"A Yankee Circus on Mars" was the production that opened the 5,200-seat "The Hippodrome" theater in New York, the world's largest, in April 1905
Ilargi: As you may know, Stoneleigh returns to (writing for) the Automatic Earth after a too long absence. I’ll hand you over to her in just a moment, but I wanted to say to some things first. In the first place, congrats to Aaron Krowne on his long drawn out court victory, Pyrrhic as it may unfortunately be. All independent finance writers owe him quite a few words of gratitude for his courage and perseverance.
(Update: Aaron tells me: "Sadly the case has NOT been dismissed; I'm now left hoping the lower court will do so dutifully; and wondering how we will be left paying for the remaining perfunctory lawyer functions.[..] Then there's the "big" lawsuit, in Maryland, but also of a frivolous fraudsters-steamrolling-whistleblowers nature.")
As you may know, Stoneleigh returns to (writing for) the Automatic Earth after a too long absence. I’ll hand you over to her in just a moment, but I wanted to say to some things first. In the first place, congrats to Aaron Krowne on his long drawn out court victory, Pyrrhic as it may unfortunately be. All independent finance writers owe him quite a few words of gratitude for his courage and perseverance. (Update: Aaron tells me: "Sadly the case has NOT been dismissed; I'm now left hoping the lower court will do so dutifully; and wondering how we will be left paying for the remaining perfunctory lawyer functions.[..] Then there's the "big" lawsuit, in Maryland, but also of a frivolous fraudsters-steamrolling-whistleblowers nature.")
Some links Aaron sent:
The de facto NH lawsuit "victory" announcement
The 2008 "press release" from when the other (Maryland) lawsuit started
Secondly, that 290.000 April jobs gain number we saw announced on Friday is yet another in the interminable series of government funded silly putty math. 66.000 of those "jobs" came from the US census, while the birth/death model hologram added 188.000. Also interesting to note in this regard is that the mythical mystery model now puts January at -427.000, while the "Total nonfarm over-the-month change, not seasonally adjusted" for the same month is -2.84 million (On February 5, nonfarm payroll for January was reported as -20,000). The BLS won’t explain until early 2011.
And then without further ado here’s the return of the amazing Stoneleigh:
Stoneleigh: The Imperial Eurozone (With All That Implies)
In the light of events in Greece, I want to address the structure and prospects for the eurozone, and specifically how the structure pre-determines the prospects. Talk about long term austerity measures in southern Europe by no means covers a worst-case scenario.
All aggregate human structures at all degrees of scale are essentially predatory. They all convey wealth from a necessarily expanding periphery towards the centre, where wealth is concentrated. The periphery may be either forced or enticed to join the larger structure, but that does not affect the outcome. Such structures are all inherently self-limiting, as the fundamental dependence on the buy-in of new entrants grounds them in Ponzi dynamics.
The Eurozone project is no different. The European periphery was sold an impossible dream - that they could by fiat have the same living standards as northern Europe. Perhaps the architects of the project believed that equalization by fiat would work, but whether their intentions were honourable or not is immaterial to the outcome.
The Ponzi scheme was very effective, because the impossible dream was so appealing. The euro project gave people and companies and governments in the periphery access to far lower interest rates than they had ever seen before, and encouraged them to enter the gingerbread palace. The result was a manic period of credit expansion where people borrowed vastly more than they could ever hope to repay, just like the US subprime borrowers who indulged in the same dynamic. Attempting to borrow yourself into wealth absolutely never works, no matter where you live. The developing debt slavery further enriches the centre in the meantime, though.
As we have discussed at The Automatic Earth many times, credit expansions create outward appearances of great real wealth. They do this by creating multiple and mutually exclusive claims to the same pieces of underlying real wealth pie. Many people feel wealthy, but that is perception, not reality. This wealth is virtual. The structure is Enron-esque. At maximum expansion it appears robust, yet it is destined to implode rapidly.
When such expansions happen on a small scale, borrowers can end up in long term debt slavery but a centre can hold, albeit after taking a haircut and perhaps seeing a change of control to some larger external entity able to absorb the impact. When the same thing happens on a large scale, or indeed an all-consuming scale as it has this time, it will take down both borrowers and creditors alike, in a climate of mutual recrimination. The debt exposure to the periphery is simply too large to avoid taking down the centre as well, especially as there is no external structure large enough to absorb the impact. This time we have created the first truly global Ponzi scheme, with a myriad local manifestations.
To revisit an earlier essay on Adaptive cycles in natural and human systems, the effect of a cycle turning to the downside depends on where it is positioned in relation to both the smaller-scale cycles it is composed of and the larger-scale cycles within which it is embedded. The deepest collapses occur when cycles at many scales move to the downside in a coordinated fashion, so it is not possible to cushion the fall. The erstwhile European Imperium is destined to fail, and it will by no means be alone in this, as it is but one component of a global financial structure of the same nature and at the same position on the brink.
A credit expansion requires two sides - a predatory lending structure at the centre and and gullibility and greed in the periphery. They are mutually responsible for the outcome. In a collapse, the center attempts to blame the periphery and impose all the consequences upon it, while holding on to all the perceived wealth. This is toxic to the larger structure. The socioeconomic disparities created in the attempt to contain the consequences in the periphery will be politically impossible to sustain. Germany will not be able to continue business as usual while expecting the Greeks (and the Portuguese, Spanish, Irish, Italians, British, Eastern Europeans etc.) to live with drastic austerity measures for years.
The extent to which the attempt to do this will inflame destructive old hatreds is very much larger than people currently suppose in a place as apparently civilized as Europe. Collective memory is long. Remember Sarajevo - the veneer of civilization is very thin when push comes to shove.
Russia Today’s financial editor Mark Gay explains the matter at hand quite well in this video. He does, however, appear to see the eurozone's austerity limited to Southern Europe. It won’t be.
Senate Votes For Wall Street; Megabanks To Remain Behemoths
by Ryan Grim and Shahien Nasiripour
A move to break up major Wall Street banks failed Thursday night by a vote of 61 to 33. Three Republicans, Richard Shelby of Alabama, Tom Coburn of Oklahoma and John Ensign of Nevada, voted with 30 Democrats, including Senate Majority Leader Harry Reid of Nevada, in support of the provision. The author of the pending overall financial reform bill in the Senate, Banking Committee Chairman Christopher Dodd, voted against it.
The amendment, sponsored by Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.), would have required megabanks to be broken down in size and capped so that their individual failure would not bring down the entire system. Under Brown-Kaufman, no bank could hold more than 10 percent of the total amount of insured deposits, and a limit would have been placed on liabilities of a single bank to two percent of GDP. In practice, the amendment required the six biggest banks -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley -- to significantly scale down their size. It was touted as a way to end Too Big To Fail.
Though top Obama administration officials have not publicly opposed the amendment, its leading economists have opposed ending Too Big To Fail simply by breaking up the nation's financial behemoths. Austan Goolsbee and Larry Summers have both fought back against this idea, as has Treasury Secretary Timothy Geithner. "This is certainly a defeat for those who are concerned about the dangers of financial concentration in this country," Kaufman said in a statement after the vote. "Some causes are worth fighting for, and for me, the concern about the risks 'too big to fail' banks pose to the American economy and people is deep and profound given the economic tragedy millions of American have endured. I believe the debate itself -- though failing to gain a majority of votes -- has helped to change attitudes about the degree of financial concentration and power these megabanks now represent."
The banks owned by the four largest financial firms in the U.S. collectively account for about 45 percent of all assets in the U.S. banking system, according to a HuffPost analysis of Federal Deposit Insurance Corporation data. Those four megabanks collectively hold about $7.4 trillion in assets, according to the most recent regulatory filings with the Federal Reserve. That's equal to about 52 percent of the nation's estimated total output last year. The top 12 banks in the U.S. control half the country's deposits. By comparison, it took 25 banks to accomplish this feat in 2003 and 42 banks in 1998, according to a Jan. 4 research note by Jason M. Goldberg of Barclays Capital. There are 23 bank-holding companies in the U.S. with more than $100 billion in assets, according to Federal Reserve data.
Richard W. Fisher, president and chief executive of the Federal Reserve Bank of Dallas, is among a group of at least three current regional Fed presidents that have called for the nation's megabanks to be broken up, joining Kansas City Fed president Thomas M. Hoenig and St. Louis Fed president James Bullard. Fisher has suggested a ceiling on bank assets placed at $100 billion. "In the past two decades, the biggest banks have grown significantly bigger," Fisher said last month. "The average size of U.S. banks relative to gross domestic product has risen threefold. The share of industry assets for the 10 largest banks climbed from almost 25 percent in 1990 to almost 60 percent in 2009."
Of course, size is not the only danger -- Lehman Brothers, whose crash rocked the financial system, would have been under the size caps proposed by the amendment. To that end, the Brown-Kaufman amendment limited the amount of leverage an institution can take at about 16-to-1. Hoenig has suggested a 15-to-1 ratio. Leverage is the use of debt to increase assets without a corresponding increase in capital. The amendment began as a wild longshot, backed by the junior senator from Ohio, Brown, and a longtime aide to Joe Biden, Kaufman, appointed to keep his seat warm for two years until the 2010 election. That the amendment gained as much support as it did is an indication of the depth of the populist anger.
Sen. Mark Warner (D-Va.) and Dodd of Connecticut spoke against the amendment. Sen. Judd Gregg (R-N.H.) was indignant. "I don't understand this Brown-Kaufman amendment. Basically, what it says is if you're successful...you're going to break them up? I mean, where does this stop? Do we take McDonald's on?" "It really doesn't make any sense to me," he said. After the vote, Kaufman defended the provision. "I believe this idea was sound policy -- and I further believe that a mainstream consensus will continue to grow that these megabanks are too large, too complex and too internally conflicted to regulate successfully," he said, echoing a position voiced by regional Fed presidents, former top Fed officials, and former top bankers on Wall Street.
Economy Adds 290K Jobs, But Jobless Rate Inches Up
by Jeannine Aversa
More confident employers stepped up job creation in April, expanding payrolls by 290,000, the most in four years. The jobless rate rose to 9.9 percent as people streamed back into the market looking for work. The hiring of 66,000 temporary government workers to conduct the census helped overall payroll growth last month. However, private employers – the backbone of the economy – boosted jobs, too. They added a surprisingly strong 231,000 positions last month, also the most since March 2006, the Labor Department reported Friday.
"Clearly companies have a newfound confidence in the future of the economic recovery and on the part of their own business prospects," said Joel Naroff, president of Naroff Economic Advisors. "The broadbased job gains are an indication that businesses are feeling more comfortable about expanding their work forces," he said. The unemployment rate rose from 9.7 percent in March to 9.9 percent in April, mainly because 805,000 jobseekers – perhaps feeling better about their prospects – resumed their searches for work. Many economists have predicted the unemployment rate would rise as people come back into the labor force. The jobless rate hit 10.1 percent in October, a 26-year high. The rate could climb back up to the 10 percent range in the months ahead, Naroff said.
Friday's employment report sketched out a picture of a healing jobs market and an economy picking up momentum in the early spring. The improvements, however, were taking place before the stock market plunged this week on concerns that the European debt crisis could spread. There are fears the crisis could make companies more cautious about hiring in the future, economists warned. The surprisingly high number of jobs added in April offered the latest evidence that businesses are feeling more confident in the recovery. Consumers increased their spending in March by the largest amount in five months. Factory production grew in April at the fastest pace in nearly six years and demand grew briskly for a variety of services in that same month.
Job gains in April were widespread. Manufacturers, construction companies, retailers, professional and business services, education and health services, leisure and hospitality, and government all showed gains. Among the weak spots: transportation and warehousing, and information companies, which all cut jobs last month. Also encouraging: The employment picture in both February and March turned out to be stronger than previously thought. Payrolls grew by 230,000 in March, better than the 162,000 first reported. And, 39,000 jobs were actually added in February, an improvement from the previous estimate of 14,000 losses.
All told, 15.3 million people were out of work in April. Counting people who have given up looking for work and part-timers who would prefer to be working full time, the so-called underemployment rate rose to 17.1 in April. That's close to the record high of 17.4 percent in October and shows just how difficult it is for jobseekers to find work. Another grim statistic: The number of people out of work six months or longer reached 6.7 million in April, a new high. These people made up 45.9 percent of all unemployed people, also a record high.
Hiring isn't expected to be robust enough anytime soon to lower the unemployment rate much. Economists think it will remain above 9 percent by the November midterm elections. That could make Democratic and Republican incumbents in Congress vulnerable. Just 21 percent of Americans consider the economy in good condition, according to an Associated Press-GfK Poll conducted April 7-12. Nationwide, average hourly earnings edged up to $22.47 in April, from $22.46. Lackluster wage gains are a big reason consumers are still hesitant to spend lavishly, making for a more subdued economic recovery.
For employers to boost hiring significantly, the economy would need to grow at an annual rate of 6 percent to 8 percent a quarter, rather than the 3.2 percent pace logged in the first three months of this year, economists say. Such growth would mean shoppers were spending much more freely. That would give companies confidence that sales gains would last. That scenario isn't likely. High unemployment and sluggish wage gains are likely to prevent consumers from going on spending sprees any time soon. Small businesses, which usually help drive job creation during recoveries, are having trouble getting loans. That tight credit is crimping their ability to expand operations and hire.
Europe's debt crisis will probably dampen demand for U.S. exports. And the debt crisis may continue to weigh on markets. Thursday's stock market plunge – the Dow Jones industrial average dropped nearly 1,000 points before recovering two-thirds of its losses – introduced fresh uncertainties. Many economists think it will take until at least the middle of the decade to lower the unemployment rate to a more normal 5.5 percent to 6 percent.
End of unemployment checks will mean no income for many
by Tony Pugh
Xernna Nieves, her four children and her sister, Sara, have for the past eight months lived in a single, cramped hotel room just outside of Atlanta. Nieves, her sister and the two youngest children, both girls, sleep four to a bed. The boys, 15 and 12, sleep on the floor. In such close quarters, "We're getting on each others' nerves," Nieves said. After nearly two years without a job, about the only thing that Nieves, 41, a former accounting worker, can count on is her unemployment insurance check; a $330-a-week lifeline that pays the rent, fills her gas tank and feeds her family when their $300-a-month food-stamp benefit runs out in mid month.
Barring any further action from Congress, however, Nieves' "lifeline" will be cut at the end of June. That's when she's slated to join hundreds of thousands of jobless workers nationwide who've exhausted their maximum 99 weeks of unemployment benefits and face life with no meaningful income. "What am I going to do then? That's going to be the end of the line for me," Nieves said, adding that she has no personal belongings she can sell for cash. "I got rid of all my stuff, so I don't own anything. All I have is the clothes on me and my kids' backs."
Most states provide up to 26 weeks of jobless benefits for qualified workers. Then the worst recession since the Great Depression forced Congress to step in and pay for extended coverage. Twenty-seven states and the District of Columbia now provide a maximum of 99 weeks, while other states offer from 60 to 93 weeks. The beefed-up benefits are unprecedented in the history of the unemployment insurance program and have helped millions such as Nieves survive the recession and keep roofs over their heads. With a projected $1.5 trillion federal deficit looming this year, though, lawmakers from both parties are resisting costly and politically unpopular appeals to extend benefits.
That could change quickly in an election year. Last week, however, Senate Finance Committee chairman Max Baucus, D-Mont., who supported previous extensions, told Bloomberg News Service that 99 weeks is enough. That didn't sit well with Mignon Veasley-Fields, a 61-year-old former charter school administrator from Los Angeles. "Ninety-nine weeks is sufficient? I paid into unemployment for almost 40 years of my life. How dare he (Baucus) say that. This is what hurts," Veasley-Fields said, fighting back tears. "He has no clue what it's like to have to spend money on groceries and then pray that the utility company will give you an extension so that you'll have lights."
When she hits her 99-week limit at the end of the month, Veasley-Fields will join more than 100,000 "99ers" in California who've also maxed out their benefits. Last week, she and other jobless Americans faxed letters urging President Barack Obama and members of Congress to extend unemployment insurance beyond 99 weeks. The national "Mayday S.O.S. Fax Attack" was coordinated by Donalee King, an unemployed "99er" from San Diego who's become an Internet hero among the long-term unemployed. King's website — Jobless Unite — offers a chat room for the unemployed, an online radio program, tips on how to fax lawmakers and a "hall of shame" for politicians, pundits and journalists who don't support the benefits beyond 99 weeks.
"The bottom line is we're desperate, and we need it," King said. "The longer you're unemployed, the less chance you have of getting hired because your skills are deteriorating." After he hit his benefit limit in March, Keith Ragan, a construction worker in Gibsonton, Fla., received his final unemployment check for $275 on April Fool's Day. Ragan, 46, was building homes before he was laid off in November 2007, just before the economy began its slide into recession.
Recently, he was fortunate to get 15 hours of day labor. "Pushing a broom and picking up some wood" paid enough to pay his electricity bill, but with his home in foreclosure, each day is an adventure. Without unemployment insurance, Ragan depends on his family for support. He can't get food stamps because he's a homeowner — at least for now. "I could have a deputy pull up to my doorstep right now and tell me, 'Hey Bud, you've got three days to get out,'" he said about what would be his summary eviction. A few more months of unemployment benefits would help Ragan with his $780 monthly mortgage.
Economist Peter Morici of the University of Maryland School of Business said that extending benefits can make unemployment attractive for some, particularly those who want to continue their education or those in households with a high-income person who's working. "If you have some other assets and you want to do something else other than work, it can encourage you to stay unemployed for a while," Morici said.
