Washington, DC: F Street NW covered in slush
Ilargi: No doubt there are people who see this week's BLS Non-Farm Payroll survey as "not good, but not all that bad either". They can point for instance to the fact that the 85,000 jobs lost according to the report is much better than the 800,000 jobs lost back in March 2009. The Wall Street Journal puts it like this: ”Even though the payroll number was worse than expected, the data reflects an improvement in the jobs market.”.
But unfortunately, this is all smoke, mirrors, bias and outright falsehood. The Household part of the monthly BLS survey mentions 465,000 lost jobs. 647,000 full time jobs left the building. But that's not even remotely where the true problem lies.
The reason why unemployment, as per the Household survey, stayed at 10% and "only" 85,000 jobs are reported MIA in the Payroll survey can be found in the labor force numbers. From November to December 2009, the "persons not in the labor force" category went up by 843,000 (over 1 million when not seasonally adjusted), and now stands at 83,865,000. The vast majority of those singing off, i.e. not actively looking for work, are people who can't see any jobs anywhere in their environment. The worse the economy gets, the fewer people are counted as unemployed. It’s a lovely invention, but it's also am awfully perverted one.
That is also true for seasonal adjustments in other categories. It’s estimated that that actual initial claims numbers may be double what's reported, simply because the models used are too rigid to take into account present economic conditions. A similar idea is true for continuing claims. Michael Widner at Stifel, Nicolaus says:
”We could conceivably have nearly 11 million people collecting unemployment and see the data reported as a 3.something million figure."
U6 unemployment is up. Average and median unemployment duration is up on all counts. The amount of people without a job for more than half a year is soaring, and these people now form 40% (6.1 million) of the total unemployed. The employment to population ratio fell to 58.2%, the lowest in at least 27 years. The national payroll level went from 130.8 million in 2000 to 130.9 million today. 100,000 jobs added for the 13 million people who were added to the "available" labor pool. In other words, 13 million unemployed were added.
Extended benefits and Emergency Unemployment Compensation, the two programs set up for the long-time jobless, are bursting through their seams. A slight decrease in initial and continuing jobless claims may seem to indicate something positive, but the reality is that people don't leave these programs because they find jobs, but because they've exhausted their benefits and are forced into extended and emergency programs. There are strong suggestions that the latter grew by some 43% in just the past month.
And though we've seen no mention of it this week, we haven't forgotten that the BLS "owes" us the 824,000 jobs they "forgot" to count till March 2009.
No matter where you stand, no matter what you see the economy doing in 2010, it should be clear to everyone who can read by now that reporting on unemployment in the US is a god-forsaken mess, strongly biased towards what pleases Washington, i.e. numbers much lower than the real ones. That said, while many citizens may still be fooled by the official data, you can bet that Washington knows perfectly well what the real numbers are, and many hours of backroom meetings are dedicated to the topic. How much of that reflects genuine care for constituencies, and how much mere worry about election numbers, we’ll leave up to you to ponder.
The same mentality that leads to the severely distorted jobs numbers speaks loudly from the AIG files, that increasingly question Tim Geithner role in the $100+ billion handed to Goldman Sachs et al as 100% compensation for lost credit default swaps wagers. And that, predictably, leads to calls for the resignation of Geithner.
But we've seen similar calls for Ben Bernanke and Larry Summers to resign. And they're still there. Moreover, what difference would it make to remove one of them and leave the others be where they are? If you don't clean up for real, why bother? It becomes just another silly game that way, doesn't it?
Reminds me of a man named Travis Bickle, who said some 35 years ago:
"All the animals come out at night - whores, skunk pussies, buggers, queens, fairies, dopers, junkies, sick, venal. Someday a real rain will come and wash all this scum off the streets."
85,000? We’re Missing a Million of Them!
by David Goldman
No, Virginia: There isn’t a Santa Clause, and even if there is, he didn’t bring an employment recovery for Christmas. But the household data in many ways are far more concerning than the establishment data, which show an 85,000 drop in December payrolls.
A far more disturbing number (in Table A-1 of today’s BLS release) shows that "persons not in the labor force" increased by about 840,000 between November and December, from 83,022 to 83,865. That’s seasonally-adjusted; unadjusted, the number is closer to a million. Correspondingly, the total size of the civilian labor force fell from 153,720 to 153,059 between November and December.
What happened to the million Americans who went missing from the BLS definition of the labor force in the single month of December? They are the "long-term discouraged" or whatever, those whose prospects of finding a job are so poor that they have stopped looking.
Employers Cut 85,000 Jobs in December
U.S. job losses were higher than expected in December of last year and the unemployment rate remained at a lofty 10%, a sign the labor market has still some way to recover. Although the November 2009 data was revised to show the U.S. economy added jobs for the first time since the recession began two years earlier, the December payroll number was worse than forecast. Nonfarm payrolls fell by 85,000 last month, compared with a revised 4,000 gain in November, the Labor Department said Friday.
Economists surveyed by Dow Jones Newswires had expected a payroll decrease of just 10,000. The November figure originally showed an 11,000 drop in payrolls. The unemployment rate, calculated using a survey of households as opposed to companies, remained at 10% in December, the same level as the previous month. Economists had forecast the jobless rate would edge higher to 10.1%. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care continued to add jobs.
Even though the payroll number was worse than expected, the data reflects an improvement in the jobs market. Job losses have been moderating substantially during 2009 as the U.S. economy recovered from its worst recession in decades. In the fourth quarter of 2009, employment losses averaged 69,000 per month, compared to job losses of 691,000 a month in the first quarter of last year. Employment in construction fell by 53,000 in December, while manufacturing jobs fell by 27,000. Temporary help services added 47,000 jobs in December and health care employment continued to increase, by 22,000.
Ahead of the release, analysts warned against reading too much into one piece of data. "The number, as reported, is revised no less than three times, often showing a final number that bares little resemblance to the originally reported figures" said Dan Greenhaus, chief economist at Miller Tabak & Co. The Federal Reserve's view that U.S. interest rates must remain at a record low for several more months isn't expected to change following the December jobs report.
The central bank's rate-setting committee left interest rates close to zero mid-December in the face of low inflation and still-high unemployment. Since the financial crisis began in 2007, the Fed has slashed its benchmark lending rate from a peak of 5.25%. Minutes of last month's meeting, released earlier this week, showed that Fed officials remained worried about the labor market's weakness. "Several participants observed that more than one good report would be needed to provide convincing evidence of recovery in the labor market," the December minutes showed.
Fed officials have predicted the unemployment rate will average between 9.3% and 9.7% in the fourth quarter of 2010 due to a slow recovery. The U.S. economy is expected to have expanded at a healthy pace in the second half of 2009, but the jobs market's weakness, tight bank lending and a fading government stimulus is seen keeping the recovery contained. Friday's report showed that average hourly earnings rose to $18.80 from $18.74.
Euro-Zone Jobless Rate Hits Double Digits
The unemployment rate in the euro area touched double digits in November for the first time since the introduction of the single currency more than a decade ago, demonstrating that the nascent recovery has yet to feed through to the labor market. Eurostat, the European Union’s statistics agency, said on Friday that the seasonally adjusted unemployment rate in the 16 euro countries rose to 10 percent in November from 9.9 percent in October and 8 percent in November 2008.
For the euro area, the rate was the highest rate since 1998, a year before the euro was introduced. The number of unemployed in November rose by 102,000, a still significant pace of increase although down from the monthly peak of 475,000 seen at the start of last year. The unemployment rate for the broader 27-member E.U. was 9.5 percent in November, from 9.4 percent in October and 7.5 percent in November 2008.
In France, the rate stood at 10 percent, up from 9.9 percent in October. In Germany, it was 6.8 percent, unchanged from October and down 0.1 point from September. For Italy, the rate was 9.7 percent, unchanged on the month. The highest rates in the month were recorded in Latvia, at 22.3 percent, and Spain, with 19.4 percent. Unemployment among the under-25s in Spain has now touched a massive 43.8 percent. The lowest rates were in the Netherlands, at just 3.9 percent, and Austria, on 5.5 percent.
While there have been signs of accelerating economic activity in Europe — France and German officially emerged from recession during the third quarter and Britain is expected to have done the same during the fourth quarter — economists say that the unemployment rate could well keep rising through this year, as employment does not tend to pick up until later in the cycle. "We think that the labor market correction has a long way to go," said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. "Employment has still not fully adjusted to the fall in output during the recession, reflecting institutional rigidities in the euro-zone labor market."
During past recoveries, labor markets in the euro area have taken longer to improve than that of the United States, he said. Data on the U.S. labor market for December will be released later Friday. In November, the U.S. unemployment rate edged down 0.2 points from October to 10 percent. Eurostat also confirmed Friday that the euro-zone economy grew by 0.4 percent in the third quarter from the previous period, driven by a strong performance in Germany. Growth in the wider E.U. picked up by 0.3 percent.
Economists say that the rate of unemployment would be even higher in Europe if government like France and Germany had not backed schemes that offer support to companies putting workers on shorter hours. Separately, the Swiss federal department of economic affairs said Friday that unemployment there climbed to 4.4 percent in December, the highest level since 1997. It was 4.2 percent in November.
The Lost Decade
by David Rosenberg
Today’s U.S. nonfarm payroll report, when you consider how many barbiturates the government has supplied the economy, can only be described as horrible.
It’s not that for the first time in a long time the consensus missed the headline to the downside — looking for a flattish print versus the reported decline of 85,000 — but the details were very soft and a big problem emerged for the bond bears and Fed hawks, which is that the "gaps" in the labour market are widening. This, in a word, is "deflationary" in a world where governments have been reflating like crazy into a post-bubble credit collapse. It’s one thing to cushion the blow, but it is quite another to turn the tide. From top to bottom that message came across loud and clear. There will be those who blame the cold weather for the dismal tally, but for some reason that didn’t stop 11 million souls from buying a new car last month (though 20% of that was fleet-related).
Even as weak as the -85,000 headline print was, the details were even softer. What is critical, given that the payroll survey has a large company bias, is what the Household survey showed when measured in a similar fashion. The population and payroll concept adjust employment figure better measures what is occurring at the small company level where the trend in orders, output, sales and employment have been far less robust than has been the case for big businesses, which have greater access to credit and exposure to the global consumer. On this basis, employment showed a massive 465,000 decline in December and down exactly three million in the second half of the year.
In our view, this is the most accurate employment barometer in the current environment. Even adjusted for the inclement weather, which kept some people homebound last month, this metric still would have shown a massive decline in excess of 400,000. If this is what the beginning of a recovery looks like then we’d be keen on seeing what would happen if the economy were to double dip. It’s not just the magnitude of the job declines but how widespread they are that is disturbing. The employment diffusion index fell to 40.0% from 42.4% in November. The manufacturing diffusion index came in at 39.8%, which belies the ballyhooed bounce in the ISM to a three-year high of 55%.
While there may have been some notable bright spots, such as financial services posting a payroll gain for the first time since July 2007, the fact that so many economic-sensitive sectors lost more jobs in December: construction (-53,000), durable goods manufacturing (-16,000), retail/wholesale (-28,000), transportation (-8,000), leisure/hospitality (-25,000), information services (-6,000) and real estate (-6,000). In other words, the segments of the employment pie that are sensitive to the business cycle actually cratered 142,000 last month, which flies in the face of the overwhelming view that this recession has really fully run its course.
In a sign that we, at the very least, are still finding a way to employ doctors, nurses and teachers, the health/education sector managed to eke out a 35,000 advance. Though even here the gains are a tad below the typical 40,000 monthly increases we were seeing during the boom years of the last cycle. Once again, the growth bulls will point to the 47,000 rise in the ‘temp help’ segment of the payroll report — the fifth increase in as many months — as a constructive signpost but the problem here is that the only jobs that are being filled are in part-time positions. Full-time employment plunged 647,000 last month while part-time edged up by 66,000 — every one was because they could not find anything but part-time work.
