"Communications tech some 80 years after the telegraph tapped out its first message, Chesapeake & Potomac Telephone Co. wiring, Washington, D.C."
Ilargi: So much to cover today, let me just walk you through some bullet points, if you don't mind.
• The Huffington's Post "Real Misery Index" is at yet another new all time high, while:
• US banks have a "perfect quarter" (profits on every single trading day), at the same time that:
• Civil and criminal probes against Wall Street firms keep accumulating, and
• Companies lose access to bond markets, not because of Euro problems, as Bloomberg suggests, but because of record global sovereign debt sales. Turns out, grandma really baked only so much pie to be handed out at the dinner table.
• US trade deficit keeps chalking up notches like there's no tomorrow (maybe it knows something we don't -yet-), while Washington screws up two audits in one day: the Federal Reserve and Fannie and Freddie:
• Fannie, Freddie will be subject to a "weak review" , where even John McCain of all people is pushing for an end to the misery of the dying "entities", but is told that he's behaving irresponsibly. Really, Obama, Geithner, Summers, you want to talk "irresponsible"?
• As for the narrow one-time Fed audit, apparently there's a silver lining in there somewhere. Or at least,
• Rep. Alan Grayson is jubilant, even though his own amendment was thrown out, and manages to get in a few jabs about foreigners. Now, I've come to sort of like Grayson, he seems if not good, then minimum less bad then most of his peers (one eyed's, blinds and all that), but he either doesn't get this one, or he's less than honest about it (don’t you just loathe that two-some in a politician?)
See, Grayson claims that the fact that the:
• New-fangled Fed currency swaps with central banks will run into the trillions, means America is bailing out foreigners. But America is very simply once again through backdoor tactics (never let a crisis go to waste) bailing out its own big banks.
Over the weekend, Obama was on the phone with Merkel and Sarkozy, calling for strong measures, and they said: "Sure, we got "strong" down, but we’re not bailing out your guys, boyo. So show us the money."
And so he did. Europe's central banks are buying up PIIGS sovereign debt as we speak -partly with Fed (US taxpayer) money-, and who do you think are the sellers? SocGen, Deutsche, Goldman, JPMorgan. Want to bet? No need to thank me, Mr. Grayson, glad to be of service.
Moreover, and this would be the topic of the day if we hadn't gotten immune to the immoral hazard of it all,
• European banks are now feverishly betting against the euro. And of course US banks are doing the same. You know what they're all shorting the Euro with? With the money provided to them courtesy of the European and US taxpayers to keep the Euro and the global markets strong. What else? It's not as if they have any funds of their own left. They were all bailed out one way or another.
They have nothing but your money to gamble against your own interests with.
Now if you realize that they're making a killing betting against you, who do you think will have to pay up on those wagers? Yup, Yeah, You! You yourself furnish the dough used to bet that you are a sucker. And because you definitely are a sucker, you then end up paying, and losing on both sides of the wager. Do you understand how this works? Do you? Moral hazard anyone? Conflict of interest? Those terms are so passé. It’s a new world now, with new morals. As in none.
But for the 1 in 100 of you who start to see what happens right before their eyes, maybe, just maybe, you'd want to take a look at, just to name an example, Ireland, where
• Protesters tried to storm their own parliament . Question: what comes next after Greece, Ireland....?
Talking overseas, maybe China can't quite make your growth and recovery dreams come true. Of course there's always a chance that I could be mistaken, but with
• Beijing home prices down 31.4% in one month(?!),
... I don't think so.
Returning back home,
• Paul Farrell puts US debt at $825 trillion, give or take a few nickels, and "en passant" calls Warren Buffett a lying through his teeth spineless ukelele strumming retard.
Now Farrell may be them few nickels south of today's reality, but we might never know, or will we? To wit, the SIGTARP himself says the Treasury doesn’t know either how many billions of your cash went to which many billions a year’s bonus payments:
• Neil Barofsky has a thing or two to say about the US Treasury (someone give that man a real job with real power, please). What the SIGTARP bail-out watchman says is that the Treasury hands out billion upon billions of dollars of your money to Wall Street without even bothering to keep a record. AKA they don’t WANT any records of the sleaze deals to persist.
Oh, and we're all still baffled too(?!):
• US regulators are still searching for the cause of last Thursday's market plunge, or so they'd like us to believe. And whether the 1000 point drop was caused by either Goldman, software malfunction, fat elbows, trained dolphins, your "kind" of waitress, or Chinese hackers, one thing is certain: the US government inability to either figure out what went on, or, alternatively, to spin a good lying tale around the whole "event", will keep a lot of people out of the stock market.
For all they know, it may happen again tomorrow morning, wiping out all they have. Then again, the lower the trading volumes, the easier -and cheaper- it gets to make the stock markets look good. Still, lots of investors will have moved into gold, but much of that is just paper. And yes, gold will be fine down the line, but not in the immediate future. Think: getting a haircut administered by a lawnmower.
That is to say, gold is no good to hold on to, nor for now, not unless you have oodles of extras lying around. If you want to do fast 1 day, 1 week, 1 month trades, no problemo, but one year is a different story altogether. And "buy and hold" gold is definitely not. Too many players presently into gold will need to sell their stash to make up for losses elsewhere. For instance because they are also invested in real estate. ValuEngine strategist Richard Suttmeier "gets“ domestic real estate, echoing what I've said since times immemorial in:
• Hope You Enjoyed the Housing Recovery ... Because It's History.
"The temporary increase in prices has been driven by government efforts to prop up the housing market and those measures have come to an end". Amen, brother.
Which harks straight back to the Capitol Hill impotency regarding Fannie and Freddie that becomes glaringly painful among US Democrats. Or maybe "impotency" is not the correct term. Sheer inability, or "attachment to one’s post being more important than the interests of the voters who put one in that post" may be more accurate. Dissolve Fannie and Freddie, and you dissolve Wall Street itself, after all. Sadly, dissolved they must and will be. And yes, in case you were wondering, that includes all of Wall Street.
¿Por qué? Porque the entire US housing market is about to be hit by a slow lingering timebomb that all of us could have detected a long time ago (wait, I did!):
• U.S. mortgage holders owing more than homes are worth rise to 23% of total. We’re talking some $2.5 trillion worth of loans here that are defunct, unless and until the borrowers see a huge sudden upward tick in their finances. And the chances of that happening, if you don't mind my saying so, across the board, are zero or less.
• Even JPMorgan Chase Warns Its Investors About Underwater Homeowners. Yeah, that’s right, you in the first row with your finger up in the air, they're one of the banks with a "perfect quarter". So wherever the losses on the severely obese to the point of diabetes US housing market go, it won‘t be on JPMorgan, Goldman, or, well, you get the idea. You will pay, and you alone.
And how will you know your time is up? If you live in New York State, perhaps this way:
• New York State forces 1 day-a-week non-paid furlough on 100,000 employees, a 20% pay cut, indicative of a trend that will soon spread across the nation at about the same rate as the oil in the Gulf of Mexico. And it won't stop there. 20-40-60% pay-cuts will be all the fashion all over as we attempt to come to grips with the idea and the fact that money's too tight to mention.
Yes, we find ourselves in a new-found place of volatility, and that will turn to chaos, and that will turn to sheer pain, If we're prepared for it, it'll be much easier to take. Then again, what if the cuts go to 60 or 80%. Could you still survive if it came to that? If your answer is negative, you have a whole bunch of other questions to respond to.
And it's terribly ironic that all this stuff may not even be the no. 1 issue in the US going forward. There's something else hiding in plain sight, and it may do irreparable damage to Obama as we go along:
• Oil spill will make large scale landfall today or tomorrow and get much worse from there. The footage of dying animals on the beaches of Louisiana, Florida, Alabama may be to the Obama administration what Keh Sanh was in 1972. There is no end in sight, even though BP now suggests putting a two ton tea pot on the well. Yeah, right. Washington's been lucky so far, and that luck is noe officially over, and what does Obama have to show for it?
We have entered a new, a next, phase, of our lives. It's defined by volatility, chaos, and eventually mayhem; it will get worse than what you know or imagine, and make you much poorer than you are today. You may not realize it yet, but what you can do is ask if that next giant HDTV is really worth the credit you'll owe for it.
Here’s a guarantee: 9 out of 10 of us will soon have less wealth than we have today (it'll all have been transferred to banks trying to hide behemoth losses). Not those of us who work on Wall Street, or the City of London, or Frankfurt, or Washington or Brussels, but those of us who are real living people. We need to allow our hopes and desires to slide down to a level where what we want meets what we can have. If we don’t, which is my bet will happen, we’re in for a world of pain.
We’re being suckered by our own governments into believing we are fine, but we're lost instead. It's just that we don't like that idea, being lost. So we keep on believing we're fine. Until we can't. Until we're dead broke.
And then what? Then we'll storm our parliaments? Here's thinking it’ll be too late by then.
We're like a bunch of happily oinking piglets set to be roasted over the biggest campfire ever. And all we really need to know is who wins American Idol.
Ilargi: Yes, in case you were wondering, our donations channels are wide open (top left hand column), while we work hard on the TAE makeover due this summer, and our advertisers are still eager for your clicks, which carry no obligation on your part whatsoever. Just reminding you/
Europe faces debt jitters despite giant bailout
Europe struggled Tuesday to shake off doubts that it can emerge from its debt crisis as jitters returned to world markets despite the creation of a giant financial safety net to shore up the euro. A day after an EU-IMF one-trillion-dollar support scheme sparked market euphoria, shares in Asia and Europe fell and the euro faltered amid worries that Greece and other debt-burdened countries will not carry out tough austerity measures.
In Athens, the epicentre of the crisis, the finance ministry said Greece would receive 5.5 billion euros from the IMF on Wednesday and 14.5 billion euros from the EU early next week, the first tranche of a 110-billion-euro bailout package to help it make debt payments this month. On Monday, Athens ordered a radical overhaul of the country's costly pension system that it had warned faced collapse. But unions vowed to oppose the plan, which would see an average pension cut of seven percent by 2030. In Berlin, the cabinet approved Germany's part in a broader 750-billion-euro (one trillion-dollar) EU-IMF package agreed to prevent the Greek crisis from spreading to other weak eurozone economies.
After massive gains on Monday, stock markets slumped on Tuesday as the gloss came off the deal. "The optimism from the one-trillion-dollar euro-area financial rescue package is dissipating as the focus shifts to the difficult fiscal changes that debt-ridden eurozone nations will have to implement to move toward long-term sustainability," Charles Schwab & Co. analysts said in a note to clients. The London market was down nearly one percent and Paris closed down 0.73 percent. Frankfurt, however, recovered from early losses to finish with a gain of 0.33 percent while Wall Street also climbed in choppy trade. In Asia, Tokyo, Sydney and Hong Kong all closed down by more than one percent.
The euro, which briefly jumped above 1.30 US dollars on Monday, fell back to 1.2715 US dollars in European trade on Tuesday. The interest rate paid on Greek 10-year debt rose to 7.3 percent from 6.7 percent on Monday. But the eurozone appears to be marching forward with its expansion despite the crisis. A source close to the European Commission said it would recommend Wednesday that Estonia be allowed to adopt the single currency next year. The commission's evaluation on Estonia's bid to become the 17th member of the eurozone "is more than positive," the source said.
Major governments expressed optimism that the 750 billion euros set aside by the European Union and IMF had ended the risk of a new debt crisis enveloping the global economy. Angel Gurria, head of the Organisation for Economic Co-Operation and Development, said the package was credible and "the right size." But the IMF warned that European levels of government debt have hit danger levels and vigorous action will be needed to get them down. Radical short term action had to be avoided as it risked "a relapse into recession," said the IMF in a report on Europe.
"However, sustainability indicators are flashing warning signs over public debt levels in most countries and sizable (fiscal) consolidation efforts are needed in the medium-term," it said. "For countries with already low fiscal credibility, more immediate consolidation is a must," it said, warning that the recovery in Europe is particularly weak when compared with other regions and that traditional growth sectors may not be as strong as previously. European Commission president Jose Manuel Barroso stressed that the EU would not be content at just throwing money at the problem without tackling the root causes. "It's not just about giving money, it's about asking members states or the eurozone to make additional efforts for the correction of some imbalances that still exist," he said.
In another move to bolster the troubled eurozone, the European Commission will propose Wednesday much stricter control of national budgets, with tougher penalties for fiscal indiscipline. "The timeframe available to governments to announce and implement fiscal retrenchment (and to deal with longer-term challenges to debt sustainability) has been dramatically reduced," said Arnaud Mares, a senior vice president at Moody's ratings agency. He added: "This will result in accelerated -- and painful -- simultaneous fiscal tightening across Europe."
Bailout Is 'Nail in the Coffin' for Euro: Jim Rogers
by Shiyin Chen and Haslinda Amin
Investor Jim Rogers said Europe’s bailout of indebted nations to overcome the sovereign-debt crisis is just “another nail in the coffin” for the euro as higher spending increases the region’s debt. The 16-nation currency weakened for a second day against the dollar after rallying as much as 2.7 percent on May 10, when the governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators and the European Central Bank pledged to intervene in government securities markets.
“I was stunned,” Rogers, chairman of Rogers Holdings, said in a Bloomberg Television interview in Singapore. “This means that they’ve given up on the euro, they don’t particularly care if they have a sound currency, you have all these countries spending money they don’t have and it’s now going to continue.” U.S. and European stocks fell yesterday on concern the plan to rescue debt-laden governments in the region will fail to reverse the euro’s worst start to a year since 2000, forcing the European Central Bank to keep rates at a record low for longer.
New York University professor Nouriel Roubini said Greece and other “laggards” in the euro area may be forced to abandon the common currency in the next few years to spur their economies. The euro will remain the currency for a smaller number of countries that have “stronger fiscal and economic fundamentals,” he said in an interview on Bloomberg Television. Greece’s budget deficit of 13.6 percent of gross domestic product is the second-highest in the euro zone after Ireland’s 14.3 percent. As part of the bailout plan, Spain and Portugal also pledged deeper deficit reductions than previously planned.
The euro weakened against 13 of its 16 major counterparts and fell to $1.2644 from $1.2662 in New York yesterday. Last week, the currency fell to the weakest level against the dollar since January 2009 as stocks dropped globally and borrowing costs soared in nations from Greece to Portugal and Spain. Economic growth in the nations that share the euro will lag behind the U.S. by almost 1.5 percentage points next year, Bloomberg surveys of economists show.
All paper currencies are being “debased,” with the euro currency union at risk of being “dissolved,” Rogers said, adding that he continues to own the dollar, the Swiss franc, the Japanese yen and the euro. “It’s a political currency and nobody is minding the economics behind the necessities to have a strong currency,” Rogers said. “I’m afraid it’s going to dissolve. They’re throwing more money at the problem and it’s going to make things worse down the road.”
Shorting Emerging Markets
Investors should instead buy precious metals including gold or currencies of countries that have large natural resources, Rogers said. Among other asset classes, he favors agricultural commodities as the best bet for the next decade as well as silver because prices haven’t rallied. Rogers started short-selling emerging markets in the past two weeks after last year’s rally, he said. Still, the investor will seek to add to his Chinese holdings if shares fall further.
Chinese stocks are the world’s second-worst performers this year as government officials sought to curb accelerating inflation and speculation in the nation’s real estate market. The Shanghai Composite Index yesterday entered a bear market after falling 21 percent from its Nov. 23 high.
Fed Posts Terms Of Unlimited FX Swaps With Bank of England, European Central Bank And Swiss National Bank, Bank of Canada and Band of Japan to follow
by Tyler Durden
Late yesterday, the FRBNY posted the full terms of the various FX swaps that it instituted as part of the bailout of the Euro, and of various French and German banks. The specifics of the rescue agreements with the BOE, the ECB and the SNB are below while the Bank of Canada and BOJ swap details are still pending. One thing we know is that all swap arrangement will have a maximum duration of 88 days.