As of March, some 6.5 million Americans, or 44 percent of the nation's unemployed, have been jobless for 27 weeks or more. Another million people have given up on looking for jobs. Harvard University economist Lawrence Katz said the nation is 11 million jobs short of where it should be population-wise. To catch up, 15 million new jobs are needed during the next four years. Although the economy created 162,000 new jobs in March, Nieves of Atlanta isn't buying the happy talk that the economy is turning the corner. She doesn't see it. "It's not true. Where are all these jobs?" she asked in frustration. "I still go online everyday and send out weekly e-mails to see if they have anything, but it's dry. It's really dry."
Her experience isn't unique. A new survey by the John J. Heldrich Center for Workforce Development at Rutgers University found that of 1,202 people who were unemployed in August, two of three, or 67 percent, were still unemployed in March. While 21 percent, about one in five, were employed, 12 percent had stopped looking for work. If her benefits are cut off, Nieves said she'd probably stay with relatives in New York, where the social services for single mothers are better. "I really try not to worry about that, because it gives me major migraines," she said.
Long-Term Unemployment: The Bad News In The Jobs Report
by Arthur Delaney
Even though the unemployment rate rose to 9.9 percent, the government's jobs report for the month of April is the most positive one since the start of the recession: The economy added 290,000 jobs as the labor force swelled by 805,000, causing the rate to rise. Here's the bad news: More and more people are out of work for longer and longer. The number of jobless folks out of work for more than six months rose by 169,000 to 6.7 million, constituting 45.9 percent of all the unemployed.
"We've never quite experienced this in America -- a recession that's gone on so long that even when job creation is strong, people have been out of work so long that it's difficult for them to climb out," said Andrew Stettner, deputy director of the National Employment Law Project. "It stretches beyond the kinds of supports that we are used to providing." Even though Congress has extended unemployment benefits to the point where in many states the jobless can get 99 weeks of benefits, it's still not enough -- hundreds of thousands of people are exhausting their benefits every month.
The picture is especially ugly for older folks who've lost their jobs. Though the unemployment rate for workers older than 55 is lower than for the rest of the labor force, older workers are more likely to suffer long-term unemployment. According to an analysis by the AARP Public Policy Institute, 56.8 percent of jobless Americans older than 55 are out of work for longer than six months as of April, up from 50.6 percent in March. The average duration of unemployment for older workers rose from 38.4 weeks in March to 42.9 weeks, compared with 33 weeks for the total unemployed population.
Dean Baker, an economist with the Center for Economic and Policy Research, said there are two reasons older workers are unemployed for longer periods of time. "First, they are far more likely to have enough of a work history to be able to qualify for benefits," Baker wrote in an email. "Remember, less than half of the unemployed are getting benefits. The over 55 group are far more likely to be in that half." The second reason, Baker said, is a mix of experienced workers passing over low-paying jobs for which they are overly qualified and employers refusing to hire experienced workers who won't stick around if better jobs become available when the economy improves.
Stettner said he worried that people will lose their focus on the unemployed now that the economy is adding jobs. He said Congress should be proactive in creating jobs and helping the long-term unemployed get back to work. He pointed to California Democrat Rep. George Miller's proposed Local Jobs for America Act in particular. A Rutgers University survey released Tuesday found that 80 percent of people unemployed last August remained jobless in March, and most of the people who found jobs were working for less money. "We don't have enough tools to keep people out of homelessness, out of hunger," Stettner said. "It's just really tragic what's happening."
Same Job, Less Pay: Employees Learn to Swallow Their Demotions
by Laura Bassett
Three years ago, employees were being rewarded for their years of loyalty to a particular company with raises, promotions and increasing amounts of paid leave. Today, those workers who are lucky enough to avoid being laid off are rewarded for their years of service with big pay cuts and spikes in the cost of their health care. "My company didn't eliminate my job, they just eliminated my salary," wrote marketing creative director Mike Cheaure in an email to HuffPost. "I was back at work as a freelancer the next day working at 1/4 the pay and no benefits."
Cheaure, 45, said that after losing his health benefits, he had to borrow $32,000 out of his 401K and drain his savings to pay for his autistic son's therapy. "For us, the American dream is gone," he said. "Now its just getting by. College? Retirement? House equity? Security? Gone."
Michael Giannini, 52, is in a similar boat. He says he has been working for Sacramento Regional Transit for almost 23 years and was promoted to Transportation Supervisor in 2003, a management position with a 4-day, 10-hour-a-day schedule that allowed him to help his wife with her real estate business part-time. But this year, he said, his paid leave was taken away, his health insurance plan became more expensive and he was told he will be required to take at least 15 unpaid furlough days a year, all of which amount to a $7,500 salary cut.
Adding insult to injury, when the housing market turned, his wife Roseann says she went from making about $35,000 a year as a real estate agent to bringing in only $16,000 in 2009. After nurturing their careers for over 20 years and and purchasing a home together in Rocklin, California, the Gianninis found themselves filing for bankruptcy in a last-ditch attempt to save their house. "Money was getting tighter and tighter, and I was paying everything on my own and it was getting almost suffocating. We decided to put our pride in our pocket and file bankruptcy." Giannini said. "I know that a lot of people have it much worse, so I shouldn't complain. But I never expected to file bankruptcy in my lifetime. We had good credit, I've been super responsible, I've never been late on a bill payment. It just makes me ashamed and embarrassed to have to go through that."
Giannini said he tried to get a loan modification on his house, but IndyMac Bank (now OneWest) has been less than helpful. He worries that he and his wife will be evicted any day now. "They wont do anything to keep us in our homes. They'll force us out and sell it to someone for cheaper, when they could have just reduced our payments and allowed us to stay," he said. "We're not the only ones being treated like a stepchild, and the government isn't doing anything to make these lenders work with us. I look at the backyard I worked on for two months and planted all these beautiful trees, and it just makes me sad. We put so much into this, and these bankers look at us like we're scumbags."
Roseann, a self-employed realtor, said she sees other families going through the same thing every day. "To see families broken apart, seeing them not know where they're going to go is just really disheartening," she said. "The banks treat people's homes as a commodity." Michael Gianninis say he isn't sure where they will go after they lose their house. "We'll probably be gypsies looking for a place to live," he said. "It makes my blood boil."
President and Congress React to New Jobs Numbers
by Kelly Chernenkoff
President Obama received news of the 290,000 jobs created in April with a grain of salt, if not a smallish one. Along with the uptick in jobs, came an increase in the overall unemployment rate from 9.7 percent to 9.9 percent of the population. The president credited his administration's response to the sour economy, "These numbers are particularly heartening when you consider where we were a year ago, with an economy in freefall," he told reporters at the White House. His Press Secretary, Robert Gibbs, was blunt, "Today's jobs report and last week's GDP report show the Recovery Act is working."
But House Republican Whip Eric Cantor of Virginia said it's too early to see a trend, "Even if the economy added 250,000 jobs every month, it would take nearly five years to get back to full employment." And what about that increase in the jobless rate? "Given the strength of these job numbers, this may seem contradictory, but this increase is largely a reflection of the fact that workers who had dropped out of the workforce entirely are now... seeking jobs again, encouraged by better prospects," Mr. Obama explained.
Economist and University of Maryland Professor Peter Morici, agrees. "Unemployment rose because many discouraged workers returned to the labor force and unemployment benefits are running out for some workers pushing families harder into the jobs market." But as both Democrats and Republicans have proclaimed, the private sector is key to both boosting and sustaining jobs. Morici says there are complicating factors, as well, "Businesses need customers and capital to invest in new facilities and create jobs. Slow growing private demand-- less than 2 percent-- is the big problem," he says.
The president himself acknowledges the baby-steps involved, "So this week's job numbers come as a relief to Americans who found a job, but it offers, obviously, little comfort to those who are still out of work. So to those who are out there still looking, I give you my word that I'm going to keep fighting every single day to create jobs and opportunities for people."
Jim Rogers: 'More turmoil ahead in global financial markets'
by Andy Mukherjee
What are you shorting?
I am shorting a stock market index in the US, I am shorting an emerging market index and I am shorting one of the large western international financial institutions. It is an emerging market index; it is not a specific country. It is an index of many emerging markets and that is mainly because the emerging markets have grown the most during the past few months of this big recovery. So that is where some of the excesses are developing. As for the large western bank, it is a bank which people think is extremely sound. If I am right, there are going to be more currency problems and more turmoil in the markets, it will have to come down.
Are you bearish on all Asian equity markets or are there any pockets of value that you like?
I am not buying any stock markets anywhere in the world. I have not bought any stock markets for the past 18 months. I have been playing the world economy through the commodity markets for those 18 months and the currency markets. And as I said, now I am starting to sell short but I have nothing to do with any Asian market. I have not bought any market anywhere because I have been leery of this big rally in the stock market. It has been caused by a lot of money being pumped into the world economy. If the world economy gets better, commodities will do well and they have. If the world economy does not get better, commodity is going to be a better place to be than stocks, all over the world, not just Asia.
You said you are shorting western financial institutions. Now if I am not wrong, you were doing the same thing in the second half of 2008 and we saw what happened back then. Are you concerned or worried that something like that is going to happen again? Do you think another financial crisis is going to be upon us when investors are just going to get scared about banks?
Well, I was short on major western financial institutions in 2008, I am delighted and surprised you remember but I was. Then there were great excesses in the western financial community. We do not have that kind of excess now. We have excesses but nothing like we did then. I am just shorting this major western financial institution because it's very highly priced and if the markets are going to consolidate, it will be one of the first to get hit because as there will be consolidation because of currency turmoil and financial market turmoil. I do not see a bubble in finance like we had two or three years ago. I only see two bubbles in the world, one is the Chinese urban to real estate and the other is the United States' government bond market.
The latest data indicates that EPFR funds have been pulling out of the emerging markets. But if China does slow down over the next six months and Europe comes out relatively unharmed, what do you think will happen to fund flows to emerging markets over the next six months?
Well, I am not quite sure that you would see emerging markets slowing down if Europe did. If Europe and America slow down, that will affect markets everywhere. Europe and America, for instance, are over 10 times as big as the Chinese market. People talk about China, people talk about India, but these are very small markets or economies compared to the major economies in the West and in Japan, so if the West slows down, of course, it is going to affect everybody.
I do not see the emerging markets slowing down and the West reviving because the West is so very big and it needs most emerging markets. Most emerging markets are commodity-based economies and if the world economy does well, the commodities are going to do okay, so I do not see the emerging markets slowing down if the West continues to revive. I started selling short in emerging market index but that's just because the emerging markets were the ones which went up the most in the past few months.
Did Shutdowns Make Plunge Worse?
by Scott Patterson
A number of high-frequency firms stopped trading Thursday in the midst of the market plunge, possibly adding to the market's selloff.
Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points, said Dave Cummings, founder and chairman of the firm.
Tradeworx Inc., a N.J. firm that operates a high-frequency fund, also stopped trading during the market turmoil, according to a person familiar with the firm. Mr. Cummings said Tradebot's system is designed to stop trading when the market becomes too volatile, too fast. "That's what we do for safety," he said. "If the market's weird, we don't want to compound the problem."
Tradebot says it often accounts for about 5% of U.S. stock-market trading volume.
The withdrawal of high-frequency firms from the market didn't necessarily cause the downturn, but could have added to it, some market experts say.
A number of high-frequency firms closing down in the midst of a sharp market drop can "widen markets out substantially," said Jamie Selway, managing director of New York broker White Cap Trading.
High-frequency firms have in recent years become central to how the market operates, growing to account for about two-thirds of daily market volume, according to industry estimates.
The firms use high-powered computers to send "buy" and "sell" orders to the market at rapid speeds. High-frequency traders have said part of the value they add to markets is the liquidity they bring—being at the ready to swiftly complete a trade. Some of these firms have said that, were it not for them, the 2008 market declines would have been worse.
Thursday's downdraft suggests how important that liquidity-providing role has become. Market participants say some high-frequency firms pulled back as the speed and extent of the decline went outside their models, which are generally based on the market behaving in a normal fashion. To avoid the risk of big losses, the firms essentially turned off their trading programs.
That appeared to leave investors with fewer traders to take the other side of their orders. "We did see several clients who stopped trading," said a broker who caters to high-frequency firms. Some high-frequency traders, including Mr. Cummings at Tradebot, say their moves didn't accelerate declines. He says other firms selling large positions caused the market turmoil and that Tradebot would have been risking losses if it had continued trading. He says exchanges need to install better systems that automatically stop or slow trading when the market becomes overly chaotic.
"The design of the market should halt [trading], and there should be an orderly reopening," he said. Exchanges such as the New York Stock Exchange, operated by NYSE Euronext, have circuit breakers that can halt trading over the broader market in steep declines, but they weren't triggered Thursday.
Technical factors that high-frequency firms and other quantitative funds use to trade likely also played a part as the selling accelerated. When the market hits certain levels as it falls, these firms' computers are programmed to sell automatically as protection against further losses. "This was a massive liquidation panic," said Bill Strazzullo, chief market strategist for Bell Curve Trading, a Freehold, N.J., technical-research firm.
As the losses accelerated, there were little to no "buy" orders left in many stocks and other assets, causing a plunge that saw some securities spiral to near zero. "You just blew through everything," he said.
The Near 1,000 Point Slide of the DJIA Compels Further Investigation of the Wall Street Casino Scam
by JS Kim
Yesterday’s slide in the US stock markets provides further proof that the world’s financial markets are nothing more than a rigged casino where the house (Wall Street) holds by far the better odds in every game (currency markets, stock markets, derivative markets, commodity markets) it offers the mark (the retail investor). How else could the US DJIA lose 700 points in a 10-minute span and a number of blue chip stocks lose 25%, or 30% in a matter of minutes as well? The answer? Wall Street’s use of predatory algorithmic High Frequency Trading (HFT) programs that are designed to trigger cascade-like buying and selling. To believe that, as an individual investor, you have a snowball’s chance in hell of beating these Wall Street trading programs that front run your trades or block your trade executions faster than you can blink your eye is tantamount to believing that skill is involved in winning when you shimmy up to the slot machine stool at the Bellagio in Vegas.
Predatory algorithmic HFT programs aren’t called “predatory” without good reason. Not that yesterday’s selloff wasn’t partially the result of fear injected into a Fed Reserve inflated stock market bubble, because it was. But Wall Street deployed HFT programs had a lot to do with the cascading nature of the decline in yesterday’s trading. Continuing our casino analogy, HFT programs act in the same capacity as the thugs employed by casinos that take you to the back room to rain down their “thuggery” upon you if you start winning too much. HFT programs are designed to block the retail investor from making successful trades against the trades of the house (Wall Street) and often prevent the retail investor from obtaining fair prices in the execution of trades in numerous financial markets.
Consider the following example. Stock A’s bid is $10.10 and the ask is $10.13. An investor places an order to buy at $10.13. Instead of his order being filled and executed as it would if human traders were executing the trade, HFT programs often immediately step up the ask price to $10.14 and screw both parties in the trade. Depending on the orders that HFT programs “see”, sometimes the HFT will see an order at $10.13, and step up the price to $10.18 so the bids follow higher and the bid price gets reset from $10.10 to $10.13 almost immediately. Or, if the bid price does not follow higher, then the bid-ask spread becomes grotesquely distorted from $0.03 to $0.08 for no other reason than HFT programs are blocking liquidity. Should the human trader withdraw his order to buy at $10.13, then often the bid-ask spread almost immediately returns to $0.03 and the ask will subsequently fall from $10.18 back to $10.13. Should he place the order again seconds later, however, the bid-ask spread will often immediately increase again with the bid price increasing to a point higher than $10.13 again.
The HFT programs execute the shame shenanigans in the options markets depending on what side of the market they are manipulating. I have many times been forced to take a lower profit on options trades because of HFT programs. For example, if I placed an order to sell on option contracts at $2.50 when the bid is at $2.50 and the ask is $2.60, instead of my order filling, the bid often immediately falls to $2.40 and the ask becomes $2.50, blocking my order from filling. HFT programs run amok in options markets as well. This is Skynet from Terminator rigging markets, destroying liquidity and unfairly rigging prices of all possible financial instruments that trade in every conceivable market, all with the blessings of the SEC.
Wall Street has been running these types of scams ever since advances in technology have enabled them to develop algorithmic programs to manipulate markets. In fact, on my company’s website, I have stated the following message for a long time now: “Today, when stock markets rise in the face of horrid economic fundamentals, fundamental and technical analysis are inadequate when making critical decisions about your financial future…If one expects to be profitable in today's investment world, one MUST realize that ALL MARKETS ARE RIGGED, including gold, silver, currency and stock markets…Without understanding the fraud and rigging games of the financial oligarchs, it is impossible to accurately predict long-term trends. It is a near certainty that future shocks to the economic system will catch the vast majority of all investors unprepared and we expect great shocks to hit the global economy at some point in 2010.”
The only difference is that when I started pushing this message a decade ago, people laughed off my proclamations and accused me of being enamored with conspiracy theories. Today, more and more people finally are awakening to the reality that such a message is not a conspiracy but a fact.
So this is how the Wall Street Casino Scam operates.
The ratings agencies like Moodys and Standard and Poors are the pretty cocktail waitresses that lure the mark (the retail investor) into the Casino (stock markets) with free alcoholic drinks (abominably horrible and deceitful credit ratings of financial instruments) to instill the mark with the false sense of confidence necessary to induce gambling in the rigged Casino. The regulators like the CFTC and the SEC are the pit bosses that oversee the floormen (Wall Street firm CEOs) that oversee the table games dealers (the firm’s traders) and ensure the games (stock markets, currency markets, commodity markets) you are allowed to play possess a feature (HFT trading programs) that ensures that the odds will always enormously be in favor of the house.
