"Doyers Street, Chinatown, NYC"
Ilargi: Don’t look now, ‘cause they sure don’t want you to, but they're at it again. First, 180,000 more fools will get a tax credit extension thanks to you, the taxpayer. Wouldn't be fair if they couldn't get the $8000 to sign them into servitude, would it? Everyone deserves a shot at that golden opportunity. And after that, there’ll be more credits. Want to bet?
Second: The U.S. House approves bill to rebuild FHA coffers While the law allows the FHA a 50:1 leverage ratio, already a potentially disaster-seeking level, its actual leverage today is some 188:1. Know what that means? That the suckers who get that credit extension need it to pay extra charges to the FHA, which is -how predictable do you want it?- fast turning into a shadow Fannie and Freddie.
Keeping the US housing market illusion alive is just as important, read: costly to the taxpayer, as doing the same for the banking system is. And when you get down to the nitty gritty, you find they’re one and the same. Christ almighty, we said years ago that anyone buying a home for a long term perspective instead for flipping, and doing so with a long term mortgage to boot, is a fool, a victim and a sucker, and they’ll lose most of the property’s value, which in the majority of cases will mean the property itself as well. It’s June 12, 2010, and that charade is still going on and strong?
The disregard of politicians worldwide for their voters and citizens is hard to digest, that much should be clear by now. Sad thing is, it's not. Just about wherever I look, governments guarantee 100% of mortgage losses. Which are sure to come, and which are sure to deplete tax coffers even more then they already are. It’s a brain deficient game, and it needs to stop. But it won’t, not in the US, because, just to name one reason, U.S. Home Foreclosures Rose 44% to a Record in May.
In the end it will be, simply because that’s where most private capital is, and because that’s where most of the casino instruments are, CDO’s, CDS, you name it, the housing mess that will bankrupt the majority of US banks, the US government, and most of its citizens. Please make no mistake about it. It all started with, and will tragically end, there. One day these insane credits must stop. One day Fannie and Freddie's books will have to be opened, and on that day Americans will know how desolate their futures look.
But also on that day, the US will probably (I’d give it 10 to 1) be engaged in a -senseless- large scale war somewhere on the planet, with lots of US citizens dying on foreign soil, so you won't even notice how badly you’ve been screwed.
And what more can I say about the Gulf of Mexico oil spill? It’s not Katrina, it’s way worse than that. It’s a government failure like none else. Obama has a great spin team, doh, but there’s no spinning your way through mayhem like this. Former US Environmental Protection Agency boss Eric Schaeffer says about the spill: 'It's Going To Blow The Record Books Up'. Have I ever told you anything else? Not that I could be sure, but the threat was there from the first moment. And a certain someone who resides at 1600 Pennsylvania Avenue completely failed to see that, and is now trying to play catch-up. Unfortunately for him, catch-up in the face of disaster is the wrong idea.
I know various people have differing ideas on how it's all playing out, but I’d say that at the very least Obama’s performance is not Oscar-worthy. Michael Bloomberg may chime in with "BP CEO Tony Hayward didn’t personally spring the leak ", but then again, no-one said he did, and it’s therefore an utterly irrelevant statement that merely puts the New York City mayor's credibility in question.
What does matter, unlike Bloomberg's braindeadness, is that BP has an awful record when it comes to preventing calamities [sic]. And that BP, according to everything I read that’s not White House propaganda, BP is still in charge of just about all operations related to clean-up and solutions in the Deepwater Gulf theater. On top of that, there are increasingly questions about how much, when and how BP will settle the claims of the people and communities whose livelihoods, living environment and, let’s call that spade for what it is, entire lives have now been destroyed irrevocably.
And we're just getting started, don’t forget that. As a politician, you can screw over Louisiana and Alabama a whole lot easier than you can Miami, Myrtle Beach or Chesapeake Bay. The former are pretty desperately poor communities, the latter are certainly not. So expect the real political fall-out about 10-15 days from now, when Atlantic beaches start being closed.
Holding BP’s entire planned $10 billion dividend pay-out in escrow for the victims (state governments will be elbowing to be first in line, before their citizens) seems like the very least that can be done. Yeah, even if it leaves Scottish widows in the cold.
Do you begin to grasp the magnitude of it all? It’s either/or for the poor, and business as usual for executives. Why don’t you do something about it? Don’t get me wrong, I don’t begrudge the rich their spoils, but I do draw the line at drawing people unnecessarily (to an extent, I know) into hunger and despair,
Best line of the day, finally, comes from the Times of London, which reports that UK Business Secretary Vince Cable won’t rescue weakened BP if foreign predator attempts takeover, and says:
"[..] Dr Cable — a former chief economist at Shell — is unwilling to draw up plans that would protect BP should an overseas group such as Gazprom try to seize control".
Isn’t that the greatest idea? That Vladimir Putin seizes control of the formerly fourth-largest enterprise on the planet? Britain would depend for all its energy on the late KGB.... Hey, say what you will, but I think that’s comedy material. Moreover, Gazprom may well be the only party that can afford BP’s assets.
But we won’t let that happen, will we? Because, after all, we have access to our taxpayers' funds, on both sides of the pond.
Ilargi: TAE needs you more today than ever to donate and/or visit our advertisers. We will expand this place to a great extent, tentatively as per July 1. Having to prepare, organize and execute that on a meager budget makes it that much harder. We know how close we may already be to the large scale economic changes we've long predicted. Which is precisely why we feel we have to do more. Still, hard as we try, hard as we work (my day today again will exceed 12 working hours), it’s not going to happen without your support.
ECRI Leading Economic Index Drops To 44 Week Low, Predicts Massive Economic Contraction
by Tyler Durden - Zero Hedge
David Rosenberg's favorite leading indicator, the Economic Cycle Research Institute (ECRI) Leading Index, fell to 123.2 in the week ended June 4, down from 124 the week before, a -3.5% annualized contraction: the first time this has gone negative in over a year. This is the lowest level since July 31, 2009, when it was at 122.4, as the chart below demonstrates.
What is more troubling is a historical comparison to the dark days of the 1970's recession. While the amplitude of the recent pick up has been unprecedented, from -30 to +30, it is only mirrored by the -20 to +20 jump seen in 1971-1973. However, as can also be seen below, the ensuing crash following the first spike, was the worst one in the past 35 years. If history is any predictor, does the ECRI Leading Indicator index anticipate a comparable collapse in the economy to what was seen in late 2008?
Debt Spreading 'Like a Cancer': Nassim Taleb
by Barbara Stcherbatcheff - CNBC
The economic situation today is drastically worse than a couple years ago, and the euro is doomed as a concept, Nassim Taleb, professor and author of the bestselling book "The Black Swan," told CNBC on Thursday. "We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base," Taleb said. "Banks balance sheets are just as bad as they were" two years ago when the crisis began and "the quality of the risks hasn't improved," he added.
The root of the crisis over the past couple of years wasn't recession, but debt, which has spread "like a cancer," according to Taleb, who is now relived that public attention has shifted to debt, instead of growth. The world needs to prepare itself for austerity, he warned. "We need to slash debt. Unfortunately, that's the only solution," Taleb said. Other analysts warned about austerity programs spreading from the euro zone to the US where the growth in debt will become unsustainable over the longer term.
Obama administration's efforts to pull the US out of recession haven't succeeded, according to Taleb. "It's not that they make mistakes, it's that they almost get nothing right." Moreover, a second major stimulus package may be futile, he warned. "Obama promised us 8 percent unemployment through stimulus. It hasn't worked." There are significantly more liabilities in the US than in other countries around the world, he said. "Don't give a junkie more drugs, don't give a debt junkie more debt."
Investors should avoid Treasurys and other bonds and place their money in instruments that will hedge them against looming inflation. Commodities are one place where a bull market may form over the coming years, as people try to protect their cash from price rises, famous investor Jim Rogers told CNBC earlier Thursday.
The "Black Swan" metaphor is used to describe those rare, unexpected but consequential events that people cannot predict because they view the world through a sort of tunnel vision - as something structured, ordinary, and comprehensible. "I want to live in a society that is robust to adverse events. We don't live in that world," Taleb said. "A bridge that's very poorly constructed will eventually break. A white swan for the butcher is a black swan for the turkey," he added. The "Black Swan" reference has become ubiquitous within popular and business culture over the past couple of years.
As recently as Wednesday, a top authority on oil reservoir management and upstream technology called the BP oil spill in the Gulf of Mexico a "Black Swan" event that, however catastrophic, has the potential to improve drilling practices in particular and the industry in general.
Taleb expressed reservations about the future of BP, given the catastrophic fall in its market capitalization since the oil spill on April 20th. He suggested that incentives in corporate culture are inherently flawed. "Size is bad for companies," he said. "We shouldn't give a manager of a nuclear plant an incentive bonus. People are given bonuses to hide risk, to cut corners. The same thing happens with every large corporation. It permeates the entire economic system."
Time to Slip into Something Less Comfortable?
by Jessica Silver-Greenberg - Bloomberg Business Week
The bearish forecasters who rose to fame in the market crash of 2008 have, for the most part, not surrendered their pessimism. Their moment could be coming back around
During the great credit party that raged around the world for the five years leading up to 2008, a few economists and investors studiously avoided the punch bowl. They stood in the corner, muttering darkly about how it would all end with the hangover of the century. They were outcasts. "I was lambasted and ridiculed as an idiot," says Michael Panzner, a stockbroker and author who began calling the collapse in 2005. "Like one of those guys holding a cardboard sign predicting apocalypse."
By the time Lehman Brothers collapsed and worldwide markets did their synchronized nosedive, Panzner had already published a book called Financial Armageddon: Protect Your Future from Economic Collapse and would soon follow up with When Giants Fall: An Economic Roadmap for the End of the American Era. Bearishness is a countercyclical asset; as the economy fell, the professional reputation of doomsayers soared. Suddenly they were the party animals. Gary Shilling, a veteran investment guru based in New Jersey, was feted for nailing all 13 of his investment guidelines for 2008, most of which involved shorting banks and housing. Banking analyst Meredith Whitney, who had shocked her peers with a devastating report on Citigroup (C) when it was still widely viewed as fundamentally sound, started her own firm on the basis of her newfound celebrity. An obscure New York University professor named Nouriel Roubini, aka Dr. Doom, became a headliner on the international conference circuit, attracting actual groupies.
Then the ground started to shift. For most of the last year the U.S. economy has been inching toward recovery. While far from sunny, 2009 didn't bring with it much in the way of tent cities or snaking breadlines, as some of the most extreme bears said it surely would. The U.S. Labor Dept. reported that payrolls grew by 431,000 in May, marking the fifth consecutive month of gains. In April, sales at U.S. retailers edged up 8.8 percent from the same month last year. The major investment banks beat analysts' (admittedly depressed) earnings expectations, and the markets gained 80 percent in just over a year. Consumer confidence is up, and gross domestic product, though hardly robust, is growing at around 3 percent. Gradually the bears lost airtime, and most—although not Roubini—slipped from view.
Now, as the markets show fresh signs of panic, much of it emanating from the sovereign debt crisis in Europe, the spotlight is swinging back their way. Despite evidence of improving conditions, most bears have changed their outlooks only marginally, if at all. Which raises the question: Is their persistent pessimism a mark of brave, nonconformist thinking, or has their negativity become a kind of crisis schtick—contrariness for the sake of notoriety? To find out if they should be feared or ignored, Bloomberg Businessweek assembled a cast of the most prominent bears from 2008, traced the development of their dark outlooks, and assessed where they see the economy going from here.
As early as 2004, Roubini, now 52, predicted an imminent recession caused by yawning U.S. trade deficits and a spike in oil prices and interest rates. It didn't come. In 2005 he again called for a recession. It didn't come. His revised prediction was for 2006. That year he spoke at an International Monetary Fund meeting and predicted the coming housing bust, saying the "United States was likely to face a once-in-a-lifetime housing bust...and ultimately a deep recession."
After Roubini's predictions finally came true and the world staggered into 2009, he said oil prices would remain low through the year, sinking to between $30 and $40 a barrel, and that the S&P would dip to 600. Neither happened. Oil jumped to $70 a barrel in November and the S&P hit bottom at 676, then blew past 1000. Still, Roubini sees doom almost everywhere, including Brazil, one of the world's best-performing economies over the past year; he diagnosed it as at risk of "overheating" at an event last month in São Paulo.
Back in the U.S., where he recently celebrated the publication of Crisis Economics: A Crash Course in the Future of Finance with a lavish party hosted by Ken Griffin of Citadel Investment Group, he remains skeptical of the banks, as well as the debts run up by the federal government to resuscitate them. In a May 11 interview with Charlie Rose, Roubini pointed out that the government had picked up roughly $40 billion of soured debt from now-deceased Bear Stearns and said "this buildup of public debt is something I worry about." He called the bailout of AIG (AIG) "a mistake," and when prodded by Rose said that "zero interest rates are leading to an asset bubble globally." In the first chapter of Crisis Economics, Roubini argues that financial crises are predictable and not merely random events. In discussing this with Rose, he said: "When you live in a bubble, everyone is delusional." Present company excepted, naturally.
Roubini is the leading brand name in the community of market prognosticators who pride themselves on being outside the Wall Street Establishment. This independence, they say, allows them to see the fictions that people inside the system are blind to. Compared with the others, Roubini's forecast is mild. Most tend to view a double dip as a near certainty, with the second leg more brutal and destabilizing than the first.
One of the most famous of these extremist outsiders is Robert Prechter. In the 1970s he revived an old system of measuring investor psychology called the Elliott Wave Principle and used it to advise subscribers of his investment newsletter on Oct. 5, 1987, that they liquidate their stock holdings. Two weeks later, the market crashed. Prechter was hailed as a genius—though the label didn't stick. In 1993, The Wall Street Journal ran a page-one story headlined "Robert Prechter Sees His 3600 on the Dow—But 6 Years Late." He stayed pessimistic through the 1990s, and in 2002 said the Dow Jones industrial average would fall below 1000. It surged 25 percent the following year and kept going up until 2007.
According to Prechter, 61, the market's failure to crash as he predicted only set it up for more devastating blows down the road—which could be right now. Last March he correctly called the market bottom and predicted a rally. That has now run its course. The Standard & Poor's 500-stock index, he says, will dip below its March 2009 low. "From a peak in 2010, the stock market should fall for six years," he says.
Although his pessimism remains the same, the basis of it has changed. This time around it's rooted in the actions of governments. "Government is acting like the last drunk at the party. Government is spending at an unprecedented rate, regulating the minutest areas of our lives, and strutting around as if it's solving problems as it creates them." Coming up next, according to Prechter? Another crisis in real estate and stocks. "The next crisis will encompass markets that are already off their highs: stocks, commodities, and real estate. But it will also extend to areas that have so far sailed through, namely corporate and municipal bonds, asset-backed bonds, and even many sovereign government bonds."
Money manager Peter Schiff was born an outsider—his father was a famous tax objector who is serving a lengthy sentence in an Indiana prison. Like Panzner, Schiff had a book on the shelves (Crash Proof: How to Profit from the Coming Economic Collapse) when the financial panic struck. His thesis, which revolved around the major structural flaws of the U.S. economy as well as what he saw as the inevitable collapse of the U.S. housing market, proved to be half correct. The second part of it, that investors could protect themselves by plowing their cash into foreign stocks, didn't pan out so well.
Schiff, 47, became a fixture on business television, fanning the flames with bold pronouncements that economic conditions were actually worse than people thought. Now he's attempting to leverage his notoriety into a run for the seat being vacated by Senator Chris Dodd (D-Conn.) Monetary policy, or what he sees as the colossal mismanagement of it by the Federal Reserve, is the centerpiece of his fledgling campaign. "Everything the government has done has been dead wrong," he says. "They have compounded the underlying problems in our economy."
On the campaign trail, Schiff gets worked up about the government's mishandling of the economy, especially the quasi-public mortgage agencies Fannie Mae (FNM) and Freddie Mac (FRE) that have consumed $125 billion in government aid so far. According to Schiff, the Obama Administration's decision to save companies deemed too big to fail exacerbated the problems facing the country because it created an unmanageable federal deficit. "We bought some time, but the cost of the borrowed time is a great recession," he says. "Those who think otherwise were just fooled by phony economic growth produced by stimulus funds."
Schiff believes that frivolous personal spending has corrupted the U.S. economy and that it must be reformed by reconstituting the manufacturing sector. "We have to spend less and we have to invest more because there is going to be a depression that spans the Obama Presidency," he says, "and it has the potential to be really horrific." When asked about immigration, on the campaign trail—where he barely has made a dent against former World Wrestling Entertainment executive Linda McMahon in the Republican primary—Schiff answers that he's more worried about the opposite: "Ambitious, smart people are going to want to leave the country. No one is going to want to stay here."