So, while the jobless claims data have been signaling that the pace of firings has subsided sharply, the reality is that nobody is hiring, especially in the small business sector, and this was the primary concern the Fed highlighted in the set of minutes that was just released for the December Federal Open Market Committee (FOMC) meeting. As we said above, labour market ‘gaps’ are widening; this is economist lingo that basically refers to the fact that slack in the jobs market is expanding, and this is why wage growth remains under relentless downward pressure. The unemployment rate stayed at 10% in December but it did so for a very bad reason. It was because the labour force plunged 661,000 in what was the sharpest decline in nearly 15 years. Without that dramatic disengagement from the jobs market on the part of the general public, the unemployment rate would have spiked to 10.4%.
In fact, the U6 measure of joblessness, which captures all the various degrees of unemployment and underemployment, rose to 17.3% from 17.2% and is flirting with the highest levels ever for this series.
To add insult to injury, both the average (29.1 weeks) and median (20.5 weeks) duration of unemployment rose to new all-time highs in December; and the ranks of the unemployed who have been looking fruitlessly for a job for at least 27 weeks surged 229,000, or 3.9% MoM, also to a record high of 6.1 million (or 40% of the total jobless tally, yet another record). It is exactly this discouragement that has led to the participation rate sliding to its lowest level since August 1985.
The so-called ‘employment rate’ — the ratio of employment to population — fell 58.2% from 58.5% in November and the cycle peak of 63.4% in 2007. This is extremely significant because what it means is that it would take an expansion in employment of 20 million over the next five years just to get back to those old cycle highs. But here’s the problem — the country has never before managed to come close to creating that number of jobs over a half-decade period, so what the future holds is one of ongoing deflationary labour market pressure as far as the eye can see.
We started the decade with a national payroll level of 130.8 million. We finished the decade practically unchanged at 130.9 million. Meanwhile, the total pool of available labour rose from 146 million to 159 million. In other words, we have the same number of jobs today as we did a decade ago, and yet we also have 13 million more people competing for them. It was more than just a lost decade for the equity market. It was a lost decade for the labour market. Today’s report validated the Fed’s concern over the outlook for employment, which dominated the FOMC minutes released earlier in the week. Those pundits calling for an early exit from the central bank’s accommodative stance may have some reconsidering to do.
No doubt that we are seeing modestly positive growth in the economy and that the pace of job declines is moderating. We won’t quibble with the rose-coloured glass crowd on that. But the extent of any improvement has to be viewed in the perspective of the vast amount of fiscal and monetary resources that have been deployed to-date to try and bring the economy out of its malaise. If indeed the economy is fully out of recession then that first quarter of positive growth normally is 7.0% at an annual rate, not the pathetic 2.2% rate posted for the third quarter. And, considering that the Fed began to ease monetary policy back in the summer of 2007, what is normal typically 21⁄2 years after the first rate cut is that real GDP is humming along at a 5.0% annual rate and employment isn’t declining at a slower rate but is booming. The fact that that the private domestic demand is still so stagnant following the greatest experiment with fiscal and monetary ease in recorded history, we have to admit, leaves us more than just a tad worried over the macro outlook and beyond.
Massive Jump In Emergency Unemployment Compensation (EUC) Benefits - Up 43% In One Month!
by Mike Shedlock
I was intrigued by a post by Zero Hedge asking Is The Government Misrepresenting Unemployment By 32%?"...government spent a record $14.7 billion on Unemployment Insurance Benefits as of December 30, a 24% jump sequentially from the $11.8 billion in November. Yet the DOL has disclosed a mere 1.7% increase in those to whom insurance benefits are paid: from 9.4 million to just under 9.6 million. To put the $14.7 billion number in perspective, in December the Federal Government paid a total of $14 billion ($700 million less) in Federal Salaries!I figured the explanation would show up in charts somewhere and I asked Chris Puplava at Financial Sense for a chart of Emergency Unemployment Compensation (EUC) Benefits as well as an update on other charts he has graciously provided on request.
And some more perspective: in calendar 2009 the government has paid $140 billion in Unemployment Insurance Benefits. This is yet another economic stimulus that nobody in the administration discusses, yet which undoubtedly has the biggest impact on the economy, as all those millions unemployed can moderate their pain courtesy of a passable weekly check from the government which should just about cover the rent and beer.
Which is why more than anything, Obama is dead set on extending insurance benefit payments in perpetuity: because if the 10 million official and 14 million unofficial people who are on benefits (not to mention the tens of millions of unemployed unlucky enough to even get their weekly allowance from Uncle Sam) start thinking about their true predicament and their real "employability", then a landslide loss by this administration at the mid-term elections will actually be an upside surprise to what it can objectively expect.
From Chris Puplava ...
My answer would be a MASSIVE jump in the Emergency Unemployment Compensation (EUC) benefits, which jumped from 3,594,253 (11/07/09) to 5,143,410 (12/19/09), up 43% in just over a month! The increase in EUC more than offset the decline in continuing claims and we are now at a new record when combining all measures of unemployment benefits. Economists were pointing out that continuing claims and initial claims were falling as a bullish sign, however what was happening was that those benefits were exhausting for people who used up that benefit, leading to the decline in the numbers which is proved by a record (52.24%) exhaustion rate.
Record Unemployment Deterioration
However, these people were not finding employment which is why the House passed a bill in December to extend benefits, thus leading to a massive 43% jump in the aptly named “EMERGENCY” Unemployment Compensation program. The jump was so large that now the EUC numbers surpass continuing claims!
The data I have from Moody’s comes with a lag, so the data in the charts below is only updated through 12/19/09, but the combined unemployment claims numbers just broke out to a new record!
Combined Weekly Claims
Combined Weekly Claims Detain Since 2000
Combined Weekly Claims As % Of Population
Continuing Claims From Bloomberg
Extended Claims From Bloomberg
Emergency Claims From Bloomberg
The above charts and commentary all thanks to Chris Puplava at Financial Sense .
4 Week Moving Average Of Weekly Claims
Those charts should help put the "improvement" in weekly claims numbers from the Department of Labor in perspective.In the week ending Jan. 2, the advance figure for seasonally adjusted initial claims was 434,000, an increase of 1,000 from the previous week's revised figure of 433,000. The 4-week moving average was 450,250, a decrease of 10,250 from the previous week's revised average of 460,500.BLS Chart of Weekly Claims
Lovely. The 4-week moving average of initial claims is a whopping 450,000. Yes, that is down from 550,000 or so, last March but it is still consistent with losing jobs. The average needs to get below 400,000 before it is consistent with jobs being added.
Moreover, employers are not firing as many as before, but the above charts show that jobs once lost, are not coming back.
US Job Loss Report Bad on Almost All Counts
The expert consensus proved wrong once again today, and extremely disappointing, as the Bureau of Labor Statistics today reported a drop of 85,000 in the country’s nonfarm employment for December. In one of the only bright spots in today’s report, the bureau revised its report for November, making that the only month since December 2007 to show a slight job gain. The official "U3" unemployment rate remained at 10.%. The decrease in jobs was substantially below the lowest estimate made by experts surveyed by Bloomberg last Friday. The "U6" unemployment rate, an alternative BLS measure that includes discouraged workers and part-time workers who want full-time jobs rose to 17.3%.
The tally of officially unemployed is now at 15.3 million, with the U6 population of unemployed and underemployed still clocking in at 26 million. The civilian labor force participation rate fell to 64.6 percent in December. The employment-population ratio declined to 58.2 percent. According to the BLS’s current population survey, the civilian workforce fell another 843,000 Americans in December. How many of these retired, decided to stay home to raise a child or take care of an elderly parent or decided to go to college or just got discouraged at looking for work, is unknown. Whatever their reasons, if they had stayed in the workforce, the unemployment rate today would be 10.5%.
Talk of a possible positive BLS jobs report for December grew in the media after the government originally reported last month that only 11,000 jobs had been lost in November, a sharp drop from previous months. The question now is how long it will be before there is a positive jobs report. At least 8.2 million jobs have been lost during the Great Recession, and even if private-sector jobs were to be created at the rate they were during the Clinton administration, about 225,000 a month, it would take three years before as many people are employed as were working in December 2007, the last time that the economy showed job growth.
That kind of increase would be hard enough to sustain. But, while there are a few contrarians, many factors continue to point to tepid economic growth over the coming year, meaning that nowhere near 225,000 jobs will be created each month. For instance, in December, the Federal Open Market Committee was generally positive about an improving economy, but most participants ...anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion would imply slow improvement in the labor market next year, with unemployment declining only gradually.
How gradually is too gradually? If you’re one of the 6.1 million Americans who has been out of work for six months or more, or one of the several million working part time because you can’t get a full-time position, you’ll likely answer that question rather differently than if you’re a politician who thinks the biggest problem right now is deficit spending.
The BLS report also noted:
- Construction employment declined by another 53,000; manufacturing employment fell another 27,000.
- Employment in health care services rose by 22,000.
- The average workweek for production and non-supervisory workers stayed steady at 33.2 hours.
- The number of long-term jobless (27 weeks or longer) rose to 6.1 million.
- October job losses were revised from 111,000 to 127,000, and the losses for November were revised from 11,000 to a gain of 4,000.
A +316,000 NFP Print On Friday? The BLS Seasonal Fudge Factors Make It Very Likely
While the ADP number today of -84k was not much of a surprise to consensus, everyone is focused on this Friday's much more important NFP release, which economists expect to post the first rise in 2 years at +10,000. Yet an analysis out of Stifel Nicolaus points out that due to various seasonal adjustments, an NFP print of up to +100,000 could be expected (which incidentally does not reflect anything favorable at all about the actual employment picture as it is due exclusively to seasonal fudge factors). In fact, Stifel argues, a print of +316,000 is theoretically possible (we await Goldman's whisper leak to provide additional color). In either case, should the NFP come at that level, we fully anticipate the market will react like a stung, rabid bull, as computers buy blindly on the headlines, with no regard for the underlying adjustments.
For those who care where such an aberration of a number could come from, here is one explation courtesy of Michael Widner at Stifel, Nicolaus.
- Any rigid predictive model will occasionally be predictably wrong.
- We believe we are coming up on such an event with employment data.
- We believe the jobs reports later this week and for the next few weeks will paint a rosier picture of the employment market than is expected or warranted.
- This is driven by the interaction of how the methodology works, how seasonal adjustment factors are calculated and applied, and the specific economic condition we are currently in.
- Non-farm payroll appears the likely big beneficiary on Friday and we see a strong chance of a +100K or better print (vs. ADP data today at -84K).
- Thursday's claims numbers are just a precursor to next week's as this mathematical peculiarity plays out but we believe there is a reasonable likelihood of seeing reported initial claims fall below 400K and continuing claims fall below 4M in the January 14 data.
- The issue here is that the Department of Labor's fairly rigid adjustment models assume we had the usual surge in seasonal end-of-year hiring in 2009 and that the corresponding post-Christmas and post-New Year cutbacks will follow.
- It doesn't account for the fact that average weekly hours worked before the holidays were at an all-time low (indicating excess labor capacity), that retail shopping expectations were muted, and in general seasonal hiring was fairly low. As a result we believe it overestimates impending seasonal firings and will subtract too high a number from actual results.
- There are additional peculiarities in the models that we believe will have predictable effects. While the non-farm payroll data oddities are less predictable we believe there is a quantifiable positive bias which suggests we should see good numbers there this month and next.
And the most relevant bit for those computers among you who only read the first 2 letters of a headline before lifting any and all offers:
- Our point is not to try to accurately predict what the numbers will be. There is far too much uncertainty to have any confidence in doing that.
- Rather, our point is to demonstrate that the odds are skewed toward data looking better than expectations because the methodologies at this particular juncture have a bias.
- This is independent of any actual jobs market improvement or decline.
