in the market.
This graph from San Francisco Fed senior economist John Krainer shows that Fannie Mae, Freddie Mac, and the fast rising star Ginnie Mae (which provides blanket guarantees for FHA securities), who not so long ago were responsible for less than 50% of securitizations, now are left with about 95% of them. They can't sell them to China anymore, those days are over, so the Fed has bought well over $1 trillion of the stuff just in the past year. It's in this graph that the real market-distorting perversity can be found, as well as the reason why the government needs to get out of housing as fast as it can.
You see, it's starting to look as if the homebuyer tax credit might not be renewed as is, nor even extended. Instead, we're in for a phase out. Which probably means that those people on the Hill that are up for re-election actually have begun to listen to some of the voices critical of this particular tax break. Reports have now come from multiple sides which suggest that the cost per newly purchased home of the credit is anywhere between $43,000 and $292,000, once you exclude the 85% of buyers that would have bought a home regardless of the credit.
Still, while those reports are convincing and damning at the same time, they tell but a tiny sliver of the real story. Which is that of those 85%, precious few would have been able to purchase a home without the ever-present ever-willing assistance of a full slew of governmental or semi-governmental agencies and corporations eager to buy up and securitize any and all mortgage loans the banking system can lure their dumbfounded and unsuspecting clientele into.
It would seem reasonable to assume that 85% out of those 85% wouldn't be able to get a mortgage if the government were not so hungry to put the tax revenues it receives from its citizens and voters into a housing (equals mortgage equals banking) market that is guaranteed to collapse someday soon regardless of what amounts of public funds are injected.
That is at issue here: the US housing market is way beyond any shape or form of salvation. And that in turn means that the only thing the government achieves with its tax credits and other attempts at stimulating or stabilizing the market, or whatever politically palatable term may be found, is an under the radar stealth transfer of real estate losses from the private to the public sector. And I for one don't believe for a moment that Washington doesn't know that.
So why can we be so sure that US real estate is pining for fjords and pushing up daisies? This weekend's Miami Herald provides a good answer.
'Shadow market' clouds housing recovery[..] an analysis of the so-called shadow market done for The Miami Herald suggests the number of homes and condos in the pipeline to come on the market in South Florida is nearly five times larger than all residential properties currently listed for sale
It's the sheer number of properties available, and the avalanche of foreclosures and walkaways in the pipeline. There is no way the government can buy them all, or provide and guarantee the credit for 10-20 million new homebuyers to purchase a home. And certainly not at today's elevated prices.
Oh, and at the same time that the homebuyer tax credit will be phased out, did you hear that the Federal Reserve is about to start phasing out its securities purchases? There’ll be no buyer left. It's hard to predict what other tricks Wall Street's Treasury Department has up its sleeve, but rising or stabilizing home prices are out of the question. It has cost the American people trillions of dollars to prop up the market to the present day, where general price levels have fallen "only" 30%. All attempts to keep the market alive have failed miserably, at least, that is, from the point of view of ordinary Americans.
With the government support about to vanish, the future prospects for home prices and the building and mortgage industries are Halloween material, while Bank of America (which bought Countrywide) and Wells Fargo (the country's largest mortgage lender) face increasingly shaky days. Home prices are ready to go into a freefall. When the smoke clears prices will be down 80-90% from their peak. Needless to say that will cause such a chaos it's hard to predict what America will look like.
Ilargi: The Automatic Earth’s Fall Fund Drive (see the left hand column) is going well, and we owe heartfelt thanks to all of you who have donated. That said, in order to execute what we think would be the appropriate and logical next steps for us, more is needed, and quite a bit of it actually.
There are many thousands of people who read us every single day, and if everyone of them would donate just a dime for every time they read us we'd be doing just fine. But obviously, most never will.
We would love to be able to expand on what we do, to involve more people, more opinions, a more diverse view from more places in the world. And that is unfortunately not possible right now. Along the same lines, we would like for Stoneleigh to be much more involved at TAE. Not happening. On a happy note, our brand-new Twitter and Facebook presences are directed by our good friend VK, all the way from Nairobi, Kenya, the first time we’ve been able -and willing- to expand and relinquish control at least a little.
The Automatic Earth will be busier than ever as the real economy deteriorates in the months to come and things come to a head. Inevitably that will take more from us, and we hope you will do more as well.
Again for those among you who have donated to us -and many have in the past 3 weeks-, and those who will do so in the days and weeks and months to come, please know we are deeply grateful for, and humbled by, the confidence you have shown in us.
US August S&P/Case-Shiller 20-City Index Down 11.3% YOY
U.S. home prices as measured by the S&P Case-Shiller 20-city home price index fell by 11.3% over the year to a level of 146.0. Economists were expecting prices to fall by a slightly larger 11.9% over the year. Over the month, the 20-city home price index rose 1.2% after rising 1.6% in July. On a seasonally adjusted basis, the index is up 1.0% over the month. The 10-city index rose by a seasonally adjusted 1.0% and non-seasonally adjusted 1.3% in August to 157.93. That's an unadjusted 10.6% lower than the level recorded one year ago.
Average home prices are now at similar levels as those recorded in the Fall of 2003, according to the report. Though still negative, annual returns for both the 10-city and the 20-city index showed some level of improvement as did 19 of the 20 metro regions. Cleveland was the only exception. Over the month, 17 of the 20 metro areas demonstrated price gains, with Charlotte, Cleveland and Las Vegas the only metro areas to see monthly price declines.
S&P Index Committee Chairman David Blitzer said today's report shows a general trend of improvement in both the as-reported and seasonally adjusted data. 'Once again, however, we do want to remind people of the upcoming expiration of the Federal First-Time Buyer's Tax Credit in November and anticipated higher unemployment rates through year-end. Both may have a dampening effect on home prices.'
Big drop in US consumer confidence
New figures show that US consumer confidence deteriorated sharply in October as continuing weakness in the job outweighed modest improvements in the housing sector. The Conference Board's confidence index dived to 47.7 this month from 53.4 in September, the biggest drop in eight months. The report was unequivocally weak, with the expectations index plunging to 65.7 from 73.7. The proportion of respondents saying jobs were hard to get rose to 49.6% from 47%. 'Consumers' assessment of present-day conditions has grown less favourable, with labour market conditions playing a major role,' said Lynn Franco, director of the board's consumer research centre.
The current conditions indicator fell to 20.7, and is near its lowest level in 26 years. This mirrored the labour market, where the current jobless rate of 9.8% is the highest since 1983. Meanwhile, a separate survey has shown that home prices in the main US cities fell in August, but recorded the smallest drop in 19 months. The Standard & Poor's/Case-Shiller index showed an 11.3% annual decline in home prices in 20 major metropolitan areas - the smallest drop since January 2008. Analysts had expected an 11.9% fall. On a seasonally adjusted basis, prices rose 1% from July to August this year, following a 1.2% gain in the June-July period.
In the 10 top markets, prices fell 10.6% in August from a year ago. 'Broadly speaking, the rate of annual decline in home price values continues to improve,' said David Blitzer, chairman of the index committee at Standard & Poor's. US home prices contracted after a severe home mortgage meltdown that sparked a financial crisis, plunging the economy into a recession in December 2007. The market has been benefiting from a tax credit of $8,000 for first-time buyers, which expires on November 30. Many buyers are rushing to sign contracts to be sure to close the deal before the credit expires.
The home-buyer tax credit: Throwing good money after bad
by Simon Johnson and James Kwak
Congress and the administration seem likely to extend the first-time-home-buyer tax credit. Senate Majority Leader Harry M. Reid wants to extend it through December 2010 but phase out the amount over time; Republican Senator Johnny Isakson, a former real estate agent, wants to extend it through June but double the income limit and make it available to all home buyers.
This is a bad idea.
The main argument for the tax credit is that it stimulates the economy and stabilizes the housing market. Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway). According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.
Even at a price of $43,000, what are we getting? Given that these are first-time home buyers, and given the glut of homes on the market, most of these are financial transactions where a house changes hands in exchange for cash (and additional transaction costs). The $43,000 is not being invested; it isn't buying anything for the public, like a new road. It's just cash going into people's pockets.
Putting cash in pockets does have a stimulative effect because some of that cash will turn into consumption. But as far as stimulus measures go, it has a low multiplier (the ratio of new economic activity to stimulus spending). By contrast, we could take the same cash and hire more teachers, police officers or soldiers to fight in Afghanistan. We would get more economic activity, and the government would get something for its money.
But the tax credit stabilizes the housing market, people say. What does this mean? It means that the credit keeps housing prices artificially high. But housing is something that all people need. Why do we want it to be expensive? Would we want government policies that artificially push up the price of food? (Wait, we have some of those already . . . but that's a matter for another column.)
As of July, the real price of housing, according to the Case-Shiller Composite 10 Index (adjusted using the consumer price index), was still 20 percent higher than in January 2000 and more than 30 percent higher than its average for the entire 1990s. Now, there is a risk that a weak economy can cause housing prices to fall well below their long-run average. However, housing prices appear to have stabilized, at least for now, and at too high a level. That is in part due to the tax credit, in part due to the partial economic recovery we are witnessing.
What happens when you artificially prop up housing prices? Imagine the credit were expanded to all home buyers and made permanent. This would simply boost housing prices at the low end of the market by close to $8,000, since all buyers would be willing to pay $8,000 more. (Prices would rise by a little less than $8,000 because at higher prices, more people would be willing to sell.) Whom does this benefit? Not first-time home buyers. It benefits people who already own houses (and their real estate agents) because it's a one-time boost in housing values. This would be just the latest chapter in a long history of government policies to boost housing prices -- the mortgage interest tax deduction, the capital gains exclusion on houses, the extension of the mortgage interest tax deduction to second houses, etc. Each of these policies pushes up prices just once; if you want to keep pushing up housing prices, you have to keep adding sweeteners.
A temporary tax credit has a similar effect, but for a shorter period of time. It boosts the price of a transaction that would have happened anyway. It may create additional transactions, but is that a good thing? If someone could not have afforded a house without the tax credit, then what is he or she going to do when the tax credit goes away and the price of the house falls? In effect, the tax credit is a way of making houses temporarily affordable that would not otherwise be affordable, and we know where that leads.
But doesn't the tax credit boost the value of securities backed by residential mortgages and therefore help bolster the financial system? Well, there are more direct ways of recapitalizing banks. In addition, a tax credit that shifts people from renting to owning pushes up the price of houses but pushes down the price of renting (by a smaller amount). By subsidizing home purchases, we are helping banks that own portfolios of foreclosed houses but hurting other banks with commercial real estate portfolios. Another argument for the tax credit is that it gets more people into foreclosed houses and reduces the number of vacancies, which have negative externalities (vandalism, crime, etc.). If that is true, then there are better ways to spend our money. One would be restricting the credit to people buying foreclosed houses. Another would be investing in programs to convert foreclosed properties into rentals. From 1998 to 2008, the homeownership rate grew from 66.4 percent to 67.5 percent (it peaked at 69 percent in 2003-06), while real median household income (in 2008 dollars) fell from $51,300 to $50,300. Propping up the homeownership rate in the face of declining incomes is possible only with financial engineering to inflate housing prices, which cannot be done forever.
But isn't it just better for more people to own their homes? The conventional wisdom is that homeownership has positive externalities: Homeowners are more likely to invest in their communities, and it is the best way to build household wealth. But the evidence for this is mixed. In "Our Lot," Alyssa Katz cites three academic studies and concludes: "Scholars found that once they set aside the various traits that tend to determine whether someone chooses to own or rent one's home, homeowners and tenants really aren't that different. . . . Often the new homebuyers were purchasing the worst housing in the worst neighborhoods with the worst schools -- hardly a solid investment."
Even if you want to encourage homeownership, it hardly follows that the solution is to make houses more expensive. Ultimately our housing "policy" suffers from the idea that changing the level of prices on existing housing can provide a net benefit to society; because sales of existing houses are essentially zero-sum transactions, changing the price level is purely redistributive.
Given the serious possibility that housing prices are currently being propped up by the tax credit -- Goldman estimates by 5 percent -- we can understand the argument for, at most, a gradual phase-out to smooth out the inevitable downward adjustment. But anything more would be throwing good money after bad.
U.S. Stocks Retreat on Concern Housing Tax Credit to Phase Out
U.S. stocks slid, erasing an early rally, on concern lawmakers will phase out a tax credit for homebuyers and Bank of America Corp. will have to sell shares to pay back its government bailout. The dollar rebounded from a 14- month low against the euro and oil wiped out an early advance.
All 12 shares in a gauge of homebuilders dropped as senators discussed reducing an $8,000 tax credit for first-time buyers. Bank of America sank 5.1 percent on speculation the government will force the bank to raise more capital, while Fifth Third Bancorp, SunTrust Banks Inc. and U.S. Bancorp lost at least 3.2 percent on downgrades from analyst Dick Bove. Treasuries fell, with 10-year yields touching a two-month high. The Standard & Poor’s 500 Index tumbled 1.2 percent to 1,066.95 at 4:04 p.m. in New York. The Dow Jones Industrial Average retreated 104.22 points, or 1.1 percent, to 9,867.96. Almost five stocks dropped for each that rose on the New York Stock Exchange.
“Plenty of news for traders to sell on,” said James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “We’ve still got a rise in loan losses. Some banks will probably have to raise further capital. And on the tax-credit front, we already know we won’t have that forever. But after a nice stock market run, a lot of players wanted to have a pause.” Equities rallied earlier, sending the S&P 500 up as much as 1.1 percent, as investors grew more confident that better-than- estimated profits will fuel further equity gains. About 80 percent of companies in the S&P 500 that reported third-quarter results have topped analysts’ earnings projections, exceeding the record pace of 72.3 percent for the period ended in June.
A gauge of 12 homebuilders in S&P indexes slumped 3.4 percent, led by declines of at least 3.8 percent in Pulte Homes Inc. and D.R. Horton Inc. Senate leaders are negotiating to extend and gradually reduce the housing tax credit through 2010, Senator Bill Nelson said. The credit was set to expire at the end of November. “The phase out is worse than a straight extension and probably worse for housing than the consensus,” ISI Group Inc. analysts said in a note
Banks fell 3.3 percent collectively, the steepest decline in the S&P 500 among 24 industries, after Bove downgraded Fifth Third Bancorp, SunTrust and U.S. Bancorp on concern loan losses will remain high. Fifth Third, Ohio’s largest lender, retreated 7.9 percent to $9.52. SunTrust, the seventh-largest U.S. bank, lost 5.4 percent to $19.85, while Minneapolis-based U.S. Bancorp dropped 3.2 percent to $24.15. Bank of America, the largest U.S. lender by assets, sank 5.1 percent to $15.40.
“The government apparently wants the bank to raise $45 billion in the market from a new capital offering before it will let the bank redeem the TARP preferreds,” Bove wrote in a note dated Oct. 23, referring to the preferred stock purchased by the government as part of the Troubled Asset Relief Program. “Selling more stock would meaningfully harm Bank of America’s shareholders. If the bank did what the government wants it would have to sell 3 billion shares or increase its share base by 35 percent.” Bank of America pared an earlier slide of as much as 7.1 percent after Citigroup Inc. added the stock to its “top picks” list, saying it is “very attractive” after the sell- off.