Surely at that point they will merely be rolled over as the Euro could be facing parity and various European banks will all be on the verge of bankruptcy due to the $6 trillion USD/EUR underfunded mismatch which the BIS and Zero Hedge have previously discussed. Yet a critical missing item is the full size of each specific swap, leading us to believe that the Fed's latest swap lines are limitless in size.
If the expectation is that the Fed should not be constrained by how large any given swap line can get (and even in the first European bailout round each swap line had a hard ceiling), one can speculate that the Fed fully anticipates European dollar funding needs well into the trillions. Which of course would mean that the Fed's balance sheet is about to go up by 50% on behalf of rescuing Europe... And that FR banks will make double the expected $1.25 trillion in interest on excess reserves. Thank you US taxpayers.
World Stocks, Euro Fall on Waning Optimism over Europe Bailout
by Rita Nazareth and Michael P. Regan
U.S. stocks erased losses and European equities pared declines, while the pound and gilts advanced, on speculation British politicians will form a majority government that will try to cut the nation’s deficit. The Standard & Poor’s 500 Index rose 0.4 percent to 1,164.81 at 12:42 p.m. in New York after tumbling as much as 1 percent earlier. The Stoxx Europe 600 Index slipped 0.5 percent, recovering from a 2.2 percent slide. The pound rose 0.8 percent to $1.4969, reversing a drop of as much as 0.9 percent. The yield on the 10-year U.K. government bond fell 3 basis points to 3.89 percent. Treasuries declined, sending the 10-year note’s yield up two basis points to 3.56 percent. Oil rose.
Global equities trimmed earlier declines on speculation U.K. Conservative leader David Cameron is nearing agreement on forming a coalition government with Nick Clegg’s Liberal Democrats. Negotiators for both their parties met today and the British Broadcasting Corp. reported that discussions between Prime Minister Gordon Brown’s Labour Party and the Liberal Democrats, Britain’s third party, had finished. "The market likes clarity," said Michael Mullaney, who helps manage $9 billion at Fiduciary Trust Co. in Boston. "There are significant structural issues in Europe from a fiscal standpoint. So, a definition of the U.K. situation would definitely have an important psychological effect on the market."
Equities slid earlier as optimism faded that a nearly $1 trillion emergency European loan plan would bolster the region’s economy. The European Union’s unprecedented bailout package is unlikely to be a "long-term solution" for the region, Marek Belka, the director of the International Monetary Fund’s European department, said in Brussels yesterday. Chinese stocks entered a bear market as inflation in the nation accelerated to an 18-month high, increasing pressure on the government to raise interest rates in an economy that has been an engine of growth through the global financial crisis.
The rate banks pay for three-month dollar loans held near the highest level in about nine months as Europe’s loan plan failed to encourage institutions to lend more to each other. The London interbank offered rate, or Libor, rose to 0.423 percent today from 0.421 percent yesterday, according to data from the British Bankers’ Association. Libor reached 0.428 percent on May 7, the highest since Aug. 17, on concern the sovereign-debt crisis triggered by Greece’s budget deficit is hurting the quality of loan collateral. Banks led the drop in the Stoxx 600, with the group sliding as much as 4.4 percent before paring losses and ending down 1.8 percent.
Banco Santander SA, Spain’s largest lender, slipped 3.3 percent after surging 23 percent yesterday, its biggest rally in 20 years. Deutsche Boerse AG slipped 1.5 percent in Frankfurt after reporting earnings that missed analysts’ estimates. The euro slumped 0.6 percent to $1.2715, erasing yesterday’s advance. The currency has tumbled more than 11 percent versus the dollar this year. Traders are betting the plan to rescue debt-laden governments from Greece to Portugal will fail to reverse the euro’s worst start to a year since 2000, forcing the European Central Bank to keep interest rates at a record low for longer. Economic growth in the nations that share the euro will lag behind the U.S. by almost 1.5 percentage points next year, Bloomberg surveys of economists show.
"I think 24 hours after the realization that there’s a solution in Europe, people are more reflective right now on what does that solution mean longer term," Gary Cohn, president and chief operating officer of Goldman Sachs Group Inc., said this morning at a UBS AG conference in New York. "Are we socializing the risk throughout Europe?" The MSCI Asia Pacific Index fell 1.1 percent, paring yesterday’s 1.5 percent advance. The MSCI Emerging Markets Index slipped 0.4 percent as the retreat in Chinese shares was offset by gains of more than 3.5 percent in Russian and Philippine equity markets, which were closed for trading yesterday.
The Philippine peso strengthened 0.8 percent against the dollar, the most among major emerging-market currencies, after Benigno Aquino headed for a landslide presidential election victory, ending concern that the result would be contested. The Shanghai Composite Index sank 1.9 percent, bringing its decline from a Nov. 23 high to 21 percent. Investors are concerned that accelerating inflation and surging property prices in China will spur the government to boost interest rates for the first time since 2007, slowing growth in the world’s fastest-expanding major economy and biggest metals user. Commodities erased an earlier drop, with the Reuters/Jefferies CRB Index gaining 0.2 percent after sliding as much as 0.7 percent. Crude oil rose 0.3 percent to $77.04 a barrel.
Protesters attempt to storm Irish parliament
Protesters angry at Ireland's multi-billion efforts to bail out its banks have tried to storm the entrance of the Irish parliament and several have been injured in scuffles with police. Police say officers staffing the wrought-iron gates drew batons and forced back several dozen protesters. They said the protesters' injuries were minor and none were arrested.
Tens of billions' worth of dud property loans are being transferred from five Irish banks to a new government-run "bad bank." The government also has bought multi-billion stakes in Allied Irish Banks and Bank of Ireland. Gardai said one officer received a minor facial injury during the scuffle. The march was organised by the Right to Work Campaign, sponsored by the Unite Trade Union. As the scuffle broke out organisers appealed for calm, which was restored after around a dozen gardai stood at the large iron gates at the front of Leinster House.
Several speakers hit out at the Government's handling of the economic crisis. Richard Boyd Barrett, of the People Before Profit Alliance, said there had to be a movement of opposition to the Government. "They (the Government) are bailing out the banks and the institutions and the elite that caused the crisis and they are asking ordinary people, senior citizens, young people to pay the price with brutal cutbacks and it's just not acceptable and people are here to say we're going to stop this and we want an alternative," he said. "And an alternative that puts people and jobs and our services and a decent quality of life for everyone at the heart of the economic solution to this crisis."
Mr Boyd Barrett said he did not see the scuffle and called for peaceful protest. But he added: "I think it is quite reasonable for people to vent anger against this Government and to say why is Dail Eireann not reflecting the interests of the people? "Is it an institution just for elites or is it an institution that is going to represent the people and I suppose that is what was in the minds of the protesters at the front."
Beijing Home Prices Plunge 31.4%
The average transaction price of commercial residential properties in Beijing for the week ended May 9 fell 1,790 yuan per square meter or 9.6 percent week-on-week to 16,898 yuan per square meter, reports The Beijing News, citing statistics released by Beijing Real Estate Information Network. Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent to 7,744 yuan per square meter.
In the last weeks of April, the transation volume of commercial residential properties in Beijing decreased by 10.34 percent, 11.39 percent and 30.82 percent respectively. Average transaction price was flat at between 22,000 yuan to 23,000 yuan per square meter. The share price of Poly Real Estate (600048) was down 2.65 percent to close at 10.66 yuan today. The share price of Beijing Capital Development (600376) was down 4.16 percent to close at 13.26 yuan today.
US Real Misery Index Reaches New "High"
by Marcus Baram
The unemployment crisis continues to stymie a full economic recovery, with ripple effects from credit card delinquencies and rising food stamp participation causing hardship for millions of Americans, according to the latest update of Huffington Post's Real Misery Index. The index for March/April 2010 was 33.1, a slight increase from 33.0 in February, representing another new high in the 26 years going back to 1984 analyzed by HuffPost. Though there have been some encouraging signs, from higher housing prices (which have an inverse relationship to the index) to declining home equity delinquencies, the jobless numbers continue to increase the misery.
Though the Real Misery Index has increased 16% from March 2009 to April 2010, the stock market has increased 56% during that period, reflecting an alarming discrepancy between the two metrics. Lynn Reaser, the incoming president of the National Association of Business Economists, calls it a two-tier economy, with those who are employed doing better amid rising consumer confidence while the unemployed suffer. Stock prices, meanwhile, are driven by the behavior of investors, who make up a small portion of the population -- not those who are underemployed, says Karen Dynan, the vice president of economic studies at the Brookings Institution.
She notes that employment tends to be a lagging indicator, meaning that it is one of the last numbers to turn around during a recovery, and that the stock market has a forward-looking predictive element to it. The hope is that a rising stock market will "stimulate spending and that will eventually create more jobs," she says. To formulate our index, which provides a better snapshot of the economy than the often-criticized misery index (inflation added to unemployment), we used a more accurate unemployment statistic (the U6 formulation), with the inflation rate for three essentials (food and beverages, gas, medical costs), and year-over-year percent changes in credit card delinquencies, housing prices, food stamp participation, and home equity loan deficiencies.
We gave equal weight to the broad unemployment numbers and the combination of the other seven metrics (with housing prices having an inverse relationship to the index). Thus, we added the broad unemployment U6 statistic (note: the current U6 was first introduced in 1994 so we used a similar number -- the U7 -- for the years 1985-1993) to the average of the seven other statistics.
In Greek Crisis, a Reflection of U.S. Debt Problems
by David Leonhardt
It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can. Yet in the back of your mind comes a nagging question: how different, really, is the United States?
The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today. The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem. We, the people, are.
We have not figured out the kind of government we want. We’re in favor of Medicare, Social Security, good schools, wide highways, a strong military — and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and this country. Many people, including some who claim to be outraged by the deficit, still haven’t acknowledged the disconnect. Just last weekend, Tea Party members helped deny Senator Robert Bennett, the Utah Republican, his party’s nomination for his re-election campaign, in part because he had co-sponsored a health reform plan with a Democratic senator.
Economists generally think the plan would have done more to reduce Medicare spending than the bill that passed. So, whatever its intentions, the Tea Party effectively punished Mr. Bennett for not being a big enough fan of big government. Or consider the different fates of two parts of President Obama’s agenda. Mr. Obama has unrealistically said that taxes do not need to rise on households making less than $250,000, and this position has come to be seen as an ironclad vow. He has also called for billions of dollars in sensible cuts to agribusiness subsidies, tax loopholes and the like. The news media and Congress have largely ignored these proposals.
The message seems clear: woe unto the politician — in Washington, Athens or London — who tries to go beyond platitudes and show some actual fiscal restraint. This situation obviously can’t continue, as Robert Greenstein, perhaps the leading liberal budget expert, points out. Mr. Greenstein’s politics make him sympathetic to the worry that all the deficit talk will become an excuse to pull back on stimulus spending while unemployment remains high or to gut social programs. But he also knows the numbers well enough to understand that our Greece moment, whether it takes the form of a crisis or not, is coming. "Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ " Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. "But the bottom line is, there really is no avoiding the hard choices."
For Greece and possibly other European countries, change will come from the outside. The countries lending the money for the Greek bailout — chiefly Germany — are demanding big cuts to the welfare state. Greek citizens will soon have a harder time retiring in their 40s. Here in the United States, we’re likely to have the chance to solve our problems before our lenders demand it. Those lenders continue see the American economy as a safe haven, thanks to our history of strong economic growth and political flexibility. It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. In the wake of the early 1990s recession, for example, almost no one imagined that the budget would show a surplus by the end of the decade.
But the main issue isn’t the near-term deficit — the one created by the recession, the wars in Iraq and Afghanistan, the Bush tax cuts and the Obama stimulus. The main issue is the long-term deficit. As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt. As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs).
Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion. This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear.
Democrats have more of a strategy — raising taxes on the rich and using health reform to reduce the growth of Medicare spending — but it is not nearly sufficient. What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.
Much of this may be unpleasant. But by no means will it doom us to reduced living standards or even slow economic growth. We can still afford to spend more on Medicare — even more per person — than we do today, and more on education, the military and other areas, too. We just can’t afford the unrealistic promises that the government has made. We need to make choices. "It’s not a matter of whether we have the resources to solve our problems," as Alan Krueger, the chief economist at the Treasury Department, says. "It’s a matter of political will." For now at least, our elected officials are hardly the only ones who lack that will.
US debt at $825 trillion as Warren Buffett joins the greed conspiracy
by Paul B. Farrell
Warning: Bears taking over. Time to short Buffett's new "Baby Berkshires," short Goldman, short Moody's and other favorites of Uncle Warren. Why? Behind the façade, the lovable, good ol' Uncle Warren strumming his cute little ukulele, ostensibly supporting reform, there's a dark force that's part of the toxic Goldman Conspiracy fighting to keep alive everything that's wrong with Wall Street, everything that got us into this mess, everything that will trigger another meltdown that even Uncle Warren says: "I can guarantee it."
Buffett belongs to the past while the news screams of a new world order ... Riots in Greece, more coming when the other PIIGS demand EU bailouts ... conservatives regain Britain ... unregulated BP's greed is spilling millions of gallons of oil destroying Gulf states, confirming Foreign Policy magazine warning of the "End of the Age of Oil" ... the Dow's techno-fear-driven irrational 1,000-point plunge as technicians turn bearish, ending the year-long bull rally ... even Hank Paulson's changing his tune, warning the Financial Crisis Commission that we need stronger reforms than Dobb's Senate bill.
Meanwhile, out there, seemingly oblivious of the gathering storm is an aging Woodstock hippy, good Ol' Uncle Warren strumming away on his ukulele, an over-the-hill rock star basking in the adulation of 40,000 adoring shareholders at their annual meeting in Omaha's Qwest Center ... a scene reminding us of Nero fiddling as Rome burns ... of the string quartet playing on the deck of the sinking Titanic ... of a Shakespearean tragedy with a raging, blind King Lear trapped, in denial of his role in America's collapsing empire.
Yes, folks, Uncle Warren has a bad case of denial. Remember, not too long ago Buffett was calling derivatives "weapons of financial mass destruction." And yet, there he was on stage at his love fest last week defending Wall Street's most toxic companies, trapped in denial, defending the greedy culture that got America into its current mess:
- Praising Moody's "business mode," and by inference all rating agencies that blindly rubberstamped Wall Street's toxic debt, setting up the last meltdown
- Defending Goldman Sachs bad behavior despite the fraud suit and a possible criminal indictment (while hiding his own conflicts of interest as a big investor in both Moody's and Goldman)
- Praising Goldman's CEO Lloyd Blankfein ... by far Wall Street's greediest fat-cat banker who paid himself $68 million of his stockholders profits last year
- Defending Goldman with a bizarre argument that Goldman is no more guilty than the other Wall Street banks, a tacit approval of the bad behavior of all Wall Street banks in the Goldman Conspiracy
- Worse, ol' Uncle Warren also tried deflecting attention from Wall Street's corrupt business model by blaming government regulators for the meltdown, another example of Uncle Warren's blind denial, ignoring the fact that in the past year Wall Street spent over $400 million on lobbyists and campaign cash to make absolutely certain regulators, Congress and the Obama team all played along with Buffett's songs that guarantee Wall Street controls Washington regulators
- Ironically, all this comes from a man who once lectured Congress on "Moral Integrity: I want employees to ask themselves whether they are willing to have any contemplated act appear on the front page of their local paper the next day, read by their spouses, children, and friends ... Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless"
Yes, Buffett's in denial ... just like his banker buddies ... so short Buffett, short Baby Berkshire, short Goldman, short Moody's. Why? They are all "shorting America," piling on debt that's pushed our debt-to-GDP ratio to 92%, past the IMF's 90% danger zone.
Main Street's also in denial ... forget hedger John Paulson's crooked subprime deals that made him and Goldman billions ... forget the hedgers in Michael Lewis' new "The Big Short" ... it's not the hedgers shorting America, it's the bosses inside Wall Street banks, their greedy co-conspirators inside Washington and now Uncle Warren, a nice guy who once thought derivatives were evil "weapons of financial mass destruction," but who's now defending every weapon Wall Street will use to stay in "business as usual," beating Main Street's 95 million investors, a corrupt business model destroying from within.
