"Heavy black clouds of dust rising over the Texas Panhandle"
The forces that were driving thousands of farm families in Texas and Oklahoma to the West Coast in the great Dust Bowl migration
Ilargi: Hey there, Occupy Wall Street!
Here's a gem of a quote just for you. And a word you will need to memorize and understand: Deflation.
You know, it's undoubtedly wise to remember that this whole thing we're facing has happened before. And many times.
To wit, here’s a quote by the late great - and sorely missed- Joe Bageant, taken from his 2010 publication, Rainbow Pie - A Redneck Memoir. Joe died on March 26, 2011. See here for more of and about him.
Joe Bageant:"The US postwar rural out-migration was initiated - though in a different way and for different reasons - by the same corporate-financial powers that caused the earlier tragic migration of workers in search of work during the Great Depression. Endless footage of the Dust Bowl has subsequently made it synonymous in American minds with the Great Depression, even though they were two separate events.
The Dust Bowl affected only a portion of the country. But, according to the average American's grasp of the history - to the degree that we have one at all - those ten million Americans "riding thumb" and hopping rail cars all came out of Oklahoma, which had a population of about two million at the time.
We never see documentaries or movies about the corporate malfeasance of unregulated stock markets and commodity speculation, banking and other enterprises of the already rich that ruined more rural Americans and farmers than the Dust Bowl did. But we do see and read about those very few urban investors who jumped off the twentieth floor during the 1929 stock crash.
The recklessness of the financial elites and the layer of speculators that cushioned them blew away millions of Americans - folks who never saw a stock certificate in their lives. As Depression-era migrant Grace Pample told me in one of the most poetic summaries I have ever heard from the mouth of one of my own people,
"It was the big-money men, it was them who made us to rise and blow across the land like the Russian thistle, like gypsies in the dust""
Ilargi: In other news, the Greek parliament last night voted for new and more austerity measures, but, and not only because there are more votes to come, we get the distinct feeling that these votes have little more than symbolic meaning. If the Syntagma square protests keep on coming and/or escalate ever more, the present government and/or parliament doesn't have much longer to live.
And besides, we also have the distinct feeling that the October 23 Euro summit, if (or make that when) it takes place - there are even rumors of postponing it - will have as one of its major issues the default of Greece. As in: sorry, we need to save France now, can't do both.
But we’ll gracefully admit, it's hard to gauge where Merkel and Sarkozy stand vis à vis each other. German and French primary interests seem to be diverging faster than the leaders can come up with reassuring words to the contrary. Sarkozy - if he is to save his banks - desperately needs a huge expansion of the EFSF fund, while Merkel needs that like she needs a hole in the head.
Her finance minister, Wolfgang Schäuble, apparently shifted remarkable smoothly from the idea of turning the fund into a bank that could borrow from the ECB, towards the even greater idea of turning it into a bond insurer, which could guarantee the first 20% of sovereign PIIGS losses and thus leverage the fund 5-fold anyway, despite Mr. Schäuble's own compatriots' strong objections.
To what extent this matters is about as transparent as a dust storm. Amidst all the contradictory dribble that comes forward from all the - too many- various parties involved in the Euro Kabuki, what has indeed become clear is that the minimum haircut on Greece is 50%, with 60% a lot more likely (or whatever agreement is reached will just be laughed away by those with skin in the game).
So even if Schäuble's inane bond insurance plan gains any traction, private investors will still need to swallow a 30%-40% loss, if not more. Which in turn invalidates the one agreement that does still stand, and is only three months old, which states that the Max Haircut would be 21%.
The arguably most amusing part of all this is that those private investors are to a large extent banks such as the ones Sarkozy is trying to save. Which also face increased tier 1 capital ratio requirements, to the tune of 9%, by EU regulators, and a whole lot faster than anyone predicted. The FT reports that this will only require €80 billion in extra capital, but other voices darkly whisper of €250 billion or more.
And while we're at it, everyone can agree, at least in private, that it will be impossible to raise that kind of money in the financial markets, so it will have to come from either separate countries or some troika member, EU, ECB or IMF. Now, if France bails out its own banks, it is sure to be downgraded. If it doesn't, and the ECB and/or the EFSF must be called upon, it's Germany that - a bit further down the line, perhaps, but still - stares the downgrade risk in the face.
Do any of you remember the good old days of say, oh, last year, when we were told ad nauseam that the bail outs were all meant to achieve one thing more than all, namely that banks would start lending again? Well, those days are over.
Mostly hidden from view by emergency meetings and earnings reports, we live in the days of the incredibly shrinking banks. Tens if not hundreds of thousands of job losses in the banking sector have already been announced, and they'll just keep on coming with a vengeance.
If you can't meet capital ratio requirements by raising cash, you can always sell whatever you can sell, get a whole lot smaller and lower requirements that way. Only thing is, you're going to lend less, not more, money to the consumer and industry.
But there's a problem with that too, wouldn't you know it? That is, you need someone willing to buy what you want to sell. And it won't be the banks in the same predicament as you. At first, there'll be hedge funds willing to snap up penny on the dollar deals, but if everyone wants to, needs to, sell, you get a buyer's market, in which prices keep dropping so much it's not much use to sell at all.
Which is why, while Bloomberg reports that Morgan Stanley predicts that EU (including UK) banks will need to sell assets, reduce lending and overall reduce short-term funding as much as €2 trillion, other voices say they won't be able to achieve that much, because they can't sell enough assets. Ergo: they’ll need to reduce lending even more.
Along the exact same lines, Bank of America is shrinking, and right into oblivion down the line. How any regulatory body, be it the Fed or the FDIC, can possibly comply with BofA moving $53 trillion in derivatives to its consumer deposits book is beyond us. What is it? Despair over desperation? Thinking you can get away with anything? Still, whoever's made to pay (Hello, Occupy Wall Street, protest this! Occupy BofA. Occupy the FDIC.), the effect remains what it is: Incredible Shrinkage.
And that, dear reader, is how you spell deflation.
And debt deflation. And credit crunch. This cannot be prevented. It is written in stone. Not even Occupy Wall Street or Syntagma Square have the power to undo the inevitable. They can, however, have a loud and major voice in seeing to it that the pain is evenly distributed. It is not now.
Ashvin Pandurangi: TAE community:
The following are the first four ideas to be submitted for TAE Community's "Diamonds in the Rough" project. They are all fascinating ideas in their own right, but unfortunately they cannot all be explored in-depth here. Therefore, they will be voted on in a poll which lasts for four days (see upper right hand corner of the TAE page) , and the idea with the most votes will be explored further at a later date.
The polling process will be repeated for four more ideas soon after the first poll is completed. Everyone reading this is encouraged to vote for the Diamond they wish to uncover, helping us to display a true and productive democracy in action! Here is a brief explanation of the first four ideas, as they have been described by those who submitted them:
- Tectonic Stress Mitigation Strategy - Creation of a new Canadian political party with a platform and worldview centered on the precepts of the Earth Sciences. This new political party, however, would not run in elections until after a major discontinuity has struck (i.e. financial collapse and/or peak oil).
- Reviving the Department of Subsistence Homesteads - FDR program to redistribute poor & unemployed urban families back out to rural areas on smallish plots of land (2-2.5 acres) that would provide space for growing produce and keeping livestock that would meet most of the food needs of a family. These planned communities also included communal resources and spaces like pasture, canning kitchens, farm equipment and the like.
- Optimal Nurturing - The problems of today, and the future, are manifestations of a single root cause: the destruction of the human mind. The twin pillars of psychopathology are abuse and neglect in childhood. The solution is exactly the opposite: optimal nurturing from conception through birth and childhood. Just as a gardener knows how to nurture a plant to fulfill its potential, parents can do the same for their children by creating a nurturing and supportive environment which optimizes growth and development.
- Planting Fruit Trees - Plant fruit trees and shrubs in huge numbers on private and public land = one aspect of Permaculture. The return on such an investment is rapid and large. An example: a Great Wall Kaki planted 5 years ago (cost was $25) this year yielded $150 worth of fruit (50 @ $3 each retail), and the tree is only about one fifth of expected full size with an expected life span of 50 years. The results are in dollar terms but could also be considered in terms of calories.
Europe Banks Vow $1 Trillion Shrinkage as Recapitalization Looms
by Anne-Sylvaine Chassany and Liam Vaughan - Bloomberg
European banks, assuring investors they can weather the sovereign debt crisis by selling assets and reducing lending, may not be able to raise money fast enough to prevent government-forced recapitalizations.
Banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about €775 billion ($1.06 trillion) in the next two years to reduce short-term funding needs and comply with tougher regulatory capital requirements, according to data compiled by Bloomberg.
Morgan Stanley predicts that amount could reach €2 trillion across Europe as banks curb lending and sell loans and entire businesses. A lack of buyers and the losses lenders face on loan sales are making those targets unrealistic. "Asset sales are impractical in the current environment," said Simon Maughan, head of sales and distribution at MF Global UK Ltd. in London.
"Every bank is selling, and no bank is buying. It just won’t work. Beyond that, the magnitude of the cuts the banks are talking about is nowhere near the likely required amount of deleveraging. They need to reduce hundreds of billions more to adjust to the new world order. There has to be a recapitalization."
European Union leaders are seeking to boost bank capital as investors prove reluctant to provide short-term funding, in part because of concerns that lenders face more writedowns of sovereign debt from Greece and other southern European nations. They may require that banks increase core capital to 9% of risk-weighted assets from 5% within six months, seven years ahead of the target set by the Basel Committee on Banking Supervision, according to a person with knowledge of the plans.
Banks in Europe may need €150 billion to €230 billion of additional capital to meet the requirements, Kian Abouhossein, a JPMorgan Chase & Co. analyst in London, wrote in an Oct. 1 note. Those that can’t raise cash through share sales would be required to take capital from their governments or the EU and may face curbs on paying bonuses and dividends, European Commission President Jose Barroso said Oct. 12. European leaders will consider the plans at a meeting in Brussels Oct. 23.
Banks, whose shares as measured by the 46-member Bloomberg Europe and Financial Services Index have fallen 31 percent this year, oppose the plan partly because it would dilute the value of existing shares. In addition, bankers including Deutsche Bank AG’s Chief Executive Officer Josef Ackermann and Banco Santander SA Chairman Emilio Botin say capital injections won’t address the real problem, which is sovereign debt.
"Since private investors will certainly not be providing the funds for such a recapitalization, governments would ultimately have to raise such funds themselves, thus only exacerbating their debt situation," Ackermann, who’s also chairman of the Washington-based Institute of International Finance, said at a conference in Berlin on Oct. 13.
Avoiding government aid may require reducing balance sheets, he said. Such shrinkage would help lenders meet revised capital ratios. The EU proposals "will produce a contraction of credit since many institutions will opt to reduce their balances," Botin said in a speech at Santander’s headquarters outside Madrid yesterday.
French lenders BNP Paribas SA, Credit Agricole SA and Societe Generale SA, whose share prices have fallen 37 percent, 48 percent and 52 percent respectively this year, were the latest to announce asset reductions after investors shunned their stocks in August on speculation France was facing a credit-rating downgrade and concerns that the banks were too reliant on short-term funding.
BNP Paribas, France’s largest bank, said on Sept. 14 it will reduce risk-weighted assets by about 70 billion euros by the end of next year. This amounts to about 200 billion euros in gross assets, or about 10 percent of the lender’s balance sheet, according to estimates by Christophe Nijdam, a Paris-based AlphaValue analyst. It will include sales of investment-banking operations outside Europe, the bank said.
Societe Generale, the country’s third-largest lender by assets, said this month it will cut as much as 80 billion euros in risk-weighted assets by 2013, including 40 billion euros through asset disposals. This will decrease funding needs by as much as 95 billion euros, the bank said. The reduction amounts to about 150 billion euros in gross assets, said Nijdam. Credit Agricole said it would cut as much as 52 billion euros in funding needs by the end of 2012, which equals about 30 billion euros in gross assets, according to Nijdam.
'On a Diet'
"French banks had three years to downsize their balance sheet, and they’ve done little," Nijdam said in an interview. "Today they don’t have the choice. They were so attacked this summer over their liquidity needs that the French regulator pressed them to go on a diet. And they want to avoid equity injections that would feel very punitive for their existing shareholders."
BNP Paribas had 1.93 trillion euros of gross assets as of June 30, compared with 2.08 trillion euros on Dec. 31, 2008, before purchasing Fortis’s Belgium and Luxembourg assets in 2009. Societe Generale had 1.16 trillion euros in assets in June, up from 1.13 billion euros at the end of 2008. Both banks say they can meet new Basel capital requirements.
"We’ve got a perfectly precise route plan to reach the level of shareholders’ equity corresponding to the new rules," BNP Paribas CEO Baudouin Prot said Sept. 21 on France’s Radio Classique. Carine Lauru, a spokeswoman for Paris-based BNP Paribas, said the bank would be able to comply with Basel capital requirements six years ahead of schedule.
Selling those assets won’t be easy, said Malik Karim, CEO of London-based Fenchurch Advisory Partners, which provides corporate-finance advice. "Uncertainty is high, buyers are conservative, valuations low and the pool of potential buyers is restricted because private equity has limited access to leverage," Karim said. "Selling your best business units may be feasible at attractive prices, but banks will need to decide how they will replace quality earnings, which underpin their dividends, an equity story and share prices."
RBS Asset Sales
U.K. and Irish banks have been shrinking their balance sheets with mixed success since they were bailed out in the 2008 financial crisis. Royal Bank of Scotland Group Plc, which received 45.5 billion pounds ($71 billion) in government funding, has cut about 1 trillion pounds from its balance sheet since 2008 to 1.4 trillion pounds at the end of the second half of 2011, said Sarah Small, a spokeswoman for the bank.
The sales include the European and Asian operations of commodities-trading business RBS Sempra to JPMorgan Chase for $1.7 billion, credit-card payment unit WorldPay to private- equity buyers Advent International Corp. and Bain Capital LLC for 1.7 billion pounds, and more than 300 branches to Santander for about the same amount.
RBS plans to sell or wind down another 113 billion pounds, Small said, including Churchill and Direct Line insurance units and aircraft-leasing operation RBS Aviation Capital. "It’s obviously not the best market, but there are certain types of assets that will find buyers," said Andrew Nason, a senior banker advising financial institutions at Societe Generale in London. "Banks may be able to sell custody assets and asset-management businesses, which have not been as badly affected by the downturn."
Lloyds Banking Group Plc, which received 20.3 billion pounds in a government bailout, said on June 30 it had cut 48 billion pounds from its balance sheet since 2009, taking it to 979 billion pounds. The U.K.’s biggest mortgage lender has attracted only one formal bidder, NBNK Investments Plc, for a sale of 632 branches. The 1.5 billion-pound offer is 1 billion pounds short of the 2.5 billion pounds the bank had sought to raise. Lloyds plans to reduce non-core assets by at least an additional 72 billion pounds by the end of 2014, said Sarah Swailes, a bank spokeswoman.
Other European lenders also have found it difficult to sell assets. UniCredit SpA, Italy’s biggest bank, in April abandoned an effort to find a buyer for Pioneer Global Asset Management SpA. KBC Groep NV, Belgium’s largest lender and insurer by market value, couldn’t get regulatory approval in March to sell its private-banking unit to India’s Hinduja Group for 1.35 billion euros. It announced a new buyer on Oct. 10 from the Middle East for 1.05 billion euros.
German lender Commerzbank AG, which is to disclose an asset-reduction target next month, still needs to find a buyer for its Eurohypo mortgage unit to satisfy EU antitrust regulators following its 2008 bailout.
Dexia SA, the French-Belgian municipal lender that is being dismantled as part of a government rescue, is planning to sell its stake in Turkish bank Denizbank AS and Dexia Crediop SpA, its Italian municipal lender, and its joint venture with Barcelona-based Banco de Sabadell SA.
Banks also have had mixed success with loan portfolios, often selling at discounts. Bank of Ireland Plc said this week it had agreed to sell 5 billion euros of U.S. and U.K. real- estate assets at 9 percent below face value. Anglo Irish Bank Corp. and RBS said they are close to completing loan-book sales.
Other European banks have been unwilling to sell loans that are booked at a higher value than what buyers, mostly private- equity firms and hedge funds, are ready to pay, said Richard Thompson, a partner at PricewaterhouseCoopers LLP in London, which advises banks or buyers on those transactions.
"Selling loans reduces the size of the balance sheet, but quite often you’re selling to a financial investor, who’s asking for a big discount because its return requirement is greater than the return requirement of the bank holding the assets," Thompson said. "This simple difference in cost of capital generates a loss." Irish banks, which were ordered in March to offload about 70 billion euros in assets by 2013, have been able to sell loans at losses because they have been recapitalized, he said.
European banks have about 1.3 trillion euros of non-core loans on their balance sheets, PwC estimated in April. Lured by the prospect of buying those portfolios at discounts, U.S. hedge funds and private-equity firms such as New York-based Apollo Global Management LLC have raised about $7 billion for funds targeting European distressed assets since 2009 and are seeking another $7 billion, compared with about $400 million during the 2002 recession, according to London-based researcher Preqin Ltd.
"The expectation when the financial crisis came about in 2008 and 2009 was there would be lots of opportunities to choose from," said Dilip Awtani, a managing director responsible for distressed investments in Europe at Los Angeles-based private- equity firm Colony Capital LLC. "But that didn’t materialize. There’s a huge price gap currently. A lot of the banks in a position to default or fail didn’t and are still around because the government supported them. We’ll see whether banks have gotten realistic about the pricing it will take for them to lighten their books."
