"A Southern chain gang, somewhere in the American South"
Ilargi: First of all, if you call a big press cabal together and you announce a major speech by the president all over the place and you make sure it’s televised to a billion homes, could you maybe at least actually say something in that speech? Blah, blah, we’ll prevent the next crisis, blah blah, and to do that we need the cooperation of the guys who caused the latest crisis.
Nothing about breaking them up, nothing about talking their toys away that did untold trillions of dollars in damage, nothing about threatening them with anything at all if they ever do it again, nothing about looking closely at the legal status of what they did in the past few years, nothing whatsoever. That speech could just as easily have been written by a 14-year old highschool girl in her contemporary history class. What’s the idea? That we stop listening altogether, knowing that paying attention is a waste of time anyway?
The message, however, that shone through, was clear enough. The economy had better start growing, because we’re running out of them trillions, and we draw a blank on any ideas that do not involve risking another downfall by sticking it to you Wall Street guys, so we’ll let you carry on as usual and hope and pray that a bone or two might fall from your luxuriously overladen dinner tables. If the American economy is to grow again (and God forbid if it doesn't), then America's big banks will have to lend out the money that finances that growth.
Not their own money, of course, we’ll keep providing it at close to zero percent, while you can then charge your clients pretty much any rate you want. As for the American people who voted me into office, feel free to charge them 29% rates on their credit cards while you pick up their own money for free at the Federal Reserve discount windows. Business as usual, don’t let’s rock that boat. (To me, that sounds eerily similar to "let them eat cake".)
I think perhaps the best incidence of this, frankly, amoral attitude, lies in the president's refusal to give back the money, $1 million, that Goldman Sachs donated to his campaign (let alone the $23 million more from other financial institutions). Look, buddy, Goldman Sachs has been accused of fraud. That alone should be enough to reconsider, and return the loot. A president's moral behavior shouldn’t be just OK, it should be impeccable. You're supposed, make that required, to set the example for everyone.
I know it's not yet a criminal case, it’s still civil court, but that should not make any difference. And you know why? Because it's not like it's Kim Jong-il or Tony Soprano who are the accusers, it's a branch of your own bleeding government! And no matter how you might want to twist and turn it, it doesn't exactly look like moral high ground if one branch of government files a complaint for fraud against a party, while another one rakes in that party's cash, which for all anybody knows might have been "earned" with that same fraud. And certainly not if that other branch is the president himself.
You can’t do it, it looks awful, and it doesn't matter one bit if Goldman has been found guilty or not, or if the case is civil, not criminal (for now). A presidency should not be tainted with even the suggestion or suspicion that it takes money derived from questionable activities. And I’m sure we can all agree that Goldman's ACA/Paulson deal was at the very least questionable, whether or not it's illegal and/or criminal. As soon as someone, or some party, is accused of a crime, a president needs to sever all ties with that person or persons, unless it’s his own family (and even then).
Alternatively, you can continue to hold bland speeches that don't say or mean anything, keep accepting -at least potentially- tainted money, and degrade the office of President of the United States ever more in the process. Yes, it meant something once. And yes, we know you’re by no means the first to do so, but how is that an excuse?
You have a chance, you have the power, to make sure this crisis that we're, let's say, somewhere in the 2nd or 3rd inning of, will not happen again in the foreseeable future. Instead, you elect to tell your voters that we're in the 9th inning. And many believe you, after all, you’re the boss. But that by itself doesn’t all of a sudden make it true.
You're weakly whining about too many lobbyists when you have the power to chase them all out of town to the last guy, and turn K-Street into a ghost town. You can reinstate Glass-Steagall or initiate its 21st century sibling, you can break up the 6 big banks into units small enough to not pose systemic risk, you can form your own Pecora Commission with carte blanche fact-finding power of attorney for the likes of for example Bill Black, Elizabeth Warren, Eliot Spitzer and Ted Kaufman (and many more decent and smart Americans).
You can turn the nation's mood around on this 180 degrees. You can make people believe in the country again, in its political system which once promised equal representation for everyone, in the judicial system which still to this day somewhat faintly promises to hold everyone equally accountable to the law no matter how rich, poor, powerful or destitute they are.
But you're not doing any of this. You hold empty speeches which derive their only semblance of importance from media overkill, window dressing and ancient Japanese theater (that’s how you sell bad detergent and crappy cars, and yes, no contest there, they do sell well). Well, sir, history will judge you too.
You defend your choice of not returning the Goldman campaign cash by saying you got lots of money from lots of different people.
Well, alright, so let’s talk about how well you're doing so far standing up for the interests of all those who’ve contributed small amounts but now lost their homes and jobs, or for the grandma's who donated what they couldn't afford, because they wanted to believe in a change, and whose pensions are now under siege from their pension fund's involvement with derivatives trades that benefited the very banks you refuse to give back that campaign money to. There’s a choice involved in there somewhere, and you’ve apparently made yours.
Looks like an age-old dance to me: whoever donates more gets his interests better taken care of. And if you have nothing to donate, maybe, just maybe, you’ve outlived your expiration date.
There is an age-old story about a man who sold a dear friend for 30 pieces of silver.
What would you say we have we learned from that story in the past 2000 years, sir? What have you? What's your price? Are we looking at it? Is that all there is?
Oh my name it is nothin' My age it means less
The country I come from Is called the Midwest
I's taught and brought up there The laws to abide
And that land that I live in Has God on its side.
Oh the history books tell it They tell it so well
The cavalries charged The Indians fell
The cavalries charged The Indians died
Oh the country was young With God on its side.
Oh the Spanish-American War had its day
And the Civil War too Was soon laid away
And the names of the heroes I's made to memorize
With guns in their hands And God on their side.
Oh the First World War, boys It closed out its fate
The reason for fighting I never got straight
But I learned to accept it Accept it with pride
For you don't count the dead When God's on your side.
When the Second World War Came to an end
We forgave the Germans And we were friends
Though they murdered six million In the ovens they fried
The Germans now too Have God on their side.
I've learned to hate Russians All through my whole life
If another war starts It's them we must fight
To hate them and fear them To run and to hide
And accept it all bravely With God on my side.
But now we got weapons Of the chemical dust
If fire them we're forced to Then fire them we must
One push of the button And a shot the world wide
And you never ask questions When God's on your side.
In a many dark hour I've been thinkin' about this
That Jesus Christ Was betrayed by a kiss
But I can't think for you You'll have to decide
Whether Judas Iscariot Had God on his side.
So now as I'm leavin' I'm weary as Hell
The confusion I'm feelin' Ain't no tongue can tell
The words fill my head And fall to the floor
If God's on our side He'll stop the next war.
Goldman CEO Sued by Shareholders Over Abacus
by Jonathan Stempel
Goldman Sachs Group Inc Chief Executive Lloyd Blankfein and other bank officials have been sued by shareholders in two lawsuits related to fraud allegations brought by the federal government. In complaints filed in New York State Supreme Court in Manhattan, Robert Rosinek and Morton Spiegel accused Goldman executives and the bank's entire board of breaching fiduciary duties by letting the bank enter transactions involving risky collateralized debt obligations tied to subprime mortgages.
They said the defendants had "engaged in a systematic failure to exercise oversight" over the transactions, known as Abacus, and did not properly vet how the deals were structured and marketed. The plaintiffs also said the officials had failed to ensure Goldman did not represent "conflicting interests." The lapses had subjected Goldman to "billions of dollars" of liability and serious damage to its reputation, they said. The lawsuits are derivative lawsuits, which shareholders bring on behalf of companies to enforce or defend rights that the companies fail to address on their own. The complaints were filed on Thursday and docketed on Friday.
Legal experts expect Goldman to face more litigation, including class-action complaints, after the U.S. Securities and Exchange Commission filed a civil fraud lawsuit on April 16 against the bank and Fabrice Tourre, whom the regulator called a key architect of Abacus. The SEC said Goldman had failed to tell clients that securities they were buying were created by hedge fund investor John Paulson, who stood to benefit if the securities lost value. Paulson made about $1 billion on Abacus, roughly the amount other investors are believed to have lost.
Late on Friday, the SEC Inspector General David Kotz, the regulator's watchdog, said he would examine what factors drove the SEC to file its lawsuit. Some Republican lawmakers have implied political moves were behind the decision and the timing. The lawsuit was announced days before the Senate was set to begin formal debate on financial reform legislation. Goldman shares fell 12.8 percent on the day the SEC filed its lawsuit. The company has called the SEC allegations unfounded. Paulson has not been charged.
In the derivative complaints, Rosinek and Spiegel characterized Goldman directors as "antagonistic" to their lawsuits, making it "futile" to approach them. Thomas Dubbs, a senior partner at Labaton Sucharow LLP in New York, who specializes in class action cases, declined to comment on the Goldman litigation, but said derivative actions can face an uphill battle when shareholders do not go to the board first before suing.
"Investors might argue that it would be an empty gesture to ask a corporation to sue its own officers and directors," he said. But "courts almost always require that hurdle to be jumped," he added. The lawsuits seek declarations that the Goldman defendants violated their fiduciary duties, plus compensatory damages. Goldman itself is a "nominal" defendant. Companies sometimes accept governance changes in resolving derivative lawsuits. The law firm Faruqi & Faruqi LLP in New York represents both plaintiffs. Spiegel is also represented by Gardy & Notis LLP of Englewood Cliffs, New Jersey. The cases are Rosinek v. Blankfein et al, New York State Supreme Court, New York County, No. 650318/2010, and Spiegel v. Blankfein et al in the same court, No. 650319/2010.
AIG May Be on the Hook in Lawsuits Against Goldman Sachs Board
American International Group Inc. may be required to pay to defend lawsuits against Goldman Sachs Group Inc.’s top executives, including Chairman and Chief Executive Officer Lloyd Blankfein, under directors and officers insurance policies held by the company. AIG, which was rescued from collapse by the U.S. government, sold so-called Side A directors and officers’ coverage to New York-based Goldman Sachs, according to a person with knowledge of the policy. Goldman Sachs was sued last week by the U.S. Securities and Exchange Commission, which claimed it misled investors about collateralized debt obligations tied to subprime mortgages in 2007.
“If it were a derivative suit against Goldman, defense costs would be covered, and I’d prefer not to be a primary on the policy,” said John Degnan, vice chairman and chief operating officer of AIG competitor Chubb Corp., while answering a question about Goldman Sachs on an April 22 earnings call. Goldman Sachs’s board and top management were sued by investors in two separate cases. The investors, Morton Spiegel and Robert Rosinek, said in complaints filed April 22 in New York State Supreme Court in Manhattan that Goldman Sachs officers and directors breached their duty to the company by permitting it to enter into a series of collateralized debt obligations tied to subprime mortgages. One of those CDOs is the subject of a lawsuit against the New York-based firm by the SEC.
According to the derivative complaints, Blankfein and the other defendants failed to exercise oversight of the deals, exposing Goldman Sachs to billions of dollars in possible liability and damage to its reputation. “As a result of the individual defendants’ unlawful course of conduct and breaches of fiduciary duties, Goldman Sachs has sustained substantial economic losses, and has had its reputation in the business community and financial markets irreparably tarnished,” the investors said in the complaints. Mark Herr, an AIG spokesman, didn’t immediately return a call seeking comment yesterday. On April 20, he declined to comment on the Goldman Sachs policy. Goldman Sachs spokesman Ed Canaday declined to comment. The firm has said it will fight the SEC case.
The SEC’s case centers on whether the firm should have told investors that hedge fund Paulson & Co. helped pick underlying securities in a CDO -- and then bet against it. Paulson wasn’t accused of wrongdoing. The SEC allegations sparked a 13 percent, one-day decline in Goldman Sachs shares. The derivative lawsuits, which are a type of litigation filed on behalf of a company against its officers and directors, seek a court declaration that the firm’s top executives violated their fiduciary duties to the company, plus unspecified damages. Such lawsuits often result in internal corporate governance changes and the payment of attorneys’ fees. In addition to naming top Goldman Sachs management, the suits name Goldman banker Fabrice Tourre, who was sued by the SEC.
AIG is the lead insurer of the Goldman Sachs board against shareholder suits, according to a person with knowledge of the policy. AIG may therefore have to pay the defense costs in the suit in addition to any verdict or settlement. Goldman Sachs already faces a class-action securities lawsuit over mortgage securities in federal court in New York. The Public Employees’ Retirement System of Mississippi sued Goldman Sachs in federal court in Manhattan saying the bank misrepresented the value of $2.6 billion in mortgage securities. The bank misled investors about the value of the underlying mortgages, according to court papers.
“As a result of these untrue statements and omissions in the offering documents, plaintiff and the class purchased certificates that were far riskier than represented and that were not of the ‘best quality,’ or even ‘medium credit quality,’ and were not equivalent to other investments with the same credit ratings,” the Mississippi retirees said in an amended complaint filed in September. Attorney Jacob Zamansky said he expects to file a class- action case against Goldman Sachs on behalf of investors in the coming weeks. A case would relate to Goldman Sachs’s failure to disclose the SEC’s investigation to investors, he said. “We’ve been interviewing potential clients,” Zamansky said.
Breaking Up the Banks
by Simon Johnson
On Wednesday, Senators Sherrod Brown and Ted Kaufman unveiled a “SAFE banking Act” with a clear and powerful purpose: Break up the big banks.
The proposal places hard leverage and size caps on financial institutions. It is well crafted, based on a great deal of hard thinking, and — as reported on the front page of The New York Times this week — the issue has the potential to draw a considerable amount of support.
The idea is simple, in the sense that the largest six banks in the American economy are currently “too big to fail” in the eyes of the credit market (and presumably in the leading minds the Obama administration — which saved all the big banks, without conditions, in March-April 2009). The bill put forward by Senator Christopher J. Dodd, the chairman of the Banking Committee, has some sensible proposals — and is definitely not an approach that supports “bailouts” — but it does not really confront the problem of the half-dozen megabanks.
In the American political system — where the power of major banks is now so manifest — there is no way to significantly reduce the risks posed by these banks unless they are broken up.
These banks are so powerful that they can confront and defy the government, as seen in the twists and turns of the S.E.C. versus Goldman Sachs case. They are also powerful enough to threaten a form of extortion: If reform is tough, according to JPMorgan Chase’s chief, Jamie Dimon, credit will contract, the recovery will slow and unemployment will stay high. Given the size of his bank, that’s a credible threat.
The big banks give a lot of money to politicians on both sides of the aisle and they are now digging in hard to defeat reform. Indeed, there are credible reports of various “front” organizations being used for this purpose.
Under such circumstances, the Brown-Kaufman approach might be thought unlikely to succeed.
But consider how the Republicans are already starting to counterattack the Dodd proposals, the ways in which the broader Dodd-White House approach remains vulnerable, and how exactly the Brown-Kaufman approach can help the Democratic leadership as it becomes increasingly hard pressed.
The Republicans are saying: the Dodd bill does not end “too big to fail.” Most of their reasons are misleading (“it’s all about Fannie and Freddie really,” “there will be a permanent bailout fund,” “the Federal Reserve needs to lose some of its powers,” etc.). But there is no question that this message will seriously confuse people who are only just starting to pay attention.
As the Republicans have astutely spotted, the Dodd-White House proposals will not actually reduce the size or seriously limit the activities of the megabanks — and a broad cross-section of society completely understands that these institutions brought us into the trauma of September 2008, have become even bigger since then, and still have the incentive to take on an excessive amount of risk.
The S.E.C. case against Goldman has created a great opportunity for the Democrats because it exposes details regarding exactly how big banks are mismanaged and why they treat many of their customers in an unreasonable manner. The electorate now completely understands — even more clearly than a week ago — that the attitudes and compensation structure of the largest banks lie at the heart of our current macroeconomic difficulties.
The Brown-Kaufman bill therefore addresses not just the substantive financial issues of our day but also the tough political situation now facing Democrats. If their SAFE banking bill can come to the floor of the Senate (for example, as an amendment to the Dodd bill) and be voted on — up or down — then we will really get to see which of our elected representatives support overly big banks and which want to bring them down.
The bill might fail, of course, on that basis — but then anyone who opposes it can be branded as a “too big to fail” fan in November and beyond. This would be a clear identifier that would cut through the noise and the disinformation. Did this candidate vote for or against the too-big-to-fail banks? It’s a simple yes or no.
As political logic inserts itself more and more into the economic debate on banking, there is a real possibility that Senators Brown and Kaufman have exactly what the Democrats (and the country) needs.
America must face up to the dangers of derivatives
by George Soros
The US Securities and Exchange Commission's civil suit against Goldman Sachs will be vigorously contested by the defendant. It is interesting to speculate which side will win; but we will not know the result for months. Irrespective of the eventual outcome, however, the case has far-reaching implications for the financial reform legislation Congress is considering.
Whether or not Goldman is guilty, the transaction in question clearly had no social benefit. It involved a complex synthetic security derived from existing mortgage-backed securities by cloning them into imaginary units that mimicked the originals. This synthetic collateralised debt obligation did not finance the ownership of any additional homes or allocate capital more efficiently; it merely swelled the volume of mortgage-backed securities that lost value when the housing bubble burst. The primary purpose of the transaction was to generate fees and commissions.
