Wednesday, April 15, 2009

April 15 2009 1: D'Artagnan and the Three Stooges

Harris+Ewing Wine Whisky and White 1918
Emergency Fleet Corporation building, Washington, DC

Ilargi: I know I wrote about it yesterday, but I have no choice, I must again. The upbeat messages coming from the guys I labeled the Three Stooges, Summers, Obama and Bernanke (and Geithner can be their D'Artagnan) were this morning put into a very bright light, and a clear focus, by the arguably worst overall economic numbers to come out of the downturn to date. I would strongly suggest that when they try that again, they take the opportunity to address these numbers while they're at it.

Political capital is not something that is based on, or derived from, rational evaluations. The majority of Obama's popularity doesn't seem to come from people who do much if any analysis of his economic policies; they are simply under his spell (or his wife's, daughters' or dog's). What I personally probably like least of all is that the president himself, through his refusal to come clean on economic realities, and to be open to the people about the miserable state the country is in, lends credibility to these asinine tea parties sprouting up, which have as much to do with reality as the commander-in-chief's recent speeches. The more lies and half-truths the White House spreads, the more they empower the forces lining up against them. If you don't tell the truth, Mr. President, they don't need to either. Here's the crunching:

That distant rumbling is no longer far away
  • Sam Zell, who made billions in the field, says US commercial real estate values are already down 30%. That is at a time when just about everyone still tries not to talk even mention CRE.

Deflation is officially here
  • The US consumer price index fell at an annual rate of 0.4% in March, the first time since August 1955 prices have decreased on a year-over-year basis.
  • March retail sales fell 1.1% since February, while wholesale prices fell 1.2%.

US industrial output dropped most since 1945
  • March output for factories, mines and utilities fell 1.5% in the past month. Industrial production is down 13.3% since the recession began in December 2007 and 12.8% since March 2008. Output fell at a 20% annualized rate during the first quarter of 2009.
  • Factory production dropped 1.7% in March; it has fallen 15.7% since December 2007, and 15% in the past 12 months.
  • Vehicle output is down 34.5% in the past year.
  • Production of high-tech equipment fell 3.1% for the second month in a row, for a cumulative drop of 22.6% in the past year.

Tax revenues vanish into thin air
  • As of March - or halfway through fiscal year 2009 - federal tax revenue is 14%, or $160 billion, lower than last year, the Congressional Budget Office reported.
  • Individual income tax receipts dropped 15% while those for businesses fell a whopping 57%.
  • Revenue from miscellaneous taxes and fees has fallen by $10 billion, or 12%.

A pinch of irony, anyone?
  • Local tax collections rose 3.2%, as gains in property taxes (!!) offset falling sales taxes.
  • David Walker, former comptroller general of the United States, warns taxes will double.

Spend spend faster faster
  • Government spending levels midway through the fiscal year rose by $480 billion, or 33 percent.
  • Large increases in how much the federal government spent on Medicaid (up 17%) and "other activities" (up 21%) like unemployment benefits.
  • The CBO estimates that the annual deficit will spike to between $1.67 trillion and $1.85 trillion. That's nearly four times last year's then-record $455 billion deficit.

Home sweet home
  • Foreclosure sales had dropped in the second half of 2008 as mortgage companies delayed taking action against delinquent borrowers.
  • But foreclosure-related filings increased by nearly 6% in February from the month earlier, and were up almost 30% from February 2008.
  • More than 2.1 million homes will be lost this year because borrowers can't meet their loan payments, up from about 1.7 million in 2008, according to Moody's

And finally a warning for anyone thinking of applying for Obama's refinance plans:
  • Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels.

Before you sign those papers, ask yourself what the numbers are going to look like once your home has lost another 25%-30% in value. Will it still be worth it to refinance? Don't ever forget that refinancing takes away your right to walk away, forever. It changes non-recourse mortgages into recourse loans. Be very careful with that, it can make you a debt slave for the rest of your life.

I can't wait for the next clown to claim the "shallow recession" is over. Anybody keeping tabs on who says what when about what point in the future? It'll be a gas.....

NOTE: Update April 16: It's come to my attention that the non-recourse issue for refinanced loans is not as clear cut as I thought it was. We'll go look for comprehensive information

Obama Offers Vision of Lasting Recovery
President Barack Obama warned of tough months to come for the economy while noting some "signs of economic progress," from rising home refinances, increases in consumer and small-business lending, and new hiring for economic stimulus projects. In a broad, 45-minute speech at Georgetown University here, Mr. Obama sounded a note of cautious optimism as he made his most extensive effort to weave together the many strands of his economic policies. He described it as a two-stage process -- to first lift the economy out of recession, then build what he portrayed as a foundation for long-term growth.

Recounting a Biblical parable, the president declared: "We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity -- a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad." For weeks now, even some of Mr. Obama's economic supporters have said the president has failed to explain how all of his initiatives -- from bank and auto-industry bailouts to a surge of stimulus spending on health care, energy and education -- fit into a cohesive program. The efforts have often seemed ad hoc and reactive, when in fact they tie together into a long-standing economic agenda, said Robert Reich, a former labor secretary and Obama campaign adviser.

"The public can't tell the difference between a bank bailout and 10-year budget designed to invest in our future productivity," Mr. Reich said. "The narrative is there. It has the virtue of being truthful. It's important to state it." The president laid out five "pillars" to build a lasting recovery on: new regulations for Wall Street; education spending focused on strengthening the work force; renewable energy investments to create jobs and lessen the nation's dependence on imported oil; health-care cost containment; and long-term deficit reduction based on controlling the growth of Medicare, Medicaid and Social Security.

The speech broke no new policy ground, and some of his pillars seem elusive, especially his vows of fiscal rectitude. Antonia Ferrier, a spokeswoman for House Minority Leader John A. Boehner (R, Ohio), noted that even under the most optimistic scenario, Mr. Obama's budget, according to the Congressional Budget Office, would double the national debt over five years and triple it over 10. But in making the speech, the president acknowledged his failure to articulate a larger economic vision, saying, "many Americans are simply wondering how all of our different programs and policies fit together."

He also offered some rays of hope amid continuing bad economic news. Schools and police departments have canceled planned layoffs because of the $787 billion stimulus plan. Some industries, like infrastructure construction firms, renewable-energy companies and energy-efficient window makers, have begun to hire in anticipation of federally funded projects. New programs to unclog credit markets are beginning to have an impact on auto, small-business and student loans. "The severity of this recession will cause more job loss, more foreclosures, and more pain before it ends. The market will continue to rise and fall. Credit is still not flowing nearly as easily as it should," he warned.

He said he wouldn't jettison major elements of his program, such as his national health plan, to satisfy demands for "instant gratification in the form of immediate results or higher poll numbers."
Outside advisers say the president hasn't done enough so far to put his proposals in one broader framework. He rolled out the push for national health-insurance coverage, a plan to cap carbon emissions and develop renewable-energy resources and an unprecedented expansion of federal education support as separate initiatives, inviting criticism that he isn't sufficiently focusing on the recession.

US retail sales tumble in March, casting doubt on recovery
Retail sales in the U.S. unexpectedly dropped in March for the first time in three months, raising concern the biggest part of the economy may falter again heading into the second quarter. Purchases fell 1.1%, with declines affecting almost every sector, including car dealers, electronics stores and restaurants, the Commerce Department said Tuesday. Only pharmacies and grocery stores saw a gain. Separately, the Labor Department said wholesale prices fell, indicating that deflation risks remain. The reports served to temper optimism that the recession had passed its worst phase and pushed down shares of retailers including Home Depot Inc. and Macy's Inc.

"The job losses are too great for the consumer to spring back strongly," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "Today's data is a stark reminder that we haven't yet seen the bottom in this recession." Stocks slid, with the Standard & Poor's Retailing Index closing down 2.5% at 307.08 in New York, and the broader S&P 500 index down 2% at 841.50. Benchmark 10-year Treasuries gained, sending their yields down. Retail sales had been projected to rise 0.3% in March after an originally reported 0.1% decline the prior month, according to the median estimate of 73 economists in a Bloomberg News survey.

The results indicate that incentives and promotions by car dealers and clothing stores such as Gap Inc. failed to draw customers hurt by a lack of credit and the highest unemployment rate in more than 25 years. "The green shoots are looking a little brown," said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York, referring to remarks by Federal Reserve Chairman Ben S. Bernanke last month that "green shoots" of recovery had begun to appear. "The hope is that continued policy stimulus will offset the other bad news and give us some kind of growth" in sales in the second quarter, Harris said. Excluding automobiles, retail sales decreased 0.9% after a 1% gain in February. They were forecast to show no change, according to the Bloomberg survey.

In addition to rising unemployment, a late Easter holiday this year may have shifted sales out of March and into April, some economists said. Movable holidays can make it more difficult for government surveys to take into account seasonal buying patterns when tabulating purchases. Wholesale prices fell 1.2% in March after a 0.1% gain in February, the report from Labor showed. Excluding fuel and food, so-called core prices were unchanged. Over the last 12 months, wholesale expenses fell by the most in almost six decades. "Clearly, deflation is a concern right now, though the biggest worry is to restore growth," said Anika Khan, an economist at Wachovia Corp. in Charlotte, N.C. As long as inflation remains contained, Khan said, "it gives the Fed more room to try to restore growth."

US economy goes back to 1955 as deflation returns
The US economy has begun to deflate for the first time in more than half a century as a slump in demand pushes energy and food costs lower. The consumer price index fell at an annual rate of 0.4% in March, the first decline since August 1955, figures from the US labour department showed today. It was bigger than the 0.1% drop expected by economists. Compared with the previous month, consumer prices dipped by 0.1%. The decline was mainly caused by lower energy costs, which offset a surge in tobacco prices, the biggest since 1998. If energy and food costs are excluded, the annual inflation rate stands at 1.8%. Energy costs fell by 3% on the month and gasoline prices were down 4%. Food and housing costs both edged down by 0.1%.

"It reinforces the deflationary fears that the Fed has been voicing," said George Davis, currency strategist at RBC Capital Markets. A 2.4% fall in hotel room rates and a 0.2% decline in clothing prices reflected the weakness of consumer demand. But David Buik at BGC Partners pointed out that with "oil prices now stable at close to $50 a barrel, there is no near-term prospect of a further substantial decline in energy prices". He does not think that the latest figures signal the beginnings of widespread deflation this year. Certainly, inflation is no longer an issue.

"The notion that inflation will pick up in the near-term is completely out of the picture," said Peter Kenny at Knight Equity Markets in New Jersey. "Now we're looking at numbers that speak to recession without the prospect of inflation." The figures came as the head of Wal-Mart said that he still saw a "lot of stress" in the economy and did not anticipate a quick end to the recession. "It's not a 'V' recession, where we're just going to bounce out and come back," Mike Duke said on NBC's Today Show. His comments contrasted with those of Barack Obama and Ben Bernanke, the head of the US central bank, who made a concerted effort yesterday to talk up the prospects for the American economy despite fresh evidence of the squeeze on consumer spending. US retail sales unexpectedly fell last month.

"With the unemployment rate and the output gap both headed for 10% and the financial system still crippled, the risk of a pernicious debt-deflation emerging [where the collateral on loans decreases damagingly in value] is still much bigger than the risk that the Fed's quantitative easing actions will lead to runaway inflation," said Paul Ashworth, senior US economist at Capital Economics. Britain is also on the brink of deflation. Inflation as measured by the retail price index, which is used as a basis for wage negotiations, was zero last month but failed to turn negative as the City had predicted.

