Sunday, April 5, 2009

April 5 2009: The Flooded Lightning Rod

John Vachon What do you mean you didn't bring any booze? July 1941
Sunday afternoon visitors in Vincennes, Indiana

Ilargi: Stay tuned for the first heads at Wall Street to roll. The spin campaign was launched over the weekend by Elizabeth Warren, who chairs the congressional oversight committee for the TARP program, and by Tim Geithner, who launched some first trial blimps this morning on the obligatory press circuit. Warren wants to hurt shareholders too, which likely means the biggest ones have finally managed to get their sheep on dry land. Après-eux, le déluge! After them, the flood.

It'll be fun to see who goes and who does not, who's made whole and who takes the mother of all haircuts. It will divulge a sharp and hard line between who's a friend of the Goldman-Citi-JPM bandidos who rule the land, and who's not. Expect some real good severance packages for who wants out and knows too much. It'll be a huge public relations victory, at least initially, for the government, which wants to instill the idea among the people that it is getting serious about wasting taxpayer funds.

It'll also be hilarious to see who the new CEO's are. Follow the money, follow the boys. Greenspan, Bernanke, Paulson, Rubin, Geithner, Summers, Carney in Canada. These guys shouldn't replace management anywhere, it’s they themselves who should be replaced. And that will not happen anytime soon. The only ones deemed suitable to take their spots will invariably come from the same talent pool. A pool not selected for intelligence, critical thinking or creative truth finding, but for adherence to previously formulated policies, all of which are designed to keep the system running until it no longer can. And then, le déluge.

So get your eggs out of their baskets, change what you think you need so desperately to believe in, and keep your dear ones closer to you than you ever have. I know, it's a nice and sunny day here as well, and everything just looks so bleeping normal. But a U6 unemployment number of 15.6% and rising fast doesn't lie, and it's not a mere statistic, no more than 4 million foreclosures a year, even though you may have to be there to fully realize the story that the stats tell. For now, the whole shaky edifice remains standing because Obama has the standing of a popular folk hero. But if today's finance team would have have served under W., where do you think we would find ourselves? Think American streets would resemble Strasbourg? I can tell you, Strasbourg wouldn't have resembled Strasbourg. Obama is the perfect lightning rod for our age. Maybe not for long, but they're playing it for all the have. And they have more than you in every department but headcount. This government publicly puts chains on bankers' bonuses and fees, only to lift them in backrooms.

PS: Do read Joe Weisenthal's Sheila Bair's Biggest Haters, 2nd from the bottom. Yet another lesson in how the wheels spin in the real world. And no, Weisenthal, Tim Geithner should not be banned from the private sector. He should be banned from government.

'Bailout psychology' destroying the economy
President Obama must stop the bailouts and start the prosecutions. It's time to focus on anti-poverty programs to protect the growing unemployed from hunger and homelessness. Stealth payments to billionaire bondholders must cease immediately. Since the mid-1970s, average Americans' wages have stayed flat when adjusted for inflation. Productivity rose, profits rose, but not wages. To compensate for stagnant wages and the desire to consume more each year, Americans worked more, retired later, spouses went to work, and many burned savings. Then they started borrowing. Debt became America's growth industry.

The scheme collapsed because Americans' wages weren't sufficient to pay the interest on existing debts. The only way out of this is to tighten our belts and pay down debt, the opposite of what our bank-owned government is advising. The administration and the banks keep talking about a credit crisis, but there isn't one. Banks are lending. If you want a mortgage and can afford to pay it back, you can borrow at low rates today. You can finance a car at low rates for seven years. But most Americans don't want more debt because it is a debilitating path to poverty. The average American family already pays 14 percent of annual income in interest to banks. To fix this fake crisis, there are fake discussions about what the government must do. The endlessly recycled plan to buy "troubled" assets isn't to get banks lending again, because they haven't stopped lending.

The plan seeks for taxpayers to buy worthless assets at high prices to absorb rich investors' losses. That's it. It keeps coming back as a different plan, but with that same goal. There is no goal beyond that one goal: keep rich people from taking losses. Obama and his economic gurus all chant, "Credit is the lifeblood of the economy," but they don't mean credit. They mean debt. Imagine the president saying, "Debt is the lifeblood of our economy. We desperately need to get more American families deeper in debt." That's what he means, and that's what these bailouts hope to do. In a Sept. 14 article in this newspaper, I noted that banks push senators, with the blessing of the administration, to introduce bills that are bailouts, but disguised to appear not to be bailouts. The goal is to accomplish the desired result without risking your bought-and-paid-for representative.

Imagine you bet $500,000 on a stock and it dropped to $20,000. If you owned Treasury Secretary Tim Geithner, he'd get on TV and explain that if the government didn't buy your shares for $500,000, the economy would suffer because you couldn't invest anymore. He'd say the "free market" isn't pricing the stock "right," and we have to "help" the market with taxpayer money to make sure you get the "right" price. Bailout psychology is destroying the economy. Banks hold off on foreclosures in the hope of refinancing borrowers into government-backed loans that will almost certainly default - at taxpayer expense. I've talked to ordinary people delinquent on credit cards who put off bankruptcy because they "heard" the president was unhappy with unfair bank practices and "help was coming soon." Millions of homeowners desperate to sell are keeping empty houses off the market waiting for a "rebound," flushing a stream of income down the toilet.

Worsening economic figures are being used to confirm that more bailouts are needed rather than that previous ones might be failing. The logic is much like medieval blood letting: The patient died because we didn't drain enough of his blood. The promise of more bailouts also keeps everyone from doing what's necessary. Millions of houses sit empty, open to vandalism and destruction, while millions of Americans live in cars or on the street. Our tax money is given to banks and speculators to hold houses empty. On March 20, 2007, I wrote here that a mortgage bailout was coming and would cost at least $1 trillion, yet not bail out homeowners. As it turned out, the bailout did nothing to stop foreclosures from going through the roof. On Feb. 8, 2008, I wrote here that Fannie and Freddie would be taken into receivership within a year - an event that occurred Sept. 7.

I argued here on Sept. 18 that most loan modifications were a fraud and "I optimistically predict that within 12 months half of these refinanced loans will result in default." On Dec. 8, the Office of the Comptroller of the Currency announced that 53 percent of modified loans were in default. To "fix" all these problems, the George W. Bush administration, and now the Obama administration, have chosen people (or their accomplices) who stole from the public. That's why no one has been prosecuted. Would former Treasury Secretary and Goldman Sachs chief Henry Paulson have pressured for an investigation of Goldman Sachs? Right. As president of the Federal Reserve Bank of New York, current Treasury Secretary Geithner had a front-row seat during the run-up to the crisis and watched for years while pushing a "no regulation" policy. Why? At that time his friends were winning their bets and making a lot of money.

Why didn't Bush or Obama pick Brooksley Born (the Commodity Futures Trading Commission chair who tried to regulate credit default swaps) or Harry Markopolos (the whistle-blower in the Madoff scandal) to serve as treasury secretary or chairman of the SEC? Because Born and Markopolos are technically competent and possess integrity. Banks would tolerate neither quality in an administration official. We have a crisis of confidence, because fraud permeates most of our banks and financial institutions. The solution is law enforcement, not handouts. On Jan. 31, 2009, Santa Barbara police held a 53-year-old homeless man on $20,000 bail for shoplifting $7.69 worth of soup and bread. Yet Bush did not move to prosecute a single executive at any of these banks, and Obama likewise doesn't want to be "vengeful" by investigating the crimes of investment bankers.

If the government feels lenient, can't it let alone families camping in a vacant lot in Sacramento, or homeless people stealing bread? We can stop this by closing our accounts at any bank that took government money. A list is on the Treasury's Web site. Close your accounts and move them. If we do, those banks will suffer receivership or bankruptcy within a few months, and then there will be no need for bailouts. Our healthy community banks will thrive, while billionaire bondholders will have to downsize their G-5 fleets and take a haircut. If you buy an American car, buy a Ford. Do not buy GM or Chrysler. GM and Chrysler took bailout money. If everyone who would buy a GM or Chrysler bought a Ford, GM and Chrysler would quickly go bankrupt, the government would be forced to stop giving them tycoon welfare, and Ford would probably have enough customers to get through this. If Ford takes bailout money, don't buy a Ford, either. You don't need to buy anything. Save your money until the government stops the bailouts. Your children will thank you for the peace and security.

US watchdog calls for bank executives to be sacked
Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse. Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade."

She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees. Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous." The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

Treasury chief puts bailed-out bank CEOs on notice
The government may require new faces in executive suites at banks requiring "exceptional assistance" in the future, Treasury Secretary Timothy Geithner said Sunday. Critics of the Obama administration's move last weekend to force out the chairman of General Motors Corp., Rick Wagoner, as a condition for possible additional federal loans say that strong government intervention contrasts with measures placed on the financial industry in return for billions in infusions. Geithner denied there was a double standard and put banks on notice that they may need to change leadership teams in exchange for accepting more money in the future.

"If, in the future, banks need exceptional assistance in order to get through this, then we'll make sure that assistance comes with conditions, not just to protect the taxpayer but to make sure this is the kind of restructuring necessary for them to emerge stronger," he told "Face the Nation" on CBS. "And where that requires a change of management of the board, we'll do that." The treasury chief said that is what has happened at some big institutions that are getting large amounts of government aid. They include the mortgage companies Fannie Mae and Freddie Mac, which were placed into conservatorship by the government last September, and insurer American International Group Inc., the recipient of more than $170 billion in help since last fall. "We've already seen a substantial number of the largest banks in our country fail or be absorbed by other institutions, no longer existing at independent institutions.

And where the government has acted, like in Fannie and Freddie or like in AIG, where we've had to do exceptional things to stabilize them, we have replaced the management and the board," Geithner said. "And we've done that because we want to make sure that taxpayers' assistance is going to make these companies stronger, make sure there's accountability, make sure it comes with strong conditions. And we'll do that in the future if that is necessary," he added. "It's a single standard, a single principle. And our obligation to the American people is to do what's necessary to try to bring recovery back on track as quickly as possible." Asked if chief executives of big banks such as Citibank and Bank of America should worry about their jobs if their companies don't improve their performance, Geithner said the government would not shy from such a restructuring.

"Where that's necessary, where it meets the test, where it's necessary to do what we ... exist to do, which is to make sure that this financial system supports recovery and the banks emerge stronger," Geithner said. As part of the new administration's overhaul of the $700 billion bailout effort, banking regulators are requiring stress tests for the 19 largest banks to see whether they will need additional support to withstand a more severe downturn than the country is experiencing now. Those tests are scheduled to be completed by the end of April. After that, the banks in need of additional capital will be given time to raise it on their own. If they are not able to do so, they will be provided with extra support from the bailout fund. But the administration has said the additional support will come with tougher requirements to make sure the banks' are using the money to increase lending to consumers and businesses.

Bank creditors still sitting pretty
American taxpayers and stock owners have taken it on the chin in this financial crisis. The same can't be said of bondholders who lent money to the most troubled banks. The Obama administration is now ordering General Motors Corp.'s creditors to make sacrifices to save the ailing automaker. Yet bondholders of financial companies such as Citigroup Inc. and Bank of America Corp. so far have been mostly left off the hook, even though the government has given the banks billions of dollars in bailout money. Many of those bondholders, in fact, are still profiting from their investments so long as they haven't had to sell, while the rest of us deal with vanishing wealth. "The sum total of the policy responses to this crisis has been to defend the bondholders of distressed financial institutions at the public expense," said John Hussman, who runs an investment firm in Ellicott City, Md.

Hussman is among critics who say bank bondholders shouldn't be shielded from all that has gone wrong in the past two years. "When one lends money to a financial institution, one also assumes the risk and responsibility of bearing the losses," Hussman observed. The White House has been sending out the same message as it turns up the heat on GM's creditors. In addition to forcing CEO Rick Wagoner to resign, Obama administration officials told GM bondholders over the last week they must make concessions or else the automaker will be headed for a bankruptcy reorganization that likely would diminish the value of their holdings. Creditors of GM, which has received $13.4 billion in federal loans, had been balking at restructuring their debt, betting the government wouldn't dare force the giant automaker into bankruptcy. But White House economic adviser Austan Goolsbee called their bluff: "They're going to have to make some sacrifices," he said in an interview on CNBC.

Too bad bank creditors aren't under the same pressure. They're still living in a financial world of the past, where corporate bond investors -- whether they be individuals, pension plans or hedge funds -- loan companies money and get regular interest payments. If they keep the investment until it matures, they reclaim their principal. For example, investors who took part in a $1 billion 30-year bond offering by Citigroup in 2002 are still being paid a 6.625 percent yearly return on each $1,000 invested and are scheduled to be paid back in full when the bonds mature in 2032. If they sold now, they would get about half that value since bonds of that vintage are currently trading at around 56 cents on the dollar. Federal officials have been reluctant to force any changes to the terms of bank debt. That's because they fear setting off another global financial panic -- much like what happened after the collapse of investment bank Lehman Brothers last September -- by suddenly altering bondholder agreements.

Bank creditors also are harder to push around. If they're forced to take haircuts on their investments they could threaten to close off future lending to banks, cutting off a vital supply of oxygen to financial service providers who depend heavily on debt to fund their operations. Consider that about 20 percent of the $12.5 trillion in liabilities on bank balance sheets at the end of 2008 came from corporate bonds and other debt vehicles, according to data from the Federal Deposit Insurance Corp. At a company like Citigroup, about $500 billion of its nearly $1.8 trillion in liabilities comes from debt to the company's bondholders. Citigroup has received $45 billion in rescue funds from the federal government. That doesn't mean bank creditors couldn't take action on their own, say, offering to restructure the debt of the most distressed companies in order to help them stay alive. If those investors are willing to convert some of their debt into equity, the effect could be huge. That could encourage banks to lend more by reducing the claims debtholders have on their capital. It's the same thing Washington wants from GM's bondholders. Too bad we can't count on the same from bank creditors.

< Why Creditors Should Suffer, Too
The Obama administration’s proposals to reform financial regulation sound ambitious enough as they aim to bring companies like A.I.G. under a broader umbrella of government rule-making and scrutiny. But there is a big hole in these proposals, as there has already been in the government’s approach to bailing out failing financial companies. Even as they focus on firms deemed too big to fail, the new proposals immunize the creditors and counterparties of such firms by protecting them from their own lending and trading mistakes. This pattern has been evident for months, with the government aiding creditors and counterparties every step of the way. Yet this has not been explained openly to the American public.

In truth, it’s not the shareholders of the American International Group who benefited most from its bailout; they were mostly wiped out. The great beneficiaries have been the creditors and counterparties at the other end of A.I.G.’s derivatives deals — firms like Goldman Sachs, Merrill Lynch, Deutsche Bank, Société Générale, Barclays and UBS. These firms engaged in deals that A.I.G. could not make good on. The bailout, and the regulatory regime outlined by Timothy F. Geithner, the Treasury secretary, would give firms like these every incentive to make similar deals down the road. If we are going to prevent an A.I.G.-like debacle from happening again, institutions like these need incentives to be more wary of their trading partners. Any new regulatory plan needs to deal with them in a sophisticated way. That’s because even smart and honest regulators can monitor a financial firm only so well.

A firm’s balance sheet doesn’t always reflect its true health, and regulators do not have an inside perspective on the firms they are supposed to secure. We do need more effective regulation, but calls for regulators to "get tough" are likely to prove effective only as long as a crisis lasts. What the banking system needs is creditors who monitor risk and cut their exposure when that risk is too high. Unlike regulators, creditors and counterparties know the details of a deal and have their own money on the line. But in both the bailouts and in the new proposals, the government is effectively neutralizing creditors as a force for financial safety. This suggests a scary possibility — that the next regulatory regime could end up even worse than the last. The more closely a financial institution is regulated, the more it will be assumed that its creditors enjoy federal protection. We may be creating a class of institutions whose borrowing is, in effect, guaranteed by the government. It doesn’t need to be this way.

A simple but unworkable alternative is to let major creditors make their claims in the bankruptcy courts, as was done with Lehman Brothers. But that is costly for the economy and, after the fallout from the Lehman failure, politically impossible now. Instead, the key to effective regulatory reform is to find a credible means of imposing some pain on creditors. Here is one possibility. The government has restricted executive pay at A.I.G. and banks receiving government funds, but this move fails to recognize that the richest bailout benefits go to creditors. Restricting compensation at these creditor firms would have more force — if it is done transparently, in advance and in accordance with the rule of law. A simple rule would be that some percentage of bailout funds should be extracted from the bonuses of executives on the credit or counterparty side of transactions.

Such a rule would make lenders more conservative, which would generally be a good thing. To make sure that this measure doesn’t choke off economic recovery, a workable plan would impose compensation restrictions only after the economy improves and banks are recapitalized. Here is another option: Even in good times, when there is no threat of insolvency on the horizon, credit agreements should provide for the possibility of a future, prepackaged bankruptcy. Those agreements should require that the creditors themselves would suffer some of the damage — even if the government stepped in to bail out the afflicted firm. There is a risk that these sacrifices will not be extracted when the time comes, but the prospect might still check the worst excesses of leverage. Right now, people cannot understand why A.I.G. received bailout money, so they feel deceived. A single insurance company, even a very large one, just does not seem that essential to the American economy, which makes the company all the more a scapegoat.

Much went awry at A.I.G., but in the context of a bailout, the company should be thought of as the conduit for helping an entire market that went bust. This poses a very difficult public relations problem for the government, because the Federal Reserve and the Treasury do not want to discuss the importance of the creditors too publicly right now. Why not? It would be bad precedent, and mind-bogglingly expensive, to promise to pick up all future obligations to major creditors. At the same time, any remarks that threaten to leave creditors hanging could panic the markets. So silence reigns, the Fed and Mr. Geithner receive bad publicity over the bailouts, and we are all laying the groundwork for a future financial crisis. The challenge isn’t easy, and we can’t start on it today, but one way or another a new regulatory plan has to move some risk back to creditors.

Administration Seeks an Out On Bailout Rules for Firms
The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials. Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package. The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

Although some experts are questioning the legality of this strategy, the officials said it gives them latitude to determine whether firms should be subject to the congressional restrictions, which would require recipients to turn over ownership stakes to the government, as well as curb executive pay. The administration has decided that the conditions should not apply in at least three of the five initiatives funded by the rescue package. This strategy has so far attracted little scrutiny on Capitol Hill, and even some senior congressional aides dealing with the financial crisis said they were unaware of the administration's efforts. Just two weeks ago, Congress erupted in outrage over bonuses being paid at American International Group, with some lawmakers faulting the administration for failing to do more to safeguard taxpayers' interests.

Rep. Edolphus Towns (D-N.Y.), chairman of the House Oversight and Government Reform Committee, said the congressional conditions should apply to any firm benefiting from bailout funds. He said he planned to review the administration's decisions and might seek to undo them. "We have to make certain that if they are using government money in any sort of way, there should be restrictions," he said. A Treasury spokesman defended the approach. "These programs are designed to both comply with the law and ensure taxpayers' funds are used most effectively to bring about economic recovery," spokesman Andrew Williams said. In one program, designed to restart small-business lending, President Obama's officials are planning to set up a middleman called a special-purpose vehicle -- a term made notorious during the Enron scandal -- or another type of entity to evade the congressional mandates, sources familiar with the matter said.

In another program, which seeks to restart consumer lending, a special entity was created largely for the separate purpose of getting around legal limits on the Federal Reserve, which is helping fund this initiative. The Fed does not ordinarily provide support for the markets that finance credit cards, auto loans and student loans but could channel the funds through a middleman. At first, when the initiative was being developed last year, the Bush administration decided to apply executive-pay limits to firms participating in this program. But Obama officials reversed that decision days before it was unveiled on March 3 and lifted the curbs, according to sources who spoke on condition of anonymity because the discussions were private.

Obama's team is also planning to exempt financial firms that participate in a program designed to find private investors to buy the distressed assets on the books of banks. But Treasury officials are still examining the legal basis for doing so. Congress has exempted the Treasury from applying the restrictions in a fourth program, which aids lenders who modify mortgages for struggling homeowners. Congress drafted the restrictions amid its highly contentious consideration of the $700 billion rescue legislation last fall. At the time, lawmakers were aiming to reform the lavish pay practices on Wall Street. Congress also wanted the government to gain the right to buy stock in companies so that taxpayers would benefit if the firms recovered.

The requirements were honored in an initial program injecting public money directly into banks. That effort was developed by the Bush administration and continued by Obama's team. The initiative is on track to account for the bulk of the money spent from the rescue package. All the major banks already submit to executive-compensation provisions and have surrendered ownership stakes as part of this program. Yet as the Treasury has readied other programs, it has increasingly turned to creating the special entities. Legal experts said the Treasury's plan to bypass the restrictions may be unlawful. "They are basically trying to launder the money to avoid complying with the plain language of the law," said David Zaring, a former Justice Department attorney who defended the government from lawsuits involving related legal issues. "They are trying to create a loophole to ignore Congress, and I think the courts will think that it's ridiculous."

The federal watchdog agency overseeing the bailout is looking into the matter, trying to determine whether the Treasury's actions are legal. Of the two major restrictions imposed by Congress in the bailout legislation, the limit on executive pay has been the most politically explosive issue. Obama himself has called for these limits. "We've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street," he said earlier this year. But officials at the Treasury and the Fed said they worry harsh pay limits will undermine critical bailout programs by discouraging financial firms from participating. Although many of these companies could survive without government help, they might lack money to ramp up lending, which officials consider critical to turning the economy around. In private meetings with officials in both the Bush and Obama administrations, firms' leaders have pushed back against pay limits.

A major test of whether the Treasury would apply the congressional restrictions was a $1 trillion program developed last fall to revive consumer lending. The initiative, known as the Term Asset-Backed Securities Loan Facility, or TALF, will be seeded with up to $100 billion from the financial rescue package, with the rest coming from the Fed. The program set up a special entity providing low-cost loans to hedge funds and other private investors so they can buy securities that finance consumer debt from banks and other lenders. This would free these companies to make more loans. When the Bush administration announced the program in November, officials directed the Fed to apply the pay limits to the lenders because they stood to benefit the most from the program. "There was a public hunger for executive-compensation restrictions, and we knew we couldn't be tone-deaf to the politics there," a former Bush administration official said.

In February, Obama administration officials at the White House and the Treasury began reviewing that decision. Treasury officials consulted with Department of Justice attorneys, who said they could legally avoid the pay restrictions, according to a government official. The requirements were removed just before the initiative was launched. The concerns persisted as the administration crafted other initiatives. Some private investors said, for instance, that they would not help the government buy toxic assets from banks if the congressional restrictions were applied to them. And every major provider of small-business loans has said that it will not participate in the government's program if it has to surrender ownership stakes to the government or submit to executive-pay limits.

New G.M. Chief Doesn’t Rule Out Bankruptcy
A week into his new job as chief executive of General Motors, Fritz Henderson said on Sunday he was confident in the future of the company but a structured bankruptcy remains a possibility. Mr. Henderson has just 55 days remaining to meet President Obama’s timetable to come up with a new plan to save the struggling car giant. Speaking on NBC’s "Meet the Press," he said that the company was working to avoid bankruptcy, but that if it failed to meet its goals for cutting costs and shrinking the company, it "may very well be the best alternative."

"If it can’t be done outside of a bankruptcy process, it will be done within it," he said. Treasury Secretary Timothy F. Geithner stressed Sunday that G.M. "is going to be a part of this country’s future," but said that a managed bankruptcy was among the options for the company. "These guys have made some progress in putting together a restructuring plan, but they’re not there yet," Mr. Geithner said on CBS’s "Face the Nation." "We wanted to give them the time to try to get it right. But, again, our objective is to allow — is to help these companies emerge stronger in the future so they can survive without government assistance."

Mr. Henderson, who also appeared on CNN’s "State of the Union," steered away from specifics during his two stops on the Sunday talk-show circuit. He said that he and the G.M. board are running the company, not the Obama administration, even though he conceded that he has "several masters." "I think the administration and the task force has been very clear, they don’t wish to run General Motors. They expect us to get our job done," Mr. Henderson said. "But the day we took money from the taxpayer was one of the, one of the most difficult days of certainly my career and of the history of General Motors. ... And one of the, one of the happiest days of my future career is going to be the day we pay the loans back."