Wall Street's denial is blinding: Buffett and his merry band can no longer see how blind they are. They just keep strumming the same ol' tunes. Well folks, until they stop shorting America, we'll just keep reminding you of the debt their business model is creating.
So here are my best estimates, mostly from reported resources, of the huge debts Wall Street is dumping on America, the big bubble they're already blowing, driving the global economy headlong into another meltdown that will trigger the Great Depression II. And likely, with all this debt, soon you can bet taxpayers will stage a revolution making Main Street American streets far worse than Athens:
- Federal government debt ... $14.3 trillion
Federal debt limit doubled since 2005 to $14.3 trillion limit. Bush/Cheney wars pushed U.S. deep into a debt hole. Military kills 54% of budget. Expect 4% deficits through 2020.
- Treasury and Fed cheap-money policies ... $23.7 trillion
The Fed's shadowy printing presses have created an estimated but unaudited $23.7 trillion in credits, grants, loans and guarantees, backed by taxpayers. Pure profit.
- Social Security's rising debt ... $40 trillion
Soon we must either cut benefits or raise taxes 40%. Delays worsen solutions. By 2035 Social Security and Medicare will eat up the entire federal budget, other than defense.
- Medicare's unfunded debt ... $60 trillion
Going broke faster than Social Security. Prescription-drug benefit added an unfunded $8.1 trillion. In 5 years estimates rose from about $35 trillion to over $60 trillion now.
- Annual health-care costs ... $2.5 trillion
Costs rising faster than inflation. Burden increasingly shifted to employees. Recent Obamacare plan would have cost $90 billion annually, paid to Big Pharma and insurers.
- Secretive global derivatives trading ... $604 trillion
Wall Street resists all regulation of their gambling casino that leverages the combined $50 trillion GDP of all nations by a 12:1 ratio. Warning: Less than 2% of Wall Street's derivative bets triggered the last meltdown. Buffett "guarantees" it will happen again.
- Population growth of 50% vs. Peak Oil demands ... $30 trillion
United Nations says global population is increasing from 6 billion to 9 billion by 2050. China and India need 500 new cities each. Billions more humans want autos, using up limited resources, shifting more costs to America, as commodity price increases and new resource wars.
- U.S. dollar losing as reserve currency ... $20 trillion
As China's economy rockets past America's, the dollar will be replaced as the chief foreign reserves. The shift will devalue the relative worth of all America's assets.
- Global real estate losses ... $15 trillion
Commercial real estate is bloating 25% of U.S. bank balance sheets. Dubai Tower, world's tallest, is empty. China collapse will upstage, further depress America's market.
- Foreign trade and ownership ... $5 trillion
Foreigners own more than $2.5 trillion of America. China holds over $1 trillion Treasury debt. $40 billion new deficits added monthly. Total climbing at $400 billion annually.
- State and local budget and pension shortfalls ... $3.5 trillion
Shortfalls of $110 billion in 2010, $178 billion in 2011. On top of more than $450 billion in annual shortfalls in local government employee pension funds. L.A.'s near bankruptcy.
- Corporate pensions plus 401(k) plans ... $3.2 trillion
Only 30% of Americans have enough to retire. There's $2.7 trillion in 401(k) plans. And 92% of corporate pension plans are underfunded, with defaults guaranteed by taxpayers.
- Consumer card debt ... $2.5 trillion
Americans are still living beyond their means. Even with a downturn, consumer debt rose from about $2.3 trillion to $2.5 trillion. Fat Cat Bankers love it, yes, love making matters worse by gouging cardholders and mortgagees, blocking help in foreclosures and bankruptcies.
- Lobbyists annual costs ... $1.4 trillion
Wall Street bankers, Corporate CEOs and Forbes 400 Richest spend billions to influence elected officials, regulators and bureaucrats with lobbyists and campaign donations to exercise power over government. Voters are easily manipulated, but it takes lots of cash.
The total of all 14 categories of debt is a mind-blowing $825 trillion that includes "apples and oranges," jet fighters, derivatives and insurance fees, credit cards, autos and mortgages. There are more, and of course these are just estimates. Given the lack of transparency on Wall Street and in Washington, our debt is likely over $1,000 trillion.
What must you do? Wake up, drop your denial, get active, demand guys like Uncle Warren, his fat-cat buddies and Obama's team snap out of their denial, fight a return to the old greedy, toxic, destructive culture ... demand that your elected reps in Washington pass 1930's-style financial reforms ... or America will soon trigger a bigger meltdown, a new Great Depression II and no longer be the world's leading superpower.
4 Big Banks Score Perfect 61-Day Run
by Eric Dash
It is the Wall Street equivalent of a perfect game of baseball — 27 up, 27 down, the final score measured in millions of dollars a day. Despite the running unease in world markets, four giants of American finance managed to make money from trading every single day during the first three months of the year. Their remarkable 61-day streak is one for the record books. Perfect trading quarters on Wall Street are about as rare as perfect games in Major League Baseball.
On Sunday, Dallas Braden of the Oakland Athletics pitched what was only the 19th perfect game in baseball history. But Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day. Their showing, disclosed in quarterly financial filings, underscored the outsize — and controversial — role that trading has assumed at major financial institutions. It also drives home the widening lead that a handful of big banks are enjoying over lesser rivals on post-bailout Wall Street.
Experts said it would be difficult to repeat such a remarkable feat this quarter. Even so, the performance could feed the debate in Washington over the role of proprietary trading at banks, as well as sometimes conflicted roles banks play as market makers in matching buy and sell orders. Risk management experts said the four banks, as well as other Wall Street players, reaped big rewards without necessarily placing big bets that stocks or bonds would go up or down. Instead, they mostly played matchmaker, profiting from the difference between the prices at which clients were willing to buy and sell. Banks said that customer order flows were particularly strong during the period.
“This is not about hitting home runs,” said Jaidev Iyer, who runs his own risk management consulting firm, J-Risk Advisors. “This is just, as we call it, milking the market and your captive client base.” Still, the quarterly showing was highly unusual. Bank of America said that its trading revenue surpassed $100 million on 26 days, or almost 43 percent of the 61 trading days in the first quarter. It was the first time Bank of America had a perfect quarter since acquiring Merrill Lynch in early 2009.
JPMorgan said that its trading revenue hit $90 million on 39 days during the first quarter, and exceeded $180 million on nine days, or about 14 percent of the time. A JPMorgan spokesman said the last time the bank had a perfect run was the first quarter of 2003. “The high level of trading and securities gains in the first quarter of 2010 is not likely to continue throughout 2010,” Morgan said in a regular filing with the Securities and Exchange Commission this week.
Goldman Sachs — which is fighting an S.E.C. suit claiming the bank defrauded customers on a complex mortgage investment — posted its first perfect quarter ever. Goldman made at least $100 million on 35 days during the quarter, and at least $25 million on the remaining trading days. In the wake of the S.E.C. suit, Goldman’s role as a market maker has come under scrutiny on Capitol Hill. It has staunchly defended its business practices and said it had done nothing wrong.
Gary D. Cohn, Goldman’s president, said Tuesday that the standout quarter highlighted the strength of the trading that Goldman executed for its customers, particularly its fixed income, currency and commodities unit, known as FICC. “Our FICC and equities businesses are largely global market-making businesses where we intermediate flows and commit capital and liquidity and in the process generate revenue including bid-offer spreads,” Mr. Cohn said at a UBS conference in New York. “These franchises create numerous opportunities for the firm.”
Citigroup also had a loss-free first quarter, according to a person briefed on the situation. The bank discloses its trading performance on an annual basis, but big daily losses have been a regular occurrence over the last few years. In 2008, it lost $400 million on 21 of its 260 trading days. This year, even those that lost money from time to time, performed very well during the quarter. Morgan Stanley said its losses reached as much as $30 million only four days in an otherwise profitable quarter. A Morgan Stanley spokesman said the firm’s last perfect run was the second quarter of 2007.
Given the recent turmoil, last quarter’s strong showing will be hard to replicate. In 2009, the banks posted losses on less than 20 percent of the trading days; during the turmoil of 2008, losses occurred as much as 40 percent of the time. “It was pretty smooth sailing last quarter,” said William Tanona, an analyst at Collins Stewart. “I would be very surprised to see history repeat.”
'Perfect Quarter' at Four U.S. Banks Shows Fed-Fueled Revival
by David Mildenberg and Dawn Kopecki
Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival. Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter. Citigroup Inc., the third-largest, doesn’t break out its daily trading revenue by quarter. It recorded a profit on each trading day, two people with knowledge of the results said.
"The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks," said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. "It’s a transfer from savers to banks." The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.
The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18. It’s an awkward moment for the largest banks to be reporting more profitable trading. President Barack Obama is seeking to prohibit banks from trading solely for their own profit, a proposal favored by Paul Volcker, the former Fed chairman who is now a White House adviser.
"The banks are getting while the getting is good because you have regulatory reform and the Volcker rule and possible bank taxes down the road," said Matthew McCormick, a banking analyst at Bahl & Gaynor Inc. in Cincinnati, which manages about $2.8 billion including bank stocks. "It’s statistically improbable to have three firms batting 1,000 and also pitching a perfect game. You wonder why the rest of America has some suspicion about proprietary trading."
‘Implausible’ Proprietary Model
Wells Fargo & Co., the No. 4 U.S. bank, doesn’t disclose how many days it had trading gains or losses, said John Shrewsberry, head of the bank’s securities and investment group. Bank of America declined to comment beyond its filing, according to spokesman Jerry Dubrowski. JPMorgan also wouldn’t comment, spokesman Joseph Evangelisti said. Fed spokesman David Skidmore didn’t reply to an e-mail left after regular office hours yesterday.
At Goldman Sachs, which is contesting a fraud lawsuit from the Securities and Exchange Commission tied to the sale of a mortgage-linked security in 2007, net revenue was $25 million or higher on each of the days it traded. The New York-based firm said it made more than $100 million on 35 of those days, or more than half the time. The company’s fixed-income, currencies and commodities businesses and equities unit generate those returns by making markets for clients rather than betting the firm’s own money, Chief Operating Officer Gary Cohn said yesterday at a financial services conference in New York.
"There is often speculation that proprietary trading revenues drive our outperformance in these businesses," Cohn said. "Over the last 12 months, we have only recorded 11 loss days. It is implausible that a proprietary-driven business model could be right 96 percent of the time."
The demise of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. also helped surviving banks, said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $900 million and holds shares of Bank of America and JPMorgan. "It was like a perfect storm for the fixed income market where you had very low volatility, tightening spreads and a buyer of last resort in the Federal Reserve," said Paul Miller an analyst at FBR Capital Markets in Arlington, Virginia. "Even if a trade was going against you, you could just dump it on the Fed very quickly."
The trading-powered gains may not last. At the end of March, the Fed wound up a program in which it had bought $1.25 trillion of Fannie Mae, Freddie Mac and Ginnie Mae home-loan securities. The purchases had helped drive debt buyers from U.S. mortgage bonds with government-supported guarantees and into riskier debt, helping banks that were holding or trading it. The European debt crisis this month drove many investors back to safer assets, hurting prices for debt such as corporate bonds and commercial mortgage securities. "The high level of trading and securities gains in the first quarter of 2010 is not likely to continue throughout 2010," JPMorgan said in its filing.
Trade deficit rises to $40.4 billion in March
by Martin Crutsinger
The U.S. trade deficit rose to a 15-month high as rising oil prices pushed crude oil imports to the highest level since the fall of 2008, offsetting another strong gain in exports. The larger deficit is evidence of a rebounding U.S. economy. The Commerce Department said Wednesday that the trade deficit rose 2.5 percent to $40.4 billion in March. It was close to the $40.1 billion deficit economists had expected and the biggest monthly trade deficit since December 2008. Exports of goods and services rose 3.2 percent to $147.87 billion, the highest level since October 2008. Imports were up 3.1 percent to $188.3 billion.
The higher deficit shows demand is picking up in the United States following the recession, which had cut the trade gap last year to the lowest level in eight years. Economists believe U.S. manufacturers will continue to get a boost from rising demand for their products, reflecting the rebound in the global economy and a weaker dollar against many major currencies. However, that forecast could turn out to be too optimistic if a widening European debt crisis cuts into demand for American products in Europe, a major market for U.S. goods. "The outlook for exports has been dampened by the fiscal crisis in Europe, which has reduced the prospects for overseas activity," said Paul Dales, senior economist at Capital Economics.
Greece, the center of the debt crisis, accounts for only 0.2 percent of U.S. exports. But the 16 European nations that use the euro currency account for 15 percent of U.S. exports, and Greece is one of them. So far this year, the U.S. deficit is running at an annual rate of $467.2 billion, 23.4 percent higher than last year's imbalance of $378.6 billion. For March, the rise in exports reflected increased sales of American farm products and a wide range of heavy machinery from electric generators to earth-moving equipment.
The increase in imports was led by a 25.5 percent jump in crude oil shipments, which rose to $22.3 billion March, the highest level since October 2008. That increase reflected higher volume and higher prices. The average price for a barrel of crude oil rose to $74.32, up from $72.92 in February. Prices have been falling since oil hit $87.15 a barrel in early May. The debt crisis in Europe has raised concerns about the durability of the global economic recovery. In trading Wednesday, oil dipped to near $76 a barrel.= The deficit with China rose 2.4 percent to $16.9 billion in March, the highest level since January and the largest trade gap with any country. The Obama administration is facing growing political pressure to impose trade sanctions on China if Beijing doesn't allow its currency to rise in value against the dollar.
Treasury Secretary Timothy Geithner raised hopes for a change in monetary policy when he stopped in Beijing last month to talk with Chinese economic officials on his way back from India. But Chinese President Hu Jintao, who discussed the issue with President Barack Obama during a trip to Washington last month, said China's decision on the currency "won't be advanced by any foreign pressure." American manufacturers are pressing for a tougher trade policy. They say America's trade deficit with China has cost 2.4 million manufacturing jobs at a time when the jobless rate in this country is 9.9 percent. They contend that Beijing's currency manipulation and other unfair trade practices have made Chinese products cheaper in America at the expense of U.S.-made goods, while making American-made products more expensive in China.
Geithner is expected to raise the currency issue when he and Secretary of State Hillary Clinton go to China for two days of high-level talks later this month. The deficit with the 27-nation European Union rose to $7.1 billion in March, a jump of 32.7 percent. Imports from Europe rose faster than U.S. exports to the EU. The deficit with Canada, America's largest trading partner, fell by 15.8 percent to $2.3 billion. The imbalance with Mexico rose 26.7 percent to $6 billion as imports from Mexico hit an all-time high.
European Banks Now Feverishly Betting Against Euro, As Bailout Fails, Gold Surges
by Tyler Durden
Thought experiment: You are the head FX trader at French megabank Croc Monsieur & Cie. For the past 5 years, your bonus has been getting paid primarily in company stock. In the last two weeks you have seen the stock of your firm plunge as the markets have finally realized that those idiots in the Fixed Income desk have loaded up to the gills with PIIGS debt which is now worth 60 cents on the dollar at best.
And to top things off, the euro has plunged to multi year lows killing any chance of buying that New York Pied A Terre which seemed so cheap when the EURUSD was 1.50 a few months ago. So what do you do? Well, you short the living daylights out of the EUR, knowing full well that the EU, the IMF and the ECB will not let Europe crash. You sell, you sell on margin and then you sell some more, trying to get EURUSD all they way down to 1.20, to 1.10, even to parity if possible, to make it all that more believable that the end of Europe is coming.
And, lo and behold, on May 9 your plan succeeds: Europe agrees to bail your bonus out, by flushing $1 trillion under the pretext the money will be used to stabilize the periphery and the euro. Immediately the stock of CMC, and thus the value of your accrued bonus (several million worth), surges by a record 20% in one day. So you think: "How can I get an even greater bonus appreciation? Why - I will short the euro again. At this point I know that between myself and the other FX desks at all the other French and German banks we can easily take the euro down to 1.20 if not much lower.