Federal Deposit Insurance Corp. Chairman Sheila Bair said that banks continue to face “serious challenges.” Bair also said tapping a Treasury Department credit line to replenish funds depleted by a surge of bank failures would harm her agency and the banking industry. She made the comments today during a speech at an American Bankers Association convention in Chicago. Monsanto Co. fell 6 percent to $70.69, its biggest drop since May. Goldman Sachs Group Inc. lowered its earnings estimates for the world’s largest seed producer, citing company discounts on corn-seed prices.
Producers of raw materials and energy dropped 2.5 percent and 1.5 percent, respectively, after the dollar rose, curbing demand from investors who buy commodities as a hedge against inflation. Copper prices retreated from the highest level in almost 13 months, while crude oil dropped 2.3 percent, the most in a month, to below $79 a barrel. Gold fell after gaining for four straight weeks.
Newmont Mining Corp., the largest U.S. gold producer, dropped 3.5 percent to $43.34. Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, declined 2.3 percent to $79.48. ConocoPhillips, the second- largest U.S. refiner, lost 2.4 percent to $50.74. The U.S. Dollar Index, a measure of the currency against those of six major trading partners, rose 0.7 percent, erasing an earlier loss. Newspaper shares slumped after the Audit Bureau of Circulations said that four of the top five U.S. newspapers, including the New York Times, the Washington Post and Gannett Co.’s USA Today, posted average weekday circulation declines. The Wall Street Journal’s circulation rose. New York Times Co. slumped 6.2 percent to $10.08, while Gannett dropped 7.1 percent to $12.28.
The S&P 500’s rebound of as much as 62 percent since March 9 propelled the index to a one-year high on Oct. 19 and pushed its valuation to more than 20 times the reported operating income of its companies, the most expensive level since 2004. Robert Doll, chief investment officer of equities at BlackRock Inc., said in an interview with CNBC that he expects some “digestion” in the market after recent gains. He also suggested health-care stocks may be a “defensive” strategy for investors, particularly those in oil services.
“We’ve already had a good move,” said Richard Sichel, chief investment of officer at Philadelphia Trust Co. in Philadelphia, which manages $1.3 billion. “Some investors are taking a wait-and-see attitude. Certain companies have been richly rewarded as corporate earnings beat expectations.” The S&P 500 is about 40 percent overvalued and headed for a decline as central banks pull back on securities purchases that pushed up asset prices, according to economist Andrew Smithers. Asset purchases have doubled the size of the Federal Reserve’s balance sheet to $2.1 trillion since the start of the current financial crisis.
In his March 2000 book “Valuing Wall Street,” co-authored with economist Stephen Wright, Smithers argued that U.S. equities were overvalued and should be sold. The S&P 500 then plunged 49 percent over 2 1/2 years.
Technical Watch The S&P 500 may decline as measures based on the ratio of rising stocks to falling shares are “not confirming” the rally, according to technical analysts at Bank of America’s Merrill Lynch Global Research who base forecasts on price and volume charts.
The Bloomberg Cumulative Advance-Decline Line for New York Stock Exchange shares, which is calculated by subtracting the number of falling stocks from the number of rising stocks, fell 6.7 percent to 18,838 on Oct. 23, the lowest level since Oct. 7. “The advance-decline diffusion index shows a strong bearish divergence off the August, September and October highs,” Mary Ann Bartels and Stephen Suttmeier wrote in a report today. “This is a sign that the strong uptrends for the advance-decline lines have become overextended and that breadth may begin to narrow.”
Better-than-estimated earnings at companies from Verizon Communications Inc. to Corning Inc. also helped fuel earlier gains in stocks today. Verizon, the second-largest U.S. phone company, erased a gain of as much as 0.8 percent and fell 0.7 percent to $28.64 as the overall market turned lower. Corning, the world’s biggest maker of glass for flat-panel televisions, declined 0.9 percent to $15.51 after earlier rising 2.1 percent. “We’ve seen the bottom in terms of prices with respect to stocks,” Brian G. Belski, chief investment strategist at Oppenheimer & Co. Inc, told Bloomberg Television. “We’ve seen it in earnings and now the economy will turn as a result.”
Microsoft Corp. had the biggest gain in the Dow, climbing 2.4 percent to $28.68. JPMorgan Chase & Co. raised its share price estimate by 50 percent to $30 after boosting its earnings estimates for the December quarter and fiscal years 2010 and 2011, citing strong performance. American Express Co. had the second-steepest gain in the Dow, rising 0.9 percent to $34.88. The biggest U.S. credit-card issuer by purchases was raised to “buy” from “hold” at Stifel Nicolaus & Co., which also boosted earnings estimates and said the company is best positioned for “new normal.”
Treasuries fell as the U.S. began to sell a record $123 billion of notes to fund its stimulus program and record deficits. The yield on the 10-year note increased eight basis points, or 0.08 percentage point, to 3.57 percent. The yield touched 3.58 percent, the highest level since Aug. 24.
Imagine If September Hadn't Seen The Homebuyer Tax Credit
For some added color on the existing home sales number, our friend and analyst Mark Hanson passes along this chart, which nicely demonstrates the seasonality of the housing market. As you can see, in most years, September drops big against, as families stop moving once the school year starts. This year though: it was only a modest sequential decline -- that's all thanks to first-time homebuyers rushing in to buy. When that ends... can you say clunk?
Homebuyers' Handout -- Worse Than Cash for Clunkers
The Feds seem intent upon reflating the housing bubble. Not the Federal Reserve, as you may have read elsewhere, but the federal government. Following the cash-for-clunkers idiocy, the federal government may extend its subsidy for homebuyers. The $8,000 tax credit for first-time homebuyers is due to expire Nov. 30, but our solons in the Senate are looking to push back that deadline and possibly expand the credit to $15,000 to most homebuyers, not just newbies.
As with the clunker cash, Uncle Sam is giving money to folks to do what they would have done anyway. Cash for clunkers temporarily juiced auto sales in August, but they fell back to their previous, depressed pace in September. And some 85% of the subsidy was pocketed by the dealers, not car buyers, according to one estimate ("Clunker Cash: No Boost for Consumers," Sept. 29.) As an inefficient use of taxpayer money, clunker cash pales besides the homebuyer handout. With housing affordability currently the best it's been in most of our lifetimes, with marked-down home prices and mortgage money in the 5% range, you wouldn't think homebuyers would need a subsidy.
But there it is, and it's a lot more expensive than you think. According to estimates by Ted Gayer at the Brookings Institution, each additional home sale generated by the $8,000 first-time homebuyers' tax credit actually costs the government $43,000. How's that possible? Gayer figures that of the 1.9 million homebuyers that will get the $8,000 tax credit, 85% would have bought a house anyway. The price tag of $15 billion -- about twice what Congress had intended -- he reckons will result in approximately 350,000 additional home sales, at a price tag of $43,000 for each additional sale.
That's nothing compared to the tab for a possible one-year, $15,000 tax credit for all home buyers (except those with high incomes.) Gayer figured that would cost the Treasury $73.9 billion, which he estimated would increase house sales by a total of 253,000. Each of those extra home sales would cost the Treasury $292,000 ($73.9 billion divided by 253,000.) The National Association of Home Builders, not exactly a disinterested bunch, figures the subsidy would boost house sales considerably more, by 700,000 homes. That implies each of those additional sales would cost American taxpayers only $133,000 -- still "a very expensive and poorly targeted subsidy," writes Gayer.
Unbelievable, you say. But remember, everybody gets the subsidy, both the vast majority who would have bought any way and yet are getting a windfall, plus those who were lured into the market by the largesse. It's like buying free drinks for a crowd that's bellied up to the bar with their wallets open already. In actuality, that cost does not come in the form of checks being mailed out to homebuyers. They get an $8,000 credit to their 2009 taxes when they file their return next April 15 -- a "tax expenditure" in the jargon of Washington. Either way, there's less money in the Treasury after it racked up a $1.4 trillion deficit in the fiscal year just ended -- equal to 10% of gross domestic product, a percentage not seen since the nation was paying to fight World War II.
"There are two larger points we should not lose sight of," Gayer writes. "First, tax expenditures are not a free lunch. The billions of dollars spent on the tax credit will ultimately have to be paid back through higher, economically distorting taxes. And while a tax credit is unlikely to be the straw that breaks the camel's back, our growing debt burden is something to fear. "Second, government policies to promote homeownership (or, more accurately, home-borrowership) were partial contributors to our housing and credit market problems," he continues.
"Ultimately, we need to decrease the government's housing incentives, including the mortgage-finance subsidies, the mortgage-interest deduction, and the favorable capital gains treatment for housing. A good place to start this weaning would be by not extending or expanding the home-buyer tax credit." That's the view from Brookings, which never has been accused of being a conservative, free-market outfit. But this isn't a question of right or left, just common sense.
More on the Homebuyer Tax Credit
According to this article, the Joint Committee on Taxation (JCT) has scored a Senate homebuyer tax credit at $16.7 billion. How does the JCT $16.7 billion cost estimate square with my previous back-of-the-envelope calculation of the cost of the tax credit of $73.9 billion?
For my calculation, I assumed a tax credit of $15,000, available for one year. The Senate proposal scored by JCT is for an $8,000 tax credit. I also assumed the tax credit would be available for one year, whereas the Senate proposal scored by JCT is for seven months (December 1, 2009 to June 30, 2010).
In my article, I computed a range of estimates, each assuming different parameter inputs. But let’s consider one of my estimates, which is based on a price elasticity of -0.65, baseline sales of 5.5 million houses annually, take-up of 85 percent (since high-earners are not eligible), and a median home price (for non-high-earning buyers) of $180,000. Using these assumptions, I arrived at an estimate of 253,000 additional houses sold due to the credit at a cost of $73.9 billion, for a cost-per-additional home of $292,000.
If we use the same parameter inputs, but change the credit to $8,000 from $15,000, and assume baseline sales of 2.8 million rather than 5.5 million (based on existing and new homes sales from December 2008 through June 2009), then we get an estimate of 69,000 additional sales at $19.6 billion. The $19.6 billion is higher than JCT’s estimate of $16.7 billion, but I would say within the ballpark. Part of the difference is due to JCT’s estimate that there will be a revenue gain of $1.8 billion from 2012 to 2014, since homebuyers must pay back the credit if they sell their house within three years. Even assuming the $1.8 billion in additional revenues, the point remains the same – an estimated $258,000 per additional house sold (i.e., $17.8 billion divided by 69,000) is a poorly targeted subsidy!
Home-buyer tax credit is administrative nightmare
Last November, J. Russell George, the Treasury Inspector General for Tax Administration, warned the Internal Revenue Service that if they didn't ask for documentation from people filing for the first-time home-buyer credit, there would be fraud. The IRS ignored the advice. The result? The IRS doled out about $620 million to ineligible filers. Big deal, you might say. How does it affect me? Well, thanks to the problems, the IRS is now checking every return by hand. If you're among the millions of people who bought or plan to buy a first home in 2009, be prepared for long delays in getting your tax refund sent to you.
That's true whether you plan to claim the credit on your 2009 return, or you've amended your 2008 tax return to get your refund sooner. Either way, get ready to wait. TaxMama has been hearing from people whose amended returns were filed as far back as June or July who are still waiting for their money.
What's holding it all up?
TaxMama's office has processed several hundred amended 2008 returns (From 1040X), and a few original 2008 electronically filed returns (Form 1040). Most were processed properly in the normal course of business. Then the calls started. We began to realize there's a huge problem, and it's just beginning. There are three different scenarios we've encountered.
Problem No. 1: The IRS lost some returns. We thought IRS was simply not recording them on the taxpayer record until the amended returns were processed. We reassured clients and callers, advocating patience. After four months, without their 1040X appearing in the system, we investigated, using a Power of Attorney authorization from several taxpayers. The expert staff at the Practitioner Priority Service hotline can find just about anything -- if it's in the system. They absolutely could not find two of the returns we asked about.
We've received many calls from worried taxpayers about this, but we have definitive proof about two instances. Oddly, both were received at the IRS on June 10 at 12:35 p.m., in the IRS P.O. Box at Kansas City, Mo. 64999. We're still investigating to see how many other returns were lost.
If this happens to you, resubmit a signed copy of your amended return with a cover letter. Tell IRS when and where it was filed. Attach proof if you have it. (We have USPS tracking codes for each of the hundreds of returns, and can print out the proof of delivery.) Request your resubmission be placed at the head of the processing queue, since it was filed months ago and was lost somewhere inside IRS. Attach proof of the purchase of your home. Send your resubmission to IRS's street address, rather than the P.O. Box. Call the IRS to get it: (800) 829-1040.
Problem No. 2. Some people are getting too much money.
We heard this a few times. One person provided proof. The Form 5405 (to claim the first-time home-buyer credit) we prepared called for a refund of $3,232. This taxpayer found $8,086 deposited into his bank account! He provided us with a copy of the IRS letter informing him his refund was approved for $8,000. If this happens to you, if you receive the payments by check, the IRS says don't cash it, to avoid possible interest charges. Call the IRS at (800) 829-1040 or send a letter explaining the matter to the IRS center where you filed the return. Include the Social Security number, tax year and name as shown on the return.
IRS does not say how long it will take to get your money back. TaxMama says: If you want the money now, cash the check. Send the IRS the difference. You'll have to pay a little interest. If you receive the payment by direct deposit: Promptly write a check for the excess and send it (and a note explaining the situation) to the IRS at the center where you filed or e-filed your return. Expect to be charged interest.
Problem No. 3. The big problem.
Once the IRS realized that fraud was taking place, they acted quickly to curtail the fraud. How? By auditing every request for the credit. Form 1040s are being audited, as well as the amended returns. An IRS worker must process each and every Form 5405. Can you imagine how long that takes with the modest staff IRS has? Can you imagine the burden and the pressure on the IRS staff wading their way through this?
Kirsten Helgeson, a public relations professional in Milwaukee, Wis., was smart enough to have her accountant put her 2008 tax return on extension, knowing she was about to buy a house. She filed on July 3, 2009. She just received her tax-credit check in the mail on Oct. 19. IRS requested proof of purchase from her a few weeks after she filed her tax return. At first, they were not able to find the documents she sent via certified mail. So, she called the IRS audit unit each and every week to help the case along, until the refund arrived. Helgeson believes that it's only because she did stay on top of her case that she got her money as soon as she did -- in about three-and-a-half months.
If you've been waiting on your refund for more than six weeks and have not heard from the IRS, call them now at (800) 829-1040. Have them find the group that is working on your original or amended tax return. Get the group number and address and send them all the proofs of purchase they could possibly want, to speed up the process. (Or if they can't find your return, see solution to Problem No. 1, above.) Send the information by certified mail, and make sure it's received.
Sit back and wait
The IRS's reports about the processing timeframe are not consistent. The official party line is still 12 to 16 weeks. A speaker at the recent IRS Tax Forum in Atlanta said it was at least 20 weeks. If you're considering filing an amended 2008 return to get your refund more quickly, don't bother. But for those who are amending 2008 returns for other reasons, go ahead and include the proof of purchase documentation with the amended return. See the list of documents the IRS is demanding on TaxQuips.com.
What will happen in 2010?
IRS has not updated the instructions to Form 5405. New homeowners in 2009 are not being instructed to send proof that they purchased their home, or proof of being first-time home buyers. Thus, every single tax return that requests the first-time home-buyer credit will be held back and processed manually. Expect your refund to be delayed three to four months.
