Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. The German QuestionAn interesting take on a conundrum all-too-rarely faced in discussions of the crisis: how to revive demand without pumping up the kind of credit excess that will almost certainly lead to another crisis. Bertrand Benoit, the Berlin correspondent for the Financial Times, writes that this issue has turned into a big point of contention between Germany's (and hence, to a not inconsiderable degree, the entire Eurozone) policymakers and Anglo (US, UK, etc) ones.Why the Germans just hate to spend, spend, spend By Bertrand Benoit Published: November 28 2008 19:24 | Last updated: November 28 2008 19:24 To the German radio presenter, the real news about the measures announced by Washington on Tuesday to jolt banks into lending again was not so much the astronomical costs, but a little-noticed comment in Hank Paulson's statement. "Millions of Americans," croaked the US Treasury secretary, were being denied credit or facing rising credit card rates, "making it more expensive for families to finance everyday purchases". The notion that families should finance everyday purchases on credit, the anchor commented, "suggests Washington has still to understand what brought us there in the first place". Read the rest of the article Labels: Angela Merkel, bailout, Bertand Benoit, financial crisis, Financial Times, Germany, Henry Paulson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Other Crisis: More Bad NewsFrom The Independent. Main point: "Their findings--which contradict a widespread belief that the atmosphere would recover quickly once humanity stopped polluting it..."Greenhouse gases will heat up planet 'for ever' New study shows the effects of CO2 pollution will be felt for hundreds of thousands of years By Geoffrey Lean, Environment Editor Sunday, 30 November 2008 Global warming is for ever, some of the world's top climate scientists have concluded. Their research shows that carbon dioxide emitted from today's homes, cars and factories will continue to heat up the planet for hundreds of thousands of years. Their findings--which contradict a widespread belief that the atmosphere would recover quickly once humanity stopped polluting it--come at the beginning of the most crucial week for the climate this year. Tomorrow Britain's powerful Climate Change Committee will lay out a road map to put the country on track to slash its greenhouse gas emissions by 80 per cent by 2050. At the same time, the world's governments will meet in Poznan, in Poland, to try to set the world on the path to agreeing a new international treaty next year, billed as the last chance to keep global warming to tolerable levels. Read the rest of the article Labels: climate change, Geoffrey Lean, The Independent Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Commercial Loans: Another Soft Spot?Note the threat to JP Morgan Chase. By Henny Sender, in FT Weekend (via The Penninsula):Economy bears brunt of the biggest banks' miscalculations Web posted at: 11/29/2008 1:14:57 FINANCIAL TIMES By Henny Sender Economic forecasts are being revised down with each new data point. On Wednesday, durable goods orders became the latest harbinger of gloom--down more than 6 percent last month. Most economists believe there is worse to come. "We are not even in the eye of the storm yet," says David Rosenberg, chief economist of Merrill Lynch. That means there has to be far worse to come for the banks, which inescapably mirror the economy. So far, it is banks like Citigroup that have been hardest hit. That's because this recession has been led by cash strapped homeowners and consumers. But as the downturn continues, the next phase will hit corporate America as demand for products dries up and cash flows diminish. That in turn means banks that have so far been relatively less vulnerable to the slowdown may well falter. "As the credit crisis ripples through the real economy, perceptions about strength and risk management will change," says Charles Peabody of Portales Partners, a research boutique. Peabody predicts that losses from commercial loans can increase up to six-fold. He says he is especially concerned about JPMorgan Chase, so far the symbol of prudence. JPMorgan has a far bigger book of corporate loans than Citi, far bigger exposure to the commercial real estate market and it is at continuing risk from its exposure to leveraged buy-out deals. Indeed, according to the calculations of Peabody, those exposures amount to some $288bn. Read the rest of the article Labels: bailout, Commercial banks, financial crisis, Financial Times, Henny Sender, JP Morgan Chase Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Hedge Funds: All You Need To KnowA fine basic history and survey of hedge funds, including a disturbing concluding outlook. From Donald MacKenzie in the London Review of Books:LRB 4 December 2008 An Address in Mayfair Donald MacKenzie on Hedge Funds You could walk around Mayfair all day and not notice them. Hedge funds don't--can't --advertise. The most you'll see is a discreet nameplate or two. An address in Mayfair counts in the world of hedge funds. It shows you're serious, and have the money and confidence to pay the world's most expensive commercial rents. A nondescript office no larger than a small flat can cost 150,000 pounds a year. Something bigger and in the style that hedge funds like (glass walls, contemporary furniture) can set you back a lot more. It's fortunate therefore that hedge funds don't need a lot of space. Two rooms may be enough: one for meetings, for example with potential investors; one for trading and doing the associated bookkeeping. Some funds consist of only four or five people. Even a fairly large fund can operate with twenty or fewer. These small organisations control substantial amounts of capital. If a hedge fund manages less than $100 million it isn't seen as a big player; $1 billion is quite commonplace. The capital managed by the world's ten thousand or so funds amounts to around $2000 billion. (Hedge funds don't have to divulge the details of their finances and operations, so no one knows the exact numbers.) About a fifth of this money is managed by funds based in London, and two fifths by those based in the US, mostly in New York and its upmarket suburbs, especially Greenwich, Connecticut. Read the rest of the article Labels: bailout, Donald MacKenzie, financial crisis, hedge funds, London Review of Books Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Michael Perleman's Thanksgiving RantCute piece, especially for a rant. From his Unsettling Economics siteMatter and Antimatter: How to Create a Crisis: A Thanksgiving Rant Posted November 27, 2008 Filed under: economics Skilled physicists do not know how to take nothing and turn it into matter and antimatter, but finance behaves as if it had the capacity to do something similar. Imagine a simple market economy about to create a bubble. I want to tell the story of this bubble, only to put the current, crazy stimulus package into perspective. Somebody says to me they have a piece of paper worth $1 million. I can buy for half the price. I borrow the money to cover most of the cost. People are willing to lend me the money confident in the belief that my paper will increase in value. Other people are engaging in the same transaction, spreading confidence that these papers are now increasing in value, say to $600,000. The seller of the paper now has a half-million dollars, having given up nothing but blank piece of paper. I have a capital gain of hundred thousand dollars. My lenders have a credit with a half-million dollars. We are all better off, even though nothing has been produced. Feeling secure in the increasing value of our paper, I along with the other "investors" now start consuming more, spreading prosperity for the economy. Virtually everybody is enjoying the benefit of the bubble. Within a short period of time, people throughout the economy making decisions based on the increasing appearance of health and the economy. At some point, people realize that this paper is nothing more than a blank sheet of writing paper. The bubble may have stimulated some investment that is capable of producing real economic benefits, but mostly it has induced people to consume and commit themselves to pay back debts. Remember, this prosperity was built out of nothing. In the end, matter and antimatter collided. The lenders have lost their money. The speculators and consumers are in debt. Most lack the wherewithal to repay their debts. But in the case of the current bubble, the economy does not have the productive capacity to put everything together. The loans came from abroad and so did many consumer goods. At the same time, the government loans are ultimately dependent on another set of loans, also largely from abroad. How will these loans ever be repaid? Will new loans keep coming as the bubble engulfs the rest of the world? Should the government come in and give me a half-million dollars so that I can repay my loan? Should I be rewarded for my stupidity and naivete? Will that policy really make the economy healthy? Or will it policy just facilitate the creation of even greater bubbles? Obviously, the most sensible decision would be to put the money into making a more healthy economy, one less susceptible to speculation--something impossible under capitalism, but that is another question. Eventually, somebody will have to pay the piper. The policy today seems to be an effort to shield the very people who created the crisis, placing the burden on the most innocent. The graphic picture of the stimulus package that I posted yesterday suggests a government response just as foolish as the speculations that set off the bubble in the first place. Happy Thanksgiving. Labels: bailout, derivatives, financial crisis, Michael Perleman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Interesting Piece on MobilityFrom the December issue of Britain's Prospect magazine. A pretty good, easy-to-read treatment of some of the complications of measuring mobility over long periods involving much political, economic and demographic change.More mobile than we think December 2008 | 153 Essays Britain has more upward social mobility than is often assumed--on some measures more than Germany. But there is least movement where it matters most for the idea of meritocracy, at the very top and the bottom. Can Gordon Brown help out? David Goodhart America has elected not just a black president but a leader who is the son of a single mother who was, at least briefly, dependent on food stamps. It couldn't happen here, says the political and media consensus in Britain which alleges that social mobility ground to a halt sometime in the 1980s, after a brief golden age in the 1950s and 1960s. Not everyone agrees with that consensus. "There really has been a lot of nonsense talked about the death of mobility," says the eminent sociologist John Goldthorpe. He is himself a beneficiary of social mobility, having been born 73 years ago in south Yorkshire, the son of a colliery clerk. He rose via Wath on Dearne grammar school (attended 25 years later, then a comprehensive, by William Hague) to University College, London. As a young sociologist he wrote a famous study of affluent workers in Luton and went on to become one of the world's most respected academic analysts of social mobility. One of the people who is most responsible for the "death of mobility" consensus is the businessman Peter Lampl. By chance, like Goldthorpe, Lampl spent some of his early years in the Yorkshire coalfield--the son of an immigrant Czech mining engineer. When his father moved south to the National Coal Board office in London, Lampl went to Reigate grammar school and thence on to Oxford and business success in America. When he returned in the 1990s, Lampl was horrified to find fewer bright children from state schools going to Oxbridge than had been the case in the 1960s and 1970s and set up the Sutton Trust to try to do something about it. Read the rest of the article Labels: Class, David Goodhart, Moblility, Prospect Magazine Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More on the Fed's Balance SheetFrom Credit Writedowns via Yves Smith at Naked Capitalism:If the Fed were a commercial bank, it might be declared insolvent Recently, I have written quite a few posts highlighting the U.S. Federal Reserve's ballooning balance sheet. It has increased purchases of assets at an unprecedented clip. In fact, that balance sheet had $900 billion in assets just this past year. By year's end, we should expect it to have risen more than three-fold to $3 trillion. This is a wild experiment without parallel in modern history. But, there is a cost to all of this. One cost, hidden behind much of the chatter about bailouts, loans to lending institutions, and debt guarantees, is the damage to the Fed's balance sheet. If the Federal Reserve were a commercial bank, any regulator would declare the institution insolvent due to inadequate capital and shut it down. The Federal Reserve now has leverage of over fifty times capital and this figure is expected to rise. The Fed needs $48 billion in capital just to get back to the capital ratios it had last year. How this experiment ends is anybody's guess. However, below is an article in this week's Barron's pointing out how extreme things at the Federal Reserve have become. Notice the sharp reduction in U.S. treasuries and the huge increase in securities lent to dealers and overall assets. Very worrying. Read the rest of the post Labels: bailout, Federal Reserve, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). He's Making a List, and Checking It TwiceNot Santa (yet), but New Labour's loathsome Peter (now Lord) Mandelson. The idea of Lord M. being turned into some sort of industrial Dr. Mengele is not a salubrious thought. He's also saying some pretty stupid things, like "Internationally people say to me your prime minister has been transformed. His standing has soared. People really do look to him like some Moses figure who is going to lead them away from this economic mess to the promised land..." From today's Guardian:Mandelson plans list of firms to save from bankruptcy Patrick Wintour, political editor guardian.co.uk, Saturday November 29 2008 00.01 GMT Lord Mandelson is drawing up plans to choose which businesses and industries are important enough to be saved in the event of their going bankrupt as the recession bites, the Guardian can reveal. In his first newspaper interview since returning to the cabinet, the business secretary said he planned a more interventionist policy for industry. Company data such as the number of employees, the importance of the firm's research and development and its performance were likely to be factors in deciding which businesses should be given government aid. Read the rest of the article Labels: bailout, financial crisis, Peter Mandelson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Weaponizing Credit Default SwapsAnother lovely investment strategy for tough times. From Friday's Financial Times:Speculators are being armed by banks to hurt Main St By Mark Sunshine Published: November 28 2008 02:00 | Last updated: November 28 2008 02:00 Warren Buffett called credit default swaps "financial weapons of mass destruction" and they are about to annihilate Main Street. In a disturbing new trend, international banks are creating syndicated credit facilities that "weaponise" credit default swaps (CDS) by using the trading price of a borrower's CDS to set the interest rate paid by the borrower. Unfortunately, banks don't understand that they are arming speculators to ambush and kill unsuspecting and otherwise healthy companies. Regulators are oblivious to this danger as are the victims. CDS are unregulated derivative instruments that are essentially a bet on the creditworthiness of a company. CDS are traded in an unregulated, opaque over-the-counter market, where prices have questionable value and can be easily manipulated and misrepresented. Recently, it was reported that banks have started tying commercial loan interest rates to the price of a borrower's CDS. This seemingly innocuous loan provision allows speculators to bet that a borrower's stock price will go down while insuring that the bet pays off by manipulating the borrower's CDS prices upward. Read the rest of the article Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Financial Times, Mark Sunshine Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank of America Next?Found