"Nightfall on the Ohio at Cincinnati"
Ilargi: After many winters living in Montréal, you get a sense of bewildered amusement when you visit Europe in winter and see entire societies come to a grinding halt because of a few inches of snow. Montréal shakes off a foot, or even two, of snow, within hours. In countries like Britain, one tenth of that is sufficient to slow down just about everything to a grinding halt.
It all makes it that much funnier to see those few inches of snow being blamed for the British economic meltdown in Q4 2010. Besides, Stoneleigh and I were actually in Britain doing a lectures tour in the last week of November 2010, and the bad weather didn’t start till the day we left, November 30 (got out just in time). In other words, the UK economy shrank by a "shocking" 0.5% over the quarter, but during the first two-thirds of that quarter there was nothing that even the Brits could name "extreme weather". Ergo, the UK economy is simply in real bad shape, rain or shine. Here's Graeme Wearden reporting for the Guardian:
Shock as UK economy shrank by 0.5% at end of 2010The UK economy shrank by a shock 0.5% in the last quarter of 2010 as Britain's recovery from recession faltered. Most of the unexpected contraction was caused by the wintry weather that gripped Britain last month, the Office for National Statistics said. Without it, GDP would probably have been flat – suggesting that the UK economy had already run out of steam before the snow hit. Economists said the first estimate of GDP for the last quarter was much worse than expected, and meant that Britain could now suffer a double-dip recession.[..]
George Buckley of Deutsche Bank said today's 0.5% decline was "quite shocking", and questioned whether the snow could really be blamed for the drop in economic activity. Hetal Mehta at Daiwa Capital Markets said it was "an absolute disaster for the economy". "It seems that the economy is incredibly vulnerable, and with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride," Mehta said.
Charles Davis, managing economist at CEBR, was concerned that the UK economy experienced a "complete loss of momentum" at the end of last year. "Few of us could have expected such a sharp contraction in output and the United Kingdom economy now faces the prospect of returning to recession [..]
Ilargi: Oh, my, even the "experts" can't seem to agree. What to do? What does it all mean?
Not to worry! Or perhaps... Robert Winnett quotes Britain's central banker in the Telegraph, and he has a genuine whopper:
Bank of England chief Mervyn King: standard of living to plunge at fastest rate since 1920sHouseholds face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again. Families will see their disposable income eaten up as they "pay the inevitable price" for the financial crisis, Mervyn King warned. [..]
Mr King said he was unable to offer any imminent hope of a rise in interest rates in coming months because of the poor economic outlook. Savers and "those who behaved prudently" would be among the biggest losers in the squeeze, he admitted.
Disposable household income has been hit by sharp increases in the cost of food, fuel and tax, coupled with restricted wage rises for most workers. Last year, take-home pay fell by about 12 per cent, official figures showed, and the trend was expected to continue in 2011. The governor warned that the Bank "neither can, nor should try to, prevent the squeeze in living standards". [..]
He added: "Monetary policy cannot be based on wishful thinking. So, unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal." "The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy."
Ilargi: I'd like to feel able to praise Mr. King for his honesty, if only because I can't see The Bernank following his example -yet-, but I can't. "The King", like "The Bernank", has bailed out his banks with taxpayers' money, and now tells those very same taxpayers that the "squeeze" in their pay is inevitable, while at the same time the City of London has gotten carte blanche from both Mervyn King and 10 Downing Street to hand out whatever bonuses to their bankers they see fit.
The major UK banks, just like those in Lower Manhattan, only continue to exist today because trillions of dollars were transferred from Main Street to Wall Street. That's the whole story, even if it's not distributed in print. And now Mr. King claims he cannot "prevent the squeeze" for everyday people, while London traders go home with multi-million dollar bonuses. The main take-away from that is not even that the "standard of living is plunging" at its fastest rate in almost a century, it's that the standards of honesty and dignity, of how to build a society, are plunging. Corruption and fraud have free rein. King's right when it comes to the end result, though, of course: the British future comes dressed as misery.
Yes, your future looks bad, and Mervyn King is telling you it would have been worse if you hadn't bailed out the bankers and made sure they got their X-mas bonuses. Come to think of it all that way, how is it possible that Britain doesn't yet look like Tunisia, Yemen or Egypt, why are there no people in the streets, no riots, no nothing of the kind? It's not as if the Brits have rosier futures ahead of them then the Egyptians. But then they likely missed that part. All parties are still stuck squabbling over the right path to -resumed- growth. But real economic growth will not return anytime soon, if ever, in the western world, no matter what numbers anyone comes up with.
The European markets are up again, one day after the plunge in UK GDP was announced and Mervyn King gave out his "this is a Depression era" warning. It's like reality doesn't matter anymore.
Back in the USSA, there was a report that should be as alarming as the UK GDP report was: US home prices fell 1.0% in November. Yes, that's a 12% annualized rate.
There's quite a bit of confusion over the exact numbers, but hey, that keeps people in a job, doesn't it? The S&P Case/Shiller Index says prices were off 1.0% for the month, and 1.6% YOY. The FHFA, however, says that November 2010 prices were down 4.3% (or even 4.42%) from a year ago.
Our roving reporter VK has a good one on this: "The Case-Shiller index is only 3.3% above the low it reached in April 2009. Yet stocks are 80% higher..." Things like that are possible only when reality doesn't matter anymore.
Still, shocking as these numbers may be to some, a far more interesting battle takes place behind the Washington curtains. The Obama administration has again postponed the deadline for its "grand" report/scheme on what's going to be done with Fannie Mae and Freddie Mac. What else is new? They'll have to come with something, though, and soon.
There is no perfect solution to the conundrum. Not even close. There are only terribly bad "solutions" on the table. And the one that will be picked is sure to benefit Wall Street and screw over Main Street yet again. Only, you're going to be screwed on this one an order of magnitude greater than anything you've seen so far.
And that's what you should take away from the rising stock markets. They're not signs of a recovery. They're signs of an ongoing and accelerating wealth transfer behind the scenes. And Fannie and Freddie provide a great example of just that.
On Monday, Fannie and Freddie's stock both went up some 20%. On Tuesday, when the home prices indices were known, both rose around 30%. The total price increase in the past month has been about 100%. Note that Fannie Mae and Freddie Mac were delisted from the NYSE on June 16, 2010, and are presently traded on the Over-the-Counter Bulletin Board "as long as there is trader interest". Well, there's plenty of that, apparently: trading volumes are high.
Note also that it's, frankly, insane to allow commercial trade in shares of companies which have received hundreds of billions of dollars in bail-outs, and which have further potential losses on their books that run into the trillions of dollars. That is perhaps best described by a term like Moral Hazard Squared: the recent uptick in Fannie and Freddie shares has a whole lot to do with expectations and/or insider information about the imminent White House decisions on the future of the GSEs.
It's unsure whether the option of handing their "golden status" of operating with implicit 100% government guarantee to Wall Street will be fully implemented. But the very fact that it's even considered should tell you enough. What is indeed certain is that the only option that makes sense, namely to mark to market everything on Fannie and Freddie's books, distribute haircuts in a fair manner and get it all over with, is off the table (if it were ever on). What Geithner et al are doing, and having a hard time with, is trying to find a way to assure that the toxic paper inside Fannie and Freddie doesn't contaminate Wall Street any more than it already has.
I have many times called Fannie Mae and Freddie Mac (plus the FHA, FHFA, Ginnie Mae, the whole quasi-governmental criminal enterprise), the greatest perversity and the biggest crime ever perpetrated on the American people. There have always been, and always will be, voices that claim the GSEs have been beneficial to the people, that they make homes more affordable for Jack and Jill. And you know what, maybe that's been true once, many, many, years ago. But the very idea behind them has also always been the ideal tool for Wall Street to squeeze every last drop out of homebuyers, turn them into debt slaves, and throw them out of their homes when the last drop has evaporated.
That this is so should be clear to everyone now. But it's too late to solve the issue in a way that will not bring a world of pain to Americans. The banks control Washington, cue: JPMorgan icon Bill Daley as Obama's new chief of staff, and the banks stand to lose their shirts and then some if Fannie and Freddie are dissolved in any possible way that is aimed at minimizing the suffering of the herd of US citizens.
Who are not rising up in protest anyway like the Tunisians and Egyptians do, no more than the British, since they're not aware that it's moments like these that seal their fates. Our people are watching the stock markets, listening to pundits and politicians, and telling themselves things are looking up and prosperity is just around the corner.
One headline after yesterday's State of the Union said: "Obama sees global fight for US jobs". Mother of God, how cynical is that? Who are you going to fight for those jobs? The Chinese, who make $1 or $2 an hour? You, with your $300,000 mortgage?
Mervyn King, the Governor of the Bank of England, is damned right that the standard of living will plunge at the fastest rate since the 1920s. And it won't just be in England. The same thing will happen in North America. As we at The Automatic Earth have long since maintained, we think it will be worse than the 1920s, because the relative levels are much worse, and corruption on the one hand and complacency on the other are much further evolved.
Mervyn King is not right when he says there's nothing that can be done, though. And that has to do with the fact that we are not -only- in a financial crisis. We are in a political crisis, in which politicians elect to pursue not the interests of their constituents, but of those that donate most to their campaigns. Voting out incumbents doesn't solve this: 99% of all parties and politicians at all levels proceed along these same lines.
The only thing that could possibly work is to get money out of politics. Alas, money IS politics today. 1920s it is, then. Might as well get ready.
Shock as UK economy shrank by 0.5% at end of 2010
by Graeme Wearden - Guardian
The UK economy shrank by a shock 0.5% in the last quarter of 2010 as Britain's recovery from recession faltered. Most of the unexpected contraction was caused by the wintry weather that gripped Britain last month, the Office for National Statistics said. Without it, GDP would probably have been flat – suggesting that the UK economy had already run out of steam before the snow hit.
Economists said the first estimate of GDP for the last quarter was much worse than expected, and meant that Britain could now suffer a double-dip recession. With inflation hitting 3.7% last month, there are also growing fears the UK is heading for an unpleasant dose of "stagflation". The eagerly awaited GDP figures put the government's austerity programme under fresh scrutiny, with Labour again arguing that cuts are being made too deeply, and too rapidly.
"With families and businesses already facing both rising unemployment and rising inflation, the fact that the economy is now shrinking means the Conservative-led government's claims to have saved the economy and secured the recovery will ring very hollow indeed," said shadow chancellor Ed Balls. "It is now becoming even clearer that when David Cameron and George Osborne complacently congratulated themselves in the autumn for securing economic recovery, this was in fact the result of decisions taken by the Labour government to get the economy moving again," Balls added.
Osborne, though, refused to change tack despite the evidence that Britain's economy shrank last quarter. "There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month," he said. "That would plunge Britain into a financial crisis. We will not be blown off course by bad weather," Osborne added.
The data sent the pound falling by nearly one and a half cents against the dollar to $1.575, and pushed the FTSE 100 index down by 36 points. Deputy prime minister Nick Clegg said Britain's economic recovery was still in its "early days". He said: "The government has been doing the difficult work of putting the building blocks in place."
Yesterday, though, the outgoing head of the CBI claimed that the government had failed to create a credible growth strategy. Labour MP Chuka Umunna claimed Cameron's administration was "a government of bystanders". He said: "Even accounting for the snow, today's ONS figures show the Conservative-led government has no policies for growth."
The ONS reported that the services sector – the dominant part of the UK economy – shrank by 0.5% in the last quarter. Construction suffered a 3.3% decline, but industry grew by 0.9%. Data released earlier this month had shown that services suffered a sharp drop in activity in December, when snow and ice prevented many people from reaching their offices or the high street. Output in the construction industry also slowed last month, which analysts blamed on public sector cutbacks and the weather.
Alasdair Reisner, of the Civil Engineering Contractors Association, urged the government to do more to support the construction industry, or risk a further contraction in the economy. "It is clear that a downturn in activity in the industry has an impact that is felt far beyond the site fence, acting as a brake on the country's ambitions to return to growth," said Reisner.
High street firms also suffered from the snow, with the retail sector suffering its worst December in 12 years. City experts had expected GDP to grow by anything from 0.1% and 0.7% – with last month's weather making predictions harder. George Buckley of Deutsche Bank said today's 0.5% decline was "quite shocking", and questioned whether the snow could really be blamed for the drop in economic activity. Hetal Mehta at Daiwa Capital Markets said it was "an absolute disaster for the economy". "It seems that the economy is incredibly vulnerable, and with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride," Mehta said.
Charles Davis, managing economist at CEBR, was concerned that the UK economy experienced a "complete loss of momentum" at the end of last year. "Few of us could have expected such a sharp contraction in output and the United Kingdom economy now faces the prospect of returning to recession," Davis warned. On a year-on-year basis, GDP during the quarter was 1.7% higher than in the last three months of 2009 – sharply slower than the 2.6% growth expected in the City.
Some economists predicted that the data could well be revised upwards in the coming weeks. Usually the ONS has little data from the final month of any quarter when it publishes its first estimate of GDP. This time, though, it put extra effort into trying to quantify the impact of the snow in December.
Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said he was sceptical that the economy had shrunk as much as the ONS reported. "These figures are quite staggering and scarcely believable. No doubt this will mostly be attributed to the snow, and that undoubtedly would have had a significant effect. However, the ONS have also said that GDP would have been flat had we not had that disruption and quite simply that does not square with what any of the survey indicators are telling us," Goodwin said.
An early interest rise also looks less likely, according to Howard Archer of IHS Global Insight. "Given that the contraction in GDP in the fourth quarter occurred even before the fiscal tightening had really kicked in, it reinforces already serious concern over the economy's ability to grow significantly in the face of the spending cuts and tax hikes that will increasingly bite as 2011 progresses," he said.
Bank of England chief Mervyn King: standard of living to plunge at fastest rate since 1920s
by Robert Winnett - Telegraph
Households face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again.
Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis, Mervyn King warned. With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years, he claimed. Mr King issued the warning in a speech in Newcastle upon Tyne after official figures showed that gross domestic product fell by 0.5 per cent during the final three months last year. The Government blamed the unexpected reduction — the first since the third quarter of 2009 — on the freezing weather that paralysed much of the country last month.
But there were fears that the country was poised to slip back into recession, defined as two successive quarters of negative growth. Economists said the situation was “an absolute disaster”. Labour accused ministers of jeopardising recovery by pushing ahead with public spending cuts too quickly. Mr King said he was unable to offer any imminent hope of a rise in interest rates in coming months because of the poor economic outlook. Savers and “those who behaved prudently” would be among the biggest losers in the squeeze, he admitted.
Disposable household income has been hit by sharp increases in the cost of food, fuel and tax, coupled with restricted wage rises for most workers. Last year, take-home pay fell by about 12 per cent, official figures showed, and the trend was expected to continue in 2011. The governor warned that the Bank “neither can, nor should try to, prevent the squeeze in living standards”. He said that the economic figures were a reminder that the recovery will be “choppy”. However, he said the biggest threat facing the Bank’s Monetary Policy Committee, which sets interest rates, was rising inflation.
The Bank is expected to use interest rates to keep inflation below two per cent, but the governor said inflation could rise “to somewhere between four per cent and five per cent over the next few months”. He claimed that rising inflation had been caused largely by increases in global oil and commodity prices, and tax rises such as the increase in VAT introduced at the beginning of the year, which the Bank was powerless to control.
“In 2011, real wages are likely to be no higher than they were in 2005,” he said. “One has to go back to the 1920s to find a time when real wages fell over a period of six years. “The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.” Mr King insisted that the Monetary Policy Committee could not have increased interest rates from their current record low level to tackle the rise in inflation.
“If the MPC had raised the Bank Rate significantly, inflation might well have started to fall back this year, but only because the recovery would have been slower, unemployment higher and average earnings rising even more slowly than now,” he said. “The erosion of living standards would have been even greater. The idea that the MPC could have preserved living standards, by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking.”
He added: “Monetary policy cannot be based on wishful thinking. So, unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal.” “The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy.”
The comments represented one of the governor’s starkest warnings yet. His claim that the banking crisis was behind the ongoing squeeze on living standards comes at a sensitive time, as banks prepare to announce multi-million pound bonuses for their executives. Mr King expressed sympathy for savers and highlighted the failure of lenders to pass on cuts in interest rates. “I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis,” he said. “But a return to economic stability from our fragile condition will require careful and well-judged steps looking beyond the next few months.”
Addressing the problems of borrowers, he added: “Households and small businesses with little housing equity may be unable to borrow at all or are able to borrow only in the unsecured market – where rates are much higher than before the crisis.”
How to Solve the Housing Crisis: Jobs, Jobs, Jobs
by James C. Cooper - The Fiscal Times
Washington has thrown billions at the housing slump over the past two years in an effort to support demand, keep people in their homes, and limit foreclosures. However, the simple truth is that any meaningful recovery in housing must come through the labor markets. Stronger job growth will boost home demand, reducing inventories. It will prevent defaults, thus limiting additions to inventory, and it will strengthen credit quality, facilitating lending. No mix of ad hoc housing policies can accomplish all that.
• Just 357,000 households were formed last year, a 60-year low.
• Household formation by those younger than 35 is down 600,000 since 2007.
• 180,000 new jobs per month would create 1.6 million new households by early 2012.
Improving job markets and income growth toward the end of last year are already having a positive impact on home demand, but the recovery has a long way to go. Sales of existing homes in December posted their fifth gain in the last six months, jumping 12.3 percent from November, the National Association of Realtors said last week, but demand is still 2.9 percent below December 2009. "The recovery will likely continue as job growth gains momentum and rising rents encourage more renters into ownership while exceptional affordability conditions remain," said NAR chief economist Lawrence Yun.
The crucial role of the labor markets is most visible in the stunning decline during the recession in household formations. Last year only 357,000 new households were started, a record low going back more than 60 years. That pace is down sharply from 1.6 million in 2007 and from an average of 1.3 million per year from 2002 to 2007. The latest Census data put the total number of households at 117.5 million. If household formation had continued on its trend over the past two decades, the total last year would have been about 3.5 million more.
In the long run, the growth of new households mainly reflects population growth and demographics, but in the short run household formation is particularly sensitive to job-market and general economic conditions. The plunge in the willingness and ability of people to start a household, especially among college students, young graduates, and new immigrants, has been a heavy blow to home demand. It has also been a major deterrent to reducing the glut of home inventory, despite the nosedive in housing starts to record lows.
