"Peoples Drug Store, 14th & U., Washington, D.C."
Ilargi: As Greece sinks ever deeper into its cesspool of lies and debt, dragging down the European periphery with it, even as Germany and France showed positive GDP numbers today (for what those are worth), and as Japan continues to spiral down its own cesspool of lies and radiation (and, yes, debt too) with reactor no. 1 now in full meltdown, Ashvin Pandurangi delves into what at times equally threatens to turn into a cesspool: the discussion about the future -value- of physical gold.
Part I - Dialectic Foundations
The element Au consists of 118 neutrons, 79 protons and 79 electrons. Many particle physicists would now tell you that electrons do not always act as tiny little points of matter in space-time, but rather can consist of superimposed wave-functions that have a very large, if not infinite, number of possible values. If this premise is true, then how could we get from these rather ephemeral electrons to a solid atom or an element that exists at much larger scales, such as a flake of gold?
The answer is most likely the process of "quantum decoherence", in which superimposed quantum states separate into discrete units of electric charge, mass and spin (angular momentum). This process is overwhelmingly supported by experimental evidence and explains why a "single" electron can pass through two separated slits at the same time, but will only pass through one when it interacts with a photon from a measuring device. . Physicists may disagree on the fundamental significance of these results, but they cannot deny the results themselves.
I believe that a convenient (and generalized) theoretical framework for thinking about the process is complexity theory, to the extent that quantum decoherence leads to increased systemic complexity in the resulting particle and the particle displays emergent properties. When the superimposed particle-states interact with an external environment, its wave-functions "collapse" and it takes on properties of mass, charge and momentum that simply did not exist before.
The stable atom containing these electrons can also be thought of as a complex system with internal structure, a relatively high degree of order and inter-dependent parts. It too has emergent properties, because it exhibits fundamental traits that do not exist at the level of its individual constituents. To better understand the process, imagine that you are floating above an Ocean near the coastline and looking down:
From this perspective, the Ocean appears to be a coherent body of water without any series of waves that exhibits discrete properties (amplitude, wavelength, frequency). Alternatively, you can imagine that you have come down to Earth, so to speak, and are now standing on the beach looking out into the water:
Now, we clearly see multiple waves with discrete properties moving towards us and breaking as they approach the shoreline. The first overhead perspective would represent a particle existing in coherent quantum states, while the second represents a particle that has interacted with its environment and has lost that coherence. Both of these perspectives are fundamental representations of reality, and neither is more "correct" than the other. They do, however, reflect a reality that has fundamentally changed from one perspective (level of complexity) to another.
The point of the above theoretical musings is to help the reader begin thinking about what it means for something to have a "fundamental nature", and how that nature can change as systemic complexity increases. Specifically, with regards to gold as a "monetary" asset, we can ask ourselves what its fundamental role has become in our highly inter-dependent systems of societal organization, and what it will ultimately be.
One of the most insightful and popular physical gold advocates is a blogger called Friend of a Friend of Another ("FOFOA"), and he frequently writes about what he believes to be gold's unique role in the modern global economy. He argues that physical gold, unlike fiat currency assets, has traditionally been and will continue to be the most stable "store of wealth" used by nations, central banks, many large corporate institutions and wealthy individuals around the world.
The nominal dollar value of debt-backed assets held by these "giants" currently outstrips that of their gold-related assets by a large margin, but he argues that the dollar is merely a liquid means of exchange and temporary store of value for the major players. They are hoarding gold and patiently waiting for the dollar to "find" its true "store value" in relation to physical gold, at the bottom of a very deep monetary well.
In essence, they will outrun the "haircuts" on debt-assets by converting them into gold and other hard assets before any of the smaller players even know what hit them [Another, FOA on Hyperinflation] [emphasis mine]:
"Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…
Allowing the US to destroy our own system and offering an avenue of escape for investors worldwide is a master political play. Why dump your dollar reserves when such an action would make you the bad guy? Buy some gold quietly, yes. But, better to let your dollars dissolve and have your assets transformed by a dollar / physical gold devaluation."
The dollar hyper-inflationary process (in terms of price) could take off tomorrow or a few years from now, but, regardless of the timing, the only assured way to preserve one's excess investment wealth is by exchanging dollar-based assets for physical gold from here on out. A fundamental problem begins for this argument, in my opinion, when it attempts to predict the long-term destiny of physical gold through the lens of isolated monetary and political systems.
Isolated to the extent that they are perceived as being both able and willing to unleash a dollar devaluation "bear" on the current financial system, allowing a new global paradigm to inevitably rise in its wake. In our global society, however, we (and FOFOA) should be talking about how the role of gold will be influenced not only by monetary, currency and political systems in isolation, but also by these systems as naturally dependent components of our complex economic and financial systems; as discrete waves in the high seas of industry and credit.
Readers of this article who adhere to the concept of "Freegold" may notice that the theoretical distinctions between it and what I lay out are very subtle. That is certainly true, but subtle differences in such a broad context can spawn vastly different implications for global society's future path. Are we really watching the monetary, social and political systems around the world siege the global financial system and take back a large portion of the value lost through years of imaginary capital creation and wealth concentration? Or are we simply watching them respond in kind as mechanical parts of an unholy and inseparable union?
Can the atom let its electrons go free and reclaim their place in the coherent fabric of the Universe, or will they first be forced to float down to lower energy orbitals, a bit closer to the bright white sands of the shore? Abstract theories and philosophies help us place specific developments into a much broader context, as long as they are initially built on a block of solid foundation. FOFOA writes the following critique of Karl Marx, in his article The Debtors and the Savers [emphasis mine]:
Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.
And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.
Marx writes, "The history of all hitherto existing society is the history of class struggle." He got this part right! What he got wrong was his delineation of the classes.
I couldn't agree more with the statements in bold above, but, naturally, I disagree with what immediately follows. FOFOA goes on to describe Marx's premise - the capitalist system of production contains a constant dialectical struggle between the working class (labor) and the capitalist class (owners of productive capital) - but argues that, instead, the struggle is actually between the debtors (net consumers) and the savers (net producers). It is claimed that the debtors are essentially oppressing the savers by spending beyond their means, devaluing their debt (currency) via printing and diluting the value of the savings in the system.
However, as I plan to demonstrate in further detail, it is FOFOA who argues from the false premise that debtors occupy a distinct class in society apart from savers, and that the former are merely consuming more than they contribute to productive society. That premise naturally leads him to conclude that the next phase of economic evolution will involve a global monetary system that essentially rids the savers of debtor oppression, by containing a branch that functions and derives value independent of the paper financial system. Through this logic, he spins himself around to have his back conveniently turned on Marx.
The latter was, in fact, technically correct with his theory of dialectical materialism and his class delineations, but he did not envision the extent to which large financiers would absorb the functions of the capitalist producer class. He also failed to see how debtors would come to comprise such a large share of the working class, right alongside the savers. We have ended up with a global class struggle between financial owners of capital, on the one hand, and debtors (including governments/taxpayers) and savers on the other (both of them being "workers").
The defaulting debtors are not necessarily "net consumers" over time, but many times receive less and less compensation for their productive efforts. The subtle distinction leading to this class delineation instead of the debtors/savers opposition is the specific dialectic involved. FOFOA's dialectic stems from the Hegelian tradition of two opposing ideological forces (i.e. “easy money” debtors vs. “hard money” savers) synthesizing to create a new paradigm. Essentially, the cart is being put well before the horse, which is a fact that Marx (and Engels) recognized when they developed the theory of dialectical materialism and turned Hegel on his head .
"My dialectic method is not only different from the Hegelian, but is its direct opposite. To Hegel, the life-process of the human brain, i.e. the process of thinking, which, under the name of ‘the Idea’, he even transforms into an independent subject, is the demiurgos of the real world, and the real world is only the external, phenomenal form of ‘the Idea’. With me, on the contrary, the ideal is nothing else than the material world reflected by the human mind, and translated into forms of thought." [Marx]
The material environment of human existence is what underlies the development of socioeconomic structures in society and their inherent class delineations, and these opposing forces (“oppressor” vs. “oppressed”) are what drive the political economy. For example, the industrial (energy) revolution is what really allowed the capitalist system of production to root itself around the world, and this economic system necessarily created two general classes in society – the owners of the means of production (capitalist) and those who are forced to sell their labor to the capitalist (worker).
When discussing the scopes of these very abstract and fluid systems, it helps to have some kind of visual representation, simple and crude as it may be. The following is a snapshot of the critical systems influencing Marx's material dialectic at this point in time:
Connected Red Diamonds = Sociopolitical Systems Derived From the Financial Capitalist System
The currency system is the smallest and most specialized part of the cone, as it only encompasses mediums of exchange and stores of wealth that have been officially sanctioned by national or transnational political institutions. Our monetary system is larger because it includes the currency cone plus any tangible or intangible asset that can act as a medium of exchange and a store of wealth, regardless of whether it is officially recognized by a political body (as long as it is generally recognized by prevailing social norms in a given region).
Money is actually a less abstract (complex) concept than currency, as it can reflect the relative value of tradable goods more directly (in fact, it may be the goods themselves). All forms of currency (i.e. U.S. dollar) are money, but not all forms of money are currencies. Physical gold can be thought of as money, since it is a widely accepted means for members of a society to store their savings (net income minus non-investment consumption). It can also be used as an informal medium of exchange in many parts of the world, but it may not necessarily be accepted by large merchants in the developed world and certainly not governments collecting taxes.
FOFOA claims that, since physical gold now only acts as a global money reserve rather than a currency reserve (or a backing of currency), it is an ideal store of value for savers. That is arguably true because its "value" does not have to be diluted by expanding the currency supply for the purpose of providing "liquidity", easing debt burdens and stimulating growth. In that sense, physical gold could be a repository for saving excess wealth without stifling economic activity, and currencies used in the global monetary system as mediums of exchange can independently float against its price on the market, as the global reserve asset.
The "reference point" of gold would provide a natural carrot and stick mechanism, in which political or financial institutions that use their currency "printing presses" with relative control are rewarded with an influx of gold capital, while those that use them with reckless abandon are punished by gold capital flight to another currency region. Is such a mechanism really capable of being implemented, though, or are we projecting an ideal monetary system (a coherency) onto our global society that is very unlikely to occur, and fundamentally impossible to predict with certainty?
The following passages from Reference Point Revolution help illuminate the flaws in the logic of the Freegold paradigm [emphasis mine]:
"But right now, for perhaps the first time in history, individuals can join central bankers and the true Giants of the world by participating in the ultimate hedge fund. One that, like modern hedge funds, focuses on the hedge itself as the key investment with the most leverage, with the expectation of life-changing returns. And the main differences between this and traditional hedge funds are 1) much less risk, and 2) it is open to ALL individuals, including you!" [FOFOA]
"If you are following closely, now, we can begin to see how easy it is for the concepts of modern money to convolute our value and understanding of gold. It is here that the thought of a free market in physical was formed. Using the relationship of a free physical market in gold, we will be able to relate gold values to millions to goods and services that are currency traded the world over. Instead of having governments control gold's value to gauge currency creation; world opinion will be free to associate the values of barter gold against barter currency. In this will be born a free money concept in the minds of men and governments." [FOA]
The Freegold perspective tends to view the global monetary system as a coherent body of water, in which monetary waves can take on a nearly infinite number of forms or functions as the oppositional ideologies of humans naturally progress. That perspective does not adequately reflect the complex, inter-dependent society that has evolved over the last few hundred years, beginning with the industrialization of national economies and ending with the global financialization of nearly all economic activity. During that time, the monetary waves became increasingly discrete, diverse and dependent as they traveled towards the shores of their destiny.
The properties (roles/values) of these waves have necessarily been constrained by the vast financial body of water in which they were formed, and their potential wavelengths must be measured as a function of financial dynamics. The global financial system is characterized by digital instruments that attach legal claims onto the productive assets of others. These assets may be farmland, human labor, machinery, the actual production process, supply lines, currency, money or any number of things, but such assets do not solely imbue the instruments with value.
Another important aspect of a financial instrument's value is its ability to be issued and traded on a "liquid" market and act as a medium of exchange, promoting the ease of economic transactions. For example, "negotiable instruments" in the U.S. are required to be "payable in currency", rather than just money, because a promise to pay someone in physical gold would not be easily negotiated through markets. Finally, and perhaps most importantly, the financial instruments obtain value through the social and political leverage they affix to the debtors themselves, which include individuals, corporations and governments.
These systems, like the monetary and currency systems, have also been fundamentally transformed into tools of the financial economy. For that reason, the political will of major countries will not drive the global monetary system to its final destination, but instead both politics and money will be driven by the dynamics of industrial and financial capitalism. Eventually, all monetary waves will break on the shore and their components will recede into the water, but those components will never exist independently of the industrial and financial bodies of water, as long as the latter have not yet dried up.
As a consequence, those who are invested in various forms of money, including the U.S. dollar, physical silver and/or physical gold, will not be able to store their wealth outside the broader system of industrial production and finance until they have fully broken down, and that process could last for some significant period of time. This fact implies that no monetary store of wealth can be insulated from the manipulative forces of capitalist production, systemic finance (leveraged speculation) or the sociopolitical leverage at their disposal during such a period.
Through political control, money can be transferred between segments of society at will by means of redistributive policies, capital controls or even outright confiscation, and it could also be made much more available ("liquid") to those with "adequate" economic influence over those with little or no leverage whatsoever. If the Freegold system were to take root in certain parts of the world soon, then it would most likely consume itself rather quickly, since none of the underlying structural instabilities of the system would be absolved by its presence. These instabilities stem from the mechanisms of value creation, realization (profit taking) and speculation in the financial capitalist system.
Such instabilities escape the imagination of Freegold advocates because, along with the flawed dialectic foundation, they base its prospect on a fundamental misunderstanding of economic value in a capitalist system. The broader inevitability of financial capitalism is ignored to make room for the perceived inevitability of a global and gold-based monetary paradigm. In Part II, we will visit the foundation of economic value in modern society and it will become clear that value, just like politics and money, has been fundamentally transformed from what it once was in the simpler barter societies of our past. Until then, let this dialectic foundation settle.
There is only one holistic system of systems, one vast and immane, interwoven, interacting, multivariate, multinational dominion of dollars.
Petro-dollars, electro-dollars, multi-dollars, reichsmarks, rins, rubles, pounds and shekels. It is the international system of currency which determines the totality of life on this planet.
