"The burnt out San Francisco Call newspaper building from Grant Avenue"
Ilargi: The Automatic Earth's senior editor Stoneleigh is a nuclear safety expert. The subject of her master thesis at the Law Faculty of Warwick University in Coventry, England, was nuclear safety research.
After graduating in 1997, she became a Research Fellow at the Oxford Institute for Energy Studies, where her research field was power systems, with a specific focus on nuclear safety in Eastern Europe.
The monograph she wrote sets the nuclear safety debate in the political and economic context of the collapse of the Soviet Union. It was published in 1999 under the title Nuclear Safety and International Governance: Russia and Eastern Europe, and it remains available online here at the Oxford Institute for Energy Studies.
We have now seen a series of explosions at the stricken Fukushima Dai-ichi plant (Fukushima 1), and it is becoming increasingly clear that containment systems have been breached in at least some units. The pervasive consequences of station blackout began with a hydrogen explosion in unit 1, followed by a much larger explosion in unit 3, two explosions at unit 2 and one at unit 4. Units 1-3 had been operational prior to the earthquake and tsunami, but were automatically shut down with the quake. Units 4-6 had not been operational for some months, but reactors require constant cooling whether or not they are operational. It is likely that we will see all units compromised due to the loss of power that has prevented cooling.
At nearby Fukushima Dai-Ni (Fukushima 2), where there are four units, outside power has apparently been restored and, although three units remain in a state of nuclear emergency. Slightly radioactive steam is being vented in order to reduce the internal pressure from overheating. Similarly, steam venting is being undertaken at the Onagawa plant, where there are an additional three units. Fire was previously reported at Onagawa.
Spent fuel also requires constant cooling in a separate pool, and we are beginning to see problems with its storage at Fukushima 1. The explosion at unit 4 appears to have involved a cooling pool, with water levels dropping. There is considerably more radiation contained in the spent fuel than in the reactor cores, and spent fuel can also suffer a meltdown if cooling cannot be maintained. There are seven spent fuel pools at Fukushima 1, many of them densely packed with some 20 years worth of spent fuel. (All spent fuel world-wide is stored in this way, near the reactors which produce it, as no country has yet developed and implemented a long-term storage solution for waste that will remain radioactive for thousands of years.)
The most seriously affected reactor so far is unit 2 at Fukushima 1, where an initial hydrogen explosion was followed by a second explosion in the suppression pool below the reactor. A breach of containment in this unit seems to be the most likely source of the spike in radiation that has recently been noted. Radiation levels of 400 millisieverts per hour were observed at Fukushima, as compared to a normal yearly background radiation level of 3 millisieverts.
Radiation levels have increased to levels harmful to human health, and all but 50 essential workers have been evacuated. The Japanese Prime Minister is has called for evacuation of a 20km exclusion zone. People have been asked to remain indoors and not to bring in laundry drying outside that may now be contaminated. Thousands are being screened for contamination and those with high levels are being showered on site in insulated tents or sent to hospital. Radiation levels are elevated as far away as Tokyo, following a change in wind direction. People are trying to leave the city, but that is becoming more and more difficult as fuel line-ups begin and long distance trains are often not available. Stores are already running out of some supplies as people engage in panic buying. Fear of shortages can easily become a self-fulfilling prophecy under such circumstances. As always, the human reaction to events can provide a major portion of the impact.
In towns and cities fearful citizens stripped supermarket shelves, prompting the government to warn against panic-buying, saying this could hurt the provision of relief supplies to quake-hit areas. But scared Tokyo residents filled outbound trains and rushed to shops to stock up on food, water, face masks and emergency supplies amid heightening fears of radiation headed their way.
The health damage from exposure to radioactive isotopes comes from the energy they release as they decay from unstable forms to stable ones. Each isotope has a specific decay path over a specific timeframe, defined by the half-life of the element. The half-life is the time it takes for quantity of material to be halved, halved again and so on. A short half life indicates a shorter term risk, as the material will release its decay energy over a short time. In contrast, materials with a long half life will be persistent in the environment.
The health effects will depend on how the particular isotope is taken up in the body, what form the release of its decay energy takes, and what is the residence time of the isotope within the body. Isotopes can decay by releasing alpha, beta or gamma radiation. Alpha radiation is composed of helium nuclei (2 protons and 2 neutrons). These are large and energetic and therefore potentially very damaging), but do not penetrate far. Beta radiation is composed of fast moving electrons, and gamma radiation is composed of photons (light particles). Beta and gamma radiation penetrate to a much greater extent.
The radioactive material of most concern in the initial stages of a nuclear accident is iodine 131, a major fission product which was responsible for the majority of health effects seen so far in the Chernobyl area. Iodine 131 has a half life of only 8 days, so it is of most concern early on. It is taken up by the thyroid gland where it can be retained (especially in young children), greatly raising the risk of thyroid cancer. Taking potassium iodide tablets can protect the thyroid from taking up the radioactive isotope. People in the affected area should be given this option as a preventative measure.
Other isotopes of concern include Caesium 137, with a half life of 30 years, and strontium 90, with a half life of 29 years. Unlike iodine 131, both of these isotopes are persistent in a contaminated area. Caesium 137 is taken up by the body in place of potassium, while strontium 90 is taken up in place of calcium. Caesium accumulates primarily in muscles and organs, while strontium accumulates in bones. The risk is organ damage, leukaemia and bone cancer, depending on the dose. At Chernobyl, caesium 137 appears to have represented a much larger health risk than strontium 90.
Some units at Fukushima ran on MOX fuel (mixed oxide fuel), which would contain a quantity of plutonium 239. Plutonium 239 is an alpha-emitter with a half-life of some 24,000 years. If inhaled or ingested, alpha particles can affect the lungs or digestive system at close range. Explosions at sites where containment is impaired or destroyed are a major risk factor for inhalation of radioactive particles.
It is important to note that the distribution and level of radioactive contamination from the Fukushima disaster is likely to be very much less than at Chernobyl, as boiling water reactors (BWRs) like those at Fukushima do not have the potential for the same failure mode as occurred at the Chernobyl RBMK plant. Chernobyl suffered a nuclear explosion on an abrupt power surge aggravated by a moderator fire.
The Fukushima reactors, where the nuclear reaction had been immediately halted by the lowering of control rods, are instead at risk of meltdown from excess decay heat in the absence of the ability to dissipate that heat. In a full meltdown scenario, the molten core would melt through the pressure vessel and concrete containment, particularly if these have already been compromised by explosive force. The core could melt down into the groundwater, causing steam explosions. Relatively local contamination could eventually be considerable, depending on the final scope of this rapidly developing situation, but I would not expect major international contamination as happened following Chernobyl.
Even within Japan I would not expect widespread gross levels of contamination even under a worst case scenario. Fear of radiation is likely to be widespread and extreme, however, as fear is a phenomenally 'catching' emotion, and that can have serious consequences of its own, especially under circumstances where social infrastructure is already overwhelmed. A perception of coverup would add significantly to this fear. It is therefore extremely important for the Japanese authorities to be consistently and completely forthcoming about the situation.
Frightened people are inherently suspicious that they are being kept in the dark to their own detriment, and TEPCO's former behaviour (falsification of safety records) has aggravated this natural reaction. Japanese Prime Minister Naoto Kan has today criticized the TEPCO utility company for not sharing information after he was not informed of one explosion for an hour after he had already seen it on television.
The risk is that the aftermath of the earthquake and tsunami could be substantially aggravated by the effects of the human herding behaviour we discuss so often here at The Automatic Earth in relation to financial markets (where we are already seeing the effects of fear in Japan).
Those who live closest to Fukushima are the most concerned. “Our feeling is the government is hiding some things, that the information is not fully transparent,” said Hiroko Okazaki, a 60-year-old housewife in Koriyama, the city closest to the crisis-stricken plant. “Even if some experts explain [that it is safe], they might not know the reality on the ground.”
PS: Here is the latest headline from Reuters: Tokyo Electric says may drop water by helicopter onto Daiichi No.4 spent-fuel cooling pond.
This is not going well. This reeks of desperation.
PS 2: The no. 4 reactor at Fukushima 1 is out of control. Fuel rods have been exposed for hours at a time, and they can't get (enough) water to it -hence the heli dropping "plan"-. What caused the fire in no. 4 is apparently unclear. Also, the suppression chamber at no. 2 appears to be damaged. And the IAEA demands better information sharing from the Japanese government, who in turn blame TEPCO for poor information.
Blasts, fire escalate Japan's nuclear crisis
by Hiroshi Hiyama - Agence France Presse
Explosions and fire rocked a quake-stricken nuclear plant in Japan Tuesday, pumping out dangerous radiation and sparking a rout on the stockmarket and panic buying in supermarkets. Tokyo stocks, which were punished Monday and sent indexes around the world sliding, plummeted another 14 percent on Tuesday before paring some losses and ending 10.55 percent down.
In towns and cities fearful citizens stripped supermarket shelves, prompting the government to warn against panic-buying, saying this could hurt the provision of relief supplies to quake-hit areas. But scared Tokyo residents filled outbound trains and rushed to shops to stock up on food, water, face masks and emergency supplies amid heightening fears of radiation headed their way.
Radiation levels around the Fukushima No.1 plant on the eastern coast had "risen considerably", Prime Minister Naoto Kan said, and his chief spokesman announced the level was now high enough to endanger human health. In Tokyo, some 250 kilometres (155 miles) to the southwest, authorities also said that higher than normal radiation levels had been detected in the capital, the world's biggest urban area, but not at harmful levels.
Kan warned people living up to 10 kilometres (six miles) beyond a 20 km exclusion zone around the nuclear plant to stay indoors. "I would like to ask the nation, although this incident is of great concern, I ask you to react very calmly," he said.
The fire, which was later extinguished, broke out in the plant's number-four reactor, he said, meaning that four out of six reactors at the facility were in trouble -- and temperatures were reportedly rising in the last two. Radiation levels later dropped at both the plant and in Tokyo, chief government spokesman Yukio Edano said.
As well as the atomic emergency, Japan is struggling to cope with the enormity of the damage from Friday's record quake and the tsunami that raced across vast tracts of its northeast, destroying all before it. The official death toll rose to 2,414, police said Tuesday, while officials said at least 10,000 were likely to have perished. But in the only country in the world to have experienced a nuclear attack -- two bombs dropped by the United States during World War II killed some 200,000 people -- Japanese citizens are gripped by fear of nuclear fallout.
"What we most fear is a radiation leak from the nuclear plant," Kaoru Hashimoto, 36, a housewife living in Fukushima city 80 kilometres (50 miles) northwest of the stricken plant, told AFP by phone. Hashimoto said supermarkets were open but shelves were completely empty. "Many children are sick in this cold weather but pharmacies are closed. Emergency relief goods have not reached evacuation centres in the city. "Everyone is anxious and wants to get out of town. But there is no more petrol."
More than 200,000 people have already been evacuated from the exclusion zone around the crippled plant. At one shelter, a young woman holding her baby told public broadcaster NHK: "I didn't want this baby to be exposed to radiation. I wanted to avoid that, no matter what."
However, even in evacuation centres filled with shell-shocked quake and tsunami survivors, Japan's famed emphasis on social harmony is in evidence. From the sharing of tasks among volunteers to the neat arrangement of shoes outside the living areas, life in the shelters is orderly and peaceful. "I have never been in a disaster before so I didn't know what to expect. In the movies, you always see people running around screaming but here at the centre, it's really calm," Canadian student Jouvon Evans told AFP.
But the crisis at the ageing Fukushima nuclear plant has worsened daily since Friday's quake and tsunami knocked out cooling systems. On Saturday an explosion blew apart the building surrounding the plant's number-one reactor. On Monday, a blast hit the number-three reactor, injuring 11 people and sending plumes of smoke billowing into the sky.
Early on Tuesday a blast rocked the number-two reactor. That was followed by a hydrogen explosion that started a fire at the number-four reactor. Chief government spokesman Yukio Edano said radioactive particulates leaked along with the hydrogen. The UN's nuclear watchdog, the International Atomic Energy Agency, said Tokyo had asked for expert assistance in the aftermath of the quake, which US seismologists are now measuring at 9.0-magnitude, revised up from 8.9.
But the IAEA's Japanese chief Yukiya Amano moved to calm global fears that the situation could escalate to rival the world's worst nuclear accident at Chernobyl in Ukraine in 1986. "Let me say that the possibility that the development of this accident into one like Chernobyl is very unlikely," he said.
In Tokyo, the French embassy on Tuesday retracted an earlier statement indicating that a radioactive cloud was headed for the capital, saying the city was not at risk. But the devastation in tsunami-hit areas such as Sendai city in the northeast is absolute. At the once-bustling regional airport small planes jutted out at awkward angles from thick mud, amid the wreckage of clusters of wooden beachfront houses that were splintered into flotsam in an instant by the waves.
As far as the eye can see, the machinery of modern life has been crumpled almost beyond recognition -- cars are stuck incongruously into the few remaining structures or balanced on top of wrecked homes. Aid workers and search teams from across the world have joined 100,000 Japanese soldiers in a massive relief push in the shattered areas. In the region of Miyagi, which took the full brunt of Friday's terrifying wall of water, rescue teams searching through the shattered debris of towns and villages have found 2,000 bodies.
And the Miyagi police chief has said he is certain more than 10,000 people perished in his prefecture alone.
Millions have been left without water, electricity, fuel or enough food and hundreds of thousands more are homeless and facing harsh conditions with sub-zero temperatures overnight, and snow and rain forecast. The government expects a "considerable" economic impact from the disaster, which has plunged the nation into what Prime Minister Kan called its worst crisis since World War II. Singapore's DBS Bank estimated Tuesday that the twin disasters would cost Japan's economy about $100 billion, or about two percentage points of its annual gross domestic product.
High radiation levels threat to human health: Japanese government
by Mark MacKinnon - Globe and Mail
Japan faced the growing possibility of serious radiation leaks – maybe even a catastrophic meltdown – after two more explosions rocked a nuclear power plant and workers were forced to abandon the most dangerous reactor, which suffered damage to its containment structure. The government warned Tuesday of an alarming radiation leak from the stricken nuclear power plant and told people nearby to stay indoors to avoid becoming sick in a rapidly escalating national crisis following last week's earthquake and tsunami.
Tokyo also reported slightly elevated radiation levels, but officials said the increase was too small to threaten the 39 million people in and around the capital, about 270 kilometres away.
In a nationally televised statement, Prime Minister Naoto Kan said radiation has spread from the three reactors of the Fukushima Dai-ichi nuclear plant in one of the hardest-hit provinces in Friday's 9.0-magnitude earthquake and the ensuing tsunami.
"The level seems very high, and there is still a very high risk of more radiation coming out," Mr. Kan said. He warned there are dangers of more leaks and told people living within 30 kilometres of the Fukushima Dai-ichi complex to stay indoors to avoid radiation sickness. Chief Cabinet Secretary Yukio Edano said a fourth reactor at the complex was on fire and more radiation had been released. "Now we are talking about levels that can damage human health. These are readings taken near the area where we believe the releases are happening. Far away, the levels should be lower," he said.