A Detroit-born son of a car salesman who has spent more than 20 years with G.M., Mr. Henderson was given the reins to the company late last month just minutes before a final review of the company’s restructuring plan by President Obama’s auto task force. At the start of that meeting his boss, Rick Wagoner, was told to resign by the White House. Mr. Henderson, who said his salary is $1.3 million after a 30 percent pay cut, must make a number of sweeping changes, including obtaining huge financial concessions from the bondholders and workers, if the company is to receive the additional federal aid it has requested. The company has received $13.4 billion from the government and requested up to $16.6 billion more.

Who’s Most Indebted? Banks, Not Consumers
Fifty years after executives at Bank of America had a clever idea — issue credit cards to ordinary consumers — the leveraging of America may finally be over. The amount owed by consumers, in relation to the entire American economy, has started to fall. But it is not consumers whose willingness to take on debt was most notable during the half-century. It is the financial sector itself. The banks that made the loans proved to be much more willing to borrow than their customers, whether corporate or consumer. And that debt has not begun to recede, despite Wall Street bankruptcies and widespread efforts by financial firms to reduce their own debts. At the end of 2008, according to the Federal Reserve Board, total debt in the financial sector came to $17.2 trillion, or 121 percent of the size of the gross domestic product of the United States. That was $1 trillion more than a year earlier, when the total came to 115 percent of G.D.P.

Half a century earlier, the financial sector debt was $21 billion, which came to just 6 percent of G.D.P. Household debt, by contrast, stood at $13.8 trillion at the end of both 2007 and 2008, allowing the debt as a proportion of G.D.P. to fall to 97 percent from 98 percent. Peter L. Bernstein, an economist and financial historian, drew attention to that trend last month in his publication "Economics and Portfolio Strategy." He says he thinks households will choose to continue cutting debt even after the economy begins to recover. Even if they want to keep borrowing, he wrote, "The free and easy days of reckless borrowing from 2000 to 2007 are hardly likely to repeat." He added that such a decline in debt would reflect "a sustained reduction in the appetite for consumption, which has been the driving force of growth in the economy over the past 15 years or so." And that, he said, will "be a powerful drag on economic activity for an indefinite period of time."

Debt levels of nonfinancial businesses rose during a period of high profits earlier in this decade and kept growing last year. The high levels of debt left some companies ill prepared for the combination of recession and tight credit markets that developed in 2007 and 2008. Government borrowing has soared over the last year and seems likely to continue doing so as the bailouts grow. But over the longer term, the changes have been minimal. In 1958, the total debt of governments, from the federal level down to the smallest town, came to 60 percent of G.D.P. Half a century later, the proportion was just about the same. Put another way, in 1958, of every $100 in loans in the country, governments accounted for $44 of the borrowing. At the end of last year, government borrowing accounted for only $17 of each $100, while the proportion borrowed by companies and consumers was far higher.

The changes reflect the rapid changes in the American financial system over those years. Not only did consumer credit become much more widely available, as the Bankamericard became Visa and drew competition from other credit cards, but the ways banks financed their loans also changed. In 1958, 75 percent of financial sector debt was on the books of traditional financial institutions — banks, savings and loans and finance companies. Now the proportion is 18 percent. Over the half-century, a myriad of financial products and institutions were created to borrow money and own assets, so that one loan to a consumer could create a myriad of debts as it was bundled into a pool that issued securities to buyers that, in turn, borrowed money to finance their purchases. That created a mound of debts that enhanced profits in good times but left financial institutions vulnerable if the value of their assets began to fall. One of the major questions of the current financial crisis is how many of those innovations will endure and how much they will be changed. It seems likely that the result will be a contraction of financial sector borrowing, but so far that does not show up in the statistics.

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Goldman considers share sale to pay back TARP funds
Goldman Sachs is considering a multi-billion dollar share issue to fund the repayment of the $10bn (£6.75bn) US government loan handed to the Wall Street bank at the height of the global financial crisis last autumn. Goldman, which will report its first-quarter results on April 14, is expected to announce on the same day that it is to submit a formal application to repay the sum given to it as soon as it passes the formal "stress test" being conducted by government officials on all major US financial institutions. People close to the bank say that its management, led by chairman and chief executive Lloyd Blankfein, is assessing a range of options for repaying the money loaned to it as part of the US Treasury’s Troubled Asset Relief Programme (Tarp). These include orchestrating a new share sale or funding the repayment from existing capital resources, and it may still decide to pursue the latter route.

Goldman, along with a number of its rivals, is understood to have enjoyed a spectacular first three months of the year in terms of its trading performance, according to insiders. The bank would not require additional capital to repay the Tarp money, having raised $11bn from investors including Warren Buffett, the so-called "Sage of Omaha", last autumn. Some senior Goldman officials believe, however, that the ongoing banking turmoil means that it should continue to take a conservative view of its balance sheet and exploit further opportunities to raise additional capital if it is accessible on reasonable terms. A number of smaller American banks have already taken steps to repay Tarp funds, but Goldman is expected to be the first Wall Street firm to do so. Goldman has also been linked with the sale of part of its stake in Industrial and Commercial Bank of China, the world’s largest bank by market value, when a lock-up period expires later this month. However, people close to Goldman said that any such disposal would be unconnected to the repayment of the Tarp funds.

Next big worry: when jobless aid runs out
In the coming weeks and months, hundreds of thousands of jobless Americans will exhaust their unemployment benefits, just when it's never been harder to find a job. Congress extended unemployment aid twice last year, allowing people to draw a total of up to 59 weeks of benefits. Now, as the recession drags on, a rolling wave of people who were laid off early last year will lose theirs. Precise figures are hard to determine, but Wayne Vroman, an economist at the Urban Institute, estimates that up to 700,000 people could exhaust their extended benefits by the second half of this year. Some will find new jobs, but prospects will be grim: Layoffs are projected to continue, and many economists expect the jobless rate, already at 8.5 percent, to hit 10 percent by year's end. "It's going to be a monstrous problem," Vroman said.

U.S. employers shed 663,000 jobs in March, and the jobless rate now stands at its highest in a quarter-century. Since the recession began in December 2007, a net total of 5.1 million jobs have disappeared. Those who know that their unemployment aid is about to run out are counting the days, taking on odd jobs, moving in with relatives and fretting about the future. "My biggest fear is we'll lose the house," said Hernan Alvarez, 54, an Orlando, Fla., construction worker who lost his job in July and whose benefits will end in four weeks. "The only thing I can do is keep looking for work and hope tomorrow will be better than today." That so many people have remained on jobless aid for more than a year underscores the depth and duration of this recession. If the downturn extends into May, it will be the longest recession since the Great Depression.

The jobs crisis it has created has proved worse than most economists forecast - not to mention what lawmakers expected when they extended jobless benefits last year. In March, nearly a quarter of the unemployed had been without work for six months or more, the highest proportion since the 1981-82 recession. And the problem will probably get worse. Employers typically remain reluctant to hire even months after a recession has officially ended. In the 1990-91 and 2001 recessions, the jobless rate peaked more than a year after the recovery began. "What comes next, I'm afraid, will be the mother of all jobless recoveries," said Bernard Baumohl, chief global economist at the Economic Outlook Group, a consulting firm. "While we may emerge from recession from a statistical standpoint later this year, most Americans will be hard-pressed to tell the difference between a recession and a recovery in the next 12 months."

States typically provide 26 weeks of unemployment benefits, an average of about $350 a week. Last year, Congress tacked on 20 extra weeks of benefits, and later it added 13 additional weeks for people in states hit hardest by unemployment. Experts said food stamps and other social programs provide a partial backstop for many recipients who exhaust benefits. Some will also take low-paying "tideover" jobs - if they can find them, said Rebecca Blank, an economist at the Brookings Institution. One of them is Pittsburgh resident Rainie Uselton, 39. She took a course to become a certified nursing assistant after being laid off from a restaurant early last year. She landed a job at an assisted-living facility but lost it after her car broke down and she couldn't make it to work. Uselton is caring for a friend's mother part-time in exchange for a meal, bus pass and $50 a week. She hopes to use that money to help pay for car repairs before her benefits run out in four weeks.

"It takes a little longer to fall asleep because of all the scenarios in your head," Uselton said. Unemployment has risen so high that in some states a third leg of benefits is kicking in - a new lifeline for many who would otherwise run out. Under federal law, states found to have particularly high unemployment under complex formulas must provide 13 to 20 more weeks of benefits. It has already taken effect in 18 states, twice as many as activated it in either of the last two recessions. The National Employment Law Project, an advocacy group for low-wage workers, wants more states to change their laws to make it easier for the extended benefits to kick in. The federal stimulus package provides full federal funding for the extension, which otherwise would be split between the states and federal government. California's Legislature took such a step last week, and Gov. Arnold Schwarzenegger is expected to sign the legislation.

Unemployed Lose Fallback Options
The growing ranks of unemployed Americans are turning to the traditional fallbacks -- retail, restaurants, customer service -- to ride out a rough economy. The bad news is job openings there are growing scarce, too. Widespread "trading down" is sparking a fight for low-wage jobs that employers once struggled to fill. Mark Hall, 24 years old, of Alexandria, Pa., lost his $12-an-hour gig as a videographer when his employer folded and is now looking for anything to make ends meet. "Finding a regular job, not even in my field, is very challenging," said Mr. Hall. "Even working for Lowe's, I'd settle for that, and I have a four-year degree." Last week, Mr. Hall joined more than 500 people at a job fair in Lewistown, a fading manufacturing hub. Hardware and appliance retailer Lowe's was among 30 employers recruiting, down from 46 last year, and looking for mostly part-time and seasonal employees.

Despite what objectives they may have put atop their resumes, when asked to describe the work they really wanted, the job seekers largely had the same goal: "I'll take anything right now." In many cases, that desperation means that even educated workers must trade down to jobs below their potential and with lower pay. That results in painful, long-term effects, from hurting their own career advancement to displacing those with less education or experience. Job seekers line up to apply for positions at an American Apparel store April 2 in New York City. Employment is down in every industry except health care, education and government. In the areas Americans could count on to get through past recessions, February's employment data show administrative and support services jobs were down 11%, retail trade fell 4% and jobs in food services and drinking establishments dropped 1%.

Web site has seen listings for work such as food preparation and service fall by more than a quarter, while jobs in sales and administrative support dropped by more than a third from a year earlier. The government gives its latest snapshot of the job market Friday morning, and economists expect it will report another 675,000 jobs or more were lost in March, and the jobless rate rose sharply from February's 8.1%. Another gauge of joblessness -- which tracks the unemployed, those who aren't looking for work but want it, and part-timers who want full-time jobs -- hit 14.8% in February, up from 9% a year earlier. That underscores how many people are searching for work or merely settling for something less than satisfactory. Lewistown -- about 55 miles west of Harrisburg, with a population of about 9,000, according to the 2000 census -- had a jobless rate in January of 9.9%, nearing the double digits that economists say the U.S. is likely to see by later this year or in 2010.

Rebecca and Dave Yohn both attended the fair to search for something to make up for the manufacturing jobs they lost when their factories either shut down or downsized. He worked for a cabinet maker; she sold seats for automobiles. No longer relying on manufacturing, the Yohns were looking for anything to help cover their property taxes and utility bills. "You do what you have to do," Mrs. Yohn said. "If I could get a painting job or something to get by...that would be terrific." Nationwide, companies with low-wage jobs report a surge of such applicants. Noodles & Co., a Colorado-based restaurant chain, has seen a 40% increase in applications for all types of positions -- cooks, cashiers, corporate managers -- across more than 200 restaurants, said Heath Grantham, manager of staffing and recruiting. From January to late March, that worked out to more than 23 applicants for each open position.

See some of the largest layoffs in the fourth quarter of 2008 and the first quarter of 2009. Phillips Seafood Restaurants experienced large turnouts at two recent restaurant open houses in Baltimore and Washington, D.C. The open houses, which usually attract 40 or 50 applicants, pulled in 300 in Washington and 165 in Baltimore. Savannah Red restaurant in Charlotte, N.C., received nearly 200 applications for a part-time server job that, six months ago, drew only five applicants. Even though the recession is bad for business, it can be good for those who are hiring. During the boom years, restaurants and retailers struggled to find Americans willing to work at low-wage jobs. Seasonal employers, such as lifeguards and camp counselors, often recruited overseas to fill open positions. For workers such as Mr. Hall, low-wage jobs look a lot more desirable now. He needs to pay the bills and dreams of starting his own videography business. After searching unsuccessfully for video-production and media work, he is ready to consider just about anything. "I've applied to about 25 jobs," he said, "and I either haven't heard back or been flat out said 'no' to."

Merrill's Rosenberg: A New Bull Market? Are You Out Of Your Mind?
Merrill's economist David Rosenberg is unfortunately leaving the firm. Before he goes, however, he wants to warn you again that this boomlet is all just a sucker's rally.  In fact, he thinks the market is headed to startling new lows. Why?" It all starts with the housing market. Here are some excerpts from the report David published yesterday:

Need to see housing stabilize to put in a definitive bottom We have said it once and we shall say it again, that it all comes down to housing, the quintessential leading indicator. It was the deflation in home prices in the summer of 2006 that led the crunch in the mortgage market later that year, which in turn led the credit collapse in the summer of 2007. That led the onset of the bear market in the fall of 2007; which subsequently led the recession at the end of that year. That finally triggered the severe consumer down-leg, which is ongoing, notwithstanding the seasonal noise in the data through the first two months of 2009. So, for the domino game to flip in the other direction, as is it did in the aftermath of the 1990-91 meltdown in the economy, stock market and consumer confidence – we desperately need to see housing prices stabilize to put in a definitive bottom.

A total lack of equilibrium in the housing market To reiterate, there is simply no sustainable recovery in the economy, the stock market or the financial backdrop until we get some clarity on the outlook for residential real estate prices. It was rather telling that the Case-Shiller home price index sagged a record 2.8% in December. As the nearby table illustrates, every major city had double-digit home price declines over the past three months. And not only was January the 30th consecutive monthly decline, taking the cumulative decline from the mid-2006 peak to an unprecedented 29%, it is a critical sign that we continue to have a total lack of equilibrium in the housing market. In other words, the "price" is still telling us that, at the latest data point, we still have more sellers than buyers, which is amazing considering that this is now a three-year-old depression in the housing market, despite the fact that affordability has improved to its best level ever recorded.

Would take over three years to achieve price stability The problem is that prices do not begin to stabilize until we break below eight months’ supply – and they tend to deflate 3% per quarter until that happens. So as impressive as it is that the builders have taken single-family starts below underlying sales, their efforts are just not sufficient to prevent real estate prices from falling further. In fact, even if the builders were to declare a moratorium immediately – that is taking starts to ZERO – demand is so weak and the unsold inventory so intractable that it would now take over three years to achieve the holy grail of price stability in the residential real estate market.

A lethal deflationary combination The combination of a 10% savings rate and 10% unemployment rate is a lethal deflationary combination that the Obama dream team of economists seems prepared to fight hard against, and we wish them good luck, but we think we are in for another year of very weak economic growth that warrants a focus on safe income wherever you can get it, and a focus on high-quality assets and defensive sectors in the equity market.

S&P 500 will hit new lows, in our view We remain of the view that the risk of earnings disappointments will take the S&P 500 to new lows before the bear market runs its course. Based on the outlook for corporate profits and the typical trough P/E multiple that characterized recession bear markets, it would not surprise us to see the S&P 500 gravitate in a 475-650 range for an extended period of time.

Will retest or break below 2% on the 10-year Treasury note As for the here and now, just consider that consumer discretionary stocks have outperformed the market by 520 bps since the S&P 500 hit its interim low back on March 9, while the homebuilders have outperformed by nearly 2000 basis points. It could be time to sell some calls. As for bonds, we would just have to assume that if the yield on the 10-year note sank to 2% in December on the rumor of the Fed buying Treasuries, we will ultimately retest or perhaps even break below that level on the fact. Considering that the 10-year T-note tested the 3% threshold no fewer than four times before the Fed made its quantitative easing announcement last month, at least we know what the risks are to the view. It seems pretty one-sided.

Mark-To-Market My Words
To most people, it's an arcane accounting rule. But to bankers, it's the whole ballgame: "mark to market" pricing is the practice of requiring banks to value their assets based on their current market value. Not what banks paid for those assets yesterday. Not what they could get for them in, say, a year or two when the financial industry has settled down. What they could get right now. Which is basically bubkes. Banks have been pleading for this requirement to be lifted since the credit crisis began, and last week they got their wish. Confused? Here are four things you need to know about "mark to market" in order to sound smart at a cocktail party.
  1. Banks say mark-to-market pricing cost them billions.
    When the housing bubble burst, the market for all those mortgage-backed securities vanished, leaving bank balance sheets larded with assets that no one wanted. So at the end of each quarter, banks had to write down billions of dollars of "toxic assets"—even though their value might've been artificially, and only temporarily, depressed. But if banks never intended to sell an asset in the current market, they reasoned, why should they be forced to value it as if they did?
  2. The key players: five big-shot accountants in Connecticut.
    Banks began lobbying Congress last year to do away with mark-to-market, arguing that they couldn't lend because it had bled away so much capital. Congress in turn put the heat on the Financial Accounting Standards Board, a group of five über-accountants based in Connecticut who write all the rules. After months of pressure, including threats to take away its authority, the FASB caved and voted to loosen the rule.
  3. The new guidelines, and the fly in the ointment.
    Banks can now use "significant judgment" to value assets. Translation: they can stop assigning doomsday values to securities they think will have more value down the road. The hitch: some investors fear the rule change will help banks disguise their garbage, which was part of what got us into this mess in the first place.
  4. Bully for the banks, but will this actually work?
    It'll help big banks like Citi recoup billions in losses. But it does little to solve the underlying problem: piles of troubled assets no one wants. And it might not help for long, because Treasury Secretary Tim Geithner plans to rebuild a market for the assets by handing private investors cheap credit so they can start buying them up

West has to deal with toxic debt to end recession
Attempts by the G20 leaders to halt the global recession are doomed unless they get to grips with the "toxic" debt hidden in the shadow economy, warned to Hernando De Soto, the prize-winning Peruvian economist. Mr De Soto said: "This toxic debt is the elephant in the room and solving the problem is the missing link to getting the world economy moving again. Until we know what proportion of the estimated $600trn [£400trn] of derivative contracts is toxic, then credit markets will remain in a state of chronic paralysis." He added: "No amount of fiscal stimulus or new international regulation will get the banking system fixed until we know how much poisonous paper there is on the balance sheets of the banks. The G20 leaders have given the world economy a blood transfusion but now they need to get on with the operation if they are to save the patient's life."

Mr De Soto welcomed the efforts of the US Treasury Secretary, Tim Geithner, to put pressure on institutions to establish how much toxic debt they hold. "But there must be more focus on forcing all the financial institutions and banks to face up to the bad debt hidden away in the shadow economy. Lawyers and bankers must now work on bringing these contracts out of the shadows so they can be given a value and be traded." The economist also claimed that it was fear which forced Mr Geithner's predecessor, Hank Paulson, not to go ahead with his original $780bn rescue plan to ring-fence toxic paper: "I'm told that the bankers told him they didn't know where it was hiding." Mr Paulson's U-turn over toxic debt – switching instead to recapitalising the banks – was never fully explained. "My sources told me they were terrified that they couldn't find out where all the contracts were lodged and that's why Paulson dropped the plan," he said.

An adviser to presidents around the world, Mr De Soto runs the Institute of Liberty and Democracy in Lima, and advises emerging economies on how to alleviate poverty by giving the poor property and other legal rights. "The problems are similar," he said. "US and European authorities find it difficult to believe that the fundamental cause of a recession could be a badly documented legal system. But this is what this crisis comes down to and will only be alleviated when that paper is documented, has a value and can be traded."
Mr De Soto reckons there are only a few hundred billion dollars of toxic paper: "Until we acknowledge this toxic debt then this crisis could get even worse. Let's learn the lessons of Iraq and find out if these derivatives are the financial equivalent of weapons of mass destruction or not, and if so, get them documented."

The G20's Blind Spot: President Obama must squarely face the bad asset problem
Bad debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the "painkilling" effect wears off, US and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks. In proceeding with financial reform in response to the financial crisis, the US has been injecting public funds into banks and struggling companies with little success, sometimes forced to do so repeatedly. It appears that even President Barack Obama, a leader upon whom the expectations of the world await, has been unable to cut the Gordian knot. The global financial crisis triggered by the collapse of the US housing bubble has been far more serious and fast moving than the crisis following the burst of the Japanese bubble.

Yet, just as the two crises differ in their depth and urgency, they also vary in terms of the speed at which they have been dealt with. Indeed, US and European policymakers have responded to the ongoing crisis with much greater alacrity than did Japanese policymakers in the 1990s, or so it initially seemed. However, as we move beyond the emergency response stage and face the challenge of correcting the fundamental problems that caused the financial crisis, things appear to be quite different. Watching how President Obama has had to continually struggle to work with Congress, I cannot help but realize, all things considered, that politicians in the US, or those in Europe for that matter, are not much different from their Japanese counterparts. Particularly striking to me has been some of the remarks I have heard from US and British think-tank researchers at recent seminars and conferences. In essence, their remarks can be summarized as follows:
  • Because we USs are extremely optimistic people, we will regain our confidence and begin to increase consumption in one year's time.
  • By stimulating demand through fiscal measures, the prevailing pessimism can be dispelled and confidence in the economy will be restored.

Déjà vu of Japan in the 1990s It was a bizarre experience. I felt as if I were hearing USs and British recite the same words Japanese politicians, bureaucrats, and bank officials had repeated so many times during the first half of the 1990s. When the finance ministers and central bank governors from the Group of Twenty (G20) major economies met in Horsham, England on March 13-14, they devoted much of their time to discussing fiscal measures. As evidenced by this fact, excessive expectations are being placed on fiscal policies. It is relatively easy to get the people's approval for using fiscal expenditures to finance public works projects, tax breaks, employment measures, and so forth. I am afraid that today's US and European leaders might be adopting the same mentality as that of the Japanese leaders in the 1990s. That is, it seems to me that they are clinging to wishful thinking by hoping that all of the current global economic problems will solve themselves in due time. As this situation prolongs itself, leaders may buy time with pain-relieving fiscal measures, but by doing so they will continue to ignore the true nature of the problems before them.

Bad debt as the root of the problem The root problem is an enormous mountain of nonperforming assets. Over the past 10 years the US has undergone two bubbles -- an IT bubble and the housing bubble -- in succession, and has fallen into the habit of borrowing to spend in the process. The aggregate amount of nonperforming assets left in the aftermath of these adjoining bubble periods encompassing the past 10 years is said to be two to three times larger than the amount that Japan had to deal with in the 1990s. In Japan, two government-backed agencies -- the Resolution and Collection Corp. (RCC) and the Industrial Revitalization Corp. of Japan (IRCJ) -- were established to dispose of soured loans and restructure troubled corporate borrowers such as Daiei Inc. As we learned from Japan's experience, the disposition of nonperforming assets is a painful process that takes enormous time and energy. Given that understanding, it is all the more necessary for the US to develop a well-defined, fundamental policy portfolio to solve the problem of nonperforming assets. However, the package of plans laid out by Treasury Secretary Timothy Geithner was too abstract and failed to provide a concrete road map. The market was disappointed with the package and the Dow Jones Industrial Average has lost more than 720 points in less than two months since President Obama took office.

How Japan finally turned around in the 1990s crisis The greatest lesson from Japan's experience is not that bank recapitalization should take place quickly, but that market confidence can be restored only when progress is made on the painstaking process of disposing of nonperforming assets. In retrospect, the recapitalization of banks in 1998 and 1999 delivered only a temporary respite and did not guide the Japanese economy onto a true path of recovery. Only after Resona Bank had been temporarily placed under government control, the IRCJ had been established, and Japanese banks had embarked on an all-out effort to dispose of bad loans, did stock prices finally pick up and people come to embrace the recovery. Up until then, whatever measures had been taken by the government -- whether bank recapitalization or pork-barrel fiscal spending -- did nothing but provide temporary pain relief.