European banks need to cut more assets than they are announcing to wean themselves from their reliance on wholesale funding, MF Global’s Maughan said. Of the 1.1 trillion euros in total funding required by euro-zone banks through next September, about 60 percent will come from the short-term money markets, Roger Francis, an analyst at Mizuho Securities Co. in London, said in a note to clients on Oct. 7.
If banks want to shrink, they could dispose of financial assets on their trading books, AlphaValue’s Nijdam said. That’s something they have been reluctant to do because some of those trading assets are more profitable than loans, he said.
"Banks think the funding costs will go back to the way they were as if by magic," Maughan said. "But they will not, not in my lifetime, because the implicit sovereign guarantee of banks’ balance sheets is gone."
Franco-German deadlock over ECB’s role in rescue fund
by Ambrose Evans-Pritchard - Telegraph
French president Nicolas Sarkozy has raised the stakes dramatically in Europe's debt crisis.
"If there isn't a solution by Sunday, everything is going to collapse," he told his inner circle before an emergency trip on Wednesday night to see German Chancellor Angela Merkel in Frankfurt.
The talks are deadlocked, reflecting a deep rift between Euroland's two great powers. The French fear the EU's €440 billion EFSF rescue fund will not be enough to shore up monetary union without mobilising the might of the European Central Bank as lender of last resort. It is a view shared by UBS, Citigroup, RBS and the US Treasury.
Mr Sarkozy wants the fund to operate as a bank, able to leverage its rescue power by tapping the ECB's credit window. This is less likely to endanger France's AAA credit rating. Yet the idea is anathema to Germany and Bundesbank purists.
Paris has grave doubts about Mrs Merkel's demand for larger "haircuts" – perhaps 50% – for Greek bondholders. Such a move risks triggering default, crystallising crippling losses for French banks and courting "Lehman-style" contagion. Mr Sarkozy's task is made harder by bail-out fatigue and mounting euroscepticism in the Bundestag. "It is not just Merkel we need to convince, the coalition is divided," he said.
German finance minister Wolfgang Schäuble cannot stem the crisis by embracing eurobonds or fiscal union without a change in Germany's constitution, requiring a popular vote. He has instead offered an ungainly compromise to boost the EFSF to €1 trillion or so by turning it into a bond insurer, perhaps taking the "first loss" of 20% on Club Med debt.
Even this may be going too far in Berlin. Peter Schäffler, economics chief for the coalition's Free Democrats (FDP), said Mr Schäuble had broken a pledge given to the Bundestag when it voted for the revamped EFSF last month. "People feel deceived. He said there would be no leverage," he told The Telegraph. "It is absurd for him to claim that this plan is not leverage." Mr Schäffler said escalating liabilities threaten Germany's AAA credit rating. "That is what worries me about this whole situation."
A chorus of analysts on Wednesday said the EFSF proposals are unworkable. "It is unlikely financial markets will be fooled by this for long," said Commerzbank. "I have no confidence in this plan whatsoever," said Hans Redeker, currency chief at Morgan Stanley. "It creates a two-tier capital market, which is dangerous. How can you insure Italian debt but not Belgian, or French debt?"
Mr Redeker said the proposals risk setting off a chain reaction in which France loses its AAA rating, followed by Germany and the creditor core as ever greater liabilities engulf them, too. Morgan Stanley said European and UK banks may have to slash their loan books by €2 trillion over the next two years to boost capital and cut dependence on short-term funding. Lenders have already identified €775 billion in cuts. The credit squeeze risks trapping Europe in near-slump next year, exacerbating the debt dynamics of Italy and Spain.
Jacques Cailloux from RBS said the attempt to turn EFSF into a bond insurer is misguided. "In our view it will ultimately fail to restore confidence. It is very risky for euro area policy-makers to rush out some quick deal on leverage," he said, adding that the plan concentrates risk. Its "Achilles Heel" is that financial stress in Club Med states would inevitably ricochet back into Northern banks, he said.
Mr Cailloux said coverage of just 20% of damage is no longer enough to lure back shell-shocked investors. "It's like insurance that covers the cost of a front door rather than the full house," he said.
EU banks face penalties in return for bail-outs
by Gerrit Wiesmann - FT
Distressed European Union banks that tap national governments or the region’s €440bn rescue fund for capital will be subject to state-aid penalties, involving compulsory restructuring or – in the worst case – orderly wind-downs. The EU stance has emerged after several weeks of intense debate between European officials and banks over whether the plan for forced recapitalisations should be exempt from normal state-aid rules.
European leaders are set to meet at the weekend to approve a set of rescue measures for the continent’s financial system, centred on a plan to boost capital levels in the banks. Regulators at the European Banking Authority have identified a capital gap of about €80bn if banks’ holdings of troubled eurozone sovereign bonds are marked down to market valuations and groups are then forced to lift core tier one capital ratios – a key measure of strength – to 9 per cent.
In draft guidelines, seen by the Financial Times, for the operation of the enhanced European financial stability facility, EU governments say a “planned restructuring/resolution of financial institutions” is “the sine qua non condition” for assistance.
The proviso – consistent with EU state-aid rules applied throughout the crisis – is likely to discourage banks from seeking public assistance and spur them to shrink their balance sheets instead, raising the danger of a credit crunch, bankers say.
EU governments have in recent weeks put pressure on their banks to beef up their capital cushions and make the region’s financial system more resilient should Greece be forced to restructure its bonds. The confidential guidelines also outline the other tools which the EFSF has been given better to deal with the debt crisis – buying sovereign bonds in primary and secondary markets, and giving states precautionary loans.
But the document says nothing about how to increase the firepower of the EFSF to fund such precautionary credit lines, which are meant to run for up to two years and cover 2-10 per cent of a state’s gross domestic product. According to the document, circulated to German lawmakers before the EU summit, banks should seek funding on the markets and from national governments before turning to the EFSF as “the last-resort” instrument.
Banks considered for EFSF-funded capital injections would have to be “systemically relevant or [pose] a threat to financial stability”, with the relevant government and the European Commission drawing up a “restructuring plan”.
“As a rule, every beneficiary will be subject to a restructuring plan commensurate with the extent of financial support received,” the guidelines say, adding that this was meant “to limit, to a maximum, the distortion of competition.”
The cost of a recapitalisation loan, which will pass from the EFSF to banks via national governments, will be “consistent” with the cost of current EFSF loans to Ireland and Portugal. Capital injected would have to be “of the highest possible quality.” A government can apply for EFSF intervention on the secondary bond market if, for example, debt prices are “unusually volatile”, prices move in a fall, or poor liquidity excessively widens the gap between bid and offer prices.
Precautionary credit lines would be available to governments whose sovereign bonds are threatened by speculative attack. It is described as a “credit line to overcome external temporary shocks to prevent crisis from occurring.” “It is important that the resources available are sizeable enough to counter doubts that the country has sufficient funds to meet its financing needs, and give market confidence,” the text says, suggesting an intervention equal to 2-10 per cent of GDP.
A country qualifying for a loan would get money for one year, though its duration could be extended twice, each time by six months. Less fiscally sound countries would have to agree to “enhanced surveillance” during the period.
Pain Spreads to Biggest Banks
by Liz Rappaport and Dan Fitzpatrick - Wall Street Journal
Goldman Posts a Rare Loss; BofA Falls From No. 1 Spot
In a sign of the pain rippling through the financial system from Wall Street to Main Street, investment-banking giant Goldman Sachs Group Inc. on Tuesday posted a rare quarterly loss while Bank of America Corp. lost its title as the nation's biggest bank as it pared back its struggling consumer empire.
Results at Goldman were hammered by falling stock and bond prices and soft merger activity. The slowdown starved its once-roaring trading engine and sent Goldman to its sixth straight year-over-year drop in quarterly revenue.
Bank of America posted a third-quarter profit, reversing a year-ago loss. But the results were boosted by accounting gains and came as the lender dropped behind rival J.P. Morgan Chase & Co. as the biggest U.S. bank by assets. Plagued by problems in its mortgage business, Bank of America is shedding assets and employees in an attempt to get leaner and, its executives hope, healthier.
Shares in Goldman and Bank of America rallied as investors cheered a report that European leaders may soon agree on a financial relief package. Even so, Tuesday's milestones highlight the grim new reality for U.S. banks: slow economic growth that tamps down loan demand, low interest rates that pressure investment returns, volatile markets that inhibit risk-taking and tighter regulation that adds to bulging costs—not to mention a rising wave of populist, antibank sentiment.
"Those pressure points are becoming more of a tinderbox because there is no relief," said Paul Miller of FBR Capital Markets. "Banks have to work through these holes in their balance sheets, and they can only do that with time."
While Tuesday's results are unlikely to cause much angst in Zuccotti Park, site of the Occupy Wall Street headquarters, they offered vivid proof that the aftermath of the financial crisis and this year's troubles in Europe are pummeling even strong companies and causing weaker ones to scramble to shore themselves up. In addition to uncertainty in Europe, banks still are struggling to find borrowers in a sluggish U.S. economy, while securities firms like Goldman are scrambling to find companies and investors who haven't retreated to the sidelines.
But as banks retrench—Charlotte, N.C.-based Bank of America is planning 30,000 job cuts in coming years—and compete for a shallow pool of eligible borrowers, a reduced flow of credit threatens to mire a soft economy. Wells Fargo & Co. said this week deposits rose 10% from a year ago in the third quarter, while loans increased just 1%, in a pattern that is likely to be repeated as smaller banks report their numbers in coming weeks.
"The industry is still paralyzed…as the world works through the collateral damage of the financial crisis and the credit bubble," said Roger Freeman, an analyst at Barclays Capital.
The more acute problems plaguing financial firms vary from company to company. Bank of America, for example, has the greatest financial exposure to mortgage-related lawsuits and other disputes. Morgan Stanley is fighting to convince investors that it isn't vulnerable to a rerun of the customer exodus that nearly killed the securities firm in late 2008.
But the entire industry is facing the same combination of struggling economies, skittish customers and dismal growth prospects. "It is hard not to be cautious," J.P. Morgan Chase & Co. Chief Executive James Dimon said last week after the New York bank posted its first quarterly profit decline in nearly three years.
Goldman's weak results were spread across all its major businesses, but its losses came primarily in fixed income trading and investing and lending—areas in the cross hairs of regulators overseeing the implementation of the Volcker rule.
The rule, named after former Federal Reserve chief Paul Volcker, aims to reduce the risk to the taxpayer-backed safety net posed by federally insured banks making market bets. Analysts estimate big U.S. banks could together lose $2 billion or more in annual revenue, depending on how the rule is drawn up by regulators. "There is tremendous operational burden and cost of compliance for the entire industry," David Viniar, Goldman's chief financial officer, said in a conference call with reporters and analysts on Tuesday.
Goldman lost $393 million between July and September, a dramatic swing from the $1.9 billion profit it made in the same quarter a year ago. It reported $3.59 billion in revenue, down 60% from $8.9 billion a year ago.
The last time Goldman posted a quarterly loss was in its fiscal fourth quarter of 2008—the period in which Lehman Brothers Holdings Inc. collapsed, freezing many credit markets, intensifying a U.S. recession and prompting the government to promise trillions of dollars in aid to bolster financial firms and support markets.
Shares of Goldman rose $5.35, or 5.5%, to $102.25, while Bank of America rose 10%, adding 61 cents to $6.64. Both stocks have been pounded this year: Bank of America is down 50% and Goldman is off 39%, compared with a 26% decline in the KBW index of big commercial banks.
At Bank of America, a third-quarter profit of $6.2 billion beat Wall Street expectations and reversed a $7.3 billion loss in the year-ago period. But the results were clouded by $10.5 billion in one-time gains, including $3.6 billion from the sale of half its stake in China Construction Bank. The bank also benefited from a gain tied to the declining value of its debt, an accounting quirk that similarly juiced results for other rivals during the quarter.
Total revenue was up 6% to $28.7 billion, and four of Bank of America's six operating units were profitable. But the mortgage business, largely acquired in the 2008 acquisition of Countrywide Financial Corp., and capital markets both showed losses.
Bank of America played down the loss of its crown as the country's biggest bank, emphasizing instead its efforts to boost the bank's capital levels as a way of riding out future economic shocks. Chief Executive Brian Moynihan has staked his tenure on a strategy of making the bank smaller and more efficient. "I don't think it's a matter of No. 1, 2 or 3," said Chief Financial Officer Bruce Thompson in an interview. "I think it's about shaping the balance sheet."
But some analysts said Mr. Moynihan's decision to shrink, reversing an expansion that started more than two decades ago under the leadership of Hugh McColl at a company called NationsBank Corp., wasn't his alone. Like other major banks, Bank of America is under investor pressure to raise capital as the new bank safety rules called Basel 3 begin taking effect next year.
"By necessity I think that the world has forced them to focus on manageability and the health of the balance sheet, not size," said John McDonald of Sanford Bernstein & Co.
BofA loses rank as nation's biggest bank
by E. Scott Reckard - Los Angeles Times
Bank of America Corp. lost its title as the nation's biggest bank, and the mission for its beleaguered chief executive now is to convince Wall Street that it's better off for it.
Brian Moynihan is tasked with turning around the company's struggling consumer empire just as rival JPMorgan Chase & Co. surpassed BofA's $2.2 trillion in assets. It marks the end of an era for a bank known for a near-obsessive zeal for acquisitions and growth, and the start of a new chapter in which the bank hopes to slim down to raise profitability.
"We don't have to be the biggest company out there; we have to be the best," Moynihan has been telling his employees, investors and analysts. He believes the strategy will revive the company, which on Tuesday reported that revenue fell during the third quarter in five of its six main business lines.
But, there was one bright spot in BofA's results that investors cheered: No new blowups in its troubled mortgage business. Investors responded by sending shares up 10% to $6.64. "In the end, the results weren't as bad as feared," said RBC Capital Markets analyst Joe Morford. "They still have a lot of work to do, but they're making progress."
In a report tangled by the effects of asset sales and unusual accounting charges, BofA earned $6.23 billion, or 56 cents a share, compared with a $7.3-billion loss, or 77 cents a share, a year earlier.
Revenue jumped 6% to $28.7 billion. But the results were inflated by the $8.3-billion sale of BofA's stake in a Chinese bank, part of a downsizing that includes the sale of several foreign credit card operations and the closure of a mortgage division that had bought loans from other lenders.
Analysts said another factor was short sellers, investors who make money when a stock price declines, cashing out negative bets on BofA. "If you were counting on the bank to fail — and many of the shorts were — the fact that this bank could post these numbers and show the balance sheet strength it demonstrated was a shock," said Rochdale Securities analyst Richard X. Bove.
During a call with analysts, Moynihan also addressed the latest controversy over plans to charge customers $5 a month to use their debit cards. He seemed confident during the call that BofA would find plenty of consumers willing to avoid the fee by taking out a BofA mortgage or depositing $20,000 in total with the bank or its Merrill Lynch & Co. brokerage.
It's bad business, he said, to allow consumers to pay nothing for use of the bank's huge branch and ATM system, mobile banking and debit-card systems and then to shop elsewhere for important services. "The fees are to get people bring more relationships," he said. "We're comfortable that we'll end up in a good dynamic there."
Right now, BofA has a comfortable lead in deposits, more than $1 trillion compared to $895 million at Wells Fargo & Co. But Wells has had more branches for several years. Even Citigroup Inc., which like BofA needed two doses of federal bailout funds to stay afloat, has a bigger stock market value.
That has left Moynihan, who became CEO nearly two years ago, to justify his vision of shrinking his way to profit at a time when consumers are rebelling against fees, protesters are occupying bank offices, and his stockholders have seen their shares tumble 50% this year even after Tuesday's big gain.
Can he actually reward loyal customers, as he promises, while he's busy hacking away 30,000 jobs, closing 750 branches and selling off businesses left and right? "We need to get a sense that things are under control, in spite of this constant cascade of distracting news," independent bank analyst Nancy Bush said before the earnings were released.
Control seemed to slip a notch late last month, when BofA disclosed plans to charge consumers if they use debit cards to make purchases. While some analysts agreed with Moynihan that the fee would cost BofA only some unprofitable customers, the reaction from many consumers and politicians including President Obama seemed overwhelmingly negative, especially when Moynihan said customers would "understand we have a right to make a profit."
Even some banking executives suggested that Moynihan was hurting the company at a time of high unemployment, declining incomes and cities echoing with protests against perceived corporate greed and arrogance.
"Why would you want to piss off 50 million customers when you're already lying in the dirt?" said Robert H. Smith, 75, who was chairman of L.A.'s Security Pacific Corp., then the nation's fifth-largest bank, when it stumbled and was acquired in 1992 — by Bank of America.
Bank of America, founded in 1904 to serve Italian immigrants in San Francisco, became the nation's largest bank and master of the California banking universe by acquiring Security Pacific, giving it twice as many deposits as Wells Fargo at the time.
It was in turn taken over by NationsBank Corp. of Charlotte, which, having kept the BofA name, went on an acquisition rampage late last decade. Under Moynihan predecessor Ken Lewis, BofA took over big banks in Florida and Illinois and the giant MBNA credit-card franchise. Then, as the financial crisis set in, it bought Countrywide Financial and Wall Street's Merrill Lynch.
Critics say the acquisitions spree caused it to become distracted by growth, enabling competitors to gain traction. In California, Wells Fargo has more branches than BofA, and Chase has plans to overtake both of them. "Bank of America seemed to lose interest in California, which was a big mistake," Smith said. "With all its problems, California still has a lot of wealth, so you ought to be concentrating here."