The death toll from last week's earthquake and tsunami jumped Tuesday as police confirmed the number killed had topped 2,400, though that grim news was overshadowed by a deepening nuclear crisis. Officials have said previously that at least 10,000 people may have died in Miyagi province alone.
The rapidly deteriorating crisis raised the likelihood of more mass evacuations from the area around the plant, which sits 260 kilometres northeast of Tokyo and its metropolitan population of 30 million. Already, some 200,000 people living within 30 kilometres of the plant have been ordered to leave, although 600 people were known to be trapped in the area closest to the plant, having not heard the initial evacuation order after the earthquake and aftershocks apparently left them without communications. They were told Monday to stay inside, though some of their homes were damaged by the quake.
"It’s like a horror movie," said 49-year-old Kyoko Nambu told the Associated Press as she stood on a hillside overlooking her ruined hometown of Soma, 40 kilometres from the plant. "Our house is gone and now they are telling us to stay indoors. "We can see the damage to our houses, but radiation? ... We have no idea what is happening. I am so scared."
The explosion Tuesday morning at Fukushima No. 2 reactor occurred near a suppression pool that removes heat under a reactor vessel, plant owner Tokyo Electric Power Co. said. But it initially didn’t appear the containment vessel had been breached and there were conflicting reports on whether radiation levels had increased. Only workers essential to efforts to cool the reactor were kept at the No. 2 site.
That came after hydrogen explosions Monday at the No. 3 reactor and Saturday at No. 1 destroyed the outer concrete structure, but reportedly did not damage the inner radiation containment shell or the reactor itself. On Tuesday, officials acknowledged that the containment shell of one of the nuclear reactors appeared to be damaged, indicating possible serious radiation leaks. A top Japanese official said the fuel rods in all three of the stricken reactors at the Fukushima Daiichi plant appeared to be melting. "Although we cannot directly check it, it’s highly likely happening,"Mr. Edano told reporters.
News was coming so fast as dawn broke on Tuesday in Japan, that news anchors on state-run NHK television were frequently interrupted by colleagues handing them updates on pieces of paper. The rods at all three reactors in the Fukushim Daiichi plant, normally kept cool by water, have been at risk of overheating since Friday’s massive 9.0-magnitude earthquake and tsunami, the plant’s operator, Tokyo Electric Power Co, and the Japanese government have acknowledged.
When troubles first started at Fukushima, sea water was injected into the reactor and the exposed rods were cooled. But water levels fell again Monday at the No. 2 reactor after the water pump temporarily ran out of fuel and workers failed to notice it quickly enough. It was unclear how long the reactor’s volatile core lay fully exposed or to what extent it heated up in that time. Sea water was again injected, but water levels had fallen dramatically and only one out of five fire pumps in the facility was functioning, the official Kyodo news agency reported.
Separately, the outer building encasing the No. 3 reactor went up in a small mushroom cloud Monday after a hydrogen explosion blew the roof off in a blast almost identical to the one that struck Fukushima’s Reactor No. 1 in Saturday. The explosion Monday had been predicted by officials, who said afterwards that the inner building had not breached, making a complete meltdown very unlikely.
The three reactors at Fukushima Daiichi are among nine reactors in the northeast of Japan that have been in crisis. Six of the reactors are in the Fukushima area – 260 kilometres northeast of Tokyo – and three are located at the Onagawa plant, 50 kilometres north of Sendai in the area worst-affected by the tsunami.
The reactors at Fukushima Daini and the Onagawa facility have emitted higher than legal levels of radiation, but have thus far not experienced the kind of troubles suffered by Fukushima Daiichi. "The Japanese authorities are working as hard as they can, under extremely difficult circumstances, to stabilize the nuclear power plants and ensure safety," read a statement from Yukiya Amano, head of the International Atomic Energy Agency. "The nuclear plants have been shaken, flooded and cut off from electricity. Operators have suffered personal tragedies," he said.
The expression of confidence from Mr. Amano, a former senior Japanese diplomat, echoes the line taken by the government, which has maintained throughout the four-day old crisis that a Chernobyl-style meltdown is very unlikely at any of the troubled reactors. Nonetheless, concern over what may be taking place at Fukushima Daiichi, in particular, has sparked a quiet panic in Tokyo, where normally stoic citizens began to stock up on staples such as noodles, bread and rice. Some convenience stores opened to lineups of 40 or 50 people Monday morning, and exhausted their stores of some goods within an hour.
Fuel lineups, already commonplace in the tsunami-stricken north of the country, were seen in Tokyo Monday as well. Many commuter and long-distance train routes were out of service even as the country returned to work for the first time since the multiple crises began.
Those who live closest to Fukushima are the most concerned. "Our feeling is the government is hiding some things, that the information is not fully transparent," said Hiroko Okazaki, a 60-year-old housewife in Koriyama, the city closest to the crisis-stricken plant. "Even if some experts explain [that it is safe], they might not know the reality on the ground." Thousands of residents of the Fukushima area have been brought to radiation clinic set up in the parking lot of a Koriyama to be tested for levels of radiation exposure. Those with high levels are given on-the-spot showers and scrubs inside an insulated tent or taken directly to hospital.
Japan earthquake: past cover-ups undermine nuclear reassurances
by John Bingham - Telegraph
Attempts to offer reassurances over the leak of nuclear crisis engulfing Japan in the wake of the earthquake and tsunami have been undermined by years of cover-ups over safety in the country.
The ageing Fukushima Daiichi plant, which has been rocked by two explosions since Friday’s magnitude 8.9 earthquake, has repeatedly been at the centre of scandal over falsified safety data. Five years ago, the operator of the plant, Tokyo Electric Power – known as Tepco – was ordered to carry out a trawl of its records after the company admitted temperatures readings for coolant materials had been falsified as long ago as 1985.
It meant that subsequent safety inspections at the plant were based on incorrect figures. The admission came as the company was attempting to restore public confidence following an even bigger sandal four years earlier. In September 2002 the company’s then President Nobuya Minami, his vice-president, chairman and a handful of senior officials resigned in disgrace after the Japanese government disclosed allegations that at least 29 cases of cracks and other damage to reactors had been covered up.
The scandal centred on three nuclear sites including Fukushima’s number one and number two plants. There was further alarm over nuclear safety in Japan five years ago after four workers were killed and several others injured when steam leaked from a broken pipe at the Mihama nuclear power plant in the centre of the country. It was the third incident at the plant to raise concerns over safety.
In 1999 two workers at a nuclear processing plant accident in Tokaimura died from radiation poisoning. Only a few months earlier there were accusations of a cover-up after an accident at the Tsurugura nuclear power plant in the north of Japan. The plant’s operators, Japan Atomic Power, were criticised after it took 14 hours to fully shut the site down after a leak of cooling water from a pipe. It later transpired that the level of radiation was several times higher than that originally estimated.
There was also outrage across Japan amid allegations of a cover-up following a fire at the Monju reactor in central Japan in 1995. It took up to an hour and a half for a full shutdown at the plant to be ordered after the initial alarm was sounded. Allegations later emerged that reports detailing the extent of the incident had allegedly been falsified and videotape had even been edited.
Japan radioactivity "directly" into atmosphere-IAEA
by Fredrik Dahl - Reuters
Spent fuel storage pond on fire
Japan has told the U.N. nuclear watchdog a spent fuel storage pond was on fire at a reactor damaged by the earthquake and radioactivity was being released "directly" into the atmosphere, the Vienna-based agency said on Tuesday. The International Atomic Energy Agency (IAEA), citing information it had received from Japanese authorities, said dose rates of up to 400 millisievert per hour have been reported at the Fukushima power plant site.
It did not give details or comparisons on the radiation level but the yearly background radiation from natural sources is estimated at around 3 millisieverts, a unit the IAEA uses to measure doses of radiation received by people. "The Japanese authorities are saying that there is a possibility that the fire was caused by a hydrogen explosion," the IAEA said in a statement.
In Japan, authorities warned radiation levels had become "significantly" higher around the nuclear power plant on Tuesday after explosions at two reactors, and the French embassy said a low-level radioactive wind could reach Tokyo within hours.
The IAEA said it had been informed "that the spent fuel storage pond at the Unit 4 reactor of the Fukushima Daiichi nuclear power plant is on fire and radioactivity is being released directly into the atmosphere". It added: "Dose rates of up to 400 millisievert per hour have been reported at the site. The Japanese authorities are saying that there is a possibility that the fire was caused by a hydrogen explosion."
Japanese plant races to contain meltdowns after two blasts; third reactor loses cooling capacity
by Chico Harlan and Steven Mufson - Washington Post
A second explosion rocked Japan’s seaside Fukushima Daiichi nuclear complex Monday, this time destroying an outer building at unit 3. A Japanese government official separately said that a third reactor at the six-reactor facility had lost its cooling capacity, adding to the complications facing the engineers who try to limit the damage of a partial meltdown. The blast injured 11 people, one seriously.
The string of earthquake- and tsunami-triggered troubles at the Fukushima Daiichi plant began with the failure of the primary and back-up cooling systems, necessary to keep reactors from overheating. On Saturday, a similar explosion occurred at unit 1. Trace amounts of radioactive elements cesium-137 and iodine-131 have been detected outside the plant.
The U.S. Seventh Fleet said on Monday that some of its personnel, who are stationed 100 miles offshore from the Fukushima Daiichi plant, had come into contact with radioactive contamination. The airborne radioactivity prompted the fleet to reposition its ships and aircraft. Using sensitive instruments, precautionary measurements were conducted on three helicopter aircrews returning to USS Ronald Reagan after conducting disaster relief missions near Sendai. Those measurements identified low levels of radioactivity on 17 air crew members. The low level radioactivity was easily removed from affected personnel by washing with soap and water, and later tests detected no further contamination.
A news release from the United States Pacific Fleet attributed the detected radiation plume to the quake-plagued plant. But officials believed that radiation plume would cause minimal health effects, saying that radiation received from the plume equaled "about one month of exposure to natural background radiation from sources such as rocks, soil, and the sun." The Seventh Fleet has been stationed off the shore of northeastern Japan, assisting with relief and rescue operations.
Like the Saturday explosion at unit 1, the blast at unit 3 took place after a buildup of hydrogen was vented by the reactor. The hydrogen was produced by the exposure of the reactor’s fuel rods and their zirconium alloy casing to hot steam. In normal conditions, the fuel rods would be covered and cooled by water. The explosion occurred as Tokyo Electric entered day four of its battle against a cascade of failures at its two Fukushima nuclear complexes, using fire pumps to inject tens of thousands of gallons of seawater into two reactors to contain partial meltdowns of ultra-hot fuel rods.
The tactic produced high pressures and vapors that the company vented into its containment structures and then into the air, raising concerns about radioactivity levels in the surrounding area where people have already been evacuated. The utility said that at one of the huge, complicated reactors, a safety relief valve was opened manually to lower the pressure levels in a containment vessel. But the limited vapor emissions were seen as far less dire than the consequences of failure in the fight against a more far-reaching partial or complete meltdown that would occur if the rods blazed their way through the reactor’s layers of steel and concrete walls.
The potential size of the area affected by radioactive emissions could be large. A state of emergency was declared briefly at another nuclear facility, the Onagawa plant, after elevated radio?activity levels were detected there. Later, Japanese authorities blamed the measurement on radioactive material that had drifted from the Fukushima plant, more than 75 miles away, according to the International Atomic Energy Agency. The IAEA noted that forecasts said winds would be blowing to the northeast, away from the Japanese coast, over the next three days.
Tokyo Electric said radioactivity levels inside the plant and at its nearby monitoring post were higher than normal. Although levels had fallen Sunday, the Kyodo News Agency said that radiation at the plant’s premises rose Monday over the benchmark limit of 500 microsievert per hour at two locations, measuring 751 microsievert at the first location at 2:20 a.m. and 650 at the second at 2:40 a.m., according to information Tokyo Electric gave the government. The hourly amounts are more than half the 1,000 microsievert to which people are usually exposed in one year. In addition to one worker hospitalized for radiation exposure, two others felt ill during stints in the control rooms of Fukushima Daiichi units 1 and 2.
Although Tokyo Electric said it also continued to deal with cooling system failures and high pressures at half a dozen of its 10 reactors in the two Fukushima complexes, fears mounted about the threat posed by the pools of water where years of spent fuel rods are stored. At the 40-year-old Fukushima Daiichi unit 1, where an explosion Saturday destroyed a building housing the reactor, the spent fuel pool, in accordance with General Electric’s design, is placed above the reactor. Tokyo Electric said it was trying to figure out how to maintain water levels in the pools, indicating that the normal safety systems there had failed, too. Failure to keep adequate water levels in a pool would lead to a catastrophic fire, said nuclear experts, some of whom think that unit 1’s pool may now be outside.
"That would be like Chernobyl on steroids," said Arnie Gundersen, a nuclear engineer at Fairewinds Associates and a member of the public oversight panel for the Vermont Yankee nuclear plant, which is identical to the Fukushima Daiichi unit 1. People familiar with the plant said there are seven spent fuel pools at Fukushima Daiichi, many of them densely packed. Gundersen said the unit 1 pool could have as much as 20 years of spent fuel rods, which are still radioactive. At Fukushima Daiichi unit 3, the explosion was an indicator of serious problems inside the reactor core.
Victor Gilinsky, a former commissioner at the Nuclear Regulatory Commission, said that to produce hydrogen, temperatures in the reactor core had to be well over 2,000 degrees and as high as 4,000 degrees Fahrenheit. He said a substantial amount of fuel had to be exposed at least at some point. "That’s the significance of the hydrogen — it means there was serious fuel damage and probably melting," said Gilinsky, who was at the NRC when Pennsylvania’s Three Mile Island reactor had a partial meltdown in 1979. "How much? We won’t know for a long time. At TMI we didn’t know for five years, until the vessels were opened. It was a shock."
The Fukushima Daiichi unit 3 was built by Toshiba. Last year, the unit began using some reprocessed fuel known as "mox," a mixture of plutonium oxide and uranium oxide, produced from recycled material from nuclear weapons as part of a program known as "from megatons to megawatts." Anti-nuclear activists have called mox more unsafe than enriched uranium. If it escapes the reactor, plutonium even in small quantities can have much graver consequences on human health and the local environment for countless years, much longer than other radioactive materials.
The Kyodo News Agency cited Tokyo Electric as saying that more than three yards of a mox nuclear-fuel rod had been left above the water level, raising concerns that bits of plutonium or its byproducts may already be mixed into vapors or molten material. The Fukushima Daiichi unit 3, once capable of generating 784 megawatts of power, is substantially bigger than unit 1, which generated about 460 megawatts. As a result, lowering temperatures in its reactor core could prove a much tougher task, experts said.
Japanese officials were also trying to figure out whether Friday’s earthquake, or the subsequent high pressures and temperatures in the reactors, had caused other cracks or leaks in reactors in the region. So far officials have not said that they have found any, though they have noted still unexplained losses of water in some reactor vessels. Although Fukushima Daiichi units 1 and 3 posed the gravest dangers for now, Tokyo Electric said it was still working on its other units.
