Saturday, February 12, 2011

February 12 2011: Pensions, Treasuries, Fannie and Freddie: Ponzi's one and all


Detroit Publishing Co. Smoking Rubble April 18, 1906
"Nob Hill from roof of Ferry Post Office; San Francisco after the earthquake and fire"


Ilargi: Stephen Hawking's "A Brief History of Time" begins like this:
A well-known scientist (some say it was Bertrand Russell) once gave a public lecture on astronomy. He described how the earth orbits around the sun and how the sun, in turn, orbits around the center of a vast collection of stars called our galaxy.

At the end of the lecture, a little old lady at the back of the room got up and said: "What you have told us is rubbish. The world is really a flat plate supported on the back of a giant tortoise." The scientist gave a superior smile before replying, "What is the tortoise standing on?" "You're very clever, young man, very clever", said the old lady. "But it's turtles all the way down!"

Ilargi: If there is a better way to illustrate our financial systems, and our economies, I haven't seen it. Substitute "Ponzi's" for "turtles", and you've got yourself the perfect way to describe what's going on in our world today, if anyone should ever ask for such a description.

Not that that is anything new for those of you who read The Automatic Earth, but it's always good to see support of one's ideas pop up in other places. Let's start off with pensions.

Pension schemes today are perhaps the most obvious example of a Ponzi character. We can all understand that in order to keep the schemes running as they have until now, you would need a large influx of new workers paying into the various systems, while at the same time the demand for pay-out rises fast, due to the baby boomer retirement schedule. First, you don't have that large influx of new workers. You have very high unemployment levels, and jobless people don't pay into pension plans. You also have a much broader segment of the population that make much less money than before even if they have jobs, and their contribution won't keep the schemes running either.

So you would need much larger contributions than ever before, and coming from far fewer people. What are you going to do? Double or triple contributions per worker? In a time when housing prices are plunging, and taxes are rising fast, and it takes a year's income just to send a child through a decent college? That doesn't look like a workable plan.

Sure, pension plans have made up part of their steep 2008 losses in the stock markets. But what happens if those markets tumble? Or are you willing to bet your retirement plans on a DOW 20,000 in a world where unemployment, foreclosures and overall debt levels rise, while home prices fall? How safe a bet would you say that is?

Here's an example of why pensions are a Ponzi scheme, from Philip Aldrick in the Daily Telegraph:
Public sector's 'Madoff-style' pensions pyramid will spark crisis, warns Centre for Policy Studies
Britain's civil servants must be weaned off their gold-plated final salary pensions to avert a "fiscal calamity", a new report into the looming pension crisis has warned. Public-sector retirement promises have become a "Madoff-style pyramid, now collapsing under the weight of insufficient contributions, rising longevity and an ageing workforce", Michael Johnson said in his report for the Centre for Policy Studies, "Self-sufficiency is the key".

Unless the problem is addressed, Britain faces a "societal division" caused by the gulf between private and public-sector pension provisions, and the "disproportionately high pensions paid to high earners" in the Civil Service. Without reform, the divisions will be entrenched between the generations, he added, warning of "looming generational inequality [that] manifests itself as a rising tax burden on today's workers, who then save less for their own retirement".

More than three-quarters of civil servants are in a final salary scheme, compared with less than a fifth of private-sector employees, with the taxpayer providing almost 80pc of all public-sector final salary contributions. In 2009, the state paid £14.9bn towards the £19.3bn cost of the UK's four largest civil service schemes, while staff provided £4.4bn.

By 2016, Mr Johnson added, the taxpayer is likely to be contributing an even larger portion as the state makes up a projected £10.3bn shortfall between total contributions and total payments. "It is a system that is out of control," he said. The total unfunded UK public-sector pension liability is estimated to be up to £1.18 trillion – 80pc of GDP or £47,000 per household.


Ilargi: What happens in UK public-sector pensions is of course reflected in pension plans all over the western world. Those 2008 losses have been partially made good with risk-taking. And while this has paid off recently, there's no guarantee it will continue to do so. If and when it does not, or for that matter even if it does, you will still need all those new workers paying in. And they're simply not there. Western populations are at best stabilizing, and in many cases dropping already. What population growth there is often comes mainly from immigrants, who are generally at the bottom rungs of the pay ladder, from where shortfalls are not made up for.

But it's not just pensions: it really is Ponzi's all the way down. As John Mauldin states, talking about the latest debt report from the Bank for International Settlements (BIS):
The Future of Public Debt
[..] If public debt is unsustainable and the burden on government budgets is too great, what does this mean for government bonds? The inescapable conclusion is that government bonds currently are a Ponzi scheme. Governments lack the ability to reduce debt levels meaningfully, given current commitments. Because of this, we are likely to see "financial oppression," whereby governments will use a variety of means to force investors to buy government bonds even as governments actively work to erode their real value.[..]

BIS: "Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability."[..]

The United States has exploded from a fiscal deficit of 2.8 percent to 10.4 percent today, with only a small 1.3 percent reduction for 2011 projected. Debt will explode (the correct word!) from 62 percent of GDP to an estimated 100 percent of GDP by the end of 2011 or soon thereafter. [..]

[..] fiscal restraint tends to deliver stable debt; rarely does it produce substantial reductions. And, most critically, swings from deficits to surpluses have tended to come along with either falling nominal interest rates, rising real growth, or both. Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if.

"When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways? In some countries, unstable debt dynamics, in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels, are already clearly on the horizon.

"It follows that the fiscal problems currently faced by industrial countries need to be tackled relatively soon and resolutely. Failure to do so will raise the chance of an unexpected and abrupt rise in government bond yields at medium and long maturities, which would put the nascent economic recovery at risk.

Government debt-to-GDP for Britain will double from 47 percent in 2007 to 94 percent in 2011 and rise 10 percent a year unless serious fiscal measures are taken. Greece’s level will swell from 104 percent to 130 percent, so the United States and Britain are working hard to catch up to Greece, a dubious race indeed. Spain is set to rise from 42 percent to 74 percent and only 5 percent a year thereafter, but their economy is in recession, so GDP is shrinking and unemployment is 20 percent.[..]

Japan will end 2011 with a debt ratio of 204 percent and growing by 9 percent a year. They are taking almost all the savings of the country into government bonds, crowding out productive private capital. Reinhart and Rogoff [..] note that three years after a typical banking crisis, the absolute level of public debt is 86 percent higher, but in many cases of severe crisis, the debt could grow by as much as 300 percent. Ireland has more than tripled its debt in just five years.[..]

[..] debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States. And, as is clear from the slope of the line, without a change in policy, the path is unstable.

Ilargi: In other words, here's why government bonds (Treasuries, Gilts etc.) are Ponzi schemes: when you're deep enough into debt, you will need to both bring down government borrowing AND see your debt payments go up as interest rates rise. The first reaction politicians will have is to borrow even more just to pay off the interest -and maybe principal, if they can at all-, but that will at some point down the line only raise your interest payments even more. And there are pretty clear limits set here, though many choose to ignore them. Mauldin again:
Remember that Rogoff and Reinhart show that when the ratio of debt to GDP rises above 90 percent, there seems to be a reduction of about 1 percent in GDP. The authors of this paper, and others, suggest that this might come from the cost of the public debt crowding out productive private investment.

Think about that for a moment. We (in the US) are on an almost certain path to a debt level of 100 percent of GDP in just a few years, especially if you include state and local debt. If trend growth has been a yearly rise of 3.5 percent in GDP, then we are reducing that growth to 2.5 percent at best. And 2.5 percent trend GDP growth will not get us back to full employment. We are locking in high unemployment for a very long time, and just when some 1 million people will soon be falling off the extended unemployment compensation rolls.

Ilargi: Maybe Reinhart and Rogoff are off by 1 or 2%, but on the whole the 90% limit looks pretty solid. And remember where we are going according to the BIS:
[..] in the baseline scenario, debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States.

Ilargi: To get rid of debt, you need strong economic growth. Just like Charles Ponzi needed a strong influx of new players in his schemes. But in both cases, the principle is self-defeating. Where Charles Ponzi ran out of the exact gullible victims he needed to keep going, our economies will see the exact economic growth needed to pay their debt's growing principal and interest, eaten up by that same growing principal and interest.

This principle, by the way, also completely demolishes the notion that at this point in time we could borrow our way out of debt. Not only is this a counterintuitive idea to begin with, there's something else at play. If your debt levels are low, you could perhaps borrow some money, make sure it's used as productively as possible, and work your way out of the hole. When your debt levels are high though, as they are all over today, this is not possible. And we're not even talking about the fact that right now every dollar we, as a society, borrow, produces less than $1 in gains. Or maybe we are: for all we know, it could be the very debt payments that cause the negative return.

The thing to take away from this is that we cannot grow our way out of debt. And neither can we borrow our way out. We are stuck, as stuck as Charles Ponzi was on the eve of his demise. Oh, if only he could have found another sizable batch of suckers! He couldn't.

And that brings us to the next Ponzi scheme: US housing finance. What makes Fannie Mae and Freddie Mac a Ponzi scheme is this: you need an endless and large influx of new homebuyers, as well as available credit, to keep home prices sufficiently high for the scheme to continue. And those buyers are not there anymore. From 2002-2008, or thereabouts, every American who could write his or her initials was given a mortgage loan. So was every Brit, Irishman, Spaniard and Dutchman. And now the conditions that allowed for this to take place are gone, and they will never return in our lifetime. Our housing finance schemes have run out of -potential- clients, just like Charles Ponzi did in his day.

Of course I was pondering writing something about Egypt today, but so much already has been said on that. Still, I was thinking about Cairo when the US government released its long overdue Fannie and Freddie plan on Friday. Or, well, plan?! There's really nothing there. The Obama administration in both instances has decided to go with what could probably best be described as the "fake". I see pundits calling it a "punt", but I myself lean towards another "fumble". For those of you not familiar with American Football terms, there's always Wikipedia.

Obama has chosen to remain on the sidelines in Egypt, never committing to one side over the other, just so he couldn't possibly pick the wrong side. A huge miss, if you ask me, but one that at first glance may look safe. In the same vein, his "plan" for Fannie and Freddie isn't really a plan at all. After two years in office, the no. 1 domestic issue, two years and counting overdue, gets dropped, or thrown out of bounds if you will, through a series of opaque statements that have one intention, and one only: to run down the clock.

The gist is that things won't settle until 2018, if at all. And by then it won't be any skin off Obama's back, or Geithner's, or Barney Frank's. Your very own elected government refuses to take a stand, any stand at all, when it comes to the issue at the very core of what's ailing the country. They're not even trying. That's not kicking a can, or even a snowball, down the road, that's kicking the entire country down the mountain.

Nobody has the guts to touch this iron, nobody with the political power to start mending this fence. It makes one want to move to Egypt. Here's Shahien Nasiripour at the Huffington Post on the topic:
Obama Calls For End Of Fannie Mae, Freddie Mac
The Obama administration outlined three options Friday to change the way home loans are financed, calling for the slow death of mortgage giants Fannie Mae and Freddie Mac and jumpstarting the debate over the future role of government in helping borrowers secure mortgages.

If implemented, the proposals would likely make it more expensive for borrowers to buy a home and thus restrict the availability of mortgages.[..]

There's $10 trillion in outstanding home loan debt. Policy makers, bankers and investors agree that taxpayer-owned Fannie and Freddie should be wound down. But there's no consensus on what should replace them.
  • The first option outlined in the report calls for a private system in which lenders and investors fund new mortgages, with a limited role for existing federal agencies to subsidize home loans for the poor and other special groups, like veterans.

  • The second proposal calls for much of the same, but it includes a government backstop for mortgages during times of market stress. If credit markets froze -- like they did at the height of the crisis -- the government would step in and guarantee new home loans.

  • The third option outlines a much broader government role. Under this alternative, taxpayers would insure securities backed by home loans, which is what Fannie and Freddie already do.[..]

The 31-page outline says "very little that is surprising or market-moving as it lacks specific details or...any extreme views," mortgage bond strategists Greg Reiter and Jeana Curro at RBS Securities wrote in a note to clients. [..] Analysts at Amherst Securities, led by Laurie Goodman, said in a report that the plan is "largely a non-event."

Along with federal agencies, taxpayer-owned behemoths Fannie Mae and Freddie Mac guarantee more than nine of every 10 new mortgages. They were effectively nationalized in 2008. Delinquencies on home loans they back have thus far cost taxpayers more than $150 billion. Their regulator, the Federal Housing Finance Agency, estimates Fannie and Freddie could need up to $363 billion in taxpayer cash through 2013 [..]

Geithner said it will take another three years for the housing market to recover. It currently suffers from a high foreclosure and delinquency rate, low levels of homeowner equity, and an abundance of homes for sale without a corresponding number of interested buyers. [..]

[..] if borrowers start putting down 20 percent of the purchase price, investors would price in lower risks of default and snap up the securities. He added that getting borrowers to put that much down is good for the economy because it gets consumers in the habit of saving more and only being willing to buy a home once they were sure they could afford it.

This would lessen the risk of a housing collapse and minimize costs to taxpayers, Rosner said, as opposed to the administration's preferred approach of a continued government role, which he argues simply continues the current system of privatized gains and socialized losses.

Ilargi: Corbett B. Daly and David Lawder at Reuters:
Obama launches housing overhaul plan, long road ahead
The Obama administration nailed a 'condemned' sign on the wrecked U.S. housing finance system on Friday but did not offer a clear blueprint for a rebuilding project that promises to take years.[..]

"Realistically this is going to take five to seven years," Treasury Secretary Timothy Geithner told reporters on a conference call. He urged Capitol Hill to get moving and set a transition into law, suggesting a two-year deadline.[..]

Big banks could be helped by the overhaul if it lets them raise the prices they charge consumers for mortgages, [..] The proposals bolstered demand for the $5 trillion in outstanding Fannie Mae and Freddie Mac mortgage-backed securities, held largely by big banks and foreign governments.

Ilargi: And Colin Barr at Fortune:
Fannie Mae: the long goodbye
Treasury Secretary Tim Geithner admitted in a call with reporters Friday that it is rather likely the Obama administration will be long gone by the time the next housing finance system, whatever it looks like, finally springs up in place of the current, deeply dysfunctional one. "Realistically, this is going to take five to seven years," Geithner said.

He said the shift would take place in three stages:
  • First, in the next two or three years, the government will dial back its support for the housing market, through moves such as a reduction in the size of the loan Fannie and Freddie can buy. That so-called conforming loan limit was raised to $729,000 in some areas during the financial crisis but will fall to $625,000 Oct. 1 if Congress doesn't extend the measure enabling the higher number.

  • The second stage, also taking two to three years in Geithner's view, will "accelerate the pace of transition" to a privately financed market that offers government support for typical mortgage lending only through programs that put investors in the first-loss position on any default.

  • The third stage turns on whatever legislation Congress passes to create the system to replace Fannie and Freddie, whose bailout has cost taxpayers $153 billion since Treasury's takeover of the companies in September 2008.

Ilargi: To summarize, Tim Geithner, who should have produced a much more extensive report ages ago, now says that:
  1. It will take another three years for the housing market to recover
  2. It will take 5 to 7 years to resolve Fannie and Freddie
  3. Prospective homebuyers will need to table far larger downpayments (20%?!) and pay higher interest rates on their loans.

And that is the plan? And he worked on that for two years? Home sales are scraping the gutter even with the present non-downpayment and ultra low interest rates, and the market will still recover in 3 years with 20% down and 6-7-8-10% interest? That's not a plan, that's not even a punt. That's a fumble.

The Fannie and Freddie loan limit, initiated early in the crisis, at $729,000, will fall to $625,000?! If you include the 20-30% fall in prices since 2008, $625,000 is a higher, not a lower limit! And why does the American taxpayer have to be on the hook for anyone at all who wants to buy a $625,000 home, anyway? Is there anything in Fannie Mae's 1930's statute that says the poor need to absolve the risk for the homes of the rich?

So after 3 years, and by then Geithner will be at Goldman Sachs or JPMorgan, the loan limit will be down, and the market will have "recovered". But we all know by now that there's only one way for the market to recover, and that's for prices to drop like there's literally no tomorrow. Otherwise, who will be able to afford a home with a 20% downpayment and 10% interest rates?

I could go on about the perversity of it all for hours, and I will in the future, but for now here's just one last question:

There was a Chinese economist this week who said Beijing should sell their Fannie and Freddie bonds and MBS, even though Washington guarantees all of it through future tax revenues. Why is it that in that shoddy Treasury "report" on Fannie and Freddie, all we see is vague ideas, projected far enough into the future for all "responsible participants" to be long gone, about US government involvement in housing finance, but we see no mention whatsoever of what to do with Fannie and Freddie's existing $5 trillion+ liabilities?

Here's thinking that Charles Ponzi, on his deathbed, could have told you why that is. In detail.





















Public sector's 'Madoff-style' pensions pyramid will spark crisis, warns Centre for Policy Studies
by Philip Aldrick - Telegraph

Britain's civil servants must be weaned off their gold-plated final salary pensions to avert a "fiscal calamity", a new report into the looming pension crisis has warned. Public-sector retirement promises have become a "Madoff-style pyramid, now collapsing under the weight of insufficient contributions, rising longevity and an ageing workforce", Michael Johnson said in his report for the Centre for Policy Studies, "Self-sufficiency is the key".

Unless the problem is addressed, Britain faces a "societal division" caused by the gulf between private and public-sector pension provisions, and the "disproportionately high pensions paid to high earners" in the Civil Service. Without reform, the divisions will be entrenched between the generations, he added, warning of "looming generational inequality [that] manifests itself as a rising tax burden on today's workers, who then save less for their own retirement".

More than three-quarters of civil servants are in a final salary scheme, compared with less than a fifth of private-sector employees, with the taxpayer providing almost 80pc of all public-sector final salary contributions. In 2009, the state paid £14.9bn towards the £19.3bn cost of the UK's four largest civil service schemes, while staff provided £4.4bn.

By 2016, Mr Johnson added, the taxpayer is likely to be contributing an even larger portion as the state makes up a projected £10.3bn shortfall between total contributions and total payments. "It is a system that is out of control," he said. The total unfunded UK public-sector pension liability is estimated to be up to £1.18 trillion – 80pc of GDP or £47,000 per household.

To build a sustainable system, he urged the Government to begin the process of closing final salary schemes and moving towards defined contribution plans unrelated to salaries and depending on the performance of investments. He recommended two courses of action:

A "brave" path, phasing in a "watered-down [salary-based scheme] before the introduction of a pure defined contribution framework, perhaps in 2020", or; A "cautious" path, offering staff a "career average" scheme up to a salary cap of £38,000 with defined contribution above that. However, he added that the second proposal, which would help protect lower earners, "is likely to be merely an interim step on the road to a pure defined contribution framework".

The Government is in the process of reviewing public- sector pensions under Lord Hutton, who is expected to report back next month. He is not expected to go as far as Mr Johnson has proposed, indicating instead that staff may be asked to make higher contributions, retire later, and perhaps move to a "career average" salary scheme.

Lord Hutton's changes will build on recent reforms, including the decision to inflation-link pensions to the consumer price index instead of the retail price index, which will shave 15pc from future costs and raise the pension age for newer recruits to 65. As a result, the cost of paying unfunded public sector pensions is expected to fall from 1.9pc of GDP in 2011 to 1.4pc by 2060. However, Mr Johnson pointed to the spiralling cost of the existing pensions as "robust evidence that the [unfunded schemes] are unsustainable".

Treasury forecasts show the present amount of cash liabilities to be £48.8bn this year. "That is a measure of the cashflow problems for the future," he said. "It shows that current contributions [of £21.1bn] are too low, and don't reflect the scale of the problem coming our way."




The Future of Public Debt (is Terrifying)
by John Mauldin - Frontline Thoughts

[..] Our argument in Endgame is that while the debt supercycle is still growing on the back of increasing government debt, there is an end to that process, and we are fast approaching it. It is a world where not only will expanding government spending have to be brought under control but also it will actually have to be reduced. In this chapter, we will look at a crucial report, “The Future of Public Debt: Prospects and Implications,” by Stephen G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli, published by the Bank of International Settlements (BIS).

The BIS is often thought of as the central banker to central banks. It does not have much formal power, but it is highly influential and has an esteemed track record; after all, it was one of the few international bodies that consistently warned about the dangers of excessive leverage and extremes in credit growth.

Although the BIS is quite conservative by its nature, the material covered in this paper is startling to those who read what are normally very academic and dense journals. Specifically, it looks at fiscal policy in a number of countries and, when combined with the implications of age-related spending (public pensions and health care), determines where levels of debt in terms of GDP are going.

Throughout this chapter, we are going to quote extensively from the paper, as we let the authors’ words speak for themselves. We’ll also add some of our own color and explanation as needed. (Please note that all emphasis in bold is our editorial license and that we have chosen to retain the original paper’s British spelling of certain words.)

After we look at the BIS paper, we will also look at the issues it raises and the implications for public debt. If public debt is unsustainable and the burden on government budgets is too great, what does this mean for government bonds? The inescapable conclusion is that government bonds currently are a Ponzi scheme. Governments lack the ability to reduce debt levels meaningfully, given current commitments. Because of this, we are likely to see “financial oppression,” whereby governments will use a variety of means to force investors to buy government bonds even as governments actively work to erode their real value. It doesn’t make for pretty reading, but let’s jump right in.

A Bit of Background
But before we start, let’s explain a few of the terms the BIS will use. They can sound complicated, but they’re not that hard to understand. There is a big difference between the cyclical versus structural deficit. The total deficit is the structural plus cyclical.