BofA remains the leader in total deposits, with nearly 25.6% market share in the state and 13% nationally, compared with Wells Fargo's share of 19.4% in California and 9.6% nationally, according to the Federal Deposit Insurance Corp.
But other banks are bent on homing in, such as JPMorgan Chase, which took the lead in assets Sept. 30 with $2.29 trillion. Chase, which stormed into California by taking over failed Washington Mutual Bank in 2008, soon will have more Golden State branches than BofA as it promotes its expertise in business lending and managing wealth for affluent customers.
Chase had 852 California offices compared with 981 for BofA as of June 30, according to the FDIC. But Chase retail executives say they plan to add hundreds of branches in the state while BofA will close an undisclosed number. Wells Fargo had 1,059 California offices at June 30, the FDIC says.
Other banks have taken to promoting their no-fee debit cards. It's a chance for regional powerhouses like City National, along with larger credit unions and community banks, to poach customers.
"We believe we will gain share as consumers search for value," said Gregory Mitchell, chief executive of PacTrust Bank, an expanding San Diego County community bank that charges nothing for basic checking accounts and use of its debit cards. "For a bank our size, every customer counts."
BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit
by Bob Ivry, Hugh Son and Christine Harper - Bloomberg
Bank of America Corp., hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.
Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.
"The concern is that there is always an enormous temptation to dump the losers on the insured institution," said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. "We should have fairly tight restrictions on that."
Jerry Dubrowski, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on the transfers or the firm’s discussions with regulators. The company "continues to accommodate the needs of our clients through each of our multiple trading entities, including Bank of America NA," he said in an e-mailed statement, referring to the company’s deposit-taking unit. Barbara Hagenbaugh, a Fed spokeswoman, said she couldn’t discuss supervision of specific institutions. Greg Hernandez, an FDIC spokesman, declined to comment.
Bank of America posted a $6.2 billion third-quarter profit today, compared with a loss of $7.3 billion a year earlier, as credit quality improved and the firm booked one-time accounting gains. The lender rose 7.3 percent to $6.47 at 1:54 p.m. in New York trading, making it the day’s best performer in the Dow Jones Industrial Average. Credit-default swaps on Bank of America eased 10 basis points to a mid-price of 380 as of 11:49 a.m. in New York, according to broker Phoenix Partners Group.
Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.
The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.
Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesn’t include possible collateral payments due to "variable interest entities," which the firm is evaluating, it said in the filing. Dubrowski declined to comment on collateral or termination payments after the downgrade.
Bank of America’s rating is now four grades below the one Moody’s assigned to JPMorgan Chase & Co. (JPM), the biggest U.S. bank by deposits at midyear, and a level below the rating given to Citigroup Inc. (C), the third-biggest. Bank of America is the only U.S. lender that lacks a rating of A3 or higher among the five firms listed by the Office of the Comptroller of the Currency as having the biggest derivatives books.
"We had worked very hard over the course of the last nine months to be prepared to the extent that we did receive a downgrade, and feel very good about the way that we’ve minimized the potential impact" Bank of America Chief Financial Officer Bruce Thompson said in a conference call today with analysts. "Since the downgrade, we have not seen any change in our global excess liquidity sources."
Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.
Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation. The legislation gave the FDIC, which liquidates failing banks, expanded powers to dismantle large financial institutions in danger of failing.
The agency can borrow from the Treasury Department to finance the biggest lenders’ operations to stem bank runs. It’s required to recoup taxpayer money used during the resolution process through fees on the largest firms.
Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded.
The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.
'The Normal Course’
Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show. The moves by Bank of America are part of "the normal course of dealings that we’ve had with counterparties since Merrill Lynch and BofA came together," Thompson said today.
'Created a Firewall'
Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.
"Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall," Omarova said. The discount window has been open to banks as the lender of last resort since 1914. As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.
In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.
The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one. Section 23A "is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks," Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.
Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depositors
by Yves Smith - Naked Capitalism
If you have any doubt that Bank of America is in trouble, this development should settle it. I’m late to this important story broken this morning by Bob Ivry of Bloomberg, but both Bill Black (who I interviewed just now) and I see this as a desperate (or at the very best, remarkably inept) move by Bank of America’s management.
The short form via Bloomberg:Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…
Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
Now you would expect this move to be driven by adverse selection, that is, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.
And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated.
The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.
This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.
But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.
The FDIC is understandably ripshit. Again from Bloomberg:The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.
Well OF COURSE BofA is gonna try to take the position this is kosher, but the FDIC can and must reject this brazen move. But this is a bit of a fait accompli, and I have no doubt BofA and the craven Fed will argue that moving the risker derivatives back will upset the markets. Well too bad, maybe it’s time banks learn they can no longer run roughshod over regulators. And if BofA is at that much risk that it can’t afford to undo moving over unacceptably risky exposures measure, that would seem to be prima facie evidence that a Dodd Frank resolution is in order.
Bill Black said that the Bloomberg editors toned down his remarks considerably. He said, “Any competent regulator would respond: “No, Hell NO!” It’s time that the public also say no, and loudly, to yet another route for running a drip feed from taxpayers to banksters.
Update: Brett in comments raise the question that since JP Morgan books virtually all of its derivatives in a depositary, is this really all that sus?
The short answer is that while this on paper looks similar, in fact the JPM derivatives exposures (and those of the other big banks) are pretty different than those of Merrill. The big commercial banks traditionally were the big players in plain vanilla, low margin derivatives, specifically interest rate and FX swaps. They are ALSO in credit default swaps, so there is no denying that there are risky derivatives included in the mix.
JPM runs a massive derivatives clearing operation, and a lot of its exposure relates to that. This and the businesses of the other large banks have been supervised by the regulators for some time (you can argue the supervision was not so hot, but at least they have a dim idea of what is going on and gather data). By contrast, no one was supervising the derivatives book at Merrill. The Fed long ago gave up supervising Treasury dealers, and the SEC does not do any meaningful oversight of derivatives. And Chris Whalen confirms that Merrill was and is the cowboy among derivatives dealers.
You can argue that this is just normal business, the other big banks have their derivatives operations largely in the depositary. But BofA has owned Merrill for over a year and a half, and didn’t undertake this move until it was downgraded. Goldman and Morgan Stanley reamin big players in this business and don’t have a large depositary. If this was all normal business, BofA would have done this a while ago, and not in response to market pressure, and they would have gotten the FDIC on board. The way this was done says something is amiss.
EU bank failures will crash Wall Street — again
by Paul B. Farrell - MarketWatch
8 warnings for Washington and Occupiers
Worst-case scenario’s closing fast: Occupy Wall Street growing. But no political power or allies yet. Feared yes, attacked by GOP proxy tea party. Soon the Occupation will explode into a new American Revolution. When? A string of European bank collapses is dead ahead. And like the Arab Spring, they will trigger an economic disaster for American banks.
Yes, coming soon says Martin Weiss in his “7 Major Advance Warnings,” which is “bound to have a life-changing impact on nearly all investors in the U.S. and around the globe.” His new Weiss Ratings warnings are the “most important” in a 40-year career. The stress on Wall Street banks will force them back to Congress for more bailouts. Warning eight: No new bailouts. That will push the economy into a deep recession.
Then what? New Glass-Steagall? Not enough. Tax the rich? Not enough. Perp walks? Not enough. Presidential commission? Useless promises. Occupy Wall Street will fail without a fundamental constitutional change. No compromise. Or Wall Street wins, again. We go back to the same free market, deregulated, too-greedy to-fail, conservative Reaganomics policies that have been destroying democracy for a generation.
All this was so obvious, so predictable. America is at a crossroads. Occupy Wall Street buildup has emerged as America’s last great hope to restore democracy. Last week when USA Today called the Occupiers a “ragtag assortment of college kids, labor unionists, conspiracy theorists and others” hinting they’re a flash-in-the-pan “devoid of remedies,” I smiled, reminded of that famous painting of George Washington crossing the Delaware on Christmas 1776, leading what historians also called a “ragtag” Continental Army, surprising the British, and winning the Battle of Trenton.
America’s collective conscience wants true democracy restored
Yes, USA Today sees a “ragtag” army: No mission, no goals, no organization, no agenda, no leaders, and no staying power. Wrong. Look deeper: The Occupiers are the voice of America’s collective conscience demanding a return to our 1776 roots, to a “government of the people, by the people, for the people.”
Our collective inner voice knows America’s moral compass is broken. We’ve become a government “of, by and for” special interests, the wealthiest 1%, Wall Street insiders, CEOs and Forbes-400 billionaires. It happened fast: In one generation the Super Rich grabbed “absolute power,” killing the middle class American dream.
Wall Street banks are already dismissing the Occupiers … planning bigger bonuses this year… lifting limits on their license to gamble Main Street deposits in the $600 trillion global derivatives casino … they already spend hundreds of millions lobbying every year … they’re convinced they can defeat the Occupiers with campaign donations in the back rooms of Congress … writing off the fight as another business expense … ultimately expecting the Occupiers will vanish into the cold winter months.
One citizen. One dollar. One vote. Anything less is failure
Warning: Don’t be fooled. Occupy Wall Street knows exactly want it wants. The tea party, GOP’s proxy, isn’t fooled. They feel threatened, counter-attacking, worried their role will be lost in the 2012 elections, fearful they’ll lose sway over Republicans, so they’ve got a smear campaign against Occupy Wall Street. Won’t work:
Amid all the noise surrounding Occupy Wall Street we hear their “one simple demand.” Missed by most outsiders, that demand echoes down through American history, first heard in 1776 in the Declaration of Independence. Earlier the Occupiers voiced their one simple demand:
“We demand that integrity be restored to our elections. One citizen. One dollar. One vote. Only citizens should make campaign contributions. Campaign contributions by citizens should not exceed $1 to any political candidate or party. Help us reclaim democracy.”
Yes, one simple demand: “Stop the monied corruption at the heart of our democracy.” That one simple demand echoed over and over. And no compromise when dealing with so fundamental a principle of democracy. Compromises the last generation surrendered America to Wall Street and the Super Rich. Compromise this principle again, and we all lose, destroy America. No compromise. Period.
Phase 2: EU bank collapse gives Occupiers new political power
The Occupiers Revolution enters a new phase soon: First Arab Spring rippled into American Fall. Next, EU bank collapses will ripple through Wall Street. For a long time we’ve been warning the 2008 meltdown never ran its course, foiled by mega-bailouts … bankers never shared the sacrifice … fought all reforms … are back to business-as-usual … learned no lessons … now even more delusional, expecting bigger bonuses … trapped in denial for three years … cannot see what’s ahead … a perfect setup for a bigger crash.
That’s why my eye locked on Martin Weiss’ “7 Major Advance Warnings.” Weiss has been a champion of the little guy for 40 years, author of “The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.” Weiss Ratings of domestic and foreign debt markets downgraded U.S. debt before the S&P.
Both of us were warning well in advance of the 2008 crash. It was so predictable: Weiss warned of “failure of Bear Stearns Lehman, Washington Mutual, near-failure of Citigroup and the demise of Fannie Mae years before it collapsed.”
So listen closely to his “7 Major Advance Warnings,” which are “the most important in the 40-year history of my company.” Many will dismiss them, distracted by today’s campaign noise. Others will dismiss them as “over there,” problems for Europeans. Weiss warns: EU banks problems are “bound to have a life-changing impact on nearly all investors in the U.S. and around the globe.”
So listen and discount what Wall Street is selling you. Protect your portfolio. Here are edited highlights:
- Greece will default very soon ...
”Banks must bite the bullet and take some big hits in their Greek loans. … Whether banks accept this ‘solution’ voluntarily or not, it will mean Greece is in default.”
- The contagion of fear will spread …
Global investors know “if one major Western government can default, so can others.” They will refuse to lend “to highly indebted governments” or “demand outrageously high yields.”
- European megabanks will collapse …
Some of the “largest banks will collapse under the weight of defaulting sovereign debts and … mass withdrawals … Spain … French banks” … the impact will ripple across “J.P. Morgan Chase, Bank of America and Citigroup … All three are in danger.”
- EU governments suffer new credit rating downgrades ...
”France and Germany, will scramble to rescue their failing banks.” But “bank bailouts are seriously flawed” as “governments gut their own fiscal balance … suffer big downgrades,” or pay “far higher interest rates.”
- Spain and Italy next to face default on their massive debts ...
With “$3.4 trillion in debt, or about 10 times more than Greece” they too risk default.
- Global debt markets will suffer a critical meltdown ...
Anticipating “default by a country as large as Spain or Italy, nearly all debt markets in the world will freeze.” Withdrawals, panic “not only crush the borrowing power of the PIIGS” but threaten meltdowns in “France, Germany, Japan, the U.K. and the U.S.”
- Vicious cycle: sovereign defaults, bank failures, global depression ...
Government defaults trigger more bank failures, “cut off the flow of credit to businesses and households, sink the global economy into a depression, and perpetuate the vicious cycle.”
Warning to investors: No bank bailouts, power to Occupation
History inevitably repeats itself: Arab Spring triggered Wall Street Fall. Next, the raging European monetary collapse will ripple through America’s banking system, completing the 2008 meltdown that never ended because Wall Street fought all reforms. But now, a bigger meltdown as history repeats a dangerous cycle like the 1929 Crash and Great Depression.
History will also deal a fatal blow to Wall Street. Weiss adds a key warning: No bank bailouts. America’s banking system is bankrupt, structurally and morally. Washington is broken. And thanks to the Occupiers Revolution the masses will never accept new bank bailouts. Never. They’ll toss politicians and overthrow government first.
No new bailouts will be the stake in the heart of Wall Street, ending the “greed is good” power of America’s “bloodsucking vampire squid,” handing the Occupiers new political power in Washington.
Weiss’s worst-case scenario highlights everything we’ve both been warning investors about for a long time. The 2008 meltdown never ended, lessons never learned. But now the end game is accelerating.
Listen closely: Weiss final warning to all investors: “Get all or most of your money out of danger immediately … above all, stay safe!” Prepare for the coming bank collapse. And discover how this historic scenario will empower the Occupiers message to get money out of elections: “One citizen. One dollar. One vote.” Compromise on that principle and Wall Street wins, again.
'Commercial Banking Should Be Split From Investment Banking'
by Christoph Pauly and Christoph Hickmann - Spiegel
In an interview with SPIEGEL, Sigmar Gabriel, the leader of the opposition center-left Social Democrats, outlines his plans to tame financial capitalism, warns that the supposed supremacy of banks and markets is eroding faith in politics and says the SPD would do a better job containing the crisis.
SPIEGEL: Criticising capitalism seems to be all the rage -- even Frank Schirrmacher, Editor in Chief of the conservative daily Frankfurter Allegmeine Zeitung, has joined capitalism's critics. Why is the SPD remaining true to the existing system?
Gabriel: We have long criticized financial capitalism for trying to evade almost any form of democratic influence. We, the Social Democrats, are convinced that capitalism needs to be tamed a second time. The first time we achieved that in Germany for many decades with the social market economy. That is no longer enough. Now we need to do it in Europe and even globally.
SPIEGEL: Why are you being so restrained?
Gabriel: This is not about reviving the pseudo-alternative of communism but about re-conquering the social market economy. In the current climate I know that it sounds modern and left-wing to say that we should do away with capitalism. But we simply don't want that.
SPIEGEL: So you think the current finance system can be reformed?
Gabriel: Yes. The new social question is: democracy or the rule of the financial markets. We are currently witnessing the end of an era. The neoliberal ideology has failed worldwide. The US movement Occupy Wall Street is a good example of this. In Germany it is good if as many people as possible join initiatives and peaceful demonstrations against the rule of the financial markets. Worshipping the unfettered freedom of global markets has brought the world to the brink of ruin. We now need social and ecological rules for the market economy.
SPIEGEL: You promised those three years ago, during the first financial crisis.
Gabriel: But it wasn't our fault that it didn't happen. Almost everything developed by Social Democrats like (former German Finance Minister) Peer Steinbrück during the financial crisis was halted by the change of government to the conservatives and (pro-business) FDP. It is like what happened with the Elbe River floods: When there is water in people's cellars then everyone agrees never to build on flood plains again. But once the water has receded, it doesn't take long before the first houses are planned. As soon as the crisis appears to be overcome, all effective suggestions are put on ice.
SPIEGEL: The SPD had long enough in power, from 1998 to 2009. During that time you could have prevented some of this.
Gabriel: Of course we have also made mistakes, for example, we shied away from implementing systems to restrain markets on an international level. We allowed ourselves to be intimidated by the assertion that Germany would be left behind if we failed to deregulate financial markets. But we have to learn from our mistakes, something that distinguishes us from the conservatives and the FDP. The 27 members of the European Union include some 20 liberal conservative governments. So Social Democrats can't be blamed for the fact that things stayed the same after the financial crisis three years ago.
SPIEGEL: Do you really believe that there wouldn't have been a second crisis if Europe had been ruled by Social Democrats?
Gabriel: We would have tackled the two most pressing issues. The first is repairing the currency union's birth defect and finally unifying finance, tax and economic policy. Secondly, we have to force the banks back into their role as servants to the real economy. The correct move would be to split investment banking off from commercial banking. Every mid-sized company which needs a loan will run into difficulties if a bank is threatened with bankruptcy because of bad bets made in its investment banking business.
SPIEGEL: So you want to break apart Deutsche Bank, which makes up to 70 percent of its earnings through investment banking?
