"No. 28 -- The Kodak Girl"
Ilargi: Ashvin today takes us into the deeper parts of our brains, where lies and deceit dwell. And their siblings manipulation, misinformation and disinformation. We are easily fooled. Especially into thinking that we're not.
Our global human society, at this unique point in time, is perhaps the most complex series of inter-connected relationships in the known Universe. It has functioned as an intricate web of economic, social, cultural and political structures that have fed off of each other in locally unpredictable, yet generally stable ways. Everything from our computers and cars to our health care products, homes and groceries pass through each thread of this web and are ultimately churned out by the complex machine.
Considering the fact that human beings have only existed for a very tiny fraction of the time since life first evolved on Earth (<0.00005%), the level of complexity we have generated is truly remarkable. Yet, there is really only one thing that makes any of this complexity possible - the ability to communicate and preserve information and emotions through the use of human language (spoken, written, drawn, signed, etc.). For all we know, other living beings, such as apes and dolphins, have similar levels of cognitive ability (information processing, logical reasoning, emotional sensitivity, etc.) as humans. What would prevent them from creating "societies" with our level of complexity is their inability (unwillingness?) to preserve complicated communications between each other and materially build upon them over time.
Imagine, for a moment, that you are born into the world completely deaf and blind. Your mind would still formulate memories and ideas about those memories and other sensations, most likely at an extremely high level of "clarity", but it would be practically impossible for you to communicate any of these thoughts to other human beings. You would have no attachment to an economic, social or political unit, and from your perspective, these arrangements would not even exist.
At the same time, the underlying reality of the Universe would be simple - a reality that is perhaps most clearly reflected in the famous credo articulated by Rene Descartes:
"I think (cogito), therefore I am (ergo sum)."
You can easily doubt your five senses, but you simply cannot doubt the fact that you have doubts. This type of simple existence has not really occurred in any human population (beyond some very minimal extent) during the history of our evolution, since it could not be naturally selected for material survival over generations. Most people who are born with genetic abnormalities that consequently make them "deafblind" are not completely deaf or blind, and only recent developments in medical technology and social care have significantly increased their chances of survival (this trend will not last).
If you can easily doubt your own senses, then it stands to logic that it is even easier to doubt the senses of another, expressed through that person's language, or the language of third, fourth... nth parties removed. Humans evolved not only the ability to learn to communicate distinct ideas and emotions, but to communicate through increasingly more complex forms. As material resources were exploited and economic structures expanded, human language has adapted and grown as well, becoming more specialized and complex. Regardless of the specific form a mainstream language takes (English, Spanish, Hindi, etc.), the primary evolved function of its common usage is to maintain material exploitation and growth within or across regions.
In 2009, it was estimated that there are anywhere from 5,000 to 10,000 "living human languages", which are defined as those "in wide use as a primary form of communication by a specific group of living people". . While many have "died" (no speakers as primary language) or gone "extinct" (no speakers at all) over time, the general trend has been an increase in the number of languages, especially when considering all of the various dialects and also "constructed languages" (those that were consciously created by humans, rather than natural evolution over time - i.e. computer programming languages).
Some may argue that this plethora of languages has allowed humans to communicate increasing amounts of meaningful ideas with each other, but, in my opinion, this argument is simply not valid. In 1936, at the age of 25, the philosopher Alfred Jules Ayer completed a work entitled Language, Truth and Logic, which fleshed out specific criterion for determining whether a statement has any "meaning". . The statement must either be tautological or verifiable to have meaning, with the former referring to statements that are necessarily true by their definition (under any circumstances), such as mathematical or logical identities.
To be "weakly" verifiable (capable of being probabilistically, rather than conclusively, confirmed), an empirical proposition must have practical conditions under which it can be affirmed or denied. While Ayer also asserted that empirical propositions have meaning if they can be theoretically (in principle) tested, I would under-emphasize, if not completely disregard, this assertion in modern society (for reasons discussed later).
Perhaps the most important function of human language in the modern world has been to communicate information about the "real world" (external environment) through empirical propositions, with the intention of influencing the thoughts or behaviors of others by asserting the truth of such propositions. I would wholeheartedly admit that I sometimes use empirical propositions, carefully crafted in my writing and asserted as truth, to describe the nature of reality to my readers.
The adjective "wholeheartedly" is a good example of this craft, as it is intended to influence your thoughts about my attitude, but adds very little substance to the sentence. While I am confident that most of my propositions are practically verifiable through a combination of logical identities and reasonably accurate models/data, making them "meaningful", I will refrain from continuing down this same path for the rest of the article.
Instead, I will try to infuse the underlying analytic (philosophical) proposition of this article with more clarity in meaning through the use of an example. The following is a passage from a CNN article regarding the recent "Coalition" air-strikes on Libya :
Coalition forces made "very effective" progress Monday toward their goal of enforcing a U.N. Security Council resolution intended to protect civilians from attack by forces loyal to Libyan leader Moammar Gadhafi, the head of U.S. forces in Libya told reporters.
My Analysis: The sentence above contains two propositions that are constructed to assert truths about reality, but have very little, if any, "meaning".
(1) Coalition forces, as represented by the head of U.S. forces, told CNN reporters that they made very effective progress on Monday towards their goal of enforcing a U.N. Security Council Resolution.
The truth asserted is that the missile attacks in Libya were designed to enforce a U.N. Security Council Resolution, and the Coalition forces believe they made a lot of progress towards that end. To practically verify the truth or falsity of this assertion, it would have to be possible to examine video/audio recordings or primary witness descriptions of the negotiations that took place in the U.N. meeting before the resolution vote, the complete and original copy of the U.N. Resolution, any detailed records of strategic plans developed for the attacks, video or witness accounts of the results of missile attacks and also to question the head of U.S. forces about the alleged statements to CNN reporters, such as the following:
"I assess that our actions to date are generally achieving the intended objectives," said Gen. Carter Ham, commander of U.S. Africa Command. "We think we have been very effective in degrading his ability to control his regime forces."
While all of these things may be theoretically possible, none of them can practically be done by any individual or entity existing on Earth. Our global society has built-in hurdles that would prevent any person, organization, court of law, etc. from gathering all of this information for assessment. It should be noted that I am not making any value judgments about the CNN article or its reporting practices, even though my commentary may create that impression (an illusion of complex human language).
(2) The U.N. Security Council Resolution was intended to protect Libyan civilians from attack by military forces that take direction from Gadhafi or are, at least, fighting to protect his position in power.
The proposition asserted is that the above is, in fact, true, regardless of what any third party has said. In the original passage, the relevant phrase is structured so that "the head of U.S. forces in Libya told reporters" condition does not apply to it, especially since the only quoted words are "very effective", which relates only to the first proposition. Once again, we would have to conduct extensive interviews with U.N. representatives and, more importantly, relevant executive officials that influence and determine outcomes of U.N. resolution discussions, to assess their intentions with any significant degree of probability.
Of course, almost every proposition in this article and many others fails to meet a basic threshold of practical verifiability, given the enormous amount of evolved complexity that we are dealing with. While these propositions may have no "meaning" in the Ayers sense, that fact does not imply that they have no value to their readers at all.
Propaganda comes in the form of outright lies (consciously misstating the truth), partial-truths (consciously withholding part of truth or context needed), truth revealed for misdirection (consciously done) or asserted truths that simply have no meaning (consciously or subconsciously done). The latter are perhaps the most misleading and subversive, since they constantly inform our complex reality through network media, yet we have no way of affirming or denying their validity.
They do, however, provide us with key insights into the collective mindset of those making the propositions. The frequency and extent at which mainstream corporate media outlets, politicians and academics use these propositions reveal a surprisingly clear thread of our global society's complex web; one in which seemingly diverse and "professional" institutions all maintain and reinforce the same descriptive narratives of reality.
When the majority of citizens in Western nations ask why their dwindling tax dollars are spent on military operations in other countries, ones they perhaps had never heard of before, a somewhat coherent response must be provided. Meaningless propositions are the most effective way to validate this response, since meaningful ones are scarce, contrary to the narrative and usually appeal to logic, rather than emotion. As a result, we end up with propositions and narratives that sound something like this:
An oppressed population in Libya has decided to rebel against their leader, Moammar Gadhafi, and, in response, this leader has decided to massacre innocent civilians and restore his oppressive order. A coalition of dozens of nations, with diverse interests, subsequently convened and decided that Gadhafi's actions are universally unacceptable and clear violations of objective standards of international law. After the Security Council, consisting of five permanent members (U.S., U.K., China, Russia and France), adopted a resolution, the U.S. and European nations launched missile attacks on various "command-and-control" sites that are critical to Gadhafi's oppressive strategy, as a means of enforcing the resolution and its underlying intentions. These attacks have been largely successful at immobilizing military forces loyal to Gadhafi and will, therefore, ultimately save the lives of Libyan civilians and restore peace. In addition, with stability returned to Northeast Africa, the national security of Western nations is also enhanced.
Is this narrative supported by meaningful propositions, either analytically or empirically? No, it is not. It is propaganda, which is almost always either a complete lie or a severe distortion of the truth. Lies work well to preserve material exploitation and growth in cultures that do not value the truth, because they also do not embrace uncertainty or doubt. They trust in the language of others, because, without it, the material world becomes too simple for their acquired tastes.
The current trend towards greatly reduced complexity, however, is not a matter of choice, and it has the power to transform the most compelling narratives, supported by meaningless propositions, into the most obvious mockeries of straight forward logic. These narratives eventually take a stand in direct opposition to the thoughts we are all initially born with:
"I am thirsty."
"I am hungry."
Japan Raises Possibility of Breach in Reactor Vessel
by Hiroko Tabuchi, Keith Bradsher And David Jolly - New York Times
Japanese officials began encouraging people to evacuate a larger swath of territory around the Fukushima Daiichi nuclear plant on Friday as new signs emerged that parts of the crippled facility are so damaged and contaminated that it will be hard to bring the plant under control soon.
The authorities said that they would now assist people who want to leave the area from 12 to 19 miles outside the plant and that they were now encouraging "voluntary evacuation" from the area. Those people had been advised March 15 to remain indoors, while those within a 12-mile radius of the plant had been ordered to evacuate. The United States has recommended that its citizens stay at least 50 miles away.
Speaking to a national audience at a news conference Friday night two weeks after the magnitude 9.0 earthquake and the devastating tsunami that followed it, Prime Minister Naoto Kan dodged a reporter’s question about whether the government was ordering a full evacuation, saying officials were simply following the recommendation of the Japan Nuclear Safety Commission.
"The situation still requires caution," Mr. Kan, grave and tired-looking, told the nation. "Our measures are aimed at preventing the circumstances from getting worse." "The state of the plant is still quite precarious," he said. "We’re working hard to make sure it doesn’t get worse. We have to ensure there’s no further deterioration."
One sign of possible deterioration came at reactor No. 3. Workers who were trying to connect an electrical cable to a pump in a turbine building next to the reactor were injured when they stepped into water that was found to be significantly more radioactive than normal. On Friday officials and experts offered conflicting explanations of what went wrong — but all pointed to greater damage to the reactor’s systems and more contamination there than officials indicated earlier.
Two workers were burned when water poured over the top of their boots and down around their feet and ankles, Linda Gunter, a spokeswoman for the Tokyo Electric Power Company, said. She said workers on an earlier shift had no problem with low boots, but the water rose between shifts and the injured workers were unprepared for the deeper water. A third worker was wearing higher boots and did not suffer the same exposure, she said.
Like the injured workers, many of those risking their lives are subcontractors of Tokyo Electric, paid a small daily wage for hours of work in dangerous conditions. In some cases they are poorly equipped and trained for their task. A Japanese physicist, who asked not to be identified so as not to damage his relations with the establishment, said it was "ridiculous" that the workers had not been wearing full protective gear.
