Ilargi: Mike Maloney of Gold and Silver Inc. got quite a bit of media attention (and flack, supposedly) for a speech he held at the 8th International Banking Forum in Sochi, Russia last year, as well as for the videos of the event that were posted on YouTube. In the speech, Maloney told the assembled bankers they will soon be witness to events never before seen in the history of mankind, and that if they didn't prepare, they'd all be working for their governments before long.
He also said oil would go down to perhaps as low as $10 per barrel (which closely resembles our contention that deflation will cause prices of assets, commodities etc. to fall by 80-90%). For those of you who haven't seen the videos, they're highly recommended viewing. They offer a very good description of the workings of our credit based monetary system, complete with technical analysis. Here's Part 1, and here's Part 2.
A few days ago, Maloney posted an update on the speech. And since his views are so -obviously- close to those we have here at The Automatic Earth, I thought it might be a good idea to talk about it a bit. Not in the least because Mr. Maloney gets just about everything right, and then 'somewhat falters' with the finish line in sight, simply since he can't seem to keep himself from talking his book.
First, here's the video (you may want to watch it after reading this essay). The title is $10 Oil Follow Up - The Case For Short Term Deflation.
So yes, Mike Maloney, just like us here at The Automatic Earth, predicts deflation followed by hyperinflation. Only, as far as I can see, he has more emphasis on the hyperinflationary period than on the deflationary period that will -of necessity, as we both realize- precede it. We do not. Here's thinking that difference has a lot to do with him talking that book, which, after all, is gold and silver. As for us, we think that the coming (debt-) deflation will devastate our economies to such an extent that when hyperinflation arrives, it will feel silly, if not worse, to ever have focused on it -contradictory as that may sound-. In short, we see a world far more drastically altered down the road than Maloney seems to do.
Still, he has a lot of good points to offer:
Mike Maloney: "It could be that the foreclosures that we've already seen, and the crash of 2008, was the deflation, but I don't think so, because there hasn't been enough of the excesses cleared out of the system. We're in this long term cycle, and there has to be what's called a credit revulsion, where people just WILL not take on any more credit.
And to get to that point, they all have to get burned. More people have to lose their houses, more people have to lose their margin trading accounts, we need something that happens that will cause these excesses to be flushed out of the system."
Ilargi: Maloney then goes on to state that you can’t have markets overvalued for a long time, "with P/E ratios in the stratosphere forever". Markets, according to him, and it's a great metaphor, are a voting machine in the short term (the whole crowd rushes in to one side, they all want paper assets), but they're a weighing machine in the long term (i.e. they seek an equilibrium). Furthermore, "they always have to go to fair value, and then they overshoot it and they go to the opposite extreme".
He follows this up by declaring that "there is a scenario where gold can go up while all these other commodities like oil are falling. In fact there are several such scenarios". And that is probably where we diverge the most. And I'm thinking: we have no book to talk, we just have our "message to you Rudy". What are the chances that Mike Maloney sees what he does because he looks through his book's slightly distorted glasses?
Whatever's the answer to that one, Stoneleigh and I can't see how the price of gold -and silver- can hold up, let alone go up, if and when the very rounds of never-before-seen deleveraging and deflation Mike predicts come to pass. We think that it will force a huge amount of people who hold gold, to sell it into a buyers market. And those left standing afterwards will not be numerous enough to hold up the price either. It's not that gold can't reach $20,000, but that it can't do so in today's dollars. A subtle difference.
Mike then proceeds to go through a set of charts at the St. Louis Fed website that show the deflation going on. Note: he talks about what he labels “monetary deflation" (i.e. the definition of inflation/deflation as pertaining to the currency supply, not to rising prices). We of course simply call that deflation. I looked up some of the graphs he addresses, at the St. Louis Fed:
Commercial and Industrial Loans at All Commercial Banks - 80 years
Mike Maloney: "Base money before the bail-outs was only $825 billion, $800 billion of that was the money in circulation, the rest were deposits that commercial banks have in their checking accounts at the Federal Reserve. Then Ben Bernanke bailed them out and he more than doubled the base money portion of the currency supply, but base money was a very small portion. The total currency supply is total outstanding credit, which is up in the $50 trillions. So $825 billion is nothing. You're only talking about a few percent of the currency supply that Ben Bernanke has direct control over. The rest of it, all the Federal Reserve can do is try and influence it; but to influence it, he's got to make us feel good."
Total Consumer Credit Outstanding - 80 years
Ilargi: As you can see, the drop in the second graph, Consumer Credit Outstanding, is less dramatic than that in the first one, Commercial and Industrial Loans. That is to a large extent because of elasticity: it is far easier for banks to refuse new funding to companies than it is to grab back what consumers owe them.
Real Estate Loans at All Commercial Banks - 80 years
Ilargi: For the same reason, Real Estate Loans are down less than Commercial and Industrial Loans.
Consumer (Individual) Loans at All Commercial Banks - 80 years
Ilargi: And this one is just weird. As Mike Maloney says, it's hard to find a more obvious sign of the Fed pumping "money" into the banking system. This becomes even clearer as we zoom in on the last six years:
Consumer (Individual) Loans at All Commercial Banks - 6 years
Ilargi: Apparently, sometime in early 2010 American consumers, virtually overnight, decided to take out 50% more in loans than they already owed. And the banks let them. Right.
Commercial and Industrial Loans of Weekly Reporting Large Commercial Banks - 30 years
Ilargi: What we see here is identical to what's in the first graph, the not weekly reported Commercial and Industrial Loans: a decline of 25% in a period of maybe 20 months. That's a lot. Don't let's forget that QE1 fell in this timeframe. Here’s the zoom-in:
Commercial and Industrial Loans of Weekly Reporting Large Commercial Banks - 6 years
Ilargi: Sure, there seems to be a small uptick, presumably QE2 related, but it really only serves to illustrate how powerless a program QE2 has been. Remember what Mike Maloney said earlier: "[..] all the Federal Reserve can do is try and influence it; but to influence it, he's got to make us feel good." Moreover, look at the next graphs:
Total Revolving Credit Outstanding - 50 years
Ilargi: No uptick here, the Total Revolving Credit Outstanding has been falling for 2.5 years now. Zoom:
Total Revolving Credit Outstanding - 6 years
Ilargi: That is a drop of some 16-17%. And that spells deflation in any dictionary.
Mike Maloney: "What I’m saying is that deflation is actually happening and you got this grand, this epic play that's happening right now, that's unfolding in front of us, where for the first time in history the entire world is in this IOU-based currency system.
Every 30-40 years the world has a new currency system. Each system that is a man-made manipulated system can not account for all of the forces in the free market and energy builds up in certain areas and then the thing starts to self-destruct. That's what we're seeing right now. The Euro is such a poorly designed system that it barely lasted a decade and here it's already self-destructing. We're going to see all of these debt-based monetary systems self-destructing. There's going to be in this decade some big emergency G-20 meeting where they're going to hash out another world monetary system just like they did in 1944, Bretton Woods, New Hampshire."
Ilargi: I full-heartedly agree with Mike that these graphs, which more or less cover the entire US currency supply (or are at least as close as you need to get for the purpose of distinguishing between inflation and deflation), paint a very clear picture of the deflationary time we are currently in. As for price rises in some areas: prices are a lagging indicator when it comes to inflation and deflation, they necessarily follow the currency (money and credit) supply. Hence: they WILL come down.
And yes, Maloney is right in saying that a lot more will need to happen before we reach the peak (or the trough, if you will) of this deflation. People will have to lose a lot more in home values, asset values, stocks, commodities, everything tangible. And then they will lose trust. Which is where "Credit Revulsion" will come in.
By then, however, and I've talked about this before, the number of people who could be called "investors" according to the definition of the term we use today, will of course plummet, by at least the same 90% that asset prices will. The revulsion will be widespread. And this is nothing new. There never was a time until quite recently when every mom and pop were investors. So we’ll only get back to normal, not away from it.
Still, that does not bode well for the price of gold and silver, a point Mike Maloney somewhat hesitantly tries to ignore. If, as we both expect, the vast majority of people lose the vast majority of their wealth, there will be a lot of gold for sale in "the market" (whatever it may look like by then). That means a huge amount of sellers, forced to sell by investment losses and other predicaments, and an ever shrinking number of potential buyers. Who might just be wise enough to wait for the price to come down further. It seems obvious where that leads.
But other than that, great videos, and very smart points. Thanks, Mike.
$10 Oil: The Case For Short Term Deflation - Mike Maloney
US lacks credibility on debt, says IMF
by Chris Giles and James Politi - Financial Times
The US lacks a "credible strategy" to stabilise its mounting public debt posing a small but significant risk of a new global economic crisis, says the International Monetary Fund. In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011 at a time when its economy was growing fast enough to reduce borrowing.
The latest warning on the deficit was delivered as Barack Obama, the US president, is becoming increasingly engaged in the debate over ways to curb America’s mounting debt. To meet the 2010 pledge by the Group of 20 countries for all advanced economies – except Japan – to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960, the IMF said. In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.
Carlo Cottarelli, head of fiscal affairs at the Fund, said: "It is a risk that if it materialises would have very important consequences?...?for the rest of the world. So it is important that the US undertakes fiscal adjustment in a way sooner rather than later." At the moment, the US has outlined less than half of the tax increases and spending cuts necessary to bring its public debt down in the medium term, the IMF calculated. "More sizeable reductions in medium-term deficits are needed and will require broader reforms, including to social security and taxation," the IMF said.
The IMF said the US economy "appears sufficiently strong" to withstand greater austerity measures and tax increases, adding that the benefit of last year’s stimulus package "is likely to be low relative to its costs". Having narrowly averted a government shutdown last week through a deal with congressional Republicans to cut $38.5bn in spending from this year’s budget, Mr Obama will today unveil his plans to rein in America’s long-term deficits, which are driven by popular programmes like Medicare,Medicaid and social security.
The debate over US fiscal policy is expected to intensify in the coming weeks and months as the US hits its congressionally mandated debt limit of $14,300bn. Without approval by lawmakers to increase it, the US could face potential default as early as July, and so far Republicans and Democrats remain some distance from reaching a deal.
Geithner seeks to reassure on US debt
by James Politi - Financial Tmes
Senior US officials sought to allay concerns about a future debt crisis in the world’s largest economy, saying the country had taken a leap towards fiscal discipline with President Barack Obama’s new deficit plan.
In separate comments on Thursday, Jack Lew, White House budget director, and Tim Geithner, Treasury secretary, played down the political tensionsover fiscal policy, expressing confidence that Republicans and Democrats would quickly reach a deal to repair the US’s long-term finances. "There is a shared sense of urgency in Washington on fiscal issues," said Mr Lew, in a video interview with the Financial Times.
Mr Obama on Wednesday proposed cutting US deficits by $4,000bn over the next 12 years, a slightly less aggressive pace of reductions than the $4,400bn in savings over 10 years offered by Republicans in the House of Representatives last week. Mr Geithner – speaking at an FT-Bertelsmann conference – said that despite differences on how to reach those targets, the US had made a "fundamental shift?...that makes it very hard for future presidents, future congresses to decide that you can live with the risk of higher deficits in the future".
Mr Lew said he expected agreement on a framework to curb the mounting debt by the end of next month, with a possible vote in Congress at the end of June. "There’s going to be some tough period of time when people ... sit down and make some hard decisions and we think the right time is the next two months," he said, adding that "with the right spirit of co-operation and patriotism we can get it done". But he cautioned that some details may not be agreed so rapidly, raising the possibility that any deal this year might revolve around broad fiscal goals, rather than specific reforms of government programmes and taxation.
Meanwhile, Paul Ryan, chairman of the House budget committee, said Mr Obama’s speech – which attacked the Republican plan – was essentially a 2012 re-election campaign event that damaged the chances of a fiscal grand bargain. "I think when you go after your political adversaries with the kind of demagogic terms and comparisons that the president did, that makes it harder," Mr Ryan said. Mr Lew and Mr Geithner warned against any delay in increasing the US’s $14,300bn debt ceiling, which Congress must approve by early July to avoid a potential default.
"There is no conceivable way in which this country ... can court that basic risk," Mr Geithner said. Republicans want to use the debt ceiling vote to extract spending cuts and budget controls. Mr Geithner said lawmakers looking for "leverage" risked triggering a default and would "own responsibility for that miscalculation". "If you look at what we pay to borrow, the world basically believes that our problems are more manageable, our system will solve it," he said, in a nod to low Treasury yields. "But we want to make sure that we’re earning that confidence every day."
Can we believe Geithner’s patter on debt?
by Gillian Tett
Don’t panic. That, in a nutshell, was the soothing message of Tim Geithner, US Treasury secretary, as he did the rounds of Washington on Thursday, the day after President Barack Obama called for a fiscal reform deal, together with $4,000bn cuts. Never mind that President Obama’s plan sparked a furious response from Republicans; this could further rile Tea Party politicians who are so opposed to letting the US government raise its debt ceiling that they are threatening to force a US bond default this summer.
If Mr Geithner is to be believed, bond investors should know that this default chatter is just part of the normal political process. "You see a lot of confidence in markets that the American political system will be able to get on a path [to resolving the fiscal problems]," he told the Financial Times on Thursday. "The markets believe that our problems are manageable and our system will solve them. There is no conceivable way that Congress would take the risk [of forcing a default]."
Can this reassuring patter be believed? Up to a point, m’lud. On the surface, the current behaviour of the bond market appears to support Mr Geithner; though the government came to the brink of a shutdown last week, due to fiscal brinkmanship, 10-year Treasury yields were on Thursday trading at just 3.48 per cent. There is little sign of foreign selling; bond auctions remain well covered. However, what is less visible – and more ominous – is that, behind the scenes, some large asset managers and banks are already discreetly debating contingency plans, not just for a spike in yields but also a technical default.
"There are all kinds of ‘what if’ scenarios being discussed," one senior banker confesses. And while such "what if" scenarios are still viewed as extreme, the big question dogging Mr Geithner now is what exactly does Washington need to do to maintain this sense of calm? Is it enough for Mr Obama to simply call for a $4,000bn plan? Would a deal on the debt ceiling be enough? Or is a tangible fiscal plan required? Where, in other words, does the $14,000bn (debt ceiling) sentiment tipping point lie?
The honest answer, of course, is that nobody knows; or not unless that tipping point is reached. But some seasoned heads in the White House think that there are now three crucial variables to watch: first, the "acknowledgement" issue (namely whether politicians recognise the fiscal problem); secondly, the "process" question (whether there is a constructive debate); and thirdly, the "plan" (namely whether there are credible proposals on the table). If two out of three of these items are on the checklist, the argument goes, investors will remain reassured. If not, trouble looms.
As checklists go, this seems quite sensible to me. And on the first item – namely the "acknowledgement" question – there has been progress. In late 2010, when Mr Obama’s bipartisan fiscal commission first issued a report on the debt, the White House hoped that tough fiscal debates could be delayed until after the 2012 election. That thinking, however, has now changed. That is partly because voters are becoming focused on the issue. However, recent reports from the International Monetary Fund, and revelations that Pimco has taken a negative stance on Treasuries, have also concentrated minds.
On the second point on this list, though, the score is more mixed. Late last year, the bipartisan Simpson-Bowles fiscal plan provided one sign of constructive engagement. Another encouraging sign of sensible process can be seen in a similar fiscal report being prepared by a so-called "Gang of Six" Democrat and Republican senators. However, Mr Obama’s speech this week may – ironically – have actually undermined this constructive debate, by alienating Republicans. Sensible dialogue remains the exception, not norm.
And that makes it that much harder to produce the third item on the checklist: a credible fiscal plan. Optimists in Congress insist that the main players in the fiscal debate now accept that any eventual plan "will look something like Simpson-Bowles, plus or minus twenty per cent," as one leading senator says. After all, both sides are targeting cuts in the $4 trillion-$5 trillion range. However, the two sides remain bitterly divided about the fiscal mix. Thus, there is almost "no chance" of any tangible fiscal plan being agreed on this summer, Henry Waxman, Democrat Congressman, told the FT on Thursday; he thinks this must wait two years.
Now, that long delay may not be entirely disastrous for market sentiment if the first two factors on that checklist are in place. At the very least, Congress must have enough "process" in place to raise the debt ceiling. But just acknowledging the problem is clearly not enough. Little wonder that those banks are preparing contingency plans, even amid the reassuring rhetoric. Mr Geithner now has his work cut out.
CBO Says Budget Deal Will Cut Spending by Only $352 Million This Year
by Tim Fernholz - National JournalCBO
A Congressional Budget Office analysis of the fiscal 2011 spending deal that Congress will vote on Thursday concludes that it would cut spending this year by less than one-one hundredth of what both Republicans or Democrats have claimed.
A comparison prepared by the CBO shows that the omnibus spending bill, advertised as containing some $38.5 billion in cuts, will only reduce federal outlays by $352 million below 2010 spending rates. The nonpartisan budget agency also projects that total outlays are actually some $3.3 billion more than in 2010, if emergency spending is included in the total.
The astonishing result, according to CBO, is the result of several factors: increases in spending included in the deal, especially at the Defense Department; decisions to draw over half of the savings from recissions, cuts to reserve funds, and mandatory-spending programs; and writing off cuts from funding that might never have been spent.
National Journal previously reported that after removing rescissions, cuts to reserve funds, and reductions in mandatory-spending programs, discretionary spending would be reduced only by $14.7 billion. CBO’s analysis, which takes into account the likelihood that certain authorized funding will never be spent, suggests that the actual cuts will be even smaller.
With some conservatives already opposing the deal for not going far enough to meet the GOP campaign pledges to cut $100 billion, the news could complicate House Republicans' efforts to pass the bill. The minimal effect on current government spending, however, could improve macroeconomic forecasts that predicted lower economic growth if government spending was drastically reduced. "This bill will cut $315 billion in Washington spending over 10 years, $78 billion compared with the President's request this year alone," said Michael Steel, spokesman for House Speaker John Boehner, R-Ohio. "Democratic spin and arcane budget jargon doesn't change that."
