"REO Mountaineer -- New York to San Francisco and back: Percy Megargel and David Fassett on the present-day site of Yankee Stadium, at the conclusion of their 10-month, 11,000-mile trip in a 16-horsepower touring car"
Ilargi: To order Stoneleigh's video presentation of "A Century of Challenges", the lecture that's receiving rave reviews across Europe and North America,
or click the button on the right hand side just below the banner.
Ilargi: Stoneleigh did another interview with Jim Puplava at Financial Sense this week, and since Puplava has asked her, after the first talk, to come on once a month, it looks like there will be more installments.
This episode primarily addresses peak oil issues, and there are very few people in the world better versed in these issues than Stoneleigh is. This has to do with both her academic background and her experience in running an energy producers association. Which makes this interview a must-hear: Stoneleigh can pinpoint with great accuracy where the problems in our energy supply will be going forward, even if we realize very well that many voices out there will not agree with her views.
One of those voices is Jeff Rubin, who's in the second half of the show. You may have heard that Rubin was very dismissive of Stoneleigh's talk at the recent ASPO-USA conference. Now, I wasn't there, but in the first few minutes of Rubin speaking here, it becomes grindingly clear where he misses the boat.
As Puplava is talking about oil prices, Rubin says, paraphrased: "Prices are still at $80 a barrel with the economy in a downturn, where do people think prices will go once the economy starts growing again?"
And that is simply the wrong question to ask. The right question would be: where does Mr. Rubin think oil prices will go when it becomes clear that the economy will NOT start growing again for years to come, when we find that instead it's got years of contraction to go through? At the very least, every economist, and every government official involved in economic and energy-related decision-making, should ask both questions. But, except for a precious few, they do not.
Jeff Rubin may dismiss Stoneleigh for being a "non-economist", but this particular line of thinking, i.e. "the economy will start growing, no questions asked", dismisses Mr. Rubin precisely BECAUSE he is an economist. Growth is an article of faith for economists, something that shall not be questioned. And since economists and their views carry so much weight in our world today, even if for all the wrong reasons, there is great danger for us all in this unbalanced, one-sided attitude.
I've said it a thousand times if I said it once: the fact that all these people in positions of influence and power consistently refuse to even consider a Plan B is about to bring us down much faster and much deeper than if a more balanced view were to prevail. Jeff Rubin, even though at least he recognizes peak oil, is one of those people, who simply refuse to acknowledge A) the possibility that growth may not resume, and B) the need to devise the Plan B that would be needed if indeed it does not.
You're much better off with Stoneleigh, who knows far more about energy issues to begin with, and who does not shy away from thinking about all plans and all possibilities, A, B C, whatever's needed.
Enjoy the interview.
PS: I added a transcipt Sunday, October 24 at 4.15 AM EDT
PS2: There’s a second Stoneleigh interview below this one.
Jim Puplava at Financial Sense interviews Stoneleigh, Part 2
Peak Oil: An Inflationary & Deflationary Perspective
NOTE: Transcript added below
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RealPlayer WinAmp Windows Media MP3Nicole M. Foss is senior editor of The Automatic Earth, where she writes under the name Stoneleigh. She and her writing partner have been chronicling and interpreting the on-going credit crunch as the most pressing aspect of our current multi-faceted predicament. The site integrates finance, energy, environment, psychology, population and real politik in order to explain why we find ourselves in a state of crisis and what we can do about it. Prior to the establishment of TAE, she was previously editor of The Oil Drum Canada, where she wrote on peak oil and finance.
Her academic qualifications include a BSc in biology from Carleton University in Canada (where she focused primarily on neuroscience and psychology), a post-graduate diploma in air and water pollution control, the common professional examination in law and an LLM in international law in development from the University of Warwick in the UK. She was granted the University Medal for the top science graduate in 1988 and the law school prize for the top law school graduate in 1997.
On this week's Financial Sense Newshour, Nicole Foss and host Jim Puplava discuss the deflationary aspects of peak oil that Nicole sees coming in the years ahead. Nicole writes under the name Stoneleigh for her blog, The Automatic Earth.
Jeff Rubin, after twenty years as Chief Economist for a North American investment bank, it was time to seek a larger audience for the story he needed to tell. Jeff's predictions of steadily rising oil prices over the last decade, including his call for $100-per-barrel oil by 2007, had flown in the face of conventional wisdom.[..]
This week on the Financial Sense Newshour, Jeff Rubin joins host Jim Puplava to discuss peak oil. Jeff, an energy economist who writes the blog SmallerWorld, discusses the recent ASPO conference, and other significant peak oil issues.
Ilargi: And what do you know? We have a transcript! Thank you so much to Natimukjen in Australia.
Jim Puplava: Joining us next on the program is Nicole Foss, and Nicole you are currently in Wisconsin doing a tour. Tell us a little bit about that tour and its purpose if you would.
Stoneleigh: Well, I've done a number of tours this year in the US and Europe primarily, and this one is Michigan, Wisconsin, Minnesota, Montana, Wyoming, Colorado and Iowa and then home; all in my little tiny fuel sipping car. But essentially I'm travelling around delivering a presentation that I've prepared, that integrates Finance and Peak Oil, and then looks at what you can do to protect yourself and your family against the kind of scenario that I see playing out. And I'm also developing a second presentation emphasizing more the kind of things that people can do.
So, when I travel around, there are a number of purposes, partly to inform people, partly to try to turn virtual communities into real ones, because we have a tremendously large virtual community at The Automatic Earth but that doesn't count for much when times are hard, so I want to bring people together in a room and then inspire them to work together to do what can be done at a community level. And I also want to warn them, provide a kind of psychological inoculation if you like, that there are going to be a lot of movements that arise that are very thoroughly grounded in fear and anger, and I would rather see people put their efforts into building something constructive than playing a blame game. I think a lot of people would do that, but I'm trying to get people to not buy into the fear and anger model and buy into the whole constructive 'what can we build, what can we do with the resources we have as we preserve them' type of mind set.
Jim Puplava: I notice in this tour that you'll be speaking with Professor Keen and also Dr Joseph Tainter.
Stoneleigh: Yes, that's slightly after this tour, I'll be back in Michigan, that's Grand Rapids Michigan. It's a Local Futures conference, 4 days I believe, and with as you say, Joe Tainter and Steve Keen. It's primarily focused on economic structures this time; other times it has focused on Peak Oil. So, that will be an opportunity for people to come together and discuss, certainly the economic side of where we're going and how that fits into local communities in the future. And then I'll be flying to Europe, shortly thereafter, and I'll be in Europe, at the behest of the Belgian government, to begin with, and then touring around various other places.
Jim Puplava: Well, its amazing, because just about every month, we've seen major studies come out, from the UK Task Force, to Oxford University, to Lloyds of London. In the month of October the New Zealand parliament, just came out with a research paper called The Next Oil Shock, and I want to get to Peak Oil, but I want to talk about a recent article you wrote about “Renewable Power? Not in Your Lifetime”, because this is a political election year, you hear the President and members of the opposite party talking about energy independence and they talk about things like clean technologies: wind, solar, etc. You don't believe we're going to see that in our life time in terms of replacing fossil fuels, do you?
Stoneleigh: Oh, absolutely not. It really is physically impossible. We aren't going to have the money for one thing, because it's not going to be very long until we realise that we are actually in a depression. People don't build things in depressions, on the whole, so they live with the infrastructure that they have, and they make do. And it's hard enough even to maintain what you have, let alone do any kind of enormous build out. A lot of renewable energy is intermittent, it's mediated through electricity, it depends on the grid. The grid is not in a good state of repair, it's been under invested in for a very long time. There would have to be an enormous amount of money ploughed into grids, merely for them to continue doing what they do now. And if you look at trying to plug a whole lot of renewable energy into the existing grid, you're going to run into a lot of problems very quickly.
Renewable energy is very dispersed, it's not concentrated, typically. There are places where you can have larger concentrations of it, but still it's not going to be a large source of energy in comparison with say an enormous nuclear plant or coal plant or something like that. So you're having to bring in this power from a lot of places; you're going to have to have a lot of infrastructure for that. The problem with trying to run power backwards, down low voltage distribution lines, which is typically what you would have to do, if you are putting small amounts of power in very distributed places, the losses are proportional to the square of the current. The current is going to be high of the voltage is low; you're going to find that the losses are very high when you do that. If you're trying to carry power over long distances, you may actually find that not very much of it actually gets to where you need it, because there is enormous mismatch between renewable resource intensity, demand and grid capacity.
The feed in tariff program they introduced recently in Ontario, where I live, the grid capacity that was available was over-subscribed during the launch period. Anyone else who's trying to bring on projects and there are an enormous number of them, could find themselves having to wait for grid build out. This could be years - the projects won't survive that long. And by the time we get to the point where there could conceivably be the grid capacity, people are not going to be able to finance the projects, because we are moving into a credit crunch. So we are not looking at a scenario where we are suddenly going to invest enormous amounts of money in renewable energy. We don't even have the productive capacity for wind turbines and solar panels and various other alternatives at this point. We would have to build the factories first, then we would have to build the renewable energy infrastructure, then we would have to plug it into the grid; we'd have to build the grid out.
The amount of money and the amount of time are absolutely staggering. And a lot of these technologies have a very low energy returned on energy invested anyway, so you are not talking about something where you can create an enormous surplus of energy beyond what you are having to put in to create the capacity in the first place. So net energy is a very important concept; if your energy returned on energy invested is maybe 3:1, you're not producing much of a surplus beyond the energy you had to put in to build the infrastructure. So this is no panacea. I'm a tremendous fan of renewable energy, I have solar panels in my back field , but that helps me, it doesn't run society and that really is the problem that we have. A lot of these things work tolerably well in niche applications, and they can help at a small scale, but you are not going to run an industrial society on them. That really is the problem.
Jim Puplava: The other problem besides that, is if you take a look at where the wind blows, or where the sun shines, the problem with sun and wind is sometimes the wind doesn't blow and we also have a thing called night time.
Stoneleigh: Exactly. And what you have to do if you are going to rely on intermittent sources you need to build in energy storage. Well, energy storage, we don't have it, or not to any large extent, and it's extremely expensive to build it. It's another aspect of infrastructure that we do not have. If we already had, you know, a wonderfully robust grid, and tons of energy storage, we would then be able to upgrade the amount of renewable energy we can put on the system much more quickly. But because we do not have that situation, we have to build that first. And that is another thing that just is an enormous amount of investment money that we are not going to have.
Jim Puplava: In your article when you talk about renewable power, you go 'far from the future of a greater high tech connectedness under a smart grid model, where electric vehicles would charge at night and cover both transportation needs and power storage, we are looking at a much more fragmented picture' and you paint a real bleak picture. If we head in this direction, about rural areas, where we may not have the grid structure, or the power structure to get, let's say the needed electricity into these small rural areas or communities.
Stoneleigh: You know I think, if a rural area decides to invest in renewable energy now there is quite a lot that they could do, provided they're prepared to be realistic. They would need to drop their demand, and only attempt to supply the most important things. So supplying a Business as Usual scenario, the way the grid currently does, is simply not an option. But in these rural areas, you could actually build micro-grids. You could put in your own generating capacity and your own small amount of infrastructure to carry that power around. You may well find that certain things are doable in that scenario. I think the odds are quite high that rural areas are going to have a hard time because they are going to be at the very low end of the priority list if there are grid problems.
So, they may well find that their centralised service providing electricity doesn't survive but that doesn't mean they can't have anything, but they are going to have to be realistic. They're going to have to only supply something at a much lower level and live with the lower level of demand. We dropped our demand by 90% before we attempted to supply what was left. And I think that's a very important approach. There's a lot of energy that's wasted; we are not going to have Business as Usual scenario that we can ever hope to supply with renewable energy but within the niche applications, and I would argue that remote communities are one of these niche applications, where this could work, you can put in renewable energy infrastructure and you can build micro-grids. It takes a lot less time and money to put in something on a modest scale.
People, I would say though, would have to pool resources to do it, or get grants or something, because I don't think it makes sense to finance it; to take on the debt, because in my view, as we discussed the last time, was that we're moving into a deflationary era, and one of the implications of that, is that debt becomes very much more difficult to service. I would not suggest anyone to go out and take on debt, to put in this infrastructure, but of you can pool resources at a community level in one of these remote communities, you can provide a certain basic level of electricity. And then it is under your own control, and that's arguably a very good thing.
Jim Puplava: Where does that leave the big cities then, because like here in California, I think the United States has about 20, a little over 20% of the world's operating nuclear power plants. In India, China I believe has 20 power plants under construction, their goal is to have 90 by the end of the decade. What about nuclear power?
Stoneleigh: Nuclear power doesn't have the most wonderful energy returned on energy invested, so it is a very expensive technology, not just in financial terms, but in energy terms, with everything in the life cycle from uranium mining to building the plants, and the regulations for nuclear safety require for instance, as the last time I looked, three separate mechanisms, each capable of shutting the system down and they must have no common parts, so that there are no common mode failures, because they do not want to have another Three Mile Island, or something worse. So all of that adds to the cost, both in financial terms and in energy terms. I think there are also going to be a lot of issues with waste, potentially.
We do not have a centralised waste repository. Nobody wants one anywhere near them. So storage is on site. And you tend to have nuclear material stored in what is effectively a swimming pool. You have to look after that for a long period of time. It's going to produce heat and radio-activity for a long period of time. I think this could be a significant problem. It's a ???? driven, among other things, there are also environmental issues as well. It simply requires vigilance over hundreds of years and human beings are not good at that. We don't have a time horizon that long, so while we might be able to look after it for a certain period of time, what happens to it after that is really the question. And there are going to be safety issues. Nuclear power is not particularly compatible with social upheaval, to put it mildly.
Now when I was a research fellow, at the Oxford Institute for Energy Studies, and I was working on nuclear safety in eastern Europe, in the context of the Soviet collapse, looking at what happened to their nuclear power industry and how it actually operated. And so if you start adding in factors like not paying people, or paying them months late, and then people having to drive taxis, to moonlight as taxi drivers or vodka salesmen, and then people living lives that are not what they had hoped to live and that they're not enjoying, so that they turn up to work drunk; this is what happens in the Soviet nuclear power industry.
