"Winslow, Arizona, young Indian laborer working in the Atchison, Topeka and Santa Fe yards"
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Ilargi: On to the popular topics of the day.
The Foreclosure Crisis
What foreclosure crisis? The US government has been bailing out banks for three solid years now, and there's still anyone alive who believes they’re going to drop them over mere technicalities? I like idealism up to a point, but....
Everyone in Washington has the same line: bad things may have happened, but we couldn't hinder the industry, now could we? Da show must go on! They even say stuff like, paraphrased: 'there's no proof that anyone evicted so far could have stayed put if their lenders had not broken the law'. If you feel that sounds reasonable, and that's the main point you get out of this mess, then you too should look at a career in politics.
This whole legal issue goes back many decades, try the 1930's, and it was precisely because there once were times that people got thrown out on mere technicalities that present day requirements pertaining to foreclosures became part of US law.
In the past few years these laws have been and still are broken, no lack of proof for that, but the White House official point of view is the most important thing they take away from this is that the show must go on? Nothing has changed, and nothing ever will, not until this thing breaks up in ugly ways.
Many of the loans we're addressing here were sold based on false, that is illegal, documents (stated income, you name it), and now they're being foreclosed on using illegal documents too. So where's the convictions, where's the arrests? Ah well, never mind.
Which reminds me, I have this great link to ease us into popular topic no. 2:
If Obama et al. would go after the banks for the foreclosure fraudulence, QE 2, coming up in a matter of days/weeks, simply couldn’t work. How are you going to get liquidity back into the financial system if you’re suing the well-deserved heebees out of the banking system at the same time? Hey, it would shatter the entire illusion. And yes, that's what it is.
All those people who claim that QE doesn't work, that QE 1 didn’t, 2 won't, yada,yada, you don't get it. QE works like charm. Just not for you, or for the purpose it's advertised for.
It won't get banks back into lending, nothing will, and it won't get anyone a job or a home or anything else. What it WILL do, though, is transfer another inordinate amount of money from the public to the private sector. QE 2 isn't meant to alleviate YOUR problems, it never was nor will be. Come on, be honest, what government program in the past 3 years has done anything for you?
QE 1 and 2 through 826 have, and always will have, only one objective in mind: to clear toxic assets from bank vaults, and at the same time transfer good non-toxic money to those same banks. It is the greatest swindle in history after Fannie and Freddie. Move over Charles Ponzi!
See, you may think you have a problem. But your government says it's the banks that have the problem. And that they're more important than you. So they are handed your money, and you are NOT handed theirs. Got it now? Why so slow? It's been three years!
What the banks do with all that new money is two things: 1) they place it with the Fed, in Treasuries and such, and 2) they go place wagers in international markets, stocks, derivatives, guns, you get the idea, whatever gets them profits and bonuses. In both cases, they make more, at less risk, than if they would lend it to you. Look, you guys were easy pickings for a bit there when you were all signing those fraudulent home loans, but now y'all got one of those, so where would the bonuses come from?
And isn't that the greatest show on earth, Wall Street announcing record payrolls for its geniuses when 1) they wouldn't have a job if not for the future tax revenues of the very Americans who are losing their homes and jobs as we speak, and 2) some 90% of their employers have just been caught with their red-hot hands in the foreclosure cookie-jar?
Record numbers of foreclosures, record unemployment numbers sizzling just below the surface, and record bonuses for the very bankers that got bailed out with the very money that belongs to those very same foreclosed and jobless US citizens.
These days, that’s the way we spell New York. And Washington. And no criminal indictments, other than for a few poor sods in Illinois who can't pay their bills.
Here's a few numbers I picked up along the way today:
Public debt as of 10/06 (U.S. Dept. of Treasury)
Latest population (U.S. Census Bureau)
Amount owed by every man, woman and child (See above)
Amount financed at 10 years or longer (U.S. Dept. of Treasury)
Amount to be refinanced within 10 years (See above)
Amount of debt maturing in 1 to 3 years. (U.S. Dept. of Treasury)
Corporate tax receipts on a rolling 12 month period. (U.S. Dept. of Treasury)
Yup. $7 trillion in US debt needs to be rolled over in the next 3 years. Another $6 trillion in the 7 years after that. And that's before any new debt commitments are taken on, which they presently are at some $1-1,5 trillion per year. With corporate tax receipts down 35% y-o-y.
But no, that doesn’t spell the demise of the US dollar, really, it doesn't. It spells the demise of the American people.
I told you, QE works.
Ilargi: We can talk finance till we're blue in our faces, hands and toes, in the end what matters is how real people are doing. There's nothing more valuable than that. Here’s our longtime friend Dan Weintraub with his take:
Dan Weintraub: The Nominal Man
I am a nominal man living in a real world. Yesterday, I spent $16 on a bag of whole-grain rice, a bag of beans and a hunk of cheese.
One goal of the Federal Reserve’s quantitative easing policies is debasement of the dollar. It is often argued that a weak dollar – relative to other currencies – promotes our supposed export-based economy. Lest we forget, however, our $14-trillion-plus economy is 70-percent consumer-dependent. The most productive capital in the U.S. was shipped overseas long ago. Economic growth over the past three decades has been predicated not on the creation of productive capital, but on access to cheap credit, and thus on consumer spending. The United States, despite beliefs to the contrary, is no longer an export-driven economy. And I remain a nominal man living in a real world.
While the world operates on numbers, I subsist on the relative value of those numbers. For several months now, commodity prices have been rising – and not just those of precious metals. The price of wheat, of cotton, of coffee, of cocoa: all rising sharply. But why would the price of commodities rise when a contracting global economy should equate to a decrease in overall demand (and thus to falling prices)? Commodity prices are rising because investors increasingly believe that the relative value of their financial assets is no longer assured. In a global financial system rife with fraud, in a system teetering precariously close to the brink of an all-out currency conflagration, investors and speculators are abandoning financial assets in lieu of commodities because these same investors believe that the world’s central banks are bent upon destroying the purchasing power of their money. And still I remain a nominal man living in a real world.
I am a middle-class citizen. I make a modest wage teaching history at a local independent school. Like many in the middle class, my nominal monthly income purchases less of the real goods and services that I need in order to get by. I understand that the federal government ultimately must increase its tax revenues in order to subsidize its growing debt-service obligations and to pay for an ever-expanding pool of necessary social services (unemployment insurance, food stamps, etc.), but the real impact of these tax burdens hits those of us in the middle class the hardest. For members of the shrinking American middle class, a seemingly modest nominal tax increase of perhaps $100 a month is, in real terms, far more expensive than the numbers convey.
I understand why economists like Paul Krugman are calling for trillions more in government spending. Fiscal austerity disproportionately hurts the middle class and working poor, and political extremists and opportunists are famous for promoting their nativistic and self-aggrandizing agendas while skyrocketing unemployment hurls millions of citizens toward the abyss. But in our credit- and debt-subsidized economy, virtually all stimulus monies are created, either directly or indirectly, by the Federal Reserve through its open-market operations – in this case, through the monthly purchase of billions of dollars in government securities.
And while such actions may increase systemic liquidity in the near term, these policies of debt monetization also further destabilize the world’s already shaky currency markets. As more people lose trust in the long-term viability of the world’s currencies, more people “buy” commodities. In other words, you may not be able to trust the value of the dollar from one day to the next, but you can always rely upon the hard value of such assets as food and energy. And so, one by one, investors abandon financial assets and move toward commodities, and as they do the price of commodities goes vertical. In nominal terms, this is disastrous for the majority of Americans who subsist on fixed incomes. In real terms, it is far worse. This is but one of the unspoken impacts of our government’s stimulus policies.
I am a nominal man living in a real world. In the real world, trillions more in government stimulus has no substantively positive impact upon my life. In the real world, a 2-percent cost-of-living (wage) increase for someone earning $40,000 per year, in terms of cost inflation, more closely resembles a 2-percent reduction in pay than it does a “raise.” In the real world, the majority of government stimulus monies are used by the largest and most powerful financial institutions to drive up the cost of those very commodities that the majority of us find increasingly difficult to afford. In the real world, as access to credit contracts (real deflation) and as the prices of food and energy increase, austerity arrives regardless of the Federal Reserve’s policy decisions.
I am a nominal man living in a real world, and in my world the numbers just don’t add up.
Debt market strips U.S. of triple-A rating
by Colin Barr - Fortune
The United States has lost its gold-plated triple-A rating -- in the eyes of credit traders, at least. U.S. sovereign debt was the third-worst performer in a closely watched derivatives market during the third quarter, CMA said Tuesday in its quarterly review of global sovereign credit risk.
The cost of insuring against a default on U.S. government bonds via so-called credit default swaps rose 28% in the quarter ended Sept. 30, the firm said. That puts the United States' third-quarter performance behind only two other nations, both of which are struggling with the early stages of sovereign debt crises: Ireland, whose CDS prices rocketed 72% to a record amid growing questions about the costs of a massive bank bailout, and Portugal, whose costs jumped 30%.
What's more, the decline leaves U.S. debt trading at an implied rating of double-A-plus for the first time in memory. Despite building worries about its financial outlook, the U.S. had traded in recent quarters in line with its triple-A rating from S&P and Moody's. But some skeptics have been arguing the U.S. is overrated, and that argument now seems to be gaining steam.
"You can see an indication of concern about the easing course the Fed is likely to continue on," said Sean Egan, who runs the Egan-Jones credit rating agency in Haverford, Pa. "There's a number of items that are going to be difficult to reverse as we get down that road, starting with the dramatic underfunding of state pension funds." The shift comes at a head-spinning time for the U.S. economy. The government has run two straight trillion-dollar-plus budget deficits, with more to come. Yet Treasury bonds are trading at record-low yields, reflecting questions about the economic outlook.
Meanwhile, the Federal Reserve is considering another round of major asset purchases in a policy observers have dubbed QE2, for the central bank's second attempt at quantitative easing – a bid to boost economic activity by expanding the size of the Fed's balance sheet. Comments by Fed chief Ben Bernanke and other policymakers have sent the dollar tumbling to its lowest level since January and helped light a fuse under commodity prices. Those remarks have had the effect of making even weak economic numbers look bullish, by suggesting the Fed will ride in if jobs data, for instance, get too ugly.
The rising price of insuring against a default on U.S. government debt is of a piece with these moves and suggests the full tab for the profligacy of the past decade has yet to be presented. To be sure, a default on U.S. debt remains a remote possibility. Even after the third quarter's runup, it costs just $48,000 annually to insure for five years against a default on $10 million worth of Treasury securities. That's a tenth the going rate on Irish debt and about one-eighth the price prevailing in Portugal.
And at that, CDS spreads are far from a pure read on default risk. A report by rating agency Fitch on Tuesday noted that credit default swaps performed "unevenly" during the credit crisis in predicting defaults by companies and other private-sector debt issuers. "While there are notable instances in which CDS spread widening preceded eventual defaults, there have also been numerous false positives where spreads ramped up dramatically even though few if any defaults ensued," Fitch wrote.
Even so, the third-quarter rise in its CDS spreads knocks the U.S. out of the triple-A league it has long shared with the likes of Germany, Switzerland and the Nordic countries, all of which regularly run trade surpluses and have relatively manageable debt positions. It's early to say there's no going back, but our political leaders certainly have their work cut out for them – without any particular sign they're up to the task.
Moody’s warns on refinancing risks
by Aline van Duyn - Financial Times
The credit quality of US companies may soon start to deteriorate as they take on debt to carry out share buy-backs and finance mergers and acquisitions, says a report by Moody’s Investors Service. The credit rating agency is also concerned that companies with relatively low ratings, those at the bottom end of the “junk” or speculative grade category, may have trouble refinancing the large amounts of debt due to mature in coming years. This could lead to an increase in default rates. “Signals could be showing that much of the improvement in corporate credit quality since the depths of the downturn may have been realised,” said Mark Gray, managing director at Moody’s.
One warning sign has been an increase in the number of credit ratings being reviewed for possible downgrades. In August, this jumped to 42, the highest level since July 2009, Moody’s said, driven mostly by reviews related to M&A activity. “With the economy in a slow-growth phase, companies are beginning to shift emphasis from conserving cash and cutting costs to increasing pay-outs to shareholders and engaging in strategic M&A activity,” Moody’s said.
Another source of concern is a persistently high number of companies with the lowest junk ratings, which are the most at risk of default. “Some companies at the lower end of the scale are having more difficulty with cash flow or refinancing,” Moody’s said. “Many of the lowest-rated companies can and will avoid default in the near term with the aid of receptive bond and loan markets. Yet many are wounded, with unsustainable capital structures that leave them at longer-term risk of default, even in a moderately growing economy.”
Investor demand for bonds has been very strong as interest rates have continued to fall amid concerns that stocks are too risky. This has resulted in record amounts of junk bond sales this year. However, such high levels of investor demand may not persist. Historically, demand for the riskiest types of corporate debt can fluctuate sharply.
Gregg Lemos-Stein at Standard & Poor’s, which together with Moody’s dominates the credit rating industry, says that the ease with which companies can borrow in the bond markets may be masking the potential for corporate funding problems ahead, especially as the costs for banks rise amid tighter regulation. “Costs will increase for banks, and banks, like any other business, look to pass on those costs to their customers,” he said.
Jobless America threatens to bring us all down with it
by Jeremy Warner - Telegraph
A depression may have been averted, but nothing has been fixed. This is the depressingly downbeat message that came across loud and clear from last weekend's annual meeting of the International Monetary Fund. The destructive trade and capital imbalances of the pre-crisis era are back, banking reform appears stuck in paralysing discord, public debt in many advanced economies remains firmly set on the road to ruin, and the spirit of international co-operation that saw nations come together to fight the crisis has largely disappeared.
This was not where we were meant to be in tackling the underlying causes of the crisis and returning the world to sustainable growth. Yet beneath this sense of frustration at lack of progress – and at international organisations such as the IMF and the G20 to bring it about - there is an underlying truth that's often left unspoken; many of the problems in the world economy right now are not international at all, but US specific and can only really be solved by America itself.
