Friday, May 15, 2009

May 15 2009: White Hot Air

John Collier HOT WHITE AIR August 1941
Local band leader plays 'An Old Southern Melody' and everybody cheers. Coffee County, Alabama

Ilargi: Today's a pivotal day, the entire system has started to visibly tumble in on itself, and it unfortunately takes me more time than I have right now to detail it. There's always tomorrow. But the evidence still doesn't lie.

Exchanges can rally all they want. When you see that "US prices fall most since 1955", you’re looking at something that could change rather quickly. Once you get to "US production capacity utilization lowest since records began in 1967", that is not the case. There's a lot more inertia in capacity utilization. Detroit runs at 42% of capacity, and all economic numbers except for those blurting out of Wall Street and Washington indicate that even that is nowhere near a bottom relative to actual sales.

Like a diabetic junkie camping out at a fast food takeout counter, President Obama, after increasing government debt and borrowing close to fourfold, says the debt and borrowing that are on his tab are not sustainable. And then pledges to bail out insurance companies, for no reason that anyone can seem to fathom, and to prop up the municipal bonds markets, after ensuring the death of those very markets himself with the announcement of the issuance of mind-boggling amounts of federal bonds.

Everything that still functions to a degree in the US now runs on government hand-outs, bail-outs and guarantees. Everything. That's it. And I’m not kidding here. Take out government support for banks, home purchases, car loans and all the rest, and you would be looking at a barren lunar economic landscape. And things are getting visibly worse every single day. GM and Chrysler may or may not come out of bankruptcy proceedings, their present predicaments are sure to cost millions of jobs this year alone. Those losses will be added up on top of the millions more in non-car-related firings, and there will come a point, and soon, when something breaks in the chain that cannot be mended easily, if it can at all.

America has been consuming a lot more than it has been producing for years now. What makes today stand out from what has been before is that what we are now witnessing is that the consequences of overconsumption are starting to further deplete production, and with a vengeance. The government is losing its grip at lightning speed, even though you would of course never know from their public utterances. Don't underestimate the possibility that they have reached the same conclusion that people like Stoneleigh and I did quite a while ago, that there is no way back, no recovery anywhere is sight. If that were so, and you would be in their shoes, what would you do?

I can tell you what their choice is: keep up the semblance of normality as long as possible, while behind the curtains frantic efforts are taking place to save and safeguard as much as possible for themselves and their own people. And no, you are not among their own people, you are not Obama's people. To know whose people you are, look around you in your homes, your towns and your families.

Take another good look at those home prices, and the beat of the trendlines they move to. We’ve seen them lose 31% nationwide so far, much more in some specific places. And the "experts" are still looking for bottoms predicted by "fair value" and "3 times income" and data like that. Those data no longer apply. There is absolutely nothing at all, other than them, that provides any indication that prices are about to stabilize. US home sales depend on one source of financing, and one only: your money, provided through the government and its Fannie, Freddie, FHA and FHLB agencies. Without them, where would prices be? It would make you shudder to know where.

The nation, and its economy, along with much of the -western- world economy, would have already fallen to bits and shreds and pieces if not for the full faith and credit of what the taxes on your labor will provide as revenue to the state. However, you will desperately need the fruits of your labor to pay off your own debts. That is, if there are going to be any monetary fruits of your labor. The fact that production capacity utilization is at its lowest point in at least 42 years doesn't bode well. While you are getting poorer by the day, the future of the nation rests on you getting richer.

And try to understand the following, and never lose sight of it: the only way your government has on offer to provide you with a job that will pay you actual revenues, as in anything above the red line, with which you can pay off your debts or even make any future purchases, is by using your own money to lift production, and capacity utilization, to a degree at which some enterprise would wish to employ you.

That is at best zero-sum, but more likely, with 99.9% certainty, a losing proposition as temporary as the leaves of spring you see on the trees around you.. Look at it this way: everything you've seen go wrong in the economy so far has been like kindergarten. Now you're going to have to learn how to read.

US April Industrial Production Down 0.5%; Capacity utilization lowest since records began in 1967
U.S. industrial production tumbled a 15th time in 16 months during April, cut down by massive business inventory liquidation. Industrial production decreased by 0.5% in April compared to the prior month, the Federal Reserve said Friday. Output fell 1.7% in March, revised from a previously estimated 1.5% decline. Capacity utilization shrank in April to 69.1%, a historical low since records began in 1967. March capacity use was a revised 69.4%; originally, "cap-U" was estimated at 69.3% in March. The 1972-2008 average was 80.9%. Economists expected industrial production to drop 0.6% in April, with a capacity utilization rate of 68.9% for the month. Over the 12 months ending in April, industrial production was 12.5% lower.

And it might recede even more, given recent data on U.S. business inventories. Government data this week said the inventory-to-sales ratio held steady at 1.44 - even though companies have been slashing stocks of goods furiously to adjust for waning demand amid the recession. The ratio indicates how well firms are matching supply with demand. It measures how long, in months, a firm could sell all current inventory. A year earlier, the I/S ratio was 1.28. Inventory slashing took a large bite out of gross domestic product in the first quarter. GDP is the broad measure of economic activity. The latest data showed businesses in the first quarter drew inventories down by $103.7 billion, reducing GDP by 2.79 percentage points - or nearly half of its 6.1% plunge.

In the short run, liquidating excess supply of merchandise hurts orders and production and weighs on GDP. But liquidating is good for the long term, preventing a further buildup of goods that could damage the economy later on. A 1.0% drop in March meant business inventories shrank seven straight months - the longest period of decline since February 2001 through April 2002. Because business sales also plunged, down 1.6%, the I/S ratio didn't budge, suggesting further liquidation of excess supply and more downward pressure on output. The Fed report Friday said April manufacturing production fell 0.3%, after plunging 2.1% in March. Manufacturing capacity utilization slid to 65.7% from 65.8%.

Business equipment fell 0.6%. Construction supplies were down 1.1%. Home electronics decreased 0.6%. Computer and electronic products decreased 0.2%. Machinery fell 0.7%. Furniture dropped 2.8%. Manufacturing of motor vehicles and parts rose a third straight month, up 1.4% in April after rising 0.3% in March. For the year, however, auto and parts production was down 32.1%. The economy's troubles discourage consumers from spending, especially on big purchases like cars. And uncertainty over the fate of General Motors and of Chrysler isn't good for sales.

The auto industry was operating at 42% capacity in April. Excluding motor vehicles and parts, industrial production would have decreased 0.5% in April. Production ex-auto in March fell 2.3%. Selected high-technology industries dropped 0.4% last month. Output in the mining industry plunged 3.2% in April after falling 2.6% the prior month. Mining capacity receded to 82.5% from 85.2% in March. "Oil and gas field drilling and support activities continued to drop," the Fed said. Utilities production rose last month, up 0.4%; it rose 1.9% in March. Utilities capacity use rose to 80.7% last month from 80.5% in March.

US prices fall most since 1955
Prices in the US fell in the year to April at the fastest annual rate since 1955, labour department figures showed on Friday, as declining energy prices pulled back the cost of living. Separately on Friday official figures showed that US industrial output slid again in April, but at a more modest pace than in prior months, and consumer confidence rose in May to the highest level seen since before the collapse of Lehman Brothers last September. Consumer prices fell by 0.7 per cent over the year to April and were flat from March due to sagging prices of petrol, electricity and food. Slumping prices have lessened pressure on consumers who have seen their wealth and employment savaged by the recession.

But core prices, which exclude food and energy and are the measure by which economists judge the risk of general deflation, rose by 0.3 per cent from March and were 1.9 per cent higher than in April 2008. More than 40 per cent of the monthly increase, however, was due to a 9.3 per cent jump in the price of tobacco which has been driven by a government tax that recently took effect. Energy prices fell by 2.5 per cent in April and have plunged by 25.2 per cent during the last 12 months. The annual rate of inflation is expected to bottom this summer because they will be compared with the year before when petrol prices peaked, said Mike Englund, an economist at Action Economics. Housing, food and apparel prices were all down last month, while the cost of education and medical care rose.

The results on Friday were in line with analysts’ expectations. Economists remain divided about whether price inflation or deflation remains a persistent risk. Although consumers have benefited from lower prices, the expectation of falling prices can lead to a deflationary trap. Such fears were stoked after prices were flat or declined during the final five months of 2008. As the economic recession deepened in the second half of last year companies slashed prices to clear stocks. The Federal Reserve has said it remains "focused like a laser beam" on finding ways to stimulate the economy that do not fuel inflation. Ben Bernanke, Fed chairman, said earlier this month that he was working on plans to avert inflation in the event that recent tentative signs of economic stabilisation morph into recovery. He has maintained that inflation is likely to remain low during the next two years and that a rate of 2 per cent would be a healthy target.

"The broad inflation debate is a tussle between those who focus on the disinflationary forces resulting from a startling increase in spare capacity, and those with a visceral inflation fear," said Alan Ruskin, strategist at RBS Greenwich Capital. Friday’s report follows figures on Thursday which showed that US wholesale prices rose last month. The producer price index for finished goods rose by 0.3 per cent in April from previous month, but has fallen by 3.7 per cent year-on-year, the biggest annual drop since 1950. Separately on Friday, the Federal Reserve said that US industrial production dropped in April for the sixth month running, falling by 0.5 per cent. The decline was slower than the 1.7 per cent fall the month before, but industrial output has now plummeted by 12.5 per cent during the last year on weak factory and manufacturing output as global demand has continued to erode.

Paul Dales, an economist at Capital Economics, noted that much of the strength in April’s industrial output was due to a 1.4 per cent rebound in motor vehicle output. This is likely to be reversed in May, he said, due to the idling of plants caused by the Chrysler bankruptcy. Meanwhile, the capacity utilisation rate, a measure of the proportion of plants in use, across all industries fell from 68.1 per cent to 67.9 percent, the lowest level since records began in 1967. In spite of the mixed results, signs that the economic crisis may be starting to turn a corner have left consumers feeling less gloomy. According to the Reuters/University of Michigan preliminary index of consumer sentiment, confidence rose in May for the third straight month. The index is up from 65.1 in April to 67.9 this month, leaving behind the record low reached last November, and was fuelled by improved expectations about the future of the economy. "The apocalyptic tone to public discourse on the economy is steadily abating," Mr Englund said.

Falling prices could bring a nasty hangover
Call it one of the recession's silver linings — with each passing day, the purchasing power of each consumer dollar is getting stronger. But if it keeps up, and prices continue to fall, that boost in buying power comes with some nasty side effects, say economists. The government reported Friday that consumer prices fell over the past 12 months at the fastest rate since Dwight D. Eisenhower was president. Prices were flat in April after dropping 0.1 percent in March, leaving the Consumer Price Index 0.7 percent lower than it was a year ago, according to the Labor Department. That's the biggest 12-month decline since June 1955.

General deflation of any kind has not been seen in the United States since the 1950s, and benefits cash-strapped consumers looking for bargains and retirees trying to live on a fixed income. Falling prices also help savers. If consumer prices are falling 1 percent a year, the real (price-adjusted) return on a bank CD paying 2 percent magically becomes 3 percent. And falling prices are a terrific antidote to the stagnant wage growth that has weighed on many U.S. households since the last recession ended in 2001. Even if your boss freezes your wages, when prices are falling 2 percent a year, your real wage is rising 2 percent. The flip side is that borrowers and consumers carrying heavy debt loads see their burden increase. As prices fall, the purchasing power of your dollars goes up, so your future monthly payments will take a bigger bite out of your spending power. That means if you’re paying 8 percent on a mortgage, and prices are falling 2 percent a year, your borrowing cost in real, price-adjusted terms is 10 percent.

Household borrowers are not the only ones who need to worry about falling prices. The threat of continued deflation is a thorny problem for businesses, and government policymakers including Federal Reserve Chairman Ben Bernanke. The risk is that the drop in prices begins to feed on itself. Lower prices take a big bite out of employers’ profits, which forces wage cuts or layoffs. That cuts consumer spending and demand, which brings more price cuts to spur sales. "Once you get more downward pressure on wage and prices and it’s hard to get yourself out of that cycle," said Brian Bethune, chief U.S. economist at IHS Global Insight. Take the falling price of airline tickets, which have dropped for eight straight months — down another 1.5 percent in April, according to government data.

As the recession grinds on, consumers continue to postpone discretionary travel, further weakening demand. Business travel is also off sharply according to Mark Masuda, who manages airline partnerships with travel company Carlson Wagonlit.   "They’re putting the screws to their budgets and holding their travel and entertainment expenses down," he said. "Once they get comfortable that consumers are coming back, they’re going to have to get out and see customers and find new customers and you’re going to see that travel increase as well." Until then, the only way for airlines to fill planes is to cut fares.  If that keeps up, airlines can afford to lose only so much money before they make steeper cuts in their schedules, which means lower wages for their workers. As those workers spend less on other products and services, the lower demand forces wider cuts in prices.

Since the recession began over a year ago, changes in consumer prices have been uneven. While some categories have fallen, others continue to post gains, especially for goods and services where prices are regulated or changes take time to work their way through the system. Medicare reimbursements don’t fall if fewer patients show up for a given procedure. When bus ridership goes down, fares rarely follow. (Fares may even have to go up to make up for the revenue shortfall.) If an office building has lots of vacant space, most business tenants won’t get a break on their rent until their lease it up. But there’s evidence that consumer prices are falling faster than the so-called "headline" consumer price index.

Take housing prices, for example. As of February, home prices nationwide had fallen by more than 18 percent in the prior 12 months, according to the S&P/Case Schiller Home Price Index. The National Association of Realtors, which uses a separate formula, figures home prices in the first quarter of this year were nearly 14 percent lower than a year earlier. But the housing component of the government’s price formula — which makes up about a third of the Consumer Price Index — shows housing costs have risen about 1.5 percent in the 12 months ending in March.  One big reason is that since 1983 the government has measured homeowners’ housing costs with "rental equivalence" — what they would pay to rent their own home. (The Labor Department says it made the change to strip out the investment gains homeowners enjoy when home prices are rising.)

Critics of the inflation formula say it tends to understate the inflationary effects of housing prices on the way up and is now underestimating the drop in consumer prices as housing prices have fallen. "The reality is that deflation will become more apparent in the CPI numbers as we look forward over the next few months," said Bethune. Economists are divided on how long prices will keep falling. A lot depends on how long it takes for the economy to start growing again. With consumer spending making up 70 percent of the gross domestic product, that won’t happen until consumers get back in a spending mood. The economy has been shedding more than half a million jobs a month, so most households have sharply boosted savings for a rainy day. Until the job market stabilizes, consumers will likely remain skittish.

Consumers' discretionary spending in April dropped 90 percent compared to a year ago, according to Britt Beemer, Chairman of America's Research Group, a market research firm. "The only thing they bought this year compared to last year was major appliances because they had to buy them because the one they had in their home was broken," said Beemer. "That tells you their mindset."  Falling prices may throw even more cold water on spending. Why buy a new car if you expect prices to fall further in the next six months? Consumers aren’t the only ones motivated to hoard cash when prices fall. Banks lending money become leery about accepting collateral that is losing value: If the borrower doesn’t pay back the loan, the bank is at greater risk for losing money.

American households have also cut spending and boosted savings to try to fill the huge hole created by the twin collapse of the stock and housing markets, which destroyed trillions of dollars of wealth they were counting on for retirement. With 401(k) accounts in tatters, millions of older Americas are putting off retirement and regrouping.    "If a lot of consumers think they're going to have to work three (or) five years longer, they're not going to change their spending habits for a long time," said Beemer. "I feel we're going to be in this retail deep freeze until Labor Day 2010. There's just too many issues out there consumers have got to get beyond before they’re going to have any money to spend."

A true downward deflationary spiral hasn’t been seen in this country since the Great Depression. Now, the threat of deflation has spurred the Federal Reserve to undertake an unprecedented program of "reflating" the economy with a $1 trillion expansion in lending to pump more money into the financial system. The hope is that all that money will offset the collapse in wealth from the housing and financial markets and prevent deflation from taking hold. In the short run, the plan seems to be working. The drop in housing prices is slowing; so is the rise in job losses. The historic government response has been generally well-received by the public. But it remains to be seen what the longer-term impact of these policies will be.

"The electorate doesn't have a high degree of tolerance for a lot of pain," said Michael Darda,   Chief Economist at MKM Partners. "People don't like rising unemployment and falling incomes. So they want government action." But the long term impact of these policies is still an open question, said Darda. The huge expansion of government debt could bring a crushing tax burden that hurts the economy. The Fed’s lending spree could bring major distortoins in the money supply and spark a longer-term bout of inflation. "(The government response) does certainly increase the potential for probably a more rapid rebound — and then a possibly a  hangover effect," said Darda.

Obama Says U.S. Long-Term Debt Load 'Unsustainable'
President Barack Obama, calling current deficit spending "unsustainable," warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries. "We can’t keep on just borrowing from China," Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. "We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt." Holders of U.S. debt will eventually "get tired" of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. "It will have a dampening effect on our economy."

Earlier this week, the Obama administration revised its own budget estimates and raised the projected deficit for this year to a record $1.84 trillion, up 5 percent from the February estimate. The revision for the 2010 fiscal year estimated the deficit at $1.26 trillion, up 7.4 percent from the February figure. The White House Office of Management and Budget also projected next year’s budget will end up at $3.59 trillion, compared with the $3.55 trillion it estimated previously. Two weeks ago, the president proposed $17 billion in budget cuts, with plans to eliminate or reduce 121 federal programs. Republicans ridiculed the amount, saying that it represented one-half of 1 percent of the entire budget. They noted that Obama is seeking an $81 billion increase in other spending.

In his New Mexico appearance, the president pledged to work with Congress to shore up entitlement programs such as Social Security and Medicare. He also said he was confident that the House and Senate would pass health-care overhaul bills by August. "Most of what is driving us into debt is health care, so we have to drive down costs," he said. Obama prodded Congress to pass restrictions on credit-card issuers, saying consumers need "strong and reliable" protection from unfair practices and hidden fees. "It’s time for reform that’s built on transparency, accountability, and mutual responsibility, values fundamental to the new foundation we seek to build for our economy," the president said. Obama called on Congress to send to him by May 25 a bill that would clamp down on what he says are sudden rate increases, unfair penalties and hidden fees. He also wants the measure to strengthen monitoring of credit-card companies.

The U.S. House of Representatives passed the credit-card bill last month after adding a provision requiring banks to apply consumers’ payments to balances with the highest interest rates first. The bill also imposes limits on card interest rates and fees. The Senate continued debating its version of the bill today. It would require credit-card companies to give 45 days’ notice before increasing an interest rate. It would prohibit retroactive rate increases on existing balances unless a consumer was 60 days late with a payment. The president said Americans have been hooked on their credit cards and share some blame for the current system. "We have been complicit in these problems," he said. "We have to change how we operate. These practices have only grown worse in the midst of this recession."

The American Bankers Association, which represents card issuers, has warned lawmakers and the Obama administration against taking punitive action or setting requirements that are too stringent. Doing so, the lobby group says, would limit consumer credit and worsen a credit crunch. Obama said that restrictions "shouldn’t diminish consumers’ access to credit." Uncollectible credit-card debt rose to 8.82 percent in February, the most in the 20 years that Moody’s Investors Service Inc. has kept records. Lawmakers have said they’re under increasing pressure from constituents to respond to rising interest rates and abrupt changes to consumers’ accounts.

Obama held a White House meeting last month with executives from the credit-card industry, including representatives from Bank of America Corp. and American Express Co. Afterward, he told reporters that credit-card issuers should be prohibited from imposing "unfair" rate increases on consumers and should offer the public credit terms that are easier to understand. "The days of any time, any increase, anything goes -- rate hike, late fees -- that must end," Obama said today at Rio Rancho High School. We’re going to require clarity and transparency from now on." He also said the steps he has taken to stimulate the economy and start the debate on overhauling the health-care system are beginning to take effect.

"We’ve got a long way to go before we put this recession behind us," Obama said. "But we do know that the gears of our economy, our economic engine, are slowly beginning to turn." Taking questions from the audience, Obama repeated his stance that he wants legislation to overhaul the health-care system finished before the end of the year, saying it is vital to the economy. Health-care costs are driving up the nation’s debt and burdening entitlement programs such as Medicare, the government- run insurance program for those 65 and older and the disabled. The programs’ trustees reported May 13 that the Social Security trust fund will run out of assets in 2037, four years sooner than forecast, and Medicare’s hospital fund will run dry by 2017, two years earlier than predicted a year ago.

The happiest places on Earth are heavily taxed
Northern Europeans are the happiest people on the planet, according to a new survey. The Organization for Economic Cooperation and Development says people in Denmark, Finland and the Netherlands are the most content with their lives. The three ranked first, second and third, respectively, in the OECD's rankings of "life satisfaction," or happiness. There are myriad reasons, of course, for happiness: health, welfare, prosperity, leisure time, strong family, social connections and so on. But there is another common denominator among this group of happy people: taxes.

Northern Europeans pay some of the highest taxes in the world. Danes pay about two-thirds of their income in taxes. Why be so happy about that? It all comes down to what you get in return. The Encyclopedia of the Nations notes that Denmark was one of the first countries in the world to establish efficient social services with the introduction of relief for the sick, unemployed and aged. It says social welfare programs include health insurance, health and hospital services, insurance for occupational injuries, unemployment insurance and employment exchange services. There's also old age and disability pensions, rehabilitation and nursing homes, family welfare subsidies, general public welfare and payments for military accidents. Moreover, maternity benefits are payable up to 52 weeks.

Simply, you pay for what you get. Taxes in the U.S. have taken on a pejorative association because, well, we are never really quite sure of what we get in return for paying them, other than the world's biggest military. Healthcare and other such social services aren't built into our system. That means we have to worry more about paying for things ourselves. Worrying doesn't equate to happiness. The U.S. ranked 11th on the OECD list. In addition to the top three, we were beat out by Sweden, Belgium, Canada, Australia, New Zealand, Switzerland and Norway. To be sure, we were ahead of France, Great Britain, Japan and China, among many others. But we can do better.

With the highest gross domestic product in the world, we are the richest country. On a per capita basis, though, we don't even make the top 10. The U.S. ranks 15th in this category, according to the International Monetary Fund. Denmark -- maybe because they are happy -- ranked fifth. Other, more "satisfied" countries also earn more on an individual income basis. Oh yes, and the average workweek in Scandinavian countries is less than the U.S.'s We need to take better care of ourselves.

It may not just be taxes, of course, that lead to happiness. There are other factors to consider. But better social services and less worry about having to pay for things such as medical bills, retirement and education do help with the happiness factor. Yet, we are so dead set against paying more taxes that it's even spawning nationwide protests. Tea party, anyone? Maybe it's time that we looked at taxes differently. We have to pay them anyway. So they might as well make us happy. If Northern Europe is any benchmark, the more we'd pay the happier we just may be.

Euro-Zone Economies Report Massive Shrinkage
The global economic crisis depressed GDP in Germany and the entire euro zone during the first quarter of 2009. Berlin's preliminary 3.8 percent drop in GDP is even worse than economists predicted. With demands for exports dropping, the German economy was hit hard during the first quarter of 2009, with gross domestic product shrinking by 3.8 percent compared to the previous quarter. The decline was the biggest quarter-on-quarter drop since Germany began collecting GDP data in 1970 --  but some economists nevertheless expressed cautious optimism. Still, the fall was more precipitous than expected. Forty-five economists polled by the news agency Reuters prior to the data's release had predicted a drop of only 3 percent.

GDP is considered the most important measure of a country's economic health because it takes into account both products and services. "The collapse has come as a result of a drop in exports and investments," a Federal Statistical Office spokesperson said after the release of the data on Friday. At the same time, private and state spending increased slightly during the period, preventing an even worse outcome. The government is expected to present its official figures on May 26. The shrinkage represented the fourth consecutive quarterly loss for the German economy. During the final quarter of 2008, Europe's biggest economy shrank by 2.2 percent and it contracted by 0.5 percent in each of the two previous quarters.

The German government and leading economics institutions are forecasting a 6 percent drop in GDP in 2009 in the country, the steepest since the founding of the Federal Republic after World War II. A decline in demand for high value goods has put intense pressure on the German economy. Germany is the world's leading exporter. Year-on-year data showed a drop of 6.7 percent compared to the first quarter of 2008. And if the data is adjusted for working days, it shows that German GDP actually contracted by 6.9 percent during the first quarter. Economists had only expected a 6.2 percent year-on-year drop. Despite the unexpectedly bad figures, some economists expressed a slightly optimistic tone on Friday, saying the German economy may already have bottomed out. For the coming quarters, they expect a smaller economic contraction and some suggest positive economic growth could happen by year's end.

