Monday, July 20, 2009

July 20 2009: Cocksure

Unknown Turkish officers watch the British withdraw from Gallipoli December 1915

Ilargi: Malcolm Gladwell writes an article in this week's New Yorker, entitled COCKSURE: Banks, battles, and the psychology of overconfidence. The topic is Wall Street bankers in general, and Bear Stearns' Jimmy Cayne in particular. Gladwell quotes a spring 2008 interview by William Cohan just days prior to Bear's fall, in which Cayne says this, talking about Treasury Secretary Tim Geithner (then head of the New York Fed):
The audacity of that prick in front of the American people announcing he was deciding whether or not a firm of this stature and this whatever was good enough to get a loan. Like he was the determining factor, and it’s like a flea on his back, floating down underneath the Golden Gate Bridge, getting a hard-on, saying, “Raise the bridge.” This guy thinks he’s got a big dick. He’s got nothing, except maybe a boyfriend.

That sets a nice tone. Gladwell continues:
Since the beginning of the financial crisis, there have been two principal explanations for why so many banks made such disastrous decisions. The first is structural. Regulators did not regulate. Institutions failed to function as they should. Rules and guidelines were either inadequate or ignored. The second explanation is that Wall Street was incompetent, that the traders and investors didn’t know enough, that they made extravagant bets without understanding the consequences. But the first wave of postmortems on the crash suggests a third possibility: that the roots of Wall Street’s crisis were not structural or cognitive so much as they were psychological.

Gladwell explains how overconfidence can at times be an asset, but how it also can be lethal. He says Britain lost Gallipoli in 1915 because they knew they were superior, and therefore simply couldn't imagine losing to the Turks.
The British were overconfident at Gallipoli not because Gallipoli didn’t matter but, paradoxically, because it did; it was a high-stakes contest, of daunting complexity, and it is often in those circumstances that overconfidence takes root.

Here's another bit on Jimmy Cayne:
The high-water mark for Bear Stearns was 2003. The dollar was falling. A wave of scandals had just swept through the financial industry. The stock market was in a swoon. But Bear Stearns was an exception. In the first quarter of that year, its earnings jumped fifty-five per cent. Its return on equity was the highest on Wall Street. The firm’s mortgage business was booming. Since Bear Stearns’s founding, in 1923, it had always been a kind of also-ran to its more blue-chip counterparts, like Goldman Sachs and Morgan Stanley.

But that year Fortune named it the best financial company to work for. “We are hitting on all 99 cylinders," Jimmy Cayne told a reporter for the Times, in the spring of that year, “so you have to ask yourself, What can we do better? And I just can’t decide what that might be." He went on, “Everyone says that when the markets turn around, we will suffer. But let me tell you, we are going to surprise some people this time around. Bear Stearns is a great place to be."

What Malcolm Gladwell means to say is that today's Wall Street leaders have been encouraged by the litany of bail-outs they have received to keep on being as cocksure as Cayne was. The government implicitly says that it won’t let the big financials fail, which provides ample assurance to go out and gamble all the more, not for being more careful.

Goldman Sachs' trading software escapades, combined with their call today for a surge in the S&P 500, which Tyler Durden identifies as just another -albeit cocksure- way to suck the suckers into the market, would seem to make Gladwell's argument a convincing one.

But there's another side to this as well.

President Obama today interestingly made a similar argument. He told PBS television:
"The problem that I've seen, at least, is you don't get a sense that folks on Wall Street feel any remorse for taking all these risks... [..] You don't get a sense that there's been a change of culture and behavior as a consequence of what has happened. And that's why the financial regulatory reform proposals that we put forward are so important.."

Yes, the cocksure culture still exists on Wall Street. But the regulatory reform comes from Obama's economic people, who look no less cocksure, and who also don't seem to have had a change in culture and behavior.

Tomorrow, Neil Barofsky, the special inspector general for the Treasury’s Troubled Asset Relief Program (the SIGTARP office), will report on the Hill that the Treasury should, and easily can, keep much more detailed tabs on where the TARP money has gone and will be going. According to Barofsky the info, which the Treasury has never revealed, is readily available from the banks.

The special inspector general also dropped a huge bombshell by declaring that the total cost of all US bail-out programs may amount to $23.7 trillion. The Chinese, Japanese and Middle East holders of US debt must have been very interested to hear that.

So how does the Treasury Department react to the statements by Barofsky, the man appointed by the President and conformed by the Senate? They act as if he's a complete fool who has no clue what he’s talking about. Which is exactly how Gladwell would have predicted Wall Street CEO's to react, if only because winners know how to bluff.
"Treasury spokesman Andrew Williams said the U.S. has spent less than $2 trillion so far...." "These estimates of potential exposures do not provide a useful framework for evaluating the potential cost of these programs," Williams said. "This estimate includes programs at their hypothetical maximum size, and it was never likely that the programs would be maxed out at the same time."

There are a few options:
  • The President and Congress have accidentally appointed absolute nincompoops in Barofsky and Elizabeth Warren, chair of the Congressinal Oversight Panel for TARP.
  • Barofsky and Warren are purposely frustrating the good people at the Treasury by incessantly making unfounded claims about false numbers and a lack of transparency.
  • The Treasury on purpose gives these people, appointed by the President and with salaries paid by the American people, incomplete and/or faulty information.
  • The Treasury thinks it can get away with anything it says and Congress won't dare act on the reports.
  • Congress and Treasury both, and in unison, have elected to ignore the watchdogs and think they can get away with anything in front of the American people

We won't have to wait long to find out. Barofsky is on the Hill tomorrow. He will face tough questions, big words and angry senators, but If that’s all there is, you’ll know who's in on the dealmaking.

As for Obama's regulatory reform, forget about it having any positive effect. Wall Street will never reform itself, and the present crew at the Treasury is a Wall Street crew.Their behavior gives them away. They think they can get away with whatever they do.

U.S. Rescue May Reach $23.7 Trillion, Barofsky Says
U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program. The Treasury’s $700 billion bank-investment program represents a fraction of all federal support to resuscitate the U.S. financial system, including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today.

"TARP has evolved into a program of unprecedented scope, scale and complexity," Barofsky said in testimony prepared for a hearing tomorrow before the House Committee on Oversight and Government Reform. Treasury spokesman Andrew Williams said the U.S. has spent less than $2 trillion so far and that Barofsky’s estimates are flawed because they don’t take into account assets that back those programs or fees charged to recoup some costs shouldered by taxpayers.

"These estimates of potential exposures do not provide a useful framework for evaluating the potential cost of these programs," Williams said. "This estimate includes programs at their hypothetical maximum size, and it was never likely that the programs would be maxed out at the same time." Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

Williams said the programs include escalating fee structures designed to make them "increasingly unattractive as financial markets normalize." Dependence on these federal programs has begun to decline, as shown by $70 billion in TARP capital investments that has already been repaid, Williams said. Barofsky offered criticism in a separate quarterly report of Treasury’s implementation of TARP, saying the department has "repeatedly failed to adopt recommendations" needed to provide transparency and fulfill the administration’s goal to implement TARP "with the highest degree of accountability." As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report.

"This administration promised an ‘unprecedented level’ of accountability and oversight, but as this report reveals, they are falling far short of that promise," Representative Darrell Issa of California, the top Republican on the oversight committee, said in a statement. "The American people deserve to know how their tax dollars are being spent." The Treasury has spent $441 billion of TARP funds so far and has allocated $202.1 billion more for other spending, according to Barofsky. In the nine months since Congress authorized TARP, Treasury has created 12 programs involving funds that may reach almost $3 trillion, he said.

Treasury Secretary Timothy Geithner should press banks for more information on how they use the more than $200 billion the government has pumped into U.S. financial institutions, Barofsky said in a separate report. The inspector general surveyed 360 banks that have received TARP capital, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. The responses, which the inspector general said it didn’t verify independently, showed that 83 percent of banks used TARP money for lending, while 43 percent used funds to add to their capital cushion and 31 percent made new investments. Barofsky said the TARP inspector general’s office has 35 ongoing criminal and civil investigations that include suspected accounting, securities and mortgage fraud; insider trading; and tax investigations related to the abuse of TARP programs.

The Amazing Expanding Bailout
TARP watchdog Neil Barofsky says the total size of the bailout has now hit $23.7 trillion, when all the guarantees are factored in. Of course, the government doesn't just provide a bailout total, so different parties may come up with different numbers. But one thing's clear: ever since the first bailout, the estimate has grown and grown and grown and grown and grown. Let's hope today's number is as big as it gets.

Bailout Overseer Says Banks Misused TARP Funds
Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government's financial rescue program. The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.

Roughly 80 percent of respondents, or 300 banks, also said at least some of the money had supported new lending. The report by special inspector general Neil Barofsky calls on the Treasury Department to require regular, more detailed information from banks about their use of federal aid provided under the Troubled Asset Relief Program. The Treasury has refused to collect such information.

Doing so is "essential to meet Treasury's stated goal of bringing transparency to the TARP program and informing the American people and their representatives in Congress about what is being done with their money," the report said. In a written response, the Treasury again rejected that call. Officials have taken the view that the exact use of the federal aid cannot be tracked because money given to a bank is like water poured into an ocean.

"Although it might be tempting to do so, it is not possible to say that investment of TARP dollars resulted in particular loans, investments or other activities by the recipient," Herbert M. Allison Jr., the assistant Treasury secretary who administers the rescue program, wrote in a letter to Barofsky. The Treasury has required 21 of the nation's largest banks to file public reports each month showing the dollar volume of their new lending.

The government so far has invested more than $200 billion in more than 600 banks under a program that began in October with investments in nine of the largest banks. Some banks have started to repay the aid even as others continue to apply for it. Officials said the program intended to increase the capital reserves of healthy banks, allowing them to make more loans. From the beginning, however, the government invested in troubled banks -- most prominently Citigroup -- that had publicly announced intentions to reduce lending.

The government has also used the money to encourage mergers, such as Bank of America's acquisition of Merrill Lynch and PNC's deal for National City. The report provides the most comprehensive look to date at how banks have used the money, based on voluntary responses to a March survey. Banks were asked to describe how they used the money, but they were not asked to break down the amounts. One response, which the report described as typical, said the money had been used "to make loans to credit worthy customers, and to facilitate resolution of problem assets on our books."

Some bailout firms up lobbying spending in 2Q
Some of the biggest recipients of the government's $700 billion financial bailout, including Bank of America and Morgan Stanley, increased their spending on lobbying in the second quarter as Congress began to look closely at revamping the rule system for financial institutions. Bank of America Corp., which received $45 billion in federal rescue aid, spent $800,000 in the April-June quarter, up from $660,000 in the first quarter. The tally was down from nearly $1.2 million in the year-ago period.

Morgan Stanley's lobbying costs jumped to $830,000 from $540,000 in the first three months of the year, and $690,000 in the second quarter of 2008. "While these companies continue to count their taxpayer cash, they're using their lobbying against critical financial reform," said Ed Mierzwinski, consumer program director at Public Interest Research Group. "Anywhere but Washington, you would think this was the Saturday morning cartoons."

Bailed-out automaker General Motors again was one of the biggest spenders, according to the mandatory disclosure reports filed so far with Congress covering the April-June period. GM spent about $2.8 million on lobbying Congress and the federal government, about the same as in the first quarter but down from $3 million in the second quarter of 2008. GM made an unusually swift exit from bankruptcy protection on July 10, with what once was the world's biggest and most powerful automaker leaner and cleansed of massive debt and burdensome contracts that would have sunk it—if not for $50 billion in federal aid. The government holds a 61-percent controlling interest in the automaker.

Failed insurance conglomerate American International Group Inc., which became an lightning rod for public outrage over its payment of millions in bonuses to employees, trimmed its lobbying spending in the second quarter to $950,000 from nearly $1.3 million in the first quarter and about $2.8 million in the year-earlier quarter. Several of the big banks receiving aid last fall under the Troubled Assets Relief Program have repaid the money in recent weeks.

Ilargi: Read Malcolm Gladwell's COCKSURE: Banks, battles, and the psychology of overconfidence here.

How The Bailout Made The Overconfidence Problem Worse
If Malcolm Gladwell is right—and I think he is—that overconfidence played an important role in creating our financial crisis, it’s time to start asking what we should be doing about this. In the first place, we need to recognize the limits of policy. The search for technical fixes to behavior embedded in the flawed characters of men and women in finance is doomed to failure. We’re not going to find some easy way to discount for overconfidence or even reign it in.

But we can adopt a policy of not making the problem worse. Unfortunately, much of what has gone on in what former Treasury Secretary Hank Paulson terms the "rescue" of the financial sector has been making the problem of overconfidence worse. In particular, the various guarantees—implicit and explicit—of assets and liabilities of financial firms tends to increase  overconfidence. Everyone from Fed chair Ben Bernanke to Treasury Secretary Tim Geithner has officially announced that the policy of our government is that we will not allow another Lehman Brothers, which means that the government will do whatever it takes to prevent the collapse of a large, complex, systemically important financial institution.

Not many people seem to understand that this policy makes it almost impossible for banks to competently manage their risk. On the surface, the Wall Street banks benefit from lower borrowing costs thanks to the subsidies from both the explicitly guaranteed debt and the broader implicit guarantee against failure. But because this leaves the financial firms without a market check on their activities, it becomes impossible for them to gauge whether they are taking the appropriate risks and the appropriate level of risk.

So, for instance, we see that Goldman Sachs dramatically increased the amount of risk it takes from day to day last quarter. The market doesn’t seem to have penalized them for this additional risk. And why should investors care? They’ve got the government on their side.  Which means that Goldman has no market check on its risk, leaving the firm without outside guidance about the wisdom of its investments. In short, the market penalty on overconfidence is destroyed by the guarantees.

Artificially cheap capital also enables Goldman to speculate on trades that would normally be too risky. A kind of phony, government ‘Alpha’ is created by the guarantees—excess gains obtained without internally taking on commensurate levels of risk and its market costs. The folks at Goldman, to pick on them a bit more, are deceived into thinking they are better at this than they are. This is sure to encourage even more overconfidence. Goldman still makes a show about caring about risk management, but the truth is that the firm is basically flying blind. That’s because while traditional risk management isn’t quite useless, but it is nearly so. Even somewhat sophisticated measures such as "Value at Risk" that banks employ don’t really work very well. Goldman itself admits this.

The only real test of risk management is provided by the financial Darwinism of the markets. By reading market signals about products—pricing of assets, pricing of insurance on those prices—banks develop models that can inform them about risk. By reading market signals about their own financial health—their cost of capital, their borrowing cost, the cost to insure their debt, the willingness of customers to enter into trades—risk managers get a view about the risks of their own portfolios and the strength of the business model. Guys and gals whose standard operating procedure is overconfidence, have this trait checked in the markets.

Now we’ve scrambled these signals, and encouraged overconfidence. Shareholders, bondholders, counterparties can become indifferent to risk. Business models can seem more effective than they actually are. In this situation, financial executives cannot appeal to the external market to determine whether they have the right business models, asset portfolios or capital structures. They just have to guessitimate. This calculational chaos is far worse than simple ‘moral hazard.’ It doesn’t matter what regulations are in place, or how closely supervised a firm might be. After all, the regulators and supervisors suffer from the same blindness of the bank executives. The worst kind of overconfidence is encouraged across the broader markets.

It was this calculational chaos that brought down Fannie Mae and Freddie Mac. Even when closely supervised by regulators and with well-intentioned executives in place, the mortgage agencies were unable to properly evaluate the size of their balance sheets, the content and quality of their portfolios or the appropriateness of their business models. And now we’ve reduced Goldman Sachs to Goldie Mac, another flying blind, overconfident financial firm.

Obama hits out at Wall Street banks
President Barack Obama said on Monday that Wall Street banks had failed to show remorse for the "wild risks" that triggered a financial meltdown and helped to push the United States into recession. Obama unveiled a sweeping regulatory overhaul in June aimed at improving government oversight of banks and markets to avert a repeat of the financial crisis. "The problem that I've seen, at least, is you don't get a sense that folks on Wall Street feel any remorse for taking all these risks," Obama said in an interview with PBS television.

"You don't get a sense that there's been a change of culture and behavior as a consequence of what has happened. And that's why the financial regulatory reform proposals that we put forward are so important," he said. Obama said the planned regulatory reforms would prevent Wall Street firms from taking the "wild risks" they had taken before the financial crisis.

Shareholders should also have the right to weigh in on huge bonuses paid to executives, he said. Wall Street paid more than $18 billion of bonuses in 2008, a year in which it needed trillions of dollars of taxpayer support. Asked if he was concerned about the jump in profits reported by banks Goldman Sachs and JPMorgan Chase & Co, Obama said his administration had less leverage over them now that they had repaid government bailout money.

He said the measures put in his place by his government to stabilize the economy were working, despite unemployment projected to rise above 10 percent within months. "I think we've put out the fire. The analogy I use sometimes is, we had this beautiful house. And there was a fire. We came in and we had to hose it down. "The fire is now out, but what we've discovered is, we need some new tuckpointing, the roof's leaking, the boiler's out, oh, and by the way, we're way behind on our mortgage," he said.

Goldman Ups S&P 500 Target for End-Year
Goldman Sachs raised the S&P 500 index's target for the end of the year to 1060 from 940 Monday, but said the risk of "double-dip" recession remains significant. Goldman Sachs made the move to reflect potential price return of about 13 percent from the current levels, Reuters reported. It also raised the S&P 500 operating earnings view to $52 from $40 for this year. Operating earnings view for next year was also raised to $75 from $63.

Goldman's current economic view is for below-trend growth through 2010, and it believes the risk of a "double-dip" recession is still significant. Asian markets rallied, with the Hang Seng index closing more than 3.7 percent up, while European stock indexes were also up, with banks dominating the upturn. Stock markets in the US and Europe are likely to see a significant rally if indexes manage to rise further from current levels, technical analyst Clem Chambers, CEO of ADVFN, also said Monday.

Is Goldman Starting To Offload Prop Positions?
by Tyler Durden

Abby Joseph Cohen must have threatened with retirement and David Kostin is here to pick up Olympic torch. Goldman Sachs just raised its 2009 year end S&P target to 1060, "13% above the current level" meaning Goldman prop positions are full and the great offloading to marginal buyers has begun. The justification: "After trading in a 10% band for the past three months, our "Pop, Stall, & Sustained recovery" framework, sequential improvement in ex-Financials EPS, stabilization in profit margins, and higher forward EPS guidance all point to a rising market through 2009."

More specifically, 85 Broad is raising its 2009 EPS to $52 from $40, and 2010 EPS to a patently absurd $75 from $63, a 45% increase in bottom line earnings. And just so it seems more credible, "measured on a pre-provision and pre-write-down basis our estimates are $69 and $81. S&P 500 trades at 12.5x our 2010 operating and 11.6x our pre-provision EPS." In other words, pure rose-colored glasses halcyon.

As Q1 and Q2 earnings "beats" have demonstrated, all bottom line upside surprises have come from companies trimming the fat and mass firing employees left and right: alas for the most part revenues have been flat if not materially lower to expectations - just look at GE's recent results for a good recap of what is happening wth the economy theme. Arguably, there is no more SG&A extraction available to the vast majority of US corporations, meaning Goldman is expecting an unprecedented pick up in revenues.

And with the US consumer completely tapped out and unable or unwilling to borrow, this implies that foreign countries will have to pick up the pace in bailing out our top line: so look for much more weakness in the dollar to even remotely justify Goldman's prediction. This will put Bernanke's claim of pursuing a strong dollar policy to the biggest test, as well as Europe's resolve to continue playing in this highly rigged version of F/X "game theory."

But back to Goldman - up until this point the firm has been at least slightly sensitive about catching marginal end buyers. Now the guns are blazing, and as all Wall Street professionals tongue-in-cheekly know all too well, a forceful upgrade is when any firm (Goldman most definitely included) starts to sell into a call (in this case its own). So buyers please beware: you are now implicitly buying the shares that Goldman and other brokers have been accumulating over the past 4 months.

Banks Fail to Make Adequate Loan-Loss Provisions, Moody’s Says
Banks have failed to make adequate provision for the losses on loans and securities they face before the end of next year, Moody’s Investors Service said. U.S. banks may incur about $470 billion of losses and writedowns by the end of 2010, which may cause the banks to be unprofitable in the period, the ratings company said in a report published today. "Large loan losses have yet to be recognized in the banking system," Moody’s said. "We expect to see rising provisioning needs well into 2010."

Banks and financial firms worldwide have reported losses and writedowns of $1.5 trillion since the credit crisis began in 2007, according to data compiled by Bloomberg. New York-based Citigroup Inc. has reported $112 billion of writedowns, more than any other firm, the data show.

Any economic recovery is likely to be "weak and bumpy hook-shaped," Moody’s said. Banks will also be challenged in an environment where government support is replaced by tighter regulation, the report said. Higher credit and funding costs may force a re-pricing of credit, Moody’s added. "The fundamentals of financial institutions are still traveling on a downward slope," Moody’s said. "No-one should consider recent improvements as assurance that the current rebound can be sustained."