I don't want to belittle the difficulties faced by some of the peripheral eurozone nations, but in the scale of things they are a sideshow alongside the malaise which has settled on the world's largest economy. Ignoring the troubled fringe, Europe as a whole is to almost universal surprise starting to look in reasonable shape again, and for reasons that I will come to, Europeans are in any case not nearly as fixated by high unemployment as their American peers.
What applies to the eurozone is also true of the UK. As in Europe, the dominant issue in UK policy is not joblessness, but unsustainable public debt. There's a real, and growing, trans-Atlantic divide in perceptions and rhetoric. And with good reason. Europe had a much deeper economic contraction than the US – oddly, perhaps, given that the crisis originated in the US – but joblessness didn't climb nearly as steeply, and in the main eurozone economies is now falling again. In Germany, unemployment is already below pre-crisis levels.
Even in the UK, this has so far been a relatively jobs rich recovery, backed by a reasonably robust pick up in manufacturing and investment. For us, things are not as bad as the doomsayers of America suggest. Heathrow experienced record levels of cargo and passenger traffic last month, according to new figures from BAA, and in a key marker of returning business confidence, premium traffic is also well up again. This chimes with what UK bankers were saying on the fringes of the IMF meeting in Washington last week. A year ago at the same event, they were still trying to convince each other that they were still solvent. This year, new mandates are being thrown around like confetti, and many of the inter-bank disputes of the crisis period are now being resolved.
Why America has failed to respond as positively is still not entirely clear, though continued deep recession in house building and other forms of private construction is obviously some part of it. These sectors have historically been a larger proportion of employment than in Britain and Europe, and won't begin to recover until prices stabilise and unsold stock is cleared. The house price collapse means people can't sell and move to economically stronger parts of the country, as they've tended to in past downturns. High US unemployment – already at 9.7pc and getting on for double that on some wider measures - is becoming entrenched.
If there is one thing the crisis has reminded politicians of it is that they really must be running surpluses during the good times. Going into the downturn, Germany was better prepared than the US, and has therefore proved more resilient. Whatever the explanation, realisation that there may be a structural problem of unemployment in the US on top of the cyclical one has come as a rude awakening for a country raised on the merits of hard work and enterprise.
US Treasury forecasts, both for growth and the public finances, continue to be based on delusionally optimistic use of "the Zarnowitz rule", which posits that deep recessions are followed by steep recoveries. Regrettably, it's not happening this time around. These harsh economic realities have combined with the relentlessness of the US political cycle to produce a tsunami of demands for job creative policy. It's not just experience of the Great Depression which instructs American terror of unemployment. Very limited jobless entitlements make the pain of mass and prolonged unemployment very real indeed, another key difference with Europe.
Serious losses for the Democrats in the mid-terms are already pre-cooked. If there aren't solutions over the next year, the Administration may in desperation turn to more populist measures. Retaliatory action against China and other "currency manipulators" is unlikely to help US employment much, but that's not going to deter a president who sees his chances of a second term going down the pan. It would on the other hand create chaos in China by depriving millions of their jobs.
The Chinese economy is only a fifth of the size of the US, and its consumption less than an eighth. Even assuming other Asian exporters are punished equally, currency devaluation and import tariffs are not going to solve the problem of US joblessness. So what's left? The Fed can act, by pouring more money into the economy (QE2), but the Hill is paralysed. A second fiscal stimulus of any size is blocked by political division. More monetary stimulus is all very well, but it's a blunt instrument which struggles to get through to the job creative bit of the economy - small and medium sized enterprises - and threatens new bubbles in emerging markets as abundent liquidity chases yield.
There's no political appetite or will in the US for the long term entitlement reform and tax increases necessary to bring the deficit under control. Nobody believes US Treasury forecasts that public debt will be stabilised by 2014. Much more believable are IMF estimates which see gross US debt rising to well in excess of 110pc of GDP by 2015. The US has no strategy for the jobless and no strategy for rolling back debt. Little wonder that a renewed sense of gloom has settled on international policy makers.
U.S. Economy Is 11.5 Million Jobs Short"
by William Alden - Huffington Post
Even though the unemployment rate remained flat at 9.6 percent in September, the labor market would now need to add a total of about 11.5 million jobs to restore the pre-recession rate, according to analysis from Heidi Shierholz, an economist with the Economic Policy Institute.
The economy lost about 95,000 jobs last month, including temporary Census workers. Not including Census positions, roughly 18,000 jobs were lost, as the private sector addition of 64,000 jobs couldn't offset the 83,000 jobs cut by state and local governments, whose unusually severe deficits have lead analyst Meredith Whitney to predict that the next major financial crisis will come from municipal debt defaults. The state and local cuts included 58,000 teaching jobs.
The true numbers could be even worse. As HuffPost's Shahien Nasiripour notes, the reported numbers of jobs lost in July and August were revised up after the initial reports.
According to Shierholz's analysis, the economy is down about 8.1 million jobs from where it was when the recession began, in December 2007. Considering population growth, the economy should have added 3.4 million jobs during the recession, Shierholz notes. To fully recover, the country would need to add 11.5 million jobs. Check out the EPI's chart:
That's a huge number, and population growth continues to make it bigger. To fully recover in five years, Shierholz says, the country would need to add 300,000 jobs "every month for that entire period."
UK government spending cuts will see a million people lose their jobs
by Richard Tyler - Telegraph
Almost half a million people in the private sector will lose their jobs as a result of public spending cuts, new research suggests. The number is the same as the Government expects to cull from the public sector by 2015. For parts of the UK, it will mean one in 20 people lose their job over the next four years as a result of the £83bn public spending cuts to be announced by the Chancellor next week. Private sector output could be slashed by £46bn, or 2pc of the total, consultants PricewaterhouseCoopers (PwC) said. This would not be enough to push the economy back into recession, it said.
However, it is forecasting, that the private sector will only generate around 1m new jobs over the next four years in areas such as outsourced business services and social care. This is far fewer than the 1.6m new jobs predicted by the independent Office for Budget Responsibility in June. Of the industry sectors most exposed to the spending cuts, PwC said business services will shed 180,000 jobs and construction 100,000.
Job losses across the public and private sector are likely to hit 5pc of the total workforce in Northern Ireland, and 4pc in Wales, Scotland and the North East, although overall more jobs will be lost in London and the South East because their economies are larger. UK-based manufacturers of leather goods and footwear, electronic components, weapons and ammunition and office machinery and computers will all be hit hard by the cuts, PwC predicted. Nick Jones, PwC director, said: “Businesses have been scenario planning and making contingencies but now it is going to become very real.”
John Hawkesworth, PwC’s chief economist, said addressing the budget deficit would help keep interest rates low for longer, benefiting businesses. But rising taxes and a weaker international trading environment would “dampen down growth significantly”. Dave Prentis, general secretary of Unison, said: “This report bears out all we have been warning over the past few months. Public spending cuts will damage the economy and will drag the country into a downward spiral.”
British middle classes hit again with tax raid on pensions
by Robert Winnett and Myra Butterworth - Telegraph
Middle-class professionals and savers are facing a tax raid on their pensions under measures to be unveiled by the Coalition. The amount that people can pay into their pension pot every year and still receive tax breaks is to be capped at less than a fifth of its current level. The maximum size of a pension pot that workers can accrue before high rates of tax apply is also likely to be significantly reduced by the Treasury.
Accountants predict that the changes will hit more than 500,000 people, including middle-class professionals, savers who choose to pay lump sums into pensions to benefit from tax relief and self-employed businessmen. Some will face demands to pay tens of thousands of pounds in tax as a result. Other allowances, including a scheme that allows people to pay more into their pension during the final year of their working life, may also be scrapped. The changes are likely to take effect next April.
It is the latest move by George Osborne, the Chancellor, designed to target higher earners. It follows the controversial decision to strip child benefit from higher-rate taxpayers and allow a rise in university tuition fees. The threshold at which higher-rate tax is payable is also being reduced. The Treasury is expected to announce today that the annual limit on payments that people can make into their pension and still receive tax relief will be cut to between £30,000 and £50,000. People can currently save £255,000 a year in their scheme and still receive relief on their contributions at the rate at which they pay income tax.
Ministers are also likely to reduce the total amount that people can save in a pension during their lifetime. It is currently capped at £1.8 million but will be reduced to £1.5 million. Retiring workers will lose 55 per cent of any sum above the limit in a one-off tax. Experts say the changes could save the Treasury more than £8 billion over the next three years. Mr Osborne will stress that the measures are aimed at only the richest Britons. The changes will effect many better-paid professionals and ordinary savers who pay into pensions because of tax relief. Anyone who sells a house or a business as they approach retirement and chooses to pay the money into a pension could also be hit.
Although most Britons save much less than the proposed annual limit into their pension, technical changes to the rules could result in even those on modest salaries in final salary schemes being landed with an unexpected tax charge. Complicated Treasury rules mean workers on salaries of between £40,000 and £50,000 who receive relatively small pay rises could be pushed above the new tax-free limits and left with tax demands running to several thousand pounds.
The changes come at a particularly bad time for many retiring workers who have to build up bigger pension pots than in the past to compensate for lower annuity rates, which determine how much pensioners earn each year from their savings. They are linked to interest rates and are at historically low levels. PricewaterhouseCoopers, one of the country's biggest firms of accountants, estimated that the changes would affect more than 500,000 people. "This will affect far more people than anyone imagined," said Marc Hommel, one of its pensions partners.
Tom McPhail, a pensions expert at Hargreaves Lans?down, a wealth manager, said: "Given the tone of the Treasury's thinking, the prospects look even darker for pensioners than initially thought. "We will certainly see severe restrictions to tax breaks available to pension investors. Particular losers will be middle senior managers in final salary schemes and those people looking to catch up on missed years in pension funding."
Ros Altmann, the director general of the Saga Group, said: “It could hit people on £40,000 a year and they are already being hit by things like child benefit changes. We have to stop targeting that group, the people who just hit the higher tax rate. “The Government is talking about fairness, but is creating a dangerous cliff edge at this income level. At a higher level, you won’t notice as much, and while £40,000 is higher than average, it is not the very well off.”
Critics say the pension changes will erode the “crumbling foundations” of final salary pension schemes. The new annual allowance — after which an extra tax charge would be applied — could be exceeded by someone whose pension entitlement in a final salary scheme had risen by just over £2,000 a year. Calculating the increased value of an individual’s pension pot if they are a member of a defined contribution scheme is relatively straightforward because they are given an annual statement of the value of their pension investments.
But assessing the total value of final-salary schemes is more complicated. It involves a calculation where the rise in someone’s annual pension entitlement is multiplied by 10. For example, an extra £2,000 in annual pension is valued at £20,000. It means a pay rise — of say, £50,000 to £57,000 — that resulted in increasing someone’s annual pension entitlement by £4,000 would fall within a £40,000 limit.
But the Treasury wants to increase the multiple to 15 or even 20, which would limit the annual pension increase that can take place tax-free. In this case, the increase of £4,000 in a year would be worth up to £80,000 and lead to a tax rise for the worker of up to £16,000.
David Cameron's secret plan to cut UK's £149bn debt by selling off property
by Alistair Osborne and Helia Ebrahimi - Telegraph
The Government is working on a secret plan to tackle Britain's £149bn deficit by hiving off state-owned property assets worth tens of billions of pounds and selling them to the private sector. Prime Minister David Cameron is understood to have written to all ministers demanding they produce an inventory of the property in their spending departments, including lengths of leases and occupants.
The Office for National Statistics estimates that government property is worth about £370bn. However, there is no comprehensive register of the entire portfolio and some City experts believe the estate could be worth £500bn. The Shareholder Executive, the body responsible for realising value from state-owned assets, has been tasked with co-ordinating the government-wide attempt to maximise returns from its property portfolio. Its work is being led by John McCready, the Ernst & Young senior partner hired last December to head a new property unit at the Executive.
The Government's property plan, which is at a relatively early stage, coincides with a crackdown on Whitehall waste being spearheaded by Bhs-owner Sir Philip Green. The retail entrepreneur will on Monday publish his report into how civil servants have wasted hundreds of millions of pounds through such things as renting empty offices and allowing each police force to source its own uniforms.
The previous government commissioned Labour peer Lord Carter of Coles to report on the value locked up in state-owned property. He found it could expect to make about £20bn from disposals over the next 10 years and a further £5bn in annual savings by the end of the period. However, Mr Cameron has brought fresh urgency to the project and expanded it beyond assets already managed by the Executive – including Royal Mail, the Met Office and the British Waterways Authority – to include all government property.
One source familiar with the project said: "The idea is that responsibility should be centralised in one place but there is still a huge amount of work to do. It's being taken very seriously but it's not easy." It is thought that the initial aim is to bring together similar sorts of properties spanning all departments that could be packaged up and eventually sold. That includes potentially floating portfolios on the stock market as real estate investment trusts (REITs) – a way of investing in property that cuts or eliminates corporate taxes.
One senior City source said flotations would allow the Government to sell assets at a lower headline price because the UK taxpayer would be a potential beneficiary. However, he added: "The downside of a flotation is that you may have the moral high ground to sell cheap but you then end up with 30m shareholders and an unworkable register." Insiders say the Government's biggest challenge is creating what would be the first realistic inventory of what it owns. "The real issue is that the Government do not know what they have," said a source. "In the Department of Health alone there are 77,000 buildings – but this inventory was completed only recently and no one know what the numbers are elsewhere."
America should open its vaults and sell gold
by Edwin Truman - Financial Times
Gold is back in the news. Its price is soaring in what some analysts say is a reflection of a weak economy and a lack of confidence in government policies. Naturally, investors are looking at a new sure thing in the expectation that prices will continue upward. My advice to the US government, however, is that this may be the best time – to sell. Doing so would help President Barack Obama and Congress reduce indebtedness, at little cost.