Meanwhile, the euro zone, the 16 countries that share Europe's common currency, on Friday reported a first-quarter drop in GDP of 2.5 percent. Economic output in the euro zone has now fallen for four consecutive quarters, with Europe falling deep into a recession. As in Germany, the decline was deeper than the 2 percent expected by economists. Comparing year-on-year data, the euro zone contracted by 4.6 percent. Across the European Union, including countries that have not adopted the euro, the economy shrank by 2.5 percent in the first quarter and 4.4 percent year-on-year. The economies hardest hit by the recession are Latvia and Slovakia, which each contracted by 11.2 percent during the first quarter. Italy on Friday reported its greatest quarterly economic contraction in 29 years, with quarter-on-quarter GDP shrinkage of 2.4 percent. The country hasn't seen a drop that big since it began collecting GDP data in 1980, and economists had only been predicting a decline of 1.8 percent.

Compared to the same quarter in the previous year, Italian GDP fell by 5.9 percent. With the first-quarter data now in, the euro zone's third-biggest economy has now seen four consecutive quarters of GDP shrinkage. France, meanwhile, appears to have slowed its economic slide. Compared to the previous quarter, first-quarter contraction was only 1.2 percent. During the last quarter of 2008, France also experienced negative economic growth of 1.5 percent. And like Italy and Germany, France has reported four straight quarters of economic decline. For 2009, French Economics Minister Christine Lagarde is expecting a contraction of 3 percent. On Thursday, Spain also released its latest figures showing a first-quarter shrinkage of 1.8 percent. Analysts had been forcasting a drop of 1 percent. On a year-on-year basis, GDP there fell by 2.9 percent. And Britain, where the financial sector has been badly hit by the global economic crisis, GDP shrank by 1.9 percent in the first quarter -- a bigger contraction than the 1.6 percent drop experienced in the previous quarter.

Ilargi: At first I thought they'd gotten the number wrong, since I had read a 6.7% figure for Germany earlier. Turns out, the latter is the one-year number, and Germany shrank 3.8% in just one quarter. Yikes.

German economy shrinks 3.8%
Germany’s economy contracted by a record 3.8 per cent at the start of this year – even more than feared – dragging down overall eurozone growth and confirming it has been the worst hit among the big European countries by the global downturn. The dramatic fall in first-quarter German gross domestic product figures highlighted the exceptional weakness at the start of the year, when the country’s export-led economy saw industrial orders and production plunging. Germany’s recession has become the deepest in its post-war history. The latest quarterly contraction was the biggest since comparable records were first published in 1970, the country’s statistical office said. The final quarter had already seen a contraction of 2.2 per cent, revised from 2.1 per cent.

Germany’s weak performance resulted in eurozone GDP falling by a larger-than-expected 2.5 per cent in the first quarter. That was significantly faster than in the US or UK, which have reported falls of 1.6 per cent and 1.9 per cent. The latest eurozone data also pointed to an acceleration in the pace of decline from the 1.6 per cent contraction reported in the final quarter of last year. "Spring has not yet arrived in the euro area," said Julian Callow, European economist at Barclays Capital. Among the most striking country details, Slovakia - the eurozone's newest member - saw GDP fall by 11.2 per cent in the first quarter compared with the previous three months, almost certainly the result of weakness in the car industry.

In contrast, France continued to fare relatively well amid the global economic storms, thanks to the bigger role played by domestic demand in supporting growth. It reported a 1.2 per cent fall in first quarter GDP, after a 1.5 per cent contraction in the fourth quarter of 2008. The global slump in confidence after the collapse of Lehman Brothers in September hit the 16-country eurozone particularly hard because of its reliance on global trade. Eurozone industrial production was a fifth lower in the first quarter of 2009 than a year before, according to data earlier this week. However, the European Central Bank has argued that the quarter's exceptional weakness was exaggerated by companies running down inventories. Its monthly bulletin argued this week that output had fallen faster than demand with destocking taking place at "an exceptionally high rate". At the same time, European policymakers are becoming increasingly confident that the worst of the continent's recession is over.

Lucas Papademos, ECB vice-president, told a conference in Vienna on Thursday: "We have observed an increasing number of positive signs suggesting that the economy is stabilising and that the recovery may start sooner than previously envisaged." The ECB still expects a gradual eurozone recovery only in 2010 – as do the International Monetary Fund and European Commission. But some economists believe a return to growth is possible this year. Forward looking surveys, including eurozone purchasing managers' indices, have suggested the eurozone economy is already contracting at a slower pace. An expected slower pace of destocking could help boost second quarter GDP. Recent data, for instance for industrial orders, have even suggested that Germany could recover faster than other European economies. Germany’s statistics office said economic growth in the first quarter had been hit by sharp falls in exports and in investment. Consumer and government spending provided only a modest offsetting boost.

Germany Faces Biggest Tax Revenue Shortfall In 60 Years
German public finances will deteriorate massively because the recession and the cost of cleaning up the financial crisis will lead to the biggest tax revenue shortfall in 60 years, the government said Thursday, forecasting a shortfall of EUR316.3 billion for the years running through to 2012. A group of tax experts and the finance ministry forecast 2009 total tax revenue will be EUR45 billion less than predicted in November. The forecast is roughly in line with expectations. Finance Minister Peer Steinbrueck previously said the estimates would be very bad, forecasting a countrywide tax revenue shortfall of EUR300 billion to EUR350 billion for the next four years, with revenue for this year alone forecast at EUR48 billion less than the previous estimate.

Steinbrueck called the fresh estimates "fairly depressing," noting that the government will present a supplementary budget at the end of this month. The federal government faces a shortfall of EUR152 billion until 2012, compared with previous estimates. Roughly one third of the tax revenue shortfall is due to taxation changes. The result of the tax audit is likely to spur a debate ahead of the September general election, where none of the major political parties are keen to campaign for tax hikes to plug the widening budget gap. Steinbrueck said there is no room for tax cuts given the strained public finances, but Economics Minister Karl-Theodor zu Guttenberg called for tax cuts to help promote economic growth. As a result, borrowing is expected to shoot up, with the government's 2010 budget that is due in June facing a massive rise in net new borrowing to balance its books.

Next year, total tax revenue is expected to fall short of previous estimates by EUR84.7 billion. Federal government tax revenue, which is included in the total shortfall, is expected to be EUR21.5 billion lower this year, and EUR41.1 billion lower in 2010 than previously forecast. Germany will need more than EUR350 billion of additional borrowing from 2009 until the end of the next legislative period, compared with current plans, the ruling Christian Democratic Union party budget spokesman Steffen Kampeter said last week. The government will have to borrow around EUR80 billion in new debt this year, which includes provisions for the financial market stability fund, or SoFFin, Werner Gatzer, deputy finance minister, said.

Next year, Steinbrueck said new debt will total "up to EUR90 billion." Opinions are mixed whether 2009 debt issuance will be revised higher. "We don't expect the issuance calendar to be revised based on the EUR80 billion of new debt announced by Finance Minister Peer Steinbrueck," said David Schnautz, strategist at Commerzbank AG. "The preliminary 2009 issuance plan of EUR323 billion included a EUR60 billion amount for Soffin, and now it looks more likely that the EUR60 billion was very generous," he said. "So every new billion of euro new borrowing need doesn't automatically translate into EUR1 billion of new issuance." The German Finance Agency revised upward its preliminary 2009 issuance plan in March, penciling in a further total EUR23 billion for the third and fourth quarters.

"The EUR45 billion of tax revenue shortfall is a big number, which supports our view that Germany will need to increase its supply needs in 2009," said Giuseppe Maraffino, strategist at UniCredit SpA. "One solution can be that EUR20 billion-EUR25 billion out of the EUR45 billion will be covered via additional issuance of government bonds - we think Germany doesn't have any more room to increase treasury bill issuance." This outcome would mean an additional EUR1.2 billion-EUR1.5 billion of supply at each of the remaining 17 government bond auctions scheduled by the Finance Agency until the year-end. "This increase could be manageable for both the bond market and the German Finance Agency," Maraffino said, adding that the remaining EUR20 billion-EUR25 billion could be raised via a supplementary budget law.

Our Vanishing Home Equity
Everyone knows that U.S. house prices have fallen almost 30% from the peak. What is less well known is that Americans' equity in those houses--the part that American homeowners actually own--has fallen much further. Why?  Because, despite all the foreclosures and write-offs, our total mortgage debt has only dropped slightly from its peak. When value falls and debt stays the same, equity gets crushed. If house prices end up falling more than 40% peak to trough, which seems likely, U.S. homeowner equity will drop more than 70% and as many as half of American mortgage holders will be underwater. For most consumers, one's house is one's biggest source of wealth.  Economists have demonstrated that a loss of wealth leads to cuts in spending--from psychology and necessity. A 50%+ drop in home equity is one whopping-big loss of wealth.  And it will have a lasting impact on consumer spending.

Notes on the chart:
• Total mortgage debt from the Fed Reserve through Dec 31 2008
• Mortgage-to-value ratio estimated at 45% at the peak, per data from Northern Trust
• Total housing value at peak estimated at $25 trillion (exact value not so important)
• Quarterly change in home prices from Case Shiller Comp 20 through Dec 31 2008.
• Change in homeowner equity The Business Insider estimates (value less debt).

Ilargi: Henry Blodget copies a few files from Deutsche Bank's Karen Weaver, and I in turn copied some of them. Remarkably, she sees nothing to stop the fall, but still thinks the fall will stop at 40%. I call that wishful thinking. Basically, these people fail to see the overall picture. Home equity losses lead to less available cash leads to less onsumption leads to job losses leads to foreclosures lead to home equity losses, or any similar chain of effects.

An interesting point mentioned here that we seldom think about is the effect that people moving in with each other has on supply.

Housing Bubble Has Almost Completely Burst! But No Recovery In Sight
>Here are the conclusions from Deutsche Bank Securitization Head Karen Weaver's latest look at the housing market:
  • The "bubble" has almost completely burst.  In many markets, prices are now almost back to 2000-2003 levels on an affordability basis.  However...
  • Rising unemployment, rising delinquencies, tight credit, and over-supply will keep pressure on house prices for a good long while.  Prices will probably significantly overshoot fair value on the downside and they'll stay down.  This would be in keeping with the aftermath of every other bubble we've ever studied.
  • Nationally, prices will likely fall another 17%, for a peak-to-trough decline of 40%.
  • There's no recovery in sight.

Here are some highlights of a recent Weaver presentation.  We've also included some of the charts below.

  • Price declines have happened sooner and deeper than we originally expected, and for all intents and purposes the housing bubble has been burst according to our affordability calculation (which is a relationship between local income, mortgage rates, and home prices).
  • Of the top 100 MSA's, 82 markets have fully mean-reverted back to our base '00-'03 affordability mean. Only 12 markets need to fall more than 5% to mean revert - NY/NJ, Allentown, Edison, Baltimore, Virginia Beach, Orlando, West Palm, New Orleans, Honolulu, Portland, and Seattle.
  • Despite the affordability readings, serious delinquencies are rising at an increasing rate...which will become tomorrow's foreclosures 18 months from now.
  • We are in the over-correction phase, which could last for a long time - assuming 3.5mn units of excess supply and that a depressed household formation number of 800k persists, we may need 3-5 years to cure the supply problem. Until that happens, will be difficult for a meaningful recovery to take hold.

Karen Weaver's exhibits:

First, the peak-to-trough price declines by city:


Weaver concludes we're in a new phase of the cycle, one in which macro economic factors rather then inflated prices will put pressure on housing.


Is there anything that will stop prices from falling?  No.


Today's deliquencies will become tomorrow's foreclosures:



And there's still too much supply.  First, because homeownership as a percentage of the population will likely shrink:


The supply overhang will also be exacerbated by more people living in the same houses again:


Will mortgage-modications really help?  In a word, no.  At least not based on the history so far.  Just look at those re-default rates!


The bottom line?  A long way (and/or a long while) to go:


The 81% Tax Increase
This week, the federal government published two important reports on long-term budgetary trends. They both show that we are on an unsustainable path that will almost certainly result in massively higher taxes. The first report is from the trustees of the Social Security system. News reports emphasized that the date when its trust fund will be exhausted is now four years earlier than estimated last year. But in truth, this is an utterly meaningless fact because the trust fund itself is economically meaningless. The 2010 budget, which was finally released this week, confirms this fact. As it explains in Chapter 21, government trust funds bear no meaningful comparison to those in the private sector. Whereas the beneficiary of a private trust fund legally owns the income from it, the same is not true of a government trust fund, which is really nothing but an accounting device.

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled "Social Security trust fund." The problem is that by law 100% of these "assets" are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It's as if you wrote an IOU to yourself; no matter how large the IOU is it doesn't increase your net worth. This fact is documented in the budget, which says on page 345: "The existence of large trust fund balances … does not, by itself, increase the government's ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole."

Consequently, whether there is $2.4 trillion in the Social Security trust fund or $240 trillion has no bearing on the federal government's ability to pay benefits that have been promised. In a very technical sense, it would lose the ability to pay benefits in excess of current tax revenues once the trust fund is exhausted. But long before that date Congress would simply change the law to explicitly allow general revenues to be used to pay Social Security benefits, something it could easily do in a day. The trust fund is better thought of as budget authority giving the federal government legal permission to use general revenues to pay Social Security benefits when current Social Security taxes are insufficient to pay current benefits--something that will happen in 2016. Effectively, general revenues will finance Social Security when the trust fund redeems its Treasury bonds for cash to pay benefits.

What really matters is not how much money is in the Social Security trust fund or when it is exhausted, but how much Social Security benefits have been promised and how much total revenue the government will need to pay them. The answer to this question can be found on page 63 of the trustees report. It says that the payroll tax rate would have to rise 1.9% immediately and permanently to pay all the benefits that have been promised over the next 75 years for Social Security and disability insurance. But this really understates the problem because there are many people alive today who will be drawing Social Security benefits more than 75 years from now. Economists generally believe that the appropriate way of calculating the program's long-term cost is to do so in perpetuity, adjusted for the rate of interest, something called discounting or present value.

Social Security's actuaries make such a calculation on page 64. It says that Social Security's unfunded liability in perpetuity is $17.5 trillion (treating the trust fund as meaningless). The program would need that much money today in a real trust fund outside the government earning a true return to pay for all the benefits that have been promised over and above future Social Security taxes. In effect, the capital stock of the nation would have to be $17.5 trillion larger than it is right now. Alternatively, the payroll tax rate would have to rise by 4%. To put it another way, Social Security's unfunded liability equals 1.3% of the gross domestic product. So if we were to fund its deficit with general revenues, income taxes would have to rise by 1.3% of GDP immediately and forever. With the personal income tax raising about 10% of GDP in coming years, according to the Congressional Budget Office, this means that every taxpayer would have to pay 13% more just to make sure that all Social Security benefits currently promised will be paid.

As bad as that is, however, Social Security's problems are trivial compared to Medicare's. Its trustees also issued a report this week. On page 69 we see that just part A of that program, which pays for hospital care, has an unfunded liability of $36.4 trillion in perpetuity. The payroll tax rate would have to rise by 6.5% immediately to cover that shortfall or 2.8% of GDP forever. Thus every taxpayer would face a 28% increase in their income taxes if general revenues were used to pay future Medicare part A benefits that have been promised over and above revenues from the Medicare tax.

But this is just the beginning of Medicare's problems, because it also has two other programs: part B, which covers doctor's visits, and part D, which pays for prescription drugs. The unfunded portion of Medicare part B is already covered by general revenues under current law. The present value of that is $37 trillion or 2.8% of GDP in perpetuity according to the trustees report (p. 111). The unfunded portion of Medicare part D, which was rammed into law by George W. Bush and a Republican Congress in 2003, is also covered by general revenues under current law and has a present value of $15.5 trillion or 1.2% of GDP forever (p. 127).

To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax. Since many taxpayers have just paid their income taxes for 2008 they may have their federal returns close at hand. They all should look up the total amount they paid and multiply that figure by 1.81 to find out what they should be paying right now to finance Social Security and Medicare.

To put it another way, the total unfunded indebtedness of Social Security and Medicare comes to $106.4 trillion. That is how much larger the nation's capital stock would have to be today, all of it owned by the Social Security and Medicare trust funds, to generate enough income to pay all the benefits that have been promised over and above future payroll taxes. But the nation's total private net worth is only $51.5 trillion, according to the Federal Reserve. In effect, we have promised the elderly benefits equal to more than twice the nation's total wealth on top of the payroll tax.

Of course, theoretically, benefits could be cut to prevent the necessity of a massive tax increase. But how likely is that? The percentage of the population that benefits from Social Security and Medicare is growing daily as the baby boom generation ages and longevity increases. And the elderly vote in the highest percentage of any age group, so their political influence is even greater than their numbers. The reality, which absolutely no one in either party wishes to face, is that benefits are never going to be cut enough to prevent the necessity of a massive tax increase in the not-too-distant future. Those who think otherwise are either grossly ignorant of the fiscal facts, in denial, or living in a fantasy world.

IMF head says the global crisis is not over yet
Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), warned the global downturn was not over and more financial shocks were likely. Speaking in Vienna on Friday, he said the world was still in the grips of a "Great Recession" and it would be wrong to become complacent. "This crisis is not yet over, and there will, in all likelihood, be further tests ahead," he said. Mr Strauss-Kahn said the main reason why the global economy will "almost certainly" avoid a crisis as severe of the 1930s' Great Depression was the co-ordinated action taken by world leaders. "World leaders embraced multilateralism, and are reaping the rewards. Vehicles like the G-20 were used to coordinate policies and deliver a unified message," he said. The IMF has calculated that a global fiscal stimulus equal to 2pc of the world's gross domestic product - which has already been delivered - will boost economic growth by 1-3 percentage points this year. Up to a third of that will be the direct result of co-ordinated action, Mr Strauss-Kahn said.

However, he warned the "jury is still out" on whether more fiscal stimulus will be needed. He praised central banks for aggressively cutting interest rates to historic lows in a co-ordinated manner, followed by a leap into the unknown with unconventional measures in its attempts to try and resuscitate markets. "For most countries, this is uncharted waters - but the fact all were willing to jump in at the same time provided a needed boost to confidence," he said. Mr Strauss-Kahn said the IMF had played a key role in directing what policy responses were necessary and was "ahead of the curve". Looking to the future he said that credible and co-ordinated exit policies from the policies put in place during the crisis would be required, as would fiscal tigthening if "serious fiscal problems down the road" were to be avoided. He also said changes to cross-border financial sector regulation would be needed, which would involve governments and central banks as well as financial supervisors, and would include "harmonising" national legislation where necessary.

Big steps taken to reform Wall Street
by Gillian Tett

What does mainstream – or Main Street – America make of Wall Street these days, not to mention the world of derivatives? That is a question I have been mulling this week. For having just published a book on the financial crisis and derivatives*, I have spent recent days bouncing through dozens of radio and TV stations from New York to Los Angeles to discuss the financial world. This (admittedly unscientific) survey has revealed at least three things. First – and understandably – ordinary Americans are furious about the incompetence and greed of Wall Street. Secondly, what makes them doubly angry is a perception that innovations such as credit derivatives have produced no real economic benefit in recent years. "I don’t see anything good in credit derivatives for Main Street America! We should just ban them all!" declared one radio host in Colorado, echoing an oft-repeated view. Thirdly, to many Americans, men such as Tim Geithner, Treasury secretary, look almost as guilty for creating the current mess as Wall Street bankers. "Why are guys like Geithner still there? They should be kicked out, not put in charge!" I was repeatedly told.

Will this week’s initiative from Geithner to clamp down on over-the-counter derivatives do anything to quell this fury? Certainly, in symbolic terms, the reforms mark a watershed. During the past nine years, Wall Street has operated on the assumption that the 2000 Commodity Futures Modernisation Act had "slammed the door shut" on government OTC controls, as Mark Brickell, a former lobbyist for the derivatives world puts it. Indeed, the International Swaps and Derivatives Association was so confident that they had won the deregulation debate, that a senior financier once joked to me that ISDA did not need a public relations firm "because we have Alan Greenspan [former Federal Reserve chairman] doing our PR for us." In reality, Geithner never subscribed to Greenspan’s extreme, free-market anti-deregulation views. In public, when Geithner was head of the New York Federal Reserve, he took care not to contradict Greenspan because that would have undercut central banking convention (and, in any case, Greenspan was very powerful then). In private, Geithner was aware as early as 2005 that free-market self-discipline was not producing rational outcomes, or curbing the wilder excesses of banks – and he was fretting about the opacity of the OTC world.

And this week’s announcement suggests that Geithner is now firmly determined to start a new era on his terms. For what this week’s announcement essentially represents is not just an effort to reform the letter of the 2000 act; it is also a move to overturn the spirit – and idea that free market discipline alone can encourage bankers to behave. However, the problem that dogs Geithner – and others – is that while this shift might have great symbolic value and could potentially produce benefits, many of the details of the new measures remain distinctly unclear. Take the case of credit derivatives. Tales are circulating on Wall Street that some unscrupulous traders have been manipulating the price of "single name" CDS contracts to hurt rivals, or make quick profits. It is also claimed that banks have been deliberately trying to push companies into bankruptcy, in locations ranging from Ukraine to the heartland of the US, to profit on CDS positions they secretly hold. One senior banker, for example, described to me this week how the large Wall Street group where he recently worked had a trading desk that would "pick off" weak companies and hedge funds, by exploiting the murkiness and illiquidity of bilateral CDS deals to push prices around. "It disgusts me, and its still going on," he admitted.

In theory, Geithner’s proposals might now curb such abuse by enabling regulators to track many CDS prices and volumes. In that sense, they are progress indeed. But they will not enable investors or companies to know who hold CDS contracts. Nor is it even entirely clear whether the reforms will apply to the more controversial bespoke, bilateral trades. Whether that matters in the eyes of non-bankers sitting in Arizona, Arkansas or Los Angeles is still unclear. What many bankers now desperately hope is that if the economy bounces back in the coming months, the current sense of outrage among ordinary Americans will soon dissipate – and business will go back to "normal". Perhaps that will occur. But it seems a bold bet, given that the financial problems have hardly disappeared. Either way, the moral is clear: if Wall Street is to regain respect among mainstream America, it needs to fundamentally rethink how it does business. The Geithner reforms are a good step on that road; they are, however, merely a start.

Bair Says Some Bank Chiefs Will Be Replaced in Months
Federal Deposit Insurance Corp. Chairman Sheila Bair said some bank chief executive officers will be replaced within the next several months after the U.S. scrutinizes lenders subjected to tests of their financial strength. "Management needs to be evaluated," Bair said today on Bloomberg Television’s "Political Capital with Al Hunt," to be broadcast this weekend. "Have they been doing a good job? Are there people who can do a better job?" The FDIC and other regulators last week released stress tests results on 19 lenders including Citigroup Inc., Wells Fargo & Co. and Bank of America Corp., and ordered 10 to raise $74.6 billion in capital to withstand a "deeper and more protracted" slump than forecast by economists. Bair, in the interview, didn’t suggest the government would remove any CEOs.

"There will be an evaluation process," Bair said. "We’re requesting it as part of the capital plan. And yes," she said, responding to a question from Hunt about chief executives being replaced. Chief executives at American International Group Inc., Fannie Mae and Freddie Mac were ousted by the Bush administration after the U.S. took control in September. General Motors Corp. CEO Rick Wagoner was forced out in March after the Obama administration rejected GM’s recovery plan. The CEOs of Citigroup Inc. and Bank of America Corp., which combined received $90 billion in U.S. aid, remain in their jobs. Bair said regulators should oversee the "adequacy" of the boards of directors at banks receiving U.S. aid, Bair said.

"We do need bank management and bank boards that know how to work through troubled environments, who know how to do good, bread-and-butter, basic bank-risk management," she said. "Those are the things we’re looking at." Bair said the evaluation may include a review of a bank’s board, which may result in replacing some of the directors. "In some instances," Bair said. "It needs to be on an individualized basis." Bank of America CEO Kenneth Lewis "heard the shareholders’ message that they wanted a different course" after the April 29 vote stripping him of his title as chairman, bank spokesman Robert Stickler said in a telephone interview today. Walter Massey, a retired college president who was elected chairman, on May 7 announced a committee to suggest changes to the board.