Commercial Loans Failing at Rapid Pace
U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009. The losses by regional banks on their commercial real-estate loans will be among the most watched details as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate. So far, 57 banks have failed this year.

The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The trend continued as a handful of major banks reported second-quarter results, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Bank of America Corp. Regional banks tend to have higher exposure to commercial real estate than these big financial institutions. The commercial real-estate market, valued at about $6.7 trillion, represents 13% of the U.S.'s gross domestic product. But the recession and scarce credit are pushing more commercial developers and investors into default. Meanwhile, property values continue to decline, and banks are required to record a loss on any troubled real-estate loans where the appraised value falls below the amount owed.

Delinquencies on commercial mortgages held by banks more than doubled to about 4.3% in the second quarter from a year earlier, Foresight Analytics estimates. Rep. Carolyn Maloney (D., N.Y.), who heads the House's Joint Economic Committee, said she is working with Treasury Department officials on a plan to try to head off rising defaults on commercial mortgages before they cascade into a crisis. In contrast to home loans, the majority of which were made by about 10 lenders, thousands of U.S. banks, especially regional and community banks, loaded up on commercial-property debt.

Ironically, small banks appear to be much less aggressive in recognizing losses than their bigger brethren. According to the Journal analysis, the largest banks, with assets of more than $100 billion, saw charge-offs roughly quadruple last year, while losses at many medium-size banks grew at a much smaller rate of 120%. One monument to both the excessive froth of the real-estate boom and the morning-after headache setting in for lenders is the landmark Equitable Building, rising 33 stories above downtown Atlanta.

In 2007, San Diego real-estate firm Equastone LLC paid $57 million for the office tower and took out a $51.9 million mortgage from Capmark Bank, a Utah-based unit of Capmark Financial Group Inc. in Horsham, Pa. Equastone planned to expand the tower and attract a tenant with pockets deep enough to rename the building. Shortly after the purchase, the economic slump pushed vacancies higher and rents down. In April, Capmark Bank foreclosed on the building after Equastone defaulted on the debt.

In June, the Equitable Building was sold in a foreclosure auction for $29.5 million, 43% less than the original loan amount. And the buyer? It was 100 Peachtree Street Atlanta, a company formed by Capmark Bank for the purpose of acquiring the building. There were no other bidders. Steven Nielsen, Capmark Bank's chief executive, said the mortgage was written off to the "estimated value" of the building. He wouldn't specify the size of the related charge-off on Capmark's books. Property-tax records show the building was valued at about $44.8 million at foreclosure, which would equal a $7.1 million loss for the bank.

Some bankers say they feel growing pressures from regulators to take losses on commercial real-estate exposure as a way of reducing the possibility of a catastrophic hit later. "We recognize losses as quickly as any bank, partly because bank regulators dictate that," said Ed Garding, chief credit officer at First Interstate Bank, of Billings, Mont. More than 40% of the bank's loans are in commercial real estate, but according to the Journal analysis, annualized charge-offs in 2009 would be just 3% of its nonperforming commercial mortgages as of the end of 2008. That compares with an average of 34% for all U.S. banks.

Mr. Garding said the commercial real-estate market has held up relatively well in First Interstate's markets in Montana and Wyoming. Meanwhile, "we're strongly collateralized so the loan doesn't result in a loss," he added. Among other banks with notably low charge-offs: Based on the Journal study, annualized write-offs this year would be only 9% of all nonperforming commercial mortgages at a Wachovia Corp. unit in Charlotte, N.C. A spokeswoman at Wachovia declined to comment.

At New York Community Bank, a New York State-charted savings bank, that ratio would be a meager 2% in the first quarter. Ilene Angarola, director of investor relations at New York Community Bancorp., the bank holding company, credited the bank's strong underwriting standards. "Even though we have seen a decline in property values, our loan-to-value ratio is conservative enough that we haven't experienced anywhere near the degree of the charge-offs our peers have experienced," Ms. Angarola said.

Some analysts, meanwhile, worry that banks aren't sufficiently recognizing losses on their commercial real-estate loans, thereby exposing themselves to bigger losses later. According to Deutsche Bank AG, since the beginning of last year, the amount of charged-off commercial mortgages as a percentage of such debt outstanding has ranged from a high of 3.2% to as low as 0.3%. "Net charge-offs to date have been highly inadequate," said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank. "This is clearly a problem that is being pushed out into the future." How aggressively regulators respond could help determine how long the commercial-property market remains mired in turmoil. "If banks are allowed to bury problem loans away in their portfolios for years via massive term extensions, this is likely to be a very long process," Mr. Parkus said.

Commercial Real-Estate Prices Fall 7.6% In May
Commercial real-estate prices fell 7.6% in May, according to Moody's Investors Service, as both dollar volume and transaction count reached record lows in the nine-year history of the firm's Commercial Property Price Indices. The indexes are down 29% from a year ago and 35% from their October 2007 peak. The commercial real-estate sector has suffered since mid-2008 as the recession deepened, vacancies increased and new owners have been unable to refinance mortgages. Retail and hotel properties have been hit especially hard in the commercial sector.

"Large commercial real-estate price declines in the last two months suggest that a bottom may be starting to form, although higher transaction volumes would be necessary in order to draw any definite conclusions," Moody's Managing Director Nick Levidy said. Office buildings fared worst, dropping 29% from a year earlier, while industrial buildings were the best performers, down 12%. Apartment buildings in the South suffered a 21% drop, with a 23% slide in Florida, one of the worst-hit states by the housing crisis and global recession.

Ilargi: MyBudget360 is fast becoming a favorite of mine.

Negative Equity Nation for 1 out of 5 Homeowners: The Psychology of the 10 Million American Homeowners with Zero Equity
Recent data suggests that the number one factor for walking away from a home is negative equity.  For us to understand this dynamic, it is important to understand why someone would leave a home with a mortgage.  According to the U.S. Census Bureau some 51.6 million owner occupied homes have a mortgage.  This is data from late 2007 so we should be getting the updated data in the ACS that comes out in September of 2009.  Another third of homeowners have paid off their mortgage.  But with 26,000,000 unemployed and underemployed Americans, paying the mortgage has become more challenging.

We recently discussed the rise in bankruptcies which comes even with the stricter guidelines put in place in 2005.  A recent Freddie Mac report found that 17 percent of the mortgages in their portfolio had negative equity while another 11 percent had equity of 10 percent or less.  Now if you think about it, selling costs can be 6 percent so even those with 10 percent or less equity stand to lose money in a home sale.  If we put this together, some 28 percent of Freddie Mac loans if they were sold today may yield the borrower zero or will cost them thousands.  This is a recipe for disaster.

First let us take a look at the Freddie Mac world:

freddie mac us mortgage debt

At the end of 2008 some $11.9 trillion in mortgage debt was outstanding.  Between Fannie Mae and Freddie Mac, a total of $5.3 trillion was in their portfolios.  The massive rise in debt followed in line with the multi-decade long housing bubble.  Now Freddie Mac and Fannie Mae serve virtually the same role in the mortgage market.  They provide so-called liquidity in the secondary arena.  What this means is no one else would buy these mortgages now that they know Wall Street virtually turned many loans into casino like instruments.  Now, the two giant government agencies are virtually the only game in town.  But what is in the report should be of concern.  Let us pull out the Freddie Mac data by itself:

mortgage portfolio

Freddie Mac has a mortgage portfolio worth $1.96 trillion.  Of this portfolio 13 percent is made up of option ARMs, ARMs, and interest only products.  These are toxic loans.  This may not seem like much but this is equivalent to $254 billion in toxic loans.  Keep in mind those 30-year fixed mortgage are also seeing rises in defaults.  Assuming 17 percent of the borrowers are underwater, some $333 billion in mortgages are severely at risk.

Yet the risk is much deeper since the unemployment situation is causing even those with 30-year fixed mortgages to default.  The problem with being underwater is that the owner has little motivation to keep paying the mortgage.  For most people, they buy homes to live in but also to build up a steady stream of equity.  Yet in this decade, we have seen something that hasn’t occurred since the Great Depression.  We have seen a nationwide housing market decline.  And now, with websites like Zillow and also, local county assessors offices going online many people can check the “value” of their property with very little hassle.  So what this creates is an obsessive real estate culture.  Let us take a look at what occurred in this decade:

us housing market

Since the 1980s for nearly 30 years housing prices have been on a tear.  Now that the bubble has burst equity levels are now back to 2001.  The peak was reached with zany valuation while the debt still exists.  That is why on the chart above you’ll notice housing prices declining while mortgage debt levels are still near their peak.  It is interesting to note that Freddie Mac assumes booming mortgage debt again:

freddie mac us mortgage debt

Yet the losses are going to continue mounting as home prices continue to decline.  Freddie Mac figures some 1 out of 5 homeowners with mortgages are underwater.  Yet we know that there are still many more Alt-A loans that will have much higher default rates.  Freddie Mac is probably as conservative of a portfolio as we will get.

Here is some of the data on walking away:

“(WSJ) The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default - even if they could pay the mortgage - when the equity shortfall hits 50% of the house’s value, they found.

“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”

And here is another point.  If you live in area with high defaults the stigma may not be there for a strategic default.  Take a look at the rising losses in certain states:


In California the negative equity rate is much higher.  So losses are starting to mount and virtually all Alt-A and option ARM holders in the state are underwater.  This is going to increase the walking away phenomenon.  Even a map of the U.S. will tell us where most of the foreclosures will occur:


With 1 out of 5 homeowners with negative equity, we have a fleet of 10 million Americans being tempted to walk away from their mortgage.  With unemployment rising, the default may occur because of necessity.  Keep in mind these are people who are still current on their mortgages and not in a stage of default.  Unfortunately housing prices still have a way to go on the downside thus pushing more homeowners underwater.

Why Toxic Assets Are So Hard to Clean Up
Despite trillions of dollars of new government programs, one of the original causes of the financial crisis -- the toxic assets on bank balance sheets -- still persists and remains a serious impediment to economic recovery. Why are these toxic assets so difficult to deal with? We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed to clean them up.

The bulk of toxic assets are based on residential mortgage-backed securities (RMBS), in which thousands of mortgages were gathered into mortgage pools. The returns on these pools were then sliced into a hierarchy of "tranches" that were sold to investors as separate classes of securities. The most senior tranches, rated AAA, received the lowest returns, and then they went down the line to lower ratings and finally to the unrated "equity" tranches at the bottom.

But the process didn't stop there. Some of the tranches from one mortgage pool were combined with tranches from other mortgage pools, resulting in Collateralized Mortgage Obligations (CMO). Other tranches were combined with tranches from completely different types of pools, based on commercial mortgages, auto loans, student loans, credit card receivables, small business loans, and even corporate loans that had been combined into Collateralized Loan Obligations (CLO). The result was a highly heterogeneous mixture of debt securities called Collateralized Debt Obligations (CDO). The tranches of the CDOs could then be combined with other CDOs, resulting in CDO2.

Each time these tranches were mixed together with other tranches in a new pool, the securities became more complex. Assume a hypothetical CDO2 held 100 CLOs, each holding 250 corporate loans -- then we would need information on 25,000 underlying loans to determine the value of the security. But assume the CDO2 held 100 CDOs each holding 100 RMBS comprising a mere 2,000 mortgages -- the number now rises to 20 million!

Complexity is not the only problem. Many of the underlying mortgages were highly risky, involving little or no down payments and initial rates so low they could never amortize the loan. About 80% of the $2.5 trillion subprime mortgages made since 2000 went into securitization pools. When the housing bubble burst and house prices started declining, borrowers began to default, the lower tranches were hit with losses, and higher tranches became more risky and declined in value.

To better understand the magnitude of the problem and to find solutions, we examined the details of several CDOs using data obtained from SecondMarket, a firm specializing in illiquid assets. One example is a $1 billion CDO2 created by a large bank in 2005. It had 173 investments in tranches issued by other pools: 130 CDOs, and also 43 CLOs each composed of hundreds of corporate loans. It issued $975 million of four AAA tranches, and three subordinate tranches of $55 million. The AAA tranches were bought by banks and the subordinate tranches mostly by hedge funds.

Two of the 173 investments held by this CDO2 were in tranches from another billion-dollar CDO -- created by another bank earlier in 2005 -- which was composed mainly of 155 MBS tranches and 40 CDOs. Two of these 155 MBS tranches were from a $1 billion RMBS pool created in 2004 by a large investment bank, composed of almost 7,000 mortgage loans (90% subprime). That RMBS issued $865 million of AAA notes, about half of which were purchased by Fannie Mae and Freddie Mac and the rest by a variety of banks, insurance companies, pension funds and money managers. About 1,800 of the 7,000 mortgages still remain in the pool, with a current delinquency rate of about 20%.

With so much complexity, and uncertainty about future performance, it is not surprising that the securities are difficult to price and that trading dried up. Without market prices, valuation on the books of banks is suspect and counterparties are reluctant to deal with each other. The policy response to this problem has been circuitous. The Federal Reserve originally saw the problem as a lack of liquidity in the banking system, and beginning in late 2007 flooded the market with liquidity through new lending facilities. It had very limited success, as banks were still disinclined to buy or trade such securities or take them as collateral.

Credit spreads remained higher than normal. In September 2008 credit spreads skyrocketed and credit markets froze. By then it was clear that the problem was not liquidity, but rather the insolvency risks of counterparties with large holdings of toxic assets on their books. The federal government then decided to buy the toxic assets. The Troubled Asset Relief Program (TARP) was enacted in October 2008 with $700 billion in funding. But that was not how the TARP funds were used. The Treasury concluded that the valuation problem seemed insurmountable, so it attacked the risk issue by bolstering bank capital, buying preferred stock.

But those toxic assets are still there. The latest disposal scheme is the Public-Private Investment Program (PPIP). The concept is that private asset managers would create investment funds of half private and half Treasury (TARP) capital, which would bid on packages of toxic assets that banks offered for sale. The responsibility for valuation is thus shifted to the private sector. But the pricing difficulty remains and this program too may amount to little.

The fundamental problem has remained untouched: insufficient information to permit estimated prices that both buyers and sellers find credible. Why is the information so hard to obtain? While the original MBS pools were often Securities and Exchange Commission (SEC) registered public offerings with considerable detail, CDOs were sold in private placements with confidentiality agreements. Moreover, the nature of the securitization process has made it extremely difficult to determine and follow losses and increasing risk from one tranche and pool to another, and to reach the information about the original borrowers that is needed to estimate future cash flows and price.

This account makes it clear why transparency is so important. To deal with the problem, issuers of asset-backed securities should provide extensive detail in a uniform format about the composition of the original pools and their subsequent structure and performance, whether they were sold as SEC-registered offerings or private placements. By creating a centralized database with this information, the pricing process for the toxic assets becomes possible. Making such a database a reality will restart private securitization markets and will do more for the recovery of the economy than yet another redesign of administrative agency structures. If issuers are not forthcoming, then they should be required to file the information publicly with the SEC.

Subprime Brokers Resurface as Dubious Loan Fixers
From the ninth floor of a downtown office building on Wilshire Boulevard, Jack Soussana delivered staggering numbers of mortgages to homeowners during the real estate boom, amassing a fortune. By Mr. Soussana’s own account, his customers fared less happily. He specialized in the exotic mortgages that have proved most prone to sliding into foreclosure, leaving many now scrambling to save their homes.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

"We just changed the script and changed the product we were selling," said Mr. Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and "Now, we’re able to help you out because we understand your lender." Mr. Soussana’s partners at FedMod, as the company is known, were also products of the formerly lucrative world of high-risk lending. The managing partner, Nabile Anz, known as Bill, previously co-owned Mortgage Link, a California subprime lender, now defunct, that once sold $30 million worth of loans a month.

Jeffrey Broughton, one of FedMod’s initial partners, served as director of business development at Pacific First Mortgage, a lender that extended so-called Alt-A mortgages for borrowers with tarnished credit for Countrywide Financial, which lost billions of dollars on bad mortgages before being rescued in an acquisition. FedMod is but one example of how many of the same people who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry focused on selling loan modifications.

Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company.

The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees. The suit seeks an end to FedMod’s practices, and compensation for customers. "Our job was to get the money in and then we’re done," said Paul Pejman, a former sales agent who worked out of FedMod’s two-story headquarters in Irvine, Calif. He recounted his experience, he said, because "I really feel bad."

"I had people calling me crying, and we were telling them, ‘You can pay me or you can lose your house,’ " Mr. Pejman said. "People were giving me every dime they had, opening credit cards. But I never saw one client come out of it with a successful loan modification." Mr. Anz, who is challenging the F.T.C. lawsuit, acknowledged that FedMod’s business went "horribly wrong," but he maintains the company made genuine efforts to help delinquent borrowers. He said FedMod has refunded fees to 3,000 dissatisfied customers, while modifying 1,500 mortgages.

FedMod is among dozens of similar companies that have been accused by state and federal authorities of fraudulent business practices. On the same day in April that the F.T.C. sued FedMod, it brought action against four similar companies and sent letters of warning to 71 others. Last week, the commission brought lawsuits against four more loan modification companies, advancing an enforcement campaign involving 23 states.

Many of the companies formerly operated as mortgage brokers, The Times found. Since October, the California Department of Real Estate has ordered 210 businesses and individuals to stop offering loan modification or foreclosure prevention services, because they lacked a real estate license, as required by the state. In fact, nearly half the people have roots in the mortgage industry or other areas of real estate, according to public records.

Debt Barter Inc. is among them. A loan modification company based in Irvine that was cited by the state in January for collecting upfront fees without a license, it is owned by Sean R. Roberts, who formerly headed Instafi, a mortgage broker that closed $2 billion worth of loans a year at its peak. Since February, customers have filed 17 complaints against Debt Barter with the Better Business Bureau. Most accused the company of charging upfront fees, then failing to lower their payments. "We can’t please everyone all the time," said Mr. Roberts, who added that the company had modified loans for nearly 300 of its roughly 500 clients.

In Aliso Viejo, Calif., the Citywide Mortgage Corporation, which previously brokered Alt-A and subprime loans, last year became a loan modification company, USMAC. The company has not received a cease and desist order, but complaints on numerous consumer Web sites assert that it fails to deliver. "I’m saving homes," said the company’s president, Scott Gimbel, who claimed a success rate above 70 percent.

Chris Mozilo, nephew of Angelo R. Mozilo, the former chief executive of Countrywide Financial — a name synonymous with the subprime disaster — recently started a new business, eModifyMyLoan. It sells software that homeowners can use to apply for loan modifications. Chris Mozilo worked at Countrywide for 16 years. "I’m very proud of my career in mortgage lending," he said. "We helped millions of people achieve the goal of homeownership."

From its inception in the middle of 2008, FedMod aimed to dominate the loan modification industry, growing swiftly with the aid of a national advertising campaign. Mr. Broughton, 49, had worked in the mortgage industry since the mid-1980s. As the market ground to a halt in 2008, he founded FedMod with two Los Angeles entrepreneurs, Steven Oscherowitz and Boaz Minitzer. Mr. Broughton sought to distinguish his company from the unscrupulous ventures that dominate the industry. "You had a lot of these modification companies that were subprime guys," he said. "All they cared about was making quick dollars."

But the partners behind FedMod had their own questionable backgrounds. In the mid-1990s, Mr. Oscherowitz settled an F.T.C. lawsuit that accused his company, Universal Merchants, of falsely marketing the weight-loss benefits of a dietary supplement. The partners entrusted Mr. Soussana with FedMod’s Los Angeles sales office precisely because he had proved adept at selling the sorts of loans that now required modification. In 2006, Mr. Soussana, then 30, was listed as the nation’s sixth most prolific mortgage broker by Mortgage Originator, a trade magazine, brokering $318 million worth of loans. The same year, he paid $1.8 million for a house near Beverly Hills.

"He was one of the biggest guys in subprime mortgages," Mr. Minitzer said. "He basically wanted to get back to his old days of 50, 60, 70 guys in his office, and we could help because we were basically taking over the market." The three original partners brought in Mr. Anz to gain a crucial asset: his law license. Having a lawyer in charge enabled them to market their venture as a law firm and thus collect upfront payments under California rules. "Jeff asked me how I could, for lack of a better word, legitimize it," Mr. Anz said.

The California Department of Real Estate warns consumers that many dubious loan modification companies have organized themselves as law firms solely to allow them to collect upfront fees, even though the lawyers have little, if anything, to do with the services provided. The department cautions consumers against hiring such companies. In its lawsuit against FedMod, the F.T.C. contends that the company’s advertisements implied it had the backing of the federal government. "If you’re like the millions of Americans out there who are struggling to pay a mortgage, you may be eligible for the Federal Loan Modification Program," radio ads beckoned.

