"Washington, D.C.: Congressional hog caller. The Capitol Plaza reverberated with sounds of the barnyard today as Rep. Robert L. Mouton of Louisiana went into serious training for his coming hog-calling contest with Rep. Otha D. Wearin of Iowa. The contest, which will take place on the Capitol steps sometime in the near future, is the result of an argument between the two solons as to the abilities of the hog-yodelers from the respective states"
Unemployment numbers on the one hand, and home sales and prices on the other, are the by far most important trend indicators for the US economy. Without falling unemployment, in combination with rising home sales and prices, there can be no recovery. And a jobless recovery is no more real than a homeless one.
Trillions upon trillions in wealth, capital, earning potential, that belongs to our children and grandchildren, has served only to temporarily soften the deterioration in economic indicators. This has provided us with an entirely illusory picture, greatly helped along by politicians and media pundits, which serves to make people believe what they want so much to believe: that things have been, and are, getting better.
We can all understand that if you ignore the millions of Americans who drop out of what the government defines as the "looking for work" category, and that if millions of -often foreclosed- homes that sit empty are not put on the market, the indicators will look less detrimental. We understand this. Still, we all do follow the "polished" numbers, because they are the ones that make the headlines.
And if even the polished data start looking bad, there's never a shortage of pundits to tell us it's all just a temporary blip on the road to recovery. All we really need to do, goes their -often unspoken- message, is to look at the stock markets, which are doing just fine. Or the price of gold, copper, or food commodities.
But the largest investors in these items are the very financial institutions that have received your children's money to invest, play, and gamble with. They don't have to fess up their losses, say our invented-on-the-fly accounting "standards", but instead the house supplies them with more and new money, in order to keep the game going.
The house doesn’t want the game to stop, because the house is the game. The house isn't about to shut its doors, and its elected puppets aren't about to join the ranks of the unemployed, as long as access to the capital and earning potential of future generations is available.
That is where the financial crisis has long since become a political one. Right there. In the bankers, industrials and politicians' access to the -fast rising, re: the deficit- interest your children will have to pay on their labor. The Greeks, Spanish and Egyptians seem to understand this dynamic much better than do Americans, but then the PR industry in these countries is a lot less sophisticated than that in the US.
Still, this should be no excuse. It is glaringly obvious, so much so that nobody, when put to the question, will attempt to deny it: there can be no economic recovery with falling home prices and rising unemployment. There can be a period of confusion, especially when gargantuan amounts of public money are transferred to the private sector; indeed, we have witnessed such a period in the past two years.
Confusion sown by tax incentives for homebuyers, for instance, but most of all by manipulation of the data. By mortgage modification initiatives that are as dead in the water when they start as they turn out to be down the line. By job creation programs that strip down hourly wages and benefits until what's left is not even enough to feed and house an individual, let alone a family. By pushing millions of would be workers off the back of the employment truck, and hoping they’ll never be heard from again; even if they are, at least for now they don't show up in the stats anymore. And don't let's forget: there's always an election somewhere coming up that trumps the interests of those who will vote in it, and those who elect not to.
So where to from here? The BLS unemployment report on Friday was once again dismal. There was supposed to be a lot of growth in the job market that had long since been forecast by the usual suspects, but hasn't materialized. Temporary blip, says White House economist Austan Goolsbee. Just a bump in the road. Looks like the road is nothing but a bump. Even if the official U3 number went up "only" to 9.1%, and U6 even fell a notch, unemployment duration went up again, and that's a big one.
It’ll take many years for the labor market to get anywhere near "normal" numbers, and even then, and even IF it does, it will look nothing like what we have become used to over the past decades. The situation where we had good wages, and strong benefits, will never return, or at least not for decades. For that situation to occur, you need an economy with a solid manufacturing base, with near full employment, and with home prices that are available and affordable for Joe and Jane Main Street with their average salaries.
But homes have only been affordable for Joe and Jane off late because the Federal Reserve and the government pushed down interest rates and made huge amounts of credit available (re: Fannie and Freddie). Ironically, though, these policies pushed up home prices to levels where they were no longer affordable. And just as ironically, this means that Joe and Jane and all of their families and friends now owe trillions of dollars more to the banks than before Greenspan and Rubin and Summers et al. injected US society with financial steroids. All these every day Americans may not all realize it yet, but then, home prices are only down 33% so far. Just wait for the real plunge. It’ll come. Soon enough. Pending home sales came in down 11.6%, 27% for the year. Just follow the money. As it vanishes.
Where from here? Looking at all the week's awful stats, it should be clear that a return to business as usual, in case this wasn't clear yet, is out of the question. You need to find a way to make sure your elected leaders', and their financial leaders', fingers, no longer have access to your kids' cookie jars and piggy banks. That is pivotal. It's also the hardest part; you'll have to snatch it from their cold dead fingers, since it's the biggest prize out there to be had. An infinite claim on the future, which pays out today: the rewards of multiple generations worth of labor used to pay off the gambling debts of the past and present. There is nothing more perverse than that.
We will have to mark down all assets, including our homes, to their present market value. A value that, moreover, will go down enormously simply because we do the marking down. If we don't do it now, it will happen later anyway, but it will then occur beyond our control. Better to keep our hands on the pulse, no matter how painful the experience may be. And it's from that point that we will have to try and rebuild. It's not going to be fun, not by a long shot, but it'll be our own "not fun", not something contrived for us by psychopaths and perverse narcissists who care not whether we live or die.
Ilargi: Because of all the thoughts, trials and tribulations described above, as well as through the past 3.5 years of The Automatic Earth in its present form, Stoneleigh and I have decided that it's time to change things around here. Observing the shenanigans of the financial and political world inevitably turns to rubber necking and accident tourism, and we feel it's time to talk more about what comes after the present, what we can supply people with that can help them when what we are witnessing today snaps out of this suspended animation and starts its way down into the gorge for real.
We will continue to comment on the economy, but we will also add sections to our new site on for instance preparation, in all its diverse forms, from growing and preserving food to building homes and energy facilities to keeping your remaining wealth where it counts. In short, all that will serve to make people less dependent on the crumbling infrastructures they presently rely upon. We invite anyone who thinks they can contribute to contact us.
We’ll fill you in on the details as we go along. It may take a while longer to get all the pieces to fit into place, but they will be there. In order to make that happen, we do something today that we haven't done for a long time: launch a fund drive. People have been very generous with their donations in the past, and it's thanks to them that we have been able to do what we have done, and to contemplate doing just that, but more and better. In order to achieve this, we need a stable funding base; it is the only way we can make future -financial- commitments involved in everything a larger and more elaborate site requires.
We have been thinking about setting up a members sections at TAE for this purpose, and we may have to go that road at some point. However, if enough people sign up for recurring donations, which for members -if we would be forced to go that route- would be maybe $10 per month, we may not need to do this, which would be a relief: it's not really what we're about. We've set the goal for this Summer Fund Drive at $50,000. We know that may seem like a lot of money to some, but believe me, it's really not; not for what we have in mind.
There are several ways to support the Automatic Earth: One-time donations and recurring donations via Paypal, donations through other means, visits to our advertisers (that’s why they're there!), and clicking on the Amazon box with Stoneleigh’s book favorites in the left hand bar: if, for any Amazon purchase you make, not just those books, you go through their box at TAE, we get a percentage of what you purchase without any extra cost to you. That should be easy...
As I said, we will explain -much- more soon. First, here's Stoneleigh's own personal message for you:
Stoneleigh: This summer The Automatic Earth marks three and a half years of big picture commentary on finance, energy, the environment, resources, carrying capacity, geopolitics, the psychology of herding behaviour, networked systems, crisis preparedness and anything else we have considered to be relevant to helping people to navigate the tumultuous times we are poised to descend into. While there are many sources of information on single aspects of our predicament, there are few that attempt to truly tackle complexity and render it comprehensible. That is our chosen role and we see it as being of the utmost importance.
The consequences of ponzi finance on the global scale, the peaking of the energy supply that has been our lifeblood as a civilization, environmental degradation and ecological overshoot are set to manifest in our times, and we need to understand what is unfolding in order to minimize the impact on ourselves, our loved ones and our societies.
The Automatic Earth focuses first on finance for reasons of timeframe. As the resumption of financial crisis looms, and bubbles can burst very rapidly once a critical momentum to the downside is reached, people must address the issues of debt vulnerability, control over the essentials of their own existence and capital preservation in order to retain their freedom of action to deal with the other challenges to follow.
However, we must not lose sight of the larger context. Humanity faces an intractable and thoroughly multi-faceted predicament, with no means to continue a busines-as-usual scenario. As the top down structures we have built, which are structurally dependent on cheap energy and cheap credit, begin to fail, we must construct new means of supporting ourselves from the bottom up - at a human rather than an industrial scale.
These community initiatives will need to be funded, and that requires capital to be rescued and preserved for the purpose, rather than allowing it to disappear into a giant black hole of credit destruction or end up entirely in the the hands of the very few. The Automatic Earth attempts to provide the information ordinary people need to accomplish this critical task.
We also exist to warn people as to the dangers of the darker side of human nature that typically manifests when there is not enough to go around, especially when that circumstance can manifest rapidly. When fear and anger are in the ascendancy, societies can turn in directions that benefit no one but a handful of manipulative predators.
One of our goals is to minimize the tendency for people to become embroiled in movements that feed such interests, and maintain a focus on the constructive activities that will be absolutely essential if we are to mitigate the pain of a major economic depression. Fear and anger are extremely 'catching', hence we regard what we do as providing a 'psychological inoculation' against them.
We feel we have a very important role to play in providing the intellectual and emotional tools that people will need in the unstable times that are coming, and we have chosen to undertake that through the vehicle of The Automatic Earth. In order to maintain and expand an endeavour that requires two people to make a full time commitment to the project, and others to play supporting vital roles, we need to develop and maintain a stable funding base.
For this reason we will soon be making a number of changes to our site and the way it is run. We have secured the programming services needed to develop an expanded and more flexible site, outside of the constraints imposed by blogspot, that will be able to offer greater value to our readers. We will need to maintain programming services and deal with other costs of a more ambitious endeavour.
Today we are instituting a summer fundraising drive in order to take The Automatic Earth to the next level. We ask you to support our efforts on your behalf, so that we can continue to bring you the biggest possible big picture, and help you to navigate the challenges to come.
Phantom Jobs Mask Extent of US Joblessness
by Jeff Neilson - The Street
In many previous commentaries I have maintained that the "statistics" from the U.S. Bureau of Labor Statistics have lost almost any relevance or analytical value.
Where we can still find some small analytical value in these numbers is to compare the differences in the BLS' (revised) aggregate numbers with the headline it has been dispensing each month. Unfortunately, the revised aggregate numbers only provide us with data up to the end of 2010. However we can still reach some interesting conclusions based upon the available numbers.
The U.S. propaganda machine tells us that the "great recession" ended in March 2009, while the BLS has been reporting monthly "job gains" in nearly every report since that time. As a matter of simple arithmetic, if the U.S. economy began adding jobs in the spring of 2009 (and the job losses had supposedly eased in the months immediately prior to that), we should have seen the year-over-year numbers turn positive no later than the end of 2009 when we looked at the total number of employed workers in the U.S. (as calculated by the same BLS).
This is not what the BLS' own data indicates. In its own "Comparison of All Employees" with seasonally adjusted numbers, we see that December of 2009 marked the absolute bottom for total employment in the U.S.
In other words, during the first eight months of "job creation" during this supposed "economic recovery," the U.S. economy lost more jobs on a net basis.
By the summer of 2010 , the Obama regime was bragging that it had "created or saved" over 3 million jobs based largely upon the questionable monthly "non-farm payrolls" reports of the BLS. Yet by the end of 2010 we see that total employment in the U.S. had inched upward by a mere 1 million jobs from the absolute low.
Note that this feeble level of "job creation" is less than half the amount of new jobs needed just to keep up with population growth. In other words, throughout this mythical "recovery," U.S. unemployment has worsened proportionately month after month. Keep in mind that by itself population growth will always generate more jobs. New additions to the population mean more "mouths" to feed, more people who need clothes, housing, and an endless assortment of consumer goods.
Obviously population growth alone could have accounted for that entire, paltry 1 million jobs. This means that despite the largest "stimulus package" in the history of the world, and more than $10 trillion in additional Fed "credit" and hand-outs to Wall Street, the U.S. economy has generated nothing in terms of jobs and in fact has lost ground due to the population growth which has occurred over that period.
