The U.S.’s Least Capitalized Big Bank: The Fed – WSJ - Last year the Federal Reserve pushed the nation’s biggest banks to beef up their capital levels to ensure that they could escape a worsening crisis with common equity of at least 4% of their total assets. Today, the Fed put out financial statements on itself and revealed that its own capital level is below that stress-test level. At the end of 2009 the Fed had $51.3 billion in total capital on $2.3 trillion of assets, for a capital ratio of 2.3%. Is this something to be alarmed about? The answer is yes and no. It’s not, because the Fed makes plenty of profits on the loans it makes to banks and the securities it holds. Still there are reasons to be concerned about the Fed’s paper-thin capital position. It has a more risky portfolio than it’s ever had before, including $1.25 trillion in mortgage securities that could lose market value if interest rates rise or if it has to sell them quickly. A 4% loss on that portfolio would equal almost all of its capital.
US Fed's balance sheet dips in latest week - The U.S. Federal Reserve's balance sheet dipped slightly in the latest week, Fed data released on Thursday showed. The Fed's balance sheet -- a broad gauge of its lending to the financial system -- decreased to $2.320 trillion in the week ended April 21 from the record $2.322 trillion in the week to April 14.After declining early last year, the balance sheet had been accumulating mass amid the Fed's asset-buying program, or quantitative easing, aimed at holding down credit rates broadly while the economy recovered from the worst recession in 70 years. That effort was led by the Fed's purchases of mortgage-related securities, the conclusion of which at the end of March is expected to stabilize the balance sheet. For a graphic illustration of the Fed's balance sheet double click on: http://link.reuters.com/cej98j
A Look Inside the Fed’s Balance Sheet — 04/23/2010 Update Assets on the Fed’s balance sheet contracted a bit in the latest week, falling to $2.320 trillion from $2.321 trillion. Last week’s level marked a record high as the central bank wrapped up its purchases of mortgage-backed securities. Its long-term debt portfolios were little changed since the program came to an end. Meanwhile, the Fed’s emergency programs continue to shrink. Direct bank lending has dropped to its lowest level since the first-quarter of 2008 before the worst of the financial crisis hit, but it remains elevated compared to nonemergency levels. In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed. See a full-size version.
US Fed Total Discount Window Borrowings Wed $78.42 Bill… The U.S. Federal Reserve's balance sheet contracted slightly in the latest week, while discount-window borrowing by commercial banks posted another decline. The Fed's asset holdings in the week ended April 21 slipped to $2.341 trillion from $2.343 trillion a week earlier, the Fed said in a report released Thursday. Total discount window borrowing fell to $78.42 billion on Wednesday from $ 79.33 billion a week earlier. Borrowing by commercial banks through the Fed's discount window slid to $6.11 billion on Wednesday from $6.36 billion a week earlier.U.S. government securities held in custody on behalf of foreign official accounts posted a modest gain to $3.052 trillion from $3.039 trillion in the previous week.Treasurys held in custody on behalf of foreign official accounts as of Wednesday climbed to $2.267 trillion from $2.255 trillion in the previous week.
Taxpayers Got Even Bigger Windfall From Fed - NYTimes - Taxpayers got a record $47.4 billion last year from the Federal Reserve, new documents released Wednesday showed. The payment to the Treasury Department is slightly higher than the $46.1 billion first estimated in January. The new figure is based on more complete information contained in audited financial statements for the Fed's 12 regional banks and related units. The amount handed over to Treasury last year is $15.7 billion more-- or a 50 percent increase -- from 2008, the Fed says. The bigger windfall to taxpayers reflects gains from the Fed's efforts to fight the financial crisis and revive the economy. Critics have worried that the Fed's actions could put taxpayers at risk by reducing the amount turned over to Treasury coffers.
Fed Hands $47.4 Billion to Treasury: If Only the Deficit Hawks Knew - - The NYT reports on the Fed handing $47.4 billion in profits to the Treasury. This event should have gotten more attention. The $47.4 billion in profits from the Fed affects the budget in the same way that raising $47.4 billion from taxes or saving $47.4 billion with spending cuts would affect the budget. However, the Fed neither raised taxes nor cut spending. It printed money.The reason why this is important is that the Fed is now printing large amounts of money and can print more to support the government's deficit during this downturn. The government does not need to raise taxes or cut spending to pay for programs like unemployment benefits or aid to state to and local education. It can simply print money. While in principle there is a limit to its ability to print money, that would only come after the economy was back near full employment and further increases in demand threatened to cause inflation. However, the economy is nowhere near this point today.
The Fed's Balance Sheet - The Fed released its financial statements for 2009 yesterday, with a New York Times business section story here. The transfer from the Fed to the Treasury increased 50% over 2008. One might think that the dramatic interventions by the Fed would surely have caused losses for the central bank, but obviously that is not so. In the New York Times piece, there is a quote from Vincent Reinhart, formerly at the Fed, who says “The Fed can only play this game as long as the public is willing to hold its liabilities,” said Mr. Reinhart, now a scholar at the American Enterprise Institute, a conservative research organization. “If it tried to increase its balance sheet tenfold, say, the public would be unwilling to hold those reserves. You’d get dollar depreciation and inflation.” Wrong. As I discussed here, the Fed can successfully induce the banking system to hold large quantities of reserves by setting the interest rate on reserves appropriately, with no inflationary consequences.
Bernanke Admits Creating $1.3 Billion Out of Thin Air - Fed Chairman Ben Bernanke admitted the central bank created $1.3 trillion out of thin air to buy mortgage backed securities. This shocking admission came from the Joint Economic Committee hearing on Capital Hill last week. I was dumbfounded when I saw Bernanke shake his head in the affirmative as Representative Ron Paul said, “Well, where did you get the money? You created this money. So you did monetize debt, and that went into the banking system.” I was amazed he admitted this. I looked up the original hearing on C-Span to make sure the clip was not edited. It was not. What is even more shocking is I could not find a single mainstream news agency that covered this revelation.
The Federal Reserve: No exit - The Economist - Despite internal dissent, the Fed plans to maintain ultra-easy monetary policy AMERICA’S GDP is growing, employment is finally expanding and the stockmarket is buoyant. Yet one thing has not changed: the Federal Reserve’s monetary pedal remains firmly pressed to the floor. For more than a year it has kept its short-term interest-rate target near zero while pledging to keep it there for an “extended period”. It has also bought $1.7 trillion of long-term bonds, primarily mortgage-backed securities (MBS), to keep long-term interest rates down. That is unsettling some inside the Fed, fuelling speculation it will soon signal an exit from that ultra-easy monetary policy, perhaps even by altering its “extended period” commitment when its next two-day policy meeting wraps up on April 28th.
Federal Reserve poised to keep rates low - WaPo - The question of when they will change course and start raising rates has immense implications for the economy, and people in financial markets have been parsing every hint from the Fed on when its stance may change. The parsing may not be necessary: The Fed has laid out the conditions that would lead it to reconsider its low rate, and those criteria clearly point toward no hikes anytime soon. Moreover, by laying out the Fed's three main criteria, the central bank has offered a road map that tells when interest rates may be set to rise. The Fed's policy of ultra-low interest rates is driven by three economic conditions, spelled out in its recent policy statements: "low rates of resource utilization," or an economy that is producing less than it would if fewer people were unemployed and fewer factories were idle; "subdued inflation trends," meaning that prices are rising very slowly; and "stable inflation expectations," meaning that Americans who are making financial decisions aren't assuming prices will go up rapidly.
Fed’s Plosser Supports Ending Emergency-Lending Power -The president of the Philadelphia Fed wants to end the emergency lending powers most central bankers think were key to fixing financial markets during the darkest days of the market meltdown. In a letter to senators published on the bank’s Web site Tuesday, Federal Reserve Bank of Philadelphia President Charles Plosser outlined his preferred path for the central bank as Congress mulls reforming the financial regulatory system. Other Fed officials have also written to Congress about the issue, seeking to influence a process that could see big changes in how the Fed interacts with the banking system, should some sort of reform pass.
Bank of Canada’s Rate-Increase Signals May Provide Lessons for Fed -The Bank of Canada signaled it could raise interest rates as soon as June, in a surprise shift in stance that underscores how Canada has pulled ahead of peers like the U.S. in its economic recovery. Though the U.S. Federal Reserve has signaled no inclination to begin raising interest rates any time soon, Fed officials are likely to watch Canada’s move closely for another reason: To better understand the impact of a central bank’s words on markets. During the crisis, the Bank of Canada and the Fed chose similar ways to communicate their plans to the markets, with Canada making an explicit commitment to keep rates low until a set date and the Fed offering vaguer guidance that it expected to keep rates low. Fed officials paid close attention to Canada’s approach and are likely to watch market reactions carefully now that its words have changed.
FRB: FEDS Abstract 2010-20 Financial Statistics for the United States and the Crisis: What Did They Get Right, What Did They Miss, and How Should They Change? Full paper (361 KB PDF) | Full paper (Screen Reader Version)
Keep the Fed on Main Street - By THOMAS HOENIG - LAST week, I visited Santa Fe, N.M., and spoke to one of America’s many Main Streets: more than 300 small-business owners, real estate developers, artists, bankers and other citizens. A good number of them, experiencing the fallout of the financial crisis and feeling the stress it put on New Mexico’s banks, were angry and frustrated. You see, New Mexico’s financial institutions were not too big to fail. They were never invited to meetings and told to accept financing from the Troubled Asset Relief Program. As a result, banks and residents of Santa Fe, like those in towns all over Middle America, have struggled mightily through this recession. It was clear that, like politics, the effects of financial crises are mostly local. This explains why it undermines the very foundation of our economic system when the government decides that a financial institution is too big or too powerful to fail.
Fed Paper: Regulators Should Act Like Intelligence Analysts - Regulators should adopt a more dynamic approach in using economic data in order to help prevent a new financial crisis, a U.S. Federal Reserve paper said Monday. The paper, which was co-authored by Fed Vice Chairman Donald Kohn, argues that combining macroeconomic data showing trends like the large rise in household debt with specialized data, such as borrowers’ solicitations showing the rapid decline of underwriting standards, may have helped supervisors spot the crisis earlier.Supervisors should act like intelligence analysts, who begin by looking at grainy satellite images, which the paper compares to aggregate data. The supervisor should then follow up by bringing other resources to better understand the full picture, the paper says.
Falling U.S. money supply creates downturn fears - The money supply in the United States is doing something that almost never happens: it's shrinking, after taking into account inflation. Similar episodes in the past have usually been scary times for investors. Declines in the amount of money in circulation have coincided with recessions, and some analysts looking at the current trend say it is a harbinger of trouble. Despite signs that the U.S. is in recovery, they worry that the money supply numbers indicate the economy remains vulnerable to the feared double-dip downturn, or is close to experiencing deflation. While not everyone is so gloomy, some economy watchers say the money supply trend still bears attention because it indicates the U.S. credit system isn't yet back to full health. This suggests the business upturn under way is going to be muted, unlike the sharp rebounds that normally accompany recoveries from steep recessions.
US Dollar Money Supply Underreported - As the financial crisis has unfolded over the last two years, the Federal Reserve has been responding in a variety of unprecedented ways. Therefore, it is logical to assume that these never-before-used actions have altered long-established ways of viewing things. One area that has been impacted is the US dollar money supply.The quantity of dollars in circulation is being underreported by relying upon the traditional and now outdated definitions used to calculate M1 and M2. These ‘Ms’ are calculated and reported by the Federal Reserve based on the following guidelines that identify the several different forms of dollar currency used in commerce:
Where is the U.S. Currency? About $450 billion or two-thirds of all U.S. currency notes are held outside the United States according to a 2006 U.S. Treasury report. This effectively amounts to an interest-free loan for the United States as it has simply exchanged at some point in the past ink-stained paper for $450 billion worth of goods and services. To boot, the purchasing power of the dollars has eroded making the eventual repayment of these interest-free loans even easier. Of course, if the dollars are never returned to the United States then it is an even better deal for the United States. This is just one of the perks to having the main reserve currency of the world. So which countries in the world have been so generous to the United States? Here is a table from the Treasury report that accounts by country for about $250 billion of the total U.S. currency notes held abroad (click on figure to enlarge):
China Cuts U.S. Treasury Debt Holding by 1.3% - CBS - China trimmed its holdings of U.S. Treasury debt 1.3 percent in February, the fourth consecutive decline. Those reductions are raising concerns that the U.S. government could face higher interest rates to finance its soaring budget deficits. The Treasury Department said Thursday that China's holdings dropped $11.5 billion to $877.5 billion. That still left China as the largest foreign holder of U.S. Treasury debt. Japan retained the No. 2 spot with $768.5 billion, a drop of 0.4 percent from the January level. Net foreign purchases of long-term securities, a category that includes both government and corporate debt, totaled $47.1 billion in February. That compared with an increase of $15 billion in January. By contrast to the declines in holdings of Treasury securities by China and Japan, holdings by Britain jumped 12.2 percent to $321.7 billion. Hong Kong also recorded a large increase of 4 percent to $152.4 billion.
IMF Says Rising Government-Debt Levels Pose Biggest Risk to Global Economy (Bloomberg) -- The International Monetary Fund cautioned that rising government debt has replaced financial industry stress as the biggest threat to the global economy and cut its estimate for asset writedowns by 19 percent. Banks reduced the value of loans and securities by $2.28 trillion since 2007, two-thirds of which had been realized by the end of 2009, down from the IMF’s October estimate of $2.81 trillion, the fund said today in its Global Financial Stability Report. About 39 percent of the writedowns were in U.S. banks, 29 percent in the euro area and 20 percent in the U.K., the IMF said. While the global economic recovery has “gained steam” and risks to the financial system have subsided, concerns are rising for sovereign debt issued by advanced countries that bailed out banks, the IMF report said. Governments need “credible, medium- term” plans to reduce deficits and some nations need to do more to revive the flow of credit and boost growth.
Jim Rickards: Possible Run on the Gold Bank, Fed Insolvent, Currency Endgames in US Debt Crisis- The interview is refreshing because Mr. Rickards lays his thoughts out clearly and without excessive jargon. I found his rationale for China's desire to increase its gold holdings to be intriguing. The price objective of $5,000 - 10,000 is somewhat arbitrary, but directionally correct if it is not accompanied by a reissuance of the currency, which I think is much more probable. Essentially it works out to be the same, since the new currency is likely to be a factor of 1 for 100 exchange for current dollars. If this seems outlandish, it should be kept in mind that this is not all that far removed from the fairly recent post-empire experience of the Soviet Union. Jim Rickards audio interview on King World News
What Happened to Financial Armageddon? - I'm talking about gold-hoarding-living-in-caves style financial armageddon. Has it really been averted? A few worthy souls are still carrying the armageddon torch. For instance, Marc Faber thinks that our governments will bankrupt and expropriate us and that the whole system will collapse. He believes the crisis has merely been postponed by all the government intervention. Then there is Louis Bacon, head of Moore Capital that is joining George Soros in his expectation of a breakdown of the European Monetary Union. Also, the FT's chief economics commentator, Martin Wolf, in yesterday's paper discussed the "Challenge of halting the financial doomsday machine," which was accompanied by some fairly sobering graphs showing the explosion in financial sector assets in the UK and US, as well as displaying how much the fate of the financial industry was now concentrated in a few hands. So which is it? Global economic V-shaped recovery? Or government reinflation by money printing leading to a much bigger bubble which is bound to burst later?
Extend and Pretend - U.S. Cash Crunch? - The US Government is caught in a cash vise and is being squeezed between too slow a rebound in tax revenues and the limitations on how quickly it can realistically take its funding requirements to the US Treasury auction. The US Treasury was saved in March by what the government reports as “proprietary receipts”. Those receipts require an explanation that is not well publicized since it begs the question of what happens next month without the $117 BILLION journal entry.The March cash management numbers from the US Treasury’s Financial Management Service are alarming and in my estimation have become perilous. The economy is simply taking much too long to recover which is affecting urgently required tax receipts.
Banks May Not Be Lending, But They Are Buying Treasurys -Surprisingly strong Treasury auctions in March had help from banks, which normally stay away from such events. Banks snapped up $5.7 billion of the total $34 billion auctioned in 10-year notes and 30-year bonds, providing demand for auctions that many analysts thought would flop. The auctions occurred as inflation fears began to grow and amid signs that investor appetite for the massive supply of government debt was beginning to wane. But there's also another less-obvious reason banks could be stepping in to the Treasury market: A type of tacit quid pro quo with the Federal Reserve to keep short-term rates low by helping the government finance its debt through Treasury.
The Whole Earth is Owned; Debts Net Out to Zero - At the end of the day, the world as a whole is owned 100%. There are people with short positions, calls, puts, etc., and even things more exotic. Those are noise around the real economy that produces the goods and services of our world. Beyond that there are debt transactions in order to own assets, or purchase products and services. But every debt is an asset to another party, and cancels out across the globe. There are no debts on net in the world. Does that mean that debts are irrelevant? No. Debts are relevant for two reasons: 1) Highly indebted economic systems are inflexible, because there are too many fixed claims. They are far more prone to crises. 2) The debt of financial companies is very important because they often borrow short-term to finance longer-term assets. In the current crisis, repo funding is the great example of this.
Why the U.S. Can't Inflate Its Way Out of Debt - A MSN Money article published on Wednesday titled, "Why Inflation Would Be Good For Us," declares:… a quick bout of higher-than-normal inflation would lower the nation's debt in real dollars, bailing the government out of the debt threat. That means we could avoid Draconian tax increases or big spending cuts, both of which would be politically unpopular and could scuttle the economic recovery.Sounds neat! Too bad it's fantasy thinking. The timing of this article was unfortunate. Just 18 hours after it was published, Fed chairman Ben Bernanke sat before the Joint Economic Committee, which asked him point blank about inflating away debt. His answer gets to the heart of the matter: "Given the structure of our debt, [inflation] wouldn't even help reduce the debt ... given that so many of our obligations are indexed."
Deflation Is Not On The Menu - A constant debate rages over whether we will ultimately head down an inflationary path or get sucked into a deflationary whirlpool. In fact, the most common question I am asked at my public talks is whether the future will consist of inflation or deflation. So I thought we'd spend a bit more time on the subject here. While I can't tell you which will happen for certain, I can tell you that the inflationary path is infinitely preferred over deflation by our fiscal and monetary authorities. Given their druthers, we'd most definitely head down a path of inflation. While a renewed bout of deflation may be in our future, it is simply not among the acceptable range of policy options.
Can’t Cut Spending? Look Around the Globe Tyler Cowen, Commentary, NY Times: America's long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, we’ll likely see a combination of revenue increases and spending cuts. And we’ll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high. ... Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases. The most potent way to add revenue is to impose a value-added tax; politicians like the revenue, and voters don’t always notice the burden. A move toward a V.A.T., however, also brings price inflation, a big increase in the tax-collecting bureaucracy and the emergence of favored sectors with exemptions or lower rates. Though we may well end up with a V.A.T., it isn’t obviously the best option.
"Government Pay" "This is a directory of links to federal, state, county and municipal government salary and employee name databases. These searchable databases of salaries, pay, overtime and compensation of government workers are compiled by news organizations, open government advocates and government agencies." Pay at a number of colleges and universities are collected at one site, here.
Get Ready for More Taxes - There is now widespread agreement that at some point the federal government must stop piling on the federal debt. On the campaign stump, political candidates all agree. But would a politician dare openly to advocate cutting specific programs – for example, agricultural subsidies for the rural states whose voters have disproportionate voting power, or cuts in military spending that would kill jobs in particular states, or spending on Medicare, which in many parts of the country has been a major source of employment?Now, if it is politically impossible to cut spending — as it has been so far — then taxes will have to be raised sooner or later. So, my friends, get ready for the inevitable: Before this decade is out, whether you like it or not, the United States will have a value-added tax, just as they have long had in most of the world. The VAT will not be a substitute for the income tax (which, ideally, I wish it would be), but a complement to it, to supplement what can be had through income taxes.
Great Tax Expectations - NYTimes - More than 6 in 10 Americans expect their taxes to go up in the next year, according to Gallup. Even a majority of low-income taxpayers foresee an increase in their taxes: Here’s the important question in deciphering this poll: Are Americans are expecting to pay more taxes because their tax rates will rise, or because their taxable income will rise as the economy recovers? Or both?
Value-Added Taxes: A Primer - In recent weeks there has been lots of buzz — much of it preemptively negative — about value-added taxes. This post presents a short primer to help you get up to speed if you’re unfamiliar with this policy tool. A value-added tax is a type of consumption tax. In short, it is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Even though it is collected in stages from different producers, economists generally think the cost of the tax is passed along to and primarily paid by consumers, just like a regular retail sales tax would be.Here is a more in-depth explanation of how these taxes work. It has a hypothetical example of how it might be levied in the production of a dress you might buy at Macy’s.These taxes may sound unusual and exotic, but they are already being used in every other developed country and most developing countries. You can find a map of countries with VATs here.
The VAT is not the only simple consumption based tax - In a post on Friday Bruce Bartlett wrote: That being the case, it makes sense to raise those revenues, which will be raised in any event, in a way that is least damaging to the economy. Hundreds of years of analysis show that a broad-based tax on consumption is the best way to do that and a VAT is simply the best form of such tax ever invented. No economist I know of denies this. Well, then Mr. Bartlett doesn't know of many economists, or a very wide range. First, the vast majority of economists expert in this area (real economists with PhDs) will tell you that the least economically harmful way to tax is to tax negative externalities and activities, like pollution and cigarettes. Here the harm from the tax is negative. The tax does good in addition to raising money; it increases efficiency and total societal utility. Here's an example of an obscure economist few have heard of speaking in favor of externalities taxes, Nobel Prize winner Paul Krugman.
The Senate wants higher income taxes in lieu of a VAT? – Rebecca Wilder - I don't normally do politics, but this is just ludicrous. Senator McCain drafted bill H.R.4851 that was actually voted on - in favor of, no less - to do the following: It is the sense of the Senate that the Value Added Tax is a massive tax increase that will cripple families on fixed income and only further push back America's economic recovery.Call me crazy, but by rebuking the Value-Added Tax, isn't the Senate effectively confirming support of higher personal income or corporate income taxes? I'm not a professional bill-sifter; but since taxes will (eventually) rise - the merits of which will not be discussed here - this is the only conclusion I draw. The mix of taxes does matter, something about which Stephen Gordon has written many times, so I will cite him directly:
Conservatives and the VAT - The Senate resolution seems to be part of a full-court press by conservatives against the VAT. In recent days, the Wall Street Journal editorial page, conservative bloggers, and columnists such as George Will have all written broadsides against the idea. Curiously, the left, which also usually opposes a consumption tax, has been fairly quiet in this round of overheated rhetoric. Conservatives make two big arguments against the VAT, neither of which makes a lot of sense. The first is that it is a money machine that will suck trillions of dollars into the federal treasury that liberals will immediately spend. Now, it is true that if you give liberals trillions of dollars, they probably would spend every penny. But why would they spend consumption tax dollars more enthusiastically than income tax dollars? Well, goes the argument, they’d do so because people would not know they are paying the VAT and thus would blindly accept rate increases. Really? Europeans certainly complain about it enough.
Why a VAT? Give Me a Better Way to Raise Revenue -Lori Montgomery’s story in today’s Washington Post highlights the tax-side version of how unreasonable the discussion over fiscal responsibility has become in this town:... Why do we have taxes? You mean they’re supposed to actually raise revenue to buy public goods and services, and to pay for subsidies–via tax breaks or direct spending–on certain (ideally socially-beneficial) activities? If you don’t like the idea of an add-on VAT, then give us some better tax policy ideas to actually raise revenue–not just more ideas on how to lose revenue. “Better tax policy” does not always mean “lower taxes.”
The Case Against the VAT - In my Forbes column this morning I respond to various arguments against a value-added tax. In a previous column, I explained why I think it would be desirable for the United States to adopt a value-added tax. In a nutshell, I think it's impossible to cut spending enough to forestall a fiscal crisis, that taxes will eventually be raised a lot, that it would be economically debilitating to raise income tax rates as high as would be necessary to get the necessary revenue, and that a broad-based consumption tax such as a VAT would be much less damaging to the economy than very large budget deficits. Today I want to look at some of the arguments against my view. Some are serious, but many are not; they're just straw men created solely to obfuscate the issue. I will try to deal with them in order of seriousness, from least to most.
Obama Leaves Value-Added Tax on Table - CBS - President Obama suggested Wednesday that a new value-added tax on Americans is still on the table, seeming to show more openness to the idea than his aides have expressed in recent days. Before deciding what revenue options are best for dealing with the deficit and the economy, Obama said in an interview with CNBC, "I want to get a better picture of what our options are." After Obama adviser Paul Volcker recently raised the prospect of a value-added tax, or VAT, the Senate voted 85-13 last week for a nonbinding "sense of the Senate" resolution that calls the such a tax "a massive tax increase that will cripple families on fixed income and only further push back America's economic recovery."
Mortgage Deduction-Americas Costliest Tax-break - While there's no way to stabilize U.S. debt without making tough choices on the tax and spending sides of the ledger, some sacred cows are more sacred than others. And the mortgage-interest tax break is still deemed untouchable. Between 2009 and 2013, the government will lose out on nearly $600 billion because of it, according to the Joint Committee on Taxation. Case in point: a new bipartisan tax reform proposal that has been gaining currency in policy circles. Co-sponsored by Sens. Ron Wyden, D-Ore. and Judd Gregg, R-NH, the proposal would simplify the income tax system, streamline the numbers of credits and deductions, and lower the corporate tax rate. But it doesn't touch the mortgage deduction.
Graph: Financial Industry Profits - Needs no comment from me. --Kalpa
Financial reform: First, define the problem - The Economist I HAVE been meaning to summarise my thoughts on financial regulatory reform in the wake of the Hyman Minsky conference on same. I have to say, it has left me with a sense of resigned cycnicism. I'll get to details in a moment, but I think that the most important thing to understand about financial reform is that its dynamics are simply too complicated to lend themselves to good policy. As Paul Krugman said during his talk on Thursday, financial reform is totally different from health care reform. There the crises are clear—coverage and costs—and the policy positions were clearly defined and coherent. On financial reform, no one really agrees about anything. No one can agree on the underlying causes of this latest crisis, or on why the world managed to avoid crises in the postwar decades, or on what steps should be taken to make financial systems more secure. While I think there are good regulatory ideas out there, I'm increasingly of the opinion that if the bill that passes ends up being an effective change to the regulatory environment, it will mainly be by accident.
The Two Issues to Watch on Financial Reform, by Alan Blinder, WSJ: First, how much independence will the new agency have, especially for writing and enforcing rules? ... People who come to bury the CFPA, not to praise it, want to subordinate it to some more powerful agency. Second, and related, to what extent does the legislation create an agency focused on a single mission: protecting consumers? Opponents of the CFPA concept would rather hand the responsibilities over to, say, the Fed, where consumer protection would be its fourth most important priority—after monetary policy, financial stability, and safety-and-soundness regulation. Last, but certainly not least, watch how many institutions and financial products get exempted from consumer protection regulations. The more, the merrier for the industry—but not for the public.
Do something - I'M GOING to respectfully disagree with my colleague at Democracy in America, who writes: Besides the complicated politics, ramming the policy too quickly through carries plenty of risk. Sarbanes-Oxley holds a cautionary tale: just as you shouldn't eat while you're hungry, you shouldn't legislate while you're angry. The Senate should take its time, and the Democratic leadership should make every attempt to get real Republican support, not just pick off Susan Collins (who is looking less persuadable anyway). Acting quickly is for moments like that in which TARP was passed. Now is the time to get this right. Several points.
Six Doctrines In Search Of A Policy Regime - Paul Krugman = So: what’s the problem? Here are the views I see out there.
- Size: Our largest financial institutions have just gotten too big
- Shadows: The rise of shadow banking, institutions that fulfill banking functions but evade the regulatory regime, has undermined stability
- Opacity: We’ve come to rely on complex financial instruments that neither regulators nor the private sector
- Predation: Financial firms deliberately misled consumers and investors
- Government intervention: Public policy pushed lenders into making bad loans, especially to the poor
- Monetary mismanagement: The Fed did it by keeping interest rates too low for too long, and/or policymakers panicked in 2008 and spooked the markets
Preventing Another Wall Street Melt Down - Sizing Up Seven Key Elements of Financial Reform - In December, the House passed a 1,279-page bill to overhaul federal regulation of financial institutions. The Senate's version — which rings in at 1,336 pages — has passed out of committee and will probably soon be considered by the full chamber. What's in those thousands of pages and what are the chances that the changes will prevent another Wall Street meltdown? Here we take apart seven key areas of reform.
What's Missing from the Dodd Proposal for Financial Reform? - At the Room for Debate, we were asked "What's missing from the Dodd proposal for financial reform?" My answer reiterates things I've been saying here for quite awhile: Controlling Bubble Damage - Mark Thoma: While we should certainly do our best to prevent bubbles through legislative and regulatory changes, and to prevent other problems like fraud, legislative and regulatory remedies can never ensure that the financial sector will be free of bubbles in the future. Thus, it’s important for financial reform legislation to limit the damage that bubbles can do. An important factor determining the amount of damage a bubble can do is the amount of leverage in the financial system. The more leverage there is, the bigger the crash. For this reason, limits on leverage are essential
Alan Grayson Discloses That Dodd Bill Covertly Eliminates Already Passed Legislation Requiring Full Fed Audit - Once again we get confirmation that Chris Dodd is nothing but a paid manservant for his Federal Reserve masters, in addition to being a lame duck, whose last days in office are meant to do everything to allow the old-school Wall Street ways of endless secrecy and Fed bailouts to continue in perpetuity. As Ryan Grim points out "Alan Grayson and co-author Rep. Ron Paul passed legislation through the House that would allow the Government Accountability Office (GAO) to audit the Federal Reserve and, after a delay, release the information to Congress. It was a remarkable victory, with a populist coalition beating back the combined lobbying efforts of the Treasury Department, the Fed and Wall Street banks. The Senate has been more hostile territory for the Fed audit provision. Banking Committee Chairman Chris Dodd (D-Conn.) opposes the Grayson-Paul version, but allowed a much more restrictive audit proposal from Sen. Jeff Merkley (D-Oregon) into his bill." Why and how Dodd believes he can stand against this critical issue, that over 80% of America supports by demanding Fed transparency, is beyond any rational attempts at explanation.
Conservative Radio Silence On Financial Regulation - Yesterday I commented on the miraculous nature of the sudden revival of financial reform. One other key element in this upsurge is the intellectual disarray on the right. Conservatives do not know what to say or think about this. A few of them are calling for breaking up the big banks. A few more are following the Frank Luntz line that regulation is a big favor to Wall Street. But mostly they're saying... nothing. It's almost a non-issue at the National Review and Weekly Standard blogs.
The Bankrupt Theology of Financial Deregulation - Beyond regulatory improvements, preventing payment incentives from rewarding reckless risk taking, and building Chinese walls between originators of securities and rating agencies, we need to discover what made this crisis so difficult to predict.The International Monetary Fund is our global watchdog, and many believe that it failed to foresee the crisis because it was distracted or looking in the wrong places. I disagree. The problem is that the IMF was unable to interpret the evidence with which it was confronted. I served on the IMF Board in June 2006 when it discussed its annual review of the United States. The staff “saw” the relaxation of lending standards in the US mortgage market, but noted that “borrowers at risk of significant mortgage payment increases remained a small minority, concentrated mostly among higher-income households that were aware of the attendant risks.”
Wall Street says Washington doesn't understand finance. Well, neither does Wall Street. -"What do you get when you cross a Godfather with an investment banker? Someone who makes you an offer you can’t understand."That's from a talk Paul Krugman gave at the Levy Institute's 19th annual Hyman Minsky conference. The Economist's Ryan Avent also attended and walked away shaking his head. "I think that the most important thing to understand about financial reform is that its dynamics are simply too complicated to lend themselves to good policy," he wrote. Wall Street has gotten a lot of mileage out of the accusation that the political system simply doesn't understand how Wall Street works. And that's, well, correct. The problem is that Wall Street also doesn't understand how Wall Street works.. That was what caused the financial crisis. Bankers didn't understand the tail risk of collateralized debt obligations. Ratings agencies didn't understand the subprime mortgage market. Alan Greenspan didn't understand the risks posed by derivatives. Robert Rubin, the former co-chair of Goldman Sachs and one of Citigroup's directors, told the Financial Crisis Inquiry Commission that "all of us in the industry failed to see the potential for this serious crisis."
Racket Wars and Reform Policy - As we’re driven out into the arena for the next circus, we see that the next bloodbath on the list is “finance reform”. As always, what we need to do here is clear:
- 1. Break up the rackets completely. This can include a restoration of something like Glass-Steagall.
- 2. Ban speculative derivatives.
- 3. Real leverage limits and reserve requirements.
- 4. A Tobin tax.
- 5. A strong, independent CFPA.
Pimco's McCulley calls for money market fund reform | (Reuters) - A top executive at the world's largest bond fund said on Thursday that money market mutual funds should not exist in their current form. Pacific Investment Management Co's (PIMCO) Paul McCulley told a Levy Economics Institute conference that money market funds contributed directly to the instability of the financial system by acting as foundation for the shadow banking system. McCulley's remarks followed a similar call by former Federal Reserve Chairman Paul Volcker at the same conference. Volcker proposed money market funds be regulated in a fashion similar to banks. He called for tighter restrictions on the types of assets in which they could invest.
Dodd Financial Reform Bill: All Holes and No Cheese...Dodd himself has admitted that his bill "will not stop the next crisis from coming". In fact, the bill is wholly ineffective, failing to address the core things which need to be done to stabilize the economy. See this, this and this. As I wrote last month: Senator Dodd is trying to push through a financial "reform" which bill won't do anything to break up the too big to fails, or do much of anything at all ... For example, Dodd's bill: Won't break up or reduce the size of too big to fail banks. Won't remove the massive government guarantees to the giant banks. And won't even increase liquidity requirements to prevent future meltdowns
Schumer, a Friend to Wall St., Is Suddenly Quiet – NYTimes -After years of being a go-to guy for the elite of high finance, Mr. Schumer has embraced new legislation that would put constraints on his hometown’s leading industry. The stance has put him at odds with Mayor Michael R. Bloomberg, caused consternation among his allies at the investment houses and led to suggestions that he was putting political ambition ahead of protecting New York’s interests. “There are some on Wall Street who want me to say Wall Street right or wrong, and I’m not going to do it,” Mr. Schumer said in interview on Thursday, a few hours after Democrats brought their overhaul of financial rules to the floor. “Clearly they did a lot of things wrong,” he said. “Too many Wall Street firms had no one looking over their shoulder, and they went off the deep end.”
Sen. Ted Kaufman: 'We need to pass something'… Earlier today, Sens. Ted Kaufman (D-Del.) and Sherrod Brown (D-Ohio) introduced the Safe Banking Act, a proposal to end the too-big-to-fail problem by ending too-big-to-fail banks. The legislation sets firm size limits and capital requirements and forces banks above those limits to either shrink or be broken into pieces. I spoke to Kaufman this afternoon, and an edited transcript of our conversation follows.
"There is No Future in Actually Fixing a Problem ... The Way to Permanent Electoral Success is to PRETEND to Fix the Problem" - Not only is Congress bought and paid for by the powers that be, but politicians have a built-in conflict of interest against actually solving problems. As a reader notes in the most cynical - but perhaps insightful - summary of U.S. politics I have seen recently: This is the way of Washington. There is no future in actually fixing a problem, as that's a one election cycle boost. The way to permanent electoral success is to pretend to fix the problem, which you can run on for one cycle; let the problem occur again, which you can run on fixing for another cycle; if called out about not fixing the problem the first time, pull out the all purpose answer "we didn't go far enough"; and each "fix" makes the bureaucracy (your minions) bigger and bigger. Its all kabuki theater to keep the issue alive, get re-elected, and gain more power & money by ever expanding bureaucracy. Actually solving problems is a dead-end.
Financial Reform Bill Marks Only ‘Modest’ Step Forward - Lots of chatter about Sen. Chris Dodd’s financial reform bill floating around the blogosphere this week. Here’s a look at what three academics have to say about the issue. - Proposed financial reform legislation is missing one big aspect: effective reform for ratings agencies, University of Oregon economics professor Mark Thoma writes. The bill is a “very modest step” in right direction, but it’s missing three key aspects to help prevent another Wall Street meltdown, writes former labor secretary and UC Berkeley economics professor Robert Reich. - The proposed bill misses one main thing: “the idea of a better, more intelligent and more accountable Congress,” writes George Mason economics professor Tyler Cowan.
Resolution Authority: Safe Harbors - This is the first of a series of posts commenting on the resolution authority as it currently appears in the Dodd bill.The present draft of the bill includes “safe harbors” that excuse derivatives from the normal operation of the resolution authority – with a vague suggestion that the safe harbors might be suspended for five days while the receiver tries to transfer assets to a buyer, although no indication if termination provisions can be enforced once the derivatives are in the hands of the buyer. And the draft does not address the safe harbors already in the Bankruptcy Code, even though the resolution authority contemplates that all but the largest institutions will proceed under the Code.
Resolution Authority: Is It Constitutional - The Dodd financial services reform bill, S. 3217 would give "original and exclusive jurisdiction" over liquidation petitions for failed systemically important financial firms to a panel of three Delaware bankruptcy judges appointed by a the Chief Bankruptcy Judge for the District of Delaware. This panel is supposed to adjudicate whether a "a covered financial company is in default or in danger of default." If so, then the FDIC takes over. This arrangement strikes me as having (at least) two potential Constitutional problems.
Resolution Authority: What's Wrong With the Republicans' Argument - The Senate Republicans are arguing that resolution authority, including a $50B resolution fund, would institutionalize bailouts. Implicit in this argument is the belief that without such resolution authority or fund there would not be bailouts. This is a demonstrably false position. There is no way to credibly commit to not having bailouts. Our current system is to have bankruptcy/FDIC as a default resolution system and bailouts as need be. Creating resolution authority is hardly going to mean that there will be bailouts where there were none. We already have bailouts. Exhibit 1: the TARP, which was passed with the votes of 33 Senate Republicans (including Mitch McConnell, who has taken the lead in making this silly argument against resolution authority).
Resolution Authority: What's Wrong With the Dodd Bill - The Dodd bill gets things right on first principles: there needs to be some type of resolution authority, and it needs to provide the ability to impose haircuts on creditors. The bill accomplishes that much. But it goes way off the rails on a critical issue that has received virtually no discussion: how the resolution authorization process is supposed to work. There's been a good deal of ink spilled recently over how to regulate systemic risk, but little consideration of the institutional design of resolution authority. Who gets to decide to pull the plug on a troubled firm? And who gets to decide to provide support for other firms or sectors of the economy?