Aggressive marketing ensured that Mr. Pejman, 22, never lacked for calls when he started at the Irvine sales office in January. He had worked at three wholesale mortgage brokerages. Now, a trainer emphasized he was at a law center. "Our big sales pitch was that an attorney could do a better job with your loan modification," Mr. Pejman said. "If you told them these were basically washed-up people from the mortgage industry, or just people sending in paperwork, they would say, ‘Well, why bother? I might as well do this myself.’ " He went on: "It was misleading to the client. Attorneys never touched those files."

Among the 700-plus full-time employees who worked for FedMod this spring, only nine were lawyers, Mr. Anz said, though the company retained a lawyer in every state. Mr. Pejman and his fellow agents urged homeowners to send FedMod $3,495; the agents were promised a 30 percent commission for fees they took in. Most clients could not come up with more than $1,000 and agreed to a payment schedule for the rest. Assurances of relief from a homeowner’s loan terms were typically extravagant, Mr. Pejman said.

"A big grabber was that your loan will be reduced to 2.5 percent to 5 percent on a 30-year fixed rate loan," he said. "They’d print out all these mythical success stories for us to read over the phone."
Under FedMod’s policies, agents were prohibited from making false claims, counseling clients not to pay their mortgages or providing success rates, Mr. Anz said. New clients received follow-up compliance calls to ensure they understood nothing was guaranteed. But sales agents were told of such policies with a wink, Mr. Pejman said.

"They basically told us, ‘Do whatever you need to do,’ " he said. " ‘It’s a sales floor. You’re here to sell.’ People would quote success rates and just pull them out of thin air. People would say 60 percent, 80 percent, 90 percent. To the average Joe in Kansas, that sounded great. But the reality is that 50 percent were immediately declined by the lender." What shocked Mr. Pejman was how readily customers handed over their credit card numbers. Sales agents tapped into a deep vein of anxiety. "I’d hear people say, ‘Would you pay $1,000 to save your home? To save your marriage? Your kids’ education?’ " he recalled. "I’d hear people say, ‘Yeah, we’re the federal government.’ There were a lot of corrupt people working there."

In Charlotte, N.C., Joshua Garland telephoned FedMod in March after seeing one of its television commercials. Mr. Garland’s wife had been laid off from her hospital job. He had lost his job as a chef and was now bartending. Their monthly income had plunged from $3,200 to less than $1,000. They were already three months behind on their mortgage. A FedMod agent confidently described how his company could cut their monthly payments from $1,200 to $532, Mr. Garland recalled. But first, he had to pay a $995 "retainer fee." This was nearly as much as Mr. Garland earned in two weeks. Dental bills were piling up for his three children. He was behind on his utilities.

"I told him, ‘We have $1,200 left to make our mortgage payment, and if we give that money to you, we’re going to get further behind,’ " Mr. Garland recalled. "He said, ‘Go ahead and make the $995 payment, because once you’re under our plan, the bank can’t foreclose on you.’ " After several follow-up calls from the agent, Mr. Garland paid. Then, months passed with no contact from FedMod, he said. He left countless messages seeking updates, demanding a refund. His lender foreclosed on his house, scheduling a sale for Aug. 26.

"This guy hounds me for the $1,000, and then as soon as I pay him he disappears," Mr. Garland said. "I usually don’t fall for stuff like this. I can usually tell if it’s a scam. But this guy, I mean he came with his guns loaded." FedMod was drowning in cases. The pipeline swelled by 8,000 clients from December to March, according to Mr. Anz. Once sales agents took in applications, they passed files on to the processing department, where case managers were supposed to assemble documents and submit them to lenders. But their offices were hopelessly underequipped.

"The owners didn’t want to invest in software, so everything was tracked manually," said Rachelle Cochems, who took over as operations manager on Jan. 19 and left the company in May after FedMod stopped paying her. "We couldn’t handle the volume we were taking in. The system was broken." Each case manager was responsible for as many as 200 files at a time, Ms. Cochems said, making it impossible to keep in regular touch with customers. Some files floated in limbo, because sales agent did not bother handing them over.

"You’re paying the sales agent upfront," Ms. Cochems said. "So what motivation does he have to get it closed?" In February, Mr. Anz shut the Los Angeles sales office, uncomfortable with reports that Mr. Soussana had filled it with "unsavory types" from the mortgage industry, he said. "I’m not a shady person," Mr. Soussana said. By March, sales agents were inundated by calls from furious clients who had paid long ago, but not heard from anyone. Some called from motels, their belongings piled in boxes, weeping as they recounted losing their homes.

The agents let most calls go to voicemail, playing the most dramatic messages over speakerphones for communal amusement, Mr. Pejman said. "Guys would sit there and laugh," he said. " ‘This lady’s going crazy,’ that sort of thing." The next month, Mr. Anz took full control of the company, banishing his partners and blaming them for "a train wreck." He ceased marketing, he said, and concentrated on processing the backlog of files.

In April, the F.T.C. filed its lawsuit, prompting credit card companies to freeze their accounts with FedMod. The court imposed a temporary restraining order, barring FedMod from acquiring new customers. By the time Rana Hajjar began working there on April 13 as a client representative, she found the company utterly chaotic. "They just handed me 70 files and told me to call these people because they’re very upset," Ms. Hajjar recalled. "The majority of them had paid three or four months earlier and had never heard from anyone. I was yelled at from today until tomorrow."

Several times a week, clients called to report that the police were at their door, ordering them out for foreclosure sales, Ms. Hajjar said. When she alerted negotiators, they sometimes called banks and postponed sales, but usually they ignored her messages, she said. When Ms. Hajjar cashed her first paycheck, it bounced, she said. Over the next three weeks, she never received payment. On Monday, May 11, her manager told her and dozens of other employees to take the rest of the week off because the company had no money for payroll.

She was never called back, later adding her name to a file of more than 120 wage disputes leveled against FedMod with the California Labor Commissioner. Today, FedMod has only 40 employees, said Mr. Anz, pledging to plow through the company’s 4,200 remaining files. "We’re doing what we can," he said. "I’m the bad boy of loan mods." Yet as television advertisements attest, many other companies remain aggressive in what amounts to perhaps the last growth industry left in American real estate.

What's Wrong With Spending Stimulus Cash On Mozzarella Cheese?
As only he can do, Matt Drudge set off a mini scandal today, pointing to some questionable stimulus expenditures, like $1.5 million for mozzarella cheese and $16.8 million for canned pork. Drudge's little hyperlinks made such big waves this morning, that the Agriculture Secretary put out a press release explaining what the money went to. Anyone who pays even the slightest attention to government spending and stimulus efforts won't be particularly surprised by any of this, and the money isn't even that much.

Plus, as liberal political pundit Peter Feld points out, the point is just to get cash "into the economy," and it doesn't matter how it gets there. Unfortunately, this is flat-out wrong, and it exposes a deep flaw in the orthodox Keynesian idea that the job of the government is to just get "demand" higher when it goes into a lull. Fostering a healthy economy is not about stuffing it up with cash like a Christmas turkey, or just getting people to buy "stuff." It's about facilitating actually productive trade.

So for example, we doubt that Feld would think it'd be a good idea to spend money on shoddy houses in the middle of California's inland empire, even though technically this would constitute getting money into the economy. And we think many would agree that we don't need new, gigantic highway projects stretching deep into the exurbs, and that rail projects would be better. Both would get money into the economy, but one might be good for the economy, and the other might keep us mired deep in the weeds. The stuff we spend our money on actually matters.

Remember, it's easy enough to get cash into people's hands. You can just print it, or repeal the payroll tax or extend unemployment benefits or whatever you want. If only cash=wealth, it'd be super simple. But the actual challenge is in making sure you have a scenario in which people can create real wealth for themselves, and you're not going to get there if you insist that "demand" is this big pile of gloop (or mozzarella cheese) that you sometimes just need to make more of.

Financial Invention vs. Consumer Protection
by Robert J. Shiller

James Watt, who invented the first practical steam engine in 1765, worried that high-pressure steam could lead to major explosions. So he avoided high pressure and ended up with an inefficient engine. It wasn’t until 1799 that Richard Trevithick, who apprenticed with an associate of Watt, created a high-pressure engine that opened a new age of steam-powered factories, railways and ships.

That is how innovation often proceeds — by learning from errors and hazards and gradually conquering problems through devices of increasing complexity and sophistication. Our financial system has essentially exploded, with financial innovations like collateralized debt obligations, credit default swaps and subprime mortgages giving rise in the past few years to abuses that culminated in disasters in many sectors of the economy.

We need to invent our way out of these hazards, and, eventually, we will. That invention will proceed mostly in the private sector. Yet government must play a role, because civil society demands that people’s lives and welfare be respected and protected from overzealous innovators who might disregard public safety and take improper advantage of nascent technology. The Obama administration has proposed a number of new regulations and agencies, notably including a Consumer Financial Protection Agency, which would be charged with safeguarding consumers against things like abusive mortgage, auto loan or credit card contracts.

The new agency is to encourage "plain vanilla" products that are simpler and easier to understand. But representatives of the financial services industry have criticized the proposal as a threat to innovations that could improve consumers’ welfare. As the story of the steam engine shows, innovation often entails tension between safety and power. We need to foster inventions that better human welfare while incorporating safety mechanisms that protect the public. Could the proposed agency accomplish this task?

The subprime mortgage is an example of a recent invention that offered benefits and risks. These mortgages permitted people with bad credit histories to buy homes, without relying on guaranties from government agencies like the Federal Housing Administration. Compared with conventional mortgages, the subprime variety typically involved higher interest rates and stiff prepayment penalties. To many critics, these features were proof of evil intent among lenders. But the higher rates compensated lenders for higher default rates. And the prepayment penalties made sure that people whose credit improved couldn’t just refinance somewhere else at a lower rate, thus leaving the lenders stuck with the rest, including those whose credit had worsened.

This made basic sense as financial engineering — an unsentimental effort to work around risks, selection biases, moral hazards and human foibles that could lead to disaster. This might have represented financial progress if it weren’t for some problems that the designers evidently didn’t anticipate. As subprime mortgages were introduced, a housing bubble developed. This was fed in part by demand from new, subprime borrowers who now could enter the housing market. The bursting of the bubble had results that are now all too familiar — and taxpayers, among others, are still paying for it all.
This raises a question: If a consumer agency had been set up 20 years ago, would the subprime mortgage crisis have been prevented? We don’t know, but it seems improbable.

Such an agency would most likely have slowed some abusive practices, like offering low teaser rates on adjustable-rate mortgages and hiding information about future rate increases in fine print that most people do not read. That kind of regulatory intervention would have reduced the severity of the crisis, and that is no small thing. On the other hand, unless these regulators were extremely vanilla in approach and just said no to any innovation, or unless they had an unusually deep understanding of speculative bubbles, I think they would have allowed most of those subprime mortgages.

And they probably wouldn’t have had the detailed knowledge they would have needed to halt the decline of lending standards on prime mortgages in a timely way. In all likelihood, we would still be in this financial crisis.

In short, the new agency seems a good idea, and, if it is created, it should be chartered to support innovation and should be staffed by people who know finance and its intricacies, including some who appreciate that human behavior must be understood and factored into financial design. But that leaves us with the deeper quandary: Our society needs financial innovation, and still seems vulnerable to changing animal spirits and speculative bubbles that create truly big problems. Even if they can be mitigated, periodic crises may not be preventable, at least not by banning abusive credit cards or even by throwing the bad guys in jail.

We need consumer products that people can use properly, and if this is what "plain vanilla" means, that’s a good thing. But we also need financial innovation that responds to central problems. The effectiveness of our free enterprise system depends on allowing business people to manage the myriad risks — including the risk of asset bubbles — that impinge on their operations in the long term. And this process needs constant change and improvement.

Complexity is not in itself a bad thing. It is, in fact, a hallmark of modern civilization. A laptop computer is an immensely complex instrument, with trillions of electronic components, and almost none of us can explain what goes on inside it. Yet it can be designed well so that it seems plain vanilla to the ultimate user. And as for steam engines, the modern turbine high-pressure versions are not plain vanilla in any sense. They are sophisticated triumphs of engineering. They help generate most of our electric power with very few accidents.

Shiller tries to defend subprime mortgages
by Felix Salmon

Robert Shiller thinks that creating a Consumer Financial Protection Agency "seems a good idea", but is also a fan of financial innovation:
Our financial system has essentially exploded, with financial innovations like collateralized debt obligations, credit default swaps and subprime mortgages giving rise in the past few years to abuses that culminated in disasters in many sectors of the economy. We need to invent our way out of these hazards…

The subprime mortgage is an example of a recent invention that offered benefits and risks… the higher rates compensated lenders for higher default rates. And the prepayment penalties made sure that people whose credit improved couldn’t just refinance somewhere else at a lower rate, thus leaving the lenders stuck with the rest, including those whose credit had worsened.

We need consumer products that people can use properly, and if this is what "plain vanilla" means, that’s a good thing. But we also need financial innovation.

This is the point at which I want to do my Jon-Stewart-rubbing-his-eyes act: Shiller really has just written a column defending "financial innovation" and using, as his sole example of a good financial innovation, the subprime mortgage. Shiller seems to think that the best response to harmful financial innovations like CDOs is even more financial innovation, to reverse the damage initially caused. Wouldn’t it be better just to scale back the amount of financial innovation we had in the first place? Net-net, financial innovation is a bad thing: the downside, during times of crisis, is higher than the upside in more normal years.

And Shiller’s defense of subprime mortgages is unbelievably weak. He never comes close to addressing the point that a huge proportion of subprime mortgages were sold to people who could have qualified for a prime mortgage; and his attempted defense of prepayment penalties is utterly bonkers. People prepaid subprime mortgages for three main reasons: (a) because their house had gone up in value and they wanted to do a cash-out refinance; (b) because they were selling their house; and (c) because interest rates had fallen since they took out their mortgage. The number of people who wanted to prepay a subprime mortgage because their credit had improved was negligible.

In fact, as Shiller knows but won’t admit, prepayment penalties were a profit center for subprime lenders — a way of squeezing money out of borrowers at the end of the relationship as well as at the beginning. If this is financial innovation, I want much less of it, thanks for asking. And while I agree that the CFPA "should be staffed by people who know finance and its intricacies". I just don’t think they should start from the assumption that financial innovation is a good thing.

Geithner Has Tough Task In Marketing US Debt
Timothy Geithner, architect of bank, auto and economic rescue plans, has another high-stakes job these days: traveling bond salesman. The recession, financial crisis and two wars have pushed the federal deficit above $1 trillion, a record level that makes the Treasury secretary's role as chief marketer of U.S. debt tougher than any of his recent predecessors'. Geithner, who traveled last week to the Middle East and Europe, has to convince foreign investors to keep buying Treasury bills, notes and bonds; they hold nearly half of the government's roughly $7 trillion in publicly traded debt.

"He's a smart guy but it's a very, very big task," said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning Washington think tank. If foreign demand for U.S. debt sags, that could drive up interest rates and spell big trouble for an economy hobbled by 9.5 percent unemployment. Higher rates would make it more expensive for consumers to buy homes and cars, and for businesses to finance their operations. In the worst case scenario, a rush by foreigners to sell their U.S. debt could send the dollar crashing and inflation soaring. Because that would also hurt the value of their remaining holdings and the U.S. economy – a key market for their exports – private analysts believe such a scenario is not likely to occur.

With the risks in mind, Geithner last week visited Saudi Arabia and the United Arab Emirates, whose vast oil wealth gets recycled into Treasury holdings. Last month, he visited China, the largest foreign holder of U.S. Treasuries. That trip was marked by an extra dose of drama. In March, Chinese Premier Wen Jiabao said his country was concerned about the "safety" of the large amounts of money it had lent to the United States. Throughout these trips, Geithner very much stuck to his sales script, at least in his public pronouncements. He said the Obama administration was committed to guarding the value of the dollar and, once the economy improves, shrinking the deficit.

The deficit has been driven higher in part by the $787 billion economic stimulus package and $700 billion financial system bailout approved by Congress over the past year. The deficit-cutting proposals the administration has so far revealed would fall far short of what is needed. "If the Obama administration has a credible plan to bring the deficits down, they are keeping it a deep secret at the moment," said Michael Mussa, senior fellow at the Peterson Institute and former chief economist at the International Monetary Fund.

With nearly three months left in the budget year, the Obama administration forecasts that this year's deficit will total $1.84 trillion, more than four times the size of last year's record tally. The nonpartisan Congressional Budget Office estimates the annual deficits under the administration's spending plans will never drop below $633 billion over the next decade. And it forecasts an additional $9.1 trillion added to the debt held by the public – the amount that Geithner has to finance with bond sales.

During a stopover in Paris on Thursday, Geithner acknowledged in an online chat sponsored by the French newspaper Les Echos that "the dollar's role in the international financial system places special responsibilities on the United States." The foreigners Geithner meets with have a keen sense of the pressure he faces. When Geithner told a packed auditorium at Peking University that Chinese investments in the U.S. were safe, his comment was greeted by laughter. The students appeared to be laughing more at the quickness with which Geithner had responded to a question, not at what he said. Still, the reaction did highlight underlying skepticism.

Officials in the Middle East last week gave no public hint of nervousness. UAE crown prince Sheik Mohammed bin Zayed Al Nahyan, who met with Geithner last Wednesday, stressed the strength of his country's relationship with the U.S. in comments carried by state news agency WAM. "The UAE attaches great significance to further promoting cooperation with the friendly United States in all areas, and in banking, finance, trade, investment and education in particular," Sheik Mohammed said.

But such easygoing relations could fray if the U.S. isn't careful about its spending, some economists warned. That goal is even more urgent with China, Russia and some other countries grumbling that there should be alternatives to having the U.S. dollar serve as the world's reserve currency. Publicly traded U.S. debt – which excludes deficits the government owes to itself in Social Security and other trust funds – stood at 41 percent of the total economy in 2008. It is projected to climb to 82 percent of the entire economy by 2019. "If these trends are not reversed, the world will stop buying our debt and the economy will break," said Mark Zandi, chief economist at Moody's

Credit Card Companies Dealt A Major Blow
That was fast!  Last week the Minnesota attorney general sued the National Arbitration Forum alleging credit card companies were too closely tied to the creditors in the arbitrations the NAF conducted between consumers and credit card companies.  This weekend, a settlement was reached and the NAF - one of the biggest players in the credit card arbitration game, according the WSJ Law Blog - will no longer be a forum for consumer-related arbitrations.

This suit is going to get a lot of attention when Obama's proposed Consumer Protection Agency gets rolling. From Business Week:
The settlement with the National Arbitration Forum comes after the Minnesota AG sued the firm on July 14 for consumer fraud, deceptive trade practices, and false advertising. The civil suit, filed in state district court in Minneapolis, alleged conflicting ties between the NAF and debt-collection law firms that represented major credit-card companies. The suit also alleged that New York hedge fund Accretive LLC owned stakes in such collection law firms and the NAF, sending arbitration business between the two.

Under the terms of the consent decree, dated July 17 and signed by the AG and NAF officials, the arbitration firm by the end of this week will stop accepting new consumer arbitrations of any sort. These include arbitrations over disputed credit-card debt as well as new lines of business the NAF has moved into, such as arbitrating consumer debts in healthcare, telecommunications, utilities, mortgages, and consumer leases. The only business NAF can now be involved with is in arbitrating Internet domain disputes, a business it has long been in.

The settlement throws in turmoil an increasingly favored venue for credit-card companies to collect disputed debts from card holders. Since the beginning of the decade, most card companies have included mandatory arbitration clauses in credit-card contracts, forcing consumers to arbitrate rather than use the courts. The Minnesota suit said that Bank of America, JP Morgan Chase, Citigroup, Discover Card, and American Express use NAF, which is based in St. Louis Park, Minn.

Attorney General Swanson will testify this week before Congress and will ask that mandatory arbitration clauses in consumer contracts be prohibited, according to the Minnesota Star-Tribune.   As we mentioned earlier, one of the powers of the proposed Consumer Protection Agency is to review and potentially ban mandatory arbitration clauses in certain contracts, although no one really knows which ones yet. With AG Swanson already asking industry heavyweight the American Arbitration Association to voluntarily end its own credit card-related arbitrations, a major shake-up in the industry could be on its way. 

If mandatory arbitration clauses are prohibited, when a customer dispute arises or the card company needs to enforce a debt and more informal collections fail, the company will have to either bring the case in court or request the cardholder submit to mediation or arbitration. It is important to point out that nothing has been said about ending voluntary arbitrations.  The parties can still agree to arbitrate either once a dispute arises or when they enter into a mutually negotiated contract. 

But if credit card and other consumer companies can no longer insist disputes be kept out of court, the flood of lawsuits tort reformers always threaten - according to the suit, the NAF handled more than 200,000 collection claims in 2006 - could actually occur.  Complete destruction of mandatory arbitration clauses is unlikely - the lobbyists for the related industries are sure to see to that.  But the back-and-forth could result in a few compromises that give consumers more power in choosing the location and forum for the arbitration, as well as increased abilities to appeal the arbitration decision.