Biggest drop in US industrial output since VE Day
The output of the nation's factories, mines and utilities fell 1.5% in March, retreating in spite of higher production of motor vehicles and a boost from utilities, the Federal Reserve reported Wednesday.Industrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II, when production of equipment used in the war effort ground to a halt. In the past year, industrial production has fallen 12.8%. Output fell at a 20% annualized rate during the first quarter and it's now at the same level as December 1998, the Fed's latest data showed.

Factory production dropped 1.7% in March. Factory output has fallen 15.7% during the recession, also the largest decline since 1945-1946. Underscoring the trend in manufacturing, factory output has dropped 15% in the past 12 months and has fallen for five consecutive quarters. Capacity utilization fell by a full percentage point, to 69.3%, the lowest since the data series begins in 1967. In manufacturing, capacity utilization fell to 65.8%, which means a third of the nation's manufacturing capacity is idle. Output was much lower than expected by economists surveyed by MarketWatch, who had been looking for a smaller 0.8% decline.

In March, mining output fell 3.2%. Utility output increased 1.8%. In the factory sector, output of business equipment fell 2.8% and is down 14% in the past year. Output of consumer goods fell 0.3% in March and is down 8% in the past year. Output of motor vehicles increased 1.5% in March after a 9.4% jump in February. Vehicle assemblies rose to a seasonally adjusted annual rate of 4.84 million, up from 4.65 million in February and 3.72 million in January. In 2008, 8.45 million cars and light trucks were produced.

Vehicle output is down 34.5% in the past year. Excluding vehicles, industrial production fell 1.9% in March. Factory output fell 2.8% excluding vehicles. Production of high-tech equipment fell 3.1% for the second month in a row, putting the cumulative drop at 22.6% in the past year. Excluding high-tech, industrial production fell 1.4%. In a separate report, the Labor Department said consumer prices fell 0.1% in March after seasonal adjustments. Prices have dropped 0.4% in the past year, the first time since 1955 that prices have decreased on a year-over-year basis. The core CPI rose 0.2% in March

Uncle Sam won't make ends meet
For Uncle Sam, Wednesday is a big payday. But what the government rakes in on April 15 - and throughout the year - won't be enough to cover its expenses. Federal coffers are much less flush than they were last year as tax receipts have fallen sharply because of the economic downturn. As of March - or halfway through fiscal year 2009 - federal tax revenue is 14% lower than last year, the Congressional Budget Office recently reported. In dollars and cents terms, that means Washington has $160 billion less to spend today than it did a year ago. All the while, the demands on the government to fund the country's way out of recession are on a steep trajectory north.

"Receipts from almost all sources declined, reflecting the continuing effects of the recession and recently enacted legislation," the CBO noted in its monthly budget review. The economic crisis is showing up in the government's profit-loss statement in myriad ways. Considerably more people are out of work than they were last year - which means they're not paying as much in income taxes. Corporate earnings have taken a beating, which means less taxable green coming in from that corner. And refunds have increased for individuals and corporations alike. All told, individual income tax receipts dropped 15% while those for businesses fell a whopping 57%.

In addition, revenue from miscellaneous taxes and fees has fallen by $10 billion, or 12%. The CBO attributes that decline in part to losses in the Federal Reserve portfolio of assets, in particular a $3 billion drop in market value of the corporation set up last year to smooth the takeover of investment bank Bear Stearns by JPMorgan Chase. At the same time, the country's spending levels midway through the fiscal year rose by $480 billion, or 33 percent, compared to last March. The jump is due in large part to the government's funding of the Troubled Asset Relief Program as well as Fannie Mae and Freddie Mac. There were also significant increases in how much the federal government spent on Medicaid (up 17%) and "other activities" (up 21%) such as providing unemployment benefits.

Spending also rose - although modestly by comparison - for defense, which accounts for roughly 20% of the total federal budget; and for Social Security benefits, which account for another fifth of the budget. Of course, this is hardly the first year Uncle Sam has taken in less than he will have to pay out. In fact, that's been the case for all but five of the past 40 years, according to CBO data. The difference this year is that the spending demands on the federal government have grown in historic ways. In fact, the CBO estimates that the annual deficit will spike to between $1.67 trillion and $1.85 trillion. That's nearly four times last year's then-record $455 billion deficit.

Over the next few weeks, President Obama will submit his most detailed budget proposal to date as lawmakers in the House and Senate try to reconcile their own versions of the 2010 fiscal plan. But for the keepers of federal tax revenue, it's a safe bet that next year is likely to be déjà vu all over again. The budget proposals on the table all exceed $3.5 trillion. And given the state of the economy, no one is proposing to raise taxes in 2010.

Sales-Tax Revenue Falls at Fastest Pace in Years
State and local sales-tax revenue fell more sharply in the fourth quarter of 2008 than at any time in the past half century, and has continued to erode through the beginning of 2009, according to a report released Tuesday. The report by the Nelson A. Rockefeller Institute of Government at the State University of New York underscores how swiftly the consumer slowdown has eaten into municipal budgets. The drop in tax revenue has forced cities and towns of all sizes to cut everything from police to summer pool hours, and has sent legislatures scrambling for federal economic-stimulus funds to help ease budget gaps.

"The sales tax has been absolutely hammered," said Don Boyd, senior fellow at the institute. State and local sales taxes, among the largest sources of revenue for municipalities, fell 6.1% in the fourth quarter of last year, as consumers bought fewer clothes, ate out less and canceled vacations. Revenue from personal income taxes was down 1.1% in the fourth quarter; corporate income taxes dropped 15.5%, reflecting weaker profits. The declines have continued through the beginning of this year. In the first two months of 2009, the 41 states that have reported tax revenue saw total receipts decline 12.8%, versus the same period a year ago. States have so far been hit harder than towns and cities. Overall, states' taxes declined 4% in the final three months of 2008 versus the same period in 2007, the first decline in six years, according to the analysis of state data by the Rockefeller Institute. Local tax collections rose 3.2%, as gains in property taxes offset falling sales taxes.

While income and property taxes have generally fared better than sales taxes, those revenues are also under stress. Property taxes typically lag behind real-estate prices, because it takes municipalities a year or longer to reassess the home values on which those levies are calculated. With home prices still falling, property taxes are also set to grow more slowly or in some cases decrease. Carnage in the stock market also is likely to substantially reduce income-tax collections. With tax day on Wednesday, this is the time of year when high-income earners start writing checks to cover capital gains and other investment-based income taxes that have accrued over the past year. "This time around, the checks will be much smaller, and some [people] may be seeking refunds," Mr. Boyd said. Further declines in tax revenue could force legislatures -- which in many cases used heavy cuts to balance this year's budget -- to make further reductions later this year.

Banks Ramp Up Foreclosures
Some of the nation's largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration's housing-rescue plan gets into gear. J.P. Morgan Chase & Co., Wells Fargo & Co., Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures. Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration's housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers' payments to affordable levels.

Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws. Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process. The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off. Some of the mortgage companies are themselves receiving funds under the government's financial-sector bailout, which could make their actions politically sensitive. But mortgage companies say they are taking steps to keep borrowers in their homes, and are only resorting to foreclosure when there are no other options.

Foreclosure sales had dropped in the second half of 2008 as mortgage companies delayed taking action against delinquent borrowers. But sales have been edging up this year, according to LPS Applied Analytics, which tracks loan performance. Foreclosure-related filings increased by nearly 6% in February from the month earlier, and were up almost 30% from February 2008, according to RealtyTrac. The backlog of seriously delinquent loans has been growing. In California, notices of trustee sales, which are preludes to foreclosure sales, climbed by more than 80% to 33,178 in March, from February, according to data from and the Field Check Group. The increase reflects both the expiration of foreclosure moratoriums and a California law enacted late last year that temporarily delayed default and foreclosure notices, says Mark Hanson, president of the Field Check Group, a research firm.

Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can't meet their loan payments, up from about 1.7 million in 2008, according to Moody's Mortgage-servicing companies, such as J.P. Morgan Chase and Wells Fargo, collect mortgage payments and work with troubled borrowers, both for loans they own and those held by investors. J.P. Morgan Chase has increased foreclosure actions since the expiration of a moratorium on new foreclosures that began on Oct. 31, and a later moratorium put in place at President Obama's request. The Oct. 31 moratorium delayed foreclosures on more than $22 billion of Chase-owned mortgages involving more than 80,000 homeowners.

"We had stopped putting additional loans into the foreclosure process so we could be sure that delinquent borrowers would have every opportunity to take advantage of new initiatives that we were putting in place," a Chase spokesman says. Borrowers who are now receiving foreclosure-sale notices, he said, "own vacant properties, have not been in contact with us and/or do not qualify for the modification programs." Citigroup Inc. says it stopped all foreclosures until March 12, at the Obama administration's request, on loans serviced for Fannie and Freddie. Since then, says a spokesman, it has "reverted to our previous business-as-usual moratorium." Under that policy, it will not initiate a foreclosure sale for any borrower who is working with Citigroup and is a good candidate for a loan modification, provided Citigroup owns the loan or has investor approval. "For borrowers who do not qualify under these criteria and where no other options are available, we will move forward with foreclosures," the spokesman says.

Wells Fargo has also increased foreclosure actions since the expiration of its foreclosure moratorium, put into place while it awaited details on the administration's plan. Wells Fargo "will continue to work with our customers to find solutions up to the actual point of a foreclosure sale," a Wells Fargo spokesman says. "But the expiration of foreclosure moratoriums is having an impact."
Both Fannie and Freddie have stepped up sales of foreclosed properties since their moratoriums ended on March 31. Freddie says it has started to complete some foreclosure sales, such as those involving investment properties or second homes, though it continues to delay foreclosures on loans that may be eligible for modification under the Obama plan. Fannie has told servicers that "a foreclosure sale may not occur on a Fannie Mae loan until the loan servicer verifies that the borrower is ineligible" for a loan modification under the Obama administration's plan, "and all other foreclosure prevention alternatives have been exhausted," a Fannie spokeswoman says.

GMAC's mortgage division, which had temporarily halted foreclosures while awaiting details of the Obama plan, is now reviewing loans to see which ones will qualify under the program. So far, about 10% of borrowers in some stage of foreclosure appear to be eligible for the federal program, a company spokeswoman says. Although GMAC may be able to work with investors who own these loans to come up with another solution, she says, many borrowers who don't qualify for help under the federal program are likely to wind up in foreclosure. Mortgage companies are sorting through loan files to determine which borrowers are candidates for help. "At the time a moratorium expires, we have a team of folks who will pore through all of those loans where borrowers have not paid before we will take the next step in the process," says Jim Davis, executive vice president for American Home Mortgage Servicing Inc. "If there is any borrower contact, we will hold off on the foreclosure process until we've exhausted every effort to assist that borrower."

Still, some borrowers who are currently talking to their mortgage companies are also likely to wind up in foreclosure once their files are reviewed. "We are getting so many of these cases where people don't fit the new [Obama] program," says Michael Thompson, director of Iowa Mediation Service, which works with troubled borrowers. Many borrowers are unemployed or underemployed or have credit problems that go well beyond their mortgage troubles, he says. Many have been "playing for time" while the moratoriums have been in place, he says. But the delays have only increased the amount of interest and fees they owe, making their loans "nonviable in the long run."