After all we are only trading against the very central banks that are keeping us alive. And when that happens Europe will have to print another trillion, then ten trillion, then one hundred trillion, all the while the stock portion of my accrued bonus surges. Brilliant." Brilliant indeed - Zero Hedge has received confirmation that several of the largest French banks are now actively shorting the euro to take advantage of globalized moral hazard, which with every ensuing bailout does nothing but make the bonuses of French FX traders surge.
In other words, the very banks that Europe is bailing out are betting more and more aggressively with each passing day against Europe's own survival! Even George Soros has shed a tear of pride in how beautifully his initial plan to take on the BOE has mutated for the Bailout Generation. And overnight, the traders from the imaginary CMC, and other all too real French banks (and now US hedge funds), are succeeding, as the last traces of this weekend's $1 trillion bailout are long forgotten: futures are plunging, Asia is collapsing, the EURUSD is probing a 1.26 handle and we see it easily going back down to 1.25, even as gold surges.
We anticipate another record bailout to be announced by Europe within the month as Europe now has no other choice. And each subsequent bailout will only lead European banks to bet even more aggressively against the survival of Europe, which destroys more and more European taxpayer capital. Welcome to Global Moral Hazard.
ECB risks its reputation and a German backlash over mass bond purchases
by Ambrose Evans-Pritchard
The European Central Bank risks irreparable damage to its reputation by agreeing to the mass purchases of southern European bonds in defiance of the German Bundesbank and apparently under orders from EU leaders. Jean-Claude Trichet, the ECB's president, denied there had been any political interference. "We are fiercely and totally independent," he said. It is clear, however, that the two German members of the ECB's council voted against the move, a revelation that may cause a catastrophic political backlash in Germany.
Axel Weber, ultra-hawkish head of the Bundesbank, told Boersen-Zeitung that the emergency move over the weekend had been a mistake. "The purchase of government bonds poses significant stability risks and that's why I'm critical of this part of the ECB's council's decision, even in this extraordinary situation," he said. The rebuke is devastating. The ECB draws it authority from the legacy and aura of the Bundesbank. The European Commission made matters worse by announcing the decision in the small hours of Monday morning before the ECB had spoken, fuelling suspicions that monetary policy is being dictated by the political authorities. French President Nicolas Sarkozy further enraged Berlin by claiming that 95pc of the $1 trillion "shock and awe" rescue package was based on French proposals.
"Germans are watching this in horror," said Hans Redecker, currency chief at BNP Paribas. "If this ends up in full-blown quantitative easing, people are going to be up in arms." As recently as last Thursday Mr Trichet said the governing council had not even discussed buying bonds. Julian Callow, of Barclays Capital, described the volte-face as incredible. "The ECB has ripped up its exit strategy. They have always prided themselves on transparency and consistency, and now they have done this abrupt U-turn."
The ECB said it was intervening in "those market segments that are dysfunctional", almost certainly buying Greek, Portuguese, Irish and Spanish bonds. It will sterilise purchases through other means so that the action will not add net stimulus or undermine monetary policy, at least for now. Spreads on 10-year Greek debt fell 467 basis points to 7.75pc in euphoric trading. Crucially, spreads fell 163 points to 4.62pc in Portugal and 51 points to 3.92pc in Spain.
Marco Annunziata, chief economist at UniCredit, said the ECB alone is powering the market, raising concerns that any rally will be short-lived. "The spread tightening has so far been driven mostly by ECB purchases and some short-covering, with much less buying interest from real money accounts," he said. Mr Redeker said China and other emerging powers have lost confidence in EU management and stopped buying Club Med bonds, leaving the euro vulnerable to further sell-offs. The bank is predicting parity against the dollar by early 2011, but the immediate panic is over. "The ECB has done what it had to do: if spreads had continued to widen after what happened on Friday we would have faced a death spiral," he said.
Marek Belka, head of the IMF's European operations, said the show of financial power buys time but cannot solve EMU's deeper structural crisis. "It has a potential of calming the markets for a moment. I obviously don't treat it as a long-term solution. This is morphine that stabilises the patient, and the real medication and the real treatment has yet to come," he said.
Fresh EU data shows that total debt is 224pc of GDP in Greece, 272pc in Spain, 309pc in Ireland, and 331pc in Portugal, each with a heavy reliance on external finance that can dry up at any moment. They are all being forced to impose austerity measures, risking a slide into deeper slump and a potential debt-deflation trap. Details of the rescue plan are becoming clearer. The EU has invoked the "exceptional circumstances" clause of Article 122 of the Lisbon Treaty to beef up the EU's balance of payments fund from €50bn to €110bn. The money can be used to bail-out countries within the eurozone for the first time. This is a "Euro Bond" by any other name, evoking the German nightmare of an EU debt union.
The eurozone will create a Special Purpose Vehicle able to marshal a further €440bn. This is to be a outside the EU institutions on German insistence in order to circumvent the EU's "no bail-out" law. The hope is to head off trouble at Germany's constitutional court, though it is certain to be challenged anyway. The IMF will match this with another €220bn or so, taking the whole package to roughly €750bn. Ulrich Leuchtmann, currency chief at Commerzbank, said it is far from clear whether EU states can cover their pledge, since most have their own debt problems. "Not even the eurozone as a whole has sufficient finds to provide for member states in trouble. The volume of aid is likely to be much smaller than the official figures suggest," he said.
The ECB resisted the purchase of state bonds after the Lehman crisis, arguing such action would amount to a subsidy for the most indebted states. But it also made no secret of its disdain for quantitative easing by the Bank of England and the US Federal Reserve, viewing this as the start of a slipperly slope towards "monetisation" of deficits. ECB board member Lorenzo Bini Smaghi went so far as to deride QE an inflation policy, saying: "It is not what people in Europe want." The sudden change in policy will come as a shock to those who see the ECB as last bastion of orthodoxy in a world of heretics.
Lesson For Bond Vigilantes: Governments Aren't Kidding When They Say They'll Crush You
by Vincent Fernando
Europe's bond vigilantes pushed up European bond yields in the marketplace, alerting the world to the Eurozones growing debt problems. For the ones who hung around too long betting against nations like Greece or Portugal, their reward has been death at the hands of European leaders.
A few weeks back, Greece's finance minister said that anyone betting against Greece would lose their shirts and it looks like they just did.
Greece's ten year bond yield has collapsed a remarkable 47% to 6.6% from 12.4% (as bonds surged) just before Europe's new bailout fund was announced, in what has likely been unprecedented upward move for Greek debt in such a short period of time. Portugal's ten yield dropped 20% to 5%, while Spain's fell 11% to 3.95% according to Bloomberg.
Anyone using credit default swaps to bet against PIIGS creditworthiness has been annihilated in an instant, as shown by the huge reductions in default spreads taken from CMA below.
It's a tough game betting against government muscle, today it's paid to rather ride alongside European governments and bet on a bailout by buying PIIGS bonds, and of course buying European stocks, which are soaring. Once again, this lesson is learned -- ultimately bet on bailouts, not 'the right thing.'
European central banks' bond buying focuses on EMU periphery
by William James and George Matlock
Euro zone central banks moved to restore investor confidence on Monday with purchases of shorter-dated government bonds, concentrated in the euro zone's weakest and most illiquid markets, traders said. It was unclear how many bonds the banks bought on Monday in one element of a $1 trillion rescue deal designed to stabilise the euro. European Central Bank President Jean-Claude Trichet gave no indication of how much the ECB was prepared to spend but Governing Council member Axel Weber said in a newspaper interview the purchases carried significant risk to price stability so would be limited.
Traders said central banks were active in the market and bids were mainly seen in shorter maturity debt from the higher-yielding euro zone states that have been the subject of intense pressure over their fiscal imbalances in recent months. "Central banks from Mediterranean islands all the way to the mothership in Frankfurt were busy buying periphery today, and Greece was rather central to the buying," a trader said. The concerted action by global policymakers amounts to the biggest rescue package seen since the 2008 collapse of Lehman Brothers.
The inclusion of a commitment to buy bonds, coordinated by the ECB, surprised some analysts given Trichet's denial that the option had even been discussed at last Thursday's monthly ECB rate setting meeting. Traders said central banks had been seeking to buy mainly shorter-dated debt, with many citing bids for paper dated between one and five years. "In some markets (central bank bids) have gone further out than others -- the worse the credit, the shorter they've stayed," a London-based trader said.
Charles Berry, senior trader at LBBW in Stuttgart, said the purchases were focused in bonds close to expiry which had been issued as longer maturities and carried high coupons. "With funding issues acute in the next year, it makes sense to focus on that paper," he said. Estimates of the size of the buying varied, though in previously illiquid markets their effect was pronounced. The premium investors demand to hold Greek government bond rather than benchmark German Bunds plummeted by nearly 600 basis points, from 1,047 bps at Friday's settlement.
"Such is the illiquidity in many of these markets that small size is moving prices a long way," said Chris Clark research analyst at ICAP. Italian, Portuguese and Spanish spreads over Bunds also tightened sharply off euro-lifetime record highs reached last week, when market fears over the spread of Greece's debt crisis peaked.
Britain must fend for itself in event of crisis, French official warns
by Angela Monaghan
Britain should not rely on EU help in the event of a renewed financial crisis after refusing to sign up to the bulk of a €500bn (£429bn) rescue package for the eurozone, the head of the French financial markets watchdog said. Jean-Pierre Jouyet said the UK would have to fend for itself if ongoing political uncertainty led to a meltdown in the financial markets. "The English are very certainly going to be targeted given the political difficulties they have. Help yourself and heaven will help you. If you don’t want to show solidarity to the eurozone, then let’s see what happens to the United Kingdom," he told Europe 1 radio.
Mr Jouyet, European affairs minister from 2007-2008, was clearly angered by the Chancellor Alistair Darling’s refusal to pledge funds in an attempt to protect the euro, by failing to agree to provide troubled eurozone countries with €440bn in loans or guarantees. He said it was a clear sign of the divisions within the European Union. "There is not a two speed Europe but a three speed Europe. You have Europe of the euro, Europe of the countries that understand the euro...and you have the English," he said.
However, Mr Darling did agree to contribute to a €60bn extension to an existing European Union facility to help those countries in particular difficulty. The International Monetary Fund has agreed to provide a further €250bn. The bail-out agreement boosted markets around the world on Monday, including the FTSE 100 which closed up 5pc – the biggest one-day jump since December 8, 2008. Part of that gain was unwound on Tuesday morning, with the FTSE 100 down 1.8pc at 5291. The pound was down at around $1.48.
As political uncertainty rumbled on, with no new government in place, analysts at Morgan Stanley said investors should sell the pound, targeting $1.35. It said the prospect of a Labour-Liberal Democrat coalition would hit sterling. "We have decided to initiate a short pound-dollar position," said Stephen Hull, global head of currency strategy. "This coalition would probably find it difficult to make the required tough spending cuts to the public deficit, risking a downgrade by the rating agencies in coming months."
"Markets Are Happy" But Even $1Trillion Won't Solve Europe's Woes, Nouriel Roubini Says
by Aaron Task
With a $1 trillion bailout package for Greece and the other sick men of Europe, the EU and IMF spurred a huge global rally in stocks Monday, with the Dow rising 405 points, its biggest gain since March 2009. The massive bailout prevented "another systemic seizure of the global financial system" and, "in the short run, markets are happy we're not going to have another global meltdown like Lehman," says NYU professor Nouriel Roubini, co-author of Crisis Economics.
But in the long run, Europe has just "kicked the can down the road," Roubini says, agreeing with our earlier guest Richard Suttmeier. Even $1 trillion isn't enough so solve the "fundamental questions" facing Europe, the economist says, citing the following:
- Even in Europe, There's No Free Lunch: All of the bailout money is conditional on countries approving what Roubini calls "massive fiscal consolidation," i.e. big austerity packages like Greece's parliament just passed. Such measures mean fewer public sector jobs (and lower salaries for those who remain) and higher taxes in countries where a lot of people work for the government and already pay relatively high tax rates. "Politically can they do that...or will there be riots and strikes that are going to limit" fiscal austerity measures, Roubini wonders.
- Tough Love Hurts: Raising taxes and cutting government spending should help alleviate the short-term debt crisis in Europe's so-called PIIGS but will also likely lead to recession, if not outright deflation. "That will make it harder to force austerity" on the public, he says. There's already violence and rioting in the streets of Athens. "The question is: Will we see the same thing in, for example, Lisbon, Madrid [and] throughout the euro zone?"
- No Easy Way Out: One reason the European Union is in this mess is because few of its countries are able to compete in a global economy, especially since they lack the ability to deflate their currency, the economist says. Considering it took Germany 15 years to restructure its private sector so unit labor costs came down low enough to compete globally, nations like Greece, Portugal and Spain face a long, hard slog even if they embark upon such painful programs immediately.
So what does all that -- and the political pressure against more bailouts in Germany -- mean for the future of the euro and the EU itself? In late April, Roubini said "in a few days, there might not be a euro zone for us to discuss," at the Milken Conference. In the accompanying clip, the founder of Roubini Global Economics says he was "just joking" about that dire prediction, which potentially contributed to the recent rout in Europe. But expect "volatility in economies and markets" is going to be with us for the foreseeable future, Roubini says, offering cold comfort (and an odd sense of humor).
Euro Package Leaves Governments Out of Ammunition
by Matthew Lynn
Big problem, big number. The leaders of the euro-area countries have thrown 750 billion euros ($963 billion) at shoring up confidence in the single currency. But it doesn’t matter how many zeros you put on the end of a bad idea. It’s still a bad idea. In reality, you can’t stabilize a sinking ship. The new stability package suffers from the same problem as all the other ones the European Union has come up with in the months since the Greek crisis started rattling the markets last year: It tries to fix the symptoms, not the causes. Greece has exposed deep structural problems within the euro.
There is no mechanism to stop governments breaking the rules. There is no popular support for massive fiscal transfers between countries. The rules for the euro area have turned out to be unreliable. And there is no way to start stimulating economic growth again in the heavily indebted nations. Those are the hard questions. Even 750 billion euros won’t get close to answering any of them. The markets have greeted the latest package with a wave of euphoria. No great surprise there. Everyone likes a bailout, and particularly the financial markets. There is so much sovereign debt on the books of European banks that the possibility of default, or just sharp losses on those portfolios, was prompting fears of a meltdown in the financial system. It could have been Credit Crunch Round Two. There was bound to be relief at avoiding that.
Relief for Markets
The stock prices on European bourses soared. The euro strengthened the most in 18 months against the yen on foreign- exchange markets. Finance ministers will have been relieved at the reaction. They were looking to reassure the markets, and to punish speculators, and on that measure they succeeded. Don’t expect it to last. In the next few days, tough questions will be asked about the euro. First, where are the incentives for governments to stick to rules? The crisis arose because the euro area didn’t enforce the Stability and Growth Pact, which limited budget deficits to 3 percent of gross domestic product in all but exceptional circumstances. If the pact had been rigorously enforced, Greece would never have been allowed into the euro. Once in, it would have been disciplined for allowing its deficits to balloon even when the economy was booming.
If it got bailed out for behaving badly, why should any other government behave itself? The bailout package talks about tougher disciplinary measures, but what are they? Are tanks going to be sent into Dublin if Ireland doesn’t stick to its austerity program? Will the Portuguese get kicked out of the euro if they don’t control their deficit? Of course not. The only credible deterrent was letting Greece default. By wimping out of that, the EU has no ammunition left. Second, there is no popular support for the massive fiscal transfers between countries that are now proposed. Take a look at the hammering that German Chancellor Angela Merkel’s coalition took in regional elections this weekend. Where is the 750 billion euros supposed to come from?
Elected politicians are going to pay a terrible price at the ballot box for offering to foot any of the bill. Don’t be surprised if they start sliding on their commitments once they look at their poll ratings. Third, the rules of the euro area turned out to be about as solid as a slice of brie left out in the midday sun. We were told there wouldn’t be any bailouts between member states. We were told the European Central Bank wouldn’t buy government bonds in the market. We were told the stability pact would be enforced. None of those promises turned out to be true.