Of course the BLS isn't alone in boasting about "job creation." The Federal Reserve itself likes to make grandiose claims about jobs which never existed. Fed Vice Chairman Janet Yellen claims that Fed money-printing (by itself) will have "created 3 million jobs" by the end of 2012. And critics of this piece will argue that (supposed) job creation has been "even stronger" in 2011 than in 2010.
The reality here is that the "stronger growth" in jobs this year is 100% accounted by the BLS to its thoroughly discredited "birth/death model," Who has "discredited" the birth/death model? The BLS itself.
Over the last few years, the BLS has added roughly 1 million "phantom jobs" per year via its birth/death calculation. And then after each of those years it "revises" its calculation (using real data) and then subtracts all of those jobs. It is the BLS itself which has calculated that none of these "birth/death" jobs ever existed.
This year, if we subtract the more than 600,000 phantom jobs added by the birth/death model since January, we see virtually all of the supposed "new jobs" vanish. And keep in mind that all of the numbers from this year will be "revised" again (lower), just as the BLS has been doing every year.
Thus, as we near the mid-point of 2011, here is the reality of the U.S. economy. At best, since the supposed end of the "great recession," the U.S. economy has added roughly 1 million new jobs: less than one new job for every eight lost jobs which have (officially) been recorded since the U.S. economy crashed. And those jobs were generated not by real "economic growth, but simply due to a swelling population.
In terms of the unemployment rate," the numbers are unequivocal: The percentage of employable Americans who are without jobs continues to go up every month due to the combined effect of the still extremely high weekly layoffs and the fact that the number of "new jobs" doesn't come close to even matching the growth in population.
We've already been through the charade in the U.S. housing market. Again we were told by countless media talking-heads and "experts" that the U.S. housing market had "bottomed" in 2009. They even had the audacity to claim there was a "recovery" taking place in the U.S. housing market -- as opposed to merely a "dead-cat bounce" after the worst real estate crash in the history of the U.S. economy.
Returning to the real world, we have now seen U.S. housing prices plunge through that supposed "bottom."
We are about to reach the same point with the U.S. jobs market Today's BLS monthly report claimed that the U.S. economy added an anemic 54,000 jobs. Buried beneath the "headline", the BLS quietly added over 200,000 mythical birth-death jobs. What this means is that even when we add in all of the other statistical deceptions which the BLS uses, the U.S. economy would have lost 150,000 jobs in May.
Obviously there was never more than a tiny trickle of job-creation in the U.S. during this pretend recovery. Obviously the U.S. economy is again losing jobs on a monthly basis. And we arrive at this conclusion just as the last of the Obama "stimulus" dollars are being spent and with the Federal Reserve again pretending that it is about to "end" its own gravy-train of trillions of dollars in "free money" (for Wall Street).
Meanwhile, the Republicans in Washington are flexing their muscles and talking about slashing spending.
The situation is now very clear with the U.S. economy. If Washington politicians follow through on their promise/threat to subtract from current spending levels, the anemic U.S. economy will completely implode. And as revenues collapse even from today's extremely depressed levels, the U.S. is facing a Soviet Union-style disintegration in less than two years. Given that the most extreme/reckless "stimulus" in the history of the world did nothing but allow the U.S. economy to "tread water." Removing all that stimulus from this still-crippled economy can only result in catastrophe.
The other scenario is equally bleak. With the U.S. economy even weaker than when it first crashed in 2007 and much more bloated with debt, it would require a significantly more extreme "stimulus" program just to allow the U.S. economy to avoid collapse.
With the U.S dollar already teetering on an historic collapse when the market thought that the Fed would "end" its reckless money-printing, the only possible result is the collapse of the U.S. dollar (and the hyperinflation this directly implies ), should it instead ramp-up this currency-dilution even faster.
The cheap parlor tricks of this "smoke and mirrors" economy have run their course. The tens of millions of Americans without jobs will soon become tens of millions without food, if state Republicans follow through on their plans to slash unemployment benefits, pension benefits, and health-care benefits.
If they don't follow through on these misguided threats, and simply continue racking-up the same humungous deficits, hyperinflation looms directly ahead. The only thing we can say for sure is that regardless of which of these two economic catastrophes takes place, there won't be any jobs for Americans.
US unemployment unacceptably high, White House advisers admit
by Larry Elliott - Guardian
The White House admitted on Friday that unemployment in the US was "uncomfortably high" after the latest set of figures for the American labour market showed only 54,000 new jobs were created by the world's biggest economy last month.
Amid signs that growth has slowed markedly during the first half of 2011, the closely watched figures for non-farm payrolls showed an across-the-board weakening in hiring during May.
The news led to an immediate sell-off in shares on Wall Street amid speculation that the Federal Reserve, the US central bank, would be forced into a third round of electronic money creation, known as quantitative easing, to bring down unemployment.
The report from the US labour department was the weakest since last September. Private-sector jobs grew by 83,000, the smallest rise since June 2010, while government payrolls fell by 29,000. Employment growth in March and April was revised down by a total of 39,000, while the jobless rate rose in May from 9% to 9.1%.
In London, share prices shrugged off the poor US figures, bouncing back from an earlier decline prompted by a drop in the latest CIPS/Markit report on the UK service sector from 54.3 to 53.8 in May. Although the cut-off point of 50 separates expansion from contraction, economists said the survey was consistent with quarterly growth in services, which account for about three-quarters of UK national output, of about 0.3%. John Lewis fuelled concerns that the recovery is weakening after turnover at its stores fell at the end of May.
Wall Street economists expected payrolls to rise 150,000 and private hiring to increase by 175,000 but had been revising down their estimates since the release of a downbeat survey of private sector employment earlier this week. The economy has regained only a fraction of more than 8m jobs lost during the recession and analysts believe payroll growth above 300,000 a month is needed to make significant progress in shrinking the pool of 13.9 million unemployed Americans.
Austan Goolsbee, chairman of the Council of Economic Advisers, which advises the president, said of the non-farm payrolls: "There are always bumps on the road to recovery but the overall trajectory of the economy has improved dramatically over the past two years. "While the private sector has added more than 2.1m jobs over the past 15 months, the unemployment rate is unacceptably high and faster growth is needed to replace the jobs lost in the downturn.
"The initiatives put in place by this administration – such as the payroll tax cut and business incentives for investment – have contributed to solid employment growth overall this year, but this report is a reminder of the challenges that remain. We will continue to work with Congress to responsibly reduce the deficit and live within our means."
The US labour department said last month's tornadoes and flooding in the midwest and the south did not materially affect data collection. It said that while some workers in those areas may have been temporarily displaced from their jobs, it found "no clear impact of the disasters" on the employment data. Wall Street economists said supply chain problems for US industry after the Japanese earthquake had been a factor in the drop of 5,000 in manufacturing jobs.
Paul Ashworth, chief US economist at Capital Economics, said: "It is now pretty clear that the economy ran into a brick wall last month. We probably will see growth rebound in the second half of the year, as commodity prices drop back and any Japan-related disruptions unwind. For that reason we don't expect the Fed to act immediately. Nevertheless, the extent of this slowdown is becoming a big concern, particularly with a potentially big fiscal consolidation on the way and we wouldn't rule out a QE3 either later this year or in early 2012."
James Knightley at ING said the figures were "undeniably weak" but saw reasons for optimism. "In terms of what is driving the weakness in the labour market we feel that the lagged effects of rising energy costs plays a major part," he said. "This has hurt household spending power since they are spending more of their income on fuel and gasoline, leaving less money to spend on other goods and services. This is damaging businesses from the revenue side, while their costs too have been increasing because of higher fuel bills.
Aidan Manktelow, of the Economist Intelligence Unit, said: "The job creation figure for May was very disappointing. It is clear now that the weak patch in the economy has fed into the labour market. We still think this is likely to be a temporary soft patch – the result of high oil prices, some disruption to the manufacturing sector related to Japan's disasters, and firms being spooked by recent weak data.
"In underlying structural terms the recovery is now further advanced than in 2010, and more positive sentiment could come back pretty quickly, for example as the recent fall in the oil price feeds through".
How Failed Obama Foreclosure Relief Plan Contributes To Jobs Crisis
by Zach Carter and Jennifer Bendery - Huffington Post
The Obama administration's inability to stem the foreclosure crisis ricocheted dramatically on Friday, as the Labor Department released unexpectedly low job-growth numbers that pushed the unemployment rate back over 9 percent. The jobs report comes on the heels of both a devastating report that found housing prices hit new lows in March and warnings from economists that the tumbling real estate market threatens to drag the economy back into recession.
"The jobs numbers, they ain't pretty, man," economist Jared Bernstein told HuffPost. Bernstein left the Obama administration last month to join the Center on Budget Policy and Priorities, a highly respected left-of-center Washington think-tank. "You don't wanna make too much out of one month, but when that month reflects other trends in the economy, you want to take note." "The bottom line is that the job market simply isn't meeting the basic employment and income needs of working families," he said.
"This is an emergency," said Preeti Vissa, community reinvestment director of the Greenlining Institute, a foreclosure relief advocacy group. "The ongoing foreclosure crisis is well on the way to dragging the whole economy into a double-dip recession if strong action isn't taken immediately."
The connection between the foreclosure crisis and rampant unemployment is well known by economists and the administration. Diving home values and heavy debt burdens force cutbacks in both consumer spending and tax revenue for local governments. These reduced spending levels and lower government revenues force layoffs in both the public and private sector. And those layoffs, in turn, spur more foreclosures. A July 2010 report from the International Monetary Fund suggested that foreclosure problems added 1.25 points to the unemployment rate -- or more than 10 percent.
On Thursday, President Barack Obama warned House Democrats in a private meeting that the housing situation could drag down the entire economy. His stated concern about foreclosures, however, doesn't match up with the administration's public response. One House Democrat who was in the meeting complained that the president "said housing was the main thing dragging down the economy, with Geithner nodding solemnly like they'd done everything humanly possible for the last 27 months to fix the housing market."
For nearly a year, the Obama administration has been boasting to voters of economic improvement. The White House embarked on a PR blitz dubbed "Recovery Summer" last year and toured the country to spread the good news that jobs were finally coming back.
Political strategists say that message is not convincing businesses, consumers or voters. The heavy losses sustained by congressional Democrats in the November 2010 elections were largely the result of the sagging economy. "They've gotta show that they're gonna be on the side of the middle class in these hard times," said Mike Lux, CEO of Progressive Strategies, a Democratic political consulting firm. "The only way an administration wins when they're governing during hard times is by convincing people you're still working for them in the middle of a very tough moment. I just don't think there's any way to convince people that the economy is good, because it ain't."
That call for a new economic narrative from Obama reflects consistent polling results from Democratic pollster Stan Greenberg, who urged Democrats on Thursday to alter their message to reflect "a real economy" outside Washington "that's not changing." "The indicators are all speaking together that something more needs to be done," Bernstein told HuffPost. "I'm not sure there's any magic to such a pivot other than to stand up and say something needs to be done." Bernstein recently defended the administration's inaction on housing, saying that it had been very difficult politically to provide relief to borrowers.
In an early May interview with HuffPost, White House economic adviser Austan Goolsbee cheered what appeared to be three consecutive months of stronger job growth. "It's clearly a trend," Goolsbee said. "We've had, in the last three months, an average gain of a quarter of a million private-sector jobs a month. That could not be more different than the three-quarters of a million jobs we were losing when the president took office."
But today's numbers undermine confidence in the trend. The Labor Department revised prior months' job gains so that the past three months -- March, April and May -- showed an average climb of just 160,000 jobs per month, only marginally better than the 152,000 increase seen in the prior three-month period. The administration's claims of job market improvement have frequently been coupled with caveats. Even the triumphant Goolsbee warned last month that "we've got a long way to go" on the economy. But the administration has been unwavering in its claims that its signature foreclosure relief effort, the Home Affordable Modification Program, has been a success.
Anti-foreclosure advocates have long bemoaned the program as overly reliant on the very Wall Street banks whose reckless lending helped spark the housing and financial mess. HAMP was also thoroughly criticized in several reports from the Congressional Oversight Panel for the bank bailout, and a new report from the Government Accountability Office indicated that over 75 percent of housing counselors have a negative view of HAMP.
The program has only helped a small fraction of the 3 million to 4 million borrowers that President Obama claimed it would aid when the initiative was announced in February. Some homeowners have reported being stuck in limbo for more than a year.
Advocates say several other plans could provide relief without creating "moral hazard" -- a term economists use to describe a policy that could inadvertently encourage economically destructive behavior. By revising bankruptcy law to allow judges to write-off mortgage debt in bankruptcy, struggling homeowners could receive aid, provided they were willing to subject themselves to the financial hardships of filing for bankruptcy.