Many troubled loans will ultimately wind up in foreclosure because the borrower doesn't have sufficient income to make even a reduced mortgage payment, or doesn't respond to the mortgage company's requests for information. "Certainly half of the loans that would have wound up in foreclosure before the foreclosure moratoriums went in place" will ultimately wind up in foreclosure, says Michael Brauneis, director of regulatory risk consulting at Protiviti Inc., a consulting firm. While many troubled loans are held by hedge funds, pension funds and other investors, the expiration of foreclosure moratoriums could also put a dent in bank profits, says Frederick Cannon, an analyst with Keefe, Bruyette & Woods. The moratoriums "have to some degree postponed the realization of problems" and "may help bank earnings in the first quarter" by delaying charge-offs of some troubled loans, he says.

Ilargi: Funny how, and how fast, headlines can change. Bloomberg changed this one:Zell Says Commercial Values Down 30%; Tribune Was a 'Mistake' into this one:Billionaire Zell Says 'I Made a Mistake' in Purchasing Tribune in very short order today. Someone didn't like that 30% number. So we’ll just pretend that Zell's problems with some newspaper are more important then the entire US commercial real estate holdings losing a third of their value. Well, two can play that game.

Sam Zell Says US Commercial Real Estate Values Down 30%
Billionaire investor Sam Zell made what is acknowledged to be one of the best-timed investment decisions ever by selling his real estate empire at the peak of the market in February 2007. Now he says he made one of the worst 10 months later by purchasing Tribune Co. "The definition if you bought something and it’s now worth a great deal less, you made a mistake," Zell said in a Bloomberg Television interview today. "And I’m more than willing to say that I made a mistake. I was too optimistic in terms of the newspaper’s ability to preserve its position."

Zell, 67, exited the U.S. office market by selling Equity Office Properties Trust to Blackstone Group LP for $39 billion including debt in the biggest leveraged buyout at the time. The sale earned Zell about $900 million. In December 2007, Zell and investors took Tribune private in a deal that gave the company $13 billion in debt. The company filed for bankruptcy in December 2008. "I think you’re going to recognize the fact that by filing for bankruptcy in December and being the first one, we also were able to stop the bleeding and preserve a great company.," said Zell of the owner of the Los Angeles Times and the Chicago Cubs.

"I think we’re looking at every option at the Tribune Co.," he said. "It’s very obvious that the newspaper model in its current form is not working. And the sooner we all acknowledge that the better. Whether it be home delivery, whether it be giving away content for free, I mean these are critical issues." Zell said a merger of Tribune is unlikely now. "That’s like asking someone in another business if they want to get vaccinated with a live virus," Zell said. "There’s not a long list of people who want to buy newspaper companies today."

In commercial real estate, values are down about 30 percent, Zell said. "You’re going to see a lot of change of ownership in commercial real estate" as a result of the once optimistic forecasts, he said. "It’s more likely the banks will either foreclose or come up with some kind of restructurings that will ultimately allow the properties to trade." Zell said defaults on commercial property loans aren’t a problem because most debtors are current on payments. "The problem is maturities, not carrying the real estate," Zell said. The Blackstone transaction capped a tumultuous period for Zell after his 2001 purchase of Spieker Properties, then the biggest commercial landlord on the U.S. West Coast.

He paid $7.2 billion just as California’s technology boom fizzled and cut Silicon Valley rents, causing Equity Office shares to lag behind other real estate investment trusts for the next four years. Two years after the Blackstone deal, declining property values are again confronting landlords. Debt-laden developers are being forced to sell buildings and vacancy rates at U.S. offices, apartment buildings and retail centers have risen to their highest levels in at least four years. The Bloomberg Real Estate Investment Trust Index is down 57 percent during the past year. Zell, chairman of Chicago-based apartment REIT Equity Residential, said there are signs the housing market may be starting to recover. The single-family housing market is starting to "bottom out" and "this summer we’ll see equilibrium," he said.

Why your taxes could double
by David Walker

Even under the best of economic circumstances, tax season is a tense time for American households. The number of hours we collectively spend working on our returns is probably a lot more than government agencies claim. The burden in financial terms is even greater: A recent independent survey found that the average American's total federal, state and local tax bill roughly equals his or her entire earnings from January 1 up until right before tax day. Now imagine that tax bill doubling over time.

In recent years, the federal government has spent more money than it takes in at an increasing rate. Total federal debt almost doubled during President George W. Bush's administration and, as much as we needed some stimulus spending to boost the economy, the nonpartisan Congressional Budget Office now estimates total debt levels could almost double again over the next eight years based on the budget recently outlined by President Obama. Regardless of what politicians tell you, any additional accumulations of debt are, absent dramatic reductions in the size and role of government, basically deferred tax increases. Remember the old saw? "You can pay me now or you can pay me later, with interest."

To help put things in perspective, the Peterson Foundation calculated the federal government accumulated $56.4 trillion in total liabilities and unfunded promises for Medicare and Social Security as of September 30, 2008. The numbers used to calculate this figure come directly from the audited financial statements of the U.S. government. If $56.4 trillion in financial commitments is too big a number to digest, think of it as $483,000 per American household, or $184,000 for every man, woman and child in the country. Even broken down, the numbers can be tough to swallow. Yes, you've paid your taxes, but you still bear a significant share of the government's own financial burden. To help this news go down with a smile, the Peterson Foundation is supporting a campaign designed to help Americans understand what Washington is doing to us, rather than for us.

Meet Owen & Payne (, partners in a fictional accounting firm that specializes in helping Americans fill out the "new" Form 483000, which spells out how our elected officials are putting our nation into more and more debt and how that bill eventually will have to be paid: By doubling your taxes. The campaign is all in fun, but the intent is very serious. Unless we begin to get our fiscal house in order, there's simply no other way to handle our ever-mounting debt burdens except by doubling taxes over time. Otherwise, our growing commitments for Medicare and Social Security benefits will gradually squeeze out spending on other vital programs such as education, research and development, and infrastructure. Personal savings, while experiencing an uptick lately because of the recession, have been too low for too long. As a result, when our government has to borrow money, it must increasingly turn to lenders overseas.

Effectively addressing these issues will require tough choices and comprehensive reforms, including budget controls, changes to our entitlement programs, reductions in health care costs, other spending cuts, and yes, tax increases. But as the old saw goes, paying now, or paying soon, won't be as painful as paying later. So as you file your tax returns this year, bear in mind that no matter how much you're paying now, you'll pay much more in the future because of Washington's failure to get its finances in order. If you don't like the idea, then get informed and get involved. And by listening rather than punishing, help encourage our elected officials to speak the truth about our financial condition, even if it means reforming entitlements, cutting spending, and yes, raising taxes.

David M. Walker was comptroller general of the United States and head of the Government Accountability Office from 1998 to 2008.

Honest Man Emerges From Muck of Banking Crisis
Remember this man’s name: Charles Bowsher. He’s one of the few people leaving the banking crisis behind with his reputation enhanced. Bowsher, who was comptroller general of the U.S. from 1981 to 1996, had a simple reason for resigning last week as chairman of the Federal Home Loan Bank System’s Office of Finance. He didn’t want to put his name on the banks’ combined financial statements, because he was uncomfortable vouching for them. Bowsher, 77, had held the post since April 2007. With so many top executives complaining they can’t figure out what their companies’ assets are worth, the real wonder is that more corporate directors haven’t quit rather than certify financial reports they don’t understand.

The job Bowsher left is a crucial one. The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt -- $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook. The finance office’s board also oversees the preparation and auditing of the FHLBanks’ combined financial statements. Some of the banks have run into trouble the past year because of plunging values for mortgage-backed securities they own.

"I was not comfortable as an audit-committee member in signing off on the financial statements, after I became aware of the standards and processes for valuing the mortgage-backed securities," Bowsher told me. The finance office didn’t say why Bowsher was quitting, when it issued its March 24 press release announcing his resignation. On March 30, a spokesman, Michael Ciota, told me the people who work there didn’t know, including its chief executive, John Fisk. "We’re not aware of any reason," Ciota said. "There’s not a whole lot to tell." After I told Ciota yesterday about Bowsher’s comments to me, Fisk called me back. He confirmed that "Mr. Bowsher has expressed his concerns to me around the complexity of valuing mortgage-backed securities and the process of producing combined financial statements from the 12 home loan banks." He added: "I don’t think it’s appropriate for us to speak for Mr. Bowsher."

Bowsher told me he was concerned, in part, with the methods used for determining when losses on hard-to-value securities should be included in banks’ earnings and regulatory capital. The way the accounting rules work, as long as such losses can be labeled "temporary," they don’t count in net income. For the fourth quarter of 2008, the FHLBanks said their total preliminary net loss was $672 million. It would have been many times larger, had they included all their red ink. The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year.

The FASB’s rules on this subject, which have never been well defined, are now in flux. Today, after caving in to pressure by the banking industry and members of Congress, the Financial Accounting Standards Board is set to vote on a plan to relax its rules on mark-to-market accounting, so that companies can disregard market prices and ignore losses on their securities indefinitely. While that wouldn’t make the banks any healthier, it would make their numbers look prettier. The FHLBanks have been among the most vocal lobbyists pressing for the change. Bowsher said the process of valuing such assets was fraught with doubt already.

"Now if you think about it, the FASB might be changing the whole thing, and everybody might mark their assets up," he said. "Who wants to be part of that?" The finance office hasn’t released the banks’ audited combined financial statements for 2008. It was scheduled to do so March 31, but issued a press release saying it would delay the disclosure, because the FHLBank of Boston was late filing its annual report with the Securities and Exchange Commission. Tough stands are nothing new to Bowsher. As comptroller general, he was in charge of the General Accountability Office, the investigative arm of Congress. At his direction, the GAO was among the first to warn the public about the brewing savings-and- loan crisis during the 1980s.

He testified before Congress in 1994 that there was an "immediate need" for "federal regulation of the safety and soundness" of all major U.S. derivatives dealers. (How’s that for prescient?) Most recently, in 2007, he led an independent committee that issued a blistering report on financial missteps at the Smithsonian Institution, whose board of regents included U.S. Chief Justice John Roberts. Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be? Somebody ought to give this guy a medal.

What About That Other $28 Billion?
Addendum at 5 p.m. This post previously said Goldman borrowed $19.5 billion with a government guarantee. That number came from Thomson Reuters, but Goldman tells me they missed one issue, and also did not include some private offerings. The actual total, they say, is $28 billion, and Goldman has the right to raise that as high as $35 billion. I have also updated the post to reflect the closing price of Goldman stock today.

Goldman Sachs, as you know by now, wants to return that $10 billion in TARP money it got. And what about the $28 billion it borrowed in the credit markets with a guarantee from the federal government? A spokesman tells me that Goldman has no plans to pay that back early. Nor will it say if it would have been profitable had it reported on the quarter ended in February, as it traditionally has. The spokesman did tell me something I would have included in my earlier Goldman blog had I known it, that the change in fiscal year was required when it converted to a bank holding company.

The bank regulators did not, however, force Goldman to avoid any mention of the December orphan month in the text of its earnings release, instead relegating it to a table deep in the announcement. Goldman may also have some unhappy customers today. It says its stock offering was oversubscribed when it was priced this morning at 9 a.m. at $123 a share. That means it may be able to sell the overallotment option, which would give it an additional $750 million. Goldman shares opened above $123 this morning, but fell below that level at noon, and closed at $115.11. At that price, and assuming the overallotment option is exercised, Goldman’s customers, on a mark-to-market basis, have lost $368.8 million on the sale today.