Resolution Authority: The New Court - Under the Dodd bill, petitions to invoke the resolution authority are to be presented to a new Liquidation Authority Panel. Under section 202 of the bill, the Panel is to be comprised of three Delaware bankruptcy judges, selected by the Chief Judge. Presently there are seven bankruptcy judges in Delaware, including the Chief. This seems like too small of a pool to select the judges from, and Wilmington seems like an unlikely place to hold the kind of secret hearings contemplated in this legislation. Moreover, most of the key governmental, legal, and financial actors in these matters are based in New York.Solution: Create a nationwide court, based in New York, utilizing the best bankruptcy judges from around the country.
Lucy And The Football - Krugman -Talking Points Memo reports that Democrats are largely unprepared for the possibility that Republicans will filibuster financial reform. Is this really possible? I’m afraid it is. My own conversations with administration officials over the past few weeks have given me the sense that they were quite sure that FinReg wouldn’t be like health care — and that they didn’t seem to take seriously those (including me) who thought they were taking too much for granted.
Robert Reich (A Short Citizen's Guide to Reforming Wall Street)… The Dodd bill now being considered in the Senate is a step in the right direction. Yet despite the hype, it’s a very modest step. It leaves out three of the most important things necessary to prevent a repeat of the Wall Street meltdown: 1. Require that trading of all derivatives be done on open exchanges where parties have to disclose what they’re buying and selling and have enough capital to pay up if their bets go wrong. The exception in the current bill for so-called “unique” derivatives opens up a loophole big enough for bankers to drive their Ferrari’s through. 2. Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn’t go nearly far enough. 3. Cap the size of big banks at $100 billion in assets. The current bill doesn’t limit the size of banks at all.
Don’t Cry for Wall Street - Krugman - NY Times: On Thursday, President Obama went to Manhattan, where he urged an audience drawn largely from Wall Street to back financial reform. “I believe,” he declared, “that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector.” Well, I wish he hadn’t said that... Mr. Obama should be trying to do what’s right for the country — full stop. If doing so hurts the bankers, that’s O.K. More than that, reform actually should hurt the bankers. A growing body of analysis suggests that an oversized financial industry is hurting the broader economy. Shrinking that oversized industry won’t make Wall Street happy, but what’s bad for Wall Street would be good for America.
Dodd Bill Would Allow Fed To Hide Its Spending - The Wall Street reform bill headed for a test vote on the Senate floor Monday night will allow the Federal Reserve to continue to pump trillions of dollars into major banks largely in secrecy, the co-author of House language that would open the central bank to an audit charged in a memo to the Senate. "The Senate has a provision in its reform bill that purports to audit the Fed. But, it really doesn't do anything of the sort. I'm going to run down the details for you, and reprint the legislative language so you can read it yourself," writes Rep. Alan Grayson (D-Fla.).It would not allow the GAO to look into the Fed's massive purchase of toxic assets, its hundreds of billions in foreign currency swaps with other central banks or its open market operations, among other restrictions. Grayson and co-author Rep. Ron Paul (R-Texas) passed legislation through the House that would allow the Government Accountability Office (GAO) to audit the Federal Reserve and, after a delay, release the information to Congress.
6 Things Worth Fighting For in the Senate Bill - Wow, so it looks like we could have votes on the Senate Bill starting next week. So this is going to move very quickly. It’s going to move quicker because nobody wants to be tagged as pro-Wall Street with Lehman and Goldman in the new cycle. And it’s moving even quicker because the “Bailout Fund” talking points Republicans put all their weight behind (and it was all they said in the House too) were false, and quickly batted away. Since things are so uncertain and moving so fast, there are a few things that can change that would make a huge difference in building a more stable financial system. I’m created a quick two-page backgrounder here: Six Critical Elements of Financial Reform, laying out six pieces of financial reform that are still in play but could change by the hour. Each one of them is necessary to really doing this right, and if you are interested in making this bill better at the margins these are the things that will really make a difference. Here is a chart that summarizes them:
Why banks must prepare for a 'black ash' event - The volcanic ash cloud and the effect across Europe is truly unique and an outlier scenario. This resembles a black swan event that we can call a 'black ash' event," says Panagiotis Tsaoussis, senior vice-president in operational risk at ING Insurance Americas. "It is more like a one-in-200-year event than a one-in-10-year event. I do not believe there is impact on the business continuity of financial institutions, unless an institution has a key operations centre in proximity to the volcano. However, this underscores the importance of business continuity, scenario planning, crisis management and enterprise risk management for all companies. History continues to remind us that events we do not believe will happen, will. It is just a matter of one's time horizon. Some events will happen this year and some in 300 years for the next generation of risk managers to address.
REALLY? - U.S. Treasury Secretary Timothy Geithner said he was astonished when he read that International Monetary Fund Managing Director Dominique Strauss-Kahn thought the U.S. was moving too quickly on financial regulation—a process the Obama administration has sweated over for more than a year.“I read that and I thought, Really?,” Mr. Geithner said, with a stunned emphasis on the last word.Mr. Strauss-Kahn said he was worried that different nations were moving in different ways on financial regulation – not in a globally coordinated fashion. The U.S. acting before there was a global deal could deepen that split, he felt.
Clinton Says Rubin, Summers Advice on Derivatives Was Wrong (Bloomberg) -- Former President Bill Clinton said his Treasury Secretaries Robert Rubin and Lawrence Summers were wrong in the advice they gave him about regulating derivatives when he was in office. “I think they were wrong and I think I was wrong to take” their advice, Clinton said on ABC’s “This Week” program. Their argument was that derivatives didn’t need transparency because they were “expensive and sophisticated and only a handful of people will buy them and they don’t need any extra protection,” Clinton said. “The flaw in that argument was that first of all, sometimes people with a lot of money make stupid decisions and make it without transparency.” “Even if less than 1 percent of the total investment community is involved in derivative exchanges, so much money was involved that if they went bad, they could affect 100 percent of the investments,” Clinton said.
America must face up to the dangers of derivatives - Whether or not Goldman is guilty, the transaction in question clearly had no social benefit. It involved a complex synthetic security derived from existing mortgage-backed securities by cloning them into imaginary units that mimicked the originals. This synthetic collateralised debt obligation did not finance the ownership of any additional homes or allocate capital more efficiently; it merely swelled the volume of mortgage-backed securities that lost value when the housing bubble burst. The primary purpose of the transaction was to generate fees and commissions. This is a clear demonstration of how derivatives and synthetic securities have been used to create imaginary value out of thin air. More triple A CDOs were created than there were underlying triple A assets. This was done on a large scale in spite of the fact that all of the parties involved were sophisticated investors. The process went on for years and culminated in a crash that caused wealth destruction amounting to trillions of dollars. It cannot be allowed to continue. The use of derivatives and other synthetic instruments must be regulated even if all the parties are sophisticated investors. Ordinary securities must be registered with the SEC before they can be traded. Synthetic securities ought to be similarly registered,
Opinion: Time to start curbing the growth of derivatives - How dangerous are financial derivatives to societies? I don't have an answer so this is more of a post to make you think and maybe respond. I have never really worried about the damage derivatives pose to society. My feeling is that the damage won't be that bad because derivatives are a zero-sum game. I still think that's true but, given how financial institutions making huge mistakes end up running up to the taxpayer, I am slowly shifting my position towards a negative view. I have a bad feeling that developed societies—only they have sophisticated derivatives markets—may be edging closer to irreparable harm.
Outstanding CDS amounts fall 21% over 2009 - The notional amount of outstanding credit default swaps fell 21% during 2009 to $30.4 trillion from $38.6 trillion in the previous year, the International Swaps and Derivatives Association said Thursday at its annual meeting. The current notional amount was split between bought and sold protection with bought protection at about $15.4 trillion and sold protection at about $15 trillion. The notional amount of interest rate derivatives rose 6% to $426.8 trillion from $403.1 trillion over 2009, the ISDA said.
A Useful Primer on Derivatives Regulation - Bob Litan of the Brookings Institution recently penned an excellent overview of the issues surrounding derivatives regulation, with a particular focus on credit default swaps (CDS). ”The Derivative Dealers’ Club and Derivatives Markets Reform: A Guide for Policy Makers, and Other Interested Parties,” is really two pieces in one: a primer on derivatives policy and a warning about the power that a few firms now exercise over CDS markets. Bob’s recommendations for reform (which I have numbered for convenience) are:1. Induce or require “standardized” derivatives to be “cleared” on central clearinghouses rather than handled by dealers2. Establish the conditions that will induce derivatives that are centrally cleared to be traded on exchanges or an equivalent transparent platform, as is now the case generally with stocks and futures contracts.3. Ensure that adequate reserves – in the form of capital or margin – are held against all trades that are not centrally cleared.4. Require the margin or collateral backing derivatives positions to be held either in segregated accounts or by third parties 5. For derivatives that are both centrally cleared and traded on exchanges, regulators should ensure that the transaction prices and volumes of derivatives transactions are posted promptly on the equivalent of a “ticker”
Ezra Klein - Explaining FinReg: Derivatives (see graphic) I've been dreading this one. Derivatives are rough sledding. Explaining futures, options and swaps is the blogger's version of the Oregon Trail: It'll take months, and you'll probably lose most of your people along the way. Maybe to dysentery (but maybe not). But you have to get into it: If we don't get derivative reform right, FinReg isn't worth the paper it's printed on. Here's the good news: You don't need to understand the different types of derivatives. All you really need to know is that financial firms trade derivatives, they're worth an extraordinary amount and there's a category of them that's almost totally unregulated. That's a big part of the reason why the financial crisis was as severe as it was: We had no idea how many derivative contracts these major firms had with each other -- and with everyone else.
The Next Derivatives Disaster Is the legislation currently working its way through Congress. According to The Hill, Harry Reid wants the Lincoln derivatives bill incorporated into the Dodd legislation (replacing the “place-holder” derivatives title of the Dodd bill). Great. There are many bad features in the Lincoln bill. Arguably the worst (though the competition is stiff!) is the proscription on any “Federal assistance”, including Fed lending, to financial institutions that trade derivatives, including clearinghouses. Especially when combined with the mandated expansion of clearing, this is extremely dangerous. Clearinghouses can blow up. It has happened historically, and it almost happened with disastrous effects during the ‘87 crash. Arguably the only thing that prevented that from happening was the intervention of the Fed. I strongly suggest that Lincoln, or her staff, read the Brady report on the Crash to get some understanding of that. Or better yet, read Bernanke’s “Clearing and Settlement During the Crash”
Why is the bill to regulate financial firms going through the Senate Agriculture Committee? - The Senate Committee on Agriculture approved the Wall Street Transparency and Accountability Act on Wednesday. Should the bill become law, it will prohibit the Federal Reserve from bailing out financial firms that trade derivatives—a practice widely considered to have aggravated the economic crisis. Why is a committee best known for dealing with farm subsidies and forest boundaries regulating financial markets? Because traders used to gamble with corn. A derivative contract, very briefly, is a bet on what's going to happen in the future. These instruments are now associated with interest rates, or with a company's creditworthiness, but in the 19th century they were more often attached to the future prices of agricultural commodities, like rice, wheat, cotton, or corn. Farmers were suspicious: They worried that speculators were depressing the value of their goods and lobbied their representatives to step in.
Derivatives: What's a clearinghouse? | The Economist I BELIEVE that I linked to this post by Economics of Contempt in a Link exchange, but it's a useful explainer of the difference between moving to a system in which complex derivatives are subject to central clearing and one in which they are merely traded on an exchange: Repeat after me: a clearing requirement and an exchange-trading requirement are NOT the same thing. They are very, very different. It is extremely important that people understand the difference between mandatory clearing and mandatory exchange-trading, because there's an incredible amount of confusion about this in the press — even journalists who cover financial reform constantly conflate clearing and exchange-trading...
Banks, Exchanges Seek to Influence Derivatives Reform - The final piece of the financial regulatory reform puzzle is about to come into place as Sen. Blanche Lincoln released language last Friday that would impose rules on the unregulated world of over-the-counter derivatives trading. Lincoln’s bill, the Wall Street Transparency and Accountability Act, is more far reaching than proposals from both the Obama administration and the House of Representatives. This comes as somewhat of a surprise from the moderate and previously bank-friendly senator who has benefited from finance industry contributions in her post as chair of the Senate Agriculture Committee.
Synthetic securities are not so strange - Many retail investors own them. If you hold a commodity ETF or a equity ETF that tracks its benchmark via futures, you hold a synthetic security. Like a synthetic CDO, commodity and equity ETFs are investment vehicles that hold very vanilla “collateral securities” (like Treasury bills), but simulate exposure to some other thing by taking positions in derivative markets. For example, if you were to purchase the PowerShares DB Agriculture ETF (DBA), you would hold an interest in an entity that holds T-bills and takes futures positions in commodities like corn, wheat, and sugar. Despite the fact that this entity is synthesized in part from “zero-sum” derivatives, your shares of DBA constitute “securities” in every common sense: They are standardized, transferrable, claims on a business entity.
SEC ‘could bring’ charges over Lehman – Telegraph - The 2,200 page report which uncovered the murky world of Repo 105 and off-balance sheet accounting at Lehman Brothers may provide the basis for charges from the Securities and Exchange Commission (SEC), the regulator's former head has warned. Christopher Cox, who chaired the SEC until January 2009, said Anton Valukas's report into the demise of the Wall Street investment bank could lead to charges from the SEC. "The examiner's report of evidence ... may provide the basis for SEC law enforcement action in that case," said Mr Cox, in a US Congressional hearing looking into the bank's final days.
Geithner and the NY Fed Accused of Willfully Ignoring Fraud and Covering Up Lehman's Bad Assets by Senior Regulator During the S&L Crisis - Inquiring minds are digging into a 27 page statement made by William Black before the Financial Services committee. Black is an Associate Professor of Economics and Law, at the University of Missouri. Professor Black's statements regarding the collapse of Lehman and the role the Fed played in that collapse are refreshingly candid. Please consider "Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner". Emphasis, highlighting, and subtitles are mine.
William Black Warns That Financial Reform Bill Won't Stop The Wall Street Crime Wave - Black sees what he calls "control fraud" at the heart of the financial crisis. "Control fraud," he explained, "is when the people controlling a seemingly legitimate entity use the entity as a weapon to defraud." It's fraud committed by design, by the people at the top. "WaMu is a control fraud," he said, referring to the case of Washington Mutual Bank, the largest bank failure in history, "Lehman is a control fraud," he said, referring to the massive investment bank that went bankrupt after making a record numbers of mortgage loans based on little or no documentation (known as "liar's loans") and using accounting tricks to make the company look healthier than it was.
Bill Black Calls It As It Is - An amazing set of written testimony was given to the panel on Lehman's collapse that you all need to read has been filed by Bill Black.Lehman’s principal source of (fictional) income and real losses was making (and selling) what the trade accurately called “liar’s loans” through its subsidiary, Aurora. (The bland euphemism for liar’s loans was “Alt-A.”) Liar’s loans are “criminogenic” (they create epidemics of mortgage fraud) because they create strong incentives to provide false information on loan applications. The FBI began warning publicly about the epidemic of mortgage fraud in 2004 (CNN). Liar’s loans also produce intense “adverse selection” – even the borrowers who are not fraudulent will tend to be the least creditworthy. The combination of these two perverse incentives means that liar’s loans, in economics jargon, have a deeply “negative expected value” to the lender. In English, that means that the average dollar lent on a liar’s loan creates a loss ranging from 50 – 85 cents.Gambling against the casino creates a negative expected value, but making liar’s loans creates inevitable, catastrophic losses. Is it over? Oh hell no.
Bill Black Interview: The Great Global Bank Robbery, Part 2 - When it comes to White-Collar Crime and Control Fraud, the economist William K. Black is surely the leading expert to ask. In an exclusive and comprehensive interview in two parts, he answers questions related to some major causes for the financial / economic crisis, the SEC charges against Goldman Sachs and the connection between drug money and the survival of the international banking system. The following exclusive interview with William K. Black is a Joint Venture between New Deal 2.0 in the USA and MMNews in Germany.
Learning from the Crisis: Future IMF Lending Role - Let’s rewind the tape to October 2008. Barely a couple of weeks have passed since Lehman filed for bankruptcy, and emerging markets are selling off like crazy. With strong support from its membership, the IMF did not hesitate to come to the rescue. It provided large and upfront financial assistance to help countries weather the crisis. It overhauled its lending toolkit, notably by establishing the Flexible Credit Line (an instrument allowing countries with very strong policies to tap IMF resources unconditionally). And, importantly, its membership, building on the political momentum of the G-20, committed to tripling its resource base. These actions helped put out the fire, setting emerging market spreads on a downward trajectory
Senate Panel to Release Documents in Inquiry of Ratings Agencies - NYT- In 2004, well before the risks embedded in Wall Street’s bets on subprime mortgages became widely known, employees at Standard & Poor’s, the credit rating agency, were feeling pressure to expand the business. One employee warned in internal e-mail that the company would lose business if it failed to give high enough ratings to collateralized debt obligations, the investments that later emerged at the heart of the financial crisis. “We are meeting with your group this week to discuss adjusting criteria for rating C.D.O.s of real estate assets this week because of the ongoing threat of losing deals,” the e-mail said. “Lose the C.D.O. and lose the base business — a self reinforcing loop.”
Congress drops the ball on ratings agency reform - Today the Senate's Permanent Subcommittee on Investigations held a hearing on the role credit ratings agencies played in the financial crisis. These are the companies that gave high marks to securitization deals, like the one Goldman Sachs is currently being sued over, even though the underlying collateral—namely, home loans—was pretty much crap. As today's hearing illustrated, the ratings process became particularly corrupt in recent years, as companies like S&P and Moody's slapped AAA lipstick on collateralized debt pigs, bending standards to keep the investment banks doing these deals happy and profits gushing in the door.In today's hearing, Eric Kolchinsky, a former team managing director at Moody's, said he considered what had taken place—that is, what he saw go on first hand—to be securities fraud. Another witness, former Moody's vice president Richard Michalek, explained the term IBGYBG. "I'll be gone, you'll be gone," he said. "That thinking was driving what was going on." Make your money, then get out before the whole thing blows. The good news is that Congress addresses credit ratings companies in the financial reform legislation it is currently working to pass. The bad news is that what's in both the House and Senate bills does practically nothing to take on the true, underlying problem.
Rating Agency Data Aided Wall Street in Mortgage Deals - NY Times: One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them. In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested...The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds — companies and states, for instance — wouldn’t be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate. But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings.
Rating Agency Testimony: "Must say yes" to Wall Street - From McClatchy: Executives testify: Bond-rating agencies corrupted themselves Testifying under oath before the Senate Permanent Subcommittee on Investigations, officials who were closely involved in giving investment-grade ratings to complex financial instruments backed by shaky U.S. mortgages described how they were pressured to give Wall Street what it wanted. Called to appear before the panel, Richard Michalek, a former Moody's vice president and senior credit officer, described the ratings process for deals that could bring more than $1 million in fees as a "must say yes" atmosphere. The testimony is pretty amazing, but how is this being fixed?
Senate panel: Ratings agencies rolled over for Wall Street - A Senate panel investigating the causes of the nation's financial crisis on Thursday unveiled evidence that credit-ratings agencies knowingly gave inflated ratings to complex deals backed by shaky U.S. mortgages in exchange for lucrative fees. The Senate Permanent Subcommittee on Investigations will hold a detailed hearing on Friday, where its chairman, Sen. Carl Levin, D-Mich., will introduce e-mail records in which executives from Standard & Poor's and Moody's Investors Service acknowledge compromising the integrity of ratings to win business from big Wall Street firms.The documents to be released Friday confirm what a McClatchy investigation revealed in October _ that pressure from top ratings-agency executives to retain market share and the fees that it brought meant that ratings on complex deals were malleable. Some fees were as high as $1.4 million.
E-Mails Offer Look at Rating Firms During Crisis - As the housing market began to falter 2006 and the risks embedded in Wall Street’s giant collective bet on subprime mortgages became apparent, a sense of omen filled the corridors of Standard & Poor’s and Moody’s Investors Service, the two big credit rating agencies. The New York Times’s Sewell Chan reports from Washington.“Rating agencies continue to create an even bigger monster — the CDO market,” one S.&P. employee wrote in an internal e-mail message that December, referring to the collateralized debt obligations that later emerged at the heart of the financial crisis. “Let’s hope we are all wealthy and retired by the time this house of card falters.”
Moody's Slapped With Subpoena: Credit Rating Agency Not Cooperating With Crisis Investigators - The panel created to investigate the roots of the financial crisis slapped credit rating agency Moody's Corp. with a subpoena Wednesday for failing to turn over key documents. It's the first subpoena issued by the Financial Crisis Inquiry Commission to compel compliance, the panel's chairman, Phil Angelides, said during a conference call with reporters. The commission faces a December deadline to produce a report documenting and explaining the causes behind the worst financial crisis since the Great Depression. Until now, every party contacted by the commission has either complied or indicated a willingness to comply with its requests, Angelides said. Moody's -- one of the three major credit rating agencies accused of contributing, if not worsening, the financial crisis -- is the only party delaying the panel's investigation.
Time To Break Up The Credit Rating Cartel - The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years. Establishment of the NRSRO did three things (all bad):
Asking a Better Question About Who to Blame for the Financial Crisis - Maybe a better question to ask is, who could have prevented it or stopped it? After all, there is merit to the argument that capitalism is, by its nature, prone to bubbles, so, maybe it would be a good idea to learn how to stop them.What individual or group had it in their power to prevent the financial market meltdown but, for whatever reason, chose not to? While one could argue that these two are the same question – who caused it versus who could have stopped it – for all practical purposes, the list of candidates for the former is far bigger than the latter and, without doubt, the answer to second question is far more important for the future, that is, if anyone in government or industry is seriously interested in preventing this sort of thing from happening again, something that appears to be in question given the progress on financial market reform so far.
The Timeline of Magnetar’s Deals - ProPublica - From the middle of 2006 to the summer of 2007, Magnetar helped to create and invested in at least 28 subprime mezzanine CDOs, or collaterized debt obligations, deals it often bet against while also pushing for riskier assets to go inside them. The black circles below represent the amount in dollars of their identified deals by month while the blue circles represent the total amount in dollars of the same type of subprime CDOs issued during that time. Magnetar declines to specify which CDOs it invested in but ProPublica identified 26 of them, 24 of which are subprime mezzanine CDOs.Return to the story.
Revisiting the Magnetar Trade - In the wake of the SEC charges against Goldman Sachs, a lot of people have been wondering whether Magnetar, or its bankers, might be next up in the SEC’s crosshairs. Moe Tkacik has been looking into Magnetar for a couple of months now, and I spent a lot of time on IM with her today, learning just what it is about Magnetar which seems to drive people crazy — to the point at which they’ll happily spend seven months on a journalistic investigation of the company. I’m not going to even attempt to get into all the nooks and crannies and conspiracy theories which surround Magnetar, but I think, after talking to Moe at some length, that I have a much better grasp of the very big picture than I did after reading the ProPublica report.
Magnetar comes out fighting on synthetic CDOs - Before the Abacus synthetic CDO that led to Goldman Sachs being accused of securities fraud came the CDO deals associated with Magnetar, the Illinois-based hedge fund.Now Magnetar has come out fighting against accusations from ProPublica, the online news group, that it helped to stoke the US housing bubble in order to short its CDOs with astronomy titles such as Libra and Norma."Magnetar insists it “did not control asset selection in CDOs in which it participated”, although though it told collateral managers... what sort of yield it needed to invest.... It also asserts that it “did not participate in the marketing or distribution of CDO transactions” and “did not make representations to qualified investors who purchased CDO tranches.” Magnetar argues that it was not shorting the subprime market but was arbitraging between different layers of CDOs, taking advantage of the fact that it could get a yield of 20 per cent on the equity and then hedge that by shorting the mezzanine layers.
E-mails From Mordor - A 15 year veteran of Wall Street who put us on to Magnetar disappeared unexpectedly, much to our concern. He resurfaced recently and gave us a bulletin: Sorry I’ve been out of touch so long. It’s just that I’ve become quite disappointed/disaffected by the whole thing. We have failed and “they” have won. All the good that could have come out of the debacle has been lost… and it has broken my heart. The Powers That Be have no inclination to learn anything or correct any of the imbalances. What is even more soul crushing? They are actively and desperately attempting to wrench things back to the way they were. That would be “Mission Accomplished” and it disgusts me.Every day I go to work in the Bubble that is Wall Street. A bunch of self-important ass clowns that think they somehow deserve or have earned their outsized compensation....
Wall Street beware: the lawyers are coming - The US Congress will debate new financial legislation this week, but the real action in financial reform started last Friday with the fraud lawsuit filed by the Securities and Exchange Commission against Goldman, Sachs & Co. That case opens the litigation floodgates for more suits based on subprime mortgage fraud, and smart investors know it. Goldman’s market value fell $12bn during trading on Friday, more than 10 times the losses alleged in the case. Shares of other major banks, such as Bank of America, Citigroup and Morgan Stanley, lost more than 5 per cent. JPMorgan Chase was also hammered last week and announced a $2.3bn increase in its reserve for litigation expenses. These declines reflect two important consequences of the Goldman case. First, it shows how fraud allegations about complex subprime mortgage deals can be made simple. Although the SEC focused on an arcane synthetic collateralised debt obligation known as Abacus 2007-AC1, its complaint is a spare 22 pages. The heart of the document is one straightforward claim: that Goldman misrepresented the role played by Paulson & Co, a hedge fund. Goldman allegedly told investors that Paulson was investing in the deal, when instead Paulson bet against it.
Report: SEC knew of Stanford scheme since 1997 - The Securities and Exchange Commission knew since 1997 that R. Allen Stanford likely was operating a Ponzi scheme and an agency enforcement official who helped quash investigations of his business later represented the billionaire, according to the SEC inspector general.The SEC didn't bring charges against Stanford, alleging a $7 billion fraud, until February 2009. The SEC inspector general also said in a report released Friday that "institutional influence" in the enforcement division was a factor in the agency's repeated decisions not to conduct a full investigation.
How Wall Street Became a Giant Casino - NYTimes - WHILE the Securities and Exchange Commission’s allegations that Goldman Sachs defrauded clients is certainly big news, the case also raises a far broader issue that goes to the heart of how Wall Street has strayed from its intended mission. Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody. In essence, they were simply a side bet — like those in a casino — that allowed speculators to increase society’s mortgage wager without financing a single house.
Credit Default Swaps on Trial - – The lawsuit filed by the US Securities and Exchange Commission against Goldman Sachs for securities fraud, charging the bank with misrepresenting the way a collateralized debt obligations (CDO) had been formed, has revived public disgust at credit default swaps (CDS), the instrument used to bet against these CDOs. Before the 2008 financial crisis, CDSs were an esoteric product, known only to a restricted number of sophisticated investors and specialized academics. Today, they are a household name, synonymous with unruly speculation, boundless greed, and, ultimately, systemic instability. Indeed, CDSs are blamed as one of the main causes of the financial crisis. The legality of Goldman Sachs’ behavior will be determined by a court of law, but CDSs’ odious reputation is jeopardizing the survival of this instrument in the court of public opinion.
Is This Why The SEC Announced The Goldman Fraud Charges Friday Morning? - The Securities and Exchange Commission suspected Texas financier R. Allen Stanford of running a Ponzi scheme as early as 1997 but took more than a decade to pursue him seriously, according to a report further tarring the agency that missed Bernard Madoff's huge fraud.The report by the SEC's inspector general says SEC examiners concluded four times between 1997 and 2004 that Mr. Stanford's businesses were fraudulent, but each time decided not to go further. It singles out the former head of the SEC's enforcement office in Fort Worth, Texas, accusing him of repeatedly quashing Stanford probes and then trying to represent Mr. Stanford as a lawyer in private practice.
GOLDMAN SACHS VAMPIRE SQUID GETS HANDCUFFED - In a startling turn of events, the SEC announced a civil fraud lawsuit against Goldman Sachs. I use the word startling because a) the SEC has done virtually nothing in the way of enforcement for years, managing to sleep through every bubble and bust in recent memory, and b) Government Sachs has been presumed to be above the law since it took over Washington during the Clinton years. Of course, there is nothing startling about bad behavior at Goldman—that is its business model. The only thing that separates Goldman on that score from all other Wall Street financial institutions is its audacity to claim that it channels God as it screws its customers. But when the government is your handmaiden, why not be audacious?
Goldman Sachs Clients-First Pledge Undercut by SEC (Bloomberg) -- Goldman Sachs Group Inc.’s efforts to burnish its reputation just got a lot tougher. Chairman and Chief Executive Officer Lloyd Blankfein, 55, spent the last year defending the firm against criticism from politicians and pundits, who decried Goldman Sachs’s profit in the aftermath of the financial crisis and its sale of mortgage securities that went sour. Now the U.S. Securities and Exchange Commission is charging the company with fraud. On Goldman Sachs’s list of business principles, “clients’ interests always come first” ranks highest. The SEC paints a different picture. The firm failed to tell investors when selling them a so-called collateralized debt obligation tied to mortgages that the package had been designed to fail by hedge fund Paulson & Co., which profited from the losses, the agency alleged.
For Goldman Sachs, a Deal’s Stakes Keep Growing - NYTimes… Accusations that Goldman defrauded customers who bought investments tied to risky subprime mortgages have only just begun to reverberate through the financial world. The civil lawsuit that the Securities and Exchange Commission filed against Goldman on Friday seemed to confirm many Americans’ worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks’ favor. It is the first big case — but probably not the last, legal experts said — to delve into a Wall Street firm’s role in the mortgage fiasco. It is a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation’s financial regulations, and the news could embolden those seeking to rein in the banks. President Obama on Saturday stepped up pressure for financial reform by accusing Republicans of “cynical and deceptive” attacks on the measure. The S.E.C.’s action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.
Abacus Let Goldman Shuffle Mortgage Risk Like Beads (Bloomberg) -- From July 2004 through April 2007, as credit markets boomed, Goldman Sachs Group Inc. created 23 financial transactions called Abacus, the word for a relatively crude counting tool involving the shuffling of beads. Yesterday, the Securities and Exchange Commission sued the bank for securities fraud in what would be the penultimate offering in the series, according to Bloomberg data. The bank used the deals to off-load the risk of mostly subprime home loans and commercial mortgages to investors, either as hedges for similar positions or to bet against securities itself. While the data show New York-based Goldman Sachs issued at least $7.8 billion of Abacus notes, the risk passed to investors was multiples higher.
Fraud and Fecklessness on Wall Street - The most obvious takeaway from the Goldman Sachs/Abacus scandal is that trusting Wall Street firms to act in their clients’ interests is a mug’s game. (Felix Salmon offers a clear explanation of the way Goldman seems to have misled just about everyone on the wrong side of the Abacus deal.) But the whole story is also important because it shows, in painful detail, the utter fecklessness of investors and financial institutions during the housing bubble.The obvious way that investors in the Abacus deal were feckless was that they were making a massive bet on the crappiest part of the U.S. housing market at a time when the huge problems in subprime lending were already rising to the surface. Felix, in his searing and generally quite convincing refutation of Henry Blodget, tries to argue that investors buying mortgage-backed securities in early 2007 were not betting on housing prices, because the structure of the deal was supposed to guarantee that even if housing prices flattened, they wouldn’t lose their money. But this is far too generous to the investors.
Questions Surrounding the SEC’s Litigation vs Goldman - Reading the SEC complaint (SEC vs GOLDMAN SACHS & CO. and FABRICE TOURRE) makes it hard to avoid the conclusion that there were material misstatements of facts and significant omissions performed in the selling of the Abacus 2007 securitized product. When you consider the factors surrounding the complaint, it raises a dozens of more questions: A Bakers Dozen: Questions Provoked by the SEC Goldman Complaint
Squashing the Goldman vampire squid -- The central allegation is that in early 2007, hedge fund manager John Paulson recognised that the housing bubble was starting to collapse.This meant that many mortgages would go bad. The subprime mortgages, in which homeowners had little or no real collateral, and were facing resets to higher interest rates, were especially vulnerable. Paulson worked out a deal with Goldman in which he would pick the mortgage-backed securities that were put into the CDO. Paulson would then bet that the CDO would go bad, by taking out credit default swaps (CDS) on the CDO. A credit default swap is effectively an insurance policy where the issuer makes up a loss if an asset goes bad. Goldman was left with the other side of Paulson's deal, finding suckers to buy this huge piece of junk. It would have been hard to find buyers for this CDO if investors knew that Paulson had deliberately constructed it as a piece of junk to short. Therefore, according to the SEC charges, Goldman concealed Paulson's role in constructing the CDO.
A Modern Tale of Financial Loss - A developer (Goldman) built houses that looked well built, but were in reality designed to be firetraps, using plans provided by an architect (Paulson). They were sold as conforming to code with certain characteristics represented and endorsed by the building inspectors (Ratings Agencies) and overseen by fire inspectors who did spot checks (the SEC).After the sale, the developer and the architect bought huge amounts of fire insurance on the homes from a friendly insurance agent (AIG London) who was eager to collect the commissions. The amounts that were insured were sometimes well in excess of what a home might actually be worth. They even took out policies on nearby homes that they had not even built or sold. The developer had also encouraged the city government to allow the firetrucks and safety equipment to fall into disrepair, and for too few inspectors to be hired to do spot safety checks. So when the houses inevitably burned, the fire department was unable to adequately respond. The fires became so bad that they destroyed entire neighborhoods and threatened whole sections of the city.
Our Pecora Moment - We have waited long and patiently for our Ferdinand Pecora moment – a modern equivalent of the episode when a tough prosecutor from New York seized the imagination of the country in the early 1930s and, over a series of congressional hearings: laid bare the wrong-doings of Wall Street in simple and vivid terms that everyone could understand, and created the groundswell of public support necessary for comprehensive reregulation. On Friday, that moment finally arrived. There is fraud at the heart of Wall Street, according to the Securities and Exchange Commission. Pecora took on National City Bank and J.P. Morgan (the younger); these were the supposedly untouchable titans of their day. The SEC is taking on Goldman Sachs; no firm is more powerful.
Investor Who Made Billions Not Targeted in Goldman Suit - Three and half years ago, a New York hedge fund manager with a bearish view on the housing market was pounding the pavement on Wall Street. Eager to increase his bets against subprime mortgages, the investor, John A. Paulson, canvassed firm after firm, looking for new ways to profit from home loans that he was sure would go sour. Only a few investment banks agreed to help him. One was Deutsche Bank. The other was the mighty Goldman Sachs. Mr. Paulson struck gold. His prescience made him billions and transformed him from a relative nobody into something of a celebrity on Wall Street and in Washington. But now his brassy bets have thrust Mr. Paulson into an uncomfortable spotlight. On Friday, the Securities and Exchange Commission filed a civil fraud lawsuit against Goldman for neglecting to tell its customers that mortgage investments they were buying consisted of pools of dubious loans that Mr. Paulson had selected because they were highly likely to fail.
Merrill Used Same Alleged Fraud as Goldman, Bank Says - (Bloomberg) -- Merrill Lynch & Co. engaged in the same investor fraud that the U.S. Securities and Exchange Commission accused Goldman Sachs Group Inc. of committing, according to a bank that sued the firm in New York last year. Centrale Raiffeisen-Boerenleenbank BA, known as Rabobank, claims Merrill, now a unit of Bank of America Corp., failed to tell it a key fact in advising on a synthetic collateralized debt obligation. Omitted was Merrill’s relationship with another client betting against the investment, which resulted in a loss of $45 million, Rabobank claims. Merrill’s handling of the CDO, a security tied to the performance of subprime residential mortgage-backed securities, mirrors Goldman Sachs conduct that the SEC details in the civil complaint the agency filed yesterday. It claimed Goldman omitted the same key fact about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter.
Is the Goldman Sachs suit the tip of the iceberg? - Put simply, here's how the SEC claims it all went down: Imagine you are the biggest car company in the country. Goldman in this example, and a client, Paulson, comes to you and asks you to design a car that will crash. So you make that bad car "CDO," then sell it to people without telling them you cut the brake lines! Then when the car "CDO" hits a wall, you rake in the dough from the insurance you bought on the bad car before the crash. And you get paid twice! Once when you sell the car, and then again when it crashes and cash in your insurance policy! Of course in Goldman's case, they bought the insurance from AIG, which didn't have the cash to back up its bets. Hence, thanks to the $180 billion taxpayer rescue, those bets paid Goldman Sachs back at 100-cents on the dollar
Defending Goldman - - Eric's got some great posts up, and you can find much elsewhere on the Goldman prosecution, including from Larry. I'll interrupt the very interesting masters forum to do what seems to be the unconventional: defend Goldman. Sophisticated investors comprised every party to the transaction, for one thing. The fraud seems to be the failure to disclose that John Paulson picked the assets for the investment vehicle - but someone had to, and anyone purchasing the assets knew someone was betting against them. When this CDO was structured, moreover, John Paulson was a middling hedge fund manager, not the Wall Street titan of today. For that reason and many, many others, the idea that dropping his name in the fine print would have changed a single investment decision strikes me as laughable. I'm generally skeptical of the personification of financial crises, and I haven't followed this suit too closely, but this seems like making fraud allegations about Wall Street business as usual.
Goldman-plated excuses - My first reaction, upon reading about the SEC’s complaint against Goldman Sachs was to shrug. Basically, the SEC claims that Goldman failed to disclose a conflict of interest in a deal the firm arranged, that perhaps Goldman even misdirected and misimplied and failed to correct impressions that were untrue but helpful in getting the deal done. If that’s the worst the SEC could dig up, I thought, there’s way too much that’s legal. But Goldman’s PR people have once again proved themselves to be masters of ineptitude. Haven’t those guys ever heard, “it’s not the crime, but the cover up”? The SEC threw Goldman a huge softball by focusing almost entirely on the fibs of a guy who calls himself “the fabulous Fab” and makes bizarre apocalyptic boasts. Given the apparent facts of this case, phrases like “bad apple” and “regret” and “large organization” and “improved controls” would have been apropos. It’s almost poignant: The smart thing for Goldman would be to hang this fab Fab out to dry, but whether out of loyalty or arrogance the firm is standing by its man.
What Goldman’s Conduct Reveals - NYTimes Room for Debate Forum According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like foreign banks and pension funds. As those securities plunged in value, the Paulson hedge fund made money on the negative bets, while the Goldman clients who bought the investments lost billions of dollars. Is this chain of events surprising? The S.E.C. is suing Goldman Sachs, but could regulation or monitoring of these financial instruments have prevented such losses? What kind of regulatory structure would need to be put in place?
- Lynn A. Stout, professor of corporate and securities law, U.C.L.A.
- Michael Greenberger, former commodities regulator
- Nicole Gelinas, Manhattan Institute
- Yves Smith, financial analyst
- Nomi Prins, senior fellow, Demos
- Edward Harrison, banking and finance specialist
- Douglas Elliott, Brookings Institution
- Megan McArdle, Asymmetrical Information
- William K. Black, former banking regulator
UK's Brown wants investigation into Goldman Sachs Prime Minister Gordon Brown said on Sunday he wanted Britain's financial watchdog to investigate U.S. bank Goldman Sachs ..."I want a special investigation done into the entanglement of Goldman Sachs and the companies there with other banks and what happened," Brown told BBC television."There are hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened. I want the Financial Services Authority (FSA) to investigate it immediately," he said.