If the rules of the euro can be rewritten on a Sunday night in Brussels once, they can be rewritten next time there is a crisis. Investors will remember that. And they won’t believe what they are told about how the euro operates from now on. Finally, it doesn’t address the issue of how you get the heavily indebted countries growing again. The problem in Greece, Portugal, Spain, Ireland, Italy, and potentially France as well, isn’t just that governments are going to have to push through huge and painful austerity programs. It is that they can’t devalue their currencies at the same time to provide some relief to their economies -- and to provide some hope of future growth.
You can’t run an economy with just sticks -- not in a democracy anyway. You need some carrots as well. The EU not only has to fix the debt problem, it has to provide the money to stimulate growth as well. But, for all the reasons explained above, that isn’t going to happen. The money isn’t available. "We will do whatever it takes" to defend the euro, European Commission President Jose Barroso said last week. The euro area threw everything it could at the crisis this weekend. The immediate battle may have been won. The markets will rally and the panic will abate. Yet investors will pick away at the real issues in the next few weeks until we are back where we started. And next time around, there won’t be anything left to throw at the problem.
Hope You Enjoyed the Housing Recovery ... Because It's History
by Henry Blodget
Since the recovery in house prices began last summer, homeowners and real-estate agents have embraced what many believe is a return to normalcy (forever rising prices).
In Wall Street-fueled markets like New York City, properties are once again getting multiple bids, and optimists are chattering about a quick return to old highs.If the trend continues, friends, neighbors, and real-estate agents will no doubt soon start repeating the adage that helped inflate the housing bubble in the first place: Real-estate is always a great investment. But the trend won't continue, says Richard Suttmeier, strategist at ValuEngine.com.
The temporary increase in prices has been driven by government efforts to prop up the housing market, Suttmeier says, and those measures have come to an end. A new wave of foreclosures is hitting the market. Fannie Mae and Freddie Mac have become black holes into which taxpayers must shovel endless billions just to keep the mortgage engine running.Most importantly, as measured by the Case-Shiller index, housing prices are still way too high.
In most major house-price indexes, prices have already begun to roll over and head back down. Suttmeier thinks this trend will continue. In fact, he thinks prices could fall another 25% nationwide.
For a good overview of the trends that concern Suttmeier, see fund manager Whitney Tilson's latest presentation on the housing market.
U.S. Probes Morgan Stanley
by Amir Efrati, Susan Pulliam, Serena Ng and Aaron Lucchetti
Federal prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter say, in a step that intensifies Washington's scrutiny of Wall Street in the wake of the financial crisis. Morgan Stanley arranged and marketed to investors pools of bond-related investments called "collateralized debt obligations," or CDOs, and its trading desk at times placed bets that their value would fall, traders say. Investigators are examining, among other things, whether Morgan Stanley made proper representations about its roles.
Among the deals that have been scrutinized are two named after U.S. Presidents James Buchanan and Andrew Jackson, a person familiar with the matter says. Morgan Stanley helped design the deals and bet against them, but didn't market them to clients. Traders called them the "Dead Presidents" deals. The probe is at a preliminary stage. Bringing criminal cases involving complex Wall Street deals is a huge challenge for prosecutors. The government must prove beyond a reasonable doubt that a firm or its employees knowingly misled investors, a high bar. The government launches many criminal investigations that end without any charges being filed.
Morgan Stanley wasn't among the biggest players in the CDO market. Although the firm made money on the Dead President deals, any profit was far overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, a person familiar with the matter said. The investigation grew out of an ongoing civil-fraud investigation launched by the Securities and Exchange Commission in 2009, examining the mortgage-bond business of more than a dozen Wall Street firms, the people say. The Manhattan U.S. Attorney's office now is investigating some of those firms' activities in a criminal probe. A Morgan Stanley spokesman said, "We have not been contacted by the Justice Department about the transactions being raised by The Wall Street Journal and we have no knowledge of a Justice Department investigation into these transactions."
The criminal and civil investigations are part of growing government pressure on Wall Street firms that profited by betting against their clients before the financial crisis. The developments indicate that a broader swath of Wall Street—not just Goldman Sachs Group Inc.—is being scrutinized for how it arranged and sold mortgage-related products before the financial crisis. The investigations could help shape the debate in Washington over tighter regulation of the financial market. The Wall Street Journal previously reported that federal prosecutors also are investigating whether Goldman or its employees committed securities fraud in connection with its mortgage trading. Goldman declined to comment on the criminal probe.
Last month, the SEC filed a civil suit against Goldman in a New York federal court, alleging the firm and one of its mortgage traders created a product secretly designed to fail for the benefit of a hedge-fund client, without disclosing the hedge fund's role in picking investments for the 2007 deal, called "Abacus." Goldman has vigorously denied the allegations of the civil case but recently began settlement talks with the government, according to people familiar with the matter. In both the Goldman and Morgan Stanley deals, investigators are examining whether there were proper representations made to investors.
Among the Morgan Stanley deals that have been scrutinized are the Jackson and Buchanan CDOs, created in mid-2006. Those deals essentially were portfolios of derivatives that aped the performance of dozens of residential and commercial mortgage-backed securities. Morgan Stanley helped to create the deals, which each issued about $200 million in bonds and were underwritten and marketed to investors by Citigroup Inc. and UBS AG, respectively.
A Citigroup spokesman said the bank wouldn't comment on this specific transaction. It earlier disclosed that it is cooperating with inquiries from the SEC and other regulatory agencies about its activities in the subprime mortgage market. A UBS spokeswoman declined to comment. In its quarterly financial update this month, UBS noted that it is "responding to a number of governmental inquiries and investigations" related to mortgage securities.
One feature of the Morgan Stanley deals was a structure that could increase the magnitude of the bullish investors' exposures to the underlying mortgage bonds. This feature, which was disclosed in some offering documents, made it more likely that such investors could lose money if the underlying bonds performed poorly. Morgan Stanley traders took the more profitable, bearish side of these transactions, according to traders. These positions weren't disclosed in some deals. It couldn't be determined how much money Morgan Stanley made with these wagers.
The SEC's industry-wide civil investigation into Wall Street activities in selling CDOs began in 2009. Beginning earlier this year, prosecutors from the Manhattan U.S. attorney's office began showing up to meetings arranged by SEC investigators who were questioning individuals about their firms' practices, people familiar with the matter say. There have been several rounds of SEC subpoenas issued in the probe, a person familiar with the matter says. Last summer, the SEC asked Wall Street firms about any of their clients that were betting against CDOs, the person says. In the fall, Morgan Stanley provided offering documents to the SEC about CDOs, including its Dead Presidents deals. Morgan Stanley, among other firms, received a subpoena in December 2009 asking about its sale and marketing of CDOs, people familiar with the matter say.
In the past six weeks, a fresh round of SEC subpoenas have asked a smaller number of Wall Street firms for a broad range of information on CDO deals, including prospectuses, offering documents and other data that would include disclosure statements. On an April 21, 2010, conference call with investors and analysts, Morgan Stanley Chief Financial Officer Ruth Porat responded to an analyst question, saying "we have not received a Wells notice in connection with our CDO business." Wells notices inform firms or individuals that the SEC's enforcement staff plans to recommend that the agency bring charges.
After the SEC filed its civil fraud case against Goldman last month, a Morgan Stanley spokeswoman said: "Morgan Stanley did not make any misrepresentations to investors concerning the selection of the collateral for CDOs underwritten by Morgan Stanley."
The White House Should Stop Pandering to the Street and Support Three Critical Banking Reform
by Robert Reich
The White House opposes three important financial reforms that have drawn bipartisan support in the Senate. It should reverse course.
1. Require the Fed to disclose the entities it lends to. There's no reason the public should be kept in the dark about who benefits when the Fed departs from its traditional interest-setting role and chooses to provide credit (or in Fed parlance, "open its discount window") to particular companies or entities. To the contrary, a well-functioning capital market and a well-functioning democracy depend on full disclosure about who the Fed picks for such special treatment and why.
Senator Bernard Sanders, Independent of Vermont, pushed an amendment requiring that the Fed be subject to a public audit that reveals which specific companies and entities the Fed is supporting with extra loans. The measure drew support on both sides of the aisle, including conservative Republicans like David Vitter of Louisiana. But Sanders's amendment met stiff opposition from the White House and the Fed. Both argued that it would undermine the Fed's independence. That's a red herring. Fed's independence is important when it comes to basic decisions about monetary policy and short-term interest rates, but not about which companies and entities get special treatment.
Bowing to the pressure, Sanders has agreed to alter his proposal. He says his new amendment would still force the Fed to disclose many of its steps to bail out banks. But what why shouldn't all of the Fed's special machinations be disclosed? And why limit disclosure only to the banks that the Fed supports and not other firms or entities? Sanders shouldn't retreat on this.
2. Require big banks to spin off their derivative businesses. Derivatives got us into the mess and Wall Street's biggest banks are still wielding them like giant poker games. That's because they're enormously lucrative for the banks. But they're also dangerous to the economy because bad bets can lead to meltdowns, especially if they're backed only by flimsy promises to pay up rather than real capital. The credit default swap business continues to be out of control. To this date, no one knows how big it is, where it is, and who has promised what.
Senator Blanche Lincoln, Democrat of Arkansas, has pushed an amendment that would force big banks to spin off most of their derivative businesses -- bringing derivatives into the open and insulating them from the kind of proprietary trading that can cause so much havoc. But the Administration thinks Lincoln is going too far and has instructed its allies in the Senate not to go along. Lincoln should stick to her guns.
3. Cap the size of the biggest banks. You don't have to be a rocket scientist to understand that the best way to reduce financial risks that could (and almost did in the fall of 2008) bring down the entire economy is to spread risk-taking over thousands of small banks rather than centralize it in four or five giant ones. The giants already account for a large percentage of the entire GDP. Because traders and investors know they're too big to fail, these banks have a huge competitive advantage over smaller banks. This advantage will make them even bigger in coming years, and make the economy even more vulnerable to them.
That's why Senators Sherrod Brown of Ohio and Ted Kaufman of Delaware have proposed breaking up the nation's biggest banks by imposing caps on the deposits they can hold and put limits on their liabilities. The proposal has drawn support from Republican Senators Tom Coburn (Okla.), John Ensign (Nev.) and Richard Shelby (Ala.).
But the White House has let Senate Democrats know it's against the proposal, and the Senate this past week voted it down, 33-61. Twenty-seven Democrats opposed this common-sense measure. Brown and Kaufman should do everything they can to make sure the public understands what they're trying to do, and reintroduce their amendment.
The White House dismisses all three of these three measures as "populist," as if that adjective is the equivalent of "irresponsible." But in fact, these amendments are necessary in order to restore trust in our financial system. They would reduce Wall Street's tendency to take huge risks, pocket the wins, and fob off the losses on the public.
Wall Street's lobbyists have been fighting these amendments tooth and nail. The Street is willing to accept the Dodd bill that emerged from the Banking Committee, but no more. Goldman Sachs CEO Lloyd Blankfein told Congress last week he is "generally supportive" of the Dodd bill -- which should be evidence enough of how weak it really is. The bi-partisan amendments just introduced would give it the backbone it needs. The White House should reverse course and support them. Senate Democrats (and Republicans) who want to be remembered for reining in rather than pandering to Wall Street should, too.
Lawmakers patch Wall Street problems
Dylan Ratigan and Simon Johnson.
SIGTARP Barofsky: Treasury Bailout Records Fail To Include Key Details
by Daniel Wagner
The Treasury Department is lax about keeping records of its negotiations with bailed-out banks, including undocumented conversations in which billions of taxpayer dollars are at stake, a new watchdog report says. Treasury fails to keep meeting minutes or notes from phone calls with banks that received money from its $700 billion financial bailout, says the report from Neil Barofsky, the Special Inspector General for the bailout fund.
Barofsky's audit concerns Treasury's negotiations to sell bank warrants – securities that allow the holder to buy stock in the future at a fixed price. Treasury received the warrants from hundreds of banks as a deal-sweetener as it injected billions of dollars to stabilize the reeling banking sector. The report blasts Treasury for failing to keep complete notes about the process by which it sells those warrants after banks have returned their bailout money.
"When a brief telephone call can mean the difference of tens of billions of dollars, it is a basic and essential element of transparency and accountability that the substance of that call be documented," Barofsky writes.
The warrants were designed during the financial crisis to give taxpayers an extra benefit if the bailouts were successful in calming the stock market and reviving the banks. When stock prices rise, the warrants become more valuable because holders can pocket the difference.
After banks pay back their bailout money, they negotiate with Treasury over how much they will pay to buy back their warrants. Banks prefer to buy the warrants because selling them to third parties would eventually dilute the value of existing shares. During these negotiations, officials failed to keep detailed minutes of meetings during which they set target prices, Barofsky writes. Even more troubling, he writes, is Treasury's failure to document its contact with the banks.
"Even assuming that Treasury is making decisions in every case based on reasonable and fair rationales, in the absence of documentation Treasury leaves itself vulnerable to criticism that its decisions are unwise, arbitrary or unfair," he writes. The report also says Treasury lacks clear rules about what information is shared with banks as they attempt to bid the lowest acceptable amount to buy back the warrants. Investigators found that different banks received widely varying amounts of information, the report says.
Barofsky says Treasury should begin collecting detailed notes on meetings and phone calls, and should develop guidelines about what banks will be told concerning Treasury's price estimates. As of March 19, Treasury had collected $5.63 billion by selling the warrants, the report says. Treasury will review its procedures surrounding warrant negotiations and will detail its response within 30 days, according to a statement from Herb Allison, Treasury's assistant secretary for financial stability.
96-0: Weakened One-Time Fed Audit Passes Senate
by Ryan Grim
UPDATE - 12:10 p.m. - The amendment to open the Fed to a one-time audit of its lending between December 1, 2007 and the present passed 96-0.
* * * * *
Judd Gregg (R-N.H.), the Federal Reserve's most outspoken defender, came out in support of an amendment by Sen. Bernie Sanders (I-Vt.) to force transparency on the Federal Reserve. Gregg's surprising support gives the amendment a major boost. The Sanders amendment began as a reflection of language passed by the House and cosponsored by Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.) that would authorize a broad audit of the Fed. In negotiations with Banking Committee Chairman Chris Dodd (D-Conn.) and officials from the Fed, Sanders scaled back his audit and restricted it to a one-time look at lending activity from December 1, 2007 until the present -- information that the Fed has so far fought to keep from disclosing. It goes further in some respects than the Paul-Grayson measure, in that it mandates the disclosure of recipients of Fed largesse.
Even a year ago, it would have been unthinkable to have Judd Gregg and Ron Paul agree on anything having to do with the Fed other than its street address. The momentum behind a Fed audit is an indication of surging populist sentiment and a financial industry on the defensive. The battle will continue in conference committee negotiations between the House and Senate and will go on after the bill is signed, as backers push for real transparency at the Fed. But prying open the lid just once would represent a remarkable victory of an ideologically diverse, bipartisan coalition against establishment power.
"Occasionally around here you get to make a historic contribution," said Dodd from the Senate well. A longtime opponent of the Paul-Grayson's audit, Dodd's support of the compromise initially convinced Fed opponents that the measure must have been gutted. A closer look, however, showed it to be a step forward. "This is a historic moment," said Dodd, asking to be added as a cosponsor. The pressure on the Fed, Dodd said, was already having an impact. He had just met with Federal Reserve Chairman Ben Bernanke to be briefed on the European bailout, Dodd said, and the amendment is already having an impact.
"I want to tell my colleague from Vermont, not only are we going to achieve what he wants here with this amendment, but we had a meeting with the chairman of the Federal Reserve to brief us on the events in Europe over the weekend and the chairman of the Federal Reserve is going to put up on its web site as soon as possible the contracts between the Fed and any other central banks that occurred over the past weekend. He's also committed that the Fed would report weekly on the activity on each of the swap accounts by the federal bank, not simply the aggregate. The legislation is going to do a lot, but you already have an influence on the conduct of the Fed in terms of the transparency issues," Dodd said.