this Reuters link on LBO Talk:After Citi, is Bank of America next? Mon Nov 24, 2008 6:52pm EST By Elinor Comlay NEW YORK (Reuters) A government rescue plan has eased investors' concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including Bank of America Corp could still tempt short-sellers. Bank of America, the No. 3 U.S. bank by assets, has loaded up on mortgages as the world's largest economy wrestles with the worst housing market since the Great Depression. The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial Corp, the largest U.S. independent mortgage lender and agreeing to buy Merrill Lynch & Co, which owns the world's largest retail brokerage. If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels. Read the rest of the article Labels: bailout, Bank of America, Citibank, Countrywide, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Crowds trample Wal-Mart workerThis story is beyond words.NEW YORK -- A Wal-Mart worker was killed Friday when "out-of-control" shoppers desperate for bargains broke down the doors at a 5 a.m. sale. Other workers were trampled as they tried to rescue the man, and customers shouted angrily and kept shopping when store officials said they were closing because of the death, police and witnesses said. Labels: consumerism, Wal Mart Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Geithner & Kissinger Associates--pt. 2From Bob Feldman:Treasury Secretary Designate Geithner's Kissinger Associates Connection--Part 2 Between 1986 and 1989, U.S. Treasury Secretary-Designate Timothy Geithner was employed at Henry Kissinger, Brent Scowcroft and Lawrence Eagleburger's Kissinger Associates influence-peddling firm, which also employed George W. Bush's former special envoy to Iraq, L. Paul Bremer, during the early 1990s. Commerce Secretary-Designate Bill Richardson also is a former employee of Kissinger Associates. Among the political influence-peddling firms in the United States, "Mr. Kissinger and his associates are by all accounts the most successful of this new breed of former senior Government officials," according to the April 20, 1986 New York Times Magazine article, titled "Kissinger Means Business: Corporate America is eagerly seeking Henry Kissinger's insight and celebrity." The "Kissinger Means Business" article also implied that the motive of these former and current senior Government officials for moving back-and-forth between U.S. foreign policy-determination roles and private influence-peddling position was generally a mercenary one, asserting that "many of these former Government leaders asked themselves, why not capitalize on our stardom, international contacts and insider knowledge to make large incomes on our own." In 1986, U.S. Treasury Secretary-Designate Geithner's former colleagues at Kissinger Associates—Kissinger, Scowcroft and Eagleburger—peddled their special influence to 25 to 30 corporate clients in exchange for payments from their clients that totaled $5 million in Kissinger Associates gross income. Each political influence-purchaser paid Geithner's former employer between $150,000 and $420,000 per years for its services because, as former New York Times national security correspondent Leslie Gelb observed in 1986: "The super-star international consultants were certainly people who would get their telephone calls returned from high American Government officials and who would also be able to get executives in to see foreign leaders." When I telephoned the Kissinger Associates office in Manhattan in early 1991 to ask who some of its clients were at that time, a spokesperson for Kissinger Associates replied: "That's all confidential." The April 20, 1986 New York Times Magazine article indicated, however, that besides the Kuwaiti government-owned Midland Bank of Britain, the Kissinger Associates client list--at the time Treasury Secretary-Designate Geithner was employed by Kissinger Associates--included H.J. Heinz, American Express/Shearson Lehman, Fiat, Volvo, ASEA, L.M. Ericsson of Sweden, Montedison of Italy, the International Energy Corporation, Atlantic Richfield/ARCO and the Fluor Corporation. Although Henry Kissinger was the sole owner of Kissinger Associates when Geithner was employed by his firm, former National Security Affairs Adviser Brent Scowcroft and former Deputy Secretary of State Lawrence Eagleburger each received hefty salaries when they worked as Kissinger's partners in influence-peddling, prior to assuming their influential posts in the Bush I Administration in 1989. To further attract foreign government-owned corporations like Midland Bank of Britain as influence-purchasing clients, Kissinger Associates also established a board of directors that included the following international corporate establishment figures around the time that Treasury Secretary-Designate Geithner was employed by Kissinger Associates: former U.S. Treasury Secretary William Simon; former Citibank Chairman of the Board Edward Palmer; former U.S. Under-Secretary of State William D. Rogers; then-S.F. Warburg Chairman Lord Roll; then-Atlantic Richfield/ARCO Chairman Robert O. Anderson; then-Volvo Chief Executive Office Pehr Gyllenhammar and former Japanese government foreign minister Saburo Okita. (end of part 2) --bf Labels: Bob Feldman, Kissinger Associates, Timothy Geither, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Just In...From (I haven't seen this story reproduced elsewhere yet, even in the British press. This is strange, considering it's 8.00 pm in the UK as I post) the International Herald Tribune:U.K. takes over Royal Bank of Scotland By Julia Werdigier International Herald Tribune Friday, November 28, 2008 LONDON: The British government took majority control of Royal Bank of Scotland on Friday after investors shunned the lender's share sale, paving the way for a larger government role in Britain's banking sector. Investors only signed up for 0.24 percent of the shares, which were offered as part of a plan to bolster the bank's capital, and the government had to take up the rest, leaving it with a 57.9 percent stake in RBS. The government agreed to buy a separate block of preferred shares bringing its investment in RBS to about 20 billion pounds, or $31 billion. The investment leaves taxpayers already with a paper loss of more than $3 billion, based on the closing share price Thursday. RBS was one of three British financial services companies that tapped government help to fulfill stricter capital requirements intended to help them survive the credit crisis. Lloyds TSB and the mortgage lender HBOS, which have recently agreed to combine, also relied on the government to take up any shares they could not sell to investors as part of a banking bailout plan orchestrated by Prime Minister Gordon Brown. But some analysts warned that even those stricter capital rules might not guarantee the stability of Britain's banks as the turmoil in the financial markets continued. Read the rest of the article Labels: bailout, financial crisis, HBOS, International Herald Tribune, Lloyd's TSB, Royal Bank of Scotland Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 3 Links on Global DemandReviving demand in the face of unprecedented deleveraging on the part of consumers and corporations (leaving governments--many already indebted to an at least problematic degree) worldwide was always going to be tough. These articles pinpoint in numerous ways exactly how difficult the process will be. First, from Stephen Roach, who writes in the New York Times (thanks to Economist's View for link) about the US consumer:Worse, millions of homeowners used their residences as collateral to take out home equity loans. According to Federal Reserve calculations, net equity extractions from United States homes rose from about 3 percent of disposable personal income in 2000 to nearly 9 percent in 2006. This newfound source of purchasing power was a key prop to the American consumption binge. So, somehow, The United States cannot afford to squander this opportunity. Runaway consumption must now give way to a renewal of saving and investment. That's the best hope for economic recovery and for America’s longer-term economic prosperity. Meanwhile, China's economic meltdown (and thereby ability to transform itself into more of a consumer-led economy, reducing the likelihood of a serious overhang of supply and investment worldwide) may be worse than its exceptionally rapid decline over even the last few weeks suggests. Brad Setser looks at the details. Finally, Nouriel Roubini on the increasingly desperate measures authorities will have to take to put it all together. I'd like to say "happy reading!", but will content myself with the wish that you (US readers anyway) had a happy holiday... Labels: aggregate demand management, bailout, Brad Setser, financial crisis, Nouriel Roubini, Stephen Roche Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why Should We be Surprised? (Yves Smith)We noticed the article in today's NY Times that the GAO will be releasing the first audit of the TARP program. Here is what Yves Smith of Naked Capitalism has to say about it:Here's what the Times had to say: Read the rest of the article. Labels: bailout, financial crisis, GAO, Naked Capitalism, TARP program, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Change Immigrants and Labor Can Believe InBy David BaconThe Nation, web edition, November 26, 2008 Since 2001 the Bush administration has deported more than a million people--including 349,041 individuals in the fiscal year ending just prior to the election. It has resurrected the discredited community sweeps and factory raids of earlier eras, and started sending waves of migrants to privately run jails for crimes like inventing a Social Security number to get a job. Every day in Tucson 70 young people, including many teenagers, are brought before a federal judge in heavy chains and sentenced to prison because they walked across the border. It's no wonder that Latinos, Asians and other communities with large immigrant populations voted for Barack Obama by huge margins. People want and expect a change. Ending the administration's failed program of raids, jail time and deportations is at the top of the list. National demonstrations have called for a moratorium on raids since the summer, and one big reason why Los Angeles turned out so heavily for Obama was the anti-raid encampment and hunger strike in the Placita Olvera, which electrified the city. But the raids program has been rejected by more than immigrants alone. The election took place as millions of people were losing their jobs and homes. Yet while Lou Dobbs and the talk show hysteria-mongers tried to scapegoat immigrants for this crisis ("What about illegal don't you understand?"), most voters did not drink the Kool-Aid. In fact, every poll shows that a big majority reject raids and want basic rights and fair treatment for everyone, immigrants included. The political coalition that put Obama into office--African-Americans, Latinos, Asian-Americans, women and union families, expects change. Read http://www.thenation.com/doc/20081215/bacon. Labels: David Bacon, ICE raids, immigrants, immigration Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Motor City Meltdown (Thomas Palley)Thomas Palley's latest policy op-ed.The financial crisis that began in 2007 has been persistently marked by muddled thinking and haphazard policymaking. Now, the United States Treasury is headed for a mistake of historic and catastrophic proportions by refusing to bail out America's Big Three automakers. Make no mistake, if Detroit's Big Three go bankrupt, the perfect storm really will have arrived with a collapse in both the real economy and the financial sector. This threat means that the financial bailout funds authorized by Congress can legitimately be used to support the automakers. Treasury's refusal to do so is a monumental blunder that risks a general meltdown, the consequences of which will extend far beyond America's shores. Proponents of a bailout for the Big Three have emphasized the enormous job losses associated with a bankruptcy scenario, including not only jobs directly provided by the automakers, but also jobs with parts suppliers, auto dealers, and in the transport and advertising industries. Read the rest of the article. Labels: auto industry, bailout, financial crisis, Thomas Palley Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Neoliberalism, the IMF, Summers, & GeithnerInteresting post by Ken Hanly on lbo-talk, about Obama's new economics appointees: Timothy Geithner (to be Treasury Secretary) and Larry Summers (to be head of the National Economics Council, which coordinates economic policy throughout the executive branch):Both Summers and Geithner worked at the IMF and favored the deregulation that caused the financial crisis and Geithner of course has worked with Paulson and Bernanke and also used taxpayer money to help JP Morgan purchase Bear Stearns. Labels: IMF, larry Summers, neoliberalism, Timothy Geither Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). George Monbiot on the 'Other Crisis'From the fantastic Tuesday morning Guardian columnist's latest. Note in particular this little item: "This approach is challenged by the American thinker Sharon Astyk. In an interesting new essay, she points out that replacing the world's energy infrastructure involves "an enormous front-load of fossil fuels", which are required to manufacture wind turbines, electric cars, new grid connections, insulation and all the rest. This could push us past the climate tipping point."The planet is now so vandalised that only total energy renewal can save us It may be too late. But without radical action, we will be the generation that saved the banks and let the biosphere collapse George Monbiot guardian.co.uk Tuesday November 25 2008 00.01 GMT George Bush is behaving like a furious defaulter whose home is about to be repossessed. Smashing the porcelain, ripping the doors off their hinges, he is determined that there will be nothing worth owning by the time the bastards kick him out. His midnight regulations, opening America's wilderness to logging and mining, trashing pollution controls, tearing up conservation laws, will do almost as much damage in the last 60 days of his presidency as he achieved in the foregoing 3,000. His backers--among them the nastiest pollutocrats in America--are calling in their favours. But this last binge of vandalism is also the Bush presidency reduced to its essentials. Destruction is not an accidental product of its ideology. Destruction is the ideology. Neoconservatism is power expressed by showing that you can reduce any part of the world to rubble. If it is too late to prevent runaway climate change, the Bush team must carry much of the blame. His wilful trashing of the Middle Climate--the interlude of benign temperatures which allowed human civilisation to flourish--makes the mass murder he engineered in Iraq only the second of his crimes against humanity. Bush has waged his war on science with the same obtuse determination with which he has waged his war on terror. Is it too late? To say so is to make it true. To suggest there is nothing that can be done is to ensure that nothing is done. But even a resolute optimist like me finds hope ever harder to summon. A new summary of the science published since last year's Intergovernmental Panel report suggests that--almost a century ahead of schedule - the critical climate processes might have begun. Read the rest of the article Labels: bailout, environmental crisis, George Monbiot, The Guardian Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Pushing on a String? Or on an Elastic Band?Depends on the future of the dollar. From an indispensable post by Yves Smith:Monday, November 24, 2008 Government Lending Support Pledges and Measures At $7.4 Trillion ... Second, this effort cannot achieve its stated aim. We have said before that the markets are too large for government to salvage. Paul Krugman also made this point in March: ....the financial markets are so huge that even big interventions tend to look like a drop in the bucket. If foreign exchange intervention works, it's usually because of the "slap in the face" effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses. And the problem now becomes obvious. This is now the third time Ben & co. have tried slapping the market in the face--and panic keeps coming back. So maybe the markets aren't hysterical--maybe they're just facing reality. And in that case the markets don't need a slap in the face, they