"Hanna furnaces of the Great Lakes Steel Corporation, Detroit, Michigan, Coaling door atop coke ovens"
Ilargi: There are more examples than one can even try to sum up when it comes to painting the picture of the perversity and ineptitude of the US political system. The so-called grilling of Tony Hayward a few days ago was one prime example. The BP CEO started out with a "so sorry" statement that was an almost exact copy of a recent BP mea culpa TV ad.
When responding to the subsequent questions, Hayward mainly repeated the same line over and over: he wasn’t there when it happened, he had no influence on the decision-making process concerning the Macondo well, it was not his personal fault, and moreover, he was the very man who had announced strict safety measures when he took the job. Absolute habberdash, obviously, all of it, but it didn't matter one iota to Tony Hayward.
The reason why, or at least a major one, became clear the day after the "grilling": Tony Hayward was "relieved of his duties" that same day, to be replaced by some American deputy director at the company. Not replaced as CEO, mind you, but as BP's "face" in the US.
Capitol Hill, therefore, looks like the bunch of ass-clowns they are. Any further or follow-up questions will not be answered by the company's CEO anymore. They can now complain, whine and yell at his servant. Obviously, this was a decision that had been made a while ago; let Tony take the flack, he's leaving anyway.
In the past two weeks, despite Obama's moratorium on offshore drilling, the White House (through The Department of Interior's Minerals (Mis)Management Service has signed off on at least five new offshore drilling projects. That all by itself provides a much clearer idea of where the power lies, and where the truth, than all the made-for-media show trials together.
BP has signed off on a $20 billion escrow fund, but it may well be liable for damages totaling over $100 billion. Judging from Tony Hayward's performance, the fourth-largest company on the planet doesn't seem too worried, or at least its directors don’t. It may be wise not to underestimate BP's political clout, in London, Washington and many other capitals around the world.
Possibly even more perverted, and more telling of how Washington works, is this from the Huffington Post:
White House Flip Flops On Reining In CEO PayThe White House is intervening at the last minute to come to the defense of multinational corporations in the unfolding conference committee negotiations over Wall Street reform. A measure that had been generally agreed to by both the House and Senate, which would have affirmed the SEC's authority to allow investors to have proxy access to the corporate decision-making process, was stripped by the Senate in conference committee votes on Wednesday and Thursday.
Five sources with knowledge of the situation said the White House pushed for the measure to be stripped at the behest of the Business Roundtable. The sources -- congressional aides as well as outside advocates -- requested anonymity for fear of White House reprisal.
The White House move pits the administration against House Speaker Nancy Pelosi (D-Calif.), who told Barney Frank (D-Mass.) to stand strong against the effort. "I met with the Speaker today and she said, 'Don't back down. I'll back you up,'" Frank, the lead House conferee, told HuffPost. "Maxine Waters is very upset, as are CalPERS and others." Advocates said that the corporations fought the issue primarily over executive compensation concerns. Given proxy access, investors could rein in executive salaries. The Business Roundtable is a lobby of corporate CEOs.
Yes, BP would be a natural member of the Business Roundtable. The fishermen and tourist operators on the Gulf Coast would not. If I've said it once, I must have said it a thousand times: there will be no economic recovery in the US, and neither will there be any meaningful reform, whether financial or political, as long as the final say rests with those who have the most money.
They've gotten where they are through, and because of, the system as it is, and they will successfully resist any significant changes that would hurt their interests. That's the light in which to view for instance Obama's bizarrely numb Oval Office speech, and that’s why the White House deems it necessary to intervene on Capitol Hill on behalf of its friends and masters in the Business Roundtable.
It’s not a pretty picture that you get to see when you peer behind the curtain of spin, is it?
Ilargi: Please go to the very last article in this post to read another raving review of Stoneleigh's presentation "A Century of Challenges". And don’t forget that The Automatic Earth needs your donations and our advertisers are eager for you to pay them a visit.
White House Flip Flops On Reining In CEO Pay
by Ryan Grim and Shahien Nasiripour - Huffington Post
The White House is intervening at the last minute to come to the defense of multinational corporations in the unfolding conference committee negotiations over Wall Street reform. A measure that had been generally agreed to by both the House and Senate, which would have affirmed the SEC's authority to allow investors to have proxy access to the corporate decision-making process, was stripped by the Senate in conference committee votes on Wednesday and Thursday. Five sources with knowledge of the situation said the White House pushed for the measure to be stripped at the behest of the Business Roundtable. The sources -- congressional aides as well as outside advocates -- requested anonymity for fear of White House reprisal.
The White House move pits the administration against House Speaker Nancy Pelosi (D-Calif.), who told Barney Frank (D-Mass.) to stand strong against the effort. "I met with the Speaker today and she said, 'Don't back down. I'll back you up,'" Frank, the lead House conferee, told HuffPost. "Maxine Waters is very upset, as are CalPERS and others." Advocates said that the corporations fought the issue primarily over executive compensation concerns. Given proxy access, investors could rein in executive salaries. The Business Roundtable is a lobby of corporate CEOs.
Valerie Jarrett, a senior White House adviser and Obama confidante, is the administration liaison to the Business Roundtable. An administration spokesperson said that the White House isn't flip-flopping because it has never made proxy access an explicit position it supports. "It was not part of our original financial reform proposals, and we have not taken a position explicitly. We have heard from and understand the various concerns on this critical corporate governance issue from multiple stakeholders including business, investors, labor and others. We are confident that the House and Senate conferees will come to a resolution and deliver a consensus view," said the spokesperson.
But two top administration officials publicly supported proxy access, and the Senate version in particular, at the Council of Institutional Investors annual conference in April. Deputy Secretary of the Treasury Neal Wolin addressed the provision. "The Senate bill will make clear that the SEC has unambiguous authority to issue rules permitting shareholder access to the proxy. We support that proposal. The SEC's rulemaking process will define the precise parameters of proxy access," he said. "But the principle is clear: long-term shareholders meeting reasonable ownership thresholds should have the ability to hold board members accountable by proposing alternatives and making their voices heard."
Valerie Jarrett followed Wolin. "The Senate bill will make it clear that the SEC has unambiguous authority to issue rules permitting shareholders access to the proxy -- essential, as I know you guys know," she said. "We agree that corporate governance means more transparency, more responsibility, more accountability, and once again -- I can't say it too often -- we stand firmly with you on that point." The statements were heartening to the investors, who were blindsided by the reversal this week. The investor-protection language was stripped and replaced by an amendment from Sen. Chris Dodd (D-Conn.), who leads the upper chamber's negotiations in the conference committee. Dodd is retiring at the end of this Congress.
Dodd's amendment to the Senate language inserts a requirement that only an individual with a five percent stake in a corporation can nominate candidates to the board or otherwise participate in corporate governance. Even the largest pension funds don't come anywhere close to owning five percent of a major corporation. The biggest pension funds are more likely to hit the half-percent threshold in rare cases. "I guess this is the way it works, but the sucker was like a bolt from the heavens. It came out of nowhere," said one advocate working on the issue.
Frank said that he wasn't certain the White House was involved. "There may be some sense that the White House -- I'll explain it this way: this affects, of course, not just the financial institutions, but all corporations and, yeah, I think there are some people in the White House who think, 'Well, we're fighting the financial institutions, but why fight with some of the others you know, the other corporations?' But all I can do is stand firm in our position, which we're doing. I think there may be some White House influence, but I don't really know. I would ask the Senate. It is interesting that they are reversing their own position," he said.
Backers of the underlying House and Senate language said that, as of last week, there was no indication that the provision would be stripped. Because the conference committee deliberations are televised, a broad range of interested observers were able to watch corporate America gut the reform proposal live. On Thursday, Sen. Chuck Schumer (D-N.Y.) fought back, attempting to amend the language to strike the five percent requirement. It failed; the only Democrats to back Schumer in the vote were Pat Leahy (D-Vt.), Tom Harkin (D-Iowa) and Jack Reed (D-R.I.).
The SEC is planning to issue rules related to proxy access. Those rules would be made meaningless by the language currently being pushed. "We're just horrified that the Senate would try to weaken language that was similar in both bills. To set such a high threshold makes the reform totally unworkable," said Ann Yerger of the Council of Institutional Investors. "It is very, very costly for investors to mount a proxy contest and to solicit votes against directors. Proxy access changes that by giving investors -- the owners of the business -- the same access to the proxy as management has for purposes of nominating a director," said
Lynn E. Turner, the Securities and Exchange Commission's chief accountant from 1998 to 2001. "It is extremely important [that] to avoid systemic risk investors be able to hold boards accountable. Otherwise, board members see no upside, only downside, to ever opposing management or putting the tough questions to them."
Senate Democrats dismantling aid package due to deficit
by Lori Montgomery - Washington Post
President Obama's urgent plea for more spending on the economy ran into the political buzz saw of the Senate on Tuesday, where Democratic leaders began chopping apart an aid package for unemployed workers and state governments in an effort to lessen its impact on the deficit.
The slimmed-down measure was still evolving late Tuesday. But Senate Majority Leader Harry M. Reid (Nev.) was trying to salvage one of Obama's top priorities -- $24 billion to avert the layoffs of state workers -- by scaling back other pieces of the sprawling package, including a provision to postpone a scheduled pay cut for doctors who see Medicare patients. Instead of postponing the cut until 2012, Reid is considering protecting doctors only through the rest of this year.
Reid also took aim at jobless benefits, which some Democrats complained may be too generous in a time of economic recovery. While the revised package would extend emergency benefits through the end of November, aides said it also would take $25 out of the weekly checks received by 15 million unemployed workers, repealing a payment boost first approved in last year's economic stimulus package. Those changes were aimed at slicing billions of dollars from the overall cost of the package and attracting the support of moderates in both parties who objected to the original price tag. According to the nonpartisan Congressional Budget Office, the original measure would have increased deficits by $80 billion over the next decade.
It was unclear Tuesday whether the leaner package would win the 60 votes needed to avert a Republican filibuster and push the measure to passage. Senate leaders planned to stage a vote Wednesday that would permit senators to go on record in opposition to the larger package, but senior Democratic aides said the ultimate fate of the legislation remained uncertain. "It's going to be manipulated and worked over and dealt with," said Sen. Jon Tester (D-Mont.), who came up with the idea to trim unemployment checks. "But as it goes forward," he said, "we've got to look for ways to save money."
Advocates for the unemployed bemoaned the proposed cut in benefits, saying $25 is a big bite from checks that average $309 a month. "It's shocking what their priorities are," said Maurice Emsellem, policy co-director at the nonprofit National Employment Law Project, noting that there are no apparent efforts to similarly scale back provisions that would extend expired tax breaks for businesses and individuals, adding $32 billion to the package. "Unemployment is still close to 10 percent, and there's no indication that it's coming down anytime soon."
If approved, the package would represent a significant down payment on Obama's request for additional federal cash to bolster a still-fragile economic recovery. On Saturday, the president sent a letter to congressional leaders pleading for more spending to avert "massive layoffs" at the state and local level, even as policymakers begin planning to reduce deficits that have soared to their highest levels since World War II when compared with the size of the economy. Democratic leaders agree with those goals. But with midterm elections approaching and public anxiety about deficits rising, many rank-and-file Democrats are increasingly unwilling to support additional deficit spending.
On Tuesday, the House approved another piece of Obama's job-creation agenda, voting 247-170 to approve a small package of tax cuts for small businesses that would not increase the deficit. Other concerns were hanging up the Senate jobs bill Tuesday. Several moderate senators are dissatisfied with a plan to increase taxes on hedge fund managers and other partnerships whose profits are taxed at the lower capital gains rate, rather than as regular income. Sen. Olympia Snowe (Maine.), one of several Republicans whose support is being sought for the package, said she remains concerned that the measure also would increase taxes on certain small businesses.
Now Stocks Are 48% Overvalued, Says Smithers
by Henry Blodget - Business Insider
We've been pointing out for a while that, based on a cyclically adjusted PE ratio, the stock market is significantly overvalued--say, 20% or so.
To arrive at this view, we use a "fair value" estimate for the S&P 500 of about 900, which is close to the one used by fund manager Jeremy Grantham, fund manager John Hussman, and others. This compares to the S&P's current level of about 1100.
But now Andrew Smithers, an excellent economist based in London, is telling us that we're way too optimistic, that fair value for the S&P 500 is actually in the 700-750 range. Smithers, therefore, thinks the stock market is about 50% overvalued.
Smithers constructs his estimate in two ways: 1) the same cyclically adjusted PE ratio that we use, and 2) something called "Tobin's Q," which is a measure of replacement value. Like Yale professor Robert Shiller, Smithers charts these valuation measures for the last century, which provides some context for where we are today:
Image: Smithers & Co.
Now, as always, the big caveat here is that valuation doesn't tell you much about what stocks are going to do over the near-to-intermediate term (1-3 years). To paraphrase Keynes, overvalued markets can keep on getting more overvalued for longer than you can stay solvent (and sane).
But valuation does give you a pretty good sense of what future long-term returns are likely to be (7-10 years). And all of these valuation analyses still suggest that long-term stock market returns are likely to be pretty crappy.
For a similar look at the market's valuation over time, here's Robert Shiller's chart, which charts the cyclically adjusted PE ratio. Smithers' chart above plots the valuation measures against their own average. Shiller's chart below plots them against their absolute levels (ie. today's PE is in the 20X range):
Image: Professor Robert Shiller, Yale University
Lastly, here's Smithers' explanation for his valuation chart. It's complicated, but basically the idea is that near-term earnings are way too volatile to provide a meaningful read on the market's valuation at any given moment. Thus, to get a meaningful sense of valuation, you need to look at a fundamental measure that is more stable than quarterly earnings. The cyclically adjusted PE, which averages 10 years of earnings, and Tobin's Q, which looks at assets, provide this. And as you can see in the chart, over the long haul, the market does tend to revert to the means.
US CAPE and q chart
With the publication of the Flow of Funds data up to 31st March 2010 (on 10th June 2010), we have updated our calculations for q and CAPE, which show very little change from our previous calculations.
Non-financial companies, including both quoted and unquoted, were 62% overvalued according to q at 31st March 2010, when the S&P 500 index was 1169. Adjusting for the subsequent decline to 1087 (10th June, 2010), the overvaluation had fallen to 50%. Revisions to data had little impact on q, with downward revision to net worth for Q4 2009 of 2.9% being offset by a downward revision to the market value of non-financial equities of 2.1%. Net worth for Q1 2010 fell slightly as equity buy-backs exceeded profit retentions.
The listed companies in the S&P 500 index, which include financials, were 58% overvalued at 31st March 2010, according to our calculations for CAPE, based on the data from Professor Robert Shiller’s website. Adjusting for the subsequent decline to 1087 (10th June, 2010), the overvaluation had fallen 46%. (It should be noted that we use geometric rather than arithmetic means in our calculations.)
Data for our calculations of q are taken for 1900 to 1952 from Measures of Stock Market Value and Returns for the Non-financial Corporate Sector 1900 - 2002 by Stephen Wright, published in the Review of Income and Wealth (2004) and for 1952 to 2009 from the Flow of Funds Accounts for the United States (“Z1”) published by the Federal Reserve. Data for our calculations of CAPE are taken from the data published on Robert Shiller’s website.
As net worth and cyclically adjusted earnings per share change little during a quarter, only changes in share prices are important for changes in the market value between our quarterly updates. The value of the market can thus be readily adjusted by viewers to this website. As the S&P 500 index changes, viewers can simply insert the new value and calculate the q and CAPE values, i.e:
With the S&P 500 at 1169 as at 31st March 2010, q was 1.6166 and CAPE was 1.5761.
To update as at 10th June 2010, when the S&P 500 was 1087, for q take 1.61 × 1087 ÷ 1169 = 1.50 and for CAPE take 1.58 × 1087 ÷ 1169 = 1.46.
Reality of America’s fiscal mess starting to bite
by Gillian Tett - Financial Times
If you pop into a toilet on the Seattle waterfront this summer, you might see over-flowing bins. The reason? A polite notice explains that "because of 2010 budget reductions", the Seattle government can no longer afford to "service this comfort station" each day. Hence the dirt. Investors would do well to take note. In recent months, America’s fiscal mess has assumed a rather surreal air. On paper, the country’s federal-level deficit and debt numbers certainly look very scary. But in practical terms, the impact of those ever-swelling zeroes still seems distinctly abstract.
After all, so far the federal government has not been slashing spending; on the contrary, there was a stimulus bill last year. And, as my colleague John Plender pointed out this week, Treasury bond yields have been falling as investors flee the eurozone woes. As a result, those scary numbers still seem to be a problem primarily concocted in the world of cyber finance. But there is one place where reality is already starting to bite in America and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.
