"Group before the photographic tent at Camp Winfield Scott, Yorktown, Virginia (vicinity)." From photographs of the Peninsular Campaign, May-August 1862.
Ilargi: There's nobody -except for my incomparable Automatic Earth colleague Stoneleigh- that I can think of in the entire world whose ideas resonate more with me, with whom I have more affinity, and whose views of both our present and our future resemble mine more, as you have been able to read at the Automatic Earth, than Gerald Celente, the founder of the Trends Research Institute.
Indeed, the "economic recovery" we've been fed for a year now, is, and was always, fake. We never left the first dip, and so we can't enter a second one. And no, this is not a recession, it's a depression, one that Celente labels "the Greatest Depression". Yes, things will get a whole lot worse than they are today. And yes, the way the US calculates its official unemployment numbers are a disgrace. Also, one thing that could and should be done now is to reinstate for instance Glass Steagall.
But it's not happening. As Celente says, corporate and political interests (of both parties) are so intertwined in America today that there's only one word that really fits the whole package, and that is "fascism" (or corporatism, if you like) . And that's a word that conjures up images of another aspect of our futures, one that Celente talks about and I leave mostly alone. That is to say, increasing violence. It's not that I don't share his fears on the topic, it is one of those things that we all have, that we don't talk much about, but that do keep us up at night.
Whether it’s random, wanton, gratuitous, or organized, and whether it’s domestic or international, violence will be -much- more a part of life for most of us than it has been in the past. The US today sends its troops to foreign lands in hopeless wars, and shows no signs of letting up. Tomorrow, it may scale up those efforts, and the government military apparatus may turn inward as well, in order to keep the people from starting a revolution of sorts.
Celente mentions that 20% of the people -will- mean to do good, in his opinion, a number he states in order to claim all's not lost, but that of course still leaves 80% of the people. Anywhere between 25% and 50%, if not more, will be unemployed in many places, and without any material means of existence. "Increasingly, people are going to lose it", says Celente. Does anyone doubt that? The Great Depression was remarkable in that the people alive then in the US largely remained peaceful, and accepted their sorrowful fates without lifting a finger against those who brought those fates upon them. Will the Greatest Depression evolve in the same fashion? It doesn't seem very likely.
There are a number of things the present US government is doing spectacularly wrong. Perhaps first and foremost is the complete failure to make good on its promise of more transparency in politics. Just a few days ago, both Washington and BP declared that “most of the oil" in the Gulf of Mexico was gone. But that statement was always ridiculous, and is now proven to be so. What were they thinking? Does anyone still realize that there was never any impartial research done into the amount of oil that was spilled? That all the numbers that are available come from BP and the government, both of whom have excellent reasons to hide the truth? As Celente puts it: "Let’s call a spade a spade, it's fascism".
Another issue that Obama and his men fail miserably in is economic numbers. Unemployment is far higher than they let on, simply because they don't care for looking all that bad. Home prices are artificially kept high, through subsidies and the wavering of mark-to-market accounting rules for loans and securities, simply because neither the government nor the corporations would remain standing if housing prices were left to the free market to deal with.
And also: last week in Ohio, Obama stated in a meeting with the public that the US economy "is on track". Is it, though? GDP numbers have been revised downward multiple times already this year. The present "official estimate" is a 2.4% growth, and expectations are that next week, this will be lowered to 1.4%.
The Consumer Metrics Institute begs to differ. Its Growth Index 91-day (one quarter) trailing figure now stands at -5.06%!! Which is 7.46% lower than the present government number, derived from the Department of Commerce's Bureau of Economic Analysis. I'll leave you with a few of the CMI's data and graphs from the front page of its website, as well as some accompanying explanatory text. You decide who you think is telling the truth.
NOTE: In the first graph you can see, if you shift the CMI Growth Index forward by a few months, that both it and the official BEA line up quite well; a simple time lag. Except at the very end, today. This can mean one of two things, neither of which are good news: either the BEA has started seriously fooling around with its data, or, and this is still possible, its GDP numbers are about to take a steep plunge. A very steep one.
(1) The Consumer Metrics Institute's 91-day 'Trailing Quarter' Growth Index -vs- U.S. Department of Commerce's Quarterly GDP Growth Rates over past 4 years. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average. Please see our Frequently Asked Questions page for a more complete description of our Growth Index.
Consumer Metrics Institute's Contraction Watch(2)
(2) The comparison of the 91-Day Growth Indexes during the 'quarter' immediately following the commencement of a contraction. The contraction events of 2008 and 2010 are shown against the same scale of annualized contraction.
(4) The average net year-over-year growth percentage of the Weighted Composite Index over the past 91, 183 and 365 Days (the daily value for the equivalent of a real-time Consumer 'GDP' for the trailing moving 'quarter', 'six months' and 'year').
(5) The percentile of the above among all GDP quarters, six months and years since the spring of 1947 in the BEA's GDP growth tables (i.e., the percentage of all comparable time spans in the BEA's data below the values in the '% Growth' line above).
Our Daily Growth Index has reached a year-over-year contraction rate of 5%, and it is rapidly closing the gap on the worst contraction rate observed during the 2008 Great Recession:
The current 2010 contraction is now over 215 days old. At the same point during the duration of the 2008 Great Recession, consumer demand was contracting at less than a 1% year-over-year rate. Additionally, during the 2008 Great Recession our Daily Growth Index had returned to net growth after 223 days. From the above chart we can see that the profile of the 2008 contraction and the 2010 contraction are substantially different. The 2008 event was a classic "V" shaped recession. So far this one is not. We have previously suggested that this contraction might be mild but prolonged. We are no longer confident about "mild".
We have previously gained some notoriety for having our Daily Growth Index lead the GDP by a relatively consistent 18-20 weeks during the Great Recession. Does this mean that we expect the GDP a couple of quarters from now to be contracting at rates similar to our current -5% rate?
- Our methodologies capture only on-line consumer demand for discretionary durable goods, the most volatile portion of the consumer's 70% contribution to the GDP. As a consequence we are not seeing the impact of most ongoing governmental stimuli. If governmental stimulus packages can successfully offset the 2010 drop in consumer demand, the GDP might never feel the full weight of the 2010 contraction event.
- However, as we have said before, we suspect that consumers are the "800 pound gorilla" in this recession, and their actions (or inactions) will ultimately be felt to a major extent in the GDP.
By analogy to (American) football statistics, we are only measuring the performance of the starting quarterback for the U.S. economic team. It is possible for a football team to win even though the quarterback is below average -- an overwhelming defense and a punishing running game can compensate for a journey-man quarterback -- but the performance of the starting quarterback is by far the best predictor of a football team's final results. The U.S. economy might grow without the U.S. consumer's support, but only with net exports and/or unsustainable governmental consumption. At the current time the likelihood of the U.S. becoming a net exporter is very low, and unsustainable governmental consumption is simply that: unsustainable.
It is also helpful to distinguish between "leading" and "predicting": we have deliberately decided to measure discretionary consumer demand data because it is highly leading, while fully realizing that the volatile data provides amplified signals. Fortunately during the 2008 recession the BEA's numbers for the full economy eventually matched the discretionary consumer demand portion (that we measure) with embarrassing accuracy. While we know that we are measuring only one portion of the economy -- the quarterback in the above analogy -- we still feel that those measurements reliably lead the economy as a whole. And they should not be expected to predict exactly what the BEA's 1937 based methodologies eventually measure -- for those portions of the economy that really mattered in 1937.
As the saying goes: our numbers are what they are. They are pure daily measures of on-line consumer demand for discretionary durable goods. If consumer demand decisions initiate 70% of all U.S. commerce, we think that there is merit in knowing that demand as far "upstream" as possible.
And Now We're Headed For The GREATEST Depression, Says Gerald Celente
by Henry Blodget - Tech Ticker
The fake "recovery" was nice while it lasted, says famous apocalyptic forecaster Gerald Celente, founder of the Trends Research Institute. But now the fun's over, and we're headed for what Celente describes as the "Greatest Depression." Specifically, the always startling Celente says the country is headed for rising unemployment, poverty, and violent class warfare as the government efforts to keep the economy going begin to fail.
The crux of the problem, Celente argues, is that the middle class has been wiped out. America used to be a land of opportunity for all, where hard-working people could build their own small businesses in their own communities and live prosperous and fulfilling lives.
But now a collusion of state and corporate interests that Celente describes as "fascism" have conspired to help only the biggest companies and the richest Americans. This has put a shocking amount of the country's wealth in the hands of a privileged few and left the rest of the country to subsist on chicken-feed wages and low job satisfaction as Wal-Mart "associates" -- or worse.
The answer, Celente says, is to bring back the laws that prevented huge companies from getting so big and powerful, and put some opportunity back in the hands of ordinary people. But doing that is going to take a while. And in the meantime, we're headed for trouble.
On the same topic, from Daniel Tencer at Raw Story:
The US economic recovery in recent quarters is little more than a "cover-up" and the world is headed for a "Greatest Depression," complete with social unrest and class warfare, says a renowned economic forecaster.
Gerald Celente, head of the Trends Research Institute, told Yahoo!News' Tech Ticker that there's no risk of a "double-dip recession" because the first "dip" never ended. "We're saying there's no double dip, it never ended," Celente said. "We're looking at the Greatest Depression. There's no way out of this without [rebuilding] productive capacity. You can't print [money to get] out of it."
Celente, who has been credited with predicting the 1987 stock market crash, the collapse of the Soviet Union and the subprime mortgage crisis of recent years, said the US and other developed countries can expect to see the sort of social unrest the world witnessed in Greece this year once government attempts to shore up the economy fail and lawmakers turn to "austerity measures" to plug gaping budget holes.
"You're going to see it all over the world," Celente said. "What they call austerity programs ... What are they doing? They're bailing out the banks and they're making the people pay for it. And the people don't like that." Celente pointed to a near-riot that took place last week in Atlanta when 30,000 people showed up to be put on a housing waiting list, saying that the event is a harbinger of what's to come.
He also argued that the way unemployment is measured today masks a much larger joblessness crisis because "once you're off the unemployment rolls, you're no longer unemployed." Celente said the current unemployment rate, if it were measured as it was measured during the Great Depression, would be around 17.5 percent. And he expects that number to rise to around 22 percent in the coming years.
"One of the good businesses to get in to may be guillotines," Celente quipped. "Because there's a real off-with-their-heads fever going on. People are really fed up." Celente argued that the conditions needed for an economic recovery simply don't exist. "Let's go back to the 1990s. We're in a recession. What got us out of it? The Internet. It wasn't a government policy, and Al Gore didn't invent it."
But today, Celente argued, there are no new booming industries pushing towards economic expansion. And the US middle class may not have the right skills to take up the challenge. "We went from a country that used to be merchants, craftspeople, manufacturers, to clerks and cashiers," Celente said. "We have to bring manufacturing back to America." Celente agreed with his Tech Ticker interviewers that the green economy, which seeks to replace fossil fuels with alternative and renewable energy sources, is a good place to start on an economic recovery, but he said the Obama administration's handling of the issue was misguided.
Celente pointed out the US has committed $54 billion for nuclear power expansion, and has also committed to "clean coal" -- neither of which he sees as being large drivers of the green economy. The government is "not putting money where it should go," he said.
America Won the Cold War But Now Is Turning Into the USSR, Gerald Celente Says
by Aaron Task - Tech Ticker
There's a lot of talk these days about America being an empire in decline. Gerald Celente, director of the Trends Research Institute, goes a step further, arguing America is following a similar path as the former Soviet Union. "While the many glaring differences between the two political systems have been exhaustively publicized - especially in the U.S. - the glaring similarities [go] unnoticed," Celente writes in The Trends Journal, which he publishes.
In the accompanying video, Celente describes some of these similarities, including:
- A rotten political system: He compares politicians (Democrats and Republicans alike) to "Mafioso" and says campaign contributions are really thinly disguised "bribes and payoffs."
- Crony capitalism: Like in the USSR of old, Celente laments that so much of America's wealth (93%) is controlled by such a small group small portion of its population (10%). Owing to that concentration of wealth, the government makes policies designed to reward "the bigs" at the expense of average citizens (see: Bailouts, banks).
- Military-industrial complex: The USSR went bankrupt fighting the cold war and Celente fears the U.S. is "squandering its greater but still finite resources on a gargantuan defense budget, fighting unwinnable hot wars and feeding an insatiable military stationed on hundreds of bases worldwide."
As with many observers, Celente thinks America will suffer the same fate in Afghanistan as the USSR, the British Empire, Alexander the Great and all others who've ventured into the "graveyard of empires." The irony, of course, is that while America defeated Soviet Communism and won the Cold War, perhaps our greatest threat today comes from China and its booming state-controlled economy.
'Too Big to Fail' Is Killing the Middle Class, Celente Says
by Peter Gorenstein - Tech Ticker
August has been a hot bed of merger & acquisition activity, including:
- Intel to buy McAfee for $7.7 billion
- Mining giant BHP Billiton wants to takeover agricultural goliath Potash for $40 billion.
- Dell to buy 3PAR for about $1.2 billion in cash
- First Niagara Financial Group agreed to buy Connecticut’s NewAlliance Bancshares Inc. for about $1.5 billion in cash and stock.
M&A activity is generally viewed as a good sign for the market and economy. To the contrary, says Gerald Celente, director of the Trends Research Institute. "This country went from a nation of Main Street, mom and pop businesses to Wall Street and 'too big to fails'," he tells Tech Ticker in this clip. ("Not only were they 'too big to fail,' they were 'too big to jail'," he says of Wall Street execs.)
Deregulation and bailouts favor the country’s largest corporations, at the expense of small business, Celente believes. "They’re squeezing out everybody else." Policies like these have created the widest wealth gap in the industrialized world, he says; "10% of the nation controls 93% of the assets." Former IMF Chief economist Simon Johnson makes a similar point in his book, 13 Bankers. In it, Johnson claims, six banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) control 60% of America’s gross national product.
The only way to turn the tide, says Celente, is to "put back what was in place that worked," like the Glass-Steagall Act and the Sherman Antitrust Act, which exists in name only. "That’s what stopped the robber barons from raping the country."