This problem could be prevented easily right now. Doing this would save thousands of staff hours, and avoid many angry taxpayer calls: The IRS simply has to change two forms and their related instructions: 1) Form 5405 should have a box to check to indicate that proof of purchase is being sent to IRS via Form 8453. Put information into the instructions for Form 5405 spelling out the documentation that IRS wants to receive. 2) Form 8453 should have a checkbox for the Form 5405 proof of purchase. People will still be able to file electronically -- they'll just mail the back-up with Form 8453, just like they do some other documents.
So, what can you do, as a taxpayer wanting your credit? First, call the IRS or your legislator and let them know you see this as a problem and that the agency should change the forms or put an easier system in place to screen for refunds. Second, when you file your 2009 tax return, file it on paper. Include all the purchase documentation with it. You're not going to get the quick electronic refund anyway. This will speed up your return's examination. You'll probably get your refund in a month, instead of four months.
Home buyer tax credit fraud stiffs Feds for $600 million
If you bilked Uncle Sam out of a first-time home buyer tax credit, start looking over your shoulder. Wait, better yet, turn yourself in and beg for mercy. The Internal Revenue Service will likely audit your tax return. Tax fraud is a felony. On the other hand, the IRS may get in touch with you to let you know you are due a lager first-time home buyer tax credit. As Congress considers extending the first-time home buyer tax credit, a federal audit revealed this week that nearly 90,000 taxpayers may have fraudulently enjoyed the credit, hoodwinking the government out of more than $600 million.
The Treasury Inspector General for Tax Administration (TIGTA) said the Internal Revenue Service may have allowed about 70,000 taxpayers to claim approximately $480 million in tax credits even though there were "indications" that they were not first-time homebuyers. The rules define a "first-time" buyer as one who has not owned a home in the past three years. Another group, more than 19,000 taxpayers, claimed about $140 million in credits for homes they had not yet purchased. If they closed later they may have been eligible for the credit, but could be audited to verify the purchase anyway. Current rules say you must actually close escrow and provide proof to apply for the credit.
Among the alleged defrauders, the audit found 582 taxpayers who claimed almost $4 million in credits were under 18 years of age and as young as 4 years old. The tax credit is only eligible for those 18 and older. Cheating the IRS is a federal felony that comes with a fine of up to $250,000 and three years in a federal pen, or both. Another group of about 48,000 taxpayers didn't get the full credit, but likely because they weren't aware they were eligible.
As part of the Housing and Economic Recovery Act of 2008, Congress first created a $7,500 tax credit for those who purchased a home between April 8, 2008, and July 1, 2009. Later, under the American Recovery and Reinvestment Act of 2009, Congress extended the credit and raised it to an$8,000 tax credit for those who purchased homes by the current Nov. 30, 2009 expiration date.
By October 9, 2009, more than 1.2 million tax returns had claimed about $8.5 billion in the refundable tax credit, according to TIGTA. The report said the frauds were able to snooker the IRS because the agency didn't originally use recommended controls available on IRS Form 5405 to prevent fraud. IRS also didn't require taxpayers to provide documentation to verify their eligibility. The IRS says it is tracking down the frauds and taking corrective measures to prevent future problems with the credit.
'Shadow market' clouds housing recovery
The number of properties heading to the market may be much larger than anyone thought and appears likely to swamp South Florida with more deeply discounted homes, clouding the prospects for a housing recovery. Figures from the Florida Association of Realtors released Friday show that South Florida's median home prices have stabilized over the past several months and sales are up year-over-year as the number of properties on the market shrinks.
But an analysis of the so-called shadow market done for The Miami Herald suggests the number of homes and condos in the pipeline to come on the market in South Florida is nearly five times larger than all residential properties currently listed for sale by Realtors. LPS Applied Analytics, a firm that supplies loan data to the federal government, did the analysis on the shadow market, which refers to properties that will eventually be listed for sale -- because they are about to enter foreclosure, are in foreclosure or already owned by banks.
Economists and real estate analysts say the forces of supply and demand mean prices have further to fall because there will be more homes on the market than people to buy them, forcing sellers -- in this case, banks that have taken homes back in foreclosures -- to further cut prices. "That's what everybody is afraid of," said Jesse Acevedo, president of the Realtor Association of Greater Fort Lauderdale. He recently conducted his own shadow market analysis by cross-referencing the public record with the MLS, a Realtor database, for properties in Tamarac. He said banks owned about 300 homes, but had listed only 81 for sale.
The Florida Association of Realtors numbers released Friday show that in September new buyers and investors continued to eat away at the mass of existing homes for sale at a steady pace. Single-family home sales in Miami-Dade were up 51 percent from the same month a year ago; condo sales were up 73 percent. In Broward, home sales rose 31 percent from last year and condo sales jumped 57 percent, according to the Realtors. But such figures provide only a partial snapshot of the overall housing market.
For every home sold in Miami-Dade, lenders took back almost four through foreclosure auction, according to LPS data. In Broward, for every sale, banks took back six properties, according to LPS' analysis, which uses sales information from the public record, not Realtor data that captures only sales through agents. "This foreclosure hangover is going to prevent any substantial price recovery and could even lead general market statistics downward," said Adam Cappel, a market analyst and principal of Miami-based CondoReports.com.
While the number of homes on the market in Miami-Dade has shrunk 36 percent since last year to 26,296 homes, the number of loans 90 days or more past due or in the foreclosure process stood at 122,800 in September, according to LPS. In Broward, listings fell by 41 percent to 18,919, yet 88,863 homes were being queued up for the market. A few caveats: A percentage of those homes, though small, will not be taken back by banks because they are sold or the owner catches up on loan payments. Also, some of them may already be listed for sale.
Meanwhile, though, a flurry of activity at the lower price range reduced the median home price in Miami-Dade to $190,900, down 30 percent compared to a year ago, according to the Realtor data. The median condo price fell to $132,900, a drop of 37 percent versus last September. In Broward, the median single-family home price fell to $200,000 from $259,300, a fall of 23 percent. The median condo price dropped to $78,000 from $129,000 last year, a 40 percent decline.
Earlier this week, Fiserv, a financial information and analysis firm, forecast that Miami average home values will plunge another 30 percent by June 2010, on top of price declines of 48 percent since peaking in 2006. Prices are forecast to fall another 26 percent in Fort Lauderdale. David Stiff, Fiserv's chief economist, said the forecast is based on a number of economic variables, including home affordability, demographic trends and household growth. He said inventory levels going forward were a major concern.
"If you look at markets across the U.S., the Miami area has some of the largest foreclosure numbers. In addition to that, there was a lot of overbuilding," Stiff said. Ken Thomas, a Miami-based banking analyst and economist, however, said he expected prices to fall no more than 20 percent on average. But, he added, "one thing this crisis has taught us is that no matter what we predict, things are always much worse than we believed."
Acevedo, of the Realtor Association of Greater Fort Lauderdale, took a more optimistic view. As long as banks refrain from dumping homes on the market, and the courts, which are understaffed and overwhelmed, continue to serve as a kind of control valve, slowing the pace of bank take-backs, price can still hold. "When are the banks going to put it out and how much at a time and why are they holding on to it? Everybody is speculating on those issues," he said.
As it is, bank-owned properties in decent shape are selling for above list prices as buyers compete for bargains. Good deals are dwindling, meaning buyers will have to choose from homes listed at higher price ranges. "Right now, buyers can't find properties at the lower end because those foreclosures were feeding first-time home buyers and investors," Acevedo said.
Want Recovery? History Says Be Patient. Very Patient.
Take a long enough perspective, and it is no surprise that what some had been calling the GGBAT (the Greatest Global Boom of All Time) ended with the GGRSGD (the Greatest Global Recession Since the Great Depression). Both the boom and its panicky finale fit neatly into a long, human tradition of greed, self-deception and financial folly. And, never mind the Dow at 10,000. Eight centuries of history suggest the GGRSGD is a long way from over.
That, anyway, is one of the cheery conclusions you take away from This Time It’s Different: Eight Centuries of Financial Folly, a book co-authored by economists Carmen Reinhart of the University of Maryland and Harvard’s Kenneth Rogoff. The title, in case you didn’t notice, is ironic. The authors’ point is that it’s never different: the temptation to justify reckless financial behavior as long as it’s profitable in the short run is as old as lending. We’re human. We can’t help it. Sigh.
Professor Reinhart, who this spring gave CBS MoneyWatch a sneak peak into her book’s insights, met with us editors yesterday. She is disarming, funny, deeply knowledgable and, as her publicist put it, about the only economist you’ll meet who wears Chanel. What she is not, is optimistic.
Some findings from her research:
- Every crisis is preceded by a boom in which people convince themselves that the ordinary rules no long apply. Reinhart recalls visiting Asia in the mid-1990s with the International Monetary Fund, where she worked at the time, and being told in country after country that currency crises could never happen there. “We’re too productive, we have too high a savings rate,” she was told. “Crises only happen in places like Latin America.” That stuck with the Cuban-born Reinhart, especially when the Asian currency crisis hit three years later.
Americans take a second seat to none in our capacity to fool ourselves.
- “Profits don’t matter” : Internet-bubble wisdom, circa 1999
- “Deficits don’t matter”: George W. Bush fiscal policy, allegedly voiced by Dick Cheney
- “Credit quality doesn’t matter”: conventional magical thinking during the GGBAT
What that says about our ability to recognize future bubbles in their formative years and head them off is not very encouraging.
- History suggests we’ve got a long way to go Banking crises like the one we’re in tend to stick around. On average it takes six years for home prices to recover, five years for unemployment to turn around and two years for the economy to come back.
- We’re acting Japanese and don’t know it We lectured the Japanese during their lost decade on the need to bite the bullet and deal with zombie banks. But now, in the same pickle as the Japanese were, we’re acting with the same irresolution. Remember how TARP was supposed to get troubled assets off the banks’ balance sheets? They’re still there.
And like us, the Japanese flooded their economy with stimulative cash that helped jump start growth. By the mid-1990s, though, central bankers and government lost their nerve and began to tighten up. That helped turn a lost five years into a Lost Decade. It’s a repeat of the Japanese mistake that worries Reinhart the most about our current situation.
- Watch out for Treasuries Almost every financial crisis going back in history has led to a huge surge in sovereign debt. On average, it doubles, and frequently leads to default. In this crisis, the U.S. has made pikers of such great historic debtors as Napoleon and Phillip II of Spain, who launched the Great Armada. Our debt has tripled in a year to $1.2 trillion. A default on U.S. Treasuries is impossible. A downgrade or hyper-inflation, not so much.
- Don’t trust anyone telling you that they’ve found a way around risk That applies equally to insurance salesman selling equity indexed annuities and to central bankers telling you they’re smarter than their predecessors.
Remember that Reinhart and Rogoff’s grasp of history doesn’t necessarily give them a failsafe grip on the future. History isn’t kind to prognosticators either, however far back their data goes. But after talking to Reinhart, I’m double checking my allocations to U.S. Treasuries and thinking of adding more to my inflation-adjusted bonds. Phillip II has got nothing on me.
U.S. to unveil new "too big to fail" strategy
The Obama administration will soon make public a new approach to dealing with so-called "too big to fail" financial firms that would make it easier for the government to seize control of them and make major changes, an administration official said on Monday. The strategy would make it easier for the government to oust managers, wipe out shareholders and restructure the firm's outstanding loans, the official said.
Separately, a White House official said President Barack Obama will outline principles on the issue to Congress soon. "In the coming days, the president will send a letter to Chairman Dodd and Chairman Frank setting out principles to guide the process," the official said, referring to House of Representatives Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd.
A council that includes U.S. Treasury Secretary Timothy Geithner would help set policy for dealing with troubled financial firms under the White House plan, CNBC television said, citing sources. The Federal Deposit Insurance Corp would have authority to unwind large firms whose failure could threaten the overall economy, said the TV business news channel.
"Resolution authority," or empowering the government to deal with large troubled firms that are not banks, is crucial to reforming financial regulation, lawmakers and Obama have said for months since last year's severe financial crisis. The president wants to avoid another episode like the Bush administration's frantic and confused efforts in 2008 to address crises at former Wall Street giants Lehman Brothers and Bear Stearns, former mega-insurer American International Group, and other firms that got massive taxpayer bailouts.
How the U.S. Blew Trillion-Dollar Trade of Century
by Mark Fisher
Hindsight is 20/20, especially when it comes to missed trading opportunities. But when the government has the trade of the century at its fingertips and fails to take advantage of it, someone has to play the Monday morning quarterback.
Flashback to 2008: When the government was forced to bail out the financial system, our friends in Washington also had the opportunity to make the trade of the century for the American taxpayer. While Uncle Sam succeeded in the former, he failed miserably in the latter. Lehman Brothers Holdings Inc.’s shocking fall exposed the instability of the U.S. banks. In the aftermath, it quickly became clear that the collapse of the financial system was imminent without the intervention of the U.S. government.
In a recent interview in the Financial Times, John Thain, Merrill Lynch & Co.’s former chief executive officer, gave an insider account of those dark days: “Once it became clear that Lehman wasn’t going to be rescued and was going to go bankrupt, the group then shifted its discussion to OK, well, how do we prevent this domino effect?” Within this environment of impending doom, the government had no choice but to play Atlas and save the financial world. Unfortunately, it failed to realize that along with this role came a tremendous opportunity: to capitalize on the situation. In this sense, the government failed to make the trade that would have catapulted the taxpayer -- rather than just the banks -- back to stability.
The government had an opportunity to structure the following innovative investment solution: Uncle Sam could have demanded 25 percent to 30 percent of the underlying equity in the banks before agreeing to negotiate a bailout package with the weakened institutions. Had the government brokered a deal that tied bank earnings to taxpayer payback over time, the animosity between Wall Street and Main Street that exists today would have been eliminated, or mitigated at the very least.
I’m certainly not advocating government control of the banks; rather, just the opposite -- the government would have taken a passive stake and then stepped aside to let business take care of business. Unfortunately, our leaders in Washington lacked the shrewdness required to guarantee taxpayers a permanent ownership stake in the banks their money was being used to save. An innovative investment solution could have secured some of the necessary funds to fix our disaster of a health-care system or Social Security mishap.
Instead, the government went ahead and lent hundreds of billions in capital to Wall Street, insured all the money-market funds, bailed out companies such as American International Group Inc. and allowed financial institutions to issue government- backed debt while exacting negligible profits in return. And so I ask: What trader in his right mind decides to dump his money into a glorified black hole, taking on unlimited risk in the process, for minuscule returns? I’m no socialist, mind you. All I am saying is that the banks should have been made to drop off an envelope at the taxpayer’s doorstep every month. Obviously, no one in President Barack Obama’s administration has ever watched “The Godfather.”
Thus, when confronted with the opportunity to make an epic trade, the government managed to make the worst deal possible -- so bad that I’m completely comfortable comparing it to the mistake made by the Native Americans back when they sold Manhattan for $24. Just as the settlers weren’t to be blamed then the banks aren’t to be vilified today. When the U.S. government gives you a lay-up trade, you take it. Anyone in the banks’ position would have taken advantage of the terms they were offered and, frankly, would have been stupid not to.
