"Sailing on the beach. Ormond, Florida"
Can you sense that? It is a perturbation in the forces of human civilization.
It is the feeling you get when events around the world are unfolding in a certain direction, but you are uncertain exactly how they will unfold or exactly where they will finally leave us. That is the nature of complex, dynamic systems, and more systemic complexity usually means less certainty.
Perturbation theory is commonly used by physicists to describe the behavior of complex physical systems that involve equations which cannot be solved exactly. Take the movement of planets in our solar system and through our galaxy, for example, which, at first, may seem relatively simple to predict.
In reality, the existence of multiple planets and moons with inter-acting gravitational effects make the necessary calculations extremely complex and render exact predictions of planetary paths through space-time impossible. Instead, astronomers attempting to predict the path of planet Earth would first start with the gravitational effect of the Sun, as it is the body with the largest gravitational influence.
Then, they would "correct" the solution with the second, third...nth-order gravitational effects of the next most influential bodies of mass respectively. It was discovered, however, that even the last correction in a perturbation analysis can end up being larger than the first one, which means that a relatively small perturbation can disproportionately affect the dynamics of the entire system. This "butterfly effect" of perturbations also operates at the smallest scales of our Universe, and presents a major obstacle to other physical theories, such as those encompassing the quantum scale.
An example would be String Theory, commonly referred to as a potential "Theory of Everything", since it posits that the fundamental constituents of the Universe (strings) are way too small to be directly or indirectly observed (via experiments such as particle accelerators) because of technological (energetic) limitations.
Therefore, it must provide precise predictions of their behavior and its correspondence with known properties of the Universe to verify their existence. But the strings, like all other constituents of matter, interact with each other through multiple spatial dimensions and make such specific predictions practically impossible.
If the specific behavior of massive planets or one-dimensional oscillating strings is too complex for prediction, then what are the chances for a global human society consisting of economic, social and political systems that are enormously specialized and inter-dependent?
We spend a lot of our time thinking about how much prices for specific goods will rise or fall next week or next month, and telling others what we imagine will happen. What kind of return will gold provide by the end of the Summer, or how about some local real estate?
Perhaps we are wondering how U.S. and European stock market valuations will be affected by the ongoing disasters in Japan, or the worsening sovereign debt situation in Europe. We ask people to tell us where and when the next Middle Eastern revolution will break out, and exactly how the global community will respond. In the final analysis, the "predictors" just end up using the same speculative "value at-risk" models that global financial investors followed right off of an economic cliff in the first place.
Instead, we should content ourselves with knowing the generalized "solutions" derived from perturbation theory, and embracing its shortcomings. We start with the biggest influences on our global society and work our way down, until it becomes meaninglessly complex to continue. The size of the influence must be measured by its approximate timing and its systemic impact, which is largely rooted in the scope of the system which it affects (financial, industrial, environmental, etc.). We attempt to "calculate" the general pressures that will be exerted on civilization's path by each influence, adjusting the path's course as new influences are incorporated.
It is not a process that is nearly as simple as going from the Sun to the Moon, but it is still useful for calculating the general direction in which our global civilization is headed and the path we may all be on. These are the biggest influences that I perceive in general order of size (biggest to smallest), with an emphasis on the temporal contribution to influence, but there is certainly room for re-arranging the order or assigning equal weights to multiple influences:
(My personal calculations, with the exception of those relating to climate change and imperialist policies, are referenced by the relevant articles linked under each listed influence.)
- The peak of speculative private debt in the global financial system, including both on and off balance sheet liabilities of individuals and institutions (the shadow derivatives markets). "Speculative debt" means liabilities that are only supported by deceptive accounting methods and/or worthless government guarantees, rather than productive cash flows.
The Debt-Dollar Discipline (Conservation & Release)
The Math Is Different At The Top (Financial Threats To Power)
Exporting Speculative Debt
- The fiscal and monetary policies of governments and central banks in regions with relatively large economies. Among these institutions, the biggest influences would include the Federal Reserve, the IMF, the European Central Bank, the Bank of China, the Bank of Japan and the governments of the U.S., several European states, China and Japan.
- The peak of the total percentage of public debt and deficits relative to global GDP, including unfunded entitlement obligations in developed economies.
- The peak in global oil production that most likely occurred sometime between 2000-2010, and its negative impact on economic growth for developed economies that mostly rely on imported oil, as well as major oil exporting countries.
- Environmental degradation issues, such as water scarcity, and their contribution to widespread famine, disease, industrial instability and violent conflicts.
- Accelerating trends in climate change and its contribution to the issues listed in #5.
- The imperialistic (militaristic) policies of developed countries and their contribution to economic disruption and violent conflict around the world.
- Deterioration of the psychosocial and political structures of developed economies that are struggling with all of the above factors, and its contribution to systemic fear and violent conflict around the world.
By now, it should be clear that, even though the above is an extremely general list of influences, the interaction between them makes for a very complex task of prediction. There is a lot of room to add detail to the listed influences, such as specifics about public debt held in the EU and the U.S. or the range of policy tools at the hands of powerful institutions, as well as new generalized influences that will develop over time. That is why we must sacrifice high levels of certainty for generalized accuracy and a somewhat reasonable sense of where we are headed.
I will not rehash my calculations here, because that is obviously not the point of this article. Everyone must evaluate the objective evidence on their own, and use their mind's "calculator" to determine humanity's most likely destination. We must accept that our margin of error will necessarily be large, and we must also pay strict attention to details, because even the slightest perturbations can lead to radically different outcomes. It is often an extremely tedious, frustrating and mind-numbing process, but, frankly, there is no other option.
The new Victorians: UK families face biggest cash crunch since 1870
by Daily Mail
Families face the greatest pressure on their finances for nearly 150 years, a report has warned. Workers face a combination of inflation and low pay rises or even freezes for a fourth year in a row, according to international financial consultants Deloitte. It will be the first time since the 1870s that ‘real’ wages, the sum you earn after inflation has been taken into account, have fallen for four successive years.
Step back in time: It will be the first time since the 1870s that 'real' wages, the sum you earn after inflation has been taken into account, have fallen for four successive years. The report said average earnings will rise by 2.4 per cent this year and inflation is expected to be 4.4 per cent. Deloitte economic adviser Roger Bootle said households’ disposable incomes will fall by £780 this year. He also predicted incomes will not return to their 2009 peak until 2015.
It's worse, actually: Governor of the Bank of England Mervyn King predicted things would get as bad as the 1920s The report also forecast economic growth of just 1.5 per cent this year and next year – well below the 1.7 per cent and 2.5 per cent expected by the Treasury.
The nightmare picture is even bleaker than the one painted by Bank of England Governor Mervyn King who has said households face the worse squeeze since the 1920s. Mr Bootle said: ‘Mervyn King has called it the biggest squeeze on real pay since the 1920s – but the worst may be yet to come.
‘I expect real earnings to fall this year. This will mark the fourth successive year of falling real earnings – the first time that this has occurred since the 1870s when the Franco-Prussian war was fought between France and Germany. ‘An additional reason to be pessimistic about the outlook for household incomes is the deepening fiscal squeeze.’
Average earnings have lagged behind inflation for the last three years as rocketing household bills and the soaring cost of everyday goods have more than wiped out any wage rises. In addition to those granted meagre, below-inflation pay rises, millions have had their wage levels frozen while some have had their pay cut. ‘By the end of 2012, real incomes should be rising again,’ said Mr Bootle.
‘Of course, not all households will be affected equally. Attention has focused on the "squeezed middle" but I am not convinced that middle income households will be any worse affected than the poorest or richest households. ‘The big picture is that pretty much all households face a further squeeze over the next year or two. ‘Consumers may therefore have little choice but to cut their spending.'
Deloitte also said the Government will need to borrow £12 billion more over the next two years than pencilled in by the Chancellor. The warning comes as employers’ group the CBI said Britain’s small and medium-sized manufacturers saw their orders from customers at home and overseas grow at the fastest rate in 16 years. The CBI’s latest quarterly survey found volumes of domestic and export orders among smaller firms rose at the fastest rate since April 1995. But it also warned smaller firms are being squeezed by intense cost pressures.
Bond Vigilantes Ignore Next Stage of Euro Crisis: France
by Matthew Lynn - Bloomberg
Greece? Been there. Ireland? Done that. Portugal? Got the T-shirt.
For the past year, countries sharing the euro have been going bust one by one. So where’s next? Plenty of people will point the finger at Spain. Some at Italy. A few single out Belgium, a country with high debts, and no government. But they should be looking somewhere else: France.
It is increasingly politically unstable, its debt position is getting worse all the time, it is losing competitiveness against Germany, and it shows little willingness to change. Those are all good reasons for the bond markets to make France the next battleground. But the yield on France’s 10-year bond is still hovering quietly at about 3.6 percent.
There isn’t, of course, a shortage of candidates for the next leg of the euro-area’s rolling crisis of confidence. Spain experienced a property bubble every bit as extreme as Ireland’s, and has one of the biggest budget deficits in the euro area. Italy has a legacy of government debt almost as bad as Greece’s, and has struggled to grow since joining the single currency.
The same is true of Portugal. Belgium has just marked a year without a government, a world record in peacetime: There isn’t much chance of it getting a grip on the budget deficit while the country can’t even agree on who is in charge. Amidst all that, France has managed to slip off the radar. It is Europe’s second-biggest economy and still a prosperous one, even if its gross domestic product has expanded only 1.6 percent on average over the past two decades.
‘Turn to France’
"It won’t be long before bond investors turn to France after they have finished with Portugal and Spain," Xavier Rolet, the chief executive officer of London Stock Exchange Group Plc, told the Independent newspaper in December.
There are four reasons to think France may be next in line.
First, it is entering politically dangerous territory. Next year’s presidential election promises to be dramatic. The polls suggest President Nicolas Sarkozy will struggle to make the second-round run-off, and may well be relegated to third place by the extremist National Front, led by Marine Le Pen. Only one poll in the last seven weeks has shown Sarkozy defeating Le Pen for the run-off.
The interesting point is this: Le Pen is a fierce critic of the euro. Spain and Italy don’t have popular politicians arguing the case for bringing back national currencies. France does. Her chances of winning power aren’t much better than they were for her father, Jean-Marie, who once led the party. But all it will take is a whiff of victory for the bond markets to take fright. After all, a Le Pen victory could easily lead to the restoration of the franc, followed by a devaluation. You wouldn’t want to own French bonds if there was any possibility of that happening.
Second, France’s debt position is getting worse all the time. In 2010, the nation ran the fifth-biggest budget deficit in the euro area, at 7 percent of GDP. It was beaten only by Greece, Portugal, Ireland and Spain -- hardly great company. Its stock of outstanding government debt hit 81 percent of GDP in 2010. That figure will reach 90 percent this year and 95 percent in 2012, according to London-based consulting firm Capital Economics. Italy has more outstanding debt -- 119 percent of GDP in 2010 -- but it isn’t adding to the pile the same way France is. What the markets really look at is the direction you are traveling in -- and in the case of France, it isn’t good.