Germany to Review Possible Legal Steps Against Goldman: Wilhelm - (Bloomberg) -- Germany may take legal action against Goldman Sachs Group Inc., German government spokesman Ulrich Wilhelm said today by phone. Germany’s Bafin financial regulator will ask the U.S. Securities and Exchange Commission for information on the Goldman case, Wilhelm said. It’s too early to say whether any legal action will relate to Germany’s IKB bank, he said.
Germany, UK demand Goldman Sachs probe (Reuters) - Germany and Britain will seek details from the U.S. Securities and Exchange Commission (SEC) about the activities of Goldman Sachs Group Inc as a prelude to potential legal steps following a U.S.-led fraud investigation. Prime Minister Gordon Brown said on Sunday he wanted Britain's financial watchdog to investigate U.S. bank Goldman Sachs after it was charged with fraud by U.S. regulators. Brown, who is fighting an election campaign, piled pressure on Wall Street's most powerful bank, accusing it of "moral bankruptcy" over reported plans to pay big bonuses.
EU’s Investigation of Goldman Will Be ‘Profound,’ Rehn Says… (Bloomberg) -- The European Union investigation into Goldman Sachs Group Inc.’s role in providing swaps to the Greek government to help reduce its budget deficit will be “profound and thorough,” EU Monetary Affairs Commissioner Olli Rehn said. The investigation relates to “our relationship with Goldman Sachs,” Rehn said at a press conference in Madrid today after a meeting of EU finance chiefs and central bankers. “I have asked the Ecofin and Eurostat to conduct a profound and thorough investigation in which the Greek authorities are very well cooperating.”
ASIC considers joining Goldman Sachs probe – - AUSTRALIA'S securities regulator is considering whether to join a widening international probe into Goldman Sachs, following landmark US legal action that claims the Wall Street company deceived big clients.The Australian arm of Goldman Sachs was yesterday distancing itself from the crisis enveloping its US parent, although Goldman Sachs JBWere was assuring clients that none of the investment products at the heart of the claims had been marketed in Australia. US regulators launched civil charges against Goldman and one of its high-profile traders, Fabrice Tourre, early in Friday trading, over a complex product sold by the company, known as a collateralised debt obligation (CDO), tied to subprime mortgages. The heart of the claim by the Securities and Exchange Commission was that Goldman or Mr Tourre did not tell institutional investors, including a German bank, that a fund that designed the CDO was also betting against it.
A Glare on Goldman, From U.S. and Beyond - Calls for increased scrutiny of Goldman Sachs emerged on Sunday as two congressmen pressed for investigations into possible taxpayer losses generated in securities sold by the firm, and the British prime minister also asked his nation’s securities regulator to investigate the Wall Street powerhouse because of losses suffered by a major British bank. The German government, too, said it was considering taking legal action against Goldman because of a German bank’s losses, a spokesman said. The civil lawsuit filed against Goldman last Friday contained damaging allegations whose reverberations are just beginning to be felt.
interfluidity » L’Affaire Goldman in price/information terms - I have found it helpful to pull away from the details of the Goldman/Paulson/ABACUS deal and think through the issues abstractly. In the unlikely event that others will find it helpful, I present the tale below… Let’s suppose there is a trader, whom we’ll call “Trader X”. Trader X wishes to take a very large position on a bunch of related and correlated financial instruments. But Trader X has a problem. The size of the trade he wants to make is large relative to ordinary turnover in the asset. The market would almost surely move against him before he executed more than a fraction of his trades.
The Goldman Defense: Caveat Emptor – Updated with both Goldman response documents Months before the Securities and Exchange Commission sued Goldman Sachs for securities fraud, the investment bank outlined its defense to potential charges related to its construction of a mortgage investment.The essential thrust, as explained by two documents obtained by The New York Times (and mentioned here): buyer beware. The S.E.C., Goldman’s lawyers at Sullivan & Cromwell wrote, was benefiting from “perfect hindsight” in pressing its investigation. A party like ACA Management, the third-party manager of the Abacus collateralized debt obligation in question, was “no mindless dupe that could be easily manipulated,” they wrote. Instead, they should have known what they were doing.
Dylan Ratigan: A Patriot’s Day Call to Arms - Mr. President, please show the American people the AIG emails. In the wake of the disclosures associated with Friday's government fraud accusations against Goldman, Sachs & Co., one of our nation's wealthiest, largest and most politically well-connected banks, it is inexcusable the U.S. government still refuses to release the thousands of emails that exist between AIG and Goldman Sachs. Unlike the Icelandic volcano, this was no natural disaster. Trillions of dollars have been defrauded from the U.S. taxpayer by a banking scam run by the top 1% of our country. The mark for this con game has been and continues to be every teacher, cop, firefighter, nurse, conservative saver, small investor, student and retiree. People whose pensions, homes, jobs and monthly retirement stipends have been and continue to be deprived -- so these people can use our government to transfer money from your work to themselves. We also know that the same people responsible for this failed system are STILL RUNNING IT, leaving obvious conflicts of interest everywhere you turn.
Quick (and, alas, non-substantive) word about the Goldman case - It's pretty clear that people are going to believe whatever they want to believe, facts/law be damned. But reading over the SEC's complaint yesterday, I was stunned by how weak their case is. Unless the SEC is holding back an absolute smoking gun, which is unlikely, Goldman is going to knock this weak shit out of the park. The debate inside Goldman right now is over whether to settle quickly, or take it all the way to judgment. I'm betting they take it to judgment. My guess is that the SEC was demanding too high a settlement, and that Goldman balked, wagering that the SEC wouldn't bring such a ridiculously weak case. Whoops. If I were there, I'd tell them to just settle, but then again, I was always the one saying we should settle. My sense is that they're thinking, "You know what? The know-nothing talking heads can get all huffy if they want, but we're right, and they're wrong, and we've had just about enough of this shit. We're taking it all the way!"
The SEC, Disclosure, and the Goldman Complaint - The SEC complaint filed against Goldman is a disclosure case. Yet critics of Goldman and of other investment banks charge these institutions with having played too many roles, creating conflicts of interest, and with having designed terrible products. How well, then, does the question of role complications and bad products fit with disclosure law? The definition of materiality, which is a critical element in the case, is mostly fashioned for public markets. One of the principles is that investors, or proxy voters, should not have to examine an entire disclosure document to find a fact that, joined with certain other facts, becomes material to a reasonable investor, or shareholder. How well does this same principle apply to sophisticated players?
Goldman SEC Litigation: The End of OTC?; Alan Boyce on the Duration of Fed Open Market Operations - Whereas in the trades with Paulson GS was helping a client create and then sell short a CDO that was being sold to another client, in the case of TCW the GS firm was helping a client buy toxic loans to be contributed to a CDO in the knowledge that doing so would cause losses to a regulated insurer, AIG. The activities of GS to harm AIG make the subsequent payments by AIG to GS, using money from the US Treasury, seem all the more outrageous. But the other thing that really bothers us about both the TCW transactions and the more recent revelations about GS and the Paulson firm is the fact that the SEC apparently still does not fully understand the symbiotic relationship between the dealer and the hedge fund.
In the wake of SEC/Goldman, the must-read Appendix - I’m way late in writing my review of Yves Smith’s new book “Econned.” The book, which primarily describes how flawed economic thinking culminated in the financial crisis, is more important than ever in the wake of the SEC’s allegations against Goldman Sachs. In it, Smith reports extensively about synthetic CDOs. Goldman, of course, now stands accused of committing fraud in the structuring and marketing of one particular synthetic CDO, Fabulous Fab’s Abacus 2007 AC-1. The most valuable part of her book may be the second appendix. In it she breaks down in minute detail the strategy that a hedge fund might employ to short subprime in large quantities via CDS. It’s a veritable roadmap to understanding other, similar malfeasance that may have happened in this market. The appendix, along with the the lengthy discussion of Magnetar in Chapter 9, together make a powerful argument that Goldman may not be the only firm that should face charges for securities fraud.
Mortgage Deal Got Rapid Approval by Goldman Panel - WSJ - The 2007 mortgage deal that set off controversy at Goldman Sachs Group Inc. was quickly approved by a group of roughly a dozen senior executives in a routine meeting in a drab conference room, according to people familiar with the matter. That group of senior-level executives—which included those helping to manage Goldman's mortgage, credit and legal operations—has surfaced as an important participant in the Securities and Exchange Commission's securities-fraud case against Goldman, which has rocked the firm and Wall Street. The Goldman group that approved the deal was led by Daniel Sparks, Goldman's mortgage chief, according to people familiar with the matter.
Simon Johnson: Goldman Sachs: Too Big to Obey the Law - On a short-term tactical basis, Goldman Sachs clearly has little to fear. It has relatively deep pockets and will fight the securities "Fab" allegations tooth and nail; resolving that case, through all the appeals stages, will take many years. Friday's announcement had a significant negative impact on the market perception of Goldman's franchise value - partly because what they are accused of doing to unsuspecting customers is so disgusting. The main action, obviously, is in the potential widening of the investigation (good articles in the WSJ today, but behind their paywall). This is likely to include more Goldman deals as well as other major banks, most of which are generally presumed to have engaged in at least roughly parallel activities – although the precise degree of nondisclosure for adverse material information presumably varied. Two congressmen have reasonably already drawn the link to the AIG bailout
Goldman Sachs: A Pattern of Organized Criminal Behaviour? - Chris Whalen provides some excellent commentary on the Goldman Sachs fraud inquiry by the SEC at the beginning of his weekly newsletter, The Institutional Risk Analyst. In addition to the information he provides about other deals, including those that specifically targeted AIG, he puts an interesting twist on this. He intimates that at times the Hedge Funds were acting in concert with the Big Banks as off-balance-sheet accomplices in crafting these complex frauds. And the Paulson - Goldman scandal may only be one of a type, and not perhaps the best or most flagrant example. A reaction from many is that this is just the tip of the iceberg, a single point in a much larger picture of calculated fraud involving many more deals and significantly more money up to and including the bailout of AIG.
Would a Goldman disclosure have helped? - I’m still working my way through the two Goldman Sachs responses to the SEC, as posted by Alphaville — the 49-page September 10 memo, and the 20-page September 25 follow-up. But even without reading the whole thing, it’s easy to dismiss the section excerpted by Henry Blodget, which claims that the kind of disclosure the SEC was looking for “would provide a potential investor with no information the investor did not already know”.But that’s simply not true, as the first line of Goldman’s own slighly-sarcastic disclosure statement reveals:
More on Goldman Sachs - I’ve only started wading through Goldman’s response to the SEC’s Wells Notice, but my general impression is that the document is a masterpiece of apophasis. If Goldman’s dealings were completely above board, the firm’s defense would go something along the lines of “here, exactly, is how we described Paulson’s interest in the transaction to ACA,” or “you are wrong, Paulson was not involved in the selection process at all.” Alas, that is not Goldman’s defense. Goldman appears to make three arguments. First (and predictably), these were sophisticated investors capable of analyzing the underlying securities themselves, which were detailed for them. Second, because the investors could analyze the underlying securities themselves, it was immaterial to investors who selected them Third, Goldman is under no obligation to investors to disclose what steps the firm takes to offload the risk the firm accepts in the transaction.
Goldman in the Eye of the Beholder - So the vote on the SEC to bring charges against Goldman broke down by party lines. Liberals, understandably, view this as evidence of malfeasance. But of course, there's an alternative interpretation also consistent with these facts: that Democrats brought a weak charge that won't stand up in court because they thought it would help them push through their bank reform.One piece of evidence in favor of this: none of the people I know who are familiar with securities law think that the government has a strong case; the opinions range from "seriously pushing the envelope" to "give me a break." And no, these aren't my fat cat friends on Wall Street
How the SEC cracks down on unethical behavior - Emanuel Derman has a fantastic two-line blog entry on the SEC/Goldman affair, which I can’t really help but quote in full: The architects of the bailout have been trying to cure insolvency by treating it as illiquidity. The SEC may be trying to cure unethical behavior by treating it as illegality. This is also known as “how people behave when the only tool they have is a hammer”. Central banks can inject liquidity much more easily than finance ministries can spend money. And the lawyered-up SEC, if it finds a deal it considers odious, will go to great lengths to find a way in which that deal is illegal.
Short-sellers: The importance of John Paulson - Sorkin asks today whether the synthetic CDOs at the heart of the SEC’s lawsuit against Goldman Sachs serve any useful social purpose. Pose the question differently: would we be better off without a means to bet against housing? It’s widely accepted that while short sellers of stock are despised by corporate America, they serve a useful purpose. They enable people who don’t believe CEOs’ happy talk to put their money where their scepticism is. You may not believe the stock (or house prices) are a bubble, but those who think they are serve to restrain valuations by betting against them. In the process, they actually mitigate bubbles. One of the structural shortcomings of the housing market is that it is quite hard to short; houses are illiquid and heterogenous. This, all else equal, makes housing more inefficient and prone to bubbles. Arguably, devices that addressed this market flaw made the market more efficient. Perhaps the stock example does not translate directly to synthetic CDOs
Carl Levin: Another "big shoe" to drop at Goldman - Washington is suddenly looking very unkind to the firm that used to be known as "Government Sachs." Now the Senate's Permanent Subcommittee on Investigations, led by Carl Levin, Democrat of Michigan, is planning to focus hearings scheduled for next week at least in part on Goldman Sachs's role in the financial disaster. Levin's staff has uncovered new documents "that link certain actions to specific people" at Goldman, according to a senior legislative official who spoke on condition of anonymity. The official would not divulge the nature of the allegation but said that Levin believes it amounts to "another big shoe to drop on Goldman." Spokespeople for Levin said they were not prepared to discuss the nature of the probe, but his committee has been conducting several weeks of hearings and one is planned for April 27 on "the role of the investment banks."
On The Goldman Complaint (Janet Tavakoli) Goldman and the SEC eviscerated by Janet Tavakoli, recognized international expert on derivatives (and one of the few truth-tellers who you will never see on CNBS!)
Fraud, It’s Much Bigger Than Goldman Sachs - Regulators allege “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” If you think this was the only shady deal dreamed up by Wall Street banks, you have another thing coming. All of the big banks have been selling securities called derivatives for at least two decades. Derivatives are usually bundles of debt. There are derivatives for mortgages, car loans, credit cards, student loans and all types of government debt, to name a few. Derivatives are complex, but when it comes right down to it, you can sum them all up as debt bets.
Video: Eliot Spitzer on Goldman charges (Reuters)
Goldman: When is a misimpression materially misleading? - As I wrote before, one of the most important legal issues in the Goldman case is whether Goldman misled the collateral manager ACA into thinking that Paulson was investing in the CDO and not betting against it. Why does it matter? Because as "Goldman's defense documents" make clear, ACA and the CDO investors were sophisticated investors able to "negotiate forcefully at arm's length" with Paulson. But to bargain at arm's length you need to know that is what you are doing. In other words, you need to know if the party who is making requests to you ("I want this collateral - not that.") is on your side or not. Paulson was either short or long. He was either with ACA or against it. (Even if Paulson was engaging in a funky investment strategy of going short some tranches and long others, ACA would still want to know that it had to bargain at arm's length). If ACA thought Paulson was on its side, it would have had a much different attitude towards its requests on collateral than if it thought Paulson was betting against the CDO. "Are you cherry picking and trying to give me bad assets?" vs. "are you sure "we" (our side) wants this?"
Goldman’s unwanted super-senior position - Kate Kelly has the obvious answer to the question of what on earth Goldman Sachs was doing with that 45-50% super-senior tranche: “The core of the SEC’s case is the allegation that one employee misled two professional investors by failing to disclose the role of another market participant in a transaction,” said Goldman CEO Lloyd Blankfein said in a recent message to employees. The firm “assumed risk in the deal, and we lost money,” he added. But Goldman invested the money only because sales of the deal didn’t play out as planned, forcing Goldman to step up with its own money, people familiar with the matter say. This is surely exactly right. We’ve already seen that it took Goldman a full five weeks after the deal closed just to wrap the 45% of the super-senior tranche that it did manage to get off its books — and it did so at the end of May 2007, when the mortgage market was hitting three-month highs
SEC v. Goldman Sachs: Regime Change or Crowd Control? In-depth analysis by Bill Singer - My view on SEC v. Goldman Sachs & Co. is that it will likely become a watershed event in the history of Wall Street regulation. It's time that we pull back the curtain between us and the mighty Wizard of Oz -- so that we might see the old man pulling the bells, whistles, and levers. It is also appropriate for us to stop pretending that laissez-faire regulation must tolerate financial products that are little more than roadside IEDs along the highway that is Wall Street. The larger question is are we now about regime change on Wall Street or merely crowd control? Since the Securities and Exchange Commissions (SEC) announced its Goldman Sachs Complaint last Friday (Copy of the SEC Complaint and my initial comments), I have given a number of interviews to the press concerning the case.
Inside a Goldman Sachs Abacus Deal - The recent news about Goldman, especially the deep dive by the NYT, has focused on a transaction that, until now, not many people knew about and even fewer people understood. These deals, collectively known as ABACUS, were based on an extremely esoteric type of transaction known as synthetic CDO's. Attached to this article is a termsheet that shows the important terms for one of the earlier iterations of the ABACUS trades. Unlike the transaction that is the subject of the SEC investigation, this transaction wasn't marketed as a CDO with a third party actively managing the transaction. Instead, as one can see when comparing the documents, this transaction is stripped down and much simpler. This is an important detail because, in effect, this transaction was a way for Goldman to go very, very short on residential or commercial mortgage bonds and make no representation of being a customer-centric transaction.
TARP watchdog probes Goldman CDOs, maybe Blackrock (Reuters) - The special inspector general for the government's bailout program said he would probe whether securities sold by Goldman Sachs Group Inc (GS.N) led to losses at AIG and if the American taxpayer was a victim of fraud. Goldman Sachs was charged last week with fraud by the U.S. Securities and Exchange Commission over its marketing of a subprime mortgage product. The SEC's charges concern Abacus, a synthetic collateralized debt obligation that hinged on the performance of subprime residential mortgage-backed securities, and which the regulator said Goldman structured and marketed. According to the SEC, Goldman did not tell investors "vital information" about Abacus, including that Paulson & Co was involved in choosing which securities would be part of the portfolio Paulson was separately betting against.
Blankfein: Suit Against Goldman Will “Hurt America” -- Yves Smith - An interesting disconnect exists between Goldman’s public posture on the SEC’s suit against it over its Abacus 2007 AC1 deal, and its private remarks. Goldman’s chief Lloyd Blankfein made a series of calls to clients yesterday to defend the firm. The substance of his remarks sound so over the top as to suggest that the firm’s leadership feels badly threatened by the pending action. A truly confident actor would make reassuring noises along the lines of “Look, this may all look dramatic in the headlines, really there isn’t anything here, but the press and the government will take decisions and actions out of context and try to make them into something they aren’t. These distortions are unpleasant, but we are confident the truth will come out in the end. If you see or hear anything that troubles you as we fight this case, don’t hesitate to call me or XXX.” Instead, Blankfein’s comments sound like those of a narcissist completely unhinged at the idea that he is being criticized. If this neurosis pervades the Goldman executive ranks (which we think is entirely possible, see our earlier discussion), that provides an indirect confirmation of the widespread perception that the firm is concerned only with what it can get away with, and is lacking in any moral compass.
Now we know the truth. The financial meltdown wasn't a mistake – it was a con - The global financial crisis, it is now clear, was caused not just by the bankers' colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday's announcement that the world's most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud. Yet Britain, centre of the world financial system, has not yet levelled charges against any bank; all that we've seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves.
The SEC-Goldman Flap - Steven Randy Waldman writes, - A CDO, synthetic or otherwise, is a newly formed investment company. Typically there is no identifiable "seller". The investment company takes positions with an intermediary, which then hedges its exposure in transactions with a variety of counterparties. The fact that there was a "seller" in this case, and his role in "sponsoring" the deal, are precisely what ought to have been disclosed. Investors would have been surprised by the information, and shocked to learn that this speculative short had helped determine the composition of the structure's assets. That information would not only have been material, it would have been fatal to the deal, because the CDO's investors did not view themselves as speculators. This stuff is getting beyond my depth. I'm guessing that a synthetic CDO is to a CDO as a fantasy baseball team is to a baseball team.
Has the SEC changed the culture of Wall Street? - Michael Lewis addresses the fixed-income group at Goldman Sachs: The masses will be curious to know, for instance, how you became blinded to the very simple difference between right and wrong. He concludes:There was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done. That just changed. This, it would seem, is the power of the SEC: by filing its complaint in public rather than seeking to settle in private, it might have significantly changed the culture of Wall Street in a way that Barney Frank and Chris Dodd and Paul Volcker and of course Barack Obama have been trying and failing to do ever since they took office.
House Democrats calling for criminal investigation of Goldman Sachs - A growing number of House Democrats are asking the Department of Justice to open a criminal investigation into Goldman Sachs. Rep. Marcy Kaptur (D-Ohio) made the request Tuesday in a letter to Attorney General Eric Holder. Since then, almost 20 of her colleagues have signed on. The Securities and Exchange Commission (SEC) has filed a fraud action against Goldman for allegedly promoting a package of investments that was designed to fail. But the SEC can only pursue civil actions. Kaptur wants the Justice Department (DOJ) to consider criminal charges as well. "[I]f the DOJ is not currently looking into this particular case, we respectfully ask you to ensure that the U.S. Department of Justice immediately open a case on this matter and investigate it with the full authority and power that your agency holds," Kaptur wrote to Holder.
Did ACA know Paulson was going short? Steve Liesman has got his hands on Paolo Pellegrini’s testimony to the SEC, and you can see why the Goldman case seems to be building up to the conclusion that ACA did know Paulson was going to short the deal: In one part of Pellegrini’s testimony, a government official asked him: “Did you tell (Schwartz) that you were interested in taking a short position in Abacus?” “Yes, that was the purpose of the meeting,” Pellegrini responded. "we wanted to buy protection on traunches of a synthetic RMBS portfolio.” Contrast the SEC complaint: Had ACA been aware that Paulson was taking a short position against the CDO, ACA would have been reluctant to allow Paulson to occupy an influential role in the selection of the reference portfolio because it would present serious reputational risk to ACA, which was in effect endorsing the reference portfolio. This is fascinating stuff, not least because there doesn’t seem to be any hint of it in Paulson’s letter. But if Pellegrini’s testimony turns out to be reliable, it surely constitutes a simple disproof of the SEC statement.
Goldman Sachs: The Defense Case Starts to Firm Up -Professor Bainbridge suggests that the timing of the Goldman suit may be suspicious, but not in the way that Republicans have claimed. From the Wall Street Journal: Last Friday, the same day that the government unexpectedly announced its Goldman lawsuit, the SEC's inspector general released his exhaustive, 151-page report on the agency's failure to investigate alleged fraudster R. Allen Stanford. Mr. Stanford was indicted last June for operating a Ponzi scheme that bilked investors out of $8 billion. He has pleaded not guilty. Guess which of these two stories was pushed to the back pages? The SEC did its part by publishing the Stanford report so deep in its Web site that more than a few of our readers had trouble finding it. Yesterday, the SEC management's response to the report was available on the agency's homepage, yet it provided no links to the report itself.Little wonder. The report is damning for an SEC that wants the public to believe it has turned the corner after the Bernie Madoff disaster.
Just How Weak is the Case Against Goldman? - A growing number of people are chiming in to say that the SEC case against Goldman Sachs is not as strong as it seems. Not sure why they would say that. I have read the SEC complaint a few times and it seems like damaging stuff to me. Even if Goldman didn't break the disclosure rules that are at the heart of the case against it, the whole thing just seems sleazy and morally wrong, and a great window into what went wrong on Wall Street in the past decade. If you are not Goldman or Paulson, I just don't get why you would defend this behavior. Nonetheless, Newsweek's foreign affairs expert Fareed Zakaria comes out swinging on the side of Goldman in a piece on CNN.com with some of the dumbest logic so far on why the SEC doesn't really have a case. Zakaria is a pretty smart guy when it comes to the Middle East, but on business he seems way over his head. Zakaria's first point is one that my 3-year-old would make. It's the "everyone else was doing it" excuse.
Defending Goldman II - My first reaction to the SEC's Goldman case was skeptical, and it now appears that there are plenty of commentators who agree. I've since had a chance to look more closely at the complaint, and, while as complaints go, it is a model of brevity and clarity, I'm still unconvinced by the case. Fraud of omission is always a troubling claim to make, but that's what the SEC's complaint relies on in large part. And, of course, a fundamental problem for the SEC is the sophisticated nature of every party to the transaction...the consumers in this case didn't need to be protected. Most compelling, to me at least, is the fact that ACA may not have known that Paulson was short, when Goldman knew it.
Goldman's Dirty Customers - In Michael Lewis’ bestseller The Big Short, when Greg Lippman, one of the top traders dealing with the kind of derivatives that helped implode the world’s economy, was asked who was selling insurance on all the lousy subprime loans, he answered concisely: Dusseldorf. “Stupid Germans,” Lippman purportedly told wary hedge-fund investors, despite the fact that he worked at a Deutsche Bank. “They take the ratings agencies seriously. They believe in the rules.” But the Germans selling the credit default swaps to Goldman Sachs—the very swaps at the heart of the SEC’s case against Goldman Sachs—weren’t stupid. In fact, they were wily and wealthy financial players. Nor did they necessarily play by the rules: Their dealings with Goldman seemed designed to evade regulatory and auditor supervision—something the SEC conveniently shoved down the memory hole in order to paint the Germans as just another victim of Goldman fraud.
Buffett Has `Great Confidence' in Goldman Sachs, Berkshire's Murphy Says (Bloomberg) -- Berkshire Hathaway Inc.’s Warren Buffett, who injected $5 billion into Goldman Sachs Group Inc. in 2008, remains comfortable with his investment after regulators sued the bank for fraud, said Berkshire Director Thomas Murphy. “He’s not concerned with the investment at all,” Murphy, 84, said in a Bloomberg Television interview, citing a telephone conversation with Buffett, Berkshire’s chief executive officer. “He has to see what’s going to happen on it, but I think he has great confidence in Goldman,” Murphy said. The two men spoke after the Securities and Exchange Commission announced its lawsuit on April 16, Murphy said. Buffett, a longstanding Wall Street critic, has supported a firm that’s become a lightning rod for politicians and people who feel cheated by the recession. Public regard for Goldman Sachs, the most profitable firm in Wall Street history, has plummeted in the year and a half since Buffett, 79, provided the company with capital in the depths of the financial crisis.
Democrats happy to keep Goldman contributions - A senior executive of Goldman Sachs might be viewed as persona non grata by households across America that have felt the effects of the credit meltdown on jobs and wages, but not it seems by the White House. Lloyd Blankfein, the CEO of Wall Street's most powerful firm, visited Barack Obama or his chief economic adviser on at least four occasions in just over a year, and the US President says he is happy to keep almost $1m in campaign donations that came from Goldman employees. Mr Blankfein was the Wall Street boss most often called by the previous administration's Treasury secretary and his predecessor at the firm, Hank Paulson. And his access was not shut off by the new President. Larry Summers, who heads Mr Obama's economics team, met Mr Blankfein in February last year and again in September.
Goldman Sachs Was Top Obama Donor - Goldman Sachs contributions to the Obama campaign were more than four times larger than the $230,095 in donations to Sen. John McCain's presidential campaign... Since the 2008 election, FEC reports indicate that Goldman Sachs has contributed generously to Senate Banking Committee and House Financial Services Committee members. The two panels are responsible for oversight of the industry."
Goldman's White House connections raise eyebrows - While Goldman Sachs' lawyers negotiated with the Securities and Exchange Commission over potentially explosive civil fraud charges, Goldman's chief executive visited the White House at least four times. White House logs show that Chief Executive Lloyd Blankfein traveled to Washington for at least two events with President Barack Obama, whose 2008 presidential campaign received $994,795 in donations from Goldman's employees and their relatives. He also met twice with Obama's top economic adviser, Larry Summers. No evidence has surfaced to suggest that Blankfein or any other Goldman executive raised the SEC case with the president or his aides. SEC Chairwoman Mary Schapiro said in a statement Wednesday that the SEC doesn't coordinate enforcement actions with the White House or other political bodies.
Pay No Attention To The SEC Failure Behind The Curtain - Once upon a time, there was a Securities and Exchange Commission, and it – at least per its mission statement – tried valiantly to protect investors from the bad guys who would take their cash and disappear. And every once in a while it would absolutely drop the ball. A lot of individual investors would lose a lot of money to a guy like Bernie Madoff or Allen Stanford, right under the SEC’s nose, and the SEC would get called on it. When stuff like that happened, it would be supremely helpful to bury that kind of news. Sorry for the massive quoting, but this is a WSJ pay story and I’d like everyone to be able to read it: Last Friday, the same day that the government unexpectedly announced its Goldman lawsuit, the SEC’s inspector general released his exhaustive, 151-page report on the agency’s failure to investigate alleged fraudster R. Allen Stanford. Mr. Stanford was indicted last June for operating a Ponzi scheme that bilked investors out of $8 billion.
IG report: SEC knew of Stanford scheme since 1997 The Securities and Exchange Commission knew since 1997 that R. Allen Stanford likely was operating a Ponzi scheme but waited 12 years to bring fraud charges against the billionaire, the agency inspector general said Friday.An SEC enforcement official who helped quash investigations of Stanford's business later legally represented him, according to a new report by the agency watchdog.The SEC didn't bring charges against Stanford until February 2009, when it alleged a $7 billion fraud. SEC Inspector General David Kotz said in the report that "institutional influence" in the enforcement division was a factor in the agency's repeated decisions not to conduct a full investigation. The IG's office did find evidence, however, that "institutional influence" within the enforcement division contributed to the repeated decisions not to conduct a thorough investigation of Stanford, the report says.
As Economy Tanked, SEC Officials Surfed Porn - At the SEC, all they thought about was SEX.The country's top financial watchdogs turned out to be horndogs who spent hours gawking at porn Web sites as the economy teetered on the brink, according to a memo released Thursday night.The shocking findings include Securities and Exchange Commission senior staffers using government computers to browse for booty and an accountant who tried to access the raunchy sites 16,000 times in one month. Their titillating pastime was discovered during 33 probes of employees looking at explicit images in the past five years, said the memo obtained by The Associated Press.It says 31 of those probes occurred in the 2-1/2 years since the country's financial system nearly crashed. The report was written by SEC Inspector General David Kotz in response to a request from Sen. Charles Grassley (R-Iowa).
SEC staffers watched porn as economy crashed - As the country was sinking into its worst financial crisis in more than 70 years, Security and Exchange Commission employees and contractors cruised porn sites and viewed sexually explicit pictures using government computers, according to an agency report obtained by CNN. "During the past five years, the SEC OIG (Office of Inspector General) substantiated that 33 SEC employees and or contractors violated Commission rules and policies, as well as the government-wide Standards of Ethical Conduct, by viewing pornographic, sexually explicit or sexually suggestive images using government computer resources and official time," said a summary of the investigation by the inspector general's office. More than half of the workers made between $99,000 and $223,000. All the cases took place over the past five years.
SEC Staff Watched Porn as Economy Crashed (WASHINGTON) — Senior staffers at the Securities and Exchange Commission spent hours surfing pornographic websites on government-issued computers while they were being paid to police the financial system, an agency watchdog says. The SEC's inspector general conducted 33 probes of employees looking at explicit images in the past five years, according to a memo obtained late Thursday by The Associated Press. The memo says 31 of those probes occurred in the 2 1/2 years since the financial system teetered and nearly crashed. The memo was first reported Thursday evening by ABC News. It summarizes findings of past inspector general probes and reports some shocking findings: A senior attorney at the SEC's Washington headquarters spent up to eight hours a day looking at and downloading pornography. When he ran out of hard drive space, he burned the files to CDs or DVDs, which he kept in boxes around his office...
In Light Of The SEC's Pornography Fetish Revalations, Bill Singer Proposes A Simple SOP Checklist - By now it is well-known that the bulk of the SEC's budget is spent on maintaining internet bandwidth to ensure that its 80286-based computers can cope with the terabytes of daily internet porn downloaded by its employees. In light of the need by the SEC to buckle up in preperation for the critical lawsuit against Goldman, which will make or break the agency, Bill Singer of Broke and Broker has come up with a simple list of several Standard Operating Procedures that the agency's employees must adhere to if they hope to have a job next year.We agree with his recommendations wholeheartedly.
Didja Miss Me? I have continued to be amazed by the sheer number of visits to this site during my bloggy hibernation. Either all your RSS readers are set to auto-refresh, or a hell of a lot of you need something much better to do. Don't you have jobs? Or homes? Or at least demanding girlfriends?2 I have been reliably informed that something scandalous has recently been unearthed which involves a recurring target of Your Formerly Diligent Blogosopher's ruminations. I even believe the word "fraud" has been bandied about liberally. Given that a) I have been occupied elsewhere, and b) I really couldn't give a flying fuck in a rolling donut whether the Great Vampire Squid of West Street (new digs, natch) vanishes into the singularity or not, I frankly have not paid much attention to the scandal beyond a cursory perusal of the headlines and a couple of blog posts. Honestly, life is just too short.3 However, in the spirit of duty which compels Your Humble Servant to satisfy every bloggy whim my Peremptory Audience demands of me (and also because Natasha has temporarily left the hotel room to get more caviar and ice cubes), I will make the following brief observations:
Goldman Sachs Analogies - Economists Do It with Models - A few days ago, I presented you with an analogy that Rachel Maddow came up with to explain the Goldman Sachs fraud mess. Aaaaaaand you didn’t like it very much, which is fair since it was a little too oversimplified. (If you’re curious, I added some more detail in the comments of that post.) But I have to admit that it’s not as bad as the analogies that some others have come up with…*cue Daily Show montage* Oh man. First off, what on earth was Jim Cramer thinking regarding that costume? Second, apparently decent analogies to explain things like potential large-scale bank fraud are harder to come up with than I would have initially thought.
Lloyd Versus the Volcano - My buddies on the golf course this morning were way more interested in chatting about the Goldman Sachs charges than the Icelandic volcano that's shut most of northern Europe down. I thought I'd check out which subject was more interesting for the rest of the US and while both terms are spiking, the volcano trounces Lloyd's Merry Men by a landslide. According to Google search trends, at least (see below)...
SEC v Goldman Links Roundup - A major story, I'm just going to add links below throughout the day that I feel add interesting details and angles on it...
GOP seeks SEC records on Goldman Rep. Darrell Issa, the top Republican on the House Oversight committee, is demanding a slew of documents from the Securities and Exchange Commission, asserting that the timing of civil charges against Goldman Sachs raises “serious questions about the commission’s independence and impartiality.” Issa’s letter, addressed to SEC Chairwoman Mary Schapiro and signed by eight other House Republicans, asks whether the commission had any contact about the case, prior to its public release, with White House aides, Democratic Party committee officials, or members of Congress or their staff. Issa implied that the timing was a bit too convenient, saying President Barack Obama’s push on Wall Street reform “neatly coincided with the commission’s announcement of the suit.”
The politics of the Goldman fraud case - When I first wrote about the case against Goldman Sachs for fraud on Friday I said that my reaction was “largely positive” as fraud was a major factor in what led to crisis and it is high time regulators started to acknowledge this. Nonetheless, from my vantage point. The Goldman case is a politically-charged one because there are a number of political and tactical advantages to this particular case. Let me review some of them. It is no coincidence that this is a civil case instead of a criminal one. When the Obama Administration went after the Bear Stearns hedge fund managers Cioffi and Tannin who blew up in July 2007 via the Brooklyn US Attorneys office, the defendants were acquitted. This was a black eye for the Administration.
More House Dems call for criminal investigation of Goldman - We reported on Wednesday that 18 House Democrats are calling for a criminal investigation of Goldman Sachs. As of today, that number has more than doubled, reaching 44 lawmakers.You can see the full list of signing members at the website of the Progressive Change Campaign Committee (PCCC), which is organizing a grassroots campaign to get more lawmaker support.The SEC does not have authority to launch a criminal investigation, however, so the letter-signers are urging the Department of Justice to open their own probe. The effort was spearheaded by Rep. Marcy Kaptur (D-Ohio).
The Financial Crisis as Crime Story - The case has not even been heard in court and the company denies all the allegations. Almost every business publication has carried commentaries by insiders who say the government may have a hard time prevailing, and dismissing all the Sturm and Drang. And yet the public seems to be delighted if not outraged by the SEC's charges against Goldman Sachs, the opulent investment bank that many Americans see as the poster child of those causing the financial crisis. Even in the world of business where dislike of government crackdowns is dominant, a new poll shows that a majority believe Goldman is getting what it deserves
The Death of a Salesman - The news last Friday that Fabrice Tourre, a 31-year old Vice President at Goldman Sachs had been charged with civil fraud by the Securities and Exchange Commission (SEC), together with the firm, for failing to advise investors that he was knowingly peddling a custom-tailored package of mortgages handpicked for failure by John Paulson, a hedge fund manager that planned to short them, was half the story. The eyebrow raiser in the story went unnoticed; the lawyer and law firm that would be representing Mr. Tourre (who referred to himself as the Fabulous Fab[rice] in an internal email), was Pamela Chepiga of London’s derivatives powerhouse Allen & Overy: the law firm that signed off on the Structured Investment Vehicles (SIVs) that blew up Citigroup and made it a ward of the taxpayer.
Goldman Sachs banker Fabrice Tourre tried to get rent down… The banker at the heart of the Goldman Sachs fraud case persuaded his London landlords to reduce his rent because of the credit crunch. The owners of the two-bedroom apartment had no idea that Fabrice Tourre was a high-flying figure in the investment bank, earning up to $1.5 million a year. Goldman transferred Mr Tourre from Wall Street to London in 2008 after the toxic debt policy that he sold plunged in value. The move seems to have been made in a hurry as he had no time to view the flat, chosen by his French girlfriend, before moving in. Goldman received a subpoena for information in August 2008. Mr Tourre was registered with the Financial Services Authority in London in November 2008.
Exclusive: Goldman Sach's voicemail to staff - Goldman Sachs plans a confident, resolute approach to fighting Friday's SEC fraud suit, an industry source said. The 140-year-old firm’s executives believe they are "a prop” and are being “set up as the villain” in the administration’s campaign for Wall Street reform, the source said. Goldman plans to continue expressing confidence "after a sucker punch," as the source put it, by focusing on clients, who the executives believe are largely sympathetic. Here is the text of a voicemail left for employees by Chairman and CEO Lloyd C. Blankfein:
Goldman Sachs e-mails - E-mail exchanges cited by the Securities and Exchange Commission in its fraud suit against Goldman Sachs and one of its vice presidents, Fabrice Tourre, include messages between Tourre and his girlfriend. The Washington Post obtained copies of some of the e-mails Friday. In one Jan. 27, 2007, e-mail, Tourre suggests he knew he was creating risky securities that were likely to not succeed. "Not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient . . . amazing how good I am in convincing myself!!!" In March 7, 2007, e-mail, Tourre refers to Dan Sparks, head of Goldman's mortgage business: The "US subprime business situation is that it is not too brilliant. . . . According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long!" In a subsequent e-mail, Tourre wrote that he sold the investment "to widows and orphans that I ran into at the airport."