Last year, that pain was partly eased by Barack Obama’s stimulus package(s). But that spending splurge is now fading away. And in fiscal 2011 and 2012, the states are expected to face another combined budget deficit of $260bn, with the 2011 shortfall in places such as New Jersey, Illinois, Nevada and Arizona projected to be more than 35 per cent of last year’s budget. So far, the municipal bond market has been dangerously complacent about all this, with yields on 10-year municipal bonds hovering just above 3 per cent. But even if markets seem relatively relaxed, the key point is that the state statistics are already having a very real world impact – in contrast to the federal debt.
Never mind the trivial matter of Seattle’s comfort stations; as it happens, Washington State’s finances are better than most. In New Jersey schools, classes are being cut. In California, public sector employees are not getting paid. In New York, a subway extension has just been cancelled. And in places such as Illinois and San Diego, pension benefits are being renegotiated altogether, breaking numerous taboos. This, in turn, begs a bigger question: what will be the wider economic and psychologal impact? One obvious, immediate consequence of these cuts is that they appear to be undermining consumer confidence, over and above the damage already being inflicted by the stubbornly high unemployment rate. The pattern may also be fuelling some subtle shifts in terms of how investors view the future.
In Seattle, for example, local insurance companies have recently changed the message they are giving to customers. For though financial planners used to steer households into tax-deferred products (such as 401K), since they assumed that employees would pay lower taxes when they retired, the new mantra is "tax diversification". That is based around the idea that households should not defer tax payments, since taxes wll inevitably rise in the future, as the fiscal squeeze takes hold. And that, in turn, raises another question: namely what all of this real-world squeeze in Seattle (and eslewhere) might - or might not - do to the bigger debate about the federal debt.
It is a fair bet that eventually the debate about state spending cuts will encourage investors and voters to start paying more attention to the seemingly abstract federal fiscal numbers. That might spark more market upheaval. it might also create more political upheaval. Just look at the rise of the Tea Party for signs of that. But if you want to be optimistic, it is also possible to put a more upbeat spin on this. For all the gloomy statistics about state deficits and spending cuts, what has not received as much attention is that some states are now trying proactively to tackle their woes. Illinois, for example, is facing a big crunch due to credit downgrades; but it is also doing some imaginative things, such as raising the retirement age for local state employees.
That may not please voters. Nor will it necessarily save Illinois from further downgrades to its debt. But this is the type of step that needs to embraced at the federal level, too. So if places such as Illinois can actually break these taboos, it could be a reason for cheer; conversely, if it sparks too much social unrest, it will be a powerful warning sign. Either way, holders of US Treasury bonds had better keep a close watch on what happens to state budgets this year; even in the all-too-tangible world of the Seattle waterfront.
Illinois Debt-Default Insurance Climbs to Record
by Allison Bennett - Bloomberg
The cost of insuring bonds issued by Illinois against default rose to a record high as lawmakers sought to close a $13 billion budget deficit for the year starting July 1. The cost of a five-year credit-default swap to insure Illinois obligations rose 6 basis points to 308.61 basis points today, or $308,610 to insure $10 million of debt, at 1:10 p.m. in New York, according to CMA DataVision. The gain makes insuring bonds from the fifth-most populous state the most costly among municipal issuers and puts it 66 basis points above Spain. A basis point is 0.01 percentage point. Illinois lawmakers passed a provisional $25.9 billion fiscal 2011 spending plan that’s about $13 billion short, and are resisting Governor Pat Quinn’s plan to sell $3.7 billion in debt to help close the gap.
Legislators recessed last month without providing a plan to make a $3.7 billion pension payment and pay $4.5 billion in bills. "If the spread is the widest, it says the problem is bigger than it’s ever been before," said Peter Hayes, who oversees $106 billion of municipal bonds for New York-based BlackRock Inc. "It’s a reaction to the inability to pass a budget. We’ve seen a greater unwillingness from Illinois and the market is reacting to that." Illinois’s credit-swap costs surpassed California’s, the largest U.S. municipal borrower, which saw its default-insurance contracts fall 1 basis point to 297 basis points, or $297,000 per $10 million of debt. Illinois is rated A+ by Standard & Poor’s, two levels higher than California. Moody’s Investors Service values both at A1, the fifth-highest, and both are its lowest-rated U.S. states.
While the cost to protect Illinois debt rose, a 3.5 billion euro ($4.3 billion) bond auction in Spain eased concern that the Mediterranean nation will struggle to meet redemptions. The cost to protect Illinois debt is 3 basis points higher than for Portugal and still remains below Greece’s credit-default swaps, valued at 812.49 basis points. Moody’s and Fitch Ratings downgraded Illinois this month, citing the lack of political will to deal with budget issues. "You can’t short regular cash municipal bonds, so the CDS market is the way" to bet against the securities, Hayes said.
Earlier Illinois Sale
The state sold $455.1 million in sales tax-backed bonds June 15, as investors demanded higher yields. Bonds with a 5 percent coupon maturing in 2020 yielded 4.02 percent, 82 basis points above top-rated tax-exempts, according to Municipal Market Advisors. Investors paid 108 cents on the dollar for the debt. "We don’t know of any deal better that has been done this week," said Kelly Kraft, a spokeswoman for the governor. "We had $1.5 billion of orders for $450 million of bonds. The state received excellent execution and we are very pleased with the rate." The state’s previous issue of sales-tax-backed bonds was for $375 million. Securities maturing in 2020 with the same coupon, priced to yield 3.9 percent, with investors paying more than 107 cents on the dollar. The yield at pricing was 75 basis points higher than 11- year top-rated debt. The bonds traded June 14 at 3.78 percent, 60 basis points more than top-rated comparable maturities, according to MMA.
House Prices Still Have Another 10%-20% To Fall, Says Gary Shilling
by Henry Blodget - Tech Ticker
A year ago, house prices finally stopped collapsing after two years of brutal declines. Over the following few quarters, moreover, they actually rose. This led many observers to conclude that the housing bottom had been reached and that we were headed for a v-shaped bounce. Not Gary Shilling.
Gary Shilling, head of economic research firm A. Gary Shilling & Co., thinks house prices still have another 10%-20% to fall. Just as bad, Gary thinks this fall will happen over the next three years, meaning that house prices won't bottom until 2013. Most people think prices have already bottomed, or will bottom later this year or next. Why is Gary so bearish?
Supply versus demand. Basically, Gary says, we still have way too many houses relative to the number of people who want to buy them. Consumers are under pressure, overloaded with debts and struggling to find work, and the mass-hallucination that investing in housing was a "sure thing" is now a distant memory. These days, many would-be home buyers are moving in with relatives or downsizing or dumping second homes. And the supply-demand balance is so out of whack, in Gary's view, that even super-low interest rates won't keep prices afloat.
Recovery Was Never Strong, Shilling Says: Only Change Is Perception
by Jonathan Light - Tech Ticker
From fears of economic Armageddon just a year ago, to expectations of a V-shaped recovery just a few months ago, the U.S. economy now sits at an uneasy crossroads. But other than the perception of the economy's strength, not much has really changed, according to Gary Shilling of A. Gary Shilling & Co.
It's much easier to declare the recovery "robust" when stocks rally the way they did from March 2009 to April 2010, Shilling tells Henry in the accompanying clip. But the recent troubles in Europe and the subsequent downward shift in the market have changed the perception of what the recovery will be. But Andre Agassi was wrong: perception isn't everything. Shilling says this is, and always has been, a long, slow recovery, with the possibility of a double-dip recession.
After decades of ratcheting up the debt-to-income ratio, first by the U.S. Government in the 1970's, then by U.S. consumers in the 1980's, we are now entering a period of deleveraging, which will be a drag on the recovery, and possibly bring some major hiccups along the way. Don't be too scared of a meltdown, but don't expect a return to the era of negative savings rates and maxed out credit cards anytime soon.
Shilling also says the slow recovery and a continuation of high unemployment could bring us into an extended period of no-growth, similar to the "slow-motion train wreck" that has characterized the Japanese economy for the past 20 years. But we're in better shape, he says, suggesting our good old-fashioned American optimism (and a return to high-savings rates) will serve us well, and help us avoid such economic purgatory.
Suddenly, Gary Shilling's Bearishness Doesn't Seem So Nutty
by Aaron Task - Tech Ticker
In case you hadn't noticed, Gary Shilling is here to let you know what's become apparent to just about everybody: "It's difficult to make a lot of money in this environment from a long only portfolio, especially from a long only stock portfolio." The best bet for most investors right now is probably a highly diversified portfolio with uncorrelated assets that can profit (or at least preserve capital) as the market seesaws back and forth between the "risk-on" reflation trade and the "risk-off" deflation trade.
But Shilling, president of A. Gary Shilling & Co., is a charter member of the risk-off deflation camp and is positioned accordingly:
- Short Stocks: Never a believer in the recovery, Shilling says stocks "have gotten way ahead of themselves" and says there's a 30% chance the devilish lows of March 2009 (S&P 666) will be retested before this secular bear market ends.
- Long Treasuries: Treasuries are "THE safe haven," Shilling says, predicting the yield on the 30-year bond will go to 3%; that would be an over 30% appreciation from current levels and about 55% for his old favorite, zero coupon bonds. "That not a bad return when you look at the alternatives," he says. "I don't think we'll get anything close to that from stocks."
- Long the Dollar, Short Commodities: Shilling is long the dollar vs. the euro, British sterling and Aussie dollar, the latter of which is a bet on a slowdown in China. Australia "has become a Chinese colony," Shilling quips. But it's no joke that a China slowdown will, by definition, hurt demand for commodities, most notably copper.
Broken Clock or Crazy Like a Fox?
Anyone familiar with his work and writings knows these are time-tested themes for Shilling. In December 2008, he put a 2009 target of 600 on the S&P 500, which nearly came true. But instead of declaring victory, Shilling reiterated that forecast here in March 2009, and stuck by the bearish guns in May 2009 and again in February 2010. Back in February, Shilling was starting to look stubborn at best, and out of touch at worst. Now, however, his bearishness doesn't seem so crazy, what with:
- The U.S. housing market downshifting, unemployment still high and consumers cutting back again.
- The euro zone teetering on collapse about about to trigger another global financial crisis or "just" heading for a steep drop in growth amid all the austerity measures.
- China trying to tamp-down inflation.
- Japan still a basketcase.
- Sovereign debt looking like the new subprime.
- The dollar benefiting from its "best house in a bad neighborhood" status, which is lulling policymakers into a false sense of security about America's ability to continue its profilgate spending.
- U.S. stocks expensive on a long-term cyclically adjusted P/E basis.
"Trying to time this is tough -- it always is," Shilling tells Henry in the accompanying clip. "Deleveraging is difficult to predict [and] it's happening in discreet pieces. That affects investor sentiment and market behavior. " Check the accompanying for more on why Shiling isn't worried about inflation (hyper or otherwise) and doesn't think you should be either.
BP replaces CEO Hayward as point man for oil spill response
by Walter Hamilton and Scott Kraft, Los Angeles Times
Embattled BP Chief Executive Tony Hayward, who endured a ferocious daylong grilling this week on Capitol Hill, was replaced Friday as the point man for the day-to-day response to the gulf oil disaster, a move that drew praise from BP critics and suggested the company was growing increasingly concerned with damage to its image. BP's chairman, Carl-Henric Svanberg, told Sky News television in Britain that Hayward was handing over daily operations to managing director Robert Dudley, a Mississippi native who started his career at Chicago-based Amoco Corp., which BP bought in 1998. Dudley has handled sensitive international assignments for BP in Russia and Africa.
Hayward, a soft-spoken British geologist, has been a lightning rod for criticism of BP since the April 20 Deepwater Horizon rig explosion in the Gulf of Mexico. Under questioning in Washington on Thursday, members of Congress accused him of "stonewalling" and "insulting our intelligence." Hayward also has been pilloried for several rhetorical missteps that critics interpreted as signs of callousness and detachment. His comment last month that "I'd like my life back" — an inartful attempt to underscore his desire to move quickly to cap the well — sparked a firestorm from those who said it showed BP's disregard for the suffering of people in the gulf region. "It is clear Tony has made remarks that have upset people," Svanberg told Sky News on Friday, explaining the decision.
Earlier this month, BP had announced that, after the spewing well was capped, Dudley would take over management of the long-term response and sought Friday to downplay the move. Hayward retains his position as CEO, and Dudley will report to him. But Svanberg's decision to relieve Hayward of those duties on the heels of the CEO's congressional testimony, analysts said, reflected BP concern that Hayward was no longer effective in the role of primary spokesman.
At the hearing, Hayward angered lawmakers by stressing that he wasn't involved in key decisions before the deadly explosion of the rig and refused to comment on possible causes of the accident. "Unfortunately in most cases, he did not have good answers — or give any answers," said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. "He obviously was unprepared and ill-equipped to go through this inquisition."
Svanberg said he will assume a more public role. But he also suffered a verbal gaffe this week by saying BP cares about the "small people" hurt by the crisis. BP had to backpedal, attributing the remark to a cultural misunderstanding.
The decision to replace Hayward was welcomed by many lawmakers still seething from the CEO's testimony. "I have absolutely no confidence that Hayward can respond to this crisis," said Rep. Cliff Stearns (R-Fla.), among Hayward's critics. "I hope that Mr. Dudley will be more forthcoming in explaining how BP plans to cap the oil well and address the huge and severe environmental and economic damage in the gulf region."
Rep. Charlie Melancon (D-La.) said BP should fire Hayward, arguing that "as long as Mr. Hayward remains at the helm of BP, it will be impossible for the people of Louisiana to trust anything the company says." Rep. Bart Stupak (D-Mich.), chairman of the House Energy and Commerce Subcommittee on Oversight and Investigations that held the hearing, said he expected Dudley to take a "much more cooperative and open approach to answering our questions and responding to the needs of the gulf region. If not, his tenure will likely be as short-lived as Mr. Hayward's."
BP has received the cold shoulder publicly from other oil companies, and on Friday, Anadarko Petroleum Corp., a Texas company that owns 25% of the leaking BP well, said it wasn't responsible for any of the costs related to the explosion because "mounting evidence clearly demonstrates that this tragedy was preventable and the direct result of BP's reckless decisions and actions." In a statement, Anadarko Chairman and Chief Executive James Hackett said he was "shocked" that information revealed during congressional hearings "indicates BP operated unsafely and failed to monitor and react to several critical warning signs."
Meanwhile, Kenneth Feinberg, who has been appointed by President Obama to oversee the $20-billion fund BP set aside to pay claims arising from the spill, said in an interview Friday that he gave BP "a lot of credit" for trying to make timely payments, but acknowledged the oil company's efforts were falling short. "It is clear that they're not processing the claims fast enough. There isn't enough transparency in providing claimants with information about when they can expect their check," he said. "We've got to come up with a much more transparent system."
Feinberg said he will rely on state law in determining the validity of claims, adding that he would probably consider, among other claims, those made by out-of-work fishermen for health premiums and other expenses they are currently not able to pay.
In the gulf Friday, Coast Guard Adm. Thad Allen said BP now estimates that the amount of oil it is collecting from two containment systems on the broken well has increased to 25,000 barrels a day. The current collection rate is about a 25% increase from efforts earlier in the week. By the end of the month, Allen said, it could reach as high as 53,000 barrels a day. At that time, BP will face a decision on whether to replace the existing system with one capable of harnessing even more oil and better able to weather a hurricane.
Tentative plans call for replacing the broken bit of pipe, or riser, now sticking above the well with a more robust and flexible production system. BP earlier sheared that same broken pipe and installed the existing temporary containment system over it. The next step would require removing the pipe entirely from its base and bolting a new cap over the hole. The cap would attach to a flexible tube and to two floating risers suspended from buoys. Oil could then be funneled by two routes to storage and production facilities at the water's surface.
The switch might be risky, Allen acknowledged. The existing containment system is the only one that has worked. But the new system would allow BP to collect more oil and also make it easier for boats to unhitch quickly during a storm, Allen said. Whether BP decides to replace the existing collection system depends on several factors, including how much oil is really leaking. Allen said new scientific estimates of the leak are as high as 60,000 barrels of oil a day, but that Coast Guard experts believe the actual number is probably lower — maybe 35,000 barrels. But he added that even if the existing containment system is able to capture all the leaking oil, the hurricane-safety advantage of a new cap might outweigh the risks.