Like Schiff, Panzner is an evangelist on the evils of debt, and finds confirmation of his views in the Moody's Investors Service (MCO) statement in March that the U.S. government was at risk of losing its pristine AAA credit rating and might have to so drastically alter fiscal and monetary policy that it "will test social cohesion." Also like Schiff, he faults the government for not forcing Americans to reckon with the real consequences of the recession. "What makes this so much worse is that the government has been assuring people that everything will be O.K. and that a solution to this didn't require pain," he says. "That's just not true." Without a period of genuine austerity, he argues, the economy will never properly recover. "So yeah, I am a perma-bear," he says proudly. "Because none of the fundamental problems have been addressed, the government is still enabling companies to make risky loans, and even some of the same kinds of loans that helped contribute to the downturn in the first place."
Among the outsiders, Nassim Nicholas Taleb, 49, is the polemicist-in-chief. Famed for hectoring audiences of bankers (who invite him to speak and pay his five-figure speaker fees) and aggressively countering negative reviews of his work, Taleb gained a cult following when he published Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life in 2001. It was, naturally, a screed that detailed how Wall Street deludes itself and investors with neat predictive models that regularly get blown apart by reality.
In 2002, Malcolm Gladwell profiled Taleb in The New Yorker, focusing on his investment in cheap, out-of-the-money options, betting that the market underestimated the likelihood of crashes. Then he shot to stardom with the publication of The Black Swan: The Impact of the Highly Improbable in May 2007, which extended his critique of risk management on Wall Street. Taleb argued that the models used to measure and contain risk were inherently flawed because they did not—and could not—take into account the existence of black swans, or unpredictable, potentially disastrous events.
Taleb's timing was exquisite: The book hit shelves just months before banks started announcing billion-dollar writedowns on their subprime holdings. The Black Swan hovered at the top of the New York Times best-seller list, was translated into more than 27 languages, and won Taleb an appointment as Distinguished Professor of Risk Engineering at New York University, a custom-fit title he's quite proud of. "It's the highest title that they bestow in the department," he says.
To Taleb's way of thinking, the worldwide response to the 2008 crash has only made the economy more vulnerable to black swans. "The same analysis I made in 2006 holds stronger today with even more force," he says. "It's worse on both fronts. We have a swelling of contingent liabilities and hidden risk. We may be, cosmetically, growing things, but our liabilities and our debt are growing, too. I am expecting that things will only get worse because we wasted too much time not repairing the system. We are in an unprecedented time."
For pure bombast, Taleb's only rival is Marc Faber, who publishes the Gloom, Doom and Boom Report from his home in Hong Kong. Since 2002 the 64-year-old, Zurich-born economist has been predicting that the dollar would plummet in value, and since 2005 that an economic meltdown was about to hit the U.S. Faber now expects a sovereign-default domino effect, and he's not much rosier on China, saying in a Bloomberg Television interview that its economy might "crash" within the year. As for the S&P, he expects it to drop as much as 15 percent in the next six months. How will we cope with all this turmoil? In the June 2008 issue of Gloom, Doom and Boom, he recommended that Americans can help themselves by partaking in "prostitutes and beer" because they are "the only products still produced in the U.S."
BEARS WITH LESS BITE
When he last worked on Wall Street a quarter century ago, Gary Shilling, now 73, had a hard time being the bull his bosses wanted him to be. He believed the U.S. economy was in a long-term deflationary period and that bonds would prove to be a better bet than equities.
The last two years haven't shaken his certainty. He believes American consumers can't avoid a fundamental downshift in their spending habits. "It's not about perception at all," says Shilling, who was the chief economist at Merrill Lynch (MER) and has published an investment newsletter for the past 25 years. "I am a realist."
For someone who rejects the title of bear, Shilling has an unfortunate hobby: He keeps bees and frequently hands out jars of honey to friends—gifts far sweeter than his outlook on the global economy. After his stunning success in 2008, he kept investment advice unchanged heading into 2009, bluntly predicting "the worst global financial crisis and deepest world worldwide recession since the 1930s will continue throughout 2009," which Business Insider editors translated succinctly into "We are still screwed." He forecast a continued boom in U.S. Treasuries, as capital worldwide sought safety, and predicted that the S&P would end the year between 500 and 600 points. Not quite. It turned out to be almost double that, with Treasuries performing worse than the junk he warned investors away from.
Shilling holds to the view that recovery is a mirage whipped up by government stimulus, that the economy is held in check by declining home prices and contracting credit. Even though consumers had more personal income in March, according to the U.S. Commerce Dept., spending patterns didn't follow suit. The personal savings rate has been increasing, reaching 3.6 percent of disposable income in April. "With the decline of housing prices, consumers went off a cliff," he says. "They just don't have the kind of spending power or desire that they did in the past."
While many have focused on how the European debt crisis will effect U.S. trade with the Continent, Shilling sees it reigniting the banking crisis, which he contends has been papered over. "U.S. banks have $1.5 trillion in exposure to the euro zone and the U.K.," he says. "That's 48 percent of their total exposure, so the risk to the U.S. is predominately financial." Shilling doesn't mind one bit that 2009 returned him to the outskirts of popular opinion. Consensus around his views is bad for business. For his advice to be worthwhile to his newsletter subscribers, he says, "it's got to be something the herd doesn't see."
For Stephen Roach, traveling outside the pack is professionally precarious. Unlike most of the 2008 bears, he works within the financial Establishment, serving until recently as chairman of Morgan Stanley Asia. (He is now returning to New York, where he will split his time between Morgan Stanley and teaching at the Yale School of Management). "It's never easy, especially when you are working on Wall Street, especially when there is an awful lot at stake for the good times to continue," he says. "It's one thing to be an academic who can make points purely for academic purposes. It's energizing to think and rethink your position."
Roach, 64, has been warning Wall Street of imminent pain since 2004, based on his conviction that runaway housing prices were feeding an unsustainable boom in consumer spending. When he moved to Hong Kong in 2007, he focused his consternation on the East, arguing that for the world economy to achieve stability, Asians would have to start spending more and American consumers would have to start saving more.
Although he concedes that "the world is definitely in better shape than it was a year and a half ago," he believes, like Shilling, that the European debt crisis will smack the U.S. hard. "No one wants to talk about the possibility of a double-dip recession," he says, "but it's very much there." The $962 billion aid package hammered together by the E.U. "is not going to be enough," he says. "Multiple contractions will inevitably follow." Monetary policy is a particular bugaboo for Roach because he believes that the preponderance of easy money led to the bubbles and bursts. "Fiscal and monetary policymakers haven't given me any confidence that they have adopted or even thought deeply about an exit strategy from zero interest rates and massive deficits."
Like Roach, Meredith Whitney made her dire predictions from within the financial Establishment, which is one reason they caused such a stir. As an analyst for Oppenheimer, Whitney, 40, put out a research report with the seemingly innocuous title, "Is Citigroup's Dividend Safe? Downgrading Stock Due to Capital Concerns." The conclusion, however, was jarring: Unless Citigroup raised $30 billion by chopping its dividend or quickly unloading assets, Whitney opined, it would surely fail. Citi's shares promptly swooned, and within days the bank's CEO, Chuck Prince, resigned.
Whitney left Oppenheimer and launched Meredith Whitney Advisory Group in February 2009, where she continued to predict trouble in the banking sector. The market judged otherwise. In the spring of 2009, as the banking sector rallied strongly off its historic lows, Whitney made no calls as unambiguously prescient as her Citi analysis. She was skeptical of the government efforts to revive the banks and maintained her bearish stance. She remains extremely cautious, contending that U.S. lenders face a tough second quarter because of rising capital requirements that will undercut their profitability.
"A vast majority of last year's profits for the banks were government-induced," she told the Bloomberg Markets Global Hedge Fund & Investor Summit in May. "The government is putting a lifeguard on duty so that people will play in the pool." Still, she indicated that if prices fell further, she might dip a toe in the water and fish out some bank stocks. As for the housing market, "I'm steadfast in my belief that there's going to be a double dip," she says.
David Rosenberg, chief economist at Gluskin Sheff, has been as consistently bearish as Whitney, though he's less certain of a double dip. His is the cool, calm, and collected voice of doom, cautioning restraint and a dispassionate assessment of the markets. In his former job as chief North American economist at Merrill Lynch, Rosenberg was persistently wary of the boom surrounding him. In 2006 he circulated a research note called "Reassessing Hard Landing Risks" in which he argued that "you can't blindly look at a 4.7% unemployment rate and draw the conclusion that the labor market is tight enough to generate accelerating wage growth when there are as many as three potential job seekers out there for every available position."
As the subprime mortgage market contagion spread into 2008, Rosenberg estimated that the economy would barely notch any real growth, pegging his estimate at 1.6 percent. By the end of January, he'd already cut his forecast in half. He has long been more negative than most. In a 2008 Bloomberg survey of 55 forecasters, he ended up in the bottom 10 for his predictions on GDP, inflation, unemployment and the federal interest rate for 2006 to the middle half of 2008. Rosenberg has spent most of the past year casting doubt on the market rally, which he saw as a product of government stimulus and false hope. "Still no sign of organic private sector growth," he wrote on Feb. 3, 2010.
For now, he says, investors should understand that a "corrective phase is completely normal." The movement of the markets so far, he says, is pointing toward some "visible growth moderation toward the end of the year, but not a double dip recession." Rosenberg, 49, hasn't yet settled on the magnitude of the contraction. For now he's focused on the stability of whatever growth we've seen. "Mortgage applications for new purchases are down to levels we haven't seen since 1997 and there is a downdraft of jobs, so the recoveries are extremely fragile." But he allows that economic data don't tell the whole story. "The problem, of course, is essentially one of human emotion," he says. "We are essentially somewhere between Armageddon and Nirvana."
That's called a hedge.
Even the most sophisticated people have difficulty switching world views, especially after their views have been affirmed. "Outlooks tend to be fairly deeply ingrained," says Julie K. Norem, an associate professor of psychology at Wellesley College. "Pessimists will pay attention to information that is punishing, not rewarding, and that's their fundamental outlook."
Some bears understand that—and are trying hard to change. Take Jeremy Grantham, the erudite 71-year old head of Grantham Mayo Van Otterloo, who trotted out his negative predictions to much public ridicule at the 2006 meeting of the IMF in Davos. While he has been predominately down on the economy since 1997, he has to balance his negative view of the economy against the demands of his day job, which is about making money for clients. During a January speech to investment advisers, he reflected on the price of his past bearishness: "We lost business like it was going out of style."
While he's certainly not a bull this time around, Grantham has taken a gentler tone on the U.S. economy's future. He says it won't be disastrous and is advising his clients to pick up stocks of U.S. companies with little debt and stable returns, which will beat out other large-cap firms. His latest newsletter, called "Playing with Fire (A Possible Race to Old Highs)," expresses both hostility to what he sees as the Federal Reserve's careless monetary policy and a flirty acknowledgment of the investment opportunities out there. Fed Chairman Ben Bernanke, Grantham writes, "is begging us to speculate."
James Grant, the 63-year-old publisher of Grant's Interest Rate Observer, also refuses to stick to pessimism merely for consistency's sake. Grant's reputation also soared in the 1987 crash—and fell during the two major bull markets since. The Wall Street Journal lampooned him in 1996 for being "a foolish idiot who was way behind the times," he says. "That's what I remember most about the errors of my impetuous youth, having an unshakable conviction that the credit difficulties were never really resolved, therefore the stock market was on shaky ground. It makes me very humble about what one can know about the future, and makes me less dogmatic."
Where not so long ago he saw inflated prices everywhere, he is now enthusiastic about undervalued assets, recently advising his newsletter clients to buy the despised stock of Yellow Pages publishers and steering them away from bonds ("bundles of promises to repay debt with valueless currency," he called them). The bookish investor, in jaunty pinstripes and tortoiseshell glasses, is actually optimistic about the economy—or at least optimistic for him. "I am a skeptic who is trying to be less the prisoner of his own neurological makeup," he says, before citing historical precedent: "There is a well-documented tendency for steep and ugly recessions to give rise not to weak and profitless recoveries, but to strong ones."
Peering out his office at a picture-perfect view of 300-year-old Trinity Church, Grant continued: "We observed this in the recessions of 1991 and 2001, which were meek and mild, and so were the corresponding recoveries." The deep recession of the early 1980s, on the other hand, led to a spectacular recovery. Based on that, Grant believes the rebound from this recession will be job-rich and strong, a position he has stuck to for nine months now. His bear suit has been sent out to the cleaners, and he doesn't know when it's coming back.
U.S. Home Foreclosures Climb 44% to Record in May
by Dan Levy - Bloomberg Business Week
U.S. home foreclosures reached a record for the second consecutive month in May, with increases in every state, as lenders stepped up property seizures, according to RealtyTrac Inc. Bank repossessions climbed 44 percent from May 2009 to 93,777, the Irvine, California-based data company said today in a statement. Foreclosure filings, including default and auction notices, rose about 1 percent to 322,920. One out of every 400 U.S. households received a filing.
“We’re nowhere near out of the woods,” Rick Sharga, RealtyTrac’s senior vice president for marketing, said in a telephone interview. “We’re likely to set a quarterly record for home seizures if June is anything like May.” Lenders are completing the “inevitable progression” of taking properties from homeowners who stopped paying, Sharga said. He predicted last month that another 5 million delinquent mortgages will end in foreclosure in addition to properties that had already been repossessed.
Almost 3.1 million properties have been seized by banks since April 2005, Daren Blomquist, RealtyTrac’s marketing communications manager, said in an interview today. “The second quarter won’t be the peak,” Sharga said. “I’m not even sure 2010 will be.” The previous record for seizures was 92,432 in April. Last month was the first in which every state had an increase in repossessions from a year earlier, according to RealtyTrac.
U.S. private payrolls rose by 41,000 in May, Labor Department data showed last week. The hiring of temporary census workers boosted overall payroll growth to 431,000. The jobless rate fell to 9.7 percent, from 9.9 percent in April. Almost a quarter of the nation’s mortgage holders owed more than their homes were worth in the first quarter, Zillow.com said last month. Bank sales of foreclosed properties accounted for more than a fifth of all U.S. home transactions in March, the Seattle-based real estate data provider said.
Wells Fargo & Co. and Bank of America Corp., the two largest U.S. home lenders, are cutting principal on some mortgages in an effort to keepwners in properties and get them to pay at least part of what they owe. Bank of America said in March it was reducing principal for some borrowers who owe more than 120 percent of what their homes are worth. “Marginal people, those types that were working as laborers, are most affected by foreclosures,” said Albert Kyle, a finance professor at the University of Maryland’s R.M. Smith School of Business in College Park. “A lot of foreclosures are occurring in modest houses.”
The number of homes that received default notices last month was 96,462, down 7 percent from April and 22 percent from a year earlier, RealtyTrac said. A default notice is the first stage in the foreclosure process. They peaked at 142,064 in April 2009. A foreclosure auction, the second stage in the process, was scheduled on 132,681 properties, down 4 percent from April and about 1 percent from May 2009. The record was 158,105, reached in March.
Nevada had the highest foreclosure rate for the 41st straight month. One in every 79 households got a notice, more than five times the national average. Filings fell almost 12 percent from the previous month and 16 percent from May 2009. Arizona had the second-highest rate, at one in 169 households, or more than twice the U.S. average. Filings fell 5 percent from a year earlier. Florida ranked third at one in 174 households, and California was fourth at one in 186.
Rise in Michigan
Michigan ranked fifth at one in 223 households, with filings up 6 percent from April and 46 percent from a year earlier, RealtyTrac said. Georgia, Idaho, Illinois, Utah and Maryland also ranked among the 10 highest rates. Ten states accounted for more than 70 percent of all U.S. filings, led by California’s 72,030. Filings in the most populous state rose 3 percent from April and declined 22 percent from a year earlier.
Florida ranked second with 50,685 filings, up 5 percent from April and down 14 percent from a year earlier. Michigan was third at 20,322, followed by Arizona at 16,097. Illinois had 15,061 filings, up 38 percent from a year earlier, and Nevada had 14,346. Georgia, Texas, Ohio and New Jersey rounded out the top 10, said RealtyTrac, which sells default data from more than 2,200 counties representing 90 percent of the U.S. population.
U.S. House approves bill to rebuild FHA coffers
by Corbett B. Daly - Reuters
The U.S. House of Representatives on Thursday approved a bill to shore up the finances of the cash-strapped Federal Housing Administration while also backing a measure to raise the loan limits for FHA-backed mortgages used to develop some apartment buildings. In a 406-4 vote, lawmakers approved legislation to strengthen the FHA's finances by giving it authority to nearly triple the annual fees it charges to borrowers, known as mortgage insurance premiums.