Goldman Sachs taps ex-White House counsel - Goldman Sachs is launching an aggressive response to its political and legal challenges with an unlikely ally at its side — President Barack Obama’s former White House counsel, Gregory Craig. The beleaguered Wall Street bank hired Craig — now in private practice at Skadden, Arps, Slate, Meagher & Flom — in recent weeks to help in navigate the halls of power in Washington, a source familiar with the firm told POLITICO. “He is clearly an attorney of eminence and has a deep understanding of the legal process and the world of Washington,” the source said. “And those are important worlds for everybody in finance right now.”
Goldman Sachs readies forceful response against claims it misled clients - Goldman Sachs is preparing its most detailed defense yet to allegations that it misled clients in its mortgage securities business, arguing that the firm was unsure whether housing prices would rise or fall and did not take any action at odds with the interests of its clients. An internal Goldman document, prepared for senior executives and obtained by The Washington Post, addresses the criticism that the bank invested its own money betting against the housing market while simultaneously urging clients to invest in securities that would increase in value only if the housing market did.
Is Goldman’s Hardball Stance a Big Mistake? - Yves Smith - It’s important to keep in mind that this is not the only line of defense the firm is taking (for instance, predictably, it is laying the groundwork to distance itself from Fabrice Tourre, the Goldman employee singled out in the complaint). Nevertheless, the problem with this line of thinking is twofold. First, even if the Obama Administration ramped this case into the foreground at a politically expedient time, it does not disprove the idea that the underlying charges may have merit. The fact that the UK’s FSA has launched a probe into Goldman conduct, and SIGTARP is looking into Goldman’s Abacus trades with AIG. Moreover, Senator Carl Levin says “another big shoe is about to drop on Goldman” . the more closely Goldman’s conduct is scrutinized, the more troubling behavior is likely to come to light.
Goldman’s biggest lie - Alea has given us Abacus for Dummies: a very useful quick overview of the structure of the deal. And in doing so, he helps to reveal Goldman’s biggest lie. Simplifying Alea even further, we have five steps here:
- The reference portfolio is put together.
- Goldman sells super-senior protection, Paulson buys it.
- IKB and ACA sell senior protection, Goldman buys it.
- Goldman takes the senior protection that it bought from IKB and ACA, and sells it on to Paulson.
- Goldman buys super-senior protection from ACA, through ABN Amro
10 Things You Don’t Know (or were misinformed) About the GS Case - Ritholtz: I have been watching with a mixture of awe and dismay some of the really bad analysis, sloppy reporting, and just unsupported commentary about the GS case. I put together this list based on what I know as a lawyer, a market observer, a quant and someone with contacts within the SEC. (Note: This represents my opinions, and no one else's).
Surprise: Goldman Sachs to pay out $5 billion more in bonuses for first three months of 2010 - As if to put the icing on the cake, the investment bank Goldman Sachs is set to shell out another $5 billion in bonuses to employees. What's more, the bonuses are expected to cover the employees' work for just the first three months of the year, according to the UK Sunday Times. According to the report, bankers will receive remuneration of about $170,000 per person for the firm's 32,500 employees. Some traders are set to receive millions. Earlier this year, Goldman's "junior" bankers were told they'd begin receiving salaries that were double their previous takes. "It's made me rethink everything," a Goldman Sachs employee, "sipping champagne," told the site. "I like the new structure even better. My monthly take home just went way up."
Government’s Goldman-Buffett Deal Probe – WSJ. -A Goldman Sachs Group Inc. director tipped off a hedge-fund billionaire about a $5 billion investment in Goldman by Warren Buffett's Berkshire Hathaway Inc. before a public announcement of the deal at the height of the 2008 financial crisis, a person close to the situation says.The revelation marks a significant turn in the government's case against Raj Rajaratnam, the hedge-fund titan at the center of the largest insider-trading case in a generation. Mr. Buffett's investment in Goldman in September 2008 was a watershed moment in the financial crisis. One of the world's savviest investors, Mr. Buffett helped allay fears about the instability of the financial system by backing America's leading investment bank.
Bond Market Will Never Be the Same After Goldman (Bloomberg) -- If you happen to be sitting on the Goldman Sachs bond-trading floor life must feel horribly unfair. You did nothing worse than live by the ethical assumptions of your market -- any money-making event short of obviously illegal is admirable -- and now your own grandfather thinks you’re some kind of monster. Your world feels upside down: What was right is now wrong; what was good is now bad; what once felt like winning now feels like losing. You are probably wondering: What next? What will the angry rabble -- all those ordinary people who can never really understand your business -- now demand that you explain to them, so they can disapprove of you all over again?
Editorial - After Goldman Sachs - NYTimes - After the government sued Goldman Sachs for fraud, a lot of politicians vowed to finally clean up the system. In an important committee vote on Wednesday, 13 senators — including one Republican for a refreshing change — approved a measure that would go a long way toward regulating derivatives, the complex instruments at the heart of the bubble, the bust, the bailouts and the Goldman case. It is still not tough enough to avoid another catastrophe.
Simon Johnson: Wall Street's Stranglehold on Our Democracy Must Be Broken - Simon Johnson is the former chief economist for the International Monetary Fund, and co-founder of the Baseline Scenario, a blog about the financial crisis and financial reform. He is a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. Johnson's latest book, 13 Bankers (co-authored with Baseline Scenario co-founder James Kwak) is a detailed examination of Wall Street's political and ideological power and the devastating economic results. AlterNet's economics editor Zach Carter recently talked with Johnson about the U.S. banking system
Prime Number - NYTimes - 125: The approximate number of former Congressional aides and lawmakers who are lobbying for Wall Street and the financial services sector as part of a multibillion dollar effort to shape, and often scale back, federal regulatory power over the industry, according to analyses by Public Citizen and the Center for Responsive Politics, two nonpartisan watchdog groups.
Hope rises for real financial reform - The Goldman Sachs scandal has done the unthinkable: It's made it possible that legislation reining in Wall Street's casino may actually be enacted. The odds against real reform are still steep. Wall Street remains the most deep-pocketed lobby in the land. And the problem isn't just Republican opposition. "A lot of our members up here just want a bill passed," says one Democratic legislator. "They don't think that people are watching that closely. But this matters immensely to people. This is a which-side-are-you-on moment." The clearest way for senators to demonstrate that they're not on Wall Street's side would be to support the bill that Arkansas Democrat Blanche Lincoln plans to bring before the Senate Agriculture Committee on Thursday. Going well beyond the bill that the House passed and the legislation that came out of Connecticut Democrat Chris Dodd's Senate Banking Committee, Lincoln's bill aims squarely at the big banks' most highly leveraged, profitable and risky-to-the-rest-of-us business: their trade in derivatives.
Goldman makes financial reform passage certain - It is now virtually certain financial reform legislation will go sailing through the Senate, following the complaint filed against Goldman Sachs and an employee in the U.S. District Court for the Southern District of New York by the Securities and Exchange Commission this afternoon. Filing a complaint is not the same as proving it. Goldman Sachs has already stated that “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation”. But in the current environment, no one in Washington, certainly not the 41 Republican senators who would all be needed to block the bill’s progress or force significant amendments, will want to go on record defending the big banks. Industry lobbyists will have their hands full handling the fallout from today’s actions.
SEC chief pledges better oversight of banks -- The chairman of the Securities and Exchange Commission on Tuesday pledged better oversight of the nation's largest banks after criticism that the agency failed to spot accounting tricks at investment bank Lehman Brothers before it collapsed. Chairman Mary Schapiro told a congressional panel that the agency has sent letters to 19 banks seeking information about whether they are using accounting tricks that a bankruptcy examiner said masked the bank's precarious financial condition. Lehman failed in September 2008 in the largest corporate bankruptcy in U.S. history.
Financial Debate Renews Scrutiny on Banks’ Size - In the last year and a half, the largest financial institutions have only grown bigger, mainly as a result of government-brokered mergers. They now enjoy borrowing at significantly lower rates than their smaller competitors, a result of the bond markets’ implicit assumption that the giant banks are “too big to fail.” In the sweeping legislation before the Senate, there is no attempt to break up big banks as a means of creating a less risky financial system. Treasury Department and Federal Reserve officials have rejected calls for doing so, saying bank size alone is not the most important threat. Instead, the bill directs regulators to compel the largest banks to hold more capital as a cushion against losses. It sets up a procedure intended to allow big banks to fail, with the cost borne not by taxpayers but by the biggest financial institutions.
Our Giant Banking Crisis – What to Expect - Paul Krugman and Robin Wells, New York Review of Books - From an economist’s point of view, there are two striking aspects of This Time Is Different. The first is the sheer range of evidence brought to bear. Reading Reinhart and Rogoff is a reminder of how often economists take the easy road—how much they tend to focus their efforts on times and places for which numbers are readily available, which basically means the recent history of the United States and a few other wealthy nations. This Time Is Different ventures into the back alleys of economic data, accepting imperfect or fragmentary numbers as the price of looking at a wide range of experience. The second distinguishing feature is the absence of fancy theorizing
Concentration of the US Banking System - [chart source] As noted in the post below this one, I don't think bank size and stability of the banking system are closely related, we still had financial meltdowns in the days when banks were small. But I do think bank size and political power are highly correlated, and that banks have far too much political influence. So the question is, why do banks need to be so much bigger today? If we were to cut the share of total commercial banking sector assets held by the top three banks back to its historical average of 10-15%, which still seems relatively concentrated, would that be a disaster? I certainly haven't seen convincing evidence that economies of scale require banks to be this large, so why allow it?
Breaking Up the Banks - On Wednesday, Senators Sherrod Brown and Ted Kaufman unveiled a “SAFE banking Act” with a clear and powerful purpose: Break up the big banks.The proposal places hard caps on leverage and size of financial institutions. It is well crafted, based on a great deal of hard thinking, and — as reported on the front page of The New York Times this week — the issue has the potential to draw a considerable amount of support.The idea is simple, in the sense that the largest six banks in the American economy are currently “too big to fail” in the eyes of the credit market (and presumably in the leading minds the Obama administration, which saved all the big banks, without conditions, in March-April 2009). The bill put forward by Senator Christopher J. Dodd, the chairman of the Banking Committee, has some sensible proposals — and is definitely not an approach that supports “bailouts” — but it does not really confront the problem of the half-dozen megabanks.
TBTF Requires a Controlled Demolition - As the news of Wall Street's underhanded dealings goes mainstream thanks to the SEC's case against Goldman Sachs, the idea of letting the bankers fail never seemed so sweet to so many in recent history. Yet, failure might have nasty consequences. Just as one wouldn't want a skyscraper to topple over in a crowded city, one wouldn't want the TBTF banks to collapse. Better, I think, to effect a controlled demolition. Explaining the problem's emergence, Mr. Grant draws our attention to the FDIC, an institution ostensibly designed to benefit the man on the street whose limited life savings might be lost in a bank failure. An additional effect, however, was to shield bank owners from liability, at state expense.
Geithner Says Bailouts to Cost Taxpayers $87 Billion (Bloomberg) -- U.S. government bailouts, including funds for Citigroup Inc. and American International Group Inc., will cost taxpayers about $87 billion, according to a letter Treasury Secretary Timothy F. Geithner sent congressional leaders. The Troubled Asset Relief Program will lose about $117 billion, and funding related to Fannie Mae and Freddie Mac will cost taxpayers another $85 billion, Geithner said in a letter today to the Democratic and Republican leaders in the Senate and House. The government expects to make about $115 billion on Federal Reserve programs, including the purchase of mortgage- backed securities, he wrote
Stop Stop Too Big To Fail – Krugman - In the last few weeks, a new player entered the financial reform fray with a $1.6 million ad buy, a respected economist on board, a blitz of opinion columns on left-leaning websites, and a message, cooked right into the group’s name — Stop Too Big To Fail — that liberals could love. But as TPMmuckraker has looked into the group, every indication is that Stop Too Big To Fail is an astroturf operation funded by corporate interests to give the appearance of grassroots opposition to reform. Not too surprising, actually. “Too big to fail” has been adopted wholesale by opponents of financial reform; rather than admitting that they’re trying to head off serious regulation, they claim that anything you do is actually institutionalizing TBTF — that what we need to do is swear that we’ll never do another bailout, and never mind the rest.
Larry Summers Defends Megabanks, Says Too Many Small Banks Make U.S. 'Less Stable' - President Barack Obama's top economic adviser defended megabanks Thursday, arguing that breaking them up serves no purpose and that a proliferation of smaller banks would instead make the financial system "less stable."The remarks stand in sharp contrast to those being made by the presidents of at least three regional Federal Reserve banks, one Nobel Prize-winning economist, top bank regulators in Europe, and former Wall Street chieftains, all of whom argue that in order to truly end Too Big To Fail, the U.S. needs to shrink its top financial institutions so that none of them ever again threaten the financial system. In an interview with "PBS NewsHour", Lawrence H. Summers, director of the White House's National Economic Council, said that breaking up megabanks would hurt the economy.
Pesos, Ponzi, And Financial Sector Profits - Krugman - There’s been an interesting exchange over my suggestion — which is by no means original — that the stability of banks between 1935 and 1980 or so had a lot to do with lack of competition, which gave banks a franchise value that executives didn’t want to endanger with risky strategies.Mike Konczal raises a good point: how do we reconcile loss of franchise value with huge financial-sector profits? And Ryan Avent offers a possible answer: soaring leverage. I’ve been thinking along the same lines, with a bit of a twist. Here’s how I come at the issue: basically, the financial industry has been borrowing vast sums at low interest rates, and investing the funds in higher-yielding assets. But why do those assets yield more? Largely, I’d argue, because of the “peso problem” — a term that came out of the MIT graduate student lunchroom in the mid-70s...
Leveraging up - EARLIER this week I mentioned Paul Krugman's speculation that bank franchise value might have had something to do with the "quiet period" in financial markets in the postwar decades. The argument is that before significant deregulation, the banking industry was highly uncompetitive, and so bankers were fat, sleepy, and risk a averse, sitting on cash cows they daren't disturb with excessive risk taking. Once the banking sector was freed up, on the other hand, banks had to fight for profits. This encouraged big banks to get involved in risky businesses which led to crises. Mike Konczal points out that something seems slightly amiss here.
This Bailout Is a Bargain? Think Again - IT’S way too early to tally the costs of the government’s various efforts to help our nation’s financial institutions survive the credit debacle. But that hasn’t stopped anonymous Treasury officials from claiming in recent days that their Armageddon-avoidance will wind up costing far less than many feared. It is understandable, of course, that Treasury might want to transmit good news about bailouts the same week Americans were rushing to meet the I.R.S.’s tax deadline. And given that Treasury is run by Timothy F. Geithner, the man who doled out bailout billions as president of the Federal Reserve Bank of New York, his current minions certainly have an interest in peddling the view that the price of these rescues has become less onerous
SEC/CDO Litigation: Why Aren’t the Collateral Managers Being Sued Too? - One issue that continues to puzzle us, in looking at the sudden furor about seemingly duplicitous dealings by investment banks in the real estate related CDO business, is that the focus thus far has been primarily on the investment banks that packaged and sold these toxic investments. On the one hand, that emphasis had a certain logic, since the investment banks profited from these deals in numerous ways (fees for underwriting the CDO itself, the profits that could be attributed to the CDO by virtue of keeping the subprime machines that the various banks were operating going, the opportunity the CDOs gave for at least some of the dealers to set up short positions). That, plus their size, makes them the logical deep pocket to target in litigation.
CDO Market – Rife With Collusion and Manipulation? - The consensus reality of the credit crisis appears to be: it was the result of a complex combination of factors, no one can be blamed all that much (save maybe greedy borrowers and complicit rating agencies) and almost no one saw it coming. We’ve argued that many of the arguments that support that view are myths. In particular, the more we have dug into the CDO market, the more we are convinced that it was central to the crisis. Furthermore, we believe that this market did not operate on an arm’s length basis, that many of the practices that were widespread in the industry amounted to collusion. Collusion and resulting price distortions serve as the most likely explanations for behaviors that are consistently glossed over in the consensus accounts of the crisis.
EU Now Investigating Use Of CDOs And Other Derivatives - Well, that spares some wholesale problems for individual countries to pursue action against Goldman. The EU's Rehn, who earlier catalyzed the upmove in the market by saying what the EU has been saying for week, i.e., that Europe can provide aid to Greece if Greece requests it (no seriously, the same headline repeated 1,000,000 times will push the market green every single time). But his latest is that the "EU is investigating use of CDO's and other derivatives." We are confident that all cash strapped countries, which are so because they ended up blowing money by bailing out their banks who gorged on CDOs (yes, if you are a European country, the sucker on the table is you), will suddenly find more reasons to go after Goldman. If nothing else, it will make Tuesday's congressional hearing a more watched event than the superbowl. To that end, we have inquired about a 30 second advertising spot with C-SPAN.
What to do about CDO ratings? -- There is no doubt that part of the reason for the unreliable over generous ratings was conflict of interests. The bond ratings agencies also consulted earning fees for helping to design the instruments they went on to rate. This is unacceptable and should be banned. Beyond that, many instruments were rated by only one of the big three – Moody’s, Fitch and S&P . This gave each an incentive to be generous in order to attract business. Maybe, it is possible to eliminate this incentive by requiring clients of any of the three to pay for ratings from all three.As I argued here, the agencies’ incentives would still be unacceptably distorted. They have to power to decide if whole sectors of finance exist or not. If they had procedures such that no CDO tranche were ever rated AAA, then the volume of CDOs would have been a small fraction of what it was. Even without competing for business, the agencies have an incentive to help new types of structured finance grow, since more assets means more assets to rate and more income.
Shocking Fraud from Financial Scum : Good Math, Bad Math –- Against my better judgement, I've ended up writing a lot about the financial mess that we're currently going through. If you've read that, you know that my opinion is that the mess amounts to a giant pile of fraud.But even having spent so much time reading and studying what was going on, the latest news from the financial mess shocks me. Even knowing how utterly sleazy and dishonest many people in the financial world have been, even knowing about the stuff they've been doing, the kinds of out and out fraud that they've perpetrated, the latest news makes them look even more evil than I could have imagined. Let's start by reviewing a bit. The basic thing at the root of the problem is something called a collateralized debt obligation - CDO. A CDO is basically a share of a great big bunch of loans, where the loans are backed by a piece of property. The most common form of CDO is basically a wrapper around a batch of mortgages.
Even With U.S. Oversight, AIG Keeps Secrets - After taxpayers rescued American International Group from the brink of collapse, the U.S. government moved to protect its investment by appointing directors and special trustees to oversee the company. Now the government's appointees, all hailing from Wall Street or the Federal Reserve, are allowing AIG to withhold key records generated during the company's decline. The documents could decode the murky circumstances leading to the second largest bailout of the financial crisis. The Huffington Post Investigative Fund has learned, in the course of inquiring into oversight of AIG, that the government's six appointed directors and trustees are resisting calls for AIG to release its internal documents and e-mails from that time.
After Getting Bailed Out By American Taxpayers, General Electric Pays ZERO U.S. Taxes, Pretending that All of Its Profits are Overseas - General Electric got bailed out by American taxpayers. Specifically, it was given $139 billion in FDIC guarantees and support by the Federal Reserve for it's commercial paper (see this). So you'd think that GE would return the favor by paying American taxes, right? Wrong. GE paid no U.S. taxes for 2009. As CNN points out: GE had plenty of earnings last year -- just not in the United States. For tax purposes, the company's U.S. operations lost $408 million, while its international businesses netted a $10.8 billion profit. Unfortunately, GE is not alone...
What Links The Banking Crisis And The Volcano? - We are seldom more vulnerable than when we feel insulated. The miracle of modern flight protected us from gravity, atmosphere, culture, geography. It made everywhere feel local, interchangeable. Nature interjects, and we encounter – tragically for many – the reality of thousands of miles of separation. We discover that we have not escaped from the physical world after all. Complex, connected societies are more resilient than simple ones – up to a point. During the east African droughts of the early 1990s, I saw at first hand what anthropologists and economists have long predicted: those people who had the fewest trading partners were hit hardest. Connectivity provided people with insurance: the wider the geographical area they could draw food from, the less they were hurt by a regional famine. But beyond a certain level, connectivity becomes a hazard. The longer and more complex the lines of communication and the more dependent we become on production and business elsewhere, the greater the potential for disruption. This is one of the lessons of the banking crisis.
The Discount Rate Mismatch. . . or, how finance is like quantum mechanics. Many pundits like to discuss the issue of Maturities Mismatch – that banks borrow short (at low interest), lend long (at higher interest), take the profit and (allegedly) absorb the risk. We often hear talk about how the Maturities Mismatch is integrally linked to liquidity risk – the sometimes self-fulfilling threat of bank runs – which the FDIC is designed to fight. Rarely if ever do we see anyone making the connection to the Discount Rate Mismatch . . . In fact you’ve probably never even heard of it, and neither have I. It is the difference between the risk-free return on investment that investors demand, and the risk-free return on investment that can be generated by real world investments.
Republican Opposition to the Orderly Liquidation Fund - The thing that annoys me most about Republicans' new-found opposition to the $50bn orderly liquidation fund is that they are, without question, doing Wall Street's bidding on this. Killing a "pre-funded" resolution fund — which would be used to help pay for resolutions under the new resolution authority — is the Street's #1 issue in financial reform. That might seem a bit strange at first, until you realize that the majority of the $50 billion would come directly out of the major dealer banks' profits over the next few years. (Never underestimate the Street's ability to be short-sighted.) This issue has been at the top of the Street's wish list since last summer, when Barney Frank started suggesting that the House bill might include a pre-funded resolution fund.
Regional banks beat, warn on loan demand - Regional banks PNC Financial Services Group, BB&T and Fifth Third Bancorp reported better-than-expected first-quarter results on Thursday but warned that U.S. consumer demand for loans is still low.The banks are highly exposed to struggling U.S. consumers as well as local businesses. Even as U.S. unemployment has dropped below 10 percent and other economic data appears to be improving, the banks' results show customers are still saving more and borrowing less. While loan losses on some classes of loans, such as residential mortgages, are showing signs of easing, banks such as Fifth Third said that commercial loan losses are rising.
How Safe Is Your Bank? Texas Ratios of 7,500+ Banks - In March I posted an Interactive Map of Worst Banks in the U.S. by Texas Ratio, Non-Performing Assets, and Total Capital. Today I have data for every bank in the report, over 7,500 banks. There are so many banks in the list, an interactive map is not possible. This display contains a lot of data and it may take extra time to load. Please be patient. It takes an extra 3-5 seconds on my computer. Your results may vary. If you have an inadequate memory, the display may be slow or inoperable.
FDIC Sells Junk Zeros The FDIC announced two deals today. The first was a 1.38B CDO that was “secured” by $4.5 bil of Corus Bank sludge. The assets were non-perform construction loans and REO “assets”. The coverage ratio on this one is 3.25X1. This implies the assets are worth about 30 cents on the dollar. The second transaction was a $653mm deal secured by 1.2 B of Franklin Bank SSB loans and more of those REO assets.The debt sold today against this package of swill is non-interest bearing. The notes sold at a discount. At the maturity (up to four years) the junk notes will be paid at par. I don’t think you could sell this deal to even IKB. It is just crap. But it went out the door in about two seconds. The reason is that the discount notes are full faith and credit of both the FDIC and Uncle Sam. These notes are as solid as Treasuries and the yield is better.
Bring Criminal Charges Against Chief Executives of Leading Originators And Securitizers of Stated-Income Mortgages – You can steal and burn money many different ways. Leaders of financial firms use a conservative bias with money they lend to protect society’s most precious asset: Savings accumulated through blood, sweat, tears — sacrifice. Unless you live in interesting times. What was sacred is profane. We have and do live in interesting times. The basic rules of lending were banned in the credit bubble. Sacrifice was a joke. Money was easy. Now we have the aftermath of the crisis. It is only beginning. The most notorious method for stealing burning squandering money in our real-estate-and-mortgage bubble was something called stated-income loans. The popular term now is liar loans. What does that mean? For the person who can’t believe fraud could be committed on a grand scale, who believes the world works according to right and wrong, the truth is stark and simple: Originating banks allowed borrowers to say or to “state” or to lie about their income and no proof was required to back up what was said or “stated” or lied about.
Citigroup Cards Show Reliance on Foreign Consumer: CHART OF THE DAY - Purchases using Citigroup Inc. credit cards are accelerating outside the U.S. and still contracting in North America, adding to evidence that foreign consumers are leading the recovery from the global recession. The CHART OF THE DAY shows the breakdown in first-quarter purchases using Citigroup-branded cards on a year-over-year basis. Transactions made with Citigroup-issued credit cards rose 23 percent in Asia, a second straight increase, while the dollar amount of charges in North America fell 10 percent. Purchases were also up in Latin America and Europe. These differences may help explain why Federal Reserve Chairman Ben S. Bernanke is poised to keep interest rates low until the labor market improves enough to allow for a sustained pickup in Americans’ spending.
Blackstone Said to Weigh Reworking $4.9 Billion Debt (Bloomberg) -- Blackstone Group LP may ask creditors to restructure $4.94 billion of debt remaining from its 2007 purchase of Sam Zell’s Equity Office Properties Trust, according to two people familiar with the discussions. Blackstone would consider paying down about 5 percent of the balance and agreeing to a slightly higher interest rate in exchange for extending the maturity, according to the people, who declined to be identified because the talks are private. The debt, which was packaged and sold as a commercial mortgage- backed bond in June 2007, matures in 2012, according to data compiled by Bloomberg. While U.S. commercial property values have fallen almost 42 percent since 2007, the Blackstone properties are generating enough cash to pay the mortgages, according to the data.
Moody's: CRE Prices Decline 2.6% in February - Moody's reported this morning that the Moody’s/REAL All Property Type Aggregate Index declined 2.6% in February. This is a repeat sales measure of commercial real estate prices. Moody's noted that the share of distressed sales has increased sharply. In 2008 distressed sales were only 4% of all sales, in 2009 nearly 20% of all the repeat sales transaction were classified as distressed. In February 2010, the percent of distressed sales jumped to a record 32%. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.
Fitch: Commercial mortgage defaults to keep rising Defaults on the loans behind U.S. commercial mortgage backed securities will continue to rise through the year, Fitch Ratings said Wednesday. The agency expects the overall rate of default for deals it has rated to exceed 11 percent by year-end. That spike would follow a more than fivefold increase in loan defaults last year, to 1,464 loans totaling $17.75 billion, with 34 percent of defaults happening in the last three months of the year."Fourth-quarter default rates reached their highest ever levels both in principal balance and number of loans with no clear signs of stabilization,"
Fitch: CMBS Defaults to Top 11% This Year - CMBS loan defaults will continue rising throughout 2010, topping 11% by year’s end, Fitch Ratings said Tuesday. The agency also notes that in 2009, multifamily loans did not generate the highest number of new defaults, with that distinction now going to the retail sector. "Fourth-quarter default rates reached their highest-ever levels both in principal balance and number of loans with no clear signs of stabilization," Fitch managing director Mary MacNeill says in a release. The $17.75-billion total of ’09 defaults in the Fitch-rated universe was higher than the cumulative total of defaults from the inception of the CMBS market through 2008, $17.74 billion. Thirty-four percent of those ’09 defaults occurred in Q4, Fitch says. In terms of vintages, 2007-era CMBS loans led in defaults during ’09 with 35.6% of the tally by principal balance. "The aggressive underwriting and higher leverage in the 2007 vintage is leading to substantially higher default rates," MacNeill says. The agency predicts 10-year cumulative default rates on ’07-vintage CMBS to reach 27% within the Fitch-rated universe.
Southern California office market continues to weaken - Southern California's long-suffering office market continued to weaken in the first quarter as demand slid and rents fell, a pattern expected to carry on through the months ahead. The trend is dreary for landlords, who have seen their incomes fall for more than a year, but a boost for office renters who are looking for new space or negotiating to renew their existing leases as they expire."Rents are as low as they have been in a number of years," Overall office vacancy in Los Angeles County reached 17.6% in the first quarter, up from 14.3% a year earlier, according to Cushman & Wakefield. The average rent landlords asked for dropped to $2.60 a square foot per month from $2.82 in last year's first quarter.
The Busted Homes Behind a Big Bet (WSJ) The government's civil-fraud allegation against Goldman Sachs Group Inc. centers on a deal the firm crafted so that hedge-fund king John Paulson could bet on a collapse in U.S. housing prices. It was a dizzyingly complex transaction, involving 90 bonds and a 65-page deal sheet. But it all boiled down to whether people like Stella Onyeukwu, Gheorghe Bledea and Jack Booket could pay their mortgages. They couldn't, and Mr. Paulson made $1 billion as a result. More than half of the 500,000 mortgages from 48 states contained in the Goldman deal—known as Abacus 2007-AC1—are now in default or foreclosed.
Property Down 30 Percent. Mortgages Down 2 Percent. Everything Which Diverges Must Collapse. (graph) You know about a housing bubble, but not a mortgage bubble. Why? Seeing the mortgage bubble requires both competence and independence and a little courage. These are not available at Joe-or-Jane magazine or newspaper. A crash in mortgages represents a true-and-possible Armageddon scenario. Property values have fallen 30 percent and mortgage balances have fallen 2 percent. One measure is right and one is wrong. In your heart, which one do you think is true?
FHFA House Price Index Declines in February -The two house price indexes I usually use are from S&P Case-Shiller and First American Corelogic LoanPerformance (the one the Fed uses). The FHFA index is also a repeat sales index, but only includes GSE loans - and it has other issues too. The LoanPerformance and Case-Shiller indexes for February will be released soon, but here is the FHFA index (and a graph of all three). From (FHFA): U.S. Monthly House Price Index Declines 0.2 Percent from January to February U.S. house prices fell 0.2 percent on a seasonally adjusted basis from January to February, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.6 percent decline in January was unchanged. For the 12 months ending in February, U.S. prices fell 3.4 percent. The U.S. index is 13.3 percent below its April 2007 peak.
S&P Concerned about Seasonal Adjustment for House Prices - From S&P: S&P Issues Statement, Publishes Research on Seasonally-Adjusted Home Price Index Data(PDF) Economic data which are affected by the time of the year, or the seasons, are often adjusted to remove these effects to make it easier to identify underlying changes in the economy. Seasonal adjustment increases the unadjusted values in weak months and decreases the unadjusted values in strong months to eliminate regular seasonal patterns while leaving the underlying trend unaffected. For the S&P/Case-Shiller Home Price Indices, S&P reports two data sets – before seasonal adjustment and seasonally-adjusted. In some recent reports the two series have given conflicting signals, with the seasonally-adjusted series rising month-over-month and the unadjusted series declining. After reviewing the data, the S&P/Case-Shiller Home Price Index Committee believes that, for the present, the unadjusted series is a more reliable indicator
Fannie Mae updates "Waiting Period" following Pre-Foreclosure Events - From HousingWire: Fannie Shortens Wait for Some Distressed Borrowers to Get New Loans Fannie Mae announced it is reducing the wait time for some borrowers between when they complete a short sale or deed-in-lieu of foreclosure transaction and when they can obtain a new mortgage. Previously, a borrower was required to wait four years before getting a new mortgage, or two years if their home sold in a short sale. Under the new guidelines, a borrower that previously completed a deed-in-lieu of foreclosure transaction can get a new mortgage in two years, provided the borrower has a 20% down payment. If the borrower has a 10% down payment, the wait period is still four years. Here is the update from Fannie Mae.
A turning point for foreclosures? - Good news in the WSJ this morning: mortgage delinquencies are on the decline. According to LPS Applied Analytics, the number of loans that were at least 30 days past due or in foreclosure declined by 8.6% in March. That's the second month in a row we've seen a drop. The president of LPS, which does mortgage processing for most large U.S. banks and has great data as a result, called the new numbers a potential "turning point." Mark Zandi, the chief economist of Moody's Analytics, recently made a similar comment.Let's just be cautious about assigning too much weight to a couple of months worth of data. Check out the following graph (click on it to make it larger):
Excess, Shadow Inventory Threaten Fragile Housing Recovery: Fannie – Although the US housing market shows signs of stabilizing, excess inventory and shadow supply could hinder recovery, according to economists at government-sponsored enterprise Fannie Mae Despite “encouraging” recent growth in consumer spending, Fannie said economic growth likely decelerated from an annualized 5.6% in Q409 to 2.7% in Q110. Economists project a 3.1% rate of economic growth for all of 2010, according to the April outlook report by the Fannie Mae economics and mortgage market analysis group (download here). “Financial conditions are improving as seen by the unwinding of various programs, most notably the [mortgage-backed securities] purchase program which ended in March,” said Fannie Mae chief economist Doug Duncan. “This is strong evidence that the [Federal Reserve] believes the financial sector can stand on its own.”
Shiller: The Housing Recovery Could Be on Shaky Ground. Robert Shiller: Home prices have been going up for nearly a year now, according to our data, the S&P/Case-Shiller indices ... Normally we could extrapolate that kind of upward trend because historically home prices have shown a lot of momentum. But I think we're in a very unusual circumstance because of the massive bailouts, the homebuyer tax credits, the Fed's purchase of mortgage-backed securities -- and these things are coming to an end. So it's an unusual period. So I don't trust the trend that we have. I'm worried that it might get reversed.
John Burns Report Card Gives Housing a Grade of D+ - Each month, the analysts at John Burns Real Estate Consulting (JBRC) get out their red pens and score various aspects of the industry using the grade school scale. Looking at the firm’s latest report card, housing overall is very near the bottom of the class, with a D+.Let’s start with the good marks. Housing affordability got a grade of C-. Affordability, the California-based market research firm said, “continues to be excellent this month,” with mortgage rates and median home prices throughout the country still extremely low. JBRC’s housing-cost-to-income ratio dropped to 25.2 percent
Housing Expert: Foreclosures are 'Pigs with Lipstick… So even though Zelman's now making boatloads of consulting cash at her own firm, I still like to hear her latest musings, so this morning I headed over to the Urban Land Institute's Washington Real Estate Trends Conference, where she was keynoting a session. "Public policy is delaying the pig in the python," Zelman told an auditorium full of real estate types. "The pig has lipstick." Zelman is referring to the shadow inventory of foreclosures (the pig) that is making its way through the nation's financial system. The average number of days from when a borrower stops paying on his/her mortgage to when the bank sends out the first foreclosure notice is 417, Zelman notes, and the final foreclosure can take up to a year more.
Housing markets: The bulge to come | The Economist - OPTIMISM about the state of housing markets is once more rising, as data turn positive after a bleak period between last fall and this spring. The latest bit of good news came out today: existing home sales rose 6.8% in March. Finally, housing markets have found their footing again, right? The question is whether this latest uptick will be sustained or will turn out like the last one, which was driven by the initial enactment of the housing tax credit. This credit was extended, at the last minute, to cover contracts signed through the end of April. The sales will register when they close, so we should expect so see a growing spike in April, May, and June. And then what?
'Strategic Defaulters' Skip Mortgage Payments as Home Values Tumble (PBSNewshour) (video & transcript)
12 Million Homes Yet To Go Through Foreclosure - That's what Laurie Goodman told the National Economists Club today in D.C. 7.2 million are already in the delinquency pipeline, and 250,000 are going delinquent each month bringing the total to 12 million. "Once you're 60 days delinquent, a foreclosure is highly probable," she said. Goodman is a Senior Managing Director of Amherst Securities and is widely recognized as the best housing finance economist on Wall Street. She emphasized that negative equity is the main problem, and that any program which doesn't significantly reduce principal won't work. She estimated that under the most optimistic assumptions, President Obama's HAMP program would avert 1.1 million foreclosures. Goodman added that banks aren't renegotiating underwater mortgages in which they hold a second lien, "a huge conflict of interest problem."
DataQuick: Foreclosures moving to mid-to-high end - As a followup to the previous post, here is some more data from DataQuick: "We are seeing signs that the worst may be over in the hard-hit entry-level markets, while problems are slowly spreading to more expensive neighborhoods. We're also seeing some lenders become more accommodating to work-outs or short sales, while others appear to be getting stricter about delinquencies. It's very noisy out there," [John Walsh, DataQuick president] said. The state's most affordable sub-markets, which represent 25 percent of the state's housing stock, accounted for 47.5 percent of all default activity a year ago. In first-quarter 2010 that fell to 40.9 percent. California's mid- to high-end housing markets were more likely to have seen a rise in mortgage defaults last quarter, though the concentration of default activity - measured by defaults per 1,000 homes - remained relatively low in those areas.
Recession, Recovery, and Remodeling - - Today, I stumbled across another intriguing indicator. It’s called the Leading Indicator of Remodeling Activity – LIRA for short. Produced regularly by Harvard University’s Joint Center for Housing Studies, the index measures “national homeowner spending on improvements for the current quarter and subsequent three quarters,” and aims to track “future turning points in the business cycle of the home improvement industry.” The graph charts the trend. The plunge from 2007 through 2008 is striking. But a turnaround does seem to be in the works. Harvard’s Nicolas Retsinas, who directs the Joint Center, notes that: ”The LIRA suggests annual spending will accelerate, with nearly five percent growth in 2010.”
Toxie Update: Our Latest Check Arrives. Oh No. As you know, we purchased our own toxic asset so we could watch it die. And she, Toxie, is dying. We just got our latest monthly check, and it's for just $72.41. We'd been hoping for about $180, but there's been less money coming in from those 2,000-plus mortgages. All the investors in this thing are basically standing in line to get paid. We're near the back of the line, so we take the hit. But that's not the real problem. Toxie soon will be actually wasting away. Every month some of the houses that had been foreclosed upon, actually get sold and sold for a loss. As those losses accumulate, Toxie shrinks and eventually there's nothing left. Our online folks just updated the graphic. Check out the "how long we have left" bar chart. It looks like next month the losses will actually eat into our Toxie, and she'll start to shrink.
Existing Home Sales increase in March The NAR reports: Existing-Home Sales Rise Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 6.8 percent to a seasonally adjusted annual rate of 5.35 million units in March from 5.01 million in February, and are 16.1 percent above the 4.61 million-unit level in March 2009. Total housing inventory at the end of March rose 1.5 percent to 3.58 million existing homes available for sale, which represents an 8.0-month supply at the current sales pace, down from an 8.5-month supply in February. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.
U.S. existing-home sales rise 6.8% in March - Boosted by a federal subsidy to buyers, resales of U.S. homes and condos rose 6.8% in March to a seasonally adjusted annual rate of 5.35 million, a real estate trade group reported Thursday. Sales were up 16.1% compared with March 2009. Existing-home sales rose in all four regions of the country in March. "The tax credit has done its work," said Lawrence Yun, chief economist for the National Association of Realtors, said in releasing the data. Median home prices rose 0.4% in the past year to $170,700, the NAR said. Inventories of unsold homes increased 1.5% in March to 3.58 million, an 8-month supply at the current sales pace.
