"One of Chris Adolph's younger children. Farm Security Administration Rehabilitation clients, Washington, Yakima Valley, near Wapato"
Stoneleigh: Since we at The Automatic Earth generally tell people to hold cash or cash equivalents, it makes sense to expand on that a little, and to point out some of the location-specific risks of doing so. We tell people to hold cash because that is what they will need access to in order to make debt payments and to purchase the essentials of life in a society with little or no remaining credit. The value of cash domestically - in terms of goods and services in your own local area - is what matters most.
Domestic currency value relative to other currencies internationally will be very much a secondary concern for most people, as the ability to exchange one currency for another is not likely to last far into the coming era of capital controls. Currency risk is likely to become very large, and almost everyone will be better off holding whatever passes for cash wherever they happen to be.
As the price of goods and services fall, thanks to the destruction of purchasing power brought about by collapsing money supply, what cash you still have will go a lot further in terms of, say, milk and bread. Capital preserved as liquidity will go a long way. However, there are no no-risk scenarios. Apart from the obvious risks of fire, flood and theft, other risks to holding cash will grow over time. Liquidity can be as hard to hold on to as it sounds.
One particular risk is the reissuing of currency. Russia did this during the economic collapse of the Soviet Union, and made it so difficult for ordinary people to convert old currency into new that much of the middle class lost their life-savings. In Russia trust in relation to banks was not particularly high, hence there was a lot of money under the beds of the nation that the powers-that-be were attempting to flush out. That is not the case in present day industrialized countries, where people generally believe that banks are safe and deposits are publicly guaranteed in any case.
On top of that, few people have savings, having become dependent on access to cheap credit for their rainy-day funds. There is virtually nothing under the beds of the Western nation, and so essentially nothing to flush out.
Although that particular rationale for currency reissue does not really exist (the flushing out of hidden wealth), there may be other reasons for doing so, and these will be locational. The risk of currency reissue in the US is likely to be low for some time. The US is likely to benefit from capital flight from other places, on a knee-jerk flight to safety.
In addition, dollar-denominated debt deflation will increase demand for dollars, and hence increase their value. This should reduce pressure for any kind of radical currency reform for a while. If the US does eventually reissue its currency, I would imagine them doing so in order to deprive foreign holders of dollars of purchasing power. There are very large numbers of dollars held overseas, and these would not be able to be exchanged in a currency reissue. At some point this may serve the interests of the US, but not soon.
The situation in Europe is far more complex, and the risk is likely to vary between European countries. The reason is that the euro is less of a single currency than it is a strong currency peg. Whereas in the US the primary loyalty is to the political unit that issues the currency, in Europe the primary loyalty is to a lower level political unit. Currency values are grounded in relationships of trust, and the disparity between primary loyalty and currency control suggests that this essential component is weak in Europe. Where trust is weak, common currencies are also weak and my have a limited lifespan.
I think it very likely that the eurozone will decrease in size over the next few years, as the countries of the periphery find the austerity measures they are forced to live with increasingly intolerable. The social divisions that will widen as austerity measures are applied locationally will have greater and greater effects. Europe has a long history of conflict, with each country feeling that the natural extent of its own sphere of influence is whatever is was at its maximum past extent. This means that they all overlap on a continent with a long history of imperial rise and fall.
Emotional responses to past events still run very deep in Europe, even where those events were hundreds of years ago. This is a recipe for balkanization once there is no longer enough to go around. Witness for instance the ridiculous marching season in Northern Ireland, which exists to rub the noses of the catholic population in a defeat (the Battle of the Boyne) from several centuries past. That sort of behaviour is grotesque and should be an outright anachronism in a modern Europe, yet it persists, and there are other comparable examples (see for instance the reaction of Serbian people to the anniversary of the Battle of Kosovo Polye).
All common currency zones define zones of predation, that is: define the regions that feed an imperial centre. The current European periphery includes such nations as Greece, Spain, Portugal, Ireland and all of Eastern Europe. It may also include Italy and the Netherlands, as both of these areas have major debt issues (housing bubbles and national debt). It would also include the UK in a sense, despite the fact that the UK is not part of the single currency. The UK is an international financial centre of considerable stature, but has an enormous debt problem and very few visible means of support going forward, once North Sea oil and gas cease to provide revenues and the City of London takes an inevitable knock-out blow.
I would expect the eurozone to be composed of a much smaller number of countries in the future than it is now, as peripheral countries are driven to the brink and beyond. The risk of currency reissue in these countries is therefore significantly elevated in comparison with the US, for instance. Where that risk is higher, there will be greater impetus for moving from cash to hard goods sooner rather than later. In places where that risk is smaller, one may wait longer for the price of hard goods to fall and therefore spend less on them. Where that risk is larger, the wait should be shorter, even though that would mean paying more, so long as debt is still not part of the equation.
Short term bonds (the primary cash equivalent) are not really an option in Europe the way they are in the US. The shortest term available is measured in years rather than months, which could easily be too long. This means that Europeans will face harder choices on this front as well. I would suggest that Europeans afraid of facing a currency reissue should consider the value of hard goods sooner rather than later. As always, pooling resources can get you further own the list of recommended priorities than you could possibly hope to achieve on your own (ie hold no debt, hold cash and cash equivalents and gain control over the essentials of your own existence).
Everyone will need to make the transition from cash to hard goods at some point. Cash is what you need to navigate the great deleveraging, but over the time the risks to cash will rise and you will need to think of the next phase, which is addressing the risk of the kind of economic upheaval that breaks supply lines. That will come first, and inflation (ie actual currency printing) will come much later. Inflation is only a risk once the power of the bond market has been broken, and that is not today's risk, nor tomorrow's.
That is something to consider much further down the line. Deflation and depression are mutually reinforcing in a spiral of positive feedback. That is not a dynamic that will end quickly, but end it will some day. At that point, or well before depending on where you live, you will want to be fully invested in hard goods.
Ilargi: I'm sure you've all noticed that the July 1 switch deadline to the new site hasn’t materialized. Apologies for that, there’s simply too much that comes down to me myself and I, and maybe it was a bit daring in that light. Anyone who has any talents in the IT field is welcome to take some tasks off my hand. Please leave your initials in the commant field or the email address in the left hand column. We should be able to do this within the next month. I know, my choice to join Stoneleigh on her European speaking tour doesn't help things perhaps, but then again, we make contacts all over the place.
"A Gigantic Ponzi Scheme, Lies and Fraud": Howard Davidowitz on Wall Street
by Aaron Task - Yahoo
Day one of the Financial Crisis Inquiry Commission's two-day hearing on AIG derivatives contracts featured testimony from Joseph Cassano, the former head of AIG's financial products unit. Goldman Sachs president Gary Cohn was also on the Hill. Meanwhile, the Democrats are still trying to salvage the regulatory reform bill, with critical support from Senator Scott Brown (R-Mass.) reportedly still uncertain.
According to Howard Davidowitz of Davidowitz & Associates, what connects the hearings and the Reg reform debate is the lack of focus on the real underlying cause of the financial crisis: Fraud. "It was a massive fraud... a gigantic Ponzi Scheme, a lie and a fraud," Davidowitz says of Wall Street circa 2007. "The whole thing was a fraud and it gets back to the accountants valuing the assets incorrectly."
Because accountants and auditors allowed Wall Street firms to carry assets at "completely fraudulent" valuations, he says the industry looked hugely profitable and was able to use borrowed funds to make leveraged bets on all sorts of esoteric instruments. "Their bonuses were based on profits they never made and the leverage they never could have gotten if the numbers were right - no one would've given them the money in their right mind," Davidowitz says.
To date, the accounting and audit firms have escaped any serious repercussions from the credit crisis, a stark difference to the corporate "death sentence" that befell Arthur Anderson for its alleged role in the Enron scandal. To Davidowitz, that's perhaps the greatest outrage of all: "Where were the accountants?," he asks. "They did nothing, checked nothing, agreed to everything" and collected millions in fees while "shaking hands with the CEO."
Howard Davidowitz: U.S. Economy "Is a Complete Disaster"
by Keegan Bales - Yahoo
The U.S. economy is in shambles and Americans will continue to see high unemployment and lower living standards in the years to come, Howard Davidowitz tells Henry and Aaron in the accompanying clip. Davidowitz lays much of the blame for the economy's woes at the feet of the Obama administration, which he calls "the worst of my lifetime."
Obama "Mr. Mass Destruction"
Davidowitz says that the key to Obama's success is his ability to sell his policies to the public. He can confidently read from a teleprompter and appear competent and in control, when in reality, "it's one big bag of empty words," Davidowitz says of Obama's messages. Davidowitz contends that the President's spending, including the health-care bill, is creating massive deficits that will take the U.S. years to dig itself out of. "He is Mr. Mass Destruction," Davidowitz says of Obama. "I mean he is a human destroyer. This guy has spent his way into oblivion and we don't have a budget. He is surrounded by a bunch of complete incompetents, led by himself. "
As far as the actual economy goes, Davidowitz's chief concern is the strained state of the housing market, from which the bad news continues to pour in. According to Davidowitz, Americans are facing an $8 trillion negative wealth effect from the bursting of the housing bubble. "We're talking about some serious money here," Davidowitz exclaims. "I mean this is a complete disaster and that's why we are going to have a double dip. We're guaranteed a double dip in housing."
Small Businesses and Unemployment
Davidowitz says that the job market is also in ruins, noting for every new job there are six applicants. As a result of the intense competition for positions, employers can offer lower wages. Young people entering the work force today can expect to make less money in their lifetime than previous generations.
Considering the majority of new jobs are created by small businesses, Davidowitz argues that new regulations governing loans to small businesses are only making matters worse -- both for the entrepreneurs and the millions of people out of work. "We have this insane new regulation," Davidowitz says. "Community banks will not even be able to fill out the forms. They'll pack up and quit. They're already underwater. Commercial real estate is still terrible."
The Future a Massive Struggle
Asked whether he thought the U.S. would experience another Great Depression, Davidowitz said the coming years will look more like Japan today vs. the U.S. in the 1930s. People will be making and spending less money and the nation as a whole will be dealing with the consequences of the deficit, he says. "We are in a struggle, day by day it's ugly. At the core, when we look at our debt, we are going to have to deal with it."
A few months ago, while other analysts claimed that the economy would continue to follow a V-shaped recovery path, Davidowitz seemed out of step by insisting the nation's problems were still dire. Regardless of what you think of his message or style, Davidowitz's doom and gloom outlook now appears much more credible.
How Goldman Sachs Gambled On Starving the Poor - And Won
by Johann Hari
By now, you probably think your opinion of Goldman Sachs and its swarm of Wall Street allies has rock-bottomed at raw loathing. You're wrong. There's more. It turns out the most destructive of all their recent acts has barely been discussed at all. Here's the rest. This is the story of how some of the richest people in the world - Goldman, Deutsche Bank, the traders at Merrill Lynch, and more - have caused the starvation of some of the poorest people in the world, just so they could make a fatter profit.
It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 percent, maize by 90 percent, and rice by 320 percent. In a global jolt of hunger, 200 million people - mostly children - couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in over 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, called it "a silent mass murder", entirely due to "man-made actions."
Earlier this year I was in Ethiopia, one of the worst-hit countries, and people there remember the food crisis like they were hit by a tsunami. "It was very painful," a woman my age called Abeba Getaneh, told me. "My children stopped growing. I felt like battery acid had been poured into my stomach as I starved. I took my two daughters out of school and got into debt. If it had gone on much longer, I think my baby would have died."
Most of the explanations we were given at the time have turned out to be false. It didn't happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn't because demand grew either. We were told the swelling Chinese and Indian middle classes were pushing it up, but as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand from those countries for them actually fell by 3 percent over this period.
There are some smaller explanations that account for some of the price rise, but not all. It's true the growing demand for biofuels was gobbling up much-needed agricultural land - but that was a gradual process that wouldn't explain a violent spike. It's true that oil prices increased, driving up the cost of growing and distributing food - but the evidence increasingly shows that wasn't the biggest factor.
To understand the biggest cause, you have to plough through some concepts that will make your head ache - but not half as much as they made the poor world's stomachs ache.
For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer and the global price is high, he'll lose some cash, but if there's a lousy summer or the price collapses, he'll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked well.
Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into 'derivatives' that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born.
So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to financial speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutschebank, who sell it on for £30,000 to Merryl Lynch - and on, and on, provided they think the price can be jacked up, until it seems to bear almost no relationship to Farmer Giles' crop at all.
If this seems mystifying, it is. John Lanchester, in his superb guide to the world of finance, 'Whoops! Why Everybody Owes Everyone and No One Can Pay', explains: "Finance, like other forms of human behaviour, underwent a change in the twentieth century, a shift equivalent to the emergence of modernism in the arts - a break with common sense, a turn towards self-referentiality and abstraction and notions that couldn't be explained in workaday English."
Poetry found its break broke with straightforward representation of reality when T.S. Eliot wrote 'The Wasteland.' Finance found its Wasteland moment in the 1970s, when it began to be dominated by complex financial instruments that even the people selling them didn't fully understand. As Lanchester puts it: "With derivatives... there is a profound break between the language of finance and that of common sense."
So what has this got to do with the bread on Abiba's plate? How could this parallel universe of speculation affect her? Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was itself deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in contracts that were speculating on theoretical food that would be grown in the future - and the speculators drove the price through the roof.
Here's how it happened. In 2006, financial speculators like Goldman's pulled out of the collapsing US real estate market, and they were looking for somewhere else to make their stash of cash swell. They started to buy massive amounts of derivatives based on food: they reckoned that food prices would stay steady or rise while the rest of the economy tanked. Suddenly, the world's frightened investors stampeded onto this ground and decided to buy, buy, buy.
So while the supply and demand of food stayed pretty much the same, the supply and demand for contracts based on food massively rose - which meant the all-rolled-into-one price for food on people's plates massively rose. The starvation began.
The food price was now being set by speculation, rather than by real food. The hedge fund manager Michael Masters estimated that even on the regulated exchanges in the US - which take up a small part of the business - 64 percent of all wheat contracts were held by speculators with no interest whatever in real wheat. They owned it solely to inflate the price and sell it on. Even George Soros said this was "just like secretly hoarding food during a hunger crisis in order to make profits from increasing prices." The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.
When I asked them to comment on the charge of causing mass hunger, Merrill Lynch's spokesman said: "Huh. I didn't know about that." He later emailed to say: "I am going to decline comment." Deutsche Bank also refused to comment. Goldman Sachs were a little more detailed in their response: they said "serious analyses... have concluded index funds did not cause a bubble in commodity futures prices", offering as evidence a single statement by the OECD.
How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period - but only a fraction as much as the ones affected by speculation. Her research shows this speculation was "the main cause" of the rise.
So it has come to this. The world's wealthiest speculators set up a casino where the chips were the stomachs of hundreds of millions of innocent people. They gambled on increasing starvation, and won. This is what happens when you follow the claim that unregulated markets know best to the end of the line. The finance sector's Wasteland moment created a real wasteland. What does it say about our political and economic system that we can so casually inflict such misery, and barely even notice?
If we don't re-regulate, it is only a matter of time before this all happens again. How long would it last then? How many people would it kill next time? The moves to restore the pre-1990s rules on commodities trading have been stunningly sluggish. In the US, the House has passed some regulation, but there are fears the Senate - drenched in speculator-donations - may dilute it into meaninglessness. The EU is lagging far behind even this, while in Britain, where most of this "trade" takes place, advocacy groups are worried David Cameron's government will block reform entirely to please his own friends and donors in the City.