Had Uncle Sam been a student in my class, he would have gotten an “F” in Sensible Trading and an “Incomplete” in Bailout 101. To put this all in perspective, just consider for a minute how in the world Warren Buffett managed to negotiate a better deal with Goldman Sachs Group Inc. than the government did for the taxpayer. The policy wonks on Capitol Hill should have stuck to what they know best and called in someone like Buffett or bond guru Bill Gross when it came time to negotiate. Obviously, Federal Reserve Chairman Ben Bernanke and his cronies have learned from the experience of the Great Depression how to repair what has been broken, but they have failed to understand how to capitalize on it.
The jury is still out on the verdict for the bailout, but I would bet good money that the worst is yet to come for the economy. While some are speculating that the financial crisis is over, I’d say we’re still in Act I, with a great deal of financial drama left to unfold. There’s no question that the government officials who brokered the deal with major banks during the crisis will ultimately go on to become highly respected economists, academics, professors and the like. But I can guarantee that none of them will ever be hired on our trading floors.
The Economic Bomb That Didn’t Drop
Nearly every day this year, as for the past generation, Washington has rattled with the sound of partisan gunfire. Democrats snipe at Republicans for obstructing their plans on health care, energy and Wall Street regulation. Republicans criticize Democrats for big government, overspending and high unemployment. But Neel T. Kashkari, who served both sides as a top Treasury Department official, hears something different: the quiet of the economic bomb that did not drop.
It did not drop, in his view, because the leaders of America’s rival political armies ceased firing long enough a year ago to pass the $700 billion bailout that prevented Wall Street from imploding. They included President George W. Bush and Speaker Nancy Pelosi, the liberal Representative Barney Frank of Massachusetts and the conservative Senator Judd Gregg of New Hampshire, the Democratic presidential candidate Barack Obama and the Republican presidential candidate John McCain.
“As bad as it is today, it could have been so much worse,” Mr. Kashkari said in an interview. “If the financial system had collapsed,” businesses on Wall Street and Main Street alike “wouldn’t have been able to access funds to pay their employees, who then wouldn’t have money to pay their bills. It would have cascaded through our economy.” It was “one of the worst times in our country’s history,” he said. “But it was in many ways the best time, watching all these people come together to put out the fire.”
That bipartisan achievement has become so clouded by public discontent that few politicians embrace it. With unemployment hovering around 10 percent, Americans find little consolation in the possibility that the rate might have reached twice that level, or higher. But Mr. Kashkari, a 36-year-old Republican, has a different vantage point from the seclusion of the mountain cabin in California where he has spent recent months after running the Troubled Assets Relief Program, or TARP, for the Treasury. He has chopped wood to decompress from the whirlwind; he decided against writing a book after former Vice President Dick Cheney advised that could complicate his chances of returning to government, which Mr. Kashkari hopes to do someday.
A onetime engineer turned Goldman Sachs executive, Mr. Kashkari never had strong partisan instincts. Instead, following his boss Henry M. Paulson Jr. to Mr. Bush’s Treasury, he took along Wall Street’s disdain for the culture of Washington. As the crisis in an over-leveraged financial system crested last year, that skepticism led him to question the wisdom of seeking bailout money from Congress; he feared that lawmakers would say no and trigger a catastrophic loss of confidence. But lawmakers surprised him, as did the civil servants at Treasury and the Federal Reserve that he calls “patriots” for their frantic efforts to avert disaster.
Mr. Kashkari himself become a target over Treasury’s shifting TARP strategy; one Democratic House member wondered aloud at a hearing whether he was “a chump.” He acknowledges Treasury’s failures in underestimating dangers to the economy and communicating about its policy response. But in the signs of turnaround that President Obama now points to, Mr. Kashkari sees evidence that those policies have worked. In Ben S. Bernanke, the Fed chairman, and Timothy F. Geithner, the Treasury secretary and former president of the New York Fed, central players that Mr. Kashkari and Mr. Paulson teamed up with remain in place.
Notwithstanding partisan gibes, Mr. Kashkari said that a Republican administration would have followed the same course had Mr. McCain won the presidential election — albeit with less populist rhetoric. “The way a Democratic administration talks about certain issues is probably a little different,” he said. “But the substance of the actions, I think, are very consistent.”
Mr. Kashkari embraces the Obama administration’s financial regulation proposal as a good first step. But he said policy makers needed more time to determine rules that could temper risk while preserving financial dynamism and innovation. With Wall Street firms on track to pay employees a record $140 billion this year, executive compensation has become a flashpoint. “I completely understand the anger of the American people,” Mr. Kashkari said.
But he worries that too stringent a crackdown could make the economy less stable by driving financial activity and executives offshore. Washington’s economic bureaucrats may be patriots, but Mr. Kashkari does not see his onetime Wall Street colleagues that way. “No, they’re not,” he said. “I don’t expect every American to be a patriot. I do think Wall Street firms need to show more sensitivity. “Every single Wall Street firm, despite their protest today, every single one benefited from our actions,” he said. “And when they get up there and say, ‘Well, we didn’t need it,’ that’s bull. “They did need it. And they’re all happy with the actions that we took, and they need to show restraint today.”
Analysts fear impending asset bubble burst in China
With the Shanghai Composite swelling by around 68 percent this year, fears of an asset bubble bursting is already doing the rounds — the nervousness fed by the maddening 73 per cent increase in property sales in the first nine months of the year.
Is it a bubble or isn't it? That's the question coming to trouble analysts and investors watching the Chinese stock markets. With the Shanghai Composite swelling by around 68 percent this year, fears of an asset bubble bursting is already doing the rounds — the nervousness fed by the maddening 73 per cent increase in property sales in the first nine months of the year. Ironically, it is the Chinese panacea for the recession which has led them into a bubble trap. Excess liquidity in the market is now being touted as an evil.
Since the beginning of the year, the government has used its enviable control over the banks to unleash a massive increase in lending. New loans in the first three quarters stood at 8.6 trillion yuan (Dh4.6 trillion), which is 149 per cent higher than last year. This could go up to 10 trillion yuan by the end of the fourth quarter. Also, banks could continue to make loans of more than 10 trillion each year in 2010 and 2011 to reinvest in projects activated by its stimulus plan.
This giant investment programme is now raising concerns. The banks almost went on a lending binge to ward off recession and initiate torrid economic growth. While a lot of the money is going into infrastructure spending, the massive liquidity is inevitably inflating the stock market, the commodity markets and the property markets. Tomo Kinoshita, an economist at Nomura International, said in a report last week that China risked creating an asset bubble if it continued with its aggressive lending.
There is now a "speculative frenzy" in Chinese assets. Already, expensive Chinese real estate has continued to rise at a rapid rate. In Shanghai's dazzlingly new Pudong area, row upon row of well-manicured housing complexes wear an eerily empty look. But apartment owners like Jiu Feng are not worried that their properties are lying empty. They have seen a mind-boggling appreciation of their flats in the past year, never mind the fact they haven't been able to get tenants for these.
Latest statistics show that housing prices in China's 70 major cities grew one per cent in July from a year earlier — the biggest increase over nine months. China's property sales surged 60 per cent by value in the first seven months. While property owners are smug about the recovery in the real estate sector, government officials worry that prices are rising too quickly, luring speculators into the market and turning it into an asset bubble — which is certainly not an economic driver.
One person who has only tough words for China's market boom is former Morgan Stanley analyst Andy Xie. In his blog, Xie writes: "Chinese stock and property markets have bubbled up again. It was fuelled by bank lending and inflation fear. I think that Chinese stocks and properties are 50 to 100 per cent overvalued. The odds are that both will adjust in the fourth quarter. "However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future."
Xie has often courted controversy by spoiling the China party. He has infamously slammed the Chinese asset markets as a giant Ponzi scheme. According to Xie, share prices in China are supported by an "appreciation expectation". "As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn't enough liquidity to feed the beast." Xie describes the peculiarity of the China market by the term "Panda Put," where investors believe that the government will not allow the stock market to go down before important dates like the National Holidays in October.
The idea that the government wouldn't let the market drop is deeply rooted in Chinese market psychology. Despite Xie's scorn, there is some merit in this popular belief. The government in Beijing is ever ready to tweak its liquidity policy if it finds the markets on a dangerous edge. Qin Xiao, chairman of China Merchants, said in a statement that China needs an urgent tightening of monetary policy to prevent the huge stimulus measures introduced this year from inflating stock and property bubbles.
But for now, the Chinese markets are in a frenzy. Young inexperienced retail investors are being sucked into it. Like Cicy Xie, 28, who works as a movie producer in Beijing. This sprightly girl feels a bit sheepish after losing her hard-earned money in buying shares of a container company in the recession months. But this hasn't dampened her new found enthusiasm for the market. Will the paternalistic government in China save her from the bubble?
Treasuries Fall as U.S. Begins Record $123 Billion Note Sales
Treasuries fell, with 10-year note yields touching their highest level in two months, as the U.S. began to sell a record $123 billion of notes to fund its stimulus program and record deficits. Government securities declined for a fourth day as the Treasury sold of $7 billion of five-year Treasury Inflation Protected Securities at a yield of 0.769 percent. The offering, which drew higher-than-average demand, will be followed by three auctions of fixed-rate notes this week.
“We are still at relatively low yield levels, which in front of so much supply and an economy that seems to be starting to turn the corner, don’t seem justified,” said Ajay Rajadhyaksha, head of U.S. fixed-income strategy in New York at Barclays Plc, one of the 18 primary dealers required to bid at Treasury auctions. The yield on the 10-year note increased eight basis points, or 0.08 percentage point, to 3.57 percent at 4:20 p.m. in New York, according to BGCantor Market Data. The yield touched 3.58 percent, the highest level since Aug. 24. The 3.625 percent security maturing in August 2019 fell 22/32, or $6.88 per $1,000 face amount, to 100 15/32.
“The momentum suggests we could move higher in yields,” said David Ader, head of U.S. government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC. “If we break 3.52 percent, then the next projection is 3.76 percent. Resistance is at 3.28 percent.” The 10-year yield will increase to 3.56 percent by year- end, according to the average forecast of analysts in a Bloomberg survey, with the most recent estimates given the heaviest weightings.
The U.S. is scheduled to sell $44 billion of two-year notes tomorrow, $41 billion of five-year notes on Oct. 28 and $31 billion of seven-year securities on Oct. 29. The auction today is a reopening of the $8 billion five- year TIPS offering on April 23, and the notes mature in April 2014. The securities drew a yield of 1.278 percent at the April sale. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.10, the highest level since October 1997’s 3.56 percent. For the past five sales of the securities, the ratio averaged 2.31.
Indirect bidders, the category of investors that includes foreign central banks, bought 47.8 percent of the securities, the most since they received 51.4 percent of the securities at the October 2006 auction. At the past five auctions, the group bought 30.8 percent on average. “Five-year TIPS are superstar today and are of the few asset classes doing well, relative to the other markets,” said George Goncalves, chief fixed-income rates strategist at primary dealer Cantor Fitzgerald LP in New York. “TIPS offer an inflation hedge and offer diversification in fixed income, especially when all other yields are so low.”
The difference between rates on five-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices for the next five years, widened to 1.52 percentage points from 1.37 percentage points at the beginning of the month. The previous record for notes sold in a week was $115 billion over the five days ended July 31, when the Treasury sold $6 billion in 20-year TIPS, $42 billion in 2-year notes, $39 billion in 5-year securities, and $28 billion in notes maturing in seven years.
Treasury has sold $1.6 trillion in notes and bonds to finance a budget deficit that reached a record $1.4 trillion in fiscal year 2009 that ended Sept. 30. Debt amounted to 9.9 percent of the nation’s economy, triple the size of the 2008 shortfall. After issuing $1.9 trillion of short-term securities to finance President Barack Obama’s efforts to end the worst recession since the 1930s, the Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26- year low of 49 months. That may mean boosting sales of 10- and 30-year securities by 40 percent over the next year to $600 billion, according to FTN Financial in Memphis, Tennessee, driving down prices of longer-term securities.
“The talk by the Treasury pertaining to the extension of the debt will continue to weigh on the back-end of the market and allow the trading range to resolve toward higher rates going forward,” John Spinello, chief technical strategist in New York at primary dealer Jefferies Group Inc., wrote in a note to clients.
Replacing bills with bonds may drive up the so-called yield curve as the Fed keeps its target rate for overnight loans between banks unchanged near zero until the second quarter of 2010, according to the weighted average of 67 forecasts in a Bloomberg survey. The gap between yields on 2- and 10-year notes widened to 2.53 percentage points from 1.29 percentage points at the end of last year.
The Fed is scheduled on Oct. 29 to complete the $300 billion Treasury purchase program it began in March, part of its effort to cap consumer borrowing costs. Fed Chairman Ben S. Bernanke and his fellow policy makers cut the target rate for overnight loans between banks to a range of zero to 0.25 percent at the end of 2008. They will keep the benchmark there until August, when central bankers will boost it to 0.5 percent, according to the median estimate of 47 economists surveyed by Bloomberg from Oct. 1 to Oct. 8.
S&P overvalued by 40%, according to economist Smithers
Economist and president of a research firm that bears his name, Andrew Smithers (not related to the Smithers of Mr. Burns fame) is saying our on-fire stock market is set to burn itself out. The S&P 500 Index is overvalued by 40%, he believes, and we can expect a plunge thanks to central bankers restraining themselves on the securities purchases that have pushed the markets up so far so fast. Also, banks are going to need to sell more shares to raise capital and pump up their balance sheets.
If the S&P 500 were to take a 40% dive today, it would fall to 647.76 (based on the Friday close), below the low it recorded in March. How likely is a decline? Well, Mr. Smithers claims that equity markets have been exposed based on the effects of quantitative easing – the process by which governments pump cash into an economy.
In the United States, "queasing" has resulted in asset purchases that have doubled the size of the Fed's balance sheet since the beginning of the financial crisis – and it's now at $2.1 trillion. The Bank of England has spent $286 billion in the last seven months for the same reason. So, if Smithers is right, we could find ourselves in a disconcerting spot. Until then, all we can do is brace ourselves.
ING Shows EU Means Business
So now we know: the European Union really does mean business. ING Group has been forced into a much more radical restructuring than anticipated, as the price of compliance with the E.U.'s rules on state aid provided during the financial crisis. That's bad news for ING. It also sends a worrying signal to the other 30 or so European banks whose financial restructuring plans still await E.U. approval.
The Dutch banking and insurance giant is to divest the insurance businesses, sell its U.S. ING Direct online subsidiary, divest 6% of the Dutch retail banking market, pay the Dutch government an extra 1.3 billion euros ($1.93 million) in fees for access to its bad asset protection scheme, and commit not to make acquisitions or be a price leader in certain retail banking for another three years. Meanwhile, ING is raising 7.5 billion euros in equity to repay half of its state aid. At the end of this restructuring -- expected to take until 2013 -- ING will be essentially reduced to a Benelux regional bank and its balance sheet almost halved to 760 billion euros.
This is a huge shift for ING which has spent years trying to persuade the market of the charms of bancassurance. True, ING may have decided to implement one spin off -- that of insurance -- even without E.U. pressure. Under its "Back to Basics" restructuring plan launched in April, ING cut the number of divisions from six to two which investors took to be a prelude to full separation. Investors never liked the conglomerate structure. The shares have persistently traded at around a 30% discount to the rest of the banking and insurance sectors. ING now admits that benefits were limited, with cross-selling minimal.