The pit boss oversees all floor dealers and conspire with the regulators (the cocktail waitresses) to give gamblers (the investor) a sense that all dealings are legitimate even though the odds of every table game (currency markets, commodity markets, stock markets) are insanely rigged in favor of the house (Wall Street firms). If we consider the table game of blackjack, in a real casino, should you receive a good hand, the dealer will pay out your bet. In the case of Wall Street, due to HFT programs, in many instances, should an investor receive a favorable hand (i.e., a favorable move in the stock market) in the game he or she is playing, HFT programs move in to prevent the bet from paying out in full or paying out at all (an investor’s sell order never executes at the price at which the market has informed the investor that he or she can cash out).
In essence, financial markets are rigged exactly like casinos except for one difference. The predatory algorithms executed by HFT programs ensure the winnings of the house to a much greater extent than any Casino table game is able to accomplish. It this sense, Wall Street is rigged to a greater extent than even casinos. In the instances when you win, they deploy HFT trading programs that prevent the bet from paying out full value so that the house (Wall Street firms) can step in and earn profits from a trade it spots AFTER an order has already been placed. Or in the mirror example, HFT programs allow the house (Wall Street firms) to step in front of trades they “see” and front run them for their own profits, again screwing the retail investor out of a lower price in a buy transaction.
In these cases, which must happen by the thousands every day, the HFT programs employed by Wall Street screw both the buyer and seller in the transaction as it always attempts to widen the losses or lessen the gains of both parties involved. In some instances, frustrated traders leave the game tables so liquidity dries up which leads to the establishment of even more grossly distorted and unfair bid and ask prices. Despite this practice being commonplace, the pit bosses of the giant rigged Wall Street casino, men like Goldman Sachs’s Lloyd Blankfein, want us to believe that their enormous profits are derived because of their upstanding integrity and above-average intelligence of his firm’s employees.
Next on the list of financial weapons of mass destruction? The $600 trillion (notional value) of the derivatives market. Oh, what joy we’ll experience when the banksters are eventually forced to unwind a fraction of this market and various parties will actually be forced to make good on these contracts when the financial instruments insured by them start heading south (or the true value of them are finally recognized, whichever comes first). It's no wonder that the price of gold has diverged from the behavior of the US dollar and US stock markets on multiple days for the last several weeks. The next significant dip in gold/silver price that occurs may be the last best buying opportunity in "real" money for years.
JS Kim is the Chief Investment Strategist and Managing Director of SmartKnowledgeU, LLC, a fiercely independent wealth consultancy company
The Day The Market Almost Died (Courtesy Of High Frequency Trading)
by Tyler Durden
A year ago, before anyone aside from a hundred or so people had ever heard the words High Frequency Trading, Flash orders, Predatory algorithms, Sigma X, Sonar, Market topology, Liquidity providers, Supplementary Liquidity Providers, and many variations on these, Zero Hedge embarked upon a path to warn and hopefully prevent a full-blown market meltdown.
On April 10, 2009, in a piece titled "The Incredibly Shrinking Market Liquidity, Or The Black Swan Of Black Swans" we cautioned "what happens in a world where the very core of the capital markets system is gradually deleveraging to a point where maintaining a liquid and orderly market becomes impossible: large swings on low volume, massive bid-offer spreads, huge trading costs, inability to clear and numerous failed trades. When the quant deleveraging finally catches up with the market, the consequences will likely be unprecedented, with dramatic dislocations leading the market both higher and lower on record volatility." Today, after over a year of seemingly ceaseless heckling and jeering by numerous self-proclaimed experts and industry lobbyists, we are vindicated.
We enjoy being heckled - we got a lot of it when we started discussing Goldman Sachs in early 2009. Look where that ended. Today, we have reached an apex in our quest to prevent the HFT "Black Monday" juggernaut, as absent the last minute intervention of still unknown powers, the market, for all intents and purposes, broke. Liquidity disappeared. What happened today was no fat finger, it was no panic selling by one major account: it was simply the impact of everyone in the HFT community going from port to starboard on the boat, at precisely the same time. And in doing so, these very actors, who in over a year have been complaining they are unfairly targeted because all they do is "provide liquidity", did anything but what they claim is their sworn duty.
In fact, as Dennis Dick shows (see below) they were aggressive takers of liquidity at the peak of the meltdown, exacerbating the Dow drop as it slid 1000 points intraday. It is time for the SEC to do its job and not only ban flash trading as it said it would almost a year ago, but get rid of all the predatory aspects of high frequency trading, which are pretty much all of them. In 20 minutes the market showed that it is as broken as it was at the nadir of the market crash. Through its inactivity to investigate the market structure, the SEC has made things a million times worse, as HFT-trading seminars for idiots are now rampant. HFT killed over 12 months of hard fought propaganda by the likes of CNBC which has valiantly tried to restore faith in our broken capital markets. They have now failed in that task too.
After today investors will have little if any faith left in the US stocks, assuming they had any to begin with. We need to purge the equity market structure of all liquidity-taking parasitic players. We must start today with High Frequency Trading.
Further to demonstrate this point, we bring our readers attention to our post from April 1, 2009 titled An Open Letter To Quant Funds. In it we said:In his April 14th report Matt Rothman wrote about a dramatic, parabolic outperformance trend for names with high short interest, low prices and fundamentally weak names. He opined that all conditions for this trend to end are in place. Contrary to his very valid arguments, the trend accelerated yesterday.
Stocks with poor fundamentals, market share losses and poor earning prospects that quantitative managers tend to short, gained more than higher quality long positions.
It is clear from Mr. Rothman's report that this trend is a main contributor to outsized losses for quant managers. Some of his respondents admitted to hitting P&L stops. Recent acceleration of this trend, aka the "crap rally" clearly further damaged quantitative managers performance and resulted in further hits of P&L stops. The resulting short covering and long index hedges have perpetuated the market rally for now.
At this point, it is hard to say what set off this process, but it is currently accelerating and feeding on itself.
From the timing of Mr. Rothman's poll of quant managers, it is clear that smaller managers had ample time to exit positions and get flat. Continuation of the "crap rally" could indicate larger, systematic problems at the largest, most sophisticated quant managers.
We are paging Jim Simmons, DE Shaw, Citadel, LSV, Jacobs Levy and "significant"' others. Are you all right? We need you alive, small and nimble, to help provide liquidity and maintain orderly markets, not outsized, bigger than the market and dead.
If you still can, please come out and speak up before it is too late.
Today, it was too late. Liquidity disappeared.
And now we have to deal with the consequences. One amateurish way is to cancel trades which is what the Nasdaq is doing. This is simply pathetic, and indicates that everyone is powerless to stand before the consolidated idiocy of the HFT "cash cows."
One person who does get it is Senator Kaufman, who should be a shining example to all the other idiots and traitors in both Congress and Senate. Senator Kaufman issued the following release:“As I said on the Senate floor today, the growing sovereign debt and banking crisis in Europe is very troubling. The U.S. needs to get its financial house in order through strong Wall Street reforms that will serve as a lasting bulwark against financial instability.
“I also have been warning for months that our regulators need to better understand high frequency trading, which appears to have played a role today when the US market dropped 481 points in 6 minutes and recovered 502 points just 10 minutes later. The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today. The battle of the algorithms – not understood by nor even remotely transparent to the Securitiesand Exchange Commission – simply must be carefully reviewed and placed within a meaningful regulatory framework soon.”
It is time for the SEC to step up to its own sole duty, which is not to guarantee itself jobs at Goldman Sachs (well, not so much anymore), or to watch 18 hours of transvestite porn each day, but to protect the US investor from such borderline criminal activity as High Frequency Trading gone amok. Forget the Fat Finger - today we were one Fed Finger away from a meltdown that would make Black Monday seem a joke in comparison. Next time we won't be so lucky.
We will have much more to say on this shortly, but we leave you with the words of Dennis Dick of Bright Trading:Predatory Market Making May Have Led to Crash
Dennis Dick, CFA
Bright Trading LLC
On January 4th of this year, Rambus (RMBS) fell 30% in a matter of five minutes. It immediately bounced back and was later attributed to a trader with a “fat finger”. When this incident occurred, I discussed on Zero Hedge, the possibility of this being more than just a trader with a “fat finger”. . I speculated that this could have been caused by a market structural problem. This could have been caused by a lack of liquidity due to predatory market making.
Today the same incident occurred, except this time, it happened in the overall market. Again, the media is blaming a trader with a fat finger. This may have been the catalyst but it was not the problem.
Predatory market making practices are driving liquidity providers out of the market. Algorithmic systems constantly step in front of displayed liquidity providers, and discourage them from placing passive limit orders. They are programmed to automatically step in front of displayed limit orders, to be at the front of the line for execution. This practice is especially prevalent in thinner stocks. If a human trader places an order at $20.05, the algorithmic system automatically bids $20.06. If the human raises their bid to $20.07, the computer goes to $20.08. This discourages true liquidity providers, and they place less passive limit orders.
Even in the 5 minutes that the market was crashing, these algorithmic systems were still abusing displayed orders. I placed a few buy orders during the crash, and my orders were still automatically stepped in front of by a penny. As my friend, Jason Fournier mentioned in his comments to the SEC, “not only are they discouraging liquidity, they are not allowing it.”
Broker-dealer internalization also abuses displayed liquidity as they continuously internalize retail order flow in front of displayed limit orders. In some cases they step in front of the order by as little as 1/100th of a penny, an abusive practice called sub-pennying.
Broker-dealers justify this practice by saying they were giving their customer price improvement. But they completely ignore the unquantifiable loss to the market participant who was displaying the order, and did not receive the fill.
These predatory market making practices are having a devastating effect on liquidity in our market. As true liquidity providers become more discouraged, and place less passive limit orders, the depth of the market gets thinner. Therefore, when we have a trader with a “fat finger” accidentally make a mistake, there are less liquidity providers to cushion the blow.
If these predatory market making practices are allowed to continue, eventually there will be no real liquidity in the depths of the market, and when there is a market impact event, we’re in big trouble.
Today was just a taste of things to come, if our regulators don’t take note.
And for the benefit of the SEC, this is what a broken market looks like.
The Run on the Shadow Liquidity System
by Paul Kedrosky
Back in 2008 when banks and the like were busily going to zero the phrase that captured much of what was going on best was that it was a "run" on the shadow banking system. By that it was meant that, for the first time, the non-bank banks -- sell-side firms, creators of CDOs, and the like -- who were busily creating credit outside the traditional banking system finally had a run on them. Rather than, however, depositors en masse withdrawing their deposits, which is the way a run worked in traditional banking (or did until we had deposit insurance), the run on the shadow banking system involved the withdrawal of overnight funding via the repo market. The result, however, was the same, with shadow banks quickly having insolvency crises, with unhappy results for Lehman, Bear, and others that we all saw.
Something similar happened yesterday, albeit in the shadow liquidity system. As most will know, liquidity is, like so many things in financial life, something you can choke on as long as you don't want any. So long as there is nothing awry in U.S. markets the depth of liquidity -- the amount of stock, currency, futures, etc. you can trade without materially moving the price -- is impressive, almost certainly the best in the world. That isn't magic, of course. Liquidity is a function of various things working fairly smoothly together, including other investors, market-makers, and, yes, technical algorithms scraping fractions of pennies as things change hands. Together, all these actors create that liquidity that everyone wants, and, for the most part, that everyone takes for granted.
Largely unnoticed, however, at least among non-professional investors, the provision of liquidity has changed immensely in recent years. It is more fickle, less predictable, and more prone to disappearing suddenly, like snow sublimating straight to vapor during a spring heat wave. Why? Because traditional providers of liquidity, market-makers and other participants, are not standing so ready to make the other side of the market. There are fewer traders prepared to make a market for the sake of market health. This is partly because they can, but mostly
because of what has happened with high-frequency trading, algorithms, and the like, which increasingly jump into the trading queue in front of and around orders, creating some liquidity, but also peeling pennies for themselves, frustrating market participants and heretofore liquidity providers, but in the course of normal business generally accepted as a price that gets paid to the market's battle bots.
But all of this changes market microstructure in insidiously destabilizing ways. For the first time we have large providers of this shadow liquidity, algorithms and high-frequency sorts, that individually account for large percentages of daily trading activity, and, at the same time, that can be turned off with a switch, or at an algorithmic whim. As a result, in market crises, when liquidity was always hardest to find, it now doesn't just become hard to find, it disappears altogether, like water rushing out sight via a trapdoor to hell. Old-style market-makers are standing aside as panicky orders pour in, and they look straight at shadow liquidity providers and say, "No thanks. You battle bots take it". And, they don't.
All Signals Are Go for More Euro Selling
by Michael Casey
Except for a few short-term opportunists who have taken quick profits amid the market chaos, it is fair to say every man and his dog is short the euro. Europe's common currency is, after all, facing the biggest crisis of its 11-year-long life, one that is now stirring fears of a fresh liquidity crisis in the world's banks. Given the paucity of good policy options for this crisis, where is the euro's fair value over the medium to longer term?
Not surprisingly, currency analysts are calling for a bottom that is far beneath the euro's current value of around $1.27. Where they differ is at what level the euro eventually stabilizes and on the speed with which it will get there. Some have drastic forecasts: Stephen Jen, managing director of macroeconomics and currencies at hedge fund BlueGold Capital Management, sees the euro dropping to parity against the dollar in just a few months. The sovereign debt crisis will lead foreign central banks to shun the euro as a reserve currency, he said.
BNP Paribas analysts have the same target but a longer time frame. According to a recent research note, they see the euro crossing the $1.00 threshold in 2011, partly because the crisis has meant that "European bond markets are no longer a homogenous entity," which portends a decline in capital flows into the euro. While those calls may seem extreme, it is worth noting that the euro is still significantly overvalued by various measures. According to purchasing power parity, which takes account of different currencies' spending power, the euro's fair value is just above $1.16, said Win Thin, a currency strategist at Brown Brothers Harriman.
Conveniently, that is also the level at which the euro was launched on Jan. 1, 1999. In fact, the euro's long-run average value is near the same number, at $1.20, a figure that takes into account a range of values between its November 2000 low of $0.84 and its July 2008 high near $1.60. David Gilmore, a partner at Foreign Exchange Analytics, points out that markets don't typically revert back to the mean and then stay there. They tend to overshoot. So, he thinks the euro could perhaps get to $1.10 before it stabilizes.
Why the unanimous pessimism? In part, it is because the euro zone's unwieldy political structure is preventing its policy makers from acting aggressively enough to prevent a sovereign debt crisis that began in Greece from bringing down other euro-zone countries and the banks that lent to them. That goes for German Chancellor Angela Merkel as much as it goes for European Central Bank President Jean-Claude Trichet. Yet it is also because the aggressive solutions available—especially that of having the ECB purchase euro-zone governments' bonds—are themselves inherently euro-negative.
It's Catch-22: The only way to contain a euro weakening crisis is to do something that weakens it further. On Thursday, Mr. Trichet said the ECB didn't even discuss the idea of outright bond purchases during an earlier meeting and instead declared the ECB to be "inflexibly attached to price stability." In so doing, he demonstrated the ECB's deep fear of having to monetize euro-zone sovereigns' debts and of the inflationary effect this could have.
Even so, the liquidity crisis will become so severe that the ECB will eventually have to "hold its nose and undertake euro-style quantitative easing" in this way, Citigroup chief economist Willem Buiter said at the Council on Foreign Relations in New York Friday. And once the ECB does pump fresh euros into debt markets, currency traders will have no choice: They will sell the euro.
David Letterman and Brian Williams on Wall Street's Free Fall
"Greece, this is the other reason the world is coming to an end. What happened in Greece? They have no money, they’re bankrupt. I used to eat at a Greek diner here in the city. Will that be open? Will that still be open?"
"We understand for now they are no longer lighting the ceremonial cheese."
Greek tragedy could be a sign of dramas to come
by Gillian Tett
Investors fear "uncertainty cubed"
Three weeks ago the world was diverted from weightier matters as the lives of many travellers were tipped into turmoil by the Icelandic volcano. Now, financial explosions in Greece are casting a heavier cloud over the financial system. In recent days the markets have gyrated wildly as rumours have suggested some banks were cutting credit lines or (most recently) that the European Central Bank was preparing emergency aid. And while these stories were hotly denied, the one thing that was clear yesterday, amid all the confusion, was that fear and confusion stalk the financial system again; so much so that the chatter among some financiers is that we are witnessing a return to the type of panic last seen during the collapse of Lehman Brothers.
Why? Some of last week's wild market swings can be blamed on computer malfunctions. However, the more intractable problem is that investors are confronting a profound set of uncertainties - or, perhaps more accurately, a situation akin to "uncertainty squared" - if not cubed. On the one hand, the outlook for the global economy is riddled with doubt, since while some modest recovery has recently been under way, it is unclear whether this can be sustained if - or when - central banks remove their liquidity support.
At the same time, there is also profound political uncertainty in much of the western world. The UK is reeling from an inconclusive election result. The US is struggling with political gridlock. Meanwhile, most dramatically, Athens was in flames on Wednesday, as popular anger erupted in response to an austerity package, raising questions about the credibility and sustainability of the government there. That creates doubt about the future of financial reform. More important, it also makes it extremely hard to work out what will happen to government debt; or, more accurately, whether governments will have the ability to implement fiscal reform.