Only one force can stop another speculation-starvation-bubble from swelling, probably soon. The decent people in developed countries need to shout louder than the lobbyists from Goldman Sachs. In the UK, the World Development Movement is launching a week of action this summer as crucial decisions on this are taken: text WDM to 82055 for your marching orders. In the US, click here to find out what you can do. The last time I spoke to her, Abiba said: "We can't go through that another time. Please - do anything you can to make sure they never, never do that to us again."
U.S. Jobs Picture Darkens
by Sara Murray And Joe Light - Wall Street Journal
Payrolls Shrink for First Time This Year as Census Work Winds Down
Nonfarm payrolls fell 125,000, their first month of losses this year, as the government let 225,000 census workers go, the Labor Department said Friday. Private-sector employment grew by a slight 83,000 jobs on a seasonally adjusted basis, and seems to have downshifted from average gains of nearly 200,000 in March and April. The unemployment rate declined to 9.5% from 9.7% in May, but not because more jobs were available. Instead, 652,000 workers dropped out of the labor force, meaning they weren't counted as unemployed and looking for work. "The biggest problem is, we're getting economic growth but it's less than people had expected," said John Silvia, a Wells Fargo Securities economist.
The economy shed jobs in June as meager private-sector hiring failed to make up for the end of thousands of temporary census worker jobs, the latest signal that an already-slow recovery might be shifting into an even lower gear. Some economists are downwardly revising forecasts for the second half of the year. Those at UBS Securities LLC on Friday estimated the economy would grow at a 2.5% annual rate in the second half of the year, compared with the 3% growth rate they previously expected. That kind of growth typically isn't enough to absorb new work-force entrants and bring down the jobless rate.
Stocks traded lower on the jobs news, but after a week of declines triggered by downbeat economic data, there wasn't much steam left in the sell-off. The Dow Jones Industrial Average finished the day down 46.05 points, or 0.47%, at 9686.48. For the week, the Dow fell 4.5%. Weak growth could become a big problem for U.S. officials, who have few obvious solutions for nagging unemployment. The Federal Reserve has already pushed interest rates—its main policy tool—to near zero. In 2009 and early this year, Fed officials augmented rate cuts with purchases of mortgage-backed securities to drive down long-term interest rates. But they are reluctant to repeat the act.
Meanwhile, deficit worries make federal stimulus spending unappealing. "Make no mistake: We are headed in the right direction," President Barack Obama said Friday, attempting to highlight how far the economy has come. But "we're not headed there fast enough for a lot of Americans." Even with recent job gains—both April's and May's estimates were revised a total of 25,000 higher—the economy is 7.9 million jobs short of where it was in December 2007. Some 14.6 million people are out of work, and some economists predict the unemployment rate could rise again in coming months as others return to the work force in search of jobs.
"It's hard to overstate how deep the hole is," Jesse Rothstein, chief economist for the Labor Department, said in an interview earlier in the week. Many people, he added, "don't seem to be appreciating the gravity of the situation." Jobless Americans had been out of work for a median of 25.5 weeks as of June, up from 23.2 the prior month. Nearly 6.8 million workers have been out of a job for at least half a year.
Among the bright spots, professional and business services added 46,000 jobs in June, transportation and warehousing added workers and education and health services added another 22,000 positions.
Leisure and hospitality also upped its head count. But some uncertain employers in that industry said they are shying away from adding more. Cooper Hotels of Memphis, Tenn., this year has completed three projects that started before the recession hit, said Pace Cooper, the company president. He has hired about 160 workers to staff the facilities, and in a better economy would have added 20 more workers as business got under way. But not now. "It's a stressful time to open," Mr. Cooper said. "We have to be very conservative in our labor philosophy now. We're certainly going to keep that head count flat."
Manufacturers are a little more optimistic. The factory sector's recovery ramped up quickly as firms rebuilt inventories. Manufacturers added 9,000 jobs last month, but growth slowed. A separate report Friday showed factory orders declined in May after eight monthly increases.
Alcoa Inc., the aluminum maker, will cut 65 jobs from a plant in Lafayette, Ind., in the coming week. About 20 workers had been cut in February from the 700-employee plant, which primarily serves the commercial aerospace market. "The demand just isn't there," said spokesman Kevin Lowery. He noted the aerospace market is traditionally hit by downturns later than others. Alcoa had just completed a company-wide restructuring in which it eliminated 28,000 jobs, 70% of which the company said are unlikely to return.
Friday's report showed fewer industries added to payrolls in June than in April or May. Construction employers cut 22,000 jobs as the housing rebound appeared to stall. Retail, information-technology and financial-activity fields also cut workers. State and local governments' budget pressures caused a combined 10,000 job cuts.
In another discouraging development, employers cut the workweeks of existing employees. The average workweek for private, nonfarm employees fell 0.1 hour to 34.1 hours after rising the past three months. Average hourly earnings also slipped by 2 cents in June to $22.53. Fed officials had been encouraged by earlier workweek and wage gains because it showed that even though payrolls weren't growing quickly, household paychecks were rising and could support consumer spending.
"I could see myself accepting a position for half of what I've been making," said Cathleen Royce, who runs the Minneapolis office of Fund for an Open Society, a nonprofit focused on race relations. Donations have dried up and the office is being closed in August, putting her in the market for a new job. Ms. Royce is casting a wide net for a job, she said. The main priority for this 51-year-old cancer survivor: finding something that will ensure health insurance for her and her nine-year-old daughter.
7.9 million jobs lost - many forever
by Chris Isidore - CNN
The recession killed off 7.9 million jobs. It's increasingly likely that many will never come back. The government jobs report issued Friday shows that businesses have slowed their pace of hiring to a relative trickle. "The job losses during the Great Recession were so off the chart, that even though we've gained about 600,000 private sector jobs back, we've got nearly 8 million jobs to go," said Lakshman Achuthan, managing director of Economic Cycle Research Institute.
Excluding temporary Census workers, the economy has added fewer than 100,000 jobs a month this year -- a much faster and stronger jobs recovery than occurred following the last two recessions in 2001 and 1991. But even if that pace of hiring were to double immediately, it would take until 2013 to recapture the lost jobs. And the labor market very likely doesn't have years before it gets hit with the shock of the inevitable next economic downturn. "It's virtually certain that the next recession will come before the job market has healed from the last recession," said Achuthan.
More frequent recessions
Despite signs of slowing economic growth, Achuthan is not predicting that the U.S. economy is about to fall into another downturn later this year. But a combination of a slower growth and greater volatility is a prescription for as many as three recessions over the upcoming decade, he said. "We've entered a era where the United States will see more frequent recessions than anyone is used to," Achuthan said.
One of the big problems is that many of workers who have lost jobs were in industries that are not likely to recover their former strength. "We've got the wrong people in the wrong place with the wrong skills," said John Silvia, chief economist with Wells Fargo Securities. He said construction workers in California or Florida and auto workers in Michigan will have to relocate and retrain to find new jobs. "As many as half the people who lost their jobs will have to find something else to do," said Silvia.
Home building lost nearly 1 million jobs since the start of 2008, while the auto industry shed 300,000 manufacturing jobs due to plant closings. The finance and real estate sectors lost more than 500,000 jobs. "Those are the areas with the biggest bubbles, and so it's not a surprise that those are the areas with some of the biggest job losses," said Scot Melland, CEO of Dice Holdings, a provider of specialized career web sites. "Many of the jobs we lost are never coming back."
More new workers
And recapturing the lost jobs fixes only part of the problem. The nation's working-age population grows by about 150,000 people a month. So the hole is deeper than it looks. It would take the creation of 10.6 million jobs immediately for the same percentage of the population to be working as was the case three years ago.
Of course, it will take time to create jobs. If it takes three years, more than 3.5 million additional jobs will be needed because of continued population growth. The unemployment rate is currently 9.5%. A return to the 4.4% rate it was the summer before the recession started in 2007 is out of reach. In fact, the Federal Reserve, in its latest forecast, predicts that unemployment will stay around 7% or above through 2012, and in the 5% to 5.3% range in the long-run.
States turn from furloughs to layoffs
by Lisa Lambert - Reuters
For U.S. states, the practice of furloughing employees to save money is going out of fashion while the more drastic step of laying off workers is becoming a more popular cost-cutting tool. U.S. state and local governments employ around twice as many workers as the country's manufacturing and construction sectors combined, so the switch to layoffs risks swelling already high unemployment in the United States.
"I can confirm that states are now moving to layoffs they had hoped to avoid," said Philippa Dunne, who polls state leaders for the economic newsletter she co-edits, the Liscio Report. "To me, this is terrible timing because private hiring remains anemic, so piling on state and local layoffs is dangerous." The Center on Budget and Policy Priorities, a think tank tracking states' economies, found states' cumulative budget shortfall will likely reach $140 billion in fiscal 2011, which starts Thursday in most states, the largest shortfall since the recession began in 2007.
Because all states except Vermont must balance their budgets they will have to find ways to raise revenue or places to cut spending. This year may be tough because states have few places left to slash and taxpayers, badly bruised by unemployment and home foreclosures, have no appetite for extra taxes and fees. According to a recent report from the National Governors Association and the National Association of State Budget Officers, 22 states used furloughs while attempting to close budget gaps in fiscal 2010, sending groups of public employees home without pay and closing offices.
That was nearly even with layoffs, with 25 states and Puerto Rico cutting positions during fiscal 2010. To close budget gaps in fiscal 2011, only 13 states are adopting furloughs, or a little more than half the number that used the unpaid days in fiscal 2010. On the other hand, 19 are planning to turn to layoffs. "The scale of the crunch that states -- and local governments for that matter -- are under suggests furloughs are not enough," said Nicholas Johnson, a director of the state fiscal project at CBPP. "You can't just tell everyone to take a day off here and there and expect that will remedy the situation."
Big Sector, Big News
Since the beginning of the recession, 200,000 state and local employees have lost their jobs, according to CBPP. Just since December, 81,000 state workers have been laid off, according to the U.S. Bureau of Labor Statistics. In May there were 5.2 million people employed by state governments and 27.7 million by local governments, according to BLS. That compares to 5.6 million workers in construction and 11.6 million in manufacturing. "This is a big sector and trouble in it is big news, whatever one may think about government spending," said Dunne.
That is especially true when the U.S. jobless rate has been above 9 percent for 13 straight months. Analysts polled by Reuters expect Friday's jobs report to show that the rate rose to 9.8 percent in June. Furloughs and layoffs increased in fiscal 2010 as tax revenue plunged dramatically due to high unemployment rates, the housing bust and continued economic recession. The high initial dependency on furloughs showed states had not expected such a huge drop in revenues, said NASBO Executive Director Scott Pattison.
"Furloughs become more necessary when you have to quickly cut because money is coming in less than what you planned," he said, adding that states are seeing more stable levels of revenue, allowing them to forecast more accurately. Recent government data showed state and local revenue improved during the first quarter of 2010 from the first quarter of 2009, but only by 0.82 percent. Analysts do not expect revenue to return to pre-recession levels for years.
The Furloughs Fix
Furloughs are intended to save states money and public employees their jobs. However, the money savings are in dispute. "The furloughs were seen as some help in the short run. The problem is that you don't save as much money as you hope," said NGA Executive Director Raymond Scheppach, adding that states have to pay for benefits even if they skip a day of salaries. According to California's budget office, the state saved $2.8 billion through its 46 furlough days from February 2009 to June 2010.
But California's Franchise Tax Board found the blanket furloughs may have also cost the state money. The board said in a February report that furloughing 5,300 of its workers cost the state seven times more money than it saved because the tax collectors were not around to take in revenue. The board also said prisons and other facilities that cannot be shuttered for the day must hire temporary workers or pay current employees overtime. Meanwhile, furloughs at many agencies, such as the Department of Motor Vehicles, save no money but slow down service on days when offices are open.
Currently, in Washington state the public employee union is suing to scrap 10 furlough days the state legislature hoped would save $10 million. The state has "no way of determining the savings," the union said in a legal filing. But regardless of the potential savings furloughs offer, many states have had no choice but to lay off employees. "There are just going to be a lot more terminations as opposed to the furloughs going forward because it's so bad," said Scheppach.
Maywood, California, to all city cops and employees: You're fired
by Tami Luhby - CNN
Tiny Maywood, Calif., laid off every single one of its city employees on Wednesday. But that doesn't mean the city is closing up shop. City Hall will still be open, as will Maywood's park and recreation center. Police will continue to patrol the streets. They just won't be staffed by Maywood employees. The city can't have any staff because it can't get liability or worker's compensation insurance for them. Maywood's carrier, the California Joint Powers Insurance Authority, dropped it earlier this month in part because of several police-related claims.
Instead of declaring bankruptcy, Maywood officials decided to outsource all city functions. The Los Angeles County Sheriff's Department will patrol the streets, while the neighboring city of Bell will cover other city functions, such as staffing City Hall. Maywood already relies on contract workers and outsources many city services. The director of parks and recreation, for instance, is a contractor, and the city's lights, landscaping and street sweeping are handled by private companies. Los Angeles County maintains the library and fire department.
Some of Maywood's 96 employees -- which include 41 police officers -- will also continue as contract workers. Elected officials, such as the city council and the city clerk, will remain on the job in the 1.5-square-mile municipality, which has about 45,000 residents. "Odds are residents will see the same faces as in years past, just under a different administrative process," said Magdalena Prado, the city's community relations director, who is a contract worker and is keeping her post.
Maywood is billing itself as the first American city to outsource all of its city services. In an odd twist, officials say it can provide even better services because the shift will help it save money and close a $450,000 shortfall in its $10 million general fund budget. For instance, the contract with the sheriff's department costs about half of the more than $7 million spent annually to maintain the Maywood police department, Prado said. And patrols will be increased. "Our community will continue to receive quality services," Mayor Ana Rosa Riso said in a statement. "Maywood's streets will continue to be swept, our summer park programs will continue to operate and our waste will be collected and hauled as scheduled."
A growing number of cities are looking to contract out or share services regionally as the economic downturn takes its toll on municipal budgets. "Everything is on the table," said Chris Hoene, research director at the National League of Cities. "The fiscal stress cities are feeling mean they are looking for alternative options to deliver services that cost less money." Some 7 in 10 city officials said they are cutting personnel to balances their budgets, while another 68% are holding off on capital projects, according to a survey the league did in May. More than half of respondents say they will make to further slash city services next year if taxes or fees are not raised.
Not everyone is distressed by Maywood's unusual plan for providing city services. While Jesus Padilla feels sorry for the workers being affected, he thinks things might improve. He's made lots of calls to the county sheriff's department when he worked as a security guard and said officers always responded promptly. "The council made the best decision it could," said Padilla, a local activist who has lived in Maywood for more than 30 years. "It's going to be good for the city and the citizens."
Congressional Budget Office says US needs to tackle debt fast
by James Politi - Financial Times
The US needs to find a way to increase revenues and reduce spending as quickly as possible, the congressional budget watchdog said on Wednesday, as it warned that the federal debt was on a path towards “unsustainable levels”.
The bipartisan Congressional Budget Office said that spending on Social Security and mandatory healthcare entitlement programmes was set to increase from a combined 10 per cent of gross domestic product at present to 16 per cent of GDP in 2035 on the back of America’s ageing population. The CBO noted that this increase in spending would occur in spite of the passage of healthcare reform legislation this year, which is projected to shrink the deficit over the next two decades.
Douglas Elmendorf, CBO director, said that, under a relatively optimistic scenario that involved little changes to current law, US debt would rise from 62 per cent of GDP this year to about 80 per cent of GDP in 2035. But under an alternative scenario, in which several changes were made by lawmakers, including the extension of tax cuts pushed through under George W. Bush, the former president, US debt could hit 185 per cent of GDP by 2035.