The CBO did confirm that budget authority would remain $78.5 billion below what President Obama requested in his fiscal 2011 budget request, and Republicans can point to long-term savings as a result of lowering the government’s spending baseline, including some $40 billion from cuts to Pell Grants. "It is kind of crazy to have come to the brink of shutting down the government over a $350 million difference," said Scott Lilly, a former staff director at the Appropriations Committee under Chairman David Obey, D-Wis.
10 Years, 10 Broken U.S. Debt Ceilings
by Julia Edwards
Congress has raised the federal debt ceiling limit 10times in the past 10 years, and Treasury officials say the government will hit the current $14.3 trillion limit no later than May 16. Without another increase, the government will either default on its bonds or have to slash spending by about 40 percent. Republicans say they won't vote for an increase without big additional cuts in spending.
Data Source: Congressional Research Service and news reports
When it comes to debt, the United States Congress is all grown up. They can make their own rules--and have 10 times over the past 10 years. According to a warning letter sent recently from Treasury Secretary Timothy Geithner to Senate Majority Leader Harry Reid, D-Nev., it’s time to change the rules again.
Unless Congress votes to raise the debt limit, the United States could hit its statutory debt ceiling by May 16. Geithner warned Reid that unless the ceiling is raised, the Treasury would not be able to borrow money to meet the needs of the country, including "military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits, and tax refunds."
Since the debt limit’s introduction in 1917, Congress has never failed to raise it. But now, in the midst of a serious spending debate, some Republicans may threaten to hold the increase hostage unless they see substantial cuts in government spending. Sen. Kelly Ayotte, R-N.H, said on Wednesday, "As a new member of the Senate, I refuse to perpetuate this cycle. We cannot let this moment pass us by and I cannot in good conscience raise our debt ceiling without Congress passing real and meaningful reforms to reduce spending. That plan should include a Balanced Budget Amendment, statutory spending caps, spending cuts, and entitlement reform."
To be clear, reaching the debt ceiling would not directly trigger a government shutdown in the way a failure to negotiate a budget would. And the debt is not to be confused with the deficit, which represents the difference between spending and revenue, but is vulnerable to its effects.
Senator Carl Levin Calls Goldman Sachs a "Financial Snake Pit"
by JD Journal
The finger of blame for the 2008 market collapse is pointing squarely in Goldman Sachs direction. Banks earned billions by creating and selling financial products that essentially backfired in tandem with the housing market, which caused the worst economic crisis in the U.S. since the Great Depression. The recent passage of the Dodd-Frank law is in direct response to this crisis.
Yesterday, Senator Carl Levin (D-MI) released the findings of a two-year probe, and was quoted as saying he wants "the Justice Department and the Securities and Exchange Commission to examine whether Goldman Sachs violated the law by misleading clients who bought the complex securities known as collateralized debt obligations without knowing the firm would benefit if they fell in value," according to the April 13th washingtonpost.com article, "Goldman Sachs misled Congress after duping clients, Senate panel chairman says".
Levin also said he wants federal prosecutors to determine whether perjury charges should be brought against Goldman Sachs Chief Executive Officer Lloyd Blankfein and other employees who testified in Congress last year. Levin was also quoted as saying that Goldman Sachs is "a financial snake pit rife with greed, conflicts of interest, and wrongdoing," according to an April 14th article at vanityfair.com. Goldman Sachs spokesman Lucas van Praag was quoted as saying: "The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report."
Goldman Sachs Accused By Senate Panel Of Misleading Clients And Congress, Manipulating Markets
by Kevin Drawbaugh - Reuters
In the most damning official U.S. report yet produced on Wall Street's role in the financial crisis, a Senate panel accused powerhouse Goldman Sachs of misleading clients and manipulating markets, while also condemning greed, weak regulation and conflicts of interest throughout the financial system.
Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, one of Capitol Hill's most feared panels, has a history with Goldman Sachs. He clashed publicly with its Chief Executive Lloyd Blankfein a year ago at a hearing on the crisis. The Democratic lawmaker again tore into Goldman at a press briefing on his panel's 639-page report, which is based on a review of tens of millions of documents over two years.
Levin accused Goldman of profiting at clients' expense as the mortgage market crashed in 2007. "In my judgment, Goldman clearly misled their clients and they misled Congress," he said, reading glasses perched as ever on the tip of his nose. A Goldman Sachs spokesman said, "While we disagree with many of the conclusions of the report, we take seriously the issues explored by the subcommittee."
The panel's report is harder hitting than one issued in January by the government-appointed Financial Crisis Inquiry Commission, which "didn't report anything of significance," Republican Senator Tom Coburn said at the briefing.
More than two years since the crisis peaked, denunciations of Wall Street misconduct are less often heard on Capitol Hill, with lawmakers focused on fiscal issues. But Coburn joined Levin at Wednesday's bipartisan briefing, firing his own sharp attacks on the financial industry. "Blame for this mess lies everywhere -- from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and members of Congress who failed to provide oversight," said Coburn, the subcommittee's top Republican. "It shows without a doubt the lack of ethics in some of our financial institutions who embraced known conflicts of interest to accomplish wealth for themselves, not caring about the outcome for their customers," he said.
The Levin-Coburn report criticized not only Goldman, but Deutsche Bank, the former Washington Mutual Bank, the U.S. Office of Thrift Supervision and credit rating agencies Moody's and Standard & Poor's. "We will be referring this matter to the Justice Department and to the SEC," Levin said at the briefing, though he did not elaborate. A spokesman later said, "The subcommittee does not intend to reveal the specifics of any referral."
The report offered 19 recommendations for reform going beyond changes already enacted after the crisis in 2010's Dodd-Frank Wall Street and banking regulation overhaul. Case studies from the go-go years of the real estate bubble formed the bulk of the report, which said a runaway mortgage securitization machine churned out abusive loans, toxic securities, and big fees for lenders and Wall Street.
It cited internal emails by Wall Street executives that described mortgage-backed securities underlying many collateralized debt obligations, or CDOs, as "crap" and "pigs." It said Washington Mutual -- which became the largest failed bank in U.S. history in 2008 -- embraced a high-risk home loan strategy in 2005 while its own top executives were warning of a bubble that "will come back to haunt us."
The U.S. Office of Thrift Supervision -- which will be shut down and merged into another agency under 2010's Dodd-Frank regulatory overhaul -- logged 500 serious deficiencies at Washington Mutual from 2003-2008, but no crackdown followed, the report said. Mass downgrades of mortgage-related investments in July 2007 by Moody's and Standard & Poor's constituted "the most immediate cause of the financial crisis," it said.
Investment banks, it said, charged $1 million to $8 million in fees to construct, underwrite and sell a mortgage-backed security in the bubble, and $5 million to $10 million per CDO. As for Goldman, the subcommittee said, the firm "used net short positions to benefit from the downturn in the mortgage market." It said Goldman designed, marketed, and sold CDOs in ways that created conflicts of interest with clients, while also at times providing the bank with profits "from the same products that caused substantial losses for its clients."
Could Goldman Sachs Fail?
by Simon Johnson - Baseline Scenario
This link to MIT Sloan’s website provides a partial transcript and video covering the points made below.
If Goldman Sachs were to hit a hypothetical financial rock, would they be allowed to fail – to go bankrupt as did Lehman – or would they and their creditors be bailed out?
I asked this question on Sunday to four leading experts (Erik Berglof, Claudio Borio, Garry Schinasi, and Andrew Sheng) from various parts of the official sector at the Institute for New Economic Thinking (INET) Conference in Bretton Woods – and to a room full of people who are close to policy thinking both in the United States and in Europe. In both the public interactions (for which you can review video here) and private conversations later, my interpretation of what was said and not said was unambiguous: Goldman Sachs would be bailed out (again).
This is very bad news – although admittedly not at all surprising.
Why wouldn’t policymakers allow Goldman Sachs to fail? The simple answer is that it is too big. Goldman’s balance sheet fluctuates around $900 billion; about 1,5 times the size that Lehman was when it failed. All sensible proposals to reduce the size of firms like Goldman – including the Brown-Kaufman amendment to Dodd-Frank – have been defeated and regulators show no interest in tackling Goldman’s size directly.
The largest financial institution we let go bankrupt post-Lehman was CIT Group, which was about an $80 billion financial institution. Some people thought CIT should be bailed out; fortunately they did not prevail – and CIT restructured its debts in November-December 2009 without any discernible disruptive effect on the economy.
Supposedly, the Dodd-Frank financial reform legislation expanded the resolution powers of the FDIC so that it could handle the orderly wind-down of a firm like Goldman, imposing losses on creditors as appropriate – without having to go through regular corporate bankruptcy (after more than 2 years and over $1 billion in legal fees, Lehman’s debts are still not fully sorted out).
Speaking to a press conference at INET on Friday evening – which I attended – Larry Summers, former head of the National Economic Council, emphasized the importance of this resolution authority.
But the resolution authority would not be helpful in the case of Goldman Sachs because it is a global bank operating on a massive scale across borders. Such a case would require a cross-border resolution authority, meaning some form of ex ante commitment between governments. As this does not exist and will not exist in the foreseeable future, Goldman is as a practical matter essentially exempt from resolution.
For a bank like Goldman there remain the same unappealing options that existed for Lehman in September 2008 – either let them fail outright or provide some form of unsavory bailout.
The market knows this and most people – including everyone I’ve spoken to over the past year or so – regards Goldman and other big banks as implicitly backed by the full faith and credit of the US Treasury. This lowers their cost of funding, allows them to borrow more, and encourages Goldman executives – as well as the people running JP Morgan, Citigroup, and other large bank holding companies – to become even larger. No one I talked with at the INET conference even tried to persuade me to the contrary.
Given that this is the case, the only reasonable way forward is to follow the lead of Anat Admati and her colleagues in pressing hard for much higher capital requirements for Goldman and all other big banks. If they have more capital, they are more able to absorb losses – this would make both their equity and their debt safer.
Professor Admati was also at the same INET conference session (her video is on the same page) and made the case that Basel III does not go far enough in terms of requiring financial institutions to have more capital.
Claudio Borio from the Bank for International Settlements argued strongly that requiring countercyclical capital buffers – that would go up in good time and down in bad times – could help stabilize financial systems. But when pressed by Admati on the numbers, he fell back on defending the current plans, which look likely to raise capital requirements to no more than 10 percent tier one capital (a measure of banks’ equity and other loss-absorbing liabilities relative to risk-weighted assets).
Given that US financial institutions lost 7 percent of risk-weighted assets during this cycle – and next time could be even worse – the Basel III numbers are in no way reassuring. Tier one capital at the level proposed by Basel III is simply not sufficient.
Even among smart and dedicated public servants, there is a disconcerting tendency to believe bankers when the latter claim that "equity is expensive" – meaning that higher capital requirements would have a significant negative social cost, like lowering growth.
But the industry’s work on this topic – produced by the Institute of International Finance last summer – has been completely debunked by the Admati team.
Intellectually speaking, the bankers have no clothes. Unfortunately, the officials in charge of making policy on this issue are still unwilling to think through the implications; capital requirements need to be much higher.
Lower Reserves Drive J.P. Morgan Profit
by Dan Fitzpatrick - Wall Street Journal
J.P. Morgan Chase & Co. posted strong quarterly results as profit rose 67%, but the bank still is struggling to boost revenue amid sluggish loan growth and mounting mortgage costs. The New York bank's profit leapt in the first quarter to $5.6 billion, or $1.28 a share, from $3.3 billion, or 74 cents a share, a year earlier. While the profit exceeded Wall Street's expectations, revenue fell 9% to $25.2 billion.
The bank is wrestling with rising regulatory expenses and flat loan demand, and its profit was largely the result of having to set aside less money to cover loan losses. That disappointed investors hoping for improved revenue. "We just aren't seeing a whole lot of growth," said Nomura Securities analyst Glenn Schorr. "It is hard to get some investors too excited."
Big bank stocks slipped Wednesday, with J.P. Morgan down 39 cents, or 0.8%, at $46.25 at 4 p.m. in New York Stock Exchange trading. The growth challenges facing the nation's most profitable commercial bank and second largest by assets is a bad omen for rivals who are to report results in coming weeks.
J.P. Morgan's performance is considered a bellwether for the banking industry, and analysts already were expecting weaker results from competitors. Bank of America Corp., of Charlotte, N.C., Citigroup Inc., of New York, and Wells Fargo & Co., of San Francisco. are expected to show revenue declines, according to analyst estimates. All are wrestling with rising regulatory expenses and flat loan demand. As at J.P. Morgan, any profit will largely be driven by reductions in loan losses.
The biggest trouble spot for J.P. Morgan and other big U.S. banks remains their real-estate exposure. Investors are asking banks to repurchase billions of dollars in bad mortgages made in the run-up to the credit crisis that began in 2007. J.P. Morgan set aside $420 million in the latest quarter to cover repurchase requests. Banking regulators also are asking banks to adopt a slew of new procedures designed to make the foreclosure and loan-modification process easier for consumers.
Several federal bank regulators issued enforcement actions Wednesday for foreclosure misdeeds. J.P. Morgan Chase took $1.1 billion in one-time costs in the first quarter in anticipation of that, the bank said. It also said it recorded an additional $650 million related to foreclosure delays. To handle the new requirements from regulators, J.P. Morgan said it will add as many as 3,000 more people in its home-loans unit, which has a total staff of 40,000. It also may have to pay additional penalties or fees resulting from ongoing mortgage-servicing settlement talks with state attorneys general and several federal agencies.
J.P. Morgan's rivals could face even higher costs as they change practices to comply with the new rules. Both Bank of America and Wells Fargo service more mortgages than does J.P. Morgan, and Bank of America's 10.1% mortgage delinquency rate is higher than J.P. Morgan's 7.3%, according to Inside Mortgage Finance, a trade publication. No bank is expected to show outsize demand for new loans in the first quarter. J.P. Morgan's total loans fell 4% from a year earlier, lead by declines in student and auto loan originations.
The retail unit, which includes branch banking and mortgage and auto lending, had a loss of $208 million in the quarter—the only J.P. Morgan unit in the red—and revenue slumped 19%. It was a "very bad quarter" for retail, said Chief Executive Officer James Dimon. The bank attributed the decline to lower loan balances, thinner margins, and the drop off in new student and auto loans. The only sector showing signs of demand is commercial lending, where companies are slowly taking out more loans to fund inventory and capital improvements. J.P. Morgan's commercial bank reported a 5% rise in loans and 40% increase in net income.
Like J.P. Morgan, the other big banks may able to balance lackluster loan demand and rising costs with strong results from their Wall Street trading and investment-banking operations. J.P. Morgan tripled its trading revenue, and investment-banking earnings of $2.4 billion represented about half of the bank's total profit. The investment bank flexed its muscles by providing $20 billion in financing for AT&T's acquisition of Deutsche Telekom AG's T-Mobile. The deal likely helped boost the firm's advisory fees 41%.
Like J.P. Morgan, big competitors will be able to lean on improvements in credit cards as banks set aside less for future loan losses there. J.P. Morgan's credit-card unit swung to a $1.34 billion profit from a $303 million loss, in large part because the bank released $2 billion from its credit card loan-loss reserves. Across all bank divisions, J.P. Morgan set aside a total of $1.17 billion to handle future loan losses, down from $7.01 billion a year earlier.
JP Morgan Warns Of A Dystopian Future Where America Will Kick Old People To The Curb
by Gus Lubin - Business Insider
JP Morgan's Michael Cembalest gives a chilling analogy to America's future: the 1976 film Logan's Run.In the film, a world with insufficient resources maintains its equilibrium by killing everyone over the age of 30 (in the original book, the age was 21). The narrative revolves around how people are tracked through imprints in their hands, and how the protagonist tries to escape. It’s just a movie, but it taps into American fears about who makes these choices, and how they make them. With 30% of Medicare expenses taking place in the last year of life, and with government healthcare spending outstripping education spending by 10x over the last 50 years, this issue will be very hard to sort out.
JP Morgan's chief investment officer, Cembalest says entitlement costs are unsustainable: "The United States (its politicians and its citizens) have jointly created a leviathan of entitlement obligations which are 10 times the real cost of all its wars since the American Revolution."
He points to charts like these:
Long-term America must reform entitlements or face revolt in the treasury market.
Cembalest recommends "shorter-duration G7 government bond holdings, non-dollar assets and portfolios positioned for volatile markets (hedge funds, distressed assets and credit as a complement to equities)."
U.S. Argues Over Peanuts to Tame Elderly
by Laurence Kotlikoff - Bloomberg
The time to disagree agreeably is over for health-care policy in America. U.S. President Barack Obama and Congress last week approved a measly budget cut of $39 billion and no tax increases. That leaves us with a massive deficit equal to 9 percent of gross domestic product and a debt-to-GDP ratio that will exceed 90 percent within six years.
Our politicians touted this deal as the biggest compromise since 1850 and the largest cut in spending ever. But it really just constituted more fiscal child abuse that will force the young to take on additional debt while the elderly are let off the hook. While our officials crow over peanuts, other countries are getting their fiscal houses in order. The U.K.’s budget cuts and tax increases are 32 times larger when scaled by GDP.
Fortunately, the political euphoria over the budget deal lasted but a day. Whether you like his ideas or not, House Budget Committee Chairman Paul Ryan’s long-term budget plan shifted attention from keeping the government running to keeping it solvent. And Obama, too, will now present his views about spending and taxes.
The single biggest fix -- one that can eliminate about 60 percent of our $202 trillion long-term fiscal gap -- is keeping government (federal and state) health-care spending (including tax subsidies) constant at 10 percent of GDP. That’s a lot of GDP for any government to spend on health care. Germany’s total health-care bill (private plus government) is only 11 percent of GDP, and its health outcomes beat ours by a mile.
Lid on Costs
But keeping a lid on government spending is just one of our collective goals. The others are making sure that everyone has a basic health plan, that people aren’t penalized for having bad genes or bad luck, that health-care provision remains private, that people face strong incentives to improve their health, and that treatment be determined by medical, not legal, concerns.