To meet cleanup demands, Allen said workers have begun to construct new skimmer boats in Port Fourchon, La. Coast Guard officials are also reviewing U.S. Navy resources and scouring the rest of the country in an effort to bring more boats and skimming equipment to the region, he said.
Dudley, the new BP point person for the spill, is the head of BP's Gulf Coast operations and has won guarded praise for his public remarks thus far in the crisis. In numerous television appearances, he has defended BP's strategy in dealing with the spill. One of the few Americans in the top ranks of BP, he grew up in Hattiesburg, Miss., about 80 miles north of the Gulf Coast, and spent summers in Gulfport and other coastal communities. At BP, he was handed several tough assignments, including head of BP's TNK-BP unit in Russia during a tense standoff between the company and its Russian partners. Dudley and Louisiana Gov. Bobby Jindal recently walked together on an oil-covered beach. "What I saw was painful and emotional and shocking," Dudley said.
BP CEO Tony Hayward Re-Recites Ad Copy In Congressional Hearings
Jason Linkins and Ben Craw - Huffington Post
Anyone who was tuned in to [Thursday's] morning session of Congressional hearings featuring various angry members of the House of Representatives, BP CEO Tony Hayward, and Hayward's pet parakeet, "Representative Joe "Rationalizin' and Apologizin'" Barton (R-Tex.) probably noticed the same strange thing about Hayward's opening remarks that I did -- a large part of his opening statement seemed to be a robotic recitation of the ad copy used in BP's famous "Sorry about that oil spill" ad.
Well, as it turns out, it was. HuffPost's own Ben Craw went ahead and spliced together the relevant portions of Hayward's statement and the BP ad and if you close your eyes, you won't be able to tell the difference.
BP Looking to Protect Itself by Hiring More Banks
by Charlie Gasparino - FOX Business
BP Plc is on a bankers buying spree, offering several large financial institutions lucrative roles as advisers on financing deals in exchange for guarantees that they will help the firm raise money in a pinch, FOX Business has learned. The troubled oil giant has already hired Goldman Sachs, Credit Suisse and Blackstone as advisers, but it is in negotiations to bring aboard Morgan Stanley, HSBC, UBS and Asian bank Standard Charter. People at the firm say the sticking point is that they are being asked to somehow guarantee that they would lend money to the company. A BP spokesman declined to comment on the company's relationship with its banks, and officials at those firms also had no comment.
Underwriters are often asked to provide multiple financing arrangements, but U.S. securities laws prohibit underwriters "tying" of various assignments, meaning they cannot offer to make bank loans in exchange for being hired as an investment advisor. However, the companies themselves can demand access to bank lines of credit in exchange for hiring on other assignments, which appears to be the case here.
For BP, however, the access to cash is important for its survival. The massive spill in the Gulf of Mexico and its potential financial impact – Credit Suisse estimates it might cost the company nearly $40 billion—has raised the possibility that the firm might have to file for bankruptcy protection. It has already agreed to a demand from president Obama to set aside $20 billion to cover liabilities stemming from the oil spill.
It’s unclear how BP will raise money to pay for the claims. Sources say it may issue billions of dollars of bonds in the coming weeks as well as tap bank lines, or do a combination of both. People at the firms say they haven’t agreed to BP’s terms just yet.
Obama officials still approving flawed Gulf drilling plans
by Shashank Bengali - McClatchy Newspapers
Despite President Barack Obama's promises of better safeguards for offshore drilling, federal regulators continue to approve plans for oil companies to drill in the Gulf of Mexico with minimal or no environmental analysis. The Department of Interior's Minerals Management Service has signed off on at least five new offshore drilling projects since June 2, when the agency's acting director announced tougher safety regulations for drilling in the Gulf, a McClatchy review of public records has discovered.
Three of the projects were approved with waivers exempting them from detailed studies of their environmental impact — the same waiver the MMS granted to BP for the ill-fated well that's been fouling the Gulf with crude for two months. In a May 14 speech in the Rose Garden, Obama said he was "closing the loophole that has allowed some oil companies to bypass some critical environmental reviews."
Environmental groups, however, say the loophole is as wide as ever and that the administration is allowing oil companies to proceed with drilling plans that may be just as flawed as BP's, which concluded that a major spill was "unlikely" and that the company was equipped to manage even the worst-case blowout. "It's just outrageous," said Kieran Suckling, executive director of the Center for Biological Diversity, a conservation organization. "The whole world is screaming and . . . they're just continuing to move this stuff through the system."
The Obama administration has said it's cracking down on the oil industry with a six-month moratorium that prevents regulators from granting new permits for offshore wells deeper than 500 feet underwater in the Gulf of Mexico. That, however, hasn't stopped oil companies from submitting new drilling plans, which, as McClatchy reported earlier this month, routinely underestimate environmental risks and overestimate the companies' ability to respond to a disaster.
According to MMS records, since June 2 the agency has granted environmental exemptions — known as "categorical exclusions" — to three new drilling projects. Of those, an Exxon Mobil site at a water depth of 1,000 feet and a Marathon Oil site at 775 feet are classified as deepwater; the third is a shallow-water project by Houston-based Rooster Petroleum. Environmentalists say these approvals fly in the face of the June 2 order by acting MMS director Bob Abbey that requires oil companies to submit additional safety information in their development plans. All three drilling plans were submitted to the MMS before Abbey's order.
The MMS also approved two other deepwater drilling plans — for a Chevron site 6,730 feet underwater and for an Exxon site at a depth of 6,943 feet — after subjecting them to environmental reviews, the records show. When Obama's six-month ban is lifted, experts say these projects could form the basis for new, flawed wells unless the MMS submits them to tougher oversight. "At no point did any of the moratoriums cease the use of (categorical exclusions)," Suckling said. "They're cueing up all these drilling projects with no environmental review, so they're just sitting at the starting line" until the ban ends.
A spokesman for the Interior Department said the policy on categorical exclusions "is still being studied" as part of a 30-day congressionally mandated review of U.S. drilling policy. The department issued a separate directive Friday that requires oil companies to submit information about the possibility of a blowout, which had been missing from many drilling plans, but made no mention of the waivers.
Suckling's group filed a petition with the department this week to ban the waivers and charged that the MMS violated the 1970 National Environmental Policy Act when it approved a 2007 lease sale — including for BP's blown-out Macondo well — saying it would have "no significant environmental impacts." The center also has filed suit in federal court in Louisiana to force the MMS to review all 49 exploration plans for the Gulf that were approved with categorical exclusions. Other environmental groups have brought similar suits, with lawyers charging that the ongoing issuance of the waivers is part of a business-as-usual mentality among the oil industry and the Department of Interior.
Congressional investigators found that, 11 days before the April 20 explosion aboard BP's Deepwater Horizon rig, the company sent a letter to federal officials urging them to continue issuing the waivers "to avoid unnecessary paperwork and time delays." "The fact that the agency continued to spit them out while oil was pouring into the Gulf is just ridiculous to the extreme," said Mike Senatore, an attorney for Defenders of Wildlife, a nonprofit environmental group. There are other signs that the BP spill hasn't put the brakes on offshore drilling in the Gulf.
Last week, Defenders of Wildlife and the Southern Environmental Law Center filed suit in federal court in Alabama challenging the MMS's approval of 198 new deepwater leases in the central Gulf since the BP spill began. The lease sales — an earlier step, before oil companies submit drilling plans — create an incentive to continue offshore drilling despite the risks, attorneys argue. If federal regulators opt to cancel a lease once it's issued, the government must repay the company the fair market value of the lease or compensate it for the cost of its bid plus interest, the lawyers said.
"It immediately puts the U.S. taxpayer on the hook financially," Senatore said.
The lawsuit challenges Lease Sale 213, which covers 36 million acres in the central Gulf off the coasts of Louisiana, Mississippi and Alabama, and drew $1.3 billion in bids at a March auction at the Superdome in New Orleans, according to MMS records. Of 198 deepwater leases sold, at least 10 are owned by BP and are located over a mile deep, the groups say. "The moratorium does not stop this process," Senatore said.
Slippery Start: U.S. Response to Spill Falters
by Jeffrey Ball and Jonathan Weisman - Wall Street Journal
Officials Changed Their Minds on Key Moves, and Disagreements Flared Between Agencies; Boom Taken Away From Alabama
On May 19, almost a month after BP PLC's Deepwater Horizon rig exploded, the White House tallied its response to the resulting oil spill. Twenty thousand people had been mobilized to protect the shore and wildlife. More than 1.38 million feet of containment boom had been set to trap oil. And 655,000 gallons of petroleum-dispersing chemicals had been injected into the Gulf of Mexico. That same day, as oil came ashore on Louisiana's Gulf coast, thousands of feet of boom sat on a dock in Terrebonne Parish, waiting for BP contractors to install it. Two more days would pass before it was laid offshore.
The federal government sprang into action early following the vast BP oil spill. But along the beaches and inlets of the Gulf, signs abound that the response has faltered. A Wall Street Journal examination of the government response, based on federal documents and interviews with White House, Coast Guard, state and local officials, reveals that confusion over what to do delayed some decision-making. There were disagreements among federal agencies and between national, state and local officials.
The Coast Guard and BP each had written plans for responding to a massive Gulf oil spill. Both now say their plans failed to anticipate a disaster threatening so much coastline at once. The federal government, which under the law is in charge of fighting large spills, had to make things up as it went along. Federal officials changed their minds on key moves, sometimes more than once. Chemical dispersants to break up the oil were approved, then judged too toxic, then re-approved. The administration criticized, debated and then partially approved a proposal by Louisiana politicians to build up eroded barrier islands to keep the oil at bay.
"We have to learn to be more flexible, more adaptable and agile," says Coast Guard Adm. Thad Allen, the federal government's response leader, in an interview. Because two decades have passed since the Exxon Valdez oil spill in Alaska, he says, "you have an absence of battle-hardened veterans" in the government with experience fighting a massive spill. "There's a learning curve involved in that." It is unclear to what extent swifter or more decisive action by the government would have protected the Gulf's fragile coastline. The White House's defenders say the spill would have overwhelmed any defense, no matter how well coordinated.
President Barack Obama, in his address to the nation Tuesday night, said that "a mobilization of this speed and magnitude will never be perfect, and new challenges will always arise." He added: "If there are problems in the operation, we will fix them." Under federal law, oil companies operating offshore must file plans for responding to big spills. The Coast Guard oversees the preparation of government plans. In the event of a spill, the oil company is responsible for enacting its plan and paying for the cleanup, subject to federal oversight. If the spill is serious enough, the government takes charge, directing the response.
BP's plan, submitted to the Minerals Management Service, envisioned containing a spill far larger than government estimates of the Gulf spill. Among other things, it said it would hire contractors to skim oil from the water, spray chemical dispersants on the slick and lay boom along the coast. The Coast Guard's spill-response plan for the area around New Orleans, updated in August 2009, said that laying boom would be one of the main ways to protect the coastline.
When Adm. Allen took charge of fighting the BP spill, he found that both sets of plans were inadequate for such a large and complex spill. "Clearly some things could have been done better," says a BP spokesman about the company's response, which he says has been "unparalleled." President Obama first heard of the problem the night of April 20, when a senior National Security Council aide pulled him aside to tell him a drilling rig 50 miles off the Louisiana coast had exploded. It would be "potentially a big problem," the aide said.
Adm. Allen, then the Coast Guard's commandant, was dispatched to the scene; he later said he knew right away the spill would be serious. The next day, Interior Department Deputy Secretary David Hayes flew to Louisiana to set up a command center, leaving Washington in such haste that he had to buy a change of underwear at a Louisiana K-Mart. On April 22, the day the rig sank, the president convened his first Oval Office meeting on the disaster, with Homeland Security Secretary Janet Napolitano, Interior Secretary Ken Salazar and others. As far as they knew, no oil was leaking.
Two days later, the White House received word that oil was escaping into the Gulf. White House science adviser John Holdren, an environmental scientist, pulled aside two top security officials, White House counterterrorism adviser John Brennan and National Security Council chief of staff Denis McDonough. He pressed them on what secret technology the government had—a submarine, for example—that could help, Mr. McDonough recalls. The answer was none.
On the evening of April 28, the NSC's Mr. McDonough and a White House aide interrupted a meeting in the White House's secure situation room. Oil was gushing faster than previously believed. Officials now expected the oil sheen to reach the Louisiana coast the next day.
The federal government's priority was to keep the oil offshore, partly by laying boom. The coast has hundreds of miles of inlets, islands and marshes, which makes that strategy difficult. "There's not enough boom in the world to boom from Texas to Florida, so we're doing triage," Benjamin Cooper, a Coast Guard commander, told shrimpers and other residents in Dulac, La., in mid-May. There were problems from the start. The first weekend in May, when the president made his initial trip to the region, the water was rough.
Contractors hired by BP to lay boom off St. Bernard Parish, east of New Orleans, mostly stayed ashore, says Fred Everhardt, a councilman. Shrimpers took matters into their own hands, laying 18,000 feet of boom that weekend, compared to the roughly 4,000 feet laid by the BP contractor, Mr. Everhardt says. BP did not respond to requests for comment about the incident. Edwin Stanton, the Coast Guard official in charge of the New Orleans region, says workers overseen by the government had laid tens of thousands of feet of boom the first week of the spill. But he acknowledges problems getting it to the right place.
He says the Coast Guard decided it needed to accommodate local parish presidents, who all demanded boom even though they all didn't equally need it. Without the competing demands, he says, "we might have been able to use what boom we had to greater effect."
To make matters worse, the government didn't have the right kind of boom. Boom built for open ocean is bigger and stronger than that made for flat, sheltered water. The bigger boom is expensive and was in short supply, Mr. Stanton says. "We really didn't have the appropriate boom sizes," he says. "I think we would have liked to put out open-water boom at the big passes, but we just didn't have enough."
As the oil spread east, Alabama Gov. Bob Riley wanted to stop it from crossing into Perdido Bay, a key to Alabama and Florida's fishing and tourism industries. In mid-May, the governor and Coast Guard officials worked out a plan to hold the oil back using heavy boom built for open ocean. Alabama authorities scoured the globe for the boom they needed, says a spokesman for the governor. In late May, they found it in Bahrain and flew it to the Alabama coast. Days later, the Coast Guard gave it to Louisiana.
Mr. Riley was furious. The Coast Guard and Alabama authorities instead deployed lighter boom. On June 10, oil breached Perdido Bay. "This isn't a fight between Louisiana and Alabama, it's not between governors," the governor's spokesman says. "But it is incredibly disappointing to have those resources taken from us." A spokesman for Adm. Allen says the boom was needed to protect a bay in Louisiana, and was taken "well before oil was in sight off Alabama."
Louisiana officials, frustrated that the boom wasn't working, proposed building sand "berms" along the coast to block oil from reaching shore. Dredges would suck sand from the sea floor and spray it in a protective arc along barrier islands. On May 11, state officials asked the U.S. Army Corps of Engineers for an emergency permit to build some 130 miles of berms. Several federal agencies criticized the proposal. In written comments to the Army Corps of Engineers, the Environmental Protection Agency said the berms might not be built in time to stop oil from hitting shore. It worried the process might spread oil-tainted sand and change the water's flow, possibly hurting marshes. White House officials also were skeptical.
Frustrated by the delay, Louisiana's Republican governor, Bobby Jindal, sent the Louisiana Army National Guard to plug gaps in barrier islands, for which the state had legal authority. EPA Administrator Lisa Jackson was worried about another threat: the use of dispersants, chemicals designed to break oil into particles that can be digested by bacteria. BP was using unprecedented amounts—about 1.3 million gallons so far, according to federal officials. According to EPA data, one dispersant, Corexit 9500, is especially toxic to the shrimp and fish used in tests. But it was available in large quantities, so that's what BP was using.
On May 10, with the boom and berm plans foundering, Ms. Jackson met about 25 Louisiana State University scientists to discuss the spill. Most of the scientists urged her not to let BP spray dispersants directly at the leaking well without more research, recalls Robert Carney, one of the LSU professors. Ms. Jackson responded that the EPA was "under extreme pressure from BP" to approve the move, Mr. Carney recalls. An EPA official confirmed Ms. Jackson met with the LSU scientists. Five days later, the EPA said it would let BP spray the dispersant on the wellhead.
In mid-May, large globs of oil started washing ashore. The EPA, under pressure from scientists and environmental groups, abruptly turned against using the dispersant Corexit. On May 20, a day after Ms. Jackson was grilled by lawmakers, the EPA said it had given BP until that night to find a less-toxic alternative or explain why it couldn't. "We felt it was important to ensure that all possible options were being explored," Ms. Jackson said. BP responded in a letter that makers of other dispersants wouldn't be able to supply large volumes for 10 to 14 days. It said it intended to keep using Corexit, which it said "appears to have fewer long-term effects than other dispersants."