In addition, he said that the CBO projections might “understate the severity” of high debt levels over the long term, since it could lead to higher interest rates and slower growth. Mr Elmendorf appealed for quick action to address the budget crisis, even if this could slow the economic recovery. “The sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt,” he said.
Mr Elmendorf presented his conclusions at a hearing before the National Commission on Fiscal Responsibility and Reform, which was set up by Barack Obama, US president, in February to search for ways to bring down the deficit, and is expected to report on its findings in December. Mr Obama and Democratic lawmakers on Capitol Hill are faced with the tough task of balancing the need for more stimulus to revive the sluggish economic recovery and growing concerns about the country’s fiscal position, which would require a meaningful retrenchment.
In addition, the Republican minority is seeking to use increasing popular concern about the deficit to their advantage in the midterm congressional elections in November. Peter Orszag, director of the White House office of management and budget and a key participant in formulating the administration’s fiscal policy, will be leaving his post this summer, passing the delicate task to a yet unnamed successor.
Mr Orszag, a former CBO director, said on Wednesday there was “no ambiguity” that the US was on an “unsustainable fiscal course”. He added: “The key fiscal question is how we will build on the deficit reduction embodied in the [healthcare] legislation – both in terms of making sure it is realised and also in terms of moving forward with other efforts to reduce long-term deficits further. The administration is strongly committed to addressing this challenge.”
U.S. May pending home sales plunge 30%
by Corbett B. Daly - Reuters
Contracts for pending sales of previously owned homes plunged a record 30 percent in May, far more than expected, after a popular tax credit expired at the end of the prior month, a survey from the National Association of Realtors showed on Thursday. The Realtors said its Pending Home Sales Index, based on contracts signed in May, fell to a record low 77.6 from 110.9 in April. Economists polled by Reuters had expected a smaller decline of 12.5 percent in May.
"Consumers are rational and they rushed to meet the tax credit eligibility deadline in April. The sharp decline in contract signings in May is a natural result with similar low levels of sales activity anticipated in June," said NAR chief economist Lawrence Yun. First-time home buyers who had signed a contract before the end of April are eligible to receive $8,000 from the government. Buyers who are selling a home and buying a new home are eligible for $6,500.
The index is 15.9 percent lower than May 2009 and fell sharply in all regions of the country. Contracts fell 33.3 percent in the South, the country's largest region, and dropped 20.9 percent in the West. Contracts dropped 31.6 percent in the Northeast and fell 32.1 percent in the Midwest.
Let Bad Banks Go Broke: Howard Davidowitz's Simple Solution to Complex Problems
by Peter Gorenstein - Yahoo
Howard Davidowitz is a bear on America. If you’ve watched any of the recent clips, you know he’s negative on stocks, the economy and the political system. Much of Davidowitz's frustrations stem from the bailout of our financial system. "If a bank is bad, you let it go broke," he says. "The bondholders lose their money, because they should. The stockholders lose their money, because they should. Lots of people get fired job, because they should. That’s the solution to the problem."
In the 1980s, Davidowitz's firm worked on the restructuring of then struggling retailer Toys “R” Us. "We kept the good, we cut the bad. That’s how restructuring works," he says. The national retail chain was cut down to 13 stores, but was kept alive. Today, the company is preparing for an IPO, five years after private equity giant KKR purchased the company for $6.6 billion.
Again, Davidowitz believes the same measures should have been taken with the banks. Sure, bankruptcy is a painful solution in the short-term, but he believes the government's rescue of some of our biggest financial institutions has had, and will continue to have, catastrophic economic consequences. As economist and Carnegie Mellon professor Allan Meltzer once said: "Capitalism without failure is like religion without sin." Howard couldn’t agree more.
Cash calls expected as Europe’s banks face stress tests
by Patrick Jenkins and Daniel Schäfer - Financial Times
Bankers and analysts expect up to 20 of Europe’s banks to be forced into cash calls as a result of this month’s stress tests, raising up to €30bn ($37.3bn) of fresh equity. One senior European banker said that even in the event of mild stress the capital shortfall would approach that level. “We are urging clients to come early to market,” he said. Another investment bank chief said not only the weakest should seek to recapitalise. “The top three or four banks in Europe should be thinking: ‘How do I make myself bullet-proof?’”
The views reflect a persistent nervousness about the outlook for European banks amid continuing jitters over eurozone sovereign debt. The news came as it emerged that Axel Weber, head of Germany’s Bundesbank, told banks at a meeting on Wednesday that they should prepare emergency capital-raising plans in case they fail the stress tests. Mr Weber told the chief executives of 16 German banks they might need to recapitalise “either with the help of their owners or with the help of the German bank rescue fund”, according to one bank executive present at the meeting. “In effect, this will lead to forced recapitalisations of such banks,” the banker said.
The eight Landesbanken, or state-owned regional wholesale banks are seen as particularly vulnerable, with up to four at risk of failing the tests, according to one German banker. A Bundesbank spokesman declined to comment. Publication of the Europe-wide tests has been delayed a week to July 23, according to the banker at the Bundesbank meeting.
In recent days, the scope of the testing has expanded from 26 banks to about 100, and measures have been added on the disclosure of sovereign debt holdings. The tier one capital hurdle to pass the test has been lifted from 4 per cent in last year’s test to 6 per cent, to make the exercise as credible as the US test last year which appeared to restore market faith in US banks. About two-thirds of the forecast €30bn Europe-wide capital-raising is expected to be focused on the public sector banks, with the remaining €10bn spread across private sector institutions in the more troubled eurozone economies.
Bankers singled out the likes of Monte dei Paschi and Banca Popolare di Milano in Italy, Spain’s Banco Popular and Greek, Portuguese and Irish banks as the most likely candidates to be pushed into capital raisings. But investors worry most about the state of Spain’s public sector savings banks, or cajas. Although they are unlisted they could put Spanish government debt under more pressure if the state bail-out is more extreme than expected. Spain has embarked on a process of forced mergers to bolster the most troubled cajas, and has so far earmarked €12bn of state funds in fresh capital for the sector. Bank of Spain regulators believe only about €3bn more will be needed to shore up cajas following the stress tests.
Schwarzenegger orders California state workers’ pay cut to minimum wage
by CNN Staff
As many as 200,000 state workers in California could see their pay scale slashed to minimum wage, if orders from the governor's office are followed. In a letter to the state controller Thursday, Gov. Arnold Schwarzenegger's administration ordered the department to reduce the payment of state workers to the hourly rate of $7.25 unless a budget is reached soon.
"These are preparations for the prospect of not having a budget passed this month," said Lynelle Jolley with the California Department of Personnel Administration. Without a budget, the July payroll, sent to go out the end of the month, would be cut, she said. "This is not a scare tactic," she said. "This is based on a very real legal requirement." The legal requirement was ordered in 2003, when the California Supreme Court ruled that the state controller had no legal authority to pay wages in the absence of a budget. "His role is to process the payroll that we give him," Jolley said. But the state controller disagreed.
"I will not be following the governor's orders," John Chiang told CNN Radio, calling the governor's actions dangerous. "I don't understand why we would continue to impose greater hardships upon the good workers here in California and delay the economic recovery that needs to take place as soon as possible. "It's my responsibility to protect the state's pocketbook," Chiang said, "and even though the governor is trying to fix a budget, he understands that he had that opportunity, he still has that opportunity, and he should not put people in harm's way."
Chiang said he is willing to work with the governor to come up with a better solution. The wage cut directive would not affect state employees who already have a contract, Jolley said. "Thirty-seven thousand employees are under a contract that protects them, and the state is currently in negotiations with its largest state employee union, the Service Employees International Union," she said. That union has as many as 95,000 workers, she said. If the governor's order is followed, the pay cut would take effect this month, according to Jolley. The workers will get their missed wages once a budget is enacted, she said.
Illinois Governor Pat Quinn outlines cuts to state services
by Kurt Erickson - H&R
Unable to convince lawmakers to go along with his push to raise income and cigarette taxes, Gov. Pat Quinn announced plans to cut $1.4 billion in state spending Thursday. Taking the brunt of the cuts are programs serving the physically and mentally disabled. There were no announced layoffs, but the state workforce will drop by about 1,000 employees by not replacing workers who leave the public sector.
"This hasn't been easy, but it has been necessary," said Quinn, who is trying to balance an underfunded budget as he seeks a full term as governor in November. The governor tried to sound a positive note on the first day of the state's fiscal year, pointing to unemployment figures that showed a slight uptick last month. "We're on the road to economic recovery but we have a long, long way to go," Quinn said during a lengthy press event in Chicago.
In May, lawmakers sent the Chicago Democrat a budget plan granting him wide power to manage state spending. He signed off on most of the plan Thursday, but used his veto pen to cut about $509 million out of various agency budgets. The biggest chunk is a $312 million reduction to the Department of Human Services. Mental health care services offered on an outpatient basis will be reduced or eliminated, as will certain services to disabled residents that don't receive federal matching dollars.
"There are some vulnerable people whose services will be cut," said DHS chief Michelle Saddler. Quinn said he tried to avoid cutting money for general education expenses and public safety programs. He said lawmakers concerned about voting for a tax hike to help close a $13 billion budget gap might change their minds after watching the election returns in November. "After the election I think some of them may be more willing to take a look at the issue," Quinn said.
General state aid to school districts is essentially the same as last year, but $241 million was cut from a variety of grant programs. Money for student transportation and reading programs was reduced by more than $150 million. "We were able to minimize cuts to our budget," said Illinois State Board of Education Chairman Jesse Ruiz. State universities will see an overall cut of $96 million, which essentially reflects the absence of federal stimulus dollars this coming year.
Unlike former Gov. Rod Blagojevich, Quinn did not target the prison system for cuts. Rather than threaten to lay off workers or close prisons, Quinn hopes to save $42 million by managing overtime costs. "I wanted to preserve as many jobs as possible," Quinn said. The governor said he would pay the state's employee pension obligation, which amounts to $4 billion this year. The monthly cost of that will mean other government services will be pinched. The Illinois State Police will see a $15.4 million reduction, but Quinn has backed off his earlier threat to shutter district headquarters.
The Illinois Department of Public Health will see a $17 million cut. Among programs on the chopping block are a prostate cancer awareness initiative and rural health grants. Quinn also issued an executive order aimed at cutting costs for everything from in-state travel to magazine subscriptions. The plan does little to address a huge backlog of unpaid bills to universities, vendors and school districts.
He signed off on a plan to extend the time the state has to pay down the $4.5 billion backlog from September to December, meaning those who are waiting for checks can expect a long wait. "I want to say to all who are owed money. you will be paid," Quinn said. In order to manage the budget, Quinn plans to dip into special state funds to the tune of about $1 billion. He also will use the proceeds of a national tobacco settlement to help keep the state afloat.
Expired Unemployment Benefits Causing Panic, Desperation: 'I'm Drowning Fast'
by Laura Bassett - Huffington Post
Debra Rousey of Gainesville, Georgia, says that she received an unemployment check of $194 last week, half the usual amount she receives, along with a letter announcing that this check would be her last. She is now in a complete panic over what to do next. "I'm desperate and devastated," she told HuffPost. "I didn't get any warning. I was barely making ends meet on $330 a week, trying to diaper my grandchild and put food on the table for the four people I support. What do I do now? How am I going to make rent next month? I keep thinking, 'If I end up in a cardboard box, can I find one big enough for everybody, or do I have to send my son to live with someone else?'"
Since Rousey, 45, was laid off from her job as a branch manager for Suntrust bank in November, she says she has been "frantically looking" for a job -- everything from entry-level marketing positions to a fry cook job at McDonalds -- but hasn't had an interview in months. As of tomorrow, she will be one of nearly 1.7 million people whose unemployment benefits have prematurely expired while Congress sits on legislation that would renew those benefits.
"I hate being on unemployment," Rousey said. "I haven't applied for food stamps or Medicaid for myself because I have a work ethic that says if I want to eat, I want to work to eat. I don't want a handout. But right now I'm at the breaking point. If I don't come up with cash quick, everything will be cut off within two weeks -- gas, electric, water. Five people will be displaced. How am I supposed to come up with the money?"
Rousey is currently pursuing a master's degree in adult education through an online program, and her son, 17, and her 25-year-old daughter are also full-time students. She said all three of them are desperate for work. "I have put in at least 5 resumés a day since November," she said. "It's not like I'm not employable. I have a bachelor's degrees in business, an associate's degree in marketing, and 25 years of office management experience. But I can't even get McDonald's to call me back for an interview."
If her unemployment benefits are not renewed soon, Rousey says she will have no way to pay rent or put food on the table. The House passed a bill on Thursday that would extend unemployment benefits for those who have been unemployed longer than six months, but the bill is moving slowly in the Senate. Rousey said she she's not holding her breath for help from the government. "They cut off my Internet and cable about five minutes ago, and my landlord is already calling," she said. "I don't have time to wait for Congress to extend these benefits. I'm drowning fast."
Rep. Jim McDermott: Unemployment Standoff 'A Class Warfare Issue'
by Arthur Delaney - Huffington Post
The House of Representatives approved a bill to reauthorize expired unemployment benefits for the long-term jobless on Thursday, after a similar measure failed for the fourth time in the Senate the previous night due to a Republican filibuster. The House measure, sponsored by Reps. Jim McDermott (D-Wash.) and Sander Levin (D-Mich.), is essentially moot until the Senate is able to pass a bill of its own, which, because of the Independence Day recess, won't happen until July 12 at the earliest. The Republican party, along with Nebraska Democrat Ben Nelson, is objecting to the bill because it would add $33 billion to the federal budget deficit.
The plight of today's long-term unemployed -- 1.2 million of whom have already missed checks because of the Senate's inability to pass this legislation since the end of May -- is less compelling, Republicans argue, than the plight of future generations dealing with a massive public debt burden. "It's a class warfare issue," said McDermott in an interview with HuffPost after the House vote. McDermott, chairman of the Ways and Means Income Security and Family Support Subcommittee, lamented the fact that congressional deficit hawks squawked little during two wars and when Congress authorized a $700 billion bailout of the financial industry.
"Wall Street is saying to them, 'These deficits, they're making problems, we need to get this deficit down,'" McDermott said. "So the very people who took the money and were stabilized because we created deficits are now turning around and biting the hand that feeds them, that is, the taxpayers. It's unconscionable." House Speaker Nancy Pelosi (D-Calif.) told HuffPost last week that there is a debate within the caucus over whether, for the first time in history, to use tax hikes or spending cuts to offset the cost of federally-funded extended unemployment benefits, which have routinely been put in place as emergency spending to protect the economy during periods of recession. Republicans have offered several alternative bills to pay for unemployment benefits by cutting other programs.
McDermott said, essentially, that caving to such demands would be caving to an assault on the New Deal. "The Social Security Act of 1935 made these entitlements, Social Security and unemployment insurance and welfare," he said. "The Republicans have been after all three of those programs ever since 1935. They got welfare a few years ago, because that's poor people. They could jump on them. But unemployment and Social Security is middle-class people -- they haven't been able to get them, but it isn't because they're not willing to try." It would start with offsetting the cost of benefits for the first time: "If you say that you can't feed people because you don't have the money right now, that is a real new precedent."
Offsetting benefits would be an unprecedented step, and so too would letting them lapse for good. According to the National Employment Law Project, since the 1950s Congress has not allowed extended jobless aid to expire when the national unemployment rate is above 7.2 percent. In 1973, extended benefits remained in place until unemployment sank to 5 percent. The current national rate is 9.7 percent, and it's not expected to go down in Friday's jobs report for the month of June.