But lawmakers struck down a proposed amendment to require borrowers who purchase a home with a loan backed by the FHA to put more money down. Minimum down payments are still 3.5 percent, though lawmakers did back a plan to require the FHA to examine those down payment requirements every year and submit a report to Congress. The proposal to raise down payment minimums to 5 percent, sponsored by New Jersey Republican Representative Scott Garrett, had not been not expected to pass but did force members of the committee to vote against tightening lending standards at a time when the FHA is under financial stress.
The FHA has capital reserves equal to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures, well below the 2.0 percent required by law, according to an independent actuarial study released late last year. The bill would give the FHA authority to raise annual mortgage insurance premiums -- which are paid out by the borrower over the life of the loan -- to a maximum 1.5 percent. That's up from the current 0.55 percent maximum, though the FHA says that if the measure becomes law it would gradually raise the premium--first to 0.85 percent or 0.9 percent.
To become law, the measure still faces approval by the Senate before President Barack Obama could sign it into law. A Senate version has not yet been introduced. If the FHA is granted authority to raise the annual premium, FHA has said it would lower a separate upfront premium from the current 2.25 percent to offset those costs. The upfront premium is paid all at once at the time the loan is issued.
Representatives Anthony Weiner, a Democrat from high-priced New York and Republican Gary Miller from high-priced Southern California, sponsored the amendment, approved by voice vote, to increase the loan limits for buildings to be devloped into rental apartments. FHA Commissioner David Stevens has repeatedly expressed confidence that the agency's Capital Reserve Account would return to levels above 2 percent as recent changes to FHA underwriting standards would bring an additional $5.8 billion to FHA coffers. The non-partisan Congressional Budget Office estimates those changes will bring just $1.9 billion to the FHA.
Because about 80 percent of the FHA's business is with first-time home buyers, who typically make smaller down payments, the FHA's role in the housing market is widely seen as vital. The FHA's share of the mortgage market has ballooned from a few percent in the boom years to more than 30 percent of home-purchase loans today as private capital has dried up. Including loans backed by Fannie Mae and Freddie Mac, the government is directly or indirectly backing close to 97 percent of the mortgage market.
The legislation's chief sponsors are Representative Maxine Waters, a California Democrat, Representative Shelley Moore Capito, a West Virginia Republican and Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee.
Lawmakers consider home tax credit extension
by Alan Zibel - AP
Homebuyers may get an extra three months to finish qualifying for federal tax incentives that boosted home sales this spring. Senate Majority Leader Harry Reid, D-Nev., said Thursday he wants to give buyers until Sept. 30 to complete their purchases and qualify for tax credits of up to $8,000. Under the current terms, buyers had until April 30 to get a signed sales contract and until June 30 to complete the sale.
The proposal would only allow people who already have signed contracts to finish at the later date. The National Association of Realtors estimates that about 180,000 homebuyers who already signed purchase agreements are likely to miss the deadline. Reid introduced the proposal as an amendment to a bill that would extend jobless benefits through the end of November. Joining him were Sen. Johnny Isakson, R-Ga., and Christopher Dodd, D-Conn.
The Senate is expected to take up the amendment next week. Senate Democratic leaders hope to finish work on the jobless benefits bill next week, but they have yet to secure enough votes.
Reid, who faces perhaps the toughest re-election campaign of his political career, represents a state that has the nation's highest foreclosure rate. The Realtors group has been pushing hard in Congress for the extension. Mortgage lenders, the trade group says, have been swamped with borrowers trying to get approved by the end of the month. Many potential borrowers are unlikely to make the deadline.
"Time is of the essence," said Lucien Salvant, a spokesman for the group. "It's important for Congress to get this done, because there's whole bunch of loans that aren't' going to close on time."
First-time buyers were eligible for a tax credit of up to $8,000. Current owners who bought and moved into another home could qualify for a credit of up to $6,50
FBI to target mortgage fraud
by Suzanne Kapner - Financial TImes
The Federal Bureau of Investigation is preparing a nationwide crackdown on mortgage fraud, the latest in a series of efforts to curb lending practices that contributed to the housing meltdown, according to people familiar with the matter. The FBI is preparing to arrest hundreds of people across the US as early as next week for offences including encouraging borrowers to falsify income on mortgage applications, misleading home owners about foreclosure rescue programmes, and inflating home appraisals, said two people with knowledge of the operation. An FBI spokesman declined to comment.
Since October 2008, the FBI has opened 23 local mortgage fraud task forces around the country with the purpose of curtailing the illegal misstatement, misrepresentation or omission of material facts on mortgage applications. Such misstatements and omissions helped to fuel the housing bubble by allowing brokers, banks and other lenders to issue loans to borrowers with unverified income and low credit scores.
Many of these borrowers could not afford the loans and once the housing market started to deflate they stopped making interest and principal payments. More recently, mortgage fraud has involved foreclosure schemes in which financial firms collect a fee for falsely promising to help borrowers stay in their homes. As of June 2009, suspicious mortgage-related activity for the year was on track to exceed 70,000 cases, a 10 per cent increase over 2008 levels, according to preliminary FBI estimates. Mortgage fraud-related losses totalled $1.4bn in 2008, an 83.4 per cent rise over the previous year.
In the first six months of 2009, losses exceeded levels for the same period in 2008 by $208m. California and Florida, two states that played a key role in the subprime meltdown, had the most mortgage fraud in 2008, according to the latest data. Los Angeles, Miami, San Francisco, Chicago, Sacramento, New York, Tampa, Detroit, Minneapolis and Atlanta were the top cities in descending order for mortgage fraud.
The FBI is scheduled to release its 2009 mortgage report on June 17. In previous years a series of arrests have coincided with the report’s publication. In June 2008, the FBI, along with other agencies, arrested 400 people as part of “Operation Malicious Mortgage,” a comprehensive shutdown of illegal mortgage schemes. That sweep was a coordinated effort among multiple agencies, including the Internal Revenue Service, the Department of Housing and Urban Development and the Federal Deposit Insurance Corporation. A multi-agency effort is also expected to be behind the latest crackdown, said a person familiar with the operation.
Government Raises Estimate Of Oil Flow To 20,000 To 40,000 Barrels A Day, More Or Less
by Dan Froomkin - Huffington Post
The Obama administration has once again increased its estimate of the flow of oil from BP's blown-out well. Three different groups of scientists making educated guesses have come up with upper and lower ranges that go as low as 12,600 barrels a day and as high as 50,000 barrels a day. Marcia McNutt, the federal official charged with determining the flow rate, cited the range of about 20,000 to 40,000 barrels a day as the official estimate. That would be 840,000 to 1.7 million gallons a day.
All those numbers come with the caveat that they estimate the flow from the well before a kinked riser pipe was lopped off on June 3, a move that inevitably increased the flow, although to what extent remains unclear. Interior Secretary Ken Salazar told lawmakers on Wednesday that the riser cut increased flow four to five percent -- though given the extraordinary range of guesses involved, it's hard to fathom how he could be so sure.
The new numbers could still be low. One member of the flow group told reporters earlier this week that the flow could well be 100,000 barrels a day. But the actual flow rates are certainly much higher than the 5,000 barrel a day figure that the government stuck to long after the first video from the well head made it clear the real number was magnitudes higher. "This is obviously a challenging scientific issue, since the leak is located a mile beneath the ocean," McNutt, the head of the U.S. Geologic Service, told reporters in a conference call.
One of the teams of scientists -- led by Richard Camilli of the Woods Hole Oceanographic Institution -- is new to the government's estimating group. McNutt said that team is using acoustic technology to measure the flow rate. Yet another team, this one led by Energy Secretary and Nobel Laureate Steven Chu, is analyzing differential pressure readings they demanded BP provide from both inside and outside the new containment cap, but McNutt said their measurements are not yet complete.
These estimates still carry with them a great deal of uncertainty. One group estimated a range from 12,600 to 21,500 barrels a day; another estimated a range from 25,000 to 50,000 barrels a day. In other words, both of them can't be right. At 40,000 barrels (1.7 million gallons) a day, over 52 days, that would mean the blown-out well has belched over 2 million barrels (88 million gallons) of oil into the Gulf of Mexico -- and somewhere around that much gas as well. The 1989 Exxon Valdez spill was estimated at about 250,000 barrels, which would make this spill at least 8 times as big, and counting.
BP CEO Tony Hayward warns top BP investors it's 'likely' to suspend dividend
by Louise Armitstead, Harry Wilson, Rowena Mason and Helia Ebrahimi - Telegraph
Tony Hayward has warned BP’s top institutional shareholders that he is now “likely” to suspend the dividend for up to two quarters in a radical bid to appease US President Barack Obama. The embattled chief executive briefed investors yesterday afternoon on plans that would halt dividend payments at BP for the first time in 18 years. Other BP board members were despatched to meet top institutions to “ask for their opinion and blessing” on the plans they claim are an unavoidable political cost of the oil spill in the Gulf of Mexico.
Meanwhile, in other developments:
- Carl-Henric Svanberg, chairman of BP, met George Osborne, the Chancellor, at Downing Street.
- Nancy Pelosi, US House of Representatives speaker, added to calls for BP to suspend dividend payments.
- Florida demanded $2.5bn (£1.7bn) in escrow to cover potential losses as heavier oil washed ashore.
BP’s directors are still insisting that the company has enough cash to continue paying the dividend but explained to investors that suspending the payment is the only move that could ease the damaging political attacks. Insiders said that the majority of shareholders were supportive of the move, although they told Mr Hayward they wanted “some quid pro quo” from the US government that the “excessive” anti-BP rhetoric would stop.
One source close to the talks said: “Investors are very keen that they don’t give up the dividend for nothing. They will give Obama his political victory but only in return for assurances from the US. Investors also made it clear to BP that the company must stand up and fight.” Under plans being discussed by BP, the dividend could be paid into an escrow account that could then be distributed to investors after the clean-up and compensation costs have been settled. The company is determined to avoid setting up a general compensation fund because of fears the US demands will be limitless.
Investors told BP they would rather see the dividend suspended for a short time and then re-established in full rather than cut and then remain at a lower level. They also sought assurances from BP that the suspension would last a maximum of two quarters. BP has not yet made a decision on its dividend policy but is expected to finalise its policy at a board meeting early next week. The decision is expected to coincide with the launch of a more intense diplomatic strategy backed by the Government.
BP’s share price has almost halved since the disaster on April 20, wiping nearly £50bn off the company’s market value. Yesterday, the stock rallied 7pc to 391.9p on the view that markets had over-reacted. The company is also facing a crisis in the credit markets, as the cost of insuring its debt in the wake of the spill has spiralled to new highs, with bond markets indicating for the first time that bankruptcy is a real possibility. Credit default swaps on BP debt closed last week at more than 470 basis points, meaning that to insure £1,000 of the company’s bonds against default now costs £47, which compares with less than £5 on the day the Deepwater Horizon oil rig exploded, triggering the leak.
Banks with credit lines to BP, along with counter-parties of the oil company’s trading arm, have all been large buyers of credit protection in recent days. The frantic buying, which has seen trading in BP bonds and CDS rise from negligible amounts to between £500m and £1bn a day in the past week, has caused the company’s one-year yield curve to invert, meaning that its short-term cost of borrowing is now higher than its long-term rate. Yield curve inversions are one of the most obvious market signals that a borrower is expected to default, or even go bankrupt.
The yield curves of US investment banks Bear Stearns and Lehman Brothers both inverted in the weeks and days leading up to their collapse, though few think it is likely that BP is facing an imminent default situation. Simon Ballard, a senior credit strategist at RBC Capital Markets, said: “Clearly, the market is going to take some convincing that the company can survive in one piece.”
Hedge funds have become big traders in BP debt, which from being among the most predictable investments in the market has turned into one of the most volatile.
“It’s the biggest game in town; funds see this as the new Greece,” said Anthony Peters, a strategist at SwissInvest in London. “The wide bid/offer spread, the volatility and the large volumes make this the perfect trade for hedge funds and an ideal opportunity for them to make back money.”
In an analyst and investor conference call last week, Mr Hayward and Mr Svanberg tried to calm market fears surrounding BP and the potential financial impact of the spill, which is expected to leave the company with a bill that could easily exceed $10bn. Despite these assurances, BP shares and debt have fallen in value this week. The shares are down 10pc over the week, while the cost of insuring BP’s debt more than doubled over the same period. A spokesman for BP said the company’s financial position remained strong.
Michael Bloomberg, mayor of New York city, was a rare American voice to speak out in defence of the company and of Mr Hayward. The billionaire businessman said that Mr Hayward “didn’t exactly go down there and blow up the well”.
Investors fear no limit to spill damages
by Ed Crooks - Financial Times
The reason investors have been panicking about BP over the past couple of days is that the US administration has apparently crossed a line in its determination to take action against the company. When Ken Salazar, the interior secretary, said he would hold BP responsible for the wages of workers on oil rigs who lost their jobs, he raised the prospect that the cost to BP could be limited only by the administration's restraint.
Mr Salazar told a Senate energy committee hearing that job losses among workers laid off as a result of the administration's six-month ban on deep-water drilling in the Gulf of Mexico were "some of the consequences from that [BP] oil spill", and therefore the company's responsibility. The concern for BP's investors is not just the extra cost in itself, which could potentially run into billions, but the signal it sends on how far the administration is prepared to stretch the definition of damage caused by the spill.
By the same logic, the government could pursue BP for the tax revenues it will not earn on the operations shut down by the drilling ban. The possibilities for similar claims are endless. Some commentators have drawn a parallel with Yukos, once Russia's largest oil group but forced into bankruptcy between 2003 and 2006 under pressure from Vladimir Putin, then president. That analogy may be exaggerated, but investors' fears about the attitude of the administration are real.
Yesterday's fall in the share price to its lowest since 1997, even though it was reversed later in the day, and the soaring cost of insuring BP's debt against default to junk bond levels, reflected growing nervousness that the financial burden of the Deepwater Horizon accident might be hard to bear, even for a company the size of BP. Until now, the debate on BP's dividend, the central issue driving the share price, has focused on the question of political tactics.
When the board comes to take a decision on the second-quarter dividend, to be announced on July 27, some analysts believe it should make a gesture to placate US lawmakers. who have been demanding that it should be suspended until the full costs of the disaster are known. Tony Hayward, BP's chief executive, told shareholders last week that the company had sufficient financial strength to meet its obligations to "all stakeholders", including investors as well as the communities of the Gulf coast affected by the spill.
"From a financial point of view, the numbers are there to pay the dividend," says Richard Griffith of Evolution Securities. "But there is an emotive situation going on here, and BP's board might decide to suspend the dividend for two quarters to cover the capping of the well and the majority of the clean-up."
As estimates of the cost to BP escalate, however, the financial strain it could impose on the company begins to look significant. Analysts at Citigroup forecast that BP will have free cash flow after its dividend of only about $1.2bn (€1bn, £827m) this year, after paying the same dividend as last year, at a cost of $10.5bn. The cost of tackling the spill has already exceeded that figure, BP has said, which means that the cost of the clean-up will have to be funded by higher -borrowings.
BP entered the crisis in a strong financial position, with debt just below its target range of 20-30 per cent of capital employed, but that gives it room to borrow only about another $18bn before it risks going over that ceiling. Next year and thereafter, free cash flow should improve to about $12bn per year, Citigroup believes, but that figure is based on an oil price of $80 per barrel, and a weaker price would mean a tighter cash position. Cutting capital spending, which is about $20bn per year, would be possible but highly damaging to BP's future.
The inherent decline of oil and gas fields means that companies are constantly running to stand still, having to develop new production merely to stop their output falling. BP already invests at only about 70 per cent of the rate of Royal Dutch Shell, its leading European rival. The result is that if the cost of the disaster rises to $40bn or so, the figure now being suggested by some analysts, with most of that likely to come in punitive damages, it would curtail the company's cash flows.
Even if spread over a number of years, which it would be, it would put the dividend under pressure if combined with a period of weak oil prices. The risk that the US administration will keep adding to the costs explains why BP's investors - and no doubt the company itself, if only as worst-case scenario planning - are considering extreme options such as a takeover, demerger or receivership.
Final relief for BP is unlikely to come until after the US elections in November, the company's executives believe. By then, the well should have been plugged, and most of the oil cleaned from the coast, although the environmental damage is likely to take many years to put right. With the immediate political pressures behind it, the administration is likely to feel it can ease up a bit on BP. Until then, however, the company's investors are likely to be in for a bumpy ride.