Governments tax and spend every year, but in the good years, they collect more in taxes than in the bad years. In the good years, they typically spend less than in the bad years. That is because spending on unemployment insurance, for example, is something the government does to soften the effects of a downturn. At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and spending is high.

On the other hand, at the peak of the cycle, unemployment is low, and businesses are making money, so everyone pays more in taxes. The additional borrowing required at the low point of the cycle is the cyclical deficit.

The structural deficit is the deficit that remains across the business cycle, because the general level of government spending exceeds the level of taxes that are collected. This shortfall is present regardless of whether there is a recession.

Now let’s throw out another term. The primary balance of government spending is related to the structural and cyclical deficits. The primary balance is when total government expenditures, except for interest payments on the debt, equal total government revenues. The crucial wrinkle here is interest payments. If your interest rate is going up faster than the economy is growing, your total debt level will increase.

The best way to think about governments is to compare them to a household with a mortgage. A big mortgage is easier to pay down with lower monthly mortgage payments. If your mortgage payments are going up faster than your income, your debt level will only grow. For countries, it is the same. The point of no return for countries is when interest rates are rising faster than their growth rates. At that stage, there is no hope of stabilizing the deficit. This is the situation many countries in the developed world now find themselves in.

Drastic Measures
“Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.”

“Drastic measures” is not language you typically see in an economic paper from the Bank for International Settlements. But the picture painted in a very concise and well-written report by the BIS for 12 countries they cover is one for which the words drastic measures are well warranted.

The authors start by dealing with the growth in fiscal (government) deficits and the growth in debt. The United States has exploded from a fiscal deficit of 2.8 percent to 10.4 percent today, with only a small 1.3 percent reduction for 2011 projected. Debt will explode (the correct word!) from 62 percent of GDP to an estimated 100 percent of GDP by the end of 2011 or soon thereafter. The authors don’t mince words.

They write at the beginning of their work:

“The politics of public debt vary by country. In some, seared by unpleasant experience, there is a culture of frugality. In others, however, profligate official spending is commonplace. In recent years, consolidation has been successful on a number of occasions. But fiscal restraint tends to deliver stable debt; rarely does it produce substantial reductions. And, most critically, swings from deficits to surpluses have tended to come along with either falling nominal interest rates, rising real growth, or both. Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if.

“When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways? In some countries, unstable debt dynamics, in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels, are already clearly on the horizon.

“It follows that the fiscal problems currently faced by industrial countries need to be tackled relatively soon and resolutely. Failure to do so will raise the chance of an unexpected and abrupt rise in government bond yields at medium and long maturities, which would put the nascent economic recovery at risk. It will also complicate the task of central banks in controlling inflation in the immediate future and might ultimately threaten the credibility of present monetary policy arrangements.

“While fiscal problems need to be tackled soon, how to do that without seriously jeopardizing the incipient economic recovery is the current key challenge for fiscal authorities.”

Remember that Rogoff and Reinhart show that when the ratio of debt to GDP rises above 90 percent, there seems to be a reduction of about 1 percent in GDP. The authors of this paper, and others, suggest that this might come from the cost of the public debt crowding out productive private investment.

Think about that for a moment. We (in the US) are on an almost certain path to a debt level of 100 percent of GDP in just a few years, especially if you include state and local debt. If trend growth has been a yearly rise of 3.5 percent in GDP, then we are reducing that growth to 2.5 percent at best. And 2.5 percent trend GDP growth will not get us back to full employment. We are locking in high unemployment for a very long time, and just when some 1 million people will soon be falling off the extended unemployment compensation rolls.

Government transfer payments of some type now make up more than 20 percent of all household income. That is set up to fall rather significantly over the year ahead unless unemployment payments are extended beyond the current 99 weeks. There seems to be little desire in Congress for such a measure. That will be a significant headwind to consumer spending.

Government debt-to-GDP for Britain will double from 47 percent in 2007 to 94 percent in 2011 and rise 10 percent a year unless serious fiscal measures are taken. Greece’s level will swell from 104 percent to 130 percent, so the United States and Britain are working hard to catch up to Greece, a dubious race indeed. Spain is set to rise from 42 percent to 74 percent and only 5 percent a year thereafter, but their economy is in recession, so GDP is shrinking and unemployment is 20 percent.

Portugal? In the next two years, 71 percent to 97 percent, and there is almost no way Portugal can grow its way out of its problems. These increases assume that we accept the data provided in government projections. Recent history argues that these projections may prove conservative.

Japan will end 2011 with a debt ratio of 204 percent and growing by 9 percent a year. They are taking almost all the savings of the country into government bonds, crowding out productive private capital. Reinhart and Rogoff, with whom you should by now be familiar, note that three years after a typical banking crisis, the absolute level of public debt is 86 percent higher, but in many cases of severe crisis, the debt could grow by as much as 300 percent. Ireland has more than tripled its debt in just five years.

The BIS paper continues:

“We doubt that the current crisis will be typical in its impact on deficits and debt. The reason is that, in many countries, employment and growth are unlikely to return to their pre-crisis levels in the foreseeable future. As a result, unemployment and other benefits will need to be paid for several years, and high levels of public investment might also have to be maintained.

“The permanent loss of potential output caused by the crisis also means that government revenues may have to be permanently lower in many countries. Between 2007 and 2009, the ratio of government revenue to GDP fell by 2–4 percentage points in Ireland, Spain, the United States, and the United Kingdom. It is difficult to know how much of this will be reversed as the recovery progresses. Experience tells us that the longer households and firms are unemployed and underemployed, as well as the longer they are cut off from credit markets, the bigger the shadow economy becomes.”

Clearly, we are looking at a watershed event in public spending in the United States, United Kingdom, and Europe. Because of the Great Financial Crisis, the usual benefit of a sharp rebound in cyclical tax receipts will not happen. It will take much longer to achieve any economic growth that could fill the public coffers.

Now, let’s skip a few sections and jump to the heart of their debt projections.

The Future Public Debt Trajectory
(There was some discussion whether we should summarize the following section or use the actual quotation. We opted to use the quotation, as the language from the normally conservative BIS is most graphic. We want the reader to understand their concerns in a direct manner. This is in many ways the heart of the crisis that is leading the developed countries to endgame. It is startling to compare this with the seeming complacency of so many of our leading political figures all over the world.)

“We now turn to a set of 30-year projections for the path of the debt/GDP ratio in a dozen major industrial economies (Austria, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, the United Kingdom and the United States). We choose a 30-year horizon with a view to capturing the large unfunded liabilities stemming from future age-related expenditure without making overly strong assumptions about the future path of fiscal policy (which is unlikely to be constant). In our baseline case, we assume that government total revenue and non-age-related primary spending remain a constant percentage of GDP at the 2011 level as projected by the OECD.

“Using the CBO and European Commission projections for age-related spending, we then proceed to generate a path for total primary government spending and the primary balance over the next 30 years. Throughout the projection period, the real interest rate that determines the cost of funding is assumed to remain constant at its 1998–2007 average, and potential real GDP growth is set to the OECD-estimated post-crisis rate.”

Here, we feel a need to distinguish for the reader the difference between real GDP and nominal GDP. Nominal GDP is the numeric value of GDP, say, $103. If inflation is 3 percent, then real GDP would be $100. Often governments try to create inflation to flatter growth. This leads to higher prices and salaries, but they are not real; they are merely inflationary. That is why economists always look at real GDP, not nominal GDP. Reality is slightly more complicated, but that is the general idea.

That makes these estimates quite conservative, as growth rate estimates by the OECD are well on the optimistic side. If they used less optimistic projections and factored in the current euro crisis (it is our bet that when you read this in 2011, there will still be a euro crisis, and that it may be worse) and potential recessions in the coming decades (there are always recessions that never get factored into these types of projections), the numbers would be far worse. Now, back to the paper.

Debt Projections
As noted previously, this text is important to the overall intent.

“From this exercise, we are able to come to a number of conclusions. First, in our baseline scenario, conventionally computed deficits will rise precipitously. Unless the stance of fiscal policy changes, or age-related spending is cut, by 2020 the primary deficit/GDP ratio will rise to 13% in Ireland; 8–10% in Japan, Spain, the United Kingdom and the United States; [Wow! Note that they are not assuming that these issues magically go away in the United States as the current administration does using assumptions about future laws that are not realistic.] and 3–7% in Austria, Germany, Greece, the Netherlands and Portugal. Only in Italy do these policy settings keep the primary deficits relatively well contained—a consequence of the fact that the country entered the crisis with a nearly balanced budget and did not implement any real stimulus over the past several years.

“But the main point of this exercise is the impact that this will have on debt. The results [in Figure 6.1] show that, in the baseline scenario, debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States. And, as is clear from the slope of the line, without a change in policy, the path is unstable.

“This is confirmed by the projected interest rate paths, again in our baseline scenario. [Figure 6.1] shows the fraction absorbed by interest payments in each of these countries. From around 5% today, these numbers rise to over 10% in all cases, and as high as 27% in the United Kingdom. Seeing that the status quo is untenable, countries are embarking on fiscal consolidation plans. In the United States, the aim is to bring the total federal budget deficit down from 11% to 4% of GDP by 2015. In the United Kingdom, the consolidation plan envisages reducing budget deficits by 1.3 percentage points of GDP each year from 2010 to 2013 (see e.g. OECD [2009a]).

“To examine the long-run implications of a gradual fiscal adjustment similar to the ones being proposed, we project the debt ratio assuming that the primary balance improves by 1 percentage point of GDP in each year for five years starting in 2012. The results are presented in [Figure 6.1]. Although such an adjustment path would slow the rate of debt accumulation compared with our baseline scenario, it would leave several major industrial economies with substantial debt ratios in the next decade.

This suggests that consolidations along the lines currently being discussed will not be sufficient to ensure that debt levels remain within reasonable bounds over the next several decades. An alternative to traditional spending cuts and revenue increases is to change the promises that are as yet unmet. Here, that means embarking on the politically treacherous task of cutting future age-related liabilities. With this possibility in mind, we construct a third scenario that combines gradual fiscal improvement with a freezing of age-related spending-to-GDP at the projected level for 2011. [Figure 6.1] shows the consequences of this draconian policy. Given its severity, the result is no surprise: what was a rising debt/GDP ratio reverses course and starts heading down in Austria, Germany and the Netherlands. In several others, the policy yields a significant slowdown in debt accumulation. Interestingly, in France, Ireland, the United Kingdom and the United States, even this policy is not sufficient to bring rising debt under control.”

chart

And yet, many countries, including the United States, will have to contemplate something along these lines. We simply cannot fund entitlement growth at expected levels. Note that in the United States, even by draconian cost-cutting estimates, debt-to-GDP still grows to 200 percent in 30 years. That shows you just how out of whack our entitlement programs are, and we have no prospect of reform in sight. It also means that if we—the United States—decide as a matter of national policy that we do indeed want these entitlements, it will most likely mean a substantial value added tax, as we will need vast sums to cover the costs, but with that will lead to even slower growth.

Long before interest costs rise even to 10 percent of GDP in the early 2020s, the bond market will have rebelled. (See Figure 6.2.)

chart

This is a chart of things that cannot be. Therefore, we should be asking ourselves what is endgame if the fiscal deficits are not brought under control? Quoting again from the BIS paper:

“All of this leads us to ask: what level of primary balance would be required to bring the debt/GDP ratio in each country back to its pre-crisis, 2007 level? Granted that countries which started with low levels of debt may never need to come back to this point, the question is an interesting one nevertheless. [Table 6.1] presents the average primary surplus target required to bring debt ratios down to their 2007 levels over horizons of 5, 10 and 20 years. An aggressive adjustment path to achieve this objective within five years would mean generating an average annual primary surplus of 8–12% of GDP in the United States, Japan, the United Kingdom and Ireland, and 5–7% in a number of other countries. A preference for smoothing the adjustment over a longer horizon (say, 20 years) reduces the annual surplus target at the cost of leaving governments exposed to high debt ratios in the short to medium term.”

Can you imagine the United States being able to run a budget surplus of even 2.4 percent of GDP? More than $350 billion a year? That would be a swing in the budget of almost 12 percent of GDP.

chart





Obama Calls For End Of Fannie Mae, Freddie Mac
by Shahien Nasiripour - Huffington Post

The Obama administration outlined three options Friday to change the way home loans are financed, calling for the slow death of mortgage giants Fannie Mae and Freddie Mac and jumpstarting the debate over the future role of government in helping borrowers secure mortgages.

If implemented, the proposals would likely make it more expensive for borrowers to buy a home and thus restrict the availability of mortgages. It also marks a significant departure from past government policies, which treated homeownership in America as a virtual right. "The government must...help ensure that all Americans have access to quality housing that they can afford," the administration said in its report to Congress, delivered as part of last year's financial overhaul law. "This does not mean our goal is for all Americans to be homeowners."

The troubled housing market -- a legacy of the deep bust that followed a historic boom in which reckless lending and borrowing led to the most punishing downturn since the Great Depression -- led to calls for the federal government to radically reform the way home mortgages are financed. There's $10 trillion in outstanding home loan debt. Policy makers, bankers and investors agree that taxpayer-owned Fannie and Freddie should be wound down. But there's no consensus on what should replace them.
  • The first option outlined in the report calls for a private system in which lenders and investors fund new mortgages, with a limited role for existing federal agencies to subsidize home loans for the poor and other special groups, like veterans.

  • The second proposal calls for much of the same, but it includes a government backstop for mortgages during times of market stress. If credit markets froze -- like they did at the height of the crisis -- the government would step in and guarantee new home loans.

  • The third option outlines a much broader government role. Under this alternative, taxpayers would insure securities backed by home loans, which is what Fannie and Freddie already do.

The administration's outline explained the benefits and costs of the various options, but stopped short of endorsing any of them. Critics will likely say the administration punted.

The 31-page outline says "very little that is surprising or market-moving as it lacks specific details or...any extreme views," mortgage bond strategists Greg Reiter and Jeana Curro at RBS Securities wrote in a note to clients. They were "mildly surprised" at the lack of details, though. Analysts at Amherst Securities, led by Laurie Goodman, said in a report that the plan is "largely a non-event."

Along with federal agencies, taxpayer-owned behemoths Fannie Mae and Freddie Mac guarantee more than nine of every 10 new mortgages. They were effectively nationalized in 2008. Delinquencies on home loans they back have thus far cost taxpayers more than $150 billion. Their regulator, the Federal Housing Finance Agency, estimates Fannie and Freddie could need up to $363 billion in taxpayer cash through 2013, it said in an October report.

"We are going to start the process of reform now," Geithner said in a statement. "But we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market." Geithner said it will take another three years for the housing market to recover. It currently suffers from a high foreclosure and delinquency rate, low levels of homeowner equity, and an abundance of homes for sale without a corresponding number of interested buyers.

After that, it will likely take two to three years for policy makers to come to agreement on the government's role in funding home loans, Geithner said. The final step calls for new legislation. All told, Geithner said it will take between five to seven years to transition to a new system.

Steps to take during that time to slowly wean the market off total government support largely revolve around making Fannie- and Freddie-backed mortgages more expensive, which would make loans not backed by taxpayers more desirable. This includes increasing the fees Fannie and Freddie charge to guarantee home loans backing securities; pushing them to require homeowners to purchase additional mortgage insurance or put at least 10 percent down; and reducing the size of individual loans that Fannie and Freddie could guarantee.

But while the administration wants to decrease government's role in funding home loans, it wants to increase federal subsidies for rental housing. Shaun Donovan, the secretary of the Department of Housing and Urban Development, said Friday that half of renters spend more than one-third of their income on housing, and one-quarter of renters devoted more than half, according to HUD research.

Reactions from lawmakers ranged from pleasant surprise to muted displeasure. Rep. Barney Frank of Massachusetts, the top Democrat on the House Financial Services Committee, praised in a statement the administration's support for increasing resources directed towards renters, but said it is "not clear" whether lenders and investors alone could support the market in a way that makes mortgages affordable to borrowers.

Rep. Ed Royce, a Republican from California who also serves on the financial services committee, said he was "pleasantly surprised" that the administration wants to wind down Fannie Mae and Freddie Mac. "The 800-pound gorilla in the room remains the level of government support in the mortgage market going forward," Royce said in a statement. "On that front, [the Obama administration] decided to punt."

Rep. Maxine Waters, a California Democrat and another financial services committee member, said she has "concern" that the administration's proposals "may radically increase the cost of homeownership, and housing in general."

The theme of the report and subsequent conversations with administration officials stressed the Obama team's desire to have a smaller government footprint in the mortgage market. "The report's takeaway message is that the U.S. housing finance system is likely to undergo major changes going forward, and with the likely outcome being a significantly smaller role for the U.S. government," analysts at research firm CreditSights said in a note.

The reality is Democrats want continued government support of mortgages backing securities. A fully privatized system would lead to higher costs for mortgages, but it would also nearly extinguish the risk posed to taxpayers and would enable resources currently devoted to housing to go to more productive channels, benefitting the economy in the long run, the administration noted in a nod to the predominant Republican position.

A hybrid approach that calls for increased government support during times of market stress would enable the government to lessen the social costs from contractions in credit to borrowers. Maintaining government backing of home loans at all times ensures cheap mortgages, thus artificially inflating home prices and allowing resources to continue flowing to housing. This proposal also puts taxpayers on the hook for losses.

But while observers say the administration appears to favor a robust government role -- analysts at RBS Securities say government-sponsored entities and federal agencies will likely end up supporting 50-65 percent of the market -- it's not clear that one is needed. Firms would package home loans into bonds and Investors would buy them absent government guarantees, market participants said Friday. Mortgages would be more expensive, but only compared to today's historically-low prices. Over time, they'd moderate to average levels, they said. In effect, Democrats' argument that the cost of mortgages would skyrocket lacks merit, they said.

"The notion that the cost of these products would be extraordinarily high is predicated on the notion that we continue to accept no down payments on loans," said Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co. and one of the first analysts to identify problems at Fannie Mae and Freddie Mac. Brett D. Nicholas, the chief investment and operating officer at Redwood Trust, a California-based real estate investment firm, said that with taxpayers backing 95 percent of new home loans "there is no room for the private sector."

"It's a circular argument to say that, 'Well, the private sector is not there so oh my God rates are going to go up hundreds of basis points,'" Nicholas said. "It's just not true." One basis point equals 0.01 percentage point. "The fact is the private sector is there," Nicholas added. "We have capital. Lots of firms like us have capital. There's trillions of dollars of demand from life insurance companies, banks, [and] mutual funds."

Last year, his firm sponsored the only private-sector security backed by new home mortgages and sold to investors. The deal contained more than $200 million worth of jumbo mortgages, industry parlance for home loans too big to be backed by the Federal Housing Administration, a government agency, or Fannie Mae and Freddie Mac. "The dollars are there," Nicholas said. "There's just no loans to sell to [investors] because they're all going to Fannie, Freddie and FHA."

Rosner said that if borrowers start putting down 20 percent of the purchase price, investors would price in lower risks of default and snap up the securities. He added that getting borrowers to put that much down is good for the economy because it gets consumers in the habit of saving more and only being willing to buy a home once they were sure they could afford it.

This would lessen the risk of a housing collapse and minimize costs to taxpayers, Rosner said, as opposed to the administration's preferred approach of a continued government role, which he argues simply continues the current system of privatized gains and socialized losses. "The administration is still not thinking of ways to incent proper behavior," Rosner said. He added that the tax code could bring about many of his recommendations.




Obama launches housing overhaul plan, long road ahead
by Corbett B. Daly and David Lawder - Reuters

The Obama administration nailed a 'condemned' sign on the wrecked U.S. housing finance system on Friday but did not offer a clear blueprint for a rebuilding project that promises to take years.

In a long-awaited move, the White House offered three big-picture options for overhauling a $10.6-trillion market that cratered in 2008, triggering a wave of home foreclosures and the worst banking crisis since the Great Depression. All the alternatives sketched out in a 31-page "white paper" would unwind the troubled mortgage titans Fannie Mae and Freddie Mac and shrink the government's market footprint to allow private capital to step in.

That options strategy was designed to force newly empowered Republicans in the House of Representatives to make the next move on long-term changes to the housing system now almost entirely backed by the government. Short-term steps were also proposed to level the playing field between the publicly backed mortgage sector and the private market, flat on its back for years, as well as reduce the huge loan portfolios of Fannie and Freddie.

With property markets still fragile and the 2012 elections looming, political consensus on an overhaul could be elusive, leaving Fannie and Freddie to limp along for now. Analysts said the changes would raise borrowing costs for consumers who are still wary of getting back into housing, potentially weakening property prices again.

"Realistically this is going to take five to seven years," Treasury Secretary Timothy Geithner told reporters on a conference call. He urged Capitol Hill to get moving and set a transition into law, suggesting a two-year deadline. "Ultimately, we are going to have to explain to the market what the end-game is going to be and we can't wait too long to lay that out," Geithner said, adding that a mix of the three proposals he unveiled could be the final outcome.

Despite their key role in the crisis, Fannie and Freddie -- known as government-sponsored enterprises, or GSEs -- still dominate the market, backing nearly nine of 10 new mortgages, along with the Federal Housing Administration.

The most drastic of the administration's three options would privatize housing finance almost entirely, with government insurance and guarantees limited to FHA and other programs for low- and middle-income borrowers.

Texas Representative Jeb Hensarling welcomed that proposal, similar to one he offered last year that failed to make traction when Democrats controlled the House of Representatives. "I hope that the administration chooses to pursue that particular path," Hensarling said. The fourth highest House Republican vowed to re-introduce his legislation before the end of next year.