Some argue there could be a flip side to that increase in consumer power. Credit card companies clearly believe arbitration is the cheaper option, and any increase they see in costs to fight court battles will likely be passed on to consumers through higher fees, higher rates and less credit availability. There's no such thing as a free lunch, even if you put it on your credit card. The intricacies of arbitration clauses are no doubt tiresome (which is why none of us ever read them!), but the fight over them could be huge.

When, Oh When, Will HELP Be WANTED?
The nation’s economists are cautiously crawling out of their bunkers. The guns of recession are quieter now, and in the relative calm, there is talk of recovery — vague talk so far, particularly on the subject of hiring, lots of hiring. Recessions have their milestones. There is the start, of course, in this case December 2007; the worst months, the winter and spring of this year; the gradual return to economic expansion, late this year maybe; and, finally, adding jobs.

That last one is a tough call, because this recession in some very important ways is not only deeper than any we’ve had since the 1930s but is particularly hard on family income and savings. And without family income and savings, consumption — and the jobs it produces — are put off. Most Americans don’t consider a recession really over until work is once again plentiful, and the unemployment rate — which is now at 9.5 percent — finally starts going down. Ask economists when that will occur this time and they hesitate. No sooner than next summer, nearly all of them say. And that’s a guess, verging on wishful thinking.

"It is going to take a while for manufacturing and construction to stop losing jobs, and it will take time for businesses to be confident enough to go out and hire," said Mark Zandi, chief economist at Moody’s, who says the necessary confidence won’t return before next summer. When it does, the hiring is likely to be spotty and cautious. Health care and education, for example, have added workers throughout the recession and as that steady hiring continues in post-recession America, the overall job numbers will finally begin to rise — not from a surge in the hiring of health care workers and teachers, but because fewer and fewer jobs will be disappearing in other sectors.

"You are combining a very deep recession with what at this point looks like a sluggish recovery," said Jan Hatzius, chief domestic economist at Goldman Sachs. Steep recessions — and few in American history have been steeper than this one — are usually followed by vigorous, steep recoveries that include job growth, particularly in manufacturing and retailing, as people make purchases they had put off. The result is a chain reaction in which stores reorder, factories hum and workers are hired. Satisfying pent-up demand, this process is called.

But this time is clearly different. The pent-up demand is not present — not with 6.46 million jobs gone in just 18 months and hundreds of billions of dollars in wages extinguished. Credit is harder than ever to get for those who might want to spend again, and there are fewer and fewer spenders. People who do have jobs are saving (not spending) more of their incomes than they have in years, trying to replenish wealth lost in the stock market and in the declining value of their homes.

And, perhaps most important, millions of workers on short schedules will very likely get their hours back before their bosses hire new people. "We are talking the equivalent of adding back four to five million jobs just by restoring hours lost in this recession," said Dean Baker, co-director of the Center for Economic Policy and Research. "That process of adding back hours won’t start before next June," he says, "and I’m not confident it will begin even that soon."

So much for a surge in hiring or spending. If there is what seems like a job surge next April and May, that will be because the Census Bureau is hiring 1.2 million census takers in those months for the 2010 census. The work is part time, but it will bolster the national employment rolls — only to be subtracted once the work is done in July. Coming out of steep recessions in the past, home building, like manufacturing, flourished and the hiring of construction workers surged. Nearly half a million construction jobs returned after the steep 1981-1982 recession. Not this time. Too many homes were built during the bubble years before 2008, and too many office buildings. The glut has to be worked off before there is much new construction, or hiring.

The recovery, then, given the circumstances, is likely to come not with job growth, but "a diminution in job loss," as Mr. Hatzius put it. Like some other forecasters, he expects the economy to start growing by the end of the year. Maybe that is already happening. But it is growth without jobs — yet another jobless recovery, like the last two, this time on a giant scale. We came out of the 2001 recession into a recovery in which fewer than 60,000 jobs were lost each month, on average, not the hundreds of thousands a month very likely to disappear in the recovery to come.

That is a political problem, of course, particularly if the nation is not yet adding jobs as the Congressional election approaches next year. Mr. Zandi estimates that the stimulus package is likely to generate 2.5 million jobs. The president’s Council of Economic Advisers put the number at 3.5 million by the end of next year. Either way, that is not much of an offset for an economy that has already lost nearly two million jobs since the stimulus was enacted in February.

Such numbers suggest that if the goal is a job surge coming out of the current recession, then another stimulus package is needed, and a big one, perhaps as much as $1 trillion packed into a single year of spending, some economists say. Consumer spending and business investment provided such a kick coming out of steep recessions in the past. In their absence this time, job growth will inevitably resume as the recession gradually ends, but at a trickle, not a torrent. Health care and education seem certain to lead the way, with isolated help from the oil industry, pipeline construction companies, utilities, computer design firms and the federal government.

Mr. Zandi projects that once the employment rolls begin to grow again, in the second half of next year, nearly half the hiring will come from public schools, hospitals, nursing homes, outpatient care centers and physicians’ offices. Not that the numbers will be so great — on the order of 100,000 jobs a month, or less, for all these categories together. That increase is needed to care for aging baby boomers and a bulge in the population of young people.

Hotels and restaurants are also likely to expand their staffs as people relax a bit. And retailers, too, are expected to add workers cautiously, after downsizing hugely during the recession. There might even be a surprise, adds Robert Barbera, chief economist for the Investment Technology Group. "Some new and exciting area of job growth may emerge," he said, "although I can’t guess where that might be."

Bank 'walkaways' from foreclosed homes are a growing, troubling trend
Renetta Atterberry thought she had lost her East 102nd Street house. So she was shocked to learn in January -- five years after her mortgage company filed for foreclosure -- that it was still in her name. Worse, the long-vacant rental home had been vandalized and she faced a raft of housing code violations. Since then, she has been saddled with debts of about $12,000 to pay for demolition and back taxes. "I thought I had nothing else to do with that home," said Atterberry. "I was so embarrassed and humiliated by this."

Her mortgage company didn't buy the house and never took it to sheriff's sale to see if somebody else would, leaving Atterberry the legal owner, responsible for upkeep and taxes. These so-called "bank walkaways" are another troubling development in the foreclosure crisis, particularly in cities like Cleveland with weaker housing markets, say housing advocates and government officials. Lenders or mortgage companies decide they don't want homes they have already foreclosed on, sometimes because the value has plummeted or they believe the homes could become costly liabilities if they are socked with housing code violations.

But without that sale, the property can languish abandoned and ripe for vandalism. As liens and liabilities mount -- creating a so-called "toxic title" -- it becomes even harder to transfer the property. Neighborhoods and local governments are left to deal with the mess. "It's a growing issue. It's all over the state. It's not just Cleveland," said State Rep. Mike Foley. "That kind of lack of respect for communities that banks have made a ton of money off of in the past is infuriating."

Joseph Schilling, associate director of the Metropolitan Institute at Virginia Tech and an expert on abandoned property, said the issue of bank walkaways is increasing. Lenders may decide that given low prices and their mounting inventory of foreclosed property, it makes sense to walk away. "But as a result, it leaves the property in this type of legal limbo and it leaves the community and local government really holding the bag," Schilling said. The problem has gotten the attention of government officials who are trying to fill a void in Ohio law and force companies that foreclose on property to act.

State Rep. Dennis Murray of Sandusky is drafting a bill he hopes to introduce in the next two months that would require lenders or mortgage service companies to take foreclosed properties to sheriff sale within a certain time -- or see their mortgage lien erased. The lender wouldn't be required to buy the property -- only to take it to sale. More time could be given to lenders working to keep people in their homes by restructuring the mortgage. Under Murray's plan, property that doesn't sell could go to a local land bank.

"We're saying fish or cut bait," Murray said. "You can either take it to sheriff's sale . . . or if you're going to walk away from the property, do it now so the land bank process and the reclamation can get started." Separately, Cuyahoga County Common Pleas Judge Nancy Margaret Russo recently began ordering those granted a foreclosure decree in her courtroom to file the paperwork for a sheriff's sale in about 30 days -- or face being ordered to court for a contempt hearing. "I think it's a big problem," Russo said. "It's creating more abandoned homes with nobody responsible for taking care of them."

It's not clear whether she has the jurisdiction to issue such orders. But Russo -- who was not aware of Murray's initiative when she began hers -- believed it was time to start a discussion. Beachwood lawyer James Sassano, who represents mortgage servicing companies in foreclosure cases, said he doesn't believe Russo has the jurisdiction but understands that she wants to get properties into the hands of people who would be responsible for them. And while he hasn't seen Murray's draft legislation, he questions whether it would be constitutional to erase the mortgage holders' lien.

Frank S. Alexander, a professor at Emory University School of Law, said he's not aware of any state with a remedy similar to what Murray is proposing. "I happen to like it," said Alexander, after being told about Murray's plans. "And it would require lenders to act more cautiously in foreclosing." And he noted that many states are looking to tighten their foreclosure laws. "I think Ohio because of the magnitude of the problem -- particularly in Cuyahoga County -- and the longevity of the problem, is out in front on trying to come up with creative solutions."

How often these walkaways happen isn't clear, and there are mortgage companies that work to hasten sales. But researchers at the Center on Urban Poverty and Community Development at Case Western Reserve University are studying the issue after noticing that foreclosure filings in Cuyahoga County remained about the same in 2007 and 2008 but that sheriff's sales were down last year. Researcher Michael Schramm said they also began hearing from people in various cities and neighborhoods about homes languishing in foreclosure without being sold.

Schramm said that Cuyahoga County saw more than 14,000 foreclosure filings both in 2007 and in 2008. In 2007 there were nearly 10,000 sheriff's sales, but the number dropped in 2008 to about 8,000. Lenders or mortgage service companies may decide not to seek a sheriff's sale because they're working to restructure a mortgage or the homeowner has gone into bankruptcy. But there's no doubt they've also walked away from homes when it's in their financial interest to do so. "In the old days when values were much higher, it made a lot more sense to press the foreclosure sale," said Dave Sarver, whose Cleveland Heights-based Sarver Realty specializes in selling properties taken back by banks at sheriff's sales.

But now, he says, when a growing number of properties are worth only a few thousand dollars, it doesn't make sense for mortgage companies to take title to properties with little value and the potential for costly city code violations.
In Cuyahoga County, foreclosed homes that lenders or mortgage companies bought at sheriff's sales have recently sold for as little as 30 percent of the home's previously appraised value, according to the Center on Urban Poverty and Community Development. In the city of Cleveland the numbers are even worse -- with lenders selling foreclosed homes for just 15 percent of their former value.

Another slice of the dismal pie: In Cleveland more than 60 percent of the foreclosed homes sold by mortgage companies went for $10,000 or less. Some lenders also lose interest during the foreclosure process. "The property becomes abandoned while the foreclosure is pending and it becomes stripped, vandalized, damaged or deteriorated to the point where it just doesn't make sense to spend money to have it offered at sheriff's sale," said Larry Rothenberg, a lawyer with Weltman, Weinberg & Reis, a large creditors-rights firm based in Cleveland.

But those business decisions don't sit well with those left to deal with them. "They have a responsibility," said Cleveland City Councilman Tony Brancatelli. He said that if lenders or mortgage companies start a foreclosure, they should finish it. Or they should take off the mortgage lien so that the title can be cleaned up and the property transferred into responsible hands.

Some of the fallout that results when properties languish vacant and abandoned shows up in Cleveland Housing Judge Raymond Pianka's courtroom. "I see shocked people every single week," Pianka said. "They thought the burden was lifted because they filed bankruptcy or because somebody somewhere told them they're no longer responsible, and then they're pulled back in facing criminal code violations." His court also has worked with such owners on moving the property into the hands of another owner such as a nonprofit agency, the city land bank or the next door neighbor. But trying to transfer a problem to somebody else can become a thorny and protracted process if the long-gone owner can't be found or the foreclosed house is saddled with so many financial obligations that it is too expensive to touch.

Some transfers have been helped along when lenders remove the lien or agree to what's called a short sale and accept less than what's owned on the mortgage. Shawn Martin doesn't know what will happen to his property on Reno Avenue in Cleveland, where a foreclosure was filed on the two-family rental house in 2006. The sheriff sale had been scheduled, and Martin figured his lender took possession after he drove by and saw the windows boarded up and a tarp on the roof. But nobody bought it -- not even his mortgage company. "They backed out on it and just left it without even telling me," Martin said. "It just sat there and decayed without me even knowing about it." The house has been demolished and Martin is worried about being stuck with the bill. "This is a nightmare," he said.

Carol Zung's two-family rental property on Adams Avenue in Cleveland is still standing -- and that presents its own set of problems. A few months ago she got a call from police that the empty house had been ransacked, a call that reached her in Savannah, Ga., where Zung moved to find work after a cascade of financial troubles. The house had been foreclosed on and set for sheriff's sale in November 2007. Whether it even went to sale can't be gleaned from the court docket, which Zung has been checking in the hopes that this incredibly frustrating burden will be transferred off her 69-year-old shoulders.

Now there's another wrinkle. During a recent check, Zung learned her mortgage holder had gotten the foreclosure decree vacated and the case dismissed. But the property is still in her name and she owes around $37,000 on the mortgage. Zung has been through bankruptcy and said she has no money. "What do I do now?" she said. "There's part of my mind that's given up. Let other people figure out this mess." It is not just the homeowners who are affected when the property languishes. Neighbors can be left to suffer with vandalism and diminished property values, and taxpayers may be left with the costs of removing nuisance and blighted conditions.

"Those are the people who are picking up the tab for the business practices of calculated abandonment, " said Kermit Lind, a clinical professor at Cleveland State University's Cleveland-Marshall College of Law and an expert on foreclosures. Sarah Butler knows the fear of living next door to a foreclosed and vacant house. From her home on Reno she watched as vandals and trespassers descended on Martin's two-family after the renters moved out. She saw looters strip the house of everything from gutters to the refrigerator. Once, one of her back windows was broken. And sometimes people would pull into the driveway at 3 a.m. and wake her up with all their noise. "You've got to leave, nobody lives here," she'd shout from her window.

Homeowners, too, sometimes walk away -- for their own financial reasons or because they feel eviction from their foreclosed homes is inevitable. Once they're gone they may be hard to track down. But others, like Renetta Atterberry, abandon a house in the belief that it's no longer theirs. She doesn't know why she didn't get notices about what happened. It's not clear how her housing nightmare will end. She said she's on a payment plan with the county treasurer's office for the back taxes and would like to donate the property to a land bank -- but said she was told that can't happen as long as the $48,000 mortgage lien remains on the now-vacant property. "I was totally devastated with all of this being dumped on me," she said.

As Spain’s Economy Falters, Bank Robberies Rise
The 52-year-old contractor was desperate to save his business. Unable to pay his workers and facing bankruptcy, Ausencio C. G., as Spanish police identify him, went to the bank — but not for a loan. Covering his fingertips with surgical tape and wearing a ski mask and a reflective jacket to blur his image on security cameras, the contractor reportedly stole 80,000 euros from four banks before getting caught as he tried his fifth stickup near Barcelona in February.

That is a total of about $115,000 — half of which came from his first heist, and was used to pay his workers, according to what he told the police. Now in prison awaiting trial, the contractor, who is from Lleida, a town about 150 kilometers west of here, is reported to be part of one group that is busier than ever in this recession-battered country: bank robbers. Indeed, with unemployment approaching 20 percent, the highest in Europe, and the overall economy expected to shrink by 4.2 percent this year, bank robberies in 2009 are running 20 percent ahead of 2007’s pace, according to the Spanish Banking Association.

"In recent months, it has become apparent that Spain is suffering from an increase in bank robberies," said Francisco Pérez Abellán, head of the criminology department at the University of Camilo José Cela in Madrid. "We are seeing people committing offenses through necessity, first-time offenders who can no longer continue to maintain their lifestyle and so turn to crime." In the Barcelona area, only 7 percent of bank robbers were first-time offenders in 2008, according to José Luis Trapero, the chief of investigations for the regional police squad. That figure has jumped to 20 percent so far this year.

Though bank executives argue that there is no proven link between the falling economy and the rise in bank robberies, many Spaniards say they think the trends are more than coincidental — including the union that represents bank workers. It recently persuaded the Spanish government to classify bank robbery as an occupational hazard. "There’s unemployment, there’s hunger and there’s money in the banks, and the three factors combine," said José Manuel Murcia, head of health in the workplace for the financial sector of one of Spain’s largest trade unions, the CC.OO (Confederación Sindical de Comisiones Obreras). "Banks are denying credit, so companies are having problems, which creates more unemployment."

He added, "People can’t pay their mortgages. So it’s more logical to rob a bank than a pharmacy." Despite the increase in novice offenders like the contractor, bank executives play down the spike in robberies, and dispute any comparisons with Depression-era America, when John Dillinger and other criminals captured the public imagination. "It’s an urban myth," said Eduardo Zamora, director of security for Banco Sabadell, Spain’s fourth-largest bank. "It’s possible it does have an effect on other parts of society but I’m convinced the economic crisis doesn’t have any effect on holdups."

Besides, Mr. Zamora added, bank robberies were much more common in the late 1980s and early 1990s. As long as the total number of bank robberies does not exceed 500 a year, Mr. Zamora said, "it’s stable and controlled." All told, there were 165 holdups in the first four months of 2009, according to the Spanish Banking Association. But Mr. Murcia said he believed the actual number of bank robberies was higher than the figures disclosed by the banking association. In addition, he said his workers were at particular risk because of increasing automation and the proliferation of branches with just one or two employees and time-lock safes that require a 30-minute wait before they can be opened.

In fact, Ausencio C. G. stuck to banks with only one employee, usually female, and carefully watched his victim’s movements as well as the bank’s premises before he struck. According to his statement to the Spanish police, Ausencio C. G.’s first hit was his most successful, netting 50,000 euros that he used to pay his employees. (Spanish police have not disclosed his full name because he is still awaiting trial.) The booty from subsequent heists was earmarked for his suppliers, as well as for family expenses, including his daughter’s studies in London, according to the police.

While the typical bank robber is a Spanish-born male over the age of 35 who acts alone and strikes not far from home, according to Mr. Pérez Abellán, the Madrid criminology professor, a new wave of bandits is also emerging. These are criminals drawn from among the millions of low-skilled workers who came here from Latin America, Eastern Europe and elsewhere before Spain’s long construction boom went bust. "A kind of common market has arisen, formed by people from different countries who bring new criminal skills designed to increase the level of violence and the speed of the bank robbery," said Mr. Pérez Abellán.

For example, a four-man crew of painters from South America turned to bank robbery in March, kidnapping a bank manager and his family near Barcelona and holding them overnight before forcing the manager to open the bank vault and hand over more than 150,000 euros, nearly $215,000. The gang of painters, who had no criminal record in Spain, originally came from Brazil and Argentina. They were caught last month, still dressed in their painters’ uniforms and carrying a paint bucket along with shotguns, shells and pistols in the back seat of their car as they tried one final robbery before heading back to South America with their loot.

Because they lack a criminal record, apprehending reported perpetrators like Ausencio C. G. or the South American painters is trickier, Mr. Trapero said. In 2007, 87 percent of bank robberies were solved, compared with 72 percent last year. So far in 2009, just under half have resulted in an arrest. But Mr. Trapero, an intensely focused 19-year veteran of the force, is patient as he tracks his prey. "It often takes months or even years to solve some cases," he said. "There are some very clever robbers out there who take care of almost every detail but they always slip up in the end."

Iceland in key step to restructure banks
Iceland will announce on Monday a €1.5bn ($2.1bn, £1.3bn) recapitalisation of its banking sector and unveil a deal to hand control of two of the country’s healthy new banks to foreign creditors. The steps mark an important milestone in efforts to rebuild Iceland’s shattered banks and reintegrate the north Atlantic island nation into the international financial system. The government will issue bonds worth IKr270bn ($2.1bn) next month to three new banks set up last year after the country’s three main banks fell victim to the global credit crunch.

Creditors to the failed banks, will be offered equity stakes in two of the new banks as compensation for healthy assets that were salvaged from the ruins last October. A provisional agreement was reached on Friday after weeks of difficult negotiations, clearing the way for the long-awaited recapitalisation, according to people involved in negotiations. The deal is the latest in a series of steps aimed at restoring trust in Iceland’s financial system and stabilising its broader economy.

Last week, the Icelandic parliament voted to start negotiations to join the European Union. In another breakthrough, the government last month agreed a deal to reimburse billions of pounds and euros lost by British and Dutch savers in Icelandic bank accounts. Restructuring its banks, repaying creditors and stabilising its currency were all conditions of the $10bn rescue package granted to Iceland by the International Monetary Fund and European countries last year. The capital injection to be announced by the government on Monday would increase the core tier one capital ratios of the new banks to about 12 per cent – in line with international standards. Under the provisional deal, creditors to the failed banks will be offered controlling stakes in New Kaupthing Bank and Islandsbanki, which inherited the healthy assets of the failed Kaupthing and Glitnir banks, respectively.