Three, France is losing competitiveness. The core problem for all the countries struggling with the single currency is that they can’t stay competitive with Germany. That is certainly true of France. German labor costs shrank 0.7 percent in the fourth quarter, while in France they rose 1.1 percent. The difference was even wider in the previous two quarters. The gap isn’t massive in any single year, but enough to make France steadily less competitive against its neighbor to the east.
Four, it is reluctant to change. Sarkozy came to power promising to shake up the economy. He delivered little. At the next election, he will face a challenge from the extreme, anti- euro right. At the same time, the most likely Socialist Party candidate, International Monetary Fund Managing Director Dominique Strauss-Kahn, will be collecting the center voters. In that contest, no one will promise tough action to control the deficit, hold back wages or liberalize the economy.
Spain and Italy may have bigger debt problems, but the Spanish are working hard to improve their finances and the Italians are at least keeping their debts under control even if they aren’t doing much to become more competitive. France isn’t doing either.
There isn’t much sign of the bond markets turning on France yet. The country can still borrow on similar terms to Germany. And there is still time to turn things around. A reduction in the deficit this year or next would make things look better. But it is hard to believe that the euro crisis will end with the bailout of Portugal. Other countries are going to get caught in the crossfire. When you look around for the next candidate, France has what it takes to be the next blowup.
As Debt Ceiling Isn't Raised, 'Headache' For Cities, States Begins Friday
by William Alden - Huffington Post
As the federal government approaches its legal debt ceiling and scrambles to avoid default, the first losers will be cities and states.
Starting Friday, the U.S. Treasury will stop issuing special securities that help state and local governments pay for their debt, Treasury Secretary Tim Geithner announced in a letter to Congress this week. This freeze, the first in a series of "extraordinary measures" undertaken by the Treasury to avoid a federal default, could pose difficulties for local governments nationwide, making it more complicated for strapped localities to manage their already weak finances. "I could see it being a real problem for those guys, on top of all the headaches they have already," said David Johnson, a partner at the Chicago-based ACM Partners, a boutique financial firm that advises struggling municipalities.
Congress has been mired in a months-long gridlock, as lawmakers debate proposals to reduce the federal deficit. This stalemate in the highest echelons of American political power nearly shut down the federal government in April, when Republicans and Democrats clashed over a few billion dollars in spending cuts. Now, Republican lawmakers who advocate for budget austerity are saying they will not vote to raise the debt limit unless their demands are met.
The federal government continually issues new debt to pay for principal and interest on older debt, meaning that if it's legally barred from borrowing, it will eventually have to default on its obligations, an event that would likely spark a devastating financial crisis worldwide. Government officials and independent economists have sharply criticized the seeming game of chicken going on in Congress, as lawmakers are essentially threatening to lead the global economy into catastrophe, simply to advance a political agenda.
But it appears Congress will not raise the federal debt limit before that ceiling is reached on May 16, Geithner said in his letter. In anticipation of this inaction, the Treasury will begin shutting down certain types of debt issuance this week, a process that will kick into higher gear in mid-May if the limit isn't raised. A default, which would likely cause borrowing costs to skyrocket and credit markets to freeze, will come in early August if Congress doesn't vote to raise the limit, Geithner said in the letter.
When the "extraordinary measures" begin Friday, the first casualty will be a category of non-marketable bonds known as State and Local Government Series securities, or SLGS (pronounced "slugs"). These securities are tailor-made for state and local governments, designed to help them pay for their debt.
Local governments regularly issue bonds and then invest this borrowed money into U.S. Treasury securities. The process allows them to collect interest from the federal government, and use that yield to pay their own bondholders. By law, local governments can't earn arbitrage profits -- meaning, they can't make a profit by collecting more in Treasury yields than they pay to their own investors. So, the federal government issues SLGS, which are customized to match the specifics of a local government's need. Ideally, the process is a wash.
State and local governments have bought $23 billion in SLGS so far this year, and they have issued $62 billion in debt, according to Thomson data provided by Matt Fabian, managing director of the Concord, Mass.-based Municipal Market Advisors. These specialized securities are a handy tool for governments, Fabian said. "It's probably the most efficient way to do refinancings," said Howard Cure, director of municipal research at Evercore Wealth Management. Without SLGS, he said, governments face "a headache."
Losing SLGS temporarily is not a major hardship, but it is an annoyance, experts said. In the absence of SLGS, a local government will likely put its money in marketable Treasury debt, paying an outside advisor to craft a Treasury investment that allows it to comply with the law preventing arbitrage. When the federal government issues SLGS, it takes care of this customization. Without SLGS, a banker does that job. From the federal government's perspective, cutting SLGS does not actually lower the total debt burden. Rather, it makes debt issuance more predictable, and it helps reduce increases in debt. The Treasury issues most of its debt according to a pre-determined schedule; SLGS, though, are issued as local governments request them.
Geithner, who has persistently warned Congress of the dangers of not raising the debt ceiling, acknowledged the difficulty that comes from this first step in the process of preventing default. "It is not without costs," he said in the recent letter to Congress. "It will deprive state and local governments of an important tool to manage their outstanding debt expenses."
Already, local government officials are frustrated by the federal lawmaking process. Last week, during a conference in Chicago, Philadelphia mayor Michael Nutter struck a confrontational tone with the federal officials who sat with him on stage, saying, "Mayors could never get away with the kind of nonsense that goes on in Washington." Other mayors heartily agreed, as some stood up during the question and answer session to express their disappointment with the federal government. Local governments can efficiently create jobs, but they lack resources from Washington to help them do so, these mayors said.
Lawmakers on the Hill, meanwhile, are showing no sign of progress on the debt ceiling debate. "In a way, we are engaged in a political game," said Gary Burtless, a former Labor Department economist and a current fellow at the Brookings Institution, in Washington. "Will a miscalculation occur that leads to a real disaster?"
Meredith Whitney Defends Her Prediction of ‘Hundreds of Billions’ in Muni Defaults
by Christopher Palmeri - Bloomberg
Meredith Whitney, the analyst who correctly predicted Citigroup Inc.’s 2008 dividend cut, defended her prediction of "hundreds of billions of dollars’ worth" of municipal-bond defaults.
Whitney, 41, speaking today at the Milken Global Conference in Beverly Hills, California, said local governments in states such as California, Nevada, Arizona and Florida that are dependent on the housing and construction industries for higher tax revenue would continue to struggle financially. "States have been spending at two-and-a-half times their tax receipts," she said. "The states then are cutting off aid to their local governments which rely on them for over a third of their monies. The local municipalities have nowhere to go and their bias is to save their constituents before they save their bondholders."
Whitney, who heads New York-based Meredith Whitney Advisory Group LLC, told CBS Corp. (CBS)’s "60 Minutes" on Dec. 19 that municipal-bond investors could "see 50 sizable defaults, 50 to 100 sizable defaults, more," that "will amount to hundreds of billions of dollars’ worth of defaults." Her prediction accelerated the flight of investors from municipal-bond funds and a decline in bond prices.
"There’s nothing controversial about that call, if you look at the numbers," she said today, later adding: "This municipal issue, you can criticize me for anything you want, I’m numb to it, because I have more conviction on this than I’ve had on any single thing in my career."
David Solomon, co-head of investment banking at Goldman Sachs Group Inc. (GS), speaking on the same panel as Whitney, said he disagreed. "I don’t think we’re doomed," he said. "I’d be more balanced on it. Ultimately tax receipts will have to go up and there’s only one way to do that and that’s increase taxes. The U.S. economy is going to perform better over the next year or two than the general consensus."
Farm Belt states such as Iowa that are benefiting from rising agricultural prices and their logistics and transportation industries will see stronger growth than the rest of the nation, Whitney said. "There’s myriad ways of playing every industry and each county," Whitney said, when asked where to invest. "There’s opportunity-rich scenarios in every state and every market."
Treasury borrowing full steam ahead
by Charles Riley - CNNMoney
The Treasury Department said Wednesday it will go ahead with plans to auction $72 billion in new debt next week as the federal government approaches its debt ceiling. In a statement, Treasury said the new funds -- essentially loans from the public to the government -- would give the department's debt managers "a significant amount of flexibility" to respond to different financing scenarios.
The debt ceiling is currently set at $14.294 trillion. As of May 2, the debt that is subject to that limit totaled $14.269 trillion -- just $25 billion shy of the cap. But the total fluctuates up or down daily. After the government hits the ceiling, it's not allowed to borrow, and could eventually default on its debt.
On Monday, Treasury Secretary Tim Geithner said the pace of borrowing is on track to hit the current debt ceiling by May 16. That's the same date next week's auctions will settle. As U.S. debt approaches its ceiling, Treasury will use a set of what it calls "extraordinary measures" to prevent a debt limit breach.
What happens if Congress blows the debt ceiling?
On Friday, Treasury will make its first move. The department will suspend issuance of special Treasury securities that help state and local governments fund, among other things, infrastructure improvements. But that will all stop on Aug. 2, 2011, the date Treasury says Congress must raise the debt ceiling by in order to prevent a default on U.S. obligations and a catastrophic economic calamity. And as the Aug. 2 deadline approaches, Treasury might be forced to alter its auction schedule, Mary Miller, assistant secretary for financial markets, said in a statement.
Still, Miller said Treasury "is confident that a timely increase will be enacted this year." Confidence aside, Congress still has to act, and that means politics will soon take center stage. In exchange for lifting the borrowing limit, Republicans are hoping to extract a promise of spending cuts, or put a cap on future spending in place. Democrats will push back hard.
What yields are doing: Treasury prices rose in early trading Wednesday, as investors reacted to disappointing economic data that pointed to slower-than-expected employment and manufacturing growth. The 30-year yield ticked down to 4.33%, the 2-year yield declined to 0.59%, and the 5-year yield slipped to 1.93%. The 10-year note's yield was at 3.22%. Bond prices and yields move in opposite directions.
Treasury suggests $2 trillion U.S. debt ceiling raise
by Richard Cowan and Rachelle Younglai - Reuters
The Treasury has told lawmakers a roughly $2 trillion rise in the legal limit on federal debt would be needed to ensure the government can keep borrowing through the 2012 presidential election, sources with knowledge of the discussions said.
Obama administration officials have repeatedly said that it is up to Congress to decide by how much the $14.3 trillion debt limit should be raised. But when lawmakers asked how much of an increase would be needed to meet the government's obligations into early 2013, Treasury officials floated the $2 trillion working figure, Senate and administration sources told Reuters.
Former Treasury officials have said it is routine for Congress to ask the Treasury Department for guidance. Republican leaders have asked the White House to provide the size of any proposed increase before the two sides sit down on Thursday to discuss the debt limit face-to-face. "We have not specified an amount or a time frame. We think that should be left up to Congress," Mary Miller, Treasury's assistant secretary for financial markets, told reporters on Wednesday.
She also said it would be better to raise the debt ceiling enough so that the government does not bump up against it so frequently. "Obviously, a longer period of time between these activities would be beneficial in terms of the work that goes into preparing for a debt limit increase. But again, you know that's not the Treasury's call," she said.
A Reuters analysis of Treasury's borrowing needs forecast Congress would have to raise the debt ceiling by more than $2 trillion to get through next year's election without having to revisit the issue. According to the Treasury, the government borrows on average about $125 billion per month.