That is the natural order of things today. That is the atomic and subatomic and galactic structure of things today! -
- Arthur Jensen, Network
(PS: The descriptions of FOFOA's views above are my personal interpretations and have not been confirmed as either being accurate or inaccurate by FOFOA)
Greece had 13 off-market deals with Goldman to hide debts
by Elisa Martinuzzi - Bloomberg
Greece had 13 off-market derivative contracts with Goldman Sachs Group Inc., most of which swapped Japanese yen into euros in a 2001 transaction aimed at concealing the true size of the nation’s debt, according to the European Union’s statistics office.
The amount borrowed through the swaps was due to be repaid with an interest-rate swap that would have spread payments through 2019, Eurostat said in a report on its website today. In 2005, the maturity was extended to 2037, the report said. Restructuring the swaps spread the cost over a longer period, leading to an increase in liabilities and debt, Eurostat said.
Repeated revisions of Greece’s figures, beginning in 2009, spurred a surge in borrowing costs that pushed the country to the brink of default and triggered a region-wide debt crisis. The use of off-market swaps, which Greece hadn’t previously disclosed as debt, let the country increase borrowings by 5.3 billion euros ($7.5 billion), Eurostat said in November.
Today’s report provides details of Eurostat’s analysis of data obtained by its inspectors in Greece last year. Eurostat said most issues surrounding the swaps were resolved in September, when Greece agreed to correct its debt figures.
Greece agreed in September with Eurostat to treat other swaps from 2005 as debt. Those contracts had “very short maturity, with a quick amortization of the loan component,” Eurostat said. The Goldman Sachs deal originally amounted to a loan of 2.8 billion euros, according to Eurostat. National Bank of Greece SA (ETE), the country’s biggest lender, in 2005 took over the swap from New York-based Goldman Sachs. Four years later, National Bank securitized the swap, Eurostat said.
Greece, Portugal, Ireland See Debt Topping Total GDP This Year
by Andrew Davis - Bloomberg
Greece, Ireland and Portugal, the euro region countries that needed 256 billion euros ($366 billion) in emergency aid to avoid default, may all see their debt loads exceed the size of their economies this year.
Greece’s debt, already the biggest in the euro’s history at 143 percent of gross domestic product last year, will jump to almost 158 percent this year and 166 percent in 2012, the European Commission said today in Brussels. Portuguese debt will surpass total economic output for the first time this year, growing to 101.7 percent of GDP, while Irish debt will reach 112 percent, the forecasts show.
As European Union officials consider boosting aid for Greece a year after its 110 billion-euro bailout, today’s report shows little sign of debt levels becoming more manageable. Soaring borrowing costs have left the three nations shut out of financial markets with investors increasing bets that Greece will become the first euro member to default.“Greece is facing a very serious situation,” EU Economic and Monetary Affairs Commissioner Olli Rehn said at a briefing. “Because of weaker growth last year than expected and the burden of that, there’s a need to take additional measures of fiscal consolidation.”
The cost of insuring Greece debt against default reached a record 1,371 on May 9, and its two-year bonds now yield 24.8 percent, almost 10 percentage points more than its 10-year debt, indicating investors perceive more risk in lending to Greece for two years rather than a decade.
The European Commission also raised its deficit forecasts for all three countries and predicted that the economies of both Greece and Portugal will shrink this year as the austerity measures choke growth needed to finance deficit reduction. Greece’s economy did expand 0.8 percent in the first quarter, snapping five straight contractions, separate data showed today.
After more than a year of austerity, which included higher taxes and cuts in wages and pensions, Greece’s budget deficit was still at 10.5 percent of GDP last year. The shortfall will narrow to 9.5 percent of GDP this year and 9.3 percent next year, still three times the EU limit of 3 percent.
The European Commission and European Central Bank have stepped up opposition to a restructuring of Greece’s debt. Rehn warned on May 11 that such a move would have “devastating implications” for the country and the euro area as a whole. Euro-region finance chiefs meet in Brussels on May 16 and will discuss additional aid for Greece that would allow it to avoid trying to return to markets and sell 27 billion euros of debt next year as envisioned under the bailout plan.
‘Sooner or Later’
“Sooner or later Greece will have to restructure,” Patrick Moonen, a senior equity strategist at ING Investment Management, said in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse.” At the same time, Europe’s donor nations insist that Greece will need to meet tougher conditions than last year to win more funds. An EU and IMF delegation is currently in Athens, conducting the fourth quarterly review of the government’s deficit-cutting program.
Ireland’s deficit, the biggest in the history of the euro region last year at more than 32 percent, is forecast to fall to 10.5 percent this year. Portugal, where the economy contracted 0.7 percent in the first three months, will have a 5.9 percent deficit, the commission said.
Greece’s Finance Ministry blames the deeper-than-forecast recession for the government’s failure to meet its 9.4 percent deficit target last year and for a 1.9 billion-euro revenue shortfall in the first four months of 2011. Record unemployment of 15 percent and an inflation rate of almost 6 percent have damped consumer and business spending. Greek GDP contracted 4.5 percent last year. The economy is forecast to shrink 3.5 percent this year, according to today’s forecast.
The government next week will submit to parliament a 76 billion-euro package of spending cuts and asset sales to help meet its fiscal targets. About 18,000 demonstrators attended union-organized marches on May 11 to protest the measures.
I.M.F. Warns Europe's Debt Crisis Could Still Spread
Despite bailouts for Greece, Ireland and Portugal, Europe’s debt crisis could still spread to core euro zone countries and the emerging economies of eastern Europe, the International Monetary Fund warned on Thursday.
The IMF said it stood ready to provide more aid to Greece if requested, though the country that triggered the sovereign debt crisis in 2009 still had plenty of untapped options for raising extra cash itself though privatizations. “Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,” the global lender’s latest economic report on Europe said.
Finance ministers of the 17-nation single currency area are set to approve a €78 billion, or $111 billion, rescue plan for Portugal next Monday after Finland’s prime minister-in-waiting clinched a deal to ensure parliamentary approval of the package. But markets are increasingly concerned that Greece may never be able to pay back its €327 billion debt pile and will have to restructure, forcing losses on investors with severe consequences in the euro zone and beyond.
Asked whether there could be new aid package to help Greece work through its fiscal recovery program, the I.M.F.’s European department director, Antonio Borges, said the fund was open to the possibility. “The Greeks have to take the initiative, and so far they have not approached us. The I.M.F. stands ready” to provide additional support “as a matter of policy,” he told reporters.
However, Athens also had the potential to raise funds by selling state assets, with the €50 billion mentioned as a possible estimate of revenues from a privatization program “probably less than 20 percent of all the assets the Greeks could privatize.”
The semi-annual I.M.F. report said peripheral members of the euro zone needed to make “unrelenting” efforts to overcome the debt crisis and prevent it spreading further. It also urged the European Central Bank to tread carefully on further rises in interest rates after last month’s first increase since 2007, saying euro zone monetary policy could “afford to remain relatively accommodative.”
Mr. Borges said the program of austerity measures and structural reforms agreed a year ago was “probably the best thing that can happen” to Greece, though there was always the question of whether it was too ambitious. Greece has implemented harsh cuts in public spending, public sector wages and pensions but has struggled to raise revenue due to a deep recession and chronic tax evasion. The government faces growing resistance to austerity, highlighted by a general strike on Wednesday.
Greek sovereign bond yields soared to fresh euro-era highs on a growing belief that euro-zone finance ministers will not deliver fresh aid for Athens at their monthly meeting next week. The yield on two-year Greek bonds rose to an eye-watering 27 percent. By contrast, Portuguese and Irish yields eased after the Finnish deal on Thursday removed one key political uncertainty.
The euro-skeptical True Finns party, which scored big gains in last month’s general election by vehemently opposing the Portuguese bailout, said it would not take part in talks to form the next Finnish government.
The Washington-based fund’s views about Greece are being closely watched ahead of next month’s decision on whether Athens receives the next €12 billion tranche of its €110 billion E.U./I.M.F. bailout. Ireland and Greece are already dependent on €52.5 billion of I.M.F. aid while Portugal is awaiting a €26-billion, three-year lifeline from the fund. Banks in the troubled countries are being kept above water by unlimited E.C.B. liquidity, and the I.M.F. said the central bank might need to extend that system again beyond June 12.
Financial markets and economists are overwhelmingly convinced that Greece will have to restructure its debt mountain and force investors to take losses. But Mr. Borges said the I.M.F. believed Greece was not bankrupt despite its high debt. “All I.M.F. programs are based on debt sustainability, so as long as a program is in place that means that the I.M.F. believes Greek debt is sustainable,” he said.
Europe Will Need to Dig Deeper for Greece
by Charles Forelle - Wall Street Journal
A senior International Monetary Fund official said Thursday that debt restructuring would provide no miracle cure for Greece's debt crisis, as a delegation of European and IMF officials continued to pore over the Greek government's finances in Athens. The delegation is in the Greek capital to examine whether the country's tough economic program is still on track and whether its financing plan is sustainable. Their agreement is needed before they release another slice of funds next month from a €110 billion ($157.8 billion) rescue package agreed upon a year ago.
But public- and private-sector analysts agree that the €110 billion won't be enough, saying Greece will need to find a way to fill a finance shortfall of as much as €60 billion to tide it through 2013. "Obviously, there is going to be new official money," said Alessandro Leipold, a former senior IMF official who is now chief economist at the Lisbon Council, a Brussels think tank.
One way to ease Greece's troubles would be to change the terms of Greece's existing private debt—a so-called restructuring. However, Antonio Borges, director of the IMF's European department, speaking said in Frankfurt that he doesn't see a "miraculous restructuring solution" to Greece's debt travails. But that raises the question: What are Greece's options? The government has slashed spending. It has been told to increase taxes. A garage sale of government assets—a horse-racing concession, disused Olympic facilities, parcels of land—is opening soon. Mr. Borges said Greece's €50 billion privatization program potentially represents less than 20% of "an extraordinary portfolio of assets" that could be sold off to raise cash.
But raising anywhere this amount through asset sales would encounter huge domestic political opposition and there is a growing consensus among EU officials that more bailout money will be needed. German Finance Minister Wolfgang Schäuble said on Thursday that Germany could provide more aid to Greece—under strict conditions. The route for further money from EU governments—as well as an expected €78 billion bailout for Portugal—appeared to have been eased by events in Finland Thursday. The pullout by the euro-skeptic True Finns party from talks to form a new government suggested, analysts said, that Finland would be less obstructive to EU bailouts.
What to do with Greece will headline discussions at a regular meeting of European finance ministers early next week. There was widespread dissatisfaction in Europe's healthier countries—particularly Germany, the Netherlands and Finland—when the original Greece bailout was designed. Despite Thursday's developments in Finland and Mr. Schäuble's comments, asking people to shell out more bailout money is becoming more, not less, politically fraught.
The problem, at its base, is simply arithmetical: The three-year, €110 billion joint EU-IMF bailout was never enough to carry Greece through three full years. By design, the bailout covered all of Greece's needs—its long-term debt repayments, its bank-restructuring costs, its government deficits—for nearly two years, with the expectation that Greece would gradually begin to borrow again from private markets and the bailout tap would be gradually switched off.
Thus the original bailout math, from when the aid package was conceived in May 2010, showed Greece would need €151.5 billion over three years to cover deficits, repay existing long-term loans and prop up banks. The EU estimated Greece would need to borrow more than €40 billion on its own to plug the gap. In the ensuing year, the numbers have gotten worse. Greece has missed deficit targets, and now the EU expects Greece will need to borrow €44.1 billion—of which €26.7 billion is expected in 2012.
Almost no one believes Greece will be able to raise that much money; currently, markets want more than 15% to lend to Greece, and rating agencies consider the country's debt junk. What to do? There are at least four possible options, which could in some cases be combined.
First is to tweak the terms of the existing bailout in Greece's favor and hope privatization raises serious money fast. One common suggestion: Cut the interest rate Greece pays on the aid money. But in 2012, Greece will pay less than €3 billion in interest to the euro-zone lenders. Even eliminating interest payments makes only a small dent in the €26.7 billion gap. And significant cash from privatizations over the next several months is a very long shot.
Second, the EU could give Greece more money. The European Financial Stability Facility is set up for this purpose, and it could quickly write a check, backed by the taxpayers of healthier countries. This would not be popular. Moreover, some €35 billion in existing long-term debt is due to be paid back to private creditors in 2012. That means that the fresh funds would in large part go directly to repaying banks and other lenders in full, with taxpayers now bearing all the risk.
Third, Greece could be told to offer a "voluntary exchange" to its private creditors, whereby they turn in their maturing bonds for new ones that are repaid later. The risk: If not enough creditors go for the deal, it could quickly become a messier, involuntary exchange in which investors of maturing bonds are paid back with new Greek bonds, whether they want them or not. Indeed, telling creditors that there is no fresh official financing will make them less likely to accept a voluntary exchange. The benefit of delaying repayments: Since private creditors must wait to get their money, they continue to share the burden of risk.
If a solid majority of the holders of debt maturing in 2012 are persuaded or forced to wait for repayment, Greece could scrape by that year without additional money. But it is a very tight squeeze. None of these three options affects the absolute magnitude of Greece's debt, some €350 billion and heading up. Many economists believe Greece won't ever be able to repay it. That leaves the last option: "haircuts" to bondholders. If Greece can't repay, many economists say, it is better to deal with that sooner, rather than throwing good money after bad, mounting the pressure on the Greek economy and raising the exposure of the public lenders.
But, apart from cutting Greece off from private finance for a while, haircuts would be a major event that could trigger unknown consequences in the bond markets and banking systems across the euro zone. That could force Europe into bailing out other governments and their banking systems. In the end, there is a risk that forcing bondholders to take their medicine in Greece could turn out, in the short run, to be the most expensive option of all for taxpayers in rich countries.
Greek Debt Crisis “An Absolute Nightmare,” FT’s Wolf Says
by Aaron Task - Daily Ticker
Days after S&P's downgrade sent yields of Greek debt soaring, European officials are reportedly working on another bailout package for the debt-laden nation. The latest chapter in Europe's never-ending sovereign debt crisis comes about a year after Greece received a 110 billion euro ($158 billion) bailout package from the EU and IMF. That bailout was supposed to buy time for Greece to adopt austerity measures without having to tap the public debt markets.
But Greece has consistently fallen short of its budget targets in the past year and austerity measures have resulted in lower tax receipts and ever-higher deficits. As a result, financial markets are pricing in a default or major restructuring of Greek sovereign debt, putting renewed pressure on EU officials to prevent contagion into Europe's other 'PIIGS', most notably Spain. The situation in Greece is an "absolute nightmare" for European officials, says Martin Wolf, The FT's chief economics correspondent.