- The bad news is that the adjustment models are built by definition to be zero sum across the year. So the bias toward under-reporting now will come back as over-reporting as we move into the spring and the model expects seasonal hiring rather than firing.
- We remain highly concerned about the employment situation and expect it to weigh on economic recovery much more than usual in this cycle.
Yet while January and February numbers will likely under-report, with the launch of the census hiring, those numbers will likely offset the adjustment shifts throughout the first half of the year, painting an abnormally and transiently rosy picture for a good six months. And no, this is not artificial consumer boosting. At least not in the purest sense, as that would be illegal, even for this government. And what is going on here is perfectly legal.
Some additional information from Stifel that indicates just how the DOL's adjustment model works in various situations:
In the simplest quantitative terms the Department of Labor's seasonal adjustment model will assume 33% of this week's initial claims are seasonal and will eliminate them from the as reported number. Next week it will jump to 45%.
This is based on historical patterns that are similar but quite a bit more sophisticated than simple regressions. But their chief limitation, and thus the basis of this commentary, is that they do not take into account the specifics of current labor markets or recent employment trends.
This will likely result in initial claims reaching their highest level since last February next week while the model reports it as the lowest level in 18 months.
Initial claims data is distorted in two ways by the adjustment model. The first we described in the introductory bullets. The summary is that it expects a large number of seasonal firings that we believe will come in light because the model doesn't know that the corresponding seasonal hiring was light. If we had to guess we'd say this adds a weekly bias of 15K – 20K currently. But don't look for that as a w/w change as the bias started to roll in during November and will continue into February. As a result the model is understating (over-
correcting) the data each week. This effect peaks next week.
The second issue is that the model works using multipliers rather than additions or subtractions. Specifically it expects a 15% w/w increase on an already inflated number. Put in terms of actual jobs the model will back out 223K expected seasonal job losses from headline numbers over the next two weeks. In a more normal environment (e.g., 2003 – 2006) this would about 160K.
Put differently, the model assumes that when firings are already running high the seasonal component will be amplified as well. Intuitively we expect the opposite. Firms have already cut to the bone and since the seasonal hiring was modest the corresponding firings will likely also be. We expect this to add a bias of roughly 60K over the next two weeks, with most of it coming next week rather than this week.
All in we believe there is a high likelihood that reported initial claims will fall below 400K next week (1/14) even if the jobs market doesn't actually improve. This week is a bit less clear and we expect the reported number to actually come in fairly flat w/w and expect last week's 434K number will likely be revised higher.
We are fond of the following chart that shows how these issues have impacted the reported data over the past six months. The bars show actual initial claims, the line shows the as-reported figures. The reported data has shown a steady decline since July while the actual initial claims have been on a steadily rising trend. In other words people have been losing jobs at a faster and faster pace since September, but the adjustment model expected job losses to rise even faster than this and thus turns the rising trend into a falling trend.
Source: Department of Labor
Mathematically if the model was built to assume seasonal hiring and firing was a percentage of total employment (e.g., 1% of total employment ebbs and flows seasonally) rather than a percentage of total firings (e.g., 33% of firings this week will be assumed seasonal) the chart would tell a much different story. But it bears repeating this is a zero sum game. What the model credits us with now it will demand of us later.
The same adjustment mechanism will also wildly distort the Continuing Claims picture:
Continuing claims data suffers from the same biases as initial claims data as it is built using the same models. When unemployment claims are running high it assumes a greater number of them are attributable to seasonality. And we happen to be heading into the weeks where the highest percentage of claims will be stripped out in the name of seasonality.
We spent 27 consecutive weeks this year (April through October 3) with the reported continuing claims numbers in the 6M+ range. Over the next 10 weeks the number gradually declined to just under 5M. In the next two weeks we believe the adjustment model can push the figure to 4.1M and possibly produce a below 4M print in January. (At this point we expect it to rise again in the spring.)
There are two factors at work here. The first is the fact that individuals can only remain in the data series for 26 weeks. After that they are eliminated, even if they are still jobless and collecting benefits (which can last up to 79 weeks now). As a result the number is generally pressured lower by the fact that people are getting kicked out the back end of the data faster than they're coming in the front end, even if they're still jobless.
The second factor is the seasonal adjustment that suffers the same biases we discussed for initial claims. Specifically 14% of continuing claims this week will be assumed to be seasonal (up from 2% last week) and 30% of next week's claims will be assumed seasonal. This will translate into 1.2M people being erased from the headline number next week, vs. only 109K last week.
Mathematically if the actual number of people in the continuing claims data rises by less than 120K over the next two weeks we'll see a reported number under 4M on January 14. This would represent a huge (apparent) improvement, as we barely touched below 5M last week for the first time since last February.
The following chart depicts the unadjusted and adjusted ongoing claims data. The points we want to highlight are 1) the reported data (red line) has shown steady improvement since July, 2) the unadjusted sum of people collecting benefits (continuing claims plus those on extended benefits) has actually been steadily rising and is now at an all-time peak, and 3) the disparity between these trends is about to get much wider due to the adjustment methodology. We could conceivably have nearly 11M people collecting unemployment and see the data reported as a 3.something million figure.
The bottom line to us is that we expect the headline continuing claims numbers to drop sharply over the next two weeks driven purely by the methodology.
Whether the labor market actually improves or decays at all is going to be completely swamped by the adjustment factor in our view.
The big issue we see is that the sharp drop in reported continuing claims seems likely to give the impression that job creation is taking off, when in fact it will actually say nothing about job creation in our view.
But most disturbing for the topic at hand, NFP, here is why the Obama administration will likely be spinning "amazing" job data for the next several months:
For the initial and continuing claims data the seasonal adjustment factors are fairly rigid and published by the Department of Labor well in advance. The non-farm payroll adjustments used to be similar in that regard, but since 2003 that has changed. The Bureau of Labor Statistics no longer publishes adjustment factors in advance, and in fact now actually derives them on the fly as the data comes in. As a result it is now much more difficult to predict how seasonal adjustments may skew the non-farm payroll data. [Thank you Beijing ministry of data dissemination]
That said we do know that the seasonal adjustments need to be a zero sum game over the course of the year. And we do know the range of historical adjustment factors each month. As a result we can make predictions of the likely range they are going to exhibit in any given period.
The following chart depicts the historical seasonal adjustment factors by month for the non-farm payroll reports since 1996, when the current model was implemented. The vertical axis reflects the monthly adjustment factor, the horizontal reflects the month of the year. First we'll explain mechanically how this works and then talk about implications.
Mechanically the Bureau of Labor Statistics (BLS) surveys business each month and asks questions about their total payroll. If the BLS could talk to every employer the simple sum of all of their employees would be the unadjusted non- farm payroll figure. Of course they only make a statistical sample of businesses, biased toward large companies, but that's an issue for another day.We run with the assumption for now that their statistical sample is accurate and each month they have a correct tally of total employees in the unadjusted result.
To adjust for seasonality that unadjusted result is multiplied by the numbers depicted on the following chart. When jobs are seasonally weak the multiplier is greater than one, when they're seasonally strong the multiplier is less than one.
Here is the real crux of the issue, in our view, all the market ever really reacts to is the m/m change in seasonally adjusted non-farm payroll. And that number is very heavily influenced by the m/m change in the seasonal multiplier.
As we said earlier, we don't know where the December multiplier is going to come out. (Chances are the BLS is still deciding that.) But looking at the data plot of the past 14 years suggests it will likely be in a reasonably narrow range.
The November point (end of the heavy red line in the chart) was oddly at an all-time low. Effectively the BLS attributed a higher percentage of the current workforce to seasonality last month than any time in the past 14 years. Which means they erased a record high number of people out of the headline non-farm payroll number.
As we look to December data (reported this Friday) if this seasonal adjustment multiple returns to anything in the range of historical norms it should provide a huge lift to the reported m/m change. In quantitative terms a return to the 1996–2008 average would create a seasonal lift of 431K to the as-reported m/ m change. In comparison the 1996–2007 actual December m/m change (unadjusted) was 116K. Put differently, if this was an average December for job creation and the adjustment factor returns to a historical average we would see a non-farm payroll print of +316K on Friday.
We see this as an unlikely scenario as we don't think the BLS would make that large a change to the seasonal factor and they do have discretionary control.
We have no way of knowing what seasonal adjustment factor the BLS will use this month but we do know that eventually this imbalance will have to balance out. (Again, seasonal adjustments must work out to a zero sum across the year.) We suspect the BLS will smooth out that seasonal adjustment imbalance over the next several months, so we may get an upward bias of say 80K this month, 100K next month, then 120K, etc. Conspiracy theorists would suggest this might be an effective way to create the illusion of steady improvement that could potentially become self sustaining. (If we believe the economy could succumb to a placebo effect.) But it bears repeating, eventually these adjustments must all sum to zero.
We won't comment on the last paragraph, safe to say that there is nothing about the current administration that would provoke us to say they may have a data-manipulation agenda. Nothing.
And, once again, to those who trade merely off headline bullets instead of ever reading between the lines, here are Stifel's concluding remarks:
Every now and then circumstances come along that in our view lead to predictable distortions in the data that will create the appearance of a trend, whether or not that trend is real. We believe we are at one of those points. What is really happening and what appears to be happening with the economy can be two very different things for a certain period of time.
For those inclined to trade on such anomalies we reiterate that the probability bias seems to favor employment data coming in well above consensus expectations even if the true trend is mild worsening. We expect this to last through January for claims data and likely a few additional months for non-farm payroll.
There is most definitely a high degree of noise in actual results but in our view the methodologies force the probability distribution heavily in favor of better than consensus headlines.
As a final comment we remain fairly bearish on the economic recovery despite our expectations for data to look strong in the short term.
We will provide tomorrow's Jan Hatzius' NFP estimate the second it is released. We will not be surprised if Goldman once again leaves the consensus estimate pack and ends up with a highly favorable (and mostly imaginary) number, which will be within significant digits of Friday's NFP outcome.
U.S. consumer credit down record amount in November
U.S. consumers sharply reduced their debt in November, the Federal Reserve reported Friday. Total seasonally adjusted consumer debt fell $17.49 billion, or at a 8.5% annual rate, in November to $2.46 trillion. This is the record tenth straight monthly drop in consumer credit. Consumers have retrenched since the financial crisis hit in full force in September 2008. Credit has fallen in every month except January 2009.
Economists surveyed by MarketWatch expected consumer credit to decline by $3.9 billion. In the subcategories, credit-card debt fell $13.7 billion, or 18.5%, to $874.0 billion. This is the record 14th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell $3.8 billion or 2.9% to $1.59 trillion.
State Tax Revenue in U.S. Drops Most Since 1963
U.S. state tax collections fell the most in 46 years in the first three quarters of 2009 as the recession shrank revenue from sources including personal income, the Nelson A. Rockefeller Institute of Government said. Revenue dropped 13.3 percent, or $80 billion, compared with the same nine months of 2008, to $523 billion, the institute said. Collections in the third quarter alone sank 10.9 percent to about $162 billion, according to the report released today by the Albany-based body. It was the fourth straight quarterly decline. The institute is the public policy research arm of the State University of New York.
"The first three quarters of 2009 were the worst on record for states in terms of the decline in overall state tax collections, as well as the change in personal income and sales tax collections," Rockefeller analysts Lucy Dadayan and Donald J. Boyd wrote in the report. The institute explores ways to help state and federal governments work better. The worst economic slump since the Great Depression has forced states to cut spending, raise taxes and pass down costs to local governments to cope with $193 billion of combined budget deficits in the current fiscal year, according to a Center on Budget and Policy Priorities report issued last month.