Alternatively, economist Dean Baker, co-director of the progressive Center for Economic and Policy Research, has promoted a "right-to-rent" policy, in which borrowers on the brink of foreclosure would be given the right to rent their homes for up to five years. Since banks are reluctant to operate as landlords, Baker says the policy would encourage banks to offer meaningful loan modifications. Still, Bernstein added, the administration needs to resist the "cut spending craze," which "threatens to make an already tough situation worse."
While congressional Republicans are unlikely to let up in their political assault on government spending, he noted that a bipartisan commission led by former Federal Reserve Vice Chairwoman Alice Rivlin and ex-Sen. Pete Dominici (R-N.M.) in Nov. 2010 proposed a payroll tax cut that could create jobs by putting more money in workers' pockets. The Rivilin-Dominici plan recommended that the government lift all payroll taxes for both companies and employees for one year.
Dow Average Has Its Longest Weekly Slump Since 2004 on Employment Report
by Inyoung Hwang - Bloomberg
U.S. stocks fell this week, sending the Dow Jones Industrial Average to its longest streak of losses since 2004, after worse-than-estimated reports on jobs and manufacturing fueled concern earnings growth will slow.
All 10 Standard & Poor’s 500 Index groups dropped, with declines exceeding 1.3 percent. Newell Rubbermaid Inc. sank 15 percent, leading declines in the Standard & Poor’s 500 Index, after cutting its profit forecast. J.C. Penney Co. and Stanley Black & Decker Inc. slumped more than 6 percent as investors sold companies tied to economic growth. General Motors Co. and Ford Motor Co. decreased at least 4 percent after sales growth missed projections.
The S&P 500 lost 2.3 percent to 1,300.16, the biggest weekly decline since August. Its five-week losing streak is the longest since 2008 and puts the index at its lowest level since March. The Dow fell 290.32 points, or 2.3 percent, to 12,151.26, also posting a fifth-straight weekly slump.
"It was a C-minus week for the economy," said David Sowerby, a Bloomfield Hills, Michigan-based money manager at Loomis Sayles & Co., which oversees more than $150 billion. "These are the kind of weeks that remind investors stocks don’t just go straight up. There was enough data this week to begin to connect the dots that uncertainty remains."
The S&P 500 has retreated 4.7 percent since closing at an almost-three-year high of 1,363.61 on April 29. The Citigroup Economic Surprise Index for the U.S. has sunk to minus 117.20, meaning reports are missing projections by the most since January 2009, two months before the S&P 500 tumbled to the lowest level in 12 years.
Labor Department figures showed payrolls increased by 54,000 last month, falling short of the median forecast in a Bloomberg News survey that called for a rise of 165,000. The jobless rate climbed to 9.1 percent.
Michael Shaoul, whose Marketfield Fund Ltd. beat 81 percent of competitors last year, said that while the payrolls report was disappointing, it may also be a signal the slowdown in the economic data is near its peak. Private-sector hiring has risen by an average 145,000 a month over the last year, faster than economists had predicted, according to Shaoul. He noted that weaker nonfarm payrolls reports in February and July 2004 failed to derail the last bull market, which peaked in October 2007.
"What the data will do, however, is accelerate the process of economic revision, with estimates of U.S. growth being forced significantly lower across the board," Shaoul wrote in a note to clients. "As damaging as the process may be for asset values, it has surprisingly little to do with the actual ability of corporations to generate revenue."
The biggest decline in the S&P 500 since August is creating a buying opportunity for investors, according to Blackstone Group LP’s Byron Wien. The price-to-earnings ratio for the S&P 500 has fallen close to its lowest level in 2011, according to Bloomberg data. The index currently trades at 14.8 times earnings, near this year’s low of 14.7 when it fell in March after Japan’s earthquake.
"Investors should be looking for buying opportunities," said Wien, the vice chairman of Blackstone Advisory Partners, whose parent, New York-based Blackstone Group LP, is the world’s largest private-equity firm. "The economy is not as bad as it looks right now. Corporate profits will be good, very good. People are asking me, ‘Do you still think the market can get to 1,500 by the end of the year?’ I do."
The S&P 500 tumbled the most since August on June 1, following an ADP Employer Services’ jobs report that trailed estimates and data from the Institute for Supply Management that showed manufacturing expanding at the lowest pace in more than a year. A separate report this week showed that more Americans than forecast filed applications for unemployment benefits.
Newell Rubbermaid declined 15 percent to $14.97, the biggest retreat in the S&P 500. The maker of Sharpie pens and Rubbermaid containers cut its full-year profit forecast, saying economic woes are hampering consumer spending. J.C. Penney declined 10 percent to $32.26 and Stanley Black & Decker retreated 6.1 percent to $68.93. The Morgan Stanley Cyclical Index sank 3.9 percent this week, while the S&P 500 Consumer Discretionary and Materials Indexes led losses in the S&P 500, declining 3.2 percent each.
Limited Brands Inc. and Gap Inc. reported May sales this week that trailed analysts’ projections as increasing prices and surging gasoline costs deterred budget-conscious shoppers. Limited fell 4.9 percent to $37.44. Gap lost 6.7 percent to $17.92.
Auto companies also fell after sales last month missed analysts’ estimates on higher gasoline prices. GM dropped 6.9 percent to $29.12 this week, while Ford slumped 4 percent to $14.01. GM deliveries declined 1.2 percent to 221,192 vehicles, the Detroit-based automaker said on June 1. The average estimate was for a 1.5 percent increase. Ford light-vehicle deliveries decreased 2.6 percent to 191,529, compared with analysts’ average estimate for a 0.5 percent decline.
"This is a confidence issue for the consumer discretionary sector," said Jeffrey Kleintop, chief market strategist at LPL Financial Corp. in Boston, which manages $300 billion. "We’ve seen retail sales hold up reasonably well and consumers have continued to spend. This jobs report combined with the weakening trend in housing could undermine some of the support for the retailers."
Sealed Air Corp. sank 14 percent to $21.89. The maker of Cryovac food packaging, Jiffy protective mailers and medical supplies agreed to buy Diversey Holdings Inc. for $2.9 billion to add sales to emerging-market food-processors concerned about product safety. The company is handing Clayton Dubilier & Rice LLC an almost $1 billion windfall at the expense of its own shareholders by paying a 52 percent premium for Diversey, according to data compiled by Bloomberg.
Juniper Networks Inc. slid 13 percent to $32.33. The network equipment maker’s Chief Executive Officer Kevin Johnson indicated at a Bank of America Corp. conference this week that "the quarter is back-end loaded," fanning concern that results will be worse than investors anticipated.
"We’re about to go into the pre-announcement season which, as we have seen in the economic data, is likely to be somewhat disappointing to investors," Kleintop said. "We will hear a number of companies taking down guidance and back away from what they’ve issued previously and that could create more down draft in a June swoon for stocks."
Chinese Economic Slowdown May Lead to 75% Plunge in Commodities, S&P Says
by Maria Kolesnikova - Bloomberg
A "sudden" slowdown in China may lead commodity prices to fall as much as 75 percent from current levels, Standard & Poor’s said.
Unexpected shifts in government policies or problems in the banking sector may trigger such a slowdown, S&P said in a report e-mailed today. The floor for aluminum is 65 cents to 70 cents a pound ($1,433 to $1,543 a metric ton), compared with about $1.20 a pound now and copper’s floor is $1.50 to $1.75 a pound, compared with $4.10 a pound currently, S&P said.
"Given the extent to which China has bolstered commodity prices, that’s something that we have to be concerned about," S&P analyst Scott Sprinzen said by telephone from New York. "The efforts by the government in China to slow growth are having an effect on commodity prices. It’s been a pretty modest correction so far."
The Standard & Poor’s GSCI index of 24 commodities dropped 6.8 percent last month, the first decline since August, as accelerating inflation in China fanned speculation growth will slow. China’s central bank has raised benchmark interest rates four times and boosted lenders’ reserve-requirement ratios by three percentage points since September.
The central bank may raise rates ahead of a public holiday on June 6 because consumer prices are expected to rise to a new high in May, the Shanghai Daily said May 31, citing UBS AG. Inflation rose 5.3 percent last month, exceeding the government’s full-year target of 4 percent.
China’s gross domestic product may grow 9.5 percent this year, down from 10.3 percent in 2010, according to a median of 11 analyst estimates compiled by Bloomberg. Under S&P’s base- case scenario, China’s economic growth will moderate, while private consumption will remain strong, according to the report. "The current situation isn’t a bubble and it’s not going to burst, but there is a risk," Sprinzen said.
In case of a sudden slowdown in the world’s biggest consumer of commodities, iron ore’s floor is $85 to $95 a metric ton compared with about $170 now, seaborne coking coal at the mine has a floor of $100 to $120 a ton, compared with about $180 now, and hot rolled coil steel’s floor is $475 to $525 a ton compared with about $750 now, according to the report.
"In considering the downside for metals, we generally assume that the global industry production cost curve would set a pricing floor," Sprinzen wrote. "Specifically, we assume that prices are unlikely to fall for an extended period below the level at which 10%-20% of world capacity cannot generate positive operating cash flow before investment."
Commodities may "easily" drop 25 to 40 percent in the next 12 months, presenting an "enormous opportunity" for investors, David Stroud, chief executive officer of TS Capital, a hedge fund manager in New York, said in an e-mail today. Markets are "starting to look a lot like 2008," he said. That year, the GSCI dropped 43 percent.
Bill Gross Says More Quantitative Easing Unlikely
by Liz Capo McCormick and Tom Keene - Bloomberg
Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve is unlikely to do a third round of quantitative easing even with the economy adding fewer jobs than forecast.
Central bankers are likely to "extend the extended period" language for longer in their policy statements, Gross said in a radio interview on "Bloomberg Surveillance" with Tom Keene. The less-than-projected pace of jobs growth in May that the Labor Department reported today shows that "there is a persistency here. It’s back to our old new normal," he said.
U.S. employers in May added the fewest workers in eight months and unemployment unexpectedly rose to 9.1 percent, underscoring the concern of policy makers that the expansion is failing to boost the labor market. The Fed began the second round of asset purchases, known as QE2, on Nov. 12 after buying $1.7 trillion in securities through last year, increasing the amount of money in circulation to spur growth and prevent deflation. The Fed’s $600 billion in purchases of Treasuries are due to end this month.
"We don’t see a QE3. There has been too much discussion and dissent within the Fed to permit that type of program," Gross said in the interview from Pimco’s headquarters in Newport Beach, California. Given the current pace of growth and inflation "they will speak to a fed funds rate that persists for an extended period of time, which in effect caps interest rates in the process."
Not Buying Treasuries
The Fed has kept its target rate for overnight lending between banks at a record low range of zero to 0.25 percent since December 2008. Gross reiterated that he isn’t buying Treasuries for his $243 billion Total Return Fund even as the government bond market rallies because yields are too low once inflation is taken into consideration. Mortgages, corporate bonds and sovereign debt of other nations are more attractive, he said.
Treasuries have returned 2.7 percent this year as Gross reduced government and related debt in the Total Return Fund to minus 4 percent of assets as of April 30. The fund has returned 0.57 percent in the past month, lagging behind the performance of 74 percent of its competitors, according to data compiled by Bloomberg. Governments such as the U.S. are intentionally keeping interest rates lower than they should be to help reduce record debt levels, setting up investors up for a "skunking, or pocket picking," Gross said.
Investors could seek higher real returns than those now offered from government debt through investing in shares of "conservative" companies such as Procter & Gamble Co. (PG), Merck & Co. or those of utilities, according to Gross.
"The Treasury market up to seven or eight years is negative in terms of real interest rates, and that’s not a positive for savers," Gross said. "But if they took that money and invested it in a conservative stock, such as a Proctor or a Merck or a utility yielding 4 percent; then that’s 3.5 to 4 percent real yield in comparison to those negative real yields in the Treasury side. So you have to take a little bit of a chance in order to avoid getting your pocket picked here."
An overdependence on debt has the global economy in a period of fundamental transformation that Pimco has termed the "new normal." Gross, the founder and co-chief investment officer of Pimco, forecast last year that mounting deficits and tighter financial regulation will damp growth in the U.S. and the euro zone.
Payrolls increased by a less-than-projected 54,000 last month, after a revised 232,000 gain in April that was smaller than initially estimated, Labor Department figures showed today. The median forecast in a Bloomberg News survey called for payrolls to rise 165,000. The jobless rate climbed to the highest level this year from 9 percent a month earlier.