need more fundamental treatment--and maybe triage. The Fed inceasingly has been trying to stand in for private lenders, but it cannot take on the entire private sector. And let's look at orders of magnitude. US debt to GDP stood at 350%. as of March 31, 2008. There are some items that are arguably overstated (lines of credit are included at their full amount, but second and third mortgages not included, and perhaps most important, contingent exposures like AIG's credit default swap guarantees). It isn't unreasonable to assume they net out. The Fed's proposed intervention is a bit more than half of GDP. However, note it (and the Treasury) has already made, and will continue to make, considerable commitments to non-US parties. AIG., for instance, has over $300 billion in CDS exposures in guarantees that permit European banks to evade minimum capital requirements (and AIG also has other, substantial non-US exposures). Similarly, the most likely cause of a Citi meltdown would be withdrawals of uninsured deposits, which were primarily overseas. Moreover, the Fed has also provided considerable indirect support to non-US entities via providing unlimited dollar swap lines to other central banks. That is a long winded way of saying that not all of that $7.4 trillion applies to exposures that fall in the 350% debt to GDP figure cited above. Just to pick a number, say $6 trillion of the total goes to US debt. The US debt was $49 trillion. The Fed can commit less than 1/8 of the outstanding debt to solve the problem. Per Krugman, do we really think this will work? And if it does not work, it will make matters worse by increasing the size of the debt overhang when it needs to contract. Third, as Wolfgang Munchau said today in the Financial Times and others have pointed out earlier, the Fed seems worried solely about deflation, and not about a possible US currency crisis. This is a shocking oversight. The Fed (and many others) keep drawing analogies between the US in the Great Depression and its situation now. That is flawed and dangerous. The US was a massive creditor before the Depression and ran a very large trade surplus, to the point where the gold accumulation by the US was destabilzing to the world financial system. Sound familiar? That is the role China plays now, not the US. What happened to the nations that were in the US's shoes at the onset of the Great Depression, the overconsuming, indebted European customers of the US? They devalued their currencies, defaulted (or partially defaulted and forced a renegotiation) on foreign debts, and suffered milder downturns than the US did. But the authorities are not even considering the possibility of debt default or a dollar crisis in their plans. And if you think recent dollar strength argues against it, think again. The massive dollar purchase are due to unwinding of dollar based debt. Similarly, the massive rally in long-dated Treasuries was due to massive short covering on shorts written many years ago in connection with funky products to lower the cost of the product. A Treasury short that was then so far from recent yields was seen as free money. It turned out not to be). Read the rest of the post Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wachovia execs make out like banditsDon't worry about the bankers. They'll be alright.NEW YORK (Reuters) - Wachovia Corp (NYSE:WB - News), which lost $33 billion in the last two quarters, said 10 top executives may be entitled to $98.1 million in severance pay after the bank is acquired by Wells Fargo & Co (NYSE:WFC - News). Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). In Other News: Three More Banks Go DownAnother one of those stories that would normally be front page news for a week but barely registers these days:Two California thrifts (Downey Savings & Loan and PFF Bank & Trust) and one Georgia thrift (Community Bank of Loganville) were closed by regulators on Friday, the highest number of bank closures in a single day since the S&L crisis of the late 1980s. All the banks were put into receivership by the FDIC which then sold all the deposits. Bo depositors lost money, however the FDIC deposit insurance fund is on the hook for an estimated $2.3 billion total for all three banks. So far this year, 22 U.S. banks have failed, the largest being the $307 billion Washington Mutual. All the banks failed due to massive lending in the sub-prime mortgage sector that have since gone sour. [As we mentioned in a post a few days ago, you can follow the bank closings yourself by visiting this page at the FDIC's website regularly.] Labels: bank consolidation, bank failures, FDIC, WAMU, Washington Mutual Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bailouts Dwarf Spending on Other CrisesA new report from the Institute for Policy Studies documents how much more money is spent to bail out banks and other financial instutions than to address other global crises, e.g. climate change and poverty. Here's the press release:Washington, D.C.—A new report finds that the approximately $4.1 trillion the United States and European governments have committed to rescue financial firms is 40 times the money they're spending to fight climate and poverty crises in the developing world. Labels: bailout, climate change, financial crisis, Institute for Policy Studies, poverty Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Another Important Story TodayFrom today's Financial Times. This suggests that the selloffs from pension and other funds, that have followed the massive hedge fund ones, are far from over. And things all the more bleak for PE, or PE financed firms, as well.Investors rush to quit buy-out funds By Henny Sender in New York Published: November 23 2008 19:47 | Last updated: November 23 2008 19:47 Investors in buy-out funds are so concerned private equity returns will slump in the years ahead that they are selling their commitments for as little as 30 per cent of their original value. Eighteen months ago, if such stakes were available at all, they generally traded at a premium. The collapse in valuations reflects growing concerns that many private equity-owned companies will implode as the economic contraction intensifies. Some of the largest deals, struck at the height of the private equity boom that ended in the spring of 2007, now look to be disastrous for the equity holders. Cerberus's investment in crisis-hit Chrysler is among the most high-profile of the boomtime deals. Some investors said Cerberus fundholders were likely to have to accept the sharpest discounts on stake sales in the secondary market. TPG fundholders have been able to sell for slightly higher prices. One investor said he had just bought a piece of a TPG fund in the secondary market for 45 cents on the dollar, reflecting concerns about TPG's stake in gaming company Harrah's Entertainment and other companies hit by the economic slowdown. Blackstone, which bought a small stake in Harrah's from Apollo Management, has marked down that stake to zero, according to Blackstone investors. The sceptics' view of some TPG investments clashes with more upbeat assessments of the firm, based on the imminent returns from its sale of telecoms company Alltel to Verizon, and TPG's biggest deal yet—the purchase, with KKR, of utility TXU, widely seen as a safe, smart purchase. Nonetheless, the sell-out from private equity funds is gathering speed as pension funds, endowments and family offices realise these funds are likely to fall far short of original target returns. They are already reeling from losses in the stock market and on hedge fund investments. Monte Brem, chief executive of StepStone, which acts on behalf of such investors, says he thinks it may make more sense to buy funds at a sharp discount in the secondary market rather than paying full price for stakes in new funds. Mr Brem is now considering buying stakes in the secondary market for his clients. The growth of activity in the discounted secondary market for private equity fund stakes is compounding problems for firms seeking to raise new funds. Even those firms whose portfolios have held up the best, such as Blackstone, are finding the going very slow. Copyright The Financial Times Limited 2008 Labels: bailout, financial crisis, private equity Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Some Wise Words on the Citi BailoutFrom Across the Curve:The Citibank story is certainly the top story of the day. I know the news broke in the middle of the night but it seems to me that after 15 months of this and after Bear, and Freddie and FNMA and AIG and Lehman that the markets are inured and somewhat desensitized to news which prior to August 2007 would have been viewed as momentous. Effectively the taxpayers are propping up an outfit with $2 trillion in assets and equity markets are screaming. I guess I think that there should be a deeper concern at our plight and the realization that the problems which infect our system could run so deep. It is also ironic that Citibank is too big to fail and requires rescue. The regulators encouraged them as the firm spread its tentacle across the financial landscape. The new Administration should make its first order of business a review of the risk still inherent in the system. JPMorgan is an aggregation of JPMorgan, Chase, Manny Hanny, Chemical Bank, Texas Commerce Bank, National Bank of Detroit Bank One and First Chicago. That makes no sense and if the new administration wishes to establish "change" then they should begin by splitting up these supersized entities and establishing them as new firms which are not too large to fail. Labels: Across the Curve, bailout, Citibank, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Citi bonanza for Goldman or Morgan?According to Bloomberg.com:A purchase of Citigroup Inc. would "significantly" add to Goldman Sachs Group Inc. or Morgan Stanley's earnings as long as the U.S. government absorbed losses on the embattled bank’s assets, according CreditSights Inc. ...
In related news, analysts predict that the purchase of Citigroup Inc. would "significantly" add to Dollars & Sense's earnings as long as the U.S. government absorbed losses on the embattled bank's assets... Labels: Citigroup, Goldman Sachs, Morgan Stanley, TARP program, taxpayer ripoff Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Baker Deflates Deflation-Panic BubbleThere's a lot of talk in the business press about deflation and why we should be worried about it ("like trying to catch a falling knife" is the preferred metaphor).Dean Baker takes issue with much of what's being written in a recent post on Beat the Press. Okay, so let's parse this one. If prices are falling, why should we buy items today when we can get them for a lower price next month? That's a real good question. Baker acknowledges that housing prices are in a serious downward slide, and that this impacts consumer spending, saving, and a myriad of other related industries. But he argues that the housing market is a separate matter, and isn't even factored into the inflation indexes. Labels: Dean Baker, deflation, housing bubble, Inflation Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Geithner and Kissinger Associates--pt. 1From Bob Feldman:Treasury Secretary-Designate Geithner's Kissinger Associates Background—Part 1 Between 1986 and 1989, U.S. Treasury Secretary Designate Timothy Geithner was employed at Henry Kissinger, Brent Scowcroft, and Lawrence Eagleburger's Kissinger Associates influence-peddling firm, which also employed George W. Bush's former special envoy to Iraq, L. Paul Bremer, during the early 1990s. A leading candidate for Commerce Secretary, Bill Richardson, also is a former employee of Kissinger Associates. An expose, titled "The 'Kissinger Affair': A Look At Henry Kissinger's Kuwaiti Connection," which appeared in the March 27, 1991 issue of a Lower East alternative newsweekly Downtown, began with the following quotation from the April 20, 1986 issue of the New York Times Magazine about Kissinger Associates, during the years that Treasury Secretary-Designate Geithner worked there: "It is very difficult to pin down what Mr. Kissinger and the others are really doing in the business end of their lives. None will say for attribution who their clients are or discuss the specifics of what they do, although they do talk about their work with the understanding that they not be identified…Kissinger Associates requires a clause in its contracts stating that neither the firm nor its clients will divulge a business connection..." In 1991, T. Jefferson Cunningham III, according to Moody's International Manual, was on the board of directors of Treasury Secretary-Designate Geithner's former employer. That same year Kissinger Associates Director Cunningham was also a director of the Midland Bank of Britain and 10.5 percent of Midland Bank's stock was owned by the government of Kuwait. And coincidentally, Geithner's former boss at Kissinger Associates, Henry Kissinger, was not reluctant to use his special influence on behalf of his Midland Bank/Kuwaiti government business associates after August 1990 to push for the January 1991 Pentagon high-technology military attack on Iraq that led to thousands of Iraqi civilian casualties. In the April 20, 1986 New York Times Magazine article, titled "Kissinger Means Business: Corporate America is eagerly seeking Henry Kissinger's insight and celebrity," the Times then-national security correspondent, Leslie Gelb, reported that the Midland Bank of Britain was also one of the special influence-purchasing clients of Kissinger Associates that paid Treasury Secretary-Designate Geithner and his colleagues "slightly more than $150,000 yearly for varying services." Gelb also noted that "The other top members of the firm" were "Lieut. General Brent Scowcroft, President Ford's National Security adviser, and Lawrence S. Eagleburger, who was an Under-Secretary of State in the Reagan Administration." In the early 1990s, Treasury Secretary-Designate Geithner's Kissinger Associates colleagues, Scowcroft and Eagleburger, were both high officials in the Bush I Administration. Scowcroft, a former Santa Fe International director who received personal payments from the Kuwaiti government-owned Kuwait Petroleum Corporation (KPC) subsidiary in 1984, 1985 and 1986, was Bush I's national security affairs adviser. And Eagleburger was Bush's Deputy Secretary of State. According to a profile of Scowcroft that appeared in the Times on Feb. 21, 1991, it was the presentation of Geithner's former Kissinger Associates colleague at a National Security Council meeting on Aug. 3, 1990 "that made clear what the stakes were, crystallized people's thinking and galvanized support for a strong response" to the Iraqi military occupation of Kuwait--which has led to the deaths of hundreds of thousands of Iraqi civilians from either Pentagon military operations or U.S. economic sanctions since January 1991. Kissinger Associates was established in 1982, four years before Treasury Secretary-Designate Geithner joined the firm, after Henry Kissinger secured a loan from EM Warburg, Pincus & Company, an investment banking firm. And when Treasury Secretary-Designate Geithner worked for Kissinger in the late 1980s the Kissinger Associates Manhattan office was located at 350 Park Avenue on the corner of 52nd Street—in the same building as Chase Manhattan Bank's Commercial Bank of Kuwait subsidiary local office. The building's lobby at that time contained a computerized building directory of all the building's tenants. But, according to New York Times then-national security correspondent Gelb's April 20, 1986 "Kissinger Means Business" article, "Punch 'K' and you will not find Kissinger Associates, for Henry A. Kissinger still receives threats, so, for security reasons, you have to be invited to learn what floor his firm is on." Kissinger Associates also had an office in Washington, D.C. of three researchers and four clerks which was headed by Scowcroft when Treasury Secretary-Designate Geithner worked for the firm. According to Times correspondent Gelb, only about 25 people worked in both the Manhattan and Washington, D.C. offices of Kissinger Associates in the 1980s, "including Mr. Kissinger's bodyguards" and Geithner. In 1991 a Kissinger Associates spokesperson told me in a telephone interview that Geithner's 1980s employer was "an international consulting firm." But, according to the April 20,1986 New York Times Magazine article, "Kissinger Means Business," although "these consultants are not lobbyists in the strict sense of the