The National Institute of Radiological Sciences said that the radioactivity of the water that the three workers had stepped in was 10,000 times the level normally seen in coolant water at the plant. It said that the amount of radiation the workers are thought to have been exposed to in the water was 2 to 6 sievert. Even 2 sievert is eight times the 250 millisievert annual exposure limit set for workers at Daiichi.
Skin exposures of 2 to 6 sieverts will cause severe burns, according to Dr. David J. Brenner, Director of the Center for Radiological Research at Columbia University. But if those doses reach the whole body and not just the skin "you’re at a very high risk of dying," he said. At a dose of 4 sieverts half of the people exposed will die, Dr. Brenner said. But he said that from the information that had been provided it was not clear whether the dose to the workers reached their skin only, or penetrated their bodies.
Concerns about Reactor No. 3 have surfaced before. Japanese officials said nine days ago that the reactor vessel may have been damaged. Hidehiko Nishiyama, deputy director-general of the Japan Nuclear and Industrial Safety Agency, mentioned damage to the reactor vessel on Friday as a possible explanation of how water in the adjacent containment building had become so alarmingly radioactive. A senior nuclear executive who insisted on anonymity but has broad contacts in Japan said that there was a long vertical crack running down the side of the reactor vessel itself. The crack runs down below the water level in the reactor and has been leaking fluids and gases, he said.
The severity of the radiation burns to the injured workers are consistent with contamination by water that had been in contact with damaged fuel rods, the executive said.
"There is a definite, definite crack in the vessel — it’s up and down and it’s large," he said. "The problem with cracks is they do not get smaller."
But Michael Friedlander, a former nuclear power plant operator in the United States, said that the presence of radioactive cobalt and molybdenum in water samples taken from the basement of the turbine building raised the possibility of a very different leak. Both materials typically occur not because of fission but because of routine corrosion in a reactor and its associated piping over the course of many years of use, he said.
The aggressive use of saltwater to cool the reactor and its storage pool for spent fuel may mean that more of these highly radioactive corrosion materials will be dislodged and contaminate the area in the days to come, posing further hazards to repair workers, Mr. Friedlander added.Whichever explanation is accurate, the contamination of the water in the basement of the turbine building poses a real challenge for efforts to bring crucial cooling pumps and other equipment back online. "They can’t even figure out how to get that out, it’s so hot" in terms of radioactivity, the senior nuclear executive said.
One other major worry about reactor No. 3 is the mox fuel that reactor uses. It is an especially dangerous blend of reprocessed fuel and can be more radioactive when melted than pure uranium fuel as used in other reactors, experts say. The news Friday and the discovery this week of a radioactive isotope in the water supplies of Tokyo and neighboring prefectures has punctured the mood of optimism with which the week began, leaving a sense that the battle to fix the damaged plant will be a long one.
No one is being ordered to evacuate the second zone around the plant, officials said, and people may choose to remain, but many have already left of their own accord, tiring of the anxiety and tedium of remaining cooped up as the nuclear crisis simmers just a few miles away. Many are said to be virtual prisoners with no access to shopping and immobilized by a lack of gasoline.
"What we’ve been finding is that in that area life has become quite difficult," Noriyuki Shikata, deputy cabinet secretary for Mr. Kan said in a telephone interview. "People don’t want to go into the zone to make deliveries." Mr. Shikata said the question of where those who chose to leave would go was still under consideration. The effort to move people comes at a time when there are already hundreds of thousands of Japanese displaced by the quake and tsunami.
Officials continue to be dogged by suspicions that they are not telling the entire story about the radiation leaks. Shunichi Tanaka, former acting chairman of the country’s Atomic Energy Commission, told The Japan Times in an interview published Friday that the government was being irresponsible in forcing people from their homes around the damaged plant without explaining the risks they were facing. "The government has not yet said in concrete terms why evacuation is necessary to the people who have evacuated," he said.
The National Police Agency said Friday that the official death toll from the March 11 earthquake and tsunami had passed 10,000, with nearly 17,500 others listed as missing.
There was some good news. Levels of the radioactive isotope found in Tokyo’s water supply fell Friday for a second day, officials said, dropping to 51 becquerels per liter, well below the country’s stringent maximum for infants.
On Wednesday Tokyo area stores were cleaned out of bottled water after the authorities said the isotope, iodine 131, had been detected in the city’s water supply and cautioned those in the affected areas not to give infants tap water. On Thursday cities in two of Tokyo’s neighboring prefectures, Chiba and Saitama, also reported disturbing levels of radiation in their water.
Meanwhile, the senior nuclear executive who said the reactor vessel was definitely cracked also said Friday evening that the reason the United States Navy had moved nuclear-powered vessels like the Ronald Reagan aircraft carrier far from the plant was that officers had become concerned that radiation could enter the ships’ duct systems. The worry is not that the radiation would pose a threat to the vessels’ crews but that even trace contamination of the ducts could create problems for years in the extremely sensitive equipment that is designed to detect any hint of a radioactive leak from onboard systems, said the executive, who insisted on anonymity to protect business connections.
The Navy initially sent the Ronald Reagan toward northeast Japan to help with earthquake and tsunami relief a week and a half ago but quickly pulled it back after Navy helicopter crews had low-level radiation exposure while flying near the power plant. The Navy has been sending vessels since then to the west coast of Japan, upwind of the reactors, and providing assistance from there, although this means considerably longer flight times to affected areas.
Japanese treated for radiation in China
wo Japanese travellers have been hospitalised in China with "severe" radiation levels after they arrived on a commercial airliner from Tokyo, China's safety watchdog said. The General Administration of Quality Supervision, Inspection and Quarantine said radiation levels that "seriously exceeded limits" were detected on the two when they arrived in the eastern city of Wuxi on Wednesday. But China's customs body said they did not present a risk to others.
Until now, no-one in Japan except workers at the stricken plant has been found with seriously elevated radiation levels, and Japan's foreign ministry noted that as of March 18 the International Civil Aviation Association had declared that screening of airline passengers from Japan was not necessary. The first case of contaminated Japanese travelling abroad came as injuries to workers slowed the battle to control the Fukushima complex, 240 kilometres north of Tokyo.
Some 700 engineers have been working around the clock to stabilise the six-reactor plant since the multiple disaster on March 11 which left more than 27,000 people dead or missing. But they had to pull out of some parts of the complex when three workers replacing a cable at one reactor were exposed to high contamination by standing in radioactive water yesterday, officials said. Two were taken to hospital with possible radiation burns after the water seeped over their boots. "We should try to avoid delays as much as possible, but we also need to ensure that the people working there are safe," said Japanese nuclear agency official Hidehiko Nishiyama.
Safety fears at the plant and beyond - radiation particles have been found as far away as Iceland - are compounding Japan's worst crisis since World War II. As well as causing the most serious nuclear accident since Chernobyl in 1986, the magnitude-9.0 quake and ensuing wall of water that tore in from the Pacific killed over 10,000 people and left 17,541 more missing, according to latest police figures.
Japan's leader calls situation 'grave' at nuclear plant where dangerous breach suspected
by Jay Alabaster - Associated Press
A suspected breach in the core at one reactor at a stricken Fukushima nuclear plant could mean more serious radioactive contamination, Japanese officials revealed Friday - a situation the prime minister called "very grave and serious."
A somber Prime Minister Naoto Kan sounded a pessimistic note at a briefing hours after nuclear safety officials said they suspected a breach at the Fukushima Dai-ichi plant that would be a major setback in the urgent mission to stop the facility from leaking radiation. "The situation today at the Fukushima Dai-ichi power plant is still very grave and serious. We must remain vigilant," Kan said. "We are not in a position where we can be optimistic. We must treat every development with the utmost care."
The uncertain situation halted work at the nuclear complex, where dozens had been trying feverishly to stop the overheated plant from leaking dangerous radiation. The plant has leaked some low levels of radiation, but a breach could mean a much larger release of contaminants. Kan apologized to farmers and business owners for the toll the radiation has had on their livelihoods: Several countries have halted some food imports from areas near the plant after milk and produce were found to contain elevated levels of radiation. The prime minister also thanked utility workers, firefighters and military personnel for "risking their lives" to cool the overheated facility.
The alarm Friday comes on a day marking two weeks since the magnitude-9 quake triggered a tsunami that enveloped cities along the northeast coast and knocked out the Fukushima reactor's cooling system. Police said the official death toll jumped past 10,000 on Friday. With the cleanup and recovery operations continuing and more than 17,400 listed as missing, the final number of dead was expected to surpass 18,000.
The nuclear crisis has compounded the challenges faced by a nation already saddled with a humanitarian disaster. Much of the frigid northeast remains a scene of despair and devastation, with Japan struggling to feed and house hundreds of thousands of homeless survivors, clear away debris and bury the dead.
New Problems at Japanese Plant Subdue Optimism
by Keith Bradsher - New York Times
The Japanese electricians who bravely strung wires this week to all six reactor buildings at a stricken nuclear power plant succeeded despite waves of heat and blasts of radioactive steam. The restoration of electricity at the plant, the Fukushima Daiichi Nuclear Power Station, stirred hopes that the crisis was ebbing, but nuclear engineers say some of the most difficult and dangerous tasks are still ahead — and time is not necessarily on the side of the repair teams.
The tasks include manually draining hundreds of gallons of radioactive water and venting radioactive gas from the pumps and piping of the emergency cooling systems, which are located diagonally underneath the overheated reactor vessels. The health warning that infants should not drink tap water — even in Tokyo, far from the stricken plant — raised alarms about extensive contamination. "We’ve got at least 10 days to two weeks of potential drama before you can declare the accident over," said Michael Friedlander, who worked as a nuclear plant operator for 13 years.
Western nuclear engineers have become increasingly concerned about a separate problem that may be putting pressure on the Japanese technicians to work faster: salt buildup inside the reactors, which could cause them to heat up more and, in the worst case, cause the uranium to melt, releasing a range of radioactive material.
Richard T. Lahey Jr., who was General Electric’s chief of safety research for boiling-water reactors when the company installed them at the Fukushima Daiichi plant, said that as seawater was pumped into the reactors and boiled away, it left more and more salt behind. He estimates that 57,000 pounds of salt have accumulated in Reactor No. 1 and 99,000 pounds apiece in Reactors No. 2 and 3, which are larger.
The big question is how much of that salt is still mixed with water and how much now forms a crust on the reactors’ uranium fuel rods. Chemical crusts on uranium fuel rods have been a problem for years at nuclear plants. Crusts insulate the rods from the water and allow them to heat up. If the crusts are thick enough, they can block water from circulating between the fuel rods. As the rods heat up, their zirconium cladding can ignite, which may cause the uranium inside to melt and release radioactive material.
Some of the salt might be settling to the bottom of the reactor vessel rather than sticking to the fuel rods. But just as a heating element repeatedly used to warm tea in a mug tends to become encrusted in cities where the tap water is rich with minerals, boiling seawater is likely to leave salt mainly on the fuel rods. The Japanese have reported that some of the seawater used for cooling has returned to the ocean, suggesting that some of the salt may have flowed out again rather than remaining in the reactors. But clearly a significant amount remains.
A Japanese nuclear safety regulator said on Wednesday that plans were under way to fix a piece of equipment that would allow freshwater instead of seawater to be pumped in. He said that an informal international group of experts on boiling-water reactors was increasingly worried about salt accumulation and was inclined to recommend that the Japanese try to flood each reactor vessel’s containment building with cold water in an effort to prevent the uranium from melting down. That approach might make it harder to release steam from the reactors as part of the "feed-and-bleed" process that was being used to cool them, but that was a risk worth taking, he said.
Public alarm about the crisis increased on Wednesday after officials announced that levels of radioactive iodine had been detected in Tokyo’s tap water. Recent rains might have washed radioactive particles into the water, as the Japanese government suggested. But prevailing breezes for the past two weeks should have been pushing the radiation mostly out to sea.