This is a clear demonstration of how derivatives and synthetic securities have been used to create imaginary value out of thin air. More triple A CDOs were created than there were underlying triple A assets. This was done on a large scale in spite of the fact that all of the parties involved were sophisticated investors. The process went on for years and culminated in a crash that caused wealth destruction amounting to trillions of dollars. It cannot be allowed to continue. The use of derivatives and other synthetic instruments must be regulated even if all the parties are sophisticated investors. Ordinary securities must be registered with the SEC before they can be traded. Synthetic securities ought to be similarly registered, although the task could be assigned to a different authority, such as the Commodity Futures Trading Commission.
Derivatives can serve many useful purposes, but they also contain hidden dangers. For instance, they can pile up hidden imbalances in supply or demand which may suddenly be revealed when a threshold is breached. This is true of so-called knockout options, used in currency hedging. It was also true of the portfolio insurance programs that caused the New York Stock Exchange's Black Monday in October 1987. The subsequent introduction of circuit breakers tacitly acknowledged that derivatives can cause discontinuities, but the proper conclusions were not drawn.
Credit default swaps are particularly suspect. They are supposed to provide insurance against default to bondholders. But because they are freely tradable, they can be used to mount bear raids; in addition to insurance they also provide a licence to kill. Their use ought to be confined to those who have an insurable interest in the bonds of a country or company. It will be the task of regulators to understand derivatives and synthetic securities and refuse to allow their creation if they cannot fully evaluate their systemic risks. That task cannot be left to investors, contrary to the diktats of the market fundamentalist dogma that prevailed until recently.
Derivatives traded on exchanges should be registered as a class. Tailor-made derivatives would have to be registered individually, with regulators obliged to understand the risks involved. Registration is laborious and time-consuming, and would discourage the use of over-the-counter derivatives. Tailor-made products could be put together from exchange-traded instruments. This would prevent a recurrence of the abuses which contributed to the 2008 crash.
Requiring derivatives and synthetic securities to be registered would be simple and effective; yet the legislation currently under consideration contains no such requirement. The Senate Agriculture Committee proposes blocking deposit-taking banks from making markets in swaps. This is an excellent proposal which would go a long way in reducing the interconnectedness of markets and preventing contagion, but it would not regulate derivatives.
The five big banks which serve as marketmakers and account for over 95 per cent of the US's outstanding over-the-counter transactions are likely to oppose it because it would hit their profits. It is more puzzling that some multinational corporations are also opposed. The only explanation is that tailor-made derivatives can facilitate tax avoidance and manipulation of earnings. These considerations ought not to influence the legislation.
Treasury May Sell Record Amount of Notes, Primary Dealers Say
by Susanne Walker
The U.S. Treasury may sell an unprecedented $128 billion in notes next week as expectations increase that the amount of securities auctioned by the government is peaking with the economy strengthening. Matthew Rutherford, the Treasury’s deputy assistant secretary for federal finance, said in February that the auctions have been expanded enough to fund the budget deficit and that any changes would depend on tax receipts and how fast the economy recovers. Dealers estimated in an earlier survey that the Treasury will sell a record $2.4 trillion in debt in 2010, compared with $2.11 trillion in notes and bonds last year.
“With the economy doing better, receipts are better and there’s not as much pressure on Treasury for cash needs,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 18 primary dealers that are required to bid at Treasury auctions. “At some point, we’ll see modest reductions. We expect things will improve and we may see reductions in twos, fives and sevens by year-end. It won’t happen until August at the earliest.”
The record for securities sold in a week is $126 billion in notes and bonds when the U.S. auctioned $8 billion in 30-year TIPS, $44 billion in 2-year debt, $42 billion in 5-year notes and $32 billion in 7-year securities during the week of Feb. 22. “Large cuts in Treasury issuance lie ahead and we expect the first announcements this quarter,” William O’Donnell, U.S. government bond strategist at primary dealer Royal Bank of Scotland Group Plc in Stamford, Connecticut, wrote in a note to clients yesterday. “We expect Treasury to cut coupon supply in the same way that they added it as the crisis developed: somewhat evenly across the curve. This should be mildly positive for bond prices.”
President Barack Obama has boosted marketable U.S. debt to a record $7.76 trillion, Treasury figures show. The Federal Reserve and U.S. agencies have lent, spent or guaranteed about $8.2 trillion to lift the economy from the worst slump since the Great Depression, according to data compiled by Bloomberg.
Ilargi: Wait! WHY $170 billion? Madoff was supposed to have swindled "only" $65 billion. What is there we don't know about?
US Seeks $170 Billion from Madoff Aide DiPascali
Prosecutors have asked a U.S. federal judge to hold Frank DiPascali, a former top aide to imprisoned Ponzi schemer Bernard Madoff, liable to pay $170.25 billion to the government under a forfeiture order. In a Wednesday filing in Manhattan federal court, the government also asked a judge to order DiPascali to forfeit more than $6.1 million of personal property including a Bridgewater, New Jersey home; a Haverford, Pennsylvania condominium; cars; other vehicles and various accounts.
The defendant has been surrendering property, and the government plans to sell all his forfeited property, with net proceeds going to DiPascali's victims. His wife and children also agreed to give up some claims, and his wife would be allowed to keep $177,982, according to Wednesday's filing. DiPascali pleaded guilty to 10 charges including securities fraud, money laundering, conspiracy and perjury last August. He preliminarily agreed at the time to forfeitures, and now agrees to a final forfeiture order, Wednesday's filing shows.
DiPascali faces up to 125 years in prison for his role in Madoff's estimated $65 billion Ponzi scheme, but could win leniency for cooperating with prosecutors. Last December, the government said "it is likely his cooperation will result in an extraordinary letter" justifying a lower sentence. A spokeswoman for U.S. Attorney Preet Bharara in New York said DiPascali is still cooperating. Marc Mukasey, a partner at Bracewell & Giuliani LLP who represents DiPascali, did not return a call seeking comment.
In its filing, the government said it deserves the $170.25 billion sum as proceeds of DiPascali's crimes, "regardless of whether he personally received such proceeds." DiPascali had worked for Madoff's firm, Bernard L. Madoff Investment Securities, since 1975, and eventually became chief financial officer. The firm collapsed in December 2008. In February, U.S. District Judge Richard Sullivan ordered DiPascali's release on $10 million bond, with stringent conditions including home confinement with electronic monitoring, and tight oversight by federal agents.
Greek prime minister announces activation of EU/IMF aid package
by Anthony Faiola and Frank Ahrens
Pushed to the brink of bankruptcy, Greece on Friday officially requested a massive, $56 billion rescue from European nations and the International Monetary Fund aimed at preventing a financial meltdown in the heart of Europe. Prime Minister George Papandreou made the request Friday morning. The desperate move, potentially locking Greece into fresh rounds of austerity cuts that could worsen public unrest, came as investors lost faith in the accuracy of financial reporting by the Mediterranean nation and flight of capital was threatening to undermine the Greek banking system.
The news helped lifted stock markets from London to Frankfurt, and invigorated the euro, lifting it up from one-year lows against the dollar as fears ebbed that Greece -- one of the 16 nations that use the principle common currency -- would be forced into a catastrophic debt default. Athens had tried to avoid a bailout at all costs, seeing the prospect as deeply embarrassing. But international aid was becoming unavoidable this week as there appeared to be no way for the country to borrow enough funds on open markets on keep the government running. The crisis had escalated sharply Thursday, weakening the euro and sending ominous ripples across a stagnant European economy.
The rescue continues to face strong opposition from Germany, where the public fears it will have to shoulder an unfair burden in a bailout. IMF Managing Director Dominique Strauss-Kahn warned that there is no "silver bullet" to the nation's fiscal woes. He said negotiations on the details of a rescue package will take time, which Greece may not have. "It's really important to have a quick package in place in Greece," said Astrid Schilo, head European economist with HSBC in London. "Parliament in Germany may have to vote in favor of support, even if the public opposes it. The consequences are too high if it doesn't."
Other large nations, including the United States, that carry increasing levels of debt have worried that the Greek crisis could be a small-scale sketch of their own future. Sovereign debt is coming under increasing scrutiny by global markets, and many analysts fear that U.S. government bonds are not as attractive as they once were. Wall Street traders have referred to the months-long Greek debt crisis as the "Greece fire": It has been messy, noxious and hard to put out. Each time a solution has appeared close at hand, new revelations emerge from Greece, fanning the flames.
On Thursday, new data showed that the current Greek administration, like its predecessor, had underreported its debt in order to hide problems from outsiders. The European Union's statistical office said the government's 2009 budget deficit was $44.3 billion, 13.6 percent of Greece's gross domestic product, which is significantly higher than the 12.7 percent previously reported. In the United States, the figure is about 10 percent.
The news led Moody's, the ratings agency, to downgrade Greek debt for the second time in five months, saying it fears the financially troubled nation might be forced to continue paying high interest rates that could compound the economic woes. To sell its two-year bonds, Greece is paying a back-breaking 11.5 percent interest rate, up from 8 percent on Wednesday. The cost of insuring Greek debt is approaching record highs. The revision zapped further confidence in the reliability of Athens's figures. It also suggested that the government would need far more belt-tightening to meet budget targets this year and avoid a default.
"The revised figures are not good news," said Diego Iscaro, an analyst with IHS Global Insight in London. "A higher deficit means that fiscal consolidation will be even more difficult to achieve than previously thought. Moreover, the constant revisions made to the Greek fiscal figures exacerbate the already weak credibility of the government." The new developments raised the specter of a sovereign debt default in Greece. A default would lead to a restructuring of Greek debt; that means creditors would be forced to accept a negotiated figure that pays them cents on the dollar, a practice known in the industry as "taking a haircut." Some analysts say this is inevitable.
"Greece's only way out is a debt restructuring, which will include a haircut to bondholders, and that is an implicit default," said Peter Boockvar, an equity strategist at Miller Tabak. If Greece must restructure, much of Europe will feel the pain, Boockvar said. "We've seen the cost of capital going up for Italy, Ireland, Portugal and Spain, and banks that hold the debt of these countries will get impacted," he said.
Hampered by high levels of unemployment and government spending, the 16-nation bloc that shares the euro was hopeful of achieving a very modest 1 percent growth in GDP this year, compared with 3.1 percent for the United States, according to the IMF. If Greece defaults, Europe will be hard-pressed to show any economic growth this year. Boockvar said the austerity conditions imposed in a bailout will slow growth for up to 35 percent of the euro zone.
On Thursday, Greece's problems led investors to focus on other deeply indebted nations in Europe. The spread on Belgian bonds jumped after the government of Prime Minister Yves Leterme collapsed. Belgium's budget deficit, at 4.8 of GDP, is far lower than Greece's, but the nation is heavily leveraged, with overall debt amounting to 100 percent of GDP. Analysts remained concerned that the political crisis could further damage the fragile economy.
Escalating Greek default fears rock Europe's debt markets
by Ambrose Evans-Pritchard
Greece's debt crisis has reached a dramatic crescendo after the EU revealed that the country's debt and deficit figures are even worse than feared and leading banks began to talk openly of debt-restructuring. With contagion spreading across Southern Europe, spreads on 10-year Greek bonds exploded to almost 600 basis points over German Bunds in panic trading, pushing borrowing costs close to 9pc. Rates on two-year debt rose to 10.6pc in a market gone mad. “It is clear that the Greek situation is a very serious one,” said Dominique Strauss-Kahn, head of the International Monetary Fund. “There is no silver bullet to solve it in an easy manner.”
Credit default swaps (CDS) on Portuguese debt surged 50 basis points in a matter of hours to an all-time high of 270. Markit said the CDS on Spain reached a fresh record of 175, and Ireland jumped to 162, with jitters reaching Hungary, Bulgaria, Romania, Russia and even Argentina. “This is now a real test of EU leadership,” said Julian Callow, of Barclays Capital. “Europe needs to act very fast to ring-fence Greece to prevent contagion. There has never been a default in Western Europe since World War Two and the whole financial system is depending on the assumption that it cannot be allowed to happen. There may need to be some sort of 'Brady bonds’ or 'Barroso bonds’,” he said, referring to the solution for Latin American debt in the 1980s.
The Parthenon was closed to visitors, a symbol of the Greece’s paralysis as public employees carried out yet another general strike, this time as EU and IMF officials were holding their second day of tense talks in Athens. Ilias Iliopoulos, head of the Adedy union, said the protest was a warning that calls for further cuts would meet resistance. “These bloodthirsty measures won’t help Greece exit the crisis. A tragic period begins,” he said. Greece is already squeezing fiscal policy by 6pc of GDP this year – cutting the deficit by 4pc – in the most draconian cuts ever imposed on a modern developed country.
Goldman Sachs said it is expecting Greece to offer some sort of “voluntary debt-restructuring” to creditors over coming months. Erik Nielsen, the bank’s Europe economist, said the rescue formula may evolve into a mixture of loans and debt forgiveness in order to give Greece “a much longer breathing space”. Any move is likely to be friendly. “I don’t think we are going to cross into the territory of forced debt restructuring,” he said. It is understood that EU officials are exploring formulae that would avoid triggering CDS default contracts, which could cause big losses for European banks that issued the derivatives.
City bankers are bracing for a possible haircut of up to 50pc on €270bn (£235bn) of Greek sovereign debt, hoping that any losses will be split between creditors and some sort of EU resolution fund. The trigger for Thursday’s wild moves was a report by Eurostat, the EU’s data agency, that Greece’s budget deficit last year was at least 13.6pc of GDP, and may be revised to over 14pc after a probe into “off-market swaps” and social security funds. Overall debt may be 5pc to 7pc of GDP higher than thought, pushing the total for 2009 to 122pc.
US rating agency Moody’s downgraded Greece’s debt one notch to A3 and warned of more to come. “The debt may stabilise only at a higher and more costly level,” it said. Moody’s rebuked the EU’s “fractious” handling of rescue talks and said the country would in any case need more than the €45bn of aid so far ear-marked by the EU and the IMF. Germany’s ruling coalition is still sending mixed messages. The finance spokesman for Germany’s Free Democrats, Frank Schäffler, told Handelsblatt on Thursday that Greece should “voluntarily step outside the eurozone” if it cannot comply with austerity demands. “Any other way is frankly a placebo to calm the markets,” he said.
The Greek media said the country may ask for a short-term EU loan before the full bail-out kicks in, though it is unclear how this could work. Nor is it clear what premier George Papandreou hopes to gain from delaying activation of the rescue mechanism, unless he is hoping to exploit fears of EMU-wide contagion to extract better terms. Athens is demanding a loan rate below the 5pc so far agreed. Any talk of Greek restructuring is potentially dangerous. “It would cause massive [bond] spread turmoil in other peripherals if a troubled EMU member was not even given the chance to put its consolidation plans into practice,” said Marcel Bross, of Commerzbank.
Suki Mann, of Societe Generale, said such a move would be a major headache for Portugal, Spain and Ireland. “In extremis, this could lead to debt restructuring in these countries too,” he said. Data from the Bank for International Settlements shows that French-based banks have $75bn of exposure to Greek debt, and German banks have $45bn . Both countries are heavily exposed to Portugal as well. Northern Europe may have to agree to softer terms for Greek terms at the end of this poker game, or risk a banking crisis.
Greek 2009 Deficit Was 13.6% of GDP
by Paul Hannon
The European Union's official statistics agency Thursday said the Greek budget deficit in 2009 was wider than the government had estimated, and added that it has reservations about the accuracy of Greek budget data that may lead to further upward revisions. In the first of its twice-yearly reviews of government finances in the 27-member bloc, Eurostat said the Greek government's budget deficit was 13.6% of gross domestic product last year. The Greek government had estimated the deficit was 12.7% of GDP in 2009, although it has acknowledged that Eurostat's estimate may be higher because of differences in the way it accounts for surpluses in the state-run pension fund.
The new uncertainty on Greece's fiscal liabilities rattled the European currency and bond markets, with the euro slumping to $1.3370 from about $1.3400 within minutes of the news. The cost of insuring Greece's sovereign debt against default using credit default swaps hit a fresh high again Thursday, as Greek five-year sovereign CDS rose to 5.5 percentage points for the first time. That means the annual cost of insuring $10 million of Greek sovereign bonds for five years has risen more to $550,000 from $518,500 earlier in the morning.
The spread between the interest on 10-year Greek government bonds and comparable German government bonds, which serve as the market's benchmark, widened out to 5.26 percentage points from 5.03 percentage points at the opening, reflecting perceptions among investors of higher risk attached to Greek bonds. In reaction, the Greek finance ministry said in a statement that Eurostat's change in the 2009 deficit was due to revisions in economic output and changes to pension funds. "The announcement does not alter the target for reducing the deficit by at least 4 percentage points of GDP in 2010, as laid down in the Greek Stability and Growth Programme," the ministry said. Greece also remains commited to improving the credibility of its statistics, according to the statement.
Eurostat repeated its reservations about the quality of Greek budget figures, highlighting swaps entered into by the government, uncertainties about the size of the surplus on social security funds, and on "the classification of some public entities." Eurostat said the accurate recording of these items could lead to the deficit being revised to between 13.9% and 14.1% of GDP. "Following completion of the investigations that Eurostat is undertaking on these issues in cooperation with the Greek Statistical Authorities, this could lead to a revision for the year 2009 of the order of 0.3 to 0.5 percentage points of GDP for the deficit," Eurostat said.