Poor economic conditions, including a 9.4 percent unemployment rate, affected many of the basic supports under the growth of new households. Census data show that rates of immigration, marriage, and divorce, which are key drivers of household formation, have each dropped far below their trends of recent years. Population growth has slowed, but household formation has slowed much more, suggesting a new "doubling up" phenomenon, especially among younger adults choosing to share apartments and homes or to live with their parents. Over the past three years, Census numbers show that new households increased by 1.5 million, but the number headed by people aged 34 and under shrank by 600,000.
The sharp drop in household formation explains why the collapse in home construction has done little to reduce the supply of unsold homes. Housing starts, which stood at a 529,000 annual rate in December, fell to less than 600,000 units in both 2009 and 2010, from a peak of more than 2 million in 2005. About 250,000 homes need to be replaced each year due to fires, natural disasters, or old age. That replacement rate, plus less than 400,000 new households formed in 2009 and 2010 means that current demand is about sufficient to absorb the new construction, but is too weak to soak up the inventory of vacant or otherwise unsold homes.
The homeowner vacancy rate continued to hover at 2.5 percent last year, well above the 1.7 to 1.8 percent economists say is needed to stabilize prices, and the NAR said it would take 8.1 months to sell the December inventory, far above the more normal 4 to 5 months supply. Plus, even more inventory is lurking in the shadows as foreclosures continue to rise and banks put their repossessed properties back on the market.
Clearly, a faster pace of household formation is crucial to restoring the supply and demand balance so important for home prices. At the 2002-2007 trend of 1.3 million new households per year, plus replacement, underlying demand would be about 1.5 million per year. With housing starts below 600,000, one would expect inventories to shrink by about 900,000 homes per year. At those rates, the supply of unsold homes would have been significantly reduced by now.
All is not lost, however, as long as economists are right about faster job growth this year. Analysts at JPMorgan Chase say their models uniformly show that stronger job growth leads to faster growth of new households. Moreover, when the unemployment rate is unusually high, as it is now, it creates pent-up demand among people who would like to have their own home but are forced to double up. The analysts estimate that if payroll gains average 180,000 per month this year, household formation will accelerate sharply, to roughly 1.6 million by early 2012. "If these estimates are anywhere close to right, housing vacancies will recede noticeably over the coming year," says JPMorgan economist Robert Mellman.
The problem: Even if job growth picks up on schedule, it’s a long way between here and there. One major risk, especially to prices, is the shadow inventory. In addition to the more than 4 million homes now on the market, more than 2 million homes are either in foreclosure, at least 90 days past due, or taken by the lender and not yet listed for sale. Also, credit standards, which are easing generally, remain tight for home loans, and with one in four homeowners underwater on their mortgage, the incentive to default and walk away remains high.
Past policy efforts will continue to nip around the edges of the housing slump, by reducing some of these risks. However, only stronger job markets and the confidence they instill can make people more willing and able to start a new household, which is crucial to restoring the balance between home supply and demand.
Home prices fall 1.0% in November: Case-Shiller
by Greg Robb - MarketWatch
Home prices fell 1% in November from October in 20 major U.S. cities, according to the Case-Shiller home-price index released Tuesday by Standard & Poor’s. It marked the fourth straight monthly decline for prices. Prices have fallen 1.6% in the past year, marking the second consecutive decline. This is a faster decline than the 0.9% decline in October. Prices fell in 19 of 20 metropolitan areas tracked by Case-Shiller on a month-to-month basis. The data are not seasonally adjusted. David Blitzer, chairman of the index committee at Standard & Poor’s, said the data underscore broad-based weakness in home prices. The only bright spots are Southern California and the Washington, D.C., area, he said.
In a separate report, the Conference Board said consumer confidence hit its highest level since last May. Stocks cut their losses after the confidence data was released. The Dow Jones Industrial Average was recently down 0.5% at 11,922 Treasurys gave up gains and the dollar added to its rise after the confidence data was released.
Prices are suffering after sales dropped when the home-buyer tax credit expired last summer, economists said. Some of them say prices may stabilize soon, however, after data showed existing-home sales jumped in December to the highest level in eight months. But other economists are skeptical.
"Given a pipeline of distressed properties that is at least two years of supply, the downward pressure on prices will be with us through 2011 even if we see some improvement in housing demand," wrote Yelena Shulyatyeva, economist with BNP Paribas in a note to clients. From a longer-term perspective, Josh Shapiro, chief U.S. economist at MFR Inc., noted that in the seven years leading up to the peak in July 2006, the non-seasonally-adjusted national 20-city home-price index jumped by 155%. So far, this index has dropped by 30% in the 53 months since the peak, he said.
As for the latest Case-Shiller data, the biggest month-to-month decline came in Detroit, where November prices fell 2.7%. This was followed by Chicago, where prices fell 2.2%, and Minneapolis, where prices fell 2.1%. In the past year, prices were lower in 17 of 20 cities. The largest annual decline, 7.9%, was seen in Atlanta. Only four cities — Los Angeles, San Diego, San Francisco and Washington D.C. — showed year-over-year gains.
Eight cities — Atlanta, Charlotte, Detroit, Las Vegas, Miami, Portland, Seattle and Tampa — hit their lowest levels since home prices peaked in 2006 and 2007, meaning that home prices in these markets have fallen below the lows set in spring 2009. More broadly, Blitzer said the 20-city index could fall below its April 2009 low before spring.
Home Prices Fell 4.3% in November From Year Earlier, FHFA Says
by Kathleen M. Howley - Bloomberg
U.S. home prices dropped 4.3 percent in November from a year earlier as the housing market struggled to emerge from the worst crash in seven decades, according to the Federal Housing Finance Agency. The decline was led by an 11 percent slump in the region including Colorado, Nevada and Montana, the agency said in a report today. National prices were unchanged from October.
Mounting foreclosures are depressing home values as unemployment above 9 percent saps real estate demand. The share of people who said they intended to buy a home fell to 1.7 percent in November, matching the level at the end of 2009 that was the lowest in more than four decades, according to the New York-based Conference Board. "The more jobs there are, the more people you have who are willing to buy houses," Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts, said in an interview before the report.
The unemployment rate rose to a seven-month high of 9.8 percent in November before dropping to 9.4 percent in December, according to the Bureau of Labor Statistics. The FHFA measures transactions of homes financed with mortgages backed by Fannie Mae or Freddie Mac. The data are based on repeat sales transactions that compare prices of the same properties over time. A separate report today showed home values in 20 U.S. cities fell 1.6 percent in November. The decline in the S&P/Case-Shiller index was the biggest in a year. As measured by the National Association of Realtors in Chicago, the median home price was $170,200 in November, the period covered by the government report.
FHFA: More (Bad) Housing Data
by Sold At The Top - Seeking Alpha
Today (Tuesday), the Federal Housing Finance Agency (FHFA) released the latest results of its monthly house price index (HPI) showing that, nationally, home prices were flat at 0.06% since October but dropped a notable 4.42% below the level seen in November 2009.
The FHFA monthly HPI are formulated from home purchase information collected from mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac.
The Housing Crash: Blame It On Saturday Night Live
by Doug Short - Dshort.com
And now for a bit of whimsy in the wake of today's depressing Case-Shiller update. I was reviewing the latest housing data at Calculated Risk and had a mental flashback to August 2009, when I originally posted this hilarious SNL skit, Don't buy stuff you cannot afford.
I speculated at the time that the skit iself was the true cause of the housing collapse. Why? A bit of research on the tv.com website turned up the date of the original skit airing: February 4th 2006. With this in mind, let's have a look at Calculated Risk's latest S&P Case-Shiller Index chart, to which I've highlighted the SNL date.
So now we understand what REALLY caused the collapse of the housing market. Everyone who watched this SNL episode stopped buying houses they couldn't afford.
The Next Robo-Signing Crisis?
by Diana Olick - CNBC
It's the next big shoe to drop in the robo-signing foreclosure scandal. Call it part two.
We already know banks halted foreclosure sales when it was discovered that servicers took short cuts, so-called "robo-signing" in the foreclosure sale process in judicial foreclosure states -about half the country. Now it appears they may have done the same thing in the Notice of Default process which takes place in the other half - i.e. the non-judicial states. (Judicial foreclosures are those that are processed through the courts whereas non-judicial are processed without court intervention.)
A Notice of Default is the notice sent out in non-judicial foreclosure states that alerts the borrower that the official foreclosure process has begun. It is also filed with the county recorders office and allows the notice of foreclosure sale to be published. What's so important is that this is the process in California, Nevada and Arizona (AZ is both judicial and non-judicial), which have three of the top four foreclosure rates.
Last week an article from American Banker titled, "New Point of Foreclosure Contention: Default Notice" circulated widely among the folks who follow the mortgage mess. It talked about how several lawsuits are now being filed contending that the Notice of Default process was flawed and the foreclosure therefore invalid.
As this article was circulating, a source pointed me to the fact that Notices of Default had dropped off dramatically since October, especially in California. In fact, Foreclosure Radar shows it quite clearly. Foreclosure Radar's Sean O'Toole wasn't ready to say the banks had cut off Notices of Defaults but did say, "given the issues raised, we certainly wouldn't be surprised to see a slow down of foreclosure activity in non-judicial states."
So we contacted Bank of America, and spokesman Dan Frahm said:"As part of our voluntary, comprehensive review of the modification and foreclosure process we launched in October of 2010, we did conduct a review of the Notice of Default process. As a result, we stopped the NOD process in the non judicial states while we completed that review and, later, implemented and tested the resulting process improvements. We announced in December our foreclosure restart – starting with vacant and non-owner occupied properties – and ramp up of that volume continues, as does the related NODs."
They then said they had "improved" the process, and we would see volume increase soon, if not already. "Based on the American Banker story you referenced and the notion this is the potential next issue, I feel good knowing we addressed NOD as part of our rigorous voluntary review and testing process," added Frahm. JP Morgan Chase is still getting back to us. Wells Fargo tells us they did not stop NOD's.
What does it mean going forward? "This prolonged curtailment in NOD volume will lead to fewer foreclosure completions in 2011 than forecast," notes mortgage consultant Mark Hanson. "After four months of total uncertainty over the entire foreclosure process nationwide, it will have consequences on the mortgage, housing, and related sectors." Hanson says distressed loan pipelines are "poised to get out of control beginning in Q1"
UPDATE: JPM tells CNBC, "We stopped notices of default in some states (not all)."
Vampire Squid? Big Government? Crisis report splits
by Kevin Drawbaugh and Dave Clarke - Reuters
Three competing, politically charged tales of the financial crisis will emerge this week when a U.S. congressional panel finally concludes its 20-month investigation.
The Financial Crisis Inquiry Commission has failed to produce a consensus explanation of the 2007-2009 banking debacle, as it was asked to do in May 2009. Instead, the 10-member panel has fractured along the same ideological fault lines that divide much of political Washington. Three reports will be issued by commission members on Thursday, each conforming with a familiar political slant. The divisiveness that split the commission is also in evidence in the rollout of financial reforms that followed the crisis. The setting of position limits for commodity markets has been delayed, for instance, and Republicans are threatening to withhold funding for agencies implementing the reforms.
The crisis panel's six Democrats, including Chairman Phil Angelides, will offer a report focused on the greed and power of Wall Street, a lack of effective regulation and the "shadow banking" system, said people familiar with the document. Derivatives markets will come in for sharp criticism from the Democrats, along with a 1999 law that allowed bank holding companies to move into other financial businesses, and the immense influence of Wall Street on government.
One person, who asked not to be identified, compared the Angelides report to the "vampire squid" view of bankers preying on the public, captured by journalist Matt Taibbi's description of Goldman Sachs Group Inc as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." Republican commission member Peter Wallison will offer his own dissenting report that largely blames the crisis on the housing policy of "big government." This well-worn GOP view is shared by conservative foes of Fannie Mae and Freddie Mac, the troubled giants of mortgage finance.
Three other Republican commission members will offer a separate account of the crisis. People familiar with it said it will downplay the banks' culpability and clout and stress a confluence of global trends in tracing the origins of the devastating crisis that peaked in late 2008. "It is what it is," Douglas Holtz-Eakin, a Republican commission member said of the lack of a single narrative coming out of the commission's work.
"We know where Peter Wallison is, and in my view the majority went too far to the left for me to sign on. So we ended up in the middle," Holtz-Eakin told Reuters regarding the report he will issue with former GOP Representative Bill Thomas and former Bush White House economic adviser Keith Hennessey. That dissent, like Wallison's, will be attached to the main report being released by Angelides and the Democrats.
The commission is also expected to disclose texts of interviews and documents it obtained in its investigation. "We are less interested in the official report, given the partisan divide, but believe the source documents create significant headline risk for the big banks, the housing enterprises and the regulators. The issue is how much will be released and when will it be released," said MF Global research analyst Jaret Seiberg.
A year ago, the commission hauled some of banking's heaviest hitters into public hearings for questioning. Goldman Sachs Group Inc Chief Executive Lloyd Blankfein, JPMorgan Chase & Co CEO Jamie Dimon and former Citigroup executives testified to the panel. Angelides noted pointedly as the commission got going in mid-2009 that it would have the power to refer cases for criminal prosecution, but that now seems unlikely to occur.
One Wall Street investor, focused on the still-unfolding Basel III global bank capital accord, said the congressionally appointed commission's potential findings were "already in the past. "What else is it going to tell us? That we were light on capital and light on reserves? We know that, and that's already going up on Basel III," the investor said.
Financial Meltdown Was ‘Avoidable,’ Inquiry Concludes
by Sewell Chan - New York Times
The 2008 financial crisis was an "avoidable" disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a Congressional inquiry. The government commission that investigated the financial crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors, and risky bets on securities backed by the loans.
"The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done," the panel wrote in the report’s conclusions. "If we accept this notion, it will happen again." While the panel, the Financial Crisis Inquiry Commission, accuses several financial institutions of greed, ineptitude, or both, some of its most grave conclusions concern government failings, with embarrassing implications for both political parties.
Many of the findings have been widely described, but its synthesis of interviews, documents and testimony, along with its government imprimatur, give it a sweep and authority that the commission hopes will shape the public consciousness. The full report is expected to be released as a 576-page book on Thursday. When the bipartisan commission was set up in May of 2009, the intent of Congress and the president was to produce a comprehensive examination of the causes of the crisis.
The report, aimed at a broad audience, was based on 19 days of hearings as well as interviews with more than 700 witnesses; the commission has pledged to release a trove of transcripts and other raw material online. The document is intended to be the definitive account of the crisis’s causes, but its authors may already have failed in achieving that aim. Of the 10 commission members, only the 6 appointed by Democrats endorsed the final report. Three Republican members have prepared a dissent; a fourth Republican, Peter J. Wallison, a former Treasury official and White House counsel to President Ronald Reagan, has written his own dissent, calling government policies to promote homeownership the primary culprit for the crisis.
The commission’s report finds fault with two Fed chairmen: Alan Greenspan, a skeptic of regulation who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but then played a crucial role in the response to it. It criticizes Mr. Greenspan for advocating financial deregulation and cites a "pivotal failure to stem the flow of toxic mortgages" under his leadership as "the prime example" of government negligence.
It also criticizes the Bush administration’s "inconsistent response" to the crisis — allowing Lehman Brothers to go bankrupt in September 2008 after earlier bailing out another bank, Bear Stearns, with help from the Fed — "added to the uncertainty and panic in the financial markets." Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly it turned out — that the subprime meltdown would be contained, as the report notes. Democrats also come under fire. The 2000 decision to shield over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s time in office is called "a key turning point in the march toward the financial crisis."
Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now President Obama’s Treasury secretary, also comes under criticism; the report finds that the New York Fed "could have clamped down" on excesses by Citigroup in the lead-up to the crisis and, just a month before Lehman’s collapse, was "still seeking information" on the vulnerabilities from Lehman’s exposure to more than 900,000 derivatives contracts.
Former and current officials named in the report, as well as financial institutions, declined on Tuesday to comment on the report before it was released , or did not respond to requests for comment. The report is likely to reignite debate over the outsize influence of Wall Street; it says that regulators "lacked the political will" to scrutinize and hold accountable the institutions they were supposed to oversee. The financial sector spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with the industry made more than $1 billion in campaign contributions.
The report does knock down — at least partly — several early theories for the crisis. It says the low interest rates brought about by the Fed after the 2001 recession "created increased risks" but were not chiefly to blame. It says that Fannie Mae and Freddie Mac, the mortgage finance giants, "contributed to the crisis but were not a primary cause." And in a finding likely to anger conservatives, it says that "aggressive homeownership goals" set by the government as part of a "philosophy of opportunity" were not major culprits.
On the other hand, the report is unsparing in its treatment of regulators. It finds that the Securities and Exchange Commission failed to require big banks to hold more capital to cushion losses and halt risky practices, and that the Fed "neglected its mission" to protect the public. It says that the Office of the Comptroller of the Currency, which regulates national banks, and the Office of Thrift Supervision, which oversees savings-and-loans, blocked state regulators from reining in lending abuses because they were "caught up in turf wars."
"The crisis was the result of human action and inaction, not of Mother Nature or computer models gone awry," the report states. "The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble."
Portions of the dissents are included in the report, which is being published as a paperback book (with a cover price of $14.99) by PublicAffairs, along with an official version by the Government Printing Office. The commission’s chairman, Phil Angelides, a Democrat and former California state treasurer, has tried to keep the book under wraps, even directing the publisher to prevent bookstores from getting it before the eve of the Thursday release. He declined to comment.
The report’s immediate implications may be felt more in the political realm than in public policy. The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, takes as its premise the same regulatory deficiencies cited by the commission. But the report is sure to factor in the looming debate over the future of Fannie Mae and Freddie Mac, which have been government-run since 2008. Though the report documents questionable practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of bumbling incompetence, among corporate chieftains.
It quotes Citigroup executives admitting that they paid little attention to the risks associated with mortgage securities. Executives at the American Insurance Group, another bailout recipient, were found to be blind to its $79 billion exposure to credit default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by risky home loans. At Merrill Lynch, top managers were caught unaware when seemingly secure mortgage investments suddenly resulted in billions of dollars in losses.
By one measure, the nation’s five largest investment banks had only $1 in capital to cover losses for about every $40 in assets, meaning that a 3 percent drop in asset values could wipe out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant "shadow banking system" in which the banks relied heavily on short-term debt.