It is an article of faith in bullion markets that the US will be the last country to dispose of its gold stock. For 30 years it has had a no-net-sales policy for reasons ranging from resistance by US gold-producing interests to concerns about the international monetary system. That assumption may remain plausible. Yet the administration has an obligation to re-examine its policy.
The market price of gold has risen for more than a decade propelled by low interest rates, the hype of the bullion dealers (holding large inventories) and no doubt the normal amount of fraud and misinformation accompanying asset price bubbles. The Financial Times has reported that the precious metals industry expects the price to increase by a further 11 per cent over the next year.
Meanwhile, the US Treasury holds 261.5m fine troy ounces of gold. The government has been sitting on it since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340bn. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.
If the US were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2? per cent of gross domestic product. (US net government debt would decline by essentially the same amount because the US gold stock, listed as an asset on the balance sheet, is valued at only $42.22 an ounce.) Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15bn annually. Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy.
This proposal has other benefits too. First, the US would be obeying the maxim to buy low and sell high. Second, it would be performing a socially useful function. Demand for gold exceeds normal production, driving up the price. To the extent that the gold craze is being fed by concern (rational or irrational) about government policies, public welfare would be enhanced by giving citizens something tangible to hang around their necks or place in safe deposit boxes. Third, if the price is a bubble, as seems likely, the sooner it is burst the better for the average investor.
Some people point to possible costs.
Aside from political pressures from those who want to protect the value of their holdings, above or below ground, two principal arguments are made against US gold sales. The first is that they would disrupt the market. But the US can be cautious in its sales, avoiding disruption of the sales programmes of other countries, as it has in the past. There is little risk. In recent years, sales under the Central Bank Gold Agreement have dwindled, and some other central banks are buying gold. (The US is not a party to the agreement.) Also the International Monetary Fund has completed more than three-quarters of its own planned sales of 403.3 metric tons.
Another counter argument is that the US should hold on to its stock in anticipation of a return – by itself alone or with other nations – to a monetary system based on gold. But returning to the gold standard would reinstate a system associated with unstable prices, wages, output and employment. It has not existed for a century; and will not make a comeback. Official discussions of the reform of the international monetary system do not include any advocates of a return to gold, and the IMF articles of agreement prohibit it.
The sooner thoughts of such a return are laid to rest, the better. A related argument is to keep the US gold stock as a “rainy day” precaution. But after the recent economic and financial crisis and with the prospect of misery for several more years, how much more rain must pour before the US acts?
The writer is a senior fellow at the Peterson Institute for International Economics in Washington
Ilargi: Don’t miss this video. Trust me.
The new poor: Baby boomers in the jobless crisis
U.S. urges lenders to vet foreclosures but keep process moving
by Zachary A. Goldfarb and Ariana Eunjung Cha - Washington post
Federal regulators on Wednesday urged the nation's lenders to verify that paperwork filed as part of the foreclosure process was properly reviewed and to file new documents if problems are found. But regulators also said that lenders should continue as quickly as possible with foreclosures when no problems are found. Their comments, fashioned in close consultation with the Obama administration, demonstrate how federal officials and the White House are at odds with Democratic leaders in Congress, who favor a national freeze on foreclosures.
The framework outlined by the Federal Housing Finance Agency, is the most elaborate federal response so far to the foreclosure debacle buffetting the housing and financial markets. But it's not clear whether it will play a positive role in cleaning up the foreclosure mess. The regulatory framework largely repeated what regulators have already said or what banks were already doing.
In essence, it tells banks to make sure that documents used as part of the foreclosure were properly reviewed and signed. If they weren't, banks must work with local lawyers on a fix. This might include filing new paperwork that has been properly reviewed, the framework says. Federal regulators are acting through the federally controlled mortgage finance companies, Fannie Mae and Freddie Mac, which own or guarantee well over half of the nation's home loans.
Regulators were adamant that, in the absence of problems, foreclosures must move forward. Delays increase costs for communities, investors and taxpayers, regulators said. The Obama administration has expressed a similar view. That position runs counter to the stance taken by House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry M. Reid (D-Nev.), who have pressed for a nationwide halt to foreclosures.
"The country's housing finance system remains fragile and I intend to maintain our focus on addressing this issue in a manner that is fair to delinquent households, but also fair to servicers, mortgage investors, neighborhoods and most of all, is in the best interest of taxpayers and housing markets," said FHFA acting director Edward DeMarco in a statement. The move comes as attorneys general from all 50 states announced they are combining on an investigation of mortgage servicers who are accused of submitting false affidavits.
How Wall Street Shafted Main Street: Spitzer, Parker and Josh Rosner discuss mortgage fraud
The Mortgage Fraud Scandal Is The Biggest In Human History
by L, Randall Wray - Benzinga
We have long known that lender fraud was rampant during the real estate boom. The FBI began warning of an “epidemic” of mortgage fraud as early as 2004. We know that mortgage originators invented “low doc” and “no doc” loans, encouraged borrowers to take out “liar loans”, and promoted “NINJA loans” (no income, no job, no assets, no problem!). All of these schemes were fraudulent from the get-go.
Property appraisers were involved, paid to overvalue real estate. That is fraud. The securitizers packaged trash into bundles that ratings agencies blessed with the triple A seal of approval. By their own admission, raters worked with securitizers to provide the rating desired, never looking at the loan tapes to see what they were rating. Fraud.
Venerable investment banks like Goldman Sachs packaged the trashiest securities into collateralized debt obligations at the behest of hedge fund managers--who were allowed to choose the most toxic of the toxic waste—then sold the CDOs on to their own customers and allowed the hedge funds to bet against them. More fraud.
Indeed, the largest financial institutions were run by their management as what my colleague Bill Black calls “control frauds”. That is, the banks used accounting fraud to manufacture fake profits so that they could pay huge bonuses to top management. The latest data out on Wall Street bonuses show that these institutions are still run as control frauds, with another record year of bonuses paid by cooking the books. The fraud continues unabated.
This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time.
Many have called for a national moratorium on foreclosures. Even some of the banks that have been run as control frauds have voluntarily stopped foreclosing. And yet President Obama, ever the centrist, has taken sides with the Securities Industry and Financial Markets Association, which warns that “it would be catastrophic to impose a system-wide moratorium on all foreclosures and such actions could do damage to the housing market and the economy”.
No, it would expose the securities industry, itself, as the chief architect of the biggest scandal in human history.
Now we know that it was not just the mortgage brokers, and the appraisers, and the ratings agencies, and the accountants, and the investment banks that were behind the fraud. It was the securitization process itself that was fraudulent. Indeed, the securities themselves are fraudulent. Many, perhaps most, maybe all of them.
Some are trying to argue that this is just a matter of some missing paperwork. A moratorium would allow the banks to get all their ducks in a row so that they can supply all the documents needed to foreclose.
However, as reported by Ellen Brown (at Web of Debt) and by Yves Smith (at Naked Capitalism), the paperwork does not exist. Worse, as Yves has discovered, the banks are furiously working to manufacture documents, aided and abetted by companies like DocX that specialize in “document recovery solutions”—for a fee they will create fraudulent documents that banks can use in court.
The banks would like us to believe that in the speculative frenzy of the real estate boom they “forgot” to do some of the required paperwork. That is not likely. The absence of the documents was required to run the scam.
Recall that the banks invented “no doc” mortgages. This was not at the behest of no-account borrowers, high school dropouts with bad credit histories who were duping investment bankers into making mortgage loans they could not repay. No, these mortgages were created and endorsed by originators and securitizers and credit raters to create a patina of “plausible deniability” to be used later in court when they were sued for fraud by investors who bought the securities and by the borrowers who could not possibly service the mortgages. Because if the originators had ever requested the documentation from borrowers it would have demonstrated that the mortgages and the securities were frauds.
Similarly, the paperwork required for the securities was never done because the securities were fraudulent. Yves helps to explains why. The trust that purportedly underlies a mortgage backed security must hold the “note”—the borrower's IOU (in 45 US states the mortgage that is a lien on the property is an “accessory” to the note, and is not sufficient to do a foreclosure). If the note is not conveyed to the trustee (usually before closing but sometimes up to 90 days after signing) the securities are no good.
This is not just some pesky little rule imposed by a pin-headed regulator. This is IRS code. As reported by Brown, MBSs are typically pooled through a Real Estate Mortgage Investment Conduit (REMIC) that must according to the Internal Revenue Code hold all the paperwork demonstrating a complete chain of title. Done properly, taxes are avoided. Since a number of intermediaries are usually involved from the mortgage originator through to the trustee of the REMIC, there must be endorsements all along the line. However, it now appears that most of the original notes are still held in the loan originator warehouses. There are no endorsements. The trustees do not have the notes. Can anyone say “tax fraud”?
So why weren't the notes conveyed to the REMICs? There seem to be two possibilities—probably both of them correct. Karl Denninger at MarketTicker believes it was because the REMIC trustees feared an audit by investors in the securities. If the documentation existed, it would show that the mortgage loans were fraudulent. Far better to “lose” the docs, then later manufacture new ones for the foreclosure.
According to Brown (quoting Steve Liesman and Neil Garfield), the other possibility is that the tranching process actually prohibited assignment of the notes to the REMICs. Bundles of mortgages of varying quality would be tranched into a variety of securities, say from AAA to BBB. But no individual mortgage is actually assigned to a particular tranche—until it defaults. When one defaults, it is assigned to a lower tranche security and then the foreclosure process begins. This means that from inception of that BBB security, there was no way to assign a note to the trustee because the trustee did not know in advance which mortgage would default. The REMIC trustees tried to get around that by using a dummy conduit called MERS (Mortgage Electronic Registration System) that would “hold” the mortgages and assign them to the proper tranches later. But they do not have the paperwork either, and some courts have rejected their claims as owners.
This is a complete mess. What President Obama must understand is that fraud is endemic at every level of the home finance food chain. We were long told that securitized mortgages cannot be modified because of the complexity involved—modification of most mortgages would require consent of the holders of the securities that each have a piece of the mortgage. But actually it is impossible to tell how many—if any—of these securities holders have a legitimate claim on any of the mortgages. Simply imposing a moratorium will not be enough—it will just give the banks time to manufacture false documents, encouraging even more fraud. Meanwhile, half of all homeowners with mortgages are already underwater or are within spitting distance of being underwater. Many of these are drowning because the epidemic of fraud perpetrated by financial institutions destroyed our economy and caused housing prices to collapse.
The President needs to try a different approach, consisting of the following series of steps:
1. Declare a national bank holiday that would close the biggest financial institutions—say, the top dozen or so. Send in the supervisors to examine their books to uncover fraud. Determine which ones are insolvent and resolve them. While resolving them, net their claims on one another (including derivatives). Do not allow any insolvent institutions to reopen, and do not use the resolution process to merge institutions (we don't need even bigger “too big to fail” banks). Prosecute the crooks and jail the guilty.
2. Stop all foreclosures. Investigate and prosecute all institutions that have been selling or buying fake documents to be used in foreclosures. Prosecute the crooks and jail the guilty.
3. Announce that all homeowners who occupied their homes on October 1, 2010 will be allowed to remain in their homes indefinitely. Create a national mediation board to adjust all mortgage payments to “owner's equivalent rent”—the fair value of rent for the home. Establish a fund to provide rental assistance to keep low income homeowners in their homes.
4. Give purported mortgage holders 30 days to produce the original notes; if they cannot find them, hand the homes over to the owner-occupants—free and clear of debt.
5. Create a process to allow securities holders to sue for recovery of value. This must be national—state courts will not be able to handle the case load.
6. Direct the GSEs to refinance mortgages at a low fixed rate. Mortgages would be provided against real estate appraised at fair market value to any borrower for a primary residence. The GSEs would pay holders of existing mortgages only current fair market value. Those holding these mortgages can seek redress through the process outlined in step 5. Only in the case of borrower fraud would the homeowner be held responsible for losses attributed to the refinancing.
7. There will be fall-out from losses. It is better to deal with the collateral damage directly than to prop up the control fraud banks. For example, pension funds hold toxic waste securities as well as equities in the control fraud banks, and by all reasonable accounting the Pension Benefit Guarantee Corporation is already insolvent. But it is better to directly bail-out pensions than to maintain the charade that fraudulently created securities have value.
Bill Black likes to joke that economists are afraid to use the “F” word (fraud). The President must come to realize that there is no other word that can be applied to the US home finance system. Until we deal with the fraud we will never resolve this financial crisis.
(Go to www.nakedcapitalism.com for Yves Smith, “4ClosureFraud posts lender processing services mortgage document fabrication sheet”, October 3, 2010; and to www.webofdebt.com for Ellen Brown, “Foreclosuregate and Obama's ‘pocket veto'”, October 7, 2010.)
L. Randall Wray is a Professor of Economics, University of Missouri—Kansas City.
Geithner: Foreclosure Freeze Would Be 'Very Damaging'
by William Alden - Huffington Post
As doubts about the legality of foreclosure proceedings continue to grow, Treasury secretary Timothy Geithner said a nationwide foreclosure freeze would do more harm than good, Bloomberg reports. Speaking to PBS's Charlie Rose, Geithner, who called the foreclosure crisis "a national tragedy," said a moratorium could further depress housing prices and said it would be "very damaging to exactly the kind of people we're trying to protect," according to the transcript of his remarks (hat tip to Politico). A nationwide freeze could prevent foreclosed properties from being sold, and, as Geithner noted, unoccupied houses tend to hurt the value of their neighbors.
President Obama's top adviserr David Axelrod has also said he was "not sure" about a national moratorium. Both Axelrod and Geithner warn that such a move could cause collateral damage to valid foreclosure processes. Geithner told Rose "we're not going to make the problem worse." In an editorial last week, the Wall Street Journal expressed a similar opinion. Errors may exist in the paperwork, but, the WSJ says, there's been no proof of "substantive error" in the execution of a foreclosure.