Because it's "completely inconceivable" Greece will be able to raise enough money to fund its debts via the private market, Wolf says the country is faced with a stark choice: restructuring its debt now — and force private debt holders to take a haircut -- or become a ward of the EU, which will absorb the debt and then be desperate to avoid haircuts that would hit taxpayers (again). From Wolf's point of view, the choice is an easy one: Restructure now and force the private sector to at least share in the pain (for a change).
"It's just not going to get better," he says of Greece's debt situation. "Essentially they have to bit the bullet. The difficultly is managing that while maintaining some financial system in Greece and avoiding massive contagion within the Eurozone." Because Greece's debt problems are widely known and the potential for a restructuring well telegraphed, a 2008-style financial crisis "probably won't happen," Wolf says. "But the longer they wait, the worse [it] gets."
Athens woes hit confidence in Spain
by Victor Mallet - Financial Times
A reluctant Spain has been shoved once again into the front line of the battle over the future of the euro, following indications that Greece might need another bail-out to avoid defaulting on its sovereign debt.
After the rescues of Greece and Ireland last year and the imminent bail-out package for Portugal, investors say Spain’s €1,744bn ($2,478bn) gross external debt burden and its dependence on foreign financing place it technically next in line for emergency aid from the European Union and the International Monetary Fund.
But would such a rescue for the fourth-biggest economy in the eurozone ever be needed? Spanish ministers and most of the country’s business leaders insist the answer is no, largely because Spain is successfully cutting its budget deficit and has embarked on a radical reform of its troubled savings banks.
Even foreign funds, many of which were sceptical about Spain’s chances before it introduced a harsh austerity plan last May, now tend to give the country the benefit of the doubt. “The debate has moved from ‘Will they need a bail-out?’ to ‘Will there be any growth, and is this a good place to invest my money?’,” says one London-based hedge fund analyst visiting Madrid.
Foreign investors and analysts, however, say the outcome for Spain depends as much on confidence and on market perceptions as on what actually happens to the Spanish economy. “First, the markets don’t have nearly as much information as the individual countries have and, second, they are quite fickle,” says Luis Cabral, professor of economics at Iese, the business school.
When Portugal finally accepted it needed a bail-out a month ago, markets were so relaxed that the perceived riskiness of Spanish 10-year government bonds – as measured by the interest rate spread over benchmark German bunds – actually declined to about 170 basis points.
Yet when it became clear a few days ago that Greece would need further aid on top of the €110bn already agreed, the spread rose sharply to 220bp and has declined only slightly since then. “Between the two there was about a month, and not much has happened in the real economy in Spain,” says Prof Cabral. “It has to be a combination of psychological effects and market expectations ... Greece was a big negative shock to expectations. Restructuring is no longer a problem for Greece – it’s a problem for the entire eurozone.”
Although the Spanish bond spread is well below the euro-era record of nearly 300bp that it hit last year, foreign investors are still trying to establish whether Spain is as vulnerable as pessimists assert. “Everyone saw Greece and Portugal as weak economies, and in Ireland everyone can see the obvious – the banking sector,” says Mattias Sundling, a senior strategist at Danske Markets. “Spain is a little more complicated. Everyone is struggling to get a grip on how serious the situation is.”
As Markets Worry, Spanish Regions Borrow
by David Roman - Wall Street Journal
It’s unclear whether Spanish regional governments got the memo on the pressing need to cut down debt.
Since November last year, Spain’s regions have borrowed around €8 billion via bonds, mostly short-term, high-coupon retail issues targeting “patriotic” residents, boosting the overall debt of regional governments by more than 7%, according to Moody’s. In a report released earlier this week, Moody’s says this means that regional government debt already accounts for 11% of Spain’s overall debt. The trend is for further increases, Moody’s adds, as the high cost of servicing this debt hits regional finances which are already shaky, due to the consequences of the three-year long property bust in the country.
With local and regional elections to be held May 22 in Spain, local mandarins have had a big incentive to spend. The worry now is that, as a number of regional governments are due to change hands, new incumbents may have an interest in getting skeletons out of the closets and starting afresh, by admitting to higher-than-anticipated budget shortfalls. That’s exactly what happened last year in Catalonia, Spain’s wealthiest region, when the regional government there changed hands.
The new government led by moderate Catalan Nationalists promptly accused the previous cabinet of hiding budget shortfalls. Then, in February, it unveiled a 2010 budget deficit equal to 3.9% of the regional gross domestic product—above the estimate of 3.6% of GDP that Catalonia gave a few weeks before and much higher than the 2.4% limit set for all regional governments in 2010.
Madrid’s central government doesn’t want any more of this. Last year, Madrid fought hard and long to keep spending by the regions under control, and the terms set for this year are generous—as Spain’s overall budget deficit goes down from 9.2% of the country’s GDP to 6% of GDP, the central government plans to cut its deficit from 5% of GDP to 2.3% of GDP, allowing the regions a much smaller deficit adjustment—only from 3.4% to 3.3%.
Even these relatively generous terms may be hard to achieve by Spain’s 17 regions, six of which must still make additional cost reductions to get their deficit-cutting plans approved by Madrid. This is because many of the regional governments have become employers of last resort, and have recently become about the only sources of new jobs in the country, as the number of civil servants across the country has risen to a fresh all-time high. Regional governments alone now employ 50% more people than five years ago.
It’s true that regional governments are in charge of providing key services, but often they’re not very good at it. Health care costs per insured, mostly under the regions’ administration, have grown almost 50% since 2004, according to Fitch Ratings estimates. Then there are plenty of non-essential expenses. In a recent report, the Spanish newspaper El Economista estimated that the network of 179 foreign representation offices kept by the 17 Spanish regions will have a cost of just over €400 million this year—a 10% reduction from last year’s number, but still a fairly substantial amount given that regions have no say over Spain’s international ties
Is Spain next to fall?
by Jonathan Ratner - Financial Post
Will Spain be able to avoid the debt contagion sweeping through the euro zone or is it the next domino to fall? As the world’s 12th largest economy and the fourth largest in the euro zone, many analysts point to Spain as the country that will ultimately determine whether the region’s debt crisis can be contained. Spain’s GDP also happens to be twice the size of Greece, Ireland and Portugal combined.
“While we do not go as far as to predict that the restructuring of Spain’s debt is imminent, we do believe that the current consensus view that Spain has decoupled from Greece, Ireland and Portugal underestimates the risks facing the country,” said Angelo Katsoras and Pierre Fournier, geopolitical analysts at National Bank Financial.
One factor behind the view that Spain won’t be the next bailout candidate is the much lower yield on its government debt relative to bailout recipients such as Greece, Portugal and Ireland. Yet while Spain has relatively low public debt (62% of GDP – roughly 20% lower than the euro zone) and it has implemented several key austerity measures (wage cuts for civil servants, raising the retirement age, hiking taxes), the country still faces significant economic and geopolitical challenges.
The National Bank analysts point to the recent real estate bust, a banking sector that remains fragile, Spain’s uncompetitive labour force, high private sector debt, sub-par economic growth prospects and political uncertainty both inside and outside its borders.
Spain also faces rampant unemployment, which hit a new high of 21.3% in the first quarter of 2011 and is more than double the euro zone average. The underground economy does account for 20% of Spain’s GDP, so the unemployment picture is likely better than headline numbers suggest, but the jobless rate for youth under the age of 25 is 43.5%. At the same time, 35% of this group does not have a college education, which is double the EU average.
If interest rates continue to rise following the European Central Bank’s recent quarter-point hike, the analysts expect Spain’s weak housing market would take a hit since most mortgages in the country are linked to the one-year Euribor money market rate, which is equivalent to a variable mortgage rate.
So if Spain were to need a bailout, the country’s size means its rescue package would dwarf all others seen to date. While the Greek, Irish and Portuguese bailouts totaled approximately €275-billion, many economists estimate that if Spain loses its ability to borrow from the international markets at affordable rates, it would need a loan package worth about €350-billion.
“A bailout of Spain would not only strain the capacity of the European Union bailout fund, it could also lead to a massive political backlash from angry citizens in the creditor countries,” they said, noting the large exposure of European banks to Spain. “Historically, the number of countries that have been able to overcome debt and competitiveness-related problems without resorting to currency devaluation and/or debt restructuring is exceedingly low,” Mssrs. Katsoras and Fournier wrote in a report.
“Growing political tensions between the creditor and debtor countries of the euro zone and voter backlash against incumbent governments are undermining efforts to achieve the necessary compromises and effective domestic policy measures.”
Forex focus: watch out for Greece
by Liz Phillips - Telegraph
Beware Greeks bearing bonds is the message from across the Channel at the moment.
It’s looking increasingly likely that Greece – and therefore the European Central Bank (ECB) – will have to face crippling costs to restructure its debt, with ratings agency Standard & Poor (S&P) downgrading Greece from BB- to B. The worrying factor is that Greek banks hold predominantly Greek government bonds.
As Simon Smith, chief economist of FxPro says: “Greece is stuck between a rock and a hard place. Greek banks will take the biggest hit from any restructuring. In turn, the ECB – Greek banks having borrowed €94 billion from it – will take a hit on a major restructuring. “S&P reckon you need to lop 30 to 50 per cent off the Greek debt pile just to pull Greece out of the current nose-dive. In hair-dressing terms, that’s a pretty severe hair-cut. “There is a sense that Europe’s response to the debt crisis is now verging on the shambolic.”
Greece was the first nation to need a hand-out last time. History could be repeated with Ireland and Portugal not far behind. As Caxton FX’s Richard Driver says: “Greek debt levels are unsustainable. They will certainly need more support of some sort. It’s a matter of when and in what form, not if, Greece receives help.”
In recent weeks the euro has shown remarkable resilience in shrugging off any bad news. The reasons were that it is being propped up by rich Asian friends buying the currency as an alternative to the US dollar, its relatively high interest rates and the strength of Germany’s economy under-pinning the single currency. But finally everyone seems to be taking notice of the extent of the debt crisis.
“The worm has started to turn,” comments Jeremy Cook, chief economist at World First. “And, like a patient lying in a hospital bed with the painkillers wearing off, the markets are starting to take more and more notice of the great big European debt problem. “The rebound in the euro’s fortunes over the past week has been short and sharp. It’s been the kind of movement which suggests that the market is scared, and they are dumping it with very little care for the consequences.”
With the spotlight once again on how vulnerable the Eurozone really is, the future for the area looks bleak. As Chris Towner, director of FX Advisory Services at HiFX notes: “The euro looks vulnerable from a number of angles. The most obvious one is the suffering peripheral economies for whom the rating agencies continue to circle in the air like birds of prey diving in with downgrades.”
He also points out the shaky political will from stronger nations to continue to fund the weaker ones – the Finnish electorate is revolting against hand-outs and Germany’s Angela Merkel is struggling to maintain support politically because of her helpful attitude to the weaker peripheral countries. Her problems will only get worse if Germany’s export trade is knocked by higher wage and energy costs and a strong euro.
Mr Towner adds: “It is also important to add that the sovereign debt crisis does not need to spread any further into Spain or Italy. If it were to spread into these economies then the sovereign debt crisis would become even more alarming; however the point here is that the alert is already bright red due to Greece, Ireland and more recently Portugal.”
ECB President Jean Claude-Trichet didn’t help either by suddenly announcing at the end of last week that a further rate rise was not ear-marked for the next month or so, causing a sell-off of the single currency. The euro is now on the back foot.
And that wasn’t the only bad news. “On Friday rumours swept the currency markets that an emergency meeting could see Greece pull out of the euro. This heaped more pressure on the euro and it has dropped by nearly six cents in just over three trading days,” says Mark O'Sullivan, group head of dealing and products at Currencies Direct.
“The great thing about the ECB and the euro politicians is that they continue to peddle the same story: that the countries that had sought a bail-out - Greece, Portugal and Ireland - didn’t really have that much effect when it came to total Eurozone GDP. “This is true, but what they failed to acknowledge is the 'iceberg effect' these countries have. The tip of the iceberg is their total input to Eurozone GDP, but under the water the debt they owe is huge, to the point that a default from all three of these nations would cause a global implosion.
“To add even more uncertainty, the newly elected Finnish government have come out and publically stated that Eurozone bail-outs are nothing more than a 'Ponzi scheme', with taxpayer’s money being used to fund countries that have no real means to pay off their debts and need a constant source of bail-outs just to meet their on-going debt requirements.
“The elephant in the room is Spain and Italy. Both have different problems and day by day the yields the market demand to lend to these nations continue to rise. So the PIGS, who have been ridiculed by their northern neighbours for poor fiscal policy, have suddenly pulled a gun from under the table and held it to their heads, threatening to pull the trigger unless they get some kind of debt forgiveness.”
And where does all this leave sterling – within the EU but not in the euro club? Could the pound be seen as an alternative? HiFX’s Chris Towner thinks so. “Sterling looks far more attractive as an alternative. The UK has of course its own issues, but at least these issues are being addressed, and at least we have a currency that weakens in reaction to a crisis rather than strengthens.”
Inflation Fears: Real or Hysteria?
by Ellen Brown - Truthout
Debate continues to rage between the inflationists who say the money supply is increasing, dangerously devaluing the currency, and the deflationists who say we need more money in the economy to stimulate productivity. The debate is not just an academic one, since the Fed's monetary policy turns on it, and so does Congressional budget policy.
Inflation fears have been fueled ever since 2009, when the Fed began its policy of "quantitative easing" (effectively "money printing"). The inflationists point to commodity prices that have shot up. The deflationists, in turn, point to the housing market, which has collapsed and taken prices down with it. Prices of consumer products other than food and fuel are also down. Wages have remained stagnant, so higher food and gas prices mean people have less money to spend on consumer goods. The bubble in commodities, say the deflationists, has been triggered by the fear of inflation. Commodities are considered a safe haven, attracting a flood of "hot money" - investment money racing from one hot investment to another.
To resolve this debate, we need the actual money supply figures. Unfortunately, the Fed quit reporting M3, the largest measure of the money supply, in 2006.
Fortunately, figures are still available for the individual components of M3. Here is a graph that is worth a thousand words. It comes from ShadowStats.com (home of Shadow Government Statistics, or SGS) and is reconstructed from the available data on those components. The red line is the M3 money supply reported by the Fed until 2006. The blue line is M3 after 2006.