Whether we are Republican or Democrat, the vast majority of us support these goals. How do I know? The answer is by observing what society values from what it chooses. And what it is choosing -- albeit in a slow, piecemeal and costly fashion -- is to ensure that everyone has a basic health plan that costs the same, regardless of pre-existing conditions.
'Quality Health Care'
Whether we look at the establishment of Medicare Parts A and B and Medicaid under President Lyndon Johnson; the rapid growth or Medicare and Medicaid benefit levels under Jimmy Carter and Ronald Reagan; the introduction of Children’s Medicaid under Bill Clinton; the enactment of Medicare Part D under George W. Bush; or the provision of health exchanges under Obama, we see a policy to guarantee, in the words of Richard Nixon, "that every citizen will be able to get quality health care at a reasonable price regardless of income."
We also read in our policies a desire to maintain private health-care provision. And today, at long last, we perceive an urgent desire to control costs, part of which, both parties acknowledge, requires changes to malpractice laws. So if we agree on what is needed, why don’t we go for it?
One answer is that there are too many interests vested in the generational status quo. This is demonstrated by Ryan’s decision to exempt the current elderly from his proposed Medicare overhaul. The last politician to take on the aged over health care was Dan Rostenkowski. In 1989, he was accosted by hundreds of oldsters for daring to propose they help pay for a catastrophic nursing-home insurance benefit.
Bills for Washington
A second answer is that we like to fight. Ryan’s proposals are remarkably similar in structure to Obamacare’s, and leading Democrats immediately said he was out to destroy Medicare. Let’s be clear: Ryan isn’t out to destroy Medicare. Medicare is out to destroy Medicare. Specifically, Medicare’s service-for- government-fee system, also called fee-for-service, is an ongoing invitation for the health-care system to spend what it wants on the elderly and ship the bills to Washington. Left in place, it will lead the government to limit the fees because it can’t limit the services. This will only force doctors to stop taking Medicare patients.
It’s beyond time for us to agree. Our generational policy is immoral and about to blow up in our faces. In my column last week I offered the Purple Health Plan, which would cap government health care costs at 10 percent of GDP. It offers the elderly and everyone else the same basic, but also very generous health-care plan. It’s the way to go.
China's World-Record Currency Reserves Exceed $3 Trillion
by Zheng Lifei - Bloomberg
China's foreign-exchange reserves, the world's largest, topped $3 trillion for the first time, highlighting global economic imbalances. The number compared with the $2.98 trillion estimate in a Bloomberg News survey of five economists and $2.85 trillion at the end of last year. The People's Bank of China released the data on its website today. New loans were 679.4 billion yuan ($104 billion) in March and M2 money supply rose 16.6 percent from a year earlier.
Group of 20 leaders are targeting lopsided spending and saving in a bid to prevent a repeat of the global financial crisis. The higher-than-forecast gains in lending and money supply may fuel inflation risks, with Phoenix Television reporting today that China's consumer prices surged 5.3 percent to 5.4 percent in March, the biggest gain since 2008.
China's reserves "highlight the fact that global imbalances remain," Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB, said before the release. The increase in loans compared with the 600 billion yuan median forecast in a survey of economists. M2 compared with a median estimate of 15.4 percent. Phoenix accurately reported ahead of the central bank release what the money-supply figure would be.
Chinese officials are reining in lending to counter inflation after a record expansion of credit in 2009 and 2010, with the central bank boosting interest rates four times since mid-October and raising banks' reserve requirements. The statistics bureau is due to release inflation and gross domestic product numbers at a briefing in Beijing tomorrow.
Strength in the euro may have bolstered China's currency reserves in the first quarter by boosting the value in dollars of assets held in the European currency. At the same time, the nation's swing to a trade deficit capped the increases in the holdings.
Who wants to be a triple trillionaire?
Window-shopping with China’s central bank
By the end of last year, China's foreign-exchange reserves amounted to $2.85 trillion. Although China ran a rare trade deficit in the first quarter of this year on April 14th the country's central bank released new figures showing that its reserves at the end of March had soared above $3 trillion.
China’s central bank has a lot of money but not a lot of imagination. It keeps a big chunk of its reserves in boring American government securities. That means it can count on getting its dollars back. But it frets about how much those dollars will be worth should America succumb to inflation or depreciation.
So what else could China do with the money? Instead of the dollar, China might fancy the euro. China could buy all of the outstanding sovereign debt of Spain, Ireland, Portugal and Greece, solving the euro area’s debt crisis in a trice. And it would still have almost half of its reserves left over.
It might, alternatively, choose to abandon debt altogether and buy equity. China could gobble up Apple, Microsoft, IBM and Google for less than $1 trillion. It could also follow the lead of those sheikhs and oligarchs who like to buy English football clubs. According to Forbes magazine, the 50 most valuable sports franchises around the world were worth only $50.4 billion last year, less than 2% of China’s reserves.
Another favoured sink for the world’s riches is property. Perhaps China should buy some exclusive Manhattan addresses. Hell, why not buy all of Manhattan? The island’s taxable real estate is worth only $287 billion, according to the New York City government. The properties of Washington, DC, are valued at a piffling $232 billion. China is accustomed to being Washington’s banker. Why not become its landlord instead?
China could also allay its fears about energy, food and military security. Three trillion dollars would buy about 88% of this year’s global oil supply. It would take only $1.87 trillion (at 2009 prices) to buy all of the farmland (and farm buildings) in the continental United States. And China could theoretically buy America’s entire Department of Defence, which has assets worth only $1.9 trillion, according to its 2010 balance-sheet. Much of that figure is land, buildings and investments; the guns, tanks and other military gear are valued at only $413.7 billion.
These frivolous calculations illustrate the vast scale of China’s reserves but also the great difficulty it faces in diversifying them. Any purchase big enough to warrant China’s attention will also move the market against it. China can buy almost anything for a price—but almost nothing for today’s price.
China's Banks Said to Need $131 Billion of Capital to Meet Stricter Rules
by John Liu - Bloomberg
Chinese banks may have to raise about 860 billion yuan ($131 billion) of stock over six years to meet stricter capital rules, according to estimates from the industry regulator, a person with knowledge of the matter said. Lenders are likely to need an additional 1.26 trillion yuan in supplementary capital by the end of 2016, the person said, declining to be named because the calculations aren’t public. The estimates, compiled in January, assume economic growth of 8 percent a year and 15 percent credit expansion, the person said.
Chinese lenders including Industrial & Commercial Bank of China (601398) Ltd. sold a combined $70 billion of shares last year after record credit expansion fueled concern that their assets might be eroded by bad debts. Banks’ dependence on loan growth to increase profits means they’ll likely have to raise more equity capital, according to Fitch Ratings. "Capital erosion is a long-term issue facing Chinese banks because they don’t really have the motivation to reduce reliance on loan expansion," said Wen Chunling, a Beijing-based analyst at Fitch. "The focus of China’s rules is to ensure that banks arm themselves with abundant capital to be well-prepared for a crisis, so that the cost of any government bailout would be minimized."
China’s banking regulator has drafted rules forcing banks to have Tier 1 capital ratios of at least 8.5 percent by the end of 2016, a person with knowledge of the matter said in January. The nation’s lenders had an average Tier 1 ratio of 10.1 percent at the end of last year, according to the watchdog. That’s below the average 12.3 percent among the world’s 100 largest banks by market value, according to data compiled by Bloomberg.
"Capital is very important for banks’ development," Jiang Jianqing, chairman of ICBC, said at a Bloomberg TV interview in Sanya, Hainan province, today. "With the ongoing global regulatory reform, banks are facing increased pressure to raise capital. We can always go to capital markets to raise debt or equity. Subordinated debt is an option." ICBC doesn’t plan to sell shares until 2012, if possible, Jiang said. The company also doesn’t plan to sell debt "for now," he said.
The estimates for funding requirements to be met through stock sales account for about 13 percent of the $1 trillion combined market value of China’s 17 publicly traded lenders, according to data compiled by Bloomberg. The forecasts don’t apply to so-called policy lenders like China Development Bank Corp. and Export-Import Bank of China, the person said.
Pace of Fundraising
China’s banking regulator said it has drafted a plan to implement global rules on capital requirements. "At present, the Regulation on the Management of Commercial Banks’ Capital Adequacy Ratio is still being revised," the China Banking Regulatory Commission said in an e- mailed response to questions. "After its official publication, each commercial bank will -- based on their own operating conditions -- estimate and decide on the method, pace and amount of fundraising."
Shares of ICBC dropped 0.9 percent in Hong Kong trading to HK$6.53 as of 11:36 a.m., after earlier falling as much as 1.8 percent. The stock had fallen 8.4 percent last year, compared with a 5.3 percent gain in the Hang Seng Index. Bank of China Ltd. (3988) fell 1.4 percent today, while China Construction Bank Corp. (939) lost 1.1 percent.
Tier 1 capital comes from equity, retained earnings and hybrid securities such as preference shares. Global regulators have been pushing banks to bolster equity capital after the financial crisis and a real estate collapse in parts of Europe forced governments to amass debt to bail out lenders. Globally, banks will be required to maintain at least 7 percent core Tier 1 capital ratios, a measure that excludes perpetual preferred stock, the Basel Committee on Banking Supervision said last year. Lenders have until 2019 to phase in the requirements.
While Chinese banks’ focus on domestic loans shielded them from the fallout of the global credit crisis, the CBRC in the past year has stepped up measures to ensure a two-year lending boom that started late 2008 won’t threaten financial stability. Banks including ICBC, the world’s most profitable lender, have responded by cutting dividend payout ratios, curbing loan growth or expanding non-lending businesses. ICBC, Construction Bank and Bank of China said last month they have no plans to sell more stock for as long as three years.
Under the new rules being considered, lenders must have a minimum 6 percent of Tier 1 capital, up from 4 percent under current regulations. Banks will also be required to hold another 2.5 percent as a "conservation buffer," the person familiar with the matter said in January. Lenders considered systemically important would need an additional 1 percent of Tier 1 capital, bringing their total requirement to 9.5 percent, the person said. The nation’s five biggest banks -- ICBC, Construction Bank, Bank of China, Agricultural Bank of China Ltd. (1288) and Bank of Communications Co., are now deemed systemically important, the person said.
Those banks will have to comply with the new capital ratio requirements by the end of 2013, three years earlier than other lenders, the person said in January. An additional buffer of as much as 2.5 percent that Chinese lenders may be subjected to if credit growth is deemed excessive wasn’t used by the regulator in calculating their fundraising needs, according to the person.
Lenders will need to increase their Tier 1 capital by about 5.26 trillion yuan over the six years through 2016, of which about 4.4 trillion yuan may come from profits, the person said. The China Banking Regulatory Commission based calculations on earnings rising 12 percent annually and banks distributing 40 percent of net income as dividends, the person said.
China’s five largest banks cut their average dividend payout ratio to about 37 percent last year from 39 percent in 2009, according to data compiled by Bloomberg, as they sought to preserve capital. The new rules would also require banks to hold a minimum 10.5 percent overall capital adequacy ratio, with systemically important banks needing an additional 1 percent, the person said.
That means lenders will need to raise 960 billion yuan in supplementary capital by the end of 2016, the person said. They may have to raise an additional 300 billion yuan if subordinated bonds and hybrid bonds, which don’t qualify as regulatory capital under the new Basel rules, need to be replaced.
Chinese banks currently raise supplementary capital by issuing subordinated bonds. In a bankruptcy, holders of subordinated notes receive payment only after other bond claims are paid in full. China’s lenders boosted combined profit 35 percent to a record 899.1 billion yuan in 2010, the fastest pace of earnings growth in three years, the CBRC said last month.
ICBC plans to increase loans in 2011 at the slowest pace in three years, Jiang last month. Construction Bank, the nation’s second-largest lender, and Bank of China have also said credit growth will slow. China Merchants Bank Co. will face a "relatively big capital shortfall" over the next five years because of stricter regulatory requirements, Xinhua News Agency reported on April 10, citing comments from the bank’s President Ma Weihua.
The perils of excessive economic optimism
by Gavyn Davies - Financial Times
The newly published IMF World Economic Outlook for April 2011 is a particularly excellent document, even by the exalted standards of that publication. Since the credit crunch, the IMF has been given increased responsibilities for monitoring the world economy and for cajoling policy makers in the right direction, especially on issues which spill over from one economy to another. And they have improved the depth of their analysis to meet this task.
In the WEO, the IMF warns policy makers not about the dangers of economic pessimism in slowing the pace of the recovery, but instead cautions them about the dangers of too much optimism. Optimism, that is, about the capacity of the world economy to maintain its recent rate of growth.
The IMF is concerned that the capacity of the world economy may be less than is commonly estimated, both by its own economists, and by those in charge of economic policy in the leading economies. Why might this be the case? In the developed economies, particularly in those which have been most affected by the financial crash (i.e. the US and the UK), the shrinkage in the financial sector might prove to be permanent, leaving the underlying trend for gross domestic product lower than it was before. Furthermore, following the housing crash, the construction sector may also be smaller than it was in the bubble years. Since it will take time to redeploy bankers and builders into the rest of the economy, the capacity of the economy will have been dented.
There have been many attempts in the US to measure the size of these effects, and most of them have suggested that the impact on economic capacity has been rather small. Consequently, the predominant view in the Fed and elsewhere is that there is still about 3-4 per cent of spare capacity left in the system. But given the frequent errors which have been made in these estimates in the past, the IMF is worried that the US output gap could be smaller than is currently estimated.
Outside of the US, the IMF is also worried about the possibility that the true level of economic capacity may have been over-estimated in China and the rest of emerging Asia. Although (rather strangely) it does not spell out the reasons for this, the extraordinarily high rates of saving and investment in these economies are presumably the grounds for concern.
Many economists believe that there has been a misallocation of capital investment towards the real estate and manufacturing sectors of the Asian economy, and that this could have forced policy makers to maintain their exchange rates at artificially low levels in order to utilise these resources in the export sector. With more appropriate real exchange rates, this misallocation of investment would be laid bare, and the capacity of the economy would shrink.
To demonstrate some rough orders of magnitude, the IMF runs a simulation in which forward projections of potential output in 2015 are assumed to be over-estimated by 6 per cent in China, 4 per cent in emerging Asia and 3 per cent in the US, with policy makers failing to spot their error before 2013. (Note that there is no error assumed in continental Europe or Japan, which is interesting.) Because they wrongly believe that their economies can sustain the recent rates of recovery, policy makers in the US and Asia initially turn a blind eye to rising inflation pressures, but then they slam on the brakes in 2013 when they realise that they have been too optimistic.
In the simulation, the resulting tightening in monetary policy leads to a very large drop in GDP growth rates from 2013-15. The scale of this setback depends on whether the period of excess GDP growth has by then caused an increase in inflation expectations and has therefore become entrenched in wage formation. If this occurs, China has to raise interest rates by 300 basis points relative to the baseline scenario, and this cuts real GDP growth by 5 per cent, 4 per cent and 3 per cent in successive years from 2013-15. In the US, the Fed has to raise rates by 200 basis points, and the hit to GDP growth is 3 per cent, 2 per cent and 1 per cent respectively. These are huge effects, which would have catastrophic consequences for financial asset prices.
Why is the IMF issuing such dire warnings now? Presumably it feels that policy mistakes of a similar nature were made from 2004-08, and that these errors were in part responsible for the scale of the recession in 2008-09. The signal that this is taking place again would be persistent increases in core and headline inflation in the next two years, along with rapid rates of credit expansion in the emerging world.
These warnings are far more likely to prove relevant in China and other emerging economies than they are in the US. This is because estimates of spare capacity are probably more reliable in the US than in the emerging world. In Asia, there is plenty of evidence that inflation pressures are already rising, and higher inflation rates there seem more likely to become entrenched in inflation expectations because the credibility of monetary policy is less firmly based. What is more, output is above trend, credit is surging, and capital inflows are back to peak levels in many parts of the emerging world.
By far the most compelling message in the latest WEO is therefore that policy needs to be tightened forthwith in many emerging economies. Otherwise there is trouble brewing.
Ikea's Third World outsourcing adventure -- in the U.S.
by Andrew Leonard - Salon
Nathaniel Popper's doozy of a story in the Sunday Los Angeles Times detailing labor strife at Ikea's first American factory is getting a lot of attention in the blogosophere, and for good reason: It's chock full of globalization irony.
Ikea seems to be treating its American workers at a furniture plant in Danville, Virginia a good deal worse than it does its Swedish workers back at home. The workers are trying to unionize; in response Ikea has hired the famous union-busting-specializing law firm Jackson-Lewis. Nothing particularly out of the ordinary for American labor relations in the 21st century, but in Sweden, eyebrows are being raised.The dust-up has garnered little attention in the U.S. But it's front-page news in Sweden, where much of the labor force is unionized and Ikea is a cherished institution. Per-Olaf Sjoo, the head of the Swedish union in Swedwood factories, said he was baffled by the friction in Danville. Ikea's code of conduct, known as IWAY, guarantees workers the right to organize and stipulates that all overtime be voluntary...
Laborers in Swedwood plants in Sweden produce bookcases and tables similar to those manufactured in Danville. The big difference is that the Europeans enjoy a minimum wage of about $19 an hour and a government-mandated five weeks of paid vacation. Full-time employees in Danville start at $8 an hour with 12 vacation days -- eight of them on dates determined by the company.
What's more, as many as one-third of the workers at the Danville plant have been drawn from local temporary-staffing agencies. These workers receive even lower wages and no benefits, employees said.
Swedwood's Steen said the company is reducing the number of temps, but she acknowledged the pay gap between factories in Europe and the U.S. "That is related to the standard of living and general conditions in the different countries," Steen said.
Bill Street, who has tried to organize the Danville workers for the machinists union, said Ikea was taking advantage of the weaker protections afforded to U.S. workers. "It's ironic that Ikea looks on the U.S. and Danville the way that most people in the U.S. look at Mexico," Street said.