U.S. Stocks Drop as Bair’s Comments on CEOs Pushes Banks Lower
U.S. stocks retreated as concern the government will replace the chief executive officers of some banks snuffed out an early rally spurred by reports signaling the contraction in manufacturing is abating. Zions Bancorporation and BB&T Corp. led declines in all 24 companies in the KBW Bank Index after Federal Deposit Insurance Corp. Chairman Sheila Bair said some CEOs will be replaced in the next few months. FirstEnergy Corp. fell 10 percent, leading utilities lower, after Barclays Plc cut its rating. The Standard & Poor’s 500 Index slipped 0.9 percent to 885.10 at 12:19 p.m. in New York, poised for a weekly loss of 4.8 percent. The Dow Jones Industrial Average decreased 41.26 points, or 0.5 percent, to 8,290.06. The Russell 2000 Index of small companies declined 0.7 percent. Two stocks fell for each that rose on the New York Stock Exchange.

"In one camp you have the belief that the government should fire management," Dan Greenhaus, an equity analyst at Miller Tabak & Co. in New York, wrote in an e-mail message. "The other camp views it as unnecessary government meddling and something that should be avoided and feared at all costs. After all, who wants the government running private enterprise?" The S&P 500 has rallied 31 percent since March 9 as expectations for a recovery in the global economy and better- than-estimated earnings at companies from Ford Motor Co. to Citigroup Inc. fueled speculation the worst of the financial crisis is over. The benchmark index for U.S. equities traded at 15.1 times the earnings of its companies at the end of last week, a six-month high.

Industrial production in the U.S. fell in April at the slowest pace in six months and less than forecast, signaling manufacturing may be stabilizing. Output at factories, mines and utilities decreased 0.5 percent last month, according to the Federal Reserve. The central bank’s Empire State index, which gauges manufacturing in the New York region, rose to minus 4.6, better than forecast, from minus 14.7 the prior month. Europe’s benchmark index advanced 0.7 percent even after a report showed the region’s economy contracted 2.5 percent, the fastest pace in at least 13 years, in the first quarter as companies cut output and jobs to survive the worst global slump in more than six decades. UBS AG recommended investors reduce their holdings of stocks, saying hopes of an economic recovery are "likely to fade." The brokerage cut its global equities allocation to "neutral" from "overweight."

Bank execs face new 'stress'
The nation's leading banks may have been deemed solvent, but it remains to be seen whether top management at those firms will soon go bust. Among the findings in its two-month long "stress test" program announced May 7, the government not only told 10 institutions to raise a total of $75 billion in additional capital, but also pushed banks to take a hard look at their leadership. Industry regulators specifically asked banks to review both top executives and board members over the next month "to assure that the leadership of the firm has sufficient expertise and ability to manage the risks presented by the current economic environment."

Some experts suggest those remarks could foreshadow a wave of management changes. "There is some vulnerability there," said Gary Townsend, former bank analyst and current president of the Chevy Chase, Md.-based investment adviser Hill-Townsend Capital. Of course, when talk of management surfaces within the financial services industry, it often centers around two of its most troubled firms: Citigroup and Bank of America . Both companies have certainly made plenty of concessions to regulators so far this year. But with the government owning sizeable stakes in both institutions, there are expectations that the two financial giants may have to bend even further.

In the weeks leading up to the stress test results, the fate of the two firms' CEOs -- Citi's Vikram Pandit and BofA's Ken Lewis -- was certainly a subject of much speculation. Other analysts suspect that there could be some pressure exerted on regional lenders as well, particularly those considered by regulators to be facing a relatively severe capital shortfall. Those banks include Cleveland-based KeyCorp, Cincinnati-based FifthThird and Atlanta-based SunTrust. Of the 10 banks that need to raise capital after the tests, none would comment on whether any changes to top management or the board were deemed necessary.

Even before the stress tests results were published, however, the White House had already indicated that it may push some lenders to make changes either in the c-suite or the boardroom. Not surprisingly, bank leaders are giving a lot of credibility to those threats. In March, the Obama administration ousted General Motors chief Rick Wagoner because it believed the automaker did not have a suitable long-term viability plan. Chief executives at insurer AIG as well as the twin mortgage buyers Fannie Mae and Freddie Mac were also shown the door last year after the government intervened to rescue the three firms.

Still, there are those who consider an imminent wave of management shake-ups across the banking sector as remote -- at least for now. Graham Michener, a managing director at the Connecticut-based executive search and corporate governance recruiting firm RSR Partners, notes that it is not for a lack of available talent, but the fact that the government may be unwilling to make a lot of big changes in this important transition time as banks try to nurse themselves back to health. "For the next three to six months, we will see little to no change in the senior ranks because continuity will be crucial for the success of their plans," said Michener. Such changes, however, would hardly represent the first time that the nation's banking industry has undergone a massive management facelift since the crisis first took hold more than a year ago.

Citigroup's Chuck Prince and Stan O'Neal of Merrill Lynch became the first in a long line of executive casualties in late 2007 when both men were ousted from their respective firms. That was followed just months later with the departure of Wachovia's Ken Thompson and Washington Mutual's Kerry Killinger as part of both banks' last-ditch efforts to turn their companies around. Many of the recent leadership changes, however, have taken place at the board level. Earlier this year, Citigroup replaced Sir Win Bischoff with former Time Warner chief and long-time board member Richard Parsons. That's not to mention last month's high-profile decision by Bank of America shareholders to strip Ken Lewis of his title as chairman amid outrage over his last-minute purchase of Merrill Lynch.

Many experts contend that any further bank shakeup in the months ahead will happen in the boardroom. Bank of America has already indicated that the company was considering changes to its current roster of directors, which would match changes at Citigroup. Shareholders at the New York City-based bank confirmed a handful of new board members last month. Experts argue that bank boardrooms are ripe for change, having become tainted by cozy relationships and clogged with directors who have little, if any, banking or financial experience. Many shareholder activists and analysts cite that lack of experience with helping to create the current state of affairs at many troubled institutions.

"Why we have not wiped out the board of directors at a number of banks already is just shocking in my view," said Dick Bove, a bank analyst at Rochdale Securities. "It proves there is no accountability in banking at the board level." Certainly many controversial directors are secure for now, having thwarted several activist shareholder challenges this proxy season. But amid pressure from regulators and possibly even the Obama administration, it remains doubtful that the current board makeup of most troubled institutions will remain intact until next year's annual shareholder meeting, notes Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "The risks of making the changes are frankly minimal compared to the risks of not making the changes," he said. 

The Cure for Layoffs: Fire the Boss!
by Naomi Klein, Avi Lewis

In 2004, we made a documentary called The Take about Argentina's movement of worker-run businesses. In the wake of the country's dramatic economic collapse in 2001, thousands of workers walked into their shuttered factories and put them back into production as worker cooperatives. Abandoned by bosses and politicians, they regained unpaid wages and severance while re-claiming their jobs in the process. As we toured Europe and North America with the film, every Q&A ended up with the question, "that's all very well in Argentina, but could that ever happen here?"

Well, with the world economy now looking remarkably like Argentina's in 2001 (and for many of the same reasons) there is a new wave of direct action among workers in rich countries. Co-ops are once again emerging as a practical alternative to more lay-offs. Workers in the U.S. and Europe are beginning to ask the same questions as their Latin American counterparts: Why do we have to get fired? Why can't we fire the boss? Why is the bank allowed to drive our company under while getting billions of dollars of our money?

Tomorrow night (May 15) at Cooper Union in New York City, we're taking part in a panel that looks at this phenomenon, called Fire the Boss: The Worker Control Solution from Buenos Aires to Chicago. We'll be joined by people from the movement in Argentina as well as workers from the famous Republic Windows and Doors struggle in Chicago. It's a great way to hear directly from those who are trying to rebuild the economy from the ground up, and who need meaningful support from the public, as well as policy makers at all levels of government. For those who can't make it out to Cooper Union, here's a quick round up of recent developments in the world of worker control.

Argentina: In Argentina, the direct inspiration for many current worker actions, there have been more takeovers in the last 4 months than the previous 4 years. One example:
- Arrufat, a chocolate maker with a 50 year history, was abruptly closed late last year. 30 employees occupied the plant, and despite a huge utility debt left by the former owners, have been producing chocolates by the light of day, using generators. With a loan of less than $5,000 from the The Working World, a capital fund/NGO started by a fan of The Take, they were able to produce 17,000 Easter eggs for their biggest weekend of the year. They made a profit of $75,000, taking home $1,000 each and saving the rest for future production.

UK : - Visteon is an auto parts manufacturer that was spun off from Ford in 2000. Hundreds of workers were given 6 minutes notice that their workplaces were closing. 200 workers in Belfast staged a sit-in on the roof of their factory, another 200 in Enfield followed suit the next day. Over the next few weeks, Visteon increased the severance package to up to 10 times their initial offer, but the company is refusing to put the money in the workers' bank accounts until they leave the plants, and they are refusing to leave until they see the money.

Ireland: - A factory where workers make legendary Waterford Crystal was occupied for 7 weeks earlier this year when parent company Waterford Wedgewood went into receivership after being taken over by a US private equity firm. The US company has now put 10 million Euros in a severance fund, and negotiations are ongoing to keep some of the jobs.

Canada: As the Big Three automakers collapse, there have been 4 occupations by Canadian Auto Workers so far this year. In each case, factories were closing and workers were not getting compensation that was owed to them. They occupied the factories to stop the machines from being removed, using that as leverage to force the companies back to the table - precisely the same dynamic that worker takeovers in Argentina have followed.

France: In France, there's been a new wave of "Bossnappings" this year, in which angry employees have detained their bosses in factories that are facing closure. Companies targeted so far include Caterpillar, 3M, Sony, and Hewlett Packard. The 3M executive was brought a meal of moules et frites during his overnight ordeal. A comedy hit in France this spring was a movie called "Louise-Michel," in which a group of women workers hires a hitman to kill their boss after he shuts down their factory with no warning. A French union official said in March, "those who sow misery reap fury. The violence is done by those who cut jobs, not by those who try to defend them." And this week, 1,000 Steelworkers disrupted the annual shareholders meeting of ArcelorMittal, the world's largest steel company. They stormed the company's headquarters in Luxembourg, smashing gates, breaking windows, and fighting with police.

Poland: Also this week, in Southern Poland, at the largest coal coking producer in Europe, thousands of workers bricked up the entrance to the company's headquarters, protesting wage cuts.

US:And then there's the famous Republic Windows and Doors story: 260 workers occupied their plant for 6 world-shaking days in Chicago last December. With a savvy campaign against the company's biggest creditor, Bank of America ("You got bailed out, we got sold out!") and massive international solidarity, they won the severance they were owed. And more - the plant is re-opening under new ownership, making energy-efficient windows with all the workers hired back at their old wages. And this week, Chicago is making it a trend. Hartmarx is 122-year old company that makes business suits, including the navy blue number that Barack Obama wore on election night, and his inaugural tuxedo and topcoat. The business is in bankruptcy. Its biggest creditor is Wells Fargo, recipient of 25 billion public dollars in bailout money. While there are 2 offers on the table to buy the company and keep it operating, Wells Fargo wants to liquidate it. On Monday, 650 workers voted to occupy their Chicago factory if the bank goes ahead with liquidation.

Schwarzenegger budget would fire 5,000 workers, release up to 23,000 prisoners
Gov. Arnold Schwarzenegger today proposed major cuts to education, healthcare, prisons and other services on the eve of a special election that will determine how many billions he and lawmakers must slice from the budget to curtail a growing shortfall. The governor offered two scenarios. The first was grim, to address a $15.4-billion deficit that finance officials say the state will face even if voters approve a set of ballot measures Tuesday. The second was devastating, intended to close a $21.3 billion gap if the measures fail. The governor’s plan, unveiled this afternoon, would take $5 billion from public schools if the ballot propositions fail and $3 billion if they pass.

Depending on the size of the budget gap, the state would also borrow up to $2 billion from local government and release up to 19,000 undocumented immigrants from state prisons, turning them over to federal authorities. Up to 23,000 other state prisoners could be sent to county jails. In either budget scenario, Schwarzenegger would also lay off 5,000 workers, sell the Los Angeles Coliseum, Sports Arena, San Quentin State Prison and other facilities and eliminate some state boards and commissions. Only three months ago, Schwarzenegger and legislative leaders reached a budget deal they said would carry the state through the middle of next year. But a worsening economy and falling tax revenues have thrown that plan way out of balance.

California's bleak budget options
Gov. Arnold Schwarzenegger on Thursday proposed two sets of budget revisions to deal with the state's financial troubles. They contain an array of grim options:

Education The governor's cuts would start at $3 billion and rise to $5.3 billion if voters fail to pass the package of ballot propositions in Tuesday's special election. More than $1 billion would come from the current school year, which is nearly over. Requiring districts to cut in these waning days would lower the governor's future funding obligations. That's because, under state law, education spending is based largely on past funding. "This is a cynical manipulation" to reduce base funding for schools, said Jack O'Connell, state superintendent of public instruction. "It would be extraordinarily difficult, if not impossible, to realize these savings with 45 days left." Deputy Finance Department director H.D. Palmer said he expected school districts to balance their books by taking advantage of reserves, eased restrictions on state money and federal economic stimulus dollars.

Many districts, including Los Angeles Unified, had penciled in the federal money for the school year that begins July 1. The added deficit in Los Angeles could be about $250 million, said Chief Financial Officer Megan Reilly. The district already was expecting to lay off as many as 2,500 teachers and 2,600 other employees. The state also plans to defer more payments to school districts, which could create a cash-flow crisis, said Ken Shelton, an assistant superintendent with the Los Angeles County Office of Education, which oversees the finances of the county's 80 kindergarten-through-12th-grade school districts. Higher education leaders around the state warned of course-schedule reductions, overcrowded classrooms and staff layoffs in the fall.

California Community Colleges Chancellor Jack Scott predicted that hundreds of classes taught by part-time instructors would be canceled even as enrollment surges. If the ballot propositions are approved, the 10-campus University of California system will face a net reduction of $240 million for next year out of $3 billion in general funds. If the ballot measures fail Tuesday, the net reduction will rise to $322 million, according to the University of California. For the California State University system, the worst-case budget would be equivalent to reducing enrollment by 50,000 students and laying off 4,000 to 5,000 employees. "There are no good options," Chancellor Charles B. Reed said. Among the possible cuts are about $50 million in UC and Cal State outreach programs, which mainly get high school students ready for higher education. And fewer students would qualify for financial aid, while eligible students would receive less.

Healthcare No matter how Tuesday's vote turns out, Schwarzenegger's proposals would hit hard at Medi-Cal, which provides medical care for the poor. The plan calls for saving $750 million, likely by restricting patient eligibility and cutting payments and benefits. The governor wants to save on pharmacy costs as well. He would require that the state review prescriptions for antipsychotic drugs before they could be dispensed. He also wants to create a force of investigators to police for fraud by physicians in the program, as well as in adult healthcare centers and pharmacies, for a potential savings of nearly $50 million. Medi-Cal payments to private hospitals would be reduced by 10%, and the reimbursement rate for family-planning services would be rolled back to pre-2008 levels, saving nearly $37 million. Schwarzenegger also would cut services for newly qualified legal immigrants ages 21 and older.

If the ballot measures are defeated, the state would cut more deeply into Medi-Cal programs. It would limit an adult day healthcare program to three days a week and cut by 10% the money the state pays to providers of substance abuse treatment. Tobacco tax money that now goes to county health programs would be shifted to Medi-Cal. Eligibility for the state's Healthy Families program, which serves the working poor, would be tightened. That would make health coverage unavailable to about 225,000 children. In addition, the state would halt a dental disease prevention program that serves about 300,000 preschool and elementary school children in 31 counties. Funding would be cut off from local healthcare organizations that provide HIV education and prevention programs. The governor also would halt funds to a program operated by local jurisdictions to improve the health of mothers, children and families.

Social services The governor proposes deep cuts in a number of programs that provide assistance to the poor, regardless of Tuesday's outcome. The state contribution to the wages of home care workers for elderly and disabled Californians would be slashed from a maximum of $10.10 per hour to the state minimum wage of $8 per hour. Another cut would limit certain services provided by the program to "individuals with the highest levels of need." And the state would put more resources into rooting out fraud in that program, called In Home Supportive Services, in hopes of saving $15.8 million. Cash grants available to low-income elderly and disabled Californians would be cut in an effort to save $249 million. That reduction, which would take effect Sept. 1, would lower the monthly grant for an individual from $907 to $830, the federal minimum allowed under the program.

The state also would cut CalWorks welfare grants for poor children by $157 million. Emergency assistance intended for the children of parents who have been in the program more than five years would be ended if the parents do not meet federal work participation requirements. If the ballot measures are defeated Tuesday, the state would cut an additional $300 million from In Home Supportive Services. Funding for Child Welfare Services, which exists to protect the health and safety of children and their families, would be cut by 10%. And a $20.4-million domestic-violence program, which funds 94 shelters that provide emergency services to victims and their children, would be eliminated.

Law enforcement No matter what voters decide, the biggest share of the 5,000 proposed state worker layoffs would affect the prison system, the governor's aides say, though it remains unclear how big that hit would be.If the propositions are rejected, Schwarzenegger would save money by reducing the state's prison population. A prime target would be the 19,000 illegal immigrants currently serving time in California lockups. The governor said the federal government is not providing enough money to offset the incarceration costs for those inmates. He wants to begin shifting nonviolent prisoners who are illegal immigrants to federal custody unless the U.S. government boosts its funding.

The governor also wants to save $100 million by altering sentencing options for an estimated 23,000 low-level offenders so more would be put in county jails rather than in state prisons. But shifting that burden to local governments -- which could have their state funding cut by $2 billion -- doesn't sit well with law enforcement officers. "You cannot balance the state budget woes on the back of the county jail system," said Steve Whitmore, a spokesman for the Los Angeles County Sheriff's Department, which has already had its budget cut by $72 million this year. "This isn't a good scenario." Schwarzenegger proposes eliminating $108 million for programs that provide substance abuse and crime-prevention treatment to offenders. An additional $20 million would be cut for 94 domestic violence shelters around the state.

Local government If voters reject the ballot measures, the state would borrow nearly $2 billion from local governments under the governor's plan. The money would come from local general funds that pay for police, fire, library and other basic services. That could mean the loss of $120 million for the city of Los Angeles and $290 million for the county, according to an analysis by the League of California Cities. The money would have to be paid back to the cities in three years. "I absolutely despise taking money from local government, but this is only in the worst-case scenario," Schwarzenegger said. The impact of such cuts would be significant, said Los Angeles County Chief Executive Officer William T Fujioka. "All of us are experiencing significant economic effects," he said, "and this just adds to it."

Schwarzenegger Threatens to Sell California Landmarks
California Gov. Arnold Schwarzenegger is threatening to make deep education cuts and auction off some of state's most iconic properties -- from the San Quentin state prison to the Los Angeles Memorial Coliseum -- in order to close current and future budget shortfalls. The plan, which was announced Thursday in Sacramento as part of a revised state budget, faces political and regulatory hurdles. However, it underscores the drastic lengths the cash-strapped state is willing to consider to fix its ongoing fiscal crisis. Other properties on the governor's list include a landmark concert hall called the Cow Palace in Daly City, Calif., and fairgrounds in Sacramento and near San Diego. It's unclear how much the proposal could actually raise. The governor's office said the sales would be made two to five years from now and would not help close the current deficit. The state projects $15.4 billion in fresh red ink for the coming fiscal year, which begins July 1.

Mr. Schwarzenegger in February signed a plan that closed a then-$42 billion budget shortfall, but lower-than-expected tax revenue since then created the new $15.4 billion deficit. On Thursday, he outlined a series of other cuts he said would be needed to close that gap. The state, he said, needs to undertake $5.6 billion in additional spending cuts, borrow another $6 billion in short-term loans and raise new money such as $1 billion in accelerated payments and new fees. The cuts would include $3 billion in education; $750 million in health-care for low-income individuals and those with disabilities; and $234 million from developmental services. The education cuts could force California schools to cut the school year by five days, the governor said.

"I understand that these cuts are very painful," he said. "Behind each one of those numbers are real people." By offering up the cuts and property sales, the governor is also opening a new negotiating tactic as he struggles to cajole taxpayers into approving a set of money-raising ballot measures. A special election is scheduled for May 19, and three key budget-balancing propositions are trailing in the polls. The governor stressed the state's financial picture would be even bleaker if his measures don't pass. The linchpin of the coming ballot measures is a cap on state spending that would help California build a rainy-day fund for the first time in decades. But the measure would also extend by two years a highly unpopular tax increase, which is one reason it is being opposed by a majority of likely voters polled in recent weeks.

If those measures fail, the governor said education funding would be cut by an additional $2.3 billion -- for a total of $5.3 billion in reductions. That would force schools to shorten the school year by 7.5 days, increase class sizes and lay off even more teachers. The governor also said the state would need to borrow $2 billion from local governments, a proposition that some political observers think could prove tough given that many cities and counties are also struggling. "Until we fix the system," Mr. Schwarzenegger said, "the budget madness that has always plagued the state will always be with us." Democratic Senate leader Darrell Steinberg said in a statement that the governor's message was clear. "There are difficult choices ahead for this legislature and the governor," Mr. Steinberg said. "Regardless of what happens on May 19, on May 20 we will begin to respond to this fiscal challenge swiftly and responsibly, doing the best we can with the money we have."

The proposal to sell San Quentin, which sits on scenic waterfront real estate north of San Francisco, isn't new. California legislators in April rejected such an idea for the fourth straight year, saying it would burden already overcrowded state prisons. The governor in recent days has also floated the idea of releasing 40,000 inmates to relieve the prison system. The case of the Los Angeles Coliseum is dogged by the question of who would be willing to buy it. The University of Southern California last year signed a 25-year lease for the property to host its football games, something that the university says it has the right to keep regardless of whether the property changes hands. USC says it isn't actively looking to be the owner because under its lease deal the state has agreed to pay for about $60 million in improvements including replacing the stadium's seats and building a new scoreboard. Leasing "makes more sense" said Kristina Raspe, who manages the university's assets and real estate.

The governor's $400 million price tag for the coliseum has been called an exaggeration by those familiar with the property. Zev Yaroslavsky, a Los Angeles County Supervisor who serves as the president of the Los Angeles Memorial Coliseum Commission, said a 2001 appraisal of the property pegged its value at just $16 million. It's lost value since, he said. "It's a kind of fiscal fantasy," says Mr. Yaroslavsky. The sale of local fairgrounds could prove complicated as well, since many would need to be rezoned by local authorities for development. "It could prove unbelievably difficult," says Stephen Chambers, executive director of the Western Fairs Association. Mr. Chambers estimates that the fairgrounds proposed for sale already produce roughly $90 million in tax payments annually to the state. "When [Gov. Schwarzenegger] takes a closer look at this, we think his team will appreciate these are already valuable assets," he says.

Treasury plans help for muni bond market
The US Treasury would provide a backstop to stricken states like California, which are struggling to raise debt, under legislation due to be introduced to Congress. Proposals published on Thursday would see the Treasury acting as a reinsurer in the market and the Federal Reserve setting up bond purchase agreements, which were commonly provided by banks until the credit crisis. The changes present an even greater use of federal money and oversight into new areas of the market, with billions of dollars from the $700bn troubled assets relief programme – which has been used to buy stakes in banks and car companies. Rating agencies would also come under pressure to improve state and local governments’ credit ratings, with the Securities and Exchange Commission tasked with checking that they are not assigning too high a risk of default compared with corporate bonds.

Barney Frank, the Democratic chairman of the House Financial Services Committee who supports legislation, said that he would hold hearings into the changes on May 21. The proposals have been sought by state and local governments since the municipal bond market, where they raise money for projects that benefit the general public, seized up last year and forced issuers to shelve more than $100bn in bond sales. Financing conditions have improved considerably in the last few months thanks in part to a provision in the stimulus package which provides a subsidy for interest on taxable muni bonds sold for infrastructure projects. These new bonds, called Build America Bonds, have been popular with investors and issuers alike and helped to alleviate some of the overhang borrowing needs. Public finance still faces challenges as it tries to recover from multiple blows, including the demise of many bond insurers which guaranteed half of the $2,700bn market a year ago.

The lack of cheap insurance has left many small borrowers unable to raise debt. The credit crunch also exposed some questionable practices related to the awarding of bond contracts and the use of interest rate derivatives whose risks many issuers did not fully understand. Various groups have called for heightened regulation, particularly of financial advisors. Underlying fiscal woes of state and local economies also remain as revenues from personal income, sales and corporate income tax continue to drop. Some muni market participants, however, have warned of risks to federal intervention. For example, local governments may not tackle deficits as seriously and their credit worthiness could suffer.