Eurostat said the government's stock of debt as a proportion of GDP may be raised to between 120.1% and 122.2% from its current estimate of 115.1%. The cost of insuring Greece's sovereign debt against default using credit default swaps hit a fresh high again Thursday, as Greek five-year sovereign CDS rose above five percentage points for the first time. A team from the EU and the International Monetary Fund arrived in Greece Wednesday to negotiate the terms and conditions of a €45 billion bailout package for the government, should it be unable to repay its debts. But investors are becoming increasingly concerned that a rescheduling of those debts might be needed to make Greece's public finances manageable.
Greece's financial crisis was triggered by the revelation in October last year that its 2009 deficit would likely be twice the original estimate. It was not the first time that Greek deficit figures had proved unreliable. Eurostat said the euro zone's combined deficit hit a record high of 6.3% of GDP in 2009, up from 2% in 2008. That reflects both a rise in government debt as tax revenues declined and social welfare spending increased, as well as contractions in many economies. Greece was not the euro-zone member with the highest deficit, however. That dubious honor went to Ireland, with a fiscal gap of 14.3% of GDP, while Spain had a budget deficit of 11.2% of GDP and Portugal a budget deficit of 9.4% of GDP. Outside the euro zone, the U.K. had the largest deficit, amounting to 11.5% of its GDP.
Investors Desert Greek Bond Market
by Tom Lauricella and Nick Skrekas
Lack of Liquidity Drives Spreads to New Highs; Selloff an 'Overreaction Magnified by Thin Volumes'
Greek bond yields surged to new crisis highs on Wednesday, on the surface reflecting ever-increasing alarm over Greece's debt plight. But the sharp moves have coincided with a slump in trading volume, suggesting that the sell-off may not have been as dramatic as it seems. Markets participants say trading in Greek debt on a local electronic trading platform has dropped to around €200 million ($268 billion) a day from as much as €2 billion a day in recent months. And, according to Tradeweb, average daily trading volume in Greek debt is running 11% lower over the last seven days than in the first quarter.
The sliding activity has magnified the deterioration in Greek bonds and left traders wondering about how to interpret the sharp moves. Typically, rising yields would reflect growing alarm over Greece's deteriorating debt position, and suggest that investors are bailing out of the debt. (Yields rise as prices fall.) But with only a handful of bonds changing hands, the meaning of the bond move isn't so clear. Other markets such as the euro also have shown little sign of growing worries in the past few days. "Liquidity is very poor," says Laura Sarlo, a senior sovereign debt analyst at Loomis Sayles & Co.
Wednesday, the gap between the yield on Greek 10-year bonds and comparable German bonds briefly set a crisis high of 5.2 percentage points before ending the day around 4.8 percentage points. That marks the third consecutive session in which this widely watched indicator of sentiment on Greek debt has deteriorated to new highs. On April 1 that spread stood at 3.5%. The overall yield on Greek 10-year notes rose to 8.25%, from 8% Tuesday and 7.2% two weeks ago.
The selloff came as European and International Monetary Fund officials began talks in Athens aimed at hammering out the details of any bailout package. The European Union and the IMF have pledged €45 billion to backstop Greece should it be unable to raise money in the open markets. Those talks, though, may last upwards of two weeks. The shrinking volume has coincided with other indicators of minimal activity in the Greek bond market. The gap between the price at which Greek bonds are quoted for sale and for purchase—the "bid-ask" spread—has risen to its worst level of the crisis, reaching 1.85 percentage points from 1.26 percentage points two weeks ago, according to Tradeweb. In mid-March the bid-ask spread hovered around 0.08 percentage point.
The extent of the selloff "could be an overreaction magnified by the thin volumes," Angelos Lyberis, head of bond trading in Athens for Emporiki Bank. Some traders speculate the drop-off in volume is a reflection of foreign banks that previously held Greek debt having largely sold their holdings. And a seller of any meaningful amount of bonds in the current environment could find it tough going. "A foreign bank that wants to offload a remaining part of its Greek government bond portfolio would find it very hard to attract sufficient demand or appropriate prices," Lyberis said.
At the same time, the lack of liquidity also make its difficult for Greek bonds to attract big investors, such as mutual funds, who might see recent rise in yields as compensating for the risks. That isn't good news for a country hoping to complete a U.S. bond sale in coming weeks. U.S. investors have already expressed reluctance to take part in a Greek sale of U.S. dollar denominated bonds, citing in part lack of liquidity in the market.
Meanwhile, as long as the details and timing of any bailout remain unclear, there is little catalyst for new buyers to step in. In the absence of news, prices are essentially just drifting lower. Investors cite a long list of unknowns that need to be clarified, such as the degree to which loans to Greece from the EU or the IMF would take priority over government debt holders and whether the IMF will require Greece to meet additional conditions, such as more budget cuts, before granting it any aid.
More credence is being given to the idea that Greece will have to restructure its debt. That could lead to maturities being extended, especially for shorter-term paper, resulting in sharply lower bond prices and losses for bondholders. But that process, too, would be uncharted territory. "Although we can apply historical experience—largely from emerging markets," says Loomis Sayle's Ms. Sarlo, "to imagine what a potential restructuring might look like, it's really just a guess given that Greece is part of the euro area, so it's a rather different and unique situation,"
IMF and Bundesbank fear contagion from Greece as bond spreads soar to fresh records
by Ambrose Evans-Pritchard,
The International Monetary Fund has warned that Greece’s debt crisis risks spinning out of control, threatening to spill over across the region unless action is taken soon to restore confidence. "In the near term, the main risk is that – if left unchecked – market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion," said the Fund in its World Economic Outlook. Bundesbank chief Axel Weber echoed the concerns, saying the financial system was still very fragile and subject to a "significant risk of contagion effects. A possible default by Greece would most likely be a severe economic blow for other countries in monetary union".
Debt markets are already under severe stress. Spreads on 10-year Greek bonds jumped on Wednesday to a post-EMU high of 529 basis points above German Bunds, pushing borrowing costs to over 8.3pc. The Greek daily Kathimerini said the government was out of its depth and appeared to be in a state of "nervous exhaustion". The new twist on Wednesday was a sharp rise in default insurance on Club Med and Irish debt. Five-year credit default swaps (CDS) for Portugal rose 36 basis points to 235. Spain’s CDS rose to 17 to 162. Both countries are now nearing the all-time highs at the peak of last year’s credit crisis.
Greece’s bond market is effectively frozen, so spreads are almost meaningless. "It is a very thin market. Investors are keeping their powder dry," said Chris Pryce from Fitch Ratings.
Marco Annunziata, Europe economist at Unicredit, said Greece must bite the bullet and activate the joint EU-IMF rescue plan, warning that time is running out with an €8bn refinancing crunch looming on May 19. "Action needs to be taken quickly. Investors want to make sure that the aid plan is no bluff," he said. "The external image of EMU has been seriously damaged during this crisis. The fact that a eurozone country has been forced to seek IMF assistance has not only underscored how the eurozone has been impacted more harshly by the crisis than the US, but also that the ties binding the area together are perhaps looser than previously thought," he said.
Bond investors have been alarmed by reports that Greek officials have discussed debt restructuring among a range of options with the IMF, perhaps by lengthening bond maturities. Gavan Nolan, a credit expert at Markit, said that any such move would normally trigger the default clause on CDS contracts. A restructuring would entail hefty losses for bondholders, with `haircuts’ reaching 30pc or 50pc. City bankers have been studying the `Brady bond’ formula for Latin American debt in the 1980s. There were further concerns over news stories in the Greek media that the budget deficit for 2009 will be 13.7pc of GDP rather than the already revised figure of 12.9pc.
An EU spokesman said the exact figure will be published on Thursday by Eurostat. If there is any adjustment, the deficit target for 2010 will also be raised by the same amount. The EU is demanding a cut of 4pc of GDP this year from the final 2009 figure. Fitch’s Mr Pryce said the fresh revision – if true – is "an unwelcome piece of news" but does not in itself imply further downgrades. He is more worried by hardening rhetoric from Greek premier George Papandreou, who reacted angrily to EU demands for further spending cuts. "This is slightly disturbing. It shows that political pressures are building up at home."
Dockworkers went on strike on Wednesday, a precursor to broader stoppages by public sector workers in hospitals, schools, and ministries. "People can only take so much," said Diego Iscaro from IHS Global Insight. "If taxes continue to go up and spending continues to be cut, support for the government will plunge. That will be counterproductive."
Bill on Finance Wins Approval of Senate Panel
by Edward Wyatt and David M. Herszenhorn
Senate Republicans and Democrats predicted on Wednesday that Congress would soon pass a far-reaching overhaul of the nation’s financial regulatory system, indicating a potentially swift resolution of the latest partisan firefight on Capitol Hill. But the sides offered starkly different reasons for their optimism. Republicans said that they had forced Democrats back to the bargaining table to negotiate a bipartisan accord, while Democrats said that Republicans were hastily abandoning their opposition in fear of a public outcry.
With President Obama headed to New York City on Thursday to press the case for tougher rules for Wall Street, a first crack appeared in the Republican wall of opposition. Senator Charles E. Grassley, Republican of Iowa, voted with Democrats on the Senate Agriculture Committee in favor of imposing tougher rules for derivatives, the complex securities that were at the heart of the 2008 financial crisis.
The Agriculture Committee, which deals with derivatives because it oversees commodities futures trading, voted 13 to 8 to approve the bill, which was sponsored by Senator Blanche Lincoln, Democrat of Arkansas, the panel’s chairwoman. The bill is expected to be part of the wider regulatory overhaul put forward by the banking committee, though Democrats are still figuring out how to combine the proposals.
Senate Republicans on Wednesday reported progress in negotiating changes to the wider bill. But they did not point to any specific concessions they had won, and Democrats said they made none. In a statement later, Mr. Grassley said that his vote did not mean he would support the larger financial bill, which he said “has a number of flaws that need to be resolved.” But Democrats seized on his defection as a sign that Republicans were finding it increasingly untenable to oppose the legislation. Democrats said they would to push for a first procedural vote on Monday, in what could be a serious test of Republican resolve.
Senior Democrats said they viewed the vote as a no-lose proposition forcing Republicans to agree to begin debating the bill or be seen as obstructing it. The Democrats’ efforts have been bolstered this week by a series of developments in Washington and on Wall Street, as regulators announced a fraud case against Goldman Sachs, and then both Goldman Sachs and Citigroup reported huge profits.
“Wall Street’s unquenchable thirst for profits and utter disregard for ordinary consumers led to a pattern of greed and recklessness that darn near led to a complete collapse of our financial economy,” Senator Christopher J. Dodd, Democrat of Connecticut and lead sponsor of the legislation, said in a floor speech on Wednesday. “Millions of Americans lost their jobs.” Republicans initially had expressed stiff opposition to the financial regulation bill, saying it would encourage, rather than prevent, future taxpayer bailouts of financial firms. But that argument has crumbled in recent days, as Republicans insisted that they, too, wanted to clamp down on Wall Street.
Mr. Grassley is up for re-election this year and has long championed greater transparency as a good-governance tool. He did not explain his vote during committee proceedings although he noted his support for a section of the bill that would help protect whistle-blowers who expose fraud in the derivatives markets. Mr. Grassley, who negotiated with Democrats for months over major health care legislation but ultimately refused to back the bill, is a farmer and represents a farm state with a strong populist sensibility. Speculative trading in derivatives is seen as especially harmful to businesses that truly rely on hedging against price swings in commodities.
As talks continued between Mr. Dodd and Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee, some Democrats said they were prepared to accede to Republican demands and drop from the bill a provision to create a $50 billion fund, paid for by big banks, which would be used to unwind failing financial institutions. The Obama administration has also opposed the fund, which it fears could limit its ability to deal with bank failures.
To advance the larger bill, Senate Democrats need the backing of at least one Republican to surmount a filibuster. Democratic leaders have said they plan to push for a first procedural vote early next week that could test Republican resolve. Some leading Republicans, including Mr. Shelby, said they hoped a deal could be reached before then. In a statement after the Agriculture Committee action, the Senate majority leader, Harry Reid of Nevada, hailed the “bipartisan committee vote.” Senator Saxby Chambliss of Georgia, the senior Republican on the Agriculture Committee, said the sides agreed on 90 percent of the derivatives bill and that Democrats had agreed to help close the gap. Still, Republicans tried to minimize the defection. “Senator Grassley decided to be a little more bipartisan than the rest of us,” Mr. Chambliss said.
One important amendment added to the bill by Mrs. Lincoln just before Wednesday’s vote would allow the Treasury secretary to exempt derivatives tied to foreign currency rates from the new rules requiring swaps contracts to be traded on an exchange and routed through a clearing agency. The bill would require most derivative contracts to be traded on a public exchange and to be processed, or cleared, through a third party to guarantee payment if one of the parties to a trade went out of business. Inability to make such payments was a big factor in the failure of the American International Group, which needed a $180 billion bailout.
The derivatives bill also would require most big banks and Wall Street firms to spin off their derivatives trading into a separate subsidiary, a move that Mrs. Lincoln said would protect small banks from speculation in derivatives by big Wall Street banks. That provision is opposed, however, by the larger banks as well as the Obama administration and therefore could emerge as a Democratic bargaining chip in trying to get Republicans to sign on to the larger bill. Republicans expressed some confidence that they would eliminate that provision as well as the $50 billion fund, which supporters said was intended to ensure that taxpayers were not asked to finance future bailouts. Republicans have criticized it as “a bailout fund.”
Senate Derivatives Bill Faces Battle on Bank Spinoff Provision
by Phil Mattingly and Christine Harper
The U.S. Senate is poised to consider a proposal that would fundamentally change the operations of commercial banks such as Goldman Sachs Group Inc.. and JPMorgan Chase & Co.
Under one part of a derivatives bill approved yesterday by the Senate Agriculture Committee, banks would have to spin off their swaps trading desks, which have generated billions of dollars in profits. The proposal, strongly opposed by the financial industry, remains far from enactment. It faces objections from members of both parties and even the Obama administration, according to Senator Saxby Chambliss of Georgia, the top Republican on the Agriculture panel. “The administration is opposed to it and I think for the right reasons,” Chambliss told reporters yesterday.
The bill’s author, Agriculture Committee Chairman Blanche Lincoln, called the spinoff provision “the most powerful of all the reforms” aimed at stronger oversight of the derivatives market. Industry officials have said the proposal would have unintended consequences. It would force trading to overseas markets and restrict lending at a time when borrowers are already finding it difficult to obtain credit, Kenneth E. Bentsen, executive vice president for public policy and advocacy at the Securities Industry and Financial Markets Association, said in a letter this week to Lincoln and Chambliss. “This section might actually require American banking organizations, including nonbank affiliates, to get out of the swap dealer business entirely,” Bentsen wrote.
For most of the Congressional debate about how to regulate derivatives, the spinoff proposal was not even on the table. It emerged last week as part of the bill crafted by Lincoln, an Arkansas Democrat. “For a handful of the largest banks that would be a major problem -- of late the rates derivatives business in particular has been nothing short of an astonishing money maker,” said Raj Date, a former Deutsche Bank AG executive who is now executive director for Cambridge Winter Inc.’s center for financial institutions policy.
U.S. commercial banks held derivatives with a notional value of $212.8 trillion in the fourth quarter, according to the Office of the Comptroller of the Currency. The five U.S. banks with the biggest holdings of derivatives -- a group that includes include JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs -- hold $206.2 trillion, or 97 percent, of that total, the OCC said.
Banks will likely flood Capitol Hill with lobbyists in an effort to get the provision stripped, Date said. “It’s one of these issues where it matters a lot to five firms,” Date said. Lincoln’s spinoff provision would bar companies that deal in swaps from bank privileges such as accessing the Federal Reserve’s discount lending window emergency liquidity function and the Federal Deposit Insurance Corp.’s deposit guarantee.
The nation’s largest commercial banks are the most dominant in the market precisely because they have such access, according to Brian Gardner, an analyst at Keefe, Bruyette & Woods in Arlington, Virginia, who was staff director on the House Financial Services Committee for former Louisiana congressman Richard Baker. “There’s a reason why commercial banks have been leaders in derivatives dealing for the better part of 15-20 years, because their balance sheets so dictated it,” Gardner said.
Democrats on Lincoln’s own committee filed amendments to strip the provision from the bill during the committee’s consideration and may try again when it hits the Senate floor. “I think we all want to make sure we don’t throw the baby out with the bathwater, that we tackle what has been clearly outrageous behavior that has hurt Americans at the same time that we allow a system to work as it should be working,” Senator Debbie Stabenow, a Michigan Democrat on the committee, said yesterday.
Michael Barr, the assistant Treasury secretary for financial institutions, wouldn’t comment on the provision when he was asked about it by reporters. Gary Gensler, the chairman of the Commodity Futures Trading Commission, wouldn’t support the provision, saying only that “the Federal Reserve and the Treasury has to think through these issues.” The spinoff proposal is just one part of the Agriculture bill, which goes further than others introduced in the House and the Senate by imposing a fiduciary duty on banks entering into interest-rate swaps with cities, counties and other municipal issuers -- a nod to the billions of dollars in unexpected interest bills and fees that hit U.S. communities when derivatives meant to protect them from rising borrowing costs began to unravel.