A second option would add a government backstop mechanism to be activated during a crisis, while the third would include government reinsurance for some types of mortgages. In the short-term, the administration called for phasing in higher prices for GSE guarantees, reducing the size of mortgages the GSEs can back and shrinking their portfolios at a rate of at least 10 percent a year.

Concern Over Consumer Impact
The Consumer Federation of America said the plan "could threaten consumers' access to affordable mortgage credit ... shifting control of the mortgage market to Wall Street banks and investors whose previous missteps have already caused massive foreclosures and losses."

The prospect of a diminished government role in the mortgage market lifted shares in private mortgage insurers, while the GSEs' borrowing costs fell a bit in anticipation that they would issue less debt in the future. Big banks could be helped by the overhaul if it lets them raise the prices they charge consumers for mortgages, while smaller banks that do a lot of business with Fannie and Freddie could suffer, said analyst Paul Miller of FBR Capital Markets.

The proposals bolstered demand for the $5 trillion in outstanding Fannie Mae and Freddie Mac mortgage-backed securities, held largely by big banks and foreign governments. Higher fees and interest rates in months or years ahead mean borrowers will be slower to pay back principal debt, bringing relief to investors who face losses when bonds priced at a premium are repaid at face value.

The GSEs were seized in 2008 by the Bush administration amid fears they might collapse under bad debts built up during a massive U.S. real estate bubble. They have since sucked up $150 billion in taxpayer aid, which has made them a political liability for the administration.

The white paper "distances the administration from the two unpopular GSEs. Economically, it could, if enacted, make home ownership and mortgage finance more expensive in the U.S., and that carries its own political risk," said Brian Gardner, analyst at investment firm Keefe Bruyette & Woods. "Legislation is unlikely to pass over the next two years but there are administrative moves that are likely to start having an effect sooner," he said.




Obama wants big changes in mortgages
by Ben Rooney - CNNMoney

The Obama administration on Friday officially unveiled its plan to remake the mortgage market and reduce the government's role in housing finance by winding down Fannie Mae and Freddie Mac. The highly anticipated "white paper" outlines steps the administration says will help draw private capital back into the mortgage market, curb unfair lending practices and make federal support for borrowers more targeted.

The plan would phase in changes over a period of years and push back the most dramatic restructuring, which would require congressional approval, until as late as 2018. "We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market," Treasury Secretary Tim Geithner said in a statement.

Fannie and Freddie are government-sponsored enterprises that buy home loans that conform to certain standards and convert them into assets that can be sold to investors. They stand behind the vast majority of mortgages in the United States. The two institutions, which were publicly traded at one time, were rescued by the government in 2008 as the downturn in the housing market led to staggering losses on bad loans. The two companies have received about $150 billion in taxpayer aid since then.

Three options for the long haul: The paper lays out three possible long-term solutions for restructuring the mortgage market after Fannie and Freddie are gone. These options will now frame the debate in Congress over how to proceed with more significant reforms.

Under one option, the government would only guarantee mortgages backed by the Federal Housing Administration and other programs for lower- and moderate income borrowers. The other options also include backing of FHA loans, but propose additional steps to reform government support for the housing market.

One proposal would create a "backstop mechanism" to support the mortgage market during a crisis. The other focuses on providing insurance for mortgage-backed securities, while providing no insurance for the actual home loans. In a conference call with reporters, Geithner said it could take between five and seven years to wind down Fannie and Freddie and put in place a permanent solution.

Near-term changes: Meanwhile, the paper also outlines a number of steps the government can take now to begin overhauling the way Americans borrow money to buy a home.
The plan recommends requiring Fannie Mae and Freddie Mac to price their loan guarantees to the same standards as private banks.

It also says Congress should allow a temporary increase in those firms' conforming loan limits to expire. Currently, Fannie and Freddie are allowed to buy loans worth up to $729,000. If the increase expires on schedule in October, the limit would fall to $625,500. In addition, the plan calls for gradually increasing down payments for loans backed by Fannie and Freddie and shrinking their loan portfolios.

The administration is also seeking to raise federal insurance premiums on mortgages. Obama's 2012 budget, which will be submitted to Congress on Monday, will include a proposal to raise federal insurance premium on FHA loans by 0.25%. Critics argue that such steps will raise borrowing costs for homeowners and shock the housing market. But the administration maintains that gradual implementation of reforms will not disrupt the economy. "We have to do this carefully and responsibly," said Shaun Donovan, secretary of Housing and Urban Development.

The paper also details steps to protect consumers from unfair mortgage practices and ensure that federal aid for low-income borrowers is more effective. 




Fannie Mae: the long goodbye
by Colin Barr - Fortune

Like it or not, it may be 2018 before we are fully free of Fannie Mae and Freddie Mac. The Obama administration released a proposal Friday for restructuring the housing market. It lays out three paths to breaking the U.S. housing finance system's toxic addiction to massive, untransparent government subsidies. Fannie, Freddie and the Federal Housing Administration currently finance more than 90% of mortgages.

But going from a heavily subsidized system to one that sharply limits taxpayer risk won't be easy. Treasury Secretary Tim Geithner admitted in a call with reporters Friday that it is rather likely the Obama administration will be long gone by the time the next housing finance system, whatever it looks like, finally springs up in place of the current, deeply dysfunctional one. "Realistically, this is going to take five to seven years," Geithner said.

He said the shift would take place in three stages:
  • First, in the next two or three years, the government will dial back its support for the housing market, through moves such as a reduction in the size of the loan Fannie and Freddie can buy. That so-called conforming loan limit was raised to $729,000 in some areas during the financial crisis but will fall to $625,000 Oct. 1 if Congress doesn't extend the measure enabling the higher number.

  • The second stage, also taking two to three years in Geithner's view, will "accelerate the pace of transition" to a privately financed market that offers government support for typical mortgage lending only through programs that put investors in the first-loss position on any default.

  • The third stage turns on whatever legislation Congress passes to create the system to replace Fannie and Freddie, whose bailout has cost taxpayers $153 billion since Treasury's takeover of the companies in September 2008.

That is a long road, but the time to start is now, Geithner said. "The current system is untenable" and "fundamentally unacceptable," he said at a question-and-answer session at the Brookings Institution in Washington.

Asked about the risk of laying out a process that will take so long to complete that it will likely span two presidential election cycles, Geithner pointed to the high stakes in supporting a housing market that is widely expected to resume its long decline over the next year or two. "Any framework promising future virtue will suffer credibility issues, but this is really the only way you can do it," Geithner said.




Chinese Economist Warns Of Risks In Freddie Mac, Fannie Mae Bonds
by Eliot Gao and Aaron Back - Dow Jones Newswires

A popular Chinese economist on Thursday said China should be aware of risks in its holdings of debt issued by U.S. government-controlled mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), and suggested that China sell the securities soon.

The report by Lu Zhengwei, a senior economist at China's Industrial Bank Co., doesn't represent the views of China's leadership, but it does highlight persistent concerns about the security of Fannie Mae and Freddie Mac securities among Chinese civilians and some influential thinkers. Lu's warning comes just ahead of a report from the Obama administration, which could come as soon as Friday, that will outline options to gradually phase-out the two companies, reducing the government's footprint in the U.S. mortgage industry.

The Obama administration has committed unlimited amounts of aid to ensure that the firms meet their obligations to holders of their debt, as well as investors in asset-backed securities issued by the two companies. The commitment has cost U.S. taxpayers $134 billion so far. Nonetheless, Lu said in his note that this commitment amounts to an "empty check" without the support of the U.S. Congress. "However, looking at the current political situation in the U.S., for the U.S. congress to give a clear guarantee on this issue is almost impossible," Lu said.

Although an outright default is unlikely, Lu said that the end of the Federal Reserve's program of quantitative easing could cause the price of the securities to fall. He suggested China sell its Fannie and Freddie holdings before the U.S.'s quantitative easing ends in June.

Lu estimated in the report that "Chinese organizations" hold around $500 billion of debt backed by the two companies. In a telephone interview with Dow Jones Newswires, Lu said "Chinese organizations" was a reference to holdings by the Chinese government in their foreign exchange reserves. Lu said he based this estimate on Chinese media reports, as the Chinese government has never confirmed the size of its holdings in the two agencies.

According to the U.S Treasury's report on foreign holdings of U.S. securities, China held $454 billion of long-term U.S. agency debt as of June 30, 2009. That includes $358 billion of "asset backed securities backed primarily by home mortgages," and $96 billion of other long-term agency debt. The bulk of those holdings are likely in Fannie and Freddie bonds and securities, though it also includes debt from other U.S. government agencies such as the Government National Mortgage Association.

The U.S. Treasury data may understate the true extent of China's holdings, as they don't include purchases made through special units based in Hong Kong and in other locations outside China. According to separate figures from the U.S. Treasury, China has been steadily selling its holdings of agency securities since mid-2008. It sold a net $24.67 billion worth of agency securities it 2009, and $27.35 billion in the first 11 months of 2010, according to the data.

In an statement published in July 2010, China's State Administration of Foreign Exchange acknowledged that it holds bonds issued by the two U.S mortgage lending giants, but said it didn't hold any of their stock. SAFE said that the price of the bonds is "stable", and they are paying back principle and interest "normally."



China's Foreign Exchange Regulator Denies Report On Possible Fannie, Freddie Losses
by Aaron Back - Dow Jones Newswires

China's foreign exchange regulator on Friday denied a media report that said it could face losses of up to $450 billion on its holdings of securities issued by U.S. housing-mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC).

The State Administration of Foreign Exchange's statement didn't specify which report it was denying, but it appeared to be referring to a report on Thursday by Chinese newspaper International Finance News, which said a forthcoming plan from the Obama Administration to gradually phase out the two government-controlled companies could lead to the losses. SAFE said the report was "groundless," and that is has been receiving regular payments of interest and principle on the bonds it holds from the two companies.

The International Finance News report didn't explain how the losses could be realized, but cited unnamed analysts as saying that losses could reach $450 billion. The paper cited western media reports as saying that the Obama Administration will issue a report as soon as Friday that will outline options to wind down the two companies. Separately on Thursday, a popular Chinese economist issued a report warning of risks in China's holdings of Fannie and Freddie securities, estimating that China's total holdings are around $500 billion, but not offering any estimate as to the extent of losses.

At issue are three kinds of Fannie and Freddie securities. The two companies' stock prices have plunged to nearly zero, but SAFE said in its statement Friday that China has never invested in the stock of the two companies, so it hasn't been affected by the decline. The real concern is over the debt issued by the companies, as well as asset-backed securities that the companies have packaged out of mortgages and sold to investors. However, the Obama administration has committed unlimited amounts of aid to ensure that the firms meet their obligation to holders of those bonds and securities. The commitment has cost U.S. taxpayers $134 billion so far.

Lu Zhengwei, a senior economist at China's Industrial Bank Co. said in his report on Thursday that such reassurance from the Obama administration amounts to an "empty check" without the support of the U.S. Congress. "However, looking at the current political situation in the U.S., for the U.S. congress to give a clear guarantee on this issue is almost impossible," Lu said. In a telephone interview with Dow Jones Newswires, Lu said an outright default on the securities remains unlikely, but that the end of the Federal Reserve program of quantitative easing could cause the price of Fannie and Freddie securities to fall. He suggested that China sell its holdings of the securities.

Lu's analysis and the International Finance News report illustrate the extent of Chinese anxiety about Fannie and Freddie, despite assurances so far from the U.S. China has never disclosed the size of its holdings of Fannie and Freddie securities. According to the U.S Treasury's report on foreign holdings of U.S. securities, China held $454 billion of long-term U.S. agency debt as of June 30, 2009. That includes $358 billion of "asset backed securities...backed primarily by home mortgages," and $96 billion of other long-term agency debt.

The bulk of those holdings are likely in Fannie and Freddie bonds and securities, though it also includes debt from other U.S. government agencies such as the Government National Mortgage Association. The U.S. Treasury data may understate the true extent of China's holdings, as they don't include purchases made through special units based in Hong Kong and in other locations outside China.

According to separate figures from the U.S. Treasury, China has been steadily selling its holdings of agency securities since mid-2008. It sold a net $24.67 billion worth of agency securities in 2009, and $27.35 billion in the first 11 months of 2010, according to the data. SAFE said in its statement it earned an annual return of around 6% on Fannie and Freddie bonds between 2008 and 2010. It wasn't clear if SAFE was referring to just the companies' bonds, or also asset-backed securities.




Factbox: Plans to overhaul U.S. housing finance system
by Rachelle Younglai, Corbett B. Daly and Kevin Drawbaugh - Reuters

The Obama administration will soon unveil proposals for overhauling the troubled U.S. housing finance system, amid expectations it will seek to reduce the government's role in the mortgage market. An industry source said on Tuesday the administration will lay out its ideas on Friday. Debate on the issue is likely to last for many more months, with the White House under growing pressure to fix the mortgage giants Fannie Mae and Freddie Mac.

Known as government-sponsored enterprises, or GSEs, the two were seized by the government in 2008 in the financial crisis and have soaked up more than $150 billion in taxpayer aid. Their role in the system is to buy mortgages from lenders and repackage them as securities, giving the system liquidity. Below are proposals from a range of industry groups, think tanks and lawmakers on what to do to repair housing finance.

Mark Zandi, chief economist, Moody's Analytics:
  • Set up a hybrid of nationalized and privatized systems that keeps roles for the government -- insuring the system against catastrophe, standardizing securitization, regulating the system, and subsidizing disadvantaged households.
  • Private markets would provide bulk of the capital and originate and own underlying mortgages and securities.
  • Catastrophic insurance would be provided on mortgage securities only after major losses.
  • Mortgage rates would be higher than they were pre-crisis, but in the hybrid system, rates would be almost 90 basis points lower than in a fully privatized system.
  • The 30-year fixed-rate mortgage would be preserved, whereas it would quickly fade in a fully privatized system.
  • Taxpayer bailouts would be unlikely.
  • Downsized Fannie and Freddie could become federal catastrophic insurers.


Center for American Progress, a think tank with close ties to the Obama administration:
  • Separate functions of Fannie and Freddie into issuers, chartered mortgage institutions, and an insurance fund.
  • Chartered mortgage institutions would be regulated by the government and provide investors a guarantee of timely payment of principal and interest on mortgage-backed securities.
  • Issuers could buy credit insurance on mortgage-backed securities from the chartered mortgage institution.
  • Government would run a Catastrophic Risk Insurance Fund to set standards for mortgages to be securitized. The fund could backstop the regulated mortgage institution if needed.
  • The insurance fund would take in premiums assessed on securities guaranteed by the regulated mortgage institution.


American Enterprise Institute, a conservative think tank:
  • Eliminate need for government guarantees and for GSEs by only allowing prime quality mortgages to be securitized.
  • Privatize Fannie and Freddie gradually so that private sector can take on more of the secondary market for mortgages.
  • Gradually reduce the so-called conforming loan limit, or the size of the mortgages Fannie and Freddie may guarantee.


Mortgage Bankers Association:
  • Preserve government role in mortgage market with a security-level credit guarantee backstop; risk-based premiums paid into a federal insurance fund; and loan-level guarantees from privately-owned, government-chartered and regulated mortgage credit guarantors.
  • Government backstop should be explicit and focused on credit risk and liquidity of mortgage-related products.
  • Loan-level guarantees should be able to absorb all mortgage-related credit losses so the federal insurance fund is called upon "only in situations of extreme distress."
  • Centerpiece should be new line of mortgage-backed securities with a security-level, federal government guaranteed "wrap" like that on a Ginnie Mae security; and the backing of private, loan-level guarantees from privately owned, government-chartered and regulated mortgage credit guarantors.


National Association of Realtors:
  • Convert Fannie Mae and Freddie Mac into government chartered companies that are not owned by shareholders.
  • Federal government continues to back loans.
  • Does not specify how much support government should offer.


Representative Jeb Hensarling, the No. 4 Republican in the U.S. House of Representatives:
  • Wind down Fannie and Freddie within five years.


Representative Scott Garrett, chairman of the House subcommittee on capital markets and the GSEs:
  • Transition to a "purely private" U.S. mortgage market and put GSEs back on official government books.




US Banks Could Face $60 Billion Tab on Bad Mortgage Loans
by Ben Protess - Dealbook

The banking industry may have to spend more than $60 billion to buy back troubled mortgages, according to a report released on Tuesday by Standard & Poor’s. The exposure stems from risky loans that the banks packaged and sold as securities at the height of the mortgage bubble. The terms of the mortgage security deals often required lenders to repurchase loans that failed to meet certain underwriting criteria.

S.&.P., the credit rating agency, said the nation’s six largest banks face the brunt of the liability. Bank of America and JPMorgan Chase "have the highest exposure," the report said. S.&.P. expects the so-called mortgage put backs to hang over the industry for the next two years. Yet the lingering problem "should have no direct impact" on the industry’s credit ratings, the report said, because most banks have plenty of cash to cover the expenses.

Banks have been stocking their litigation reserves in recent months, preparing for an onslaught of lawsuits, the report noted. JPMorgan, for instance, increased its litigation reserves by more than $6.7 billion in 2010. Banks are facing calls to repurchase soured loans from three distinct players: private investors who bought mortgage-backed securities, companies that insured the mortgage bonds and Fannie Mae and Freddie Mac, the government-controlled mortgage finance companies.

The most potent threat, S.&.P. said, comes from Fannie and Freddie. Banks could ultimately pay the companies $31 billion — more than half the industry’s total exposure — to buy back demands. Bank of America announced in January that it paid more than $2.5 billion to buy back troubled mortgages from Fannie and Freddie.

Investor and bond insurers, meanwhile, could each collect about $15 billion from a variety of banks, the report said. S.&.P.’s estimates are largely in line with those of other analysts, who have predicted that banks could spend anywhere from $20 billion to $150 billion to repurchase roughly $2 trillion of bad loans.




Freddie Mac Official Says He Has No Duty to Shareholders
by Michael J. De La Merced -

As the Obama administration works to determine the fate of Fannie Mae and Freddie Mac, a director of one of the mortgage finance giants says he has no fiduciary duty to the company’s shareholders. The federal government placed the two institutions into conservatorship in 2008, and essential owns 79.9 percent of each company.

Clayton S. Rose, a director at Freddie Mac and a professor at Harvard Business School, said on CNBC on Wednesday morning that he was focused on the company’s conservatorship. Legally, he said, he does not need to take the concerns of Freddie’s shareholders into account. "As a legal matter, our responsibilities and our duties run to the conservator here," said Mr. Rose, a former senior executive at JPMorgan. The biggest private shareholder owns less than 2 percent of Freddie Mac.

Here is a transcription of a conversation between Mr. Rose and William A. Ackman, the head of Pershing Square Capital Management, regarding the subject:
  • Mr. Ackman: So you can make decisions that are adverse to shareholders?
  • Mr. Rose: Correct.
  • Mr. Ackman: And there’s no liability to you?
  • Mr. Rose: Correct.

The comments by Mr. Rose come as the White House grapples with the future of Freddie and Fannie. The Obama administration is expected to present a range of options in a report that could be released as soon as Friday.

One possibility favored by some of President Obama’s economic advisers — and by many Republicans — would not create any federal replacement for Fannie and Freddie, leaving the private markets to provide mortgages for most Americans. Other alternatives would continue some form of federal mortgage backstop, according to The New York Times.

Both Fannie and Freddie were delisted from the New York Stock Exchange last year, and now trade over the counter. As of the close of trading on Tuesday, Fannie’s common shares gave the company a $930.2 million market value, while Freddie’s shares gave it a $555 million market value.




U.S. home foreclosures rise in January, more seen
by Leah Schnurr - Reuters

U.S. home foreclosures jumped 12 percent last month, but the sharp divide between states suggests the industry remains backlogged by investigations into the foreclosure process.

According to a report from real estate data firm RealtyTrac, lenders foreclosed on 78,133 properties in January, up 12 percent from the month before, but down 11 percent from January a year ago. Bank seizures at states with non-judicial foreclosure processes jumped 23 percent, while states with a judicial process saw a decrease of 7 percent.

"It suggests the system is still frozen up. We should have seen a much larger increase in both overall activity and bank repossession," said Rick Sharga, senior vice president at RealtyTrac. "The numbers will inevitably go up, it's just a question of will it be sooner or will it be later."

The number of foreclosure filings, which includes default notices, scheduled auctions and bank repossessions, rose 1 percent to 261,333 in January. Compared to January last year, filings are down 17 percent. The report also showed 1 in every 497 houses received a foreclosure filing during the month. Five states -- California, Florida, Michigan, Arizona and Illinois -- continued to account for more than half of all foreclosure filings. California alone accounted for more than one quarter.

Nevada, Arizona and California also had the highest foreclosure rates. Nevada had the country's highest foreclosure rate for the forty-ninth month in a row. One in every 93 Nevada homes received a foreclosure filing in January, more than five times the national average, RealtyTrac said.

Ongoing foreclosures are a major headwind for a market that is already struggling with a glut of unsold houses. Data from Zillow Inc earlier in the week showed the number of single-family homes where the mortgage is worth more than the home increased to 27 percent in the fourth quarter from 23.2 percent the previous quarter, suggesting more potential foreclosures to come.