Of course that's exactly the same line you hear when American outsourcers are justifying the low wages paid to employees on the assembly line in China or Mexico or Vietnam. Turns out, the United States isn't "exceptional" at all. To keep up with the challenge of foreign competition, our plan is to crack down on our own working class until our sweatshops are just as oppressive as any other developing nation's.
Somehow, Sweden -- and other Northern European countries -- has managed to avoid heading down this same road. Must have something to do with the different "general conditions" that prevail there.
25 Shocking Facts That Prove That The Entire U.S. Health Care Industry Has Become One Giant Money Making Scam
by Michael Snyder - Economic Collapse
What is the appropriate word to use when you find out that the top executive at the third largest health insurance company in America raked in 68.7 million dollars in 2010? How is one supposed to respond when one learns that more than two dozen pharmaceutical companies make over a billion dollars in profits each year? Is it okay to get angry when you discover that over 90 percent of all hospital bills contain "gross overcharges"?
Once upon a time, going into the medical profession was seen as a "noble" thing to do. But now the health care industry in the United States has become one giant money making scam and it is completely dominated by health insurance companies, pharmaceutical corporations, lawyers and corporate fatcats. In America today, just one trip to the hospital can cost you tens of thousands of dollars even if you do not stay for a single night.
The sad thing is that the vast majority of the money that you pay out for medical care does not even go to your doctor. In fact, large numbers of doctors across the United States are going broke. Rather, it is the "system" that is soaking up almost all of the profits. We have a health care industry in the United States that is fundamentally broken and it needs to be rebuilt from the ground up.
But wasn't that what Obamacare was supposed to do? No, in fact Obamacare was largely written by representatives from the health insurance industry and the pharmaceutical industry. Once it was signed into law the stocks of most health insurance companies went way up.
The truth is that Obamacare was one of the worst pieces of legislation in modern American history. It did nothing to fix our health care problems. Rather, it just made all of our health care problems much worse.
In case you haven't noticed, health insurance companies all over the United States have announced that they are going to raise premiums significantly due to the new law. Of course they are just using it as an excuse. They have been sticking it to us good for the last several decades and they just grab hold of whatever excuse they can find to justify the latest rate hike.
If you are looking for a legal way to drain massive amounts of money out of average Americans just become a health care company executive. Health care has become perhaps the greatest money making scam in the United States. When Americans are sick and have to go to the hospital most of them aren't really thinking about how much it will cost. At that point they are super vulnerable and ready to be exploited.
It is almost unbelievable how much money some of these companies make. Health insurance companies are more profitable when they provide less health care. Pharmaceutical companies aren't in the business of saving lives. Rather, they are in the business of inflating the profit margins on their drugs as much as possible. Many hospitals have adopted a policy of charging "whatever they can get away with", knowing that the vast majority of the public will never challenge the medical bills.
The system is broken. Everyone knows it. But it never gets fixed.
The following are 25 shocking facts that prove that the entire U.S. health care industry is one giant money making scam....
#1 The chairman of Aetna, the third largest health insurance company in the United States, brought in a staggering $68.7 million during 2010. Ron Williams exercised stock options that were worth approximately $50.3 million and he raked in an additional $18.4 million in wages and other forms of compensation. The funny thing is that he left the company and didn't even work the whole year.
#2 The top executives at the five largest for-profit health insurance companies in the United States combined to receive nearly $200 million in total compensation in 2009.
#3 One study found that approximately 41 percent of working age Americans either have medical bill problems or are currently paying off medical debt.
#4 Over the last decade, the number of Americans without health insurance has risen from about 38 million to about 52 million.
#5 According to one survey, approximately 1 out of every 4 Californians under the age of 65 has absolutely no health insurance.
#6 According to a report published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States. Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved individuals that actually did have health insurance.
#7 Profits at U.S. health insurance companies increased by 56 percent during 2009.
#8 According to a report by Health Care for America Now, America's five biggest for-profit health insurance companies ended 2009 with a combined profit of $12.2 billion.
#9 Health insurance rate increases are getting out of control. According to the Los Angeles Times, Blue Shield of California plans to raise rates an average of 30% to 35%, and some individual policy holders could see their health insurance premiums rise by a whopping 59 percent this year alone.
#10 According to an article on the Mother Jones website, health insurance premiums for small employers in the U.S. increased 180% between 1999 and 2009.
#11 Why are c-sections on the rise? It is because a vaginal delivery costs approximately $5,992 on average, while a c-section costs approximately $8,558 on average.
#12 Since 2003, health insurance companies have shelled out more than $42 million in state-level campaign contributions.
#13 Between 2000 and 2006, wages in the United States increased by 3.8%, but health care premiums increased by 87%.
#14 There were more than two dozen pharmaceutical companies that made over a billion dollars in profits in 2008.
#15 Each year, tens of billions of dollars is spent on pharmaceutical marketing in the United States alone.
#16 Nearly half of all Americans now use prescription drugs on a regular basis according to a CDC report that was just released. According to the report, approximately one-third of all Americans use two or more pharmaceutical drugs, and more than ten percent of all Americans use five or more prescription drugs on a regular basis.
#17 According to the CDC, approximately three quarters of a million people a year are rushed to emergency rooms in the United States because of adverse reactions to pharmaceutical drugs.
#18 The Food and Drug Administration reported 1,742 prescription drug recalls in 2009, which was a gigantic increase from 426 drug recalls in 2008.
#19 Lawyers are certainly doing their part to contribute to soaring health care costs. According to one recent study, the medical liability system in the United States added approximately $55.6 billion to the cost of health care in 2008.
#20 According to one doctor interviewed by Fox News, "a gunshot wound to the head, chest or abdomen" will cost $13,000 at his hospital the moment the victim comes in the door, and then there will be significant additional charges depending on how bad the wound is.
#21 In America today, if you have an illness that requires intensive care for an extended period of time, it is ridiculously really easy to rack up medical bills that total over 1 million dollars.
#22 It is estimated that hospitals overcharge Americans by about 10 billion dollars every single year.
#23 One trained medical billing advocate says that over 90 percent of the medical bills that she has audited contain "gross overcharges".
#24 It is not uncommon for insurance companies to get hospitals to knock their bills down by up to 95 percent, but if you are uninsured or you don't know how the system works then you are out of luck.
#25 According to one recent report, Americans spend approximately twice as much as residents of other developed countries on health care.
Sadly, the pillaging of the American people only seems to be accelerating.
Whether it is as a result of Obamacare or not, health insurers have decided that this is the season to raise health insurance premiums. Just consider the following excerpt from a recent article on Fox News....
Here is the terse reason CareFirst/Blue Cross/Blue Shield of Washington gave its subscribers for raising a monthly premium from $333 to $512 on a middle aged man who is healthy, is not a smoker and is not obese: "Your new rate reflects the overall rise in health care costs and we regret having to pass these additional costs on to you."
512 dollars a month for health insurance for a healthy non-smoker?
Are they serious? Apparently they are.
Things have gotten so bad that an increasing number of Americans are going outside of the country for medical care.
According to numbers released by Deloitte Consulting, a whopping 875,000 Americans were "medical tourists" in 2010.
Is there anyone out there that is not paid by the health care industry that is still willing to defend it?
Is there anyone out there that still believes that the health care industry is not just one giant money making scam?
Banks facing $3.6 trillion 'wall of maturing debt', IMF Global Financial Stability Report says
Debt-laden banks are the biggest threat to global financial stability and they must refinance a $3.6 trillion "wall of maturing debt" which comes due in the next two years, the International Monetary Fund said in its Global Financial Stability Report.
Many European banks need bigger capital cushions to restore market confidence and help reduce the risk of another financial crisis, according to the IMF's report, published on Wednesday. Banks around the world are facing a $3.6 trillion "wall of maturing debt" coming due in the next two years, and the rollover requirements are most acute for Irish and German banks, the report said.
"These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources," the IMF said. However the IMF said Spain's efforts to control its budget deficit have increased investor confidence and make it unlikely the country will follow Portugal in calling for a bail-out. "The actions that have been taken in Spain recently have managed to decouple in the views of markets the fortunes of Spain relative to those of Portugal" and Ireland, said Jose Vinals, director of the IMF's monetary and capital markets department.
Government debt was generally high and on a worryingly upward path in many advanced economies, the IMF said. It repeated its warning that the United States and Japan faced particularly dangerous debt dynamics. Advanced economies were "living dangerously" with high debt burdens, and faced the difficult task of trying to pare deficits without choking off the economic recovery.
However Dominique Strauss-Kahn, managing director of the IMF, warned countries against cuttting their budgets too far and creating long-term unemployment. "Fiscal tightening can lower growth in the short term, and this can even increase long-term unemployment, turning a cyclical into a structural problem," Mr Strauss-Kahn said in a speech in Washington DC. "The bottom line is that fiscal adjustment must be done with an eye kept keenly on growth."
Overall, the IMF said global financial stability has improved over the past six months. The most pressing challenges in the coming months will be funding of banks and sovereigns, particularly in vulnerable euro area countries, it said. US banks built up capital buffers in 2009, when regulators completed a set of stress tests that revealed some large holes. But European banks still need to raise a "significant amount of capital" to regain access to funding markets, the fund said.
The European Central Bank's upcoming stress tests provide a "golden opportunity" to improve bank balance sheet transparency and reduce market uncertainty about the quality of assets on banks' books, the IMF said. European banks won't be able to obtain all the necessary capital from markets, and public money may have to fill some of the gaps, it added. Banks could also cut dividend payouts and retain a larger portion of earnings. The IMF said banks' exposure to troubled sovereign debt is "uncertain," which adds to the funding strains.
Federal Reserve’s path of destruction
by David Stockman - Market Watch
Crony capitalism continues
This is part two of a two-part series by David Stockman. Read part one.
The destructive result of the Federal Reserve’s earlier housing and consumer credit bubble became the excuse for embracing a destructive zero interest rate policy which is self-evidently fueling even more destruction.
This destruction is, namely, the exploitation of middle class savers; the current severe food and energy squeeze on lower income households; the illusion in Washington that Uncle Sam can comfortably manage $14 trillion in debt because the interest carry is close enough to zero for government purposes; and the next round of bursting bubbles building up among the risk asset classes.
Moreover, the Fed soldiers on with its serial bubble-making, even though it is evident that the hallowed doctrines of modern monetary theory and the inherently dubious math of Taylor rules have failed completely.
Indeed, the evidence that the Fed no longer has any clue about the transmission pathways which connect the base money it is emitting with reckless abandon (e.g. Federal Reserve credit) to the millions of everyday pricing, hiring, investing and financing outcomes on Main Street sits right on its own balance sheet. Specifically, if the Fed actually knew how to thread the needle to the real economy with printing press money it wouldn’t have needed to manufacture $1 trillion in excess bank reserves — indolent entries on its own books for which it is now paying interest.
So in the present circumstances, ZIRP and QE2 amount to a monetary Hail Mary. There is no monetary tradition whatsoever that says the way back to U.S. economic health and sustainable growth is through herding Grandma into junk bonds and speculators into the Russell 2000.
Admittedly, the junk-bond financed dividends being currently extracted by the LBO kings from their debt-freighted portfolios may enable them to hire some additional household help and perhaps spur some new jobs at posh restaurants, too. Likewise, the 10% of the population which owns 80% of the financial assets may use their stock market winnings to stimulate some additional hiring at tony shopping malls.
That chairman Bernanke himself has explained in so many words this miracle of speculative GDP levitation, however, does not make it so. The fact is, if transitory wealth effects add to current consumer spending, they can just as readily subtract on the occasion of the next "risk-off" stampede to the downside. Indeed, the proof — if any is needed — that cheap money fueled asset inflations do not bring sustainable prosperity lies in the still smoldering ruins of the U.S. housing boom.
In truth, the Fed’s current money printing spree has no analytical foundation, and amounts to seat-of-the-pants pursuit of a will-o’-wisp — the idea of a perpetual bull market. Like the Bank of Japan, the Fed has made itself hostage to the global speculative classes, and must repeatedly inject new forms of stimulus to keep the bubbles rising.
This is the only possible explanation for its preposterous decision to allow the big banks to resume dissipating their meager capital accounts by paying "normalized" dividends and by resuming large-scale stock buybacks. These are the same financial institutions that allegedly nearly brought the global economy to its knees in September 2008, according to the Fed chairman’s own words.
In what is no longer secret testimony to the FCIC (Financial Crisis Inquiry Commission), Federal Reserve Chairman Bernanke claimed that the Wall Street meltdown "was the worst financial crisis in global history" and that "out of maybe 13…..of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two".
That testimony was recorded just 15 months ago, but the financially seismic events it references have apparently already faded into the dustbin of history. Still, even if the dubious proposition that the banking system has fully healed were true, what did the Fed hope to accomplish besides goosing the S&P 500 via speculative rotation into the bank indices?
Well, there are no other plausible explanations. Certainly the stated theory — namely, that by green lighting disgorgements of capital today the Fed’s action will facilitate bank capital raising and new lending in the future —merits a loud guffaw. The fast money has already priced in whatever dividend increases and share buybacks may occur before the next banking crisis, but the last thing these speculators expects is a new round of dilutive capital issuance by the banks. Stated differently, the bid for bank stocks unleashed by the Fed’s relief action is predicated on speculators’ pocketing any near-term "surplus" capital, not leaving it in harms way.
Moreover, even if the Fed’s action had the effect of bolstering, not depleting, bank capital the larger issue is why does our already massively bloated banking system need more capital in any event? The reflexive answer is that this will help restart the flow of credit to Main Street, but it doesn’t take much digging to see that this is a complete non-starter.
The household sector is still saddled with massive excess debt — unless you believe that the credit bubble of recent years is the sustainable norm. The fact is, prior to the Fed’s easy money induced national LBO, debt-to-income ratios at today’s levels were unthinkable. In 1975, for example, total household debt—including mortgages, credit cards, auto loans and bingo wagers—was about $730 billion or 45% of GDP
During the 1980’s, however, this long-standing household leverage ratio began a parabolic climb, and never looked back. By the bubble peak in Q4 2007, total household debt had reached $13.8 trillion and was 96% of GDP. Yet after 36 months of the Great Recession wring-out, the dial has hardly moved: household debt outstanding in Q4 2010 was still $13.4 trillion, meaning that it has shrunk by the grand sum or 3% (entirely due to defaults) and still remains at 90% of GDP or double the leverage ratio that existed prior to the debt binge of the past three decades.
So the banking system does not need more capital in order to increase credit extensions to the household sector. In fact, the two principal categories of household debt — mortgage loans and revolving credit, continue to decline as American families slowly shed unsupportable debt. The only reason total household debt appears to be stabilizing in recent quarters is that student loan volumes are soaring, but this growth is being funded entirely by the Bank of Uncle Sam now that private bank loan guarantees have been eliminated.
Indeed, the startling fact is that the approximate $1 trillion of student loans outstanding — sub-prime credits by definition — now exceed the $830 billion of total credit card debt by a wide margin. While this latest student loan bubble will end no better than the earlier credit bubbles, the larger fact remains that the household sector is only in the early stages of deleveraging. Not the least of the self-evident motivating forces here is that the leading edge of the household sector — the 78 million strong baby boom generation — appears to be figuring out that it is not 1975 anymore, and that retirement and old age are approaching at a gallop.
This obvious household deleveraging trend remains a mystery to the Fed and to the Wall Street stock peddlers who occasionally moonlight as economists. One recent air ball offered up by the latter is that the ratio of debt to disposable personal income (DPI) has dropped materially, and that this proves the household sector has been healed financially and is ready to borrow again. Specifically, the household debt-to-DPI ratio has fallen to 116% from a peak of 130% in late 2007.
Never mind that this measure of household financial health stood at just 62% back during the healthier climes of 1975. It is evident that even the modest improvement in this ratio during the last three years is a statistical illusion. It turns out that the debt-to-DPI ratio is improving mainly because the denominator has gained about $885 billion or 8.3% since the end of 2007.
Yet this gain in DPI has nothing whatsoever to do with an improved debt carrying capacity in the household sector. Thanks to the more or less continuous riot of Keynesian stimulus in Washington since early 2008, we have had a tax holiday and a transfer payment bonanza. Specifically, in the three years since the fourth quarter 2007 peak, personal taxes are down at a $312 billion annual rate (which adds to DPI, an after-tax measure) and transfer payments are up by a $572 billion annual rate.
Both of these are components of DPI, and taken together ($884 billion) they account, quite astoundingly, for 99.8% of the DPI gain since Q4 2007. Moreover, it does not take a lot of figuring to see that these trends won’t last. The Federal tax take is now less than 15% of GDP — the lowest level since 1950 — and will be rising year-after-year in the decade ahead, as will personal tax burdens at the state and local level.
At the same time, the 30% surge in transfer payments over the last three years is mostly done. Unemployment insurance payments — which accounted for much of the rise — will be flat or shrinking in the near future, and various one-time low income programs have already expired. Moreover, the bulk of the current $2.3 trillion in transfer payments go to elderly and poverty level households which carry negligible portions of the $13.4 trillion in household debt, in any event.
By contrast, the ratio of household debt to private wage and salary income — a far better measure of debt carrying capacity — has not improved at all. Household debt amounted to 255% of private wage and salary income at the peak of the credit boom in late 2007, and was still 251% in Q4 2010. At the end of the day, the household debt-to-DPI ratio improved solely because Uncle Sam went on a borrowing spree and temporarily juiced DPI with tax abatements and transfer handouts.
In short, banks don’t need more capital to support household credit because the latter is still shrinking, and will be for a long time to come. Moreover, it might as well be said in this same vein that the business sector doesn’t need no more stinking debt, neither!
At the end of 2005 — before the credit bubble reached its apogee — the non-financial business sector (both corporate and non-corporate entities) had total credit market debt of $8.3 trillion, according to the Fed’s flow of funds data. By the end of 2007, this total had soared by 25% to $10.4 trillion. But contrary to endless data fiddling by Wall Street economists, the business sector as a whole has not deleveraged one bit since the financial crisis. As of year-end 2010, business debt was up a further $500 billion to $10.9 trillion.