In the wake of the Securities and Exchange Commission’s suit against Goldman Sachs and the persistent bashing of Wall Street by lawmakers, the pressure on banks is unlikely to ease any time soon. “It’s not going to get better over the next couple of weeks,” Gardner said. “The only thing that can help Wall Street’s reputation and their standing with the public and their political standing is time and they don’t have time right now.”
Why Community Banks Hate Dodd's Financial Reform Bill
by Matt Laslo
Small banks across the nation are lining up against the financial reform legislation that’s winding its way through the Senate, because they worry the package lumps them in with big Wall Street firms like Citigroup and Goldman Sachs. Republicans have taken heat in the press for opposing the proposal for a new Consumer Protection Agency, but some of that opposition is coming from the ground up.
Regulators at the Federal Reserve currently examine community banks for the stability of their business practices, known as safety and soundness. Lenders, including those in Banking Chairman Chris Dodd’s home state of Connecticut, fear a new consumer regulator would have no regard for bank’s business models, thus competing with other regulators. Local officials would much rather see current regulators broaden their scope to include more consumer-oriented protections.
“I think that if they create an agency that sits down with the regulators that regulate for safety and soundness and come up with rules, we can live by them,” said Jerry Noonan, President of the Connecticut Bankers Association. “As long as everybody lives by them and … there’s a mechanism to enforce them against non-banks and our regulators can enforce them against non-banks.” That line of argument has resonated with members of the GOP caucus, like Sen. Bob Corker, R-Tenn., who has played a lead role in the bi-partisan negotiations.
“The big guys always handle regulation more easily than the small guys. That’s the way life is,” Corker said just off the Senate floor. “When you have regulation, the big guys flourish because they’ve got the resources to deal with it. It’s the small guys that get hurt.” Sen. Dodd denies the current proposal is too burdensome for banks with assets under $10 billion, because the bill includes concessions to smaller banks, like keeping their regulators local.
“They’re not gonna be examined or enforced by [the Consumer Protection Agency]. It’s gonna be done by at a local level,” Dodd said as he was swarmed by reporters. “The rules are the same. They got to comply with the rules, but the enforcement and examination gets done at a different level. That was at the request of the community bankers. We’ve complied with them.”
Even with the concessions, small lenders across the U.S. remain opposed to the Senate bill, which is a part of the reason Dodd’s having such a hard time selling the legislation to skeptical Republicans. Many state banker associations oppose any new regulations placed on them, but experts, like Douglas Elliott of the Brookings Institution, believe community banks are far from blameless. Officials at small banks charge government mortgage lenders Fannie Mae and Freddie Mac, as well as Wall Street firms, with fanning the housing bubble that led to the near financial collapse.
Elliott argues that while those groups inflated the housing bubble, small banks were doing the same in the commercial real estate market by filling their portfolios with commercial loans – some to the tune of 40 to 60 percent of their investments.
Regional Banks Bemoan Lack of Lending
by Matthias Rieker
For large regional banks, the bread-and-butter business of lending remains challenging. The loan books at a string of regional banks reporting first-quarter results continued to shrink. The banks' earnings from the lending business hardly fared any better. Bankers continue to bemoan the lack of what they consider credit-worthy borrowers taking out loans that would lift lending income and brighten the revenue outlook for future quarters. Borrowers aren't even doing much to tap their existing lines of credit.
The enervated condition of regional banks, and their resulting lackluster earnings, stand in contrast to the buoyant profits earned by big banks. But for companies such as J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc., those profits were powered by their Wall Street operations, which the regional banks largely lack. The irony for regional banks is that their loans are drying up just as the potential profit from lending is high, mainly because banks can borrow cheaply. Customers deposited more money in deposit and savings accounts in the first quarter, and banks paid less interest on those deposits, improving the profit margins of regional banks' lending business.
The cost for troubled loans, meanwhile, fell, requiring banks to put less money aside to cover losses from delinquent loans—though losses from commercial real estate remain a headache. "Loan growth is off to a weak start," Keefe, Bruyette & Woods Inc. wrote in a report summarizing the first 28 earnings reports of the banks it follows. At Wells Fargo & Co., interest income, which is mostly the spread banks earn on making loans, declined 7.6% from a year earlier, to $13.2 billion. "We would love to see more loan demand," Chief Financial Officer Howard Atkins told investors. Wells' first-quarter profit fell 16%, to $2.5 billion.
At smaller competitors, the trend looks hardly more encouraging. Jim Wells, the CEO of SunTrust Banks Inc. in Atlanta, said that "loan demand has yet to pick up as clients are focused on capital preservation and debt reduction." Net income fell 9%, to $1.6 billion, and loans declined 8%, to $114 billion. At KeyCorp in Cleveland, lending income fell 8.7%, to $892 million, while loans declined 20%, to $56 billion; and at Comerica Inc., a mainly commercial lender in Dallas, interest income fell 15%, to $476 million and loans declined 16%, to $40.8 billion. SunTrust reported a first-quarter loss of $161 million, compared with an $815 million loss a year earlier; KeyCorp narrowed its loss to $55 million, compared with $488 million a year earlier. Comerica's profit rose to $52 million, including a $17 million one-time gain.
Of course, bankers have been accused during the financial crisis of not lending enough, and of tightening conditions for new loans. In January, the Federal Reserve said banks "have yet to unwind the considerable tightening that has occurred over the past two years." Bankers, meanwhile, argue that they have had to preserve capital to survive the credit crisis. Some bankers, including Comerica's Chief Financial Officer Elizabeth Acton, said low utilization rates have stabilized. "Whether that's continuing we'll have to see. But a lot of our loan decline has been through less usage" of lines of credit.
There is some evidence, if only anecdotal, that the long dry spell is coming to an end. J.P. Morgan said last week it already sees a significant pick-up in loan demand from small business borrowers. Comerica Inc. Chief Executive Ralph Babb told investors Wednesday that the bank made more middle-market loans in Michigan in March "than we've had in any month since 2008." "Theres a renewed sense of optimism" in Michigan, he said, but loans won't "grow in any kind of a robust fashion." J.P. Morgan Chairman and CEO Jamie Dimon said during a conference call with reporters last week that most middle-market borrowers don't need credit yet. But many plan to hire, he said, and borrowing "might go up soon."
Financial crisis panel demands documents from Moody's
by Kevin G. Hall
Angered by what it viewed as foot dragging, a special panel charged with getting to the bottom of the nation's financial crisis issued a subpoena Wednesday to compel Moody's Corp. to provide information. It was the first such subpoena issued by the Financial Crisis Inquiry Commission, and comes days before Moody's chief Ray McDaniel is scheduled to appear Friday before the Senate Permanent Subcommittee on Investigations.
In a statement, commission Chairman Phil Angelides and Vice Chairman Bill Thomas accused Moody's of "failing to comply with a request for documents in a timely manner." Late Wednesday, Angelides held a teleconference with journalists and said his panel had sent a request to Moody's on March 10 for e-mail records and documents and didn't receive any until after the announcement of the subpoena. Noting that to date, the commission has received more than 2 million pages of documents from others, the chairman, a former California state treasurer, accused Moody's of stalling.
"What we cannot allow to happen is that we let people run out the clock here, we can't let that happen," said Angelides, referring to his mandate to issue a detailed report to Congress in December. He declined to elaborate on the specific documents he sought. He said there have been two other subpoenas that were procedural as part of voluntary testimony, and that Wednesday's was the first for failing to cooperate. Moody's didn't respond to a request for comment. The commission's subpoena follows a Monday news conference by California Attorney General Jerry Brown to announce court action against Moody's to compel the company to comply with a subpoena he issued seven months ago.
Moody's is under pressure on many fronts to explain its role in providing the investment grade ratings to complex financial deals backed by U.S. mortgages that proved to be anything but investment grade. These deals helped deepen the nation's housing crisis, which provoked the broader financial crisis. As a credit-rating agency, Moody's enjoys free-speech protection, since its business amounts to providing opinions about the creditworthiness of bonds and other securities. However, the company now faces class-action lawsuits, a suit by the state of Connecticut and a probe by the California attorney general because it not only gave opinions but also consulted on the composition of complex deals it rated.
Legislation moving through Congress would impose tougher rules barring such apparent conflicts of interest, but the inquiry commission has until December to report to Congress on the causes of the crisis and wants information now. The commission already had announced it would hold a special hearing into the credit-rating agencies' practices in the months ahead, and Wednesday issued the subpoena in reaction to Moody's failure to respond to its requests.
Because it's a bipartisan commission, the panel needed to have at least six of its 10 members sign off before issuing a subpoena. In an interview at the start of the commission's work, both Angelides and Thomas, a former California GOP congressman, vowed to McClatchy that they'd use their subpoena powers aggressively. The subpoena adds intrigue to a much anticipated hearing scheduled for Friday, when the Senate Permanent Subcommittee on Investigations looks into the role that credit-rating agencies played in the financial meltdown.
Moody's CEO McDaniel has said little publicly about his company's role in the crisis, as the dominant player in the rating of complex deals, called structured finance, which often netted rating agencies $1 million or more per deal. He stands out for keeping his job after a number of Wall Street financial firms have seen their executives step aside or be forced out in the aftermath of the crisis. One explanation came Wednesday morning, when Moody's reported strong first quarter earnings that reflected a 26 percent increase over the comparable three months of 2009.
However, in a statement accompanying those first-quarter results, McDaniel cautioned against forecasting a strong 2010 "due to uncertainty that (bond) issuance levels later in the year will continue to overcome weakness in some areas of structured finance." Revenues from structured finance, mostly deals involving shaky U.S. mortgages, powered Moody's stock from under $20 to above $72 from 2002 to 2007. The company's share price fell almost 5 percent to under $26 after the subpoena announcement.
US jobless claims fall 24,000 to 456,000
by Rex Nutting,
The number of people filing an initial claim for unemployment benefits declined by 24,000 last week to a seasonally adjusted 456,000, the first drop in three weeks, the Labor Department reported Thursday. Although layoffs are down significantly from the peak a year ago, initial jobless claims have remained stubbornly high, a sign that labor markets are very weak. Initial claims are essentially unchanged from the first of the year, but are down 27% from a year ago. The four-week average of new claims -- considered a better gauge of underlying trends than the volatile weekly number -- rose by 2,750 to 460,250, the highest in a month.
Meanwhile, the number of people collecting regular state benefits dropped by 40,000 to a seasonally adjusted 4.65 million in the week of April 10. The four-week average of continuing state claims fell by 5,500 to 4.64 million, the lowest since January 2009. Continuing state claims are down 21% from a year ago. However, more than 5 million others are collecting extended federal benefits, which are available after state benefits expire, generally after 26 weeks.
In the week of April 3, 5.56 million people were collecting extended federal benefits, down 479,000 from the previous week. A budget dispute in the Senate, which has now been resolved, meant that no one could move into a new tier of benefits. All told, in the week of April 3, 10.54 million people were collecting some type of unemployment benefits, down 538,000 from the previous week's 11.08 million. The economy has begun to add some jobs, but not enough to bring down the unemployment rate, which was 9.7% in March for the third straight month. In March, nonfarm payrolls rose by 162,000, the third increase in the past five months. Private-sector payrolls rose by 123,000.
Because of population growth, the economy needs to create about 110,000 jobs each month just to stay even, and it would have to create much more than that to chip way at the 15 million people who are unemployed. Most analysts in and out of government predict only a slow decline in the unemployment rate this year and next.
Goldman Sachs Should Cut Losses in SEC Standoff, Lawyers Say
by Joshua Gallu and David Scheer
Goldman Sachs Group Inc. may be better off cutting its losses instead of fighting what it terms “unfounded” fraud claims, say professors of securities law who have examined the U.S. Securities and Exchange Commission’s lawsuit against the bank. The most profitable firm in Wall Street history will probably lose what is typically the first hurdle in court, a motion to throw out the April 16 suit because it lacks legal merit, the professors said in interviews this week. After that, Goldman Sachs’s risks will mount and its negotiating position will weaken, they said.
“There’s a very low probability that Goldman could get the case dismissed,” said Thomas Hazen of the University of North Carolina at Chapel Hill, whose books include a two-volume treatise on broker-dealer law. “Every pretrial motion the SEC wins, Goldman gets one step closer to losing.” Goldman Sachs is the first major Wall Street firm accused by regulators of fraud connected to the collapse of the subprime mortgage market. The SEC’s allegation that Goldman Sachs defrauded investors sparked a 13 percent, one-day decline in its shares. The New York-based firm, led by Chief Executive Officer Lloyd Blankfein, 55, said it will vigorously contest the claims. It must weigh the risks of a drawn-out legal battle against the benefits of a more immediate resolution.
“We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact,” the bank said after the complaint was filed. Blankfein and other executives at the bank are scheduled to testify at a Senate hearing next week along with Fabrice Tourre, the Goldman Sachs banker who was also sued by the SEC. The Permanent Subcommittee on Investigations will explore investment banks’ role in the financial crisis at the April 27 hearing.
Blankfein yesterday attended a speech by President Obama in New York City pushing for financial regulatory reform, as Congress weighs legislation that could crimp profits for Goldman Sachs and the biggest U.S. banks. The legislation may come to the Senate floor as early as next week. Even if top managers are certain they’re right on the merits of the case, Goldman Sachs should probably settle, said senior executives at three of the firm’s rivals. The executives, speaking anonymously because they wouldn’t comment publicly on a competitor, said Goldman Sachs would be better off by deciding to settle the suit, cut its losses, and focus on repairing the damage to the firm’s reputation.
Two of the executives said they also believe Goldman Sachs may have to change senior management to give the appearance that the firm is changing the way it does business. The SEC’s case revolves around whether the firm should have told investors that hedge fund Paulson & Co. helped pick the underlying securities in a collateralized debt obligation -- and then bet against it. Paulson wasn’t accused of wrongdoing.
That’s too nuanced a judgment to make on the limited evidence available so far, making it unlikely the case will be dismissed, said Peter Henning, a former SEC attorney who teaches at Wayne State University Law School in Detroit. U.S. District Judge Barbara Jones, who was assigned the case and also presided over the case of former WorldCom Inc. CEO Bernard Ebbers, won’t dismiss it because materiality is what’s at issue, said Columbia University’s John Coffee.
If the SEC’s case survives a dismissal motion, the case would probably proceed to discovery, when the agency may seek additional testimony or information from the firm. That process could provide fodder for private lawsuits, additional allegations from regulators, or media attention that would further tarnish the firm’s image, according to George Cohen, a corporate law professor at the University of Virginia School of Law, and Lisa Casey, who teaches securities law at the University of Notre Dame in Indiana. “The evidence and rumors would be difficult to contain,” Casey said. “The market could react any time more information leaks out to the press.” Goldman Sachs’s shares have slipped 1 percent this week after the April 16 tumble. The stock closed at $159.05 yesterday, down 5.8 percent this year.
Few professors were willing to predict which side would win in a trial, saying the case will depend on evidence and testimony that isn’t yet public. If weaknesses emerge in the SEC’s case, Goldman Sachs may decide to press on. The reputational stakes are so high that Goldman Sachs may feel pressure to keep fighting, said Onnig Dombalagian, a former attorney fellow at the SEC who teaches at Tulane University Law School in New Orleans. “For Goldman not to stand behind its deals would be problematic for the firm,” he said.
If Goldman Sachs settles or loses at trial, “people are going to ask, ‘Am I one of the clients who Goldman does deals for, or am I one of the clients Goldman does deals against?’” Dombalagian said. “There’s the saying that if you don’t know who the mark at the table is, you’re probably the mark.” Tamar Frankel, a corporate governance professor at Boston University, said a jury may be hostile to Goldman Sachs. “If many of the jurors have lost chunks of their savings in the crisis, the weight will be for the SEC,” Frankel said.
Another ‘Big Shoe to Drop' on Goldman
by Michael Hirsh
Washington is suddenly looking very unkind to the firm that used to be known as "Government Sachs." Now the Senate's Permanent Subcommittee on Investigations, led by Carl Levin, Democrat of Michigan, is planning to focus hearings scheduled for next week at least in part on Goldman Sachs's role in the financial disaster. Levin's staff has uncovered new documents "that link certain actions to specific people" at Goldman, according to a senior legislative official who spoke on condition of anonymity.
The official would not divulge the nature of the allegation but said that Levin believes it amounts to "another big shoe to drop on Goldman." Spokespeople for Levin said they were not prepared to discuss the nature of the probe, but his committee has been conducting several weeks of hearings and one is planned for April 27 on "the role of the investment banks." "We expect to have some information tomorrow," spokesman Bryan Thomas said Monday.
Levin has been one of the most aggressive Democrats in the Senate in pushing for more dramatic financial reform, and the first week of his subcommittee's hearings focused on the role of high-risk home loans in the disaster, using Washington Mutual Bank (WaMu) as a case history. Further hearings are expected to show how banks like WaMu obtained their know-how and securitization techniques from Wall Street.
Last week the Securities and Exchange Commission filed civil fraud charges against Goldman related to the late stages of the subprime mortgage scandal, when some Wall Street firms were creating complex products like "synthetic CDOs" for the sole reason of shorting them and making money on their almost certain failure. SEC Director of Enforcement Robert Khuzami said the firm mislead investors by failing to tell them that a client that was betting against the mortgage market had helped to design a Goldman investment portfolio, "while telling other investors that the securities were selected by an independent, objective third party." Goldman has denied the charges, saying it withheld no material information from investors.