"When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans and the risky assets all came home to roost," the report found. "What resulted was panic. We had reaped what we had sown." The report is dotted with literary flourishes. It calls credit-rating agencies "cogs in the wheel of financial destruction." Paraphrasing Shakespeare’s Julius Caesar, it states, "The fault lies not in the stars, but in us." Of the banks that bought created, packaged and sold trillions of dollars in mortgage-related securities, it says: "Like Icarus, they never feared flying ever closer to the sun."
What to do with Fannie And Freddie
by John Hempton - Bronte Capital
There are a bunch of ideologues out there with solutions to the Fannie and Freddie situation. They argue that government intervention has to end and then propose a system with a permanent role for government. It is not just nonsensical - it is usually in the interest of some large financial institution. All they want is Frannie out of their part of the business. They like government subsidies in the rest of their business.
Anyway I have the free market solution to the Fannie and Freddie situation - and - I hate to say it - it is dead obvious. Answer: raise Frannie’s pricing.
At the moment there is nobody doing conforming mortgages except Fannie and Freddie. Indeed there is almost nobody doing mortgages of any kind except Fannie and Freddie. If the free market wants the business they can have it. (They just don't want it at this sort of interest rate spread - and I don't blame them.)
All the government need to do is tell Frannie to raise their price a little each quarter. Currently they charge 20-25bps for guaranteeing mortgages. (The free market won’t take credit risk at that price.) So it is entirely open to the FHFA (and hence the Treasury) to tell Fannie and Freddie to raise their prices by 5bps. The government will get paid better for the risk they are taking (and what free market ideologue will disagree with that) and the private sector can compete if they want to.
I doubt the free market will. But then in a quarter or two Frannie can raise their pricing by another 5 bps. And a quarter or two later Frannie can raise by another 5bps. At some stage you will get to a level where the private sector chooses to compete. Frannie should not set its price competitively though. In another quarter they should raise the price another 5bps. And in another quarter they should raise again. Over time Frannie will become non-competitive. It will shrink simply because bankers and mortgage brokers do not bring it business. And so Frannie is put into market chosen run-off and the business is effectively privatized.
You can do the same thing with Frannie's portfolio - you could ask them to raise their internal revenue exectations on any mortgage they buy by 5bps. They might buy less - they may not. Don’t limit the size of the portfolio: raise the profitability of the portfolio. When another quarter elapses raise spreads by another 5bps. Eventually of course the private sector won’t bring Frannie business - and so Frannie will shrink. If you want the government to keep supporting the housing market (an object of policy it seems) then you just slow the rate of price increase down. Do 5bps per half rather than 5bps per quarter - or even 8bps per year for a slow exit.
Over time the government will make a full exit from the mortgage business. Along the way the taxpayers recover as much money from Frannie as possible. If you look at my long series on Fannie and Freddie and compare my model predictions to current results you will notice that the credit losses are lower than my projections. The revenue however is much lower than my projections. The lower projected revenue has been a government choice: the Government has been forcing Frannie to charge lower spreads to support the housing market.
This is so obvious it is painful: if you want to remove the subsidy remove the subsidy. If you want to do it slow do it slow.
So why can’t anyone see it?
Every proposal for the government to get out of Fannie and Freddie is in reality a proposal for the government to get out of only a bit of Fannie and Freddie. For example: if you are a business that likes managing interest rate risk you want Fannie and Freddie out of the interest rate risk management business but you want them to stay in the credit risk management business. You would prefer the government take the risks that you don’t want. And moreover you would prefer they took it at the lowest possible price.
The worst proposal out there (much worse than doing nothing) comes from Phil Swagel and Don Marron. They propose that the government exit the interest rate risk management business (the only business at Frannie that never lost money) and allow ten or so new competitive companies with government guarantees to compete with each other to sell government guarantee of credit risk. That means that credit risk (the risk that blew up the system) will be priced as close as possible to zero with the government wearing the downside. I can't see that Swagel and Marron learnt anything from the crisis.
But Swagel and Marron are an extreme variant of the typical proposal. Everyone’s proposal involves getting Frannie out of their business whilst leaving subsidies (preferably increasing subsidies) in the parts of the value chain they don’t compete in. Every proposal is thus about maximizing profits of some financial institution whilst sticking those risks that they don't want to the government.
Are you surprised?
More rumors surface on future explicit guarantee of Fannie Mae MBS
by Jon Prior - Housing Wire
Bank of America Merrill Lynch analysts say there are rumors the Treasury Department will recommend an explicit guarantee from the government for Fannie Mae mortgage-backed securities in its white paper due out in February.
The Dodd-Frank Act called for the Obama administration to release a plan for the future of the government-sponsored enterprises by Jan. 31, but The Wall Street Journal reported over the weekend that the deadline may be pushed back to the middle of February. There is much debate within Congress on how much of a role the government should play in the future of housing finance, specifically whether or not taxpayers should support securities if they go bad.
"There is some chatter that GSE Reform, which is supposed to be launched officially within the next week or so with the release of the Treasury White Paper on the topic, will lead to an explicit guarantee for FNMA MBS," BofAML analysts wrote in a report. Credit Suisse analysts said earlier in January they expect a government guarantee to be set in stone when the Treasury makes its report.
Still, the consensus is that GSE reform is several years away. Any solution will demand congressional action, and with the House and Senate sparring over healthcare reform and a possible repeal of Dodd-Frank, investors may be waiting some time for action. The February issue of HousingWire magazine explores the many possible futures of Fannie and Freddie Mac.
In the meantime, BofAML analysts believe headline volatility may produce buying opportunities on Ginnie Mae and Fannie Mae swaps. "We remind investors that GSE Reform will most likely be a multi-year process that likely will be accompanied by many volatility-inducing headlines," the analysts said. "As a general principal, we recommend fading the volatility, as we think the duration of the process means that shorter-term forces will be the primary drivers of price action on a short-to-intermediate term basis."
IMF Says U.S. Must Move Quickly on a Housing Finance Overhaul
by Lorraine Woellert - Bloomberg
The International Monetary Fund said the U.S. should move quickly to restructure its mortgage system as it urged nations to repair their balance sheets. "An overhaul is needed of the U.S. housing finance system," including the government-controlled mortgage companies Fannie Mae and Freddie Mac, the IMF said. "The authorities should not delay efforts to create an action plan for the future."
The comments were part of an update to the IMF’s semi- annual Global Financial Stability Report, which was posted on the fund’s website today. Fannie Mae and Freddie Mac "could be either privatized or converted to public utilities with an explicit (and explicitly funded) guarantee," the IMF said. The group had suggested those ideas in its October report, along with a third option of simply winding down the companies and using bonds and private-market securities to finance mortgages.
The IMF said the U.S. also needs to mitigate financial fallout from the inventory of properties that are in foreclosure or owned by lenders. That shadow inventory "is likely to dampen house prices for some time to come and exacerbate negative home equity problems." The group said that the U.S. and other nations must address "the negative feedback loop" between financial stability and the sovereign debt. "Pressing forward with the regulatory reform agenda -- for both institutions and markets -- continues to be crucial," the IMF said.
Officials with the Obama administration said yesterday that the U.S. Treasury Department will miss a January deadline for releasing its housing revamp plan. Instead, the proposal will be issued in mid-February. The U.S. housing system has yet to recover from the fallout of a lending boom that collapsed in 2008. That year, the Treasury took control of Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, which own or guarantee more than half of all U.S. mortgages.
Since then, the government-sponsored entities, or GSEs, have drawn more than $150 billion in taxpayer aid to remain solvent as home-loan delinquencies rise. Republicans in Congress say they will introduce legislation to phase out Fannie Mae and Freddie Mac. In its October report, the IMF said the "future creditworthiness" of the U.S. government depends on creating a system that doesn’t subsidize housing costs "for political ends by accumulating contingent liabilities to the U.S. taxpayer."
Judge temporarily delays mass loan document shredding
by Scot J. Paltrow - Reuters
A U.S. bankruptcy judge temporarily blocked bankrupt subprime lender Mortgage Lenders Network USA from destroying 18,000 boxes of original loan files after federal prosecutors said documents in them may be needed as evidence in more than 50 criminal investigations.
In a hearing Monday before U.S. Bankruptcy Judge Peter J. Walsh, a representative from the Delaware U.S. Attorneys' Office said she did not know details of any of the investigations. But she said prosecutors and FBI offices around the country had requested time to access to the boxes and assess whether the contents contain needed evidence before the judge permits any destruction. Walsh granted a 30-day delay, and said he would hold another hearing on Mortgage Lenders' request.
A series of recent court rulings have increased the importance of original loan documents, holding that they are essential for investors to prove ownership of mortgages and to have the right to foreclose. Connecticut-based Mortgage Lenders Network closed down and filed for bankruptcy protection in February 2007, and now is being liquidated.
Dozens of subprime lenders went out of business in 2007 with the collapse of the housing market. There is increasing tension as trustees for several of these defunct lenders seek to destroy documents to save storage costs, while law enforcement officials and advocates for homeowners and investors in mortgage-backed securities argue that the documents should be preserved. Concern about missing mortgage documents emerged beginning in October 2010, with disclosures that large numbers of original loan documents were missing and that falsified ones were being submitted in foreclosure cases.
In a separate hearing Monday in the same court, U.S. Bankruptcy Judge Christopher Sontchi allowed defunct American Home Mortgage, once one of the largest subprime lenders, to destroy most of the 4,100 boxes of original loan files it still has. But the judge granted a request by Margaret Becker, a lawyer in Staten Island for the Legal Aid Society, to require the American Home trustee to set aside and cull through a few hundred of the boxes which may contain records still relevant to possible foreclosures.
Becker said many low income homeowners were victims of deception about how much their loans actually would cost, and records from the boxes could help prove that they had been defrauded. "These documents are critical for borrowers to demonstrate to foreclosing courts the deception and fraud that was a routine part of this mortgage industry," Becker said. Sean Beach, a lawyer for American Home's liquidation trustee, said the company under an earlier court order already had destroyed or returned to loan servicers 50,000 boxes of "hard copy loan files."
Mortgage Lenders Seeking Court Permission To Destroy 22,100 Boxes Of Original Loan Documents
by Tyler Durden - Zero Hedge
The solution to the ongoing fraudclosure fiasco is so simply and yet (in a way that benefits the banks naturally) is so brilliant, that it has to date evaded most... but not all. The solution: just shred it all. That is what insolvent mortgage lenders Mortgage Lenders Network USA and American Home Mortgage are pushing hard to get permission from their respectively bankruptcy judges in their chapter 7 liquidation cases.
Says Reuters:"Federal bankruptcy judges in Delaware are due to hold separate hearings Monday on requests by two defunct subprime mortgage lenders to destroy thousands of boxes of original loan documents. The requests, by trustees liquidating Mortgage Lenders Network USA and American Home Mortgage, come despite intense concerns that paperwork critical to foreclosures and securitized investments may be lost."
With servicer banks increasingly unable and unwilling to provide the original lender docs (since they don't have access to them) to parties curious in seeing if there is a legal case to continue paying their mortgage, what better solution than to have the banks retort that the original document was sadly destroyed in a court-appointed shredding. In that way all the fraud canaries are killed with one stone, and the party responsible is none other than some bankruptcy judge who had given the go ahead for the wholesale destruction. And since we are not talking peanuts, in the case of MLN it comes to 18,000 boxes of records, while in the AHOM case it is just over 4,000 boxes, we wonder just how many other originators have gotten a comparable idea from the banks, and are currently busy shredding every last detail of an original mortgage note. Good luck trying to convince anyone that the bank is not in possession of a mortgage that was "purposefully" destroyed as part of a company's liquidation proceedings. Soon to follow: the burning of all books and the banning of all websites that dare to claim this is nothing but pure, grade-A criminal destruction of evidence.
More from Reuters on this stunning development:In the Mortgage Lenders case, the U.S. Attorney in Delaware has formally objected to the requested destruction because loss of the records "threatens to impair federal law enforcement efforts."
The former subprime lender shut down in February 2007. In a January 6, 2010, motion, Neil Luria, the liquidating trustee, asked Bankruptcy Judge Peter J. Walsh for permission to destroy nearly 18,000 boxes of records now warehoused by document storage company Iron Mountain Inc.
In the American Home Mortgage case, the liquidating trustee, Steven Sass, has asked Bankruptcy Judge Christopher Sontchi to approve destruction of 4,100 boxes of loan documents stored in a dank parking garage beneath the company's former headquarters in Melville, Long Island.
AHM had been one of the biggest originators of subprime loans until it abruptly collapsed and closed in August 2007. The boxes are the last still held by AHM. Sass stated that the local fire marshal wants the documents removed as a fire hazard, and he said the cost of moving them would be prohibitive.
The reason cited for this scandalous request: warehousing costs:Luria stated that destruction is necessary to eliminate $16,000 per month in storage costs as he disposes of the last assets of the bankrupt company.
This is akin to the Fed terminated the reporting of the M3 due to the exorbitant costs associated with keeping track of a few data series...
And, not surprisingly, we find that some have already been going through with document shreeding for a long time already:In accordance with a 2009 court order, the bankrupt company earlier had destroyed the contents of thousands of other boxes after banks and other loan servicers had been given a chance to request and pick up particular files.
Gee, we wonder why the banks opted out of picking up files confirming they are not the proper servicer on thousands of mortgages.
And in conclusion:In court documents, Sass stated that most of the records AHM still has in storage relate to mortgages issued more than eight years ago. He also said that employees had searched the files and pulled out all vital original records, such as promissory notes, and had handed them over to the appropriate mortgage servicers, and that most of the documents had been electronically imaged and retained in a database.
But people involved in winding down AHM's affairs say that neither the contents of the boxes or the database have been audited, and that it's possible the boxes still contain crucial documents such a promissory notes. Investors must have the original promissory notes, not copies, to be able to foreclose.
The take home message: should the bankruptcy court side with the liquidation trustees, Neil Luria and Steven Sass, who without a doubt have had extended discussions with the current batch of TBTFs which will be hung out to dry if the fraudclosure issue is further prosecuted, then it is safe to say that any claim that America has a fair and impartial judicial system can follow the last hopes of Emanuel's mayoral campaign dream right out of the window.
E-mails Suggest Bear Stearns Cheated Clients Out of Billions
by Teri Buhl - Atlantic
Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. The lawsuit's supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a "sack of shit."
News of internal whistleblowers coming forward from Bear's mortgage servicing division, EMC, was first reported by The Atlantic in May of last year. Ex-EMC analysts admitted they were sometimes told to falsify loan-level performance data provided to the ratings agencies who blessed Bear's billion-dollar deals. But according to depositions and documents in the Ambac lawsuit, Bear's misdeeds went even deeper. They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally's mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books.
Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear and is now the head of mortgages and securitization for Bank of America, was a key player ensuring the defaulting loans Bear was buying would move off their books right after they bought them, with little concern for the firm's due diligence standards. He was joined in this scheme by Jeff Verschleiser, his peer and Senior Managing Director on the mortgage and asset-backed securities trading desk and head of whole loan trading. He is now an executive in Goldman Sachs' mortgage division.
According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds. The Marano-led traders also cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear could quickly securitize defective loans, without leaving enough time for investors to do their own due diligence after the bonds were sold and put-back any bad loans to Bear.
The traders were essentially double-dipping -- getting paid twice on the deal. How was this possible? Once the security was sold, they didn't have a legal claim to get cash back from the bad loans -- that claim belonged to bond investors -- but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme, and thus, are named as individual defendants in the suit.
Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as "SACK OF SHIT [2006-]8" and said, "I hope your [sic] making a lot of money off this trade."
It's this blatant internal awareness inside the Bear mortgage trading division that the Ambac suits says led Bear to implement an across-the-board strategy to disregard its contractual promises and conceal the defective loans. By JPMorgan taking over Bear, it became the successor of interest in Bear Stearns. As the lawsuit lays out, JPMorgan is responsible for the flagrant accounting fraud started by Bear designed to avoid, and has continued to avoid, recognition of vast off-balance sheet exposure relating to its contractual repurchase agreements. This allowed executives to reap tens of millions of dollars in compensation from a bank that wouldn't have been able to buy Bear without tax payer assistance.
80% of Loans Went Bad Almost Immediately
In 2007, when Ambac started to realize something was very wrong with its high-rated bonds, it demanded Bear provide loan-level detail and reviewed 695 non-performing loans in its portfolio. Ambac's audit concluded that 80 percent of the loans showed an early payment default. This meant they should have never have been packed in the bonds Bear sold and were required to be repurchased. Bear refused, and of course had already been pocketing buyback money for itself from the originators.
Bear also never told investors that its auditor Price Waterhouse and Coopers submitted an internal review in August 2006 that this repurchase process was not in-line with its due diligence standards and not typical for the industry. By January 2007, a Bear internal audit also reported the firm had collected $1.7 billion in repurchase claims -- a 227% increase over the previous year. Yet Marano's group of traders continued their double-dip payment scheme and kept selling the toxic loans with full awareness of the poor quality of the due diligence.
Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike Nierenberg in March 2006, "[we] are wasting way too much money on Bad Due Diligence." Yet a year later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due diligence firm, "[w]e are just burning money hiring them."
Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage securities were going to have big financial problems. He suggested they multiply by ten times the short bet he'd just made against stocks like Ambac. These e-mails show Verschleiser's trading desk bragging to firm leadership that he made $55 million off shorting insurers' stock in just three weeks.
Eventually, as Ambac kept demanding a repurchase of the bad loans, Bear acknowledged in late 2007 it would have to buy some back. The lawsuit lists over $600 million in claims with $1.2 billion in damages from the soured mortgage securities it invested in and insured against. But according to the lawsuit, in the spring of 2008, JPMorgan dismissed an outside audit review of the loans' need to be repurchased and once again refused to pay Ambac. The suit asserts JPMorgan knew a repurchase would result in a huge accounting liability that would put their balance sheet in serious trouble at that time.
Last week, JPMorgan CEO Jamie Dimon said it will take years to get through mortgage litigation risk the bank inherited and had set aside around $9 billion for litigation-related risk. Yet in the bank's January earnings call, Dimon suggested that the bank may not have to buy back any soured mortgages from private investors and said that the issue is "not that material" for JPMorgan. Still, Ambac recently won a court order in December to add accounting fraud against JPMorgan to its suit, which can double or triple lawsuit awards. So it's hard to tell whether America's largest bank is prepared to pay for the sins of Bear.
JPMorgan did fight tooth and nail for the Ambac suit not to be made public, however, because the firm argued it could damage the reputations of senior bank executives currently working in the industry. Individuals named as defendants included: Jimmy Cayne, Alan "ACE" Greenberg, Warren Spector, Alan Schwartz, Thomas Marano, Jeffrey Mayer, Mary Haggerty, Baron Silverstein, Jeffrey Verschleiser, and Michael Nierenberg.