The whole propaganda campaign about the business sector becoming financially flush rests on an entirely spurious factoid with respect to balance sheet cash. Yes, that number is up a tad — from $2.56 trillion in fourth quarter 2007 to $2.86 trillion at the end of 2010. Still, this endlessly trumpeted gain in cash balances of $300 billion is more than offset by the far larger gain in business sector debt — meaning that, on balance, the alleged cash nest egg held by American business is simply borrowed money.
At the end of the day, $10.9 trillion is a lot of debt in absolute terms, but based on the Fed’s data on the market value of business sector assets, it is also crystal clear that the relative burden of business debt has been rising, not falling. At the bubble peak in late 2007, business sector assets were valued at $41.5 trillion but alas this figure had shrunk to $36.9 trillion by the end of last year. The grim reaper of real estate deflation has done its work in the business sector, too.
Consequently, total business debt now amounts to 29.4% of business assets---a considerable rise from the 25.2% ratio at the bubble peak in late 2007. What the bullish cheerleaders of recovery constantly forget is that in an epochal deflation like the present one, debts remain at their contractual amounts, even as asset values wither.
So the real question regarding the Fed’s green light for bank dividends and buybacks is quite clear. Banks don’t need more capital to make new loans to households and business. What they actually need is to preserve their current artificially bloated retained earnings accounts in order to protect the taxpayers from the next — virtually certain — banking meltdown.
In this light, the Fed’s action is especially meretricious. If it weren’t in such a hurry to juice the stock market and thereby keep the illusion of recovery going, it might have considered extending the regulatory sequester on bank capital for a few more quarters or even years — thereby preserving a shield for the taxpayers until it has been demonstrated by the passage of time, not by the passing of phony stress tests, that the American banking system is truly out of the woods.
After all, the bottled-up profits currently alleged to be resident in the banking system have not been expropriated by the Fed; they have just been temporarily sequestered — a condition these wards of the state should gladly endure in return for continued access to taxpayer backed deposit insurance and the Fed’s borrowing widow, as well as their license to engage in the lucrative business of fractional reserve banking. Indeed, the fast money should be as capable of pricing in any "excess" capital in the banking system, as it has already been in goosing bank stocks in anticipation of higher profit distributions.
And it is here where the historical data on Bernanke’s 12 out of 13 crashing financial dominoes essentially speaks its own cautionary tale. At the peak of the credit and housing boom in 2006, these 13 most important financial institutions booked $110 billion of net income, and disgorged more than $40 billion of that amount in dividends and stock buybacks.
Would that these fulsome profits and attendant distributions had been real and sustainable, but the historical facts inform otherwise. By 2007, the groups’ profits had dropped to $64 billion, and then in 2008, the 10 institutions which survived to year-end reported a staggering loss of $56 billion. Moreover, if the massive loses incurred by the terrible three — Washington Mutual, Wachovia and Lehman — during their final, unreported stub quarter is added to the tally, losses for the year would approach $80 billion.
The unassailable truth here is that in 2006 and 2007 the banks were disgorging phantom profits to their shareholders. When the crunch came in 2008, bank capital had been badly depleted by these unwarranted dividends and stock buybacks.
The danger, of course, was buried in the balance sheets all along. Back in their 2006 heyday, the top 13 financial institutions had $10.2 trillion of total assets — and a not inconsiderable portion of that figure was worth far less than book value, as ensuing events proved. Today the nine banks which are the survivors and assigns of these 13 institutions still have $10.1 trillion in asset footings — hardly a measurable reduction despite the goodly amount of write-offs which have been taken in the interim.
The Fed’s foolish wager — and it is foolish because there is no real purpose other than a momentary boost to bank shares — is that this once toxic asset ridden $10 trillion balance sheet is now squeaky clean. Yet why would any sane observer embrace that dubious proposition?
While the banks have been relieved of mark-to-market accounting, they are still knee-deep in the very asset classes whose ultimate recoverable value remains exposed to the real estate meltdown. Residential housing prices are now clearly in the midst of a double dip, and rates of new construction and existing unit sales are spilling off the bottom of the historical charts
Still, the banking system holds $2.5 trillion of residential mortgages and home equity lines — plus $350 billion of construction loans and more than a trillion of mortgage backed securities. Maybe they have enough reserves to cover the remaining sins in this $4 trillion kettle of residential debt, but betting on housing bottom has been a widow-maker for several years now — and there is nothing on the horizon to suggest that this epochal bust will not make a few more.
Likewise, the banking system is carrying $1 trillion of commercial real estate loans, and the open secret is that "extend and pretend" refinancing is the primary underpinning of current book values. Similarly, the Fed has rigged the steepest yield curve in modern times, but it is a fair bet that as it is gradually forced to normalize interest rates, current record net interest margins will be squeezed. And it is also probable that some of the $2.7 trillion of government, corporate and other securities owned by the banking system may be worth less than par in a world where money rates are more than zero.
In short, a banking system that by the lights of the Fed was on the verge of extinction just 28 months ago could not possibly have gotten well in the interim. In shades of 2006, the nine survivors did report net income of $54 billion in the year just ended, and it is these retained earnings that have purportedly brought bank capital ratios to the pink of health. Then again, the cynic might wonder whether the trading book and yield curve profits of 2010 might not disappear as fast as did the mortgage origination, securitization and trading profits of 2006-2007.
One thing is certain, however, and that is that these behemoths are now truly too big to fail. At the end of 2006, the asset footings of the Big Six — J.P. Morgan, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — were $7.1 trillion. Saving the system through shotgun marriages in the interim, our financial overloads have permitted the group to grow its assets by 30% to $9.2 trillion.
If you believe that these massive financial conglomerates are a clear and present danger to the American economy, you might opine that they are too big to exist, as well. But even from a more quotidian angle — unless you are in the banking index for a trade — it’s pretty easy to see that so-called banking profits should have remained under regulatory sequester for a few more economic seasons, at least.
David Stockman is a former member of the House of Representatives and a member of the Reagan administration. He currently owns his private equity fund, Heartland Industrial Partners, L.P .
Is Now the Time to Invest in Las Vegas Properties?
by Keith Jurow - Minyanville
Investors are pouring into housing markets across the country. According to the November Report of Market Conditions by Inside Mortgage Finance, 20% of all home purchases nationwide are now made by investors. In some major markets, this percentage is much higher.
What attracts investors these days is very different from what drew them during the bubble years. They are not really enticed by appreciation potential and leverage. Investors are lured mainly by low prices and positive cash flows.
Many of them are also searching for an alternative to the ridiculously low rates they now receive from money market funds, US Treasury securities or bank CDs. One knowledgeable Phoenix broker explained that his investor-clients are often 50 and older who have been pulled into residential investing because of the plunge in interest rates they’ve had to endure. Quite a few have liquid assets over $1 million and are looking for a better return.
Metros that experienced the greatest price bubbles and subsequent collapse have seen hordes of investors leap into their housing markets -- especially Las Vegas, Phoenix, several Florida cities, and cities in the California Inland Empire. These investors are fairly confident that prices are nearing a bottom and that the risks of major declines are minimal.
Let’s take a look at some of these markets to see whether investors are acting on sound information. The following table from CoreLogic data shows the 10 weakest large counties in the US in terms of distressed properties which have not yet been foreclosed and repossessed by lenders as of the end of September 2010.
Note that this table shows the 10 large counties with the highest total percentage of first liens which were either seriously delinquent or had been placed into default. Keep in mind that these are properties which had not yet been foreclosed and repossessed. We know from historical cure rates that roughly 98% of these properties will eventually be forced onto the market as either foreclosures or short sales.
It is also important to know that CoreLogic’s enormous database of nearly 42 million loans does not include the entire universe of first liens. I was informed by their key database person that they do not extrapolate from their database to estimate the total number of loans or distressed properties. Thus the total number of seriously delinquent and defaulted first liens in these 10 counties is somewhat higher.
Three of these counties contain the major bubble metros of Las Vegas, Miami, and Phoenix. This so-called "shadow inventory" will be thrown onto the market in the not-too-distant future and will clearly add to the glut of MLS listings.
It is very hard to determine how soon the banks will start to reduce this backlog of distressed properties. The servicing banks are clearly in no rush either to put seriously delinquent homeowners into default or to foreclose on those properties which are already in default. In December 2010, according to Lender Processing Services, 34% of seriously delinquent homeowners had not made a mortgage payment in at least 12 months. In early 2009, that number was only 10%.
The servicing banks can delay putting these homes into foreclosure to avoid having to write them down, but they will definitely be hitting the housing markets in these counties over the next few years.
How does this impact you? If you are an investor thinking of buying one or more properties in Miami-Dade County, for example, you need to know that 24.9% of all active first liens there were seriously distressed. This means that more than 91,000 properties are almost certainly going to be dumped onto the market. Will that exert downward pressure on prices? Absolutely.
If you are seriously considering investing in Miami-Dade, it is essential to factor in this huge and growing shadow inventory and be prepared for a further drop in prices of 10-20% or more.
In Financial Crisis, No Prosecutions of Top Figures
by Gretchen Morgenson and Louise Story - New York Times
It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?
Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.
At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets. Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.
Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system. His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.
Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that "Mr. Geithner never suggested that there be any lack of diligence or any slowdown." Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. "to protect taxpayers." Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.
But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.
Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud. As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.
Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath. A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.
"This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity," said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. "But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here."
Even civil actions by the government have been limited. The Securities and Exchange Commission adopted a broad guideline in 2009 — distributed within the agency but never made public — to be cautious about pushing for hefty penalties from banks that had received bailout money. The agency was concerned about taxpayer money in effect being used to pay for settlements, according to four people briefed on the policy but who were not authorized to speak publicly about it.
To be sure, Wall Street’s role in the crisis is complex, and cases related to mortgage securities are immensely technical. Criminal intent in particular is difficult to prove, and banks defend their actions with documents they say show they operated properly. But legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could. Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured.
Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems.
Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known.
Executives at Lehman Brothers assured investors in the summer of 2008 that the company’s financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Stearns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm’s executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.
But the Justice Department has decided not to pursue some of these matters — including possible criminal cases against Mr. Mozilo of Countrywide and Joseph J. Cassano, head of Financial Products at A.I.G., the business at the epicenter of that company’s collapse. Mr. Cassano’s lawyers said that documents they had given to prosecutors refuted accusations that he had misled investors or the company’s board. Mr. Mozilo’s lawyers have said he denies any wrongdoing.
Among the few exceptions so far in civil action against senior bankers is a lawsuit filed last month against top executives of Washington Mutual, the failed bank now owned by JPMorgan Chase. The Federal Deposit Insurance Corporation sued Kerry K. Killinger, the company’s former chief executive, and two other officials, accusing them of piling on risky loans to grow faster and increase their compensation. The S.E.C. also extracted a $550 million settlement from Goldman Sachs for a mortgage security the bank built, though the S.E.C. did not name executives in that case.
Representatives at the Justice Department and the S.E.C. say they are still pursuing financial crisis cases, but legal experts warn that they become more difficult as time passes. "If you look at the last couple of years and say, ‘This is the big-ticket prosecution that came out of the crisis,’ you realize we haven’t gotten very much," said David A. Skeel, a law professor at the University of Pennsylvania. "It’s consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not."
The Countrywide Puzzle
As nonprosecutions go, perhaps none is more puzzling to legal experts than the case of Countrywide, the nation’s largest mortgage lender. Last month, the office of the United States attorney for Los Angeles dropped its investigation of Mr. Mozilo after the S.E.C. extracted a settlement from him in a civil fraud case. Mr. Mozilo paid $22.5 million in penalties, without admitting or denying the accusations. White-collar crime lawyers contend that Countrywide exemplifies the difficulties of mounting a criminal case without assistance and documentation from regulators — the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Fed, in Countrywide’s case.
"When regulators don’t believe in regulation and don’t get what is going on at the companies they oversee, there can be no major white-collar crime prosecutions," said Henry N. Pontell, professor of criminology, law and society in the School of Social Ecology at the University of California, Irvine. "If they don’t understand what we call collective embezzlement, where people are literally looting their own firms, then it’s impossible to bring cases."
Financial crisis cases can be brought by many parties. Since the big banks’ mortgage machinery involved loans on properties across the country, attorneys general in most states have broad criminal authority over most of these institutions. The Justice Department can bring civil or criminal cases, while the S.E.C. can file only civil lawsuits.
All of these enforcement agencies traditionally depend heavily on referrals from bank regulators, who are more savvy on complex financial matters. But data supplied by the Justice Department and compiled by a group at Syracuse University show that over the last decade, regulators have referred substantially fewer cases to criminal investigators than previously.
The university’s ’Transactional Records Access Clearinghouse indicates that in 1995, bank regulators referred 1,837 cases to the Justice Department. In 2006, that number had fallen to 75. In the four subsequent years, a period encompassing the worst of the crisis, an average of only 72 a year have been referred for criminal prosecution. Law enforcement officials say financial case referrals began declining under President Clinton as his administration shifted its focus to health care fraud. The trend continued in the Bush administration, except for a spike in prosecutions for Enron, WorldCom, Tyco and others for accounting fraud.
The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions. From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed. The thrift supervisor, however, has not referred a single case to the Justice Department since 2000, the Syracuse data show. The Office of the Comptroller of the Currency, a unit of the Treasury Department, has referred only three in the last decade. The comptroller’s office declined to comment on its referrals. But a spokesman, Kevin Mukri, noted that bank regulators can and do bring their own civil enforcement actions. But most are against small banks and do not involve the stiff penalties that accompany criminal charges.
Historically, Countrywide’s bank subsidiary was overseen by the comptroller, while the Federal Reserve supervised its home loans unit. But in March 2007, Countrywide switched oversight of both units to the thrift supervisor. That agency was overseen at the time by John M. Reich, a former banker and Senate staff member appointed in 2005 by President George W. Bush. Robert Gnaizda, former general counsel at the Greenlining Institute, a nonprofit consumer organization in Oakland, Calif., said he had spoken often with Mr. Reich about Countrywide’s reckless lending. "We saw that people were getting bad loans," Mr. Gnaizda recalled. "We focused on Countrywide because they were the largest originator in California and they were the ones with the most exotic mortgages."
Mr. Gnaizda suggested many times that the thrift supervisor tighten its oversight of the company, he said. He said he advised Mr. Reich to set up a hot line for whistle-blowers inside Countrywide to communicate with regulators. "I told John, ‘This is what any police chief does if he wants to solve a crime,’ " Mr. Gnaizda said in an interview. "John was uninterested. He told me he was a good friend of Mozilo’s." In an e-mail message, Mr. Reich said he did not recall the conversation with Mr. Gnaizda, and his relationships with the chief executives of banks overseen by his agency were strictly professional. "I met with Mr. Mozilo only a few times, always in a business environment, and any insinuation of a personal friendship is simply false," he wrote.
After the crisis had subsided, another opportunity to investigate Countrywide and its executives yielded little. The Financial Crisis Inquiry Commission, created by Congress to investigate the origins of the disaster, decided not to make an in-depth examination of the company — though some staff members felt strongly that it should.
In a January 2010 memo, Brad Bondi and Martin Biegelman, two assistant directors of the commission, outlined their recommendations for investigative targets and hearings, according to Tom Krebs, another assistant director of the commission. Countrywide and Mr. Mozilo were specifically named; the memo noted that subprime mortgage executives like Mr. Mozilo received hundreds of millions of dollars in compensation even though their companies collapsed.
However, the two soon received a startling message: Countrywide was off limits. In a staff meeting, deputies to Phil Angelides, the commission’s chairman, said he had told them Countrywide should not be a target or featured at any hearing, said Mr. Krebs, who said he was briefed on that meeting by Mr. Bondi and Mr. Biegelman shortly after it occurred. His account has been confirmed by two other people with direct knowledge of the situation.
Mr. Angelides denied that he had said Countrywide or Mr. Mozilo were off limits. Chris Seefer, the F.C.I.C. official responsible for the Countrywide investigation, also said Countrywide had not been given a pass. Mr. Angelides said a full investigation was done on the company, including 40 interviews, and that a hearing was planned for the fall of 2010 to feature Mr. Mozilo. It was canceled because Republican members of the commission did not want any more hearings, he said. "It got as full a scrub as A.I.G., Citi, anyone," Mr. Angelides said of Countrywide. "If you look at the report, it’s extraordinarily condemnatory."
An F.B.I. Investigation Fizzles
The Justice Department in Washington was abuzz in the spring of 2008. Bear Stearns had collapsed, and some law enforcement insiders were suggesting an in-depth search for fraud throughout the mortgage pipeline. The F.B.I. had expressed concerns about mortgage improprieties as early as 2004. But it was not until four years later that its officials recommended closing several investigative programs to free agents for financial fraud cases, according to two people briefed on a study by the bureau.
The study identified about two dozen regions where mortgage fraud was believed rampant, and the bureau’s criminal division created a plan to investigate major banks and lenders. Robert S. Mueller III, the director of the F.B.I., approved the plan, which was described in a memo sent in spring 2008 to the bureau’s field offices. "We were focused on the whole gamut: the individuals, the mortgage brokers and the top of the industry," said Kenneth W. Kaiser, the former assistant director of the criminal investigations unit. "We were looking at the corporate level."
Days after the memo was sent, however, prosecutors at some Justice Department offices began to complain that shifting agents to mortgage cases would hurt other investigations, he recalled. "We got told by the D.O.J. not to shift those resources," he said. About a week later, he said, he was told to send another memo undoing many of the changes. Some of the extra agents were not deployed.
A spokesman for the F.B.I., Michael Kortan, said that a second memo was sent out that allowed field offices to try to opt out of some of the changes in the first memo. Mr. Kaiser’s account of pushback from the Justice Department was confirmed by two other people who were at the F.B.I. in 2008. Around the same time, the Justice Department also considered setting up a financial fraud task force specifically to scrutinize the mortgage industry. Such task forces had been crucial to winning cases against Enron executives and those who looted savings and loans in the early 1990s.