Celente is confident more regulation on the largest companies will help entrepreneurs, which in turn strengthening a fading middle class – the backbone of our society. "America becomes strong again when the middle builds big again," he says. Unfortunately, Celente sees the trend going in the opposite direction. "The merger of state and corporate powers, let’s calls a spade a spade. It’s fascism."
Fannie Mae and Freddie Mac reform: Would it add $5 trillion to US debt?
by Mark Trumbull - Christian Science Monitor
The Obama administration turned its focus squarely on a $5 trillion question Tuesday: What to do with Fannie Mae and Freddie Mac, the giant financiers of US home mortgages that fell into a bankruptcy-style conservatorship two years ago. These two corporations together own or guarantee about half the mortgage debt in America. What happens to them will affect the ability of the economy and the housing market to recover. It also has big implications for US taxpayers, who could foot even higher bailout bills if the mortgage-insurance business isn't fixed.
"We will not support a return to the system where private gains are subsidized by taxpayer losses," said Treasury Secretary Timothy Geithner, in remarks Tuesday that opened a day-long conference on how to reform these so-called government sponsored enterprises (GSEs). Mr. Geithner cited the possibility of giving Fannie Mae and Freddie Mac an "elegant funeral." But that wouldn't mean a government exit from its prominent role in America's housing market. In fact, it could mean that the government agrees to stand explicitly behind the GSEs' obligations, while also putting in place a new system designed to ensure that mortgage credit is available even during recessions or a banking crisis.
"'Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale," Mr. Geithner said in his prepared remarks. Other panelists at the conference echoed that view. "The hit to the economy [from the recession] would have been measurably greater" without the GSEs and the Federal Housing Administration, said economist Mark Zandi of Moody's Analytics. By guaranteeing or insuring mortgages, these agencies enabled credit to keep flowing for typical home loans even as home values were falling and the private-sector channels of mortgage finance had dried up.
The Obama adminstration hasn't outlined its approach to GSE reform, which was notably missing in the financial-reform law the president signed recently. The conference represents a first step, at least in public view, toward developing a proposal. The battle in Congress, expected to ramp up early in 2011, will reflect a sharp partisan split that's existed for years. Republican lawmakers emphasize the importance of scaling back government's role in the housing market and limiting taxpayer exposure to losses. Many Democrats emphasize the risks of providing too little support for the housing market, given housing's prominent role in family wealth and in the economy's ups and downs.
Both sides of this debate were represented in Tuesday's panel discussions. Many participants from the private sector – including Mr. Zandi – said the government should eventually scale back its role in the housing market significantly. At the same time, many said government mortgage guarantees should continue to be available in some carefully managed forms. At least one participant, bond-fund manager Bill Gross of the investment firm PIMCO, suggested that government guarantees should apply to virtually all mortgages. He said this results in mortgage interest rates that are about 3 percentage points lower than if the only mortgage insurance came from the private sector.
Whatever role the governemnt takes in the future, policymakers must also decide on a transition plan to get there. Many panelists urged that Fannie and Freddie should not be reconstituted in something similar to their pre-crisis form: profit-seeking private corporations that, at the same time, have a government-chartered mission and implicit taxpayer backing. An exit strategy could involve adding Fannie and Freddie's roughly $5 trillion in obligations, in effect, to a federal balance sheet that already includes $13.3 trillion in federal government debts. The GSE obligations would be a different animal, because those liabilities would need to be covered by taxpayers only if things went bad in the housing market.
But the nation has just seen things go bad in the housing market. During the financial panic of 2008, investors who held GSE debts became increasingly worried about the solvency of those corporations. The Bush administration felt impelled to put Fannie and Freddie into a conservatorship, to avert a possible bankruptcy and to keep mortgage markets moving. The companies weren't holding enough capital in reserve to cover likely losses.
As of March 31 this year, 6.3 percent of mortgages held by Fannie and Freddie are either seriously delinquent or in foreclosure. Although that's down slightly from the figure three months earlier, it represents a big one-year rise (from 3.9 percent in early 2009). In the end, losses to Fannie and Freddie related to the financial crisis may cost taxpayers $305 billion, according to one estimate recently published by Mr. Zandi and Alan Blinder of Princeton University. But that figure could rise or fall depending on what happens with the economy – and with government policies on housing.
5 Trillion More Dollars To Fix Fannie Mae And Freddie Mac???
by Michael Snyder - Economic Collapse
Fannie Mae and Freddie Mac have become gigantic financial black holes that the U.S. government endlessly pours massive quantities of money into. Unfortunately, if the U.S. government did allow Fannie Mae and Freddie Mac to totally implode, both the mortgage industry and the housing industry in the United States would completely collapse.
So essentially the U.S. government finds itself between a rock and a hard place. Prior to the financial crisis of the last few years, Fannie Mae and Freddie Mac were profit-seeking private corporations that also had a government-chartered mission of expanding home ownership in America. But now that they have been officially taken over by the U.S. government, they have become gigantic bottomless money pits. It is hard to even describe just how much of a mess Fannie and Freddie are in.
However, the unprecedented intervention by Fannie Mae and Freddie Mac in the mortgage market over the past couple of years has been about the only thing that has kept it from plunging into absolute chaos. So what does the future hold for Fannie Mae and for Freddie Mac? Well, according to one estimate, it could take another 5 trillion dollars to "fix" Fannie Mae And Freddie Mac.
Yes, you read the correctly. According to an article in the Christian Science Monitor, Fannie Mae and Freddie Mac are facing $5 trillion dollars in liabilities that the federal government is going to have to deal with one way or another....
An exit strategy could involve adding Fannie and Freddie's roughly $5 trillion in obligations, in effect, to a federal balance sheet that already includes $13.3 trillion in federal government debts. The GSE obligations would be a different animal, because those liabilities would need to be covered by taxpayers only if things went bad in the housing market.
It is hard to even put into words how much money that is. If you were alive when Jesus was born, and you spent one million dollars every single day since then, you still would not have spent one trillion dollars by now.
But Fannie Mae and Freddie Mac are not a one trillion dollar problem.
They are a five trillion dollar problem.
And if the housing market gets even worse (which it will), that figure could rise substantially.
Of course the U.S. government should have never gotten into the mortgage business in the first place, but these days the U.S. government is intervening in virtually every industry.
And don't expect U.S. government support for the mortgage industry to stop any time soon. In fact, U.S. Treasury Secretary Timothy Geithner says that the U.S. government plans to continue to play a prominent role in back-stopping mortgages in order to keep the U.S. economy stabilized.
But if the only thing keeping the U.S. housing industry from plunging into the abyss is unprecedented intervention by the U.S. government, what does that say about the overall health of the U.S. economy?
Mortgage defaults and foreclosures continue to set new all-time records even with all of this government intervention. In fact, major U.S. banks wrote off about $8 billion on mortgages during the first 3 months of 2010, and if this pace continues it will even exceed 2009's staggering full-year total of $31 billion.
Not only that, but construction of new homes in the U.S. and applications to build new homes in the U.S. both declined to their lowest levels in more than a year during July.
And things are rapidly getting even worse for Fannie Mae and Freddie Mac. Mortgages held by Fannie and Freddie are going delinquent at a very alarming pace as the Christian Science Monitor recently explained....
As of March 31 this year, 6.3 percent of mortgages held by Fannie and Freddie are either seriously delinquent or in foreclosure. Although that's down slightly from the figure three months earlier, it represents a big one-year rise (from 3.9 percent in early 2009).
An increase in delinquencies of over 50 percent in just one year?
That is not a promising trend.
If the U.S. housing market takes another big dive in the next few years, and things certainly look very ominous at the moment, what in the world is that going to do to Fannie Mae and Freddie Mac?
So what is the solution?
Well, on Tuesday the Obama administration invited prominent banking executives to offer their thoughts on the mortgage market.
So what was the consensus?
It was something along the lines of this: "Please, oh please, oh please continue propping up the 11 trillion dollar mortgage market."
So much for capitalism, eh?
When even the banksters are begging for massive ongoing government intervention you know that the game has changed.
Adam Smith must be rolling over in his grave.
But this is where we are at.
We are on the verge of a horrific economic collapse, and it is only enormous intervention by the U.S. government that is holding things together.
Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration backed approximately 90 percent of all home loans made during the first half of 2010.
So where would we be without the government?
Of course we could let the whole thing collapse and allow housing prices to eventually settle at a level where people could actually afford them, but what fun would that be?
No, for now the U.S. government will continue to endlessly spend billions of dollars to prop up a system that is artificially inflated and that is destined to collapse one way or another.
The truth is that the American middle class is slowly being wiped out and they just can't afford to pay $300,000, $400,000 or $500,000 for their houses anymore.
Without good jobs, the American people are not going to be able to afford hefty mortgages. Unfortunately, millions upon millions of middle class jobs are being offshored and outsourced every single year and they are not coming back.
There simply will never be a recovery in the housing market without jobs. But in the new global economy, American workers have been put in direct competition with the cheapest labor in the world. It doesn't take a genius to figure out that jobs are going to be taken away from American workers and given to people who are willing to work for less than ten percent as much.
So, no, the housing market is never going to fully recover. Things got dramatically out of balance over the past couple of decades, and the housing market is going to try to restore that balance regardless of what the U.S. government does.
The U.S. government can continue to throw billions (or even trillions) of dollars at the problem, but in the end the underlying economic fundamentals are simply not going to be denied.
Where Goes Fannie And Freddie?
by Twist - Housing Doom
Government officials have been working hard to be definitively ambiguous when speaking about Fannie and Freddie. Barney Frank’s statement yesterday is a case in point:"I think they should be abolished," Frank told Fox Business Network’s Neil Cavuto in an evening interview. "The only question is what do you put in their place. This is a situation where given the importance they had come to play in housing, you can’t tear down the old jail until you build a new one."
Clearly he doesn’t really mean "abolish". If he were for abolishing the GSEs, he wouldn’t be talking about what you put in their place. What he really means is they should be replaced- and replaced with companies that have the same business model. It’s unclear how much, if any, private ownership these replacement companies should have, but the government wants to have companies that will take the risks the private industry won’t, and they want them to charge below market risk when they do it.
Yesterday’s conference did address the fate of the GSEs, and here’s a summary from Marketwatch. (Although if you really want a detailed explanation of their future, I suggest consulting your crystal ball.)
For local governments housing crisis keeps hitting
by Lisa Lambert - Reuters
For local governments in the United States, the housing crisis is far from over. The bust in the housing market that began nearly three years ago has hit them like a slow-moving avalanche, first striking with abandoned properties and rising homelessness. Some also saw drops in sales tax revenue as people, feeling poorer after the slide in home values, pared back on shopping trips.
Now, property taxes are falling. The housing slump pushed down property values but that has only recently affected property tax collections, as there can be as much as a three-year lag in assessing properties. Cities, counties and school districts chiefly rely on property tax revenues to fund services such as police and fireman and teacher salaries. That has meant spending cuts. And with recent data showing the real estate sector remains weak, local governments could face declining revenues for years, preventing them from increasing spending or forcing them to cut even more.
With the country's unemployment rate stuck above 9 percent residents may be reluctant to pay higher taxes to reinstate slashed services. California's San Bernardino County, the largest county in the continental United States, closed a budget gap of $84.9 million for the fiscal year that started on July 1. Already it is foresees a $48 million deficit for the next fiscal year. According to budget documents, the number of mortgage delinquencies and defaults have dropped in the county, which means the number of people paying taxes may be stabilizing. But the values of real estate have fallen, keeping revenues down.
"Even if the housing market were going to turn around tomorrow it would take several years for the county to see an increase in property tax revenue," said David Wert, public information officer for the county's administrative office. Worried that the largess from the housing boom wouldn't last, administrators for the county, which employs 19,000 people, started freezing positions and offering early retirements to drive down spending a couple of years ago, Wert said. When the bubble burst, the county was able to forestall slashing services. But alongside wiping out 562 positions this year, which entails laying off 85 people, it is now weighing cuts at libraries. "The bottom line is that there are counties looking at many lean years ahead," Wert said.
Waiting For 2013
In May nearly half of 800 counties surveyed by the National Association of Counties said the decline in income from property taxes was a major reason for revenue shortfalls. "I'm not looking for a real improvement, or just a beginning of a comeback, until our 2013 budget year," said Glen Whitley, president of NACo and County Judge of Tarrant County, Texas, a role akin to head of the county commission.
Most counties begin their fiscal years in July. Counties hope housing values hit bottom this past January and commercial property values will stop dropping by next January, Whitley said. The value of properties in Tarrant had been increasing by about 4 percent annually for more than a decade, but this year values fell 4 percent, the first-ever decline, he said. The county closed its budget gap through savings in salaries, but other places in Texas are cutting sheriffs, closing libraries and swimming pools, and limiting spending on public safety. Residents are not fighting spending cuts. "It's difficult to raise property taxes at the same time folks are fighting off unemployment," Whitley said.
Caught In A Lag
From January 1, 2009 to the start of this calendar year Wisconsin property values dropped $16 billion, the state's Department of Revenue said last week, noting it "fared better than most other states last year." Values fell $49 billion over the year in Michigan, a state hit hard by the economic recession and by the housing crisis due to its reliance on the automotive sector. Nevada, Oregon and Arizona have seen property values decline by at least 10 percent and Minnesota and Illinois have had drops of at least 7 percent during the last year.
The plunge is a recent development. The U.S. Census reported property tax revenue dropped in the first quarter of this year compared to the same period a year ago, the first such decline in seven years. "Property tax collections are still at a relative high, but the signs are that we're starting to head down the curve we've been expecting to see," said Chris Hoene, research director at the National League of Cities. Most local governments' property assessments lag by two to three years, according to the league, and many cities levied taxes last year based on values set in 2007. Now they are using values starting in 2008, when housing prices dropped.
Moody's Investors Services has had a negative outlook on local government for two years, said Bob Kurtter, managing director of the agency's state and local government ratings. He added, though, that when compared to sales and income taxes, property tax revenues have been relatively stable. The impact of the property tax decline has not been spread evenly, he said.