Tokyo Electric also said it had released vapors with some radioactive materials at all four of the reactors at its second Fukushima complex — Fukushima Daini — on Saturday. After injecting water into the reactors, the company said that water levels were stable, off-site power restored, and shutdowns complete or in progress. Nonetheless, Japan’s Nuclear and Industrial Safety Agency said Monday that Fukushima Daini units 1, 2 and 4 remained in a nuclear state of emergency.
Japan quake may be world's costliest disaster
by Kevin Voigt, CNN
The devastating earthquake and tsunami in Japan will rank among the costliest natural disasters on record, experts predict. Japan's central bank announced plans Monday to inject a record 15 trillion yen ($183 billion) into the economy to reassure global investors in the stability of Japanese financial markets and banks. The Bank of Japan also earmarked an additional 5 trillion yen ($61 billion) in aid for risky assets in an effort to bolster market confidence shaken by the disaster.
Still, Japanese markets dropped sharply on Monday, the first trading day since the disaster. The benchmark Nikkei 225 was down more than 6.2%. The drop was the largest single day fall since December 2008 during the financial crisis. The disaster comes at a difficult time for the fragile Japanese economy, which slipped to the world's third largest behind China in 2010. Japan's export-driven business was hit by the financial crisis and a strong yen, which hurt profits from sales abroad.
The rebuilding from the quake also will add to Japan's towering load of public debt; it is nearly twice the size of its total GDP and the highest in the developed world. S&P downgraded Japan's long-term credit ratings in January, citing its high fiscal deficits. The TOPIX futures index halted trading around 9 a.m. for 15 minutes as trading quickly spiralled down. "The stoppage was a result of a circuit breaker mechanism, triggered "if shares fall beyond a specific range," said Andrew Wong of the Tokyo Stock Exchange.
Losses from the disaster will total at least $100 billion, including $20 billion in damage to residences and $40 billion in damage to infrastructure such as roads, rail and port facilities, catastrophe modeling firm Eqecat estimated, according to CNNMoney.
Another firm, AIR Worldwide, estimated that losses covered by insurance could reach between $15 billion and $35 billion from the earthquake alone, CNNMoney said. It did not estimate losses from the tsunami or the damage to the the Fukushima Daiichi nuclear plant in northeastern Japan. "If claims come in at the middle of that range, the cost of the disaster would surpass all other natural disasters besides 2005's Hurricane Katrina," according to a Barclay's Capital research note released Monday. "Katrina losses cost the insurance industry around US$45 billion."
Stocks from automotive giant Toyota fell more than 8%, while Nissan fell 9% and Honda dropped more than 6%. Toyota shut production at manufacturing plants and affiliated suppliers nationwide until end of day Wednesday. "We are placing priority on making sure that we are supporting the relief efforts in the region affected and ensuring the safety of all our employees," said Dion Corbett, Toyota spokesperson. Toshiba Corp., maker of nuclear power plants, fell more than 16% as concerns escalated at several nuclear power plants in the aftermath of Japan's largest quake on record and powerful tsunami. Tokio Marine Holdings, the insurer, fell more than 12%.
Miyagi Prefecture, the area hardest hit by the earthquake, makes up about 1.7% of the population of Japan and accounts roughly for the same amount of the nation's total economic output, said Richard Jerram, an analyst at Macquarie Research. By contrast, the area struck by the 1994 Kobe earthquake "made up almost 4.0% of (Japan's) GDP and the importance of its port and its geographic position between Osaka and Western Japan meant that the disruption was significant," Jerram said.
Still, the rolling power blackouts, looming nuclear problems and damage to infrastructure add uncertainty to predicting the total impact to one of the world's largest economies. "It's very hard to make a forward-looking assessment, because you just don't know," Jerram said.
Japan shares tumble as nuclear crisis fears create panic
Tokyo shares closed down 10.55pc on Tuesday as panicking investors dumped stocks after the government said levels of radiation leaking from a stricken nuclear plant posed a threat to health. Japan's Nikkei index clawed back some ground from an earlier freefall - sliding more than 12pc at one stage - to close down 1,015.34 points at 8,605.15. The broader Topix plunged 9.5pc in its worst two-day fall since 1987.
European stocks markets joined spooked Asian markets in a global sell-off as the crisis in the world's No. 3 economy seemed only to escalate after a third explosion at the crippled Fukushima Dai-ichi nuclear plant in Fukushima province. London's FTSE 100 was down 1.2pc - or 69 points - at a fresh year low of 5707 in early trading. France's CAC fell 1.9pc and Germany's DAX dropped 2.5pc.
Hong Kong's Hang Seng dropped 2.86pc, China's Shanghai Composite lost 1.4pc, South Korea's Kospi fell 2.4pc, Australia's ASX slid 2.1pc. Markets in New Zealand, India, Taiwan and Jakarta all fell between 1pc and 3.3pc. Investor selling had intensified after Japan's Prime Minister Naoto Kan announced that radioactive material had leaked from the Fukushima Dai-ichi nuclear plant in and that more leaks were possible.
"There has been a fire at the No. 4 reactor and radiation levels in the surrounding area have heightened significantly. The possibility of further radioactive leakage is heightening," Mr Kan said in an address to the nation. "We are making every effort to prevent the leak from spreading. I know that people are very worried but I would like to ask you to act calmly."
The Nikkei's losses followed a 6pc tumble on Monday — the first trading day since a devastating earthquake and tsunami struck the northeastern coast, washing away towns and likely killing more than 10,000 people. Losses on Monday and Tuesday have sent the Nikkei spiraling downward 20pc since the beginning of the year.
Tuesday's stock sell-off in Japan hit nearly every business sector, with electric companies under intense pressure again. Tokyo Electric Power, which operates the crippled nuclear plant, was overwhelmed with sell orders and had yet to trade. Toshiba Corp, a maker of nuclear power plants, was also untraded. Other companies with nuclear power-related businesses faced a second day of free-falling losses. Mitsubishi Heavy Industries tumbled 19pc, Kobe Steel dived 17pc, and Hitachi shed 8.5pc. Cosmo Oil, whose refinery caught fire after the quake, slid by 18pc.
Car makers declined partly because quake-stricken northeastern Japan is a major center for auto production, complete with a myriad of parts suppliers and a network of roads and ports for efficient distribution. Major vehicle manufactures halted production after the quake, and their shares continued to slide. Toyota, the world's largest automaker, fell 11pc. Honda lost 7.4pc and Nissan dropped 10.2pc. Mitsubishi Motors lost 14.4pc and truck-maker Isuzu plunged 8.6pc.
Fears about the safety of nuclear power weighed on the shares of companies involved in uranium mining. Energy Resources of Australia, one of the world's largest uranium producers, fell 13.2pc in Sydney. Even the rare stocks that did well on Monday — industrial and materials companies, which gained due to expectations that they would benefit when Japan rebuilds — tumbled.
Brent crude, which had edged higher on Monday on continued Middle East tension, fell $2 to $111.61 in Far East trading as traders worried about the loss of demand from Japan.
Attempts by the Bank of Japan to inject more liquidity into the banks and the extension of its asset purchase scheme failed to calm nerves.
The Bank of Japan had made a record 22 trillion yen (£166bn) available to banks on Monday and doubled its asset buying scheme to 10 trillion yen (£76bn) to shore up confidence in the economy and maintain financial stability. In London, Burberry, which was one of the biggest fallers yesterday, continued its downward spiral. It fell 4.4pc as investors remained worried about the prospect of sales recovering quickly in the valuable Japan market.
Miners also fell as the investors worried about the impact of the earthquake and tsunami and the susequent explosions and radiation leaks at a damaged nuclear plant in Japan on the global recovery. Eurasian Natural Resources, Kazakhmys, Antofagasta, Xstrata and Anglo American were down between 4pc and 2.4pc. Retailers Next and Marks & Spencer, and power companies Scottish and Southern Energy and International Power were the only risers in the FTSE 100 at 8.34am.
Bank of Japan pumps more cash into markets
by William L. Watts - MarketWatch
The Bank of Japan took additional steps Tuesday to keep the nation’s financial markets from seizing up, injecting trillions of yen into money markets as equities crashed in response to a worsening nuclear crisis.
News reports said the central bank, in two separate measures, offered a total of 8 trillion yen ($8 billion) via one-day operations on Tuesday. The move comes on top of a record ¥15 trillion injection on Monday. Also, the central bank said it would buy ¥2 trillion in bonds from March 17 to 18 through repurchases, and inject an additional ¥5 trillion into the financial system from March 17 to April 18 and another ¥5 trillion from March 16 to March 23. The central bank “is flooding the market with liquidity to keep the financial system functioning,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.
So far, the measures have served to maintain stability in money markets, analysts said. Scicluna, however, said the central bank may soon face pressure to increase the size of its quantitative-easing program if markets remain under heavy pressure. Tokyo’s Nikkei stock index crashed nearly 11% on Tuesday after Prime Minister Naoto Kan said a substantial amount of radiation was leaking from a nuclear power plant following last week’s earthquake and tsunami.
The BOJ on Monday doubled the size of outright asset purchases under its quantitative easing program to ¥10 trillion. “Given financial stability concerns there is a good case for the BOJ to increase the scope and size of its asset purchases” to potentially include equities if markets remain in turmoil, he said.
European Reinsurers Fall as Japan Earthquake May Cost Industry $34 Billion
by Oliver Suess and Kevin Crowley - Bloomberg
European reinsurers fell for a second day on concern the global insurance industry may face claims of as much as 2.8 trillion yen ($34 billion) tied to the earthquake in Japan.
Swiss Reinsurance Co., Scor SE and Munich Re led declines in the Stoxx Europe 600 Insurance Index, which dropped 2.1 percent. That followed a 2.2 percent slump for the group on March 11, when an 8.9-magnitude quake struck off the coast of Sendai, a city of 1 million north of Tokyo. "Despite a probably low insurance penetration, we feel that the magnitude of this event might make it the largest insured event ever," Thorsten Wenzel, an analyst at DZ Bank AG in Frankfurt, wrote in a note to clients today.
The top-of-range preliminary estimate, which catastrophe modeler AIR Worldwide disclosed yesterday, doesn’t include damage caused by the tsunami that followed the March 11 quake. Insurers and reinsurers may face claims of 1.2 trillion yen ($15 billion) to 2.8 trillion yen tied to the Japanese earthquake, AIR said. Sales of residential and commercial earthquake insurance are "relatively low" in Japan with only 14 percent to 17 percent of homes and businesses covered, according to AIR.
Domestic insurers and the government are likely to bear most of the cost to households, said James Shuck, a London-based analyst at Jefferies International Ltd. International reinsurers are mainly exposed to losses arising from damage to companies’ property and total claims are likely to be in the $10 billion to $20 billion range, he said.
Losses at the top end of AIR’s estimate, equivalent to $34 billion, would make the disaster the second-most costly for insurers and reinsurers after Hurricane Katrina devastated New Orleans in 2005 and cost the industry $62.2 billion, not accounting for inflation, according to estimates from Munich Re. The total insured loss could exceed $60 billion, according to London-based analyst Barrie Cornes at Panmure Gordon & Co. "The loss will be so large that it will probably provide the trigger to ensure a re-rating of the non-life sector as sufficient capacity (capital) is withdrawn to allow rates to rise," he said in a note to clients. "A similar impact happened post 9/11."
'Far Too Early'
"Any impacts due to major accidents in Japanese nuclear power plants will not significantly affect the private insurance industry," Munich Re said in a statement today. "In connection with earthquake covers, in Japanese personal-lines business only a small portion of the risk is transferred to other countries." The company said it’s "far too early at this stage to issue an estimate of economic and insured losses," reiterating earlier comments. Munich Re, the world’s biggest reinsurer, dropped 3.4 percent to 108 euros in Frankfurt, following a 4.3 percent decline on March 11.
Swiss Re slid 4.5 percent to 49.36 Swiss francs in Zurich, while Paris-based Scor lost 3.4 percent to 18.60 euros. Based on a $20 billion overall insured loss, Lloyd’s insurers would lose 4 percent to 16 percent of their net tangible assets, according to Thomas Dorner, a London-based analyst at Oriel Securities Ltd. Hardy Underwriting Bermuda Ltd. (HDU), Lancashire Holdings Ltd. (LRE) and Chaucer Holdings Plc (CHU) are likely to suffer the highest losses, he said.
"We would expect industry losses to remain toward the bottom end of this range since the largest exposures are likely to be in Tokyo and damage to the capital was contained by the country’s high level of preparedness for earthquake losses," Dorner wrote in a note to clients today. Hardy dropped 5.4 percent to 268 pence in London trading, while Lancashire fell 2.4 percent to 560 pence.
"We are optimistic that it will be a market-changing event, especially if seen in connection with recent large claims," wrote Christian Muschick, a Frankfurt-based analyst with Silvia Quandt & Cie. AG. "We thus would expect natural catastrophe segments to harden in general and believe that the coming renewals thus should provide some relief." In reinsurance terms, a hardening of markets or rates refers to an increase in prices for coverage. Reinsurers help primary insurers such as Allianz SE (ALV) shoulder risks for clients.
Japanese Insurers Slide
Axa SA (CS), Europe’s second-biggest insurer, said today it expects "no direct material impact" on the group from the earthquake. "It is too early to have a precise, complete assessment," Emmanuel Touzeau, a Paris-based spokesman at Axa, said by phone. Japan’s most destructive earthquake until last week struck Kobe, Osaka and Kyoto in 1995 and cost insurers about $3 billion, not accounting for inflation. The quake caused $100 billion in economic losses, much higher than the amount covered by insurers.
Tokio Marine Holdings Inc., Japan’s second-biggest casualty insurer, plunged as much as 20 percent and fell 12 percent to 2,200 yen at the 3 p.m. close of trading in Tokyo. MS&AD Insurance Group Holdings Inc., the largest casualty insurance company, dropped 9.1 percent to 1,832 yen, and rival NKSJ Holdings Inc. (8630) slid 12 percent to 534 yen. The seven-member Topix Insurance Index (TPINSU) lost 13 percent, the worst performer among the 33 industry groups that make up Japan’s benchmark Topix index.
Japanese Crisis Only The Latest Hurdle For U.S. Nuclear Industry
by Chris Kirkham and Amy Lee - Huffington Post
Even before a tsunami ravaged Japan and presented the world with a potentially calamitous nuclear meltdown, a much-touted expansion of the U.S. nuclear energy industry was already a tough sell with the American public, not to mention the lawmakers in charge of the national pursestrings. Nuclear reactors are enormously expensive. Unlike Japan, the United States has a trove of other energy resources to draw on -- not least, huge, newly-discovered reserves of natural gas -- limiting the urgency to invest in alternative sources such as nuclear power.
Now, in the wake of an unfolding nuclear crisis in Japan, those championing aggressive construction of nuclear facilities face an immeasurably more difficult task. After a weekend spent absorbing the prospect of full-blown nuclear catastrophe in Japan, perhaps the world's most sophisticated engineering power, Americans appear far less inclined to assume such risks on their own shores, experts say.