Gabriel: I want to hang a big sign on the door of the investment banking sector reading "State guarantees end here." I don't have anything against people who want to speculate with their money. Nor do I forbid anyone from going to the casino. But when gambling goes awry, speculators should be liable, and not innocent third parties. What we have at present is a system of loss socialism. Whatever goes wrong is shouldered by the general public and anything that works is privatised. Worshippers of market freedom have suspended the most important economic principle: Risk and liability go hand in hand.
SPIEGEL: Why didn't the SPD implement such a division during the so-called grand coalition when you ruled with the CDU?
Gabriel: We intensively debated this issue during the grand coalition. Unfortunately it wasn't continued after 2009 (the start of Merkel's rule with the FDP party). Thankfully discussions have now been continued, even by the OECD.
SPIEGEL: Sahra Wagenknecht from the Left Party called for the nationalisation of banks long before the crisis. Was she right in the end?
Gabriel: Certainly not. Many state-owned banks didn't behave any better during the financial crisis. Whether a bank is private or public has little effect on how it operates. In the current crisis banks are simultaneously culprits and victims: Culprits because countries had to run up massive debt piles to avert the catastrophic consequences of the banks' gambling. Victims because they believed promises that no country would go bankrupt. Now they are experiencing the opposite and haven't prepared for such a scenario.
SPIEGEL: So is Sigmar Gabriel the bankers' friend?
Gabriel: Banks and financial markets have massively impinged on public welfare. But that was only possible because governments allowed it.
SPIEGEL: Can you understand why German taxpayers don't think they should pay for others' mistakes?
Gabriel: More than that. I think it is justifiable that many are angry that they have to cough up when others are greedy or politics fails. However, I have to tell people in Germany: If we don't get involved then we will be putting your jobs in Germany at risk. Germany's wealth depends on the prosperity of other nations -- which enables them to buy our cars and machines. My big criticism of Frau Merkel is that she hasn't explained that to people. Instead, she played with anti-European resentment. She stirred up anger and now has trouble calming people down again.
SPIEGEL: It is also a problem that markets can speculate on states going bankrupt. Should some gambles be outlawed?
Gabriel: Of course.
SPIEGEL: Back when the SPD was in government, the party cowed to the argument that it didn't make sense to forbid certain forms of speculation because people would then simply speculate in London, New York or on the Bahamas. Has that changed?
Gabriel: I used to be Germany's environment minister. Whenever there was talk of laws to protect the environment I heard comments like: If we implement that in Germany, business will move elsewhere in Europe. And when there was talk about a Europe-wide regulation then people would warn that business would relocate to China. At the end of the day the opposite was the case. Constraints protected the environment and made companies more productive.
'We Know the British Will Be Unwilling To Join In'
SPIEGEL: What does that mean for the financial markets?
Gabriel: We have to start within the euro zone as we know that the British will be unwilling to join in. The first step has to be a financial transaction tax. It is only fair that the financial markets are finally taxed. Taxpayers should not be liable for everything. Every baker has to pay-value-added tax on his bread rolls. Financial transactions are the sole exception. That's a mystery to me. I can't listen to the chatter from law firms and lobbyists anymore. They are still trying to tell us that taxing financial transactions is nonsense. I don't blame them for their egoism, but they should finally stop saying that their private business is for the common good. Politics has been listening to these lobbyists for too long.
SPIEGEL: For years it was also your finance minister who argued: If we do that, people will take their business to London.
Gabriel: I do not deny that Social Democrats have made errors of judgement in the past.
SPIEGEL: They have, for example, made it more possible for firms to securitize bad real estate loans, to conceal them.
Gabriel: Yes, the securitization law is one mistake and we are still suffering the consequences. But to explain the truth we have to look at the political context of such decisions.
SPIEGEL: But no one forced you to deregulate.
Gabriel: Public debate was led by so-called economists who behaved like theologians, preaching articles of faith. SPIEGEL too swallowed the dominant school of thought and adopted the notion: the less government, the better.
SPIEGEL: One man stood up to the prevailing theory: Oskar Lafontaine (former leader and founder of the Left Party) warned about the mistakes within the financial markets. Should the SPD have listened to him?
Gabriel: Oskar Lafontaine has certainly said some correct things in his lifetime. But he also drew the wrong conclusions from these statements. Of course, with hindsight, we should have done more to stand up to the financial markets calls for deregulation.
SPIEGEL: The opposite example to Lafontaine is your former finance minister, Peer Steinbrück. Under his leadership, the ministry still wanted to expand securitization in 2006.
Gabriel: Officials in his ministry wanted to do that. But because he is wise, he didn't do it.
SPIEGEL: But only because the financial crisis happened. His later state secretary, Jörg Rasmussen, had in 2006 already announced steps in that direction, in an article headlined "Securitization from the Point of View of the German Finance Ministry."
Gabriel: All the better that Peer Steinbrück didn't follow the recommendation of his state secretary at the time.
SPIEGEL: Steinbrück has a reputation for being especially skilful at managing crises. Is that justified in the light of massive misjudgements in the past?
Gabriel: At the crucial juncture he didn't fall for these misjudgements. Instead he and Frank-Walter Steinmeier did an excellent job steering Germany through the financial and economic crisis. Because they did the opposite of what was the prevailing doctrine at the time: from the rules on short-time working to the stimulus programs and the car scrapping bonus. That contradicted everything that free-market radicals at the time described as the right way to behave in a recession.
SPIEGEL: Before they turned into crisis managers, they were busy deregulating. From the trio of possible chancellor candidates, you are the only one with a clean slate in this regard.
Gabriel: You will find that I too have misjudged things in the past. In the end all that matters is what one learns from it. That drastically distinguishes the SPD from the conservatives and the FDP.
SPIEGEL: Another misjudgement by politicians in recent decades was the stance that government borrowing, while not pretty, isn't dramatic. What we're experiencing now is the result of this irresponsible approach by politicians. Do we need a fundamental paradigm shift to the statement: borrowing leads to disaster?
Gabriel: We've already done that, otherwise there wouldn't be a debt brake in the constitution -- Peer Steinbrück and Frank-Walter Steinmeier proposed that, by the way. But parts of the current government are trying to breach that by preparing tax cuts paid for by borrowing. Excessive government debt is always unsocial. The interest is always paid to those who have enough money to lend to the state.
SPIEGEL: Do you think politics will ever be able to reconquer its supremacy over the financial industry?
Gabriel: We're witnessing how democracy is being eroded. The European heads of state and government now prefer to meet at weekends, after the closure of American markets and before the opening of the Tokyo Stock Exchange, so that they can take decisions without financial markets going crazy. If politicians' timetables are dictated by the working hours of stock markets, it's evident that democracy is losing out.
SPIEGEL: The public increasingly sees politicians as powerless.
Gabriel: That is dangerous for democracy and especially for Social Democracy. Politics relies on people having a surplus of hope. They have to believe that involvement in politics can make life better. But we're currently seeing that this faith is eroding in almost all democracies of the western world. That's what worries me most. But the SPD's history of almost 150 years also shows: the fight for democracy is worth it.
Euro zone rescue plans shrouded in doubt
by Luke Baker and Julien Toyer - Reuters
A split between the International Monetary Fund and the European Union is threatening to delay Greece's next aid payment in another blow to European efforts to stem the debt crisis.
An admission by French President Nicolas Sarkozy on Wednesday that Berlin and Paris were divided over how to make the euro zone bailout fund more effective had already dented hopes that Sunday's EU summit would bring substantial progress.
News the IMF rated EU projections for Greece's debt too optimist and wanted to delay approval of the next aid tranche further complicated the picture. The fund wants to wait until after this weekend's summit to see if discussions produce a clearer picture, EU officials said.
Without an eight billion euros loan payment from the EU and IMF next month Greece faces default, possibly dragging the larger economies of Spain and Italy into the mire and sending shockwaves through the banking system.
Seeking a comprehensive plan, euro zone leaders are racing to agree new steps to reduce Greece's debt, strengthen the capital of banks with exposure to troubled euro zone sovereigns and leverage the euro zone's rescue fund to stem contagion to bigger economies.
But progress appears to be glacial. Sarkozy flew to Frankfurt on Wednesday evening for emergency talks with German Chancellor Angela Merkel, the head of the IMF and other key euro zone officials. French media reported he missed the birth of his daughter in the process.
France has argued the most effective way of leveraging the European Financial Stability Facility (EFSF) is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government oppose this.
Failure to reach a deal at Sunday's summit of European leaders would further undermine financial markets' confidence in the currency bloc and its ability to get on top of a two-year-long debt crisis, which threatens the long-term viability of the single currency.
Markets caught up with the downbeat tone from policymakers. The euro fell and European shares were down one percent having risen this week on hopes of comprehensive action from euro zone leaders.
Since France's finance minister pledged a decisive outcome to the October 23 summit last Saturday, expectations have been downplayed with Germany and others saying it will only be another step along the road to solving the debt crisis.
"I don't believe that such solutions could be made on Sunday that would ... fix everything. But I'm certain that there will be decisions that point to the right direction," Finnish Prime Minister Jyrki Katainen said in comments broadcast late on Wednesday. Canada's Finance Minister Jim Flaherty said the "two-steps-forward one-step-back" approach was disconcerting.
Forced Bank Losses?
Adding to the uncertainty, EU officials said there was growing acceptance among key euro zone member states that further private sector involvement in reducing Greece's debt burden may have to be forced, not voluntary, something that has been ruled out up to now. "Some countries are working under very aggressive scenarios," one EU official said. "Let's be serious, everybody knows that a 50 percent haircut, as Germany is asking for, is not a voluntary move."
In July, private sector investors agreed to contribute 50 billion euros to reducing Greece's debt pile via a debt buyback and swap agreement, which equated to a 21 percent writedown. That is now seen as insufficient to make Athens' debts sustainable.
Greece remains mired in recession and its overall debt is forecast to climb to 357 billion euros ($492 billion) this year, or 162 percent of annual economic output -- which few economists believe can be paid back. The Financial Times reported that plans to strengthen the banking system, another key plank of the discussions, would fall short of market expectations.
Latest official estimates put the banks capital shortfall at less than 100 billion euros, the FT said, compared with a recent IMF report putting the funding hole at 200 billion and analysts' estimates of 275 billion or more. With a senior Germany government source saying Berlin remained resolutely opposed to the ECB backstopping the rescue fund, euro zone officials have told Reuters that an alternative model, whereby the EFSF could underwrite a portion of newly issued euro zone debt, is also on the table.
By guaranteeing the first 20-30 percent of any losses, the 440 billion euros EFSF could be stretched three to five times further. However, analysts are unconvinced that a leverage plan involving a guarantee on first losses would succeed, warning that it could create a two-tier structure in some bond markets and would be meaningless without an explicit commitment from the ECB to go on buying at-risk debt, something it has been reluctant to do.
While Europe's leaders rush to stop a larger writedown of Greek debt infecting others in the euro zone, ordinary Greeks are raging at the prospects of several more years of pain as the price of help from international lenders. Greek protesters marched on parliament on Thursday, raising the prospect of more violence in strikes against austerity measures parliament is poised to approve to try to stave off bankruptcy.
Running battles between black-clad demonstrators and riot police on Wednesday left streets in central Athens covered with smoldering rubbish and lumps of masonry hacked off buildings in a repeat of clashes seen in anti-austerity protests in June.
EU bank recap could be only €80 billion
by Alex Barker and Patrick Jenkins - FT
Europe’s grand plan to strengthen its banking system is set to fall well short of current market expectations, identifying a capital shortfall of less than €100bn that must be made up over the next six to nine months, according to the latest official estimates.
The European Union’s estimate of the necessary recapitalisation effort compares with a recent Inernational Monetary Fund report that identified a €200bn hole in banks’ balance sheets stemming from sovereign debt writedowns. It also falls far short of analyst estimates that banks might have a capital deficit of up to €275bn.
Two people familiar with the outcome of an emergency stress test of Europe’s banks said the European Banking Authority, which ran the exercise, had suggested between €70bn and €90bn should be raised. That would allow banks to meet a 9 per cent threshold for their core tier one capital ratios, a key measure of financial strength that goes beyond current requirements, after marking down to market values their sovereign bond holdings of the eurozone’s peripheral states.
A fierce political debate has started over almost all the key assumptions used in the analysis but people familiar with the discussions expect any changes to reduce, rather than increase, the estimated shortfall.
European leaders are due to ratify the plan at the weekend, alongside a broader sweep of initiatives to strengthen the eurozone, including a well trailed project to use the European Financial Stability Facility as a vehicle to guarantee national governments’ sovereign debt issuance.
Apparent deadlock over a mooted state guarantee system for bank bonds, seen as crucial to thaw a frozen funding market will exacerbate fears of an impending credit crunch across Europe. "This is going to be a damp squib all round," said one person involved in the process.
Officials said the main reason for the different numbers was the EBA’s inclusion of the positive impact on banks’ capital position of applying market values to the region’s better performing sovereigns, such as Britain and Germany, offsetting the peripheral "haircuts".
UK 10-year Treasuries are currently trading at 11 per cent above their par value, compared with a 60 per cent discount on the equivalent Greek debt and 18 per cent on Italian debt.
The methodology helps the likes of Deutsche Bank – widely reckoned by analysts to be the hardest hit of Europe’s banks in the recapitalisation drive – and should ensure that Britain’s banks are spared recapitalisation altogether. The news will come as a particular relief to UK government officials, who had feared that the already part-nationalised Royal Bank of Scotland might need a politically sensitive injection of more bail-out money. One previous estimate by analysts at Credit Suisse had projected a €19bn capital shortfall at RBS.
Under the model used, about €40bn to €50bn of the capital shortfall is reckoned to be at Europe’s big banks, largely in Italy, France and Spain. The rest would be spread among smaller lenders in the eurozone periphery.
Officials caution that most of the key assumptions in the EBA model – including the number of banks involved, the capital threshold and market to market model – are still the subject of debate between member states and Brussels.
While Germany has pushed for a lower capital threshold, other countries are suggesting amendments that would further reduce the overall capital shortfall, either by exempting certain banks, changing the form of capital that will count or introducing a more lenient means of valuing sovereign debt.
Even if the existing analysis is not watered down, some critics argue it is unrealistic to test for distressed sovereign debt while not including the risk of severe economic downturn, which was included in last summer’s EBA stress tests.
Eurozone bailout fund prepares for the spotlight
by Gabriele Steinhauser, AP
Europe's financial fire brigade is hiring.
Successful candidates should have the "ability to develop innovative legal solutions," an "eye for detail," and the "ability to argue convincingly and achieve a consensus among colleagues and third parties," proclaims the website of the European Financial Stability Facility.
And those skills could come in handy pretty quickly.
After this Sunday's summit of EU leaders, the EFSF will wield massive financial power to contain the eurozone's debt troubles and keep them from plunging the global economy into another recession and putting thousands of people out of a job.
And yet the bailout fund, backed by euro780 billion ($1.1 trillion) in financial guarantees from the 17 euro states, has a tiny staff — 18, counting two secretaries. That is expected to increase slightly in coming months, taking the core team behind Europe's main anti-crisis weapon to 25.
After already funding large parts of the bailouts for Ireland and Portugal, the EFSF will soon take over the emergency loans to Greece — some euro27 billion ($37 billion) left over from the first rescue package with several tens of billions expected to come through a second loan program.
More importantly, the fund is now the number one institution charged with stopping the debt crisis from engulfing large economies like Italy and Spain, helping to stabilize wobbling banks across the continent and protect the future of the euro.
That role could turn it into a bond insurer or see it manipulate government bond prices like a central bank.
The fund's headquarters, in a nondescript office block on the outskirts of Luxembourg city, look a lot less spectacular than one may expect. Apart from the blue and yellow EFSF labels on the mail boxes, there is nothing to suggest that actions taken within the building could determine the fortunes of the 330 million citizens of the eurozone.
The fund was hastily set up in the summer of 2010, when the currency union's leaders realized that their initial euro110 billion ($152 billion) bailout of Greece was not enough to stem market panic over high debt in several euro countries.
Because creating an international institution would have taken too much time, the EFSF was registered as a private company under Luxembourg law, taking over an empty suite of offices from the European Investment Bank.
More than a year later, the premises haven't changed much — dark blue carpet, gray hallways and papers piled high in offices. In expectation of the new staff and responsibilities, the EFSF recently took over another corner of the EIB's office space that still stands empty.
Presiding over the whole thing is Chief Executive Klaus Regling, a gray-haired EU veteran who helped set up the single currency in the 1990s and then unsuccessfully fought to protect the union's rules on government spending a decade later.
It was the limitations of those rules that allowed countries like Greece to run up massive debts and failed to counteract Ireland's property bubble and Portugal's pervasively low growth — the very problems Regling is now trying to solve.
"It was totally unpredictable how this would evolve," says Regling, as he thinks back to June 8, 2010, when he interviewed for, was offered and accepted the job at the helm of a yet-to-be-created institution within less than 24 hours. "I was actually worried that it may become too boring."
No such luck.
Instead, the fund has seen its role evolve from acting as a financial backstop so big that its mere presence would prevent it from ever having to be used — that hope was disappointed when Ireland asked for a bailout last November — to essentially turning into a European Monetary Fund, the eurozone's lender of last resort for cash-strapped governments.
"Of course it's exciting to be in the middle of the storm," says Juha Kilponen, one of the EFSF's finance experts who came on board just as Ireland asked for help. "But of course the problems are very big."