Budget gaps have opened in 31 states since fiscal year 2010 began, Dadayan and Boyd wrote, citing a National Conference of State Legislatures study. "2010 is going to be very difficult for the states and the next year is likely to be significantly worse," Rockefeller Deputy Director Robert Ward said in an interview. California’s deficit is going to total $20 billion for the next 18 months, Governor Arnold Schwarzenegger said in a speech yesterday. Schwarzenegger, a Republican, is scheduled tomorrow to release his budget plans for the state, the largest issuer of municipal debt.
New York is grappling with an $8 billion budget deficit, Governor David Paterson said in his state-of-the-state speech yesterday. "The great recession hit virtually every single source of tax revenue and pushed a number of states to revise revenue forecasts numerous times throughout fiscal 2009 and 2010, with significant impacts on services," Dadayan and Boyd wrote. State income tax revenue was down 11.8 percent in the third quarter, sales tax collections were down 8.9 percent, and corporate income tax declined 22.6 percent, according to the study.
The Obama administration’s $787 billion stimulus package made up as much as 40 percent of the revenue losses states suffered, Ward said by telephone. "It is a very significant amount of compensation but by no means eliminates the problem," he said. Ward said economists are split over whether the economy is recovering. He said taking an optimistic view "states still have some way to go just to stop the losses." Local tax revenue grew by 0.7 percent in the third quarter, the report said.
Wave of Bankruptcies Hits States Hammered by Housing Bust
Personal bankruptcies soared last year in Western states hit hardest by the real-estate bust. In states such as California, Arizona and Nevada, where housing prices soared and then collapsed during the past decade, consumer bankruptcy filings rose roughly twice as much as the national average increase of 32%. Homeowners fell behind on mortgages and could no longer tap into their home equity to pay down other debts. "There's a close relationship between high levels of household debt, including mortgage debt, and bankruptcy filings," said Samuel J. Gerdano, executive director of the American Bankruptcy Institute, a research organization made up of attorneys, accountants and other bankruptcy professionals. "That...has been exacerbated by the bursting of the housing bubble."
In Arizona and Nevada, where bankruptcies increased most, filings skyrocketed by 79.6% and 59.5%, respectively. Nearly 6.2% of mortgages in Arizona and 9.4% of mortgages in Nevada were in foreclosure by the end of the third quarter of 2009, according to the Mortgage Bankers Association. California saw personal bankruptcy filings rise 58.8% last year. At the end of the third quarter, some 5.8% of loans were in foreclosure there. Not everyone who goes through foreclosure ends up in bankruptcy and not every bankruptcy is driven by foreclosure. Some states with relatively few foreclosures, such as Utah and Wyoming, had larger increases in personal bankruptcies than Florida, the scene of lots of foreclosures.
Mortgage troubles and job losses were primary contributors to the rise in personal bankruptcies last year, with the impact of both often felt in the same household. Makoto Shuttleworth, a California bankruptcy lawyer, said his clients four years ago were almost exclusively renters. Homeowners in financial trouble could almost always take care of their debts by selling their home or turn its equity into cash via refinancing, he said. As real-estate prices collapsed, Mr. Shuttleworth saw more homeowners come through his doors, most with steady incomes. Today, with the unemployment rate at 10%, he is seeing more clients whose debts have piled up after losing their jobs.
Fed Tells Banks They Need To Worry About Rising Interest Rates
Is the Fed signalling the end of uber-cheap money, and the tidal-wave steep yield curve that's been a gravy train for struggling banks? That's certainly one interpretation of a new ADVISORY ON INTEREST RATE RISK MANAGEMENT that the Fed has sent to all banks. Think about it: there's no reason for banks to be too concerned under the current environment, but they should be prepared if things change. And you know that eventually they will.
The Federal Reserve Thursday released an advisory reminding depository institutions of supervisory expectations for sound practices in managing interest rate risk. This advisory, adopted along with the other financial regulators, reiterates the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the interest rate risk exposures of depository institutions. It also clarifies elements of existing guidance and describes interest rate risk-management techniques used by effective risk managers.
The financial regulators recognize that some interest rate risk is inherent in the business of banking. At the same time, institutions are expected to have sound risk-management practices to measure, monitor, and control interest rate risk exposures. The financial regulators expect each depository institution to manage its interest rate risk exposures using processes and systems commensurate with its complexity, business model, risk profile, and scope of operations.
The financial regulators remind depository institutions that an effective interest rate risk-management system does not involve only the identification and measurement of interest rate risk, but also addresses appropriate actions to control this risk. If an institution determines that its core earnings and capital are insufficient to support its level of interest rate risk, it should take steps to mitigate its exposure, increase its capital, or both.
In an accompanying Supervision and Regulation letter to Reserve Bank heads of supervision, the Federal Reserve noted that although the advisory is targeted at depository institutions, the advice provided is also directly pertinent to bank holding companies. Bank holding companies are reminded of supervisory expectations that they should manage and control aggregate risk exposures, including interest rate risk, on a consolidated basis, while recognizing legal distinctions and possible obstacles to cash movements among subsidiaries.
In addition to the Fed, the financial regulators include the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Financial Institutions Examination Council State Liaison
Geithner’s Fed Told AIG to Limit Swaps Disclosure
The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.
AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.
The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a "backdoor bailout" of financial firms. "It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information," said Issa, a California Republican. Taxpayers "deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information."
"Secretary Geithner played no role in these decisions," Meg Reilly, a Treasury spokeswoman, said in an e-mail. "He was recused from working on issues involving specific companies, including AIG," after his nomination for Treasury secretary on Nov. 24, 2008. Geithner "began to insulate himself weeks earlier in anticipation of his nomination," she said in a separate statement. Geithner, who was tapped by President Barack Obama, took the Treasury job in January, 2009.
Issa requested the e-mails from AIG Chief Executive Officer Robert Benmosche in October after Bloomberg News reported that the New York Fed ordered the crippled insurer not to negotiate for discounts in settling the swaps. The decision to pay the banks in full may have cost AIG, and thus taxpayers, at least $13 billion, based on the discount the insurer was seeking. The e-mail exchanges between AIG and the New York Fed over the insurer’s disclosure of the transactions show that the regulator pressed the company to keep details out of the public eye. Issa’s comments add to criticism from Republican lawmakers, including Senator Chuck Grassley of Iowa and Representative Roy Blunt of Missouri, who wrote letters in the past two months demanding information from Geithner, 48, about the costs of the AIG bailout.
Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, said the e-mail exchanges were "troubling" and that he supports holding congressional hearings to review them. AIG’s Dec. 24, 2008, filing was challenged privately by the U.S. Securities and Exchange Commission, which polices the adequacy of disclosures by publicly traded firms. The agency said in a letter to then-CEO Edward Liddy six days later that AIG should provide a Schedule A, which lists collateral postings for the swaps and names the bank counterparties that purchased them from the company. The Schedule A was disclosed about five months later in a filing.
"Our position has always been that if AIG’s securities lawyers determine that AIG is legally obligated to make a particular filing or disclosure, then that is what AIG must do," Thomas Baxter, general counsel for the New York Fed, said in a statement. He said it was appropriate for the New York Fed, as party to deals outlined in the filings, "to provide comments on a number of issues, including disclosures, with the understanding that the final decision rested with AIG’s securities counsel."
Kathleen Shannon, an AIG deputy general counsel, wrote to the insurer’s executives in a March 12, 2009, e-mail about the conflicting demands from the New York Fed and SEC. "In order to make only the disclosure that the Fed wants us to make," Shannon wrote, "we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available."
Under pressure from lawmakers, AIG disclosed the names of the counterparties, which included Deutsche Bank AG and Merrill Lynch & Co., on March 15. The disclosure said AIG made more than $27 billion in payments without identifying the securities tied to the swaps or listing the value of individual purchases by each bank, details the Fed wanted to keep out, according to the March 12 e-mail from AIG’s Shannon. Earlier that month, Fed Vice Chairman Donald Kohn testified to Congress that disclosure of the counterparties would harm AIG’s ability to do business. The insurer agreed to turn over a stake of almost 80 percent in connection to its bailout.
The e-mails span five months starting in November 2008 and include requests from the New York Fed to withhold documents and delay disclosures. The correspondence includes e-mails between AIG’s Shannon and attorneys at the New York Fed and its law firm, Davis Polk & Wardwell LLP. Tom Orewyler, a spokesman for Davis Polk in New York, declined to comment as did Shannon. According to Shannon’s e-mails obtained by Issa, the New York Fed suggested that AIG refrain in a filing from mentioning so-called synthetic collateralized debt obligations, which bundled derivative contracts rather than actual loans.
The filing "reflects your client’s desire that there be no mention of the synthetics in connection with this transaction," Shannon wrote to Davis Polk on Dec. 2, 2008. "They will not be mentioned at all." AIG had about $9.8 billion of swaps protecting the synthetic holdings as of September 2008, the company said on Dec. 10, 2008. Goldman Sachs said in a press release last month that it was among banks that had losses on synthetic CDOs.
As part of a bailout that swelled to $182.3 billion, AIG and the Fed created Maiden Lane III, a taxpayer-funded facility designed to remove mortgage-linked swaps from the insurer’s books. Shannon told the New York Fed on Nov. 24, 2008, that AIG executives wanted to publicly disclose details about Maiden Lane the next day. "Do you think it might be feasible to hold off on the Maiden Lane III 8K and press release until next week?" Brett Phillips, a New York Fed lawyer wrote in an e-mail that day. "The thinking is that the Maiden Lane III closing will be a less transparent event, and it might be better to narrow the gap between AIG’s announcement and the New York Fed’s publication of term sheet summaries."
"Given the significance of the transaction, AIG would be best served by filing tomorrow," Shannon wrote. "We will of course be guided by your counsel." The document outlining the Maiden Lane agreement was posted on Dec. 2, 2008. In at least one instance, AIG pushed for documents to be disclosed and then released the information. "We believe that the agreements listed in the index (i.e., the Master Investment and Credit Agreement and the Shortfall Agreement) do not need to be filed," Peter Bazos, a Davis Polk lawyer wrote on Nov. 25, 2008. "Please let us know your thoughts in this regard."
AIG’s Shannon replied that "the better practice and better disclosure in this complex area is to file the agreements currently rather than to delay." The agreements were included in the Dec. 2 filing. More details of the negotiations over swaps payments emerged in November 2009 when Neil Barofsky, the special inspector in charge of policing the Troubled Asset Relief Program, assessed the Fed’s role in the bailout. "Federal Reserve officials provided AIG’s counterparties with tens of billions of dollars they likely would have not otherwise received," Barofsky wrote in a Nov. 17 report. "The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds."
The New York Fed may eventually recoup its loan to Maiden Lane III, the vehicle that obtained CDOs from the banks after paying to cancel the swaps, Barofsky wrote. According to a New York Fed report, the value of securities and cash held in Maiden Lane III climbed 4.5 percent to $23.5 billion in the three months ended Sept. 30. AIG’s first rescue was an $85 billion credit line from the New York Fed in September 2008. The bailout was expanded three times and is valued at $182.3 billion. That includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury and up to $52.5 billion for Maiden Lane facilities to buy mortgage-linked assets owned or backed by the company.
Geithner-AIG Emails Tip of the Iceberg
by Eliot Spitzer, William Black, and Frank Partnoy
In a December New York Times op-ed, we called for the full public release of AIG email messages, internal accounting documents and financial models generated in the last decade. Today, a Bloomberg story revealed that under Timothy Geithner’s leadership, the Federal Reserve Bank of New York told AIG to withhold details from the public about its payments to banks during the crisis. This information was discovered when emails between the company and the Fed were requested by representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.
The emails requested by Issa span five months beginning in November 2008. If five months of emails reveal information key to our understanding of the aftermath of the crisis, imagine what 10 years of emails could contribute to our understanding of its causes. We believe the AIG emails and other internal company documents are the ‘black box’ of the financial crisis. If we understand the failure of AIG, we will more fully understand the crisis - what caused it and more importantly how to prevent it from happening again.