Ambac's lawsuit is led by Eric Haas of Patterson Belknap Webb & Tyler LLP. Depositions show internal Bear executives saying Nierenberg and Verschleiser were responsible for deciding how much risk to take when acquiring loans and for aspects of the securitization process. They reported up to Marano. Testimony shows Marano would have known about the decisions his head traders were making. When asked about these accusations, Nierenberg's, Marano's, and Verschleiser's current employers had no comment. The defendants' lawyers at Greenberg Traurig LLP failed to respond to calls for comment.
A public hearing is currently scheduled to be held by the New York State assembly regarding whether legal action should be brought against banks for misleading insurers about mortgage related securities. If approved, the New York Attorney General will likely be asked to bring criminal fraud charges against these banks. Now we must wait and see if JPMorgan will settle or go to trial -- or if the bank tries to claw back tens of millions of dollars in pay from the former Bear executives.
Mortgage Giants Leave Legal Bills to the Taxpayers
by Gretchen Morgenson - New York Times
Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress. The bulk of those expenditures — $132 million — went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.
Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller. Late last year, Randy Neugebauer, Republican of Texas and now chairman of the oversight subcommittee of the House Financial Services Committee, requested the figures from the Federal Housing Finance Agency. It is the regulator charged with overseeing the mortgage finance companies and acts as their conservator, trying to preserve the company’s assets on behalf of taxpayers.
"One of the things I feel very strongly about is we need to be doing everything we can to minimize any further exposure to the taxpayers associated with these companies," Mr. Neugebauer said in an interview last week. It is typical for corporations to cover such fees unless an executive is found to be at fault. In this case, if the former executives are found liable, the government can try to recoup the costs, but that could prove challenging.
Since Fannie Mae and Freddie Mac were taken over by the government in September 2008, their losses stemming from bad loans have mounted, totaling about $150 billion in a recent reckoning. Because the financial regulatory overhaul passed last summer did not address how to resolve Fannie and Freddie, Congress is expected to take up that complex matter this year. In the coming weeks, the Treasury Department is expected to publish a report outlining the administration’s recommendations regarding the future of the companies.
Well before the credit crisis compelled the government to rescue Fannie and Freddie, accounting irregularities had engulfed both companies. Shareholders of Fannie and Freddie sued to recover stock losses incurred after the improprieties came to light. Freddie’s problems arose in 2003 when it disclosed that it had understated its income from 2000 to 2002; the company revised its results by an additional $5 billion. In 2004, Fannie was found to have overstated its results for the preceding six years; conceding that its accounting was improper, it reduced its past earnings by $6.3 billion.
Mr. Raines retired in December 2004 and Mr. Howard resigned at the same time. Ms. Spencer left her position as controller in early 2005. The following year, the Office of Federal Housing Enterprise Oversight, then the company’s regulator, published an in-depth report on the company’s accounting practices, accusing Fannie’s top executives of taking actions to manipulate profits and generate $115 million in improper bonuses.
The office sued Mr. Raines, Mr. Howard and Ms. Spencer in 2006, seeking $100 million in fines and $115 million in restitution. In 2008, the three former executives settled with the regulator, returning $31.4 million in compensation. Without admitting or denying the regulator’s allegations, Mr. Raines paid $24.7 million and Mr. Howard paid $6.4 million; Ms. Spencer returned $275,000. Fannie Mae also settled a fraud suit brought by the Securities and Exchange Commission without admitting or denying the allegations; the company paid $400 million in penalties.
In addition to the $160 million in taxpayer money, Fannie and Freddie themselves spent millions of dollars to defend former executives and directors before the government takeover. Freddie Mac had spent a total of $27.8 million. The expenses are significantly larger at Fannie Mae. Legal costs incurred by Mr. Raines, Mr. Howard and Ms. Spencer in the roughly four and a half years prior to the government takeover totaled almost $63 million. The total incurred before the bailout by other high-level executives and board members was around $12 million, while an additional $18 million covered fees for lawyers for Fannie Mae officials below the level of executive vice president. Many of these individuals are provided lawyers because they are witnesses in the matters.
Employment contracts and company by-laws usually protect, or indemnify, executives and directors against liabilities, including legal fees associated with defending against such suits. After the government moved to back Fannie and Freddie, the Federal Housing Finance Agency agreed to continue paying to defend the executives, with the taxpayers covering the costs. But indemnification does not apply across the board. As is the case with many companies, Fannie Mae’s by-laws detail actions that bar indemnification for officers and directors. They include a person’s breach of the duty of loyalty to the company or its stockholders, actions taken that are not in good faith or intentional misconduct.
Richard S. Carnell, an associate professor at Fordham University Law School who was an assistant secretary of the Treasury for financial institutions during the 1990s, questions why Mr. Raines, Mr. Howard and others, given their conduct detailed in the Housing Enterprise Oversight report, are being held harmless by the government and receiving payment of legal bills as a result.
"Their duty of loyalty required them to put shareholders’ interests ahead of their own personal interests," Mr. Carnell said. "Had they cared about the shareholders, they would not have staked Fannie’s reputation on dubious accounting. They defied their duty of loyalty and served themselves. At a moral level, they don’t deserve indemnification, much less payment of such princely sums."
Asked why it has not cut off funding for these mounting legal bills, Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, said: "I understand the frustration regarding the advancement of certain legal fees associated with ongoing litigation involving Fannie Mae and certain former employees. It is my responsibility to follow applicable federal and state law. Consequently, on the advice of counsel, I have concluded that the advancement of such fees is in the best interest of the conservatorship."
If the former executives are found liable, they would be obligated to repay the government. But lawyers familiar with such disputes said it would be difficult to get individuals to repay sums as large as these. Lawyers for Mr. Raines, for example, have received almost $38 million so far, while Ms. Spencer’s bills exceed $31 million. These individuals could bring further litigation to avoid repaying this money, legal specialists said.
Although the figures are not broken down by case, the largest costs are being generated by a lawsuit centering on accounting improprieties that erupted at Fannie Mae in 2004. This suit, a shareholder class action brought by the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, is being heard in federal court in Washington. Although it has been going on for six years, the judge has not yet set a trial date. Depositions are still being taken in the case, suggesting that it has much further to go with many more fees to be paid.
Financial Crisis Commission Finds Cause For Prosecution Of Wall Street
by Shahien Nasiripour - Huffington Post
The bipartisan panel appointed by Congress to investigate the financial crisis has concluded that several financial industry figures appear to have broken the law and has referred multiple cases to state or federal authorities for potential prosecution, according to two sources directly involved in the deliberations. The sources, who spoke on condition they not be named, declined to identify the people implicated or the names of their institutions. But they characterized the panel's decision to make referrals to prosecutors as a significant escalation in the government's response to the financial crisis. The panel plans to release its final report in Washington on Thursday morning.
In the three years since major lenders teetered on the brink of collapse, prompting huge taxpayer rescues and amplifying an already painful recession into the most punishing downturn since the Depression, public indignation has swelled while few people who played prominent roles in the crisis have faced legal consequences. That may be about to change. According to the law that created the Financial Crisis Inquiry Commission, the panel has a responsibility to refer for prosecution any evidence of lawbreaking. The offices that have received the referrals -- the Justice Department, state attorneys general, and perhaps both -- must now determine whether to prosecute cases and, if so, whether to pursue criminal or civil charges.
Though civil charges appear a more likely outcome should prosecution result, one source familiar with the panel's deliberations said criminal charges should not be ruled out. The commission's decision to refer conduct for prosecution underscores the severity of the activities it has uncovered and plans to detail in its widely anticipated final report, the sources said. A spokesman for the commission declined to comment. "I cannot comment on the commission's report or its activities until January 27th," said the spokesman, Tucker Warren.
When the 10-member panel was first convened in late 2009, participants emphasized that they did not intend to focus on prosecution, but were rather intent on illuminating the root causes of the crisis. Indeed, the fact that the body has opted to make referrals adds an unexpected coda to a proceeding that some observers have written off as just another bit of Washington stagecraft aimed at generating headlines. "Few will notice its absence," said Michael Perino, a law professor at St. John's University School of Law in New York and an expert in financial history, in an opinion piece published in the New York Times last October. It "had no discernible influence over the financial reforms." He added: "How did this commission fail so badly?"
But the decision to refer cases for potential prosecution could provoke a different conclusion: It may yet satisfy public craving for what Treasury Secretary Timothy Geithner once referred to as the "very deep public desire for Old Testament justice." The commission's report is supposed to detail the definitive causes of the crisis. Over the course of the past year, the panel has interviewed more than 700 witnesses, reviewed millions of pages of documents, and held 19 days of public hearings across the country.
Among those who testified were the heads of the nation's largest financial institutions -- all of them recipients of multi-billion dollar public bailouts. Among those who testified were Lloyd Blankfein, chief executive of Goldman Sachs Group Inc.; Jamie Dimon, chief of JPMorgan Chase & Co.; and Robert Rubin, a former Goldman chief and Clinton administration Treasury Secretary, who later held a prime executive chair at Citigroup. The panel also questioned Federal Reserve Chairman Ben Bernanke and his predecessor, Alan Greenspan.
The commission drew on testimony from less prominent senior executives with intimate knowledge of how Wall Street engaged in modern-day financial alchemy, turning mountains of dubious mortgages into seemingly rock-solid investments rated as safe as American Treasury bonds. Richard Bowen, former chief underwriter for Citigroup's consumer-lending unit, testified that, in the middle of 2006, he discovered more than 60 percent of the mortgages the bank had purchased from other firms and then sold to investors were "defective," meaning they did not satisfy the bank's own lending criteria.
Keith Johnson, former president of Clayton Holdings, one of the top mortgage research companies, testified that some 28 percent of the loans given to homeowners with poor credit examined by his firm for Wall Street banks failed to meet basic standards. Yet nearly half appear to have been sold to investors regardless, he added. The commission has been dogged by partisan sniping within its ranks and high staff turnover. But the referrals may mollify criticism that the panel was more about conveying the illusion of an investigation than conducting the real thing.
Life Insurers Sue Countrywide, And Allege "Massive Fraud" In Mortgage Sales
by Joe Weisenthal - Business Insider
Just another taste of the legal worries that will keep Brian Moynihan's lawyers busy putting out mortgage related fires. A group of life insurance companies has sued Countrywide alleging massive mortgage fraud.
Here's the list of plaintiffs.
Here's the intro of their complaint:This action concerns a massive fraud perpetrated by Defendant Countrywide Financial and certain of its officers and affiliates against the Plaintiffs, which are investors in mortgage-backed securities ("MBS") issued by Countrywide’s subsidiaries. The Plaintiffs are institutional investors that wanted conservative, low-risk investments and thus bought Countrywide MBS (the "Certificates") that were represented to be backed by mortgages issued pursuant to specific underwriting guidelines and rated investment-grade (primarily AAA).
In purchasing the Certificates, the Plaintiffs and their investment managers relied on term sheets, prospectuses and other materials prepared by and provided to them by the Defendants, which made representations about the Countrywide Defendants’ purportedly conservative mortgage underwriting standards, the appraisals of the mortgaged properties, the mortgages’ loan-to-value ("LTV") ratios, and other facts that were material to Plaintiffs’ investment decisions. Plaintiffs and their investment managers also relied on Defendants’ public statements concerning the Countrywide Defendants’ adherence to prudent underwriting guidelines and careful credit analysis.
These representations by Defendants were recklessly or knowingly false when made. In reality, Countrywide was an enterprise driven by only one purpose – to originate and securitize as many mortgage loans as possible into MBS to generate profits for the Countrywide Defendants, without regard to the investors that relied on the critical, false information provided to them with respect to the related Certificates.
SEC looks at Cahill, Goldman Sachs link
by Frank Phillips - Boston Globe
The US Securities and Exchange Commission has delivered subpoenas to the state treasurer’s office in a wide-ranging request for documents concerning dealings between investment banking giant Goldman Sachs and former treasurer Timothy P. Cahill, onetime top staff members, and former campaign aides, according to an official briefed on the document request.
The agency’s subpoenas, which seek e-mails, phone records, schedules, files, and memorandums, come just over a month after Goldman Sachs removed itself from two state bond deals in Massachusetts following the disclosure that a vice president at the firm, Neil Morrison, was active in Cahill’s 2010 gubernatorial campaign, which could violate federal securities regulations. Morrison had previously served as a top deputy to Cahill in the treasurer’s office.
The SEC served the papers just before the close of business Friday, catching the new treasurer, Steven Grossman, and his staff off guard. A spokesman for Grossman said the treasurer would not comment on details of what federal regulators are seek ing but said his staff is quickly assembling the requested material. "We are cooperating fully and promptly with the US Securities and Exchange Commission’s request for documents consistent with our commitment to running a transparent and accountable Treasury,’’ the spokesman, Al Gordon, wrote in an e-mail yesterday. "Due to the nature of this matter, we cannot comment further.’’
A spokesman for Goldman Sachs, Michael DuVally, said yesterday the firm would have no comment. Cahill also declined to comment, telling the Globe he had not yet been informed of the subpoenas. "This is the first I heard of it, so I can’t really comment,’’ he said. The SEC also would not comment on the subpoenas.
It is not clear from the subpoenas alone what direction the federal investigation is taking. An official who has been briefed on the documents said that they refer specifically to Goldman Sachs and seek all communications between Cahill’s office and Morrison and the investment bank dating back to June 1, 2008. The SEC, the official said, also asked for documents from the state Lottery and School Building Assistance authority, both of which are under the treasurer’s control.
The breadth of the subpoenas suggests federal regulators could be looking at possible connections between Cahill’s work as treasurer and his gubernatorial campaign, which was the subject of a separate investigation launched last year by the state attorney general’s office. Named in the subpoenas are Cahill; his former chief of staff, Scott Campbell, who left state government last year to help manage Cahill’s campaign; deputy treasurer Colin MacNaught, who oversaw bond issuances under Cahill; Amy Birmingham, a top aide on Cahill’s gubernatorial campaign; and political finance consultant Laurie Bosio, a major political fund-raiser for Cahill in his bid for governor.
Morrison’s role in the campaign, which he has downplayed, could trigger SEC regulations that sharply restrict public-finance bankers from contributing to political figures and elected officials who issue public bonds. The Globe reported last June that Morrison negotiated a $455.9 million bond with a state water-pollution control board that Cahill chairs and operates within the treasurer’s office.
As part of a civil lawsuit Cahill filed against ex-advisers during the gubernatorial campaign, Morrison was identified as a "top political adviser’’ to Cahill. Documents filed in the suit included a copy of an e-mail that Morrison sent from his private account to two consultants for the campaign, in which he accepts, on Cahill’s behalf, the terms of a contract between the campaign and the consultants.
Such work could be considered an in-kind contribution to the Cahill committee. If it was done on company time and if its value exceeds the $250 limit set by the SEC, Morrison, under federal regulations, could face fines and lose his broker’s license. The e-mail was sent during working hours on Friday, Aug. 13. Morrison, who is leaving his position at Goldman Sachs later this month, declined to comment yesterday when asked about the subpoenas or the campaign work. In an abbreviated response to Bloomberg News last month about the issue, he referred to his political role as minor. There was no "formal role with the Cahill committee,’’ he said.
The SEC could impose penalties on Goldman Sachs, including banning it from underwriting bond offerings by the state treasurer’s office for two years, according to federal regulations. Complicating the issue is Morrison’s role in negotiating the bond deal with the Massachusetts Water Pollution Abatement Trust board last spring. The banking firm earned an estimated $2 million in fees on the deal. The subpoenas also seek documents from the trust and its dealings with Goldman Sachs. Morrison, a former Taunton city councilor, joined the Treasury staff after Cahill was elected to his first term in 2002, rising to become first deputy treasurer. He left in 2006 and joined the Swiss banking firm UBS. He was hired by Goldman Sachs in July 2008.
The decision by the water-pollution control board to give Goldman Sachs the bond work last spring came just months after the SEC had charged Goldman, one of the most influential and prestigious investment firms in the country, with fraud in a federal suit. The regulators argued that Goldman’s investment banking division had created a system that allowed the company to bet against the mortgage securities it had sold to some of its clients.
In July, the firm paid a $550 million fine to settle the suit. It also launched an advertising campaign to repair its image. Although some state agencies were concerned about contracting with the company, Goldman Sachs had also landed work last year managing bond sales for the MBTA and Massachusetts Housing Finance Agency. But late last year, Goldman Sachs, concerned about the revelations that Morrison was involved in the political campaign, suddenly withdrew.
SEC Launches Inquiry Into 50% Underfunded Illinois Pension Fund
by Michael Corkery - Wall Street Journal
The Securities and Exchange Commission has launched an inquiry into public statements by Illinois officials about the state's underfunded pension fund, the state's governor's office confirmed Monday night. The Illinois inquiry is focused on public statements concerning an overhaul measure passed in 2010 meant to help shore up the retirement system, said the governor's spokeswoman, Kelly Kraft. "We are fully cooperating" with the inquiry, said Ms. Kraft in an interview. "We feel our disclosure was always accurate and complete."
An issue being examined is whether Illinois was taking future savings and treating them as current reductions in the cost of the pension fund, said Robert Kurtter, a managing director in the public finance division at Moody's Investors Service, who said his firm spoke with Illinois officials about the inquiry. One of the measures that Illinois took to save costs was to raise the retirement age for newly hired Illinois workers. Mr. Kurtter mentioned the inquiry in a report released Monday evening.
Illinois's pension system is only about 50% funded with liabilities of about $136 billion, according to Moody's. The underfunding, one of the worst among states in the nation, is partly the result of the state frequently skipping its recommended contributions to fund. Illinois was informed by the SEC of the inquiry in September, Ms. Kraft said. Illinois has included mention of the SEC inquiry in documents being prepared for the sale expected in the next few weeks of a approximately $3.7 billion bond, said Ms. Kraft. The debt is expected to allow the state to make a required pension-fund contribution
The inquiry is the latest example of the SEC probing a state's financial disclosures related to pensions. In August, the federal agency accused New Jersey of failing to properly disclose the true health of its two largest pension funds. New Jersey authorities settled the SEC case without admitting or denying wrongdoing. In October, the agency said that four former San Diego officials agreed to pay penalties for allegedly misleading investors in $262 million of the city's municipal bonds. The agency said the civil settlement marked the first time it had secured financial penalties against city officials in a muni-bond fraud case.