Former EPA Chief On Gulf Oil Spill: 'It's Going To Blow The Record Books Up'
by Brian Skoloff - Associated Press
New estimates equate leak to an Exxon Valdez every 5 days
The astonishing news that the oil leak at the bottom of the sea may be twice as big as previously thought could have major repercussions for both the environment and BP's financial health, killing more marine life and dramatically increasing the amount the company must pay in fines and damages. Scientists now say the blown-out well could have been spewing as much as 2 million gallons of crude a day before a cut-and-cap maneuver started capturing some of the flow, meaning more than 100 million gallons may have leaked into the Gulf of Mexico since the start of the disaster in April. That is more than nine times the size of the 1989 Exxon Valdez disaster, previously the worst oil spill in U.S. history.
The larger estimates, while still preliminary and considered a worst-case scenario, could contribute to breathtaking liabilities against BP. Penalties can be levied against the company under a variety of environmental protection laws, including fines of up to $1,100 under the Clean Water Act for each barrel of oil spilled. Based on the maximum amount of oil possibly spilled to date, that would translate to a potential civil fine for simple discharge alone of $2.8 billion. If BP were found to have committed gross negligence or willful misconduct, the civil fine could be up to $4,300 per barrel, or up to $11.1 billion. "It's going to blow the record books up," said Eric Schaeffer, who led the Environmental Protection Agency's enforcement office from 1997 to 2002.
A larger spill also could lead to increased environmental hazards, with shrimp, crabs and fish such as marlin and swordfish especially hard hit. "Certainly if there are greater volumes of oil than were originally estimated, that doesn't bode well," said Jim Franks, a fisheries biologist at the University of Southern Mississippi Gulf Coast Research Laboratory. "Do we expect twice the impact? I don't know how to judge that, but that much more oil could not be good at all for fish and wildlife resources. I would anticipate far-reaching impacts."
Days after the spill began, government officials told the public that the ruptured well a mile below the Gulf was leaking 42,000 gallons a day. Then, officials said it was actually five times bigger. That estimate didn't last long either. The new estimates are based on spillcam video as well as such things as satellite, sonar and pressure readings. The lead scientist in the effort said the most credible range at the moment is between 840,000 gallons and 1.68 million gallons a day.
Another part of the equation is how much more oil started to leak last week after the riser pipe was cut, a step that BP and government officials said could increase the flow by 20 percent. The pipe cut was necessary to install a cap over the well; the cap has captured an estimated 4 million gallons so far. If the higher-end estimates prove accurate, the leak amounts to an Exxon Valdez every five days or so. At that rate, in just over three weeks from now it will eclipse the worst oil spill in peacetime history, the 1979 Ixtoc disaster in Mexico, which took 10 months to belch out 140 million gallons of oil into the Gulf.
And there's more bad news. The oil gushing from the Gulf contains large amounts of natural gas. Samantha Joye, a professor of marine sciences at the University of Georgia, said that can contribute significantly to oxygen levels plummeting in the water as microbes eat the methane clouds. In addition to the potential for billions in fines, BP is responsible for paying all cleanup costs and up to $75 million for economic damages. But it could face far heavier expenses if gross negligence is found or if it is determined that there was a violation of a federal safety, construction or operating regulation, Schaeffer said. "You bet the trial lawyers are sharpening their swords around that language," he said.
And that's not including the tens of billions of dollars in shareholder wealth that has already evaporated with the plunge of BP's stock since the disaster. New York City Mayor Michael Bloomberg became a lonely defender of BP, declaring the world should not rush to point fingers at the British oil giant. The billionaire tycoon often sides with CEOs and businesses entangled in public relations disasters. "The guy that runs BP didn't exactly go down there and blow up the well," Bloomberg said on his weekly radio show. "And what's more, if we want them to fix it and they're the only ones with the expertise, I think I might wait to assign blame."
That the BP oil spill may be twice as bad as earlier estimates was hard news to hear but no surprise to Christian Delos Reyes, a 39-year-old oyster dredger. "Crabs start real small. You know they're all going to die. It'll kill all the oysters. In my opinion, I don't think it'll ever be all right," Reyes said. "I think it's destroyed." Wanda Kirby, 65, owns the Sandpiper Shores Motel in Grand Isle, La., a couple of hundred feet from where a long strand of bright orange boom slices across the beach to block the oil. "Whether it's five gallons or five million, I don't care. We don't really need to be wasting time measuring it," she said. "We just need to stop it."
From the Ground: BP Censoring Media, Destroying Evidence
by Riki Ott - Huffington Post
While President Obama insists that the federal government is firmly in control of the response to BP's spill in the Gulf, people in coastal communities where I visited last week in Louisiana and Alabama know an inconvenient truth: BP -- not our president -- controls the response. In fact, people on the ground say things are out of control in the gulf. Even worse, as my latest week of adventures illustrate, BP is using federal agencies to shield itself from public accountability.
For example, while flying on a small plane from New Orleans to Orange Beach, the pilot suddenly exclaimed, "Look at that!" The thin red line marking the federal flight restrictions of 3,000 feet over the oiled Gulf region had just jumped to include the coastal barrier islands off Alabama. "There's only one reason for that," the pilot said. "BP doesn't want the media taking pictures of oil on the beaches. You should see the oil that's about six miles off the coast," he said grimly. We looked down at the wavy orange boom surrounding the islands below us. The pilot shook his head. "There's no way those booms are going to stop what's offshore from hitting those beaches."
BP knows this as well -- boom can only deflect oil under the calmest of sea conditions, not barricade it -- so they have stepped up their already aggressive effort to control what the public sees. At the same time I was en route to Orange Beach, Clint Guidry with the Louisiana Shrimp Association and Dean Blanchard, who owns the largest shrimp processor in Louisiana, were in Grand Isle taking Anderson Cooper out in a small boat to see the oiled beaches. The U.S. Coast Guard held up the boat for 20 minutes - an intimidation tactic intended to stop the cameras from recording BP's damage. Luckily for Cooper and the viewing public, Dean Blanchard is not easily intimidated.
A few days later, the jig was up with the booms. Oil was making landfall in four states and even BP can't be everywhere at once. CBS 60 Minutes Australia found entire sections of boom hung up in marsh grasses two feet above the water off Venice. On the same day on the other side of Barataria Bay, Louisiana Bayoukeeper documented pools of oil and oiled pelicans inside the boom - on the supposedly protected landward side - of Queen Bess Island off Grand Isle.
With oil undisputedly hitting the beaches and the number of dead wildlife mounting, BP is switching tactics. In Orange Beach, people told me BP wouldn't let them collect carcasses. Instead, the company was raking up carcasses of oiled seabirds. "The heads separate from the bodies," one upset resident told me. "There's no way those birds are going to be autopsied. BP is destroying evidence!"
The body count of affected wildlife is crucial to prove the harm caused by the spill, and also serves as an invaluable tool to evaluate damages to public property - the dolphins, sea turtles, whales, sea birds, fish, and more, that are owned by the American public. Disappeared body counts means disappeared damages - and disappeared liability for BP. BP should not be collecting carcasses. The job should be given to NOAA, a federal agency, and volunteers, as was done during the Exxon Valdez oil spill in Alaska.
NOAA should also be conducting carcass drift studies. Only one percent of the dead sea birds made landfall in the Gulf of Alaska, for example. That means for every one bird that was found, another 99 were carried out to sea by currents. Further, NOAA should be conducting aerial surveys to look for carcasses in the offshore rips where the currents converge. That's where the carcasses will pile up--a fact we learned during the Exxon Valdez spill. Maybe that's another reason for BP's "no camera" policy and the flight restrictions.
On Saturday June 12, people across America will stand up and speak out with one voice to protest BP's treatment of the Gulf, neglect for the response workers, and their response to government authority. President Obama needs to hear and see the people waving cameras and respirators. Until the media is allowed unrestricted access to the Gulf and impacted beaches, BP - not the President of United States - will remain in charge of the Gulf response.
States Seek Compensation From BP as Losses Mount
by Mike Esterl - Wall Street Journal, in Gulf Shores, Alabama
States along the Gulf of Mexico are ratcheting up demands for financial compensation from BP PLC as a massive oil spill continues to spread along their shorelines, slamming the tourism and fishing industries. The British oil company meanwhile submitted to the federal government a new plan aimed at increasing the amount of oil it is collecting at the Deepwater Horizon well site, U.S. Coast Guard Adm. Thad Allen said Friday.
The proposal involves replacing BP's current drilling ship with other vessels that can withstand harsher sea conditions and will be able to capture more oil as the company awaits a more permanent solution: the completion of drilling on two relief wells. U.S. government officials are reviewing the plan, Adm. Allen said. BP said it captured 15,400 barrels from the well on Friday, more than seven weeks since the Deepwater Horizon rig exploded and sank. Scientists charged by the government with measuring the well's flow rate now estimate that 20,000 to 40,000 barrels a day could be spewing into the Gulf.
State officials say they are feeling the effects, not only on their beaches but in their coffers. Joe Morton, Alabama's education superintendent, said he plans to deliver a sizeable bill to BP in the coming weeks to cover lost income and sales-tax receipts that fuel about 90% of the state's $5 billion annual budget for schools. Like most state governments, Alabama's has been reeling from the impact of the recession on its revenue.
"We're already down to the bone" in terms of funding, Mr. Morton said in an interview Friday. The state cut its education budget by 7.5% this year, to $5.3 billion. It pulled more than $800 million from "rainy day" funds the previous two years to soften budget cuts, but those emergency funds are now empty, he added.
Tar balls have been washing ashore on Alabama's beaches and parts of Florida's Panhandle coast since last week, driving away tourists and curbing fishing activities. In recent days, the oil also has begun invading environmentally sensitive inlets, including Perdido Pass on the Alabama-Florida border. Florida's Attorney General, Bill McCollum, sent a letter to BP on Thursday requesting that the company deposit $2.5 billion into an escrow account to cover potential losses. The spreading spill likely represents "a staggering blow" to the state's economy and already has "seriously" hurt local tourism and fishing, Mr. McCollum wrote.
BP said late Thursday it would give an additional $25 million each to Florida, Alabama and Mississippi to help with recovery efforts. It made identical grants to the three states in early May, in addition to a combined $55 million grant in mid-May for tourism marketing efforts. Local authorities say they need much more to recover lost wages and taxes. In this popular Alabama tourist region, most beach chairs were empty on Friday and a 1,500-foot-long fishing pier was closed to anglers. Some tourists waded into the surf along the beaches, despite signs advising them to stay out of the water because of the spill.
Robert Craft, the mayor of Gulf Shores, said vacation rental rates are down anywhere from 30% to 70% in the town, which will hurt the town's tax collections. "In June, it has just fallen off the table," said Mr. Craft, of tourist bookings. Baldwin County, encompassing Gulf Shores and other beach towns, typically generates $1.7 billion in tourist spending between Memorial Day and Labor Day, he added.
Tourism pumps an estimated $9 billion a year into Alabama's economy. The downturn, coupled with the closure of big stretches of Gulf waters to fishing, is putting a damper on tax receipts in a state trying to claw its way back from the recession.
First the Spill, Then the Lawsuits
by John Schwartz - New York Times
"Oil spill damages? You May Be Entitled to Compensation," reads a billboard in LaFourche Parish, Louisiana. It is just one of the tactics lawyers are using to sign up clients to sue BP, along with running advertisements on Gulf Coast television stations, buying Internet addresses like GulfOilSpillLawFirm.com, and holding informational seminars — with free food and drinks — for those who feel the oil company owes them something.
Lawyers across the nation have filed nearly 200 lawsuits so far related to the April 20 oil disaster, including death and injury claims for those aboard the rig, claims of damage and economic loss for people whose livelihoods are threatened by the slick, and shareholder suits over BP’s plunging stock. Cases have even been filed on behalf of the oil-coated fish and birds. Lawyers also plan to file a civil racketeering action alleging a corporate conspiracy with the Bush administration.
At a seminar on Tuesday evening at the Emerald Grande hotel in Destin, Fla., 150 residents and business owners heard a presentation by two lawyers, Robert J. McKee of Fort Lauderdale, Fla., and Stuart H. Smith of New Orleans, about dealing with the BP claims process. Mr. Smith, who had flown his private plane from his home in New Orleans for the event, called the continuing gusher under the gulf "a disaster on the installment plan."
They introduced a team of experts they have assembled to fight BP in court, including accountants, an oceanographer, chemist and toxicologist, and explained to the audience how to gather records to improve their chances. Mr. McKee’s advice to the group — and it was just advice, because he had to stay on the proper side of the ethical line that bars solicitation of clients — was blunt. Should they decide to sue, he said, "You find someone competent who can kick their butt and take what is owed to you for full, fair and honest compensation."
Because thousands of plaintiffs’ lawyers from across the country are trying to join in the kicking, consolidation of the federal suits is almost certain. The decision will be made, oddly enough, some 2,000 miles away from the Gulf Coast, by a panel of judges meeting on July 29 in Boise, Idaho, to manage what is known as multidistrict litigation. The panels will almost certainly give the oil cases to a single judge or a small number of judges, who will then sort them into groups and combine tasks, like the discovery process to ferret out underlying facts for all the cases.
Finding a judge without a potential conflict of interest in the sprawling case could be a challenge: half of the active judges in the federal judicial district in which New Orleans sits have already recused themselves. The judges in Idaho may send the cases to New Orleans (where more of the plaintiffs and the damage can be found), to Houston (as the defendants wish, perhaps because of the city’s ties to the oil industry) or to more neutral ground. Wherever it ends up, Louisiana’s feisty lawyers are likely to play a big role in the litigation.
Seasoned Texas litigators like Brent W. Coon, who fought BP over the 2005 plant explosion in Texas City, are likely to be deeply involved, as will experts in mass tort litigation from around the country who have taken part in enormously complex suits involving tobacco, pharmaceuticals, accelerating Toyotas and defective Chinese drywall. The plaintiffs’ lawyers are eager to fight the oil giant, just as soon as they get past fighting one another. They are still involved in the scrum at the beginning of most multidistrict litigation, trying to get the largest number of clients and earliest filings in hopes of winning influence in steering the consolidated litigation.
Mass tort litigators and the specialists do not think highly of each other. Mr. Smith, an environmental litigator in New Orleans who has sued oil companies for much of his career, scoffs at the generalist approach to mass tort lawyering. "If you need brain surgery, you don’t go to an orthopedic surgeon," he said. The mass tort litigators do not pretend to be experts in every field of law required in every case. Asked whether he had experience in the arcane maritime law involved in the spill, Stephen A. Sheller, a mass tort specialist from Philadelphia, said, "I go on a cruise boat occasionally."
But the mass tort lawyers argue that their experience in prior multidistrict cases is essential to building the ad hoc law firm that will take on the large defense firms that the corporations retain. "That’s the David-and-Goliath dynamic," said Richard J. Arsenault, a lawyer in Alexandria, La., who represents plaintiffs in many BP cases.
The question that is likely to dominate much of the litigation, wherever it lands, is the extent of liability for BP and the companies it worked with. The most straightforward cases are those involving direct impact — compensation to the families of the dead and wounded on the rig, and the effect of the spill on people like commercial boat operators, fishermen and others whose livelihood could be destroyed, and landowners whose property is fouled. Beyond those cases, there are shades of gray, including for businesses that have not been touched by oil, but still feel its impact.
The Oil Pollution Act, which governs many of the damage issues, does not spell out how far such liability extends, said Val P. Exnicios, a New Orleans lawyer. The commercial fishing boat is an easy call, Mr. Exnicios said, but what about the stand next to the dock that sells snowballs, the shaved-ice treat that the fishermen might buy after a hot day on the water? What about the company that sells the ice to the snowball stand? "This case will ultimately determine where the courts are going to draw the line," he said.
Stephen J. Herman, who is serving as a liaison between plaintiffs’ lawyers and a New Orleans judge who has many of the cases, said he expected BP to fight continuing claims of indirect damage though they might pay initially. "In the short term they might, for PR purposes," he said. "But in the long run they won’t, because it would bankrupt them."
The lawyers are plotting a range of strategies. Mr. Smith hopes to circumvent some of the restrictions on the claims process under the Oil Pollution Act for some clients by arguing that the act does not come into play at all. His point: the pollution is not coming from a vessel or rig, as the law requires. The rig, he notes, is long gone, and what is left is a hole in the ground spewing oil.
The pollution should fall under the nuisance claims in Louisiana civil law and other states’ common law, just as a neighbor’s toxic dump or feedlot might. That might provide recovery, he said, for people whose land will never get oil on it, but who will claim the smell interferes with the quiet enjoyment of their property. Mike Papantonio, a Florida lawyer, has many cases involving fishermen and shrimpers, but he is also filing civil racketeering claims intending to tie the BP blowout to what he sees as close collaboration between the industry and Bush administration officials.