States like California and Maryland cap how much taxes can increase each year. During the housing bubble local government revenue in those states did not rise very high and, therefore, did not have far to fall. The county association's Whitley said the caps also meant that counties could not use rising revenue during the bubble to build up reserves. That means that now they cannot rely on "rainy day funds" in lieu of tax hikes and spending cuts.
Kurtter called finding the assessed value of real estate "a byzantine process" differing from taxing district to district, which means that some governments' assessments could lag changes in market values by as much as five years. Even when housing values stop fluctuating they could reach equilibrium at such a low level that cities and counties have to cut services, he said. "Yes, there's uncertainty for sure," Kurtter said. "The stress is not going to go away."
We Killed The Goose That Laid The Golden Egg And Now The Number Of Americans Receiving Long-Term Unemployment Benefits Has Risen A Whopping 60% In Just One Year
by by Michael Snyder - Economic Collapse
For middle class Americans, the new global economy has provided mountains of cheap products made in China, India and dozens of other nations, but it has also killed the goose that laid the golden egg. Millions of American workers have been discovering that the price for all of those inexpensive foreign-made goodies is their jobs. Now we have so many long-term unemployed workers in the United States that we are inventing new terms (such as "the 99ers") to describe them.
Unemployment is on the rise again (we'll get to the figures in a minute) and everyone seems perplexed at the continuing inability of the "greatest economy in the world" to provide jobs for everyone. But the truth is that this has been coming for a long time. The debt-fueled prosperity of the past couple of decades allowed us to live far beyond our means and provide very high levels of employment for a while, but now economic reality is setting in. The millions of middle class jobs that have been shipped overseas are never coming back. Unfortunately, the existence of a large class of chronically unemployed Americans that are struggling just to survive is going to quickly become "the new normal".
This week the U.S. Labor Deparment announced that for the week ending August 14th, new applications for unemployment insurance benefits reached the half-million mark. That was the first time since last November that the psychologically important 500,000 threshold had been hit. Most economists had predicted that unemployment claims would actually decline, but instead they experienced their fourth increase in the past five weeks.
But the increase in new applications for unemployment benefits is only part of the story. It is not such a bad thing to be unemployed if you can find another job in a couple of weeks or a couple of months. But in 2010, there are millions of Americans that cannot seem to find a job no matter what they do month after month after month.
In fact, the number of Americans that have exhausted their state unemployment benefits and that are collecting long-term federal unemployment benefits has increased 60 percent over the past year. The following is how a recent article on CNBC recently described the situation....
"Claimants under the Emergency Unemployment Compensation provision—who have exhausted their state benefits—surged 260,105 to 4,753,456 for the week ended July 31 (the data lags the weekly claims by two weeks). While that represents a weekly increase of 0.5 percent, the total is 60.5 percent higher than the 2009 figure of 2,961,457."
So what will the figure be at this time next year?
And what happens if the U.S. Congress finally decides to cut off the long-term unemployment benefits at some point?
The truth is that things are getting really frightening out there.
"There’s a red flag being waved right now that says ‘Danger,’" Bloomberg quoted Mark Vitner, a senior economist at Wells Fargo Securities LLC as saying recently. "Growth is going to slow in the second half and we might face something a little more ominous than that."
The reality is that there are not nearly enough jobs out there for everyone. According to one recent survey, 28% of U.S. households have at least one member that is looking for a full-time job.
Just think about that.
Almost 30 percent of all U.S. homes have someone who is looking for a full-time job.
That is not just a problem.
That is a national crisis.
But it is not just those who are unemployed who are suffering. The reality is that this economic downturn has hurt most of us in one way or another. A recent Pew Research survey found that 55 percent of the U.S. labor force has experienced either unemployment, a pay decrease, a reduction in hours or an involuntary move to part-time work since the recession began.
Millions of Americans are putting up with increased workloads, pay decreases and benefit cuts right now because the alternative is joining the hordes of jobless Americans that are fighting tooth and nail over the few jobs that are actually available.
Once you lose your job in this economy there is no telling when you are going to be able to get another one. In America today, the average time needed to find a job has risen to a record 35.2 weeks.
Could you imagine being unemployed for 35 weeks?
The truth is that in 2010, it is employers that have all the power and all the leverage.
In fact, when you really analyze it, it is a wonder that companies are hiring new workers at all. It is a massive pain in the rear end to hire a new worker in America today. The thousands upon thousands of regulations that must be complied with, the big pile of forms that need to be filled out and the elaborate bookkeeping that must be maintained make hiring someone a major headache. One top of that, tax contributions, benefit packages and health insurance premiums make each worker a very expensive proposition.
There is a reason why so many companies are trying to squeeze more out of the employees that they already have or are only hiring temporary employees right now.
But the biggest reason why there is such a lack of jobs is because millions upon millions of good jobs have been shipped overseas. Globalism and "free trade" have put middle class American workers into a situation where they are in direct competition for jobs against the cheapest labor in the world.
Why in the world should U.S. companies hire American workers when they can hire very willing workers on the other side of the world who will do the same job for less than one-tenth the cost?
Those who once warned us about "the great sucking sound" that globalism would create were right, and the truth is that the U.S. has already been bleeding good jobs for years. According to one analysis, the United States has lost 10.5 million jobs since 2007, and the truth is that unless something is done things are going to get even worse.
But what can get lost in all of these statistics is the very real pain that so many millions of Americans are now experiencing.
Losing a job and watching everything that you have worked for crumble can be extremely soul crushing. In fact, this economy is pushing some Americans completely over the edge.
The following is an excerpt from an actual letter to U.S. Representative Anthony Weiner....
"My dad, S, killed himself March 16, 2009 because he ran out of money and could not find work. My whole family had been devastated by the economy. He was 61 years old and could not take it anymore. He could not figure out how to keep the electric on, buy food, or keep a roof over his head. A day before his electric was to be shut off, and 2 weeks away from eviction, my dad took the hardest walk of his life. He left a note on the dining room table for my sister and I. His suicide letter said ‘I love you. I had to do this. I ran out of money. I wish you both luck in your lives’. He left the door unlocked with the door key left in the lock. He carefully laid out two suits for us to pick from to bury him in."
Could you imagine if that was your father?
As the economy continues to deteriorate, many more Americans are going to be pushed to the edge of despair.
Life is not about paying our bills or about the things that we own, but there is no denying the pain that comes when you run completely out of money and you feel totally helpless.
But nobody should ever give up. There is always hope. Things can always be turned around.
Unfortunately, we have entered a time when there are always going to be a large number of unemployed Americans because there are just not nearly enough jobs to go around.
Anyone who thought that we could merge American workers into a massive global labor pool and still be able to maintain our middle class lifestyles was living in fantasy land.
No, the truth is that globalism has killed the goose that laid the golden egg and now tens of millions of Americans are going to pay the price.
The Five Stages of America’s Housing Bubble
by Michael David White - Housing Story
Jobs Outlook Isn't Just Bad, It May Be Getting Worse
by Jeff Cox - CNBC
An anticipated gradual gain in US employment has turned into a surprising deterioration, and that has economists worried about the increasing threat to the economic recovery. Thursday's weekly jobless claims report was just the latest but perhaps most definitive sign yet that if the economy is to recover, it will do without participation from the labor market.
Instead, the continued trend of businesses doing more with less likely will hold as jittery employers remain reluctant to start bringing workers back on board. "We've had increases (in jobless claims) the last couple of weeks, when most of us thought they would be decreasing. The number of people claiming benefits is now disturbingly high," says David Resler, senior economist at Nomura Securities in New York. "For those who doubted it will be a long, drawn-out period, they can't doubt it anymore."
New filings for unemployment claims breached the psychologically important 500,000 level in the past week, an increase of 12,000 from the previous week's revised number of 488,000. That came despite data that the private sector actually has been creating jobs. The monthly Labor Department report for July showed 71,000 private jobs were created even as total nonfarm payrolls fell 131,000.
The trend is confounding economists, who say the net job creation in the private sector ought to start having some effect on the weekly number. The latter figure is significant in that it is the rawest measure of the jobs picture. While the monthly number entails a series of computations based on the government's birth-death model, determinations of who is actually looking for a job and who is discouraged, and a host of other arcane measuring tools, the weekly number is a simple census of how many people filed new claims for unemployment insurance.
"There's got to be an awful lot of job-churning going on if we can have positive private sector employment growth for seven months out of the year and this (weekly claims) thing is drifting up," says Kurt Karl, chief US economist at Swiss Re in New York. "Businesses have got to be laying off a lot of people and hiring a lot of people, and the net is slightly positive."
One of the most vexing problems for policy makers has been what to do about the long-term unemployed. Claimants under the Emergency Unemployment Compensation provision—who have exhausted their state benefits—surged 260,105 to 4,753,456 for the week ended July 31 (the data lags the weekly claims by two weeks). While that represents a weekly increase of 0.5 percent, the total is 60.5 percent higher than the 2009 figure of 2,961,457.
Congress in July agreed to extend the program until Nov. 30, over objections of some members regarding how to pay for the benefits as well as whether they discouraged recipients from seeking work. The EUC program was created in June 2008 to address the burgeoning unemployment problem when the national rate stood at 5.5 percent; it is now at 9.5 percent.
Economists weren't sure how much of a long-range impact the benefits extension will have. "Before the programs lapsed, (claims) were on a gentle downward trend. My assumption would have been that we would have stayed on a downward trend. But we may be seeing an interruption of that," Resler says. "For the time being we have to conclude that we are definitely seeing a higher level of claims in recent weeks because people who had lost their benefits are now reclaiming them and we just don't know how much of an impact that is." Besides the sharp drop in government payrolls and the dynamics of the benefits program, small business remains a major concern.
Recent surveys have shown waning confidence among small business leaders, who believe the general uncertainty of the economic environment combined with higher costs of government health insurance weigh against the costs of hiring new employees. "The revenue of private held companies has been going down, and if you combine that with the regulatory environment, it makes for poor prospects for these businesses to start hiring people," says Brian Hamilton, CEO of Sageworks, a Raleigh, N.C.-based financial analysis firm. "People just don't feel good. I haven't seen anything like this in 20 years."
The multiplicity of factors lining up against the labor market is sure to stoke up talk about a double-dip in the economy, or at the very least little chance of meaningful gains for quite some time. "It's not good, it just isn't, particularly when you piece it together with all of the other data we're getting," says Paul Ashworth, senior economist at Capital Economics in Toronto. "This isn't just rising claims and nothing else is going on. We're seeing activity rates going down, we're seeing confidence weaken—a lot of not very encouraging signs."
UK government urged to reveal 'true' national debt of £4.8 trillion
by Philip Aldrick - Telegraph
The Institute of Economic Affairs (IEA) has calculated that the national debt is £4.8 trillion once state and public sector pension liabilities are included, or £78,000 for every person in the UK.
The IEA raised its concerns after the latest public finances data from the Office for National Statistics (ONS) this week, which showed that the total debt, excluding bank bail-outs, is £816bn – itself a record high. However, the figures strip out the state's pension liabilities in a contravention of standard accounting practices.
Mark Littlewood, the IEA's director-general, said: "The latest official national debt figure is seriously misleading. Looming in the background are pension liabilities. These should be moved to the forefront. "The ONS should include these liabilities in their calculations. It is shocking enough to see official figures revealing a jump in national debt over the last year from the equivalent of 48pc of GDP to 56pc, but the grave reality is that our real national debt stands at 333pc of GDP." Nick Silver, an IEA research fellow, said the full figure, including the £1.2 trillion public sector pension liability and £2.7 trillion state pension liability, should be published either monthly or annually alongside the net debt data for reasons of transparency.
The ONS has already begun to assemble the data, publishing the full list of Britain's debts and liabilities for the first time in July, which came to a total of between £3.68 trillion and £4.84 trillion. Aileen Simkins, ONS director of operations on economic statistics, said the figures would be updated in September and that the ONS plans to compile and release them on an annual basis "to begin with". "We are in no doubt that there is a bigger number that is also relevant to public data," she said. "We think it is important to have more transparency on public sector debt – looking at figures that go beyond standard monthly net debt and include state and public sector pensions."
The ONS numbers included a £1 trillion to £1.5 trillion liability for the Government's stakes in the part-nationalised banks, equivalent to the relevant portion of their total liabilities, £1.35 trillion for state pension liabilities, and £1.2 trillion for public sector pensions.
Social Security Cuts Weighed by Panel
by Laura Meckler - Wall Street Journal
A White House-created commission is considering proposals to raise the retirement age and take other steps to shore up the finances of Social Security, prompting key players to prepare for a major battle over the program's future.
The panel is looking for a mix of ideas that could win support from both parties, including concessions from liberals who traditionally oppose benefit cuts and from Republicans who generally oppose higher taxes, according to one member of the commission and several people familiar with its deliberations. In addition to raising the retirement age, which is now set to reach age 67 in 2027, specific cuts under consideration include lowering benefits for wealthier retires and trimming annual cost-of-living increases, perhaps only for wealthier retirees, people familiar with the talks said.
On the tax side, the leading idea is to increase the share of earned income that is subject to Social Security taxes, officials said. Under current law, income beyond $106,000 is exempt. Another idea is to increase the tax rate itself, said a Democrat on the commission. Even before the commission settles on a plan, many liberals are vowing to block any cut in retirement benefits. But the White House and the powerful senior group AARP appear open to a deal.
Republicans on the commission have mostly held their fire. One of them, Rep. Jeb Hensarling (R., Texas) said Thursday he opposes tax increases but wouldn't rule anything out at this stage in the discussions. Otherwise, he said, "the thing blows up before it has a chance to work." The commission's Social Security proposals would face an uncertain reception in Congress, which would have to approve changes to the program. But some commissioners were optimistic.
"Are Republicans willing to sign onto a tax increase, and are Democrats ready to sign onto a benefit cut? I think the answer is probably yes in both cases if the other is willing to do it," said Alice Rivlin, a Democrat and former White House budget director. Some have suggested raising the retirement age to as high as 70, but Ms. Rivlin said she doubts there is support on the commission to go that high.