McDermott echoed other Democrats who've said the Republicans will benefit politically if they can stop the legislation (Sen. Debbie Stabenow said last week the GOP wants to "create as much pain as possible" to foster anti-incumbency in November). "It's all about making the Democrats look weak, therefore we can take back the House, we can take back the Senate, and we'll also take back the presidency, because we've made the Democrats look weak," he said. "It has nothing to do with deficits. They don't care about deficits."
Hedge-Fund Lending Draws Scrutiny
by Gregory Zuckerman - Wall Street Journal
Companies that borrow money from hedge funds often see a sharp rise in bets against their shares before the loans or loan amendments are announced, new research shows, suggesting that fund managers or others privy to these deals may be illegally trading ahead of the announcements. The sharp spike contrasts with little change in the short selling of companies that borrow money from banks, according to the research.
"Hedge fund lenders, like banks, are 'quasi-insiders' and thus privy to private information about the performance of borrowing firms," the authors write. "However, hedge funds are not subject to the same degree of oversight and regulation as banks." The paper, by four academics and accepted for coming publication in the Journal of Financial Economics, tracks the trading of 105 U.S. companies that borrowed money from hedge funds between January 2005 and July 2007—a period when regulators began demanding more information about short selling.
The academics found that the average company receiving a new loan from hedge funds saw a 74.8% spike in the volume of short sales during the five days preceding announcement of the new loan, as compared with the volume of short selling 60 days before the deal. By contrast, 255 similar companies turning to banks for loans saw little change in the volume of short selling during the five days prior to the announcement of new loans. Short selling also jumped 28.4% before the announcements of amendments to existing loans from hedge funds, compared with a drop of 17.4% in short selling before the announcements of amendments for bank loans.
Short selling after a loan is announced might be expected, as investors and lenders hedge their exposure or bet against a company taking on debt at a high rate. But when it jumps before the announcement of a loan, the activity raises questions about whether the very firms lending money are using nonpublic information to trade against their borrowers, or whether information is leaking out to others. The paper's authors say regulators should investigate the area.
"It's impossible to know if it's hedge funds that are doing the shorting, but our study raises important questions about regulating hedge funds when they make loans," says Debarshi Nandy at York University's Schulich School of Business in Toronto, one of the co-authors of the paper. The other researchers are Nadia Massoud and Keke Song, both also at York, and Anthony Saunders, at New York University's Stern School of Business.
While the Securities and Exchange Commission has pursued insider-trading inquiries involving hedge funds, there haven't been many high-profile cases alleging that hedge funds use inside information obtained from their lending efforts. An SEC spokesman wouldn't comment on any enforcement interest but noted that the SEC's division of risk, strategy and financial innovation, established last year, is examining the area.
Meanwhile, another research paper, by Victoria Ivashina of Harvard Business School and Zheng Sun of University of Calfornia, Irvine, finds outperformance by institutional investors, including hedge funds, that have negotiated loan amendments with borrowers and also hold the borrowers' shares. Ms. Ivashina says some investors seem to be profiting by using information obtained during the amendment negotiation, before the amendment is announced.
The study about the short selling compared "syndicated" loans, or those made by a group of investors, led by hedge funds, with loans made by banks. The average company in the study borrowing money from a hedge fund had a book value of $1.1 billion; the average company turning to a bank had a book value of $640 million. The academics say they adjusted for size, industry and other factors to come up with their conclusions.
Hedge funds that consider lending to companies usually sign nondisclosure agreements before examining confidential financial information, hedge-fund executives say, though sometimes they receive an exception that allows them to continue trading. A fund that signs a confidentiality agreement and shorts shares before the announcement of a loan could violate insider-trading laws, says Arthur Laby, associate professor at Rutgers University.
Why might a hedge fund bet against shares of a company while also lending it money? Traders say a fund might seek short-term gains from a potential tumble when word emerges that a company has turned to hedge funds for a high-rate loan, even if the fund is comfortable extending a loan because the company is likely to survive over the long haul. It also could be that some hedge funds are offered the chance to lend to a company, turn down the opportunity and then short the company's shares. Bankers also can be privy to information, as well as company insiders.
It isn't clear if today's market circumstances lend themselves to questionable trading activity. Higher-quality companies have turned to hedge funds to borrow money over the past two years, as bank lending shrank, giving funds less reason to short the shares. Lending was a hot business for funds during the economic expansion. They often focused on companies with heavy debts. This business came under pressure in 2008. Still, dozens of hedge funds lend hundreds of millions of dollars a year to various companies, industry specialists say. Some funds are raising money to make new loans, partly because banks remain reluctant to lend.
Fed Made Taxpayers Unwitting Junk-Bond Buyers
by Caroline Salas, Craig Torres and Shannon D. Harrington - Bloomberg
Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money.
The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.
By using its balance sheet to protect an investment bank against failure, the Fed took on the most credit risk in its 96- year history and increased the chance that Americans would be on the hook for billions of dollars as the central bank began insuring Wall Street firms against collapse. The Fed’s secrecy spurred legislation that will require government audits of the Fed bailouts and force the central bank to reveal recipients of emergency credit.
“Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact,” Senator Sherrod Brown, an Ohio Democrat and member of the Senate Banking Committee, said in an e-mail when informed about the credit quality of holdings in the Maiden Lane LLC portfolio. The committee held the April 3 hearing.
Bear Stearns Purchase
Maiden Lane, named for a street bordering the New York Fed’s Manhattan headquarters, was created to hold the assets the central bank acquired to facilitate JPMorgan Chase & Co.’s purchase of Bear Stearns. The Fed disclosed the Maiden Lane holdings in March after Bloomberg News went to court using the Freedom of Information Act, and the U.S. District Court in New York held that the Fed should release documents related to Bloomberg’s request.
“The Federal Reserve was not straightforward with the American people regarding the risks they were taking with taxpayer money, despite my efforts to obtain such clarity at the time,” U.S. Senator Richard Shelby of Alabama, the Senate Banking Committee’s top Republican, told Bloomberg News. “It is apparent that the Fed withheld from the Congress and the public material information about the condition of these securities.”
Downgraded to Junk
When Bernanke and Geithner testified in April 2008, $42 million of the CDO securities the Fed would eventually buy had been downgraded to junk, data compiled by Bloomberg show. By the time the central bank funded its $28.8 billion loan to Maiden Lane 12 weeks later, about $172 million of such securities the Fed purchased were rated below investment grade, according to data compiled for Bloomberg by Red Pine Advisors LLC, a New York firm specializing in the valuation of complex, illiquid securities.
CDOs bundle assets ranging from mortgage bonds to high- yield loans and divide them into new slices, or tranches, of varying risks. High-yield, or junk, bonds are those rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. “As was noted in testimony, all of the cash securities in the Maiden Lane portfolio were investment grade on March 14, 2008, when the deal was agreed to in order to facilitate the acquisition of Bear Stearns and to prevent the systemic consequences of its sudden and disorderly failure,” Michelle Smith, a spokeswoman for the Fed’s Board of Governors, said in an e-mail.
“The Federal Reserve considered not just credit-rating valuations, which have varied some over time based on economic conditions, but also relied on a separate assessment from an independent investment firm, which advised us that over time, we would likely fully recover our principal and interest,” Smith said. “We continue to expect the loan to Maiden Lane to be fully repaid.” The Fed valued the loan at $27 billion as of the end of last year, $1.8 billion below the amount that was funded in 2008, according to financial statements audited by Deloitte & Touche LLP. More than 88 percent of Maiden Lane’s CDO bonds and 78 percent of its non-agency residential mortgage-backed debt are now speculative grade, according to data compiled by Bloomberg based on holdings as of Jan. 29.
The nonagency home-loan bonds and CDO securities made up about 44 percent of the $74.9 billion in face amount of Maiden Lane’s assets, Fed data show. Maiden Lane also contains commercial real-estate loans and other mortgage debt. The central bank hasn’t released how or at what prices it has valued the securities and derivatives, which are contracts whose values are tied to assets, including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather. Being “investment grade” was a requirement for Maiden Lane’s bonds even after Bernanke and Geithner publicly criticized inflated ratings for helping to cause the financial crisis.
“The complexity of structured credit products, as well as the difficulty of determining the values of some of the underlying assets, led many investors to rely heavily on the evaluations of these products by credit-rating agencies,” Bernanke said in a January 10, 2008, speech in Washington. “However, as subprime-mortgage losses rose to levels that threatened even highly rated tranches, investors began to question the reliability of the credit ratings and became increasingly unwilling to hold these products.”
Members of Congress pressed Bernanke, who received a doctorate in economics from the Massachusetts Institute of Technology and served as chairman of Princeton University’s economics department, and Geithner, a Dartmouth College graduate who earned a master’s degree in economics and East Asian studies from Johns Hopkins University, about the quality of the assets during the April Bear Stearns hearings.
“You’ve got about $30 billion of collateral. And some comments have been made that you feel comfortable because it’s highly rated,” Senator Jack Reed, a Rhode Island Democrat, told Bernanke, according to a transcript. “But a lot of highly rated collateral these days is being subject to questions.” “Senator, as was mentioned, it is all investment-grade or current performing assets,” Bernanke responded. “We do not know for sure what will transpire,” he said. “But we have engaged an independent investment-advisory firm who gives us reasonable comfort that if we can sell these assets over a period of time that we will recover principal and interest for the American taxpayer.”
Chances for Loss
When asked by Shelby during the hearing what the chances were for a loss, Robert Steel, then the U.S. Treasury undersecretary for domestic finance, said the transaction “was $30 billion, approximately, of collateral, all investment-grade securities, all of them current in interest and principal.” Steel, who was named deputy mayor for economic development last month by New York City Mayor Michael Bloomberg, declined to comment through Andrew Brent, a spokesman for the mayor’s office. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.
Bernanke and Geithner didn’t detail during the hearing that the Fed would expose itself to below-investment-grade assets through credit derivatives it was also acquiring. The $16 billion of credit-default swaps included bets protecting some junk-rated asset-backed securities against default, according to two people familiar with the agreement who declined to be identified because the terms weren’t made public.
The Fed hasn’t disclosed how much was tied to below- investment-grade debt. Geithner, who is now Treasury secretary, said in an addendum to the text of his remarks only that the Fed was assuming “related hedges,” without elaborating. Credit-default swaps are used to hedge against losses or to speculate on creditworthiness. The derivatives pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
“I strongly object to the mischaracterization of the portfolio,” Sylvain Raynes, a principal at R&R Consulting in New York, said in an interview. “The ratings that were purportedly investment-grade had long lost their utility” and to call several billion dollars of derivatives “related hedges” is “nonsense” and a “material omission.” So-called hedges aren’t without risk, said Raynes, who is also co-author of “Elements of Structured Finance,” which was published in May by Oxford University Press. “You can be on the wrong side of a hedge, by definition. Which side are they on?”
Maiden Lane has been unwinding its credit-default swaps, according to the people familiar with the agreement. The holdings shrank to a face amount of $11.8 billion in December 2008 and $7.3 billion at the end of last year, according to its financial statements. Of the $7.3 billion, $2.45 billion were contracts guaranteeing debt against default, including $2.1 billion of junk-rated securities. The bank valued the credit swaps it sold at a $1.8 billion loss, according to the 2009 statement.
Overall, Maiden Lane assumed more bets against securities than for them, the people familiar with the agreement said. The market value of its entire swaps book, including more than $3 billion of interest-rate contracts, was $1.13 billion as of Dec. 31, 2009, according to year-end financial statements. The Senate Banking Committee also called JPMorgan Chief Executive Officer Jamie Dimon to testify on the Bear Stearns deal on April 3, 2008.
Riskier, More Complex
“The assets taken by the Fed consist entirely of loans that are current and rated investment grade,” Dimon said, according to a transcript. “We kept the riskier and more complex securities in the Bear Stearns portfolio for our own account. We did not cherry-pick the assets in the collateral pool.” If the Fed hadn’t engineered the takeover, “the consequences could have been disastrous,” Dimon said. JPMorgan didn’t pick the individual securities for Maiden Lane, Geithner said in an annex to his April 2008 testimony. Instead, it selected groups of assets that met criteria set by the central bank, and the Fed and its adviser, New York-based BlackRock Inc., reviewed those assets, according to one of the people familiar with the agreement. As part of the bailout, JPMorgan agreed to absorb the first $1 billion in losses.
JPMorgan had to weigh how many real-estate assets it could absorb against its existing inventory, Dimon said, adding that the New York-based company acquired about $360 billion of Bear Stearns assets and liabilities in the transaction. JPMorgan spokesman Justin Perras declined to comment further on Maiden Lane. “We certainly had doubts at the time: Why wouldn’t JPMorgan want a bunch of AAA assets?” said Mark Calabria, a former Senate Banking Committee staff member who was present at the April 2008 hearings and is now director of financial- regulation studies at the Cato Institute in Washington. “The answer is it was all borderline junk.”
The average CDO security was cut 7.6 grades by Moody’s and 7.3 levels by S&P in the 22 months between the time the Fed funded the loan and April 2010, according to Red Pine. “That is quite steep,” said Wade Vandegrift, a Red Pine partner. “The default rates and the delinquency rates of these deals were a significant multiple of even the worst-case projections that rating agencies and other people projected.”
WaMu Asset-Backed Certificates Series 2007-HE1 M2, a $4.1 million mortgage-bond position the Fed acquired, was backed by home loans originated by the subprime-lending unit of Washington Mutual Inc., the Seattle-based thrift that went bankrupt in September 2008. As of March 2008, the month Bear Stearns collapsed, more than 26 percent of the loans were at least 60 days late, in foreclosure or the properties had already been seized, according to data compiled by Bloomberg.
Three weeks after the Fed agreed to the Bear Stearns rescue and four days after Bernanke’s April testimony, Moody’s cut the security to junk. S&P followed a month later and now rates it D. “It is hardly surprising or particularly newsworthy that the value of” the Maiden Lane “portfolio deteriorated in the midst of the worst financial crisis in generations, but it is unlikely that the taxpayers will lose a dime on the government’s loan,” Treasury spokesman Andrew Williams said in an e-mail. The Congressional Budget Office estimates the Fed will make $200 million on Maiden Lane from inception through 2020.
Billions of dollars in Fed loans -- some possibly involving subsidies for the biggest banks and corporations -- remain secret, and Congress is demanding more accountability from the Fed than at any time in its history. House and Senate negotiators agreed on the sweeping Dodd- Frank Wall Street Reform and Consumer Protection Act last week, which requires the Government Accountability Office to audit the Fed’s emergency loans and forces the Fed to reveal recipients of such credit by Dec. 1. The House approved the measure 237-192 yesterday. It awaits approval by the Senate and will then go to President Barack Obama for his signature.
Vermont Senator Bernard Sanders wrote the legislation requiring an audit of Maiden Lane and other credit facilities. The act also would make it more difficult for the Fed to provide emergency loans in the future. “We need to lift the veil of secrecy at the Federal Reserve,” Sanders, an independent, told Bloomberg News when informed about the credit quality of Maiden Lane’s holdings. “We need a complete and independent audit. The American people have a right to know what the Fed is doing with trillions of their taxpayer dollars.”
Financial Crisis Commission Turns Up Heat On Goldman Sachs: 'Nobody Here Believes You'
by Shahien Nasiripour - Huffington Post
The panel created to investigate the roots of the financial crisis escalated the government's assault on Goldman Sachs on Thursday, criticizing the Wall Street firm for failing to turn over basic documents and accusing it nearly lying under oath. For a second consecutive day, the bipartisan Financial Crisis Inquiry Commission reiterated its request for additional data from Goldman, namely figures regarding the firm's derivatives activities. And for a second consecutive day, Goldman's top executives demurred. "We generally do not have a derivatives business," David Viniar, Goldman's chief financial officer, told the panel Thursday under oath.