How to address today’s problem Continuing to give "adrenaline shots" of fiscal expenditures would not cure a patient suffering from the "cancerous" effects of nonperforming assets unless the cancer tumour was removed by surgery. However, surgery this time around -- the removal of nonperforming assets from US and European banks -- is going to be far more difficult than the previous procedure that relieved Japanese banks of their bad loans. First, the nonperforming assets from the latest crisis have been chopped up and embedded in various forms of different types of securities that have been spread among investors and financial institutions across the world. The disposition of nonperforming assets involves identifying the holders of these securities, determining the amount of losses the creditors have incurred on such securities, and then persuading them to take their share of the losses. Altogether, this process would require an enormous amount of time and effort. Negotiations on burden-sharing are, by definition, a troublesome task that no one wants to deal with. That task is even more challenging this time around because the disposition of nonperforming assets will have to proceed multilaterally with affected parties scattered around the world.

However, due to strong public opposition and/or the intertwining of interests, most countries are far from being ready to coordinate and work together to clean up nonperforming assets. At the present time the US and European countries are most likely in a state of paralysis in terms of addressing the problem of nonperforming assets. Just 10 years ago in 1999, I had an opportunity to discuss with a leading financial economist what policy measures should be implemented to revive the Japanese economy. After providing clear analysis and pointing to the necessity of disposing of a massive amount of bad loans as a prerequisite to achieving an economic recovery, he self-mockingly added, "but the fact is that all of us are utterly stricken and standing transfixed by the sheer scale of the problem before us, isn't it?"

Wishful thinking on fiscal stimulus This might be the state in which the Americans and British find themselves today. A counter-reaction to this state of paralysis might be manifesting itself in the form of excessively wishful thinking about the effects of fiscal policies. Many decision makers want to force themselves to believe that fiscal measures will cure the problem because there is nothing else they can do at the moment. However, as we learned in Japan in the 1990s, people in the US and Britain will soon realize that fiscal measures alone cannot provide an ultimate cure. What happens next? One probable future scenario would have the US and global economies temporarily regaining strength over the next two to three years with the support of fiscal measures, but the problem of nonperforming assets, the root cause of the ongoing economic turmoil, would remain unsolved because of various political difficulties such as strong public opposition to bailing out banks. Consequently, once the painkilling effect of fiscal measures wears off, the US and global economies would once again plunge into another serious crisis.

Only after going through this ordeal and realizing that fiscal measures alone cannot solve the problem would people recognize the need for ultimately disposing of nonperforming assets. And only then could a global policy scheme for addressing the core problem of financial instability be formulated. But until this happens, the US government will most likely continue to run a fiscal deficit, further snow-balling its already huge federal debt. For Japan, this crisis is not akin to a fire on the other side of the river. As the US economy continues to stagnate, the Japanese economy will be the hardest hit because its exports will suffer directly from the sluggish demand in the world's largest market. Thus, Japan has no choice but to keep on priming the fiscal pump to prop up its economy. Finance Minister Kaoru Yosano promised a ¥3 trillion fiscal stimulus package at the Horsham G20 meeting, but Japan will still need to take further fiscal steps and act in tandem with the US in the coming months.

Conclusion So long as people hold onto the expectation that recovery could be brought about by fiscal measures, no national consensus can be built to proceed with the painful disposition of nonperforming assets. It is necessary to learn by firsthand experience that fiscal measures are only makeshift. In this context, the enormous fiscal deficit that will be built up in the US in the coming months may be the political cost for consensus building, which would be a replay of what Japan went through in the 1990s. Up until several years ago, the US and European countries had repeatedly criticized Japan's policy responses for being too slow. But it might be the case that US and European policy responses are just as slow as those of Japan when it comes to tackling the daunting task of solving nonperforming asset problems. By studying Japan's experience, foreign policymakers have an excellent example from which they can learn what not to do. Yet, the recent developments show just how difficult it is to learn from the mistakes of others. We, as human beings, are by nature probably unable to take to heart anything having negative implications unless we learn its lesson the hard way through firsthand experience.

A Global Free-For-All?
The world economy is suspended between the lofty rhetoric of last week's G20 summit and the gritty realities of domestic politics. We are in a race between economic recovery and economic nationalism. At last week's G20 summit, leading nations agreed to roughly $1 trillion of additional lending, mostly through the International Monetary Fund, to end the worldwide slump. But beneath the veil of consensus, countries are maneuvering to protect their economies and blame someone else for the crisis. Will the world economic order overcome these stresses or give way to a global free-for-all, characterized by rampant protectionism, nationalistic subsidies and preferences? Emblematic of the tension is a recent proposal by Zhou Xiaochuan, governor of the People's Bank of China (PBOC), to replace the dollar as the world's major international currency.

In a paper posted on the PBOC's Web site, Zhou argued that the present crisis reflects "the inherent vulnerabilities and systemic risks" of the dollar-based global economy. The PBOC is China's Federal Reserve, meaning that Zhou is no obscure bureaucrat or renegade academic. His critique is a significant event. It may surprise Americans that, up to a point, his analysis is correct. The dollarized world economy developed huge potential instabilities—vast trade imbalances (American deficits, Asian surpluses) and massive, offsetting international money flows. But what Zhou omits from his analysis is revealing. To wit: China and others are implicated in the dollar system's failings. By keeping their currencies artificially depressed—a way to aid exports—they abetted the very imbalances that they now criticize. The Chinese denounce American profligacy after promoting it and profiting from it. Low prices of imported consumer goods (shoes, computers, TVs) encouraged overconsumption. From 2000 to 2008, the U.S. trade deficit with China ballooned from $84 billion to $266 billion. China's foreign-exchange reserves are now an astounding $2 trillion. The reserves are not an accident; they are the consequence of conscious policies.

It's not just that exchange rates were (and are) misaligned. American economists have argued that a flood tide of Chinese money, earned from those bulging trade surpluses, depressed interest rates on U.S. Treasury securities and sent investors searching for higher yields elsewhere. That expanded the demand for riskier securities, including subprime mortgages, and pumped up the real-estate bubble. So China's policies contributed to the original financial crisis (though they were not the only cause) as well as to Americans' excess spending. For decades, dollars have lubricated global prosperity. They're used to price major commodities—oil, wheat, copper—and to conduct most trade. Countries such as Thailand and South Korea deal in dollars for more than 80 percent of their exports, notes economist Linda Goldberg of the Federal Reserve Bank of New York. The dollar also serves as the major currency for cross-border investments by governments and the private sector. Indeed, governments hold almost two thirds of their $6.7 trillion in foreign-exchange reserves in dollars.

But overreliance on the dollar can also backfire, as it now has. Not only have countries suffered declines in exports to a slumping U.S. economy. They've also lost dollar loans needed to finance trade with third countries. "When the crisis hit, U.S. banks cut back on dollar credit lines to foreign borrowers," says David Hu of the International Investment Group. The additional IMF loans endorsed at last week's summit aim to offset these losses. Given the dollar's drawbacks, why not switch to something else, as Zhou suggests? The trouble, as even he concedes, is that there's no obvious replacement. The attraction of an international currency depends on its presumed stability, what it will buy and how easy it is to invest. The euro (27 percent of government reserves) and the yen (3 percent) don't yet rival the dollar. As for China, it hasn't even made its currency (the renminbi, or RMB) freely convertible for Chinese investments. Zhou mentions relying more on "special drawing rights" (SDRs). But SDRs are not a real currency. They're synthetic money issued by the IMF that can be converted into a mix of dollars, euros, yen and pounds.

We are stuck with the dollar standard for many years. To work, it requires that countries with huge trade surpluses reduce the export-led growth that fed the system's instabilities. The Chinese increasingly recognize this. "They're very aware of the need to promote [domestic] consumer spending," says economist Pieter Bottelier of Johns Hopkins University. In November, China announced a "stimulus" of 4 trillion RMB ($586 billion). In addition, says Bottelier, the government is expanding health and pension benefits to dampen households' need for high savings. But China also has a default position: promote exports. It has increased export rebates; it has engaged in RMB currency "swaps" with trading partners (the latest: $10 billion with Argentina) that seem designed to stimulate demand for Chinese goods; it has stopped a slow appreciation of the RMB.

China seems comfortable advancing its economy at other countries' expense. The significance of Zhou's pronouncement is political. It rationalizes this sort of predatory behavior: if we are innocent victims of U.S. economic mismanagement, then we're entitled to do whatever's necessary to insulate ourselves from the fallout. Down this path lies continued instability and growing mistrust. The global economy is suspended between the lofty rhetoric of last week's summit and the gritty realities of domestic politics. We've already seen more protectionism. A World Bank study found that 17 countries in the G20 had recently adopted policies that discriminate against imports or favor domestic production. Though mostly modest in themselves, they "open the door for a lot of other opportunistic measures," says Gary Hufbauer of the Peterson Institute. Precisely. The deeper the recession goes—and the longer recovery is delayed—the greater the danger of economic strife.

Inside Obama's bank CEOs meeting
The bankers struggled to make themselves clear to the president of the United States. Arrayed around a long mahogany table in the White House state dining room last week, the CEOs of the most powerful financial institutions in the world offered several explanations for paying high salaries to their employees — and, by extension, to themselves. "These are complicated companies," one CEO said. Offered another: "We’re competing for talent on an international market." But President Barack Obama wasn’t in a mood to hear them out. He stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. "Be careful how you make those statements, gentlemen. The public isn’t buying that."

"My administration," the president added, "is the only thing between you and the pitchforks." The fresh details of the meeting — some never before revealed — come from an account provided to POLITICO by one of the participants. A second source inside the meeting confirmed the details, and two other sources familiar with the meeting offered additional information. The accounts demonstrate that despite the public comments on both sides that the meeting was cordial, the tone in the room was in fact one of mutual wariness. The titans of finance — men used to being the most powerful man in almost any room — sized up a new president who made clear in ways big and small that he expected them to change their ways.
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There were signs from the outset that this was a business event, not a social gathering. At each place around the table sat a single glass of water. No ice. For those who finished their glass, no refills were offered. There was no group photograph taken of the CEOs with the president, which typically happens at ceremonial White House gatherings but not at serious strategy sessions. "The only way they could have sent a more Spartan message is if they had served bread along with the water," says a person who attended the meeting. "The signal from Obama’s body language and demeanor was, ‘I’m the president, and you’re not.’" According to the accounts of sources inside the room, President Obama told the CEOs exactly what he expects from them, and pushed back forcefully when they attempted to defend Wall Street’s legendarily high-paying ways.

From the White House, there were five principal attendees: chief of staff Rahm Emanuel, who arrived a few minutes late, Treasury Secretary Timothy Geithner, Council of Economic Advisers chairwoman Christina Romer, senior adviser Valerie Jarrett and director of the National Economic Council Larry Summers. Uncharacteristically, Summers said almost nothing, and it appeared to one participant as if he had been told to remain silent. To break the ice, JPMorgan Chase CEO Jamie Dimon offered Geithner a fake check for $25 billion, the amount of Troubled Asset Relief Program money that the company has accepted. Although many of those in the room laughed, Geithner didn’t keep the check. The president entered the room a few minutes later and made a lap of the table, shaking hands and saying hello to the CEOs, several of whom he called by name. Taking his seat at the table, the president said, "So let’s get to it." He spoke for several minutes without notes, giving an overview of the economic situation as he saw it. But the first comment that made an impression on several attendees was on Wall Street salaries and bonuses.

The president spoke of public outrage over the high-flying executive lifestyle. "The anger gentlemen, is real," Obama said. He urged pay reform and said rewards must be proportional, balanced, and tied to the health and success of the company. The president described the financial system as still "fragile" and asked for cooperation from the CEOs. But he also told them he wouldn’t shy away from regulatory reform. Obama wrapped up his remarks and threw the conversation open to the table, saying, "So, who’d like to talk?" JPMorgan’s Dimon spoke first. He began by complimenting the president on the economic team he’d assembled. And he said his industry needs to explain more directly to the American people that the economic recovery plans are already working. Dimon also insisted that he’d like to give the government’s TARP money back as soon as practical, and asked the president to "streamline" that process.

But Obama didn’t like that idea — arguing that the system still needs government capital. The president offered an analogy: "This is like a patient who’s on antibiotics," he said. "Maybe the patient starts feeling better after a couple of days, but you don’t stop taking the medicine until you’ve finished the bottle." Returning the money too early, the president argued could send a bad signal. Several CEOs disagreed, arguing instead that returning TARP money was their patriotic duty, that they didn’t need it anymore, and that publicity surrounding the return would send a positive signal of confidence to the markets. Bank of America CEO Ken Lewis cracked a joke at the expense of his peers who’d lavished praise on the administration: "Mr. President," he said, "I’m not going to suck up to Geithner and Summers like the other CEOs here have." Lewis also urged the president not to paint all the banks with the same broad brush.

The president argued that’s not what the White House was doing. Indeed, earlier the same week, Obama said at a nationally televised news conference, "The rest of us can’t afford to demonize every investor or entrepreneur who seeks to make a profit." As the meeting wound down after nearly an hour and a half, the CEOs hustled out to live television positions on the White House grounds, where many gave interviews to CNBC. It had been a landmark day in the history of American capitalism. Unbeknownst to the financial executives, General Motors CEO Rick Wagoner was also on Pennsylvania Avenue that day, meeting with Obama’s auto bailout task force. Although the finance CEOs got a meeting with the president, Wagoner saw only Obama’s senior advisor Steven Rattner at the Treasury Department. During the meeting, Rattner demanded Wagoner’s resignation. It had been a tough day for CEOs in the nation’s capital.

It Really Is All Greenspan's Fault
It's been quite a spectacle for those who have followed Alan Greenspan's career for decades. Gone is the financial rock star or even the statesman testifying before Congress in a measured baritone. Instead, over the past several months, Alan Greenspan has morphed into a totally new person.

The first incarnation was the shaken Greenspan who was stunned that greedy and reckless short-term behavior could overwhelm long-term, rational self-interest. That was rather amazing all by itself. But now, there's a newer Greenspan--a decidedly prickly and whiny one.

I'm talking about Greenspan's recent op-ed in The Wall Street Journal. A 1,500-word attempt to move blame for the financial crisis away from himself and onto ... China.

It was, writes Greenspan, Chinese growth that led to "an excess" of global savings. That growth kept long-term interest rates low, which fueled the housing bubble. As for himself, the lowly chairperson of the Fed, he says he was helpless. He only had control over short-term rates.

Why this recent incarnation as a self-pitying victim of historical forces? Most likely, it's because of John Taylor, a mild-mannered professor at Stanford and former colleague of Greenspan's at the Fed.

In his Getting Off Track, a nifty little book, Taylor exposes, as plain as day, the culprit behind the financial boom-bust: Greenspan. His weapon of choice is the "Taylor rule" (discovered by Taylor--but not named by him, as he modestly points out.) (The Taylor rule is a recommendation about how the Fed should set the short interest rate--suggesting the amount it should be changed given economic conditions.)

Here's Taylor's take. Short interest rates fell in 2001 in response to the dot-com bust. But--and here's the important moment--beginning in 2002, the Taylor rule indicated that Greenspan ought to have tightened. Indeed, from 2002 to 2005, rates ought to have climbed to a touch over 5% and then stayed there through 2006.

But the Fed kept to a loose monetary stance, and rates kept falling during the period 2002 through 2004. Rates didn't start back up until middle of 2004 and didn't reach 5% until 2006. You can check this out in Figure 1, below.


The result? The Greenspan Loose policy went on to fuel a boom, while the Taylor Tight would have avoided one. As Taylor says, all the Fed needed to do was follow "... the kind of policy that had worked well during the period of economic stability called the Great Moderation, which began in the early 1980s."

The connection between Greenspan Loose and the housing boom is also clear. Housing starts took a sharp spike up in 2003 and then continued to climb through 2006. If the Fed had followed Taylor Tight, however, housing starts would have peaked at a much lower level at the end of 2003, and drifted down through 2006.


What about Greenspan's argument that he only controlled short-term rates? And that short rates became decoupled from long-term rates in 2002?

Nonsense, says Taylor. Surely the existence of adjustable-rate mortgages (accounting for about one-third of mortgages starting in 2003) linked the mortgage market and short-term rates. Moreover, says Taylor, whatever minor decoupling occurred, happened because bond investors were flummoxed by the Fed's odd behavior.

Taylor also takes on Greenspan's excuse that he was helpless in the face of a global saving glut. Cutting off the feet of Greenspan's excuse, Taylor says there wasn't a glut, there was a shortage. Figures from the International Monetary Fund show global saving rates, as a share of world GDP, were low during 2002 to 2004--way lower than rates in the 1970s and 1980s. In fact, the global saving rate fell at the end of 1990s, hitting bottom about 2003.


Greenspan's monetary excess was also crucial in setting off a chain of bad government policies. As Taylor argues, Greenspan Loose was amplified by the popularity of subprime mortgages, especially adjustable-rates, which promoted risk taking. And it made for a lethal brew in a pot of policies to promote homeownership.

Greenspan pulls out many stops in his defense. He even quotes the great Milton Friedman's approving assessment of Fed policy between 1987 and 2005. Well, Friedman died in 2006 and, in 2009, his equally great colleague, Anna Schwartz, has this to say: "There never would have been a subprime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for." As for Greenspan's argument that the whole mess is China's fault, she says tartly: "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events."

As fine a last word as there could be.

Failure Rate Rises on US Mortgages Revised in Late 2008
Mortgages modified in the third quarter failed at a faster pace than those revised in the first, and the delinquency rate on the least risky loans doubled, signs of deteriorating credit quality, U.S. regulators said. Loans modified in the first quarter to help borrowers keep their homes fell delinquent 41 percent of the time after eight months, and second-quarter loans had a 46 percent default rate, the Office of the Comptroller of the Currency and Office of Thrift Supervision said in a report today. Third-quarter trends "are worsening," the agencies said. "For the year and this quarter, we saw the same trend that we saw last time: quite high re-default rates, no matter how we measured them," John Dugan, the U.S. Comptroller of the Currency, said in a conference call with reporters.

Lenders including Citigroup Inc. and loan-servicing companies are adjusting mortgages by lowering interest rates or crafting longer-term payment plans. The Obama administration is acting to help as many as 9 million struggling homeowners by using taxpayer funds to pay lenders such as bond investors, mortgage servicers for reworking the mortgages. Dugan said higher re-default rates are likely related to stressful economic conditions and new loan plans are not producing significant reductions to make mortgages sustainable. "Credit quality continues to decline and that’s true of all types of mortgages that we cover by risk category," Dugan said. Prime mortgages that were delinquent after 60 days more than doubled in the fourth quarter, to 2.4 percent from 1.1 percent in the first, and rose significantly from the third quarter to the fourth, the report showed. Prime mortgages, considered the least likely to fail, account for two-thirds of all mortgages.

Borrowers with mortgages that were modified in the first quarter re-defaulted after three months 22 percent of the time, while loans revised in the second quarter had a 27 percent failure rate and third-quarter loans that were 60-days overdue failed 31 percent of the time, the report showed. Seriously delinquent mortgages, those 60 days or more overdue, increased in all loan categories in the fourth quarter, including subprime, Alt-A, and prime loans. The percentage of borrowers skipping the first payment on a modified loan rose significantly in all categories, except prime loans, the agencies said. Fourth-quarter first-payment defaults on subprime mortgages rose to 4.4 percent from 3.8 percent in the first, and overall climbed to 1.4 percent from 1.2 percent in the first, the report showed.

Fannie, Freddie Quietly Lift Moratorium on Foreclosures
A ban on foreclosure sales and evictions from houses owned by mortgage giants Fannie Mae and Freddie Mac, which began as a high-profile effort just before the holidays to keep people in their homes as the government tried to come up with homeowner rescue plans, is over. Spokesmen for Fannie Mae and Freddie Mac confirmed the ban ended March 31, in a response to an inquiry from TWI. The agencies made a major announcement in November to roll out the ban, garnering headlines and extensive news coverage. Freddie Mac CEO David Moffett issued a statement at the time, saying the ban "provides a new measure of certainty" to families facing foreclosures during the holidays. But its expiration didn’t seem to merit the same level of fanfare, with some housing advocates caught by surprise, scrambling for information today and Wednesday on listservs and in phone calls.

Danilo Pelletiere, research director for the National Low Income Housing Coalition, said the ban’s eventual expiration wasn’t unexpected - but it also wasn’t clear specifically when it was supposed to end. Some housing attorneys and advocates were confused because they were in the middle of cases that would be affected by the expiration. Fannie and Freddie have repeatedly extended the ban, which was originally expected to expire on Jan. 9. Fannie Mae said in a brief statement from spokesman Brian Faith that "Fannie Mae’s suspension of foreclosure-related evictions concludes as of March 31, 2009. The company has in place special foreclosure sale requirements that take into account the Making Home Affordable program. A foreclosure sale may not occur on any Fannie Mae loan until the loan servicer verifies that the borrower is ineligible for a Home Affordable Modification and all other foreclosure prevention alternatives have been exhausted."

Since the ban started, both Fannie and Freddie have developed rental programs to keep tenants from being evicted from foreclosed properties owned by the two agencies. In addition, the Obama administration in March unveiled its plan to help troubled borrowers either refinance their homes or modify their mortgages. Housing advocates aren’t exactly cheering about the ban being lifted. But they are hoping the new programs succeed, and plan to keep a close eye on their progress, Pelletiere said. The lifting of the ban will be a testing ground for the administration’s approach to foreclosures. A bill to allow bankruptcy judges to modify mortgages has stalled in Congress. Money from the Troubled Assets Relief Program has gone to banks and bailout efforts. The ban, enacted as foreclosures soared and the holidays approached, was the government’s first dramatic step to help homeowners. The housing rescue plan was developed and announced only after the Treasury Department first unveiled its plan to buy toxic assets from banks. "A perpetual moratorium is not a solution to how we do foreclosures in the future," Pelletiere said. "It’s a holding pattern. We need to break that holding pattern to allow for something else positive to happen."

Brad German, a spokesman for Freddie Mac, said he was "mystified" as to how anyone could be surprised by the ban’s expiration. The idea behind it was to give the government time to create homeowner rescue plans, and that’s been done, he said. Neither agency also expects a flood of homeowners out on the street because the ban is being lifted, he added. "For all practical purposes, people will be in their homes for a while," despite the ban’s expiration, German said. Fannie and Freddie will need time to approach tenants and homeowners and figure out whether they are qualified for help, he said. Separate programs launched recently by Fannie and Freddie to allow tenants to stay in Real Estate Owned (REO) foreclosed properties owned by the agencies and lease them on a month by month basis at market rents, until they can be sold again, are not affected by the ban’s expiration, German said. Those programs will continue, with no expiration date scheduled. Fannie’s program covers renters of foreclosed properties, while both former owners and renters can qualify for Freddie’s program.

The REO rental programs aim to reach out to those no longer covered by the foreclosure ban and see if they can qualify, German said - which mitigates the effect of the ban being lifted. For example, under Freddie Mac’s program, a homeowner currently facing eviction could stay in his house as a renter until it is sold, if he meets the program’s guidelines. But with little information to go on today, housing advocates found themselves in confusion and concern over whether the REO program was ending, and whether all renters would be subject to evictions again. Even when the Fannie and Freddie ban was active, however, it sometimes failed to reach people before they got evicted, said Judith Liben, a senior housing attorney with the Massachusetts Law Reform Institute, a nonprofit legal services advocacy group. Only the District of Columbia and a few states have no-fault eviction laws requiring that a lease survives foreclosure, and that tenants can’t be automatically evicted. And the new REO policy by Fannie and Freddie, while laudable, takes time to reach the neighborhood level, Liben said.

Expanding no-fault eviction laws could be one answer to the problem of renters facing evictions, Liben said. Other states are moving to require more foreclosure notice for tenants. The vulnerability of tenants to foreclosure evictions, along with falling property values of vacant and foreclosed homes, are prompting Liben and others to question the banking industry’s reluctance so far to move toward allowing people to stay in foreclosed houses and pay rent. Many are hoping the rest of the mortgage industry will follow Fannie and Freddie’s lead in establishing REO rental programs. "Very few people have reached the stage where they are looking at renters as part of the solution," Pelletiere said. "There’s almost a resistance to it. Bankers in particular still have this mindset that ‘I need to get those people out and sell the house right away.’ But rental housing really is part of the solution to this crisis." An oversupply of housing, combined with a weak economy that often requires people to move to find new jobs - and not tied down to a house they can’t sell - makes renting an especially worthwhile option, Pelletiere added.