"Out of tens of thousands of potentially affected borrowers, we're still waiting for the first victim claiming that he was current on his mortgage when the bank seized the home," the editorial reads. "Even if such victims exist, the proper policy is to make them whole, not to let 100,000 other people keep homes for which they haven't paid." The WSJ reported Tuesday that the government has not found any evidence of wrongful foreclosure eviction.
But some commentators beg to differ. Barry Ritholtz, CEO of Fusion IQ, who spoke Monday on CNBC about the severity of the foreclosure crisis, blogged Monday in response to the WSJ editorial that the newspaper's editors are either "clueless" or "liars." Ritholtz points to the case of the Florida man whose home did not have a mortgage and yet was foreclosed upon anyway by Bank of America, which has since frozen its foreclosures nationally.
Reuters' Felix Salmon, for his part, is also skeptical of the argument against a foreclosure moratorium. Responding to a release by a Wall Street trade group that warned about the damage a nationwide freeze would inflict on the economy, Salmon said, "it's far from clear that a foreclosure moratorium would hurt house prices." He added that such a move might help mortgage servicers sort out their legal issues.
Banks Hired Hair Stylists, Teens, Walmart Workers as Foreclosure 'Robo-Signers'
by Michelle Conlin - AP
In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in "foreclosure expert" jobs with no formal training, a Florida lawyer says.
In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn't define the word "affidavit." Others didn't know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers' accusations about document fraud.
"The mortgage servicers hired people who would never question authority," said Peter Ticktin, a Deerfield Beach, Fla., lawyer who is defending 3,000 homeowners in foreclosure cases. As part of his work, Ticktin gathered 150 depositions from bank employees who say they signed foreclosure affidavits without reviewing the documents or ever laying eyes on them -- earning them the name "robo-signers." The deposed employees worked for the mortgage service divisions of banks such as Bank of America and JP Morgan Chase, as well as for mortgage servicers like Litton Loan Servicing, a division of Goldman Sachs.
Ticktin said he would make the testimony available to state and federal agencies that are investigating financial institutions for allegations of possible mortgage fraud. This comes on the eve of an expected announcement Wednesday from 40 state attorneys general that they will launch a collective probe into the mortgage industry. "This was an industrywide scheme designed to defraud homeowners," Ticktin said.
The depositions paint a surreal picture of foreclosure experts who didn't understand even the most elementary aspects of the mortgage or foreclosure process -- even though they were entrusted as the records custodians of homeowners' loans. In one deposition taken in Houston, a foreclosure supervisor with Litton Loan couldn't define basic terms like promissory note, mortgagee, lien, receiver, jurisdiction, circuit court, plaintiff's assignor or defendant. She testified that she didn't know why a spouse might claim interest in a property, what the required conditions were for a bank to foreclose or who the holder of the mortgage note was. "I don't know the ins and outs of the loan, I just sign documents," she said at one point.
Until now, only a handful of depositions from robo-signers have come to light. But the sheer volume of the new depositions will make it more difficult for financial institutions to argue that robo-signing was an aberrant practice in a handful of rogue back offices. Judges are unlikely to look favorably on a bank that claims paperwork flaws don't matter because the borrower was in default on the loan, said Kendall Coffey, a former Miami U.S. attorney and author of the book "Foreclosures." "There has to be a cornerstone of integrity to the process," Coffey said.
Bank of America responded to Tiktin's depositions by re-affirming that an internal review has shown that its foreclosures have been accurate. "This review will ensure we have a full understanding of any potential issues and quickly address them," Bank of America spokesman Dan Frahm said. Frahm added that, on average, the bank's foreclosure customers have not made a payment in more than 18 months. JP Morgan Chase spokesman Thomas Kelly said the bank has requested that courts not enter into any judgments until the bank had reviewed its procedures. But Kelly added that the bank believes that all the underlying facts of the cases involved in the document fraud allegations are true.
Even before the foreclosure scandal broke, the housing market was in the midst of an ugly detoxification. Now the escalating crisis is likely to prolong the housing depression for at least another few years. The allegations are opening the entire chain of foreclosure proceedings to legal challenge. Some foreclosures could be overturned. Others could be deemed illegal. For a housing recovery to occur, all the foreclosed properties -- which could account for 40 percent of all residential sales by 2012 -- need to be re-scrutinized by the banks and resold on the market. Now, with so much inventory under a legal threat, the process will become severely delayed.
"This just adds more uncertainty to the whole mortgage process, so buyers are asking themselves: do I want to buy a home in this environment?" says Cris deRitis, director of credit analytics at Moody's Analytics. "We need to fix these issues before the economy can recover."
Though some have chalked up the foreclosure debacle to an overblown case of paperwork bungling, the underlying legal issues are far more serious. Yes, swearing that you've reviewed documents you've never seen is a legal offense. But at the center of the foreclosure scandal looms something much larger: the question of who actually owns the loans and who has the right to foreclose upon them. The paperwork issues being raised by lawyers and attorneys generals have the potential to blight not just the titles of foreclosed properties but also those belonging to homeowners who have never missed a mortgage payment.
So far, JP Morgan Chase, PNC Financial and Litton Loan Servicing have stopped some foreclosure proceedings in 23 states. Bank of America and GMAC, recently renamed Ally, have extended their moratoriums to all 50 states. Wells Fargo and Citigroup have said they are continuing with foreclosures, adding that they are confident in their documents and processes. But Citigroup has now backpedaled some on that assertion. The bank sent out a press release Tuesday that it was no longer using the law firm of "foreclosure king" David Stern, now under investigation by the Florida attorney general's office. "Pending the outcome of the AG's investigation, Citi is not referring new matters to this firm," the bank said in an e-mailed statement.
Late last week, in an interview with the Florida attorney general, a former senior paralegal in Stern's firm described a boiler-room atmosphere in which employees were pressured to forge signatures, backdate documents, swap Social Security numbers, inflate billings and pass around notary stamps as if they were salt.
Meanwhile, the public outrage continues to mount. In what is perhaps a sign of things to come, a Simi Valley, Calif., couple and their nine children broke into their foreclosed home over the weekend and moved back in, according to television station KABC of Simi Valley. The couple, Jim and Danielle Earl, say they were working with the bank to catch up on payments until they discovered a $25,000 difference between what they owed and what the bank said they owed. The family was evicted from their Spanish-style two-story in July. The home has been sold, and the new owner was due to move in soon. The Earls and their attorney now allege that they were victims of fraudulent paperwork.
September home foreclosures top 100,000 for first time
by Corbett B. Daly - Reuters
The number of homes taken over by banks topped 100,000 for the first time in September, though foreclosures are expected to slow in coming months as lenders work through questionable paperwork, real estate data company RealtyTrac said on Thursday.
Banks foreclosed on 102,134 properties in September, the first single month above the century mark, RealtyTrac said. There were 347,420 total foreclosure filings in September, 3 percent higher than August and 1 percent higher than a year earlier. "We expect to see a dip in those bank repossessions -- and possibly earlier stages of the foreclosure process -- in the fourth quarter as several major lenders have halted foreclosure sales in some states while they review irregularities in foreclosure-processing documentation that has been called into question in recent weeks," said James J. Saccacio, chief executive officer of RealtyTrac.
On Wednesday, all 50 states launched a joint investigation of the mortgage industry after widespread reports of mortgage industry officials signing foreclosure documents without knowing their contents. For the quarter, there were 930,437 foreclosure filings, an increase of 4 percent over the prior three months and 1 percent lower than a year ago. One in every 139 homes received a foreclosure filing in the third quarter.
The firm said foreclosures could spike after a brief lull if lenders are able to quickly resolve the paperwork questions. "However, if the documentation issue cannot be quickly resolved and expands to more lenders we could see a chilling effect on the overall housing market as sales of pre-foreclosure and foreclosed properties, which account for nearly one-third of all sales, dry up and the shadow inventory of distressed properties grows - causing more uncertainty about home prices," Saccacio said.
Nevada posted the highest foreclosure rate for the 45th straight month, followed by Arizona, Florida, California and Idaho. In 2005, before the housing bust, banks took over just about 100,000 houses, according to the Irvine, California-based company.
Foreclosure Fraud: It's Worse Than You Think
by Diana Olick - CNBC
There has been plenty of pontificating over the ramifications of foreclosure freezes on troubled borrowers, foreclosure buyers and the larger housing market, not to mention lawsuits, investor losses and bank write downs. There has been precious little talk of what the real legal issues are behind the robosigning scandal. Yes, you can't/shouldn't sign documents you never read, but that's just the tip of the iceberg. The real issue is ownership of these loans and who has the right to foreclose. By the way, despite various comments from the Obama administration, foreclosures are governed by state law. There is no real federal jurisdiction.
A source of mine pointed me to a recent conference call Citigroup had with investors/clients. It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."
The issues are securitization, modernization and a whole lot of cut corners. Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule. Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts. Trustees hold the note (which is the IOU on the mortgage), the mortgage (the security that says the house is collateral) and the assignment of the note and security instrument.
The issue is in that final stage getting to the trust. The law demands that when the papers get moved around they are "wet ink," that is, real signatures on real paper. But Prof. Levin tells me that's not the worst of it. Affidavits assigned to the notes and security instruments are supposed to be endorsed over to the trust at the time of sale, but in many foreclosure scenarios the affidavits have been backdated illegally. So with the chain of documentation now in question, and trustee ownership in question, here is one legal scenario, according to Prof. Levitin:The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money.
You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.
Josh Rosner, of Graham-Fisher, put the following out in a note today, claiming violations of pooling and servicing agreements on mortgages could dwarf the Lehman weekend:Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser's rights under this Agreement (to the extent set forth in Section 15)”.
Also, an Assignment of Mortgage must accompany each note and this almost never happens. We believe nearly every single loan transferred was transferred to the Trust in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA. Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved.
Quite the can of worms. Anyone who says that the banks will fix all this in a few months is seriously delusional.
Josh Rosner: “Could Violations of PSA’s Dwarf Lehman Weekend?”
by Yves Smith - Naked Capitalism
Josh Rosner, a well respected bank analyst (he describes himself as “a recovering GSE analyst”) is circulating a client note and it takes the foreclosure crisis very seriously.
The critical part is his discussion of the conveyance chain. As we indicated before, the minimum chain for a recent mortgage securitization is is A (originator) => B (sponsor) => C (custodian) => D (trust). Older deals might only have three parties, but recent vintage typically had at least four, and some as many as seven or eight.
The reason for doing this is bankruptcy remoteness. You as the buyer of a mortgage backed security want certainty in what you purchased. If an originator goes bust (as ironically many did), you don’t want the creditors to say, “They were already toast by the time they set up that MBS, so the sale of the loans was a fraudulent conveyance, we are gonna take the loans back.”
The way to prevent that was to introduce intermediary parties between the originator and the trust. Each party had to be independent (which meant fit the legal definition of independence; the intermediary parties and even many originators were dependent on financing called warehouse lines from the investment bank packager/distributors). The note (the borrower IOU) had to be endorsed (like a check) to the next party in the chain, who then endorsed it over to the party after that, with the last party being the trust.
Rosner’s remarks are consistent with our prior posts, and he adds a couple of important additional observations: We have a larger and more significant concern, which, if proved out, could call into question the validity of nearly all securitizations and raise material questions about whether “true sale” was achieved.Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser’s rights under this Agreement (to the extent set forth in Section 15)”. Also, an Assignment of Mortgage must accompany each note and this almost never happen.
We believe nearly every single loan transferred was transferred to the Trust in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA. Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved. To think of it simply, if you go to sell your car and you endorse your title but neither you nor the party you are selling it to sign their name who owns the car? It appears you likely still do.
While there may be a view that the government can intervene it appears that the private contract spelling out the terms was violated at the transfer point. The Trustee, who has responsibility to make sure all loans were properly assigned to the trust, may have liability. So too might the lawyers who issued the legal opinions.
Yves here. Let’s deal with this in reverse order. The attorneys are probably not liable; lawyers who have looked at typical opinions have advised us that the legal opinions provided on these deals were highly qualified (they took the form “if you took the steps you said you are going to, you have a true sale”). However, the significant part of Rosner’s comment is his belief (and Rosner typically has very good contacts) that the notes were endorsed in blank. That means they were presumably endorsed only by the originator. This means, effectively, that none of the intermediary transfers took place. This is independent of verification of what we’ve been told. Per a post from late September:One of my colleagues had a long conversation with the CEO of a major subprime lender that was later acquired by a larger bank that was a major residential mortgage player. This buddy went through his explanation of why he thought mortgage trusts were in trouble if more people wised up to how they had messed up with making sure they got the note. The former CEO was initially resistant, arguing that they had gotten opinions from top law firms.
My contact was very familiar with those opinions, and told him how qualified they were, and did not cover the little problem of not complying with the terms of the pooling and servicing agreement. He also rebutted other objections of the CEO. The guy then laughed nervously and said, “Well, if you’re right, we’re fucked. We never transferred the paper. No one in the industry transferred the paper.”
This creates a lot of problems. If the originator is bankrupt (New Century, IndyMac), the bankruptcy trustee is supposed to approve any assets leaving the BK’d estate. I’m told bankruptcy judges who have been asked were not happy to hear this sort of thing might be taking place, which strongly suggests this activity is going on without the requisite approvals. And who from the BK’d entity can endorse it over? It doesn’t have any more officers or employees. Similarly, a lot of the intermediary entities (the B and C in the A-B-C-D chain earlier) are long dead. How do you obtain their endorsements?
Now you understand why everyone is resorting to fabricated documents and bogus affidavits. There is no simple way to fix this mess. The cure for the mortgage documents puts the loan out of eligibility for the trust. In order to cure, on a current basis, they have to argue that the loan goes retroactively back into the trust. This is the cure that the banks have been unwilling to do, because it is a big problem for the MBS.
Yves here. The next question is “what does this mean for MBS investors?” If you are a Fannie and Freddie investor, there will probably be no obvious consequences, even thought there ought to be. The government is not going to want to raise doubts about the integrity of such an important market. Servicers will continue to pay advances on delinquent accounts.