Goldman Sachs holds more than $49 trillion in notional derivatives contracts, making it the third-largest derivatives dealer among U.S. banks, according to first quarter figures from national bank regulator the Office of the Comptroller of the Currency. The commission has found that Goldman is a party to more than 1 million different derivatives contracts, Commissioner Brooksley Born disclosed Thursday. "We don't separate out derivatives and cash businesses," Viniar clarified under questioning. The derivatives units are "integrated" into the firm's cash businesses, making it difficult for the firm to isolate its derivatives data, he said.
In January, the panel asked Goldman chairman and chief executive Lloyd C. Blankfein for a breakdown of the firm's revenues and profits from its derivatives activities. He said the firm would comply. The commission reiterated that request Wednesday and Thursday. Viniar said the firm doesn't "keep" records outlining its revenues from its derivatives dealing. "I am very skeptical that you can't measure these revenues and profits," Born told Viniar. "I urge you to provide us with this information. It's been about six months we've been asking for it... and it makes one wonder also why Goldman has the incentive or impetus not to reveal this information.
"You're suggesting you don't give it to your regulators. You don't put it in your financial reports... so you don't give it to the market... [or to your counterparties]," Born continued. "And you're refusing to give it to us. I hope very much that we will see this very shortly." Viniar took exception to that last comment. "Commissioner, again, we're not refusing anything," Goldman's chief financial officer said. "We don't have a separate derivatives business."
Viniar then said that Goldman isn't alone in not breaking out its derivatives-specific revenues and profits. Born quickly shot back. "They don't," Born, the nation's former top derivatives regulator, conceded. "But some other firms have provided us with that data when we've asked for it, and Goldman Sachs hasn't." Phil Angelides, the panel's chairman, could barely contain his incredulousness.
"Are you telling me you have no system at your company that tracks revenues or assets of contracts, and liabilities and payments under contracts?" Angelides asked. "You have no management reports, no financial reports that track these contracts?" "I've never seen one," Viniar responded. Pressed further, Viniar added that the firm doesn't track these things because it's "not meaningful." Viniar again was asked to provide the data.
Later on, Byron Georgiou, another commissioner, reiterated the panel's request for information pertaining to Goldman's contracts with AIG. Goldman "aggressively" demanded increasing amounts of collateral from the insurer beginning in 2007 to cover what it perceived as the deteriorating value of those contracts' underlying securities, Angelides said. Goldman may have marked those securities at a lower value than what it marked comparable securities for its own clients. In other words, it may have undervalued securities from AIG in order to get more cash while overvaluing them when dealing with other counterparties in order to hold on to its own cash.
The panel has asked for that data. Goldman has not handed it over. "When you tell us that you don't know how much you make in your derivatives business, nobody here really believes it," Georgiou said. "It's crazy. It doesn't make any sense. Goldman Sachs is, if not the most sophisticated investment bank, certainly one of the most sophisticated investment banks in the world -- and nobody here believes you don't know how much money you're making on various aspects of your business. It doesn't make any sense."
Georgiou then asked for a specific breakdown of what Goldman paid AIG to insure specific securities, and what Goldman charged its own clients for the same protection. That insurance came in the form of credit default swaps, which are derivative contracts that act like insurance against default. Georgiou wants to know the premium, if any, Goldman received. It's not the first time the panel has asked for this information. Viniar said he'd provide the data.
Self-fulfilling prophecy? Panel pushes Goldman on AIG collapse
by Greg Gordon - McClatchy Newspapers
Goldman Sachs executives first threatened to stop making exotic trades with the American International Group in July 2007 unless the insurance giant posted $1.8 billion in cash collateral to compensate for a slide in the mortgage securities market, internal AIG e-mails show. When AIG refused to meet its demands, Goldman began betting hundreds of millions of dollars on the insurer's collapse, ramping up those wagers to $3.2 billion over the next 10 months in a strategy that put AIG under huge financial pressure, a congressional commission found.
While Goldman executives defended those tactics in testimony to the Financial Crisis Inquiry Commission Thursday, panel members took turns publicly pushing the embattled investment bank to fully disclose dealings that brought it hefty profits and might have helped force a $162 billion taxpayer bailout of AIG. A central issue surrounding Goldman, panel Chairman Phil Angelides said, was whether the Wall Street titan turned the screws so tightly on AIG that it created a "self-fulfilling prophecy," forcing the insurer into a massive cash squeeze.
The commission, appointed by Congress to ferret out the root causes of the worst financial crisis since the Great Depression, was mostly docile in January in taking sworn testimony from Goldman chief executive Lloyd Blankfein. However, with four Goldman executives and six present and former AIG officials under oath over two days this week, several panel members turned skeptical and confrontational in asking about AIG's management failures and Goldman's wagers against the housing market that drained the world's largest insurer of more than $15 billion.
The panel also heard from present and former state and federal officials also described gaping regulatory holes that allowed a London-based unit of AIG to build a $2.7 trillion book of exotic trades with little reserve capital, all but forcing the taxpayer bailout of the insurer to avoid systemic chaos.
David Viniar, Goldman's chief financial officer, told the panel that Goldman behaved toward AIG as it always does with insurance-like contracts known as credit-default swaps. When the housing market began to sour in the summer of 2007, he said, Goldman "tightly managed" contract provisions requiring AIG to post collateral to compensate for drops in the securities' value. "We're pretty passionate about fair value accounting," Viniar said. " . . . We have 1,000 people in our controller's department. Probably half of them spend their time trying to verify marks," or securities' valuations.
In a lesson in how steel-knuckled Wall Street executives duke it out in high-stakes deals, commission investigators pieced together a chronology of Goldman's negotiations with AIG. Even in July 2007, the market for mortgage securities had begun to freeze, leaving few trades on which to gauge the market value of securities in the AIG deals. Nonetheless, on July 27, Goldman jolted AIG with a demand for $1.8 billion in collateral, simultaneously making its first purchase of swaps that would pay $100 million if AIG went bankrupt.
The moves led to a series of tense exchanges over the ensuing days. After a conference call on Aug. 1, Tom Athan of AIG's Financial Products unit e-mailed Andrew Forster, a former AIG senior vice president for financial services, that Goldman had warned that AIG must honor the contract or it wouldn't do similar deals in the future. Goldman executives promised to set a mid-market valuation of the securities to determine collateral requirements, AIG executives wrote, but that Goldman posed "a very credible threat" because it could influence market valuations.
For example, Athan wrote on Aug. 8, 2007, if Goldman asked rival Merrill Lynch to submit bids on 100 mortgage-backed bonds similar to those that AIG was insuring and prices them at 80 cents of face value, dealers could use the bid to set market prices. By Aug. 10, investigators wrote, Goldman had bought $575 million in swaps that would pay off if AIG defaulted. AIG ultimately posted $450 million in response to Goldman's demands, but that was just round one.
On Aug. 16, Forster wrote that he'd heard rumors that Goldman was "marking down asset types that they don't own so as to cause maximum pain to their competitors." The two companies haggled over the next year, as Goldman's collateral demands mounted and its swap "protection" reached $3.2 billion. Viniar told the commission that Goldman was primarily an "intermediary" buying swaps with AIG after selling similar credit insurance to investors. When AIG posted collateral, he said, Goldman posted the same amounts in cash with investors.
However, Commissioner Byron Georgiou pressed Goldman executives about a McClatchy story published Tuesday describing Goldman making proprietary trades — wagers with its own money — on so-called bets with AIG in which neither party actually bought any mortgage securities. When Viniar said he knew nothing about it, Angelides and Vice Chairman Bill Thomas told Viniar that the commission wants records of all such trades. The commission, which recently subpoenaed documents from Goldman, wasn't through with its demands for information.
Georgiou asked Viniar to identify the companies that sold Goldman coverage on an AIG collapse, saying he was "incredulous" that other financial institutions could cover such huge bets if AIG couldn't during the meltdown of 2008. "I do not know the specific names of the parties," Viniar said, but added that the bets "were predominantly with other major financial institutions." In addition, Georgiou noted that Goldman likely sold swaps for higher fees than the typically modest amounts it paid to AIG, saying that Goldman's $2.1 million in fees for $1.76 billion in coverage in a 2004 deal amounted to 0.12 percent. He asked Goldman to provide details of all fees it charged clients for whom it was an intermediary with AIG.
Commissioner Brooksley Born, a former chairwoman of the Commodities Futures Trading Commission, said she found it odd that Goldman couldn't say how much profit it made on swaps and other exotic bets known as derivatives. "Your risk officer said the other day you can't manage something that you can't measure," she said. "I am very skeptical that you can't measure these profits."
Born also demanded to know how Goldman and other swap partners of AIG wound up with releases of legal liability, meaning taxpayers would have a difficult time suing them for fraud, as part of settlements awarding them the full $62 billion face value of those contracts in late 2008. Viniar said that Goldman would cooperate with the panel's requests.
Bankers Who Broke Big Dig With Swaps Gone Awry Get Paid for Fix
by Michael McDonald - Bloomberg
The same bankers who sold Massachusetts interest-rate swaps that blew up the debt financing for the so-called Big Dig road and tunnel project in Boston -- costing taxpayers $100 million -- are getting even more money to fix what they broke. UBS AG bankers showed up at the Massachusetts Turnpike Authority in 2001 with a solution to a growing deficit at the state agency overseeing the $15 billion project. The bank gave the authority $29.1 million for an interest-rate swap linked to $800 million of Big Dig bonds, an agreement meant to cut the cost of paying back the debt and cover part of the budget shortfall. JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. made similar deals.
The deal with UBS backfired as credit markets faltered two years ago, costing toll payers $36.3 million in extra interest and leading the Zurich-based bank to demand as much as $400 million to end the arrangement when the Big Dig bonds’ insurer lost its top credit ratings. “There was really no mention of any downside of these swaps,” said Christy Mihos, a turnpike board member from 1999 to 2004 who voted for the UBS agreement. “It was portrayed as a no-brainer that we could not lose.”
The same Wall Street banks that triggered the worst financial collapse since the Great Depression also helped government borrowers from Greece to California paper over deficits with derivative deals promising savings on borrowings. Many of the agreements failed when credit markets seized up in 2008 and swap payments from banks no longer covered rising debt costs.
States, cities and nonprofits have spent about $5 billion unwinding the transactions since then, said Peter Shapiro, managing director of Swap Financial Group in South Orange, New Jersey, an adviser to state and local governments. “Use of these types of derivatives is making a bet,” said Joseph Giglio, a business professor at Northeastern University in Boston and former head of municipal securities at Chase Manhattan Bank. “If it seems too good to be true, it is.”
The fallout from the Big Dig swaps didn’t stop Massachusetts from giving new business to many of the same banks and officials who arranged them. Governor Deval Patrick, 53, hired UBS in September 2007 to advise him on overhauling the state’s transportation finances. The agreement came about nine months after he named former UBS banker Henry Dormitzer undersecretary for administration and finance. The former UBS banker was a member of a team that sold the firm’s swap to the turnpike, according to Mihos.
“If you want to find out where the bodies are buried, you’ve got to go talk to the gravedigger,” Patrick, who’s seeking re-election this year, said in an Oct. 29 interview in Boston regarding his use of UBS as an adviser. Dormitzer, who left the Patrick administration in 2008, declined to comment when reached by telephone. Massachusetts also hired Paul Ladd, a former turnpike official who authorized the UBS swap in 2001, as part of an investment-banking team that refinanced about $2 billion of Big Dig debt this year.
The state signed up underwriters that would get Massachusetts the best price on its bonds, said Jay Gonzalez, the governor’s secretary of administration and finance. “Whether or not a particular individual happened to work at the firm that has some history or another was not an overriding concern,” Gonzalez said in an interview. “We wanted to make sure we got the breadth in the underwriting team with the banks that were capable of selling hundreds of millions of dollars worth of bonds that have a real story behind them.”
The Massachusetts Turnpike Authority was created in 1952 to oversee a 138-mile (229-kilometer) section of what is now part of Interstate 90. In 1997, the Boston-based agency was put in charge of the Big Dig, the most expensive public works project in U.S. history, which transformed the city’s downtown by replacing an aging elevated highway with tunnels. While the project’s cost was estimated at about $5 billion when work began in 1991, expenses soared, sparking federal and state probes and criminal charges against contractors. No charges were brought related to the bond sales and derivatives.
To help cover budget shortfalls, the authority took the projected savings from swaps as upfront payments instead of waiting for them to accrue over time, according to Fitch Ratings. It collected $5.3 million from JPMorgan in 1999, $29.1 million from UBS in 2001 and $35 million from Lehman in 2002, according to its annual report.
“It’s easy to sit back now and say it was a terrible decision,” said Jordan Levy, a board member from 1997 to 2004 who voted for the swaps. “We were sitting there with this humongous deficit and they presented us a way out.” In a swap transaction, two parties exchange payments, typically a floating one for a fixed. State and local governments usually sold variable-rate bonds and negotiated with banks to leave them paying fixed interest that was lower than prevailing municipal rates.
In addition to the expenses of the UBS swap, the authority paid $408,000 of extra interest since 2002 on a JPMorgan derivative linked to $100 million of Big Dig bonds, said Cyndi Roy, a spokeswoman for the state’s administration and finance office. The contract is set to last until 2029, according to a copy of the agreement. The turnpike also had to set aside as much as $19.6 million of cash as collateral against the JPMorgan contract as central banks slashed benchmark rates amid the credit crisis, according to bond documents.
The authority paid $3.2 million to end the Lehman Brothers swap after the New York-based bank declared bankruptcy. Lawyers for what remains of the firm are disputing the amount paid, according to bond documents. The turnpike was told by bankers in 2007 that terminating the derivative contract could cost as much as $43 million. The UBS swap backfired in January 2008 when the exchange of payments began.
The agency, rated close to below-investment grade at Baa2 and Baa3 by Moody’s Investors Service, was unable to refinance $800 million of its bonds into floating rates to match the agreement. It paid an extra $49.9 million in interest through the end of March this year and received $13.6 million from the bank, Roy said. The UBS burden worsened last year when a unit of Ambac Financial Group Inc. that insured both the Big Dig bonds and the swap lost its top credit ratings. UBS sought a payment to end the swap, which the state said would cost as much as $400 million.
The demand forced Governor Patrick to step in. The Democratic-controlled Legislature dissolved the turnpike authority and pledged $100 million a year from a sales-tax increase to a new transportation agency so it could refinance the bonds. UBS dropped its payment claim and Patrick refinanced all of the highway’s Big Dig debt, including a sale of $800 million of floating-rate bonds to match the bank’s swap.
“I’m glad the governor is cleaning up these messes,” Mark Montigny, a Democratic state senator from New Bedford who last year sought a formal probe of the turnpike swaps, said in an interview. “However, until we investigate and assign blame and find out if in fact there is criminal behavior or at a minimum serious civil recovery, then we learn nothing.” The governor’s new transportation department in November hired Bank of America Corp., JPMorgan Chase, Barclays Plc and Citigroup Inc. to refinance the turnpike’s Big Dig bonds, paying the underwriters $7.7 million for securities sold in March and May this year, according to sale documents.
Working With Massachusetts
Ladd, the turnpike’s former chief financial officer who authorized the UBS swap, according to a copy of the contracts, represented Charlotte, North Carolina-based Bank of America working with the state to sell the bonds, said Jonathan Davis, the official who oversaw the offering. Ladd left the turnpike in 2002 and is based in Boston. He declined to comment in a telephone call. Paul Haley represented Barclays in a role similar to Ladd’s, Davis said. Haley was the Lehman Brothers banker who sold the turnpike a swap in 2002, according to Mihos, and a former chairman of the Massachusetts House Ways and Means Committee. He joined Barclays when the London-based bank bought Lehman’s investment banking and trading operations after its bankruptcy. He declined to comment.