Investors will welcome greater simplicity. Even so, separation will not be cost-free. ING will forfeit its notorious "double leverage" -- regulators historically allowed ING to operate with lower capital at group level to reflect its diversified and supposedly lower-risk model. Meanwhile, investors will now focus on the weak-looking growth prospects for ING bank. Despite encouraging third quarter underlying earnings of 750 million euros boosted by lower credit losses, near-term opportunities look limited to cost cuts and online banking. And ING's post-restructuring core Tier 1 ratio of 7.6% is below the sector average, suggesting it also has further to go to rebuild capital.
Where ING has led, other European banks, including U.K. giants Lloyds Banking Group and Royal Bank of Scotland, may now be obliged to follow. The E.U. was able to drive a hard bargain with ING because the Dutch bank needed a quick deal to take advantage of an early redemption discount on its state aid. But now the E.U. has secured such a conspicuous success, others will find it harder to resist.
The Government's Loan Modification Numbers Are A Total Sham
Mortgage expert and one-time Fannie Mae Chief Credit Officer Edward Pinto blasts the claim that 500,000 homeowners have entered into HAMP (Home Affordable Modification Program).
Based on comments being made by industry participants and program results to date, HAMP is rapidly becoming: I will pretend to modify your loan if you pretend that you will make the payments.
On October 9 Treasury Secretary Geithner announced that the Obama administration’s HAMP had enrolled its 500,000 participant. However, only about 1200 borrowers have entered the permanent modification phase; with the balance being in the 3-5 month trial period. This is in spite of the fact that there were 200,000 trials in progress back in July.
The reason for this snail like progress is, in an effort to reach its previously announced target of 500,000 modifications by November 1, program documentation guidelines were loosened. According to Michael Young, vice chairman of the Mortgage Bankers Association, 99% of the loan modification packages are incomplete. This has led to speculation that many of the 500,000 will never submit the necessary documentation or will not qualify.
Also of concern is the expected dropout of a sizable number of qualified borrowers who fail to make all the payments required during the trial period. This fear has been heightened by the concern of some servicers that borrowers will use the trial period to game the foreclosure process and delay their own foreclosures by another 5 or 6 months. Finally, in an effort to get more modifications approved, unemployment compensation will be counted.
The number of permanent modifications resulting from these 500,000 trial modifications could be low as 100,000-200,000. Finally, at a 50% ultimate redefault failure rate, only 50,000-100,000 performing loans will result. At this success rate, it is mathematically impossible for the administration to meet its announced goal of keeping 3 to 4 million Americans in their homes by preventing avoidable foreclosures with loan modifications . To do so would require putting 15 -30 million loans into trial modifications to reach the stated goal.
If Lenders Say ‘The Dog Ate Your Mortgage’
by Gretchen Morgenson
For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.
On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.
In other words, with lenders in the driver’s seat, borrowers were run over, more often than not. Of course, errant borrowers hardly deserve sympathy from bankers or anyone else, and banks are well within their rights to try to protect their financial interests. But if our current financial crisis has taught us anything, it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring. And banks often lacked a clear understanding of whether all those borrowers could really repay their loans.
Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.
One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order. So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.
The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.
To be sure, many legal hurdles mean that the initial outcome of the White Plains case may not be repeated elsewhere. Nevertheless, the ruling — by a federal judge, no less — is bound to bring a smile to anyone who has been subjected to rough treatment by a lender. Methinks a few of those people still exist. More important, the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court.
The United States Trustee, a division of the Justice Department charged with monitoring the nation’s bankruptcy courts, has also taken an interest in the White Plains case. Its representative has attended hearings in the matter, and it has registered with the court as an interested party.
The case involves a borrower, who declined to be named, living in a home with her daughter and son-in-law. According to court documents, the borrower bought the house in 2001 with a mortgage from Wells Fargo; four and a half years later she refinanced with Mortgage World Bankers Inc. She fell behind in her payments, and David B. Shaev, a consumer bankruptcy lawyer in Manhattan, filed a Chapter 13 bankruptcy plan on her behalf in late February in an effort to save her home from foreclosure.
A proof of claim to the debt was filed in March by PHH, a company based in Mount Laurel, N.J. The $461,263 that PHH said was owed included $33,545 in arrears. Mr. Shaev said that when he filed the case, he had simply hoped to persuade PHH to modify his client’s loan. But after months of what he described as foot-dragging by PHH and its lawyers, he asked for proof of PHH’s standing in the case. “If you want to take someone’s house away, you’d better make sure you have the right to do it,” Mr. Shaev said in an interview last week.
In answer, Mr. Shaev received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool. But U.S. Bank was not a party to the action. Mr. Shaev then asked for proof that U.S. Bank was indeed the holder of the note. All that was provided, however, was an affidavit from Tracy Johnson, a vice president at PHH Mortgage, saying that PHH was the servicer and U.S. Bank the holder.
Among the filings supplied to support Ms. Johnson’s assertion was a copy of the assignment of the mortgage. But this, too, was signed by Ms. Johnson, only this time she was identified as an assistant vice president of MERS, the Mortgage Electronic Registration System. This bank-owned registry eliminates the need to record changes in property ownership in local land records. Another problem was that the document showed the note was assigned on March 26, 2009, well after the bankruptcy had been filed.
Mr. Shaev’s questions about ownership also led to an admission by PHH that, along the way, it had levied an improper $450 foreclosure fee on the borrower and had overcharged interest by an unstated amount. John DiCaro, a lawyer representing PHH at the hearing, was in the uncomfortable position of having to explain why there was no documentation of an assignment to U.S. Bank. He did not return a phone call seeking comment last week. Ms. Johnson, who couldn’t be reached for comment, did not attend the hearing.
According to a transcript of the Sept. 29 hearing, Mr. DiCaro said: “In the secondary market, there are many cases where assignment of mortgages, assignment of notes, don’t happen at the time they should. It was standard operating procedure for many years.” Judge Drain rejected that argument, concluding that what had been presented to the court just did not add up. “I think that I have a more than 50 percent doubt that if the debtor paid this claim, it would be paying the wrong person,” he said. “That’s the problem. And that’s because the claimant has not shown an assignment of a mortgage.”
Mr. Shaev said he was shocked when the judge expunged the mortgage debt. “We are in uncharted territory,” he said. “Right now I am in bankruptcy court with a house that has no discernible debt on it, yet I have a client with a signed mortgage. We cannot in theory just go out and sell this house because the title company won’t give a clear title on it.” Among the next steps Mr. Shaev said he would take is to file an amended plan or sue to try to get clear title to the property.
Late last week, PHH appealed the judge’s ruling. But Mr. DiCaro and PHH are in something of a bind. Either they will return to court with a clear claim on the property — including all the transfers and sales that are necessary in the securitization process — or they won’t be able to produce that documentation. If they do produce it, they will then have to explain why they didn’t produce it before. Oh, what a tangled web these mortgage lenders weave.
US Commercial Mortgage Delinquency Hits 4.7%
The total delinquency rate for commercial mortgages expanded 60 basis points in the third quarter to 4.7%, according to an early estimate by locally based Applied Analysis. While final figures for the third quarter are not due out until late November, the real estate market analysis and forecasting specialist uses earnings reports and call report filings from many smaller banks to produce its quarterly estimates.
The commercial mortgage delinquency rate has been rising at an accelerated rate ever since Lehman Brothers’ collapse in September 2008 and the ensuing severe credit crunch and economic downturn. While more than double the commercial mortgage delinquency rate from the same year-earlier period, the 4.7% delinquency rate is still well below the 8% rate in the third quarter of 2001. However, given a weak economy, severely constrained credit availability and a high volume of commercial mortgages coming due during the next several years, Applied Analysis principal Mathew Anderson calls the increasing delinquency rate "worrisome."
The delinquency rate for other commercial and industrial loans--loans to businesses typically unsecured and separate from commercial mortgage lending--rose 50 basis points in the third quarter to 4.2%. Anderson says the rate has been trending up by 50 basis points a quarter as the weak economy and reduced credit availability have put pressure on borrowers’ finances. "The lack of credit is most apparent in the C&I loan category," Anderson says. "We estimate a 6% decline in the volume of loans outstanding during Q3, following several quarters of contraction. The volume of loans outstanding has contracted by approximately 15% since peaking in Q3 2008."
The delinquency rate in construction lending, including both residential and commercial, jumped 190 basis points in the third quarter to 18.2%. The last recession's peak came in the first quarter of 2001 when construction loan delinquency hit 19.2%, according to AA. "While for-sale residential construction loans [single family and condo] are by far the main source of problems, our estimates indicate that delinquency rates for other construction sectors, including apartments and commercial properties, are on the rise, too," Anderson says. "Worsening fundamentals and reduced liquidity in the commercial real estate sector will likely contribute to further rises in the delinquency rate."
Residential mortgage delinquencies rose 80 basis points in the third quarter to 11%. Aside from an approximately 200 basis point increase in the final three months of 2008, the delinquency rate has been rising by approximately 100 basis points per quarter since the first quarter of 2008. One year ago the rate was 6.4%. "We have been expecting the rate of increase to slow, but clearly this has not yet occurred," Anderson says.
Citi, Bank of America Managers Averaged $18 Million Pay in 2008
Citigroup Inc. and Bank of America Corp. paid top executives an average of $18.2 million each last year as the banks accepted $90 billion of bailout funds, records from Treasury Department paymaster Kenneth Feinberg show. Citigroup paid $390.2 million to 21 people, an average of $18.6 million each, the records released Oct. 22 show. Bank of America paid $227.8 million to 13 executives, or $17.5 million apiece, according to Feinberg, who didn’t name them. The review excluded top-paid employees from 2008 who have since left.
Average pay for managers at the two banks was almost double that of the other five bailed-out companies reviewed by Feinberg. He ordered 2009 pay cuts averaging more than 50 percent for 136 executives at the seven firms after President Barack Obama said “it does offend our values” when company executives “pay themselves huge bonuses even as they continue to rely on taxpayer assistance.” Overall, the employees whose pay was reviewed by Feinberg will get $339.7 million this year, or an average of $2.5 million. The totals for 2008 and 2009 were derived using figures Feinberg provided on the dollar amount and percentage decline between the two years.
Feinberg cut the Citigroup executives’ pay by $272 million, or 70 percent, from last year. They’ll still get $118.4 million this year, or an average of $5.6 million each. Most of the pay is in the form of restricted stock, complying with a Feinberg requirement that the companies encourage executives to focus on long-term performance. Citigroup’s 2009 total includes $1 for Chief Executive Officer Vikram Pandit, 52, who in January volunteered to slash his pay after getting $10.8 million in 2008.
Feinberg stipulated “$0” in pay for Andrew Hall, the former head of Citigroup’s energy-trading unit, who was paid about $100 million in 2008. Citigroup agreed earlier this month to sell the unit, Phibro LLC, to Occidental Petroleum Corp., which will foot Hall’s 2009 tab. Citigroup sought aid from the Treasury Department last year as it posted a record net loss of $27.7 billion. Citigroup previously had only disclosed the 2008 pay for Pandit, former Chief Financial Officer Gary Crittenden and Citi’s three other highest-paid officers, former Asia head Ajay Banga, trading chief James Forese and Vice Chairman Stephen Volk. The five of them made a combined $56 million, or an average of $11.2 million each.
Charlotte, North Carolina-based Bank of America will pay the 13 top executives a total of $78.6 million in 2009, according to Feinberg. While the total is down by 66 percent from last year, the executives will still get an average of about $6 million each. CEO Kenneth Lewis, 62, who plans to step down at the end of the year, is working for free this year. He still stands to collect pension benefits that earlier this year were valued at $53.2 million, David Schmidt, senior consultant at James F. Reda & Associates, a New York compensation consulting firm, said Oct. 1. Lewis also has accumulated common shares worth about $57 million, deferred compensation of about $10 million and restricted stock of about $5 million, Schmidt said.
The other five companies reviewed by Feinberg were GMAC LLC, American International Group Inc., General Motors Corp, Chrysler Group and Chrysler Financial. The 22 GMAC executives covered by Feinberg’s review will get an average $3.17 million in 2009 pay, while AIG’s 13 top executives will average $2.42 million. The average was $1.1 million at General Motors, $507,424 at Chrysler Group and $310,506 at Chrysler Financial. The highest approved pay among all the covered executives was $10.5 million for Robert Benmosche, the CEO of AIG, whose bailout totals $182 billion.
Washington's Plans May Result in Even Higher Executive Pay
Executive pay has emerged, once again, as a major issue in Washington. This week Treasury and the Federal Reserve announced new regulations designed to oversee and limit executive pay at thousands of financial institutions. This is deeply ironic, because today's pay woes are the direct result of prior government intervention.
In 1992, Congress decided it would use the tax code to "improve" (i.e., reduce) executive compensation in publicly traded companies. Its vehicle was the Budget Reconciliation Act, a key provision of which became Section 162(m) of the Internal Revenue Code. Noting that executive compensation levels had received negative "scrutiny and criticism" from the public, the new law targeted what it called "excessive employee remuneration." It did so by limiting the ability of public companies to deduct executive compensation for its top employees unless the compensation was paid out in a form that Congress found acceptable. Salary was bad. Stock options were tax favored.
Specifically, corporations were barred by law from deducting as a normal business expense any salary payments of over $1 million. Stock options, however, qualified for the corporate tax deduction without limitation. Much maligned today, stock options then were said to be "performance based" and therefore exempt from the new tax rules. The new tax law immediately led to a tectonic shift in the way CEOs and other top U.S. executives were paid. Stock and stock options became the dominant feature of executive compensation packages.
The impetus for changing the executive compensation laws back then was exactly the same as it is today. Politicians wanted pay lower and wanted to change the executive compensation model to "fix" the risk-taking proclivities of top managers. In 1992, the government thought that managers were too risk averse. Stock options were seen as the magic bullet for making managers act more aggressively in the shareholders' interests. Today, many in Congress are blaming U.S. executives for causing the financial crisis precisely by engaging in "excessive" risk-taking. What they fail to mention is that it was Congress's own tinkering with the tax code that led to the very compensation packages that incentivized the risk-taking.
Fed Chairman Ben Bernanke asserted this week that "compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability." Mr. Bernanke promised that the government "is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."
Other government interference has made the executive compensation problem even worse. A provision in the 1992 tax law required that executives meet certain "objective" performance measures in order to qualify for incentive-based (tax deductible) pay. In the scramble to come up with objective metrics on which to base executive pay, cottage industry "executive compensation consultants" emerged as the most important architects of executive compensation plans.
The compensation consultants promised to design pay programs that did things like "drive the right behaviors" by corporate management, which meant assuming more risk to maximize shareholder value. Public companies hired droves of consultants to analyze pay schemes and design pay packages that created incentives to maximize share prices. Consultants came to be viewed as essential to boards of directors that wanted to implement appropriate—and tax qualified—performance measures.
The most successful consultants are those who can justify the biggest salary increases for the top executives of the companies that hired them. Researchers at the University of Southern California recently found that the median CEO compensation is $1.5 million in companies not using executive compensation consultants, $3 million in companies that purchase general survey data from such consultants but do not directly retain them, and $4.2 million in companies that retain consultants. Some companies use multiple consultants. The USC study found that the more consultants a company hires, the more it pays its top executives. About one-quarter of Fortune 250 companies hire multiple compensation consultants.