In recent days, for example, the Greeks have repeatedly pledged to introduce measures to slash their spiralling deficit. The rest of Europe has in effect promised to support this, by backing a €110bn ($140bn, £95bn) aid deal. However, one reason why the price of Greek assets has continued to plunge is that many investors doubt whether those plans will be implemented. And such cynicism and fear are emphatically not just confined to Greece. After all, the fiscal position of many other western countries, ranging from the UK to Portugal (and even the US) also looks pretty dire.
And while investors used to ignore those bad numbers, because they trusted that governments would have the ability to act, the political and economic fog is creating doubts. The nightmare scenario that is haunting investors, in other words, is that the saga of Greece is only a foretaste of dramas that might soon unfold across the western world. Hence that market panic. Can this turmoil be addressed? Hopefully, the European Central Bank is at last trying to do just that. And the "good" news - as it were - is that the past two years have given central bankers plenty of practice in fighting market shocks.
But the problem hanging over the ECB is that there is simply no easy way for bureaucrats to fix the problem of "uncertainty squared", particularly given that the political system is not under their control. Anybody who thought the financial crisis had ended in 2009, in other words, had better think again. This summer is likely to see more market explosions and clouds, but without unpredictable volcanic ash.
German Lower House OKs Greek Bailout
by Andrea Thomas
Germany's Lower House of Parliament on Friday approved the country's contribution of up to €22.4 billion ($28.3 billion) in emergency loans to Greece. The bill was approved by 390 of the 601 votes cast, while 139 voted against it and 72 abstained. The bill goes to the Upper House of Parliament later Friday. Approval is expected as Chancellor Angela Merkel's center-right coalition holds a majority in the Bundesrat, which represents Germany's 16 states.
German President Horst Köhler must then sign the bill before it becomes effective. Upper House approval isn't a requirement for the bill to pass into law, but it could delay the bill by sending it to a reconciliation committee to bridge differences between the houses. The government is seeking parliamentary approval for the aid to debt-ridden Greece. Germany's contribution is part of the €110 billion, three-year bailout plan set up by euro-zone countries and the International Monetary Fund, the biggest rescue fund in the short history of the euro zone. "We have to make a difficult decision today," Finance Minister Wofgang Schäuble told the Lower House. "A decision in a time that is cause for great concern to many people in Germany, in Europe, in Greece and beyond."
The euro, the euro-zone and the European internal market "are without a comparable alternative in the 21st century," Mr. Schäuble said. "That's why we must defend our common European currency as a whole...This is the decision that we have to make today, at a time of great uncertainty for people, also markets and not just in Europe." Germany's loans will be provided by state-owned KfW Banking Group with the government standing guarantee.
The bailout has been controversial, partly as Germany will be the biggest contributor to the aid package. Germany has tackled painful structural reforms of its own to deal with high deficits without outside help. The unpopular aid also comes ahead of crucial state elections Sunday. Recent opinion polls suggest Ms. Merkel's ruling center-right coalition parties may lose. Lawmakers from opposition parties have demanded that creditor banks must be forced to contribute to the bailout package. But the government has favored voluntary contributions, which banks and insurers agreed to Tuesday, saying they would keep open credit lines to Greek bonds and Greek banks over the next three years.
Greece said it wants aid from the joint European Union-IMF loan mechanism to be made available within days of its formal request. Euro-zone countries will provide up to €80 billion while the IMF will contribute up to €30 billion. Germany's contribution will be up to €8.4 billion this year, and up to a combined €14 billion in the second and third years. Separately, a group of retired professors has said they will file a lawsuit against the bill later Friday at the constitutional court in Karlsruhe. The group says Greece won't be able to repay the aid and that the bailout infringes the European Monetary Union's constitution.
Euro Zone Pledges Bailout Fund
by Charles Forelle And Stephen Fidler
Leaders of the 16 euro-zone nations agreed to assemble a fresh pot of money that could be used to rescue its troubled members, as a crisis spurred by Greece's fiscal woes spiraled well beyond its epicenter. Meeting here past midnight Friday, EU leaders sealed their €110 billion ($145 billion) bailout of Greece, allowing money to be released in the next few days, and quickly turned their attention to the crisis's contagion into countries such as Portugal and into the European banking system.
The leaders agreed to create a "stabilization mechanism" over the weekend that would be in place before markets reopen Monday morning. There were few details on the mechanism, though French President Nicolas Sarkozy said the bloc's crisis response would "include all the institutions of Europe." He said the euro was facing "its most serious crisis since its creation." One possibility for part of the stabilization mechanism is direct borrowing by the European Commission, the EU's executive arm, which would be guaranteed by European nations. A similar structure was used in earlier bailouts of non-euro-zone countries such as Hungary. A person close to the discussions described it as "not huge."
The euro-zone leaders also agreed on a host of other, longer-term measures, including a pledge to accelerate budget cuts across the bloc and to craft more effective sanctions for those who violate its debt and deficit limits—as Greece and others have done for years. Europe was eager to demonstrate its capacity to move swiftly. Friday's meeting capped a tumultuous week in which financial markets panned Europe's muted response to the Greece situation—dumping both Greek bonds and the euro. The leaders' expected ratification of the bailout it plans along with the International Monetary Fund was all but a formality. Finance ministers approved it Sunday, and the package on Friday cleared its highest hurdle: approval by the German parliament.
But the rescue has taken months to assemble and U.S. officials say that slow decision-making by European governments has already allowed the crisis to threaten Spain and Portugal and could lead it to spread.
In an ominous sign that the present contagion is moving faster than European governments are acting to stop it, investors punished the debt of Portugal, in a near-repeat of the credit squeeze that preceded the Greek bailout. Portugal ran a budget deficit of 9.4% of its gross domestic product last year and is struggling to tighten that gap.
Friday evening, the yield on a Portuguese two-year note stood at 8.78%—more than eight percentage points above what ultra-safe Germany pays to borrow. Just last week, that gap stood at three percentage points. Concerns that European banks, major holders of euro-zone sovereign debt, are sitting on shaky assets, including billions of euros of government bonds, battered the interbank lending market Friday. Rates on short-term bank-to-bank lending surged, a small echo of the credit crunch of 2008. Meantime, European leaders rowed against the market's tide, saying repeatedly that Portugal and Spain—the next weakest links--wouldn't need aid.
The difference between Portugal and Greece is "absolutely obvious," ECB President Jean-Claude Trichet said Thursday. Investors haven't been reassured by the European response to the crisis. European officials began the year rejecting the notion that Greece would need financial help, saying a tough fiscal diet would be enough for the country to regain the capital market's confidence. A bailout emerged drip by drip over the course of several months. That has dented confidence that Europe can handle a crisis broader than just Greece.
"Right now there is a very widespread skepticism about the European leadership," says Adolfo Laurenti, an economist at Mesirow Financial in Chicago. "Very early on there was very little understanding of the gravity of the situation of Greece." EU leaders are loath to let Greece reduce its debt by default—a solution that would radically ease the country's fiscal pressures—in part because big European banks, primarily in Germany and France, are major holders of Greek debt. Big losses on that debt could trigger another banking crisis.
Another option is the ECB's direct purchases of sovereign debt. That so-called nuclear option wasn't even discussed at Thursday's monthly ECB meeting, Mr. Trichet said. He didn't rule the option out, suggesting it is still a possibility especially if the actual dispersal of funds to Athens from euro-zone governments and the IMF fails to calm markets, ECB watchers say. Friday, European Union President Herman Van Rompuy, asked about the nuclear option, stressed that all euro-zone institutions, including the ECB, "Agree to use the full range of means available." He didn't directly address purchases of government bonds, and the European Commission's chief stressed the ECB would make its own determination.
That doesn't mean the ECB is out of tools in the meantime, particularly when it comes to preventing sovereign default worries from trickling down to the banking sector. If credit stops flowing between banks in private markets, as it did in 2008 after the Lehman crisis, the ECB could revert back to longer-term loans. At the height of the crisis it created six-month and one-year loan programs at the ECB's low policy rate, giving banks an unlimited source of cheap funds.
As Athens burns, China may cling to peg
by Geoff Dyer
One of the collateral impacts of the carnage in global markets over the last few days could be a delay in any Chinese decision to begin appreciating its currency. That, at least, is the message from the onshore forward market for the Chinese renminbi which is now implying an increase in the value of the Chinese currency of only 0.8 per cent over the next 12 months - well down on the sort of appreciation that was widely expected only a few weeks ago.
In fact, before the situation in Europe began to really scare markets a few days ago, there had been a fair amount of speculation that next week would provide an ideal window for the Chinese authorities to make their move. New figures are expected to show another uptick in inflation, which would give the government the cover to argue that a stronger currency is needed for domestic reasons. And after next week, we will be in the run-up to a big summit with the US at the end of May and the G20 summit in June, which could tie the hands of a government that does not want to be seen giving into foreign pressure.
There are still plenty of official comments in favour of a stronger currency.
In an article published in the China Securities Journal today, Ba Shusong, an economist at the State Council’s Development Research Centre, said that resuming currency reform and scrapping export tax rebates would be the next steps in China’s gradual exit from the stimulus policies adopted to weather the financial crisis. “We think the renminbi exchange rate will return to a managed floating regime, with reference to a basket of currencies,” Mr Ba said.
Yet given the cautious approach of Chinese policymakers, they will likely think twice before announcing any big policy shift during a moment of market panic. The Chinese business media is full of stories today playing down the prospects of a currency move - a headline in National Business Daily says “The weakening of euro relieves the pressure for RMB appreciation”. As Europe is China’s biggest export market, Beijing can argue that a weaker euro means that its effective exchange rate is already strengthening, although that argument is not likely to carry much sway in the US Congress.
Indeed, some investors are already predicting that the broader impact of the Greece situation could encourage China to begin undoing some of the tightening measures it has already announced. “What we will likely see is the market forcing action by the European Central Bank and potentially, an earlier-than- expected unwind of Chinese tightening policies,” Howard Wang, head of the Greater China team at JF Asset Management, told Bloomberg yesterday.
Are You Ready For The United States Of Germany?
by Michael Pettis
“How can I, that girl standing there, my attention fix,” asked William Butler Yeats plaintively in the midst of the political upheavals of the early 1930s, “on Roman or on Russian or on Spanish politics?” Well, love and beauty in the Beijing spring weather notwithstanding, it is hard once again not to fix attention on Roman and Spanish politics or, more specifically, on the politics of the euro
At first all this might not seem to be a subject to fit into a blog called “China financial markets,” but aside from personal interest – I was born in Spain, and spent most of my youth there (and my family still lives there) – what happens to the euro will matter to China. Weakness in the euro will make a US export adjustment much more difficult, and this will increase trade tensions between China and the US. More intriguingly, the trade imbalance within Europe that is at the heart of the euro crisis is replicated globally, and is just as much at the heart of the global crisis. Both are going to be equally difficult to resolve.
On this subject I recently called a Spanish friend of mine who studied in the US and currently lives in China. He likes living in China a lot but has often thought about returning to Spain and beginning a career in politics. During the call I told him that if he ever wanted to do so, now was the time. There are two issues which I am certain will move to the center of the political debate in Spain within a few years, and if he were to stake out radical positions on both positions now, his prestige and visibility would quickly soar.
The first issue is Germany’s role in the crisis. I am convinced that over the next few years, fairly or unfairly there will be a crescendo of blame directed at Germany and German policies, and this ire will be magnified by the fact that many Germans seem oblivious to their role in the crisis. The German press in fact seems to delight in wagging a disapproving finger at the shameless profligacy of the south, and this can’t make southerners very happy.
Critics of Germany will argue that this moralistic posturing is thoroughly misplaced. European monetary policy, which was driven largely by Germany, was incompatible with German trade and labor policies that effectively suppressed German consumption, forced a large trade surplus onto its neighbors, and together made a southern European debt crisis almost inevitable.
The strong euro and burgeoning liquidity it brought on meant that much of Germany’s trade surplus had to be absorbed within the eurozone, forcing especially southern Europe into high trade deficits. These deficits were dismissed, very foolishly it turns out, and against all historical precedents, as being easily managed as long as the sanctity of the euro was maintained. A very false analogy was made with the US, in which it was argued that because European countries all use the same currency, trade imbalance within Europe are sustainable in the same way they are sustainable between states in the US.
But states in the US are not like states in Europe. Labor and capital mobility in Europe is very low compared to the US, and the Civil War in the US ensured that sovereignty, including most importantly fiscal sovereignty, resided in Washington DC, and not in the various state capitals. The US is clearly as much an optimal currency zone as any large economy can be.
This isn’t the case in Europe. In fact I would argue that the existence of a common currency in Europe, the euro, is only a little more meaningful than the existence of various currencies under the gold standard, and it was pretty obvious under the gold standard that balance of payments crises could indeed exist.
So why not also in Europe under the euro? As I see it, domestic German policies, perhaps aimed at absorbing East German unemployment, forced a structural trade surplus. The strong euro, along with the automatic recycling of Germany’s large trade surplus within Europe, ensured the corresponding trade deficits in the rest of Europe – unless Europeans were willing to enact policies that raised unemployment in order to counter the deficits. As long as the ECB refused to raise interest rates, southern Europe had to accept asset bubbles and rapidly rising debt-fueled consumption.
This couldn’t go on forever, or even for very long. Now southern Europe is paying the inevitable price, and of course the moralists are accusing the south of being shiftless and lazy, confusing the automatic balancing mechanisms in the balance of payments with moral weakness.
This is not to say that it is all Germany’s fault (although I’m sure I will be accused of making this claim anyway), but rather that the existence of the euro seriously exacerbated the problem by making it very difficult for certain countries to adjust to Germany’s domestic policies, which generated employment growth at home at the expense of Germany’s trading partners. There is no question that a long history of fiscal irresponsibility in southern Europe made things much worse, but the imbalance could have never gotten so large without Germany’s role, and since in a crisis it is always easier to blame foreigners, bashing Germans will become a very popular sport in much of Europe.
Abandon the euro
The second issue that will divide Spanish politics of course is Spain’s future within the monetary union. Spain simply cannot remain within the euro without making radical political changes. American economist Barry Eichengreen argued in his book on monetary policies during the 1920s and 1930s, Golden Fetters (a book I never tire of recommending), that the democratic enfranchisement of workers made a return to the gold standard impossible because workers, who had traditionally borne most of the burden of gold-standard adjustment through rising unemployment, would no longer passively accept those policies.
Spain is in just such a position. Although most Spanish politicians continue to insist that Spain’s joining the euro is irreversible and a symbol of its modernity, in order to adjust within the euro I suspect that Spain is going to have to suffer unemployment of 20% or more for several years. Spanish voters, correctly in my opinion, will not tolerate such an outcome.
The argument will be made by establishment politicians that to reject the euro will be seen as an indication of contemptible irresponsibility and will condemn Spain to developing-country status for the foreseeable future. Without the euro, Spain is a third-world nation, they will insist, and because many Spaniards are still sufficiently insecure about their status as “real” Europeans, this criticism will carry some emotional weight.
But the strength of this argument can only survive a few years of high unemployment. It was the same argument made, by the way, in France in the 1920s, when the value of the franc collapsed against other currencies, and the dour governor of the Bank of France, Emile Moreau, was forced to re-establish the link between gold and the franc in 1928 at a humiliating 80% discount to the pre-war parity.
I am not sure France’s subsequent experience justified the negative assessment. France struggled after the huge inflation of World War 1 to return to the pre-war gold parity and its economy suffered badly in the process. Bankers and the rich argued that maintaining the old pre-war parity was vital to France’s international standing, but to no avail. The cost was too high. France had no choice but to accept a devalued franc, while the rest of the world poured scorn on France for its spineless irresponsibility and predicted economic disaster.
But they were wrong. During the period of franc weakness France had regained its competitiveness and became one of the stronger economies in Europe, while those who had condemned France’s spinelessness were forced into their own humiliating devaluations after struggling mightily with unemployment and economic contraction. France also had a milder experience during the depression of the 1930s than other large economies, although as other countries devalued their own currencies against gold, France lost its competitiveness and slid into deeper economic contraction.
The virtues of irresponsible behavior
In fact by my reading it seems that during the 1920s many of those countries that were quickest to behave “irresponsibly” – to recognize that orthodox monetary policies were untenable – suffered the least during the subsequent years of the great economic crisis. This is not a vote for beggar-thy-neighbor devaluations, by the way, although it may seem like that. Rather it is a vote for recognizing when monetary conditions cannot be maintained, and then acting quickly to resolve them. The foreign exchange rate value of the currency matters.
Like France in the 1920s, the sooner Spain – and by extension the rest of southern Europe – admits that current monetary conditions are untenable, the less damage it is likely to suffer. The current system, in which fiscal authority is concentrated in Madrid and monetary policy is determined by the needs of the euro, will create insurmountable political opposition as many years of high unemployment turn the population to more radical solutions.
Spain will almost certainly have to choose. Either it gives up fiscal sovereignty – including, most importantly, taxation authority – to Brussels, or it gives up the euro. The alternative, several years of difficult adjustment borne mostly by workers, is politically unlikely.
Can Spain give up fiscal sovereignty? Actually that might be easier than many people think. Already there are strong separatist movements in many parts of Spain, and a number of regional governments might be happy to reassign sovereignty from Madrid to Brussels in exchange for real relief from the burden of adjustment. I would imagine that Catalunya and Euskadi (the Basque provinces) would not find it so difficult if economic conditions deteriorated. Other regions are also likely to consider it a viable prospect.