What could cause such a turnaround among Dodd and Gregg? The threat that the original Sanders amendment -- Paul-Grayson's version -- might actually pass. By backing a substitute, even one that's less than the Fed would like, Dodd and Gregg are able to stave off the stronger proposal. Whether the original amendment could have passed was unclear; on Friday, Sanders himself said he wasn't sure the votes would have been there in the face of intense lobbying from the White House and Fed. Sen. David Vitter (R-La.) took up the Sanders standard and introduced the Paul-Grayson language separately. In backing the Sanders compromise, both Dodd and Gregg savagely attacked the broader amendment. Paul first introduced a bill to audit the Fed in 1978.
On the Senate floor, Gregg acknowledged the role the Fed played in "aggressively" negotiating the compromise. "Chairman bernanke, I also wish to congratulate he and his staff for stepping forward and progressively -- aggressively pursuing this, which will be positive for both sides," said Gregg. To get a sense of how far the debate has swung, consider that Gregg warmly reference populist leader William Jennings Bryan in announcing his support for the measure, recalling (accurately) that the Fed was originally founded as a result of populist pressure. "There was a huge debate in this country since the great depression of 1897 and 1907 about how you managed the currency of this country.
And the central figure in that debate was William Jennings Bryan, a man of immense proportions in our history. He was a populist in the extreme. And he believed genuinely that turn control of the currency to elected officials, the currency becomes at risk because there is a natural tendency by elected bodies to want to produce money arbitrarily to take care of spending which they deem to be in the public interest. And thanks to the leadership at that time of a number of thoughtful people, including people like Woodrow Wilson, the decision was made to create a separate entity called the Federal Reserve which would manage the currency of the United States and decide how much money was printed," Gregg said.
UPDATE II - 12:39 p.m.: The Vitter amendment failed 37-62. Five senators, four of them Democrats, voted against Vitter's broader amendment, even though they had cosponsored virtually the same amendment when it was led by Sanders, confirming in practice what had already been announced, that a deal had been agreed to. Sens. Pat Leahy (D-Vt.), Barbara Boxer (D-Calif.), Jeanne Shaheen (D-N.H.), Mark Begich (D-Alaska) and Bob Bennett (R-Utah) all cosponsored the Sanders amendment but voted no on it with Vitter as lead sponsor on the floor.
On The Passage Of The Partial "Audit The Fed" Amendment
by Alan Grayson
The Senate just voted, 96-0, to audit the Federal Reserve. Soon, we will know what the Federal Reserve did with the trillions of dollars that it handed out during the financial crisis. A few months ago, such a vote would have been unthinkable. One senior Treasury official claimed he would fight to stop an audit 'at all costs'. Senator Chris Dodd predicted that an audit would spell economic doom, while Senator Judd Gregg attacked accountability for the Fed as "pandering populism".
Today, both the Treasury Department and Senator Dodd support this amendment. As for Judd Gregg, he was just on the floor of the Senate discussing -- of all people -- 19th century populist Presidential candidate William Jennings Bryan. What happened?
People Power is what happened. We built a coalition of people on the right and the left, ordinary citizens and economists, ex-regulators and politicians, all with one question for which we demanded an answer: "What happened to our money?" No longer can Ben Bernanke get away with saying, "I don't know." Now, we're going to know who got what, and why. Releasing this information will show that the Federal Reserve's arguments for secrecy are -- and have always been-- a ruse, to cover up the handing out of hundreds of billions of dollars like party favors to the Wall Street favorites who brought the American economy to the brink of ruin.
But our work isn't quite done. The Senate audit provision isn't as strong as what we passed in the House. The Senate provision has only a one-time audit, whereas what we passed in the House would allow audits going forward. There will be a conference committee that will merge the provisions from the two bills.
The need for audits and oversight over Fed handouts going forward is great. The financial crisis isn't over, and neither are the Fed's secret bailouts. Earlier this week, the Federal Reserve announced it was going underwrite the Greek bailout by lending dollars to the central banks of Europe, England, and Japan. The loans may never be paid back, the Fed accepts the risk that the dollar will strengthen in the meantime, and the interest rate charged by the Fed is very likely at below-market rates. So such loans are in effect just a subsidy, to bail out foreigners.
The Fed has not been chastened. It is bolder and more of a rogue actor than ever. It's clear that without full audit authority going forward, the Fed will continue to give out "foreign aid" without Congressional or even Executive permission. And it will do so in secret. So we will be fighting on to get a full audit from the conference committee.
But let's not lose sight of what we have accomplished so far - real independent inquiry into the Fed, and its incestuous relationships with Wall Street banks. For the first time ever. Our calls, emails, lobbying, blogging, and support really mattered. We made it happen. Today, we beat the Fed.
Fannie, Freddie Review by Treasury Approved as Amendment to U.S. Bank Bill
by Lorraine Woellert
The U.S. Senate approved a proposal to order the Treasury Department to study how to withdraw government support of Fannie Mae and Freddie Mac, rejecting a Republican deadline for ending aid to the two companies. The Democratic measure to study the companies, passed on a 63-36 vote, becomes part of the Senate’s financial regulation bill. It would direct the Treasury to study and make recommendations for ending government conservatorship of the companies in a way that minimizes cost to taxpayers.
The Senate voted 56 to 43 to reject the Republican amendment to phase out the mortgage-finance companies in two years and eliminate their government support. "Don’t tear down what you have unless you know what you’re going to replace it with," Senate Banking Committee Chairman Chris Dodd said during the debate. He called the Republican plan "the height of irresponsibility."
Fannie Mae and Freddie Mac have drawn on nearly $145 billion in government aid since September 2008. Under the failed amendment filed by Republicans John McCain of Arizona, Richard Shelby of Alabama and Judd Gregg of New Hampshire, government aid would have been phased out within two years and the companies’ affordable-housing mandates repealed. "The system cries out for reform now" McCain said during debate. "We’re doing nothing about it except ask the secretary of the Treasury to conduct a study? Remarkable."
Democrats say they will look for ways to repair Fannie Mae and Freddie Mac later this year. In the meantime, the companies are needed to provide liquidity in the mortgage market, said Dodd. He called McCain’s proposed phase-out "drastic." "This program needs to be fixed, no question about it," Dodd said during debate. "You need an alternative housing finance system. But this amendment doesn’t offer any. It just says get rid of the one you’ve got."
Robert Gibbs, a spokesman for President Barack Obama, echoed Dodd’s comments. "We are eager to see reform but understand that reform has to take into account a very fragile housing market," Gibbs told reporters. Washington-based Fannie Mae and its rival, McLean, Virginia-based Freddie Mac, operated as private companies investing in the mortgage market with an implicit government guarantee against default. The so-called government-sponsored enterprises were seized by regulators when the firms became overwhelmed by losses linked to risky mortgages.
As private companies fled the housing finance market, Fannie Mae and Freddie Mac grew even more central. They financed or backed about 70 percent of single-family mortgages in 2009 and now own or guarantee more than $5 trillion in U.S. residential debt, according to the Treasury Department.
The Congressional Budget Office in January estimated that direct U.S. aid to the GSEs might total $389 billion by 2019. In addition, the Treasury and the Federal Reserve last year spent $1.4 trillion to buy distressed mortgage-backed securities held by the companies. The Democratic amendment, offered by Dodd, directs the Treasury to explore ways to liquidate, privatize, or otherwise reinvent the GSEs and make recommendations to Congress by January 2011.
U.S. still searching for market plunge cause
by Jonathan Spicer and Rachelle Younglai
The top U.S. securities regulator said no single event had been found to explain Thursday's mysterious market plunge but the events were unacceptable and additional safeguards were coming.U.S. Securities and Exchange Commission Chairman Mary Schapiro said it would take time to pinpoint the cause but reiterated an agreement with major exchanges to strengthen trading curbs in response to large market moves.
In prepared testimony for a congressional hearing later on Tuesday, Schapiro said SEC staff were now on site at all major markets to monitor trading conditions. "The markets failed many investors on May 6, and I am committed to finding effective solutions in the very near term," she said in written testimony to the House Subcommittee on Capital Markets. Schapiro said regulators were still sifting through more than 17 million trades in listed equities in the hour beginning at 2 p.m. EDT on May 6, and she cited the growth of trading in multiple markets over the past few years for the complexity of the probe.
But in some preliminary observations, Schapiro sounded skeptical that a large erroneous trade, the so called "fat finger" scenario, had triggered the brief stock rout. nShe gave greater weight to theories that a confluence of events were responsible, but had come to no conclusion. Schapiro also said there did not appear to be any unusual trading in Procter & Gamble Co's stock ahead of the decline. Speculation was that large trades in Procter & Gamble may have triggered the broader sell-off.
The drop in stocks followed the drop and recovery in the value of the E-mini Standard & Poor's 500 futures contracts, but Schapiro said the fact that stock prices follow futures prices does not demonstrate what may have been the trigger. Commodity Futures Trading Commission Chairman Gary Gensler also downplayed the role of the E-mini contracts in his prepared testimony. Gensler said his agency's inquiries showed the 10 largest traders in those contracts were on both sides of the market, providing liquidity, during the May 6 events, and clearing and settlement worked effectively and without incident.
Under heavy pressure from the SEC and the Obama administration, the exchanges have had to reconcile most of their differences and come up with ways to address their disparate trading systems.
Nasdaq OMX Group Inc said an internal analysis found no system malfunction or errant trade, adding in prepared testimony to lawmakers that it backs adjusting an existing market-wide circuit breaker that halts trading.
NYSE Euronext, in prepared remarks to the panel, said regulators should require all trading venues use a coordinated mechanism to pause trading. CME Group Inc, the world's biggest futures exchange operator, said there needed to be better coordination across futures, securities and options markets. Backbiting initially broke out among the exchanges as they blamed one another in the hours after the shock trading jolt, but the sniping has since died down as the main market venues propose reforms that they believe they can live with. Sources said new circuit breakers to halt precipitous drops in individual stocks is "a done deal."
Circuit breakers have emerged as a key solution despite the dearth of answers. While breakers exist for broader market drops, those were not breached on Thursday. Any new breakers would likely trip when individual stocks fell by a set amount in a set time frame. The source requested anonymity because the discussions between regulators and exchange operators are private. Nasdaq OMX suggested halting trading for 15 minutes when the Standard & Poor's 500 index drops by 5 percent; for an hour when it drops 10 percent; and for the rest of the trading day when there is a 20 percent drop. Currently, the breakers are tripped at the 10-percent and 20-percent thresholds.
Both the Dow Jones Industrial Average and S&P never reached the crucial trigger point on May 6. The Dow fell as much as 9.2 percent and the S&P was off as much as 8.6 percent during the latter half of Thursday's trading day. The SEC hosted a meeting Monday with the heads of major exchanges, and said afterward the parties agreed to a framework that would strengthen circuit breakers and safeguard markets from such chilling drops. But the exchanges still have some differences.
Nasdaq OMX said in its testimony that the E-Mini was a factor in the plunge. But CME Executive Chairman Terrence Duffy disagreed, and said the E-Mini contract was liquid during the plunge and that the futures markets functioned properly. Schapiro and Gensler were due to appear with exchange executives before the subcommittee beginning at 3 p.m. EDT. Also scheduled to appear are NYSE Euronext Chief Operating Officer Lawrence Leibowitz, CME's Duffy, Nasdaq OMX Transaction Services Executive Vice President Eric Noll, and Robert Cook, the director of the SEC's division of trading and markets.
NYSE Floor Trader Flips Out On High-Frequency Trading
CNBC contributor Steve Grasso got all "Rick Santelli" this afternoon, slamming the HFTers, and calling the floor guys the real defenders of the little guy. He was greeted with cheers.
Why The Market Crashed Last Thursday, # 826
by Henry Blodget
Immediately after the DOW plunged 999 points last Thursday, explanations started coming fast and furious. It was a "fat finger error!." Some idiot typed "billion" into a sell order when he meant "million"!
Then, when that explanation was debunked, the crash was blamed on all sorts of other computer glitches (stocks trading at a penny!). Then it was blamed on high-frequency traders. And so on. And now Congress has called hearings to investigate, so surely they'll get to the bottom of it.
Except that we already know the real reason the market crashed: Because, for a panicked 15-20 minutes, people stopped buying stocks.
Why did they stop buying stocks? Because, among other fundamental concerns, the market was in freefall. That fact would make a lot of sane folks hesitate before hitting the "BUY" button, especially with Europe imploding, the US recovery disappointing the bulls, and stocks already at least 25% overvalued.
But don't take our word for it. Read some words describing what happened in OTHER market crashes. Because the way the market behaved on Thursday is how the market usually behaves under such circumstances.
Buyers disappearing? Stocks trading for absurdly low prices? That's just how markets crash.
Here are John Kenneth Galbraith and Richard Russell, as quoted by fund manager John Hussman. JKG is writing about the crash of 1929, Russell about the the aftermath of the '73-74 crash. Note that there was no "electronic trading" in those days.
"Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it."
John Kenneth Galbraith, 1955, The Great Crash
"I started accumulating stocks in December of '74 and January of '75. One stock that I wanted to buy was General Cinema, which was selling at a low of 10. On a whim I told my broker to put in an order for 500 GCN at 5. My broker said, 'Look, Dick, the price is 10, you're putting in a crazy bid.' I said 'Try it.' Evidently, some frightened investor put in an order to 'sell GCN at the market' and my bid was the only bid. I got the stock at 5."
Richard Russell, 1999, Dow Theory Letters
# 827: "Banging" the U.S. Stock Market
by Janet Tavakoli
Chicago residents grew up to the sound of local early morning radio rundowns of pork belly futures and other exchange traded commodities. Every trick in the book from manipulation of soybeans to silver has played out in Chicago's trading pits. Every market professional I've talked to in Chicago since Thursday is of the same opinion. It makes no difference whether human beings or computers are front running and manipulating trades. The gyrations in the market last week have the look and feel of classic market manipulation.
If you want to manipulate a market, deregulate it as much as possible. Then make it as "dark," and fast as possible. Make it hard for outsiders to view your trades as they get done, and make it even harder for anyone to figure out why you are trading. Get as much monopoly power as possible over the market. Get funding at the cheapest possible rate. The best possible rate is the near zero cost funding available from the Federal Reserve.
Next, get your "men" stationed in the most influential positions at the exchanges. Make sure your cronies have shock and awe market dominance through, say, High Frequency Trading algorithms that now make up the majority of stock trades. Then, make sure you have advance information of major market-moving events. A bailout announcement by the European Union would do nicely. A few days before the announcement, "bang" the market. Pound down the value so you can monetize put options and other bearish instruments. Trigger customers' stop-loss orders, and pick up bargains at their expense. Then cash-in again when the market pops up on bailout news.
To paraphrase Paul Erdman's 1975 tongue-in-cheek observation: "The lack of discretion in financial and political circles these days is appalling."
Meanwhile, take the heat off of yourself by leaking "fat finger" rumors to CNBC, since they can be relied up on to repeat as gospel any self-serving news you throw at them. Did someone type billions? It should have been millions. If we want to rescue the market from the Jaws of future disasters, we have to recognize that "this was no boating (or typing) accident." The system itself is flawed. (See also: "How to Corner the Gold Market," TSF, March 30, 2010)
The NYSE was supposed to provide market liquidity. Trading safeguards are no good unless they are system-wide. The current and former heads of the NYSE, billed as the "best and the brightest," i.e., the most connected, should be asked a few questions about High Frequency Trading and "liquidity" providers. Our mega-bank trading desks that control most of the volume on the exchanges should be called in for an accounting and justification of their trading activities. Trading patterns during last week's debacle and over the last year should be examined.
Unfortunately, as others have observed before, the SEC is both largely incompetent and captured. They are learning to crawl in the space age. Moreover, the next stop for SEC officials seems to always be a highly paid influential job at a law firm, fund, or other entity that heavily relies on Wall Street for revenues. Financial reform requires radical overhaul of our "regulators."