The emails today detail the efforts of the Fed to suppress the disclosure of payments made to banks such as Goldman, Sachs Group for reimbursement of their credit-default swap exposure. When the Treasury Department stepped in, AIG had at least $440 billion in credit-default swaps outstanding. The Fed, led by Tim Geithner, paid Goldman, Sachs Group and other banks 100 cents on the dollar for these instruments rather than negotiating a lower rate closer to the actual value, (estimated by some to have been as little as 20 cents). In testimony to the Congressional Oversight Panel, Tim Geithner insisted it was necessary to make these payments in full, arguing that even a small downward negotiation would prove catastrophic to the financial sector. Elizabeth Warren, head of the oversight panel has repeatedly challenged repeatedly this assertion.
Regardless the size of the payments, the Fed’s request to suppress both their amount and the parties to whole these payments were made would not have come to light without the release of these emails. Without the rest of the emails, we will be unlikely to fully understand what led to the collapse of AIG and the financial markets. If we can’t understand it, we will be unable to prevent it from happening again.
As such, today we are renewing our request for the full public disclosure of all AIG documents. We believe the government should put these documents on-line, thereby establishing an open-source investigation that would allow journalists and citizens the opportunity to piece together the story of what happened at AIG and in so doing more fully understand what happened in the broader financial collapse. AIG — and more specifically its credit-default swaps exposure — was an important contributing factor to the crash of the financial markets. What sets this company apart from others that played a role in the crisis is that we, the taxpayers, own it.
As we noted in our original piece, US taxpayers bought 80% of AIG when they bailed the company out with $180 billion last year. As owners of the company, taxpayers are also owners of AIG. As owners of the company we can demand the release of these documents. The taxpayer’s stake in AIG is held by the A.I.G. Credit Facility Trust, whose three trustees are Jill M. Considine, a former chairman of the Depository Trust Company and a former director of the Federal Reserve Bank of New York; Chester B. Feldberg, a former New York Fed official who was chairman of Barclays Americas from 2000 to 2008; and Douglas L. Foshee, chief executive of the El Paso Corporation and chairman of the Houston branch of the Federal Reserve Bank of Dallas. We call on these three officials (interestingly all former Fed officials) to immediately release the documents we request.
The value of these documents, if it were ever in doubt, was certainly proved by today’s revelations. Release the emails.
Rep. Cummings Demands Geithner Testify on AIG-Fed E-Mails
Treasury Secretary Timothy Geithner should testify before Congress about efforts by the Federal Reserve Bank of New York to limit American International Group Inc.’s disclosures of payments to banks, a House Democrat said. Representative Elijah Cummings of the Oversight and Government Reform Committee called for an investigation and hearing into what information was withheld from the public at the New York Fed’s request in 2008, when Geithner led the regulator. E-mails obtained by Congress include New York Fed requests that the bailed-out insurer withhold documents from public filings and delay disclosures about payments to banks to retire credit-default swaps, Bloomberg News reported yesterday.
"It is essential to know what knowledge or involvement now-Secretary of the Treasury Geithner had in the decisions made by New York Fed officials to exclude information" from AIG’s regulatory filings, Cummings wrote yesterday to committee Chairman Edolphus Towns, a New York Democrat. It is "critical" that Geithner testify before Congress, Cummings wrote. The demand adds to pressure on Geithner to justify his handling of New York-based AIG’s bailout, which was $85 billion when he helped orchestrate the first rescue in 2008 and swelled to $182.3 billion. Representative Darrell Issa, a California Republican on the oversight committee, has called payments to AIG trading partners a "backdoor bailout" because banks got 100 cents on the dollar for swaps tied to subprime mortgages.
Cummings, a Maryland Democrat, was among the first lawmakers to question AIG’s plans to pay $1 billion in retention bonuses. A firestorm of criticism about the awards prompted President Barack Obama to demand payments be blocked or recovered. Cummings last year demanded the resignation of then- AIG CEO Edward Liddy, who stepped down in August. "Secretary Geithner played no role in these decisions," Meg Reilly, a Treasury spokeswoman, wrote in an e-mail late yesterday. "He was recused from working on issues involving specific companies, including AIG," after his nomination by Obama for Treasury secretary on Nov. 24, 2008.
Before the Fed took over negotiations late in 2008, AIG tried to persuade banks to accept so-called haircuts of as much as 40 cents on the dollar, according to people familiar with the matter. The Fed’s decision to pay the banks in full may have cost taxpayers $13 billion, or 40 percent of the $32.5 billion paid to retire the swaps. Representative Roy Blunt, a Missouri Republican, wrote to Geithner about five weeks ago asking him to discuss "$13 billion in wasted taxpayer dollars" from when AIG made to payments to banks including Goldman Sachs Group Inc. and Societe Generale SA. Senator Chuck Grassley, an Iowa Republican, wrote a letter to Geithner questioning whether taxpayers gained in December by accepting units from AIG in exchange for reducing the insurer’s debt by $25 billion.
Thomas Baxter, general counsel for the New York Fed, said this week it was appropriate for the regulator, as party to deals outlined in the filings, "to provide comments on a number of issues, including disclosures, with the understanding that the final decision rested with AIG’s securities counsel."
Geithner Must Go
by Henry Blodget
The latest revelations about the New York Fed's actions in the AIG bailout make one thing clear: Treasury Secretary Tim Geithner must go. Geithner must go not just because of the emails showing that his New York Fed ordered AIG to keep details of the bailout secret, but because of many other decisions and policies he has championed in the past two years. These decisions and policies have consistently put the interests of Wall Street ahead of the interests of the taxpayer, and they have undermined the public's confidence in the government at a time when the country needs it the most.
Tim Geithner's defense of his actions continues to be, in effect, "We had to do it or the world would have ended." This isn't good enough. It is also, at the very least, debatable. It is true that Tim Geithner made many of his decisions in the midst of a crisis, and we do not doubt that his intentions were good and that he was doing the best he could. But this does not rinse his hands of responsibility for his decisions or their ongoing ramifications.
For five reasons, Geithner must go:
- Geithner was directly responsible for the most appalling corporate bailout in U.S. history, in which tens of billions of taxpayer dollars were secretly funneled to some of the richest corporations in the world. The terms of this bailout, and the associated cloak of secrecy under which it was conducted (the details of which continue to leak out) have hurt the public's confidence in the government and fueled populist outrage.
- Geithner's ongoing decision to save banks at any cost was predicated on the theory that this would keep the banks lending. This policy has failed: The banks have not continued to lend. What the banks HAVE done is coin billions of dollars of profits risk-free at taxpayer expense, fueling even more public outrage.
- Geithner's policy of "too big to fail" has created a banking system whose bets are guaranteed by the US taxpayer, and it has distorted lending and market forces across the entire economy. This policy, which has now been all but written into the Constitution, is grossly unfair. Big banks can do whatever they want with no concern about the consequences; small banks have to hunker down or they'll get taken over and shut down.
- Geithner's role in the AIG bailout, which the current administration bears no responsibility for, continues to destroy confidence in his current boss, President Barack Obama. If AIG stays in the headlines, and Geithner does not accept responsibility for what happened. Obama's agenda and influence will continue to suffer.
- Geithner's consistent decision to put Wall Street first has helped fuel a populist rage that will make it very difficult for the government to do anything more to help the financial system. If the recovery continues, such help might never become necessary. If it falters, however, Geithner's policies will have severely curtailed the government's ability to do anything about it.
Those who know him say that Tim Geithner is a very good guy. He made the decisions above in the midst of a panic, and we have no doubt that he was trying to do the right thing. But contrary to the revisionist history now being promulgated, these actions were not the only way out. They were grossly unfair to taxpayers, and they have undermined public confidence in the government--and our current President--at a time when the country needs it most.
Contrarian Investor Chanos Sees Economic Crash in China
James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true. Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.
As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like "Dubai times 1,000 — or worse," he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.
"Bubbles are best identified by credit excesses, not valuation excesses," he said in a recent appearance on CNBC. "And there’s no bigger credit excess than in China." He is planning a speech later this month at the University of Oxford to drive home his point. As America’s pre-eminent short-seller — he bets big money that companies’ strategies will fail — Mr. Chanos’s narrative runs counter to the prevailing wisdom on China. Most economists and governments expect Chinese growth momentum to continue this year, buoyed by what remains of a $586 billion government stimulus program that began last year, meant to lift exports and consumption among Chinese consumers.
Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore. Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New York, has $6 billion under management, is hardly the only skeptic on China. But he is certainly the most prominent and vocal.
For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored. "I find it interesting that people who couldn’t spell China 10 years ago are now experts on China," said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. "China is not in a bubble."
Colleagues acknowledge that Mr. Chanos began studying China’s economy in earnest only last summer and sent out e-mail messages seeking expert opinion. But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans. "In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades," said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. "He homes in on the excesses of the markets and profits from them. That’s been his stock and trade."
Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much. "The Chinese," he warned in an interview in November with Politico.com, "are in danger of producing huge quantities of goods and products that they will be unable to sell." In December, he appeared on CNBC to discuss how he had already begun taking short positions, hoping to profit from a China collapse.
In recent months, a growing number of analysts, and some Chinese officials, have also warned that asset bubbles might emerge in China. The nation’s huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth. But many analysts now say that money, along with huge foreign inflows of "speculative capital," has been funneled into the stock and real estate markets.
A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 — one that Mr. Chanos and others have called wasteful and overdone.
"It’s going to be a bust," said Gordon G. Chang, whose book, "The Coming Collapse of China" (Random House), warned in 2001 of such a crash. Friends and colleagues say Mr. Chanos is comfortable betting against the crowd — even if that crowd includes the likes of Warren E. Buffett and Wilbur L. Ross Jr., two other towering figures of the investment world.
A contrarian by nature, Mr. Chanos researches companies, pores over public filings to sift out clues to fraud and deceptive accounting, and then decides whether a stock is overvalued and ready for a fall. He has a staff of 26 in the firm’s offices in New York and London, searching for other China-related information. "His record is impressive," said Byron R. Wien, vice chairman of Blackstone Advisory Services. "He’s no fly-by-night charlatan. And I’m bullish on China."
Mr. Chanos grew up in Milwaukee, one of three sons born to the owners of a chain of dry cleaners. At Yale, he was a pre-med student before switching to economics because of what he described as a passionate interest in the way markets operate. His guiding philosophy was discovered in a book called "The Contrarian Investor," according to an account of his life in "The Smartest Guys in the Room," a book that chronicled Enron’s rise and downfall.
After college, he went to Wall Street, where he worked at a series of brokerage houses before starting his own firm in 1985, out of what he later said was frustration with the way Wall Street brokers promoted stocks. At Kynikos Associates, he created a firm focused on betting on falling stock prices. His theories are summed up in testimony he gave to the House Committee on Energy and Commerce in 2002, after the Enron debacle. His firm, he said, looks for companies that appear to have overstated earnings, like Enron; were victims of a flawed business plan, like many Internet firms; or have been engaged in "outright fraud."
That short-sellers are held in low regard by some on Wall Street, as well as Main Street, has long troubled him. Short-sellers were blamed for intensifying market sell-offs in the fall 2008, before the practice was temporarily banned. Regulators are now trying to decide whether to restrict the practice. Mr. Chanos often responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron, Boston Market and other "financial disasters" over the years. "They are often the ones wearing the white hats when it comes to looking for and identifying the bad guys," he has said.
Horizon Bank first U.S. bank failure of 2010U.S
. regulators closed Horizon Bank of Bellingham, Washington, on Friday, kicking off what has been forecast as a peak year for small bank failures. The Federal Deposit Insurance Corp said Horizon Bank had approximately $1.3 billion in total assets and $1.1 billion in total deposits as Sept. 30. Friday's bank failure is expected to cost the FDIC's insurance fund a total of $539.1 million. The 18 branches of Horizon Bank will reopen during their normal business hours beginning on Saturday as branches of Washington Federal Savings and Loan Association and deposits will continued to be insured by the FDIC.