word," some of them "are involved in selling their influence at home and almost all do so abroad." (end of part 1) --b.f. Labels: Kissinger Associates, Timothy Geither, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Not Looking Good for CitiEven amidst yesterday's stock market rally, Citigroup's shares fell; it lost more than half its value in four days. Here is what today's New York Times has to say:With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company's executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.Read the rest of the article. The fact that there is no run on Citi, though, indicates that there needn't be a government bailout, as Yves Smith has pointed out on Naked Capitalism: The market shrugged off the prospect of a Citigroup meltdown and focused instead on the leak that Timothy Geithner was Obama's pick for Treasury Secretary. Citi fell another 20%, its shares dropping below $4. Have banking catastrophes become so routine that it is now assumed that the officialdom will clean up the broken china and put the bill in the post? I recall when Citi nearly failed in the early 1990s (the big culprit then was junior loans on a lot of commercial development in Texas that wound up being see-throughs) and it was white-knuckle time.Read the rest of the post. Labels: bailout, Citibank, Citigroup, financial crisis, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Biggest CEO Losers are WinnersEven when their companies go belly up, Wall Street's former kings won't have to count on their unemployment checks.The Wall Street Journal (we only read it for the articles), has a wonderfully infuriating list of CEOs of failed or failing giants who have made out, quite literally in some cases, like bandits while their investors have been left holding the bag. Some of the highlights: Angelo R. Mozilo, former CEO of the former mortgage giant Countrywide Financial pocketed $470 million. Richard S. Fuld Jr., ex-honcho of the ex-Lehman Brothers walked away with $184 million and change in compensation. James E. Cayne, ex-head of Bear Stearns, only got a whisker over $163 million. The list goes on, but it's too depressing to detail here. Labels: Bear Stearns, Corporate Swindles, Countrywide, Lehman Brothers, Richard Fuld Jr, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Closures & Layoffs (Nov. 16-22)Mark Heschmeyer's weekly report, from CoStar.Layoffs Hit Sun, AMD and Other Tech Firms A Weekly Report on Future Corporate Downsizings In this week's issue: We give you the latest announcements of major U.S. corporation closures and layoffs including Advanced Micro Devices, Alcoa, Amylin Pharmaceuticals, Brunswick Corp., Comsys IT Partners, Imation, Intersil, Metaldyne, MGP Ingredients, Sun Microsystems, Weyerhaeuser and additional closings in Texas, Wisconsin and Washington. Read the rest of the report. Labels: closures and layoffs, Mark Heschmeyer, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Big Three Spent $30 Million on Lobbying in '08From Bob Feldman:If you check out the Center for Responsive Politics, you'll notice that General Motors, Ford, and DaimlerChrysler have already spent $20 million in 2008 on lobbying Congress, the White House and federal government agencies to serve their special transnational corporate interests. GM, for example, spent over $10 million on lobbying the federal government in 2008, while Ford and DaimlerChrysler each spent over $5 million on lobbying federal agencies, the U.S. Congress and the White House in 2008. In addition, during the 2008 election cycle, U.S. automobile industry political action committees (PACs) and U.S. automobile industry executives made over $14.6 million in campaign contributions to Democratic or Republican candidates for federal office. To see a list of all the Members of Congress who accepted campaign contributions from the U.S. automobile industry in 2008, click here. --bf Labels: auto industry, bailout, Bob Feldman, Center for Responsive Politics, Chrysler, financial crisis, ford, General Motors Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). S & P 314?After the latest tanking of the stock market, the stocks of 101 companies on the S&P 500 are now trading at less than $10 a share. As Reuters notes, the number can create its own feedback cycle as many institutional investors are prohibited from holding shares valued below this amount.In fact, only 314 of the companies listed in the S&P 500 are qualified to be there, as the other 186 have fallen below the required $4 billion minimum market capitalization required for membership. Labels: stock market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Unemployment Insurance Running OutUPDATE 6:31 PM:Responding to the massive public outpouring as a result of our earlier blog post, Congress rushed through an emergency 13-week extension of jobless benefits. President Bush is expected to assign the legislation immediately. Original post from 2:23 PM: According to the latest Economic Snapshot by the Economic Policy Institute (EPI), the massive spike in jobless claims coincides with the expiration of unemployment benefits for millions. From EPI:  Over 890,000 unemployed workers already have exhausted their 13-week extension, and another 1.2 million are projected to exhaust benefits by year's end.3 Without these benefits, the Congressional Budget Office finds that about 50% of the long-term unemployed fall under the poverty line.4 Congress should act swiftly to extend benefits for another seven weeks in all states, and an additional 20 weeks (for a total of 33) in states with unemployment over 6.0%. Labels: EPI, unemployment, unemployment benefits Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Insurance Co.'s Endorse Universal Coverage......as long as it isn't single payer.The New York Times is reporting that the health insurance industry is suddenly in favor of universal coverage--as long as it looks like the Democrats' proposals, and not single-payer. According to this article in today's Times: The health insurance industry said Wednesday that it would support a health care overhaul requiring insurers to accept all customers, regardless of illness or disability. But in return, the industry said, Congress should require all Americans to have coverage.The article also notes the similarity between what the insurance companies are proposing and the plan Hillary Clinton proposed in the presidential primaries (and the differences with Obama's plan): But the industry's position differs from that of Mr. Obama in one significant respect. Insurers want the government to require everyone to have and maintain insurance. By contrast, Mr. Obama would, at least initially, apply the requirement only to children.During the primaries, many of us in Massachusetts, which has the kind of mandated plan that Clinton was calling for (but leaves the insurance industry intact) were ambivalent about Clinton's version of universal coverage. But Obama's plan hardly seemed better. The idea that he "wanted to be certain that insurance was affordable and available to all," yet his plan leaves the insurance companies in the picture, seemed ridiculous. This latest development hardly counts as news. An earlier article in the Times indicates that the industry has even endorsed expanding publicly-funded health care. What's more, the industry made a similar proposal for mandating care in 1992. In fact, the Times article about that proposal makes the current announcement sound like déjà vu: The industry has often been described as an obstacle to change in the nation's health-care system. But with the new proposal, to be announced Thursday, the industry signals its willingness to accept sweeping changes, many of them similar to those proposed by President-elect Bill Clinton.But the fact that the insurance industry essentially endorses the Democrats' approach to universal health care shows how timid this version of universal care is. If the new Democratic president and Congress really want to expand coverage and cut costs, they should go for single-payer; John Conyers' "Medicare for All" bill (H.R. 676) would bring that about. For evidence that a single-payer would reduce costs, see Joel Harrison's article explaining why leaving insurance companies in the loop costs everyone more--in premiums, co-pays, and tax dollars, and whether or not you're actually covered. And visit this page, which lists other coverage of health care in the pages of D&S. Labels: Barack Obama, health care, hillary clinton, insurance industry, single-payer Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Jobless Claims Reach 16-Year High (AP)Posted to the New York Times site this morning:Jobless Claims Reach a 16-Year High By THE ASSOCIATED PRESS | November 20, 2008 WASHINGTON—New claims for unemployment benefits jumped last week to a 16-year high, the Labor Department said Thursday, providing more evidence of a rapidly weakening job market expected to get even worse next year. The government said new applications for jobless benefits rose to a seasonally adjusted 542,000 from a downwardly revised figure of 515,000 in the previous week. That was much higher than Wall Street economists' expectations of 505,000, according to a survey by Thomson Reuters. That is also the highest level of claims since July 1992, the department said, when the economy was coming out of a recession. Read the rest of the article. Labels: recession, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). GMAC Wants To Be A BankIn the olden days, you had to be a car company to get a bailout from DC (cue Tom Paxton's "I'm Changing My Name To Chrysler").Now, car companies have to be banks (cue Arlo Guthrie's update "I'm Changing My Name To Fannie Mae"). That's what seems to be happening in the Motor City. After the pampered pleas of Detroit's mighty fell on unsympathetic ears in Congress, GMAC, the financial arm of Cerberus (the folks who own Chrysler, as it happens), is now seeking to become a bank so that they can formally apply for funds from the bailout. Cerberus CEO John Snow (yes, the former Bush Treasury Secretary) and his sidekick Dan Quayle (you laugh at him, but he's still richer than you'll ever be), probably figures that if American Express can call itself a bank, why can't a car company? Labels: American Express, bailout, Cerberus Capital Management, Chrysler, Dan Quayle, GMAC, John Snow Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Congressman worries that taxpayers are chumpsGreat video of Rep Elija Cummings (D-MD) grilling Neil Kashkari (the guy Paulson has put in charge of handing out the $700 billion bailout). He asks why taxpayers shouldn't feel like "chumps" for handing over endless billions to AIG. HT to Michelle Singletary.Kucinich has a nice line at 8:04 -- "I don't think anyone questions, Mr. Kashkari, that you're working hard. Our question is who you're working for." Labels: AIG, Dennis Kucinich, Elija Cummings, Henry Paulson, Neil Kashkari, Washington Post Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Colombian Flower Workers Fired for OrganizingRemember the brief mention of the US-Colombia Trade Pact during the presidential debates? Contrary to the standard line in the business press, labor conditions in Colombia are far from free. In fact, more trade unionists were killed in the first 8 months of 2008 than in all of 2007.And our friends at US/LEAP have notified us of new labor violations:
Click here for more information and to sign on to an action alert. Labels: Colombia, flowers, labor organizing, US-Colombian Free Trade Agreement, US/LEAP Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Historic Fall in CPI (Bloomberg)The CPI fell 1% last month--the biggest fall on record--signaling the possibility of a "deflation-type scenario" (as one economist put it):U.S. Economy: Consumer Prices Fall, Raising Deflation DangerRead the rest of the article. Labels: CPI, deflation, financial crisis, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Tax Breaks for Banks Buying BanksWe've reported on the fact that many of the banks receiving bailout money are using it to buy other banks, instead of using it to increase lending. If you thought that the main point of the bailout was to reverse the credit freeze, there's plenty of evidence that the Treasury Department actually intended it to spur further consolidation in the banking sector.One more bit of evidence: an article in today's New York Times reports that the day before Congress passed the $700 billion bailout, Treasury changed tax rules and "said that a bank was entitled to use all the losses related to troubled loans in a bank that it was purchasing, thus reducing its tax bill." The article goes on: The break, which can be applied to deals made years ago, before the financial crisis began, will hand banks at least $110 billion, according to Robert Willens, an independent tax and accounting analyst.The department's inspector general is reviewing the rule change, in response to complaints from members of Congress who say that the rule change was improper. It may well have been improper, but it sure lends credence to the notion that bank consolidation was part of Paulson's agenda all along. Here's how much of a deal some banks are getting, according to the Times: Several banks that have recently announced acquisitions will benefit from the tax break, which helps offset their own steep losses in ailing mortgages. Wells Fargo will be able to use $19.4 billion in losses at Wachovia, which it is buying for $15.1 billion.Read the rest of the article (it's quite short, and was buried in the business section). Labels: bailout, bank consolidation, financial crisis, Henry Paulson, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Ask Dr. Dollar at the JP ForumWe have the audio from an event we co-sponsored at the Jamaica Plain Forum a couple of Fridays ago—an evening with Arthur MacEwan, who writes our "Ask Dr. Dollar" column. We'll soon be posting the full audio, including both Arthur's excellent talk on the financial crisis and a lively Q&A period.In the meantime, Radio With a View on WMBR, Cambridge, ran a segment on this past Sunday's show featuring excerpts from Arthur's talk. You can find the audio for that segment here. Labels: Arthur MacEwan, bailout, financial crisis, Radio with a View, WMBR Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank Closures in 2008Thanks to Bob Feldman for directing us to the handy list at the FDIC site of recent bank closures. The page lists bank closures since October 1, 2000. There were 27 closures between then and the beginning of 2008 (including eleven in 2002); there have been 19 so far in 2008 (listed below, with the original closure date):Security Pacific Bank, Los Angeles, CA——November 7, 2008 Franklin Bank, SSB, Houston, TX——November 7, 2008 Freedom Bank, Bradenton, FL——October 31, 2008 Alpha Bank & Trust, Alpharetta, GA——October 24, 2008 Meridian Bank, Eldred, IL——October 10, 2008 Main Street Bank, Northville, MI——October 10, 2008 Washington Mutual, Henderson, NV/Park City, UT——September 25, 2008 Ameribank, Northfork, WV——September 19, 2008 Silver State Bank, Henderson, NV——September 5, 2008 Integrity Bank, Alpharetta, GA——August 29, 2008 The Columbian Bank and Trust, Topeka, KS——August 22, 2008 First Priority Bank, Bradenton, FL——August 1, 2008 First Heritage Bank, NA, Newport Beach, CA——July 25, 2008 First National Bank of Nevada, Reno, NV——July 25, 2008 IndyMac Bank, Pasadena, CA——July 11, 2008 First Integrity Bank, NA, Staples, MN——May 30, 2008 ANB Financial, NA, Bentonville, AR——May 9, 2008 Hume Bank, Hume, MO——March 7, 2008 Douglass National Bank, Kansas City, MO——January 25, 2008 Labels: bank closures, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Layoffs We Can WelcomeA silver lining to California's Prop 8? At least it drained the coffers of the religious right. Hat-tip to Doug Henwood of lbo-talk.More layoffs at Focus on the Family Ministry spent more than $500,000 to pass California's Prop. 8 gay marriage ban By Cara Degette | 11/17/08 11:50 AM | Colorado Independent UPDATE: Focus on the Family announced this afternoon that 202 jobs will be cut companywide—an estimated 20 percent of its workforce. Initial reports bring the total number of remaining employees to around 950. Focus on the Family is poised to announce major layoffs to its Colorado Springs-based ministry and media empire today. The cutbacks come just weeks after the group pumped more than half a million dollars into the successful effort to pass a gay-marriage ban in California. Critics are holding up the layoffs, which come just two months after the organization's last round of dismissals, as a sad commentary on the true priorities of the ministry. "If I were their membership I would be appalled," said Mark Lewis, a longtime Colorado Springs activist who helped organize a Proposition 8 protest in Colorado Springs on Saturday. "That [Focus on the Family] would spend any money on anything that's obviously going to get blocked in the courts is just sad. [Prop. 8] is guaranteed to lose, in the long run it doesn't have a chance—it's just a waste of money." In all, Focus pumped $539,000 in cash and another $83,000 worth of non-monetary support into the measure to overturn a California Supreme Court ruling that allowed gays and lesbians to marry in that state. The group was the seventh-largest donor to the effort in the country. The cash contributions are equal to the salaries of 19 Coloradans earning the 2008 per capita income of $29,133. In addition Elsa Prince, the auto parts heiress and longtime funder of conservative social causes who sits on the Focus on the Family board, contributed another $450,000 to Prop. 8. Read the rest of the article. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Naomi Klein: Bailout is borderline criminalInteresting piece by Naomi Klein in The Nation:The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bailout is not merely incompetent. It is borderline criminal. Read the full article here. Labels: financial crisis bailout, Naomi Klein Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Reid Names Elizabeth Warren to TARP BoardAccording to Politico, Senate Majority Leader Harry Reid has named Harvard Law prof Elizabeth Warren to the oversight board of the Troubled Assets Relief Program (TARP). This is the program that was established by the Emergency Economic Stabilization Act of 2008, aka The Bailout, and regular readers of the D&S blog know that it is sorely in need of oversight.Warren is a great (and surprising) pick. She's a bankruptcy expert, and has been outspoken on the issue of the "middle-class squeeze." Back in March, we posted a video of her appearance on the University of California TV's public affairs program "Conversations with History." Politico also reports that Reid and House Speaker Nancy Pelosi jointly appointed Damon Silvers, AFL-CIO Associate General Counsel, to the TARP board. This is a nice contrast to the utter lack of labor folks among the economic advisers pictured behind President-Elect Obama in news reports last week. Hat-tip to Michael Pollak on lbo-talk. Labels: bailout, financial crisis, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Michael Lewis on 'The End' of Wall StreetMichael Lewis, the author of Liar's Poker, a chronicle of Wall Street excess in the 1980s, has posted an enlightening perspective on how mortgage-backed securities and derivatives were packaged, promoted, and sold by Wall Street. The article follows the career of a fund manager, Steve Eisman, who bet on the collapse of the subprime mortgage market. Eisman was proven right, but came to be genuinely shocked by the sheer mendacity and foolishness of the banks, ratings agencies, and other players involved in the subprime game. Here's a snippet of the long, but juicy article from Portfolio magazine:That's when Eisman finally got it. Here he'd been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren't enough Americans with sh**ty credit taking out loans to satisfy investors' appetite for the end product. The firms used Eisman's bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn't create a second Peyton Manning to inflate the league's stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. "They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford," Eisman says. "They were creating them out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans. But that's when I realized they needed us to keep the machine running. I was like, This is allowed?" Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG Reputation Destruction VideoOur recent post More AIG Fun With Bailout $$ was featured in a terrific Flash animation titled Social Media Guns on AIG, produced by VizEdu, which looks like a great company (and we like their politics).The final bit of the animation is especially good: "Your Brand Is Now Owned By The People." Labels: AIG, bailout, financial crisis, VizEdu Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG to pay $503 million to top execsMore good times at AIG, the failed insurance company that has (so far) received $152 billion in Federal bailout money.After receiving endless grief about spending millions on lavish corporate retreats, executives have decided to take the more direct route and pay out an extra $503 million in corporate compensation to top executives. According to the Washington Post AIG's plans to crack open its deferred compensation bank for payments early next year is conveyed in a two-sentence paragraph buried inside a quarterly financial report filed with the Securities and Exchange Commission on Monday. But some compensation experts and AIG stakeholders yesterday said they considered the exodus of $503 million in AIG money dubious at a time when the company is drenched in red ink. The company reported losses this week that brought total losses to $37.63 billion for the first nine months of the year. In their defense, AIG officials said that the half-billion dollar payout was necessary to keep its top talent (you know, the people who've been doing such a great job with the company) from leaving. They also stress that the payouts won't come from the taxpayer-funded bailout money. It will come from their secret stash of money hidden deep in a fortified bunker. Labels: AIG, financial crisis bailout, Golden Parachutes Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). $10 million gets you $billions!Several insurance and financial service companies are reportedly buying up small S&L's, for as little as $10 million, in order to qualify for billions of dollars from the TARP bailout fund.According to Bloomberg News, Hartford Financial Services Group Inc.,Genworth Financial Inc. and Lincoln National Corp. plan to buy lenders, a move that may entitle the three insurers to billions of dollars from the Treasury's bank rescue fund. Labels: bailout, financial crisis bailout, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Closures & Layoffs (Nov. 9-15)Mark Heschmeyer's weekly report, from CoStar. We'd heard about the DHL layoffs from our UPS driver. The NYTimes just reported one round of layoffs not mentioned here: up to 6,000 at Sun Microsystems: Crisis Spreads to Tech Sector as Sun to Cut Work Force.A Weekly Report on Future Corporate Downsizings In this week's issue: * DHL cutting 9,500 U.S. jobs. * Motor home, RV dales running out of gas. * Fidelity Investments layoffs not 'mutually' exclusive. * Plus, a whole new round of major U.S. corporation closures and layoffs were announced in: Alabama, Connecticut, Florida, Georgia, Indiana, New Jersey, Ohio, Pennsylvania, Utah and Virginia. Read the full report. Labels: closures and layoffs, DHL, Fidelity Investments, Mark Heschmeyer, Sun Microsystems Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Bank of Michael PerelmanFrom Michael Perelman's blog, Unsettling Economics.I am happy to announce that I have changed my name. As of now, you may address me as The Bank of Michael Perelman. I am not greedy. If Secretary Paulson would grant me only a couple hundred million, I would not trouble him for one of the billion dollar bailouts. Labels: bailout, Henry Paulson, Michael Perelman, Unsettling Economics Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Big Mac's Heart AttackThe Treasury is pumping in billions of dollars into mortgage giants Fannie Mae and Freddie Mac (now under federal control for an initial $100 billion stake). But the money isn't going in as fast as it's going out.Freddie Mac just posted a $25 billion loss from July to September. These losses, together with the red ink spilled since the start of the housing meltdown, have virtually wiped out its gains from the past ten years. Fannie Mae posted an even larger $29 billion loss on Monday. The Washington Post reports that the government is set to give $14 billion to Freddie Mac to shore up its balance sheet. But most analysts predict this will just be a drop in the bucket, as Fannie and Freddie are given larger mandates to help struggling homeowners. Labels: Fannie Mae, financial crisis bailout, Freddie Mac, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Should we stop dumping money into a hole?In The Know: Should The Government Stop Dumping Money Into A Giant Hole? Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More AIG Fun With Bailout $$AIG execs just want to have fun, even if it means they have to sneak around mean old Uncle Sam to do it.Local news crews got wind of another AIG retreat, this time at a posh resort in Phoenix. The cost for rooms alone was a reported $300,000. Now, it's not like the company has no shame. After being lambasted for a $440,000 retreat at a California spa, followed up by an $86,000 corporate hunting trip to England, the Phoenix event organizers had the good sense to issue a memorandum urging hotel workers to keep a low profile:
Perhaps the company felt that it was time to loosen the purse strings, as the news of the latest corporate shindig broke on the same day the government announced a restructuring of the bailout package that increased the total taxpayer financing available to AIG by $50 billion. Company officials claim that they have canceled all unnecessary retreats, although this didn't stop them from
Meanwhile, back in the world of financial meltdown, a Canadian law firm has filed a class-action lawsuit against AIG for $550 million in damages on behalf of Canadian investors. Labels: AIG, bailout, financial crisis bailout Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Transcript of NewsHour Interview with PaulsonFrom the NewsHour with Jim Lehrer, to be aired tonight.JIM LEHRER: Mr. Secretary, welcome. SECRETARY HENRY PAULSON: Good to be here. MR. LEHRER: Is it correct to say, at this point, Mr. Secretary, that the $700 billion rescue plan has not worked? SEC. PAULSON: Oh, I wouldn't say that at all; I would say quite the opposite, that what we've been able to do since that legislation has been passed is stabilize our financial system. And I think that was very important; the financial system was at the tipping point. The credit—inter-bank credit market was frozen—banks weren't lending to each other—that situation has resolved itself, when you look at the Fed funds rates and the inter-bank rates and so on, it's—that market is working better. Now, I would say that the economy has some very significant challenges and the financial markets have some significant challenges and they will for some time; we're not going to work through these stresses until the biggest part of the real estate price correction is over. And it's going to take—it took a long time to build these things up, and it's going to take a while to work through them. MR. LEHRER: But the expectation, wouldn't you agree, Mr. Secretary, when in September, when you and others—everybody was saying, hey, we've got to pass this rescue plan. If we don't, things are going to get worse. The plan was passed, and things have gotten worse in the financial markets—in the economy—everything—every measurement is worse, is it not? SEC. PAULSON: Yeah, well, I think in the economy, that's right. The economy has worsened, but I think what we sure tried to say is that if this isn't passed, things are really going to get worse, because we need a stable financial system that is functioning. And so part of the issue we always had was, I think, to the American people, generally, they look at the equity markets—some of them going up and down; they're not focused on the inter-bank funding or the credit markets or the banking system. But what we saw, when we went to Congress, was we saw that the markets were frozen, lending had stopped, the economy was turning down—so we could see all this happening and we knew how severe it was going to get if we didn't stabilize the system. But I never intended to say, nor did I ever say, that the process of recovery and repair was going to be a quick one. This is—the situation we've confronted is the kind of thing that happens once or twice every hundred years. MR. LEHRER: But the lending, for instance—that was a key part of the rescue plan—I almost said bailout, I know that's a bad word, but—at any rate, they're still not lending. People still can't borrow money. They can't buy a house, buy a car—all those things. SEC. PAULSON: Well, let's go back—lending is going to be a key part of this. And what happens when you're in a period of financial stress, banks pull in their horns, regulators reinforce it as banks are concerned about continuing slowdown in the economy and credit losses, that is restricted. What we have done by taking steps to make sure the banks are well-capitalized—and let's remember that we are still in the process of getting that money out—the nine big banks have $125 billion and they account for 55 percent of the assets, and we've got another 20 or so out the door, but we've got much more to go, there. But, again, to get back to your point, the thing that I will say—if this works, lending will be much more than it would have been, okay, that it would have been. But the key is that—if the banks are confident and people are confident in dealing with the banks, there's going to be more lending. But the first benefit is the stability to the system. But let me say one other thing about lending, which I think is very important, and it happened this week—that I can exhort banks to lend, but I'm not a regulator. And what happened this week, which was for the first time I've ever heard of, we had a statement come out signed by the four regulators in this country—the Fed, OCC, OTS and FDIC—that addressed four things. It addressed the lending; it addressed compensation practices; it addressed dividend policy and the area of mitigating foreclosures. And it was a strong statement focused on the need for prudent lending. Now, for that statement to come out is one thing, and then when you look at what the regulatory supervisors do, I think it will make a meaningful difference. But, again, you should not take my comment as meaning that this credit is immediately going to become available like it used to be and that the economy is going to turn around right away. MR. LEHRER: All right. And yesterday, you announced a whole change in your approach. You said the first part was not working and so now you – SEC. PAULSON: No, I did not say that. MR. LEHRER: Well, all right. Say what you did say. SEC. PAULSON: Okay, because it was very clear; I didn't say the first part wasn't working. When we went to Congress, we pointed to the fact that there was a great deal of illiquid assets in financial institutions and – MR. LEHRER: Illiquid assets means money that can be lent, right? SEC. PAULSON: Holding mortgages—mortgage-related assets—money tied up in this. And we said something at that time which was a very good idea, and it still is a good idea, which is, if we bought those assets—invested in them—this would put capital into the banks and there would be a price discovery process that would cause more capital to go into the banks. But what happened is, the situation worsened as it took a good while to get through Congress, the situation worsened. By the time we had that legislation passed on October 2nd, I had concluded that when you looked at the finite amount of resources we had, that the more powerful way to deal with the issue—because the problem was of a greater magnitude, and to protect the taxpayer—was to go the capital route, and so – MR. LEHRER: Which means put the money directly in the banks? SEC. PAULSON: Put the money directly in the banks, which then puts them in a stronger position to sell the illiquid assets and continue lending. The money will go further. So what we said—so what I said yesterday, so we—right out of the legislation, we moved with lightning speed to being implementing this program. Ten days after legislation, getting the money in the nine largest banks—we're working on that. So what I said yesterday was, after, again, looking at the problem we have before us and looking at the TARP resources, how best to use – MR. LEHRER: TARP, that's the name of the bill. SEC. PAULSON: Yeah, for the rescue package. And what they also say on