The chart shows that the overall US money supply is shrinking, despite the Fed's determination to inflate it with quantitative easing. Like Japan, which has been doing quantitative easing (QE) for a decade, the US is still fighting deflation. Here is another telling chart - the M1 Money Multiplier from the Federal Reserve Bank of St. Louis:
Barry Ritholtz comments, "All that heavy breathing about the flood of liquidity that was going to pour into the system. Hyper-inflation! Except not so much, apparently." Ritholtz quotes David Rosenberg: "Fully 100% of both QEs by the Fed merely was new money printing that ended up sitting idly on commercial bank balance sheets. Money velocity and money multiplier are stagnant at best." If QE1 and QE2 are sitting in bank reserve accounts, they're not driving up the price of gold, silver, oil, and food, and they're not being multiplied into loans, which are still contracting.
The part of M3 that collapsed in 2008 was the "shadow banking system," including money market funds and repos. This is the non-bank system in which large institutional investors that have substantially more to deposit than $250,000 - the Federal Deposit Insurance Corporation (FDIC) insurance limit - park their money overnight. Economist Gary Gorton explains:
[T]he financial crisis ... [was] due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) - short-term, collateralized, agreements that the Fed rightly used to count as money. Collateral for repo was, to a large extent, securitized bonds. Firms were forced to sell assets as a result of the banking panic, reducing bond prices and creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears about the locations of subprime risk concentrations among counterparties.
This banking system (the "shadow" or "parallel" banking system) - repo based on securitization - is a genuine banking system, as large as the traditional, regulated banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend, and credit, which is essential for job creation, will not be created.[Emphasis added.]
Before the banking crisis, the shadow banking system composed about half the money supply, and it still hasn't been restored. Without the shadow banking system to fund bank loans, banks will not lend, and without credit, there is insufficient money to fund businesses, buy products, or pay salaries or taxes. Neither raising taxes nor slashing services will fix the problem. It needs to be addressed at its source, which means getting more credit (or debt) flowing in the local economy. When private debt falls off, public debt must increase to fill the void. Public debt is not the same as household debt, which debtors must pay off or face bankruptcy. The US federal debt has not been paid off since 1835. Indeed, it has grown continuously since then, and the economy has grown and flourished along with it.
As explained in an earlier article, the public debt is the people's money. The government pays for goods and services by writing a check on the national bank account. Whether this payment is called a "bond" or a "dollar," it is simply a debit against the credit of the nation. As Thomas Edison said in the 1920's:If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way.... It is absurd to say our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people.
That is true, but Congress no longer seems to have the option of issuing dollars, a privilege it has delegated to the Federal Reserve. Congress can, however, issue debt, which, as Edison says, amounts to the same thing. A bond can be cashed in quickly at face value. A bond is money, just as a dollar is.
An accumulating public debt owed to the International Monetary Fund (IMF) or to foreign banks is to be avoided, but compounding interest charges can be eliminated by financing state and federal deficits through state- and federally owned banks. Since the government would own the bank, the debt would effectively be interest-free. More important, it would be free of the demands of private creditors, including austerity measures and privatization of public assets.
Far from inflation being the problem, the money supply has shrunk and we are in a deflationary bind. The money supply needs to be pumped back up to generate jobs and productivity and, in the system we have today, that is done by issuing bonds, or debt.
Foreclosure Filings Drop to 40-Month Low as U.S. Lenders Delay Processing
by Dan Levy - Bloomberg
Foreclosure filings in the U.S. fell 34 percent last month from a year earlier as lenders already swamped with seized homes delayed action on thousands of additional delinquent mortgages, RealtyTrac Inc. said.
A total of 219,258 properties received default, auction or repossession notices in April, the fewest in 40 months, the Irvine, California-based data seller said today in a statement. It was the seventh straight month that filings dropped from a year earlier. They were down 9 percent from March. One in 593 U.S. households got a notice. “Banks already sitting on thousands of properties they can’t sell as quickly and profitably as they’d like aren’t going to be anxious to accelerate foreclosures on tens of thousands more,” Rick Sharga, RealtyTrac’s senior vice president, said in an e-mail.
The U.S. housing market faces “enormous challenges,” Brian Moynihan, chief executive officer of Bank of America Corp. (BAC), the largest U.S. bank, told shareholders yesterday in Charlotte, North Carolina. Three-fourths of U.S. cities had declines in home prices in the first quarter, according to the National Association of Realtors. Distressed properties, which include foreclosures and short sales, accounted for 40 percent of transactions in March, the group said.
As many as 11 million home loans are underwater, in foreclosure or close to default, Lewis Ranieri, a pioneer of mortgage securitization, said last week while urging lenders to reduce the debt of U.S. mortgage holders with solid credit histories.
Investigation by Attorneys
Foreclosure filings have been falling since U.S. attorneys general in October began a probe of lender practices including improper documentation. Bank of America and JPMorgan Chase & Co. (JPM) are among five U.S. mortgage servicers in talks with state and federal officials to settle the investigation.
RealtyTrac is planning to revise its forecast for 2011 foreclosures at midyear, Sharga said. A 20 percent increase in total filings, which the company predicted in January, is unlikely amid scrutiny of lenders and “market saturation” from distressed homes already for sale, he said. Default notices were filed on 63,422 U.S. properties last month, close to a four-year low and down 39 percent from a year earlier, according to RealtyTrac.
Auctions were scheduled for 86,304 properties, the lowest number in 31 months and a decrease of 37 percent from April 2010, while lenders seized 69,532 homes, down 25 percent from a year earlier. States where courts oversee foreclosures showed a 47 percent decrease in filings from a year earlier, while non- judicial states had a 26 percent decline, RealtyTrac said.
Nevada had the highest rate of foreclosure filings per household at one in 97, with a record 4,606 homes seized. Arizona had the second-highest rate at one in 205 and California was third at one in 240. Utah, Idaho, Michigan, Florida, Georgia, Colorado and Oregon also ranked in top 10. Ten states accounted for 70 percent of the U.S. filing total, led by California’s 55,869. Florida was second at 19,649 and Arizona third at 13,419. Michigan, Nevada, Illinois, Texas, Georgia, Ohio and Colorado rounded out the top 10.
RealtyTrac sells default data from more than 2,200 counties representing 90 percent of the U.S. population.
Proposed US Mortgage Bill Favors Private Firms
by Nick Timiraos - Wall Street Journal
Two lawmakers, a California Republican and a Michigan Democrat, are set to unveil legislation Thursday to replace mortgage giants Fannie Mae and Freddie Mac with at least five private companies that would issue mortgage-backed securities with explicit federal guarantees. The measure is a compromise between conservative Republicans who have advanced bills to build a mostly private mortgage-finance system and Democrats, who say the government shouldn't abandon the mortgage market.
Fannie and Freddie were taken over by the government in 2008 as rising mortgage losses wiped out thin capital cushions. Taxpayers are on the hook for $138 billion to keep the companies afloat and stabilize mortgage markets. Amid an uneven housing recovery, lawmakers have largely shied away from fashioning a successor to the failed mortgage giants.
Analysts say that the compromise proposed by Rep. John Campbell (R., Calif.) and Rep. Gary Peters (D., Mich.) may be the only plan likely to attract sufficient support from both parties on a politically explosive subject, particularly at a time when gridlock looms over issues such as how to curb federal spending.
Other policy makers, including Treasury Secretary Timothy Geithner, have publicly discussed the merits of a limited but explicit government guarantee of securities backed by certain types of mortgages.
Rep. Campbell said, "Rather than putting out a political marker, we can move a piece of legislation that is significant...and can actually become law. The only other approach that's out there in a bill is one that replaces Fannie and Freddie with nothing."
Like Fannie and Freddie, the new entities would be restricted to buying loans that meet certain standards, including size caps. But the firms would have to hold much more capital than Fannie and Freddie. And only the mortgage-backed securities that they issue—not the companies themselves—would enjoy federal guarantees. The companies would operate more as public utilities and likely wouldn't have exchange-listed shares.
The approach signals policy makers' desire to usher more private capital into the mortgage market, where the government currently backs more than nine in 10 new loans. But the measure also reflects an unwillingness to cut the federal cords entirely. The bill comes as the housing and financial-services industries dial up efforts to block more aggressive overhauls of the mortgage market. Thursday's measure mirrors proposals advanced by industry groups such as the Financial Services Roundtable's Housing Policy Council.
Critics say the hybrid model risks recreating the same dynamics that led Fannie and Freddie to use their government ties to take risks that cost taxpayers. "In reality, this is almost surely going to be terrible," said Dwight Jaffee, finance professor at the University of California, Berkeley. Government insurance programs, he says, inevitably lead to "a catastrophe."
Advocates say taxpayers will be less exposed to losses because borrowers would be required to make significant down payments and the new firms would be required to hold more capital. The firms will also pay a fee for government backing to finance a catastrophic insurance fund, much as the Federal Deposit Insurance Corp. levies fees and handles bank failures. "There is a lot of private capital ahead of the federal government and the taxpayers on this," said Rep. Peters.
The proposal leaves many details to an independent regulator, which Rep. Campbell says should be insulated from Congress to prevent lawmakers from leaning on it "to do politically correct things, which may not be financially correct things." That role would fall to the Federal Housing Finance Agency, which currently regulates Fannie and Freddie. It would issue charters to the mortgage "guaranty associations," and would be charged with setting guarantee fees and ensuring appropriate capital levels.
While the bill doesn't specify whether the new entities would be allowed to hold mortgage portfolios, the more-stringent capital requirements would make such investment vehicles economically unattractive.
Since the Great Depression, the government has had a hand in the U.S. housing-finance system, which has featured an odd blend of public and private roles. The loans Fannie and Freddie buy from lenders are primarily long-term fixed-rate ones that banks are less willing to hold on their balance sheet. They repackage them for sale to investors as securities, offering guarantees to make investors whole if borrowers default.
Investors were willing to buy those securities in part because the shareholder-owned firms had an "implied" government guarantee. The government was forced to make good on that guarantee by taking the firms over in 2008. The bill pledges that the U.S. would stand behind the existing obligations of Fannie and Freddie, formalizing in writing a position thatthe Bush and Obama administrations never quite made explicit.
The bill would require Fannie and Freddie to accelerate a planned run-off of their combined $1.5 trillion mortgage portfolios. But it wouldn't liquidate the firms until after two or more new associations had been chartered.
Federal Retreat on Big Mortgage Loans Rattles Housing
by David Streitfeld - New York Times
By summer’s end, buyers and sellers in some of the country’s most upscale housing markets are slated to lose one their biggest benefactors: the deep pockets of the federal government. In Monterey, Calififornia, a seaside community of pricey homes, the dread of yet another housing shock is already spreading. “We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo, a loan broker. “This snowball that’s been rolling downhill is going to pick up some speed.”
For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.
But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.
Michael S. Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities. “There’s always going to be a line, and for the person just over it it’s always going to be an arbitrary line,” said Mr. Barr, who teaches at the University of Michigan Law School. “But there is no entitlement to living in a home that costs $750,000.”
As the housing market braces for more trouble, homeowners everywhere have been reduced to hoping things will someday stop getting worse. In some areas, foreclosures are the only thing selling. New home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the last year.
The federal government last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.
Getting the government out of the mortgage business, however, is proving much more difficult than doling out new benefits. As regulators prepare to drop the level at which they will guarantee loans — here in Monterey County, the level will drop by a third to $483,000 — buyers and sellers are wondering why they should be punished simply for living in an expensive region.
Sellers worry that the pool of potential buyers will shrink. “I’m glad to see they’re trying to rein in Fannie Mae, but I think I’m being disproportionately penalized,” said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.
Buyers might face less competition in the fall but are likely to see more demands from lenders, including higher credit scores and larger down payments. Steve McNally, a hotel manager from Vancouver, said he had only about 20 percent to put down on a new home in Monterey County. If a bigger deposit were required, Mr. McNally said, “I’d wait and rent.”
Even those who bought ahead of the changes, scheduled to take effect Sept. 30, worry about the effect on values. Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant. He qualified for government insurance, which meant he needed only a small down payment. If that option is not available in the future, he said, “home prices all around me will plummet.”
The National Association of Realtors, 8,000 of whom have gathered in Washington this week for their midyear legislative meeting, is making an extension of the loan guarantees a top lobbying priority. “Reducing the limits will put more downward pressure on prices,” said the N.A.R. president, Ron Phipps. “I just don’t think it makes a lot of sense.” But he said that in contrast to last year, when a one-year extension of the higher limits sailed through Congress, “there’s more resistance.”
Federal regulators acknowledge that mortgages will get more expensive in upscale neighborhoods but say the effect of the smaller guarantees on the overall housing market will be muted. A Federal Housing Administration spokeswoman declined to comment but pointed to the Obama administration’s position paper on reforming the housing market. “Larger loans for more expensive homes will once again be funded only through the private market,” it declares.
Brokers and agents here in Monterey said terms were much tougher for nonguaranteed loans since lenders were so wary. Borrowers are required to come up with down payments of 30 percent or more while showing greater assets, higher credit ratings and lower debt-to-income ratios. In the Federal Reserve’s quarterly survey of lenders, released last week, only two of the 53 banks said their credit standards for prime residential mortgages had eased. Another two said they had tightened. The other 49 said their standards were the same — tough.
The Mortgage Bankers Association has opposed letting the limits drop, although a spokesman said its members were studying the issue. “I don’t want to sugarcoat this,” said Mr. Barr, the former Treasury official. “The housing finance system of the future will be one in which borrowers pay more.”
The loan limits were $417,000 everywhere in the country before the economy swooned in 2008. The new limits will be determined by various formulas, including the median price in the county, but will not fall back to their precrisis levels. In many affected counties, the loan limit will fall about 15 percent, to $625,500.
Monterey County, however, will see a much greater drop. The county is really two housing markets: the farming city of Salinas and the more affluent Monterey and Carmel.
Real estate records show that 462 loans were made in Monterey County between the current limit and the new ceiling since the beginning of 2009, according to the research firm DataQuick. That was only about 1 percent of the loans made in the county. But it was a much higher percentage for Monterey and Carmel — about a quarter of their sales.
Heidi Daunt, with Treehouse Mortgage, said loans too large for a government guarantee currently carried interest rates of at least 6 percent, more than a point higher than government-backed loans. “That can definitely blow a lot of people out of the water,” Ms. Daunt said.
The housing crash will be short-lived for America's politicians
by Richard Blackden - Telegraph
President Bill Clinton once described homes as something Americans "will always know that their country wanted them to have because they were entitled to it as part of the American dream".