"Until the economy finds its footing, we don’t want to put pressure on people to settle down," he said. "In the past we’ve had a very significant bias toward homeownership that has been to the detriment of rental housing. And that has to stop. Housing policy going forward really has to balance out a little more. In the long term, rental housing can be good for communities." Problems with bank-owned foreclosed properties that sell for way below market value, for example, could be addressed by keeping renters in the houses. Community groups last month urged Congress to crack down on the practice of Broker Price Opinions , which are cheaper substitutes for full appraisals and are used to determine a property’s value. BPOs often are performed by real estate agents with minimal training and cost as little as $50, compared to $300 and above for a traditional appraisal. They are increasingly employed by lenders for sales of bank-owned foreclosed properties, known as REOs, or Real Estate Owned properties, and for short sales, in which owners sell their homes for less than they are worth. The bank forgives the difference, and takes a loss.

Using a BPO is illegal in more than 20 states, but the practice has become widespread, said David Berenbaum, executive vice president of the National Community Reinvestment Coalition. The BPOs frequently result in lowball estimates of a property’s value, with lenders using them to unload REOs and short sale properties. Agents who perform BPOs have an inherent conflict of interest, because they are working for lenders who want to quickly dispose of properties. Speculators and other investors scoop them up at the fire sale prices, dragging down property values overall. "Right now, it’s a race to the bottom," Berenbaum said. "They’re having a terrible impact on property values." Whether or not they use BPOs, banks increasingly are selling off REOs at low prices, even in stronger housing markets. In Temecula, Calif., for example, Citigroup sold a foreclosed house for just $139,000, when comparable houses in the area were going for $240,000 to $260,000, the North County Times reported - meaning the bank left some $100,000 on the table.

In markets where the REOs don’t sell and lenders fail to maintain their properties, other problems persist, with neighborhoods facing a glut of abandoned homes and blight, as TWI has explained. RealtyTrac, an online foreclosure database, predicts a record 1.5 million REOs this year, meaning more trouble ahead. Given all this, some housing advocates can’t understand why lenders aren’t allowing more former homeowners or current tenants to pay rent and live in foreclosed houses until they can be sold. The new REO rental programs of Fannie Mae and Freddie Mac marked a major step toward that goal. But there’s been no major private industry initiative to move beyond the model of getting owners and tenants out ASAP, Berenbaum noted, despite the obvious benefits of doing so. "Frankly, if the mortgage industry would allow homeowners facing foreclosure to remain in the properties as tenants, it would stabilize their investments and stabilize the communities," Berenbaum said.

But bloated REO inventories are proof of how overwhelmed servicers and lenders due to record numbers of foreclosures - and they’ve said repeatedly they don’t want to be in the property management business. They also contend they’re not always the ones responsible for the vacant homes problem. In a magazine published by the Housing Wire mortgage blog, Robert Klein, CEO of Safeguard Properties, a major servicer, put it this way:
"The fact is, as an industry, mortgage servicers spend in excess of $2 billion annually to take care of vacant properties so they don’t become nuisances to neighbors and communities. Unfortunately, servicers who are the ‘good guys’ get lumped in with property flippers and Internet investors whose irresponsible practices have been major contributors to urban blight."
Despite that blight, lenders and servicers seem to be closing their eyes to the possibility of economic benefits from filling empty houses with renters, said Liben said. "I think that the mortgage industry and the banking industry are very slow to catch on to why things are different in this particular crisis," Liben said. "They aren’t even trying to be creative. It’s like "This is the way we’ve always done it. Get people out and sell the house and get new people in and that’s that.’" Or, "We don’t want to be landlords.’" That’s all they ever say. "

Foreclosed and vacant houses often lose 50 percent of their market value by the time they are sold out of bank REO inventories, Liben said. Those kind of losses should be spurring the industry to at least undertake a cost benefit analysis to figure out whether it might be more financially advantageous to rent out the properties, she said. "Maybe those properties wouldn’t have declined by 50 percent if they had people in them," Liben said. Creating policies to encourage lenders to rent their foreclosed properties remains an uphill battle, said Dean Baker, co-director of the Center for Economic and Policy Research. The mortgage industry just isn’t interested in getting involved in the rental market. And some of the nonprofit development groups that overreached in promoting homeownership during the boom, putting people in houses they couldn’t afford, aren’t taking the lead on initiating rental options, he said. "They don’t want to own up to what they did," Baker said. "They’ve pretty much put their heads in the sand."

Pelletiere, of the National Low Income Housing Coalition, said the rental issue remains a "tense" one for some nonprofits, because of the bitter controversy over whether the Community Reinvestment Act, an anti-redlining law, played a role in the housing crisis. Conservatives have blamed the CRA and poor and minority borrowers for the foreclosure crisis, saying the government forced lenders to make risky mortgages to them to meet CRA requirements. Nonprofits fought that campaign by pointing out that most subprime loans were made by independent mortgage brokers and firms not covered by the CRA. Nonetheless, the belief persists, and nonprofits are wary of ceding any ground on the issue by changing their focus to promoting renting, Pelletiere said.

For the lending industry, the issue is far less complicated, Liben charged. The savings and loan crisis should have prepared them to better manage their REOs, she said. "They have no excuses," she said. "They should have seen this coming." In the absence of industry initiatives, economists and housing experts have been floating various rental ideas, including allowing a delinquent homeowner to give the property back to the bank, in return for having his credit wiped clean. Rent-to-own programs, in which a portion of rent goes toward a downpayment, also are being revived in some communities with too many foreclosed homes. But none of those efforts will gain a foothold until the mindset that renters are a detriment to a neighborhood begins to change, Pelletiere said. Or until renting is seen as one of the answers to the problem of foreclosures and vacant homes. For those reasons, he and others will watch closely as Fannie and Freddie run their REO rental programs, and try to keep people in their homes as a ban on foreclosure sales and evictions finally ends.

U.S. May Keep Losing Jobs After Unemployment Hit 25-Year High
The U.S. may suffer further job losses in the coming months after employers cut payrolls by 633,000 in March and the unemployment rate jumped to a 25-year high of 8.5 percent. A host of companies -- from manufacturers such as Johnson Controls Inc. and Dana Holding Corp. to service providers like International Business Machines Corp. and even the U.S. Postal Service -- have announced plans to eliminate jobs in the face of depressed demand from their customers. "We expect labor-market conditions to remain appalling for many months to come," Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, wrote in a client note following yesterday’s report from the Labor Department. The risk is that a continued hemorrhaging of jobs triggers another round of spending cuts by consumers, pushing the economy deeper into a recession just as it is showing signs of steadying after plunging in the fourth quarter.

"We are not out of the woods yet," Federal Reserve Vice Chairman Donald Kohn said in a speech in Wooster, Ohio, yesterday. He added that the central bank and administration of President Barack Obama must remain "flexible and open" to taking further measures to help the economy. Stocks rose yesterday for a fourth day as Fed Chairman Ben S. Bernanke said measures to unfreeze credit markets were working. The Standard & Poor’s 500 index climbed 8.1 points, or 1 percent, to close at 842.5. Treasuries fell on growing concern over the amount of borrowing needed to finance the budget deficit, pushing the yield on the 10-year note to 2.90 percent at yesterday’s close, up from 2.77 percent the previous day.

Since the recession began in December 2007, the economy has lost about 5.1 million jobs, the worst in the postwar era, Labor Department figures released yesterday in Washington showed. Some 3.3 million have been cut in the last five months, including 651,000 in February, when the jobless rate was 8.1 percent. The job losses have been widespread, though they have been particularly large in manufacturing, construction and temporary- help services. Those three industries have accounted for nearly two-thirds of the jobs eliminated during the recession. "In the past, businesses seemed to show a bit of caution in their payroll reductions," said Joel Naroff, president of Naroff Economics in Holland, Pennsylvania, and Bloomberg’s best economic forecaster for 2008. "Now, the philosophy seems to be cut massively now and ask questions about whether too much has been done later."

Companies in such industries as automobiles and home building may be more aggressive in paring payrolls because they don’t expect demand to recover anytime soon, said Vincent Reinhart, a former Fed official now at the American Enterprise Institute in Washington. Yesterday’s report showed factory payrolls fell by 161,000 in March after dropping 169,000 in February. The decrease included a loss of 17,500 jobs in auto manufacturing and parts industries. There were signs last week that the worst of the recession may have passed for some areas of the economy, as reports showed improvements in manufacturing and housing, the industries in steepest decline. The Institute for Supply Management’s factory index climbed to 36.3 in March, a third consecutive increase that brought it closer to the breakeven point of 50. The number of contracts to buy existing homes in February rose 2.1 percent, according to the National Association of Realtors. Also, consumer purchases advanced for a second straight month in February, the Commerce Department said March 27.

Still, the manufacturing slump that began more than a year ago may intensify should General Motors Corp. be forced into bankruptcy, economists said. As many as 1 million additional auto-industry jobs may be lost and unemployment would climb to 11 percent, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. The auto slump has already rippled through the industry. Johnson Controls, a maker of car interiors and batteries, said last month it will shut 10 factories and cut about 4,000 jobs. Dana, the truck-axle manufacturer that exited bankruptcy in 2008, said it will boost its payroll reduction to 5,800 this year, 800 more than previously announced.

"We are taking the difficult actions necessary to survive," Dana’s Chief Executive Officer John Devine said in a March 16 statement. Service industries, which include banks, insurance companies, restaurants and retailers, cut 358,000 workers after a 366,000 decline in February. Financial firms cut payrolls by 43,000, after a 44,000 decrease the prior month. Retail payrolls decreased by 47,800 after a 50,800 drop. In addition to cutting jobs, companies also reduced hours for those still on payrolls. The average number of hours worked fell to 33.2 per week, down six minutes from February and the lowest since records began in 1964.

U.S. Trade Gap Probably Held at Six-Year Low as Exports, Imports Collapse
The U.S. trade gap in February probably held at a six-year low as the worst global slump since World War II caused exports and imports to collapse, economists said ahead of a government report this week. A deficit of $36 billion, the same as in January, is the median estimate of economists surveyed by Bloomberg News before the Commerce Department’s April 9 report. Other figures the same day may show the cost of imported goods increased in March for the first time in eight months as fuel prices rebounded. Flagging sales overseas will keep depressing U.S. economic growth as manufacturers, already in a yearlong freefall, cut payrolls, output and inventories. The gloomy outlook prompted world leaders, meeting in London last week, to pledge more than $1 trillion to stem the slump in world trade.

"The combination of a global recession and the global credit crunch are causing worldwide trade to dry up," said Jay Bryson, a global economist at Wachovia Corp. in Charlotte, North Carolina. "The worst part for the trade deficit will be here in the first half of the year." While consumer spending has shown signs of stabilizing this year after plunging in the last six months of 2008, the improvements may not be enough to lead to a pickup in import purchases, economists said. Any gain would probably be caused by the rebound in fuel costs. The price of crude oil on the New York Mercantile Exchange averaged $48.11 a barrel in March, up from $39.26 the month before. Rising oil probably contributed to a projected 0.9 percent gain in the cost of imported goods, the first increase since July, according to the survey median ahead of a Labor Department report on April 9.

Forecasts are calling for a decline in global trade, sapping overseas demand for American-made goods. The World Bank last month projected trade will fall 6.1 percent worldwide. Earlier in March the World Trade Organization predicted a 9 percent drop. Another report from Commerce this week is likely to show inventories at U.S. wholesalers fell in February for a sixth straight month, indicating companies may trim orders going into the second quarter. Weak sales are contributing to job cuts as firms rein in labor costs to weather the recession, now in its second year. Employers cut 663,000 workers from payrolls in March, and the jobless rate surged to 8.5 percent, the highest level in more than a quarter century, the Labor Department reported last week. FedEx Corp., the second-largest U.S. package-shipping company, said last week it is eliminating 1,000 jobs as part of a plan to save $1 billion as sales drop. The "global economic reality" made the job cuts "unavoidable," Maury Lane, a FedEx spokesman, said in an April 3 telephone interview.

GM's problem, Mr President, is there are just too many cars in the world
I once met Rick Wagoner, the recently departed chief executive of General Motors. It was a couple of years ago, but even then GM's problems were becoming critical. Since then, as we well know, they have turned terminal. Unlike President Obama, who decided that getting rid of Mr Wagoner was an essential precondition of restructuring and revitalising GM, I was impressed by Wagoner. I would have been even more impressed had I know then that he would offer to work through 2009 for a salary of just $1 (or 67p). He knew his cars, and he seemed to have a quality of humility rare in someone so exalted. Maybe he wasn't ruthless enough. In any case, sacking Mr Wagoner will not solve GM's difficulties nor, by extension, those of the global car industry.

Those problems can be summed up in one word: overcapacity. The world has the factories to make about 94 million cars a year – some 34 million more than it is buying, according to CSM Worldwide, a management consultancy. In North America, capacity exceeds demand by around seven million vehicles. In still fast-growing markets such as China, India and the Asean economies, additions to car-building capacity in recent years have been phenomenal, and will continue to be so. Last week, Tata Motor s of India launched its much-hyped Nano, a microcar that will be priced at about £1,200. The last thing the world needs right now is more car factories; yet that is precisely what is being planned. It is insane. The madness must end sometime, and we may not have to wait that long for some sort of resolution.

Mr Obama has given GM some 60 days to sort itself out, and Chrysler has been given 30 days to do a deal with Fiat. That does not, it has to be said, put Chrysler in a commanding negotiating position, but that was never going to be the case. Since its demerger from Daimler (commonly known as Mercedes-Benz) and its sale to the private equity outfit Cerberus only two years ago, Chrysler has lurched inexorably towards failure – as indeed it has, on and off, for three decades. Such long-term underperformance is telling the world something. As for GM, America may be starting to prepare itself for something much more traumatic; Chapter 11 bankruptcy of one of the great symbols of free-market capitalism. Although GM has also been in decline for decades, the shock will still be huge, and not just to the supply chain, customers, stock- and bondholders, and staff. America will feel a part of itself die. When our own "national" maker, MG-Rover Group, went bust in 2005, it was much less of a shock than it would have been when it was the giant British Leyland Corporation, nationalised in 1975. Then it employed 100,000 workers and was one the country's biggest industrial concerns. Thirty year s later, it was down to the last factory and the last 6,000 staff, and a market share in the UK below VW's.

Sad as it was, it hardly raised the roof, even in the West Midlands. In the general election that quickly followed, Labour did not suffer the widespread loss of marginal seats some expected. Though it should have, Longbridge had ceased to matter to the Government and to the British people. A BMW executive recently asked me, in some bemusement, why the Government never seemed to want to buy cars form its home producers. I had no answer, except to surmise that it was down to Gordon Brown's almost messianic dedication to free trade and indifference to the real world, hence the Government's quixotic wish to be the only free-trading buyer of official cars in a world where no other nation followed such a selfless policy. (Imagine Nicolas Sarkozy in a Toyota or Angela Merkel in a big Citroën: it just wouldn't happen.) GM is a different story. Mr Obama goes around in a Cadillac (one of GM's brands), and the effect on US business and consumer confidence of even a temporary demise and radical restructuring will be painful.

GM estimates that the administration might have to pay up $86bn to finance its journey through Chapter 11 bankruptcy. Even the much smaller Chrysler could cost as much as $24bn to wind up. It makes the $35bn or so the pair are asking in total in loans from the US taxpayer look modest, but millions of jobs, including those in the supply chain and wider economy, are at stake. It's political, too. Yet even if GM and Chrysler were completely eliminated from the world auto scene – which is unlikely – this would take out only around 18 million and 1.5 million units af annual production, respectively. So even shutting large swathes of GM and Chrysler would not solve the global problem of overcapacity – although it would help the profitability of the remaining carmakers. Bernstein Research says that around €18bn (£16.4bn) of profitability could be restored to the industry if Chrysler and GM were downsized, noting that GM has been "a deflationary force for years". Perhaps, given the potential for an uplift to earnings per share, Toyota, Honda and Ford should volunteer to fund a GM downsizing. Just a thought.

The pair won't be eliminated, though. Chances are that Fiat will use Chrysler's four-wheel drive technology and Jeep brand to advantage, even if it dumps the rest. Parts of GM might easily survive even the most brutal treatment, but not all of these parts will be in the US: perhaps the Korean Daewoo/Chevrolet small car operation, Holden in Australia, plus the US people carrier brands, Cadillac SUVs and the truck business. But the GM business is so intertwined that it's anyone's guess which bits might be worth saving. The most intriguing and, for us, vital question is what happens to GM's European operations. We know these as Vauxhall in the UK, GM Europe's strongest market, though the designs are mostly by Opel of Germany, the dominant force. GM Europe is also a major employer in Sweden (Saab) and Spain, and also manufactures in Belgium, Poland and Hungary. The Insignia and Corsa models are selling well, as should the new Astra. Yet the crisis in GM Europe is almost entirely approached in national terms.

What, Lord Mandelson is asked, will the Government do to save the Ellesmere Port plant in Merseyside. German ministers fret about Rüsselsheim, the Spanish about Zaragoza, and so on. GM has spent 80 years building up and integrating its pan-European business – and yet, at its most dangerous moment, the pan-European EU is hardly there. Bloody as it may be, at least Mr Obama is getting a grip on the problems of the American GM business, even if it means cutting GM Europe adrift; there is little sign of the European Commission taking p the challenge. GM and Obama seem determined to "green" GM, with innovative products such as the Chevy Volt electric car. GM Europe suddenly seems friendless. Maybe they should ask Mr Wagoner to come over, at a salary of €1 (90p) per annum, to rescue the business. Six pubs shut every day – and it's nothing to do with the recession When this recession is over we will, sadly, come out the other side with a severely depleted stock of public houses. This, in its own way, is as important a loss of our national infrastructure as imperilled hi-tech manufacturing facilities and the big banks. But, once a pub is gone, it is gone.

Sure, new bars converted from bank branches or even offices will sprout up. But these deeply depressing, drinking warehouses offer little cheer and even less community spirit. They are facilities for binge drinking in a way that "proper" pubs usually are not. In suburban and urban centres, the long-established real pub with real ale will be sorely missed. Neither is the decline an inevitable part of the economic shake-out that comes with every recession, and which is, arguably, a benefit (though it never seems that way to those affected). The British Beer & Pub Association says six pubs are shutting down every single day – and for no good reason. It is largely a matter of deliberate, perverse government policy. Beer tax was increased by 18 per cent last year alone, while supermarkets can sell beer or lager for as little as 23p a can, surely below cost. Sometimes you wonder whether ministers are completely tone deaf to what people care about. The Budget would be a good opportunity to show some sort of sensitivity to what is happening to the British pub – and indeed our excellent, indigenous brewers. As I say, once gone, never recovered. Mine's a pint.

GM Europe hangs on a knife edge
Last week German chancellor Angela Merkel took time out from plotting with French president Nicolas Sarkozy about how to push Europe's agenda at the G20 and Nato summits in London, Strasbourg and Prague. On Tuesday she addressed 3,000 Opel workers at the Rüsselsheim car plant near Frankfurt. She was greeted with applause by workers wearing T-shirts emblazoned with slogans such as "We are Opel" and "Angie, don't let us down". After rumours she would duck out, she told them: "I gladly came - and think I would have been a coward not to appear." But she failed to set out a clear plan to save the car company from being brought down by the likely insolvency of its US parent, General Motors, in Detroit. By Wednesday Rainer Einenkel, head of the works council at the threatened Opel plant in Bochum, whose 5,500 workers are offering to give up their recent 2.1% pay increase to help save their factory, was sceptical. "I would have wished for a clearer statement from the chancellor."

A day later, in an SEC filing, GM raised anxieties by saying that negotiations over its European operations may not bring a final resolution until mid-year and "the company is developing contingency plans in the event of prolonged negotiations". Saab, its premium model, was effectively written off, despite talks of a sale or partial sale. Einenkel and his boss, Klaus Franz, chief of Opel's German works council and, nominally, a key player in the negotiations to rescue the company and its UK sister, Vauxhall, are pawns in a much bigger global power play. As, so far, is Lord Mandelson, the business secretary. This horse-trading pits the US government against Detroit, Berlin and Zurich, the headquarters of GM Europe, as the global auto industry faces its deepest downturn for perhaps 80 years, with millions of jobs on the line.

Carl-Peter Forster, GME president, says that up to 300,000 jobs are at risk in Europe - Germany, Britain, Spain and Poland above all - if his €3.3bn (£3bn) rescue plan goes under. Merkel, who spoke on the issue to Barack Obama during last week's summits, knows this only too well. The German chancellor has won a 60-day breathing space to come up with a scheme as that is the time-frame Obama has given Fritz Henderson, GM's new CEO after the enforced resignation of Rick Wagoner, to convince him he can make what was the world's biggest carmaker viable again. Juergen Ruttgers, minister-president of North Rhine-Westphalia and one of Merkel's fiercest critics, says: "We've got a good chance to save Opel." But the chancellor, faced with a general election on 29 September, is at sixes and sevens. Her Social Democrat challenger, Frank-Walter Steinmeier, who now serves as her deputy and foreign minister, is upping the ante. Where Merkel endorses a state-backed rescue plan but rules out direct state equity, her opponent, riding high in the polls, wants the federal government and affected Länder administrations to inject capital into what would be a semi-autonomous European firm.

He wants these governments, dealers (who have pledged €400m) and employees to own at least 50% of the "new" GME. Merkel is counting far more on private investors, with insiders saying there is much genuine interest from Asia - shorthand for state-owned Chinese auto groups keen to expand their global presence. Steinmeier said on Friday: "We simply cannot let Opel go to the wall." Henderson, a former head of GME and renowned as a cost-cutter, has endorsed the European unit's plan to go it semi-alone. At the Geneva motor show last month, he and Forster said they could envisage GM owning less - or more - than 50%. The latest SEC filing speaks clearly of a minority stake for Detroit. The plan envisages €3.3bn in government support, perhaps in the form of loan guarantees. Germany would provide €1.9bn and Britain perhaps £600m, with Spain already offering €200m in loan guarantees. The UK contribution would come from the £2.3bn Mandelson scheme, which draws heavily on European Investment Bank lending. But, with Forster admitting GME has 30% overcapacity, that means plant closures. Not at Ellesmere Port or Luton, which have been pared to the bone but, insiders confirm, Antwerp in Belgium and, to the horror of Franz and his team, Bochum and Eisenach in Germany.

The Henderson/Forster plan to rescue Opel and Vauxhall relies heavily on taking out €1.2bn in costs through wage cuts and closures. Insiders point out that in 2008 rival Ford made $1bn in Europe via four plants; GME lost $1bn via nine plants and $2bn in gross terms. Mandelson is pushing for Ellesmere Port to be a lead European plant to assemble the electric car, the Chevvy Volt, or Ampera. But this depends, above all, on the Germans, who have assembled a team of ministers and investment bankers to negotiate with the US. In this high-wire power play there are fears that, if Detroit files for Chapter 11 bankruptcy or fails to meet Obama's 60-day deadline, GME could be knocked out. When, on Monday, Obama committed to a "stronger, leaner and more competitive" GM, the European business insisted that Opel/Vauxhall would emerge "a significantly more independent part of a strong GM product network as we navigate these very difficult economic times". It remains a knife-edge prospect.

UK car industry crisis deepens as sales fall further
Britain's ailing car industry is set to intensify calls for government help tomorrow with the publication of figures showing that new car sales fell by up to 30pc last month. Car registrations fell by between 28pc and 30pc in March compared with the same period a year earlier, according to figures to be revealed by the Society of Motor Manufacturers and Traders (SMMT). The sharp decline is especially worrying because it came in the month that registration plates changed, a time of the year when sales have historically risen. The fall marks a further deterioration from the 21.9pc decline in new registrations reported in February and is similar to the 30.9pc slump in January. Some 54,359 new cars were registered in February, with manufacturers including Bentley and Mitsubishi seeing some of the biggest slumps in sales.