Turmoil In The Housing Market Makes A Recovery All But Impossible
by Comstock Partners

The housing market is likely to remain at historically low levels in 2011 to the detriment of the economy.  According to data provider Zillow.com home prices fell by another 2.7% in the 4th quarter of 2010, the largest quarterly decline since the first quarter of 2009.  Prices were down for the quarter in all 25 of the nation's largest metropolitan areas, and down year-to-year in all but one.  

A full 27% of homeowners carrying a mortgage were under water at year-end.  This amounts to 15.7 million homeowners and is a leading indicator of future foreclosures that will throw large amounts of additional inventory on the already burdened market.  Moreover, the under-water homes were not confined to the well known trouble spots such as California, Florida and Arizona.  Mortgages were 39% under-water in Chicago, 54% in Atlanta, 42% in Minneapolis-St. Paul, 41% in Denver and 38% in Cleveland.

Actual foreclosures dropped in the 4th quarter as a result of bank moratoriums and the delays associated with the "robo-signing" scandal, but are expected to rise once again as the mess is unwound and more defaults occur among the huge number of households with under-water mortgages.  The renewed rise in foreclosures is likely to result in a continued drop in home prices, particularly when we consider that homes are still somewhat overvalued compared to disposable income and rentals, and that mortgage rates have risen from 4.7% to 5.3% over the last two months.

We expect the housing situation to cause additional problems for the economy.  According to the Center For Economic Policy Research (CEPR), if house prices decline by another 15%, the loss in household net worth would amount to about $2.5 trillion.  A consensus of various studies indicates that consumers spend about 6 cents for every dollar of housing net worth.  Therefore a $2.5 trillion decline in consumer net worth would lead to a drop of $150 billion in consumer spending, amounting to 1% of GDP.  In addition the increased number of foreclosure would cause another big loss for banks or for Fannie and Freddie.  All in all, this is a great burden to bear for a fragile economy already beset with a large number of major problems.




Bernanke to GOP: Don't take that punch bowl away
by Peter Grier - Christian Science Monitor

The punch bowl analogy is one that often gets mentioned when a Fed chief appears before Congress. Translation: The Federal Reserve thinks the economic recovery remains fragile.

Here’s what Fed chief Ben Bernanke said to skeptical Republicans at his appearance before the House Budget Committee on Wednesday: No, it’s not yet time to take the punch bowl away from the party. What this means is that the Federal Reserve thinks the economic recovery remains fragile. The Fed needs to keep up a maximum effort to get the economy moving – even though some of its actions, if maintained too long, risk awaking an old foe, inflation.

Inflation is beginning to show up in some developing nations such as Brazil, Mr. Bernanke acknowledged. But under questioning from panel chairman Rep. Paul Ryan (R) of Wisconsin, he said the risk of that happening in the United States at the moment is minimal. "It is always an issue, as you know, Mr. Chairman, that in the recovery period, you have to pick the right moment to begin removing accommodation and taking away the punch bowl," said Bernanke.

The punch bowl-party analogy for the Federal Reserve is one that often gets mentioned when a Fed chief appears before Congress. It was coined by William McChesney Martin Jr., who served as the nation’s top central banker for five presidents, from 1951 until 1970. The job of the Fed is to "take away the punch bowl just as the party gets going," he famously said, referring to the need to raise interest rates when the economy is performing strongly, so that it does not overheat.

But Representative Ryan used a different saying on Wednesday to illustrate his concern that the Fed already may have done too much in the way of monetary stimulus. "My fear is ... that the cow’s out of the barn ... that we’re going to catch this when it’s too late," he said.

GOP lawmakers at Wednesday’s hearing criticized the Fed’s effort to get the economy going by buying back government bonds. They fear this "quantitative easing" is just a backdoor way to increase the US money supply, an action that in economic theory leads to inflation if taken too far. "There is nothing more insidious that a country can do to its people than to debase its currency," Ryan said.

In response, Bernanke said that recent inflationary spikes in other nations have been driven by the growth in their own economies. Rising gasoline and food prices in the US are driven by increased demand in other nations – something about which the Fed can do little. "Monetary policy can’t do anything about, for example, bad weather in Russia or increases in demand for oil in Brazil and China," said the Fed chief.

The Fed would end the bond-buying program, Bernanke said, when the economy appeared to be growing enough on its own. Using yet another analogy, he likened the Fed to a quarterback who needs to lead his receiver by throwing the ball ahead of him as he runs down the field. If that is the case, then the Fed is no Aaron Rodgers, the Super Bowl-winning Green Bay Packers quarterback, said some GOP members.

"If the Fed didn’t see this mess coming, will they see the recovery starting in time to turn off the printing presses to stop inflation?" said Rep. Frank Lucas (R) of Oklahoma at a separate hearing Wednesday. "I am not sure their vision in the future will be any better than in the past."





Ship of Knaves: How Bank Executives Piled up Risk for Own Reward
by Simon Johnson - New York Times

One view of executives at our largest banks in the run-up to the crisis of 2008 is that they were hapless fools. Unaware of how financial innovation had created toxic products and made the system fundamentally unstable, they blithely piled on more debt and inadvertently took on greater risks.

The alternative view is that these people were more knaves than fools. They understood to a large degree what they and their companies were doing, and they kept at it up until the last minute – and in some cases beyond – because of the incentives they might receive.

New evidence in favor of the second interpretation has just become available, thanks to the efforts of Sanjai Bhagat and Brian Bolton, who went carefully through the compensation structure of executives at the top 14 financial institutions in the United States from 2000 to 2008.

The key finding is that chief executives were "30 times more likely to be involved in a sell trade compared with an open-market buy trade" of their own bank’s stock and "the dollar value of sales of stock by bank C.E.O.’s of their own bank’s stock is about 100 times the dollar value of open market buys." (See page 4 of the report.)

If the chief executives had really believed in what their banks were doing, they would have wanted to hold this stock — or even buy more. Disproportionately, more sales than purchases strongly suggests that the chief executives felt their stock was more likely overvalued than undervalued.

The problem runs deeper, as Professors Bhagat and Bolton explain. Given the compensation structure of chief executives — particularly the fact that they can sell stock with very little restriction — they have an incentive to take on excessive levels of risk. When the outcomes are good, as they may be for a while in an up market, the chief executive can turn his or her stock into cash.

When the outcomes are bad, the chief executive doesn’t care so much because he or she already has cash — and some form of government bailout or other support may be forthcoming. Professors Bhagat and Bolton argue that if this incentive problem is important, we should see chief executives make a great deal of money while long-term buy-and-hold shareholders lose money.

Table 4 in their paper (Pages 45-48) shows the amounts of money involved, and they are simply staggering. Collectively, the people who headed these 14 institutions pocketed — in hard cash terms — more than $2.6 billion during 2000-8. It’s true that the paper value of their wealth dropped in 2008, although this was an unrealized paper loss. Even including that notional loss, the chief executives made an impressive $650 million profit.

In contrast, long-term shareholders in these 14 banks did very badly, particularly in 2008 (see Figure 1 on Page 61 of the paper). Professors Bhagat and Bolton show that shareholders in the biggest banks — where chief executives got their hands on more cash — did significantly worse than investors in smaller banks. Interestingly, chief executives in the smallest banks in their sample did not sell much stock relative to their purchases of their own bank’s stock. The big bank-small bank contrast is quite striking.

This points the authors toward moderate but appealing changes in executive compensation practices: "Executive incentive compensation should only consist of restricted stock and restricted stock options — restricted in the sense that the executive cannot sell the shares or exercise the options for two to four years after their last day in office."

With regard to the need to increase the equity financing of all banks, the authors comment:
As a bank’s equity value approaches zero (as they did for some banks in 2008), equity-based incentive programs lose their effectiveness in motivating managers to enhance shareholder value. Hence, for equity-based incentive structures to be effective, banks should be financed with considerably more equity than they are being financed currently.

This recommendation puts the authors on very much on the same page as Professors Anat Admati, Peter DeMarzo, Martin Hellwig and Paul Pfleiderer and many others in the finance profession. It should adopted by all shareholders and their representatives.

But who devised and negotiated the compensation packages at issue here, and who is in charge going forward? The executives in question hire people like Steven Eckhaus, a top Wall Street compensation lawyer, who puts up a spirited defense of current practices and insisted to The Wall Street Journal just last weekend that "to blame Wall Street for the financial meltdown is absurd."

There is no sign that financial sector executives making decisions at our largest banks — and supposedly acting in the interests of shareholders — are at all interested in being compensated in a more responsible fashion that would better protect shareholder value. They want to get the cash out at every opportunity. Boards comply; the breakdown in corporate governance in this respect is complete.

The only fools here are the shareholders – and the rest of society that buys into such a foolhardy scheme.




Budget Deficit in U.S. Rose to $49.8 Billion as Spending Grew
by Vincent Del Giudice - Bloomberg

The U.S. government posted a wider budget deficit in January as spending climbed from a year earlier when outlays were depressed by the New Year’s holiday. The gap totaled $49.8 billion last month, lower than the median forecast of economists surveyed by Bloomberg News, compared with a $42.6 billion shortfall in January 2010, figures from the Treasury Department showed today in Washington. An 11 percent increase in spending exceeded a 10 percent gain in revenue that reflected growing income tax receipts as the economy improved.

The compromise between President Barack Obama and congressional republicans that extended Bush-era tax cuts, renewed emergency jobless benefits and reduced payroll taxes may push this year’s budget shortfall to a record, surpassing the $1.4 trillion reached in 2009. Republicans, who took control of the House after last year’s election, have made spending cuts a top priority.

"It’s still a very wide budget deficit," said Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, who forecast a $50 billion gap. "We’re going to have a similar performance as last fiscal year. Congress needs to do something on the budget. The situation as it stands now is not sustainable." This year’s budget deficit is projected to reach $1.5 trillion, according to a Congressional Budget Office estimate released Jan. 26. Economists at Goldman Sachs Group Inc. in New York projected it will climb to $1.35 trillion from last year’s $1.29 trillion.

Year to Date
For the fiscal year to date, the deficit totaled $418.8 billion compared with $430.7 billion the prior fiscal year to date, according to the Treasury’s data.
"Everybody agrees the deficit is too big, but no one is willing to do anything about it -- raise taxes or cut spending, and that means draconian cuts in government entitlement plans," such as Medicare, David Wyss, chief economist at Standard & Poor’s in New York, said before the report.

A survey of 29 economists by Bloomberg News showed a median estimate for the deficit of $56.2 billion in January. Forecasts ranged from $44.1 billion to $70 billion. The non-partisan CBO, in a forecast issued Feb. 7, estimated a January gap of $53 billion.

More Spending
The Treasury’s report showed that government spending rose to $276.3 billion in January from $247.9 billion a year ago, when the New Year’s holiday fell on a Friday, pushing more government payments into December 2009, the CBO said in its forecast. "If the effects of shifts in the timing of certain payments were excluded, the deficit would be $16 billion less in January 2011 than it was in January 2010," according to the CBO’s estimate.

Revenue and other fees increased to $226.6 billion from $205.2 billion in January 2010. Receipts from individual income taxes have climbed 24 percent year to date to $385 billion. Corporate income tax receipts were up 6.5 percent year over year. Treasury Secretary Timothy F. Geithner, at a town hall event in Washington yesterday, said the Obama administration soon will release "very detailed" programs for curbing future deficits, and that the fiscal outlook is "fundamentally manageable." He also predicted that Congress would raise the $14.29 trillion debt limit.

Obama on Tax Code
Obama this week called for businesses to join him in an effort to change a "burdensome corporate tax code." In a speech at the U.S. Chamber of Commerce on Feb. 7, Obama said "various loopholes and carve-outs" distort economic decisions. In an effort to help contain spending, a bipartisan group of senators has revived a proposal to give the president a form of the line-item veto enjoyed by many state governors. In 1996, Congress approved the full line-item veto and then-President Bill Clinton used it until it was declared unconstitutional two years later.

"I think the mood has changed," said Senator Rob Portman, an Ohio Republican who was President George W. Bush’s budget director. "The legislative line-item veto is an important tool in our toolbox to rebuild our fiscal house." Meantime, former Senator Alan Simpson, co-chairman of a White House panel budget reform, said Social Security, Medicare, Medicaid and the pentagon need reining in, the Wyoming Republican said Feb 6.




US Trade Deficit Grows 33% In 2010
by Sudeep Reddy - Wall Street Journal

U.S. trade rebounded strongly in 2010, as fast-growing emerging markets, led by China, became not only a growing source of American imports but also a vital export market.

After tumbling during the recent global downturn, U.S. exports grew by almost 17% to $1.8 trillion last year, the Commerce Department said Friday. But as the economy gained momentum and oil prices rose, imports jumped nearly 20%, pushing the annual trade deficit up to almost $498 billion, a 32.8% increase that marked the biggest percentage gain in a decade. With developed economies growing slowly, U.S. companies are recognizing that expansion lies in selling to other foreign markets—some that were long seen as competitors. The Obama administration is pushing that perspective to achieve its goal of doubling U.S. exports by 2014.

The 2010 data show China holding its place as the top source of imports into the U.S., after having jumped ahead of Canada, Japan and Mexico in the past decade. China also rose to become the No. 3 market for U.S. exports last year, up from No. 18 in 1990. Like many countries, China once relied on the U.S. for computers but now looks to America for semiconductors, civilian aircraft and parts, and complex industrial machinery, as well as materials such as copper and chemicals that serve as inputs for other goods.

Some U.S. companies that once saw China as a threat now see it as an opportunity. At Paulson Manufacturing Corp., a maker of facial safety equipment, competition from China since the 1980s ate into the company's U.S. sales for sporting-goods equipment. So six years ago, President Roy Paulson began working to export equipment for firemen, electricians and steel workers. Last year the Temecula, Calif., firm got about a quarter of its $13 million in sales from exports.

"We enjoy nice sales to China," Mr. Paulson said. Some customers there, particularly those looking for safety equipment, "don't want to buy the quality of the products that are made in their country," he added. Mr. Paulson expects his exports to overtake domestic sales in the coming decade, driven in part by emerging markets such as China and Brazil. "The greatest growth for our business will come from exporting," he said. "They don't make the kinds of things in Brazil that I make in my factory."

Welch Allyn Inc., a maker of medical devices, has seen sales to some European countries, such as Ireland and Spain, remain weak as those governments cut their budgets. While the U.S. remains a strong health-care market, all signs point to the government, insurers and consumers trying to rein in costs. So the company is looking to expand in strengthening economies where governments are spending more on health care and establishing primary-care clinics. In China, "they have a multibillion-dollar commitment to improving community health care," said Julie Shimer, CEO of the privately held business. "We see that as an opportunity."

The Skaneateles Falls, N.Y., firm relied on international sales for about 10% of revenue two decades ago. That is now 35% and the company expects the percentage to keep growing. Across the industry, about 55% of global spending on medical devices is made outside the U.S. "We feel like we're leaving money on the table," Ms. Shimer said. The U.S. still maintains significant trade relationships with major advanced economies. Canada, Mexico, Japan, Germany, the United Kingdom and South Korea are among the top 10 sources of imports into the U.S. as well as consumers of U.S. exports. All were also in the top 10 back in 1990.

But growth in emerging Asian economies has major U.S. firms focusing more on the continent. Last month, Caterpillar Inc. reported that for the first time, its 2010 revenue in Asia exceeded that in Europe, Africa and the Middle East combined. Last year, Caterpillar sold $10.3 billion of excavators, engines and other machines in Asia, $300 million more than Europe, Africa and the Middle East. This marks a reversal of the previous pattern: Three years ago, it sold $6.4 billion in Asia and $14.3 billion in Europe.

A review of trade data over the past two decades shows other developing economies gaining as U.S. trade partners. Brazil has become a key export market for U.S. aircraft, industrial chemicals and computer accessories. India, now a big buyer of U.S. diamonds and gold, fertilizers and aircraft, sends back to the U.S. uncut diamonds, apparel, and medicinal products. The mix of goods flowing in and out of the U.S. also has changed. Exports of aircraft, refined petroleum products, pharmaceutical goods and soybeans have increased. A decade ago, exports were led by semiconductors, data-processing machines and other high-tech products. More of those goods are now being imported, alongside crude oil and passenger vehicles.

In December, the nation's trade gap widened 6% to $40.6 billion in December, the Department of Commerce said. That month, the U.S. trade deficit with China declined 20% to $20.7 billion as U.S. exports climbed to a new high of $10.1 billion and imports fell. But the full-year trade deficit with China also reached a high of $273 billion, a trend that will likely lead U.S. officials to continue pushing China to allow its currency to appreciate.

The strength in U.S. exports in December was better than the government expected, suggesting the Commerce Department will eventually upgrade slightly its 3.2% estimate for economic growth in the fourth quarter. With many American consumers cutting back spending as they pay down debt, U.S. officials are counting on exports to accelerate the recovery. The Obama administration wants to double U.S. exports in the five years through 2014 to generate stronger economic growth at home. The White House and many members of Congress are pushing ahead on free-trade agreements with South Korea, Colombia and Panama, recognizing how much such deals can boost U.S. exports.

About 40% of U.S. exports today are to countries with which Washington has free-trade agreements—a group that represents just 7% of global economic output, said Edward Gerwin, senior fellow for trade and global economic policy at Third Way, a Washington think tank. "To the extent that there are lower barriers, we are highly competitive," he said. The U.S. can be more competitive by pushing higher-quality manufactured goods abroad, Mr. Gerwin said, "but that's hard. There are a lot of people, including the Chinese, who are trying to move in that direction."

At the Port of Los Angeles, the nation's largest container port, Japan was the largest trading partner two decades ago, accounting for a quarter of its trade flow. Today, Japan accounts for 6%. China, which represented 5% of the port's trade in 1990, now represents more than 40%. "They've dwarfed everyone else," said Geraldine Knatz, the port's executive director.

Taiwan and South Korea are increasing their activity through the port as well. So are countries such as Vietnam, which catapulted in two decades to a leading trade partner for the port. The port is no longer exporting large amounts of coal as it did in the 1980s, but it is still sending grain and scrap metal abroad to developing economies in Asia. Most containers from Asia hold furniture, clothing and electronics.




Record £9.2bn UK trade deficit dents hope of export-driven recovery
by Heather Stewart - Guardian

Hopes of an export-led recovery in Britain's fragile economy remain bleak, according to official figures which showed that the trade deficit hit a record high of £9.2bn in December. Exporters delivered their best performance since 1977 over last year as a whole, with foreign sales of UK products expanding by 17%; but their efforts were swamped by a larger rise in imports, according to the Office for National Statistics.

The dismal trade figures were released as the business secretary, Vince Cable, delivered a white paper promising help to small and medium-sized companies to take advantage of the cheap pound and lucrative markets in India and China. The goods deficit was up by £700m, from £8.5bn in November, the ONS said, underlining the challenge facing Cable and his colleagues as they battle to "rebalance" the economy.

Britain's services sector, including the resurgent banks, ran up a surplus of £4.4bn in December, but that was not enough to offset the £9.2bn shortfall in goods, and the overall monthly trade deficit, of £4.8bn, was the highest for five years. Economists said the snow in December may have had some effect, but Britain's underlying trade performance remained weak. "The big picture is still that the external sector is not giving the economy the support it needs to weather the fiscal squeeze," said Vicky Redwood, UK economist at Capital Economics.

Lee Hopley, chief economist at manufacturers' organisation the EEF, said the strong export performance last year – including a 44% increase in car exports, for example – provided some cause for optimism. "Manufacturing continues to take advantage of the buoyancy in export demand and capitalise on growth in world markets, though the continued strength of imports is denting the contribution to growth from net trade," she said.

Exporters have complained in the past that they fail to win overseas contracts because they lack credit guarantees and insurance offered by the UK's competitors. Cable said the white paper, outlining the government's plans to promote trade and investment, offered exporters comfort that a wider range of credit facilities would soon be on offer. However, he rejected pleas to match the direct government support offered by the German and French governments, insisting that the poor state of the government's finances meant firms must rely on the private sector to provide credit insurance.

Last year the British Chamber of Commerce called for an overhaul of credit insurance after it said the failure of the banks to offer cover had cost the UK billions of pounds in lost contracts. Trade minister Lord Green, the former HSBC chairman, said a new Export Enterprise Finance Guarantee Scheme would offer finance valued up to £1m, to target smaller firms.

The Exports Credit Guarantees Department, which was set up in the early 1990s to co-ordinate credit cover, will launch the Export Working Capital Scheme later this year for those not eligible for the Export EFG, offering export finance worth over £1m. Green said: "The Government will offer an expanded, better-coordinated range of products to large and small businesses alike, working closely with the banks to widen access to the capital and credit insurance exporters need to make the most of their opportunities.

Shadow business secretary John Denham welcomed the announcement, but warned that without a wider strategy for restoring the economy to health, measures to boost trade were unlikely to succeed. "Putting new tyres on the car won't improve the performance if you don't fix the engine," he said.

The ONS revealed a list of Britain's top trading partners during 2010, which revealed how dependent the economy remains on its traditional markets. Top of the list as buyers of British goods were the US, Germany, the Netherlands, France and Ireland - none of them among the group of fast-growing economies Cable would like British firms to target. Germany and China were the largest sources of UK imports.




For U.K. Banks, a Calamity Is Born
by David Enrich - Wall Street Journal

U.K. bank regulators are launching a new type of "stress test" that forces banks to consider unlikely but potentially disastrous scenarios like a flu pandemic or disruptions to the country's food-supply chain. It is a far cry from the comparatively quaint variables, bursting property bubbles and economic downturns, that regulators traditionally have used to gauge banks' financial health.