A year ago Levin was critical of what he called the reluctance of the Obama administration to take on Wall Street, saying: "Some of the people around the president needed to be given a push." Levin has also sought to rescind many of the laws that led to deregulation. Chief among them: the 2000 Commodity Futures Modernization Act, which exempted the credit-default swaps that brought AIG—and much of the financial system—to the brink of meltdown. Goldman's role in AIG's near-meltdown also has been a subject of various government inquiries.
Senator Specter opens new front against Wall Street bankers
by Greg Gordon
Sen. Arlen Specter said Thursday that he'd hold a hearing next month to examine Wall Street firms' potential conflicts of interest when they secretly bet against products similar to those they sold, and into whether investment banks were being penalized too lightly for their roles in wrecking the economy. Specter's announcement opened a new front for Goldman Sachs and other banks that already are facing scrutiny from the Securities and Exchange Commission, the Senate Permanent Subcommittee on Investigations and House of Representatives oversight panels.
"In my judgment, Congress should examine these complicated transactions with a microscope and make a public policy determination as to whether such conduct crosses the criminal line," the veteran Pennsylvania Republican-turned-Democrat, who's facing a tough re-election race, said in a Senate floor speech. Contending that major companies consider fines "a cost of doing business," the former Philadelphia district attorney said: "I have long been concerned about the acceptance of fines instead of jail sentences in egregious cases."
Last November, McClatchy reported that Goldman sold more than $40 billion in risky mortgage securities to institutional investors in 2006 and 2007 while secretly betting that the U.S. housing market would sink and depress the value of the securities. Specter said he'd convene a hearing May 4 before a Senate Judiciary Committee subcommittee to explore the assertions by Goldman and other such banks that sophisticated investors such as pension funds and insurance companies "have a duty to protect themselves without relying on the investment counselor."
Last week, the SEC filed a civil fraud suit accusing Goldman and one of its vice presidents of setting up an offshore deal in which a longtime client, the hedge fund Paulson & Co., helped select and then bet against the securities in the deal without telling investors of Paulson's role. Paulson made $1 billion in profits while the investors — a German bank and a fund that was backed by the Royal Bank of Scotland — lost that much.
The suit, Specter said, "has brought intense public concern to conduct on Wall Street which has long been questioned." He said he wanted to explore the structures of complex Wall Street transactions, the circumstances under which investment bankers had a legal duty to the investors and "where, if at all, do conflicts of interest arise." Specter said he also wanted to define investment counselors' duty to provide suitable investments to clients and whether their recommendations amounted to implicit representations that an investment was a wise one.
Congress should define these relationships, he said, "and what conduct is sufficiently anti-social to warrant criminal liability and a jail sentence." Specter said he complained to the Justice Department that prison sentences weren't imposed in three cases:
- A Sept. 2, 2009, settlement in which drug maker Pfizer agreed to pay $2.3 billion to resolve criminal and civil liability for health care fraud stemming from its sale of the anti-inflammatory drug Bextra, although the Food and Drug Administration had found the drug unsafe.
- Guilty pleas entered by Siemens AG on Dec. 15, 2008, with an agreement to pay $1.6 billion in penalties for violations of the Foreign Corrupt Practices Act.
- A May 8, 2007, agreement by Purdue Pharma and three of its employees to pay $19.5 million to 26 states and the District of Columbia to settle complaints that Purdue violated an FDA ruling and encouraged doctors to prescribe excessive doses of the painkiller OxyContin, resulting in numerous deaths.
Greed is not good for Goldman
by John Gapper
There are various ways to describe the synthetic collateralised debt obligation that Goldman Sachs constructed for John Paulson, the hedge fund manager who bet on the collapse of the mortgage bubble.
Goldman itself terms it “nothing unusual or remarkable”. The US Securities and Exchange Commission describes the Abacus deal that closed in April 2007 as securities fraud. I call it short-term greedy.
Goldman rose to its dominant position on Wall Street through the dictum of Gus Levy, its former senior partner, that it should be “long-term greedy”. He meant that it should forgo quick gains for enduring profits. The bank’s expression of that principle on its website is: “Whether a mid-size employer in Kansas, a larger school district in California, a pension fund for skilled workers, or a start-up technology firm, our clients’ interests come first.” So what about a Düsseldorf bank?
In late 2006, after an internal debate on its mortgage desk, Goldman made a far-sighted decision to protect itself from what it had come to fear would be a severe downturn in the housing market. It pulled back from taking risk and hedged its mortgage book, saving itself from the deluge. At exactly the same time, it was approached by Paulson & Co to structure a CDO that the hedge fund could make money by shorting. Paulson offered it a $15m fee to assemble the deal and find an investor that would take the risk from which Goldman was simultaneously fleeing.
Fabrice Tourre, Goldman’s front-man on the deal, went to IKB, a bank that had invested in several of its Abacus CDOs and was a valuable Goldman client. He offered it a package, which it took without looking closely enough at the dodgy mortgage swaps inside. When the smoke cleared, Paulson made a profit of about $1bn while IKB lost $150m and had to be bailed out that August. ACA Capital, which selected the securities, lost $900m and later failed (with ABN-Amro assuming liability). Goldman, which tried to shed its position but could not hedge it exactly, lost $100m.
The SEC will find it difficult to make a charge of fraud stick against Goldman and Mr Tourre. IKB was a “qualified” professional investor that was not supposed to need its hand held by an investment bank (although there always seems to be a German bank in such cases, eager to blow a hole in its balance sheet). But judged by Levy’s dictum, and the principles of John Whitehead, another senior partner (“We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends on unswerving adherence to this standard”), Abacus was a tawdry episode.
None of the deal documents made clear that Paulson had called the tune and Goldman had initially acted on its behalf. Goldman has been reduced to brandishing the letter of the law and insisting that it adhered to “market practice”, which is not the same as ethical principle. Goldman gave 8m documents to the SEC, but did not include the overarching philosophy that brought it to Abacus, the strategy laid out by Lloyd Blankfein, its chairman and chief executive, in 2005.
As Charles Ellis’s The Partnership records, Mr Blankfein feared that if Goldman stuck to its traditional separation of agency and principal businesses – keeping its client advisory and asset management work isolated from risk-taking with its own capital – it would be overtaken by commercial banks. “Its complex variety of many businesses was sure to have lots of conflicts,” Ellis writes. “Goldman Sachs, Blankfein said, should embrace the challenge of those conflicts.” It definitely embraced them with Abacus, keeping IKB in the dark both about Paulson and its own view of mortgage CDOs.
Goldman was, to borrow words from Robert Armstrong, the former British cabinet secretary, being “economical with the truth”. It treated IKB like a trade counterparty while Paulson got the privileges associated with a client. The biggest client business in banking is mergers and acquisitions and there is a saying in M&A, honoured more in the breach than the observance. It is that the best piece of advice a banker can give a client is not to do an ill-advised deal although he would earn a fee.
IKB was Goldman’s client for its first Abacus deal in 2004, and, if it had truly put IKB first Goldman would have told it not to take part in the last one. Even as it was being assembled, Jonathan Egol, Mr Tourre’s colleague, was e-mailing: “You know I love it, all I’m saying is that the CDO business is dead and we don’t have a lot of time left”. Goldman can argue, and it does, that it did not have any fiduciary duty to IKB to tell it any such thing. It had a view of the mortgage market, IKB had another and Paulson & Co a third. They were all consenting counterparties operating in a sophisticated market.
In the end, that is not good enough, certainly not for a bank that takes pride on putting clients first. IKB was one such but, when it came to this deal, Goldman’s message was: “We’re taking care of our balance sheet and you’re on your own.” Emanuel Derman, a former partner who was one of Goldman’s first derivatives wizards, wrote on his blog this week: “The SEC may be trying to cure unethical behaviour by treating it as illegality.” But the law is all the SEC has; ethics are Goldman’s responsibility.
Goldman case warrants full French probe - Economy Minister Lagarde
by Sudip Kar-Gupta
Accusations that Goldman Sachs acted fraudulently warrant a full probe by French regulators, Economy Minister Christine Lagarde said on Wednesday. Regulator AMF (Autorite des Marches Financiers) said it aimed to publish an update on its Goldman probe next week. "AMF head Jean-Pierre Jouyet has told me that at first glance, there is no French counterparty," Lagarde told a news briefing. "It warrants an in-depth investigation," she added.
The U.S. Securities and Exchange Commission (SEC) is investigating Goldman Sachs. The bank is accused of fraud in the structure and marketing of a debt product tied to subprime mortgages. Goldman has denied the charges. Britain has already launched a probe into the Goldman Sachs case and the AMF said earlier this week that it also planned to co-operate with the SEC over the Goldman case if necessary.
With Goldman charged, rivals smell blood
by George Chen, Fiona Lau, and Kennix Chim, Michael Wei, Paritosh Bansal, Megan Davies
Within days -- perhaps even hours -- of news that Goldman Sachs (GS.N) was facing fraud charges from U.S. regulators, rivals seized on a chance to elbow in front of Wall Street's most profitable bank. Investment bankers have been lobbying executives at state-owned Agricultural Bank of China and pushing officials in Beijing to drop Goldman as an underwriter for the more than $20 billion IPO the Chinese bank is preparing, according to sources familiar with the matter. The sources said rival bankers were also asking officials at state-controlled Bank of Communications to ditch Goldman from its joint global coordinator role in the $6.1 billion rights issue that China's fifth-largest bank is planning for the Hong Kong Stock Exchange. A lot of it probably is wishful (banker) thinking: There is no indication that either AgBank or Bocom will push Goldman aside. In fact, everything appears hunky-dory. AgBank on Tuesday asked the firm to take the lead in its planned roadshows to sell the IPO to investors, according to one source.
AgBank and Bocom were unavailable for comment. Goldman declined to comment. The rivals are well aware that in China how an organization is perceived can mean everything, and that a tainted Goldman could be vulnerable. In particular, the nature of the case brought by the U.S. Securities and Exchange Commission provides fertile ground for the bank's rivals because it alleges that Goldman failed to tell clients key information about a subprime mortgage securities product that it sold to them in 2007. The product blew up during the financial crisis and led to the clients suffering big losses. Goldman has addressed questions about client loyalty by saying that its impressive quarterly earnings on Tuesday underscored the support it has from clients. The bank has denied any wrongdoing and has vowed to fight the charges.
Industry veterans and even direct competitors wonder whether the SEC has overreached in its case against Goldman but in the shark tank that is investment banking, dealmakers smell blood. "People have been known to market against Goldman by saying things like: 'Look you never really are a client of Goldman. The only client of Goldman is Goldman,'" said a senior U.S.-based investment banker who declined to be named. "If I knew I was pitching something against Goldman tomorrow, I'd probably make some flippant remarks." In the United States, Goldman isn't seen bleeding business anytime soon but in the longer run some perceive there is more risk.
"People will continue to use Goldman, but at the moment it's a natural question to ask yourself whether it makes sense to award that mandate today or whether you should wait a little bit and let the dust settle," said a U.S.-based investment banker who specializes in financial institutions. "This is going to be pretty serious for Goldman as time goes on," said the banker, who did not want to be identified. Some financial institutions are reviewing their dealings with Goldman Sachs during the financial crisis to see if they have any legal recourse. On Friday, attorneys for Lehman Brothers filed notices of subpoena for firms including Goldman seeking access to documents and employees. American International Group Inc (AIG.N) took a loss of up to $2 billion last year as it ended credit default swaps it had written on some Goldman-issued CDOs, though these were different from those at the center of the SEC suit. Such firms may have issues hiring Goldman for advice, the financial institutions banker said.
"You have to ask yourself what are they thinking: Are they thinking about whether they have got causes of action against Goldman, and can they hire Goldman as an adviser on the one side while they may be seeking to recover on the other side?" The issues facing Goldman were underlined when Nick Clegg, the leader of Britain's Liberal Democrats, told a news conference on Tuesday that Goldman should be shut out of government contracts until the fraud case was settled. The party is enjoying a dramatic surge in popularity ahead of a national election on May 6. It's a common practice in the cutthroat banking world to pounce on a competitor who is either wading through a public relations mess or financial trouble. When Lehman Brothers got into trouble, rival bankers expressed sympathy for their peer -- and simultaneously moved quickly to seize its clients.
The chance to cut Goldman out of a deal is the dream of many bankers because the firm has established itself as the top investment bank in the world. Its reputation and riches have been the envy of financial professionals. That reputation took a hit with the fraud charges last week, adding to the impact of a stream of negative publicity over the past year. It would still be an extraordinary measure for a company to drop Goldman entirely, especially given its stature, but there is now an impression among rivals that it is no longer impossible to successfully muscle in. "People probably won't pull IPO and M&A business from GS, but might hold off hiring them for projects," said another U.S. investment banker. "But it will probably be temporary and just the next few weeks. There will be a bit of schadenfreude."
Obama to Scold Wall Street
by Jonathan Weisman
President Barack Obama will return to Manhattan’s Cooper Union on Thursday, two years after a campaign speech that laid out his vision for Wall Street, to castigate a financial industry that he will say has too often forgotten the ordinary Americans who have suffered from its reckless irresponsibility. The speech comes at a pivotal moment in Senate negotiations over a sweeping measure to re-regulate the financial industry. After trading barbed accusations, senators from both parties now say they are near a deal that would preserve the framework of Mr. Obama’s plan. By appearing just two miles from Wall Street, Mr. Obama hopes to raise the political pressure and seal the deal.
“A free market was never meant to be a free license to take whatever you can get, however you can get it,” Mr. Obama will say, according to speech excerpts released Wednesday night. “That is what happened too often in the years leading up to the crisis. Some on Wall Street forgot that behind every dollar traded or leveraged, there is family looking to buy a house, pay for an education, open a business, or save for retirement. What happens here has real consequences across our country.”
As he has done several times in the year-long debate, the president will implore industry executives to call back the lobbyists engaged in “furious efforts” to thwart or water down his legislation. “I am sure that many of those lobbyists work for some of you,” he will say, according to the excerpts. “But I am here today because I want to urge you to join us, instead of fighting us in this effort. I am here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of our financial sector.”
The legislation would grant the federal government the power to seize teetering financial giants and dismantle them the same way the Federal Deposit Insurance Corporation now can seize failing banks. It would create a new financial consumer regulator, would boost the strength and budget of the securities and exchange commission and would impose new transparency rules on the trading of derivatives, the complex financial instruments that helped bankrupt Lehman Brothers and nearly wipe out American International Group and Merrill Lynch.
Mr. Obama will treat his return to Cooper Union as something of a triumphal homecoming, with a touch of “I told you so” in the speech. Two years ago, he called on Congress to give the Federal Reserve more supervisory power over the biggest financial institutions and to demand tougher new capital and liquidity requirements. Pending legislation largely follows that demand. Congress appears ready to meet his request, now two years old, for a new financial consumer regulator. His calls for stronger, international accounting standards and financial stability requirements have been taken up by the Group of 20 nations, although talks are proceeding haltingly.
His 2008 suggestion of streamlining the hodgepodge of “overlapping and competing regulatory agencies” has been abandoned. But he will dwell more on the warnings he issued in that first Cooper Union address. “I take no satisfaction in noting that my comments have largely been borne out by the events that followed,” he plans to say. “But I repeat what I said then because it is essential that we learn the lessons of this crisis, so we don’t doom ourselves to repeat it. And make no mistake, that is exactly what will happen if we allow this moment to pass – an outcome that is unacceptable to me and to the American people.”
Obama to Keep Goldman Funds
by Brody Mullins and Jean Spencer
President Barack Obama won't return about $1 million that employees of Goldman Sachs Group Inc. donated to his 2008 presidential campaign, according to a spokesman for the Democratic National Committee. "We make these decisions on a case-by-case basis, and in this case we have not accepted contributions from specific individuals accused of wrongdoing, nor have we advocated for positions that big Wall Street banks generally favor," said DNC spokesman Hari Sevugan, speaking on behalf of Mr. Obama.
The development comes as fallout over the Securities and Exchange Commission lawsuit against Goldman continues to reverberate in political campaigns across the country. The civil suit, which accuses the firm of deceiving investors, named Goldman and trader Fabrice Tourre, who is French. U.S. law bars foreign nationals from making campaign contributions. Mr. Tourre hasn't made any donations to Mr. Obama or other candidates in the last decade, according to election records. Lawmakers in several states who received donations from Goldman are being challenged by political opponents to return the campaign funds.
In New York's Senate race, primary challenger Jonathan Tasini called on Sen. Kirsten Gillibrand, a fellow Democrat, to return donations from Goldman. Mrs. Gillibrand has accepted about $30,000 from Goldman's political action committee and from employees so far in the 2010 election, making her the third-largest recipient of donations from the firm among candidates for Congress, according to the nonpartisan Center for Responsive Politics. Mrs. Gillibrand will keep the Goldman money for now but will return donations from Goldman employees if they are later found guilty, according to her spokesman, Matt Canter.