The yield on the 10-year Treasury note dropped three basis points, or 0.03 percentage point, to 3 percent at 1:31 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent security due in May 2021 rose 8/32, or $2.50 per $1,000 face amount, to 101 1/32. The Total Return Fund can have a negative position by using derivatives or futures or by shorting. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.
The fund has returned 8.23 percent in the past year, beating 77 percent of its peers, according to data compiled by Bloomberg. Gross, the founder and co-chief investment officer at Pimco, has averaged returns of 8.75 percent on average over the past five years, topping 98 percent of his competition. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.28 trillion of assets as of March 31.
US credit rating under threat over national debt, Moody's warns
by Graeme Wearden - Guardian
America risks losing its triple-A credit rating unless swift and significant progress is made over its debt ceiling, Moody's has warned, piling fresh pressure on the US a few hours before crucial employment data is released.
The ratings agency is concerned by the lack of progress made by the US Treasury and Congress over whether to allow the US national debt to increase. It said that the risk of the US defaulting on its loans was "very small but rising", suggesting that the country might not deserve its AAA rating.
"Although Moody's fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations," the agency said. "The heightened polarisation over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged in coming weeks, Moody's will place the rating under review."
Under US law, the country's national debt may not exceed $14.3 trillion (£8.75tn). That figure was reached last month, forcing America to dip into two government pension schemes to service its debts. That, though, will only tide the US over until the start of August.
President Obama has been locked in talks with members of Congress in recent days, in an attempt to reach agreement to raise the ceiling. The Republican party is demanding massive spending cuts in return, and the two sides have made little progress.
Moody's is the second ratings agency to warn recently that America's credit rating may be on shaky ground. In April, Standard & Poor's cut its outlook on the US to "negative", warning that it needs a more credible long-term plan to lower its deficit.
The US economy will be under close scrutiny on Friday afternoon when the monthly non-farm payroll is published. This will show how many new jobs were created in America during May, excluding its volatile agricultural sector.
A separate study, released on Wednesday, showed that there were fewer new hires than expected in the private sector last month, prompting economists to slash their non-farm predictions. The consensus forecast is for an increase of 150,000 jobs, down from 180,000 earlier in the week, although Goldman Sachs expects the non-farm payroll to increase by just 100,000 jobs. A low number would add to fears that the US recovery is entering a soft patch, with its manufacturing sector suffering the weakest growth in nearly two years.
Trichet Calls for Tougher Debt Intervention, EU Finance Ministry
by Tom Fairless - Wall Street Journal
European Central Bank President Jean-Claude Trichet on Thursday called for much tougher fiscal intervention within the euro zone and suggested the creation of a euro-zone finance ministry.
At a ceremony to receive the Charlemagne prize for European unity, Mr. Trichet proposed a raft of possible radical changes to improve the euro zone as a currency bloc as a number of its member states
struggle with debt crises. He said that if a bailed-out country isn't delivering on its fiscal-adjustment program, then a "second stage" could be required, which could possibly involve "giving euro-area authorities a much deeper and authoritative say in the formation of the county's economic policies if these go harmfully astray."
He suggested that euro-zone authorities could have "the right to veto some national economic-policy decisions" under such a regime. In particular, a veto could apply for "major fiscal spending items and elements essential for the country's competitiveness." "In this union of tomorrow ... would it be too bold in the economic field ... to envisage a ministry of finance for the union?" Such a ministry wouldn't necessarily have a large federal budget but would be involved in surveillance and issuing vetoes, and would represent the currency bloc at international financial institutions.
by Janet Tavakoli - Huffington Post
The European Central Bank (ECB) is facing a dilemma similar to that faced by major U.S. banks in the 1980's with defaulted loans to Latin America. The PIIGS (Portugal, Ireland, Italy, Greece and Spain) collectively require debt write-downs that exceed banks' capital and reserves, and the tantrums of Jean Claude Trichet, President of the ECB, won't change that fact.
The crazy but true strategy so far has been "Don't call bad debt, bad debt" -- at least not openly. The continued attempt to "convert" bad loans to good loans by lending bad debtors more money so they can pay interest on bad loans, makes it temporarily unnecessary for Eurozone Banks and other debt holders to take write-downs.
Greece provides one example. The current last-ditch attempt by the IMF and Eurozone Banks is to impose on Greece exogenous wage deflation under the guise of "internal devaluation," higher retirement age and pension reforms, reduced spending protocols, and "privatization" of Greek assets by foreigners. Greece is coming under pressure to sell crown jewels like Thessaloniki Water and Sewage and Piraeus Port Authority. Greek citizens may view that as robbery, since it will only provide enough to make interest payments on debt for a short period to help the ECB cover up its problems. This benefits the Eurozone banks that are in denial, but it doesn't help Greece.
The most egregious mistake is the attempt to impose exogenous reform of Greece's inefficient and often ineffective tax collection system. Similar to Iceland, Greek citizens may object to outside interference, demand a vote, and repudiate Greek debt, especially since there is a widespread perception that crony capitalism enriched irresponsible bankers and connected government officials while saddling disenfranchised Greek citizens with a multi-generation bill. Greeks invented democracy and they may be inspired by a slogan of the American Revolution: "No Taxation without Representation!"
Greece will have to impose fiscal restraint. The austerity measures forced on Greece from the Eurozone will be more onerous than those Greece will have to impose on itself, if it takes back control of its own currency and devalues it.
Euro: Super Deutsche Mark with a French Accent
The immediate crisis is in Greece, but it is not alone. It is futile to blame the citizens of deadbeat borrower countries, and given the flaws in the European Union, it isn't entirely their fault. The Euro is a super Deutsche Mark with a French accent. There was no Renaissance of manufacturing and productive jobs in the outer reaches of the Eurozone.
When you're overleveraged, your entire future depends on cash flow, and the cash flow isn't there for countries like Greece. The ECB is threatening to cut Greece off from bank liquidity -- triggering Greek bank failures -- if there is any restructuring of Greek debt. But the cash flow isn't there to service and repay existing debt, and even selling off assets won't change the long-term situation for Greece.
The ECB alone bought €75 billion in government bonds, and €45 billion or around 60% of them are Greek debt. Despite JPMorgan's estimate of around €81 billion in capital and reserves for other European banks to sustain a 50% haircut in various government bonds, it likely isn't enough given that government bonds aren't the only challenges the banks face.
The ECB's problem and the problem for many Eurozone banks is that they do not want to mark their bonds to market. They don't want to know what the debt is really worth, and it's not worth anything near what they're telling themselves it is worth. Threatening Greece so that they can cover up the problem is only a temporary fix, and it isn't fooling anyone.
Deep Discounts: If PIIGS Owe You Money, You're in Trouble
Given that no one wants to face the magnitude of the problem, it is difficult to say how bad this can get, but history gives us an example of what needs to be done. In the late 1980's if U.S. banks had marked-to-market their Latin American debt, the losses would have wiped out the capital of Bank of America and Manufacturers Hanover (now part of JPMorgan Chase). Citibank was close to being wiped out.
Other banks were also on the ropes: Irving Trust (now part of Bank of New York Mellon), First Chicago (now part of JPMorgan Chase), and Continental (later seized by the FDIC due to other bad loans). By the end of 1987, Latin American debt ranged from around 15 cents on the dollar for Bolivian debt to around 35 cents on the dollar for Argentine debt. Market value estimates at the time recognized a valid appraisal method based on the fact that the U.S. had forgiven a large chunk of Mexico's debt and restructured it.
After Latin American countries defaulted on debts, the subsequent granular restructuring negotiations resulted in various dollar-denominated Brady Bonds, named for then U.S. Treasury Secretary Nicholas Brady. Each country negotiated its own terms. In the earlier Mexican debt restructuring for example, half of the $20 billion debt was forgiven, and the principal of the other half of the debt was secured with a zero coupon UST bond then trading at around $2 billion of the $10 billion face value (the other half of the original debt). Mexico then had to meet the interest payments to service the $10 billion bond.
Greece is a sovereign country. The ECB is acting as if it can dictate terms to Greece, but as U.S. banks found out, when someone owes you a lot of money and they cannot pay it back, you are in as much trouble -- and sometimes in more trouble -- as they are.
Endgame for the Euro
The crisis the Eurozone now faces is that citizens of countries with the most fiscally irresponsible governments and banks may be of a mind to vote out their current governments and repudiate their debt. If the ECB keeps storming out of meetings and isn't willing to engage in meaningful negotiations, then it will be in Greece's best interest to exit the Euro. The ECB can threaten all it likes, but it is dealing with sovereign states.
Greece can exit the Euro, implement its own austerity programs, force a renegotiation of its debt, and devalue its own currency. If politicians dig in their heels at the expense of Greek citizens, the Euro will likely end not with a whimper, but with a bang, and other distressed debtor countries may follow suit.
Why a Greek Default Could Be Worse Than the Lehman Collapse
by Martin Hutchinson - Money Morning
The 2008 collapse of Lehman Bros Holdings Inc. ignited a financial meltdown that resulted in widespread bank failures and caused the Dow Jones Industrial Average to lose 18% of its value in just one week. Yet a Greek default -- which (even with a bailout) becomes increasingly likely with each passing day -- would actually be much, much worse in many respects.
Sure, it's possible that European Union taxpayers will soon be dragooned into yet another rescue plan. But that would only delay the inevitable -- a catastrophic collapse that will drudge up feelings of panic we haven't witnessed since the global financial crisis hit its apex nearly three years ago.
Dodgy Debt and a Dozing Economy
Greece's debt, at about $430 billion, is less than that of Lehman Brothers, which owed around $600 billion at the time of its bankruptcy. But Greece's finances are much less sound. Whereas Lehman Brothers participated in the 2003-07 financial bubble with considerable enthusiasm, accumulating vast amounts of the dodgy subprime mortgage paper whose value collapsed in the 2007-08 downturn, Greece's misdeeds date back much further -- to its 1981 entry into the EU.
As the poorest member of that group, Greece became eligible for a vast array of inventive subsidies, primarily related to agriculture. However, the frauds the country perpetrated to justify even larger subsidies were even more inventive. This allowed Greece to bring its living standards close to the EU average, while still being subsidized as if it was a genuinely poor country.
Indeed, Greece produced nothing close to the level of economic output that would be needed to justify its spending and the lifestyle of its people. The problem for Greece is thus stark: Its people need to suffer a decline in living standards of about 30% to 40% so that the country's output is sufficient to repay its debts.
A Greek Default Will Be a Tough Sell
From 45th place in the world ranking of per-capita GDP -- above Spain, Israel and New Zealand -- it needs to lower its living standards to about 65th place. That would put it on a level with Poland, below Hungary and Slovakia, and only modestly above the very well-run Chile. Needless to say, the Greek people are not about to vote democratically in favor of this outcome.
In a truly free-market system, without massive subsidies and with independent currencies, this could be achieved by a collapse in the value of the drachma. Even with the EU and the advent of the euro currency, such a collapse would probably have happened 10 years ago if the Greek government had not undertaken fraudulent accounting to make its economy appear qualified for euro membership.
That's the advantage of a true free market system; the Greek populace can demonstrate all it likes, but if the value of the drachma drops 40%, there's nothing the Greek citizens can do about it; it would be like staging sit-ins against the law of gravity.
Worse Than Lehman
In the system we have, the bailout staged last year by the EU and International Monetary Fund was too lenient. It gave Greece too much money and left far too many opportunities for the Greeks to trash downtown Athens in protest. Since the IMF and the EU insist on being repaid before private creditors, the banks that lent to Greece have been bumped well down the creditors' totem pole. The upshot: Those banks are on the hook for more than $100 billion.
This is exactly why a Greek default would dwarf the Lehman collapse: There were no artificial forces damaging the banks' position in the Lehman bankruptcy, and Greece has fewer viable assets than did Lehman. That means the losses to the banks -- almost all of them European banks, in this case -- will probably be greater in the event of a Greek default than they were in the Lehman bankruptcy.
As was the case for Lehman, a Greek default would require another bank bailout, another period of cockeyed fiscal and monetary policies, and another major recession. The only difference this time around is that the global recession and bailout will be centered on the EU, as opposed to the United States. And that's at least a small bit of comfort to us American taxpayers.