Activist investor Carl Icahn summed the situation up well when he recently observed on his Web site that "the use of these compensation consultants, gives both boards and CEOs the appearance of legitimacy for their decisions to award massive pay packages to lackluster CEOs, making it appear that these decisions are objective and scientific, which they absolutely are not." The government also has tried to regulate executive compensation by requiring greater disclosure of the details of compensation plans. Perversely, this too has contributed to an increase in executive pay.
How so? No self-respecting board of directors is willing to admit that their company's CEO is below average. So anytime the new disclosures indicate that an executive's pay is below average in any way, a pay increase is ordered. Since the early 1990s, government regulation of executive compensation has encouraged greater share-price volatility and risk-taking by U.S. corporate executives and led directly to higher, rather than lower, levels of executive compensation. Nevertheless, the Obama administration is now seeking an even greater role in overseeing and regulating executive pay.
In June, Gene Sperling, a top aid to Treasury Secretary Tim Geithner, told the House Committee on Financial Services that "our goal is to help ensure that there is a much closer alignment between compensation, sound risk management and long-term value creation for firms and the economy as a whole." This is just what the regulators told us back in 1992. Current proposals will no doubt result in even higher percentages of executive compensation coming from stock and option schemes rather than from salaries. History teaches that the most profound consequences of new compensation regulation will be unintended. It also teaches that as bad as private ordering may have worked in getting executive compensation right, the results of central planning have been even worse.
Wall Street Follies: The Next Act
by Gretchen Morgenson
It certainly sounded good.
Hoping, perhaps, to persuade a dubious public that curbing reckless business practices is indeed a Washington priority, the Obama administration and Congress produced a hat trick of financial reforms last week. The outlines of a consumer financial protection agency emerged from the House Financial Services Committee. The House Agriculture Committee spelled out ways to regulate risky derivatives trading, and the United States Treasury’s compensation czar announced his plan to rein in runaway executive pay at seven companies that, in total, have received hundreds of billions of dollars in taxpayer help within the past year.
Not to be outdone, the Federal Reserve announced plans late Thursday to review pay practices at the nation’s largest banks. It all left the question, would it make Wall Street safe for America?
For all the apparent action in Washington, some acute observers say that it was much ado about little. Last week’s moves, they say, were tinkering around the edges and did nothing to prevent another disaster like the one that unfolded a year ago. The white-hot focus on pay, for example, looks like a way for the government to reassure an angry public that they are making genuine changes. But compensation is a trifling matter compared to, say, true reform of derivatives trading.
“The American public understands the immorality of paying people huge bonuses for failures that damaged the economy,” said Michael Greenberger, a law professor at the University of Maryland and a former commodities regulator. “What they don’t understand is that those payments are only a small fraction of the irregularities that took place and that, in essence, the compensation problems, as bad as they are, are a sideshow to the casino-like nature of the economy as it existed, pre-Lehman Brothers, and as it exists today.”
It is difficult enough for seasoned regulators or market professionals to assess whether various reform proposals will close pernicious loopholes and make the financial system safer. But for a crisis-weary public, such an analysis is almost impossible. Much easier to grasp are the cuts to executive pay announced by Kenneth R. Feinberg, the Treasury official in charge of setting compensation at bailed-out companies.
Mr. Feinberg reduced compensation across the board at American International Group, Citigroup, Bank of America, Chrysler, General Motors, GMAC and Chrysler Financial, the companies that received the most government help. He cut average cash payments by more than 90 percent and overall pay by around 50 percent. Trying to discourage the instant-gratification mindset that permeates trading desks and executive suites, Mr. Feinberg also required that the majority of the salaries he oversees be paid in stock that must be held for the long term.
It is certainly worthwhile to reduce outsize pay at companies receiving taxpayer support. But regulating derivatives is far more important to those interested in eliminating the possibility of future billion-dollar bailouts. These financial instruments, which trade privately and beyond the prying eyes of regulators, are central to the interconnectedness among companies that required some of the costliest rescues. American International Group, for example, had to be rescued to cover the costs of insurance it had written for customers intending to protect their mortgage holdings from default. The insurance is a derivative called a credit-default swap. The company has received $170 billion in taxpayer aid.
But the derivatives bill generated by the House Agriculture Committee contains a sizable loophole. It is designed to push the trading of these opaque instruments onto exchanges or clearinghouses where regulators and participants can better assess who is at risk. But the bill would let transactions remain private if they involve nonfinancial companies that are trying to protect against fluctuations in their costs of doing business, a practice known as hedging. For example, when Exxon buys or sells derivatives to hedge against shifts in the price of oil, those transactions would be exempt from having to be traded on an exchange or clearinghouse. Thus, many derivatives would not trade in the light of day.
Such companies argue that trading on an exchange will make their costs rise. But critics of the exemption say that if protecting the system from a meltdown costs participants a bit more, so be it. This last go-round has certainly been expensive for taxpayers, after all. The consumer financial protection agency moving through Congress would also carve out an exemption that disturbs advocates for borrowers. It means that the agency will not oversee loans provided by auto dealerships.
Travis Plunkett, legislative director at the Consumer Federation of America, said this is akin to exempting mortgage brokers from oversight in real estate finance. “It’s crazy to us not to cover the people who are offering the loans, who benefit from the loans and who sometimes have been found to participate in unfair lending,” he said. None of this, mind you, addresses the most significant issue of all: how to make sure that companies do not grow to a point where they become too big or interconnected to be allowed to fail. The man with a plan to resolve that crucial problem is Paul A. Volcker, the former chairman of the Federal Reserve who is revered for crushing the ruinous inflation of the early 1980s.
In an interview last week with The New York Times, Mr. Volcker said the nation’s commercial banks should not be allowed to hold and trade risky securities, a practice that generated deep losses for many of them in the credit crunch. The governor of the Bank of England made the same point last week. Separating these operations was the response the United States government took after the Crash of 1929, but today, the administration says it has no plan to break up the banks again in the manner Mr. Volcker suggests.
The former Fed chairman is certainly not alone in his fears about the threat that large institutions still pose. Neil Barofsky, special inspector general of Treasury’s Troubled Asset Relief Program, was asked last Wednesday by CNN about the changes being made to ensure that a disaster like the one starting last year would not recur. “I think actually what’s changed is in the other direction,” the refreshingly candid Mr. Barofsky said. “These banks that were too big to fail, are now bigger. Government has sponsored and supported several mergers that made them larger. And that guaranteed that implicit guarantee of moral hazard. The idea that the government is not going to let these banks fail, which was implicit a year ago, its now explicit.”
Then he added, “So, if anything, not only have there not been any meaningful regulatory reform to make it less likely, in a lot of ways, the governments have made such problems more likely. Potentially, we could be in more danger now than we were a year ago.”
Do not ignore the need for financial reform
by George Soros
The philosophy that has helped me both in making money as a hedge fund manager and in spending it as a policy oriented philanthropist is not about money but about the complicated relationship between thinking and reality. The crash of 2008 has convinced me that it provides a valuable insight into the workings of the financial markets. The efficient market hypothesis holds that financial markets tend towards equilibrium and accurately reflect all available information about the future. Deviations from equilibrium are caused by exogenous shocks and occur in a random manner. The crash of 2008 falsified this hypothesis.
I contend that financial markets always present a distorted picture of reality. Moreover, the mispricing of financial assets can affect the so-called fundamentals that the price of those assets is supposed to reflect. That is the principle of reflexivity. Instead of a tendency towards equilibrium, financial markets have a tendency to develop bubbles. Bubbles are not irrational: it pays to join the crowd, at least for a while. So regulators cannot count on the market to correct its excesses. The crash of 2008 was caused by the collapse of a super-bubble that has been growing since 1980. This was composed of smaller bubbles. Each time a financial crisis occurred the authorities intervened, took care of the failing institutions, and applied monetary and fiscal stimulus, inflating the super-bubble even further.
I believe that my analysis of the super-bubble offers clues to the reform that is needed. First, since markets are bubble-prone, financial authorities must accept responsibility for preventing bubbles from growing too big. Alan Greenspan and others refused to accept that. If markets cannot recognise bubbles, the former chairman of the US Federal Reserve asserted, neither can regulators – and he was right. Nevertheless authorities have to accept the assignment.
Second, to control asset bubbles it is not enough to control the money supply; you must also control credit. The best known means to do so are margin requirements and minimum capital requirements. Currently they are fixed irrespective of the market’s mood because markets are not supposed to have moods. They do, and authorities need to counteract them to prevent asset bubbles growing too large. So they must vary margin and capital requirements. They must also vary the loan-to-value ratio on commercial and residential mortgages to forestall real estate bubbles.
Regulators may also have to invent new tools or revive ones that have fallen into disuse. Central banks used to instruct commercial banks to limit lending to a particular sector if they felt that it was overheating. Another example of needing new tools involves the internet boom. Mr Greenspan recognised it when he spoke about “irrational exuberance” in 1996. He did nothing to avert it, feeling that reducing the money supply was too blunt a tool. But he could have devised more specific measures, such as asking the Securities and Exchange Commission to freeze new share issues, as the internet boom was fuelled by equity leveraging.
Third, since markets are unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks, believing they can always sell their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. That means the positions of all major participants, including hedge funds and sovereign wealth funds, must be monitored to detect imbalances. Certain derivatives, like credit default swaps, are prone to creating hidden imbalances so they must be regulated, restricted or forbidden.
Fourth, financial markets evolve in a one-directional, non-reversible manner. Financial authorities have extended an implicit guarantee to all institutions that are too big to fail. Withdrawing that guarantee is not credible, therefore they must impose regulations to ensure this guarantee will not be invoked. Such institutions must use less leverage and accept restrictions on how they invest depositors’ money. Proprietary trading ought to be financed out of banks’ own capital not deposits. But regulators must go further to protect capital and regulate the compensation of proprietary traders to ensure that risks and rewards at too-big-to-fail banks are aligned. This may push proprietary traders out of banks and into hedge funds, where they properly belong.
Since markets are interconnected and some banks occupy quasi-monopolistic positions, we must consider breaking them up. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall act of 1933 did. But there have to be internal compartments that separate proprietary trading from commercial banking and seal off trading in various markets to reduce contagion.
Finally, the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks. That will probably discourage the securitisation of loans.
All these will cut the profitability and leverage of banks. This raises an issue about timing. It is not the right time to enact permanent reforms. The financial system is far from equilibrium. The short-term needs are the opposite of what is needed in the long term. First you must replace the credit that has evaporated by using the only source that remains credible – the state. That means increasing national debt and extending the monetary base. As the economy stabilises you must shrink this base as fast as credit revives – otherwise, deflation will be replaced by inflation. We are still in the first phase of this delicate manoeuvre. Banks are earning their way out of a hole. To cut their profitability now would be counterproductive. Regulatory reform has to await the second phase, when the money supply needs to be brought under control and carefully phased in so as not to disrupt recovery. But we cannot afford to forget about it.
Food will never be so cheap again
Biofuel refineries in the US have set fresh records for grain use every month since May. Almost a third of the US corn harvest will be diverted into ethanol for motors this year, or 12pc of the global crop. The world's grain stocks have dropped from four to 2.6 months cover since 2000, despite two bumper harvests in North America. China's inventories are at a 30-year low. Asian rice stocks are near danger level. Yet farm commodities have largely missed out on Bernanke's reflation rally in metals, oil, and everything else. Dylan Grice from Société Générale sees "bargain basement" prices. Wheat has crashed 70pc from early 2008. Corn has halved. The "Ags" have mostly drifted sideways over the last six months. This divergence within the commodity family is untenable, given the bio-ethanol linkage to oil.
For investors wishing to rotate out of overstretched rallies – Wall Street's Transport index and the Russell 2000 broke down last week – this is a rare chance to buy cheap into a story that will dominate the rest of our lives. Barack Obama has not reversed the Bush policy on biofuels, despite food riots in a string of poor countries last year and calls for a moratorium. The subsidy of 45 cents per gallon remains. The motive is strategic. America is weaning itself off imported energy at breakneck speed. It will not again be held hostage by oil demagogues, or humiliated by states that cannot feed themselves. Those Beijing students who laughed at US Treasury Secretary Tim Geithner may not enjoy the last laugh. The US is the agricultural superpower. Foes will discover why that matters.
The world population is adding "another Britain" every year. This will continue until mid-century. By then we will have an extra 2.4bn mouths to feed. China and Southeast Asia are switching to animal-protein diets as they grow wealthy, as the Koreans did before them. It takes roughly 3-5kgs of animal feed from grains to produce 1kg of meat. A report by Standard Chartered, The End of Cheap Food, said North Africa and the Middle East have already hit the buffers. The region imports 71pc of its rice and 58pc of its corn. It lacks water to boost output. The population is growing fast. It will have to import, and cross fingers.
The UN says global farm yields must rise 77pc, which means redoubling Norman Borlaug's "green revolution". It will not be easy. China's trend growth in crops yields has slipped from 3.1pc a year in the early 1960s to 0.9pc over the last decade. "We've all heard the stark anecdotes: precious topsoil weakened by over-farming, dust clouds darkening the Asian skies, parched land becoming desert and rivers running dry," said Mr Grice. Since 2000, China has lost nearly 1,400 square miles each year to desert. Urban sprawl is paving over fertile land in the East. Water supply from Himalayan glaciers is ebbing. The Yellow River has been reduced to "an agonising trickle". It no longer reaches the sea for 200 days a year.
Farmers are draining the aquifers. Environmentalist Ma Jun says in China's Water Crisis that they are drilling as deep as 1,000 metres into non-replenishable reserves. The grain region of the Hai River Basin relies on groundwater for 70pc of irrigation. China's water troubles are not unique. North India lives off Himalayan snows as well. Nor can we take fertiliser supply for granted any longer since "peak phosphates" threatens. One can be Malthusian about this. Grizzled commodity guru Jim Rogers certainly is. "The world is going to have a period when we cannot get food at any price, in some parts." He advises youth to opt for a farm degree rather than an MBA, if they want to make serious money.
Mr Grice remains an optimist, believing that human ingenuity will rescue us. You can trade the "Ag" rally by investing in exchange traded funds (ETFs), but this amounts to speculation on food. There are ancient taboos against this practice. Or you can invest in the bio-tech, fertiliser, and land services companies that will both make money and help to solve the problem. Monsanto, Syngenta, and Potash are popular, but trade at high price to book values. Golden Agri-Resources, Yara, Agrium, and Bunge are at better multiples. Kingsmill Bond at Moscow's Troika Dialog suggests the Baltic company Trigon Agri as a way to play the catch-up story in the Eurasian steppe. He likes sunflower processor Kernel, grain group Razgulay, and fertiliser firm Uralkali.
Strictly speaking, the world has enough land to feed everybody. The Soviet Union farmed 240m hectares in Khrushchev's era. The same territory now farms 207m hectares. Troika says crop yields could be doubled in Russia, and tripled in the Ukraine using modern know-how. Africa's farms could come alive with land registers, allowing villagers to use property as collateral for credit. None of this can be done with a flick of the fingers. What seems certain is that the terms of trade between country and city will revert to the norms of the Middle Ages. Landowners will be barons again.