And until Wednesday, some experts had predicted that radioactive iodine would not be much of a problem, because the fission necessary to produce iodine — which breaks down quickly, with a half-life of just eight days — stopped within minutes of the earthquake on March 11. The fear is that more radiation is being released than has been understood.
Preventing the reactors and storage pools from overheating through radioactive decay would go a long way toward limiting radioactive contamination. But that would require pumping a lot of cold freshwater through them, which is not easily done. The emergency cooling system pump and motor for a boiling-water reactor are roughly the size and height of a compact hatchback car standing on its back bumper. The powerful system has the capacity to propel thousands of gallons of water a minute throughout a reactor pressure vessel and storage pool. But that very power can also be the system’s Achilles’ heel.
The pump and piping are designed to be kept full of water. But they tend to leak and develop alternating pockets of air and water, Mr. Friedlander said. If the pump is turned on without venting the air and draining the water, the water from the pump would hit the alternating pockets with enough force to blow holes in the piping. Venting the air and draining the water requires a technician to reach a dozen valves, sometimes using a ladder. The water is removed through a hose to the nearest drain, usually in the floor, that leads to machinery designed to remove radiation from the water.
The process takes a full 12 hours in a reactor that is operating normally, Mr. Friedlander said. But even then, the water in the pipes tends to become radioactively contaminated because the valves that separate it from the reactor are not entirely tight. It is likely to be an even bigger problem when the water inside the reactor is much more radioactive than usual and is under extremely high pressure, as it has been in all three reactors at the Fukushima Daiichi plant.
Japanese government and power company officials expressed optimism on Wednesday morning that the crisis was close to being brought under control, only to encounter two reminders in the afternoon of the unpredictable difficulties that lie ahead. Fukushima Daiichi’s Reactor No. 3 began belching black smoke for an hour late in the afternoon, leading its operator, the Tokyo Electric Power Company, to evacuate workers. No. 3 is considered one of the most dangerous of the reactors because of its fuel — mixed oxides, or mox, which contain a mixture of uranium and plutonium and can produce a more dangerous radioactive plume if scattered by fire or explosions.
The cooling system at Reactor No. 5, which was shut down at the time of the quake and has shown few problems, also abruptly stopped working Wednesday afternoon, said Hiro Hasegawa, a spokesman for Tokyo Electric. "When we switched from the temporary pump, it automatically switched off," Mr. Hasegawa said. "We’ll try again with a new pump in the morning."
Troubled Plant Had High Rate of Problems, Records Show
by Andrew Morse - Wall Street Journal
The crippled Japanese power plant at the heart of the world's worst nuclear crisis in a quarter of a century has a history of mechanical and operational flaws, including a recent incident in which workers used the wrong plans to work on a reactor.
In August 2010, employees at Tokyo Electric Power Co.'s Fukushima Daiichi power plant, armed with plans for work on the complex's No. 6 reactor, instead began conducting work on the facility's No. 5 unit, according to regulatory records. They then altered work plans on their own, leading to a mistake that rendered the unit's cooling system inoperable. Regulators looking into the issue discovered a cable for controlling the cooling system had mistakenly been removed, an error that wasn't discovered for more than two weeks.
The mechanical and operational problems underscore the sometimes trouble-prone nature of Fukushima Daiichi, the first nuclear-power station of Tokyo Electric, or Tepco. The power plant, whose first reactor became operational in 1971, had the highest rate of accidents of any big Japanese nuclear power plant for the five years from 2005 to 2009, according to data from the Japan Nuclear Energy Safety Organization, a group that gets government funds to monitor safety.
Fukushima Daiichi has attracted global attention since March 11, when an earthquake and tsunami crippled its backup systems. With cooling systems down, nuclear material stored at the plant overheated, causing a series of explosions and elevated radiation levels as far away as Tokyo. A Tepco spokesman said the company takes all required safety measures and has built-in backup systems to handle contingencies. Until March 11, the plant had never suffered a serious accident.
A spokesman for the Nuclear and Industrial Safety Agency, the regulatory unit of the Ministry of Economy, Trade and Industry, said the agency ordered Tepco to put in place measures to prevent the recurrence of the problems and report to the agency on those measures. In another case, in 2009, drain pipes were misconnected at five different places at Fukushima Daiichi, allowing radioactive tritium to mix with water from storm drains, according to records. It is unclear whether the tritium was released to the broader environment.
Experts say it isn't unusual for nuclear-power plants to experience more problems in their first 10 years of operation because the facilities are complex. Other Japanese facilities, though generally having a lower rate of accidents than Fuku-shima Daiichi, also occasionally suffer similar types of incidents. To be sure, not all of the incidents were serious. On Nov. 26, 2008, Tepco reported that water oozed from the casing of two valves in the hydraulic system used in control rods. On April 3, 2009, irregularities were found with the control rods at the facility's No. 3 reactor. Regulators said the incidents carried a low level of risk.
In the incident involving the cooling-system cable, Tepco reported to regulators its workers printed out plans for the wrong reactor before starting work. They then began altering those plans on their own, causing unnecessary and incorrect work to be done.
U.S. Nuclear Waste Increasing With No Permanent Storage Available
by Jonathan Fahey and Ray Henry - AP
The nuclear crisis in Japan has laid bare an ever-growing problem for the United States – the enormous amounts of still-hot radioactive waste accumulating at commercial nuclear reactors in more than 30 states. The U.S. has 71,862 tons of the waste, according to state-by-state numbers obtained by The Associated Press. But the nation has no place to permanently store the material, which stays dangerous for tens of thousands of years.
Plans to store nuclear waste at Nevada's Yucca Mountain have been abandoned, but even if a facility had been built there, America already has more waste than it could have handled. Three-quarters of the waste sits in water-filled cooling pools like those at the Fukushima Dai-ichi nuclear complex in Japan, outside the thick concrete-and-steel barriers meant to guard against a radioactive release from a nuclear reactor.
Spent fuel at Dai-ichi overheated, possibly melting fuel-rod casings and spewing radiation into the air, after Japan's tsunami knocked out power to cooling systems at the plant. The rest of the spent fuel from commercial U.S. reactors has been put into dry cask storage, but regulators only envision those as a solution for about a century and the waste would eventually have to be deposited into a Yucca-like facility.
The U.S. nuclear industry says the waste is being stored safely at power-plant sites, though it has long pushed for a long-term storage facility. Meanwhile, the industry's collective pile of waste is growing by about 2,200 tons a year; experts say some of the pools in the United States contain four times the amount of spent fuel that they were designed to handle. The AP analyzed a state-by-state summary of spent fuel data based on information that nuclear power plants voluntarily report every year to the Nuclear Energy Institute, an industry and lobbying group. The NEI would not make available the amount of spent fuel at individual power plants.
While the U.S. Department of Energy previously reported figures on overall spent fuel storage, it no longer has updated information available. A spokesman for the U.S. Nuclear Regulatory Commission, which oversees nuclear power plant safety, said the capacities of fuel pools are public record, but exact inventories of spent fuel are tracked in a government database kept confidential for security reasons.
The U.S. has 104 operating nuclear reactors, situated on 65 sites in 31 states. There are another 15 permanently shut reactors that also house spent fuel. Four states have spent fuel even though they don't have operating commercial plants. Reactors in Colorado, Oregon and Maine are permanently shut; spent fuel from all three is stored in dry casks. Idaho never had a commercial reactor, but waste from the 1979 Three Mile Island accident in Pennsylvania is being stored at a federal facility there.
Illinois has 9,301 tons of spent nuclear fuel at its power plants, the most of any state in the country, according to industry figures. It is followed by Pennsylvania with 6,446 tons; 4,290 in South Carolina and roughly 3,780 tons each for New York and North Carolina.
Spent nuclear fuel is about 95 percent uranium. About 1 percent are other heavy elements such as curium, americium and plutonium-239, best known as fuel for nuclear weapons. Each has an extremely long half-life – some take hundreds of thousands of years to lose all of their radioactive potency. The rest, about 4 percent, is a cocktail of byproducts of fission that break down over much shorter time periods, such as cesium-137 and strontium-90, which break down completely in about 300 years.
How dangerous these elements are depends on how easily can find their way into the body. Plutonium and uranium are heavy, and don't spread through the air well, but there is a concern that plutonium could leach into water supplies over thousands of years. Cesium-137 is easily transported by air. It is cesium-137 that can still be detected in a New Jersey-sized patch of land around the Chernobyl reactor that exploded in the Ukraine in 1986.
Typically, waste must sit in pools at least five years before being moved to a cask or permanent storage, but much of the material in the pools of U.S. plants has been stored there far longer than that. Safety advocates have long urged the NRC to force utility operators to reduce the amount of spent fuel in their pools. The more tightly packed they are, the more quickly they can overheat and spew radiation into the environment in case of an accident, a natural disaster or a terrorist attack.
Industry leaders say new technology has made fuel pools safer, and regulators have taken some steps since the 9/11 terror attacks to reduce fuel pool risks. Kevin Crowley, who directs the nuclear and radiation studies board at the National Academy of Sciences, says lessons will be learned from the crisis in Japan. And NRC Chairman Gregory Jaczko says his agency will review how spent fuel is stored in the U.S.
A 2004 report by the academy suggested that fresh spent fuel, which is radioactively hotter, be spread among older, cooler assemblies in the spent fuel pool. "You're buying yourself time, basically," says Crowley. "The cooler ones can act as a thermal buffer." First Energy, which runs two nuclear power stations in Ohio and one in Pennsylvania, was able to reconfigure the spent fuel rods in its pools to make more room. Still, the company is now running out of space, says spokesman Todd Schneider. Ohio has 1,136 tons of spent fuel in pools and 37 tons in dry casks.
The casks in the U.S. are kept outdoors, generally on concrete pads, but industry officials insist they are safe. Unlike the pools, the casks don't need electricity; they are cooled by air circulation. One cask model, selling for $1.5 million, places spent fuel inside a stainless steel canister, which is placed inside an "overpack" – an outside shell composed of a layer of carbon steel, 27 inches of concrete and another layer of carbon steel. When in place, the system stands 20 feet tall and weighs 150,000 pounds, said Joy Russell, a spokeswoman for manufacturer Holtec International of Florida. Russell said engineers have designed the system to withstand a crash from an F-16 fighter jet and survive the resulting jet fuel fire.
Plant operators in some states have moved aggressively to dry cask storage. Virginia has 1,533 tons of nuclear waste in dry storage and 1,105 tons in spent fuel pools. Maryland has 844 tons in dry storage and 588 tons in spent fuel pools. Utilities in Texas, though, have not. There are 2,178 tons kept in spent fuel pools at reactor sites there, and zero in dry casks. In New York, 3,345 tons are in spent fuel pools while only 454 tons are in dry storage.
No cask is totally invulnerable, but the academy report found that radioactive releases from casks would be relatively low. "If you attacked a fuel cask and managed to put a hole in it, anything that came out, the consequences would be very local," Crowley said. Casks can be licensed for 20 years, with renewals, said Carrie Phillips, a spokeswoman for the Atlanta-based Southern Co., which has a dozen such casks at its two-reactor Joseph M. Farley plant near Columbia, Ala. She said officials have "every expectation" the casks could last "in excess of 100 years by design."
But not the needed tens of thousands of years. For long-term storage, the government had looked to Yucca Mountain. It was designed to hold 77,160 tons – 69,444 tons designated for commercial waste and 7,716 for military waste. That means the current inventory already exceeds Yucca's original planned capacity. A 1982 law gave the federal government responsibility for the long-term storage of nuclear waste and promised to start accepting waste in 1998. After 20 years of study, Congress passed a law in 2002 to build a nuclear waste repository deep in Yucca Mountain.