Greece goes further into junk territory
by Ralph Atkins, Kerin Hope and Peter Spiegel - Financial TIme
The pressure mounted on Greece on Wednesday night when Moody’s cut its credit rating by three notches to Caa1 from B1 and maintained its negative outlook. The ratings agency cited a growing risk that the European periphery economy would fail to stabilise its debt position without a restructuring.
Greece responded by saying Moody’s was not taking into account Athens’ efforts to put the country’s finances on an even keel. "[This downgrade] is influenced by intense rumour in the media and overlooks the Greek government’s pledges to achieve its fiscal targets for 2011 and to accelerate privatisations," the Greek finance ministry said in a statement.
Earlier on Wednesday the European Central Bank had backed the idea of encouraging banks to roll-over Greek bonds as a way of helping the country out of its financial plight. Jürgen Stark, an ECB executive board member, said in an interview with Italy’s Sole 24 Ore business newspaper that a scheme by which investors would buy new bonds to replace maturing securities "could be a way of involving the private sector in financing Greece". His comments suggest the ECB is open to fresh ideas for bridging Greece’s finance gap.
Mr Stark drew a clear distinction between a debt rollover plan and a debt rescheduling, however, which would see Greece reneging on commitments to investors. The ECB remains opposed to any kind of rescheduling, which it has warned would have a catastrophic impact on Greece and other countries.
Despite the ECB’s support, it remains unclear how a rollover scheme would work in practice. Private sector banks would have to be given considerable incentives to reinvest funds in Greek bonds – the ECB, which holds about €45bn in Greek government debt, would not itself buy new bonds. But a rollover could help win support in Berlin, where politicians are keen for private sector role in helping Greece.
It has taken Greece’s socialist government an unprecedented four weeks of negotiations to reach a draft agreement with the European Union and International Monetary Fund on emergency measures to rescue this year’s budget, a medium-term structural reform plan and a far-reaching programme of privatisations.
George Zannias, a senior finance ministry official, was due to present the draft deal on Wednesday night at a meeting of eurozone deputy finance ministers in Vienna, according to people familiar with the EU-IMF negotiations. "The package is almost complete, but still has one grey area concerning the structure of the organisation that will manage the privatisation programme," said one such person.
Greece has come under pressure to accept international involvement in both tax collection and privatisation of state assets – areas where it has failed to meet EU-IMF targets – in return for €60bn-€70bn of fresh financing over the next two and a half years. "There is no problem with having more IMF tax experts to help boost revenues, but there is an issue of sovereignty on the privatisation proposal that has to be settled at the political level," said a Greek economist who has been following the negotiations.
A senior European official involved in the Greek discussions said the "troika" of EU, ECB and IMF officials in Athens should "certainly" be able to conclude talks on short-term budget measures within days. But negotiators were still awaiting a mandate from national capitals to start preparing a successor programme with the IMF, the official added. The official said that, although negotiators had yet to win formal approval to move forward on another bail-out programme, "we are already, of course, working on that".
Negotiators hope to have such a deal by the next formal meeting of EU finance ministers in three weeks. "This means June 20 is the crunch time," the official said, referring to the meeting. "There are many concrete issues to be settled by then."
Greece agrees €6.4 billion in budget steps
by Lefteris Papadimas - Reuters
Greece has agreed to 6.4 billion euros in new steps to cut its 2011 budget deficit and aims to wrap up bailout talks with international inspectors by Friday, a senior government official told Reuters on Thursday. Prime Minister George Papandreou would present the main points of the government's medium-term budget plan when he meets Jean-Claude Juncker, the chairman of euro zone finance ministers, in Luxembourg on Friday, the official said.
The "troika" team from the European Union, IMF and European Central Bank, has been in Athens since early May negotiating two main points -- whether the government has qualified for a fifth slice of funding under the existing 110 billion euro rescue deal and the sustainability of Greeece's 340 billion euro debt. "Negotiations with the troika are likely to conclude late on Thursday or Friday. We are at a stage where the troika is asking for details on various issues," said the official, who did not want to be named. The medium-term budget plan included tax increases and lower income tax exemptions, he added. "The discussion on additional measures of 6.4 billion euros for 2011 has been concluded, the resources have been found."
Papandreou Meets Juncker
Juncker chairs the Eurogroup which must decide whether to release the 12 billion euro tranche this month to cover immediate funding needs of 13.7 billion euros -- an issue which hangs on whether Athens has met budget deficit cutting targets. "The prime minister will present the main points of the mid-term plan to Juncker, which include speedier privatisations and new measures to cut government spending and raise revenues," said the official.
Greece and the inspectors made a late push on Thursday to agree the funding to keep Athens afloat. "The measures include lowering the income tax exemption, terminating other exemptions and possibly taxes on soft drinks and natural gas," said the official. He was hopeful on the latest tranche of aid for the government to repay maturing debt and cover day-to-day bills. "From the overall picture on the talks so far, I am optimistic that we will get the fifth instalment," he said.
Greece's original bailout agreed a year ago assumes that the government can resume borrowing on financial markets in 2012. But credit ratings agency Moody's Investors Service knocked a final nail into the coffin of that idea late on Wednesday, slashing Greece's credit rating by three notches to the same level as communist Cuba
The big fat Greek sell-off
by Helia Ebrahimi - Telegraph
Required to contribute €50bn towards its own bail-out, Greece is finally facing up to the sale of its most treasured assets. Roll up, roll up, roll up. Elgin Marbles, Acropolis, Mykonos. Anyone? You don't have to be an ancient Greek historian to understand the significance of it. But maybe it helps. For Thucydides, born back in 460 BC, the Port of Piraeus was the commercial heart of the Athenian democracy. "From all the lands, everything enters," wrote the author of the History of the Peloponnesian War.
But now the port is up for sale – alongside the sort of assets even Thucydides would never have envisaged – in the biggest and most controversial privatisation Greece has ever seen. Under pressure to raise €50bn as the quid pro quo for its massive €110bn (£98bn) bail-out, Greece is being forced to hawk its industrial and commercial backbone to the highest bidder.
On the block, alongside the Government's 74pc stake in Piraeus, is a similar-sized holding in the country's other main gateway port – Thessaloniki. Then there are the government's stakes in a host of public and private companies – as well as tracts of land. Corporate assets include OTE, the largest telecommunications company in the Balkans; PPC, the country's biggest electricity producer; horse-racing organisation ODIE; the state's 34pc stake in Europe's biggest betting company OPAP; another 34pc stake in Hellenic Postbank and train operator TrainOSE.
It is a gut-wrenching moment for a nation, whose heavily unionised workers are unlikely to be forced into accepting such privatisations without a fight. Kevin Featherstone, professor of contemporary Greek at the LSE, says the sell-offs push Greece's capabilities to the limits. "It is very controversial. It is testing the limits of what government should be doing," he says. "It is a challenging thought that foreigners have come to sell the family silver. "But the Greek government has realised the depth of the crisis. And so have the people of Greece. If the choice is between further tax rises or more job losses then people are OK with OPAP being sold."
That it has come to this goes right to the heart of the eurozone bail-out programme, highlighting the political tensions between the main provider of funds – Germany – and the weaker southern nations taking the money. That German companies are likely to wind up as the owners of many of the assets only adds to the controversy. In addition to the €110bn of rescue aid already promised in last year's bail-out orchestrated by the International Monetary Fund, European Union officials reckon Greece will need around €30bn more in each of 2012 and 2013.
Privately angry that Greece has so far done too little after last year's bail-out to put its own debt-bloated house in order, officials from Germany's finance ministry last week pressed for the holders of Greek bonds to share some of the pain. They suggested the bondholders should accept late repayment of their investments – a rescheduling of debts that has so far been resisted by the European Central Bank.
Whatever, something has to give – because the clock is ticking. Greek bond spreads have rocketed far higher than last year. And economists now forecast that between 2009 and the end of this year, Greece will have added €50bn in debt. Moody's has just downgraded Greece even further into junk bond territory to CAA1 – a rating that implies a 50pc chance of default over the next five years.
Greece needs to show the markets something. Which is why prime minister George Papandreou has pledged to accelerate the privatisation programme. His promise has been met with dissension from his political opponents at home and calls from EU diplomats abroad to appoint an independent body to monitor and, if necessary, force the asset sales, whether Greece likes it or not.
The Greek government is now looking at bringing in an expert from overseas with business experience rather that a European technocrat to oversee a special vehicle fund that will house all the privatisation assets. This, it hopes will ease concerns that the process will crumble. Already advisers have been appointed to around 15 privatisation programmes, with the OTE telecoms stake earmarked as first to be sold.
The advisers and sell-offs being set up include:
- Deutsche Bank and National Bank of Greece on the sale of OPAP, the state gambling monopoly
- Credit Suisse on state lotteries
- Rothschild and Barclays appointed for road concessions
- PriceWaterhouse selected for railway firm OSE
- France's BNP Paribas and Greece's National Bank on the extension of an operating lease on Athens International Airport.
- Lazard on exploiting the commercial activities of the Greek trusts and loans funds.
Harris Ikonomopoulos, president of the British Hellenic Chamber of Commerce – which is holding a conference in London for would-be buyers of Greek assets at Claridges later this month – says: "These are long stagnating assets – and it is a good thing that the sales process is being expedited to fill up the coffers and jump-start the economy. More than that, competition will create growth. New investment in Greece is essential because it will produce new taxpayers and new tax income."
Simply listing assets for sale is only half the problem, however. There is also a more widespread obstacle to the privatisation programme. Greece is still in recession, with Deutsche Bank forecasting a 2.9pc contraction this year. Staff in state-controlled industries are naturally jumpy about job security.
Already the unions, supported by most of the opposition parties, are preparing for a battle. Thousands of Greeks have taken to the streets in Athens and Thessaloniki to protest against the sales. Staff at Postbank blocked the entrance to the retail bank's headquarters in Athens. The country's public sector umbrella union, ADEDY, is planning a 24-hour strike next month to protest against the privatisations.
Says the LSE's Featherstone: "The problem is that Greece has a history of partial privatisation. This means that even when government has had a minority stake, the culture and the management are still overwhelmed by government. "It is because management of businesses is so dependent on political influence that unions have so much power. What Greece needs is a huge cultural change from an environment where business is too close to politics. But to jump to an open and competitive market is a deep root-and-branch shift. The hope is that this crisis is actually going to be able to trigger this fundamental shift. But attitudes are deeply embedded."
The spectre of slowing growth makes for a nervous summer
by Tom Stevenson - Telegraph
It's all worryingly familiar, a kind of Groundhog Day for investors. During the summer of 2010, markets had a nasty wobble and volatility spiked as investors worried that major economies, the US's in particular, were heading back into recession.
Today the spectre of slowing growth is spooking markets again and a nervous summer is in prospect. The past week has produced a catalogue of dispiriting announcements, with surveys of purchasing managers' intentions and unemployment data pointing to a renewed economic slowdown in most of the countries that matter in this regard. The renewed popularity of government bonds, the yields on which are the canary in the investment mine, suggests a search for safe harbours in which to see out the expected storm.
A good guide to the way the economic wind is blowing is provided by Citigroup's Economic Surprise Index (CESI). It measures how far away from expectations data announcements are and then calculates an index. If the data are better than expected, the index is positive, if worse it turns negative.
Since last autumn, readings have been consistently the right side of zero, but recently CESI has plunged back into negative territory, with the latest print at the depressed level reached in August 2010. That in turn was the worst reading since the beginning of 2009 at the bottom of the bear market. The last time we were here, the cavalry appeared in the form of Ben Bernanke, chairman of the Federal Reserve. He announced he was prepared, if necessary, to give the flagging US economy a boost by restarting the asset purchase programme known as quantitative easing (QE).
No sooner had he spoken than the stock market, which had given up 17pc over the summer, took off. And while the rally has lost momentum in the first half of 2011, prices have broadly speaking held up. The Fed actually did begin a new round of QE in November but the market had already moved, as the chart clearly shows. The promise that Bernanke would come to the rescue was all investors needed to hear.
The trouble with QE2 is that it was, from the outset, time-stamped June 2011. The Fed was clear that its $600bn (£366bn) supplementary bail-out would come to an end this month and now we have arrived. Relief has turned to anxiety about whether the global economy can stand on its own two feet once the taps are turned off. The latest data suggests it might struggle to do so.
The worry is that, despite QE2, the recovery in the US economy has been relatively modest by the standards of previous recoveries from recession. Unemployment remains high, the housing market is on its knees and inflation (if you exclude food and energy prices) is subdued. In other words, QE2 hasn't worked – at least not yet.