Treasury Will Act to Avoid Default
by Naftali Bendavid and Damian Paletta - Wall Street Journal
Treasury Department officials said Monday that they will begin to take extraordinary actions Friday to manage the government's finances so the U.S. won't default after hitting its borrowing limit on May 16. The moves come amid divisions among congressional leaders over how to raise the $14.29 trillion debt limit and avoid a default that Treasury officials say could cause another financial crisis.
Treasury Secretary Tim Geithner told lawmakers last month that the U.S. would hit the debt ceiling by May 16 and could default as soon as July 8. Officials now estimate that the actions announced Monday, combined with stronger-than-expected tax receipts, will enable the government to postpone a possible default until Aug. 2. But the longer Congress delays raising the debt ceiling, the greater the risk that markets will fall due to fears that the government won't meet its financial obligations.
In the first emergency step, Treasury on Friday will stop issuing state and local government series securities, commonly known as SLGS. That could make it harder for states and cities to issue debt, because they will have to seek issuers in the private market. If the debt limit hasn't been raised by May 16, the government will begin delaying payments into two government pension funds and redeeming Treasury securities in those funds. It also will suspend its daily investment of Treasury securities into another government employees' retirement plan.
In addition, Treasury officials are prepared to suspend their daily reinvestment of Treasury securities held as investments in the Exchange Stabilization Fund, a fund held by the government to guard against exchange-rate fluctuations. The government had $14.231 trillion in debt as of April 28, $63 billion under the ceiling. Mr. Geithner, in a letter to Congress, urged lawmakers to act "as soon as possible" to raise the cap.
"Default by the United States on its obligations would have a catastrophic economic impact that would be felt by every American," Mr. Geithner wrote. At that point, he said, the government would stop or delay in such payments as military salaries, Social Security checks and tax refunds.
Raising the debt limit is unpopular with many voters. Leaders of both parties have decided to soften the blow by attaching budgetary restraints to any vote to raise the debt ceiling, but they are battling over what sort of restraints. Democrats want to cap the deficits that the government can run up each year, which have now reached $1.5 trillion. Republicans fear a deficit cap would mean tax increases as Congress struggles to close its deficits, and they are pushing for a spending limit instead.
"You can count on House Republicans saying that if Congress is going to raise the debt ceiling, there has to be considerable spending reforms attached to that," said Rep. Peter Roskam (R., Ill.). Democrats attacked Republicans for threatening to block a debt-ceiling increase if they don't get the conditions they want. "The idea that in the name of fiscal responsibility people would say we're not going to raise the debt ceiling is a joke, to be honest with you," said Sen. Michael Bennet (D., Colo.).
Many GOP freshmen ran biting television ads last fall during the midterm election campaigns against Democratic incumbents for raising earlier debt limits, making it hard for the Republicans to support an increase this time. GOP leaders plan to canvass their members in coming days to learn what it would take for them to support an increase. House Speaker John Boehner (R., Ohio) recently told GOP House members he wants to tackle the debt limit as soon as possible, as long as there is a credible plan in place to curtail spending.
The debt-ceiling battle comes as a bipartisan group of senators, the so-called Gang of Six, is reaching a critical moment in its plans to release a deficit-cutting plan. The next few days will tell whether the six can unite behind a single package. Vice President Joseph Biden , at Mr. Obama's direction, is leading another group of lawmakers working on a debt plan. It isn't entirely clear how the two groups will interact, but some suggest the Gang of Six's plan could be a template for Mr. Biden's group.
Bank Stocks Too Fancy for Money Managers Turned Off by Use of Derivatives
by Charles Stein - Bloomberg
"Above all stick with what you know," Warren Buffett cautioned investors in a 1974 Forbes magazine interview. "Don’t get too fancy."
Banks, in the view of some of today’s best-performing money managers, are too fancy -- their businesses and finances too complicated to understand even as regulators have tried to make them more transparent. Investors owning few if any of the stocks in the group include Clyde McGregor, who runs Oakmark Equity and Income Fund, Delafield Fund’s John Delafield and Donald Yacktman of Yacktman Focused Fund.
The fund managers said they are frustrated by complex balance sheets stuffed with derivatives that make it hard to evaluate bank assets and how they will fare under different economic scenarios. They are also concerned that profits may be hurt by a slowdown in the economy, litigation over mortgage bonds and foreclosures, and new fee-crimping rules. "We find it hard to believe the banks have cured all their bad asset problems, and they aren’t transparent enough for us to understand the risks," McGregor, whose $20.5 billion fund beat 99 percent of peers over the past decade, said in a telephone interview from Chicago.
The 24-stock KBW Bank Index fell 8.6 percent in the past year, compared with the 13 percent increase by the Standard & Poor’s 500 Index, a benchmark for the broader market. The bank index is priced at roughly book value, or the value of total assets minus liabilities, which makes bank stocks cheap by historical standards, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. At the end of 2006, the index traded at two times book value, according to data compiled by Bloomberg.
Banks earnings in the first quarter provided few reasons for bearish investors to change their view. Net revenue at the six largest U.S. lenders -- Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- fell 13.3 percent from a year earlier, according to Bloomberg data. Profits excluding taxes, loan-loss provisions and one-time items slid 40.2 percent. Bank stocks, as measured by the KBW index, fell 50 percent in 2008 and then more than doubled from March 9, 2009, when stocks reached a 12-year low, to the end of the year. 2009. Bank shares gained another 22 percent in 2010, Bloomberg data show.
McGregor’s Oakmark Equity and Income held no bank stocks as of March 31, according to Bloomberg data. He and co-manager Edward Studzinski got out in 2006 on concern that mortgage lending had gotten too aggressive. The fund, which buys stocks and bonds and is part of part of Chicago-based Harris Associates LP, returned 8.7 percent annually in the past 10 years, almost twice the average gain by balanced mutual funds, data from Morningstar show.
"Can you still make money in banks?" McGregor, 58, said. "Maybe. But we can build a portfolio that doesn’t demand owning them." The problem, he said, is the complexity of the banks, especially their use of derivatives. Derivatives are contracts whose value is based on stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather. Options and futures are the most common types of derivatives. Unlike traditional loans, which can be studied and evaluated, derivatives are described by banks in general terms that makes it difficult to determine the quality of the underlying assets, McGregor said.
Rocket Science In its 10-K annual report filed in February, Bank of America listed its credit derivatives, securities that let buyers guard against a borrower’s missed debt payments. The filing doesn’t say which specific debts the bank is buying protection for, and it describes the counterparties to the trades as "large multinational financial institutions." "We don’t know what we are being exposed to," McGregor said.
It’s not a question of requiring more disclosure, which regulators have done in the past several years, according to George Shipp, manager of the $694 million Sterling Capital Special Opportunities Fund in Virginia Beach, Virginia. "You need to be a rocket scientist to understand it," Shipp, 52, said in a phone interview. He said he recently read through Goldman Sachs’s annual report and, even with pages of disclosure, "it is not something the layman is going to be able to figure out." His fund, which beat 97 percent of peers over the past five years, holds one bank, Boston-based State Street Corp.
Buffett, who once called derivatives "financial weapons of mass destruction," doesn’t consider all banks too fancy. Berkshire Hathaway Inc., the Omaha, Nebraska-based holding company he has run since 1970, is the largest shareholder of Wells Fargo, according to Bloomberg data. His $10.1 billion stake in the San Francisco-based bank is Berkshire’s second- largest, after Coca-Cola Co. Buffett is the third-largest shareholder in U.S. Bancorp of Minneapolis, with $2 billion of stock at year-end.
"U.S. banking profitability will be considerably less in my view in the period ahead than it was in the early part of this century," Buffett said April 30 at the annual meeting of Berkshire shareholders in Omaha. Buffett said profits would diminish as regulations forced banks to reduce leverage. At the same meeting he described Wells Fargo and U.S. Bancorp as "very good operations."
Delafield, who has been managing money since 1970, can’t remember the last time he owned a bank stock. "It’s impossible from the outside to know the value of what they hold," Delafield, 75, who runs the $1.4 billion Delafield Fund from New York for Tocqueville Asset Management LP, said in a phone interview. The fund had 30 percent of its money in industrial stocks, 28 percent in basic materials and none in financials as of March 31, according to Morningstar data. It has gained 12 percent a year for the past decade, ranking first among midcap value funds.
The $1.4 billion FPA Capital Fund, the best-performing diversified U.S. stock fund over the past 25 years, owned no bank stocks as of March 31, Bloomberg data show. The fund gained 15 percent annually over that stretch, according to Morningstar. "Back in 2007 many investors weren’t paying attention to the huge risks embedded on the balance sheets of financials," Dennis Bryan, 49, co-manager of the Los Angeles-based fund since 2007, wrote in an e-mail. "Today more investors are closely monitoring those risks."
Berkowitz the Bull
One of the biggest bulls on bank stocks is Bruce Berkowitz, manager of the $20 billion Fairholme Fund. He began buying lenders in the fourth quarter of 2009, convinced an improving U.S. economy would lift the banks along with it. Berkowitz, who in January 2010 was named Morningstar’s domestic stock manager of the decade, now has more than two-thirds of the fund’s equity in financial stocks, including Citigroup and Bank of America.
"The balance sheets look better than ever, the banks are making money and they are dealing with their issues," Berkowitz, 52, said in a telephone interview from Miami, where his firm, Fairholme Capital Management LLC, is based. Fairholme Fund fell 3.2 percent this year through May 2. In addition to Citigroup and Bank of America, its top 10 holdings as of Nov. 30 included New York-based banks Goldman Sachs and Morgan Stanley (MS), Bloomberg data show.
Goldman Sachs is a favorite holding of billionaire investor Michael Price, who said some large banks stocks are "great" values. "Some of the worst-performing things are big financials this year, which is kind of surprising," Price said yesterday in a Bloomberg Television interview on "Surveillance Midday" with Tom Keene. "We own Goldman, we buy Goldman on dips. I think Goldman’s a great large-cap financial value guy’s stock."
In an April 15 interview with Bloomberg Television, Bank of America CEO Brian T. Moynihan said that while the bank was making progress in many areas, "the mortgage business continues to push us back." Like other banks, the Charlotte, North Carolina-based company has tangled with investors, state and federal regulators, and mortgage insurers over claims that it owes money for loans made during the housing boom and for its handling of foreclosures. State attorneys general negotiating a settlement of foreclosure practices have reached agreements with lenders on some terms while failing so far to reach an accord on payments by the banks, a person familiar with the talks said this month.
The battles will be resolved, possibly by the end of the year, Berkowitz said. "It is only a matter of time before everyone settles up." That’s not enough of a reason to buy for Yacktman, whose $2.9 billion Yacktman Focused Fund returned an average of 13 percent a year in the past decade, topping 99 percent of rivals. He held one large bank, U.S. Bancorp, as of March 31, Bloomberg data show. "With a bank you create assets with a stroke of a pen," Yacktman, 69, said in a telephone interview from Austin, Texas. "You’ve got a black box."
Paul Singer, founder of hedge fund Elliott Management Corp., held one bank stock as of Dec. 31, a $65 million stake in Flagstar Bancorp Inc. of Troy, Michigan, according to Bloomberg data. Singer, 66, whose New York-based firm oversees $17.1 billion, said in a March interview with the Wall Street Journal that the "opacity" of bank financial statements means he can’t assess their strength or sensitivity to changes in interest rates and asset prices.