these investments, this is money the taxpayer will get back; these are investments. These are preferreds in these banks are well-protected and I believe that will be a good investment. But what we said is, looking at what we've got before us, the best thing we can do is have additional money, ample additional money to continue to put equity into financial institutions, if needed, and also equity to put into institutions if there's a systemic event and it needs to be a rescue. And so, what we said is, we want to evaluate this first plan once it's done and then determine the best way to go forward as needed with additional capital programs. MR. LEHRER: And it correct to say, is it not, Mr. Secretary, that everything that's been done, up until now, has not resulted in the kind of lending that this whole thing was designed to freeze? SEC. PAULSON: I take big issue with that because what I say is, we were clear from day one that we were talking about stability of the system, that this system was at a tipping point and this plan, thank goodness Congress enacted it. And I also am very grateful that we were able to see the size of the issue in front of us and move as quickly as we did to stabilize the financial system with the actions the FDIC took in terms of hardening their bank guarantees and the capital program. Now, what you are saying, which I agree with, is that the economy is having a tough time, that credit is being restricted, we're not seeing the kind of lending we'd like to see and that is clear. Now, I will say to you, it's going to take a while. The banks just got these funds and, even if this is working better than expected, you're still going to see lending restricted more than we would like given the severity of what's going on in the economy. MR. LEHRER: All right, in the general thing of the economy, the financial system, everything, as we sit here right now, are things continuing to get worse? SEC. PAULSON: Well, here's what I would say to you. In terms of the financial system—and I'm repeating myself—there's—the system has been stabilized and that is a huge positive here and around the world. So that's been stabilized. In terms of the economy, okay, in terms of the economy, this is a tough period and our focus has got to be on recovery. MR. LEHRER: But what I'm getting at is this, Mr. Secretary, most of the folks don't know the difference between a financial system and an economy if they can't buy a car, if their house is being foreclosed and they're losing their jobs. What's the difference? SEC. PAULSON: Well, I would say this – MR. LEHRER: It's a technical difference. SEC. PAULSON: It is. It's not just a technical difference, because if the banking system had failed, they would know the difference, okay, because it would be much, much worse. And so what—and I do empathize and I do say that there's no doubt that we're going through a real challenge. And, consequently, we made another suggestion, not something that we are prepared to roll out yet, but something we're working on, which will take a relatively smaller amount of TARP assets, which is the rescue plan funds, to invest in a Federal Reserve program which would provide big amounts of liquidity for credit for consumers because, in this country, 40 percent of the lending takes place through a securitization market outside of the banking system. So when you look at people who borrow to buy a car, there are—there's AAA-rated auto-loan paper, there's AAA-rated credit card, there's AAA-rated student loan. That market has all but collapsed and when that collapses, it's hard for the American people to get the money they need to get the economy going. And so that will be—that's another program we're working on. It isn't as systemically important, but it's very important to the economy. MR. LEHRER: And if it's important to the economy, that means it's important to everybody in the country. SEC. PAULSON: You betcha. MR. LEHRER: So, you mean, it isn't just a little bit over here; the financial system, a little over here, it's called this. That's my main point. SEC. PAULSON: Yes, and I want to come back to you on that because it's all—all of this is about the economy and the American people. We don't want to do anything to do something for the banks' sakes; this is about the American people. But here's a distinction I'm making; the TARP or the rescue package was never intended to be the panacea for the whole economy, okay? It wasn't intended for that; there were other plans. This was intended to stabilize the financial system and it's done that. MR. LEHRER: Now, there are a lot of people who believe, a lot of experts, who believe that the key to this, from the very beginning, was not the financial system so much as it was the housing problem. And that's what started all of this. And one of the end results of it was a bad financial system, but it began with housing. Why has—why have you and the other rescuers not done more about that? SEC. PAULSON; Well, I think, I, again, take issue with that. I think that's been a huge focus because one of the things that we did at Treasury—let me step back and say that in this country, we do have government guarantees for securitized mortgage financing. We have Fannie Mae and Freddie Mac. MR. LEHRER: But those systems collapsed. SEC. PAULSON: Yes, and what happened? This was a flawed system. We had a flawed congressional charter. We had a system where the regulator was set by law and the regulator had no authority. I went to Congress before those companies collapsed. I got the authority to deal with it. We moved very, very quickly to come in and stabilize that situation. And they are providing a lot of mortgage finance. And I would say this—that while the cost of other credit has gone up a lot, the cost of Fannie Mae and Freddie Mac-insured mortgages has been relatively constant, has been insulated from that. I'd like to see those rates lower. But that was, I think, a very strong statement. And the other thing I would say, the more we can do to help the financial system and lending, and have lending going, that's the number-one thing we can do for the housing. But I think it's very hard to—when you look at how long it's taken for these excesses to build up and for these home prices to appreciate, to suddenly say maybe government could push some button and make it all go away and solve the problem. So I think we've dealt with it in as effective a way as – MR. LEHRER: But again, it isn't—the value of the average home in America goes down as we sit here right now. SEC. PAULSON: You're absolutely right. MR. LEHRER: The ability to get a loan is harder now every day as we sit here. And so, what—until that is fixed, can the rest be fixed? That's really what I guess I'm asking. SEC. PAULSON: Well, I have always said that at the heart of the problem is the housing correction. And until the biggest part of the price decline in houses is behind us, we will have stresses in the financial markets and in the economy. MR. LEHRER: When is that going to get better? SEC. PAULSON: I can't give you a date for when that's going to get better. But I can tell you because we're dealing with that and we're dealing with that as effectively as anyone can come up with an idea, stabilizing Fannie and Freddie. And while we're dealing with that, we sure as heck better stabilize our banking system, which we did. And so, we didn't come forward with the TARP and say—or the rescue plan and say vote for this and all the economic problems will be behind us. And the housing correction will be over and credit will be easy. We said do this because the situation is at the tipping point. We need to stabilize it. MR. LEHRER: I take your point, Mr. Secretary. I'm just talking from the ordinary folk on the street, saying, hey come on. You know, rescue this, bail out, and things continue to get worse. But one other question—very specific question that's on the table right now—the automobile industry. Everybody says, if the United States automobile industry is about to go down the tubes, if it does, it's going to be a huge thing to everybody in this country. You do not believe anything should be done about this? SEC. PAULSON: I have said quite the opposite, okay? What I've said repeatedly is I think the auto industry is a very important industry. I think it would be harmful to see a bankruptcy of a major auto manufacturer, particularly during this period. And I've said that I think anything that is done should show a path to long-term viability. And I've said that I've cited a auto bill that was passed by Congress, $25 billion, Department of Energy bill. And I've suggested that one idea for Congress would be to modify that to make that money available to lead to a viable auto industry. The only thing that I've said about the rescue plan is that the intent of that—again, getting back to my earlier point—Congress didn't pass that and say, go take those resources and use them on whatever you feel like. That was passed to deal with our financial system, the viability of our financial system, the strength of our financial system, to get lending going again and stabilize that. And so, clearly, I am of a view you should do something for the auto industry – MR. LEHRER: But not through the rescue plan. SEC. PAULSON: Yeah, I'm just saying that is not the congressional intent. MR. LEHRER: Finally, Mr. Secretary, I take it from what you've said on all these things, you're comfortable with what your role has been and how you have performed in your capacity as secretary of the Treasury in this crisis? SEC. PAULSON: Yes, I am. You know that we've had a lot of challenges. We've dealt with some unprecedented events. We've taken some unprecedented actions. We dealt with a number of these on a case-by-case basis. When it became clear that you needed to take a broader, systemic approach, we went to Congress. Some people have said to me you should have gone to Congress earlier. And I said, well, it wasn't real easy to get something through Congress even when we were in the middle of a crisis. And if we'd gone to Congress earlier, the challenge was how do you go to Congress if you know you're not going to be able to get something done? So as soon as we saw that we needed to go, and it was clear to us and to Chairman Bernanke and me, when it was clear, we went. Do I wish we had got the rescue package done earlier? Yes. And as you've shown right here with me, maybe my greatest strength is not communicating broadly with the American people. But again, it's a challenge when you're up there and when people say, tell us how grave and how severe the problem is and all the bad things that are going to happen if we don't pass the legislation. And I don't like to talk that way and don't like to scare people. And so, Ben and I had a interesting challenge. But we got the legislation and the system is stabilized. And we've got a lot of challenges ahead of us as you've pointed out. But you don't get yourself into a situation like this overnight and you don't get yourself out of a situation like this overnight. And the last thing I'd say to you that I'm never going to apologize ever for changing an approach when the facts change. My job is to look at this trust that's been given to me and look at these resources, this $700 billion to invest to protect the system, and use them in a way that I believe they will have the biggest impact for the American people. MR. LEHRER: Mr. Secretary, thank you very much. SEC. PAULSON: Thank you. (END) Labels: bailout, financial crisis, Henry Paulson, Jim Lehrer, NewsHour Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dialectic of ExaggerationsThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Yesterday the Dow Jones average had yet another 400-point day (this time downward), as the TARP program underwent the final step of its spectacular unraveling. Today, it has more than reversed direction, as investors bought into energy shares, of all things. From ad-hoc to one-size fits all and back again, it is clear that the policymakers have no clue not only in coming up with constructive ways to deal with the crisis, but even as to where the chief problems lie. In this they are not altogether at fault. A perusal of today's Financial Times indicates several areas that will get in the way of dealing with the clear deflationary trend that is only beginning to exert its full power on simultaneously deleveraging economies (for more on this, see another post of today, of Anatole Kalesky's Times piece, "It's an Emergency: Long-Term Cures Must Wait"). First of all, the TARP program itself: it's gone from being a means to provide a floor under mortgage debt that would, conceivably anyway, revive a still-essential, if overpriced housing market, to a selective recapitalization (sans voting rights) of banks. But the remit of the recap program has come to potentially include so many firms, financial (non-bank, insurance, credit-card, what have you) and even industrial (auto firms), that the effect has been an unprecedented bloating of the Fed's balance sheet, and that without loans making it out into the wider economy at all. So it became necessary to shrink the program. Et voila: no more buying-up of distressed assets, which, after all, is what the program was named for (Troubled Assets Relief Program) in the first place. Now, according to the FT's Krishna Guha, who spoke with Treasury Secretary Henry Paulson, the administration wants to "leverage the public funds," by matching companies' capital infusions from the private sector with taxpayer-supplied funds. The fact such leverage will be taking place amidst a veritable torrent of deleveraging, and in an environment characterized by exceedingly poor consumer demand--and hence profits (unless the government picks up the slack and then some, which will take far more than public leveraging of the few selected winners who might be favored in the current clime)--suggests that the already-dead corpse of the TARP program retains some phantom limbs that still need to be killed off. On top of the giant contradictions and confusion at the heart of policy, which will no doubt continue to erode investors'--not to mention consumers'--confidence, two other likewise twisted themes deserve mention, both of which featured in strangely juxtaposed stories in today's FT. First of all, the International Energy Commission's Nobuo Tanaka said it "would be possible, but very hard" to cut greenhouse emissions such that atmospheric concentrations remain below the critical 450 parts per million threshold (which would be consistent with a rise in global temperatures of an "acceptable" 2 degrees centigrade), and, consequently, that technologies not yet commercially developed would have to be somehow implemented to prevent such a temperature increase. Right next to this ("IEA Warns on Severe Climate Cost of 'Business as Usual Policy") story (I can't find these stories online) was another ("Crash in Oil Exploration Puts World 'on Bad Path")on the continuing decline in oil exploration, which has continued despite the recent, unprecedented spike in oil prices, and which will be enhanced by its equally rapid plunge. So, energy costs look set to continue to be a nuisance, especially if energy retains its status as a commodity prone to bouts of intense speculation (especially if its inverse relationship to the US dollar holds up), even if the ultimate aim is to convert to more efficient technologies: for these probably aren't commercially available yet, and the world economy will need a lot of energy to recover from the economic downturn, which will only exacerbate the environmental degradation, and so on. For global recovery to be sustainable, global trade will need to revive (though this will also contribute mightily to ecological deterioration), especially given the fact that it, too, is now subject to a credit crunch (the drying up of "letters of credit" financing). But another FT story ("Tax Rebates Raised for Chinese Exporters") shows that attempts to revive China's bloated export sector are calling forth protests from trade competitors, just as attempts to stimulate its consumer sector with subsidies did so during the inflationary uptick early this year. No matter how you look at it, and even with the global duel between inflation and deflation settled with a clear victory on the part of the latter, there are enough kinks and remaining complications in key global markets that will hamstring policymakers worldwide, and at every turn, even if the next lot turn out to be a lot more competent, and