And therein lies the problem for markets, which have become addicted to monetary stimulus. If QE2 is seen to have been ineffective, then the case for QE3 is hard to make, given the inflationary risks of restarting the printing presses and the overheating that US money printing has already caused in many emerging markets. If the US economy cannot get back to growth when it's pumped up by massive monetary stimulus, it surely looks unlikely to do so if the juice is turned off.
Add in a growing chorus of support for spending cuts that can make a bigger dent in a $1.5 trillion deficit than the paltry $38.5bn of savings approved by Congress recently and the outlook is not encouraging. Thanks to Britain's recce down the path of austerity, investors have a sense of what might lie ahead if America ever gets serious about putting its own fiscal house in order. It's not a pretty sight, with recovery on this side of the pond predicted to be the slowest in 180 years of recession-watching.
A case can certainly be made for further QE and investors will be picking over comments from the Fed with the attention to detail of a 1980s Kremlinologist. Signs that Bernanke will ride to the rescue again this year will provide a fillip; worries that he won't will knock the market back again. I still believe we are in the relatively early stages of a multi-year recovery but at times this summer I suspect it will be easy to forget that.
Moody’s Warns on Citi, Wells, BofA Ratings
by Shira Ovide - Wall Street Journal
Uh oh. More bad news for banks. Moody’s put its ratings of Bank of America, Citigroup and Wells Fargo on watch for a possible downgrade. It’s all about what Moody’s expects to be no more desire for the government to bail out big banks in future financial crises.
Moody’s writes:"Each of these ratings currently incorporates an unusual amount of "uplift" from Moody’s systemic support assumptions that were increased during the financial crisis. The review will focus on whether these ratings should be adjusted to remove this unusual uplift and include only pre-crisis levels of government support…."
"[T]he support assumptions built into these three banks’ ratings are unusually high, which may no longer be appropriate in the evolving post-crisis environment," added Moody’s SVP Sean Jones.
Moody’s and Standard & Poor’s have previously said that banks’ debt ratings may have been artificially inflated by implicit government support. (Same for Fannie Mae and Freddie Mac.) Now that Uncle Sam is trying to put rules in place to wind down failing financial institutions, Moody’s figures it might not be fair to assume the government will prop up big banks in future financial crises.
(Side note: Do we really think the next time Citigroup teeters, that Uncle Sam won’t be there to catch it? Hard to imagine.)
US Banks May Need More Capital
by Deborah Solomon and Randall Smith - Wall Street Journal
Fed Weighs a Range of 8% to 14% of Assets, Stricter Than Many Expected
Large U.S. financial institutions might be forced to sharply increase their capital cushions as part of a plan discussed by the Federal Reserve to help prevent another financial crisis.
In a speech on Friday, Federal Reserve governor Daniel Tarullo suggested institutions could be ordered to hold capital ranging from 8% to 14% of assets, adjusted for the amount of risk they pose. No decision has been made, but in some extreme cases that would be twice as high as the 7% agreed to last year by global policy makers in Basel, Switzerland.
"The regulatory structure…should discourage systemically consequential growth or mergers unless the benefits to society are clearly significant," Mr. Tarullo said at the Peterson Institute for International Economics. "No one wants another TARP," he said, referring to the Troubled Asset Relief Program, the $700 billion government bailout that became necessary as financial institutions teetered on the brink of insolvency in 2008.
His comments come amid continuing international disagreement over the appropriate levels of capital for such "systemically important financial institutions," or SIFIs. International policy makers agree banks need stronger capital buffers to withstand market tremors but consensus tends to end there. U.S. policy makers, including Treasury Secretary Timothy Geithner, want an international agreement so U.S. firms aren't put at a competitive disadvantage by having to hold more of their capital in reserve.
In an interview on Friday, Michel Barnier, the European Union's financial-services commissioner, rejected the need for additional capital levels beyond those agreed to in Basel. "Let's not go too fast," he said. "We can't rush forward. We have to implement what we said we should."
The Fed, as part of the Dodd-Frank financial law passed last year, must impose stringent capital requirements on large, complex financial institutions that pose a risk to financial markets. About 35 banks with $50 billion or more in assets are automatically subject to the enhanced capital rules and regulators are discussing which other nonbanks, such as insurance companies, private-equity shops and hedge funds, also should fall into the SIFI category.
The Fed is considering a stricter capital regime than many on Wall Street expected. A leading idea among Fed staff would require the riskiest institutions—those whose collapse could cause the most collateral damage—to boost capital levels 100% above the Basel international standards, while less-risky institutions would need a 20% bump. That would translate into firms putting aside between 8.4% to 14% of capital. The Basel agreement requires institutions to slowly increase capital cushions to 7% by 2019 from roughly 2% now.
Banks would have to boost their capital reserves using common equity—a stricter form of capital than many want to use because it dilutes the outstanding shares. Mr. Tarullo said other forms of capital, such as contingent capital, which allows banks to convert debt instruments into equity in an emergency, are insufficient and potentially subject to "political pressures" in times of stress.
Mr. Tarullo said the U.S. needs to move beyond the Basel requirements because they are narrowly tailored to an individual institution's ability to withstand losses and don't take into account the "high degree of risk correlation among large numbers of actors in quick-moving markets." Tougher capital standards are necessary, he said, because systemically important institutions have "no incentive to carry enough capital to reduce the chances of such systemic losses."
Goldman 'Too Big' to Face Prosecution Over Mortgage Securities, Hintz Says
by Christine Harper - Bloomberg
Goldman Sachs Group Inc. won’t face criminal prosecution related to sales of mortgage-linked securities because such a move could threaten the U.S. financial system, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co.
The U.S. Department of Justice, which is reviewing a Senate subcommittee report that alleged Goldman Sachs misled clients before the financial crisis, will avoid jeopardizing the fifth- largest U.S. bank by assets because it’s viewed as "too big to fail," Hintz wrote in note to clients today. "If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department," Hintz wrote. "In a worst case environment, we would expect a ‘too big to fail’ bank such as Goldman to be offered a deferred-prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge."
Under a deferred-prosecution agreement, the U.S. files charges against a company and agrees to dismiss them after a certain period, typically if the company pays a fine or penalty and improves its governance or other practices. In October, the Justice Department dismissed a conspiracy case against UBS AG, Switzerland’s biggest bank, after the expiration of an 18-month deferred prosecution agreement with the Zurich-based bank.
Litigation Risk ‘Manageable’
Hintz, ranked the No. 1 analyst covering brokerage firms in a survey by Institutional Investor last year, said that the Justice Department’s approach to criminal charges against companies has changed since accounting firm Arthur Andersen LLP’s business collapsed following a felony charge.
A 2003 Justice Department policy document "stated that prosecutors can reward cooperation by offering a negotiated settlement to a targeted company that can range from immunity from criminal indictment to a deferred prosecution agreement," Hintz wrote. "Ultimately, the targeted company is treated not as a hardened criminal but as the equivalent of a juvenile offender that can be reformed."
Goldman Sachs’s potential civil litigation risk related to sales of mortgage-backed securities and collateralized debt obligations "is manageable," Hintz wrote, because the statute of limitations for many of the claims has already passed.
Franchise Will ‘Suffer’
Goldman Sachs’s most senior employees, known as partners, have every incentive to put the firm’s legal and political problems behind them, Hintz said. He kept his "outperform" rating on Goldman Sachs. The stock fell $2.32, or 1.6 percent, to $138.41 at 9:55 a.m. in New York Stock Exchange composite trading. Goldman Sachs has declined 16 percent this year through yesterday.
"As politicians continue to criticize the firm and the public scrutiny persists, we believe that Goldman’s clients will begin to rethink their relationship with the firm and the franchise will ultimately suffer," he wrote. "With approximately 17 percent of the ownership in the hands of current and former partners, this control group has ample motivation to make amends with politicians and the public in order to reduce the threat to its franchise."
In July, Goldman Sachs agreed to pay $550 million to settle a civil fraud suit by the U.S. Securities and Exchange Commission that alleged the firm misled clients about a mortgage-linked investment. The settlement, in which the company also admitted to making a "mistake," was agreed to three months after the firm’s statement that the allegations "are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation." Fabrice P. Tourre, the only Goldman Sachs employee who was also sued by the SEC in that case, hasn’t settled that suit.
How falling house prices are making a national scandal worse
by Ian Cowie - Telegraph
Many families where parents or grandparents have been householders for decades may imagine that capital they built up from house price inflation, before recent setbacks, will be sufficient for them to pay for decent long-term care if they need it in old age.
Now new analysis by independent experts suggests that assumption could prove complacent and incorrect. The bad news comes just as politicians rediscover the long-running scandal about low standards and high costs in many care homes for the elderly – and before the publication next month of the latest in a series of official reports commissioned over the years by governments keen to kick the issue into the long grass.
Vulnerable older people have been the victims of a callous game of pass the parcel in recent decades, as neither taxpayers or families are keen to pay for long term care. As rising numbers of us live longer but often in frailty during the final years, Government, local authorities and families have each urged the other to pick up the bill.
Falling house prices mean that selling the family home may not be enough to pay for long term care, according to analysis of Land Registry house price data and Laing & Buisson care fees by FirstStop Advice. For once, the analyst has no axe to grind. FirstStop is a free service offering information for older people, their families and carers about housing and care options in later life, backed by the charity Elderly Accommodation Counsel.
It calculates that at 9pc fall in the average house price to £163,000 and a collapse in average interest rates on bank deposits from 5pc to 1pc over the last five years has occurred at the same time as a 13pc increase in the Consumer Prices Index and a 22pc increase in average care home fees to £26,200 per annum. That combination will leave the typical family where one member needs care £53,700 worse off over the last year and facing an ongoing annual shortfall in income needed to pay fees of £14,900.
Philip Spiers, a director of FirstStop said: " The consequences of this are going to be catastrophic for older people who are self-funding their care homes for more than a few years and for councils, who are going to have to pick up the costs far earlier than ever before. "In 2006, councils could expect someone with an average valued property to be able to fund their care for well over 10 years but in today’s climate someone funding their care in real terms can expect to be £53,700 worse off after five years. "This is based on a fairly low average fee rate, care homes can cost far more, if you need a nursing home which could easily cost £700 per week you could expect to be asking the council for support after just over five years."
Who will fill the £6bn deficit in long term care funding forecast to open up over the next decade as an additional 1.7m older people become unable to look after themselves? Should it be central government, local authorities or the families affected?
Here and now, tens of thousands of older people are caught in the middle of this stand-off. Many are forced to sell homes they have lived in for decades to fund care while others are punished for having savings of more than £23,500 by the imposition of means tests for local authority aid that varies widely and unfairly from one postcode to the next. Annual fees for a nursing home can often exceed the cost of a luxury cruise or a place at Eton, so just a few years’ frailty can wipe out a lifetime’s savings.
Before the General Election last year, all three major parties promised to end the need for pensioners to sell their homes to pay for the cost of care. Under plans drawn up by the previous government, the elderly faced a fee of up to £20,000 — to be paid in advance or taken from their estate when they died — whether they ended up needing care or not.
In opposition, the Conservatives favoured a voluntary insurance scheme which would involve a one-off payment of £8,000 on retirement. The Liberal Democrats proposed a partnership scheme to which both the state and individuals contributed. But the Coalition agreement talked only about "a range of ideas, including both a voluntary insurance scheme … and a partnership scheme."
A market-led solution which allows individual choice and rewards individuals for saving and insuring in a responsible manner must be better than the bureaucratic cop-out of creating yet another tax. Three in four older people never need long term care. So it ought to be possible for the majority to share the cost of insurance to fund the needs of the minority who do need to claim – just as most of us already do as householders and motorists.
Earlier attempts to market long term care insurance failed due to lack of demand. People entering retirement simply did not buy these policies because they preferred not to think about the risks. But that is likely to change, as the extent of the problem becomes clearer and doing nothing ceases to be an option. The government must help insurers explain the value of the service they are offering, just as it already does with the wider problem of pensions.
U.K. Banks Cut 103,000 Jobs Since 2008, More Reductions to Come
by Jon Menon - Bloomberg
The U.K.’s five-largest banks including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc have eliminated more than 103,000 jobs since 2008, with more to come. That’s about 11 percent of their combined global workforces from the end of 2008 through 2010, according to Bloomberg data based on company filings. At least 34,500 of the cuts were made in Britain.
Banks have "aggressive" plans to control costs, "which would suggest that some further headcount reduction is required," said Andrew Gray, banking leader at PricewaterhouseCoopers LLP in London. "In many cases cost savings will need to be made on their global businesses and will be spread across their international cost base."