Break Them Up
"You don’t know the financial condition of Citigroup, JPMorgan, Bank of America, any of them," said Singer, whose fund gained 14.3 percent a year since 1977 compared with the 11 percent increase for the S&P 500 Index (SPX), according to company data. Scott Tagliarino, a spokesman for the firm, said Singer wouldn’t comment beyond the interview.
Simon Johnson, a professor at Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts, has pushed for breaking up the biggest banks as a way to make the financial system safer. It would also be a plus for investors, he said in a telephone interview from Washington. "Shareholder value has been destroyed by the opaqueness of the big banks," he said. "If you are a shareholder you want to see them split up. The added transparency would be a virtue."
Sterling Capital’s Shipp said that while splitting off businesses such as investment banking would make big banks easier to understand, the remaining traditional lending business wouldn’t be too appealing. "Garden variety banking, with all the competition and cheap money available, is not very attractive right now."
Given all the problems facing banks, there are more compelling places to invest today, he said. "Who needs the aggravation when I can buy Pepsi or McDonald’s."
China risks credit-fuelled Minsky moment
by George Magnus - Financial Times
China is widely seen as a beacon of sustained economic expansion and financial stability, in contrast to a troubled western world. However it is worth asking whether China’s investment-intensive growth model, and developments in credit and inflation, are pushing it towards its own version of a "Minsky moment" – named after the US economist who warned that the process of leverage always culminates in instability.
As western countries discovered in 2008, this is the point at which policy or other endogenous shocks lead to financial instability and falls in asset prices, investment and economic growth. Could China be flirting with a similar outcome? China’s transition over the past decade from low to borderline-middle per capita income has been based on an investment-intensive growth model. This has seen the investment share of gross domestic product rise from about 35 per cent in the late 1980s to an unprecedented 47 per cent today. More than half this rise was related to property investment.
Yet investment’s share of GDP cannot keep rising, since chronic overcapacity would eventually cause investment returns to collapse. Although corporate profits have been robust, they are boosted by subsidies to energy prices, for example, and by a monetary system that diverts income away from households and underprices capital. A sharp rise since 2000 in the ratio of capital to output does not make China unique among emerging markets, but it is worrying when the investment share of GDP is so high and the quality of investment financing is deteriorating.
But a more immediate worry is the growing credit intensity of China’s economy. What China calls "total social financing" – conventional bank loans and most other external sources of finance – was still 38 per cent of GDP in the first quarter of 2011, almost as high as in 2009 when China implemented a credit-centric stimulus programme. The credit intensity of growth, or the amount of new credit generated for each unit of GDP growth, has risen from 1-1.3 before 2009 to 4.3 in 2011.
Despite a 500 basis points rise in bank reserve requirement ratios since January 2010, and four 25bp increases in interest rates since October, credit demand and supply seem barely affected. In real terms, interest rate levels are the lowest for 13 years: the three-month deposit rate stands at -3 per cent, and the one-year lending rate at 1 per cent. Companies are borrowing more as cash-flows weaken, with energy, utility and wage bills rising.
Although formal bank loan volumes are subject to restraint, they only comprise about half of TSF. Companies can also access plentiful liquidity in Hong Kong, where the renminbi deposit market has increased eightfold since mid-2010 to more than RMB400bn and where offshore renminbi financing is rising fast.
Minsky stressed the vulnerability of banking systems, but the integrity of China’s state banking system is not the key issue. Foreign exchange reserves of $3,000bn give ample ammunition for recapitalisation and the China Regulatory Banking Commission, which warns regularly about the risk of excessive lending and borrowing, has already set a minimum 11.5 per cent capital ratio.
But financial instability, arising from excessive credit, increasing inflation and weak investment returns, is always an important catalyst. That is why China’s current inflation rate of almost 5.5 per cent, and its policy response, should be monitored closely. Decisive, sustained measures to put China’s inflation and credit genies back in the bottle, including a significant rise in interest rates, would hit cyclical growth. But they would make growth more sustainable by taming investment and allowing time for other measures to boost household incomes and consumption.
A different scenario is all too plausible. In this, the leadership changeover in 2012, a reluctance to compromise growth or alienate workers, and political interests in rising property prices could lead to a premature call of victory over inflation. This might boost asset price and growth in the short term, but increase the likelihood the new leadership will have to deal with a credit-fuelled Minsky moment.
A Chinese Minsky moment would hit global growth and resource markets, and shock the consensus about steady appreciation of the renminbi. It would also undermine China’s aim of rebalancing its economy towards consumers; and raise the risk of political unrest.
Financial Overhaul Grows and Slows
by Jean Eaglesham - Wall Street Journal
What is 20 times taller than the Statue of Liberty, 15 times longer than "Moby Dick" and would take the average reader more than a month to read, even if you hunkered down with it for 40 hours a week?
The answer: The growing paper trail formed by the Dodd-Frank law, passed by Congress last year to give U.S. financial regulations their biggest overhaul since the Great Depression.
Getting the legislation through that political thicket was easy compared with the slog now under way to turn Dodd-Frank into regulations. The process has produced more than three million words in the Federal Register—or more than 3,500 11-inch-high pages that would stretch end-to-end more than a third of the way from the Capitol to the White House.
And about 62% of the 387 sets of rules required by the law haven't even been proposed, according to law firm Davis Polk & Wardwell. In April, not a single U.S. agency met any of the 26 Dodd-Frank-related deadlines set for April under the law. Just 21 rules are finished, including a new requirement for say-on-pay votes for shareholders and a permanent increase in bank-deposit insurance to $250,000.
The pace has snarled the creation of bounty payments by the Securities and Exchange Commission and Commodity Futures Trading Commission for whistleblowers who expose financial fraud. Banking regulators are lagging on completion of a rule that would force lenders to retain some of the credit risk on mortgages that are sold off and bundled into securities. "I count my blessings every day that I'm no longer a commissioner" at the SEC, says Joseph Grundfest, a Stanford University law professor who from 1985 to 1990 was one of the five commissioners who make decisions on behalf of the agency.
Regulators have warned for months about the daunting logistical pressures imposed by Dodd-Frank. Political and lobbying battles have further bogged down the process. Delays of a few months or so aren't expected to make much of a difference, but the Obama administration has repeatedly vowed to fight efforts by some Republicans to cause a longer freeze or attempt to undo some of the changes required under the law. "The reality is, we're not going to complete all the work in the timetable Congress set," Scott O'Malia, a commissioner at the CFTC, said in an interview. But the need to "get the rules right" is more important than rigidly meeting Congress's "unrealistic" deadlines, he said.
The Dodd-Frank law has 849 pages, compared with 66 pages in the Sarbanes-Oxley Act, a 2002 law that overhauled accounting rules following the Enron scandal. The landmark Glass-Steagall Act, which created the Federal Deposit Insurance Corp. and barriers between commercial and investment banking during the Depression, was a slim 34 pages. "Dodd-Frank is Sarbanes-Oxley on steroids. It's an exponentially greater volume of regulation," says Margaret Tahyar, a Davis Polk partner. The "sheer number of rules still in the pipeline makes it almost inevitable agencies will miss an increasing number of deadlines over the next year."
In addition to the 30 rule-making procedures that already have missed the deadline set by Congress, 145 are supposed to be completed by year end. A big chunk of the looming deadlines falls close to July 21, the one-year anniversary of President Barack Obama signing the bill into law. Officials at the SEC, on the hook for more Dodd-Frank-related regulations than any other U.S. agency, have finished six rules, proposed 28 additional rules, missed deadlines on 11—and still have 50 to go, on which they have yet to issue any proposals. The agency's rule-making responsibilities range from new controls on credit ratings to powers to claw back executive pay.
John Nester, an SEC spokesman, said the agency is "working hard to meet the deadlines, with an emphasis on getting the rules right." "We're stretched incredibly thin," SEC Chairman Mary Schapiro said last month.
Last week, the CFTC hit the brakes on many of its draft rules written to implement sections of the Dodd-Frank law, extending by 30 days the comment period on provisions that include a regulatory overhaul of the derivatives market. The move came after criticism from the financial industry and some Republican lawmakers that the process was moving too fast. A bill introduced by Republicans earlier this year would delay new derivatives rules by 18 months. Other rules also have been snagged by intense industry lobbying. Retailers and manufacturers have complained about the costs and practicality of implementing a requirement to disclose annually whether goods contain "conflict minerals" from war-torn central Africa.
Another rule that missed the April deadline sets new fee limits on debit-card transactions. The rule's wording has been the focus of an intense campaign by banks, which have billions of dollars in revenue riding on the outcome. "The problem is not just the number of rules, it's the complexity of them, and it's the political power of the various constituencies who are affected by those rules," says Mr. Grundfest, the former SEC commissioner.
Some Democratic lawmakers have accused Republicans of foot-dragging, saying the need to make sweeping regulatory changes is as urgent as it was during the worst of the crisis. Deputy Treasury Secretary Neal S. Wolin criticized "some on Wall Street, K Street and Capitol Hill" last month for trying to "slow down, roll back, or even repeal these crucial reforms."
U.S. Regulators Face Budget Pinch as Mandates Widen
by Ben Protess - New York Times
Government regulators on the Wall Street beat have long been outnumbered and outspent by the companies they are supposed to police. But even after receiving budget increases from Congress last month, regulators are still falling behind. The Securities and Exchange Commission and the Commodity Futures Trading Commission are struggling to fill crucial jobs, enforce new rules, upgrade market surveillance technology and pay for travel.
On a recent trip to New York to tour a trading floor, a group of employees from the commodities watchdog rode Mega Bus both ways, arriving late to their meeting despite a 5:30 a.m. departure. The bus, which cost $30 a person round trip, saved the agency roughly $1,000 over Amtrak. "We spent hundreds of billions of dollars on a hideous bailout, and now we’re not going to fund reforms to prevent another one," said Bart Chilton, a commissioner with the agency.
The money squeeze comes as Wall Street regulators take on added responsibilities in the wake of the financial crisis, including monitoring hedge funds, overseeing the $600 trillion derivatives market and other tasks mandated by the Dodd-Frank law. Their budgets may soon be even tighter, with Republicans looking to cut the regulators’ spending beginning Oct. 1, the start of the government’s fiscal year. Gary Gensler, the chairman of the commodities agency, and Mary L. Schapiro, the head of the S.E.C., will discuss their budgets for the 2012 fiscal year before a Senate committee on Wednesday.
Current and former regulators warn that budgets cuts would prevent the agencies from enforcing hundreds of new rules enacted under Dodd-Frank, or worse, catching the next Bernard Madoff. But critics contend that the agencies don’t deserve extra money, given that they missed warning signs and failed to catch serious wrongdoing in the years leading up to the crisis. The S.E.C., too, has been accused of mismanaging its finances. The Government Accountability Office has faulted the agency’s accounting almost every year since it began producing financial statements in 2004.