Some in the White House view a deal on Social Security as a confidence-building measure that could prepare the political system to tackle even tougher fiscal questions, such as the federal government's budget deficit. Asked about Social Security on Wednesday, President Barack Obama hinted of coming changes, saying: "We're going to have to make some modest adjustments in order to strengthen it."
The 18-member National Commission on Fiscal Responsibility and Reform is charged with generating solutions to address medium- and long-term fiscal problems. To be endorsed by the panel, an idea must garner 14 votes. The commission includes 12 members of Congress, six Democrats and six Republicans appointed by congressional leaders, plus four non-lawmakers chosen by the White House. The White House also appointed the co-chairmen, Democrat Erskine Bowles, a former White House chief of staff, and Alan Simpson, a retired GOP senator. The group is to issue its report by Dec. 1.
The Congressional Budget Office underscored the challenge Thursday, forecasting that the federal government's budget deficit for this fiscal year would total $1.34 trillion. That is slightly less than previous projections as a result of lower-than-expected spending on the Troubled Asset Relief Program financial rescue. The deficit will fall to just over $1 trillion in 2011, due to lower stimulus spending, the office said. But the deficit would grow if Congress extended the Bush tax cuts.
Social Security officials project that beginning in 2014, the program will routinely pay out more in benefits than it collects in taxes, requiring it to draw on reserves that have been funding the rest of the government. By 2037, the reserves would be depleted and the program would only be able to pay about 75% of promised benefits. The U.S. is facing the same demographic trends that are at play in most other parts of the world: life expectancies have lengthened while fertility rates have fallen, leaving countries with a shrinking proportion of young workers to help support elderly residents.
The problem is particularly acute in Europe. Germany raised its retirement age by two years, to age 67. In France, President Nicolas Sarkozy has proposed raising the retirement age to 62, up two years. According to the World Bank, Hungary has raised its retirement age, while Poland has moved to reduce incentives for early retirement, and other nations have changed the way benefits are calculated. In the U.S., this election year's political debate on Social Security has been dominated by Democratic attacks on Republicans who support individual private accounts that could be invested in stocks, an idea that President George W. Bush pushed unsuccessfully in 2005. But many predict any 2011 debate on Social Security will focus on the issue of benefit cuts and tax increases.
Liberal Democrats are already organizing to head off any proposal that cuts Social Security benefits, including any plan to raise the retirement age. They argue the program's finances can be fixed with tax increases alone and that benefit cuts would harm low-income seniors who have little savings. "People would rather pay more or have revenue raised than cut the benefits," said Rep. Jan Schakowsky (D., Ill.), a commission member. She said she was fairly confident a proposal that included benefit cuts would not garner the needed 14 votes.
Many liberals are particularly opposed to any plan that would link cuts in Social Security to deficit reduction. They say that because the retirement program has long run a surplus, it is not to blame for the budget deficit. The commission's mandate is to examine ways to balance the budget and to address the growth of entitlement programs. Outside the commission, Moveon.org, the Campaign for America's Future and other liberal groups are pressuring candidates for Congress to promise not to support benefit cuts, posting name-by-name results on a website. A coalition of 125 groups, called Strengthen Social Security, calls for closing the shortfall with tax increases alone. But others are open to the conversation, including the powerful senior group AARP.
"We're prepared to be quite supportive of a real engagement on the issue," said John Rother, director of public policy for AARP. Acting sooner allows for changes to be made gradually, he said, and will reassure younger workers that the program will be there for them. He dismisses those who said they can never support benefit cuts. "I know all these people personally and they'll say we have to be hard line now to influence the debate...I kind of take it with a grain of salt, these emphatic statements."
Time for debate on equity market structure
by Gillian Tett - Financial Times
If you pay peanuts, you get monkeys. That has long been the mantra of the financial industry when bankers want to defend their out-sized pay. But could it be time to give this adage a new twist, and apply it to the structure of the equity market – at least in the sense of asking investors to pay higher upfront trading fees, to build a less costly financial system? That thought is posed in a letter from Ted Kaufman, a Democrat Senator from Delaware, to the Securities and Exchange Commission and the Commodity Futures Trading Commission, which calls for radical reform to equity markets after the recent "flash crash".
This letter is worth reading for at least two reasons. Firstly, what happened on the May 6 "flash crash", when share prices gyrated wildly, has had a brutal impact on retail investor confidence (as I noted in another recent column). So, with the CFTC and SEC due to release a report on this event next month, it is welcome that politicians such as Kaufman are now trying to jump into the debate with some granular ideas. But secondly, Kaufman’s letter touches on issues wider than the flash crash. Specifically, the senator – who has long been calling for equity market reform – argues for a debate about what is market "liquidity", and how beneficial it might be.
In the past few decades it has been taken for granted in the west that high levels of liquidity are a good thing. The more trading that occurs, the easier it is to buy and sell stocks, and the lower that transaction costs should be – or so the argument goes. In some senses, what has happened in equity markets in the past decade might appear to bear this argument out. For the advent of computerised trading programmes – which now account for two-thirds of all US trading volumes – has raised activity significantly. New alternative trading venues have also offered investors more choice about how they execute deals. And this, coupled with rising technological efficiency, has helped to cut the upfront cost of executing large equity trades in US markets.
But Kaufman argues that these apparent upfront "savings" have also come at a longer-term cost. When times are good in the markets, there is frenetic trading activity, because computers are programmed to pump out price messages and chase every tiny trade they can; but only a small proportion of these trading messages produces tangible trades – and this arbitrage-hunting pattern creates markets that are fragmented and jittery. Thus, if a crisis hits, the computers may all freeze and sell partly because they are all programmed in a similar way; hence that flash crash.
Kaufman argues that it is not good enough for the SEC just to tackle the symptoms of the flash crash (say, by imposing circuit-breakers); he wants to address the root causes too, by making markets more "truly" liquid. And he offers a pretty sensible set of proposals for doing this: regulators should create incentives to move more trading on to regulated exchanges; they should monitor strategies of high-frequency traders; they should force HFT entities to pay a fee per message, not per trade; and HFT entities should also hold more capital.
Most controversially of all he argues that there need to be strong regulatory incentives for HFT (and others) to execute large orders, at firm prices – and not exit when a crisis hits. In a sense, this is an appeal to a return of old-fashioned broking and market-making. While such services would be expensive, Kaufman argues that it is a worthwhile price. "It may seem counterintuitive, but the Commission should examine whether regulation should aim not to facilitate narrow spreads with little size or depth of orders, but instead promote deep order books and – if necessary – wider markets with large protected quote size," he writes."
The SEC must carefully scrutinise and empirically challenge the mantra that investors are best served by narrow spreads." Put another way, paying "peanut" spreads is no use if trading ends up in the hands of computerised monkeys. Could this idea ever fly? In the UK, some regulators, such as Lord Turner are sympathetic. So are some continental European policymakers. But the big uncertainty now is the SEC and CFTC. Until recently, Kaufman was rather a lonely voice calling for equity market reform; indeed many powerful financial participants regarded him as something of a crackpot.
But many of Kaufman’s ideas would play well on Main Street – and Mary Schapiro, SEC chairman, is keenly aware of just how much damage the events of May 6 have done. Other politicians, such as senator Charles Schumer, are now entering this debate too. So, as my colleague Jeremy Grant notes, it is just possible that the events of May 6 might have created a trigger for real debate. If so, that is long overdue; Kaufman’s ideas definitely deserve to be widely aired.
Banks Stuck With Bill for Bad Loans
by Floyd Norris - New York Times
If nobody does their job right, and disaster ensues, who should pay for the sins of all? That is the predicament now confronting the mortgage industry, where it has become clear that many billions of dollars in home loans were sold, guaranteed and rated as safe without anyone bothering to examine whether the loans were made with due regard for the rules.
You can make a case — call it the caveat emptor case — that no one should be able to recover any losses they suffered from loans that went bad. If they had performed even rudimentary checks before the loans were made, sold, rated, insured or securitized, it’s very likely that big problems would have been visible before disaster hit. There would have been fewer bad loans and many fewer foreclosures. That case is not, however, showing any sign of prevailing as legal battles increase in number. Instead, it appears that big banks will be compelled to pay for their own sins as well as the sins of others.
Already the four big commercial banks — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup — have taken losses of $9.8 billion on loans they have repurchased or expect to be forced to repurchase. Moshe Orenbuch, an analyst at Credit Suisse, says he thinks that figure will rise to $20 billion or $30 billion before the wave is over. Other analysts think the number could be significantly higher.
Even now, long after we learned just how bad the underwriting standards were, it is surprising to see how bad many of these loans were. In the second quarter, Wells Fargo repurchased $530 million of mortgage loans. It concluded those loans were worth, on average, a little less than half their face value. Wells says it has the right to recover some of that from the companies that sold it the loans. Unfortunately, "due primarily to the financial difficulties of some correspondent lenders, we typically recover on average approximately 50 percent from these lenders," Wells added in a filing with the Securities and Exchange Commission.
So far, most of the money the banks have paid has gone to Fannie Mae and Freddie Mac, which used to be government-sponsored enterprises and now, after the bailouts, are government-controlled. But even though they have collected billions, Fannie and Freddie are getting increasingly frustrated with the banks for what they see as foot-dragging. Freddie, in its quarterly report filed this month, said it was now requiring banks "to commit to plans for completing repurchases, with financial consequences or with stated remedies for noncompliance, as part of the annual renewals of our contracts with them."
A spokesman for Freddie would not say just what those remedies or financial consequences might be. But any bank that wants to keep offering mortgages must have contracts with Fannie and Freddie. Tying the repurchases to contract renewals could be a strong bargaining chip. The mortgages sold to Fannie and Freddie were supposed to conform to specified requirements. Those requirements did get weaker as the credit bubble intensified — a fact some bankers privately mutter the government now wants to forget — but they were still of higher quality than many mortgages sold into private securitizations.
Those securitizations are the subject of demands for mortgage repurchases made by monoline insurers like MBIA and Ambac, which erred in promising to make the payments if the securitizations did not have enough money from payments by borrowers. When MBIA began making such claims last year, it seemed a little presumptuous. In its suits, it admitted it did virtually no due diligence to assess the quality of the loans it was insuring. Instead, it said it had relied on the representations and warranties made by banks and brokerage firms that bought the insurance.
"It would be enormously expensive, even if it were logistically feasible, for a credit insurer to investigate the health of these ground-level loans," MBIA argued in a court filing, adding that if it had done such research, it would have been forced to charge much higher premiums. Something similar could be argued by almost everyone involved. To cite one example, Credit Suisse, which was sued by MBIA after it guaranteed a securitization of second-mortgage loans that may have been among the worst such loan collections ever, said it had not reviewed the loans either. Instead, it relied on assurances from the firms that made the loans.
Nor did the bond rating agencies do reviews of individual loans before they assigned AAA ratings to securities that in no way deserved them. Conveniently, everyone assumed that the others were telling the truth. The industry motto could have been, "Since we trust, why verify?"
In decisions that should send alarms through bank boardrooms, MBIA has managed to persuade judges in three cases that it has a strong enough argument to avoid dismissal at an early stage. In a decision on Credit Suisse earlier this month, a New York judge rejected the bank’s claim that MBIA was a sophisticated party that failed to perform due diligence and thus had only itself to blame. The prospectus for the deal MBIA insured did have plenty of warnings. There were "Nina" loans (no income, no assets), for which the borrower did not even have to claim having income or assets to get the loan. Some of the loans were made by New Century, a subprime lender that had already gone bankrupt.
Many of the loans left the borrower owing 100 percent of the appraised value of the property, including the first mortgages sold to others. The prospectus even said that the underwriting standards varied and that in some cases even those standards had not been met. But the judge said that all those warnings, and MBIA’s failure to do due diligence, were not enough to let Credit Suisse avoid charges that it made representations and warranties about the loans that were not accurate.
MBIA has persuaded its auditors to let it book $2.1 billion in receivables from banks, although only one small bank has reached a settlement with the insurer. Other insurers are making similar claims. So are some institutions that purchased bad paper, like some Federal Home Loan Banks. Of course, some banks are now judgment-proof. One of them is IndyMac, which was seized by the Federal Deposit Insurance Corporation. Unable to get money from the bank, MBIA has now filed suit against its officers (who may still have some insurance) and the underwriters of the securitizations that MBIA guaranteed.
Those underwriters, of course, include some of the big banks that did not fail, like Credit Suisse and JPMorgan Chase. They may have to pay for the sins of their former competitors. The banks are fighting many repurchase demands, and say they are winning some arguments. The issue is not whether a given loan went bad, of course, but whether it was properly documented and underwritten by the standards that were promised. The result is that Freddie and Fannie and MBIA and Ambac and the banks are all now going over loans one by one. Had any of them bothered to do that in 2006, 2007 and 2008 — when most of the disastrous loans were made — this tragedy could have been avoided.
But they all thought such care would cost too much and take too long. After all, MBIA charged as little as $77,500 for each $100 million of insurance, and you can’t hire many financial analysts for that kind of money. Fannie and Freddie were competing with each other and with the private securitization companies for business, and speed mattered. Banks richly deserve to suffer for their role in creating this mess. But so do a lot of other players who may well end up being compensated for losses that, to a significant extent, they brought on themselves by not doing the work they should have done.
Unlocking the language of structured securities
by Professor Donald MacKenzie - Financial Times
"The limits of my language," wrote the philosopher Ludwig Wittgenstein, "mean the limits of my world."
The languages of today’s complex financial markets often consist not simply of words and numbers but also of technical systems. The credit crisis has shown the importance of their powers – and limits.
Although few outsiders have heard of it, the single most important language of mortgage-backed securities and similar products is a system called Intex. It includes a computer language for defining deals’ intricate cash flow rules, a graphics-based tool for designing deals, and a truly remarkable computerised "library" of the parameters of the underlying asset pools and the cash flow rules of more than 20,000 deals. Intex is not cheap – one user told me his bank pays about $1.5m a year for it – and it has competitors such as Bloomberg, but it is essential for all serious participants in structured securities.