Community banks are facing persistent pressure from deteriorating loans, many tied to commercial real estate projects that have collapsed or are in decline. Regulators closed 140 banks last year, the highest level since 1992 when officials were still cleaning up from the savings and loan crisis. That compares with 25 in 2008 and only three in 2007. FDIC Chairman Sheila Bair has said in the current banking crisis, failures will peak in 2010 and then start to subside. The price tag for the bank closings is expected to total $100 billion from 2009 through 2013, according to the FDIC.
The failures have drained the agency's deposit insurance fund, but the agency recently collected about $45 billion by having banks prepay three years of industry assessments. The FDIC expects the insurance fund's balance will remain negative until 2013 but says it has plenty of access to cash, including the ability to tap a $500 billion line of credit with Treasury. In a new twist in the way the FDIC collects fees, the agency may propose next week that banks with risky employee compensations practices be ordered to pay more for deposit insurance. The proposal is preliminary and it is unclear if it will gain favor with other regulators or the industry.
Stiglitz: Wall Street talking up the economy to sell stocks
Joe Stiglitz says the low rate environment suggests markets are overvalued, that companies are making profits only off the back of laid-off workers, and that Wall Street is hyping up the economy purely to sell stock.
Why Iceland Does Not Want to Pay
by Hannes H. Gissurarson
The British first contributed to Reykjavik's banking collapse and now demand half of the island's GDP to pay for the damage.
Tuesday's refusal by President of Iceland Olafur Ragnar Grimsson to sign into law the recent deal on bank deposits between Iceland, on the one hand, and the British and the Dutch governments, on the other hand, is only the latest in a series of dramatic events befalling the once prosperous and peaceful island in the North Atlantic. According to the deal, Iceland undertakes to reimburse the British and the Dutch governments for their payments to depositors with the Icelandic Landsbanki in so-called Icesave accounts.
The deal was forced on the Icelandic government mainly by the British, who, during the first months of the international financial crisis of the autumn of 2008, used London's position as one of the financial centers of the world to hinder money transfers to and from Iceland, so as to slowly strangle its small economy. The U.K. government even briefly put Iceland's central bank and the Icelandic ministry of finance on an official Internet list of terrorist organizations, notwithstanding the fact that Iceland—which does not have an army—has been an ally of the United Kingdom in NATO for 60 years .
The British also turned the IMF on the Icelanders, as if it was a bounty collector. Despite strenuous denials by the IMF, it is clear that its financial assistance to the small island nation was on condition that it would reimburse the British and the Dutch for their payments to depositors. By his refusal, the Icelandic president was responding to the fierce opposition of the vast majority of his nation to the deal with the British and the Dutch. But why does Iceland not want to pay?
First, Icelanders point out that the amount of money involved is enormous by Icelandic standards, possibly as much as $6 billion—about half the country's entire GDP: It is on a scale with the debt burden imposed on the Germans after World War I.
Secondly, the Icelanders assert that they will honor all legal obligations to depositors in the EEA (European Economic Area, of which Iceland is a member-state). But they argue that this only means that deposits are covered by the Icelandic Depositors' and Investors' Guarantee Fund set up under EEA rules. If that Fund is unable to meet its obligations, there is no clear requirement, under EEA rules, for the Icelandic government to step in.
In the third place, the Icelanders refer to Jean-Claude Trichet, the president of the European Central Bank, and Wouter Bos, the Dutch finance minister, who both have stated publicly that the EEA rules on deposit insurance were not designed, anyway, for the collapse of an entire financial system, such as Iceland saw.
Fourthly, a lot of the damage done can be directly attributed to the actions of the British government, which brought about, or at least contributed to, the collapse of the Icelandic banking system. Should the British not solve the problem they themselves created?
Many Icelanders are dismayed by the feebleness of the present Icelandic government, led by the left-leaning Social Democrat Johanna Sigurdardottir. This government seems to have succumbed to almost all the demands made by the British and the Dutch governments. It has even signed away its right to refer eventual legal disputes in the matter to the courts. Instead of explaining the Icelandic arguments abroad, Ms. Sigurdardottir has largely echoed the British and the Dutch positions in Iceland, possibly in the hope of being able to lead Iceland into the EU, a long-standing dream of the Icelandic Social Democrats.
The present upheaval will however make EU membership less likely: The EU will be less eager to accept Iceland; and the Icelanders, seeing the EU as supporting the interests of the British and the Dutch against Iceland, will be more reluctant to join.
Mr. Gissurarson is a former board member of Iceland's Central Bank and a professor of political philosophy at the University of Iceland.
Nice country you have there, be a shame if anything happened to it
by Ian Welsh
....... is the title of an email a friend sent to me about the threats made by Britain and the Netherlands to Iceland, when Iceland’s President refused to ratify a bill which would have required Iceland to pay 5.5 billion US to the Netherlands and Britain. When Iceland’s banks failed, Britain and the Netherlands made up the deposits, and now they want Iceland to pay. If Iceland doesn’t, they have threatened to spike both its entry to the European Union and its 10 billion dollar aid package from the IMF.
The President’s decision means there must be a referendum to determine the fate of the bill. A lot of folks are decrying this and insisting that Iceland should pay, but the background and the consequences aren’t that simple.
First, by European law, only the first 20K of each account is covered. Iceland already passed a bill in which they agreed to pay that back, and that bill was not vetoed. England and the Netherlands insisted that they cover all of the money, not just the amount legally required.
Second, Iceland is a small country,with a population of 316,960. That isn’t even as large as most Canadian suburbs. The cost per citizen, including children, people out of work, and seniors, would be $17,352. Given Iceland is in complete economic collapse, that is a massive burden they simply can’t afford.
Third, the banks were essentially unregulated. Britain, yes Britain, gave them licenses to operate despite the fact that other European nations lobbyed against it. Given how lightly regulated British banks were, this means that Icelandic banks were being used by the City (London) to do things too dubious even for the City. And given what the City was (and is) willing to do, that means they were black holes. You put your money in a country like Iceland where the banks are set up for those sort of unregulated operations, you take your bloody chances. The old saying "you can’t cheat an honest man" applies. The depositors wanted largely unregulated earnings. In exchange they need to accept the risk that comes with it.
Fourth, a fifth of the population had signed a petition asking the President to block the law and force a referendum. Responding to that is democracy.
Fifth: the corporations are limited liability corporations. Are countries responsibility for all the debts of limited liability corporations in their country? I don’t think so.
Britain and the Netherlands are extorting money with what amounts to threats to turn Iceland into a third world country where people may well starve to death. They are doing so to bail out depositors who were greedy or stupid enough, or both, to be put money into banks set up precisely because they were doing stuff too risky even for London to do and which are limited liability companies. After Gordon Brown used anti-terrorism laws to seize Icelandic assets, this is a further descent into thuggery and blackmail and those who say that Icelanders should pay it all off should think very carefully if they want their country to be forced to pay off all its private companies debts to foreigners. For shame.
Ilargi: Well, Michael Hudson doesn't see it anymore either, apparently. He feels so sorry for the Icelanders that he forgets to raise the core issues. He starts out nice and all, but entirely misses the key question: is there any provision under Icelandic, European or international law that forces the Icelandic government to fund the Iceland Depositors’ and Investors’ Guarantee Fund? if not, when that fund runs out of money, it's game over. Until that question is answered, why continue any of the other discussions? Why talk about Iceland's ability to pay when it's not sure at all if it has to pay anything? My guess is England and Holland will eat crow on this, but not until a lot of ugliness will come to pass. Hudson, judging from the piece below, is not going to be of much help.
Iceland can refuse debt servitude
by Michael Hudson
Olafur Ragnar Grimsson, Iceland’s president, has created uproar with his decision to block legislation that would have repaid €3.9bn ($5.6bn) lost by British and Dutch savers in a failed Icelandic bank, triggering a referendum that the government is expected to lose. The initial response by credit rating agencies was to downgrade Icelandic bonds, as if Iceland were repudiating its debts, Argentina-style. But opponents of the bill have no intention of reneging on their legal obligations.
At issue is what the relevant European law says should be done – and, more to the point, what should have been done on October 6 2008, when Gordon Brown closed down the UK operations of Icesave, an online subsidiary of Landesbanki, Iceland’s second-biggest bank. Icelandic authorities were given no voice in how to resolve matters. Did the British prime minister let Iceland off the hook by jumping the gun in reimbursing depositors as though they were covered by UK insurance rather than following European Union procedures? Under normal conditions Iceland, a prospective EU member that had signed up to European deposit insurance rules, would have availed itself of the right to settle with depositors in an orderly manner. Article 10 of EU Directive 94/19/EC gave Iceland’s Depositors’ and Investors’ Guarantee Fund (TIF) nine months to settle matters after the failure of a financial institution. Privately funded by domestic banks (unlike Britain’s public Financial Services Agency), the TIF collected just 1 per cent of deposit liabilities as a risk premium.
The EU law did not anticipate a systemic failure and made no provision for the government to be liable beyond its insurance agency. But guidelines agreed by the Ecofin meeting of European Union finance ministers on November 14 2008 were clear: "These negotiating discussions shall be conducted in a compatible and co-ordinated manner and account will be taken of the difficult and unprecedented circumstances in which Iceland finds itself and the urgent necessity of deciding on measures which will enable Iceland to restore its financial and economic system." So the broader issue concerns Iceland’s ability to pay 250 per cent of its current gross domestic product – nearly $20,000 for each Icelandic citizen – to settle its Landsbanki mismanagement. The International Monetary Fund did not think this was a realistic option when its team calculated in November 2008 that: "A further depreciation of the exchange rate of 30 per cent would cause a further precipitous rise in the debt ratio (to 240 per cent of GDP in 2009) and would clearly be unsustainable."
Opponents of the Icesave agreement explain that they want to appeal to the EU rules regarding bank bail-outs and the Ecofin understanding that any agreement would preserve Iceland’s economic viability. That is why Iceland’s parliament, the Althing, asked last autumn for an impartial court to adjudicate the issue. Britain and the Netherlands turned down the request. They have been willing to negotiate over the timing of payments by Iceland – with interest mounting – but not the overall amount. Iceland’s government was willing to give in as the price necessary to obtain EU membership, but recent polls show that 70 per cent of voters have lost interest in joining. This is the same proportion estimated to oppose approving the Althing’s agreement to give Britain and the Netherlands what they are demanding.
Icelandic voters are worried about how they reasonably can be expected to pay enough in taxes to cover the huge debt. The problem is that foreign debt is not paid out of GDP. It is paid out of balance-of-payments receipts from net exports, from the sale of assets to foreigners and from new borrowing. The market for cod is limited, and many of Iceland’s quota licences already have been pledged to bankers for loans, whose debt service absorbs much of the export revenue. Interest charges also absorb most of the revenue from its aluminium exports and its geothermal and hydroelectric resources, leaving little taxable revenue behind. There is also a dagger hanging over the heads of Iceland’s homeowners: mortgages and other debts are indexed to the consumer price index. For an import-dependent country such as Iceland this, in effect, means the foreign exchange rate. Attempts to pay more foreign currency than the nation can generate in export earnings will cause the currency to depreciate and raise monthly mortgage bills. Many will lose their homes. Many already are. There is a moratorium on foreclosures, but it expires in February.
A pragmatic economic principle is at work in such conditions. Debts that cannot be paid, will not be (unless one pays back Peter by borrowing from Paul). At stake, therefore, is how much can be paid without wrecking Iceland’s economy. How many Icelanders must lose their homes as carrying charges soar on mortgages indexed to the exchange rate? Emigration is accelerating, and many foreign workers already have left. How many more must depart? And if the post-Soviet experience of a steep and sudden drop in living standards is relevant, by how many years must Icelandic lifespans shorten?