Some Republicans argue that the regulators’ cries of poverty are overblown. The S.E.C.’s budget this year is $1.18 billion, up 6 percent over 2010 — and nearly triple what it was a decade ago. "A dramatic spending increase to fund the S.E.C. and C.F.T.C., as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation’s problems can be solved with more spending, not more efficiency," Representative Scott Garrett, the New Jersey Republican who leads the House Financial Services Committee’s Capital Markets panel, said in a statement earlier this year.
While hiring bans and travel restrictions have been eased since the new budget, regulators say they are largely in a holding pattern as lawmakers debate the 2012 budget. Any further cuts, they say, could undermine their efforts to police Wall Street. The commodities agency says the uncertainty has forced it to delay some investigations and forgo other potential cases altogether. "We don’t have the sufficient number of bodies to pursue all relevant investigations and leads," said Mr. Gensler, adding that his agency was short nearly 70 people in its enforcement division.
Robert S. Khuzami, the S.E.C.’s enforcement chief, has similar worries, noting that some Wall Street investigations have faced mounting delays. Recent departures of lawyers will only magnify the problem, he added. Mr. Khuzami also said he faced a "significant backlog" of tips and referrals, including in the area of market manipulations and accounting irregularities. The tips, which come from whistle-blowers, law enforcement agencies and investors, often prompt S.E.C. investigations.
"The biggest concern is we’re not going to get to fraud and wrongdoing as early as we should," he said. And if the agency’s budget is not increased in 2012, the S.E.C.’s enforcement division "won’t cast as wide a net," he added. Already, the S.E.C.’s enforcement division has adopted cutbacks. The division, for instance, has curbed its use of expert witnesses in some securities fraud trials, Mr. Khuzami said.
The division also started sending only one lawyer — sometimes a junior staff member — to conduct depositions and interview witnesses, according to defense lawyers and people close to the agency. Senior S.E.C. lawyers monitor the depositions via videoconference. To avoid hotel costs, some S.E.C. investigators have shuttled between New York and Washington on Amtrak trains that leave around dawn and return the same day. The agency only recently started to again examine investment firms and public companies in some Southern states, after postponing reviews to avoid paying for plane fares.
Despite the recent budget increase, the S.E.C. "still must closely monitor expenses such as travel to make sure that each expense is truly mission-critical," according to an internal agency memo dated April 14 that was provided to The New York Times. "It is not at all clear what fiscal year 2012 funding level will be approved by Congress," said the memo, which was signed by Jeff Heslop, the S.E.C.’s chief operating officer.
While the S.E.C. offsets its budget with fees from Wall Street banks and other financial firms — and in recent years has even turned a profit for taxpayers — Congress sets the agency’s spending levels each year. Lawmakers in April raised the S.E.C.’s budget for the next few months by $74 million, to $1.18 billion. President Obama had requested $1.25 billion for the agency, and Dodd-Frank called for $1.3 billion.
The Commodity Futures Trading Commission received $202 million. Although that was a 20 percent increase over the previous year, the budget fell short of the $261 million the agency said it needed to enforce Dodd-Frank. The law requires the commission’s staff for the first time to oversee swaps, a type of derivative. The industry is seven times the size of the futures business now under its jurisdiction, Mr. Gensler said. "With $202 million, we can grow moderately," he said. But "we need more resources to protect the public and oversee the swaps market."
After the budget increases, regulators ended a yearlong hiring freeze. But both agencies say they are reluctant to significantly increase staffing for fear of having their budgets cut in October. "Please keep in mind that this round of hiring will focus on the agency’s very highest priorities, and many divisions/offices may receive approval for very few, if any, of their priorities at this time," the internal S.E.C. memo said. The memo further instructed officials to compile a list of the "top 10 priorities for hiring," which will then be reviewed on a "case-by-case basis."
The agency said it had not been able to fill nearly 200 positions this year owing to budget constraints. The S.E.C. had five open spots for experts in complex trading and received about 1,000 applicants for the roles; it could afford to hire just one person. The agency also lacks money to adequately train the enforcement lawyers already on staff, Mr. Khuzami said. Some lawyers who wanted to attain their brokerage licenses to better understand the industry had to put off prep classes.
"I don’t think people realize how serious the problem is and how serious the consequences are," said Harvey Pitt, who was chairman of the S.E.C. from 2001 to 2003. The regulators, for instance, have had to slow down the adoption of Dodd-Frank rules. The S.E.C. has put off creating several offices mandated by the law, including a bureau that will oversee the credit rating agencies and a special office of "women and minority inclusion."
The commodities agency, which planned to complete its 50 new rules by July, is now hoping to finish by early fall. Once the rules are complete, the agency will not have the funds to enforce them, Mr. Gensler said. Some 200 firms registering with the commission as swaps dealers may have to wait months for the agency to process their applications — unless it can hire several new employees in the department.
Regulators fear that Congress will soon slash their budgets, which could send the agencies scrambling to cut costs again — much as they did in recent months amid the threat of a government shutdown. Until recently, employees from the commission were instructed not to order certain office supplies — items like three-hole punches and heavy-duty staplers. The ban was lifted after the new budget was instituted.
Some regulators were also paying for their own travel. When Mr. Gensler, a former Goldman Sachs executive, headed to Brussels to help the European Parliament create new derivatives rules, he paid out of his own pocket. Another commissioner from the commodities agency who attended a conference in Boca Raton, Fla., paid for a night at the Sheraton using his family’s promotional points. Mr. Gensler attended via a videoconference.
Goldman Sachs lobbying hard to weaken Volcker rule
by Lauren Tara LaCapra - Reuters
Goldman on track to break its 2010 lobbying spending record
Goldman Sachs Group Inc. has just a few more months to put its stamp on the Volcker rule, and it is not wasting any time.
The rule, designed to limit banks from speculating with their own money, will cost Goldman at least $3.7 billion in annual revenue, by one estimate. And billions more could be at stake if regulations now being drawn up are extra-tough. The Volcker rule was one of the main topics on the agenda when Chief Executive Lloyd Blankfein met recently with U.S. Securities and Exchange Commission Chairman Mary Schapiro. Wall Street chiefs do not often lobby top regulators directly, but this issue is unusually important to Goldman.
"They're totally freaked out about Volcker," said a Goldman lobbyist who declined to speak on the record for fear of losing the contract. "People are working on that a lot, with agency staff, with lawmakers, you name it." Indeed, lobbying disclosures show Goldman representatives have been working both sides of the political aisle and meeting with top officials in the White House and regulatory agencies.
One big area of concern for Goldman is that regulators who are interpreting the Volcker rule will severely limit the amount of time a bank can hold a security or derivative. Positions held long term can be backstairs bets on markets. The Volcker rule is not the only element of financial reform that Goldman is resisting. Important issues on its lobbying docket also include derivatives reform, capital requirements and bonus restrictions. Other bank heads, including Morgan Stanley's James Gorman, have met Schapiro about the Volcker rule. But the provision is most important for Goldman, whose business is far more weighted towards trading, three lobbying sources said.
All Star Team
Goldman has hired an all-star team of lobbyists and former government officials, leveraging powerful connections to get its message across to regulatory and political leaders. "Before the crisis, Goldman was basically non-existent in Washington," said a former Congressional staffer who now works as a policy analyst at a Wall Street bank. "Post-crisis, Goldman is everywhere."
Under last year's Dodd-Frank law, regulators have until July to come up with specific rules for implementing the Volcker provision, meaning banks have limited time to try to shape the regulations. Adding to the complexity of lobbying efforts is the number of parties involved. The SEC and four other regulators are in the process of writing separate versions of the Volcker rule, which must then be reconciled and shaped into a single set of regulations. "Volcker is the subject of a very quiet, closed-door battle right now, not just between us and Wall Street, but among the agencies as well," said Bart Naylor, who has lobbied regulators for consumer-rights coalition Americans for Financial Reform.
The impending changes have already spurred Goldman to dismantle much of its "proprietary trading" operations, which trade for the bank's own account. These operations were some of the bank's most profitable, and their closure will erase about $3.7 billion in revenue and $1.5 billion in profit annually, according to an estimate by JPMorgan Cazenove analyst Kian Abouhossein. By Abouhossein's reckoning, the bank gets another $17 billion of revenue from "market making," or linking up buyers and sellers across global markets. That revenue could also be squeezed, depending how stringent the regulations are. Those figures represent about 65 percent of Goldman's annual revenue, according to Abouhossein's estimates.
Lawmakers say the Volcker rule will ensure that big banks are not gambling in markets, and that taxpayers will not be left on the hook when their bets backfire. Implementing the Volcker rule will be tricky, though. When a bank buys a security from a client, it is difficult for a regulator to determine whether the bank is serving the client or betting on the market itself. Limiting holding periods could be a simple way to ensure that banks are not making secret bets under the guise of helping clients.
Goldman argues that holding on to securities for a long period of time can be a crucial part of trading on behalf of customers because assets trade infrequently in some markets. A substantial amount of the securities that Goldman trades seems to fall into the longer-term category. In a February presentation, Goldman said it held about a third of the securities and listed derivatives on its trading books for three months or more, and 8 percent for more than a year. The bank did not disclose how long it holds unlisted derivatives positions, where it also has significant exposure.
Goldman is also advocating that regulators exclude currency contracts from the Volcker rule, in addition to Treasury bills and interest-rate swaps, which were excluded in the law. "They definitely don't want their entire book to be micro-managed by the SEC," said a regulatory consultant who once worked at Goldman and is familiar with its lobbying efforts. "They want as much -- I wouldn't say self-policing -- but as much flexibility as possible."
In the years following the crisis, Washington has been reshaping the financial industry in an effort to prevent another collapse. Goldman has in turn been trying to shape the legislative and regulatory process. The intensity of its efforts is evident in at least one concrete way: the amount of money it is spending on lobbying. That figure totaled $1.32 million in the first quarter of 2011. That's 15 percent higher than the same period a year ago, putting the bank on course to break its annual record for lobbying expenditure of $4.61 million, set in 2010.
"They're a big and powerful company with a lot riding on financial reform," said Dave Levinthal, editor of OpenSecrets.org, which tracks lobbying and campaign spending. "When monumental legislation like Wall Street reform gets passed, it's not only about the legislation when it's coursing through Congress, but how it's being implemented."
For Wall Street, where a bank can earn billions of dollars a year, a $5 million lobbying budget may seem paltry. But in Washington it's a lot of money. And relative to revenue, Goldman's spending is exponentially higher than that of its competitors. The bank has hired an all-star stable of Washington lobbying heavyweights. Michael Paese, former deputy staff director for the U.S. House Financial Services Committee, heads its internal lobbying group. His team includes former staffers from the U.S. Senate Banking Committee, the White House and regulatory agencies.
Outside of its own payroll, Goldman also has several high-profile legislative veterans working on its behalf in Washington, hailing from both sides of the political aisle. Among them are former Republican lawmakers Trent Lott and John Breaux and former Democratic House Majority Leader Dick Gephardt. It is common for large companies to seek influence in government, but old hands in Washington say Goldman stands out both in its wide network of high-level contacts and its ability to leverage those relationships to its advantage.
"The individuals at Goldman have been incredibly powerful over time," says Hillary Sale, a law professor at Washington University in St. Louis who specializes in Wall Street regulation. "When you're a consumer, it gives you the creeps thinking about that kind of influence over regulation. But from the bank's side, it's a perfectly smart strategy."