U.S. government now a "bond insurer"
Towns, municipalities and even states across the U.S. teetering on bankruptcy

With towns, municipalities and even states across the U.S. teetering on bankruptcy, and essentially shut-out of credit markets due to the high risk attached to their debt, once again the "free enterprise" government of the U.S. is stepping in to totally manipulate a market. The same U.S. government which intends to intervene and insure state and municipal debt has also announced it intends to "pressure" (so-called) credit-rating agencies to give U.S. states and municipalities higher ratings. This bears an eerie resemblance to Wall Street's multi-trillion dollar Ponzi-scheme, where U.S. banksters "pressured" credit rating agencies (with money) to rubber-stamp the fraudulent feces they were selling as "AAA" - and then the investors victimized by Wall Street watched one "toxic" investment after another implode.

Apparently, the U.S. government has decided that the scam worked so well the first time (at least, at first), that they should start up their own Ponzi-scheme in the municipal bond market. Expect the corrupt and servile ratings agencies to meekly submit to these pressures. However, merely creating another, huge Ponzi-scheme does not guarantee a new supply of foolish victims – ready to throw away their money based on false promises of "security". Another news item today reported that a large Singapore investment fund, Temasek has dumped all of its Bank of America shares – absorbing roughly a 75% loss in the process. How many people will be fooled if California's "single-A" credit rating is jacked-up, when they hear the state's governor wondering out loud whether he should close the prisons or the schools. Gutless politicians at all levels of government refuse to take the necessary action to avoid their own bankruptcy: raising taxes.

Instead, these leaders are abdicating their responsibility and submitting "initiatives" to voters – asking them to approve tax increases. If the initiative passes, then political "leaders" can escape the wrath of voters already squeezed by collapsing asset prices and falling wages – by blaming the voters, themselves. If voters refuse to authorize tax increases, placing these governments in imminent danger of bankruptcy, these same spineless "leaders" can then scurry to the federal government and beg for help, claiming they did "everything possible" to avert bankruptcy. After all, if the Bernanke printing press can supply $10 TRILLION in hand-outs and pledges for the U.S. financial crime syndicate, then surely "Helicopter" Ben can print up another trillion or so to bail-out towns and states.

The same U.S. government which believes it can solve all its problems through manipulating markets and printing infinite amounts of money is trying to simultaneously convince its previous scam-victims that the U.S. economy is now "stabilizing", and its bonds are risk-free. The same U.S. government which has promised "transparency" in its financial products to investors – at home and abroad, is now eagerly embarking on another scheme to remove transparency in the municipal bond market by attaching "AAA" rubber-stamps to its municipal bonds – rather than allowing the market to assign realistic credit-ratings to these high-risk bonds. Keep in mind that potential investors are facing two categories of risk here. First there is the direct risk of default. Once almost negligible, such risks are now substantial – given that several municipalities across the U.S. have already declared bankruptcy.

The second risk faced by all investors purchasing any asset denominated in U.S. dollars is the huge currency-risk. Despite being burdened with more debt than the rest of the world combined, despite recklessly printing money at record rates, and printing up hundreds of billions of dollars "buying" its own bonds, the U.S. dollar has been propped up to an absurd level. Indeed, without a dramatic devaluation of the U.S. dollar, the U.S. government will be crushed by its own mountain of debt – in a Soviet Union-like implosion. The scheme (and scam) is to try to use the temporarily high value of the U.S. dollar to lure in trillions more from already-burned foreign investors, and then to let the U.S. dollar crash. While I have consistently underestimated the stupidity of market-lemmings, I would suggest that most of those lemmings have already plunged off a cliff – leaving far too few "chumps" to soak-up the trillions in scam-bonds, which the U.S. government needs to flog.

Insurers get preliminary OK for Treasury funds
The federal government has agreed to extend billions in bailout funds to six major U.S. life insurers, helping them shore up their capital positions in the wake of major investment losses. The Hartford Financial Services Group Inc. said Thursday that it had been notified by the Treasury Department that it was eligible for $3.4 billion from the Troubled Asset Relief Program, or TARP. Lincoln National Corp., which goes by the name Lincoln Financial Group, said it has been initially cleared for a $2.5 billion injection from TARP's Capital Purchase Program.

Allstate Corp. of Northbrook, Illinois, Minneapolis-based Ameriprise Financial Inc., Principal Financial Group Inc. of Des Moines, Iowa, and Prudential Financial Inc. of Newark, New Jersey, also are among insurers receiving preliminary investment approval, Treasury spokesman Andrew Williams confirmed. He declined to disclose the amount of investment each company will receive. The total capital injection into the six companies will be less than $22 billion, The Wall Street Journal reported, citing a person familiar with the situation. Shares of the insurers were mixed at midday Friday. Shares of Connecticut-based Hartford Financial rose 58 cents, or 3.9 percent, to $15.33, while Lincoln National gained 10 cents to $16.34, Ameriprise added 17 cents to $25.23 and Principal Financial rose 26 cents to $19.13. But shares of Prudential fell 96 cents, or 2.5 percent, to $38.41 and Allstate lost 55 cents, or 2.2 percent, to $24.70.

The $700 billion TARP bailout fund, approved by Congress last year, was originally intended to purchase toxic loans on the books of banks that were inhibiting their ability to make loans. But the fund quickly morphed into a capital backstop fund for banks and was also used by the Treasury Department to make loans to General Motors Corp., Chrysler and insurance giant American International Group Inc. Life insurers also requested government aid, worried that their balance sheets had became clogged by illiquid assets and escalating liabilities to policy holders who bought in to this decade's explosion in the variable annuities market. Life insurers own 18 percent of all corporate bonds, so aiding them is consistent with the bailout program's goal of unclogging credit markets. Insurers also have seen their investment portfolios slammed by declines in stocks, real estate and other financial assets in the last two years. Analysts have warned that some insurers risked falling below necessary capital levels, which is essential to avoiding costly downgrades from ratings agencies.

Insurance companies won backing from the Bush administration last year to be considered for the government's TARP program because some of the companies either owned savings and loans or acquired them to be considered for the bailout program, or were already classified as bank holding companies. The Hartford and Radnor, Pennsylvania-based Lincoln National, two of the largest U.S. life insurers, and several others applied to become thrift holding companies last fall. Regulators approved applications earlier this year from those two firms. Hartford said in January that it expected to be eligible for between $1.1 billion and $3.4 billion in bailout money.

After a company receives preliminary approval for support from the TARP program, it can take several weeks for the final paperwork to be approved and for the loans to be disbursed. "These funds would further fortify our capital resources and provide us with additional financial flexibility during one of the most volatile market climates in our nation's history," Ramani Ayer, chairman and chief executive of The Hartford, said in a statement. "Access to the Treasury's Capital Purchase Program is a means to further enhance the company's financial flexibility and capital in what has continued to be an unprecedented economic environment," said Dennis R. Glass, president and chief executive of Lincoln Financial. Not all insurers sought U.S. aid, however. MetLife Inc. said last month it would not participate in the Treasury Department's capital purchase program. The New York-based insurer issued the statement in response to widespread speculation that life insurers would seek a federal bailout.

Robert Prechter: Stocks still face deflationary collapse
Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites. Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression, he said. The U.S. S&P 500 stock index's rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

"It's not the start of a new bull market," said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. "Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932," he told Reuters in a wide ranging interview. "It's a very rare event," he added. "I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety," he said. As in his 2002 book "Conquer the Crash," which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills.

Riskier assets such as commodities, corporate bonds, and stocks which are currently anticipating that the severe global economic downturn may be bottoming, are likely to have short lived intense rallies, but within an inexorable long-term decline that may last another seven years, he said. As banks continue to accumulate losses and corporate earnings fall, "the difficulties will probably last through about 2016," he said. "There will be plenty of rallies along the way." Oil may rally further from current levels just below $60 per barrel but the upside will be capped at about $80 per barrel as the commodity is locked in a long-term bear market, he said. In July, U.S. crude oil hit a record peak above $147 per barrel and was just above $57 per barrel around noon on Thursday.

"Deflation is coming, it's going to lead to a depression. We're not at the bottom yet," Prechter said. "I think we are going to have bouts of deflation separated by recoveries." Prechter also painted a bleak picture for commodities like silver and is largely unenthusiastic about gold, believing the precious metal made a major peak when it rose above $1,000 last year. While gold may have already topped at above $1,000 an ounce in March 2008, Treasury bond prices are likely to fall in a long term bear market, with huge government debt issuance being the main catalyst. The benchmark U.S. 10-year Treasury note yield, which moves inversely to its price, hit a five-decade low of 2.04 percent in mid-December. "People got very enamored with bonds and very enamored with gold and I don't like to be invested in markets that are over subscribed," Prechter said.

"The Treasury (Department) has taken on so much bad debt" at a time tax receipts are falling, that "there will be a slow, but very steady change in the way people will view the U.S. government," said Prechter. As a result, investors in Treasury notes and bonds will ultimately demand higher yields, he said. The U.S. central bank will not be able to control the government bond market and prevent yields from rising, regardless of how much money the Fed uses to buy Treasuries, he added. Next year, U.S. corporate bond prices will probably fall below their extreme price lows of December during the market panic of 2008 when investors fled riskier assets, he said. "Corporates in terms of price have the big wave down coming. This has been a prequel," Prechter said. "Many corporations who (now) say we can borrow more money and take more risks: those are the ones who will get in trouble," he said. "Many municipalities will default," he added.

Billionaire Rupert Says Crisis May Provoke Unrest, Inflation
South African billionaire Johann Rupert said the financial crisis may lead to inflation and social unrest as savers find they’re too poor to retire, while pension-fund managers deserve to be jailed for incompetence. Rupert, speaking at the annual presentation for Cie. Financiere Richemont SA, the luxury-goods company he controls, said he doesn’t see any "green shoots" of economic recovery. He said governments may resort to inflation to reduce the burden of increased debt from stimulus programs, such as U.S. President Barack Obama’s $787 billion package. "If this thing carries on, my generation will have to work until they are 75," the 58-year-old Rupert said. Governments are "going to have to find the capital in the markets, which will crowd out the private sector, or they’re going to have to tax the living hell out of consumers, or inflate their liabilities to oblivion. There are not too many other options."

Rupert told analysts at the meeting that they’re too young to remember Red Brigade terrorism in Italy or the 1968 Paris uprisings, when the French state sent tanks into the streets. "Things can get volatile very quickly," he said. "This is a very turbulent situation. It could flat-out turn into big inflation if not managed properly over the next two or three years. The saver is going to start rebelling." Spain needs to reduce unemployment from its current rate of about 20 percent to avoid future social problems, he said. Richemont’s brands include Jaeger-LeCoultre watches and Cartier jewelry. It’s the second-largest luxury goods maker in the world, trailing only LMVH Moet Hennessy Louis Vuitton SA.

Rupert has become increasingly outspoken since he assumed sole control over Richemont following the death of his father Anton three years ago. Last October, he said investment bankers too young to remember a serious recession helped cause the financial crisis. Rupert himself worked in banking at Chase Manhattan Bank and Lazard Freres in New York before founding South Africa’s Rand Merchant Bank in 1979. He set up Richemont in 1988, which was built on proceeds from his family’s Rembrandt Tobacco Corp. Governments should promote economic growth, which is the only way to improve states’ finances, Rupert said today. Protectionism and increased tariff barriers between countries could lead to a "second Depression," he added.

"All of the excess leverage in the system is being assumed by governments, in some way or other," he said. "They’re going to have to de-lever sometime." Rupert said some former schoolmates and friends from his time in South Africa’s Navy won’t be able to afford to retire, as their money managers lost their savings in the bear market. "People should be put in jail for their lack of maintenance of purchasing power in the pensions and retirement funds that they managed," Rupert said. "People are simply not going to have the retirement funds at their disposal." The Rupert family’s fortune declined by more than half in dollar terms to $1.2 billion, ranking them no. 601 in the world, according to the most recent Forbes list of billionaires, as Richemont shares retreated and the rand fell against the dollar.

Unions vs. Taxpayers
Organized labor has become by far the most powerful political force in government.

Across the private sector, workers are swallowing hard as their employers freeze salaries, cancel bonuses, and institute longer work days. America's employees can see for themselves how steeply business has fallen off, which is why many are accepting cost-saving measures with equanimity -- especially compared to workers in France, where riots and plant takeovers have become regular news. But then there is the U.S. public sector, where the mood seems very European these days. In New Jersey, which faces a $3.3 billion budget deficit, angry state workers have demonstrated in Trenton and taken Gov. Jon Corzine to court over his plan to require unpaid furloughs for public employees. In New York, public-sector unions have hit the airwaves with caustic ads denouncing Gov. David Paterson's promise to lay off state workers if they continue refusing to forgo wage hikes as part of an effort to close a $17.7 billion deficit.

In Los Angeles County, where the schools face a budget deficit of nearly $600 million, school employees have balked at a salary freeze and vowed to oppose any layoffs that the board of education says it will have to pursue if workers don't agree to concessions. Call it a tale of two economies. Private-sector workers -- unionized and nonunion alike -- can largely see that without compromises they may be forced to join unemployment lines. Not so in the public sector. Government unions used their influence this winter in Washington to ensure that a healthy chunk of the federal stimulus package was sent to states and cities to preserve public jobs. Now they are fighting tenacious and largely successful local battles to safeguard salaries and benefits. Their gains, of course, can only come at the expense of taxpayers, which is one reason why states and cities are approving tens of billions of dollars in tax increases. It's not as if we haven't seen this coming.

When the movement among public-sector workers to unionize began gathering momentum in the 1950s, some critics, including private-sector labor leaders such as George Meany, observed that government is a monopoly not subject to the discipline of the marketplace. Allowing these workers -- many already protected by civil-service law -- to organize and bargain collectively might ultimately give them the power to hold politicians and taxpayers hostage. It wasn't long before such fears were realized. By the mid-1960s, dozens of cities across America were wracked by teachers' strikes that closed school systems. Groups like New York City's transit workers walked off the job in 1966, bringing business in Gotham to a near halt. The United Federation of Teachers led an illegal strike which closed down New York City schools in 1968. Widespread ire against strikes by public workers produced legislation in many states outlawing them. That prompted government workers to retreat from the picket lines into the halls of government. In Washington, they organized political action committees, set up sophisticated lobbying efforts, and used their muscle to help elect sympathetic public officials.

Today, public-sector unions sit atop lists of organizations that devote the most money to lobbying and campaign contributions. In Pennsylvania, a local think tank, the Commonwealth Foundation, counted the resources of the state's teachers union a few years ago. It had 11 regional offices, 275 employees and $66 million in annual dues. In Connecticut, representatives of the teachers union camped outside the legislators' doors in 2005 to keep tabs on school reformers who were calling on these officials to expand school choice. And in California, unions spent more than $50 million in 2005 to defeat a series of ballot proposals that would have capped growth in the state's budget. Now the state's teachers union is putting its clout behind a ballot initiative, to be voted on next week, that would restore more than $9 billion in educational spending cut from the state's budget.

The results of such efforts are evident in the rich rewards that public-sector employees now enjoy. A study in 2005 by the nonpartisan Employee Benefit Research Institute estimated that the average public-sector worker earned 46% more in salary and benefits than comparable private-sector workers. The gap has only continued to grow. For example, state and local worker pay and benefits rose 3.1% in the last year, compared to 1.9% in the private sector, according to the Bureau of Labor Statistics (BLS). But the real power of the public sector is showing through in this economic crisis. Some five million private-sector workers have lost their jobs in the last year alone, and their unemployment rate is above 9% according to the BLS. By contrast, public-sector employment has grown in virtually every month of the recession, and the jobless rate for government workers is a mere 2.8%.

For anyone who thinks such low unemployment numbers are good news, remember that the bulging public sector must be paid for with revenues that most governments don't currently have. This is one reason for a spate of state and local tax increases, such as $5 billion in tax increases New York state passed in April, and $12 billion in tax increases California's legislature agreed to in February that will only become law if voters pass a series of ballot initiatives next week. The next lesson we are likely to learn is that voter revolts against new taxes are no longer effective because of the might that these public- sector groups now wield. The tax-cut uprising of the late 1970s began in California with Proposition 13 capping property taxes. It then spread to more than a dozen states before it became a national movement that helped elect Ronald Reagan. The next tax revolt, during the recession of the early 1990s, helped sink officials like New Jersey Gov. James Florio and produced ballot propositions in places like Colorado that capped spending or made tax increases more difficult.

Now powerful and savvy, public unions have moved effectively to quash antitax movements. In New Jersey, public unions derailed a taxpayer revolt in 2005 by using their legislative clout to water down a bill that would have created a state constitutional convention to enact property-tax reform. Meanwhile, under pressure from unions, state legislatures in places like Florida have been tightening rules and requirements for passing voter initiatives and referenda -- blunting a favorite tool of antitax groups. In states like Iowa where public unionization rates are still low government workers have had to accept concessions. But allies of the unions in Washington are working to rectify that situation with union-friendly legislation like the card check bill, which will make organizing much easier.

In the private sector such efforts will still be subject to the demands of the marketplace. Employers who are too generous with pay and benefits will be punished. In the public sector, however, more union members means more voters. And more voters means more dollars for political campaigns to elect sympathetic politicians who will enact higher taxes to foot the bill for the upward arc of government spending on workers. That will be the pattern for the indefinite future unless taxpayers find a way to roll back the enormous power public workers have acquired.

Economists Foresee Protracted Recovery
Economists in the latest Wall Street Journal survey see an end to the recession by autumn, but say it will take years for the economy to fully recover. On average, the 52 economists who participated in the survey project that the recession will end in August. They expect gross domestic product to contract 1.4% at a seasonally adjusted annualized pace in the current quarter, compared with the 6.1% drop recorded in the first quarter. Slow growth is expected to return by the third quarter, with the economy expanding more than 2% in the first half of 2010. The survey was conducted before the Commerce Department's report this week that retail sales fell 0.4% in April from the previous month, which left some economists questioning whether consumer spending is ready to rebound.

Initial unemployment claims released Thursday brought more gloomy news: Seasonally adjusted claims in the week ended May 9 increased 32,000 to 637,000 from a revised 605,000 in the preceding week. Most of the losses can be chalked up to Chrysler LLC's 27,000 layoffs following its April 30 bankruptcy filing. Separately, the April producer price index, which gauges prices at the wholesale level, rose 0.3%, driven by growth in food prices. The core price index, which excludes food and energy, was up 0.1%. Even before the new data were released, economists were expecting a major pullback in consumption. Nearly three-quarters of survey respondents said the recent increase in the U.S. saving rate is the beginning of a major behavioral shift. A consumer retrenchment is one factor that is likely to make any recovery a long slog. The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over the next 12 months, even as growth returns to the economy.

The depth of the downturn means it will take years to eat up the slack created by the recession. Nearly half of the economists said it will take three to four years to close the output gap, while more than a quarter say it will take five to six years. "We're going through a transition in the economy back to a more normal share of consumer spending relative to GDP," said Paul Kasriel of The Northern Trust Corp. "This is a very deep and defining recession that is going to lead to a transformed U.S. economy, and these transformations don't take place overnight." The survey respondents were more positive about the financial sector. A third of the economists said the recently completed bank stress tests were a well-done and very constructive process, while half said they were helpful even if they understated risks.

Last week, the Federal Reserve and Treasury Department released the results of tests to gauge how well banks' balance sheets would withstand the recession. Meanwhile, more than three-quarters said President Barack Obama's administration won't have to go back to Congress for more money to aid banks. Half the respondents said that fiscal and monetary stimulus has provided the basis for a sustainable recovery. Twenty-seven percent said it has boosted the economy, but they had doubts about sustainability. "The Fed has the big guns and has effectively averted a depression or a much more severe recession," said Diane Swonk of Mesirow Financial. The role of the Fed in stabilizing the market has boosted the outlook for Chairman Ben Bernanke. On average, the economists say there is a 72% chance that Mr. Obama will reappoint the Fed chairman in 2010. "If there's a hero to this piece, it's Ben Bernanke," Mr. Kasriel said.

Fed's Fisher: Worst-Case Stress-Test Scenario Very Unlikely
Richard Fisher, president of the Federal Reserve Bank of Dallas, described the worst-case scenario in the Fed's recent bank stress tests as all but "unimaginable," saying the exercise should help restore some confidence. "It was an extremely stressful stress test," Fisher said Friday. As for criticism that the tests weren't stringent enough, he said, "You can pick at the scab if you want to (in terms of the test criteria), but the stress tests, I think, did their job."

Fisher, speaking with reporters here during the 125th Annual Convention of the Texas Bankers Association, said some of the assumptions in the worst-case scenario outlined by the tests were more extreme than anything since the Great Depression, "which to me are unimaginable." Late last week, the Fed released the results of the so-called stress tests of the nation's 19 largest banks. The exercise was designed to determine if the institutions had enough capital to weather a significant worsening in the economic and financial environment. The Fed reported that if its worst-case scenario were realized, banks' additional losses could total about $600 billion. Under the test, the Fed determined that 10 of the banks would collectively require $185 billion in new capital.

Meanwhile, Fisher said Friday that a "correction" is taking place in commercial real estate, although he disputed the notion that the sector is undergoing a "collapse." Commercial real estate "is an issue," Fisher said. "It is a shoe that is dropping." Still, he said, market participants are well aware of the issue and are attempting to manage it. Fisher also said an overall economic recovery, when it comes, likely will be shaped "like a check mark," with a slow incline, rather than V- or U-shaped. Fisher currently is a non-voting member of the Federal Open Market Committee.

See the USA in Your Chevrolet - Dinah Shore 1952

GM says Chrysler-like deal best bankruptcy option
General Motors Corp on Thursday said that if it files for bankruptcy it would most likely pursue a quick sale of its best assets to a new operating company similar to the process now reshaping Chrysler LLC. The disclosure, which came in a filing for U.S. securities regulators, marked the first time that GM said it would most likely pursue the same legal strategy that Chrysler is using under federal oversight to slash its debt and dealerships. GM faces a June 1 deadline to restructure its bond debt and reach a sweeping new deal with its major union. The automaker repeated in its filing with the U.S. Securities and Exchange Commission that it expected to file for bankruptcy if not enough of its bonds are tendered in exchange for shares by that deadline. As part of its restructuring now headed by Chief Executive Fritz Henderson, GM has had legal advisers mapping out a strategy if it is forced to file for bankruptcy.

GM has said that those options could include a sale of its profitable assets under "Section 363" of the bankruptcy code. "We are considering ... alternatives in consultation with the U.S. Department of the Treasury, our largest lender," GM said in its SEC filing. "We currently believe that if we pursue one of these (bankruptcy) alternatives, a 363(b) sale would be the most likely." Chrysler, which filed for bankruptcy protection on April 30 after failing to win a deal with secured lenders to cut its debt, aims to use that provision of the bankruptcy code to complete a sale of most of its operations to Italy's Fiat SpA later this month. It was not immediately clear what entity would buy GM assets out of bankruptcy, but analysts have said an entity backed by the U.S. government was one likely alternative. U.S. officials with the Obama administration's autos task force have described Chrysler's strategy as a "quick rinse" or a "surgical" bankruptcy intended to allow the automaker to resume operations quickly and minimize uncertainty for consumers.

But the process has also proved controversial because of the administration's insistence that the United Auto Workers union have its unsecured claims against Chrysler paid out at a higher rate than the recovery for the higher-ranking secured debt. Analysts have said similar disputes between creditors could complicate any GM restructuring under court protection. GM has offered to swap $27.1 billion in its bond debt for a 10-percent stake in a restructured company under the majority ownership of the U.S. Treasury. The automaker has said it needs to bondholders to swap out of 90 percent of the value of the debt they are owed in order to avoid a bankruptcy filing. GM also remains in talks with the United Auto Workers on a new contract and new payment terms for the $20 billion it owes the union for retiree health care. The union, which could own almost 40 percent of the restructured GM through a retiree trust fund, has objected to the automaker's plans to import more vehicles into the U.S. market at the same time it is looking to cut about 21,000 additional U.S. factory jobs.