The SMMT had forecast a decline in new car registrations of 20pc to 1.72m units this year but is set to review that figure later this month. The latest fall in sales will fuel calls for the Government to offer incentives for motorists to scrap old cars and buy new ones. Such schemes have been introduced in countries including France, Germany and Italy, and have served to lift the market. The SMMT has proposed that the Government should introduce a scheme whereby owners of car and vans that are more than nine years old would scrap the vehicles in return for a £2,000 cash incentive towards a new or nearly new vehicle. Some 76pc of UK consumers are in favour of the scheme, according to an SMMT-commissioned survey.

In a letter to Alistair Darling, the Chancellor, SMMT chief executive Paul Everitt called on the Government to introduce a wide range of measures to boost the car market ahead of the Budget. Mr Everitt said that as well as the scrappage scheme and improved access to credit, the government should remove or delay its planned 2010/11 introduction of a first-year rate of tax on new cars, increase the Annual Investment Allowance for businesses to £500,000 to boost spending on vehicles and defer the CO2-based business car capital allowance regime set to be introduced next year. "The UK motor industry is reaching a state of emergency and the rate of government action is crucial to the future success of the sector," said Mr Everitt. "Government must use the Budget to boost consumer confidence and kick-start the market with a scrappage incentive scheme to encourage private sales and tax changes to generate business sales." The SMMT claims that some 870,000 people in the UK rely on the automotive sector for employment in an industry that last year recorded a turnover of nearly £45bn.

UK's Brown to call in banks on imposing G20 rules
Prime Minister Gordon Brown said on Sunday he would be calling in the heads of British banks to discuss how new international rules on supervision of tax havens agreed at the G20 will be implemented. He said this process would start on Monday with an initial meeting with Bank of England Governor Mervyn King and other top economic officials. Finance minister Alistair Darling, Financial Services Authority Chairman Adair Turner and Trade and Investment Minister Mervyn Davies will also take part in the meeting, British officials confirmed on Saturday. "I am going to call the banks in, and the Governor of the Bank of England is coming to see me on Monday," Brown told Sky news in an interview recorded after the NATO summit in Strasbourg on Saturday. "We have got to make sure that all this new regulation and supervision is effected in Britain. We have got to make sure that the tax havens that have got some relationship with Britain are conducting their affairs in such a way to justify the decisions that we made at the G20 that change is going to happen."

Britain will call on a number of British territories that have not yet implemented pledges to sign agreements to exchange tax information with other countries to do so as soon as possible. At Thursday's G20 summit of leading industrial and developing economies in London, world leaders clinched a $1.1 trillion deal to combat the worst economic crisis since the Great Depression and said financial rules would be tightened. The summit promised a crackdown on jurisdictions that failed to cooperate in cross-border tax evasion cases. Pushed by France and Germany, the G20 agreed that countries should sign up to global rules on sharing tax information or risk being placed on a blacklist. A number of British territories that have not yet implemented pledges to exchange information figure on a "grey list" published by the Organisation for Economic Cooperation and Development, including Bermuda, the Cayman Islands, Gibraltar and Turks and Caicos Islands.

Brown also stressed that the economy was his overriding priority when asked if he would consider calling an election after one opinion poll gave him a healthy post-G20 summit boost. "I am not going to get into talk about dates. We have got to show people how we can take the country through this difficulty," he said. A YouGov poll for the Sunday Times showed Brown's Labour Party had cut the Conservative lead to seven points as voters expressed their approval of the $1.1 trillion global economic stimulus package. "Our first priority, and it is our first priority, is jobs and it's homes and it's businesses. That's the only thing on my mind at the moment -- how we can take the action that is necessary to take us through this downturn," he said. Brown must go to the polls by mid-2010.

Bankrupt Britain: 340 people go bust every day
Britain is facing a bankruptcy timebomb with a record number of individuals and companies predicted to go bust this year. Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year. Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day. Richard Goodwin, editor of The London Gazette, the newspaper of record that prints personal and corporate bankruptcy notices, said pagination had reached a record last month – averaging 96 pages a day – up from 85 last year and 78 in 2007.

Hood told The Sunday Times: "The rate is accelerating – on a bad day we could see 20 businesses going under a day. Companies [you couldn’t imagine going bust] in the last recession are going to the wall this time round – a Chinese restaurant next to a university campus or a hairdressing salon." He added: "It feels much worse than the 1990s – there are much fewer options to rescue businesses today. In the past you could go to another bank or small-business owners could remortgage and use equity from their homes – today that is next to impossible." The bankruptcy boom comes seven years after the Labour government tried to remove the stigma of going bust through the introduction of the 2002 Enterprise Act, which made the process much easier. Critics claim the act created a mood of easy credit with no downside.

In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005. The news comes as a report released today by Ernst & Young, the accountancy firm, shows quoted companies in Britain issued 117 profit warnings in the first quarter with worse to come. The first-quarter figure for warnings was the highest since 2001, and the third consecutive three-month period in which there had been more than 100 warnings. Keith McGregor, restructuring partner at Ernst & Young, said: "It is not just the number of warnings that concerns us. The tone of company statements has also darkened. "The prospects for 2009 appear asuncertain and as gloomy as at any point in the crisis."

The highest warning sectors were support services, with 22; media, 13; industrial engineering and software & computer services, with 10 each; and general financial, 9. Ernst & Young said the fact that so many different sectors were being affected reflected the spread of the credit crisis into a full-blown recession. Also today, Hay Group, the consultancy, predicts more than 600,000 job losses as companies retrench. On the basis of a survey of 140 of the top 1,000 firms, it discovered "unprecedented" cost-cutting which it said threatened to do long-term damage to the economy. Nine in ten firms plan operational cuts in 2009-10, it found, with a high proportion planning job cuts. A fifth of companies intended a big restructuring of their businesses in response to the recession. Almost half of large companies plan to reduce headcount by an average of 10% this year.

Darling admits economic forecast wrong
Chancellor Alistair Darling acknowledged on Sunday he had wrongly forecast Britain's economy would be in recovery by the second half of the year. Darling, due to present his annual budget on April 22, said in an interview with the Sunday Times that now he did not expect the economy to come out of recession before the end of the year at the earliest. He said GDP figures for the first quarter of this year would be bad. "We won't get the figures for another month, but we think they will be bad, because if you look around the world there's nothing that tells you otherwise," said Darling. "I thought we would see growth in the second part of the year," he said of the pre-budget report forecast he made last year.

"I think it will be the back end, turn of the year time, before we start seeing growth here." The Organisation for Economic Co-operation and Development said last month the economy would shrink by 3.7 percent this year, its fastest pace of decline since World War Two. The economy shrank by 1.6 percent in the last quarter of 2008 and the newspaper quoted Treasury officials as saying the fall for the first three months of this year could be at least as big. Darling criticised bankers who expected a return to the big bonus culture when the economy recovers, warning them that there needed to be a cultural change in the industry. "I still come across people in the banking industry who give you the distinct impression that once this is all over, we'll be back to where we were," he said. "The culture needs to change, the attitude needs to change. I'm afraid there are still people out there who don't realise the world has changed."

Ilargi: The British just can't resist writing horror stories about the continent. It's amusing, for sure, but alos a tad pathetic. It's not that Germany is doing all that great, either, but there is no doubt that Britain is in far worse shape at the moment, and you'd think the UK press has more pressing topics to cover. But apparently the fear is so palpable that deflecting attention simply looks too tempting. Let's talk again when Germany needs that IMF loan, shall we?

Germany has more to fear than inflation
Claims by Germany and France in the run-up to last week's G20 meeting that big fiscal boosts were inflationary and unnecessary belied the fact that the big eurozone economies are stuck in a deflationary spiral. Growth in the German economy was worse than either Britain or the United States in the fourth quarter of last year, and last week its unemployment rate rose to 8.1%, well above Britain's 6.6% rate, although still below the US's 8.5%. Unemployment has reached 3.4 million; retail sales are falling; consumer confidence remains weak; and business confidence hit a record low last month. Meanwhile, inflation in the eurozone as a whole has fallen to its lowest level to date on the consumer price index (CPI) measure at just 0.6%, and the euro remains relatively strong against the pound and dollar.

That did not stop German Chancellor Angela Merkel arguing against further fiscal stimulus on the grounds that it could prove inflationary and therefore unsustainable. France's President, Nicolas Sarkozy, made similar noises, and so renewed fiscal stimulus disappeared from the G20 agenda. However, the Japanese prime minister, Taro Aso, said fiscal stimulus was urgently needed. "Because of the experience of the past 15 years, we know what is necessary, while countries like the US and European countries may be facing this sort of situation for the first time," he said. Germany had felt relatively immune from the credit crisis, as it had not had an unsustainable boom in consumption and house prices.

It was, however, far too dependent on exports, and now that world trade has collapsed, its lack of domestic demand has left it painfully exposed. Analysts think the first quarter of this year could see its worst economic performance since the second world war. France, too, is looking very sickly. Its unemployment level jumped 80,000 in February to nearly 2.4 million - well above Britain's, even though the populations are broadly similar. And its statistics office expects joblessness to rise to almost 9% in the current quarter. Rising unemployment is a big worry in France, where consumer spending is a mainstay of the economy. Consumer confidence has plunged, and spending in February fell at its fastest pace in more than a year. As in Germany, business confidence is at a record low.

The Organisation for Economic Cooperation and Development last week forecast that the German economy would shrink by even more than the UK's and the US's this year, with France not far behind. Many economists in France and Germany are even gloomier. The European Central Bank has come to the rescue to some extent, but last week surprised analysts by cutting interest rates by only a quarter of a point, to 1.25%. In Britain rates are at 0.5% and in the US at 0.25%. Many analysts have criticised the ECB for being too slow to react to the downturn. Japan and China - the world's other big surplus, exporting countries - have grasped the importance of reflating their economies quickly. Germany, though, is in trouble, but refuses to take the necessary action, such as slashing taxes. And if it goes into an even deeper slump, as seems likely, the whole continent will suffer.

Loan modifications rise, but most don't lower payments
U.S. lenders are boosting their attempts to avoid home foreclosures, but fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments more than 10%, data released Friday show. The report, based on an analysis of nearly 35 million loans worth more than $6 trillion, was published by the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision. It provides the most detailed and broad analysis to date of efforts to stem the foreclosure crisis. Among loan modifications made in the October-December quarter, about 37% resulted in a drop in payments of more than 10%, compared with about 25% in the first nine months of the year. Regulators saw that growth as a positive sign.

"The trend toward lowering payments to make home mortgages more affordable is moving in the right direction," John Bowman, acting director of the Office of Thrift Supervision, said in a prepared statement. Still, nearly one in four loan modifications in the fourth quarter resulted in increased monthly payments. That situation can happen when lenders add fees or past-due interest to a loan and spread those payments out over the 30- or 40-year period. Perhaps unsurprisingly, the report found that loans were far less likely to fall back into default if a borrower's monthly payment is reduced by a healthy amount. Nine months after modification, about 26% of loans in which payments had dropped 10% or more had fallen back into default. That compares with about half of loans in which the payment was unchanged or increased.

"This new data shows that, in the current stressful environment, modification strategies that result in unchanged or increased mortgage payments run the risk of unacceptably high re-default rates," Comptroller of the Currency John Dugan said in a statement. The Obama administration is aiming to help up to 9 million borrowers stay in their homes through refinanced mortgages or modified loans. It is spending $75 billion to provide lenders an incentive to alter more loans. Still, the faltering economy, driven down by the collapse of the housing bubble, is causing the housing crisis to spread. Among the loans surveyed in the report, just over 10% were delinquent or in foreclosure, compared with 7% at the end of September, the report said. Delinquencies are increasing the most among prime loans made to borrowers with strong credit, it said.

Ohio power company says more people stealing electricity amid recession
Consumer advocates in Ohio are urging people struggling to pay utility bills not to risk injury or death by tampering with power equipment to steal electricity. Dayton Power and Light Co. says it has investigated 860 case of suspected electricity theft in January and February, up 70 percent during the same period last year. "It is a sign of the times in terms of how desperate consumers are," said Ryan Lippe, spokesman with the Ohio Consumers' Counsel. People should work with utility companies and seek help from special payment programs before they consider doing something desperate and dangerous, such as tampering with electric meters, Lippe said.

Detectent, an Escondido, Calif.-based company that helps utilities such as DP&L fight theft, estimates utilities lose up to 3 percent of total distribution revenues to theft. DP&L investigator Gary Gabringer said people who mess with power lines risk their lives. People do various things to get electricity without paying for it, he said. Some tamper with their electric meters. Others do wiring projects where the power lines meet the house. A few risk being zapped by trying to tap into the big lines that run between the power poles.
Even tampering with meters is risky. "There's enough electricity in there where it can knock your heart out of rhythm," Gabringer said.

DP&L spokeswoman Lesley Sprigg said the company's billing system flags locations where energy use continues after disconnection. Investigators usually stop the thievery before it exceeds the $500 limit that separates a misdemeanor from a felony. In about 30 percent of the 6,816 suspected theft cases in 2008, DP&L was able to find a culprit and arrange for repayment. About 70 percent involved squatters living in vacant homes with no active, legal electrical service. Carol Frisch, who is struggling to find work, got behind on her DP&L account in January, when she was hit by a $400 bill to heat and power her all-electric home. She paid half of the bill and was threatened with disconnection, then arranged a payment plan. She has until May to catch up or be disconnected. "With the economy the way it is, DP&L should give the people that are trying (to pay) a break," she said. "A lot of people like me have to choose between electricity and food."

Calpers Apollo Bet Sours as Private Equity Doubles Down on Debt
The California Public Employees’ Retirement System poured $1.71 billion into Apollo Management LP last year, more than twice as much as it gave any other private- equity manager, betting that the firm could exploit the global credit crisis. So far, the bet is coming up snake eyes. After posting average annual returns of more than 25 percent in the last two decades, Apollo founder Leon Black, 57, is trying to salvage some of the $60 billion worth of companies he has acquired since 2006. Retailer Linens ‘n Things Inc. filed for bankruptcy last year. Casino operator Harrah’s Entertainment Inc. is restructuring debt to stave off default. At least $2 billion of loans Apollo bought last year have lost half their value, according to London-based pricing service Markit.

"Calpers really swung for the fences these last few years chasing returns," said Jonathan Macey, a professor of corporate finance and securities law at Yale University in New Haven, Connecticut. "Leon Black has made investors a lot of money, but it’s risky to commit so much to one manager. Calpers can’t control how that cash gets called." The largest U.S. public pension fund, with $173.8 billion in assets, Calpers provides retirement and health benefits to 1.6 million state government workers. While it says it stands behind the decision to commit more than $3.5 billion to New York-based Apollo since 2006, Calpers has hired a new chief investment officer who managed private-equity holdings at another state pension fund that didn’t invest in Black’s funds.

"The market dislocation presents an opportunity to invest at some favorable prices," Calpers chief of public affairs Pat Macht said in an e-mail. "Apollo was best-suited to take advantage of these opportunities, and Calpers determined they had the most experience and track record -- a view shared by those who provide us independent advice." The Sacramento-based fund, which lost 27 percent of its value between July 1 and Jan. 31, committed $2.08 billion to Apollo funds originated in 2008, after agreeing to invest $950 million in funds started in 2007 and $650 million in funds from 2006, according to documents posted on Calpers’s Web site. Calpers, one of Apollo’s largest investors, had not previously promised more than $250 million to any single Apollo fund. The $1.71 billion it gave to Apollo last year were so-called capital calls against those pledges.

About 14 percent of Calpers’s assets, or $23.8 billion, are in so-called alternative investments, according to the fund’s Web site. It says its private-equity investments generated $14.2 billion in profits from 1990 to Sept. 30, 2008. "Calpers is a valued partner and one of Apollo’s oldest relationships dating back to the mid-1990s," Apollo spokeswoman Anna Cordasco said. She declined to comment further. Calpers committed $1 billion last year to the Apollo Credit Opportunities Fund, which buys distressed debt. Apollo called $751 million of that last April, according to Calpers disclosures. That same month Apollo was among the private-equity firms that purchased more than $10 billion in loans used to finance leveraged buyouts from banks including Citigroup Inc.

Much of that debt, including $2 billion in loans to now- bankrupt Lyondell Chemical Co., based in Houston, has lost more than half of its value, forcing Apollo to put up more cash to meet a margin call in the second half of last year as bank loan prices plummeted to record lows, according to people familiar with the matter. "When Apollo made its money in the 1990s, they were the only game in town," said Steven Kaplan, a professor at the University of Chicago Booth School of Business. "There’s a ton of money going after distressed, and that’s going to make it a lot tougher." Distressed securities are mostly loans and low-rated, high- yield bonds having trouble meeting interest and principal payments. Investors can profit if prices rebound or the securities are swapped for equity in a restructuring. Distressed loans usually trade below 90 cents on the dollar and bonds below 70 cents.

Apollo’s own buyouts have also struggled. The private- equity firm agreed last year to pay Salt Lake City chemical- maker Huntsman Corp. $1 billion after terminating a $6.5 billion offer, and it saw Linens n’ Things, a Clifton, New Jersey-based home-furnishings retailer that it bought for $1.3 billion in 2006, file for bankruptcy. The firm has also announced distressed-debt buybacks for Claire’s Stores, Harrah’s and Realogy Corp., the Parsippany, New Jersey-based owner of residential brokerage agencies Century 21 and Coldwell Banker, to which it offered an equity infusion of up to $150 million to offset mounting losses. The three companies, which had combined losses of more than $7 billion in 2008, all appear on a list of businesses at highest risk of default released by Moody’s Investors Service last month.

Eight Apollo funds called a total of $1.71 billion from Calpers last year. Washington, D.C.-based Carlyle Group, the world’s second-largest private-equity firm, made $681.3 million of capital calls on the pension fund in 2008. Fort Worth, Texas- based TPG, which also has piled into distressed debt, drew down $272 million, and Blackstone Group LP in New York, manager of the world’s largest buyout fund, called $143 million. Founded in 1990 by former Drexel Burnham Lambert Inc. executives Black, Joshua Harris and Marc Rowan, Apollo got its start trading in distressed debt. It made $2 billion, along with Credit Lyonnais SA, on high-yield bonds acquired from insolvent Executive Life Insurance Co. for 50 cents on the dollar.

That success attracted institutional investors, who saw non-public asset classes, including private equity, as a way to boost profits. Apollo’s funds have generated average annual returns of 28 percent, net of fees, since the firm’s creation, according to filings with the U.S. Securities and Exchange Commission. Apollo’s 2001 fund, in which Calpers invested $250 million, generated average annual returns, net of fees, of 47 percent, according to a person familiar with the matter. That fund included the Linens ‘n Things investment. Joseph Dear, the new CIO of Calpers, inherited the Apollo relationship when he took over last month. He replaced Russell Read, who left the fund in April 2008. During six years at the Washington State Investment Board, Dear, 57, was an advocate of private-equity investment. As of Sept. 30, about 20 percent of the fund’s $68 billion in assets was invested in private equity. Of the $30 billion committed by managers such as KKR & Co., TPG and Blackstone, none was invested in Apollo or New York-based Cerberus Capital Management LP.

"There is no significance to the separate decisions by Washington State Investment Board and Calpers as to Apollo," Macht said. "Our new CIO intends to maintain Calpers’s diligent oversight of its private-equity relationships." Calpers solidified its ties to Apollo when it bought a $600 million stake in the private-equity firm in 2007, before shares were made available to investors at $24 apiece through a private exchange managed by Goldman Sachs Group Inc. Some investors have marked those shares down to as little as $1. AXA Premier VIP Trust valued its 450,000 Apollo shares at $450,000 as of Dec. 31, according to a March 5 SEC filing. The low values may be tied in part to the illiquidity of the Goldman exchange, which is limited to qualified investors. A listing of the shares on the New York Stock Exchange has yet to happen.

Blackstone, which went public in June 2007, has seen its shares drop by more than 75 percent from its $31-a-share initial offering price. The stock plunge is tied, in part, to questions about the ability of private-equity firms to generate the same outsize returns they delivered in the past. Announced deals dropped more than 60 percent last year, to about $211 billion, according to data compiled by Bloomberg. Apollo already has a publicly traded fund in Europe called AP Alternative Assets LP. That fund, traded on the NYSE Euronext exchange in Amsterdam, reported on March 31 that the value of its assets in last year’s fourth quarter slumped 45 percent after writing down some private-equity investments.

Ilargi: If there are still people out there who believe for whatever reason that instances of corruption in the Wall Street-Washington mob family are rare and could be removed without too much pain, here's your next chapter.

Sheila Bair's Biggest Haters
Back during the last administration it was always obvious that FDIC chair Sheila Bair was never really on the same page as Hank Paulson and Ben Bernanke. They tried to paper up their differences, but it didn't work. That being said, Sheila Bair has enemies all across the land. Judging by the response to our post about bailout corruption, there's an angry faction of former WaMu shareholders who are convinced that she, along with Jamie Dimon conspired to kill the bank, wipe out the equity and gift it to JP Morgan. They have petitions, letters and lawsuits against her. John Hempton, who's far from crazy or paranoid (but who did lose money on WaMu) penned a long argument last September calling the move reckless and irresponsible. Following our recent post we received this letter from a disgruntled shareholder, calling on her to be indicted.