At their summit this Sunday, eurozone leaders are expected to set up a complicated scheme that could increase the EFSF's firing power so it is fit for the next hot phase in the fight against the crisis.
It's in moments like these that the staff's legal and financial expertise will come into play. The EFSF has to operate through a complicated web of European rules and treaties where 17 governments, central banks and bureaucracies in Brussels each have a say — and often widely divergent opinions.
The fund's euro780 billion in guarantees translate into euro440 billion ($608 billion) it can actually give out in loans, since it needs extra guarantees to obtain the AAA-rating that allows it to raise money at low interest rates.
Of those euro440 billion, euro43.7 billion have already been promised to Ireland and Portugal. Some euro100 billion will likely go to Greece, leaving the EFSF with just under euro300 billion to contain the crisis.
That's way too little to recapitalize ailing banks across Europe, get them ready for a potential default of Greece, and buy up Spanish and Italian bonds to keep the countries' funding rates down.
Instead, the EFSF could start acting as an insurer for bond issues from those countries, using its guarantees as protection for banks and other investors against a first round of potential losses. That could theoretically multiply the fund's financial impact up to around euro1 trillion, analysts say.
Such a sum was unimaginable when Kalin Anev was asked in May 2010 to help set up the EFSF. Originally an employee at the EIB, Anev was the one who registered the bailout fund with the Luxembourg chamber of commerce, organized phone lines and computers and helped hire the rest of the staff.
"It shows how fast Europe also can act, if they want to do something," Anev, now the EFSF's secretary general and institutional memory, says not without pride. "In a month's time we were able to set up this very complex organization."
And that organization is proving to be an attractive place to work. For each job ad, the EFSF receives 200 to 400 applicants.
By now, the fund has employees from Germany, Finland, France and the Netherlands, but also from Portugal, Italy and Spain.
And although resistance to the bailouts has been growing both in rich and poor countries, Kilponen and Anev insist that the reaction they get to their job is mostly positive.
"A lot of people have trust and hope that we do the right job," says Anev. "So most people, they wish you the best and good luck."
UBS Chief Pushes New Banking Cuts
by Francesco Guerrera And Deborah Ball - Wall Street Journal
Under pressure to revive UBS AG's fortunes and help the firm recover from a rogue-trading scandal, the Swiss bank's interim chief is preparing to shrink its once high-flying investment-banking unit.
Sergio P. Ermotti, who has been at the helm for less than a month, has ruled out a sale or spinoff of the investment bank but has decided to significantly reduce its scope and size in order to bolster UBS's focus on its giant wealth management business, according to people familiar with his thinking.
The plans are a U-turn for UBS, Switzerland's largest bank, which spent billions of dollars on acquisitions and investments to build a global investment bank capable of competing with Wall Street's largest firms. The investment bank soared in the years leading up to the financial crisis, recording large profits in 2005 and 2006 as it ramped up its trading and advisory businesses and took on more risk to boost its returns.
However, many of those bets backfired. The unit suffered huge losses during the financial crisis and slipped behind some of its competitors in many business areas, especially in the U.S.
The brunt of the proposed changes are expected to be felt in parts of the investment bank's fixed-income business, the people familiar with the matter said. UBS's investment bank employed 17,776 people around the world at the end of June, according to regulatory filings. The unit has a large presence in the U.S., where it employs thousands of traders and bankers, largely based in New York and Stamford, Conn., where it boasts one of the world's largest trading floors.
In the summer, UBS announced plans for 3,500 layoffs, with around half of the job losses coming from the investment bank. It is unclear how many additional jobs would be affected by Mr. Ermotti's proposed shake-up. Mr. Ermotti, who is considered by many to be the front-runner to become permanent CEO, is likely to announce his plans at an investor meeting Nov. 17.
Mr. Ermotti has kept the bank's board apprised of the plans but it is not clear if it has approved them, said people familiar with the matter. The former deputy chief executive at Italy's Unicredit Group ascended to UBS's top job after the resignation of Oswald Grübel in the wake of news that a London-based trader at the firm's investment bank had lost $2.3 billion through unauthorized trades.
People familiar with the situation said Kweku Adoboli is that trader. British police have charged Mr. Adoboli with fraud and false accounting. Mr. Adoboli hasn't entered any pleas.
Mr. Ermotti has told senior colleagues that UBS's long-held strategy of having two pillars of roughly equal importance—the investment bank and the wealth management unit—is no longer viable.
In his view, UBS must concentrate on the relatively low-risk, high-margin business of selling investment and savings products to its wealthy clients around the world, according to people familiar with the situation.
The strategy being championed by Mr. Ermotti is an extension of a shift that had begun under Mr. Grübel before the trading scandal, but the events of the past few months and the tough times experienced by investment banks around the world amid widespread economic uncertainty have strengthened the new chief's resolve, said people familiar with his thinking.
As a result, UBS is set to reduce the amount of capital at the investment bank's disposal. At present, the investment bank accounts for around two-thirds of UBS's balance sheet of 1.3 trillion Swiss francs ($1.4 trillion). Mr. Ermotti intends to tell investors on Nov. 17 that number will be much lower as more resources are diverted to the wealth management unit, with a focus on Europe, Asia and the U.S., these people said.
A reduction in assets would have ripple effects throughout UBS's investment bank, whose roots date back to the iconic British securities house SG Warburg. Traders and bankers have already been bracing for job losses and much lower bonuses, and the announcement of Mr. Ermotti's plans is likely to deepen those fears.
To be sure, not every part of the investment bank will be hit. In Mr. Ermotti's strategy, the slimmed-down unit will focus on helping the wealth management business by selling products to that unit's ultra-rich clients. It will also continue to work with companies and fund managers in areas such as equities and foreign-exchange trading, capital markets and mergers and acquisition advice.
Last year, UBS began integrating the private and investment banks in order to produce more services and products—such as access to initial public offerings or private equity investments—to appeal to private-banking clients with more than 50 million francs (about $55.4 million) with UBS. That affluent segment is the fastest-growing area of wealth management, particularly in Asia, where many clients are entrepreneurs.
However, the investment bank's fixed income business—a high-octane area that has delivered both huge gains and huge losses for investment banks and contributed to $50 billion in write-downs at UBS in 2007 and 2008—will be significantly scaled back, according to people familiar with the situation.
In July, Mr. Grübel announced plans to shrink the division in light of new regulations in Switzerland and elsewhere that have made it tougher to compete. Despite having added hundreds of fixed-income bankers over the past 18 months, the unit failed to meet Mr. Grübel's targets. Revenue from the bank's fixed-income, currencies and commodities business was 1.15 billion francs, far from Mr. Grübel's target of eight billion francs in annual revenue by about 2013.
The plans represent a bold move for Mr. Ermotti, who is vying with internal and external candidates to become the bank's permanent CEO, not least because the wealth-management division has had to overcome its own challenges.
Starting in 2008, UBS became the target of an investigation by U.S. authorities into suspicions that its bankers had helped Americans evade taxes. After a protracted and bruising battle, UBS settled the case in 2009, agreeing to admit to wrongdoing, pay a fine of $780 million and turn over 4,500 names of clients to the U.S. Internal Revenue Service.
That scandal, along with the near collapse of the bank due to the huge securities writedowns by the investment bank, drove hundreds of UBS private bankers to quit and propelled rich clients to withdraw hundreds of millions of Swiss francs from the bank. UBS managed to stem the outflow only late last year.
The moves to scale back the investment bank will fuel questions over the future of Carsten Kengeter, the head of the unit who, until the trading scandal, was seen as a potential candidate for CEO. UBS declined to make Mr. Kengeter available.
The Next Domino? Top Economists Warn of France Downgrade
Top German economists are warning that France's AAA rating could be in danger should additional measures become necessary to prop up indebted euro-zone members or to save ailing banks. With debt relief for Greece under discussion, it may be a question of when, not if.
Ever since Europe's common currency crisis began erupting in earnest last year, two countries have been largely responsible for preventing a complete collapse of the euro zone: France and Germany. Without their support, Greece, Portugal and Ireland would have long since declared insolvency.
This year, though, with the euro crisis going from bad to worse, it is looking increasingly likely that France may not be able to emerge unscathed. Indeed, leading German economists on Monday told the website of financial daily Handelsblatt that French debt is likely to be downgraded in the months to come.
"A new bailout package for debt-stricken countries in the southern part of the currency union will also strain French state finances," Jörg Krämer, chief economist for the German banking giant Commerzbank, told the website. "In the coming year, the country could lose its top AAA rating." Thorsten Polleit, chief economist of Barclays Capital Deutschland, agrees. "The problems of their domestic banks could result in significant additional pressure for the financial situation of the French state," he told the Handelsblatt website.
Increased concern about France's ability to shoulder additional bailout burdens come as European leaders prepare to gather in Brussels this weekend to consult on the ongoing common currency crisis. Whereas European Union leaders agreed in July to a second bailout package for Greece, including a debt haircut of 21 percent, most now say that the new package -- worth €109 billion ($150 billion) -- is nowhere near enough. Many think that Greek debt could be slashed by as much as 50 percent or even more.
Budget Problems of its Own
With French banks holding significant quantities of Greek debt on their books, however, an already heavily indebted Paris would likely have to plunge even further into the red to recapitalize its banks. Highlighting the problem, the ratings agency Fitch placed several French financial institutions on its watch list last week while Standard & Poor's downgraded BNP Paribas on Friday.
Furthermore, France has been battling budget deficit problems of its own in recent years. Just a few weeks ago, Paris announced an austerity program aimed at bringing its deficit, which is projected to be 5.7 percent of gross domestic product this year, to below the EU-mandated ceiling of 3 percent by 2013. Its overall debt stands at 85.5 percent of annual GDP, well above the EU limit of 60 percent. Any additional expenditures relating to bank bailouts -- or even additional euro-zone bailouts -- would slow the country's return to fiscal health. The current state of French finances, Polleit told Handelsblatt, is anything but reassuring.
French banks, though, do not represent France's only Achilles heel. Europe just recently boosted the bailout fund known as the European Financial Stability Facility (EFSF) to increase its lending capacity to €440 billion.
Given the fund's tasks, however -- providing liquidity to heavily indebted euro-zone countries, buying bonds from those countries and indirectly propping up European banks -- many analysts say the fund is much too small. Any moves to further increase its size or to "leverage" it by allowing it to borrow money, however, would increase the risk to its main guarantors, France and Germany.
"A further expansion of the EFSF ... would very likely mean an end to France's AAA rating," Ansgar Belke, research director for international macroeconomics at the German Institute for Economic Research, told Handelsblatt. "But any leveraging of the EFSF, which would increase the likelihood of a loss of guarantees, would be poison for France's rating."
A leveraged EFSF is pure poison
by Ambrose Evans-Pritchard - Telegraph
Big snag. If Europe’s leaders do indeed leverage their €440bn bail-out fund (EFSF) to €2 trillion or €3 trillion through some form of "first loss" insurance on Club Med bonds – as markets now seem to assume – the consequences will be swift and brutal.
Professor Ansgar Belke, from Berlin's DIW Institute, said any leveraging of the EFSF would be "poisonous" for France’s AAA rating and would set off an uncontrollable chain of events. "It counteracts all efforts made so far to stabilize the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone", he told Handlesblatt.
France is already vulnerable. It has the worst budget deficit and primary deficit of the AAA states in Euroland. (Yes, Britain is worse, but the UK has a sovereign currency and central bank. Chalk and cheese.)
Dr Belke said France is already under pressure. BNP Paribas, Société Générale, Crédit Agricole may need €20bn in fresh capital, with knock-on risk for the French state. He warned that France’s public debt (Now 82pc of GDP) would shoot up to 90pc of GDP if the debt crisis rumbles on. Variants of this theme were picked up by other German economists in a Handelsblatt
Thorsten Polleit from Barclays Capital said France’s banking woes could put "massive pressure" on French finances, but the risks do not stop there. Germany itself is at risk. "The bail-out burdens taken on by the German government could lead to a drastic deterioration of our own debt, and put Germany’s AAA in doubt."
Mr Polleit told me Germany’s debt was 83.2pc of GDP at the end of last year (higher than France, but the current deficit is much lower). "Of course there is a danger. We are in a tough situation and there is no easy way out."
We will find out soon enough what EU leaders actually intend to do – rather than what the European Commission would like them to do. As US Treasury Tim Geithner said "the devil is in the details", not in the headlines.
Chancellor Angela Merkel sought to play down the Grand Plan earlier today. "Dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled," said her spokesman. There is no "big bang" miracle cure.
So far there is an ominous silence from the rating agencies. One has to wonder what they think of apparent plans to use the EFSF for "first loss" guarantees of EMU debt — debt to be upheld by states that may or may not be solvent, depending on the trajectory of the world economy and the trigger-happy reflexes of uber-hawks at the European Central Bank. At the moment the EFSF is a privileged creditor (or so we assume: this is not contractual).
Banks, life insurers, pension funds, and others who bought Greek debt in good faith will take the loss. Only once they are reduced to zero with a 100pc haircut does EFSF debt start to be written down – ie, this is "last loss". The new "first loss" idea inverts the order. The EFSF would take the first hit. That changes everything.
Surely the EFSF deserves no more that BBB rating, or perhaps just CCC, if EU leaders really embark on this course. The whole discussion has become surreal.
Athens braced for 'mother of all strikes'
by Helena Smith - Guardian
Thousands of riot police are being rushed to Athens ahead of what one Greek daily has dubbed 'the mother of all strikes' – a 48-hour stoppage with a pledge by unions to flood the capital with protesters
Greek unions have promised to flood Athens with protesters in the biggest demonstrations the capital has so far seen, as politicians prepared for Thursday's vote on potentially make-or-break reforms demanded by the EU and IMF in return for further aid. As activists warned of "the mother of all strikes" and the debt-laden country edged closer to chaos with rubbish piling up in streets and ministers locked out of their offices, 5,000 riot police were rushed to the capital in preparation for the protests.
"All of Athens will be flooded with protesters. These will be the biggest protests that Greece has ever seen," said Ilias Illiopoulos, who heads the union of public-sector employees, Adedy. "The ability of the people to tolerate policies that have only yielded poverty and despair has come to an end."
Amid rising anger over cuts that have pared wages, pensions and workers' rights, and sent taxes and inflation soaring, unions representing more than half Greece's five million workers said they would forge ahead with a 48-hour general strike beginning Wednesday.
The industrial action, which coincides with what the beleaguered prime minister, George Papandreou, has called the country's "most critical week", comes in the wake of often violent rallies and rolling walkouts as workers from rubbish collectors to judges, seamen to schoolteachers, transport employees to journalists have stepped up their resistance to the ruling socialists' reforms. In a campaign of surprise sit-ins, civil servants have taken over government buildings and locked cabinet ministers out of their own offices.
With protesting municipal employees blockading Athens' main landfill site for a second week and experts warning of a public health risk, the sight of mounds of rotting rubbish piling up around the capital has heightened the sense that the country is veering out of control.
Evangelos Venizelos, the embattled finance minister – who has been unable to enter his office for the past two weeks – spoke of the country being gripped by "complete lawlessness". Notices proclaiming "the massacre of our wages will be the nightmare of bankers" were taped across the facade of the economy ministry.
As EU officials struggle to find a new rescue plan for Greece, the picture of deepening chaos has added urgency to the demand, openly voiced by eurozone countries, that Athens should further relinquish its power to the bodies propping up its moribund economy.
Sceptical of its ability to implement reforms after months of failing to "walk its talk", several EU states say the country's stalled privatisation campaign should now be overseen by a European commission taskforce. "This is a government that has lost credibility. No one believes it anymore," said the prominent political commentator Giorgos Kyrtsos. "It is obvious that the system cannot deliver and that the debt load is simply unviable."
The stinging austerity measures due to be voted on by the Greek parliament on Thursday will determine whether Athens gets a fresh instalment of aid from the €110bn rescue loans provided by the EU and International Monetary Fund in May last year. The cash injection is vital to pay public-sector wages and pensions. Senior government officials say the government has until 10 November before it is forced to declare bankruptcy – a move that would wreak havoc on the EU.
The new austerity measures, which follow relentless cutbacks over the past year, would further slash public-sector jobs, wages and pensions, curtail collective bargaining agreements and impose a hugely unpopular levy on property owners.
The end of bargaining rights – viewed by both the EU and IMF as an essential step in making recession-hit Greece more competitive – has incensed trade unionists, who fear it will lead to the abolition of the minimum wage. At least two MPs in Papandreou's increasingly divided Pasok party have said they will not endorse the measures because they are overly "anti-labour".
With the ballot and two-day strike casting a shadow of uncertainty over the country, and the governing socialists trailing badly in polls, many believe that Greece is at a critical point. Appealing for unity, Papandreou held crisis talks with Antonis Samaras, leader of the main opposition New Democracy party, in a desperate bid to build a "common front" in time for Sunday's EU summit, at which Greece is expected to be the focus of talks.
Samaras' vehement opposition to the fiscal remedy demanded by the EU and IMF has caused deep consternation within both bodies. "International lenders are greatly concerned that there are two Greeces," said one insider. "At the IMF's annual meeting it was the first thing that Christine Lagarde [IMF managing director] brought up in discussion with Venizelos. Everyone views political consensus as vital for the enforcement of reforms."
The release of government figures showing a jump in unemployment rates from 16% to 16.5% heightened fears that the country is heading for a period of protracted political tumult. "We are at the beginning of the crisis, not the end," said Kyrtsos. "Greece's economy has contracted for five consecutive years. Before us lies political, economic and social disarray. We are entering uncharted territory."