The Goldman Two-Step
So Goldman Sachs now wants to repay its $10 billion in taxpayer capital, with its CFO even saying the Wall Street giant has a "duty" to do so now that it is once again turning a nice profit. Congratulations to Goldman on its desire to escape federal bondage. The question taxpayers might still ask, however, is whether Goldie is also willing to forswear a bailout when it next gets into trouble. Is it still "too big to fail"? It is certainly a good sign that one of the bigger banks is eager and able to leave the clutches of the political class. The Washington crowd wants to hide its own role in the financial crackup -- supereasy money, Fannie and Freddie -- so it has taken to blaming the bankers, and the Troubled Asset Relief Program is its velvet truncheon. The sooner every bank can safely escape Barney Frank and Chris Dodd, the faster we can restore a capitalist financial system.

On the other hand, Goldman isn't exactly swearing off all Beltway help. The firm has benefited enormously from the federal bailout, and many of our sources believe Goldman would have failed without it. Goldman denies this, claiming in particular that the firm had "no material economic exposure to AIG" at the time of the insurer's collapse. There's no denying, however, that Goldman has been among the largest recipients of AIG cash since the bailout. Goldman is getting the same terms as AIG's other counterparties, but the partnership of AIG and the Federal Reserve has been a lot nicer to Goldman than AIG was as an independent firm. Without a functioning AIG able to post additional collateral, Goldman might have struggled to hedge its AIG exposure. Instead, government-owned AIG, in cooperation with the Fed, has removed almost all of Goldman's risk on its contracts with AIG.

Here's how it has worked: In 2007, Goldman began marking down the value of the collateralized debt obligations, or CDOs, underlying these contracts. Since AIG had essentially sold insurance against the possibility that these CDOs would default, Goldman began demanding larger amounts of collateral to cover this increased risk. AIG disputed Goldman's valuations and sometimes posted half or less of the amount requested. By the time of AIG's September 2008 collapse, AIG had posted $7.5 billion of collateral on credit default swap (CDS) contracts guaranteeing $20 billion in securities. Given the plummeting value of these securities, Goldman estimated its exposure was $10 billion, not $7.5 billion. To cover this difference between the collateral Goldman believed it was owed by AIG and the amount of collateral actually posted, Goldman bought credit default swaps that would pay off if AIG went bust.

So it could be true that, on the day AIG failed, Goldman's books showed no material exposure. But the underlying assets of the CDS contracts continued to decline. Would a bankrupt AIG have made Goldman whole? All we know for sure is that taxpayer-funded AIG and the Fed kept on paying Goldman. The Fed's Maiden Lane III vehicle essentially bought out $14 billion of the $20 billion in contracts at face value. This was a sweet deal for Goldman and the other counterparties, a deal only available from the government. By way of comparison, a similar resolution in 2008 involving Merrill Lynch and XL Capital Assurance resulted in Merrill receiving 13 cents on the dollar, not the 100 cents Goldman received. This is not to say that 13 cents was the correct price. The Merrill deal was largely dictated by the New York Insurance Department for the benefit of XL, just as the Fed drove a hard bargain with AIG and U.S. taxpayers for the benefit of AIG's counterparties. But for Goldman to imply that it would not have been hurt by an AIG failure isn't credible.

Meanwhile, Goldman also has access to the Fed's discount window, as it didn't before the 2008 Bear Stearns rescue. And Goldman has benefited from the FDIC's debt-guarantee program, which means it can borrow money at cheaper rates. Think Fannie Mae. This FDIC liquidity guarantee is supposed to expire at the end of 2009, but we doubt Goldman and the other banks will lobby to escape that taxpayer subsidy. The larger issue going forward is whether Goldman is "too big to fail," which means that everyone knows the feds will ride to the rescue if it gets into trouble again. Before Bear Stearns, investment banks were allowed to fail, a la Drexel Burnham. But after last autumn, no one will believe it. And Goldman will hardly mind if that's what the marketplace believes, because such an implicit taxpayer guarantee will let it borrow more cheaply and thus make more money. Think Fannie Mae again. Even now on the taxpayer dime, Goldman is still trading on its own equity account -- risky banking behavior.

The point is that Goldman and other banks can't have it both ways. If they want taxpayers to save them, then they have to take fewer risks and become smaller. Either that, or we need a new financial resolution or bankruptcy process that lets these companies fail while protecting the larger banking system. We're glad Goldman wants to flee Barney Frank's embrace, but it's still only half way back to the promised land of capitalism -- which includes the freedom to fail.

Banks Await Stress-Test Results
White House Treads a Fine Line as It Weighs Whether to Disclose Findings

The Obama administration is considering making public some results of the stress tests being conducted on the country's 19 largest banks, said people familiar with the matter, a move that could help more clearly separate healthy banks from the weaklings. Until now, the government has tried to treat all banks equally, pouring cash into both strong and struggling institutions to prop up the financial sector. The strategy has provided cover for beleaguered banks, which received funds along with their stronger brethren. This possible move, combined with first-quarter bank earnings and the push by some financial institutions to raise new capital and repay their bailout funds, could lay the groundwork for a new phase in the financial crisis.

Within weeks, the stronger banks could emerge free of government shackles and flush with new funds, with weaker ones still reliant on federal largesse. That would transform how investors and the government view the financial sector. Since announcing the stress tests earlier this year, the government hasn't made clear what, if anything, would be disclosed about the assessments. The Treasury originally suggested it would defer to individual banks to disclose results. But some regulators worried about banks selectively leaking information, causing a possible bias against rivals. The stress tests were designed to build confidence that the nation's largest banks could weather a severe and prolonged economic downturn. Regulators are trying to determine how much assistance banks might need to continue lending in such circumstances.

Banks that need more capital will get six months to raise it from private investors or take cash infusions from the government. It isn't clear precisely what information the government might disclose. It remains possible the data won't be specific to individual banks. But some within the administration believe a certain amount of information needs to be released in order to provide assurance about the validity and rigor of the assessments. In addition, these people also are concerned that the tests won't be able to fulfill their basic function of shoring up confidence unless investors are able to see data for themselves. Staff at the various regulatory agencies have been discussing the matter for several weeks and are expected to brief top regulators as soon as this week. One possible solution: Aggregating the data provided by the banks so the government could provide a broad snapshot of the banking industry's health without disclosing firm-specific data.

Last month, Comptroller of the Currency John Dugan said "there will be definitely some information that will be provided" once regulators make their decisions. "Exactly what that will be and when it will be provided will come forth later," he said at the time. Several small banks have already repaid their bailout funds. On Tuesday, Goldman Sachs Group Inc. successfully raised $5 billion in equity aimed at helping it repay $10 billion in Troubled Asset Relief Program, or TARP, capital it received in October. Other large financial institutions don't appear to be keen to tap the equity markets any time soon, but the recent revival in their stock prices has made the concept more appealing. A senior U.S. Treasury official said the government will accept repayment of rescue funds from any institution whose regulator dubs it healthy enough to operate without federal capital. The move to stop treating banks equally is sparking concern about the effect on specific institutions seen as weaker than peers.

"You can create a run on a bank pretty quickly," said Eugene Ludwig, chief executive of consulting firm Promontory Financial Group and a former Comptroller of the Currency. Wayne Abernathy, executive vice president of financial institutions policy and regulator affairs at the American Bankers Association, said the government needs to provide information about the results but also protect examination data. "I don't think they can ignore the appetite they have created for this information," Mr. Abernathy said. Having the government publicize some information would allow policy makers to control the message. "It's what can we say that is meaningful while still protecting the quality of that exam data," he said. Mr. Ludwig cautioned that any information could give rise to mischief. "Bank exams are confidential for good reason," he said. "Given the kind of confidential information they contain, there is always the possibility of misuse or misinterpretation."

Fiat to Chrysler: Cut costs or we walk
Fiat SpA will abandon Chrysler LLC, leaving it to fend for itself in bankruptcy court, unless Chrysler's Canadian and American unions agree to substantial labour-cost reductions by the end of the month, Fiat CEO Sergio Marchionne says. For Chrysler, which is subsisting on cash borrowed from the U.S. and Canadian governments, the deal with Fiat is the last chance to avoid a bankruptcy filing and possible liquidation. But Fiat is prepared to scrap the deal and look elsewhere for an international partner if the unions do not agree to match the lower labour costs of Japanese and German plants in the United States and Canada, Mr. Marchionne said in an exclusive interview with The Globe and Mail at the Italian auto maker's headquarters in Turin. "Absolutely we are prepared to walk. There is no doubt in my mind," he said. "We cannot commit to this organization unless we see light at the end of the tunnel."

Mr. Marchionne, 56, said Chrysler workers on both sides of the border have to end their sense of entitlement if the wrecked auto maker is to have any chance of repairing itself. "The minute you talk to me about historical entitlement in an organization that is technically bankrupt, it's a nonsensical discussion," he said. "There is no wealth to be distributed." The administration of U.S. President Barack Obama has given Fiat and Chrysler until the end of the month to negotiate partnership terms. If the deal is done, the U.S. and Canadian governments would prop up Chrysler with about $7-billion(U.S.) in loans to sustain its operations while Fiat overhauls the company and fills its dealerships with Fiat-derived models.

Because of the lack of progress on labour negotiations, especially on the Canadian side, there is only a 50-50 chance the partnership will be formed, Mr. Marchionne said. "From what I can tell from a distance, the CAW may have taken more rigid positions," he said. "The dialogue is out of sync. I think they need to see what state the industry is in. Canada and the U.S. are coming in as the lender of last resort. "No one else would put a dollar in. This is the worst condemnation of the viability of this business. "We are not anti organized labour. No one wants to remove the UAW or the CAW from the table. But it will happen if a bankruptcy process drags on. …The UAW and the CAW have a unique opportunity here to change the framework of the discussion." Hourly labour costs vary among the plants operated by Japanese and German auto makers in the United States – mainly in such southern states as Kentucky, Alabama, Georgia and Tennessee.

At a mature plant such as the Toyota Motor Corp. assembly operation in Georgetown, Ky., hourly labour costs are in the high $40 (U.S.) range, Toyota spokesman Mike Goss said yesterday. Costs at Honda Motor Co. Ltd. and Nissan Motor Co. Ltd. plants in the United States are estimated to be about $40 an hour. Chrysler has already demanded that the CAW trim hourly labour costs by $19 (Canadian) to $55 to match what it pays UAW workers at its U.S. plants. The CAW has refused to go that far, offering Chrysler the same $7 to $7.25 an hour it has already given General Motors of Canada Ltd. in overall cost cuts, plus agreeing to reduce break times at Chrysler plants in Brampton, Ont., and Windsor, Ont., which would reduce hourly costs by what the union says is several more dollars an hour. Fiat, with the backing of the White House, has proposed taking a 20-per-cent stake in Chrysler, which is currently 80-per-cent owned by Cerberus Capital Management LP and 20-per-cent by Daimler AG of Germany, owner of Mercedes-Benz.