Bank of Japan May Forecast Third Year of Deflation
The Bank of Japan will probably forecast this week that deflation will extend into fiscal 2011, an indication that borrowing costs are likely to stay near zero. Consumer prices excluding fresh food, the bank’s preferred gauge of inflation, will tumble 0.5 percent in the year starting April 1, 2011, and economic growth will accelerate to 1.2 percent, according to the median estimate of 15 economists surveyed by Bloomberg. The central bank will release its semiannual outlook on Oct. 30 at 3 p.m. in Tokyo.
Policy makers will say in the report they plan to keep the benchmark interest rate low to foster the nation’s recovery from its worst postwar recession, analysts predict. That commitment, against the backdrop of forecasts for entrenched deflation and a fragile recovery, will quell any investor speculation that the bank unwinding emergency credit measures will lead to a rate increase, said Masaaki Kanno. “The BOJ will probably highlight that consumer prices will be stuck in negative territory and use that to convince investors that a rate hike is still far, far away,” said Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo.
Eleven analysts said the bank will say this week it plans to stop buying commercial paper and corporate bonds from lenders in December as scheduled because companies are finding it easier to obtain credit. Fifteen of the 16 economists who gave monetary policy forecasts through 2011 said they expect the key rate to stay at 0.1 percent through the end of 2010 at the earliest. Japan’s borrowing costs have been kept below 1 percent since Sept. 1995. The yen traded at 92.05 per dollar at 7:15 a.m. in Tokyo from 92.06 late Oct. 23 in New York.
“The central bank will likely decide this week it will end the credit programs” on Dec. 31, said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo. “They can use the meeting to simultaneously show their subdued outlook for the economy and prices while underlining their commitment to a low-rate policy,” quashing speculation of an imminent rate increase, he said. The asset-purchase programs have been in place since the bank lowered borrowing costs to 0.1 percent in December amid the worst global financial crisis since the Great Depression. It has also been offering lenders unlimited loans backed by collateral, a facility analysts say the bank may extend into next year.
Bank of Japan Governor Masaaki Shirakawa and his deputy Kiyohiko Nishimura said this month the need for the programs of buying corporate debt has diminished as credit markets have stabilized. The bank is committed to keeping borrowing costs “very low,” they said.
Some central banks are tightening policy as the global economy recovers. Australia this month became the first Group of 20 nation to raise interest rates since the height of the financial crisis and policy makers in South Korea have signaled they will tighten credit to prevent asset bubbles from destabilizing growth. Japan’s central bank may decide this week to extend the limitless lending initiative to March because the facility is being used by lenders and terminating it may cause borrowing costs in the money market to rise, according to JPMorgan’s Kanno.
Not all economists expect a decision on the programs this month. Analyst Mari Iwashita says the bank may postpone the decision for a month because this week’s gathering will focus on the economic projections. “Board members probably won’t oppose ending the corporate debt programs, which are being little used, but they probably remain divided over” the lending program, said Iwashita, chief market economist at Nikko Cordial Securities Co. in Tokyo. “This week’s meeting may not be a good opportunity to make a decision given that the board also wants to focus on their economic forecasts.” The economy will shrink 3.1 percent in the year to March before growing 1.1 percent in fiscal 2010, according to the median estimate of 16 economists surveyed. Prices will fall 1.6 percent this year and 1.3 percent in the following 12 months, they said.
Shirakawa has said the bank isn’t confident about the strength of the world’s second-largest economy once global stimulus fades and companies replenish inventories. The yen’s more than 5 percent advance against the dollar in the past six months has eroded exporters’ profits, while also made making imports cheaper and contributing to price declines. Domestic demand is also showing signs of waning. Economists expect the unemployment rate to rise to an unprecedented 6 percent next year. Prime Minister Yukio Hatoyama’s government last week pledged to create 100,000 jobs by March.
“We’ll soon see more signs that the rebound is losing steam and that Japan may slip back into a recession,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. The BOJ’s report “will convince investors that the central bank won’t seek to raise rates until the first half” of fiscal 2011 at the earliest, he said.
Merkel's New Government 'Financially Foolhardy and Politically Faint-Hearted'
Chancellor Angela Merkel is taking a big gamble by cutting taxes at a time of record government debt, write media commentators. Her new government is betting that lower taxes will boost economic growth enough to allow her to avoid big spending cuts. Some commentators say she has no choice. Germany has a new center-right government after three weeks of coalition talks that ended in the early hours of Saturday morning. Chancellor Angela Merkel's conservatives and the pro-business Free Democrats have come up with a program of tax cuts and benefit increases, and have shelved issues they couldn't agree on, for example health policy.
German media commentators say Merkel is taking a big risk by cutting taxes at a time when the government debt is already at record levels in the wake of the financial crisis. In effect, she is gambling that the tax cuts will spur growth and thereby pay for themselves through increased tax revenues once Europe's largest economy starts chugging again. If that strategy doesn't work, the government will have no option but to slash spending to stop its budget getting out of control. Investors and consumers may have their doubts about whether Merkel's strategy will work. But several commentators say she has no option but to try. Reining in spending now, just when the economy has left recession and embarked on a very fragile recovery, would be even more risky, they say.
Business daily Handelsblatt writes:
"The main defect of this government is that it combines financial foolhardiness with political faint-heartedness. It is foolhardy to pack credit-financed presents on top of record government debt. Twenty years after the fall of the Berlin Wall one is reminded of the government of Helmut Kohl which told the Germans that the immense costs of unification could be shouldered without a radical financial reform. Kohl used the first Gulf War in 1991 as an excuse to break his promise and to raise taxes. Merkel has left herself a way out too: her government will compile a 'financial status' in 2011. That will give her the chance to catch up with something that is already clear today: her government will have to reduce debt through a combination of tough spending cuts and new revenue.
The uncertainty surrounding the maneuvers and tricks the government will come up with to break its promises is weighing on investors and consumers. That, together with the extent to which the state is tapping the financial market, is weakening the momentum for economic growth. There's only one hope left: the new finance minister, Wolfgang Schäuble. His first statements since his appointment reveal the realism that has been sorely lacking in others. He's thick-skinned and is well aware of Germany's European obligations. If he turns the 'financial status' into his agenda, the botched launch of this government can be mended. But that's little more than a hope."
Business daily Financial Times Deutschland writes:
"They haven't come up with any major reforms, and decisive issues such as health reform and energy policy have been left up to working groups. But the question is whether the country now needs major reform. It's far more important that the economy gets going again. And in this central point the new government has laid the right foundations. The conservatives and FDP aren't making the mistake of choking off the delicate recovery with spending cuts. On the contrary: they are trying to support the recovery."
Left-wing Die Tageszeitung writes:
"If one were to find this collection of minor admininstrative steps on a subway one would assume it were the election manifesto of an exhausted ruling party that has run out of ideas rather than the program of a fresh coalition."
Center-left Süddeutsche Zeitung writes:
"This coalition agreement has many shortcomings but so far its creators don't warrant the accusation of social callousness. The first trademark of the coalition is its incompleteness. The government will be sworn in on Wednesday even though the coalition isn't ready for it. The entire agreement contains plans that haven't been fully formulated yet. It resembles a novel that is full of printing errors: whenever things get exciting there's a page missing. The incompleteness of the new alliance fits in with the picture that Merkel herself gave during the talks which weren't her best three weeks. The chancellor herself stands for little in this agreement. She wants to stimulate growth but was pushed into making concessions of which she said nothing during the election campaign. During the campaign Merkel spoke of modertate tax cuts of more than €15 billion. Now it's €24 billion."
Mass circulation daily Bild writes:
"The conservatives and the FDP have kept their tax promises. People will get noticeable tax cuts. The coalition is putting all its eggs in one basket and relying on growth. If there's no growth this promise will come to nothing. It's a bold move. But at the moment it's the only possible one."
Conservative Frankfurter Allgemeine Zeitung writes:
"Betting on growth, the way the chancellor is now doing it, is risky. Because it's true what she says: that the crisis isn't over yet. It's reckless of the conservatives and the FDP to launch their government without putting a single additional brake on government debt. No one expected the new coalition would pull out of all its crisis aid overnight, halt new borrowing or jettison its tax reform plans. But one had a right to expect that the agreement would not just contain the timetable of tax cuts but also include spending cuts with the same level of commitment, if not for tomorrow then for the day after tomorrow. There's not a word in those 130 pages about how the new government proposes to cut spending."
IMF tells Ukraine to veto pay rises
The International Monetary Fund warned Ukraine on Sunday that the financial institution might freeze assistance ahead of a hotly contested presidential election if populist wage and pension increases are introduced. The warning comes as fears grow that Kiev could sink deeper into political turmoil, following in the footsteps of other eastern European countries – most recently Romania – which saw their governments collapse amid the economic downturn.
In a statement issued after talks with Kiev’s officials, the IMF said its decision to issue an additional $3.8bn (€2.5bn, £2.3bn) in aid would hang on “assurances that the wage and pension law approved by Ukraine’s parliament, which is at odds with the objectives of the authorities’ programme, will be vetoed”. The statement was a clear warning to President Viktor Yushchenko, who has not yet clarified whether he will sign or veto the law. Ukraine needs the aid to service a budget deficit and keep the country stable as it heads into the election.
The law envisions some $1bn in wage and pension increases ahead of January’s presidential election, and nearly $10bn next year. It would increase Kiev’s budget deficit from 6 to 8 per cent. With gross domestic product plunging by 18 per cent in the first half of 2009, and finances stretched to the limit, Ukraine’s government has stayed afloat this year thanks to nearly $11bn in IMF assistance. Officials say the economy is starting to pull out of a deep recession, but insist they do not have funds to cover additional expenditures.
The IMF said “the economic and financial situation in Ukraine is stabilising as a result of” fund assistance and policies. “Preserving these gains will require policy discipline and corrective actions in some areas.” Mr Yushchenko, with his popular support at single-digit levels, is not expected to be re-elected. But he and other presidential candidates have accused the IMF of being too soft on Yulia Tymoshenko’s government. They have suggested the IMF could be backing Ms Tymoshenko’s presidential candidacy by providing financial assistance despite adoption of unpopular reforms. The IMF has denied such allegations. Observers say reforms have been stalled due to constant political bickering.
The presidential race, which formally kicked off last week, is considered by many to be wide open. But the two frontrunners are Ms Tymoshenko and Viktor Yanukovych, the former prime minister and Moscow-backed candidate in the 2004 presidential election. Like Mr Yushchenko, Ms Tymoshenko is a pro-western leader who supports Ukraine’s bid to join the European Union. She has also positioned herself as a candidate who could harmonise relations with Russia. These went sour under Mr Yushchenko’s presidency.
UK households 'lost 13% of wealth in one year'
The huge impact of the economic turmoil on households in Britain has been revealed by new figures that show that household wealth in Britain fell by £844bn between 2007 and 2008, driven by sharp falls in house prices and the collapse of the stock market. It is expected to fall by a further £251bn in 2010 after a slight improvement this year. The near 13pc decline, to £5.8 trillion between the end of 2007 and the end of 2008, was a combination of a £394bn fall in housing wealth and a £450bn decline in net financial assets.
The findings, by the National Institute of Economic and Social Research (NIESR), were described as "staggering" by Simon Kirby, research fellow at the think tank. "In just one year that's almost the total annual income of households wiped from their stock of wealth," he said. Pensioners, and people who are close to retirement, have been among the worst affected by the decline in wealth. Shareholder losses following the nationalisation of some of Britain's banks and building societies, will also have wiped out wealth for many.
The latest survey by Nationwide on Friday is expected to show that that house prices rose for the sixth consecutive month. However, many economists agree with NIESR that recent rises could prove to be a false dawn, and predict further falls next year. "We suspect that higher prices will usher new properties on to the market over the coming quarters and this will subdue future house price growth," said David Page, economist at Investec. Consumer spending is not expected to lift the country out of this recession, because disposable income growth is likely to remain weak, and unemployment, a lagging indicator, is expected to keep rising and stay high long after the recession has ended. Most economists expect the jobless total to peak at about three million next year. John Philpott at the Chartered Institute of Personnel and Development said: "Unemployment will continue to rise well into 2010.
Modest economic growth and the need for businesses to raise productivity and restore profitability will then result in a jobs-light recovery and a prolonged squeeze on pay packets lasting well into the next decade." NIESR predicts consumer spending will fall by 3.3pc this year, followed by a 0.7pc drop in 2010, and a further 0.1pc decline in 2011, partly as Britons take a more cautious approach to their finances. Over the past 20 years, Britain has had the lowest net saving ratio of all major economies, NIESR said. The saving rate is expected to rise in the coming years. Spending is also likely to be hit once the temporary VAT reduction to 15pc is reversed back to 17.5pc on December 31. A significant proportion of the boost to spending is expected to come over the next couple of months, as consumers bring purchases forward to take advantage of the lower rate.
Conrad Black's shadow hangs over the collapse of a Canadian media empire
While he languishes in a Florida prison cell, press baron Conrad Black might permit himself a nostalgic smile. Canada's largest media company, Canwest Global Communications, has filed for bankruptcy protection, laden with debt incurred in an ill-considered deal with the notoriously ruthless fraudster who once owned the Daily Telegraph. Struggling to pay its bills and facing a crisis of confidence among advertisers, Canwest filed for protection for some of its operations, including the National Post newspaper, from its creditors at a Toronto court this month. The move could lead to a break-up of an empire spanning Canada's Global Television network, and a roster of press titles including the Montreal Gazette, the Ottawa Citizen and the Vancouver Sun, and part-ownership of BBC Canada.
It is difficult to overstate Canwest's influence in Canada. It's an extraordinary story of acquisitive growth. The company was founded in 1975 when a chain-smoking former provincial politician, Israel "Izzy" Asper, bought a North Dakota radio station and had its transmitters trucked to his home town of Winnipeg. As its collection of pre-eminent Canadian media properties swelled, the company horrified those on the left with its eager dissemination of neo-conservative philosophy and hawkish views on the Middle East.
Its bankruptcy filing is a severe blow to a dream of international influence harboured by Asper and his children, who wanted Canwest to rank alongside global giants such as News Corporation and Viacom. Experts trace its downturn to a deal in 2000, when the firm was out-foxed by Black, who sold Asper a stable of top newspapers for C$3.2bn (£1.9bn). "That was the start of the unwinding," says Todd Johnson, a portfolio manager at BCV Asset Management in Winnipeg. "I don't think you can say they ever got the returns from that newspaper business they expected and the deal was financed with high-cost debt."
The transaction with Black was classic brinkmanship. Frustrated by the limitations of news broadcasting, Asper was keen to build a press platform through which he could expound his political views. Meanwhile, Black, a fellow conservative media mogul, had decided that the fortunes of the newspaper industry had peaked. According to evidence at his fraud trial in 2007, the peer gave Asper the impression that there were rival bidders in the wings for his Southam collection of papers. In fact, there were none.
"Conrad sold him those papers at the very height of their value. It was almost the week, the day, when they peaked," says journalist Peter Newman, author of a biography of Asper. "Here, being offered by Conrad at one swoop, were the most powerful newspapers in Canada. It was a very tempting proposition." Canwest borrowed the funds to purchase Black's papers at 12% interest and then, further weakening its balance sheet, bought a television network covering western Canada for an additional C$900m. Newman says: "Suddenly, this very healthy company had a huge debt that had to be serviced."