The federal government spent $9 billion developing the project, but the Obama administration has cut funding and recalled the license application to build it. Nevadans have fiercely opposed Yucca Mountain, though a collection of state governments and others are taking legal action to reverse the decision. Despite his Yucca Mountain decision, President Barack Obama wants to expand nuclear power. He created a commission last year to come up with a long-term nuclear waste plan. Initial findings are expected this summer, with a final plan expected in January.
"They are 13 years late," says Terry Pickens, Director of Nuclear Policy at Xcel Energy, the Minneapolis-based utility that operates three reactors in Minnesota. Xcel is building steel-and-concrete cask containers to hold old waste on site, and suing the government periodically to pay for them. "We would like them to get done with what they said they would get done."
Some countries – such as France, Japan, Russia and the United Kingdom – reprocess their spent fuel into new nuclear fuel to help reduce the amount of waste. The remaining waste is solidified into a glass. It needs to be stored in a long-term waste repository, but reprocessing reduces the volume of waste by three-quarters. Because reprocessing isolates plutonium, which can be used to make a nuclear weapon, Presidents Gerald Ford and Jimmy Carter put a stop to it in the U.S. The ban was later overturned, but the country still does not reprocess.
France produces 1,300 tons of nuclear waste per year, and reprocesses 940 tons. Still, fuel is only reprocessed once and then it, too, needs to be stored. France is expecting that engineers will eventually succeed in building a new type of nuclear reactor called a fast reactor that will use the waste it can't reprocess as fuel. "They've kicked the can down the road," says Frank von Hippel, a director of the Program on Science and Global Security at Princeton University.
Other countries, such as Germany, store spent fuel in casks. Finland is building a repository it says will store waste safely for 100,000 years. Even though there is no long-term storage in the U.S., utility customers and taxpayers have been paying for it – twice. Customers have paid $24 billion into a fund Congress established in 1982 to pay for such storage. The charge – a penny for every 10 kilowatt-hours – would typically add up to about $11 a year for a household that received all its electricity from nuclear plants.
Users pay as taxpayers, too – for dry storage. Utilities that have run out of storage space in pools successfully sued the federal government for breach of contract, because it failed to keep to the 1998 deadline to establish long-term storage. By law, the money for dry casks cannot come from the nuclear waste fund, and must come from the federal budget.
Global auto output may fall 30% due to quake
by Deepa Seetharaman - Reuters
A shortage of auto parts stemming from Japan's earthquake may cut global vehicle output by 30 percent within six weeks in a worst-case scenario, research firm IHS Automotive said on Thursday.
This translates to a drop of as many as 100,000 vehicles per day, IHS analyst Michael Robinet said, adding there could be more North American plant shutdowns in the meantime. "We're already feeling the impact in Japan," Robinet said in an interview. "North America, Europe, China: those three areas for sure will feel some impact."
Last week, General Motors Co idled its pick-up truck plant in Shreveport, Louisiana. Toyota Motor Co (7203.T) is likely to idle its own pickup truck plant south of San Antonio. The delivery of parts from transmissions to electronics to semiconductors is being hampered by the Japanese earthquake and subsequent infrastructure problems. About 13 percent of the global auto industry output has been lost now because of parts shortages, Robinet said.
The slowdowns could grow even more severe by the third week of April. To cope, automakers will likely funnel parts to their higher margin vehicles or new product launches. The pick-ups built at the GM and Toyota plants were low-sellers. Robinet stressed that situation remained difficult to predict. "I've never seen a situation so fluid," he said.
Albert Edwards: U.S. Housing Market Optimists Are "Nuts"
by Gregory White - Business Insider
Those still bullish on the U.S. housing market after this week's new home sales report are "nuts," according to Societe Generale's Albert Edwards. Edwards notes that, yes, those involved in the housing market are traditionally positive, but questions whether or not current participants have lost their minds.
From Albert Edwards:I don't normally write about monthly data releases but I want to make an exception this week regarding February's shock 16.9% mom decline in US new home sales. With sales languishing at a record low, I had to laugh when I read the Reuters story. The phrase that made me chuckle was "despite the surprise plunge in sales, economists do not believe a new downturn is underway" Are they nuts?! We are plunging to new all time lows for many housing indicators (see chart below) and we are not in a new downturn? I know this industry has a consistent bias towards optimism about which one gets rather blasé, but this really does deserve some sort of special award. I'm going to think of a name.
Edwards then goes on to admit why he's not a glass half-full kind of guy. A gentleman, whose name I didn't quite catch, decided it would be a jolly good idea to smash a beer glass in my face. Despite no lasting damage to my handsome visage, I did emerge from the evening minus a front tooth. Maybe that's why I get suspicious whenever I see a glass half-full.
Looking at this chart on the U.S. housing market, there isn't much to be optimistic about.
Fannie Report Warned of Foreclosure Problems in 2006
by Carrick Mollenkamp and Nick Timiraos - Wall Street Journal
Fannie Mae was warned in a 2006 internal report of abuses in the way lenders and their law firms handled foreclosures, long before regulators launched investigations into the mortgage industry's practices.
The report said foreclosure attorneys in Florida had "routinely made" false statements in court in an effort to more quickly process foreclosures and raised questions about whether some mortgage servicers or another entity had the legal standing to foreclose. The report found no evidence that borrowers were improperly placed in foreclosure. "Fannie Mae took the necessary steps to address the specific issues identified by the 2006 report and regularly evaluates and enhances oversight of its retained attorney network," said a Fannie Mae spokeswoman.
The government-controlled agency is the largest U.S. mortgage investor by amount of mortgages guaranteed. Fannie and Freddie Mac buy loans from banks and sell them to investors, providing guarantees to cover losses when loans default. They largely are reliant on banks and other firms to service those loans or to handle day-to-day management, including foreclosure. The firms were taken over by the government in 2008 as loan losses soared and have cost taxpayers $134 billion.
In recent months, federal and state officials have initiated probes into whether banks and foreclosure law firms improperly seized homes by using fraudulent or incomplete paperwork. Some U.S. banks temporarily froze foreclosures to review their processes and now face the prospect of a multibillion-dollar settlement with federal and state officials. Fannie Mae severed ties with two Florida law firms in the past six months due to concerns about how the firms pursued foreclosures in Florida courts.
State and federal officials are seeking to establish new rules for the industry. The report could add ammunition to those calling for stronger regulation of mortgage servicers. Elizabeth Warren, the White House adviser in charge of establishing the new Bureau of Consumer Financial Protection, said in congressional testimony last week that with proper oversight, "the problems in mortgage servicing would have been exposed early and fixed while they were still small." Ms. Warren didn't name Fannie Mae and referred to the industry in general.
Fannie Mae hired law firm Baker & Hostetler LLP to investigate potential mortgage-servicing abuses after a Fannie shareholder raised concerns to Fannie five years ago about the industry's practices. A person familiar with the report provided an account of its findings. A spokeswoman for Baker & Hostetler declined to comment. Florida has emerged as a hot spot for foreclosure problems. The state's top prosecutor is investigating several law firms for improper foreclosure work. Fannie Mae officials "believe foreclosure counsel are sacrificing accuracy for speed," said the report. The report didn't name any firms.
Among other efforts, Fannie revamped its attorney network in October 2008 to facilitate more effective management of "fees, costs, quality, and reporting to Fannie Mae," said the spokeswoman. While Fannie requires its loan servicers to monitor the conduct of foreclosure proceedings, Fannie said its employees make periodic visits to firms and conduct training. Last year, Fannie retained an auditor and third-party law firms to assist monitoring its network.
At the time of the report, foreclosures nationally stood at relatively low levels. The report didn't identify the practice of "robo-signing" that initially sparked the foreclosure-document inquiries last fall. Robo-signing occurs when affidavits are signed without someone fully reviewing underlying documentation. But the report raised other red flags that have roiled the industry, including improper legal filings by foreclosure attorneys and questionable practices surrounding the Mortgage Electronic Registration Systems, an electronic-lien registry set up by the mortgage industry to reduce paperwork and lower costs.
Fannie's legal department suspected that in order to reduce time-consuming efforts to track down documents, "foreclosure attorneys may be taking short cuts by misrepresenting that [original loan documents] are lost," the report said. Fannie hadn't authorized such conduct. The Fannie spokeswoman said the company began requiring Florida law firms to notify Fannie about every filing of a "lost-note" affidavit in 2006.
Fannie officials also told investigators that the company had opted against performing regular reviews of its foreclosure attorneys because the company's lawyers felt the firm would be better insulated from responsibility for misconduct. The report said the approach was under review at the time. Last fall, Fannie Mae severed ties with the Law Offices of David J. Stern PA, one of the largest foreclosure attorneys in Florida, after internal reviews raised questions about document-handling practices. This month, the firm said it would cease "the practice of law with respect to all pending foreclosure matters."
In February, Fannie stopped using law firm Ben-Ezra & Katz PA because of similar document-handling concerns. A spokesman for Ben-Ezra & Katz said that when the firm "spotted technical deficiencies through our own internal self-audit, we addressed them proactively and forthrightly with our clients, with the court and with Fannie Mae, and we began to remediate the issues case by case and at our own expense."
Why isn't a further fall in US house prices troubling Wall Street?
by Richard Blackden - Telegraph
America's housing market is again falling but investors appear untroubled. Firstly, a health warning to the more than 500,000 people who live in Portland, Oregon. A bus full of estate agents will pull into town tomorrow, and they’ll all want to tell you about the benefits of owning a home.
Journalism has many purposes, but safeguarding someone’s Saturday morning from an unwanted conversation with a realtor, as they are known here, should always be one of them. Conscience now clear, it’s worth asking why The National Association of Realtors (NAR) has embarked on the catchily titled 'Home Ownership Matters Tour.’ This week’s housing data is a good place to start.
Monday’s newsflash was that average prices are now at their lowest since 2002. Tuesday’s news was also gloomy. If homeowners hadn’t ripped out their broadband, on Wednesday they’ll have learnt that the volume of new homes being sold is at a record low. The American housing market isn’t used to this. It’s been the engine of almost every economic recovery since World War Two.
Since the economy started growing again in 2009, it’s been a flat tyre, at best. Two statistics help make the point - one economic and the other largely psychological. At its peak in 2006, residential investment amounted to 6.2pc of gross domestic product. It’s now at 2.3pc. After reaching its own peak of 69.4pc in 2004, the level of home ownership has dropped to a current level of 66.6pc, according to the Census Bureau. This is not news to most Americans.
They’ve also known that the market’s mini rally, helped by a tax credit from the government, expired with the incentive last summer. However, what’s become clearer in 2011, and was underlined this week, is that rather than stagnating, prices are hunting for a new bottom. It’s also the conclusion of a poll this week of experts questioned by Professor Robert Schiller, the man behind America’s leading housing index. Almost half now expect prices to extend their 30pc fall to beyond the low reached in the spring of 2009. Just 15pc had that forecast in December.
So, with fresh smoke coming from the usual recovery engine, how has the stock market reacted? The Dow Jones Industrial Average and the S&P 500 are on course to end the week up.
It’s true that the Federal Reserve has lit a fire under equities since resuming quantitative easing in November. And markets are also rebounding as fears of a Chernobyl-like catastrophe in Japan recede. But it’s worth noting that just 5pc of the profits of all the companies on the S&P500 are exposed to Japan, according to Bank of America Merrill Lynch.
Instead, investors seem to be making a bold and historically unusual bet: that the recovery can accelerate even as the housing market turns south again. There are, of course, reasons why this particular flat tyre is less likely to send the economy skidding. With the biggest banks having raised more than $300bn (£186bn) in new equity in the last two years, housing losses aren’t the systemic risk to the financial system they were in 2008.