"There's no question in my mind that the situation in Japan will delay any major activities in the United States," said Forrest Remick, a former member of the U.S. Nuclear Regulatory Commission and a professor emeritus of nuclear engineering at Pennsylvania State University.
Although nuclear energy has the backing of powerful politicians in Washington, including President Barack Obama, its value as a clean energy alternative has long been haunted by the specter of past accidents -- Three Mile Island in 1979 and Chernobyl in 1986 -- and the vexing questions surrounding disposal of nuclear waste. But recent times seemed to be placing the industry in a different light. A swelling U.S. trade deficit combined with fears that some oil-producing states nurture anti-American terrorist groups has fueled interest in alternatives to imported petroleum.
Concerns about climate change have intensified the search for cleaner sources of energy. In the past decade, those two forces have helped the nuclear industry transcend its association with past disasters, sowing hopes for a nuclear renaissance. But the scenes from Japan now dominating the media have dealt a considerable blow to that scenario, underscoring the dangers attendant to nuclear power.
"Having a nuclear reactor is bit like having a trained elephant," said Ellen Vancko, the nuclear energy and climate change project manager at the Union of Concerned Scientists, an environmental research group. "When the elephant is trained and well-behaved and does all the tricks, there most likely isn't going to be a problem. But sometimes elephants have a mind of their own, and nuclear power is particularly unique, in that reactors have a life of their own. When it gets out of control, problems occur."
As stock markets opened Monday morning, companies tied to the nuclear industry took an early hit. General Electric, which has a partnership with the Japanese firm Hitachi to design new reactors, slid 2.1 percent to start the day and has continued to fall. The company also designed one of the reactors at the Fukushima Daiichi plant that suffered an explosion Saturday. Uranium companies saw the sharpest declines, with Denison Mines Corp. plummeting 27 percent and Uranium Energy Corp. falling 22 percent.
Some experts suggested the situation in Japan, while alarming, should not be used as an argument against expanded nuclear power in the United States, because of differences in geography -- Japan is more vulnerable to major earthquakes and tsunamis. "Unfortunately, we have a habit of not putting things into perspective," said Remick, the former member of the U.S. Nuclear Regulatory Commission. "So I think it will result in an overreaction."
But even those inclined toward that view said the Japan tragedy should compel a swift reassessment of the risks. "A review on reactors in earthquake-prone regions is certainly called for," said Burton Richter, a Nobel Laureate in Physics and professor emeritus at Stanford University. "If I was doing it, I wouldn't approve any new ones in earthquake-prone regions until this is fully understood." Currently there are two nuclear power plants in earthquake-prone California, which the industry says have undergone extensive seismic analysis to withstand magnitudes greater than 7.0, along with all other nuclear reactors in the country.
The Japan events present a quandary to President Obama, who has been a vocal proponent of expanding nuclear energy. On Sunday, a White House spokesman staked out the middle ground, acknowledging safety concerns while also reiterating the president's support for nuclear. "Meeting our energy needs means relying on a diverse set of energy resources that includes renewables like wind and solar, natural gas, clean coal and nuclear power," the spokesman said, adding that the administration is committed to learning from what happened in Japan and "ensuring that nuclear energy is produced safely and responsibly here in the U.S."
Nuclear power is often viewed as a bargaining chip in the political debate over climate change. Nuclear energy production does not directly contribute to carbon dioxide emissions, as do coal-fired power plants, but environmental groups on the left have traditionally opposed or been lukewarm toward nuclear because of the concerns with the waste it produces. "Throwing a bone to nuclear is not entirely unlike offshore drilling," said Michael Levi, the director of the Program on Energy Security and Climate Change at the Council on Foreign Relations. "Middle-of-the-road Democrats are increasingly seeing support for nuclear as one concession they can make to the other side in trying to find compromise, and this will make it harder for them to do that. That's unquestionable."
As an entrenched part of the utility industry for decades, nuclear has traditionally been embraced by those on the right. Obama has given the nod to nuclear energy several times in recent months. In his State of the Union speech, he mentioned the concept of a "clean energy standard," which, as opposed to a "renewable energy standard," would put nuclear energy alongside the push for renewables such as wind and solar. And last month he repeated a budget request, also made last year but not approved by Congress, for $36 billion in loan guarantees for new nuclear reactors.
Immediate political fallout from the events in Japan is still difficult to evaluate, with a variety of sometimes-contradictory reactions capturing attention. On Sunday's political talk shows, both Democratic Sen. Charles Schumer (N.Y.) and Senate Majority Leader Mitch McConnell (R-Ky.) said the situation in Japan did not change their support for nuclear energy. "I'm still willing to look at nuclear," Schumer said. "As I have always said, it has to be done safely and carefully."
But Independent Connecticut Sen. Joe Lieberman, historically a supporter of nuclear energy as an option for dealing with climate change, suggested the need for a pause. "I think we've got to kind of quietly and quickly put the brakes on until we can absorb what has happened in Japan as a result of the earthquake and the tsunami and then see what more, if anything, we can demand of the new power plants that are coming online," Lieberman said on CBS' "Face the Nation."
Rep. Edward Markey (D-Mass.) has raised numerous concerns on the nuclear front since the tsunami, asking the Nuclear Regulatory Commission to halt approval of a new design for a new nuclear reactor and calling for safety reviews of 31 reactors in the United States that are designed like the stricken ones in Japan. Even before the crisis in Japan, the nuclear industry in the United States had been facing decades of stagnation. Although no one was injured in Three Mile Island, the 1979 disaster in Pennsylvania cast a pall over the industry that led to a significant slowdown in expansion.
No new nuclear power plants have been built in the United States in three decades, although nuclear energy production has increased as existing plants have become more efficient. The most recent reactor was built 15 years ago. Nonetheless, the United States remains the leading producer of nuclear energy worldwide, with a fleet of 104 nuclear reactors spread across 31 states -- most of them built in the 1970s and '80s. The industry has generally been the source of about one-fifth of the nation's power supply.
Before the economic recession, incentives for nuclear power in the Bush administration prompted a flurry of applications to build more than 20 new reactors and 14 new nuclear power plants. The current near-term expectation is for four new reactors at sites in South Carolina and Georgia. But the financing challenges proved immense, with the estimated costs of the 14 plants coming in at $188 billion. Regulatory approvals required three to four years of government review. And the recession put a damper on rising demand for electricity.
Cost overruns have often plagued past projects, and the financial risk is often so great that without government loan guarantees, an entire company could be taken down in the event of failure. The discoveries of vast new deposits of homegrown natural gas in areas like the Marcellus Shale in Pennsylvania and Northeast made the arithmetic difficult for nuclear investment. And the lack of any comprehensive climate bill, with some form of tax on carbon, has dampened the urgency to invest in large-scale nuclear projects.
As recently as last week, the chief executive of Exelon Corp., a utility company based in Illinois that is the largest owner of nuclear plants in the United States, cited much less expensive natural gas as the primary driver of clean energy in the years to come. "Some in Congress talk about doubling or tripling the size of the existing nuclear fleet to face our energy challenges," Exelon CEO John Rowe said in a speech last Tuesday at the American Enterprise Institute. "Since these plants are not currently economic at today's low natural gas prices, the government would have to spend $300 billion to 600 billion to get these plants built."
Tom Kauffman, a spokesman for the Nuclear Energy Institute, a lobbying group representing the industry, conceded that public opinion in the wake of Japan could alter public opinions on nuclear energy. "There's a multitude of variables that are going to impact the situation for new builds, and this is one of those variables that will affect people's views," he said. "But new nuclear power plants will be built. We expected it to be slow, and to be measured. Time will tell."
Unlike the United States, which has historically had vast deposits of coal, oil and natural gas to fuel its own electricity, Japan in recent decades has placed much more of an emphasis on nuclear power because the small island country has fewer domestic natural resources, making its energy supply more vulnerable to fluctuations in import prices. Japan has actively pursued continuous development of nuclear reactors in recent years, and is the third-largest producer of nuclear energy in the world. The country sources about a third of its energy from nuclear, and aimed to grow it more over the next decade.
Several U.S. companies involved in building nuclear reactors, including Westinghouse and GE, have partnered with Japanese companies to develop new technologies. "They're extremely developed, they're extremely careful and cautious, and my guess on what you'll see coming out of this is there's a lot of stuff they did right in terms of their safety procedures," said Sarah Ladislaw, a senior fellow on energy and national security at the Center for Strategic and International Studies. "All of that being said," she added, "this just shows, even with all that good planning, what is possible when you're dealing with these kind of facilities."
Yucca Mountain still alive under GOP nuke plan
by Rob Hotakainen - McClatchy Newspapers
Yucca Mountain is still breathing.
It's been 24 long years since Congress first designated the desert locale in southern Nevada as the best place to store the nation's nuclear waste. While opponents have gained the upper hand in trying to block the project in recent years — in 2009, Energy Secretary Steven Chu said that "Yucca Mountain as a repository is off the table" — a group of House Republicans is fighting back. They want to revive the site as part of a broader plan that calls for building 200 new nuclear plants by 2030.
Under that plan, the nation would begin building nuclear plants on an unprecedented scale: Currently, the nation gets 20 percent of its electricity from 104 nuclear reactors. But there's one big problem: There's no place to put the waste.
The Republican legislation would take care of that. It would require the Nuclear Regulatory Commission to complete its review of the Yucca Mountain site "without political interference." That would be difficult, with top Democrats trying hard to scrap the project. In a speech to the Nevada legislature last month, Senate Majority Leader Harry Reid of Nevada boasted that Congress had "killed Yucca Mountain" because of fears it would hurt the state's tourism industry.
And President Barack Obama, who campaigned against the proposed repository in 2008, has included no money for Yucca Mountain in his 2012 budget. Obama, though, has become a fan of nuclear power, reflecting how much things have changed since the "no-nukes" days of the 1970s. He regards nuclear power as an important part of his push for "clean energy." And nuclear power is moving up on the agenda on Capitol Hill after the president talked it up in his State of the Union speech. Since then, Republicans have repeatedly cited nuclear power as an issue that could result in their cooperation with the White House.
The president promoted the issue again last month in his 2012 budget, which called for spending another $36 billion on loan guarantees to help build more nuclear plants. The guarantees could save power companies billions in financing costs. However, the nuclear risk rising from Japan's Friday earthquake is likely to revive anti-nuclear power sentiments in this country, and could tilt political momentum against the radioactive power source.
Senate Homeland Security Committee Chairman Joe Lieberman (I-Conn.) said Sunday on CBS News' "Face the Nation" that he's been a "big supporter" of nuclear power and that the U.S. has "got a good safety record." But he said the tragedy in Japan requires the U.S. to take care before proceeding. "I think it calls on us here in the U.S. naturally not to stop building nuclear power plants but to put the brakes on right now until we understand the ramifications of what's happened in Japan," Lieberman said.
Still, for now House Republicans have upped the ante, with a group of 64 signing onto the bill that would triple the nation's nuclear capacity in 19 years. The legislation also promises to reignite an old battle by calling for energy exploration in Alaska's Arctic National Wildlife Refuge.
The issue is of particular importance for a number of states with complexes that built nuclear weapons during World War II and the Cold War and are currently storing large amounts of radioactive waste, including:
- Washington, home to the Hanford Nuclear Reservation, the nation's largest atomic waste dump;
- South Carolina and Georgia, on whose border sits the Savannah River Site;
- Tennessee, site of the Oak Ridge National Laboratory;
- and Idaho, home of the Idaho National Laboratory.
Washington state and South Carolina sued the Obama administration in April 2010, claiming the Department of Energy had no right to junk the Yucca Mountain plan. The project calls for digging deep tunnels into mountainsides, about 90 miles northwest of Las Vegas, where high-level nuclear waste could be stored and buried for 10,000 years as it decays.
"There's a fundamental issue here, and that is Yucca Mountain was created statutorily," said Republican Rep. Doc Hastings, the chairman of the House Natural Resources Committee, whose western Washington district includes the Hanford Nuclear Reservation. "No executive, I don't care which party he is, can unilaterally say, 'I don't want to carry out the law.' And that's precisely what this president is saying."
It's not only Republicans who are complaining. Rep. Norm Dicks of Washington state, the top-ranking Democrat on the House Appropriations Committee, said the Yucca Mountain project "is being stopped without Congress changing the law." "I think it's a travesty, and we're wasting billions of dollars," Dicks said.
South Carolina Republican Sen. Lindsey Graham, one of the Senate's strongest supporters of nuclear energy, said the president's decision to close Yucca Mountain "was ill-advised and leaves our nation without a disposal plan for spent nuclear fuel or Cold War waste." "It was a political, not scientific, decision," Graham said. "It is incumbent on the administration to come up with a disposal plan for this real problem facing our nation."
The White House and its allies contend that the administration has the power to stop the Yucca Mountain project after concluding the site was not a workable option. During a debate on the House floor, Nevada Republican Rep. Dean Heller told his colleagues that the Yucca project is dead and that it was time to "acknowledge reality" and find a new site. "Yucca Mountain is in my district, and our state has been dealing with this boondoggle project literally for decades. ... I continue to be disappointed at the House's insistence of reviving the Yucca Mountain boondoggle," Heller said.
But Hastings and other Republicans said the House will continue to provide funding for Yucca Mountain in their budgets. "We're going to continue to fight the administration's position and we have the goal of opening Yucca Mountain," said Republican Rep. Cathy McMorris Rodgers of Washington state, whose district borders Hastings'. In the Senate, the issue has divided leadership along parochial lines, with Washington state Democrat Patty Murray, who ranks fourth in power, opposing Reid.
Congress chose Yucca Mountain as the sole repository in 1987, after a search had been narrowed to three locations: Yucca; Hanford, which began producing plutonium for nuclear weapons during World War II; and Deaf Smith County, in the Texas Panhandle. In Washington state, some fear that Hanford could again emerge as Plan B if Yucca is scuttled for good.
Backers of the Yucca plan note that the government's failure to build the repository has been costly, leading to more than 70 lawsuits filed by utilities against the government, $1 billion in settlements being paid, and roughly $16.2 billion in potential liabilities to settle the remaining cases. And Republican proponents said their plan to build another 200 power plants would be good for the economy, creating 480,000 construction jobs and 140,000 permanent jobs, while adding $20 billion a year in local, state and federal tax collections.
Mervyn King: rebalance global economy or risk a trade war
by Larry Elliott - Guardian
Since bankers and bondholders have declined to share the cost of their folly, its ordinary taxpayers who are paying the price
Mervyn King will be able to see for himself the devastation wrought by the natural disaster in Japan when he gives a speech in Tokyo today* stressing the need to rebalance the global economy and to head off protectionist pressures.
Like the rest of us, the governor of the Bank of England could be forgiven for thinking that the gods continue to punish us mortals for the greed and stupidity of the bubble years. The first obstacle thrown in the way of recovery from the Great Recession was the ruinous cost of the crisis to sovereign states. Then, violent political unrest rippled across the world's most significant oil-producing region, sending the cost of crude rocketing. Now, Japan has been laid low by one of the biggest earthquakes of the past 100 years at a time when its public finances are in a parlous state.