We, decent American middle class taxpayers and Washington Mutual shareholders, are writing to you regarding the Office of Thrift Supervision (OTS) and FDIC's confiscation of WaMu and aiding JP Morgan to wipe out WaMu's shareholders in September 2008. We respectfully request Congress investigate FDIC/JP Morgan's conspiracy and order JP Morgan to compensate WaMu shareholders.  
 Founded in 1889, WaMu was the largest savings bank in the U.S. until the OTS/FDIC intentionally killed it in September 2008.  According to Wall Street Journal, on or about 09/04/2008, three weeks before the seizure of WaMu, the FDIC had already informed JP Morgan of the planned seizure. On 09/08/2008 the new CEO of WaMu signed a memorandum of understanding with the OTS, agreeing to provide a multiyear business plan to the regulator, including a forecast for earnings, asset quality and capital. The media said the plan did not require WaMu to raise capital, boost liquidity or cut products and services, indicating WaMu had enough capital and liquidity to operate as a well-capitalized institution. 
On Sep 9, 2008 Standard & Poor's (S&P) downgraded WaMu to negative from stable, signaling that a rating downgrade to junk status is more likely over the next two years. Two days later, Moody's also downgraded WaMu. WaMu responded immediately with a statement that Moody's downgrade was inaccurate and biased. WaMu had enough capital and liquidity, significantly above the requirements for a well- capitalized bank. Having been scrutinized by regulators everyday inside the bank, WaMu dared not and did not lie.  However, the OTS/FDIC didn't want to wait for two years. They played all kinds of games in order to kill WaMu and give it to JP Morgan as soon as possible. Even though WaMu's capital level was significantly above well-capitalized, several days later, WaMu was downgraded again by S&P, Moody's and the OTS to "junk" status. Obviously, people believe it was the OTS/FDIC that directed, arranged or instructed these downgrades in order to collapse WaMu.  
 On one hand the OTS advised WaMu's new CEO to look for buyers without a deadline, indicating that WaMu was well capitalized by then. WaMu was then discussing terms with 6 potential suitors including J.P. Morgan through investment bank Goldman Sachs. On the other hand, the FDIC went behind WaMu to forge a dirty deal with JP Morgan, knowing that JP Morgan was negotiating with WaMu in the front. Unbeknownst to WaMu, the FDIC had talks with all the potential buyers, exaggerated WaMu's problems and threatened that the FDIC was going to seize WaMu soon, so that nobody would dare to make an offer.  
 It was these downgrades orchestrated by the OTS/FDIC and illegal secret talks between the FDIC and the 6 potential buyers behind WaMu that induced what the FDIC claimed a "bank run" in deposits between Sept. 15 and 24, 2008. Important to note, the FDIC's secret deal with JP Morgan started before this period. The FDIC then had an excuse to claim that WaMu did not have enough capital and liquidity and should be seized immediately (even though WaMu did have enough capital and liquidity, with $5 billions in cash on deposit and 90% of WaMu's deposits still left intact during the period). The FDIC then seized WaMu and gave it to JP Morgan for next-to-nothing. A decent, well-funded (and the country's largest) U.S. savings bank that had served the American people for over 100 years was suddenly killed by the FDIC and JP Morgan's premeditated conspiracy. 
All communications between Moody's, S&P, and the OTS/FDIC should be investigated by Congress. The 6 insider firms that the FDIC secretly dealt with should come to light and answer questions. Their transactions on WaMu must also come to light.  The FDIC had already leaked a planned seizure of WaMu to JP Morgan 3 weeks before WaMu's seizure. The possible inappropriate relationship between the FDIC chairwoman Sheila Bair and JP Morgan CEO Jamie Dimon should also be investigated. This article from WSJ validates this claim. 
JP Morgan had long wanted to buy WaMu, but their low offer had been rejected by WaMu earlier. This time, for a mere 1.9 billion dollars, JP Morgan got WaMu's $310 billion in assets, plus 2239 WaMu branches nationwide, including those in California, where JP Morgan did not have a foothold, but had long dreamed to have one. JP Morgan kept WaMu's huge assets and very profitable branches, but dumped the trouble loans to the government and the American taxpayers. This transaction is like getting a $310K house, for only $1.9K and then asking government and taxpayers to fix the house for the new owner.     
 The FDIC now becomes a corruptive profit institution. They took over WaMu, sold off and pocketed the money while it was still healthy, like putting and burying a healthy person into a coffin while he is still able to jog and run. JP Morgan got the assets and deposits at a bargain while shareholders of WaMu get nothing. It is literally something that would happen in Nazi Germany, not in the United States. What the FDIC did to WaMu was exactly the same as what the Japanese did to the Americans during World War II. On Saturday, Japanese Foreign Minister signed the peace treaty with the USA in Washington D.C. Next morning, Japanese bombed Pearl Harbor and seized all the assets of American banks in Hong Kong. President Franklin Roosevelt was totally in the dark. Like FDIC seizing WaMu and giving it to JP Morgan, only planners Sheila Bair and Jamie Dimon knew when to pull the trigger, because it was totally a conspiracy.   
It is believed that the misconduct of the OTS/FDIC helped JP Morgan steal WaMu from investors. JP Morgan had been making phantom negotiation with WaMu in the front, while getting inside information from Ms. Bair behind the curtain. It is theft and a criminal act on the part of JP Morgan to exploit the director of OTS and chairwoman of the FDIC and benefiting to take WaMu's $310 billion dollars in assets plus 2239 very profitable branches at an exorbitant discount. WaMu is not the first victim JP Morgan has claimed. Inside information, Senator Chuck Grassley recently disclosed, was used by JP Morgan to aid in the collapse of Bear Stearns. Lehman Brothers has also accused JP Morgan of freezing its assets precipitating in their bankruptcy. Not only did WaMu shareholders lose all their savings due to the FDIC's unlawful act of snatching the share value by conspiracy, but by also being taxpayers, they now have to pay for the loans that JP Morgan will dump, a perfect example of double shafting.  
Because of their less stringent policy, WaMu was ripped off by mortgage agents who cheated WaMu in order to get the biggest commission. Like Citigroup and Bank of America, WaMu had lost huge and become one of the biggest victims. Congress passed and the president signed the rescue and stimulus plan. However, the real victim, decent, hard working WaMu, who was supposed to be rescued, was unfortunately untimely killed by the FDIC and JP Morgan's collusion. Now the biggest corruptor - JP Morgan's CEO Jamie Dimon benefits on WaMu's behalf from the rescue stimulus plan. Dimon, who has a salary of 15.5 millions plus option 40 millions per year, will get double and triple this year because he can proudly take credit for corrupting huge WaMu assets for free through a collusion with Bair. 
 Unfortunately, the person to blame for this debacle is still in charge and threatening future American prosperity. Forbes stated that the FDIC's Sheila Bair is the second most powerful woman in the world next to the German Chancellor. She can make any big bank disappear and wipe out its shareholders at any time she wants. Above the law and the Congress Bair dares against the American spirit to plunder the property from hard working middle class families. It was Bair who destroyed the American people's confidence in the stock market by this unlawful seizure of well-funded WaMu and wiping out all shareholders. Bair did the same to another big bank, Wachovia, after she threatened Wachovia with either being seized by the FDIC or accepting Citigroup's $2.1 billion arbitrarily set by Bair, Wachovia chose the latter, the less lethal option.  
 When AIG collapsed and Lehman Brothers bankrupted, the stock market was still stable. It wasn't until WaMu was unlawfully seized by the FDIC that the stock market collapsed, because it was totally against the American spirit. The American people were totally astonished and panicked. Who would be the next victim? They worried that their lifetime savings and retirement investment could be plundered by Bair without any justification and given away for free. It was Bair's illegal abuse of power by plundering WaMu from the shareholders while it was still healthy that scared American people and caused the cascade of American stock market meltdown and worldwide financial crisis. If the Congress didn't pass the bill to increase the FDIC insured amount from $100k to $250k, Sheila Bair's wrongdoing would have caused even worse damage.  
 It is an insult to American civilization, our senators and congressmen for Bair to extremely abuse her power and help Dimon of JP Morgan to corrupt. JP Morgan now benefits hugely from WaMu's huge assets and thousands of very profitable branches at the expense of WaMu shareholders. Investors all know that JP Morgan's value increased greatly by getting WaMu for free. JP Morgan's stock significantly outperformed their peers in this financial crisis. JP Morgan now is the biggest bank in the U.S., at the expense of WaMu shareholders. Articles from media clearly point out that JP Morgan is Responsible For The Destruction Of The US Financial System. ( ) 
 Even though CitiBank and Bank of America have problems similar to that of Washington Mutual months ago, Ms. Bair dares not to play the same kind of game to kill them because they are too big for JP Morgan to swallow. We don't mean Citi and Bank of America shareholders should suffer the same as WaMu shareholders, but it clearly shows that when JP Morgan wanted WaMu, Bair was anxious to help JP Morgan in exchange for future benefits. 
 All Americans have now become victims of this grand theft orchestrated by a politically influential and cunning businessman, JP Morgan's Mr. Dimon, with the government's help. If this corruption orchestrated by the FDIC can be tolerated in our great nation and with the blessing of Congress, do we have any moral right to criticize any other countries human rights record? FDIC Bair's unlawful seizure of WaMu has shown that the U.S. like Nazi, Germany, has the worst human rights record in the whole world. The American people believe that the OTS/FDIC acted in a premeditated fashion to kill WaMu from the very beginning, no matter how hard WaMu was working in order to stay alive. All the games that the FDIC played were designed to benefit JP Morgan. American people have a lot of questions and doubts regarding this untimely killing of WaMu, and they deserve answers.
  • How could the FDIC inform JP Morgan the planned seizure while WaMu was still a well capitalized bank?
  • How could JP Morgan pretend to negotiate with WaMu in the front while they had inside information behind the curtain from the OTS/FDIC? 
  • How could JP Morgan present hundreds of pages of acceptance of purchase of WaMu to FDIC within a few hours, if this wasn't a premeditated game?  
  • How does JP Morgan bribe top officials of the OTS/FDIC in exchange for their help to get WaMu dirt cheap and become the biggest bank in the nation and biggest winner in this worldwide financial disaster? What position/compensation/benefit did Dimon promise them once they are out of government office? and/or what did Dimon offer their family members, that prompt them so anxious to kill WaMu to give it to Dimon? 
  • How did the OTS/FDIC orchestrate downgrades by Moody's, and S&P?  
  • While WaMu was advised by the OTS to actively discuss with potential buyers, was it justified for the OTS/FDIC to secretly talk with the same buyers behind WaMu's back, exaggerating WaMu's problems, and threatening them away so that JP Morgan could have WaMu for free?  
  • Why did the OTS/FDIC initiate this seizure immediately after media reports of a possible bailout deal? What made Bair decide that WaMu's $310 billion asset and 2,239 profitable branches is only worth of $1.9 billion without open competition? How could she pocket that $1.9 billion and wipe out WaMu shareholders?  
  • What was Bair based on when she gave Wachovia to Citigroup for 2.1 billion a few days later? Wells Fargo later offered Wachovia $15 billion or $6 per share, in an open, fair, traditional and healthy way. Wachovia accepted their offer and both banks have been proven a very healthy combination since. However, because of Bair's wrongdoing, WaMu shareholders received nothing for a similarly valued property.  

 A hundred years from now, people will still remember that in the year 2008, the biggest U.S. Savings bank WaMu was killed, plundered, WaMu-ed by conspiracy and corruption of the FDIC and JP Morgan. WaMu shareholders and American taxpayers demand that the FDIC be investigated for abusing their power and WaMu shareholders should be compensated.  The Department of Justice has launched an investigation into the collapse of WaMu. It is widely believed by American people that the failure of WaMu was precipitated by the OTS/FDIC, who breached the law to help JP Morgan to steal WaMu. It was Bair who destroyed American people's trust in government. The FDIC should be investigated even more than WaMu for their illegal abuse of their powers which caused the nations largest thrift bank to disappear over night.

In order to maintain fairness and impartiality, the FDIC, the one who committed the crime should not be in the investigation team to avoid a possible obstruction of justice. Like WaMu, FDIC is an entity to be investigated rather than a member in Task Force. Ms. Bair should be indicted and investigated for her misconduct. Compensation should be paid out to WaMu's shareholders to respect human rights of the shareholders and restore American people's confidence destroyed by Ms. Bair.  After losing our lifetime savings and retirement investments, we respectfully request that the Congress start an investigation into the possibility of wrongdoing, misconduct, conspiracy, and corruption of OTS/FDIC, who unlawfully helped JP Morgan steal WaMu from its shareholders by the Nazi, Germany-like seizure of WaMu. Like Wachovia who received fair compensation from Wells Fargo, WaMu shareholders should be compensated for their righteous property plundered by FDIC/JP Morgan's conspiracy. 

The Banker Who Said No
Standing outside the glass-domed headquarters of his Plano, Texas, bank in March, D. Andrew Beal presses a cellphone to his ear. He's discussing a deal to buy mortgage securities. In just a few minutes, the deal's done: His Beal Bank will buy $15 million of face value for $5 million. A few hours earlier he reviewed details on a $500 million loan his bank is making to a company heading into bankruptcy--the biggest he's ever done. A few floors above, workers are bent over computer screens preparing bids for chunks of $600 million in assets dumped by two imploded financial firms. In the last 15 months, Beal has purchased $800 million of loans from failed banks, probably more than anyone else.

Andy Beal, a 56-year-old, poker-playing college dropout, is a one-man toxic-asset eater--without a shred of government assistance. Beal plays his cards patiently. For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank's assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about "stupid loans." His odd behavior puzzled regulators, credit agencies and even his own board. They wondered why he was seemingly shutting the bank down, resisting the huge profits the nation's big banks were making. One director asked him: "Are we a dinosaur?"

Now, while many of those banks struggle to dig out from under a mountain of bad debt, Beal is acquiring assets. He is buying bonds backed by commercial planes, IOUs to power plants in the South, a mortgage on an office building in Ohio, debt backed by a Houston refinery and home loans from Alaska to Florida. In the last 15 months Beal has put $5 billion to work, tripling Beal Bank's assets to $7 billion, while such banks as Citigroup and Morgan Stanley shrink and gobble up billions in taxpayer bailouts. Beal has barely got a dime from the feds. A self-described "libertarian kind of guy," Beal believes the government helped create the credit crisis. Now he finds it "crazy" that bankers who acted irresponsibly are getting money and he's not. But he wants to exploit their recklessness to amass his own fortune.

"This is the opportunity of my lifetime," says Beal. "We are going to be a $30 billion bank without any help from the government." (A slight overstatement: He is quick to say he relies on federal deposit insurance.) Not much next to the trillion-dollar balance sheets of the nation's troubled banks, but the lesson here might be revealed in the fact that this billionaire is not playing with other people's money--he owns 100% of the bank and is acting accordingly. It's hard to imagine Beal fitting in at a bankers' convention. He walked into the Las Vegas Bellagio in 2001 and challenged the world's best poker players to games with $2 million pots--the highest stakes ever. Donning large sunglasses and earphones, Beal held his own against the poker stars, once winning $11 million in a single day, although he shrugs that he lost more than he won. At the track he'll drive one of his nine race cars (costing as much as $100,000 each) at 150 mph. On city streets he cruises in a huge Ford Excursion, the vehicle that has made him feel safe since a drunk driver punctured his lungs in 2000. When Ford Motor discontinued the Excursion a few years ago, Beal bought an extra one for storage.

A math whiz who left Michigan State to dabble in real estate, Beal has offered a $100,000 prize to anyone who can solve a number-theory puzzle. Beal launched a rocket company that built the largest liquid-fuel engine since the Apollo missions. After spending $200 million over four years he shut the venture down, saying it was impossible to compete with NASA's subsidies. In the last 15 years Beal says he has bought only one stock. If he ever thinks of investing in hedge funds or private equity, he says, "Just shoot me." The blunt-spoken Beal shuns publicity and is uncomfortable in the public eye. He concedes he can seem "unprofessional." After 20 years in the business he attended his first bankers' conference last year.

The son of a mechanical engineer, Beal grew up in Lansing, Mich. He ended up in Texas after buying an apartment complex in Waco. He founded Beal Bank in Texas in 1988, opening the first branch next to a Wendy's, and started purchasing distressed real estate loans from failing banks. Years later he also opened a bank in Las Vegas. Beal Bank has long been a unique animal, mostly buying loans in the secondary market instead of originating them. It was a successful model: In 2000 American Banker declared Beal Bank the most profitable bank in the nation as measured by its five-year return on equity of 50%. By September 2004 Beal Bank's assets had climbed to $7.7 billion. Then Beal stopped buying, letting his loans run off. By September 2007 assets had shriveled to $2.9 billion, one-fifth of which was cold cash. He was worried that consumers had taken on too much debt and money was being lent to companies for next to nothing. "Every deal done since 2004 is just stupid," Beal says.

He began by pulling back from home loans--even those guaranteed by Fannie Mae and Freddie Mac. Beal thought the two quasi-government agencies were over-leveraged. When staffers mentioned their guarantees in deal presentations he would fire back that these guarantees were "worthless." Outsiders thought it was Beal who didn't get it. Despite its aversion to credit then, the bank occasionally had to buy mortgages to meet federal low-income-lending requirements. Jonathan Goodman, then head of loan purchases, recalls salesmen from Countrywide laughing at him on the phone when he refused to buy iffy condo paper backed by the two agencies. "Countrywide, Bank of America, Washington Mutual ... every single [mortgage seller] thought we were insane," Goodman says. "They didn't know why we cared. They thought Fannie and Freddie guarantees were as good as Treasuries."

Beal also stopped making commercial loans. "If I see another office condo in Las Vegas or Phoenix, I'm going to throw up," he said at the time. He started selling, too. At a price of 115 cents on the dollar he unloaded a $75 million pool of loans that had been extended to Kmart, exercise chain 24 Hour Fitness and Regal Cinemas. That translated into a yield for the buyer of a mere 1.35 percentage points over Treasuries. "They were great loans at 85 cents," says Beal, referring to the price he had paid for them years earlier. "They're stupid at 115." With fewer assets, he began laying off staff, cutting down to 200 people from a peak of 400. "Escorting all those people out the door was awful, the worst moments of my life," says Jacob Cherner, who oversees Beal's lending and debt purchases. Half of the 270,000-square-foot polished wood and Brazilian granite headquarters went dark. (Beal hastens to add he bought the building from an oil company desperate to move only because it was selling at a discount.) He hired agents to rent out the space.

Beal started coming to work at 10:30 and leaving at 2:30. He challenged colleagues to backgammon games and took hour-long lunches, complaining of being "bored stiff," recalls one frequent meal companion, real estate investor Steven Houghton. Then Beal would head home to walk a nearby creek with the youngest of his six children. He took up car racing, too. "I thought it would end in six months, and sanity would return," he says. "If I knew it would last nearly four years I would have thought of something else to do." In late 2006 he sold $74 million of preferred stock although he had no immediate use for the proceeds. He says he couldn't resist the "stupidly mispriced" terms--as low as Libor plus 1.7 percentage points for 30 years. He wanted as much money available when the boom turned to bust. With the extra money the bank could pay off nearly all its depositors with capital on hand--nearly unheard of in the history of banking.

Then came a shocker: Amid one of the most reckless lending sprees in history, regulators focused on the one bank that refused to play along. Beal's moves confused and worried them, and so they began to probe him with questions. "What are you doing?" he recalls them asking. "You're shrinking yet you're raising capital?" Says Beal about the scrutiny, "I just didn't fit into any box." One regulator, the former head of the Texas Savings & Loan Department, Charles Danny Payne, says, "I was skeptical at first, but I've gained a lot of confidence over the years," adding that Beal has an "uncanny ability to sniff out deals." Next, the credit rating agencies started pestering him about his dwindling loan portfolio. They never downgraded him but scolded him for seeming not to have a "sustainable" business model. This while their colleagues were signing off on $32 billion of bum collateralized debt obligations issued by Merrill Lynch. Then came the summer of 2007, and Wall Street's securitization machine began to break down. Prices on pools of mortgages were falling. Beal was tempted but insisted on inspecting individual loan files. Wall Street refused.

Still, he knew his time was coming. To prepare bids he locked himself in his office to write a computer program with 50 variables (now 250), ranging from home price changes by neighborhood to interest rates to origination dates. By 2008, Wall Street started letting Beal peel off individual loans. He bought a bit, then in earnest when Bear Stearns collapsed. He concentrated first on whole single family residential loans, buying $1.8 billion of those. He has hired 160 people to service residential mortgages, arranging the employees in rows of cubicles one floor below his office. His payroll has more than doubled to 450. Lately he's been spending on a broad range of assets. Beal just bought a $465 million loan to bankrupt chemical maker Lyondell. He's extended tens of millions to utilities, manufacturers, convenience stores, hotels, casinos--"everything you can imagine, in every state," he says. Many of those assets have come from 15 failed banks, including First Integrity in Minnesota, Arkansas National and First Priority in Florida. Since November he's bought $2 billion (face value) of home loans bundled into securities, too. But he says he's still just picking off loans with a "rifle" not a "shotgun," buying only 3% of what lands on his desk while waiting for the financial system to further "unravel."

To fund his purchases Beal has relied on brokered deposits, known as hot money in the banking business. A year ago Beal Bank had $49 million, but by dangling relatively generous rates on certificates of deposit (0.88% for a six-month CD) brokers have since funneled $1.2 billion into the bank. To replace the brokered funds Beal is building 28 branches from Miami to Seattle, up from 7 at the end of last year. He's getting scant help from the government. The Troubled Asset Relief Program does not accommodate a guy like Beal because the maximum amount available is 3% of 2008 assets. Had Beal leveraged up his capital to $25 billion and made toxic loans in the last few years, he would now qualify for $750 million. As things stand he can get only $150 million, hardly worth the trouble given the strings attached. Beal is amply using the Federal Deposit Insurance Corp. to attract small deposits; he isn't approved for the wholesale version of deposit insurance, which goes by the name of Temporary Liquidity Guarantee Program. Launched in October, this federal giveaway has the government backing senior unsecured bank debt.

Banks that got too big, like Citigroup, have flocked to the cheap funding, issuing $200 billion. The FDIC's stated purpose is to "encourage liquidity in the banking system," and Beal would love the extra capital, but FDIC staffers have told him, without providing details, that the program was not designed for him. "We must be the only bank that has tripled in size in the last eight months, but we aren't eligible for nothing," says Beal. "The crazy thing is guys who weren't real responsible are eligible." He thinks the government is going to be "disappointed" by its various programs to revive lending. He says Treasury Secretary Timothy Geithner's new plan to guarantee loans to buyers of toxic assets won't lead to many sales because the problem isn't liquidity but price. They are not low enough. Half the country's banks--4,000 in all--would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.

"Banks are on a prayer mission that somehow prices will come back and they won't have to face reality," Beal says. And that reality, according to Beal, is going to get a lot worse. "Unemployment is going over 10%, commercial real estate hasn't even begun collapsing and corporate credit defaults are just getting started," he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society. As for the cause of this mess, Beal points a finger at the government for giving its imprimatur to just a handful of credit rating agencies, then insisting that money market and pension funds buy only paper with top grades. He also blames government for luring people into debt by backing everything from bank deposits to Fannie and Freddie to student loans. A sign in Beal's office reads: "Often wrong, but seldom in doubt." His tenacity led him on a six-year seemingly quixotic quest suing his own regulator, the FDIC, over thousands of terrible subprime loans Beal bought after it seized a failed Pritzker-family-owned bank in 2001. Beal claimed the FDIC made loans to unqualified buyers that did not meet the representations the agency made to him. In December the FDIC settled by agreeing to cough up $90 million.

Now Beal is taking on the IRS. Earlier this year he concluded a trial over big loss deductions he took on nonperforming Chinese loans. He sold them for $9 million less than he paid but used a loophole later closed by Congress to shelter 90% of the $1.2 billion of income he personally earned from the bank between 2002 and 2004. The government disallowed the deductions and was not amused when Beal sued to recover them and tens of millions in penalties imposed. Beal says he was deferring taxable income that he recognized in 2007 and was merely following the tax code. "I am a good guy made to look like a bad guy for doing what every taxpayer does--appropriately use the law to minimize my taxes," he says. A decision is expected this summer, but don't expect a chastened Beal if he loses. After New York state's highest court ruled against him in a contract dispute in 2007, Beal took out a full-page ad in The Wall Street Journal asking: "When is a contract NOT enforceable according to its clear terms? When it is in the state of New York."

Beal is putting in full days now, much of it spent reviewing loans in his office, which overlooks a construction pit for a new garage to accommodate his expanding staff. One March afternoon a credit officer walks in with a report on a possible $224 million loan at a fat 12% interest rate that an airline needs to buy eight Boeing 737s. Beal peppers him with questions: How much are other airlines ordering? How many similar planes are parked in storage? The staffer mentions that the airline was balking at paying the bank a 1% fee just to get it to formally review the loan. Beal sends the staffer away with these instructions: no fee, no loan. Next, a guy in charge of bidding for failed bank assets pops his head in the door to update Beal on loans he's recently bought for as low as four cents on the dollar. "[FDIC Chairman] Sheila Bair doesn't like the prices," says Beal, but "you need a margin of error."

Then an analyst walks in with details on a $130 million loan to a battery maker for sale in the secondary market. Beal fires off a half-dozen questions probing some vague language in the original loan contract about collateral in case of default, and his face curls in disgust. "This had to be originated in the stupid times," he says, before ruling against making an offer. Then there's something worth a bite. A loan to a power producer was selling at par a year ago. Today a $25 million piece of it is offered at 72 cents, and Beal is buying. "All these guys were stumbling over each other 18 months ago to pay over par," he says. "Now they can't sell fast enough at a discount. Why do people not do the great deals and do all the stupid ones? It's crazy."

The Impersonator
Like Bernie Madoff, Marc Dreier bilked unsuspecting investors out of many millions of dollars. But Dreier did it with flair.

There was a time when Marc Dreier thought he could talk his way out of anything. But by last fall, even he was scrambling. Whenever the stylish, hyperaggressive 58-year-old white-collar litigator turned around, clients and colleagues at Dreier LLP, the marquee Park Avenue firm he’d built from almost nothing to 250 lawyers in just five years, were asking questions—about back rent, unpaid loans, depleted client escrow funds, documents of uncertain provenance. What Dreier needed to make these questions go away, he knew, was money. About $40 million, for starters.

On Tuesday, December 2, Dreier boarded a private jet and flew to Toronto. When he landed, a driver brought him to the financial district and pulled up to the stout, glass-encased Xerox Tower. Dreier climbed out of the car and walked into the building. He was expensively dressed, but short and perma-tanned, with a thatch of gray hair swept over a sizable bald spot. He rode the elevator to the third-floor offices of the $100 billion Ontario Teachers’ Pension Plan, one of the largest retirement funds in Canada. Dreier had arranged a meeting with one of the plan’s in-house lawyers, Michael Padfield, ostensibly to discuss business opportunities. But Dreier had other motives, and the meeting lasted only briefly. Before saying good-bye, Dreier asked for a place to wait until his plane was ready. He was sure to take Padfield’s business card.