Prices are also being pulled down by distressed sales - those in which banks have repossessed a home. The NAR estimates they accounted for almost 40pc of all sales last month. As painful as it is for those involved, such sales have so far been largely concentrated in states - such as California, Arizona and Nevada - which saw the steepest gains. Economists reckon many buyers and sellers with better properties are holding back until it’s done. Given the excess supply of homes created during the last bubble, it would be more alarming if the market was now beginning to blow a new one.
Even if investors are proved right about the housing market - and it’s too early to tell - the absence of a recovery in the industry is evident. Of the 8.75m jobs lost in the recession, roughly 2.25m came from the construction industry. Given property remains the most important financial asset for Americans, it’s bound to be a drag on spending. What we don’t yet know is whether a greater scepticism about home ownership, which all administrations have backed over the last twenty years, will be a lasting legacy of the crisis. Those estate agents stepping off in Oregon should soon have a clearer idea.
Eyes Open, WaMu Collapsed Just the Same
by Floyd Norris - New York Times
In the crazy days of 2005 and 2006, when home prices were soaring and mortgage underwriting standards were crumbling, it took foresight and judgment to see that it was all a bubble. As it happens, there was a bank chief executive whose internal forecasts now seem prescient. "I have never seen such a high-risk housing market," he wrote to the bank’s chief risk officer in 2005. A year later he forecast the housing market would be "weak for quite some time as we unwind the speculative bubble."
At that same bank, executives checking for fraudulent mortgage applications found that at one bank office 42 percent of loans reviewed showed signs of fraud, "virtually all of it attributable to some sort of employee malfeasance or failure to execute company policy." A report recommended "firm action" against the employees involved. In addition to such internal foresight and vigilance, that bank had regulators who spotted problems with procedures and policies. "The regulators on the ground understood the issues and raised them repeatedly," recalled a retired bank official this week.
This is not, however, a column about a bank that got things right. It is about Washington Mutual, which in 2008 became the largest bank failure in American history. What went wrong? The chief executive, Kerry K. Killinger, talked about a bubble but was also convinced that Wall Street would reward the bank for taking on more risk. He kept on doing so, amassing what proved to be an almost unbelievably bad book of mortgage loans. Nothing was done about the office where fraud seemed rampant.
The regulators "on the ground" saw problems, as James G. Vanasek, the bank’s former chief risk officer, told me, but the ones in Washington saw their job as protecting a "client" and took no effective action. The bank promised change, but did not deliver. It installed programs to spot fraud, and then failed to use them. The board told management to fix problems but never followed up.
WaMu, as the bank was known, is back in the news because the Federal Deposit Insurance Corporation sued Mr. Killinger and two other former top officials of the bank last week, seeking to "hold these three highly paid senior executives, who were chiefly responsible for WaMu’s higher-risk home-lending program, accountable for the resulting losses." Mr. Killinger responded by going on the attack. His lawyers called the suit "baseless and unworthy of the government." Mr. Killinger, they said, deserved praise for his excellent management.
I’ll let the courts sort out whether Mr. Killinger will become the rare banker to be penalized for making disastrously bad loans. But I am fascinated by how his bank came to make those loans despite his foresight.
Answers are available, or at least suggested, in the mass of documents collected and released by the Senate Permanent Subcommittee on Investigations, which held hearings on WaMu last year. Mr. Killinger wanted both the loan book and profits to rise rapidly, and saw risky loans as a means to those ends.
Moreover, this was a market in which a bank that did not reduce lending standards would lose a lot of business. A decision to publicly decry the spread of high-risk lending and walk away from it — something Mr. Vanasek proposed before he retired at the end of 2005 — might have saved the bank in the long run. In the short run, it would have devastated profits.
Ronald J. Cathcart, who became the chief risk officer in 2006, told a Senate hearing he pushed for more controls but ran into resistance. The bank’s directors, he said, were interested in hearing about problems that regulators identified over and over again. "But," he added, "there was little consequence to these problems not being fixed." There were consequences for him. He was fired in 2008 after he took his concerns about weak controls and rising losses to both the board and to regulators from the Office of Thrift Supervision.
By early 2007, the subprime mortgage market was collapsing, and the bank was trying to rush out securitizations before that market vanished. The Federal Deposit Insurance Corporation, a secondary regulator, was pushing to impose tighter regulation, but the primary regulator, the Office of Thrift Supervision, was successfully resisting allowing the F.D.I.C. to even look at the bank’s loan files.
In June of that year, amid evidence that home prices were falling in some of the areas of California and Florida where WaMu had its greatest concentration of loans, Mr. Killinger was crowing that he had been right. "For the past two years, we have been predicting the bursting of the housing bubble," he wrote in a memo to the company’s directors. "That scenario has now turned into a reality."
That was, however, no reason to turn his back on the high-risk loans. Instead, he wanted to keep more such loans for the bank, rather than sell them in securitizations. He viewed WaMu as overcapitalized by $7 billion and said reducing its capital — and attractiveness to a potential acquirer — was a "must do."
In Washington, concern over highly risky mortgages had been growing, and in 2006 regulators issued guidance about them. The Office of Thrift Supervision fought to weaken the guidance, and when it met with WaMu after the guidance came out, its officials told the bank not to worry. "They specifically pointed out," a WaMu official wrote in a memo after meeting with regulators, "that the language in the guidance says ‘should,’ vs. ‘must’ in most cases and they are looking to WaMu to establish our own position of how the guidance impacts our business processes."
As things got worse and worse in 2008, the regulators resisted taking any enforcement action, despite pleas by the F.D.I.C. Finally, on July 3, John M. Reich, director of the Office of Thrift Supervision, notified Mr. Killinger that they would take harsher action than the bank had wanted, by requiring the bank to sign a memorandum of understanding. He did so in an apologetic e-mail, saying he had written only after Mr. Killinger failed to return a couple of phone calls.
Mr. Reich promised the action would be kept confidential, and said action was needed in part because "if someone were looking over our shoulders, they would probably be surprised" the regulator had not acted long before.
By then it was too late. After Lehman Brothers failed in September, depositors fled and the bank was closed. The vast majority of its loans were based on "stated income," and it turned out that there were more than a few liars among the borrowers. Its $178 billion in mortgage loans went to JPMorgan Chase, which promptly concluded that about two-thirds of them were impaired. It took a $30 billion write-down, but that proved inadequate. It has written off another $5 billion since.
The Dodd-Frank law abolished the Office of Thrift Supervision, in part because of the WaMu failure. To Carl Levin, the Michigan senator who heads the subcommittee that investigated WaMu, a lesson is that "you need cops on the beat." I doubt it is that simple. There were cops at the thrift office, and the ones on the ground found lots of problems that their bosses did little about. There were also cops inside WaMu. But they were neutered, ignored and eventually pushed aside. The board passed appropriate resolutions, but did nothing to stop the rot.
A few decades ago, I recall the chairman of one large bank explaining why his bank had joined in the lending folly of that era — lending to developing countries that needed money to pay rising oil prices. If his bank had not joined in, he said, business would have gone elsewhere, and his bank would no longer have been a major lender.
So it was with WaMu. It had identified Countrywide Financial as a model to emulate, and any other course would have surrendered market share, not to mention the immediate profits that financed huge paychecks for executives. Was that illegal? A court will decide, assuming no settlement is reached. Perhaps a judge will be impressed by all the formalities that Mr. Killinger’s lawyers listed in rising to his defense:
"Washington Mutual’s management structure was a model of corporate governance," they wrote. "The mortgage lending practices of the bank were established by a professional corps of bankers and risk managers with extensive experience in home lending. Those practices were in turn carefully reviewed and monitored by independent credit risk management and board committees.
An internal audit group similarly reported directly to an audit committee of the board to assure compliance with law and management objectives. The work of the management and board committees were, in turn, subject to continuous review and scrutiny by outside auditors and, perhaps most importantly, by federal bank regulators."
Senator Levin’s view of the bank is more pithy. "It was a model," he said, "of corporate ineptitude, greed and wrongdoing."
Jerry Brown Sees 'Bears in Forest' as Defeat Looms for Tax Plan
by Michael B. Marois and James Nash - Bloomberg
California Governor Jerry Brown faces his first legislative defeat this year as he races against time to persuade at least four Republican lawmakers to support a June ballot measure on extending tax increases. Brown, a 72-year-old Democrat elected in November, has been lobbying Republican legislators to allow a statewide vote on extending $9.3 billion in temporary tax and fee increases, to no avail. The governor said yesterday that he remains hopeful.
Still, Brown and his advisers are weighing alternatives such as an initiative that would reach the ballot in November through a petition process rather than legislative approval. The extension is key to the governor’s plan to close a $26.6 billion budget deficit projected through June 2013. "Nobody said it was going to be easy," Brown told reporters outside the capitol in Sacramento yesterday. "Whichever way I look, I see bears in the forest."
Brown was elected to a third term last year on pledges to repair financial strains that have left California with the biggest deficit and the lowest credit rating among U.S. states. The former attorney general and Oakland mayor served two terms as governor from 1975 to 1983. If lawmakers snub his plan for a June vote, both Brown and the Legislature will likely lose credibility, said Mark Baldassare, president of the Public Policy Institute of California in San Francisco. A survey from the organization yesterday showed approval ratings for both Brown and the Legislature fell since January, when the governor took office.
"People had really prioritized the budget and budget solutions as something that this Legislature and this governor would be able to accomplish," Baldassare said by telephone yesterday. "This is what matters," he said. "This is something in control of the governor and the Legislature." State officials say it may be too late to set up a special election for as early as June 14 without running the risk of disenfranchising voters because of the time it takes to prepare the ballot. Brown hasn’t set a hard deadline for reaching a deal or abandoning his goal of a June plebiscite.
Brown had sought agreement in the Legislature by March 10 to give election officials time to get ready for a statewide vote June 7 or June 14, the last possible day before the constitutional deadline of June 15 for passage of a budget. So far, no Republican has publicly come over to Brown’s side. The survey by Baldassare’s group showed that support for the governor’s plan has waned, with 51 percent of likely voters backing it compared with 66 percent in January. The poll also showed that Brown’s approval rating among likely voters dropped to 41 percent from 47 percent in January.
Popularity a Key
Brown’s personal popularity will be crucial to support his pitch to voters for tax increases or extensions, said Sherry Bebitch Jeffe, a political analyst at the University of Southern California.
The governor will have a harder time selling his proposal in November, as then the measure would be framed as a tax increase rather than as an extension of existing taxes in June, Jeffe said. The higher taxes and fees are set to end that month. "He would have to put it on the ballot as a tax increase" after they expire, Jeffe said. "Words matter."
California law requires the Legislature to approve ballot referendums at least 131 days before an election, a deadline that has passed. Lawmakers can rewrite the statutes if they want and have before, setting a vote in as little as 88 days -- yet June 14 is closer than that. The 88-day period was set in 2009, when former Governor Arnold Schwarzenegger sought to extend the same temporary tax increases. Voters rejected the measure.
Treasurer Bill Lockyer said he isn’t optimistic Brown will find a compromise with lawmakers before time runs out. "I’m skeptical," Lockyer said in an interview yesterday on Bloomberg Televison’s "InBusiness With Margaret Brennan." "If there’s not an agreement, there are some very substantial cuts that need to be made and some of these citizen groups that care about these issues are talking about circulating petitions and getting it on the ballot by initiative and having an election in the fall," Lockyer said.
A citizen-sponsored ballot initiative in November would probably need to seek tax increases, because the temporary measures end with the fiscal year in June. A November vote likely would favor Brown’s cause because Democratic turnout is typically heavier for elections that month, said Jaime A. Regalado, director of the Edmund G. "Pat" Brown Institute of Public Affairs at California State University at Los Angeles. On the other hand, opponents would have an easier time labeling Brown’s proposal a tax increase, he said.
"We’re in a climate right now where people feel they can’t afford any more taxes, even though they still want the services," Regalado said by telephone from the institute, named after Brown’s father, a former governor. "A continuance is not the same thing as asking voters for an increase," Regalado said.