‘Brink of Ruin’
The state used Mintz, Levin, Cohn, Ferris, Glovsky & Popeo PC, the turnpike’s bond counsel on the derivative, according to Mihos and Levy, as its disclosure counsel. John Regier, a lawyer at the Boston-based firm, said it verified the accuracy of information on the state’s finances given to investors for the bond sale and had nothing else to do with the transaction. “The turnpike authority was on the brink of ruin because of the financial decisions made earlier this decade,” said Mary Connaughton, who served on the turnpike’s board from 2005 to 2009 and is running for state auditor this year as a Republican. “It doesn’t make sense to bring back the same old players.”
Spectre of an economic relapse stalks markets as China wobbles
by Ambrose Evans-Pritchard
Fears of an economic relapse across the world have begun to stalk markets again after pending homes sales in the US crashed by a third and a slew of weak data from China and Japan sent bourses tumbling across Asia. The credit system is once again flashing warnings of extreme fragility, with the yield on 10-year US Treasuries plummeting back to crisis-levels of 2.89pc. Japan's 10-year bond dropped to 1.06pc, the lowest since the country's deflation battle seven years ago.
Tokyo's Nikkei stock index tumbled to the lowest level since 2005 as safe-haven flight into the yen surged to levels that leave many Japanese exporters underwater. "Double-dip is back in the lexicon," said David Bloom, currency chief at HSBC. "Everybody hoped that China's huge fiscal package would keep global growth going long enough for the West to recover, but it does not look like that is happening. "China is now slowing but the US housing market is falling off a cliff. It's cataclysmic. In Japan the data is turning nasty, and fiscal tightening is just starting in Europe and the UK, so everybody is asking where the growth is going to come from," he said.
Goldman Sachs said its gauge of Global Leading Indicators had peaked. "Signs `under the hood' have pointed to some slowing momentum. Industrial growth is set to decelerate," said the bank. The US National Association of Realtors said the numbers of home buyers signing contracts dropped 30pc in May from a month ealier, confirming fears that the expiry of subidies would lead to a cliff-edge fall in sales. "Tax credits merely cannibalised sales for the coming months, and did not succeed in jump-starting a lasting recovery of the housing market," said Teunis Brosens from ING.
The US property market is haunted by worries that a cluster of "option ARM" mortgages will reset upwards over the coming months, leading to a fresh wave of defaults. "Payment option ARMs are about to explode," said Iowa's Attorney General Tom Miller after a White House meeting on housing. The new twist for investors is the sudden slowdown in China. The HSBC/Markit index of Chinese manufacturing has fallen from a high of 57.4 in January to 50.4 in June, the result of monetary tightening and curbs to cool the red-hot property market. Wensheng Peng from Barclays Capital said the risk of a double-dip is small. "We are seeing a policy-led soft landing, a slowdown that is desired and targeted by the government," he said.
However, analysts are deeply divided on China. A report by the European Chamber in China said there was pervasive over-capacity in steel, cement, chemicals, refining, and energy equipment. "The Chinese government's massive stimulus package is being pumped into building new plants and adding unnecessary capacity. The problem is getting worse in many industries," it said, claiming that usage rates were as low as 35pc in some sectors.
Professor Victor Shih from Northwestern University in the US has warned that local entities have borrowed $1.7 trillion, using inflated land values as collateral. China's authorities have played down these concerns, denying that credit has been allowed to balloon out of control as it did in Japan during the 1980s. But it is an open question whether the Communist leadership can calibrate fine-tuning any better than the rest of the world.
Clearly China's slowdown is starting to send ripples through Asia and commodity markets, with knock-on effects for Australia. The Baltic Dry Index measuring freight rates for bulk goods has almost halved since October, a trend that is now surfacing within Chinese shipping and port data. Japan's unemployment jumped to 5.2pc in May, and households have cut spending over the last two months. Industrial output slipped 0.1pc. Overseas shipments fell 1.7pc. Europe's recovery looks ever more fragile. French consumer confidence has weakened for five months in row. The eurozone manufacturing index slipped in June. Britain has seen a sharp fall in new export orders. Turkey's exporters have reported a sudden drop in demand from Europe in June.
It is not yet a global double-dip, but bourses from Tokyo to Shanghai, Frankfurt, London, and New York are all signalling a clear risk that we face a "truncated" V-shaped recovery, a plateau where we grind along at best with stubbornly high unemployment. At worst, it could be the start of a deeper slump as yet more chickens come home to roost from the credit crisis. "The world is starting to look more and more like Japan," said Mr Bloom.
Bailed-out Anglo Irish Bank racks up worst losses in world
by Emmet Oliver - Independent.ie
Losses posted by Anglo Irish Bank are the worst by any bank in the entire world, according to new data from a prestigious financial journal. The taxpayer-owned bank's loss in 2009 of €15bn was far bigger than those of giant US, Japanese and German banks, according to 'The Banker', an industry magazine listing the 25 biggest losses.
Anglo, which is hoping to split itself into a so-called 'good' and 'bad' bank, managed to lose almost more money than the two next biggest loss-makers put together, the magazine reveals. Anglo, nationalised since January 2009, has already set a record with its 2009 loss -- the largest ever posted by an Irish company. Many experts believe such losses may never be recorded again in Irish business. And to cope with future losses, the Government is committed to pumping over €22bn into the bank.
The scale of destruction wrought by the bank is clear when compared with other banks that reported smaller losses. For example, Royal Bank of Scotland, one of the largest banks in the world, lost only a quarter of what Anglo lost last year, the survey reveals. US lender Citigroup, once the world's largest bank, only lost half of what Anglo lost in 2009, despite taking a massive hit during the subprime crisis. Most of the 25 banks surveyed lost money because of the subprime crisis, whereas Anglo's losses came from property lending.
Anglo is not the only Irish bank on the list, however, with AIB posting the 11th highest losses in 2009 at $3.8bn (€3.1bn), although other Irish banks, like Bank of Ireland and Irish Nationwide, managed to avoid making it on to the list. The only mitigation for Anglo is that the 2009 results, which set all the records, covered 15 months, rather than the standard 12. However, such is the scale of losses that even on a 12-month basis the bank would have finished up number one.
The survey, while bad news for Anglo, was good news for the industry, as it showed that most banks were on the road to recovery. For example, bank profits are now almost four times higher than they were in 2008. But profits are down on the boom years for most banks. Banks have increased their capital levels, the money they use to protect them from losses, by 15pc. "This means they are stronger but less able to lend," the magazine adds.
Spain may need financial rescue, says Merrill
by Ambrose Evans-Pritchard - Telegraph
Spain's debt crisis may force the country to tap the EU-IMF rescue fund over the next two to three months and set off a political storm, according a confidential report by the Bank of America Merrill Lynch. "There is a serious risk that Spain have to make use of Europe's €750bn (£618bn) aid packet," said the document, obtained by Spanish newspaper Expansion. The bank declined to comment. The report said it was not yet clear whether weaker states on the periphery of the eurozone will be able to raise money to fund their debt needs at viable rates on the global markets. Any request for a bail-out by Spain would be extremely controversial, potentially bringing down the government.
The bank said it was possible that Italy would also require a rescue or that there would be a total divorce between Germany and France, though these were viewed as "extremely unlikely" outcomes. Spain's premier Jose Luis Rodriguez Zapatero yesterday proclaimed "his full confidence in the strength and solvency" of the country after Moody's threatened to downgrade Spanish debt by up to two notches on the grounds that fiscal austerity would undercut growth. Moody's then twisted the knife deeper, cutting ratings on five Spanish regions. Spain's treasury sold €3.5bn of five-year debt successfully, but at a stiff rate of 6.6pc.
Eurozone woes leave successful Swiss with a sore head
by Gillian Tett - Financial Times
Another week, another bout of eurozone jitters. No wonder that Jean-Claude Trichet, and George Papandreou - not to mention Angela Merkel - look badly in need of a summer holiday.
But as the eurozone writhes in pain, it is worth sparing a thought for a separate, but symbiotic, dilemma that is gripping Switzerland's central bank. To be sure, Zurich does not appear to have that much to panic about. Switzerland's growth rate has recently been the second highest in Europe (beaten only by Slovakia). Last year - quite remarkably - the country even managed to cut its debt.
But in today's topsy-turvy world, this commendable "success" is what is giving the Swiss National Bank a headache. Most notably, as global investors increasingly try to diversify away from the troubled eurozone, many are turning to Switzerland. Although Swiss denominated assets are limited in volume and by and large do not produce high returns, they do generally offer the promise of capital preservation. Nowadays that makes them akin to gold. So, as money floods into Switzerland, this is creating huge pressure for Swiss franc appreciation against the euro, particularly since the only way that many investors can actually express their enthusiasm for Switzerland, given the limited range of assets, is by playing the forward currency market.
During most of the last year, those gnomes at the SNB managed to keep a lid on these pressures by unleashing a massive unsterilised intervention. Between April and May, for example, the SNB's currency reserves leapt more than 50 per cent from $145.6bn to $261.9bn, an expansion so remarkable in scale that (as my colleague Peter Garnham recently observed) it has only been topped by China twice before.
Last month, however, the SNB appeared to row back from this stance. The Swiss franc has since appreciated by some 7 per cent on a trade-weighted basis, as investors frantically try to work out what the once-dull SNB will do next.
It is not easy to tell. Unsurprisingly, the rise in the franc has prompted horror from Swiss exporters, particularly since this could soon accelerate. Eurozone banks with big exposures to countries such as Hungary are worried, since a high proportion of Hungarian mortgages are Swiss-denominated. The SNB claims that it is reluctant to keep intervening. Ostensibly this is because it is looking for an exit strategy from the unorthodox monetary policy measures. But there is also a political tale at work.
Most notably, one unintended consequence of the intervention is that the SNB's holdings of eurozone assets have risen dramatically in recent months. The SNB has tried to handle that risk by diversifying into currencies such as sterling or Canadian dollars and by only buying the "safest" eurozone bonds (i.e. nothing Greek or Spanish.) That, however, has not protected it from pain. Thus next month the SNB is likely to reveal that it has suffered paper losses worth a couple of billion Swiss francsbecause of eurozone woes. From a macroeconomic perspective that should not really matter; those paper losses may be reversed in the future and in any case could easily be absorbed by the SFr17bn of reserves the SNB has amassed in recent years.
But Switzerland is a conservative place and Philipp Hildebrand, SNB governor, is under fire from the Swiss banking community because of his tough stance on regulatory reform. Thus, news of those losses could easily spark a bigger political row; indeed, it is creating behind-the-scenes controversy about the whole intervention policy. This obviously matters greatly to Swiss exporters (or Hungarian homeowners) though it might have wider implications, too. After all, the SNB is not the only central bank which has engaged in bold policy measures recently: the Bank of England has been gobbling up gilts, the Fed has acquired mortgage bonds and the European Central Bank is buying eurozone bonds.
Thus far, there has been little public debate about who will bear losses from this, if they arise. And the Bank of England thinks (or hopes) this will never be a problem in countries such as the UK, since the British central bank is clearly indemnified by the government (meaning that the UK government pays). But in other countries, the legal pattern is less clear (and the ECB is not actually indemnified by a government at all). Moreover, it remains an open question how the markets - or voters - might really react to losses if these arise. Investors around the world would be wise to keep watching closely what does, or does not, happen next in Zurich. Barring a miracle - i.e. eurozone stabilisation - the SNB faces a tough task. I, for one, do not expect to see that miracle anytime soon.
Black hole in biggest final salary pensions to reach record high
by Myra Butterworth - Telegraph
A black hole in Britain’s biggest final salary pension schemes will reach a record high of £140 billion within the next year, it has been predicted. The forecast comes after the deficit of the 200 biggest schemes jumped by £12 billion in just one month to £100 billion. The report by pensions experts Aon Consulting warned the pain may be too difficult to bear for some companies. Pension deficits have suffered due to the poor economic climate which means companies are unable to fulfill their pension promises. Marcus Hurd, head of corporate solutions at Aon Consulting, said: “The government’s mantra is that ‘we’re all in this together,’ and final salary pension funds are going to share the nation’s pain. “A consequence of the tough financial measures introduced in the emergency budget is that deficits could increase in the short-term. This will be a bitter pill to swallow to companies who are already piling in billions of pounds to plug these deficits.”
And he added: “The short term pain may be too much to bear for some companies in difficult times.” The report, published each month, looks at the deficit or surplus of the 200 largest final salary pension schemes in the private sector. It is not the first time that the deficit has reached £100billion, having previously touched this level for the first time in December last year, but it has never reached the £140billion mark predicted for next year. Most companies have already closed their final salary schemes to new members as they are too expensive to run. Accountants have suggested that 94 per cent of companies plan to either close them altogether or reduce benefits that existing members can accrue. Many companies are switching to cheaper defined contribution schemes, which rely on the performance of the stock market instead. The BBC proposed dramatic changes to its pension this week, which could more than halve the retirement income of some workers.
The decision to overhaul the broadcaster's current scheme - which offers members a pension based on their average earnings during their career - was taken in a bid to a £2 billion deficit. Laith Khalaf, a pensions expert at financial firm Hargreaves Lansdown, said: “Companies need to find the money to fund their pensions schemes but this is not why they went into business in the first place. They end up spending huge resources propping these schemes up.” The coalition Government has ordered an urgent review into affordability. It has also announced a wider shake-up of pensions, including a review of the state pension age, with a view to raising it to 66 in 2016 for men. And it has announced a consultation into how quickly to phase out rules making it illegal for companies to force staff to give up work at 65, and it has made a commitment to auto-enrolling staff into workplace pensions.
British households face second credit crisis, official survey warns
by Edmund Conway and Angela Monaghan
Households must brace themselves for a return of the credit squeeze, with mortgages far harder to procure in the coming months, new Bank of England research has shown. Banks and building societies expect to lend less next quarter – the first time they have predicted a contraction of credit supply since the height of the financial crisis. The warning, contained in the Bank's Credit Conditions Survey, underlines fears that Britain may suffer a dip in economic activity later this year as the impact of austerity measures and the sovereign debt crisis start to bear down on the wider economy. The survey also revealed that in last quarter the corporate sector suffered its biggest shortage of credit since 2008, reinforcing worries about the health of British business.
The survey found that a balance of 11.4pc of banks said that they expected to lend less in the coming three months, putting this down to expectations that the wholesale markets will continue to tighten in the coming months. The poor levels of lending to businesses took many by surprise. Three months ago a balance of +22.7pc of lenders said that they expected an improvement in corporate credit availability during the most recent quarter; in the event a balance of only 7.1pc reported an increase in lending – the lowest level since the end of 2008. Melanie Bien, director at mortgage broker Private Finance, said: "Just when it looked as though lending conditions were starting to ease, the Bank is warning that we could face a second credit crunch. For those borrowers who are already struggling to secure mortgage finance, this is nothing short of disaster."
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "The likelihood is that the finance for the property market will continue to be in short supply for some time to come." A separate survey showed UK manufacturing grew strongly in June, but at a slower pace than May. The manufacturing purchasing managers' index (PMI) fell to 57.5 from 58, where anything above 50 indicates expansion. Output and orders continued to grow but at a slightly slower pace, whereas growth in export orders fell sharply to 50.7 in June from 56.7. The Ernst & Young ITEM Club said the deceleration in exports was "slightly concerning".