And to add to that, the technology they used of course, they cut a lot of corners and they didn't have the safety systems that we have, but the risks you take when you run a nuclear power plant in an environment where there's nowhere near enough money, it's hard to get spare parts, it's hard to find the money to maintain the infrastructure, and you've got people working there, assuming you can afford to pay them; you've got people working there who may have to worry about where their next meal is coming from. Their minds might not be on the job, might not be on the task at hand. So you can create tremendous risks operating nuclear power plants under circumstances of social upheaval. You know, if it's a question of do that or freeze in the dark, people will do it, but the risks will increase. And I think we need to be aware of that.
Jim Puplava: Nicole, there's been studies, they're coming out on almost a monthly basis now about Peak Oil. First of all, do you think most major governments; we started out our conversation by talking about New Zealand's parliament, just issued a report out this month called 'The Next Oil Shock'. Are governments aware of it, and if they are, what steps are they taking to prepare for this.
Stoneleigh: Governments are aware of it. Oil is effectively liquid hegemonic power. Governments are thinking that way now. But to express an opinion that is generally very unpopular with the Peak Oil people, I think the reason you're seeing so many reports come out now, is because we are seeing a parabolic rise in the oil price, that I think does not reflect the situation at this point. Yes, oil will be scarce in the future, but I think right now we're seeing prices get ahead of themselves because prices are set by perception not by reality. And we saw an enormous parabolic rise and then a crash in prices in 2008 into 2009. When oil was at $140 a barrel, I was trying to explain to the Peak Oil people that this was a speculative bubble; prices had got ahead of themselves and the next move was going to be very sharply down. My message is the same today. That I think we have seen a parabolic rise, I think we are seeing oil top, not just oil, but gold and agricultural commodities and stocks. I think we're seeing a top. I think the next move will be down, but I think people are writing about, writing oil reports at the moment because commodities top on fear.
So there is a fear that shortages are in the short term. I would argue they're actually not, because I think the affect of financial crisis is going to have a very significant affect on the way Peak Oil plays out. I think what's actually very likely to happen, first you would see oil prices move into reverse on a reversal of speculation. The hot money has moved in, overwhelmed the indexes, made the profit, chased momentum and then it abandons the sector, when it's wrung all the profit out of it in the short term. So I think speculation moving into reverse will be the beginning of oil prices falling. Then I think because we are moving into depression, we're going to see a fall in demand. And what a fall in demand does, it undercuts price support even further. So you then see a tremendous fall in prices. If you have a scenario where the price is low but the costs are high because you are doing business in these very difficult areas, like the deep off-shore or maybe in the arctic in the future, if you are looking at a high cost structure and low prices, there's no business case for that particular endeavour. So your demand collapse sets up a supply collapse, and then you have no investment in drilling and exploration and production.
You don't even have the money to maintain your production infrastructure. And a lot of oil infrastructure is already not in a good state. It needs a lot of investment just to keep doing what it currently does. We're not going to have that money and I think nobody's going to be making investments in energy at a point where prices are low and there's really no profitability in it. You could see oil prices fall to approximately the cost of the lowest cost producer. And given that some production costs will be falling, like labour costs for instance, in a depression, that lowest cost producer could be at a lower cost than the current lowest cost producer. So I think we have a scenario where initially oil prices fall, and not just oil but many other things: electricity and gas, simply because in a deflationary scenario, nobody has any money, so they can't afford to buy the stuff, production is at the previous level of demand, the demand falls you have a temporary glut.
But then you have this supply crunch that comes down the line; I think that's when reality bites, so although the reports are being written now, because we are seeing a peak I would argue in oil prices, I think those reports are still incredibly important because oil is a long term prospect. And just because the price is going to fall in the short term doesn't mean that we don't need this information for the longer term, we absolutely do, and in the longer term, under conditions of supply collapse, you are very likely to see an enormous price spike, and a resource grab. Whether countries do that by sending in the tanks, or whether they send in the contract negotiators, and buy up all the production of a field, that tie it all up in bilateral contracts, either of those will take oil off the open market.
The open market is where you really have the price of oil, you can actually see oil lose fungibility. And under those circumstances it's going to be very difficult for ordinary people to get access to any oil products at all. Even with oil at a low price, at the nadir of where I think prices are going, just because the price is low does not mean something will be cheap, because deflation drops purchasing power faster than prices. So even if oil were to fall to $20 a barrel, $20 a barrel is not cheap oil when you are in a depression; when nobody has any money. And if $20 a barrel is expensive, they move five years down the line to a supply collapse, and you're looking at $500 a barrel, and that's absolutely out of reach. So I think finance is going to rewrite the energy debate over the next five years, probably. And we're going to see tremendous amounts of upheaval, that people who are coming at it purely from a Peak Oil perspective, from geology and engineering, are not seeing because they don't understand finance, and the finance people typically don't have enough background in the science of the energy production, you absolutely have to have both. And that's very much what we try to do at The Automatic Earth. We are a Big Picture site; we're integrating all the factors that people need to understand.
Jim Puplava: You know, Nicole, you hit upon something that really changed as a result of the oil embargo in the 70's. The United States and Great Britain moved to create what I call the Virtual Oil Pool, where all of this oil was moved to the spot markets, so that for example in 2005, when Katrina and Rita hit the United States, and our refinery capacities were shut down, we could go into this Virtual Oil Pool, and have products show up on our shores within 30 days. But you talk about China. One thing that I have been watching that is alarming, that we're seeing China, India and other countries start to lock up oil production in these long term contracts oil, if they give money to Brazil, or they give money to Venezuela, that is oil that is being taken off the global market. It's not coming back. And I don't know if many governments have woken up to this fact. But it seems to me, at least, the Chinese understand it, at least they seem to be reacting in a rational way, trying to lock up resources that could be scarce.
Stoneleigh: They are doing that, and they do it par excellence. And they have been doing it for a long time. I think we underestimate the Chinese at our peril. They have an enormous pile of dollars, and they are the party - as I was saying earlier, you can either send in the tanks or you can send in the contract negotiators - the Chinese send in the contract negotiators, tie it all up in bilateral contracts. They have this enormous pile of dollars, they know at some point that they will not be worth something, because all fiat currencies die in the end. They don't die in the short term, and I've said elsewhere that I actually think the dollar could do well for a couple of years, but if you're China and you're sitting on a staggeringly large number of them, you can't play games like timing. You just have to turn those dollars into hard assets as fast as you possibly can.
And it's not just energy; they're buying up farm land in Canada, and all sorts of things. And they're not just taking ownership: they're also sending people there, and taking it beyond ownership to de facto control, which is the sort of structure that's likely to survive even when times are hard, when otherwise if you only had ownership, you might expect that to revert to the country that the asset is in, where possession can be nine tenths of the law. But you know if you have de facto control, because you have your people there and you're managing it; the Chinese are absolutely going to be economically colonising large parts of the rest of the world. They are going to be tying up their energy supplies. Now I would argue that China is also in a massive bubble; they are going to take a major hit over the next few years, very much like America did at the dawn of the American century. That's what the Depression was of the 1930's: the set back at the dawn of the American century.
I think what we're looking at now is, from a Chinese perspective, is the set back at the dawn of the Chinese century. But I think they will continue to be the empire in the ascendancy. That is their trajectory at this point. Don't expect the Chinese century to look like the American century because there's not going to be anything like the energy to do it. But by saying they're the empire in the ascendancy, I think there will come a point where they're the most significant hegemonic power in a much more multi-polar, low energy world. But never-the-less, they are still the empire in the ascendancy. So I think we are going to see the same kind of fall in demand for oil that we are. I do think they will see a fall in demand as their economy takes an enormous hit. I don't think it will be as big a fall as ours and I think it will recover faster. So, speaking to Jeffrey Brown, for instance at ASPO, he was pointing out that oil in the Depression, bottomed in 1931. I have said multiple times in various places, I think oil will bottom early in this Depression.
And one of the reasons for that is that I think demand will start to pick up again in places like China and India much more quickly than it will pick up for us. So I think what we're looking at is the western developed countries actually losing out in comparison with the developing countries that are taking on this 'empire in the ascendancy' role. I think they will come out of this with a much larger share of oil production tied up and oil is liquid hegemonic power. So I think we are looking at, over the very long term of a decade, at a shift in hegemonic power. But I don't think that the US is going to take that lightly, by any stretch of the imagination. So I think there is going to be a great deal of upheaval. I think we're also going to see a lot of very nasty proxy-wars in resource rich areas. This is the way the Great Powers typically play the Great Game. You know, they will pick a client-state, in a resource rich region, pump it full of guns, and then perhaps inflame some local hostilities, of which there are usually plenty to go around.
And then some of these areas go up in flames, and I'm certainly thinking this could happen in the Middle East, perhaps the Caspian, or the South China Sea, where there are going to be a number of parties, that are looking to secure supplies in the same area, and their areas of influence overlaps, the areas they claim, especially areas of the sea floor: sea floor claims are going to be a major problem going forward. These overlapping claims are going to be a source of conflict. And if you have conflicts between client-states, proxy-wars between client-states in resource rich regions, you could actually see quite a large amount of the resource that still exists being destroyed. Or at least if not the resource, then the infrastructure necessary to extract it; I mean very much like Sadam Hussein setting fire to the reservoirs in Kuwait, before he left. I think we could see a lot more of that. I think we could see a lot of instability in Saudi Arabia, where half the population is under 15; very radicalised young people, there's not enough employment and they despise their own government. So I think you're going to see a lot of upheaval in some of these places, very much aggravated by the Great Powers playing the Great Game of resource extraction. And I think we're going to see a great deal of conflict over energy, among all manner of other resources going forward.
Jim Puplava: It's almost Michael Klare's contention: resource wars. Nicole, another thing that strikes me about is, you know, from the start of discovery of a new oil field, to the time you bring it into production is a long process. So as we move from Peak Oil to alternative forms of energy, whether it's you know, trying to get the tar sands, whether… whatever it is, that we're going to be doing this whole process, even if we start changing and electrifying our transportation fleet, all of this stuff takes decades. You know, if I look at your scenario, Nicole, I think of what I just watched on the History Channel: the Dark Ages.
Stoneleigh: It's possible. I think we are looking at decades of upheaval. I think something less than the Dark Ages, because the Dark Ages were centuries of upheaval. I think we're looking at decades. That's what happened after the bursting of the South Sea Bubble, in 1722, that was the next largest bubble we've seen in human history and that was decades of upheaval culminating in a series of revolutions including yours. So I think we are looking at a long term structure. You know the point about the tar sands and various other things, the tar sands is not going to save anybody. There is no way you are getting 5 million barrels a day out of the tar sands, because you cannot scale it up. The energy returned on energy invested is extremely low, and essentially it's an arbitrage between natural gas and syncrude. So the energy you're putting in, in the form of natural gas, is not that much less than the energy you're taking out in the form of liquid fuels. So yes, you are creating liquid fuel from gaseous fuel, but it's really not an energy source.
Plus it exists in an extremely water constrained environment, where you're simply not going to be able to continue doing what you do now in the tar sands for reasons of water scarcity, and of course the environmental impacts are staggeringly large as well. A number of other things don't scale up; bio fuels have an incredibly low net energy: energy returned on energy invested. Some of them are less than one: in other words, if you create ethanol, you're actually losing energy in the process of creating ethanol. This makes no sense whatsoever. And bio-diesel is slightly better. But a lot of these technologies absolutely do not scale up. And there is no way they can act as a substitute. There is no way that a United States, at its current level of demand could ever conceivably be energy self-sufficient; it is not physically possible.
What you can do, is drop your demand an awfully long way, all developed countries waste staggeringly large amounts of energy, and if demand was a lot more realistic, you would bring it back, much more in line with what you could hope to supply. This is how people who work in renewable energy constantly think; you drop demand, you supply what's left at a much more realistic level and you're very careful with what you use. But Business as Usual is not an option. Mr Cheney said, not so many years ago, that the American lifestyle is not negotiable, to which I would say that's perfectly true because reality is not going to negotiate with you. It will dictate. And you cannot have what you currently have. Nobody will be able to. We're going to be moving into a different scenario; it doesn't have to be a dark age.
There's a lot we can do, and there's a lot we can do specially at a local level. Working together with people to build structures on a human scale that actually make sense. Getting our 'needs' and 'wants' sorted out; if we stop worrying so much about our 'wants' and deal with our needs, there's a lot we can do. It doesn't have to be a dark age. But we have to work at a scale that makes sense. And right now, all our thinking is it that top down level. I do not work at that level, on the whole. I think at that level, but I don't promote 'solutions', so to speak, at that level. The solutions I promote are the ones that are bottom up because they're the ones that really have the best, most realistic chance of working. Where people can pool resources, and I don't just mean money, I mean time and skills, and build something that is actually robust enough to carry you through the difficult times. Then you can start to rebuild things at larger scale again, when you had a chance to ride out the worst of the hard times. But yes we are going to be moving into hard times and they are going to last a long time.
Jim Puplava: Nicole, what has been the response, because one of the other aspects that bothers me about governments, not only are they aware of Peak Oil, but you know, some of their solutions are not the best way to think about how to solve a problem. You just mentioned ethanol, I mean it's a net energy loser [Stoneleigh: yes] not to mention the fact it's driving up the price of other commodities because farmers [Stoneleigh: absolutely] have to feed chickens and cows, corn, so what has been the response at the local level to your tour?
Stoneleigh: It's been overwhelming. And people have been very, very appreciative. When I do tours, and I'm speaking to ordinary people, they really value the information. Not just the information about the scope of the problem, but the information about how to deal with that problem and work within the scope of what is realistic. I've really only had one negative reaction to my world view, and that came from Jeff Rubin, former Chief Economist at CIBC, at the ASPO Conference, a week or so ago. And to paraphrase, (I don't remember his exact words) but he called my view of the world, something like a bastardised version of monetarism, that could only be devised by a non-economist. And to which I would say, if you look at the job economists have done running our economy, could non-economists possibly do any worse.