Existing home sales better but real test lies ahead - Existing Home Sales totaled 5.35mm, 60k more than expected and up from 5.01mm in Feb. Contracts were likely signed in the Dec-Jan time frame as 1st time buy buyers take advantage of the home buying tax credit before it expires as 44% of buyers were first time, up from 42% in Feb. The NAR said “the home buying tax credit has been a resounding success.” Investors accounted for 19% of sales, unchanged with Feb and distressed sales totaled 35% of sales. The greater than expected sales offset the rise in the number of homes for sale thus sending the months supply to 8 from 8.5. Bottom line, without the tax credit in a week, the industry will be put to its next major test and the NAR holds out hope as do the rest of us, “with home values stabilizing, a revival in home buying confidence will likely help the housing market get back on its feet even as the tax credit impact disappears.” Can we transition without such a popular drug?
More on Existing Home Sales and Inventory - Earlier the NAR released the existing home sales data for March; here are a couple more graphs ... The first graph shows the year-over-year change in reported existing home inventory and months-of-supply. There was a rapid increase in inventory in the 2nd half of 2005 (that helped me call the peak of the bubble). Then the increase in inventory steadily slowed. The YoY inventory has been decreasing for the last 20 months. However the YoY decline is getting smaller - only 1.8% in March. The second graph shows NSA monthly existing home sales for 2005 through 2010 (see Red columns for 2010). Sales (NSA) in March 2010 were 19.6% higher than in March 2009, and also higher than in March 2008.
New Home Sales at 411K in March - The Census Bureau reports New Home Sales in March were at a seasonally adjusted annual rate (SAAR) of 411 thousand. This is an increase from the revised rate of 324 thousand in February (revised from 308 thousand).The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted). Note the Red columns for 2010. In March 2010, 38 thousand new homes were sold (NSA). The record low for March was 31 thousand in 2009. The second graph shows New Home Sales vs. recessions for the last 45 years.
Economists React: Tax Credit, Weather Lift New Home Sales - Economists and others weigh in on the unexpected surge in new home sales.
Home Sales: Distressing Gap - First a comment on the seasonal adjustment ... on a Not Seasonally Adjusted (NSA) basis, the Census Bureau reported there were 38,000 new homes sold in March. That is up from 31,000 in March 2009. Some (or all) of the increase was due to a one time event - the tax credit that expires in April. The Census Bureau doesn't know the number of homes sold due to the tax credit, so they report the Seasonally Adjusted Annual Rate (SAAR) assuming this is the underlying rate of sales. It isn't. The April new home sales headline number will be distorted too, but the key is the actual underlying sales rate is much lower. Note: remember the tax credit shows up in the new home sales numbers when the contract is signed (March and April), and in the existing home sales numbers when the transactions are closed (April through June). The following graph shows existing home sales (left axis) and new home sales (right axis) through March.
Number of the Week: 103 Months to Clear Housing Inventory - WSJ - 103: The number of months it would take to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales. How much should we worry about a new leg down in the housing market? If the number of foreclosed homes piling up at banks is any indication, there’s ample reason for concern.As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates from LPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory” was up 30% from a year earlier.Based on the rate at which banks have been selling those foreclosed homes over the past few months, all that inventory, real and shadow, would take 103 months to unload. That’s nearly nine years. Of course, banks could pick up the pace of sales, but the added supply of distressed homes would weigh heavily on prices — and thus boost their losses.
As Markets Fizzle, Buying May Cost Less Than Renting - NYTimes - In much of the country, for much of the last decade, renting a home has usually been a better financial move than buying one. It’s been true in Southern California, San Francisco, Phoenix, Las Vegas and large parts of Florida, the Pacific Northwest and the Northeast. Renting required you to suffer the scorn of many real estate agents and the skepticism of friends and relatives who believed that owning a home was almost always superior. But renting also would have typically saved you thousands of dollars a year. Now, however, the situation is getting more complicated because the housing bust has been playing out unevenly across the country. In some once bubbly markets, prices have fallen so far that buying a home appears to be a bargain, based on a New York Times analysis of prices and rents in 54 metropolitan areas. In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis.
Rent or buy? - GOING into the housing bust, I would have accepted David Leonhardt's general framing in this piece: that the decision to rent or buy one's home is primarily about the relative costs, and that most people should at least consider buying if the price to rent ratio hits a certain threshold. These days, I think that's not at all the right way to think about the choice. Homeownership, let's recall, is in most cases a highly leveraged, undiversified, relatively illiquid bet, with a return that is highly correlated to local labour market conditions. In general, responsible financial planners would warn their clients away from such an investment. Sure, you get a roof over your head as part of the bargain, but the potential downside is enormous, as should be blindingly obvious to us all.
Is 15 a Better Rent-Ratio Cutoff? - Dean Baker, one of those economists who saw the housing bubble for what it was in real time, argues that I’m wrong to use 20 as a rule of thumb for the rent ratio. He writes: David Leonhardt devoted his column today to an analysis of the relative merits of owning versus renting…. While this is the right question, Leonhardt’s math is off. He assumes a 20 to 1 price to rent ratio leaves a rough balance between owning and renting. In fact, the ratio would be closer to 15 to 1, it’s long-term average. I can see Mr. Baker’s argument here. In the column, I was careful to say that people should consider renting if the ratio is above 20 while the argument for buying becomes stronger when the ratio is “well below 20.” But I realize that’s a subtlety some readers may miss.
Many Americans Struggling With Rising Rental Housing Costs - On average, a family must earn $38,355 a year, $18.44 an hour, to afford a simple two-bedroom apartment at the 2010 national average fair market rent of $959. However, the average wage for U.S. renters is $14.44 an hour, down from $14.69 last year. Further, more than 60 percent of U.S. renters live in counties where even the average one-bedroom fair market rent of $805 isn't affordable for average wage earners, the study found. Minimum wage earners are at the greatest disadvantage. Under the standard measure of affordability — housing costs should account for no more than 30 percent of income — full-time minimum wage earners can't afford one-bedroom apartments in any county in the country, even though Congress increased the minimum wage from $6.55 an hour to $7.25 last year.
What About Home Prices and Incomes? - Before we get to some more good housing statistics, I want to emphasize that I am not trying to persuade people who now rent their home to become owners. If you rent now and you’re happy, you probably should not move just for the sake of buying. Prices in most places are not that low yet. As I said in my column this week, renting still does not get enough respect in this country. Now let’s consider a second group of people: those who are planning to move anyway and need to decide between renting their next home and owning it. What should they do?
Housing: Impact of Changes in Household Size - If we look at a long term graph of housing starts, we notice that there were more starts at the peak in the '70s than during the recent housing bubble. If we plotted housing starts per capita, or per total households, the surge in housing starts during the last decade would not look extraordinary at all (ht Dave). But it was extraordinary ... First, here is the long term graph of both total housing starts and single unit starts. Obviously there were many more multi-unit housing starts in the '70s - and that is a clue. The key is household formation. Household formation is a function of changes in population, and also of changes in household size. During the '70s, the baby boomers started moving out of their parents' homes, and there was a dramatic decrease in the number of persons per household. And that lead to a huge demand for apartments
BofA Could Cover Unemployed Borrower Mortgages for 9 Months… - Bank of America is considering a special program for unemployed borrowers that would offer as many as nine months of no mortgage payments while they hunt for a new job. A spokesperson for BofA told HousingWire that the program is still pending regulatory approval. Whether or not the payments are forgiven or just deferred has not been solidified yet, but according to the spokesperson, a likely option would be to capitalize the past due payments into the new permanent modification. If the borrower finds employment during the nine-month period, BofA would structure a loan modification using its own programs or the Home Affordable Modification Program (HAMP).
Quantifying the stimulus effect of missed mortgage payments - (summary) Missed mortgage payments are a substantial, though largely unremarked, stimulus. The total is currently running at an annual rate of roughly $40 billion. Government estimates of household spending are overestimated by about the same amount. Thus as the mortgage market normalizes there will be an anti-stimulus of this size, both real and in the GDP accounts.
Extra Tax Refunds Giving Consumers A Short-Term Boost - Amid all the optimism that the consumer is back, it’s worth considering one of the reasons why: a huge tax refund season.As the economy was nose-diving last spring, most people probably overlooked the record-smashing $259 billion in refunds awarded (as of April 24) — roughly $40 billion, or 17% ahead of the 2008 tax season. Back then, panic was in the air, consumers were retrenching and the refunds acted as a Band-Aid on an open wound. But this year, with an economic upturn under way, an even more rewarding tax season is serving more as a vitamin boost. New IRS data out Friday show that refunds are running about $10 billion ahead of last year’s record pace, even though the agency has processed 4% fewer returns. That means refunds are running about $50 billion ahead of 2008 levels — hardly chump change. If you consider that the bulk of refunds are doled out within a three-month period (though spread out between the first and second quarter), the extra refunds amount to an annualized 1.3% of GDP.What’s more, as IBD previously reported (subscription required), the Joint Committee on Taxation has estimated that people who don’t pay income tax are receiving an extra $30 billion in refundable credits courtesy of the Recovery Act.
Recession Is Ending? Some Americans Don't Buy It - She's seen the headlines. The recession is ending! Unemployment is stabilizing! From Wall Street to Washington, the message comes: America, the worst is over. Let the spending begin. But in places like Twinsburg — where for so many the misery goes on, unabated — people aren't buying the rhetoric. If brighter days are ahead, they say, they're still awaiting the dawn.According to an Associated Press-GfK poll conducted in early April, many Americans' impressions of the economy — and their own financial straits — haven't budged in a long time. "Who are they trying to kid?" Bittner says. "Are they trying to make you think it's better so you'll go out and spend?"
GDP Is The Real Fraud - It's all Goldman Sachs all the time now that the SEC has charged them with fraud. For the first time in a long time, observers are talking about ethics and morals (or lack thereof). That's a welcome but no doubt short-lived development in an Empire that lost its way sometime in the 1980s. Rather than add to the Giant Squid discussion, I want to briefly demonstrate that fraudulent Gross Domestic Product (GDP) calculations are far more important in the Grand Scheme of Things. Let's look at retail sales.
Is the Six Percent Rise in Producer Prices a Signal that Inflation is Coming?, by Mark Thoma: Many news reports are noting the six percent increase in the producer price index on a year over year basis and wondering if it signals that inflation is back. However, this report should not be read as a warning that inflation is just around the corner.Why? The pass through from producer prices to consumer prices is less than 100 percent in any case, and in some cases it is close to zero. Pass through to consumer prices is smaller when the change in producer prices is temporary, and core inflation measures indicate that most of the rise in producer prices was due to a rise in food and energy prices. Once the temporary changes in food and energy prices are stripped out, the core inflation rate only increased .9 percent over the previous year, and that isn't much different from previous measures.
A Chicken in Every VAT - Well, now we know why there is such a substantial disconnect between growing retail sales and falling state sales tax collections: the Census Bureau Retail and Food Service Sales report theorizers now must be incorporating the value of bartered goods and services, like healthcare for chickens, in light of the growing talk of creating a Value-Added Tax (VAT) on consumption. (Shhh...not 'til after the November elections.) Bartered goods and services ARE, of course, taxable at the federal and state levels, but probably not being reported by, nor income/sales taxes remitted by, tax-rules-challenged goods and services traders, nor perhaps by doctors and hospitals which currently accept poultry in exchange for treatment. At least not yet.
It’s Aggregate Demand, Stupid - David Wessel explains Christina Romer’s view of the economic situation:Christina Romer, chair of the president’s Council of Economic Advisers, says the reason unemployment remains so painfully high is clear: It’s not the inadequacy or laziness of the workers or the long-standing mismatch between workers’ skills and employers’ needs. It’s the old-fashioned Keynesian diagnosis: Too little demand in the economy.“The overwhelming weight of the evidence is that the current very high—and very disturbing—levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified,” Ms. Romer said in remarks prepared for a conference at Princeton University today. Here’s the nominal GDP situation
Recovery: Is it the aggregate demand? - The Economist - LAST week, Christina Romer (head of Barack Obama's Council of Economic Advisors) gave a talk on the state of the economy, and particularly on unemployment. She joked that her preferred title for the speech, which she didn't end up using, was "It's the aggregate demand, stupid". Her argument is that the reason unemployment remains high is the persistent shortfall in aggregate demand. Structural factors are not important. Let me first say that there is no question that a demand shortfall remains a huge part of the story of high unemployment. There continues to be a significant gap between actual and potential output, which is producing a lot of cyclical unemployment. But can we really dismiss structural factors this easily?
Small firm contribution to job growth: An update - The U.S. Bureau of Labor Statistics (BLS) recently produced research that builds on a topic the Atlanta Fed earlier addressed: job creation and destruction rates by firm size. In our research, we identified a disproportionately larger impact on small firms (those with fewer than 50 employees) over the 2007–09 period than the 2001–03 period. In the recent BLS study, Jessica Helfand finds that actually it looks like the 2001–03 period may be the odd man out in at least one respect when it comes to recessionary effects on small business. Using unofficial data for the 1990–92 period to supplement the official Business Employment Dynamics data, Helfand shows that the gap between job destruction and creation for large versus small firms (in this case firms with fewer than 100 employees) over the 2001–03 employment downturn was much larger than in either the 1990–92 or 2007–09 episodes.
Wholesale prices rise by 0.7 percent in March due to sharp jump in food costs (AP) -- Wholesale prices rose more than expected last month as food prices surged by the most in 26 years. But excluding food and energy, prices were nearly flat. The Labor Department said the Producer Price Index rose by 0.7 percent in March, compared to analysts' forecasts of a 0.4 percent rise. A rise in gas prices also helped push up the index. Food prices jumped by 2.4 percent in March, the most since January 1984. Vegetable prices soared by more than 49 percent, the most in 15 years. A cold snap wiped out much of Florida's tomato and other vegetable crops at the beginning of this year.
Consumers get more pessimistic - The Reuters/Michigan index of consumer sentiment tumbled four points in April. Could just be measurement noise, or could be that something new is pressing down on consumers. Bill McBride notes that one reason consumer sentiment remains low is that unemployment remains high. He graphs unemployment on an inverse scale below to emphasize the correlation. But with no further deterioration in unemployment, why would consumer sentiment be falling again?Bill suggests the answer may be the recent uptick in gasoline prices, which he again plots on an inverse scale below (with gas prices deflated by the CPI).
Durable Goods Orders Crash Below Expectations - Durable goods orders came in at -1.3%, far below the Reuters-based consensus estimate of a 0.3% rise. But the good news was a +1.1% revision of February data.New orders for manufactured durable goods in March decreased $2.2 billion or 1.3 percent to $176.7 billion, the U.S. Census Bureau announced today. This decrease followed three consecutive monthly increases, including a 1.1 percent February increase. Excluding transportation, new orders increased 2.8 percent. Excluding defense, new orders decreased 1.2 percent.Transportation equipment, down two consecutive months, had the largest decrease, $5.9 billion or 12.9 percent to $40.2 billion. This was due to nondefense aircraft and parts which decreased $6.5 billion.
Poor Pricing Power Poses Problems for the U.S. - The attention of policymakers and economists is trained mostly on a looming inflation threat, the drawback you typically associate with enormous amounts of liquidity pumped into the financial system and an economy rebounding from a severe recession. A negligible 0.1% rise in the March consumer price index and comments from the Federal Reserve that interest rates will remain very low for an extended time don't appear to confirm that risk, however. Some economists and analysts see reasons to worry about the opposite scenario—a period of deflation if companies feel compelled to lower prices to jump-start demand in a sluggish economic recovery burdened by high unemployment. Consumers initially embrace falling prices, but if it becomes deep and pervasive enough, deflation will eventually push employers to cut wages and ax jobs, driving worried consumers into complete retreat. Perhaps most dangerous, deflation hikes the cost of repaying debt by boosting the value of the dollar.
Daily Number: 70% Economic Woes - Pew - Americans are united in the belief that the economy is in bad shape (92% give it a negative rating), and for many the repercussions are hitting close to home. Fully 70% of Americans say they have faced one or more job or financial-related problems in the past year, up from 59% in February 2009. Jobs have become difficult to find in local communities for 85% of Americans. A majority now says that someone in their household has been without a job or looking for work (54%); just 39% said this in February 2009. Only a quarter reports receiving a pay raise or a better job in the past year (24%), while almost an equal number say they have been laid off or lost a job (21%). Read more
How To Eat Well On A Food Stamp Budget - How well can a family of four eat on just $68.88 a week? For more than 38 million Americans, it's more than a matter of conjecture. With job growth and the economy still only sputtering along, a record number of Americans have turned to the Supplemental Nutrition Assistance Program, the formal name for federal food stamp program. At the end of last year, roughly 1 in 8 Americans received food stamps, the highest rate ever, according to Lisa Pino, the program's deputy administrator. During the past two years alone, another nearly 12 million people enrolled in the program.
More than Half of U.S. Households Affected by Joblessness - In a startling new Pew survey, more than half of households say that within the past year a member of the household has been out of work — up 15 percentage points since last year. The survey in general paints a bleak picture of the jobless recovery: (table) And 70 percent of respondents report having a major financial difficulty, including unemployment, in the past year.
Don’t Blame Extension of Jobless Benefits - The now ending recession has been defined by huge levels of unemployment, and the long periods of time that many are out of work. Congress has extended unemployment benefits on several occasions, but those actions have become more difficult and partisan. It’s been a theme in some political circles that long-term unemployment insurance makes it too easy to stay unemployed. Sen. Jon Kyl (R., Ariz.) was widely quoted this spring as saying unemployment insurance creates a “disincentive” to find new work.. Those who believe the nation has made it too easy to be without a job are basically wrong, a new paper from the Federal Reserve Bank of San Francisco argues. The research, published by the bank Monday, takes a look at the connections between extended periods of joblessness and the unemployment insurance system.
Extended Unemployment and UI Benefits -SF Fed - During the current labor market downturn, unemployment duration has reached levels well above its previous highs. Analysis of unemployment data suggests that extended unemployment insurance benefits have not been important factors in the increase in the duration of unemployment or in the elevated unemployment rate.
Minimum wages and employment -"An increase in the minimum wage will raise workers' incomes, which will increase aggregate demand, which will increase output and employment. So would an increase in union wages." I remember hearing that argument a lot in the 1970s. You don't hear it as much nowadays, but it still lives on in the underworld of economic ideas. It's (usually) wrong; but it's not a stupid argument. And you can't dismiss it just by drawing a downward-sloping labour demand curve, and showing how an increase in wages will cause a movement up along that demand curve, to a point with lower employment. And (most) firms (nearly) always want to expand output and employment. What constrains firms from doing so is not that wages (and other costs) are too high to make additional sales at current prices unprofitable. What constrains firms is demand. They want to sell more output, and would be able to hire the extra labour needed to produce more output. They just can't find the extra customers to buy more output
Workers, No Suitable Work - It's too early to be sure, but the U.S. labour market certainly looks unhealthy. At 6.55 million, long-term unemployment has doubled in the past year. The percentage of all unemployed people who meet the long-term standard of six months out of work is 44.1%, far above the previous postwar peak of 26%, hit in 1983. High long-term unemployment increases the danger that employee skills will decay or become mismatched with job openings. If skill-atrophy is a genuine problem, unemployment rates may remain much higher than in 2007, even if vacancy rates return to 2007 levels. That would be hugely damaging, both economically and socially. Prolonged mass unemployment is bad for the nation's soul.
Losing a Job During a Recession - CBO Director's Blog - Each year, even when the economy is growing, millions of people lose a job for reasons other than poor performance or misconduct. In an issue brief released today, CBO reviews the research on the short- and long-term effects of involuntary job loss for reasons other than poor performance or misconduct on people’s future employment and earnings. In light of the recession that began in December 2007 and CBO’s projection that, under current law, the unemployment rate will remain elevated for a number of years, the brief focuses on the effects of involuntary job loss during periods of weak economic activity. The brief also summarizes some of the government programs that help people who have lost their job.
Employment Is Still in Need of a JOLT This repost from Mark Thoma (original comes from Julie Hotchkiss at the Atlanta Fed) has drawn a few reactions from around the web (here are Matthew Yglesias and Brad DeLong). The following graph uses the same JOLTS data. However, instead of layoffs, total separations (which include quits and other reasons for leaving a job) are used. The graph shows that the labour market suffered quite a bit during the recession, perhaps even more than what most economists have been saying. The H-S ratio represents the hire levels over the separation levels – in the graph the axis crosses at 1.00 where hiring equals separations (in other words, 0.10 is equal to 1.10 while 0.00 is actually equal to 1.00). The positive deviations from 1.00 are interpreted as an expanding labour market; the opposite is applicable for negative deviations.
Democrats making reconciliation an option for jobs bills in 2011 I've been arguing for a while that the single most important thing Democrats could do on jobs would be to include reconciliation instruction in the 2011 budget so they can pass further jobs bills with 51 votes. Recent legislation has attracted a couple of Republican co-sponsors, of course, but not that many, and Democrats are likely to be well short of 60 senators after the 2010 election and the jobs picture is likely to remain grim. According to The Hill, Democrats are going to do just that. The specifics of the stimulus instruction appear to say that whatever goes into that vehicle has to reduce the deficit by $2 billion. The question is whether that's over 10 years or five years. It's easy enough to imagine substantial jobs investment that spends out in 2011 and 2012 and is paid for with new revenue or cuts that replenish the fund over the remainder of the decade. It's a bit harder to do if you're dealing with a five-year window.
Young and Unemployed, Around the World - Around the developed world, young workers are nearly three times as likely to be unemployed as their older counterparts.The chart below shows the ratio between the unemployment rates for young workers and those for the rest of the labor force.
Gender Pay Gap: Male Salaries Still Higher than Females - Last year's tax returns may already be signed, sealed and delivered, but April 20 is the day the average American woman will finally finish earning her 2009 salary — at least, the one she would have pulled down if she were a man. That's because U.S. women still earned only 77 cents on the male dollar in 2008, according to the latest Census stats. (That number drops to 68% for African-American women and 58% for Latinas.) To highlight the need for change, since 1996 the National Committee on Pay Equity, an advocacy-group umbrella organization, has marked April 20 as Equal Pay Day. There are some signs of progress: the first bill President Obama signed into law as President targeted the U.S. pay gap, and the Senate is currently considering another meant to address underlying discrimination. But the question remains: Why has it taken so long? Nearly half a century after it became illegal to pay women less on the basis of their sex, why do American women still earn less than men?
Obama Administration Presses Cities, States to End ‘Jobs Poaching’ -The Obama administration wants cities and states to push a more regional approach to economic development instead of using tax breaks and other incentives to poach jobs and businesses from each other, according to this story on Stateline.org.The story notes that the administration believes the current system of economic development — where businesses often use the carrot of jobs and investment to play neighboring cities off each other in hopes of weaning tax breaks — is destructive to the recovery.One example given is that of Ohio and Michigan, both of which have been smacked by the decline in auto manufacturing. Rather than allow the states to fight each other to attract similar jobs or industries (say, green-technology jobs) the story notes the administration recently gave $25 million to an Ohio plant that will make batteries for electric vehicles built in Michigan.
California's jobless rate hits high of 12.6% in March - California's unemployment rate reached a new high of 12.6% in March, bolstering fears that a weak labor market will remain a drag on the state's economy at least through the end of the year. The unemployment rate in February was 12.5%. Despite hints of an economic turnaround, some of the 2.3 million unemployed in the state found March the toughest month yet. That's because tens of thousands have been out of work so long that their unemployment checks will be cut off within the next few weeks. They're not helped by the $18-billion measure signed Thursday by President Obama that extends jobless benefits for many Americans through June 2. The Employment Development Department estimates that about 100,000 Californians will have exhausted their benefits by this weekend.
Recovery? Most Metro Areas Still Losing Jobs - The recovery remains jobless for most of the nation, with only 16 of 384 metro areas showing job gains in the past year, according to new Adversity Index data for February from Moody's Economy.com and msnbc.com. Of the nation's 384 metro areas, 205 had begun to recover, or 53 percent, according to the February Adversity Index. That's up from 185 metro areas in January, or 48 percent. But the gains have been confined to manufacturing and housing, not employment. Moreover, the only areas showing jobs growth are low-population areas. Here is a list of the 16 areas (only 4 percent of the total) showing job gains in the three-month period ending February 2010 compared with the same period a year earlier. They're ranked by annualized growth in jobs:
U.S. States Face ‘Staggered’ Recovery - U.S. states face a “staggered” recovery even as the national economy shows signs of stabilizing, Susan Urahn, a managing director at the Pew Center on the States, told investors on a conference call. They may also have to contend with three to four more years of budget woes, said Laura LaRosa, director of fixed income at Glenmede Investment & Wealth Management in Philadelphia, on the call yesterday. States’ personal income-tax revenue fell 7.1 percent in January and February from the same period in 2009, and there is a risk the slide will extend into this quarter, the Nelson A. Rockefeller Institute of Government said in a report yesterday.
Cash-Strapped States Turn to Sin Taxes - In tough fiscal times, everything needs to be monetized. Including morality. And governors and legislators in many cash-strapped states have decided that vice can be lucrative, in the form of sin taxes. Texas, Georgia and Pennsylvania have considered “pole taxes” — for buyers of pornography and patrons of strip clubs and escort services. Seven states last year either enacted new taxes on alcohol or raised old ones, according to the Center on Budget and Policy Priorities. Since January 2009, 22 states have increased their tobacco taxes, and now South Carolina, which has held its cigarette tax at 7 cents a pack for more than three decades, may follow. In Nevada, the State Senate has discussed expanding, and taxing, legalized prostitution. Proposals for soda and candy taxes are also percolating in places like New York, Colorado and Washington State.
More borrowing, budget gaps for US states - S&P (Reuters) - U.S. states will borrow more to bolster their budgets, which face a projected collective shortfall exceeding $100 billion in fiscal 2011, Standard & Poor's Ratings Services said on Tuesday. S&P said that since the current recession began in December 2007, states have issued more than $15 billion of bonds to plug deficits, restructure outstanding debt, securitize assets and raise money for pension payments. While the $135 billion flowing to states from the federal stimulus act has tempered this borrowing, that will change as the federal money ends, according to the rating agency. The expiration of the American Recovery and Reinvestment Act will also likely lead to structural budget problems for states in 2012 and beyond.
The Worst 2011 State Budget Gaps - CNBC (slide show)
10 US Cities in Freefall We ranked each MSA on the percent its median home price has fallen since its individual peak, using data provided by Local Market Monitor, a housing market data tracker. To get an estimate for the number of new homes being built, we used data from the U.S. Census Bureau, which tracks how many building permits are issued. Roughly 98% of these permits become new home starts. We looked at the percent change in new building permits between February 2007 and February 2010. We also wanted to know how many people were moving in and out of these metros, since a growing population buoys a local economy. We used the Census Bureau's most recent population estimates to rank each metro on its net population change between July 2006 and July 2009. To judge each city's productivity we also ranked each metro on its per capita gross domestic product in 2008, the most recent year available, using data from Moody's
DiNapoli: State Could Run Short of Cash - State Comptroller Thomas P. DiNapoli today reported that New York State finished the 2009-10 fiscal year with a General Fund balance of $2.3 billion. The state only ended the fiscal year in the black because the Governor delayed $2.9 billion in payments. By pushing these payments into the new fiscal year, the state could run out of money in June. “The state is starting the new fiscal year the way we ended the old one,” DiNapoli said. “The state’s finances are very shaky. Big bills are piling up, and there may not be enough cash to cover them. We need the Governor and the Legislature to agree on a realistic budget that aligns revenue with spending and isn’t a replay of last year’s buy-time budget. Without a responsible spending plan, our cash shortfalls may be much worse than last year.”
New York State Senate Considering New Mortgage, Auto Taxes - Some state lawmakers seem willing to look anywhere to come up with $9 billion. And that includes new taxes and fees on mortgages and vehicle purchases. With the state facing a massive deficit and lawmakers unable to agree on how to close it, State Senator Martin Dilan (D-Brooklyn), who is chairman of the Transportation Committee, is proposing two new taxes to help address the budget imbalance. Dilan is calling for an increase in the limit of the so-called "doc fee" on new car purchases. The "doc fee," or documentation fee, is the amount a dealer can charge a customer for handling all of the registration and vehicle paperwork. The amount is currently capped at $75. Dilan's proposal would raise that to $175, which would allow the state to tax more of the transaction. His office believes it could generate more than $30 million
Property tax bills rise even as home values fall - Live in Westchester County and you pay the highest property taxes in the nation: the median is $8,404 a year. Live in upstate New York, and you also have an unenviable distinction: Sixteen upstate counties -- including Cortland, Seneca and Allegany -- pay the highest property taxes compared to home values in the country, according to the U.S. census. Orleans County, near Rochester, is No. 1. In all, New York's taxpayers pay property-tax bills that are 79 percent above the national average, a 2008 state report found. Property-tax levies grew 60 percent between 1995 and 2005, more than twice the inflation rate , the state Comptroller's Office said. And closer to home, we don't fare much better: Steuben is the 18th highest county, comparing taxes to home values; Chemung is 21st; Broome is 28th and Tioga is 30th."
Spending Freeze Deals Another Blow to Ailing Roads and Bridges Late last month, in response to the budget crisis, Gov. David Paterson halted payments on state-funded construction projects already underway or soon to be started. Work deemed to be of an emergency nature or funded by federal stimulus funds will continue. Recent studies show that New York's roads and bridges are falling into a state of disrepair and putting drivers in danger. State funds from gas, motor vehicle and highway taxes that are designated for road maintenance and rehabilitation have been raided over and over again to fill budget gaps. As a result, with each passing year roads and bridges overseen by the state become more worn and increasingly costly to repair. Rather than making the big expenditures needed to completely rehabilitate an ailing bridge, the state spends just enough money to keep the bridges and roads passable. Meanwhile cars and trucks jam old roads and bridges that were not designed for current levels of traffic, exacerbating traffic problems and leading to delays and accidents.
Proposal would charge inmates for "doing time" -- State lawmakers are pitching a new idea to help close the state budget deficit. They want to make prisoners pay for every day they spend in jail. California taxpayers spend roughly $43,000 a year per inmate. State Senator Tom Harman, R-Huntington Beach, who is running for Attorney General, thinks it's time to start charging them room and board, up to $25 a day. "This bill is simply trying to level the playing field and make more of those convicted criminals pay some fair share," he said.
Get used to trash on county roads - Sonoma County has stopped collecting trash illegally dumped alongside roads, a decision officials say is necessary to save money amid a massive budget shortfall. County officials were divided last week over the impact of the stoppage. Some predicted that trash service would resume this summer, while others said it could disappear for three to five years.
Budget crisis puts LA court system at risk - The nation's largest court system is in the midst of a painful budget crisis that has shut down courtrooms and disrupted everything from divorce and custody proceedings to traffic ticket disputes.The Los Angeles court system has already closed 17 courtrooms and another 50 will be shut down come September unless something is done to find more money. The judge who presides over the system predicts chaos and an unprecedented logjam of civil and family law cases in the worst-case scenario.The crisis results from the financially troubled state's decision to slash $393 million from state trial courts in the budget this year. The state also decided to close all California courthouses on the third Wednesday of every month.
Who Killed California? - The decimation of the California economy was a long-term project. It began in earnest in 1978 with the passage of the infamous Proposition 13 (the People’s Initiative to Limit Property Taxation). Like the current Proposition 16 (a proposal that protects private utilities while pretending to uphold the right vote), Prop 13 was perhaps the first use of the most brilliant means of circumventing democracy ever devised. Embodied in the state constitution that appropriately numbered ballot proposition not only set a limit on property taxes at one percent of value but it also made it virtually impossible for the state to raise sales or income taxes by requiring a two-thirds vote in both legislative houses. Since property taxes were the primary source of funding for education, Prop 13 was the poison pill that sickened and eventually killed the future of education in the state once known as golden.
Will California Default Bring Goldman-like Lawsuits? It seems everyone has an opinion on the Goldman case, as though there's some really big principle here. Lawsuits have very little to do with principle, as these are merely pretexts to get lucre. Think of ambulance chasing attorneys jumping on Toyota based on dubious claims that accelerators were 'stuck': supposedly they just want a safe public. Yeah sure. In my lawsuit with Telluride Asset Management, they asserted I violated a confidentiality agreement. They claimed that any usage by me of certain base ingredients for portfolio selection was a violation, because it was necassarily informed by their sage stewardship at Telluride. Yet, I had used these criteria before Telluride as a portfolio manager, and they weren't exactly secret ingredients: profits, momentum, volatility, mean-variance optimization. After the judge noted I did not invent these while at Telluride, she then asked the simple question: "what's your end game? What do you want?" I would have loved an end game.
Illinois Statehouse rally for tax increase could be largest in history Up to 15,000 citizen lobbyists are expected to descend on the Capitol on Wednesday to rally for a tax increase to help fix the state’s crippling budget. If those estimates are correct, the rally will be the largest in Statehouse history. “In fact, it may be twice as large as anything before it,” said Anders Lindall, spokesman for the American Federation of State, County and Municipal Employees union. As it stands, the state is in a $13 billion hole, leaving the state months behind in paying its vendors. The budget crisis also has hit schools, mental service agencies and law enforcement, causing layoffs and service reductions across the state.The rally will target lawmakers, who Lindall said have done little to fix the state’s fiscal problems.“The coalition is going to be sending a very strong message that inaction is not acceptable,” Lindall said.But the rally probably won’t push politicians to support a tax increase in an election year, many lawmakers said
Lawsuits Over Illinois Budget Mess Could Be Coming Thousands of state vendors could face the prospect of having to go to court to collect money they are owed by the state. In a memo to legislative leaders Tuesday, Gov. Pat Quinn acknowledged the possibility that the state’s budget mess could force angry vendors to file lawsuits with the Illinois Court of Claims this fall. The Chicago Democrat told the leaders that he wants a change in law in order to avoid the looming legal showdown.“I think there’s an understanding that we have to do something,” Quinn budget chief David Vaught told reporters in the Capitol. As of Tuesday, the state owed $4.5 billion to individuals and companies that sell products and services to the state.
NY Times: Up to 300,000 public school jobs could be cut - From the NY Times: School Districts Warn of Even Deeper Teacher Cuts School districts around the country ... are warning hundreds of thousands of teachers that their jobs may be eliminated in June. ... their usual sources of revenue — state money and local property taxes — have been hit hard by the recession. In addition, federal stimulus money earmarked for education has been mostly used up this year...Districts in California have pink-slipped 22,000 teachers. Illinois authorities are predicting 17,000 public school job cuts. And New York has warned nearly 15,000 teachers that their jobs could disappear in June. Secretary of Education Arne Duncan estimated that state budget cuts imperiled 100,000 to 300,000 public school jobs. In an interview on Monday, he said the nation was flirting with “education catastrophe.”These cuts will make the employment situation worse. This is also a reminder that the Federal stimulus spending peaks in Q2, and then starts to decline in Q3.
Districts Warn of Deeper Teacher Cuts - School districts around the country, forced to resort to drastic money-saving measures, are warning hundreds of thousands of teachers that their jobs may be eliminated in June. The districts have no choice, they say, because their usual sources of revenue — state money and local property taxes — have been hit hard by the recession. In addition, federal stimulus money earmarked for education has been mostly used up this year. Secretary of Education Arne Duncan estimated that state budget cuts imperiled 100,000 to 300,000 public school jobs. In an interview on Monday, he said the nation was flirting with “education catastrophe,” and urged Congress to approve additional stimulus funds to save school jobs. “We absolutely see this as an emergency,” Mr. Duncan said.
Recession could result in deep school staff layoffs, larger class sizes… - From coast to coast, public schools face the threat of tens of thousands of layoffs this year in a fiscal crunch likely to result in larger class sizes and fewer programs to help students in need. Reports of deep staffing and service cuts are emerging in several states, including California, Illinois and New Jersey, as school officials say that finances have been stretched to the breaking point. The Washington area is not immune. Prince George's County schools plan to cut 800 positions, many through layoffs, in the third straight difficult budget for a system that is battling to improve uneven academic performance. That will mean an average of 29 students a class, up from 27, in the coming school year. D.C. school funding is so tight that officials enlisted private foundations to help fund provisions of a proposed teachers contract.
California's teachers strike against pay cuts - Hundreds of teachers from dozens of schools in Orange County of Southern California went on strike on Thursday to protest pay cuts. This was the first teacher's strike in Orange County in a decade, organizers said. The teachers from the Capistrano Unified School District walked picket lines at all of the district's 56 schools to protest a 10.1 percent salary cut imposed to reduce a budget deficit. Some parents reportedly kept their children home from school on Thursday to support the teachers. District officials were using substitute teachers and combining some classes to keep the schools open.
Deep cuts likely in doomsday school budget Chicago Public Schools chief executive officer Ron Huberman is set Friday to unveil a doomsday budget, which will likely include deep cuts. Huberman and other top Chicago school officials will deliver an address on the doomsday budget at 10 a.m. at John M. Smyth Elementary School, at 1059 W. 13th St. on the city's Near West Side. The budget proposal will outline what CPS will have to cut if the state goes ahead with deep cuts to education in its own budget rather than approving a tax increase as Gov. Pat Quinn has proposed. "With just two weeks left in its current session, the Illinois General Assembly must soon decide whether to accept a budget that slashes state education spending by $1.3 billion," a CPS news release said. These cuts would result in the elimination of more than 20,000 education jobs throughout the state."
INDIANA: School Board Wades Into Budget Details - Indiana Area School District administrators delivered a new round of estimates for the 2010-11 school year budget, with the first look at revenues, expenditures and tax rates. Business Manager Dale Kirsch also updated projections for the budget for the following two years when the district would be hit with the heaviest projected increases in contributions to the school employees' retirement fund. School board members reviewed the figures at a 2½-hour budget workshop Monday. This is the year retirement fund contributions will increase from 4.78 percent of employee salaries to 8.22 percent. The rate jumps to 10.59 percent for 2011-12, then to 29.22 percent in 2012-13.
Massive Teacher Layoffs Likely With Budget Cuts - Oklahoma education officials say a proposal by lawmakers to cut 10 percent from the common education budget could cause massive teacher layoffs and larger class sizes for the next school year. State Department of Education officials told a House budget panel Monday such a cut would lead to $244 million less in funding for education. Lawmakers are dealing with a $1.2 billion shortfall for the fiscal year that begins July 1. State agencies are being asked to present reports on how they would deal with a 10 percent budget cut. Education Department Chief of Staff Lealon Taylor said a $244 million cut equates to about 5,000 teacher salaries, but he acknowledged it’s likely less than 5,000 teachers will lose their jobs.
Layoff Notices Sent To 2,000 Detroit Teachers - About 2,000 Detroit Public Schools teachers have received layoff notices as the district's financial manager continues to pare down a $219 million budget deficit.Steve Wasko, a spokesman for Robert Bobb, confirms Tuesday that notices have been mailed but says many teachers likely will be returned to work.The Associated Press left a message seeking comment from the president of the 5,000-teacher union. Bobb announced last month that he would close more than 40 schools in June. The school board sued, claiming he has no authority over academics.