Dreier dropped his things in a conference room, then went to the lobby, where he paced for an hour and eyed the entrance, until he spotted Howard Steinberg, an executive with a $34 billion New York hedge fund named Fortress. Steinberg and Dreier had never met, but they had been in touch earlier, when Steinberg had been trying to confirm the authenticity of some documents Dreier had sent him, promissory notes said to be worth $44.7 million that Dreier was offering to sell to Steinberg. When Dreier had told Steinberg the notes were guaranteed by the Ontario Teachers’ Pension Plan, Steinberg had asked to meet with someone from the fund personally. Dreier told Steinberg he’d arrange a meeting with Michael Padfield. Dreier worked Padfield’s business card into Steinberg’s hand. Upstairs in the conference room, Dreier showed Steinberg some papers signed in Padfield’s name. But the meeting didn’t go as planned; Steinberg sensed something was off, and Dreier ended the meeting abruptly and went straight for the elevator. When he was gone, Steinberg approached the receptionist and asked her a simple question. "Was that Michael Padfield?" "No," said the receptionist, "it wasn’t."

We live in an age of white-collar villains. But of all the financial bad guys out there, Marc Dreier is arguably the single greatest character of them all. Bernie Madoff may have stolen more money. Dick Fuld may have caused more systemic damage. But it’s Dreier alone whose story reads like the stuff of Hollywood. Dreier isn’t just accused of swindling more than $400 million from thirteen hedge funds. Prosecutors say he carried out the deception by inventing $700 million in financial assets out of whole cloth, staging fictional conference calls, and impersonating executives, sometimes personally, sometimes with the help of an associate, all while snapping up Warhols and waterfront homes, partying with pop stars and football players, and chasing an endless parade of much-younger women. He also allegedly stole some $40 million from his clients’ escrow accounts, a brazen legal sin. Unlike Madoff, who worked from behind the scenes in the Lipstick Building, Dreier took a starring role in his own financial drama. Where Madoff was outwardly quiet and self-effacing, Dreier was openly egotistical, even smug. He seemed to think he could lie to his victims’ faces and get away with it, to thrill, even, in the art of deceiving people. It’s been suggested that Bernie Madoff was a pathological liar. With Marc Dreier, there appears to be little doubt.

Like any accomplished confidence man, Dreier had a signature modus operandi. Just weeks before his Toronto performance, he had staged a similar show here in New York. On Wednesday, October 15, Dreier allegedly walked into the lobby of 9 West 57th Street, the tan, sloped skyscraper off Fifth Avenue, and took the elevator to the 45th-floor offices of the billionaire real-estate developer Sheldon Solow. Although the two men rarely worked together anymore, Solow had once been one of Dreier’s most valuable clients. Dreier didn’t have an appointment, but he told the receptionist he did and she let him through. Again, Dreier set up shop in a conference room, then returned to the reception area and waited.

Before long, a man about Dreier’s age named Kosta Kovachev arrived. For the past several years, Kovachev had worked as Dreier’s aide-de-camp—employed not by Dreier’s firm but personally by Dreier. Dreier walked Kovachev to the conference room and left him there, then turned around and came back to the reception area to wait for his other guests. When the others arrived—two hedge-fund executives, both from the same firm—Dreier brought them to the conference room, where he and Kovachev fielded their questions. At one point, Steve Cherniak, the CEO of Solow Realty, walked past, saw the meeting, and shrugged and went on his way. But had he joined the meeting, he would have learned that the hedge-fund representatives believed they were there to see Steve Cherniak—the man they were told was sitting next to Marc Dreier.

Dreier had been running similar scams with different marks, prosecutors say, since 2004. Dreier would allegedly contact an investment fund like Eton Park, Fortress, GSO Capital, Westford Global Asset Management, Perella Weinberg, and, before it went under, Amaranth and say that his client, Sheldon Solow, was trying to finance his real-estate projects by borrowing money with promissory notes. Dreier wasn’t a financier; he was a lawyer. But he would tell people he was working as a marketing agent for his client Solow’s securities. Solow, it appears, knew nothing about what Dreier called the "note program," but that didn’t stop Dreier from sending along various offering materials—information about Solow, phony notes and financial statements on fake letterhead from Solow’s auditing firm, e-mails that he said had been issued by Solow, and so on. Dreier and his accomplices forged the notes themselves, complete with the fake signatures of Solow executives. If anyone asked to meet someone in the Solow organization, Dreier would arrange conference calls with people posing as Solow executives. He set up phone lines at his law firm. He created fake e-mail addresses. He kept hard-to-trace, no-contract cell phones—"burners" like Tony Soprano used—in a box in his office. Last July, Dreier diversified beyond his Solow strategy, selling $52 million in phony notes he said were issued by the Ontario Teachers’ Pension Plan. He used part of the proceeds to pay interest on some of the Solow notes he’d already sold.

Dreier’s motives were at once shallow and profound. Even by New York standards, he was wildly ambitious. It wasn’t enough for him to be a successful lawyer; he had to be the most successful lawyer in town, and he needed everyone else to know about it. You could see his obsession reflected in the $10 million Beacon Court condominium, the fully staffed $18 million 123-foot yacht, the $40 million in Warhols and Lichtensteins and other artworks, the Aston Martin, BMW, and two Mercedes, the two Hamptons homes, the Anguilla property, the Park Avenue headquarters with his name emblazoned on the side, the star-studded charity golf tournament, the girls. When he’d couldn’t come by all of that honestly, it seems, he found another way. The whole operation was audacious to the point of sheer recklessness—from the start, he was just one due-diligence phone call from being found out—yet the very boldness of his plan was central to its success. Who would believe that such a respected and apparently successful attorney would knowingly peddle hundreds of millions of dollars worth of nothing?

Marc Dreier seemed born to be a player. The son of a Polish war refugee who settled in Long Island, Dreier was voted most likely to succeed by his graduating class at Lawrence High School in the Five Towns. At school, Dreier was more of an intellectual than a jock and presided over the student council. Friends remember him driving his Oldsmobile 442 with the top down and dating the prettiest girl in school. "The fact that the guy remained the big man on campus later on in life, that surprises nobody," says classmate Kenneth Gross. "He had that flash in him from his early days." Next came Yale and Harvard Law. "He had a plan even then to do well," says Henry Kass, another old friend. "The mantra for all of us was ‘Be somebody.’?"

After law school, Dreier went to work as a white-collar defense litigator at the New York firm Rosenman & Colin. "He was one of the shining stars," says Donald Citak, a former colleague. "He was ambitious, bright, and full of energy—hyper but personable." Dreier pitched on the company softball team and was always up for drinks, often at the Beach Café at 70th Street and Second Avenue, a few blocks from his bachelor apartment on York Avenue. But even Dreier’s friends didn’t fully trust him. "He never put other people’s interests first," one friend says, "and he’d make no bones about it. Part of him wanted to have friends, but all of him wanted to be admired."

Dreier left Rosenman in 1989, then worked at two other firms before starting his own shop with a lawyer from Boca Raton named Neil Baritz in 1996. Dreier & Baritz’s first major client was Sheldon Solow, one of the city’s real-estate titans, who, like Dreier, was wildly ambitious and had a taste for expensive art. Solow already had a reputation as one of the most litigious real-estate developers in town, suing rivals, tenants, even tenants’ houseguests. Dreier only enabled Solow’s habit. In one matter, Dreier filed eight different lawsuits on behalf of Solow in thirteen different states and federal jurisdictions—losing every time but still appealing. Opposing lawyers say Dreier was a shark. "He was the type of guy who would do anything a client asked if it was in his interest," says Kevin Smith, a lawyer who faced Dreier in court many times. "Everybody draws a line at some point. But this guy, he would do anything. Every courthouse, he’d pull up in a limo. He had suits that were cut, watches, jewelry. He was nasty, very aggressive, and contentious. He treated me like I didn’t exist."

Early on, Dreier & Baritz sought to expand by establishing limited partnerships with lawyers in other cities. In 2001, an Oklahoma City attorney named William Federman sued Dreier, saying that Dreier owed him money, and, worse, that Dreier had failed to offer a proper accounting of Federman’s client escrow funds. Federman settled with Dreier in 2002. That same year, Neil Baritz left the firm. He has said that he left "for personal reasons and because our businesses were no longer compatible."

In 2003, Dreier took his small firm of 30 lawyers and rechristened it Dreier LLP. It was an odd time to embark on an expansion. Not only had his partner just left him, but Dreier had cash-flow problems. He had secured a revolving credit line in 2001 for $750,000, which he amended a year later to $2 million, with another $2 million in outstanding debt, and now needed to refinance yet again owing to lack of payment. He was also getting divorced: He had married an associate at Rosenman & Colin named Elisa Peters in 1987; the couple had a son, Spencer, in 1989, and a daughter, Jackie, in 1992, but now Elisa was divorcing him. (The matter dragged on for six years, in part, a source says, because Elisa claimed Dreier was hiding assets from her.) But friends and former classmates were surpassing Dreier, and that seemed to chafe him. One former colleague, Marc Kasowitz, had already won a historic tobacco-related settlement that Dreier couldn’t help but notice. Kasowitz had left Rosenman to start his own firm, just like Dreier. But Kasowitz was doing far better. "Dreier wanted the big cases," says a friend. "His firm wasn’t doing anything that looked really impressive. I think that bugged the shit out of him."

Whether Dreier expanded his firm to make money to pay the interest on his phony notes or sold his phony notes so that he could expand his firm is an open question. What’s clear is that the firm grew dramatically. Dreier lured away entire departments from other shops, establishing practices in everything from bankruptcy and tax law to sports licensing and entertainment, and bringing the firm’s total number of lawyers to more than 250. With the new acquisitions came high-profile clients, such as Jay Leno, Wilco, and Michael Strahan. Dreier moved the company’s offices to 499 Park Avenue, the sleek I.M. Pei–designed former Bloomberg headquarters (complete with private entrance), and opened satellite branches in Stamford, Connecticut; Albany; Pittsburgh; Los Angeles; and Santa Monica. One source says Dreier hired an aircraft to fly over a party he was hosting in the Hamptons displaying the firm’s name. "He was charming, gregarious, sure-footed, and clear-thinking," one lawyer says. "It seemed like he built just what he said he would build—a large, successful, bi-coastal firm."

To finance the firm’s expansion, Dreier used a risky accounting practice called factoring receivables, in which one borrows money against future income. Essentially, he was leveraging himself not on real assets, but on a wish. Dreier also structured the firm in an unusual way. Instead of sharing ownership with a group of partners, he owned the firm himself. The other attorneys were partners in name, but really employees. Rather than sharing in the firm’s profits and being subject to the ups and downs of its performance, they were paid guaranteed salaries, plus a bonus or commission on new business. Many of them took in salaries of up to $1 million a year, well above market rate. To the extent anyone suspected that Dreier was spending more than he was earning, they assumed, as one friend says, that "he had independent means." As the firm’s sole equity partner, Dreier had virtually no oversight. He was the lone signatory, for instance, on more than a dozen different escrow accounts that were supposed to be holding clients’ money. The money was supposed to be off-limits, but if he chose to tap it, no one could stop him. Of course, Dreier was also the sole responsible party if the firm couldn’t pay its bills.

Although he was never on the firm’s payroll, Kosta Kovachev was a close associate of Dreier’s. As recently as last year, he had an electronic entry card for Dreier LLP’s offices, and access to the firm’s computers. A stocky and bearded ex-banker in his late fifties, Kovachev was born in Belgrade and educated at Columbia University and Harvard Business School. He lived in Greenwich, Connecticut, for years in the nineties before moving to Florida, but has no recorded residence at the moment, just a cell-phone number that flips over to the Harvard Club. Over the years, he has worked for Morgan Stanley and Drexel Burnham Lambert. But his banking career ended in 2006, when the SEC revoked his broker’s license after a scandal involving a low-level Ponzi scheme to sell time-shares in Florida. Kovachev’s lawyer in that proceeding was Marc Dreier.

Dreier also had ties to a man named Armando Ruiz. "Ruiz had some celebrity relationships, and that’s how they became friends. Dreier wanted to meet celebrities," says a longtime business associate of Dreier’s. "Every time Dreier had a party, this guy was the one that was putting everything together. He used to hang out with him at his home in the Hamptons all the time." Ruiz, who did not respond to calls to his last known phone number, was once photographed at Dreier’s golf tournament, smiling alongside Michael Strahan.

A year after Dreier LLP was founded, Dreier was sanctioned by a judge, apparently for the first time in his career. He was cited for planting advertisements made to resemble legal notices in the Times and the Post, listing damaging information about a rival of Sheldon Solow’s. Dreier’s chief confederate in the matter was Kosta Kovachev. In one deposition, Dreier refused to answer his interlocutor’s questions 79 times and threatened to walk out of the room ten times. "I’m not going to sit here and have you waste my day by asking these questions," he said, until he finally admitted he was working for Solow the whole time. "What I found most peculiar was, even after we had him sanctioned, he was just, ‘So what? Screw you,’?" says Stanley Arkin, the attorney who exposed Dreier’s role in the smear job. "Some people think they can bull their way through anything."

The phony note program started that same year, and Dreier was soon issuing more in bogus debt than he was earning in legal work. By December 2006, prosecutors say, one hedge fund alone had invested $60 million in the notes. According to bankruptcy-court records, Dreier LLP’s gross revenue for that year totaled $58 million. By 2008, prosecutors say, Dreier was on the hook for $180 million in phony notes, plus another $20 million in annual interest. That was almost double the firm’s annual revenue.

Last fall, on one of the first Mondays in November, Dreier got a phone call from a man he’d never heard of named Tom Manisero, a lawyer who told Dreier that he represented Solow’s audit firm, Berdon LLP. With a Berdon executive sitting in on the call, Manisero told Dreier that someone from Berdon had discovered an audit report on Berdon letterhead that had apparently been used to market some Solow Realty notes to the Whippoorwill hedge fund. Dreier’s name had been mentioned; he was said to be the person marketing the notes. The audit report was, apparently, a forgery. Dreier was evasive on the phone. "It clearly took him by surprise," says someone familiar with the call. "He wasn’t angry. He was hemming and hawing a bit. He was trying to give some bullshit story that he was acting on his own, but that Solow was involved in some sort of litigation and they were trying to buy the debt of the person who was litigating."

The truth is, Dreier already knew that his enterprise was starting to unravel. Investigators now believe that by September or October, Dreier had largely run through his cash and had to sell new phony notes just to pay his bills, all the way down to the firm’s car-service tab. In September, a representative from one hedge fund had contacted Dreier asking why the firm’s Solow notes weren’t being repaid on schedule. On October 17, Dreier had signed a credit agreement with Wachovia Bank for $14.5 million, pulling out $9 million right away. To bring in more money, he also allegedly sold phony notes to two hedge funds in October—Verition (owned by Amaranth’s founder, Nick Maounis), which paid him $13.5 million, and a firm the U.S. Attorney’s Office is not naming, which paid Dreier $100 million. People who knew Dreier well noticed a change in his demeanor. He was colder, more calculating, and "he seemed nervous," says one source. "There was a manicness to him."

The call from Tom Manisero appeared to shake Dreier further. Soon after, prosecutors say, he tried to move money into a personal account he used for his Caribbean properties. Dreier didn’t know that the authorities had already been alerted: Shortly after that first call, Manisero along with Solow’s attorneys at Shearman & Sterling had called the U.S. Attorney’s Office. A few days later, Manisero’s phone rang. It was Dreier again. "Tom," he is said to have said, "I need to talk to you." "I’ve got an office full of people," Manisero replied. "I need to call you back."

What followed were at least a half-dozen phone calls over then next few weeks between Dreier and Manisero, most of them secretly recorded by the U.S. Attorney’s Office. Dreier assumed an accommodating posture, professing to be cooperative and willing to give Manisero whatever he wanted to assure him everything was all right. In one call, Dreier admitted the audit reports were fake, saying he was "ashamed" and that it was "very serious what happened here." But he insisted it was only this one instance. He mentioned Kosta Kovachev by name, as well as Armando Ruiz.

Manisero told Dreier he didn’t believe this was the only time and asked to talk to the other people involved. Dreier stalled. He began calling Manisero from time to time unprompted, apparently to feel him out about how much he knew. He’d implore him to keep this a private matter because it would damage a lot of people, including his firm and his family. On November 10, Dreier called Manisero from the United Arab Emirates, where he said he was meeting with several businesspeople about the possibility of opening another law office. He also traveled in November to St. Martin and Qatar. Manisero kept asking Dreier for more information about what he’d done, never letting on that the investigation had begun.

The Friday after Thanksgiving, Dreier called Manisero one more time with a different pitch: Maybe there was some way they could settle the matter. "Obviously," a source familiar with the calls says, "the suggestion was money can buy peace here." Manisero’s response, a source says, was incredulousness. Technically, Dreier had admitted only to trying to sell the notes once and not even succeeding. If, as Dreier said, this was the only instance he’d tried, and it had failed, why offer a settlement? "How would a settlement work?" Manisero is said to have said. "I don’t understand it."

According to the source, Dreier suggested Manisero would sign a release form limiting Dreier’s liability. "It was a real shuck and jive," the source says—with "a hint of desperation setting in." It was the last time Manisero and Dreier would speak. Over the course of these calls, the Verition hedge fund, which had been speaking with Whippoorwill, learned about similar irregularities in its transactions with Dreier and sought to reclaim the $13.5 million the fund had paid him. In November, a lawyer for Verition was asked if the fund ever got its money back. "We got money back," a source says the lawyer said. "But I don’t know if it was our money."

On Monday, December 1, another front of trouble opened up for Dreier. A bankruptcy lawyer with the firm named Norman Kinel sent Dreier an e-mail asking for $38.5 million out of the firm’s escrow account. Kinel needed the money for a client that had been dealing with a bankruptcy for more than five years and wanted to use some of its escrowed funds to pay its creditors. But there was a problem. Less than half the needed money remained in the escrow account. The day after he got the e-mail from Kinel, Dreier flew to Toronto.

On December 3, the phone rang in the comptroller’s office of Dreier LLP. It was Dreier, calling from Toronto. He’d been arrested for criminal impersonation. Someone at the Ontario Teachers’ Pension Fund had alerted the police moments after Dreier was caught pretending to be Michael Padfield, and someone, either the police or a representative of the fund, had reached Dreier on his phone before his plane took off. Dreier agreed to turn himself in. "He was obviously a beaten-down man," a Dreier LLP source says. "His voice was gravelly, desperate. He said he did wrong, he’d ruined his life and career, and he’d try to make up for it."

The same day, Dreier’s 19-year-old son, Spencer, walked into the offices of Dreier LLP to deliver a message on behalf of his father. Spencer’s mother, Elisa, was with him. According to one source, Spencer walked into a conference room where about 40 of Dreier’s partners were meeting to discuss what to do. With his mother waiting outside, Spencer delivered his speech. "He said no one should be deserting his father because his father gave them so much," says someone who was there. "It was bizarre." The lawyers in the room were livid. One even started shouting: "I’m not going to listen to you! You have no place in here! This is a partnership meeting. You’re not a partner!" Spencer even apparently came back to 499 Park Avenue the next day, trying to get in, when the guards stopped him. "He said, ‘I’m just going up to get some computers!’?" a source says. "And they said, ‘Well, you can’t. Sorry.’?"

On December 4, Dreier, still in jail in Toronto, spoke on the phone with two of his partners, Steven Gursky and Joel Chernov, who asked him about the missing escrow funds. Dreier tried to tell the men that had he not been arrested, he would have been able to come back to New York and straighten things out—perhaps by selling some of the firm’s art. Chernov was having none of it. "I understood from this conversation that Mr. Dreier was implicitly admitting that he had improperly used client escrow funds," he later told the court.

Dreier remained in jail for three days before bailing himself out, long enough for his arrest to make the news and the escrow revelations to spread within the firm. The lawyers at Dreier LLP knew that Marc Dreier was the only thing keeping the firm together. If the only equity partner was stealing clients’ money, the whole firm could implode, leaving 250 lawyers unemployed and potentially exposed to lawsuits from angry clients. "As soon as we heard there was a problem with the escrow accounts, that’s when we knew," one partner says. "The escrow is the holy grail. You don’t touch escrow unless you have no other option." Says one close colleague: "I’ve never seen such mass hysteria in my life. People were running out the door, lawyering up. People started to see their careers evaporate."

During the chaos, Dreier still managed to transfer more money from another escrow fund into one of his personal accounts. The firm’s comptroller, John Provenzano, refused to do it twice before Dreier ordered him to connect him directly to someone at the firm’s bank and then arranged a $10 million transfer himself. At 2 p.m. on December 4, Kosta Kovachev reportedly went to the fifth-floor conference room at the Park Avenue offices of Dreier LLP, took two paintings, and left in a cab.

Dreier finally made it back to New York on Sunday night, December 7. The escrow matter wasn’t public yet, and one colleague believes Dreier even thought he could still clear everything up before coming under further scrutiny. Maybe he could contain the impersonation arrest, keep the hedge funds at bay, and solve the escrow problem. Maybe Tom Manisero and Norman Kinel and Michael Padfield weren’t talking to one another yet. But it was too late. Dreier was arrested on the tarmac and charged with two counts of fraud. It was then that he learned that the Justice Department had been looking into his business affairs for weeks.

Marc Dreier now spends his days under house arrest in his Beacon Court apartment. His son and mother are guaranteeing his bail and paying the $70,000-a-month costs of around-the-clock security. If convicted, the man one prosecutor calls "a Houdini of impersonation and false documents" faces some 30 years in prison. Dreier has all but confessed to parts of the scheme, and his own lawyer has said he expects his client to plea out before the proposed June 15 trial date. Kosta Kovachev has been arrested, too, and at last report was still in jail. Through their attorneys, both Dreier and Kovachev have refused to comment. Armando Ruiz has not been charged with any crimes, but the government has subpoenaed all documents concerning him from the law firm. Because Dreier was the only equity partner in Dreier LLP, the firm vaporized, as expected, practically the day he was arrested. Many of Dreier’s former colleagues have since joined other firms and argue that they were partners of Dreier’s in name only. What liability they may face is not yet known.

All told, Dreier is accused of selling $700 million in phony notes to thirteen hedge funds and three individuals. More than 200 creditors, including a few hedge funds, have already filed more than $450 million in claims against the firm; Eton Park is seeking $84 million, Fortress wants $61.9 million. Investigators say the money is mostly gone—Dreier spent it on his homes, cars, art, and the like. It’s unclear how much anyone will recover. It may be true that Dreier was driven by an excess of ambition and ego. "It was always important to him that people thought he was doing well," says one old friend. "He had his name on that big fucking building on Park Avenue." And so instead of scaling back or closing the firm or selling the yacht, "he crossed a line." Then again, there are those who view him in a darker light. "Marc Dreier has been a shakedown artist his entire career," says an angry former client. "That’s what he does. That’s how he makes money. He insinuates himself into people’s lives. He gains their confidence. And then he exploits them."


Greenpa said...

What to do with the rating agencies? Very little discussion there- except everybody seems to agree they are really incompetent, and corrupt.

So far I'm not aware of any movements to investigate, shut down, or regulate them; possibly I think because they're so integral to "business as usual" - and nobody knows what we'd do without them.

It just seems clear to me that they are, truly, directly responsible for some of the current mayhem; both the business raters and the consumer credit agencies. Corrupt idiots, all around.

Anybody aware of movements anywhere? This request for an investigation is the first I've seen.

Anonymous said...

It has become common practice for employers in the United States to eliminate high wage earners and replace them with lower wage earners to support profitability. The capitalists of the United States are essentially doing the same thing, eliminating on a national scale, a middle class that is an anachronism for the new world order.

Overseas, there are intelligent and hard-working people that have no choice but to work at much lower pay scales than those that exist in the United States and, in addition, these people work without healthcare, in degraded environments and with few welfare benefits. Manufacturing has fled to China where a temporary disparity in wealth has created a profit opportunity. The U.S. has borrowed money to improve our lifestyles when wages and work opportunities have not been available. The primacy of the dollar has allowed individuals and government to borrow that which cannot be earned.

It now seems that certain international banks are cleaning-out the U.S. treasury (U.S. taxpayer) in advance of an equilibrium event. The event has started with a catastrophic debt implosion, which through the magic of the CDS, has allowed these international banks to be compensated from government coffers for losses they anticipated would occur. The resulting deflation has taken down housing prices, wiped out equity, destroyed pensions and 401k's with more to come.