The bigger implications will be for the servicers and trusts of securitizations for so-called non-conforming mortgages, aka private label or non GSE paper. If Rosner is correct and no one endorsed the notes correctly, at best this is now effectively unsecured paper. I’ve had securitization lawyers argue that even though the trusts may have impaired rights to foreclose, a lower standard of rights applies to ongoing payment, so the trust may be OK as far as non -defaulted borrowers is concerned. But the New York trust experts (and all the trusts are governed by New York law, this was the standard choice for these deals) say if no notes got to the trust by closing, it was unfunded and does not exist.
Regardless, this mess looks likely to be an attorney full employment act. Stay tuned.
States to Probe Mortgage Mess
by Robbie Whelan and Ruth Simon - Wall Street Journal
Attorneys General Hope Lenders Will Re-Write Loans With Troubled Documents
A coalition of as many as 40 state attorneys general is expected Wednesday to announce an investigation into the mortgage-servicing industry, an effort some of them hope will pressure financial institutions to rewrite large numbers of troubled loans. The move comes amid recent allegations that mortgage-servicers, which include units of major banks such as Bank of America Corp., submitted fraudulent documents in thousands of foreclosure proceedings nationwide.
The banks say the document problems are technical—largely the result of papers approved by so-called robo-signers with little review—and don't reflect substantive problems with foreclosures. Still, they have drawn criticism from consumer advocates and state and federal lawmakers. "I think the mortgage-servicing firms need to understand that they face real exposure now, and they would be well advised to take this very seriously, to clean this up by doing loan workouts to keep people in their homes, which up till now they've just paid lip-service to," said Ohio Attorney General Richard Cordray.
Some in Congress have called for a moratorium on all foreclosures until the documentation issue is resolved, though senior Administration officials Monday again declined to endorse that idea. Servicers that have lied to courts by filing incorrect paperwork "need to suffer the consequences for their irresponsible actions," said Shaun Donovan, the Secretary of the U.S. Department of Housing and Urban Development. But "where we have not found problems with particular servicers…we do have some risk of going too far."
The attorneys' general immediate aim is to determine the scale of the document problems and correct them. But several of them have said that the investigation could force the lenders and servicers to agree to mass loan modifications or principal forgiveness schemes. Other possibilities include financial penalties or changes in mortgage servicing practices. Lenders and servicers have largely resisted reducing principal on mortgages, instead focusing on interest-rate reductions or term extensions. Banks say they are worried about lawsuits from investors, some of whom could lose money in a principal write down.
Former New Jersey attorney general Peter Harvey, now a trial lawyer in New York, said that a settlement with state attorneys general would likely "to give the banks some cover" to make changes that might otherwise result in lawsuits by investors in mortgage-backed securities. The mortgage servicers had little to say in response to an impending multi-state probe. "We will work with the attorneys general to address the concerns they have expressed," said Dan Frahm, a spokesman for Bank of America.
"We look forward to cooperating with the attorneys general," said a spokesman for J.P. Morgan Chase & Co., which has suspended foreclosure sales and evictions in 23 states in response to questions about it use of robo-signers. A spokesman for Citigroup said the company, has "no reason to believe our employees have not been following" proper procedures in processing foreclosures. A spokeswoman for GMAC Home Mortgage Inc, a unit of Ally Financial, Inc, said it continued to review its loan documents. The number of servicing companies that will be included in the probe hasn't been determined.
Iowa attorney general Thomas Miller, who is leading the effort, said his office might take cues from an investigation brought by Massachusetts attorney general Martha Coakley. She successfully pressured Bank of America Corp. in March to reduce mortgage-loan balances by as much as 30% for thousands of borrowers, using the threat of a lawsuit to get a settlement, though documentation problems were not at issue then.
The primary weapon the states could wield would be their respective laws against unfair and deceptive acts and practices, said Prentiss Cox, a professor of law at the University of Minnesota and former Assistant Attorney General in Minnesota. Those laws are easier to apply, however, when a lender misleads a borrower than in pursuing problems with foreclosures related to documentation, he said. Individual attorneys general could also bring actions under states' various foreclosure laws.
Illinois Attorney General Lisa Madigan said she was preparing to introduce legislation meant to tighten foreclosure laws and prevent document errors in the future. She also is pushing federal representatives to resurrect a bill that would allow bankruptcy judges to "cram down," or cut, a troubled homeowner's mortgage debt. "The immediate goal is to stop fraudulent foreclosure and to require that the lenders and servicers are following the law. But that's the bare minimum. That's what they have to do to follow the law," she said.
Nearly a dozen attorneys general nationwide, including Ms. Coakley and Mr. Miller, have called on lenders and servicers to suspend foreclosures until document irregularities are studied and corrected. Top lawyers from multiple states have gone after mortgage lenders before. In 2008, Bank of America Corp. settled charges brought by 15 attorneys related to accusations of predatory lending in its Countrywide Financial Corp. unit, granting loan modifications worth $8.4 billion to thousands of homeowners.
Mr. Cordray, of Ohio, last week became the first attorney general to sue a mortgage servicer, when he filed suit against GMAC Mortgage LLC. The suit also named as a defendant GMAC employee Jeffrey Stephan, an alleged "robo-signer," who said that he signed off on thousands of court documents related to foreclosures without reading them first. GMAC announced that it was suspending foreclosures in the 23 U.S. states where judges are required to sign off on them after news of Mr. Stephan's activities surfaced. J.P. Morgan Chase & Co.'s Chase Home Mortgage unit suspended judicial foreclosures soon after, and Bank of America followed suit. On Friday, Bank of America widened its foreclosure freeze to all 50 states.
Some attorney generals would like to look beyond the narrow issues raised by the robo-signing. The issue "I'm most engaged in right now is the big servicers who are initiating foreclosures while the borrower is in the modification process," said Arizona Attorney General Terry Goddard.
Wall Street Pay: A Record $144 Billion
by Liz Rappaport, Aaron Lucchetti and Stephen Grocer - Wall Street Journal
Pay on Wall Street is on pace to break a record high for a second consecutive year, according to a study conducted by The Wall Street Journal. About three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year, a 4% increase from the $139 billion paid out in 2009, according to the survey. Compensation was expected to rise at 26 of the 35 firms.
The data showed that revenue was expected to rise at 29 of the 35 firms surveyed, but at a slower pace than pay. Wall Street revenue is expected to rise 3%, to $448 billion from $433 billion, despite a slowdown in some high-profile activities like stock and bond trading. Overall, Wall Street is expected to pay 32.1% of its revenue to employees, the same as last year, but below the 36% in 2007. Profits, which were depressed by losses in the past two years, have bounced back from the 2008 crisis. But the estimated 2010 profit of $61.3 billion for the firms surveyed still falls about 20% short from the record $82 billion in 2006. Over that same period, compensation across the firms in the survey increased 23%.
"Until focus of these institutions changes from revenue generation to long-term shareholder value, we will see these outrageous pay packages and compensation levels," said Charles Elson, director of the Weinberg Center for Corporate Governance. Firms surveyed said it is too early to comment on 2010 compensation levels. Many firms say that if they don't adequately compensate employees, they risk losing top talent. The pay numbers show that firms, benefiting from low interest rates and strong international markets, continue to base their pay on economic and market conditions rather than the level of pressure coming from regulators in Washington and overseas.
Still, politicians and market watchdogs have been successful in influencing the structure of pay, if not its levels. They have pushed for more compensation in stock and other deferred instruments. Firms have found other ways to limit the risks employees take for short-term gains, which was mandatory for firms that accepted government funds during the financial crisis. Many large Wall Street firms have come out from under the Treasury Department's rules about pay. But with the passage of financial-overhaul legislation that aims to change pay policies, many public firms are still awaiting specific rules. Those rules, as required by the Dodd-Frank financial regulatory bill, won't be written for several months.
"The current wave of regulation is helping keep comp relatively flat," said Steven Eckhaus, a partner at law firm Katten Muchin Rosenman LLP. There are some signs that pay might slow down in coming quarters. Tough new rules about how much capital banks must hold could force Wall Street to cut back on compensation in an effort to preserve returns on equity for shareholders, analysts say. Since Wall Street firms pay out up to half of their revenue in compensation, cutting back on that large cost can meaningfully increase profits left for shareholders.
"I see a flat outlook over the next couple of years" on pay, said Roman Regelman, a partner in the financial-services practice at consulting firm Booz & Co. More regulations in high-profit businesses like derivatives will continue to hamper traders' pay, he said.
Though higher revenue often means higher compensation, that isn't always the case. At Citigroup Inc., which remains about 12%-owned by the government, analysts projected revenue would increase this year by about 4%. But pay for the banking giant is likely to be down about 8%, according to projections in the Journal survey. The opposite is true at Goldman Sachs Group Inc. and Bank of America Corp., where analysts project revenue will be down, but compensation will be up, according to the survey.
Goldman's revenue is expected to decline by 13.5% this year to $39.1 billion from $45.2 billion in 2009. Compensation remains projected higher than last year, up 3.7% to $16.8 billion, from $16.2 billion in 2009, according to the Journal survey. Through the first half of 2010, Goldman Sachs set aside 43% of its revenue for compensation. Goldman's ultimate payouts could change drastically. In 2009, for example, it withheld revenue for compensation in the fourth quarter, dropping the overall ratio of revenue to compensation.
This year, employees have jumped to more lucrative opportunities when firms don't pay. Senior staff at Goldman Sachs and Credit Suisse Group in London, for example, defected last year when the firms cut their pay in response to a U.K. tax on bonus payments. Where revenue falls short, analysts and experts expect that Wall Street will lay off employees in order to keep bonus pools high. U.K.-based Barclays Capital and Credit Suisse have cut some staff, while Morgan Stanley has a hiring freeze in place.
As proprietary-trading businesses were closed to adhere to new regulations, some traders have abandoned Wall Street to join private-equity firms and hedge funds. Such nonbank firms like Blackstone Group LP, Och-Ziff Management Group LLC and Fortress Investment Group LLC aren't as scrutinized in Washington. All three firms' revenue and compensation are projected to increase.
At Blackstone, revenue is projected to be up 50% to $2.7 billion, from $1.8 billion in 2009. The Journal survey estimates that compensation will climb 12% in the year. At Fortress, which has closed two new funds this year, compensation is projected to climb by 29% to $656 million, from $505 million last year. Revenue is projected to rise 16.6%, to $680.8 million from $584 million in 2009, analysts say.
Acquisitions also have boosted revenue and compensation. Morgan Stanley, for example, acquired a 51% stake in Citigroup's brokerage unit, which affected 2010 revenue and compensation more than it did in a weak 2009. While Morgan Stanley's compensation is expected to be up slightly because of higher revenue, its overall ratio of compensation is expected to drop to 49% of revenue from 62% in 2009.
James Gorman, Morgan Stanley's chief executive, told shareholders earlier this year that 2009's compensation was at a peak when compared with revenue. And he seemed sensitive to shareholder concerns. "We're extremely conscious of the comp-to-revenue ratio," he said at the Feb. 2 conference. "There is nobody on my management team who will ever see again the kind of comp-to-revenue ratio as we had last year."
U.S. mortgage rates at new record lows
by Julie Haviv - Reuters
U.S. mortgage rates reached new record lows in the latest week, according to a Freddie Mac survey released on Thursday, as data showing economic weakness fueled demand for safe-haven government debt. Interest rates on U.S. 30-year fixed-rate mortgages, the most widely used loan, averaged 4.19 percent for the week ended Oct. 14, down from the previous week's 4.27 percent and the lowest on record, according to the survey that began in 1971.
The 30-year fixed-rate mortgage has been under 5 percent for 23 weeks in row. Rates were also below their year-ago level of 4.92 percent, said Freddie Mac, the second-largest U.S. mortgage finance company. While rock-bottom rates offer a glimmer of hope for a housing market struggling to find footing in the aftermath of the expiration of popular home buyer tax credits earlier this year, their impact on demand for home purchase loans has been tepid. A weak jobs market and flailing economy continue to weigh on consumer confidence.
Meanwhile, 15-year fixed-rate mortgages fell to average 3.62 percent from 3.72 percent last week, the lowest since Freddie Mac began surveying this loan type in 1991. "September's employment report held no big surprises to financial markets, allowing long-term bond yields and fixed mortgage rates to continue to ease," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement. "As a result, both the 30-year and 15-year fixed mortgage rates hit all-time record lows for the third consecutive week," he said. Mortgage rates are linked to yields on Treasuries and yields on mortgage-backed securities.
The Mortgage Bankers Association said on Wednesday mortgage applications for home refinancing loans rose for the first time in six weeks, with demand jumping to its highest level since late August. An increase in refinancing may provide a jolt to the economy as it could portend an increase in consumer spending. By lowering monthly mortgage payments it may also help some homeowners avoid default and foreclosure if their credit is good enough.
Michael Gapen, senior U.S. economist at Barclays Capital in New York, said low mortgage rates have significantly improved affordability, but believes a housing market recovery will be elusive without a stronger labor market. "The rise in refinancing activity is good for household balance sheets and supportive of housing activity in general," he said. "At this point a housing market recovery will largely depend on the ability of the economy to create jobs and support higher incomes for people," he said.
Freddie Mac said rates on 5/1 ARMs, set at a fixed rate for five years and adjustable in each following year, was 3.47 percent, unchanged from last week, tying the all-time lowest level since Freddie Mac began tracking this loan type in 2005. One-year adjustable-rate mortgages were 3.43 percent, up from 3.40 percent last week. A year ago, 15-year mortgages averaged 4.37 percent, the one-year ARM was 4.60 percent and the 5/1 ARM 4.38 percent.
US trade deficit swells amid record China gap
by Veronica Smith - AFP
The US trade deficit ballooned in August as the gap with China hit a fresh record, official data showed Friday, suggesting further weakness in the economic recovery. The Commerce Department said the August trade deficit rose nearly nine percent from July to 46.3 billion dollars. That was far worse than economists predictions of a 44.5 billion dollar gap.