In a sense, the obstacle-strewn road to redemption should come as no surprise. This was no ordinary crisis and it is proving to be no ordinary recovery. The debts that caused the global system to self-destruct back in the summer of 2007 have not gone away, they have merely been passed on to the public sector. This was always a solvency crisis, because it was clear four years ago that many banks were bust and would have gone under without the aid of governments. It is still a solvency crisis, because some countries – Greece, Ireland and soon perhaps Portugal – are struggling with the enormous cost of paying off their debts.
But it is not just the small fry who are financially impaired. Japan already has a debt-to-GDP ratio of getting on for 200%, while the US national debt is now in excess of $13tn (£8tn), up from $1tn 30 years ago. This, of course, is before anything like the full impact of the ageing of the baby boomer generation has been felt. Here, then, are some predictions.
Contrary to the knee-jerk reaction in the oil market on Friday, the earthquake and tsunami in Japan will be positive for growth, at least given the somewhat bizarre way statisticians calculate gross domestic product. There will be a massive reconstruction effort in Japan, which will be funded by a mixture of quantitative and fiscal easing. The rest of Asia will continue to expand briskly, leading to higher demand for oil. Crude prices will continue to rise, with Brent hitting $130 a barrel in the spring if speculation about turmoil spreading from Libya to Saudi Arabia continues.
City analysts who travel to Asia and Latin America return with tales of how the emerging world is booming. It is certainly true that the big developing economies have been crucial to the recovery of the global economy since the spring of 2009.
But the warning signs, flashing amber a few months ago, are now flashing red. Commodity prices, especially oil, were on a sharp upward trend before the unrest began in north Africa. Higher oil prices mean higher inflation, which in the four previous oil shocks has tended to mean higher interest rates. The European Central Bank will be the first to move, having signalled that it feels the time is right to start unwinding the ultra-expansionary policy stance of the past two years. In the UK, there will be intense pressure on the Bank of England to follow suit, not least because the ECB's action will result in a weaker pound, making imported goods more expensive.
Dearer borrowing will be a double whammy for the weak countries on the fringes of the eurozone. It will slow their growth and make the cost of paying their ruinous debts more expensive. Europe provided itself with some additional firepower to tackle a sovereign debt crisis late last week, but this will deliver only short-term relief from a problem that will eventually ensnare Spain and Belgium as well as Greece, Ireland and Portugal.
The position of these developed countries is little different from that of poor countries in the 1990s: they are burdened with excessively high debts. Yet there is no Jubilee 2000 for Greece, and nor is there a bankruptcy mechanism for sovereign states. It is infra dig to suggest that bankers and bondholders should "take a haircut" for their duff decisions, and since they have declined, ordinary taxpayers will have to do so.
The fundamental problem for countries such as Greece, Ireland and Portugal is that they need growth to pay off their enormous debts, yet are unable to do so because of the deflationary policies inflicted on them by the European Union and the IMF. The widening of bond spreads suggests that something is going to give sooner or later. This can either be in an orderly manner if policymakers get their act together or in a chaotic fashion if there are attempts to get through the crisis with a mixture of bluster and confusion.
The debt crisis, tighter borrowing conditions and the squeeze on incomes and profits caused by higher energy costs will mean that global activity will start to cool over the coming months. Indeed, we could be quite close to the point where the main cause for concern ceases to be inflation and becomes growth. Interest rates will rise but not by nearly as much as the markets expect.
In the UK, inflation will hit 5%, intensifying the policy debate at the Bank of England. If the Bank does act, a combination of tighter monetary policy and fiscal austerity will push the economy back into recession. Watch out for the second quarter of 2011: it is not going to be pleasant.
Elsewhere, a deep and long recession will be followed by an unusually weak and shallow upturn, particularly given the size of the stimulus provided by central banks and finance ministries. The realisation that there will be no easy return to pre-2007 business as usual will trigger a wave of bankruptcies among firms that have been kept on life support in expectation of better times.
Banks will have to own up to some of their hidden losses, resulting in a second phase of the financial crisis. This will be a bitter-sweet outcome for people like King, who have been warning that there will be no permanent solution to the crisis without addressing the global imbalances and to rein in the activities of big finance. Who knows, if things get really bad, his warnings may be acted upon?
Nine in 10 homebuyers 'taking a gamble they can't afford to lose'
by Ian Cowie - Telegraph
More than two years after the Bank of England last raised interest rates, many homebuyers are betting the roof over their head that cheap mortgages are here to stay. Nine in 10 people currently arranging homeloans are opting for variable rate deals rather than fixed rate alternatives, according to Legal & General.
It’s not hard to see why when a market-beating five-year fix from First Direct costs 4.59pc while the same lender offers a variable rate tracking base rate plus 1.99pc, giving a current cost of 2.49pc. Both deals are available up to 65pc loan to value (LTV). Some homebuyers may be setting aside what they save from variable deals, building up a fund to protect themselves against the risk that rates may rise substantially and soon. But others will be using the cash to make ends meet and could find themselves horribly overstretched if base rates rise from their current 340-year low of 0.5pc.
Nor is that wholly improbable when the Retail Prices Index (RPI) is rising at 5.1pc and even the Consumer Prices Index (CPI) – which produces a consistently lower measure of inflation by excluding housing costs, such as mortgages and council tax – is rising by 4pc.
Melanie Bien, a director of independent mortgage broker Private Finance, commented: "There is huge pressure on the Bank of England to raise interest rates. Inflation is well above the government’s 2 per cent target, prompting several members of the Monetary Policy Committee to vote for an immediate increase in rates. "But the majority still have to be convinced, and it may take a few more months for this to happen. We expect interest rates to remain on hold until the summer before rising slowly. There are too many risks associated with increasing interest rates sharply in the short term, while there is also a debate as to whether this would have any impact on inflation anyway."
Similarly, David Hollingworth of London & Country mortgage brokers, said: "The risk of inflation is a growing one. There will no doubt be more conjecture over when the rise will come but the bottom line is that its highly likely that Bank rate will start to increase in coming months. "Although fix deals have increased in price, it’s worth remembering that they still look very low compared to historical fixed rate products. While consensus expects base rate to increase soon, there is little to suggest that increases will come thick and fast."
No wonder only a minority of people arranging mortgages now are willing to pay extra for the peace of mind of knowing what their housing costs will be in future. Here and now, prudent homebuyers trying to decide whether to fix or float with a variable rate deal may consider a three-step decision-making process.
First, accept that when it comes to forecasts about financial markets and interest rates there are only two types of expert; those who don’t know and those who don’t know they don’t know. So various experts’ predictions that rates will stay low should be viewed with scepticism.
Second, recent history strongly suggests that current mortgage costs are abnormally low. According to the Building Societies’ Association, variable rates averaged 5.3pc in the decade after 2000; 8.9pc in the 1990s; 12.5pc in the 1980s and 10.1pc in the 1970s.
Third, many household’s biggest monthly outgoing is their mortgage. So, before anyone decides to bet that rates will remain at or near their historically abnormal current low levels, they should ask themselves whether this is a gamble they can afford to lose.
Have the nine in 10 homebuyers currently opting for variable rates done so? I wouldn’t bet on it.
Germany's new boom: making money by making stuff
by Larry Elliott - Guardian
While the UK and US increasingly relied on the financial sector, Germany concentrated on manufacturing
Strolling the broad, prosperous streets of Munich, it is worth recalling the times over the past decade when Gordon Brown used to boast in his budgets about how the UK economy was leaving Germany for dead.
Now – following the most successful year for Europe's biggest economy since the euphoria that followed reunification two decades ago – that looks like the sort of prediction English football fans make ahead of each World Cup: premature, based on little more than wishful thinking – and wrong. "We will have a golden decade now," says Hans-Werner Sinn, president of Munich's Ifo Institute, one of the country's leading thinktanks. Sinn wrote a book early in the last decade, when unemployment was high and pessimism rampant, called Can Germany be
Saved? His view then was that it could be. Now he says it has been. The phrase "crisis, what crisis" also springs to mind outside the Audi plant an hour up the autobahn in Ingolstadt, where a happy band of German motorists have turned up to pick up their new cars, fresh off a one-kilometre production line churning out 2,500 vehicles a day, six days a week. "2010 was our best ever year," says Jurgen de Graeve, Audi's head of communications. "At the beginning of last year it was clear the market was about to turn up but we didn't expect it to happen so fast."
Current trading conditions for Audi, as for the rest of German industry, have been transformed since the long, hard winter of 2008-09, when some factories slashed output by up to 90% as the financial crisis threatened a second Great Depression. Overdependent on its export sector, Germany suffered a 20% drop in manufacturing output in 2009.
But government wage subsidies meant companies could keep highly skilled workers employed part-time rather than throwing them on the dole, enabling industry to respond quickly to the pick up in global demand. There is now confidence the traumas of 2008-09 will help the country reinvent itself after a troubled period in which the economy was hobbled first by the costs of reconstruction in the former East Germany, then by the uncompetitive rate at which Germany joined the single currency, and finally by the collapse of the IT bubble in 2001.
It was then that the rumours of inexorable decline started to circulate. The list of defects was long: pampered workers; an over-generous welfare state; a too cosy relationship between companies and their bankers; the lack of a venture capital industry; too high a reliance on family-run manufacturing businesses; a population that was getting older and starting to shrink. Put together, the view was that for decades Germany had been living on past glories – the explosive growth of the Wirtschaftswunder, or economic miracle, in the 1950s and 1960s – and had allowed its economy to become sclerotic.
Now there is belief the good times are coming back, and that some of the weaknesses flagged up in the 1990s and 2000s have turned out to be strengths. It will, however, take more than one year of powerful growth to convince sceptics – inside and outside Germany – that a second Wirtschaftswunder is guaranteed. The integration of the old communist lander is far from complete: money has moved from west to east, the people have moved in the opposite direction. Some Germans now say the old East Germany is the equivalent of a Potemkin village: the buildings have been given a makeover but the mass exodus of the young means there is no one living in them.
The skewed nature of Germany's growth is also a concern. Unemployment is falling, and in rich states such as Bavaria it is below 5%, but there are few signs yet of a classic export-led revival broadening into a pick up in wages and consumption. Heiner Flassbeck, once adviser to Oskar Lafontaine – briefly the leftwing finance minister to Gerhard Schröder – is one who says there is no real comparison with the 1950s and 1960s, when the proceeds of growth were shared by companies and their employees.
In those days, German workers worked hard and grew prosperous, earning higher wages as the factories they worked in became more efficient. Over the past decade, there has been another productivity spurt as German companies have overcome the handicap of an over-valued exchange rate on entry into the single currency by making themselves hyper-competitive. This time, though, workers have not enjoyed the fruits of their labour. Real wages have stagnated, consumption stayed weak.
"Over the next 10-15 years there has to be an increase in wages to shift demand from the export sector to domestic demand," Flassbeck says, echoing the calls from the International Monetary Fund and the Organisation for Economic Co-operation and Development for Germany to play its part in evening out the imbalances in the global economy between those countries that run massive trade surpluses and those with chronic deficits. As the two biggest exporters in the world, China and Germany are seen as sharing a common problem: "Chermany", it is said, needs to import more.
Flassbeck says that unless Germany does so at a European level the euro cannot survive because weaker countries will face permanent austerity. Sinn believes that falling unemployment will eventually lead to increases in wages, which in turn will boost consumer spending. There is, though, little sign of Germany's policy-makers hastening this process. They seem quite content with the combination of factors that help explain Germany's comeback.
The first is Germany's economic and political structure. Prosperity is far more widely spread across the country, with none of the excessive concentration of wealth in one region found in Britain. There is an emphasis on long-term growth rather than flipping assets, and boom-busts in the housing market are unknown. Germany was not immune from the speculative mania, and one reason Angela Merkel is prepared to bail out the struggling economies of the eurozone is that German banks are up to their eyeballs in Greek, Spanish, Irish and Portuguese debts.
But there was still an industrial bedrock. Thomas Mayer, chief economist at Deutsche Bank, agrees. "Looking back, some economies were putting too many of their resources into sectors such as real estate. Perhaps they overdid it. Germany benefits from an old-fashioned structure. What looked old fashioned was more durable. The UK has overdone it but it is not the only one. The Americans, the Irish and the Spanish all overdid it."
So, while the City boomed and Wall Street became fixated by sub-prime mortgages and collateralised debt obligations, Germany concentrated on making stuff. This was true of the prestige international names like BMW and Siemens, but it was also true of the hundreds of thousands of lesser-known names that make up the Mittelstand. These are companies, often family run and in many cases founded a century or more ago, that provide the hidden wiring for the global economy. Germany provides the kit that other companies need to make their products, and the Mittelstand companies have become expert at dominating their corners of the market.
It is not uncommon for a German company to have a global market share of 80% in a particular piece of equipment, and despite high labour costs customers keep coming back for the guaranteed delivery times, the reliability of the products and the after-sales service. The second explanation for Germany's renaissance is that the country finally embraced structural reform of its economy at least two decades after Margaret Thatcher and Ronald Reagan pioneered deregulation, privatisation and welfare reform in the UK and the US.
What happened, according to supporters of this theory, is that unlike Britain and America, Germany coped well with the oil shocks of the 1970s and 1980s so saw no need to change anything in the 1980s. Towards the end of that decade, and increasingly after reunification, the economy became increasingly sclerotic, but the warning signs were ignored by Helmut Kohl. But by the early 2000s, the evidence of slow growth and high levels of unemployment was too powerful to ignore, so Gerhard Schröder introduced the Agenda 2010 reforms which cut business taxes, slashed the top rate of income tax, made pensions less generous, cut unemployment pay and allowed the shops to stay open later.
"Schröder didn't get the full credit for what he did," Mayer said. "He attacked all the sacred cows and paid the price by losing the election to Merkel. Industry embarked on a ruthless cost-cutting programme, they exploited new production techniques and IT to make their operations leaner and more profitable. Some parts of manufacturing were moved overseas but not all of it. "It is an amazing comeback. The country seems to be a lot more dynamic."
Flassbeck has a different view. He blames the timidity of the unions on the changes introduced by the former SDP/Green coalition. "There is no pressure for higher wages because of the fear of being fired. Schröder killed the unions. That's a nice paradox." The third explanation is that German investors had their fingers burned in the financial crisis and are now keeping their money safely at home. That has provided the capital for an investment boom that will help keep German industry hyper-competitive in the future. Sinn says this is a real change from the period 1995-2008, when Germany had one of the lowest investment rates in the west. "The crisis has meant the perception of risk has changed.
"Investors see that not all glitters is gold. "There was a period under the euro when lots of attractive investment opportunities seemed to be in other countries. Government bonds seemed to be absolutely secure so German banks invested there. The risk perception means that German savings now don't go out of Germany."