1959 'Subliminal' Chevrolet Commercial- Pat Boone and Dinah Shore

GM Seeks to Close 1,100 Dealers Holding $2.5 Billion in Vehicle Inventory
General Motors Corp. is sending termination notices today to 1,100 U.S. dealers with about $2.5 billion in unsold vehicles as the automaker starts shrinking its retail network, a person familiar with the matter said. The dealers hold about 120,000 GM vehicles of various brands, said the person, who asked not to be identified because Detroit-based GM hasn’t announced details yet. The company scheduled a conference call for reporters with Mark LaNeve, GM’s North American sales chief, at noon New York time. GM is working to pare U.S. dealers by 42 percent, to 3,600, by the end of next year as it faces a probable bankruptcy by a June 1 government-set deadline. With competition reduced among retail outlets, the remaining dealers each may be able to sell more cars at higher prices, boosting profit, the person said. GM is hoping for an orderly wind-down of the affected dealers over the next year or so, the person said, meaning they will close when their inventories are gone. The next wave of dealer terminations will take place as some dealers decide whether they wish to remain, leaving the automaker to choose who it wants to keep, the person said. Peter Ternes, a GM spokesman, declined to comment about the company’s plans.

Mike Morgan vs Goldman Sachs

Fed Clashes With FDIC on Scrutiny of Bank Chiefs, Creating 'Special Class'
U.S. regulators are arguing over how much influence the government should wield over bank management, pitting taxpayer protection against concern at roiling fragile financial markets. The clash intensified as supervisors completed last week’s stress test results on the biggest U.S. banks. Federal Deposit Insurance Corp. officials sought to make top executives and boards of directors of 10 banks accountable for raising more capital by November. The Federal Reserve insisted that managers’ fates be left to boards and shareholders. While a compromise left the matter to the companies, FDIC Chairman Sheila Bair signaled the debate isn’t done, issuing a statement May 7 that she looked forward to reviewing "corporate governance structures" with the Fed.

The exchanges are a contrast with the clear line the U.S. has taken in other industries -- the heads of General Motors Corp., American International Group Inc., Fannie Mae and Freddie Mac were all removed -- and raises questions about regulators’ handling of the financial rescue. "It is very clear that we have a special class of corporate citizens," said Joshua Rosner, managing director at Graham Fisher & Co., a New York research firm. "Banks get special treatment, but we don’t hold them to a higher standard." Lawmakers may question why bank managers aren’t being held to account by officials when the Senate Banking Committee holds a hearing with Treasury Secretary Timothy Geithner on the financial-rescue efforts May 20. Geithner said at the conclusion of the stress tests May 7 that any financial firm needing "significant" government aid in future will be subject to a Treasury evaluation on "whether existing board and management are strong enough."

The commercial bank that’s received the most federal-rescue money is Citigroup Inc., where Chief Executive Officer Vikram Pandit and nine of the bank’s 14 board members remain in office. The New York-based lender received $50 billion in pledges of taxpayer funds last year, with a portfolio of about $301 billion of its assets guaranteed. Citigroup, the third-largest bank by assets, paid dividends every quarter last year, and reported losses every quarter. It wasn’t until February that the Fed re-stated "guidance" on "prudent" dividend policy. The government stress tests said Citigroup needs to raise $5.5 billion as a capital buffer to support lending even if the economy worsens.

Bank of America Corp. received the second-biggest tally of taxpayer commitments among banks so far, at $45 billion. The Charlotte, North Carolina-based bank’s CEO, Ken Lewis, remains at the helm, even after shareholders stripped him of his board chairmanship in a vote last month. "The boards of the banks were pathetic," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "But the solution is investors in those institutions to force changes, not the government." The U.S. government oversees about $200 billion in investments in banks through the taxpayer-funded Troubled Asset Relief Program or TARP. Regulators’ review of the 19 largest institutions found that 10 banks needed to raise a $74.6 billion capital buffer against the risk of a worsening downturn. They set a deadline of November 9 for obtaining that reserve. The Fed published the results of the three-month review of the 19 banks May 7, and agency heads issued individual written remarks that differed from their joint statement.

Federal Reserve Chairman Ben S. Bernanke and Comptroller of the Currency John Dugan focused on the strength of the banking system and didn’t mention management or corporate governance in their statements. Bair said she looked forward to helping review "corporate governance structures to ensure that institutions that require higher capital buffers take appropriate steps such as conserving cash, issuing new equity, converting existing capital securities, and selling assets and non-core business lines." Bair’s position is unique among regulators because her agency has the most at stake. The agency has guaranteed some $342 billion of debt issued by banks, insures about $4.7 trillion of bank deposits, and is responsible for managing banks in receivership.

In their May 7 joint statement, the U.S. financial regulators said that the banks "will need to review their existing management and Board in order to assure that the leadership of the firm has sufficient expertise and ability to manage" their challenges. While financial shares soared as the results of the stress tests were released last week, some investors remain concerned at the government’s role in bank management. Officials still lack a single, coherent framework and it’s "very disconcerting," said Richard Schlanger, a portfolio manager at Pioneer Investment Management USA Inc. in Boston, who helps manage $13 billion. Government action "is a wild card."

In the case of GM, the Obama administration ousted CEO Rick Wagoner in March as the automaker’s reliance on Treasury loans deepened. When the former Bush administration in September seized Fannie Mae and Freddie Mac, the federally chartered housing finance companies, chief executives Daniel Mudd and Richard Syron were also removed. AIG, the insurer that required a rescue in September after it made bad bets on credit derivatives, agreed to replace Robert Willumstad after its bailout. "It is a very delicate balancing act," said Kevin Petrasic, former special counsel at the Office of Thrift Supervision who is now an attorney at Paul Hastings in Washington. "You don’t want to usurp the rights of shareholders or the direction the institution is heading. You do want the government to step in and protect the taxpayer."

FDIC Abandons Plan to Extend Bank-Debt Guarantees to 10 Years
The Federal Deposit Insurance Corp. has abandoned plans to extend its program to guarantee bank bonds to 10 years after the Obama administration opposed the move, Chairman Sheila Bair said. "That’s on hold," Bair said in an interview today in Washington when asked about implementing the extension of the FDIC’s initiative from the current three-year term. "The Treasury is not completely comfortable with that." The FDIC announced the plan in January alongside the unveiling of the government aid package for Bank of America Corp. At the time, the agency said it would be extending its guarantees to covered bonds and other kinds of secured debt that supports consumer lending.

Since its January statement, the FDIC has been mum about when and how it might proceed. Bair said today that the agency decided to go in a different direction, and instead proceed with an effort to expand the current program to include an additional type of debt known as mandatory convertible. Final rules on that new kind of debt will be released soon, Bair said. Interim rules were released in March. "That will be coming up soon," Bair said. "That was pretty non-controversial." The debt guarantees are part of the FDIC’s Temporary Liquidity Guarantee Program, started in October, to provide a backstop to business checking accounts and interbank lending.

Federal Reserve Chairman Ben S. Bernanke has credited the TLGP with helping stabilize financial markets, most recently in a May 11 speech at a Fed conference in Georgia. Banks have about $343 billion in outstanding debt under the TLGP, according to FDIC data. The program provides a safety net for a potential market of more than $1 trillion in bank borrowing and business checking account deposits. Federal regulators said last week that big banks need to prove they can borrow without the FDIC’s guarantee before they pay back capital injections from the U.S. Treasury.

Derivatives Trades Should All Be Transparent
On Wednesday, Treasury Secretary Timothy Geithner proposed new regulations on derivatives trading. The administration's goal is to introduce greater transparency to these financial contracts in order to reduce the systemic risk they pose to financial markets and to the economy as a whole. The proposals are good as far as they go, but they don't go far enough. Under the proposed reforms,standard derivative products such as credit default swaps (CDS) -- in which one party sells insurance to another party against the possibility of default by a firm or country -- will be traded on open, centralized exchanges. Trades will thus be recorded on a timely basis and regulators will gain unfettered access to information on prices, volumes and the risk exposures of all parties to these contracts. It has not yet been recommended that all such information be made available fully to the public. It should be.

Certain other financial derivatives -- such as collateralized debt and loan obligations (CDOs and CLOs), in which pools of bonds and loans are put together and their cash flows sliced up -- are not amenable to trading on a public exchange because of their nonstandard nature. But they too pose a systemic risk and need to meet minimum levels of transparency. Most financial contracts are arrangements between two parties to deliver goods or cash in amounts and at times that depend upon uncertain future events. By their nature, they entail risk, but one kind of risk -- "counterparty risk" -- can be difficult to evaluate, because the information needed to evaluate it is generally not public. Put simply, a party to a financial contract might sign a second, similar financial contract with someone else -- increasing the risk that it may be unable to meet its obligations on the first contract.

So the actual risk on one deal depends on what other deals are being done. But in over-the-counter (OTC) markets -- in which parties trade privately with each other rather than through a centralized exchange -- it is not at all transparent what other deals are being done. This makes it likely that some institutions will build up excessively large positions in OTC derivatives without the full knowledge of other market participants. If these institutions were to default, their counterparties would also incur significant losses, creating a systemic risk. For example, in September 2008 it became known that the liquidity of American International Group (AIG) was inadequate, given that it had written credit default swaps for many investors guaranteeing protection against default on mortgage-backed products. Each investor now realized that the value of AIG's protection was dramatically reduced. Investors demanded increased collateral -- essentially extra cash -- which AIG was unable to come up with. The Treasury had to take over the company. The counterparty risks were so widespread that a default by AIG would probably have spurred many other defaults, generating a downward spiral around the world. The AIG example illustrates well the cost that large OTC exposures can impose on the system.

When trading in such derivatives is moved to exchanges under the Treasury's proposals, the positions of counterparties will naturally be subject to capital requirements. But inadequately capitalized positions might still build up in derivatives such as collateralized debt obligations and collateralized loan obligations that continue to trade in opaque OTC markets. And this means continued systemic risk to the economy. To prevent this from happening again in the future, we suggest that regulators make all derivatives transparent. In particular, derivative transactions in OTC markets should be public information. Suppose every trade was posted on an Internet site within a reasonable time after execution -- as is now required by the National Association of Securities Dealers for all OTC trades in corporate bonds. Counterparties could then determine the volume of contracts of any form and by any other counterparty. Vendors would presumably make a profitable business compiling, analyzing and selling the complex data from this source.

Counterparty risk could be more accurately priced and collateral arrangements more safely based on this information. The sellers of risk in derivatives markets would have incentives to limit their exposures and to advertise this to other market participants. Investors, regulators and even the financial institutions themselves would have a much better way to analyze and hedge the true risk of their exposures. Systemic risks arising from derivatives traded OTC would be substantially reduced. Large broker-dealers and banks will naturally resist such transparency legislation. But such resistance needs to be balanced against the risk of systemic losses when large players fail.

Centralized exchange trading of standard derivative products, which Mr. Geithner has proposed, is an important step forward. But regulators must look to fighting the next war, not just the last one. Transparency in OTC markets would discourage players from cloning standard derivative products to reduce capital requirements on centralized exchanges. The huge losses announced by the Royal Bank of Scotland and State Street Corp. earlier this year suggest that we still don't know exactly what toxic assets are held by which banks. With our proposed transparency reforms, we eventually would.

Mr. Acharya teached at New York University's Stern School of Business and is affiliated with the London Business School. Mr. Engle also teaches at the Stern School and is the 2003 recipient of the Nobel Prize in Economics.

Danger in Wall Street’s Shadows
On Wednesday, the Obama administration fired a shot across the bow of lobbyists — and their friends in Congress — who have been guarding against regulation of derivatives, the financial instruments at the center of the financial crisis. In a brief letter, Treasury Secretary Timothy Geithner suggested how new laws might help regulators oversee this $600 trillion shadow market. For nearly two decades, derivatives have been at the center of every major financial calamity — from the bankruptcy of Orange County in California to Long-Term Capital Management to Enron to the recent subprime mortgage collapse. Yet over time, derivatives have become subject to progressively less regulation.

Following the lead of the Federal Reserve chairman at the time, Alan Greenspan, both political parties in the 1990s agreed with Wall Street that derivatives should be permitted to grow unchecked. Why are derivatives so problematic? Although they have useful purposes, particularly for hedging risks — as when an airline bets on increases in jet fuel prices — they frequently are used to avoid the disclosure rules applied to other financial transactions. A.I.G. held tens of billions of dollars of subprime mortgage-related derivatives, but did not tell its investors or counterparties. Citigroup, Lehman Brothers and other banks used derivatives to place hidden trillion-dollar bets. Even now, numerous institutions are using derivatives to skirt investment restrictions or to take on unwarranted leverage.

This is an old story: during the 1920s, complicated techniques helped companies move risks off balance sheets or into off-shore subsidiaries. In response to the fall of Ivar Kreuger, the financier who pioneered these innovations, Congress adopted the securities laws of the 1930s, designed to plug two key regulatory gaps by requiring more disclosure and protecting investors against fraud. Mr. Geithner’s proposal has the same twin goals: to improve disclosure and to police unsuitable sales of derivatives. These reforms are much needed. Banks might not have taken on so much subprime mortgage risk if they had been required to disclose it. Nor would they have marketed unsuitable products to pension funds and municipalities if they had more clearly been subject to liability.

Yet there is one potential weakness in the Treasury proposal, one that reopens a dangerous loophole. Mr. Geithner suggested that derivatives should be split between standardized instruments, which would be traded on regulated exchanges, and privately negotiated contracts, customized deals (often called "swaps") that are made between two financial organizations and would not be publicly traded or regulated. Rather, such transactions would be reported privately to a "trade repository," which apparently would make only limited aggregate data available to the public.

This proposal of Mr. Geithner’s also echoes history, but in a more dangerous way. In 1989, the Commodity Futures Trading Commission, a federal agency then led by Wendy Gramm, an economist and the wife of Senator Phil Gramm, a Texas Republican, issued a policy statement splitting derivatives into these same two categories. Standardized derivatives would be traded on exchanges, but individually negotiated contracts would not. Four years later, Ms. Gramm signed an order making this policy official, a sort of farewell gift to the derivatives industry before she left government service and took a place on Enron’s board.

The exception swallowed the rule, as regulators deemed more derivatives "individually negotiated." In December 2000 Senator Gramm led a lobbying effort to cement his wife’s approach. It paid off: one of President Bill Clinton’s last official acts was to sign the law largely deregulating derivatives. The leading derivatives lobbying group, the International Swaps and Derivatives Association, is already looking to exploit the Treasury’s proposal to split derivatives markets in two. As part of its lobbying campaign to protect negotiated instruments, it insists that last year "the derivatives business — and in particular the credit default swaps business — functioned very effectively during extremely difficult market conditions."

Congress should not be fooled by such talk again. The current crisis is proof that although most people do not trade derivatives, everyone is subject to their risks. All derivatives, exchange-traded or private, must be in the sunlight. If institutions want to negotiate individual derivatives contracts, they should tell investors the full details of their exposure. For decades, the American financial markets attracted capital because investors believed they were getting the information they needed. That faith has been shaken. To restore it, Congress should enact all of Mr. Geithner’s proposals, except one: it should not permit any private derivatives to grow in the dark. Otherwise, today’s exception will become tomorrow’s rule.

Creditor to predator
It was 2004 and America’s housing boom was near its height – 2.2m homes were started in the US that year and, if there was one thing they all needed inside and out, it was doors. One main supplier of those: Masonite International, a Canadian company that for 80 years had been in a construction materials business William Mason, its founder, helped develop with his trademarked hardboard. So it came as little surprise that Masonite caught the eye of the mighty Kohlberg Kravis Roberts, which days before that Christmas won management’s approval for it to take over the group. Outside shareholders held out against the New York private equity house and a few months later were won round only by an improvement in the terms to value Masonite at C$3.3bn.

Four years on, with housing markets ravaged by subprime defaults and the wider crisis those triggered, Masonite finally filed this March for bankruptcy protection in the Delaware and Ontario courts. Under the ownership of KKR, which had borrowed $1.5bn from the banks and issued an additional $770m in high-yield bonds to help gain control, it had closed or consolidated two dozen facilities and, from some 15,000 staff, it was down to fewer than 8,500. Last year the group sold only 36m doors, compared with 55m in 2006. But what is most telling of all about Masonite is who its next owners may be. They are likely to include Oaktree Capital, a little-known investment firm based in Los Angeles. Despite its low profile, Oaktree is emerging as one of the dominant players of an arcane game that will dominate the financial world this year – investing in the debt of troubled companies in anticipation that some debtholders will end up controlling them at bargain prices.

In bankruptcy, ownership of a company passes to the debtholders from those who control the equity. But in a twist of fate among the practitioners of tooth-and-claw capitalism, it is the private equity buy-out groups – which loaded with debt the companies they acquired and squeezed those assets to improve their returns – that are now about to be bested by other masters of the fleet-footed financial arts. Among targets of these predators are many of the less happy purchases made by the world’s most renowned private equity firms. "Creditors are about to become the owners of many companies," says Howard Marks, Oaktree’s chairman. "Equity owners will be wiped out. When you buy with borrowed money, there are some environments you can’t withstand." The end of the boom brought a halt to the ownership drive by private equity that used cheap debt to acquire ever larger companies, paying a big premium over the public market. In 2005-07, the industry spent almost $2,000bn on deals, according to Carlyle Group. Now, the transfer of part of the west’s corporate landscape to investors in distressed debt is just beginning.

Just like private equity, distressed debt investors are used to playing hardball to get their way. But because they thrive on the misfortunes of others, they are inevitably referred to as vultures or grave-dancers. Yet the business of Oaktree and others such as Apollo Management, Avenue Capital and Centerbridge Partners is not for the faint of heart. It has about as much predictability as Russian roulette. Success can depend on obscure legal arguments, with billions of dollars riding on a judge’s interpretation of minor technical points. On the occasions that this pays off, however, distressed debt players can acquire companies at a fraction of the price the private equity firms paid – as little as 20 or 30 cents on the dollar.

Buy-out firms have been good at acquiring companies. But their ability to operate them has increasingly been questioned as more and more of the solid operating businesses they own default on their bequeathed debt and file for bankruptcy. The question then also becomes whether investors in distressed debt will be any better at the exigencies of day-to-day business once such groups pass into their hands. Certainly, the approach of each varies greatly. Some are mere traders, wanting to flip their stakes on the slightest rise in the value of the debt or if they can cut a deal with other stakeholders. But Oaktree and Centerbridge are among those to have developed capabilities in owning companies for years, adding value and learning from the mistakes of their previous owners.

When the buy-out firms bought these companies during the boom years, executives claimed that the debt they were piling on to their acquisitions would not be a problem. Agreements with lenders imposed virtually no conditions, while innovations such as the ability to suspend cash interest payments on part of the debt gave added flexibility. But, like others, they underestimated the severity of the recession. "Private equity firms anticipated a 30-year storm," says Mr Marks. "They did not anticipate a 100-year storm. They had good companies but there was too much financial engineering and too much leverage." By buying cheaply, reducing the debt burden and improving their operating performance, distressed investors are positioning themselves to be able to resell these businesses for huge profits.

But first they must identify companies with a sound underlying business but that are faltering because they have too little cash flow to support their debt. Then they have to determine how much a company is worth and examine how its debt is structured – as highly leveraged groups invariably have different classes of debt, each with its own place in the creditors’ pecking order. The key is to guess which portion will turn into equity – and then build up control of that class of debt. Secrecy is the key to accumulating a big enough position to be able to control a company when it hits the wall. If word gets out, the price will rise and the exercise becomes more costly as others piggyback. Miscalculations can mean an investment ends up worth zero – "a bagel", in Wall Street’s pithy jargon. Aim too low and you can get wiped out because there is not enough money to go around. Aim too high and at best you are merely paid back. "The business is all about probabilities," says Jeff Aronson, co-founder of Centerbridge.

That gamble is clear from what happened with Aleris, an ailing aluminium sheet maker. In the last quarter of 2008, Oaktree started buying chunks of its debt. Nobody was immediately around to piggy?back. "We were like pigs in mud," Bruce Karsh, co-head of Oaktree, recalls fondly. TPG, the San Francisco-based private equity firm, had paid $3.5bn for control of Aleris with $850m of equity and the rest in debt. But as the economy worsened, so did the prospects of Aleris. In December, TPG had to post money with the banks on its behalf, a sign that it was standing by the company. That made the debt worth more but the big prize – control – threatened to elude Oaktree. "We can’t predict what will restructure and what won’t," Mr Karsh says philosophically. "All we can do is try to identify what is good value." But by February, as Aleris bled, TPG had withdrawn its support and the group filed for Chapter 11. As the largest lenders, Oaktree and Apollo, which turned out also to have bought some of the debt, were asked to give the company the so-called debtor-in-possession money to function while operating under bankruptcy protection. When it emerges, the two are likely to own Aleris for a fraction of what TPG paid.

Private equity’s splurge left companies with so much debt. It is harder to know which class of it will be paid off fully, which will return nothing (since recoveries are likely to be far lower than before) and which class will take over a company – the distressed debt equivalent of scoring a touchdown. To play successfully therefore requires patience and a variety of skills as well as luck at any one of several crucial junctures. About a year ago, Oaktree and Centerbridge both began looking at the long list of good cyclical companies that were likely to have difficulty repaying their debt as the economy slowed. Unbeknowns to each other, Masonite was one that showed up on both their screens. Working independently, each monitored the company for signs of distress, which included clues such as whether it was drawing down bank lines of credit. The two then contacted the trading desks of Wall Street to let them know they were buyers and began accumulating.

Initially, Oaktree bought the bonds but quickly switched to the bank loans as it became clear that holders of the bank debt would become the new owners. "To be fair, it was a miscalculation," Mr Karsh says. Through last autumn and winter, Masonite was in talks with its lenders to restructure the $2.2bn debt that its sales could no longer support. An agreement was reached that would mean a Chapter 11 filing. Oaktree and Centerbridge will own the largest chunk of equity and may have control when it emerges from court protection. Oaktree’s approach is seen as more cautious and cerebral than many of its peers. "They are among the most thoughtful groups out there," says Mark Bradley, responsible for relations with the private equity groups at Morgan Stanley. "The [recessionary] environment fits their capability perfectly."

Mr Marks sends out letters to his investors that have acquired cult status in almost the same way as those of Warren Buffett (who threw in his lot with Oaktree in the Enron bankruptcy and has used data from Oaktree in his own letters). Among readers are Bader al-Sa’ad, head of the Kuwait Investment Authority. Although Mr Marks is a product of the University of Chicago, with its markets-know-best approach, he believes securities prices are not always right but merely reflect consensus. His favourite observation is that a 6ft man can drown in a stream whose average depth is 5ft. Today, Oaktree is waiting to see what will happen to its investments in Masonite and in Charter Communications, the fourth largest US cable operator, which in March filed for Chapter 11 with almost $22bn (€16bn, £14.4bn) in debt. Bank lenders to Charter plan to go to court next month in an effort to block a restructuring that would give Oaktree and Apollo control.

"In 2001, in the last distressed cycle, the lesson was to jump in quickly or miss the opportunity," says Steve Kaplan, another of the half-dozen who founded Oaktree six years earlier. This time, the cycle is likely to last far longer. "Once we gain control, we forget we were distressed investors and become owners," he adds. As that last cycle became more severe, Oaktree for example spent $100m acquiring the debt of SpectraSite, gaining control at the provider of signal towers for mobile phone operators along with Apollo in 2003. Nursed back to health, SpectraSite emerged as a public company and Oaktree tripled its money. In 2005, SpectraSite merged with American Tower in a deal valuing it at $3.8bn including debt. But whatever distressed investors’ skills at running businesses rather than just running a slide rule over them, the companies over which they preside have far less debt than before.

Signs of distress
Companies may attract the attention of investors in distressed debt if they:
  • Draw down bank lines of credit
  • Stretch out payment terms
  • Hire restructuring experts
  • Suspend cash interest payments if permitted
  • Show a drop in working capital
  • Have suppliers or customers who say recent orders have been smaller

Employee-friendly deals behind closed doors
Of the few distressed debt investors prepared to brave the high-risk business of investing in troubled European companies, many have been forced to sit on the sidelines as debt trading has dried up, writes Anousha Sakoui. Part of the problem is that in Europe most financing takes the form of loans – unlike in the US, where actively traded bonds are more common. And as European banks have been unwilling to sell those troubled loans at low prices, distressed debt funds have found it hard to build up controlling stakes in companies’ debt. For US distressed debt funds, European investing presents additional challenges. Unlike the US, with its Chapter 11 bankruptcy protection code, Europe has no one regime that covers the region. Little of the information on a restructuring or even a court-led insolvency process is made public.

Most European restructurings are arranged out of court to avoid bankruptcy regimes that are unpredictable and unfriendly towards creditors. There are moves to change this, most recently in the UK. The UK regime – seen as one of the most predictable and creditor friendly in Europe – is likely take a leaf out of the Chapter 11 code, increasing companies’ protection from creditors and improving the rights of lenders that provide vital funds. For some US investors it was perhaps a shock to hear the government may have pressed creditors of carmaker Chrysler into a deal to save the company. But for those with experience of investing in distressed European debt, it is often to be expected.