The agreement was struck with the "resolution committees" set up by the government to unravel the failed banks but creditors were closely involved and are expected to give approval. The deal would compensate creditors only for the assets transferred to the new banks, which represent just a fraction of the $60bn owed to foreign lenders. But it clears a crucial hurdle towards building a new bank system and starting the process of cleaning up bad assets in the failed banks. "It was important that we reached an agreement with creditors rather than it ending up in litigation," said an Icelandic official.

A formal deal has not yet been struck concerning assets taken from Landsbanki, the third failed bank, because its foreign entanglements – including heavy liabilities to the UK and Dutch governments – are the most complex. People familiar with negotiations said an outline deal was in place and would be finalised by the end of July. Negotiations were led by Hawkpoint, a British financial advisory firm, appointed by the Icelandic government to oversee the process.

Warning to UK and France on derivatives
Rivalry between Paris and London could jeopardise Europe’s competitiveness in the vast "over-the-counter" derivatives markets, France’s stock market regulator has warned. Jean-Pierre Jouyet, chairman of the Autorité des Marchés Financiers, the French regulator, told the FT that disagreement between the two countries over how to regulate trading in these complex products could hinder a European solution and drive business to the US.

"In the US they have seen the threat. They are creating centralised clearing houses. But in Europe we are not there because there is disagreement between Paris, London and Frankfurt," he said. London had "to accept that Paris has a role" in clearing trades in euro-denominated derivatives, while Frankfurt was more neutral in the debate. "If Europe cannot agree and falls behind, trading will be done with the clearing system of the US. Because they have the technology, they have the savoir faire, and they will have the regulation. Europe has to know what it wants."

This month the European Commission called for more standardisation in the OTC markets and increased use of clearing houses, which is under way in the US. A clearing house steps in when a party to a trade defaults, ensuring that a transaction is completed. Most OTC trades are not cleared, exposing firms – and the financial system – to so-called "counterparty risk" such as default. Europe wants to establish clearing for OTC credit derivatives, with Eurex Clearing, owned by Deutsche Börse, and Ice, the US futures exchange, nearing launch by a July 30 deadline set by the EC.

Recession forces a million Brits to work part-time
Almost a million people are being forced to work part-time because they cannot get a full-time job, according to official figures that shed light on the hidden cost of the recession for thousands of families. In the past year more than 250,000 extra people who would like to be in full-time employment have found themselves working four days a week or fewer, according to the Office for National Statistics. This is an increase of more than a third on the previous year, and illustrates the extent to which companies are trying to cope with the downturn by reducing staff hours, rather than just laying them off.
Several major employers have offered staff reduced hours or extended holidays in an attempt to cut costs. Earlier this month, The Daily Telegraph disclosed that BT had offered tens of thousands of its staff the right to take a holiday of up to a year if they took a 75 per cent pay cut. British Airways has asked many of its staff to work part-time or for free. When Britain’s biggest accountancy firm KPMG offered employees the opportunity to move to a four-day week, 86 per cent of staff signed up. Many of the City’s biggest law firms, including Norton Rose, are staffed by some part-time workers.

Manufacturers including Ford, Honda and JCB have also asked staff to work reduced hours. The latest statistics indicate that, between March and May this year, a record 927,000 individuals were working fewer than 30 hours a week because they could not find a full-time job, a rise of 38 per cent on last year. The figures include new employees who have been hired on a part-time basis and existing staff who have been offered reduced hours. Separate figures released last week showed that unemployment had jumped to 2.38?million, with economists predicting it was inevitable that the total would exceed three million, matching the job crises of the early-1990s and 1980s.

This time round, however, the rise in unemployment has been accompanied by more dramatic changes in the labour market, with hundreds of thousands cutting their hours and pay in an attempt to hold on to their jobs. Others are working well beyond retirement age because their pension pots have suffered from dramatic falls in the stock market. Economists said that many more businesses were looking to restructure their workforce in similar ways, and expect further announcements later this year.

Corin Taylor, the head of policy at the Institute of Directors, said: "This recession has been marked by employers being very flexible. They are very keen to hold on to good people, even if that means freezing or cutting pay. And that has to be a good thing. "But it does suggest that we are in a far more severe employment downturn than the headline jobless figures suggest." Benjamin Williamson, of the Centre for Economics and Business Research, said: "Employers have learnt from previous recessions not to get rid of people with adequate skills because otherwise they will be left short when the recovery comes."

He added: "A reduction in salary is never great as people tend to make their purchasing decisions based on the future. While it is all well and good for young people with savings, it is particularly hard for those with large mortgages and families." While many young workers have been happy to take a break from the workplace on reduced pay, the ONS figures make clear that there is a growing body of people who have been forced to slash their hours against their wishes. The overall figures indicate that there were 595,000 fewer full-time workers than a year ago, taking the total to 21.47 million, and 51,000 more part-time workers, taking the total to 7.53 million.

However, while the number of part-time workers increased, 927,000 of those working part time did so "because they could not find a full-time job", the ONS calculated. Brendan Barber, the general secretary of the TUC, said: "This is the hidden impact of the recession. These people won’t be showing up in the spiralling unemployment figures but the economic slowdown and their subsequent move into part time work will have forced many of these families to rein in their spending dramatically."

The ONS employment figures, which have been collected since 1992, also suggest that far more pensioners are working than a year ago, as thousands of people are forced to defer their retirement because their pension pots have been hit by the falls in the stock market. In the three months to May there were 1.36?million people of pensionable age working, an increase of 45,000 on last year. More than half of Britain’s workers spend between 31 and 45 hours at work per week, according to the ONS figures.

The remainder are almost equally divided between those working between 16 and 30 hours a week and those working more than 45 hours a week. John Philpott, of the Chartered Institute of Personnel and Development, said: "The 255,000 extra people who are now working part-time because they cannot find a full-time job is a big increase on last year." But he added: "It is a temporary phenomenon relating to the recession and once the labour market is in better health, there will be a shift among part-time workers back into full time work."

Even as police investigate £80m Ponzi scheme, some 'victims' can't believe it
Fraud squad detectives have embarked upon a unique attempt to break the stranglehold that a group of suspected fraudsters holds over hundreds of investors. Clients of Business Consulting International (BCI), a Knightsbridge-based investment firm accused of running an £80 million Ponzi scheme, are being invited to public meetings by City of London Police to be told how their money was lost. Yet some of those investors appear not to believe they have been victims of a crime at all.

Three investment consultants have been arrested over the alleged bogus scheme, which allegedly operated in a similar way to that run by Bernard Madoff, the jailed American financier, by paying high returns from money invested by new clients. Police are seeking to recover money invested by the men around the world — including accounts in Dubai and the Cayman Islands — and last week seized eight high-performance cars leased by the suspects. The vehicles included two Ferraris — a 612 Scaglietti and F430 Spider — two Bentleys, a Lamborghini, a Rolls-Royce and a Maserati.

Detectives have also seized jewellery, watches and cash, but their inquiry is being hampered by the refusal of a large number of BCI’s 600 investors to accept that they may have been victims of a fraud. Some of the firm’s clients, who include a 1960s pop star and a number of sports personalities, believe that they can still recover their investments. They have been told that BCI loaned money to "distressed" companies in need of cash and that their investments would be recouped.

Detective Superintendent Bob Wishart, of City of London Police, said that many alleged victims could not accept that people they trust may have cheated them. "Some of the victims point-blank refuse to believe that they may have been victims of a crime," he said. "They think these people are their friends and they have placed complete trust and have given over a lot of ... information and it is very difficult to break that link of trust. "Consequently, we get this situation where we find they do not believe us. Even though they have been arrested and we have searched their homes and offices and closed them down, the victims still do not believe anything is wrong."

Police say that the alleged Ponzi scheme ran between 2007-08 and was marketed by word of mouth between friends and relatives, who were told that they could earn returns of 6 per cent and 13 per cent annually. Several investors are said to have lost their homes, others have been declared bankrupt and some have attempted suicide. Two families lost large sums of money that they had saved to help to pay for the long-term care of disabled children. At the meetings, held at a City police station, many investors reacted with disbelief as police explained that most of their money could not be traced and they were unlikely to see it again. Some people angrily turned on officers and accused them of provoking the collapse of the fund by freezing assets and making arrests.

One woman, aged in her late twenties and from North London, asked: "How can £80 million just disappear?" Another woman said that she had lost £50,000 saved from benefit payments that was being put aside for the care of her son, who has cerebral palsy. The woman, 48, said: "We had been saving for about 13 years; it was going to be a deposit for a flat or for an annexe to our house. The worst thing is the abuse of trust. We invested the money in stages from March last year onwards. Because we got some back we then invested more." Three men have been arrested and questioned on suspicion of conspiracy to defraud, money laundering and fraud by misrepresentation. Kautilya Nandan Pruthi, 38, Kenneth Peacock, 40, and John Anderson, 43, were released on police bail.

As Boom Times Sour in Vegas, Upward Mobility Goes Bust
Drew Johnson and his wife, Tina had the life many Americans only dream of: A big house in a swanky suburb, a backyard hot tub, and a $100,000 deposit on a new condo with views of the Las Vegas Strip and 24-hour concierge service. They did it all on the salaries of a construction-equipment salesman and a cocktail waitress who brought in $1,000 a week in tips alone. But the recession has slashed their incomes by nearly half, and financing for the condo might not come through. "It's Vegas," says Mr. Johnson, who fears he could lose most of his deposit. "We gambled."

During the boom years, Las Vegas wasn't just a place where gamblers could hit the jackpot, but where hard-working hotel maids and cocktail waitresses could, too. The city offered something almost no other place in America did: upward mobility for the working class. Now, that is evaporating. The recession has jolted Las Vegas in a fundamental way. Like other job-creating cities in the Sunbelt, Las Vegas saw its population, income levels and housing prices surge over the past decade. And like those cities -- including Phoenix, Orlando and San Diego -- it's been battered in the bust.

But by many measures, Las Vegas's rise and fall has been more dramatic than most. Last year, Clark County's population declined for the first time in more than two decades. More than 10,000 people left Las Vegas between July 2007 and July 2008, according to Keith Schwer, director for the Center for Business and Economic Research at the University of Nevada Las Vegas. The unemployment rate in the metropolitan area tripled from 4% in May 2007 to just over 12.3% in June 2009, higher than the national rate of 9.5%. And after the median price of existing homes rose by 122% in sales between 2000 and 2006 -- more than double the national rise of 49% -- sale prices fell by 30% between last year and this year.

The big bet that fueled Las Vegas's growth for so long is the same one that's now going bad: tourism. Vegas expanded into the lucrative market for business meetings and conventions, building massive exhibition halls and new hotels and casinos. Construction jobs multiplied and the housing market bubbled over. Now that tourism and business travel have collapsed, Vegas has little else to cushion the blow. Even some long-time Vegas stalwarts now believe the era of astounding growth is over.

"I don't see any opportunities for any development in Las Vegas," said Las Vegas Sands chief executive Sheldon Adelson in an interview. Mr. Adelson, who in 1999 opened the Venetian, a Vegas-style replica of Venice complete with indoor canals, rattled off a list of U.S. states he has his eye on now: Massachusetts, Florida, Kentucky, Ohio, Texas. All along the Las Vegas Strip, massive, half-finished edifices may never see a grand opening. Last month, the $3.5 billion Fontainebleau Las Vegas hotel and casino declared bankruptcy, and 3,500 construction workers lost their jobs. Other projects, such as the $5 billion Echelon resort, a hotel tower at Caesar's Palace and a luxury condo tower at the Palazzo, also halted construction.

"There won't be another [casino] property built in Las Vegas for a decade," says Jim Murren, chief executive of MGM Mirage, Nevada's largest employer. Mr. Murren's company plans to move forward with the opening of City Center, the $8.4 billion resort and residential project that the Johnsons bought into. When it's completed later this year, City Center is expected to employ 12,000 workers, a bright spot for Las Vegas employment. But many casino operators are worried the nearly 5,000 new hotel rooms will flood the market with new supply while demand is down. That could further depress prices at a time when visitors are already spending less on food, gambling and spa services, say casino executives.

Much in the way jobs on Detroit's assembly lines allowed poor Southern blacks a route out of poverty two generations ago, Las Vegas provided a shot at the middle class for workers fleeing dying industrial centers, or for immigrants arriving from Latin America and Asia. While average wages stagnated throughout much of the country over the past decade, pay in Nevada skyrocketed. Wages in the state grew at nearly double the national rate between 2000 and 2008, according to an analysis by the Economic Policy Institute, a Washington think tank.

Union workers -- who account for the bulk of employment along the Las Vegas Strip -- saw their pay grow by 12.6% between 2000 and 2008, while union workers nationwide saw an increase of 2.9%, according to the Economic Policy Institute. Nevada's non-union pay increased by 5.4% in the same period, while wages for all workers in the U.S. increased by 1.6%. The union made upward mobility part of the Vegas allure. In Vegas, the union-negotiated salary for a hotel maid is still $14.25 an hour. In contrast, the median wage for the same worker in Orlando is $8.84 an hour; in Phoenix, it's $9.25, according to the Bureau of Labor Statistics.

While the union sent casino workers' salaries and benefits up, tips were often what helped push ordinary workers into the world of posh condos and sports cars. Tips could triple the base pay of casino workers who dealt directly with guests. Gamblers who hit it big on the tables; young visitors who spent thousands for bottle service at night clubs; and businessmen treating clients to lavish dinners, were all free and easy with gratuities, say current and former casino workers. Valet attendants could take home an average of $500 a week in tips, while room-service waiters at swankier properties could earn $600 a week in tips, often outstripping their weekly base salaries. Such excess turned Las Vegas into one of America's biggest boomtowns. From 2000 through 2006, Clark County -- home to the Strip and three quarters of the state's population -- was the fastest-growing county in the U.S.

The number of people employed by the casinos crammed along the four-mile Strip shot to 109,000 in 2007 from 40,000 in 1985. Retirees, drawn by low taxes and affordable housing, poured into the area, too. Many of those who found steady work in casinos or on construction sites were able to harness another engine of prosperity: the area's bubbling housing market. Fashionable new suburbs sprang up. The flurry of new housing starts created even more jobs.

Meanwhile, the casino companies listed on Wall Street had acquired other properties until the Strip was dominated by just a few major players: Harrah's Entertainment, Inc., MGM Mirage, Las Vegas Sands Corp., and Wynn Resorts Ltd. They began competing with each other and took on billions in debt to build ever-more-lavish gambling palaces. During the mid-2000s, hotel occupancy on the Strip was typically above 95%; room rates soared. Then, early in 2008, as the mortgage crisis swept the country, the number of visits began to slow. The number of visitors continued to drop every month on record this year, just as casino companies were preparing to unleash thousands of new luxury hotel rooms onto the market. The share prices of the casino companies tumbled, and many sought emergency financing. Even some of the titans, such as MGM Mirage, had begun to sell assets in order to meet debt obligations.

Mr. Schwer, of UNLV, says when he charts the region's economic history, the lines rise then decline so severely, "we call these cliff-diving charts." During good times, the pull of Las Vegas was so strong that it sometimes drew entire communities. The Bias family -- about 150 aunts, uncles, cousins, brothers and sisters -- moved to Las Vegas from Tallulah, La., over three decades as economic conditions in the mill town deteriorated. More than 43% of Tallulah's 9,000 residents live below the poverty line, according to the latest census. In Las Vegas, the Bias family found steady, well-paying jobs. The men went to work as cooks in the casinos and the women worked in housekeeping. Sometimes, it seemed that all of Tallulah had relocated to Las Vegas, says Josh Bias, 31. "It got to the point where I'd meet someone here from Louisiana and I'd say, 'Don't tell me, you're from Tallulah,' " Mr. Bias says.

Mr. Bias, the eldest of 10 siblings, was able to go to college. To help pay for school, he found work as a cook, alongside his father and uncles. He took to the profession, and landed a job as a fry cook at a casino. He says he made $17.35 an hour, received full medical benefits, a 401(k) plan, and free training through a union and casino-backed program to upgrade his skills. His wife was able to stay home and raise their two young children. There was a Chevy Malibu, a spacious apartment, and new clothes and toys. His eight-year-old daughter talked about "going into the family business" and becoming a pastry chef. But in 2008, business on the Las Vegas Strip was stalling. In early December, Mr. Bias was laid off from his job. His family moved into a cheaper apartment in a sketchier part of town. He negotiated with his car lender to put off payments for a few months.

Mr. Bias recently landed a new job at the M Resort, where he works from 10 p.m. to 6 a.m. as a cook. Even though it's a non-union job and pays less, he's grateful he got it. "I was told I beat 10,000 other people who applied for this position," he says. Mr. Bias said the family is helping each other, with working relatives taking in laid-off ones. Las Vegas has experienced ups and downs before. Business dropped off in the 1970s, during years of stagflation. And casinos were hurting for business in the months after Sept. 11, 2001. The city emerged from these downturns when Americans felt confident and wealthy enough to travel as the larger economy grew. But analysts and observers say now, unlike then, Vegas has billions in debt that will make a recovery much harder.

Harvey Perkins, a gambling consultant with Spectrum Gaming, believes the industry can no longer depend on regular Americans to behave like high rollers. "I think people have fundamentally changed in their spending patterns." The casino business model, he says, will have to be "re-engineered." Vegas, Mr. Perkins and others believe, will have to return to the days of being a bargain destination. That's already starting to happen, with hotels throwing in coupons for spa services, and high-end restaurants offering cheaper options. Others predict that the current downturn will prove to be a momentary hiccup, and that the good times, along with social mobility, will again return to Las Vegas, just as they have in the past.

"I think we'll be like a phoenix," says D. Taylor, the secretary-treasurer for Culinary Union Local 226, which represents 55,000 hotel and casino workers. The union recently agreed to delay a negotiated 34-cent-an-hour pay increase for one year. But Mr. Taylor still expects a turnaround. "People like to kick us around, but we'll come back bigger and stronger and more exciting and vibrant." That's Raymond Wadsworth's hope, too. For a time, Mr. Wadsworth thought he might be condemned to the underclass. With a high-school education, he bounced from one menial to job to another in Los Angeles. Then he landed in prison on a drug conviction.

In 2003, he moved to Las Vegas on the advice of a relative, and his luck changed. He got a union job in a casino kitchen that paid nearly $17 an hour, and included full medical benefits. He bought a used Toyota Camry, and later, a $191,000 four-bedroom house with his girlfriend. Then, late last year, the casino cut his hours and eventually laid him off. He hasn't worked since New Year's Eve, and his unemployment benefits are nearly drained. For now, his girlfriend's salary is keeping them afloat. "I know times are tough everywhere," says Mr. Wadsworth, who has applied for jobs all over the area, including at the airport and City Center. "I guess we just aren't used to this in Vegas."

Pension Calculus Draws New Scrutiny
A California dustup over large pension payments is shining a spotlight on the practice of spiking -- increasing a salary just before retirement and boosting the lifelong payout. Pete Nowicki had been making $186,000 shortly before he retired in January as chief for a fire department shared by the municipalities of Orinda and Moraga in Northern California. Three days before Mr. Nowicki announced he was hanging up his hat, department trustees agreed to increase his salary largely by enabling him to sell unused vacation days and holidays. That helped boost his annual pension to $241,000.

The boost was legal, and Mr. Nowicki said he is receiving a permissible pension. "People point to me as a poster child for pension spiking, but I did not negotiate these rules," he said. The fire district's board agrees. "Chief Nowicki abided by existing rules and guidelines for optimizing his retirement pay," said Frank Sperling, the board's vice president. "I don't fault him. The system itself is broken. We need to change the system." Mr. Nowicki's situation isn't unique. Contracts that permit a jump in salary just before retirement -- boosting the pension payout -- have been around for years. But as tough times are putting more scrutiny on public pensions, Mr. Nowicki's case has sparked particular anger from colleagues and local residents. Some recently demanded an explanation from the department trustees and others have lobbied the Orinda council to divert funds away from the fire department.

"These guys may have priced themselves out of job," said Steve Cohn, a financial analyst in Orinda. The practice is getting more attention amid growing concerns about the sustainability of guaranteed pension payouts for public employees after brutal market losses last year in public pension funds. In California, which has taken to issuing IOUs to hoard cash, a private interest group has launched a campaign to publicize the names of government retirees with pensions of $100,000 or more to promote its view that steep pensions threaten to bankrupt states and municipalities. Mr. Nowicki's payout was brought to light in the spring in a Contra Costa Times column.

While it happens nationwide, pension spiking has been especially prevalent in California, which some attribute to favorable terms negotiated by powerful unions. The Pacific Research Institute, a San Francisco-based conservative think tank, estimates that pension spiking costs California taxpayers $100 million a year for the additional pension payments. "It's only a minority of workers who engage in pension spiking," said Lawrence McQuillan, a director at the institute. "But it adds up to real money."