Despite exports of goods and services edging up to a two-year high, imports jumped even higher. "Our exports barely budged but we bought a lot more of just about everything including food, consumer goods, vehicles, capital goods and industrial supplies," said Joel Naroff of Naroff Economic Advisors. Imports increased 2.1 percent from July, to 200.2 billion dollars, while exports edged up only 0.2 percent, to 153.9 billion dollars.
The August trade deficit was the second biggest since October 2008 when the global financial crisis accelerated, and confirmed a trend of widening gaps that began in mid-June 2009. The US surplus in services, a key trade strength of the world's largest economy, shrank for the third consecutive month as imports of services reached a record high. Americans' dependence on foreign oil and appetite for imported consumer goods once again caused imports to swell.
In August, exports of goods were virtually flat, while imports of goods jumped 3.9 billion dollars to 166.7 billion. The department downwardly revised the July deficit to 42.6 billion dollars. It was initially reported at 42.8 billion dollars. The politically sensitive gap with China expanded eight percent, to 28.0 billion dollars wiping out the previous record of 27.9 billion dollars set in October 2008. The United States has long criticized China's currency policy, accusing Beijing of keeping the yuan undervalued to gain an unfair trade advantage.
The monthly trade report came on the eve of the scheduled release Friday of the US Treasury Department's assessment on currency manipulation. Treasury Secretary Timothy Geithner in April delayed the report, originally due an April 15, in a bid to pursue other ways to advance US interests with China. Currency tensions boiled over at last week's annual meetings of the International Monetary Fund, with China rejecting calls for a quick yuan revaluation.
Thursday's trade report highlighted the difficulties of President Barack Obama's goal to increase exports to help put the economy on track for a sustainable recovery from the worst recession in generations. The report added fuel to the growing furor over China, widely blamed in the United States for job losses as cheap Chinese manufactured goods pour into the economy. The House of Representatives last month passed a bill that allows Washington to impose countervailing duties on imports from countries found to be manipulating their currencies.
The news of a record-high trade deficit with China, the country's second-largest trading partner, also came less than three weeks ahead of crucial November 2 mid-term elections. Obama's Democratic Party is expected to lose seats in Congress to the Republican opposition. "The ongoing, American job-destroying leakage of national wealth to China confirms the House's wisdom in passing the anti-currency manipulation bill last month," said Alan Tonelson, a research fellow at the US Business and Industry Council.
"President Obama finally needs to wake up as well, urge Senate passage, and help American businesses and their employees fight foreign protectionism," he said. Analysts estimated the trade deficit subtracted 3.5 percentage points of growth from gross domestic product in the second quarter, the biggest loss since 1947.
Stephen Roach: QE1 Didn’t Work, and Neither will QE2 or QE12
QE Is Another Wasteful Government Program
by Cullen Roche - TPC
I’ve cited Hoisington in the past due to their knowledge of how our monetary system actually functions (a rarity on Wall Street unfortunately). Unlike most commentators, who believe QE is inherently inflationary “money printing” Hoisington actually understands this fairly simple procedure that Ben Bernanke has convinced us is some sort of cure-all:“The monetary base, bank reserves plus currency, does not fulfill these functions and hence does not constitute money. To paraphrase Friedman and Schwartz, the base, which is also known as highpowered money (currency in the hands of the public and assets of banks held in the form of vault cash or deposits at Federal Reserve Banks) cannot meet these criteria.
The nonbank public – nonfinancial corporations, state and local governments and households – cannot use deposits at the Federal Reserve Bank to effectuate transactions. Moreover, currency is not sufficiently broad to be considered a temporary abode of purchasing power. For Friedman, high-powered money can be properly regarded asassets of some individuals and liabilities of none.
So, let us be clear on this subject. In 2008, when the fed purchased all manner of securities, to the tune of about $1.2 trillion, the fed was not “printing money”. Bank deposits at the fed exploded to the upside, the monetary base rose from $800 billion to $2.1 trillion, yet no money was “printed”. Deposits did not rise, loans were not made, income was not lifted, and output did not surge. The fed could further “quantative ease” and purchase another $1 trillion in securities and lift the monetary base by a similar amount yet money would still not be “printed”.
That’s an important paragraph. Go back and read it again. QE does not involve the creation of net new financial assets. It does not boost lending, it does not boost output, it does not boost incomes. Yet, Ben & Co. appear to have convinced a significant portion of the population otherwise. I know I’ve hammered on this topic for the last few weeks, but I continue to read about “money printing” and all the other inflationary impacts of QE from market commentators who simply do not understand what QE actually is and how it actually works. Since this is THE single most important market factor currently it’s important that investors not be herded up to the trough of the Federal Reserve where Mr. Bernanke feeds them half truths and misguided policy responses.
In their most recent letter (which I highly recommend reading in its entirety) Lacy Hunt and Van Hoisington describe why QE is likely to fail:Another Failed Attempt–QE2
“The flaccid nature of this business recovery should serve notice that economic conditions are far more precarious than generally understood. Federal Reserve forecasts were obviously flawed and have now been significantly lowered since they placed great emphasis on the presumed stimulative power of massive deficit spending and numerous aggressive monetary actions. The Fed is contemplating another round of quantitative easing (QE2) because the weakness of the economy has surprised them. They are feeling the political pressure to act, even though the problems facing the economy are not related to monetary policies.
The Fed’s position seems to be that more of the same economic policies are needed, even though they have failed to produce the advertised results. As microeconomist Steven Levitt (author of Freakonomics) documented, conventional wisdom is generally flawed since it fails to ask the right question about economic problems. We view the Fed’s econometric model as the personification of conventional wisdom.
For instance, as a result of QE1 the banks are holding close to $1 trillion of excess reserves. The important question is why are banks unwilling to put these essentially zero earning reserves to work. Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds.
A parallel situation exists in the corporate sector. Non-bank corporations are sitting on huge cash reserves. In the past two quarters liquid assets amounted to 7% of total assets, the highest level since 1963 (Chart 2). This cash reflects a lack of compelling uses for the funds, as well as the need to hedge against risks, including those of dealing with potential vulnerable counter-parties. The fact that substantial bank and corporate funds remain idle is a strong signal that U.S. economic problems exist outside the monetary sphere.”
This is superb analysis. What we can see here is that QE1 essentially did nothing for the real economy. Well, that’s not entirely true. It altered bank balance sheets and helped unclog credit channels and that was an important confidence builder and a necessary move to get the economy functioning smoothly again. For this, I applaud Mr. Bernanke. However, in terms of generating sustained economic recovery QE1 can be seen as an utter failure. After all, we wouldn’t be discussing QE2 if it had succeeded the first time around. Hoisington continues by succinctly summarizing why QE2 will ultimately fail:“The problem with the U.S. economy is fourfold: 1) The economy is grossly overleveraged, with many asset prices falling; 2) fiscal policy is counter-productive and debilitating to economic growth as government expenditure multipliers are near zero; 3) proposed tax increases are already curtailing economic activity and tax multipliers approach -3%; and 4) increased bureaucracy with many new and yet unwritten regulations from the Dodd-Frank bill, along with health care regulations, make business planning nearly impossible.
With existing excess liquidity in banks and companies, and the above-mentioned key economic problems, it should be clear that QE2 and the purchases of additional assets by the Fed will, like previous purchases in QE1, serve only to bloat excess reserves without advancing income, spending, or jobs. From this point in the cycle, for QE2 to generate expansion, money growth and therefore debt levels would have to rise.
According to economist Hyman Minsky, there are three phases of credit extension: hedge finance, speculative finance, and Ponzi finance. In view of the extremely leveraged conditions, additional credit would be almost exclusively of the Ponzi finance variety – loans with no reasonable prospect of repayment. Indeed, Ponzi finance appears to typify the bulk of the loans being made by the Federal Housing Authority to unqualified home buyers, replicating the practices underwritten by FNMA and Freddie Mac during the heyday of the sub-prime lending extravaganza whose consequences linger. But, for the purpose of argument let’s assume that with additional excess reserves the banks lend to other potential Ponzi-like borrowers. This could lead to an increase in the money supply, but the net result may still not stimulate faster growth in GDP because velocity would fall, as it did from 1997 to 2007 (Chart 3).”
The Velocity Impediment
“For a rise in excess reserves to boost GDP, two conditions must be met. First, the money multiplier must become stable. Second, the velocity of money must not decline. The second condition is not likely in view of the theory and history of velocity. Velocity is primarily determined by the following: 1) financial innovation; 2) leverage, provided that the debt is for worthwhile projects and the borrowing is not of the Ponzi finance variety; and 3) numerous volatile short-term considerations.
Since 1900, M2 velocity has averaged 1.67, and has demonstrated distinct mean reverting tendencies (Chart 3). Velocity has been declining irregularly since Ponzi finance took over in the late 1990s. For leverage to lead to an expansion of velocity the loans must meet the requirement of hedge finance, i.e., where there is a reasonable expectation that the borrower can repay both principal and interest.
Fundamentally, the secular prospects for velocity have not improved even though velocity recovered by 2.1% in the past four quarters. This marginal uptick in velocity reflected an assist in federal spending along with the unparalleled recovery in inventory investment discussed previously. Without the gain in these two GDP components, velocity was unchanged over the past four quarters (Table 1).”
That’s not all though. Hoisington actually believes the program could ultimately be detrimental to the economy:Unintended Consequences
“The Fed’s adoption of QE2 may lead to severe unintended consequences. There are two possibilities: 1) QE2 does manage to temporarily improve GDP via continued overleveraging of the economy with non-repayable loans, 2) QE2 goes into the history’s dustbin of failed projects, along with QE1, cash for clunkers, tax credits for first time home buyers, and other numerous failed attempts to boost the economy with rebate checks.
For QE2 to work, a renewed borrowing and lending cycle must take place, resulting in a further leveraging of the already highly overleveraged U.S. economy. Such additional leverage would not be beneficial since increasing indebtedness from these levels ultimately leads to economic deterioration, systemic risk, and in the normative case, deflation, as documented by Rinehart and Rogoff in their book, This Time Is Different. Therefore, at best QE2 can be nothing more than a short-term panacea exacerbating the serious structural problems already facing the United States.
Thus, we believe that QE2 is an ill advised program that offers little prospect of boosting economic activity. If the program achieves success, any gains in economic activity will be for a very limited period of time with major risks that any short-term gain will be swamped by incalculably high costs in the future. These unknown, questionable experiments in monetary policy are being made to correct problems that are clearly of a non-monetary nature.”
QE – just another wasteful government program….
FDIC Floats Rules on Closing Firms
by Deborah Solomon - Wall Street Journal
Federal regulators proposed a rule that would require creditors of large financial firms to suffer losses in the event of a firm's collapse but left wiggle room for the U.S. to make payments to certain types of creditors. The proposal is the first step in the government's effort to clarify how it will seize and dismantle large financial firms that run into trouble. The Federal Deposit Insurance Corp. was given authority to liquidate firms as part of the U.S. effort to prevent another collapse like that of Lehman Brothers, whose demise rippled through the financial sector.
The agency is expected to propose additional rules next year outlining how it would dismantle a large firm, including ways to recoup money from the financial industry in the event the U.S. has to step in and provide temporary funding. The FDIC proposal comes as international regulators are grappling with the same issue of "too big to fail," seeking ways to prevent taxpayer bailouts across the globe and improve cross-border coordination in the event of a failure. The Financial Stability Board, a group of regulators, central bankers and finance ministers, expects to present a series of proposals at the meeting of the Group of 20 industrial and developing nations in Korea next month. The proposals may include stricter capital standards for firms and requirements that they submit so-called "living wills," or plans for how they could be dismantled without harming the broader financial sector.
On Tuesday, the Federal Deposit Insurance Corp. took a first step by saying it planned to prohibit additional payments to shareholders and long-term debtholders in the event of a firm's demise. The FDIC said it could make additional payments to certain short-term creditors in situations where it maintains "essential operations" or to "minimize losses and maximize recoveries." FDIC Chairman Sheila Bair said the authority to differentiate between creditors would be used rarely and would require approval of the entire FDIC board.
She said such payments would most likely be confined to paying creditors for things like keeping the lights and computer systems up and running. But the agency will have discretion to pay other types of creditors if the board determines such payments would "maximize recovery." For example, Ms. Bair said such payments could occur if a potential acquirer of a firm's assets said it would be willing to pay more if the FDIC didn't impose losses on a certain class of creditors. The discretion would also allow payments to counterparties holding short-term securities or other short-term creditors of a failing firm if the FDIC determines that would help prevent a disorderly collapse.
The proposal has been controversial, with some academics and officials in the Treasury Department worried that this discretion would encourage unprotected creditors to flee a faltering firm, accelerating its demise. An FDIC official said any such payments could ultimately be reclaimed or subject to a "claw-back" by the government if the U.S. needed to recoup any taxpayer money spent on the liquidation. The FDIC also has the authority to levy a fee on the financial industry to recoup costs.
An overarching goal of the financial overhaul, approved earlier this year, was to prevent taxpayer money from being spent on financial rescues. The proposed rule, approved by the board last Friday, includes a request for public comment on a broader range of questions that the FDIC will use as it crafts its rules. The public has 90 days to comment on the questions and 30 days to comment on the proposed rule.
Marc Faber Says World Heading for 'Major Inflection Point'
by Jun Yang and Saeromi Shin - Bloomberg
Global markets are heading for an “important turning point” as interest rates begin to rise within about three months and the U.S. dollar gains, according to investor Marc Faber. Investors should buy stocks and sell cash and bonds because governments are continuing to print too much money and may create a new “credit bubble,” Faber, publisher of the Gloom, Boom & Doom report, told reporters during a forum in Seoul today.
“Instead of interest rates going down, they could start to go up, instead of the dollar being weak, it could strengthen,” Faber said. “I’m ultra-bearish on everything, but I believe you’ll be better off owning shares than government bonds.” The Dollar Index slid 8.5 percent last quarter, the most since June 2002, and dropped 1.3 percent this month after Federal Reserve Chairman Ben S. Bernanke signaled he may add money to the economy.