British banks have cut jobs and sold assets, trimming their balance sheets by 1.5 trillion pounds ($2.5 trillion) since the 2008 banking crisis as lenders reduce leverage and meet tougher capital requirements from regulators. Financial companies plan to cut 16,000 more jobs in the first half of 2011, according to the Confederation of British Industry, a lobbying group.
The biggest reductions have been at government-assisted RBS and Lloyds. RBS, which is 83 percent owned by the government, has cut 74,000 jobs in continued and discontinued units, with most of the decline resulting from asset sales. Lloyds, 41 percent government owned, has eliminated about 18,100 jobs including asset sales in the period following its acquisition of HBOS Plc, the U.K.’s biggest mortgage lender. As part of the integration, the bank last month said it had saved 1.6 billion pounds a year in costs at the end of the first quarter and plans to increase savings to 2 billion pounds by the end of the year.
"If each day massive groups of staff in processing centers, bank branches and call centers across the country are informed that their futures are uncertain, this is detrimental for the U.K.’s chances of economic recovery," David Fleming, a Unite trade union’s national officer, said in a statement.
Barclays Plc’s reduced employee numbers by 5,300 since 2008. HSBC Holdings Plc’s headcount declined by 17,000, including about 6,000 in the U.S. after the bank closed its consumer-finance subprime unit to new customers. Europe’s biggest bank may eliminate jobs and close offices as part of its plans to make as much as $3.5 billion of cost savings by 2013, HSBC said last month. It’s reinvesting the savings in emerging markets, the bank said.
Standard Chartered Plc, which employs 97 percent of its workforce outside the U.K., added more than 11,400 people since 2008. Like HSBC, the bank has increased assets in the period, though it is the only bank to have expanded staff, according to data compiled by Bloomberg. Spokesmen for the banks declined to comment on the job losses.
"The underlying trend is trying to make the back-office business more efficient, lower and lower, and create the room for client-facing staff so you can actually take market share," said Mike Trippitt, an analyst at Oriel Securities Ltd. in London.
Goldman Sachs subpoenaed by Manhattan district attorney
New York prosecutors have asked Goldman Sachs to explain its behavior in the run-up to the financial crisis, the latest investigation that has cast a pall over the reputation of the largest U.S. investment bank.
Goldman Sachs Group Inc. now faces probes by several government authorities into derivatives trades it executed in late 2006 and 2007. On Thursday, sources close to the matter said Goldman received a subpoena from the Manhattan district attorney, who joins the Justice Department and the Securities and Exchange Commission in examining Goldman's actions.
Separately, New York Atty. Gen. Eric Schneiderman is investigating Goldman as part of a broader probe into the mortgage operations and securitization practices of seven banks. A source familiar with the situation said Schneiderman's office met Goldman executives and attorneys in the last two weeks.
The probes follow a scathing report by U.S. lawmakers that cast Goldman as a central villain of the financial crisis and accused it of misleading clients about mortgage-linked securities.
The report by a Senate subcommittee, headed by Carl Levin (D-Mich.), said Goldman offloaded much of its subprime mortgage exposure to unsuspecting clients as the market for such securities was starting to tank. In some cases, the bank dragged its heels when clients wanted to get out of their losing positions, according to the report.
The investigations do not imply that the bank or its top executives will face criminal or civil charges, but they display a growing interest by prosecutors to build a case against Goldman, legal experts said.
"They have subpoena power to get certain records, correspondence, emails, and they're trying to find out every last detail that could prove fraud," said Peter Berlin, an attorney who represents defendants in white-collar cases.
The Manhattan district attorney, Cyrus Vance, is not seeking new documents, according to one source, but wants to ask further questions about the information contained in the Levin report.
In a statement, Goldman said: "We don't comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them we cooperate fully."
Goldman Sachs Investigators Bolstered by New York's Martin Act
by David Voreacos - Bloomberg
Prosecutors at the Manhattan District Attorney’s Office who are examining Goldman Sachs Group Inc. may have an easier time than federal authorities in bringing criminal charges because of a 90-year-old New York state law.
District Attorney Cyrus Vance Jr. subpoenaed Goldman Sachs, the fifth-biggest U.S. bank by assets, for records on its activities leading into the credit crisis, two people familiar with the matter said. Vance may bring charges under the state’s Martin Act, which lawyers call a potent tool for New York prosecutors probing investment frauds, Ponzi schemes and other white-collar crime.
To prove securities fraud in federal court, prosecutors must show that a defendant intended to defraud victims and that the investors relied on misstatements or omissions. Under the Martin Act, prosecutors aren’t required to prove intent, said Michael Perino, a law professor at St. John’s University in New York. "The reason why New York prosecutors love it so much and Wall Street firms hate it so much is that it is a much, much easier case to bring," Perino said in an interview. "All a prosecutor has to show under the Martin Act is a material misstatement in connection with a securities offering."
Vance’s subpoena of New York-based Goldman Sachs related to the U.S. Senate’s Permanent Subcommittee on Investigations report on Wall Street’s role in the collapse of the financial markets, said the people, who spoke on condition of anonymity because the inquiry isn’t public.
The subcommittee, led by Michigan Democrat Carl M. Levin, released a 640-page report in April that accused the bank of misleading buyers of mortgage-linked investments. Levin said Goldman Sachs also misled Congress about the company’s bets on the housing market. The firm has said its testimony was truthful. "Subpoenas are a normal part of the information request process," said David Wells, a spokesman for Goldman Sachs. The bank is cooperating with the investigation, he said.
Vance is far from deciding to charge any individuals with crimes, said John Moscow, a former deputy chief of the investigations division in the Manhattan District Attorney’s Office. "The big question they’re probably looking to answer is what happened," said Moscow, now at Baker Hostetler LLP. "When you’ve figured out what happened, then you can figure out if it’s wrongful and it’s criminal. Before you’ve figured out what happened, it’s premature" to predict the outcome.
'A Smoking Gun'
Peter Henning, a professor at Wayne State University Law School in Detroit, said he doubts that Vance’s investigators will find "a smoking gun" in documents that have already been reviewed by Congress and federal regulators, including the U.S. Securities and Exchange Commission. By using the Martin Act, Vance may instead be able to build a criminal case based on circumstantial evidence, he said. "It makes it easier to prove," Henning said of the state statute.
Last year, Goldman Sachs paid $550 million to settle SEC claims related to its marketing of the complex securities known as collateralized debt obligations. The settlement 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. After the SEC settlement, the Vance probe "has the appearance of being political piling on," said attorney Jacob Frenkel, a former SEC lawyer now with Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland.
"That has to be balanced by the fact that, regardless of perception, state and local law enforcement have a legitimate place in the investigative process because the applicable laws are different," Frenkel said. "I do not expect that this investigation will result in a criminal case against Goldman Sachs as a firm." The Martin Act was enacted in 1921, and five years later, an appeals court said it applied to "all deceitful practices contrary to the plain rules of common honesty." The law imposes a two-year statute of limitations on misdemeanors and five years on felonies.
The New York state attorney general can bring civil or criminal actions under the Martin Act, while district attorneys only use it in criminal cases. Former New York Attorneys General Eliot Spitzer and Andrew Cuomo used the law against investment banks and the mutual-fund industry, while Robert Morgenthau, Vance’s predecessor, used it often during his 34-year tenure to combat boiler rooms, Ponzi schemes, private-placement investment fraud, and corrupt trading practices.
Goldman Sachs met last month with New York Attorney General Eric Schneiderman’s office as part of his examination of mortgage securitization before the housing collapse, according to a person familiar with the matter. The meeting took place within the past two weeks, said the person, who spoke on the condition of anonymity because the probe isn’t public.
Schneiderman has been conducting a broad examination of mortgage practices and the packaging and sale of loans to investors, according to the person. JPMorgan Chase & Co. (JPM), UBS AG (UBSN), Deutsche Bank AG (DBK), Bank of America Corp. (BAC), Morgan Stanley (MS) and the Royal Bank of Scotland Group Plc (RBS) also are part of that probe, the person said. Four bond insurers have been subpoenaed as well.
The Senate report was referred to the U.S. Department of Justice and the SEC, which are also investigating. Levin said at the time of his report that U.S. prosecutors should review whether to bring perjury charges against Goldman Sachs Chairman and Chief Executive Officer Lloyd Blankfein, 56, and other current and former employees who testified before 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. "The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report," Goldman Sachs said in a statement in April after the Levin report was released.
"The report references testimony from Goldman Sachs witnesses who repeatedly and consistently acknowledged that we were intermittently net short during 2007," Goldman said in that statement. "We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point."
In a Jan. 25 speech to the New York City Bar Association, Vance, who only has jurisdiction over crimes committed in Manhattan, said "the Martin Act has never been more relevant" as "widespread mistrust infects financial markets." Still, he said the law is "marred by its overly lenient penalties," and he called on state lawmakers to stiffen punishment.
Vance said he would seek prison sentences of as long as 8 1/3 years to 25 years for frauds involving more than $1 million. The crime now carries no minimum prison sentence, regardless of the money involved. "Whether the perpetrator steals $500 or $500 million, the felony penalty is the same -- that reserved for the lowest-level felonies in New York," two Vance deputies, Adam S. Kaufmann and Marc Frazier Scholl, wrote in Business Crimes Bulletin last September.
It's not just Dominique Strauss-Kahn. The IMF itself should be on trial
by Johann Hari - Independent
Imagine a prominent figure was charged, not with raping a hotel maid, but with starving her, and her family, to death
Sometimes, the most revealing aspect of the shrieking babble of the 24/7 news agenda is the silence. Often the most important facts are hiding beneath the noise, unmentioned and undiscussed.
So the fact that Dominique Strauss-Kahn, the former head of the International Monetary Fund (IMF), is facing trial for allegedly raping a maid in a New York hotel room is – rightly – big news. But imagine a prominent figure was charged not with raping a maid, but starving her to death, along with her children, her parents, and thousands of other people. That is what the IMF has done to innocent people in the recent past. That is what it will do again, unless we transform it beyond all recognition. But that is left in the silence.
To understand this story, you have to reel back to the birth of the IMF. In 1944, the countries that were poised to win the Second World War gathered in a hotel in rural New Hampshire to divvy up the spoils. With a few honourable exceptions, like the great British economist John Maynard Keynes, the negotiators were determined to do one thing. They wanted to build a global financial system that ensured they received the lion's share of the planet's money and resources. They set up a series of institutions designed for that purpose – and so the IMF was delivered into the world.
The IMF’s official job sounds simple and attractive. It is supposedly there to ensure poor countries don’t fall into debt, and if they do, to lift them out with loans and economic expertise. It is presented as the poor world’s best friend and guardian. But beyond the rhetoric, the IMF was designed to be dominated by a handful of rich countries – and, more specifically, by their bankers and financial speculators. The IMF works in their interests, every step of the way.
Let’s look at how this plays out on the ground. In the 1990s, the small country of Malawi in south-eastern Africa was facing severe economic problems after enduring one of the worst HIV-AIDS epidemics in the world and surviving a horrific dictatorship. They had to ask the IMF for help. If the IMF has acted in its official role, it would have given loans and guided the country to develop in the same way that Britain and the US and every other successful country had developed – by protecting its infant industries, subsidising its farmers, and investing in the education and health of its people.
That’s what an institution that was concerned with ordinary people – and accountable to them – would look like. But the IMF did something very different. They said they would only give assistance if Malawi agreed to the ‘structural adjustments’ the IMF demanded. They ordered Malawi to sell off almost everything the state owned to private companies and speculators, and to slash spending on the population. They demanded they stop subsidising fertilizer, even though it was the only thing that made it possible for farmers – most of the population – to grow anything in the country’s feeble and depleted soil. They told them to prioritise giving money to international bankers over giving money to the Malawian people.
So when in 2001 the IMF found out the Malawian government had built up large stockpiles of grain in case there was a crop failure, they ordered them to sell it off to private companies at once. They told Malawi to get their priorities straight by using the proceeds to pay off a loan from a large bank the IMF had told them to take out in the first place, at a 56 per cent annual rate of interest. The Malawian president protested and said this was dangerous. But he had little choice. The grain was sold. The banks were paid.
The next year, the crops failed. The Malawian government had almost nothing to hand out. The starving population was reduced to eating the bark off the trees, and any rats they could capture. The BBC described it as Malawi’s "worst ever famine." There had been a much worse crop failure in 1991-2, but there was no famine because then the government had grain stocks to distribute. So at least a thousand innocent people starved to death.