U.S. Agencies Probing Senate Goldman Sachs Findings After Formal Referral
by Phil Mattingly, Robert Schmidt and Justin Blum - Bloomberg
U.S. senators formally referred to the Justice Department and the Securities and Exchange Commission an investigative report that found Goldman Sachs Group Inc. misled clients about mortgage-linked securities.
Senators Carl Levin of Michigan, the Democratic chairman of the Permanent Subcommittee on Investigations, Tom Coburn of Oklahoma, the senior Republican, signed a letter asking the agencies to examine the panel’s report, Levin said in an interview yesterday. The results of the investigation, made public by the committee April 13, lay much of the blame for the credit crisis on Wall Street banks that earned billions by enticing clients to buy the risky bond deals. "If something comes up that needs to be reviewed by some agency, it gets referred," said Levin. "That’s the way we do it."
The scrutiny is a setback for Goldman Sachs, which hired lawyers, lobbyists and public relations specialists to monitor the two-year Senate probe and tamp down any controversy that arose from the subcommittee’s conclusions. Levin said in the interview that the referral sends the entire report, rather than specific facts, to the agencies. The Senate inquiry also examined the role of credit-rating firms in the meltdown, lax oversight by regulators and the decline in lending standards at banks including Washington Mutual Inc. that fueled the mortgage bubble.
Top of List
A formal referral from the Senate is "much more than a symbolic gesture" because it would prompt an agency to put the matter "at the top of its list," said Robert Hillman, a professor at the University of California, Davis, School of Law. For Goldman Sachs, "the question is how much pain they’re going to have to endure with the public spotlight for these revelations, and that depends in part how long the government’s willing to drag this out," said James Cox, a securities law professor at Duke University School of Law.
Still, Cox said he is "very skeptical" that the examinations by the agencies will ultimately lead to new claims against Goldman Sachs, which last year paid $550 million to settle SEC claims related to its marketing of the complex securities known as collateralized debt obligations. Attorney General Eric Holder, testifying before the House Judiciary Committee yesterday, confirmed that his department is scrutinizing the report. Two people briefed on the matter confirmed that the SEC enforcement division is also studying it.
Holder, in his comments, didn’t offer any specifics though he did single out the New York-based bank in his remarks. "The department is looking right now at the report prepared by Senator Levin’s subcommittee that deals with Goldman Sachs," Holder said. When the report was released, Levin said he wanted the Justice Department and the SEC to examine whether Goldman Sachs violated the law by misleading clients who bought CDOs without knowing the firm would benefit if they fell in value.
Levin also said at the time that federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chairman and Chief Executive Officer Lloyd Blankfein and other current and former employees who testified to Congress last year. Levin said they denied under oath that Goldman Sachs took a financial position against the mortgage market solely for its own profit, statements the senator said were untrue.
‘Truthful and Accurate’
When the report was released, Goldman Sachs said it never misled anyone about its activities. "The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report," Goldman Sachs spokesman Lucas van Praag said. David Wells, a spokesman for Goldman Sachs, declined to make any additional comment yesterday. The company’s shares advanced 57 cents to $151.87 at 4:01 p.m. in New York Stock Exchange composite trading.
While the panel levied its harshest criticism at Goldman Sachs, it also accused Deutsche Bank AG of selling collateralized debt obligations backed by risky loans that the bank’s own traders believed were likely to lose value. Deutsche Bank spokeswoman Michele Allison said at the time: "As the PSI report correctly states, there were divergent views within the bank about the U.S. housing market. Moreover, the bank’s views were fully communicated to the market through research reports, industry events, trading desk commentary and press coverage. Despite the bearish views held by some, Deutsche Bank was long the housing market and endured significant losses."
Separately yesterday, the Justice Department sued Deutsche Bank and one of its mortgage units for more than $1 billion for allegedly lying to qualify thousands of risky mortgages for insurance by the Federal Housing Administration. The bank said the claims were "unreasonable and unfair." Goldman Sachs’s settlement with the SEC last year resolved claims that it failed to disclose that hedge fund Paulson & Co was betting against, and influenced the selection of, CDOs the company was packaging and selling.
The Senate report reveals details of four Goldman Sachs CDOs. One was named Abacus, the CDO at the center of the SEC civil claim that led to the bank’s settlement last year. Others were Timberwolf, Anderson and Hudson.
E-mails and Documents
According to the people briefed on the SEC’s review of the Senate report, who spoke on condition of anonymity because the matter isn’t public, investigators at the agency will scrutinize interviews, e-mails and other confidential documents that surfaced in the inquiry. While much of that evidence was seen by the SEC before its 2010 settlement, some is new, the people said.
Hillman, the law professor, said that given Goldman Sachs’s earlier settlement, the SEC or Justice Department would likely have a high bar for bringing a case against the bank. In resolving that case, Goldman Sachs admitted no wrongdoing and said in a regulatory filing it "understands that the SEC staff also has completed a review of a number of other Goldman mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman or any of its employees."
The SEC’s enforcement division is "certainly free to revisit that, but the odds are that it won’t unless something very new comes out in the way of facts," said Hillman. "The SEC has probably taken its major step with Goldman already."
U.S. May Pursue More Lenders After Suing Deutsche Bank on Loans
by Dawn Kopecki, Hugh Son and David Voreacos - Bloomberg
The U.S. Department of Justice may pursue claims against other lenders after suing Deutsche Bank AG for more than $1 billion, alleging the firm lied while arranging federal insurance on faulty mortgages.
The Housing and Urban Development Department is examining loans insured through the Federal Housing Administration and may refer additional cases to the Justice Department, HUD’s general counsel, Helen Kanovsky, said yesterday in an interview. "We go where the evidence takes us, and if it takes us to the larger players on Wall Street, so be it," Kanovsky said. U.S. Attorney Preet Bharara said it wouldn’t be a "fantastical stretch" for prosecutors to scrutinize other lenders.
Deutsche Bank’s MortgageIT unit falsely certified that it was examining default risks while qualifying loans for FHA insurance, according to the government’s complaint. HUD has already borne $386 million in claims and costs, and has yet to make payments on defaulted loans with principal balances of $888 million. Some mortgages stem from the housing boom, when the industry eased lending standards, fueling more than $2 trillion in credit losses and writedowns.
"Nobody was doing any mortgage due diligence whatsoever," said Christopher Thornberg, principal at Beacon Economics LLC in Los Angeles. He said the government may have brought the claim against Deutsche Bank as a "test case" before targeting other banks or seeking to force settlements. "The only question is, ‘Who’s next?’" Thornberg said. Kanovsky and Bharara declined to identify lenders that might face claims.
"We could see another potential big negative for the industry out of this," said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst with FBR Capital Markets in Arlington, Virginia. "It’s going to be a continued earnings drag on the industry."
Deutsche Bank said it will "vigorously" fight the government’s allegations. "We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair" Renee Calabro, a spokeswoman for the Frankfurt-based company, said by e-mail. "Close to 90 percent of the activity covered by the DOJ allegations happened prior to Deutsche Bank’s acquisition of MortgageIT."
Countrywide Financial Corp. was the biggest originator of FHA-insured loans during the agency’s fiscal year ending Sept. 30, 2008, as housing-market losses prompted the collapse of financial firms including Bear Stearns Cos. and Lehman Brothers Holdings Inc. The lender had $10.8 billion in endorsed mortgages, according to FHA data.
Wells Fargo & Co. was the second-largest, with $9.8 billion in loans, and National City Corp. was third with $3.6 billion. Bank of America Corp., which acquired Countrywide in 2008, was No. 4 with $3.2 billion. Jerry Dubrowski of Bank of America, Veronica Clemons of Wells Fargo and Fred Solomon of PNC Financial Services Group Inc., which acquired National City in 2009, declined to comment.
Deutsche Bank and MortgageIT concealed problem loans through "egregious" violations of HUD rules for analyzing the income and creditworthiness of borrowers, according to the Justice Department’s complaint filed yesterday in Manhattan federal court. MortgageIT endorsed more than 39,000 loans for FHA insurance after 1999, making them "highly marketable for resale," the U.S. said. Of those, 12,500 defaulted. Deutsche Bank paid $429 million in January 2007 to buy MortgageIT. Bharara said it was closed in 2009.
"While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction, and the government has paid hundreds of millions of dollars in insurance claims, with hundreds of millions of dollars more expected to be paid in the future," according to the complaint. The Justice Department didn’t file criminal charges or identify employees. "Not every lie is a crime," Bharara said.
Deutsche Bank fell as much as 3.7 percent in Frankfurt trading yesterday. The shares for the day declined 2.1 percent to 43.25 euros. As of February, HUD had insurance claims and related costs arising from 3,100 loans, according to the complaint. Another 7,500 mortgages defaulted without HUD making any payments yet, according to the complaint. The FHA paid $15.3 billion in claims in the 12 months ended March 31, according to payout records.
The U.S. sued under the False Claims Act, which means it can seek triple damages and penalties of more than $1 billion. It also claims breach of fiduciary duty, negligence, gross negligence and indemnification. It seeks compensatory damages for past and future payments, as well as punitive damages. "It’s good to have people cracking down," David H. Stevens, president of the Mortgage Bankers Association, said in an interview. Stevens, who headed the FHA from mid-2009 until March and fined "hundreds" of lenders for violations during his term, said he had no personal knowledge about the case.
Deutsche Bank Sued by L.A. for Evicting Low-Income Tenants
by Edvard Pettersson - Bloomberg
Deutsche Bank AG was sued by the City of Los Angeles for allegedly failing to maintain foreclosed properties and illegally evicting low-income tenants.
The lawsuit comes a day after the U.S. Department of Justice sued the German bank for more than $1 billion, claiming it lied while arranging federal insurance on faulty mortgages. Deutsche Bank’s MortgageIT unit falsely certified that it was examining default risks while qualifying loans for Federal Housing Administration insurance, according to the government.
Renee Calabro, a spokeswoman for the Frankfurt-based bank, said the complaint filed by the Los Angeles City Attorney is "against the wrong party," according to an e-mailed statement. "Loan servicers, and not Deutsche Bank as trustee, are contractually responsible for both the maintenance of foreclosed properties and any actions taken with respect to tenants of foreclosed properties." Calabro yesterday called the federal government’s lawsuit "unreasonable and unfair" and said the company would fight the litigation.
Deutsche Bank and MortgageIT concealed problem loans through "egregious" violations of federal rules for analyzing the income and creditworthiness of borrowers, the Justice Department said in a complaint filed yesterday in Manhattan federal court. MortgageIT endorsed more than 39,000 loans for FHA insurance after 1999, making them "highly marketable for resale," the U.S. said. Of those, 12,500 defaulted.
Portugal agrees asset sale in return for €78 billion bail-out
by Louise Armitstead - Telegraph
Portugal has agreed to sell off the government's stakes in some of its best-known companies in exchange for a €78bn (£70bn) bail-out provided by the European Union and International Monetary Fund.
Stakes in companies including TAP, the national airline; Galp, the oil giant; EDP, the utility firm; and REN, the electricity grid operator, will all be sold over the next two years. BPN, the failed Portuguese bank, will be sold with no minimum price set by the end of July. The conditions of the package, that were revealed on Wednesday following the agreement announced late on Tuesday night by José Sócrates, Portugal's caretaker prime minister, also focused on rescuing the banks.