"It’s a case that helps us reflect on where we are after eight years," Mr. Papantonio said. The relaxation of regulatory oversight "disconnected the hydraulic line from your brakes," he said. The lawyers, meanwhile, know that they are often viewed as predators who sue for their own profit. A person commented on the Web site of The Times-Picayune of New Orleans about an article on the lawyers’ conference saying, "The vultures are circling, hopefully some of them will get soaked in the oil."
Lisa A. Rickard, the president of the U.S. Chamber Institute for Legal Reform, said compensation efforts should reward victims, but litigation drags on for decades and "the end result has too often left at least some victims at the back of the line." Such talk riles the plaintiffs’ lawyers. "Why do I need more money?" asked Daniel E. Becnel Jr., who has worked on mass tort cases leading to billions of dollars in settlements from tobacco companies, breast implant makers and others.
Mr. Becnel raised his shirt to show a long scar on his left side, the mark of difficult surgery to give a kidney to his brother, which left him with lasting health problems. He has also survived grueling treatment for leukemia. "I’m living on borrowed time," he said. "I should have been dead 10 years ago." With these cases, he insisted, "I want to do right." Calvin Fayard Jr., a New Orleans lawyer, said the damage to the gulf and the way of life there was "heartbreaking and gut-wrenching for me, being born and raised in Louisiana."
BP oil spill: how are my finances affected?
by Rosie Murray-West - Telegraph
BP's shareholders are not the only ones suffering financially from the crisis at the oil giant. Our Q&A explains how anyone can feel the pain.
Q. I've Read That BP Is In Trouble. What Exactly Is Happening?
A. BP has been battling for more than 40 days to contain an oil spill in the Gulf of Mexico. It began with an explosion on a drilling rig, and the company has failed to cap the leak completely despite spending over a billion pounds on the clean-up. The American government has waded in to the issue, and shares in the company have plunged on fears that Barack Obama may force the company not to pay a dividend.
Q. Why Should It Matter To Me?
A. BP was, until this crisis, Britain's biggest company. It made up 7pc of the FTSE All Share Index and paid out around 15pc of all the dividend income in Britain. Now the spill has wiped billions of pounds off the company's value, which affects almost everyone in Britain with equity investments.
Q. I Don't Have Shares In BP, So Why Should That Affect My Money?
A. Pension funds, investment funds and even your child's trust fund probably have some exposure to the company. Equity income funds – some of the most popular funds in the UK – tend to hold BP shares because the company is such a good dividend payer. You may well be exposed to BP without even knowing it.
Q. I Have A Pension Through My Employer. Will It Be Invested In BP Shares?
A. Probably. Adrian Lowcock of financial information group Bestinvest has calculated that most managed funds have between 0.6pc and 1.2pc of their investments in BP. "It's not great, but it's not critical," he said. If you have a final salary pension scheme, the fall in BP shares should not affect you, as the pension you get should be guaranteed unless the company goes bankrupt. However, if you have a defined contribution scheme, the crisis will affect the value of your pension pot.
Your company pension probably invests in a tracker fund. Three-quarters of funds in money purchase pension schemes are invested in trackers, totalling £8.2bn, according to PensionDCisions, the pensions analyst. If your fund tracks the FTSE 100, BP makes up around 6pc of it, which is a little worrying. Remember that BP is only part of your company's holding, and that pensions are long-term investments, however.
Ian Naismith of Scottish Widows said there was "no need to panic". "Any fall in BP's share price or dividend will affect the value of pension arrangements because its size means that most pension funds will hold a large number of shares," he said. "As pensions are a long-term investment, the impact is likely to be relatively small, though, assuming that efforts to contain the oil leak are successful."
Q. I'm Just About To Retire, Though. What Happens If I Don't Have Time To Wait For The Share Price To Recover?
A. Most company pensions include something called 'lifestyling', which means that as you get older your money is moved out of equities into perceived 'low risk' investments such as corporate bonds and sovereign debt. So if you are approaching pension age now, your pension probably contains a lower proportion of BP shares than most. The fall may be more of a problem if your investments are just now undergoing the lifestyling process. "The problem is that lifestyling can move you out of something at just the wrong time," said Laith Khalaf of financial advisers Hargreaves Lansdown.
Q. I Am Already Retired – Do Bp's Problems Affect My Pension.
A. Not if you are drawing a state pension, or you have purchased an annuity with your pension pot from your private pension. If you have continued to leave your pension invested then you could have some exposure to BP.
Q. I Have Been Putting My Stocks And Shares Isa Allowance Into Funds That Track The FTSE – Will They Hold BP?
A. Yes. Before the oil spill, funds tracking the FTSE 100 would have had around 8pc of their holdings in BP, and will now have nearer 6pc.
Q. I Have Put My Money Into Some Investment Funds. How Can I Check Whether They Hold BP?
A. The Fund Factsheet, available from your fund manager, and usually online, should tell you what the company's biggest holdings are. Most UK equity income funds hold BP, with the notable exception of Neil Woodford's popular Invesco Perpetual Income Funds. The largest holder was S&W Munro's fund, which had nearly 9pc of its money in BP.
Q. I Own BP Shares. What Will Happen To The Income I Am Receiving From Them?
A. At the moment, BP has not said it will not pay its dividend, but President Obama has said that the company should not pay it, in order to pay for the clean-up operation. Richard Hunter of Hargreaves Lansdown said he believed that the company could afford the clean-up and still pay its dividend, but that it might cut it because of political pressure. "Even the most bearish estimates on the cost of the clean-up are between $5bn and $10bn and BP is well-placed to handle that," he said. He suggested that the company may pass its dividend for one or two quarters but then make up for it with higher dividends later.
Q. Should I Sell Or Buy BP Now?
A. If you sell them now, stockbrokers say you will simply lock in the losses with no possibility of recovery. Certainly, many private investors see this as a buying opportunity. Paul Inkster of Barclays Stockbrokers said investments in BP had soared. "So far this week, BP has accounted for 14pc of total stock purchases," he said.
Republicans Jubilant About Gulf Coast Coverage
by Ryan Grim - Huffington Post
Republican communication strategists in Washington and Louisiana are thrilled at the press coverage of the disaster in the Gulf of Mexico, according to e-mails from GOP officials accidentally sent to the Huffington Post. The specific news report that had party operatives celebrating was a local Fox Channel 8 report on an event held by Louisiana Gov. Bobby Jindal calling on President Obama to lift the moratorium on offshore drilling. "Watch the video -- you can't beg for a better package than that," writes a top Louisiana GOP spokesman to a communications staffer at the Republican National Committee. "Good perspective on moratorium from the gov and locals."
The package is, to be sure, a PR coup. Jindal, local officials and workers worried about the effect of the moratorium rip into Obama, pleading with him to reconsider. Peter Duet, in a thick Louisiana accent, tells the assembled crowd that he is a single father and that his daughter recently asked him why he works so much at Port Fourchon. "Baby, so daddy can take you to Wal-Mart and buy you toys," he says, explaining that he won't be able to buy his daughter toys -- or food, for that matter -- if Obama doesn't reverse his decision. "This is literally all that is being talked about in the Gulf -- gives good perspective," writes the RNC official, looping in a number of other RNC operatives, along with HuffPost.
While that isn't literally true -- more than a few people are still talking about the massive spill -- the moratorium issue is of deep concern to Louisianans, whose economy has yet to recover from Hurricane Katrina and its aftermath. Republicans have badly damaged Democrats in Louisiana by focusing on the moratorium, winning the public relations battle day after day. David Vitter has repeatedly accused his Democratic Senate opponent Rep. Charlie Melancon of supporting the moratorium evn though he does not.
The GOP's PR campaign is made easier by the fact that the job loss is a real issue. As many as 75,000 workers in the Gulf Coast area could lose their jobs as a result of the 6-month moratorium on deepwater drilling and a stoppage of the 33 currently operating rigs, according to a recent estimate by the Louisiana Oil and Gas Association. For each rig idled by the work stoppage, up to 1,400 jobs are at risk.
UK Business Secretary Vince Cable won’t rescue weakened BP if foreign predator attempts takeover
by Suzy Jagger and Roland Watson - London Times
Vince Cable, the Business Secretary, believes that BP should be left to fend for itself if its distressed state triggers an unwanted takeover approach from a foreign rival. The Times has learnt that Dr Cable — a former chief economist at Shell — is unwilling to draw up plans that would protect BP should an overseas group such as Gazprom try to seize control. While the Business Secretary has argued that some companies may be so critical to Britain’s national interest that they should be protected, BP is not thought to be one of them.
Earlier this year, Dr Cable backed Labour plans to beef up Britain’s takeover rules, which included raising the shareholder voting thresholds and effectively blocking hedge funds from having a say in the future ownership of a company. In the 1970s, the Government had a so-called golden share in BP, which meant that it had the power to veto an unwanted takeover. No such golden share in BP exists now.
The Cabinet has yet to discuss the Deepwater Horizon disaster, and for much of the past few weeks Downing Street has sought to play down its relevance to the Government. Earlier this week No 10 officials were saying that the oil leak was a matter for the Department of Energy. Charles Hendry, the Energy Minister, was the only politician to have been directly involved.
Shares in BP recovered some ground yesterday after supportive comments from the British Government and with the news that Carl-Henric Svanberg, the BP chairman, will meet Mr Obama in the White House next week. There was also renewed institutional interest at what is seen as a bargain price. BP closed 7 per cent higher at 391.9p.
George Osborne, the Chancellor, has been thrust into the heart of the matter, speaking to BP’s chairman and chief executive in the past couple of days. Mr Osborne hastily convened a meeting at No 11 yesterday afternoon attended by Mr Svanberg, Jeremy Heywood, the No 10 Permanent Secretary, and other senior civil servants. After the meeting, the Chancellor said: “We are all concerned about the human and environmental impact and, as the Prime Minister has said, we understand the concerns of the US Administration. The Prime Minister is also clear that we need constructive solutions and that we remember the economic value BP brings to people in Britain and America.”
While Chris Huhne, the Energy Secretary, has not yet met any members of the BP board since the oil spill on April 20, he was due to conduct broadcast interviews last night and to meet executives on Monday. Dr Cable is conspicuous for his decision to remain quiet on BP, a move that contrasts sharply with his predecessor, Lord Mandelson, who intervened publicly on the hostile takeover of Cadbury by Kraft, its US rival.
The Government’s official line is that this is an environmental disaster and that BP is economically important to both Britain and the US. It is, however, still struggling with precisely how tightly to try to grasp a crisis unfolding on the seabed 6,000 miles away over which it has very little control. Pat McFadden, the Shadow Business Secretary, told The Times: “Everybody accepts the sensitivity of the situation in the US. It is a very large scale oil leak which has been going on for weeks and BP has a responsibility to plug the leak and carry out its duty. But it is in no one’s interest for BP to be damaged in the long term.”
UK Deputy PM Nick Clegg accuses 'tit for tat' Barack Obama
by Rosa Prince, Fiona Govan and James Kirkup - Telegraph
Nick Clegg suggested that Barack Obama was engaged in a “tit for tat diplomatic spat” by employing anti-British rhetoric over the BP oil disaster. The Deputy Prime Minister made his remarks after the US president declared earlier this week that he was looking for “some ass to kick” following BP’s persistent failure to plug the Gulf of Mexico oil leak. Carl-Henric Svanberg, the chairman of BP, who has been summoned to the White House next week, met George Osborne, the Chancellor, at Downing Street to discuss what more could be done to find a solution to the crisis.
David Cameron spoke on the phone to Mr Svanberg, stressing that it was in “everyone’s interests that BP continues to be a financially strong company”. Tony Hayward, BP’s chief executive, yesterday warned its biggest shareholders that the firm was “likely” to suspend its forthcoming dividend payment, of $10?billion (£6.86?billion), for up to six months. Business leaders have criticised the Prime Minister’s failure to demand that Mr Obama tone down his antagonistic statements. The president has described the company as “British Petroleum,” a name it has not used for years.
Asked about Mr Obama’s suggestion that he would like to be able to sack Mr Hayward, Mr Clegg said: “I don’t frankly think we will reach a solution to stopping release of oil into the ocean any quicker by allowing this to spiral into a tit for tat political diplomatic spat. “I’m not going to start intervening in a debate which clearly risks descending into megaphone diplomacy.” His words, during an official visit to Madrid, highlighted the continuing reticence of Mr Cameron over what has come to be seen as the first test of the “special relationship” of the Coalition.
The Prime Minister has faced calls to be more robust in his defence of British interests, particularly given BP’s key relationship to the pension pots of millions. BP is responsible for one in every six pounds paid in dividends into pension funds in the UK, and the company is now likely to bow to pressure from the Americans not to pay the planned $10 billion next month.
Mr Cameron and Mr Obama are due to speak by video-conference this afternoon and will discuss the issue, hours before England and the US play each other in the World Cup. No 10 initially suggested that BP would be raised only “briefly,” with the main focus of the conversation expected to be on Afghanistan. Following Mr Cameron’s conversation with the BP chairman, Downing Street put out a statement saying: “The Prime Minister explained that he was frustrated and concerned about the environmental damage caused by the leak but made clear his view that BP is an economically important company in the UK, US and other countries.
“Mr Svanberg made clear that BP will continue to do all that it can to stop the oil spill, clean up the damage and meet all legitimate claims for compensation.” No 10 said the Deputy Prime Minister’s words should not be seen as an attack on Mr Obama. Sources added that Mr Cameron rejected any suggestion that he was “complaisant”. But Lord Jones of Birmingham, a former trade minister and past director of the CBI, said: “I would like my Prime Minister to stand up and be counted, to take this away from nationalism.” Prof ManMohan Sodhi from Cass Business School said Mr Cameron’s “softly-softly” approach “will lose [him] friends in corporate UK.”
BP's Long History Of Destroying The World
by Ryan Grim - Huffington Post
The oil gushing into the Gulf of Mexico is a final onslaught launched from the grave of colonialism, perpetrated by a corporation that can compete with Goldman Sachs when it comes to creating misery around the world.
One of the most pivotal moments in world and United States history came in 1953 when the CIA and British intelligence forces staged a coup in Iran, overthrowing the democratically elected Mohammed Mossadegh, a national Iranian hero who was named Time's Man of the Year in 1952. That coup led directly to the Iranian revolution of 1979, which launched an era of Middle East anti-Americanism whose repercussions have since been felt in deadly ways.
Mossadegh earned the adoration of his people and the scorn of Britain for nationalizing the Anglo-Iranian Oil Company, which controlled Iran's oil reserves, shared little of the revenue and kept its workers in slave-like conditions. Anglo-Iranian became British Petroleum.
BP's role in Iran's descent into tyranny is no trivial historical coincidence. To this day, it is not difficult to find an Iranian living in America who refuses to buy gas from BP.
There was one primary purpose of the coup that overthrew Mossadegh and installed the Shah: To reclaim BP's domination of Iranian oil.
Mossadegh's government had attempted to negotiate a resolution, but BP's executives flatly refused any compromise. BP's stubbornness led to the most extreme policy move -- full nationalization. Their failure to negotiate led Dean Acheson to coin what has become an oft-repeated analysis applied to varieties of bad actors: "Never had so few lost so much so stupidly and so fast."
War -- or, in this case, a coup -- is political negotiation by another means. And BP's failure in the first round of negotiations led directly to the more violent second round. How history would have unfolded had Iran's liberal democracy been allowed to flourish can never be known. Policy makers at the time worried that the Soviet Union may have taken it over, though Stalin died shortly after the coup and the nation's foreign policy turned away from imperialism. Indeed, its subsequent invasion of Afghanistan was launched largely in response to the Iranian revolution. In other words, a Soviet invasion of Iran was unlikely.
Would a democratic Iran have been a bulwark against Middle Eastern extremism? Most likely. Would it have been an ally of Turkey and Israel? A real possibility. Would it have gone to war against Iraq? It's doubtful. (Iraq invaded Iran in 1980, shortly after the revolution, worried about having a Shia theocracy on its border, given its own majority Shia population living in the south atop its own vast resources.)
If not for the coup, what would the Middle East look like today? We can't know. But what we do know is that Iran's oil was a global prize and one that BP had no plans to let go. When Winston Churchill helped seize it in the 1920s he called it "a prize from fairyland beyond our wildest dreams."
President Harry Truman resisted efforts by the British to persuade the U.S. to overthrow Mossadegh, respecting the will of the Iranian people. The British had better luck with Dwight Eisenhower. Shortly after he was inaugurated, the British made their pitch. "Not wishing to be accused of trying to use the Americans to pull British chestnuts out of the fire," wrote Christopher Montague Woodhouse, a senior British intelligence agent involved in the campaign, "I decided to emphasize the Communist threat to Iran rather than the need to recover control of the oil industry."