That new supply is reflected in exchange rates, based on how the currency reacted to the last round of so-called quantitative easing, said HSBC Holdings Plc, BNP Paribas SA and Nordea Bank AB. The central banks of Israel and Taiwan raised borrowing costs in the last 15 days. Faber’s recommendation on stocks is shared by Warren Buffett, the billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc. Investors buying bonds now “are making a mistake,” he said Oct. 5 at Fortune magazine’s Most Powerful Women conference in Washington.
“It’s quite clear that stocks are cheaper than bonds,” Buffett said. “I can’t imagine anyone having bonds in their portfolio when they can own equities.” U.S. stock dividends are paying more than government bonds. Ten-year Treasuries yield 5.2 percentage points less than equities of companies in the Standard & Poor’s 500 Index when adjusted for annual inflation, near the most since March 2009.
Faber told investors to abandon U.S. stocks a week before 1987’s so-called Black Monday crash and said in August 2007 that U.S. shares were entering a bear market. The S&P 500 peaked two months later before retreating as much as 57 percent.
New York Confronts $200 Billion Bill For Retiree Health Costs
by Mary Williams Walsh - New York Times
The cities, counties and authorities of New York have promised more than $200 billion worth of health benefits to their retirees while setting aside almost nothing, putting the public work force on a collision course with the taxpayers who are expected to foot the bill. The total cost appears in a report to be issued on Wednesday by the Empire Center for New York State Policy, a research organization that studies fiscal policy.
It does not suggest that New York must somehow come up with $200 billion right away. But the report casts serious doubt over whether medical benefits for New York’s retirees will be sustainable, given the sputtering economy and today’s climate of hostility toward new taxes and taxpayer bailouts.
The daunting size of the health care obligation raises the possibility that localities will be forced at some point to choose between paying their retirees’ medical costs and paying the investors who hold their bonds. Government officials aim to satisfy both groups, and have even made painful cuts in local services when necessary to keep up with both sets of payments.
Only a few places have tried to rein in their costs, by billing retirees for a portion of the premiums, for example. Retirees have responded with lawsuits, but ratings agencies and municipal bond buyers have shrugged off these warning signs. “So far, the market doesn’t care,” said Edmund J. McMahon, the director of the Empire Center. “The market seems to assume, on the basis of nothing, that at some point all of these places are simply going to stop paying retiree health benefits.”
The health benefits are entirely separate from the pensions that New York’s public workers have earned. Governments have reported their pension obligations for years, but their retiree medical obligations have been building up unseen, because governments were not required to account for them. The information is starting to come to light because of a new accounting requirement.
One city, Schenectady, found the cost too overwhelming to calculate, warning that it “will be astronomical, with the potential of bankrupting municipalities.” The city even said in a document accompanying a recent debt offering that it did not know whether it was really required to comply with the new accounting rule.
The $200 billion that New York State and its localities owe retirees in the aggregate is less than the amount they owe their bondholders, about $264 billion. But health costs are rising, and in some places the obligations have already eclipsed the value of the government’s outstanding bonds. Most credit analysts seem to expect that if a municipality has to default on something, it will default on its retiree health promises, not on its bonds. Pensions, meanwhile, are considered protected by the New York State constitution.
But no one knows for sure, and no one is predicting that retirees will take the loss of a valuable health plan lying down. “It will be a mess. There will be a lot of disputes, a lot of litigation,” said Jerry A. Webman, chief economist for OppenheimerFunds. He said that defaults and bankruptcies by governments were still so rare that there was little legal precedent, and no way of knowing which pledges would survive a court challenge.
Retiree health benefits in New York consist of an indemnity plan plus optional managed-care plans. There is no central source of information, but Mr. McMahon found governments paying 35 percent to 100 percent of the premiums. Retirees can further reduce their share by paying their premiums with unused sick time. The vast majority of the work force can start drawing benefits at age 55. When retirees turn 65 and join Medicare, their former employers reimburse their Medicare premiums and supplement the federal program.
The cost pressures are by no means unique to New York. States and cities across the country have promised retiree health benefits without identifying a way to pay for them, leaving taxpayers on the hook. Mr. McMahon said he thought his group’s new study was the first to aggregate the obligations in a single state.
In practice, each municipality pledges to pay its own retiree health obligations. But if one were in distress, the state could step in through the Financial Emergency Act, passed in 1975 for the rescue of New York City, and might backstop some costs. The state already stands behind the bonds of some authorities as well. Some officials and bankers worry that the state might be unable to make good if a number of towns and authorities got into trouble at the same time. New York State does have a solid AA rating on its general obligation bonds, however.
New York City has the biggest retiree health obligation, having promised benefits worth $62 billion as of June 30, 2008 — roughly what the state of California has promised, and more than New York City’s outstanding debt on its bonds. The city’s five pension funds also have big holes, which have been calculated in various ways. The last time the city’s chief actuary, Robert C. North, assessed their status, in June 2008, he found a shortfall of about $75 billion between what the workers had earned and the money that had been set aside.
The new accounting rule for retiree health plans lets governments disclose a little at a time, but New York City reported its entire obligation. The combination of the unfunded pension and retiree health obligations gives New York City a negative net worth, but that does not mean it is about to collapse, just that it will have to bring its finances back into balance. New York City’s general obligation debt is rated AA.
The obligation to employees of New York State was only slightly less than the city’s, $60 billion. Third place went to the Metropolitan Transportation Authority, which has promised health benefits worth about $13 billion. Mr. McMahon of the Empire Center drew the numbers primarily from local government reports, ferreted out from obscure documents, bond offering statements and audited financial statements.
He then tried to determine where the burden was heaviest. He found that every resident of New York City was responsible for $7,343, in today’s dollars, for health care for retired city workers. What’s more, they owe a big share of the costs for retired state workers, an additional $3,082 for each person living in New York state.
Among the state’s smaller cities, Mr. McMahon found unusually large per capita amounts owed in Buffalo, Syracuse, White Plains and Niagara Falls. “You’ve got a lot of cities whose growth prospects are murky, to put it best,” Mr. McMahon said. “You’re looking at a G.M.-type situation, a struggling company that’s trying to remake itself, but it has this huge legacy cost.” Buffalo also has the distinction of paying more for health care for its retirees than for its current employees, a situation Mr. McMahon called “exceptional.”
Wells Fargo adds to crisis over home seizures
by Suzanne Kapner - Financial Times
The US mortgage foreclosure crisis deepened as it emerged that Wells Fargo may have used practices that prompted rivals to halt home repossessions, and JPMorgan Chase said banks might be fined over the issue. Bank of America, JPMorgan and GMAC have halted foreclosures after learning that “robo signers” had rubber-stamped thousands of mortgage documents without checking their accuracy. Attorneys-general in 50 states have launched a joint investigation into the matter.
Jamie Dimon, JPMorgan chief executive, on Wednesday became the first top banking executive to say some attorneys-general may levy penalties on banks for their foreclosure practices. Legal documents obtained by the Financial Times suggest that Wells Fargo, the second-largest US mortgage servicer, also used a “robo signer”. Unlike its rivals, Wells Fargo has not halted foreclosures. The San Francisco-based bank said on Tuesday it was reviewing some pending cases, but it has maintained that it has checks and balances designed to prevent serious procedural lapses.
In a sworn deposition on March 9 seen by the FT, Xee Moua, identified in court documents as a vice-president of loan documentation for Wells, said she signed as many as 500 foreclosure-related papers a day on behalf of the bank. Ms Moua, who was deposed as part of a foreclosure lawsuit in Palm Beach County, Florida, said that the only information she verified was whether her name and title appeared correctly, according to the document.
Asked whether she checked the accuracy of the principal and interest that Wells claimed the borrower owed – a crucial step in banks’ legal actions to repossess homes – Ms Moua said: “I do not.” Ms Moua nevertheless signed affidavits that said she had “personal knowledge of the facts regarding the sums of money which are due and owing to Wells Fargo”. The affidavits were used by the bank in foreclosure proceedings. Ms Moua added that before reaching her desk, it was her understanding that the foreclosure documents had been reviewed by outside lawyers.
Wells declined to comment on the deposition but said its records show its “foreclosure affidavits are accurate”. The bank added: “When we find team members who do not follow procedure, we fix what is done incorrectly. Until this case is resolved, we should keep in mind that a deposition does not suggest a wrongful foreclosure.” Mr Dimon defended JPMorgan’s conduct but said banks’ costs might rise as a result of the controversy, although not significantly.
“We don’t think there are cases where people have been evicted... where they shouldn’t have been,” he told investors during a call to discuss third-quarter earningsadding that JPMorgan is reviewing 115,000 foreclosure cases across the US “Obviously it will increase our costs a little bit and maybe we’ll have to pay penalties eventually to some of the [attorneys-general]”. Mr Dimon pledged that if JPMorgan made mistakes, “we will fix them”. The moratorium on foreclosures has the potential to delay the recovery in the US housing market and hurt growth in the economy as millions of homes remain in ownership limbo.
Access To Justice In U.S. At Third-World Levels
by Dan Froomkin - Huffington Post
Why haven't more Americans successfully sued the banks that lured them into fraudulent mortgages, then foreclosed on them without the required paperwork? It could be because the civil justice system in this country is essentially inaccessible to many Americans -- and when it does get accessed, is tilted toward the wealthy and moneyed interests. That's certainly consistent with the finding of a world-wide survey unveiled Thursday morning that ranks the United States lowest among 11 developed nations when it comes to providing access to justice to its citizens -- and lower than some third-world nations in some categories.
Particularly when it comes to access to and affordability of legal counsel in civil disputes, the U.S. ranks 20 out of the 35 nations surveyed, below not only developed nations but also such countries as Mexico, Croatia and the Dominican Republic. The results are from the World Justice Project's new "Rule of Law Index", which assesses how laws are implemented and enforced in practice around the globe.
Countries are rated on such factors as whether government officials are accountable, whether legal institutions protect fundamental rights, and how ordinary people fare in the system. The index will expand from 35 countries to 70 next year. The lowest-ranking countries in this year's survey included Liberia, Kenya, Nigeria and Pakistan. The U.S. didn't lead the world on any of the rule-of-law measures, ranking near the bottom of the developed world on most -- including even fundamental rights. But the most striking findings related to access to justice for ordinary people.
As part of its fact-finding, the organization polled 1,000 people in New York, Chicago and Los Angeles, and found a significant gap between the rich and the poor in terms of their use and satisfaction with the civil courts system. According to a news release:For instance, only 40% of low-income respondents who used the court system in the past three years reported that the process was fair, compared to 71% of wealthy respondents. This 31% gap between poor and rich litigants in the USA is the widest among all developed countries sampled. In France this gap is only 5%, in South Korea it is 4% and in Spain it is nonexistent.
Juan Botero, the index's director, told the Huffington Post that the U.S.'s poor ranking on access to justice "is a little bit surprising" considering that our society is so prone to litigation, and so fascinated by TV shows about law and order. But he said the index simply quantifies what was already the consensus among legal experts: That when it comes to access to justice, "the U.S. could do a better job, especially with marginalized communities."
Indeed, the index's findings are consistent with previous studies of access to justice by lower-income people. The Legal Services Corporation reported last year that state-level studies had concluded that less than one in five of the legal problems experienced by low-income people are addressed with help from either a private or legal-aid lawyer.
Unequal access to the legal system is also a problem that the Obama administration has publicly acknowledged and is trying to address. In March, Attorney General Eric Holder appointed prominent Harvard Law Professor Larry Tribe to serve as a senior counselor in charge of a new Access to Justice Initiative. His goal is to work with judges and lawyers across the country to find ways to help people who cannot afford a lawyer.
As Tribe himself put it in a June speech:The truth is that as a nation, we face nothing short of a justice crisis. It is a crisis both acute and chronic, affecting not only the poor but the middle class. The situation we face is unconscionable. It's why the President and the Attorney General created the Access to Justice initiative that I am leading, and it's why we won't rest until we have made measurable and sustainable progress, but to make that progress and to do it across the board, we have got to first acknowledge that what we do know is far outweighed by what we don't know.
Botero said the index is not intended to be prescriptive. "The index doesn't give you a complete recipe for action; it doesn't even give you a full diagnosis. It's like a thermometer," he said.
Nevertheless, he noted that many other countries have more robust mechanisms to provide legal assistance to the poor.
For instance, in many Latin American countries, law students spend their final year of law school serving the poor. Or in Japan, many disputes are adjudicated by administrative bodies. In the U.S., he said, small claims court works very well. "However, the scope of coverage is limited." The result: "There seems to be a gap in the system." The U.S. criminal justice system received a mixed grade in the new index, ranking well when it comes to guaranteeing due process of law, but ranking last among developed nations on delivering impartial justice.
How exactly does the index define access to justice? The report states:In a nutshell, these factors measure whether regular citizens can peacefully and effectively resolve their personal grievances in accordance with generally accepted social norms, rather than resorting to violence or self-help. For civil and informal justice, this implies a service that is affordable, effective, impartial, and culturally competent. For criminal justice, this implies a system capable of investigating and adjudicating criminal offences impartially and effectively, while ensuring that the rights of suspects and victims are protected.
Impartiality includes absence of arbitrary or irrational distinctions based on social or economic status, and other forms of bias, as well as decisions that are free of improper influence by public officials or private interests. Accessibility includes general awareness of available remedies, availability and affordability of legal advice and representation, and absence of excessive or unreasonable fees, procedural hurdles, and other barriers to access the formal dispute resolution systems. Access to justice also requires fair and effective enforcement of the decisions.
And why is all this important? The report explains:Establishing the rule of law is fundamental to achieving communities of opportunity and equity--communities that offer sustainable economic development, accountable government, and respect for fundamental rights.