About €12bn of the total €78bn must be pumped into the banking sector and to boost core tier one capital levels from 8pc to at least 10pc over the next 18 months. The EU and IMF will provide the funds in the form of loans which will run until 2013, after which Portugal is expected return to markets to finance itself. The interest rate on the loans will be set by European finance ministers at a meeting within the next couple of weeks.
Portugal also agreed to:
- Cut the budget deficit faster than it had previously outlined – from 3pc to 4.5pc in 2012, and to from 2pc to 3pc in 2013.
- Freeze public sector wages and pensions until the end of 2013 and reduce the number of civil servants by 1pc in both 2012 and 2013.
- Freeze all existing tax benefits and incentives and cut some. Imposing a cap on health, education and housing allowances and on personal income tax is expected to raise about €150m in 2012 and €175m 2013.
Portuguese bond yields fell to their lowest level for five months amid general relief at the announcement of the bail-out. The cost of insuring Portuguese sovereign debt against default also fell. Five-year credit default swaps were down 25 basis points at 6.2pc , according to data monitor Markit. However, the yield on 10-year Portuguese bonds remaining above 10pc.
Traders and analysts were still concerned about the precise terms of the deal and the possibility of it being stalled by the political process. The bail-out has to win cross-party support in Portugal as well as approval by other European countries, and it has already run into opposition from Finland.
Marie Diron, an economic adviser at Ernst & Young said: "Overall, the package is unlikely to change market sentiment much. Debt restructuring still looks likely, especially if it is implemented in Greece." Michael Leister of WestLB told Reuters: "Even though we have clarity regarding the amount, the more interesting detail will be the interest rate that Portugal will have to pay on the loans so we are still waiting for this."
Ireland state pension fund sells off investments to help cover bailout costs
by Charlie Weston - Independent.ie
The National Pensions Reserve Fund (NPRF) was forced to sell some of its investments in the past few months to help cover the costs of the €85bn bailout, it emerged yesterday. The pension fund reported it held only €5.3bn in its so-called discretionary portfolio at the end of April. This was down from €9.8bn in assets a month earlier, as it liquidated investments to help cover the cost of bailing out the banks.
Up to €10bn is to be put up by the pension fund as part of the bailout deal agreed with the European Union and IMF last November. The NPRF also said the value of its so-called directed portfolio, which includes €7.9bn the Government has provided in aid to AIB and Bank of Ireland in return for shares in the lenders, was €13.4bn at the end of March. There was €5.5bn in cash, representing liquidated investments to help the State meet its contribution to the EU/IMF bailout. The total fund size at March 31 was €23.2bn.
A return of 0.3pc was earned by the discretionary portfolio in the first three months of the year, but the total fund had a return of minus 5.3pc over the quarter. On an annualised basis, the total fund return was 1.3pc. The pension fund was set up almost a decade ago to help fund part of the country's public sector pension liabilities from 2025. However, the crisis with the banks means the fund is now being used to cover some of the country's sovereign and banking debts.
Until the start of the crisis, it was financed by an annual payment provided by the Government that was equivalent to 1pc of the gross national product. The total cost to the Government of rescuing its banks may increase to over €70bn, the Central Bank stress test results in March showed.
Ireland slashes growth projections
by Ronald D. Orol - MarketWatch
Revision may impact Ireland’s ability to reduce deficit
Ireland cut its growth projections by more than half after reporting weaker than expected output in the first quarter, according to a report Saturday. The cut was expected, according to a report by the Financial Times, because the International Monetary Fund cut its growth forecasts in April. However, the revision also means that forecasts for Ireland’s ability to reduce its deficit will also have to be adjusted.
The projection adjustment comes after the country received a nearly 80 billion euro ($101.2 billion) bailout in November from the European Union and the IMF. According to the Financial Times, Ireland cut its projections for gross domestic product from 1.75% in December to 0.75 % for 2011 and from 3.25 % to 2.5 % for 2012.
The projections come after European Commission, the European Central Bank and the IMF said April 15 that Ireland’s efforts to shore up its crippled banking sector, fix its public finances and restore the economy to sustainable growth are "on track, but challenges remain and steadfast policy implementation will be key."
Banks accused of talking up Greek debt fears
by Erik Kirschbaum - Reuters
The head of Europe's rescue fund was quoted on Sunday as telling a German newspaper that he believes banks are encouraging talk of a possible Greek debt restructuring because they are hoping to earn large fees.
Klaus Regling, the head of the European Financial Stability Facility (EFSF), told the Handelsblatt business daily in an advance released on Sunday that he sensed banks were thinking of their own profits in fuelling a discussion about restructuring. "In the 1980s and 1990s banks cashed in very high fees for the restructuring of sovereign debt in Latin America and Asia," Regling was quoted saying. "They would like to do that again in Europe."
Regling said on the one hand a partial relief for Greece's debts would hit some banks' own balance sheets as lenders. But those losses would be "limited" while the fees involved with a restructuring would be "very promising." The Handelsblatt quoted sources as saying European Central Bank president Jean-Claude Trichet also believes banks are deliberately talking up the possibility of a Greek debt restructuring. The newspaper said Trichet had warned euro zone finance ministers explicitly against allowing the banks to influence them.
Mounting fears that Greece will have to restructure a debt mountain expected to reach 340 billion euros this year, roughly one and a half times its output, have pummelled Greek bonds, driving yield spreads over German bunds to new record highs. European Central Bank Executive Board members Juergen Stark and Lorenzo Bini-Smaghi have both warned against such a step, saying it would hammer the Greek banking system and damage Europe's credibility.
Spain’s Illegal Homes Overshadow Minister’s U.K. Sales Pitch
by Sharon Smyth - Bloomberg
Jose Blanco, Spain’s development minister, will try to persuade U.K. investors today to purchase unsold vacation homes in a country where more than 50,000 home buyers have lost the legal rights to their properties.
Blanco, 49, plans to promote the "strength" of Spain’s economy, the "transparency" of its housing market, and the "soundness" of its property legislation, according to an April 14 statement from the Ministry of Transport and Development. He will then deliver the same message during presentations in France, Germany, Switzerland, the Netherlands and Russia.
The campaign follows renewed calls from European Parliament members including Marta Andreasen, Roger Helmer and Michael Cashman to freeze some of the funds the European Union gives Spain until it resolves legal shortcomings that have stripped once-legal buyers of ownership rights. A non-binding 2009 report by the parliament’s petitions committee criticized the country for applying restrictions on coastal property retroactively and showing "judicial laxity" toward corruption and speculation.
"It’s inconceivable that anyone would want to invest in property in a country that has shown itself to be lawless when it comes to property rights," Andreasen, a member of the U.K. Independence Party, said in a telephone interview. "Andalusia has 300,000 illegal homes alone. If we extrapolate that to the rest of Spain, a million homes is a conservative number."
Andalusia, a popular tourist destination in southern Spain, is one of the worst affected areas, according to the committee’s report. A spokesman for Andalusia’s regional government, who asked not to be cited by name, said an inventory of illegal properties in the region is being compiled. So far, 25,000 have been identified, he said. Marisa del Valle, a spokeswoman for the public prosecutor responsible for cases involving town planning and the environment, said there’s no way of knowing how many homes have been built illegally in Spain. Eva Santiago, a spokeswoman for the transport and development ministry, said her department doesn’t have an estimate.
About 50,000 owners of beachside properties have lost rights to their homes after Spain’s coastal law was amended and applied retroactively, according to PNALC, a group representing owners affected by the coastal law. As many as 500,000 could eventually be affected by the law, the organization said. Maria Jose Cejas, a spokeswoman for the Ministry for the Environment, said that fewer than 2,000 home owners have lost their property rights under the new coastal law.
British nationals account for about 31 percent of all foreign-owned homes in Spain, the transport and development ministry estimates. Each of Spain’s 8,116 town halls has the authority to make planning decisions and issue building permits with little oversight from the regional or national governments. At the peak of the housing market in 2007, municipal governments collected 40 billion euros ($59 billion) from real estate activities such as building permits and land sales in that year alone, according to Jose Antonio Perez, a professor who teaches about real estate at the Instituto de Practica Empresarial in Malaga.
As property prices more than doubled in the 12 years to 2007, some local officials found unlawful ways of profiting from home construction. There are now 340 cases under investigation of officials and politicians suspected of crimes, according to Jesus Sanchez Lambas, head of the Spanish office of Transparency International, an organization that documents corruption. In some cases, developers were given permission to build on unclassified land or were allowed to proceed without the appropriate permits, in return for cash or other incentives.
A spokesman for the Spanish Federation of Municipalities and Provinces, who declined to be named in line with policy, said "isolated cases of irregularities" don’t detract from the work carried out by local government officials. The federation has a good governance code that aims to improve transparency and fight corruption, he said. The national government set up a website in 2009 to enable buyers to see the development plans of more than 900 cities to check whether a property has been built within legally approved areas, Santiago said. It has also increased the number of investigators focusing on real estate corruption and imposed harsher penalties for civil servants who break the law.
Leo Levett-Smith, a 68-year-old retired traffic policeman from Cheshire, England, and his wife were told that the three- bedroom retirement home they bought in 2005 in Catral near Alicante for 220,000 euros was illegal three years after the transaction was completed. The couple made the purchase through a registered real estate broker, hired a Spanish notary to oversee the deal and got a 130,000-euro mortgage from a Spanish savings bank. They also paid 300 euros for an independent survey on the property.
"We left no legal stone unturned and paid property tax to the local government to buy the place," Levett-Smith said. "Three years later, I was told it had been built without a sufficient permit. I’ve spent three years living in a legal limbo and the Spanish authorities have done nothing to address the issue."
Spain built 675,000 homes a year from 1997 to 2006, more than France, Germany and the U.K. combined, according to a report by a unit of Spanish savings bank Cajamar. Spanish residential property prices fell in real terms for the first time in more than a decade during the first quarter of 2008 and have dropped 15 percent since, according to data from the Transport and Development Ministry. Prices in Ireland fell 36 percent and U.S. prices 27 percent from their highs. In England and Wales, they fell 16.8 percent from the November 2007 peak to the trough in April 2009.
The collapse of the housing boom beginning in 2008 left Spanish banks with 320 billion euros worth of property assets and loans to the real estate and construction industries after they were forced to take on properties and land in return for canceling debt to bankrupt developers, according to the Bank of Spain. Over the past two years, more than 2,600 real estate and construction companies went out of business, according to credit insurer Credito y Caucion, pushing unemployment to 21.3 percent, the euro region’s highest.
The country has a surplus of more than 1 million empty homes, both new and existing, according to RR de Acuna & Asociados, a Madrid-based research company. The Development Ministry estimated in 2009 that there were 680,000 newly built and unsold homes on the market. More current statistics aren’t available, according to a ministry spokeswoman.
In 1988, the country increased restrictions on coastal development and applied the law retroactively to properties that were already built. Owners of those homes can apply to extend their stay in the property for as much as 60 years, though they can’t sell it or pass it on to children. The concession can be rescinded at anytime by the authorities if deemed to be in the public interest.