In Terrebonne Parish, BP contractors still hadn't installed the boom, angering Coast Guard officials. "I could just see the fury in their eyes," Michel Claudet, parish president, says of the Coast Guard officials. The poor coordination with BP contractors, he says, "was just a common occurrence." Boom installation finally began on May 21. Interior Secretary Salazar lit into BP on a trip to Louisiana, threatening to "push them out of the way" and let the government take over ground-level operations. He was contradicted by the Coast Guard's Adm. Allen, who suggested the government didn't have the technical know-how to fight the spill alone.
On May 24, the EPA's Ms. Jackson said the agency wouldn't stop BP from using Corexit, after all, given the lack of alternatives. She said BP would have to "significantly" cut the amount it was using while it and the EPA looked for a better approach. Louisiana's Gov. Jindal was losing patience. That same day, Homeland Security Secretary Napolitano traveled to Gulf and poured cold water on Louisiana's berm plan. The administration, she said, was looking into "some responses that would be as effective" without the environmental risks.
Standing by Ms. Napolitano, Mr. Jindal didn't disguise his frustration. "We know we have to take action and take matters into our own hands if we are going to win this fight to protect our coast," he said. On May 27, the administration changed course on the berms. The Corps of Engineers authorized construction of about 40 miles of the 130 miles of berm proposed by Louisiana. Complicating matters, Adm. Allen ordered BP to pay for only a small portion of the 40 miles, to "assess" their effectiveness.
Mr. Obama got an earful when he met state and parish officials the next day on a visit to Grand Isle, a barrier island south of New Orleans. BP crews had arrived prior to the president's arrival and worked feverishly to tidy up the beaches. They left after he flew out. Before leaving, the president ordered Adm. Allen to look into building more berms. On June 1, Adm. Allen convened a meeting in New Orleans, where Gov. Jindal and parish chiefs demanded BP pay for more berms. The next day, Adm. Allen said the administration was ordering BP to pay for all 40 miles authorized. The work began Sunday.
With Criminal Charges, Costs to BP Could Soar
by John Schwartz - New York Times
As BP watches its bill rise quickly for the oil spill, including $20 billion it is setting aside for claims, it could find the tally growing much faster in coming months if the United States Department of Justice files criminal charges against the company. Based on the latest estimates, for example, the daily civil fine for the escaping oil alone could be $280 million. But criminal penalties, if imposed, could cause the costs to balloon still further, said David M. Uhlmann, a law professor at the University of Michigan, who headed the environmental crimes section of the Justice Department from 2000 to 2007.
Others note that such penalties could lead to loss of government contracts. Even misdemeanor convictions under environmental laws could produce stunningly large fines under general federal criminal statutes, Mr. Uhlmann added. That is because the Alternative Fines Act allows the federal government to request twice the gain or loss associated with an offense if the Justice Department shows that a crime was committed.
Predictions by analysts of the overall cost of the spill to BP, when criminal penalties are included, have been rising. On Wednesday, Pavel Molchanov, an analyst at Raymond James, estimated the total legal cost, including criminal fines, at $62.9 billion, which would dwarf the $20 billion escrow account to be used to pay claims of economic loss. The agreement to create the fund would not pre-empt people from using the courts to resolve disputes with BP over the spill.
Proving a criminal case beyond misdemeanor crimes under federal environmental laws could be difficult. The standard for proving environmental misdemeanors can be relatively low: merely negligent actions can lead to misdemeanor penalties under the Clean Water Act. Prosecutors would probably prefer, given the severity of the ecological crisis caused by the spill, to seek tougher penalty charges, Mr. Uhlmann said. But those carry a tougher standard of proof. The government would have to show that the company knew its actions would lead to the gushing well on the ocean floor. A BP spokesman, Toby Odone, said, "We wouldn’t comment on either current or future legal matters."
Andrew Ames, a spokesman for the Justice Department, said there was no timeline for the civil or criminal investigations, and that the department was "looking for all possible violations of the law." The department is reviewing the actions of all companies involved in the spill, and focusing on several environmental laws in particular, including the Clean Water Act, which carries civil and criminal penalties, and the Oil Pollution Act of 1990.
The Migratory Bird Treaty Act and the Endangered Species Act, which provide penalties for injury and death to wildlife, could come into play, along with "traditional criminal statutes," Mr. Ames said. The investigation would almost certainly take into account prior criminal plea agreements from the company, like the guilty plea in the 2005 refinery explosion that killed 15 people in Texas City, Tex. Prior criminal charges can be used during a trial to support arguments that the Deepwater Horizon disaster is not a unique occurrence, but the result of a corporate culture that lets schedule and budget pressures lead to increases in risk.
Any criminal charges are unlikely to reach up to the executive suite, and would apply to the company as an entity. Few of the laws under consideration by the Justice Department have felony provisions that would lead to incarceration, and even those require a direct and intentional connection between the defendant and the crime. Stanley L. Alpert, a former federal prosecutor of environmental crimes, said that even if decisions that might have contributed to the disaster are found to be criminal in nature, they are rarely made by top executives. "It’s likely it was done at a much lower, operational level," Mr. Alpert said.
Criminal indictments alone could have substantial ripple effects on a company’s fortunes, said Steven L. Schooner, a professor at George Washington University Law School. A company that is indicted risks being blacklisted from future sales contracts with the government under procedures officially known as suspension and debarment. BP sold $1.6 billion worth of aviation fuel and other products to the military last year, according to the government’s procurement site, usaspending.gov. If a company were given a short-term suspension or debarment, which can last three years, it would not be eligible to get a new contract during that time, Mr. Schooner said.
The point of debarment under the law, he said, is not to punish, but to protect the government from suppliers that do not perform. Still, he added, "It would not surprise me at all if somebody in the White House decided that we ought to suspend or debar BP just because it will make it look like we’re doing something."
Many states monitor the federal debarment list, Mr. Schooner said, and so sales to airports, fire departments, school districts and more could be imperiled by a listing. "The trickle-down can often exceed the initial problem," he said. Mr. Uhlmann said that if the federal government took an extremely aggressive approach, it might try to argue in court that suspension or debarment should also be applied to the company’s federal drilling and operating licenses — potentially, a devastating blow.
But, he added, it would be a risky tactic that would stretch the definition of the blacklisting process. Even if it were successful, it could stay in place only "as long as the condition giving rise to the violation remained in effect." If the company overhauled its processes as part of a settlement, he said, the ban would have to be lifted. State law enforcers, working from state environmental statutes, might step in as well, predicted Tracy D. Hester, who teaches environmental law at the University of Houston Law Center. "BP may think they are dealing with one big man across the ring," Mr. Hester said. "The fact is, they are going to have a tag team."
BP-Hired Mercenaries Keep Reporters From Interviewing Workers
by Adam Rawnsley - Wired
Last week, we all voted here on who should buy Blackwater now that it’s up for sale. In addition to Steve Jobs and the Salvation Army, one of the top finalists was British Petroleum. "Somebody is gonna have to keep all those sunbathers away from the beach," one commenter noted. Well, today we can tell you: Danger Room gets results. Kinda.
BP, in a move destined to go down as one of the bestest public relations moves ever, has apparently hired a private security company to help to keep pesky reporters from covering the unfolding catastrophe on the beaches of the Gulf Coast. The report comes via New Orleans’ 6WDSU reporter Scott Walker, who last week ran into representatives of a "Talon Security" trying to block him from interviewing cleanup workers on a local beach. Just which of the various companies named "Talon Security" is storming the (public) beaches for BP, however, remains unclear.
Of course, this wouldn’t be the first time a private security firm made an appearance in a Gulf disaster. When Hurricane Katrina hit New Orleans, the Department of Homeland Security and a number of private firms, fearful of reported widespread violence and chaos, turned to private security contractors like Blackwater and ArmorGroup International to protect their property. So take heart, Blackwater. BP may have opted rent the services of a rival instead of purchasing you wholesale, but disasters are fairly regular occurrences and there seems to be no shortage of companies willing to make ill-considered PR moves in their midst.
UPDATE: Merc-chronicler Jeremy Scahill reminds us that this isn’t the first time BP has enlisted the aid of a private security company. The company hired Wackenhut Services to guard the joint US government-BP Unified Incident Command for the Deepwater Horizon spill response, Scahill reported in May. If Wackenhut Services doesn’t ring a bell, you may remember the scandal surrounding their subsidiary, the 101st Tequila Brigade (a.k.a Armor Group), and its drunken bacchanalia at the U.S. embassy in Afghanistan. You stay classy, British Petroleum.
Florida Panhandle County Takes Oil Matters Into Its Own Hands
by Kelli Morgan - FoxNews
A Florida Panhandle community that's been victimized by the oil spill in the Gulf of Mexico says it can fight the destruction of its beaches and waterways better than the federal government -- but it's left with one problem: "Who will pay the bill? Now that tar balls are washing ashore along the beaches of Okaloosa Island, county commissioners say it's time to stop waiting for the federal government's Unified Command Center to approve closing its East Pass -- the area leading to the docks of the profitable fishing village in the town of Destin.
"Over the last 50 days," Okaloosa County Commissioner Chairman Wayne Harris told FoxNews.com, "I like to say we played the game, if you will. We did what we were required to do, which was wait for all the permitting processes and wait for all the permission .... "Over that period of time, it was obvious to us that somebody in those levels were not communicating with each other."
Frustration started when the county devised a $9 million plan to implement an extensive boom system of barges and air curtains to close off all inlets and bayous from incoming oil. But the government rejected that proposal and began reducing the number of areas a system would protect. That, Harris says, is when the county decided to take matters into its own hands. "We were getting the bureaucratic shuffle," he said. "We couldn’t wait for the bureaucratic process. We could not wait for indecisiveness. "This is our county, and our people depend on us to make decisions."
John Ward, public information officer for the Unified Command Center in Mobile, Ala., says a 14,000-foot boom system is being placed in nearby Choctawhatchee Bay this week. But Okaloosa has already begun preparing to install its own boom system at East Pass, which also is combating an erosion problem. For now, Harris says, the county is using credit cards to pay the tab. He says the county has a limited reserve fund that can cover just one month of the cost of the system. "Now they’re letting us do what we want to do," he said. "The dilemma is, doing what we want to do ... we’ve stood the chance of not getting reimbursed."
And Okaloosa isn't alone in its decision to go it alone. "A lot of counties are going beyond what the Unified Command Center is doing … A lot of people are concerned about their counties," Ward says. Harris says Okaloosa will file a claim with BP for the cost of its boom system, but it also hopes to use some of a $25 million grant BP has given the state of Florida to help pay for costs like $16,500 for the use of an air curtain each day and $850,000 each month for six barges.
Okaloosa is already hurting financially, as the oil spill has caused many tourists to cancel their summer vacations to the area. The Breakers condominium on Okaloosa Island is 37 percent behind compared with the same time last year, says General Manager Kathy Houchins. And by the end of this month, she said, that number probably will pass 50 percent. Houchins, a board member on the county’s Tourist Development Council, says the area’s total loss is anywhere from 40 percent to 60 percent so far.
"Cancellations are coming in left and right. It doesn’t take long for the word to get out," she said. "People are calling in saying, ‘We aren’t going to vacation where there is oil at, we’re just not going to fight that.’" July is the area's busiest month for tourists, and the Breakers is usually at full occupancy. But the resort, which has experienced more than a $100,000 loss in revenue so far, has laid off four employees and cut back its full-time workers’ hours. "Right now, we are wide open for availability," Houchins says. "I’ll bet you we’re probably going to look at $700,000 or $800,000 loss in our season."
Gulf oil full of methane, adding new concerns
by Matthew Brown and Ramit Plushnick-Masti - Associated Press
It is an overlooked danger in the oil spill crisis: The crude gushing from the well contains vast amounts of natural gas that could pose a serious threat to the Gulf of Mexico's fragile ecosystem. The oil emanating from the seafloor contains about 40 percent methane, compared with about 5 percent found in typical oil deposits, said John Kessler, a Texas A&M University oceanographer who is studying the impact of methane from the spill.
That means huge quantities of methane have entered the Gulf, scientists say, potentially suffocating marine life and creating "dead zones" where oxygen is so depleted that nothing lives. "This is the most vigorous methane eruption in modern human history," Kessler said. Methane is a colorless, odorless and flammable substance that is a major component in the natural gas used to heat people's homes. Petroleum engineers typically burn off excess gas attached to crude before the oil is shipped off to the refinery. That's exactly what BP has done as it has captured more than 7.5 million gallons of crude from the breached well.
A BP spokesman said the company was burning about 30 million cubic feet of natural gas daily from the source of the leak, adding up to about 450 million cubic feet since the containment effort started 15 days ago. That's enough gas to heat about 450,000 homes for four days. But that figure does not account for gas that eluded containment efforts and wound up in the water, leaving behind huge amounts of methane. Scientists are still trying to measure how much has escaped into the water and how it may damage the Gulf and it creatures.
The dangerous gas has played an important role throughout the disaster and response. A bubble of methane is believed to have burst up from the seafloor and ignited the rig explosion. Methane crystals also clogged a four-story containment box that engineers earlier tried to place on top of the breached well. Now it is being looked at as an environmental concern. The small microbes that live in the sea have been feeding on the oil and natural gas in the water and are consuming larger quantities of oxygen, which they need to digest food. As they draw more oxygen from the water, it creates two problems. When oxygen levels drop low enough, the breakdown of oil grinds to a halt; and as it is depleted in the water, most life can't be sustained.
The National Science Foundation funded research on methane in the Gulf amid concerns about the depths of the oil plume and questions what role natural gas was playing in keeping the oil below the surface, said David Garrison, a program director in the federal agency who specializes in biological oceanography. "This has the potential to harm the ecosystem in ways that we don't know," Garrison said. "It's a complex problem."
BP CEO Tony Hayward on Thursday told Congress members that he was "so devastated with this accident," "deeply sorry" and "so distraught." But he also testified that he was out of the loop on decisions at the well and disclaimed knowledge of any of the myriad problems on and under the Deepwater Horizon rig before the deadly explosion. BP was leasing the rig the Deepwater Horizon that exploded April 20, killing 11 workers and triggering the environmental disaster. "BP blew it," said Rep. Bart Stupak, D-Mich., chairman of the House investigations panel that held the hearing. "You cut corners to save money and time."
In early June, a research team led by Samantha Joye of the Institute of Undersea Research and Technology at the University of Georgia investigated a 15-mile-long plume drifting southwest from the leak site. They said they found methane concentrations up to 10,000 times higher than normal, and oxygen levels depleted by 40 percent or more. The scientists found that some parts of the plume had oxygen concentrations just shy of the level that tips ocean waters into the category of "dead zone" — a region uninhabitable to fish, crabs, shrimp and other marine creatures.
Kessler has encountered similar findings. Since he began his on-site research on Saturday, he said he has already found oxygen depletions of between 2 percent and 30 percent in waters 1,000 feet deep. Shallow waters are normally more susceptible to oxygen depletion. Because it is being found in such deep waters, both Kessler and Joye do not know what is causing the depletion and what the impact could be in the long- or short-term. In an e-mail, Joye called her findings "the most bizarre looking oxygen profiles I have ever seen anywhere."
Representatives of the National Oceanic and Atmospheric Administration acknowledged that so much methane in the water could draw down oxygen levels and slow the breakdown of oil in the Gulf, but cautioned that research was still under way to understand the ramifications. "We haven't seen any long-term changes or trends at this point," said Robert Haddad, chief of the agency's assessment and restoration division.
Haddad said early efforts to monitor the spill had focused largely on the more toxic components of oil. However, as new data comes in, he said NOAA and other federal agencies will get a more accurate read on methane concentrations and the effects. "The question is what's going on in the deeper, colder parts of the ocean," he said. "Are the (methane) concentrations going to overcome the amount of available oxygen? We want to make sure we're not overloading the system."
BP spokesman Mark Proegler disputed Joye's suggestion that the Gulf's deep waters contain large amounts of methane, noting that water samples taken by BP and federal agencies have shown minimal underwater oil outside the spill's vicinity. "The gas that escapes, what we don't flare, goes up to the surface and is gone," he said.