It's how the 42nd president ended an address in The White House extolling the virtues of homeownership. He gave the speech in 1995, a year like most before it and several since, when US politicians were more than happy to talk about the housing market.
Fast forward 16 years and the relative silence is striking. More than three years since the collapse of Bear Stearns – a bank that choked on mortgage debt – the only financial debate in the capital is how to cut the country's $14 trillion (8.6 trillion) debt.
Meanwhile on Wall Street, the housing market has become the D-list celebrity of financial markets. It has to do something really shocking to get attention. The steepest quarterly drop in house prices since the three shuddering months after Lehman Brothers' demise certainly isn't enough. US stock markets didn't blink at Monday's news that average prices fell 3pc in the first three months of this year. Nor that only three of the 132 metropolitan areas escaped the declines, according to Zillow, a major property listings website.
In fairness to investors, given the 30pc drop in prices since they peaked in July 2006, a further 3pc amounts to a much smaller number in actual dollars. The only real division among economists at the beginning of the year was not on the direction of house prices, but how much further they would go before stopping and, eventually, reversing. And a third of the way through 2011, most still believe that the wider economic recovery can accelerate even as millions of Americans see the value of their homes continue to head south.
While Wall Street and Congress aren't paying too much attention to the housing market, the American public is. Many have no choice. For starters, take the record 2.9m homeowners who had their properties repossessed by banks last year. The wave of property seizures temporarily eased towards the end of the year, but only because many banks were found to have strayed from the proper procedures. RealtyTrac, which follows the market, predicts repossessions will rise 20pc this year, while Bank of America, the country's biggest bank, expects a further 8m homes to be taken back by lenders by the end of 2013.
The painful mechanics of this process is already having one clear effect: fewer Americans are owning their homes. Homeownership levels have dropped to 66.5pc from the peak of 69.2pc they reached in the last quarter of 2004. Even without further repossessions, it's hard to see how the trend will reverse any time soon. As in Britain, mortgage lenders have tightened their standards following the egregious abuses in the years leading up to the crisis.
The Obama administration has, for example, proposed regulations that would reserve the best mortgage deals for those able to put down a 20pc deposit. Though a sensible step away from the kamikaze lending before 2007, it's caused an outcry from those who argue it punishes poorer but creditworthy borrowers who will never be able to raise a deposit of that size.
But it's only a return to deposit requirements much more commonly required just 30 years ago. And then there's Fannie Mae and Freddie Mac, the lenders set up in 1938 and 1970 respectively to spread homeownership through the implied promise of government guarantees. Since prices began falling, they've relied on more than $150bn of support from US taxpayers and still either own or guarantee half the country's mortgages. No one expects any clarity on their future until at least after next year's presidential election.
In his book Fault Lines: How Hidden Fractures Still Threaten the World Economy, former IMF economist Raghuram Rajan argues that Clinton and then President George W. Bush sought to accelerate the spread of homeownership to counter the economic threat posed to working and middle-class Americans from more jobs heading overseas. There's no sign of that changing. America's multinationals eliminated 2.9m jobs in the US during the last decade, while creating 2.4m outside the country, according to the Commerce Department.
With prices still falling, it's too early to judge whether Americans' faith in the benefits of homeownership has been permanently shaken. In Washington DC, few in Congress are talking about the subject with the zeal that Clinton used so confidently. But when prices do eventually reach a bottom, it's hard to see politicians resisting the temptation to once again preach the benefits of owning a home. Even to those Americans who can't afford one.
Starbucks chief Howard Schultz attacks coffee speculators
by James Hall - Telegraph
Howard Schultz, president of Starbucks, the world's largest coffee chain, has attacked speculators for pushing up the price of coffee to a 34-year high. Howard Schultz, who masterminded Starbucks' growth from four stores in Seattle to more than 17,000 worldwide, said that more transparency was urgently needed to identify those responsible for pushing up raw material prices.
Mr Schultz, who is also Starbucks' chief executive and chairman, said that the current spike in the cost of commodities such as coffee and other foodstuffs is "not based on supply and demand" but based on market speculation. He said that the farmers who actually produce the commodities are receiving a "de minimus" proportion of the price rises.
"Right now we are experiencing a very strange and almost inexplicable phenomenon in the commodities market. Without any real supply or demand issues we are witness to the fact that most agricultural food commodities are at record highs at once, and coffee is at a 34-year high," he said. "Through financial speculation – hedge funds, index funds and other ways to manipulate the market – the commodities market is in a very unfortunate position. This has resulted in every coffee company having to pay extraordinarily high prices for coffee."
In April, coffee cost an average of $2.31 (£1.38) per pound, according to composite prices from the International Coffee Organisation. This compares with $1.97 in January and $1.27 last April. A decade ago, the average price for a pound of coffee was 45.6 cents. Retailers have also been hit by soaring prices of commodities such as cotton, copper, sugar, wheat and oil.
Speaking in London as part of a book tour, Mr Schultz said: "I don't know the rules and regulations in the UK but unfortunately in the US you can't identify who is buying the commodities. So there is no transparency. I just think it is [unfortunate that] at a time in the world where there is such concern over the economy, unemployment and the cost of food – not to mention the cost of oil – we could be in a position where we have inflationary prices on food not based on supply and demand. This is the first time in my 30-years of being in the coffee business where this exists.
"I don't think, by the way, that this is sustainable, however it is not a good situation for the consumer and I am not convinced that the farmers benefit from this," he said. The US businessman added that if he knew "for a fact" that the coffee farmer at the end of the food chain is reaping the benefits, then the increase might be "justifiable".
Mr Schultz, who returned to running Starbucks day-to-day in 2008 after an eight-year spell as chairman, said that despite the economic downturn Starbucks is experiencing one of its strongest financial performances in its history. Late last month it said that second-quarter sales increased by 10pc to $2.8bn. "Fiscal year 2010 was a record year and the last two quarters were record quarters in our 40-year history. The backdrop of the economy is still fairly fragile in many places. Starbucks is still a relatively affordable luxury.
"But there is no victory lap, no celebration and we do not take for granted that we have to come to work every day and earn it with relentless focus and commitment," he said. Starbucks will launch a loyalty scheme in the UK "hopefully sooner rather than later". The scheme has launched in the US and how has 1.5m premium members.
Bill Gross: The leader Treasury, Fed needs
by Paul B. Farrell - MarketWatch
We need new blood, because something’s very wrong. Bear’s growling. Commodities tanking. Speculation. Inflation fears. Confidence weak. Negative yields.
Soon Fed Chairman Ben Bernanke will be forced to raise interest rates, confirming Ned Davis Research’s February forecast of an S&P 500 mid-year peak. Yes, “the midyear peak could mark the end of the cyclical bull market that began in March 2009 and the start of a new cyclical bear market,” chipping away at the 50% returns stockholders are praying would continue for two more years. Sorry, game over.
Will Treasurys get boost?
Worse, today’s wealth-income gap is soaring at levels not seen since the days before the 1929 Crash. Reasonable minds outside the political bubble are quietly praying for new leadership before the inevitable happens, before America’s bumbling political and financial leaders trigger the Mother of all Meltdowns and Depressions.
Yes, I’m talking about stopping the damage inflicted on America by the Bernanke Money Printing Company … by Treasury Secretary Timothy Geithner and his ol’ buddies in the too-greedy-to-fail Wall Street banks … by the 261,000 lobbyists creating a Soulless Anarchy of the Super Rich. Yes, they’re all leveraging a self-destructive Reaganomics ideology that’s tearing down a few centuries of capitalism in one generation. America needs new leaders who can reset our moral compass, stop the destruction.
Who? Who can change our course before incompetence, greed and ideology crashes the U.S.S. Titanic again? There is one strong voice out there that tells it like it is, knows how we got here, can keep America from hitting that iceberg, repeating the 1929 Crash, triggering another long Great Depression. This new leader: Pimco’s Bill Gross. He’s already a proven leader and statesman as head of a $1.2 trillion global financial institution. And in his recent “Devil’s Bargain” he clearly sees that “money has become the economic and political wedge for profound changes in American society.” For the worse.
Here’s how we’d paraphrase his “Devil’s Bargain” message. Imagine him in front of the Reagan Library announcing a much-needed new economic direction for America. Yes, he’d make a great president. Yes, he’d be perfect as a new Treasury Secretary, now. Then later, Bill Gross would be the next great Federal Reserve Chairman, in a clearly historic move that would rival the appointment of Paul Volcker back in 1979. Listen:
Our financial system is destroying us from within, stop it now
For more that two centuries, money has been the backbone of a healthy economy. Way back in 1966 Gross memorized this definition of “money” from an economic textbook: “A medium of exchange and a store of value,’ it said” … but “it failed miserably.”
He warns that it also failed to see “the increasingly dominant function that money was to assume in a finance-oriented, capitalistic system: Money can be used to make money.” In today’s world, money magically grows more money. Money rules the political process, writing favorable laws to increase power. Money creates clever new ways to relentlessly shift more and more money from taxpayers to big banks and the Super Rich. Gross warns: America has made a “bargain with the devil.”
Back in 1966 economists also did not see “the half century of financial ‘innovation’ that was ahead and how money and its leveraging was to be the foundation for much of America’s prosperity.” Something happened … after two centuries of building a healthy economy, the paradigm shifted … capitalism began morphing into a dark saboteur … “Money has become the economic and political wedge for profound changes in American society.” Gross captures the shift in simple examples.
”Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the ‘golden’ route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street,” and stays there. “Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, money is made from securitizing ‘things’ instead of booting and rebuilding America.”
Look around at how money has distorted America: “The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living. One of this country’s premier investment banks paid each of its 26,000 employees and an average of $370,000 in 2010, nearly ten times the take-home pay of other American workers. Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their money from money, whereas only 8% could make that claim in its first issue in 1982.”
Wall Street ‘money’ is at the core of America’s deteriorating economy
Gross is one of a growing new breed of insiders who see that the path America’s on is destroying us from within: our economy, democracy, our very soul: “I know one thing for sure: This is not God’s work — it has the unmistakable odor of Mammon,” the financial community has “failed miserably at our primary function, the efficient and productive allocation of capital.” Rating agencies failed us. Bankers make bad loans to book fees. And “active money managers underperform the market 80% of the time.”
“Hang your heads, moneychangers.” In the past generation, we’ve had a long run of failures: “S&L debacle of the early 1980s, the Asian crisis, Long-Term Capital Management, dot-coms, subprimes, Lehman.” And since 2008, the ultimate failure: “The resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money.”
Today’s Wall Street CEOs are more crybabies rather than leaders, whining … it’s “not yet time to move on … how can bond traders make ten, one hundred, one thousand times more money than an engineer or social worker given their dismal historical performance?” Worse, “some of today’s doctors are using food stamps” even as “investment banking executives complain about millions of dollars in compensation that might be deferred in case of a future bailout.”
Get it? They’re already planning on another collapse, another bailout! We need new leaders.
Rebalance America’s priorities … before its too late
“Financiers lost their high ground” when they “figured out a turbocharged way to make money with money and proclaimed themselves geniuses in the process.” Paul Volcker hit the nail on the head when he said “the only productive invention to come out of the banking industry over the past generation was the ATM.” No wonder Gross says we “desperately need a rebalancing of priorities:”
- America needs new leaders “who can create something more than a cash machine and make this country competitive again in the global marketplace.”
- But we need “more than a makeover or a facelift. We need a heart transplant absent the contagious antibodies of money and finance filtering through the system.”
- A “new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again.”
- We need a major “readjustment of our compensation scales via regulation and/or free-market common sense.”
- We need a “president whose idea of ‘centrist’ policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship.”
- “A President who does more than propose ‘Win The Future’ at annual State of the Union addresses without policy follow-up.”
- America needs “a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola.”
Then Gross challenges everyone: “Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.”
Warning: The Fed and central banks everywhere have been striking this “devil’s bargain” for 30 years, “lowering the cost of money to today’s rock-bottom yields … providing fuel for an asset-based economy that promotes unsustainable wealth creation and a false confidence in perpetual capital gains.”
Cheap money is “responsible for 3,000–4,000 Dow points and 2–3% annual appreciation in bonds over those three decades.” But this policy of cheap money has been slowly killing the dollar, blowing bigger market bubbles, setting up newer, more frequent meltdowns and another depression.
The Fed and Treasury are stealing your money, giving it to Wall Street
”Ultimately, the devil always gets his due” says Gross, “central bankers run out of mathematical room to lower real yields below commonsensical floors.” Yes, today’s investors are stuck in negative real yields. Why? The Fed has created a market that’s “lost its fundamental value anchor.” Investors “are being shortchanged” by the “most deceptive” of all government policy tools, “negative or exceedingly low real interest rates that central banks impose on savers and debt holders.”
As former SEC chairman Arthur Levitt once put it, “America’s investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask.” Get it? By focusing solely on recapitalizing the same incompetent financial institutions that created the meltdown, Bernanke, Geithner, “central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an ‘extended period of time’ is the most devilish of all policy tools.”
Yes, your government really is stealing your future: “The asset class holder that it affects, or better yet, ‘infects,’ is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed-income assets.” That’s most Americans, everyone “who holds bonds with coupons that cannot keep up with inflation or the depositor in a local bank who cumulatively holds trillions of dollars in time deposits that don’t earn a real rate of interest.”
In one brief generation, the Fed and Congress have become enemies of the people, undoing centuries of prosperity, sabotaging capitalism, destroying democracy. This “framework has been created by modern-day policymakers who have innovated far beyond their biblical counterparts. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation.”
Folks, America needs a Bill Gross as Treasury Secretary, as Fed Chairman, even as president. He knows we’re trapped in a self-sabotaging “devil’s bargain.” And he knows how to change our direction. We need a leader like Bill Gross at this crucial turning point in our history, before it’s too late.
The People vs. Goldman Sachs
by Matt Taibbi - Rolling Stone
A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges
They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.
Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn't leave much doubt: Goldman Sachs should stand trial.
This article appears in the May 26, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive May 13.
The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — "a million fraud cases a year" is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin's small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street's aristocratic impunity and prosecutorial immunity produced since the crash of 2008.
To date, there has been only one successful prosecution of a financial big fish from the mortgage bubble, and that was Lee Farkas, a Florida lender who was just convicted on a smorgasbord of fraud charges and now faces life in prison. But Farkas, sadly, is just an exception proving the rule: Like Bernie Madoff, his comically excessive crime spree (which involved such lunacies as kiting checks to his own bank and selling loans that didn't exist) was almost completely unconnected to the systematic corruption that led to the crisis. What's more, many of the earlier criminals in the chain of corruption — from subprime lenders like Countrywide, who herded old ladies and ghetto families into bad loans, to rapacious banks like Washington Mutual, who pawned off fraudulent mortgages on investors — wound up going belly up, sunk by their own greed.