The problem with this strategy might actually be Germany. Although one can posit a scenario in which regions in Spain and other southern economies (for example Italy, with its own regionalist movements, especially in the north) reassign sovereignty to Brussels, unless Germany does the same the viability of a United States of Europe would be doubtful. It is hard for me to imagine, however, a situation in which Germany assigns fiscal sovereignty to Brussels. In that case the only real European entity with any chance of viability might be the United States of Germany.
Could this happen, and European regions assign sovereignty to Berlin? Maybe, but aside from the near impossibility of imagining France agreeing to a United States of Germany, if I am right about rising anti-German feeling in many parts of Europe, this will make it tough even for the smaller countries to swallow the prospect.
So these are the options as I see them. Spain might choose closer integration into Europe, including giving up fiscal and tax sovereignty, although it is not clear which European entity this would entail. Spain might choose to disenfranchise the working class, but the probability of this is close to zero, I think, and would be morally unthinkable. Or Spain might choose to give up the euro. This is just another restatement of Dani Rodrik’s “inescapable trilemma of the world economy”, by the way.
If you do decide to follow my advice, I told my Spanish friend, I wouldn’t bet too heavily on the first two outcomes. It would be much safer politically to become vociferously anti-German and to demand that Spain exit the euro. It might be a little sleazy, but it would lead to a very exciting political career, and isn’t a certain amount of sleaziness useful to a politician?
UK CDS Blast Higher With Government In Hung Parliament Chaos
by Gregory White
Uncertainty over the outcome of the UK election is being reflected by the widening CDS spreads of UK companies, across sectors. Surely, uncertainty in Europe over Greece and further debt crises is effecting this as well.
From CMA Datavision:
And further from our earlier report on Australian CDS, widening there has been significant as personal debt worries are expanding.
From CMA Datavision:
Risky Loans in Foreign Currencies Persist in Eastern Europe
by Jack Ewing
No other region suffered more grievous economic damage from the financial crisis last year than Eastern Europe, and a main cause was extensive borrowing in euros and other foreign currencies. When the currencies of countries like Hungary and Romania plunged last year, thousands of businesses and homeowners found themselves stuck with some of the most extreme variable-interest-rate loans on the planet.
Monthly payments soared, raising the threat of defaults and bank failures that was averted only with a joint rescue last year by the European Union and the International Monetary Fund — at a cost of 52 billion euros, or about $66 billion. So it may come as a surprise that Austrian, Italian and other Western European banks that dominate the regional market are again offering Eastern Europeans the same credit that nearly derailed their economies a few months ago.
The revival of euro-based lending in countries that are not yet members of the euro zone unsettles many economists. But others say a ban on foreign-currency loans would be counterproductive, because it would cut off a source of capital crucial for growth. Developing countries in Europe need to create conditions for local-currency lending to flourish, including low inflation, said Erik Berglof, chief economist for the European Bank for Reconstruction and Development. "Regulation is part of the policy mix," Mr. Berglof said. "But if you do it when you’re still in recession, you can do more harm than good."
Call it hair-of-the-dog economics. For countries to start growing again, businesses and consumers need the same kind of credit that bit them in the first place. And bite them, it did. Gross domestic product in Hungary fell 6.3 percent last year, while in Romania it dropped 7.1 percent, in part because of the instability caused by foreign-currency lending. Output in Latvia tumbled 18 percent after its leaders imposed severe austerity measures to avoid a currency devaluation that would have been disastrous for foreign-currency borrowers.
Loan defaults rose, but not as much as feared. For example, nonperforming loans at Erste Bank grew to 8.5 percent in Eastern Europe at the end of March from 7.8 percent at the end of December. By comparison, bad loans in Erste Bank’s home country, Austria, fell to 6.3 percent, from 6.4 percent in that period. Erste is the third-biggest lender in the region, after UniCredit, based in Milan, and Raiffeisen International, based in Vienna. After the rescue, local currencies recovered much of their value, taking pressure off borrowers. Poland and the Czech Republic felt the stress of foreign-currency lending as well, Mr. Berglof said. But they weathered the crisis much better and have emerged from recession. Yet for many borrowers, the benefits of a loan denominated in euros are still compelling.
Loans denominated in the currencies of Hungary or Romania carry much higher interest rates. The higher rates are a result of higher inflation than in Western Europe and imprudent fiscal policies by national governments. In Hungary, payments on a typical mortgage of 7.5 million forints, or about $34,000, would come to about 85,000 forints a month. The average monthly salary in Hungary is about 200,000 forints. A loan tied to euros would cost the equivalent of 76,000 forints, or more than 10 percent less, according to data from Erste Bank.
Demand for foreign-currency loans seems to be holding steady. In Hungary, foreign-currency loans slipped to 63 percent of all loans at the end of 2009, from 68 percent in the first quarter of the year. But they still dominate. Most of the decline was in loans denominated in more exotic currencies like the yen, which have all but disappeared from the market. Euro-based loans actually rose in the fourth quarter, according to data from the Hungarian central bank.
The risk for holders of euro loans remains. If the local currency loses value, payments rise accordingly. That is what happened last year; the forint lost more than a quarter of its value against the euro from July 2008 to March 2009. "Customers learned at their own cost that, yes, currencies can move," said Laszlo Olah, president of the Hungarian Venture Capital Association. The effects were felt by several industries. Car sales fell by half in Hungary last year and by half again so far this year, according to the Hungarian Vehicle Importers Association. Many dealers suffered twice from the risks of foreign-currency lending. The payments on their small-business loans soared just as many customers were struggling with payments and as prices of imported cars were rising in local-currency terms.
"The exchange rate loss could reach 30 or 40 percent, which they could not realize from sales," said Peter Erdelyi, president of the importers association. Hungarian regulators have since intervened to limit foreign-currency lending. "You can do foreign-currency lending in a responsible way and a nonresponsible way," said Bernhard Spalt, the chief risk officer at Erste Bank. "We will continue to do foreign-exchange lending in a responsible way." UniCredit said in a statement that it had always taken "a prudent, not aggressive" approach to foreign-currency lending and required loan applicants to have a special advisory session to ensure that they understood risks.
Raiffeisen International, known for its willingness to invest in markets like Kosovo, has stopped making foreign-currency loans in Ukraine but continues to offer them in other countries, including Hungary and Romania. In the meantime, the local and European Union authorities are trying to create a more robust market for local-currency loans. There are signs that forint lending is rising after the Hungarian central bank steadily cut the benchmark interest rate by more than half since 2008, to 5.25 percent. The cuts affect forint loans, making them more competitive with euro credit. European institutions and central banks are also trying to encourage some of the other conditions for local-currency lending, like a vibrant bond market. Banks need to be able to issue long-term bonds to cover long-term loans like mortgages. "Now there is a real opportunity to take some important steps," Mr. Berglof said.
Plan for Congressional Audits of Fed Dies in Senate
by Sudeep Reddy and Michael R. Crittenden
Last-minute maneuvering in the Senate allowed the Federal Reserve to sidestep legislation that would have exposed its interest-rate decision-making to congressional auditors. Pressure from the Obama administration led Senate lawmakers to alter a provision pushed by Sen. Bernie Sanders (I., Vt.) that was gaining momentum despite opposition from the Treasury and the Fed. It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors.
The compromise, endorsed by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and the Treasury, would require the Fed to disclose more details about its lending during the financial crisis. It would also require a one-time audit of those loans and a one-time review of Fed governance. A formal vote was pushed back until next week. Thursday's Senate showdown came after senators on the left and right joined forces to support Mr. Sanders' provision.
"At a time when our entire financial system almost collapsed, we cannot let the Fed operate in secrecy any longer," Mr. Sanders said. "The American people have a right to know." But Fed Chairman Ben Bernanke, while insisting on a commitment to "openness" at the Fed, said in a letter to Congress the Sanders measure would "seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation."
Deputy Treasury Secretary Neal Wolin, in a statement, endorsed the revisions to the Sanders provision, saying they would provide a comprehensive audit of the Federal Reserve Board's operations in response to the financial crisis, "while preserving the existing protections of the Federal Reserve's independence with respect to monetary policy." A House bill sponsored by Rep. Ron Paul (R., Texas) that passed in December contains a proposal similar to the original Sanders measure. If the Senate bill passes, it will need to be reconciled in a conference committee. That keeps the pressure on the Fed alive for the coming months.
The original Sanders measure stated that it shouldn't be "construed as interference in or dictation of monetary policy." But the Fed and administration warned that would allow auditors to interview Fed policy makers and staffers about monetary policy, thereby allowing congressional critics to pressure the Fed and undermine its independence. Like most other capitalist democracies, U.S. politicians have given the central bank considerable latitude to control interest rates on the theory that elected politicians are prone to keep rates too low to get more growth during their terms at the cost of more inflation later. Although sponsors of legislation insisted that wasn't their intent, the Fed and its allies said otherwise.
"It's a chilling kind of circumstance," former Fed Chairman Paul Volcker, an Obama adviser, said in an interview. "The more you have no clear boundaries about what's appropriate and what's inappropriate, you castrate the decision-making process. That's true for any organization, but it's particularly true when you get into the sensitivities of monetary policy that can generate speculative waves in financial markets and speculation in people's minds," said Mr. Volcker, who also urged lawmakers to eliminate the audit provision.
Anil Kashyap, an economist at the University of Chicago's Booth School of Business, stressed that independent central banks need to be insulated from politics and make decisions several months ahead of expected trends. "There are times when you have to start raising interest rates before the economy's recovering. If you're going to get audited while you do that, you know you're going to be slower—meaning we're going to tolerate higher inflation."
Before the last-minute compromise, the Fed's foes appeared to be winning, and got a major boost when Senate Majority Leader Harry Reid (D., Nev.) said he would side with Mr. Sanders. Mr. Bernanke, meanwhile, returned to Washington Thursday afternoon after a morning speech in Chicago to continue pressing for changes to the Sanders bill. In the past few days, Mr. Bernanke has spoken to at least a half-dozen senators to argue the Fed's case that the bill would deeply damage the Fed's credibility and ability to make tough decisions about interest rates.
At least half a dozen Obama administration officials joined the blitz, including Treasury Secretary Timothy Geithner—a former Fed official—and Rahm Emanuel, the White House chief of staff. Administration aides credited Mr. Dodd with pushing back against the original amendment and developing an acceptable alternative. New York Fed President William Dudley also advocated to scale back the scope of the auditing. He was among those arguing that ongoing reviews of the Fed's regular lending to financial institutions would stigmatize the program and cripple the Fed's role as the nation's lender of last resort.
The Senate beat back another amendment with populist tinges, defeating 61-33 a provision that would have put strict caps on the size of the nation's banks. Offered by a bloc of liberal Democrats, it would have capped at 10% the limit on the nation's total insured deposits any single bank holding company could carry. It would have also set a 6% leverage limit for banks and capped their non-deposit liabilities at 2% of U.S. gross domestic product.
Bank Risk Soars to Record, Default Swaps Pass Lehman Crisis
by Abigail Moses
The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc., as the sovereign debt crisis deepened. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers soared as much as 40 basis points to 223, according to JPMorgan Chase & Co. The index closed at 212 basis points March 9, 2009. Swaps on Greece, Portugal, Spain and Italy rose to or near all-time high levels.
Credit risk rose for a sixth day on concern the Greek debt crisis is spiraling out of control and triggering concern banks may face losses on their sovereign bond holdings. The Group of Seven plans to hold a conference call today to discuss the turmoil, after a global stock rout that briefly erased more than $1 trillion in U.S. market value. "Financials are caught in a really bad place right now," said Aziz Sunderji, a London-based credit strategist at Barclays Capital. "Investors are selling bonds, not just hedging with CDS. It shows investors are repositioning portfolios and there’s a more long-term repricing of peripheral risk."
Pacific Investment Management Co.’s Mohamed El-Erian and Loomis Sayles & Co.’s Dan Fuss said Europe’s crisis may spread across the globe because of investor concern that governments have borrowed too much to revive their economies. Markit’s financial gauge was trading at 198 basis points at 2:30 p.m. in London, according to JPMorgan. Contracts on Spanish and Portuguese banks rose to records, according to CMA DataVision prices. Portugal’s Banco Comercial Portugues SA increased 53 basis points to 579 and Spain’s Banco Santander SA rose 12 basis points to 253.
In the U.K., swaps on Royal Bank of Scotland Group Plc jumped 41 to 229 after Britain’s biggest government-owned bank posted the only first-quarter loss among British rivals. The spread between the three-month dollar London interbank offered rate and the overnight indexed swap rate, a barometer of the reluctance of banks to lend that’s known as the Libor-OIS spread, is at 18 basis points, up from 6 basis points on March 15 and near the highest level in more than five months. It’s still far from the record 364 basis points in October 2008, almost a month after Lehman’s bankruptcy.
Swaps on Greece surged 75 basis points to 1,008 before the advance was pared to 950. Portugal climbed 42 to 502 before falling to 430 and Italy rose 24 to 255.5 before dropping to 227 and Spain increased 14 to 288 before trading at 246, CMA prices show. Contracts on the U.K. rose 8 basis points to 99, according to CMA. Britain’s election produced a parliament without a majority for the first time since 1974, stoking concern the new government will be too weak to rein in its record budget deficit.
European policy makers are under mounting pressure from investors and foreign officials to broaden their response to the Greek fiscal crisis after a 110 billion euro ($140 billion) bailout package failed to ease concerns. "We do not see a clear sign that markets will calm down in the absence of decisive action by authorities, which so far have ignored the opportunity to convince investors that they are capable of battling the European sovereign debt crisis," Markus Ernst, a credit strategist at UniCredit SpA in Munich, wrote in a note to investors.
German lawmakers approved their nation’s share of loans to Greece worth as much as 22.4 billion euros before Chancellor Angela Merkel and other euro region governments meet in Brussels to review the bailout and look for ways to stop the burgeoning crisis. The leaders arrive in Brussels about 6:15 p.m. local time and the final press conference is slated for 10 p.m. The cost of insuring against losses on corporate bonds also rose. Contracts on the Markit iTraxx Crossover Index linked to 50 companies with mostly high-yield credit ratings increased as much as 74 basis points to 625, JPMorgan prices show, the highest since September. The index pared its advance to 611.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed as much as 29.5 basis points to 152.5, JPMorgan prices show, the highest since April 2009. It was trading at 139. A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase signals deterioration in perceptions of credit quality.
The extra yield investors demand to own investment grade corporate bonds rather than government debt jumped 21 basis points from last week to 174, the largest weekly rise in a year, according to Bank of America Merrill Lynch index data. The gauge has also increased 10 basis points from yesterday, the biggest one-day increase since October 2008.
Australia Warns on Greek Fallout as Japan Injects Cash
by Christopher Anstey
Australia’s central bank warned that an escalation of Europe’s debt woes may cause a "sharp" global economic slowdown and the Bank of Japan mounted the biggest one- day injection of cash since 2008 as stocks tumbled worldwide. "The fiscal problems in Europe could intensify, prompting a retreat from risk-taking by investors and a sharp slowing in the world economy," the Reserve Bank of Australia said in a quarterly economic report released in Sydney today. Japan’s central bank said it will pump 2 trillion yen ($22 billion) of funds into the financial system through repurchase operations.
Policy makers across Asia stressed that their economies are likely to be unscathed for now from the collapse in confidence of some European countries to repay debt. Even so, the slide in equities from Wall Street to Sao Paolo to Tokyo and Sydney heightened the attention of officials across the region as Group of Seven finance chiefs scheduled a conference call on the issue. "We’re keeping thorough eyes on its impact on the domestic market and movement of foreign investors," Choi Yoonkon, the head of the securities market team at South Korea’s Financial Supervisory Service, said in a telephone interview in Seoul today, referring to the slump in overseas shares.
Japan’s Nikkei 225 Stock Average lost 3.1 percent as of 3:29 p.m. in Tokyo, Hong Kong’s Hang Seng dropped 1.1 percent and the S&P/ASX 200 Index retreated 2 percent in Sydney. Asian traders came in today after the U.S. Dow Jones Industrial Average at one point overnight tumbled the most since the 1987 crash, before closing down 3.2 percent.
Officials differed on their assessment of how the European Union is handling the crisis with Greece, which has faced soaring debt financing costs on concern it will fail to rein in its budget deficit. "There’s been a problem with the Greeks, and specifically Greek sovereign debt and Europe’s ability to step in on Greece’s behalf, and markets have judged those arrangements to be inadequate," Australian Prime Minister Kevin Rudd said in an interview with 3AW radio today from Melbourne. That has "spread a broader lack of confidence into market perceptions of a range of other economies in Europe."
By contrast, Japan’s National Strategy Minister Yoshito Sengoku said Europe is handling the Greek situation appropriately. He also told reporters in Tokyo today that his government is in touch with the European Union and International Monetary Fund with regard to Greece and is watching Tokyo’s financial markets closely. Sengoku added that the Greek crisis won’t have a major impact on Asia’s economy. Philippine Treasurer Roberto Tan said in Manila today that "Asia will be able to lift its own market," citing the region’s strong economic growth. The RBA said Australia could be affected should the global expansion weaken and undermine commodity prices.