The coup, led by the CIA's Kermit Roosevelt, TR's grandson, was successful. The Shah, installed as leader, turned tyrannical, leading directly to the Iranian revolution of 1979. Protesters carried placards of Mossadegh through the streets in the course of the overthrow and once triumphant, many members of Mossadegh's government were restored to positions of power. Within several years, however, the pluralist nature of the revolution receded and Ayatollah Khomeini tossed out the liberal element.
The hostage crisis was also directly an outgrowth of the coup. The students later said that they took the hostages because they were afraid that the CIA would manage to reverse the revolution and re-install the Shah -- whom President Jimmy Carter had granted asylum. "In the back of everybody's mind hung the suspicion that, with the admission of the Shah to the United States, the countdown for another coup d'etat had begun," one hostage-taker said. "Such was to be our fate again, we were convinced, and it would be irreversible. We now had to reverse the irreversible."
Without the Iranian revolution, which led to the infamous gas lines, and without the hostage crisis, Carter very well may have been reelected in 1980 against a man who was considered at the time a very weak opponent: Ronald Reagan.
Of greater consequence than Reagan's election, however, was the Islamist regime's financial and ideological inspiration of a global, anti-Western network of Islamic terror. The 1983 Beirut bombing, which was organized by the Iranian regime, has been cited by Osama bin Laden as an inspiration. Witnessing Reagan pull out of Lebanon in the wake of the attack convinced him that the United States was vulnerable to attack.
The coup shattered Iran's nascent democracy and taught Middle Eastern leaders that the West cared more for access to resources and stability than human rights and democracy. "We are not liberals like Allende and Mossadeghh, whom the CIA can snuff out," said Ayatollah Ali Khamenei, who was a top aide to Khomeini during the revolution and is now supreme leader in Iran.
"In retrospect, the United States-sponsored coup d'etat in Iran of August 19, 1953, has emerged as a critical event in postwar world history," concludes political scientist Mark J. Gasiorowski, an expert on Iran.
The coup "paves the way for incubation of extremism, both of the left and of the right. This extremism became unalterably anti-American," offers James A. Bill, author of "The Shah, the Ayatollah, and the U.S."
In 2000, the U.S. finally acknowledged its role in the coup. "In 1953 the United States played a significant role in orchestrating the overthrow of Iran's popular prime minister, Mohammed Mossadegh," said Secretary of State Madeleine Albright. "The Eisenhower administration believed its actions were justified for strategic reasons. But the coup was clearly a setback for Iran's political development. And it is easy to see now why many Iranians continue to resent this intervention by America in their internal affairs."
Woodhouse, the British agent who persuaded the U.S. to get involved, conceded years later that things had spiraled out of control in the simple effort to recover BP's oil. "It is easy to see Operation Boot as the first step towards the Iranian catastrophe of 1979," he acknowledged. "What we did not foresee was that the Shah would gather new strength and use it so tyrannically, nor that the US government and the Foreign Office would fail so abjectly to keep him on a reasonable course. At the time we were simply relieved that a threat to British interest had been removed."
The quotes and research in this story come largely from New York Times reporter Stephen Kinzer's history "All The Shah's Men: An American Coup and the Roots of Middle East Terror."
Meanwhile, Above The Water Surface...
BP CEO Tony Hayward is not aware of any reason which justifies [BP's] share price [sharply downward] movement. Rep. John Boehner weeps for BP, and begs for a bailout for them, and Senator Mary Landreiu spreads it wide to keep the Oil flowing. The world would be a better place without monsters like them.
Meanwhile, the rest of us keep watching in horror, as Oil and raw Methane continue to gush into the Gulf of Mexico, and watch our fellow Citizens' lives and livelihoods destroyed. Here are some articles from solid sources that are getting drowned out by BP's ridiculous PR strategy, the US Coast Guard, and the Media. Over FIFTY DAYS, folks.
via Zero HedgeSenator Bill Nelson (D-FL): Andrea we’re looking into something new right now, that there’s reports of oil that’s seeping up from the seabed… which would indicate, if that’s true, that the well casing itself is actually pierced… underneath the seabed. So, you know, the problems could be just enormous with what we’re facing.
Andrea Mitchell, MSNBC: Now let me understand better what you’re saying. If that is true that it is coming up form that seabed, even the relief well won’t be the final solution to cap this thing. That means that we’ve got oil gushing up at disparate places along the ocean floor.
Sen. Nelson: That is possible, unless you get the plug down low enough, below where the pipe would be breached.
It's nice to be proved right. Plenty of people smarter than me are putting their reputations on the line with this same claim-- Matt Simmons and Ira Leifer amongst them. They have much more to lose than I do. We saw the Seabed Methane eruptions. We know that there must me more that we are not being shown.
Next: Pilot: “Total, total destruction” has already occurred. “This is just the beginning of it.”
Next: Coast Guard’s Expert: “There will be oil off the coast of Miami shortly, if it’s not already there. It’s happening”“There will be oil off the coast of Miami shortly, if it’s not already there. It’s happening,” says Dr. Robert H. Weisberg, director of the University of South Florida Ocean Circulation Group in the school’s College of Marine Science. And Weisberg says he has the forecasts to prove it–four of them to be exact. The latest updates to those forecast has oil from the Gulf spill showing up in the Gulf Stream off the coast of Miami today.
It’s no surprise then that Weisberg says he has already received reports of oil from the Gulf spill off the coast of Fort Lauderdale. “And if it’s off the coast of Fort Lauderdale then it means it has already been by Miami.” Weisberg understands why some government and tourism officials are hesitant to play up the threat of oil on South Florida beaches. But that doesn’t make it any less serious, he cautions.
The way Weisberg explains and eddy has formed in the massive loop of oil still growing in the Gulf. “If the loop reattaches with the eddy then it could mean a lot of oil for Miami. That is the reality,” he says. “It all depends on whether the loop current reattaches and those things we can’t really predict.”
USF Scientists: “Troubling news about the loop current”, South Florida’s “respite may be over”University of South Florida scientists who are working to confirm the source of the oil clouds… also had troubling news about the loop current, the warm river of water that enters the gulf from the Yucatán Peninsula and surges north into the central gulf before looping south and around the tip of Florida.Last week, they said it appeared to be reshaping, meaning it would be less likely to carry oil from the spill toward Florida and the East Coast.
That respite may be over, said USF Ocean Circulation Group director Robert Weisberg.
“Over time, there will be more oil getting into the loop current and the Florida Straits,” he said. “We just have to watch.”
Next: via Miami HeraldIf oil ruins beaches up and down Florida’s [Gulf] coast, it would cost the state nearly 200,000 jobs, according to a new report. …
If Florida suffers a nightmare scenario of oil soaking its Gulf Coast, the economic cost could top $10 billion and put about 195,000 people out of work, according to a new report.
The grim estimates from a University of Central Florida economist involve fairly simple math: Take the value of tourism on Florida’s western coast and cut it in half.
The economist, Sean Snaith, said a 50 percent drop in tourism and related spending seemed reasonable should Florida suffer a massive, direct hit from the Gulf oil spill.
Next: BP's Oil In Florida StraitsStreamers of oil spotted NNW of Marathon
“Unfortunately, [the photos] don’t give what we saw justice,” said Chris Kauffman, referencing the photos he snapped while flying over the Florida Keys on May 22.
Oil streamers in FL Keys (Chris Kauffman)
“We saw a lot of oil in the water,” he said.
The oil streamers stretched north to south for at least 10 miles “North-northwest of Marathon,” on the Gulf side.
“The water appeared to be heading easterly but I can’t confirm that. Plus, the shape of the deposits seemed to indicate that,” Kauffman added.
Photos taken NNW of Marathon at an altitude of 1500
“You can see the larger ‘deposits’ but the water just under the surface was lined with smaller streams for about 10 miles north-to-south from when we first noticed it.”
Next: Dying, dead marine wildlife paint dark, morbid picture of Gulf Coast following oil spillHere's what President Obama didn't see when he visited the Gulf Coast: a dead dolphin rotting in the shore weeds.
"When we found this dolphin it was filled with oil. Oil was just pouring out of it. It was the saddest darn thing to look at," said a BP contract worker who took the Daily News on a surreptitious tour of the wildlife disaster unfolding in Louisiana.
His motive: simple outrage.
"There is a lot of coverup for BP. They specifically informed us that they don't want these pictures of the dead animals. They know the ocean will wipe away most of the evidence. It's important to me that people know the truth about what's going on here," the contractor said.
"The things I've seen: They just aren't right. All the life out here is just full of oil. I'm going to show you what BP never showed the President."
The day was 85 degrees, the blue sky almost white with sunshine, the air fresh with salt tang.
After checking that he was unobserved, he motored out to Queen Bess barrier island, known to the locals as Bird Island.
The grasses by the shore were littered with tarred marine life, some dead and others struggling under a thick coating of crude.
"When you see some of the things I've seen, it would make you sick," the contractor said. "No living creature should endure that kind of suffering."
Give some money to the groups trying to save the wildlife. i am personally going to go apeshit crazy when BP kills the Manatees. They've killed too much already.
Crazy mad Monkeyfister Love to Florida Oil Spill Law. You are doing Yeoman's work in posting these stories. One hell of a map that we are making in documenting BP's atrocities.
Chaos, Anarchy To Reign If Paterson Shuts Down NY
by Marcia Kramer - CBS
Monday Could Be Doomsday If Budget Deal Can't Be Reached
Chaos and anarchy. That's what New York Gov. David Paterson is warning if he's forced to shut down the government in a few days. The clowns in the state Legislature, now deadlocked for 71 days on the budget, are ready to take down the "big tent" and bring state government to a standstill. At least that's what Paterson thinks. "No one knows the full ramifications of a government shutdown," said Paterson. "It would create unimaginable chaos around the state and the greater metropolitan areas." Such chaos includes closing all state parks, motor vehicles offices, courts, and even the lottery. Public assistance payments would not be made and unemployment payments might also be held up.
The governor is in this pickle, in part, because wild cards like Sen. Ruben Diaz Sr. (D-Bronx) and possibly scandal-scarred Sen. Pedro Espada (D-Bronx) might not go along. Sources said the next emergency bill from Paterson will have up to $350 million in cuts to human services and mental health. But Republicans, who could become Paterson's new allies in the budget battle, aren't satisfied with that.
They want $750 million in new cuts like:
- Delaying the 10 percent welfare grant increases
- Withholding welfare from those who don't comply with employment requirements
- Reducing the personal needs allowance of people in drug and alcohol programs
Diaz will not go along with that. "I am not voting for any more cuts. I understand that it is painful," said Diaz. "But the governor is leaving me no choice." The other renegade, Espada, thinks there might be a budget deal in the offing, but, he said, "I would vote no if such a massive cut were included because the state needs a fiscal plan.
Paterson called both men "thugs." Espada, like some in both houses of the Legislature, thinks lawmakers will find a way to avoid bringing the government to a grinding halt. "There will not be a shutdown on Monday. We've never wanted a shutdown," he said. It's really too early to tell what is going to happen. Will Espada and Diaz back down? Will Paterson make a deal with the Republicans? Or will pigs fly?
Geithner signals U.S. patience waning on China currency
by Paul Eckert and David Lawder - Reuters
Treasury Secretary Timothy Geithner indicated U.S. patience on China's currency policy was wearing thin on Thursday as a key lawmaker warned that he would move soon on legislation that would penalize Chinese goods. Striking his toughest tone on the yuan since delaying a decision in early April on whether to name China a currency manipulator, Geithner told a U.S. Senate hearing Chinese policies had a harmful worldwide impact.
"The distortions caused by China's exchange rate spread far beyond China's borders and are an impediment to the global rebalancing we need," Geithner said. Echoing a refrain he has used since April, he said Beijing would find it in its own interest to have a more flexible yuan, also known as the renminbi. "A stronger renminbi would benefit China because it would boost the purchasing power of households and encourage firms to shift production for domestic demand, rather than for export," he told the Senate Finance Committee.
U.S. lawmakers, many of whom face re-election in November, believe an undervalued yuan subsidizes Chinese exports at the expense of American competitors. With the U.S. unemployment rate hovering just below 10 percent, many demand action. "The time is long past for any Treasury Department to admit publicly what everyone else already knows, that China is manipulating the value of its currency in order to gain an unfair advantage in international trade," said Charles Grassley, the senior Republican Senator on the committee.
Democratic Senator Charles Schumer told Geithner to "be prepared" because lawmakers would move forward soon with legislation that would slap anti-dumping penalties and countervailing duties on goods from China and other countries with a "fundamentally misaligned" currency.
Back To 2005
After partly freeing its currency to rise gradually from mid-2005 to mid-2008, China repegged the yuan to the dollar at a rate that U.S. lawmakers and some economists say is as much as 40 percent below the actual value. "The level of undervaluation is back to where it was in 2005. We have not made progress," said Schumer. Under sharp criticism, Geithner acknowledged that he did not know when China would allow the yuan to rise again. "I, to be honest, do not know whether we're at the point now when we're going to see meaningful progress in the near term," he said.
Two opportunities for the Chinese to move on the currency -- the U.S.-China Strategic and Economic Dialogue in May and the Group of 20 Finance Ministers meeting in South Korea last week -- passed without any action. The deepening of Europe's debt crisis since April has severely weakened the euro, causing markets to dampen expectations of a yuan shift any time soon.
But new Chinese data released on Thursday showed a robust 48.5 percent jump in exports in May, putting pressure on U.S. President Barack Obama to placate critics. Chinese imports almost rose by nearly as big a margin. Dollar/yuan offshore forwards reversed earlier rises to fall late on Thursday, implying more yuan appreciation in future. But dealers said there was not a solid uptrend for the yuan for now.
No More Good Cop?
Geithner, who in April delayed a much-anticipated Treasury report on whether Beijing manipulates the value of its yuan, said he would "take stock" of the currency report after the G20 leaders summit in Canada later this month. Schumer's pressure and broad anti-China sentiment in Congress might help persuade Beijing to move, he said. "I'm saying that it's important for China to understand that Congress will act if China does not act," added Geithner.
Geithner "played less of a good cop than before" in the face of mounting congressional impatience, said economist Derek Scissors of the Heritage Foundation, a Washington think tank. "The Chinese need to understand that the closer we get to September, the more likely we are to actually get this legislation passed by Congress," he said, referring to lawmaker's calculations ahead of November elections.
Currency and trade are just one flashpoint in the difficult U.S.-China relationship. Ties were strained this year over human rights, Tibet and U.S. weapons sales to Taiwan. But Washington won Chinese support for new U.N. sanctions on Iran and has turned to China to help rein in North Korea after a series of provocative actions by Pyongyang.
Senate Finance Committee Chairman Max Baucus said the United States appeared to be withholding criticism of Chinese economic policies in order to enlist Beijing's geopolitical support and should consider "de-linking" the two areas. "We no longer have the luxury of pursuing failed approaches," said "We must rethink the U.S.-China economic relationship. We must act, not just talk."
Government Workers Cost More to Employ
by Sara Murray - Wall Street Journal
It costs about $12 more per hour to employ a state or local government worker versus a private sector employee, the Labor Department said Wednesday. Employers spent $39.81 per hour worked for state and local government workers in the first quarter compared to $27.73 per hour for those with private industry jobs. The numbers are part of the Labor Department’s quarterly series on employer costs for employee compensation and they wrap in wages and salaries as well as health benefits such as health insurance and retirement packages.
The largest share of the costs comes from wages and salaries for both sets of workers: 70.6% for private employees and 65.9% for government workers. The rest of the payment comes in the form of benefits. It costs state and local governments $3.16 per hour to pay for employees’ retirement and savings plans, compared to 96 cents for private workers. Another $4.52 goes to health insurance for public workers, compared to $2.08 for private workers. And governments spend $3 per hour for its workers’ paid leave, compared to $1.88 for private workers.
Meanwhile, a breakout of private workers showed that it cost more to employ union workers than nonunion employees. Compensation for union workers cost $37.16 per hour compared to $26.67 for non-union workers. Overall compensation of all civilian workers in the U.S. typically cost employers $29.71 per hour in the first quarter, compared to $29.39 per hour the same time a year ago. Public employee compensation has come under the knife lately as strapped states and cities search for ways to cut costs and balance their budgets. In New York, for example, Mayor Michael Bloomberg has said he’ll freeze teacher salaries and in Memphis the highest-paid city employees are getting pay cuts.
U.S. Firms Build Up Record Cash Piles
by Justin Lahart - Wall Street Journal
U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery. The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.