The SEC currently lacks the authority to require issuers to disclose financial information before selling debt in the muni-market. SEC Commissioner Elisse Walter has said the agency has anti-fraud authority and authority over the professionals that deal in the marketplace.
House GOP leader Cantor says no federal bailout of states
by Daniel Wagner and Philip Elliott - AP
A top House Republican said Monday that the federal government will not bail out fiscally ailing states and said he opposes a proposal that Congress allow states to declare bankruptcy as a way of handling their growing piles of debt. Though there has been little discussion of Washington bailing out states, some congressional Republicans and conservative groups are suggesting that states be allowed to seek protection in federal bankruptcy court, which they are currently barred from doing. Public employee unions, liberal groups and some lawmakers of both parties oppose the bankruptcy idea.
House Majority Leader Eric Cantor, R-Va., told reporters Monday that he believes states already have the tools they need to ease crushing budget deficits since they can cut spending, raise taxes and pressure public employee unions to renegotiate their contracts and pension benefits. As a result, he said, he opposes letting states declare bankruptcy because he said they don't need that power. While some conservatives say that allowing states to declare bankruptcy would prevent a federal bailout of states, Cantor said he disagreed. "We don't need that to stave off a federal bailout. There will be no bailout of states," he said. "The states can deal with this and have been able to do so on their own."
Supporters of allowing states to declare bankruptcy say it is the best way for states to dig themselves out of debt. Opponents say the idea will drive up borrowing rates for states on the already shaky municipal bond market and make it easier for states to cut government workers' benefits and pensions, even though those benefits are just a minor cause of states' budget problems. Thirty-five states and Puerto Rico expect to run up budget gaps during the fiscal year ending Sept. 30, according to a December report from the National Conference of State Legislatures. Twenty-one expect spending to outpace tax collections and other revenue by more than 10 percent, the report said.
For their upcoming fiscal year, the 50 states face combined projected deficits of about $125 billion, according to Iris Lav, a senior adviser with the liberal Center on Budget and Policy Priorities. About one-fifth of President Barack Obama's $814 billion economic stimulus law has gone to help states reduce their budget deficits and help pay for costs like education and Medicaid since 2009, but that aid is winding down.
The idea of letting states declare bankruptcy — such a move could let states restructure their debts — has been suggested by conservatives such as Newt Gingrich, the former GOP House speaker who is a possible 2012 presidential contender. Former Minnesota Gov. Tim Pawlenty, another potential presidential candidate, told a group of New Hampshire Republicans on Monday that the idea is worth considering as a way to avoid costly pension liabilities.
Cities and counties are already permitted to declare bankruptcy. "It currently looks to be one of the best options to prevent a federal bailout of the most fiscally reckless states," said Patrick Gleason, director of state affairs for the conservative Americans for Tax Reform, which also champions the idea.
Government labor unions see the idea as one that is aimed directly at them because it would give states more leverage in trimming workers' benefits and pensions, and because the proposal makes it appear that state workers are a major cause of states' budget problems. Even if the proposal fails to become law — a strong scenario given Democrats' control of the Senate and White House — it could still hurt unions, they say. "I think the goal is to create an issue-frame in states in severe fiscal straights in which public employee unions are mainly responsible for this. We strongly disagree with that notion," said Charles Loveless, director of legislation for the American Federation of State, County and Municipal Employees.
With many investors already fleeing the municipal bond market, even discussion of letting states declare bankruptcy further weakens municipal bonds because it "injects more buzz, or more of what's referred to as headline risk," said Paul S. Maco, an attorney and former top Securities and Exchange Commission official under President Bill Clinton. Sen. John Cornyn, R-Texas, asked Federal Reserve Chairman Ben Bernanke about the state bankruptcy idea at a Senate hearing earlier this month. Bernanke was noncommittal. "Bailing out a state is not an option," Cornyn spokesman Kevin McLaughlin said of the senator's concerns. "But we need to explore what, if anything, should be done."
Kate Dickens, spokesman for Sen. Mark Kirk, R-Ill., said Kirk believes Congress should give states the power to declare bankruptcy and avoid default and is talking to other lawmakers about potential legislation. Illinois lawmakers recently voted for a 66 percent hike in personal income tax, from 3 percent to 5 percent, to address a $15 billion deficit that amounts to more than half of the state's general fund. The tax increase will be coupled with strict 2 percent limits on spending growth. "Governors should have the option of reorganizing to operate under lower costs. This allows essential functions to continue, no federal bailout and the state preserves its credit," Dickens said.
House Judiciary Committee Chairman Lamar Smith, R-Texas, said his panel will hold a hearing on the issue in two weeks and expressed misgivings about the idea. In a written statement, he cited constitutional and policy concerns, "including whether state bankruptcy will actually encourage more irresponsible spending by states." Mike Schrimpf, spokesman for the Republican Governors Association, said GOP governors oppose state bankruptcies and a federal bailout of states because states should be forced to live within their means. Ray Scheppach, executive director of the bipartisan National Governors Association, said he is aware of no states or governors interested in the idea of being allowed to declare bankruptcy. "Who would turn over a state's whole fiscal situation to a judge?" said Scheppach.
Q+A: $14.3 trillion debt limit looms closer
by David Lawder - Reuters
The U.S. government is on track to hit its $14.294 trillion statutory debt limit as early as March 31, and newly emboldened Republican lawmakers intend to use the need to raise it as leverage for spending cuts.
Financial markets will listen closely to President Barack Obama's State of the Union address on Tuesday for any clues on whether he would be willing to strike a deal with Republicans to cut spending in exchange for a debt limit increase. A lengthy standoff could lead to worries in markets about a potential U.S. default. Following are key questions and answers on the debt limit and the politics and market forces surrounding it.
What Is The Debt Limit?
Congress sets a ceiling that limits the amount of public debt that the Treasury can issue. This authority was first enacted in 1917 when United States began borrowing heavily to finance its entry into World War One. The limit was meant to allow the Treasury discretion to issue large amounts of bonds more efficiently, while maintaining Congress' broader control over the federal purse strings. The debt limit applies to all debt held outside of the government and many intra-governmental holdings, such as internal debt owed to the Social Security and Medicare trust funds. It does not apply to certain categories of debt -- currently totaling $52.6 billion -- including unamortized discount adjustments on Treasury bills and zero-coupon bonds and federal agency debt held by the Federal Financing Bank.
How Close Are We To The Limit?
As of January 20, the U.S. national debt stood at $14.004 trillion, just $290 billion below the limit. The Treasury has estimated that based on recent spending and revenue trends, the government will hit the limit as early as March 31. This could stretch out until May 16, depending on the strength of government tax receipts and economic growth. Treasury Secretary Timothy Geithner has asked Congress to raise the limit before the end of March so the government can meet previous spending commitments made by lawmakers.
What If Congress Fails To Act And The Limit Is Hit?
The government would have to stop issuing debt to fund its day-to-day operations. If it does not have sufficient cash on hand from other sources, such as tax receipts, it would have to curtail some activities, including closing government offices. The government may have to halt payments of federal benefits, such as Social Security or Medicare, or default by halting interest payments on Treasury debt. It paid $148.2 billion in interest to bondholders from October through December 2010.
What Would Happen If The United States Defaulted?
Treasury officials have said this would be "catastrophic." Financial markets could experience severe turmoil. The government would likely have to deeply cut spending, which would suck fiscal support away from a still-fragile recovery and hurt those who depend on federal benefits. The Treasury, normally a safe haven for investors, may also be shut out of borrowing in public debt markets for a period, so it might have to turn to international institutions such as the International Monetary Fund for assistance. After the United States is able to resume borrowing, analysts say it would be punished with sharply higher interest rates for years to come as a result of losing its top-tier credit rating. This would in turn cause mortgage rates to rise and further increase the U.S. debt burden.
Are Republicans Willing To Risk A Default?
No. Although a number of Republicans have voiced opposition to raising the debt limit as a matter of principle, many also have stressed the importance of ensuring that the United States meets its financial obligations. House of Representatives Speaker John Boehner and other House Republican leaders have acknowledged that the limit will have to be raised. But Boehner and House Budget Committee Chairman Paul Ryan have said any vote to increase the ceiling must be paired with a commitment to lower spending over the long-term. They will be looking at Obama's proposed budget, to be unveiled in February, for evidence of spending restraint.
How Are Markets Viewing The Debate At The Moment?
So far, there has been little sign of worry among buyers of Treasury debt, with 10-year note yields a manageable 3.34 percent. Markets have been through this before, and are accustomed to a certain level of political rhetoric before a debt limit increase is approved. Although yields on long-term debt have climbed a half percentage point over the last two months, analysts attribute this to an improved economic outlook, which has led investors to shift funds to riskier assets, like stocks. But some on Wall Street fear a prolonged debt limit standoff and failure to make tough choices to cut deficits could ultimately cause investors to sell Treasuries and push up yields.
Can The Treasury Delay Reaching The Debt Limit?
Yes. It has several tools to alter its cash flow, but these measures can only last about eight weeks or so, pushing back the day of reckoning to mid-July at the latest. Chief among these are drawing down a $200 billion fund at the Federal Reserve that was created to finance emergency lending measures and halting sales of securities to state and local governments. It can also dip into some government pension funds and the $50 billion Exchange Stabilization Fund.
Republicans mull bill to force payment on U.S. debt
by Rachelle Younglai - Reuters
U.S. may hit debt ceiling as early as March 31
Republican lawmakers are working on legislation designed to help the United States avoid defaulting on its debt if the country is not allowed to borrow more, congressional aides said on Monday. Republicans in the Senate and House of Representatives are expected to introduce similar legislation this week that would require the U.S. Treasury to pay interest on its debt if the nation reaches its $14.3 trillion borrowing limit.
The Obama administration has said that the so-called debt ceiling could be breached as early as March 31, and as late as mid-May. It is pressuring Congress to raise the debt limit, or the amount of debt the country is legally allowed to issue, predicting catastrophic consequences if the borrowing limit is not raised. Fearful of anti-government sentiment, Republicans are loathe to allow the nation to borrow more without taking substantive steps to cut spending and trim the $1.3 trillion budget deficit.
Under legislation that Representative Tom McClintock is crafting, the U.S. Treasury would be forced to prioritize payments on national debt. Senator Pat Toomey is getting ready to introduce similar legislation, requiring the government to prioritize payments on U.S. debt before the federal government's other obligations in the event the debt ceiling is reached. An aide to Toomey said his bill has 10 co-sponsors so far. It is not known how many lawmakers are supporting McClintock's bill. Although Toomey acknowledges that a lack of funds would hurt the country, he has said: "It would be even worse simply to raise the debt ceiling without regaining control of federal spending." In order for a bill to become law, both chambers must pass similar legislation.
Treasury Calls Plan Unworkable
The U.S. Treasury has already rejected the concept of prioritizing payments and has said it would not prevent the country from defaulting on its debt because it would only protect principal and interest payments and not other legal obligations of the United States. "While well-intentioned, this idea is unworkable," Deputy Treasury Secretary Neal Wolin has said.
"Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments," Wolin said on the Treasury's web site. If Congress does not allow the government to borrow more, the U.S. could default on its debt and wreak havoc on financial markets.
The Phantom 15 Million
by Jim Tankersley - National Journal
Taming unemployment starts with solving the mystery of the jobs that were supposed to have been created in the past 10 years but weren’t.
America’s jobs crisis began a decade ago. Long before the housing bubble burst and Wall Street melted down, something in our national job-creation machine went horribly wrong. The years between the brief 2001 recession and the 2008 financial collapse gave us solid growth in our gross national product, soaring corporate profits, and a low unemployment rate—but job creation lagged stubbornly behind, more so than in any economic expansion since World War II.
The Great Recession wiped out what amounts to every U.S. job created in the 21st century. But even if the recession had never happened, if the economy had simply treaded water, the United States would have entered 2010 with 15 million fewer jobs than economists say it should have. Somehow, rapid advancements in technology and the opening of new international markets paid dividends for American companies but not for American workers. An economy that long thrived on its dynamism, shedding jobs in outdated and less competitive industries and adding them in innovative new fields, fell stagnant in the swirls of the most globalized decade of commerce in human history. Even now, no one really knows why.
This we do know: The U.S. economy created fewer and fewer jobs as the 2000s wore on. Turnover in the job market slowed as workers clung to the positions they held. Job destruction spiked in each of the decade’s two recessions. In contrast to the pattern of past recessions, when many employers recalled laid-off workers after growth picked up again, this time very few of those jobs came back.
These are the first clues—incomplete, disconcerting, and largely overlooked—to a critical mystery bedeviling a nation struggling to crawl out of near-double-digit unemployment. We know what should have transpired over the past 10 years: the completion of a circle of losses and gains from globalization. Emerging technology helped firms send jobs abroad or replace workers with machines; it should have also spawned domestic investment in innovative industries, companies, and jobs. That investment never happened—not nearly enough of it, in any case.
If we can’t figure out why, we may be doomed to a future that feels like a long jobless recovery, no matter how fast our economy grows. “It’s the trillion-dollar question,” says David E. Altig, senior vice president and research director for the Federal Reserve Bank of Atlanta, where economists are beginning to explore the shifts that have clubbed American workers like a blackjack. “Something big has happened. I really don’t think we have a complete story yet.”
The Lost Decade
We certainly didn’t see it coming. At the turn of the millennium, the Bureau of Labor Statistics predicted that the U.S. economy would create nearly 22 million net jobs in the 2000s, only slightly fewer than the boom 1990s yielded. The economists predicted “good opportunities for jobs” and “an optimistic vision for the U.S. economy” through 2010.
Businesses would reap the gains of new trading markets, the projection said, and continue to invest in technologies to boost the productivity of their operations. High-tech jobs would abound, both for systems analysts with four years of college and for computer-support analysts with associate’s degrees. The manufacturing sector would stop a decades-long jobs slide, and technology would lead the turnaround. Hundreds of thousands of newly hired factory workers would make cutting-edge electrical and communications products, including semiconductors, satellites, cable-television equipment, and “cellular phones, modems, and facsimile and answering machines.”
Such long-term projections are inexact by nature. (One economist who consults in the private sector said that the companies he works with refuse to make employment projections more than a year or two ahead.) These government forecasts for 2010 were particularly off. When the job market peaked in 2008 on the eve of the financial crisis, the manufacturing sector had already shed 5 million workers since the decade began, with more layoffs to come in the Great Recession. Politicians, particularly those in the Rust Belt, decried the losses. Hardly anyone, meanwhile, noticed the more damaging shortfall in the national jobs picture: Every major occupational group was running far behind the 2010 job-growth projections—often to the tune of 2 million jobs per group.
The forecasters said that the economy would create 22 million jobs over the next 10 years. At the decade’s economic peak, though, that number stood at only 7 million. Job growth in the 2000s was the lowest of any decade ever recorded by the federal government, stretching back to the 1940s. As a result, workers were extremely vulnerable to the tidal-wave recession that washed away all of the decade’s meager gains. U.S. payrolls, by their 2008 peak, had grown about 5 percent from the start of the decade. Ever since the Labor Department began tracking employment in the late 1930s, no previous decade produced less than 20 percent payroll growth.
The national population grew faster than the labor force; in 2008, about 63 percent of working-aged Americans held a job, down from 65 percent in 2008, reversing decades of improvement in the employment-population ratio. Real middle-class incomes fell from 2000 to 2007—from a median of $58,500 to $56,500 another first in U.S. record-keeping. It’s easy to see today why such alarming numbers went so undetected. The national unemployment rate stayed persistently low, between 4 and 6 percent, until the financial crash. Voters tend to associate the jobless rate with the strength of the economy. But the rate was low not because the economy was adding a lot of jobs, but because fewer people were joining the workforce—specifically, fewer women.
Female workers poured into the labor pool during World War II and steadily throughout the decades that followed. In the late 1990s, that trend began to end with about three in five women in the workforce. The phenomenon was a mathematical blessing for the unemployment rate, which measures the percentage of eligible workers who want to find jobs but can’t. When women’s employment demand stopped increasing, the economy didn’t need to create as many new jobs to keep the jobless rate low. Blinded by low unemployment, lawmakers and economists overlooked two crucial warning signs of the nation’s deteriorating economic health. One was the percentage of working-aged men—the traditional backbone of the U.S. labor force—who held a job. The other was the number of jobs being created each month. Throughout the 2000s, both numbers nose-dived.
A few researchers caught early warning signs of the trend. In 2003, economists Erica L. Groshen and Simon Potter at the Federal Reserve Bank of New York warned in a paper that “structural changes” in the economy appeared to be hindering job creation. Groshen and Potter noted that after the past two recessions, in 1990-91 and 2001, economic growth had picked up long before jobs began to reappear, bucking a long historical trend of growth and jobs returning in tandem. The explanation, Groshen and Potter said, was a shift away from the time-honored American tradition of laying off workers in bad times and recalling them when the clouds parted.
“Most of the jobs added during the recovery have been new positions in different firms and industries, not rehires,” they wrote. “In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier” when recovery still appears fragile. In other words, American companies had adopted a more cold-blooded attitude toward recessions, one that fit the new model of globalization and automation. Technology made it easier to lay off your 100 least-effective workers and ship their jobs to India, or to replace them with a software program that made your remaining workforce dramatically more productive. That theory would hold true in the next recession, too. Meanwhile, it raised a troubling question: Why didn’t the gains of cold-bloodedness stack up to the costs?
Here is how the evolving global economy is supposed to work: Mature economies with high living standards, such as the United States, ship some of their lower-skill jobs to developing countries where wages are lower. The costs of the outsourced goods and services go down, and the buying power of the developing countries goes up. American firms reap higher profits, which they invest in developing higher-value products that can’t be made elsewhere and sell them to increasingly flush consumers at home and abroad. Laid-off American workers find jobs in the innovative industries that result.
That story has almost entirely come true for corporate America, whose record profits spurred strong GDP growth throughout the 2000s, but not for workers. “A lot of people have been displaced due to technology and outsourcing,” says Mark Thoma, an economics professor at the University of Oregon who writes the popular Economist’s View blog. Those workers have often settled into worse jobs than the ones they lost, he adds, if they have found work at all. “That’s not really what’s supposed to happen.”
Thoma is one of a fleet of economists from top university research departments, regional Fed banks, think tanks, and the wonky economic blogosphere, who were asked why U.S. job creation had stalled so spectacularly in the past decade. Liberals and free-market purists alike all said, “Good question,” and almost to a person added some form of “I wish we knew the answer.” Lawmakers have still barely touched the question—they are too focused on taxes, regulation, and government spending, policy areas that hardly any economist has suggested as explanations for our lost decade of job growth. Researchers are just starting to piece together the evidence, and no one can yet finger the culprit.