G-7 finance ministers will hold a conference call to discuss Greece’s fiscal situation, Japan’s Finance Minister Naoto Kan told reporters in Tokyo today. He added that he didn’t think countries will call for joint currency intervention, speaking after the euro tumbled yesterday to a 14-month low against the dollar. The turmoil worsened yesterday when European Central Bank President Jean-Claude Trichet resisted taking any new steps to stem contagion from Greece, which won a 110 billion-euro ($139 billion) aid package from the EU and IMF. The extra yield investors demand to hold Spanish and Portuguese debt yesterday rose to the highest level since the euro’s inception in 1999.
Mitsuhiro Onosato, executive officer at the Tokyo Commodity Exchange, said "Tocom may be affected by increased volatility in overseas markets." "Japan cannot but be affected by the Greek situation," said Financial Services Minister Shizuka Kamei, a member of a minority party in Prime Minister Yukio Hatoyama’s government. "There is no way to shut us off from the financial markets." Asian central banks, which have begun withdrawing monetary stimulus adopted during the global crisis, may be forced to hold off on raising interest rates in the wake of the stock slide.
"Generally any central bank that has not started its tightening cycle by now will be unlikely to start," most likely for the rest of the year, said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. "The sovereign debt issues are creating a more general liquidity risk and the credit crunch risks that go with that."
Europe’s fiscal woes are coming just weeks after the IMF boosted its forecast for the global economy. The Washington- based lender that mounted rescues of countries from Iceland to Ukraine during the crisis said last month world gross domestic product will rise 4.2 percent this year, the most since 2007. Economists at JPMorgan Chase & Co., IHS Global Insight and Wells Fargo Securities LLC said this week that the Greek debt crisis will probably trim U.S. economic growth, prices and interest rates over the next couple of years.
Officials in Indonesia and the Philippines ruled out imposing capital controls in response to the market turmoil. Such a move would "only exacerbate a temporary slump," the Philippines’ Tan said. Bank Indonesia will ensure a "stable" rupiah and doesn’t plan to impose capital controls, Deputy Governor Budi Mulya said in a mobile-phone text message today. Singapore’s central bank, which said last month it would undertake a one-time revaluation of its currency and seek a gradual and modest appreciation of the local dollar, said today it will respond to the market turmoil if there is a need.
The Monetary Authority of Singapore "continues to monitor international developments closely as well as their impact on our markets," a spokesperson said in an e-mailed response to questions from Bloomberg News. "We will take appropriate actions where necessary."
Moody's Faces Possible SEC Action
by Aaron Lucchetti and Serena Ng
The Securities and Exchange Commission told Moody's Investors Service that it may face enforcement action for misleading regulators in a license application, an escalation of the pressure on a major player in the credit crisis. In its annual report released late Friday, Moody's Corp., the parent of the New York rating firm, disclosed that the SEC is considering a recommendation to start an administrative case against Moody's based on a 2007 application to the SEC to remain an officially recognized credit-rating firm. The firm said it had received a so-called Wells Notice in March.
The SEC, according to Moody's filing, is arguing that Moody's failed to adhere to policies it detailed in its application. The threat of an SEC case is the latest setback for Moody's, which has been buffeted by criticisms about its failure to properly rate billions of dollars worth of mortgage-related securities and other complex debt products. In this case, the SEC is focusing on Moody's approach to problems it discovered in its models for rating certain exotic European debt products, which weren't mortgage-related. Allegations at the time were that Moody's failed to immediately downgrade securities because it would have been embarrassing to the firm, or possibly hurt certain market participants. This contradicted Moody's stated policy that no factor other than a bond's credit worthiness should dictate its rating.
In July 2008, Moody's acknowledged that it had an error in the way it rated constant-proportion debt obligations, or CPDOs, which are tied to the performance of corporate debt. The changes would have lowered triple-A ratings of 11 CPDOs to double-A territory—or a reduction of one to three notches. An internal investigation showed that in April 2007, members of Moody's European rating surveillance committee breached the company's code of conduct.
According to Moody's filing, the SEC staff has informed Moody's that its description of its procedures and principles in its 2007 application "were rendered false and misleading… in light of the company's finding that a rating committee policy had been violated." "We have responded to all the requests on the matter by the SEC staff and will continue to do so," a spokesman for Moody's said. "Moody's policy clearly prohibits the conduct in which these employees engaged, and we do not believe a single violation of the policy renders that policy false," he added.
A person familiar with the matter said the cease-and-desist order would likely be limited to the conduct identified by the SEC and that the company could agree to this part of the case since it had agreed that employees broke the rating firm's policies. As part of the investigation, Moody's announced that an executive overseeing the division, Noel Kirnon, left the firm following the internal investigation by law firm Sullivan & Cromwell LLP that began in May 2008 and focused on the CPDO error. Other people who worked for Mr. Kirnon also left after the investigation. Since the 1970s, Moody's has been a "nationally recognized statistical rating organization," or NRSRO, a designation that allows their ratings to be used in laws and regulations.
By the early part of the 2000s, there were only a handful of companies with that designation. A few years ago, the SEC decided to open up the field to more players. In 2006, a law was passed that required firms that wanted to be NRSROs to file applications to the SEC starting in 2007. Existing rating agencies like Moody's also had to submit these applications. In the forms submitted to the SEC, rating firms had to detail their internal policies and principles for determining credit ratings, that would ensure their compliance with regulations. Moody's submitted its code of professional conduct along with its application.
Goldman Talks Settlement With SEC
by Susan Pulliam and Susanne Craig
Goldman Sachs Group Inc. lawyers met this week with representatives of the Securities and Exchange Commission in a first step toward a potential settlement of the agency's fraud lawsuit against the securities firm. The two sides remain far apart. The preliminary settlement talks, held Tuesday, between Goldman co-general counsel Gregory Palm and other lawyers representing the New York company and SEC officials didn't include any specific settlement terms, such as the amount of a fine or agreements Goldman could make with the agency, people familiar with the situation said.
Goldman's willingness to even meet with the SEC is a sign that executives are scaling back their combative stance since the lawsuit was filed April 16. While the company hasn't retreated from its public statements that the suit's accusations are groundless, some Goldman executives are taking a softer line with restive shareholders. The talks come ahead of Goldman's scheduled shareholder meeting Friday morning in lower Manhattan. Protesters are expected outside the building. The meeting is expected to be a big departure from the almost perfunctory events of the past, when investors applauded Goldman's ability to make money at a blistering pace. Also on Friday, Goldman directors are expected to discuss a revision of some company practices in dealing with customers, people familiar with the situation said.
On Monday, Goldman Chief Financial Officer David Viniar and Vice Chairman J. Michael Evans told some large shareholders that Goldman "would be happy to settle today," according to people who heard the comment. Mr. Viniar said the company "does not want to antagonize the SEC," adding that a settlement is impossible unless both sides agree. Fox Business News earlier reported that settlement talks between the SEC and Goldman were imminent.
Goldman shares are down 23% since the SEC accused the firm and trader Fabrice Tourre of selling a collateralized debt obligation called Abacus 2007-AC1 without disclosing that hedge-fund firm Paulson & Co. helped to pick some of the underlying mortgage securities and was betting on the financial instrument's decline. The legal and public-relations crisis has erased about $20 billion in stock-market value while fueling doubts among some Goldman partners, managing directors and other current and former executives about the future of Goldman Chairman and Chief Executive Lloyd C. Blankfein. There appear to be no plans for a management shake-up. Goldman also is under pressure following last week's report by The Wall Street Journal of a federal criminal probe of the firm's mortgage business.
That investigation might complicate Goldman's settlement talks with the SEC, since it is unclear how the lawsuit could be resolved without simultaneously addressing the criminal matter. The criminal investigation is in an early stage and could end without charges being filed. Any settlement could take months, but Goldman's lawyers have concluded that the company needs to make a serious effort to resolve the SEC lawsuit. Another hurdle in the settlement talks: bad blood between lawyers for Goldman and the SEC, according to people familiar with the matter. Goldman officials still are furious about being blindsided by the lawsuit. The SEC filed the suit without giving the company a chance to settle.
Also, any settlement has to be structured in a way that allows the SEC to show that it punished Goldman. Goldman likely wants a deal in which it neither admits or denies wrongdoing. That legal wiggle room could help shield the company from shareholder and customer lawsuits. Michael Mayo, an analyst at Calyon Securities, said in a report Monday that the total cost of an overall settlement by Goldman could approach $1 billion. Some executives and powerful alumni of Goldman are discussing whether Mr. Blankfein should resign to restore confidence in the company.
A huge settlement with the SEC could be one of the largest in Wall Street history. In 2006, Bear Stearns Cos. agreed to pay $250 million to settle charges by the SEC and New York Stock Exchange that the firm aided improper mutual-fund trading. In 2003, Citigroup Inc. paid $400 million as part of the $1.4 billion settlement by 10 big Wall Street firms of accusations that they issued overly optimistic stock research to win more lucrative investment banking; Goldman paid $110 million in that settlement.
A.I.G. Said to Replace Goldman as Top Adviser
by Louise Story and Eric Dash
As its legal troubles mount, Goldman Sachs is losing a big corporate client: the American International Group. A.I.G., the insurance giant that planned to retain Goldman to help reorganize its businesses, has replaced Goldman as its main corporate adviser, according to three people with knowledge of the matter, which was not intended to be public. Instead, the insurer is turning to Citigroup and Bank of America. The move is the first in what some analysts warn could be a series of defections among Goldman’s clients after accusations — vigorously denied by Goldman — that it defrauded customers in a complex mortgage investment.
As Goldman’s legal problems have escalated — first with a civil fraud suit filed by the Securities and Exchange Commission, and then with a federal criminal investigation — some investors have grown increasingly anxious about the potential damage to Goldman’s reputation and business. A.I.G.’s decision leaves Goldman out of the mix at a pivotal moment for the insurance company and breaks a traditionally close relationship. A.I.G., which has yet to repay billions of dollars of federal aid, helped to insure billions of dollars of Goldman’s mortgage securities, including seven deals like the one involved in the securities fraud case filed last month by the S.E.C.
The news comes as Goldman executives prepare to meet with shareholders on Friday at the bank’s annual meeting. Goldman’s chairman and chief executive, Lloyd C. Blankfein, will confront shareholders who are anxious over the S.E.C. case and a continuing criminal investigation into the bank’s mortgage trading unit. In what some characterize as a referendum on Mr. Blankfein, shareholders will also vote whether to separate the roles of chairman and chief executive. Many corporations, including major banks, have separated those roles to improve corporate governance.
While A.I.G. is the first company that is known to have canceled major work with Goldman, European officials and some local officials in the United States have also said they are reconsidering their relationships with the bank. Several shareholders have filed suits against Goldman and its board and executives, saying they should have disclosed the S.E.C. investigation earlier. Goldman executives have told analysts that the bank’s business has not suffered since the case. The bank’s most recent quarterly profit — $3.3 billion — was a huge success by almost any standard, and Goldman officials said the results were proof that they were doing right by their clients.
Still, Goldman’s share price has fallen about 20 percent since the S.E.C. complaint was announced. A.I.G. met with its two new advisers on Thursday, according to the people with knowledge of the situation. The issue at hand is how A.I.G. can sell off parts of its business to help it return government bailout money while still preserving valuable units that will be part of a surviving company. Once involved in practically every insurance business, A.I.G. is trying to redefine its role in the industry.
The company’s relationship with Goldman dates back decades. A.I.G.’s former chief executive, Maurice R. Greenberg, had a long relationship with Goldman’s leaders. A.I.G. and Goldman briefly considered merging, in the late 1990s. But this relationship proved disastrous for A.I.G. in the mortgage crisis. A.I.G. insured some $20 billion of mortgage securities for Goldman, including seven similar to the deal at the center of the S.E.C. case, known as Abacus 2007-AC1, though it did not insure that specific deal.
In 2007, Goldman put on a negative bet against housing — what its chief financial officer, David A. Viniar, called "the big short" — and the bank issued aggressive demands for A.I.G. to put up collateral for some of its trades with Goldman. Those demands from Goldman and later other banks contributed to A.I.G.’s liquidity crisis and eventually led to a government bailout. After the government stepped in, Goldman was among the largest recipients of money from A.I.G. when the insurance company paid its counterparties 100 cents on the dollar to end contracts tied to mortgage investments.
A.I.G. has been through a series of executive changes since its collateral battle with Goldman, and the insurance giant continued to hire Goldman for certain assignments, like its recent sales of its Asian unit, A.I.A., as well as Alico, its overseas life and health insurance business. Earlier this year, A.I.G. heard pitches from various banks on its overall strategy. It indicated to several parties that Goldman had won that business. Goldman had not begun significant work on A.I.G.’s strategy.
Citigroup also worked with A.I.G. on its sales of A.I.A. and Alico, and Bank of America has been helping the insurance company with some financing. But the change last week was a step up in both of their roles to fill the gap left by Goldman. Goldman’s employees, top to bottom, have been reassuring clients in recent weeks to try to retain their business. On Wednesday, Mr. Blankfein held a conference call with wealthy individual clients whose savings are managed by the bank. Still, last week the Teachers’ Retirement System of Oklahoma warned Goldman’s asset management division that it was "on alert" and that the state pension might stop working with Goldman because of the S.E.C. accusations.
California Sues Pension Middleman
by Gina Chon
alifornia's attorney general has alleged that a former top executive and a former board member at Calpers accepted trips, champagne and other gifts from another former board member trying to secure investments from the giant California public pension fund. The perks allegedly included trips to New York on a private jet, to parties in Lake Tahoe and to the Academy Awards. The attorney general filed a civil lawsuit Wednesday against former Calpers Chief Executive Fred Buenrostro and Alfred Villalobos, a former Calpers board member who later became a "placement agent," or middleman who helps money managers get pension-fund business.
The suit focuses on Mr. Villalobos's efforts on behalf of his biggest Calpers client, Apollo Global Management, the New York private-equity firm run by Leon Black, which manages billions of dollars for Calpers, or the California Public Employees' Retirement System. Mr. Villalobos, the suit says, "attempted to bribe" a senior investment officer at Calpers as he was trying to persuade Calpers to purchase a stake in Apollo, which it did. Apollo isn't accused of wrongdoing and said in a statement it was "deeply troubled" by the suit's allegations.
The suit by Jerry Brown's office, filed in Los Angeles County Superior Court, alleges that Mr. Villalobos "cultivated improper relationships" with Mr. Buenrostro and others at Calpers and, in so doing, "compromised the integrity" of Calpers's investment process and violated California law. The lawsuit is a black eye for Calpers, which has prided itself on being a model for investing among public pension funds and is an advocate for upstanding corporate governance. "We are all working hard to address these issues," said Calpers in a statement that praised the attorney general's efforts.
Arvco obtained more than $47 million in "undisclosed and unlawful commissions" from money managers in its investment dealings with Calpers from 2005 to 2009, the suit alleges. The suit seeks $95 million from the defendants. A Superior Court judge on Wednesday ordered that Mr. Villalobos's bank account and other assets be frozen. Mr. Brown said assets include two Bentleys, two BMWs, a Hummer, art work and 14 pieces of property. The suit alleges that when Calpers was contemplating buying a stake in Apollo, Mr. Villalobos flew Senior Investment Officer Leon Shahinian to New York City to attend a fund-raiser honoring Mr. Black hosted by the Museum of Modern Art in May 2007.
The suit alleges that Arvco rented a private jet for Messrs. Villalobos and Shahinian to fly to New York, where they shared a two-bedroom suite at the Mandarin Oriental Hotel. Expenses for the trip, which included a visit to Florida the following day, were paid for by Mr. Villalobos or Arvco and were reimbursed by Apollo (with the possible exception of a flight back to California), the suit alleges. Expenses amounted to at least $63,000, it says. After the trip, the suit says, Mr. Shahinian received three bottles of champagne from Mr. Villalobos.
Later that month, Mr. Villalobos faxed Mr. Shahinian a term sheet for a proposed investment in Apollo of up to $700 million by Calpers. In June, Mr. Shahinian recommended the investment to the Calpers board, the suit says. He didn't disclose to the board that he had just returned from the all-expense paid trip with Mr. Villalobos, the suit says. Calpers invested $600 million in Apollo in July 2007 for a 9% stake in the firm; the value has dropped about 66%. Apollo in a statement said: "We will continue to cooperate fully with all regulatory agencies investigating this matter. We believe we at all times have handled our placement agent relationships in an appropriate manner. We are deeply troubled by the alleged activities described in the California Attorney General's complaint."
Mr. Shahinian, who wasn't named in the suit, has been placed on administrative leave in connection with the allegations, according to a person familiar with the matter. The issue of placement agents exercising improper influence on investment decisions of public pension funds has been the subject of a major criminal investigation by New York's attorney general that's resulted in six guilty pleas. In California, Calpers itself has been conducting an internal investigation into placement-agent fees. Justice Department investigators in Los Angeles have also been looking at whether potentially illegal payments were made to influence decisions on where to invest public-pension-fund money, including at Calpers.
In addition to the gifts, the suit also alleges that Mr. Villalobos and Arvco weren't licensed securities broker-dealers and used "unlawful and fraudulent means" to execute securities transactions with Calpers. It also alleges that Mr. Villalobos made a "standing but undisclosed" job offer to Mr. Buenrostro for after he left Calpers that included a condominium. Mr. Buenrostro began working for Arvco as a consultant the day after he retired from Calpers in 2008, the suit says, earning $25,000 per month. The lawsuit further alleges that Mr. Buenrostro agreed to requests by Mr. Villalobos to sign disclosure forms "supposedly acknowledging that Arvco had disclosed the placement agent agreements and commissions" to Calpers. Neither Calpers nor its investment staff new of the existence of these forms which, the lawsuit says "are nowhere to be found in Calpers's files."