While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the cash on hiring or expansion amid doubts about the strength of the recovery. They are also anxious to keep cash on hand in case Europe's debt troubles lead to a new market freeze. "Cash is still king," said Jeff Hand, chief operating officer at Ross Controls, a Troy, Mich., maker of pneumatic valves and other products that is holding more cash as it struggles to recover from a sharp drop in business last year. "We're coming out of that, but the uncertainty is still there."
The rising corporate cash balances could represent a longer-term behavioral shift in the wake of the deepest financial crisis in decades. In the darkest days of late 2008, even large companies faced the threat that they wouldn't be able to do the everyday, short-term borrowing needed to make payrolls and purchase inventory. "We just went through this liquidity crunch that's made them realize the value of a dollar in hand," said John Graham, an economist at the Duke Fuqua School of Business.
Even now, banks continue to pull back on lending. The Fed reported Thursday that net lending by the financial sector—including banks, credit unions and other lenders—was down 5.4% in March from a year earlier. The comfort of having cash on hand, though, comes at a high price companies may not be willing to pay for much longer. They are earning almost no interest on their holdings of cash, making it more difficult for them to achieve the returns shareholders typically expect from them. That will put pressure on companies to pare down the cash holdings eventually.
"Stockholders don't want them to keep sitting on cash at a zero return," said Paul Kasriel, an economist at Northern Trust. "They're going to use it," either to increase hiring and investment or to make payouts to shareholders in the form of dividends or share buybacks, he said.
Earlier this week, retailer Target Corp. raised its quarterly dividend to 25 cents a share from 17 cents, saying that the company's cash holdings were "well above the amount needed for optimal reinvestment in our core business." When it reported results for its fiscal quarter ended May 1 on Monday, Philadelphia auto-parts and service retailer Pep Boys—Manny, Moe & Jack said it had $87.8 million in cash on its balance sheet, versus $21.3 million a year earlier. But in a call with analysts Tuesday, Chief Financial Officer Ray Arthur suggested the company would soon be putting the money into capital investments. "I just wouldn't plan on seeing $80 million or $90 million at the end of every quarter on our balance sheet," he said.
In a recent survey of company chief financial officers that Duke's Mr. Graham conducted with CFO Magazine, he found that companies expect capital spending to increase by 9% over the next year, compared with 1.5% when he asked the question in December. They expect employment to grow by 0.7%, compared with the 1.4% drop they expected six months ago. Cash has piled up at Hooker Furniture Corp., based in Martinsville, Va. The company has seen increasing demand for the upholstered furniture it makes in the U.S., which it has found usually leads demand for the other furniture it imports from China. Hooker is being cautious nonetheless.
When it reported results Monday, the company said it had $38.7 million in cash and other highly liquid assets on its balance sheet in its fiscal quarter ended May 2, up from $26.2 million a year earlier. "We're a fairly conservative company, and keeping our powder dry makes sense to use," said Hooker Chief Financial Officer E. Larry Ryder. Mr. Ryder says he sees the cash as a sort of insurance fund to make sure he can buy the raw materials and other inventory he will need to meet demand if business picks up. The company has cut its inventories to $38.5 million from $47.1 million over the past year. "We don't want to tie our cash up to the point that we don't have the liquidity we need to accumulate inventory when we need it," said Mr. Ryder.
Companies' willingness to use their cash will play a major role in the strength of the recovery at a time when consumers need jobs to support their spending and many people are still trying to repair their finances. The Federal Reserve data showed households making some progress in paring down their debt, which fell at a 2.5% annual rate in the first quarter as credit remained tight and more homeowners defaulted on their mortgages.
Household net worth—the value of houses, stocks and other investments, minus debts—rose for a fourth straight quarter as markets continued to rebound. At $54.6 trillion, though, it was still $11.3 trillion below its 2007 peak of $65.9 trillion.
Spanish Labor Talks Fail, Forcing Zapatero to Rule by Decree
by Emma Ross-Thomas - Bloomberg Businessweek
Negotiations between Spanish trade unions and employers ended without an agreement today, forcing Socialist Prime Minister Jose Luis Rodriguez Zapatero’s minority government to overhaul labor rules by decree. All-night talks broke down without a deal at around 6 a.m. today, said a spokeswoman for the Labor Ministry, who declined to be identified in line with policy. Zapatero has said he will change the rules by decree on June 16 with or without consensus.
Spain, facing the highest unemployment rate in the euro region and a jobless rate of more than 40 percent among young people, has some of the heaviest firing costs in Europe. Both the International Monetary Fund and European Central Bank have called for changes to the country’s labor legislation. Zapatero, a union member who leads a minority government, risks not being able to gather enough support for the overhaul in parliament if the decree isn’t backed by unions and employers.
“You have very little margin for error,” Josep Sanchez Llibre, the economic spokesman for Catalan party CiU, told Finance Minister Elena Salgado today in a parliamentary debate in Madrid. CiU, whose votes would be enough to give Zapatero a majority in parliament, has said it may support the government over the labor overhaul if it’s rigorous enough. Zapatero pushed austerity measures through parliament on May 27 with a margin of one vote, as smaller parties that had voted with him in the past turned against him.
High Firing Costs
Spain has some of the highest firing costs for open-ended contracts in Europe, according to the World Bank’s Doing Business Index, while around a quarter of workers have temporary contracts. Workers fired from open-ended contracts receive 45 days of compensation for each year worked, compared with eight days for temporary workers. A third contract gives 33 days of compensation and is aimed at promoting employment among most groups, except men aged 31 to 45.
Labor Minister Celestino Corbacho said yesterday the government wants to make the third contract more “attractive” while increasing protection for temporary workers. The government may take up part of the cost of firing, reducing the burden on companies while leaving workers’ compensation intact, La Vanguardia newspaper reported yesterday. Zapatero’s hand may have been strengthened by low participation at a public-sector strike on June 8. Just 12 percent of public workers followed the walkout, the government said. The unions Comisiones Obreras and UGT put the figure at 75 percent. Comisiones Obreras may call a general strike if workers’ rights are harmed, Secretary General Ignacio Fernandez Toxo said June 8.
Japan prime minister Naoto Kan warns of Greek-style public debt problems
by Justin McCurry - Guardian
Japan's new prime minister, Naoto Kan, today warned that the country risked being sucked into a Greek-style debt crisis unless it quickly reined in its massive public debt. Kan, who took over last week after the sudden resignation of Yukio Hatoyama, told MPs that Japan risked defaulting if it continued to issue bonds at the current pace.
"Our country's outstanding public debt is huge," he said in his first policy speech to parliament. "Our public finances have become the worst of any developed country. "We cannot sustain public finance that overly relies on issuing bonds. As we can see from the eurozone confusion that started in Greece, there is a risk of default if growing public debt is neglected and trust lost in the bond market."
Japan's public debt stood at 218% of gross domestic product last year, according to the International Monetary Fund – the highest in the industrialised world. Kan said the debt problem could not be dealt with overnight. "That is why we need to have a drastic reform from now in order to obtain fiscal health." His prospects for honouring a commitment to devise a tighter fiscal plan by the end of the month improved today after Shizuka Kamei resigned as financial services minister over a disagreement with cabinet colleagues on post office privatization.
Kamei, who leads a junior coalition partner, had advocated big spending to drag the world's second-largest economy into sustained recovery and fend off long-term deflation. But other obstacles, including a looming election, remain to the sweeping fiscal reforms envisaged by Kan, who in his last job as finance minister criticised the Bank of Japan for doing too little to encourage lending, even after it lowered interest rates to near zero.
Kan may be able to gain a mandate for reform if his Democratic party performs well at upper house elections next month, giving them an outright majority in both houses. Support for the Democrats has leaped since Kan's election, from below 20% before he took office to almost 70% this week. Analysts accused Kan of overplaying Japan's susceptibility to a Greek-style meltdown. "Greece had a huge public debt and huge overseas loans," said Hiromichi Shirakawa, chief economist at Credit Suisse Japan. "Japan has a trade surplus, and it's a major creditor nation. I don't think Japan's fiscal condition is facing a similar crisis."
The government's plan to tackle mid-term debt is expected to include a ¥44.3 trillion (£330bn) cap on government bond issuance through to the end of March 2012. Fiscal reformers in the government appear to have succeeded in including a reference to tax reform in the ruling party's manifesto for the upper house elections, although it is likely to stop short of suggesting a rise in the consumption tax, currently 5%, to pay for rising health and welfare costs.
Kan has been one of the few politicians to talk publicly about the need to raise the tax, an unpopular move but one that many voters now accept is inevitable. Economists have warned, however, that the government will have to abandon some of its spending plans if it is to stand a chance of reining in debt.
Top Fed Official Supports Restricting Banks' Derivatives Bets, Goes FURTHER Than Obama
by Shahien Nasiripour - Huffington Post
The top fiscal hawk and longest-serving policy maker in the Federal Reserve supports limiting banks' derivatives activities, a potential blow to Wall Street megabanks that use their taxpayer support to trade the kind of risky financial products that nearly brought down the global financial system. In a letter of support, Federal Reserve Bank of Kansas City President Thomas M. Hoenig endorsed a Senate provision Thursday that would force banks to strip their swaps desks out from their depository institutions, calling it "of utmost importance to our nation's long-term financial and economic stability."
The affected firms would have to move those units, which deal and trade in a type of financial derivative product, into a separately-capitalized institution within the bank holding company, collectively raising as much as a few hundred billion dollars to protect their swaps desks in case their bets go bad. Or, they could disband the activity altogether. Of the nearly 8,000 banks in the U.S., less than 25 would be seriously affected.
Authored by Senate Agriculture Committee Chairman Blanche Lincoln, the measure is beloved by economists and financial experts like Nobel Prize-winning economist Joseph Stiglitz who wish to purge the riskiest of risky activities from the U.S. banking system. Since banks enjoy taxpayer-financed protection via federal deposit insurance and access to cheap funds from the Federal Reserve, they shouldn't use that taxpayer support to subsidize risky bets on derivatives, proponents of the measure say.
The explosion of risky swaps, like those sold by AIG, helped cause the worst financial crisis since the Great Depression, resulting in what's now referred to as the Great Recession. The Wall Street-caused crisis led to the loss of about eight million jobs. Federal Deposit Insurance Corporation Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke, former Federal Reserve Chairman Paul Volcker and Treasury Secretary Timothy Geithner all have expressed reservations about the provision.
"As you know, commercial banks are the trusted guardian of depositors' funds and the primary intermediary of the national and global payments system -- a role that is critical to our country's financial and economic stability," wrote Hoenig, a noted defender of community banks and an impassioned critic of the nation's current policy of propping up too-big-to-fail megabanks, in a letter obtained by the Huffington Post.
"I have been a long-time proponent of limiting the derivative activities of commercial banks to only those designed to mitigate the institution's balance sheet risk. Accordingly, I support the reinstatement of Glass-Steagall-type laws to separate higher-risk, often more-leveraged, activities of investment banks from the commercial banking system. "Section 716 appropriately allows banks to hedge their own portfolios with swaps or to offer them to customers in combination with traditional banking products," Hoenig wrote in a reference to the part of the Senate's financial reform bill that compels banks to split their swaps desks from the depository institution.
"However, it prohibits them from being a swaps broker or dealer, or conducting proprietary trading in derivatives. The risks related to these latter activities are generally inconsistent with the funding subsidy afforded institutions backed by a public safety net. Such activities should be placed in a separate entity that does not have access to government backstops. These entities should be required to place their own funds at risk," Hoenig said.
Hoenig is particularly well known for his hawkish views on monetary policy. Last month before the Financial Crisis Inquiry Commission, Geithner made a veiled reference to the provision when he argued that policymakers should not "simply separate banks from risk." "[I]n important ways, driving risk-taking into areas with less regulation -- that's exactly what caused this crisis," Geithner said on May 6. Activities such as helping businesses hedge risk with derivatives should not be moved outside of banks, "outside the reach of strong regulation," Geithner said. Bernanke and Volcker argued against the proposal in separate May letters; Bair expressed her concerns in an April letter.
They all essentially say moving these units outside of banks would court disaster as banks are the best-regulated entities in the nation's financial system. However, they don't note that the current financial reform legislation compels the Federal Reserve to further examine the nation's largest bank holding companies, looking at all their subsidiaries, affiliates and associated activities. According to proponents of the legislation in the Senate and in the Obama administration, the overall bill should have the effect of making these separate entities within bank holding companies as well regulated as banks in order to avoid another catastrophic meltdown and subsequent taxpayer-financed recovery.
The financial industry vigorously opposes the measure. Senate Banking Committee Chairman Christopher Dodd is said to be looking for ways to gut the provision before the bill reaches President Barack Obama's desk. But Hoenig, a native Iowan, reads the provision differently than his counterparts nestled in Washington and Wall Street. According to his letter, Lincoln's measure would allow banks to continue to hedge against their own risk (such as offering a fixed-rate 30-year mortgage when one's not sure where interest rates will be over the next 30 years) and offer customers similar products in conjunction with "traditional banking products."
All it bans are the kinds of Wall Street activities that historically have not benefited from explicit (or implicit) taxpayer support. There's speculation that Lincoln's measure will be taken out of the bill given the strong opposition from Wall Street and the Obama administration. Having an independent voice like Hoenig on board -- one who's argued for breaking up too-big-to-fail megabanks, raising interest rates to avoid another financial bubble, and reining in federal spending to a more sustainable level -- strengthens Lincoln's hand, said one Senate aide involved in the negotiations. "It's an impressive voice to have in her camp."
Banks With State Debt Ignore Not-If-But-When Default
by Niklas Magnusson, Elena Logutenkova and Aaron Kirchfeld - Bloomberg Businessweek
European banking shares indicate a Greek debt default may be just a matter of time. Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring, said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in London. A Bloomberg index of European financial firms dropped as much as 22 percent since April 15 to the lowest level since July.
A $1 trillion aid package from the European Union and International Monetary Fund may delay a Greek default and give Spain, Italy and possibly Portugal time to get their finances in shape, averting a wider contagion, analysts said. Greece’s debt burden is likely to prove unsustainable, said Thomas Mayer, Deutsche Bank AG’s London-based chief economist.
“Deficit reduction alone doesn’t solve the debt issue,” Mayer said in a telephone interview. He estimates Greece’s debt will rise to 150 percent of gross domestic product following the country’s austerity program, from 120 percent. “Hardly anyone I know believes they can carry it out and still not restructure. This is basically the expectation across all asset classes.” Writedowns stemming from a Greek default would total almost $200 billion, estimates Jon Peace, an analyst at Nomura Holdings Inc. in London. Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura estimates.
Banks holding sovereign debt are faced with a “prisoner’s dilemma,” said Hoffmann-Becking, referring to a mathematical theory that seeks to explain the behavior of two parties that can choose to either cooperate or pursue their own interests. “From an individual bank’s perspective, it would be great to get rid of the sovereign debt,” Hoffmann-Becking said by telephone. “However, if everybody did it you’d have a rapid collapse of the government bond market and then you’d have the default. And in the default, the fact that you have no sovereign debt actually doesn’t help you at all.”
German financial companies including Deutsche Bank agreed in May to refinance maturing Greek debt and maintain existing credit lines to Greece and its lenders for the next three years. French banks made a similar pledge. A majority of European banks haven’t tendered their Greek sovereign debt to the European Central Bank, according to an informal survey by Morgan Stanley analysts. One reason may be that some banks bought their Greek bonds when they were trading at 20 percent above par, meaning a sale to the ECB would prompt a loss, Morgan Stanley’s London-based analyst Huw van Steenis said in a note to clients on June 9.
Most See Default
Deutsche Bank Chief Executive Officer Josef Ackermann said May 14 that Greece may not be able to repay its debt in full, adding that Spain and Italy are “strong enough” to service their debt following the EU aid plan, while this may be “slightly more difficult” for Portugal. Global investors have little confidence in Greece’s ability to solve its debt crisis, with 73 percent calling a default by the country likely, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. Some 35 percent of those surveyed said a default by Portugal was likely, while more than a quarter said the same about Spain.
A Spanish or Italian cancellation of payments would dwarf a potential Greek default. European banks’ claims on Spain totaled $832 billion at the end of 2009, while those on Italy stood at $1.02 trillion, according to figures from the Bank for International Settlements in Basel, Switzerland. That compares with claims on Greece and Portugal of $193 billion and $240 billion, respectively.
EU banks could absorb losses on government and private debt in Greece, Portugal, Spain and Ireland without having to raise funds, Moody’s Investors Service said in a report today, after surveying more than 30 lenders in 10 nations. The value of private loans such as mortgages and business credit is greater than that tied to government debt, Moody’s said, adding that any losses on private loans would be absorbed over several years.