Finally, there's China, where year after year of 9-10% growth has sucked in exports from Germany. In part this has been demand for German cars from a rapidly expanding middle class in Shanghai and Beijing, with Audi now expecting to sell more cars in China this year than it does at home. But it is also the result of Germany's global dominance in investment goods, the products countries need when building up a manufacturing capacity. Britain talks about breaking into the Chinese market: Germany has done so.
Are there lessons in this for Britain? Yes, says Martin Zeil, deputy prime minister of Bavaria. "All the countries that have kept the nucleus of their industry are more successful." Bavaria has invested carefully in the region's science and technology base, identifying future growth sectors such as green technology and life sciences and building up clusters of excellence that act as a magnet for investment. It takes more than a clutch of world class companies to provide a solid industrial base.
And yes too says Mayer at Deutsche Bank, who spent eight years in London watching the boom-bust come to grief. "You have to realise that Gordon Brown was wrong when he praised economic stability and high growth as the result of his policies. It was an illusion. "A large part of the world was living on the drug of credit. The UK economy is so reliant on housing. It has a high social value. Everybody is obsessed with it. In Germany almost everybody rents.
"Britain was on a 10-year high and now it is doing cold turkey. You have to wean the economy off credit and rebalance towards production and traded goods. But it takes years and years and years. In Britain there is a tendency to take the easy way out, to just go for another gin and tonic."
Total German triumph as EU minnows subjugated
by Ambrose Evans-Pritchard - Telegraph
The Iron Chancellor of Germany could not have been clearer. "Whoever wants credit must fulfill our conditions".
These conditions are capitulation by three vulnerable states on core policies, and partial loss of sovereignty for the rest of the eurozone. For Greece, the terms are a fire-sale of €50bn (£43.2bn) of national assets within four years, a tenfold increase from the original €5bn that premier George Papandreou thought he signed up to a year ago. When the IMF first mooted this sum last month he told the inspectors not to "meddle in the internal matters of the country."
State holdings in Hellenic Post, Hellenic Railways, Athens Public Gas, the Pireaus port authority, Athens airport, Thessaloniki water, and ATEbank, to name a few, will not fetch more €15bn. What next? In return, Chancellor Angela Merkel has agreed to cut the penal interest rate on the EU share of Greece’s €110bn loan package by 100 basis points (still penal), and stretch the maturity to 7.5 years. This does not restore solvency. Greece’s debt spiral is too far advanced. The debt load will approach 150pc of GDP this year, and debt service costs are 14.4pc of tax revenue.
Meanwhile, austerity is biting harder. The jobless number jumped almost a full point to 14.8pc in January. Youth unemployment hit 39pc. For Portugal, the condition is more hairshirt retrenchment, a fiscal squeeze of 5.3pc in one year. Pensions, welfare, and health will be cut, following wage cuts already under way. "A descent into Hell," said the Bloco de Ezquerda.
Almost 300,000 youth took to the streets of Lisbon and Oporto on Saturday in a day of wrath by the "Desperate Generation", openly invoking the events of Egypt’s Tahrir Square.
A wing from the ruling Socialist Party said it would not vote for a "disastrous policy". They said the cabinet did not even know about the cuts imposed by Brussels before Wednesday night. Fiscal tightening of this magnitude in a country with public-private debt of 330pc of GDP, an over-valued currency, and reliance on fickle foreign financing, is not a happy prospect. "This is likely to have meaningful implications for the stability of the domestic banking system," said Giada Giani from Citigroup. Yields on Portugal’s 5-year bonds hit a record 8pc on the news of cuts. The bond markets view further belt-tightening as self-defeating.
For Ireland, one condition - as yet unmet - is to give up the 12.5pc corporate tax rate described by France’s leader Nicolas Sarkozy as "shameful". Angela Merkel was more clinically imperious: "We weren't satisfied with what Ireland agreed to, so the question of lowering interest rates has only been addressed for Greece." What a debut for the new Taoiseach, Enda Kenny.
This tax has been the foundation of Ireland’s economic strategy, a reason why it has been able to build a pharmaceutical, medical, and software industry so far from Europe’s geographic core. Peter Sutherland, former EU competition tsar, said Ireland is being punished for transparency. The real corporate tax rate in France is 8.2pc when hidden incentives are included. He called the EU rescue deal a Diktat, with "exorbitant" interest of 5.8pc. Such a rate is suffocating for an economy in the grip of core deflation, already reeling from a 22pc contraction in nominal GNP.
The condition for Spain, Italy, Belgium et al, is intrusive surveillance of pensions, wage policies, productivity levels, as well as demands for a mandatory "debt-brake", regardless of whether or not such a reactionary policy implies 1930s deflation. Just as eurosceptics always feared, monetary union has led to a state of affairs where – in order to "save the euro" as Mrs Merkel puts it - Europe’s ancient states find themselves having to accept a quantum leap towards political union and a degree of subjugation that would not have been tolerated otherwise.
There is no democratic machinery to hold this central system to account since the European Parliament lacks a unifying language or demos, and remains a technical body in practical terms. Raw power is shifting, but to whom exactly? It is as if Merkel has somehow been crowned Magna Mater Europae by the Consilium, behind closed doors.
In exchange for these conditions, Gemany has agreed to boost the deployable lending power of the rescue machinery (EFSF, soon to be ESM) from €250bn to €500bn. It is not clear how this can be squared with the fund’s AAA rating, though the looming threat of EU rules to make Moody’s, Fitch, and S&P liable for "incorrect ratings" may secure some flexibility. She has agreed to let the fund buy bonds of rescued states "as an exception", and not on the secondary market. The language is odd, and EU summits have a habit of issuing communiques that mean different things to different countries and unravel under scrutiny.
She has not agreed to eurobonds or a "soft-restructuring", where debtors buy back their own bonds at a discount on the market, to chip way away at the debt burden. Yet unless this is done, the laggards will struggle to pull out of debt deflation. She has not agreed to the purchase of bonds of crippled debtors pre-emptively to cap yields and nip crises in the bud, and has certainly not agreed to pay one cent in extra transfers to southern Europe or Ireland. Mrs Merkel professed to be "very pleased" with the outcome. "We’ve accomplished our national goals," she said.
Indeed. The deal does not take Germany across the Rubicon into a 'Transferunion'. It ushers in economic intergration on Teutonic terms, but without the prize of shared debt liability. Germany gets most of what it wants, and avoids most of what it does not want. She can return to the Bundestag and plausibly reassure the three blocs of her coalition that she has not violated their instructions, or signed off on concessions that manifestly violate Maastricht or the German constition.
Yet is this the "grand bargain" that will resolve the crisis once and for all? The tenor is cruelly one-sided, as if this were a morality tale of wise and foolish sovereign virgins. The debtor states are made to carry opprobrium for what is at root a pan-European banking crisis.
Ireland and Spain never breached the deficit ceiling of the Stability Pact, though Germany and France did. They did not break the rules. If anything, it was the European Central Bank that broke the rules by running negative real interest rates and gunning the money supply. Europe’s whole financial system was out of control, and still is. The North has not yet forced banks to rebuild their capital buffers or nationalize those that cannot do so, understandably in one sense since it might risk a credit crunch. Germany’s policy towards the Landesbanken is a study in paralysis.
That is why Europe dares not lance the boil with "haircuts" and debt restructuring. It dares not risk a repeat of Europe’s Lehman moment in May 2010. It is why the EU has scotched any quick move by Ireland to deflect the shards of pain from taxpayers to senior bank creditors.
How long will democracies accept being made the scapegoat for what is in part a Franco-German-Benelux banking debacle? Not for ever, judging by comments this week by Avriani, a paper with ties to Greece’s ruling PASOK party. "We should default and return to the Drachma to punish foreign loan sharks who have bled us dry," it said.
Ireland’s Enda Kenny may ultimately have to choose between his EU club loyalties and his duties to the sovereign nation that elected him. Some within his coalition ranks already seem tempted to retaliate by pulling the plug on EU banks. That would certainly remind Chancellor Merkel and President Sarkozy what this crisis is really about. Popular revolt is the dog that has not barked since the long slump began. This may just be a question of time. The pattern of the 1930s is that deep alienation starts in year three as austerity grinds on, and in this case tensions on the eurozone peripery can only turn nastier as the ECB tightens monetary policy.
What is clear is that sovereign states are being forced to cut wages and dismantle parts of their welfare state under foreign diktat, with a gun held to their heads. This will not be forgotten lightly. The character of the European Project has changed utterly.
Debt relief for Greece comes at tough domestic cost
by Costas Paris - Wall Street Journal
Greece is relieved after its European Union partners agreed to cut the interest rate on its bailout loan and give it access to an emergency fund, but the favor came with strict conditions to carry on with a highly unpopular austerity program and kick off the biggest selloff of public property in the country's history.
"Our efforts so far were recognized, so we got both a longer repayment period for our loan and a lower rate. It's the first good news in a very long time. But the challenges ahead remain huge. The Greek people are angry with the unprecedented belt tightening and we must also get €50 billion from privatizations in the next five years," a senior Greek government official said over the weekend. "Beyond the logistical challenge, privatizations are always unpopular in Greece. So the anger will grow."
Euro-zone leaders agreed Friday to extend the repayment period of the €80 billion Greece got from its European Union partners to 7.5 years from three years and more importantly to slash the interest rate to 4.8% from 5.8%. This will save the debt-ridden country around €6 billion in interest. Greece got that loan, plus €30 billion from the International monetary Fund, last May when it was on the brink of default. In exchange, Athens embarked on a series of austerity measures to bring down its budget deficit from 15.4% of gross domestic product in 2009 to below 3% by 2014.
The euro-zone leaders also agreed that bailed out EU countries can sell their bonds directly to a fund called the European Financial Stability Facility if they are unable to tap the international bond market. The deal came after commitments by Greece to sell, rent or lease state land and businesses over the next five years which will earn state coffers €50 billion.
Previous attempts by Greek governments to sell public property prompted angry demonstrations and divisions within ruling political parties and were swiftly abandoned. "For the average person, privatizations mean job losses. The unemployment rate is very high and those who work have already lost a good part of their income because of salary cuts. There is going to be more anger and frustration," the senior official said. "Beyond that 50 billion is a very ambitious target."
If Greece fails to raise the amount, it could be forced by its EU partners and the IMF to raise at least part of it through equally unpopular means, like higher taxes. Greece has a huge amount of commercially exploitable real estate and significant stakes in listed and unlisted companies. The cash raised should be earmarked for the reduction of Greece's huge national debt that tops €330 billion. But the government had only committed to a €7 billion privatization program over three years, which was itself considered difficult to implement. Economists estimate that over the last 20 years Greece has only managed to raise €10 billion from privatizations.
The international lenders backstopping Greece have also argued that there should be reductions to already low private-sector wages, further cuts to the public service payroll, dramatic changes to public administration and health care, reduced military spending, as well as speedy implementation to open up closed professions.
Banks have $2.5 trillion exposure to ailing quartet of Greece, Ireland, Portugal and Spain
by Ambrose Evans-Pritchard - Telegraph
The total exposure of foreign banks to the struggling quartet of Greece, Ireland, Portugal and Spain tops $2.5 trillion (£1.6 trillion) once all forms or risk are included, according to the latest data from the Bank for International Settlements.
On an "ultimate risk" basis that includes the potential loss on derivatives and credit guarantees of different kinds, the figure rises to $2.51trillion as of September 2010, well above the headline figure of $1.76 trillion in cross-border loans. The sheer scale highlights the systemic dangers if the EU fails to stabilize the debt crisis. Eurozone leaders agreed to boost the lending power of the EU bail-out fund on Friday, but Germany vetoed proposals for a debt buy-back scheme or an activist policy of bond purchases.
The BIS, the central bank of central banks, said in its quarterly report that Germany had $569bn of exposure to the quartet, France $380bn, and the UK $431bn. A chunk of British exposure is on behalf of Mid-East and Asian clients banking through London. Italy has just $81bn at risk and seems uniquely insulated from the crisis all around it. The geography of risk varies greatly. British-based banks and subsidiaries have $225bn at stake in Ireland, and $152bn in Spain, but little in Portugal or Greece. France is up to its neck in Greece with $92bn; a Benelux-led group has $180bn in Spain, and Spain itself has exposure of $109bn to Portugal.
The complex web of lending shows how hard it is to contain the problem to one country at time. American lenders capitulated in the third quarter, slashing exposure to the four countries by 8.7pc. It is likely that US players took advantage of bond purchases by the European Central Bank to sell bonds and cut their losses. The BIS said global cross-border lending rebounded by $650bn in the third quarter to $31 trillion, but is still far below the $36 trillion peak in the heady days before the Great Recession. UK-based banks are still leaders with $5.69 trillion, followed by the US at $2.92 trillion.
The BIS said Western central banks still enjoy the benefit of the doubt on pledges to contain inflation, but "swap rates" have begun to flash warning signals, especially in Britain where two-year inflation swap rates have risen well above the Bank of England's inflation estimates. The BIS study said the VAT rise accounts for part of inflation dynamic, but there is also an "investor wariness of a persistent overshoot". While the risk of "policy mistakes" by central banks is rising, this is a double-edged threat. US core inflation has fallen to 0.6pc. "In many mature economies, any premature tightening could jeopardise the economic recovery and risk sparking expectations of deflation," it said.
Separately, BIS has recently cracked down on derivative trading. It has demanded higher costs for banks and other participants trading derivatives, equities and bonds. BIS has proposed "new and more demanding standards" for payment, clearing and settlement systems – the infrastructure that underpins trading activities. Regulators want to ensure clearing houses are financially robust enough to stand the default of one or two big members.
The Burden of Pensions on States
by Mary Williams Walsh - New York Times
For public workers in Wisconsin, there’s more bad news. Having lost the battle on collective bargaining, they may soon be asked to make more financial sacrifices.
The state’s workers offered to start picking up part of the cost of their pensions and health insurance early in their showdown this year with Gov. Scott Walker. That change will provide immediate relief for struggling towns, school districts and state agencies, and help them balance their budgets.
But new pension cost estimates, ordered before Governor Walker was elected, are coming as soon as next week. They are expected to show that the current contribution levels to the state pension system are too meager. More money, from employers and employees in some combination, will be needed, and perhaps much more in coming years.
Other states will also probably find that Wisconsin’s idea of simply dividing pension contributions between labor and management is an illusory solution to their long-term financial woes. That’s because several studies have shown that promises to workers are far more costly than routinely calculated by Wisconsin and most states.
And the problem seems unlikely to be solved by putting curbs on the collective bargaining power of state workers. Despite the arguments of some Republican governors and popular perception, the places with the most unionized work forces are not necessarily the ones with the most generous pensions, according to a new study. Coming up with bigger contributions to pension funds will require states to make difficult choices about the size of their work forces, their commitment to public services and the viability of their employee benefits, which are often said to be irreversible and protected by state constitutions.
"The amount they have to be contributing could potentially be two to three times as much as they’re contributing now," said Joshua Rauh, an associate professor of finance at Northwestern University, who has been challenging the way most cities and states measure their pension promises. "If you don’t want to count on the stock market to pay for all this, this is what you’re going to have to contribute."