even responsible, than those who brought us this cataclysmic mess. Labels: bailout, environmental crisis, financial crisis, Financial Times, Henry Paulson, Krishna Guha, Larry Peterson, trade policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The High Priests of the Bubble EconomyDean Baker via Yves Smith of Naked Capitalism; hat-tip to Ben Collins.Dean Baker goes full bore after two deserving targets, Bob Rubin and Larry Summers, at TPM Cafe. Key excerpts: Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe. Labels: Dean Baker, financial crisis, housing bubble, larry Summers, Naked Capitalism, Robert Rubin, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Outstanding Analysis by Anatole KaletskyFrom today's Times. Here's a nugget:"The answer, to return to my medical analogy, is that the world was suddenly hit by a second, more dangerous disease in mid-September that was quite distinct from the chronic, but manageable, illness from which it had been suffering for the previous year. Correctly diagnosing these two separate ailments is absolutely crucial because they require different, and to some extent contradictory, cures." For the record, I don't agree that the problems were quite as separate (or as manageable) as Kaletsky makes out before September, but they certainly have become so, and Kaletsky is right on target in pointing to the added complexity that now characterizes the situation. -Larry Peterson From The Times November 13, 2008 Anatole Kaletsky It's an emergency. Long-term cures must wait The world economy is suffering from two quite separate problems. Unfortunately they need contradictory solutions Unemployment is soaring. Property and share prices are collapsing. Gordon Brown's borrowing plans are accused of driving Britain towards bankruptcy. Mervyn King, the Governor of the Bank of England, says that it is impossible to predict when the recession will be over and is pilloried for "losing touch with reality". What is to be done? When a patient is seriously sick--as the British and world economies clearly are at present--it is wise to make a careful diagnosis before prescribing the cure. The first step in this, as the Bank of England prepares for its next interest-rate cut and Mr Brown flies off to Washington for the global economic summit this weekend, is to decide who is qualified to make the diagnosis and who isn't. Should we disqualify all those who failed to foresee the gravity of this crisis--a group that includes Mr King, Mr Brown, Alistair Darling, Alan Greenspan and almost every leading economist and financier in the world with the partial exceptions of Warren Buffett and George Soros? Speaking as a junior member of this confederacy of dunces, my answer is, not surprisingly, an emphatic "no". The reason for continuing to take seriously the views of the many so-called experts wrong-footed by this crisis is, however, more complex, and more enlightening, than the self-justification offered yesterday by Mr King. The Governor excused the Bank's past misjudgments on the grounds that economic performance is inherently unpredictable and "the world changed completely" in mid-September after the Lehman Brothers collapse. This is perfectly true, but not very helpful. The question raised by Mr King's refrain that "the world changed in September" is why this happened and whether this sudden transformation was inevitable. Read the rest of the article Labels: Anatole Kaletsky, bailout, financial crisis, The Times Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Paulson Changes Tack Yet Again on TARPIt's a good thing (for him) this guy doesn't have to face elections.From Reuters: Treasury backs away from plan to buy bad assets Wed Nov 12, 2008 11:51am EST WASHINGTON (Reuters) Treasury Secretary Henry Paulson on Wednesday said he was backing away from buying troubled mortgage assets using a $700 billion bailout fund, instead favoring a second round of capital injections into financial institutions that would match private funds. Paulson, in an update on the Treasury's financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Program. "Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources," Paulson told a news conference. When Treasury was selling the $700 billion bailout plan to Congress, it initially promoted it as a vehicle that would purchase illiquid mortgage assets from banks and other institutions to cushion potential losses. But it became quickly apparent that setting up such purchases would take time, and Treasury opted for the faster method of injecting capital directly into banks by buying preferred stock. The Treasury has allocated $250 billion of the fund to such purchases so far. Paulson said the Treasury is evaluating a second program that would provide government investments that would match private investments in capital raisings. "In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program," Paulson said. He also said support was needed for the markets that securitize credit outside the banking system for products such as car loans, credit cards and student loans. The Treasury and Federal Reserve are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities. "We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment," Paulson said. (Reporting by David Lawder, Editing by Chizu Nomiyama) Labels: bailout, financial crisis, Henry Paulson, housing bubble, Reuters, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fannie/Freddie Relief Plan for HomeownersFrom International Herald TribuneFannie Mae and Freddie Mac plan to help U.S. homeowners By Edmund L. Andrews Tuesday, November 11, 2008 WASHINGTON: Fannie Mae and Freddie Mac, the mortgage-finance giants now controlled by the U.S. government, said Tuesday that they planned a broad new effort to reduce the loan burdens of homeowners facing foreclosure. The program will be offered to people who are at least 90 days behind on their payments, according to government officials. The goal will be to modify the mortgage - most likely by reducing the interest rate - so that the monthly loan payment is no higher than 38 percent of the borrower's monthly income. The government plan could help as many as 300,000 families that are delinquent in their mortgage payments, and the costs would ultimately be picked up by taxpayers. But people with knowledge of the details said Tuesday that it was more limited than a program advocated by Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp. The plan may apply only to so-called conforming mortgages that Fannie Mae and Freddie Mac have guaranteed. While there are trillions of dollars worth of those loans, they are far more conservative than, and generally separate from, the bulk of subprime loans that are at the heart of the nation's foreclosure crisis. The foreclosure rate on loans owned by Fannie Mae is about 1.72 percent. By contrast, the foreclosure rate on adjustable-rate subprime loans is nearly 20 percent, according to the Mortgage Bankers Association. Nevertheless, officials said the new program amounted to the biggest ever government-funded effort to refinance people with substantially less-expensive mortgages in order to keep them in their homes. Read the rest of the article Labels: bailout, Fannie Mae, financial crisis, Freddie Mac, housing bubble, International Herald Tribune Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Credit Losses To Exceed 10% of US GDP?From Reuters:Credit losses may surpass 10 percent of U.S. GDP Wed Nov 12, 2008 12:07pm EST Reuters By Walden Siew NEW YORK (Reuters) - Credit losses from the financial crisis may exceed even dire estimates of $1.4 trillion, or more than 10 percent of U.S. economic output, according to the chief strategist of research firm CreditSights. Financial and non-financial loss estimates by the International Monetary Fund and World Bank may be too conservative as the economy weakens and companies and consumers focus on repaying debt, Louise Purtle said on Wednesday. "What does life after leverage look like?" asked Purtle, during a credit conference in New York. "We're not prepared for it. The great danger looking into 2009 is being too optimistic." Most indicators suggest no easy fix, she said. U.S. existing home sales indicate there are about 1 million extra homes that can't be sold. Defaults and delinquencies for home loans continue to climb, adding to the 6.9 million foreclosures over the past three years. U.S. consumer confidence is at its worst levels, exceeding pessimism seen during the 1970s, she said. "The impact is rolling from the finance sector into the real economy," said Purtle, who said growth trends point to a 1970s or 1980s-type recession. "We are facing something that is quite different" in terms of the type of recession the U.S. is entering, she said. One aspect of the current crisis is the slump in consumer sentiment that will weigh on any short-term recovery or rise in home sales. A second characteristic is the difficult unraveling of the huge debt binge undertaken by corporations and consumers over the past decade. Purtle said the question of whether credit markets are experiencing a reversion to trend in terms of leverage has already been answered. "The answer is not 'yes we can,' but the answer is "yes we are," she said. (Reporting by Walden Siew; Editing by Tom Hals) Labels: bailout, credit crisis, financial crisis, Reuters Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Billionaires and the 'Great Recession'From Bob Feldman:Should 'Great Recession' Burden Be Borne By U.S. Billionaires? As more layoffs of U.S. working-class people and U.S. middle-class people are announced by the transnational corporations, the local, state, or federal government agencies and the tax-exempt "non-profit" sector private institutions of the United States in late 2008, it again looks like the burden of a U.S. economic crisis is being placed on the backs of U.S. working-class and middle-class people--instead of on the Super-Rich folks who most profited from the global and U.S. economy during the 1990s. Yet in an authentically democratic society, the economic burden of the "Great Recession of 2008 and 2009" would be borne by the upper-class people who are most able to afford to make some economic sacrifices in their living standards: the U.S. Billionaires and Multi-Millionaires whose daily business activities helped cause the current global economic crisis. In written testimony submitted by the Executive Director of the Foundation for the Advancement of Monetary Education, Lawrence Parks, before the House Banking and Financial Services' Subcommittee on Capital Markets, Securities and GSE's on May 24, 2000, for example, the multi-millionaire "principals" of hedge funds and billionaire George Soros were mentioned as having played a role in contributing to the global economic crisis of the late 1990s and early 21st century. According to the Foundation for the Advancement of Monetary Education's executive director's May 2004 testimony: For several years John Meriwether's Long-Term Capital hedge fund garnered many hundreds of millions, perhaps more than a billion, dollars annually in 'profit' from currency and derivative trading. Consider the 3,000 other hedge funds along with major banks and brokerage firms doing the same thing. All told...I reckon these folks are pulling around $50 billion out of the markets each year. Citibank alone, according to its 1997 annual report, garnered $2 billion from this activity. --bf Labels: bailout, Bob Feldman, financial crisis, George Soros, Lawrence Parks Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Worst Is Far from Over (Meredith Whitney)This FT.com interview with Oppenheimer's analyst is well worth listening to. Some of Whitney's observations follow:"For a bank to sell into the Tarp, they are going to have to write down their assets differently from how they are currently carrying it and the capital implement will cause them to gobble up the existing money...so some banks see it as too dear. I don't think a lot of people will use the Tarp because the terms and consequences are going to be too disruptive over the near term." "If you're draining liquidity from the system, you know the losses are going to be worse and that's why it's so significant that the aggregate mortgage market is going to show actual contraction for the first time as you are choking off more and more consumers. The next shoe to drop is the credit card industry." Labels: bailout, financial crisis, Financial Times, Meredith Whitney, Oppenheimer Funds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Some (Belated) Thoughts on Obama's VictoryThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.One week ago, after Senator Barack Obama had been anointed President-elect by the high priests at the TV networks, I witnessed some things I never thought I'd see in the United States at the conclusion of one of its peculiarly puerile, mercilessly interminable, all-too-often ineffectual and, last but certainly not least, offensively expensive national political campaigns. And the late-night cheering and horn-honking reminded me, in a very slight sense, of some of the clips I had heard or seen in broadcasts from places like Haiti and South Africa, when popularly elected governments finally replaced unspeakable dictatorships. Particularly in the case of the latter, the comparison, though exceedingly small, is, I feel apt; for Obama's election not only signaled an undeniable liberatory movement on the part of the whole society away from a shameful racist past, but marked a point at which the days of the the Bush administration--surely the worst in the history of the country--could finally be put behind all of us. But the euphoria should stop right there. It must be remembered that it took no less than two wars (one clearly illegal, and both, in important ways, lost), a financial meltdown the like of which hasn't been seen in three generations (and this before the potential extent of the economic fallout of that collapse really seemed to hit home with much of the electorate earlier in the autumn), scandals--including indictments and imprisonment of key personnel--unlike any since Watergate (which isn't surprising, since a key objective of many administration personnel, especially Vice-President Cheney, who served as President Ford's chief of staff after Nixon resigned in disgrace, was to reverse Watergate-era checks on the powers of the presidency, a task at which they far more than succeeded), and a spectacularly bad campaign by an opposing candidate, McCain, who seemed unable to believe that any other strategy could prove victorious bar the one that vanquished him in the 2000 Republican primaries (i.e. pandering to religious and social conservatives organized in the type of rigid vanguards so artfully exploited by Bush-fixer Karl Rove), to get Obama elected to the presidency, and to maintain Democratic control of both houses of Congress (though not with a filibuster-proof majority). And Obama will not only have to face the truly unprecedented challenge of the economic crisis, but also--and more-or-less simultaneously with--the full onset of a whole host of unfavorable demographic (think pensions here), ecological and geopolitical trends (which will require huge outlays merely to address, never mind handle appropriately). And that probably without the luxury of being able to print money that will be bought up by our trading partners at will. And with a population already blighted by decades of neglect where wages, savings, education, health care and even quality-of-life indicators are concerned. Even racial progress shouldn't be emphasized too much. I actually heard the fools on the Chris Matthews roundtable enthusing about the invigorating sense the American population will develop having finally attained a prolonged and visible access to a successful, functional black upper-middle class family (the Obamas). Meanwhile, just about every other social and economic indicator for blacks continues stuck in unacceptable territory, if not trending downright downward. Nothing to honk about here. As I write, at 1.45 pm EST, US stock indices are suffering significant declines and oil is down yet another 6% for the day, with all of this due to an economic situation that relentlessly surprises on the downside. Meanwhile, the Bush administration is obstructing the stimulus program Obama promised last week, the Fed and Treasury are being coy about spending on the TARP program, and Obama has said he won't attend the G-20 meeting on the 15th. Maybe all those horns