France and Germany ready to agree €2 trillion euro rescue fund
by David Gow - Guardian
France and Germany have reached agreement to boost the eurozone's rescue fund to €2tn (£1.75tn) as part of a "comprehensive plan" to resolve the sovereign debt crisis, which this weekend's summit should endorse, EU diplomats said.
The growing confidence that a deal can be struck at this Sunday's crisis summit came amid signs of market pressure on France following the warning by the ratings agency Moody's that it might review the country's coveted AAA rating because of the cost of bailing out its banks and other members of the eurozone. The leaders of France and Germany hope to agree a deal that will assuage market uncertainties or, worse, volatility, in the run-up to the G20 summit in Cannes early next month.
France would now have to pay more than a percentage point – 114 basis points – over the price paid by Germany to borrow for 10 years as the gap between the two country's bond yields widened to their highest level since 1992.
The news cheered US investors. All the major stock markets surged, with the Dow Jones Industrial Average rising 250 points, or 2.2%, to 11,651, after earlier falling by 101 points earlier in the day.
US markets have previously reacted uneasily to any new news from Europe. Earlier in the day Goldman Sachs reported third-quarter losses of $393m, only its second loss in 12 years, and chief financial officer David Viniar said market volatility had contributed to the fall. "Last week there was a big market rally; yesterday there was a big market decline," Viniar said.
Jack Ablin, chief investment officer of Harris Private Bank, said: "We are all reacting to headlines – every new headline triggers another move. There is so much uncertainty it's difficult to navigate."
Berlin had dampened down prospects of a full-scale deal, although EU diplomats close to the talks say the Franco-German agreement covers boosting the financial firewalls for eurozone members to withstand the threat of a "credit event" or sovereign debt default in weaker countries.
This takes two forms. First, the main bailout fund, the European financial stability facility, will be given additional levers enabling it to offer first-loss guarantees for bondholders, be they private or public. Senior diplomats say this will deliver a fivefold increase in the fund's firepower – giving it more than €2tn compared with the current €440bn lending capability. The EFSF will in effect become an insurer, thereby overcoming European Central Bank resistance to the idea of turning into a bank.
Second, Berlin and Paris have agreed that Europe's banks should be recapitalised to meet the 9% capital ratio that the European Banking Authority is demanding after its re-examination of the exposure levels of 60 to 70 "systemic" banks. The EBA has marked these exposures much closer to current market values.
It is said that the overall recapitalisation required will be closer to €100bn rather than the €200bn talked about by Christine Lagarde, IMF managing director, and others. French and German banks, senior sources said, can meet the new capital ratio target on their own without recourse to state funds, let alone the EFSF. Other countries' banks, however, may need financial support from the state or the EFSF.
Berlin and Paris are also said by those close to the negotiations to be edging nearer to agreeing on the increased scale of private sector involvement in the second rescue package (€109bn) for Greece. This was set at a voluntary 21% "haircut" in the July package but, under worsening overall economic conditions and a likely restructuring of Greek debt, Germany has been pushing for losses of up to 50%. France, backed by the ECB, has resisted the idea, while EU officials have clearly indicated that a range of 30 to 50% is being considered.
Josef Ackermann, Deutsche Bank's outgoing chief executive, held talks on Tuesday with senior EU officials on behalf of disgruntled bondholders. But there are signs that they are reluctantly accepting the need for bigger "haircuts" under the comprehensive plan to resolve the sovereign debt crisis. "We're not talking about a unilateral, one-sided restructuring of Greek debt," the diplomats said ahead of the imminent arrival of the full report from the troika of ECB, IMF and European commission on Greece's compliance with the bailout terms.
Senior EU officials admit that technical details remain to be settled. Some of these will be agreed by finance ministers who meet on Saturday, while others will await final agreement in the run-up to the G20 summit in Cannes. "It's a huge agenda," senior officials said of the plan of work for the summit. "But there will be a number of breakthroughs."
They added: "We thought the [Greek] package of 21 July was a big step, but obviously it was not enough and now we're pretty confident that markets will say that these people really mean what they say and will ensure stability."
France Risks AAA on Expanded EFSF Bailout Fund
by John Glover - Bloomberg
Proposals to beef up Europe’s bailout fund by offering to guarantee portions of the debt owed by the region’s weaker governments threaten to trash France’s top credit rating.
The nation’s 10-year notes are the fourth-worst performers this quarter -- behind Greece, Belgium and Ireland -- as traders speculate the European Financial Stability Facility will be used to insure the first portion of losses in the event of a sovereign default. France’s rating is under pressure, Moody’s Investors Service said yesterday, and investors now demand a record 112 basis points more to hold its bonds rather than German notes, up from 29 basis points in April.
"France is the key factor here," said Bob McKee, chief economist at Independent Strategy Ltd. in London. "Offering insurance increases France’s contingent liability and that puts pressure on its rating. If France loses its AAA status, that in turn increases the pressure on Germany."
French bonds are being hurt as policy makers consider using the guarantee to ensure Italy, the world’s third-largest bond issuer, and Spain can continue to access markets as contagion spreads from Greece. A downgrade of France will also limit the EFSF’s ability to hold a top grade, according to Moody’s.
The cost of insuring French bonds using credit-default swaps has soared to 191.5 basis points, from an average of about 84 in the first half of the year. They are the most expensive to protect among the top-rated nations in Europe and more costly than for nations rated AA- by Standard & Poor’s, including China, Estonia and the Czech Republic.
"Looking at the numbers, France is no longer a AAA credit," said Nicola Marinelli, who oversees $153 million in funds at Glendevon King Asset Management in London. "They’re talking about guaranteeing trillions of euros of bonds but if France isn’t a AAA then even guaranteeing one more euro might not be sustainable."
French bonds have lost 2.37 percent this quarter, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Belgian bond returns are down 4.19 percent in the period and Greek notes have lost 7.58 percent, the indexes show.
European leaders meet in Brussels on Oct. 23 to determine a recapitalization of the region’s banks as they face the prospect of higher losses on Greek debt, an increase in the effectiveness of the EFSF as well as ways to tighten economic and financial policy. The meeting won’t provide a complete fix for the crisis, German Chancellor Angela Merkel’s spokesman Steffen Seibert said yesterday, and the work will extend well into next year.
"The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government’s Aaa debt rating," Moody’s said in a report late yesterday. "The French government now has less room for maneuver in terms of stretching its balance sheet than it had in 2008."
Moody’s said it will monitor and assess its "stable" outlook on the nation’s debt over the next three months. In a separate statement dated today, Moody’s said that Europe’s central banks have "substantial capacity" to support lenders and sovereign debt markets. The so-called Eurosystem, headed by the European Central Bank, will continue to meet the liquidity needs of solvent euro area banks, Moody’s said.
French 10-year borrowing costs increased to about 3.13 percent from 2.6 percent at the end of September. Italy’s 10- year borrowing costs, as low as 4.93 percent on Aug. 17 after the European Central Bank started buying its bonds, have soared to 5.85 percent.
Spain’s 10-year bond yields, currently 5.33 percent, were 5.35 percent at the end of September and as much as 6.32 percent on July 18. German 10-year yields also jumped this month, rising to 2.01 percent from 1.73 percent on Oct. 4.
The need to lever the EFSF stems from the size of the potential calls on its limited resources, said Sony Kapoor, managing director of London-based policy group Re-Define Europe. The facility is backed by so-called over-guarantees of about 780 billion euros from its member states, allowing it to claim a AAA rating, according to Bloomberg calculations.
The EFSF’s firepower drops to about 230 billion euros when over-guarantees are accounted for, the countries that have already received bailouts are excluded, Italy and Spain drop out of the tally, and the cost of a second Greek bailout is deducted.
Italy and Spain alone must refinance more than 420 billion euros of bonds that come due next year, data according to Bloomberg show. By offering to take the first loss on some portion -- the part mooted is 20 percent -- of new issuance, the euro-region states can show they are standing behind the issuer and persuade private investors to step in.
"You’re sending a very strong political signal that all the member states believe that Spain and Italy are solvent and they are willing to demonstrate that by putting themselves in harm’s way," said Kapoor at Re-Define. "They have a very narrow space for maneuver in terms of the leverage. They’re between the devil and the deep blue sea."
French banks tumbled in the past four days with BNP Paribas SA, the biggest of the nation’s lenders, dropping more 15.7 percent and Societe Generale SA down 17 percent amid concern they would be downgraded along with the government and that they need more capital.
"Given the sheer size the French banking system it may end up being singled out as the most vulnerable country to a rating agency downgrade," said Marchel Alexandrovich, an economist at Jefferies International in London.
France Back In The Spotlight
by Win Thin - Credit Writedowns
Euro zone stresses are back in the spotlight with a report on France that was issued by Moody’s late in the North American afternoon. It was not a rating action but rather an annual update on the state of the country. The agency noted that France’s financial strength has weakened from the impact of the financial crisis, and that its debt metrics are "now among the weakest of France’s Aaa peers." While Moody’s said that France’s financial strength remains "very high", it notes serious challenges in the coming months due to the likely the need to provide additional support to other euro zone sovereigns (EFSF contributions) or to its own banking system. The punch line is that "The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government's Aaa debt rating." Moody’s added that it will monitor and assess the stable outlook over the next three months.
While the contents of the report should not come as any surprise, we do note that 10-year French and Belgian spreads to Germany have moved to record euro-era highs today. We have always viewed France as the most problematic of the so-called core euro zone countries. Indeed, our sovereign ratings model has shown France slipping into AA+/Aa1/AA+ territory since mid-2010, where it has since remained. The ratings agencies are finally coming around to our view, and we note that any sort of spike in government liabilities as highlighted by Moody’s would likely push France down even further into AA/Aa2/AA territory in our model. By most metrics, France is a weaker credit than the US, and so we think all the agencies will have to reassess its AAA/Aaa/AAA rating. The recent move by Moody’s to downgrade some French banks due to heavy exposure to Greece was viewed by us as a warning shot that would be followed up with sovereign pressures in the future. Moody’s report this week confirms this.
With France under the microscope, we think market attention will swing back to other core DM countries that are facing downward pressure on ratings too. Here is a summary of our most recent ratings outlooks for DM:
We note that the French developments underscore the fact that the supply of true AAA credits is dwindling. In Europe, there is still Germany, but we believe that as it takes on more and more countries to backstop, Germany’s debt ratios and fundamentals will deteriorate too. Now, it is a solid AAA credit, but the future is very uncertain. The dollar bloc, the Scandinavian countries, and Switzerland are left as very solid AAA countries, along with the Netherlands and Luxembourg. But taken together, these countries are a very small slice of global GDP and so investors have few options with regards to AAA safe havens.
Our model has the US as a weak AAA/Aaa/AAA credit, so we did not think that the downgrade was entirely justified on fundamental grounds. Our model gives the US score a small boost due to the dollar’s standing as the world’s reserve currency. Taking that out drops the US down to AA+/Aa1/AA+, but at this juncture, we see no end to the dollar’s premiere status. Over the summer, analysts were predicting all sorts of Armageddon scenarios if the US were to lose its AAA status. Well, it happened and the world is still here. In fact, US borrowing costs are lower now than before the S&P downgrade. So perhaps France and Germany should not be so worried about losing AAA status. It may be a blow to the ego, but life goes on. AA may be the new AAA.
After France, the next weakest euro zone credit is Belgium. Our model has Belgium at AA/Aa2/AA, below actual ratings of AA+/Aa1/AA+. Being without a government for over a year surely qualifies Belgium for a downgrade, since S&P took pains to note that the broken political process in the US was a factor in its downgrade. Moody’s put its Aa1 rating on review for downgrade earlier this month, citing the deteriorating financing environment for euro zone sovereigns as well as increasing risks to growth. The other two have negative outlooks, and so we think downgrades are likely and warranted.
Next comes the UK, which we have long viewed as a likely candidate for downgrades since our model has it as AA/Aa2/AA vs. actual ratings of AAA/Aaa/AAA. S&P had the UK on credit watch negative during the financial crisis, but took it off in 2010 after the incoming Tory government instituted fiscal tightening. With growth prospects dimming, we think the agencies will take another look at the UK’s AAA standing and start to consider downgrades. For now, all three have the UK on stable outlook so the first shots across the bow should be moves to negative outlooks in the coming months.
Moody’s cut Japan to Aa3 back in August after putting it on review in May, but put it back on stable outlook. We agreed with that move, and view Japan as AA-/Aa3/AA- compared to actual ratings of AA-/Aa3/AA. Only Fitch looks out of line now. Reconstruction spending may end up putting downward pressure on its ratings, however, and both S&P and Fitch have negative outlooks on Japan.
A word about the euro zone periphery is in order. We continue to believe that Spain, Italy, Ireland, and Portugal are all still facing significant downgrade risk. Only Greece at CC/Ca/CCC is close to correctly rated. And with euro zone growth slowing, these peripheral countries are likely to be downgraded further. Details below:
Our ratings model has Spain at A-/A3/A- vs. actual ratings of AA-/Aa2/AA-. Fitch was the most recent to cut Spain just this month. On July 29 2011, Moody’s put Spain’s Aa2 on review for possible downgrade. The three month review period is not hard and fast, since a similar review of Italy resulted in a multi-notch downgrade after almost four months. Still, we fully expect Moody’s to downgrade Spain in the next month or so, possibly multi-notch like it did with Italy recently. S&P cut Spain by one notch to AA from AA+ back in April 2010, and is long overdue for a downgrade after it moved Spain’s outlook to negative back in March 2011. All three agencies have a negative outlook, so further downgrades appear likely and warranted.
Our ratings model has Italy at A-/A3/A- vs. actual ratings of A/A2/A+. Italy showed remarkable stability in its credit standing during the early part of the crisis and stayed at an implied A+/A1/A+ for quite some time but finally succumbed in recent quarters to move lower. All three agencies have cut Italy recently and all three have kept negative outlooks, so further downgrades appear likely and warranted.
Our model has Ireland’s implied rating at BB/Ba2/BB, which suggests that actual ratings of BBB+/Ba1/BBB+ remain vulnerable to downgrade risk. We note that S&P and Fitch have moved their outlooks to stable from negative. This is interesting as well as unwarranted, as S&P and Fitch are the most out of line with our model and are in need of adjustment downwards. Moody’s has maintained a negative outlook on Ireland’s Ba1 while being the closest to our implied Ba2 rating.
Fitch recently said that it retained its negative outlook on Portugal’s BBB- rating, suggesting that a junk rating is still in the cards. Our model has Portugal’s implied rating at BB-/Ba3/BB-. Earlier this year, S&P affirmed its BBB- rating but kept a negative outlook. In July, Moody’s cut Portugal to a junk level Ba2 with a negative outlook. With all three agencies keeping a negative outlook, further downgrades to actual ratings of BBB-/Ba2/BBB- appear likely and warranted.
To complete our tour of the periphery, note that our model gives Greece implied ratings of CCC-/Caa3/CCC vs. actual CC/Ca/CCC. Those ratings are still vulnerable to downward pressure as S&P has a negative outlook, Moody’s has a developing outlook (which apparently depends on how Greek debt is restructured), and Fitch is at stable.
French warning to euro summit
by Hugh Carnegy, Peter Spiegel and David Oakley - FT
France warned on Tuesday that European unity would be at risk if eurozone leaders failed to take bold action to tackle its sovereign debt crisis at a crucial summit this weekend.
In sharp contrast to signals from Angela Merkel, Germany’s chancellor, playing down the chances of a breakthrough, President Nicolas Sarkozy said that "an unprecedented financial crisis will lead us to take important, very important decisions in the coming days".
Raising the sense of urgency, the French president added: "Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsiblity for resurgence of conflict and division on our continent."
As Moody’s, the US rating agency, warned that France could see its credit outlook cut as a result of the growing sovereign debt emergency, Mr Sarkozy alluded to his country’s vulnerability were the eurozone to fall apart. "France on its own cannot cope." Prime minister François Fillon echoed the need for a rapid breakthrough on Sunday: "If we don’t succeed, Europe will be at great risk."
The European Commission also pushed back against Berlin’s warning that a solution to the eurozone crisis might not be reached this weekend, with a spokesman saying non-EU finance ministers at the G20 had made clear last weekend that "we are expected to provide a comprehensive answer as soon as possible". "No piecemeal approach is possible any more," said Amadeu Altafaj-Tardio, the commission’s monetary affairs spokesman. "We need a comprehensive plan."
The high stakes for France were underlined by the warning from Moody’s that it could lower its outlook for the country’s cherished triple A rating to negative from stable due to the impact of "the uncertain financial and economic environment".
French bond markets sold off sharply with investors saying the rise in French bond yields, which have an inverse relationship with prices, showed contagion had spread to Paris.
Also on Tuesday night Moody’s dowgraded Spain’s sovereign rating to A1. Earlier, Standard & Poor’s cut the ratings of 24 Italian banks and financial institutions on Tuesday, citing weaker economic growth prospects and tighter credit conditions
The extra cost France has to pay over Germany for 10-year debt rose to 112 basis points, the highest level since 1992. The spread has doubled in the past month as investors increasingly worry France may be sucked further into the crisis. French 10-year bond yields saw one of the biggest daily jumps in recent months, rising to 3.13 per cent.
The euro eased against the dollar, while shares in French banks, heavily exposed to eurozone sovereign debt, dropped sharply. Société Générale stocks fell more than 5 per cent, BNP Paribas dropped more than 4 per cent and Crédit Agricole fell more than 3 per cent.