Upon reaching certain milestones, such as the rollout of Chrysler vehicles based on Fiat platforms, Fiat's ownership would rise in stages by 5-per-cent increments to 49 per cent. Fiat could raise its stake above 49 per cent only if Chrysler repays its bailout loans to the U.S. Treasury. At the end of March, the U.S. auto task force gave Chrysler 30 days to complete an alliance with Fiat or face a cut-off of its government funding that could force its liquidation. Yesterday, Mr. Obama said it is his "fervent hope that in the coming weeks, Chrysler will find a viable business partner." Mr. Marchionne, who was educated in Canada, started his career here and holds dual Italian-Canadian citizenship, has vowed to put no Fiat money into Chrysler and plans to save the company through technology transfers and a corporate overhaul modelled on the one that rescued Fiat from oblivion in the middle part of this decade.

Short of injecting funds into Chrysler, Mr. Marchionne said Fiat will do whatever it takes to revive Chrysler, including offering himself up as CEO. "Fundamentally, that's possible, but the title isn't important," he said. "What's important is that they hear me. It's possible that I will have to divide my time between running Fiat and running Chrysler." As the April 30 Fiat-Chrysler partnership deadline approaches, the chances of Chrysler's failure appear as high as ever. Earlier this month, Moody's Corporate Finance said Chrysler's risk of a bankruptcy filing was greater than 70 per cent. Mr. Marchionne would not offer odds on a Chrysler bankruptcy, other than to say that a Chapter 11 bankruptcy-protection filing "is an option" in the absence of a partnership agreement. He wouldn't rule out a Chapter 7 filing – liquidation – meaning 85 years of Chrysler history would come to an end.

In the short term, some of Chrysler's 30 plants would be closed – the Fiat boss would not say which ones would be targeted. Chrysler's headquarters in Auburn Hills, Mich., would be thinned out. "Fiat has an incredibly flat management structure," he said. "Chrysler needs a flat management structure." A deal with the UAW and the CAW would mean substantially lower labour costs. Chrysler as a brand might be downgraded so the stronger Dodge and Jeep brands could be developed. Mr. Marchionne said the Fiat Cinquecento (Italian for 500), the hot-selling car launched in 2007 and credited with ensuring the revival of Fiat, would be introduced in North America as early as next year.

It would be built in North America, but would probably carry the Fiat badge because the company considers the Cinquecento a brand in its own right. Chrysler would launch its own small car based on the Cinquecento platform, as Ford has done in Europe with the new Ka. "Chrysler needs its own Cinquecento, meaning a model that is the remaking of Chrysler," Mr. Marchionne said. Alfa Romeo, Fiat's sporty, upscale brand, would produce Alfas in either Canada or the United States, Mr. Marchionne said. Last year the Ontario government tried to convince Mr. Marchionne that he should build the Alfa in Ontario. He said Ontario Premier Dalton McGuinty tried to "sell" him an auto plant. The new Alfa 149, to be unveiled next year, would be built in North America, as would the successor to the larger Alfa 159.

Calpers May Buy TARP, Citigroup Assets on 'Glimmer of Hope'
The California Public Employees’ Retirement System said it plans to buy assets of Citigroup Inc. and other financial companies under the U.S. government’s $700 billion Troubled Asset Relief Program. Calpers, as the largest U.S. public pension manager is known, is setting aside "billions of dollars" and is ready for more investments, Henry Jones, a Calpers board of administration member, said in a speech in Seoul. The fund may buy "assets of these financial companies such as Citi and the others, assets that they’re trying to get off their balance sheets," Jones said in an interview after the speech.

The MSCI World Index jumped 14 percent in the past month as governments around the world stepped up efforts to stimulate their economies and end the first global recession since World War II. Jones said there is a "glimmer of hope" in the stock market, adding that Calpers has widened its asset allocation ranges to ensure more flexibility and will hold its investment review in May, about 18 months ahead of schedule. "Credit is still tight in the markets, but we’re able to raise enough cash to still make good deals and position ourselves for an eventual market turnaround," Jones said in the speech. Stocks have risen on growing confidence that coordinated interest-rate cuts by central banks and more than $2 trillion of stimulus spending by Group of 20 nations will revive global growth.

U.S. President Barack Obama yesterday said he sees "glimmers of hope" for the U.S. economy and Lawrence Summers, director of the National Economic Council, said the nation’s recession should end "within the next few months." The Sacramento, California-based pension fund, which provides pension and health benefits to 1.6 million government workers, retirees and their families, lost more than a quarter of its value in the first seven months of its current fiscal year, according to its most recent investment activity report. The performance was undermined by stocks, real estate and commodities, the report showed, as the collapse of the subprime housing market prompted banks to curb lending, triggering recessions in the U.S., Europe and Japan.

"The assumptions that we used 18 months ago no longer fit the present market," Jones said. "There’s still a tremendous ocean of toxic debt out there. Even if we didn’t buy it, it’s done enough damage to our banks to affect all of us on Wall Street." The MSCI World Index sank 42 percent last year and has declined 6.5 percent in 2009. Calpers had $175 billion in assets as of April 13, down from a record $260 billion in October 2007. Calpers’ cost of managing its investments declined to the lowest level since 2004 after the value of fund holdings fell 27 percent this fiscal year, according to a report that will be presented to the fund’s governing board. It projects investment costs will fall to $817 million in the 12 months starting July 1, down from $1.04 billion last year, the lowest since the fund spent $523 million in the fiscal year that ended June 30, 2004.

The fund invests 7.6 percent of its funds in cash, a category that calls for no allocation under targets established in December 2007, according to its Web site. The fund’s bond investments represent 24.8 percent of the total, more than the 19 percent target. It’s underinvested in equities, with 53.5 percent allocated there compared with a target of 66 percent. "Credit and liquidity are still scarce," Jones said. "So we’re setting aside billions of dollars of cash to stay flexible and ready to deploy capital." Calpers has $500 million invested in South Korea, including a $100 million investment with Lazard Asset Management Plc last year, Jones said.

A Grimm Mood Among UBS Shareholders
UBS shareholder Rudolf Weber, who produced a string of sausages at UBS's annual general meeting of shareholders one year ago, this time arrived curiously armed with a mysterious red book. Amid calls for calm and trust, and peace and quiet by the bank's management, Mr. Weber appeared to have left those qualities at the door. One of the first of at least 50 shareholders who had signed up in advance to speak during the meeting, Mr. Weber explained: "I have come along with a red book. It is not the Bible, but Grimms' fables. My mother used to read them to me when I was young, and she said they wrote the best fairy tales. She was wrong. [Outgoing Chairman] Peter Kurer wrote the biggest fairy tale of all time. He told us fairy stories and promised many things that could not be fulfilled in the given timeframe."

Mr. Kurer, along with UBS's incoming chairman, Kaspar Villiger, and Chief Executive Oswald Grübel, had earlier delivered speeches to shareholders attending the event in Zurich's Hallenstadion, in which they outlined UBS's goal of regaining investors' trust following the turbulent events of the past year, and stressed the bank needs "peace and quiet" to follow its recovery plans. Peace and quiet were thin on the ground. The sheer level of attendance and the number of shareholders lined up to speak at the event forced UBS' leaders to fall back on the fabled Swiss trait of good timekeeping. As attendees geared up for a typically marathon-length annual meeting, Mr. Kurer warned shareholders: "We have imposed a five-minute limit on those wishing to speak. Timekeeping devices have been installed in the control room, and after five minutes shareholders will find that the microphone has been switched off."

Not that the imposition of a time limit prevented Mr. Weber from telling his own tale, or another shareholder expressing his "shock" at what he called "payment in advance," or hefty compensation handed to UBS staff even before they had started work. Mr. Kurer had earlier outlined the progress UBS has made in the past year, saying: "No stone has been left unturned, no taboo has been left unchallenged…What UBS needs now is calm and trust. The more clearly we can focus on the tasks ahead of us, the quicker we can turn our bank around." He also called for a combined effort to get the bank back of track, saying: "If we combat the crisis with a well-thought-out programme, if we gather together our brightest minds from politics and the private sector and get them working on a solution, if we support one another and also receive support from our media and political environment, then we will find ourselves back on the path to success as quickly as we fell off it." However, Mr. Grübel warned "it will be a long road back to success without any quick fixes" and made rebuilding the trust of investors, clients and political institutions the bank's top priority. He added that the latest round of job and cost cuts will not necessarily drive better results in the "next few quarters."

While the UBS leaders said the bank has been at the forefront of moves to change compensation practices in the industry, Mr. Villiger warned of repercussions: "To my knowledge, UBS is the only major bank in the world that has worked with academic support to revise its salary structure for senior management with a view to long-term incentives. Our salaries have fallen more than the competition's…But we're seeing increasing evidence that we're starting to lose our competitive edge with regard to recruiting the best of the best." Mr. Villiger, whose board appointment was due to be voted on at today's meeting, also defended UBS' staff as he revealed they are "often afraid to admit where they work" and called on shareholders "not to take out any frustration you might feel, however understandable, on our employees, who are doing their very best."

Drop-off in oil demand accelerating, OPEC says
World oil demand is shrinking faster than previously thought as a slowing global economy erodes consumption, OPEC said on Wednesday. The Organization of Petroleum Exporting Countries said in its monthly oil market report that demand would drop by 1.37 million barrels per day (bpd) in 2009 to average 84.2 million bpd. Its previous forecast was for demand to fall by 1.01 million bpd. Demand is falling fastest in the developed nations of the Organization for Economic Co-operation and Development (OECD), but the global downturn has also curbed previously rapid demand growth in developing countries like China and India. Demand growth in countries outside the OECD has fallen by 90 per cent year-on year, OPEC said, and is now expected to increase by just 200,000 bpd in 2009.

"Unlike last year, non-OECD oil demand growth has lost 90 per cent of its strength this year," OPEC said in its report. Oil prices spiked to almost $150 (U.S.) a barrel last July, partly influenced by expectations of continued strong demand growth in the developing world. Oil prices have fallen to around $50 since then as a result of the spreading economic slowdown. OPEC has promised to cut 4.2 million bpd, equal to about 5 per cent of daily world demand, from its output levels since September to try to support prices. The producer group, which pumps more than a third of the world's oil, held its output quotas steady when it last met in March, but called another meeting for May 28 to reassess the market.

"In the coming months, the market is expected to remain under pressure from uncertainties in the economic outlook, demand deterioration and the substantial overhang in supply," OPEC said. "Vigilant monitoring is essential to assess the likely developments in the second half of the year and the impact these will have on market stability." OPEC is complying with 83 per cent of its pledged supply cuts, according to Reuters calculations based on OPEC data. The group said its production was at 27.9 million bpd in March, down by 145,000 bpd on the previous month.

Anarchy in Streets Builds When GDP Isn’t Shared
It’s easy to dismiss protesters wreaking havoc in Thailand as misinformed anarchists. They don’t understand the wonders of globalization, you may be thinking. If only they had more reverence for the splendor of capitalism. If only true democracy were able to work its magic in Asia’s eighth-biggest economy. If only any of these assumptions got at the crux of Thailand’s crisis. The problem is the "Cult of GDP." An obsession with high growth rates and failure to use them to narrow the gap between rich and poor are graphically playing out on Thailand’s streets. People are angry, and rightfully so.