Critics of pension spiking maintain the practice is unfair because employees or employers contribute toward pensions based on salaries. When a salary is significantly boosted around the time of retirement, it creates a shortfall between what a pension system has collected for an employee and what it must pay out. Union representatives say that over time the system has suffered some abuses. "The rules have been in place historically for a number of reasons, some of them good reasons. But times have changed rather dramatically now," said Rich Ferlauto, head of corporate governance and pension investment at the American Federation of State, County and Municipal Employees. "We support changes in the rules to prevent spiking and other similar abuses."

Mr. Nowicki recently turned 51 years old. If he lives another 25 years, his pension payments will cost the fire district an estimated additional $1 million or more over what he would have received had he retired at a salary of $186,000, not including cost of living adjustments, a fire board representative said. In addition to drawing his pension, Mr. Nowicki currently is working for the fire department as a consultant at an annual salary of $176,400 while the department searches for his replacement.

Some peers aren't pleased. "We want him out," said Mark DeWeese, a firefighter who along with three other union members recently demanded an explanation for the spike from the fire district's board. Mr. DeWeese said firefighters are agreeing in current contract talks to forgo raises because of the poor economy. The board said it had no choice but to honor the chief's requests. Mr. Sperling, the board's vice president, said directors spent months trying to decipher a 300-page document that details the pension law passed in 1937.

Mr. Nowicki said he began talking with the board in spring of 2008 about changes to his employment contract that would affect his pension. On Dec. 10, the board approved amendments to his contract requested by Mr. Nowicki, which enabled him to sell back unused vacation and holidays. On Dec. 13, he announced his retirement.

Mr. Nowicki said he asked to have this vacation provision included in his contract because he rarely had time to take vacations. Since he had recently volunteered to forgo a raise, he felt he was entitled to other compensation, he said. If vacation days are sold during the last year of employment, they count as income for the purposes of calculating a pension, Mr. Sperling said. Because the chief didn't retire until January, he was able to sell back vacation days for both 2008 and 2009.

House climate bill was flooded with last-minute changes
Many provisions were narrowly focused to help certain industries. Expect more of the same in the Senate.

Less than 24 hours before the House approved its landmark energy and climate bill last month, Rep. Ed Perlmutter (D-Colo.) got several paragraphs added to the 1,200-page measure -- additions expected to be worth millions of dollars to companies that install solar panels. About the same time, Rep. Melissa Bean (D-Ill.) took the lead in adding another little-noticed provision to the legislation -- a section designed to prevent regulatory action she said could shut down the multitrillion-dollar market for over-the-counter derivatives, a complex type of financial instrument.

These narrowly focused amendments were part of a torrent written into the bill during the wheeling and dealing that took place as Democratic leaders rounded up the votes needed to squeak out a victory. There were about 300 pages of last-minute amendments, many designed to make money for industries and constituencies important to fence-sitting lawmakers. The bill that passed the House included sweeteners for developing natural-gas-powered cars and energy-efficient mobile homes, plus financial rewards for early participants in the Chicago Climate Exchange, North America's first trading center for greenhouse gas emissions.

Surprisingly for a climate bill, there was also a provision making it harder to develop the vast wind-power potential of states like North Dakota -- a key element in President Obama's strategy to fight global warming. Some of the provisions could be tweaked or killed in the Senate. But more likely, analysts said, more will sprout as Democratic leaders and the White House strive to build a majority on that side of Capitol Hill. Making deals to get votes is a time-honored part of the legislative game, but the enormous scale of the climate bill and the pressure to act quickly in a time of economic crisis put the process on steroids.

"We started hearing about deal-making before the bill came to the House for debate, but then it blossomed," said Rep. Joe L. Barton of Texas, the top Republican on the energy and commerce committee and a critic of the legislation. Obama indicated he would accept the grab bag of added provisions so long as they did not undermine the bill's core goals of curbing global warming, spurring renewable energy production and efficiency, and creating "clean energy" jobs. "There are going to be provisions in the House bill and in the Senate bill which I question, in terms of their effectiveness," Obama told a group of energy reporters in the Oval Office after the legislation passed. "I'm not going to have a line-item veto, so ultimately, you know, I'll take a look at the final product."

The centerpiece of the climate bill is establishing specific limits on heat-trapping greenhouse gas emissions from major pollution sources such as power plants and factories. To comply with the limits, which would tighten over time, emitters would be required to obtain permits or pay to offset their emissions by funding tree-planting or other means of soaking up carbon dioxide. The system, called cap and trade, would impose new costs on some parts of the economy but open profit opportunities for others. For example, a recent analysis by the investment group Goldman Sachs projects that the U.S. emissions trading market could generate as much as $400 million a year in trading fees.

Perlmutter, the Colorado Democrat, used his seat on the rules committee to insert loan guarantees and a variety of other incentives for home energy efficiency and so-called distributed power generation -- in-home sources of electricity such as solar panels. He also added language to prevent homeowners associations and real estate covenants from banning construction of solar panels on the roofs of houses. John Berger, chief executive of Houston-based Standard Renewable Energy, one of the nation's largest installers of solar panels, predicted the homeowners association language would generate millions of dollars in new sales to his company alone.

Perlmutter said it was a matter of national security. "To have a distributed and diverse energy grid just makes us that much stronger of a country," he said in an interview. One of the congressman's biggest campaign contributors is the International Brotherhood of Electrical Workers, which is betting that the expansion of solar power will provide new jobs for its members. In the case of wind power, the key to realizing its potential is the construction of transmission grids to carry electricity from the windy Great Plains states to urban centers.

The climate bill gave the federal government the power to overcome local delays and speed up construction of the power lines. But East Coast representatives, worried that jobs would migrate to Chicago and other cities closer to the sources of wind power, changed the bill to take away that expediting power anywhere east of the Rocky Mountains.

Bean, a member of the House Financial Services Committee who is helping design a regulatory framework for the financial industry, said the climate legislation could kill trade in over-the-counter derivatives, which are touted for reducing investor risks but blamed for helping to bring on the worldwide recession. Bean, who has long received campaign contributions from the financial services industry, made it clear to party leaders that she would oppose the bill unless the language was changed. Two days before the vote, the change was made. Bean voted yes.

The Most Misunderstood Man in America
Joseph Stiglitz predicted the global financial meltdown. So why can't he get any respect here at home?

Anya Stiglitz was in the middle of a Pilates class in Central Park on an April morning when her cell phone rang. Glancing down, she saw "202" pop up—no number attached—and knew it was the White House. An aide to Larry Summers was on the line, looking for her husband, the Nobel Prize–winning economist Joseph Stiglitz. Anya said she'd pass on the message to Joe—then went back to work on her abs. No big deal, she thought. People often call her when they want to talk to Joe, because even though he's spent four decades figuring out how the global economy works, he hasn't quite gotten the hang of voice mail. "He doesn't listen to his messages, so if you want to talk to him, keep calling," Anya says on his cell-phone recording.

Anya figured Summers, Obama's chief economic adviser, was probably just calling to gripe about Joe's latest op-ed in The New York Times. Joe Stiglitz and Larry Summers, two towering intellects with egos to match, are not each other's favorite economist. "They respect each other, but they hate each other like poison," says Bruce Greenwald, Stiglitz's friend and academic collaborator at Columbia. ("I've got huge admiration for Joe as an economic thinker," Summers told NEWSWEEK.) Stiglitz had been hammering at Obama's economic team for its handling of the financial crisis. He wrote that the stimulus program was too small to be effective—a criticism that has since swelled into a chorus, though Obama says he's not adding more money. Stiglitz also had called the administration's bailout plan a giveaway to Wall Street, an "ersatz capitalism" that would save the banks' investors and creditors and screw the taxpayers. "I thought, Larry—he's just going to yell at Joe," Anya recalls.

But Summers's aide soon called back, and this time he said it was urgent: could Professor Stiglitz come to Washington for a dinner hosted by the president—that same night? Anya patched him through to Joe's office at Columbia University; Stiglitz accepted, and jumped on an early train. He was a little miffed: the other eminent economists attending the dinner, like Princeton's Alan Blinder and Harvard's Kenneth Rogoff, had been invited the week before. Stiglitz, a former chairman of Bill Clinton's Council of Economic Advisers, had supported Barack Obama as a candidate as early as 2007. But until that day, four months into the administration, he had heard barely a word from the White House. Even now, when the president was making an effort to hear a range of economic voices, Stiglitz seemed to be an afterthought. (A White House spokesman said only that the president wished to include Stiglitz.)

Such is the lot of Joe Stiglitz. Even in the contentious world of economics, he is considered somewhat prickly. And while he may be a Nobel laureate, in Washington he's seen as just another economic critic—and not always a welcome one. Few Americans recognize his name, and fewer still would recognize the man, who is short and stocky and bears a faint resemblance to Mel Brooks. Yet Stiglitz's work is cited by more economists than anyone else's in the world, according to data compiled by the University of Connecticut. And when he goes abroad—to Europe, Asia, and Latin America—he is received like a superstar, a modern-day oracle. "In Asia they treat him like a god," says Robert Johnson, a former chief economist for the Senate banking committee who has traveled with him. "People walk up to him on the streets."

Stiglitz has won fans in China and other emerging G20 nations by arguing that the global economic system is stacked against poor nations, and by standing up to the World Bank and International Monetary Fund. He is also the most prominent American economist to propose a long-term solution to the imbalances in capital flows that have wreaked havoc, from the Asian contagion of the late '90s to the subprime-investment craze. Beijing has more or less endorsed Stiglitz's idea for a new global reserve system to replace the U.S. dollar as the world currency. Chinese Prime Minister Wen Jiabao has been influenced by Stiglitz's work, especially when "he talks about the economics of poor people," says Fang Xinghai, the head of Shanghai's financial-services office.

But his stature is huge in Europe as well: French President Nicolas Sarkozy recently featured him at a conference on rethinking globalization. And earlier this month, while traveling to Europe and South Africa, Stiglitz received a call from British Prime Minister Gordon Brown's office: could he return through London and help the P.M. get ready for the G20 meeting in Pittsburgh?

Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. Since the days of Adam Smith, classical economic theory has held that free markets are always efficient, with rare exceptions. Stiglitz is the leader of a school of economics that, for the past 30 years, has developed complex mathematical models to disprove that idea. The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say. The work that won Stiglitz the Nobel in 2001 showed how "imperfect" information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party.

The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information, like global investors who bought up subprime- mortgage-backed securities. As Stiglitz puts it: "Globalization opened up opportunities to find new people to exploit their ignorance. And we found them." Stiglitz's empathy for the little guy—and economically backward nations—comes to him naturally. The son of a schoolteacher and an insurance salesman, he grew up in one of America's grittiest industrial cities—Gary, Ind.—and was shaped by the social inequalities and labor strife he observed there. Stiglitz remembers realizing as a small boy that something was wrong with our system. The Stiglitzes, like many middle-class families, had an African-American maid. She was from the South and had little education. "I remember thinking, why do we still have people in America who have a sixth-grade education?" he says.

Those early experiences in Gary gave Stiglitz a social conscience—as a college student, he attended Martin Luther King's "I Have a Dream" speech—and led him to probe the reasons why markets failed. While studying at MIT, he says he realized that if Smith's "invisible hand" always guided behavior correctly, the kind of unemployment and poverty he had witnessed in Gary shouldn't exist. "I was struck by the incongruity between the models that I was taught and the world that I had seen growing up," Stiglitz said in his Nobel Prize lecture in 2001. In the same speech he declared that the invisible hand "might not exist at all." The solution, Stiglitz says, is to move beyond ideology and to develop a balance between market-driven economies—which he favors—and government oversight.

Stiglitz has warned for years that pro-market zeal would cause a global financial meltdown very much like the one that gripped the world last year. In the early '90s, as a member of Clinton's Council of Economic Advisers, Stiglitz argued (unsuccessfully) against opening up capital flows too rapidly to developing countries, saying those markets weren't ready to handle "hot money" from Wall Street. Later in the decade, he spoke out (without results) against repealing the Glass-Steagall Act, which regulated financial institutions and separated commercial from investment banking. Since at least 1990, Stiglitz has talked about the risks of securitizing mortgages, questioning whether markets and authorities would grow careless "about the importance of screening loan applicants." Malaysian economist Andrew Sheng says, "I think Stiglitz is the nearest thing there is to Keynes in this crisis."

That would be John Maynard Keynes, the great 20th-century economist who rocketed to international renown in late 1919 when he published The Economic Consequences of the Peace. In his book, Keynes warned that the draconian penalties imposed on Germany after World War I would lead to political disaster. No one listened. The disaster he predicted turned out to be World War II. Like Stiglitz, Keynes was not a favorite at the White House. Keynes also believed that markets were imperfect: he invented modern macroeconomics—which calls for major government intervention to help ailing economies—in response to the Great Depression. But after meeting Keynes for the first time in 1934, FDR dismissed him as too abstract and intellectual, according to Robert Skidelsky, Keynes's biographer. Keynes himself fretted that Roosevelt was not spending enough.

To his critics—and there are many—Stiglitz is a self-aggrandizing rock-thrower. Even some of his intellectual allies note that while Stiglitz is often right on the substance of issues, he tends to leap to the conclusion that government can make things better. Harvard economist Rogoff has called him intolerably arrogant—though he added that Stiglitz is a "towering genius." In a letter to -Stiglitz published in 2002, Rogoff recalled a moment when the two of them were teaching at Princeton and former Fed chairman Paul Volcker's name came up for tenure. "You turned to me and said, 'Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?' I responded something to the effect of 'Well, he was arguably the greatest Federal Reserve chairman of the 20th century.' To which you replied, 'But is he smart like us?'" (Stiglitz says he can't remember the comment, but adds that he might have been referring to whether Volcker was an abstract thinker.)

Stiglitz's defenders say one possible explanation for his outsider status in Washington is his ongoing rivalry with Summers. While they are both devotees of Keynes, Summers often has supported deregulation of financial markets—or at least he did before last year—while Stiglitz has made a career of mistrusting markets. Since the early '90s, when Summers was a senior Treasury official and Stiglitz was on the Council of Economic Advisers, the two have engaged in fierce policy debates. The first fight was over the Clinton admin-is-tration's efforts to pry open emerging financial markets, such as South Korea's. Stiglitz argued there wasn't good evidence that liberalizing poorly regulated Third World markets would make any one more prosperous; Summers wanted them open to U.S. firms.

The differences between them grew bitter in the late 1990s, when Stiglitz was chief economist for the World Bank and took issue with the way Treasury Secretary Robert Rubin, and Summers, who was then deputy secretary, were handling the Asian "contagion" financial collapse. After World Bank president James Wolfensohn declined to reappoint him in 1999, Stiglitz became convinced that Summers was behind the slight. Summers denies this, and maintains that no rivalry exists between them. Summers's deputy Jason Furman says that Summers now "talks to [Stiglitz] a lot." "A lot" is an exaggeration, Stiglitz responds. "We've talked one or two times," he says.

Despite the Obama team's occasional efforts to reach out to him, Stiglitz remains deeply unhappy about the administration's approach to the financial crisis. Rather than breaking up or restructuring the big banks that failed, "the Obama administration has actually expanded the notion of 'too big to fail,' " he says. In a veiled poke at his dubious standing in Washington, Stiglitz adds: "In Britain there is a more open discussion of these issues." A senior White House official, responding to this critique, says that the Obama administration is most often criticized these days for intervening too much in the economy, not too little.

In other respects, Obama is embracing some of Stiglitz's views, suggests Peter Orszag, director of the Office of Management and Budget—and a former Stiglitz protégé (he worked for Stiglitz during the Clinton administration). One example: Obama's new idea for reforming health care by creating a government-run program to compete with private-sector insurers. "There is an intellectual paradigm in health care that says you should move to purely private markets," says Orszag. "Joe's perspective would suggest major difficulties [with that]. That led to the thought that we need a mix: there is an important government role."

Today, settled as a professor at Columbia, Stiglitz occasionally finds himself welcomed in the nation's capital, though usually at the other end of Pennsylvania Avenue, to testify before Congress. While he had no great desire to go back into government, friends say he was deeply disappointed when an offer didn't come from Obama last fall. Not surprisingly, Stiglitz believes his old rival was behind it, though Summers denies this. As for the invitation to dinner at the White House, there were a few theories kicked around the spacious Stiglitz household on Manhattan's Upper West Side as to why it came at the last minute: one was that Obama, in an interview posted online that week by The New York Times, had cited Stiglitz as one of the critics he listens to, so it would have seemed strange if he hadn't been invited to the dinner.

While Stiglitz was flattered by the discussion over a dinner of roast beef and Michelle Obama's homegrown lettuce, he can't stop himself from complaining that an occasional meal with dissidents is not the best way for the president to formulate policy. "Some of the most difficult debates and judgments can't really be hammered out in an hour-and-a-half meeting covering lots of topics," he says. Stiglitz may a prophet without much honor in Washington, but he seems to be determined to keep the prophecies coming.


rapier said...

For years I've chuckled over the fact that Abby Joseph Cohen was the public face of GS. Little Aunt Abby. You can imagine her baking cookies for the nice boys on the trading floor when she isn't spiffing up her latest market call. "Stocks are undervalued by 10%" she always said. Well sometimes it was 15.

Meanwhile the nice boys in the trading rooms and the big boys upstairs were more akin to the werewolves in all those movies. Ripping open the throats of punks and innocent maidens under a full moon. Canines dripping fresh blood.

There was Rubin of course. No werewolf he or so it seemed. Looking like the eternal Sophomore, with nary a hint of malice. At least Paulson looked like he could rip your throat open but that's what was needed when the deal went down. No more Mr. Nice Guy.

Anonymous said...

The chicken dance

Gourdier said...

The incompetent British officer core were also gambling with the lives of the Aussies and Kiwis who made up a majority of the frontline troops in the Gallipoli campaign. If they'd been overseeing the slaughter of their own compatriots, then there might have been a unhappy British public to have answer to.

Other peoples lives, other peoples money - another curious parallel. On a positive note - Gallipoli was formative in galvanizing Australian and New Zealand independence. After the Turkish campaign Mother England no longer seemed so nurturing anymore.

MrMoto said...

Speaking of Walter Cronkite
(from the 19th)

40 years ago today I watched the moon landing on television in a 'common room' in the infamous Rochdale College (look it up if needed)

Good old Walter was doing his bit on the telecast.

When the 'small step' was taken a huge cheer went up in the room. Very cool.

Later they switch back to Walter and he's doing a good job about a great day for mankind etc. but then he switches to a big 'Rah Rah America' rant (typical) and a huge chorus of boos arises from the room - too funny. What do you expect from a crowd of hippies and draft dodgers I guess. Makes me laugh every time I think about it.

Worthwhile piece by S. Das yesterday if anyone noticed it.

Guess I'm going to have to go back to check out what this Scepticus had to say that got the acolytes all a twitter - I think I like him already!

$24 trillion bailout now that's some serious cash for sure.

I'm going to have to update my 'I Want My Money and I Want it NOW' plan. For sure we can put an end to this mess now!

Arnold said...

Well guys, there is no way to spin this. The total potential cost of the bailout means this country is finished. Being conservative, if we add 1/4 of that 24T figure to our public float we are well above 100%. We will be finished and an out and out explicit default will take place. 1/3 = $8T. 1/2=$12T. Treasury is mistaken if they think that anything below the $24T is an acceptable amount to waste. GAME OVER. This would almost assuredly push the marginal productivity of debt into negative territory, if it is not already there.


Arnold said...
This comment has been removed by the author.
Arnold said...

Crap! more bad news. The opposition is against buying more US bonds and they are leading in the polls. Things could get very serious by fall. Yikes!

Rototillerman said...

Great, now we get to have Fake Arnold. Cut the clowning, guys.

Arnold said...

Roto - This is simply terrible. I had thought that the debt could have been managed but putting all of it on the government's balance sheet means we are finished. $24T in backstops cannot be spun away unfortunately. If even 1/3 of that makes it's way into the public float, we are finished. Plain and simple. I am hoping that the government will have the good sense to stop spending, but who knows with these guys.

Anonymous said...

I'm making a prediction that 6 months from now, when the Great Unraveling's true dimensions become obvious to most, except scepticus, that he will claim it didn't have to be this bad if only the authorities had listened to him, in a vain and lame attempt at moving the goal posts to paper over and divert attention from his truly lousy pollyannish call that this depression won't be all that bad. Give me a break. He's made enough posts here to start his own blog, I wonder if his readership's expectations would inflate or deflate?

He doesn't believe housing will go down another 30-40% from it's peak. Well, we'll see won't we, easy enough to see who called it correctly after Alt-A mortgages and Option ARM's hemorrhage like a stuck pig.

When proved wrong, he'll feign shock in 6 months at how utterly disastrous it has become. 'Who could have known' will be his refrain.