In European debt restructurings, the impact on jobs and industry has always been an important consideration. According to one European distressed debt investor, the assumption in such situations is that in Europe governments are likely to be working behind the scenes for an outcome that favours employees. "The US bankruptcy regime, being very court driven, is more transparent than the insolvency regimes in many European countries, including the UK," says Jennifer Marshall, restructuring partner at law firm Allen & Overy in London. "Political influence may well be being exerted in European restructurings but this will be done in private and court hearings are often carried out behind closed doors."

Authorities probe insider trading at SEC
Two U.S. Securities and Exchange Commission employees are under investigation by federal criminal authorities for allegedly using insider information to trade stocks, a source familiar with the matter said on Thursday. A report by the SEC's internal watchdog alleges that the two SEC lawyers traded in stock of a large financial services company despite being told by another SEC employee of ongoing investigations of that company, CBS News reported. The SEC inspector general report said one SEC attorney under investigation works in the Office of the SEC's Chief Counsel and has access to a tremendous amount of nonpublic information, CBS News said.

An SEC spokesman said: "We take seriously even the suggestion that any SEC employee would engage in insider trading. We note that the inspector general report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place." Calls to the SEC's inspector general and Federal Bureau of Investigation were not immediately returned. The SEC is in charge of policing markets and protecting investors. Ferreting out individuals who use nonpublic material information to profit on a company's stock has been a priority for the SEC. The SEC spokesman said the agency has been taking additional steps to enhance its protections against the potential for improper conduct.

U.S. Senator Brown (D-Ohio) holds hearing on manufacturing, credit crisis
U.S. Senator Sherrod Brown (D-Ohio), chairman of the U.S. Senate Banking Subcommittee on Economic Policy, on May 13 held a hearing entitled "Manufacturing and the Credit Crisis." A copy of Brown’s opening statement, as prepared for delivery, follows: "Manufacturing is integrally tied to U.S. prosperity. It accounts for 12 percent – $1.6 trillion – of U.S. gross domestic product (GDP). It accounts for nearly three-fourths of the nation’s research and development. Yet today, we are facing an economic challenge few among us have witnessed and our manufacturing sector is in crisis.

"On Friday, the Labor Department reported the loss of 539,000 jobs in April, including 149,000 in manufacturing. There are 13.7 million unemployed Americans, raising the national unemployment rate to 8.9 percent – the highest rate in more than 25 years. And this doesn’t include the millions of Americans not working full-time. If you count underemployed Americans, the number is 22 million, or 15.8 percent. The true unemployment rate isn’t high, it is sky-high, and most of the job loss has occurred in the manufacturing sector. U.S. manufacturing has contracted for 15 consecutive months. According to the Federal Reserve Board, manufacturing output fell 2.7 percent in January 2009 to a level 13.1 percent below that of only 12 months earlier. These numbers only tell part of the story. Today, there are manufacturers in Ohio and every state of the country trying to figure out how to remain viable. For these business owners, working families, and communities, the economic situation could not be more urgent.

"Earlier this year, an Ohio manufacturer wrote to me explaining the devastating reality shared by manufacturers around our nation: ‘We are getting squeezed on two sides. Our customers are demanding 60- to 90-day payment terms, and on the other end, suppliers are demanding cash down payments. We are seeing the small supplier cut back or close down routinely.’ "Today, we are fortunate to have witnesses with us who can better inform us on both the short and the longer-term challenges American manufacturers are facing, and how the financial markets are compounding the crisis. Like other states, Ohio has collateral damage from both manufacturing and the subprime crisis. When banks have addressed declining values in mortgages, there is evidence they limit credit to other sectors, like manufacturing. I hope today we can learn more about these trends and discuss some of the policy options Congress should consider to help manufacturers who play such a pivotal role in our economy.

"Since 1987, manufacturing’s share of GDP has declined more than 30 percent.  That’s almost exactly the percentage increase in the financial services industry over the same time.  As a percentage of all corporate profits in our country, the profits of the financial services industry have more than doubled over the past decade, to more than 40 percent. We need to understand where the changing economy is taking us. A continuing loss of U.S. manufacturing means a greater dependence on foreign factories to produce both everyday consumer goods and the key elements of our national security, including the building blocks of our nation’s infrastructure and the equipment crucial to our nation’s military. 

"My point is not that the manufacturing sector is more important than other key sectors of our economy like the financial services sector.  My point is that our nation needs to excel in both of these economic sectors to maintain our leadership in the global economy and our security in the global arena." Leo Gerard, president of the United Steelworkers (USW), and David Marchick, a managing director of the Carlyle Group, provided testimony in the first panel. While not likely partners, USW and Carlyle Group have teamed up to advocate for federal investment in manufacturing as a way of reviving our nation’s economy.

The second panel included testimony from representatives of manufacturing companies that have been affected by the credit crisis. The panel included T. Eugene Haffely, CEO of Assembly and Test Worldwide in Dayton, Ohio; Lt. Gen. Larry Farrell, president of the National Defense Industrial Association; and William Gaskin, president of Precision Metalforming Association of Independence, Ohio. On May 8, the Labor Department reported the loss of 539,000 jobs in April, including 149,000 in manufacturing. In the past eight years, Ohio has lost more than 250,000 manufacturing jobs. Seventy-seven of Ohio’s 88 counties have had a loss of manufacturing jobs since 2001, with the remainder experiencing job stagnation. Manufacturing supports two-thirds of all private-sector U.S. research and nearly 80 percent of our patents.

Ilargi: Oh my, OPEC is falling to bits. Now who was it that again said it would?

OPEC resolve to cut output fraying, says IEA
The Opec oil cartel’s resolve to cut production to boost prices is fraying, says the International Energy Agency, the developed countries’ watchdog. The cartel, which produces more than a third of the world’s oil, last month raised its output by 270,000 barrels a day, ending a seven-month run of ever steeper cutbacks, the IEA said. The move is important because the rise in production together with weak global oil demand could increase inventories and depress prices. The IEA on Thirsday revised downward its demand outlook for 2009. This year demand would contract by 2.56m barrels a day, the sharpest annual fall since 1981. That is a drop of 160,000 barrels a day on the figure the IEA had expected in the report it published last month.Analysts say the cartel’s resolve may be fraying in part because of its success in boosting oil prices back to about $60 a barrel, up from the $32-low they hit in February. As prices rose, so did the temptation to cheat, the analysts said.Consequently, Opec’s compliance to the 4.2m b/d of cuts it has pledged since last autumn has fallen to 78 per cent from 83 per cent in March. This runs counter to its March agreement to boost compliance to near 100 per cent by cutting 800,000-900,000 b/d of overproduction by May 28 when it next meets.

Uneven compliance among the 11 active member countries is posing a problem for the group. Saudi Arabia has cut more than its pledged amount, while Iran and Angola pump well in excess of their quota. Angola is even asking for Opec to exempt it from the current output targets, arguing it is still suffering the effects of its 30-year civil war. The IEA said: "Uneven compliance by a few members and Angola’s plea for an exemption threaten to chip away at Opec’s otherwise strong resolve to rein in oversupply. "The thorny issue of compliance and Angola’s special request might limit the group’s ability to implement any further reductions in official production targets at the Vienna meeting." The IEA expects world oil consumption in 2009 to be 83.2m b/d. Production usually closely follows consumption, with inventory gains and losses making up any difference. Prices are still well below their July record of $147 a barrel. Opec has said it wants to boost prices to $75, but has since suggested it would accept prices of $50-60 a barrel temporarily while the world economy tried to recover.

UK repossessions rise by 50%
The number of people who lost their homes because they did not keep up mortgage repayments has risen by more than 50pc during the first quarter of the year. The Council of Mortgage Lenders said that a total of 12,800 properties were repossessed by first-charge lenders during the three months to the end of March, up from 8,500 a year earlier and 10,400 during the previous quarter. The number of loans with arrears of more than 2.5pc of the mortgage balance rose by 12pc from 182,600 in the fourth quarter of 2008 to 205,300 in the first quarter of this year. That was 62pc up on the 127,000 in the first quarter of 2008. But despite the steep jump in people losing their homes, the group said its forecast of 75,000 repossessions during 2009 now looked pessimistic, and it expects to revise the figure downwards. The CML previously predicted that 75,000 homes would be repossessed in 2009, almost double the 40,000 of last year.

But the organisation has now described this prediction as "pessimistic" and said it could change its view in the summer. Michael Coogan, the CML's director general, said: "It is clear that mortgage arrears continued to increase. So did repossessions, but not as much as our 75,000 forecast figure for the year would suggest. So our forecast now looks pessimistic and we expect to revise it over the next month or so. "Lenders are acutely conscious that behind the statistics are real people, many of whom are affected by the economic downturn and its impacts on unemployment, changes in circumstances and inability to refinance." He added: "The key message continues to be: talk to your lender as soon as you identify difficulties emerging, and take advice from an independent money adviser if you have other debt issues as well as your mortgage. Lenders do not want to repossess if a realistic alternative solution can be found."

Sickly Britain Crawls Toward Low Growth
Bank of England Governor Mervyn King forecasts a return to growth in 2010 but says the recovery will be long and slow. The UK faces a "relatively slow and protracted recovery", according to the Governor of the Bank of England, Mervyn King. The Bank's latest Inflation Report suggests that the British economy will contract by about 4 per cent this year, with a nadir of -4.5 per cent around the summer, before returning to growth early in 2010. Next year is projected to see an expansion of about 1 per cent, with growth of 2.5 per cent following in 2011. These are more pessimistic forecasts than the Treasury's Budget predictions of -3.5 per cent, 1 per cent and 3.5 per cent respectively. They are also lower than the Bank's previous estimates, published in February (of -3 per cent, 2.3 per cent and 3.6 per cent). Mr King warned that "the pace of the recovery may be slowed by a number of factors: the contraction in world demand and trade may be protracted; households may save more; and the availability of credit to companies and households may improve only gradually".

He again expressed concerns about the level of bank lending, especially higher fees and other charges, and endorsed recent comments by the former chairman of the US Federal Reserve, Alan Greenspan, that the banks may still not have the capital they need to return to more normal levels of lending in today's risk-averse climate. Even so, Mr King again repeated that the authorities had "stabilised" the banking system after the panics of the past year. Inflation, says the Bank, is likely to stay below the official 2 per cent until at least 2012 – even with the hundreds of billions of spending power now being injected into the economy. The Bank says that inflation will reach 1.5 per cent by the end of 2010. The markets took the report as signalling a continuation of the Bank's loose monetary policy to avoid deflation or a relapse in the recovery; gilt prices firmed, inferring lower interest rates, yesterday. Sterling weakened against the euro and the dollar after Mr King's remarks.

George Buckley, of Deutsche Bank, said: "These uncertainties add to our conviction that the Monetary Policy Committee will be reticent to take back policy easing quickly. To do so could threaten any continued economic improvement and potentially lead to a W-shaped (rather than V-shaped) recovery." The expectation is that interest rates will remain at 0.5 per cent for another year, and the policy of quantitative easing completed and possibly extended even further. Jonathan Loynes, of Capital Economics, commented: "The prospect of a prolonged period of very low short rates and possible further asset purchases provides scope for a further rebound in gilts." David Page, economist at Investec, added: "Given the uncertainties, we would not be surprised to see the BoE raise its asset purchase target again. This could include asking the Chancellor to raise the £150bn asset purchase ceiling."

However, Mr King also gave "pretty solid" reasons why the economy ought to stage a recovery. Apart from survey evidence from business organisations and the Bank's own soundings on the economy, Mr King pointed to the large fiscal and monetary stimulus now being implemented by the authorities; the near-30 per cent deprecation in sterling since its peaks in 2007; and the reversal of previous "destocking" effects – where retailers sell from stock in the face of falling sales and cancel orders from factories, something that greatly exacerbated the downturn among manufacturers in particular. Mr King said that the financial system had received "emergency treatment": "a period of healing was now required". Throughout the report the huge countervailing forces facing the economy are stressed, leaving the outlook for economic growth "unusually uncertain". The Bank's "fan chart" to illustrate the range of outcomes it deems possible is extremely wide: a 7.5 percentage points spread compared with the 4.5 percentage points in the May 2008 Inflation Report.

Mr King offered the view that "the chance that the level of output will be higher in the middle of 2010 is... no higher than the probability that output will be lower in the middle of 2010. In other words, growth has just as much chance of being positive over the next 12 months as it has of being negative". Despite past public misgivings about the public finances, Mr King went out of his way to compliment the Chancellor, Alistair Darling: "It was helpful that the Budget was extremely honest and open about the scale of the fiscal problems facing us... There certainly seem to us at least as many reasons to suppose that it may turn out to be a smaller deficit than a bigger one." Nonetheless he was less generous on the longer term outlook: "There is no doubt that we will need to move back to a path for fiscal sustainability—that is very important."

Does the ECB/Eurosystem have enough capital?
‘Enough capital for what?’ should be the question prompted by the title of this post. The short answer, amplified below, is "enough capital to be able to engage in effective monetary policy, liquidity policy and credit-enhancing policy (including quantitative easing or QE), without endangering its price stability mandate." Let’s consider the conventional balance sheets of the ECB and of the consolidated Eurosystem (the ECB and the 16 national central banks (NCBs) of the Euro Area. The most recent publicly available balance sheet of the ECB is in the 2008 Annual Report, published in April 2009. It is reproduced here:

It is clear that if the ECB were all there is to the Eurosystem, the Euro Area would be in trouble. The ECB has negligible capital (€ 5 billion subscribed, rather less than that paid in; even if we add capital and reserves to 2008 profits, we only get €5.4 bn. With assets of €3839, that gives the ECB 71 times leverage at the end of 2008, a number that would impress even Deutsche Bank. The previous year, the ECB had 48 times leverage. On its own, the ECB looks like an overblown pawn shop. Fortunately, the balance sheet of the ECB by itself is effectively irrelevant and uninformative as to the financial strength of the Euro Area monetary authority. In 2008, about 75% of the assets of the ECB consisted of intra-Eurosystem claims (the left hand lending to the right hand). What is informative is the consolidated balance sheet of the ECB and the 16 NCBs of the Euro Area - the Eurosystem. This consolidated balance sheet of the Eurosystem is available monthly:

A central bank can go broke (become insolvent) despite its ability to ‘print money’ (issue currency and/or create (electronically) deposits owned by commercial banks and other eligible counterparties that are generally accepted as final means of payment) if it has a sufficiently large stock of liabilities denominated in foreign currency and/or a sufficiently large stock of index-linked liabilities. Neither condition would seem to apply to the Eurosystem. A shortage of foreign exchange assets or credit lines is not going to be a material problem for the Eurosystem. As of May 8, 2009, the net position of the Eurosystem in foreign currency (asset items 2 and 3 minus liability items 7, 8 and 9) was EUR 263.9 billion. The ECB is also able to create reciprocal or one-sided swap arrangements with all other serious central banks. As far as I know, the Eurosystem does not have any significant amount of index-linked liabilities. No, the Eurosystem will not encounter the ‘Iceland problem’. It will always be able to create euro base money (either by issuing additional euro currency or by increasing euro bank reserves and similar deposits held with the Eurosystem by eligible counterparties) by any amount required to maintain its solvency. It is, however, possible that the amount of additional base money that would have to be created to maintain the Eurosystem’s solvency could endanger the ECB’s price stability mandate, operationalised as a rate of inflation, measured by the HICP, below but close to 2 percent per annum in the medium term.
So the question is: does the Eurosystem have enough capital to be able to risk significant capital losses in its monetary operations, liquidity operations and credit enhancing operations (including quantitative easing), without endangering its price stability mandate? The Eurosystem already has taken a lot of private sector credit risk exposure on its balance sheet. It accepts as collateral in repos and at its discount window (the marginal lending facility), most private securities (including most asset-backed securities except those that have derivatives as underlying assets) rated BBB- or better. That includes a lot of rubbish. Commercial banks throughout the Eurozone (including subsidiaries of Lehman Brothers and of the now defunct Icelandic banks) have repoed with the ECB. When three banks went belly-up in late 2008, the Eurosystem was exposed to potentially dodgy collateral to the tune of about €10 bn and provisioned about € 5 bn. With assets of € 1,795 bn and capital and reserves of € 73 bn, the Eurosystem has 24,6 times leverage. A decline of just four percent in the value of its assets would wipe out its capital. That does not look like a terribly comfortable position, as the quality of much of the assets it has accepted as collateral from Euro Area banks is likely to be uncertain at best.
Unlike the US banks and the UK banks, Eurozone banks have barely made a start on recognising the toxic and bad assets they are exposed to, on balance sheet or off-balance sheet. I won’t this time single out Iberian banks as likely suppliers of vast quantities collateral consisting of dodgy residential mortgage-backed and commercial-mortgage-backed securities to the Eurosystem. Being given the evil eye by the Governor of the Central Bank of Iberia is no laughing matter. And in any case, the Irish banks are likely to have saddled the Eurosystem with collateral that yields to no other Eurozone nation in awfulness. We know of the dreadful state of most of the German Landesbanken, the fragility of the bailed-out Commerzbank, the opaque balance sheet of Deutsche Bank, the precarious state of the remaining large listed Benelux banks, the exposure of the Austrian banks to Central and Eastern Europe etc. etc. If any of these banks had good collateral, they would not give it to the Eurosystem. They would sit on it. Even before the Eurosystem starts to buy private securities outright (as it is planning to do with high-grade covered bonds, Pfandbriefe, to the tune of € 60 bn), it is certainly within the realm of the possible (or even likely) that it would suffer losses on its assets of €73 bn or more, before this crisis and this contraction are over. That, of course, would not endanger the solvency of the Eurosystem, which has the present discounted value of current and future seigniorage income (the interest earned (or saved) by being able to borrow at a zero rate of interest through the issuance of currency and through mandatory reserve requirements).
The monetary base issued by the Eurosystem (not all of which is held in the Euro area) is just over a trillion euros. Eurozone GDP at current market prices in 2008 was about € 9.2 trillion. So the monetary base is about 11 percent of GDP. If long-run nominal GDP growth in the Euro Area is four percent per annum (two percent real GDP growth and 2 percent inflation), then, assuming for simplicity that the demand for base money does not depend significantly on the rate of inflation for low rates of inflation), the Eurosystem would be able to issue another 0.43 percent of GDP worth of additional base money each year ($40 bn worth of base money in 2009) withough putting upward pressure on inflation or driving it above the inflation target, assumed to be 2 percent to make the arithmetic easy. This is likely to be an overstatement of seigniorage revenues at a rate of inflation consistent with the price stability mandate for two reasons. First, the demand for base money is likely to be boosted significantly and unsustainbly by the extreme liquidity preference of banks and households following the collapse of interbank markets and other ready sources of liquidity. Also, a large but unknown share of euro notes is held outside the Euro Area, both for legitimate and illegitimate purposes. This demand for euro currency will not depend on Euro Area income growth, inflation and interest rates. Even if the ‘normal’ euro seigniorage as a share of GDP at a 2 percent rate of inflation is only 0.2 percent of GDP, the capitalised value of the current and future stream of seigniorage, assuming that the long-term nomopnal nterest rate exceeds the long-term growth rate of nominal GDP by one percentage point, would be 20 percent of Euro Area annual GDP. That would allow the ECB to absorb quite massive losses to its balance sheet, which as it happens equals 19.5 percent of Euro Area annual GDP.
A complete blow-out of the balance sheet of the ECB is unlikely, to say the least. Admittedly, we have to set against the present value of current and future seigniorage the present discounted value of the cost of running the Eurosystem. The ECB is lean and mean, but many of the NCBs are over-staffed, bloated organisations. I have not been able to find data on the current and capital costs of the Eurosystem, but it seems unlikely to alter the conclusion that with its monopoly of the issuance of currency in the Euro Area, and its tax on eligible bank deposits (aka reserve requirements), the Eurosystem is so wildly profitable that it can withstand very large capital losses on its conventional financial balance sheet. Things are different in that regard for the Bank of England and the Fed, where, under normal circumstances, base money is a much smaller fraction of annual GDP than in the Euro Area - typically no more than 4 or 5 percent. The maximum losses these central banks can sustain without having to either increase base money issuance to a volume that generates inflation above the (implicit or explicit) target, or knock on the door of the Treasury for compensation for their capital losses are therefore less than a quarter of the losses the Eurosystem can tolerate. That is just as well, since the ECB and the Eurosystem ’swim naked’: there is no Euro Area fiscal authority that, explicitly or implicitly, stands ready to act as the recapitalisor of last resort for the Eurosystem. As the Euro Area develops financially, and as its Southern Fringe becomes less tolerant of tax evasion and the grey and black economies, the demand for base money will shrink as a share of GDP. This would tighten the intertemporal budget constraint of the Eurosystem and make it more likely that it will have to look for a Euro-Area fiscal indemnity for capital losses incurred in the pursuit of its monetary, liquidity and credit easing objectives. But that is likely to become an issue only with the next financial crisis, a couple of decades down the road.

China Jobs Slump Makes Graduates Swap Dreams for Civil Service
Sun Yizhen considered her university degree in international trade the ticket to a prestigious career with a state-owned enterprise like Bank of China Ltd. in Beijing. Instead, she found herself huddled against a freezing wind in a middle school parking lot in Huai’an, waiting to interview for a job with the local tax collector. "I never thought I’d go for civil-servant jobs," said Sun, 21. "But the financial crisis is something that none of us would expect. We’re just desperate." The global financial meltdown is taking a toll on this year’s 6.1 million Chinese college graduates and the 1 million still unemployed from last year. The government said the 2009 official urban registered unemployment rate may reach 4.6 percent -- a three-decade high -- as collapsing exports drag gross domestic product to its lowest growth rate in nine years. That is turning off the pipeline depositing new graduates with multinational corporations and state companies, forcing many students to lower their sights and consider the once- unthinkable for them: a civil-service career.

The last test for central government openings attracted about 775,000 candidates - - or 56 for every job, a 20 percent jump from the year before. The China Disabled Person’s Federation received more than 4,700 applications for a community-organizer position, said Wei Chunfeng, a human resources official there. The starting salary is 3,000 yuan ($440) a month. "Civil-servant jobs just became suddenly attractive again," Wei said. China’s official jobless rate doesn’t include rural workers migrating from one province to another, a population the labor ministry puts at 130 million. A survey of the entire population last year showed the estimated unemployment rate may have reached 9.4 percent, the government-backed Chinese Academy of Social Sciences said in December. Only 20 percent of graduating seniors landed work in the first quarter this year, down from the historical average of 70 percent, said Sherman Chan, a Sydney-based economist at Moody’s, an economic analysis unit of New York-based Moody’s Corp.

Prospects aren’t any better in the U.S. and U.K. Just 20 percent of graduating U.S. students who applied for a job have one, according to a survey by the National Association of Colleges and Employers in Bethlehem, Pennsylvania. That’s down from 26 percent last year and 51 percent in 2007. The U.S. unemployment rate reached 8.9 percent last month. Of the 35,000 students surveyed, 12 percent had plans to work in government, compared with 8.9 percent last year, spokeswoman Mimi Collins said. In the U.K., a December survey of 100 firms by London-based High Fliers Research Limited showed that they had reduced recruitment targets by 17 percent since September and expected to hire almost 3,400 fewer graduates this year than planned. The U.K. jobless rate was 7.1 percent in March. Yet the number of entry-level positions for graduates in public service increased by 51 percent in 2008-2009. A third of 1,017 final-year students from 30 universities say such work is more appealing now, the survey said.

China’s Communist Party is especially sensitive about student unemployment as it approaches the 20-year anniversary of the student-led Tiananmen Square uprising in June. The State Council said in January that creating jobs for new graduates was the government’s top priority. "Students, please rest at ease," Premier Wen Jiabao said in December while visiting Beijing University of Aeronautics and Aerospace, state media reported. "We are putting the problem of graduates’ employment on top of our agenda." The labor ministry said it would lend money to small- and medium-sized enterprises and subsidize salaries for positions in the countryside. "The government especially wants stability this year, and the graduates can be an unstable force," said Zhou Xiaozheng, a sociologist at Renmin University in Beijing. "Students created such a big headache for the government 20 years ago." Since changes were introduced in 1978, China’s economy has averaged 9.9 percent annual growth and is now the world’s third- largest behind the U.S. and Japan. Wen says GDP must expand 8 percent a year to create enough jobs in the world’s most populous nation.