I think there's a lot more to it, and I didn't really get a chance to respond at the time, but I think that that criticism, which is the only seriously negative criticism I have had in a year of doing these talks, I think a lots of that criticism was unfounded and there is a lot to do with discussions of monetary theory that I would be more than happy to debate with Mr Rubin. But ordinary people do not respond in that kind of way. They do not mock; they are not derisive of views like this. So I think we really need to have a debate and we certainly need to have a debate between finance people and energy people, because they tend not to understand where each other is coming from and so we need to bring that into the public eye. But my view at the moment is that I work at the local level, because that is the level where things can really get some traction, and it is working. It really is.
I'm trying to divert resources into the hands of ordinary people. So in a Ponzi collapse, only a certain amount of resources are going to come out of that system, because we have excess claims to underlying real wealth, that's what a credit expansion creates. And therefore there only is a certain amount of underlying real wealth to go round. There's nothing I can do that will make that any larger but what I can do, and what I do, is I try to divert that into the hands of ordinary people. For one thing they've worked hard for it all their lives, but apart from that, they are the ones who will actually do something constructive with it.
The kind of thing that we actually need to do to ride out the very period of upheaval that I would argue is coming. You need to fund these local initiatives. And if ordinary people simply see everything they own disappear into a giant hole of credit destruction, then they cannot do the very things that our whole society may depend on. Bankers are not going to do these things. Government is not going to do it - ordinary people can, but only if the resources end up in their hands. And I'm trying to make sure that as much of those resources as possible do end up in the hands of the people best placed to use them for all our benefit.
Jim Puplava: Well Nicole, it's amazing, because I will be speaking with Jeff Rubin tomorrow - I'll be doing an interview [Stoneleigh laughs, then Jim laughs]
Stoneleigh: I would be happy to debate him. Do tell him, that I'm not a disciple of Milton Friedman. We can talk about Hyman Minsky, if he would like. [she laughs]
Jim Puplava: OK. Are there any questions you would like me to ask Jeff?
Stoneleigh: [She laughs] I think I'd probably rather ask the questions myself, at some point. At some point I will try and debate him on the intricacies of monetary policy and the role of credit. And the fact that what credit expansions do is they bring demand forward. I think that's the factor that's meet; I don't think he recognises. He does recognise resource limits, which most economists do not, but I don't think he's looking at the fact that an enormous credit expansion, such that we have lived through, brings demand forward at the expense of cratering it afterwards. And it's the fact that demand craters that leads to things like oil prices falling. So his view is that you're going to see triple digit price of oil, very soon, and I would say, no you're not because we're about to see speculation go into reverse and then demand crater and under those circumstances, there's no way you're going to get high oil prices out of it. And so I think there's some fundamental misconceptions of his view of the world and at some point I would be more than happy to debate him, even though I am a non-economist! [she laughs].
Jim Puplava: OK. Well let's see if I can put that together, between the two of you, but it's interesting you mention Jeff, because I'll be talking with Jeff tomorrow. Listen Nicole, you have, I believe, a video presentation called “A Century of Challenges.” If our listeners would like to get a copy of that presentation, how could they do so please?
Stoneleigh: Well, if they visit The Automatic Earth, there is a link right at the top. There's a picture, click on it, it's at the top right hand side, they can click on that and that will take them to a landing page. It does cost $12.50. We were trying to keep the cost as low as we could; we're trying to cover production costs, because it is a professional production. The point was not to make staggeringly large amounts of money. It was to be able to fund the site; to keep us going. But what this is, it's, this is a professional production of the presentation that - the first presentation, anyway - that I've been giving all over the US and Europe. So, it's 80 minutes long.
It's a discussion of energy, finance, interactions between the two, and the beginnings of the what you can do about this. I've another presentation I'm working on now, with a great deal more about what you can do about this, but we haven't had that one produced yet. So for the time being, this is the production that we have available, and we very much encourage people to watch it, and once they have paid their $12.50, it's a streaming video, they can watch it as many times as they want. So hopefully they will consider that to be good value. I think well certainly in Canada anyway, it's about the same as an evening at the movies. An evening at the movies would be more expensive, because you'd have to pay for the popcorn, so [Jim: Oh, OK] provide your own popcorn and this is cheap.
Jim Puplava: All right. We've been speaking with Nicole Foss, and if you'd like to follow Nicole's work, you can just Google 'Automatic Earth'. The website is theautomaticearth.blogspot.com. Nicole: thanks for coming on the program. Always a pleasure speaking with you.
Stoneleigh: You're very welcome! Thank you very much for having me.
Ilargi: And then, I was sent another Stoneleigh interview this week, which took place during the recent ASPO-USA Conference. This one’s from TAE reader Alexander Ac, who posts on Energybulletin.cz, and flew all the way to Washington DC from the Czech Republic to attend. He's promised a part 2.
Q1) Here at the ASPO-USA conference in Washington everybody seems to understand implications of energy scarcity. What would be your message to a lay person? What are the main implications of peak oil for the daily life?
We are going to have to get used to a much lower energy lifestyle. Energy has been cheap for a very long time, so we have developed a structural dependency on it. Energy is not going to be cheap for much longer though, and that means many of the things we take for granted will no longer be affordable. A much larger proportion of our income will have to go to energy costs, and that will leave very much less for everything else. Our material standard of living will fall, and we will have to go back to performing many functions with human energy rather than fossil fuel energy.
The wealthy may still have access to fossil fuels, but if most people do not, then they will not be able to live a modern life. A life fuelled by human energy alone is one where people have to spend an enormous amount of time performing everyday tasks, and will not have time to undertake much of a role in the wider economy. Some family members will have to stay at home and devote all their time to household tasks that will take far longer than we are used to.
Q2) When did you first see the term "peak oil" and when did you realize it might be a problem?
I used to work at the Oxford Institute for Energy Studies, which is primarily an oil and gas institute, back in the 1990s. I worked on electricity, but most of my colleagues were involved in fossil fuels. There were many discussions about the upstream, meaning where oil is coming from, and that fact that it is finite. It was clear that supply would be a problem at some point, although when I was there, oil prices were very low ($10/barrel), so no one thought it would be an imminent problem. I began to look into energy returned on energy invested (net energy) and realized the problem would be much closer at hand in net energy terms, and that we would see major declines in my lifetime.
Q3) Why is that most economists do not recognize the role of energy in economy?
Energy is invisible, and therefore taken for granted. Most economists do not recognize resource limits at all, partly because they do not understand the laws of thermodynamics. They live in a world of substitutions when something becomes scarce, and do not understand that energy is the master resource for which there are no substitutes.
Economists typically say that there are no limits, only price. If something is scarce, it will cost more, but we will never run out. I think this misses the tremendous impact on a society dependent not only on energy, but on cheap energy. All our modern infrastructure requires a steady supply of affordable energy to maintain it.
Q4) Are "conservation" and "energy efficiency" solutions to peak oil? Is it enough?
Conservation and energy efficiency can help to extend the timeframe, but they cannot solve the problem. They could have done much more if we had made the necessary investments early, while we still had both cheap energy and enough money to make fundamental changes.
In wealthy countries, and even in moderately wealthy ones, we can greatly reduce the amount of energy we use because so much of what we use is wasted. Anything that has been far too cheap for a long time will be wasted. We do not need to use electricity to remove the lids for cans or to brush our teeth, for instance, and yet many of us do. Ceasing to do this would allow us to conserve some energy painlessly.
We also use many machines which have not been designed for energy efficiency at all. For instance a top-loading washing machine, like people typically use in North America, uses far more energy than a European front-loading one. If we were able to replace wasteful infrastructure with efficient infrastructure, we could probably save 30-40% of our energy consumption and hardly notice a difference in our standard of living. The difficulty is that in an era of financial crisis, we will not have the money to replace infrastructure. This will make it very hard to make efficiency improvements.
Rather than increase efficiency greatly, we will find ourselves forced to conserve energy in a low-energy and low-money future. We will have no choice but to do without, and it will not be painless once scarcity starts eating into our ability to perform essential functions rather than merely frivolous ones.
Q5) What about alternatives or nuclear energy? People often say that if oil gets more expensive, alternatives are to be deployed. Is this flawed logic?
Alternatives to oil typically have a much lower energy returned on energy invested (EROEI), and are expensive, at a time when money will be very scarce. They also depend on the availability of cheap oil to produce them. These problems mean that it will be very difficult to provide anything like the energy we get from fossil fuels. Alternatives can help in small-scale niche applications, but they cannot solve the problem of running a society, especially an energy-intensive industrial society.
Alternatives generally do not scale up, for reasons of net energy, money and time. We do not even have the capacity to produce things like solar panels on a massive scale, and we have neither the time nor the money to build that capacity before our oil supplies decline, let alone build all the panels we would need as well. We have also allowed our grid infrastructure to age, to the point where much of it will need to be replaced.
As most alternatives produce electricity, we are very dependent on the grid. Unfortunately there is a large mismatch between renewable energy resource intensity, energy demand and grid capacity. That means far more grid investment would be required. We would also have t covert energy demand away from liquid fuels to electricity, and that will take a huge amount of time and money at a time when both will be in very short supply.
Q6) The financial system seems to complicate the whole issue? In which way?
Financial crisis will make everything very much harder. We will have very little money in a deflationary world, and people will be highly risk averse. No one (individuals, companies and governments) will be wanting to spend at a time when future earnings are so uncertain, which will make it almost impossible to invest in the infrastructure changes we need to make in order to address energy crisis. With not enough to go around, people are unfortunately likely to waste efforts and resources fighting over what there is, rather than pooling scarce resources for the good of all. Financial crisis leads to social instability at a time when we most need to keep our heads and work together.
Q7) Do you expect a crash in stock markets? How serious will it be and what will be the main consequences?
Yes, I do expect a crash, and a very large one at that. I expect the larger trend to be down for several years. A lot of investments will fall a very long way in value, and where these investments have been used as collateral for borrowing, there will be knock-on consequences. We will see margin calls as values decline, and outstanding debt is now too high compared to the value of the asset, so that additional debt repayments have to be made. We are going to see a very large number of bankruptcies and many debt defaults. This will be a factor in crashing the money supply, leaving too little lubricant to run the engine of the economy.
Q8) Debt seems to be a large part of the problem. How large?
A massive debt bubble is the at the heart of the problem. It has been building for decades and is now far larger than any previous debt bubble in human history. Humanity periodically rediscovers leverage on a grand scale, after the lessons of the previous episode have mostly passed out of living memory. Expansions of credit and debt create the appearance of great wealth, but it is illusory (virtual). The obligations created are real though. People have expectations of being repaid, and they will not be, which will set up a grab for the underlying real wealth (collateral) which is nowhere near enough to go around. This is deflation, and its effects are very significant. Money will be scarce for a very long time.
Q9) Still, some people say we should leave the solution of peak oil to the free market...
The free market has a very short time horizon, while energy investments are long-term. In fact the time horizon of the free market is likely to shrink in the times of high risk that we are facing. No one will be making investments where there is no economic visibility, so returns are completely uncertain. Financing projects will be almost impossible. We are going to have to depend on public financing, but governments will have very little money and many more calls on their resources, so they will not be in a position to make many investments either.
Q10) What does Paul Krugman (and others) get wrong? Should we listen to him (and spend more)?
No, we should not listen. Spending more will only dig us into an even deeper hole, and will not prevent the deflation that is coming. We need to become economically responsible and save. Of course this will accelerate the decline in economic activity, but this needs to happen. If we keep making the problem worse by spending, we will only have to face an even larger set of consequences later. It is better to let the house of cards fall and begin rebuilding once the toxic debt has been defaulted upon. The sooner that happens, the sooner we can begin to rebuild the trust and social cohesion that facilitate investments in the public good.
Mr Krugman is a monetarist, and does not understand the critical role of debt in setting up a deflationary collapse. Monetarists treat economies as machines governed by the laws of physics, rather than as formed of people. Machines can be controlled in order to produce predictable outcomes in ways that people cannot. Any human social construct will depend on the mechanisms of human social behaviour, and this is outside the monetarist model.
Bill Black: 'Major Frauds' Continue at Mortgage Companies
FDIC Called On To Put Bank Of America Into Receivership
by Dan Froomkin - Huffington Post
Charging that the ongoing foreclosure fraud epidemic is the work of precisely the same unrepentant bank officers whose fraudulent mortgage schemes crashed the financial system in the first place, two leading critics of the financial industry are calling on the FDIC to put some of the nation's biggest banks into receivership -- starting with the Bank of America -- and make them clean house.
William K. Black, a former regulator who cracked down on massive fraud during the savings and loan scandal of the 1980s, and his fellow economics professor at the University of Missouri-Kansas City, L. Randall Wray, write in the Huffington Post that "the lenders, officers, and professional that directed, participated in, and profited from the fraudulent loans and securities should be prevented from causing further damage to the victims of their frauds, through fraudulent foreclosures."
They argue that, far from being a coincidence, massive foreclosure fraud "is the necessary outcome of the epidemic of mortgage fraud that began early this decade." The reason for that:The banks that are foreclosing on fraudulently originated mortgages frequently cannot produce legitimate documents... Now, only fraud will let them take the homes. Many of the required documents do not exist, and those that do exist would provide proof of the fraud that was involved in loan origination, securitization, and marketing. This in turn would allow investors to force the banks to buy-back the fraudulent securities. In other words, to keep the investors at bay the foreclosing banks must manufacture fake documents.... Foreclosure fraud is the only thing standing between the banks and Armageddon."
So the only solution, then, is new management. "We should remove the senior leadership of the banks and replace them with experienced bankers with a reputation for integrity and competence, i.e., the honest officers that quit or were fired because they refused to engage in fraud," Black and Wray write. They suggest starting with Bank of America, which they call "a 'vector' spreading the mortgage fraud epidemic throughout much of the Western world."