The latest exercise, which the U.K.'s Financial Services Authority instructed banks to start conducting in mid-December, is dubbed a "reverse stress test." It requires banks to identify potentially fatal events and then to work backward to find ways to revamp their businesses so they would be better prepared to withstand such shocks. After being caught flat-footed by the financial crisis that nearly toppled two of the U.K.'s largest banks, the FSA sees the tests as part of prudent contingency planning. The agency last year told banks that the exercise is designed to spur them to "explore more fully the vulnerabilities of their current and future business plans."

Bankers call it the latest example of regulatory overkill. Executives protest that they are wasting countless hours dreaming up outlandish doomsday scenarios. The chief executive of a major U.K. bank said the tests are predicated on "a massive confluence [of] absurd scenarios" in which executives passively watch events unfold rather than trying to stabilize the situation. Bankers are especially worried that the process could result in them being forced to hold more capital. The FSA said in a planning document that the tests "may result indirectly in changes to the levels of capital held by firms" if the exercise "identifies business model vulnerabilities that have not previously been considered."

An FSA spokeswoman defended the exercise. "It might seem outlandish to them, but the point is that it pushes the business model to the point it collapses," the spokeswoman said. She said the banks also should be evaluating relatively mundane situations like what they would do in the event of a major internal fraud. The U.K. arms of foreign banks, including U.S. investment banks, also are subject to the tests, although they face a more gradual timetable than British lenders for conducting the exams. One Wall Street bank's London unit is likely to look at how it would fare in a global liquidity crisis, said a person familiar with the matter.

Meanwhile, the man likely to be Ireland's next prime minister said the government should wait until a round of stress tests on the country's banks has been completed before recapitalizing them. In an interview Thursday, Enda Kenny said it would be "prudent and realistic" to wait "to see if there is another black hole in the banks" before they receive any new capital injections. Under the terms of the roughly €67 billion ($92 billion) bailout it negotiated for Ireland late last year, the government had been due to inject up to €10 billion into Bank of Ireland, Allied Irish Banks and EBS Building Society by the end of this month.

But the departing finance minister, Brian Lenihan, postponed the plan Wednesday until after the election, scheduled for Feb. 25, effectively leaving the decision to the next government. In the U.K., the griping about the reverse stress tests comes as bankers mount a counteroffensive against what they perceive as overzealous U.K. regulation, especially when it comes to the amounts of capital and funding they are required to keep on hand.

Barclays PLC Chairman Marcus Agius complained in a letter last month to Treasury chief George Osborne that the situation is "resulting in a nonlevel playing field." Mr. Agius, writing in his capacity as chairman of the British Bankers' Association, attached an eight-page report listing examples, including the reverse stress tests, that said the FSA is outpacing other regulators and international rules.

The new testing process highlights the lengths to which regulators are going to guard against a repeat of the global financial crisis, in which a confluence of events crippled banks around the world and sent many economies into recession. In November 2008, the FSA pioneered the use of stress tests to determine how much more capital banks would need to weather a variety of unpleasant but plausible economic environments. The U.S. adopted that model in 2009 to help ease its banking crisis.

The European Union last year conducted stress tests of 91 banks, but they were widely panned for giving passing marks to almost all banks, including some that subsequently required taxpayer bailouts. European officials now are negotiating the variables they will use in a second round of tests this spring. Those variables include factors such as economic growth rates and real-estate values. Those exams are tame compared with the reverse stress tests getting under way at U.K. banks and other financial institutions.

In those, bank executives are supposed to run simulations of a series of scenarios and then take steps to fortify their companies to withstand such crises. Such steps could include drawing up new contingency plans, restructuring business lines or beefing up cash reserves.

The FSA doesn't dictate the terms of the exams, leaving it up to banks to choose the catastrophes that they prepare for. But those situations are subject to FSA vetting and, in at least some recent cases, agency officials have told executives they aren't looking at sufficiently severe events, according to people familiar with the matter. The FSA has insisted those banks take into account more-extreme possibilities.

The banks appear to be "having difficulty thinking of something that will satisfy the regulators," said Irving Henry, a director at the British Bankers' Association who specializes in regulatory issues. As a result, bankers are evaluating some seemingly far-fetched possibilities, according to people involved in the process. For example, they are calculating what would happen if a swine-flu pandemic wiped out most of their employees, contemplating questions regarding how the bank continues to operate and even who would restock cash machines.

Another scenario posed involves the potential for a Latin American coup that would knock out the bank's local operations, potentially trapping large sums of money thousands of miles away. And at least one bank was asked to asses the impact of a full-fledged trade war between the U.S. and China.

Some scenarios are easier to imagine. Last spring, an Icelandic volcano erupted, sending a big ash cloud floating over the U.K. and other parts of Western Europe. What if a future eruption prevented air travel for months rather than weeks? The banks maintain that they would be doing this type of contingency planning without prodding from the FSA. Having regulators looking over their shoulders, demanding clear-cut answers and the completion of hundreds of spreadsheets, is simply making the process more cumbersome, bank officials said. It is "risk planning gone mad," one bank executive said.




Tax avoidance protesters turn their attention to Britain's banks
by Matthew Taylor and Paul Lewis - Guardian

Britain's fastest-growing protest movement is to target scores of high street banks in the next stage of its campaign against government cuts and corporate tax avoidance. Activists from UK Uncut have, over the past five months, caused the temporary closure of more than 100 branches of high street stores accused of avoiding millions of pounds in tax.

The group will stage its first national day of action against UK banks on 19 February. "The idea this time is not to shut these places down but to open up high street banks, occupying them and using them for things that may be more useful for the community," said Daniel Garvin from the group. He and other protesters have mobilised thousands of activists using the Twitter hashtag #UKuncut since the group was formed in October.

The protests, which come as banks reveal multimillion-pound bonus packages over the next few weeks, will involve a range of peaceful – and creative – direct actions. "If libraries are being closed in their area, people may decide to stage a read-in in the bank," said Garvin. "The housing benefit cap means people are losing their homes, so some groups may opt for a sleep-in. Theatres are being shut, so others have talked about staging a play. "Health provision is being cut, so what about setting up a walk-in clinic? Education funding is being savaged so how about holding a lecture series?"

Garvin said one local group concerned that a swimming pool was under threat was going to set up a paddling pool in a local bank. The National Audit Office calculated in 2009 that the taxpayer spent £131bn supporting the banking system and the government is facing growing criticism over its failure to tax the banks, rein in excessive bonuses or enforce lending to businesses.

Government efforts to draw a line under the row over bankers suffered another blow on Wednesday when Vince Cable, the business secretary, said he was still determined to end "unjustified and outrageous" salaries in the sector and his Liberal Democrat ally Lord Oakeshott left the frontbench after damning the government's attempts to curb bonuses.

Garvin said the growing anger over banks was fuelling support for UK Uncut's new campaign. "It was greed and reckless banking that caused the financial crisis," he said. "Now the government is making the political choice to cut public services that will hit the poorest hardest rather than force the banks to change how they operate and repay those who kept them afloat."

The first UK Uncut day of action will focus on Barclays bank, which is due to reveal how much it is paying in bonuses on 15 February – the day before the latest unemployment figures come out. Barclays chief executive Bob Diamond, who last month called for end to the attacks on bankers, is reportedly in line for a £9m payout. "Barclays is the obvious first target," said Garvin. "With its bonuses about to be announced next week and Bob Diamond telling us to forgive and forget, we wanted to give people the chance to have their say on what is going on as the government seems incapable of taking any meaningful action."

UK Uncut started when a group of friends decided to target Vodafone on 27 October, claiming that the mobile phone company had avoided £6bn in tax, an allegation denied by Vodafone. The protest, organised through Twitter, went viral and over the next four months hundreds of protests have been organised – targeting a range of high street names, from Topshop and Boots to Tesco. All of these firms are alleged to have avoided hundreds of millions of pounds in tax.

The campaign has seen UK Uncut activists force the issue of corporate tax avoidance into the mainstream political debate, with its members appearing on BBC Newsnight. There have also been reports that its disclosures have prompted HMRC to launch an inquiry into alleged leaks by its own officials, after companies' private financial details appeared in the press.

UK Uncut says the campaign against corporate tax avoiders will continue. But the decision to focus the next round of protests on banks was taken after a "Twitter debrief" in late December. "Hundreds of people were coming through with their comments every minute," said Garvin. "We were talking about what had gone well, what had not gone so well, and there was lots of discussion. "But when the 'what next?' question came up, everybody just said: 'Banks'."




Moody's Downgrades Unsecured Irish Bank Debt
by Mark Brown - Wall Street Journal

Moody's Investors Service Inc. cut its ratings on senior debt issued by six Irish banks that is not guaranteed by the Irish government Friday, saying that recent statements cast doubt on the government's willingness to support the banks and there was a growing risk that senior bondholders would share the costs of bailing out the country's banking system.

The banks whose long-term, unguaranteed senior debt ratings are affected are Bank of Ireland, Allied Irish Banks PLC, EBS Building Society, Irish Life & Permanent, Anglo Irish Bank, and Irish Nationwide Building Society. Moody's also put these ratings on review for further possible downgrades. The rating agency said it had until now "assumed a high degree of systemic support for the banks' senior unsecured debt and deposits" and this had been a reflection of Irish government measures like capital injections and debt guarantees.

But recent statements by both opposition politicians and Irish Finance Minister Brian Lenihan, who this week postponed further capital injections until after February's election, have brought this support into question. Moody's also said there was a growing risk that senior bank creditors would have to share the "huge fiscal burden" that bank bailouts have placed on taxpayers, "most likely through distressed exchanges."




Spain orders drastic caja clean-up to win confidence and fight off EMU debt contagion
by Ambrose Evans-Pritchard - Telegraph

Spain has imposed draconian rules on its saving banks and is preparing for part-nationalisation of the industry to restore confidence and boost the country’s defences against contagion from the debt crisis in Portugal.

The weaker banks, or "cajas", must raise Tier 1 core capital to 10pc by September if they depend on wholesale capital markets for more than a fifth of their funding or if less than a fifth of their shares are in private hands. If they fail to do so, the government will seize control through the state bailout fund (FROB). The demands are even tougher than the broad-brush plans unveiled last month and shows the determination of the authorites to cut out any cancers rather than allowing the sort of drift that bedevilled Japan in the 1990s.

The move comes after yields on Portuguese 10-year bonds punched to a post-EMU high of 7.66pc, renewing fears of a spill-over into Spain. The European Central Bank intervened on Thursday to restore calm but it is clear that Euroland euphoria over Chinese purchases of Portuguese debt has not lasted long. Jose Manuel Campa, Spain’s economy secretary and the architect of the financial overhaul, acknowledged that the most vulnerable cajas are unlikely to find private investors. "It will be a challenge. They have not taken part in the equity markets for some time," he told The Telegraph.

Only five of the 17 cajas meet the 10pc rule. Caixa Nova is 6.0, Unnim is 6.22, Caixa Galicia 6.43 and Catalyunia Caixa 6.6. Even the giant Caja Madrid with €328bn (£277bn) of assets has core capital of just 7.1, though it is already preparing a stock listing.

Mr Campa is hopeful that cajas will be able to raise "a big chunk" from investors given the strides made in cleaning up their books. He said fresh capital of €20bn will be enough to restore the caja industry to health, disputing claims by City analysts that €40bn to €80bn will be needed. "These high numbers are based on very stretched scenarios, with a fall in house prices by 50pc and land prices by 70pc," he said.

Madrid is basing its estimates on bank stress tests last July that included a severe double-dip recession, with a 3pc fall in GDP over the two years of 2010 and 2011. Since the economy in fact contracted by just 0.1pc last year, it would take a dire relapse at this point to exhaust the safety buffer. However, there is a risk that Spain may have missed a chance once again to "get ahead" of the crisis.

A report this week by the world’s Financial Stability Board (FSB) said the sheer scale of Spain’s property bubble had overwhlemed the country's seemingly tough rules on loss provisions. While the FSB praised Spain’s latest efforts to strengthen its banking system, there was a sting in the tail. "Such determined actions became necessary partly because of the delay in addressing earlier the structural weaknesses of savings banks," it said.

The Spanish media reports that the cajas have yet to come clean on €80bn of exposure to property loans, and are under fresh scrutiny by central bank inspectors. Mr Campa blamed the renewed eruption of the bond crisis last Autumn on Franco-German talk of haircuts for holders of EMU sovereign debt, coupled with the failure of the Irish authorities to carry out rigorous stress tests of their banks. "That really hurt us. We had made huge efforts to be transparent, but the Irish crisis devalued the quality of the tests for everybody."

The fate of the cajas is inseparable from the Spanish property market. Mr Campa said construction has fallen from 700,000 homes year during the bubble to around 200,000 until well into the next decade, helping to clear an overhang of properties estimated by consultants RR de Acuna to be as high as 1m. The uber-bubbles were in the Madrid suburbs and parts of the tourist belt on the coast, but the market is much closer to balance in the rest of the country.

Mr Campa, a free market economist who taught at New York’s Stern School of Business with arch-bear Nouriel Roubini, was brought in to restore Spain’s credibility in world finance after the crisis was in full swing. He advises astute investors that right now may prove to be the optimal moment to buy a house in Spain. "The Germans are coming back. We need the English, too," he said.




Inside the mind of a Fannie-Freddie bull
by Nin-Hai Tseng - Fortune

At a time when the odds are stacking up against the future of Fannie Mae and Freddie Mac, it seems as though almost no one will publicly defend the embattled mortgage financing giants. In 2008, during the peak of the financial crisis, the companies were nationalized to avoid huge losses after being saddled with toxic mortgages. As of October, Fannie and Freddie have cost taxpayers roughly $151 billion in taxpayer funds to cover their losses. More losses are expected on the horizon.

The U.S. Treasury Department on Friday, in a much-anticipated report, unveiled a plan to wind down Fannie and Freddie over the next several years. And fees that the troubled companies charge for guaranteeing home loans sold to investors should be increased to ease the private sector back into the housing market.

Indeed, it's hard to find reason these days to defend Freddie and Fannie. But the ailing mortgage giants do still have a few bullish shareholders. One of them is Derek Pilecki, founder of Tampa-based hedge fund, Gator Capital Management, who currently owns 400,000 shares of mostly Freddie preferred stock. He beefed up the firm's holdings when shares fell dramatically after the U.S. government put the companies under conservatorship, paying as low as 30 cents per share to as high as $2 per share (it trades today for around 62 cents per share). His logic: The stocks were cheap but prices will come back.

We caught up with Pilecki, who thinks Friday's Treasury report is a step in the right direction, especially since the recommendations include putting the companies in competition with private agencies. But he doesn't think lawmakers will have much success winding down the companies – at least not any time soon. Even while Pilecki's firm earns no dividend for holding shares of the companies because it's under conservatorship, he has great faith in the companies and thinks Freddie will turn profitable this year. Here's an edited transcript of our talk.

What do you think will be the outcome of the Treasury's recommendations – specifically, to shrink Freddie and Fannie?
Just because they come out with a plan doesn't mean they'll be implemented. I'm thinking not much will come out of it, at least in the next two years. Congress won't pass any bill or take much, if any, action. There isn't a middle ground that is acceptable to anybody. We're about to start the Presidential cycle. I don't think people will spend the political capital to get the legislation done.

So what's your outlook for Freddie and Fannie this year?
I believe Freddie Mac is going to turn profitable in 2011 and be able to pay back the U.S. Treasury. If they're in the process of paying back the Treasury, it would be impossible to wipe out shareholders. I think their loan loss reserves are adequate. It's approximately $35 billion. I don't think they're going to have to continue to add to these reserves. They have enough money set aside to cover their losses.

Also the mortgages they put onto the books in 2009 and 2010 are very profitable because lending standards have tightened. The criticisms aren't new. Some of them I fundamentally disagree with. One criticism is that the pubic-private model didn't work. I disagree -- I think they just had bad management. They didn't conserve capital. They reduced underwriting guidelines. That is the wrong move when home prices are at all time high.

So what changes need to happen now?
I think there should be changes. They're simple. First, the companies should not be able to insure any loans without full documentation. That would have eliminated 80% of their losses—that one simple rule. Also, the companies shouldn't buy any mortgage securities issued by Wall Street or private label securities. I think those two rules would have eliminated 90% of their losses.

Anything else?
Freddie is going to come back and it's going to surprise people. I hope I don't sound crazy.




Fannie debt fears won't die
by Colin Barr - Fortune

Almost three years after Hank Paulson first brandished his bazooka, the sight of Fannie and Freddie debt is still giving people the yips. The government unveiled a plan Friday that it said will result in the eventual wind-down of the government-backed mortgage companies. Officials stressed that the process will take years, and Treasury Secretary Tim Geithner went out of his way to say the administration will in the meantime stand behind Fannie and Freddie's obligations.

"We will make sure these institutions have the resources they need to meet their commitments," Geithner said. "The world understands we will stand behind so these institutions can meet their commitments." But contrary to what Geithner says, there are signs the world isn't totally at ease with the companies at a time U.S. finances are stretched and Fannie and Freddie are being cast by many Republicans as public economic enemy No. 1.

Commentators are wondering again, as they were before Paulson took over the companies in September 2008, whether China – the biggest single foreign holder of the $7  trillion or so in outstanding agency debt – will unnerve the market by starting to sell the companies' bonds. So far the answer is no. But even if the world believes the Obama administration stands firmly behind the companies, there is the question of whether that might change if a new administration takes office in January 2013. And even if nothing changes then, as is likely, the cost of backing the companies is only going to mount.

Together, those factors make administration support for Fannie and Freddie an "empty check," according to a report issued this week by a prominent economist at a major Chinese bank. "Looking at the current political situation in the U.S., for the U.S. Congress to give a clear guarantee on this issue is almost impossible," said Lu Zhengwei, a senior economist at China's Industrial Bank Co., Dow Jones reported.

Separately, China's government on Friday denied a Chinese news report that it could face losses on its holdings of Fannie and Freddie securities. China is believed to hold around $500 billion or so of the companies' bonds. China is surely right that there is next to no default risk on the GSE debt. Were the U.S. to yank the rug out from under Fannie and Freddie, it would almost certainly precipitate a major fiscal crisis here – something even the looniest hawks in Congress might stop short of.

But Lu questions whether China would benefit by selling more of its GSE debt now, while the Fed is propping up all debt markets by buying Treasury securities. He reasons the prices on all bonds should fall after the Fed ends QE2 in June, which could give China an incentive to move quickly.

If this sounds familiar, it should. Fear that China would dump the bonds led Paulson in 2008 to make his famous claim on Capitol Hill that a congressionally approved credit line to support the companies would keep investors from fleeing the market in the companies' debt. "If you have a bazooka in your pocket and people know it, you probably won't have to use it,'' he said at a July 2008 Senate Banking Committee hearing. The rest is history, $153 billion worth and counting.




One Big Chart That Explains Why Munis Won't Cause A Systemic Crisis
by Joe Weisenthal - Business Insider

We've pointed this out before, that unlike with other credit instruments, munis are unlikely to pose systemic risk (even with a lot of defaults) simply because they're not typically owned by systemically important institutions.

Most are owned by individuals -- people who are small enough to fail.

This chart from Bank of America/Merrill Lynch's Global Credit Strategy Outlook Conference Call breaks it down.

munis
Image: Bank of America

Now, what about the impact on property-casualty insurers?

All told, they account for about 25% of holdings.

munis

By their estimates, an "extreme" level of muni defaults would lead about 5% equity hit for these companies.





3.9 Million Americans Ran Out Of Unemployment Benefits In 2010
by Arthur Delaney - Huffington Post

Last year, 3.9 million Americans ran out of unemployment insurance benefits, according to a new analysis provided to HuffPost by the National Employment Law Project. Those 3.9 million are not necessarily still unemployed, and not all of them are necessarily "99ers" -- people who exhausted the maximum 99 weeks of benefits currently available in 25 states -- but the number offers a dramatic reminder that the longest-ever unemployment lifeline is still not long enough for some Americans to climb out of the deepest jobs hole since the Great Depression.

"These numbers demonstrate the grave nature of the long-term unemployment crisis and should lead all lawmakers to realize that it is imperative to put partisan fights aside and concentrate on job-creation efforts that are targeted to the longest of the long-term unemployed," NELP lobbyist Judy Conti said. The Congressional Research Service has estimated that as of October, roughly 1.4 million Americans have been unemployed for 99 weeks or longer, a tenfold increase from three years ago.

In December, the White House estimated that another 4 million would exhaust their unemployment benefits during the course of 2011. The federal government provides up to 73 weeks of benefits for workers in the hardest-hit states who exhaust the standard 26 weeks of state benefits. The average unemployment spell now lasts 36.9 weeks, and those who remain out of work longer than that are at serious risk of getting stuck.

Congressional Democrats have introduced legislation to give the long-term unemployed in all states an additional 14 weeks of benefits, but that measure faces steep odds in a Republican-controlled House of Representatives.

For those who run out of unemployment benefits, not much help is available besides Social Security, food stamps or charity. Rhonda Taylor, a 42-year-old 99er who traveled to Washington from Rhode Island this week to lobby Congress for additional benefits, told HuffPost on Wednesday that her family of five is getting by on little more than $600 a month from her son's Social Security disability benefits. She said her unemployment insurance ran out in March after she lost her IT job in 2008. Taylor said life since the cutoff has been "awful" and "devastating."

Patty DiMucci of Cary, N.C., told HuffPost this week she's been out of work since losing her job as a director of event planning for a beauty products retailer in March 2009. She said her unemployment benefits will run out this month. "This is the first time in my career I'm struggling to find a job," said DiMucci, 42. "I've applied for hundreds of jobs. The rejection takes its toll on you -- that is, when you even get a response from a company."