Timeline: Fallout from Iceland's financial meltdown
The Icelandic banking crisis resulted in diplomatic rows, the overthrow of the government and a fierce debate over compensation
6 October 2008 Threatened with national bankruptcy, Icelanders give the government sweeping powers, including wide-ranging authority over its banks.
7 October The government dismisses the board of directors of Landsbanki, the island's second largest bank by value, and puts the bank into receivership.
8 October The government takes control of Glitnir, the third largest bank, buying a 75% stake for €600m (£534m).
9 October The financial crisis deepens as Iceland also takes control of Kaupthing, its biggest bank. A diplomatic row breaks out between Iceland and Britain over how to deal with hundreds of millions of pounds of British deposits trapped in collapsed Icelandic banks. Gordon Brown threatens to use anti-terror laws to reclaim British assets.
15 October Iceland shores up its ravaged economy by slashing borrowing costs; the central bank cuts its main interest rate to 12% from 15.5%.
24 October Iceland asks the IMF for €€.4bn in aid to help fix the economy and restart currency trading.
25 October Protesters demand the resignation of conservative prime minister Geir Haarde.
28 October The government raises interest rates by a massive 6 percentage points to 18%, a surprise move that aims to please the IMF and restore trust in the shattered currency.
19 November The IMF approves a €1.5bn loan for Iceland. The deal is complemented by more than €2bn in loans from Nordic countries, Russia and Poland and around €3.5bn from Britain, the Netherlands and Germany, making the whole package worth about €7bn.
2 December The government announces debt relief and investment measures for its ailing business sector and says it will settle debts with foreign creditors by offering stakes in the new Icelandic banks.
26 January 2009 Iceland's ruling coalition falls apart when Haarde quits and five days later an interim centre-left government is formed with Johanna Sigurdardottir as prime minister.
29 June Parliament approves a government plan to raise taxes and slash spending to tackle a ballooning budget deficit.
17 July Iceland applies to join the EU a day after parliament narrowly backed government plans to begin talks on joining.
28 August Parliament approves "Icesave" bill, having added conditions such as linking payment to GDP development. The revisions will need the approval of the governments of Britain and the Netherlands.
18 October A new deal to repay Britain and the Netherlands is agreed, paving the way for new aid from international lenders.
30 December Parliament approves an amended bill to repay more than €3.5bn lost by savers in Britain and the Netherlands.
5 January 2010 Iceland's president refuses to sign the bill, meaning a referendum on the issue will be held and jeopardising foreign aid to the stricken nation.
Japan braves bond markets with high-risk plans, talks down the yen
Japan has appointed its sixth finance minister in eighteen months and opted for yet another high-stakes shift in economic strategy, this time ditching its strong-yen policy and reverting to fiscal largesse in hopes of pulling the country out of deflationary perma-slump. The change of tack by the world's second largest economy sparked jitters on Tokyo's bond markets and may have implications for the global currency system, leading to a revival of the yen "carry-trade" that helped fuel the last international asset bubble. Deputy premier Naoto Kan is to take over the finance ministry. A high-spending populist and an advocate of radical stimulus measures, he is a stark contrast to the outgoing Hirohisa Fujii, the aging apostle of financial orthodoxy.
Mr Kan's opening gambit on Thursday was a call for devaluation, saying it would be "nice" if the yen were to weaken further to help exporters. He has in the past said 95 yen to the dollar - 2pc-3pc weaker than cuurently - is a tolerable level for the likes of Toyota, Toshiba, and Sony. His appointment opens the door for outright intervention to ensure a weaker yen if necessary, adding Japan to the long list countries now intervening openly or covertly to hold down their currencies. These include China, Russia, Korea, Brazil, Taiwan, Indonesia, Switzerland, and arguably Britain – some using of capital controls to stop inflows of hot money.
Mr Kan is a fierce critic of the Bank of Japan, accusing the monetary authorities of sitting on their hands as the country slid into the deepest deflation in post-War history last year. "I think that is partly why he was given this position," said Neil Mellor from Bank of New York Mellon said. The scourge of Japan's all-powerful officials, Mr Kan may try to break the Bank of Japan to his political will, demanding the sort of full-fledged quantitative easing seen in Britain and the US. Many economists agree that the bank has been strangely passive over the last year as GDP contracted by 10pc and the yen rocketed, pushing Japan deeper into deflation. Mr Fujii resigned over ill-health but it is an open secret that he fell out with the ruling Democrats over plans for fresh welfare spending, fearing that fiscal extravagance could lead to a state funding crisis. Yields on 10-year government bonds (JGBs) have crept up 10 basis points over recent days, rising to 1.34pc on Thursday on doubts over Mr Kan's plans.
The budget deficit is already set to hit 9pc of GDP this year. The International Monetary Fund says gross public debt will reach 227pc of GDP this year, warning that Japan is nearing the limits of sustainability. While Tokyo has been able to borrow cheaply - barely above 1pc - this may not continue. The IMF said the sheer scale of the debt burden means that a modest rise in yields would cause havoc to state finances. Japan can no longer count on a captive bond market. The savings rate has fallen from 14pc in 1990 to near 2pc today, below the US. The state pension fund became a net seller of JGBs last year as the country's demographic crunch began in earnest. The population has been declining since 2005, at an accelerating pace. It dropped by 75,000 last year to 126m. The growing debt must be serviced by a declining base.
The US rating agency Moody's says investors may demand a higher risk premium for Japanese debt unless the government can "articulate a credible medium-term deficit reduction plan". Mr Kan appears deaf to such warnings. His immediate aim is to prime-pump the economy before Diet elections next summer, perhaps breaching the cross-party understanding that new debt issuance should be limited to $475bn in the coming year. Gregg Gibbs from RBS said Japan sticks out like a sore thumb on the global stage "Fiscal concerns dog most major economies, but Japan is the only one not discussing the need to start winding deficits back," he said.
The Biggest Losers
Behind the Christmas Eve taxpayer massacre at Fannie and Freddie.
[..] ... before we get on with the debates of 2010, there's still some ugly 2009 business to report: To wit, the Treasury's Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow. The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?
The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."
The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter. The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.
Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.
This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down. Unlimited bailouts will now allow the Treasury to keep them in conservatorship, which means they can help to conserve the Democratic majority in Congress by increasing their role in housing finance. With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble.
That's why on Christmas Eve Treasury also rolled back a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion. Risk-taking will now increase, so that the government can once again follow Barney Frank's infamous advice that the companies "roll the dice" on subsidies for affordable housing. All of which would seem to make the CEOs of Fannie and Freddie the world's most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.
Freddie also has one of the world's highest-paid human resources executives. Paul George's total compensation can run up to $2.7 million. It must require a rare set of skills to spot executives capable of losing billions of dollars. Where is Treasury's pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks. The government gave away the game that these firms are no longer in the business of making profits when it announced that the CEOs will be paid entirely in cash, though it is discouraging that practice at other big banks. Who would want stock in the Department of Housing and Urban Development?
Meanwhile, these biggest of Beltway losers continue to be missing from the debate over financial reform. The Treasury still hasn't offered its long-promised proposals even as it presses reform on banks that played a far smaller role in the financial mania and panic. Senate Banking Chairman Chris Dodd (D., Conn.) and ranking Republican Richard Shelby recently issued a joint statement on their "progress" toward financial regulatory reform, but their list of goals also doesn't mention Fannie or Freddie.
Since Mr. Shelby has long argued for reform of these government-sponsored enterprises, their absence suggests that Mr. Dodd's longtime effort to protect Fan and Fred is once again succeeding. It would be worse than a shame if, having warned about the iceberg for years, Mr. Shelby now joins Mr. Dodd in pretending that these ships aren't sinking. In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves.
FOMC Discussed Expanding Purchases If Economy Weakens
Federal Reserve officials last month debated increasing and extending asset purchases should the economy weaken, with a few favoring the move and one seeking a reduction, minutes of their last meeting showed. Policy makers also differed over whether risks are greater that inflation will speed up or slow down too much, the Fed’s Open Market Committee said today in minutes of its Dec. 15-16 meeting in Washington. Some officials said "quite elevated" slack in the economy would damp prices, while others saw a risk of faster inflation from the Fed’s "extraordinary" stimulus.
Short-term Treasuries rose after the report as traders reduced bets the Fed would raise rates by August. Fed Chairman Ben S. Bernanke and his colleagues are trying to withdraw unprecedented stimulus and emergency lending programs without impeding efforts to sustain a recovery and reduce unemployment, which is now close to a 26-year high. "To keep inflation expectations anchored, all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and place," the minutes said.
Policy makers in the Dec. 16 statement following their meeting said the labor market is stabilizing, while keeping a pledge to keep interest rates "exceptionally low" for an "extended period." The Fed said most lending programs would expire as scheduled on Feb. 1 because of "improvements in the functioning of financial markets." The FOMC, in a unanimous decision, left its target for the benchmark interest rate unchanged in a range of zero to 0.25 percent. Fed policy makers next meet Jan. 26-27 in Washington.
"A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the committee’s large-scale asset purchases and continuing them beyond the first quarter," especially if the economic outlook or mortgage market deteriorated, the minutes said. One member said the Fed could reduce planned asset purchases because of improvement in financial markets and the economy, and "that it might become appropriate" to start reducing asset holdings "if the recovery gains strength over time," according to the report.
The Fed is buying $1.25 trillion of mortgage-backed securities issued by housing-finance companies Fannie Mae, Freddie Mac and federal agency Ginnie Mae. The central bank began the program in January 2009. The Fed separately purchased $300 billion of Treasury securities from March through September 2009 and is buying, through March, $175 billion of corporate debt issued by government-backed Fannie and Freddie and the government- chartered Federal Home Loan Banks. "The Fed is keeping some levers out there as options," said Paul Ballew, a former Fed economist who’s now a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio. "They’re focused on a balancing act: wrestling with a recovery that’s gaining solid footing but that remains fragile."
Some officials said there was a risk that the end of Fed purchases and federal homebuyer tax credits may "undercut" improvements in the housing market, the minutes said. Under Bernanke, the Fed has cut interest rates almost to zero and pumped more than $1 trillion into the financial system to battle the worst recession since World War II. The U.S. economy expanded at a 2.2 percent annual pace in the third quarter, the first growth after four quarters of contraction. The economy has lost 7.2 million jobs since the recession began in December 2007. Payroll cuts peaked at 741,000 in January 2009 before receding to 11,000 in November. The unemployment rate in November fell to 10 percent, from a 26-year high of 10.2 percent in October.
Officials "generally thought the most likely outcome" was for economic growth to "gradually strengthen over the next two years," helping reduce joblessness and slack. Still, the "weakness in labor markets continued to be an important concern," the Fed said. Fed staff economists "modestly increased" their forecast for economic growth in 2010 and 2011, predicting a "very gradual reduction in economic slack," the minutes said without giving specific figures. At the same time, Fed officials "noted that any tendency for dollar depreciation to put significant upward pressure on inflation would bear close watching," the central bank said.
The minutes said that the New York Fed’s open market desk "was continuing to develop" the capacity to conduct reverse repurchase agreements using agency mortgage-backed securities collateral and anticipated the work would be finished in the first half of this year. The New York Fed is also "exploring the operational issues associated with expanding potential counterparties" for reverse repurchase agreements beyond the 18 primary dealers, the minutes said.
In a reverse repo, the Fed lends securities for a set period, draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to the 18 primary dealers that act as counterparties to the central bank. "The reverse repo transactions authorized in this resolution shall have terms to maturity of 20 business days or less and the total amount of all transactions outstanding at a given time shall be $5 billion or less," the minutes said. Meeting participants also approved a suggestion by open market desk officials to not reinvest the proceeds from maturing agency debt or prepayments on mortgage debt as an interim approach pending further discussion.