Education And Investment
Perhaps, some economists theorize, the United States isn’t creating innovative jobs because its workforce isn’t up to the challenge. For probably the first time in history, our young adults are no better educated than their parents. Nearly all our international rivals, in developed and developing economies alike, continue to make generational leaps in college graduation. Brainpower is still our comparative advantage with the rest of the world, but the advantage is shrinking.
“It is the best educated and those with the highest skills that derive the most benefits from a globalizing economy,” says Jacob Funk Kirkegaard, a research fellow at the Peter G. Peterson Institute for International Economics who studies global labor markets. “As the U.S. workforce becomes relatively less skill-intensive vis-à-vis the entire world, the broader benefits of the global economy, both in terms of job creation (and national well-being), are going to decline.”
Mounting evidence suggests that educational stagnation has already socked American workers, particularly men. David Autor, the associate chairman of the Massachusetts Institute of Technology’s economics department, makes the case in a series of recent papers that globalization has effectively “hollowed out” much of the country’s middle-skill jobs—assembly-line, call-center, and bookkeeping occupations, for example—and replaced them with a computer or a lower-paid foreign worker. Those types of jobs typically required technical training but not necessarily a college degree. As the jobs disappear, the workers who held them are generally pushed into lower-skill, lower-paid occupations such as retail or janitorial services, because they lack the education to compete for higher-wage, higher-skill jobs such as engineering.
Autor is pioneering the research into what he calls the “polarization” of American jobs into low- and high-skill camps, but even he isn’t sure whether his findings explain our national jobs crisis or result from it. “I don’t have a simple answer,” he wrote in an e-mail recently. “I think the prosperity in the 2000s, even prior to the crisis, was quite ephemeral, bordering on illusory. I’m not sure that’s a result of polarization per se. But it is a mystery why the good times ended” at the turn of the century. The completed circle of losses and gains from globalization, he added, is “what is supposed to happen in the long run. But it requires investment, adjustment, adaptation.”
Mention of that requirement raises another leading theory for our job-creation woes: American companies aren’t investing enough in domestic innovation and the jobs it should create. One baffling aspect of the current recovery is why U.S. companies continue to sideline nearly $2 trillion in cash instead of using it to buy equipment or hire workers. That hoarding turns out to be a piece of a decades-long investment puzzle. American corporate spending on nonresidential plant equipment—factories and equipment, not houses or shopping malls—has fallen to its lowest rate as a share of the economy in 40 years.
Businesses aren’t investing in American workers, either. The major productivity gains of the fledgling recovery, and in the 2000s in general, came largely from companies producing more with fewer employees.
The simple truth is that American firms are either returning the spoils of globalization and technology to their shareholders, spending them on new projects abroad, or both. “Globalization isn’t the problem,” says Howard F. Rosen, a labor economist and visiting fellow at the Peterson Institute. “U.S. companies are investing in plants and equipment, just not in our borders.… They are privatizing the gains of globalization. That’s really it. They’re our gains!”
Policymakers, Rosen adds, must learn why that is happening. “What motivates investment?” he says. “How do we stimulate investment? I personally think we should use that question to judge every economic policy that we do.” This is not an academic exercise. The mystery of why 15 million jobs never materialized could haunt our economy for the foreseeable future.
More Like Europe?
Economists, lawmakers, and other Americans have mostly assumed that if we could just get the postrecession economy growing again at a good clip, jobs would come back in high numbers. But what if that’s wrong? What if we’ve blown a gasket in the job-creation machine and workers remain stuck on the roadside until we get it fixed?
What if the Peterson Institute’s Kirkegaard is correct when he says, “There is a significant risk that we wander aimlessly into a situation where U.S. labor markets … end up becoming much more European than they were before,” less dynamic, less innovative, with persistently higher unemployment. “That’s not a description that I use lightly,” he says, “because that’s a very, very bad outcome.” It’s worth noting, as we look back at the last decade’s job projections, that American workers aren’t making many answering machines or modems. They’re also not making cell phones—even the market-moving cell phones that forecasters couldn’t conceive of 10 years ago.
A recent paper by researchers at the Asian Development Bank Institute concluded that the iPhone, one of the United States’ top innovations of the past decade, actually contributes nearly $2 billion to our trade deficit because it is almost entirely produced and assembled in Asia. The paper also raises a conundrum for lawmakers and business leaders alike: If Apple moved its assembly line to the United States and created domestic jobs but didn’t raise the cost of the iPhone, the company would still turn a 50 percent profit on every one it sold. Maybe Apple’s greed is at fault. Maybe the government is to blame for not making the industrial climate more hospitable to Apple and other job producers. The harsh reality is that workers, companies, and lawmakers all need to readjust if we ever hope to rev up the job-creation machine again.
Some free-market economists say that we could encourage more domestic investment by cutting corporate tax rates, although it’s fair to note that the jobs breakdown of the 2000s coincided with hefty tax cuts under President Bush. Still, liberal and free-market analysts alike have argued for a sweeping reform of America’s corporate tax code—one that would reduce rates while eliminating many deductions and provisions that give companies incentives to spend their global profits outside the United States. More narrowly, groups such as the Association for Financial Professionals have urged Congress to lower America’s tax rates on repatriated income, to levels closer to international competitors.
Some liberal economists say we should consider more direct industrial policy to force investment in innovative fields such as clean energy, to match China, Germany, and other competitors, or we should further curb foreign trade until the international playing field is more level in areas such as currency.
Thoma, of the University of Oregon, says he has been lately rethinking whether the situation demands more pronounced government income redistribution to help those whom globalization has hurt the most.
Nearly all the economists interviewed for this article called education a key piece of any solution, and some were alarmed by the potential fallout from state and local budget shortfalls that could lead to cuts in primary, secondary, and higher education. As middle-skill jobs disappear in the United States, some experts recommend new policies to push more students into college or vocational school in order to swell the future ranks of highly skilled workers. Implementation could include more federal college aid or even a requirement that students complete a year of higher education after high school.
Others say that the government should revamp its approach to unemployment benefits, linking payments to job retraining in an effort to shift workers from disappearing fields. “We’re in an economy that is undergoing rapid change,” Carl Van Horn, director of the John J. Heldrich Center for Workforce Development at Rutgers University, said, “but we have policies for an economy that we assume is more or less the same.” Autor, the MIT economist, says that there’s no guarantee the gains from globalization and automation will appear as immediately as the costs—or that everyone in America will benefit equally from them. “What people tend to not appreciate is how large the adjustment costs are and how long adjustments take,” he said in an interview, adding later: “There are things we can do to help people adjust. But we’re not very good at this.”
It may be that Washington must take bolder steps to encourage higher-risk, higher-reward investments by companies flinching at the violent churn of the global economy. As the New York Fed’s Groshen and Potter wrote in their trailblazing paper in 2003, “Structural change itself may have given rise to uncertainty. In periods of rapid change, it is hard for investors, companies, and workers to know which firms and industries will require more jobs. Our findings suggest that a return to job growth may require a mix of two ingredients: improved financing options for riskier ventures and resolution of current uncertainties, including time for the dust to settle from all the recent structural changes.”
Eight years later, it’s hard to say that anything in the economy feels more settled. Policymakers just now seem to be tuning in to the mystery of our changing situation. Before we can fix our jobs machine, we must figure out what broke it. As several economists noted, anyone who says they’ve solved the problem is lying.
1.4 Million Americans Have Been Out Of Work For 99 Weeks Or Longer
by Arthur Delaney - Huffington Post
There are 1.4 million "very long-term unemployed" who have been out of work for 99 weeks or longer, according to a new report from the Congressional Research Service. Ninety-nine weeks is a milestone for the jobless because that's the limit for unemployment benefits (though 99 weeks are not available in all states). Beyond that point, the jobless aren't eligible for much help besides food stamps and charity. The job market for anyone out of work that long is downright hostile.
The 1.4-million figure, calculated using the latest data available as of October, is much smaller than some home-cooked estimates circulated online by advocates for additional weeks of benefits for these "99ers." Some of those estimates are as high as 7 million. A spokesman for Rep. Barbara Lee (D-Calif.) told HuffPost on Monday that the Lee intends to reintroduce legislation to provide additional weeks of benefits, but more help for the jobless seems unlikely to pass a Republican-controlled House of Representatives.
The long-term unemployed, as opposed to very long-term unemployed, are people who've been out of work for six months. As of December, 6.4 million people, or 44.3 percent of the 14.5 million total jobless, have been out of work for six months or longer. The CRS report shows that very long-term unemployment is more likely to afflict older workers than younger ones. Of jobless workers older than 45, 10.7 percent have been unemployed for 99 weeks, compared to 6 percent of workers younger than 35. And 44.4 percent of the very long-term unemployed are older than 45.
Once long-term unemployment sets in, even a college degree is often of little help. Even though the national jobless rate for college graduates is just 4.8 percent, CRS says "unemployed workers at all educational levels were equally likely to have been looking for work for more than 99 weeks." The report warns that the ranks of the very long-term unemployed could grow.
"Many workers who were laid off during the recession and are still unemployed have not, as of October 2010, been unemployed for more than 99 weeks," the report says. "If a large number of these workers remain unemployed, the number of very long-term unemployed could increase. Finally, during an economic recovery workers who have been unemployed the longest are often the last to be hired." As HuffPost has reported, job ads on Craigslist and other sites routinely insist that applicants must be currently employed, and older job applicants say age discrimination is rampant.
For older, out-of-work residents, the future looks grim
by Jamie Smith Hopkins - Baltimore Sun
Kathleen Harwell can't imagine what life on the streets would be like for a 59-year-old woman with diabetes and high blood pressure, but she's afraid she'll soon find out. After nearly two years without work and no luck finding a new job, the Laurel resident is on the brink of homelessness. She has run out of savings and unemployment benefits. She's too young for Social Security. And she's not the only one in this frightening fix.
A burgeoning group of older, jobless people — here and nationwide — have found everything they worked for over the decades snatched away by the sharp downturn and slow recovery. Laid-off workers in their 50s, 60s and older are facing grim prospects of finding a new job, the worst for any age group in at least five recessions, at a time when hardly anyone is finding re-employment easy or quick. That has left these residents in a precarious state.
Baltimore's homeless-services agencies saw a 15 percent jump last year in the number of clients ages 50 and up. Calls for help to the United Way of Central Maryland's 211 line rose almost 9 percent among those older than 45 last year, compared with a 1 percent increase among all ages. And food pantries served by the Maryland Food Bank have noticed an influx of baby boomers, including some who were donors before job loss struck.
The Community Action Council of Howard County, which helps low-income residents of the affluent jurisdiction, is on track to see about 2,000 people ages 45-plus this fiscal year — up 50 percent from a year earlier. More older, out-of-work professionals are asking for the group's help because they have nowhere else to turn. "They are not traditionally individuals who seek social-services assistance," said Bita Dayhoff, president of the Community Action Council. "So they wait until their situation is very challenging, and they're truly struggling, before they come to us. That's an emotional side of the impact of the recession that we see on a day-to-day basis in this age category as well, because they're really, truly surprised by the economic status they find themselves in."
Older workers aren't more likely to be laid off — job seniority helps protect them. But once out of work, the odds are against them. And many worry they are being shut out of the job market because of their ag
The Great Debt Shift
by John Browne - Financial Sense
If one were asked to describe the major global economic changes that have unfolded since the financial crisis began, a good starting place would be the massive shift of debt from the private to the public sector. Attempting to arrest a deepening crisis, governments all around the world have bailed out businesses and companies by transferring bad debts to the public books. Although these moves have provided some current stability (after all, governments are much less likely to default), the long-term consequences may be dire.
Two of the world's largest economies, the EU ($16 trillion) and the US ($14 trillion), have become the leading practitioners of private-to-public debt shifting. The US has assumed the debts of banks, insurers, mortgage holders, and even entire industrial sectors. The European Union has done the same for entire states. The resulting public debt levels are, predictably, placing strains on both the dollar and the euro.
Worse still, the bailouts have created a spirit of apathy toward debt accumulation. Western governments have embarked on a debt binge for the ages. Already, the credit ratings of the United States and some of the EU's core countries, such as France and the UK, are being questioned. While this socialization of private debt has created deep citizen resentment, it remains to be seen whether political pressure is enough to hold back the tide. In the US, the forces of fiscal restraint appear to have the upper hand at present; but, this late in the game, it is far from certain that the newly elected fiscal hawks will be able to avert civil unrest and debt default.
It is worth noting that the debt shift has offered some near-term benefits. Relieved of repayment anxiety, many companies have posted very promising earnings reports in recent months (one needs to only glance at Detroit). Despite continued demand weakness, these companies have worked hard to improve their balance sheets and raise operating margins. The resulting rally in share prices has given rise to a belief that recovery is at hand. However, despite buoyant share prices, unemployment continues at dangerously high levels, depressing tax revenues and leading to much greater entitlement spending. This has made public debt levels rise even faster.
Total world direct sovereign debt, excluding guarantees and unfunded medical and pension obligations, is some $41.6 trillion dollars. When the $2.9 trillion owed by global municipalities is included, total direct public sector debt is over $50 trillion. Against this total, even the wealth of cash-rich nations such as China ($2.85 trillion in foreign-exchange reserves) and Japan ($1.1 trillion in reserves) pale into insignificance.
With so little credit to soak up the future financing needs of the US and the EU, it is no wonder that both their currencies are coming under pressure. It should be no surprise that Chinese President Hu began his state visit to the US by warning that the debased dollar was causing much of the world's monetary problems - and was thus no longer credible as the world's reserve. Once unshielded by that great privilege, I forecast that the US dollar will plummet.
In many ways, the euro may fare little better. The EU has organized a $1 trillion rescue package for its smaller members, but, in practice, there is not enough money for all the troubled peripherals, let alone a core state like France or Spain. Last week, the EU suggested that Greece should be allowed to default and restructure much of its debt. The Irish Times reported that the EU has allowed Ireland to print its own euros to settle the debts of its banks. Will it allow Portugal, Spain, Belgium, Italy and France to do the same? If so, what credibility will remain for the euro?
Possible because a major currency collapse is unprecedented in living memory, investors have been slow to react. While the markets are calm at present, we mustn't forget that the nature of panic is that it is sudden. It can erupt quickly and overwhelm the unprepared. When it does, even supposedly rock-solid assets like Treasury bonds may be discounted severely.
America: An uncertain outlook
by Suzanne Kapner and Aline van Duyn - Financial Times
Room to improve: potential buyers view a foreclosed property in Seymour, Connecticut. Some 5.6m US home loans are at least three months in arrears on payments In the spring of 2009, Dena Cooper received what she thought was a lifeline from the US government. The single mother of four had her monthly mortgage payment cut to $1,000 from $1,500 under a federal programme intended to reduce defaults and foreclosures.
Less than two years later, her housing situation is again critical. Even the lower payments proved too expensive for Ms Cooper once her income as a nurse’s assistant in Morris Plains, New Jersey, was cut after surgery kept her out of work for several months. She has since fallen behind again on her mortgage, joining a growing number of American borrowers who redefault on home loans even after their payments are substantially reduced. "I just can’t get back on my feet," says Ms Cooper.
The problem of redefaults is only one of several headwinds facing the US housing market – and is among the factors that has made a recovery in house prices elusive. Last year, many analysts thought prices would stop falling. Those hopes proved premature. Instead of hitting the bottom, 2010 marked another year of house price declines and record defaults by homeowners on their mortgages. Now, even as some parts of the US economy are on the mend and business begins to recover, the housing market – the area where the financial crisis began – remains a blight on the landscape. Home prices are expected to decline yet again this year – for the fifth year in a row – and the number of houses entering foreclosure is rising.
The continued problems in housing are a cause for concern that reaches far beyond the individuals living in Morris Plains or any of the other thousands of US towns hit by foreclosures. The effects of housing declines are still having an impact on the American economy, its government and investors around the world. "The US housing market is still putting the brakes on any US recovery," says Paul Dales, economist at Capital Economics. "Politically and socially, the foreclosure crisis also continues to create huge problems."
Housing concerns are centred on three issues. First, housing accounts for one-quarter of US households’ assets. With persistent uncertainty surrounding the spending power of consumers, on whose activity the economy relies for its strength, further weakness in housing could dampen expenditure and growth.
Second, bond investors and banks remain exposed to further mortgage losses. Huge numbers of home loans were financed before the housing crisis through securitisation, with the mortgages repackaged into bonds. The value of the bonds is linked to mortgage payments, and lower payments will ultimately mean losses for bondholders. Further losses would also affect US banks, which have been pressed by holders of toxic mortgage debt to make good on terms in the securitised bond contracts to buy back badly underwritten mortgages.
Third, the decline in house prices makes it even more difficult for Washington to extract itself from financing mortgages. Currently, more than 90 per cent of new US mortgages are guaranteed by government-backed agencies such as Fannie Mae and Freddie Mac – a situation that will come into the spotlight in coming weeks when the administration of President Barack Obama is due to submit plans for their future. "It is very hard to discuss mortgage market reform while we are still in a declining home price market," says Tom Deutsch, executive director of the American Securitisation Forum, an industry grouping.
The after-effects of the housing bubble, which was swollen by the easy credit made available due to strong global investor demand for securitised mortgages, are still being strongly felt across the US. Already, some 5.6m homes are in some stage of delinquency or foreclosure, meaning that the borrower is at least three months behind on payments – a record number of soured loans. As many as 1.5m additional borrowers are expected to default this year, according to Sandeep Bordia, the head of residential credit strategy at Barclays.
For the housing market to return to some sense of normality, those homes will need to be cleared out of the pipeline. To do that, banks must take possession of the properties and put them on the market, usually at a depressed price. Analysts predict that it could take another four years to work off the backlog of foreclosed homes. So even if home prices stabilise by the end of this year, they are unlikely to increase any time soon. "For housing, it will be a long, slow slog," says Chandrajit Bhattacharya, who analyses the mortgage market for Credit Suisse.
One city hit hard by foreclosures is Newark, New Jersey, which has struggled with economic decline for decades. At the peak of the housing boom, 54 per cent of new mortgages in Newark were made to the subprime borrowers that turned out to be at the heart of the mortgage crisis. Don Baldyga is the biggest buyer of foreclosed homes in Upper Clinton Hill, one of the most distressed Newark neighbourhoods. Episcopal Community Development, the housing provider he works for, uses government grants to buy abandoned homes and fix them up.