It’s a far bigger risk than governments and investors realize, and it may be with Asia for a long time. The region didn’t use the fat years of the early-to-mid 2000s to spread the benefits of 6 percent or 8 percent growth. Now, the global financial crisis, political tensions and widespread discontent are fusing together. This dangerous dynamic has come up in this column before, and Thailand’s woes demonstrate why it deserves more attention. Protests there are essentially a feud between the rural poor and urban rich. The former group rues the 2006 ouster of Prime Minister Thaksin Shinawatra, who it believes bettered its economic situation. The latter group championed the coup that removed a billionaire they say bastardized Thai democracy.

The truth lies somewhere in between. "Thaksinomics" did pump government largess into rural communities. Thaksin centralized power and removed government checks and balances. The urban rich allege that his family and business associates benefited most from his 2001-2006 tenure. The disconnect between the better-off and the struggling masses can also be found in Indonesia, Malaysia and the Philippines, as well as in China and India. It will come to a head as the fallout from the credit crisis heads Asia’s way. It’s often said that in a world awash in recession and toxic assets, Asia is the least ugly region. That’s true only if the U.S., Japan and Europe bottom out in 2009 and are growing in 2010. Export-driven Asia can only live without U.S. growth for so long without dire socioeconomic consequences.

Thailand’s crisis is a complex one and involves many moving parts: economic hardships, class tensions and the role of King Bhumibol Adulyadej. There’s also a powerful establishment versus anti-establishment angle. Thaksin’s supporters see U.K.-born and Oxford-educated Prime Minister Abhisit Vejjajiva as the face of the establishment. There’s a perception among Thais that politics is increasingly controlled by an old elite. That’s why protesters are going after both Abhisit and the political establishment. Abhisit is standing firm, refusing to step down even after a decidedly humiliating weekend. Protesters forced the cancellation of the Association of Southeast Asian Nations summit. It cost the region a rare chance to cooperate amid the global crisis. It cost Abhisit even more.

The ease with which demonstrators overwhelmed security forces at a conference venue that should have been easy to protect made a fool of Abhisit’s government. Asian leaders who fled by helicopter and boat won’t soon forget it. Nor will international investors watching the chaos unfold on CNN. Fitch Ratings joined Moody’s Investors Service and Standard & Poor’s in saying they may cut Thailand’s foreign-currency debt ratings. Instability is hurting government revenue and spurring capital outflows at the worst possible time. Fitch and S&P have BBB+ ratings for Thailand, a level similar to Moody’s. Thai protesters yesterday ended their siege of government offices in Bangkok. The risk of renewed unrest is undermining markets as the economy confronts its first annual contraction in 11 years. Thailand’s vital tourism industry is targeting 14 million arrivals this year. Well, good luck with that.

Thailand has had a dizzying four prime ministers in a year. Imagine if Abhisit, premier since December, were to step down. How can investors be sure his replacement won’t face the same dubious honor as all the others? Thailand is caught in a vicious cycle in which any leader is likely to lack enough legitimacy to lead the nation of 66 million people. Just four years ago, Thailand was an economic success story. Leaders in Indonesia and the Philippines were considering Thaksinomics for their own populations. Not anymore. One problem is weak institutions. A more independent judiciary, central bank, media and freer watchdog groups to weed out corruption would serve Thailand well.

Yet there’s an even bigger problem: high growth rates haven’t enriched enough Thais on a consistent basis over the last decade. Big increases in gross domestic product get headlines and cheer investors. All too often, though, they are used to conceal poverty and widening rich-poor divides. Thailand’s recent experience suggests those strains are bubbling to the surface as rarely before. That should be a warning to governments in Asia and to investors, too. It’s one thing to spread the gospel of rapid GDP. It’s quite another to deliver by divvying up its spoils. It’s time for Asia to practice what it preaches.

Brown Poverty Target Strained as 31% in England Live In Unsuitable Housing
Almost a third of all children in England live in unsuitable housing, the government’s statistics office said, adding to pressure on Prime Minister Gordon Brown to make good on promises to end child poverty. Thirty-one percent of families with dependent children lived in a home that does not meet "sufficient standards of upkeep, facilities, insulation and heating" in 2006 the Office for National Statistics said in an e-mailed statement today. The statement did not provide data for the previous year. The Labour party’s election manifesto in 2005 pledged to end child poverty in the U.K. and to halve it by 2011. Chancellor of the Exchequer Alistair Darling will assess the issue in his annual budget speech on April 22.

Data from the Institute for Fiscal Studies show the number of children living in relative poverty had increased every year since 2004, while those facing material depravation fell. Darling and Brown are struggling to keep their promises as the budget deficit widens and the Treasury focuses on battling the worst recession since the early 1980s. The economy contracted 1.6 percent in the fourth quarter, and unemployment climbed above 2 million for the first time since Labour took office in 1997. Brown was one of the Group of 20 policy makers who this month pledged to add $500 billion to the International Monetary Fund’s war chest while it is inundated with requests for loans from troubled countries. The IMF will also use revenue from sales of gold reserves to aid the world’s poorest countries.

Russia Risks Bad-Loan 'Avalanche' With 20% in Default
Russia’s banks face an "avalanche" of bad loans this year with 20 percent of the debt likely to be in or close to default by year-end, according to UniCredit SpA. "Plunging asset quality is the main threat to the Russian banking industry and in fact to the economy as a whole," UniCredit banking analyst Rustam Botashev wrote in a research note. He previously forecast non-performing loans would reach 9.5 percent. Companies struggling to repay $229 billion of debt in the next 12 months are the "root cause" of the surge in defaults as the global financial crisis and seizure in credit markets exacerbates Russia’s worst slowdown since it defaulted on $40 billion of debt in 1998, according to UniCredit. Oil-drilling company Siberian Services Co. last week became first Russian borrower to renege on foreign debt this year.

Russian banks are experiencing a 20 percent increase in delinquent debt every month, German Gref, Chief Executive Officer of OAO Sberbank, Russia’s largest bank, said April 8.
Bad loans will probably peak between August and February, when Russian businesses need to repay $109 billion to banks, Botashev said. A bad-loan rate of 20 percent may force the government to inject $15 billion into banks, while a rate of 25 percent would require as much as $40 billion, he added. "We expect a wave of debt restructuring and bankruptcies in Russia unless large-scale refinancing becomes possible," Botashev wrote in the note e-mailed late yesterday, adding that as much as 12 percent of all Russian bank debt is already bad.

Sberbank, which holds more than 50 percent of all Russian bank deposits, has increased its reserves for bad debt to 9 percent of total loans this year, spokeswoman Irina Kibina said last week. The Moscow-based bank will probably be able to cope with rising bad loans without raising new equity so long as delinquencies don’t increase above 16 percent, Botashev said. UniCredit has a "buy" recommendation on the stock. VTB Group, the country’s second-largest lender, is rated a "sell" by UniCredit, Italy’s largest bank, because of its "high-risk profile and an expected equity issue within the coming months," said Botashev, who forecast April 8 that Sberbank’s bad loans would reach 8 percent of total credits in 2009, while VTB’s will rise to 10 percent. Sberbank’s share of overdue retail loans was 2.36 percent as of April 1, Deputy Chief Executive Officer Dmitry Davydov said today, according to Interfax.

Poland to ask IMF for $20.5 billion flexible credit line
Poland on Tuesday said it planned to ask the IMF for a $20-billion (15-billion-euro) credit line to bolster reserves and fend off currency attacks as it bucks the recession. Finance Minister Jan Rostowski told reporters that Warsaw had asked the International Monetary Fund to open a "Flexible Credit Line" (FCL), a strings-free program designed to encourage countries to act proactively to combat the financial crisis. "This will increase the reserves of the Polish central bank by one third... to immunize Poland against the virus of the crisis and the attacks of speculators," Rostowski said. "This isn't emergency funding," he insisted.

"I can say that during talks with the IMF it was clear that Poland is considered a pillar of stability in the region" and that the IMF aimed to reinforce that role, he added. "This in an instrument, thanks to which we are getting priceless insurance policy in the time of a global uncertainty," Deputy Finance Minister Ludwik Kotecki told Reuters. The European Union's largest ex-communist member, Poland is in better shape than the region's other emerging economies, such as Hungary, Latvia and Romania - all of which have received outside funds. It has previously been reluctant to flag any need for additional funding, even though it suffered from an evaporation of capital due to the credit crunch and worries over the region's growth and financing.

IMF head Dominique Strauss-Kahn welcomed Poland's move, noting its "economic fundamentals and policy framework are strong, and the Polish authorities have demonstrated a commitment to maintaining this solid record." Strauss-Kahn said he expected the fund to move quickly with an approval. Deputy Finance Minister Kotecki said Poland may get the credit line as soon as next week. Poland followed the lead of Mexico, which announced on March 31 that it would activate an FCL worth up to $40 billion. The FCL is the result of a reform announced March 24 by the IMF. In a sharp break with past practices, the global lender unveiled the new instrument designed for countries deemed as having "very strong fundamentals, policies, and track records of policy implementation."

The credit line has no conditions, no limit on the amount of money that can be borrowed, can be drawn on at any time, and can be used to confront a crisis or as a "precautionary instrument" to prevent one. Under the terms of the FCL, the credit line initially can be for six months, or 12 months with a review of eligibility at the six-month mark. Its repayment period extends to between three years and three months, to five years. Poland is a rarity because it expects economic growth this year. Warsaw has been battling to dissociate itself from the grim regional picture in other eastern European states that are facing some of the sharpest recessions in the EU.

"Polish fundamentals stand out relative to regional peers," said Manik Narain, an analyst at Standard Chartered, in a statement. Independent Polish analyst Marek Zuber told AFP that "if one bolsters Poland, one bolsters the whole region." "A loan to Poland isn't a loan to one country ... It's about boosting the strongest link," he added. The economy of this country of 38 million people has been in robust health over recent years, notably since the ex-communist state joined the European Union in 2004. In 2007 it grew 6.7 percent. In 2008 the rate was a still-credible 4.8 percent. Polish authorities forecast growth of between 0.3 percent and 1.9 percent this year while the European Commission, the 27-nation EU's executive body, is expecting around 2.0 percent.

Despite the relatively rosy outlook, Poland's currency, the zloty, has found itself under attack. In mid-February it plunged to a five-year low point of 4.92 to the euro - marking a 40-percent fall since July 2008 and making it the world's most beleaguered currency despite the recession-bucking forecasts. At the time, Warsaw announced it was prepared to intervene if the zloty fell to 5.0 to the euro - and the government subsequently made what it called a "routine" sale of euros from its coffers, pulling the rate back to 4.68, and it has since climbed further. Poland's government has some 150 billion zlotys (currently 35 billion euros, $46 billion) of debt to refinance in 2009 and some analysts had earlier voiced fears the credit crunch may put strong upward pressure on the yields offered by the country of 38 million.

Fiji cuts currency value amid political turmoil
Fiji's military ruler accused expatriate judges today of trying force him to call elections under an outdated voting system, while the central bank slashed the country's currency value to boost exports amid the political turmoil. Commodore Frank Bainimarama, who seized power in a 2006 coup and launched a fresh crackdown in the past week after a court ruled his government was illegal, said his latest actions were justified and that he has the support of the people. In his first interview with foreign media since the constitution was abolished and a state of emergency imposed on Friday, Bainimarama implied that the three Court of Appeal judges who ruled against him last week were biased against his government.