Wall Street's Memo to Meredith Whitney: You're So 2009
Need more evidence the bulls are in command on Wall Street? Look no further than Meredith Whitney. Tuesday, the lionized banking analyst lowered her forecast on Goldman Sachs. Guess what? The stock ended the day higher. This is quite an about-face. During the depths of the financial crisis, when Whitney spoke the market listened. Nowadays, the charging bulls on Wall Street drown out her bearish predictions, as with other notable bears like Gluskin Sheff's David Rosenberg.
No one knows how long the rally will last. There are still plenty of unresolved problems underlying the market and economy. And, everyday the market goes higher, valuations become less attractive. But, as Henry and Aaron point out in the clip, for now, it pays to be a bull. Bullish sentiment is still near highs, as measured by the Investors Intelligence Sentiment Index. Even those that are bearish are hedging their bets. The index shows an increasing number of bears expecting a short-term correction are looking to buy into the market once that occurs.
Ironically, the only thing that may hurt the market is good economic news which would give the Fed cover to raise rates. The market has been discounting the recovery for so long that if we actually see more signs of a robust economy, especially in Friday's employment report, the market momentum may cool.
Fed Eyes Extending Scope of MBS Purchases
The Federal Reserve, in notes from its mid-December meeting, considered extending and expanding government-led initiatives to buy assets from mortgage agencies Fannie Mae, Freddie Mac and Ginnie Mae. The FOMC also confirmed plans to buy $1.25trn of agency mortgage-backed securities (MBS) and $175bn of agency debt by the end of the first quarter, according to minutes released Wednesday.
The size of these purchases are being reduced gradually with time, with the aim of preparing private investors to return to the market. Questions abound, however, as to the effect of a potential exit by the government from the mortgage securities market. A few committee members considered the possibility of at some future point providing more policy stimulus through an expanded scale and time line of large-scale asset purchases extending beyond Q1 2010. This scenario, according to the Fed minutes, would be especially applicable in situations where economic growth were to weaken or mortgage market functioning were to deteriorate further.
Such a scenario — the so-called double dip — is expected by many in the financial markets, including PIMCO bond chief Bill Gross, who in an interview with TIME Magazine this week said he expects economic growth in the U.S. to weaken in Q3 and Q4 of 2010, "which would basically call for some additional help." According to Gross, the Fed will exit mortgage markets, only to have to consider a re-entry later this year. "[B]ased on our forecasts for the second half of the year, they may have to reinitiate it, and that will be difficult to do once they stop because it then becomes a political hot potato," he told TIME.
Most of the Federal Reserve’s liquidity facilities are set to expire February 1st, but the Term Asset-Backed Securities Loan Facility (TALF) for loans backed by new-issue commercial mortgage-backed securities (CMBS) is set to expire June 30th. TALF facilities for loans backed by all other types of collateral will expire March 31st, but committee members indicated they were prepared to modify these plans, if necessary, to support the securitization markets.
FDIC considers plan to penalize banks whose pay practices encourage risky moves
The Federal Deposit Insurance Corp. is considering financial penalties for banks whose pay practices encourage reckless behavior, potentially opening a new front in the federal government's effort to reshape the way bankers are paid, according to people familiar with the matter. Officials at the FDIC and other federal agencies are concerned that some banks reward executives for increasing revenues and profits in the short term even if those executives also are increasing the company's risk of losses in the long term.
The FDIC, which collects fees from all banks to repay depositors in failed banks, is reviewing whether it could adjust those fees to reward companies that adopt reforms, such as "clawback" provisions that can require executives to repay bonuses. The discussions remain at an early stage and were described by sources who spoke on condition of anonymity because the work is not finalized. The FDIC's board is scheduled to discuss the issue at a Tuesday meeting, and it could vote to seek public comment on the idea.
The Obama administration has loudly criticized compensation practices at large banks, and it placed limits on pay for top executives at companies that took extraordinary federal aid, such as Citigroup and American International Group. But the government has struggled to define a broader policy toward pay practices that preserves the autonomy of private companies while discouraging lavish paydays for short-term victories.
The Federal Reserve said earlier this year that it would review and compare pay practices at the largest banks and that it would generally instruct regulators to examine whether companies were tying compensation to long-term success. The FDIC is exploring whether it can use fees as a carrot-and-stick complement to the Fed's approach, the sources said. The FDIC, which estimates that it will spend $100 billion cleaning up the wreckage of banks that fail during this financial crisis, has tried increasingly under Chairman Sheila C. Bair to reward prudence and discourage recklessness.
Banks pay fees to the FDIC based on size, adjusted for the likelihood that the bank itself will fail. Less healthy banks pay larger fees. The agency also imposes penalties for a variety of practices that make failure more likely, such as paying relatively high interest rates to attract deposits, and rewards for practices that make failure less likely. The agency now is considering whether some compensation practices should be included in those categories for the first time.
Bair said in October that the size of the bonuses some large banks planned to pay for 2009 "distresses me." "I think it is in the enlightened self-interest of these large financial organizations to, you know, suspend these outsized bonuses at least, if not permanently realign compensation to more rational levels," Bair said. But she added that it was primarily the responsibility of shareholders, not the government, to curb excessive compensation. "Some of it is just you're going to have to rely on the industry's own self-restraint," she said, "and unfortunately a lot of them don't seem to be too self-restrained right now."
Sensible Rules to Regulate Risk
by Rolfe Winkler And Fiona Maharg Bravo
Sheila C. Bair looks to be leading the regulatory race to the top. The agency she oversees, the Federal Deposit Insurance Corporation, recently unveiled a handful of clever ideas to contain risky bank behavior and protect the nation’s deposit insurance fund. Rival watchdogs fighting for turf will find it difficult to ignore the F.D.I.C.’s latest tactics. Generating the most buzz is a sensible plan to tie the amount that banks pay for deposit insurance to the risk in their compensation plans. Banks with plans that favor short-term gains would pay more than those that, for example, include multiyear clawbacks on bonuses. The agency will vote on the plan next week.
Of course, this comes as the Federal Reserve is also putting in place its own proposal to include executive pay in its overall assessment of bank stability. It’s not clear which agency will be more stringent. But a little competition between the two wouldn’t be the worst outcome after years in which banking regulators rivaled each other in their laxity. Linking pay to insurance premiums follows a handful of other changes the F.D.I.C. is making. It recently revised the formula it uses to assess how much interest undercapitalized banks can pay to attract deposits. The net effect of the changes will be to reduce the rates banks can pay by an average of 12 basis points, the analytics firm Market Rates Insight estimates.
That is a clever way to limit moral hazard. Failing banks, more concerned with survival than profitability, often make last-ditch attempts to attract new deposits by offering ultrahigh rates on savings products wrapped by the F.D.I.C.’s insurance. Similarly, the F.D.I.C. is pushing for a form of insurance from the buyers of failed bank assets. To mitigate some losses the fund incurs on assets in receivership, the F.D.I.C. is pushing for the buyers of the assets to make payments linked to the increase in their share prices after the announcement of a deal.
In isolation these may look to be incremental, if sensible, changes to the way the F.D.I.C. does business. But in the context of a regulatory turf battle over power and resources in Washington, it’s an encouraging sign indeed.
The bulls and bears on the price of oil have both had their triumphs in recent history. The price of crude rose to $145.29 a barrel in July 2008 only to plummet to $33 a barrel a few months later. It swung past $82 a barrel this week because of a cold snap, and is up 18 percent since mid-December. But barring heightened tension in the Middle East, oil looks likely to slide in the short term.
Demand remains relatively subdued, in spite of the huge stimulus applied to the global economy. This is especially true in developed countries that are part of the Organization for Economic Cooperation and Development and in the United States, the largest consumer of energy. American crude oil inventories actually rose by 1.3 million barrels last week when temperatures plummeted, according to the latest figures by the Energy Department. Elsewhere in the O.E.C.D., oil inventories have fallen slightly, according to the International Energy Agency, to nearly 60 days of demand.
Other factors could weigh on the price in the immediate future, too. A combination of easy money from the world’s central banks and the weak dollar has made investing in commodities relatively attractive. But the central bankers’ generosity could soon come to an end if inflation moves from a theoretical threat to a reality. Oil bulls argue that global economic growth, in particular in China and other emerging markets, will be strong enough to sustain further gains. But the recovery remains too uncertain to call. China has just increased interest rates on its three-month bills in an effort to slow bank lending, a move that could lead to a damping of demand. That alone shaved a few cents off the oil price Thursday.
The bulls may eventually have their day. Production is falling in non-OPEC countries, even factoring in some megafields coming on stream in Russia and elsewhere. But it will not be until mid-2011 that global demand will outpace supply, according to Goldman Sachs, which predicts an average oil price of $110 for that year. It may make sense to snuggle up with the oil bears — at least for the rest of the winter.
U.S. apartment vacancy rate hits 30-year high
The U.S. apartment vacancy rate rose to an almost 30-year high of 8 percent in the fourth quarter, and rents dropped in the biggest one-year slump in 2009, according to real estate research company Reis Inc. The report reflects the job market, which so far has stubbornly refused to follow positive economic indicators such as the stock market rebound and improved manufacturing demand. Even large apartment landlords such as Equity Residential, AvalonBay Communities Inc, Essex Property Trust Inc, UDR Inc and Post Properties Inc have reduced rents and offered perks to retain and attract tenants.
Yet, the apartment market may still turn around this year if those out of work become confident enough about a job market recovery to move into a rental, Victor Calanog, Reis' director of research, said on Thursday. In addition, the supply of newly built apartments is winding down as the last projects funded before credit dried up start to open for business. "If we wanted to be hopeful about the situation, we might see a recovery by the middle of this year," Calanog said. "If we don't see any movement like that by the middle of the year, then it's going to be a bad year again."
In the fourth quarter, the U.S. apartment vacancy rate rose 0.10 percentage points from the prior quarter, and 1.3 percentage points for the year. At 8 percent, it was the highest national vacancy rate Reis has recorded in its 30 years of tracking the sector. Of the 79 U.S. markets that Reis follows, Tucson, Arizona experienced the biggest vacancy rise, up 3.1 percentage points in 2009 to 10.5 percent. Meanwhile, vacancies in the small market of Chattanooga, Tennessee fell 2.2 percentage to 6.4 percent. Jacksonville, Florida ended the year with the highest vacancy rate at 14.4 percent.
In New York City, the largest U.S. apartment market, vacancies fell 0.10 percentage points to 2.9 percent. However, factoring in months of free rent and other perks, effective rent fell 0.7 percent to $2,646 per square foot. Higher priced rental properties in Manhattan drove the vacancy decline, while apartment buildings in more middle-class boroughs such as the Bronx, Brooklyn and Queens haven't been able to dodge the bullet.\ On average, close to 60 percent of all rental buildings across the New York metropolitan area lowered their rents from the third quarter.
Year-over-year, effective rents in New York fell by 5.6 percent, making 2009 the worst year for landlords by this measure. This was even worse than the 3.8 decline in 2002, when New York reeled from the after-effects of the Sept. 11, 2001 attacks. Nationally, 28,000 newly constructed apartments came onto the market in the fourth quarter, mostly by developers who had obtained financing before the credit crisis worsened. "Newly completed properties represent intensifying competition for existing buildings given the difficulty of attracting new tenants and retaining existing ones, and it is reflected in the massive decline in asking rents," Calanog said.
In the fourth quarter, U.S. asking rents fell by an average of 0.7 percent to $1,026 per square foot, the largest single-quarter decline since 1999. For 2009 asking rents fell 2.3 percent, also the largest decline in 30 years. Effective rent fell 0.7 percent in the quarter to $964 per square foot. The 3 percent drop for the year was more than three times the deterioration in 2002. "Never before have we observed rental properties in so much distress, both on the space and pricing side," Calanog said. "Declines in asking and effective rents may be massive, but landlords may at least be retaining tenants as opposed to losing income altogether from dealing with vacant space."