Michael B. Mukasey, a former federal judge in New York who had been the head of the Justice Department less than a year when Bear Stearns fell, discussed the matter with deputies, three people briefed on the talks said. He decided against a task force and announced his decision in June 2008. Last year, officials of the Financial Crisis Inquiry Commission interviewed Mr. Mukasey. Asked if he was aware of requests for more resources to be dedicated to mortgage fraud, Mr. Mukasey said he did not recall internal requests. A spokesman for Mr. Mukasey, who is now at the law firm Debevoise & Plimpton in New York, said he would not comment beyond his F.C.I.C. testimony. He had no knowledge of the F.B.I. memo, his spokesman added.
A year later — with precious time lost — several lawmakers decided that the government needed more people tracking financial crimes. Congress passed a bill, providing a $165 million budget increase to the F.B.I. and Justice Department for investigations in this area. But when lawmakers got around to allocating the budget, only about $30 million in new money was provided. Subsequently, in late 2009, the Justice Department announced a task force to focus broadly on financial crimes. But it received no additional resources.
A Break for 8 Banks
In July 2008, the staff of the S.E.C. received a phone call from Scott G. Alvarez, general counsel at the Federal Reserve in Washington. The purpose: to discuss an S.E.C. investigation into improprieties by several of the nation’s largest brokerage firms. Their actions had hammered thousands of investors holding the short-term investments known as auction-rate securities.
These investments carry interest rates that reset regularly, usually weekly, in auctions overseen by the brokerage firms that sell them. They were popular among investors because the interest rates they received were slightly higher than what they could earn elsewhere. For years, companies like UBS and Goldman Sachs operated auctions of these securities, promoting them as highly liquid investments. But by mid-February 2008, as the subprime mortgage crisis began to spread, investors holding hundreds of billions of dollars of these securities could no longer cash them in.
As the S.E.C. investigated these events, several of its officials argued that the banks should make all investors whole on the securities, according to three people with knowledge of the negotiations but who were not authorized to speak publicly, because banks had marketed them as safe investments.
But Mr. Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their "best efforts."
This shift eased the pain significantly at some of the nation’s biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. These institutions have subsequently recouped some but not all of their investments. Mr. Alvarez declined to comment, through a spokeswoman.
An S.E.C. spokesman said: "The primary consideration was remedying the alleged wrongdoing and in fashioning that remedy, the emphasis was placed on retail investors because they were suffering the greatest hardship and had the fewest avenues for redress." A similar caution emerged in other civil cases after the bank bailouts in the autumn of 2008. The S.E.C.’s investigations of financial institutions began to be questioned by its staff and the agency’s commissioners, who worried that the settlements might be paid using federal bailout money.
Four people briefed on the discussions, who spoke anonymously because they were not authorized to speak publicly, said that in early 2009, the S.E.C. created a broad policy involving settlements with companies that had received taxpayer assistance. In discussions with the Treasury Department, the agency’s division of enforcement devised a guideline stating that the financial health of those banks should be taken into account when the agency negotiated settlements with them.
"This wasn’t a political thing so much as, ‘We don’t know if it makes sense to bring a big penalty against a bank that just got a check from the government,’ " said one of the people briefed on the discussions. The people briefed on the S.E.C.’s settlement policy said that, while it did not directly affect many settlements, it slowed down the investigative work on other cases. A spokesman for the S.E.C. declined to comment.
Attorney General Moves On
The final chapter still hasn’t been written about the financial crisis and its aftermath. One thing has been especially challenging for regulators and law enforcement officials: balancing concerns for the state of the financial system even as they pursued immensely complicated cases.
The conundrum was especially clear back in the fall of 2008 when Mr. Geithner visited Mr. Cuomo and discussed A.I.G. Asked for details about the meeting, a spokesman for Mr. Geithner said: "As A.I.G.’s largest creditor, the New York Federal Reserve installed new management at A.I.G. in the fall of 2008 and directed the new C.E.O. to take steps to end wasteful spending by the company in order to protect taxpayers."
Mr. Cuomo’s office said, "The attorney general went on to lead the most aggressive investigation of A.I.G. and other financial institutions in the nation." After that meeting, and until he left to become governor, Mr. Cuomo focused on the financial crisis, with mixed success. In late 2010, Mr. Cuomo sued the accounting firm Ernst & Young, accusing it of helping its client Lehman Brothers "engage in massive accounting fraud."
To date, however, no arm of government has sued Lehman or any of its executives on the same accounting tactic. Other targets have also avoided legal action. Mr. Cuomo investigated the 2008 bonuses that were paid out by giant banks just after the bailout, and he considered bringing a case to try to claw back some of that money, two people familiar with the matter said. But ultimately he chose to publicly shame the companies by releasing their bonus figures.
Mr. Cuomo took a tough stance on Bank of America. While the S.E.C. settled its case with Bank of America without charging any executives with wrongdoing, Mr. Cuomo filed a civil fraud lawsuit against Kenneth D. Lewis, the former chief executive, and the bank’s former chief financial officer. The suit accuses them of understating the losses of Merrill Lynch to shareholders before the deal was approved; the case is still pending.
Last spring, Mr. Cuomo issued new mortgage-related subpoenas to eight large banks. He was interested in whether the banks had misled the ratings agencies about the quality of the loans they were bundling and asked how many workers they had hired from the ratings agencies. But Mr. Cuomo did not bring a case on this matter before leaving office.
Canada’s crumbling infrastructure: the silence is deafening
by Barrie McKenna - Globe and Mail
Elections should be the time to discuss the big issues. That’s rarely how it works. True to form, the parties aren’t talking seriously in this election about health care, climate change or Canada’s role in two foreign wars. Here’s another big one that probably won’t come up in Tuesday’s televised leaders debate: the decrepit state of Canada’s public infrastructure.
Consider Montreal’s Champlain Bridge, a 50-year-old landmark and a vital transportation link to the bustling South Shore and beyond. Ravaged by salt, it is literally falling into the St. Lawrence River, chunk by chunk. Engineers believe it might have, at best, 10 to 15 years of life left in it, and even the belated $212-million Ottawa has earmarked for repairs might not be enough to save the bridge.
If a major earthquake were to strike the city (and Montreal sits in an active quake zone), Canada’s busiest bridge likely wouldn’t last more than a few minutes. "This bridge can be expected to collapse, partially or altogether, in a significant seismic event," engineers at Delcan noted matter-of-factly in a recent report. That’s not "might" or "could." The experts are pretty much saying it will.
It’s hard to underplay the urgency. A replacement to the Champlain Bridge could take 15 years, or the outer lifespan of the existing bridge (cost: at least $1-billion). That’s just one city, and one bridge. Across Canada, key pieces of vital public infrastructure badly need fixing or replacing. There are roads and bridges, water and sewer plants, public transit networks, parks and ports.
Here’s a number to ponder: $123-billion. That’s what the Canadian Federation of Municipalities estimated it would cost, four years ago, to renew aging municipal infrastructure. Roughly 60 per cent of the money is needed for transportation, water and sewage treatment. That’s just part of the story. As the country grows and expands, new demands emerge, such as transit expansions and new sewage treatment capacity (cost: $115-billion). Now we’re at $238-billion and counting. And that’s just for municipal infrastructure.
The Champlain Bridge is owned by the federal government. Meanwhile, the major highways that Canadians depend on, both for commuting and travelling between cities, are largely in provincial hands. The provinces spend roughly $8-billion a year on transportation projects. They arguably could spend a lot more and our highways still wouldn’t match what Americans have. And the electrical grid needs $293.8-billion in improvements, according to a Conference Board of Canada report.
How did we put ourselves in this hole? Neglect, underinvestment and skewed priorities. The Conservative government’s $60-billion Economic Action Plan is all but gone, and the legacy is underwhelming. A quarter of the money supposedly went into infrastructure. As much as $20-million more was spent advertising the plan.
In its eagerness to get the money out the door fast to "shovel-ready" projects, the money was sprinkled across the country on mainly small, local projects. The Action Plan website highlights transmission lines and waste-water projects. More typically, the money went to hockey rinks, park benches and planters. Small-town thinking applied to big-world problems. It was an opportunity lost. Ottawa and most of the provinces are now in austerity mode, and there will be less money for infrastructure in the years ahead.
If there is a silver lining to this grim situation, it just might be buried in another Conference Board report. It turns out governments aren’t very efficient at pricing and planning our infrastructure. We waste too much water (a Canadian uses more than the twice the water a Briton does). And we don’t allocate our infrastructure very efficiently. We provide transit to ever-distant suburbs, but don’t make these users pay the real cost, or even the incremental cost of expansion.
We can probably squeeze a lot more out of the dollars we spend, the Conference Board argued. "Enhancing pricing policies and productivity will create or free up resources that can be used to better achieve other social objectives, while also helping to reduce the infrastructure gap," the report concluded. "All options will have to be on the table." Simply curbing our water consumption to international norms would cut the infrastructure gap by $4-billion, the report pointed out.
It’s inevitable that Canada will have to spend a lot more on large, critical infrastructure. Conservative Leader Stephen Harper might point to his pledge of loan guarantees for Labrador’s Lower Churchill hydro project. But that’s for the future. It won’t do anything about all the infrastructure that needs replacing now. Big challenges demand big thinking – especially at election time.
Pain of British Fiscal Cuts Could Inform U.S. Debate
by Landon Thomas Jr. - New York Times
In the United States, the debate over how to cut the long-term budget deficit is just getting under way. Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years. And a new report by the Center for Economic and Business Research, an independent research group based here, forecasts that real household income will fall by 2 percent this year. That would make Britain’s income squeeze the worst for two consecutive years since the 1930s.
All of which has challenged the view of Britain’s top economic official, George Osborne, that during a time of high deficits and economic weakness, the best approach is to aggressively attack the deficit first, through rapid-fire cuts aimed at the heart of Britain’s welfare state. Doing so, says Mr. Osborne, the chancellor of the Exchequer, secures the trust of the financial markets, and thereby ensures the low interest rates necessary for long-term economic growth.
That approach, and the question of whether it risks stifling an economic recovery that might itself help narrow the budget gap, lies at the root of the deficit debate in the United States. On one side is the go-slow strategy favored by President Obama. On the other is the more radical path championed by the Republicans. The two camps are no doubt closely watching Britain’s experiment. On paper, at least, both countries face broadly similar deficit challenges. Britain aims to close a fiscal gap of about 10 percent of gross domestic product. The comparable figure in the United States is 9.5 percent.
In Washington, the Republican proposal recently sketched out by Representative Paul D. Ryan of Wisconsin calls for broad and significant cuts in social spending, including Medicare and Medicaid, and wide-ranging tax cuts. On Wednesday, President Obama called for a more balanced approach, one that he said would combine some tax increases for the wealthy with selective spending cuts that he said would not break the "basic social contract" of programs like Medicare and Medicaid.
While severe in its approach to spending cuts, the British plan lacks the stark sweep of the Republican proposal. Britons will certainly feel pain at the local government level as money dries up for care of the elderly, youth programs and trash collection. But icons like the National Health Service have largely been spared. Other notable differences suggest that even Europe’s most conservative party is markedly to the left of the mainstream Republican position in the United States, and in some ways is more liberal than the position Mr. Obama has taken.
To strike a political balance, the coalition government led by Prime Minister David Cameron of the Conservative Party, Mr. Osborne — himself a Conservative — has retained a 50 percent income tax rate on the wealthiest individuals. That is among the highest in Europe, and it imposes more of a burden on the rich than anything Mr. Obama or anyone else in Washington would find politically feasible.
But in Britain, the big worry now is not tax rates. Instead, the fear is that Mr. Osborne’s emphasis on cuts in social spending — which aim to achieve an approximate budget surplus by 2015 and are likely to result in the loss of more than 300,000 government jobs — might tip the economy back into recession. Already the government has had to slash its growth estimate to 1.7 percent, from 2.4 percent, for this year, as consumer incomes are under pressure from high inflation, weak wage growth and stagnant economic activity. "My view is that we are in serious danger of a double-dip recession," said Richard Portes, an economist at the London Business School. "This is going to be a cautionary tale."
Not all economists agree, of course. And this week’s slight improvement in the unemployment rate, to 7.8 percent from 7.9 percent, suggests it is still too early to declare a second slump inevitable. No one would disagree with Mr. Portes that a deficit of 10 percent of G.D.P. is unsustainable in the long run. But, with the opposition Labour Party, he argues that moving so quickly in the face of weak economic growth is not justified.
Mr. Osborne proposes to slash the deficit to 1.5 percent by 2015. By comparison, the stark program Mr. Ryan offers does not project reaching that deficit target until 2021. Besides the difference in speed, a crucial distinction is how each plan would reach its goal. Mr. Osborne’s plan calls for 75 percent of savings to come from spending cuts, and the rest from mostly indirect revenue and tax increases — an increase in the sales tax, for example.
Mr. Ryan, on the other hand, proposes to slash spending by $5.8 trillion but — in contrast to the British approach — would allow most of the spending reductions to be offset by $4.2 trillion in tax cuts, rather than applied to closing the deficit gap. In other words, while Mr. Ryan would lean heavily on spending cuts to close the deficit, he also hopes to spur the sort of supply-side economic growth most often discussed when Ronald Reagan was in the White House.
But while the continued lure of Reagan-style tax policy seems to have contributed significantly to the Ryan plan, Mr. Osborne has defied the popular caricature of him as a heartless Tory pushing a Thatcheresque agenda. He has refused to cut the tax rate for top earners, despite calls to do so from his party’s right flank and Britain’s powerful financial sector. Such an approach might still be heresy to many Republicans in the United States. But in Britain, as in the rest of Europe, it has become widely accepted. "It’s hard to cut taxes and lower the deficit — that is why personal tax cuts can’t be justified," said Patrick Nolan, chief economist at Reform, a right-of-center research organization based here.
Mr. Osborne has taken other steps to make sure the wealthy pay their share, from taxing banks to the oil companies, which Mr. Osborne’s top advisers say is crucial to convincing Britons that sacrifice will be shared. While gritting their teeth at these populist measures, Britain’s businesses and banks have largely accepted Mr. Osborne’s plan. Last week, as Portugal became the third country in Europe, after Greece and Ireland, to petition the European Union for a financial bailout, Mr. Osborne was vocal in underscoring his central contention as a deficit hawk: that in this new debt-averse era, no country has the luxury of delaying the painful steps needed to balance government books.
Many analysts support that view. "People can march and break windows all they like, but you can not get away from not cutting the deficit," Douglas McWilliams, the chief economist at the Center for Economic and Business Research and an author of its report on the plight of the British consumer. His forecast of about 1 percent British economic growth this year is one of the lowest to be found anywhere. Yet he, too, says that to backtrack now from the government’s austerity plan would be folly — and would severely rattle the British bond market, which has been quite forgiving compared with the high interest rates the markets have imposed on Greece, Ireland and Portugal.
Remarkably, yields on the British government’s 10-year bonds are slightly above the 3.6 percent or so achieved by Germany, which has Europe’s healthiest economy. That is partly because Britain lies outside of the euro zone and can control its own monetary policy. But those relatively low interest rates have helped gird the support Mr. Osborne has so far received from the British business community. In that sense, comparing the British and American deficit-cutting plans becomes a bit more difficult. In Europe the bond market is the ultimate judge of deficit-reduction plans. In the United States, by contrast, the global demand for Treasury bills, and the benefits of the Federal Reserve Board’s easy-money "quantitative easing" policy, have kept 10-year bond yields well below those of Britain.
Those low American interest rates, in turn, have reduced the pressure on Washington to take more immediate, painful steps to pare the deficit. But, as the example of Europe has borne out, at some stage foreign bond investors might tire of financing unsustainable deficits — even Washington’s. If and when they do, a government has little choice but to cut.
How deep, and how fast, depends on how long a government waits to begin.
Resentment Is Rising In Euro Zone
by Floyd Norris - New York Times
The real Golden Rule, it has been said, goes like this: He who has the gold, rules. They are trying that in Europe these days. Germany has the gold and it sees no reason other countries should not do as the Germans say.
The prescription for the so-called peripheral countries of the euro zone is simple: Enact the reforms Germany thinks are needed. Cut spending. Take wage and benefit cuts. Reform your tax system to produce more revenue, which may mean raising tax rates or just forcing people to comply with existing laws. Require people to work longer and retire later. Follow austerity as far as the eye can see.
Do all those things, and the rest of Europe will provide grudging assistance.
To some with the gold, this is simply a morality play. "They had their fun," a former European central banker told me a few weeks ago, speaking of the peripheral countries. A different official used the same words last week.
In each conversation, I was reminded that the creation of the euro led to interest rates declining sharply in peripheral countries and to economic booms. Those countries lost competitiveness in export markets because they tolerated inflation and did not hold the line on wages. Now, those who partied deserve the pain of hangovers. It is probable that countries will follow the German prescription. From the perspective of a national government, the alternatives may seem worse.
But democracy can be messy. Will populations go along? There are a couple of hints that they may not. One comes from Portugal, the other from Iceland, which is not in the euro zone but is in a mess.
In Portugal, the government is seeking a European bailout but seems not to have the authority to agree to one. The opposition has forced elections, which it is widely expected to win, but it won’t say what it will do. In the meantime, the situation is in limbo, which may force Europe to help out before it can get any enforceable promises of reform.
In Iceland, the issue is whether the population should pay for the sins of its banks. The banks had big operations in Britain and the Netherlands, and when they collapsed, the British and Dutch governments made good on the deposits. The government of Iceland promised to pay the money back. The amount is $5.8 billion, 46 percent of Iceland’s gross domestic product in 2010. A similar bill sent to the United States would call for a payment of $6.8 trillion.
I’m not really clear on why Iceland should be responsible. No doubt its bank regulators performed abysmally. But where were the British and Dutch regulators when the banks were taking in deposits from their citizens?