Steven DiMarco, an oceanographer at Texas A&M University who has studied a long-known "dead zone" in the Gulf, said one example of marine life that could be affected by low oxygen levels in deeper waters would be giant squid — the food of choice for the endangered sperm whale population. Squid live primarily in deep water, and would be disrupted by lower oxygen levels, DiMarco said. Meanwhile, the Coast Guard signaled a shift in strategy Friday to fight the oil, saying it was ramping up efforts to capture the crude closer to shore.
Coast Guard Adm. Thad Allen said an estimated 2,000 private boats in the so-called "vessels of opportunity" program will be more closely linked through a tighter command and control structure to direct them to locations less than 50 miles offshore to skim the oil. Allen, the point man for the federal response to the spill, previously had said surface containment efforts would be concentrated much farther offshore.
Far From Gulf, a Spill Scourge 5 Decades Old
by Adam Nossiter - NY Times
Big oil spills are no longer news in this vast, tropical land. The Niger Delta, where the wealth underground is out of all proportion with the poverty on the surface, has endured the equivalent of the Exxon Valdez spill every year for 50 years by some estimates. The oil pours out nearly every week, and some swamps are long since lifeless. Perhaps no place on earth has been as battered by oil, experts say, leaving residents here astonished at the nonstop attention paid to the gusher half a world away in the Gulf of Mexico. It was only a few weeks ago, they say, that a burst pipe belonging to Royal Dutch Shellin the mangroves was finally shut after flowing for two months: now nothing living moves in a black-and-brown world once teeming with shrimp and crab.
Not far away, there is still black crude on Gio Creek from an April spill, and just across the state line in Akwa Ibom the fishermen curse their oil-blackened nets, doubly useless in a barren sea buffeted by a spill from an offshore Exxon Mobil pipe in May that lasted for weeks. The oil spews from rusted and aging pipes, unchecked by what analysts say is ineffectual or collusive regulation, and abetted by deficient maintenance and sabotage. In the face of this black tide is an infrequent protest — soldiers guarding an Exxon Mobil site beat women who were demonstrating last month, according to witnesses — but mostly resentful resignation.
Small children swim in the polluted estuary here, fishermen take their skiffs out ever farther — "There’s nothing we can catch here," said Pius Doron, perched anxiously over his boat — and market women trudge through oily streams. "There is Shell oil on my body," said Hannah Baage, emerging from Gio Creek with a machete to cut the cassava stalks balanced on her head. That the Gulf of Mexico disaster has transfixed a country and president they so admire is a matter of wonder for people here, living among the palm-fringed estuaries in conditions as abject as any in Nigeria, according to the United Nations. Though their region contributes nearly 80 percent of the government’s revenue, they have hardly benefited from it; life expectancy is the lowest in Nigeria.
"President Obama is worried about that one," Claytus Kanyie, a local official, said of the gulf spill, standing among dead mangroves in the soft oily muck outside Bodo. "Nobody is worried about this one. The aquatic life of our people is dying off. There used be shrimp. There are no longer any shrimp." In the distance, smoke rose from what Mr. Kanyie and environmental activists said was an illegal refining business run by local oil thieves and protected, they said, by Nigerian security forces. The swamp was deserted and quiet, without even bird song; before the spills, Mr. Kanyie said, women from Bodo earned a living gathering mollusks and shellfish among the mangroves.
With new estimates that as many as 2.5 million gallons of oil could be spilling into the Gulf of Mexico each day, the Niger Delta has suddenly become a cautionary tale for the United States. As many as 546 million gallons of oil spilled into the Niger Delta over the last five decades, or nearly 11 million gallons a year, a team of experts for the Nigerian government and international and local environmental groups concluded in a 2006 report. By comparison, the Exxon Valdez spill in 1989 dumped an estimated 10.8 million gallons of oil into the waters off Alaska. So the people here cast a jaundiced, if sympathetic, eye at the spill in the gulf. "We’re sorry for them, but it’s what’s been happening to us for 50 years," said Emman Mbong, an official in Eket.
The spills here are all the more devastating because this ecologically sensitive wetlands region, the source of 10 percent of American oil imports, has most of Africa’s mangroves and, like the Louisiana coast, has fed the interior for generations with its abundance of fish, shellfish, wildlife and crops. Local environmentalists have been denouncing the spoliation for years, with little effect. "It’s a dead environment," said Patrick Naagbanton of the Center for Environment, Human Rights and Development in Port Harcourt, the leading city of the oil region.
Though much here has been destroyed, much remains, with large expanses of vibrant green. Environmentalists say that with intensive restoration, the Niger Delta could again be what it once was. Nigeria produced more than two million barrels of oil a day last year, and in over 50 years thousands of miles of pipes have been laid through the swamps. Shell, the major player, has operations on thousands of square miles of territory, according to Amnesty International.
Aging columns of oil-well valves, known as Christmas trees, pop up improbably in clearings among the palm trees. Oil sometimes shoots out of them, even if the wells are defunct. "The oil was just shooting up in the air, and it goes up in the sky," said Amstel M. Gbarakpor, youth president in Kegbara Dere, recalling the spill in April at Gio Creek. "It took them three weeks to secure this well." How much of the spillage is due to oil thieves or to sabotage linked to the militant movement active in the Niger Delta, and how much stems from poorly maintained and aging pipes, is a matter of fierce dispute among communities, environmentalists and the oil companies.
Caroline Wittgen, a spokeswoman for Shell in Lagos, said, "We don’t discuss individual spills," but argued that the "vast majority" were caused by sabotage or theft, with only 2 percent due to equipment failure or human error. "We do not believe that we behave irresponsibly, but we do operate in a unique environment where security and lawlessness are major problems," Ms. Wittgen said. Oil companies also contend that they clean up much of what is lost. A spokesman for Exxon Mobil in Lagos, Nigel A. Cookey-Gam, said that the company’s recent offshore spill leaked only about 8,400 gallons and that "this was effectively cleaned up." But many experts and local officials say the companies attribute too much to sabotage, to lessen their culpability.
Richard Steiner, a consultant on oil spills, concluded in a 2008 report that historically "the pipeline failure rate in Nigeria is many times that found elsewhere in the world," and he noted that even Shell acknowledged "almost every year" a spill due to a corroded pipeline. On the beach at Ibeno, the few fishermen were glum. Far out to sea oil had spilled for weeks from the Exxon Mobil pipe. "We can’t see where to fish; oil is in the sea," Patrick Okoni said. "We don’t have an international media to cover us, so nobody cares about it," said Mr. Mbong, in nearby Eket. "Whatever cry we cry is not heard outside of here."
German Flip-Flops on European Bank Stress Tests
by cgh - Der Spiegel
The German Finance Ministry confirmed on Thursday that Berlin is in favor of revealing the results of stress tests performed on European banks last year. They hope the move will slow down speculators betting against Spanish debt. It is an intriguing paradox. Financial markets are notoriously distrustful, ignoring even the most solemn pledges of European politicians regarding their intention to help out debt-laden countries as needed. At the same time, however, the gullibility of traders appears unlimited on occasion -- all it takes is the whisper of a rumor and indexes spike upwards or, more often, plunge into the depths.
Spain, this week, has been victimized by both tendencies -- which is why Germany now appears to be reversing course and supporting Madrid's calls for the results of banking stress tests carried out on major European banks to be made public. According to an article in the Financial Times Deutschland on Thursday, Berlin is prepared to buck the intense opposition of German financial institutes and back the publishing of stress-test data. The report was confirmed by a Finance Ministry spokesman on Thursday.
News of the course change comes a day after the governor of the Bank of Spain, Miguel Angel Fernandez Ordonez, said that Spain would move forward on its own even if the rest of Europe did not. The central bank, he said, "plans to disclose stress-test results ... so markets can perfectly assess the situation of Spain's banking system."
Fretting About Health
Madrid's push to reveal the results of the tests stems partially from a German media reports earlier in the week and repeated in Spanish business paper El Economista on Wednesday that the EU, the International Monetary Fund and the US Treasury were assembling a €250 billion ($335 billion) credit line for Spain. Both Spain and the European Commission were, however, quick to deny the rumor.
Berlin and the European Union are currently working on a unified position, an anonymous government source told the Financial Times Deutschland. That position could even be reached at an EU summit meeting which began on Thursday in Brussels.
Similar to those carried out in the US, the European stress tests, which were performed last year, took a close look at 22 of the largest financial institutions in the EU to determine how they might weather economic downturns of varying severity. The results of the individual tests have remained under lock and key, though it was announced that the banks were "sufficiently capitalized." A further round of testing began in March.
German banks have been vehemently opposed to publishing the results of individual stress tests for fear that various balance-sheet details could lead to confusion or misinterpretation. The US published the results of its banking stress tests a year ago in a move that has widely been credited for helping to unfreeze US financial markets. US Treasury Secretary Timothy Geithner has urged Europe to provide as much transparency as possible when it comes to stress-test results.
Far from a Given
Spain is hoping that a publication of stress-test results will prove to investors that "all (Spanish) banks have sufficient capital to cope" with a variety of economic growth scenarios, said Ordonez. The stress tests did not encompass the myriad smaller banks in Spain that have suffered mightily due to their exposure to the country's struggling real estate sector.
Investors are worried that a heavily indebted Spain could follow in the footsteps of Greece, whose debt crisis has carried it to the very brink of bankruptcy. In response to the growing concerns, Spain passed a far-reaching austerity package last month aimed at reducing the country's budget deficit, which currently stands at 11.2 percent of gross domestic product. On Wednesday, the Spanish cabinet pushed through labor market reforms aimed at adding flexibility to the country's calcified job market. The changes met with widespread approval within Europe, but will eventually have to be cleared by parliament. Given that parliament almost blocked last month's austerity program, the passage of the labor reform package is far from a given.
E.U. Agrees to Publish Results of Stress Tests on Biggest Banks
by Stephen Castle and Jack Ewing
The European Union agreed Thursday to publish the results of stress tests imposed on major, cross-border banks, a move aimed at restoring confidence in the health of the bloc’s financial sector. The move would be accompanied by a pledge to show flexibility in applying rules limiting government aid to companies, according to an agreement reached at a summit meeting of E.U. leaders in Brussels. That would allow European governments to move to recapitalize any banks deemed to be in trouble — before the publication of the stress-test results.
Herman Van Rompuy, president of the European Council, confirmed the agreement, and said the stress test results would be published before the end of July. "I think it’s good news," said Nicolas Véron, an economist at Breugel, a research organization in Brussels. "Nations have come to the realization they couldn’t go on telling people everything was fine and giving no evidence." But the effect could be less reassuring than hoped. Mr. Van Rompuy said the agreement would apply "around 25" systemically important banks.
That means they would not shed light on the financial health of the hundreds of smaller savings or public-sector institutions which dominate the retail banking market in countries like Germany. Those institutions, which fall under the jurisdiction of national authorities, are often fiercely opposed to attempts to force more disclosure. "Making stress tests public is counterproductive and could in certain cases lead to misperceptions in markets," Karl-Heinz Boos, director of the Association of German Public Sector Banks, said in a statement. Yet lingering doubts about their strength could even add to market pressures on some countries.
The draft text prepared by the European Commission president, José Manuel Barroso, called for publication of the test results on a "bank-by-bank basis" and pledged "sufficient flexibility" over E.U. state aid rules, to deal with any problems detected in a "timely manner." In effect, that would mean the European Commission waiving its strict rules on state aid, which are meant to guarantee a level playing field for companies across the 27-nation single market. The text also made it clear that any bank recapitalization would be undertaken by national governments and not as part of a broader E.U. safety net for countries already struggling to deal with their massive debt.
The Europeans were hoping to go to a Group of 20 meeting in Toronto next week with a clear position on the transparency of stress test results. Stress tests are designed to estimate the potential losses financial institutions could be facing under adverse circumstances, and therefore to prompt corrective action if appropriate. The debate on publication of results resumed this week when Spain, which faces a lack of market confidence, promised to publish the results of its stress tests in a bid to calm investor worries. Germany indicated it, too, was in favor of more transparency.
But Mr. Boos at the Association of German Public Sector Banks said that stress tests could only be made public with permission of the banks, which none have given. The association represents banks accounting for about a quarter of the German market, including the state-owned Landesbanks which in several cases have already required multi-billion euro bailouts because of investments in securities tied to the U.S. subprime market and other toxic assets.
Mr. Véron predicted that evaluations of the large banks, along with plans by Spanish authorities to disclose results of their tests of domestic banks, will force other countries to follow suit and disclose the financial state of smaller institutions. "Once you have a benchmark for the first 25 banks, then this will have trigger effects," he said. One big risk is that some banks will prove to be weaker than has been publicly known, or even insolvent once forced to do a frank evaluation of their financial state. "It could be there will be some delicate moments in the process," Mr. Véron said. "But it’s much better than the stonewalling we have had."
French and German banks are the most exposed to debt from Spain, Greece, Portugal and Ireland, according to a report released Monday. French banks had lent $493 billion to businesses, households and governments in the four countries by the end of 2009 while German banks had lent $465 billion, according to the report by the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearing house for the world’s central banks.
Wall Street Reform Could Cost Goldman Sachs BILLIONS
by by Ryan Grim and Shahien Nasiripour - Huffington Post
The proposed financial reforms pending before Congress could cost Goldman Sachs nearly a quarter of its annual profits, Citigroup analysts estimate in a new report. Goldman, the most profitable securities firm on Wall Street, could lose up to $5.06 in earnings on a per-share basis if Congress passes a bill that forbids banks from trading for their own profit, owning or sponsoring hedge funds and private equity funds, and compelling them to move most of their derivatives dealing into regulated markets, according to the research note.
Combined with a potential fee to recoup taxpayer losses on TARP and higher deposit insurance assessments on its bank, Goldman could lose up to 23 percent of its profits, giving it the distinction of being the firm most impacted by the financial reform legislation. Morgan Stanley is a close second as the team of Citi analysts, led by Keith Horowitz, estimate that it could lose up to 20 percent of its profits. Up to 18 percent of JPMorgan Chase's profits are at risk, while Bank of America, the nation's largest bank by assets, could see up to 16 percent of its profits evaporate.
The so-called "Volcker Rules," which would ban banks from putting their own capital at risk in hedge funds, private equity firms and through proprietary trades, and limit the growth of the largest ones, could shave four percent off the banks' bottom lines, the Citi analysts estimate. Tighter restrictions on prop trading, which come in the form of a provision pushed by Democratic Senators Carl Levin of Michigan and Jeff Merkley of Oregon, could cost the big banks five percent of their profits.
Combined with the various other aspects of the pending legislation -- like compelling banks to hold better-quality capital, making the biggest ones pay more for deposit insurance and robust regulation of heretofore unregulated derivatives -- and the nation's biggest banks could collectively lose up to 11 percent of their annual profits, the Citi analysts estimate in their Wednesday report. Goldman, Morgan, JPMorgan and Bank of America would be the most impacted.
"[O]ne of the biggest areas of risk for the group is tougher trading rules via [a] narrow definition of what constitutes banned proprietary activity," the authors noted. They were also careful to note that while their estimates required many assumptions, they viewed their final figures as a "reasonable and conservative base to gauge where earnings might shake out."
Goldman, for example, could lose up to $1.5 billion in annual profits due to the tighter rules governing trades when their own capital -- rather than that of their clients -- is at risk. Goldman's potential loss would be bigger than the combined impact on BofA, JPMorgan and Morgan Stanley. The combined impact of the Volcker Rules and the Merkley-Levin provision could cost Goldman up to $5.6 billion a year in lost profits.
The report also notes that derivatives could become a more expensive line of business for megabanks if the final legislation adopts a measure pushed by Sen. Blanche Lincoln, an Arkansas Democrat. Lincoln wants to compel banks to spin off their units that deal in swaps, a kind of derivative, into a separately-capitalized affiliate within the larger bank holding company. The amount of capital the banks would have to raise would be "substantial," the Citi analysts note. "Funding costs will likely rise," they wrote, as "[c]ommercial banks enjoy the benefit of funding derivatives with low cost and stable deposits. A separate subsidiary would require funding with a mix of short- [and] long-term debt, and equity."
This may also hurt their competitiveness, as U.S. firms like Goldman and JPMorgan would have to compete with European megabanks that fund their derivatives bets with low-cost deposits, the authors note. Elsewhere in the report, the authors note that a proposed measure to regulate the interchange fees large banks collect from merchants on customers' debit card usage could cost Bank of America up to $432 million in annual lost revenue. Wells Fargo could lose up to $350 million, while JPMorgan Chase could lose up to $298 million. A Senate measure that would force large banks to pay more for deposit insurance relative to smaller banks could lost BofA up to $1.2 billion annually, while JPMorgan Chase could have to shell out $1.7 billion and Wells Fargo about $634 million.