Looming large among Bank of America's sins is its purchase of mortgage giant Countrywide Financial long after it became clear that the company had engaged in massive fraud. Even the extremely slow-to-anger New York Fed, which bought billions of securitized mortgages that Bank of America improperly represented as fully documented and conforming to underwriting standards, is now demanding that it buy some of them back.
But far from expressing remorse, Bank of America is going on the offensive, announcing it will end its three-week-old freeze on foreclosures in 23 states on Monday, much earlier than expected. Bank of America officials are claiming they didn't find evidence of unwarranted foreclosures and are vowing to "defend the interests of Bank of America shareholders," and hire more lawyers, the New York Times reported. "It's loan by loan, and we have the resources to deploy in that kind of review," said the bank's chief executive.
Black and Wray write that Bank of America "is sufficiently large and powerful that its receivership will send the credible signal that America is restoring the rule of law and that even the most elite frauds will be held accountable."
They note that about a thousand receivers were appointed during the S&L and banking crises of the 1980s and early 1990s under Presidents Reagan and Bush. "Contrary to the scare mongering about 'nationalizing' banks, receivers are used to returning failed banks to private ownership," they write.
The new managers would "direct the business operations, find the true facts about the bank's operations, senior managers, and financial condition, recognize the real losses, and make the appropriate referrals to the FBI and the SEC so that the frauds can be investigated and prosecuted," they write. "The receiver is also a well-proven device for splitting up banks that are too large and incoherent by selling units of the business to different bidders who most value the operations."
On Wednesday, administration spokesmen declined to endorse any dramatic federal action. They declared that they had found no "systemic" threat to the financial system from the foreclosure problems, spoke of "mistakes" and "errors" rather than pervasive fraud and said the banks and servicers now need to "fix" their "processes." They "cannot even bring themselves to use the 'f' word -- fraud," Black and Wray write. "They substitute euphemisms designed to trivialize elite criminality."
The central problem appears to be that Obama Administration continues to see the mortgage and foreclosure crises primarily through the eyes of the banks -- not through the eyes of the regular people who became their victims, or even the taxpayers who bailed out the very fat-cat bankers who are now back to their tricks.
Black and Wray write:This nation's most elite bankers originated and packaged fraudulent nonprime loans that destroyed wealth -- and working class families' savings -- at a prodigious rate never seen before in the history of white-collar crime. They created the worst bubble in financial history, echo epidemics of fraud among elite professionals, loan brokers, and loan servicers, and would (if left to their own devices) have caused the Second Great Depression.
The two professors call for "[n]othing short of removing all senior officers who directed, committed, or acquiesced in fraud."
Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership
by William K. Black and L. Randall Wray - Huffington Post
After a quick review of its procedures, Bank of America this week announced that it will resume its foreclosures in 23 lucky states next Monday. While the evidence is overwhelming that the entire foreclosure process is riddled with fraud, President Obama refuses to support a national moratorium. Indeed, his spokesmen on the issue told reporters three key things. As the Los Angeles Times reported:A government review of botched foreclosure paperwork so far has found that the problems do not pose a "systemic" threat to the financial system, a top Obama administration official said Wednesday.
Yes, that's right. HUD reviewed the "paperwork" problem to see whether it threatened the banks -- not the homeowners who were the victims of foreclosure fraud. But it got worse, for the second point was how the government would respond to the epidemic of foreclosure fraud.The Justice Department is leading an investigation of possible crimes involving mortgage fraud.
That language was carefully chosen to sound reassuring. But the fact is that despite our pleas the FBI has continued its "partnership" with the Mortgage Bankers Association (MBA). The MBA is the trade association of the "perps." It created a ridiculous on its face definition of "mortgage fraud." Under that definition the lenders -- who led the mortgage frauds -- are the victims. The FBI still parrots this long discredited "definition." That is one of the primary reasons why -- in complete contrast to prior financial crises -- the Justice Department has not convicted a single senior officer of the large nonprime lenders who directed, committed, and profited enormously from the frauds.
Note that the Justice Department is not investigating foreclosure fraud. HUD Secretary Donovan's statement shows why:"We will not tolerate business as usual in the mortgage market," he said. "Where there have been mistakes made or errors, we will hold those entities, those institutions, accountable to stop those processes, review them and fix them as quickly as possible."
Note the language: "mistakes", "errors", "processes" (following the initial use of "paperwork"). No mention of "fraud", "felony", "criminal investigations", or "prosecutions" for the tens of thousands of felonies that representatives of the entities foreclosing on homes have admitted that they committed. Note that Donovan does not even demand that the felons remedy the harm caused by their past fraudulent foreclosures. Donovan wants them to "fix" "processes" -- not repair the harm their frauds caused to their victims.
The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers' trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce. The FASB's new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional "income" and "capital" at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks.
The inflated asset values allow the Fed and the administration to ignore the Fed's massive loss exposure and allow Treasury to spread propaganda claiming that TARP resolved all the problems -- at virtually no cost. Donovan claims that we have held the elite frauds accountable -- but we have done the opposite. We have made the CEOs of the largest financial firms -- typically already among the 500 wealthiest Americans -- even wealthier. We have rewarded fraud, incompetence, and venality by our most powerful elites.
If the government does not hold the fraudulent CEOs responsible, who is supposed to stop the epidemic of elite financial fraud? The Obama administration's answer is the fraudulent CEOs themselves, at a time of their choosing. You can't make this stuff up.But ultimately resolving the problems is not the government's responsibility, said Michael Barr, assistant Treasury secretary for financial institutions.
"Fundamentally, this is up to the banks and the servicers to fix," he said. "They can fix it as fast as they feel like."
So who is Michael Barr and why is saying things on behalf of the Obama administration that make it appear to be a wholly-owned subsidiary of the fraudulent lenders and servicers? He's a Robert Rubin protégé and he's the senior Treasury official for banking policy.
We have a different policy view. We believe that only the government can stop fraud from growing to catastrophic levels and that among the government's highest responsibilities is to provide the regulatory "cops on the beat" with the competence, resources, courage, and integrity to take on our most elite frauds. We believe that anything less is a travesty that causes tens of millions of Americans to be defrauded and poses a grave threat to our economy and democracy.
Prompt Corrective Action
First, it is time to stop the foreclosures until the banks and servicers adopt corrective steps, certified as adequate by FDIC, that will prevent all future foreclosure fraud. They must also adopt plans to remedy the injuries their foreclosure frauds have already caused, and assist the FBI, Department of Justice, and legal ethics officials investigations of their officers' and attorneys' frauds and ethical violations.
Second, it is time to place the financial institutions that committed widespread fraud in receivership. We should remove the senior leadership of the banks and replace them with experienced bankers with a reputation for integrity and competence, i.e., the honest officers that quit or were fired because they refused to engage in fraud. We should prioritize the receiverships to deal with the worst known "control frauds" among the "systemically dangerous institutions" (SDIs). The SDIs' frauds and fraudulent leaders endanger the global economy.
We propose Bank of America for the first receivership. In the last few weeks, the SEC has obtained a large (albeit grossly inadequate) settlement of its civil fraud charges against the former senior leaders of Countrywide. (Bank of America acquired Countrywide and is responsible for its frauds.) Fannie and Freddie's investigations -- with their findings reviewed by their regulator, the Federal Housing Finance Agency (FHFA) -- have identified many billions of dollars of fraudulent loans originated by Countrywide that were sold fraudulently to Fannie and Freddie through false representations and warranties. The Fed, BlackRock, and Pimco's investigations have identified many billions of dollars of fraudulent loans provided by Countrywide under false reps and warranties. Ambac's investigation found that 97% of the Countrywide loans reviewed by Ambac were had false reps and warranties. Countrywide also engaged in widespread foreclosure fraud. This is not surprising, for every aspect of Countrywide's nonprime mortgage operations that has been examined by a truly independent body has found widespread fraud -- in loan origination, loan sales, appraisals, and foreclosures. Fraud begets fraud. Lenders that are control frauds create criminogenic environments that produce "echo" epidemics of control fraud in other professions and industries.
We have been amazed that, as one financially sophisticated entity after another found widespread fraud by Countrywide in the entire gamut of its operations, the administration, the industry, and the financial media act as if this is acceptable. Countrywide made hundreds of thousands of fraudulent loans. It fraudulently sold hundreds of thousands of loans through false reps and warranties. It fraudulently foreclosed on large numbers of loans. It victimized hundreds of thousands of people and hundreds of financial institutions, causing hundreds of billions of dollars of losses. It has defrauded more people, at a greater cost, than any entity in history.
Bank of America chose to purchase Countrywide at a point when it -- and its senior leaders -- were infamous. Bank of America made some of these Countrywide leaders its senior leaders. Yet, Bank of America is not treated as a criminal entity. President Obama, Attorney General Eric Holder, Donovan, and Barr cannot even bring themselves to use the "f" word -- fraud. They substitute euphemisms designed to trivialize elite criminality. The administration officials do not call for Bank of America to be the subject of a criminal investigation. They do not demand that Fannie, Freddie, Ambac, the FHFA, and Pimco file criminal referrals about Countrywide's frauds. They do not demand that Fannie, Freddie, and the Fed refuse to purchase or take as collateral any mortgage instrument from Bank of America. No one at the Harvard Club in New York moves to kick Bank of America's officers out of their club! The financial media treats Bank of America as if it were a legitimate bank rather than a "vector" spreading the mortgage fraud epidemic throughout much of the Western world.
For the sake of our (and the global) economy, our democracy, and our souls this willingness to allow elite control frauds to loot with impunity must end immediately. The control frauds must be taken down and their officers removed promptly. Receivership is the way to begin to reclaim our souls, our economy, and our democracy and Bank of America has the track record that makes it a good place to start. It is sufficiently large and powerful that its receivership will send the credible signal that America is restoring the rule of law and that even the most elite frauds will be held accountable.
Next we need to remove the rest of the "too big to fail" institutions -- we call them systemically dangerous institutions, or SDIs -- to reduce the global systemic risks that they pose. We are rolling the dice with disaster every day. The SDIs are inefficient, so shrinking them will reduce risk and increase efficiency. We need to follow three types of policies with respect to SDIs.
- They cannot grow larger and compound the systemic risk they pose.
- They must create an enforceable plan to shrink to a level and functions such that they no longer pose a systemic risk within five years.
- Until they shrink to the point that they no longer pose systemic risks they must be regulated with far greater intensity than other banks. In particular, control fraud poses so severe a risk of triggering another global financial crisis that there must be no regulatory tolerance for control frauds at the SDIs. One of the best ways to reduce their risks is to mandate that high levels of executive compensation be paid only after sustained and superior performance (at least five years), and with "claw back" provisions if compensation was obtained by fraudulent reported income or seriously inadequate loss reserves.
Appointing a receiver for an SDI will be a major undertaking for the FDIC, but it is also well within its capabilities. Contrary to the scare mongering about "nationalizing" banks, receivers are used to returning failed banks to private ownership. Receiverships are managed by experienced bankers with records of competence and integrity rather than the dread "bureaucrats." We appointed roughly a thousand receivers during the S&L and banking crises of the 1980s and early 1990s under Presidents Reagan and Bush.
Here is how it works. A receiver is appointed on Friday. The bank opens for business as normal (from the bank's customers' perspective) on Monday. The checks clear, the ATMs work, and the branches all open. The receiver's managers direct the business operations, find the true facts about the bank's operations, senior managers, and financial condition, recognize the real losses, and make the appropriate referrals to the FBI and the SEC so that the frauds can be investigated and prosecuted.
The receiver is also a well-proven device for splitting up banks that are too large and incoherent by selling units of the business to different bidders who most value the operations.
Dealing with the "Dirty Dozen" Control Frauds
Simultaneously, we should put in place a system to replace the existing cover up of the condition of other banks with vigorous investigations and honest accounting. The priority for these investigations should be the "Dirty Dozen" -- the twelve largest banks. The Fed cannot conduct a credible investigation. It has taken so many fraudulent nonprime loans and securities as collateral that it is the leading proponent of covering up these losses.
The FDIC should lead the investigations (it has "backup" regulatory authority over all banks), but it should hire investigative experts to add expertise to its Dirty Dozen examination teams. The priorities of the teams will be identifying existing losses and requiring their immediate recognition (the regulatory authorities have the authority to "classify" assets that can trump the accounting scams that Congress extorted from FASB). The FDIC should prioritize the order of its examinations of the largest SDIs on the basis of known indicia of fraud. For example, Citi's senior credit manager for mortgages testified under oath that 80% of the loans it sold to Fannie and Freddie were made under false reps and warranties. The Senate investigation has documented endemic fraud at WaMu (acquired by Wells Fargo). The FDIC should sample nonprime loans and securities held by Fannie, Freddie, the Federal Home Loan Banks, and the Fed to determine which nonprime mortgage players originated and sold the most fraudulent loans. This will allow the FDIC to prioritize which SDIs it examines first.
We should also create a strong incentive for financial entities to voluntarily disclose to the regulators, the SEC, and the FBI their frauds, their unrecognized losses, and the officers that led the frauds -- and to fire any officer (VP level and above) who committed (or knew about and did not report) financial fraud. Any SDI that originated or sold more than $2 billion in fraudulent nonprime loans or securities should be placed in receivership unless it has conducted a thorough investigation and made the voluntary disclosures discussed above prior to the commencement of the FDIC examination, and developed a plan that will promptly recompense fully all victims that suffered losses from mortgages that were fraudulently originated, sold, or serviced.
We make three propositions concerning what we believe to be institutions that are run as "control frauds". To date, this situation has been ignored in the policy debates about how to respond to the crisis. The propositions rest on a firm (but ignored) empirical and theoretical foundation developed and confirmed by white-collar criminologists, economists, and effective financial regulators. The key facts are that there was massive fraud by nonprime lenders and packagers of fraudulent nonprime loans at the direction of their controlling officers. By "massive" we mean that lenders made millions of fraudulent loans annually and that packagers turned most of these fraudulent loans into fraudulent securities. These fraudulent loans and securities made the senior officers (and corrupted professionals that blessed their frauds) rich, hyper-inflated the bubble, devastated millions of working class borrowers and middle class home owners, and contributed significantly to the Great Recession -- by far the worst economic collapse since the 1930s.