The differing sentiments in Paris and Berlin appeared to mirror continuing splits between the eurozone’s two largest members over the substance of a weekend deal.
Germany continues to push for significant losses for Greek bondholders – "haircuts" of up to 50 per cent – while resisting efforts vastly to increase the firepower of the €440bn eurozone rescue fund.
France in turn has resisted big Greek haircuts, and argued they should only be attempted if the rescue fund is enlarged to fight off runs on European banks and Italian sovereign bonds, which most analysts believe would follow quickly on a large writedown of Greek bonds.
Officials from Ms Merkel’s Christian Democratic Union said she told allied lawmakers on Tuesday afternoon that talks at EU level were advancing only "millimetre by millimetre". A day earlier, Ms Merkel’s spokesman had warned already that "dreams" that "everything will be solved and everything will be over on Monday" were misplaced.
Spanish credit rating downgraded
by Graeme Wearden - Guardian
Country's low growth prospects and high debt prompt Moody's A1 rating, increasing pressure on EU leaders
Spain saw its credit rating cut by two notches on Tuesday as Moody's warned that the country risked being sucked deep into the European debt crisis. The agency raised the pressure on EU leaders prior to this weekend's crucial summit by cutting Spain's credit rating to A1, its fifth highest rating, from Aa2. Moody's pointed to Spain's low growth prospects and high levels of debt.
If the crisis in the heart of the eurozone intensifies, Moody's warned, Europe's fourth-largest economy would suffer badly. Even if a resolution is agreed, it will take years before its prospects improve.
"Spain continues to be vulnerable to market stress and event risk," said Moody's. "Even if policy action at the euro area level were to succeed in the short term in returning some degree of normality to bank and sovereign debt markets … the underlying fragility and loss of confidence is deep and likely to be sustained."
The downgrade came just 24 hours after Moody's warned that it could place a negative outlook on France's AAA credit rating, an action that would escalate the crisis. Spain's government is aiming to cut its deficit to 6% in 2011, from 9% in 2010. Analysts warned last week that this target may be missed, with little apparent progress made so far this year.
The Spanish unemployment rate has already soared to 21%, with 4.2 million people now officially out of work. This has led to an increase in bad debts across Spain's banking sector, as people find they are unable to meet repayment costs.
The threat of a downgrade has been hanging over Spain since the end of July, when Moody's put the rating under review. Although this process is now over, Moody's has placed a negative outlook on the new rating. It said this reflected "the downside risks from a potential further escalation of the euro area crisis".
A lower credit rating may push up Spain's borrowing costs, which have already been rising this month. The yield, or interest rates, on its 10-year bonds inched up to 5.3% on Tuesday. Last summer, they rose above the 6% mark, towards the "danger zone" where countries lose the support of the financial markets.
Last week, both S&P and Fitch cut their rating on Spain, leaving the country at AA-, their fourth-highest rating. On a busy day for the rating agencies, Standard & Poor's lowered its rating on 24 Italian banks, blaming troubles in the eurozone and Italy's "dimming" growth prospects. It also downgraded Egypt by one notch to BB-, the third-highest speculative-grade, or junk, rating.
Pentagon's nightmare: $1 trillion in cuts
by Charles Riley - CNN
What's the easiest way to scare the biggest, baddest fighting force on the planet? Budget cuts. Already facing a $350 billion reduction in funding over the next decade, top Pentagon officials are worried that number could rise to $1 trillion.
The problem? The debt super committee and gridlock on Capitol Hill. A product of the debt ceiling deal, the committee must cut at least $1.5 trillion in debt from the overall federal budget over 10 years. If it fails to do that or it deadlocks, automatic cuts will be triggered at the Pentagon.
Dubbed "the trigger," defense cuts were supposed to force lawmakers to compromise on debt reduction, acting as a powerful and politically unthinkable deterrent. But, Washington being Washington, the committee appears to be making precious little progress. Defense Secretary Leon Panetta is worried. "It will truly devastate our national defense," Panetta told lawmakers last week. "We will have to hollow it out ... I don't say that as scare tactics. I don't say it as a threat. It's a reality."
Defense hawks are also up in arms. Sen. John McCain suggested last week that if the super committee fails to reach an agreement, Congress should nullify the Pentagon budget cuts. "The Congress is not bound by this," McCain said. "It's something we passed. We can reverse it."
Why all the hubbub? An awful lot of ships, planes, weapons systems and soldiers are at stake. The Pentagon is facing a worst case scenario of up to $1 trillion in defense cuts over the next decade if the super committee fails, according to an analysis by the Center for a New American Security, a defense think tank.
"That's a fairly drastic drop-off in defense spending," said Travis Sharp, one of the report's authors. "I'd call that a cliff." The center estimates that the Pentagon can absorb up to $550 billion in budget cuts without affecting the military's "ability to protect vital American interests worldwide, engage key allies and modernize after a decade of grueling ground wars."
But if cuts reach $1 trillion, the military -- and its mission -- will look very different. According to the report, the Army and Marines might be forced to cut troop strength to pre-2001 levels. Ships would go unbuilt, aircraft orders would be cancelled and capabilities diminished.
The United States would no longer be able engage in two major conflicts at the same time. "Does the world come crumbling down? No," Sharp said. "But political leaders would have to be far more disciplined about using force. And quite frankly they have not been very disciplined over the last 65 years."
Cuts that total near $1 trillion would likely force the military and its civilian leadership to rethink strategy -- and change the American military's place in the world. "The major cuts to ground forces and strike fighters ... risk sending a message of receding U.S. power in a dangerous world," the report said.
Behind Las Vegas glitz and glamour lies a dark city marred by poverty
by Dominic Rushe - Guardian
Nevada has gone from having the lowest unemployment in 2006 at 4% to the highest at 13.4% against the national rate of 9.1%
The dentists are back in town, 27,000 of them. Up and down the Las Vegas strip they are fighting for cabs and bar space with rival conventioneers and a united nations of Chinese, German, Australian and British tourists. Beneath the two million crystals of the eponymous Chandelier Bar at The Cosmopolitan hotel, everyone is getting loaded on cut price cocktails. In Tom Ford, Louis Vuitton and Prada shoppers are flashing their plastic.
Forget the hangover, Vegas is back. But not for most of the people who live here. Of all US cities Las Vegas was the one hit hardest by the credit crunch. The city seemed emblematic of the excesses of the easy credit era. A huge property boom led to overbuilding as some people made fortunes from buying and selling homes they never intended to live in. Huge abandoned casinos mar the north end of the strip like so many busted flushes.
Now things are looking up. Visitor numbers are rising, hotels have upped their room rates. Home sales are set to hit a high this year – albeit at rock bottom prices. Houses that once sold for $400,000 (£252,000) are being snapped up for $100,000 by cash buyers. But for those without ready funds getting a home loan hasn't been this hard for years.
Once again Vegas is proving to be a reflection of the country's wider problems. This is a tale of two cities. For the rich – mostly from out of town – the good times are rolling. For those in coach they seem a long way off. This week the Republican would-be presidential candidates are in town, the economy is the only issue on the agenda and no city could provide a starker illustration of the nation's dilemma.
Nevada has gone from having the lowest unemployment in the US in 2006 at 4% to the highest now at 13.4%. US unemployment rate is 9.1% but Stephen Brown, director of the University of Nevada Las Vegas's center for business and economic research, reckons the real number in Las Vegas itself is closer to 24%. The poverty rate has doubled since 2010, the state has the highest rate of children with unemployed parents, according to a report by the Annie E. Casey Foundation. About 13% of all children in Nevada have been affected by their families being evicted from their homes.
Jim Murren, chief executive of MGM Resorts, the towns biggest casino firm, sees plenty of encouraging signs but, he says, "The remnants of the recession are still being felt today. You need look no further than the unemployment numbers or the foreclosure rate for homes. "Prices have fallen 50-60% in some cases. Look at the tremendous pressure that's been put on public services, shelters, food banks."
After decades of "epic, unparalleled growth" this community was "hit as hard, if not harder than any community in the Unites States," he says. "It's easy to see, just look at the shells of buildings as you drive up the strip," says Murren.
Things are starting to improve across the board, the recovery is "not as strong as we would like," but a recovery is underway. But what will Las Vegas look like after the dust settles? For decades Las Vegas has been one of the fastest growing cities in the US. In the 1990s the population was growing at 4.5% a year. Now it's flat.
The construction boom that drove that growth is over. Murren believes it will be a decade before any significant building project takes place in the city. Locals say illegal immigrants who did much of the heavy lifting have disappeared, an observation backed by a report from the Pew Hispanic Center last year that concluded the number of illegal immigrants entering the United States plunged by almost two-thirds between 2005 and 2009. Las Vegans are mowing their own lawns.
The boom years were crazy, says Linda Andrew Ness, national director of Smart City, a convention centre organiser. "It got to the point where sales people didn't even have to pick up the phone, the business just came in." Friends were buying and selling homes in a morning at huge profits, money was everywhere. "It was nuts," she says. Vegas today is a very different city, she says.
Her husband Jim Ness, vice president of Freeman, an audio-visual company that also works with conventions, grew up in the city. "We shrugged off other recessions in the past," he said. "When I was at school a lot of people weren't interested in higher education, they just left and got a job in construction or the casinos. Now if you haven't been to college, you are in real trouble."
Brown agrees. "In 2000 people parking cars could make $80,000 a year. Now from our masters programme we place people in jobs making an average of $65,000," he says. The easy money has gone.
That may be true for the middle class and below but the top end of the market is roaring back. Over at Maverick Aviation, where people charter private helicopters at $500 a person and private jet rides that can cost more than $2,000 an hour, director Bryan Kroten says their biggest problem is finding enough pilots to cope with demand. Maverick is poaching pilots from oil rigs in the Gulf states. "The top end of the market never left," says Kroten.
If anyone knows the top end of the Vegas market, it's Joe Vann, publisher of Vegas magazine, the city's glossy monthly. "The super high end is doing fantastically," he says. "Chanel and Dior are kicking butt. They are having record months at Louis Vuitton." The city at the moment is a "juxtaposition of diametric opposites," he says. While the death of the construction industry has claimed the thousands of jobs, there are seven Louis Vuitton stores in a seven mile radius and all doing well.
The world's rich have made Vegas their playground. On Mexican independence day the super wealthy Mexicans come here to party, on Chinese new year, it's the Chinese. "This is two cities," says Vann.
Doing more with less
The middle classes will come back, Murren says. Vegas is a cheap city to live in and the weather's always good, he says. "More than that people love coming here," he says. But he says it will have to change profoundly if it is to avoid the mistakes of the past. "We have to be very nimble," he says. The future for Vegas will not be one of big new casino openings, it will be about doing more with less.
"The philosophy of this company was to build spectacular, must see destinations, mostly in Las Vegas, and that by virtue of doing that people would feel compelled to come visit us," he says. The "if you build it, they will come" attitude won't work anymore, he predicts. The rich may be rolling in but for the rest of Vegas, like most of the rest of the US, the future is about doing more with less.
"Growing up here people always said that we couldn't expand beyond x because of the water shortages. Then we'd get to x and they'd say, well we'll never get beyond y. That never happened," says Ness. In the end it wasn't water that tamed this city in the desert, it was money.
Fannie Mae and Freddie Mac, Still the Socialites
by Gretchen Morgenson - New York Times
The mortgage business is moribund. New loans are down. New foreclosures are up.
But why let a little sorry news get in the way of a good party? Last week, almost 3,000 people descended on the Hyatt Regency in Chicago for the 98th annual convention of the Mortgage Bankers Association.
The price of admission: about $1,000 a head. But for that grand, you got to hear the band Chicago play hits from the ’70s. And David Axelrod and Jeb Bush give speeches. And experts discuss things like demographics, the politics of housing and the future of the mortgage industry, according to a flier for the event. "Gather the information you need to help your business and our industry drive change," the pitch went.
The city of Chicago was no doubt grateful for the conventioneers’ dollars. Besides, Mayor Rahm Emanuel knows something about this industry: he used to be a director at the mortgage giant Freddie Mac.
Nothing wrong with a bit of schmoozing. But it might seem jarring that Freddie, which was rescued by Washington and today exists at the pleasure of taxpayers, paid $80,000 to become a "platinum" sponsor of this shindig. Fannie Mae, that other ward of the state, paid $60,000 to become a "gold" sponsor. Keep in mind that taxpayers bailed out Fannie and Freddie to the tune of about $150 billion.
Today, Fannie and Freddie are about the only games in mortgage town. Yes, banks make loans, but more often than not they hand them off to one of the two. So it’s a mystery why Fannie and Freddie needed to help foot the bill for the gathering.
Freddie’s companions in the platinum sponsor list make for interesting reading. One was the Mortgage Electronic Registration System, or MERS, which has repeatedly foreclosed on troubled homeowners and made a hash of the nation’s real estate records. Another was Lender Processing Services of Florida, which made robo-signing a household word.
MERS and Lender Processing Services are at the center of the foreclosure crisis. Why would Freddie keep such company?
Perhaps more disturbing is that Fannie and Freddie sent an army of their own to Chicago: 87 people in all. According to a list of registrants, that’s more than hailed from the Mortgage Bankers Association (60 people), Bank of America (58), Wells Fargo (54) and JPMorgan Chase (24). Only Lender Processing Services had more — 91 — than Fannie and Freddie. (Perhaps they robo-signed their registrations.)
The C.E.O.’s of Fannie and Freddie were conference headliners and gave presentations. But Freddie also sent 15 vice presidents and 14 directors from various units. Fannie’s list included 12 vice presidents, 12 unit directors and three events managers.
I asked Fannie and Freddie what they got out of sending all of these people to Chicago. Representatives of both said participation was an efficient use of taxpayer dollars because it allowed their employees to hold crucial meetings with hundreds of customers to discuss ways to address the housing crisis. Fannie Mae’s spokeswoman, Amy Bonitatibus, added that it has "significantly reduced sponsorship and support of events and industry-related conferences."
Representative Randy Neugebauer, the Texas Republican who heads the oversight and investigations subcommittee of the House Financial Services Committee, said he was disturbed by the turnout from Fannie and Freddie. It reflected a troubling "business as usual" approach by the mortgage giants, he said. "They don’t act like companies that have had a huge infusion of taxpayer money," he told me. "Why do they feel the need to go out and spend the money for networking when they have all of the mortgage market in its entirety?"
Trying to tally the costs borne by the taxpayers for the four-day event in Chicago, Mr. Neugebauer sent a letter last week to the Federal Housing Finance Agency, conservator for Fannie and Freddie. "I am concerned that the expenditures that Freddie and Fannie made in connection with the conference bear no relation to furthering the actual purposes of the conservatorship,"he wrote.
He requested a rundown of amounts paid by the companies to cover travel, lodging, entertainment and sponsorship. He also asked for details about whether Fannie and Freddie had consulted with the agency beforehand about sponsoring and attending the conference. The agency was asked to respond within a week.
"We’re going to really look through their entire budget and see if we can see signs where they are tightening their belt," Mr. Neugebauer said, referring to Fannie and Freddie. "The American people are tightening their belts, businesses all over the country are tightening their belts. These entities can certainly do the same."
Scariest Student Loan Debt Numbers Ever: $100 Billion, $1 Trillion
by Brad Tuttle - Time
For the first time ever, the total amount of student loans taken out last year in the U.S. topped $100 billion. And sometime this year, it’s expected that outstanding student loan debt will hit $1 trillion—also for the first time ever.
Using data from the College Board, the Federal Reserve Bank of New York, and other sources, a USA Today story lays out the seriously disturbing state of student loan debt today. In addition to the record-setting factoids above, there are these:
- Students today are borrowing double the amount they did ten years ago—after adjusting for inflation.
- Over the past five years, while most consumers have tried diligently to pay off credit card debt and mortgages, total outstanding student loan debt has doubled.
- The percentage of student loan borrowers in default (more than nine months behind on payments) is on the rise, from 6.7% in 2007 to 8.8% in 2009, per the most recent federal data available.
What’s more, there are plenty more borrowers who haven’t fallen quite as behind on student loan payments, but who are nonetheless struggling. Over the summer, a report showed the student loan delinquency rate (when loans are more than 90 days past due) at 11.2%. In other words, more than 1 in 10 people with student loans were more than three months behind in their payments.
While student loans are typically portrayed as the best kind of debt to take on—you’re investing in your future, after all—these loans are also among the scariest, most inescapable sort of debt out there. Declaring personal bankruptcy won’t get rid of them. If you can’t pay off a mortgage or a credit card, there are ways out—via short sales and negotiations to pay off debt for pennies on the dollar. Nothing along these lines is possible, however, with student loan debt.
All of this sounds pretty scary. Now add in the fact that the employment levels for young people reached their lowest levels ever over the summer. The proportion of Americans ages 16 to 24 in the workforce was just 59.5% in July 2011. That’s the lowest rate in any July on record, and it’s down substantially from, for example, July of 1989, when 77.5% of young people were in the workforce.
In September, the unemployment rate for men ages 20 to 25 stood at 15.8%, much higher than the rate for the general population (9.1%), and both of these figures are understated because they don’t factor in people who have never joined the workforce or who have given up looking for jobs.
Then again, while it may seem like a bad idea to take on hefty student loans with the jobs market in such awful shape, workers who never earn college degrees typically have a poor understanding of things like late fees and interest payments—and they often wind up in even worse financial straits than the folks struggling to pay off their student loans.