Another Senate provision that would force banks to hold better-quality capital, introduced by Maine Republican Susan Collins with the support of Federal Deposit Insurance Corporation Chairman Sheila Bair, would have a "limited" impact on the nation's biggest banks, the authors note. However, big regional banks like Fifth Third Bancorp, M&T Bank Corp., and BB&T Corp. could be hit particularly hard as between a fifth and a quarter of their current capital is in the form of a debt-like security that Collins wants to limit. Those banks may have to raise billions in fresh capital to maintain current levels.
Cases against Wall Street lag despite Holder's vows to target financial fraud
by Jerry Markon - Washington Post
Since taking office at the height of the financial crisis, President Obama has promised to hold Wall Street accountable for the meltdown. Attorney General Eric H. Holder Jr. reinforced that message in November when he vowed to prosecute Wall Street executives and others responsible for the crisis. "We will be relentless in our investigation of corporate and financial wrongdoing, and we will not hesitate to bring charges," Holder said as he launched a financial fraud task force.
His Justice Department took steps to fulfill that promise this week when it arrested the former chairman of one of the nation's biggest mortgage firms -- the largest crisis-related criminal case -- and announced that 1,215 people have been charged with mortgage fraud since March 1. But that success masks the government's difficulties in the highest-profile investigations: those of Wall Street banks.
Nearly 1 1/2 years into Obama's tenure, despite several cases against mortgage companies whose lending practices contributed to the crisis, the administration has not brought any charges against the big Wall Street banks that took those loans, converted them into toxic securities and pumped them into the world's financial markets. Law enforcement sources say no such charges are imminent.
The blunt words of administration officials have triggered debate over whether they have gone too far in appearing to promise difficult cases that critics say might never be filed, in part because they would essentially criminalize an entire business model in the financial industry. "The attorney general got out ahead of the facts and the evidence in saying, 'We're going to go down to Wall Street with a pitchfork and roust those fat cats out of their offices and put them in jail,' " said Tim Coleman, who prosecuted major fraud cases before leaving the Justice Department five years ago. "This was a case, in general, of people making business judgments and taking risks and having them go badly. That's not criminal misconduct."
A law enforcement official agreed. "I'm not big on using such strong language before your cases are ready," said the official, who spoke on the condition of anonymity to discuss internal deliberations. Referring to a key Wall Street filed during the Bush administration against two former Bear Stearns executives -- a case lost last year -- the official added: "Look what happened with Bear Stearns."
Justice officials say that Holder did not over-promise and that the task force is targeting all financial fraud, not just on Wall Street. At a news conference Thursday, Holder said the efforts should not be evaluated only in terms of Wall Street cases: "You have to look at the totality of what this task force was supposed to do." James M. Cole, Obama's nominee for deputy attorney general, reinforced the message during his Senate confirmation hearing Tuesday. "We need to hold people accountable" for the financial crisis, he told the committee. "One of the main ways to do this is to go after the individual executives who are responsible. It is they who will go to jail, they who will suffer the consequences."
The Justice Department is pouring resources into financial fraud, including 48 FBI investigations of businesses and financial institutions involved in the crisis. Officials say more indictments will come and point to major fraud cases in recent months, including Ponzi schemes, mortgage frauds and the largest insider-trading case in a generation. But investigators are encountering obstacles in what they call their top-priority cases, which sources said include probes of J.P. Morgan Chase, Citigroup and other household names.
"Not every case can be brought, and it's very easy for people to want to see heads roll and sometimes understandable when they do. But it's not possible to roll the head if you don't have the evidence," said Preet Bharara, the U.S. attorney in Manhattan, who sources said is overseeing some of the highest-priority investigations. He added: "We have never been working harder, have never put so many resources into investigating and prosecuting corporate fraud in this office. . . . If there is anything to get to the bottom of, we will."
Kevin L. Perkins, assistant director for the FBI's Criminal Investigative Division, said Wall Street and other corporate investigations involve "very highly paid, educated and sophisticated" targets who argue that they warned investors of potential risks. Prosecutors must prove a deliberate intent to defraud. "Is that a valid defense that makes it hard? From a criminal standpoint, it is, yes," Perkins said.
The political imperative to bring cases shows no sign of weakening, with the administration pushing for financial reform legislation and key senators calling for prosecutions. The administration has also raised expectations. The Justice Department, which secured a 12 percent budget increase to fight financial fraud this year, is requesting 23 percent more in 2011. Neil H. MacBride, the U.S. attorney in Alexandria, recently announced a Virginia financial fraud task force.
When Holder unveiled the broader task force with some fanfare in November, he embraced the administration's message that "Wall Street does not play by the same rules as Main Street." In his prepared remarks, still posted on the Justice Department's Web site, he warned "unscrupulous executives" and others that "we will investigate you, we will prosecute you, and we will incarcerate you." The task force is run by Executive Director Robb C. Adkins, 39, a former Enron prosecutor who was chief of the U.S. attorney's office in Orange County, Calif. Adkins works out of the fourth floor of department headquarters.
The administration calls the panel the broadest government coalition ever assembled to combat fraud. More than 20 agencies, from the Securities and Exchange Commission to the Treasury Department's Financial Crimes Enforcement Network, share information and coordinate cases. The task force also aims to help fraud victims. It has hosted mortgage-fraud "summits" and the Web site, http://www.stopfraud.gov, allows the public to report fraud. The administration has brought major cases, including Tuesday's arrest of Lee Bentley Farkas, who led Florida-based Taylor, Bean & Whitaker. He is charged in federal court in Alexandria in a $1.9 billion fraud scheme that led to the failure of a large regional bank.
But in two Wall Street cases, both filed in the Bush administration, the record is mixed. Obama Justice Department prosecutors convicted two former Credit Suisse brokers in a $1 billion subprime mortgage fraud, but the two former Bear Stearns executives accused of lying to investors were acquitted. Among the companies under investigation, law enforcement sources said, are Deutsche Bank, UBS, Goldman Sachs, Morgan Stanley and the former Lehman Brothers.
Credit Suisse bets against deflationary spiral
by Ben Harrington - Telegraph
Credit Suisse appears to be nailing its colours to the inflation versus deflation debate. Strategist Andrew Garthwaite boldly stated today that he does "not" believe the global economy will enter a deflationary period. He says that the policy mistakes that sent Japan into deflation seem unlikely to be repeated. He had several arguments to back his central thesis:
- Wage growth is still positive and this is the most important driver of inflation. Furthermore, inflation expectations, which drive wage growth, are still positive and are likely to stay that way.
- To get falling wages and deflation, Credit Suisse calculates that domestic demand would have to fall 5pc in the US and that is very unlikely.
- In the emerging markets, which account for 47pc of global GDP, there are concerns about inflation, not deflation.
- Admittedly, wide monetary aggregate growth is decelerating. Yet, importantly, this measure lags the economic cycle, while narrow money growth, which leads the economic cycle, is still rising.
- Unlike the 1930s, policymakers know what to do to avoid deflation. The policy mistakes that sent Japan into deflation seem unlikely to be repeated.
- Assets prices (housing) are not as overvalued as they were prior to historical deflationary events (e.g. Japan in the early 1990s).
Mr Garthwaite said the only countries likely to enter deflation are those with significant output gaps and overvalued currencies which they cannot devalue because of the increased risk of default as loans are foreign-currency denominated or because they are in the eurozone.
Soros: European recession next year "almost inevitable"
by Adrian Croft - Reuters
Europe faces almost inevitable recession next year and years of stagnation as policymakers' response to the euro zone crisis causes a downward spiral, billionaire investor George Soros said on Tuesday. Flaws built into the euro from the start had become acute, Soros told a seminar, warning that the euro crisis could have the potential to destroy the 27-nation European Union. The euro's lack of a correction mechanism or of a provision for countries to leave it could be a fatal weakness, he said. Germany had imposed its criteria on how a 750 billion euro ($1 trillion) euro zone rescue mechanism should be used and was imposing its own standards -- a trade surplus and a high savings rate -- on the rest of Europe, Soros said. "But you can't be a creditor country, a surplus country, without somebody being in deficit," he said.
"That's the real danger of the present situation -- that by imposing fiscal discipline at a time of insufficient demand and a weak banking system, by wanting to have a balanced budget you are actually ... setting in motion a downward spiral," he said. Germany would do relatively well because the decline in the euro had boosted its economy, he told the seminar on the euro zone crisis organized by two thinktanks, the European Council on Foreign Relations and the Center for European Reform. "Germany is going to smell like roses but (the rest of) Europe is going to be pushed into a downward spiral, stagnation lasting many years and possibly worse than that," he said. "In other words, I think a recession next year is almost inevitable given the current policies," Soros said, later clarifying that he meant a recession in Europe as a whole.
"If there is no exit, (it) is liable to give rise to social unrest and, if you follow the line, social unrest can give rise to demand for law and order and (sow the) seeds of what happened in the inter-war period," he said. Political will to forge a common fiscal policy in Europe was absent and since Europe was liable to move backwards if it did not advance, "the crisis of the euro could actually have the potential of destroying the European Union," he said. European banks had bought large amounts of the sovereign bonds of weaker euro zone countries for a tiny interest rate differential, Soros said.
"That's one of the reasons why the banks are so over-leveraged and why the German and the French banks own Spanish bonds," he said. "Now ... they have a loss on their balance sheets which is not recognized and it reduces the credibility of those banks so the banking system is in serious trouble," he said. "The commercial paper market, for instance, in America is now refusing to lend to European banks so there is even a funding crisis and the ECB (European Central Bank) has to step in and the banks are unwilling to lend to each other," he said.
ECB must buy 'hundred of billions' of bonds to tame Europe's debt crisis
by Ambrose Evans-Pritchard - Telegraph
Fitch Ratings has warned that it may take massive asset purchases by the European Central Bank to prevent Europe's sovereign debt crisis escalating out of control. Brian Coulton, the agency's head of sovereign ratings, said German members of the ECB appeared to be blocking the sort of muscular intervention in southern European bond markets needed to restore the shattered confidence of investors. "There has been an unwillingness to follow through, and markets are going to want to see the ECB's money. It will require hundreds of billions in my opinion," he told a global banking conference.
The ECB agreed to start buying Greek, Portuguese, and Irish bonds in April to help buttress the EU's `shock and awe' package, known as the European Financial Stability Facility. Total purchases so far have been €47bn (£39bn). It has focused its firepower on Greece, mopping up some €25bn of government bonds. This has prevented a collapse of the Greek debt market but at the high political price of letting banks and funds dump their holdings onto the EU taxpayer. ECB council member Jose Manuel Gonzalez-Paramo said it was "not entirely correct" to assume that the ECB was the sole buyer of the debt. "We will continue buying bonds until the situation has stabilized," he said.
The Bundesbank is reportedly irked that French banks have led the rush to the exits while German banks have stuck by a gentleman's agreement to keep their Greek assets. The ECB's council insists that it has "sterilized" all purchases, offering no net stimulus. In effect, the ECB has done little to offset severe fiscal tightening by some eurozone states, and as the M3 money supply contracts. "The ECB commitment seems half-hearted," said Andrew Balls, head of PIMCO's team in Europe. "The European sovereign problem has started to contaminate the European banking sector and the global economy." Experts attending a seminar by the Central Banking Journal said the ECB had been behind the curve for months. "They were always one day and one euro too late," said Paul Mortimer-Lee, market chief at BNP Paribas.
A smooth auction of €3.5bn of Spanish bonds offered some respite yesterday after a week of stress on the EMU periphery, but Spain had to pay punitive rates. The average yield on 10-year bonds was 4.86pc, a near record spread of 220 basis points over German Bunds. Silvio Peruzzo from RBS said the auction does little to help Spanish banks and firms that have been frozen out the debt markets and face a funding crunch. "The ECB needs to act before contagion becomes endemic. Spain's banking system in at the heart of an ice-storm and there is a risk of 'sudden stop' if they can't roll over debt. We expect intervention, probably in covered bonds," he said.
Spain's premier Jose Luis Zapatero said the banks remain well capitalized, and has led the way in pushing for release of stress tests on each lender. "There is nothing better than transparency to show solvency, and leave behind baseless rumours," he said. Santander has emerged from the probe as the strongest of the EU's large banks, according to leaks in the Spanish press. Madrid said weaker lenders would need just a third of the country's €99bn bank-rescue fund. Marco Annunziata from UniCredit said the release of the stress tests is a gamble. "Spain has raised the stakes, and market expectations: now it will need to show it is up to the challenge. Spain is the eurozone's lynchpin. If it fails, the eurozone's wheels will come off," he said.
European president Herman van Rompuy said the EU-wide results would be published in July, helping to clear the air and restore trust to the inter-bank lending market. The Bundesbank insists that "back-stop" facilities should be in place, a tacit admission that some lenders are in dire shape. Fitch said European banks must refinance nearly €2 trillion of long-term debt by the end of 2012 in an unfriendly market. "There's an awful lot of debt coming due in 2011 and 2012, and that is becoming a concern," said Bridget Gandy, the agency's banking expert. Smaller banks have put off refinancing in the hope that spreads would fall and are now caught in a vice. Mrs Gandy said the situation could turn serious if global growth falters, tipping Europe into a double-dip recession.
David Owen from Jefferies Fixed Income said the eurozone may start contracting again in the second half of the year. He said the "core problem" haunting the European debt markets is that investors have little faith in the EU strategy of forcing states to carry out draconian cuts in the middle of a recession. Mr Owen said these countries need sustained growth to claw their way out of debt-deflation traps, and that will require fully-fledged quantitiatve easing by the ECB, and drastic currency depreciation. "If the euro falls to parity or down to 80 cents against the dollar, we would start to see a solution," he said.
US initial jobless claims rise 12,000 to 472,000
by Rex Nutting - MarketWatch
First-time applications for state unemployment benefits rose by 12,000 last week to a seasonally adjusted 472,000, the Labor Department reported Thursday, providing further evidence that U.S. labor markets remain very weak. The previous week's initial claims were revised higher by 4,000 to 460,000 as more complete data were collected.
The jobless claims report shows that the level of layoffs, while down from the peak a year ago, is too high to be consistent with robust job growth. The economy is creating jobs, but too few to bring the unemployment rate down meaningfully. "While jobless claims have been elevated in recent weeks, it has been clear that the economy can still manage modest private payroll gains at these levels," wrote economist Neil Dutta of Bank of America Merrill Lynch. "Consider that over the last four months, private payroll employment has [averaged] gains of roughly 120,000, while initial jobless claims have averaged 460,000."
The four-week average of new claims was roughly unchanged at 463,500 in the latest week. The four-week average is considered a better gauge of labor-market conditions than the volatile weekly number, which can be influenced by non-economic factors such holidays, weather or strikes.
Meanwhile, the total number of people collecting unemployment benefits of any kind fell by 350,000 to 9.47 million in the week ending May 29 from 9.82 million. The number of people collecting federal benefits fell by 170,000 to 5.28 million. These figures are not seasonally adjusted. The reduction in total claims could be related to the expiration of extended benefits for some recipients. The Senate is wrangling this week with a law that would renew the extended benefits. The number of people who were collecting state benefits - which are typically available for 26 weeks - rose by 88,000 to 4.57 million in the week ending June 5 after plunging 234,000 the week before.
In a separate report, the Labor Department said the consumer price index fell 0.2% in May, with core prices advancing 0.1%, as expected. The Conference Board said the index of leading economic indicators rose 0.4% in May, signaling softer growth ahead. Finally, the Philly Fed index fell to 8 in June from 21.4 in May, a sign that growth in the manufacturing sector in the region could be softening. Details of the report, however, weren't as weak.
Initial claims are down about 24% compared with the same week a year ago but are unchanged since the first of the year. Continuing claims are down about 29% compared with a year ago and down about 9% since the first of the year. Jobless claims measure only a portion of the labor market - those who lose jobs through no fault of their own. But they don't measure the number of people being hired, or the number who quit their jobs voluntarily.
Since the December, hiring and quits have picked up modestly, while layoffs and discharges have fallen to the lowest level in nearly three years, according to other Labor Department data released separately. The number of people who've been out of work for more than six months has surged during this recession to a record 6.8 million in May, accounting for 46% of the 15 million people officially classified as unemployed, according to monthly data previously released.
In response to this long-term unemployment, the federal government has created several new programs of extended benefits. In some states, benefits are available for as much as 99 weeks. Due to a budget impasse, new applicants for extended benefits are being turned away, but those already collecting extended federal benefits can collect under they expire. Benefits are generally available for those who lose their full-time job through no fault of their own. Those who exhaust their unemployment benefits are still counted as unemployed if they are actively looking for work.