Mr. Rauh and a number of other analysts say the states’ biggest problem has been a failure to understand how much benefits will really cost. Instead of the states’ models, these analysts have come up with alternatives that more closely approximate those used by insurance companies. Unlike recalcitrant states like New Jersey and Illinois, Wisconsin has been setting aside money every year for its fund. It has also been thinking of lowering its reliance on stocks, to reduce its exposure to bear markets.
The issue is whether it has been setting aside anywhere near enough, given the magnitude of its promises to workers. The idea that public pensions may cost more than expected angers many union officials. They say economists like Mr. Rauh are trying to frighten workers, or build resentment among taxpayers so that public pension funds will be scrapped and replaced with something less generous.
"We think there’s an agenda," said Steve Kreisberg, research director for the American Federation of State, County and Municipal Employees. "These numbers have become intensely politicized, and they’re being distorted in a way that does real harm to real people." A spokesman for Wisconsin’s governor said Mr. Walker had not factored any possible increase in pension contributions into his budget proposal or talks with the unions. "That was never discussed," said the spokesman, Cullen Werwie.
An analysis being prepared for the state agency that operates Wisconsin’s pension system — and which is to be presented to the agency’s board on Wednesday — is expected to show that it has been relying on too high a figure for investment gains. If the system’s trustees accept those findings, overall cash contributions will have to rise.
The actuary preparing the analysis is not tipping his hand, but any increase at this point is likely to be small. The state estimates that 12 percent of all public workers’ pay will need to be set aside annually for the pension fund. Lowering investment expectations sharply, to 7 percent a year from the current 7.8 percent, could push the contribution rate up to perhaps 16 percent, meaning an additional $2,000 to $3,000 a year apiece for workers nearing retirement.
Based on the 12 percent figure, workers agreed earlier this year to contribute 5.8 percent of their pay to the pension fund, leaving their employers to pay the remaining 6.2 percent. Workers also agreed to cover a portion of their health costs. How to pay for health benefits for retirees is still being discussed. Workers in Wisconsin point out that their payments in retirement are hardly a king’s ransom. Their average annual benefit is about $26,500, and they believe they have been wrongly portrayed as greedy chiselers who game the system and walk away with six-figure pensions.
But it can be a huge burden for states and municipalities to provide even a modest, $26,000-a-year pension to hundreds of thousands of people, at least in today’s economic environment, and especially if those people are able to retire well before 65 and collect that money for many years. "When interest rates are low, these plans are really expensive to run," said Gordon Latter, an actuary at RBC Global Asset Management (U.S.) Inc., (formerly Voyageur Asset Management) whose clients include both corporate and public pension funds.
Despite the furor in Wisconsin, collective bargaining does not appear to be the main factor driving pension costs higher. Sylvester J. Schieber, an economist and independent consultant, recently compared public pensions in each of the 50 states, ranking them from richest to poorest. Instead of looking at dollar values, like Wisconsin’s $26,500 a year, Mr. Schieber looked at what part of the average worker’s paycheck his pension was designed to replace in retirement. The method eliminates regional disparities and certain other problems with benefit-cost data.
Mr. Kreisberg of the public workers union said he considered the approach fair. Mr. Schieber said he expected to find that the most generous states were the ones with collective bargaining for public workers, but he found no correlation whatsoever. "I was surprised at the result," he said. "I had expected that the unions would be a significant force."
Wisconsin turned out to have the eighth-richest pensions of any state, replacing on average 57 percent of a worker’s pay in retirement. But the most generous state by far is Colorado — even though it has granted collective bargaining to only a fourth of its public work force. In Wisconsin, roughly half are covered, according to Unionstats.com, a database that uses Census data to track union membership.
Colorado offers pensions that replace 90 percent of salary, with generous annual compounding that more than keeps up with the current rate of inflation. (The state has tried to reduce this compounding; retirees have sued.) Colorado’s pensions are unusually rich because its public workers are not permitted to participate in Social Security — the state pension is the only one they get.
The second-richest state is New York, which replaces 77 percent of a worker’s income, even though New York’s public work force earns Social Security benefits as well. A New Yorker’s public pension benefit, combined with Social Security, replaces more than 100 percent of his pay, Mr. Schieber found.
That might appear to be the fruits of collective bargaining, since New York State grants that right to more of its public work force than any other state. But the third most generous state is Georgia, replacing 68 percent of a retiree’s former paycheck on average. And Georgia is a right-to-work state with one of the lowest rates of collective bargaining in America, just 14 percent of its public work force.
Nonunion Georgia’s public pensions are, in fact, three times as generous as those of labor-friendly Vermont, where more than half the public work force has collective bargaining. Vermont replaces just 20 percent of a retiree’s previous pay, the lowest of any state.
Mr. Schieber said he was at a loss to explain these findings. He had expected rich pensions would go hand in hand with collective bargaining. But his research, to be published in the Journal of Pension Economics and Finance, does shed light on how a seemingly modest $26,000-a-year pension can be considered unaffordably rich. One reason is low interest rates; another is that public employees can often start claiming their pensions in their 50s. Wisconsin’s pension plan allows people to retire at 57 with a full pension, as long as they have 30 years of service. Police officers and firefighters can retire at 53, with 25 years of service.
In the private sector, pensions like that "have just kind of dropped off the radar screen," Mr. Schieber said. At the dwindling number of companies that still grant full pensions below age 65, people seldom take them, for fear of giving up their health insurance before they qualify for Medicare. Labor statistics show a marked increase in the number of 60- to 65-year-olds still working.
Public employees have so far dodged that bullet. They can still generally retire several years younger, which means their states or municipalities must pay their benefits over a longer period. That adds up. It also means the money for their benefits has fewer years to compound, so more must be set aside years in advance. "By the time the typical private-sector worker has retired, the teachers, the highway patrolmen and these folks have already gotten $200,000, $300,000, $400,000 in pensions," Mr. Schieber said. "Plus, they’re getting a pretty rich retiree health benefit. That’s why these benefits are so expensive. "
Lehman Auditor Ernst&Young May Bear The Brunt on 'Repo 105' Accounting
by Steve Eder - Wall Street Journal
Federal investigators have conceded that Lehman Brothers executives won't likely face charges for an accounting tactic that obscured the Wall Street firm's true financial condition. Lehman's auditor, on the other hand, has already been hauled into court.
Federal investigators have grown increasingly doubtful they can prove Lehman executives violated the law by using an accounting maneuver known as Repo 105, which obscured the amount of risk Lehman held, making the firm's finances look better than they were, The Wall Street Journal has reported. But Ernst & Young, Lehman's auditor, is fighting fraud charges filed in December by the New York attorney general for, among other things, allegedly failing to adequately follow up on a whistleblower's claim that Lehman was misstating the value and size of its assets.
The contrasting fates of Ernst and Lehman, which went bankrupt in 2008, may reflect the fact that Ernst is the only firm left to punish—a going concern from which to extract settlement fees. Their divergent fortunes also emphasize the tensions between an auditor's obligations to its client and its responsibility to the public.
The charges come down to whether the auditing firm went easy on one of its most lucrative clients. The case, which is being closely watched, strikes at one of the most deeply rooted problems in the financial system: the conflicts that can arise when watchdogs are paid by the firms they are supposed to police. The issue was a key factor in the case that ultimately destroyed accounting firm Arthur Andersen for its audits of Enron Corp., and it is at the heart of the criticism of the credit-ratings firms during the financial crisis. Lehman paid Ernst more than $150 million in fees in the seven years before the firm collapsed, according to the attorney general's complaint.
"As a partner on one of the biggest clients of Ernst & Young, there is always a tension between revenue generation and abiding by prudential standards," said Amy Poster, a former senior adviser for audit with the Special Inspector General for the Troubled Asset Relief Program. Ernst said in a statement that it would vigorously defend itself in court. "We firmly believe that our work met all applicable standards, applying the rules that existed at the time," the company said. Because its accounting was correct, Ernst said, there was "no factual or legal basis" to bring a claim against the firm, which it says didn't go easy on its client.
The attorney general's office may face a high hurdle. It will likely have to prove the firm never properly disclosed those transactions and gamed the rule for the sole purpose of making Lehman appear less risk-laden. Rules that require more disclosure about financial assets and limit Repo 105 accounting have changed only since Lehman's collapse. And some observers say it makes no sense for a firm that believed the accounting was appropriate to sound the alarm for a problem that didn't exist. "If I'm the partner and I have concluded that what we are doing is correct and consistent with [standards], I don't know why I would take that to the audit committee, as I'm the expert," said Randolph Beatty, the dean of the Leventhal School of Accounting at University of Southern California Marshall.
At the heart of the case against Ernst is the contention by the attorney general and by the bankruptcy examiner that it ignored a whistleblower who said Lehman was obscuring its financial condition. Just four months before the firm collapsed in September 2008, Matthew Lee, a Lehman finance executive, informed Lehman executives in a letter of a number of issues that he felt could "possibly constitute unethical or unlawful conduct."
Among his allegations: that Lehman wasn't valuing "tens of billions of dollars of inventory" in a "fully realistic or reasonable" manner, and that financial statements may not be presented in a "full, fair, accurate and timely manner. A month later, William J. Schlich Jr., the lead Ernst & Young partner in charge of auditing Lehman's books, interviewed Mr. Lee about his allegations. Specifics of the interview weren't made public. But a week before their meeting, Mr. Schlich told his superiors in an email that he didn't expect Mr. Lee's charges would change how Lehman reports its results, according to a copy of the email that was included in the bankruptcy examiner's report.
The meeting where Repo 105 was discussed was one of three occasions in which Mr. Schlich and other Ernst auditors held conversations about Lehman's use of the accounting practice, according to the attorney general's complaint and the bankruptcy examiner's report. No individual auditor, including Mr. Schlich, has been named as a defendant in the attorney general's complaint. His attorney, Larry Robbins, said in a statement that Mr. Schlich applied the accounting rules that existed at the time. "Nothing more can or should be expected of him or any other auditor, and criticism of him in that regard is completely unjustified," he wrote. "Mr. Lee confirmed repeatedly during his interview with Mr. Schlich that he was unaware of any material error in Lehman's financial reporting."
Repo 105 transactions, which temporarily erased Lehman assets near the end of quarters when financial results are disclosed, first began in 2001, according to the examiner's report. That year, Lehman discussed the transactions with outside auditors from Ernst, including Mr. Schlich, and Mr. Schlich testified that Ernst became "comfortable" with the firm's use of Repo 105, according to the examiner's report.
Mr. Schlich's attorney said Ernst and Lehman had concluded multiple times over several years that the accounting for Repo 105 transactions was acceptable under accounting standards.
SEC officials have generally reached the same conclusion, adding they aren't convinced Repo 105 caused material harm to shareholders, according to people familiar with the matter. The SEC hasn't sent Ernst a "Wells notice," which often signals charges from the agency are possible. Without harm to shareholders or improper accounting, Mr. Schlich's attorney said, there is no "legitimate basis for being critical of Mr. Schlich's conduct."
The most explicit challenge to the accounting tactic surfaced with Mr. Lee, who at the time of his allegations was negotiating his severance package from Lehman. His letter, which alleged "unethical and unlawful conduct," was referred by Lehman's audit committee to Mr. Schlich. Though his letter, written a month before Mr. Schlich interviewed him, didn't explicitly refer to Repo 105, an email Mr. Lee sent to Lehman management two days before the interview explicitly addressed his reservations about the Repo 105 accounting for the first time in writing, according to Mr. Schlich's attorney. That email was never shared with Ernst, he added.
Mr. Schlich and Hillary Hansen, another Ernst partner, interviewed Mr. Lee. According to the bankruptcy examiner's report, Mr. Lee noted his concerns with auditors that Lehman moved $50 billion of inventory off its balance sheet at quarter-end through Repo 105 transactions. After the meeting, Ms. Hansen also raised concerns about Repo 105 with Mr. Schlich, though the attorney general's complaint doesn't elaborate on the nature of her concerns. It also didn't detail Mr. Schlich's reaction to Mr. Lee other than to say he "casually" dismissed Ms. Hansen's concerns because he said the Repo 105 transactions were being properly recorded.
The next day, Mr. Schlich didn't bring up Mr. Lee's concerns about Repo 105 when he met with Lehman's audit committee, the complaint says. Ms. Hansen and Mr. Lee declined to comment.
Ernst, in its statements, said Mr. Lee's concerns were raised during the course of Lehman's 2008 audit, which the firm didn't complete because Lehman collapsed that September, spreading havoc throughout the global financial system. Two months before Lehman's bankruptcy, Mr. Schlich was promoted to run Ernst's global-banking and capital-markets practice, overseeing its 14,000 financial-services professionals.
Attorneys General May Be Rushing Proposal for Loan Servicers
by Gretchen Morgenson - New York Times
One crucial reason the nation’s mortgage industry ran itself — and the entire nation — off the rails was its obsession with speed. Mortgages had to be approved chop-chop, loans pooled instantly. When it came to foreclosure, well, the quicker the better.
So it is disturbing that the same need for speed is at work in the bank settlement being devised by state attorneys general relating to improper loan-servicing and foreclosure practices. When Tom Miller, the Iowa attorney general who leads the talks, announced initial terms of a deal on Monday, he said, "We’re going to move as fast as we can."
While some might argue that a rapid approach will help borrowers, it is apt to benefit the banks far more. Hurrying to strike a deal means less time to devote to understanding how pernicious the foreclosure practices were at the nation’s largest institutions. How can you determine appropriate penalties for troubling practices when you haven’t conducted a full-fledged investigation?
Remember that the attorneys general who are participating in this settlement process have been a coalition only since October. Two people who have been briefed on the discussions, but who asked for anonymity because the deal was not final, told me last week that no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered.
And, yet, along comes a 27-page outline of remedies that the banks would have to abide by in their loan servicing and foreclosure businesses. Talk has also circulated that the banks would have to cough up $20 billion to close the deal, though there are no figures in the outline.
Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. "We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers," he said. "We know what the problems are, and we know what needs to change."
Maybe so. But being able to produce reams of deposition testimony from bank employees and documents turned over under subpoena would give those negotiating for consumers and mortgage investors far more leverage than they’d have working with a series of talking points.
Recent lawsuits filed against Bank of America by Terry Goddard, then the Arizona attorney general, and Catherine Cortez Masto, Nevada’s attorney general, show the power that in-depth investigations provide. Both cases contend that the bank engaged in consumer fraud by failing to abide by loan modification provisions of a previous state settlement completed with Countrywide Financial in 2009. The bank has disputed the allegations, but the filings by these officials are chock-full of details gleaned from investigating more than 250 consumer complaints.
Mr. Miller’s list of remedies is helpful in showing just how dysfunctional and abusive the loan servicing business has become. Consider this proposed requirement: "Affidavits and sworn statements shall not contain information that is false or unsubstantiated." And how’s this for revolutionary: "Loan servicers shall promptly accept and apply borrower payments." (When they don’t, late fees magically appear.) And, get this: Loan servicers should also track the resolution of customer complaints.
You don’t say!