Britain's QE2 may add £45 billion to pension deficits
by Michelle McGagh, Dylan Lobo - Citywire.co.uk
The National Association of Pension Funds (NAPF) has warned the latest round of quantitative easing (QE2) could push UK pension fund deficits a further £45 billion into the red.
NAPF chairman Lindsay Tomlinson (pictured) will today tell the NAPF conference that 1,000 funds are at risk of a double hit from the ‘torture of QE2’. The organisation will call on The Pensions Regulator to give pension funds more breathing space by extending recovery periods, smoothing valuation results and postponing valuation dates.
The funds were valued by the regulator three years ago under its triennial valuation system when the first round of QE was unveiled and are about to be hit again by the latest round, with many seeing their position heavily undervalued because of the government’s economic stimulus. The NAPF estimated that £55 billion will be added to pension fund liabilities and £10 billion in assets will be added.
‘Pension funds want to see a strong economy, so we understand the thinking behind the latest tranche of QE, but this is a strong medicine with some nasty side-effects,’ said Tomlinson. ‘QE is a key ingredient in a recipe that is destroying the value of the UK’s retirement savings. It’s a torture for pension funds because it artificially suppresses long term interest rates. Pension funds are already struggling with gaping deficits, and now they are being forced to carry an extra £45 billion.’
He added: ‘We must avoid a valuation lottery in which pension funds ensnared by QE end up having to pay more into recovery programs than their competitor. The regulator has a range of tools it could look to.’
Italians Leave Fears of Debt Crisis to Others
by Alexander Smoltczyk - Spiegel
For the financial markets, Italy's debts are a disaster waiting to happen. But after living with the problem for hundreds of years, most Italians would seem to disagree. They insist that no other country knows as much about getting in and out of debt -- and that many of their fiscal strengths go unappreciated.
After so many centuries, the secret door sticks a bit. But it still exists, hidden behind an image of Italy in the "Hall of Maps" of Florence's Palazzo Vecchio. "Eccolo," says Francesca, the custodian. "It happened here."
This is where it all began. Starting sometime in the mid-14th century, the leather-bound ledgers the city of Florence used to record its debts were kept hidden in this secret place. Someone in the city government had apparently hit upon the idea of using the citizens' money to fund the next military campaign. After Florence's (supposedly certain) victory, the city would simply repay the debts -- and with interest.
The wealthy Florentines, who were required to buy their city's debt securities, had their names recorded in the ledgers at Palazzo Vecchio. But, for them, paying up was still preferable to putting on their own suits of armor to defend the city. Besides, they could also sell these new debt securities to others.
The arrangement marked the beginnings of a system of state borrowing and trading in government bonds. Today's $50-trillion (€36-trillion) market in government bonds, which is now forcing governments to their knees, originated in Italy -- first in Venice and, later, in the hills of Tuscany. The concept of debt securities quickly caught on, and soon the cities of Siena, Florence, Pisa and Venice were hopelessly in debt -- a condition that persists to this day.
Inheriting the Bill
"We currently pay more in interest than we spend on our schools," says Matteo Renzi, who makes the Palazzo Vecchio his home as the mayor of Florence. Renzi, only 36, was voted into office on the strength of his reputation as a "bulldozer" -- and his pledge to finally clean house in Florence. He is the youthful face of his party, the center-left Democratic Party (PD), a mayor who wears jeans and has Apple stickers on his oak desk. "Our fathers walked into the restaurant, and we inherited the bill."
The bill -- at least for his city of Florence -- currently amounts to €518 million.
Many see Florence as the embodiment of the euro-zone nightmare, with massive government debt, close to zero growth and a government led by a man who has been charged with tax evasion.
No other European country, except Greece, is as deeply indebted as Italy. The country's debt level has reached 120.3 percent of its gross domestic product (GDP). At the same time, Italy has one of the lowest birth rates in the Western world, which means that there will be fewer and fewer people to pay off its debts in the future.
'It Was Like a Drug'
On October 4, this combination of factors prompted the Moody's rating agency to downgrade Italian sovereign bonds. Another rating agency, Fitch, downgraded its Italy rating soon thereafter. Next year, Italy will pay interest amounting to 5.1 percent of its economic output. Greece, at 7.5 percent, is the only European country with a higher ratio of interest to economic output.
Robert Mundell was one of the intellectual fathers of the euro -- and he happens to own a palazzo in Tuscany, as well. But the Nobel laureate in economics still sees Italy's debts as the greatest threat to the euro zone. "The caste of old politicians ran up the debt without restraint," says Mayor Renzi. "It was like a drug."
Debts were the basis of the "bella vita" period in the 1980s. The political parties pumped massive amounts of money into Italy's poor south, including funding for government agencies and state-owned companies, to keep the social peace and hold on to power. Even today, clientelism, corruption and tax fraud remain symptoms of what is often described as "the Italian sickness."
The constant pressure to reach political compromises drove the bills up. And this continues to happen to this day, as can be seen by the fact that the 10 provincial capitals with the highest debt levels are run by grand-coalition governments.
Bloated Public Sectors
The Italians' behavior didn't improve with the introduction of the euro. On the contrary, Italy took the position that if it could not print its own money anymore, the next-best solution was to incur more debt. Some 3.5 million Italians are civil servants. Italy spends a full 14 percent of its aggregate output on pension benefits for retired government employees. Only France spends more.
In the south, in particular, nepotism has resulted in bloated public administrations. Mayors, provincial governors and regional prefects shamelessly incur debt to service their clientele with construction contracts or positions in garbage collection. They also line their own pockets.
"We have almost twice as many members of parliament as the United States," adds Florence Mayor Renzi, and the ratio of members of the Italian parliament to the total population is almost twice as high as it is in Germany, as well.
Renzi is determined not to make the same mistakes as his predecessors -- but without spending more money in the process. Renzi is currently suing three banks -- Merrill Lynch, UBS and Dexia -- for allegedly having foisted €50 million in substandard derivative securities on the city. "But it isn't a problem," says Renzi. "We expect to win these cases."
Making Mountains of Debt
The words "bank," "cash" and "bankruptcy" are all derived from Italian, and double-entry bookkeeping was developed in Italy in the late Middle Ages. The "banche," or moneychangers' banks, stood on the banks of the Arno River, and it was where the Medici, Peruzzi and Acciaiuoli families did their business. They were the first traders in an unlimited money market. Perhaps out of a sense of guilt, the bankers commissioned painters like Botticelli, Michelangelo and Fra Angelico to create pious works. Even Dante was the son of a moneychanger.
The government debt of the day was ominously known as "monte" (mountain). And if a "monte" was no longer sufficient, it was refinanced with a "monte nuovo," a new mountain. The world's oldest financial institution still active today is the Banca Monte dei Paschi di Siena, founded in 1472.
Marco Massacesi, the bank's chief financial officer, says he's having trouble sleeping these days. This is hardly surprising, given the fact that -- according to the most recent stress test in late 2010 -- his bank's portfolio includes close to €32.5 billion in Italian government bonds. These are the kinds of securities any broker in London's financial district would immediately condemn as "toxic papers."
"But that's not why I'm losing sleep," Massacesi says. "Granted, these bonds are no longer the epitome of security, as they were only a few months ago. But what really worries me is the situation in Europe." Massacesi is referring to Greece and the hesitancy of politicians, including German Chancellor Angela Merkel.
A Banking System Healthier than the Government
Like all big Italian banks, Banca Monte, known as "Il Monte," was downgraded by the major rating agencies in the fall as part of a routine correction for the lenders after Italy's rating had been lowered.
However, the country's banks are not in as poor shape as the government. The large banks have been conservative in their lending practices, and they benefit from a high savings rate among Italians. They managed to survive the financial crisis with almost no government assistance. Hardly any Italian banks have significant numbers of Greek sovereign bonds in their portfolios. According to Massacesi, his bank will not have to drum up any new capital in international market before the end of the year. "Next year," he says, "we'll have to see whether we need new funding."
No other country has such a long history of involvement in debt. High debt levels and little growth have been part of the status quo in Italian budget policy, and the Italians have survived even more serious crises.
A Lack of Concern
Massacesi's office is in a Renaissance palace. Since the Middle Ages, horse races have been held twice a year on a nearby square. For someone who works in such opulent surroundings, the prospect of an imminent demise would seem hard to imagine.
Massacesi insists that Italy cannot be compared with Greece. "We are a rich country," he says. "The Italians own €8 trillion in assets. But the wealth is poorly distributed. We urgently need tax reform." Massacesi also doesn't care if saying this makes him sound like a communist. "Do you know how many times Italy has gone bankrupt?" he asks. "Only a single time, and that was after World War I."
For these reasons, Massacesi sees no reason to panic and remains convinced that the country that invented debt is not about to go under as a result of it. While analysts in London count Italy among the PIIGS countries -- in other words, on a par with Portugal, Ireland, Greece and Spain -- it's hard to find anyone in Italy who is seriously concerned about the government's finances.
Similar Challenges, Different Circumstances
Whenever the issue is raised among Italians, the standard response is that Italy has successfully come down from a similar mountain of debt once before, in the mid-1990s, when then Prime Minister Romano Prodi was preparing the country for the euro.
But, back then, the government budget was in far better shape than it is today. The economy was growing, the government was not spending massive amounts of money to pay off old debts, and there was no risk premium abroad for Italian government bonds. Those days are gone.
Indeed, it is getting more difficult -- and expensive -- for the Italians to refinance their debt on international markets. The yield on 10-year Italian bonds is currently at 5.73 percent, which is more than twice as much as the 2.15-percent yield on comparable German bonds.
The higher the interest rates being offered to wary investors, the greater Italy's expenses. This, in turn, makes the markets even more cautious. Under these circumstances, some might wonder if this is a vicious cycle or a self-fulfilling prophecy.
Highly Predicated Optimism
"There will be a 20-percent rollover next year," says Marco Valli, chief economist for the euro zone at Italy's UniCredit, in Milan. This means that one-fifth of the government's debt matures next year, and that it will presumably have to be refinanced with new loans bearing less favorable terms.
But, for Valli, this is still no reason to be concerned. "Italy has an average maturity of about seven years on its debt." In other words, newly issued Italian government bonds will mature -- that is, come due for repayment -- in an average of seven years. "This means that the impact of current high-risk premiums will only be felt in the long term. This makes things much easier to deal with."
In its "Fiscal Report September 2011," the International Monetary Fund (IMF) expressed the same view, writing that Italy can "sustain" sovereign risk premiums of three to five percent "for a few years." It's also a good thing that Italians own about half of their government's debt themselves.
"One reason for our optimism is the low level of private-sector debt," Valli adds. "But weak growth is problematic. We have to address the need for structural reforms." According to Valli, one of Italy's problems is the high level of "immobilismo" in the labor market as well as in the service industry, infrastructure and the corporate sector. "We consider the current debt level to be sustainable as long as we have about 1 percent growth," Valli concludes.
This doesn't sound like much. But the country has been stagnating for over the last decade and, during that period, its economy only grew by an annual average of only 0.2 percent. In late September, Antonio Borges, the European director of the IMF, called Italy's economy "the most worrisome example" of weak growth in Europe. Italy has experienced almost zero growth and no increase in productivity per hour worked.
Mario Draghi, Central Banker and 'German Agent'
What's more, according to Mario Draghi, the new president of the European Central Bank (ECB), this applies "to the entire country, both the north and the south." Indeed, parts of Draghi's farewell speech at the Bank of Italy, the country's central bank, sounded about as upbeat as an autopsy report.
Italy's economic structure is often praised for being fragmented into thousands and thousands of very small businesses. But, when viewed as a whole, this is actually a deterrent to growth. Pharmacists, notaries and lawyers do their utmost to block deregulation, as if they were members of exclusive brotherhoods. As Draghi sees it, on top of that, you also have to add "the policies of governments that do not encourage and often obstruct development."
The result of all these factors is a general state of stagnation. As an example, Draghi takes civil trials. According to his estimate, if they didn't drag on for years, Italy's GDP could jump "up to 1 percent." For being frank in his opinions, Draghi has already been berated as a "German agent" -- and by none other than Giulio Tremonti, Italy's finance and economics minister.
Selling the Country to Save It
Italy's debts are already eating away at the country's national budget -- which, incidentally, would be in better shape than Germany's if it didn't have the debt burden (see graphic). The government collects revenue wherever it can. Electricity and water are expensive, and revenues from sales and income taxes are higher than in Germany, for example. Municipalities will be particularly hard-hit by the €54 billion in budget cuts that were approved for the next two years this summer. Libraries will be closed, and fees will increase.
Rome expects to balance its budget by 2014 -- but only if its interest payments don't continue to increase. It isn't as easy to pay off debt as senior government officials optimistically believe. Finance Minister Tremonti, for example, likes to point out that the government would only have to sell its holdings to eliminate the €1.9 trillion in national debt.
A large segment of the economy, a total of more than 13,000 businesses, is directly or indirectly owned by the public sector. This includes the postal service, the national railway provider, parts of the national airline, Alitalia, and electric and water utilities. Tremonti would like to privatize some of these operations. But if he does, he will also have to do without substantial sources of revenue because many of these companies -- such as the government-owned insurance company SACE -- are highly profitable.
The government currently plans to sell some of the real estate it owns, which it hopes will raise €25-30 billion, while the auctioning off of CO2 emissions rights would bring in another €10 billion.
Problems at the Top
Still, perhaps it would be more effective for Italy to completely divest itself of other things that have done much to hurt its image abroad for years -- such as the prime minister.
The fact is that, when evaluating a country's creditworthiness, rating agencies also take into account a government's stability and the qualities of those in leadership positions. In this respect, Italy is at a disadvantage. Last Tuesday, Prime Minister Silvio Berlusconi lost a vote over his administration's 2010 spending review. Then, on Friday afternoon, he barely survived a confidence vote from his own party.
Berlusconi seems to enjoy living the life of an eastern satrap, while his finance minister has been weakened by a corruption scandal involving a close associate. Meanwhile, the Northern League, Berlusconi's important coalition partner, would prefer to introduce its own currency for "Padania," its northern Italian fantasy realm.
The Berlusconi regime has made almost no serious attempts to take any of the steps bankers and the industrial lobby have proposed, including tax reform, deregulation and judicial reform. Likewise, Berlusconi and Tremonti have been feuding for weeks. Even the appointment of a successor to Draghi, the head of the central bank before he became president of the ECB, has deteriorated into an embarrassing theater of squabbling and power politics.
The Standard & Poor's rating agency stressed that, more than anything, it was Italy's unstable political situation and the debt level that prompted it to downgrade the country's creditworthiness. Its analysts doubt that Berlusconi will be able to continue his austerity program with the current coalition. Indeed, it did not go unnoticed that the premier softened his list of austerity measures the minute the ECB began buying up large numbers of Italian bonds.
Tapping Hidden Assets
Italy's former head accountant is sitting in his favorite Calabrian restaurant near Via Veneto in Rome, eating a plate of Mediterranean sole. "Delicious, isn't it?" he says. For 13 years, until 2002, Andrea Monorchio was the "Ragionere Generale dello Stato," which made him the overseer of Italy's debt and fiscal sins under nine prime ministers.
If anyone knows how bad the situation is, it is this elderly man. Monorchio says he would prefer to not comment on "certain politicians" because he doesn't want to spark any more calamities for the government. "But," he adds, "have you noticed that our national debt corresponds to the total amount of unpaid taxes?"
Still, Monorchio adds, Italy has a kind of wealth that is hard to explain to hedge-fund managers in London. "Italian families own real estate worth €4.832 trillion, of which only 7 percent is burdened with mortgages," he explains. "Every family owns one, two or three houses -- and we're supposed to be part of the PIIGS?" "With about 20 percent of this wealth," he adds, "we could pay the €950 billion by which we exceed the Maastricht criteria for government debt."
As impressive as these numbers are, the problem lies in finding a way to tap this wealth in fiscal terms. Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem. Bringing its sovereign debt back into the country and getting it farther away from the global financial markets would make it easier to control.
Not So Bad If You Ignore the Debt
Monorchio, together with Prodi and the later President Carlo Azeglio Ciampi, was one of the three key economists who guided Italy into the euro zone. He is the prototype of the high-ranking civil servant in Italy, never touched by scandal and equipped with a polite contempt for certain newcomers in Italian (and German) politics.
Like many politicians and bankers in Italy, Monorchio feels that German Chancellor Angela Merkel is one of the people mainly responsible for his country's current plight. As he sees it, the iron-willed "Madame No" has hesitated for too long, he says. "Our primary balance is positive," he notes, "more positive than that of most other euro countries." In fact, thanks to high taxes, the Italian treasury takes in more than it spends -- but only if the interest payments for existing debts are factored out.
Even the IMF finds this commendable. As European IMF Director Borges said in a press conference in late September: "Italy has the best primary budget or primary balance of all the large European economies, even better than Germany." In other words, Italy's budget would be stable without its interest burden.
But, of course, this is just one way of looking at things.
Indeed, the world would undoubtedly be a better place if its economies were not as isolated as, say, the Tullio Restaurant near Via Veneto. It would also be a better place if the people in London and elsewhere who Karl Marx once castigated as a "brood of bankocrats, financiers, rentiers, brokers, stock-jobbers and stock-exchange wolves" didn't exist. It is because of them and their instincts that the markets are now unwilling to put their trust in Italian certainties.
"In the end," Monorchio says, "the English are just jealous of us." He nods almost imperceptibly to the waiter and says: "Il conto!" Check, please.