The next hit will come from unemployment and inflation. Tax receipts are way down. Borrowing will have to go way up on a national level. The interest demanded on dollar instruments will increase dramatically as the shear amount of quantitative easing makes them an unsafe investment. Your wages are also denominated in dollars. If inflation hits 20% per year, good luck getting an equivalent pay raise when unemployment is also at 20% or more. In one short stroke, your home equity, pensions, 401K, are wiped out.

The coup de grace comes when your dollar wages, if you have any, buy very little in what will be a world full of shortages. As the dollar fails, social security, medicade, medicare and other welfare programs will be vaporized. The final results will be an international population of slaves in wage equilibrium, willing and able to work for meager sustenance.

Forget about stepping in and buying the greatly deflated assets at pennies on the dollar, you won't have the credit or the cash. However, foreign entities, especially energy exporters and banks will likely purchase much that is of value (income producing) as non-performing assets are left to rot. People will get to work again, just to survive. Like Warren Buffet said, "A country that is now aspiring to an 'Ownership Society' will not find happiness in - and I'll use hyperbole here for emphasis - a 'Sharecropper's Society.' But that's precisely where our trade policies, supported by Republicans and Democrats alike, are taking us."

Bigelow said...

“Second, page 40 has some truly frightening implications, among them granting The Department of Commerce plenary authority to invade networks and access the data therein irrespective of Constitutional or legal restrictions against that action.
Finally, there is a provision within this draft allowing The President to order disconnection of any "critically important" infrastructure - but it does not define what that is, once again, granting effective plenary authority to The President to silence communications irrespective of Constitutional protections regarding Free Speech..”
Constitution Dies - To Thunderous Applause

Persephone said...

Until Bush signed the Rating Agency Reform Act,
the rating agencies reported to the government - and not paid by the entities they were rating.

The law should be rescinded.

Anonymous said...

Great Sean Olender article posted by Ilargi today:

" On Jan. 31, 2009, Santa Barbara police held a 53-year-old homeless man on $20,000 bail for shoplifting $7.69 worth of soup and bread. Yet Bush did not move to prosecute a single executive at any of these banks, and Obama likewise doesn't want to be "vengeful" by investigating the crimes of investment bankers."

Anonymous said...

Anon 6:40

Great post. Perhaps you could leave a clue in the future--your words resonate with power and truth.

Signed, An Appreciator

Jack O'Sullivan said...

Your words once again ring true. Long time reader, first time poster. Keep the knowledge flowing!!!

Jack O'Sullivan
Bedroom Sets

Ilargi said...

Yo everyone,

Jack O'Sullivan sells bedroom sets -not sure in what part of the planet- that are as hideous as they are expensive. Though admittedly, it's a close call.

Now Jack, not having moved much of anything in the way of merchandise off late, thinks up a new sales strategy and decides to come to a website that deals with the downfall of the economy, slips in some generic compliments, and proceeds with his attempt to get rid of his grossly overpriced has-been-out-of-taste-since the 1950's insults to man's basest sense of shape and form inventory, right here.

A bonus point for desperation.

redcatbiker said...

Yes, Ilargi is correct, that bedroom furniture is ugly! Actually, it is beyond ugly, it is fugly!

Anonymous said...

comfy cozy sleep all night
till cows do moo a doomers morn
in a Wharram Percy Groupie - snug and warm!

Wharram Percy
Period Furniture
for the Discriminating Voyeur

Ilargi said...

Re: Wharram Percy:

"The basic peasant house in the 13th century was about 15 feet wide and might be twice the length; houses of the 14th century were about 20 feet wide and 80 feet in length."

That right there spells the beginning of the end. And I'm sure they called it progress, the doomed souls. But the horror! The Horror! Do your own math and color the pictures.

Anonymous said...

"..What to do with the rating agencies? Very little discussion there- except everybody seems to agree they are really incompetent, and corrupt...."

Funny you should mention the rating agencies today. Just had a spirited discussion (i.e. argument) with a diehard Obama guy. He was fuming about how this financial meltdown happened and for what ever reason he brought up and zeroed in on the rating agencies as a key factor. I said that Obama's Attorney General has been quiet as a door mouse on just about everything to do with indicting anybody in this whole mess.

Prosecutor's and US Attorneys are usually chomping at the bit to bulk up their reputations with juicy convictions. I've heard they will even indict a ham sandwich if it results in some good career PR.

Pat answer from the O man supporter, he hasn't had enough time to 'build' any cases. I said a first year law student could have come up with several by now, there are so many to choose from, you could swing a lawyer by their neck tie in DC without hitting one.

This is typical 'blinders' loyalty.

Take this headline for instance:

Holder Pledges Caution in Prosecuting Public Corruption Cases

Wow, Eric is a real go getter.

Sounds like he might have a case or something ready in a year or two at that rate.

Shallow rationals for not aggressively going after the Banksters and 'Kleptocrats' is sounding like the AJ is part of the problem, not the solution.

Hey, just like Geithner is at Treasury, what a coincidence!

rachel said...

Worsening economic figures are being used to confirm that more bailouts are needed rather than that previous ones might be failing. The logic is much like medieval blood letting: The patient died because we didn't drain enough of his blood.

Is there hope or are we as good as dead?
I personally have ripped out the needle and applied direct pressure but can't seem to get out of the doctor's office.

Thanks as allows for the post.

Anonymous said...

Question for I&S; how high can the savings rate in the US go? Won't it start to decline at some point? If it does start to decline will this be an important indicator of anything in the economy?

Armando Gascón said...

Banco de Santander, the first bank in the world.
Earnings, 8,876 million euros, number of offices -14,137. Santander bought some big banks, like Abbey, Banco Real, Bradford & Bingley, Alliance & Leicester, these figures do not include the American Sovereign. Earnings since 2003 have multiplied by 240%. Shareholders dividends increased from 6,14% to 7,23 %.
BBVA, the other great Spanish bank is 3rd in the world on earnings (5,020 million euros), seventh in branches -7,787.
There's a lesson here. They are normal, boring traditional banks. A couple years ago Botin, CEO of Santander said they were going to surpass Citi, some time in the future. Apparently he did it, by just holding its place. The others sank.

Gravity said...

"Mr De Soto reckons there are only a few hundred billion dollars of toxic paper"

I was under the impression that
its at least 150 trillion.

"Until we acknowledge this toxic debt then this crisis could get even worse."

But revealing the true extent of the swamp would destroy the big boys, so this must be prevented
at all costs.

Could it be there are only a few hundred billion in poisons?
or is this guy being wildly optimistic?

el gallinazo said...

If anyone is more interested in De Soto's views, you can check out this video panel along with Stiglitz and Naomi Klein. I find some of his ideas interesting, but I am not a huge fan of his as I am of Klein.


As to bloodletting, I think a better analogy would not be pulling the needle, but rather crushing the leeches.

Anonymous said...

Gravity fyi:

The derivative monster is Much larger than most suppose.

"....As the April G20 summit in London approaches, it is worth noting that the trans-national play of derivatives has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, an annual increase of +22% worldwide...

While it may seem intuitive that the world’s stack of derivatives has shrunk during this crisis, in fact it is still growing on its exponential curve according to mi2g a London based digital banking, security, and risk management company.(

...As the April G20 summit in London approaches, it is worth noting that the trans-national play of derivatives has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, ie, +22% worldwide...

This is a staggering increase and most of it is seen in the Over-The-Counter (OTC) category as opposed to exchange traded derivatives...

As a result, the global size of the derivatives bubble which was calculated last year at USD 190k per person-on-planet, has risen to USD 206k per person-on-planet...

The ever rising commitment of governments for the repeated bailouts of financial institutions is partially linked to various flavours of derivatives exposure settlements and “black hole” losses emanating from off-balance-sheet vehicles."

Blue Monday

The Good Presbytaritan said...

on Friday, Ahimsa said:

"IMHO, if one has cash now, one should start moving in the direction of purchasing hard assets -- water filters ....."

Presumably it would be best to start with specialty items brought in from overseas that are not likely to go down in price, such as water filters.

I believe Stoneleigh recommended a Berkey water filter a few weeks ago? Any idea how to get one of these "Big Berkeys" in Canada if not living in a big city? I have a camping filter (Katadyn) purchased from Mountain Equipment Coop a few years ago, but think it would be good to have a larger drip filter for emergencies. Are these Big Berkey's good enough to filter runoff from a roof?

If the UK is really heading for an IMF bailout, will austerity measures be imposed and affect supply lines of specialty products sooner than one might expect?

Anonymous said...

The whole derivative story is surrealistic.

Makes me feel like a character in Toy Story.

Buzz: "To infinity, and beyond!"

or some other memorable lines for these financial times spoken by toys!

Buzz: This is no time to panic.
Woody: This is a perfect time to panic!

Buzz: I just want you to know that even though you tried to terminate me, revenge is not an idea we promote on my planet.

Buzz: But we're not on my planet, are we?

Buzz: How are you fixed for fuel? Are you still using fossil fuels, or have you discovered crystallic fusion?

Woody: Well, we have double-A's.

Buzz: One minute you're defending the whole galaxy, and, suddenly, you find yourself sucking down Darjeeling with... Marie Antoinette and her little sister.

Sid Phillips: No-one has ever attempted a double bypass brain transplant before.

Rex: And I'm from Mattel. Well, actually I'm from a smaller company that was purchased by Mattel in a leveraged buyout.

Anonymous said...

Katadyn water filters are great because they are small and portable but need pressure (i.e. hand pumping) to filter. The top Katadyn ($225?) is good for filtering 10k plus gallons of relatively 'clean' water. Needs to have spare parts (seals & gaskets) for the pump mechanism.

Katadyn's are used by international aid agencies for their employees in the field, not for large scale filtered water production.

Big Berkey come in 5 or 6 sizes. Gravity fed water filter, good for at home on the counter situations. Does take more time to filter the same amount of water than the Katadyn because they do not use pressure to filter.

Berkey's should do fine with cistern roof water.

One kind for the road and the other for home is my strategy.

el gallinazo said...


Finally managed to download Michael Panzner's Book-TV C-Span 2 interview - almost 2 hours. I know Stoneleigh has a very high opinion of his analyses and I can see why. About midway through the video, in response to a question, he states that we are in a deflationary phase due to the bursting credit bubble, but with the huge printing of central bank money, this will eventually reverse, and we will hit an inflection point where inflation will start.

Timing is always the most difficult, but Panzner says that the inflection point could be as early as the end of this year. If the collapse of the suckers' rally occurs in September, we will be seeing a huge credit collapse continuing into 2010. Thus I agree with your timing that the inflation inflection point will be quite a bit further down the road. In all fairness to Panzner, his timing of the inflection point was a wild guess. His point is that it has to happen eventually as you also point out.

Thinking about it more, I think that there will be two inflection points; one in the rate of deflation and the other in the actual deflation. I think he may have been referring the the first, the rate of deflation occurring around the new year.

Anonymous said...

The Good Presbytaritan said: "Any idea how to get one of these "Big Berkeys" in Canada if not living in a big city?"

I ordered mine through The Alert Store in Texas, then explored their affiliations and got nervous when their phone led to an answering machine and there was no response to an email inquiry. I was much relieved when it arrived a couple of weeks after ordering. There was a customs duty to pay of about $20.

The included filters are good for about 6000 gallons. I'd like to order another 2 sets, but will lool elsewhere for them.


Hombre said...

el gallinazo

You are a great asset to all these "doomer" and economic site discussions--especially here at TAE. Just a word of thanks for your input.

Some of us are not competent to analyze these financial terms and functions and depend on folks like yourself, St and Il, etc.

Greenpa said...

Persephone- I was not aware of that point- thanks!

Anon 10:05. I agree, in large part. Every time I see "Cuomo goes after..." whatever, I head inside my head " why the hell isn't this the Fed AG going after- instead of the NY state AG, who is obviously campaigning for higher office?"

I have only one mitigating possibility to offer. It will probably put me in the "diehard Obamaist" category- but most folks already think that. I don't think I am- I'm just trying NOT to be a pissed off knee jerk cynic. :-)

Remember that Obama, at least, in the new administration, is generally admitted to be much smarter than your average bear, or president. And pretty savvy, in terms of tactics.

So- you're taking power. A long process, fraught with peril, if you're intending to actually change stuff.

One of the things that is classically tactically idiotic, is to announce your real intentions.

"Hey, you scumbags; we're coming after you!"

Oh, don't do that. The shredders would go into overdrive and overtime immediately; and evidence you need would vanish, very quickly; and the people themselves would all move to Berzerkistan.

You want your targets fat, happy, and complacent.


Gravity said...

"the trans-national play of derivatives has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, ie, +22% worldwide..."

If some of this expansion is based on squared derivatives that are toxic, but not rated as such, the eventual cascade in downgrades would also make most of the increase toxic.

Perhaps half of the 1,4 quads is worthless at best, when the conomy
continues to deteriorate most of what is healthy now should follow the toxic legacy.

If De Soto's estimate is accurate, wouldn't the problem have been solved by now?

ExRanger said...

@The Good Presbytaritan and Hugh,
You can get Berkey water filter systems and other brands on They have a pretty decent selection when I looked today.

el gallinazo said...

@Coy Ote

Thanks for the compliment, but I am far from the same league as I & S. Until 1.5 years ago, my total knowledge of economics was from a 101 course going back over 40 years. But as I neared retirement and started thinking about preparing, I got interested and found to my amazement that there was this tsunami headed at us that almost no one was talking about. This blog has helped me more than any other to figure what is happening, why, and what I can possibly do to save my own ass.

I do take a lot of flack, but some of it's deserved as I can be blunt, irascible, and tactless. I guess I have reached the curmudgeon age. And then there are the Robert De Niro Taxi Drivers anon lurkers. Maybe I will get that shotgun.

Ahimsa said...

@ The Good Presbytaritan

Through the years, I have purchased my British Berkefeld (initially only offered with white filter) and Black Berkey (comes with black filter, which removes more contaminants) from the following company. I've been pleased with their service and knowledge regarding water purification. You might want to call them regarding your specific question.

I have both white and black filters. It's good to keep a supply of both.

Anonymous said...

“In short, the government cannot save the banks by improving liquidity or changing mark to market rules because the problem isn't illiquidity or accounting. The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks--because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors. The alternative--allowing the insolvent banks to fail, seizing the assets, wiping our shareholders, giving bond holders a serious haircut--is still not on the official agenda.”
Geithner Wrong, Crap Assets Correctly Priced, Say Harvard And Princeton Profs

Anonymous said...


“A disturbing 50% of Americans say they are only one month — or only two paychecks — or less away from not being able to meet their financial obligations if they were to lose their job, and more than half of these, a startling 28% of the total respondents, couldn’t survive financially for more than two weeks.”

Anonymous said...

One has to wonder what price Ilargi would deem fair for a piece of furniture. Of course, the posted link looks to be some very pedestrian,period reproduction type of stuff, most likely manufactured in China and resold at the prices seen in the link.

Personally. I would never pay 3500 for a headboard; however, that price for a custom builder translates into fairly mediocre wages, perhaps twenty bucks an hour when all is said and done.

So-- and assuming there is steady year round work--twenty bucks an hour translates into 40 grand a year. How much lower do the Prophets of Doom suggest hourly wages should fall to escape the "grossly overpriced" accusations?

Travis Bickle

Ahimsa said...

Excellent article by Larry Chin on "The Smooth Criminal Transition from Bush/Cheney to Obama."

An excerpt:

"Beneath his seemingly boundless charisma and charm, Barack Obama has always been an utterly ruthless politician. He has been a compromiser who has danced with the darkest forces of political and criminal power, while winning over common people; a consensus-abiding chameleon and a “pragmatist”. Obama is the true model of what George W. Bush only claimed to be: “a uniter, not a divider”.

The signs were clear from the early days of the presidential contest that Obama was, like every presidential candidate, a handpicked puppet. His cadre of national security and foreign policy advisors included the most notorious war criminals, intelligence/security “advisors” and corrupt think tank assets in the world. His campaign was bankrolled by Wall Street, and big corporations. His policy agenda was taken from the playbook of the Bilderberg Group, the Council on Foreign Relations and the Trilateral Commission. Both neoliberal (and neocon) elite power and money coalesced behind Obama, as his political rivals dropped off.

Obama’s record in the US Senate was one of general complicity with Bush/Cheney and the status quo, including enthusiastic support of the consensus "war on terrorism" deception and the big 9/11 lie. Former US congresswoman Cynthia McKinney has described how, in her encounters with Obama, the senator from Illinois repeatedly refused to act in opposition to Bush/Cheney policies. Time again, during his days in the Senate, and throughout the presidential campaign, Obama has not only fully supported the Bush/Cheney administration on the Patriot Act, and the wholesale the militarization and criminalization of the United States."

Greenpa said...

Re water filters. My father, teaching sanitary engineering at the time, told me "10 feet of sand will filter out anything."

I think that's true, for anything that is a particle; like a bacterium or virus. It's almost true for molecular toxins, and even metallic things like arsenic.

So bear in mind that you might be able to make your own filter; by using a 10 foot, or more, column of sand-filled pipe. The bigger diameter, the better, of course.

And- SHARP sand is much more effective as a filter than round sand. It's also more "active"- to some extent, it can actually serve directly as a catalyst to break down organic compounds.

Just file that in the back of your head, in case. Practical use of sand is a little more complex; you have to prevent it from clogging, for example. There are ways.

Greenpa said...

"He has been a compromiser who has danced with the darkest forces of political and criminal power,"

Welcome to the real world.

Seriously. Would you like to run a business in New York City? Chicago? LA?

You WILL have to do business with "dark forces". There is no other option.

A very tiny mom and pop operation out in the sticks may escape it for a while. But- expand- do business across state lines- you will have to compromise something.

Other voices on this point?

Ahimsa said...

Re fancy furniture

Who needs fancy, decadent, bourgeois furniture?

My family and I sleep on cot size (30 X 75), organic (cotton or cotton/wool) futons (placed on the floor). They are made by a small family business in Vermont.

"Live simply that others may simply live." ~ MOHANDAS K. GANDHI

Anonymous said...


How do you sleep on something only 75 cm long?



Ventriloquist said...

@ FB --

Those measurements are in inches, not centimeters, Silly!!


Ahimsa said...


Ooops, I forgot to say we're Hobbit size.


Shibbly said...

El Gallinazo,
What do you mean by "the rate of deflation occurring around the new year"
i.e actual vs. rate

Hombre said...

@ Greenpa...
"Seriously. Would you like to run a business in New York City? Chicago? LA?"

No thank you. Not even Indianapolis is squeaky clean! But like you infer, one does have to get dirty hands if you attempt to clean things up!

I read Ahimsa's referred article and thought it was quite well written and interesting, but perhaps a tad too single-minded in terms of trashing Obama regarding his motivations and actions.

At least I don't buy the notion that the whole thing is a Bildeburger... CFR... Trilateral Comm. connected plot!
(Gore Vidal once jokingly implied that the leadership of said organizations meet each morning at a D.C. Taco Bell!)

Ventriloquist said...

April 6 (Bloomberg) -- U.S. stocks fell for the first time in five days as Mike Mayo, analyst at Calyon Securities, advised selling bank shares . . .

U.S. Bancorp and SunTrust Banks Inc. slid at least 5 percent as Mayo said government measures to shore up banks may not help as much as expected and loan losses will exceed levels from the Great Depression. . . .

. . .

Mayo, the former Deutsche Bank AG analyst who gained a reputation for independence, gave “sell” ratings to the two companies as well as BB&T Corp., Fifth Third Bancorp and KeyCorp. He assigned “underperform” ratings to Bank of America Corp., Citigroup Inc., Comerica Inc., JPMorgan Chase & Co., PNC Financial Services Group Inc. and Wells Fargo & Co. He cited concern over rising loan losses.

A gauge of financial companies in the S&P 500 fell 3.8 percent for the biggest decline among 10 industry groups. The group of 80 banks, insurers and investment firms is still 55 percent above its March 6 low. . . .

“While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” Mayo wrote in a report. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

So, let me get this straight. The last several weeks have seen a general market euphoria/rally driven primarily by financial equities.

And so, today, a major analyst announces that in fact, the financial sector is nowhere near complete recovery, and the market drops.

Ummm . . . nobody in the entire equities analyst community figured this out over the past few weeks, and this is all *NEWS*???

I&S should be pulling down those six-and-figure stock analyst salaries, since their advice is far superior to the drivel from Wall Street, and savvy investors would pay good money for same.

Think about it.

Anonymous said...

Here is some fitting art for our current economic BALLOON predicament

Warning: No one NEEDS art, so the simpletons may cover their eyes.

Travis Bickle

jal said...

Mike Mayo stops market rally!!!!

What we need is a discussion on "the herd", the lead cows, alpha bulls.

Being right, (I&S) is different than being able to drive the market.

HappySurfer said...

Thanks from a few days ago

VK said...

Courtesy from a guest post written by Option Armageddon at Naked Capitalism,

A relevant quote from the article,

"Already, the federal government has committed $12.8 trillion to fight this financial fire (a figure that doesn't include FDIC's $6 trillion worth of insurance commitments). Then there's the trillions of unfunded liabilities for private and public pension schemes that Uncle Sam may be forced to absorb. Also there's Obama's budget deficits, which will commit us to borrowing trillions more over the next decade. Finally and most importantly, our unfunded liabilities for Medicare and Social Security surpass $50 trillion."

Anonymous said...

The history of civilization is one 'mob boss/ war lord' subjugating a lesser skilled one.

Years ago, before the Web, I was reading an interview with Francis Ford Coppola where he was asked about the 'Godfather' series of movies. What was the big picture on their significance.

He said that he wanted to show the transformation of a localized ethnic mafia into a modern multinational corporation. The evolution of 'organized crime'.

When Eliot Ness took on Al Capone, it was essentially one mob subduing another. The federal government being the biggest gang in the country when you get right down to it.

Obama's carefully staged Whitehouse meeting with the Gang Banksters the other day that was then "leaked"(cough, cough) was also a power play.

Obama thinks, rightly or wrongly, that he is the Shogun here, the top war lord, and that anyone who crosses him had better watch their backs.

An interesting history lessons for the kids to say the least.

VK said...

50 Ways to Crash the Net

An old article but one that could still apply to a potential cyberwar. The key paragraph,"The myth persists that the Net was built to withstand the blast of an atomic bomb. But that was the military-run Arpanet of the 1970s, not the corporate-run Internet of today. "What's basically wrong is we are centralized," explains Dr. Peter Salus, Internet historian and author of Casting the Net. "We have violated the constraints that the Department of Defense had in 1967."
Indeed, one of the most significant results of commercializing the Internet has been to create more single points of failure, rather than a more redundant and reliable network. That's because companies are busy finding ways to make themselves indispensable: User self-sufficiency is incompatible with sustained corporate profits."

Anonymous said...

I have to wonder whether or not that transcript of the meeting O-man had w/the banksters was carefully leaked to give political cover for the back door granting of "bonus"monies to select members of that fraternity.Too cute by half.

There was a interesting statistic in the last plateful of tasty information given by our hosts.The figure of 14% of a average Americans income going to interest payments alone,should provide more concern to anyone paying attention than it appears to...think about it.I would imagine the lower on the socio-economic scale you look,the higher as a percent of total income this would become...endlessly paying a "tithe"of their lifes blood... [literally hours of life spent at work]
Mrs Snuffy and I got out of this about 5 years ago.No credit card.We have a rarity.A savings account distinctly conservative.As hard as it is to save money..before we buy...WE THINK.
No,we do not have a big screen tv.We drive cars over 20 years old[god bless Toyota].We have a mortgage,true,but pay a little extra[at least 50$] on it every payment[we paid of the second 4 years ago]....With the .gov soaking up every nickle they can lay their mitts on,becoming independent of "the system" will become a deadly necessity for anyone who tries to become successful.
Its not going to take much more of this for young folks to pick up on the "frugal is cool" meme..
I see a distaste,a re-assessment of those things that are important that does not include a whole lot of physical possessions...think hippies late 60s'to mid seventies....Where your head is at is more important than whether or not you are wearing top end fashion[sorry persephone]
I need to get busy as my bees..

later folks,