But Goldman, as the Levin report makes clear, remains an ascendant company precisely because it used its canny perception of an upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself, not only at the expense of clients but ultimately, through the bailouts and the collateral damage of the wrecked economy, at the expense of society. The bank seemed to count on the unwillingness or inability of federal regulators to stop them — and when called to Washington last year to explain their behavior, Goldman executives brazenly misled Congress, apparently confident that their perjury would carry no serious consequences. Thus, while much of the Levin report describes past history, the Goldman section describes an ongoing? crime — a powerful, well-connected firm, with the ear of the president and the Treasury, that appears to have conquered the entire regulatory structure and stands now on the precipice of officially getting away with one of the biggest financial crimes in history.
Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money. We now know, unequivocally, that this is bullshit. Goldman isn't a pudgy housewife who broke her diet with a few Nilla Wafers between meals — it's an advanced-stage, 1,100-pound medical emergency who hasn't left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes. If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana. Caught, but still free: above the law.
To fully grasp the case against Goldman, one first needs to understand that the financial crime wave described in the Levin report came on the heels of a decades-long lobbying campaign by Goldman and other titans of Wall Street, who pleaded over and over for the right to regulate themselves.
Before that campaign, banks were closely monitored by a host of federal regulators, including the Office of the Comptroller of the Currency, the FDIC and the Office of Thrift Supervision. These agencies had examiners poring over loans and other transactions, probing for behavior that might put depositors or the system at risk. When the examiners found illegal or suspicious behavior, they built cases and referred them to criminal authorities like the Justice Department.
This system of referrals was the backbone of financial law enforcement through the early Nineties. William Black was senior deputy chief counsel at the Office of Thrift Supervision in 1991 and 1992, the last years of the S&L crisis, a disaster whose pansystemic nature was comparable to the mortgage fiasco, albeit vastly smaller. Black describes the regulatory MO back then. "Every year," he says, "you had thousands of criminal referrals, maybe 500 enforcement actions, 150 civil suits and hundreds of convictions."
But beginning in the mid-Nineties, when former Goldman co-chairman Bob Rubin served as Bill Clinton's senior economic-policy adviser, the government began moving toward a regulatory system that relied almost exclusively on voluntary compliance by the banks. Old-school criminal referrals disappeared down the chute of history along with floppy disks and scripted television entertainment. In 1995, according to an independent study, banking regulators filed 1,837 referrals. During the height of the financial crisis, between 2007 and 2010, they averaged just 72 a year.
But spiking almost all criminal referrals wasn't enough for Wall Street. In 2004, in an extraordinary sequence of regulatory rollbacks that helped pave the way for the financial crisis, the top five investment banks — Goldman, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns — persuaded the government to create a new, voluntary approach to regulation called Consolidated Supervised Entities. CSE was the soft touch to end all soft touches. Here is how the SEC's inspector general described the program's regulatory army: "The Office of CSE Inspections has only two staff in Washington and five staff in the New York regional office."
Among the bankers who helped convince the SEC to go for this ludicrous program was Hank Paulson, Goldman's CEO at the time. And in exchange for "submitting" to this new, voluntary regime of law enforcement, Goldman and other banks won the right to lend in virtually unlimited amounts, regardless of their cash reserves — a move that fueled the catastrophe of 2008, when banks like Bear and Merrill were lending out 35 dollars for every one in their vaults.
Goldman's chief financial officer then and now, a fellow named David Viniar, wrote a letter in February 2004, commending the SEC for its efforts to develop "a regulatory framework that will contribute to the safety and soundness of financial institutions and markets by aligning regulatory capital requirements more closely with well-developed internal risk-management practices." Translation: Thanks for letting us ignore all those pesky regulations while we turn the staid underwriting business into a Charlie Sheen house party.
Goldman and the other banks argued that they didn't need government supervision for a very simple reason: Rooting out corruption and fraud was in their own self-interest. In the event of financial wrongdoing, they insisted, they would do their civic duty and protect the markets. But in late 2006, well before many of the other players on Wall Street realized what was going on, the top dogs at Goldman — including the aforementioned Viniar — started to fear they were sitting on a time bomb of billions in toxic assets. Yet instead of sounding the alarm, the very first thing Goldman did was tell no one. And the second thing it did was figure out a way to make money on the knowledge by screwing its own clients. So not only did Goldman throw a full-blown "bite me" on its own self-righteous horseshit about "internal risk management," it more or less instantly sped way beyond inaction straight into craven manipulation.
"This is the dog that didn't bark," says Eliot Spitzer, who tangled with Goldman during his years as New York's attorney general. "Their whole political argument for a decade was 'Leave us alone, trust us to regulate ourselves.' They not only abdicated that responsibility, they affirmatively traded against the entire market."
By the end of 2006, Goldman was sitting atop a $6 billion bet on American home loans. The bet was a byproduct of Goldman having helped create a new trading index called the ABX, through which it accumulated huge holdings in mortgage-related securities. But in December 2006, a series of top Goldman executives — including Viniar, mortgage chief Daniel Sparks and senior executive Thomas Montag — came to the conclusion that Goldman was overexposed to mortgages and should get out from under its huge bet as quickly as possible. Internal memos indicate that the executives soon became aware of the host of scams that would crater the global economy: home loans awarded with no documentation, loans with little or no equity in them. On December 14th, Viniar met with Sparks and other executives, and stressed the need to get "closer to home" — i.e., to reduce the bank's giant bet on mortgages.
Sparks followed up that meeting with a seven-point memo laying out how to unload the bank's mortgages. Entry No. 2 is particularly noteworthy. "Distribute as much as possible on bonds created from new loan securitizations," Sparks wrote, "and clean previous positions." In other words, the bank needed to find suckers to buy as much of its risky inventory as possible. Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars.
The day he received the Sparks memo, Viniar seconded the plan in a gleeful cheerleading e-mail. "Let's be aggressive distributing things," he wrote, "because there will be very good opportunities as the markets [go] into what is likely to be even greater distress, and we want to be in a position to take advantage of them." Translation: Let's find as many suckers as we can as fast as we can, because we'll only make more money as more and more shit hits the fan.
By February 2007, two months after the Sparks memo, Goldman had gone from betting $6 billion on mortgages to betting $10 billion against them — a shift of $16 billion. Even CEO Lloyd "I'm doing God's work" Blankfein wondered aloud about the bank's progress in "cleaning" its crap. "Could/should we have cleaned up these books before," Blankfein wrote in one e-mail, "and are we doing enough right now to sell off cats and dogs in other books throughout the division?"
How did Goldman sell off its "cats and dogs"? Easy: It assembled new batches of risky mortgage bonds and dumped them on their clients, who took Goldman's word that they were buying a product the bank believed in. The names of the deals Goldman used to "clean" its books — chief among them Hudson and Timberwolf — are now notorious on Wall Street. Each of the deals appears to represent a different and innovative brand of shamelessness and deceit.
In the marketing materials for the Hudson deal, Goldman claimed that its interests were "aligned" with its clients because it bought a tiny, $6 million slice of the riskiest portion of the offering. But what it left out is that it had shorted the entire deal, to the tune of a $2 billion bet against its own clients. The bank, in fact, had specifically designed Hudson to reduce its exposure to the very types of mortgages it was selling — one of its creators, trading chief Michael Swenson, later bragged about the "extraordinary profits" he made shorting the housing market. All told, Goldman dumped $1.2 billion of its own crappy "cats and dogs" into the deal — and then told clients that the assets in Hudson had come not from its own inventory, but had been "sourced from the Street."
Hilariously, when Senate investigators asked Goldman to explain how it could claim it had bought the Hudson assets from "the Street" when in fact it had taken them from its own inventory, the bank's head of CDO trading, David Lehman, claimed it was accurate to say the assets came from "the Street" because Goldman was part of the Street. "They were like, 'We are the Street,'" laughs one investigator.
Hudson lost massive amounts of money almost immediately after the sale was completed. Goldman's biggest client, Morgan Stanley, begged it to liquidate the investment and get out while they could still salvage some value. But Goldman refused, stalling for months as its clients roasted to death in a raging conflagration of losses. At one point, John Pearce, the Morgan Stanley rep dealing with Goldman, lost his temper at the bank's refusal to sell, breaking his phone in frustration. "One day I hope I get the real reason why you are doing this to me," he told a Goldman broker.
Goldman insists it was only required to liquidate the assets "in an orderly fashion." But the bank had an incentive to drag its feet: Goldman's huge bet against the deal meant that the worse Hudson performed, the more money Goldman made. After all, the entire point of the transaction was to screw its own clients so Goldman could "clean its books." The crime was far from victimless: Morgan Stanley alone lost nearly $960 million on the Hudson deal, which admittedly doesn't do much to tug the heartstrings. Except that quickly after Goldman dumped this near-billion-dollar loss on Morgan Stanley, Morgan Stanley turned around and dumped it on taxpayers, who within a year were spending $10 billion bailing out the sucker bank through the TARP program.
It is worth pointing out here that Goldman's behavior in the Hudson scam makes a mockery of standards in the underwriting business. Courts have held that "the relationship between the underwriter and its customer implicitly involves a favorable recommendation of the issued security." The SEC, meanwhile, requires that broker-dealers like Goldman disclose "material adverse facts," which among other things includes "adverse interests." Former prosecutors and regulators I interviewed point to these areas as potential avenues for prosecution; you can judge for yourself if a $2 billion bet against clients qualifies as an "adverse interest" that should have been disclosed.
But these "adverse interests" weren't even the worst part of Hudson. Goldman also used a complex pricing method to turn the deal into an impressive triple screwing. Essentially, Goldman bought some of the mortgage assets in the Hudson deal at a discount, resold them to clients at a higher price and pocketed the difference. This is a little like getting an invoice from an interior decorator who, in addition to his fee for services, charges you $170 a roll for brand-name wallpaper he's actually buying off the back of a truck for $63.
To recap: Goldman, to get $1.2 billion in crap off its books, dumps a huge lot of deadly mortgages on its clients, lies about where that crap came from and claims it believes in the product even as it's betting $2 billion against it. When its victims try to run out of the burning house, Goldman stands in the doorway, blasts them all with gasoline before they can escape, and then has the balls to send a bill overcharging its victims for the pleasure of getting fried.
Timberwolf, the most notorious of Goldman's scams, was another car whose engine exploded right out of the lot. As with Hudson, Goldman clients who bought into the deal had no idea they were being sold the "cats and dogs" that the bank was desperately trying to get off its books. An Australian hedge fund called Basis Capital sank $100 million into the deal on June 18th, 2007, and almost immediately found itself in a full-blown death spiral. "We bought it, and Goldman made their first margin call 16 days later," says Eric Lewis, a lawyer for Basis, explaining how Goldman suddenly required his client to put up cash to cover expected losses. "They said, 'We need $5 million.' We're like, what the fuck, what's going on?" Within a month, Basis lost $37.5 million, and was forced to file for bankruptcy.
In many ways, Timberwolf was a perfect symbol of the insane faith-based mathematics and blackly corrupt marketing that defined the mortgage bubble. The deal was built on a satanic derivative structure called the CDO-squared. A normal CDO is a giant pool of loans that are chopped up and layered into different "tranches": the prime or AAA level, the BBB or "mezzanine" level, and finally the equity or "toxic waste" level. Banks had no trouble finding investors for the AAA pieces, which involve betting on the safest borrowers in the pool. And there were usually investors willing to make higher-odds bets on the crack addicts and no-documentation immigrants at the potentially lucrative bottom of the pool. But the unsexy BBB parts of the pool were hard to sell, and the banks didn't want to be stuck holding all of these risky pieces. So what did they do? They took all the extra unsold pieces, threw them in a big box, and repeated the original "tranching" process all over again. What originally were all BBB pieces were diced up and divided anew — and, presto, you suddenly had new AAA securities and new toxic-waste securities.
A CDO, to begin with, is already a highly dubious tool for magically converting risky subprime mortgages into AAA investments. A CDO-squared doubles down on that lunacy, taking the waste products of the original process and converting them into AAA investments. This is kind of like taking all the kids who were picked last to play volleyball in every gym class of every public school in the state, throwing them in a new gym, and pretending that the first 10 kids picked are varsity-level players. Then you take all the unpicked kids left over from that process, throw them in a gym with similar kids from all 50 states, and call the first 10 kids picked All-Americans.
Those "All-Americans" were the assets in the Timberwolf deal. These were the recycled nightmare dregs of the mortgage craze — to quote Beavis and Butt-Head, "the ass of the ass."
Goldman knew the deal sucked long before it dinged the Aussies in Basis Capital for $100 million. In February 2007, Goldman mortgage chief Daniel Sparks and senior executive Thomas Montag exchanged e-mails about the risk of holding all the crap in the Timberwolf deal.
MONTAG: "CDO-squared — how big and how dangerous?"
SPARKS: "Roughly $2 billion, and they are the deals to worry about."
Goldman executives were so "worried" about holding this stuff, in fact, that they quickly sent directives to all of their salespeople, offering "ginormous" credits to anyone who could manage to find a dupe to take the Timberwolf All-Americans off their hands. On Wall Street, directives issued from above are called "axes," and Goldman's upper management spent a great deal of the spring of 2007 "axing" Timberwolf. In a crucial conference call on May 20th that included Viniar, Sparks oversaw a PowerPoint presentation spelling out, in writing, that Goldman's mortgage desk was "most concerned" about Timberwolf and another CDO-squared deal. In a later e-mail, he offered an even more dire assessment of such deals: "There is real market-meltdown potential."
On May 22nd, two days after the conference call, Goldman sales rep George Maltezos urged the Australians at Basis to hurry up and buy what the bank knew was a deadly investment, suggesting that the "return on invested capital for Basis is over 60 percent." Maltezos was so stoked when he first identified the Aussies as a target in the scam that he subject-lined his e-mail "Utopia."
"I think," Maltezos wrote, "I found white elephant, flying pig and unicorn all at once."
The whole transaction can be summed up by the now-notorious e-mail that Montag wrote to Sparks only four days after they sold $100 million of Timberwolf to Basis. "Boy," Montag wrote, "that timeberwof [sic] was one shitty deal."