As for Wall Street mega-bank reform, Congress seems disinclined to break up our Too-Big-To-Fail banks, define proprietary trading, or sever Goldman Sachs, Morgan Stanley, and proprietary trading at large banks from the Federal Reserve's, i.e., taxpayers' heavy subsidies. (See also: "Goldman Sachs: Spinning Gold," Huffington Post, April 7, 2010.)
If everyone wants to stick to the story of "woe is us, we had no idea things could go this wrong," then fine. No one is in control; no one is in charge; and no one can competently regulate our current system. This is a compelling argument for immediate radical financial reform.
Roubini: Happy Days Are Over, Economy to Slow in Second Half of Year
by Henry Blodget
Nouriel "Dr. Doom" Roubini sounds less cataclysmic than he did two years ago, when he was one of the only folks warning of impending disaster, but he still doesn't come bearing good news. A professor of at NYU and economist at Roubini Global Economics, Roubini says that the U.S. economic recovery will slow in the second half of the year, as consumers nurse their wounds and the peak spending from the stimulus wears off.
The culprit? Final sales, which grew at less than a 2% rate in the last couple of quarters. What drove strong GDP growth in the last few quarters was inventory adjustments (companies replenishing inventory they had sold down during the recession). For the economy to sustain this rate of growth, consumer spending now needs to take over, and Roubini doesn't think it will. Further, the impact of the government's stimulus on GDP growth will peak this quarter, and its contribution to growth will decline from here on in. With the public fed up with bailouts and concerned about debt and deficits, orchestrating additional stimulus would be difficult if not impossible. So help won't be on the the way.
Perhaps worst of all, the employment picture will stay bleak. Even if we add 300,000 a month forever, Roubini says, it will still take us years to recover all the jobs we've lost since the start of the recession.
And as if this weren't bad enough, Roubini thinks Europe is facing a double-dip recession.
U.S. Mortgage Holders Owing More Than Homes Are Worth Rise to 23% of Total
by Brian Louis
More than a fifth of U.S. mortgage holders owed more than their homes were worth in the first quarter as repossessions climbed to a record, according to Zillow.com. Twenty-three percent of owners of mortgaged homes were underwater during the period, up from 21 percent in the previous three months, the Seattle-based property data provider said today in a report. More than one in 1,000 homes were repossessed by lenders in March, the highest rate in Zillow data dating back to 2000.
Underwater homes are more likely to be lost to foreclosure because their owners have a harder time refinancing or selling when they fall behind on loan payments. U.S. home values dropped 3.8 percent in the first quarter from a year earlier, the 13th straight period of year-over-year declines, Zillow said. "Having a lot of underwater homeowners will add to the downward pressure on house prices," said Celia Chen, senior director at Moody’s Economy.com in West Chester, Pennsylvania. "We do expect that home prices will fall a bit more."
Bank repossessions in the U.S. rose 35 percent in the first quarter from a year earlier to a record 257,944, according to RealtyTrac Inc., an Irvine, California-based company. Sales of foreclosed properties by banks accounted for more than a fifth of all U.S. home sales in March, Zillow said. They made up 66 percent and 62 percent of transactions, respectively, in the metropolitan areas of Merced and Modesto in California. About 32 percent of homes sold in the U.S. in March went for less than their sellers paid for them, Zillow said. The closely held company uses data from public records going back to 1996. Its mortgage figures come from information filed with individual counties.
JPMorgan Chase Warns Investors About Underwater Homeowners Walking Away
by Shahien Nasiripour
The nation's second-biggest bank is warning investors that underwater homeowners may walk away from their mortgages. In a Monday filing with the Securities and Exchange Commission, JPMorgan Chase told investors and regulators that homeowners who owe more on their mortgages than their homes are worth may not continue to make their payments -- even when they're able to. "Declining home prices have had a significant impact on the collateral value underlying the firm's residential real estate loan portfolio," the bank stated. "In general, the delinquency rate for loans with high LTV [loan-to-value] ratios is greater than the delinquency rate for loans in which the borrower has equity in the collateral.
"While a large portion of the loans with estimated LTV ratios greater than 100% continue to pay and are current, the continued willingness and ability of these borrowers to pay is currently uncertain." Because of its size and reach, the bank, with more than $2 trillion in assets, is a bellwether for the industry, as well as for the broader economy. If the financial services giant can't reassure investors that underwater homeowners will continue to be willing to make their payments, it's a sign of how much the recent phenomenon of "strategic defaults" has grown.
About one in eight defaults in February were strategic, according to an April 29 research note by a team of Morgan Stanley analysts led by Vishwanath Tirupattur. Strategic defaults are those in which the homeowner could have continued to make payments but chose not to. The rate of strategic defaults has tripled since mid-2007, notes Tirupattur. Underwater homeowners, those whose homes are worth less than the mortgage, now comprise about a quarter of all homeowners with a mortgage, or about 11.3 million homeowners, according to CoreLogic, a real estate research firm. Another 2.3 million have less than five percent equity in their homes (for example, a homeowner who owes more than $285,000 on a $300,000 house). All told, about 29 percent of all homeowners with a mortgage are either underwater or very close to it.
These are the homeowners most likely to strategically default, research shows. In fact, the deeper underwater homeowners are, the more likely they'll walk away from their mortgage, according to findings by a team of academics at Northwestern University and the University of Chicago. "Such so-called strategic defaults, once rare, are now common enough to jeopardize the already-weak housing and mortgage markets," wrote economists Celia Chen and Cristian deRitis of Moody's Economy.com in an April 13 note. "If the trend continues, strategic defaults could both accelerate the pace of home foreclosures and also make it harder for new borrowers to obtain mortgages. Both factors would in turn worsen the decline in house prices."
For JPMorgan Chase, the problem is getting worse. As of March 31, 27 percent of the home mortgages in its consumer credit portfolio were worth more than than underlying property, meaning those homeowners are underwater, according to the bank's Monday filing with the SEC. At the end of the previous quarter, which ended Dec. 31 of last year, that rate stood at 26 percent, according to the bank's filing. Those numbers don't include mortgages the bank acquired through its taxpayer-assisted purchase of failed lender Washington Mutual, the biggest bank failure in U.S. history, or those insured by U.S. government agencies or mortgage giants Fannie Mae and Freddie Mac -- taxpayers ultimately will pick up whatever losses the bank experiences on those mortgages.
JPMorgan's Washington Mutual loans, though, are detailed in the bank's SEC filing -- and they're even worse than JPMorgan mortgages: The entire portfolio -- $98 billion of unpaid mortgage principal -- is underwater. And those mortgages are even deeper underwater at the end of this year's first quarter than they were at the end of last year's fourth quarter. The options ARMs loan-to-value ratio was at 113 percent, meaning they were 13 percent underwater; now they're at 119 percent, according to JPMorgan's Monday filing. Home equity loans were 15 percent underwater; now they're 20 percent. Prime mortgages were at 6 percent; they've climbed to 11 percent. Subprime jumped from 10 percent underwater to 13 percent.
A review of recent SEC filings from the three other banks holding at least $1 trillion in assets -- Bank of America, Wells Fargo and Citigroup -- did not yield any similar statements warning investors about homeowners walking away from their mortgages. But the threat posed by strategic defaults has gotten so large that a top executive at taxpayer-supported Freddie Mac posted a note on the firm's website pleading with homeowners to not intentionally walk away from their homes.
"Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn't make it good social policy," argued Freddie executive vice president Don Bisenius in a May 3 note. His main argument? It affects neighbors' property values. In a March 8 note, Bisenius contrasted strategic defaulters with "responsible" homeowners. "But unlike some who walk away from their mortgage obligations -- a practice known as strategic defaults -- most responsible homeowners pay their mortgage regardless of current property values," he wrote.
The firm identified the risk as early as March 2008. But during a conference call with investors and analysts, Dick Syron, Freddie's former chairman and CEO, in noting that the firm had seen a rise, used different terminology to phrase it. "[T]he term that['s] used for people walking away when they are caught up upside down, more frequently used in autos than it is in homes, is ruthlessness. Right? And we are seeing an increase in ruthlessness and I think, it is probably not just speculators or investors, but [I] think it is a different period and the changes... we have seen an enormous amount... [have] the potential for changing consumer behavior," Syron said according to a transcript of the call. It's that change that JPMorgan Chase is warning its investors about.
More Financial Crises Coming Thanks to Global "Wall of Liquidity," Roubini Says
by Heesun Wee
In the new book, "Crisis Economics: A Crash Course in the Future of Finance," co-author Nouriel Roubini makes the case for why "black swans may become white swans." In other words, "crises once thought to occur only once or twice a century may hammer the global economy far more often."
"In practice we've seen that things that should have happened once every 100 years are occurring much more frequently and they're much more virulent," Roubini tells Aaron and Henry in the accompanying segment. "The fiscal costs of these financial crises are becoming larger, larger and larger."
So where's the next bubble?
Roubini is concerned the "wall of liquidity" from central bankers around the globe is laying the foundation for the next crisis, citing evidence of potential bubbles in various asset classes. "When you can borrow everywhere in the world at zero rate, and you can take leverage, the risk of creating the next asset bubble -- dollar-funded carry trades, for example -- that significant risk is rising," he says.
Corporate Bond Sales Plunge as Europe Crisis Drives Investors Away
by Tim Catts and Pierre Paulden
Europe’s sovereign debt crisis is punishing corporate borrowers, with bond issuance tumbling as investors doubt a $1 trillion bailout plan will be enough to bolster confidence in government finances for the region. Borrowers worldwide have sold $15 billion of corporate debt this month, a 62 percent decline from the same period in April and 83 percent less than the average for the past year, according to data compiled by Bloomberg. The extra yield investors demand to own corporate debt instead of government bonds soared last week to the highest in more than four months.
While a finance package hammered out over the weekend by European leaders slowed the decline in the euro and spared Greece from defaulting, investors aren’t showing they’re convinced a 13-month credit-market rally is poised to resume. Corporate bonds have lost 0.47 percent so far in May, the worst start to a month since February, according to Bank of America Merrill Lynch index data. "This is a fix and not a resolution," said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, who helps manage $8 billion in fixed-income assets. "Investors have seen volatility and that makes it harder to get excited about longer-dated assets paying a fixed return."
'Not a Panacea'
Federal Reserve Chairman Ben S. Bernanke told U.S. senators yesterday the euro region’s aid package isn’t a cure-all, said Alabama Senator Richard Shelby, the senior Republican on the Banking Committee. "He said, ‘This is basically not a panacea,’" and that the measures are "temporary," Shelby told reporters in Washington after a closed-door briefing. "There’s got to be fundamental underlying changes in their economies, not just Greece, but a lot of other countries," Shelby cited Bernanke as saying.
Elsewhere in credit markets, Ceva Group Plc, the world’s largest transporter of auto parts for carmakers, scrapped a plan to extend about 750 million euros ($954 million) of loans, according to people familiar with the situation. The Hoofddorp, Netherlands-based company is owned by Leon Black’s Apollo Management LP. An increase in the London interbank offered rate, a borrowing benchmark, indicated banks are more reluctant to lend to each other. Three-month Libor rose to 0.43 percent, from 0.423 percent yesterday.
European Central Bank
European financial companies are meantime increasingly relying on funding from the euro-region’s central bank. Banks in the area borrowed 3.83 billion euros ($4.8 billion) from the European Central Bank’s marginal loan facility, the most since March 10, ECB data show, while the amount of overnight deposits held at the central bank increased to 314.8 billion euros two days ago, the highest since July.
Volvo AB sold $616 million of bonds backed by loans on trucks and construction equipment at a tighter relative yield than planned.
The largest top-rated portion of debt from Gothenburg, Sweden-based Volvo yields 55 basis points more than the benchmark interest rate. It was originally marketed at a spread of 65 basis points. Tokyo-based Honda Motor Co., through a finance arm, plans to sell $1 billion of bonds backed by auto loans as soon as today. The automaker last sold similar debt on Feb. 18, according to data compiled by Bloomberg.
The Federal Deposit Insurance Corp. advanced a proposal aimed at overhauling part of the $4 trillion asset-backed securities market. The FDIC board voted 3-2 yesterday to seek comment on a measure requiring sellers of securitized loans to keep 5 percent of the credit risk in exchange for safe-harbor protection that makes the bonds more attractive to investors. The proposal aims to bolster a market whose collapse helped trigger the 2008 financial crisis, FDIC Chairman Sheila Bair said yesterday.
"Now is the time to put some prudent controls in place to make sure we don’t get into some of the problems we saw in the past," Bair said at the board meeting. Spreads on corporate debt rose 1 basis point yesterday to 170 basis points, after soaring 28 basis points last week, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The relative yield peaked at 511 on March 30, 2009, and dropped to as low as 142 on April 21.
European Debt Risk
An indicator of European corporate credit risk fell for a third day after the EU sovereign rescue package. The Markit iTraxx Europe index tied to investment-grade companies fell 3 basis points to 96.5, according to JPMorgan Chase & Co. prices at 12:30 p.m. in London. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 6 basis points to 110 basis points, prices from Royal Bank of Scotland Group Plc show. Credit-default swaps on the Markit CDX North America Investment Grade Index rose 0.75 basis point to a mid-price of 100.25 basis points yesterday, according to Markit Group Ltd.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The extra yield investors demand to own emerging-market bonds was unchanged at 291 basis points yesterday, after falling 37 basis points May 10, according to JPMorgan Chase & Co.’s Emerging Market Bond index.
Argentine bonds gained for a third day as an early period for institutional investors to tender defaulted bonds as part of the country’s $20 billion swap was set to end today. The yield on Argentina’s 7 percent dollar bonds due in 2015 dropped 17 basis points to 12.55 percent as of 5 p.m. in New York, according to Bloomberg pricing. The bond’s price rose 0.59 cent to 79.51 cents on the dollar. Italian and Portuguese bonds also rose yesterday after the ECB snapped up government debt, halting a potential contagion from Greece’s deficit problems.
Under the bailout package, euro region governments will offer guarantees of 440 billion euros to a special fund. The facility will sell debt and use that cash to buy the bonds of euro-area countries in need. Another 60 billion euros will come from the European Union’s budget and 250 billion euros from the International Monetary Fund. "Typically it takes some time for the details of a plan like this to be understood in the market before we can have a full stabilization," said John Bender, head of U.S. fixed income for Legal & General Investment Management America, who oversees more than $15 billion.
"The Greece issue is a great reminder that while we’ve come a long way from the credit crisis of the fall of 2008, we still have many issues to work through and finalize and resolve in 2010 to continue the U.S. recovery," he said. The loss on corporate bonds this month follows returns of 1.16 percent in April and 0.62 percent in March, according to the index. The bonds lost 0.43 percent in the first 10 days of February.
Jones Apparel Group Inc., the New York-based clothing company and Banco Cruzeiro do Sul SA, the Brazilian bank, were among at least six companies that postponed bond offerings this month, according to the companies and people familiar with the transactions, who declined to be identified because the decisions were private. Some borrowers are taking advantage of reduced issuance and a rise in debt prices to sell bonds. Enterprise Products Operating LLC, a unit of the largest U.S. pipeline partnership by market value, sold $2 billion of debt in a three-part offering.
Morgan Stanley Notes
New York-based Morgan Stanley, the sixth-largest U.S. bank by assets, sold $1.75 billion of three-year floating-rate notes that pay 2.5 percentage points over Libor, Bloomberg data show. Chief Executive Office James Gorman denied allegations the U.S. bank misled investors about mortgage derivatives it sold them. "Spreads in our market are actually tighter today and that’s going to be the catalyst for a resurgence in supply and a market that trades much better," said Justin D’Ercole, head of Americas investment-grade syndicate at Barclays Capital in New York.
Sales of high-yield bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, have totaled $1.6 billion this month. The Morgan Stanley sale helped push investment-grade bonds sales in the U.S. this month to $5.4 billion.