"It was quite clear that all they wanted was to force us to go into elections which we didn't want under the old system," Bainimarama told New Zealand's National Radio. The court panel was comprised of expatriate Australians, a common practice in South Pacific countries where senior lawyers are in short supply, and Bainimarama accused them of making their decision "long before they got to Fiji". Bainimarama says he will hold elections to restore democracy only after he rewrites the constitution and electoral laws to remove what he says is racial discrimination against the country's large ethnic Indian minority. He plans to hold elections by 2014 and has repeatedly told outsiders he will not rush the process, but has not explained why it would take so long. Critics, including the Australian and New Zealand governments, have depicted him as a virtual dictator intent on maintaining power.

Under the now-revoked constitution, Fiji voters cast ballots on communal lines, with indigenous Fijians, ethnic Indians and "others" voting on separate voter rolls for separate lists of candidates to represent them in the parliament. This meant indigenous Fijians, who make up the majority of citizens, have generally dominated the race-based electoral system. Ethnic Indian-dominated parties won power and held office briefly in 1987 and 2000 because some Indian lawmakers were able to successfully run for Fijian-designated seats. However, those governments were ousted in coups. Indigenous Fijians make up about 55% of the population, while Indian Fijians originally brought to the country as labourers in the 19th century by colonial ruler Britain are now about 37%.

Bainimarama, an indigenous Fijian, insists all Fiji citizens are equal and has consistently attacked what he calls "racist" laws and policies implemented by the indigenous Fijian-backed government that he ousted from power. Bainimarama said polling by his government showed 64% of the people supported his reforms. In the latest crackdown, foreign journalists have been expelled and censors posted in domestic media newsrooms, and all judges and some senior bureaucrats have been fired. President Ratu Josefa Iloilo, a Bainimarama ally, is ruling by decree. The Reserve Bank of Fiji said today that Sada Reddy had been appointed by decree as the bank's new governor, a day after the former head Savenaca Narube was removed.

Reddy announced in a statement today that the Fiji dollar was being devalued by 20% with immediate effect to benefit exporters and boost tourism. The decision would likely send inflation soaring in the next 12 months but Fijians were being asked to bear that burden "so that our economy can recover quickly", Reddy said. Reddy yesterday imposed currency controls to prevent a flight of capital out of the country. The tourism and sugar export-dependent economy has stalled since Bainimarama seized power, and Fiji's international credit rating was downgraded last month from stable to negative.

Germany Bans Cultivation of GM Corn
Germany has banned the cultivation of GM corn, claiming that MON 810 is dangerous for the environment. But that argument might not stand up in court and Berlin could face fines totalling millions of euros if American multinational Monsanto decides to challenge the prohibition on its seed. The sowing season may be just around the corner, but this year German farmers will not be planting gentically modified crops: German Agriculture Minister Ilse Aigner announced Tuesday she was banning the cultivation of GM corn in Germany.

Under the new regulations, the cultivation of MON 810, a GM corn produced by the American biotech giant Monsanto, will be prohibited in Germany, as will the sale of its seed. Aigner told reporters Tuesday she had legitimate reasons to believe that MON 810 posed "a danger to the environment," a position which she said the Environment Ministry also supported. In taking the step, Aigner is taking advantage of a clause in EU law which allows individual countries to impose such bans. "Contrary to assertions stating otherwise, my decision is not politically motivated," Aigner said, referring to reports that she had come under pressure to impose a ban from within her party, the conservative Bavaria-based Christian Social Union. She stressed that the ban should be understood as an "individual case" and not as a statement of principle regarding future policy relating to genetic engineering.

Greenpeace and Friends of the Earth Germany (BUND) both welcomed the ban. Greenpeace's genetic engineering expert, Stephanie Töwe, said the decision was long overdue, explaining that numerous scientific studies demonstrated that GM corn was a danger to the environment. However the ban could prove costly for the German government. Experts in Aigner's ministry recently told SPIEGEL that it will be hard to prove conclusively that MON 810 damages the environment, which could enable Monsanto to win a court case opposing the ban and potentially expose the government to €6-7 million ($7.9-9.2 million) in damages. Monsanto said Tuesday that it would look into the question of whether it would take legal proceedings as quickly as possible. Andreas Thierfelder, spokesman for Monsanto Germany, said the matter was very urgent as the planting season was just about to start.

Aigner has recently come under pressure from Bavaria to ban GM corn. Bavaria's Environment Minister Markus Söder wants to turn Germany into a "GM food-free zone." Environmental groups have long called for a ban on GM crops in Germany, arguing that they pose a danger to plants and animals. However, supporters of genetic engineering argue that a ban could prompt research companies and institutes to pull up stakes and leave Germany. Wolfgang Herrmann, president of Munich's Technical University, has said that a prohibition risks precipitating "an exodus of researchers." The issue has exposed a split between Bavaria's CSU and its larger sister party, Angela Merkel's Christian Democratic Union. Katherina Reiche, deputy chairwoman of the CDU/CSU's parliamentary group, has complained of the "CSU's irresponsible, cheap propaganda," claiming that it could harm German industry.

She argued that anti-GM sentiment was one reason a subsidiary of the German chemical giant Bayer decided to moved its facilities for genetic engineering from Potsdam, near Berlin, to Belgium. MON 810 was approved for cultivation in Europe by the European Union in 1998 and is currently the only GM crop which can be grown in Germany. The plant produces a toxin to fight off a certain pest, the voracious larvae of the corn borer moth. The crop was due to be planted this year on a total area of around 3,600 hectares (8,896 acres) in Germany. The cultivation of MON 810 is already banned in five other EU member states, namely Austria, Hungary, Greece, France and Luxembourg.


Dan W said...

great post Ilargi...

concise presentation of the stats is always a great tool when pointing out the issues to the truth and reality challenged! Thanks!! I will employ your post, with your blessing, in my ongoing effort to change the tone and subject of the debate in Vermont.

Ilargi said...

Thanks Dan

If you need anything you think I can provide in that effort, do ask.

I would, in your place, ask the people there to take an in-depth look at commercial real estate values (that is, the real ones, not the sales(wo)men's, as well as the exposure of local banks to the loans with which it was built. I can''t see anyway the picture will be pretty.

el gallinazo said...

@calloflower 10:19

"or further projected as someone did here, that it means that only 1/400 of current world population could survive sustainably.el gallinazo

Who said that? You wouldn't be going 'sustainable' and trying to burn straw men would you?"

Who? Me? Perish the thought! I think the Church had it right when they burnt real men (and maidens too).

"EBrown said...
Anon 1226,
How about 16,000,000? I suspect the carrying capacity will actually prove to be a bit higher than 1/400th current world population, but it is an interesting thought all the same to relate energy availability directly to population.
April 15, 2009 1:39 AM"

Obviously, there is some mix of human population and technology which is sustainable, so the idea of the "s" word on this blog becoming one of the late George Carlin's forbidden words strikes me as strange.

Anonymous said...

We become sustainable.Or extinct


Ahimsa said...

Dan W,

Thank you for the great work you're doing for the people of Vermont. Your efforts will bear fruit, I'm sure. Vermonters tend to be receptive to reality.

Anonymous said...

From what I can tell, it would seem that Pennsylvania is not listed as one of the "Anti-Deficiency / Non-Recourse" states. What are the implications regarding refinance here then? Does it mean that this distinction doesn't matter in PA?

ogardener said...

Hello all,

I'm glad Germans said no to Monsanto's MON 810 genetically modified corn. The arrogance of Monsanto is really something.

Anyone remotely familiar with thermodynamics I and II knows that GMO is not going to save the world from hunger or anything else. It may even exacerbate such problems.

Ilargi said...

El G,

"there is some mix of human population and technology which is sustainable "No, there's not. It could, obviously, only be true if man were a non-evolving, as in anti-Darwinian, species.

But that's not even why, if only because it seems too hard to grasp for most; it's the abuse of the term by well-intentioned fine folk that irks me, as in "green cars" and "sustainable cities". That sort of thing comes from a lack of thought.

Anonymous said...

Thanks for the stats, but as the song goes,"even a blind man knows when the sun is shining." Or not.

No stats are necessary to see that multi-million dollar homes for the wealthy are sitting half-built in abandoned lots.

No stats are necessary to see that the construction and building trades are at virtual stand still; the only sign of life being the glint of fear emanating from men and women who realize that as the economic dragon undulates, the tail of devastation hits them first and last.

No stats will be necessary to see the full scale panic as it envelopes the land--even for those who believe they have sufficiently prepared and who now vicariously broadcast the impending disaster as something to be viewed from atop Mt Grind A Political Ax.

Oh you may be able to draw a breath or two in order to utter a "I told you so," but the python will soon constrict the life out of each and every one of us.

When push comes to shove--I wonder if people truly realize how mean,cruel, vicious and violent this potential catastrophe might be--there will be no distant vantage points to escape the intimacy of despair and destruction.(Be careful of vicariously flung doomsday scenarios.)

Go ahead and point that castigating finger, and proudly thump chests of preparation and self-sufficiency. It will matter not.

We're all in quicksand at the end of this particular day; even if some will thrash a few moments longer than others.

Anonymous said...

For inspiration on a sustainable society, read Ecotopia (US, fiction, c.30 yrs ago) or look online for 'the two kilowatt society' (Swiss concept developed by ETH earlier in the 2000s), or for California's record of using electricity more efficiently, and so on.

Switzerland already emits 70% less CO2 per capita than USA and has a similar GDP/cap. Doing more on less energy is relatively easy; the mystery is why some countries find it so hard.


Frank said...

@DO Massive amounts of hydropower also help on the CO2.

Erin Winthrope said...

I'm keeping close tabs on all those politicians, economists and reporters who've been busy passing out the party hats and balloons. I have a tab in my delicious account entitled "bullsh*t." It has grown rapidly over the last month.

I can't wait to read the mea culpa when it all ends in tears. Sadly, most of these folks will simply blame the messenger. It's the doomers' fault will become the common refrain.

dan w said...

@ anon 415

funny you should quote the song GOOD LOVIN' and then make such a dark comment. :)

Phil said...

Extinction is, of course, sustainable.

el gallinazo said...

"No, there's not. It could, obviously, only be true if man were a non-evolving, as in anti-Darwinian, species. "

There is an infinitesimally small but actual probability that humans could evolve behaviorally into ecologically sustainable creatures :-)

Anonymous said...

Great site. Thanks for your comments and the great links to articles.

[QUOTE]Don't ever forget that refinancing takes away your right to walk away, forever. It changes non-recourse mortgages into recourse loans. Be very careful with that, it can make you a debt slave for the rest of your life.[/QUOTE]

Do you have citations for this? I'm pretty sure it is incorrect for CA home loans (first home only). I.e., if you refi a non-recourse loan on your primary residence, it will still be a non-recourse loan. It seems unlikely to be allowed in at least some of the other non-recourse states as well.

[QUOTE]Does it mean that this distinction doesn't matter in PA? [/QUOTE]

If your mortgage is recourse, it will most likely remain recourse. You might be able to refinance into a non-recourse loan (available in many areas) by paying more but you'd have to ask your mortgage broker about that.

Hombre said...

Everything changes but awareness.

Gravity said...

Hey, Ilargi.
I used to vote for the dutch green party, groenlinks.
Lately, though, I'm getting tired of their neurotic use of "duurzaam" - sustainable.
Its their version of "growth",
after so much use it becomes meaningless, but it retains the desired pavlof-effect for the voters.
I think its really a cheap way of alleviating consumer guilt.

Anonymous said...