The Washington-based World Bank, a multilateral lender established after World War II, predicts growth will slow to 6.5 percent this year. China is one of five major economies -- joining Australia, Brazil, India and Russia -- that are still growing, according to data compiled by Bloomberg. By comparison, the world economy may contract 1.3 percent this year, said the International Monetary Fund, the Washington- based lender with 185 member nations. The U.S. economy shrank 2.6 percent in the first quarter from a year earlier. China’s rate of growth for the first quarter was 6.1 percent, the weakest since 1999, according to Bloomberg data. The primary cause is a slump in exports, down 23 percent in April from a year earlier. As many as 30 million migrant workers lost their jobs, Chen Guoqiang, deputy head of the Chinese State Council’s Development & Research Center, said last month. A dearth of opportunities for China’s best and brightest may present a challenge to Communist Party leaders, who say the economy must wean itself from dependence on low-cost manufacturing and develop the auto, shipbuilding and steel industries.

"Failing to find those students proper jobs would mean a great loss of human resources, thus irreversible economic loss over a long term," said Li Xiangwei, head of the college graduate employment department at the Ministry of Human Resources and Social Security. Students from the best schools who cannot find employment will go abroad for work or graduate school and may not come back, said William McCahill Jr., vice chairman of research firm JL McGregor & Co. in Beijing. "For the U.S. it’s been a great source of innovation and technological growth," he said. "That trend might be a bit accentuated." Yet it won’t have a long-term effect on multinational corporations because "there will be a lot more smart kids coming along next year and the year after," McCahill said. "It’s more of a hiccup."

The government could try to stem the tide by encouraging firms to consider hiring domestic candidates first, potentially slowing "international labor flows," Chan of said in an e-mail. Government efforts to lure graduates to jobs in lower-tier cities and the countryside should benefit China in the long run, she said. "China is still an emerging economy, and skills in developing the vast areas of poverty are critical to the continued development of the country," Chan said. Eric Ma, 25, is earning his master’s degree in logistics from the Shenzhen branch of Tsinghua University -- ranked in U.S. News & World Report as the No. 2 school in China. He interviewed unsuccessfully with Procter & Gamble Co. of Cincinnati and Lenovo Group Ltd. of Raleigh, North Carolina, and said he couldn’t even get in the door at Atlanta-based United Parcel Service Inc. and New Brunswick, New Jersey-based Johnson & Johnson. He said he beat out 1,000 others taking the test for a resource management position with the National Development and Reform Commission in Beijing.

"Graduating from the most prominent university doesn’t help very much this year," Ma said. Students are under great stress to succeed, said Li of the human resources ministry. China has a one-child policy. Parents in eight of the biggest cities -- including Beijing, Shanghai and Guangzhou -- spend about a third of their incomes on education, according to the Beijing-based Horizon Research Consultancy Group. "Every student carries the hope of the entire family, so there would be great social impact if they can’t find jobs," Li said. "The government is under pressure." Civil service is nicknamed the "gold rice bowl" because of its stability, annual pay raises and benefits packages, Wei said. Most of the more than 10 million civil servants work in government and law enforcement, and in related agencies. Sun, a slender 5-foot-3 (1.6-meter) woman, said she never considered that route while attending Beijing Technology and Business University. She interviewed to be an interpreter with Shenzhen-based Huawei Technologies Co., the nation’s biggest maker of equipment for telephone networks, and a customer- service representative with Beijing-based Bank of China, the country’s third-largest by market value.

Her worried parents encouraged her to take the civil- service test in November, she said in a series of interviews by phone and in person in Beijing. She focused on jobs outside the capital because she believed there would be less competition. In October, she attended a campus seminar organized by a Beijing training school, where she said she crammed into a lecture room with more than 300 schoolmates. "I was dumbfounded," she said. "I hadn’t realized that the interest and potential competition could be so intense." Sun took practice exams every day and earned the highest score of 60 applicants for a State Administration of Taxation office job in her hometown of Lianyungang in Jiangsu province, she said. She and two other finalists were scheduled for interviews at the Qiming Foreign Language School, a two-hour drive away, on Feb. 15. Sun spent the weeklong Lunar New Year holiday at home reading self-help books, including one listing 1,000 possible interview topics. She returned to Beijing for four days of interview training with China Office Education, a network of civil-service test consultants, she said.

A subfreezing wind howled the day Sun arrived for her appointment at the school, where 200 other candidates shivered outside locked doors. Sun waited 2? hours before interviewing with nine officials who sat in horseshoe formation and wore overcoats because the classroom had no heat, she said. The interviewers didn’t ask Sun anything about taxation, she said. Instead, they caught her off-guard by soliciting her opinion of the government’s handling of last year’s scandal involving melamine-tainted milk that killed at least six babies. Sun said she praised the Chinese media for exposing the poisonings and the government for what she called a quick response. Yet she also said she hoped the government could do a better job in the future of preventing such an incident. "My mind froze for a second there," she said. Sun tried to answer quickly so she wouldn’t delay the interviewers, whose lunchboxes were stacked outside the room, she said. Later that night, she checked the school bulletin board and saw she was picked to work as a tax officer on the bureau’s front desk.

She said she expects to earn between 2,000 and 3,000 yuan a month. Her family calls her a "little gold collar," meaning she can live comfortably as a civil servant because her hometown is less expensive than Beijing. "It wouldn’t be my dream job, but when I look around at my classmates, I think, ‘Oh God, I finally got settled!’" she said. Fang Hanmin is still looking for a job. The Sichuan University student in preventive medicine was among 700 applicants for a bottom-rung job in the Ministry of Health’s pricing and planning department. She qualified for an interview, yet found herself competing against candidates with master’s degrees and doctorates, she said. She spent 10,000 yuan on a weeklong training session in Beijing with China Office Education. Participants take classes, exams and mock interviews from 7 a.m. to midnight. If they don’t get the job, the school refunds 80 percent of the cost, she said.

Fang, 24, got her money back. She was so upset by the Health Ministry rejection that she flubbed an interview two weeks later with the Guangzhou Institute of Health Inspection, she said. She’s currently waiting for test results from the Guangdong health bureau’s human resources department. "Now is the time to pull myself together and get into the battlefield again," Fang said. "I’d take up any job available for me at local levels." Sun said she will enjoy the last few months of school knowing she has a job. Still, she’s already thinking about the next step after her contract expires in five years. "I still want to try something more challenging and go overseas to broaden my horizons," Sun said. "Hopefully, the financial crisis will be all over by then."

My Personal Credit Crisis
Edmund L. Andrews is an economics reporter for The New YorkTimes

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds. We all had our reasons. The brokers and dealmakers were scoring huge commissions. Ordinary homebuyers were stretching to get into first houses, or bigger houses, or better neighborhoods. Some were greedy, some were desperate and some were deceived. As for me, I had two utterly compelling reasons for taking the plunge: the money was there, and I was in love. It was August 2004, just as the mortgage party was getting really good. I was 48 years old and eager to start a new chapter in my life with Patricia Barreiro, who was then my fiancée.

Patty was brainy, regal, sexy, fiery and eclectic. She was one of my closest friends when we were both students at an American high school in Argentina. Back then, we would talk together about politics and books at a coffee shop every day after school. We were not romantic in those days and went our separate ways after high school. But each of us would go through bruising two-decade-long marriages, and we felt that sweet spark of remembrance and renewal upon meeting again in middle age. After a one-year bicoastal courtship, Patty was about to move from her home in Los Angeles to Washington. We would need a home with enough space for her two youngest children, as well as for my own teenage boys on the weekends. I had assumed we would start by renting a house or an apartment, but it quickly became clear that it was almost easier to borrow a half-million dollars and buy something.

Patty discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, Md. We sent in an offer of $460,000 and one day later got our answer: the sellers accepted. I felt both amazed and exhilarated, convinced that the stars had aligned for us. I loved the house as soon as I saw it. It was one block from a school and a park. My boys would be within a 15-minute drive, and it would be easy for them to come over and stay whenever they wanted. The only problem was money. Having separated from my wife of 21 years, who had physical custody of our sons, I was handing over $4,000 a month in alimony and child-support payments. That left me with take-home pay of $2,777, barely enough to make ends meet in a one-bedroom rental apartment. Patty had yet to even look for a job. At any other time in history, the idea of someone like me borrowing more than $400,000 would have seemed insane.

But this was unlike any other time in history. My real estate agent gave me the number of Bob Andrews, a loan officer at American Home Mortgage Corporation. Bob wasn’t related to me, and I had never heard of his company. "Bob can be very helpful," my agent explained. "He specializes in unusual situations." Bob returned my call right away. "How big a mortgage do you think you’ll need?" he asked. "My situation is a little complicated," I warned. I told him about my child support and alimony payments and said I was banking on Patty to earn enough money to keep us afloat. Bob cut me off. "I specialize in challenges," he said confidently. As I quickly found out, American Home Mortgage had become one of the fastest-growing mortgage lenders in the country. One of its specialties was serving people just like me: borrowers with good credit scores who wanted to stretch their finances far beyond what our incomes could justify. In industry jargon, we were "Alt-A" customers, and we usually paid slightly higher rates for the privilege of concealing our financial weaknesses.

I thought I knew a lot about go-go mortgages. I had already written several articles about the explosive growth of liar’s loans, no-money-down loans, interest-only loans and other even more exotic mortgages. I had interviewed people with very modest incomes who had taken out big loans. Yet for all that, I was stunned at how much money people were willing to throw at me. Bob called back the next morning. "Your credit scores are almost perfect," he said happily. "Based on your income, you can qualify for a mortgage of about $500,000." What about my alimony and child-support obligations? No need to mention them. What would happen when they saw the automatic withholdings in my paycheck? No need to show them. If I wanted to buy a house, Bob figured, it was my job to decide whether I could afford it. His job was to make it happen.

"I am here to enable dreams," he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. "Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine." You had to admire this muscular logic. My lenders weren’t assuming that I was an angel. They were betting that a default would be more painful to me than to them. If I wanted to take a risk, for whatever reason, they were not going to second-guess me. What mattered more than anything, Bob explained, was a person’s credit record. History seemed to show that the most important predictor of whether people defaulted on their mortgages was their "FICO" score (named after the Fair Isaac Corporation, which developed the main rating system). If you always paid your debts on time before, the theory went, you would probably keep paying on time in the future.

Bob’s original plan was to write two mortgages, one for 80 percent of the purchase price and a piggyback loan for 10 percent. I would kick in the final 10 percent, cashing out a chunk of New York Times stock — my last. If I had been a normal borrower, the whole deal would have sailed through at a low interest rate. My $120,000 base salary and my assets were easy to document. But given my actual income after alimony and child support, I couldn’t possibly have qualified for a standard mortgage. Bob’s plan was to write a "stated-income loan," or "liar’s loan," so that I wouldn’t have to give the game away by producing paychecks or tax returns. Unfortunately, Bob’s plan hit a snag a few days later. "Ed, the underwriters say that your name is on another mortgage," he told me. "That means you’re carrying too much debt."

The mortgage was on my old house, which I had turned over to my ex-wife. As part of our separation agreement, she accepted full legal responsibility for making the payments. But the separation agreement also spelled out exactly how much I had to pay each month to my ex-wife. If we showed it to the underwriters, they would reject me. Bob didn’t get flustered. If Plan A didn’t work, he would simply move down another step on the ladder of credibility. Instead of "stating" my income without documenting it, I would take out a "no ratio" mortgage and not state my income at all. For the price of a slightly higher interest rate, American Home would verify my assets, but that was it. Because I wasn’t stating my income, I couldn’t have a debt-to-income ratio, and therefore, I couldn’t have too much debt. I could have had four other mortgages, and it wouldn’t have mattered. American Home was practically begging me to take the money.

Despite the obvious red flag of applying for a Don’t Ask, Don’t Tell loan, I wasn’t paying that much for the money. The rate on my primary mortgage of $333,700 was a remarkably low 5.625 percent for the first five years, though my monthly payments would probably jump substantially after the fifth year. On top of that, I was paying a much higher rate of 8.5 percent on my "piggyback" loan for $80,300. Even so, I would be paying slightly more than $2,500 a month for the first five years. It would get expensive eventually, but I could worry about that later. "Don’t worry," Bob reassured me, saying what almost everybody else in real estate was saying at that moment. "The value of your house will be higher in five years. You’ll be able to refinance."

As I walked out of the settlement office with my loan papers, I couldn’t shake the sense of having just done something bad . . . but also kind of cool. I had just come up with almost a half-million dollars, and I had barely lifted a finger. It had been so easy and fast. Almost fun. I couldn’t help feeling like a high roller, a sophisticated player who could lay his hands on big money at a moment’s notice. Despite my nagging anxiety about the gamble that Patty and I were taking, I had whipped through the pile of loan documents in less than 45 minutes.

The icy slap of reality hit me two weeks after New Year’s Day in January 2005. We had been living in our new house for five months. I walked out of The Times’s Washington bureau, several blocks from the White House, and crossed Farragut Square to my bank. I had a bad feeling about what the A.T.M. would reveal about my balance, but I was shocked when I looked at the receipt: $196. We were broke. My stomach churning, I reached Patty on her cellphone as she was running errands. "We are out of money," I snapped, skipping over any warm-up chat. "What do you mean, we’re out of money?" she asked in bewilderment. "I mean, I just checked my bank account, and we are out of money," I repeated, my voice rising in panic. "We can’t buy anything!" My next paycheck would come in about a day or so, but that was entirely reserved for the February mortgage payment. We didn’t have enough cash to cover more than a week’s worth of groceries and gasoline. For the last few months we were living off the cash left over after I sold my Times stock and we bought the house. But now it was gone.

"How the hell could we have run through so much money so quickly?" I asked her accusingly. Patty wasn’t sharing my shock. "I don’t know what’s going on," she responded. "Let’s talk about it when you get home." Patty had spent much of the two previous decades as a stay-at-home mother in Los Angeles. Her last full-time job, as an editor at a political research company, was back in the early 1980s. Not surprisingly, Patty’s re-entry into the job market was bumpy. When Saks Fifth Avenue offered her a full-time job selling high-end clothing on commission — something she knew about and loved — she grabbed it. But with her take-home income averaging only about $2,400 a month, we didn’t make enough to cover our bills because my take-home pay was going straight to the mortgage. We were spending way more than we were earning.

In the euphoria of moving in together, we both succumbed to magical thinking about ourselves, as well as about money. My fantasy was that Patty would become an ambitious go-getter. "This can really be an exciting new chapter of your life," I kept telling her. Patty had a very different dream. "I feel as if I am finally at home," she exclaimed as soon as we moved into the house. She could settle down and do the things she had always been best at: making a new home, nurturing her children and loving me. One way or another, she figured, we would earn enough money to make good on our glorious gamble. We had very different ideas about money. Patty spent little on herself, but she refused to scrimp on top-quality produce, Starbucks coffee, bottled juices, fresh cheeses and clothing for the children and for me. She regularly bought me new shirts and ties to replace the frayed and drab ones in my closet. She thought it wasn’t worth agonizing over nickels and dimes. I was almost exactly the opposite. My answer to any money squeeze was to stop spending. I would skip lunch at work to save $7. If I arrived at the Metro just before the end of rush hour, I would wait for five minutes to save 50 cents on the fare.

We were both building up grudges. "You can’t keep second-guessing me," she told me angrily. "It’s small-minded and petty, and it’s not very attractive." I was beginning to wonder whether she had any clue about how money worked. We were lurching from paycheck to paycheck, one big home repair away from disaster. Meanwhile, neither of us was paying attention to how easy our bank had made it to build up debt. The key was the overdraft protection — more accurately described as "bounced-check loans." Every time I overdrew my checking account by even a few dollars, the bank would tap my MasterCard for $100, helpfully deposit the cash in my account and charge me $10 for the privilege.

Patty and I were now unwittingly tapping into our credit line at a terrifying pace: $5 overdrawn because of school supplies for Patty’s daughter Emily — $100 from the MasterCard. Fifteen bucks over because of gasoline? Another $100 from the MasterCard. Groceries for $305? No problem! Uncle MasterCard would front us $400.Our debt spiraled up faster than I had ever dreamed possible. Chase Bank had cold-called me to offer a "platinum" card with no interest charges for the first six months. I took them up on it and shifted $3,000 in debt from my old card onto the new Chase card. But instead of paying down the balance before the interest charges began, I let it balloon to $6,000. Chase had sent us blank checks that we could use to either pay bills or give ourselves cash advances. I dismissed them as a cheap trick to lure dimwits into borrowing more money. In March, I grabbed one of the checks and used it to pay down $1,000 on my more expensive credit card.

I felt like a crack addict calling up my dealer. It was April 2006, and I had just reached Bob Andrews, our once and future mortgage broker, on his cellphone. I was surprised at how glad I was to hear his voice. In his own way, Bob knew more about my messy life than almost anybody else. He never seemed judgmental or condescending. Instead, he seemed to think that money trouble and failed marriages were natural parts of life, even for good people with decent jobs. I felt relieved to have the chance to unload my problems and ask for his advice. "Bob, we’re dying over here," I wailed. "I can’t even explain how it happened, but we’ve got these unbelievable credit-card bills, and the minimum payments add up to almost $1,100 a month. There’s no way we can keep that up."

I had months and months of credit-card bills spread across the dining-room table, and I quickly confessed the full horror of what they contained. We were approaching $50,000 in credit-card debt alone, and it was amazing how fast and how deeply we had dug ourselves in. It was even more amazing how long we had avoided the screaming evidence of a train wreck in the making. Patty had suddenly got the break that seemed to solve our problems. In November 2005, she was hired as a full-time editor at a nonprofit organization with a salary of $60,000 a year. The problem, I told Bob, was that things were so bad that even Patty’s new job wouldn’t be enough to rescue us. Chase was now charging us 13.99 percent on our platinum card, and the rate on our SunTrust card was up to 27 percent.

Between humongous loan balances and high rates, we had hung ourselves with the rope they gave us. In the previous December alone, we charged $2,845 on the Chase card for Christmas gifts, food, gasoline, clothing and other expenses. The charges included almost $350 for groceries, $700 in clothes from J. Crew, $179 at GapKids and $700 for airplane tickets for two of Patty’s children to visit their father in Los Angeles. Our balance climbed from $14,118 to $17,135, and in January 2006 we maxed out at our $19,000 credit limit. And there were other expenses on other cards: $1,200 in dental work for Patty’s son Ben; $1,600 to rent a beach house the previous year for us and all the children. Granted, the beach house was an embarrassing mistake. But given that Patty had landed a solid job, it seemed like an indulgence we could work off later.

I felt foolish, ashamed and angry as I confessed to Bob. Why had I been trying to live a lifestyle that I couldn’t afford? Why had I tried to keep up the image of a conventional suburban family man, when nothing about my situation was conventional? How could I have glossed over the fact that we had been spending about $3,000 more than we were earning, month after month after month? How could a person who wrote about economics for a living fall into the kind of credit-card trap that consumer groups had warned about for years? "My inclination is to just raid my 401(k) account to pay off the cards," I told Bob. "I know we’d be paying huge taxes and penalties for withdrawing money before retirement, but it’s not as bad as paying all that interest to the banks."

"No!" Bob interrupted fiercely. "You don’t want to do that. You’ll be paying a basic tax rate of 28 percent, and they’ll hit you with another 10 percent penalty. You’d be giving up 40 percent in taxes. There’s got to be a better way." I gave Bob permission to pull a credit report on us, and by the next day, he had come up with a scheme that was either wickedly smart or proof that the big-money people had gone mad. Or both. "What we’re going to do is a two-step plan," he announced. "The bad news is that your credit scores are down, so we can’t just do a simple refinance. But the good news is that you’ve owned your house for a year and a half, and it’s gone up in value. So you can borrow against the equity. So in the first step of the plan, we’re going to get you a really ugly mortgage that is big enough to pay off all your credit cards." "O.K., I’m with you so far," I said uncertainly.

"Now, because this mortgage is really ugly, your monthly payments will jump to about $3,700. But don’t worry about it, because you’re only going to stay in it for about three months. Once we pay off your credit cards, your credit scores will go up and we can get you a cheaper loan." The way Bob figured it, my monthly payment would be down to about $3,200 by the fall. The new mortgage would be nearly $700 more than my current mortgage because it would include all my credit-card debt, but it would be at least $500 a month less than the combined total of what I was paying on everything right then. And mortgage interest, unlike interest on credit-card debt, is entirely tax-deductible.

The whole plan worked exactly as Bob had predicted. Within a few weeks, an appraiser valued our house at $505,000, almost 10 percent above the original purchase price two years earlier. On June 12, Patty and I signed a new mortgage for $472,000 with Fremont Investment and Loan in Santa Monica, Calif. Fremont gave us a classic subprime loan. Our monthly payment jumped to $3,700 from $2,500. If we kept the mortgage for two years, the interest rate would jump as high as 11.5 percent, and the monthly payments would ratchet up to as high as $4,500. The paperwork was so confusing that I was never exactly sure who was paying what. I hazily understood that I was paying most of the fees, one way or another, but I couldn’t figure out how, and I couldn’t see any better alternatives. After it was all over, I figured we had paid about $5,800 in fees to Bob’s mortgage company and the settlement company, on top of the sales commission that came out in higher interest rates every month. But Patty and I paid off our credit cards, and my credit scores jumped. In October 2006, Bob refinanced us once again, and our payments dropped just as he had predicted.

We were still loaded with debt, but we weren’t paying 27 percent interest rates on our credit cards. Patty was earning a solid salary, and I was earning extra money working overtime at The Times. If we were careful, we could meet our monthly expenses, chip away at our debt and even go out to dinner once in a while. Our brief interlude of optimism and peace ended on Oct. 10, 2006, when Patty lost her job. "Don’t worry," she said bravely. "This will not be like the first time I was looking for a job. I’ve learned so much since then, and I am going to find another job quickly." In the meantime, she said, she could collect unemployment for six months. She would also cash out her retirement account, which had about $7,000 in it.

By any measure, the loss of Patty’s job was a financial catastrophe. We hadn’t yet gone more than 30 days delinquent on the mortgage, thanks, in part, to $15,000 I had borrowed shamefacedly from my mother after Patty stopped working. But we were behind on everything else. Bill collectors were calling six days a week, starting promptly at 8 a.m. "Telemarketers," I would mumble when my son Matthew asked why we got so many robocalls from 800 numbers. Our stately little house looked increasingly trashy: peeling paint and broken screens on the front windows, crumbling concrete on the front stoop, a lawn that was mostly crabgrass. The furniture that Patty salvaged from her first marriage was falling apart. The cotton slipcovers on the sofa and armchair were in shreds. The frosted-crystal shade on a beloved Italian floor lamp was cracked. The dog had gnawed the leg on her Biedermeier chair.

The panic attack hit me around 2 a.m. on Patty’s birthday. It was Oct. 17, 2007, and I was lying in bed obsessing over bills that couldn’t be postponed and the money we didn’t have to pay them. Like many of my predawn fear cascades, this one had its start with a specific unpaid bill: $240 in traffic tickets — $140 for speeding, $50 each for expired tags and inspection. The fines would double if we didn’t pay them in less than a week. The tickets had uncorked the bottle on all the other "must pays": the $400 electric bill with the cutoff date printed in red; the $220 cable/telephone/Internet bill for the past two months; the MasterCard and American Express bills — at least one of which had to be brought current or I wouldn’t even be able to travel for work. And of course, there was the $3,271 mortgage payment.

My panic circuitry was in fine form, connecting small debts to big ones, short-term problems to the bottomless abyss, private calamity to public shame. Once Patty was asleep and I was alone in the dark, the bottled-up fear reached the surface. I tossed from side to side, trying to figure out at least a triage plan for our bills. I was too fidgety to lie still in bed, but I was in no mood to actually sit down with the bills themselves. I climbed out of bed for a moment, then jumped back in. I couldn’t decide if I would rather feel confined or all alone. Patty woke up, irritated by all my movement and my occasional moans of despair. "What’s the matter?" she asked. "I can’t sleep," I answered. "I’m panicking about money, because I don’t know how we’re going to pay all the bills that need to be paid right now." I wanted her to take me in her arms and reassure me that everything would be O.K. But that wasn’t happening. "There’s nothing you can do about it right now," she answered sleepily.