She's worried that the big employment gap on her resume is itself an obstacle to finding new work. "Am I deemed unemployable?" she asked.




Obama's Big Budget Cut Proposals Target The Poor
by Arthur Delaney - Huffington Post

As Democrats and Republicans wrangle over fiscal austerity and the shape of the 2012 federal budget, the White House is targeting programs in the $4 trillion budget that benefit low-income Americans. It's a sop to moderates and conservatives, and it's likely to infuriate voters who put President Barack Obama in the White House.

In the past week, the Obama administration has signaled that it will propose significant cuts to community service block grants and an energy assistance program that helps poor people stay warm in the winter and cool in the summer. A White House source familiar with the budget process told HuffPost that the president will propose cutting $2.5 billion from the Low Income Home Energy Assistance Program, or LIHEAP, which received $5.1 billion in federal funds in 2009. That program distributes money to states, which then distribute it to social service agencies to help families heat or cool their homes.

The National Energy Assistance Directors' Association, a group that represents state aid officials in Washington, said Wednesday that the bad economy has forced more low-income households to rely on LIHEAP. About 8.3 million households used it in fiscal 2010, up from 7.7 million and 5.8 million during the previous two years, and the association expects eligible applications to rise to 8.9 million this year. NEADA director Mark Wolfe told HuffPost that the administration's proposal would cut off 3.5 million households. "It's just a cruel proposal," Wolfe said. "What this would do is take some of the most vulnerable families in the country off energy assistance."

Wolfe said he assumed the White House had "drawn a circle" around education-aid programs like Pell Grants and Head Start. "My guess is that the administration sees a course of programs they want to protect," he said. "But why offer this up before the Republicans suggest cuts. Why volunteer us? Why volunteer LIHEAP?" The White House declined to address these concerns on the record, though a source noted that energy prices are lower now than when Congress increased LIHEAP funding for 2009.

Although energy prices have indeed declined since then, Bob Greenstein, the director of the Center on Budget and Policy Priorities, a progressive think tank, pointed out that the overall economy hasn't improved much since then. Price drops don't offer much relief to people still looking for jobs. "The unemployment rate is higher and there are lot more people that have low incomes today than during fiscal 2008 when this was written," Greenstein said. "I'm certainly surprised and disappointed at this cut."

And this isn't the only program for low-income people that the White House has put on the chopping block, at a time when the administration and Congress chose to extend tax cuts for upper income and wealthy Americans. Community service block grants, which fund community organizers in poor neighborhoods, are also facing cuts. During the 2008 campaign, Obama emphasized that his own resume included a stint as a community organizer. White House budget director Jacob Lew said in a New York Times op-ed Sunday that Obama would propose cleaving block-grant allocations to $350 million from $700 million.

"These are grassroots groups working in poor communities, dedicated to empowering those living there and helping them with some of life's basic necessities," Lew wrote. "These are the kinds of programs that President Obama worked with when he was a community organizer, so this cut is not easy for him." David Bradley, director of the National Community Action Foundation, that works with Congress and local governments on behalf of programs for low-income people, said he was surprised that the president, a former community organizer, would go after programs that represent such a tiny part of the massive federal budget.

"The question is why? Why pick on this program? It makes a statement, particularly when you're able to say, 'Here's a program I really care about,'" Bradley said. "Once the Obama administration throws a poverty program in the water, it starts a feeding frenzy." Bradley said the the White House has thrown chum into the waters swirling around the budget-cut debate. He said the Obama administration's move simply emboldened Republicans to propose even deeper cuts to the same programs.

In the wake of the White House proposal, Republicans said yesterday that they would seek $405 million in cuts to community service block grants as part of their proposed continuing resolution, a stopgap budget measure that would fund the federal government for the rest of the year. Even before word of the block grant and LIHEAP cuts, the National Law Center on Homelessness and Poverty worried that the White House will abandon a waning homeless prevention program created by the stimulus bill.

The White House has also stepped on other programs for poor folks. In August, it pushed Congress to pass a child-nutrition bill -- a priority of the First Lady's -- that was paid for in part with cuts to future funding for the Supplemental Nutrition Assistance Program, better known as "food stamps." At the time, the Food Research and Action Center, a national anti-hunger organization that lobbies on behalf of food stamps and other programs, estimated that a family of four will receive $59 less per month starting in November 2013 as a result of the $2.2-billion cut, which came on the heels of another $11.9-billion cut to food stamps that was folded into a state-aid bill.

More than 100 House Democrats protested and promised to block the child nutrition bill because of the cuts, but the White House persuaded them to fall in line. With mounting evidence that the White House is willing to sacrifice low-income assistance as it jockeys for position in budget and election battles, it may be hard this time around to convince congressional Democrats to support the proposed block grant or LIHEAP cuts. The 11 Democratic members of Congress from Massachusetts sent Obama a letter on Monday opposing cuts to the block grants.

And one prominent Democrat has already voiced his displeasure with the LIHEAP proposal. "I understand that difficult cuts have to be made," Sen. John Kerry (D-Mass.) wrote in a letter to the White House on Wednesday. "But in the middle of a brutal, even historic, New England winter, home heating assistance is more critical than ever to the health and welfare of millions of Americans, especially senior citizens. I request that the administration preserve LIHEAP funding at least to the Fiscal Year 2010 funding at $5.1 billion when it submits its FY12 budget proposal to Congress."

In Massachusetts, eligible applications to LIHEAP increased 21.1 percent in 2009, and that represents a population of voters likely to be as disgruntled about the White House's proposal as Kerry.




GOP cuts deep as right revolts
by David Rogers - Politico

Faced with a revolt on the right, House Republicans scrambled Wednesday to adjust their budget strategy and come up with tens of billions of dollars in additional savings — including a possible across-the-board cut — to appease tea party supporters.

The day began with the once-proud House Appropriations Committee previewing what it saw as an unprecedented package of more than $40 billion in reductions from current domestic and foreign aid funding. But even as the numbers were released, conservatives at a morning caucus demanded twice the reductions. And by late in the day, the committee’s cardinals were closeted away in the Capitol, fending off talk of across-the-board cuts but also admitting they will most likely need days more to come up with an alternative.

More than any single event in the new Congress, the standoff captured what’s become a rhetorical nightmare for GOP leaders — having pledged to cut $100 billion from spending this year but then single-mindedly targeting just one narrow segment of the budget covering domestic programs and foreign aid.

The whole intellectual framework for the $100 billion pledge was based on rolling back these same programs to the 2008 appropriations levels set in the last year of the Bush administration. Two bites were always expected to be needed, and the $40 billion in reductions represents a major down payment. But that 2008 marker is largely ignored now in the devotion to $100 billion, a number that has taken on a currency of its own and seems to defy any effort by the leadership to rationalize a lesser figure.

Republican freshmen, having just returned from their recent recess at home, complained at the morning meeting of being embarrassed now after telling their constituents that the $100 billion target would be met. "The first rule of politics is when you are explaining, you are losing," Rep. Jeff Flake (R-Ariz.) told POLITICO. And as a new member of the Appropriations Committee, Flake had warned the leadership Tuesday that $40 billion would not be enough. "After we spent a significant portion of the conference trying to explain why it really is closer to $100 billion than it is, we’ve lost."

"Right now, there are a lot of moving parts," said a Republican leadership aide. "We’re actively working to bring the conference together with a unified strategy," the aide said, indicating $100 billion would be the target. The Republican disarray is small comfort for Democrats, given the number of prized initiatives at risk.

A partial list of the proposed cuts includes high-speed rail, renewable energy programs and the Environmental Protection Agency. Community health centers and federal block grants for cities face significant reductions. And at a time of high world food prices, the GOP envisions more than $1.3 billion in combined cuts from White House requests for international food aid programs as well as from the Women, Infants and Children nutrition program.

The Securities and Exchange Commission would be effectively frozen at its current $1.1 billion budget and denied new funds sought by the administration to implement Wall Street reforms enacted in the past Congress.

The EPA cuts alone are estimated to be a $1.6 billion reduction from President Barack Obama’s 2011 budget request. Community health centers and maternal and child health block grants would be pared back by more than $1.5 billion, and the Energy Department appears especially hard hit. Its current energy efficiency and renewable energy programs would be cut virtually in half. And Republicans would provide just $4.01 billion for energy science — an 18 percent, or $893 million, cut from last year’s appropriations.

To be sure, there are the "usual suspects" of all Republican budget cuts. The elimination of Obama’s $5 billion high-speed rail initiative and funding for public broadcasting falls in this category; legal services for the poor is a standard target, as is the Clinton-era Community Oriented Policing Services program for local law enforcement grants, a great favorite of Vice President Joe Biden.
By comparison, the National Aeronautics and Space Administration, a Republican leadership favorite, escapes with an estimated $100 million reduction from its 2010 funding. The Federal Bureau of Investigation emerges largely unscathed, and the National Science Foundation is promised increased funding over 2010, albeit less than Obama wanted.

But to meet its targets, the committee already has pared back accounts many Republicans have long favored and that affect industries like nuclear energy with which the GOP is aligned. For example, the National Institutes of Health faces a $1 billion reduction, more than wiping out the 2011 increase sought by Obama. And the proposed $530 million cut from community development funds is sure to meet protests from mayors of both political parties.

The National Endowments of arts and humanities are sure to become bigger targets, having survived thus far. And the GOP appears to have a split personality when it comes to funding for health care reform.

On one hand, conservatives talk of defunding the reforms. But on the other hand, the Appropriations Committee is assuming some of the extra money mandated by the bill and using it to backfill where it has made discretionary spending cuts, such as in the case of community health centers. Going forward, the great challenge for the leadership is to reframe the $100 billion target in a manner that can be achieved.

The cut was always measured against Obama’s 2011 budget, and as it happened, rolling appropriations back to Bush-era levels met this goal. But now that even Democrats have rejected many of the president’s requests, the standard has become more 2010 spending levels embodied in a series of continuing resolutions that have kept the government operating since Oct. 1. The latest of these is due to expire March 4, meaning the House can’t afford long delays, since it’s already slated to go home for the Presidents Day recess late next week.

This time pressure is one reason both conservatives and some moderates have been attracted by the idea of an across-the-board reduction. But Appropriations Committee leaders are strongly opposed to this course and argue now that its defense savings should be added to the picture, thereby getting closer to the magic $100 billion target.

The rub here is that while the Pentagon budget would, in fact, be cut from Obama’s request, it and other security-related spending would go up by a net of $8 billion compared with 2010. And that math puts the committee back in a pickle, making the new reduction even smaller: $40 billion minus $8 billion equals $32 billion.

That’s one-third of $100 billion.




NYSE Death as Dominant Exchange Presaged Deutsche Boerse Deal
by Nina Mehta and Nandini Sukumar - Bloomberg

The New York Stock Exchange, the symbol of American capitalism for more than a century, may merge with a German rival after losing ground to smaller competitors.

NYSE Euronext, the owner of the NYSE, is negotiating to to be acquired by Deutsche Boerse AG with equity valued at $10 billion after its market share dwindled to 23 percent from 80 percent in the past six years. The new company will be the biggest exchange owner, handling equities worth $15 trillion and 40 percent of the U.S. options market.

The 219-year-old exchange led by Chief Executive Officer Duncan Niederauer, home to General Electric Co. and Ford Motor Co., was diminished as regulators opened U.S. markets to more competition after investors demanded lower trading costs. The sale to 18-year-old Deutsche Boerse in Frankfurt shows the increasing importance of machines over humans in trading stocks and the rising influence of derivatives, where profit margins are as high as 55 percent.

"Sadly, the NYSE became a victim of its own success -- too large and dominant to move quickly to adapt," said Peter Kenny, a managing director in institutional sales at Knight Equity Markets LP in Jersey City, New Jersey, who became a member in 1987. "It is not all bad, but it is very sad to an old timer like myself." Deutsche Boerse and NYSE Euronext announced merger talks on the same day that London Stock Exchange Group Plc agreed to purchase Toronto-based TMX Group Inc. for about $3.1 billion.

Exchange Mergers
The biggest day ever for exchange mergers triggered rallies in shares of operators from New York to Chicago and Sao Paulo. Nasdaq OMX Group Inc., IntercontinentalExchange Inc., CBOE Holdings Inc. and BM&FBovespa SA -- all of which run derivative venues for futures or options -- rallied as much as 6.7 percent yesterday.

Deutsche Boerse rose 2.3 percent to 59.77 euros as of 10:31 a.m. in London. NYSE Euronext shares surged 14 percent to $38.10 in New York. Their total market value of $25.6 billion exceeded Hong Kong Exchanges & Clearing Ltd.’s, currently the world’s largest by market capitalization. "We are still waiting for more details and are flying a bit blind right now," said Timothy Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York, which manages $2 billion. "But the market likes the combination of cross-board stock exchanges."

Fragmented Markets
With as many as 50 venues trading equities in the U.S. compared with fewer than 20 a decade ago, competition has driven down the amount exchanges can charge for executing trades. Brokers who owned the NYSE 10 years ago earned 6.25 cents or more when buying and selling 100 shares. Now, the spread is a penny for the most heavily traded stocks.

NYSE Euronext said derivatives revenue climbed 14 percent in 2010, while overall sales declined for two straight years. Derivatives are contracts whose values are determined by underlying assets. Deutsche Boerse, which may buy NYSE Euronext for about $10 billion in stock, would own about 60 percent of the new company. Niederauer, 51, would be chief executive officer of the new organization. Reto Francioni, the 55-year-old CEO of Deutsche Boerse, would be chairman.

The New York Stock Exchange, formed in 1792 under a sycamore tree on Wall Street, became the center of American capitalism through its grip on stock listings and trading. During the crash of 1987, Chairman John J. Phelan won praise for securing pledges from executives of some of the exchange’s biggest companies to buy back their own stock.

Scandal Decade
The Big Board’s reputation faded in the last decade when scandals highlighted the potential for collusion on the NYSE floor and faster technology reduced the need for middlemen.

In September 2003, Chairman Richard Grasso ended a 36-year career at the exchange as regulators and directors said a $140 million pay package called his leadership into question. Two years later, the U.S. charged 15 NYSE specialists with fraud, saying they manipulated orders for four years to pocket $19 million at clients’ expense. The NYSE was censured for self- regulatory failures and agreed to submit to outside monitoring for the first time.

Grasso’s successor, John Thain, orchestrated the 2006 reverse merger that gave the NYSE control of Chicago-based Archipelago Holdings Inc. and turned the member-owned exchange into a public company. By then, regulatory directives aimed at lowering transaction costs were in the process of cutting the NYSE’s market share.

Penny Increments
The 2001 switch to decimal share pricing, from sixteenths of a dollar, allowed any firm willing to sell for a penny less than the best available price to step in and make the trade. That reduced margins for specialists on the floor of the exchange. Automated-trading firms such as Getco LLC in Chicago used high-speed computers on electronic venues such as Bats Global Markets in Kansas City, Missouri, and Jersey City, New Jersey-based Direct Edge Holdings LLC to overcome lower profits by sending thousands of orders to trade every second.

At the same time, exchanges around the world were combining, with at least $95.8 billion of mergers completed since January 2000. NYSE combined with Euronext NV in 2007. TMX bought Montreal Exchange Inc. in 2008, a year after London Stock Exchange Group acquired Borsa Italiana SpA. ICE purchased the New York Board of Trade in 2007 and Bolsa de Mercadorias e Futuros bought Bovespa Holding SA in 2008.

Futures exchanges around the world traded 8.2 billion contracts in 2009, almost three times the turnover in 2003, according to data from the Futures Industry Association.

Seeking Volume
With rivals taking business, one of the quickest ways for NYSE Euronext to grow is through mergers and acquisitions, said Michael Pagano, a professor of finance who studies exchanges and market structure at the Villanova School of Business in Villanova, Pennsylvania. "It costs a fixed amount of money to build a computer system for trading, but once you generate revenue that covers those fixed costs the marginal cost of covering just one additional trade beyond that is basically just electricity," Pagano said.

That’s led to a reduction in costs. Total salaries and benefits at NYSE fell by 5.6 percent to $613 million last year, the biggest drop since the data on the publicly traded company began in 2005. Deutsche Boerse, which is scheduled to release results next week, cut staff expenses by 3.7 percent in 2009 and 26 percent in 2008, according to data compiled by Bloomberg.

Amsterdam, Lisbon
NYSE Euronext owns exchanges in Amsterdam, Lisbon, Paris and Brussels, as well as London-based Liffe, Europe’s second- largest derivatives market. The company also runs three U.S. stock exchanges: NYSE Arca, NYSE Amex and the New York Stock Exchange, two options platforms and the NYSE Liffe U.S. futures exchange, which trades contracts linked to interest rates.

Deutsche Boerse operates the Frankfurt stock exchange and Clearstream, Europe’s second-biggest securities-settlement firm. The company also has Eurex Clearing AG and a 50 percent holding in Eurex, the region’s largest futures market. Eurex bought a stake in International Securities Exchange, an options market that competes with CBOE, in 2007.

"In Exchange 101, it’s about operating leverage," said Jamie Selway, managing director at Investment Technology Group Inc. in New York and an expert in how markets are organized. He said NYSE Euronext and Deutsche Boerse can combine and eliminate more costs in personnel and technology. "You spend a fixed amount of cost to operate platforms. Anything additional you can trade on them is incremental revenue."

NYSE and Deutsche Boerse may move to a single execution system, coordinating trading services and eliminating jobs in areas such as sales, marketing and computer support. The combined exchange will use NYSE Euronext’s trading system for cash equities, said a person familiar with the matter who declined to be identified because the talks are private.

The deal would give the combined company about 40 percent of U.S. options volume by adding NYSE Euronext’s two markets with the ISE, currently the third-largest venue. CBOE was the biggest options exchange operator last month with 30 percent of contracts handled on its venues.

Combined, the companies will be the world’s largest futures market by volume, according to data from the Futures Industry Association, a trade group representing Wall Street banks active in derivatives. The merged firm would control 11 derivatives markets, including Liffe U.K., NYSE Arca Options, NYSE Liffe U.S., Eurex and the International Securities Exchange. The combined venues would have posted volume of 4.8 billion contracts in 2010, according to FIA.

CME Trading
That compares to 3.1 billion trades last year at CME Group Inc., the world’s largest futures exchange, FIA said. NYSE Euronext would also handle clearing, the guaranteeing of payments for transactions and delivery of securities, for equities and futures in Europe through businesses run by Deutsche Boerse. Combining products in the same clearinghouse limits the ability of other markets to compete.

"Expanding a good, modern system that already exists like NYSE costs very little," said Alfred Berkeley, chairman of Pipeline Trading Systems LLC in New York and president of Nasdaq Stock Market from 1996 to 2000. "They can eliminate all that redundancy in Deutsche Boerse and do a lot more business and a lot more trades than they’re doing now."




Boerse-NYSE derivatives HQ in Frankfurt
by Arno Schuetze and Philipp Halstrick - Reuters

The derivatives unit of Deutsche Boerse-NYSE Euronext will be headquartered in Frankfurt, while New York will get stock trading, two sources close to deal said on Thursday. "That way Frankfurt will get the main value driver of the merged company," one of the sources said.

As part of the merger plans, a new company or "NewCo" will be set up, which will merge with NYSE-Euronext in a first step. "This new entity will make a share-for-share offer for Deutsche Boerse," the source said. The headquarters of the new company's combined information technology (IT) operations will be in Paris, one source said, while another source said this was still under discussion.

The deal was not pushed by any shareholders but was an initiative of the boards of both companies based on existing drafts, one of the sources said. "It was just taken from a drawer. But it will be a long and drawn-out process, given the complexity of two legal systems and the need for several steps of regulatory approval."


65 comments:

snuffy said...

This batch of information shows some interesting trends...lots of grabbing at straws.I see no attempt at systemic reform that would indicate the parties involved realize how close we are to all hell breaking loose.
I try to keep my attention on 12hr shifts,and ignore the rumbles from Egypt,and the rest of the repressed folks in the middle east,the careful re-arrangement of deck chairs on the USS-Economic-Titanic,and the puppet show in the congress.
My focus now is get bread,pay bills,and do my best squirrel imitation.
My bees are in the California almond groves,working their sharp little asses off too.A good guy who I buy bees from,a commercial beekeeper,ask to use them due to a critical shortage....the east coast beekeepers said "Naahh",to almonds and are concentrating on honey production,and Australian bee imports were banned.[I am getting paid in new hives,and,fat and sassy colonies when I get home.]
I am in full ant mode now.As all folks with 2 brain cells working in tandem should bee...I will try and keep a eye on the board,but its going to be hard to post.

Bee good,Or
Bee careful

snuffy

christiangustafson said...

When will Maudlin follow up with a piece about a US sovereign default and collapse?

Zeke said...

I figure there will be whining and crying right to the end. Our favorites are housing and social security. The Social Security issue, if I'm correct, is really one of repayment but that never gets mentioned. Of course public pay/benefits are an enormous problem but that won't change either. The one thing I have yet to see is questioning the military. I read several blogs daily, including this one, and not the slightest whisper about the military. Wars, wars everywhere. Military retirees everywhere, and I mean everywhere, drawing pensions at 20 yrs and getting priority for public jobs. But not a whisper. The elephant in the living room and not a whisper. I hear the war drums pound daily. I read of ever more expensive weapons systems to fight guys in Toyotas. Money, money everywhere. So I wonder why not? No guts?

p01 said...