The last depression took the Dow 30 years (in inflation adjusted terms) to pull even.

This Deflationary Depression will never recover the losses (in inflation adjusted terms) from it's peak, Ever. Peak Oil and Peak Climate will slit the throat of any and all theoretical recovery proposals.

Wages, like at the collapse of the former USSR, will go to zero or be paided in bartered food.

Bukko Boomeranger said...

To follow up on what Theramus said about Gallipoli, this deadly fail by the English-speaking forces is, oddly enough, a national patriotic holiday in Oz and Kiwiland, known as ANZAC Day.

When I immigrated here, I thought it was queer that they'd have a holiday marking a defeat. (At least the holiday is on the date of the Diggers' D-Day landing, April 25, rather than the date they rowed away from the beachhead under the cover of darkness.) You're marking a time when you got your arses kicked?

Then I remembered that America's national anthem commemorates a time when British invaders kicked the hell out of an American city, in a war where the Newnited States mostly got thrashed. So it didn't seem so foolish.

Thus endeth your Australian cultural sensitivity lesson for today.

Greyzone said...

I don't have the data handy anymore and could probably replicate it if I wanted but a few years ago I looked at the lie of the "buy and hold" stock market mantra.

When adjusted for inflation, the DOW did not break even after 1929's high until the late 1950s. It then grew for a few years until it hit 1000 in 1967. Most people have no idea when the inflation adjusted DOW got back to that 1000 mark from 1967. I do and it was 1995. The market then grew from 1995 to 2000, purely via bubble mechanics. The bubble burst and we have never crossed the 2000 stock market high (in inflation adjusted terms) since then. So that's the real market when you look at the broad market overall - maybe 12-15 years of growth in the last 80 years total when you factor inflation into the lie.

That's not to say that some people did not make fortunes in that time but many of those people made specific investments rather than follow the broader market, or were simply in the right place at the right time, as my father-in-law told me of his good fortune.

The "follow the market" and "buy and hold" mantras are both lies, designed to separate you (the sucker) from his money.

VK said...

@ Scepticus, Stoneleigh, El Gallinazo

The monetization of debt involves the FED, the public + banking system and the US treasury.

1) Government issues debt to finance its spending. Debt bought by banks and public.
2) The central bank purchases the debt from the public, and the public is left with high powered money.

I am assuming that if the FED wanted to monetize public sector debt, it would essentially skip the two step process and proceed to directly issuing currency to buy debt as for the public and banks to buy 10 Trillion in US issued debt when they are already so indebted would not be possible due to constrained cash flow.

Total US debt stands at around 52 Trillion with Government issued debt accounting for 11.5 Trillion of that total. Lets say the Government decides to reduce the public sector debt burden of around 40ish Trillion dollars by 10 Trillion.

So the FED would directly buy the debt from the public and the banks. So 10 Trillion dollars in debt is transferred to the FED while 10 Trillion now lies in the hands of the public and the banks which would be highly inflationary. To counter this we would need to raise reserve requirements, but by how much?!

First a brief history and current status of reserve ratios,

The Monetary Control Act of 1980 stated that Transaction accounts required reserve ratios of 10% and Non Transaction Accounts required reserve ratios of 0%. Now banks have a neat little trick up their sleeve, it's called Deposit Reclassification.

It lets the bank spilt up your checking account into two - A transaction account and a Non Transaction account which you don't see on your bank balance statements but which the bank follows.

Deposit reclassification is a neat trick that allows the bank to avoid holding any reserves on the non-transaction sub account of your checking account! Using deposit reclassification the banking system has been operating at near zero percent reserve requirements for about 15 years or so!!

Current reserve requirement in the US is hovering between 59 - 61 billion dollars, while actual physical cash in the banking system is between 49-53 billion dollars at any time. So now the reserve requirement must be raised by some 10 Trillion in order to create minimal/ no inflation, this means a percentage increase of 16,300% in reserve requirements from the present day requirement of 61 billion to the new requirement of 10 Trillion!!

To repeat, now those reserve requirements would need to rise by 16,300% to prevent inflation in absolute terms.

Total assets in the US banking system are around 13.9 Trillion dollars according to the FED Flow Of Funds report for June, while reserve requirements are 61 billion, this leaves a rough reserve ratio to assets of 0.44%. If the new reserve requirement was 10 trillion, that would result in a new reserve ratio of 71%! Rather then the nice 20% that has been claimed numerous times.

Banks would be willing to pay ultra high interest rates for the cash that the public holds as a result of the ultra high reserve ratio requirements, while lending would virtually cease as interest rates would not only be too high but no one would be willing to borrow at those rates, presumably interest rates would soar to the mid twenties or thirties! This results in a collapse of velocity and thus hyper deflation.

This would also result in instantaneous bankruptcy of the FED as the 10 trillion in debt it now holds when marked to market would effectively be worthless as asset prices would collapse across the board.

Conclusion: There is no free lunch in economics :(

Anonymous said...

VK, good work. Some issues in your analysis though. I'll get my red pen out later.

What about the money multiplier?

If we have ~45tn M3 now, find out what M0 and M1 is, calculate the money multiplier that implies and then work out what increasing bank reserve rules from 0% to 10% would do to M3.

VK said...

ps - If I calculate the Reserve Ratio using 100*(Current Reserves/ Total US Deposit base), I get 0.77% (61 Bn/ 8 Trn)

If the Reserve requirement went upto 10 Trillion to counteract the FED's monetization, then we would get a reserve ratio of (10 Trn/ 8 Trn)*100 = 125%!

Yikes, that would mean that every time a bank makes a loan of 100, it has to set 125 aside. Interest rates in triple digits??

VK said...

Hello Scepticus

M3 as reconstructed here is around 14 Trillion, not 45 Trillion.

Anonymous said...

VK - you're right about M3. Can't recall where I got 45t from.

Money multipliers - as per steven keen, there is really no reserve requirement and no causal relation between M3 and other aggregates. However we can derive an implicit multiplier effect, which simply represents propensity of people to borrow and banks to lend, by looking at M3 in direct relation to lower aggregates.

Prior to the GFC, if M3 was ~14t (using your link), what can we say about the 'effective' multiplier?

Anonymous said...

My memory is returning...

"The growth of these alternative credit and liquidity sources during the current decade has been so significant that they can no longer be ignored in formulating monetary policy. At a minimum, using Prof. Roubinis definition, Shadow Banking is 40% larger than M2 and more broadly defined Shadow Credit may be as much as three times M2 (i.e. well in excess of $20 Trillion). To date there is no recognized monetary aggregate that adequately measures the impact of this Shadow Credit on the Effective Money Supply and as a result policymakers have focused on the measuring tools at hand such as M2. Using its traditional tools the Fed allowed moderate growth in M2 from late August 2007 until late August 2008 at an annual rate of approximately 5.4%."

If the money created due to the shadow banking system is to be replaced, this will require, and allow, a vast printing of money. The trouble is, no-one really knows how much was in there and no-one knows what the real money multiplier is and how it will change in future.

bank reserve rules applied to the entire bank and non-bank system would leave a vast gap that can be filled with monetisation.

Anonymous said...


I just don't understand your incessant 'bargaining' stance.

The Chinese have been, to coin a phrase, 'working their tits off' for buttons, on the promise of a better tomorrow. They've leant the US any cash they've received with the expectation that one day, it's the yanks that are going to work 14-18hr days for 2 dollars.

The US, on the other hand, is full of lazy fecks who've been enjoying the fruits of chinese labours through flipping houses, with no intention of role reversal.

All this talk of printing is just accounting flim flam - you think that printing up 10x the Chinese holdings, i.e. diluting their debts to tiny % of the original value isn't going to ostracise the US?

*Any* printing has some effect on the willingness of other nations to buy your debt.

What you're proposing is just the Ouroboros - a massive circle jerk.

Once the creditors have had their fingers burned, they'll go elsewhere. The Feds will be left holding the can, with nowhere to kick it.

You can't polish a turd, no matter how much you try to roll it in glitter.

Anonymous said...

Here is the 45 (or rather, 42 ) tn:

Before last fall’s financial crisis, banks provided only $8 trillion of the roughly $25 trillion in loans outstanding in the United States, while traditional bond markets provided another $7 trillion, according to the Federal Reserve. The largest share of the borrowed funds - $10 trillion - came from securitized loan markets that barely existed two decades ago. . . .

“Many legislators in Congress complain that banks aren’t lending, and cite that as an excuse to vote against further bank bailout funds. . . . But Mr. Regalia [chief economist at the U.S. Chamber of Commerce] said these critics are wrong. ‘Banks are lending more, but 70 percent of the system isn’t there anymore,’ he said.”

So if M3 was 14tn, how can we have oustanding loans of 42tn? The answer is that the money supply creating current asset values is far far larger than M3, and can be replaced by monetisation as this article alludes, with little overall change to the money supply crica 2007.

The problem is that people will suddely 'get it' when the reality is exposed. The article below is superb and well worth a read.

Caith said...

Thank you for P90X encouragement; I'm watching eBay now.

I'm in Cambridge, England, which I think is my best available option. I'm renting (with a child), and I need house prices to untriple before I can buy, which I think isn't going to happen until after a lot of businesses have gone under. I'm planting perennials in pots, and I'm going to have infeasibly many fruit and nut trees by the time we move.

I am defeated by power. The landlord is unsympathetic, and I can't get infrastructure because I haven't got a house yet. If I had a house I would be getting a smoke-free wood-burning stove and solar panels. (And double glazing.) What can I do in a rented house? If I get solar panels and keep them behind a wardrobe for five years are they going to degrade into unusability before I have somewhere I can install them?

Cambridge has not much sun (raining today, in mid-summer), but is in good farm country and has a river and community and a university which predates the Industrial Revolution by about 500 years, and a climate which could move several degrees in either direction without becoming impossible. My plan is to dig in and hold on. But oh, it's annoying being in a temporary house when you're trying to concoct a permanent doomstead.

Anonymous said...

Serenity now......

...there exists a bubble in the Shanghai Composite Index. Secondly, it will reach a critical level around July 17-27, 2009. This will lead to a change in regime which may be a crash or a more gently bubble deflation

Paper link:

It has become clear that herding behaviour in financial markets results in positive or negative feedback mechanisms causing price accelerations or decelerations and (anti)-bubble formation, where asset prices become detached from the underlying fundamentals
During the last decade, physicist-turned-financial economist Didier Sornette, and his group applied techniques used to model earthquakes, global warming, demographic patterns and the failure of materials to the financial markets. In a wide range of scientific publications, they found evidence of a simple and general theory of how, why and when stock markets crash

el gallinazo said...

septicus & VK

I am following the discussion as time permits ( I am having all sorts of catastrophes including my sailboat breaking her mooring and burying her keel in the mud flat). I am never going to get off this island :-(


The idea of being wary of the 1000 number also occurred to me. Of course, ideally, if one is shorting the market index, then one wishes to buy at the peak. But I suspect that the herd is nervous and the crash will resemble a crowded theatre with the curtains on fire. However, I am beginning to suspect that the S&P will break 1100, so I am still just watching.

ExRanger said...

I have been reading some more on the herding behavior you write about and it strikes me as something like the behavior of light. Normal diffuse everyday light would be like non herding behavior and tuned, oriented laser light would be like herding behavior. Is this a an accurate analogy in your opinion?

Anonymous said...

NEW YORK/WASHINGTON (Reuters) - U.S. small businesses say they feel slighted by the Obama administration and efforts to shore up the economy, with large companies taking much of the government's attention and stimulus cash.

The government decision last week against bailing out small business lender CIT Group raised fears of thousands of companies left without funding for day-to-day operations, and the lack of support showed big corporations can get bailout cash but small business interests are less pressing, some say.

With only some potential relief buried in the healthcare reform proposals in Congress, small businesses feel pushed aside in the stimulus and recovery efforts, they say.

"There has been nothing really in all the stimulus package that has really helped small business in general," said Kelli Glasser, president of Exhibit Concepts in Dayton, Ohio, whose 87 employees build trade show and museum exhibits.

"Most of the help has been in the form of supporting loans, but we're not looking for loans right now," she said. "We're not looking to heavily invest in equipment. We're just trying to keep our doors open."

And just which companies employ the most people in the US? Small businesses of course.

Home Loans said...

For informative post specially about commercial loans and real estate pricing in USA.
Thanks for sharing such valuable information

Anonymous said...

"They think (?) they can get away with whatever they do."

Looks to me like they are doing it.

Anonymous said...

GS and other high frequency trading computer and algorithyms can be beaten. I have one prediction system I use based on hypercomplex systems, quaternions and fractal geometry.

Andrew Carlssin

Nassim said...

7:34 AM,

It has become clear that herding behaviour in financial markets results in positive or negative feedback mechanisms causing price accelerations or decelerations and (anti)-bubble formation, where asset prices become detached from the underlying fundamentals

When I read stuff like this, I cannot help wondering what the author(s) meant. For example, is price deceleration when a price goes up but at a declining rate? Or, is it when the price starts falling?

I suspect the latter is meant here although it is a technically incorrect use of the term deceleration

Similarly, are positive feedback and negative feedback what an engineer would understand the terms to mean - positive is destabilising in either direction (up or down) and negative the opposite.

I really wish that journalists would leave these terms alone or use them properly. The FT is full of misuse of them on an almost daily basis.

(anti)-bubble formation is another beauty. Does it mean the bubble goes pop? Prices going up quickly and then dropping back even more quickly do not resemble any bubble that I have seen. :=)

Yeah, right said...

GS and other high frequency trading computer and algorithyms can be beaten. I have one prediction system I use based on hypercomplex systems, quaternions and fractal geometry.

Andrew Carlssin

Thank you for informing us! Please toss a few shekels to I&S when your foolproof system makes you richer than Goldman Squid. Or maybe you'd like to sell us info on your system for the low, low price of $29.99, with a set of Ginsu knives thrown in for the first 100 people to call...

Anonymous said...

"The government decision last week against bailing out small business lender CIT Group raised fears of thousands of companies left without funding for day-to-day operations"

This is a classic example of power consolidation. The Corporate/Fascist model come to life like one of the Undead. Mussolini's rotting corpse dancing in the American sunlight.

I wonder how all those 'conservative' small business owners view the 'market place' at this moment. They are history if this does not change.

The US will have a handful of corporate 'company stores' that control 99% of all transactions with the feds skimming off their cut, all in one nice neat place.

"Marriage is grand,
Divorce is a hundred grand"

Anonymous said...

Not to be a PIA, but when posting links can everyone please hyperlink them for those of us on mobile devices or without cut/paste capabilities?


Greenpa said...

Obama: " we need some new tuckpointing, "

you have to admit- it's kinda awesome to have a president who knows what tuckpointing is.

Hombre said...

anon 9:40 - "GS and other high frequency trading computer and algorithyms can be beaten. I have one prediction system I use based on hypercomplex systems, quaternions and fractal geometry."

I have a "prediction system" based on reality, my eyes, my nose, my ears, and not least of all my heart!

I look around me for 30 years and watch all the jobs go away and all the economists arguing over what to expect, what to do and when to do it, I think "... this is not good! Better plant a garden"

Anonymous said...

It is a neural network system using a multilayered perceptron approach.

Andrew Carlssin

Sam Dug said...

"Shiller seems to think that the best response to harmful financial innovations like CDOs is even more financial innovation, to reverse the damage initially caused."

Can we had that little gem to the list of Orwellian statements that are spewing from some economists?

Anonymous said...


Thanks so much for the English country visual; it has me thinking of John Constable’s “The Hay Wain.”

And good luck in your endeavors, even if the system makes it difficult for lovers of nature to consummate their passion and birthright.

I was also impressed (and surprised) with Obama’s mention of tuck pointing, although I shouldn't be-- Chicago is a city with a quite a few brick buildings. But I do wonder if the analogy fits. The President seems to think we now only need a little mortar--and some very expensive mortar at that-- in between stacks of otherwise well ordered bricks. If that is indeed that case, let's hire Scpeticus to fill in a hole here and patch there. But if the wall really is crumbling, and too many missing bricks is the reality, then I@S were right all along.

Speaking of buildings, Louis Sullivan, the great Chicao architect, made this wonderful observation lamenting nineteenth century academic convention:

“ That this great school, in its perfect flower of technique, lacked the profound animus of a primal inspiration.”

Sullivan’s observation sure does not fit the last thirty some years of American finance and economics. There has been a lot of primal exuberance and recklessness to be sure. But not a lot of perfect technique and profound inspiration. For that to occur, there needs to be, in my opinion, quite a less fire and a lot more ice. Fire and Ice, the way of Michelangelo. Coldy calculated as one contemplates how much marble to remove; bold, vigorous, and imbued with a lively inflection once the hammer and chisel is actually put to stone.


Unknown said...

Fire and Ice, the way of Michelangelo. Coldy calculated as one contemplates how much marble to remove; bold, vigorous, and imbued with a lively inflection once the hammer and chisel is actually put to stone.

Nicely put, there.

dark_matter said...

Andrew C.,

I haven't heard the term quaternions since taking a graduate course in abstract algebra. Thanks for the trip down memory lane. My graduate adviser defined applied mathematics as math you can use to make money. I guess quaternions are now applied math.

BTW, I think you will get better results if you conjugate your framis quotient using boojer coefficients.

NOY Andrew Carlssin said...

You can't fool me with all your sciencey words like "quaternions" and "perceptrons," Carlssin. I've Googled you and I know that you're from the future. All you're doing is traveling forward in time, reading the newspaper and then coming back in time to buy stocks. It's the oldest trick in the book.

Stoneleigh said...


The frustration is totally understandable. Most people are in a position where they can do some things that make sense, but by no means all of them. The list of ideal actions is long, and only the truly wealth will be able to accomplish them all. Everyone else, including us, just has to do what they can and hope. Working with others with pooled resources where possible can help you to get a lot further down the list, but it has its own challenges.

Thanks for reminding me of Cambridge by the way. I lived there for a while as a young adult and absolutely loved it. I still have quite a few friends there and in the surrounding area. They were the Cambridge University Youth Hosteling Association many moons ago.

el gallinazo said...

"It is a neural network system using a multilayered perceptron approach. "

Andrew Carlssin

I have one of those too, but it runs on beer and is failing rapidly.

dan w said...

Hi all...

I've been spending some time "on the ground" in VT. (Many know that I am running for Congress against Peter Welch. Here is what I am hearing/seeing from lots of folks:

1. Layoffs and pay cuts are accelerating.

1. Unemployment benefits are running out.
2. Severance monies are running out.
3. People are cashing out retirement funds to pay the bills.
4. People are putting on a "happy face"---but deep down they are really worried about what the hell they're going to do 6-12 months from now.

There's lots more, of course. But what I'm hearing is scary. While the folks on TV and on Capitol Hill talk about incipient recovery, what I am seeing ON THE GROUND!!! is lots and LOTS of people who are beginning to wake up to a coming reality (6-12 months off) of no job, no money, no benefits, no retirement savings, no way to pay the rent/mortgage, and no way to service their growing debt.

THIS IS COLLAPSE! Collapse is not some theoretical construct viz bond market dislocations and sovereign default and the artificial ups and downs of a fraudulent DOW---Collapse is growing numbers of dispossessed and morbidly impoverished individuals and families. Collapse is when a small community in Vermont watches as increasing numbers of its citizens seek food and shelter, only to find that such communities made no provision for these changing demographics because the government told them not to worry their pretty li'l heads.

Collapse is coming. And it's going to be local.

Anonymous said...

Barofsky and Warren are purposely frustrating the good people at the Treasury by incessantly making unfounded claims about false numbers and a lack of transparency.

The Treasury on purpose gives these people, appointed by the President and with salaries paid by the American people, incomplete and/or faulty information.

The Treasury thinks it can get away with anything it says and Congress won't dare act on the reports.
Having just watched the hearing it would appear to be all of the above.

Greyzone said...

Ok Skepticus...

Question, let's assume government does print up all this cash. If it simply sits in the reserves of banks as you argue there is no velocity to this money, it is doing NOTHING, and there is no economic activity from it. No effect and therefore no recovery.

If the money is instead turned loose, you will see a reaction to that much cash turned loose in the form of inflation. That, in turn, will further weaken the dollar and may cut off foreign buyers of any US debt forcing us to monetize it all (ala Weimar Germany or Zimbabwe). It would also be fuel for those calling for a new global reserve currency and if the dollar falls from its status as reserve currency, we can't continue to print paper to get real goods (what a scam, eh?). (NOTE: The dollar has fallen by slightly more than 10% since this rally began, which also coincides with some massive borrowing by the US Treasury department. That's a fall from 1.25 per Euro in March to 1.42 per Euro now.)

Neither you nor that article to which you point have elucidated how this extra cash gets back into the economy to do real work. And if it is just sitting idle on someone's books, then there is no recovery. A conundrum, eh, Skepticus? How do you get out of it? I don't think you can without destroying the dollar, at least as a global reserve currency and possibly in totality.