Intex’s power as a language is to make instruments such as mortgage-backed securities mentally tractable. I confess I’ve always found them daunting. The rules governing a deal can occupy hundreds of pages of impenetrable legal prose, and the economic value of the deal’s tranches depends on three complex characteristics of the underlying mortgage pool: the rate at which borrowers prepay (redeem their mortgages early), their propensity to default, and the loss severity (the proportion of the debt that cannot be recovered if a borrower defaults).
In July a friendly banker showed me Intex in action. He chose a particular mortgage-backed security, entered its price and a figure for each of prepayment speed, default rate, and loss severity. In less than 30 seconds, back came not just the yield of the security, but the month-by-month future interest payments and principal repayments, including whether and when shortfalls and losses would be incurred. The psychological effect was striking: for the first time, I felt I could understand mortgage-backed securities.
Of course, my new-found confidence was spurious. The reliability of Intex’s output depends entirely on the validity of the user’s assumptions about prepayment, default and severity. Nevertheless, it is interesting to speculate whether some of the pre-crisis vogue for mortgage-backed securities resulted from having a system that enabled neophytes such as myself to feel they understood them. Certainly, like any language, Intex aided communication. If you were planning a mortgage-backed deal, you could construct an Intex file, make it available to potential investors, and use it to discuss the deal’s features, modify those features, and gauge investors’ interest.
The limits of the language came when mortgage-backed securities were repackaged into collateralised debt obligations (CDOs), complex debt securities based on pools of other assets. You could still run Intex, first for each of the securities and then for the CDO, but it could be a slow process. Often, CDOs included not just mortgage-backed securities, but tranches of other CDOs, each maybe incorporating further CDOs. This multiplied enormously the number of underlying mortgage pools, causing a single valuation run to take hours. (On occasion, each of a pair of CDOs would buy a tranche of the other, creating a "loop" that slowed analysis).
Sometimes, users did little more than one run using the prepayment, default and severity rates judged most likely. Those (such as the rating agencies) that needed to do more nearly all took a fatal shortcut. Instead of analysing CDOs from the bottom (the underlying pools of mortgages) up, they shifted to a different mathematical language, which treated a CDO’s components (mortgage-backed securities and tranches of other CDOs), in effect, as if they were corporate bonds, with their properties inferred from their ratings. This often led to serious underestimation, especially by rating agencies, of correlation among these components.
The one bank I’ve found that did analyse CDOs based on mortgages from the bottom up was Goldman Sachs. It developed its own analytical techniques, and used a large "computer farm" in New Jersey to spread the analysis over multiple machines, so keeping the time each run took tolerable. Goldman’s Abacus CDOs – one of which was the flashpoint of the SEC’s recent investigations – were apparently analysed this way.
A bottom-up analysis was – and still is – expensive. It requires clever quantitative analysts, multiple computers and software developers able to "parallelise" a program so it runs efficiently on many machines at once. Nevertheless, if going beyond the limits of existing languages in this way helped Goldman take the crucial late-2006 decision to liquidate or hedge its positions in mortgage-backed securities (enabling it to survive the crisis almost unscathed), it was well worth it. I hope its competitors have learned the lesson: a limited language means a dangerously limited world.
Central banks and investors weigh in as gold market transforms
by Javier Blas - Financial Times
The global gold market has been transformed over the past decade. Jewellery, for decades the backbone of gold consumption, has moved to the sidelines amid voracious demand from investors. Central banks, for years big sellers of bullion, have performed a radical U-turn and started to buy. These changes help explain the surge in gold prices to a nominal all-time high of more than $1,200 a troy ounce earlier this year, from roughly $250 an ounce in 2000. Adjusted for inflation, however, prices are still far from their all-time high above $2,300 an ounce, reached in 1980 during the Soviet invasion of Afghanistan and the oil crisis.
The arrival, en masse, of investors – particularly buyers of physical gold through bullion-backed exchange traded funds – is the more important of these shifts in the gold market. The popular SPDR Gold Shares, the world’s largest gold ETF, holds more than 1,280 tonnes of bullion, more than most central banks. The buying spree meant that investors last year purchased more gold than buyers of jewellery for the first time in three decades, highlighting the growing impact of speculators on bullion prices. However, some analysts believe the fact investors are buying more gold than the jewellery industry is a sign of a bubble.
GFMS, the consultancy that compiles benchmark supply-and-demand data on the precious metal, said earlier this year that investment demand doubled to 1,820 tonnes in 2009, while jewellery purchases fell by 23 per cent to 1,687 tonnes, a 21-year low. Philip Klapwijk, executive chairman of GFMS, earlier this year warned that investors were likely to buy more gold again this year, but added that the bullion market could become vulnerable to a correction over the medium term if investors turned to other asset classes. "As the macroeconomic environment gradually normalises, the gold market’s dependence on investment will become all too apparent with a substantial price retreat at that point on the cards," Mr Klapwijk said.
Gold traders, jewellery industry executives and bankers believe gold prices have to fall towards $1,000 an ounce to witness noticeable purchases from the jewellery industry. However, they note that some buying could emerge at $1,100 an ounce. According to GFMS, gold jewellery demand has fallen by a third from a peak of 3,294 tonnes in 1997, when gold was trading below $500 an ounce. The other big change in the market has been the role of central banks. For two decades, these banks were net sellers of gold, but that trend has reversed as banks in Europe scale down their sales and others, such as those in China, India and Russia, make significant purchases.
The clearest example was India’s decision last year to buy 200 tonnes of the International Monetary Fund’s gold, following Beijing’s announcement that it had almost doubled its gold reserves to become the world’s fifth-biggest holder of the metal. Central banks in countries including Russia, Venezuela, Mexico and the Philippines are also buying gold, albeit in small amounts. The shift is important for the gold market on two fronts: the fresh interest provides psychological support and, more importantly, slower sales reduce sources of supply. Last year, central banks sold 246 tonnes. Although this was the lowest amount in 10 years, it was equivalent to 10 per cent of global mined gold.
Suki Cooper, a precious-metals analyst at Barclays Capital in London, believes central banks could be net buyers of bullion this year, the first time in more than 15 years. That view is widely shared on the market. But analysts are not expecting central banks to purchase any significant amount of gold on a net basis over the next few years, making a repetition of the buying spree of the 1960s seem unlikely. Even so, the more positive trend towards gold was highlighted recently by UBS, the Swiss bank, in its annual poll of central bank and sovereign wealth funds. It found nearly a quarter of central banks believed gold would become the most important reserve asset in the next 25 years.
At its annual seminar for sovereign institutions, UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets. The results were not weighted for assets under management. Asked what the most important reserve asset would be in 25 years, roughly half of polled officials chose the US dollar, but 22 per cent pointed to gold. Bullion was the second most popular response, well above others such as Asian currencies or the euro.
Analysts also said Asia’s central banks, from India to the Philippines, were the most likely to buy gold. They added that central banks and, crucially, sovereign wealth funds in the Middle East were also keen on the metal, although some bankers pointed out that sovereign wealth funds were more likely to be tactical buyers, seeking price appreciation, rather than strategic buyers seeking diversification and long-term security.
Shrinking 'Quant' Funds Struggle to Revive Boom
by Julie Creswell - New York Times
They were revered as the brightest minds in finance, the "quants" who could outwit Wall Street with their Ph.D.’s and superfast computers. But after blundering through the financial panic, losing big in 2008 and lagging badly in 2009, these so-called quantitative investment managers no longer look like geniuses, and some investors have fallen out of love with them.
The combined assets of quantitative funds specializing in United States stocks have plunged to $467 billion, from $1.2 trillion in 2007, a 61 percent decline, according to eVestment Alliance, a research firm. That drop reflects both bad investments and withdrawals by clients. The assets of a broader universe of quant hedge funds have dwindled by about $50 billion. One in four quant hedge funds has closed since 2007, according to Lipper Tass.
"If you go back to early 2008, when Bear Stearns blew up, that’s when a lot of quant managers got blown out of the water," said Neil Rue, a managing director with Pension Consulting Alliance in Portland, Ore. "For many, that was the beginning of the end," he added. Wall Street’s rocket scientists have been written off before. When the hedge fund Long Term Capital Management nearly collapsed in 1998, for instance, some predicted that quants would never regain their former glory.
But this latest setback is nonetheless a stinging comedown for the wizards of high finance. For a generation, managing a quant fund — and making millions or even billions for yourself — seemed to be the running dream in every math and physics department. String theory experts, computer scientists and nuclear physicists came down from their ivory towers to pursue their fortunes on Wall Street. Along the way, they turned investment management on its head, even as their critics asserted they deepened market collapses like the panic of 2008.
Granted, Wall Street is not about to pull the plug on its computers. To the contrary. A technological arms race is under way to design financial software that can outwit and out-trade the most sophisticated computer systems on the planet. But the decline of quant fund assets nonetheless runs against what has been a powerful trend in finance. For a change, flesh-and-blood money managers are doing better than the machines. Much of the money that is flowing out of quant funds is flowing into funds managed by human beings, rather than computers.
Terry Dennison, the United States director of investment consulting at Mercer, which advises pension funds and endowments, said the quants had disappointed many big investors. Despite their high-octane computer models — in fact, because of them — many quant funds failed to protect their investors from losses when the markets came unglued two years ago. And many managers who jumped into this field during good times plugged similar investment criteria into their models. In other words, the computers were making the same bets, and all won or lost in tandem. "They were all fishing in the same pond," Mr. Dennison said.
Quant funds are still struggling to explain what went wrong. Some blame personnel changes. Others complain that anxious clients withdrew so much money so quickly that the funds were forced to sell investments at a loss. Still others say their models simply failed to predict how the markets would react to near-catastrophic, once-in-a-lifetime financial events like the credit crisis and the collapse of Lehman Brothers.
"It’s funny, but when quants do well, they all call themselves brilliant, but when things don’t go well, they whine and call it an anomalous market," said Theodore Aronson, a quant fund manager in Philadelphia whose firm’s assets have dropped to $19 billion, from $31 billion in the spring of 2007. But Mr. Aronson, who has been using quantitative theories to invest since he was at Drexel Burnham Lambert in the 1970s, said investors would eventually return. "In the good years, the money rolled in, so I can’t really complain now about the cash flow going out," Mr. Aronson said. "If somebody can give me proof that this is a horrible way to invest, then I’m going to get out of it and retire."
Still, some of the biggest names in the business are shrinking after years of breakneck growth. During the last 18 months, assets have fallen at quant funds managed by Intech Investment Management, a unit of the mutual fund company Janus; by the giant money management company Blackrock; and by Goldman Sachs Asset Management. Even quant legends like Jim Simons, the former code cracker who founded Renaissance Technologies, have seen better days.
Mr. Simons was celebrated as the King of the Quants after his in-house fund, Medallion, posted an average return of nearly 39 percent a year, after fees, from 2000 to 2007. It was an astonishing run rivaling some of the greatest feats in investing history. But since then, investors have pulled money out of two Renaissance funds that Mr. Simons had opened during the quant boom. After losing 16 percent in 2008 and 5 percent in 2009, assets in the larger of the two funds have dropped to about $4 billion from $26 billion in 2007. (That fund is up about 6.8 percent this year, compared with a loss of about 3 percent marketwide.)
In an effort to woo back investors, some quants are tweaking their computer models. Others are reworking them altogether. "I think it’s dangerous right now because a lot of quants are working on what I call regime-change models," or strategies that can shift suddenly with the underlying currents in the market, said Margaret Stumpp, the chief investment officer at Quantitative Management Associates in Newark. The firm has $66 billion in assets under management, and its oldest large-cap fund has had only two down years — 2001 and 2009 — since opening in 1997.
"It’s tantamount to throwing out the baby with the bathwater if you engage in wholesale changes to your approach," Ms. Stumpp said. But many quants, particularly late arrivals, are hunting for something, anything, that will give them a new edge. Those who fail again may not survive this shakeout. "What we’re seeing is that not all quants are created equal," said Maggie Ralbovsky, a managing director with Wilshire Associates, which gives investment advice to pension funds and endowments.
Greek crisis refuses to go away
by Ambrose Evans-Pritchard - Telegraph
The European Commission has approved the next €9bn (£7.4bn) tranche of loans for Greece but the underlying economy continues to deteriorate as Greek banks suffer a record loss of deposits and output contracts at a quickening pace. A report by HSBC said banks had lost 8pc of their entire deposit base in the five months to May. "The Greek market has never, since the first data in 2001, experienced such attrition," said banking analyst Joanna Telioudi.
While some withdrawals point to capital flight by wealthy Greeks, it is clear that households and companies are running down savings to make ends meet. The Athens Chamber of Commerce warned yesterday that its members are in "dire straits", with a majority facing a liquidity threat.
Simon Ward from Henderson Global Investors said Greek lenders are covering their funding gap through loans from the European Central Bank (ECB), which reached a record €96bn in July. "The question is how much eligible collateral they have left to take to the ECB. It must be nearing the limits," he said. "What is worrying is that this is not just Greeks. Portuguese banks borrowed €50bn in July compared to €41.5bn in June. Together with Ireland and Spain they have borrowed €387bn from the ECB," he said.
Oli Rehn, the EU economics commissioner, said Greece has achieved "impressive budgetary consolidation and swift progress with major structural reforms" , meeting the terms for a second loan under the €110bn rescue plan with the International Monetary Fund. Mr Rehn said "risks remain", warning that tax revenue was falling far short of the 16pc rise targeted for the year. There was slippage by local governments and social security funds.
The green light from Brussels failed to offer any respite for Greek bonds. Spreads on 10-year Greek debt rose to 835 basis points over German debt. They are trading once again at the crisis levels of early May, before the EU launched its "shock and awe" rescue and the ECB began purchasing Greek bonds.
Stephen Lewis, of Monument Securities, said investors doubt whether the EU/IMF plan is workable without debt restructuring and devaluation, the usual IMF cure for countries with such problems. IMF documents show that Greece's public debt will rise to 150pc of GDP after three years, even if the government complies fully. "The markets suspect that Greece will have to restructure its debt sooner or later, and bondholders will be the losers. They don't believe that Greece's euro membership on present terms is economically viable. The country doesn't have the freedom it needs to get out of this crisis," he said.