'Almost catastrophic' budget cuts on horizon for Clark County schools (Las Vegas) The $145 million budget shortfall that the Clark County School District is still trying to reconcile is not nearly as bad as the crushing deficits it will face in 2012 and 2013, according to preliminary projections.The district says it may face deficits of $200 million to $300 million in state and local funding for each year of the next biennium.The news comes on top of the district’s current financial plight: It has cut more than $250 million in programs, services and positions since 2008 to not overspend its $2.1 billion operating budget, and is chiseling away at another $145 million for the 2011 fiscal year that begins July 1.
2000 Teachers Statewide Face Layoffs Before Next School Year - About 2,000 teaching jobs statewide are set to be eliminated in June as school boards resort to layoffs to cut expenses during difficult budget deliberations. With their principal funding sources — state and local taxes — hammered by the recession, school boards have given pink slips to hundreds of teachers as they look to reduce payroll, close schools, eliminate language instruction and, in some cases, consider switching to a four-day school week to make ends meet, superintendents said. Eliminating so many teaching jobs will almost certainly result in program cuts and slightly larger class sizes in many school systems next year. Connecticut is following a national trend as an estimated 100,000 to 300,000 teaching positions are being considered for elimination.
Buffalo, NY schools budget calls for 700 layoffs (AP) - The head of Buffalo's public school system has outlined a "worst-case" scenario that calls for laying off 700 employees, including 200 teachers, to close a $34 million budget gap.Superintendent James Williams' spending proposal presented Wednesday also would layoff 185 teacher's aides, 15 administrators and 300 bus aides. His plan would increase class sizes and reduce school maintenance and repair for the 2010-2011 fiscal year that begins July 1.Williams says the deficit could be eliminated if unions agreed to $19 million in givebacks and if the state reduced the school system's mandated charter school payments by $15 million.
Tax-Weary New Jersey Voters May Reject School Budgets (Bloomberg) -- New Jersey residents angry over rising property taxes that are the highest in the U.S. may vent their frustrations on school budgets at the ballot box today. Eighty-three percent of New Jersey’s school districts are seeking to raise local levies to fund spending plans, after Governor Chris Christie slashed their aid. That may result in the largest number of defeated budgets since voters rejected 46 percent of them in 2006, said Frank Belluscio, a spokesman for the New Jersey School Boards Association. Christie, a Republican who took office Jan. 19, said voters should nix budgets in districts where unionized employees refuse to take pay freezes to help solve the funding crisis. Residents should be outraged that teachers get average raises of 4 percent to 5 percent and free or low-cost health care, he has said.
Advanced Degrees: 139 Women for Every 100 Men - The graph above is based on college degree data that were released today by the Census Bureau, showing college degrees for the age group 25-29 years old. According to the press release: "The U.S. Census Bureau reported today more women than men are expected to occupy professions such as doctors, lawyers and college professors as they represent approximately 58 percent of young adults, age 25 to 29, who hold an advanced degree." In other words, 139 women in the 25-29 year old group hold an advanced degree for every 100 men in that age group, and women dominate men for all advanced degrees: Master's, Professional (MD, DDS and JD), and Doctor's (Ph.D.).
Med School Grads Haven't Increased Since 1980 - Physicians in the U.S. made an average about $200,000 in 1996, which was between 2 and 5 times as much as doctors made in European countries and Japan (see chart above). The median physician salary in the U.S. is now closer to $275,000 (data here). How do we explain the significantly higher physician salaries in the U.S. compared to other countries? Here's one possible explanation: The supply of medical school graduates has remained basically flat for the last 30 years (data here). At the same time, the demand for physicians' services has increased over time because of a population that is both increasing and aging. So we've now got more people with more serious end-of-life medical problems demanding more medical care from a limited supply of physicians - and that's a sure prescription for rising MD salaries.
$17.6 Billion Pension Shortfall: The Budget Is Hardly Balanced - $17.6 billion is the total unfunded liability of the Los Angeles City Employees Retirement System and the Fire and Police Pension Plans based on the market value of the assets on June 30, 2009 and a realistic rate of return assumption. As such, our pension funds are only 52% funded, representing a debt of around $11,000 per household. This is over four times the amount of the General Fund, two and a half times the total revenues of the City, over five times the annual payroll, and is over $400,000 per employee. On the other hand, the City states that the liability is “only” $4.6 billion. Why the $13 billion difference? If the assets of the pension plans are “marked to market” as mandated for public owned companies, this results in a $6.9 billion difference from the “Actuarial Value” of the assets, a methodology devised by the funny money accountants setting the rules for government pensions. The remaining $6.1 billion is the result of using a realistic rate of return on investments of the pension funds
Peeling the layers from CalPERS' realty investments - CalPERS is discovering that some of the leverage in its now $13.7 billion real estate portfolio falls outside its investment policy limits. Drawing back the curtain a little more on what went wrong in what had been a $20 billion portfolio, executives at the $209.3 billion California Public Employees' Retirement System, Sacramento, have revealed that it was not only massive amounts of leverage, but also the kind of debt and the type of investments the system took on, that ended up cutting the value of its real estate portfolio by almost half
Public employee pensions under pressure - Across California, state and local leaders are moving to confront the cost of public employee retirement packages — an escalating financial burden that threatens to choke off funding for other government services.Legislation now being debated in Sacramento would curtail pension benefits to future state employees. Elsewhere, city and county governments are looking at a variety of measures, including raising property taxes to cover shortfalls and reducing payments to retirement funds. On Thursday, pension consultant Girard Miller told California's Little Hoover Commission that state and local governments have $325 billion in unfunded pension liabilities, which he said amounts to $22,000 for every working adult in the Golden State.
Immigration reform could lead to biometric Social Security card - "I couldn't believe it," said Peisker, 50, who repeatedly had to show up to work with her birth certificate, marriage license and U.S. passport until the confusion was cleared up.Not uncommon, such problems with the federal E-verify software system — intended to pluck illegal immigrants out of the work force — have led to proposals for a more wide-reaching solution that could be as culturally transformative as it is controversial. Until recently, it also might have seemed as futuristic as a movie thriller.Two U.S. senators prominent in immigration reform efforts have proposed that all Americans be issued biometric Social Security cards, containing data from either a fingerprint or retinal scan to help employers determine whether the holder is legal.
NEW REPORT: Insurers May Re-Label Administrative Costs As Medical Care To Meet Health Reform’s Requirements - The new federal health care law requires that insurers spend at least 80% of customers’ premiums on medical care in the individual insurance market, and 85% in the employer/group market. Starting in 2011, insurers that don’t meet these requirements will have to issue rebates to consumers “based on the amount insurers’ spending falls below these minimums.” Yesterday, a new report released by the Senate Committee on Commerce Science and Transportation found that while many of the nation’s largest insurers “modestly increased the percentage of premium dollars they spent on medical care in 2009,” the disparities “in medical spending between market segments remained larger than ever.
Let the (Accounting) Games Begin! - Igor Volsky at WonkRoom has just discovered that when you arbitrarily set restrictions on what sorts of expenses companies can take, they will arbitrarily reclassify those expenses as something else. Specifically, government officials think it would be nicer if insurance companies spent a higher percentage of their revenues on medical care rather than administrative overhead. Without particularly investigating whether this was sound, or even possible, they enacted a rule dictating that the "medical loss ratio" had to be a fairly high percentage of revenues. Predictably, companies are reclassifying administrative expenses as medical in order to make their numbers.
Is the Affordable Care Act an Excuse for Income Redistribution? - - Greg Mankiw wrote on Saturday, “[O]ne of the prime motives for healthcare reform had nothing to do with health per se but rather was a desire by those on the left for greater redistribution of income.” As rationale for this claim Mankiw cites his November 2007 post. To judge whether my conjecture is correct, ask your favorite pundit of the left the following: What health reform would you favor if the reform were required to be distribution-neutral? One thing I noticed in following health reform closely is that few pundits–on the left or right–understand health economics. However, the lefty pundits in Mankiw’s hypothetical would be correct that the provisions of the Affordable Care Act (ACA) could not be implemented without increased redistribution. A motivation for increased redistribution as an end in itself is not required to hold that point of view.
The Real Chicken-Checkup Fallacy - Everyone’s having fun with the chickens for checkups story, in which Sue Lowden, the leading Republican Senate candidate in Nevada, expressed a desire to return to the good old days in which people who wanted a checkup from their doctor would offer a chicken in exchange. And she’s not backing down! But I think even the mocking critics are missing the main point. Sure, it’s funny to see a 21st-century political candidate pining for the days of a barter economy. But her remarks would have been breathtakingly ignorant even if she had called for payments in cash.
Exclusive: WellPoint routinely targets breast cancer patients(Reuters) - Shortly after they were diagnosed with breast cancer, each of the women learned that her health insurance had been canceled. But besides their similar narratives, they had something else in common: Their health insurance carriers were subsidiaries of WellPoint, which has 33.7 million policyholders -- more than any other health insurance company in the United States.The women paid their premiums on time. Before they fell ill, neither had any problems with their insurance. Initially, they believed their policies had been canceled by mistake.They had no idea that WellPoint was using a computer algorithm that automatically targeted them and every other policyholder recently diagnosed with breast cancer. The software triggered an immediate fraud investigation, as the company searched for some pretext to drop their policies, according to government regulators and investigators.
Study: Insurance companies hold billions in fast food stock… The fast-food industry has long been under fire for selling high-fat, high-calorie meals that have been linked to weight gain and diabetes, but the financial health of the industry continues to attract investors -- including some of the leading insurance companies in the U.S., a new study reports. According to Harvard Medical School researchers, 11 large companies that offer life, disability, or health insurance owned about $1.9 billion in stock in the five largest fast-food companies as of June 2009.The fast-food companies included McDonald's, Burger King, and Yum! Brands (the parent company of KFC and Taco Bell). Companies from both North America and Europe were among the insurers, including the U.S.-based Massachusetts Mutual, Northwestern Mutual, and Prudential Financial.
FDA plans to limit amount of salt allowed in processed foods - The Food and Drug Administration is planning an unprecedented effort to gradually reduce the salt consumed each day by Americans, saying that less sodium in everything from soup to nuts would prevent thousands of deaths from hypertension and heart disease. The initiative, to be launched this year, would eventually lead to the first legal limits on the amount of salt allowed in food products. The government intends to work with the food industry and health experts to reduce sodium gradually over a period of years to adjust the American palate to a less salty diet, according to FDA sources, who spoke on condition of anonymity because the initiative had not been formally announced.
They came first for the sugar, then they came for the salt…The ongoing debate at Cato Unbound on soft paternalism has focused a lot on the issue of slippery slopes. There are two directions one can slide down a slippery slope: an increasing scope of paternalism, and an increasing degree of paternalism. The danger of the former is captured in Glen Whitman’s example of smoking. First they banned it on airplanes, then it was bars and restaurants, and now it is increasingly in all public places.The other slippery slope occurs when the presence of paternalism in area A makes it more likely in area B. This type of slipper slope is evident in the spread of regulation from sugar, which is becoming more popular, to salt, which is on the horizon:
Salt Shakeup: No Need to Regulate What Our Bodies Already Control - In November, Judith Stern, a professor of nutrition and internal medicine, and David McCarron, an adjunct nutrition professor, both at UC Davis, published a study in the Clinical Journal of the American Society of Nephrology that questioned the scientific logic and feasibility of broadly limiting salt intake in humans. After examining data from sodium intake studies worldwide and a critical body of neuroscience research on sodium appetite (innate behaviors that drive us to consume salt), Stern and McCarron found compelling evidence indicating that humans naturally regulate their salt intake within a narrowly defined physiologic range. They found that Americans’ average salt intake falls well within this range.
Inventing Disorders -Of all the harmful actions of modern psychiatry, "the mass diagnosing and drugging of children is the most appalling with the most serious consequences for the future of individual lives and for society," warns the world-renowned expert, Dr Peter Breggin, often referred to as the "Conscience of Psychiatry.""We're bringing up a generation in this country in which you either sit down, shut up and do what you're told, or you get diagnosed and drugged," he points out. Breggin considers the situation to be "a national tragedy." "To inflict these drugs on the growing brains of infants and children is wrong and abusive," he contends. The kids who get drugged are often our best, brightest, most exciting and energetic children, he points out. "In the long run, we are giving children a very bad lesson that drugs are the answer to emotional problems."
"Potentially deadly fungus spreading in U.S. and Canada (Reuters) - A potentially deadly strain of fungus is spreading among animals and people in the northwestern United States and the Canadian province of British Columbia, researchers reported on Thursday. The airborne fungus, called Cryptococcus gattii, usually only infects transplant and AIDS patients and people with otherwise compromised immune systems, but the new strain is genetically different, the researchers said. "This novel fungus is worrisome because it appears to be a threat to otherwise healthy people," said Edmond Byrnes of Duke University in North Carolina, who led the study."The findings presented here document that the outbreak of C. gattii in Western North America is continuing to expand throughout this temperate region," the researchers said in their report, published in the Public Library of Science journal PLoS Pathogens here
Do you really need an environmental impact statement to replace what you took illegally? - Six years ago, TMQ christened Redskins owner Chainsaw Dan after he hired a crew to clear-cut 130 mature trees that blocked his mansion's view of the Potomac River. The trees were not on Snyder's property, rather, on a scenic easement administered by the National Park Service. Snyder paid a fine, and promised to replant -- obviously coming out ahead, since it would take saplings a decade or more to grow enough to block his view again. Now the Gazette, Washington's excellent suburban newspaper, reports that six years later, Snyder has yet to plant the first tree. His excuse? The Environmental Impact Statement isn't finished. Obviously you need an Environmental Impact Statement to plant trees! What if they develop leaves, or birds perch in them? Obviously, the Environmental Impact Statement process was intended to crack down on the irresponsible planting of trees!
All states need to embrace bipartisan climate bill -- NEXT WEEK, Senators John Kerry, Lindsey Graham, and Joe Lieberman will release their much-anticipated proposal for comprehensive climate and energy legislation — the best remaining shot at forging a bipartisan consensus on this issue in 2010. Their proposal has many strengths — and as an environmental economist who has worked on this issue for two decades, I hope it succeeds But there’s a danger that officials from some states, including Massachusetts, could undermine the effectiveness of a federal bill. While states have played an important role in pushing Congress to act, the federal initiative now has to take precedence over state regulations. Government officials from California, New England, New York, and other Northeastern states are vociferously lobbying in Washington to retain their existing state and regional systems for reducing greenhouse gas emissions, even after a new federal system comes into force. That would be a mistake —
Annual Estimates of the Loss in Households’ Purchasing Power Under H.R. 2454 -This morning CBO released a letter responding to a request from Representative Christopher Smith for additional information on the costs that H.R. 2454, the American Clean Energy and Security Act of 2009 (as passed by the House of Representatives), would impose on households as a result of the legislation’s primary cap-and-trade program, which would regulate greenhouse gas emissions. The legislation would set annual limits, or caps, on total emissions between 2012 and 2050 and would require regulated entities—including producers and importers of petroleum-based liquids, natural gas distributers, and large electricity generators—to hold rights, or allowances, to emit greenhouse gases.
Policy Basics: Climate-Change Legislation and Low-Income Consumers — Putting a price on carbon” through market-based policies like cap and trade or a carbon tax is the most cost-effective way to reduce greenhouse gas pollution. By raising the price of fossil-fuel energy products — from home energy and gasoline to food and other goods and services with significant energy inputs — these policies would encourage energy conservation, investments in energy efficiency, and the use of clean energy sources. But the higher prices would also squeeze consumers’ budgets. Consumers with low or moderate incomes would feel the squeeze most acutely. Fortunately, well-designed climate policies can generate enough revenue to fully offset the impact of the higher prices on the most vulnerable households, as well as to cushion the impact for many other households and meet other public needs, such as expanded research on alternative energy technologies. And they can do this without blunting the market “price signal” that is essential for achieving cost-effective emissions reductions.
Accounting for Carbon Offsets - Highly complex, difficult to value assets are being evaluated by a handful of firms with strong ties to the financial corporations whose job it is to market those assets to investors around the world. Sound familiar? It's not mortgages but carbon offsets and not only are the issues related many of the same players are involved. Harpers has a good piece (subs, try also here (pdf)) with more details than I have seen elsewhere on how the market works. It's not all bad, as the author, Mark Schapiro shows, the measurement infrastructure that has been created is actually quite impressive, but not enough effort has been put into monitoring. Here's one good bit:
India’s Largest Bank Seeks 25 Million Credits From Cow Dung… (Bloomberg) -- State Bank of India, the nation’s largest, plans to help farmers buy fuel-saving equipment that could generate as many as 25 million carbon credits, potentially one of the country’s biggest offset projects to date. State Bank has agreed to lend 170 million rupees ($3.8 million) to 20,000 farmers for plants that convert cow dung and kitchen waste into cooking gas, reducing their need to burn fossil fuels, said I.R. Reddy, deputy general manager. “We aim to expand that to 500,000 farmers over the next three years,” Reddy said in a phone interview.
Greenpeace: Industry Lobbyists Succeeding in 'Hijacking Climate Bill' Greenpeace has highlighted crucial elements of the draft climate bill necessary to address the catastrophic effects of global warming pollution. Senator Kerry, in a teleconference Thursday, organized by the We Can Lead coalition, outlined specific details from the draft Climate Bill expected to be released Monday that had not previously been publicly available. In response Greenpeace Executive Director Phil Radford issued the following statement: "Although we appreciate the Senate’s efforts to reduce global warming pollution, it’s clear that polluter lobbyists have succeeded in hijacking this climate policy initiative and undermined the ambitious action necessary. We cannot support this bill unless the following elements change: Inadequate Emissions Targets: Eviscerating the Clean Air Act: Money for Dirty technology:
“MAINSTREAM GREENS CAVE IN ON CLIMATE: Dangerously Allow Industry to Set Agenda” - "Our friends have become the planet’s worst enemies” - Dr. James Hansen. With climate scientists warning that we are in a global emergency and tipping points leading to runaway catastrophe will be crossed unless carbon pollution is rapidly reduced, one would expect groups identified as environmental defenders to be shifting into high gear. Instead, we are witnessing the unspeakably tragic spectacle of a mainstream environmental movement allowing itself to be seduced and co-opted by the very forces it should be vehemently opposing. At the very moment when moral leadership and courage are needed the most, what we see is a colossal failure of both – with potentially irreversible consequences for our civilization. If Congress chooses an inadequate response to the crisis, policies can get “locked in” which virtually guarantee that these tipping points are crossed.
Gore Takes Money for Water Campaign from Dow - Al Gore, the self-styled squeakiest-clean and deepest-green politician in American history, has some explaining to do this weekend. His environmental organisation has taken money to raise awareness about the need for clean water from a controversial chemicals company involved in the aftermath of one of the world's worst pollution disasters. Dow Chemical, the US firm which now owns the leaking pesticides factory responsible for thousands of deaths in Bhopal, India, is sponsoring Life Earth events in 150 cities today. The event aims to raise money for clean water programmes. Research by environmental organisations has found dangerous levels of highly toxic chemicals in rivers, lakes and other water supplies close to several other factories owned by Dow and its subsidiaries in countries including the United States, Brazil and South Africa.
Military leads fight against climate change: Pew (Reuters) - The U.S. military, the government's largest fuel buyer, is leading the fight against climate change by investing in the "Great Green Fleet" and other ways of cutting dependence on oil and coal, according to a Pew Charitable Trusts report released on Tuesday."They're not having long and protracted debates about whether or not we can afford it ... they are marching" into investments in everything from electric vehicles to forming strike groups that run on alternative fuels, said Phyllis Cuttino, director of Pew Environment Group's Global Warming Campaign.The report, "Re-energizing America's Defense," says the military has found that climate change may lead to domestic and international instability by threatening water and food supplies. In addition, stronger storms caused by emissions could increase the need for humanitarian missions by the military both at home and abroad, which could stretch resources.
Geologists Drill into Antarctica and Find Troubling Signs for Ice Sheets' Future - If you think of Earth's poles as fraternal twins, the Arctic has been the wild one in recent years, while the Antarctic has been a steady plodder. Withered by summer heat, Arctic sea ice has shrunk to record low coverage several times since 2005, only to rebound to within 95 percent of its long-term average extent this winter. By comparison, Antarctica, with some 90 percent of the world's glacial reserves, has generally shed ice in more stately fashion. However, emerging evidence from an Antarctic geological research drilling program known as ANDRILL suggests that the southernmost continent has had a much more dynamic history than previously suspected—one that could signal an abrupt shrinkage of its ice sheets at some unknown greenhouse gas threshold, possibly starting in this century. Especially troubling, scientists see evidence in the geological data that could mean the vast East Antarctic Ice Sheet, which holds at least four-fifths of the continent's ice, is less resistant to melting than previously thought
Stronger water cycle means arid regions have become drier and high rainfall regions wetter as atmospheric temperature increasesThe study, co-authored by CSIRO scientists Paul Durack and Dr Susan Wijffels, shows the surface ocean beneath rainfall-dominated regions has freshened, whereas ocean regions dominated by evaporation are saltier. The paper also confirms that surface warming of the world's oceans over the past 50 years has penetrated into the oceans' interior changing deep-ocean salinity patterns. "This is further confirmation from the global ocean that the Earth's water cycle has accelerated," says Mr Durack –"These broad-scale patterns of change are qualitatively consistent with simulations reported by the Intergovernmental Panel on Climate Change (IPCC).
Study: River water temperatures rising - New research by a multi-institutional team of ecologists and hydrologists, including the University of Virginia's Michael Pace, shows that water temperatures are increasing in many streams and rivers throughout the United States – a trend that the researchers warn could eventually impact riparian ecosystems. The study, published in the journal Frontiers in Ecology and the Environment, found statistically significant long-term warming in 20 major U.S. streams and rivers – including such prominent rivers as the Colorado, Potomac, Delaware and Hudson.By analyzing historical records from 40 sites throughout the United States, the team found that annual mean water temperatures increased by between 0.02 and 0.14 degrees Fahrenheit per year. Long-term increases in stream water temperatures were typically correlated with increases in air temperatures, and rates of warming were most rapid in urbanized areas.
Bob McDonald: '.01 percent of world's water available to drink' - "Water water everywhere but not a drop to drink." Not true according to Bob McDonald, host of CBC radio's Quirks and Quarks. There is a drop, but that's about all. McDonald was the keynote speaker Monday at the 39th Water Environment Association of Ontario (WEAO) annual conference being held in London, Ontario. McDonald demonstrated how little of the earth's water is actually available for human use. He asked Catherine Jefferson, the executive director of the WEAO, to assist him on stage. He poured Jefferson a glass of water representing all the water in the world.
Time, Water Running Out for Ogallala, America's Biggest Aquifer - That groundwater for irrigation comes from the Ogallala Aquifer, a massive underground lake that stretches from southern South Dakota through northern Texas, covering about 174,000 square miles. It is being drained at alarming rates, and some places have already seen what happens when local levels drop below the point where water can no longer be pumped. "You go to areas where the aquifer has been depleted, [they] look pretty poor now," David Brauer, program manager for the U.S. Department of Agriculture's Agricultural Research Service Ogallala Aquifer Program, told AOL News. "And it only takes a few years.
UK water use 'worsening global crisis' The amount of water used to produce food and goods imported by developed countries is worsening water shortages in the developing world, a report says.The report, focusing on the UK, says two-thirds of the water used to make UK imports is used outside its borders. The Engineering the Future alliance of professional engineering bodies says this is unsustainable, given population growth and climate change. It says countries such as the UK must help poorer nations curb water use. "We must take account of how our water footprint is impacting on the rest of the world," said Professor Roger Falconer, director of the Hydro-Environmental Research Centre at Cardiff University and a member of the report's steering committee. "If we are to prevent the 'perfect storm', urgent action is necessary."
Food supply chains at risk in changing south-east Asian climate A report co-written by the World Resources Institute (WRI) and HSBC Climate Change Centre of Excellence claims that food supply chains in India and south-east Asia are under serious threat from changing climatic conditions. Aquaculture in the region, including farmed Thai shrimps and Vietnamese catfish are at risk from rising air temperatures, which increase the temperatures of fisheries and lower yields. Other agricultural sectors are also at risk due to water scarcity. These include edible oils, such as palm oil, and the sugarcane industry, especially in India where the largest sugar growing areas are some of the most water scarce areas of the country, according to the report.
The Coming Famine: Risks And Solutions For Global Food Security - Most of us have by now heard the forecast there will be 9.2 billion people in the world of 2050. But current projections suggest human numbers will not stop there – but will keep on climbing, to at least 11.4 billion, by the mid 2060s. Equally, the world economy will continue to grow – and China, India and other advancing economies will require more protein food. Thus, global demand for food will more than double over the coming half-century, as we add another 4.7 billion people. By then we will eat around 600 quadrillion calories a day, which is the equivalent of feeding 14 billion people at today’s nutritional levels. The world food production system today faces critical constraints. Not just one or two, but a whole constellation of them, playing into one another – and serious ones.
Answer to locust swarms? Town puts them on pizza – As locusts swarm across Australia, folks are finding a way to get back at the insects that devour crops – eat ‘em! One café in Mildura, northern Victoria state, is offering locusts as a crunchy topping for pizza, CNN affiliate ABC news reports. The idea for the dish came from the mayor of the town of 60,000, Glen Milne, according to ABC. The politician rounded up locusts in a garbage bag in the town’s center. "You can't stop finding them when they get killed on your car, but it's another story when you get out on the oval and try to catch them," he said.
Rewiring Plants Could Supersize Crops “We wondered if we could take parts designed by nature, and rewire them together in a mix-and-match approach to get something that’s more efficient for human needs,” said synthetic biologist Ron Milo of the Weizmann Institute, co-author of the study published April 19 in the Proceedings of the National Academy of Sciences.So-called carbon fixation is essential for the growth of plants, which combine carbon dioxide with water to produce organic compounds in their bodies. But while modern crops have been intensively bred, the essential process of carbon fixation has remained unaltered. The chemical process used by almost all plants to fix carbon is called the Calvin-Benson cycle. Researchers have tried without success to tweak the cycle’s key enzyme, Rubisco. Evolution appears to have optimized the cycle — but according to Milo’s team, the cycle itself isn’t necessarily optimal.
Risk Mismanagement - About a decade ago, Miguel Torres planted 104 hectares of pinot noir grapes in the Spanish Pyrenees, 3,300 feet above sea level. It's cold up there and not much good for grapes—at least not these days. But Torres, the head of one of Spain's foremost wine families, knows that the climate is changing. His company's scientists reckon that the Rioja wine region could be nonviable within 40 to 70 years, as temperatures increase and Europe's wine belt moves north by up to 25 miles per decade. Other winemakers are talking about growing grapes as far north as Scandinavia and southern England. Torres' Pyrenees vineyards are a hedge, and may not be necessary. But if climate change redraws the map of Europe's wine world, he will be prepared. And his company will be one of a very few taking steps to adapt to the future effects of climate change.
Gas hydrates: past and future geohazard? - Gas hydrates are ice-like deposits containing a mixture of water and gas; the most common gas is methane. Gas hydrates are stable under high pressures and relatively low temperatures and are found underneath the oceans and in permafrost regions. Estimates range from 500 to 10 000 giga tonnes of carbon (best current estimate 1600–2000 GtC) stored in ocean sediments and 400 GtC in Arctic permafrost. Gas hydrates may pose a serious geohazard in the near future owing to the adverse effects of global warming on the stability of gas hydrate deposits both in ocean sediments and in permafrost. It is still unknown whether future ocean warming could lead to significant methane release, as thermal penetration of marine sediments to the clathrate–gas interface could be slow enough to allow a new equilibrium to occur without any gas escaping. Even if methane gas does escape, it is still unclear how much of this could be oxidized in the overlying ocean. Models of the global inventory of hydrates and trapped methane bubbles suggest that a global 3 °C warming could release between 35 and 940 GtC, which could add up to an additional 0.5 °C to global warming.
Bill McGuire, PTRS Vol. 368, Climate forcing of geological and geomorphological hazards - The meeting brought together delegates from the UK, Europe and the USA to address the issue of climate forcing of geological and geomorphological hazards, with a particular focus on examining the possibilities for a geospheric response to anthropogenic climate change. Papers included in this issue are a reflection of new research and critical reviews presented in sessions on: climates of the past and future; climate forcing of volcanism and volcanic activity; and climate as a driver of seismic, mass-movement and tsunami hazards. Two introductory papers set the scene. In the first, McGuire summarizes evidence for periods of exceptional past climate change eliciting a dynamic response from the Earth’s crust, involving enhanced levels of potentially hazardous geological and geomorphological activity.
Ice cap thaw may awaken Icelandic volcanoes: Scientific American - A thaw of Iceland's ice caps in coming decades caused by climate change may trigger more volcanic eruptions by removing a vast weight and freeing magma from deep below ground, scientists said on Friday. They said there was no sign that the current eruption from below the Eyjafjallajokull glacier that has paralysed flights over northern Europe was linked to global warming. The glacier is too small and light to affect local geology. "Our work suggests that eventually there will be either somewhat larger eruptions or more frequent eruptions in Iceland in coming decades," said Freysteinn Sigmundsson, a vulcanologist at the University of Iceland.
Economics of Natural Hazards: You Can't Fight Mother Nature - Today is the fifth day of closed airspace over Europe. ... This event is certainly a lesson for modern society. The disruption in air travel has created absolute chaos in a number of areas. Passenger travel is the obvious one, but for many there are alternatives, like my changing to a train, which is easy to do in Europe. But there are other areas that will be hurt as well. Delivery of goods, particularly perishable goods are in real trouble. It has been very easy for urban areas to have fresh fruits and vegetables available year round. We simply had them flown from warmer regions with lower labor costs. But, without air service, that produce will rot in warehouses. An event like this reminds us of how vulnerable that delivery system is.
BBC - Iceland given another $160m by IMF to re-build economy… The International Monetary Fund (IMF) has cleared a $160m (£104m) loan to Iceland that was contested by Britain and the Netherlands. The money is the latest tranche of $2.1bn in IMF aid to stave off Iceland's financial collapse. But approval got caught in wrangling over claims for compensation for the collapse of the Icelandic bank Icesave. In a poll in March voters in Iceland rejected a plan to pay Britain and the Netherlands 3.9bn euros (£3.4bn). Discussions on the IMF board, where Britain and the Netherlands have a vote, were stalled for months as the two countries discussed with Iceland their demands for compensation. The dispute has also overshadowed Iceland's application to join the European Union, which was submitted in July last year.
Iceland volcano could continue erupting for more than a month, researcher says…— The airspace over much of northern Europe remains shut and the Norwegian Prime Minister, Jens Stoltenberg, is stranded in New York City because of the threat from a volcanic ash plume being belched out of Iceland. How long will the eruption of the Eyjafjallajokull volcano continue and what other kinds of activity can we expect? A volcanologist at the Norwegian University of Science and Technology (NTNU) who has worked extensively in Iceland says a month-long eruption would not be out of the question. But the eruption could also continue for a year or more, he says.
"Eaarth": Earth is over - According to Bill McKibben, the respected environmentalist and author of the pioneering "End of Nature," the planet Earth, as we know it, is already dead. Over a million square miles of the Arctic ice cap have melted, the oceans have risen and warmed, and the tropics have expanded 2 degrees north and south. Global warming has caused such pervasive and irreversible changes, he argues, that we now live on a new planet with a new set of environmental and climatic realities — and, as such, it deserves a new name: Goodbye, Earth. Hello, "Eaarth." McKibben’s hair-raising new book, "Eaarth: Making a Life on a Tough New Planet," is a scrupulous and impassioned account of the severely compromised globe on which we now live. He lays out the myriad ways in which climate change has remade our world, but he also goes much further, chronicling its current and future human toll.
Bill McKibben on Cochabamba, Congress and Eaarth - Twenty years ago, environmentalist Bill McKibben wrote The End of Nature, but his warnings went largely unheeded. Now, as people are grappling with the unavoidable effects of climate change and confronting an earth that’s suddenly melting, drying, acidifying, flooding and burning in unprecedented ways, Bill McKibben is out with a new book about what we have to do to survive this brave new world. Today, he says, global warming is no longer simply a threat. It’s a reality. And the planet is so fundamentally different as a result, we might as well call it “Eaarth.” That’s the title of his latest book: Eaarth — Making a Life on a Tough New Planet. Author, activist and founder of 350.org, Bill McKibben joins us from Washington, D.C.
The Coming Tide of Global Climate Lawsuits - The Prunerov power station is the Czech Republic’s biggest polluter: Its Its 900-foot-high smokestack pushes a plume of white smoke high above the flat, featureless fields of northern Bohemia. Prunerov reliably wins a place on lists of Europe’s dirtiest power plants, emitting 11.1 million tons of carbon dioxide each year. So when CEZ Group, the state-controlled utility, proposed an overhaul to extend the facility’s life for another quarter of a century, protests flared — including one from a place about as far from the sooty industrial region as you can get, a place of tropical temperatures and turquoise seas with not a smokestack in sight. This January, the Federated States of Micronesia, some 8,000 miles away in the Pacific Ocean, lodged a legal challenge to the Prunerov plant on the grounds that its chronic pollution threatens the island nation’s existence.
How Badly Does Europe Want to Convert to Wind Power? - Freakonomics Blog - NYTimes... a recent Wall Street Journal article (gated) by Guy Chazan makes clear that as much as Europe, and the U.K. in particular, is devoted to building offshore wind farms to wean itself from coal-powered electricity, the logistical challenges and costs are starting to look insurmountable. Among the most important passages: “Offshore wind is one of the most expensive short-term ways you can conceive of to reduce CO2 emissions,” says Dieter Helm, professor of energy policy at Oxford University. “It’s economic nonsense to put all your eggs in one basket like this.” Dr. Helm says the most cost-effective way of “de-carbonizing” U.K. energy, at least in the short term, would be to switch from coal to cleaner-burning natural gas in power generation. “If you take out 4 to 5 gigawatts of coal and replace it with gas, the CO2 savings would be similar and it would only cost £5 billion to £7 billion, compared to £100 billion for offshore wind,” he says.
Geothermal Grows 26% In 2009: GEA Identifies New Projects Underway In 15 States (pdf) The US geothermal power industry continued strong growth in 2009, according to a new report by the Geothermal Energy Association (GEA). The April 2010 US Geothermal Power Production and Development Update showed 26% growth in new projects under development in the United States in the past year, with 188 projects underway in 15 states which could produce as much as 7,875 MW of new electric power.
Saudi Arabia to Build the First Nuclear Power Station in the Gulf States - The government of Saudi Arabia has announced a new section of its capital Riyadh is set to be powered solely by nuclear energy. This will be the first nuclear power plant in the Gulf states, and the first in the broader Middle East. If the U.S. government backs Saudi Arabia's bid to build a reactor, they'll be creating the potential for nuclear growth within the GCC, or Gulf Cooperation Council, whose members include Saudi Arabia, Qatar, Kuwait, Bahrain, the UAE, and Oman.All of those states are also reviewing the possibility of producing nuclear fuel, so they can export more oil and gas to foreign markets
Algae Could Grow Into A Biofuels Leader - CNBC - While corn ethanol dominates the current biofuel market, the future of clean liquid-energy looks more likely to be found floating on ponds than growing in fields. Algae-derived biofuels have garnered a lot of attention and investment over the past year due to their potential market-disrupting economics, even if they have become more common in research labs. "We estimate the pricing of our diesel products at as little as $30 per barrel," says Bill Sims, CEO of Joule Biotechnologies, a bioengineering firm focusing on the renewable biofuels market. "The big prize is to be competitive with fossil fuels, not with other biofuels."
TR10: Solar Fuel - Biofuels ultimately come from carbon dioxide and water, so why persist in making them from biomass--corn or switchgrass or algae? "What we wanted to know," Afeyan says, "is could we engineer a system that could convert carbon dioxide directly into any fuel that we wanted?" The answer seems to be yes, according to Joule Biotechnologies, the company that Afeyan founded (also in Cambridge) to design this new fuel. By manipulating and designing genes, Joule has created photosynthetic microörganisms that use sunlight to efficiently convert carbon dioxide into ethanol or diesel--the first time this has ever been done, the company says. Joule grows the microbes in photobioreactors that need no fresh water and occupy only a fraction of the land needed for biomass-based approaches. The creatures secrete fuel continuously, so it's easy to collect. Lab tests and small trials lead Afeyan to estimate that the process will yield 100 times as much fuel per hectare as fermenting corn to produce ethanol, and 10 times as much as making it from sources such as agricultural waste. He says costs could be competitive with those of fossil fuels.
Natural Gas Boom Gets Put On Hold - In a recent post I pointed out that the United States is betting the house on shale gas to cover declines in conventional gas production over the next decade. I followed up that post with Shale Gas Shenanigans, in which I argued that smaller operators may be understating their production costs in the big shale plays, thus inflating their own value to attract takeovers by or mergers with major oil & gas producers like Exxon Mobil or Total. I originally wrote about shale gas last summer in A Shale Gas Boom? This latter article is must-reading to understand the basic issues in the debate about the role of shale gas in America's future energy mix. Today and tomorrow I will review the natural gas issues again. Monday's post, which will be a bit technical, will discuss estimated ultimately recoverable (EUR) gas reserves in the Marcellus Shale (see the map below). I'm sure many of you are aware that there's been an enormous amount of hype accompanying the coming Shale Gas Revolution. The Wall Street Journal's US Gas Fields Go From Bust To Boom is typical—
A Miracle In the Marcellus Shale? - It's fair to say that lot of people, from shale gas operators to Pennsylvania state revenue collectors, see $$$ every time they think about the Marcellus shale. Only recalcitrant environmentalists worried about polluted drinking water do not salivate at the prospect that many years of U.S. gas supply will come from the Marcellus. Today I will not deal with the environmental issues. Instead, I want to examine the view that resources in the Marcellus are a big part of the shale gas cure-all for America's energy problems. How much economically recoverable gas exists in the Marcellus? To answer that question, let's take a close look at Range Resources, an operator in southwest Pennsylvania south of Pittsburgh, where I live. Recently, Range provided a Marcellus update—
Vehicle Sales: Fleet Turnover Ratio - This graph shows the total number of registered vehicles in the U.S. divided by the sales rate through March 2010 - and gives a turnover ratio for the U.S. fleet (this doesn't tell you the age or the composition of the fleet).The recent wild gyrations were due to the cash-for-clunkers program. Note: We are getting used to wild gyrations in economic numbers - just watch the housing numbers over the next few months! The estimated ratio for March was just under 21 years - still very high, but well below the peak of almost 27 years. The turnover ratio will probably decline further over the next few years.
Improving the fuel efficiency of U.S. light vehicles - I recently highlighted grounds for pessimism about the ease with which the U.S. could significantly change our oil consumption habits. Here I highlight some interesting new research by U.C. Davis economics professor Christopher Knittel which offers a more optimistic assessment. Knittel's paper notes that although U.S. fuel economy has shown only a modest improvement over the last 30 years, vehicle weight and horsepower have increased substantially. For example, the diagram below shows weight, horsepower, torque, and fuel economy for the Honda Accord since 1980.