For reasons good or bad, Iceland’s citizens appear to be reluctant to pick up the bill. Nearly 60 percent of voters turned down the agreement backed by their government, which called for Iceland to pay the money over 30 years beginning in 2016. Britain and the Netherlands now plan to ask something called the European Free Trade Association Surveillance Authority to order Iceland to pay.
Both the Irish and Greek governments embraced the required austerity to get European help, and electorates threw out those deemed responsible for the mess. But there are signs that the new governments are losing support, and there is no indication of early economic recovery. Portugal’s government fell precisely because the opposition would not sign off on the required austerity.
What would be happening without the euro? Neither the boom nor the bust would have been as great in the peripheral countries. But when the bust did arrive, the currencies of those countries would have plunged in value. That would have made them poorer and unable to afford the imports they once bought. Prices, measured in local currencies, would have risen. In Ireland, where a property boom collapsed, that would have ameliorated the problems faced by homeowners who owe far more than their homes are worth. Exports would have gained competitiveness, stimulating some growth.
But of course there are no separate currencies. There is no provision for allowing a country to leave the euro zone. That idea was not even considered when it turned out that Greece had lied its way into the club. In retrospect, everyone might be better off if it had been kicked out.
It is hard to see how the euro zone can be undone, but it is even harder to see how it will prosper. The reforms being pushed on the peripheral countries seem to call for slow growth, at best, for a very long time. Unfortunately, bad economies do not produce extra tax receipts, which are needed for fiscal improvement. Perhaps starving those economies will eventually make them leaner and meaner. Perhaps it will kill them first.
When the euro was created, some hoped, and others feared, that the Continent would move closer to a unified government. Some euro backers said countries would more closely align their fiscal policies with those of Germany to avoid a crisis. They were right about the need, but wrong about the action. Instead, the boom enabled countries to put off reforms.
In a speech in New York this week, Andreas Dombret, a member of the executive board of the Bundesbank, Germany’s central bank, said national governments in the euro zone remained "in charge of sound fiscal and economic policies," but there was now "a strict framework that exerts pressure toward discipline in order to ensure that every country acts in a way that is consistent with the interest of having a stable common currency."
In other words, elected governments can make decisions, so long as they are good ones.
Last week the European Central Bank raised interest rates, a move that made a lot more sense for the German economy than for most of the others in the euro zone. Mr. Dombret praised that decision. "It is essential that inflation expectations remain anchored," he explained, adding, "It goes without saying that we did not complain about the headline of the Financial Times article on the rate hike. The article was entitled ‘E.C.B. becomes Bundesbank.’ "
There is a risk over time that democracy will lead Europe to splinter. Germans are angry about having to pick up the bill for bailouts of other countries, which is one reason the German government felt called upon to insist on that "strict framework." Others are resentful of the enforced austerity.
If European economies somehow grow enough, those resentments may not matter much. But if not, voter anger may intensify and demand that something change. Maybe the Germans will want to cut off their prodigal neighbors. Maybe the neighbors will decide they would be better off with a new currency and without overbearing demands for austerity that prevent recovery. In either case, populist politicians demanding the demise of the euro might win elections. The fact that European law does not allow for such a possibility would make the situation messier, but in the end voters would have their way.
It would be good if the debate in Europe focused less on justice — Is it fair to ask Germans to bail out profligate Greeks? Is it fair for Europe to force wage cuts on citizens who were not responsible for the financial excesses of their countries’ banks? — and more on how to quickly get devastated economies growing again.
The Rise Of Nationalism In Europe And Its Threat To The Euro
by Gregory White - Business Insider
Europe is experiencing a new wave of nationalism and its eventual target could be the euro, according to Societe Generale's Dylan Grice. Grice points out that in Finland, France, and Spain, there are signs that nationalism is on the rise in politics, notably to growth of the Front National in France under Marine Le Pen. Further, in Germany, anti-euro sentiment is growing, as taxpayers become more concerned about the costs of stabalizing the system.
Nationalist sentiment against immigrants could transfer to opposition to the euro due to the concept of "in-group bias," a phenomenon that leads people to prefer their own rather than others, according to Grice. And the desire to define that outside group becomes more severe under stress, according to research from the University of Kansas Grice cites. Grice believes that the rising costs of supporting aging populations are going to put further stress on already financially challenged populations, which will exacerbate the problem of in group bias, drive further nationalism, and create more problems for the euro.I believe what we are seeing is the beginning of the eurozone’s credit crisis, not the end. The historic and psychological evidence clearly links economic dislocation with the scapegoating of out-groups and, of course, the eurozone edifice stands increasingly lonely and tall as a lightning rod for the latter. I believe the likelihood is that over the course of the next decade or so, the trend will be towards greater fiscal problems and greater economic problems. I believe these problems will increase the temperature of debates about whose fault it all is, and that as the conclusion to these debates becomes more polarized they will play into the hands of nationalist, anti-immigrant and increasingly, anti-euro sentiment.
As a potential source of further economic stress, Grice suggests the rising costs of pensions for aging populations. He estimates unfunded EU pensions to be worth 400% of GDP, the funding of which will lead to more austerity, more stress, and potentially more nationalism.
Greece to Unveil Austerity Measures to Meet Deficit Goals
by Marcus Bensasson - Bloomberg
Greece will announce measures today to meet its deficit-reduction goals after the country’s bond yields hit new highs amid talk it may restructure its debt. The government’s medium term-fiscal policy plan will detail more than 22 billion euros ($31.9 billion) of deficit-reduction measures through 2014, most of them in spending cuts, according to Finance Minister George Papaconstantinou. The government is also expected to unveil plans to raise 15 billion euros by 2013 through state-asset sales.
Greece came close to defaulting on its debt last year, requiring a 110 billion-euro bailout from the European Union and International Monetary Fund, after it emerged that the country had underreported the size of a budget deficit that reached 15.4 percent of gross domestic product in 2009. The extra yield investors demand to hold 10-year Greek debt instead of benchmark German bunds widened 37 basis points to a record 985 basis points yesterday after German Finance Minister Wolfgang Schaeuble said Greece may have to renegotiate its debt burden.
"There is no question of restructuring," Greek government spokesman George Petalotis said in an e-mailed statement yesterday. "What the government has to do, and it is the most serious job, so serious that it casts aside any other scenario, is to set goals and stick to them. And that’s what we’re doing with this national strategic plan."
The measures are aimed at meeting a target, agreed with the EU and IMF as a condition for the bailout, to cut the deficit to less than 3 percent of GDP by 2014 and a self-imposed goal of cutting the shortfall below 1 percent by 2015. The government is still aiming for a deficit of 7.4 percent of GDP this year, even as first-quarter revenue missed the target by 1.4 billion euros.
Papaconstantinou acknowledged in an April 1 interview that Greece’s 2010 deficit may be more than the government’s initial 9.4 percent projection. The figure, currently under review by EU statistics agency Eurostat, may be revised to above 10 percent, the Kathimerini newspaper reported on March 29. Greece’s Public Debt Service Management Agency will today announce the amount of 13-week treasury bills it will sell next week. Greece has continued to hold regular T-bill auctions even as it remains frozen out of international bond markets.
Moody’s Cuts Ireland Rating Two Levels, Outlook Negative
by Finbarr Flynn and Dara Doyle - Bloomberg
Ireland’s credit rating was cut two levels by Moody’s Investors Service to the lowest investment grade as the government struggles to lower the budget deficit and restore economic growth. Moody’s reduced the rating to Baa3 from Baa1, leaving the country’s outlook on negative, according to an e-mailed statement today. That’s the same rating as Iceland, Tunisia, Romania and Brazil. Standard & Poor’s on April 1 cut Ireland’s rating one level to BBB+ with a stable outlook.
Irish taxpayers may spend as much as 100 billion euros ($145 billion) trying to solve Europe’s worst banking crisis as the country draws funds from last year’s bailout. Ireland is trying to convince investors at home and abroad it has finally plugged the hole in its lenders after four failed attempts following the collapse of the country’s property boom in 2007.
Irish debt restructuring is not a "plausible scenario," Dietmar Hornung, a Frankfurt-based analyst at Moody’s, said in a telephone interview today. The country has a "good track record of delivering" fiscal consolidation, while the negative outlook reflects the "unbalanced risks" facing the nation.
The extra yield investors demand to hold Irish rather than German 10-year bonds has narrowed to 596 basis points from 687 basis points since central bank Governor Patrick Honohan disclosed on March 31 how much additional capital the country’s lenders need. Fitch Ratings yesterday affirmed Ireland’s BBB+ rating and removed the threat of a downgrade, calling latest efforts to resolve the banking crisis "credible." The ratings company maintained a negative outlook, citing "significant threats to an economic recovery and fiscal consolidation."
Ireland’s central bank yesterday forecast gross domestic product to rise 0.9 percent this year, saying consumer demand will remain "subdued" as the government cuts spending. The European Central Bank last month projected the 17-member euro- region economy will expand about 1.7 percent in 2011. "The country’s weak economic growth prospects are driven by the fiscal consolidation process, the ongoing contraction in private-sector credit, and a more adverse interest-rate environment," Moody’s said. "The Irish government’s financial strength could decline further if economic growth were to be weaker than currently projected, or if fiscal adjustment were to fall short of the government’s planned consolidation path."
Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London, said in an e-mailed note today that Ireland is now in the "most uncomfortable of places to be on the ratings scale, one false step from junk." Ireland’s government has injected about 46 billion euros into banks and taken majority stakes in four of them. Honohan said on March 31 it is realistic to expect Bank of Ireland Plc and Irish Life & Permanent Plc, the two lenders not already owned by the government, to fall under state control.
Finance Minister Michael Noonan said last month Ireland can sustain mounting debt levels if it fixes its lenders and maintains economic growth. Other euro-region governments are also seeking ways to lower budget deficits and restore investor confidence. S&P last month cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-. The country last month became the third euro nation after Greece and Ireland to ask for aid.
European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday that a debt restructuring in the euro region could cause a "chain reaction through the banking sector," calling the environment still "fragile." "The downgrade is disappointing to say the least," Bloxham Stockbrokers analysts including Dublin-based Alan McQuaid said in an e-mailed note today. "However, given the ongoing uncertainty over Ireland’s fiscal position, it is not altogether surprising."
House prices are falling faster in Britain than Spain
by Ian Cowie - Telegraph
House prices at the bottom end of the market are now falling faster in Britain than Spain, according to a comprehensive survey of the biggest house price indices. But house prices continue to rise at the top end of the market, with an average increase of 3.4pc over the last year among the most expensive fifth of properties. By contrast, the cheapest fifth of properties saw prices fall by 5.1pc over the year, compared to a 1.9pc decline over the same period in Spain.
Estate agents Chesterton Humberts base their analysis on a ‘poll of polls’, using figures from the Communities and Local Government House Price Index; the Land Registry House Price Index; the Halifax House Price Index; the Nationwide House Price Index and other sources including Rightmove.co.uk House Price IndexHome.co.uk Asking Price Index.
While there are good reasons to be wary of individual surveys, this approach – combining figures derived from Stamp Duty tax receipts with statistics from the biggest mortgage lenders – probably benefits from ‘the wisdom of crowds’ to give a fair picture of what is happening across the market.
It suggests that house prices are 11.1pc lower than when house prices peaked in February 2008, meaning that in just over two years the average property in England and Wales has fallen in value by £21,700. Robert Bartlett, chief executive of Chesterton Humberts said: "The increasing disparity between property at the top and bottom ends of the market reflects the divide between property prices in London and the South East and the rest of the country. Until the effects of economic recovery filter further out into the country, we will continue to suffer from the effects of this stagnant, disparate market.
"Mortgage availability remains the sticking point to kick starting the housing market but there are now clear signs that the banks are opening back up for sensible mortgage lending. Providing rates remain low and the spread between the UK base rate and mortgage rates narrow then we remain optimistic that the second half of 2011 and early 2012 will mark the start of a sustained recovery in house prices."
David Hollingworth of London & Country mortgage brokers was more cautious: "Mortgage availability remains an issue in the current market as does consumer uncertainty regarding employment and interest rate outlook. That could constrain the mainstream market more than the top end where cash buyers may be more prevalent. "Once the market returns to a more even keel then you would expect activity to increase more generally to address the current divergence, particularly as first time buyers begin to find the situation easing and in turn opening up the transaction chain. "
By contrast, Melanie Bien, director of mortgage broker Private Finance, predicts that a two-tier housing market is here to stay: "The top-end of the housing market is thriving as buyers are less reliant on mortgage finance. Many are cash buyers, from the UK and overseas.
"At the bottom end of the housing market, lower values do not mean it is easier to get a mortgage. Quite the contrary; buyers are likely to be trying to get on the housing ladder for the first time and therefore have little in the way of a deposit. For those with just 10 per cent of the purchase price to put down, there are fewer deals to choose from. Rates are higher, while credit scoring tougher, than for those with bigger deposits.
"It is hard to see this situation changing in the short or medium term. Prices at the higher end continue to rise as these properties remain extremely desirable. Demand shows no sign of falling. While lenders are offering more products at 90 per cent LTV, it still remains extremely difficult to qualify for such a deal, and once interest rates start rising, rates will become even more unaffordable."
Last October, I pointed out in this space how the top and bottom ends of the housing market were diverging, with prices in the capital continuing to rise despite falls elsewhere. This is creating a ‘Manhattan-on-Thames’ effect where younger residents are priced out of property ownership, unless they are extremely rich. Evidence of the widening gap between generations of Londoners can be seen in research by Key Retirement Solutions, which found that people aged over 65 now own more than 16 per cent of all the housing wealth in the capital.
That’s nearly 60 per cent higher than the proportion of local property wealth owned by pensioners in the North West and more than treble the respective proportions in Yorkshire & Humberside; Wales and the North East. Who can blame many younger people for devoutly wishing that house prices will crash?
Japan haunted by spectre of Chernobyl
by Mark MacKinnon - Globe and Mail
When Japanese officials Tuesday raised their assessment of the disaster at the Fukushima nuclear power plant to the highest rating on the international scale, they put it nominally on par with the meltdown at Chernobyl 25 years ago.
But Fukushima isn’t Chernobyl. At least not yet.
I have the little-sought-after distinction of having been to both places. The situation in Fukushima is dire – and terrifying for those who live in the region – but we’re not yet at the stage where an entire region of Japan needs to be written off for decades or centuries to come, as with Pripyat, the city closest to the Chernobyl reactor in what is now northern Ukraine. Pripyat remains a ghost town, with "April 26, 1986" still written on classroom chalkboards and envelopes left in people’s mailboxes. After being left to stare at the sky in confusion for several hours after the nuclear disaster that day, the 47,000 residents of Pripyat were hastily ordered out of the city and never allowed to return.
The tens of thousands of Japanese evacuated from the 20-kilometre zone around the Fukushima Daiichi plant into makeshift shelters are temporarily sharing that fate – video taken inside the exclusion zone shows cows and dogs wandering abandoned and earthquake-damaged streets – but for Fukushima to truly move alongside Chernobyl on the scale of nuclear disasters, the situation would have to deteriorate for some time.
The radiation released since the March 11 earthquake and tsunami is still only about 10 per cent of that spewed into the air when Chernobyl Reactor No. 1 exploded. The key difference between the two disasters remains that the four troubled nuclear reactors at Fukushima shut down, while Chernobyl exploded with the reactor still running, causing a catastrophic chain reaction that shot radiation into the upper atmosphere.
"Chernobyl exploded while the reactors were still active, which is completely different from the situation at Fukushima," said Hidehiko Nishiyama, deputy director-general of the Nuclear and Industrial Safety Agency. On Tuesday, that Japanese government body raised the severity of the Fukushima disaster to a seven out of seven on the International Nuclear Event Scale.
Nuclear incidents classified as Level 7 involve a major release of radiation with widespread health and environmental effects, according to the International Atomic Energy Agency. Fukushima is reported to have thus far released between 370,000 and 630,000 terabecquerels of iodine-131. (A terabecquerel is a unit of measurement of radioactivity equivalent to 1 trillion becquerels; a becquerel is the quantity of a radionuclide that undergoes one decay a second.)
While that’s a high number (the permissible level for vegetables and fish is 2,000 becquerels a kilogram), it remains far below the 5.2 million terabecquerels released from Chernobyl. Japan’s nuclear safety commission said Tuesday that most of the radiation escaped in the first hours and days after the tsunami. It estimates the release of iodine-131 has now come down to less than one terabecquerel an hour.
The Japanese government’s handling of the announcement Tuesday was typically confusing – news that the disaster had been upgraded to Level 7 came just hours before Prime Minister Naoto Kan went on television to say the crisis was easing. But Tokyo’s response to the nuclear crisis is still leagues better than how the Soviet Union dealt with Chernobyl. Moscow spent two days denying anything was going on, and only admitted an accident had taken place when radiation was detected in faraway Sweden.
It could, of course, still get worse. There are four reactors in trouble at Fukushima, rather than just the one that melted down at Chernobyl. There’s also the unpredictability of the ongoing aftershocks following the initial earthquake. There have been more than 400 tremors of magnitude 6.0 or greater since then, including a 6.3 magnitude quake that hit Fukushima prefecture on Tuesday, briefly forcing the evacuation of those working to cool the troubled reactors.
But while the worst-case scenarios linger as possible, some of those who live closest to the Fukushima reactor were also being allowed to briefly go home this week to collect their belongings. Japan’s Kyodo news service reported that those who returned to their shelters after the day trip into the hot zone tested negative for radiation exposure. It was surely a nervous and hurried trip home for those who went, and no one yet knows when they can go back for good. But unlike those who lived in the shadow of Chernobyl, they’ve already had a chance to collect their mail.
More signs of fuel rod damage at Japan nuke plant
by Msnbc, AP, Reuters, Kyodo News and NHK World
Water in the spent fuel storage pool at the No. 4 reactor at Japan's crippled Fukushima nuclear plant has risen to about 194 degrees in one sign that spent fuel rods may be damaged, according to a report in NHK World. The Tokyo Electric Power Company or TEPCO discovered Tuesday that the temperature was much higher than the normal level of about 104 degrees.