Our first proposition is this: The entities that made and securitized large numbers of fraudulent loans must be sanctioned before they produce the next, larger crisis. Second: The officers and professionals that directed, participated in, and profited from the frauds should be sanctioned before they cause the next crisis. Third: The lenders, officers, and professional that directed, participated in, and profited from the fraudulent loans and securities should be prevented from causing further damage to the victims of their frauds, e.g., through fraudulent foreclosures. Foreclosure fraud is an inevitable consequence of the underlying "epidemic" of mortgage fraud by nonprime lenders, not a new, unrelated epidemic of fraud by mortgage servicers with flawed processes. We propose a policy response designed to achieve these propositions.
S&L regulators, criminologists, and economists recognize that the same recipe that produced guaranteed, record (fictional) accounting income (and executive compensation) until 2007 produced another guarantee: massive (real) losses, particularly if the frauds hyper-inflated a bubble. CEOs who loot "their" banks do so by perverting the bank into a wealth destroying monster -- a control fraud. What could be worse than deliberately growing massively by making loans likely to default, converting large amounts of bank assets to the personal benefit of the senior officers looting the bank and to those the CEO suborns to assist his looting (appraisers, auditors, attorneys, economists, rating agencies, and politicians), while simultaneously providing minimal capital (extreme leverage) and only grossly inadequate loss reserves, and causing bubbles to hyper-inflate?
This nation's most elite bankers originated and packaged fraudulent nonprime loans that destroyed wealth -- and working class families' savings -- at a prodigious rate never seen before in the history of white-collar crime. They created the worst bubble in financial history, echo epidemics of fraud among elite professionals, loan brokers, and loan servicers, and would (if left to their own devices) have caused the Second Great Depression.
Nothing short of removing all senior officers who directed, committed, or acquiesced in fraud can be effective against control fraud. We repeat: Foreclosure fraud is the necessary outcome of the epidemic of mortgage fraud that began early this decade. The banks that are foreclosing on fraudulently originated mortgages frequently cannot produce legitimate documents and have committed "fraud in the inducement." Now, only fraud will let them take the homes. Many of the required documents do not exist, and those that do exist would provide proof of the fraud that was involved in loan origination, securitization, and marketing. This in turn would allow investors to force the banks to buy-back the fraudulent securities. In other words, to keep the investors at bay the foreclosing banks must manufacture fake documents. If the original documents do not exist the securities might be ruled no good. If the original docs do exist they will demonstrate that proper underwriting was not done -- so the securities might be no good. Foreclosure fraud is the only thing standing between the banks and Armageddon.
Chris Whalen: MBS Investors Are Calling Their Lawyers, But Most Have No Recourse
'Barack Obama Is Walking In Herbert Hoover's Shoes'
Plosser Says Fed in 'Difficult Spot' on Mortgage-Debt Buybacks
by Alex Kowalski - Bloomberg
The Federal Reserve's effort to recover taxpayer money used in bailouts while also ensuring the stability of the financial system puts it in a "difficult spot," said Charles Plosser, president of the Philadelphia Fed. The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., has joined a bondholder group that aims to force Bank of America Corp. to buy back some bad home loans packaged into $47 billion of securities.
On the one hand, the Fed has "a duty to the taxpayer to try to collect on behalf of the taxpayer on these mortgages," Plosser said today at an event in Philadelphia. "At the same time, as a regulator, and as someone who's trying to preserve financial stability and manage the oversight of banks and financial institutions, we've got another hat that we wear that says, 'Should we be in the business of suing the financial institutions that we are in fact responsible for supervising?'"
The Federal Reserve System, made up of 12 regional banks plus the Washington-based Board of Governors, works with other regulators to ensure the safety and soundness of the financial system. "It's a very difficult spot for the Fed to be in," Plosser said. "It's a little bit of a Catch-22, but it reinforces my notion of what the challenges and difficulties are for the Fed entering into the markets in this way." Concern that Bank of America may be forced to buy back soured mortgages helped send its stock down 7.3 percent since Oct. 18, the day before the New York Fed's role was reported.
Wall Street Banks
The New York Fed oversees many of the biggest Wall Street bank holding companies, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. Bank of America, the largest U.S. bank by assets, is based in Charlotte, North Carolina, and overseen by the Richmond Fed. The Fed owns assets from the Bear Stearns and AIG bailouts in three holding companies. The New York Fed, which has policies to manage conflicts of interest between its multiple units, created its Special Investments Management Group in January to oversee the assets.
Maiden Lane LLC, named for the street bordering the New York Fed's Manhattan headquarters, bought about $30 billion of Bear Stearns assets that JPMorgan didn't want when it acquired the company. Maiden Lane II and III were created to hold the assets from AIG's rescue. BlackRock Inc., the world's biggest money manager, was hired to manage the assets and is also part of the bondholder group.
"In terms of monetary policy, we should stick to buying government securities and Treasuries and not venture outside that for exactly these sorts of reasons," said Plosser, a former professor and business-school dean at the University of Rochester in New York who joined the Philadelphia Fed as its chief in 2006.
US taxpayers warned Fannie Mae and Freddie Mac may need $363 billion bailouts
by Edward Helmore - Guardian
US regulators have warned that taxpayers may end up absorbing losses of $363bn (£231bn) from bad mortgage loans – the latest sign that problematic lending practices that triggered the 2008 banking crisis continue to buffet the US. The issue, which has flared anew this month with a ban on the resale of foreclosed homes after flaws in the legal processes were exposed, has led investors to voice fears of second housing-related crisis.
This week, Bank of America (BofA) shares plunged on concern about the impact of legal challenges to foreclosures after the bank announced it was resuming sales of repossessed homes. Investors warn that the bank's exposure to bad mortgages could depress its stock for years to come, perhaps falling from the current $11 to $2.50 by 2013.
BofA, through its troubled Countrywide Financial unit, is under further pressure from mortgage-bond investors who claim poor mortgage lending practices entitles them to refunds that could reach $200bn. The Federal Housing Finance Agency has now warned that the government-guaranteed funds Fannie Mae and Freddie Mac, which have already absorbed $148bn in bail-outs, may now need up to $363bn under worst-case predictions.
With home prices experiencing their worst fall since 1930 by some estimates, claims are likely to soar. Pension fund and private equity firms including Pimco and BlackRock, as well as the Federal Reserve Bank of New York, are moving to force BoA into repurchasing $47bn in bonds, though BoA's chief executive officer Brian Moynihan insists that most claims can not demonstrate "the defects that people allege".
The issue of re-purchasing securitised mortgages has placed the banking system under renewed stress for investors. BoA's stock has declined 22% this year, compared to 8% for JPMorgan Chase and a 23% gain for Citigroup, at one point the weakest of the US banking companies.
Mortgage Mess: Shredding the Dream
by Peter Coy, Paul M. Barrett and Chad Terhune - Business Week
The foreclosure crisis isn't just about lost documents. It's about trust—and a clash over who gets stuck with $1.1 trillion in losses
In 2002, a Boca Raton (Fla.) accountant named Joseph Lents was accused of securities law violations by the Securities and Exchange Commission. Lents, who was chief executive officer of a now-defunct voice-recognition software company, had sold shares in the publicly traded company without filing the proper forms. Facing a little over $100,000 in fines and fees, and with his assets frozen by the SEC, Lents stopped making payments on his $1.5 million mortgage.
The loan servicer, Washington Mutual, tried to foreclose on his home in 2003 but was never able to produce Lents' promissory note, so the state circuit court for Palm Beach County dismissed the case. Next, the buyer of the loan, DLJ Mortgage Capital, stepped in with another foreclosure proceeding. DLJ claimed to have lost the promissory note in interoffice mail. Lents was dubious: "When you say you lose a $1.5 million negotiable instrument—that doesn't happen." DLJ claimed that its word was as good as paper. But at least in Palm Beach County, paper still rules. If his mortgage holder couldn't prove it held his mortgage, it couldn't foreclose.
Eight years after defaulting, Lents still hasn't made a payment or been forced out of his house. DLJ, whose parent, Credit Suisse, declined to comment for this story, still hasn't proved its ownership to the satisfaction of the court. Lents' debt has grown to about $2.5 million, including unpaid taxes, interest, and penalties. As the stalemate grinds on, Lents has the comfort of knowing he's no longer alone. When he began demanding to see the I.O.U., he says, "I was looked upon like I had leprosy. Now, I have probably 20 to 30 people a month come to me" asking for advice. Lents is irked when people accuse him of exploiting a loophole. "It's not a loophole," he says. "It's the law."
The Lents Defense, as it might be called, doesn't work everywhere. Thousands of Floridians have lost their homes in lightning-fast "rocket dockets." In 27 other states, judges don't even review foreclosures, making it harder for homeowners to fight back. Now, though, allegations of carelessness and outright fraud in foreclosures has become so widespread that attorneys general in all 50 states are investigating. So are the feds.
Even if the documentation problems turn out to be manageable—as Bank of America and others insist they will be—the economy will still suffer long-term consequences from the loose underwriting that caused the subprime housing bubble. According to an Oct. 15 report by J.P. Morgan Securities, some $2 trillion of the $6 trillion in U.S. mortgages and home-equity loans that were securitized during the height of the bubble, from 2005 through 2007, are likely to go into default. The report says the housing bust will ultimately cause losses of $1.1 trillion on those bonds.
While banks and investors take their hits, millions of homeowners continue to be punished by unaffordable mortgage payments and underwater home values. Laurie Goodman, a mortgage analyst at Amherst Securities Group, said in an Oct. 1 report that if government doesn't step up its intervention, over 11 million borrowers are in danger of losing their homes. That's one in five people with a mortgage. "Politically," she wrote, "this cannot happen. The government will attempt successive modification plans until something works."
Wall Street's unspoken strategy has been to kick mortgage losses down the road until an economic recovery reinflates the housing market. The faulty-foreclosure crisis has forced the issue back into the present tense, triggering a fight over who will bear the brunt of those losses. The combatants—all of whom are trying to minimize their share of the damage—include homeowners, lenders and mortgage brokers, loan servicers and the underwriters of mortgage-backed securities, the buyers of those securities, title insurers, rating firms, and the federally controlled mortgage buyers Fannie Mae and Freddie Mac.
J.P. Morgan predicts that bondholders will absorb most of the estimated $1.1 trillion loss—but may succeed in foisting about $55 billion on banks. If the bank losses turn out to be steeper than J.P. Morgan and most other analysts expect, taxpayers may be asked to inject more capital into the financial institutions. Fannie Mae and Freddie Mac, already wards of the state, might require more capital as well.
The last five years of rising foreclosures, to the highest rate since the Great Depression, have exposed the carelessness with which banks lent money. The banks figured they could always seize ownership and resell at a profit, assuming they hadn't already dumped the loan on an unwary investor. And they wouldn't let technicalities impede the process; the website 4closurefraud.com, which is operated by the Carol C. Asbury Save My Home Law Group, has links to documents from Nassau County, N.Y., in which someone entered "BOGUS" as the grantee for the mortgage—i.e., the party entitled to foreclose.
During the housing boom, transactions were flowing so fast that banks couldn't keep up with the paperwork. The mortgage industry depended on a digital overlay of its own invention, Mortgage Electronic Registration Systems, a database owned by Fannie Mae, Freddie Mac, Bank of America, CitiMortgage, Chase Home Mortgage, Wells Fargo, and others, including title insurers.
No matter who bought the loan, MERS was purported to be the mortgagee—i.e., the party that would foreclose if a borrower stopped paying. Ridiculous? Of all newly issued U.S. mortgages, 60 percent list MERS—a unit of Reston (Va.)-based MERSCorp that has no employees of its own—as the mortgagee. "It's a total attack on the public system," says Christopher L. Peterson, a law professor at the University of Utah who has consulted in cases against MERS.
As MERS sped up loan processing, it created a giant legal hairball. According to Peterson, state judges in Kansas, Arkansas, and Maine have said that MERS has no standing in foreclosure proceedings under their states' laws if they can't produce the promissory note. In early October a federal judge in Oregon blocked Bank of America as trustee from foreclosing on a home in the MERS system. (MERS spokeswoman Karmela Lejarde says its standing has always been upheld, "either in the initial court proceeding or upon appeal.")
Judges also resent that would-be foreclosers show up in court representing themselves as vice-presidents of MERS even though they work for various loan servicers. Fixing the paperwork won't be easy because many of the notes have been lost or even deliberately shredded. The Florida Bankers Assn. told the state Supreme Court last year that in many cases "the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file."
As staggering as the projected stakes are in the housing crisis, at least you can put a number on them. What's incalculable is the psychic cost of a legal system that may well have let banks skirt the law. "The whole financial system is becoming a lot less transparent," says Hernando de Soto, a Peruvian economist who has written on the importance of well-defined property rights. "You can't size up risk anymore."
"We are killing our competition!" says Greg Whitworth. It's a perfect October day on the Jacksonville, Fla., campus of Lender Processing Services (LPS), and Whitworth, a division president, is rallying a crowd of 200 employees inside a big white tent on the sun-drenched banks of the St. Johns River. The company is celebrating what it calls "the Year of the Megas"—key customers Bank of America, Wells Fargo, and JPMorgan Chase—with a picnic of Mediterranean chicken salad, lemon cooler cookies, and sweet tea.
LPS is America's biggest mortgage-and-foreclosure outsourcing firm. Last year its revenue from default services climbed to $1.1 billion; its nearest rival, Santa Ana (Calif.)-based CoreLogic, takes in less than half of that. One gray patch hovers over the celebration: The back-office technology provider's runaway success means it is tangled up in the foreclosure crisis. "I was thinking about the dark clouds over the company," Joe Nackashi, the chief information officer, tells the crowd. "Sure, we have made mistakes. But I don't want to let that cloud this day."