Iran Hoarding Oil At Sea Because They Can't Sell It - One source estimated Iran had crude on 19 very large crude carriers (VLCCs) and one smaller suezmax tanker, compared with around 12 VLCCs at the end of March. A VLCC can store up to 2 million barrels of crude oil, while a suezmax can store up to 1 million barrels. Iranian officials declined to say how much crude was being stored, but confirmed that there was oil on tankers. "It's not as many as 20 vessels, but some of our customers do have crude on tankers in the Gulf," one Iranian oil official said. "One of the reasons is due to refinery overhauls." Global demand typically falls in the second quarter as northern hemisphere refineries undertake work on units and switch to heavier Much of Iran's crude is heavy and has a high sulphur content, making it harder and more expensive for refiners to convert it into valued transport fuels. "One theory is they are having trouble selling the cargo," a shipping source said. "It could be due to lack of demand for some heavy Iranian crude."
15 Drill-Crazy Countries That Are Rapidly Running Out Of Oil - Thirty countries produce over 500,000 barrels of oil per day. While some petro powers could keep it up for a century, many will run dry in the next 20 years. The lucky ones may increase reserves through exploration and technology. But as we know in America, doing so can be hard. The final option will be growing dependence on imports
Ecuador Threatens Oil Seizures to Accelerate Talks (Bloomberg) -- Ecuadorean President Rafael Correa is seeking to accelerate renegotiations of oil-service contracts by threatening to seize assets if talks fail as Barclays Plc said declining oil production and exports are weakening the Latin American country’s finances. Ecuador’s economic fundamentals are “deteriorating,” after a decline in oil production and exports, Barclays said today in a report to clients. Repsol YPF SA, the country’s biggest private oil producer, posted a 17 percent drop in output to 16.3 million barrels last year from 2008, according to data from Ecuador’s Non-Renewable Natural Resources Ministry
Iraq's oil exports dip in March by 11 percent, bad weather is blamed AP) - Iraq says oil exports dipped 11 percent in March from the previous month due to bad weather. Oil Ministry spokesman Assem Jihad said Tuesday that last month's daily exports averaged 1.84 million barrels, down from 2.068 million barrels a day exported in February. But he says March revenues inched up to $4.351 billion with an average price of $76.2 a barrel. February revenues stood at $4.229 billion. He says 44 million barrels were exported through the Persian Gulf, while 13.1 million barrels were exported via Turkey's port of Ceyhan.
Demand for oil to outstrip supply within two years - RISING oil prices pose a grave threat to global economic recovery, according to some experts. The fear has been expressed by the US military and by the automobile industry. This week in Perth, Volvo's head of product planning, Lex Kerssemakers, said "we all know that oil is running out''. "We need to find alternative solutions and though we are aware of the alternatives - LPG, CNG, ethanol, electric and so on - we have to introduce these to the market,'' he said. "If we don't do it now, we won't be ready in five years when oil may be prohibitively expensive.'' Mr Kerssemakers said Volvo would have an eelctric car on the world market in 2012 that would use less than 1.5 litres/100km of fuel - about one-tenth of that used by a current V8-engined sedan.
Oil Producers Risk Blowouts, Blazes in Search for Deeper Fields (Bloomberg) -- Energy companies delving miles beneath the seafloor for oil are risking pressure surges like the one this week that may have sparked the deadliest U.S. rig accident in 23 years. Explorers began work on 17 new Gulf of Mexico wells last week in waters deeper than 1,000 feet (305 meters), spurred in part by a tripling in crude prices in the past decade. The threat of pressure surges, or blowouts, that can smash steel equipment and create gushing columns of fire increases as drillers probe deeper, U.S. Coast Guard rescuers said hope was fading of finding alive any of the 11 workers missing since an April 20 explosion aboard Transocean Ltd.’s Deepwater Horizon rig, which the company said may have been caused by a blowout in an 18,000-foot well. The $365 million vessel sank yesterday and left an oil sheen on the water large enough to cover more than half of Manhattan.
Governments Worried about Peak Oil - But Not Enough to Tell You the Truth. Part 2 of my report: Officials Wake Up to Peak Oil In the first part of this series, I reviewed a series of reports from March supporting the peak oil view, and warning that world oil production very well may go into terminal decline by 2015 or sooner. The sources included the UK Industry Task Force on Peak Oil and Energy Security and officials within the British government; researchers within the College of Engineering and Petroleum at Kuwait University; researchers from Oxford University; and ConocoPhillips, the third-largest oil company in the U.S.
When the U.S. energy secretary spoke of "peak oil" ... He was referring to the arguments of ASPO that we have already reached peak oil. The U.S. Secretary of Energy, Steven Chu, knows and understands the issues of global peak oil production. During a talk he gave in March 2005 as director of the Lawrence Berkeley National Laboratory, a U.S. Department of Energy National Laboratory, Steven Chu advanced the hypothesis of an imminent decline in world production of liquid fuels (ppt 3.6 MB, see p.16) . Steven Chu at the time chose to put forward the thesis of Colin Campbell, founder of the Association for the Study of Peak Oil (ASPO), a research group composed of academics, and especially leading engineers who previously had worked for the oil industry. The arguments of ASPO have been considered as overly pessimistic by most official sources
U.S. Military Warns of Oil Shortage as Early as 2015 - A recent Joint Operating Environment report issued by the U.S. Joint Forces Command suggests that the U.S. could face oil shortages much sooner than many have anticipated. The report speculates that by 2012, surplus oil production capacity will dry up; by 2015, the world could face shortages of nearly 10 million barrels per day; and by 2030, the world will require production of 118 million barrels of oil per day, but will produce only 100 million barrels a day. Although this is hardly a scientific prediction -- a preface to the report clearly states that it's "speculative in nature" -- it still raises the provocative question of how the U.S. will proceed when oil runs out.
The Imminent Crash Of Oil Supply: Be Afraid - Look at this graph and be afraid. It does not come from Earth First. It does not come from the Sierra Club. It was not drawn by Socialists or Nazis or Osama Bin Laden or anyone from Goldman-Sachs. If you are a Republican Tea-Partier, rest assured it does not come from a progressive Democrat. And vice versa. It was drawn by the United States Department of Energy, and the United States military's Joint Forces Command concurs with the overall picture. What does it imply? The supply of the world's most essential energy source is going off a cliff. Not in the distant future,but in a year and a half. Production of all liquid fuels, including oil, will drop within 20 years to half what it is today. And the difference needs to be made up with "unidentified projects," which one of the world's leading petroleum geologists says is just a "euphemism for rank shortage," and the world's foremost oil industry banker says is "faith based." The original graph is available here: http://www.eia.doe.gov/conference/2009/session3/Sweetnam.pdf
Peak Oil Era: Why the Cost and Risk of Oil Exploration Will Keep Rising - Transocean’s Deepwater Horizon oil rig — which exploded and subsequently sank this week — was pushing the bounds of offshore oil and gas exploration in every possible way. The massive ultra-deepwater semisubmersible oil rig is a feat of engineering that has the ability to operate in 8,000 feet of water. Just last year, the rig drilled the deepest oil and gas well ever — more than six miles in depth — into BP’s Tiber field in the Gulf of Mexico. As a result, BP made a giant oil discovery that could hold up to 3 billion barrels.Rigs like Deepwater Horizon will continue to push drilling depths merely because the company has to. The days of easy-to-access oil are gone. Now, companies like BP are faced with oil and gas exploration projects that require operating in politically unstable regions or working in technologically complex areas like the deep waters of the Gulf or offshore Brazil. Protectionist measures from countries like Russia have forced companies to look at friendlier, albeit more difficult and costly, areas including the Canadian oil sands.BP’s Gulf of Mexico activities are an example of how far technology has come and how costly it’s getting to reach oil reserves. Leasing the Deepwater Horizon rig cost BP some $458,000 a day in March 2008. The adjustable rate was set to reach $517,000 a day by September 2010 before a new three-year contract between BP and Transocean began.
Chavez: US Oil Firms Pay $3 Billion A Year In Royalties To Venezuela -(Dow Jones)- U.S. oil firms pay about $3 billion a year in royalties to the Venezuelan government, a number that dwarfs the $200 million they'd be paying if previous Venezuelan administrations remained in charge, President Hugo Chavez said. "They used to hand out the oil for free here," said Chavez during a speech Monday night that culminated Venezuela's Independence Day celebrations. "This has now ended and we are free." The left-wing leader has been in power for 11 years and one of his key moves has been to take oil-drilling profits away from foreign oil companies and give more to the state for social, infrastructure and other projects. Around 2005, Chavez ripped up contracts between the government and big oil companies, including Exxon Mobil Corp. (XOM), and re-wrote them to give state-owned Petroleos de Venezuela, or PDVSA, a majority stake. Most companies, including California-based Chevron (CVX), the U.K.'s BP PLC (BP), Royal Dutch Shell PLC (RDSA) and France's Total (TOT), reluctantly agreed to the changes. Others such as Exxon and ConocoPhillips (COP) called Chavez' changes illegal, left the country and continue to pursue their cases in international courts.
Hugo Chavez moves to diversify sale of Venezuelan oil away from US refineries CHINA has promised to lend $US20 billion ($21.6) to Venezuela, President Hugo Chavez said over the weekend, underscoring the Asian giant's push to deepen ties with oil-rich nations in the developing world. The credit - which Mr Chavez said ranks among China's biggest foreign loans ever - shows the growing importance of oil in China's energy mix, and the lengths that the fast-growing nation is willing to go to secure it.Once a net oil exporter, China is now the world's third biggest oil importer.Mr Chavez, an outspoken US adversary in Latin America, has long grumbled that the US remains the biggest buyer of Venezuelan crude. The loan is a boost to his efforts to diversify sales of the major oil exporter away from US refineries.
China and Saudi Arabia Form Stronger Trade Ties - China, one of the world’s largest oil consumers, and Saudi Arabia, holder of about a fifth of global crude reserves, are forging closer ties as the Gulf kingdom responds to a Chinese drive to supply its rising energy needs. In November, China overtook the United States as the main buyer of Saudi oil, and Saudi Arabian Oil and Saudi Basic Industries are investing in refinery and petrochemicals projects in China. The partnership between Saudi Arabia and China is part of a broader strategy by the Saudis to supply Asian markets and extend their global influence. It also helps Saudi Arabia reduce reliance on the United States, which since World War II has protected Saudi security in return for stable oil supplies, said Ben Simpfendorfer, chief China economist in Hong Kong for Royal Bank of Scotland.
Saudis Tighten China Energy Ties to Reduce U.S. Dependence - China, the world’s second-largest oil consumer, and Saudi Arabia, holder of about a fifth of global crude reserves, are forging ever closer ties as the Persian Gulf kingdom responds to a Chinese drive to feed its rising energy needs. China in November overtook the U.S. as the main buyer of Saudi oil, and Saudi Arabian Oil Co. and Saudi Basic Industries Corp. are investing in refinery and petrochemicals projects in China. The partnership between Saudi Arabia and China is part of a broader strategy by the world’s largest oil exporter to tap Asian markets and extend global influence. It also helps Saudi Arabia reduce reliance on the U.S., which since World War II has protected Saudi security in return for stable oil supplies, said Ben Simpfendorfer, Hong Kong-based chief China economist at the Royal Bank of Scotland Plc.
China Just Grew Its Oil Demand By 10x The Rate of Global Supply Growth - China's oil consumption grew 12.8% year over year in March according to Platts. This is about the same growth rate as the country reported for its GDP in Q1, which grew 11.9%. Yet in comparison to global oil supply growth this year it's massive. According to the International Energy Agency, the world's oil supply is expected to grow by 1.3 million barrels per day in 2010. That's just a 1.53% increase vs. 2009. So just to put things in perspective, China grew its oil demand at over 8x the rate of global supply growth last month. Moreover, for the entire first quarter of 2010 Chinese oil demand grew even faster...
RIGZONE - Platts: China's March Oil Demand Up 12.8% - China's apparent oil demand in March climbed 12.8% from a year ago to 35.25 million tonnes or about 8.12 million barrels per day (b/d), but fell below the all-time high of 8.5 million b/d estimated for February, according to a Platts analysis of official data just released.Amid growing refining capacity in the country and high refinery utilization rates, March was also the seventh month in row the world's second-largest oil consumer after the US posted double-digit on-year growth in oil consumption. The latest growth spurt goes back to September 2009, a month that saw Chinese oil consumption leap 12.6% on year to 28.41 million tonnes. However, the November 2009 high of an 18.7% on-year leap in demand remains unsurpassed
Essential Element Becoming Scarce: Experts Warn of Impending Phosphorus Crisis… The element phosphorus is essential to human life and the most important ingredient in fertilizer. But experts warn that the world's reserves of phosphate rock are becoming depleted. Is recycling sewage the answer? Nothing suggests that the brown dust comes from a cesspool. It doesn't smell, is hygienic and is as safe as sand in a children's sandbox. It's also valuable. The powder has a phosphate content of around 16 percent. Phosphate, the most important base material in mineral fertilizer, is currently trading at about €250 ($335) a ton.
Peak Phosphorus - From Kansas to China's Sichuan province, farmers treat their fields with phosphorus-rich fertilizer to increase the yield of their crops. What happens next, however, receives relatively little attention. Large amounts of this resource are lost from farm fields, through soil erosion and runoff, and down swirling toilets, through our urine and feces. Although seemingly mundane, this process cannot continue indefinitely. Our dwindling supply of phosphorus, a primary component underlying the growth of global agricultural production, threatens to disrupt food security across the planet during the coming century. This is the gravest natural resource shortage you've never heard of.
Rare Earth Material Shortage Could Hit Mobile Phones - GLOBAL supplies of rare earth materials vital to the production of mobile phones and other tech gear are getting scarce, the US government has warned. The US Government Accountability Office said China processes almost 97 per cent of the world's supply of these elements, which have special electromagnetic properties. Although the US has deposits of rare earth ore, it won't likely be produced until 2012. Furthermore, the US has lost the necessary rare earth material refining capacity, and rebuilding the supply chain may take up to 15 years.While the military needs the rare earth materials for many of its defense systems--including missiles, satellites and radar systems--commercial use includes hybrid electric motors and batteries, wind power turbines, computer hard drives, mobile phones, cameras, energy-efficiency light bulbs and fiber optics.
China's Rare-Earth Policies Spark Apprehension For Automakers = China's tight hold on the world's usable supply of so-called rare-earth elements is fueling one of the bigger challenges for the fledgling green car industry. Carmakers are seeking new supplies outside China and testing making autos without rare earths. Rare-earth elements are widely used, but hybrid and electric vehicles need more of these metals than most any other product. China supplies 95% of the world's rare-earth elements. Its government has put a strict quota on exploration and exports of these metals, just as global demand is rising. China is worried that it will run out of the metals for its own use.
The Future of Metals -- Science - AAAS - On 15 December 2009, the world's most fuel-efficient commercial jetliner—the Boeing 787 Dreamliner—completed its first flight. The airliner is mostly made from carbon fiber–reinforced polymeric composites (50% by weight, up from 12% in the Boeing 777) (1). Traditional metals are substantially replaced by composites with higher strength/weight ratios; aluminum usage has dropped to 20% (versus 50% in the 777). Ever since the 1950s, when "engineering materials" mainly meant metals (2), the share of metals in engineering materials has been diminishing. What are the reasons behind this trend, and which applications are likely to stay in the domain of metals? Read the Full Text
China's resouce grab - Since becoming a net oil importer in 1993, China has rapidly overtaken everyone but the US in its thirst for the world’s crude. If one could quantify a country’s eagerness to control this vital resource, though, China would surely be number one. Aggressive investments in Africa’s resource sector have led some to dub its policies there the “Great Chinese Takeout”. Its latest move, a $20bn loans-for-oil deal with Venezuela, coming on top of an existing $8bn commitment, is its largest. This follows last year’s $25bn loans-for-oil deal with Russia and separate agreements for $10bn each with Brazil and Kazakhstan. On face value, China’s energy grab appears naive. But perhaps the Chinese are being rational, whatever the direction of prices. Similarly, current deals with pariahs Sudan and Iran represent a sort of diplomatic arbitrage. And, as a massive dollar creditor, making large loan commitments better matches assets and liabilities. If an overstretched US one day devalues those greenbacks then it can count on the same number of barrels at a lower real cost.
China Could Wipe Out Recycled Toilet Paper - The paperless, global economy may have an unexpected downside for your backside: The reduction of high-quality white paper use may hurt the quality of the recycled toilet paper made from it. Printer and copier paper retain the nice, long fibers that make the best recycled toilet paper. But a resurgent Chinese economy and domestic waste reduction efforts are cutting the available supply of the good stuff, said Jeff Phillips, executive vice president of operations at Seventh Generation, a major recycled toilet paper manufacturer. “The cost of office waste paper has skyrocketed (more than doubled) in the last six months primarily as a result of China re-entering the market,” “There has [also] been a reduction in availability due to more offices trying to reduce paper consumption and through the use of electronic media.”
Geo-Graphics - U.S. Goes Low-Tech On Chinese Exports… The Center for Geoeconomic Studies has an interesting breakdown on the change in composition of U.S. exports to China. “Over the past decade, trade between the United States and China has grown dramatically while also becoming significantly more imbalanced. The United States ran a bilateral trade deficit with China of over $225 billion in 2009, compared with a $69 billion deficit in 1999. One factor contributing to this imbalance is U.S. export controls on certain high-tech products deemed important for national security. As illustrated in the chart above, the United States now exports to China relatively less machinery and relatively more crude materials, such as scrap metal, than it did a decade ago.”
Chinese Earthquake May Have Been Manmade, Say Scientists - The 511ft-high Zipingpu dam holds 315 million tonnes of water and lies just 550 yards from the fault line, and three miles from the epicentre, of the Sichuan earthquake. Now scientists in China and the United States believe the weight of water, and the effect of it penetrating into the rock, could have affected the pressure on the fault line underneath, possibly unleashing a chain of ruptures that led to the quake. "There have been many cases in which a water reservoir has triggered an earthquake," said Mr Fan. "This earthquake was very unusual for this area. There have been no seismic activities greater than a magnitude seven quake along this particular seismic belt before."
Microsoft's Chinese workforce, too tired to stay awake - This photo and others like it were smuggled out of the KYE Systems factory at Dongguan, China, as part of a three-year investigation by the National Labour Committee, a human rights organisation which campaigns for workers across the globe. The mostly female workers, aged 18 to 25, work from 7.45am to 10.55pm, sometimes with 1,000 workers crammed into one 105ft by 105ft room. They have no bathroom breaks during their shifts and must clean the toilets as discipline, according to the NLC. The workers also sleep on site, in factory dormitories, with 14 workers to a room. They must buy their own mattresses and bedding, or else sleep on 28in-wide plywood boards. They 'shower' with a sponge and a bucket. And many of the workers, because they are young women, are regularly sexually harassed, the NLC claimed. The organisation said that one worker was even fined for losing his finger while operating a hole punch press.
China's middle class under great pressure - A recent survey showed China's middle-class people are under great pressure and do not feel good about their health: 88.9 percent said they were or will be over fatigued, and 53.3 percent said they were not satisfied with their physical and mental conditions.The survey, jointly conducted by the Beijing-based Xiaokang Magazine and Tsinghua University, said China's high housing price is swallowing middle-class people's fortune and causing great pressure that overtaxes their body. About 80 percent of civil servants and white-collar workers said they were under great pressure, and more than 60 percent said their pressure was mainly about buying a house and paying mortgage loans, the survey said.
The Rise of Asia's Universities - NYTimes - Beginning in the 1960s, Japan, South Korea and Taiwan sought to provide their populations with greater access to post-secondary education, and they achieved impressive results. Today, China and India have an even more ambitious agenda. Both seek to expand their higher-education systems, and since the late 1990s, China has done so dramatically. The results of Beijing’s investment have been staggering. Over the past decade, the number of institutions of higher education in China more than doubled, from 1,022 to 2,263. Meanwhile, the number of Chinese who enroll in a university each year has quintupled.
New Real Estate Regulations From China’s State Council That May Bite-国务院10号文件：异地炒房不予贷款. Still No Property Tax - Phoenix News is reporting that China’s State Council has issued a new circular outlining new policies and regulations designed to cool off the property markets-国务院10号文件 (State Council Document Number 10). They will probably make Jim Chanos happy, at least in the short-term, though longer-term these measures may help reign in the growing bubble in time to manage a softer landing. UPDATE6: Chinese investors do not like the new rules: China Developers Fall on Latest Moves to Damp Property Prices. Of all the rules discussed in the “Document Number 10″, the one that may have the biggest short-term impact is that non-residents of a city can no longer obtain mortgages to buy property in that city unless they can prove that they have paid taxes in that city for at least one year
China's New Rules to Curb Property `Madness' Will Take Effect Immediately (Bloomberg) -- China’s central bank pledged to immediately implement new lending rules to cool real-estate speculation and one of its policy advisers said the market is having its “last madness.” The central bank commented in a statement on its Web site last night. Li Daokui, a newly appointed academic adviser to the monetary policy committee, spoke in an interview broadcast by state television on April 15. Asset-price bubbles inflated by a credit boom could derail the recovery of the world’s fastest-growing major economy, which expanded 11.9 percent in the first quarter from a year earlier. China’s cabinet, the State Council, announced higher mortgage rates and down-payment ratios for second homes on April 15 after property prices jumped by a record in March.
Was Fully Half Of Chinese Q1 GDP Simply Wasteful Projects? - China's economic growth has accelerated, running at 11.9% year over year in Q1. Yet the country's economic growth remains the result of substantial increases in fixed asset and real estate investment China Daily: In the first quarter, investment in fixed assets reached 3.53 trillion yuan ($517 billion), up 25.6 percent year on year. Investment in the real estate sector soared 35.1 percent. As seen below investment contributed to 57.9% of Q1's GDP growth. If the majority of these investments end up being economically productive in the long-term, then this is great. Problem is, should many of these investments end up being wasteful (investment that creates overcapacity in industries or real estate), then we could one day realize that half of Q1's GDP growth was simply wasteful spending.
Two More Signs China’s Economy Is Overheating The Chinese central bank’s latest analysis of the economy (Chinese-language PDF) has two interesting pieces of data that could help shift the debate about just how hot the Chinese economy is running.So far, the government seems to be taking the view that China’s main problem is that property prices are too high, not that the total economy is overheating. Most of its policy measures in recent weeks have focused narrowly on reining in property speculation, while conspicuously avoiding broader measures – like interest rate hikes – that would affect everyone. Many outside observers, including the World Bank think China still needs tighter overall monetary policy if it is to avoid inflation and overheating.
Chinese savings and the wealth effect - I was lucky enough to share the stage with a number of luminaries, including Pedro Malan. Needless to say the subject of China is hot in Brazil. There is a great deal of soul-searching about the impact of Chinese commodity purchases on Brazil’s economy, along with a great deal of hope and dread. One topic that people found especially interesting was the discussion on why China’s savings rate is so high, especially when I discussed it as one of the consequences of financial repression. At least four different economists told me, separately, that my account of Chinese imbalances and the forced rebalancing process reminded them of Brazil in the 1960s and early 1970s, and the difficult rebalancing process of the late 1970s and the “lost decade” of the 1980s. Brazilian economists seem to understand very quickly the relationship between financial repression and savings. No surprise here – I suspect quite a few Japanese economists do too. But it is not always easy for many others to see how it works
The Vital Role of China’s Pork Prices - From China Real Time Report: While property values go through the roof in China, the price of an important consumer staple is plunging: pork. It’s roiling farmers, but making some economic policymakers quite happy. Pork prices have fallen 14 weeks in a row according to China’s Ministry of Agriculture, their lowest level in four years, and cheaper even than some vegetables. In the first week of April, the average hog price was 9.43 yuan ($1.38) a kilogram. The porcine price plummet has forced the government to add to its much vaunted frozen pork reserve, a series of icy warehouses around the country it set up a few years ago to stabilize pork prices. One Chinese press report, citing government statistics, says live pig prices have dropped 21% this year. Another report says pork prices have fallen below the lowly lentil. (In Chinese)
Can the West learn from China in Africa? - As a donor, China’s way has several advantages. Take the way they operate. They rarely “poach” skilled staff from African ministries to work in their own offices. The focus on turnkey infrastructure projects is far simpler and doesn’t overstretch the weak capacity of many African governments faced with multiple meetings, quarterly reports, workshops, and so on. Their experts don’t cost much. In addition, their emphasis on local ownership is genuine, even if it leads to projects like a new government office building, a sports stadium, or a conference center. They understand something very fundamental about state-building — something that Pierre L’Enfant understood in 1791 when he teamed up with George Washington in newly independent America: new states need to build buildings and dignity, not simply strive to end poverty.
Chinese firms boost African investment - Africa, which boasts a large volume of natural resources and powerful consumption market, is turning into an increasingly important destination for Chinese investment. "When it comes to which nation is the largest investor in Africa, China is undoubtedly the largest," Egyptian Minister of International Cooperation Fayza Aboulnaga told China Daily According to a report from the United Kingdom's Overseas Development Institute, foreign direct investment into Africa fell 30 percent between 2008 and 2009 as developed nations cut spending, but BRIC nations (Brazil, Russia, India and China) increased their investment in Africa over the same period. According to Ministry of Commerce, despite the financial crisis, China's investment during the first half of 2009 in Africa's non-financial sectors - mining, manufacturing, agriculture and infrastructure - grew 78.6 percent to $875 million.
World Bank throws open it’s development data! - An important moment and a great boon for teachers and students of development economics. The World Bank has made the 2010 Human Development Data available to all - here World Bank President Robert B. Zoellick speaks about the Bank’s new open data initiative. And here is the link to the development data and all of the macro data contained in the global economic monitor. A remarkable and generous gesture from the World Bank.
Sub-Saharan Africa and the great trade collapse - Sub-Saharan Africa’s low level of financial development meant that African banks were not directly involved in the credit crunch. But this column warns against rejoicing. If the cost of such low development is that African exporters are very dependent on external trade finance, then the real cost of the global crisis on Africa may actually be higher.
Africa Reboots - NYTimes - I SPENT March with a delegation of activists, entrepreneurs and policy wonks roaming western, southern and eastern Africa trying very hard to listen .Entrepreneurs know that even a good relationship with a bad government stymies foreign investment; civil society knows a resource-rich country can have more rather than fewer problems, unless corruption is tackled. This joining of forces is being driven by some luminous personalities, few of whom are known in America; all of whom ought to be. Let me introduce you to a few of the catalysts:
How early 20th century African artists did mockingly stereotypical images of whites - At a time when Europeans and Americans were trafficking in lots of racist stereotypes of Africans, it’s nice to know some Africans were returning the favor.This picture is of a drum from Congo. The stereotype: white men wear hats and drink a lot. The irony: making out a drum out of a severely rhythm-challenged white man. This by a Yoruba mocks whites for public displays of affection and keeping a dog as a pet, both of which seemed ridiculous to Yorubas.
The next imbalance - Vox EU - Global imbalances have been central to the recent debate of China’s exchange-rate policy and its effect on US jobs. This column argues that global imbalances are not going away. The policy solution is clear. Coordination is needed among emerging economies on managing capital flows and exchange rates. Swift and substantially policy from China can help bring this about.
Will Chinese revaluation create American jobs? - Vox EU: Many in the US are pushing China to revalue the renminbi. Will that create US jobs? Traditional Keynesian analysis associates higher exports and lower imports with more jobs, but today’s world is more complex. Chinese parts and components feed into US firms’ global competitiveness. This column says a dearer renembi would boost the competitiveness of US exports to China but reduce US competitiveness everywhere else. A revaluation may be the right policy for other reasons, but its impact on US jobs is far from clear.
China's Recent Trade Deficit: Is What You Yuan What You're Gonna Get? - China is self-evidently both a minefield and a potential graveyard for would-be global economists, the sort of place where reputations are made and lost in the twinkle of a dragon's eye, so I think had better tread rather carefully here. However, having duly noted that only fools rush in, here I go...China ran its first monthly trade deficit in six years in March, a development which encouraged the country's Commerce Ministry to up the volume a bit on the argument that the need to revalue China's currency was being greatly exaggerated. The debate surrounding renminbi revaluation has also given us one more reason - beyond the recent accusations of the US SEC - to cast a watchful eye over how things are done at Goldman Sachs: the outrageous suggestion from their Chief Economist Jim O’Neill (in this Financial Times article) that if things carry on as they are, China will soon overtake France as the principal destination for German exports (see in depth analysis below).
BRICs On the Brink of a Quarrel Over Chinese RMB - A few days ago, Brazil, Russia, India, and China conducted a summit in Brazil's capital, Brasilia. What is interesting is that the originally envisioned BRICs grouping by Goldman Sachs' Chief Economist Jim O'Neill has become a grouping in its own right. (Football fans, here's some trivia: one of the Red Knights seeking to rescue Manchester United from the vile Glazers is none other than longtime fan Jim O'Neill.) Aside from all being members of the G-20, they seem to have interest as well in third world solidarity--that only goes so far, though. While China has become Brazil's largest trade partner, there is apparently anxiety as well on the part of Brazil over the value of the RMB. During the recent BRICs gathering that was cut short by Hu Jintao's need to return home because of the earthquake in the Tibetan region, currencies were kept off the table due to the issue's emerging contentiousness:
Brazil and India add to China pressure - China is facing growing pressure from other developing countries to begin appreciating its currency, providing unexpected allies for the US in the diplomatic tussle over Beijing’s exchange rate policy. ...Indian and Brazilian central bank presidents have made the most forceful statements yet by their countries about the case for a stronger Chinese currency. While most of the public pressure on China has come from the US, the comments underline that a number of developing economies feel that China’s dollar peg has imposed costs on their economies. ... Lee Hsien Loong, prime minister of Singapore, added his country’s voice to the debate last week, saying it was “in China’s own interests” with the financial crisis over to have a more flexible exchange rate.
Why China is Right on the Renminbi - China is finally prepared to let the renminbi resume its slow but steady upward march. ...Some observers, including those most fearful of a trade war, will be relieved. Others, who see a substantially undervalued renminbi as a significant factor in US unemployment, will be disappointed by gradual adjustment. They would have preferred a sharp revaluation of perhaps 20%...Still others dismiss the change in Chinese exchange-rate policy as beside the point. For them, the Chinese current-account surplus and its mirror image, the US current-account deficit, are the central problem. ... The US is running external deficits because of a national savings shortfall, which once reflected spendthrift households but now is the fault of a feckless government. In fact, both sets of critics have it wrong. China was right to wait in adjusting its exchange rate, and it is now right to move gradually rather than discontinuously.
Mighty Money: Russian Ruble & Indonesian Rupiah - We tend to think the dollar is strong when the euro is weak since it is usually the anti-dollar. However, the unique woes being heaped on the common currency by Greece obscure the observation that there are many other currencies that are quite strong against the US dollar at the moment. Commodity currencies like the Canadian (CDN) and Australian (AUD) dollars are naming names and taking no prisoners, with the former above parity against the greenback once again. (That is, it will take more than one US dollar to buy a Canadian dollar.) The Aussie is no slouch, either. To be sure, the seeming resumption of global growth heralded in the just-released April 2010 IMF World Economic Outlook is mirrored in increasing demand for commodities--hence the performance of CDN and AUD. Somewhat less obvious, though, has been the performance of the Russian ruble and the Indonesian rupiah.
BBC News - Will India's highways project be path to growth?… Prime minister Manmohan Singh has underscored the need to double infrastructure spending from $500bn (£325bn) to $1 trillion in the next five-year plan if the country plans to lift millions out of poverty. Roads and highways are a particular focus of attention and the government's high-profile highways minister Kamal Nath has set himself a tough target of 20km of roads a day from June, meaning 7,000km a year and 20,000km of work in progress. It could easily be the biggest and the most ambitious infrastructure roll-outs in the world today.
It Happens Only In India There is no other country that presents a more shameful paradox of plenty- grains rotting in the open while millions live in hunger. At the same time, no other country allows its staple food to be exported while the population of hungry and malnourished continues to multiply. In the United States, from where India borrows its economic prescriptions, food is only allowed to be exported after the country ensures that in addition to 309 million people, 168 million cats and dogs have also been well-fed. In India, food — and that includes wheat, rice, maize, pulses, fruit and vegetables — is routinely exported, and the government often provides subsidies to offset the losses incurred in trade.
BRICs take baby steps toward greater global clout - In a joint statement at the end of their second summit, the so-called BRIC nations of Brazil, Russia, India and China called for swift reforms of the World Bank and the International Monetary Fund to give a greater say to developing nations.The call itself was not new from a group that was born out of the global financial crisis with a shared goal of shifting the balance of decision making from advanced economies. But the timing of the united front before this month's G20 finance ministers and IMF meetings in Washington and a November deadline for the reforms to be completed showed a growing confidence and cohesiveness, analysts and diplomats said.
Brazil Ready for Bank Tax — for Other Countries - Brazilian Finance Minister Guido Mantega likes the idea of a tax on banks to pay for future bailouts, but he’s not sure Brazilian banks should have to pay anything. “Maybe it’s necessary mainly in countries that had problems with their financial systems,” Mr. Mantega said in an interview. And Brazil’s banks don’t fall under that category, he made clear. Expect to hear other government officials from other countries whose banks escaped the financial crisis make similar cases. That’s going to make it hard for the Group-of-20 industrial and developing countries to come to a deal. Mr. Mantega said he generally approved of the International Monetary Fund’s proposal that G-20 countries approve a bank tax to pay for a resolution authority that could shutter systemically important financial institutions. The proposal has generally won applause in the U.S. and Europe. Canada, however, opposes a bank tax.
Amazon Dam Project Pits Economic Benefit Against Indigenous Lands - NYT - The indigenous leaders had a plan. They would unite for a last, desperate stand against the mammoth dam threatening their lands in the Amazon, vowing to give their lives, if necessary, to prevent it from being built. For a moment this week, it looked as if they had won an unexpected reprieve. On Wednesday, a federal judge in Para State, where the third largest dam in the world would be built, halted the government’s April 20 auction to award contracts for its construction, saying the project could cause “irreparable harm” to indigenous peoples. But by Friday, the dam was back on the table. A judge in the capital, Brasília, overturned the ruling and said the auction would take place as scheduled. Halting the auction for the project, known as the Belo Monte dam, “would do grave harm to the economy,” the court said, forcing Brazil to procure other forms of energy that are “more expensive and polluting.”
'War' warning over Brazil dam deal - Indigenous leaders in Brazil are warning of imminent violence after a successful tender for the rights to construct a giant hydro-electric plant in the Brazilian Amazon which opponents claim will wreak havoc on the rainforest and its inhabitants. Indigenous leader says men are preparing their bows and arrows to prevent construction of the Belo Monte dam The tender for the Belo Monte dam, on the Xingu river in the state of Pará, was won by a consortium of Brazilian companies on Tuesday, taking the government one step closer towards the construction of the £7bn dam, which would reputedly be the third biggest of its kind, with the capacity to produce some 11,000MW of power.
Hydropower Solution in Central Asia: Yes But...- Surfing the wave of the hype for renewable energy such as hydropower and the invitation by the United States to many regional countries to get involved in the efforts to stabilize Afghanistan, Tajikistan is bringing back to the table the Rogun hydropower dam project. Rogun, conceived in Soviet days, was planned to generate 3,600 megawatts but the collapse of the Soviet Union halted the completion of this project. Now an independent country, Tajikistan, one of the poorest in the world, sees Rogun as a central element for its energy independence and a source of severely needed foreign currencies that could be earned through the export of electricity.That effort comes at a time when clean energy is seen as the panacea to reduce the world’s dependency on polluting fossil energy, just like using olive oil was once seen as a solution to reduce cardio-vascular diseases.
The Road to Post-Crisis Growth - Although recovery in advanced countries remains fragile, developing countries appear to have weathered the storm. Growth in China and India is bouncing back toward pre-crisis levels, Brazil’s growth is rising after a sharp dip, and developing-country trade is rebounding from depressed levels.Reasons for this remarkable resilience abound, and they offer guidance for advanced and developing countries alike. As the crisis struck, capital flowed out of developing countries to shore up damaged balance sheets in advanced countries. Credit tightened sharply. But rapid responses by developing-country central banks, in collaboration with relatively healthy domestic banks, prevented a severe credit freeze. Moreover, the reserves built up over the preceding decade were, in many cases, used to offset some of the capital outflows.
China, Japan, and US Contest the Heart of Asia - If the current century is indeed "The Pacific Century" as many commentators make it out to be, then we need to understand how major powers are jockeying for leadership in the region. Geography is often subject to political contestation, and nowhere is this truer than in defining what exactly the "Asia Pacific" is. As China, Japan, and the US jockey for position, they all define the region differently--including some, neglecting others--as suits their interests. I have prepared the following situation analysis as part of a package introducing our sister programme here at LSE IDEAS. I work in the Southeast Asia programme, but we will soon formally launch another programme focused on East Asia. This coming Tuesday, Professor Barry Buzan presents on, ahem, "The East Asian Century"--close but no cigar, perhaps? Although he's said my contribution is fine, I look forward to listening to his own ideas on how claims of stronger self-reliance will affect regional dynamics
Quiz: Which country has made the most trade complaints at the WTO? - United States. The biggest complainer at the World Trade Organization (WTO), with 94 trade complaints brought to the WTO's dispute settlement body as of April 21, is the United States. But with 109 complaints against it, it’s also the top recipient. In the WTO's 15-year history (it turned 15 on Jan. 1), its most litigious members have been the United States and the European Union, accounting for 175 of 405 disputes, though in recent years, large emerging economies such as Brazil, Mexico, and India have filed an increasing share of complaints. And for more questions about how the world works, check out the rest of the FP Quiz.
Emerging Market Countries and the Crisis: How Have They Coped? - IMF Blog - Six months ago, we took a preliminary look at the design and performance of IMF-supported programs in emerging markets. In a forthcoming paper, we are casting a wider net—examining factors that determined the extent to which a broader group of EMs were affected by the crisis, the policy measures they have taken, factors shaping the ongoing recovery, and sustainability considerations over the medium term. In a nutshell, we find that countries that improved their policy fundamentals and reduced their vulnerabilities in the pre-crisis period generally came out ahead during the crisis: they experienced smaller growth collapses, had more “space” to take countercyclical policy measures, and are recovering faster from the crisis. I describe below our results in more
Cloud prevents IMF to descend on Greece - Bailout talks between EU/IMF and the Greek government, due to start today, are postponed until Wednesday; a Greek opinion poll shows a hardening of attitudes towards austerity; a national civil servants’ strike is scheduled for Thursday; European finance ministers reject Olli Rehn’s plan for closer budgetary co-operation; Jean-Claude Trichet warns against national bank levies, and calls for global co-ordination; Bank of Italy remains cautious on the Italian economy, according to latest bulletin; Frankfurter Allgemeine is sceptical whether Greece can ever repay the bailout; Wolfgang Munchau, meanwhile, says it is time to consider restructuring and rescheduling of Greek debt.