As he sees it, many problems stem from the fact that mortgages were quickly sold on by the initial mortgage lender and sliced, diced and repackaged into mortgage-backed securities. In many cases, it is taking a long time for homes to come back on to the market – leaving them in limbo. "There is a lot of logistical craziness," Mr Baldyga says during a drive through Upper Clinton Hill, pointing to dozens of empty homes that he would like to buy. "Banks are not taking foreclosures to completion, so we cannot bid on many homes."
In the case of one foreclosed property Mr Baldyga bought at the end of last year, the value plunged during the sale process because the servicing agency had failed to ensure the abandoned home was physically secured. He bid $38,000 when the foreclosed property came on sale but eventually bought it for $1 – it had been vandalised twice. The first time, the pipes were stolen. On the second occasion, windows and metal sheets were removed, leaving the house exposed to wind and rain. "The mortgage servicers and the many different entities handling the foreclosure transactions have no incentive to make sure the properties are secured," Mr Baldyga says. "For the extra $1,000 that it would have cost to secure the property, the bank ended up losing nearly $40,000."
The foreclosure process is becoming increasingly bogged down by litigation. In a decision that is likely to reverberate across the country, the Massachusetts high court ruled this month that Wells Fargo and US Bancorp, two big mortgage banks, could not foreclose on two properties because they had failed to prove they owned the homes. The use of "robo-signers" – bank employees who rubber-stamped documents during the boom without adequate due diligence – have sparked investigations by all 50 state attorneys-general into foreclosure practices, which are also likely to snarl up proceedings.
Partially as a result of these problems, says Mr Bhattacharya at Credit Suisse, a typical foreclosure now takes 15 months, about double the time it took before the housing crisis began. The deteriorating picture is felt by Mr Baldyga in Newark. "Foreclosures are still coming into the pipeline faster than we can get them out," he says. The government’s drive to have loans modified so terms become easier is also putting the brakes on foreclosures. But rather than providing a way for borrowers to climb out of unsustainable debt permanently, the modifications are increasingly turning out to be a temporary fix. Analysts expect as many as two-thirds of these borrowers will eventually redefault, because even after their monthly mortgage payments are reduced, they still have too much debt.
Take Ms Cooper, whose mortgage payment was cut by $500 a month under the government-run Making Home Affordable Program. Even after that reduction, two-thirds of her income was going to service debt. "Modifications are not working, because even after getting one, borrowers still can’t pay their mortgages," says David Wyss, chief economist for Standard & Poor’s, the credit rating agency. Mr Baldyga, whose centre in Clinton Hill also runs foreclosure advisory clinics, says it is becoming harder to modify people’s mortgages as the problems shift from holders of high-interest subprime mortgages – where interest rates can be reset – to people who are simply unable to pay because they have become unemployed. Those seeking advice about foreclosures increasingly cite loss of employment as a cause, he says. Unemployment remains at 9.4 per cent across the US and is much higher in post-industrial cities such as Newark.
Often the two factors – reduced income and documentation problems – intersect. Brian Costigan spent $286,000 in 2005 to buy a three-bedroom home in Manville, south-west of Newark. Once the economic crisis hit, Mr Costigan’s income from selling commercial vehicles plunged 45 per cent and he fell behind on his mortgage payments. Mr Costigan is now suing Citigroup, his lender, for denying him a permanent loan modification after putting him in a trial programme – and for moving to foreclose without producing paperwork that proved the bank owned his mortgage.
Lawrence Friscia, a New Jersey lawyer who is representing Mr Costigan and other homeowners in a separate case against Bank of America, says faulty bank practices are exacerbating the situation. "We won’t solve this foreclosure crisis until we get more co-operation from the banks but, right now, they are pushing the problem under the rug," Mr Friscia says. As well as redefaults by modified mortgages, many homes are these days worth less than the size of the loan. Taking advantage of laws that in most states allow homeowners simply to hand the keys back and leave the bank to cope with any loss on the loan, there has been an increase in defaults by creditworthy homeowners who decide to walk away.
"The market is underestimating the housing problem and potential losses to bondholders if further policy actions are not taken," says Laurie Goodman, a housing analyst at Amherst Securities. Stephanie Greenwood, who works for Newark’s economic and housing development department and has been involved in trying to stave off home repossessions for more than three years, says there is a need for more comprehensive foreclosure policy. "The current foreclosure prevention system is still largely based on processing applications for modifications on a one-by-one basis," she adds. "Even if we are able to resolve all the paperwork problems and if investors were willing to agree to mortgage modifications, it would still be difficult to get to the scale needed to make a dent in the number of new foreclosures."
Battle with investors over who bears subprime losses
Investors in America, Europe and elsewhere who gobbled up $1,400bn worth of securities backed by US mortgages in the run-up to the financial crisis have seen the value of their assets plunge, writes Aline van Duyn. The fight over who ends up with the huge losses resulting from the wave of defaults by homeowners on subprime and other mortgages is far from over, however. Brian Moynihan, chief executive of Bank of America – one of the banks most deeply embroiled in disputes over toxic mortgages following its 2008 acquisition of consumer lender Countrywide Financial – told analysts on Friday that resolving the problems "will take a longer period of time, perhaps a few years".
The shares of big US lenders such as BofA have already been knocked by questions over whether they will be on the hook for tens of billions of dollars worth of loans that have soured since being repackaged and sold as mortgage-backed securities (MBS). Last week, BofA estimated that its potential exposure could be "$7bn to $10bn". The figure is hard to pinpoint because many investors have yet to claim; lawsuits that could determine their next steps remain in progress.
The disputes centre on safeguards built into MBS to protect investors from fraudulent underwriting and other factors that might hurt the value of the securities. Since MBS consist of pools of thousands of mortgages that investors could not check individually, loans included in MBS were required to meet certain standards. According to the "representations and warranties" sections of MBS contracts, investors have the right to "put back" loans that fall short – essentially, to obtain a refund.
These "reps and warranties" have turned out to be ineffective safeguards. Many investors face legal and procedural obstacles to analysing original loan information to find out whether terms were breached. Some, such as government-backed mortgage providers Fannie Mae and Freddie Mac – with which BofA reached a $2.6bn settlement – have been able to inspect files. Large investors, including BlackRock and Pimco, have joined forces to try to recover losses on more than $47bn in Countrywide MBS. Hedge funds, pension funds and European banks are also considering ways to get their hands on loan files.
Bill Frey, a hedge fund investor who has been working to spur other investors to enforce their "put back" rights, says the costs to banks will depend on whether investors team up. "If investors do not act together, the banks will not have to pay out much," he said. "If they do, the cost could be much, much higher than the $10bn Bank of America has suggested."
Spain tempts fate with minimalist bank rescue
by Ambrose Evans-Pritchard - Telegraph
Spain has set in motion a partial nationalisation of its crippled savings banks, or cajas, but stopped short of the giant rescue deemed necessary by some experts to contain the country’s festering crisis. Finance minister Elena Salgado said capital injections into the cajas would "in no way exceed €20bn [£17bn]", with a large part coming from the private sector. Spanish banks will have to boost their core Tier 1 capital ratio to 8pc, even stricter than the Basel III rules.
"This is unlikely to be a game-changer, and could potentially unwind the relief rally we have seen in the markets," said Silvio Peruzzo, RBS’s Europe economist. "We view €50bn as the minimum recapitalisation for the Spanish banking system that would restore investors’ confidence," said the bank.
RBS said Spain remains caught in a vice of tightening fiscal policy and a deepening property slump that may culminate in a 40pc fall in house prices, eroding the solvency of the cajas. The Madrid consultants RR de Acuna estimate the overhang of unsold homes at 1.2m. Mr Peruzzo called on EU leaders to take much bolder action to overcome the crisis, demonstrating that they really mean to "save Spain" by beefing up the rescue machinery. EU ministers played for time at a key meeting last week, giving an impression of complacency.
A report by RBS said the real firepower of the EU’s €440bn bail-out fund must be greatly increased to cope with the risk of a full-blown Iberian crisis. The fund should be allowed to buy Spanish and other eurozone bonds pre-emptively, and recapitalise banks. EU leaders are starting to recognise that the sort of loan packages provided to Greece and Ireland are no answer to a solvency crisis caused by excess debt, but have not yet agreed to a formula that allows these economies to claw their way back to health.
RBS said there is a risk that new proposals in the pipeline will not be "forceful enough" to mark a turning point in the eurozone drama. It said Spain "will remain exposed to contagion", unless the EU takes pre-emptive action. Goldman Sachs takes a rosier view, deeming Spain to be fundamentally "solvent". It estimates further caja losses at €15bn. Even if Spain slips into a double-dip recession this year under a "pessimistic scenario", public debt will peak below 90pc of GDP. Exports are recovering, with car shipments at record highs.
Analysts are split over the true state of the cajas. Arturo de Frias at Evolution Securities said parts of Spain’s banking system look "Irish". The "problem ratio" on €439bn of property debt may reach 60pc. "We calculate a worst case of €142bn future impairments – €59bn for banks, and €83bn for the Cajas," he said. Brussels clearly fears that Spain is still at risk. Olli Rehn, the EU’s economics commissioner, called for urgent action to beef up the rescue fund (EFSF) before the next spasm of debt jitters. "We need to agree as quickly as possible. The recent lull in market tensions gives us breathing room, but we can’t sit back: we must act now with full determination," he told Die Welt.
Mr Rehn said EU leaders must redesign the bail-out fund so that it can lend a full €440bn. "If you buy a Mercedes with 440 horsepower, you want all 440 horsepower," he said. The EFSF has a lending limit near €250bn owing to the need for extra collateral to anchor its AAA rating. EU experts are exploring ways to boost the total without needing fresh money from member states, which would entail a Bundestag vote at a bad moment before regional elections.
They have support from German finance minister Wolfgang Schauble, who said the EU cannot keep "stumbling from one crisis to the next". But the Free Democrats (FDP) and Bavaria’s Social Christians are still dragging their feet within the ruling coalition. Guido Westerwelle, the FDP leader, has sounded euro sceptic over recent weeks, accusing EU officials of trying to bounce Germany into signing a blank cheque for a "Transferunion", arguably in breach of both German and EU treaty law. He admonished EU officials for their "ex-cathedra" demands, reminding them that the rescue fund remains the prerogative of the member states that pay for it.
"It bothers me that some in Europe seem to think nothing has happened in this financial crisis, and think they can solve the problem by taking on fresh debt," he said, invoking the name of Ludwig Erhard, the free-market apostle who created the foundations of the post-war German miracle. Jean-Claude Juncker, head of the Eurogroup, said the FDP’s new tone is alarming. "I am appalled by how some German liberals are compromising their European political heritage. It is deeply painful for me to see that some in the FDP are now flirting with a populist course regarding Europe," he told Spiegel.
Mr Juncker said icily that Germany was not the only country in Europe with a AAA-rating and is not the only contributor to the EU bail-outs. "We could criticise the Greeks, Portuguese and others more credibly if Germany and France hadn’t violated the Stability Pact on purpose in 2003," he said.
Russia Seeks Foreign Investment to Fill Budget Gap
by Andrew E. Kramer - New York Times
A few years ago, Vladimir V. Putin, as president, compared the energy riches of Siberia to a piece of candy held tightly by Russia, as if in a "sweaty fist." However much investors might want it, it was off limits. Yet just last month, Mr. Putin, now prime minister, said Russian officials "understand that we need foreign investment." And if the current president, Dmitri A. Medvedev, continues with his plan to attend the World Economic Forum in Davos, Switzerland, this week — despite Monday’s airport bombing in Moscow — he, too, will be trying to attract foreign capital.
What has changed, to turn the sweaty fist into the open hand? Simply put, Russia needs the money. Windfall profits from oil exports, which Russia had salted away before the global recession to cover deficit spending, are about to run out. In fact, that portion of Russia’s sovereign wealth fund, the Reserve Fund, is down to $26 billion — not enough to cover even half of the projected 2011 budget deficit. Thus, for the first time since the financial crisis of 1998, Russia will be compelled this year to turn to international banks and pension funds in the United States and Europe to maintain financing for everything from modernizing the military to paying high public sector wages.
The government is also lining up a fresh batch of asset sales. It has retained Bank of America Merrill Lynch as an adviser for the planned sale of a stake in the state bank VTB. Shares in oil companies, hydroelectric dams and shipping lines will also go on the market. With so much state property scheduled for privatization, Goldman Sachs reinforced its Moscow office this month by moving the chief of investment banking in France, Jean Raby, to Russia. Mr. Raby will be co-director, along with Christopher Barter.
Russian officials all the way up to the Kremlin are clearly trying to entice other foreign investors as well. Mr. Medvedev had been scheduled to deliver the keynote speech Wednesday night at the Davos forum. But after the bomb attack on Monday at Moscow’s busiest airport, the Kremlin said that Mr. Medvedev had delayed his departure. There was no immediate word on when, or if, he might reschedule. But Russia’s pressing need to raise cash will remain. To make up its budget shortfalls, the government plans to issue $50 billion worth of ruble-denominated bonds and privatize $10 billion in state assets every year until at least 2014.
Mr. Medvedev had been planning to spend two days at Davos, seeking to charm chief executives from Deutsche Bank, Novartis, Siemens, PepsiCo, Boeing and others at a private reception and in public panel discussions. "The main signal that Medvedev will give is that Russia is open for investment," his chief economic adviser, Arkady V. Dvorkovich, said last Friday at a news conference to preview the Russian goals at Davos. Mr. Dvorkovich said the Russian president would also be going to gauge the chief executives’ interest in Russian assets to decide which state companies should go up for sale first.
Potentially on the block along with VTB are stakes in Rosneft, the state-owned oil company; RusHydro, the national hydroelectric utility; and Sovcomflot, a fleet of state-owned merchant ships. Russian domestic banks, which are still relatively flush, will most likely buy about three-quarters of the newly issued government debt, said Ivan Tchakarov, the chief economist at Bank of America Merrill Lynch in Moscow. But the Kremlin will depend on foreign investors to buy the rest. "We are entering an entirely different ball game," Mr. Tchakarov said during an interview. "They want to open up to foreigners."
Not since an oil price slump in the mid-1980s dented Soviet finances have officials in Moscow committed to such extensive fund-raising. The 1980s borrowing led to foreign debt of more than $100 billion. A big challenge will be overcoming multinational companies’ wariness of Russia. This month, the British political risk consulting firm Maplecroft ranked Russia 186th out of 196 countries for political risk to business — worse than Pakistan. India and China fared much better, ranked 26th and 62nd.
Meanwhile, the corruption perception index compiled by Transparency International ranked Russia as the world’s most corrupt major economy in 2010 — near the bottom of the overall list, at 154 of 178 countries, tied with Tajikistan and Kenya. To make Russia look more appealing to foreign investors, a reform-oriented wing in the government has streamlined a host of rules. Russia lowered its capital gains tax, for example. while the main stock exchange, the Micex, eliminated a requirement that nonresidents trade through local brokers.
In 2010, after years of foot-dragging, Russian negotiators resolved sticking points on entry into the World Trade Organization. By October, Lawrence H. Summers, then director of the National Economic Council in the United States, said Russia had made such progress that it appeared ready to join the trade group within a year. And in September, Mr. Medvedev trimmed the list of so-called strategic assets that were off-limits to foreigners — the large oil and metals deposits clenched in the "sweaty fist" — to about 50 sites, down from more than 200.
But problems remain. Mr. Dvorkovich, Mr. Medvedev’s economic adviser, acknowledged that the criminal conviction of the former oil company owner Mikhail B. Khodorkovsky last month had harmed Russia’s ability to attract foreign investment and that the case would surely come up at Davos. It was an unusually frank statement for a senior official. "I think that a significant part of the international community will have serious questions, and the assessment of the risks of working in Russia will increase," Mr. Dvorkovich said.
Once Russia’s richest man, Mr. Khodorkovsky had angered Mr. Putin by taking part in politics and by negotiating to sell a portion of his oil company, Yukos, to Exxon Mobil without the Kremlin’s blessing. After the second conviction, handed down last month as the police were clubbing protesters on a street outside the courtroom, Mr. Khodorkovsky will remain behind bars until 2017.
Still, the Russian government’s warming attitude toward foreign business executives was on display this month in the latest twist for the assets of Mr. Khodorkosvky’s company. Yukos was bankrupted and sold off, largely to Rosneft, which this month struck a partnership agreement with BP. The two companies have agreed to swap shares and jointly search for oil off Russia’s northern coast. Encouraged by the implication that the pendulum was again swinging toward openness, investors shifted $742 million into Russian-dedicated funds in the week after the Rosneft-BP agreement.
That was three times more than the $196 million in the previous week, and the largest jump in Russian portfolio investment ever recorded, according to EPFR Global, a research firm in Cambridge, Mass., that tracks fund flows around the world.
Melbourne housing now 'severely unaffordable'
by Chris Zappone - The Age
Melbourne has scored near the bottom of an international ranking of housing affordability, stoking fears runaway house prices have made Australia a less equitable country. The Demographia International Housing Affordability Survey, which ranked 325 markets by affordability, listed Melbourne as the world's 321st most affordable city, more reasonably priced than only Sydney and a handful of other locations. London is more affordable than Geelong.
The ratio of house prices to median yearly household income was 9 in Melbourne, versus 9.6 in Sydney - the second least affordable city in the world, in spot number 324, according to data produced by the US-New Zealand anti-regulation group Demographia in a survey of six English-speaking nations and Hong Kong. The group put the median Melbourne house price at $565,000 with the median household income at $63,100.
Hong Kong came in last at number 325, with an income-house price ratio of 11.4, while Saginaw, in Michigan ranked No. 1, with a multiple of 1.6. Demographia considers markets with a median multiple of 3 or less "affordable", while those with 5.1 or more are considered "severely unaffordable". Australia's major markets were all considered "severely unaffordable''.
US-based geographer and author Joel Kotkin said that even after the housing bubble implosion in the US and Britain beginning in 2008, the ratio of home prices to incomes has grown in major cities such as Los Angeles, San Francisco, Boston, London, Toronto and Vancouver. "Perhaps most remarkable has been the shift in Australia, once the exemplar of modestly priced, high-quality, middle-class housing, to now the most unaffordable housing market in the English-speaking world," he said. "The real issue is affordability and Australia has gone from a middle-class paradise in that regard into a more stratified society - just as we find in Britain and parts of the US."