The finding is the latest setback for the utility company as it tries to contain damage at the nuclear plant, devastated by a March 11 tsunami and now rated on a par with the world's worst nuclear accident, the 1986 Chernobyl disaster. TEPCO said Wednesday it was still working on a detailed plan to end the country's nuclear crisis as tests showed radiation levels in the sea near the complex had spiked.
Engineers moved a step closer to emptying highly radioactive water from one of six crippled reactors, which would allow them to start repairing the cooling system crucial to regaining control of the plant. Japan's nuclear safety agency said the latest tests showed radiation nearly doubled last week, to 23 times above legal limits, in the sea off Minamisoma city near the plant.
But radiation in Tokyo, 150 miles from the plant, had fallen to pre-disaster levels on Tuesday, the science ministry said late Wednesday. TEPCO's analysis of a 400-milliliter water sample taken Tuesday from the No. 4 unit's spent nuclear fuel pool revealed the damage to some fuel rods for the first time, according to Kyodo News. The sample detected higher-than-usual levels of radioactive iodine-131, cesium-134 and cesium-137.
The storage pool at the No. 4 reactor housed all the fuel rods that were in operation at the reactor, NHK World reported. Since the quake and tsunami, TEPCO has used fire engines and special vehicles to spray more than 1,800 tons of water to try to cool the rods at the No. 4 reactor. University of Tokyo Professor Koji Okamoto told NHK World that the temperature of 90 degrees indicates that cooling is continuing, although some of the water in the pool may be boiling. Okamoto said high radiation indicates the possibility of radiation leaks from damaged fuel.
Slowing the recovery effort, a series of strong aftershocks this week has rattled eastern Japan, forcing temporary evacuations of workers and power outages at the nuclear plant. "As instructed by Prime Minister Kan we are working out the specific details of how to handle the situation so they can be disclosed as soon as possible," TEPCO president Masataka Shimizu told a news conference in Tokyo.
Shimizu has been largely absent from the recovery operation, only visiting the area on Monday. He refused to comment on public calls for his resignation, and again apologized to the Japanese people for the crisis. "We are making the utmost effort to bring the reactors at Fukushima Dai-ichi to a cold shutdown and halt the spread of radiation," he said.
TEPCO's Tokyo head office has been the target of angry protests over the nuclear crisis , and authorities took no chances on Wednesday, with riot trucks and security officers guarding the front gate during the news conference. The government earlier this week revised its rating of the severity of the crisis to level 7, the worst possible on an international scale. The only other level 7 was the 1986 disaster at the Chernobyl plant in what is now Ukraine, though that explosion released 10 times the radioactivity that has come from Fukushima Dai-ichi so far.
But experts were quick to point out the two crises were vastly different in terms of radiation contamination, and on Wednesday, Russia's nuclear chief said Japan was exaggerating the scope of the disaster. "It is hard for me to assess why the Japanese colleagues have taken this decision. I suspect, this is more of a financial issue, than a nuclear one," Sergei Kiriyenko said on the sidelines of a meeting of major economies in southern China.
There have been fears of contamination among Japan's neighbors, but China said the impact there had been small, noting the radiation was just 1 percent of what it had experienced from Chernobyl. The toll of the disaster is rising. More than 13,000 people have been confirmed dead, and on Wednesday the government cut its outlook for the economy, in deflation for almost 15 years, for the first time in six months.
"The biggest risks, or uncertain factors for the economy, are when power supplies will recover, whether the nuclear situation will keep from worsening," Economics Minister Kaoru Yosano said. The total cost of the triple catastrophe has been estimated at $300 billion, making it the world's most costly natural disaster. TEPCO said it was working on a compensation plan.
The Yomiuri newspaper reported on Wednesday that the government may cap TEPCO's liability to as little as $24 billion for damages. Bank of America-Merrill Lynch has estimated compensation claims of more than $130 billion.
Seawater radiation spike
Radiation readings in seawater near the crippled plant spiked last week, Japan's Nuclear and Industrial Safety Agency said Wednesday. Seawater samples collected on Monday from around nine miles off the coast of Minamisoma city showed radiation in the water rose to 23 times the legal limit from 9.3 times on April 7, said Hidehiko Nishiyama, a NISA deputy director-general. He later said NISA had asked TEPCO to assess the quake resistance of the buildings, and to look into how they could be reinforced against aftershocks. "We need to think about how these aftershocks are affecting the buildings, which are already damaged," he said.
Japan has expanded the 12-mile evacuation zone around the plant because of high accumulated radiation. No radiation-linked deaths have been reported and only 21 plant workers have been affected by minor radiation sickness. Still, the increase in the severity level heightens the risk of diplomatic tension with Japan's neighbors over radioactive fallout. Chinese Premier Wen Jiabao told Kan on Tuesday he was "concerned" about the release of radiation into the ocean.
To cool the fuel, TEPCO sprayed 195 tons of water for 6 hours on Wednesday morning. The company thinks the pool's water level was about 5 meters lower than normal, but 2 meters above the fuel rods, NHK World reported. TEPCO believes the water level is likely to rise by about one meter after the water spraying on Wednesday.
U.S. Nuclear Regulator Lets Industry Write Rules
by John Sullivan - ProPublica
In the fall of 2001, inspectors with the Nuclear Regulatory Commission were so concerned about possible corrosion at Ohio’s Davis Besse Nuclear Power Station  that they prepared an emergency order to shut it down for inspection. But, according to a report  from the NRC inspector general, senior officials at the agency held off – in part because they did not want to hurt the plant’s bottom line.
When workers finally checked the reactor in February of 2002, they made an astonishing finding: Corrosive fluid from overhead pipes had eaten a football-sized hole in the reactor vessel’s steel side. The only thing preventing a leak of radioactive coolant was a pencil-thin layer of stainless steel. The Davis Besse incident has resurfaced in the wake of the ongoing nuclear crisis at Japan’s Fukushima Daiichi plant. Stories recounting close ties  between Japanese nuclear regulators and utilities there have reinvigorated critics who say the NRC has not been an aggressive enough U.S. watchdog.
The NRC says that is not the case, and commission Chairman Gregory Jaczko defended the agency’s independence and professionalism. "I have a great staff who are dedicated to public health and safety, and people who interact with this agency, they know that and they see that," he said in an interview. Critics of the NRC say the problem at Davis Besse, 20 miles southeast of Toledo, is a prime example of the agency’s deference to industry. The inspector general concluded that a conflict between the NRC’s twin goals of inspecting the plant to protect public safety and a desire to "reduce unnecessary regulatory burden" on the owner led to the delay in finding the gaping hole.
In 2003, then NRC’s Chairman Richard Meserve disputed the inspector general’s report , which found that the agency’s decision on Davis Besse "was driven in large part by a desire to lessen the financial impact" the plant’s owner. Meserve said the NRC had adequate technical grounds for the delay. The agency insists that it vigilantly watches operations at 104 commercial reactors and frequently issues violations to nuclear companies that step out of line. Since 2001, the agency has averaged about 120 significant enforcement actions a year at power plants and other nuclear facilities it oversees.
While the Davis Besse case focuses on singular allegations of influence, critics say the industry routinely exercises its muscle in a more pervasive way: through contributions to NRC regulatory guides  that advise nuclear companies about how to best follow the agency’s rules. Large parts of the guides, issued by NRC, incorporate or endorse material written by the industry’s trade group, the Nuclear Energy Institute .
The guides – containing detailed technical procedures and reference materials – are a key part of NRC’s oversight. They provide the nuts and bolts advice that nuclear operators follow to stay in compliance but often refer to even more detailed industry guides. The NRC’s guide on fatigue , for example, details how many hours employees in key jobs can work, how to respond when a worker is too tired, and how many days off employees in certain jobs need. It officially incorporates, with a few exceptions, another 60-page guide compiled by the industry group.
In an e-mail, Thomas Kauffman, a spokesman for NEI, passed along responses to ProPublica’s questions from the trade group’s director of engineering, John Butler. "NRC endorsement, with or without exceptions, of industry guidance is a common practice," Butler said.
Some examples from a list the trade group provided to ProPublica:
- How to apply for an operating license extension. Many aging plants are seeking to extend their original 40-year licenses. The 10-page NRC document endorses a 245-page NEI guide  that tells applicants how to identify critical equipment and inspect it to be sure it meets relicensing standards.
- How to protect plants from fires . The NRC’s regulatory guide cites an NEI document that "provides the majority of the guidance applicable" for analyzing fire risk at plants, with some specific exceptions.
- How to upgrade plant control rooms . The NRC regulatory guide says that "when possible, this guide has incorporated (NEI’s) ‘Control Room Habitability Guide,’ " again with some limits.
The NEI said its role in contributing to NRC’s guides does not mean the nuclear industry has too much influence. Kauffman said the NRC has final say on what NEI adds and frequently makes changes. "They review them completely," Kauffman said. "It is one thing to draft something and put it out there; it is quite another for the NRC to decide to accept it."
NRC spokesman Eliot Brenner said in an e-mail that the NEI is not the sole source of information in agency regulatory guides and that NRC accepts comment from a broad array of sources. "If any stakeholder – company, industry organization, individual or public group – backs up a request with appropriate information, the NRC will consider it," Brenner said. "The NRC regularly denies industry requests that lack proper support, and we’ve taken properly supported rulemaking requests from non-industry sources on many occasions." "The NRC is the final arbiter of what becomes a regulation," he said, "with safety the total focus of our effort."
But others said the reliance on the industry creates a potential conflict of interest. Jim Riccio, who follows nuclear issues for Greenpeace, said that allowing the NEI to play such a large role means the industry can shape much of what nuclear companies are required to do. Riccio said NRC’s precursor agency, the Atomic Energy Commission, was disbanded after Congress concluded it had become too concerned with promoting nuclear power instead of regulating safety.
In a 1974 overhaul , development of nuclear energy was transferred elsewhere and protection of the public was given to the NRC, a five-member body whose members are appointed by the president. Riccio asserted that over the years, NRC has become more accommodating to the industry. "The problem with inviting the industry in is that they tend to dominate the process," he said. "The NRC has a problem distinguishing between the public they serve and the industry they regulate.
Industry left high and dry
by Peter Marsh - Financial Times
A ship called Asia Symphony is left stranded after being lifted up onto the promenade of the docks by the March 11 quake and tsunami at the port of Kamaishi town in Iwate prefecture, northeastern Japan on March 18, 2011.
As news of the massive earthquake and tsunami in northern Japan broke a month ago, David Cox watched with horror at the devastation being wrought on millions of lives. He also felt a rising sense of trepidation about the impact of the disaster on his business.
The head of operations at Blue Coat, a manufacturer of electronic internet equipment based near San Francisco, spent an anxious 24 hours checking on how many of his company’s worldwide supply network of more than 1,000 companies would be affected. In the end, he says: "We discovered that a few dozen of our suppliers [in Japan] could have problems in making components available to us, and found alternative sources for most of the parts."
But he sounds less assured about what would have happened if a similar shock had hit Guangdong, the southern Chinese province that is the world’s most important electronics production centre and the site of one of Blue Coat’s two main factories. "I’m not sure what we’d do," he says. "The only compensating factor is that all our competitors would be in the same position."
The anxiety triggered by last month’s events highlights the growing importance of supply-chain strategy to Blue Coat and countless other manufacturers worldwide. It has forced them to question the resilience of networks that have grown increasingly complex and far flung, and to look at ways of reducing vulnerability to such unforeseen interruptions.
In the past decade, many manufacturers have shifted component production to multiple contractors, often in low-wage Asian nations. This is to cut costs but it is also part of a general shift to slim operations and concentrate on what they regard as core areas, such as product development and marketing. However, concurrent moves towards "lean production" – shaving inventories to the minimum and pushing parts through the system as fast as possible to cope with sudden variations in demand – have made supply chains increasingly susceptible to the kind of disruption seen in recent weeks in Japan.
It is in sectors such as carmaking, and the manufacture of construction equipment and electronics that the repercussions of last month’s disaster have been most marked. Suppliers in Japan – the third-largest manufacturing nation, behind China and the US – specialise in making parts hard for other businesses to create. Even for many factories not directly affected, production has been disrupted by electricity shortages, transport disruptions and the breakdown of Japanese supply chains for domestic assembly operations.
The catastrophe comes soon after similar shocks to supply chains, such as the Icelandic volcanic ash clouds that crippled crucial air freight routes last year and labour unrest at electronics production sites in China, also last year. "[The Japanese disruption] is another mega-event which forces everyone to reflect on the inadequacies of their manufacturing arrangements," says Jochen Zeitz, chief executive of Puma, the German sports goods manufacturer. Particularly unsettling, says Barry Tarnef, a risk manager at Chubb, the US insurance group, is that many manufacturing managers lack the information needed to mobilise alternative arrangements quickly if supply chains are interrupted.
However, room for manoeuvre – even for companies with a disaster plan in place – depends to a large degree on the nature of the industry. In electronics, about 80 per cent of basic component production, along with a great deal of final assembly, is based in China. The situation is similar for clothing and footwear. In such industries, there are few opportunities to mitigate the consequences of a disaster in south China of the type that gives Mr Cox nightmares.
But in other sectors, particularly in engineering, where expertise in production is spread more widely and pricing pressures are less intense, many companies are instituting strategies to insulate themselves at least partially. These include building several networks of suppliers in different countries. The emphasis is on shortening supply lines to make communication easier and transport less prone to disruption.
The result, says Hal Sirkin, a manufacturing expert at BCG, the Chicago-based consulting group, is that manufacturers are more able to adapt factory operations to sudden disruptive events. "The goal is to make supply chains less static and more dynamic," he says.
Bjorn Vang Jensen, head of global logistics at Swedish white goods manufacturer Electrolux, says the situation has improved. Nevertheless, he points out, some companies in a range of industries "have continued to experience difficulties getting products and materials in and out of Japan, not just in the region worst hit by the earthquake and tsunami but in other areas of the country as well".
. . .
According to Mr Sirkin, increasing numbers of these networks involve businesses in high-cost nations, which a few years ago might have been shunned. Behind this are two trends. Costs in China are rising, in part because of factory workers’ demands for higher wages. Also, faced with a need to become more competitive, manufacturers in high-cost nations have pushed up productivity by investing in new labour-saving machinery, for example.
"In a few years’ time, assuming current trends continue, it will no longer be necessary in a broad cross section of industries for companies in the US to outsource production [of goods to be sold domestically] to China. They will find their costs are no higher if they do the manufacturing at home," Mr Sirkin says.
The trend towards localism in manufacturing is embodied in a gleaming new $6.8bn semiconductor manufacturing complex near Albany, New York state. The plant is being built by Globalfoundries, an Abu Dhabi-backed microchip maker with facilities in Germany and Singapore. Benefiting from $1.2bn of US government subsidies, it is due from next year to make integrated circuits under contract for chip businesses based mainly in America that do not operate their own plants.
Globalfoundries’ chief competitor is Taiwan Semiconductor Manufacturing Company, the world leader in the microchip contracting industry. Apart from Taiwan, the leading nations providing such operations include China and Japan. In the US, however, there is currently only one high-volume plant, run by South Korea’s Samsung. Doug Grose, Globalfoundries’ CEO, says it could have built the facility "anywhere in the world". But he says it made sense to put it in the US to reap the benefits of spreading operations widely, positioning factories close to customers in as many locations as possible.
Acme Alliance, a Chicago-based maker of castings for the vehicle industry, has blazed a trail towards setting up production chains that emphasise close connections to regional suppliers. "If all a manufacturer based in the US thinks about is unit costs, then it’s likely to have a global supply chain in which it transports components long distances [to a US assembly facility]," says Matthew Lovejoy, Acme’s president and owner. "But once you think about all the hidden costs that such complex chains involve, including disruptions in transport, the need to vary production to meet changes in your customers’ demands, plus the impact of unpredictable events like the Japan earthquake, then you realise these kinds of networks do not make sense."
Accordingly, Mr Lovejoy has established three supply chains – each built around Acme’s three factories in Chicago, Brazil and Shenzhen, China. Each is largely autonomous but capable of supplying components to other parts of the business in the event of a sudden, localised disruption.
For Trumpf, a German company that is the leading manufacturer of laser cutting machines, basing its operations on local supply chains is not so much a second-best alternative as an essential source of competitive advantage. Clustered around the main factory in Stuttgart are about 100 suppliers that provide specialist components. "If you have a problem with a supplier in China then it’s likely to take weeks to sort out, while if the same thing happens with one of our local companies then we can arrive at a solution within hours," says Mathias Kammüller, head of the machine tool division.
. . .
Companies at the cutting edge of supply-chain planning have set up data systems to complement their multiple networks. These enable them to remain abreast of problems in various locations, using spare capacity from plants elsewhere to provide extra parts. Swiss-Swedish industrial group ABB has 5,500 suppliers linked via data networks and transport connections to assembly factories spread globally. Control of the flow of parts is devolved to 450 supply chain experts based in 40 countries, who ABB feels are best placed to match supply to fluctuations in local demand.
SKF of Sweden, the biggest maker of industrial bearings, places a similar emphasis on adaptability. It last year purchased parts and materials worth about $5bn from more than 2,000 suppliers, in an exercise co-ordinated by 1,000 supply planners in Belgium, Singapore and Tennessee. Backing these operations are 200 people based in Gothenburg, Shanghai, Mumbai, and Chicago who handle global logistics.
Bo-Inge Stensson, SKF’s vice-president for purchasing, says: "We have a special data network that allows us to track the progress of a single part all the way through the manufacturing system until it ends up in a finished product. We can use this to react in as timely a manner as possible to disruptions that may affect different parts of our operations."
The lesson for industry from the Japanese disaster is that the consequences of such events on the global production system are always likely to be considerable. There are ways to reduce the sensitivity of supply chains to the effects of such incidents, through better planning and more distributed operations, but too few companies are taking advantage of them. "There’s no reason to think the trend towards more unforeseen events [affecting supply chains] is going to end," says Mr Stensson. "If companies are serious about trying to minimise the impact of these events, they will have to do more to prepare themselves."