Last year, in the one significant regulatory action the government has won against the big banks, the SEC sued Goldman over a scam called Abacus, in which the bank "rented" its name to a billionaire hedge-fund viper to fleece investors out of more than $1 billion. Goldman agreed to pay $550 million to settle the suit, though no criminal charges were brought against the bank or its executives. But in light of the Levin report, that SEC action now looks woefully inadequate. Yes, it was a record fine — but it pales in comparison to the money Goldman has taken from the government since the crash. As Spitzer notes, Goldman's reaction was basically, "OK, we'll pay you $550 million to settle the Abacus case — that's a small price to pay for the $12.9 billion we got for the AIG bailout." Now, adds Spitzer, "everybody can just go home and pretend it was only $12.4 billion — and Goldman can smile all the way to the bank. The question is, now that we've seen this report, there are a bunch of story lines that seem to be at least as egregious as Abacus. Are they going to bring cases?"
Here is where the supporters of Goldman and other big banks will stand up and start wanding the air full of confusing terms like "scienter" and "loss causation" — legalese mumbo jumbo that attempts to convince the ignorantly enraged onlooker that, according to American law, these grotesque tales of grand theft and fraud you've just heard are actually more innocent than you think. Yes, they will say, it may very well be a prosecutable crime for a corner-store Arab to take $2 from a customer selling tap water as Perrier. But that does not mean it's a crime for Goldman Sachs to take $100 million from a foreign hedge fund doing the same thing! No, sir, not at all! Then you'll be told that the Supreme Court has been limiting corporate liability for fraud for decades, that in order to gain a conviction one must prove a conscious intent to deceive, that the 1976 ruling in Ernst and Ernst clearly states....
Leave all that aside for a moment. Though many legal experts agree there is a powerful argument that the Levin report supports a criminal charge of fraud, this stuff can keep the lawyers tied up for years. So let's move on to something much simpler. In the spring of 2010, about a year into his investigation, Sen. Levin hauled all of the principals from these rotten Goldman deals to Washington, made them put their hands on the Bible and take oaths just like normal people, and demanded that they explain themselves. The legal definition of financial fraud may be murky and complex, but everybody knows you can't lie to Congress.
"Article 18 of the United States Code, Section 1001," says Loyola University law professor Michael Kaufman. "There are statutes that prohibit perjury and obstruction of justice, but this is the federal statute that explicitly prohibits lying to Congress."
The law is simple: You're guilty if you "knowingly and willfully" make a "materially false, fictitious or fraudulent statement or representation." The punishment is up to five years in federal prison.
When Roger Clemens went to Washington and denied taking a shot of steroids in his ass, the feds indicted him — relying not on a year's worth of graphically self-incriminating e-mails, but chiefly on the testimony of a single individual who had been given a deal by the government. Yet the Justice Department has shown no such prosecutorial zeal since April 27th of last year, when the Goldman executives who oversaw the Timberwolf, Hudson and Abacus deals arrived on the Hill and one by one — each seemingly wearing the same mask of faint boredom and irritated condescension — sat before Levin's committee and dodged volleys of questions.
Before the hearing, even some of Levin's allies worried privately about his taking on Goldman and other powerful interests. The job, they said, was best left to professional prosecutors, people with experience building cases. "A senator's office is not an enormous repository of expertise," one former regulator told me. But in the case of this particular senator, that concern turned out to be misplaced. A Harvard-educated lawyer, Levin has a long record of using his subcommittee to spend a year or more carefully building cases that lead to criminal prosecutions. His 2003 investigation into abusive tax shelters led to 19 indictments of individuals at KPMG, while a 2006 probe fueled insider-trading charges against the notorious Wyly brothers, a pair of billionaire Texans who manipulated offshore investment trusts. The investigation of Goldman was an attempt to find out what went wrong in the years leading up to the financial crash, and the questioning of the bank's executives was not one of those for-the-cameras-only events where congressmen wing ad-libbed questions in search of sound bites. In the weeks leading up to the hearing, Levin's team carefully rehearsed the moment with committee members. They knew the possible answers that Goldman might give, and they were ready with specific counterquestions. What ensued looked more like a good old-fashioned courtroom grilling than a photo-op for grinning congressmen.
Sparks, who stepped down as Goldman's mortgage chief in 2008, cut a striking figure in his testimony. With his severe crew cut, deep-set eyes and jockish intransigence, he looked like a cross between H.R. Haldeman and John Rocker. He repeatedly dodged questions from Levin about whether or not the bank had a responsibility to tell its clients that it was betting against the same stuff it was selling them. When asked directly if he had that responsibility, Sparks answered, "The clients who did not want to participate in that deal did not." When Levin pressed him again, asking if he had a duty to disclose that Goldman had an "adverse interest" to the deals being sold to clients, Sparks fidgeted and pretended not to comprehend the question. "Mr. Chairman," he said, "I'm just trying to understand."
OK, fine — non-answer answers. "My guess is they were all pretty well coached up," says Kaufman, the law professor. But then Sparks had a revealing exchange with Sen. Jon Tester of Montana. Tester calls the Goldman deals "a wreck waiting to happen," noting that the CDOs "were all downgraded to junk in very short order."
At which point, Sparks replies, "Well, senator, at the time we did those deals, we expected those deals to perform."
Tester then cannily asks if by "perform," Sparks means go to shit — which would have been an honest answer. "Perform in what way?" Tester asks. "Perform to go to junk so that the shorts made out?"
Unable to resist the taunt, Sparks makes a fateful decision to defend his honor. "To not be downgraded to junk in that short a time frame," he says. Then he pauses and decides to dispense with the hedging phrase "in that short a time frame."
"In fact," Sparks says, "to not be downgraded to junk."
So Sparks goes before Congress and, under oath, tells a U.S. senator that at the time he was selling Timberwolf, he expected it to "perform." But an internal document he approved in May 2007 predicted exactly the opposite, warning that Goldman's mortgage desk expected such deals to "underperform." Here are some other terms that Sparks used in e-mails about the subprime market affecting deals like Timberwolf around that same time: "bad and getting worse," "get out of everything," "game over," "bad news everywhere" and "the business is totally dead."
And we indicted Roger Clemens?
Another extraordinary example of Goldman's penchant for truth avoidance came when Joshua Birnbaum, former head of structured-products trading for the bank, gave a deposition to Levin's committee. Asked point-blank if Goldman's huge "short" on mortgages was an intentional bet against the market or simply a "hedge" against potential losses, Birnbaum played dumb. "I do not know whether the shorts were a hedge," he said. But the committee, it turned out, already knew that Birnbaum had written a memo in which he had spelled out the truth: "The shorts were not a hedge." When Birnbaum's lawyers learned that their client's own words had been used against him, they hilariously sent an outraged letter complaining that Birnbaum didn't know the committee had his memo when he decided to dodge the question. They also submitted a "supplemental" answer. Birnbaum now said, "Having reviewed the document the staff did not previously provide me" — his own words! — "I can now recall that ... I believed ... these short positions were not a hedge." (Goldman, for its part, dismisses Birnbaum as a single trader who "neither saw nor knew the firm's overall risk positions.")
When it came time for Goldman CEO Lloyd Blankfein to testify, the banker hedged and stammered like a brain-addled boxer who couldn't quite follow the questions. When Levin asked how Blankfein felt about the fact that Goldman collected $13 billion from U.S. taxpayers through the AIG bailout, the CEO deflected over and over, insisting that Goldman would somehow have made that money anyway through its private insurance policies on AIG. When Levin pressed Blankfein, pointing out that he hadn't answered the question, Blankfein simply peered at Levin like he didn't understand.
But Blankfein also testified unequivocally to the following:
"Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008. We didn't have a massive short against the housing market, and we certainly did not bet against our clients."
Levin couldn't believe what he was hearing. "Heck, yes, I was offended," he says. "Goldman's CEO claimed the firm 'didn't have a massive short,' when the opposite was true." First of all, in Goldman's own internal memoranda, the bank calls its giant, $13 billion bet against mortgages "the big short." Second, by the time Sparks and Co. were unloading the Timberwolves of the world on their "unicorns" and "flying pigs" in the summer of 2007, Goldman's mortgage department accounted for 54 percent of the bank's risk. That means more than half of all the bank's risk was wrapped up in its bet against the mortgage market — a "massive short" by any definition. Indeed, the bank was betting so much money on mortgages that its executives had become comically blasé about giant swings on a daily basis. When Goldman lost more than $100 million on August 8th, 2007, Montag circulated this e-mail: "So who lost the hundy?"
This month, after releasing his report, Levin sent all of this material to the Justice Department. His conclusion was simple. "In my judgment," he declared, "Goldman clearly misled their clients, and they misled the Congress." Goldman, unsurprisingly, disagreed: "Our testimony was truthful and accurate, and that applies to all of our testimony," said spokesman Michael DuVally. In a statement to Rolling Stone, Goldman insists that its behavior throughout the period covered in the Levin report was consistent with responsible business practice, and that its machinations in the mortgage market were simply an attempt to manage risk.
It wouldn't be hard for federal or state prosecutors to use the Levin report to make a criminal case against Goldman. I ask Eliot Spitzer what he would do if he were still attorney general and he saw the Levin report. "Once the steam stopped coming out of my ears, I'd be dropping so many subpoenas," he says. "And I would parse every potential inconsistency between the testimony they gave to Congress and the facts as we now understand them."
I ask what inconsistencies jump out at him. "They keep claiming they were only marginally short, that it was more just servicing their clients," he says. "But it sure doesn't look like that." He pauses. "They were $13 billion short. That's big — 50 percent of their risk. It was so completely disproportionate."
Lloyd Blankfein went to Washington and testified under oath that Goldman Sachs didn't make a massive short bet and didn't bet against its clients. The Levin report proves that Goldman spent the whole summer of 2007 riding a "big short" and took a multibillion-dollar bet against its clients, a bet that incidentally made them enormous profits. Are we all missing something? Is there some different and higher standard of triple- and quadruple-lying that applies to bank CEOs but not to baseball players?
This issue is bigger than what Goldman executives did or did not say under oath. The Levin report catalogs dozens of instances of business practices that are objectively shocking, no matter how any high-priced lawyer chooses to interpret them: gambling billions on the misfortune of your own clients, gouging customers on prices millions of dollars at a time, keeping customers trapped in bad investments even as they begged the bank to sell, plus myriad deceptions of the "failure to disclose" variety, in which customers were pitched investment deals without ever being told they were designed to help Goldman "clean" its bad inventory. For years, the soundness of America's financial system has been based on the proposition that it's a crime to lie in a prospectus or a sales brochure. But the Levin report reveals a bank gone way beyond such pathetic little boundaries; the collective picture resembles a financial version of The Jungle, a portrait of corporate sociopathy that makes you never want to go near a sausage again.
Upton Sinclair's narrative shocked the nation into a painful realization about the pervasive filth and corruption behind America's veneer of smart, robust efficiency. But Carl Levin's very similar tale probably will not. The fact that this evidence comes from a U.S. senator's office, and not the FBI or the SEC, is itself an element in the worsening tale of lawlessness and despotism that sparked a global economic meltdown. "Why should Carl Levin be the one who needs to do this?" asks Spitzer. "Where's the SEC? Where are any of the regulatory bodies?"
This isn't just a matter of a few seedy guys stealing a few bucks. This is America: Corporate stealing is practically the national pastime, and Goldman Sachs is far from the only company to get away with doing it. But the prominence of this bank and the high-profile nature of its confrontation with a powerful Senate committee makes this a political story as well. If the Justice Department fails to give the American people a chance to judge this case — if Goldman skates without so much as a trial — it will confirm once and for all the embarrassing truth: that the law in America is subjective, and crime is defined not by what you did, but by who you are.
Shares of Goldman Drop Sharply After Downgrade
by Susanne Craig - New York Times
Shares of Goldman Sachs are under pressure following a scathing report from an outspoken industry analyst. Dick Bove of Rochdale Securities slashed his rating on the investment bank to a “sell” on Thursday, saying that pressure is building for the Justice Department to take action against Goldman. “It now appears that the pressure on the Justice Department to bring a criminal lawsuit against Goldman is building to a high pitch,” Mr. Bove said in the report.
“The new Matt Taibbi article in Rolling Stone Magazine is another all-out attack on the company. However, this time the attack is backed by a 650-page Senate report signed by both a Democrat and a Republican,” Mr. Bove wrote, referring to a recent report by Permanent Subcommittee on Investigations that concluded Goldman misled clients about mortgage-linked securities.
Senator Carl Levin, who headed up the Congressional inquiry, said last month that he wants to send the findings to the Justice Department to figure out whether executives broke the law. Such was the topic of the latest piece by Mr. Taibbi, who famously called Goldman a “vampire squid” in a 2009 article on Goldman. His recent article was titled, “The People vs. Goldman Sachs. A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges.”
Goldman stock was down more than three percent in early trading today. It is currently trading around $141. It closed 2010 at $168.16. Mr. Bove had a “buy” rating on Goldman just a month ago with a price target of $188. On April 19, he reduced his outlook to “neutral” after the firm’s first quarter earnings on April 19. His current price target is $120.
“It is clear to outsiders that there must be a major restructuring of the company at the board and executive suite levels or Congress will not be satisfied. The company continues to fight such a change,” Mr. Bove wrote, in his latest note to investors. “This is not a good investment. The stock should be sold. When the government/company conflict is resolved, then one can review what the structure of Goldman is and rethink re- instituting positions.
Jim Rogers: US Headed For A Financial Crisis
The Millionaire Retirees Next Door
by John Cogan - Wall Street Journal
Typical retired couples will collect $1 million or more in Social Security and Medicare. This is more than they paid in, and the cost will fall on today's workers.
Readers may recall the 1950s TV show, "The Millionaire," which portrayed stories of individuals who were given a "no strings attached" gift of money by an anonymous benefactor. Each week in one of the show's opening scenes, a man representing the wealthy benefactor, John Beresford Tipton Jr., knocked on an unsuspecting recipient's door and announced: "My name is Michael Anthony and I have a cashier's check for you for one million dollars."
That TV program is scheduled to return next year as a reality show, and the new recipients will be the typical husband and wife who reach age 66 and qualify for Social Security. Starting next year, this typical couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.
According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending.
We cannot even remotely afford to make good on these promised benefits. Although our system of personal liberty, free enterprise and limited government has made us an affluent and upwardly mobile people, we are not yet a nation of John Beresford Tiptons.