Cliff Carter, a 62-year-old former engineer from northern England and his Spanish wife, Maria, a retired teacher, say investors should steer clear of Spanish property, after they lost the rights to a 200 square-meter home on the coast of Valencia that has been owned by their family for 40 years. The Carters sold their home in the U.K. in 2003 to retire to Spain assuming they had equity in the Spanish house, which was built in 1970 and handed down by Maria’s late mother in 1998. In 2008, they were informed that it had been awarded to the public domain after amended coastal law shifted the boundaries of where development was banned.
"We’ve been awarded a concession to live here for 30 years and then they throw us out," Carter said in an interview. "I can’t sell the property and my children can’t inherit it." Diana Wallis, vice president of the European Parliament, said that no member state should be allowed to apply laws affecting property rights retroactively or arbitrarily. "I’d like to ask Mr. Blanco how he thinks that anyone can buy property in Spain and have peace of mind," Wallis said. "On the basis of what I have seen, it’s a minefield and frankly I would say ‘do not touch.’"
Japan's Auto Sales Fall 51% in April
by Yoshio Takahashi - Wall Street Journal
New auto sales in Japan posted their biggest-ever drop in April, as a parts shortage caused by the March 11 earthquake and tsunami cut into production of vehicles and reduced supplies of new vehicles to dealerships, the Japan Automobile Dealers Association said Monday. Sales of new cars, trucks and buses tanked 51% from a year earlier in April to 108,824 vehicles—the lowest-ever monthly volume, the association said. The figures don't include sales of mini vehicles with engine capacities of 660 cubic centimeters or less.
The April drop was the deepest since the association started compiling data in 1968, eclipsing the 45.1% fall in May 1974, when an oil supply crunch crimped sales. The fall was sharper than the 37% tumble in March, as a disruption in parts procurement after the disaster weighed on the whole month of April.
Sales of Toyota Motor Corp. vehicles dropped 68.7% to 35,557 vehicles in April, with those of the luxury Lexus brand down 44.7% at 1,656. Nissan Motor Co. vehicle sales tumbled 37.2% to 17,413, while Honda Motor Co.'s sales sagged 48.5% to 18,923.
The magnitude 9 quake and tsunami hit northeastern Japan where about 500 suppliers have factories, disrupting the auto parts supply chain. Japan's top three car makers resumed domestic production by mid-April, but they operated production lines at only half of initially planned volumes. Moreover, sales in the home market stumbled, with no sign of an immediate sharp rebound in domestic sales as makers plan to continue lowered production over the next several months.
The murky outlook makes it hard for car makers to draft earnings projections for the current fiscal year that started in April. Honda and some car makers reported earnings for the January-March quarter last week, but failed to release forecasts for this fiscal year through March as it is too early to gauge financial impact from the production disruptions, they said. Toyota and Nissan will report earnings Wednesday and Thursday next week.
Car makers are only beginning to assess their prospects for production for the rest of the year. Some makers recently outlined likely schedules for the restart of full output. "Our all production lines and all models will be back to normal in November to December," Toyota President Akio Toyoda said at a news conference late last month. Honda said last Thursday it expects to be back to production levels planned before the March 11 earthquake by the end of the year.
Among smaller Japanese car makers, the top executives of Mazda Motor Corp. and Mitsubishi Motors Corp. said when they released their earnings last week that domestic production will return to usual in the fiscal second half through March. Mazda's sales sank 38.8% to 6,598 vehicles in April. Mitsubishi Motors' sales were down 20.1% to 3,515, the association said.
Silver loses shine in 20% tumble
by Louise Armitstead - Telegraph
The price of silver futures tumbled again on Wednesday, taking total losses to more than 20pc in a week amid fears that the precious metal represented a bubble bursting.
Silver – which has suffered its biggest three-day fall in 28 years – plunged from a peak of almost $50 an ounce last Thursday to a low last night of below $40. In recent weeks, experts have warned that a dangerous bubble was forming in the silver markets. The price has soared nearly 175pc between August and the end of last week. Gold, which has also risen to record highs, is up 28pc over the same period.
Traders said a raft of hedge funds and other big speculators in the silver markets decided to take their profits and sold large positions last week. The spike in the trading volumes is thought to have caused a panic in the markets which was then exacerbated by the four-day royal wedding holiday in London. The prolonged closure of the world's biggest precious metal market caused liquidity problems at a bad moment. Also over the weekend, Comex, the American exchange for silver futures, ramped up margin requirements.
Super Rich love to bet on commodity inflation
by Paul B. Farrell - MarketWatch
Nobody wants to hear the truth. Not Big Oil. Not Big Ag. Not Wall Street. Not the Super Rich. Not China’s billionaires. Not Washington insiders on the take. They do not want to hear the relentless warnings of a Cassandra Chicken Little Crying Wolf about the "End of the World as We Know It." Forget the truth. In their minds all that matters is that they’re getting more powerful and richer and richer.
Nothing else matters in their upside-down world: Wealth increases at the top. Global poverty balloons everywhere else where living on $2 a day is it for a third of the world. Easy pickings. The rich only see more opportunities to make more money when they read in Foreign Policy Journal that "in the United States, when world wheat prices rise by 75%, as they have over the last year, it means the difference between a $2 loaf of bread and a loaf costing maybe $2.10," warns Lester Brown in "The New Geopolitics of Food … Inside a Hungry Planet."
But if "you live in New Delhi, those skyrocketing costs really matter: A doubling in the world price of wheat actually means that the wheat you carry home from the market to hand-grind into flour for chapatis costs twice as much. And the same is true with rice. If the world price of rice doubles, so does the price of rice in your neighborhood market in Jakarta. And so does the cost of the bowl of boiled rice on an Indonesian family’s dinner table.
New economics of commodity inflation and resource scarcity
Welcome to the new food economics of 2011: Prices are climbing, but the impact is not being felt equally at all. For Americans, who spend less than one-tenth of their income in the supermarket, the soaring food prices we’ve seen so far this year are an annoyance, not a calamity. But for the planet’s poorest 2 billion people, who spend 50% to 70% of their income on food, these soaring prices may mean going from two meals a day to one.
Those who are barely hanging on to the lower rungs of the global economic ladder risk losing their grip entirely. This can contribute — and it has — to revolutions and upheaval. Yes, it will get worse, far worse. Global population is sky-rocketing, tripling from 3 billion to 9 billion between 1950 and 2050, as the Super Rich at the top will get richer, as poverty spreads, as more and more go to bed hungry in emerging and developing economies. And revolutions and upheaval mean increased global wars over depleting hard assets.
In the upside-down world view the Super Rich will soon have to deal more than that extra dime for a loaf of Walmart bread. The cost of America’s denial will be trillions as the threat of WWIII grows exponentially. Remember the Pentagon forecast: Global population growth leads to "massive droughts, turning farmland into dust bowls and forests to ashes … By 2020 there is little doubt that something drastic is happening ... an old pattern could emerge; warfare defining human life." As this threat of WWIII increases, America is the major target for many emerging and developing economies.
Commodity Inflation Revolution ends America as a super power
Jeremy Grantham is a Cassandra, warning, crying wolf. Has been for many years. His firm manages $100 billion. He warned of the 2008 meltdown 18 months in advance. While Grantham’s latest Quarterly Letter offers faint signs of hope, the truth is, he’s predicting a no-win scenario for America in "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever."
He opens with a warning, "The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment." But sadly, he’s already told us that our leaders are turning a blind’s eye, can’t hear, won’t listen, till too late. Here’s his short history of America’s final decades, warnings about near-term time-bombs and some predictions of the end game.
1. Dawn of Civilization to 1800, the Industrial Revolution
Before about 1800 "our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population." Yes, for thousands of years population growth was constrained by the food supply.
2. New age of hydrocarbon energy created surplus wealth
Then "from about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress."
3. Explosion in global population, more bodies demanding more stuff
Thanks to new energy sources and surplus wealth, food supplies no longer limited our growth. By 1950 global population exploded four times from 800 million in 1800 to over 3 billion. And by 2007, just 50 years later, population shot past 6 billion. Then in just four short years, by 2011, another billion were added. The United Nations projects Earth’s population may stabilize in 2050, with perhaps as many as 10 billion.
4. New age of commodity destruction, scarce resources get scarcer
Grantham warns: "The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water."
5. Commodities and food supply rapidly become global constraint
"Despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat." Population grows over 1% annually: "There is little safety margin."
6. Compound economic growth policies prove totally unsustainable
Warning: Grantham’s equation has deadly saboteurs: All global economies are driven by the principle of economic growth: Population grows, prosperity grows, wealth grows, everybody happy. Bad economics: "If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth." Quality growth? Yes, but it will not slow quantity growth. Why? As developing economies add more people, they all want their version of the "American dream." Just look at China in the past decade. The drive for "more" is unstoppable
7. Survivability of world handicapped by short-term thinking leaders
Warning: The "problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans." Grantham’s talking about political, financial and business leaders whose brains cannot see the long term. They make decisions based on quarterly earnings, annual bonuses, the next election, or the next billion they can stash in a Swiss bank. It’s never enough.
8. Commodity price inflation signals a historic paradigm shift
Warning: The market "is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II."
9. You’re in the 21st Century Commodities Inflation Revolution
Grantham’s research staff look at the statistics and conclude that "most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed — that there is in fact a paradigm shift — perhaps the most important economic event since the Industrial Revolution." But our leaders are missing the signal.
10. Commodity investments risky: climate, demand, volatility, inflation
The Pentagon’s already warned us of the end game, WWIII. Grantham explains that commodity prices are tied to climate and "climate change is associated with weather instability," which may improve in the short term, but long term will keep driving commodity inflation with huge risks: "Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year … and by the possibility that China may stumble." And so will the whole world.
11. Commodity investors gambling in radically new global casino
Grantham warns: "From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries." Get it? Behind all the latest warnings to "sell bonds, sell domestic stocks, buy emerging markets" is a frantic inability to see this "paradigm shift," a permanent "New Normal" of commodity scarcity and inflation that’s inexorably linked to the world’s relentless population explosion, adding another three billion in the next brief generation.
12. Myopic leaders cannot see … will not lead … till too late
Grantham is once again "the voice of one crying in the wilderness," a Don Quixote pleading: America and the rest of the world need "to develop serious resource plans, particularly energy policies. There is little time to waste." Little time. But we know he won’t be heard, till too late … just as his 2007 early warnings of a global real estate crash were ignored. Tragically, the world didn’t listen to Grantham back then. And the odds are they won’t this time.
Prediction for 2011-2020: Price inflation in commodities will not only skyrocket higher than Sock Puppets in the 1990s dot-com era … not only soar higher than Countrywide’s 2008 subprime portfolio … the world’s insatiable growth will keep driving demand for nonrenewable resources, relentlessly pushing commodity inflation into the stratosphere.
Warning: the Global Super Rich not only have known this principle of "new normal" economics for a long time, they’re already spending trillions on deals to lock up and hoard long-term commodity futures. So ask yourself, can you really get rich off what’s left of the commodity crumbs falling off the Super Rich dinner table? Or is it too late?
Where is all that Fukushima radiation going, and why does it matter?
by Fairewinds Associates