Greek Lessons for the New U.K. Prime Minister
by Simon Nixon
"A new day has dawned, has it not?" Tony Blair famously declared almost exactly 13 years ago on winning the 1997 election. Well, another new day has certainly dawned in the UK – and it's unlikely to be one that anybody looks back on with any affection. What will surely become apparent in weeks, if not days, is that the election campaign was one long holiday from reality – paid for through the generosity of the markets. As a result, events in Greece and the wider euro zone, where a potentially devastating crisis with huge consequences for the UK is unfolding, was barely noticed or acknowledged by any of the parties. Certainly, no one bothered to spell out the lessons for the UK voter.
Politicians were fortunate that for the best part of a year investors and rating agencies effectively suspended judgment on the UK. It's unlikely the UK would have retained its AAA-rating or been allowed to borrow at less than 4% on the basis if the market had not believed tough action on the deficit would be taken after the election. It's only now the election is over that the real voting will begin. The futures market opened at 1AM Friday to allow investors to start trading as the election results came in. From now on, whoever emerges as Prime Minister will have his performance judged not by daily opinion polls but in real-time by the markets. And unless that performance is remarkably sure-footed, the judgment is likely to be brutal.
The new Prime Minister should not kid himself that the UK is somehow a special case, immune to euro zone contagion. The UK may have a separate currency, an independent central bank and longer debt maturities than other troubled economies. But these will come in little use if the markets lose confidence. Greece also had long-term funding. Orchestrating a multi-country euro zone bail-out is fraught with financial and political difficulties. But at least the euro zone has the aggregate fiscal capacity to backstop its banks and support Greece, Spain, Portugal and Ireland. Excluding these four countries, the rest of the Euro area had a fiscal deficit last year of 5.2% of GDP and an outstanding level of gross debt of 81.5% of GDP, according to David Mackie of JP Morgan. The UK, with gross debt of 72.9% of GDP and a deficit likely to reach 12.6% this year, the largest in the European Union, has no such capacity – and only the IMF to turn to for a bailout.
As Moody's points out in a new report, what makes the UK so vulnerable to a sovereign debt crisis is the weakness of its banking system. Including private and public sector debt, the UK is one of the most leveraged countries in the world of debt equivalent to [400%] of GDP and a banking system still highly dependent on wholesale funding. The new government will have to strike a very fine balance between cutting the deficit fast enough to satisfy the government bond markets but not too fast to choke off growth. If it cuts too fast and tips the economy back into recession, the banks could be hit by a fresh wave of losses. But if it disappoints the gilt markets, banks could be hit by far higher funding costs, hitting their ability to lend – and triggering a fresh recession.
What cuts will be required to satisfy the gilt market isn't clear. What isn't in doubt is that investors will insist the deficit reduction starts immediately. In the parallel universe of the campaign, Gordon Brown repeatedly claimed no other country was cutting spending this year. Back in the real world, Greece, Portugal, Spain and Ireland are doing just that. If the markets insist on cuts as deep as those countries – and the latest slide in the markets may force them to make deeper cuts still – then the new government really can expect, in the words of Bank of England Governor Mervyn King, to become so unpopular it is out of power for a generation.
Putting up VAT by 3p in the pound will be the easiest decision the new Chancellor ever gets to take. How about cutting public sector pay by [10%], as Ireland has done? Or raising the retirement age by 14 years from 53 to 67, as Greece has done? The Tories in their manifesto proposed only to freeze public sector pay for one year; and the retirement age will rise by just one year to 66 only in 2016. Far tougher measures will be required to convince the markets the UK is serious about tackling its problems. The violence in Greece is a warning of what can happen when sudden cuts are imposed on an unsuspecting electorate. George Papandreou was elected Prime Minister less than a year ago on a platform of increased spending. Although all the UK parties acknowledged the need to cut the deficit, the lack of detail meant that the only policy commitments that resonated with voters were spending ones.
The euro zone does offer some clues as to what may be required of the new government. For example, until the latest slide, Ireland remained largely unscathed by the sovereign debt crisis despite a wrecked banking system and a huge deficit, which demonstrates the credibility to be gained by taking tough actions early. And Wednesday's joint statement by both Spain's main political parties on banking sector reform underlined the need to seek as wide a national consensus as possible for the most difficult measures. Whoever "wins" the election is unlikely to feel like a winner for long. Voters will return from their holiday from reality to find the house has been ransacked. A new dawn indeed.
Treasury Redeems $144 Billion In Bills In First Four Days Of May
by Tyler Durden
A few days ago we reported, quite stunned, that the US Treasury had redeemed nearly $600 billion in Bills in the month of April. Alas, the side-effects of an massively short-maturity heavy bond curve will be here to haunts us for a long time: according to today's DTS, in the first 4 business days of May alone, the UST has redeemed $144 billion in Bills. Annualized this number is surely something that even Richard Feynman would not joke about. We have gotten to the point where the roll issue is not a monthly concern, but is becoming a weekly funding threat, and even daily.
Of course, as we speculated in December, what better way to raise demand for Treasuries than to stage an equity selloff. Well, we got our selloff, and the 10 Year was trading in the lower 3% range today. However, the risk now is how the sovereign fire will spread through the periphery and into the core. Already, we are seeing that CDS traders are massively betting on a collapse of the UK as the next bastion of sovereign spending lunacy. And when the UK goes, Germany is next, shortly to be followed by Japan and the US.
At that point the only buyer of US debt will be the US itself. Which will lead to the final outcome of massive consumer deflation as economic collapse finally strikes home, coupled with asset price hyperinflation, as a gallon of oil hits $10 (and helping the Dow hit 36,000). And as this is not an equilibrium state, the outcome will be, as it always is in these situations, war. Hopefully the US is good as it historically has been at finding its "deserving" opponent, WMDs aside. Otherwise, things may be a little rough for the great declining American civilization after the next 5 years.
ML-Implode Wins Reversal In NH Supreme Court Case; Re-Posts Materials on Mortgage Specialists’ Fraud
In a resounding ruling for free speech, the New Hampshire Supreme Court has reversed a superior court’s ruling ordering the Implode-o-Meter web site to take down contributed materials and divulge the identity of a whistleblower. Read the ruling.
The case was The Mortgage Specialists vs. Implode-Explode Heavy Industries, Inc. (the owner of ML-Implode.com). It concerned items posted to MoSpec’s “Ailing/Watch List” entry — the 2007 “Loan Chart” data for the company, and a post by username “Brianbattersby” accusing MoSpec and its President, Michael Gill, of habitual/systemic fraud.
In light of the ruling, the original content has been restored at the company’s ML-Implode profile here.
The portions of the post written by ML-Implode chiefly concerned MoSpec being fined in 2008 by the New Hampshire and Massachusetts banking departments for its practices. (MoSpec’s President, Michael Gill, called these “compliance” issues; the ML-Implode whistleblower argued otherwise.)
Included in the comments regarding Gill, censored until today, wereThis guy is no stranger to REGULATORY ACTIONS. He was caught for FRAUD back in 2002 FOR SIGNING BORROWERS NAMES and bought his way out. He just paid 700,000 FRAUD FINE IN NH AND MA FOR SIGNING BORROWERS NAMES AGAIN ON 20 LOANS. He isn’t really even the owner. He is listed as president of the company but the shares are in his wife’s name. He is NOT ELIGABLE for a brokers license in NH. OH MAN WHAT WAS THE NH BANKING DEPT. THINKING?
The Nashua Telegraph reported on the implications of the case:
The court, for the first time in New Hampshire, set a precedent for how lower courts should treat cases involving the protection of anonymous online commenters. They instructed the courts to weigh claims of defamation against the backdrop of the media’s right to protect its sources.
The case drew national attention for its potential First Amendment implications. The case also had broad implications in determining who constitutes the media in an Internet age that has blurred the line between traditional news outlets and bloggers or citizen journalists.
[Update: Here is the Reporter's Committee coverage of the decision. (They were one of our amici on the case).]
Since the MoSpec lawsuit against ML-Implode, Gill and MoSpec have been sued by former Operations Executive, Jean Duerr, for large-scale fraud. The suit argues that the company’s managers were forced to implement systemic doctoring of loan files. The allegations in this suit, filed in January 2010, are of the same nature as, but go well beyond the information originally released through ML-Implode.
Says site founder and publisher Aaron Krowne in a statement released on the decision,
We are pleased with the court’s ruling on the fundamental questions of free speech and find little to complain about in the analysis. We have always been confident that there was no legitimacy to MoSpec’s complaint directed towards us, especially in the absence of any actual evidence as to libel or defamation.
We are, however, perplexed that the case was not completely dismissed. The court seemed to acknowledge that the sheer nature of such a suit against us, not the anonymous “Does”, was frivolous; yet it simply let the matter survive and remanded it back to the lower court.
Besides the overall frivolity of the original action, we are unclear what valid issues involving us remain in play, considering that a former manager at the company has come out and sued them publicly. This suit contains substantially more detailed allegations of the same character as the ones the whistleblower(s) were attempting to release through us, which in our opinion, not only vindicates us, but undermines the legal cause of action against us.
At any rate, since we have been rendered insolvent by the expense of this and similar frivolous SLAPP suits, we aren’t sure how we will be able to mount a continuing “defense” at all.
As events have unfolded, the nature of this suit has become clear: it is meant to limit the public’s knowledge about financial fraud, even though it is from a known offender, as the offender (and perhaps the banking regulator itself) wishes to accept a limited “settlement” in lieu of the full truth. The fact that this matter has been allowed to continue on so long, achieving many of its tactical objectives against the whistleblowers, sets a bad precedent.
Thus, the general threat of “SLAPP” suits to bloggers and small-time, independent online media remains very much intact. We recommend that all such parties intending to comment on significant matters of public concern take strategic (if not legal) steps to inoculate themselves, rather than assuming the courts will protect their actual (rather than theoretical) right to free speech.
US Oil Regulator Ceded Oversight to Drillers
by Russell Gold and Stephen Power
The small U.S. agency that oversees offshore drilling doesn't write or implement most safety regulations, having gradually shifted such responsibilities to the oil industry itself for more than a decade. Instead, the Minerals Management Service—now caught up in the crisis of the Deepwater Horizon rig that for weeks has sent crude oil gushing into the Gulf of Mexico—sets broad performance goals for the industry. Oil producers and drilling companies are then free to decide for themselves how to meet those goals, industry executives and former regulators say.
A Wall Street Journal examination of the MMS's track record found several instances of the agency identifying potential safety problems and then either not requiring follow-up or relying on the industry to craft a solution. In some cases, the industry didn't do its part. The Journal also found that the safety record of U.S. offshore drilling compares unfavorably, in terms of deaths and serious accidents, to other major oil-producing countries. Over the past five years, an offshore oil worker in the U.S. was more than four times as likely to be killed than a worker in European waters, and 23% more likely to sustain an injury, according to International Association of Drilling Contractors data, which is adjusted for man-hours worked.
Asked about The Journal's findings on its safety record and practices, MMS officials said in an interview Wednesday that the agency plans to toughen its oversight. Any new regulations emerging from the current crisis "will be a prescriptive regulation," said Lars Herbst, head of the MMS' Gulf of Mexico region. He said the agency is unlikely to give the industry much latitude to decide how to make changes. "After this accident investigation is done, I would bet there won't be any performance-based regulation that comes out to address any problem that we may uncover," he said. Mr. Herbst questioned the data on deaths, saying the number of working hours could be underreported in the U.S. That would make the U.S. fatality rate look higher.
The agency points out it does conduct numerous inspections. It leases 14 helicopters to ferry inspectors, often unannounced, out to the 3,800 drilling rigs and platforms in the Gulf of Mexico that it oversees. But the number of rigs inspected has fallen significantly in recent years, according to agency data, from 1,292 in 2005 to 760 by 2009. Defenders of the agency say enforcement isn't its primary responsibility. Stephen Allred, who as Assistant Secretary of the Interior oversaw MMS from 2006 to 2009, said the agency does conduct spot inspections of oil rigs, and checks operators' compliance with safety procedures. However, "Their role is not to baby-sit" the operators, he said. The agency's primary task during inspections is to verify how much oil is being pumped, which is key to another MMS duty, maximizing payments the government receives for oil and gas rights from energy producers.
In one instance late last year, an oil company complained about the inadequacy of the agency's safety investigations. In November, ATP Oil & Gas Corp. sued MMS alleging it was incomplete in investigating a fatal accident at an ATP rig. The lawsuit, filed in federal court in Washington, D.C., alleged an MMS investigator misstated the accident's location, didn't interview the two eyewitnesses to the event, and told ATP to take corrective action within 14 days without identifying problems that needed to be fixed. The suit was settled in March, with ATP paying a $20,000 civil penalty, according to a company lawyer. An MMS spokesman declined to comment. An MMS court filing gave denials of some ATP claims, including the matter of the accident's location.
Some former employees say that MMS, which was founded in 1982 and is part of the Interior Department, has a built-in conflict of interest: It is supposed to be a watchdog that halts drilling when it spots unsafe behavior. But it is also supposed to promote energy independence and to generate government revenue from drilling on government lands, including the outer continental shelf. Of MMS's fiscal 2010 budget of $342 million, nearly half comes from the oil industry in the form of fees and rental receipts, known as "offsetting collections." That's one reason why collecting oil and gas royalties is emphasized at the agency, former and current officials say. The U.K.—home to one of the largest offshore-drilling industries in the world—has taken a different regulatory approach. In 1998, after a fire aboard a North Sea platform killed 167 people, the U.K. separated its offshore safety-oversight agency from the revenue-gathering side.
After that change, the U.K.'s safety record improved. The improvements also came at a time of increased mechanization of rigs, which improved the safety of offshore drilling world-wide. Told of The Journal's findings on MMS's track record, Sen. Bill Nelson (D., Fla.), a longtime opponent of drilling off his state's coast, castigated the agency. "If MMS wasn't asleep at the wheel, it sure was letting Big Oil do most of the driving," he said. In the U.S., the MMS has been criticized for giving oil companies too much sway in the royalty area, not just regulatory oversight. A 2008 Interior Department Inspector General report faulted MMS for modifying royalty payment contracts in ways that "appeared to inappropriately benefit the oil companies."
U.S. oil-industry executives and current and former regulators say the U.S.'s self-regulatory approach has worked for many years. "There has been a very good record in deep water, up until the point of this accident," said Mr. Herbst of the MMS. They also argue that offshore operations have become so complicated that regulators ultimately must rely on the oil companies and drilling contractors to proceed safely. "The regulator sets the frameworks, sets the guidance, monitors and inspects," said Elmer P. Danenberger III, the longtime head of the MMS's offshore regulatory programs, who retired in December. "But the regulator isn't conducting the operation."
Many questions remain about last month's sinking of the Deepwater Horizon, including why the rig caught fire, why fail-safe devices didn't work and why the industry wasn't better prepared for a spill of this magnitude. In recent years, oil wells in the U.S. were more likely to go out of control—as was the case with the Deepwater Horizon's blowout last month—than in other countries. According to data from the International Regulators' Forum, a group of offshore regulatory bodies, the U.S. reported five major "loss of well control" incidents in 2007 and 2008, the most recent years for which data are available. The five other countries in the forum that reported the data (U.K., Norway, Australia, Canada and the Netherlands) reported no such incidents. Last year, those five nations had roughly half as much drilling activity as the U.S.
Over the past decade, the number of MMS enforcement cases that resulted in penalties ranged from a high of 66 in 2000 to a low of 20 last year. A report by the agency's inspector general in 2000 found that it seldom referred safety or environmental violations to the Justice Department for criminal prosecution, even when it should have done so. To explain its shift toward industry self-regulation, the MMS in a 2005 rule change pointed to a 1996 law that encouraged federal agencies to "benefit from the expertise of the private sector" by adopting industry standards. Mr. Herbst also pointed out that the MMS often has a seat on panels setting industry standards.
The Journal has identified instances in which MMS didn't follow through on potential safety problems that the agency had asked the industry to examine. In 2000, the agency asked the industry for advice on how to deal with problems with cement used to keep oil and natural gas from bubbling to the surface and exploding. A decade later, the industry is still working on its recommendations, according to the American Petroleum Institute. No regulations have been issued by the agency.
Another instance involves "blowout preventers," which are critical devices meant to shut down out-of-control wells. In 1998, the MMS solicited suggestions to improve the effectiveness of the devices but didn't heed them. It commissioned Per Holand, a Norwegian researcher, to study the reliability of the devices. In 2002, Mr. Holand recommended that blowout preventers should have two pipe-cutting devices designed to shut off a well, instead of just one, in case one didn't work.
His reasoning: The pipe cutters are designed to shear off and plug an out-of-control well pipe. But they don't always work if they strike one of the thicker joints, where two pieces of pipe fit together. Joints like these make up about 10% of the length of the drill pipe, meaning the cutters could fail as much as 10% of the time. A second cutter, however, could ensure that at least one of the two would be able to cut the pipe. The MMS didn't act on Mr. Holand's recommendation. Mr. Holand said he wasn't surprised: Adding a second cutter costs money, and might make the device too heavy for some older rigs to carry.
In 2000, the MMS issued a safety alert saying it expects oil companies to have a backup system to activate blowout preventers if the main activation system fails. A spokesman for MMS says it relied on industry assurances that backup systems were in place, but did no formal survey. Last June, nine years after the safety alert, the MMS issued an almost identical safety notice, but to date has issued no rule requiring the back-up switches. "I don't recall where that rule-making process ceased," Mr. Herbst said. "It is something that we're going to go back and look at. I don't know yet whether that played into this incident, but I can guarantee we will be looking at that again."