The existence of so many million-dollar couples is not the result of elected officials carefully weighing the needs of senior citizens against the financial ability of younger workers to meet these needs. Rather, it is the result of decades of separate legislative actions by both political parties to liberalize retirement and health-care benefits, the sum total of which no one has bothered to calculate. Social Security and Medicare were the result of natural human impulses to create safety-net programs to prevent poverty in old age and to help needy senior citizens with their medical bills. But the programs are flawed.
In 1978, Congress instituted automatic cost-of-living adjustments for Social Security. That's reasonable. But Social Security's method of automatically increasing benefits to successive cohorts of retirees by more than inflation makes less sense. It means that the average worker who retires this year receives a monthly benefit that is about 23% higher after adjusting for inflation than the monthly benefit received by the average worker who retired 20 years ago. The average worker who retires 10 years from now is, in turn, promised an initial benefit at retirement that is 14% higher after adjusting for inflation than the average worker who retires today.
Under the federal government's fee-for-service Medicare program, every time a senior citizen meets with his physician or health-care provider for a check-up, lab tests or surgery, somebody other than the patient foots most of the bill. That such a program should produce runaway costs is hardly surprising. Over the years, the government has expanded the type of services covered, such as prescription drugs, and it has assumed a greater portion of the program's finances. Medicare premiums paid by senior citizens once covered half of the cost of physician and related services. They now cover one-fourth. Copayments once covered nearly 40% of these services' costs. They now cover only 20%.
To fix Social Security, Congress should start by limiting the increase in benefits of future retirees to the rate of inflation. Congress should then gradually raise Social Security's normal retirement age. Congress should also allow younger workers to invest a portion of their payroll taxes—and create more incentives for them to invest their earnings—in safe, broadly-diversified, stock and bond funds. This would allow younger workers to become millionaires through their own hard work and thrift.
To fix Medicare, we must move away from the current system of fee-for-services and low copayments. First and foremost, copayments should be increased significantly. Medicare recipients need to have more skin in the game if they are to become cost-conscious medical consumers.
The higher copayments can be offset by reducing Medicare premiums and offering more Medicare health plan choices. Rep. Paul Ryan's proposal—to provide fixed annual grants to enable Medicare recipients to buy an affordable private insurance plan—is a fiscally sound way to achieve this outcome. Competition among providers, not government-administered prices and government boards of experts to determine coverage, is the best way to ensure high quality and reasonably priced health care.
Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today's dollars) toward these benefits during their working careers.
But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.
So today's seniors need to consider how they want the script for "The Millionaire" sequel to be written: There's a knock at the door. We now know that on the other side there's a check for a million dollars. When the door opens, do we really want to see our children, under the commanding gaze of Uncle Sam, presenting us with that check?
Nuclear meltdown at Fukushima plant
by Julian Ryall - Telegraph
One of the reactors at the crippled Fukushima Daiichi power plant did suffer a nuclear meltdown, Japanese officials admitted for the first time today, describing a pool of molten fuel at the bottom of the reactor's containment vessel. Engineers from the Tokyo Electric Power company (Tepco) entered the No.1 reactor at the end of last week for the first time and saw the top five feet or so of the core's 13ft-long fuel rods had been exposed to the air and melted down.
Previously, Tepco believed that the core of the reactor was submerged in enough water to keep it stable and that only 55 per cent of the core had been damaged. Now the company is worried that the molten pool of radioactive fuel may have burned a hole through the bottom of the containment vessel, causing water to leak. "We will have to revise our plans," said Junichi Matsumoto, a spokesman for Tepco. "We cannot deny the possibility that a hole in the pressure vessel caused water to leak".
Tepco has not clarified what other barriers there are to stop radioactive fuel leaking if the steel containment vessel has been breached. Greenpeace said the situation could escalate rapidly if "the lava melts through the vessel". However, an initial plan to flood the entire reactor core with water to keep its temperature from rising has now been abandoned because it might exacerbate the leak. Tepco said there was enough water at the bottom of the vessel to keep both the puddle of melted fuel and the remaining fuel rods cool.
Meanwhile, Tepco said on Wednesday that it had sealed a leak of radioactive water from the No.3 reactor after water was reportedly discovered to be flowing into the ocean. A similar leak had discharged radioactive water into the sea in April from the No.2 reactor.
Greenpeace said significant amounts of radioactive material had been released into the sea and that samples of seaweed taken from as far as 40 miles of the Fukushima plant had been found to contain radiation well above legal limits. Of the 22 samples tested, ten were contaminated with five times the legal limit of iodine 131 and 20 times of caesium 137. Seaweed is a huge part of the Japanese diet and the average household almost 7lbs a year. Greenpeace's warning came as fishermen prepared to start the harvest of this season's seaweed on May 20.
Inland from the plant, there has been a huge cull of the livestock left inside the 18-mile mandatory exclusion zone with thousands of cows, horses and pigs being destroyed and some 260,000 chickens from the town of Minamisoma alone. The Environment ministry has announced, however, that it will attempt to rescue the thousands of pets that were left behind when residents were ordered to evacuate. At least 5,800 dogs were owned by the residents of the zone, although it is unclear how many remain alive, two months after the earthquake struck.
Fukushima reactor No. 1 has a hole, leading to leakage
by Yoko Kubota and Scott DiSavino - Reuters
One of the reactors at Japan's crippled Fukushima nuclear power plant has a hole in its main vessel following a meltdown of fuel rods, leading to a leakage of radioactive water, its operator said on Thursday. The disclosure by Tokyo Electric Power Co (TEPCO) is the latest indication that the disaster was worse than previously disclosed, making it more difficult to stabilize the plant.
The discovery of the leak provides new insight into the sequence of events that triggered a partial meltdown of the uranium fuel in the No. 1 reactor at Fukushima after the plant was struck by a massive earthquake and tsunami on March 11, officials said. The battle to bring Fukushima under control has been complicated by repeated leaks of radioactive water, threatening both the Pacific Ocean and nearby groundwater.
Workers at the Fukushima Daiichi nuclear plant have been pumping water into at least three of the six reactors on the site to bring their nuclear fuel rods to a "cold shutdown" state by January. But after repairing a gauge in the No. 1 reactor earlier this week, TEPCO discovered that the water level in the pressure vessel that contains its uranium fuel rods had dropped about 5 meters (16 ft) below the targeted level to cover the fuel under normal operating conditions.
"There must be a large leak," Junichi Matsumoto, a general manager at the utility told a news conference. "The fuel pellets likely melted and fell, and in the process may have damaged...the pressure vessel itself and created a hole," he added. Since the surface temperature of the pressure vessel has been holding steady between 100 and 120 degrees Celsius, Matsumoto said the effort to cool the melted uranium fuel by pumping in water was working and would continue.
Vessel Has A Hole
Based on the amount of water that is remaining around the partially melted and collapsed fuel, Matsumoto estimated that the pressure vessel had developed a hole of several centimeters in diameter. The finding makes it likely that at one point in the immediate wake of the disaster the 4-meter-high stack of uranium-rich rods at the core of the reactor had been entirely exposed to the air, he said. Boiling water reactors like those at Fukushima rely on water as both a coolant and a barrier to radiation.
U.S. nuclear experts said that the company may have to build a concrete wall around the unit because of the breach, and that this could now take years. "If it is assumed the fuel did melt through the reactor, then the most likely solution is to encapsulate the entire unit. This may include constructing a concrete wall around the unit and building a protective cover over it," W. Gene Corley, senior vice president of CTL Group in Skokie, Illinois, said on Thursday. "Because of the high radiation that would be present if this has happened, the construction will take many months and may stretch into years," Corley said.
TEPCO should consider digging a trench around reactors 1-3 all the way down to the bedrock, which is about 50 feet below the surface, said Arnie Gundersen, Chief Engineer at Fairewinds Associates Inc of Burlington, Vermont, who once worked on reactors of similar design to the Fukushima plant. He said this should be filled with zeolite, which can absorb radioactive cesium to stop more poisons from leaking into the groundwater around the plant.
"TEPCO seems to be going backwards in getting the situation under control and things may well be slowly eroding with all the units having problems," said Tom Clements with Friends of the Earth, a U.S.-based environmental group. "At this point, TEPCO still finds itself in unchartered waters and is not able to carry out any plan to get the situation under control," he said.
Matsumoto said the utility would study whether to increase the amount of water it was injecting to overcome the leak and raise the level of water covering the fuel, at the risk of allowing more radioactive water to leak out of the facility.
Nearly 10,400 tonnes of water has been pumped into the reactor so far, but it is unclear where the leaked water has been going. The high radiation levels makes it difficult for workers to check the site, Matsumoto said. TEPCO announced a timetable last month for addressing the crisis, saying it aimed to cool reactors to a stable level and reduce the leakage of radiation within the first three months, then bring the reactors to a cold shutdown in another three to six months.
Timetable Could Slip
TEPCO is set to review its timetable for stabilizing Fukushima on May 17 and officials indicated that the initial progress targets could slip. Officials had planned to use the same set of steps to stabilize reactors No. 2 and No. 3 that are under way at No. 1, which workers re-entered last week for the first time since the earthquake.
But Matsumoto said it was likely that the pressure vessels in the other two reactors could be leaking as well if fuel rods had collapsed and melted after the earthquake and tsunami. "It is necessary to make a reassessment of the condition of the nuclear reactor," Chief Cabinet Secretary Yukio Edano told a news conference.
On Wednesday, TEPCO sealed a fresh leak of contaminated water found near the No. 3 reactor that may have seeped into the Pacific Ocean from the coastal plant. A previous ocean leak sparked international concern about the impact of the disaster on the environment. Traces of radioactive cesium were detected in sewage treatment centers in Ibaraki and Kanagawa prefectures, both to the south of Fukushima, Japanese media reported on Thursday.
Fukushima 'Full Meltdown' Made Official
by Adam Clark Estes - Atlantic Wire
TEPCO officials confirmed today the months-long of suspicion that the Reactor No. 1 at Fukushima suffered a full meltdown. According to the disclosure today, workers discovered earlier this week that No. 1's containment vessel has been leaking water and today discovered a sizeable hole they believe was created by fallen fuel pellets. The water leakage not only indicates that the clean up efforts will take longer than originally expected but also that the worst case scenario was already underway when TEPCO said it had been avoided.
Before anybody panics over the very scary phrase "full meltdown," it's worth pointing out that nuclear scientists don't necessarily agree on what that means. The difference between a "partial meltdown," which is what we were lead to believe had happened, and a "full meltdown," which is the term dominating today's headlines, is unclear and perhaps not even that important.
According to Columbia's David Brenner, a "full meltdown" occurs when the exposed fuel melts through the bottom of the containment vessel. That's not the dangerous part, though. When asked in an interview about the danger of meltdowns, Brenner said:They’re certainly not good. You can contrast the two major nuclear incidents of the past: Both Chernobyl and Three Mile Island were meltdowns, but the difference in scale is enormous. Chernobyl was the equivalent of 1 million Three Mile Islands. A “meltdown” certainly is not a good thing, but the ultimate consequence is how much radioactivity is released into the environment. You can have a situation like Three Mile Island, where it’s extremely small amount, or a situation like Chernobyl.
The Fukushima disaster is already as bad as Chernobyl according to the International Atomic Energy Association's scale, but the radiation levels released are yet to be determined. Semantics and classifications aside, the people of Japan's situation is scarier than before for one reason: that big hole that's leaking radioactive water puts a serious damper TEPCO's plan to cool the reactor by dousing it with water. Even if they plug the leak, it's unclear how much more radioactive water has seeped into the ground or ocean around the plant. This is the third leak discovered by officials, and it may very well not be the last.
High Radioactive Radiation Levels Over North America
Japanese Reactor Damage Is Worse Than Expected
by Hiroko Tabuchi and Matthew L. Wald - New York Times
In a development that is likely to delay efforts to bring the Fukushima Daiichi Nuclear Power Station under control, the plant’s operator said Thursday that one reactor, No. 1, had sustained much more damage than originally thought and was leaking water.
The company released a plan last month to bring the plant into a relatively stable state in six to nine months, but that was predicated on the notion that it could efficiently cool the fuel in several reactors — a harder task if water is leaking out. The company had long suspected that the containment vessels at two other reactors were breached and leaking, but it had hoped the No. 1 reactor was intact and therefore easiest to bring under control.
The company, Tokyo Electric Power Company, or Tepco, was able to better assess the reactor on Thursday because workers had recently been able to get close enough to fix a water gauge. It showed that the water level in the reactor was much lower than expected despite the infusion of tons of water since a devastating earthquake and tsunami knocked out the plant’s crucial cooling systems.
One of the most startling findings announced Thursday was that water levels in the reactor vessel, which houses the fuel rods, appeared to be about three feet below where the bottom of the fuel rods would normally stand. Ever since the reactor shut down, workers’ primary task has been to keep pouring water into the reactors to ensure the nuclear fuel remained covered so that it would not melt. But the new information suggests the fuel was uncovered for at least some time, probably early in the crisis.
That indicated that the exposed fuel has probably melted and slumped to the bottom of the vessel in little pellets, Junichi Matsumoto, a Tepco spokesman, said Thursday at a news conference. Still, the worst fears did not materialize. Experts have long worried that such melting would allow a nuclear chain reaction to restart, producing enough heat to burn through all barriers — resulting in a full meltdown and a catastrophic release of radioactive material.
Mr. Matsumoto said relatively low temperature readings on the surface of the reactor, between 100 and 120 degrees Celsius (or 212 to 248 degrees Fahrenheit), suggested that the slumped fuel was being kept cool to some extent by the water inside the reactor and therefore was not as dangerous as some expected. “We are not seeing a China Syndrome,” Mr. Matsumoto said, using a term coined in the United States in the 1970s to describe a severe nuclear meltdown of the fuel, which could sink into the ground and cause an explosion. The term is a satiric reference to the idea that in such an uncontrolled reaction, the core could burn through the earth.
David Lochbaum of the Union of Concerned Scientists, a nonprofit group usually critical of the nuclear industry, agreed that the temperature readings were a good sign. He said he believed that the damage to the fuel at Reactor No. 1 was already finished, and that even if some fuel rods were still standing — and therefore exposed — they were no longer hot enough to keep melting. “As bad as things are,” Mr. Lochbaum said, “they’re getting better.”
He cautioned that dangers remain. Conditions could get worse, he said, if the continued addition of water creates conditions more conducive to a nuclear reaction. At the Nuclear Regulatory Commission in Washington, R. William Borchardt, the top staff official, briefed the five members of the commission on Thursday morning about the new disclosures, but did not describe them as major developments. Over all, he described the status of the Fukushima complex as “not exactly stable, but you might say that they’re static.”