Egyptian opposition figure, Ayman Nour, says military council statement is 'victory for the revolution'.

The statement being:
Egypt's military council meets some of protesters' demands; dissolves parliament and suspends constitution.

I seems to be going more like this:
week of celebrations->military dictatorship-> civil war.

lautturi said...

Orlov has a nice 29min interview on his site. Familiar to most of here but maybe a nice wake-up call for people close by. Be prepared for "could not happen here", "you communist" or "whatever" -replies, though (^_^)

LindaBob said...

@Snuffy,
We met in pdx when Stoneleigh was in town. Tony & Linda, we live out your way. Thinking we might hook up, help each other somehow in our ant modes. If you get a chance email us at Bobz at bctonline dot com.

Kate said...

To those commenters on the last post who were concerned about the global food crisis, please tell us about the gardens you plan to grow. Sincerely, please tell. Because there's really very little alternative to relying on global supplies, other than producing your own.

For my part I expect to grow something in the neighborhood of 850-950 pounds of produce this year on my 2/3 acre residential lot. That should include roughly 100# potatoes, 75# tomatoes, 100# winter squash, 250# apples, and perhaps a bushel of flint corn for bread and polenta. The rest will be made up with a wide variety of vegetables and some other tree, vine and cane fruits. We should also see ~1000 eggs from our four laying hens, perhaps half of which we'll sell.

If you're serious in your concern about (y)our food supply, PLEASE get serious about producing some. It's daunting to begin with, and you will fail at some things. But it gets better as you gain experience. We need every backyard or allotment grower we can scrounge up. So start small if you must. But start.

A Walk in the Woods said...

@Zeke

The Military Industrial Complex.

This is at the core of U.S. 'exceptionalism' pathology.

I shorten it and refer to it as the M.I.C. Maggots.

The M.I.C. Maggots are chewing the flesh off the republic's bones.

It is one half of the two main meal tickets in the U.S. draining the taxbase.

Welfare and Warfare

Take your pick. Choose your 'camp'.

They are represented in the faux two party Punch & Judy, Red State vs Blue State, Rethuglican=Whimpocrat continuum by the PR tags as 'liberals and conservatives', or to be hipper, 'progressives and reactionaries.'

Either way in the fake choices setup, both camps have made huge, unsustainable claims on the national revenues, for generations far into the future.

The MSM Maggots are usually whining and propagandizing against social 'welfare' programs.

Never about corporate or M.I.C. Maggot welfare.

The entirely upper echelon of the U.S. military officer corp has been 'captured' by Corporate Mafia Mobster Maggots.

They own the U.S. military like a pet junkyard poodle.

Sit up doggie, roll over doggie, trash a 3rd world country for us doggie....

The entirely upper echelon of the U.S. military officer corp are Made Men.

Some form of Warfare Welfare - M.I.C. Maggot cushy consulting 'jobs' (payoffs) await them when they retire. Let the Double Dipping begin.

The soft core Fascist-Lite porn we call Main Stream Media will never point this out.

It is Verboden .

It would endanger our security if this were showcased.

"...those who give up liberty for security deserve neither" ~ Ben Franklin

_

EBrown said...

Kate,
We will soon be starting into our second spring at our current location. "We" are four adults (myself, my wife, my brother, and my sister-in-law), and we're going to expand our garden output from last year. We're still eating potatoes, winter squash, and onions we harvested last September and they're all good. If we had a better root cellar with higher humidity our potatoes would be in better shape than they are, but there's proabably at least a month of storage left in them. The squash and onions are still great.

This year we're going to have a little over 2000 square feet of garden beds under cultivation. We expect over 200# of potatoes, over 500# of winter squash, over 1000 onions, a bunch of flint corn, more garlic than we'll be able to eat, lots of salads, and at least two bushels of dry beans of various colors.

We also eat a lot of venison from deer season on, but that too is now running a bit low in the freezer.

I've plugged it before, and now I'm going to do so again. Our gardening bible is "Gardening When It Counts" by Steve Solomon. If you expect hard times in the coming years buy that book before any other book on growing. It is hands down the best for the homestead type garden.

logout said...

I haven't seen any comment yesterday on the Lira/Stoneleigh battle, other than by one joker who weeped bitter tears about missing the fight on getting the start time wrong. I don't attend blood sports myself but admit to a prurient interest in day-after quarterbacking, and so was disappointed to see none. Did everyone get time time wrong, or what?

Greenpa said...

Kate- in case you're not aware-

http://transitionculture.org/2011/02/10/transition-strouds-potato-day/

and, it's going on in China, too:

http://tinyurl.com/4b928nv

Greenpa said...

snuffy: "I see no attempt at systemic reform that would indicate the parties involved realize... "

Systemic reform to - what?

I'm greatly afraid anyone attempting to answer that question will fairly quickly be forced to see that any systemic actions- reform or innovation - are just flat systemically impossible, at this point.

Those in any kind of power position are all deeply wedded to concepts and practices which are in fact responsible for the problems.

And they don't see it that way, and are not ever going to.

Will said...

@kate...

You did not mention small fruit and perhaps that's part of your garden. But if not, it probably should be.

Currants, raspberries, blackberries, etc are not labor intensive, are easily managed and are reliable producers.

Like your trees, the production is mostly vertical, so you get good sq.ft. ratios.

I second the Steve Solomon comment. A good book.

Phil said...

What gets me is that it isn't that we haven't had plenty of warning on the pensions front.

Increasing longevity and an aging population (as the post-war boomers get to retirement age) have been known about and discussed for at least 40 years.

A bit like the "Limits to Growth" - discussed, then ignored, as we bury our heads in the oil sands.

skilo said...

hi all,

how do you see this bankster campaign to create $2 trillion out of SDRs and given it to themselves play out?

i hear they want to use these SDRs to price oil and commodities. will this devalue the dollar?

could they create a world currency and then fix the prices of the local currencies, including the dollar, to the global currency - opening the door to fiat devaluation of the dollar?

tia for an insight.

I. M. Nobody said...

I second Greenpa's comment about systemic reform, with a further reservation. It isn't just that TPTB are wedded to the current system. The entire empire, from top to bottom, is married to it. There has only ever been one kind of imperial system. Commercial exploitation imposed and maintained through military dominance.

The system disproportionately benefits a small elite, which is why they cannot last. Even if Hitler had won his war, his Reich couldn't possibly have lasted a thousand years. Any attempt to reform an imperial system can only result in its imminent collapse.

Evidently Zeke must skip over all my comments because I and some others here have posted quite a few comments and links pointing out how deleterious our military spending is. That said, it doesn't matter. By the time Ike gave his farewell address it was already too late to free ourselves from the depredations of the Pentagonian Overlords. The day they poured the first concrete, it was over. FDR and Churchill worked a deal and the British Empire became ours.

When Pentagonia has sucked us dry it's over. I agree with the comment Chomsky made in his video for the peak oil series on The Nation website. When we go down, the globe goes down with us. Think something like a 2000 pound bomb dropped on a mud hut in Marjah to picture what that means. That is systemic reform you can believe in, but it won't be one you'll enjoy. :(

waterfireair said...

@allgreatthingsemergefromchaos said...
Noise and visibility may become a serious issue.

You just pointed out the reason going off the grid and becoming self sufficient alone isn't a viable solution as oil becomes unavailable and our system falls apart.

Do you really think that you are going to be safe anywhere when people are going hungry?

They will walk to the ends of the earth to eat, to survive.

How will you protect your home and food from what could be tens of thousands or more people on the move?

It only takes one desperate man to kill a family in the dead of night.

Living after the collapse does depend on planning, and preparing, and saving, and knowledge.

But the only way you will be safe is to bring this society along with you into the new age.

allgreatthingsemergefromchaos said...

@ Board...

Nice to hear about your food production. One more book to find. :)

To play devils advocate...

Even if you have your food production the reality is that most won't. Are you planning to share or are you planning to defend? When you share to the needy they come back for more, and violence initiates more violence/retaliation. If you give the needy seeds and a shovel...most will say *%$# you.

Like most people I make assumptions that have turned out to be falsified. In this case we are all making the assumption that the social glue that has held society together during this century long expansion phase will still be holding the social fabric together in its collapse.

Having a LARGE garden tells everyone you have lots of food. If things unravel in a threshold/seizure response over a realatively short period of time, it may be wise to have a hidden 18-24 month food stash to keep low key while the lions share of food related mortality passes over.

So what is it going to be?

Share or defend? A dilemma either way.

To expand on the share/defend ethical dilemma found in a limited system experiencing carrying capacity overshoot you may want to check out Garret Hardin's "Life Boat Ethics." Hardin is considered a heavyweight in environmental ethics.

http://www.garretthardinsociety.org/articles/art_lifeboat_ethics_case_against_helping_poor.html

Cheers

allgreatthingsemergefromchaos said...

Continued...

One can use "life boat ethics" as a metaphor for each of our own lifeboats. If I have food and other preparations in a sea of hungry and needy people, do I let people on to my lifeboat (share my food etc.) at the cost of my own life? or do I defend my lifeboat to save my life.

Garret Hardin makes the critical point that sharing can lead to the tragedy of the commons. "Complete justice can lead to complete Catastrophe"

I hope you consider the relevance of the new boundary conditions and the application of lifeboat ethics. Much better to think about this now ahead of time.

I'll leave it up to you

Share or defend?

Cheers


Cheers

allgreatthingsemergefromchaos said...

@ waterfireair...


I concur with you. :)

A homestead lacks the security provided by a functional community. While a homestead may seem desirable (I would like one) you are isolated, vulnerable, and alone.

Surviving means absolutely nothing if we do not build a community(s) worth surviving for.

That is what I appreciated about TAE and its authors. They bring more meaning to collapse survival buy inspiring communities to flourish in the aftermath.


Cheers

Cheer

VK said...

NSA = Not Seasonally Adjusted Data
SA =Seasonally Adjusted Data

Now: 311,256,000
Jan 2001: 283,920,000
Increase of 27,336,000
Per Month: 227,800 

Civilian Non Institutional Population
Now: 238,704,000
Jan 2001: 213,888,000
Increase of 24,816,000
Per Month: 206,800

Civilian Labor Force NSA
Now: 152,536,000
Jan 2001: 142,828,000
Increase of 9,708,000
Per Month: 80,900

Civilian Labor Force SA
Now: 153,186,000
Jan 2001: 143,800,000
Increase of 9,386,000
Per Month: 78,217

Employed NSA
Now: 137,599,000
Jan 2001: 136,181,000
Increase of 1,418,000
Per month: 11,817

Employed SA
Now: 139,323,000
Jan 2001: 137,778,000
Increase of 1,545,000
Per Month: 12,875

Not In Labor Force NSA:
Now: 86,168,000
Jan 2001: 71,060,000
Increase of 15,108,000
Per month: 125,900

Not In Labor Force SA
Now: 85,518,000
Jan 2001: 70,088,000
Increase of 15,430,000
Per month: 128,583

And now for the breakdown of full time vs part time employed

Full Time NSA
Now: 110,373,000
Jan 2001: 112,370,000
Loss of 1,997,000
Per Month: 16,642 full time job losses

Full Time SA
Now: 112,356,000
Jan 2001: 114,262,000
Loss of 1,906,000
Per Month: 15,883 full time job losses

Part Time NSA
Now: 27,226,000
Jan 2001: 23,811,000
Increase of 3,415,000
Per Month: 28,458

Part Time SA
Now: 26,901,000
Jan 2001: 23,423,000
Increase of 3,478,000
Per month: 28,983

GDP Now: $14,870.4 Billion
GDP Jan 2001: $10,165.1 Billion
Increase of: $4,705.3 Billion
Percentage rise of 46.3%

But the number of full time jobs has fallen over the last decade in America while the total population has risen by 27.4 Million people!!

How useless is GDP as a metric?

Patz said...

Dmitri and TAE are the two best chroniclers of our demise that I've found. And Dmitri's Nation interview is the most succinct overview of our situation I know of.

While all the efforts at transition are laudable and a few may survive the coming bottleneck, for the most part it's sayonara homo sap. It certainly is curtains for civilization as we know it.

The key is our biology. We overvalue our brain and thought processes, believing problems are something that just requires the right solution. Well there is no solution to our specieshood.

No amount of reasoning will convince the majority of people to act beyond a certain time frame; they are capable only of responding to their (ill) perceived, short--term self interest. Our ultimately stupid genes are in charge and they will ride their meat chariots right over the cliff called "Head Smashed In Buffalo Jump."

In short we're no smarter than fruit flies in a bell jar or bacteria in a petri dish. The geniuses of evolution are the dinosaurs who lasted hundreds of millions of years.

VK said...

US Total Public Debt: $14.3 Trillion (It's slightly less but we're going to breach it in March anyway). If we count Fannie & Freddie, the total liabilities are much higher. By as much $6-7 Trillion.

In Jan 2001: $5.66 Trillion
Increase of $8.64 Trillion
Percentage rise of 153pc over a decade
But with Fannie & Freddie it probably is around 276pc.

Total Govt Outlays: $3,778.8 Billion
In Jan 2001: $1,942.5 Billion
Percentage Increase: 94.5pc

Total Govt Receipts: $2,416.4 Billion
Jan 2001: $2,101.9 Billion
Percentage Increase of 15pc

An ugly ponzi scheme indeed. Not to mention total debt increased by more than 100pc over the last decade.

So full time jobs are being haemmoraged, total debt & outlays are soaring while income is stagnant given the rise in population. Cash flow crunch anyone?

Kate said...

@Greenpa, thanks for the links.

@Will, I agree about the low maintenance and square footage requirements for the plants you name. And I did mention cane and vine fruits in my original comment. We've got a wide variety of what you call small fruits.

@allgreatthingsemergefromchaos, I admit that the problems you cite are worth considering, and that I haven't done much of that considering. I ought to do more. It seems to me though that before one faces the share or defend dilemma, one must first have something to either share or defend. I'm probably naive in my hopes that some of us can "garden by example." I don't expect people in my immediate area to go from what we have today to starvation in rapid succession. I'm hopeful that as times become tougher, more people will want to garden, and I live in an area where that's possible for most people. I'd rather see lots of people growing food, and not giving serious thought to the share/defend problem, than people stewing on the share/defend problem while putting off their garden efforts. Those of us here have an opportunity, perhaps even a duty, to demonstrate proof of concept for backyard food production. The more such proofs of concept there are scattered through various neighborhoods, the better. We don't yet need to share or defend; a third way still exists - produce, and encourage others to start small production. Maybe not a full solution, but certainly better than not doing it.

p01 said...

@Kate
Being late to the party (I immigrated into Canada after the tech bubble burst, was raised very debt-adverse and I became very corporate-adverse here) I don't have any capital to do such a thing.
I agree with allgreatthingsemergefromchaos that it's probably not a good thing in more temperate climates. In the climate I live in, probably the die-off will be massive and painless. Only the Richard Proennekes might survive. I'm unsure of what my chances are, but they seem pretty slim. So I concentrate on "ant and squirrel" mode for the time being, and will go with the flow (becoming a trickle) from there on.

It is in the fan now.

Regards,
Paul

Wyote said...

One salient point about Garrett Hardin's essay "Lifeboat Ethics, The Case against Helping the Poor" is the fact that it was written 37 years ago. We have moved so far beyond that level of population/consumption that we are locked into triage with our world resources.

Of course there still is enormous money to be made at it's expense. And the mindset continues. As the commons are not much defended by law or regulation.

My own state legislature recently provided an example of how Hardin's logic has been twisted to justify a fortress mentality. Alas:
Officials furious jobless funding refused

You might like to browse the comments to get a cross sectional flavor of the people here.

Dan said...

A few random things:

1. Revolutions are always chaotic...and the chaos usually increases in frequency in the years following the "success". We have only seen the very beginning of the upheaval in N. Africa and on the Arabian peninsula.

2. The high school soccer team that I coach won our biggest game of the season, 4-0. Can't focus on gloom AND doom all the time. :)

3. Read Steve Keen to understand the distinction between fiat money and credit money. Very important to seeing why contraction (collapse?) is inevitable.

4. Reading up on rice-cultivation....IN VERMONT! Considering the possibilities.

5. The bears comment on DEATH SPIRALS: http://www.youtube.com/watch?v=0mi0-Lb2KEQ

Third Chimp said...

What happened to the Consumer Metrics Growth thingy that was leading the GDP so nicely? It was certainly interesting - can we have an update ?

Gravity said...

Hardin:
"Without a true world government to control reproduction and the use of available resources, the sharing ethic of the spaceship is impossible. For the foreseeable future, our survival demands that we govern our actions by the ethics of a lifeboat, harsh though they may be. Posterity will be satisfied with nothing less."

Globalitarian ecofascism is never a solution. Why do people assume global government is required to implement certain measures, if not precisely because global government would be harder to ignore, resist, fight back against or overthrow? It only brings a greater monopoly on force, this authority being its only defining characteristic in such narratives, and is thusly desired by certain types to crush debate and help impose their singular will to power.

Similar arguments for globalitarianism are presented by genuine orderverse ideologues and ecocentrists, out of woefully misguided perspectives, which always include a pronounced lack of awareness concerning the presence and workings of dominant sociopathy, resulting in false dichotomies of governance and fallacies of false authority wherein they profess the virtues of supersized bureaucracies to better administrate corporate despotism, yet they convince themselves its for the planet's benefit.

As the forces of dominant sociopathy have been infiltrating and abusing governance at all levels, while structurally facilitating biosphere denaturation and exploitation for favored industrial pollutors by means of legislative leverage, and whereas the propensity towards runaway governmental psychopathology remains strongly correlated with bureaucratic scale and opacity, the format of world government often suggested as solution would predictably result in instant oppression, corruption and dehumanisation so repulsive, many wish to abolish it even before it's been established.

Hardin doesn't explicitly advocate forced sterilisation, he mentions the administration of population control by unspecified means, but this often tends towards sterilization extremes. Publicly advocating forced sterilization of general populations can be seen as legally equivalent to publicly advocating genocide on said populations. Such an advocation would then not be protected speech, but a criminal offence when considered to be inductive towards same act of violence, per the UN's own legal definition of acts of mass forced sterilization legally being genocide.

Some of his views are reasonable, but lifeboat ethics don't seem congruent with any practical execution of government, such as it is, application of triage management will not yield ethical strategies or minimise suffering while under influence of dominant sociopathy.

Supergravity said...

Lifeboat ethics do make sense at local scales, at the family or community level, offensive as such choices may be to moral sensibilities, but these rely on aspects of sovereignty and self-determination, property rights associated with individuals, which would be unmaintainable if global governance with excessive authority would be established to administrate distribution of resources to effect the greatest good. I don't believe such lifeboat ethics can be a properly distributed motivation for corporatized government in general, and global government would be no different, it simply wouldn't yield more ethical choices.

team10tim said...

Third Chimp RE: Consumer Metrics Institute

dshort.com and CMI

Same index at different sites.

team10tim said...

Al Jazeera video about food prices and production. There is a nice piece on temperature increases at ~11 minutes in.

Greenpa said...

Required reading for all doomer/preppers:

http://travel.nytimes.com/2011/02/13/travel/13allure.html

disconnect? what disconnect?

team10tim said...

A comment on the One Big Chart That Explains Why Munis Won't Cause A Systemic Crisis article. The articles states that lots of defaults in the muni market won't cause a systemic crisis because most of the bonds are owned by individuals.

The way I see it they are only partially correct. The absolute loss of wealth from muni defaults is certain to have a negative effect on the economy even if none of the bond holders are systemically important. Also, I assume that most of those investors don't hold the bonds directly but rather through funds, like a mutual funds, which could be systemically important. And the defaults are certain to a profound effect on the local governments that should be viewed as systemically important.

The aggregate effect may be every bit damaging as the collapse of AIG or Lehman even though it is spread out amongst multiple agencies.

p01 said...

@Kate
Re: gardening/food

Forgot to mention that these guys are my heroes. I (and Co.) have enough experience and knowledge to at least start such a thing. Whether we'll have the opportunity is something we cannot control. But we will try.

Regards,
Paul

team10tim said...

One last note for today. The 401k has been left out of the pension fund ponzi discussion. In 1978 congress amended the tax code to allow the 401k. Corporations rapidly adopted 401k plans to shift the burden of pensions from the company to the individual, by 1984 half of large corporations had 401k plans. I have an opinion about this but the reader should take it with a grain of salt because I haven't done the necessary research to substantiate my claims.

Previous to the advent of the 401k stocks were mostly held by institutional investors. After the 401k a substantial amount of money from individual workers began to pour into the stock market. In coarse hand waving terms the the influx of 401k money helped drive the markets up.

Due to the demographics at the time most of the entrants to the 401k plan were baby boomers. The oldest of the boomer generation experienced its peak earning years in the 90's and 00's. The leading edge of boomers are just starting to retire while the youngest of the boomers are in their peak earning years. This should be roughly neutral for the markets as comparable amounts of money is entering and leaving. In 20 years when the last of the boomers retire there should be a net drain of funds from the market.

Some refinements need to be made for the greatest generations peak earning years when companies started their 401k plans amongst other details. But, IMO, superimposing this trend on everything else adds 401k plans to the list of ponzi schemes.

allgreatthingsemergefromchaos said...

@ Gravity...

In some of his video shoots online (youtube) Garrett Hardin expresses his opinion that global government is unlikely. While we could discuss the benefits/downfalls of centralized or decentralized governance, I believe that bottom up is most feasible, because of the declining marginal returns of complexity of top down solutions.