LPS supplies much of the digital plumbing for the convoluted home-finance system. At the start of 2010 it said its computer programs were handling 28 million loans with a total principal balance of more than $4.7 trillion—or more than half the nation's outstanding mortgage balances. With 8,900 employees and total revenue of $2.4 billion, it sells software and manpower to most of the largest U.S. lenders and loan servicers. "The banks were not prepared for this volume of foreclosures, and that has played to the company's advantage as the outsourcer," says Brett Horn, associate director of equity research at Morningstar.
Consider for a moment the mountains of paper that a buyer signs at closing. The industry uses LPS computer programs and sometimes LPS employees to code, store, and transfer many of these records. When things work smoothly, mortgage servicers rely on LPS software to help monitor payments. When homeowners fall behind, LPS helps assemble the information needed to foreclose.
The business has a fast metabolism; as described in an in-house newsletter published in September 2006 by Fidelity National Foreclosure Solutions, a predecessor of LPS, a single 18-person "document execution" team brings Henry Ford's mass-production techniques to the foreclosure business. "The document execution team is set up like a production line, ensuring that each document request is resolved within 24 hours," the newsletter said. "On average, the team will execute 1,000 documents per day." That was four years ago, when the foreclosure rate was a quarter what it is now.
It was when some of those documents proved difficult to track down that trouble set in. If a foreclosure lawyer working on behalf of a bank or servicer asked LPS for an errant mortgage, for example, some company workers may have gone to extremes to keep the foreclosure assembly line moving, according to prosecutors and plaintiffs' lawyers. The Florida attorney general's office has alleged that in some cases, corners may have been cut, signatures forged, documents backdated. Industry employees have said in sworn depositions that "robo-signers" executed paperwork without reviewing it.
The U.S. Attorney's Office in Tampa and the state of Florida are investigating whether LPS and affiliated companies have fabricated documents and faked signatures. LPS employees "seem to be creating and manufacturing 'bogus assignments' of mortgage in order that foreclosures may go through more quickly and efficiently," the Florida Attorney General's Office says in an online description of its civil investigation. "We're concerned that people might be put out of their houses unfairly and unjustly," Bill McCollum, the attorney general, told Bloomberg Businessweek. In a third investigation, the U.S. Trustee Program, the branch of the Justice Dept. that polices bankruptcies, is looking into whether LPS is "improperly directing legal action" to hasten foreclosures, according to a 2009 opinion issued by the bankruptcy court in Philadelphia. A Trustee spokeswoman declined to comment.
On Sept. 29, U.S. Representative Alan Grayson (D-Fla.) denounced LPS on the House floor. "The system is so organized that there is a company, Lender Processing Services, who allegedly has created the means to systemize fraud," he said. Foreclosure-defense lawyers have filed suit against LPS in Mississippi and Kentucky, seeking class-action status and accusing the company of improperly splitting fees with pro-foreclosure lawyers. LPS shares have fallen sharply on the New York Stock Exchange and as of Oct. 20 were down 33 percent for the year.
LPS executives acknowledge slip-ups, but nothing amounting to fraud. In a federal securities filing in February, the company said it had "identified a business process that caused an error in the notarization of certain documents, some of which were used in foreclosure proceedings." LPS says it fixed the problem and closed the subsidiary in Georgia where it occurred. As for the processing team described in the in-house newsletter, LPS spokeswoman Michelle Kersch says the company decided such affidavit-execution services were "not an appropriate use of resources," and ended them in September 2008. Still, she adds, LPS "signs a limited number of documents for clients," including assignments of mortgage.
"We are dealing with sensationalism vs. facts," Jeffrey S. Carbiener, the company's chief executive officer, told analysts in an Oct. 6 conference call. "Isolated instances of errors" are bound to occur, but they "are now being brought out and pointed back to that robo-signing, making it sound like a large percentage of these transactions are invalid. That is just simply not the case." He called the class-action suits "fishing expeditions."
To keep the paperwork moving, LPS uses a variety of incentives. Top-performing workers receive monthLY "Drive for Pride" awards that sometimes include $500 in company stock and a spot in an underground parking garage. LPS also devised a coding system to grade outside foreclosure attorneys based on their speed in completing tasks. Fast-acting attorneys receive green ratings; slower lawyers are labeled yellow or red and may receive fewer assignments. "Bill will move quickly and expect you to be there to pull your weight," says Jerry Mallot, executive vice-president of the Jacksonville Regional Chamber of Commerce. "I wouldn't call the environment at his company kind and genteel."
Bill is William P. Foley II, a 65-year-old West Point graduate, real estate lawyer, and wealthy vintner. He made a fortune assembling the country's largest title-insurance company, beginning with his purchase in 1984 of Fidelity National Title. By 2003, Fidelity National, then based in Santa Barbara, Calif., had $10 billion in annual revenue and 32 percent of the U.S. title-insurance market. Frustrated by the high cost of operating in California, Foley was convinced by Mallot and then-Florida Governor Jeb Bush, an occasional golfing companion, to relocate to Jacksonville. A spokeswoman said Foley, who left the LPS board last year, wasn't available to comment.
Spun off in 2008, LPS is one of the city's largest employers, with 2,400 local workers. Its headquarters is in a 12-story office building on palm-lined Riverside Avenue, part of a complex that also houses Fidelity National Financial, the original title insurer, and Fidelity National Information Services, a 2006 spin-off now called FIS. Foley and his wife, Carol, split time between a home in Jacksonville's Ponte Vedra Beach, a ranch in Whitefish, Mont., and California, where Foley owns seven wineries. His compensation last year from LPS and the Fidelity National companies was $45.9 million, according to company filings.
The growth of LPS and other foreclosure outsourcing has dismayed even some professionals deeply involved in the process. Judge Diane Weiss Sigmund of the U.S. Bankruptcy Court in Philadelphia last year published an unusual 58-page opinion scrutinizing LPS because, she said, she wished "to share my education" with others in the system "who may be similarly unfamiliar with the extent that a third-party intermediary drives the Chapter 13 process." Her opinion described an attempt by the multinational bank HSBC to foreclose on the home of Niles and Angela Taylor, who had filed for bankruptcy protection from their creditors. Judge Sigmund ruled the bank's outside attorneys mistakenly tried to take the Taylors' home because of three disputed flood-insurance payments totaling $540. She blamed lawyer incompetence, exacerbated by a "slavish adherence" to an LPS computer system called NewTrak.
What bothered the judge, she wrote, was the way HSBC and its lawyers entrusted "the NewTrak system [with] the management of its defaulted loans in bankruptcy....With the HSBC data uploaded to an LPS system, LPS responds to the perceived needs of retained counsel....The retained counsel does not address the client directly." Overreliance on LPS contributed to six months of unnecessary hearings, the judge wrote. After she ordered the parties to settle the issue in person, they did so in just an hour. HSBC acknowledged that the property did not require flood insurance after all, and the truce cleared the way for resolution of the Taylors' bankruptcy plan.
Judge Sigmund, who has since retired, scolded one of HSBC's outside lawyers for being too "enmeshed in the assembly line" of managing foreclosures and ordered her to take extra ethics training. The judge instructed HSBC to remind all of its lawyers in writing not to defer excessively to computerized data systems. LPS, the judge added, did not deserve punishment because the outsourcer had merely provided tools that others misused.
McCollum, the Florida AG, suspects that in other cases LPS is more than an innocent facilitator. In April, he says, "a homeowner contacted us," alleging that LPS paperwork had been "forged in some way." His office opened a civil investigation. While McCollum, a Republican, would not provide specifics, subpoenas his office issued on Oct. 13 demand information on six employees of an LPS subsidiary called Docx. The attorney general's office is investigating whether the employees had the authority to execute mortgage documents for lenders and servicers.
One employee, Linda Green, at various times identified herself as a vice-president or representative of more than a dozen different banks and mortgage companies, according to the subpoena. "Docx has produced numerous documents, called assignments of mortgage, that even to the untrained eye appear to be forged and/or fabricated as the signatures of the same individual vary wildly from document to document," the AG's office says on its website.
LPS disclosed in February that the Tampa U.S. Attorney's Office is "reviewing the business processes" of the Docx unit. April Charney, a senior attorney with Jacksonville Area Legal Aid and an outspoken critic of LPS, says she was contacted by a federal prosecutor about the company earlier this year. The prosecutor informed her in April, she adds, that the Justice Dept. was seeking depositions from LPS and Docx employees. LPS says it shut the Docx unit in April and is cooperating with investigators.
"We feel like we have taken all appropriate corrective actions," Carbiener, the CEO, told analysts on Oct. 6. "We don't feel like this is going to have or will have a material impact on our financial results." Quite the contrary, he added, the foreclosure chaos could be good for business. Dogged by foreclosure-defense attorneys and government investigations, lenders and servicers will have to retrace their steps. "Those services that we provided initially we'll provide again," Carbiener said. "For those loans that are held in review, we have the opportunity to earn additional revenues."
The big banks continue to insist that documentation problems are the legal equivalent of rounding errors. On Oct. 18, Bank of America, which suspended foreclosures in all 50 states, played down that suspension and said it would resubmit foreclosure affidavits in 23 states after completing a speedy review of 102,000 files. Citigroup said its foreclosure process was "sound." JPMorgan Chase Chief Executive Officer Jamie Dimon told investors on Oct. 13, "If you're talking about three or four weeks, it will be a blip in the housing market." He added, "If it went on for a long period of time, it will have a lot of consequences, most of which will be adverse on everybody."
The "blip" scenario may be too rosy. Ohio Attorney General Richard Cordray on Oct. 19 expressed deep skepticism that Bank of America had managed to complete its internal review in just 21/2 weeks, saying, "I would caution that they still have significant financial exposure in many, many cases." Even if the homeowners deserve to be foreclosed on, paperwork problems could stand in the way. Mark J. Grant, a managing director for structured finance at Dallas-based Southwest Securities, wrote on Oct. 18 that what may lie ahead is a "Whangdepootenawah," a word from Ambrose Bierce's Devil's Dictionary ("disaster; an unexpected affliction that strikes hard"). Wrote Grant: "I doubt that you have followed the contagion down the path to the end because if you had, if anyone had...there would be a lot more retching in the streets and on Wall Street's trading desks."
Even if the I.O.U.s can be straightened out quickly, the fighting won't stop. Quoting unnamed sources, The Washington Post reported on Oct. 19 that the Obama Administration's Financial Fraud Enforcement Task Force is investigating whether financial firms committed federal crimes in filing fraudulent court documents to seize people's homes.
Meanwhile, a high-stakes fight is breaking out between the banks that made loans and the investors who bought them. A shot was fired on Oct. 18 when a group of major investors claimed that Bank of America's Countrywide Home Loan Servicing had failed to live up to its contracts on some of more than $47 billion worth of Countrywide-issued mortgage bonds. The group said Countrywide Servicing has 60 days to correct the alleged violations, such as failure to sell back ineligible loans to the lenders. According to people familiar with the matter, the group includes Pimco, BlackRock, and the Federal Reserve Bank of New York.
For banks that have just started making money again after near-death experiences in 2008, mortgage losses could delay the return to good health. Chris Gamaitoni, an analyst for Compass Point Research & Trading, a Washington financial advisory firm, estimates losses for the big banks of $134 billion from having to buy back bad loans from private investors and another $27 billion in losses from buying back loans from Fannie Mae and Freddie Mac. Other estimates are lower—from $20 billion to $84 billion—in part because those analysts are less certain than Gamaitoni that investors will succeed in court.
Bank of America, the nation's largest lender, has resorted to tough tactics in resisting repurchases of bad loans. Facing pressure from Freddie Mac, one of the two government-controlled mortgage financing companies, to buy back money-losing home loans with problems like inflated appraisals, overstated borrower income, or inadequate documentation, Bank of America issued a blunt threat, according to two people with direct knowledge of the incident. If Freddie Mac did not back off its demands for the buybacks, Bank of America officials said, the bank would take more of the new, more profitable mortgages it is originating these days to rival Fannie Mae, these people said. Freddie and Fannie, known as GSEs (government-sponsored entities), need a steady supply of healthy new loans to climb out of their financial hole.
The claimed threat from Bank of America, which was not put into writing, according to one of these people, was taken seriously enough that it has been discussed at several Freddie Mac board meetings, including one in mid-October. Some officials have urged the Federal Housing Finance Agency—the government conservator that has controlled Fannie and Freddie since they were bailed out in 2008—to confront Bank of America and prevent it from trying to play one against the other, which may be infuriating but is not illegal. "If the tactic worked, I'd be shocked and appalled," said Thomas Lawler, a former portfolio manager at Fannie Mae and now an economic consultant. "The GSEs are supposed to be run now to minimize losses to the taxpayers. Freddie ought to ignore the threat." FHFA Acting Director Edward J. DeMarco declined to comment, as did officials of Freddie Mac. Bank of America also declined to comment.
For policymakers, the dilemma is this: Enormous losses will cause problems wherever they end up. They could further harm Fannie and Freddie, which insure the vast majority of the nation's mortgages and have already received nearly $150 billion in taxpayer support. Or, if Fannie and Freddie succeed in pushing the burden back to the banks, the losses could cripple some of the major institutions that have just emerged from a government bailout. Bank of America faces $12.9 billion in buyback requests, and mortgage insurers have asked for the documents on an additional $9.8 billion on which they may consider seeking repurchases, according to regulatory filings. (Bank of America has put aside $4.4 billion for buybacks, and CEO Brian T. Moynihan says the costs will be manageable.) "The Treasury is very aware that they can't push too hard on this because if you do push too hard it might put the companies in negative capital again," says Paul J. Miller, an analyst at FRB Capital Markets. "There's a lot of regulatory forbearance going on."
Aside from ignoring banks' bad debts, Washington hasn't done much to fix the crisis. Both houses of Congress easily passed a bill this year that would have undermined centuries of law by requiring every state to recognize MERS-type electronic records from other states. Only a pocket veto by President Barack Obama kept it from becoming law.