To be sure, there is substance to Mr. Miller’s proposal. A settlement would bar servicers from foreclosing on borrowers amid a loan modification, for example. And when a modification is denied, the servicer would have to explain why, and in detail. But the terms severely disappoint in their treatment of second liens, a major sticking point in many loan modifications. The proposal would treat first and subsequent mortgages equally, turning upside down centuries-old law requiring creditors at the head of the line to be paid before i.o.u.’s signed later.
Treating holders of first and second liens alike is a boon to the banks, since so many second mortgages are owned by the nation’s largest institutions; many of the firsts are held by investors in mortgage-backed securities. The banks want the first mortgages to take the hit, leaving the seconds intact. Or at least for them both to share the pain equally.
To some degree, the document presented by Mr. Miller raises more questions than it answers. For example, what will state attorneys general have to give up regarding future lawsuits or enforcement actions against the banks if they sign on to the settlement? Typically, such deals contain releases barring participants from bringing new but related cases. As they negotiate with Mr. Miller, you can bet the banks will push for aggressive releases. But because these institutions underwrote many toxic loans in the boom, barring attorneys general from bringing actions against them for lending improprieties is no way to hold dubious actors accountable.
One attorney general, Eric Schneiderman of New York, is concerned about such releases. According to a person briefed on the discussions, Mr. Schneiderman has told Mr. Miller that he will not participate in a deal that would preclude his office from pursuing claims against the banks relating to their mortgage origination, securitization and marketing practices. Mr. Schneiderman declined to comment.
It is also unclear whether the settlement would prevent borrowers or investors from bringing their own lawsuits against loan servicers — a terrible result. And the list of terms has only the briefest mention of restitution for borrowers who have been hurt by questionable loan servicing.
These borrowers are legion. Reparations should not be limited only to those who were removed from homes improperly. Consider four who are suing the Money Store, a lender and loan servicer. Their two cases contend that the Money Store levied improper legal fees while borrowers were in foreclosure; one case has been dragging on for 10 years, the other for eight.
According to court filings, one couple paid $1,125 in legal fees and expenses associated with two bankruptcy motions that were never filed. They also paid $4,418 for legal work said to have been done by an outside firm (which lawyers for the Money Store have not proved it paid). Another borrower paid $1,750 for legal fees that the Money Store could not show were paid to the firm that supposedly did the work. And yet another borrower paid $5,076 in fees and expenses that do not appear to have been submitted to the outside firm charged with the legal work, according to court filings.
"We picked four plaintiffs out of the hat here, and all four of them had situations where thousands of dollars in legal fees were passed on to them but where the evidence indicates the law firms were never paid," said Paul Grobman, a New York lawyer for the borrowers. He wants to know if the servicer kept the fees. Shoddy loan servicing has clearly done significant damage to borrowers. If a state settlement morphs into yet another gift to the banks, let’s hope that at least some attorneys general will take a different path.
Bank of America accused of loan scam by employee
by Harry Wilson and Steven Swinford - Telegraph
A series of leaked internal emails purported to be sent between Bank of America staff appearing to show improper lending procedures have been released on the internet.
The emails were published by Anonymous, a hacker group, and are said to come from a former Bank of America employee turned-whistleblower. In the documents released so far, staff at Balboa Insurance, a subsidiary of Bank of America, appear to discuss removing details from loan records to hide improper home foreclosures from the US authorities, something the bank denies.
The emails, which date from November 2010, show employees discussing removing documents from loan files for a group of about 100 properties. One of the managers raises concerns, saying that to do so will raise a "red flag to auditors". The Balboa employee in one email appears to be worried after receiving an instruction to remove "DTNs" [document tracking number] from loans made by GMAC, a large US mortgage lender. "I'm just a little concerned about the impact this has on the department and company. Why are we removing all record of this error?" writes the Balboa employee.
In a separate correspondence, the former employee said the emails demonstrated how the Balboa was hiding information about home repossessions from auditors. In an email message the former employee said he was "well known throughout Bank of America" and accused the bank of choosing to "destroy my personal career". "There are a lot of honest and good people working for that company, and their concerns are constantly silenced, because it's cheaper and easier to fire people and sweep their issues under the table than it is to fix the problems. Any BofA employee can tell you they are corrupt, but they won't because they need to pay their bills too."
A Bank of America spokesman said that the documents had been stolen by a former Balboa employee, and were not related to home repossessions. "We are confident that his extravagant assertions are untrue," the spokesman said.
Bank of America is one of the world's largest banks and during the financial crisis in 2008 bought US investment bank Merrill Lynch on the same day that Lehman Brothers announced it had filed for bankruptcy. The deal proved controversial as it emerged that Bank of America had allowed Merrill Lynch managers to pay billions of dollars to their staff in bonuses, having earlier said that it had had no knowledge of any deal on pay.
The allegations of foreclosure impropriety could again put the spotlight on the way the bank was run in the years running up to the crisis and how much the bank's managers knew about problems in the real estate market.
Slower Growth Signaled by Wal-Mart Shares as Commodities Depress Consumers
by Joshua Zumbrun - Bloomberg
Economists ignore volatile commodity prices when calculating inflation. The poorest families, who spend as much as 25 percent of their after-tax income on food and fuel, don’t have that luxury.
Rising prices "will shave a couple tenths off consumer spending, and the consumers that are going to get hit the most are at the lower end of the income scale," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. On March 11, he lowered his forecast for first quarter growth to 2.5 percent from 3.5 percent and second quarter growth to 3.5 percent from 4 percent, citing in part the persistence of higher energy costs.
America’s poorer families are suffering more than richer households as they face a bigger squeeze from the highest gasoline expenses in more than two years, stagnating wages and a jobless rate that has remained at or above 8.9 percent since April 2009. Their pain is shared by their preferred retailers, including Wal-Mart Stores Inc. (WMT) and J.C. Penney Co.
"Rising gas prices and still-high unemployment levels weigh on the minds of our customers," Bill Simon, U.S. chief executive officer of Bentonville, Arkansas-based Wal-Mart, said on a Feb. 22 earnings call. "Pressure from higher energy and commodity costs are factors that we will watch closely, as they affect our own logistics and transportation costs, as well as the prices the customer pays," he said.
Wal-Mart, Plano-Texas-based J.C. Penney, Kohl’s Corp. (KSS) and Kroger Co. (KR) in Cincinnati appear more vulnerable to gasoline inflation than Macy’s Inc. (M), also in Cincinnati, Costco Wholesale Corp. (COST) and BJ’s Wholesale Club Inc. (BJ), said Richard Hastings, consumer strategist at Global Hunter Securities LLC. Hastings, who is based in Charlotte, North Carolina, analyzed survey data for 12 retailers from Worthington, Ohio- based BIGresearch.
Eighty-two percent of Wal-Mart shoppers earn less than $75,000 annually, compared with 63 percent at BJ’s and 55 percent at Costco, according to the BIGresearch data Hastings studied. Only 8 percent of Wal-Mart customers earn more than $100,000 a year, while the share is 28.2 percent at Issaquah, Washington-based Costco and 25 percent at BJ’s in Westborough, Massachusetts. Since the start of the year, Wal-Mart stock has dropped 2.5 percent to $52.59. BJ’s is up 2.4 percent to $49.04, Costco has risen 0.5 percent to $72.55.
As the squeeze from commodities puts immediate pressure on businesses to raise prices, it also tends to reduce consumption of non-necessities and thus over time eases some of the inflationary pressure on such goods and services. "Costs are expected to be up significantly across all apparel categories, approximately 10 percent to 15 percent overall," said Kevin Mansell, chief executive officer of Kohl’s. "We’ve been preparing for these cost increases for some time and have been working diligently to minimize" their impact on Kohl’s customers, who are "less open to paying higher prices for goods that are really discretionary."
Half of shoppers at the Menomonee Falls, Wisconsin-based department-store chain said they’d be driving less and 29 percent would spend less on clothing in response to gas prices, according to the BIGresearch data. One reason for the cutbacks is slowing wage growth. Average hourly earnings, adjusted for inflation, rose at a 1.9 percent annual rate in January, down from 3.9 percent in June 2007, six months before the recession began.
America’s poorest consumers also have missed out on a two- year rally in equities as governments and central banks worldwide pumped more than $12 trillion into their economies to spur the recovery. Before the slump, the median family in the lowest-earning 20 percent of the U.S. had $1,700 in financial assets, compared with $404,000 for the top 10 percent, according to the Fed’s Survey of Consumer Finances in 2007. The S&P 500 has soared 93 percent to 1,304.28 since the recession low of 676.53 on March 9, 2009.
The financial restraints on lower-income consumers mean they have less flexibility when food and energy prices climb. Families making $15,000 to $20,000 a year use 19 percent of their after-tax income for food and those earning $20,000- $30,000 typically use 18 percent, compared with 8 percent for families earning more than $70,000 annually, according to the Labor Department’s 2009 Consumer Expenditures Survey, released October 2010.
Gallon of Gasoline
Gasoline and motor oil account for 6 percent of spending for the lowest groups, compared with 2 percent for the over- $70,000 cohort. A gallon of regular gas cost $3.557 on March 12, the highest since October 2008, according to Heathrow, Florida- based AAA, the nation’s largest motoring organization. "If you’re living paycheck to paycheck or you’re on a fixed income, the rise of gas prices impacts your habits," said Troy Green, a AAA spokesman. "If you’re more affluent and can afford gasoline at any price, then you’re going to drive regardless."
Fifty-one percent of Wal-Mart’s shoppers will be driving less as a result of fluctuating gas prices, compared with 44 percent at Costco and 46 percent at BJ’s, according to the BIGresearch data.
Prices of all goods and services will rise 2.3 percent this year, according to the median forecast of economists in a Bloomberg survey, compared with 1.6 percent in 2010. The Federal Reserve prefers to focus on the core personal-consumption expenditures index, which excludes food and energy costs. The economists predict it will increase 1.1 percent, after rising at an annual rate of 0.8 percent in December and January, the lowest in records going back to 1960.
Gas and food prices traditionally are more volatile than other costs. The U.S. Department of Agriculture raised its forecast for food prices to an increase of as much as 4 percent this year, up from a January estimate of 2 percent to 3 percent, after a surge in costs of farm goods, Chief Economist Joe Glauber said Feb. 24 at a government-sponsored agriculture forum in Arlington, Virginia.
The department boosted its estimates for meats, eggs, cooking oils, fruits and vegetables, cereals and baked goods, and sweets as food inflation accelerates at the fastest pace since reaching a 28-year high in 2008, the USDA said in a Feb. 24 report. Higher costs for corn, the primary feed for pigs and chickens, may boost pork prices as much as 6.5 percent and eggs 4.5 percent.
"There’s some substitutability for food, where if beef goes up faster than chicken, you might not like chicken as much but you buy chicken," said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. "On the energy side it gets a lot tougher. If you’re locked into a commute for your drive, you don’t have a whole lot of substitutability." Naroff, who accurately predicted the bursting of the housing bubble, says inflation could accelerate as much as 3.7 percent this year. "There seems to be almost a sea change in attitudes toward price changes," said Naroff, who added that some companies are starting to raise prices and see demand hold up.
The "high visibility" of food and fuel costs may "pose a little more risk for inflation dynamics this time than in the past," Richmond Fed President Jeffrey Lacker told reporters Feb. 26. Even so, "economic conditions are likely to warrant an exceptionally low" target interest rate "for an extended period," Fed Chairman Ben S. Bernanke said March 1 in testimony before the Senate Banking Committee.
The policy-making Federal Open Market Committee meets March 15, and investors see a 68 percent chance the Fed will hold its benchmark federal funds rate at a record zero to 0.25 percent through December, based on futures contracts on the Chicago Board of Trade. Economists surveyed by Bloomberg News from March 4 to March 10 revised down their forecast for growth this year to 3 percent from 3.2 percent in February and predicted unemployment will average 8.8 percent, not much changed from last month’s actual 8.9 percent.
Their outlook helps explain a split in the Bloomberg Consumer Comfort Index, which dropped to minus 44.5 in the week ending March 6, the lowest level in a month, on surging gasoline prices. Sentiment suffered the most among respondents who lacked a full-time job or any employment and those earning less than $50,000 a year. "The income divide is likely to become even more apparent in the year ahead, as the most vulnerable suffer disproportionate pain in the face of higher energy costs," said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.
China Edges Ahead Of U.S. In Manufacturing
by Yepoka Yeebo - Huffington Post
After over a century of dominance, U.S. manufacturing has dropped into second place behind China, according to estimates released Monday by IHS Global Insight. After being ravaged by the recession, American manufacturing rebounded in 2009, and grew 12.6 percent in 2010, representing an estimated $1.95 trillion of the American economy, according to the report. IHS examined data from the U.S. Bureau of Economic Analysis, and the National Bureau of Statistics of China. The U.S. fell behind China in the total dollar value of manufacturing output, according to the report.
In China, the manufacturing sector grew 18 percent last year, contributing more than $2 trillion to the economy. The sheer scale of Chinese manufacturing, and the Chinese Yuan becoming more valuable as a currency helped tip the balance, according to IHS Global Insight. "The U.S. went through a historically severe recession, while China continued to expand," said Mark Killion, economist at IHS Global Insight. "We knew that it would occur anyway, but decline in the U.S. and the rise in China brought this much closer," said Killion.
Analysts warned against considering the news a death knell for American manufacturing. "The U.S. were world leaders for much of the 20th century, but there wasn't much competition," said Jack McDougle, senior vice president of the Council on Competitiveness, a non-partisan group of business and labor leaders. McDougle stressed that, the IHS Global Insight report found that the U.S. still leads the way when it comes to productivity, with 11.5 million American workers producing roughly the same amount of output as as 100 million Chinese workers.
McDougle said that this was, in part, because much of American manufacturing is focussed on higher value products, which mean high-tech manufacturing methods, better management and more skilled workers. "American manufacturing jobs pay, on average a total of $70,000 a year including benefits," he said citing figures from the U.S. Bureau of Economic Analysis. "The value that they create is much higher."
Manufacturers like General Electric, for example, were realizing this, and moving production of some household appliances back to the U.S., said McDougle, and many Chinese manufacturers still had to rely on U.S. technology, he added. "The sky is not falling." And the U.S. still has a far larger economy than China, said Carl Weinberg of High Frequency Economics. "Our economy is two-and-a-half times the size of theirs," he added.China's gross domestic product for 2010 is an estimated $6 trillion, compared with an estimated U.S. GDP of $15 trillion.
The National Association of Manufacturers contend that the U.S. is still the world's biggest manufacturer. In a post on Shopfloor, a manufacturing industry blog, Fank Varago, vice president of international economic affairs at the NAM criticized the data used by IHS Global Insight:"First, the report did not measure the physical quantity or volume of manufacturing, but rather measured current dollar output which is impractical due to price changes and exchange rate changes. Real Gross Domestic Product (GDP), and its manufacturing component, Real Manufacturing Value-Added, are the correct ways to measure economic output, because they are adjusted to remove the effect of price and exchange rate changes and measure real output."