New York Legislature Approves 1-Day Furloughs
by Nicholas Confessore
The Legislature approved an emergency budget bill on Monday that would authorize Gov. David A. Paterson to furlough about 100,000 state employees, roughly half the state’s work force, without pay for one day. Public employee unions contended that the furloughs, which officials said would be the first for state workers in New York, would be illegal, and they said they would seek a temporary restraining order in Federal District Court here to block Mr. Paterson’s plan.
While some lawmakers, including many who voted for the bill, also questioned the legality of the furloughs, they said they had little choice but to approve the legislation because failing to do so would have effectively shut down the state government. The furlough plan, which would require each affected worker to take one day off next week, was included in the emergency spending bill needed to keep money flowing to state agencies. "We’re not stopping government," said Sheldon Silver, the Assembly speaker. "I think that ultimately the courts will overturn it."
The Senate Democratic leader, John L. Sampson, suggested that lawmakers would welcome a court challenge by the unions. "The executive furlough plan is a potentially unlawful breach of contract, and we will be supportive of challenges to preserve the rights of hard-working families," Mr. Sampson said in a statement. Battered by the recession and short on revenue, officials in at least 11 states have sought to furlough workers to save money.
But in some cases, courts have sided with the unions that represent government workers, blocking the furloughs on the ground that forcing workers to take an unpaid leave violates collective bargaining agreements. "This action on the part of the governor is clearly illegal," said Kenneth Brynien, the president of the Public Employees Federation, one of several unions that represent state workers in New York. "We have a contract that says that we work all year and make a certain amount of money."
Mr. Paterson announced last week that he would pursue the furloughs after the unions refused other concessions to save the state money, like giving up a 4 percent raise or delaying employees’ paychecks by several days. The one-day furlough is expected to save the state about $30 million, and the governor has said he would seek additional furloughs every week until the Legislature reaches a deal with him on the state budget, which is now nearly six weeks late. The furloughs will exclude most public safety and health workers like State Police troopers, correction officers and nurses.
"I recognize that these furloughs represent a difficult sacrifice for many of the state’s public employees," Mr. Paterson said in a statement issued moments after the final vote. "That sacrifice is only necessary because their union leadership has rejected all other reasonable attempts at compromise." "In the days ahead," he added, "the special interests will use every tool at their disposal to try and prevent me from doing what is necessary to put our state’s fiscal house in order. My only objective is to help New York turn the corner on this fiscal crisis, and that goal guides every decision I make as governor."
Many legislators expressed their anguish during debate about having to choose between furloughs or a government shutdown. And Republicans attacked Democrats, who control both chambers, for failing to close a budget deal. The Senate unanimously approved a nonbinding resolution sponsored by Neil D. Breslin, a Democrat from the Albany area, that declared the furloughs illegal and asked Mr. Paterson to resubmit his emergency bill without the furlough language. The governor, who is also a Democrat, had said he would refuse to do so. "This is a unilateral decision by the governor to force us to vote against the extender bill," Senator Breslin said. "If we voted against that extender bill and it failed, everyone would be without health insurance. Motor vehicle departments would be closed down."
The measure passed in both chambers along party lines. The Senate vote was 32 to 29, with all Republicans voting against the bill, and the Assembly voted 82 to 56, with some Democrats joining the Republicans in opposition. "We were told as soon as they blew by the April 1 budget deadline that negotiations were continuing and that weekly emergency extenders were necessary to keep government functioning," Dean G. Skelos, the Republican Senate leader, said in a statement. "By voting against the budget extender, Senate Republicans are delivering a message that enough is enough."
As lawmakers prepared to vote, about 2,000 state employees rallied outside the Capitol, heckling and even cursing Mr. Paterson in a show of emotion that underscored his low standing with lawmakers and the public. "We know the governor is furloughed at the end of the year," said Danny Donahue, the president of the Civil Service Employees Association, referring to Mr. Paterson’s decision to abandon plans to run for election this fall. "If we could get rid of him now, we would." Gesturing to a large inflatable rat, which unions typically deploy outside nonunion work sites, that was tethered to the lawn, Mr. Donahue added: "Some say the rat is a good symbol for our governor. I say that’s an insult to rodents."
Union leaders said Mr. Paterson and his staff did not try to negotiate concessions until after the budget deadline and had refused to consider their suggestions for saving money, like replacing independent contractors with unionized workers. Protesters waved signs reading "Cut the waste, not the workers," "I Love N.Y., It’s Gov. Paterson I Can’t Stand" and "Where Is Your 20% Pay Cut, Governor?" (Mr. Paterson voluntarily gave back 10 percent of his salary last year.) Joe Fox, the vice president of the Public Employees Federation, issued a blunt warning to state lawmakers. "Do the right thing, and we’ll remember you in November," Mr. Fox said. "Do the wrong thing, and we’ll remember you in November."
Workers said it was unfair for Mr. Paterson to blame them for the state’s cash problems. "I live paycheck to paycheck," said Paula Sheahan, 59, who said she has worked in state data-entry jobs for 17 years. "I can’t lose 20 percent of every paycheck." Those feelings were echoed by Andrew L. King, 62, who works for the State Office of Temporary and Disability Assistance. "We work hard," Mr. King said. "Cuts have to be done, but there are better ways to do it."
BP's Relief Wells Bring Risk of an Even Bigger Oil Spill in Gulf of Mexico
by Joe Carroll
BP Plc faces the risk of an even bigger oil spill as it attempts to drill two so-called relief wells to plug a leak on the seabed of the Gulf of Mexico that’s gushing 5,000 barrels a day into the ocean.
The relief wells will pump cement into the leak to seal it. To do that, BP will need to first drill into the same deposit of oil and gas that caused a pressure surge known as a blowout at the original well, igniting an explosion that killed 11 workers and sank a $365 million drilling rig.
In a regulatory filing BP made to drill the relief wells it estimates another blowout could release as much as 240,000 barrels of oil a day into the ocean. That’s almost 50 percent more than the company’s worst-case estimate for the first well and equivalent to two-thirds of supply pumped daily from Prudhoe Bay, the largest U.S. oil field. When detailing the risks in the filing, BP may have factored in the volatile conditions found when drilling the original well that blew up on April 20, said Fred Aminzadeh, a research professor at the University of Southern California. "Usually in any type of deep-water drilling you want to take additional safety measures," said Aminzadeh, a former Unocal Corp. geophysicist and a past president of the Society of Exploration Geophysicists.
BP has begun drilling one of the relief wells to pump cement into the leaking Macondo well, about 40 miles from the Louisiana coast. BP, based in London, expects to finish the wells by July 15, according to a plan submitted to the Interior Department. BP Chief Executive Officer Tony Hayward discounted the chances of another blowout as the company works to bring the leaking well under control and foul weather pushed the expanding slick closer to shore. "The relief wells ultimately will be successful," Hayward told reporters in Houston. Drilling back-to-back relief wells is a "belt and braces" approach, "and will assure ultimate success," he said.
Golf ball-sized clumps of tar were found this past weekend on Dauphin Island off the Alabama coast and six-foot waves in the Gulf through May 13 may push crude ashore west of the main entrance to the Mississippi River. The U.S. Fish and Wildlife Service on May 8 closed public access to Louisiana’s Chandeleur and Freemason islands, the first areas where oil reached land. BP has spent $350 million responding to the leaks and is the target of more than 100 lawsuits. A steel structure will be placed over the leaking well in the next few days in an effort to capture oil and direct it to the surface. A previous bid with a larger containment device failed on May 8. BP also plans to shoot tire pieces, golf balls and other rubber items into the top of the well to plug it during the next two weeks, Hayward said.
In its original exploration plan filed with the Interior Department’s Minerals Management Service, BP estimated the worst-case scenario for a blowout would spew 162,000 barrels of crude a day. Hayward has more recently put the maximum potential leak rate at 60,000 barrels a day. Aminzadeh said the relief wells pose bigger risks because they will be tapping into a pocket of crude and natural gas that’s already flowing into the original well. "It’s potentially the case that you’d see a larger volume of oil because in effect you’re puncturing two holes rather than one hole" in the formation, he said.
Scherie Douglas, leader of the regulatory compliance team at BP’s Houston-based exploration and production company, declined to comment about the blowout estimate. She referred a call to the joint incident command center in Robert, Louisiana, staffed by BP, U.S. Coast Guard and Minerals Management Service personnel. John Curry, a BP spokesman, didn’t return a phone message left for him at the center. BP began drilling a relief well on May 2 with Transocean Ltd.’s Development Driller III rig. The second well will begin on May 14 with Transocean’s Discoverer Enterprise vessel. The sites of the relief wells are 5,160 feet beneath the sea floor, BP said in its filing.
Sanford C. Bernstein Ltd. analysts estimated April 30 that capping the leaks and cleaning up the spill may cost BP and its partners in the Macondo prospect $12.5 billion. Transocean, based in Geneva, owned the Deepwater Horizon that BP was using at Macondo last month. The vessel, which was built in 2001, sank to the bottom of the Gulf two days after the fatal explosion and fire. More than 100 crew members survived by jumping onto lifeboats.
Gulf Oil Spill Has Gone From Bad To Worse, Damages Into The Tens Of Billions Of Dollars
by Joe Weisenthal
Last week, Cumberland's David Kotok made headlines with his piece on Oil Slickonomics, which predicted that in the ugliest case scenario, the Gulf oil spill could destroy the economy of the gulf for a generation and push us into another recession.
Well, we're not there yet says Kotok, but we have gone from bad to worse.
Within days we will have reached the second level of damages in the Gulf of Mexico. Under our “worse” scenario the total will be in the many tens of billions before this is all over. There are now early reports of “tar balls” washing up on beaches. Damage is now witnessed in Alabama, Louisiana, and Mississippi. NOAA has expanded the no-fishing zone to about “4.5 percent of Gulf of Mexico federal waters.” The original closure boundaries, which took effect Sunday, May 2, encompassed “less than three percent.”
Readers please note that this event is still mostly confined to United States “federal waters,” which are under NOAA jurisdiction. International claims are a more complex financial liability for BP and its partners.
So far, BP has offered US-based fishermen a one-month-pay settlement package. This is being routinely rejected, according to the professional fishermen we have been able to reach. If this spillage continues, as we project under our second and “worse” scenario, and IF it can be limited to that scenario and doesn’t worsen to “ugliest,” the ultimate loss of income to fisherman will continue over many, many months or even years.
According to NOAA, “There are 3.2 million recreational fishermen in the Gulf of Mexico region who took 24 million fishing trips in 2008. Commercial fishermen in the Gulf harvested more than 1 billion pounds of finfish and shellfish in 2008.” BP’s offer of one month’s pay is a pittance when compared with the ultimate damages that will be suffered by the fishing industry.
Some readers have asked about the federal fund that is designed to pay for cleanups of oil spills. It is funded by an eight-cent-per-barrel tax and is wholly inadequate for this type of catastrophic event. In the wake of the BP explosion, three Senators have offered a bill to broaden the scope of the fund and raise the tax.
Here's what Kotok wrote May 2 in the original piece on the "worse" scenario:
The containment attempts fail and oil spews for months, until a new well can successfully be drilled to a depth of 13000 feet below the 5000-foot-deep ocean floor, and then concrete and mud are injected into the existing ruptured well until it is successfully closed and sealed. Work on this approach is already commencing. Timeframe for success is at least three months. Note the new well will have to come within about 20 feet of the existing point where the original well enters the reservoir at a distance of 3.5 miles from the surface drilling rig. Damages by this time may be measured in the hundreds of billions. Cleanup will take many, many years. Tourism, fishing, all related industries may be fundamentally changed for as much as a generation. Spread to Mexico and other Gulf geography is possible.
BP, Transocean and Halliburton blame each other for Deepwater Horizon spill
by Suzanne Goldenberg,
The three oil industry titans behind the catastrophic Gulf of Mexico spill all sought to blame one another under tough questioning from senators today, as troops fanned out along the Louisiana coastline to limit the damage caused by the unfolding environmental disaster. With at least 4m gallons of oil now fouling the Gulf, the executives of BP America, which owned the well, Transocean, which owned the sunken Deepwater Horizon rig, and Halliburton, which cemented the well, were involved in a desperate attempt to avoid taking direct blame for the 20 April incident.
As the Energy and Natural Resources committee hearing got underway, Senate staffers joked it could be subtitled Scenes from an Execution, with a grilling due from the senators. But some of the worst damage may well have been done by executives themselves, as the three companies all tried to shift the responsibility. In his opening statement, Jeff Bingaman, the New Mexico Democrat who chairs the committee, suggested a fatal combination of errors. "We will likely discover that there was a cascade of failures: technical, human and regulatory," he said. The industry executives - while all professing to be too caught up in the clean-up effort to draw conclusions about the causes of the catastrophe - were more singleminded.
BP America's' chief executive, Lamar McKay, blamed Transocean, the operator of the rig. "BP hired Transocean to drill that well. Transocean had the responsibility for ensuring the safety of that operation," he said. He pinned the spill on the failure of a blowout preventer, a 450-tonne set of valves on the ocean floor. "We have a blowout preventer that didn't work," McKay said. Transocean's executive, Steven Newman, was having none of that. In his testimony, he said BP, as well operator, was calling the shots on the rig. "Offshore oil and gas production projects begin and end with the operator, in this case BP," he said. It was BP that drew up the drilling plan, and BP engineers who were in charge when the drilling wound up and crew prepared to cap the well.
He rejected any suggestion of a failure of the blowout preventer, which is supposed to stop a gusher. "The most significant clue is that these events occurred after the well construction process had been completed," Newman told the committee. That pointed the finger at Halliburton, which was brought in to cement the lining of the well, effectively sealing off the reservoir. But Halliburton, unsurprisingly, was equally unwilling to fall. The company's health safety and environment officer, Tim Probert, started off by warning against a premature rush to judgment - then took his turn at assigning blame.
Like Newman, he told the hearing that Halliburton had carried out its work according to BP's specifications. "Halliburton, as a service provider to the well owner, is contractually bound to comply with the well owner's instructions on all matters relating to the performance of all work-related activities." Probert said. As the hearings played out on Capitol Hill, the Louisiana national guard deployed troops using Blackhawk helicopters and heavy machinery to drop huge sandbags and shovel rocks, gravel and sand into breaks along the shoreline. Near Grand Isle, they hurried to plug one gap that left environmentally sensitive marshland exposed to potential pollution from encroaching oil.
Much of the evidence was highly technical, involving the various protective devices that should - if functioning properly - prevent catastrophe. But BP and the other companies faced tough questions about contingency plans in the event of a spill, with senators asking why a containment dome and stocks of dispersants were not on standby. "What I see here is a company flailing around trying to deal with a worst case scenario," Senator Robert Menendez of New Jersey told BP.
The three companies were also forced to admit under questioning that they were conducting no research into how to deal with deep water spills. BP, in particular, was singled out over fatal accidents in Texas, as well as safety violations in Alaska. The company was accused of a "pattern of accidents". It was also pressed for assurances that it would honour its commitment to pay compensation to locals affected by the spill.
But the senators' ire stretched beyond the companies, with pointed questions about the US government's regulatory regime. In anticipation, the Obama administration announced today that it was splitting the functions of the mineral and management service, the regulatory body in charge of licencing oil and gas operations. Under the new structure, one body will approve offshore drilling and collect the billions of dollars of royalties, and another will monitor safety and environmental standards. The hearing was the first of a series in Congress into the oil spill. The most immediate political casualty of the spill in America could be the climate change and energy bill, due to be formally unveiled tomorrow, and earlier versions of which included extensions for offshore drilling.
BP and other industries have acknowledged that the aftermath of the spill could well change future offshore drilling operations in regions beyond America. In Brussels, oil and gas giants operating offshore in Europe were also urged to reinforce security measures in the aftermath of the explosion. "No regulatory regime along can give us 100% guarantees of safety," the EU energy commissioner, Gunter Oettinger, said. "I wish to make sure that ... all possible efforts are made by the industry to avoid a similar accident."