In November 2010, about 57 percent of California voters rejected an $18 increase in vehicle license fees to pay for state parks. Tom Del Beccaro, the new chairman of the California Republican Party, said that result spells trouble for the larger tax package that could appear before voters this year. "Californians are never going to pass this tax increase," Del Beccaro said. "They don’t have the money. Californians didn’t ask for these tax increases."
Republicans have said they want voters to have a choice to curb public-employee pension benefits, to cap spending and to rescind business and environmental regulations. A group of five Republican lawmakers has met with Brown in an attempt to forge a compromise, without producing a deal. California’s general-obligation debt shares with Illinois the lowest credit rating of any state from Moody’s Investors Service. The A1 grade is Moody’s fifth-highest. Standard & Poor’s gives California an A-, its fourth-lowest level for investment-quality securities and the worst for any state.
Call for test cases to claim 'reckless lending' compo in Ireland
by Fiachra Ó Cionnaith - Irish Examiner
A potentially groundbreaking test case claiming banks and the former government are directly responsible for the financial ruin of tens of thousands of homeowners and property investors is set to be taken against the State. The Irish Property Council (IPC) has confirmed it is seeking individuals badly damaged by 100% mortgages, "reckless lending" and "a lack of regulation" as part of a planned case seeking mass compensation.
Notices due to be published in newspapers tomorrow will argue that people’s lives have been ruined by the system that created the Celtic Tiger-era property bubble. As a result, the IPC — which mainly represents small-scale builders, developers and property investors — will ask some of those affected to put their names forward as part of a test case seeking to force compensation from the state and the banking sector.
"The destruction of the property market has been caused by the reckless lending of our banks, lack of regulation by our government and the disregard of prudent advice on fiscal policy by the Government in power," the notice will read. "Property owners in negative equity are being ruthlessly scapegoated through the courts without any responsibility for the catastrophe falling on the banks, Government, Financial Regulator or Department of Finance.
"The IPC require a willing plaintiff that can be supported in a court action... This case will be a landmark case requiring the support of all property owners who require a new direction to resolve this national crisis." Central Bank figures show more than 44,500 households are currently more than three months behind in mortgage repayments.
Speaking to the Irish Examiner, Padraic Ferry of Ferry Solicitors — who is offering the IPC legal advice — said: "We will be trying to raise questions on what took place in regulation, in encouraging people to invest or take mortgages, in property speculation."
Portugal's borrowing costs hit new high after ratings agency downgrades debt
by Julia Kollewe - Guardian
S&P cuts Portugal's debt rating two notches to BBB and keeps it on negative watch
The cost of Portuguese borrowing has risen to a new record on the bond markets after Standard & Poor's downgraded the country's debt overnight. The yield on 10-year Portuguese government bonds hit a new high above 8% on Friday morning. Following a downgrade by Fitch on Thursday, S&P cut Portugal's debt rating by two notches to BBB and kept it on negative watch, warning it could lower the rating one notch further once the details of the European Union's permanent bailout fund are unveiled.
Markets shrugged off comments by Herman Van Rompuy, the EU president, who said that European leaders gathered in Brussels had agreed a comprehensive package of economic measures, including a permanent bailout fund for the eurozone. Once it has been approved by national governments, the European stability mechanism will replace the existing temporary fund. "We will make sure that €500bn (£440bn) is available with triple-A status. We have agreed to ensure that the temporary facility has an effective lending capacity of €440bn. It will be in place in June," said Van Rompuy.
He also stressed the importance of credible stress tests to strengthen the banking sector. European leaders have adopted the Euro Plus Pact to improve economic co-ordination, which will be joined by six countries that are not in the eurozone – Denmark, Poland, Latvia, Lithuania, Bulgaria and Romania. Portugal's crisis intensified on Thursday when prime minister José Sócrates resigned after his minority Socialist government's latest austerity measures were rejected by parliament. The country must refinance €4.5bn of debt in April, and is dangerously close to becoming the third eurozone state in six months to ask for a bailout.
"Even Moody's who downgraded Portugal two notches to A3 10 days ago may have to consider further moves," said Gary Jenkins, head of fixed income research at Evolution Securities. "The factors that could push Portugal's rating lower according to Moody's are: first, the likely trend in interest rates the government has to pay to access capital markets; with five-year yields 70bps higher than they were 10 days ago this box is already ticked. Second, how successful the government is in achieving fiscal targets; there must be a big question mark next to this following the government losing the vote on further austerity measures; and third, uncertainty over how much support the government has to provide to the banks.
"The latter is to a large extent dependent upon the first two factors and will be adversely affected by the widening sovereign yields and political uncertainty. So it does not seem inconceivable that we see more rating action on Portugal over the coming days and as they slip closer to the tipping point of low triple B from S&P so it becomes more likely that they will have to request a bailout."
Portugal bailout 'could cost UK £3 billion'
by Graeme Wearden - Guardian
Britain could be forced to contribute more than £3bn to a Portugal bailout package following the Lisbon government's failure to push through its austerity measures on Wednesday. The Open Europe thinktank claimed on Thursday that the UK's share of any rescue package would be between €810m (£702m) and €3.7bn, via the European commission's €440bn bailout fund.
Portugal is teetering on the brink of becoming the third member of the eurozone to seek assistance from the EU – and like Greece and Ireland it will probably also ask for help from the International Monetary Fund. Prime minister José Sócrates's resignation on Wednesday night has left the country in political limbo, and piled extra pressure on European leaders who are gathering at a summit in Brussels on Thursday.
"Portugal will inevitably ask for a bailout," said Open Europe's Raoul Ruparel. "But the cases of Ireland and Greece clearly illustrate that the EU's strategy – to throw good money after bad – is failing. Rather than simply taking a bailout, it would be better in the long run for Portugal to restructure its debt now," Ruparel added.
Sócrates had proposed a wide-ranging plan of tax rises and spending cuts, in an attempt to cut Portugal's deficit and retain market confidence. The yields on Portuguese government debt has reached record highs, with the 10-year bond trading hitting 7.6% – widely seen as an unsustainably high cost of borrowing. Now that the austerity programme has been rejected, economists also believe Portugal must ask for help.
"Portugal moved another step closer to needing a bailout yesterday," said Gary Jenkins, the head of fixed interest research at Evolution Securities. "Even with complete political harmony it was always going to be difficult for Portugal to persuade investors to continue to fund them and thus yields are likely to rise further from what has already been described as unsustainable levels by Portuguese officials."
Portugal needs to refinance around £4bn of bonds in April. It also emerged last night that the new European Stability Mechanism – to which Britain will not sign up – will not be signed off at the two-day meeting in Brussels, as had been planned. Instead, the deadline for a final agreement has been pushed back to the end of June. "When I started working in the City I was often told to follow the old 'under promise and over deliver' formula; the EU seems to be going for the opposite strategy when it comes to dealing with the crisis," Jenkins added.
Fears that the European debt crisis may spread to Madrid were heightened on Thursday morning, when Moody's downgraded most of the Spanish banking sector. Holger Schmieding, chief economist at Berenberg Bank, argued that Spain was in much better shape than its Iberian neighbour. "You can never say anyone is safe in these times. There is always the danger of a run on a country. But Spain is in a significantly better position than Portugal, which in every likelihood will need a bailout now," Schmieding told Bloomberg TV.
Britain's inclusion in the €440bn temporary stabilisation mechanism is controversial, as Alistair Darling signed up for the plan on 10 May 2010 – during the hiatus between the general election and the formation of the coalition government. George Osborne, who replaced Darling as chancellor later that week, has insisted that he would have taken a different decision.
Portugal Said to Need as Much as $99 Billion in Bailout
by James G. Neuger and Joao Lima - Bloomberg
A bailout for Portugal may total as much as 70 billion euros ($99 billion), two European officials with direct knowledge of the matter said as a credit-rating cut threatened to deepen Portugal’s debt woes.
Preliminary calculations put the cost of a lifeline between 50 billion euros and 70 billion euros, said the officials who declined to be named because the issue is confidential. Portugal continued to rule out a rescue, a day after the parliament’s rejection of budget cuts led Prime Minister Jose Socrates to offer to quit. A downgrade by Fitch Ratings dealt a further blow today, as European Union leaders called on Socrates and the opposition parties to unite behind belt-tightening measures that might spare Portugal from becoming the third euro country to tap emergency aid.
Portugal has proposed "a very ambitious, a very demanding reform program for the years 2011, 2012 and 2013," German Chancellor Angela Merkel told reporters before a summit in Brussels. "It will depend on all with responsibility in Portugal today or possibly tomorrow committing to the goal of this program so that the markets can gain confidence." The leaders’ meeting, which started at 5 p.m. today and ends tomorrow afternoon, will also consider lower interest rates for Ireland’s emergency loans and German efforts to renegotiate the financing of a permanent rescue fund to be set up in 2013.
As the summit got under way, Fitch announced the cut in Portugal’s long-term foreign and local currency issuer default ratings to ‘A-’ from ‘A+’ and in its short-term issuer default ratings to ‘F2’ from ‘F1’. The ratings were placed on rating watch negative. "The downgrade reflects increased risks to policy implementation and fiscal financing in light of the Portuguese parliament’s failure to pass fiscal consolidation measures and the resignation of the prime minister," Douglas Renwick, director in Fitch’s Sovereign group, said in a statement.
The yield on Portugal’s two-year note jumped 10 basis points to 6.71 percent at 5 p.m. in London, and reached 6.89 percent, the highest level since the euro’s inception in 1999. The 10-year yield advanced three basis points to 7.66 percent, leaving the difference in yield investors demand to hold the securities instead of German bunds at 442 basis points.
"It’s pretty inevitable" that Portugal will need a rescue, said Jacques Cailloux, a London-based economist at Royal Bank of Scotland Group Plc. "The market will deteriorate in the absence of other measures going through. There is obviously the risk of further downgrades, which will become anticipated by the markets and be a self-fulfilling prophecy."
Portugal navigates the next stage of the crisis with the government’s powers in doubt. President Anibal Cavaco Silva said he will meet with the main parties tomorrow and the government will retain its full authority until he accepts Socrates’s resignation.
The political deadlock comes as Portugal braces for its first bond maturities of the year. It faces redemptions worth about 9 billion euros in total on April 15 and June 15, which could coincide with early elections. Portugal intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover maturing debt. Portugal’s situation is "precarious," Belgian Prime Minister Yves Leterme said.
A backlash in Europe’s better-off countries against the 177.5 billion euros lent last year to Greece and Ireland will color the handling of Portugal. German political jitters over propping up debt-swamped states dominated the crisis response last year, with Merkel delaying aid for Greece and calling for bondholder losses that hastened Ireland’s plunge into the fiscal abyss.
Germans vote in the state of Baden-Wuerttemberg on March 27 in an election threatening to end almost six decades of control there by Merkel’s party. Political sensitivity is high in Finland, where polls show a surge in support for an anti-euro party in the run-up to April 17 elections. Germany and Finland squared off over the planned permanent rescue fund today, with Merkel questioning a March 21 accord to endow the fund with 80 billion euros in cash and 620 billion euros in callable capital. Germany would furnish 27.1 percent of the total.
Merkel wants to stagger Germany’s cash payments over five years instead of four and cut its upfront payment in 2013 to 4.3 billion euros from 10.9 billion euros, potentially limiting the fund’s firepower. No "easy answers" are likely for the German demands, Finnish Prime Minister Mari Kiviniemi said in a Bloomberg Television interview. "We understand the German position, but what is important is that, when it comes to decisions made on Monday, that we are not increasing any country’s responsibilities."