"If this keeps on, we’re going to lose the house," I persisted, sounding less panicked than petulant. If Patty wouldn’t give me comfort, then I wanted her to suffer alongside me. "I don’t know how we’re going to make it. We can’t go on like this." Patty had begged me to grant her a birthday reprieve from my nagging and kvetching over money issues. What I saw as an uncontrollable moment of panic, she saw as another deliberate attempt to browbeat her. "I can’t believe you are doing this to me on my birthday," she hissed in fury. "All I asked for was one day of peace — one day when you weren’t beating me over the head. And here it is, not even daylight yet, and you’re waking me up to berate me about money." "Son of a bitch, what did I do to you?" I asked, punching my pillow in the dark. "Do you think I enjoy having a panic attack? I can’t help what I’m feeling. I’m just scared out of my mind."

"That’s it!" Patty snapped, getting out of bed and pulling on her robe. "I’m not going to listen to any more of this. I’m going to sleep downstairs." In the morning, she let me have it. "You lied to me," she told me as I got coffee. "You said that what I saw on the outside was pretty much what you were. But you’re completely different. If I had known what you were really like, I would never have come out here." Patty and I were hurtling toward bottom. We had been under so much strain for so long that we were often at each other’s throats, jeopardizing the love that brought us together in the first place. In November, four years after buying the house, we finally crossed our personal Rubicon and fell 30 days behind on our mortgage. "The last thing Chase wants is to foreclose on your home," JPMorgan Chase wrote us. It assured us that it wanted to "help" and was willing to evaluate us for a number of "alternatives." If we didn’t "resolve" our payment delinquency, it politely warned, "you will lose your home."

I took a certain pride that I outlasted two of my three mortgage lenders. American Home, my original lender, collapsed overnight when the financial markets first froze up in August 2007. Fremont, my second lender, was forced out of the mortgage business by federal regulators. That left me with JPMorgan Chase, one of the few big banks smart enough to sell off most of the subprime loans it financed. It still serviced my loan, but it wasn’t on the hook if I defaulted. By the time that Patty and I fell behind, the rest of the world was falling apart so fast that Chase barely had time for us. Bear Stearns and Lehman Brothers were gone. American International Group, one of the world’s biggest insurance conglomerates, received the biggest taxpayer-financed bailout in history. Citigroup was a zombie bank. All of them were brought down by the same mortgage madness that infected me.

When I first called Chase in October, a representative named Sarah said I didn’t qualify for a loan modification because I wasn’t yet 90 days past due. The only "loan modification" she could offer me was a "repayment plan" under which I paid $400 more per month for six months until I was current again. "It sounds as if I would be better off waiting to fall 90 days behind," I said. "I think I’ll wait for that." It took a while, but Patty and I found we could get past blaming each other. We had seen each other’s worst sides, but we were still together, and that helped us to get closer. We started listening to each other. Patty began to find her way in the work world, and I was learning that I didn’t have all the answers. And we saw how our children were thriving. My three sons transferred to schools in our neighborhood and made scores of friends. Emily, Patty’s daughter, was a sparkling 10-year-old who loved her home and her school as well as all her brothers. Even if we lost the house, we had gained in other ways.

I called Chase back in January, when I was 90 days past due. Another representative told me that I would automatically be evaluated for a loan modification. "You should just wait until you hear from one of our negotiators," he told me politely. Another two months passed without anyone calling, so I tried again in late March. "I’m sorry, but our analysts have been backed up," yet another Chase rep told me, even more politely than the previous one. She said each analyst had about 500 distressed borrowers to deal with, and it had been taking about five weeks for customers to get a direct response. The delays seemed to be getting longer. I was actually beginning to feel sorry for Chase. It seemed to be so flooded with defaulting borrowers that it didn’t have time to foreclose on my house. Eight months after my last payment to the bank, I am still waiting for the ax to fall.


Avocado said...

Welcome to the Gimme Planet.

Anonymous said...

China finally sold more cars than the US did in a world history first.

GM and Chysler's bones will be picked clean and the best parts will bought by China for fire sale prices, pennies on the dollar with their sovereign wealth fund.

The US has no sovereign wealth fund.

The US has no wealth left.

Forget about funds, the US will have no fun from here on out.

Anonymous said...

"everything you've seen go wrong in the economy so far has been like kindergarten. Now you're going to have to learn how to read."

All I Ever Really Needed to Know I Learned in Kindergarten

- by Robert Fulghum

Most of what I really need to know about how to live, and what to do, and how to be, I learned in Kindergarten. Wisdom was not at the top of the graduate school mountain, but there in the sandbox at nursery school.

These are the things I learned: Share everything. Play fair. Don't hit people. Put things back where you found them. Clean up your own mess. Don't take things that aren't yours. Say you're sorry when you hurt somebody. Wash your hands before you eat. Flush. Warm cookies and cold milk are good for you. Live a balanced life. Learn some and think some and draw and paint and sing and dance and play and work some every day.

Take a nap every afternoon. When you go out into the world, watch for traffic, hold hands, and stick together. Be aware of wonder. Remember the little seed in the plastic cup. The roots go down and the plant goes up and nobody really knows how or why, but we are all like that.

Goldfish and hamsters and white mice and even the little seed in the plastic cup - they all die. So do we.

It's after you get out of Kindergarten is when things go to hell.

Anonymous said...

I read somewhere that consumption of durable goods has only survived the last couple decade due in large part to, drum roll, Divorce.

Yes, with sky high divorce rates, you need two refrigerators instead of one right off the bat, and two stoves and two beds... you get the picture.

Double the sale of durable goods because of family dysfunction, what a sane, sound and secure framework to base a business model on, not to mention a society at large.

This truly sick bit of news actually gets traders on Wall St wet and pumped up! More juicy profits on 'family values' tossed in the hopper. Hurrah for Lazy-Fare capitalism, it thrives on personal misery and family tragedy.

High Five for durable goods stock!

The worst possible thing to happen in an economic contraction for durable goods sales, is for people to be moving back together under one roof.

Orlov mentions this point often. Russians were use to decades of coping with multiple generations living together in small spaces.

The the US, multiple generations living together in small spaces will result in an unbelievable rise in domestic violence.

It will be like a sack of angry over caffeinated alley cats.

At least they'll only need one coffee pot.

Anonymous said...

Question - What should we do with 401k's? Cash out? or stay in cash/shortest duration assets as possible?

Will they be confiscated?

Anonymous said...

This should give some interesting answers to those impossible questions we all ask. Official launch is the 18th of May I think.

Wolfram Alpha

Should be operational right now here.

-Ponds dream-

Vinca said...

Patty is a nice-looking lady.

asdf said...


For most 401k's, you can't cash them out unless you're layed off or over Fifty-nine and a half years old.

Cashing out your 401k under the age of 59.5 will result in federal, possible state taxes, AND an additional 10% penalty. Ex. If you have $100,000 you get 20% federal withholding upfront leaving you with only $80,000. Then you pay $10,000 at tax time plus any leftover taxes. Realistically, a little less half your savings would get eaten by the IRS.

I would recommend to have everything in a money market/treasury fund. If you're feeling risky, you can take up Stoneleigh's prediction and have your 401k in equities until the bear rally fizzles in the fall and convert them into a t-bond fund.

Anonymous said...

in 1930 the US population was around 122 million... 45% of that population owned a home...

today, there are 300 million people... +70% own a home...

hitler could easily control the german state of 43 million people... germany is the size of montana... if people think that the government is going to be removing people from homes and sending them to some sort of debtor prison camps- i think they are really paranoid... it comes down to shear size and numbers...

on one hand, we are told how bad things are and how bad they will get- with banks failing, unemployment skyrocketing, services revoked... basically teotwawki---

on the other hand, we are told that there will still be an 'authority' in the midst of all this chaos to take your home when you don't pay for it... this 'authority' will probably be the government as indicated by illargi in todays post-- they own everthing... what does the government gain by making a good portion of the 70% who own homes leave them when they do not or cannot pay....

believe me- i am as pessimistic on the future as most of you-- but i am starting to question the logic of my own pessimism...

the banks have something to lose if the debt is defaulted on--- if their are no banks-- who gives a shit about the debt? wont the government just wipe the slate in a sense? what do they have to gain from having millions of empty homes and millions of angry citizens? i agree with the person who said that taxes will be needed by the state and having people in the homes and paying taxes may become the 'new mortgage'...

i think we are about to shift into a whole new paradigm... i think the old ways of analyzing markets and economies are dead---

growth is over... why is that such a bad thing? i guess it is for the guy who likes to play markets to make more money-- or the state that has been based on perpetual growth- but that shit is all over now... move on....

jal said...

"... +70% own a home..."
If you had a mortgage with no money down, (no equity), then the banks were the real owners.
You were a pretend owner.
You had all the obligations of an owner. (maintenance etc.)
The banks were better off than slum landlords.

Now, the gov. will be the owners through Fannie and Freddie and they will end up drawing contracts to their advantages with none of the responsibilities of a landlords.
As long as the rent/mortgage gets paid they will be the winners.

The banks will not write off the houses until the houses get too rundown and the cities get them demolished.

This will be a better system, (for the gov.) than having slums cities or tent cities where they cannot collect any revenues.

Anonymous said...

thanks jal--

if banks go insolvent and the government is now your landlord--- any money they get is a plus... right? if home values plunge as illargi suggests--- the government will also have to work with these new lesser values... you may come out on the other side of a new deal paying significantly less...

the government then has x% of the population paying rent to them to pay for services and whatever else... this would be a huge source of funds...

this makes more sense to me than kicking everyone out just because that is what happened in the 1930's...

Starcade said...

Anon 2209: There will be no USA from here on out.

Ilargi is right: EVERYTHING runs on government money now. We are not our own people -- we do not even own ourselves anymore. The question only comes when the slavemasters will come calling and basically put those of us who aren't "rich enough" into the camps to keep us away from rioting on the rest of "them".

Anonymous said...

hey starcade--

what are you some sort of a wimp?

afraid of the government?

get some balls man...

Starcade said...

Anon 0228: I'm not afraid of them, but I am recognisant that we live at their pleasure.

APC said...

From "Unions vs. Taxpayers""...which is why many are accepting cost-saving measures with equanimity -- especially compared to workers in France, where riots and plant takeovers have become regular news."

That of course, is a complete load of crap. There have been some demonstrations granted, but riots? Plant takeovers? Regular news? The ArcelorMittal action wasn't even widely reported, and that has been about as bad as it gets so far here in France. There is still alot of denial. Alot.

D. Benton Smith said...

Anonymous 1:09

There will be someone trying to retain authority (or gain new authority) throughout the presently developing chaos, throughout the consequent chaos, and throughout all futurely resultant chaos wherever and whenever that might be.

Hitler's minions were still hunting down, robbing and killing Jews at a furious pace when he and the Frau were celebrating their wedding night as stiffs in a bombed out bunker and the Russians were pouring into Berlin for a little rape, pillage and burn festival of their own.

Never underestimate the rapacity of the human being, especially the pissed off and hungry human being, and most especially the pissed off, hungry POLITICAL human being whose only way to keep on eating (and not be eaten) is to use the last few shreds of authority to take somebody else's stuff at gunpoint.

The error, I believe, is in thinking of the "government" as an actual entity that is working toward accomplishment of officially sanctioned goals... when in fact it is not.

"Government" is a purely abstract concept, a label, a word, a convenient way to refer to that large number of individuals working within a arbitrarily enforced set of agreements, who are all (more or less) operating on the basis of SELF advancement, under the auspices of Office and Title.

When those agreements start breaking down, all hell starts breaking loose. Count on it.

el gallinazo said...

Surprisingly good article from Bruce Bartlett of Forbes on the Social Security "trust" fund. Surprising in that their journalism tends not to be of the highest quality. I have raised the point often that the SS surplus trust fund, founded under our first ultra right wing president since the 1920's, was a scam from the beginning. It was done in conjunction with dropping the previous nominal highest tax brackets of over 90% in effect under that flaming left wing radical, Eisenhower, to the mid 30% and then the total gutting of the corporate income tax. The surplus SS was just a gimmick to shift some of the lost revenues of reduced taxation on the rich to the poor without it being brazenly blatant. As we rapidly approach the end of "surplus" payments, even Forbes Magazine can figure it out.

The truth is that a program such as SS must be a generational Ponzi scheme. This is not necessarily bad, particularly in a reasonably steady state economy. It simply means that the younger, working people must "donate" a portion of their wealth to the old and infirmed, and they will receive the same when their time comes.

Overcharging the least able to pay with this bogus surplus "lockbox" scheme was a criminal endeavor. Either the writers at Forbes Magazine are geniuses or this was obvious from the start.

As far as the entire concept, trying to store wealth in IOMe's is a non-starter. What other storage of wealth devices exist? Corporate bonds? Government bonds of other nations? All very dicey.

SanderO said...

One thing in the discussion of hoime prices which is rarely discussed. A home is both land, land scaping ie the foliage and improvements to the "ground" or the natural feature, PLUS the structures built upon that land.

The price of the land is rather intangible and it's what the market will bear. Land value is determined by many things, including mineral and water, access to transportation and communication, urban or rural, whether one can farm the land and of course zoning laws. Still it's hard to use those and other factors to determine the $value of a piece of property.

But you CAN to a greater extent determine the value of the structures as they are like manufactured goods the sum of materials and the labor involved to create the product / house /building or structure(s). While the cost of materials and labor DO vary and ARE subject to inflation it would seem that some $value can be derived say as crudely as value per square foot of wood frame construction type 1 or type 2, and so forth steel, masonry.

So when house prices drop and the value is "destroyed" or disappears is that the same thing as saying a computer is only worth $50 even though it might actually cost $400 to manufacture?

I recall when some of the Newport mansions were being horribly neglected. The owners were not using them, Newport high society was caput and upkeep and taxes were enormous. Most of them could not be sold for anything even though they were architectural masterpieces (though some in great disrepair).

I believe one of them was sold for $20K in the depression and it must be worth $10-15MM (guess) today.

They were gift to non profits, restored and turned into museums and once again are considered priceless treasures, even though the cost of upkeep is staggering.

So what IS the real value of a "developed" property? Does it exist? Obviously when no one has money demand is completely destroyed and value along with it. This might world for all but the tony properties out there where demand for them by the uber wealthy would seem to continue on somewhat.

If everything is dropping in value, how come we don't see it in the price of goods and services such as rent, auto prices, lumber, clothing etc.?

el gallinazo said...


"If everything is dropping in value, how come we don't see it in the price of goods and services such as rent, auto prices, lumber, clothing etc.?"

Inertia and time lag. The BLS year over year did go negative (though less than a percent) for the first time in over 50 years. As I&S point out, the destruction of the money/credit supply is still in its infancy. The rate of negative pricing will increase dramatically shortly.

As to tony housing units, my group just watched Garbage Warrior this week. Any opinions regarding this type of building?

Anonymous said...

Garbage Warrior essentially is just the path many people were trying in the Whole Earth Catalog days of the late 60's but most abandoned for various reasons.

Things were still chugging along in the late 70's before that old bastard Reagan symbolically took the solar array off the White House roof and North Sea oil artificially (and superficially) lowered energy costs so much that all alternative architecture and Alt energy development essentially ceased.

The 80's version of "Mission Accomplished" as far as sabotaging alternative, ecological attempts at living.

Now, with a wreaked financial system and the wrong kind of infrastructure in place, suburbia, their will be no green anything.

Garbage Warrior looks like a kinder gentler transition to Mad Max Land than it does a true change in mindset for the totally bankrupt Kulture of DuhMerica.

The US had 40 years to willfully and thoughtfully make the choice to live within it's ecological means.

It chose Poorly and shall be just that: poor.

Poor in resources, poor in attitude, poor in intellect and totally poor in the spirit of cooperation. A nation of pathological hyper-individuals all going it alone in the Darkness of Technological Collapse.

DuhMerican suburbanites will Never embrace Garbage Warrior for the same reason they will never revolt, they do not have the intellectual capacity.

It's 'beneath them".

The US will be Garbage Scavenger Nation from here on out, not by conscious choice, but in a force death march dictated by circumstance down into the slumdog dust bin of history.

You can never make up the lost decades of actually going in the opposite direction of sane living with a burst of feverish green ecologic 'innovation' in the 11th hour.

Not gonna happen in general in DuhMerica, just little tiny Amish like pockets thriving, nothing more.

-- Wild Blue Yonder --

Anonymous said...

The Garbage Warrior homes will look like Palaces to the Sheeple and the Proles in the coming decades.

Tires full of earth and used soda cans beating out America high tech, puffed up chest, 'shock and awe' 'modern' building techniques.

To bad for the SACAU (Suburbanite-Ass-Clowns-R=U.S.)

hahahaha, go Garbage Warrior!

Anonymous said...

"More than 40 per cent of the monthly increase, however, was due to a 9.3 per cent jump in the price of tobacco which has been driven by a government tax that recently took effect. Energy prices fell by 2.5 per cent in April and have plunged by 25.2 per cent during the last 12 months."

I dont see it. Food prices continue to soar as well as energy prices. Gasoline here is close to $2.50 a gallon and a Gallon of milk is near $5. My food bill is about 20% higher then it was a year ago. Transportant costs have risen. Train fare has rise by 15%, and taxes have also gone up. Even on ebay, prices for used goods remain strong. I have yet to see any significant decline in prices for tools that I look for. If anything the prices are up slightly. Postage (stamps) increased by about 5% this week. Where are prices falling? Let me guess: Worthless crap like plastic pumpkins and lawn ornaments.

"in 1930 the US population was around 122 million... 45% of that population owned a home...
today, there are 300 million people... +70% own a home..."

That's not really correct. Only about 25% own their home, The rest owe the bank which owns the home. Consider that in 1999, 40% of Americans owned their home (100% equity, no mortage). Today it has fallen to 25%.

John Hemingway said...

Didn't know you were such a fan of Dinah Shore! I remember seeing her on TV in the '70's when she was going out with Burt Reynolds.

Anonymous said...

Elwood: What kind of music do you usually have here?
Claire: Oh, we got both kinds. We got country *and* western

Freddy el Desfibradddor said...

Re thoughts on "government" -

Last night I saw on DVD the remake of The Day the Earth Stood Still - at one point the alien character says "I tried to talk to their leaders - they wouldn't let me" and the sympathetic lady scientist says, "Oh, those weren't our LEADERS" - and takes him to see her old professor, who is both smart and humane (in the original version it was clearly a representation of Albert Einstein - John Cleese is the actor in the remake - one of the few scenes that I recognized as repeated from the original version is the alien correcting the equation on the chalkboard)

The message of the movie - we are on the eve of destruction, but "We change when we're on the precipice"

May it be so

Anonymous said...

Wild Blue Yonder,

Not so fast lad, just wait until the Kilt brigade arrives-then you'll see.

Anonymous said...

" She's got the rhythm, I got the blues."

Anonymous said...

That's not really correct. Only about 25% own their home, The rest owe the bank which owns the home. Consider that in 1999, 40% of Americans owned their home (100% equity, no mortage). Today it has fallen to 25%.okay-- the point is- is that 45% of the population in 1930 lived in homes... 25% may have owned it outright... so then 20% were 'at risk'-- less than full equity...

today 70% of the population lives in homes that they are 'leasing to own' with varying amounts of equity... i think 30% own homes outright today... so alot of people are at risk... under full equity== so many in fact that we will reach a critical mass where new ways will be worked... as posted previously...

as the fuel crunch starts to hit harder- cities will attract all the fruits of labor--- they will be the hubs of production and the destination of food stuffs... suburbia may be bulldozed-- deep rural areas may whither and die-- but the urban cores of cities will again flourish-- they are not going to bulldoze homes in the cities where life is-

this population will be more in tune with survival than with shorting markets or american idol... city parks will turn into city farms... suburb tracts will turn back into the farms that used to support the city core... think new jersey-- the 'garden state'... it used to supply new york city with its food...

i think the paradigm will shift so much in the coming years and that as fuel and fertilizer inputs will increase in price, organic methods of food production will be the only way... just like the 'old days'... did people not eat when their were no fertilizers or pesticides?

remember folks-- the only thing coming to an end is a growth economy.... and it aint gonna end over night--- there may be wild uncertainties and dark phases but we have a lot of room to contract and give up... and we will all be in the same boat-- and the government will ultimately be at the helm-- this should be clear to all by now... i am not a big government kind of guy-- but as we desecnd into lesser and lesser growth-- we will use less oil--- we have ideas of what a culture looks like with certain amounts of fuel... just look at the last century for hints... we will descend through the 80's level- the 70's-- the 60's etc.... all along the way shedding numbers from our population either through war- disease- or famine---

cities will be the place to be-- as all focus will be there-- not on outlying rural areas---

toby hemenway describes all of this...

the government will be forced to play by different rules as well... it should be clear to all that their adherence to old paradigms as we see in this crisis is ill fated--- and they will eventually change through necessity or via social unrest--- eventually banks will dissolve-- there may be social unrest--- but 'new deals' will be presented--- new ideas will be tried-- new ways of living will be discovered... and if you are not willing to play by the new rules--- so be it-- you will die and that will make things all the more easy for those of us who will be trying like hell to survive....

Toddman said...

@anon 2:25

>toby hemenway describes all of this...
T.H. is really good at knocking down straw men and then formulating bad arguments of his own. He usually gets roundly taken to task by the likes of Sharon Astyk, etc.

His latest, about how there will be no food crisis, was basically ignored by everyone as far as I can tell. As it should be - he was probably just trying to stir the pot right as the 2nd addition of Gaia's Garden hits Amazon...

Toddman said...

addition --> edition

Anonymous said...

Todd, Thanks I will go see what that Hemingway has to say, always good to check out a person that has been bad mouthed. Make up ones own mind.

About Astyk, ... I say much too mushy, MSM-hippie-style-earth-mother , for my taste. Check her out and make up your own mind, and readers, never say my cheapshot influenced your view, right? ... Heh!

Anonymous said...

hey todd-

how 'bout telling us why hemenway's theory on why there might not be a food crisis bothers you...?

Stoneleigh said...

Anon @10:44,

There would certainly be a large tax penalty for early withdrawl of retirement savings. My concern is that past a certain point, withdrawl will probably no longer be possible. As more and more people make withdrawls, either because they desperately need the money or they see the writing on the wall, what develops will be akin to a bank run. That sort of dynamic only continues for so long before the door is closed. My guess is that most people will be out of luck.

Anonymous said...

i just went to astyk's- causobon's book blog and searched for hemenway...

an exchange between hemenway and astyk erupted in the comment section of astyks essay 'hemenway strikes out (again)...

she tried attacking hemenway... i would not say she roundly took him to task... her attack was a bit juvenile and hemenway responded-- explaining how wrong, overly dramatic, and factually misleading her response was---

matt savinar even jumps in... his take on the situation actually made me think a bit less of him...

hemenway- to me- presented his ideas in a clear easy to read fashion-- and most of the time-- this alternative perspective on peak oil makes those who are more pessimistic in nature to go bonkers... at one time i was one of them-- until my personal experience in rural living, which mirrors hemenway's experience, gave me a better understanding of his argument...

hemenway seemed to win this 'round' of argument--- if you have any more examples of astyk 'roundly' discrediting hemenway--- please direct me...

Anonymous said...

Marc Faber on Armageddon
A vintage performance from the author of "The Gloom, Boom & Doom Report". This morning – living up to his reputation for bearishness - Marc Faber forecast a litany of unpleasant events ahead.

His key message is: buy real assets. He thinks it will take years for the global economy to recover, but when it does the effect of governments' printing money will ultimately reignite inflation.

"If you're in any field, you should own a farm because one day you will be grateful that you are able to grow your own agricultural produce."

Recovery will be slow because government meddling in the markets will postpone it. He argues that the final low for markets and for growth will only come when the debt and losses have been cleaned out of the system.

Unless the system is cleaned out of losses, "the way communism collapsed, capitalism will collapse."

"The best way to deal with any economic problem is to let the market work it through."

The Fed is destabilizing, it's creating "enormous volatility".

"I think we are living through a major transition in the world… the economic bloc of emerging countries will be more meaningful than before."

"I think that in Asia we have lots of sectors that are quite attractive. The banks, they don't have the toxic assets that we have in the rest of the world."

While not an optimist on the Chinese economy near term – Marc likes Asian currencies, and banks ex-Japan. He also thinks the real estate markets are improving. Both Russia and Turkey get a positive mention.

Slideshow: The World's Biggest Debtor Nations (16 slides)
In Faber's world the US dollar will weaken, and the Yuan and commodity currencies like the Aussie dollar will appreciate.

Isn't there anything in the US he likes?

With just the slightest hint of irony (check gun sales numbers!) – Marc points to gun and ammunition makers. Prison builders also face better prospects he says – after all where will they put all the politicians!

Ilargi said...

New post up