Romania to cut 53,000 government jobs
Romania will cut over 53,000 public jobs and slash pay in the remaining positions by 25 percent as part of a package of austerity measures aimed at reining in a ballooning deficit, officials said on Thursday. The cuts are not expected to expected to greatly affect public services because the civil service had become very inefficient, said Prime Minister Emil Boc. The number of government employees performing similar jobs varied widely between similar sized communities, he added, as the government adopted an emergency ordinance to regulate the number of people employed by local institutions.
The cuts are the latest in a series of austerity measures announced by the government, which is struggling to cope with a budget deficit exacerbated by the global recession. On Thursday, the sales tax jumped from 19 percent to 24 percent and new taxes were introduced for people who own more than one property. All public sector wages were also reduced 25 percent.
The measures come into practice a day before the International Monetary Fund meets to conduct the fourth review of Romania's loan of euro20 billion ($24.65 billion) from the IMF, the World bank and the EU. The IMF board will decide whether to disburse an installment of about euro900 million ($1.1 billion). IMF mission chief Jeffrey Franks said earlier this year Romanian authorities must gradually reduce the number of public workers, which grew by 250,000 people to total about 1.4 million over the boom period of 2006-2008. Around one quarter of working Romanians are employed by the government.
Researchers say Obama's slow on oil spill science, too
by Renee Schoof - McClatchy Newspapers
As an unprecedented amount of oil fouls the Gulf of Mexico, research scientists and ocean experts say the Obama administration's efforts to discover the magnitude of the damage are surprisingly uncoordinated. If the government's higher estimates are accurate, the BP oil blowout already is the world's worst accidental oil spill ever. Despite a spill that may already total more than 150 million gallons of oil, however, neither federal officials nor BP has mounted a speedy, focused inquiry to understand its impact.
- There's no comprehensive strategy for scientific inquiry in the Gulf. Therefore, there's no central system for organizing the research, sharing information or avoiding duplication.
- Two and a half months after the Deepwater Horizon rig exploded and sank, little is known about the present location of the plumes of oil and dispersants, where they're heading or how toxic the brew will be to creatures in its path.
- Since BP is providing the bulk of the funds to study the oil spill, some scientists question whether firm's potential liability for future environmental damage could compromise the independence and scope of the scientific research in the Gulf.
That so much about the spill remains unknown is "kind of mind-boggling," said Frank Muller-Karger, a professor of biological oceanography at the University of South Florida. He said that one of the biggest problems he sees is the lack of a "war-room-type scenario" to coordinate all the research. Christopher F. D'Elia, the dean of the School of the Coast and Environment at Louisiana State University, agrees. "In my view, this is one of those all-hands-on-deck moments and we need to be devoting the resources necessary to understand this spill in every dimension regardless of who pays, because ultimately we'll pay a lot more as a nation if we don't do it right."
To be sure, federal officials and the Deepwater Horizon Unified Command have described a growing research effort. Since Memorial Day, six research vessels and 10 underwater monitors have been deployed. Just this week, Woods Hole Oceanographic Institution — a preeminent research organization in Massachusetts — launched an unmanned research vehicle with a sensor to detect oil.
And Friday, the National Oceanic and Atmospheric Administration agreed, at the urging of a group of East Coast senators, to begin making long-term projections for the path of the spill and its potential impact beyond Gulf shores. "Coastal communities up and down the Atlantic . . . have raised concerns over the BP spill getting caught in the Loop Current and affecting the East Coast," said Sen. Bob Menendez, D-N.J., who led the request. "Science-based probabilities like these help these communities understand the current threat of oil reaching their shores and will help ensure full preparedness."
Scientists involved in the research, however, say they remain in the dark and don't know if enough is being done. A group of more than 200 federal and university ocean scientists, who recently issued a report for a June 3 symposium on the Deepwater Horizon spill, called for central coordination of the research. They also appealed for more research on the extent of subsurface plumes of oil, how oil and gas is mixed in the water, how the oil is changing over time and where it's moving, and what the chemicals from the oil and the dispersants used to break it down will do to the ocean and its creatures.
D'Elia of Louisiana State University said the federal government should do more to share what its own scientists are learning and bring in outside researchers. "Whatever the federal government is up to — it may be well planned internally within the federal government, but the involvement of the outside research world is inadequate in my view," he said.
The reaction by scientists to the Obama administration's handling of the research echoes criticism of the government overall response. Governors and other state officials along the Gulf coast complain about the lack of resources and about the slowness of a cleanup. Residents rail at BP for the loss of their jobs, for its claims process and for BP's efforts to limit its legal liability from the spill. Others say BP has manipulated information, making estimates of the amount of gushing crude impossible to determine and assessments of the health effects on workers, residents and wildlife difficult to make.
However, the criticism about the scientific research into the spill is widespread. "It's a huge and difficult problem. This is very, very challenging," D'Elia said. "But what we're seeing right now is very little in the way of federal resources have been allocated to the external research community to do work." Nancy Rabalais, an oceanographer and the director of the Louisiana Universities Marine Consortium, said there is considerable mystery in the Gulf.
"There's no single entity that's coordinating all the results and data from the research that's going on, whether it's within a (federal) agency or agency-funded or BP-funded. I can't say and I'm not sure anybody can say" what her fellow scientists are working on. "We don't know if it's adequately covered right now."
Stan Senner, the director of conservation science at the advocacy group Ocean Conservancy, who coordinated science and restoration programs for the state of Alaska after the Exxon Valdez oil spill, said that some government officials want to shift funds quickly to onshore restoration work and curtail funds for research of the oil's impacts. He said he agreed with the sense of urgency about habitat restoration, but also said it was important to study the effects on the environment over the long term. "It's not just science for the sake of science," he said, "but it's so we can better assess the risk in the future and understand the true impact of events like this."
Robert Gagosian, the president of the Consortium for Ocean Leadership, which represents ocean research institutions, aquariums and the ocean drilling industry, said the U.S. needs a national science plan to study the oil in the Gulf and improvements in its "woefully underfunded" ocean observing system. A former director of the Woods Hole center and a marine geochemist, Gagosian and others say they're concerned about how the $500 million BP has promised for research and restoration gets spent. He said he hoped it would be handled through peer-reviewed grants.
With BP's interest in preserving its business, some worry whether the proper criteria will be used in assessing what research should be done. Jeff Short, a former NOAA scientist who's now with the conservation group Oceana, said that by insisting that BP pay for the research, the government is ceding control over what studies are conducted. "I find myself wondering why would BP want to guide money into projects that would clearly show much larger environmental damage than would have come to light otherwise," he said.
BP announced on June 15 that it had picked six scientists to oversee a review of proposals for the $500 million, and that their work would be independent. One of the six — Jorge Imberger, the director of the Centre for Water Research at the University of Western Australia — said it hasn't been decided yet how the money will be divided. Imberger said his committee had been about to send out requests for proposals, "but now, politics seems to have gotten in the way." The day after BP announced its panel, the White House issued a statement that said that part of these funds would be spent with input from governors and other state and local officials.
Some observers have questioned how independent the science committee could be if BP selected it. Natural Resources Defense Council director Peter Lehner suggested that the company give the money to the National Academy of Sciences and let the academy choose how to disburse the funds. The first $25 million of the BP funds was quickly distributed to Louisiana State University, the Florida Institute of Oceanography at the University of South Florida and a consortium led by Mississippi State University.
BP isn't telling the universities how to use the money, said Steven Lohrenz, a professor of biological oceanography at the University of Southern Mississippi, one of the schools receiving part of the funds. Lohrenz said that NOAA and other federal agencies are doing their best, but their budgets are strapped. "It's very appropriate for BP to step up and fund the research," he said. "What we would like to see in a perfect world is a more coordinated research strategy with additional resources coming in from a variety of sources and try to maximize the capabilities we have."
The main restraint on research has been lack of funds, Lohrenz said. "This is such a massive event. There's so much about it that's unprecedented." NOAA said that the research wouldn't be limited by BP's willingness to fund it, but, in a statement in response to questions, the agency said that BP has been the source of funding for "many, but not all" of the research missions. The National Science Foundation, an independent federal agency, has given more than two dozen awards totaling more than $3 million for research on the oil spill.
In a written response to questions, NOAA said it hadn't issued any formal requests for scientific research proposals. "This is an unusual crisis response and there is a flexibility built into these science missions that will enable the most pressing scientific questions to be pursued and answered," the agency said.
by Lawrence Solomon - Financial Post
Some are attuned to the possibility of looming catastrophe and know how to head it off. Others are unprepared for risk and even unable to get their priorities straight when risk turns to reality.
The Dutch fall into the first group. Three days after the BP oil spill in the Gulf of Mexico began on April 20, the Netherlands offered the U.S. government ships equipped to handle a major spill, one much larger than the BP spill that then appeared to be underway. "Our system can handle 400 cubic metres per hour," Weird Koops, the chairman of Spill Response Group Holland, told Radio Netherlands Worldwide, giving each Dutch ship more cleanup capacity than all the ships that the U.S. was then employing in the Gulf to combat the spill.
To protect against the possibility that its equipment wouldn't capture all the oil gushing from the bottom of the Gulf of Mexico, the Dutch also offered to prepare for the U.S. a contingency plan to protect Louisiana's marshlands with sand barriers. One Dutch research institute specializing in deltas, coastal areas and rivers, in fact, developed a strategy to begin building 60-mile-long sand dikes within three weeks.
The Dutch know how to handle maritime emergencies. In the event of an oil spill, The Netherlands government, which owns its own ships and high-tech skimmers, gives an oil company 12 hours to demonstrate it has the spill in hand. If the company shows signs of unpreparedness, the government dispatches its own ships at the oil company's expense. "If there's a country that's experienced with building dikes and managing water, it's the Netherlands," says Geert Visser, the Dutch consul general in Houston.
In sharp contrast to Dutch preparedness before the fact and the Dutch instinct to dive into action once an emergency becomes apparent, witness the American reaction to the Dutch offer of help. The U.S. government responded with "Thanks but no thanks," remarked Visser, despite BP's desire to bring in the Dutch equipment and despite the no-lose nature of the Dutch offer --the Dutch government offered the use of its equipment at no charge.
Even after the U.S. refused, the Dutch kept their vessels on standby, hoping the Americans would come round. By May 5, the U.S. had not come round. To the contrary, the U.S. had also turned down offers of help from 12 other governments, most of them with superior expertise and equipment --unlike the U.S., Europe has robust fleets of Oil Spill Response Vessels that sail circles around their make-shift U.S. counterparts.
Why does neither the U.S. government nor U.S. energy companies have on hand the cleanup technology available in Europe? Ironically, the superior European technology runs afoul of U.S. environmental rules. The voracious Dutch vessels, for example, continuously suck up vast quantities of oily water, extract most of the oil and then spit overboard vast quantities of nearly oil-free water. Nearly oil-free isn't good enough for the U.S. regulators, who have a standard of 15 parts per million -- if water isn't at least 99.9985% pure, it may not be returned to the Gulf of Mexico.
When ships in U.S. waters take in oil-contaminated water, they are forced to store it. As U.S. Coast Guard Admiral Thad Allen, the official in charge of the clean-up operation, explained in a press briefing on June 11, "We have skimmed, to date, about 18 million gallons of oily water--the oil has to be decanted from that [and] our yield is usually somewhere around 10% or 15% on that." In other words, U.S. ships have mostly been removing water from the Gulf, requiring them to make up to 10 times as many trips to storage facilities where they off-load their oil-water mixture, an approach Koops calls "crazy."
The Americans, overwhelmed by the catastrophic consequences of the BP spill, finally relented and took the Dutch up on their offer -- but only partly. Because the U.S. didn't want Dutch ships working the Gulf, the U.S. airlifted the Dutch equipment to the Gulf and then retrofitted it to U.S. vessels. And rather than have experienced Dutch crews immediately operate the oil-skimming equipment, to appease labour unions the U.S. postponed the clean-up operation to allow U.S. crews to be trained.
A catastrophe that could have been averted is now playing out. With oil increasingly reaching the Gulf coast, the emergency construction of sand berns to minimize the damage is imperative. Again, the U.S. government priority is on U.S. jobs, with the Dutch asked to train American workers rather than to build the berns. According to Floris Van Hovell, a spokesman for the Dutch embassy in Washington, Dutch dredging ships could complete the berms in Louisiana twice as fast as the U.S. companies awarded the work. "Given the fact that there is so much oil on a daily basis coming in, you do not have that much time to protect the marshlands," he says, perplexed that the U.S. government could be so focussed on side issues with the entire Gulf Coast hanging in the balance.
Then again, perhaps he should not be all that perplexed at the American tolerance for turning an accident into a catastrophe. When the Exxon Valdez oil tanker accident occurred off the coast of Alaska in 1989, a Dutch team with clean-up equipment flew in to Anchorage airport to offer their help. To their amazement, they were rebuffed and told to go home with their equipment. The Exxon Valdez became the biggest oil spill disaster in U.S. history--until the BP Gulf spill.
Second pipe may have crippled BP well's defense mechanism
by Jim Tankersley - Tribune
The gushing BP oil well is a mystery still unfolding, and late last month, a team of scientists from the Energy Department discovered a new twist: Their sophisticated imaging equipment detected not one but two drill pipes, side by side, inside the wreckage of the well's blowout preventer on the bottom of the Gulf of Mexico. BP officials said it was impossible. The Deepwater Horizon rig, which drilled the well, used a single pipe, connected in segments, to bore 13,000 feet below the ocean floor. But when workers cut into the wreckage to install a containment cap this month, sure enough, they found two pipes.
The discovery suggested that the force of the erupting petroleum from BP's well on April 20 was so violent that it sent pipe segments hurtling into the blowout preventer, like derailing freight cars. It also offered a tantalizing theory for the failure of the well's last line of defense, the powerful pinchers called shear rams inside the blowout preventer that should have cut the pipe and stopped the rising oil and gas from reaching the Deepwater Horizon 5,000 feet above. Drilling experts say those rams, believed to be partially deployed, could have been thwarted by the presence of a second pipe.
The doubled-up drill pipe joins a list of clues that is helping scientists understand the complexities of the Deepwater Horizon accident, and from that, craft changes in how deep-water drilling is conducted. "We still don't really know what's in" the well wreckage, said Energy Secretary Steven Chu, whose team discovered the second pipe using gamma-ray imaging. He added: "If there were two drill pipes down there when the shear rams closed, or two drill pipes below, is it possible that in the initial accident … there was an explosive release of force?…Did it buckle and snap?…The more we know about this, the better we can know what to do next."
The challenge will be making enough changes to soothe policymakers' and the public's fears of a repeat accident, while keeping deep-water drilling economically feasible in an area that provides a third of the nation's domestic oil. Whether this requires halting deep-water drilling in the Gulf of Mexico is hotly debated. Last week, a federal judge overturned the Obama administration's May decision to ban work on 33 deep-water rigs until January, when a presidential commission is expected to release its reform suggestions. The administration is appealing.
Officials are trying to plug the leak while looking for at least interim answers to fundamental questions about the oil spill. Chief among them: What part of the confluence of events that caused the disaster is unique to BP's methods and practices, and what is common to the industry at large? What amount of government oversight can increase the safety of deep-water drilling, and at what cost?
Drilling experts and advocates, environmentalists and government officials agree so far on one point: No amount of regulation can absolutely preclude another drilling accident. But some changes could not wait: Interior Secretary Ken Salazar has dismantled and begun to reassemble the agency charged with drilling oversight after finding it had too cozy a relationship with the oil industry and had ceded too much safety responsibility to the drillers.