Ian Stannard, a currency strategist at BNP Paribas, said investors have been unsettled by news that Spain is planning to soften its austerity package by renewing €500bn of rail and road projects. "The fear is that if Spain backtracks, then others like Greece are going to follow. This is creeping on to the radar screen," he said. Mr Stannard said a report on Greece by der Spiegel magazine entitled "Entering a Death Spiral" revived worries about political stability, painting a picture of a country nearing popular revolt. It said unemployment had reached 60pc to 70pc in depressed areas. "The entire country is in the grip of a depression," said de Spiegel. "Everything seems to be going downhill. The spiral is continuing unabated and there is no clear way out."
The Greek economy shrank by 1.5pc in the second quarter, not helped by transport strikes that caused tourism revenues to fall 16pc in June. The risk is that country finds itself chasing its tail, trying to sustain a rising stock of debt on a diminishing base. Critics suspect that Greece has already passed the point of no return for debt dynamics, and some IMF officials privately agree. Willem Buiter, chief economist at Citigroup, said it remains unclear whether eurozone debtors can recover amidst severe fiscal tightening. "Europe's underlying problems have not been resolved. Medium-term worries over sovereign credit quality in periphery countries will probably resurface in coming months," he said.
Chris Pryce, of Fitch Ratings, said Greece is teetering on the edge of junk status but can still claw its way back. He expects the economy to contract by 4.5pc to 5pc this year, worse that official forecasts. This is manageable. The key is whether the pace of decline slows enough next year to make q dent in the deficit, and whether the country will accept yet another round of austerity. "Everybody is away on holiday. When they get back they will have to face their miserable new world going into the autumn, and then we will see," he said.
GM's IPO Is "a Political Event," James Altucher Says: "Stay Far Away"
by Aaron Task - Tech Ticker
There are 8 million stories in the naked city and over 8000 publicly traded stocks to choose from, so don't waste your time on GM's IPO.
That, in a nutshell, is James Altucher's view of the most widely anticipated IPO in recent memory.
"Absolutely I would not go anywhere near the IPO, says Altucher, managing director at Formula Capital. "GM is one huge question mark."
Altucher notes GM has only had two quarters of profitability prior to its filing, which is mainly a "political event," he says. "It's a great PR event right before the November elections [but] I would stay far away from this."
Among the many "unanswered questions" surrounding the company, the hedge fund manager and author cited the following:
- What is General Motors?
- How they going to deal with losses in Europe?
- What's the plan for the underfunded pension?
- How much money are they going to raise?
- How many shares are the U.S. government and UAW going to sell?
- What's the dividend on the preferred stock?
- How will the preferred trade visa vis the common?
- Will the government make back its $50 billion "investment"?
Some of these questions will presumably be answered during GM's road show and "all the news is going to be about GM" prior to the offering, Altucher says. "But it's zero interest to me. In terms of just mental energy I wouldn't spend it on GM at this point." The hedge fund manager and author doesn't necessarily think GM stock is going to be a loser. In fact, he suspects there will be an unspoken view among investors that "wink, wink, the government won't let [the stock] fall below the offering price," whatever that proves to be. "But it's not something that retail investors should be paying attention to at this point."
In terms of ancillary plays, Altucher says GM's IPO could hurt Ford shares, as mutual funds use the GM offering as an opportunity to diversify their auto holdings. So who benefits? With GM moving more aggressively into China GM's offering should be good for auto suppliers like China XD Plastics, Altucher says. (Full Disclosure: Altucher owns shares of CXDC) "I'll tell you who will benefit:" the underwriters led by JP Morgan, Citigroup and Bank of America. "There are huge fees on $15 or maybe $20 billion IPO."
Ah, yes, of course. The government may be trying to get out of the car business, but corporate welfare for the Wall Street "fat cats" lives on.
Great dangers attend the rise and fall of great powers
by John Plender - Financial Times
Shakespeare’s Julius Caesar wanted to have men about him who were fat because lean and hungry men were dangerous. If the same principle applies in international relations, this week’s news that China has overtaken the world’s second-largest economy, Japan, in terms of nominal gross domestic product should be welcome to the rest of the world. Yet nominal GDP is unfortunately a poor guide to what constitutes a satisfied, unthreatening state. Per capita income is a better, if imperfect, pointer. And since China’s per capita income of $3,678 is still less than a 10th of Japan’s, Caesar would have drawn little comfort from this watershed, given that China clearly remains a very poor country despite its spectacular recent growth rate.
It is a discomfiting historical fact that great power shifts in the global economy are dangerous. They have tended to coincide with extreme financial dislocation, currency turbulence and trade friction. This is because the aspiring new boy on the block is usually a protectionist-inclined creditor country that is reluctant to shoulder international responsibility commensurate with its economic strength. Consider the transition from British to US hegemony after the first world war. From 1918 the US rejected the Versailles treaty, opted out of the League of Nations and had nothing to do with German reparations, although it collected war debts from the allies. Britain’s liberal attitude to trade allowed the US to run a big trade surplus.
Meantime, the young and inexperienced Federal Reserve pursued lax monetary policies in the Roaring Twenties while unwisely trying to prop up the ailing pound. When the Fed belatedly pricked the resulting bubble in 1929, the Jazz Age came to an abrupt end, banks collapsed and the depression ensued. As the US exported its problem of deficient demand to the rest of the world, it failed to provide leadership to prevent an outbreak of disastrous competitive devaluations and was unwilling to act as a global lender of last resort to collapsing banks.
The next case in point is postwar Japan. Japanese economic growth was export-led, fuelled by an undervalued yen and subsidies for exporters. It was a model that worked as long as Japan was not a significant economic power. Yet by the late 1960s Japan was the second largest economy in the world. It was also running a huge trade surplus with the US. International efforts to address imbalances and stabilise an overvalued dollar in the Reagan era had unintended consequences – not least that Japanese intervention in the yen-dollar rate had the same bubble-inducing outcome as the Fed’s efforts to prop up sterling in 1927. The pricking of the bubble led to 20 years of economic stagnation.
China’s challenge to the US is similarly export-led and its current account surplus is the biggest contributor to the Eurasian savings glut that led to the credit bubble and the global imbalances behind the financial crisis. Yet despite its success, China’s economic model generates wasteful over-investment and under-delivers to ordinary people, who have the lowest share of private consumption in GDP in Asia. In a country that enjoys double-digit growth rates, employment growth has been running at a paltry 1 per cent a year, while real returns on savings are negative. As with Japan at its peak, the economy delivers a poorer quality of life than the per capita income figures suggest, with pollution, adulterated food and bad employment conditions posing threats to health.
China’s export-led growth, fuelled by an undervalued renminbi, has been possible only because the US and other deficit countries have been willing to run up large debts to finance household consumption and now government spending. The snag is that the resulting imbalances are not sustainable because the point of debt exhaustion is close. Yet as Charles Dumas of Lombard Street Research argues in Globalisation Fractures, a new book on the incompatibility of the policies of the leading industrial countries, the policy response to the crisis has been too narrowly focused on financial issues rather than global imbalances.
What is needed globally is for both debtor and creditor countries to rebalance their economies. The debtors need to tidy their balance sheets, while the creditors need to bump up domestic consumption, let currencies float and reduce export dependence. This would also be in China’s own interest because its economy is in disequilibrium. It cannot, among other things, prevent inflation and asset-price bubbles while running an artificially low exchange rate. Yet the obstacles to change are formidable. The key to rebalancing towards consumption, says Mr Dumas, may be relaxation of government control over its citizens, which is unlikely to happen.
There are also powerful lobbies against change, not least the inefficient producers who have been featherbedded by a cheap currency and whose economic survival depends on continuing undervaluation. There is, then, a Chinese policy impasse. How does the world escape from its dire potential economic consequences? One scenario might be muddle-through: the US responds to an impending economic slowdown with looser fiscal and monetary policy, at the cost of racking up more debt and a crunch later on. Another would see US fiscal conservatives prevent budgetary loosening, while monetary policy remains lax. This would cause the US current account deficit to shrink sooner rather than later.
Either way, the risks of a protectionist backlash against China would rise. Under either scenario, the world’s creditor countries would ultimately see their chief market dry up. The main difference is in the timing. When, you might well ask, will the creditors wake up?
Why Baby Costs Less Down the Road in Silicon Valley
by Peter Waldman - Bloomberg
After Mark Logsdon tore a ligament in his knee skiing at Lake Tahoe in March, he returned home to suburban Sacramento and had an MRI scan at Sutter Davis Hospital. Sutter’s price for the knee scan was $1,271, payable by Logsdon and his insurer. Exactly the same MRI at one of the local imaging centers owned by Radiological Associates of Sacramento would have cost $696 -- 45 percent less.
It turns out that Logsdon didn’t know something that his insurance company does: Sutter Health Co., the nonprofit that owns Sutter Davis, has market power that commands prices 40 to 70 percent higher than its rivals per typical procedure -- and pacts with insurers that keep those prices secret. Sutter can charge these prices because it has acquired more than a third of the market in the San Francisco-to-Sacramento region through more than 20 hospital takeovers in the last 30 years, according to executives of Aetna Inc., Health Net Inc. and Blue Shield of California, who asked not to be named because their agreements with Sutter ban disclosure of prices.
Sutter operates in a competitive market, Chief Executive Officer Patrick Fry, 53, said in an interview. "I don’t see Sutter Health as having market power, given the choices that employers can make," Fry said. "The market has a lot of room to make a lot of decisions."
The pricing power of local hospital systems has received scant attention in the search for answers to the nation’s rising medical costs, according to Alain Enthoven, an economist at Stanford University. In 2009, as consumer prices fell for the first time in 54 years, the U.S. health care bill rose by 5.7 percent to $2.47 trillion, a record 17.3 percent of the economy. "Provider consolidation is driving up health care costs," said Enthoven. "We need effective antitrust enforcement, and we haven’t had that for some time."
That’s changing, said Matt Reilly, assistant director of the Federal Trade Commission’s competition bureau. Federal investigators in five states -- Connecticut, Massachusetts, Ohio, Pennsylvania and New Hampshire -- are probing proposed hospital takeovers or contracting practices for evidence of antitrust problems. Sutter spokesman William Gleeson said it knows of no federal or state antitrust investigations into its conduct. "The enforcement pendulum has now swung back to where it should be," said Reilly. "We feel growing confidence we’ve got the analysis right."
After losing court battles against takeovers in prior years, the FTC in April helped shelve a Maine hospital group’s plans to merge the two biggest cardiology practices in the state. In June, it obtained a settlement order barring 25 hospitals and 70 doctors it had accused of collusion in Minnesota from using "coercive tactics" to extract higher rates from health insurers -- and by extension, higher premiums from employee plans and consumers.
The FTC is investigating Dartmouth-Hitchcock Medical Center’s proposed takeover of Catholic Medical Center in Manchester, New Hampshire; Hartford Healthcare Corp.’s plan to acquire Central Connecticut Health Alliance; and ProMedica Health System’s pending merger with St. Luke’s hospital in Maumee, Ohio, spokesmen for Dartmouth-Hitchcock, Central Connecticut and ProMedica said. Reilly declined to comment on specific investigations.
The U.S. has 5,800 hospitals, divided about evenly between nonprofits and for-profits. Nearly 3,000 of them changed owners from 1994 through 2009, according to Irving Levin Associates Inc., an investment research company in Norwalk, Connecticut. Most were rolled into regional chains like Sutter. The federal Patient Protection and Affordable Care Act is looking for $500 billion in savings over the next decade to help pay for extending coverage to 32 million uninsured Americans. Yet it doesn’t address the problem of market concentration -- and may make it worse, said Robert Berenson, a physician and policy analyst at the Urban Institute in Washington D.C.
The "unchecked" clout of hospital and physician groups in California is a "cautionary tale for national health reform," Berenson said in a February article in the journal Health Affairs. He warned that incentives in the new legislation to improve treatment by promoting doctor-hospital alliances -- called "accountable care organizations" -- could backfire by strengthening providers’ bargaining leverage.
‘A Textbook Case’
Higher prices stemming from hospital mergers that took place between 1997 and 2006 alone add $12 billion to annual health care costs, according to a study last year by Cory Capps, a former U.S Department of Justice economist. Capps, now a consultant, estimated that the ability of powerful hospitals to stimulate usage and the merging of doctors’ groups might be adding another $6 billion to $10 billion.
Cost never occurred to Logsdon, the Sacramento doctor who wrecked his knee skiing. He said he was "shocked" to discover afterward that the MRI cost nearly twice as much at Sutter Davis as it would have at Radiological Associates. The chairman of Radiological Associates’ oncology division, Logsdon went to Sutter Davis for convenience, he said. "I guess I’m a textbook case of why policy makers say they need to make patients feel the cost of these things," he said. Sutter, as it grew by takeover, shaped a strategy geared toward raising prices and making itself "indispensable" to insurance plans, internal Sutter documents show.
10 Million People
Operating as a nonprofit, it has $8.8 billion in revenues, 24 hospitals, 17 outpatient surgery clinics and a 3,500-doctor network, making it the largest health-care provider in an 11- county region -- from San Francisco Bay to the Sierra Nevada mountains -- where 10 million people live.
Sutter has 35 percent of the revenue and 36 percent of beds that compete for patients in the region, according to a state hospital database, including 100 percent of beds the state tracks in Placer and Amador counties east of Sacramento. (The state tallies, based on 2008 hospital discharge data, exclude insurer/provider Kaiser Permanente, whose hospitals are only available to plan members.) "They are able to dictate terms," said Jeff Emerson, head of managed care for Aetna, the nation’s third-largest health insurer. "Sutter says to all of its payers -- to the best of our knowledge -- ‘These are the terms by which you will deal with Sutter. Take it or leave it.’"