Chanos Shorting Majors, Ford; Discusses Ways To Express Chinese Bearishness
by Tyler Durden
Bloomberg's Erik Schatzker interviews Jim Chanos, in which the cynic notes that while not short BP, he has been short other majors (and likely making a decent profit doing so), for the very simple reason, which as we have been pointing out for almost a year now, namely that ongoing underinvestment in business, read declining maintenance CapEx and zero growth CapEx, will erode all revenue growth (and even stability).
"If you look at their cash-flow statements relative to their income statements, you will see companies that haven’t replaced reserves in years, and haven’t seen any increase in revenues in years. They’re borrowing their dividend. They’re in effect liquidating." As we pointed out previously, one of the drawbacks of soaring cash levels is plunging CapEx: this is happening across all companies in the S&P, not just exploration, although the effect will be drastically magnified in this space, and we completely agree with Chanos that his short is spot on.
Chanos also discloses his additional shorting of Ford: "It’s going to be very interesting to see how it is that the union, which controls the employees -- and I contend these entities are still run for their employees and retirees more than the shareholders -- are going to look in an environment going forward, where the UAW is a major equity holder in some of the other entities.
It adds a new dynamic to the twist.” Jim Cramer, if you are reading this, you may reconsider your favorite long. Lastly, as expected, Chanos discusses his China shorts and how he puts those on in a country which is not very shorting friendly, to say the least.
Chinese debt binge is fuelling a dangerous property bubble
by Malcolm Turnbull - Sydney Morning Herald
Kevin Rudd may privately badmouth China, but his economic strategy is heavily dependent on continued strong Chinese growth. His earlier return to surplus depends on the new mining tax delivering massive new tax revenues. His new tax also obliges the Commonwealth to reimburse 40 per cent of unrecovered losses if a project fails. So were Chinese growth to slow, not only would mining tax revenues decline but, in a double whammy to the budget bottom line, if projects were to fail the Commonwealth would be called on to pick up its share of losses. So how sound is the government's assumption that the China boom will continue for many years?
China's extraordinary growth and development is awe inspiring. But it is capable of making the same mistakes of excessive spending and borrowing as any other country. As the historian Niall Ferguson recently observed, blow-outs in public debt are always and everywhere ''consequences of political weakness …Excessive expenditure and insufficient taxation, failures to make decisions about unsustainable fiscal policies are political, they are not the results of profound economic weakness." Working out the true level of government debt in China is very difficult. Nobody believes the official figures of about 20 per cent of GDP. But how much higher is it?
Victor Shih, of Northwestern University in Illinois, is the leading analyst of government debt in China and he has pointed to the way in which local governments have established their own local investment companies largely for the purpose of borrowing funds from Chinese banks to develop and invest in real estate. He has estimated that when you take into account the massive indebtedness of the local investment companies, government-related debt in China would, by next year, be close to RMB 40 trillion ($7 trillion) or 96 per cent of GDP and 4.6 times government revenue.
Shih's estimate would place China among the countries with the highest debt to GDP ratio, although it should be noted that China's debt (like that of Japan) is almost entirely funded from its own domestic sources. And those domestic sources are the prudent households of China who have been depositing their savings in banks at deliberately depressed official interest rates. By lending at low, indeed negative real, interest rates the thrifty households of China have been subsidising what is all-too-often speculative and wasteful investment by government-owned companies.
Another China economist, Michael Pettis, points out that this effective financial subsidy by households to the banks and their customers amounts to at least 5 per cent of GDP a year and possibly up to twice that. This raw deal for depositors is helping to fuel the property bubble. When Chinese banks are offering depositors a guaranteed loss after inflation of 1 to 2 per cent a year, is it any wonder that Chinese families are jumping into the property boom in the belief that residential property is a "hard asset" that holds value - unlike cash, which certainly does not. One property analyst was very candid when asked why there were so many apparently unoccupied flats in Beijing as there were no lights on at night: "The flats are occupied. Cash is living there."
HSBC recently calculated that the total value of China's residential property market was now 3.27 times GDP, which is nearly twice the peak reached before the subprime crisis in the US and approaching the levels in Japan during its 1980s property bubble. Asset bubbles are like a Ponzi scheme - everything is fine until the cash dries up and asset prices stop rising. Like it or not we are exposed to the Chinese property bubble. The iron ore China buys from Australia is turned into steel, and most of that goes into building apartments and infrastructure. Our bauxite and alumina exports are turned into aluminium, of which about 40 per cent goes into construction in China.
So at the same time as we congratulate ourselves on escaping from the consequences of the property bust in the United States, the resources boom that underpinned our strong economic performance is itself based on another debt-fuelled property boom in China. The Chinese government is acutely aware of the risks of the local government debt binge and consequent property bubble creating what the leading economist Fan Gang recently described as "an internal 'Greek crisis' ". And apart from the threat to bank balance sheets, rapid inflation in property values prices young families out of the housing market.
Already the Chinese government has announced it will reform real estate taxes, and most believe this will result in a new annual property tax. Li Daokui, a member of the central bank's monetary policy committee, has also called for an increase in the interest rates paid on bank deposits. This would better reward Chinese households for their thrift and reduce the flow of cheap money to property development. As part of this credit tightening policy, the China Banking Regulatory Commission has increased the capital and provisioning requirements for Chinese banks, with a director, Liao Min, saying: "We are ready to take the punch bowl away."
Hopefully a combination of fiscal discipline and solid, if somewhat slower, growth will resolve China's debt and property bubble without any damaging economic shocks - either there or here.
Malcolm Turnbull is the Liberal MP for Wentworth
China Unlikely to Move on Yuan
by Andrew Batson - Wall Street Journal
China appears increasingly unlikely to move on its currency before the Group of 20 summit next weekend, a prospect that threatens to restart a poisonous cycle of increasing criticism from U.S. lawmakers and increasing defensiveness from Beijing. In recent days, Chinese officials have forcefully pushed back against international calls for the country to relax its tightly controlled currency and are trying to rule out any discussion of the issue when President Hu Jintao meets U.S. President Barack Obama and leaders of other major economies at the summit in Toronto. Briefing reporters in Beijing Friday on China's positions for the upcoming G-20 meeting, Vice Foreign Minister Cui Tiankai said the yuan "is China's currency and this is not an issue the international community should discuss."
The shifting dynamics of China's currency policy, which economists until recently thought was ripe for change, have been driven mainly by the European debt crisis. Spooked by the turmoil in financial markets and the prospect of weaker global growth, China's leaders have repeatedly expressed concern about the strains in Europe. Their caution may well mean that the grace period the Obama administration tried to create for China will pass without a move.
China's government has kept the yuan pegged around 6.83 to the dollar since mid-2008, when the global recession was intensifying. Foreign critics say that undervalues the currency, making Chinese goods artificially inexpensive and thus giving Chinese exporters an unfair edge. But the euro's recent plunge against the dollar means that its value has risen 15% this year against the currency of Europe, China's largest trading partner.
As recently as early April, the consensus among economists was that China would probably make some kind of move on its currency by the end of June. But many economists now don't expect a change before September, and currency derivative markets are also pricing in a much lower chance of appreciation. People who have met recently with Chinese officials say they sense no appetite for a move soon, and U.S. officials aren't optimistic even in public.
"I, to be honest, do not know whether we're at the point now we're going to see meaningful progress in the short term. It is very important to us that we see that," U.S. Treasury Secretary Timothy Geithner said at a Senate hearing last week. Chinese officials, he said, "clearly have not decided when and how they're going to act, and they are watching closely developments in the world economy as they make that basic decision."
It is still possible that China could make a move on the yuan around the time of the Toronto summit—and Beijing has an incentive to act unpredictably to foil speculators. Officials have said they intend to eventually return to the precrisis policy of managing the exchange rate against a basket of currencies, a practice that resulted in a 21% gain against the U.S. dollar from 2005 to mid-2008. "When and how the reform will take place depends on our overall consideration based on the changes in world economic situation and the performance of China's economy," Foreign Ministry spokesman Qin Gang said Monday.
The G-20 summit emerged as an unofficial deadline for China to address international criticism of its currency policy after Mr. Geithner in early April postponed publication of a Treasury report on exchange-rate issues. The plan then, U.S. officials say, was to create a window when China could change policy without seeming to do so because of outside pressure. U.S. officials think it would be politically impossible for the Chinese leadership to make a shift if it appeared they were doing foreigners' bidding.
China has publicly never hinted at a timetable for a shift in currency regime, and U.S. officials say they were never given any firm schedule privately. And the comments Friday appear to mark a hardening of China's position. China's central bank governor, Zhou Xiaochuan, had in March signaled some openness to discussing currency policies in the less-politicized context of the G-20. China's lack of movement is angering some in the U.S. Congress. "The administration constructively set the G-20 meeting as an important juncture for China to change its inflexible currency practices. If China does not act and the administration does not respond promptly thereafter, the Congress will act," Sander Levin, chairman of the House Ways and Means Committee, said Wednesday at a hearing on Chinese trade policy.
China's desire to wait for more economic certainty doesn't mesh well with the U.S. political calendar. Mr. Geithner can't delay publication of the Treasury's currency report indefinitely. And with midterm elections approaching later this year, Congressional criticism is likely to increase. That will make it more difficult for China to find a quiet period to make a move. Administration officials have been trying to draw China's attention to the worsening political dynamic in Washington, to encourage a move before the tensions start to poison a relationship both sides have worked hard to keep on an even keel. "I think the strength, the sentiment in the Congress on this is overwhelmingly strong," Mr. Geithner said at last week's hearing. "I think it's important that China understands that."
Peddling Relief, Industry Puts Debtors in a Deeper Hole
by Peter S. Goodman - New York Times
For the companies that promise relief to Americans confronting swelling credit card balances, these are days of lucrative opportunity. So lucrative, that an industry trade association, the United States Organizations for Bankruptcy Alternatives, recently convened here, in the oceanfront confines of the Four Seasons Resort, to forge deals and plot strategy. At a well-lubricated evening reception, a steel drum band played Bob Marley songs as hostesses in skimpy dresses draped leis around the necks of arriving entrepreneurs, some with deep tans.
The debt settlement industry can afford some extravagance. The long recession has delivered an abundance of customers — debt-saturated Americans, suffering lost jobs and income, sliding toward bankruptcy. The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced.
State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises. Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.
In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch from a debt settlement company advertising on the radio, promising to spare her from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into a special account established under the company’s guidance before a credit card company sued her, prompting her to drop out of the program. By then, her account had only $1,470 remaining: The debt settlement company had collected the rest in fees. She is now filing for bankruptcy.
"They take advantage of vulnerable people," she said. "When you’re desperate and you’re trying to get out of debt, they take advantage of you." Debt settlement has swollen to some 2,000 firms, from a niche of perhaps a dozen companies a decade ago, according to trade associations and the Federal Trade Commission, which is completing new rules aimed at curbing abuses within the industry.
Last year, within the industry’s two leading trade associations — the United States Organizations for Bankruptcy Alternatives and the Association of Settlement Companies — some 250 companies collectively had more than 425,000 customers, who had enrolled roughly $11.7 billion in credit card balances in their programs. As the industry has grown, so have allegations of unfair practices. Since 2004, at least 21 states have brought at least 128 enforcement actions against debt relief companies, according to the National Association of Attorneys General. Consumer complaints received by states more than doubled between 2007 and 2009, according to comments filed with the Federal Trade Commission.
"The industry’s not legitimate," said Norman Googel, assistant attorney general in West Virginia, which has prosecuted debt settlement companies. "They’re targeting a group of people who are already drowning in debt. We’re talking about middle-class and lower middle-class people who had incomes, but they were using credit cards to survive." The industry counters that a few rogue operators have unfairly tarnished the reputations of well-intentioned debt settlement companies that provide a crucial service: liberating Americans from impossible credit card burdens.
With the unemployment rate near double digits and 6.7 million people out of work for six months or longer, many have relied on credit cards. By the middle of last year, 6.5 percent of all accounts were at least 30 days past due, up from less than 4 percent in 2005, according to Moody’s Economy.com. Yet a 2005 alteration spurred by the financial industry made it harder for Americans to discharge credit card debts through bankruptcy, generating demand for alternatives like debt settlement.
The industry casts itself as a victim of a smear campaign orchestrated by the giant banks that dominate the credit card trade and aim to hang on to the spoils: interest rates of 20 percent or more and exorbitant late fees. "We’re the little guys in this," said John Ansbach, the chief lobbyist for the United States Organizations for Bankruptcy Alternatives, better known as Usoba (pronounced you-SO-buh). "We exist to advocate for consumers. Two and a half billion dollars of unsecured debt has been settled by this industry, so how can you take the position that it has no value?"
But consumer watchdogs and state authorities argue that debt settlement companies generally fail to deliver. In the typical arrangement, the companies direct consumers to set up special accounts and stock them with monthly deposits while skipping their credit card payments. Once balances reach sufficient size, negotiators strike lump-sum settlements with credit card companies that can cut debts in half. The programs generally last two to three years.
"What they don’t tell their customers is when you stop sending the money, creditors get angry," said Andrew G. Pizor, a staff lawyer at the National Consumer Law Center. "Collection agents call. Sometimes they sue. People think they’re settling their problems and getting some relief, and lo and behold they get slammed with a lawsuit." In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. A Colorado investigation came to a similar conclusion.
The industry’s own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements. "The industry is designed almost as a Ponzi scheme," said Scott Johnson, chief executive of US Debt Resolve, a debt settlement company based in Dallas, which he portrays as a rare island of integrity in a sea of shady competitors. "Consumers come into these programs and pay thousands of dollars and then nothing happens. What they constantly have to have is more consumers coming into the program to come up with the money for more marketing."
Linda Robertson knew nothing about the industry she was about to encounter when she picked up the phone at her Missouri home in February 2009 in response to a radio ad. What she knew was that she could no longer manage even the monthly payments on her roughly $23,000 in credit card debt. So much had come apart so quickly.
Before the recession, Ms. Robertson had been living in Phoenix, earning as much as $8,000 a month as a real estate appraiser. In 2005, she paid $185,000 for a three-bedroom house with a swimming pool and a yard dotted with hibiscus. When the real estate business collapsed, she gave up her house to foreclosure and moved in with her son. She got a job as a waitress, earning enough to hang on to her car. She tapped credit cards to pay for gasoline and groceries.
By late 2007, she and her son could no longer afford his apartment. She moved home to Kansas City, where an aunt offered a room. She took a job on the night shift at a factory that makes plastic lids for packaged potato chips, earning $11.15 an hour. Still, her credit card balances swelled.
The radio ad offered the services of a company based in Dallas with a soothing name: Financial Freedom of America. It cast itself as an antidote to the breakdown of middle-class life. "We negotiate the past while you navigate the future," read a caption on its Web site, next to a photo of a young woman nose-kissing an adorable boy. "The American Dream. It was never about bailouts or foreclosures. It was always about American values like hard work, ingenuity and looking out for your neighbor."
When Ms. Robertson called, a customer service representative laid out a plan. Every month, Ms. Robertson would send $427.93 into a new account. Three years later, she would be debt-free. The representative told her the company would take $100 a month as an administrative fee, she recalled. His tone was take-charge. "You talk about a rush-through," Ms. Robertson said. "I didn’t even get to read the contract. It was all done. I had to sign it on the computer while he was on the phone. Then he called me back in 10 minutes to say it was done. He made me feel like this was the answer to my problems and I wasn’t going to have to face bankruptcy."
Ms. Robertson made nine payments, according to Financial Freedom. Late last year, a sheriff’s deputy arrived at her door with court papers: One of her creditors, Capital One, had filed suit to collect roughly $5,000. Panicked, she called Financial Freedom to seek guidance. "They said, ‘Oh, we don’t have any control over that, and you don’t have enough money in your account for us to settle with them,’ " she recalled.
Her account held only $1,470, the representative explained, though she had by then deposited more than $3,700. Financial Freedom had taken the rest for its administrative fees, the company confirmed. Financial Freedom later negotiated for her to make $100 monthly payments toward satisfying her debt to the creditor, but Ms. Robertson rejected that arrangement, no longer trusting the company. She demanded her money back.
She also filed a report with the Better Business Bureau in Dallas, adding to a stack of more than 100 consumer complaints lodged against the company. The bureau gives the company a failing grade of F.