Thus you do exactly what Ben Bernanke is doing now - watch as deflation clears the decks.

The key question for you, Skepticus, is if your solution is so easy why has no one done it successfully? Why didn't Japan do it to get out of 20 years of flatlined economy? Why hasn't the US done it already?

I don't think things are as simplistic as your position implies, otherwise it would have been done. The fact that it has not suggests the situation is far more complex and dangerous than your original storyline admits, which is precisely what is preventing the Fed from taking your easy way out.

Bigelow said...

I had a neural network. It helped me pick winners at Churchill Downs just for sprint races. It was trained on a sample of just under 2000 run races. It learned an appreciation for backup plans as the hard drive crashed taking all files and neurals(?)with it. sigh.

Stoneleigh said...

Dan W,

Collapse is not some theoretical construct viz bond market dislocations and sovereign default and the artificial ups and downs of a fraudulent DOW---Collapse is growing numbers of dispossessed and morbidly impoverished individuals and families. Collapse is when a small community in Vermont watches as increasing numbers of its citizens seek food and shelter, only to find that such communities made no provision for these changing demographics because the government told them not to worry their pretty li'l heads.

You're quite right that collapse is coming and that most people are completely unprepared for it, having been encouraged and enticed into debt slavery for a very long time. Our complex web of just-in-time interactions and interdependencies will eventually go into failure mode. More and more people are falling off the back of the wagon all the time. For them depression is already here.

The theoretical side of what we do here is intended to explain how and why we got into this position, the extent of our predicament, and why it is so important to take action in our own lives and communities ASAP.

Good luck with what you are doing by the way.

dan w said...

@ Stoneleigh

I did not mean to in any way denigrate what you do at TAE. First step---educate. Then people must act upon what they know.

Anonymous said...

If it simply sits in the reserves of banks as you argue there is no velocity to this money, it is doing NOTHING.

Yes it has. it's freed the government from debt. Now they can go and spend a whole shitload of freshly borrowed money, build new healthcare systems etc. Alternatively they could give out a massive tax cut, whatever.


Bigelow said...


Can't have a flight to safety, if it is the safety thing that is scaring the herd. Why is this a future event as opposed to soon?

I am truly tormented by the possibility the FED will buy ever increasing amounts of Treasuries as supply/demand goes out of balance. There must be a tipping point there somewhere that could precipitate a waterfall rejection of the dollar as reserve currency in days; massive devaluation of the dollar as the world flees as fast as they can, instead of staid rounds of competitive country devaluations.

Coco said...


We´re in the same position, looking for a small property. Try Sharon Astyk´s writings on adapting in place for some ideas. She also conducts net-based classes.

Best of luck.

Hombre said...

Dan W - Glad you posted the realities of the Vermont towns and counties. Sounds a lot like middle Indiana to me (and I suspect all over the world). Boots on the ground is always a good way to make real assessments of local situations.

Good luck with your efforts to wake folks up around there and your political efforts as well.

You being a smart guy I assume you know what you are going up against.
(You have a very active "neural network system using a multilayered perception approach" as mentioned in a previous post.)

Anonymous said...

"GS and other high frequency trading computer and algorithms can be beaten..."

Not if Gollum Squid Sacks sends a death squad out looking for you.

You sound like someone confident of running a card counting song & dance against a major Vegas casino.

That usually ends the second time they catch you at it in their House with a shallow grave in the desert.

Great inventions are dealt with in the present Fascist Corptocracy in this order:

(1) buy them off

(2) scare them off

(3) kill them off

It works.

Anonymous said...

Get ready for the Future:

Man bursts into flames after being hit by Taser

The Ass-clown Express is Pulling awy from the station, All Aboard!

Anonymous said...

Senior Democrats call on Treasury to be more open
By JIM KUHNHENN (AP) – 2 hours ago

WASHINGTON — Two senior congressional Democrats pointedly called on the Obama administration Tuesday to make the $700 billion financial bailout program more visible and accountable to taxpayers, with one complaining that the Treasury Department's approach to the fund is, "Don't ask, don't tell."

Rep. Edolphus Towns of New York, chairman of the House Oversight and Government Reform Committee, and Sen. Max Baucus of Montana, who heads the Senate Finance Committee, insisted that Treasury Secretary Timothy Geithner adopt recommendations from a government watchdog that the department has resisted.

"There is no evidence that Treasury has made any attempt to determine whether (financial rescue) funding has resulted in increased lending and whether that has had any effect on reducing unemployment," Towns said.

Glenn Frey - The Heat Is On (Live 1992)

Johanna said...

Has everyone already seen this?

Lovelace and Babbage vs the Economy. Very funny.

Anonymous said...

"with one complaining that the Treasury Department's approach to the fund is, "Don't ask, don't tell."

That's because it is going to be monetised, and according to some commentators at seekingalpha, already has been.

Anonymous said...

I'm so conflicted now!

I have the opportunity, at least theoretically, to move from the mid shift (noon to midnight but reasonably more like 1am) to a day shift (7a-7p) shift. It means taking nearly a $600 per month pay cut, but it also means that I can be home at a reasonable hour, that I probably won't get held over at work like I frequently am now, and getting up at 8 am doesn't mean having between 5 and 6 hours sleep before I go back and do it again. I can make arrangements with my company to assist me with paying back student loans, and there are some specialized certifications I can get that will allow me to earn more per hour that will in large part make up for the loss in pay.

But then I come here every day, read the news, read the comments, and get even more conflicted and worried! Reasonably, if I made myself take a pay cut of the same amount and used that money toward purchasing home related prep type things, I could get most of what I want done in a year or so. But I am to the point that I truly hate my shift. Not because of the people I work with, they're great, but because after two years I'm just tired.

I just wonder at this point whether being logical outweighs my sanity, and a normal home life.


Greyzone said...

"Yes it has. it's freed the government from debt. Now they can go and spend a whole shitload of freshly borrowed money, build new healthcare systems etc. Alternatively they could give out a massive tax cut, whatever.


While I don't know if this is really Skepticus responding, I will point out that doing the above simply injects the money back into the economy, causing massive inflation AND damaging the investments of our creditors to a huge degree. So we come right back to the question I asked the first time (a few days ago) - why would our creditors passively sit back and accept such losses?

That question never did get answered and was instead simply brushed under the rug because it did not fit Skepticus' predestined world view.

Come to think of it, Skepticus sounds a great deal like Gary North.

Anonymous said...

Skep is stuck in the bargaining stage of grief.

Reality does not compute.

He's not broke, he still has checks.

Irrational theory with no Real Politek.

Gary North, like a Huge crooked Wall St Bank, is too valuable to his followers, in other words, just a Turd to Big to Flush.

Anonymous said...

JPMorgan's Dimon makes $2.3 million from options

The looting just never stops with these guys.

Anonymous said...

Lol, greyzone thinks I'm an austrian school inflationist. How very dare you!

I'm obviously not making myself clear. Let me try one more time.

@greyzone "I will point out that doing the above simply injects the money back into the economy, causing massive inflation"

Why would it cause massive inflation? It only causes inflation if there is demand for money for investment. There is not going to be a recovery. Why? Ask Stoneleigh, and if that's not enough come back to me and I'll give you some more reasons.

Like stoneleigh I see no driver for recovery, for the only driver of recovery can be demand and demand is dead.

The reason I dispute the imminent onset of deflationary holocaust is because the boondoggle of monetisation and government stimulus can go on, and will go on, until every single credit dollar is replaced with a government greenback. This will take 5 years at an absolute minimum, more like 10.

Periods of monetisation and stimulus will be interspersed with new rounds of green shoots and massive sucker rallies. It'll be japan all over again, and here's the kicker - it doesn't matter what level of government debt you start out with - it can all be monetised.

Incipient recoveries will last a while then get killed by inflation or government tightening of policy, as you point out, followed by another round of deleveraging and monetisation. The value of the currency will fluctuate but will be kept in a range because of the dynamics above.

Thats a stagnation. Long, profound, and there is no way out of it while the 0% bound on rates remains unchallenged.

What you may ask, happens at the end of that, when all debt is monetised, and credit is history, or even, when the availability of credit gets too scarce to sustain the modern economy.

Now that is an interesting question.

Sam Dug said...

Memo To: Mr. Shiller, et al:
From: Albert

“We can’t solve problems by using the same kind of thinking we used when we created them.”

-Albert Einstein

Bigelow said...

Just to be obdurate there is one way to prevent oil from moving into the $20 a barrel range: the U.S. or proxy attacks Iran. Mike Ruppert says this will never happen if I remember correctly, but... Just think of me as the guy that says "hey, here comes the bus" when, there comes the bus.

VK said...

So if M3 was 14tn, how can we have oustanding loans of 42tn? The answer is that the money supply creating current asset values is far far larger than M3, and can be replaced by monetisation as this article alludes, with little overall change to the money supply crica 2007.

Isn't that why it's called a credit crunch? There's no easy fix. Your solution would work for a far smaller debt burden. The hyperexpansion of credit has created a pyramid of debt that will crumble as do all ponzi structures, which require continual buy in.

There's 42 Trillion in private US debt alone, 62 Trillion in Credit Default Swaps and an estimated 1 quadrillion + in derivatives that attained 'moneyness' on the way up and are losing their 'moneyness' on the way down as there is no greater fool left to buy those assets at such ridiculous prices without a corresponding increase in wages which is impossible as the Chinese, Malaysians, Indians, Brazilians are willing to do the same jobs for less then a third of the cost!

ps - Just saw Harry Potter, damn it, couldn't the credit crunch wait 5 more years, I do want to see the 2 last movies! :(

VK said...

and here's the kicker - it doesn't matter what level of government debt you start out with - it can all be monetised.

It can indeed but not without being massively destructive. Can you explain using the current balance sheet of the US banking system how this is possible? I crunched the data above. Increasing reserve requirements as I showed is hugely deflationary at large debt levels. While simply printing means that the creditors will run away leaving the country 'isolated'.

Hombre said...

skep asks... "What you may ask, happens at the end of that, when all debt is monetised, and credit is history, or even, when the availability of credit gets too scarce to sustain the modern economy?"

My take... Localization of goods and services will either have become a reality or catastrophe(s) will have made it all a moot point!

Greyzone said...

I'm sorry Skepticus but you can't have it both ways. If that money goes out to build infrastructure, etc., then it is going out in the form of salaries, etc., or the work doesn't get done. People will spend that money, driving up prices due to the increase in money supply. You keep waving magic wands and pretending that the money won't go into the economy. You act like everyone is going to sit on their hands, refusing to buy and sell even though their pockets are now flush with cash via your own mechanism.

That's rather inconsistent with human behavior and you've failed to explain why this inconsistency in human behavior will occur other than with name calling, bait-and-switch arguments, and simply ignoring the questions repeatedly.

In short, your story smells bad.

Anonymous said...

Greyzone the evidence is to be found in japan. What has transpired there is exactly what I'm talking about. The stimulus spending props things up for a while, but due to underlying deflationary forces, people are still saving more than they spend.

As the population ages the propensity to save goes up and up which kills veolocity. The multiplier effect of the stimulus money is therefore very low, probably less than one.

All the stimulus/monetisation does is to keep price levels at a workable level for a period of time and prevent the entire system becoming insolvent.

Money can be seen two ways - either as a credit-debt paticle pair created by a banking system which give off periodic 'interest particles', or as a simple monetary token like a gold coin.

Monetisation turns the former into the latter, with the latter then getting hoarded, necessitating the further transmutation of debt money into debt-free money. However the authorites have to be careful and ensure the level of monetisation lags someway behind the de-leveraging gap just in case a strong temporary recovery blows the system up. Hence the wwww shape of the stagnation period.

Either you belive in powerful deflationary forces or you dont. I do believe in theam and agree they will eventually win. You seem to favour the emergence of sudden strong demand for investment capital whenever a bit of monetisation takes place.

Anonymous said...

One more thing - the japanese could have raised bank reserves as they went about turning debt money into high powered money and it would have made no difference to the outcome in japan at all.

Now they chose not to do that and what happened is all those high powered yen got lent out abroad, and caused inflation abroad.

Because no-one in japan wanted to borrow yen, raising the reserve rules to protect the value of the yen abroad would have made little difference to Mr and Mrs Watanabe at home, as long as the reserve requirements were set just under the point at which they would damage existing domestic demand for credit.

What I'm showing is not a business-as-usual proposal, simply the logic by which stoneleigh's scenario will be avoided, although over this period I'd still expect a mild deflation to take place for the reasons I outlined.

thethirdcoast said...

I have zero formal financial background, so please bear with me during this comment.

Greyzone stated:

Question, let's assume government does print up all this cash. If it simply sits in the reserves of banks as you argue there is no velocity to this money, it is doing NOTHING, and there is no economic activity from it. No effect and therefore no recovery.

Isn't this essentially what has occurred with the TARP (bailout?) funds? For the most part, aren't the TARP recipients hoarding the bulk of the aid in the sacred cause of boosting their reserve ratios?

Meanwhile, aren't the bailed out banks telling the Main St. businesses that were reliant on lines of credit and loans, to put it in the words of Roberto Duran, 'No mas!'?

Doesn't that basically immediately doom those businesses without a cash hoard or steady cash flow?

I'm asking these questions because my company ran out and blew its cash hoards on a shiny new acquisition in March. Near term cash flow is also looking unsteady.

My firm is fairly large, but smaller than its main competitors so the credit situation is unclear. I would guess that we are probably not deemed, "too big too fail," by TPTB.

Anonymous said...

All those expecting monetisation to result in major western economys turning into zimbabwe within the year need to watch this video in which hugh hendry, a very smart man indeed, takes down an inflationist of the exact sort which all you so called deflationists inexplicably seem to mutate into when monetisation is mentioned.

Not only does he state he'll keep buying UK bonds, he also advocates at the same time they should print more money. Is he mad, or simply seeing the future far more clearly than most?

P.S. VK I hope my posts above answered some of your questions.

jal said...

What do you think J6P is thinking?

The gov. is telling us that the worst is over, the mainstream news medias are reenforcing the message, the stock market is going up and the investment advisors are saying the worst is over.

A few bloggers are saying "The sky is falling".

J6P is going to believe the mainstream media.

Those unemployed have just got to wait a little bit more and they will find a job.

Those that are employed will breath a sigh of relief and charge something on their credit cards.

All of the "lawmakers" are going to make new laws and everything will be fine.

(Please turn off the fan, something is about to hit it)

Frank said...

@VK The last two Harry Potter movies are already in production. Given the popularity of escapist entertainment in hard times, they'll get released. It's not like they don't have cash flow right now after all.

Brunswickian said...

takes down an inflationist of the exact sort which all you so called deflationists inexplicably seem to mutate into when monetisation is mentioned.

I think septicus has had more than his fifteen minutes.

Do not feed the troll.

Hombre said...

Jal 6:23

"...the mainstream news medias are reenforcing the message..."

I just witnessed that many times over on the Indianapolis local channel 13 news. "recession has bottomed" ... " Things can only get better now" ... etc.

And such extravagances as this "...Westfield to build 1.2 billion dollar sports complex!"

Now Westfield is a suburb of Indy! And yes, it's billion, not million!

To play ball! Twilight Zone episode "Idiot Indy" !

Greyzone said...

I don't find your hand waving to be convincing, Skepticus. And I am not the one calling for tens of trillions of dollars in monetization - you are. So don't pretend that this is my position. It's your position. Further, it's not a "least little bit" of monetization either. It would be the single largest monetization in the history of the world. Nothing like playing fast and loose in order to try to win points, eh, Skepticus?

You have also continued to ignore questions I have posted and instead give juvenile answers and waved your hands implying your knowledge of all this exceeds that of every other poster here at this blog. No dice, sir.

Your story still smells bad.

suicide kitten said...

Do not feed the troll.

Finally somebody is trying to look at the deflation story from another angle and he gets called a troll! Scepticus, please keep posting here, you make the comments much more interesting. I am not sure I buy your story - yet - but it makes a good argument.

End of the day, all this is untried stuff, god knows where it would lead to.

Allahu A'alam!

Anonymous said...

Entertainment in a depression becomes very important.

However, this could also be local entertainment, not just Hollywood stuff.

Support your local entertainers, they are vital to keeping the flame of local culture alive to.

Hombre said...

anon 6:58

True, support local intertainers (especially since I am, or have been one.) But are there no limits?

$1,500,000,000 for a sports stadium with unemployment skyrocketing?

(I just re-checked and it's a proposed 1.5B )

Anonymous said...

The arm chair pipe dreams of Scepticus are about as likely to actually be tried anywhere in the reality based community as Flying Monkeys would be shooting out our collective butt.

They belong in the 'how many Angels can dance on the head of a pin' category.

They have zero practical chance of even being test balloons, much less test projects.

The system is rotten to the core.

It is like a horror show version of Matryoshka dolls but they're all really little Freddy Kruegers in drag as bankers.

We don't need anymore 'if we could ride on the head of a beam of light, we could do all these super cool things...'

Way, way beyond realistic solutions in the climate of the Gangster Nation that the U.S. has devolved to.

The mis-investments of American kulture run as deep as giant squid. Nothing will work right very shortly.

I was in an ice storm in the NE awhile back and everything went to hell very quickly. If it had lasted one or two months, most people would have had to abandon their freezing cold, powerless dwellings.

Imagine an Ice Storm from hell, going on for years.

There, you've got the Preview of Coming Attractions.

team10tim said...

Scepticus, VK, Greyzone,

I just can't resist any longer. There is a much easier way to combat deflation. Counterfeiting. The govenrment needs to print money and get that money into circulation, but is constrained by the bond and currency markets. What it needs to do is print, but without letting anyone know that it is printing.

The CIA can set up lots of front businesses to buy goods and services from small businesses all over the country. This would naturally lead to inflation which is highly desirable in helping to clear debts.

The US rebounds and leads the world out recession, increasing our economic dominance and restoring credibility. Everybody wins as long as no one ever finds out. Cheating is after all what we are best at.

jal said...

Hi Coy Ote!

Even CNN played down Barofsky’s report of 24T as if it was no problem because all that money will not or could not be due all at once.

SEEEEE! J6P has nothing to worry about.

The joke is on the finance/bankers
J6P is broke and you cannot get blood out of a stone.
He doesn't give a dam about the bankers.

(He's not worried he knows how to use a gun to get food.)

jal said...

@ team10tim
Great idea! Do you think that they could buy new cars and use them for target practice.

jal said...

I’ve got a better idea!

I’ll start a company to build wind farms. Borrow the money from the gov. Build the windfarms. Go bankrupt. The gov. would seize the farms. Sell the farms to the coal electric generating power plants.
Then, the CO2 can keep getting produced because they would have the “green credits”. The banksters would love it. Think of the many ways that they would get a “cut” in all those financial transactions.

bluebird said...

Coy Ote - If the people building that $1.5B sports complex don't default, perhaps they will be putting unemployed people back to work.

We have lots of building in SW Ohio, between Cincinnati and Dayton. Huge new mall of discount stores, new hospitals, development of a new interchange due to propose buildup of even more retail stores and business, more building at colleges and universities. Spouse and I look at each other and wonder when it's just going to stop.

team10tim said...


I think you are right about the private enterprise running the, ahm, hot money enterprise. Government just can't be trusted.

Wind farms is also a good idea. I have no objections just as long as giant oil companies end up owning them.

snuffy said...


Good quality solar stores indefinitely. [Store in dark place]Concentrate on careful storage of high-quality goods ,seed especially,[if you intend to stay in England.]If you wish to stay mobile,use those pots on a "bunch" of full dwarf trees.You can keep them potted indefinitely...but will get the best yield after getting in the ground


Find those with a similar mindsets now, as small communities "tribes"will form quickly as this situation deteriorates.Look to the oldest members in the neighborhood as they have been thru the hard time THERE..and know things...

Good good luck can be stronger than the best preps...


Earnest Lux said...

Sadly, the first article seems to encapsulate the mentality of our managers.

Hombre said...

Jal - You bet, it seem likely that J6P will get poor, then get hungry, then get mean!

Bluebird - I hope there is at least some permanent jobs resulting from some of these projects, but I wish they were building a rail line, wind farm or a solar array, etc. with the billions!

By the way, I love the bike trail from Xenia to Cincy along the Little Miami. Good ride!

Arnold said...

Looks like China will get letting go of the dollar sooner than people think.

Anonymous said...

Did anyone else see Ben Bernanke define inflation in terms of price and not of money supply?

It occurred when he was being questioned by Ron Paul.

Anonymous said...

I don't usually post, but Skep's example with Japan is just begging an obvious answer which hasn't been supplied.

This isn't Japan. Japan had an export economy, exporting to a world where there was demand for its products. That's no longer the case. We'll have to see how they do, but so far it doesn't look pretty.

And the U.S. can't rely on exports to prop it up.

If you're looking to Japan for an example, it doesn't apply any more. Not even to Japan.

Ilargi said...

New post up.