Merkel’s bid to renegotiate the three-day-old financing accord punctured the EU’s plans to proclaim a "comprehensive" solution to the debt crisis, including tougher sanctions on excessive budget deficits and national pledges to increase competitiveness. Details remain unresolved over how the bloc will fulfill a promise to get full 440 billion-euro lending capacity out of the temporary rescue fund, set up last year at the height of the Greek phase of the crisis. The fund, known as the European Financial Stability Facility, is limited by collateral rules to lending only 250 billion euros.
About 19,000 demonstrators protested governments’ austerity measures before the summit started in Brussels, Nicolas Dassonville, a spokesman for Brussels City Mayor Freddy Thielemans, said by telephone. Police used water cannons after 30 demonstrators tried to break through a police cordon, injuring 12 officers, he said.
Portugal's Woes Turn Spotlight on Spain
by Marcus Walker and Jonathan House - Wall Street Journal
Portugal's admission that it will probably need a financial bailout raises a question that will shape the outcome of the euro zone's debt crisis: Is Spain next? The cost of saving Spain, a €1.1 trillion ($1.56 trillion) economy, would dwarf previous bailouts and could test the financial strength of Europe as a whole.
But if Spain can continue to repair investors' trust, as in recent weeks, then Europe stands a chance of containing the debt crisis to three countries, Greece, Ireland and Portugal, whose combined economies are half the size of Spain's. Spain's banking sector remains a big worry. Moody's Investor Service cut 30 Spanish lenders' credit ratings on Thursday, citing the sector's fragility. Spain's other challenges include a large budget deficit, burst housing bubble and feeble growth.
But despite continued strains, financial markets have grown more confident that Spain won't need a bailout. Even pessimistic projections of bank losses don't appear to threaten the county's solvency, while the government has stepped up overhauls of the budget, banks and labor market, and the economy has shown more resilience than expected. Spanish bonds and stocks, including those of banks, rose on Thursday despite the downgrades and concerns that Spanish lenders could be hit by the deepening crisis in neighboring Portugal.
Spain's borrowing costs have stabilized and come down slightly in recent months, whereas investors have continued to dump bonds of the three smaller crisis-hit countries. "Investors increasingly have come to differentiate between these countries and…Spain," said Antonio Garcia Pascual, economist at Barclays Capital in London. Policy makers in Europe and the U.S. have long believed that Spain would be the crucial battlefield in the euro zone's struggle to prevent a collapse of creditors' trust in its weaker nations.
Last year, U.S. officials even worried that the crisis could spin out of control and undermine the global economic recovery. "That fear has subsided," Dallas Federal Reserve President Richard Fisher told reporters in Berlin on Wednesday, praising Spain's "corrective surgery" on its banks and finances. Spain is forcing its banks to raise capital from either markets or the state. The government remains under pressure reduce its budget deficit and Spain's unemployment rate of just over 20%.
Prime Minister José Luis Rodríguez Zapatero was due to outline further steps to improve budget controls, labor rules and productivity at a European Union summit in Brussels Thursday. Investors could still turn against Spain if it fails to deliver, or if events elsewhere trigger a market panic. "Spain isn't out of the woods. But the market is less afraid of the worst-case scenario occurring than a few months ago," said Ben May, European economist at London consultancy Capital Economics. The worst-case scenario is that Spain's property market falls so hard that the country's struggling regional savings banks, known as cajas, need more money to cover their losses than the Spanish state can raise.
Similar problems sank Ireland last year. Concerns about Ireland's solvency are mounting despite international rescue loans granted in November. But a report by credit-rating agency Fitch this month pointed out that Spain's banks and their property risks are significantly smaller than Ireland's in proportion to the overall national economy. As a result, "it will likely be easier for Spain to cope with the country's real estate collapse" even if Spanish house-price falls and banking losses become as severe as Ireland's—"an extreme scenario which is not likely to materialize," according to Fitch.
In an Irish-style meltdown, Spanish banks would need to raise close to €100 billion in extra capital, Fitch calculates, an estimate similar to the most pessimistic economists'. If the state had to provide all of those funds, Spain's public debt would jump by about 10 percentage points of GDP. That amount would be challenging for Spain to borrow quickly from bond markets.
But economists say it wouldn't undermine the state's solvency, since public debt stood at just over 60% of gross domestic product at the end of 2010, well below the ratios of Germany, the U.S. and many other Western countries. Economists expect Spanish property prices to fall further this year, but not as drastically as in Ireland.
Some major urban markets appear to be bottoming out, analysts said. Spaniards' attachment to home ownership as their main form of saving, and Spain's unforgiving laws for mortgage debtors, slow down price declines and banks' loan losses, said observers. "In Spain you are liable for all your mortgage debt even if your house is repossessed, so you do everything you can to avoid losing your house," said Unai Ansejo, an investment manager at the public-pension fund of the Basque region.
Spain's budget deficit, at 9.2% of GDP last year, remains too high for comfort, but was down from more than 11% in 2009. Spain improved its credibility with investors by meeting its deficit-reduction target, despite overspending by some regional authorities. This year's deficit target of 6% is achievable, said economists, but might require extra fiscal measures if economic growth disappoints.
The economy grew at an annualized rate of 0.9% in the fourth quarter of last year, marking another contrast with Greece, Ireland and Portugal, which stayed mired in recession. Spanish consumer spending is falling thanks to mass unemployment and households' efforts to reduce their debts, but Spanish exports are doing better than expected, growing at an annualized 16.6% last quarter.
Spain's Bank Rescue Hits Headwinds
by Sara Schaefer Muñoz - Wall Street Journal
Spain's plan to rescue its regional banks is running into headwinds as private investors, who are being asked to pour in cash, and ratings firms raise questions about whether the lenders have admitted to all of their real-estate losses. Raising private capital to bail out Spain's private savings banks, or cajas, is an increasingly important test of confidence in Spain, especially since the market became convinced that neighboring Portugal would need a bailout.
Eight of Spain's cajas must present their capital-raising plans to regulators by April 10. That has caused a flurry of activity in recent weeks as savings banks sounded out hedge funds and private-equity funds and others pursued initial public offerings. But the exercise has stirred questions from investors about the level of reserves that the banks hold against real-estate risk in their portfolios. The banks also have faced questions over whether their executives have distanced themselves sufficiently from local politics; in some cases, they have even been quizzed about managements' own understanding of what is on their books.
In general, "people don't understand what they are buying," said a Spanish banker who has tried to get investors interested in the cajas. The pressure on Spain to show that it can clean up its banking sector has heated up in recent days. Moody's Investors Service on Thursday downgraded Spanish banks, citing, in part, greater financial pressures on the Spanish government and its smaller lenders. "We remain cautious on the capacity of savings banks to get private funds, to the extent that private investors may have concerns on whether savings banks have undertaken an upfront recognition of losses," said Alberto Postigo, a senior analyst at Moody's.
Meanwhile, Portugal's possible bailout by the European Union has raised the question of whether Spain will need intervention, too, although Spanish financial markets Thursday appeared unaffected by worries on Portugal, suggesting that investors have more confidence in Spain's overhaul of its ailing economy. The savings banks have until September, with some exceptions, to raise their core Tier 1 capital ratios—a key measure of financial strength—or turn to the Spanish state for funds. Spanish authorities said earlier this month that the entire banking sector needs €15.1 billion ($21.3 billion) to meet these new rules, although they said a significant amount could come from the private sector.
Spain's Fund for Orderly Bank Restructuring has made available €15 billion to assist the sector. Sovereign wealth funds from Qatar and United Arab Emirates have also pledged funds to invest in the savings-bank sector, although the recipients haven't been disclosed. If little capital can be raised from outside investors, "it will be a disappointment for the whole Spanish market," said a Madrid-based fund manager.
One of Spain's largest savings banks, Banco Base, already has scrapped plans to go public in the face of a lukewarm response from investors and a tight timetable to raise capital, say people close to the bank. It instead will try to sell a partial stake in the market or seek government funds. If private investors won't commit to Spanish savings banks, this could sharply raise the cost of funding for all banks, including larger, publicly listed entities, say analysts. To be sure, savings bank Mare Nostrum, with €71 billion in assets, is generally liked for its professional board and comparatively low real-estate exposures, said people who have attended its presentations.
But many investors are still wary. "Spain is an attractive market for longer term," said Fred Rizzo, an analyst with T. Rowe Price International Inc. in London. But first, he said, the cajas "need to clean up and recapitalize, then we can make apples-to-apples comparisons with other European banks." A litmus test for confidence in the Spanish banking sector will be the success of the offering of the largest entity, Bankia, a lender with €344.5 billion in assets. It is comprised of Caja Madrid, Bancaja of Valencia, and five others, and must raise €5.78 billion to comply with the requirements.
In some cases, though, Bankia's pitch to investors has fallen flat. A banker who attended a recent presentation said that according to calculations based on the bank's literature, the "capital hole" appeared far larger than what the bank planned to raise in the market. Moreover, this person said, the disclosure about asset quality was limited, and management couldn't answer questions about the some structured products on its books.
A Bankia representative declined to comment on the banker's comments but said the bank has been making progress in consolidating operations and cleaning up its balance sheet, and had recently reached an agreement to cut costs through early retirement for employees. The bank is moving ahead with its IPO, which it hopes to complete before summer.
Moody's Cuts Ratings on 30 Spanish Banks After Country Downgrade
by Charles Penty and John Glover - Bloomberg
Thirty of Spain’s smaller banks had their senior debt and deposit ratings downgraded, as Moody’s Investors Service reviews whether governments are willing to support all their lenders in a crisis. Citing heightened financial pressure on the country’s sovereign rating and "many weak banks," the New York-based ratings firm cut 15 lenders by two levels and five by three or four, according to a statement today. The outlook on most banks’ senior and deposit ratings remains negative, Moody’s said.
"It seems increasingly plausible that hard choices will need to be made at some point over the rating horizon, balancing the sovereign’s incentive to support the banks with the need to protect its own balance sheet," Moody’s said in the statement. "It is, in Moody’s view, increasingly likely that the sovereign will not be prepared to write all banks a blank check."
Governments are seeking to guarantee taxpayers don’t have to step in to support lenders in distress by ensuring creditors bear losses, prompting Moody’s to reconsider the state support it factors into its ratings. In Denmark, where senior bondholders of Amagerbanken A/S were forced to take losses, the firm cut the grades of five lenders and may cut them again.
Pressure on senior creditors of banks is growing. Moody’s has acted on the ratings of Irish banks, reflecting politicians’ remarks about their willingness to support the senior creditors of the nation’s lenders. The European Commission recently closed the comment period on its proposals to change the way in which member states shore up banks.
"This is the first step in a wider review of the systemic support available to smaller institutions, institutions we think it unlikely would be considered to be systemic," Moody’s Chief Credit Officer for Europe, the Middle East and Africa Alastair Wilson said in a telephone interview today. "We’re going to carry out a series of country-by-country reviews of banking systems." He declined to say which countries would be examined next.
Banks of a size to make them central to the smooth running of the financial system are still likely to receive support, Wilson said. Moody’s affirmed its Aa2 rating on the deposit and senior debt ratings of Banco Bilbao Vizcaya Argentaria SA, Banco Santander SA, the nation’s two biggest banks, and La Caixa, all with a negative outlook. BBVA fell 0.9 percent to 8.87 euros at 9:53 a.m. in Madrid, while Santander declined 0.3 percent to 8.46 euros and Bankinter SA dropped 0.5 percent to 4.92 euros.
"That certain lenders have problems is well-known and can’t be denied," said Pablo Garcia, head of equities at Oddo Sociedad de Valores in Madrid. "But in our opinion, at least 70 percent of the Spanish financial system is highly solvent." Spain’s credit rating was cut to Aa2 on March 10 by Moody’s, which said the cost of shoring up the banking industry will eclipse government estimates. The ratings company said then that Spanish lenders may need as much as 50 billion euros ($70.3 billion) to meet new capital requirements, a figure that compares with the Bank of Spain’s estimate that 12 lenders will need 15.2 billion euros.