Industry consultants say there are drilling rigs now in the gulf that don't have an automatic "dead man switch," or a separate, remote-control on-off switch to activate the blowout preventer, because the MMS hadn't issued the rule requiring their use. The Deepwater Horizon did have a "dead man switch," but it failed to activate the blowout preventer. The Deepwater Horizon lacked the separate, remote-control switch that's commonly used in Norway and Brazil.
In a decision that gave the industry greater control over regulatory oversight, MMS got out of the business of telling companies what training was necessary for workers involved in keeping wells from gushing out of control. About a decade ago, the agency turned this over to a trade group, the International Association of Drilling Contractors, according to Lee Hunt, president of the Houston-based organization. It represents offshore drillers such as Transocean Ltd., which owned and operated the Deepwater Horizon. "There was a recognition that everyone has a vested interest in being as safe as possible," Mr. Hunt said.
The trade group now accredits training schools to teach rig workers how to avoid blowouts, he says. When MMS inspectors visit rigs, Mr. Hunt said, they give "oral examinations" to workers on oil-well control. The MMS has received unwelcome attention for the behavior of employees assigned to a royalty-collection office in Denver, Colo. The Interior Department's inspector general concluded in 2008 that MMS employees there broke government rules and created a "culture of ethical failure" by accepting gifts from, and having sex with, industry representatives. Following the inspector general's report, the Interior Department took disciplinary action against more than a half dozen MMS workers, with punishments that ranged from a warning letter to termination.
Ethical problems also hit the offshore oil program. In 2009, Donald C. Howard, the former regional supervisor of the Gulf of Mexico region for MMS, pled guilty and was sentenced to a year's probation in federal court in New Orleans for lying about receiving gifts from an offshore drilling contractor. Mr. Howard declined to comment. The industry has fought against attempts to return to more rigid rules. In a 2009 letter, the Offshore Operators Committee and the American Petroleum Institute, two trade groups, argued against proposed new, stricter rules governing safety and environmental compliance. Mandated programs, it said, "quickly become paperwork exercises," not genuine improvements. The rules haven't been implemented. Mr. Herbst said the rules would supplement, not replace, existing rules.
Since spill, feds have given 27 waivers to oil companies in gulf
by Marisa Taylor
Since the Deepwater Horizon oil drilling rig exploded on April 20, the Obama administration has granted oil and gas companies at least 27 exemptions from doing in-depth environmental studies of oil exploration and production in the Gulf of Mexico. The waivers were granted despite President Barack Obama’s vow that his administration would launch a "relentless response effort" to stop the leak and prevent more damage to the gulf. One of them was dated Friday — the day after Interior Secretary Ken Salazar said he was temporarily halting offshore drilling.
The exemptions, known as "categorical exclusions," were granted by the Interior Department’s Minerals Management Service (MMS) and included waiving detailed environmental studies for a BP exploration plan to be conducted at a depth of more than 4,000 feet and an Anadarko Petroleum Corp. exploration plan at more 9,000 feet. "Is there a moratorium on off shore drilling or not?" asked Peter Galvin, conservation director with the Center for Biological Diversity, the environmental group that discovered the administration’s continued approval of the exemptions. "Possibly the worst environmental disaster in U.S. history has occurred and nothing appears to have changed."
MMS officials said the exemptions are continuing to be issued because they do not represent final drilling approval. To drill, a company has to file a separate application under a process that is now suspended because of Salazar’s order Thursday. However, officials could not say whether the exemptions would stand once the moratorium is lifted. MMS’ approvals are expected to spark new criticism of the troubled agency and the administration’s response to the spill.
Salazar announced Thursday that there’d be no new offshore drilling until the Interior Department completes the safety review process requested by Obama. The department is required to deliver the report to the president by May 28. Given the MMS approvals, however, Galvin said the administration’s pledge appears disingenuous. "It looks to me like they’re misleading the public," he said.
MMS spokesman David Smith said his agency conducts a thorough review before it determines whether to grant such exemptions. "It’s not a rubber stamp," he said. MMS set out rules that allow for the exemptions from some environmental requirements under the National Environmental Policy Act (NEPA) as long as the sites in question are not relying on new or unusual technology, or within high seismic risk areas, or within the boundaries of marine sanctuaries or in regions with hazardous bottom conditions. MMS also assesses the impact on biological and archeological resources.
In the gulf, Smith said, MMS has a "wealth of environmental data" from studies of the region that it can rely on when reviewing the requests from the energy firms. That’s why oil and gas companies that were given the exemptions said the approvals were routine and shouldn’t have raised any environmental concerns. Apache Corp. said it was granted four exemptions for updating production equipment and drilling wells on existing sites and for drilling in the vicinity of an existing site. Appropriate environmental studies were conducted before the purchase of the leases for those sites, said Bill Mintz, a spokesman with Apache.
"We followed the procedures and the government didn’t change the procedures," said Mintz. "The decisions are made according to rules in a framework that has been established." Anadarko also cited a previous environmental assessment of a site where it applied for a waiver. "Protecting the environment and the safety of our personnel are our highest priorities," said John Christiansen, a Anadarko spokesman, Walter Oil & Gas also received one for a survey of an existing site off the coast of Louisiana.
Environmentalists, however, say that MMS’ checklist for determining whether to grant such exemptions are far too broad and relies on sweeping environmental impact studies that are undertaken before the purchase of leases. Holly Doremus, a professor of law at Boalt Hall, University of California at Berkeley, said MMS has had a culture of minimizing environmental reviews of oil and gas development dating back to its inception in 1982. "That’s related to the fact that oil companies have a great deal of power over MMS and there hasn’t been much oversight," she said. "My guess is that these things are routinely being signed off on as categorical exclusions even though they deserve a closer look."
Other companies that received the waivers include: Shell, Kerr-McGee Oil & Gas Corporation, Royal Exploration Company, Inc., MCX Gulf of Mexico, Tana Exploration Company, Tarpon Operating & Development, Rooster Petroleum, Phoenix Exploration Company, and Hall-Houston Exploration III. Tracy L. Austin, spokeswoman for Mitsubishi International Corporation, which owns MCX Gulf of Mexico, said she could not comment on MMS’ handling of the exemptions overall.
"While we understand that the MMS has come under criticism for failing to adequately regulate the industry, with respect to our operations, we believe the MMS has acted responsibly," she said. Lawmakers from both sides of the aisle have already called for reform of MMS after news that BP was granted on exemption for the Deepwater Horizon site. That waiver was first reported by the Washington Post. "If the conclusion is we need new regulation to prevent something like this from happening again, we’d welcome that because we believe we operate in a safe and environmentally responsible manner," said Mintz with Apache. "But right now, the current rules say certain activities can proceed based on the studies that have been done."
In 2008, a series of government watchdog reports implicated a dozen current and former employees of the MMS in inappropriate or unethical relationships with industry officials. The reports described "a culture of substance abuse and promiscuity'' in the Royalty in Kind program, in which the government forgoes royalties and takes a share of the oil and gas for resale instead. From 2002 to 2006, nearly a third of the RIK staff socialized with and received gifts and gratuities from oil and gas companies.
Slick Operator: The BP I've Known Too Well
by Greg Palast
I've seen this movie before. In 1989, I was a fraud investigator hired to dig into the cause of the Exxon Valdez disaster. Despite Exxon's name on that boat, I found the party most to blame for the destruction was ... British Petroleum (BP). That's important to know, because the way BP caused devastation in Alaska is exactly the way BP is now sliming the entire Gulf Coast.
Tankers run aground, wells blow out, pipes burst. It shouldn't happen, but it does. And when it does, the name of the game is containment. Both in Alaska, when the Exxon Valdez grounded, and in the Gulf last week, when the Deepwater Horizon platform blew, it was British Petroleum that was charged with carrying out the Oil Spill Response Plans (OSRP), which the company itself drafted and filed with the government.
What's so insane, when I look over that sickening slick moving toward the Delta, is that containing spilled oil is really quite simple and easy. And from my investigation, BP has figured out a very low-cost way to prepare for this task: BP lies. BP prevaricates, BP fabricates and BP obfuscates. That's because responding to a spill may be easy and simple, but not at all cheap. And BP is cheap. Deadly cheap.
To contain a spill, the main thing you need is a lot of rubber, long skirts of it called a "boom." Quickly surround a spill, leak or burst, then pump it out into skimmers, or disperse it, sink it or burn it. Simple. But there's one thing about the rubber skirts: you've got to have lots of them at the ready, with crews on standby in helicopters and on containment barges ready to roll. They have to be in place round the clock, all the time, just like a fire department, even when all is operating A-O.K. Because rapid response is the key. In Alaska, that was BP's job, as principal owner of the pipeline consortium Alyeska. It is, as well, BP's job in the Gulf, as principal lessee of the deepwater oil concession.
Before the Exxon Valdez grounding, BP's Alyeska group claimed it had these full-time, oil spill response crews. Alyeska had hired Alaskan natives, trained them to drop from helicopters into the freezing water and set booms in case of emergency. Alyeska also certified in writing that a containment barge with equipment was within five hours sailing of any point in the Prince William Sound. Alyeska also told the state and federal government it had plenty of boom and equipment cached on Bligh Island.
But it was all a lie. On that March night in 1989 when the Exxon Valdez hit Bligh Reef in the Prince William Sound, the BP group had, in fact, not a lick of boom there. And Alyeska had fired the natives who had manned the full-time response teams, replacing them with phantom crews, lists of untrained employees with no idea how to control a spill. And that containment barge at the ready was, in fact, laid up in a drydock in Cordova, locked under ice, 12 hours away.
As a result, the oil from the Exxon Valdez, which could have and should have been contained around the ship, spread out in a sludge tide that wrecked 1,200 miles of shoreline. And here we go again. Valdez goes Cajun.
BP's CEO Tony Hayward reportedly asked, "What the hell did we do to deserve this?" It's what you didn't do, Mr. Hayward. Where was BP's containment barge and response crew? Why was the containment boom laid so damn late, too late and too little? Why is it that the US Navy is hauling in 12 miles of rubber boom and fielding seven skimmers, instead of BP? Last year, CEO Hayward boasted that, despite increased oil production in exotic deep waters, he had cut BP's costs by an extra one billion dollars a year. Now we know how he did it.
As chance would have it, I was meeting last week with Louisiana lawyer Daniel Becnel Jr. when word came in of the platform explosion. Daniel represents oil workers on those platforms; now, he'll represent their bereaved families. The Coast Guard called him. They had found the emergency evacuation capsule floating in the sea and were afraid to open it and disturb the cooked bodies. I wonder if BP painted the capsule green, like they paint their gas stations.
Becnel, yesterday by phone from his office from the town of Reserve, Louisiana, said the spill response crews were told they weren't needed because the company had already sealed the well. Like everything else from BP mouthpieces, it was a lie.
In the end, this is bigger than BP and its policy of cheaping out and skiving the rules. This is about the anti-regulatory mania, which has infected the American body politic. While the tea baggers are simply its extreme expression, US politicians of all stripes love to attack "the little bureaucrat with the fat rule book." It began with Ronald Reagan and was promoted, most vociferously, by Bill Clinton and the head of Clinton's deregulation committee, one Al Gore.
Americans want government off our backs ... that is, until a folding crib crushes the skull of our baby, Toyota accelerators speed us to our death, banks blow our savings on gambling sprees and crude oil smothers the Mississippi. Then, suddenly, it's, "Where was hell was the government? Why didn't the government do something to stop it?"
The answer is because government took you at your word they should get out of the way of business, that business could be trusted to police itself. It was only last month that BP, lobbying for new deepwater drilling, testified to Congress that additional equipment and inspection wasn't needed. You should meet some of these little bureaucrats with the fat rule books. Like Dan Lawn, the inspector from the Alaska Department of Environmental Conservation, who warned and warned and warned, before the Exxon Valdez grounding, that BP and Alyeska were courting disaster in their arrogant disregard of the rule book. In 2006, I printed his latest warnings about BP's culture of negligence. When the choice is between Lawn's rule book and a bag of tea, Lawn's my man.
This just in: Becnel tells me that one of the platform workers has informed him that the BP well was apparently deeper than the 18,000 feet depth reported. BP failed to communicate that additional depth to Halliburton crews, who, therefore, poured in too small a cement cap for the additional pressure caused by the extra depth. So, it blew. Why didn't Halliburton check? "Gross negligence on everyone's part," said Becnel. Negligence driven by penny-pinching, bottom-line squeezing. BP says its worker is lying. Someone's lying here, man on the platform or the company that has practiced prevarication from Alaska to Louisiana.
BP seeks solution after containment dome plan glitch
by Erwin Seba
BP engineers will search for a solution on Sunday after suffering a setback in an attempt to contain oil gushing into the Gulf of Mexico with a huge metal dome, dashing hopes for a quick, temporary solution to a growing environmental disaster. The company was forced to move the four-story containment dome off to the side on the sea floor after a buildup of crystallized gas forced it to suspend the effort. Covering the leak with the structure was seen as the best short-term way to stem the flow from a ruptured oil well.
BP expects to take up to two days plotting its next move, Chief Operating Officer Doug Suttles said. "I wouldn't say it's failed yet. What I would say is what we attempted to do last night didn't work because these hydrates plugged up the top of the dome," Suttles said. "What we're currently doing, and I suspect it will probably take the next 48 hours or so, is saying, 'Is there a way to overcome this problem?'"
The problem is gas hydrates, essentially slushy methane gas that would block the oil from being siphoned out the top of the box. As BP tries to resolve it, oil keeps flowing unchecked into the Gulf in what could be the worst U.S. oil spill ever. The company, under pressure from the Obama administration to limit the damage to the Gulf and coastlines of four states, expected hydrates, but not the volumes encountered after a crew lowered the dome nearly a mile to the sea floor.
Possible solutions may involve heating the area or adding methanol to break up the hydrates, Suttles said. Officials had already warned there was no guarantee the technology would work at such water depth. It hopes to attach a pipe to the 98-tonne dome to pump oil to a tanker, with the aim of capturing about 85 percent of the leaking crude.
The spill threatens an economic and ecological disaster hitting beaches, wildlife refuges and fishing in Louisiana, Mississippi, Alabama and Florida. It has forced President Barack Obama to rethink plans to open more waters to drilling. On Dauphin Island, Alabama, a barrier island and beach resort full of weekend swimmers and beachcombers, sunbathers found tar balls and tar beads washing up on Saturday along a half-mile stretch of the white-sand beach and alerted media outlets and authorities.
A team of dozens of BP-contracted workers in rubber boots and gloves was dispatched to the scene to lay down special clusters of oil-absorbing synthetic fibers called pom-poms, erect storm fencing along the beach and collect samples of the tar and water for testing. The beach remained open. The tar balls will be tested over the next two days to determine if they come from the oil slick in the Gulf. Dauphin Island Mayor Jeff Collier said he suspected they came from the leaking well, but only testing would confirm it.
A spokesman for the spill response Unified Command in Mobile said tar washing ashore was a "common occurrence" along Alabama beaches, but some local residents disagreed. "I have never seen this and I am here once a week every summer. This is the first time I have seen anything like this here," said Molly Hunter, 34, of Mobile, holding up a chunk of tar about the size of an open hand. The spill's only major contact with the shoreline so far has been in the uninhabited Chandeleur Islands off Louisiana, mostly a wildlife reserve.
Suttles said BP may now try to plug up the damaged blowout preventer on the well or attach a new one on top of it. It is also drilling a relief well to halt the leak -- which began after the Deepwater Horizon rig exploded on April 20, killing 11 crew members -- but that could take three months.
In the initial blast, a natural gas cloud enveloped the rig and exploded just as visiting BP officials were celebrating seven accident-free years in the rig's crew quarters, according to accounts by survivors of the blast. According to transcripts of interviews obtained by Robert Bea, a University of California Berkeley engineering professor, a giant methane bubble rushed up the drill pipe and filled the air above the deck of the drilling platform with flammable gas, followed by a scalding flood of crude oil that spilled onto the drill deck and ignited.
About 270 boats deployed protective booms and used dispersants to break up the thick oil on Saturday. Crews have laid more than 900,000 feet of boom, and spread 290,000 gallons (1.1 million liters) of chemical dispersant.
In Bayou La Batre, the heart of Alabama's seafood industry, the docks were largely quiet as thousands of shrimpers and seafood processors remained idled by fishing restrictions. About 30 oyster-processing plants have run out of product and shut down, putting as many as 900 people out of work, said Wayne Eldridge, owner of J&W Marine Enterprises and an oyster plant operator himself. "I'm screwed," Eldridge said. "The biggest thing is I've got 35 people unemployed there."
BP Chief Executive Tony Hayward has said a $75 million legal cap on the liabilities for economic damages under federal law, which some U.S. lawmakers now want to raise, would not be a limit and renewed promises to meet all "legitimate" claims. BP suffered another blow on Friday when ratings agency Standard & Poor's lowered its outlook to negative from stable and indicated a ratings downgrade was likely.
Oil has been gushing into the Gulf at a rate estimated at a minimum of 5,000 barrels (210,000 gallons/795,000 liters) a day since the well ruptured. A sheen of oil has engulfed much of the Chandeleur Islands, barrier islands that are part of Louisiana's Breton National Wildlife Refuge, the first confirmation of the oil slick hitting land. Some oiled birds have been found in recent days.