At the height of the starvation, the IMF suspended $47m in aid, because the government had ‘slowed’ in implementing the marketeering ‘reforms’ that had led to the disaster. ActionAid, the leading provider of help on the ground, conducted an autopsy into the famine. They concluded that the IMF "bears responsibility for the disaster."
Then, in the starved wreckage, Malawi did something poor countries are not supposed to do. They told the IMF to get out. Suddenly free to answer to their own people rather than foreign bankers, Malawi disregarded all the IMF’s ‘advice’, and brought back subsidies for the fertiliser, along with a range of other services to ordinary people. Within two years, the country was transformed from being a beggar to being so abundant they were supplying food aid to Uganda and Zimbabwe.
The Malawian famine should have been a distant warning cry for you and me. Subordinating the interests of ordinary people to bankers and speculators caused starvation there. Within a few years, it had crashed the global economy for us all.
In the history of the IMF, this story isn’t an exception: it is the rule. The organisation takes over poor countries, promising it has medicine that will cure them – and then pours poison down their throats. Whenever I travel across the poor parts of the world I see the scars from IMF ‘structural adjustments’ everywhere, from Peru to Ethiopia. Whole countries have collapsed after being IMF-ed up – most famously Argentina and Thailand in the 1990s.
Look at some of the organisation’s greatest hits. In Kenya, the IMF insisted the government introduce fees to see the doctor – so the number of women seeking help or advice on STDs fell by 65 per cent, in one of the countries worst affected by AIDS in the world.
In Ghana, the IMF insisted the government introduce fees for going to school – and the number of rural families who could afford to send their kids crashed by two-thirds. In Zambia, the IMF insisted they slash health spending – and the number of babies who died doubled. Amazingly enough, it turns out that shovelling your country’s money to foreign bankers, rather than your own people, isn’t a great development strategy.
The Nobel Prize winning economist Joseph Stiglitz worked closely with the IMF for over a decade, until he quit and became a whistle-blower. He told me a few years ago: "When the IMF arrives in a country, they are interested in only one thing. How do we make sure the banks and financial institutions are paid?... It is the IMF that keeps the [financial] speculators in business. They’re not interested in development, or what helps a country to get out of poverty."
Some people call the IMF "inconsistent", because the institution supports huge state-funded bank bailouts in the rich world, while demanding an end to almost all state funding in the poor world. But that’s only an inconsistency if you are thinking about the realm of intellectual ideas, rather than raw economic interests. In every situation, the IMF does what will get more money to bankers and speculators. If rich governments will hand banks money for nothing in "bailouts", great. If poor countries can be forced to hand banks money in extortionate "repayments", great. It’s absolutely consistent.
Some people claim that Strauss-Kahn was a "reformer" who changed the IMF after he took over in 2009. Certainly, there was a shift in rhetoric – but detailed study by Dr Daniela Gabor of the University of the West of England has shown that the substance is business-as-usual.
Look, for example, at Hungary. After the 2008 crash, the IMF lauded them for keeping to their original deficit target by slashing public services. The horrified Hungarian people responded by kicking the government out, and choosing a party that promised to make the banks pay for the crisis they had created. They introduced a 0.7 per cent levy on the banks (four times higher than anywhere else). The IMF went crazy. They said this was "highly distortive" for banking activity – unlike the bailouts, of course – and shrieked that it would cause the banks to flee from the country. The IMF shut down their entire Hungary programme to intimidate them.
But the collapse predicted by the IMF didn’t happen. Hungary kept on pursuing sensible moderate measures, instead of punishing the population. They imposed taxes on the hugely profitable sectors of retail, energy and telecoms, and took funds from private pensions to pay the deficit. The IMF shrieked at every step, and demanded cuts for ordinary Hungarians instead. It was the same old agenda, with the same old threats. Strauss-Kahn did the same in almost all the poor countries where the IMF operated, from El Salvador to Pakistan to Ethiopia, where big cuts in subsidies for ordinary people have been imposed. Plenty have been intimidated into harming their own interests. The US-based think tank the Center for Economic and Policy Research found 31 of 41 IMF agreements require ‘pro-cyclical’ macroeconomic policies – pushing them further into recession.
It is not only Strauss-Kahn who should be on trial. It is the institution he has been running. There’s an inane debate in the press about who should be the next head of the IMF, as if we were discussing who should run the local Milk Board. But if we took the idea of human equality seriously, and remembered all the people who have been impoverished, starved and killed by this institution, we would be discussing the establishment of a Truth and Reconciliation Commission – and how to disband the IMF entirely and start again.
If Strauss-Kahn is guilty, I suspect I know how it happened. He must have mistaken the maid for a poor country in financial trouble. Heads of the IMF have, after all, been allowed to rape them with impunity for years.
Global food crisis: the speculators playing with our daily bread
by Felicity Lawrence - Guardian
With food prices reaching record highs again this year, what goes on inside a 650ft Chicago skyscraper topped by a statue of the goddess Ceres is coming under intense scrutiny. It is here that the world's oldest futures and options exchange, the Chicago Board of Trade (CBOT), was established in 1848 to serve the great grain belt that had opened up in the American midwest. And it is here that the international price of agricultural commodities is set to this day.
"There's a lot of weather in the market, the northern growing season has been traumatic, with drought in Europe and China and tornadoes and floods in the US. No one is panicked yet, but any additional crop loss, say in Russia, will quickly bring new worry to the market and that could quickly turn to panic. We may be one more event away from panic," Dan Basse, president of AgResource, one of Chicago's most respected commodity analyst companies, warned as we watched the opening of a day's trading last month.
G20 agriculture ministers will meet in Paris on 22 June to discuss food security and prices. Speculative activity and how to contain it is high on their agenda. Debate has been raging since 2008, when price rises provoked riots around the world, about whether or not the new money that has flooded into the commodities markets since 2003 is the cause of the problem – and if so, how to regulate it.
In Chicago, before the financial day begins, teams of traders pump themselves up outside on chain-smoked cigarettes and outsize McDonald's coffees. The coloured blazers they use to make themselves easily identifiable on the trading floor have been reduced to bright jackets with string-vest backs to counter the heat generated by a day's speculation. They keep on their toes in training shoes.
Inside, when the bell announces the start, there is a frenzy of noise. Traders yell at one another and wave their arms in violent gesticulation, palms out to signal sell, palms in to signal buy. There are "scalpers" who buy and sell within seconds, "floor brokers" hedging for corporate accounts, and hundreds of runners rushing orders to the recorders.
At the end of May, the price of corn was up again – most traders and analysts expected it to continue rising along with other commodities. Basse is one of those who thinks underlying fundamentals – a serious mismatch between supply and rapidly growing global demand – are behind this year's price rises. "Speculation is the easy thing to point the finger at and it's easy to fix. Back in 2008, when prices were up and there was lots of money pouring in, that may have pushed prices up, but today we don't see that as having a significant effect," Basse said. "Look at growth in world livestock demand and in biofuels demand, and you can see what's been driving the agricultural bull market."
He painted a troubling picture of what is likely to come. He estimates the world needs to bring around 10.3m hectares of new land a year into food production "just to keep stocks steady", but he says that will be increasingly hard to do as the land that remains available is reduced to what is environmentally fragile.
A "weekend" farmer of GM crops himself, Basse admits the promise that biotech seeds would deliver big increases in yields has turned out to be illusory. He also fears that "superweeds are coming on so fast with GM that US farmers are going to have to go back to more traditional cultivation methods [as opposed to the practice with GM seeds of not tilling the soil and simply spraying to control pests] – but they don't have the capacity to do that."
Europe, Basse said, will soon have no choice but to lift its ban on imports of GM crops for animal feed. With its own crops suffering drought, it will have to turn to Brazil, the only major supplier of non-GM imports. However, the Chinese have already bought up large chunks of the Brazilian crop. The policies in the US and the EU of promoting biofuels will be unsustainable. The company that owns CBOT, the Chicago Mercantile Exchange group (CME), also rejects the notion that the enormous rise in speculation in agricultural commodities in recent years has caused food price rises.
Farmers and processors of physical goods have long used commodities exchanges such as Chicago's to hedge against risks such as bad harvests. Speculators willing to take the risk perform a useful role in providing liquidity. But much of the recent growth in speculation has been through new "structured" products invented by banks and sold to investors. After intense lobbying, banks won deregulation of commodities markets in the US in 2000, allowing them to develop these new products. Goldman Sachs pioneered commodity index funds, which offer investors a chance to track changes in a spread of commodity prices including key agricultural commodities.
Between 2003 and 2008, investment in commodity index funds rose from $13bn to $317bn (£193bn). But the CME's associate director of product development, Fred Seamon, said: "There is no credible evidence that suggests index funds or any group of traders are a cause for high prices or increased volatility. There may be a correlation, but that's a completely different thing."
CME argues that the volume of speculation is not a problem, because the overall composition of the agricultural commodities market has not changed; the increase in activity by index funds has been matched by an increase in trading by those who are commercial participants, that is those who have a direct interest in the physical goods. "That's an indefensible position," Chicago–based hedge fund manager Mark Newell of Quiddity retorted. He and another hedge fund manager, Mike Masters, prepared testimony to the US Senate when it was looking into the effect of speculation on food prices in 2008.
"When billions of dollars of capital is put to work in small markets like agricultural commodities, it inevitably increases volatility and amplifies prices – and if financial flows amplify prices of food stuffs and energy, it's not like real estate and stocks. When food prices double, people starve ," Masters said. The UN rapporteur on the Right to Food, Olivier de Schutter, added his weight to Masters' side of the debate at the end of last year when he concluded a speculative bubble was responsible for a significant part of the food price rises. An OECD study, however, did not find a link. Aid agencies such as Oxfam and Christian Aid are calling for reregulation.
In the US, the regulator – the Commodities Futures Trading Commission – has until July to produce a new framework for the commodities markets for Congress. It has been looking at imposing limits on the size of positions that traders can take, and at regulating the commodity index fund trades that are currently unregulated because they take place "over the counter"; that is, between investors and banks. But the financial industry has proved resistant to reforms. G20 ministers will have to decide their own position soon, too.
Newell, meanwhile, remains convinced that without action prices will continue to go up, partly because of underlying fundamentals, but also because, just like in 2008, "the game's afoot again".
Fukushima No. 1 reactor's air radiation highest measured so far
by Kyodo, AP
Tepco detects 4,000 millisieverts per hour in Fukushima reactor building
Tepco said Saturday it has detected radiation of up to 4,000 millisieverts per hour at the building housing the No. 1 reactor at the Fukushima No. 1 nuclear plant. The radiation reading, which was taken when Tokyo Electric Power Co. sent a robot into the No. 1 reactor building on Friday, is believed to be the largest detected in the air at the plant so far.
On Friday, Tepco found that steam was spewing from the reactor floor. Nationally televised news Saturday showed blurry video of steady smoke curling up from an opening in the floor. Tepco said it took the reading near the floor at the southeast corner of the building, under which runs a pipe emitting steam. No damage to the pipe was found, the utility said.
The pressure suppression containment vessel is located under the building and highly radioactive contaminated water generated by the reactor is believed to have accumulated there, Tepco said, adding the steam is probably coming from the water. The utility said its workers have no plan to work near that area, but it will carefully monitor developments.
Meanwhile, tanks for storing radioactive water were on their way Saturday to the plant. Tepco has said radioactive water could start overflowing from temporary storage areas on June 20, or possibly sooner if there is heavy rainfall. Two of the 370 tanks were due to arrive Saturday from a manufacturer in nearby Tochigi Prefecture, Tepco said. Two hundred of them can store 100 tons, and 170 can store 120 tons.
The tanks will continue arriving through August and will store a total of 40,000 tons of radioactive water, according to Tepco. Workers have been fighting to get the plant under control since the March 11 tsunami knocked out power, destroyed backup generators and halted the crucial cooling systems for the reactors, causing the world's worst nuclear disaster since Chernobyl in 1986. Several explosions have scattered radioactive debris around the plant, and reactors are spewing radiation into the air.
On Friday, nine workers entered the building to attach a pressure indicator to the pressure vessel, with the workers exposed to up to about 4 millisieverts of radiation, according to Tepco. Nuclear fuel rods are believed to have melted almost completely and sunk to the bottom of three reactors' containers, although falling short of a complete meltdown, in which case the fuel would have melted entirely through the container bottoms.
Tepco has promised to bring the plant under control by January, but doubts are growing whether this projection is overly optimistic. The plan calls for a reprocessing system for the radioactive water by June 15, with hopes of reusing the water as coolant in the reactor