Mr Kotkin, who has visited Australia extensively, described the trend as "neo-feudalism" that unravels the social achievement of spreading property ownership. Demographia's report comes as Australian home prices are expected to show little growth in 2011, after double digit yearly growth as recently as 2010, driven by the slow pace of construction approvals, strong immigration, and an economy that hasn't experienced a recession in nearly two decades.
House prices plateaued in mid-2010, amid interest rate rises and a weaker pace of sales. The national city dwelling price fell 0.2 per cent in November, to $466,000, according to RP Data-Rismark information. Six in 10 Australians live in major cities. The third quarter 2010 rankings were compiled from national housing reports and estimates drawn from census data on incomes, with calculations made in local currency.
Separately, a report from the Department of Immigration and Citizenship calculates that if 260,000 migrants come to Australia per year, both Sydney and Melbourne will need to expand by 430,000 hectares, or 4300 kilometers by 2060. “Expansion of urban areas raises issues such as likely increases in traffic congestion, city (air) pollution, and competition for land as a resource,” the report concluded. “The latter is an important issue since peripheral land of a number of capital cities has been relatively productive agriculture land, which can supply fresh food to the local area with lower freight requirements.” The report on the physical impact of immigration was prepared by Flinders University and the Commonwealth Scientific and Industrial Research Organisation Sustainable Ecosystems Department of Immigration and Citizenship.
The Demographia report showed Australian cities shared the mantle of “severely unaffordable” with American, Canadian, British and New Zealand cities. Demographia listed Melbourne as the world's 321st most affordable city, more reasonably priced than only Sydney, which came in at 325th, and a handful of other locations. The survey found that the ratio of house prices to median annual household income was 9.6 in Sydney. It put the median house price at $634,300 and median income $66,200.
Brisbane's affordability trailed London’s so-called exurbs, which stretch into neighbouring counties in east and southeast England. Queensland’s capital ranked 303 in terms of affordability, with a ratio of 6.6 per cent while the English markets were 297, with a ratio of 6.5 times. The median house price in Brisbane was $447,500, while the median household income was $67,900. Perth, ranked 291, with a 6.3 ratio, based on a $480,000 houses with a median household income of $75,700, lower than the New York City areas, which scored 289 on the list.
Better times ahead?
Sydney-based real estate research and investment group Rismark believes Australian homes will become more affordable through 2011, as incomes remain strong and house prices flatten out. "As Australia's business investment and export boom drives strong household income growth at the same time as interest rates keep dwelling prices in check, we are likely to see a substantial improvement in residential real estate valuations," said Rismark joint managing director Christopher Joye.
By Rismark's calculations, the ratio of price to disposable household income ratio has dropped from 4.6 to 4.4 between the June and September quarters, as the median quarterly Australian home price fell from $418,000 to $405,000. Rismark includes homes outside capital cities, apartments and attached units, and draws on income data that captures wealth generated from investments and multiple sources of revenue, when calculating house-price to income ratios.
Melbourne-based innovation research agency 2thinknow, which compares the social and commercial advantages of 289 cities worldwide, agreed with Demographia's assessment on Australia's affordability. "Anything [with an income-house price ratio] above 5 is a high multiple - based on two incomes and the lifestyle flexibility to have children," director Christopher Hire said.
The impact means Australian cities receive low benchmarks in the world on 2thinknow's property prices in the Innovation Cities Index. Sydney ranks among the least affordable places, with a 0 out of 5 rating, on a par with San Francisco and Hong Kong, while Melbourne, Brisbane, Adelaide, and Hobart have a rating of 1. "High property prices mean investment that should be in productive infrastructure or capital is spent on property," he said, leaving the country unprepared when the mining boom ends.
US Postal Service Eyes Closing Thousands of Post Offices
by Jennifer Levitz - Wall Street Journal
The U.S. Postal Service plays two roles in America: an agency that keeps rural areas linked to the rest of the nation, and one that loses a lot of money.
Now, with the red ink showing no sign of stopping, the postal service is hoping to ramp up a cost-cutting program that is already eliciting yelps of pain around the country. Beginning in March, the agency will start the process of closing as many as 2,000 post offices, on top of the 491 it said it would close starting at the end of last year. In addition, it is reviewing another 16,000—half of the nation's existing post offices—that are operating at a deficit, and lobbying Congress to allow it to change the law so it can close the most unprofitable among them. The law currently allows the postal service to close post offices only for maintenance problems, lease expirations or other reasons that don't include profitability.
The news is crushing in many remote communities where the post office is often the heart of the town and the closest link to the rest of the country. Shuttering them, critics say, also puts an enormous burden on people, particularly on the elderly, who find it difficult to travel out of town. The postal service argues that its network of some 32,000 brick-and-mortar post offices, many built in the horse-and-buggy days, is outmoded in an era when people are more mobile, often pay bills online and text or email rather than put pen to paper. It also wants post offices to be profitable to help it overcome record $8.5 billion in losses in fiscal year 2010.
A disproportionate number of the thousands of post offices under review are in rural or smaller suburban areas, though the postal service declined to provide any estimate on how many beyond those slated to begin closure in March might ultimately close or which ones are being targeted. "We want to make the smartest decisions possible with the smallest impact on communities," Dean Granholm, vice president for delivery and post office operations, said in an interview. He said the agency is identifying locations that are operating at a deficit and looking "for the opportunity to start the process of closing."
In addition to reducing employees—it has cut staffing by a third since 1999— the postal service has sought for years to deal with financial woes by raising rates or cutting services, such as a proposal to drop Saturday delivery. It has also talked in the past about closing a much smaller number of post offices. But while closures have been "on the table" in the past, this push is the agency's most serious yet, Mr. Granholm said, and is drawing widespread interest from a cost-cutting Congress. Still, shutting down post offices is often politically unpopular: elected officials in several communities have already written the Postal Regulatory Commission protesting planned closures.
Eighty-three specific post offices were approved for closing during the three months ending Nov. 15, more closings than in any quarter in the agency's history, according to the postal service. In addition, 408 post offices where service has been suspended for various reasons won't reopen amid the fiscal crisis, Mr. Granholm said. Some of those suspensions are being contested by the Postal Regulatory Commission, independent from the postal service and reporting to Congress, which is investigating whether the postal service has been illegally using reasons such as lease expirations to close small, underused branches. The agency has denied wrongdoing.
While paring down is a common survival tactic for organizations these days, efforts by the postal service to do so routinely raise alarms because many citizens see post offices as an essential public service. Postal service dates to the founding fathers, with Benjamin Franklin serving as the first U.S. postmaster general and the Constitution explicitly authorizing Congress to establish post offices. Critics in Washington argue the postal service should reduce what they say is too much spending on employee benefits before resorting to closures. As closure notices go up, citizens are rallying around their post offices in Millville, W.V., Hamilton, Tenn., Prairie City, S.D., and elsewhere, fearing not only a loss of convenience but a death knell for their small towns.
"It ain't right doing this to our community," says Delmer Clark, a 70-year-old retired coal miner in Eastern Kentucky's Appalachian Mountains, in the no-stoplight town of Holmes Mill. The post office here is set to close next month after more than 100 years. About the size of a garage, it has long been a part of the town's identity, and the pending closing is fueling local suspicion that public officials don't care about them. The local school closed years ago and reliable cable, Internet and cellphone reception has yet to arrive, residents say. "When they close the post office, they probably won't even come up here anymore and clean the roads," says Mr. Clark.
"It will hurt us real bad," says Esther Sizemore, a 62-year-old retired school-bus driver. Not owning a computer, and aching from hip arthritis that makes driving significant distances difficult, Ms. Sizemore drives down the street to the post office to mail her handmade quilts, trade news with friends and pick up packages, since she does her shopping by catalog. She also feels her mail is safer using a post office box; mail thefts have been a problem in the area, says Deputy Winston Yeary, of the Harlan County Sheriff's Department.
The Holmes Mill post office is closing in a consolidation set to claim more than 30 small Kentucky post offices this year, according to local postal officials. It's in the red, costing the postal service $12,748 in fiscal year 2010, according to the agency. Residents will still have home delivery, and can use the post office and maintain P.O. boxes in the next town, but some locals fear the drive: The 12-mile roundtrip is on a winding mountain road bordering a steep drop-off to the river and named "Coal Miner's Highway" for the coal trucks that take much of the road.
Some lawmakers say closing post offices is the wrong answer. Sen. Susan Collins (R., Maine) says the agency should instead cut waste in its ranks. Although the postal service has cut its work force through attrition in recent years, it is still weighed down by overly generous employee benefits, she says. Postal workers pay "significantly" lower premiums for their health and life insurance plans than other government employees because of union agreements, according to a September study sponsored by the Office of Inspector General. The report said the postal service could save $700 million this year alone by asking employees to pay more. The report, however, also said the postal service's contribution into employee benefits has started to decline, and that more reductions are planned as a result of recent union agreements.
"One of my frustrations is that the first approach the post office seems to take is to reduce service…when instead it needs to tackle a benefit structure that is too expensive, and it needs to look for ways to stay in business and deal with the digital age," says Sen. Collins. Communities that lose post offices will still get deliveries, either at homes or at clusters of mailboxes set up in town, and there are multiple options for getting postal services, including stamps by mail, said Mr. Granholm of the postal service. Also, he says, many rural dwellers already travel to nearby cities for groceries and other services. "Why can't they go there for the post office?" he says.
Under U.S. law, mail delivery is a "basic and fundamental" government function meant to "bind the nation together" by providing service to "all communities" at a reasonable price. The nation's philosophy of universal postal service has resulted in stamp prices that are among the lowest in the industrial world and post offices from the far reaches of Alaska to easternmost Maine. Yet more than half lose money and "are located in areas where people no longer live, work or shop," U.S. Postmaster Patrick Donahoe testified to the Senate in December.
Legislation filed in Congress and supported by Mr. Donahoe would make it easier for the postal service to close the thousands of unprofitable post offices. A bill introduced by Sen. Thomas Carper (D., Del.) would repeal wording in U.S. law that says "no small post office shall be closed solely for operating at a deficit." Currently, the postal service must cite other reasons—in addition to finances—such as unsafe conditions or a retiring postmaster. Mr. Carper says it isn't his intent to reduce access to service, and says the postal service could explore moving more postal counters into existing retail establishments, like banks or supermarkets. "Allowing the postal service the ability to close offices that fail to cover their costs is a huge step toward our future viability," Mr. Donahoe said.
While government owned, the postal service is an independent agency supported primarily by postage fees, though it's allowed to—and does—borrow from federal coffers. Mail traffic, particularly the more lucrative first-class mail, peaked in 2006 at 213 billion pieces, then fell 20% by 2010. The recession contributed to the drop. But a digital revolution is also at play, and with fewer people sending letters, mail volume could fall further to 150 billion pieces, an unprecedented decline, in the next 10 years, according to a September study sponsored by the Office of Inspector General.
Along with shifting consumer behavior, the agency is saddled with billions in unusually burdensome retiree health costs, the inspector general said. Historically, the postal service, which employs 532,800 workers, paid for retiree health benefits when they came due. But postal reform law passed by Congress in 2006 mandated the agency to plan ahead by pre-funding retiree health benefits at around $5 billion a year for 10 years starting in 2007. "No other federal agency or private sector companies have a similar burden," Mr. Donahoe testified. Both Sens. Collins and Carper have introduced legislation addressing retiree-health funding.
The pre-funding obligation contributed heavily to recent record losses, and has forced the postal service to borrow from the federal government to meet shortfalls, he said. The agency now owes the U.S. Treasury $12 billion, and said it expects to max out its statutory $15 billion line of credit by the year's end. In towns losing post offices, some citizens believe they are paying for mismanagement at the agency. "From what I understand, the upper crust in the post office gets plenty of money, but they can take away what we have," says Ruby VanDenBerg, who is 86, and lives in Prairie City, S.D., a ranching community of more than 100 farms. The post office officially closed on Dec. 30 after 102 years. Ms. VanDenBerg now drives 40 miles to a post office.
The Prairie City post office cost $19,000 a year after revenue, says the postal service, which blamed "safety deficiencies" for the closing. Residents say the problem was a faulty furnace, and say they offered to make repairs themselves but were ignored. They have appealed the closing with the Postal Regulatory Commission; their case is under review. Prairie City postal clerks kept a pot of coffee brewing and posted birth and death notices. "That was the gathering place for people to come in the mornings, have a cup of coffee or a can of pop, and visit, but we don't have that no more," says Daniel Beckman, a recently widowed farmer. "All that's left in the town now is just a church; it's totally depressing." The closing also crimped an informal local method for delivering medicine to isolated corners of the prairie, rural doctors and pharmacists wrote to the commission.
The area's only major hospital and pharmacy is in Hettinger, N.D., 40 miles away and over the state line from Prairie City. Before, when an elderly person or farmer in Prairie City quickly needed an antibiotic or other medication, a pharmacist in Hettinger would rush prescriptions to the Hettinger post office, catching the mail carrier who each day traveled from Hettinger to the Prairie City post office. The closing eliminated that direct route, and now Prairie City mail is sorted and delivered on a rural route out of Bison, S.D., delaying the delivery of medicine from Hettinger by two or three days, says Dr. Brian Willoughby, of West River Health Services in Hettinger. "When they cut these services, there are multiple spinoff consequences for these older people out there in the middle of nowhere, but the bureaucrats sort of forget about that," he says.
How Severe Is Europe's Intertwined Debt Crisis?
by PBS Newshour
Ilargi: The PBS piece references this great 6 month old Clarke and Dawe schtick on Europe's debt. So I thought I'd repost it.
Naomi Klein: Addicted to risk
Food Speculation: 'People Die From Hunger While Banks Make a Killing on Food'
by John Vidal - Global Research
Just under three years ago, people in the village of Gumbi in western Malawi went unexpectedly hungry. Not like Europeans do if they miss a meal or two, but that deep, gnawing hunger that prevents sleep and dulls the senses when there has been no food for weeks.
Oddly, there had been no drought, the usual cause of malnutrition and hunger in southern Africa, and there was plenty of food in the markets. For no obvious reason the price of staple foods such as maize and rice nearly doubled in a few months. Unusually, too, there was no evidence that the local merchants were hoarding food. It was the same story in 100 other developing countries. There were food riots in more than 20 countries and governments had to ban food exports and subsidise staples heavily.
The explanation offered by the UN and food experts was that a "perfect storm" of natural and human factors had combined to hyper-inflate prices. US farmers, UN agencies said, had taken millions of acres of land out of production to grow biofuels for vehicles, oil and fertiliser prices had risen steeply, the Chinese were shifting to meat-eating from a vegetarian diet, and climate-change linked droughts were affecting major crop-growing areas. The UN said that an extra 75m people became malnourished because of the price rises.
But a new theory is emerging among traders and economists. The same banks, hedge funds and financiers whose speculation on the global money markets caused the sub-prime mortgage crisis are thought to be causing food prices to yo-yo and inflate. The charge against them is that by taking advantage of the deregulation of global commodity markets they are making billions from speculating on food and causing misery around the world.
As food prices soar again to beyond 2008 levels, it becomes clear that everyone is now being affected. Food prices are now rising by up to 10% a year in Britain and Europe. What is more, says the UN, prices can be expected to rise at least 40% in the next decade.
There has always been modest, even welcome, speculation in food prices and it traditionally worked like this. Farmer X protected himself against climatic or other risks by "hedging", or agreeing to sell his crop in advance of the harvest to Trader Y. This guaranteed him a price, and allowed him to plan ahead and invest further, and it allowed Trader Y to profit, too. In a bad year, Farmer X got a good return but in a good year Trader Y did better.
When this process of "hedging" was tightly regulated, it worked well enough. The price of real food on the real world market was still set by the real forces of supply and demand.
But all that changed in the mid-1990s. Then, following heavy lobbying by banks, hedge funds and free market politicians in the US and Britain, the regulations on commodity markets were steadily abolished. Contracts to buy and sell foods were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. In effect a new, unreal market in "food speculation" was born. Cocoa, fruit juices, sugar, staples, meat and coffee are all now global commodities, along with oil, gold and metals. Then in 2006 came the US sub-prime disaster and banks and traders stampeded to move billions of dollars in pension funds and equities into safe commodities, and especially foods.
"We first became aware of this [food speculation] in 2006. It didn't seem like a big factor then. But in 2007/8 it really spiked up," said Mike Masters, fund manager at Masters Capital Management, who testified to the US Senate in 2008 that speculation was driving up global food prices. "When you looked at the flows there was strong evidence. I know a lot of traders and they confirmed what was happening. Most of the business is now speculation – I would say 70-80%."
Masters says the markets are now heavily distorted by investment banks: "Let's say news comes about bad crops and rain somewhere. Normally the price would rise about $1 [a bushel]. [But] when you have a 70-80% speculative market it goes up $2-3 to account for the extra costs. It adds to the volatility. It will end badly as all Wall Street fads do. It's going to blow up."
The speculative food market is truly vast, agrees Hilda Ochoa-Brillembourg, president of the Strategic Investment Group in New York. She estimates speculative demand for commodity futures has increased since 2008 by 40-80% in agricultural futures.
But the speculation is not just in staple foods. Last year, London hedge fund Armajaro bought 240,000 tonnes, or more than 7%, of the world's stocks of cocoa beans, helping to drive chocolate to its highest price in 33 years. Meanwhile, the price of coffee shot up 20% in just three days as a direct result of hedge funds betting on the price of coffee falling.
Olivier de Schutter, UN rapporteur on the right to food, is in no doubt that speculators are behind the surging prices. "Prices of wheat, maize and rice have increased very significantly but this is not linked to low stock levels or harvests, but rather to traders reacting to information and speculating on the markets," he says.
"People die from hunger while the banks make a killing from betting on food," says Deborah Doane, director of the World Development Movement in London.
The UN Food and Agriculture Organisation remains diplomatically non-committal,saying, in June, that: "Apart from actual changes in supply and demand of some commodities, the upward swing might also have been amplified by speculation in organised future markets." The UN is backed by Ann Berg, one of the world's most experienced futures traders. She argues that differentiating between commodities futures markets and commodity-related investments in agriculture is impossible.
"There is no way of knowing exactly [what is happening]. We had the housing bubble and the credit default. The commodities market is another lucrative playing field [where] traders take a fee. It's a sensitive issue. [Some] countries buy direct from the markets. As a friend of mine says: 'What for a poor man is a crust, for a rich man is a securitised asset class.'"