Asper died in 2003 and left Canwest to his three children, one of whom, Leonard, became chief executive. The younger Asper compounded the financial over-stretch by striving to grow internationally. The company has had interests as far afield as Chile, New Zealand and Ireland. It owned a leading Australian television station, Ten Network, and British radio stations in Bristol, Aberdeen and Southampton. Chris Diceman, an analyst at ratings agency DBRS in Toronto, says foreign expansion was, with hindsight, foolish: "They were not in good shape. If they'd then focused more on what was happening here in Canada, they might have seen some of the strategic changes going on and focused on deleveraging."
Sell-offs to raise funds over the past 18 months have proved insufficient to withstand an advertising recession. Hit by a billion-dollar write-down in the value of its assets, Canwest suffered a C$1.58bn loss for the nine months to May and had $4bn of debts. Concerned about Canwest's financial position, banks began balking at lending it money to produce television shows and US studios demanded letters of credit before renewing programming agreements.
In an email from prison to Canadian media outlets, Black has shrugged off responsibility for Canwest's difficulties. "I had nothing to do with the Canwest problems," he wrote, blaming the Aspers for loading themselves with debt. "The acquisition from us was not financed properly." Senior executives at Canwest insist this is not the end. Leonard Asper has expressed optimism that a restructured Canwest will emerge from the bankruptcy courts.
The firm has a tentative agreement under which its borrowers will take control, leaving existing shareholders with little more than 2% ownership. Its bankruptcy filing only covers divisions owning Global Television and the National Post, with specialist cable channels and city newspapers still solvent. He told the National Post: "We have a controlled restructuring and a company that when it emerges is going to be very strong and very profitable."
But a research note by Tim Casey, an analyst at BMO Capital Markets, said: "We expect the television and newspaper assets at Canwest to be formally separated in the very near term. What is much less clear is who, among the existing media companies, will end up owning various assets within the company."
If Canwest breaks up, not everyone will shed tears. Marc Edge, author of Asper Nation: Canada's most dangerous media company, said Canadians will be better off without a company that, at one point, tried to get all its city newspapers to publish centrally written editorials produced at its Winnipeg headquarters, advocating "neo-liberal economics, deregulation, privatisation and ardent Zionism". Such was the discontent among journalists about the Aspers's editorial line that staff at the Montreal Gazette went on a byline strike in 2001, refusing to put their names to articles or pictures.
"The worst thing about the Aspers was that they politicised, to a great extent, Canadian journalism," says Edge. "There seems to have been a concerted movement to take Canada's press to the right by people like Conrad Black and the Aspers. That's unhealthy for political discourse." Perhaps surprisingly, many of Canwest's businesses are in relatively healthy shape by the standards of the world's struggling newspapers and broadcasters. Canada's advertising recession has been milder than the downturn south of the 49th parallel and the country retains an appetite for print media.
The Communications, Energy and Paperworkers' union of Canada says the company fell victim to a familiar credit-crunch story – debt-friendly banks allowed its management to take on far too much leverage. "It's not as if their properties are teetering on the edge. The problem is that they were just far, far too heavily extended," says Peter Murdoch, the union's vice-president for media. "You'd like to think the banking system should have said to Canwest, 'You've borrowed too much money, you won't be able to sustain it'. It's not unlike other sections of the economy where financial institutions have fed an addiction for greed."
Russian Banks Count Pigs, Lingerie as Collateral From Debtors
When Russian billionaire Alexander Lebedev’sOAO National Reserve Bank seized collateral offered against a loan from a cash-strapped borrower, a health quarantine was slapped on the security: 40,450 pigs. “We had a court decision to take away the collateral, which is the pigs,” Lebedev, 49, said in an interview in Moscow. The borrower, a farm near Samara on the Volga river, agreed “with the local authorities to establish a quarantine” against African swine fever. The former KGB officer is still waiting to collect the pigs offered against a loan of 100 million rubles (3.5 million). A kilogram of live pig costs an average of 78.4 rubles, the National Meat Association says.
Russian lenders are seeking to recoup losses by accepting a range of collateral, including stakes in Wild Orchid, a lingerie retailer, and food store Mosmart. The banks have been hit by a surge in non-performing loans, which Moody’s Investors Service estimates may rise to 20 percent of the total by year-end. The bad debt threatens to stall bank lending and may jeopardize a recovery in Russia’s economy, which grew 0.6 percent in the third quarter from the second, the Economy Ministry says. “It is not a viable strategy for a bank because banks aren’t doing their core business there,” Eugene Tarzimanov, assistant vice president and banking analyst at Moody’s in Moscow, said. “They could be stuck with those assets for a number of years.”
Russian banks are characterized by “very high risk on a global comparison,” Standard & Poor’s said in a Sept. 28 report. The share of “problem loans” may jump to $110 billion by year-end and account for 25 percent of total lending by the end of 2010, compared with 11 percent in the middle of this year, Moody’s estimates. “We have no idea how to build roads, milk cows or pour metal,” said Vladimir Tatarchuk, co-head of corporate finance at Alfa Bank, told reporters in Moscow on Oct. 23. “We’re finance professionals, that’s what we do. We have no plans to develop other businesses. If we have an opportunity to sell immediately” assets taken as collateral, “we’ll do it, even if we lose some potential upside just so we can recover our money.”
Lebedev says loans secured with “strange assets” make up 5 percent of his bank’s total portfolio and as much as 20 percent of loan books at the country’s biggest state banks. The banks are resorting to the “strange” collateral as their only alternative to cash as companies struggle to keep up with payments. The state-run banks, which include Russia’s two biggest lenders, OAO Sberbank and VTB Group, have “less leeway” to pressure borrowers to service debt, said Tarzimanov. “They are obviously controlled by the government, and they have a social mandate and fewer options when there is a difficult situation,” he said.
The list of unorthodox collateral filling up banks’ balance sheets is long. Sberbank received a holding of 50 percent plus one share in Wild Orchid. Russia’s biggest lingerie retailer pledged the stake as it seeks to restructure 1.6 billion rubles of debt owed to Sberbank, Anton Sergeyev, a spokesman at Wild Orchid, said by phone. Russia’s largest lender also owns more than 50 percent of food retailer Mosmart, according to Vitaly Podolski, its chief executive officer.
VTB has taken majority stakes in 11 alcohol producers as payment for debt and became a majority shareholder in two developers, including a project to overhaul the Dynamo soccer stadium in Moscow. As government-controlled banks’ balance sheets swell with non-financial assets, the lenders may be forced to rethink their approach to the terms under which they provide credit.
“State banks are burdened with social responsibility to a greater extent than” their private counterparts, Zaali Tsanava, director for collecting overdue corporate debt at Moscow-based Alfa Bank, said. “But the situation is developing in such a way that state banks will have to review their policies and perhaps adopt a more stringent approach” because “even they can’t afford to give away money.” The banks’ books are filling up with risky assets as their capital buffers dwindle. Russia has stress-tested all its banks and a number of the 100 biggest lenders won’t fulfill capital adequacy requirements, central bank First Deputy Chairman Gennady Melikyan said on Oct. 21. Capital shortages may appear within six months, he added.
Banks and other companies may struggle to sell debt to consolidate their balance sheets next year as investors opt to buy government bonds instead, according to Bank of America Merrill Lynch. The government plans to sell as much as $18 billion in debt in 2010 to plug an estimated deficit of 6.8 percent of gross domestic product. The economy may shrink 7.5 percent this year, President Dmitry Medvedev said on Oct. 11. While initial and secondary public offerings by banks in which the state has holdings are possible, they are only likely to happen after “non-performing loans flush out of their system and stabilize,” said Steven Meehan, UBS AG’s chief executive officer for Russia in an interview at a conference in Moscow.
The banking industry may face more volatility as it seeks to dispose of the collateral it seized, said Svetlana Kovalskaya, an analyst at Moscow-based investment bank Aton. “The risks will increase if the economic recovery drags on and asset prices don’t return to pre-crisis levels,” she said. Meantime, Lebedev is still waiting to collect the pigs, which he plans to take to a slaughterhouse or another farm. “One of the big risks is how do you protect your investment against people who don’t want to pay you back anything,” he said. “But you don’t sit and wait until the economy switches on again. You do something about it.”
McDonald’s Closes in Iceland After Krona Collapse
Iceland’s McDonald’s Corp. restaurants will be closed at the end of the month after the collapse of the krona eroded profits at the fast-food chain, McDonald’s franchise holder Lyst ehf said. McDonald’s in Iceland, which imports most of the ingredients it uses in its meals, will shut after costs doubled over the past year, Lyst said in an e-mailed statement today. The franchise holder said it doesn’t expect the situation to change in the short term.
“We would have to raise our prices by 20 percent to get the margin needed on our products,” Magnus Ogmundsson, Lyst chief executive officer, said in a phone interview. “That would have sent a Big Mac to 780 kronur” ($6.36), compared with the 650 kronur it costs today, he said. The island’s currency collapsed last year following the failure of Iceland’s biggest banks. Offshore, the krona slumped as much as 80 percent against the euro, while capital restrictions this year have failed to prevent an 8.1 percent decline, making the krona the second-worst performer of the 26 emerging-market currencies tracked by Bloomberg. “Our competitors all use domestic meat and lettuce and so on, while we are flying in these materials, which is extremely expensive,” Ogmundsson said.
The most expensive Big Macs are sold in Switzerland and Norway, where the burger costs about $5.75, according to the Economist 2009 BigMac index. The cheapest are sold in South Africa, $1.68, and China, $1.83, the index shows. McDonald’s, the world’s largest restaurant chain, opened its first store in Iceland in 1993. The first person on the island to consume a Big Mac was then Prime Minister David Oddsson, who later became governor of the central bank before his dismissal by the current ruling coalition earlier this year. The island has three McDonald’s restaurants, all of which will be closed.
The closure sparked a wide range of responses from bloggers on the island. Pall Vilhjalmsson said he was glad the stores were closing, calling the chain a “symbol of American colonialism” and that it has “terrorized food culture all over the world.” Hreinn Omar Smarason, said he will “miss Ronald McDonald,” adding he hopes the stores will return as soon as possible. Iceland is relying on a $2.1 billion loan from the International Monetary Fund to stay afloat after its three biggest banks collapsed having racked up debt more than 10 times the size of the economy. The central bank imposed capital restrictions at the end of last year to prevent a sell-off of the currency.
Visa rules keep Mexican Supreme Court judge out of Canada
Canadian official didn't believe he had enough money to make the trip
A Mexican Supreme Court judge says he was initially denied a travel visa to visit Canada with his family this summer because an official didn't believe he had enough money to make the trip. "When I was informed that our applications were rejected, my first reaction was a big surprise, especially when we knew that we had everything that was needed," Jose Fernando Franco Gonzalez-Salas, a judge on the Supreme Court of Justice of the Nation in Mexico, told the Star in an exclusive interview last week.
Gonzalez-Salas said he agreed to tell his story because he wanted to shed light on how a controversial new requirement that all Mexican nationals obtain a temporary resident visa before travelling to Canada for business or pleasure is affecting Mexicans who have no wish to join the illegitimate refugee claimants the change was to target. "(I want to) help the Mexican authorities who are working to sensitize the government of Canada about the problems and injustice many Mexicans have suffered while asking for a visa to visit that beautiful country and enjoy the warmth and generosity of their people to tourists – especially to Mexicans," Gonzalez-Salas wrote in an email translated from Spanish.
Citizenship and Immigration Canada says 84 per cent of travel visa applications (30,130 of 35,853) have been approved from when the restriction came into force July 14 to the end of last month. Refugee claims at Canadian ports of entry from Mexican nationals fell to 35 over the same period, down from 1,287 in the 10 weeks before the rule came in. The numbers suggest the restriction is working, but critics argue it is too blunt a tool and leaves legitimate travellers little recourse except to go through the tedious process of applying for a visa again with little idea of whether they will be accepted this time.
Earlier this year, Gonzalez-Salas, his wife and their daughter planned a trip to Canada to visit his son and daughter-in-law, who were in graduate school at the University of Toronto. They were scheduled to fly to Toronto July 16 and then travel to Quebec City, Tadoussac, Montreal, Ottawa and Kingston before returning to Toronto to celebrate the completion of his son and daughter-in-law's master's degrees and then go home to Mexico City on July 30.
Gonzalez-Salas, his wife and daughter applied for single entry visas, which cost 905 Mexican pesos ($75 Cdn) each, on July 13 after hearing Canada was about to bring the new restriction into force the next day. They had to fill out forms with detailed information about their family members and educational and employment history. Gonzalez-Salas said he also had to include a letter from work stating his seniority and wages as well as bank statements. Gonzalez-Salas said he received a rejection letter the day before his family was scheduled to fly to Canada.
"The visas were denied on the basis of me not having enough stability in my job and that my finances were not enough to make the trip," said Gonzalez-Salas, who did not keep a copy of the letter. Supreme Court judges in Mexico have often been criticized for their high salaries.
A spokesperson for Citizenship and Immigration Canada said privacy legislation prevented her from commenting on specific cases but suggested there was more to the story. "Our facts differ significantly from what you have indicated," Kelli Fraser wrote in an email, adding that if Gonzalez-Salas signed a form waiving his rights to privacy she could explain more about his case.
Gonzalez-Salas declined to sign the form.
"My first reaction was to cancel the trip to Canada," said Gonzalez-Salas, who was appointed to the 11-member Supreme Court to preside over administrative and labour law in December 2006. "Personal contact with the Canadian ambassador in Mexico or anyone from the embassy was next to impossible. Everything had to be dealt with on the telephone through recorded messages." He said that some friends in high places convinced him to wait a bit and then – through some way unknown to him – his family was granted the visas early on the day they were supposed to catch their flight to Canada and so managed to enjoy their vacation as originally planned.
"What is really hurtful and upsetting still is that too many Mexicans, who with great effort made plans to travel to that wonderful country and that met all the requirements to be granted a visa, have not been able to get one. If they do, it is after great delay, which is causing great damage," Gonzalez-Salas said. "I think that is a great injustice." A spokesperson for the Embassy of Mexico in Ottawa said the country remains disappointed with the travel restriction.
"We still regret the measure and our government is still working toward modifying this measure as soon as possible," said Alberto Lozano Merino. "We have been working with some Canadian authorities in reducing any effect on Mexicans' travel plans to Canada, but we still think that this measure will not guarantee the reduction in the number of refugee claims and it is increasing the operating cost of the Canadian Embassy in Mexico."
Message from the Gyre
These photographs of albatross chicks were made just a few weeks ago on Midway Atoll, a tiny stretch of sand and coral near the middle of the North Pacific. The nesting babies are fed bellies-full of plastic by their parents, who soar out over the vast polluted ocean collecting what looks to them like food to bring back to their young. On this diet of human trash, every year tens of thousands of albatross chicks die on Midway from starvation, toxicity, and choking.
To document this phenomenon as faithfully as possible, not a single piece of plastic in any of these photographs was moved, placed, manipulated, arranged, or altered in any way. These images depict the actual stomach contents of baby birds in one of the world's most remote marine sanctuaries, more than 2000 miles from the nearest continent.
~cj, October 2009