Two Senate candidates-Sen. Arlen Specter (D, Penn.) and Rep. Paul Hodes (D, N.H.)-said they would consider returning their Goldman donations if the guilty charges resulted from the government's allegations. Rep. Jim Himes (D, Conn.) faces a different political challenge. Mr. Himes has received $15,150 from Goldman-and is also a former employee of the company. No one has received more Goldman donations this election cycle than Rep. Mike McMahon (D., N.Y.). On Wednesday, Republican candidate Michael Grimm called on him to return the $51,000 he has received. "This is the time for all elected officials to stop dancing to Washington's familiar go-along-to-get-along tune," Mr. Grimm said. Mr. McMahon's office said that it didn't have any comment.
Mr. Himes' Republican opponent, Dan Debicella, hasn't yet called on Mr. Himes to return the money. "Ultimately, the ball is in Mr. Himes' court to do the proper thing," said Jason Perillo, a campaign manager for Mr. Debicella. Two Republican candidates in Illinois have already returned Goldman donations. Republican Rep. Mark Kirk, who is running for Senate, said he would give back more than $20,000 in contributions from the company and its employees after his Democratic opponent tried to make a campaign issue of the donations. Robert Dold, a Republican who is running for the House seat being vacated by Mr. Kirk, said he'd return or give to charity the $7,000 he received from the company.
Since 1989, no company has donated more to Democrats than Goldman. The company was the fourth-largest corporate source of campaign cash to Republicans during the same period. Overall, Goldman has made $31.6 million in donations from its PAC and employees since 1989, according to the Center for Responsive Politics. About two-thirds of those donations have gone to Democrats, including about $1 million given to Mr. Obama's presidential campaign. But in the first three months of 2010, Goldman's PAC has donated a greater share of its donations to Republicans. So far this year, Goldman has contributed about $100,000 to Republican candidates and $93,000 to Democrats.
Goldman's White House connections raise eyebrows
by Greg Gordon
While Goldman Sachs' lawyers negotiated with the Securities and Exchange Commission over potentially explosive civil fraud charges, Goldman's chief executive visited the White House at least four times. White House logs show that Chief Executive Lloyd Blankfein traveled to Washington for at least two events with President Barack Obama, whose 2008 presidential campaign received $994,795 in donations from Goldman's political action committee, its employees and their relatives. He also met twice with Obama's top economic adviser, Larry Summers.
No evidence has surfaced to suggest that Blankfein or any other Goldman executive raised the SEC case with the president or his aides. SEC Chairwoman Mary Schapiro said in a statement Wednesday that the SEC doesn't coordinate enforcement actions with the White House or other political bodies. Meanwhile, however, Goldman is retaining former Obama White House counsel Gregory Craig as a member of its legal team. In addition, when he worked as an investment banker in Chicago a decade ago, White House Chief of Staff Rahm Emanuel advised one client who also retained Goldman as an adviser on the same $8.2 billion deal.
Goldman's connections to the White House and the Obama administration are raising eyebrows at a time when Washington and Wall Street are dueling over how to overhaul regulation of the financial world. Lawrence Jacobs, a University of Minnesota political scientist, said that "almost everything that the White House has done has been haunted by the personnel and the money of Goldman . . . as well as the suspicion that the White House, particularly early on, was pulling its punches out of deference to Goldman and its war chest. "There's now kind of a magnifying glass on the administration for any sign of interference or conversations with the regulators and the judiciary," Jacobs said.
The SEC investigation of Goldman's dealings lasted 18 months and culminated with the SEC filing civil fraud charges against the investment bank last week. According to White House visitor logs, Blankfein was among the business leaders who attended an Obama speech on Feb. 13, 2009, and he also joined more than a dozen bank CEOs in a meeting with Obama on March 27, 2009.
Blankfein also was supposed be among the CEOs who met with Obama in December, but he and two others phoned in from New York, blaming inclement weather. He and his wife, Laura, were listed on the logs among 438 presidential guests at the Kennedy Center Honors the previous week.
The logs also indicate that Blankfein met twice in 2009, on Feb. 4 and Sept. 30, with Summers, who was undersecretary of the Treasury Department during the Clinton administration when it was headed by Robert Rubin, a former Goldman CEO. Asked whether Goldman executives had talked to administration officials about the SEC inquiry, Goldman spokesman Michael DuVally said that the firm doesn't discuss "what conversations we may or may not have had with government officials."
Schapiro's statement said that she's "disappointed" by Republican rhetoric suggesting that the SEC case against Goldman might have been timed to boost legislative prospects for a financial regulation overhaul bill, which Obama plans to pitch in a speech in New York Thursday. "We do not coordinate our enforcement actions with the White House, Congress or political committees," Schapiro said. "We do not time our cases around political events or the legislative calendar . . . We will neither bring cases, nor refrain from bringing them, because of the political consequences."
Obama dismissed any such suggestion as "completely false" Wednesday, saying in a CNBC television interview that the SEC "never discussed with us anything with respect to the charges that would be brought." While describing Craig, his former counsel, as "one of the top lawyers in the country," Obama also said that he'd imposed "the toughest ethics rules that any president's ever had." "One thing he (Craig) knows is that he cannot talk to the White House," Obama said. "He cannot lobby the White House. He cannot in any way use his former position to have any influence on us." Goldman's chief spokesman, Lucas van Praag, said the firm "wanted Craig . . . for his wisdom and insight."
Craig, now an attorney with the Washington law firm of Skadden, Arps, Slate, Meagre & Flom, said: "I am a lawyer, not a lobbyist. Goldman Sachs has hired me to provide legal advice and to assist in its legal representation." Goldman's nearly $1 million in campaign contributions to Obama's presidential campaign were the most from any single employer except the University of California. Still, they represented only a fraction of the more than $700 million that the campaign raised. "The vast majority of the money I got was from small donors all across the country," Obama told CNBC. "Moreover, anybody who gave me money during the course of my campaign knew that I was on record in 2007 and 2008 pushing very strongly that we needed to reform how Wall Street did business."
One White House insider who knows something about how Wall Street does business is chief of staff Emanuel, who earned millions of dollars in investment banking after he left the Clinton White House. His work for the Chicago-based financial services firm Wasserstein Perella & Co. intersected with Goldman in at least one deal. In 1999, Emanuel was a key player representing Unicom Corp., the parent of Commonwealth Edison, in forging its merger with Peco Energy Co. to create utility giant Exelon Corp. Goldman was also advising Unicom. The White House declined immediate comment on that connection.
Several former Goldman executives hold senior positions in the Obama administration, including Gary Gensler, the chairman of the Commodity Futures Trading Commission; Mark Patterson, a former Goldman lobbyist who is chief of staff to Treasury Secretary Timothy Geithner; and Robert Hormats, the undersecretary of state for economic, energy and agricultural affairs. Jacobs of the University of Minnesota said that the administration now risks "kind of a feeding frenzy." "The administration has to be very careful," he said, "because . . . they're seen as the ones who bailed out Wall Street. If there are indications that the administration was talking to regulators or to Justice Department people about when and how Goldman or other firms would be investigated, I think that's going to create almost a mob scene."
Now it's the Senate's turn to take on Goldman, Moody's
by Greg Gordon and Kevin G. Hall
A special Senate panel over the next week will begin to unveil the results of yearlong inquiries into the roles of Goldman Sachs and credit ratings agencies such as Moody's Investors Service in the subprime mortgage meltdown. The hearings, with Goldman Chief Executive Officer Lloyd Blankfein as a star witness, are expected to heighten pressure on Congress to adopt new curbs on risky Wall Street behavior. The Permanent Subcommittee on Investigations announced the hearings Monday.
Moody's executives are to appear at a hearing Friday on how risky mortgage securities won the top investment-grade rating, giving investors the false impression that they were safe. Separately, California Attorney General Jerry Brown held a news conference Monday in Los Angeles to announce that he'd sought the help of the courts to force Moody's to comply with a subpoena he's issued.
The subcommittee will focus at an April 27 hearing on Goldman's sale of securities backed by subprime mortgages to borrowers with shaky credit, including its use of exotic instruments to insure them.
Three days after the Securities and Exchange Commission lodged a civil fraud suit against Goldman, the world's most prestigious investment bank, the developments intensified a media mania as Congress weighs whether to impose new rules on complex securities. Bloomberg News reported that the SEC split 3-2 along party lines in deciding to file the civil suit, with the Democratic majority prevailing. A commission spokesman didn't respond to requests for comment.
The SEC suit alleges that Goldman allowed the hedge fund Paulson & Co. to heavily influence the selection of subprime loans in a $1 billion offshore deal without telling investors that Paulson would be wagering that the securities would default. Paulson reaped a $1 billion profit while the investors lost as much. Goldman has denied the suit's allegations and vowed to vigorously contest it. Fabrice Tourre, the young Goldman vice president who put together the deal and is named as a defendant in the suit, "remains employed with the firm, but he's decided to take some time off," company spokesman Michael DuVally said. Tourre has so far declined to comment publicly on the case.
The SEC formally notified Goldman last July that a civil suit was being considered, said a person familiar with the investigation who declined to be identified because of its sensitivity. Goldman said in public filings in the ensuing months that government agencies had requested information about its dealings in exotic securities like those described in the suit. The firm did not tell shareholders about the notice because company lawyers didn’t consider it to be "material," the individual said.
In a related development, Reps. Elijah Cummings of Maryland and Peter DeFazio of Oregon, both Democrats, drafted a letter Monday asking SEC Chairwoman Mary Schapiro to investigate two dozen other deals marketed by Goldman in a series known as Abacus. They said that seven of the deals were backed by insurance-like contracts with the American International Group — contracts that the government paid at full face value after rescuing the company in late 2008 — and asked the SEC to determine whether any of the money paid to Goldman was "fraudulently generated."
Meanwhile in California, Brown accused Moody's of refusing to explain how and why it gave its top ratings to complex securities that turned out to be junk. For seven months, he said, Moody's has ignored his office's subpoena and its interrogatories. "They're not going to get away with it, that I promise you," said Brown, a Democrat and former two-term California governor who's running for that post again. "When you get an interrogatory from the attorney general, most law-abiding citizens say, 'Okay, I'll answer it.'" In a statement late Monday, Moody's denied that it wasn't cooperating.
California's action isn't challenging the underlying merits of how particular pools of subprime mortgages got top ratings, Brown said. Instead, it seeks facts about who signed off on ratings for securities that failed to live up to the top billing. "What did they know? When did they know it?" Brown said, adding that "we're going to take this as far as we have to, to get answers."
"Moody's has been working with the California Attorney General's office for many months to provide documents related to his previously announced investigation, and we are committed to continuing to do so," the company said Monday. "In fact, Moody's has already provided the Attorney General with tens of thousands of pages of documents in response to his requests, and we are continuing to provide additional materials."
California state officials are looking at the ratings agencies in connection with losses suffered by the state's pension fund, though Brown stressed that his probe was unrelated to that issue. In March, Connecticut Attorney General Richard Blumenthal, a Democrat and a U.S. Senate candidate, sued Moody's and its competitor Standard & Poor's, alleging that they misled investors about the quality of securities backed by U.S. mortgages.
Friday's hearing includes Moody's Chief Executive Ray McDaniel, who's kept his job while other top Wall Street executives haven't. He's said little publicly about the deterioration of the securities given top ratings by his firm, but in a 2008 hearing by the House Oversight and Government Reform Committee, documents showed that he admitted to his board of directors that Wall Street investment banks such as Goldman pressured his firm into giving favorable ratings, acknowledging that sometimes the firm "drank the Kool-Aid."
Clash of the Titans: Obama vs. Goldman's Reaganomics
by Paul B. Farrell
Ancient stories oft retold: Blame the mythic gods for today's political crisis, for Wall Street's 2008 meltdown, America's $23.7 trillion new debt, for Beck, Palin, the Tea party, and now for Goldman and the resurgence of Reaganomics ... Yes, the Kraken was released, ravaging American politics. Since time immemorial humans have seen their struggles as endless battles between the gods, Zeus and Hades, good vs. evil, the forces of Heaven battling the Underworld. ... so we blame Zeus ... or his arch-enemy Hades for releasing the Kraken, the deadly evil monster that devours good ... yes, blame the gods, yes, "the devil made me do it!"
Backflash: To that crucial moment, election time 2008 ... when Wall Street's near-death experience opened the Gates of Hell, beckoning Wall Street's too-sinful-to-save bankers ... Hades, ruler of the Evil Underworld, counter-attacked ... first releasing his Trojan Horse, the Treasury Secretary, to save his dark legions from certain destruction ... Henry Paulson kept Hades' warriors alive ... but Zeus feared Hades was preparing for a bigger catastrophe on earth, created a new Perseus, his son, the hero who must finally defeat Hades and his dark warriors ... for that role Zeus cast Barack Obama. But remember, Perseus is half-human, may be no match Hades' ultimate WMD, The Kraken.
Flash forward: Elections 2010 ... the eternal battle rages on Earth, growing louder, more violent ... The Kraken, reborn as Goldman and the too-political-to-fail Wall Street Greed Machine was winning many battles ... concessions on derivatives and fiduciary regulations, disclosures, on the CFPA ... yes, the Kraken returned from the Darkness, more powerful, thanks to a raid on Treasury.
Wall Street has new dark forces inside Zeus' domain ... Timothy Geithner, Lawrence Summers and the reincarnation of Reaganomics darkest hero, Ben Bernanke ... The Kraken now commands the most lethal WMD, the propaganda machine that's releasing inflammatory Scorched Earth talking points for Glenn Beck and Rush Limbaugh, Sarah Palin, Michele Bachmann, Mitch McConnell and John Boehner, Tea Partiers, militiamen and secessionists ...
Welcome to American politics, folks. Exciting fun isn't it, our tradition of American political discourse developed over two centuries ... politics is code for getting rich off the many endless battles throughout eternity cooked up to amuse the gods of Heaven and Hell, Zeus and Hades, fought by angels and saints, sinners and demons, and us humans ... minor skirmishes on the Senate floor, on cable news, at Tea Party confrontations ... and major battles over financial reform, Goldman's treachery.
There's more coming as good fights evil: The new Supreme Court nomination, abortion, gay rights, immigration, taxes, elections in 2010 and the big one in 2012 ... so blame Zeus and Hades for not getting along ... or "the devil made me do it" ... blame someone, anybody but you ... then blindly vote in a new Kraken, for both sides have one, and either one can self-destruct America ... now sit back, enjoy the popcorn, and watch the latest "Clash of the Titans."
Release the Kraken ... and defeat Dodd's financial reforms
Last week's SEC suit again Goldman Sachs may slow the trend. But the truth is, since Wall Street's takeover of Washington by the Paulson-Bernanke-Geithner-Goldman conspiracy, we've been predicting that even though we twice dodged the Great Depression II (in 2000 and again in 2008), Dodd's financial reforms will be denuded by the GOP, setting America up for the third wave, the next big meltdown that will finally bankrupt Wall Street's too-political-to-fail banks, and America.
Bankrupt America? Yes, that prediction comes loud and clear from Nobel Prize-winner Joseph Stiglitz, former bond trader Michael Lewis, financial historian Niall Ferguson, hedger Barton Biggs, Yale economist Robert Shiller, Hong Kong's Marc Faber and many other ignored voices drowned out by the hundreds of millions spent by Wall Street lobbyists to kill Dodd's reforms.
Now Simon Johnson, former IMF chief economist and co-author of "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," adds his voice: Yes, another financial meltdown is coming: "And when it comes, the government will face the same choice it faced in 2008: to bail out a banking system that has grown larger and more concentrated or let it collapse and risk an economic disaster ... But there is another choice ... take a stand against concentrated industrial power ... It is a choice that the American people need to make -- and sooner rather than later. The Panic of 1907 only led to the reforms of the 1930's by way of the 1929 Crash. We hope that a similar calamity will not be a prerequisite to action again." And yet, catastrophe is dead ahead.
That's right: Even if Dodd's financial reforms are passed with token GOP support, the reforms will be watered down. America will not have to wait 22 years as we did after the Panic of 1907 till the Crash of 1929. With today's high-tech exchanges operating at the speed of light, we have turned years into milliseconds thanks to high-frequency trading algorithms, $100 million profit days, risky highly-leveraged derivatives, and Wall Street's insatiable greed demanding mega-billion bonuses. No, not 22 years: Another crash will be triggered in 2012, certainly within the next presidential term, and it'll be a whopper.
Release the Kraken: Revive the 1981-2008 Reaganomics disaster?
Even with the Goldman suit, Wall Street's $400 million lobbyist effort to kill financial reforms signals a resurgence of unregulated free market Reaganomics capitalism, the conservative ideology that killed Glass-Steagall in 1999 creating too-big-to-fail banks, setting the stage for the 2008 meltdown. That 60-year-old law protected Main Street by separating low-risk retail banking from high-risk investment banking gambling with high-octane derivatives.
Wall Street's goals are simple: Water down the Dodd reforms enough so that Wall Street can continue to: (1) evade securities laws, (2) avoid taxes, (3) minimize capital requirements, (4) increase leverage, (5) hide speculative risks, (6) maximize short-term profits, (7) avoid stockholder disclosures, and (8) manipulate regulators. Expect surface change, but little of substantive. Why? Wall Street needs to continue running the same scam on taxpayers in order to get their mega-bonuses. They have lost their moral compass, sold their soul to the devil, lack a conscience, have no interest in the public.