Wall Street Lobbyists Besiege CFTC to Shape Derivatives Rules
by Asjylyn Loder and Phil Mattingly - Bloomberg
When Peter Malyshev was a graduate student with a part-time job at the Commodity Futures Trading Commission in 2001, he’d walk into the red-brick building near Washington’s Dupont Circle and find the lobby almost deserted. Now an attorney for Winston & Strawn LLP who represents clients including Goldman Sachs Group Inc., Malyshev said he’s more likely these days to encounter a small regiment lining up for visitor badges. Lawyers, bank executives and hedge fund managers are seeking to influence the biggest rewrite of Wall Street rules since the Great Depression.
The CFTC is no longer the “sleepy little agency” its then-chairwoman, Mary Schapiro, branded it in the 1990s. With power from Congress to oversee the previously unregulated $615 trillion market for over-the-counter derivatives, it has become one of the hottest lobbying spots in town. “These companies investing in these markets have to look at the CFTC because now they have jurisdiction,” said Malyshev, 44. The firms want to “make sure the rules are right,” he said.
The fight in Congress over how to increase transparency and reduce risk in the swaps market nearly derailed the Dodd-Frank regulatory bill and it took a contentious all-night session to reach agreement on the outlines. Lawmakers left many specifics to the CFTC and the Securities and Exchange Commission, with the first drafts of some rules to be published by the end of 2010. Since President Barack Obama signed the law July 21, calling its passage a triumph over “the furious lobbying of an array of powerful special interest groups,” those same groups have turned to regulators to try to blunt the impact on profits.
Hedge funds have lobbied the CFTC to be excluded from categories that entail increased scrutiny and higher capital requirements. Airlines and manufacturers who use derivatives to hedge their commodity costs, as well as the dealers who arrange the hedges, want an exemption from having to post cash margin on their trades. Wall Street banks have sought to avoid caps on the number of derivatives a trader can hold.
“The number of people that have come in requesting to be exempt from the law, or to have the law delayed has literally shocked me,” said Bart Chilton, 50, a Democrat who has served as one the agency’s five commissioners since 2007. “A lot of folks are having problems coming to grips with the fact that they do have a new law, and will have to change their business models.”
In one case, Chilton said, he found himself confronting the same lobbyist representing three different companies in the space of two weeks. With each meeting, the attorney argued that his client was exempt from the law, or that implementation ought to be put off, said Chilton, who declined to name the lawyer.
“The volume and intensity of the lobbying is unprecedented in my experience at the agency,” Chilton said. “They all have an ask. The types of loopholes that people are suggesting exist are either non-existent or very farfetched.”
After the Dodd-Frank bill passed, CFTC Chairman Gary Gensler announced that the commission would post the names of anyone who came to discuss the rules. According to the agency’s website, there were more than 230 meetings from July 26 through Oct. 8. Among the firms were Cargill Inc., Vitol Group, JPMorgan Chase & Co., Morgan Stanley, and Bloomberg LP, parent company of Bloomberg News, which has a swaps trading platform, according to testimony and documents the companies have provided to the CFTC. In September alone, participants included 14 people from Morgan Stanley, 18 from Goldman Sachs and about a dozen from the Air Transport Association, the airline trade group.
The lobbying began before the legislation was passed as firms anticipated new rules. As of early August, the commission had met with 126 different companies this year, according to lobbying records examined by the Washington-based Center for Responsive Politics. That was the highest since the center began tracking the records in 1998, 20 percent higher than in all of 2009 and 68 percent higher than in 2008.
Consumer advocates said they hoped the regulators would fulfill the intent of lawmakers and not weaken oversight. “It would send a message that the rulemaking process isn’t for sale to the highest bidder,” said Barbara Roper, director of investor protection at the Consumer Federation of America, who has met with the CFTC to discuss business conduct standards. Commissioner Scott O’Malia, 42, a Republican who was appointed last year, said the agency invited the input. “People have an interest in how the market turns out. They are businesses, and we get that,” he said. Still, he said, “If anyone is coming in trying to change the statute through rulemaking, they are fooling themselves.”
‘How Did You Get That Client?’
Not all participants are pleased to have their visits posted on the Web. Malyshev said the publicity interferes with attorney-client privilege. “People are calling me asking, ‘Hey, how did you get that client?’” said Malyshev, who according to the CFTC site also represents Barclays Plc and MarkitServ, a company that processes derivatives trades. Derivatives are financial instruments based on the value of another security or benchmark. Congress took aim at the industry after soured trades on mortgage derivatives tipped the U.S. economy into the deepest recession since the 1930s. The legislation was named for its primary authors, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and House Financial Services Chairman Barney Frank, a Massachusetts Democrat.
The law gives the CFTC jurisdiction over commodity, interest rate and some credit default swaps, the largest share of the derivatives markets. The financial stakes are high. U.S. commercial banks held derivatives with a notional value of $223.4 trillion in the second quarter, according to the Office of the Comptroller of the Currency. Those banks reported trading revenue of $6.6 billion in the quarter, a gain of 28 percent from the same period a year earlier.
Morgan Stanley, which holds a notional $44 billion in its commercial bank’s derivatives portfolio, sent a team of four to the commission on Oct. 4, according to the CFTC website. The subject was how regulators should define broad terms in the law, including “major swap participant.” Companies put in that category would face more regulatory scrutiny and higher capital requirements. Morgan Stanley met with three CFTC staff members and five staff members from the SEC, arguing that the decision on whether a firm is a major swap participant shouldn’t turn on whether it is highly leveraged, a standard that Congress wrote into the law.
“No single leverage test is appropriate due to vast differences in business models,” the bank said, according to the Sept. 20 comment letter filed with the SEC and CFTC and posted online as materials used during the meeting. Most of the rules must be completed by July, including public comment periods that last 30 days or more plus the months it will take the commission’s staff to review comments from industry. To manage the schedule, the commission has created 30 rulemaking teams, Gensler told the Senate Banking Committee on Sept. 30.
Gensler has asked Congress to increase the agency’s budget by 69 percent next year to $286 million and predicts the agency’s budgeted staff of about 650 will need to grow to more than 1,000 to meet its new demands. Roper of the Consumer Federation, who celebrated the enactment of the law, said she sees danger in the endgame. “Every single provision in the bill is dependent on regulators doing well, which is exactly what regulators did very badly in the run-up to the crisis,” she said. “There really is a question as to whether we can do anything differently this time.”
A radical pessimist's guide to the next 10 years
by Douglas Coupland - Globe And Mail
1) It's going to get worse
2) The future isn't going to feel futuristic
It's simply going to feel weird and out-of-control-ish, the way it does now, because too many things are changing too quickly. The reason the future feels odd is because of its unpredictability. If the future didn't feel weirdly unexpected, then something would be wrong.
3) The future is going to happen no matter what we do. The future will feel even faster than it does now
The next sets of triumphing technologies are going to happen, no matter who invents them or where or how. Not that technology alone dictates the future, but in the end it always leaves its mark. The only unknown factor is the pace at which new technologies will appear. This technological determinism, with its sense of constantly awaiting a new era-changing technology every day, is one of the hallmarks of the next decade.
4) Move to Vancouver, San Diego, Shannon or Liverpool
There'll be just as much freaky extreme weather in these west-coast cities, but at least the west coasts won't be broiling hot and cryogenically cold.
5) You'll spend a lot of your time feeling like a dog leashed to a pole outside the grocery store – separation anxiety will become your permanent state
6) The middle class is over. It's not coming back
Remember travel agents? Remember how they just kind of vanished one day?
That's where all the other jobs that once made us middle-class are going – to that same, magical, class-killing, job-sucking wormhole into which travel-agency jobs vanished, never to return. However, this won't stop people from self-identifying as middle-class, and as the years pass we'll be entering a replay of the antebellum South, when people defined themselves by the social status of their ancestors three generations back. Enjoy the new monoclass!
7) Retail will start to resemble Mexican drugstores
In Mexico, if one wishes to buy a toothbrush, one goes to a drugstore where one of every item for sale is on display inside a glass display case that circles the store. One selects the toothbrush and one of an obvious surplus of staff runs to the back to fetch the toothbrush. It's not very efficient, but it does offer otherwise unemployed people something to do during the day.
8) Try to live near a subway entrance
In a world of crazy-expensive oil, it's the only real estate that will hold its value, if not increase.
9) The suburbs are doomed, especially thoseE.T. , California-style suburbs
This is a no-brainer, but the former homes will make amazing hangouts for gangs, weirdoes and people performing illegal activities. The pretend gates at the entranceways to gated communities will become real, and the charred stubs of previous white-collar homes will serve only to make the still-standing structures creepier and more exotic.
10) In the same way you can never go backward to a slower computer, you can never go backward to a lessened state of connectedness
11) Old people won't be quite so clueless
No more “the Google,” because they'll be just that little bit younger.
12) Expect less
Not zero, just less.
13) Enjoy lettuce while you still can
And anything else that arrives in your life from a truck, for that matter. For vegetables, get used to whatever it is they served in railway hotels in the 1890s. Jams. Preserves. Pickled everything.
14) Something smarter than us is going to emerge
Thank you, algorithms and cloud computing.
15) Make sure you've got someone to change your diaper
Sponsor a Class of 2112 med student. Adopt up a storm around the age of 50.
16) “You” will be turning into a cloud of data that circles the planet like a thin gauze
While it's already hard enough to tell how others perceive us physically, your global, phantom, information-self will prove equally vexing to you: your shopping trends, blog residues, CCTV appearances – it all works in tandem to create a virtual being that you may neither like nor recognize.
17) You may well burn out on the effort of being an individual
You've become a notch in the Internet's belt. Don't try to delude yourself that you're a romantic lone individual. To the new order, you're just a node. There is no escape
18) Untombed landfills will glut the market with 20th-century artifacts
19) The Arctic will become like Antarctica – an everyone/no one space
Who owns Antarctica? Everyone and no one. It's pie-sliced into unenforceable wedges. And before getting huffy, ask yourself, if you're a Canadian: Could you draw an even remotely convincing map of all those islands in Nunavut and the Northwest Territories? Quick, draw Ellesmere Island.
20) North America can easily fragment quickly as did the Eastern Bloc in 1989
Quebec will decide to quietly and quite pleasantly leave Canada. California contemplates splitting into two states, fiscal and non-fiscal. Cuba becomes a Club Med with weapons. The Hate States will form a coalition.
21) We will still be annoyed by people who pun, but we will be able to show them mercy because punning will be revealed to be some sort of connectopathic glitch: The punner, like someone with Tourette's, has no medical ability not to pun
22) Your sense of time will continue to shred. Years will feel like hours
23) Everyone will be feeling the same way as you
There's some comfort to be found there.
24) It is going to become much easier to explain why you are the way you are
Much of what we now consider “personality” will be explained away as structural and chemical functions of the brain.
25) Dreams will get better
26) Being alone will become easier
27)Hooking up will become ever more mechanical and binary
28) It will become harder to view your life as “a story”
The way we define our sense of self will continue to morph via new ways of socializing. The notion of your life needing to be a story will seem slightly corny and dated. Your life becomes however many friends you have online.
29) You will have more say in how long or short you wish your life to feel
Time perception is very much about how you sequence your activities, how many activities you layer overtop of others, and the types of gaps, if any, you leave in between activities.
30) Some existing medical conditions will be seen as sequencing malfunctions
The ability to create and remember sequences is an almost entirely human ability (some crows have been shown to sequence). Dogs, while highly intelligent, still cannot form sequences; it's the reason why well-trained dogs at shows are still led from station to station by handlers instead of completing the course themselves.
Dysfunctional mental states stem from malfunctions in the brain's sequencing capacity. One commonly known short-term sequencing dysfunction is dyslexia. People unable to sequence over a slightly longer term might be “not good with directions.” The ultimate sequencing dysfunction is the inability to look at one's life as a meaningful sequence or story.
31) The built world will continue looking more and more like Microsoft packaging
“We were flying over Phoenix, and it looked like the crumpled-up packaging from a 2006 MS Digital Image Suite.”
32) Musical appreciation will shed all age barriers
33) People who shun new technologies will be viewed as passive-aggressive control freaks trying to rope people into their world, much like vegetarian teenage girls in the early 1980s
1980: “We can't go to that restaurant. Karen's vegetarian and it doesn't have anything for her.”
2010: “What restaurant are we going to? I don't know. Karen was supposed to tell me, but she doesn't have a cell, so I can't ask her. I'm sick of her crazy control-freak behaviour. Let's go someplace else and not tell her where.”
34) You're going to miss the 1990s more than you ever thought
35) Stupid people will be in charge, only to be replaced by ever-stupider people. You will live in a world without kings, only princes in whom our faith is shattered
36) Metaphor drift will become pandemic
Words adopted by technology will increasingly drift into new realms to the point where they observe different grammatical laws, e.g., “one mouse”/“three mouses;” “memory hog”/“delete the spam.”
37) People will stop caring how they appear to others
The number of tribal categories one can belong to will become infinite. To use a high-school analogy, 40 years ago you had jocks and nerds. Nowadays, there are Goths, emos, punks, metal-heads, geeks and so forth.
38) Knowing everything will become dull
It all started out so graciously: At a dinner for six, a question arises about, say, that Japanese movie you saw in 1997 (Tampopo), or whether or not Joey Bishop is still alive (no). And before long, you know the answer to everything.
39) IKEA will become an ever-more-spiritual sanctuary
40) We will become more matter-of-fact, in general, about our bodies
41) The future of politics is the careful and effective implanting into the minds of voters images that can never be removed
42) You'll spend a lot of time shopping online from your jail cell
Over-criminalization of the populace, paired with the triumph of shopping as a dominant cultural activity, will create a world where the two poles of society are shopping and jail.
43) Getting to work will provide vibrant and fun new challenges
Gravel roads, potholes, outhouses, overcrowded buses, short-term hired bodyguards, highwaymen, kidnapping, overnight camping in fields, snaggle-toothed crazy ladies casting spells on you, frightened villagers, organ thieves, exhibitionists and lots of healthy fresh air.
44) Your dream life will increasingly look like Google Street View
45) We will accept the obvious truth that we brought this upon ourselves