One option, opposed by the Obama Administration and most Republicans in Congress but favored by Senate Majority Leader Harry Reid and others, is a national moratorium on foreclosures. It would last until regulators assure themselves that lenders have straightened out their foreclosure procedures. Opponents say it would delay the recovery of the housing market by preventing qualified buyers from getting their hands on foreclosed homes. Supporters of the idea, such as Dean Baker, co-director of the Center for Economic and Policy Research, say there are plenty of already foreclosed homes available for sale and thus no urgent need to add to the supply.
Goodman, the Amherst Securities analyst, says banks need to reduce the principal that people owe on their homes so they have an incentive not to walk away. "Ignoring the fact that the borrower can and will default when it is his/her most economical solution is an expensive case of denial," Goodman writes. If the home whose mortgage was reduced happens to regain value, 50 percent of the appreciation would be taxed, she says. Meanwhile, to discourage people from sitting tight in homes while foreclosure proceedings drag on, she would have the government tax the benefit of living in the home rent-free.
CitiMortgage is testing an innovative alternative based on the legal procedure known as "deed in lieu of foreclosure." The owner turns the deed over to the bank without a fight if the bank promises not to foreclose, lets the family stay in the house after the agreement for six months, and gives relocation assistance.
Other ideas: In a New York Times blog post on Oct. 19, Harvard University economist Edward Glaeser suggested federal assistance to overwhelmed state and local courts, as well as $2,000 vouchers for legal assistance to low-income families that can't afford to fight foreclosures. Bloomberg News columnist Kevin Hassett, who is director of economic policy studies at the American Enterprise Institute, says in his Oct. 18 column that the newly created Financial Stability Oversight Council should make the foreclosure mess its first big project, "take authority for solving it, and do so as swiftly as possible."
Speed is essential. The longer it drags on, the more the foreclosure crisis corrodes Americans' faith in their financial and legal systems. A pervasive sense of injustice is bad for the economy and democracy as well. Take Joe Lents. The Boca Raton homeowner hasn't made a mortgage payment since 2002, but he perceives himself as a victim. "I want to expose these guys for what they're doing," Lents says. "It's personal now."
Wells Fargo: Loan Repurchase Reserve Liability Of $1.3 Billion On $144 Billion In Loan Originations
by Tyler Durden - Zero Hedge
The only pages in Wells Fargo's typically labyrinthine earnings release were 26 through 30, in which Warren Buffett's bank, which continues to be in denial over Fraudclosure and still refuses to admit it also was a RoboSigner, discloses its putback/repurchase liability. The total disclosed repurchase reserve liability as of September 30 was $1.3 billion. This compares to Bank of America's total Rep and Warranty liability of $4.4 billion, which as we disclosed yesterday took a tiny provision of $872 million in Q3.
This means that when, not if, Wells is also subject to a comparable action by litigants such as the one from yesterday which included Gross, Fink and Dudley on the offensive, the hit to the bank will be that much more dire. And since Wells management now has zero credibility, and negative fiduciary duty to its shareholders, we are currently combing through the MaidenLane portfolio to determine which New York Fed securitizations include loans originated by Wells Fargo.
We are confident quite a few will make the cut. After all, as the bank itself notes, of its $1.8 Trillion Resi Mortgage Servicing Portfolio, "8% [or $144 Billion] are private securitizations where Wells Fargo originated the loan and therefore has some repurchase risk."
Drilling further down into this $144 number:
- 55% are from vintages 2005 and prior
- 83% are prime
- Only $69 million of repurchases in 3Q10
Additionally, another $144 billion of the portfolio is non-current. Shortly we hope to have enough data to cojoin these two Venn circles and determine how much of the non-current loans were Wells originated. The 30,000 foot answer: a lot.
Below is a summary of the company's servicing portfolio:
And here is just how unprepared the bank is to an action comparable to that taken against BofA yesterday:
In other words, how many lambs does one slaughter to thank the gods for not being John Stumpf right about now?
The Bank Wins ...
New York Times Editorial
The Dodd-Frank financial reform law is supposed to correct the problems and abuses that led to the crisis. It could take years to implement. Meanwhile, Wall Street is still engaged in many of the same practices. That was abundantly clear in Louise Story's article in The Times this week on securities lending, a multitrillion-dollar activity, both before the crash and today.
In a typical securities lending deal, a pension fund, or other institutional investor, lets a bank lend some stocks to another investor, say, a hedge fund. (Investors use borrowed shares to "short" or bet against stocks.) In return, the hedge fund puts up a cash deposit. The pension fund then allows the bank to invest the cash, in presumably safe investments to eke out a little extra return.
Here's where things can get tricky. If the invested cash turns a profit, the deposit is easily repaid when the shares are returned, and the pension fund and the bank share in the gains. If the invested cash incurs losses, however, the deposit cannot be repaid in full, and the pension fund has to cover the shortfall.
Securities lending gone bad contributed to the implosion of the American International Group in 2008. Separately, Ms. Story reported that clients at JPMorgan Chase — including pension funds of New York State and the City of New Orleans — have ended up owing the bank more than $500 million to cover losses. JPMorgan shielded itself from some of the investments that hurt its clients — pulling out of one investment vehicle before it collapsed while clients with money in the deal lost millions of dollars. It also kept the profits from before the trades went south.
Several pension funds and foundations have brought cases against various banks in state courts, saying they were not warned of the risks and that the banks failed to act in the customers' best interest. The banks say they acted appropriately and intend to fight the suits. The Dodd-Frank law has directed the Securities and Exchange Commission to write new rules for securities lending, but has given the agency two years to act. The S.E.C. needs to move faster. If it needs more resources, Congress should provide them.
The S.E.C. needs to improve transparency and disclosure in securities lending. It needs to curb all potential conflicts of interest — among banks, brokers and other intermediaries. Done right, such rules could help reform securities lending. They could also begin to alter the norms of bank conduct, aptly described by Ms. Story as "heads, we win together. Tails, you lose — alone."
Private Tax Collectors: Invented In Ancient Rome, Now Run By Wall Street
by William Alden - Huffington Post
Sheila Rice, who sold her Maryland home to avoid foreclosure, was surprised to learn JPMorgan Chase was her property tax collector. But the bank can't claim to be the first private company to play the role of tax man: It's taken part in a more than 2,000-year-old tradition that, from its very start, has been tainted by abuse.
As the Huffington Post Investigative Fund reported this week, big banks and hedge funds in the U.S. have been quietly collecting taxes on hundreds of thousands of homes. The process, called "tax farming," is simple: A company goes to a local government and reimburses it for taxes that citizens aren't paying. In return, the company gets to act like an old-fashioned tax thug -- the kind rabbis condemn in the Bible -- charging up to 18 percent interest and thousands of dollars in legal fees, simply because it can. As the District of Columbia attorney general told the HuffPost Investigative Fund, there's "no oversight at all."
Like many great American traditions, the tax farming game was perfected by the ancient Romans. Provincial governors, and later Rome itself, sold tax-collection rights to private companies called publicani. As in modern America, this was a speculative bet -- a company paid a local government's tax debt, and then tried its own hand at recouping the loss. The Roman version was plainly brutal. In ours, the brutality is subtle. But in the estimation of one expert in ancient finance, it's just as bad: In our own way, we're sliding toward the conditions of ancient Rome, where private tax collectors employed soldiers to wring excessive amounts of cash from debtors.
"I fear that we're soon going to be where the Romans once were," New York University classics professor Michael Peachin said in an interview with HuffPost. "We're liable to rue the day -- not we, probably, but somebody will someday." Peachin was being facetious, but his exaggeration seems actually like understatement. In certain important ways, it's not a question of "someday" -- some of our hedge funds and banks, which strong-arm debtors like Rice with threats of foreclosure, are already there.
Modern American tax farms, like their Roman counterparts, lack government oversight. But the Romans, at least, had an excuse. The republic, and later the empire, was huge, and ancient technologies made transportation and communication difficult. As Edgar Kiser, of the University of Washington, and Danielle Kane, then of the University of Pennsylvania, say in a 2007 paper, that hugeness motivated Roman governments to turn to privatized tax collection in the first place.
With tax farms, the government knew it would get paid. It didn't care -- it couldn't afford to care -- how the publicani came up with the money. "They want their taxes, and they want people not to make trouble. And that's it," Peachin said, referring to Roman local governments. "Otherwise, they just don't do much of anything."
The major losers here, of course, were the taxpayers. Not only were they overtaxed, but publicani were free to be creative with enforcement. Violence was common. Peachin believes the publicani could even borrow troops from local governments. In the end, a focus on short-term profit undercut long-term strength. "Overtaxation only decreased tax revenue to the state in the long term through its negative effects on the tax base," Kiser and Kane write.
Modern U.S. tax farms don't use violence, but they do have the power to take their debtors' homes -- even for what starts as just a few hundred dollars in unpaid bills. And whereas ancient publicani physically couldn't communicate with regulatory powers, today's tax farms intentionally hide information. Banks and hedge funds, according to the HuffPost Investigative Fund, create dozens of companies that they use as fronts, obscuring their true identities. Today's regulators aren't located an empire away. They just haven't been regulating.
In both ancient and modern times, the guilt gets spread around. Publicani took investments, and investors shared in the profits, much like at JPMorgan or Bank of America today. The key difference was that Roman publicani accepted investments from senators who were ostensibly their regulators. Since this was in fact illegal, senators made sure their shares were unregistered. As Ernst Badian, Harvard history professor emeritus, puts it in a 1972 book, "The traditional division of functions between government and public contracting was dead." There have been no allegations of this type of conflict of interest in modern-day tax farms.
But the U.S. government today, as the Roman government did back then, enjoys what is often called a "revolving door" relationship with the financial sector. This passage from Kiser and Kane about senators and publicani sounds familiar: "Revolving doors exist when actors move back and forth between roles as principals and roles as agents. This causes an increasing likelihood of collusion between principals and agents, leading to poor monitoring."
Jim Rogers: China must increase interest rates, open up currency
Jim Puplava interviews Gerald Celente
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Founder of The Trends Research Institute in 1980, Gerald Celente is a pioneer trend strategist. He is author of the national bestseller Trends 2000: How to Prepare for and Profit from the Changes of the 21st Century and Trend Tracking: The System to Profit from Today's Trends (Warner Books). Gerald Celente's on-time trend forecasts, vibrant style, articulate delivery and vivid public presence makes him a favorite of major media.
The end of Britain's post-imperial ambition
by Philip Stephens - Financial Times
Britain is turning in on itself. Cool Britannia, self-confident globalism and liberal internationalism – all belong to a bygone era. Finance has gone out of fashion. The time has come to pull up the drawbridge and pay the bills. Introspection and austerity are the leitmotifs of the new age. Things are going to get grim.
This week David Cameron's coalition government unveiled its plans to repair the large hole in the nation's public finances. The prescription is for public spending cuts bigger that anything seen since the end of the second world war. The task? To eliminate a budget deficit of about 10 per cent of national income.
Taxes are going up and living standards are set to fall. Half a million public sector jobs are to be lost. Pay is to be frozen and pensions reduced. Investment in the physical fabric of the nation – roads and railways, schools, hospitals and housing – has been slashed. The BBC will be shutting down channels. George Osborne, the chancellor of the exchequer, was not exaggerating when he told the House of Commons that closing the deficit would be painful.
Britain is far from alone in embracing fiscal conservatism. Governments across Europe – and not just Greece and Ireland – have been running scared of the bond markets. The banking bust has left a sovereign debt crisis in its wake. The central bankers who blithely ignored the warning signs during the boom years are now the cheerleaders for austerity. Everyone wants to reduce their deficits in what is beginning to look like a race to deflation.
Washington stands out among the western crowd, still more concerned with sustaining economic growth and job creation than with tidying the fiscal arithmetic. The Europeans tut-tut. Germany sides with China in wagging a finger at US profligacy. Some of us thought the banks were to blame for the economic mess. Now we are told that spendthrift government has been the road to ruin. To suggest that John Maynard Keynes had something useful to say about managing demand during times of economic stress is to be branded a deficit-denier.
Landing in Tokyo this week, as Mr Cameron's government set about its ferocious spending squeeze, I could not help but think that Europe's future is perhaps Japan's recent past. Japan had its own crisis in the 1990s. Once through the worst, it decided it had better move quickly to balance the government's books. Too quickly: the result was a decade of no or low growth.
Mr Cameron's government prefaced Mr Osborne's spending announcements with a review of Britain's defence posture. The prime minister called it a strategic assessment. The officials and service chiefs charged with implementation complain the exercise has been little more than crude cost-cutting. Either way, Britain emerges a diminished power.
The government is holding on to some of the emblems of global reach. The navy is to get two new aircraft carriers. The Trident nuclear deterrent will be modernised. But there are insufficient funds to properly equip the carriers with fast jets, so one will be mothballed almost as soon as it is completed. Behind the "pocket superpower" facade, the armed forces are to be hollowed out.
Trident meanwhile has become a pawn in Mr Cameron's coalition agreement with Nick Clegg's Liberal Democrats. In one of the grimier trade-offs in the spending package, the prime minister has agreed to delay the Trident update in return for Mr Clegg's backing for higher tuition fees for university students. There were brighter spots in Mr Osborne's statement. Britain alone among the big industrial nations is sticking to its pledge to increase spending significantly on overseas aid. Some argue that gives Britain a lot more authority in the councils of global affairs than another squadron of fighter jets.
On the other hand, Mr Cameron intends to shrink the nation's diplomatic footprint. The Foreign Office faces a cut of about a quarter in its budget. Ambassadors have been told to put traditional diplomacy to one side; their first priority henceforth is to act as an on-the-spot sales force for exports and investment opportunities. Britain, the prime minister declares, is "open for business".
That is as it may be, but it is also largely closed to foreigners – a confusing message for the rising economic powers with which the government wants to build closer relationships.