The truth is, Beck, Rush, Sarah, Michele, and others driving the GOP Tea Party of No are in fact a smoke screen for Wall Street and their lobbyists' shadowy takeover of America's government ... the new Kraken is destined to self-destruct America ... even now as it fights for the resurgence of neo-Reaganomics. Last year we predicted this revival as a "mutant capitalism." We saw Wall Street's cultural "soul-sickness," hidden in many disguises. To fully understand this relentless toxic threat, you must see it in the broader historical context of the Reaganomics capitalism as one manifestation of the eternal war between Zeus, Hades and their armies here on earth. Here's the back story:
1. Birth of Capitalism, Adam Smith's 1776 'Wealth of Nations'
Pure capitalism is the aggregate economic activities of greedy irrational selfish people. "Every individual ... labors ... great as he can," but "neither intends to promote the public interest, nor knows how much he is promoting it. ... he intends only his own gain ... led by an invisible hand to promote an end which was no part of his intention."
2. Alan Greenspan, Ayn Rand, Fountainhead and Atlas Shrugged
For decades Rand was Greenspan's conservative guru: "When I say 'capitalism,' I mean a pure, uncontrolled, unregulated laissez-faire capitalism ... the only system that can make freedom, individuality, and the pursuit of values possible in practice because capitalism demands the best of every man -- his rationality -- and rewards him accordingly ... free ... to go as far on the road of achievement as his ability and ambition will carry him." Rand and her disciple Greenspan demanded total, unrestricted freedom for Wall Street.
3. Milton Friedman's 'Capitalism & Freedom' powered Reaganomics
After 1981 Reaganomics defined conservatism: Grounded in Nobel Economist Milton Friedman's conviction that "the government solution to a problem is usually as bad as the problem." He preached pure Adam Smith capitalism, hated FDR's New Deal, hated the Keynesian economics that Obama revived with the stimulus. Reaganomics ideology released the Kraken, gutted Glass-Steagall, created Wall Street's too-big-to fail fat-cats, set up the 2008 meltdown, and exploded America's massive debt problems.
4. Reaganomics capitalism must kill financial regulations
Today Wall Street's myopic mindset lives in this unbroken 234-year history from Adam Smith to Friedman, Rand, Greenspan, Bernanke and Reaganomics. And today it's coming to a head in this new "Clash of the Titans," driven by Wall Street's Scorched Earth obsession to kill all restrictions in Dodd's reforms. This is the ultimate turning point, a grand battle to the death between the new Obamanomics and the resurgence of Reaganomics.
Why? Wall Street knows it cannot survive without Reaganomics' ideological freedoms. Wall Street's cash got Obama elected, got their Trojan Horses in his cabinet. But they never expected Obama to turn against them, starting with suing Goldman for fraud. Wall Street spent $400 million on lobbyists to release a new Kraken in this war to kill Dodd's reforms, a war Zeus and Hades must be proud of. This, my friends, is our mythic destiny ... at least till the gods decide to shift the balance of power again in this eternal "Clash of the New Titans."
But rest assured, no matter who's elected in 2010 or 2012, who's got power in Washington, for now, Wall Street will continue financing both sides, because volatility and gridlock, deception and propaganda, lies and confusion all favor the dark forces of Hades, yes, Wall Street's too-greedy-to-fail fat-cats are his army.
Eurozone manufacturing powers ahead on falling euro
by Ralph Atkins
Eurozone manufacturers are expanding production at the highest pace for a decade, according to a closely watched survey that shows industry reaping the benefits of the euro’s Greece-related slide. April’s purchasing managers’ surveys showed the 16-country zone’s recovery firmly on track. Growth is being powered by manufacturing companies, which are benefiting from a strong pick-up in demand from emerging economies as well as the weaker currency. German manufacturers expanded production this month at the fastest since the survey began in 1996. But growth in the eurozone service sector also accelerated.
The results highlight the silver lining to the crisis over Greece’s public finances, which has fuelled fears about the stability of Europe’s 11-year-old monetary union. Since early December, the euro has fallen about 8 per cent on trade-weighted basis. They also suggest that the pace of the overall economic recovery is accelerating. First-quarter eurozone gross domestic product figures, due for release next month, were hit by the exceptionally bitter winter especially in Germany, where GDP might even have contracted. The latest purchasing managers’ indices, however, suggested the rise in second-quarter GDP compared with the previous three months could easily exceed 0.4 per cent, according to Chris Williamson, chief economist at Markit, which produces the surveys.
“Manufacturers are showing the best performance for 10 years,” he said. However, the recovery in the eurozone is still expected to lag behind the world’s other main regions. International Monetary Fund forecasts this week showed the global economy growing 4.2 per cent in 2010 and the US economy 3.1 per cent. But the Washington-based forecasters expected only 1 per cent in the eurozone, where prospects have been dragged down by the weaker southern European countries, including Spain and Greece. Christoph Weil, economist at Commerzbank in Frankfurt, said: “We are still a long way from normal economic conditions.” The eurozone would probably not return to pre-crisis production levels until the end of 2012, he said, and would “have to battle with mass unemployment for some years yet”.
Meanwhile, fears about a pick-up in inflation pressures could mount after the purchasing managers’ survey showed bottlenecks forming in eurozone manufacturing and rising input costs resulting from the weaker euro. But with eurozone inflation, at 1.4 per cent, still well below the European Central Bank’s target of an annual rate “below but close to” 2 per cent, no early rise in interest rates is expected. The purchasing managers’ indices are regarded as good up-to-date indicators of trends in private sector activity. The composite eurozone index, covering manufacturing and service sectors, rose from 55.9 in March to 57.3. With a figure over 50 representing an expansion in activity, that was the fastest increase since August 2007. The eurozone manufacturing index jumped from 56.6 in March to 57.5, the highest since June 2006. The German manufacturing index rose from 60.2 to a record 61.3.
Sovereign debt tops IMF worries
by Ambrose Evans-Pritchard
Spiralling sovereign debt in Europe, the US, and Japan has emerged as the top threat to the world economy and risks setting off a fresh financial storm, the International Monetary Fund has warned. "The crisis has led to a deteriorating trajectory for debt burdens and sharply higher sovereign risk. Vulnerabilities now increasingly emanate from concerns over the sustainability of governments' balance sheets," said the Fund's Global Financial Stability Report. Sovereign debt strains may infect the banks and "prolong the collapse of credit," with the risk of a vicious circle as this feeds back into the economy.
Europe is the epicentre of the new crisis, with a switch in hot spots from Ireland, Austria, and Holland in the original credit crunch to Greece, Portugal, Spain, and Italy today. "The recent turmoil in the eurozone has demonstrated how weak fiscal fundamentals coupled with underlying vulnerabilities can manifest themselves as short-term financing strains," it said. Countries with "outsized deficits and an unsustainable debt trajectory" that rely on foreigners to buy their bonds can run out of time quickly. The danger comes at "trigger dates" when clusters of debt maturites fall due, a problem that has hit Greece this year.
The Fund said there was a risk of "standoffs" as investors hold out for higher rates from defiant states. This could lead to "an unresolved solvency crisis", a veiled warning that some rich states may ultimately default.
Europe has yet to write down a third of its estimated $665bn (£433bn) losses, lagging the US and the UK in raising capital and boosting Tier I (RWA) capital. The IMF said German Landesbanken and savings banks have not disclosed a "substantial part" of their likely losses. Germany's weaker banks face fresh write-downs of $68bn this year.
Spanish banks are strong enough to cope with the IMF's toughest stress tests, thanks to the Banco de Espana's demand for safety buffers during the boom. The savings banks or `Cajas' face a "capital drain" of €17bn (£14.9bn) but the system as a whole looks solid.
Britain has biggest annual deficit since World War II
The UK has recorded its largest annual budget deficit since the Second World War as the election battle over how to repair the public finances intensifies. Britain's deficit in the 12 months through to the end of March reached £163.4bn, as a sharp drop in tax receipts hit the Government's coffers. The figures however were better than the Treasury's own forecast of £166.5bn. The question of how to cut the deficit without imperilling Britain's fragile recovery is at the heart of the general election campaign.
Conservative leader David Cameron is trying to persuade voters that the axe needs to be taken quickly to the deficit, while Gordon Brown is seeking to woo the electorate with a promise that cuts should wait until the economy strengthens. "While it is still a colossal amount of borrowing and highlights the dire state of the public finances, today's figures show a slight undershoot from the Budget projections, " said Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club. "Though that in itself is good news, it is the coming years that still pose more of problem."
The Conservatives, who have been rattled by a surge in support for the Liberal Democrats, yesterday argued that Britain may need to turn to the International Monetary Fund to fix the public finances if the election results in a hung Parliament. The Government is pledging to halve the deficit within four years but many economists reckon that the hope is based on too optimistic forecasts for economic growth. At the time of the Budget in March, Chancellor Alistair Darling forecast the economy would accelerate to growth of 3.25pc next year.
"With all parties’ fiscal plans based on extremely optimistic economic assumptions and unspecified spending cuts, a further sizeable fiscal squeeze will still be needed after the election, whoever is in charge," said Jonathan Loynes, an economist at Capital Economics. The UK government bond market shrugged off the data, with the 10-year yield staying at 4.02pc. Sterling was also little changed at $1.54.
Fitch warns of debt 'shock' for Japan
by Ambrose Evans-Pritchard
Fitch Ratings has warned that Japan's sovereign debt is rising to ominously high levels as the workforce shrinks and deflation grinds deeper, while the government's reserve assets may prove unusable for defence in a funding crisis. The agency said Japan's gross public debt has reached 201pc of GDP and is likely to continue pushing higher into the danger zone unless premier Yukio Hatoyama starts to get a grip on public accounts. "Japan is increasingly vulnerable to an adverse interest rate shock, given the scale of government debt and hence the volume of refinancing," said Andrew Colquhoun, Fitch's Asia specialist. "The lack of a coherent and credible plan" for fiscal discipline is likely to put "downwards pressure on creditworthiness in the medium term."
The Fitch Report comes two days after the IMF warned that the global banking crisis has mutated into a sovereign debt crisis that risks setting off a second phase of economic turmoil. Tokyo has until now been able to borrow at ultra-low rates of around 1.30pc for 10-year bonds, drawing on a huge captive savings pool from its own citizens. While this reduces the risk of a "temporary liquidity problem" – or `sudden death' in ratings parlance – as foreigners cut off funding, it does not protect Japan from deeper forces at work. "The slow but steady drop in the domestic savings rate could eventually undercut [Japan's] ability to fund itself locally at nominal yields and makes it more vulnerable to interest rate and refinancing risks," he said. Even at the current low rates – 0.16pc for two years, and 0.49pc for five years – interest payments already match 10pc of tax revenues. This is twice the average for OECD rich states. A sharp jump in yields would be ugly.
Tokyo stresses that "net" debt at 97pc of GDP is a better indicator of Japan's health, since this takes into account the country's assets at home and abroad. Fitch said these assets may prove illusory. A chunk equal to 38pc of GDP is in the form of lending to business. "It would be difficult to liquidate these assets in the event that [Japan] encountered payment stress, and the value of such assets is uncertain," it said. A second chunk worth 20pc is in foreign reserves, mostly US Treasuries. This could not be converted quickly into yen without causing currency havoc. The deflation curse is a large part of Japan's story. Falling prices alone added 1.6 percentage points a year to public debt in the decade after 1998. This has since accelerated. Nominal GDP has contracted by 5pc over the last two years, eating away at the tax base. Debt and deflation do not mix well.
Gradual Wind-Down for Chinese Economic Stimulus
by Wang Changyong and Huo Kan
The end may be near for China's 4 trillion yuan fiscal stimulus, although local governments still need matching funds
Signals from all corners of China's economic playing field are pointing to a gradual unwinding for China's successful fiscal stimulus project.
Urban fixed-asset investment, construction activity, bank lending and local government bond projects are just a few of the statistical signs of a coming phase-out for the 4 trillion yuan package, which has been pumping the economy with central and local government funds since last year.
"The stimulus has almost concluded," said the head of one foreign bank's China-based research department.
This is the second year for the economic stimulus, for which the central government has already provided 1.18 trillion yuan. It plans to spend another 572 billion yuan this year.
The stimulus, aimed at offsetting the negative impact of the global financial crisis, led directly to an explosion in construction activity nationwide in 2009. Building projects that have yet to be completed will continue to draw government funding.
But news that China's economy grew at a healthy pace of 11.9 percent in the first quarter suggested that the wind-down time had arrived, and that the central government need not allocate additional funds for new projects.
On April 14, the Standing Committee of the State Council expressed its latest fiscal investment policy stance by ordering the government to "strengthen management of government investment and strictly control the introduction of new projects."
But even before that edict, central government investment rose only 9.1 percent in the first quarter far below the 30.4 percent increase reported during same period last year. The pullback was further reflected in a 2.2 percentage point decline in the quarterly growth rate for urban fixed-asset investment to 4.81 trillion yuan, 191.4 billion yuan of which came from the central government budget.
Brakes on new construction were applied with particular force in recent months as central and local governments sought to reduce overheating risks. For the first three months this year, total investment for new construction projects jumped more than 34 percent to about 300 trillion yuan. But the quarter-on-quarter growth rate for the same period last year topped 87 percent.
Following last year's peak for government-supported construction projects, this year's nationwide investment is slated to shift from "active expansion" to "passive continuation," which will still demand considerable capital. The 153,700 stimulus-financed projects under way in the first quarter represented a total 2.79 billion yuan in investment an increase of 30.4 percent compared to the same period last year.
Yet the investment curve started turning downward with a slowdown in the pace of central government spending initiated by the National Development and Reform Commission (NDRC).
NDRC has yet to release details on the slowdown in central government investment. It's only public information released so far concerned the allocation of about 2.2 billion yuan from the central government for 10 energy-saving projects as part of the 11th Five-Year Plan.
Caixin learned from several local NDRC branches that, since the end of March, the agency has invested in a variety of civilian infrastructure projects including low-rent housing, water control projects, wastewater treatment and refuse processing facilities.
For example, a Gansu Province NDRC official told Caixin that the central government allocated 1.3 billion yuan for construction of low-rent housing in his province. The investment level and the construction scale are expected to rise this year, although the official added that "there will be no central government investment in other fields."
Low-rent housing investment funded by the central government is slated for other parts of the country as well. The municipality of Chongqing has applied for 1.5 billion yuan in central government funds for housing, while Qinghai and Hebei provinces have respectively asked for 1.3 billion yuan and 787 million yuan.
But the spending is not universal. The head of investment for the Tianjin Municipal NDRC said the central government has yet to provide a single yuan for low-rent housing in "Tianjin or anywhere else in eastern China."
Tianjin's share of the stimulus pie has so far amounted to only small allocations for its forestry industry, drinking water safety, health centers, community centers and agriculture.
Nevertheless, overall the momentum of local government investment remains strong. According to a Caixin calculation, 21 provinces have set regional GDP targets for 2010 above 10 percent after drafting long lists of investment plans and construction projects.
A key source of local funds will be bank loans, which the State Council targeted to reach 7.5 trillion yuan nationwide for new loans this year. Chen Changhua, chief researcher for Credit Suisse in China, said between 4 and 5 trillion yuan in loans will be issued to continue construction projects already launched with stimulus funds.
However, the lending through local government financing platforms that was encouraged in 2009 will be strictly controlled this year. The head of one local bank supervisory department told Caixin that banks have already started restricting loan volumes tied to local financing platforms, requiring that funding be limited to specific construction projects.
Although local governments have a responsibility to match central government investments, many are in sore straits financially. Qi Shouyin, head of the Hebei Province finance department, said the outlook for his province's 2010 budget is far from optimistic. "Problems will be even more acute than in 2009," he said.
Local government financing is generally based on money raised by auctioning land. Land sales by governments last year raised 1.27 trillion yuan, up 43.5 percent from 2008.
The 2010 central government budget allows revenue derived from land sales to reach 1.37 trillion yuan. But recent government measures designed to cool rapidly increasing real estate prices have raised doubts about the viability of this revenue goal.
Another funding source for local governments is bonds issued on behalf of the locals by the Ministry of Finance. Last year, bond sales raised a combined 180 billion yuan.
Each province this year is expected to raise several hundred million yuan from bonds, with the nationwide total expected to reach 200 billion yuan. A Ministry of Finance official confirmed provinces have been given a green light to issue bonds worth 200 billion yuan, although he refused to reveal additional details.
As of mid-April, no local government bonds had been issued, even though the Ministry of Finance arranged April 9 for bond underwriters to convene work meetings as a prelude to issues.
The finance ministry's bond management rules set three-year restrictions for local government bonds. They also limit bonds to fund-raising primarily for public works, basic infrastructure, construction, and community support projects.
Caixin learned this year's local government bonds have been divided into batches with three- and five-year terms, and that the funds would primarily be used for completing current construction projects.
Additionally, the ministry directed that funds from bonds should be used for matching central government stimulus spending.
Prospects are uncertain for urban construction bonds a type of local government bond that pumped the stimulus project last year. A securities industry source who helped underwrite urban construction bonds in 2009 told Caixin his firm has switched its focus to share underwriting, as the volume of urban construction bonds this year will decline significantly.
The decline will be fueled by the fact that "examinations and approvals by reform and development commissions will be even more strict" this year "and institutional purchasers will be even more cautious," the source said.
NDRC official Xu Lin said there are no volume controls for bond issuances, but that examinations and approvals are based on regulations. Yet recent concern over local government debt and local financing platforms mean some bond projects may be scrapped.