$4,700 CT Scan
"Instead of leveraging its system to be more cost- effective, we’ve seen Sutter leveraging its system for monopoly pricing," said Peter V. Lee, who in June became director of health-care delivery system reform for the U.S. Department of Health and Human Services. Lee was interviewed while he worked at the Pacific Business Group on Health, a coalition that includes Chevron Corp., Walt Disney Co., General Electric Co., and Wells Fargo & Co.
In San Francisco, Aetna pays Sutter’s California Pacific Medical Center in a range with a midpoint of $4,700 for an abdominal CT scan, compared to $3,200 at St. Francis Memorial Hospital, owned by Catholic Health Care West. For colonoscopies, Aetna’s midpoint price is $3,200 at Sutter’s flagship CPMC and $2,800 at St. Francis Memorial. In Palo Alto, Aetna pays Sutter $349 per visit for new patients to see Manju Deshpande, a family doctor in Sutter’s Palo Alto Medical Foundation clinic. Three miles away, Paul Ford’s Stanford Medical Group receives $222. If the patient needs an immunization, Aetna pays Palo Alto Medical $85, and Stanford Medical, $16. Deshpande removes wax from the ear for $175. Ford scoops it out for $104.
Top Quality Rating
Down the road in Silicon Valley, when obstetrician Sarah Azad, a solo practitioner, delivers a baby for a patient covered by Aetna, the insurer pays her $2,052. When Nicole Wilcox of Sutter’s Palo Alto Medical Foundation does the same job, Aetna pays Sutter $5,890. The doctors practice blocks apart in Mountain View, California. Performance isn’t an issue -- Azad has Aetna’s top rating for quality of care and trained Wilcox during residency.
Asked to explain the price difference, Cecilia Montalvo, a Palo Alto Medical Foundation vice president, said it offers state-of-the-art equipment and record-keeping "that can make the health care experience and the outcome of care superior for patients" and requires higher costs than a solo practice. The prices came from an Aetna plan members’ website. For Sutter hospitals, the prices were posted between mid-May and mid-June before they were removed. After that, the site responded to inquiries about Sutter prices with the message "Facility does not permit Aetna to disclose fees."
Doesn’t Disclose Prices
While Sutter may have higher "unit" prices than its competitors, Fry said, it is not the most costly for patients over the long run because its integration of hospitals and doctor groups allows it to provide more efficient care, cutting down on the number of procedures. "Our mission isn’t to maximize profits," Fry added. "Our mission, to the extent we can, is to optimize services." Insurers and patients have many alternatives to Sutter, according to Fry. Sutter doesn’t allow its prices to be disclosed on insurers’ websites because it believes the information is often misleading and doesn’t reflect the variables of each patient’s case, Gleeson said.
Federal antitrust authorities are moving against suspected anticompetitive mergers and contracting among health-care providers. In Massachusetts, the U.S. Department of Justice is investigating Partners Healthcare to see whether it imposed anticompetitive terms in contracts with insurers, according to people familiar with the matter. Massachusetts General and Brigham & Women’s hospitals, owned by Partners, were tied as the two most expensive of 59 hospitals in the state in 2008, according to data submitted by Blue Cross Blue Shield of Massachusetts to the state attorney general.
The insurer said Mass General’s and Brigham’s prices were 66 percent higher than Boston Medical Center, 30 percent more than Caritas St. Elizabeth’s and 20 percent more than Beth Israel Deaconess, three of its biggest Boston competitors. Partners is cooperating fully with the Justice Department, spokesman Lee Chelminiak said. The Justice Department has also been investigating University of Pittsburgh Medical Center, the biggest hospital group in the city. A UPMC statement said it was cooperating with the Justice Department, which it said was looking into "any potentially anticompetitive agreements."
‘Methodology So Flawed’
UPMC’s Presbyterian and Shadyside hospitals received an average of $35,000 for coronary bypass surgeries in 2005, compared to average payments of $24,000 at Allegheny General Hospital and $18,000 at Jefferson Regional Medical Center, according to a study by the Pennsylvania Health Care Cost Containment Council, a state agency.
"When you see the difference between the payments, the question employers ask is, ‘What am I getting for the dollars I’m spending?’" said Christine Whipple, executive director of a coalition of health-care plan sponsors including Alcoa Inc., H.J. Heinz Co. and Westinghouse Electric Co. UPMC spokesman Paul Wood said that the state’s study was based on "methodology so flawed that the results were meaningless." In 2008, the FTC stopped Inova Health System Foundation of Falls Church, Virginia, from acquiring nearby Prince William Health System, saying the deal would have driven up prices and boosted Inova’s share of beds in three counties to 73 percent.
Inova’s prices already often surpass rivals, according to the Aetna website. For a conventional birth, Aetna pays Inova Fairfax Hospital a range of prices whose midpoint is $6,750, 32 percent more than the $5,100 midpoint at Virginia Hospital Center in nearby Arlington. The Aetna midpoint price for abdominal CT scans without contrast dye at Inova Fairfax is $2,300, twice the $1,150 at Virginia Hospital Center.
"Inova owns Northern Virginia," said Berenson of the Urban Institute, who questioned why nonprofit Inova needs the $2.3 billion cash and investment portfolio it reported at the end of 2009. "What’s the rainy day they’re waiting for?" Inova needs the cache to support its capital-spending plans in the next five years, according to Richard Magenheimer, Inova’s chief financial officer. He called Inova’s prices "consistent" with competitors’ rates.
In classic economic theory, big price gaps for the same service are narrowed by competition as customers choose the low- cost provider, forcing high-priced suppliers to come down. In the U.S., which spends more on health care than any other country, Sutter and other dominant local providers demonstrate why the theory fails to work. As Sutter’s confidentiality terms show, the actual prices that hospitals receive are often kept secret by insurers. Patients in need of hospital care, especially in emergencies, often can’t travel very far, restricting competition. And if they have health insurance, they have little incentive to price shop.
When Timothy Sowerby took his nine-year-old daughter Catherine to Sutter’s Novato Community Hospital north of San Francisco last summer, the child was in pain from a fractured clavicle. It didn’t occur to Sowerby that her emergency-room x- ray, covered at $319, according to the explanation of benefits provided by insurer UnitedHealth Group Inc., would cost just $85 at Radnet Inc.’s imaging center in nearby Santa Rosa. The comparison isn’t "apples to apples" because hospitals have staffing and charity commitments that imaging centers don’t have, Sutter’s Gleeson said.
Sutter, with 48,000 employees, was among the most profitable hospital groups in the U.S. in 2009, with income of $697 million, up more than three-fold from 2008 due to large investment gains, on revenue that grew 6 percent to $8.8 billion. Its 5.2 percent operating margin -- or operating income as a percentage of revenue -- was 73 percent higher than the median for all nonprofit hospital systems in 2009, according to Standard & Poor’s.
As of Dec. 31, Sutter had a $2.63 billion investment portfolio. Sutter paid Fry $2.8 million in 2008, according to its latest Internal Revenue Service filing. His top 14 lieutenants made between $830,000 and $1.8 million each. In an interview, Fry said Sutter is aiming for a 5.5 percent operating margin to fund new technology, charity care and renovations to meet earthquake building codes.
Named for the Swiss immigrant who owned the mill where the California Gold Rush began, Sutter was founded as a single hospital in Sacramento after the 1918 flu epidemic. It later added a maternity hospital in the city and stayed close to home until 1980, when then-CEO Patrick Hays began a takeover spree. The original idea was to use Sutter’s tax-free borrowing power to raise the capital needed to rescue ailing community hospitals.
David Cox, Sutter’s CFO from 1982 to 1996, said Hays understood that having geographic reach and tie-ups with physician groups would give Sutter more patients and bargaining power on pricing with managed-care plans looking to cut costs. "At some point along the way after Hays left, the attitude shifted from providing good value to communities, and charging reasonable rates, to using market leverage to obtain the maximum revenue possible," Cox said.
‘Take No Prisoners’
At Hays’s departure in 1994 to become president of Blue Cross Blue Shield Association, Sutter had 14 hospitals. Two years later, Sutter doubled its bed count under CEO Van Johnson, with the takeover of four hospitals in and around San Francisco. The system subsequently added more. Its rapid rise hit a snag in 1999, when California’s attorney general sued to block a proposed takeover of Summit Hospital, in Oakland. The state argued that Sutter owned another large hospital in neighboring Berkeley, and that acquiring Summit would raise prices and stifle competition.
In an internal Sutter memo produced in the ensuing federal trial, Robert Montgomery, the company’s head of Bay Area operations, suggested Sutter should "hire a very aggressive negotiator and take no prisoners" on pricing if it obtained enough market share. Attaining a 25 to 30 percent share in its service areas would make Sutter "indispensable" to health plans and "assure us price stability," Sutter strategists said in another document that was part of the trial evidence. Sutter’s 1997 acquisition of Eden Medical Center in Oakland’s suburbs was described in advance of that merger as a way to "protect our market from a takeover that could develop competing physician networks."
Blue Cross projected that its prices at Summit would rise about 30 percent following the merger. Fry, then a Sutter regional head on the witness stand, projected Summit’s revenue would rise just 3 percent annually post-merger. The judge ruled against the attorney general in the 1999 case, and said Summit would have plenty of competition from hospitals outside Oakland and Berkeley. In fact, Summit’s prices rose 29 to 72 percent -- representing a range of increases for different insurers -- in the two years after the merger, according to a 2008 FTC staff study of the takeover. Summit’s revenue rose 15 percent, according to the state database, far exceeding Fry’s forecast at trial.
The "prices were negotiated with the health plans, and the health plans had alternatives," said Sutter’s Gleeson. He said Sutter lost $45 million on Summit in 2000 and 2001 before turning it profitable in 2002 and saved a failing entity. "Oakland is substantially better off today by having a high- quality hospital than if the hospital had closed," said Fry, who succeeded Johnson in 2005. Eden continues to figure into Sutter’s battles with health- care overseers. Sutter announced last year that it is closing Eden’s San Leandro Hospital campus, near Oakland’s southern border, due to San Leandro’s losses. State records show Eden earned $19 million in 2008, the last year available. Eden doesn’t report financial information for individual hospitals.
San Leandro’s emergency room, which handles about 25,000 cases a year -- 59 percent of them level-three or above in a five-level severity index -- is critical to public safety, local doctors and community activists argue. Sutter can afford to absorb San Leandro’s losses as part of its nonprofit mission, these critics contend. "You just can’t close something that serves 25,000 people and expect nothing will go wrong," said Alex Briscoe, director of health for Alameda County, where San Leandro is are located "The impact could cost some lives."
Sutter has agreed to let Alameda County use the San Leandro site as a rehabilitation center and clinic, though not as an acute-care hospital with emergency-room and other services that would compete with nearby Sutter facilities. When for- profit Prime Healthcare Services of Ontario, California, offered to lease the San Leandro facility and invest $20 million to maintain it as a full-service hospital, Sutter sent Prime Healthcare a letter threatening legal action for what it said was interference with its business affairs. "Sutter has this deliberate approach of pushing out the competition," said Miles Adler, a gastroenterologist who was chief of the medical staff at Eden and San Leandro from 2006 through 2008. "They want to tie up the marketplace here."
‘Over a Barrel’
Residents of Alameda County need an acute-rehabilitation facility more than they do a hospital in San Leandro, Fry said. He described the facility’s conversion as part of Sutter’s plan to coordinate services geographically for greater system efficiency. Last November, Claire Zvanski, a San Francisco parking administrator and commissioner of the city-employees’ health insurance fund, proposed dropping Sutter hospitals from the plan offered to the city’s 110,000 workers. Zvanski said she hoped dumping Sutter would cut costs and curb an expected rate increase from Blue Shield. Her proposal stirred heated protest from plan members at commission meetings, who said they would have to drive 30 miles to find a non-Sutter hospital. Under pressure, Zvanski tabled the idea.
On July 1, the city, to cover rising costs, raised health- care contributions from employees by 13 percent -- to $6,552 a year for a firefighter with two or more dependents. It doubled co-payments to $100 for emergency-room and outpatient services and $200 for hospital stays. "Sutter really has us over a barrel, I hate to admit it," said Larry Barsetti, a retired police lieutenant who supported Zvanski’s proposal. His premiums went up $100 on July 1, to $10,188 a year -- more than double what he paid upon retiring in 2003. "We’re getting gouged," Barsetti said. Sutter has held price increases to single digits in recent years, Gleeson said. "Still," he added, "we know we have a responsibility to make sure our services are affordable and we’re working to do so."
Homeowners' Rebellion: Could 62 Million Homes Be Foreclosure-Proof?
by Ellen Brown - Web of Debt
Over 62 million mortgages are now held in the name of MERS, an electronic recording system devised by and for the convenience of the mortgage industry. A California bankruptcy court, following landmark cases in other jurisdictions, recently held that this electronic shortcut makes it impossible for banks to establish their ownership of property titlesand therefore to foreclose on mortgaged properties. The logical result could be 62 million homes that are foreclosure-proof.
Mortgages bundled into securities were a favorite investment of speculators at the height of the financial bubble leading up to the crash of 2008. The securities changed hands frequently, and the companies profiting from mortgage payments were often not the same parties that negotiated the loans. At the heart of this disconnect was the Mortgage Electronic Registration System, or MERS, a company that serves as the mortgagee of record for lenders, allowing properties to change hands without the necessity of recording each transfer.
MERS was convenient for the mortgage industry, but courts are now questioning the impact of all of this financial juggling when it comes to mortgage ownership. To foreclose on real property, the plaintiff must be able to establish the chain of title entitling it to relief. But MERS has acknowledged, and recent cases have held, that MERS is a mere "nominee"an entity appointed by the true owner simply for the purpose of holding property in order to facilitate transactions. Recent court opinions stress that this defect is not just a procedural but is a substantive failure, one that is fatal to the plaintiff's legal ability to foreclose.
That means hordes of victims of predatory lending could end up owning their homes free and clearwhile the financial industry could end up skewered on its own sword.