Moody's warns Britain over triple-A credit rating
Moody's, the ratings agency, said Britain's triple-A credit rating could be at risk if slower growth makes it harder for the government to rein in its budget deficit. "The government's ongoing commitment to large-scale deficit reduction is very important to the Aaa rating and stable outlook," Moody's said the day after George Osborne downgraded growth forecasts in his 2011 Budget.
"Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK's sovereign rating level, we believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK's debt metrics to deteriorate to a point that would be inconsistent with a AAA rating," Moody's said in a statement. Moody's downgraded its own forecast for British growth this year to 1.6pc from 2pc, below the 1.7pc forecast by the government's independent Office for Budget Responsibility in Wednesday's Budget.
The Chancellor last year pledged to raise an extra £30bn in tax and cut £80bn of spending by 2014 to slash the country's record deficit and yesterday stressed: "We're sticking to it."
However, he faces a difficult task with the government's independent Office for Budget Responsibility saying spending will be about £10bn higher than expected from 2013. Not because his tough cuts have been relaxed but because borrowing costs on Government debt have increased by £3.1bn and the welfare bill is £4.3bn more expensive.
Preserving the triple-A sovereign debt rating that Britain enjoys from the major ratings agencies is a top economic priority for the country's coalition government of Conservatives and Liberal Democrats. Sterling slipped after the Moody's warning and weaker-than-expected UK retail sales data highlighted the downside risks to economic growth.
Both reports pushed the pound lower. Sterling lost as much as half a cent against the dollar to trade at a one-week low of $1.6149, and the euro jumped more than half a percent to 87.40p.
However, reported solid demand for sterling from Middle East and Asian central banks helped the pound pare its losses against the dollar, at least, although it remained below $1.62. "The (sales) data suggests that BoE members sitting on the fence regarding rate hikes will continue to do so," said Peter Luxton, economics adviser at Informa Global Analaysts.
British retail sales in February fell 0.8pc on the month, sharply slowing the annual rate of growth to 1.3pc in February from a downwardly revised 5.1pc in January. The figures backed up the slight shift in interest rate expectations this week following Wednesday's Budget and minutes from the Bank of England's last policy meeting. Money markets are now betting on an interest rate increase in August. On Tuesday, after inflation jumped to its highest in two and a half years, they had been expecting the first hike in July.
U.K. Said to Prepare Bank-Stake Sales for Pre-Election Windfall
by Gavin Finch, Jon Menon and Thomas Penny - Bloomberg
A sale of the British taxpayer’s 65.8 billion-pound ($107 billion) stake in Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc is likely to start next year, creating a one-time budget windfall before the next election, according to four people familiar with the talks.
Lloyds, 41 percent government-owned, will probably be offered to investors first as the London-based bank is better prepared for a sale, said the people, who declined to be identified because the discussions are private and the plans may change. The coalition government would aim to return RBS, 83 percent taxpayer-owned, to majority private ownership by the end of 2014, three of the people said. "That level of windfall would open the way for tax cuts in the run up to the next election," said Mark Wickham-Jones, professor of politics at Bristol University. "That could be a remarkable opportunity for the coalition."
By the time of Britain’s next election in 2015, the country’s budget deficit is slated to drop by more than two- thirds to 46 billion pounds, or 2.5 percent of gross domestic product, as spending cuts and tax rises take effect, according to the independent Office for Budget Responsibility. That will give Britain’s Conservative-Liberal Democrat coalition the freedom to spend privatization proceeds on alternatives.
"There’s nothing better than coming into an election with a message saying ‘We’re looking forward to a period beyond the age of austerity, and tax cuts signal the beginning of this,’" said Stephen Driver, author of Understanding British Political Parties. "If you’re a Conservative government wanting to make sure you mobilize the Conservative vote, how better to do that than through tax cuts?"
The windfall may also be used to exempt more of Britain’s poorest people from income tax and to fund extra social spending, which are priorities for Liberal Democrats, the smaller of the governing parties. Potential proceeds from selling the entirety of taxpayer shareholdings in Lloyds and Edinburgh-based RBS are equivalent to more than 4 percent of annual GDP, estimated to be about 1.5 trillion pounds this year, according to the OBR, the agency monitoring government borrowing.
The sales will be an "important issue" for the current parliament, Chancellor of the Exchequer George Osborne told the House of Commons on Feb. 9. The time to sell will come, though "not right now," Prime Minister David Cameron told the House of Commons yesterday. Deputy Prime Minister Nick Clegg said on Jan. 26 that any sale must recoup the taxpayer’s entire investment.
The Treasury and U.K. Financial Investments Ltd., which manages the taxpayer stakes, declined to comment on possible sale timetables. RBS and Lloyds also declined to comment. The previous Labour government injected 20.3 billion pounds into Lloyds and 45.5 billion pounds into RBS to bolster the banks’ capital during the credit crisis. Lloyds traded at 60.24 pence at yesterday’s close in London, less than the average of 73.6 pence at which the government bought in. RBS trades at 41.42 pence, compared with the 50.2 pence price of the taxpayer investment. That puts the U.K.’s paper loss at about 11.7 billion pounds.
British taxpayers will get a "handsome return," from the investment, Lloyds’s former Chief Executive Officer Eric Daniels told a House of Commons committee on March 16. "It looks like" the U.K. will profit from its bank investments, RBS CEO Stephen Hester told the same hearing.
The U.K. government’s preference will probably be to sell to institutional and individual investors rather than sovereign wealth funds, as the latter generally demand too big a discount to invest and the government needs to show a profit on the deal, two of the people said. While there’s a chance that the first sale may occur as early as November this year, it’s very unlikely before 2012, one of the people said.
Several hurdles remain which may derail or delay the sales, including a decline in RBS’s and Lloyds’s share prices and the outcome of the Independent Commission on Banking’s study into competition, which may force banks to sell assets or separate their investment and commercial banking units. ICB Chairman John Vickers, a former Bank of England chief economist, will present an interim report on April 11 and final conclusions in September.
"The timing has to await the Vickers report because you couldn’t sell the bank shares at the moment with the uncertainty hanging over them," John Redwood, a former Conservative Cabinet minister who advised Margaret Thatcher on privatizations in the 1980s. "If Vickers has proposals that don’t make much difference to the state holdings, they’ve got the option of selling them earlier. If he’s got proposals to change them, it will delay it."
A sale would also lower the cost of servicing the country’s national debt, estimated by the Office for National Statistics at 2.25 trillion pounds. Once taxpayer assistance to banks is excluded, net debt is 875.8 billion pounds, 61 percent lower.
Both banks are reducing their reliance on government and central bank support programs, like the Special Liquidity Scheme. Lloyds cut its dependence on taxpayer-funded programs by almost half to 83.6 billion pounds in February from the end of 2009, according to company filings. RBS lowered its support by 21 percent to 57.6 billion pounds last year from the end of 2009, filings show.
The SLS was introduced at the peak of the credit crisis in 2008 to improve liquidity by allowing banks to swap hard-to- trade mortgage-backed securities for government bonds. The banks have since reduced their reliance as access to bond markets has resumed.
Return to Profit
That process will need to be completed before sales can commence, said Joe Dickerson, a banking analyst at Espirito Santo Investment Bank. "It provides an investor with a greater level of comfort in investing in the riskiest part of the capital structure," said Dickerson. "That’s probably going to come after Lloyds and RBS have demonstrated a better profile of profitability."
RBS, which received the biggest bank bailout in the world, expects to return to profit in 2011, according to CEO Hester. Lloyds may almost double pretax profit in 2011 to 4.1 billion pounds, according to the median estimate of 21 analysts surveyed by Bloomberg.
The lesson from Sweden, which nationalized two banks in the 1990s, is that it may take longer than expected to sell the stakes, Bo Lundgren, Sweden’s minister for fiscal and financial affairs in the 1990s, said last year. The government still owns 13.5 percent of Nordea AB almost two decades after taking over its predecessor, Nordbanken, which went on to merge with Gotabank, which was also nationalized.
Even so, the idea of starting a sale before the election would echo Thatcher’s tax-cutting and asset-sale programs of the 1980s, according to Tim Bale, professor of politics at Sussex University. "It wouldn’t be the first time that a British government has tried something similar," he said. "It would certainly fit with the pattern of Conservative governments in the 1980s, who similarly managed to synchronize the economic cycle with the electoral cycle."
Anti-cuts campaigners plan to turn Trafalgar Square into Tahrir Square
by Matthew Taylor - Guardian
Campaigners against public service cuts are calling for a 24-hour occupation of Trafalgar Square – drawing inspiration from revolts in the Middle East – to coincide with Saturday's trade union protest in London. Student activists who organised last year's demonstrations say there will be a rolling programme of sit-ins and protests on the day and have called on people to occupy the central London square turning "Trafalgar into Tahrir" – a reference to the gathering point in Cairo that was at the heart of the revolution in Egypt earlier this year.
"We want Trafalgar Square to become a focal point for the ongoing occupations, marches and sit-ins that will carry on throughout the weekend," said Michael Chessum from the National Campaign Against Fees and Cuts. "There are a lot of smaller scale demonstrations and actions planned and, just as we have seen in recent protests in the Middle East and north Africa, we want to create an ongoing organising hub."
Saturday's main demonstration has been organised by the TUC and is expected to see more than 200,000 people – including public sector workers, families and first-time protesters – take to the capital's streets to oppose government cuts. This month the TUC general secretary, Brendan Barber, promised a barrage of protests against the cuts, ranging from industrial strikes and "peaceful civil disobedience" to petitions by Tory voters in the shires.
The plan to occupy Trafalgar Square is the latest in a wave of proposed sit-ins, occupations and "people's assemblies" that activists have branded a "carnival of civil disobedience". "We have seen time and again that marches from A to B do not achieve their objectives," said Chessum. "This is about creating an ongoing movement that will put pressure on the government. This is the start of what is going to be a hot summer of protest against the ideological nature of what this government is doing."
The call for an occupation of the London landmark is backed by student groups, activists and two Labour MPs – John McDonnell and Jeremy Corbyn. In a joint statement they have called on people to "stay in Trafalgar Square for 24 hours to discuss how we can beat this government and to send a message across the globe that we stand with the people of Egypt, Libya, Wisconsin and with all those fighting for equality, freedom and justice.
"We want to turn Trafalgar Square into a place of people's power where we assert our alternative to cuts and austerity and make it a day that this government won't forget." Alongside the main march, which will set off from the Embankment before making its way to Hyde Park for a rally, anti-cuts campaigners say they plan to occupy some of the capital's "great buildings", close down scores of high street stores and occupy Hyde Park.
UK Uncut, a peaceful direct action group set up five months ago to oppose government cuts and protest against corporate tax avoidance, is planning to occupy and force the temporary closure of scores of shops on Oxford Street on Saturday afternoon. Meanwhile, student groups will meet at the University of London student union building in Bloomsbury at 10am. Some are then expected to make their way to the main assembly point in a "feeder march"; others will peel off to take part in various "direct actions".
"Since Christmas the movement has become much more autonomous," one veteran of last year's protests told the Guardian last week. "There are smaller, semi-independent groups planning small-scale direct action against a range of targets. It will be a bit of a disappointment if we get to the end of the day and one of London's great buildings is not occupied. We have to make an impact."
Online, other groups are calling for more widespread direct action on Saturday. An organisation calling itself Resist 26 claims it will stage a number of "people's assemblies" along the route of the march. Under the banner "Battle of Britain" it is calling for a 24-hour occupation of Hyde Park and "after parties" at famous London landmarks including Piccadilly Circus and Buckingham Palace. Scotland Yard says it has worked closely with the TUC to ensure the demonstration passes off peacefully and senior officers are due to give a detailed briefing on police plans on Tuesday morning.