"Economist Harry Dent, having famously predicted in 2000 and again four years later that the Dow would reach 40,000 has just written a book called "The Great Depression Ahead."
The value of consistency

Anonymous said...

"Development should be for all. The government blames us for being against development. Forest area is depleting and dams are constructed without proper planning.
All this contributes to dipping water levels. Farmers should be taken into consideration when planning policies," he said.”
1,500 farmers commit mass suicide in India

Frank said...

@Ilargi: As Anon@5:32 says, recourse/nonrecourse is a state by state matter in the US, governed by both law and custom. Refinances in general will get you whatever you had the first time.

It may be that the various Fed programs will insist on a recourse loan, but if you already have one, it's irrelevant.

APC said...

I just love this, from the FT:

"In recent research, Thomas Philippon of New York University’s Stern School of Business and Ariell Reshef of the University of Virginia conclude that the financial sector was a high-skill, high-wage industry between 1909 and 1933. It then went into relative decline until 1980, whereupon it again started to be a high-skill, high-wage sector. They conclude that the prime cause was deregulation, which “unleashes creativity and innovation and increases demand for skilled workers”."Deregulation attracts unscrupulous rascals. These guys aren't geniuses, they're ethically challenged. It amazes me how they push that meme.

Ilargi said...

"Refinances in general will get you whatever you had the first time."That's not my understanding, and I've read a lot on the topic. I am of course not in the US, but I would like to see some good proof. Mike Shedlock is closer to that particular part of the equation, and he's issued the same warning I have multiple times.

Ilargi said...

Oh, and the problems Blogger has with its spacing is driving me nuts.

Anonymous said...

~there is some mix of human population and technology which is sustainable~Einstein Quote of the day on Google just so happens to be: It has become appallingly obvious that our technology has exceeded our humanity.Agree, great post today, Ilargi! Your stats should be on the front page of every newspaper across America.

And can CALPERS/California do anything right? OMG, investing in Citigroup and toxic assets! (Calpers had $175 billion in assets as of April 13, down from a record $260 billion in October 2007.)

Frank said...


See list of non-recourse states. Others are recourse:

It also mentions California's recourse on refi status as an anomaly.

Ilargi said...

"See list of non-recourse states. Others are recourse:"
No clarity there.

Care to elaborate?

Anonymous said...

I would bet dollars to donuts that any Federal bailout provisions or agencies coming to the rescue like the FDIC and their alphabet soup silblings, will come with Tentacles. Poisonous tentacles, which, like the Debt Slavery (Bankruptcy) Act of 2005, will mandate no escape for the Sheeple.

CA might be an anomaly now but next time the Governator asks for Federal help, it will include deep sixing the recourse thing. He and the CA legislature will have no options at that point.

The financial Pirates want everybody to wall the plank.

Anonymous said...

Here's a new twist on an old theme by a familiar character:

A 'Copper Standard' for the world's currency system?

Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

Funny this should come up, a friend of mine has been hoarding copper for years, claiming it is far more useful in hard times than gold or silver which he constantly denigrates as only good for jewelry and filling your teeth.

He says, "You might as well have a bulls eye painted on you when it comes to actually using gold or silver in the real world."

He melts the scrap copper pieces into 10kg ingots (liftable) and buries them. He even has a setup where he can make copper disks (like coins but with no markings)

He always says, "Try wiring or plumbing your house with gold or silver wiring and see how far you get."

Unknown said...

Don't ever forget that refinancing takes away your right to walk away, forever. It changes non-recourse mortgages into recourse loans. Be very careful with that, it can make you a debt slave for the rest of your life.I just read something to the effect that this is not exactly true. In California, the vast majority of foreclosures are non-judicial since it's much, much easier to prosecute. In a non-judicial foreclosure, there's a "one-action rule" barring any further action against the homeowner for any balance that might still be due.

So, essentially, even if the loan is recourse, the lender has to make a decision: spend 40-50K on a judicial foreclosure in order to reserve the right to try to collect on the balance against the debtor, who may at that point be judgement-proof (i.e. no assets), or may declare bankruptcy, or just take the house and forget about the rest.

Frank said...

OK, the first list of 12 states are the 'walkaway' states. The lender can foreclose on the house and that's all.

The next 6 give the lender the choice of suing you or foreclosing but not both. If he forecloses and gets less than the loan, he's stuck.

In the other 32 states, the lender can foreclose, then sue for the deficiency. This is the way it is in the UK as well. Presumably Stoneleigh knows about Canada.

This site has summaries of the foreclosure laws of several states: It mentions that lenders in California can sue rather than foreclose but rarely do because it takes longer and costs more. (They cannot foreclose then sue. New York is the same way.)

I grant an extreme lack of clarity on the details. The quick summary is that in 30 odd states the lender can foreclose, then sue for the deficiency by jumping through the appropriate set of hoops.

In several more the lender gets to choose whether to sue or foreclose, but can't do both. Suing takes longer and costs more, so is rarely done. However it might well happen if you're far under water and have a big bank account.

Anonymous said...

Frank @ 7:33,

In CA, your loan remains non-recourse if you refi. However, if you have borrowed the down payment (as a separate loan) and refinance that separately (e.g., keep the original loan on 80% of the house and refi the 20% or get two separate refis on the 20% and the 80%), the 20% part of the refi will be recourse.

NB: I disagree with some web sites that say that if you refi a first, the refi will no longer be a "purchase money" loan. As I read the statute and the relevant case law, a refi would still be a purchase money deed of trust so long as the proceeds went to pay off the original note. See, e.g., "the debtors cannot waive the anti-deficiency provision of C.C.P. § 580b [non-recourse nature of purchase money loans], and the subsequent refinance of the 1982 purchase money note did not operate as such a waiver.",

None of the web sites I've seen that say that if you refi, section 580b [non-recourse loans] will no longer apply cite any case law or other support. Since it's not difficult to find support saying that 580b still applies after a refi, my guess is that they are simply repeating incorrect info that they saw on another web site.

But even if section 580b no longer applies, the lender can't go after a borrower for any deficiency if the lender forecloses in a non-judicial sale (as most do because it's a lot faster and cheaper). The above is known as the "single action" rule and is a different, separate CA law that applies even to non-owner occupied or commercial property.

AZ also treats a refi as a purchase money loan as long as the refi went to pay off the original purchase note. AZ, like CA, also has a law that says that even if a loan is recourse, if the lender uses a non-judicial foreclosure, they can't go against the borrower for any deficiency.

redboat said...

"The Washington crowd wants to hide its own role in the financial crackup -- supereasy money, Fannie and Freddie -- so it has taken to blaming the bankers, and the Troubled Asset Relief Program is its velvet truncheon."
wsj opinion post

ugh. fannie and freddie and easy money from congress is what caused all this. Why reprint such drivel? And where do I pick up my tea bag?
Where's Rick Santelli?

ccpo said...


I ripped off your intro, too. Maybe the handful of people who read my blog will discover this site as a result.




Penn said...

I don't think Fannie and Freddie are vehicles for money laundering, not in the sense that Wall Street has short-sold the companies and the Cdos. Could be, though. AIG has certainly been milked by Goldman Sachs.

But even if the piranhas are swarming these hulks of dead corporations, the catastrophe happened unintentionally in the first place.

I think with Fannie and Freddie we're looking at Big Boy and Little Boy. They represent almost the entire mortgage wealth of these United States. Public-private partnerships, they were found cooking their books and went bankrupt. Now they're in an arrangement that amounts to bankruptcy protection; they're bleeding the largest losses in financial history due to collapsing lines of leverage.

By the way, let us take a moment to again understand what leverage is: it's borrowing money using borrowed money as collateral.

Oh, and the System is about to collapse.

bioczar said...

Anonymous April 15, 2009 5:58 PM:

I have been reading Harry S. Dent for about five years now. He bases his analysis on demographic factors and has been on the money for many years. Many other authors (Magnus, Howe, Strauss, etc) are saying exactly what he is saying. The Center for Strategic and International Studies is to a large extent on the same page with him.

el gallinazo said...


Isn't this Dent guy famous for predicting as late as 2004 that the DOW would reach 40,000? Don't know much about him, but this sticks in my mind. Doesn't strike me as much of a prophet or profit either.

As to predicting in April 2009 that we are going into a depression, I am prediction that we will be entering summer in a couple of months. That makes me a genius?

re suckers rally

My Rice Krispies told me this morning that it is nearing its peak and will be pretty much sideways until the collapse. Maybe S&P500 into the low 900's as a high. Considering the deteriorating fundamentals including earnings, a sideways movement might be considered a rally of sorts.

The big banks don't have to plead poverty anymore to steal our money. The O-man and Geithner can steal the money without Congressional approval using the FDIC as a bagman. So now they can tell us just how profitable they really are ..... not.

bioczar said...

el gallinazo:

Yes, that's what he predicted about ten years ago. He also predicted that the whole system would melt down in 2010, which it is in the process of doing as we speak.

What did you predict ten years ago, if anything?

Anonymous said...

copper is what, about 2 bucks a pound? gold running aprox 900 an ounce - times 16 gives one 14400 dollars a pound. so an equivalent in copper would weigh about 7200 lbs. May be something for governments to base a currency on, (enlarge the United States Bullion Depository 4 or 5 hundred times?) but for squireling away or taking to market to purchase that new oxen? Well on a personal appearance level just call me bagged out.


el gallinazo said...
This comment has been removed by the author.
el gallinazo said...


Going beyond anatomical relationships, please note the posting by an anon at 5:58 PM

""Economist Harry Dent, having famously predicted in 2000 and again four years later that the Dow would reach 40,000 has just written a book called "The Great Depression Ahead."

A brief scan on my part verified this statement but through secondary sources. I am not that great in math, but the last time I checked, 2009 minus 2004 does not equal ten.

To answer your last question, by 2004 I was convinced that we were headed toward a serious bubble bust recession which would be spearheaded by real estate. I had finally, by that time, acquired enough money to buy and build in my tropical paradise, but canned the idea for that very reason and continued to rent. I must admit, I didn't realize in 2004 that we would be heading into a global depression that would make the 1930's look like a walk in the park, but I expected the Dow well under 10,000.

If you had wished to make a meaningful statement, which I doubt, you would cite sources to disprove that your hero didn't repeat his DOW at 40,000 in 2004. I would find that interesting. I admit that I do not have expertise in Señor Dent's predictions.

el gallinazo said...


May not have to expand Fort Knox if the Libertarians claim that it is quite empty at the moment is true, the Federal Reserve having stolen the last of the people's gold.

Also, just be aware (when the time comes) that gold is measured in troy ounces which is roughly 10% greater than a genuine red blooded American ounce.

Brian M. said...

Also Bioczar
Strauss and Howe, DID predict a lot of the outlines of the current problems, 12 years ago in their 1997 book The Fourth Turning, based upon there understanding of demographic and historical trends.

Unlike Dent, Strauss and Howe have been saying what they are saying for at least 12 years, with gradually increasing specificity, but no real sharp turns in their predictions.

I read their stuff in 1999 and agreed with it, and repeated their predictions in public several times, and that is 10 yers ago now.

Anonymous said...

Poland seems to be in deep depression - in some cities unemployment rate is about 30 % !!! inflation is growing, 1 EUR will be about 5 PLN soon. I suppose recession will be for the next months unfortunately.

Anonymous said...

shortly you will see Polish Zloty in deep recession (5 PLN for 1 EUR) - high unemployment and inflation