Ms. Robertson received $1,470 back through the closure of her account, and then $1,120 — half the fees that Financial Freedom collected. Her pending bankruptcy has cost her $1,500 in legal fees. "I trusted them," she said. "They sounded like they were going to help me out. It’s a rip-off." Financial Freedom’s chief executive, Corey Butcher, rejected that characterization.
"We talked to her multiple times and verified the full details," he said, adding that his company puts every client through a verification process to validate that they understand the risks — from lawsuits to garnished wages. Intense and brooding, Mr. Butcher speaks of a personal mission to extricate consumers from credit card debt. But roughly half his customers fail to complete the program, he complained, with most of the cancellations coming within the first six months. He pinned the low completion rate on the same lack of discipline that has fostered many American ailments, from obesity to the foreclosure crisis.
"It comes from a lack of commitment," Mr. Butcher said. "It’s like going and hiring a personal trainer at a health club. Some people act like they have lost the weight already, when actually they have to go to the gym three days a week, use the treadmill, cut back on their eating. They have to stick with it. At some point, the client has to take responsibility for their circumstance." Consumer watchdogs point to another reason customers wind up confused and upset: bogus marketing promises.
In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a "national debt relief stimulus plan." Several claimed that 85 to 100 percent of their customers completed their programs. "The vast majority of companies provided fraudulent and deceptive information," said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.
At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr. Ansbach, the Usoba lobbyist, to explain why his organization refused to disclose its membership. "The leadership in our trade group candidly was concerned that publishing a list of members ended up being a subpoena list," Mr. Ansbach said. "Probably a genuine concern," Senator McCaskill replied.
The Coming Crackdown
On multiple fronts, state and federal authorities are now taking aim at the industry. The Federal Trade Commission has proposed banning upfront fees, bringing vociferous lobbying from industry groups. The commission is expected to issue new rules this summer. Senator McCaskill has joined with fellow Democrat Charles E. Schumer of New York to sponsor a bill that would cap fees charged by debt settlement companies at 5 percent of the savings recouped by their customers. Legislation in several states, including New York, California and Illinois, would also cap fees. A new consumer protection agency created as part of the financial regulatory reform bill in Congress could further constrain the industry.
The prospect of regulation hung palpably over the trade show at this Atlantic-side resort, tempering the orchid-adorned buffet tables and poolside cocktails with a note of foreboding. "The current debt settlement business model is going to die," declared Jeffrey S. Tenenbaum, a lawyer in the Washington firm Venable, addressing a packed ballroom. "The only question is who the executioner is going to be." That warning did not dislodge the spirit of expansion. Exhibitors paid as much as $4,500 for display space to showcase their wares — software to manage accounts, marketing expertise, call centers — to attendees who came for two days of strategy sessions and networking.
Cody Krebs, a senior account executive from Southern California, manned a booth for LowerMyBills.com, whose Internet ads link customers to debt settlement companies. Like many who have entered the industry, he previously sold subprime mortgages. When that business collapsed, he found refuge selling new products to the same set of customers — people with poor credit. "It’s been tremendous," he said. "Business has tripled in the last year and a half."
The threat of regulations makes securing new customers imperative now, before new rules can take effect, said Matthew G. Hearn, whose firm, Mstars of Minneapolis, trains debt settlement sales staffs. "Do what you have to do to get the deals on the board," he said, pacing excitedly in front of a podium. And if some debt settlement companies have gained an unsavory reputation, he added, make that a marketing opportunity. "We aren’t like them," Mr. Hearn said. "You need to constantly pitch that. ‘We aren’t bad actors. It’s the ones out there that are.’ "
The Most Damaging U.S. Deficit: Trust
by Chris Farrell - Bloomberg Businessweek
The tragic reverberations of the Apr. 20 explosion aboard the Deepwater Horizon offshore rig aren't letting up. The Gulf oil spill is an ecological disaster for the affected coastlines of Florida, Louisiana, Alabama, Mississippi, and Texas. The eventual economic damage will be substantial, too. The local fishing and tourism industries face bleak years. The Federal Reserve Bank of Atlanta recently calculated that some 132,000 jobs are at risk in the accommodation and food industries of metropolitan areas along the Gulf.
The financial damage extends far beyond the Gulf and its environs. BP has lost some 45 percent, or $80 billion, of its market value, suspended its dividend, and agreed to put $20 billion into an escrow fund to compensate victims of the oil spill. Offshore oil rigs and their workers are idle, with the Administration having placed a six-month moratorium on deepwater drilling.
That said, the most worrisome long-term economic impact of the Gulf spill lies elsewhere: The catastrophe is adding to the gradual erosion in trust in U.S. professional elites and major institutions, from government to business. It has hardly inspired confidence to watch the White House scramble to prove that President Barack Obama wasn't as detached from the crisis as he often seemed, or to witness the inability of the world's best oil engineers to stop the underwater gusher.
Confidence in the economy's commanding heights has taken a beating following a long run of scandals and malfeasance. The list includes everything from the Enron and Worldcom failures, Bernie Madoff's massive fraud, the subprime loan mess, the government rescues of Fannie Mae, Freddie Mac, and AIG, the controversy surrounding Goldman Sachs' collateralized debt obligations, and so on. The Tea Party movement may grab all the attention with its antigovernment rhetoric, but surveys have repeatedly shown that its sentiment is widely shared.
For instance, a series of long-run surveys by the Pew Research Center find that only 22 percent of those surveyed say they can trust government. That's about the lowest measure in half a century. The ratings are similarly abysmal for large corporations and banks and other financial institutions: respectively 25 percent and 22 percent. Trust isn't as easy to measure as land, labor, and capital. It's more like a recipe or a software protocol that allows for economic exchange and all kinds of innovation.
Nobel Prize Laureate Kenneth Arrow famously remarked that "virtually every commercial transaction has within itself an element of trust." Societies with high levels of trust are fertile ground for developing large corporations and innovative enterprises. Low-trust societies feature people who don't like to do business with folks outside their family or community; smaller, family-run companies are the norm.
Trust: An Economic Multiplier
There is compelling evidence that large economic benefits stem from both high levels of trust in institutions and a belief in the general trustworthiness of individuals in society. What's more, trust becomes increasingly vital to commerce as the products or services that are traded grow more sophisticated. It takes a lot more trust to buy a giant printing press—from a belief that it is well-made to confidence that repair services will keep it running—than to buy a simple commodity such as wheat.
"Along these lines sociologists, political scientists, and recently, economists have argued—and showed—that having a higher level of trust can increase trade, promote financial development, and even foster economic growth," says Paolo Guiliano, professor at the Anderson School of Management, UCLA. "Hence the more trust, the better for a country's economy." And vice-versa.
There's the rub. Take the stock market. The decision to buy stock partly reflects an analysis of value and risk tolerance. But it's also an act of faith or trust that the underlying data is reliable and that the system is fair. Research by economists Luigi Guiso of the European University Institute, Paola Sapienza of Northwestern University, and Luigi Zingales of the University of Chicago suggests that trusting individuals are significantly more likely to buy stocks and risky assets after adjusting for wealth, legal protection, and a number of other factors. For instance, in studying Dutch investors, they find that trusting others increases the probability of buying stock by 50 percent and raises the share of wealth invested in stocks by 3.4 percentage points.
What then are the implications of a decline in trust in the fairness and functioning of financial markets? A Financial Trust Index created by Sapienza and Zingales in December 2008 shows that in the first quarter of 2010, 23 percent of Americans trusted the nation's financial system, down 2 percent from the previous quarter. Looking at the stock market section of the survey in particular, only 16 percent of respondents said they trusted it. "I think that trust is important in transactions, especially financial transactions," says Zingales. "It's hard to quantify but it's very important to decisionmaking and development."
Perversely, attempts to counter the decline in trust in the aggregate may be exercising a dampening effect on the economy's vitality. Since the collapse of Enron in 2001, the government has imposed an increasing number of checks and balances on business, ranging from the corporate accounting and reporting reforms of Sarbanes-Oxley to the current financial services reform bill currently being hammered out in Congress.
Lack Of Trust Stifles Innovation
It isn't just government. Businesses have also established internal checks and balances, administrative layers of compliance, and auditing rules and regulations, all geared toward reassuring investors and employees that breaches in trust won't happen. The time clock and the expense report calculated to the penny have been replacing trust and common sense. Many of these efforts are well-intentioned. Taken together, much of the government and corporate regulatory state is now counterproductive. "When the workplace become less trusting it becomes less innovative," says John Helliwell, professor emeritus of economics at the University of British Columbia. "Successful companies turn the 'I' into a 'we' and the lack of trust converts a lot of 'wes' into an 'I'."
The most dangerous element in the burgeoning trust shortage may be the inability of the nation's political system to put its enormous debt and deficit on a downward trajectory. Right now, global investors are making an enormous bet that Congress, the White House and the Federal Reserve will manage that Herculean feat. The rate on U.S. Treasuries is remarkably low. Even more striking, the U.S. Treasury Inflation Protected Security is predicting that inflation will average slightly less than 2 percent over the next 5 years, and a fraction over 2 percent for 10 years.
This boils down to an additional matter of trust—that prickly political factions can somehow pull together to make difficult fiscal choices. Given the tone and substance of the nation's political discourse, it's almost impossible to imagine Washington getting down to business and enacting over the medium-and long-term the kind of political compromises that will be needed to embrace fiscal conservatism. If investors in U.S. Treasuries are wrong, the crowd that makes its bets on rampant inflation and financial disarray—i.e., gold investors—may have the last laugh. With the yellow metal closing at $1247.2 on the Comex on June 17—up about 25 percent over the past year—you may already hear them chuckling.
Afghan minerals may reach 3 trillion dollars: minister
Afghanistan's mining minister said Thursday that mineral deposits in his country could be worth up to three trillion dollars, tripling a US estimate from earlier this week. The results of the US geological survey released this week by American officials said Afghanistan had huge reserves of lithium, iron, copper, gold, niobium, mercury, cobalt and other minerals worth nearly one trillion dollars. "A very conservative estimate has been one trillion. Our estimation is more than that... the idea is it could be up to three trillion dollars,"
Afghan mining minister Waheedullah Shahrani told a news conference. When asked what his estimate was based on, the minister said: "the visibility of the minerals". There are also bigger than expected reserves of oil and gas, mostly in northern Afghanistan, Shahrani said, and one of the deposits in Kunduz province would be offered for exploration next year.
"The new findings show that there are five new oil and gas blocks in Afghanistan. The biggest of them is the Afghan-Tajik basin in the province of Kunduz. We'll put this up for tender next year," he said. Shahrani has already said the country would organise a roadshow to promote opportunities for foreign investors on June 25 in London. The US survey found Afghanistan's potential lithium deposits are as large of those of Bolivia, which has the world's largest known reserves of the lightweight metal, used to make batteries for mobile phones and laptops. The biggest mining contract Afghanistan has ever signed is that of Aynak, a huge copper mine awarded to a Chinese company last year.
The minister said the work on Aynak, just south of Kabul, was underway. But he acknowledged the war-torn nation, still gripped by a deadly Islamist insurgency led by the Taliban, had a long way to go before it could tap its underground wealth. "Developing mines will take a long time," he said, admitting Afghanistan lacked the basic infrastructure for major mining investments. The United States has also said it could take years to develop the industry, and acknowledged that Afghanistan, widely considered one of the most corrupt countries in the world, would be challenged to ensure profits did not enrich only a few.
The Stoneleigh Effect
by Charlotte du Cann
On the red wall in the old students’ union there were sign-up lists for all the workshops – Zero Carbon Farm, Tales for Transition, Community Ownership of Assets, Wild Zones. DIY streets... One at the end was covered in signatures. The title was Making Sense of the Financial Crisis in the Era of Peak Oil.
Nicole Foss writes under the name Stoneleigh on the influential blog, The Automatic Earth. Unlike most disciplines which only look at their subject on its own terms, Stoneleigh looks at the Big Picture, and the the Big Picture in 2010 from the financial and resource perspective is looking none too good. In fact it became obvious through this intense one and a half hour lecture that we are facing a meltdown, within which the financial collapse (already set in motion in 2008) is the defining event. This is because finanical markets move far more quickly than resource markets. They change in the speed of an email or a phone call. Fear spreads like contagion and positive feedback is the rule.
The graphs came and went. The patterns of deflation were spelled out. Bubbles burst through the centuries, pyramids collapsed. With fossil fuels the bubble has expanded like never before in history. 1600 trillion dollars of virtual money in 30 years. For every slice of financial cake that exists there are now one hundred claims. Because these expansions are built, as Stoneleigh pointed out, not on the reality of wealth, but on a perception of money. At some point the spell breaks. We are running off a cliff and our legs are still working, but very soon we’re going to look down and realise there is nothing to hold us up. We fall bigtime.
We looked at the screen: credit disppearing, affordability descreasing, house prices going down, prices for essentials going up. People hoarding and the lack of lubricant money halting the interactive flow of goods and services. What do we need to do now? Stoneleigh advises us: look at your structural dependency, deal with debt, and make relationships you can trust. In effect, be part of Transition.
The lecture hall was packed and everyone sat in a stunned kind of silence. Afterwards we reeled out to a second leg of Open Space and after lunch entered a Big Group Process in the Great Hall. It was a new Transition experiment. We gathered into our “home groups” (groups of eight people formed at the Mapping of the initiatives at the start of the conference) and looked collectively into the future. We explored what we felt would happen in one year’s time, then five, then ten. We closed our eyes and put ourselves in a frame to see what would lie ahead, as Sophy asked questions.
What does it mean we are so much in debt?What are our feelings about what is coming? Then we discussed the matter between ourselves and drew our thoughts in images and words. At the end we held up our sheets of paper in a living gallery. 2011, 2015, 2020. Everywhere there was a split between breakdown and breakthrough, fall and transcendence. In amongst the dark scribbling emerged butterflies and the phoenix. Through the dualities of hope and despair, the good ship Transition sailed on towards the future.
The Stoneleigh effect rippled through the weekend. It was the most talked about event. Not because most of us are unaware that things were going to change radically, but because the reality of the figures made the reality of what we might experience come home to everyone in the room.
Transition is well known for its positive outlook, for the fact it sees an opportunity for living very differently on the planet as fossil fuels become scarce and costly. It deliberately steers a different course of activism from environmental or social protest against the old powers; it does not encourage endtimes glee, the mind's arrogant dismissal of life. It works very hard to make new connections between human beings, to forge resilient communities, to enter the field of possibilities rather than follow a trajectory that we have been trained to see is the only way. But the fact is none of this can happen without the old structures that hold that trajectory in place breaking up.
You don’t get to the butterfly without the caterpillar dissolving. And that dissolve is what we were looking at in the Stoneleigh graphs as they dipped. It was the pattern of collapse of a civilisation.
Resilience, the key concept of Transition, is the ability to weather shock, to adapt and still thrive. This is the kind of unexpected shock we will have to weather, as Sophy explained later. The lecture was a last minute addition to the programme and interrupted the Open Space sessons; it sent people reeling and some to sit for hours in circles talking about their experiences. It influenced the way we thought, what was discussed around the tables, under trees, at the bar. But in many ways it was a relief, we didn’t have to be Pollyannas anymore. It was OK to talk about the difficulties we will face. Because it was clear we were all going to face them. That made a difference. Because instead of being alone, we will be together.
That evening I went swimming with Adrienne. There were five of us and we met up in the canteen in the self-organising style of the conference. The river Dart runs through a wooded valley, free flowing, tan-coloured with dark mossy rocks on either side. We went down a track through the trees and jumped naked into the cold wild water and swam together upsteam, and then floated back with the current.
The sun spiralled through the green leaves and I remembered a long, long time ago a moment in Australia: a boy had fallen into the rainforest pool from the cliff and I was beside him waiting for the shock to subside and a turtle swam by and I heard the wind blow through the gum trees and looked up and saw a group of men, women and children standing naked in the water, in complete syncronicity with everything around them and there was a peace and a silence between us that seemed to stretch to infinity and I realised I was looking at the future.
Because who knows what happens when we take off our clothes, divest ourselves of our caterpillar lives, what butterflies we might become? Who could predict that I would have met Adrienne again after 25 years and that we had so many deep and shared experiences to talk about in a way that we could never have known in our careless city youth? What underlying pattern brought us together, connected the totem bird of the Conference, a fledging jackdaw with the fledging jackdaws I wrote about in the blog before I came? What patterns of strength do we find within us when the shock subsides, what depth of feeling, what intelligence and skill arises when other possibilites lie ahead?
What wings do we discover when we look down and see there is only space beneath us?