“Based on our stress test, we believe that these banks would be able to absorb the losses that could arise from such exposures without requiring capital increases -- even under worse-than-expected conditions,” the credit rating company said. While investors may have priced in the immediate costs of a Greek and possibly even a Portuguese default, they haven’t reckoned on the wider impact of such an event, analysts said.
“If Greece defaulted in the near future, the ramifications wouldn’t just be banks holding Greek debt, but also Spain and Portugal and Italian bonds -- and how do you value Armageddon?” said Gary Jenkins, head of credit research at Evolution Securities Ltd. in London. “The idea is to postpone reality. If it had happened in a disorderly manner in May, it would’ve been such a quick event that it would have been very difficult for authorities to control the reactions on Portugal and Spain.” Some analysts say the recent declines among European banks represent a buying opportunity on the grounds that a Greek default would be manageable and that Spain and Italy won’t have to restructure their debt. Nomura’s Peace said in a June 2 note that European bank shares are “attractive.”
“The stocks are way too deep -- I don’t think we’ll see restructuring and sovereign defaults,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “Everything depends on making a bet on whether we’ll see a restructuring or a default or not, but the EU delivered a clear message and the IMF is in the boat and we have austerity measures.”
Greece’s public finances began rattling investors late last year, when the country more than tripled its budget deficit forecast for 2009. Stock markets fell, credit default swaps to protect against a sovereign default rose, and borrowing costs climbed for indebted nations such as Greece, Portugal and Spain, as well as European banks. The euro dropped to a four-year low of $1.1876 on June 7.
New York University Professor Nouriel Roubini said June 4 that an orderly restructuring of Greece’s public debt in the next 12 months may be necessary to avoid “massive losses” for the financial system. He recommended stretching the maturities of the country’s debt by five to 10 years, capping the interest rate at a below- market level and maintaining the face value of the bonds at par to limit writedowns for banks. Further declines in the euro would also help sustain Europe’s economies, he said.
Roubini, who predicted the global financial crisis, also remained gloomy on equity markets heading into a rally that lifted the Standard & Poor’s 500 Index by 80 percent last year.
European financial firms trade at 0.85 times book value, compared with 1.06 times on April 15 and more than two times book value at the end of 2006, based on the 52-company Bloomberg Europe Banks and Insurance Index.
Banks in Europe, on average, are pricing in an implied return on equity of 9.5 percent, below a “normalized” ROE of 12.5 percent, Hoffmann-Becking said in a May 26 note. Return on equity is a measure of profitability. The expectation for an erosion of book value is “particularly pronounced” for French lenders, Hoffmann-Becking said. Paris-based Credit Agricole SA and Societe Generale SA trade at an implied return-on-equity of 5.8 percent and 6.9 percent, respectively, he said in the note. Societe Generale published an after-tax ROE of 11.1 percent in the first quarter, while Credit Agricole didn’t report a figure.
Both banks have subsidiaries in Greece. Credit Agricole’s Emporiki Bank of Greece SA had 22 billion euros ($26.6 billion) of loans at the end of March, according to company reports. Societe Generale owns 54 percent of Greece’s Geniki Bank SA, which had 4 billion euros of loans and advances at the end of the quarter, according to the Athens-based lender’s website. “If you look at some of the names like Credit Agricole or Societe Generale, they’re trading well below tangible book and so you’re looking at some 20 percent to 25 percent cuts to equity,” Hoffmann-Becking said in a telephone interview. “I think that certainly covers the primary effects of a potential writedown on Greek, Irish or Portuguese debt. The thing that we may not have priced in, in full, is secondary and tertiary effects.”
French banks had claims on Greece of $78.8 billion at the end of 2009, the most of any country, according to BIS figures. In Germany, where banks’ Greek claims totaled $45 billion, the risks probably lie mostly with Landesbanks and government-owned lenders that aren’t publicly traded, Hoffmann-Becking said.
Moody's: EU Banks Pass 'Stress Test'
by Megan Murphy - Financial Times (video CNBC)
European banks would be able to absorb "severe" losses on their exposure to Greek, Portuguese, Spanish and Irish assets without having to raise additional capital, according to a new study from Moody's, the credit rating agency. The analysis, based on Moody's own "stress test" of more than 30 European banks from 10 countries, may ease fears about the financial sector's exposure to embattled eurozone economies amid the spectre of a Greek debt default. "Based on our stress test, we believe that these banks would be able to absorb the losses that could arise from such exposures without requiring capital increases - even under worse-thanexpected conditions," said Jean-François Tremblay, one of the authors of the report.
European bank stocks have fallen sharply in recent weeks amid investor concern over the possible contagion effects of a worsening debt crisis in Greece as well as the credibility of the austerity programmes being put in place across the region. A $1,000bn bail-out package agreed by European finance ministers and the International Monetary Fund last month has failed to steady markets amid doubts as to whether governments in Greece, Spain and other countries would actually be able to enforce swingeing cuts in public sector spending.
The Moody's report does not disclose which European banks participated in its study. But it concludes that while those institutions surveyed are not "immune" against a wider systemic crisis, they already have adequate capital cushions to absorb losses even under "harsh" economic conditions. The research also found that private sector debt was a more significant exposure for most banks than sovereign or public sector debt.
The stress test by Moody's assumed a forced sale of public sector bonds at 20 per cent below the steepest fall in market valuation in recent months. While Moody's describes such a sale as a "low probability" event, it concludes that European banks have the capital buffers in place to cope. The average regulatory capital ratio of the banks stress tested by the rating agency was "well above" 9 per cent, Moody's said. "Based on the severe loss assumptions made by Moody's, a forced sale of sovereign debt at depressed market prices would have a greater, although still manageable, impact when measured against banks' capital levels."
Gary Jenkins, head of fixed income research at Evolution Securities, rejected the Moody's report as a "hypothetical exercise". "I cannot imagine what the markets would be like in reality if all of those countries' debt was in a forced sale situation," Mr Jenkins said in a note to clients yesterday. "Who exactly would be buying the bonds (except for) the banks and in the complete carnage - forget the capital - who exactly would be providing liquidity? This report might help to support the market because of the positive headline, but I do not consider it to have any basis in reality."
Sales dip raises doubts on US recovery
by Alan Rappeport
US retail sales recorded a surprise drop in May, breaking a seven-month stretch of solid increases and signalling that the US consumer remains stubbornly fragile. Sales fell by 1.2 per cent last month, commerce department figures showed on Friday. That failed to meet economists’ expectations that they would continue climbing, as purchases were pulled back by a drop in demand for building materials and customers held off on buying new summer clothes.
Retail sales have been climbing steadily in the last year, increasing by 6.9 per cent from May 2009, as consumers reaped the benefits of surging equity markets and recovering home prices. Friday’s figures tarnished some of that, and the sharpest monthly decline since last September provoked some analysts to downgrade their economic outlooks. “This data then certainly fits with a sub-par recovery with tentative evidence of some lost momentum into the spring,” said Alan Ruskin, strategist at RBS Securities, noting that weaker consumption could dent gross domestic product projections for the coming quarter.
The disappointing data rattled US markets, with investors already feeling anxious after last week’s tepid non-farm payrolls report showed that the US economy added just 41,000 private sector jobs last month. Ian Shepherdson, chief US economist at High Frequency Economics, said that some of the recent strength in sales was due to consumers spending their tax rebates and from demand spurred by rebates for energy-efficient appliances. “With these effects all now gone, the weaker underlying picture is revealed,” Mr Shepherdson said.
Building materials sales crumbled in May, falling by 9.3 per cent after strong rises during the prior two months that were fuelled by homeowners fixing up their houses in the wake of a harsh winter. Car sales, petrol purchases and buying at general merchandise and department stores were also thin last month. But in spite of the monthly decline, there were some shades of optimism in Friday’s figures. Electronics shops reported greater demand, and sales were up at sporting goods retailers and grocery stores. April’s results were also stronger than previously thought, with sales revised to show a rise of 0.6 per cent.
Some economists downplayed the May decline as the result of bad weather and a effect of a late Memorial Day holiday on shoppers. Analysts pointed to optimism in a separate Reuters/University of Michigan survey, showing that consumer sentiment in June rose to its highest level in more than two years. Businesses also continued to demonstrate confidence, according to the commerce department, boosting their April inventories to a 10-month high in anticipation that sales will stay strong. “Looking forward, the growth in household labour income and the ongoing improvement in consumer sentiment should lend support to continued growth in real consumer spending,” said Michael Feroli, an economist at JPMorgan Chase.
Oil Consumption Around the World
by Barry Ritholtz - Big Picture
Pretty cool graphic from the Guardian in the UK. It helps to explain why the Brits think we Yanks are being less than honest with ourselves regarding our anger at BP.
The Brits have had a rather interesting response to the American Outrage over the GoM spill: With less than 5% of the world’s population, the US consumes 25% of the world’s oil production.
They believe we are being hypocritical in our outrage — if we were all that concerned, argues the Brits, we would not have been so profligate in our consumption, love affair with the SUV, and refusal to enact Pigou taxes on fuel consumption.
They raise a valid point.
Consider the per capita energy consumption of the US versus other nations:via Google
I am not looking to exonerate BP; I have no doubt they were reckless and irresponsible in how they proceeded to drill in the Gulf of Mexico with Deepwater Horizon.
However, they were trying to fulfill our own reckless and irresponsible demands for cheap and plentiful energy. Anyone who is an energy consumer cannot ignore their contribution to what happened.
We can be a bit hypocritical in the US of A. We have $50k earners who bought $750k houses, then complained about Goldman Sachs; Walmart shoppers who buy 12 packs of tighty whiteys for $2.99 — then complains about job losses. Or the non voters (the majority of us) who complain about Congress. We energy consumers ought to realize that it is our demand that led to drilling in the GoM.
Personally, I try not to be hypocritical about my enormous carbon footprint (Denying global warming, ignoring the impact consumption has). I haven’t shown much willingness to change, but I won’t pretend there is no damage from my addiction to Horsepower.
Its sure is much easier to blame BP, than to accept resposibility for our own role in the spill…
50 Statistics About The U.S. Economy That Are Almost Too Crazy To Believe
by Michael Snyder
Most Americans know that the U.S. economy is in bad shape, but what most Americans don’t know is how truly desperate the financial situation of the United States really is. The truth is that what we are experiencing is not simply a “downturn” or a “recession”. What we are witnessing is the beginning of the end for the greatest economic machine that the world has ever seen. Our greed and our debt are literally eating our economy alive.
Total government, corporate and personal debt has now reached 360 percent of GDP, which is far higher than it ever reached during the Great Depression era. We have nearly totally dismantled our once colossal manufacturing base, we have shipped millions upon millions of middle class jobs overseas, we have lived far beyond our means for decades and we have created the biggest debt bubble in the history of the world. A great day of financial reckoning is fast approaching, and the vast majority of Americans are totally oblivious.
But the truth is that you cannot defy the financial laws of the universe forever. What goes up must come down. The borrower is the servant of the lender. Cutting corners always catches up with you in the end.
Sometimes it takes cold, hard numbers for many of us to fully realize the situation that we are facing.
So, the following are 50 very revealing statistics about the U.S. economy that are almost too crazy to believe….
#50) In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined.
#49) It is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars in 2010.
#48) If you went out and spent one dollar every single second, it would take you more than 31,000 years to spend a trillion dollars.
#47) In fact, if you spent one million dollars every single day since the birth of Christ, you still would not have spent one trillion dollars by now.
#46) Total U.S. government debt is now up to 90 percent of gross domestic product.
#45) Total credit market debt in the United States, including government, corporate and personal debt, has reached 360 percent of GDP.
#44) U.S. corporate income tax receipts were down 55% (to $138 billion) for the year ending September 30th, 2009.
#43) There are now 8 counties in the state of California that have unemployment rates of over 20 percent.
#42) In the area around Sacramento, California there is one closed business for every six that are still open.
#41) In February, there were 5.5 unemployed Americans for every job opening.
#40) According to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.
#39) More than 40% of those employed in the United States are now working in low-wage service jobs.
#38) According to one new survey, 24% of American workers say that they have postponed their planned retirement age in the past year.
#37) Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008. Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005.
#36) Mortgage purchase applications in the United States are down nearly 40 percent from a month ago to their lowest level since April of 1997.
#35) RealtyTrac has announced that foreclosure filings in the U.S. established an all time record for the second consecutive year in 2009.
#34) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in March 2010, an increase of nearly 19 percent from February, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.
#33) In Pinellas and Pasco counties, which include St. Petersburg, Florida and the suburbs to the north, there are 34,000 open foreclosure cases. Ten years ago, there were only about 4,000.
#32) In California’s Central Valley, 1 out of every 16 homes is in some phase of foreclosure.
#31) The Mortgage Bankers Association recently announced that more than 10 percent of all U.S. homeowners with a mortgage had missed at least one payment during the January to March time period. That was a record high and up from 9.1 percent a year ago.
#30) U.S. banks repossessed nearly 258,000 homes nationwide in the first quarter of 2010, a 35 percent jump from the first quarter of 2009.
#29) For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.
#28) More than 24% of all homes with mortgages in the United States were underwater as of the end of 2009.
#27) U.S. commercial property values are down approximately 40 percent since 2007 and currently 18 percent of all office space in the United States is sitting vacant.
#26) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. That was almost twice the level of a year earlier.
#25) In 2009, U.S. banks posted their sharpest decline in private lending since 1942.
#24) New York state has delayed paying bills totalling $2.5 billion as a short-term way of staying solvent but officials are warning that its cash crunch could soon get even worse.
#23) To make up for a projected 2010 budget shortfall of $280 million, Detroit issued $250 million of 20-year municipal notes in March. The bond issuance followed on the heels of a warning from Detroit officials that if its financial state didn’t improve, it could be forced to declare bankruptcy.
#22) The National League of Cities says that municipal governments will probably come up between $56 billion and $83 billion short between now and 2012.
#21) Half a dozen cash-poor U.S. states have announced that they are delaying their tax refund checks.
#20) Two university professors recently calculated that the combined unfunded pension liability for all 50 U.S. states is 3.2 trillion dollars.
#19) According to EconomicPolicyJournal.com, 32 U.S. states have already run out of funds to make unemployment benefit payments and so the federal government has been supplying these states with funds so that they can make their payments to the unemployed.
#18) This most recession has erased 8 million private sector jobs in the United States.
#17) Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of 2010.
#16) U.S. government-provided benefits (including Social Security, unemployment insurance, food stamps and other programs) rose to a record high during the first three months of 2010.
#15) 39.68 million Americans are now on food stamps, which represents a new all-time record. But things look like they are going to get even worse. The U.S. Department of Agriculture is forecasting that enrollment in the food stamp program will exceed 43 million Americans in 2011.
#14) Phoenix, Arizona features an astounding annual car theft rate of 57,000 vehicles and has become the new “Car Theft Capital of the World”.
#13) U.S. law enforcement authorities claim that there are now over 1 million members of criminal gangs inside the country. These 1 million gang members are responsible for up to 80% of the crimes committed in the United States each year.
#12) The U.S. health care system was already facing a shortage of approximately 150,000 doctors in the next decade or so, but thanks to the health care “reform” bill passed by Congress, that number could swell by several hundred thousand more.
#11) According to an analysis by the Congressional Joint Committee on Taxation the health care “reform” bill will generate $409.2 billion in additional taxes on the American people by 2019.
#10) The Dow Jones Industrial Average just experienced the worst May it has seen since 1940.
#9) In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.
#8) Approximately 40% of all retail spending currently comes from the 20% of American households that have the highest incomes.
#7) According to economists Thomas Piketty and Emmanuel Saez, two-thirds of income increases in the U.S. between 2002 and 2007 went to the wealthiest 1% of all Americans.
#6) The bottom 40 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.
#5) If you only make the minimum payment each and every time, a $6,000 credit card bill can end up costing you over $30,000 (depending on the interest rate).
#4) According to a new report based on U.S. Census Bureau data, only 26 percent of American teens between the ages of 16 and 19 had jobs in late 2009 which represents a record low since statistics began to be kept back in 1948.
#3) According to a National Foundation for Credit Counseling survey, only 58% of those in “Generation Y” pay their monthly bills on time.
#2) During the first quarter of 2010, the total number of loans that are at least three months past due in the United States increased for the 16th consecutive quarter.
#1) According to the Tax Foundation’s Microsimulation Model, to erase the 2010 U.S. budget deficit, the U.S. Congress would have to multiply each tax rate by 2.4. Thus, the 10 percent rate would be 24 percent, the 15 percent rate would be 36 percent, and the 35 percent rate would have to be 85 percent.