Many drilling experts say there's already ample evidence of errors designing and drilling the well beneath the Deepwater Horizon — and of officials on the rig "cutting corners" to finish a job that was expensively behind schedule. Those could be addressed, and could be penalized with civil and criminal charges, without shutting down part of the industry. The accident "absolutely was preventable," said Eric N. Smith, associate director of the Tulane Energy Institute. The rig, he added, lacked "a regulatory presence onboard that said, 'I don't care how late it is, you do it right or you go home.' "
The experts suggest that the most glaring mistake was a faulty cementing job in the well that was unable to handle the high-pressure oil and gas flow. The government could prevent similar errors by hiring experienced engineers, stationing them on drilling rigs and empowering them to shut down any operation that failed to meet established safety standards, Smith said.
Administration officials acknowledge that the federal government has not provided nearly enough money or inspectors for that level of oversight. Salazar called past and present funding levels for inspectors "woefully inadequate" and said that "you need to have the horsepower to be able to have the inspection" of deep-water drilling rigs. He has also insisted that the drilling moratorium would give investigators crucial time to solve the mystery of why so many of the Deepwater Horizon's "fail-safe" backups failed. That includes learning why the shear rams are partially deployed but resisting efforts to fully close.
"There clearly needs to be identified what, if anything, went wrong with the fail-safe system," said Gene Beck, an assistant professor of petroleum engineering at Texas A&M University. "We need to understand, did something happen with the [blowout preventers] that we didn't understand? Did they fail to function, in any way, shape or form, within their design parameters?" Regulators could recommend additional backup systems, such as a second blowout preventer or a relief well drilled in conjunction with the initial well.
The other key to minimizing the risks of a similar blowout is economic. For example, Beck said requiring a concurrent relief well with every project could drain any profit from drilling. Smith, along with a chorus of public officials on the Gulf Coast, warns that Salazar's six-month moratorium could drive the exploration industry out of the gulf permanently. Environmentalists are pushing the administration to value ecological protection more highly as it updates its risk calculations. "Safety costs a bit more," said Chris Mann, a senior officer with the Pew Environment Group. "Our argument is that should be the cost of doing business."
Chu said scientists won't solve the mystery of the Deepwater Horizon — and absorb its lessons — until they exhume the blowout preventer from the seafloor and break it down. Still, economists are beginning to tally the costs of possible reforms. A Washington-based think tank, Resources for the Future, released an analysis suggesting that if the United States brought deep-water safety regulations up to the stricter standards of nations such as Norway, the cost of a typical drilling project would rise about 10% to 20%. That shakes out to less than half a cent per gallon at the pump.
Gulf business owners say BP is 'nickel and diming' them
by Mary Ellen Klas - Miami Herald
As hundreds of business owners shuffle through the claims process to recover losses caused by the oil disaster, BP's promise that it will "deny no legitimate claim" is taking on a bitter meaning. "They have not denied our claim. They have just not paid it all," said Tommy Holmes, owner of Outcast Marine, a fishing-tackle supply company in Pensacola. Holmes lost $73,000 in May and expects losses in June to exceed $100,000. BP has paid him $26,000 for May and refuses to pay the rest, he says. Holmes plans to sue them. "They're nickel and diming us — and they're getting away with it," he said.
The problem: BP's definition of what it is willing to cover. BP spokesman Robert Wine said the company is "trying to put shop owners in the position financially that they would have been in had the incident not occurred." That includes sending them monthly checks every month they demonstrate a loss and paying for inventory that would have been sold.
That's where Holmes sees a disconnect. "If we sell it for $1 and our profit is 40 cents, what's left is 60 cents. They don't want to pay us for the inventory that's sitting on the shelf and we can't pay for it," he said. He purchases his tackle and supplies in January for the summer months but doesn't pay his distributors until the fishing season, when business is good. "They give us credit like that because we've built up a relationship with them for 23 years," Holmes said. "But now I'm going out of business and my vendors are next. This whole thing is snowballing."
Keith Wilt, head of a Panama City resort chain, The Resort Collection, told the state's Oil Spill Response and Claims Process working group last week that he submitted a claim on June 4 for $42,000 and still hasn't gotten the money. "There's a basic misunderstanding of our business model," he told the group.
Many business owners don't know what documents are required to submit their claims, and every day past 30 days that a claim is not paid, the claimant is entitled to receive interest on it, said Lisa Echeverri, executive director of the state Department of Revenue and a member of the working group. All those hurdles were expected to be lowered when President Barack Obama announced on June 15 that BP had agreed to set aside a $20 billion escrow account to pay claims. The president named a manager, Kenneth Feinberg, to run the account independently.
Obama swung through the Pensacola area on June 14, then went on national TV and vowed to bring more money, order, and transparency to the BP clean-up effort, but businesses are still waiting for help. "The process is not perfect," said Darryl Willis, BP's head of claims process at a meeting of the state's Oil Spill Economic Recovery Task Force on Wednesday. He said the transition to the independent escrow account is still being worked out.
As of Tuesday, BP has cut about 6,000 checks in Florida and paid out $20 million in claims, 15 percent of the $132 million written by BP across the five Gulf states. There are 11 claims offices open in Florida. The company has processed 201 claims from companies that have experienced losses of more than $5,000, for a total of $1.4 million, and another $6 million is expected to be paid next week.
Willis said Feinberg's first priority is to make sure payments are made and then to focus on making sure that anyone affected can file a claim. But Willis wouldn't commit to paying for anything other than profit losses. Attorney General Bill McCollum has appointed his deputy chief of staff, Bill Stewart, to help oversee the claims process. His office has published a BP claims manual and said that while BP has responded promptly to initial calls for help, callers must wait up to a week to get the process complete.
"You're not going to be able to document the losses," said Eugene Stearns, a Miami lawyer who specializes in claims recovery told a working group put together by McCollum and Gov. Charlie Crist. "Documenting everything precisely is nearly impossible to do." Chief Financial Officer Alex Sink, whose consumer advocate has also been monitoring the claims process, said that despite all the assurances from BP, progress has been slow for people like Holmes. "They're being promised things like, submit a claim for May or June and we'll forward a payment for you for July, and they're getting a small partial payment," she said.
BP: Eagles and vultures
Tony Buzbee, owner of The Buzbee Law Firm in Houston, Texas, has more than a thousand clients with one common goal: to extract money from BP over the Gulf of Mexico disaster.
They include 18 men who were injured in the explosion on the Deepwater Horizon rig, one of whom suffered 60 per cent burns. Others, such as fishermen, allege their livelihoods have been directly undermined by the spill. Still more, ranging from suntan lotion sellers to a Florida hotel owner, say they are victims of the knock-on impact of a catastrophe President Barack Obama has described as an “environmental 9/11”.
Mr Buzbee – whose firm’s motto is “When winning is the only option” – says he is sure of just one thing: the bill facing BP is going to be very large indeed. “There has been a wide-ranging impact on the economies of these areas that are already affected or are predicted to be affected,” he says. “At the end of the day, there will be five or six law firms that will have tens of thousands of cases that will lead the litigation.”
Ever since the rig exploded on April 20 and oil spewed in large volumes into the Gulf of Mexico, plaintiff lawyers, corporate defence attorneys and law enforcement experts have all been trying to work out what the cost of criminal and civil fines, shareholder litigation, the clean-up and lawsuits from local people and businesses will be to the company.
The case has some parallels in its size and scope with a number of notorious past corporate litigations – such as those involving big tobacco, the tanker Exxon Valdez and Merck’s Vioxx drug. But Paul Cereghini, a corporate defence specialist at Bowman and Brooke, a Minneapolis law firm, says the sheer range of legal action against BP will probably “put this in a different category all by itself”. He says: “I think at some point the scale of the litigation becomes so large that it really is novel. Now, what this scale is is certainly hard to define – because the problem is continuing to expand and become more complicated.” BP has declined to comment on pending litigation against it and did not respond to a request for an interview with its legal team.
Among the most serious claims facing the company – both in financial and reputational terms – lie in the criminal and civil investigations launched by the US government. There are a range of laws that prosecutors could use against BP, including the Refuse Act, the Endangered Species Act and the Migratory Bird Treaty Act. The bird law is popular with prosecutors, environmental law experts say, because the large number of animals affected make it a useful tool for varying the level of the fine. These penalties can be augmented by the Alternative Fines Act, while BP might face still higher fines because of previous US legal problems over the 2005 Texas City refinery explosions and the 2006 Prudhoe Bay oil leak in Alaska.
Environmental law experts say both the area covered by the Deepwater Horizon pollution and its timing make its impact worse than that of the 1989 Exxon Valdez sinking off Alaska. Jane Barrett, director of the Environmental Law Clinic at the University of Maryland School of Law, says: “It’s a horrible, horrible time for it to happen, because of the spawning and nesting season. If I am the government, I am going to look not just at the critters that have died, many of whom have sunk, but to try to capture the cost of losing a whole . . . mating season.”
Then there is the cost of the clean-up itself, which BP says has reached $2.65bn (€2.1bn, £1.8bn). Gregory Evans, a California-based environmental litigation lawyer, captures the range of potential liabilities when he says these concern “all that flies in the air, all that swims in the sea, all that might occupy the land”. The great challenge, for regulators as well as the company, he says, is “trying to figure the cost of the clean-up without knowing the extent of the damage”.
Most severe of all in its monetary impact on BP may be the Clean Water Act, under which the company could be fined up to $4,300 for each barrel of oil discharged. Even based on assumptions that the leak averages an apparently conservative 20,000 barrels a day and is capped in August as planned, BP would have a possible exposure of more than $10bn. Like other laws potentially in the purview of the criminal investigation, the Clean Water Act could be used to prosecute individuals, although experts say this is more likely to be applied to managers who were directly involved rather than top executives.
Albert Lin, a professor at the University of California and former attorney for the environment and natural resources division of the Department of Justice, says that while the environmental penalties facing BP are not new, the size of them is. “You are probably going to see record amounts out of this,” he says.
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As the official probes gather pace on one legal track, BP will simultaneously face huge ?numbers of private lawsuits. In financial terms, damages relating to the 11 dead Deepwater Horizon workers and those who were injured are likely to be only a small part of the total. Anyone who has lost out has a possible claim, from seafood restaurateurs to the condominium owner who claims potential buyers have been put off by the pollution.
Some of these will be dealt with by a BP-financed $20bn compensation fund, but plaintiff lawyers say a good number are likely to end up in court. That would trigger myriad tussles over whether the damage suffered by claimants is sufficiently direct to justify compensation and, if it is, what the restitution should be. Lawyers do not envy BP if it has to argue its case before juries in Louisiana or any other of the states that have suffered.
Legal experts say the situation is likely be complicated further because the variety of probable cases means it will be hard to aggregate them into so-called class actions in which investors with a shared interest group together. This means BP may struggle to achieve what ExxonMobil did in the Valdez case and fight its opponents in one combined piece of “super-litigation”. Instead, BP is likely to face numerous cases in multiple states, each with its own particular circumstances, with the possibility of many tussles over jurisdiction.
While BP fights angry fisherman in one part of the legal system, it is likely to be having contrasting but equally tough battles with institutional shareholders in another set of courtrooms. Shareholder lawsuits have historically been successful and lucrative in past US cases of corporate wrongdoing – the collapse of Enron, the fraud-ridden energy trader, generated a $7.2bn pay-out for shareholder class action plaintiffs (and a cool $688m for the lawyers).
Claimants in BP will focus on the halving in the company’s share price since the rig explosion – a loss of more than £60bn ($90bn, €73bn) in market value. The prospect of huge liabilities hitting BP has also brought downgrades in its credit rating. Its bonds have fallen sharply and the price of its credit default swaps – the cost of insuring the company’s debt against default – has risen to levels typically associated with companies rated as “junk”.
Stopping the leak and cleaning up the oil is expected by analysts to cost only about $8bn; the remainder of the cost to BP would represent claims for damages, fines and other penalties. The shares are very volatile, hitting a 14-year low last week before rallying by 8 per cent so far this week. Richard Griffith of Evolution Securities says: “People just don’t want to take a risk until the relief wells hit and the well is plugged. But then the uncertainty will be over who owes who for what.”
The New York state pension fund has alleged BP misled it over its safety record and ability to deal with large spills – although it and other potential class action plaintiffs were dealt a blow last week by a US Supreme Court ruling limiting the rights of shareholders in foreign companies to sue in American courts. Against this formidable legal tide, BP has few options except to fight where it can and try to spread the pain a bit among other defendants, legal experts say.
Already it is in dispute with Anadarko, 25 per cent owner of the leaking Macondo well, which has accused it of “gross negligence”. Other companies whose roles plaintiff lawyers are examining are Mitsui & Co, the Japanese trading house that owns 10 per cent of Macondo, as well as two US groups: Transocean, the Deepwater Horizon’s owner, and Halliburton, a contractor.
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More fundamentally, BP faces a tension familiar to many companies that have presided over a disaster affecting large numbers of people and swaths of territory. While it must appear to be both responsible and responsive to legitimate claims, it will want to contest cases where it thinks allegations are spurious. It will not be lost on the company’s lawyers that ExxonMobil fought the Valdez case for two decades, taking some of the emotional sting out of it and eventually having a $5bn punitive damages award cut by 90 per cent on appeal.
The Valdez example and the particular characteristics of the BP case mean it is futile – or disingenuous – for anyone to claim now to know the company’s likely liabilities, lawyers say. The only near-certainty – given the compensation fund the company has established – is that the total liabilities will run into the tens of billions of dollars, putting it somewhere between the estimated $4bn Valdez costs and the hundreds of billions in cases involving tobacco and asbestos.
Back in Houston, Mr Buzbee says no previous spill gives much of a yardstick for the Deepwater Horizon case. His clients and others are in the first stages of a journey towards finding out just how much the disaster will cost what was just months ago one of the world’s leading companies. Mr Buzbee says: “We have no way to put this in historical context – because we have never faced anything like this before. There is simply no way to know how long they are going to have to continue to pay for this.”
Miami Faces Up to 80% Chance of BP Oil on Its Shores
by Kim Chipman - Bloomberg
Miami and the Florida Keys face a 61 percent to 80 percent chance of being hit with tar balls from BP Plc’s oil spill in the Gulf of Mexico, according to U.S. projections. Shorelines with the greatest chance of being soiled by oil, 81 percent to 100 percent, stretch from the Mississippi River Delta to the western Panhandle of Florida, the National Oceanic and Atmospheric Administration said today in a statement on its projection for the next four months.
Much of Florida’s west coast has a “low probability” of “oiling” from the leak that began with an explosion on a BP- leased drilling rig on April 20, the agency said. The Florida Keys, Miami and Fort Lauderdale face a greater risk because oil may be caught up in the Loop Current, a flow of warm water that snakes into the Gulf and then moves east, NOAA said. Scientists say the current could carry the oil at a speed of about 100 miles (161 kilometers) a day around the tip of Florida, potentially fouling the Keys and Miami Beach.
Any oil reaching South Florida would already be in an advanced stage of degradation and would be in the form of “scattered tar balls and not a large surface slick of oil,” NOAA said. The chance of oil reaching east-central Florida and the Eastern Seaboard are 20 percent to less than 1 percent, according to NOAA. The likelihood that areas north of North Carolina are hit becomes “increasingly unlikely,” the agency said.
Pensacola Beach Advisory
In northwest Florida, a beach advisory took effect today in Escambia County, which includes the white sands of Pensacola Beach. An “oil impact notice” issued by local health officials advises people to avoid swimming or making contact with oil if they see or feel it on the beach or in the water. The notice will stay in place until the region’s beaches are no longer affected by the BP spill, according to a county news release.
Officials are also warning the public to use caution when digging in the sand because oil may be buried underneath, and they say pregnant women, children ages 5 and younger and people with compromised immune systems should avoid skin contact with sand and water that have been affected by the oil. Signs with the warnings will be posted along the beaches today, Escambia County spokeswoman Sonya Daniel said.