The general election saw something of a backlash against the sharp influx of immigrant workers during 13 years of Labour government. Nothing can be done to stem the flow from other European Union states, so Mr Cameron has called a halt to immigration from elsewhere. The best and the brightest from the emerging nations will have to find more hospitable destinations.
It is hard to quarrel with Mr Cameron's decision to set a deadline for the withdrawal of British troops from Afghanistan. US president Barack Obama, after all, has done much the same. Building a shiny new democracy in Afghanistan was not an ignoble ambition. It has proved a hopeless one. Quite a lot of people will tell you that a more general retreat from influence was also inevitable. Tony Blair's premiership was but a small detour on the long road of relative decline. Britain was living on borrowed time and borrowed money. Cool Britannia was a last post-imperial hurrah.
The world now belongs to China, India, Brazil, Turkey and the rest. Mervyn King, the governor of the Bank of England, talks of a coming decade of sobriety. Others remark – and rightly so – that rebuilding economic strength at home is anyway an essential precursor to securing influence abroad.
The deficit must be dealt with later if not sooner. Britain cannot indefinitely pretend it is possible to match continental European standards of welfare provision with US levels of taxation. A political choice has to be made. The lesson from the wars in Iraq and Afghanistan was that even before the cuts military commitments were running far ahead of resources. All of these things are true at least in part. On the other hand there must surely be a story of Britain's ambition that reaches beyond balancing the books. Mustn't there?
UK spending review: how did the banks get off so lightly?
by Jill Treanor - Guardian
Two years ago this month, a pale and visibly shocked Gordon Brown promised that "irresponsible behaviour" by Britain's bankers would be "punished". The prime minister was angry at the level of public money needed to support banks, which eventually ran into hundreds of billions, after the credit-fuelled system expanded out of control in the run-up to the banking crisis of October 2008.
Two years on, as the taxpayer endures more pain while the government that replaced Brown's axes £81bn from public spending, the banks have returned to practices they enjoyed in the good years, seemingly bearing few scars of the punishment promised. After the coalition unveiled its £2.5bn-a-year bank levy yesterday, unions were quick to seize upon the apparent unfairness in the treatment of banks while the poorest and most vulnerable in society were being hardest hit by George Osborne's austerity Britain.
"Those who caused the recession will be cracking open the champagne today, while the full extent of the attacks on the living standards of poor and middle income Britain are starting to sink in," said Brendan Barber, general secretary of the TUC. Referring to MPs who endorsed the cutting of benefits in the chancellor's spending review, Barber said: "With government MPs cheering cuts in support for some of the most vulnerable in society, it looks like we have gone back to the 1980s 'greed is good' culture."
As Osborne wielded his axe and warned of the loss of almost 500,000 public sector jobs, banks had given a taste of the bonuses staff may enjoy this year. Goldman Sachs, the Wall Street bank with a large British operation, was attempting to show restraint but managed to set aside $370,000 (£236,000) per employee in "compensation" for the first nine months of the year. It is less than the $527,000 seen at this stage a year ago, but still demonstrates the potential payouts being lined up in the City for February, when they are traditionally handed out.
Britain's major banks give their updates on trading next month, and are expected to once again show healthy profits – and big payouts being stored up in bonus pots. The Centre for Economics and Business Research has predicted £7bn is likely to be paid out this year, while acknowledging that some jobs have been lost in the City too.
Gavin Hayes, general secretary of centre left pressure group Compass, blames politicians: "Our political leaders haven't stood up to the banks. They haven't taken the action necessary." While Labour missed opportunities, the new government was too slow to initiate change. "David Cameron said there would a day of reckoning for the banks. He simply hasn't delivered it," said Hayes.
Why? One reason is that the City and the banking industry has an army of highly paid lobbyists. The British Bankers' Association was quick to point out that the banks paid £26bn in taxes to the Treasury last year while the Corporation of London points out that the City in its broadest sense provided £66bn of tax revenues in 2009, employed a million people, and accounted for 10% of GDP.
"UK is still over-reliant on financial services for tax and growth. Whilst that's the case the politicians are not going to stand up to them," said Hayes. Tony Greenham, at the New Economics Foundation thinktank, points out that the current government is also less inclined to blame banks for ideological reasons. "Blaming the banks is a bit inconvenient for a government that wants to blame the overspend in the public sector," said Greenham.
The banks argue they can hardly be blamed for causing the crisis. Angela Knight, chief executive of the BBA, said today that lax monetary policy and regulation could also take the blame, as could government borrowing. "It's extraordinary to think that £2.5bn is 'nothing'. It's just wrong," Knight said. Greenham also argues that it may be too soon to judge the government. "They do promise that they are looking at a financial activities tax, and looking at actions on bonuses. You might have to reserve judgment for now," he said.
The government has certainly made other pledges to target banks. Osborne insisted this week that the government was still looking at a financial activities tax, or FAT, on profits and pay in the broader international context. The coalition has also set up an independent commission to look at whether big banks should be broken up to encourage competition and reduce the risk of another taxpayer bailout – a move that has infuriated big banks such as Barclays and HSBC, which have issued veiled threats about moving overseas.
The City minister, Mark Hoban, defended the government's recordtonight, and hit out against the previous government, which had imposed a bonus tax last December that brought in £2.3bn for the exchequer. "Whilst the previous Labour government opposed our plans to introduce a permanent levy, we have gone ahead and done so. This will yield more every year than the bank payroll tax delivered in one year. "The levy also actively encourages banks to move away from riskier funding that threatens financial stability, and the money raised will go towards reducing the record budget deficit we inherited. We think this balances fairness with the competitiveness of the UK banking sector," Hoban said.
The coalition also promises to stop "unacceptable bonuses". The business secretary, Vince Cable, warned in September of the "train crash" facing banking if big bonuses were paid out this year without outlining specific policies. The Financial Services Authority has changed the structure of bonuses – if not the level – ensuring that bonuses paid totally in cash are no longer feasible. Instead they must be deferred over three to five years and, under European proposals from the Committee of European Banking Supervisors, must be no more than 20% in cash with the rest in shares.
Knight said: "Most of the bonuses are being decided outside the UK [by foreign banks] and other countries don't see bonuses in the same way [as the UK]. The overwhelming majority of bonuses are for £3,000 or £4,000; for larger bonuses, the targets have to be approved by the FSA and be paid in shares and held back for several years." Bonuses are the potential melting pot for public anger, says Hayes: "I do think there will be huge public anger when the banks report their bonuses."
Cable's business department got a taste this week when it was stormed by protesters angry at public sector cuts. Such a scene may yet be commonplace, and make the government honour pledges to punish the "irresponsible behaviour" some blame for the economic crisis.
Food Stamp Usage Soars Among US Working Families
by Mark Niesse - Huffington Post
Lillie Gonzales does whatever it takes to provide for three ravenous sons who live under her roof. She grows her own vegetables at home on Kauai, runs her own small business and like a record 42 million other Americans, she relies on food stamps. Gonzales and her husband consistently qualify for food stamps now that Hawaii and other states are quietly expanding eligibility and offering the benefit to more working, moderate income families.
Data from the U.S. Department of Agriculture reviewed by The Associated Press shows that 32 states have adopted rules making it easier to qualify for food stamps since 2007. In all, 38 states have loosened eligibility standards. Hawaii has gone farther than most, allowing a family like Gonzales' to earn up to $59,328 and still get food stamps. Prior to an Oct. 1 increase, the income eligibility limit for a Hawaii family of five was $38,568 a year.
"If I didn't have food stamps, I would be buying white rice and Spam every day," said Gonzales, whose Island Angels business makes Hawaiian-style fabric angel ornaments, quilts, aprons and purses. Eligibility for food stamps varies from state to state, with the 11 most generous states allowing families to apply if their gross income is less than double the federal poverty line of $22,050 for a family of four on the U.S. mainland. The threshold is higher in Alaska and Hawaii.
With more than 1 in 8 Americans now on food stamps, participation in the program has jumped about 70 percent from 26 million in May 2007, while the nation's unemployment rate rose from 4.3 percent to 9.2 percent through September of this year. "We've seen a huge increase in participation due to the economic downturn," said Jean Daniel, a spokeswoman for the USDA's Food and Nutrition Service. "That's the way this program was designed."
In addition to helping alleviate economic pressures, many states embrace the popularity of food stamps because their cost – $50 billion last year – is paid entirely by the federal government. States are only responsible for paying half of their programs' administrative costs. Food stamps have been blasted by some Republicans in this midterm election season as just another federal entitlement program, with former House Speaker Newt Gingrich framing the vote as a choice between "the party of food stamps" and Republican policies that create jobs.
Participants in the food stamp program, technically called the Supplemental Nutrition Assistance Program, receive a per person average of $133 per month to buy staples including milk, bread and vegetables. Shortly after Hawaii announced it was raising its eligibility limits starting this month, three carloads of 10 seniors drove to the Kauai Independent Food Bank to ask if they qualified. Nine of them did, said Judy Lenthall, executive director for the food bank, which helps people apply for food stamps. "We saw an immediate and overwhelmingly wonderful response," Lenthall said. "It surprised us how fast it's spreading."
States that have relaxed food stamp eligibility did so by moving to a system where applicants could qualify based on their income, and their other assets such as real estate, vehicles and savings accounts could be ignored. Basing food stamps on income alone allows the newly unemployed and the elderly to seek government food aid without having to first sell their property or exhaust every dollar they've earned, said Sue McGinn, director of the food stamp program in Colorado, which will expand eligibility beginning in March. "They won't have to wipe out their savings to apply for benefits," McGinn said.
Many of these states also raised income limits, although applicants still have to show they're essentially living at the poverty line after accounting for allowable deductions, including elder medical expenses and child support. "It helps moderate and low-income people who are struggling," said Stacy Dean of the Washington-based Center on Budget and Policy Priorities. "They're doing everything we want: they're working, paying all their bills, taking care of their kids, and they still don't have enough money at the end of the month to put food on the table."
Since 2000, the only states that haven't enacted the lower food stamp eligibility requirements are Alaska, Arkansas, Indiana, Iowa, Kansas, Missouri, Nebraska, South Dakota, Tennessee, Utah, Virginia and Wyoming. In Hawaii, where everything from milk to gasoline is typically the highest in the nation, the changes are welcomed by Gonzales and others. "As long as my kids have good food, that's all I care about," Gonzales said. "It makes a tremendous difference."
Ruining Christmas: 1.2 Million Will Lose Benefits By Year's End Unless Congress Acts
by Arthur Delaney - Huffington Post
If Congress fails to reauthorize extended unemployment benefits by the end of November, it will spoil the holidays for 1.2 million people, according to the National Employment Law Project. "The program deadline falls in the midst of the holiday season, when unemployed families do their best to put food on the table and hold on to their family traditions," said NELP in a release. "It's also a time when the economy, especially the retail sector, is counting on consumer spending -- supported in part by unemployment benefits -- to maintain the recovery."
Around this same time last year, NELP raised the alarm about Congress playing Scrooge as expiration loomed for federally-funded extended benefits. Congress dutifully reauthorized the benefits, but that was before several months of jobs gains, GDP growth, and the coming campaign season brought about a surge in deficit worries among conservative Democrats in the House and Senate. Whether Congress will act on time this fall is an open question.
Over the summer, the Senate spent nearly two months fighting over the reauthorization as 2.5 million people who've been unemployed for six months or longer missed checks. States fund jobless aid for the first 26 weeks after a layoff, and during recessions Congress routinely makes additional benefits available. Right now in the hardest-hit states, the unemployed are eligible for an additional 73 weeks of benefits. According to the latest data from the Labor Department, 4.3 million people receive state benefits and 5.1 million people receive federal benefits.
There will be very little time to reauthorize the federal benefits, as Congress returns from its recess mid-November and the deadline will be two weeks away. NELP estimates there will only be three or four likely voting days. "Today's unemployed families and the nation's economic recovery urgently need for Congress to prioritize reauthorization of the federal UI programs during this brief window. Neither jobless workers nor the economy can afford another round of prolonged debate and destructive delay, yielding another lapse in benefits."
An additional complication is the fact that some Senate seats currently held by Democratic appointees may be immediately re-filled with Republicans, who have been steadfast in opposition to reauthorizing the benefits without massive spending cuts elsewhere in the budget. Given Congress' demonstrated willingness to go on vacation even though jobless aid will lapse in their absence -- it actually happened three times last year -- NELP has launched an aggressive lobbying effort.
Seven Banks and One Credit Union Closed by Regulators
by Ken - DepositAccounts
This was a busy Friday for the FDIC. Seven banks failed bringing the yearly total to 139. Two banks failed in Florida, two in Georgia, one in Illinois, one in Kansas and one in Arizona. The 2 failures in Florida brings the 2010 total of bank failures in Florida to 27 which is the highest number for any state.
Six of the seven banks that failed were acquired by other banks. However, the FDIC wasn't able to find a buyer for First Arizona Savings, A FSB. Thus, the FDIC will be sending checks to the depositors. According to the FDIC's press release, the uninsured funds were estimated at $5.8 million. So several depositors may lose some of their money. For the vast majority of the 2010 banks closures, the FDIC has been able to find buyers who have assumed all deposits including those above the FDIC limit.
The largest bank that failed this Friday was Hillcrest Bank in Kansas which had 41 branches and $1.65 billion in assets. The buyer of this bank was a newly-chartered bank subsidiary of NBH Holdings Corp.
One of the banks that failed in Florida, Progress Bank in Tampa, had been offering a 4% high-yield reward checking account. However, the rate fell to 0.85% last March which was likely due to them being labeled as a less-than-well capitalized bank. Once a bank reaches that status, it has to keep its deposit rates under the FDIC rate caps. The FDIC considers reward checking accounts as interest checking accounts so that's why the rate went down that much. This is one reason to avoid weak banks when you're looking for a reward checking account.
In addition to seven bank failures, there was also a credit union liquidation. The NCUA announced this liquidation on Thursday. Unlike the FDIC, the NCUA rarely waits for Fridays. That brings the total number of credit union liquidations this year to 16.