I hate to be blunt, but world governance would only be feasaable with less than a billion people living on a sustainable solar income. No point preemptively chasing that topic, because we have to survive the impending collapse first. First things first. :)

There are too many global commons that are getting destroyed at the global level (climate change, species extinction, deforestation, desertification, water crisis etc.) If these issues are left to competing interests of decentralized governance, the collapse of these commons is almost guaranteed. This is the central tenant on Hardin's work: that either complete private property or centralized governance are necessary to avoid collapse/exhausting of the commons.


This said, lifeboat ethics is directly relevant to local and personal ethical choices we will all have to make when the going gets tough.

Build that lifeboat now so at least you will have "some" control over your wellbeing. Those without a lifeboat (there will be 100's of millions to billions) will be washed away.

This is why I cannot stress the importance for community building NOW because people will likely default to such a "selfish" ethic when things unravel.

@ Board (& Gravity)...

Do you think we are setting the stage for a massive selection event in which those less perceptive individuals who are not preparing will have their relative fitness approach zero? (Not so much physical selection, but selection of the mind?)

Cheers

TechGuy said...

waterfireair Wrote:

"They will walk to the ends of the earth to eat, to survive."

That's pretty hard if your starving, have no fuel, and are out of shape. The Majority of people will perish quite quickly.

Before people start marching out of cities and the subburbs to rural regions, Pandemics will cull most of the population. Its unlikely that suddenly one day, and all at once food and fuel will stop. Its much more likely that food and fuel supplies will fall over a period trapping many people where the live. Mal-nutriention and lack of proper santition will make people much more vulunerable to disease. Consider what happened during the little ice age, which trigger events that caused the black death to wipe out 1/3 of European population. The same process will happen again if food supplies run low, but because more people are living in urban regions and the food resources are distant, the dieoff will happen much more rapidity.

Of course if your living in a urban/suburban, or too close to a major population region, there is no point in trying to make a stand. People will take what ever you try to grow and stockpile. Distance from large populations and living in a region where resources exceed local population needs will be the key to survival. In the case of the dark ages, it was the people that lived on small farms away from the cities and towns that survived.

TechGuy said...

allgreatthingsemergefromchaos Wrote
"This is why I cannot stress the importance for community building NOW because people will likely default to such a "selfish" ethic when things unravel."

The problem is most community lead lifeboats believe in going back to pre-industrialize society. I doubt many of these will survive the long term.

Very few appear to be interested in using machinery or advanced equipment to provide the means to maintain some standard of living.

For instance, I have no objections to stockpiling fertializer, powering agriculture machinery with woodgas, or using Fischer-Tropsch process to produce domestic diesel fuel from biomass and stockpiled coal. I don't want to live in a grass hut with a dirt floor (the left side) nor do I wish to join a militia stockpiling guns, canned pork and beans (the right).

I think in both cases (left side & the right side) most will collapse with in the first year because idealogies will get in their way for long term survival.

I. M. Nobody said...

@agtefc

As opinion pollsters so often do, you have biased the question so as to improve the odds of getting a desired answer. Being a geezer whose relative fitness unavoidably approaches zero, I will give you my vinegar soaked opinion on the matter.

Think for a moment about why it's called the Dark Ages. That period is dark to us because the intellectual class didn't do well in the Darwinian Open Tournament. The inordinately thuggish, deceitful and cold-bloodedly murderous were the MOTU in those days. Just like now, only they did it with swords and arrows instead of keyboards and pens. Physical will matter far more than mental.

I do think the Tournament will be held again and everyone will be invited to play. If it doesn't begin fairly soon though, I think we will succeed in setting the stage for an extinction event. In that case the Tournament won't matter very much, will it?

If there are to be survivors, while it won't hurt to know a good bit about raising plants, my money would be on the pastoral set. There is really no predicting what will happen in any particular place. Animals are much more portable than gardens and can produce for you while you are on the move. Once the population is thinned down, there should be plenty of open grassland and you'll hardly have to work at all. Should the need arise, I am confident that you could trade one or two animals for a mate.

I. M. Nobody said...

@TechGuy

Aren't you making some pretty vast assumptions about what other people are thinking and why? Do you really think our goal in life is to live in a grass hut or join a militia? Are you really sure that we can't wait to stop using our machinery?

Now for the questions that might deserve answers. Please name a few of the currently in use farm machines that would be amenable to running on woodgas. I can assure you the boys here would be delighted to burn some Fischer-Tropsch diesel. We have already made use of bio-diesel blends. Are you prepared to make it and deliver? Or are you counting on someone else to do that? Fair warning, at this time there is no way to know what they might have available to pay for it.

Stockpile away, but do try to remember that no stockpile lasts forever. A dirt floored hut is certainly not the lap of luxury, but it does come ahead of several alternatives. And finally, we have no indication that it said anywhere on those tablets that Moses failed to preserve for us that membership in a militia must always and everywhere be strictly voluntary.

One more spritz on the parade. As our recently termed out Dear Leader opined, "this sucker is going down." When it does, that thuggish crowd I mentioned in my previous post are going to want summary justice upon those deemed to be responsible. The Palinesque and Limbaughoonish types will undoubtedly point them at the likes of you and me. You know, the kind of people who helped put them out of work and made things like high-frequency trading possible. Keep your head down.

team10tim said...

Gravity RE: Garrett Hardin,

from his seminal work: Tragedy of the Commons

...Coercion is a dirty word to most liberals now, but it need not forever be so. As with the four-letter words, its dirtiness can be cleansed away by exposure to the light, by saying it over and over without apology or embarrassment. To many, the word coercion implies arbitrary decisions of distant and irresponsible bureaucrats; but this is not a necessary part of its meaning. The only kind of coercion I recommend is mutual coercion, mutually agreed upon by the majority of the people affected.

...The most important aspect of necessity that we must now recognize, is the necessity of abandoning the commons in breeding. No technical solution can rescue us from the misery of overpopulation. Freedom to breed will bring ruin to all. At the moment, to avoid hard decisions many of us are tempted to propagandize for conscience and responsible parenthood. The temptation must be resisted, because an appeal to independently acting consciences selects for the disappearance of all conscience in the long run, and an increase in anxiety in the short.

The only way we can preserve and nurture other and more precious freedoms is by relinquishing the freedom to breed, and that very soon. "Freedom is the recognition of necessity" -- and it is the role of education to reveal to all the necessity of abandoning the freedom to breed. Only so, can we put an end to this aspect of the tragedy of the commons.

Hardin is basically saying that we either find a way to reach zero population growth or we go into overshoot. Overshoot and dieoff is no fun at all. How would you propose that we get to zero population growth?

waterfireair said...

TechGuy said...
"They will walk to the ends of the earth to eat, to survive."

That's pretty hard if your starving, have no fuel, and are out of shape. The Majority of people will perish quite quickly.


Maybe the middle-aged and elder will die off fairly quickly but there are millions and million of young people who are going to carry on. Even if disease sweeps through the population.

Remember the US population alone is 308 million people.

I have been to many very remote places and I'm often surprised to learn that the history of the area includes people.

People move. That's what we do. We've moved around the earth for millennium now. It's still in the genes. And we will again.

Scholastica said...

allgreatthingsemergefromchaos said: Where about in this great continent was your son looking to build the homestead?
He is mulling over the possibilities. We live in the Great Lakes region, and there is some family land in the southern part of our state. He has a good 10 years before he will be old enough to leave home, so no rush.:)

Sherlock said...

Counter-trend Move?

Reality-based-analysis.

The counter-trend was 2008. Now we've returned to trendline. Growth.

Dark fantasies abound here. Watch the news. Or just read for heaven's sake. Things are looking up all over.

Do I really need to list all the ways?

Starcade, back on Leviathan said...

Sherlock: How about just quit the fucking shilling and tell us who needs to just Fuck Off and Die?

That's the conservative mantra, from Obummer on down.

Linda said...

Cheryl Sherlock,

You bore us. Even the dimmest here (myself included) know that the biggest failure of the human race is the inability to understand exponential growth. The party's over. Go home.

Stoneleigh said...

Logout,

The debate will be available on DVD this week. I expect a lot more people will see it that way than listened to it live.

p01 said...

It could not happen here.
And population is a lagging indicator.

Regards,
Paul

Greenpa said...

More Lifestyles Of The Clueless:

http://money.cnn.com/galleries/2011/pf/1101/gallery.consumers_plan_purchases/index.html

For those wondering if we're heading for an evolutionary bottleneck.

DIYer said...

Sherlock,
Who are you poised to blame when things don't go your way? Liberals? Environmentalists? The Messenger (aka The Automatic Earth)?

allgreatthingsemergefromchaos said...

@ Scholastica...

I anticipate leaving the core family unit will be very difficult as most will require support of the family. In many circumstances family may be brought closer together as things unravel.

Even family poses some difficulties though. For example I have several aunts and uncles (with kids) that are not preparing and I know I won't be able to feed them. I have spoken with them and put them on the trail of relevant information but they like living in denial and have no skeptical, truth seeking urge.

It comes back to lifeboat ethics but with extended family being the needy. Difficult decisions ahead indeed.


Cheers

linda Mathew said...

Dear webmaster,

Today I have visited your http://theautomaticearth.blogspot.com/ and found some interesting information.We think our visitors will be benefited by your sites information.Hope by exchanging link we will be able to promote each other sites.


i have a blog that is related with NASA news and we focus the entire news from NASA and other all information regarding science and technology. As a part to make this blog to known everyone I am in the process of doing link exchange so i would like to do link exchange with you. This blog is not used for commercial purpose and if you would give link, the information about satelite and nasa would get spread and so that others can know some useful information about the science and technology.


Title: Nasa Satellites

URL: http://nasasatellites.blogspot.com/



With regards

linda Mathew

Webmaster

A Walk in the Woods said...

Mish has a real upbeat thought for 'The Cheryl' et al

Perpetual Liabilities: An endless note on your house you can never pay off

This amplifies Max K's meme of Debt Slavery and Cotton Pickin' Time.

This is probably the ticket here.

Allied Home Mortgage Capital, the manager-contact person is listed as someone called Royal Faust , I kid you not.

Remember, it's all good

And the future's so bright, they gotta wear shades.

:•}

allgreatthingsemergefromchaos said...

@ I AM NOBODY....

Good Day,

Guilty as charged with biased question phrasing. :) Not my intent, but I prefer people critique me upfront so I can introspect on my own biases.

You are more pessimistic than most, but this is not to say that your pessimism conflicts with reality. When you fully grasp the system complexity and the integral relationship of its variables, one can rationally conclude that an imminent catastrophic collapse of socioeconomic complexity is likely to occur. Couple this with a population in excessive overshoot of its carrying capacity (over virtually every resource base and ecosystem service) and you have set the stage for the mother of all competition dramas. The musical chairs analogy that I&S use to describe how underlying real wealth will be allocated in a deflationary spiral, can be more acutely applied to the competitive appropriation of biocapacity by humans.

You can choose to "not play the game of musical chairs and bring your own chair" for economic wealth, but it will be an outright battle for your share of natural wealth whether you choose to play or not.

I see survivors belonging to a breed I call the "Enlightened Warrior."

-Physically Superior,
-Mentally superior,
-Highly Adaptable,
-Spiritually Grounded, -Compassionate with community yet decisive in battle against those who who seek harm.
-Well prepared in advance (this goes along with other points)
-Minimally Vulnerable and Mobile (Ex: No young children to feed, defend, or carry and Not pregnant!!!)
-Instinctive (Hesitating will get you killed)
-Good Karma
-Good Luck

A wise warrior learns to strategically pick his/her battles and avoid conflict if possible. Evasion and stealth will likely be highly valuable as well.

Cheers

Greenpa said...

Reuters finance blogger gets a tiny tiny piece of it:

http://tinyurl.com/4jk6pdy

I'm not holding my breath, but it might be interesting to watch and see if this bit gets any response.

ogardener said...

If you live on a road and have a driveway you're toast.

Greenpa said...

Price of clothing going up 10% -

http://tinyurl.com/45v6zwo

Fascinating analyses of why, and quotes:

"'I'm not going to spend any more than $50 for a pair of jeans," said Mignanelli, a stay-at-home mom shopping at The Garden State Plaza in Paramus, N.J., last week. "I'll just have to cut back on the extras."

Yes, dear, you surely will.

Jeotsu said...

The post-collapse survival scenario discussion needs to address two issues, IMO.

First, what is the timeframe of decline? The current system has demonstrated a capacity to "extend and pretend" that has surpised most of the memebrs of their board. Will this result in a more protracted stepwise decline, or will it push us to a cliff off suden catastrophic collapse? I don't know, and considering how the last 2 years have surprised us, I don't think anyone really knows. "There is a lot of ruin in a country." The time frame of declien plays a huge role in how much people can learn, adapt, and move about. Personally, I don't see us ina "one second after" or "dies the fire" senario. Though those are fun books for how bad that woudl be!

Issue 2- Where are you? Where you live will have a huge impact on your life and livelihood as things wind (or suddenly fall) down. Stoneliegh has told us how she deliberately left England due to the risk factors there. Population density, proximity to urban centers, growing season, vulnerability to climate change, community spirit- each of these variables radically changes what we can expect and how we should adapt our lifeboat preparant. Discussion of your personal preparaations here should probably make note of those variables, so you can explain how you have weighed the risk factors, and what you have done for each.

Issue 3- Mobility post-collapse. One tank of fuel can get you 500 km. Draw a radius that wide around big cities, that is a "high risk" zone. But people can also walk vast distances. We have been biased by our car/plane-centric recent history. The hungry and dispossed have walked across asia in the past, and they can do it again. Sure, massive casualties along the way, but many make it through. For example, what happens if the monsoon stops (climate change), and 300+Million people decide to walk from India to Europe beacuse they have heard there is still food there?

I. M. Nobody said...

@agtefc

You are certainly not the first to claim that I am more pessimistic than most. When I find something to be optimistic about, I'll see if I can balance that impression. The way I think about it though is that I'm not negative about these things. I'm positive they won't work. ;)

Your Enlightened Warrior bullet list has the commendable attribute that it necessarily describes a small number of people. If in fact it describes anybody at all.

For what little it might be worth, here is some advice for the Enlightened Warrior from Sun IMN. Avoid confrontation with those who would steal. Slip away to hide and shoot'em in the back as they leave. If they choose not to leave, wait patiently for your chance to shoot'em in the back. If you do happen to live in TechGuy's proverbial grass hut, set it on fire when you hear them snoring.

Ilargi said...

New post up.



The Short Story of How We Lose




.

btraven said...

The GSEs and government backed mortgages will not wind down until the banks say so. I don't see that happening in the near future.

The lenders will not lend unless there is a guarantee of some kind. Private guarantees will be minimal until housing prices truly level off or turn up.

Prices are unlikely to normalize until all the attempts to keep the housing market propped up are ended - thus allowing prices to fall to truly affordable levels. And that may actually not be enough, because of the unemployment level and downward pressure on wages.

Bottom line: Don't hold your breath.

TechGuy said...

IM Nobody Wrote:

"Please name a few of the currently in use farm machines that would be amenable to running on woodgas. I can assure you the boys here would be delighted to burn some Fischer-Tropsch diesel. We have already made use of bio-diesel blends. Are you prepared to make it and deliver?"

Tractor, and associate attachments (via PTO drive) will operate just fine on Woodgas. In fact WoodGas was used extensively in Europe during and after WW2 since fuel was essential un-obtainable by the public. Other items would be grain drier, ICE powered water pumps for irrigation, but electricity might be a better option for water pumps. Of course WoodGas can also be used a ICE powered generator.
[FYI: ICE=Internal Combustion Engine]

Am I prepared to make Diesel via FT? Absolutely! Do I have any plans to deliver it? absolutely not. Sorry you have to make or get your own :(

You're questions basically validated my point. No one wants to look at Woodgas, FT, or other chemical processes for sustainable long term supply. Most just want to buy a few handtools and hope to get by, because other options were never considered, or "too hard" to do.

I am not making any plans to rely on outside support to maintain my lifeboat. Eventually I will have the ability to product Nitrogen based fertilizers by making us of the FT Plant to produce hydrogen for Haber–Bosch reactor. Its just easier and less labor intensive to stockpile it.

IM Nobody Wrote:
"Aren't you making some pretty vast assumptions about what other people are thinking and why? Do you really think our goal in life is to live in a grass hut or join a militia? Are you really sure that we can't wait to stop using our machinery?"

Pretty much, I have yet to see a survival community that wasn't bent on either some sort or permaculture utopia, or the militia type. I see no one interested in developing small chemical plants, sustainable electricity for heavy machinary (aka agraculture machinery). Notice the excessive discussion on this blog about handsaws to replace chain saws for example, I have doubt that not one person here considered stockpiling fuel in a air tight container or converting a gasoline powered saw to use ethanol.

Most people just want to buy a few Solar panels and a very battery to keep the lights on at night. They have no plans to develop the skills need to replace worn out batteries or PV replacements. You might as well live in grass huts because sooner or later the technology that you bought but fail to understand (from the practicallity of repair or replacement) will eventually break.

About Biodiesel. You have a method to produce Sodium or Potassium Hydroxide and Methanol, or do you just plan to stockpile it? What happens when your stockpile runs out?

Raymonde said...

I completely disagree with the stigmatization given here to pension funds. I thought that the authors of this blog were better informed but this one post is causing me to give pause to the value of this site. Insurance plans, pension funds and Social Security are not Ponzi schemes-Social Security Insurance is just that-an insurance plan. Yes, insurance and pension plans need a steady flow of new of members to keep up the ranks or they will go broke. And? Should we not ban together because of the biological fact given us all on creation's morn, that we all die in the end? God forbid, let me not get out of bed!

A Ponzi scheme is a deliberate attempt to misdirect would be 'investors' by not telling them that there is no real investment plan. An insurance plan operates by pooling cash to spread risk around to the lowest common denominator known as a monthly premium. Claims are adjudicated along rules drawn up on statistical facts-this is called underwriting. Again, should the pool of cash be ovrerwhelmed by the number of claims-trouble! But that is the business of the plan administrators to pay keen attention to shifts in claims processing and alert the plan contract holders of impending problems when they arise and ask for more to be placed in the pool in the way of a premium increase. Insurance plans are welcomed by ship owners, airline administrators and other business folks who would run in a very much riskier business envioronment if every disaster had to be covered by the sheer force of precious savings instead of a relatively tiny monthly premium. Would any of us say " Oh, me worrry about a possibility of 250K$ in medical bills? NAH! I'll just pull the money out of savings? ! ?"

Also the myth making about the terrors of government spending and deficits are almost infantile but I'll just say this. The subject of what money is, what government deficits are and what reserve currency is and what the current account is and what the balance of payment is and . . . .

None of that is addressed.

Please, could someone educate themselves by reading these pages?
Thanks, and I'll welcome a respnose.

Government deficits translate into surpluses for the non Government sector
http://www.creditwritedowns.com/2011/02/government-deficits-and-the-financial-sectors-balances.html

The Deficit: Nine Myths We Can’t Afford
http://www.newdeal20.org/2010/04/27/the-deficit-nine-myths-we-cant-afford-10162/

Balance of Payments - Sources and Methods (2004)
http://www.stats.govt.nz/browse_for_stats/economic_indicators/balance_of_payments/bop-sources-and-methods-2004.aspx


And finally, this page has some good points and please, look at the links at the bottom of the page and read those as well. Farewell theautomaticearth.com, it's been real.

How to reduce government deficits.
http://www.creditwritedowns.com/2011/02/how-to-reduce-government-budget-deficits.html

TechGuy said...

Raymonde Wrote:
"Insurance plans, pension funds and Social Security are not Ponzi schemes-Social Security Insurance is just that-an insurance plan"

Sorry Ray, but they are Ponzi schemes, unless you consider Madoff juat a insurance manager that had a bit of bad luck.

Social Security is not invested. It is spent by the gov't using the general fund. to fund everything from roads to nowhere to the study of cow flatulence. It is not invested in to increase capital used to pay off recipients. The same is true with most state pensions and even some private pensions, as politicans (and corp execs) use pension money to fund projects.

Imagine if I was a pension manager of your pension, and I took that money to put up street lights in my neighborhood, and put in a park with a local swimming pool for my kids. As the fund manager I call these investments. Most people would call it fraud. Too add additional insult. I pay myself 5% of the new money coming in as my fee for managing the money you invest into the plan. The pension money should have been invested in real investments that will return real capital gains to its recipients. Wake up and smell the coffee!

Many Pension managers made hundreds of millions to billions by charging huge fees to invest money (a lot of it in real estate, CDOs, and other crap that tanked). But during the boom years, they made up double digit paper gains, by overvalue investments. Then before the turd hit the fan, they retired rich, leaving the states and pensioneers holding the bag.

Are you a bag holder of a pension?

Raymonde Wrote:
"A Ponzi scheme is a deliberate attempt to misdirect would be 'investors' by not telling them that there is no real investment plan."

Thats exactly how Social Security operates. The money collected by the payroll tax is not invested. It is spent. There is no lock box, and there is no fund manager investing SS money into stock, bonds, or other capital investments. SS is documented as Intergov't lending (IOU's).

Currently SS now pays out more then it collects in revenue. To make up the loss the gov't borrows more money (really it just prints it since the Fed buys every new dollar of debt).

By the way, Most private insurance companies also lost a bundle, Many own assets that are Marked-to-fanastacy, as the paper assets aren't worth the paper they are printed on. AIG, The Hartford, MetLife, etc all are on lifesupport using TARP and Fed money to hold up the facade.