Delay To Greek Aid Mission Pressures Bonds, Euro - Greek stocks and bonds are under selling pressure early Monday, and the euro is also declining, as air travel disruptions pushed back the financial aid mission to Greece to later in the week. However, with the Icelandic volcanic ash cloud blocking much of European air space, that trip has now been pushed back to Wednesday, dragging out the rescue-approval process for Greece still further. In response, the cost of insuring Greek sovereign debt against default using credit default swaps rose significantly, showing that investors now see a higher risk of a debt default.
German Bank Man: Greece May Need 80 billion Euros— German central bank governor Axel Weber has said Greece may need up to 80 billion euros (108 billion dollars) in financial aid to avoid default, the Wall Street Journal reported on Tuesday.Weber made the remarks to a small group of German lawmakers at a closed-door meeting, the report quoted a person familiar with the matter as saying. The central bank chief told the meeting that Greece's situation was worsening and that "the numbers are changing all the time," the source said
Debt Crisis: Greece May Need $112 Billion in Aid: ECB's Weber… European Central Bank Governing Council member Axel Weber has told German politicians that Greece may require assistance of up to 80 billion euros ($111.8 billion) in the coming years. Weber made the comments to members of Germany's Free Democrats party on Monday, according to people at the event. The Wall Street Journal also reported that Weber told the politicians that Greece's debt situation was worsening and that "the numbers are changing all the time," the newspaper said, citing a source. German newspaper Bild said Weber warned that the total amount of aid Greece requires may not be known until later,The Bundesbank declined to give an immediate comment. Euro zone leaders agreed a giant EU/IMF fall-back aid package for Greece earlier this month. However, the move has failed to quell market concerns.
Soros Talking the Euro to 'Death' - First it was the “Death Spiral,” now it is the “Death Circle.” George Soros told a Greek TV station last night that the government in Athens is facing the prospect of both recession and falling budget revenue if yields on Greek debt remain this high. The comments will be as welcome in Athens, Brussels and Berlin as giant cloud of ash as authorities across the euro zone fret over the impact of the European Union/International Monetary Fund rescue package. Soros, who made more than $1 billion shorting the pound out of the European Exchange Rate Mechanism in 1992, has been highly critical of the rescue package terms that he says Athens has no choice but to accept. "I think it is necessary because the market interest rate is really far too high to make it possible for Greece to meet the conditions that are required of it,”
Greek debt costs get higher and higher - Greek debt doomsday bullet points for Thursday:
- CMA Datavision reports Greek five-year CDS have jumped to a record high of 505 basis points versus 485.7 bps in the previous session;
- Greek/German 10-year government bond yields retreat to 518 basis points, after hitting a 12-year high of 532 bps on Wednesday.
- Markit reports Portugal CDS are now trading at a record wide of 248 basis points, versus 245 bps the previous day.
Greek Deficit Revised to 13.6%; Moody’s Cuts Rating (Bloomberg) -- The European Union said Greece’s budget deficit last year was worse than previously forecast and Moody’s Investors Service cut the country’s creditworthiness, sending Greek bond yields soaring. Greece’s deficit was 13.6 percent of gross domestic product in 2009 and may be revised to as high as 14.1 percent because of “uncertainties” about Greek economic data, Eurostat, the EU’s statistics office in Luxembourg, said today in a statement. Moody’s cut its rating on Greece one notch to A3, saying the EU’s “fractious mobilization” of emergency aid for the cash-strapped nation means it will be “significantly more difficult” for the rating to remain “within the A range.”
Late Night Greece Update - From the WSJ: Bonds Fall as Investors View Bailout and Default as Givens The European Union's statistical authority said Thursday that Greece's 2009 budget deficit—already yawning—was wider than Athens had estimated. Also Thursday, Moody's Investors Service downgraded Greece's debt rating.Those twin developments sent Greek bond prices into a tailspin, a selloff that spread to bond markets in Portugal and Spain. And from The Times: Euro suffers as Greek credit rating takes another dive The euro skidded to its lowest level against the dollar in almost a year last night after Greece suffered another downgrade in its credit rating. Sarah Carlson, Moody’s senior analyst for Greece, said: “It is unlikely that the rating will remain at A3, unless the Government’s actions can restore confidence in the markets and counteract the prevailing headwinds of high interest rates and low growth.
Investors are betting on Greek default - Moody’s downgrades Greek debt to A3; Eurostat revises Greek deficit to 13.6%, more downward revision is possible; euro falls to $1.32; yield on 10-year Greek bonds is 8.97%; 2-year bonds over 10%; inverted yield curve suggests that markets are betting on default and rescheduling; trigger of EU aid package now seems imminent; Germany will take several weeks to approve aid package, so that German contribution is at best delayed – and doubtful in the meantime; Portuguese spread widens to 172bp, Spanish to 88bp; Strauss-Kahn says IMF talks will last several days, and no silver bullets are to be expected; Mohamed El Erian says Greek crisis is going to worsen; RBS says seniority of EU loan would defeat the purpose, and would make it unattractive to hold Greek bonds; Finland backs German proposal for a new European treaty; euro area manufacturing industry roars ahead, helped by a weak euro; the Portguese government picks Carlos Costa, a relatively unknown economist, as the successor to Vitor Constancio; Luis Garicano, meanwhile, argues that Spain is about to emulate Japan’s worst mistake – allowing the spread of zombie banks
SqueezePlay: Euro to Fail? BNN video interview with Marshall Auerback, senior fellow, Roosevelt Institute.
Greek Cash-CDS Negative Basis Spread Hits Record, CDS Implies 33% Chance Of Eurozone Collapse - Another glaring example of how broken the Greek funding market is, is the record negative basis spread in Greek 5 Year Cash-CDS, which as of today is almost -200 bps (see below). As a reminder, the basis trade's massive inversion in the days after the Lehman collapse is among the primary reasons for the implosion of Merrill, and the spectacular blow up of Deutsche's prop trading desk. What the primary implication of this observation is that the market is essentially saying that the imminent Greek bankruptcy will likely be in the form of a voluntary restructuring, which will not trigger CDS, although that is not the full story. The risk/return scenario, as Credit Trader points out, is assuming a 200bps upside to bond spreads, or a 400 bps downside to an inline level with the rest of Europe, in essence a 33% chance of a free fall bankruptcy, whose implication would most likely be the collapse of the Eurozone, as the EMU would be defunct if a member country escalates into an uncontrollable bankruptcy.
Germany warns of 'Lehman' crisis if Greece defaults - German finance minister Wolfgang Schauble has pleaded with his country's citizens to back a joint EU-IMF bail out for Greece worth up to €45bn (£40bn), warning that failure to act risks a financial meltdown. "We cannot allow the bankruptcy of a euro member state like Greece to turn into a second Lehman Brothers," he told Der Spiegel. "Greece's debts are all in euros, but it isn't clear who holds how much of those debts. The consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank," he said
German Windfall Profits From Exiting The Euro - Germany is a nation that fears inflation for good historical reason, and among the nations of the world, Germany places a particularly high priority on price stability. Yet, so long as Germany remains in the European Economic and Monetary Union (EMU) with the euro as its currency, Germany may not be in control of German inflation. In particular, the current crisis with Greece, and the crises that may follow with other nations such as Portugal, Italy, Spain and Ireland may prove disastrous for German investors and taxpayers. For so long as it is in the EMU, Germany may have no effective choice but to bail out countries that have been running up huge deficits – despite Germany itself not having the economic capacity to do this for all of Europe on an indefinite basis, let alone the political will to do so. These are among the reasons why in a letter to clients late last week, Morgan Stanley warned that Germany may leave the euro and the EMU and that investors should be prepared for this event.
Germany’s Secrets for a Steadier Job Market - The German labor market has been surprisingly bulletproof during the economic downturn, outperforming the United States and already beginning to tick downward, falling to 8.5 percent in March from 8.7 percent a year earlier. Two recent reports help explain why. The reports offer some lessons that could be applicable in the United States and other countries. One big reason Germany has kept a lid on unemployment, already well known, is the widespread use of so-called short work — “Kurzarbeit” in German. The scheme allows companies to cut workers’ hours, with the government making up some of the lost wages.
How lending Greece a hand could get Germany kicked out of the Euro - - Dr Karl Albrecht Schachtschneider, law professor at Nuremberg and author of the complaint, told The Daily Telegraph that he will be ready to file within days and will ask the court for an expedited procedure. A ruling could occur within a week, but may take as long as six months. The complaint will argue that the rescue contains an illegal rate subsidy, threatens monetary stability as encoded in the Maastricht Treaty, and breaches the ‘no bail-out’ clause. Greece is clearly responsible for its own mess. ‘It is a question of law. The duty of the court to defend the German constitution. They have no choice other than reaching a lawful decision. This may cause a great crisis in Europe but we already have a crisis,’ he said. He will ask the court to freeze rescue aid while the case is pending. There is a precedent for this. It ordered Berlin to halt implementation of the Lisbon Treaty while it reviewed the treaty last year. Such a move would cause havoc on Europe’s bond markets.
Greek Debt Restructuring May Trigger Credit Swaps (Bloomberg) -- Credit-default swaps insuring about $8.3 billion of Greek government bonds may be paid out should the debt-ridden nation seek to restructure borrowings, said Peter Chatwell at Credit Agricole CIB.The cost of one-year default insurance on the country’s debt surged 242 basis points to a record 882, according to CMA DataVision prices. Five-year contracts jumped 132 basis points to 619, signaling about a 41 percent chance of default.Greece is likely to cut or delay payments to bond investors even as the country negotiates a bailout package to help it combat a budget deficit of 13.6 percent of gross domestic product, according to Goldman Sachs Group Inc. That could trigger the 3,488 swaps contracts the Depository Trust & Clearing Corp. says are currently outstanding on Greece.
Global safety nets: The IMF as a swap clearing house – VoxEU - Is the international-lender-of-last-resort IMF agenda passé? This column argues that the IMF could act as a “central bank swap clearing house” – an independent entity that manages existing and enhanced central bank swap agreements in one liquidity network for eligible countries and stands ready to step in with traditional programmes if liquidity fails.
World Bank: Greece Shows Need for More Joint Financing Efforts - The joint effort by the European Union and International Monetary Fund to address Greece’s problems suggests cooperative rescue packages will become more likely in the increasingly globalized economy, World Bank President Robert Zoellick said Thursday. “I think we’re going to need more combinations of regional institutions and global institutions working together,” Zoellick said in a press conference to discuss this week’s spring meetings of the bank and IMF.He said the discussions underway between E.U., IMF and Greek officials for possible financing is a “very important step.”
Greece Aid Talks Begin as IMF Signals Debt Threat Greece began talks today on activating a 45 billion-euro ($61 billion) emergency aid package as the International Monetary Fund called the country’s fiscal crisis a “wake-up call” on sovereign-debt risks. Greek officials joined counterparts from the euro-region, the IMF and the European Central Bank to begin hammering out the deficit-cutting measures Greece will have to accept to be able to tap the funds. The government needs to raise about 10 billion euros before the end of May, and its soaring financing costs are lending urgency to the talks. “There is no chance that Greece will be left hanging in the month of May, whether borrowing from the market or borrowing from our partners,” Finance Minister George Papaconstantinou said yesterday in Athens. He said the talks will take at least 10 days.
Greece: Ceding defeat, but not (yet) default - BBC - The Greek prime minister has given in to the inevitable in formally calling for help from the IMF. But in financial crises, a few days delay can be a dangerous thing. What the markets considered inevitable last week may not be enough to save Greece today. The euro has risen on the news, as you would expect. The Greek government and (hopefully) the eurozone appear to have decided that Greece's problems won't improve until investors actually see official money heading to Athens. The questions will now turn to when, exactly, Greece and the IMF will be able to reach a deal; what the conditions will be; and whether the amount of money involved can possible be enough. There are logistical issues over the next few days, because many senior Greek officials are in Washington for the IMF meetings, whereas the IMF negotiators are already in Athens. .
Greece Calls for Activation of Financial Rescue -Describing his country’s economy as “a sinking ship,” the Greek prime minister formally requested on Friday an international bailout, testing the solidarity of the European Union as never before. “We drew up a plan, we took difficult and painful measures,” Prime Minister George A. Papandreou said in a nationally televised address. “But the markets did not respond. The time has come for us to ask our partners in the E.U. to activate the mechanism we formulated together.”He was referring to an emergency aid package arranged two weeks ago in Brussels. The plan foresees up to €30 billion, or $40 billion, in loans from Greece’s euro-zone partners, and up to €15 billion from the International Monetary Fund.
Greece Asks for Bailout - From the NY Times: Greece Calls for Activation of Financial Rescue Package Describing his country’s economy as “a sinking ship,” the Greek prime minister formally requested an international bailout on Friday ... The plan foresees up to €30 billion, or $40 billion, in loans from Greece’s euro-zone partners, as well as up to €15 billion from the International Monetary Fund. Not exactly a surprise ...
BBC News – Greece ‘to activate EU/IMF loans’ -Greece has formally asked for the activation of an EU-IMF financial rescue package to help pull the debt-ridden economy out of its crisis.It had hoped that just the promise of EU support, agreed last month, would have been be enough to reassure markets and help its recovery. But Greece's problems have continued to hit investor confidence in the euro and other European economies. Eurozone countries will now provide tens of billions of euros in loans. On Friday evening, several thousand protesters took to the streets of Athens to demonstrate against further austerity measures.
Riots as Greece asks for bailout (Video) Greek riot police fired teargas on Friday at leftwing protesters marching through central Athens against austerity measures.The main Greek public sector union brought nurses, teachers and other public service workers onto the streets of the Greek capital.
Greeks Call For Referendum On IMF Bailout, Call Austerity "Barbaric Attack" And "Premeditated Crime Against Greek Society" - Looks like the downloads of "Austerity for Bankrupt Dummies" on all those paradropped Kindles, which Amazon was forced to do after the market did not share its outlook enthusiasm, has had the desired effect: suddenly with everyone understanding what is required, the threats of an revolution (both literal and metaphoric) are hitting a crescendo. As Bloomberg reports: "ADEDY, the Athens-based federation representing the more than 500,000 Greek civil servants who have seen wages cut this year, said the move signaled a new and “barbaric attack,” and called a protest rally for April 27 [yep, another day of strikes and rioting]. Another demonstration has been set by the opposition Syriza party for today in Athens. "This is a premeditated crime against Greek society,” Alexis Tsipras, the head of Syriza said in an e-mailed statement. “The majority of the Greek people are being tossed helplessly in the tempest of insecurity, unemployment and poverty.”
Greek Workers Terrified They May Have To Work Longer - Informative video report from Bloomberg which highlights that if you are a baker, waiter, hairdresser, or radio presenter in Greece you qualify for early retirement. Taxes optional along the way. Oh, and throw in the most generous pension system in Europe: 11.6% of GDP goes to pension coverage, and one can see why every IMF involvement will bring the country closer to civil way. Why are Greece bonds not yielding 300% again? Oh yeah, cause between pensions and interest, you should see about 100 times GDP paid out to fund interest expense and retirement each year.
Tax Evasion in Greece - The eyes of the international community have been fixed on Greece for some time now, and today they requested a $40 billion bailout from the EU and the IMF. Greece has a lot of financial problems to address, but a key one is its broken tax system. The Financial Times reported last week: "Tax evasion is top of the list of reforms," George Papandreou, prime minister, said in a speech to the Brookings Institution in Washington in March. "We will be prosecuting offenders, no matter how rich or powerful, to show that we mean business. The Wall Street Journal recently highlighted one reason why tax evasion is so widespread in some European nations:Trying to explain the rampant tax evasion, Prof. Schneider says countries like Spain, Portugal and Greece have had continuous democracies only since the 1970s, and people aren't used to governments representing the public interest.
Greece Asks for Loans from the EU and IMF - Der Spiegel - After months of battling the markets, Greece raised the white flag on Friday. Prime Minister George Papandreou on Friday officially requested financial aid from his partners in the euro zone and the International Monetary Fund. In Germany, Chancellor Merkel pledged voters the aid would come with "very strict conditions." Embattled Greece has finally taken the step it fought so hard to avoid. On Friday, Prime Minister George Papandreou officially asked for billions in aid from the European Union and the International Monetary Fund.
Greece presses help button, markets still wary (Reuters) - Debt-stricken Greece appealed to its European partners and the IMF for emergency loans on Friday, yielding to overwhelming market pressure to start the first financial rescue of a member of the euro zone.Prime Minister George Papandreou asked to tap the 45 billion euro ($60.5 billion) package after investors feared a default and pushed borrowing costs to record levels, undermining Athens' efforts to cut its 300 billion euro debt pile. "It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created," Papandreou said in a statement broadcast live from the remote, tiny Aegean island of Kastellorizo."The time that was not granted to us by the markets will be given to us by the support of the euro zone."
End Game in Greece - Following yesterday's announcement that the budget deficit was higher than expected, Greece has rapidly been progressing towards the denouement. Greek debt yields started rising "almost vertically" yesterday, and rumor has it that no one will sell default insurance on the stuff. As yields dipped into the double digits, BusinessWeek noted that they were approaching "Pakistan levels"--i.e. the kinds of yields we see on Pakistani debt, which got an IMF bailout in 2008. There is no longer any realistic possibility that Greece will be able to soothe debt markets with the mere possibility of assistance, bringing its interest payments down to a level where the country can reasonably (or even maniacally) hope to austerity-package its way out of this crisis. Given that Greece has a big chunk of debt to roll over in May (and an even bigger chunk to roll over by the end of 2011), the writing was on the wall. This morning, Greece formally announced that it would be tapping the European aid package put together over the last month, as well as any IMF assistance package, which is expected to be finalized next week.
Greek prime minister announces activation of EU/IMF aid package -- Pushed to the brink of bankruptcy, Greece on Friday officially requested a massive, $56 billion rescue from European nations and the International Monetary Fund aimed at preventing a financial meltdown in the heart of Europe. Prime Minister George Papandreou made the request Friday morning. The desperate move, potentially locking Greece into fresh rounds of austerity cuts that could worsen public unrest, came as investors lost faith in the accuracy of financial reporting by the Mediterranean nation and flight of capital was threatening to undermine the Greek banking system.
Greece officially asks for help - Not surprisingly, Greece has officially asked for EU/IMF help. The melt down in their bond market this week made it an inevitability. The 45b of euros that will come their way will help in the short term but for the long term financial health of the country, it just bides time for an economy that will highly unlikely be able to grow out of their trouble and will at some point be back for more help. A debt restructuring would have been the best long term option for them, however painful in the short term it would have been. A region of bailouts for profligate countries does not a healthy union make and maybe that’s why the euro is seeing no bounce on the news.
Greece, The IMF, And What Comes Next - The latest developments from Europe – including Greece appealing for an IMF program today – may well be a watershed, but if so, it is not a good one. The key event yesterday was that the yield on all the debt of weak eurozone governments widened while German yields fell. The spreads show all you need to know: a very clear and large contagion risk. The five year Portuguese yields rose from 3.84% to 4.26%. The five year Spanish bonds rose from 2.89% to 3.03%, and the five year Irish bonds rose from 3.74% to 3.97%. These are not minor moves for investment grade sovereign bond funds. These are bonds that just pay 3% per year – and one such day may be enough to cause “investment grade investors” to decide not to stay involved and not to come back for a long while.
FAQ: Everything You Wanted to Know About the IMF & Greece - WSJ - How will the bailout work and how soon can it be activated?
Eurozone: is this the big one? I'm scared again. I haven't felt this scared for over a year. Things were starting to look better, in Canada in particular, but around the world more generally. Now Greek bond yields are shooting up.I was worried about the Eurozone in January 2009. And again in December. Maybe it was just my Euroskeptic "Anglo-Saxon" genes talking, but those old posts read quite well today. I mentioned my worries again in January 2010, when I made my New Year's forecast for Canada. "My main worry is that something will go badly wrong in Eurozone financial markets. I find it very hard to predict how that would affect Canadian financial markets." That's what I want to try to do now: predict how the fallout will affect the rest of the world, including Canada.
Marshall Auerback: "Troubles in the EuroZone: Will the Contagion affect the U.S.?" - It all could get very ugly for the ECB. The only scenario that theoretically helps the value of the euro is a national government default, which does eliminate the euro denominated financial assets of that nation, but of course can trigger a euro wide deflationary debt collapse. The ’support’ scenarios all weaken the euro as they support the expansion of euro denominated financial assets, to the point of triggering the inflationary ‘race to the bottom’ of accelerating debt expansion. So timing is very problematic. A rapid decline of the euro would facilitate a competitive advantage in the euro zone’s external sector, but it could also set alarm bells off at the ECB if such a rapid devaluation creates perceived incipient inflationary strains within the euro zone. What about the US? In the latter scenario, we can envisage a situation in which the combination of panic and corresponding flight to safety to the dollar and US Treasuries, concomitant with the increased accumulation of US financial assets means that America’s external deficits inexorably increase. There will almost certainly be increased protectionist strains, a possible backlash against both Europe and Asia, especially if the deficit hawks begin sounding the alarm on the inexorable rise of the US government deficit...
The Greek Crisis Has Me Thinking About 1931 - The news about Greece’s bailout has me thinking a lot about Creditanstalt, the Austrian bank which collapsed in 1931. This account bears remembering because we should see the 1929-1933 descent as a two-part episode, with the second part starting in the Spring of 1931 with Creditanstalt. The similarities and the differences for the US economy were brought home for me by two data points I want to share. News from 1931 First, there is the blog site News from 1930 which provides verbatim news from the Wall Street Journal exactly 79 years ago because the September 2008 Lehman bankruptcy roughly corresponds to the October 1929 crash. They have an entry from yesterday with a lot of good data points. The ones I want to highlight are bulleted below. By and large, they are very bullish. Everything is upbeat.
The Curious Case Of Greece's Semi-Inverted Yield Curve - Here's one for the history books - this is what a semi-inverted yield curve looks like. The reason for the shaded area, and why the curve isn't inverted off the bat: the IMF has pledged your money, dear Americans, to make sure Greece can at least roll its immediately maturing debt. Americans, via the IMF and Ben Bernanke's Frankensteinian printing press are now guaranteeing the differential between 10% and 5% on Greek <1 year debt. And why? Is it going to prevent a Greek default in the end? Of course not, but at least US taxpayers can enjoy some of the the great moral gratification that being a part of the Komintern provides.
America on the verge of bailing out Greece - I am, of course, writing about the International Monetary Fund's (IMF) recent commitment to participate in the inevitable bailout of Greek national debt. The initial tab is $50 billion, and consensus is that this is just for triage and the patient ultimately will require much more. With the United States having the largest IMF quota, it is the largest donor country. While this unfolding story is getting daily media attention in Europe, including heads of state speaking out, President Obama and Speaker Nancy Pelosi seem to have decided just to let it happen. Except for specialty financial media, it seems as if the media also is giving a free pass to this story.
Sovereign Debt Crisis Likely to Spread: Roubini - The sovereign debt crisis facing Europe, which started in Greece, is spreading to many other large economies in the Organization for Economic Cooperation and Development (OECD), according to New York University professor of economics Nouriel Roubini. Public debt sustainability has exploded as a serious issue in advanced economies, most notably in the euro zone's 'PIIGS' —Portugal, Italy, Ireland, Greece and Spain—but also in many larger OECD economies, including the United States," Roubini said in a note posted on his Roubini Global Economics Web site. As the Greek government meets with International Monetary Fund (IMF) officials in Athens, the man who called the financial crisis warns that Greece's problems will not be solved by any rescue package.
The crisis is spreading to Portugal - The eurozone is pretty much on track for the worst case scenario: Greek 10 year yields are now above 8%, and the crisis is spreading to Portugal, where yields are rising towards 5%; markets still disbelieve the EU’s commitment to bail out Greece; Thomas Mayer of Deutsche Bank says €30bn may not be enough, and it may be politically impossible to get more; Papaconstantinou says Greece might trigger aid package even before the end of the talks; IMF downgrades Portugal’s growth, and says deficit reduction plans lacks credibility; the Portuguese news media is developing is a similar lager mentality as the Greek press did in the early days of the crisis, suspecting a foreign conspiracy; the Bundestag has forced Schauble to table the Greek aid bill as a separate piece of legislation, rather than tag it on to another bill; IMF has raised the growth forecasts for the world economy – but not for the eurozone; says the future of the eurozone will depend on world economy more than on Greece and Portugal; IMF remains optimistic on inflation, saying that low capacity utilisation means no dangers ahead; Daniel Gros and Cinzia Alcidi, meanwhile, explain why the south European countries are not all the same.
In Addition To Greece, EuroStat Report Catches Portugal Lying About Its Budget Deficit As Well - All hell is breaking loose in Europe on the just released EuroStat report which presents an "objective" look at various countries' realistic debt and budget deficit pictures sans governmental propaganda and lies. And while Greece is getting pounded for good reason, another country where the discrepancy between estimates and reality was even worse is Portgual, whose deficit EuroStat disclosed at -9.4%, on expectations of a -8% number. In the meantime Goldman is reaping a veritable bonanza trading 1 Year Greek CDS (which is at 900 bps) which now has a 200 bps bid/ask spread! Other entities getting bushwhacked as a result include Ireland, which is 23 wider at 173 bps (nothing flattering about the Irish in the EuroStat report either), and Banco Comercial Portugues SA which is 38 bps wider to 297. PIIGS are officially in freefall after the truth has finally set them free.
Anglo ruling could double deficit Ireland's exchequer deficit, already the biggest in the euro zone, could double next year following the European Commission ruling that money injected into Anglo Irish Bank is not an investment and must be treated as spending.The ruling by Eurostat, the commission statistical body, yesterday forced the Government retrospectively to revise up its 2009 deficit – the difference between what it spent and what it raised in tax in any one year – from €19.35 billion to €23.35 billion. The difference is the €4 billion injected into Anglo Irish bank.Government sources conceded last night that if the commission takes a similar view of the additional €18 billion earmarked for Anglo Irish Bank this year, then the deficit will be almost doubled in 2010 to nearly €40 billion, rather than reducing as planned
Massive increase in traders betting against Irish bonds - The number of financial bets against Ireland has risen by 77pc over the last year as concerns grow over the stability of smaller eurozone countries. Data from the International Monetary Fund (IMF) show that traders have hugely increased the amount of bets they are taking out against Irish bonds, which are among the cheapest in the eurozone after Greece. The amount of Irish credit default swaps (CDSs) bought by traders has gone up by 77pc in the year to February 5, according to IMF statistics
Poland's budget deficit doubles in 2009 - Poland’s general government budget deficit amounted to 7,1 percent of GDP last year, exceeding the 3 percent envisaged in the Maastricht criteria which sets out rules for European single currency adoption. The data, collated by the EU’s statistical agency Eurostat, means that unless Poland manages to lower its budget deficit it will not be able to initiate, as scheduled, entering the ERM-2 mechanism, the first phase of adopting the euro. The shortfall amounted to 95.7 billion zloty (24.6 billion euro) last year, double 2008’s 46.9 billion zloty. EU rules stipulate that the deficit must be under 3 percent of GDP
Ukraine Has $1.4 Billion in Domestic Debt Payments (Bloomberg) -- Ukraine’s government must pay 11 billion hryvnia ($1.4 billion) by the end of next month to service domestic debt, as the country waits for international loan donors to resume payments needed to fund its budget.The government has to repay 6 billion hryvnia this month and 5 billion hryvnia next month, Prime Minister Mykola Azarov said at a meeting with the confederation of industrial companies in the capital Kiev today. The government also needs to cover about 4 billion hryvnia in pension costs, Azarov said, without elaborating. “This is a bomb under our financial stability,” he said.
Ukraine Seeks $20 Billion Program From IMF, Tigipko Says (Bloomberg) -- Ukraine seeks to secure a $20 billion loan from the International Monetary Fund as early as next month to help finance its budget deficit and cut the cost of future borrowing abroad, Deputy Prime Minister Serhiy Tigipko said in an interview in Washington. “Having a program with the IMF will help us lower the price of future Eurobonds, because such a program gives investors more confidence,” Tigipko said. “It will also help sustain economic growth.” Output may grow between 5 percent and 6 percent this year, compared with an earlier estimate of 3.7 percent, Tigipko said. The acceleration will be triggered by higher prices for Ukraine’s key exports such as metals and lower fuel prices, including Russian gas, he said. The government maintains its aim of keeping inflation below 10 percent.
Debt Rising in Europe - NYTImes (set of interactive maps)
Sovereign debt tops IMF worries -"The crisis has led to a deteriorating trajectory for debt burdens and sharply higher sovereign risk. Vulnerabilities now increasingly emanate from concerns over the sustainability of governments' balance sheets," said the Fund's Global Financial Stability Report. Sovereign debt strains may infect the banks and "prolong the collapse of credit," with the risk of a vicious circle as this feeds back into the economy. Europe is the epicentre of the new crisis, with a switch in hot spots from Ireland, Austria, and Holland in the original credit crunch to Greece, Portugal, Spain, and Italy today. "The recent turmoil in the eurozone has demonstrated how weak fiscal fundamentals coupled with underlying vulnerabilities can manifest themselves as short-term financing strains," it said.
Tory Scare Story: Vote for Us or UK is IMF-Bound - As things stand, the upcoming British general elections scheduled for the sixth of May are going to result in a hung parliament or having no party with a clear majority. In that event, a coalition government will need to be formed, with the Liberal Democrats and Labour being more natural allies than the Lib Dems and the Conservatives or even a grand coalition of Labour and the Conservaties. Matters are complicated by the Liberal Democrats stating they would rather play for an outright majority than signal which other party they'd rather go into a coalition with. Now, I've expressed my strong support for the Liberal Democrats (obviously), but the chain of arguments that the Conservatives or "Tories" are putting forward now goes something like this:
Same old arguments = lack of leadership - You realise how misguided the economic debate is in the West when you read that the British Opposition has been telling the British people that governance is about to break down and the IMF are poised to take over the country – that is, unless they vote for their austerity plans – and on the same day the UK Office for National Statistics releases the latest unemployment data which shows that unemployment has risen to a 15-year high. And while the British election debate appears to be all about who can cut public net spending the most, the IMF releases its latest World Economic Outlook (WEO), which is far from optimistic about the future and is warning against withdrawing the fiscal support for the very fragile demand conditions around the world. Then you read the Financial Times and see that former Clinton deputy treasury secretary is predicting a debt explosion. The general conclusion: our education systems have failed – and have been pumping out a population that mindlessly believes all this stuff while the elites run us over in their rush to bank the wealth they are harvesting.
The impact of the financial crisis on poverty and income distribution: Insights from simulations in selected countries - VoxEU - A shortage of real-time data hinders evaluations of the impact of the global crisis on developing countries. This column uses a “microsimulation” approach to assess the poverty and distributional effects in Bangladesh, Mexico, and the Philippines. It finds that poverty will increase by well over a million, and that the crisis has been hardest for middle-income households.
Brussels decrees holidays are a human right. - AN overseas holiday used to be thought of as a reward for a year’s hard work. Now Brussels has declared that tourism is a human right and pensioners, youths and those too poor to afford it should have their travel subsidised by the taxpayer. The idea for the subsidised tours is the brainchild of Antonio Tajani, the European Union commissioner for enterprise and industry, who was appointed by Silvio Berlusconi, the Italian prime minister. The scheme, which could cost hundreds of millions of pounds a year, is intended to promote a sense of pride in European culture, bridge the north-south divide in the continent and prop up resorts in their off-season.
What Counts as a (Taxpayer-Subsidized) Human Right? - European countries seem to have set a precedent in defining health care as a human right, at least in wealthier nations. Next stop: vacations. From The Times Online: An overseas holiday used to be thought of as a reward for a year’s hard work. Now Brussels has declared that tourism is a human right and pensioners, youths and those too poor to afford it should have their travel subsidised by the taxpayer. Under the scheme, British pensioners could be given cut-price trips to Spain, while Greek teenagers could be taken around disused mills in Manchester to experience the cultural diversity of Europe.
Fitch warns on Japan debt; yen pressured -- The yen slipped in late Asian trading Thursday after Fitch Ratings said that Japan's sovereign creditworthiness was at risk from the country's burgeoning public debt. The Japanese government "is one of the most indebted in the world," Fitch said in a statement. "In the absence of sustained economic recovery and fiscal consolidation, government debt will continue to rise, placing downwards pressure on sovereign credit and ratings over the medium term
Fitch Sees Downward Pressure on Japan Public Debt (Bloomberg) -- Japan’s creditworthiness is under pressure as the government’s debt burden swells and households save less, Fitch Ratings analyst Andrew Colquhoun said. “On any measure, Japan is the most indebted sovereign rated by Fitch,” Colquhoun, Hong Kong-based director at the company’s Asia-Pacific sovereign group, said in a conference call today. “In the medium term, the Japanese sovereign’s ability to go on funding itself cheaply may come under pressure from the declining savings rate, although in the near term, weak credit demand in the economy supports government funding prospects,”
IMF highlights sovereign debt risks - A healthier world economy and better financial conditions have reduced banks’ need to write down assets but sovereign debt problems may be spreading, according to the International Monetary Fund. In its twice-yearly global financial stability report, the fund reduced its estimate of the writedowns required of banks around the world to $2,300bn from an earlier estimate of $2,800bn made six months ago. A recovery in the financial markets had increased the value of their assets and made it easier to raise capital, the fund said. But the fund said that the credit recovery would be “slow, shallow and uneven”, and that sovereign debt problems in countries such as Greece had the potential to undermine the recovery. “With markets less willing to support leverage – be it on bank or sovereign balance sheets – and with liquidity being withdrawn as part of policy exits, new financial stability risks have surfaced,” the report said. The rise in sovereign credit risk premiums in the early stage in the crisis had now been compounded by growing concern about the creditworthiness of countries with heavy government debt burdens.
Global Debt to Equity Ratio: 2005-2010 - For an upcoming presentation I have been looking at changes in the global debt to equity ratio over the last decade or so. Specifically, I’ve been analyzing the ratio of total global debt – corporates plus government issuance, both domestic and international – versus total world equity market capitalization over the period. Here is a graphical look at recent trends in the ratio. Interestingly, despite the massive increases in debt issuance in developed countries and despite declining capital markets, on a global basis our debt/equity ratio has declining in the last year. This is, of course, a function more of rapid increases in global equity markets than of debt destruction, and, to a lesser degree it is being driven more by emerging markets than developed markets. Nevertheless, it is worth noting this measure of global financial leverage alongside the usual debt/GDP measure
Post-crisis banks must refinance $5 trillion - The International Monetary Fund has scaled back its estimate of the cost to the banks of the global financial crisis by $500 billion (£325.6 billion) but said lenders need to refinance $5 trillion over the next 36 months. The IMF also gave warning that rising government indebtedness was creating new financial stability risks. Improving health in the banking system and economic recovery has led the IMF, in its Global Financial Stability Report, to cut its estimate of bank write-downs to $2.3 trillion from a reckoning in October last year of $2.8 trillion. The IMF points to sovereign indebtedness as a new threat, highlighting the recent tensions in Greece where the institution has agreed, if called upon, to provide financial help.
IMF Executive Board Approves Major Expansion of Fund’s Borrowing Arrangements to Boost Resources for Crisis Resolution - The Executive Board of the International Monetary Fund (IMF) today approved a ten-fold expansion of the Fund’s New Arrangements to Borrow (NAB) and the transformation of the Fund’s premier standing credit arrangement into a more flexible and effective tool of crisis management. The NAB will be increased by SDR 333.5 billion (about US$500 billion) to SDR 367.5 billion (about US$550 billion), representing a major increase in the resources available for the Fund’s lending to its members. This responds to the call by the leaders of the Group of 20 (G-20) economies, endorsed by the International Monetary and Financial Committee (IMFC), to increase the financing available to the Fund, through an expanded and more flexible NAB increased by up to US$500 billion. Thirteen new participants, including a number of major emerging market economies, have indicated their willingness to join 26 current participants in the NAB. The decision today follows the agreement reached by current and prospective participants at their meeting in Washington in November 2009 on the key elements of an expanded and more flexible NAB.
The IMF’s bank-tax proposals: Squeezing the piggy-banks - Ahead of the meetings on April 22nd and 23rd of finance ministers and central banks from the Group of 20 countries, it has emerged that the IMF is proposing that they introduce two worldwide taxes on financial institutions. Ideas for global finance taxes have been floated before and got nowhere—most notably the proposal for a “Tobin tax” on foreign-exchange transactions. But any banker tempted to dismiss the fund’s proposals as just another bit of idealistic policy-wonkery should think again: governments, most of whom are desperate to plug big holes in the public finances, have now been given a template for raising levies that are lucrative, wildly popular and come with the imprimatur of capitalism’s policeman. The first, and probably least controversial, part of the IMF’s plan is a financial-stability contribution (FSC) tax, which would be charged on the bulk of banks’ liabilities, except those of their deposits which are covered by official insurance schemes (which are in effect already taxed) and the banks’ equity (which they are being urged to build up, to bolster their strength).
The outlook for the world economy: Curb your enthusiasm - The Economist THERE is a whiff of exuberance around the world economy these days. Financial markets are buoyant, business confidence is rising and global growth seems increasingly robust. In its latest forecasts, released on April 21st, the IMF predicts that global output will grow by 4.2% this year on a purchasing-power basis, a full percentage point more than it foresaw six months ago. Other seers are even more optimistic, predicting growth of more than 4.5%—or close to the average pace of the boom years before the recession. The level of global output is now back to where it was before the downturn. And given the scale of the financial crisis, the recovery is surprisingly brisk. With global business investment accelerating and consumer spending strong, there is growing optimism that the recovery is becoming self-sustaining. Some of this optimism is justified.
IMF: Europe Will Be Laggard in Global Recovery - Europe’s economy will recover at a slower pace than other parts of the world, and could lag even further behind if concerns about the Greek government’s ability to repay its debt become more general, the International Monetary Fund said Wednesday. In its twice-yearly World Economic Outlook, the IMF cut its growth forecast for the 16-member euro zone in 2011, and now expects its gross domestic product to grow 1.5%, having previously expected it to grow 1.6%. It left its 2010 growth forecast unchanged at 1.0%. The fund last updated its economic forecasts in January.By contrast, the IMF expects the U.S. economy to grow 2.3% this year and 2.4% next.
IMF urges double tax hit on banks to refund taxpayers – Telegraph - Banks should be slapped with two unprecedented taxes in order to compensate taxpayers for the billions of pounds lost in the financial crisis, the International Monetary Fund has recommended. In a report delivered to G20 nations on Tuesday, but yet to be published, the Fund has urged countries around the world to impose two new taxes on financial institutions: a "financial stability contribution" which levies a small charge on their balance sheets, and a "financial activities tax", which taxes excess profits, including bonuses. The recommendations are likely to strike fear into a banking sector reeling from the US Securities and Exchange Commission's fraud charges against Goldman Sachs
Meeting of G-20 Ministers April 2010 (55 pdf) This report is an interim response to the request of the G-20 leaders, at the 2009 Pittsburgh summit, for the IMF to: “...prepare a report for our next meeting [June 2010] with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system.”The IMF proposes policies to charge banks for public support, including a "Financial Stability Contribution" that would finance a resolution fund, and a "Financial Activities Tax" on profits and compensation that could go to general revenue.