The latest of these court decisions came down in California on May 20, 2010, in a bankruptcy case called In re Walker, Case no. 10-21656-E11. The court held that MERS could not foreclose because it was a mere nominee; and that as a result, plaintiff Citibank could not collect on its claim. The judge opined:
Since no evidence of MERS' ownership of the underlying note has been offered, and other courts have concluded that MERS does not own the underlying notes, this court is convinced that MERS had no interest it could transfer to Citibank. Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another. Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is void under California law.
In support, the judge cited In Re Vargas (California Bankruptcy Court); Landmark v. Kesler (Kansas Supreme Court); LaSalle Bank v. Lamy (a New York case); and In Re Foreclosure Cases (the "Boyko" decision from Ohio Federal Court). (For more on these earlier cases, see here, here and here.) The court concluded:
Since the claimant, Citibank, has not established that it is the owner of the promissory note secured by the trust deed, Citibank is unable to assert a claim for payment in this case.
The broad impact the case could have on California foreclosures is suggested by attorney Jeff Barnes, who writes:
This opinion . . . serves as a legal basis to challenge any foreclosure in California based on a MERS assignment; to seek to void any MERS assignment of the Deed of Trust or the note to a third party for purposes of foreclosure; and should be sufficient for a borrower to not only obtain a TRO [temporary restraining order] against a Trustee's Sale, but also a Preliminary Injunction barring any sale pending any litigation filed by the borrower challenging a foreclosure based on a MERS assignment.
While not binding on courts in other jurisdictions, the ruling could serve as persuasive precedent there as well, because the court cited non-bankruptcy cases related to the lack of authority of MERS, and because the opinion is consistent with prior rulings in Idaho and Nevada Bankruptcy courts on the same issue.
What Could This Mean for Homeowners?
Earlier cases focused on the inability of MERS to produce a promissory note or assignment establishing that it was entitled to relief, but most courts have considered this a mere procedural defect and continue to look the other way on MERS' technical lack of standing to sue. The more recent cases, however, are looking at something more serious. If MERS is not the title holder of properties held in its name, the chain of title has been broken, and no one may have standing to sue. In MERS v. Nebraska Department of Banking and Finance, MERS insisted that it had no actionable interest in title, and the court agreed.
An August 2010 article in Mother Jones titled "Fannie and Freddie's Foreclosure Barons" exposes a widespread practice of "foreclosure mills" in backdating assignments after foreclosures have been filed. Not only is this perjury, a prosecutable offense, but if MERS was never the title holder, there is nothing to assign. The defaulting homeowners could wind up with free and clear title.
In Jacksonville, Florida, legal aid attorney April Charney has been using the missing-note argument ever since she first identified that weakness in the lenders' case in 2004. Five years later, she says, some of the homeowners she's helped are still in their homes. According to a Huffington Post article titled "'Produce the Note' Movement Helps Stall Foreclosures":
Because of the missing ownership documentation, Charney is now starting to file quiet title actions, hoping to get her homeowner clients full title to their homes (a quiet title action 'quiets' all other claims). Charney says she's helped thousands of homeowners delay or prevent foreclosure, and trained thousands of lawyers across the country on how to protect homeowners and battle in court.
Other suits go beyond merely challenging title to alleging criminal activity. On July 26, 2010, a class action was filed in Florida seeking relief against MERS and an associated legal firm for racketeering and mail fraud. It alleges that the defendants used "the artifice of MERS to sabotage the judicial process to the detriment of borrowers;" that "to perpetuate the scheme, MERS was and is used in a way so that the average consumer, or even legal professional, can never determine who or what was or is ultimately receiving the benefits of any mortgage payments;" that the scheme depended on "the MERS artifice and the ability to generate any necessary 'assignment' which flowed from it;" and that "by engaging in a pattern of racketeering activity, specifically 'mail or wire fraud,' the Defendants . . . participated in a criminal enterprise affecting interstate commerce."
Local governments deprived of filing fees may also be getting into the act, at least through representatives suing on their behalf. Qui tam actions allow for a private party or "whistle blower" to bring suit on behalf of the government for a past or present fraud on it. In State of California ex rel. Barrett R. Bates, filed May 10, 2010, the plaintiff qui tam sued on behalf of a long list of local governments in California against MERS and a number of lenders, including Bank of America, JPMorgan Chase and Wells Fargo, for "wrongfully bypass[ing] the counties' recording requirements; divest[ing] the borrowers of the right to know who owned the promissory note . . .; and record[ing] false documents to initiate and pursue non-judicial foreclosures, and to otherwise decrease or avoid payment of fees to the Counties and the Cities where the real estate is located." The complaint notes that "MERS claims to have 'saved' at least $2.4 billion dollars in recording costs," meaning it has helped avoid billions of dollars in fees otherwise accruing to local governments. The plaintiff sues for treble damages for all recording fees not paid during the past ten years, and for civil penalties of between $5,000 and $10,000 for each unpaid or underpaid recording fee and each false document recorded during that period, potentially a hefty sum. Similar suits have been filed by the same plaintiff qui tam in Nevada and Tennessee.
By Their Own Sword: MERS' Role in the Financial Crisis
MERS is, according to its website, "an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans." Or as Karl Denninger puts it, "MERS' own website claims that it exists for the purpose of circumventing assignments and documenting ownership!"
MERS was developed in the early 1990s by a number of financial entities, including Bank of America, Countrywide, Fannie Mae, and Freddie Mac, allegedly to allow consumers to pay less for mortgage loans. That did not actually happen, but what MERS did allow was the securitization and shuffling around of mortgages behind a veil of anonymity. The result was not only to cheat local governments out of their recording fees but to defeat the purpose of the recording laws, which was to guarantee purchasers clean title. Worse, MERS facilitated an explosion of predatory lending in which lenders could not be held to account because they could not be identified, either by the preyed-upon borrowers or by the investors seduced into buying bundles of worthless mortgages. As alleged in a Nevada class action called Lopez vs. Executive Trustee Services, et al.:
Before MERS, it would not have been possible for mortgages with no market value . . . to be sold at a profit or collateralized and sold as mortgage-backed securities. Before MERS, it would not have been possible for the Defendant banks and AIG to conceal from government regulators the extent of risk of financial losses those entities faced from the predatory origination of residential loans and the fraudulent re-sale and securitization of those otherwise non-marketable loans. Before MERS, the actual beneficiary of every Deed of Trust on every parcel in the United States and the State of Nevada could be readily ascertained by merely reviewing the public records at the local recorder's office where documents reflecting any ownership interest in real property are kept....
After MERS, . . . the servicing rights were transferred after the origination of the loan to an entity so large that communication with the servicer became difficult if not impossible .... The servicer was interested in only one thing making a profit from the foreclosure of the borrower's residence so that the entire predatory cycle of fraudulent origination, resale, and securitization of yet another predatory loan could occur again. This is the legacy of MERS, and the entire scheme was predicated upon the fraudulent designation of MERS as the 'beneficiary' under millions of deeds of trust in Nevada and other states.
Axing the Bankers' Money Tree
If courts overwhelmed with foreclosures decide to take up the cause, the result could be millions of struggling homeowners with the banks off their backs, and millions of homes no longer on the books of some too-big-to-fail banks. Without those assets, the banks could again be looking at bankruptcy. As was pointed out in a San Francisco Chronicle article by attorney Sean Olender following the October 2007 Boyko [pdf] decision:
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
. . . The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail . . . .
Nationalization of these giant banks might be the next logical stepa step that some commentators said should have been taken in the first place. When the banking system of Sweden collapsed following a housing bubble in the 1990s, nationalization of the banks worked out very well for that country.
The Swedish banks were largely privatized again when they got back on their feet, but it might be a good idea to keep some banks as publicly-owned entities, on the model of the Commonwealth Bank of Australia. For most of the 20th century it served as a "people's bank," making low interest loans to consumers and businesses through branches all over the country.
With the strengthened position of Wall Street following the 2008 bailout and the tepid 2010 banking reform bill, the U.S. is far from nationalizing its mega-banks now. But a committed homeowner movement to tear off the predatory mask called MERS could yet turn the tide. While courts are not likely to let 62 million homeowners off scot free, the defect in title created by MERS could give them significant new leverage at the bargaining table.
Gulf Oil Spill Bound BP, Feds Together
by Harry R. Weber - AP
For months, the US government talked with a boot-on-the-neck toughness about BP, with the president wondering aloud about whose butt to kick. But privately, it worked hand-in-hand with the oil giant to cap the runaway Gulf well and chose to effectively be the company's banker – allowing future drilling revenues to potentially be used as collateral for a victim compensation fund.
Now, with a new round of investigative hearings set to begin Monday on BP's home turf and the disaster largely off the front pages, there's worry BP PLC could get a slap on the wrist from its behind-the-scenes partner. That could trickle down to states hurt by the spill and hoping for large fines because they may share in the pie. "I don't think they've been as tough as they should have been from Day 1," said Billy Nungesser, president of Lousiana's hard-hit Plaquemines Parish. "We were at war. You don't go to war and hope people respond."
In the past few weeks, public messages from BP and the government have been almost in lockstep. The government even released a report – criticized by academic researchers and some lawmakers as too rosy – asserting that much of the oil released into the Gulf is gone, playing into BP's message that its unprecedented response effort is working. A recent AP poll shows that BP's image, which took a beating after the oil spill, is recovering.
Rep. Darrell Issa, R-Calif., said Thursday that White House support for the oil report shows the administration's "pre-occupation with the public relations of the oil spill has superseded the realities on the ground." That differs from the atmosphere early on, when BP was the recipient of some very tough talk from the government. A little more than a week after President Barack Obama's on-air comment about "whose ass to kick" in early June, BP executives encouraged White House officials at a meeting in Washington to back off on the rhetoric. They reminded the government that a bankrupt company pays no bills, according to a person who was briefed on the details of the meeting and spoke on condition of anonymity because of the sensitivity of the talks.
In mid-July, BP finally capped its runaway well and is now very close to sealing it from the bottom once and for all. With the crisis shifting from response to recovery, the focus will be on who's to blame and how much they should pay. The BP-government partnership raises questions about the government's ability to be impartial in meting out punishment for the worst offshore oil spill in U.S. history.
Many of those investigating the spill are not independent. "Whether the public accepts that remains to be seen," said Wayne R. Andersen, a retired federal judge and the only nongovernment member of a key spill investigative panel. The Deepwater Horizon joint investigation team that Andersen is on will hold its fourth set of hearings beginning Monday in Houston, where BP's U.S. offices are located. The panel is charged with reaching conclusions about what happened.
Congress and the Justice Department also are investigating, and various government agencies will be determining how much BP and others should pay in fines for the April 20 explosion that killed 11 workers and spilled 206 million gallons of oil. The amount of spilled oil alone could mean a fine of up to $21 billion if BP were found to have committed gross negligence, and criminal charges could be in order if negligence is found. The figure is important to the Gulf because Sen. Mary Landrieu, D-La., is pushing legislation that would require that at least 80 percent of the civil and criminal penalties charged to BP under the Clean Water Act be returned to the Gulf Coast for long-term economic and environmental recovery.
So if the government reaches a settlement with BP on fines that are significantly lower or, on the criminal side, lets them off easy, that could rub a lot of Americans the wrong way. By the same token, if the government comes down too hard on BP, that might hurt the government's interests, because BP's financial health and its ability to meet its spill obligations are tied together. BP executives declined repeated requests for interviews for this story.
There are also other companies' interests to consider: Transocean, the owner of the rig that exploded, and Anadarko Petroleum, a minority owner of the undersea well, will be looking to protect themselves by shifting blame to BP, while BP also will be looking to shift blame. "They're all trying to hide the football," said Daniel Becnel, a Louisiana lawyer suing BP and others over the oil spill. The entire oil and gas industry will be watching closely to see if BP's ace in the hole – its relationship with the federal government – pays off.
The ties that bind BP and the government together started forming soon after the rig explosion. BP and U.S. Coast Guard employees sat side-by-side in a command center in Robert, La., coordinating the spill response and fielding calls together from media from around the world. That setup later moved to a high-rise office building in downtown New Orleans. According to a person who has worked in the command center, the response team in New Orleans occupies two floors. Coast Guard and BP leaders each have a set of offices and work areas. The Bureau of Ocean Energy Management, Regulation, and Enforcement, formerly known as the Minerals Management Service, also has its own office, the person said.
At the height of the spill, more than 400 people were on the two floors. Now, about 200 folks sit in those offices on any given day. Often, the people from the BP leadership team would go into the Coast Guard offices with issues and vice versa, the person said. BP and the government also worked together to control media access.
The Coast Guard and BP coordinated access for The Associated Press aboard the Helix Q4000 vessel in early August on the day of the so-called static kill operation, in which mud and later cement was pumped into the runaway well from the top. Accompanying the AP reporter and photographer on a BP-chartered helicopter to the vessel were six BP employees and a Coast Guard liaison. A photographer working for the White House also was aboard.
Retired Coast Guard Adm. Thad Allen, the government's point man on the spill response, told the AP that the complexity of the response and technical know-how required made BP the natural partner. "That may seem a little bit at odds and maybe not well understood by the American public or even some leaders, but it is in fact how we have been managing oil spills in this country for 20 years," Allen said. And, he said, the law dictated that the responsible party clean up the mess. "You have to be able to tell them what you want, and they have to write a check," Allen said. "It would be inadvisable to do that anywhere but sitting next to each other."
When asked if independent industry experts could have been brought in to work on the response instead of BP – knowing that the government would be investigating the oil giant – Allen quipped, "Replace them with who?" Allen said the government doesn't have the competence or capacity to deal with drilling a relief well and the type of technology it takes. "Would you suggest I bring in a competitor?" Allen said. "One of the conundrums of this response is, and one of the things that I think is causing everybody some problems, is the federal government does not own the means of production to solve this problem at the wellhead."
On the flip side, could independent investigators have been brought in to render judgment? Andersen, the retired judge recently appointed to the joint Coast Guard-Bureau of Ocean Energy Management, Regulation, and Enforcement investigative panel, said that when you are dealing with a highly technical and narrow area of expertise, there is going to be overlap of the knowledge of the regulators and those they are regulating. "Naturally, that needs to be out on the table," Andersen said.