Controls on urban construction bonds have been hailed as the right step for risk prevention and tightening credit. But it's unclear whether the move may jeopardize unfinished construction projects that will need more capital.
Jia Kang, who heads the financial science research department at the Ministry of Finance, thinks the fiscal stimulus will likely be withdrawn through the use of a "fading" technique applied in 1998, when policies for dealing with the Asian Financial Crisis were slowly lifted. Fading could include low-key measures and a gradual slowdown for fiscal expansion, thus minimizing the social impact.
Jia said the government should begin by adjusting the government bond structure and investment path. He recommends an appropriate reduction in issuing long-term state construction bonds this year, based on local circumstances, and focusing on more flexible short- and medium-term state bonds.
Marc Faber on Chinese property bubble and crash
More borrowing, budget gaps for U.S. states - S&P
by Karen Pierog
U.S. states will borrow more to bolster their budgets, which face a projected collective shortfall exceeding $100 billion in fiscal 2011, Standard & Poor's Ratings Services said on Tuesday. "We expect that the effect of the recession on revenues will likely remain for most of fiscal 2011, particularly if economists' projections of a slow recovery prove accurate," said credit analyst Robin Prunty in a statement. "As in prior economic cycles, we expect that revenues for states may continue to drop well after an economic recovery begins, which can also make budget stability hard to achieve and maintain," she added.
S&P said that since the current recession began in December 2007, states have issued more than $15 billion of bonds to plug deficits, restructure outstanding debt, securitize assets and raise money for pension payments. While the $135 billion flowing to states from the federal stimulus act has tempered this borrowing, that will change as the federal money ends, according to the rating agency. The expiration of the American Recovery and Reinvestment Act will also likely lead to structural budget problems for states in 2012 and beyond.
Many states are hoping for or planning on extended federal assistance for their fiscal 2011 budgets as various measures work their way through the U.S. Congress, according to S&P. "States that are on the front line of recovery should find it easier to adjust to diminished stimulus funding," S&P said in a report. "We believe that governments that relied heavily on nonrecurring measures along with ARRA funds to restore balance will experience the most hardship in the post-ARRA environment."
Schwarzenegger, Villaraigosa back plans to rein in pension costs
by Evan Halper and Phil Willon
Warning that retirement benefits for public employees are escalating out of control, Gov. Arnold Schwarzenegger and Los Angeles Mayor Antonio Villaraigosa said Wednesday that they supported controversial plans to rein in the costs. The mayor and the governor, appearing at separate events, said the retirement packages which allow some public employees to stop working at age 50 with a pension nearly equal to their entire salary are more generous than taxpayers can afford. "The single biggest threat to our fiscal health and California's future is our public pension system," Schwarzenegger said at a Capitol news conference, declaring the growing costs a "crisis." "Here in Sacramento, pension reform must be our No. 1 priority," he said.
Earlier in the day, Villaraigosa declared in Los Angeles that the city's "pension system is no longer sustainable.'' Retirement benefit costs will consume 19% of the city's general fund budget in the coming fiscal year, he said. The mayor and the governor are advocating plans to give newly hired government workers less generous retirement packages than those currently offered. The city and the state are legally prohibited from taking existing benefits away from people already on the government payroll or receiving a pension. Schwarzenegger said he was supporting legislation proposed by California Senate Republican Leader Dennis Hollingsworth of Murrieta that would raise the retirement age for new state workers and decrease the size of their pension payments.
Prison guards, California Highway Patrol officers and state firefighters would see the age at which they could start collecting a pension rise to 57 from 50. The amount the pensions of such public safety workers increases for each year of service would be reduced 10%. The proposal also calls for a jump in the age at which many other state workers could start collecting a pension, to 65 from 55. "I refuse to pass this crisis onto the next governor or the next Legislature," Schwarzenegger said.
The political viability of the Hollingsworth bill remains in doubt, however. Schwarzenegger has pushed to scale back pension benefits for much of his time in office without success. Meantime, state pension system officials have said the administration has exaggerated the size of the problem by citing studies that don't take into account investment profits that are likely to offset the cost to taxpayers. Organized labor groups, which have close ties to the Democrats who control the Legislature, have vowed to continue to aggressively fight the governor's efforts to roll back pension benefits. "This is just the governor continuing to distort the actual facts on what the real situation is," said Dave Low, assistant government relations director for the California School Employees Assn. "It is our opinion that pension systems are not in dire straits."
In Los Angeles, the mayor said he would push for a November ballot measure that scales back the retirement packages available to newly hired police officers and firefighters. They are the most generous offered by the city and can be changed only with voter approval. The mayor also said he was talking with City Council leaders about making changes for other newly hired city workers. The city's contributions to its two largest pension systems the Los Angeles City Employees' Retirement System and the Los Angeles Fire and Police Pensions will increase 12% to $730.1 million for the next fiscal year from $653.4 million this year, according to the mayor's office.
The retirement systems were battered by major investment losses in the 2008 financial meltdown, forcing the increased contributions that taxpayers must make. City Administrative Officer Miguel Santana said city officials were still ironing out the details of their plan to scale back benefits, which they are negotiating with labor leaders. "We're looking at everything having our future employees contribute more, changing the retirement age to make it more sustainable for the long-term health of the city," Santana said.
As in Sacramento, organized labor's resistance to such proposals is expected to be intense. When city officials earlier announced they were considering a similar plan for the June ballot, opposition from labor derailed it. Labor leaders argue that the city would not see savings from such a plan for decades, if at all. They also warned that that creating two classes of workers one that gets a more generous retirement package than the other would harm worker morale and create resentment in the ranks.
The real reason Swedes live longer
by Geoff Watts
What happens to health during an economic recession? The question surely is a no-brainier. Wages drift down, unemployment goes up. Those who have lost jobs become depressed; those who haven’t grow fearful and anxious that they may. The outcome for many is stress if not deprivation. Health, it’s clear, will suffer; the death rate is bound to rise. Right?
Wrong – at least if the experience of history, and one bit of history in particular, is anything to go by. Few economic downturns have been as dramatic and as deep as the Great Depression that overtook America during the 1930s. But figures from that time show that mortality fell and life expectancy increased. The data suggest that economic hardship is good for health. Can this be true? Links between bodily and economic well-being are far from straightforward. In the related area of socioeconomic inequality we’ve already become aware of unexpected influences through the work of Professor Richard Wilkinson of the University of Nottingham.
In his 2009 book The Spirit Level, co-authored with Kate Pickett, he summarised a raft of research all pointing in more or less the same direction. In countries where there is a big earnings gap between rich and poor, life expectancy is lower while mental illness, obesity and drug and alcohol abuse are all more common.
The real surprise is that it’s not only the poor who suffer. The population as a whole do less well if the gap is wider. The nations with the smallest wealth gap and the lowest incidence of health and social problems are the Japanese and the Scandinavians. The countries with, respectively, the greatest and highest are America, Portugal and Britain. The biological explanation for this is uncertain, but possibly mediated by the hormonal effects of perpetual anxiety about status and position, or loss of them. Economics affects health but not always as you might expect.
Dr Jose Tapia Granados is a researcher with a particular interest in the Great Depression.A doctor by training, he moved into economics and works at the Institute for Social Research at the University of Michigan. During the Depression, from mid 1929 through to 1933, he says, life expectancy at birth rose from 57.1 to 63.3 years; mortality fell. The pattern was much the same for men and women, and blacks and whites.
Years of recession are followed by years of recovery in which GDP returns to what it was and then grows. Between 1934 and 1936 the US economy boomed – but mortality rose and life expectancy fell. In 1938, there was another recession and another reversal of the trends. The pattern lasts throughout economic ups and downs from the start of the 1920s to the end of the 1940s. Deaths from TB and cardiovascular disease tended to fall in bad years, but peaked in economic expansions.
This apparently perverse relationship between changes in economic activity and changes in mortality was first seen as far back as the 1920s – to the bewilderment of those who’d noticed it. “They were so puzzled they felt they must be doing something wrong with the numbers,” says Dr Tapia Granados. More work in the 1970s fostered the suggestion that although the figures were right they reflected a lag between the downturns and the emergence of their damaging effects. Although the effects might appear during the recovery phase, it was said, they were not caused by it.
Dr Tapia Granados doesn’t accept this explanation, saying that for this to be credible, he says, business cycles would have to be regular and of equal length. So what is going on? There is evidence that in periods of economic expansion people smoke and drink more, sleep less, work longer, experience more stress, and suffer more industrial injures – all bad for health.
And what of the period of economic contraction? It’s a mirror image, he says, in which most of these influences are reversed. An enforced switch to part-time working, for example. “To work many hours per day increases risk of heart attack. Fewer hours decreases risk. During recessions road traffic deaths decrease and during expansion they increase.” Hence the counterintuitive outcome; recovery from recession, not the recession itself, does harm.
Critics point to a contradiction between this and the link between rising GDP and improving health. Dr Tapia Granados acknowledges this, but denies a contradiction, saying: “I’m talking about fluctuations on top of the general trend.” He suggests that a clearer understanding of what’s going on in economic cycles could contribute to the development of policies to minimise harm and enhance health. These might include a limitation on overtime, increased holiday entitlements, and improved safety legislation.
Experts Warn of Impending Phosphorus Crisis
by Hilmar Schmundt
The element phosphorus is essential to human life and the most important ingredient in fertilizer. But experts warn that the world's reserves of phosphate rock are becoming depleted. Is recycling sewage the answer? They sift the powder through their fingers, smell it and admire its soft, brownish shimmer. The members of the delegation from Japan, dressed in black suits and yellow helmets, stand attentively in a factory building in Leoben, Austria, marveling at a seemingly miraculous transformation, as stinking sewage sludge is turned into valuable ash. Nothing suggests that the brown dust comes from a cesspool. It doesn't smell, is hygienic and is as safe as sand in a children's sandbox. It's also valuable. The powder has a phosphate content of around 16 percent. Phosphate, the most important base material in mineral fertilizer, is currently trading at about €250 ($335) a ton.
Untreated sewage sludge was once dumped onto fields as liquid manure, until it became apparent how toxic it is. Human excretions are full of heavy metals, hormones, biphenyls -- and drugs. New processing plants are designed to remove these toxins far more effectively than before, thereby paving the way for the use of sewage sludge in safe, human fertilizer. Ash Dec, the company that operates the pilot plant in Leoben, has dubbed the program "Ash to Cash." This unconventional approach could be important for all of mankind. While the term "peak oil" -- the point at which production capacity will peak before oil wells gradually begin to run dry -- is well known, fewer people know that phosphate reserves could also be running out. Experts refer to this scenario as "peak phosphorus."
"While the exact timing may be disputed, it is clear that already the quality of remaining phosphate rock reserves is decreasing and cheap fertilizers will be a thing of the past," warns Dana Cordell of the Institute for Sustainable Futures in Sydney. A phosphate crisis would be at least as serious as an oil crisis. While oil can be replaced as a source of energy -- by nuclear, wind or solar energy --, there is no alternative to phosphorus. It is a basic element of all life, and without it human beings, animals and plants could not survive. The element phosphorus seeks to bond with oxygen, which gives it its dual role as both a life-giving and lethal element. Because it bonds so easily, phosphorus is highly flammable, which is why it is used in incendiary bombs. On the other hand, phosphorus is an essential part of biomolecules.
The chemical known as phosphate, which consists of one phosphorus atom surrounded by a safety cordon of oxygen atoms, is a building block of life. The human body, for example, contains about 700 grams (25 ounces) of phosphorus. Our teeth and bones owe their strength to a phosphate mineral, but nerve cells and muscles are also dependent on the chemical. Even DNA molecules are held together by phosphorus. "Life can multiply until all the phosphorus is gone, and then there is an inexorable halt which nothing can prevent," the science fiction author and biochemist Isaac Asimov once wrote. People who do not consume at least 0.7 grams of phosphorus a day with their food are likely to suffer from deficiency symptoms. The demand for fertilizer to grow animal feed has grown as a result of wealthy countries' hunger for meat. Growing prosperity in China and the cultivation of plants to produce biofuel are currently boosting demand even further, which fuels speculation in global markets. Two years ago, the price of phosphate rock skyrocketed by 700 percent before declining slightly again. The markets are nervous.
Just four countries -- Morocco, China, South Africa and Jordan -- control 80 percent of the world's reserves of usable phosphate. Morocco is a particularly important exporter, the Saudi Arabia of phosphorus, if you will. Its reserves were formed millions of years ago, when animal and plankton remains were deposited as sediments on the floor of a shallow, warm sea. Morocco's fossil treasure makes up about 37 percent of world reserves. Europe, on the other hand, has almost no reserves of its own, and it depends on imports to satisfy 90 percent of its demand. Phosphorus is a "geostrategic ticking time bomb," warns David Vaccari, a professor of environmental engineering at the Stevens Institute of Technology in Hoboken, New Jersey. "We may eventually be driven to implement a high degree of recycling as resources become depleted," he says. "The sooner we implement recycling technologies, the longer the current resources will last to ease the transition to the period when intense recycling may become imperative."
Even the French writer Victor Hugo recognized the problem, interrupting his successful novel "Les Misérables" to devote several pages to a fiery plea in favor of using human fecal matter as fertilizer. "There is no guano comparable in fertility to the detritus of a capital," he raved. And now the novelist's dream could finally come true. The industry is called "urban mining," and in addition to recycling metal, glass and plastic, it could soon turn urban sewers into fertilizer mines. Sewage treatment plants accumulate almost 1 kilogram (2.2 pounds) of phosphate a year per resident. In today's sewage treatment plants, the phosphates end up in the sludge, which is then heated in mono-combustion plants and is often buried in landfills as ash or baked into concrete -- together with its valuable fertilizer component. But that could soon change, as the Japanese delegation found out during its tour of the Leoben pilot plant. The surrounding region was once the heart of Austria's proud mining industry, which has since gone into visible decline. Many houses in Leoben stand empty today.
Now urban mining could give the region a new lease on life. The ash is delivered to the plant by truck from sewage treatment plants in Vienna, about 150 kilometers (94 miles) away. The light brown, fine dust is stored in large plastic bags, and nothing about it suggests that its particles may recently have been part of a delicious meal, before it was consumed, digested, excreted and flushed away through the city's sewer system. When it is delivered to the pilot plant, the sewage sludge ash is unfit for use as a fertilizer, because it contains excessively high levels of heavy metals like cadmium. As gears groan and conveyor belts squeak, the ash, combined with chemical additives, is moved into a rotary kiln, where a hissing natural gas flame heats it to 1,000 degrees Celsius (1,832 degrees Fahrenheit). After half an hour in the rotary kiln, the ash, which has now passed through two purification steps, has a phosphate content of about 16 percent. It is then enriched with other plant nutrients, like potassium and nitrogen, to yield the final product: urban fertilizer.
"After recycling, the heavy metal content is even significantly lower than in most conventional fertilizers," says Ludwig Hermann, co-founder of Ash Dec. "At the beginning, everything went wrong that could possibly go wrong," he says, referring to the €2 million ($2.7 million) pilot plant. "The furnaces gummed up and the dust was baked into hard pieces." The machine that Hermann now uses for urban mining was once used to process aluminum. His experiences are typical of the nascent phosphate recycling industry, where there is much speculation and trial-and-error -- almost the way it was 340 years ago, when phosphorus was discovered. It was Hamburg alchemist Hennig Brand who, while searching for the "philosopher's stone" in 1669, discovered a promising substance that glowed mysteriously in the dark. The alchemist's recipe was somewhat idiosyncratic: Take "golden yellow" urine, distill it and heat the residue. Using this crude method, he obtained a few grams of phosphorus from several hundred liters of urine. He then sold the glowing crumbs to other scientists for large sums of money. German mathematician Gottfried Wilhelm Leibniz was also keenly interested in the secret of the "phosphorus mirabilis" ("miraculous bearer of light").
The prosaic use of phosphate as a fertilizer was discovered by accident more than 200 years later. The material was a by-product of steel production in England and was known as Thomas meal. This industrial waste proved to be an outstanding fertilizer. After that, phosphorus came to be used in many different applications: to promote growth in plants, in animal feed, on the strike surface of matchboxes and in weapons. Ironically, the Allies used phosphorus incendiary bombs in World War II to destroy Hamburg, the place where the "miraculous bearer of light" was first discovered. With the advent of urban mining, a new source of the coveted element is now being tapped. Many methods of deriving raw materials from sewage are being tested in the process. In the Netherlands, for example, the company Thermphos is producing high-quality white phosphorus for use in industry from vast amounts of sewage sludge ash. Germany, too, could soon assume a pioneering role with an innovative research center for phosphate recycling.
By 2012 at the latest, Hermann plans to build a circa €12 million reclamation plant in the context of a joint research project with the Berlin-based Federal Institute for Materials Research and Testing. A site in the eastern state of Brandenburg is under consideration. "With our technology, recycling could satisfy a third of German fertilizer demand," says Hermann. His first industrial-scale plant is expected to be seven times as large as the pilot plant in Austria, and would produce 29,000 tons of fertilizer a year. He plans to obtain the raw material from sewage treatment plants within a radius of 300 kilometers. But the bulk of it will come from what is potentially Germany's most important phosphate mine: Berlin's sewers.