honking last Tuesday night were just car alarms. Labels: Barack Obama, Chris Matthews, financial crisis, financial crisis bailout, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). D&S Piece on Historic Events since SeptemberWe just posted a rather long piece on the impressive string of historic events that have taken place in the last two months, from the nationalization of Fannie Mae and Freddie Mac to the election of Barack Obama. It's the fifth part of a series on the subprime/securitization crisis D&S collective member Larry Peterson has written over the last year. All the pieces can be found on the D&S website, in the "Special to the Web" section at the bottom of the site.Labels: financial crisis, financial crisis bailout, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The G-20 CommuniqueThis meeting, which President-elect Obama has said he won't attend anyway, has been pushed in some circles (even on our blog, in a highly conditional way: see posting of 22d October "NOT a Slow News Day") as a possible "Bretton Woods II." The Harvard trade theorist Dani Rodrik managed to get his hands on the documents, which he posted on his blog.Rodrik's introduction: Everyone knows that the final communiques of summits held by political leaders are written way in advance by their "sherpas." Through my contacts in the Bush administration I have managed to get my hand on the communique that will be issued at the conclusion of the G-20 summit being held on November 15th in Washington, DC. Here is how it reads: The G-20 communique of November 15th We, the leaders of the G20 nations, have come together to develop a common action agenda to prevent the further spread of the financial crisis and to ensure that the consequences for output and employment are minimized. We are pleased that G7 member governments have agreed to engage in an appropriate degree of fiscal expansion to stimulate their economies. While the degree of reflation of different economies can be best evaluated by policy makers in individual countries, we believe joint action on this front will be more effective than isolated changes in policy. We also call on countries with large current account surpluses to adopt policies that boost domestic demand. China has a particularly important role to play here, and we are happy to report that the Chinese government has decided to embark on a significant program to increase domestic consumption--both private and public--by boosting spending on infrastructure, health, education, and social transfers. We are particularly concerned that the financial crisis, which has already hit emerging markets, will have even more serious consequences in the weeks to come for the stability of their banking and financial systems. We welcome the creation of the new Short-Term Liquidity Facility (SLF) at the International Monetary Fund, and the Federal Reserve's new swap facilities for four emerging market economies. These countries are the casualty of financial excesses that are not the result of their own doing. So we emphasize that access to the SLF will be available to all developing countries that are adversely affected by the financial turbulence emanating from the subprime fallout. Further, G7 member governments emphasize that they stand ready to expand these facilities as needed, in case they are not sufficient to restore stability to markets. We also welcome the decision by the Chinese government, described in greater detail in the accompanying communique, to make available part of its foreign currency reserve assets towards an expanded swap facility in support of global financial stability. The weeks and months ahead will be trying times for economic policy makers everywhere, as they try to contain the fallout for output and employment. Raising trade barriers against imports will be a temptation, especially when currencies fluctuate so much. But the experience with the Great Depression teaches us that this is the surest way to magnify the costs of the crisis, and to spread it to other countries. Hence the most serious challenge for the global trading regime at the present is to ensure that the financial and economic crisis does not lead to a vicious cycle of protectionism, greatly exacerbating the economic downturn. So we jointly commit ourselves in public to not raising protectionist barriers in response to perceived threats to employment from imports. We further ask the secretariat of the World Trade Organization to monitor and report unilateral changes in trade policy, with the purpose of "naming and shaming" G20 members that depart from this commitment. The unfolding financial crisis has made it amply clear that we need a new regulatory approach to finance--both domestically and internationally. The rules that govern financial globalization need to be rethought to ensure that finance serves its primary goals--allocate saving to high-return projects and enhance risk-sharing--without leading to instability and crises. Our discussions have revealed that there exist great differences amongst us with respect to our respective needs and therefore with respect to how to achieve these ends. A key challenge will be therefore to strike an appropriate balance between common international regulations, on the one hand, and space for domestic approaches that may diverge from harmonized regulations, on the other. Recent experience has taught us that there may need to be a greater role for the active management of international financial flows by governments. Designing the new traffic rules for international finance, as it were, will take considerable time and thought. We have asked our ministers of finance to establish a high-level working group that will convene as soon as practically feasible to seek wider input, and craft a framework for discussion among heads of governments. Despite our differences on the details, we share a common goal: to make international finance safe for the world economy--and not the other way around. Labels: Dani Rodrik, financial crisis, financial crisis bailout, G-20, Larry Peterson, Monetary Policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Biggest Rise in Joblessness since WWIIOr so Goldman Sachs seem to believe. Note expectations of a rate cut to .5% by the Fed in December. From MarketWatch, via Brad De Long:Goldman forecasting biggest rise in joblessness since WWII MarketWatch By Rex Nutting Last update: 10:55 a.m. EST Nov. 7, 2008 WASHINGTON (MarketWatch) The unemployment rate is expected to rise to 8.5% by the end of next year and inch even higher in early 2010, economists for Goldman Sachs wrote Friday. The cumulative trough-to-peak increase of more than 4 percentage points in the jobless rate would be the most since World War II, they said. Goldman analysts lowered growth forecasts for the next three quarters, and said they now expect the Federal Reserve to cut its interest rate target to 0.50% by December. "The main reason for these changes is the accumulation of evidence that U.S. domestic demand and production are dropping sharply," they wrote. "We do not see a resumption of anything close to trend growth before 2010." Labels: Brad DeLong, financial crisis, financial crisis bailout, Goldman Sachs, MarketWatch, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). GM Shares Plummet On Analyst ReportA Deutsche Bank analyst forecast that GM's shares would soon be valued at $0 sent the car company's stock plummeting another 24% today. The analyst took the view that GM would either enter into bankruptcy or would enter into a government bailout that would leave shareholders with no equity.The stock fell to $3.02 in early trading, their lowest in over 60 years. Shares climbed back to $3.36 by the end of trading. Labels: auto industry, financial crisis bailout, General Motors, GM Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Synthetic CDOs and Merrill's FallA fine piece by Gretchen Morgenson in the International Herald Tribune (as part of a series entitled "The Reckoning"):How the thundering herd faltered and fell By Gretchen Morgenson Sunday, November 9, 2008 International Herald Tribune "We've got the right people in place as well as good risk management and controls."--E. Stanley O'Neal, 2005 There were high-fives all around Merrill Lynch headquarters in New York as 2006 drew to a close. The firm's performance was breathtaking; revenue and earnings had soared, and its shares were up 40 percent for the year. And Merrill's decision to invest heavily in the mortgage industry was paying off handsomely. So handsomely, in fact, that on Dec. 30 that year, it essentially doubled down by paying $1.3 billion for First Franklin, a lender specializing in risky mortgages. The deal would provide Merrill with even more loans for one of its lucrative assembly lines, an operation that bundled and repackaged mortgages so they could be resold to other investors. It was a moment to savor for E. Stanley O'Neal, Merrill's autocratic leader, and a group of trusted lieutenants who had helped orchestrate the firm's profitable but belated mortgage push. Two indispensable members of O'Neal's clique were Osman Semerci, who, among other things, ran Merrill's bond unit, and Ahmass Fakahany, the firm's vice chairman and chief administrative officer. A native of Turkey who began his career trading stocks in Istanbul, Semerci, 41, oversaw Merrill's mortgage operation. He often played the role of tough guy, former executives say, silencing critics who warned about the risks the firm was taking. At the same time, Fakahany, 50, an Egyptian-born former Exxon executive who oversaw risk management at Merrill, kept the machinery humming along by loosening internal controls, according to the former executives. Semerci's and Fakahany's actions ultimately left their firm vulnerable to the increasingly risky business of manufacturing and selling mortgage securities, say former executives, who requested anonymity to avoid alienating colleagues at Merrill. To make matters worse, Merrill sped up its hunt for mortgage riches by embracing and trafficking in complex and lightly regulated contracts tied to mortgages and other debt. And Merrill's often inscrutable financial dance was emblematic of the outsize hazards that Wall Street courted. While questionable mortgages made to risky borrowers prompted the credit crisis, regulators and investors who continue to pick through the wreckage are finding that exotic products known as derivatives--like those that Merrill used--transformed a financial brush fire into a conflagration. Read the rest of the article Labels: Collateralized debt obligations, derivatives, financial crisis, financial crisis bailout, Merrill Lynch Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). How Far Will Deleveraging Go?From Wall Street Journal (November the 8th); via Yves SmithWall Street Journal Opinion November 8, 2008 How Far Will Deleveraging Go? Credit will still have to shrink to keep leverage at precrisis levels. By DAVID ROCHE The global economy is in recession. Will this lead to depression? And if not, how long and deep will the recession be? The answers to both questions depend on the extent of deleveraging by financial institutions. The amount of risk-free or "tier-one" capital a bank is holding is a good reverse indicator of how leveraged it is. Globally, financial institutions had about $5 trillion of tier-one capital on the eve of the credit crisis. Those in the United States and European Union had about $3.3 trillion of tier-one capital supporting a loan book of some $43 trillion. Then came the crisis. How much did they lose? There are three answers. If mark-to-market rules are applied, global financial sector losses are estimated to amount to 85% of tier-one capital. But mark-to-market rules are extreme and assume the banks are insolvent and that all their assets will have to be fire-sold for whatever they can fetch in today's dysfunctional markets. If economic value, a concept based on the present value of future cash flows of the assets, is used instead, current losses are about half the amount calculated using mark-to-market rules. Finally, if we use only the losses that have been recognized by the institutions themselves so far, we are a touch short of $700 billion. Despite these losses, the loan books of banks have grown, not shrunk during the credit crisis. Only the balance sheets and leverage of the nondeposit-taking institutions, such as hedge funds, investment banks and prime brokers have shrunk, probably by 40%-60%. Read the rest of the article Labels: banking system, financial crisis, financial crisis bailout, leverage Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Lame-Duck Administration Still Has PrioritiesFrom the Washington Post:A Quiet Windfall For U.S. Banks With Attention on Bailout Debate, Treasury Made Change to Tax Policy By Amit R. Paley Washington Post Staff Writer Monday, November 10, 2008; A01 The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention. But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion. The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin. "Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks." The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers. The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists. Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. "This is part of our overall effort to provide relief," he said. The Treasury itself did not estimate how much the tax change would cost, DeSouza said. Read the rest of the article Labels: banking regulation, financial crisis bailout, Henry Paulson, Tax law, Treasury Department, Washington Post Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Words Can't Describe How Wacky This IsThere's an absolutely devastating critique of corporate-led globalization hidden (only a little) in this story somewhere. From today's Guardian:Paradise almost lost: Maldives seek to buy a new homeland The Guardian, November 10, 2008 Randeep Ramesh in Male The Maldives will begin to divert a portion of the country's billion-dollar annual tourist revenue into buying a new homeland--as an insurance policy against climate change that threatens to turn the 300,000 islanders into environmental refugees, the country's first democratically elected president has told the Guardian. Mohamed Nasheed, who takes power officially tomorrow in the island's capital, Male, said the chain of 1,200 island and coral atolls dotted 500 miles from the tip of India is likely to disappear under the waves if the current pace of climate change continues to raise sea levels. The UN forecasts that the seas are likely to rise by up to 59cm by 2100, due to global warming. Most parts of the Maldives are just 1.5m above water. The president said even a "small rise" in sea levels would inundate large parts of the archipelago. "We can do nothing to stop climate change on our own and so we have to buy land elsewhere. It's an insurance policy for the worst possible outcome. After all, the Israelis [began by buying] land in Palestine," said Nasheed, also known as Anni. The president, a human rights activist who swept to power in elections last month after ousting Maumoon Abdul Gayoom, the man who once imprisoned him, said he had already broached the idea with a number of countries and found them to be "receptive". Read the rest of the article Labels: climate change, globalization, Maldives Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). $600 Billion Plan: Not Enough to Sustain RallyDespite a stimulus plan of historic scale, the announcement of China's $600 billion program, though sufficient to fuel major rallies on equity markets in Asia and, to a lesser degree, Europe early, has been eclipsed by a continuing stream of bad bad news from the US. And the article doesn't even mention Circuit City's filing for bankruptcy. From Reuters:Oil falls, recession concerns outweigh China plan Mon Nov 10, 2008 1:46pm EST By Edward McAllister NEW YORK (Reuters) - Oil prices fell on Monday as concerns about the mounting global financial crisis offset Saudi Arabia's move to cut supplies and China's launch of a $600 billion economic stimulus plan. U.S. stocks cut gains as General Motors shares slumped, Fannie Mae recorded a record $29 billion loss and the United States pledged further support for struggling insurer AIG. U.S. crude fell 91 cents to $60.13 a barrel by 12:41 p.m. EST, after rising as high as $65.56 on news of China's stimulus plan. London Brent crude was down 63 cents at $56.72. "The crude futures rally didn't last even half a day today because the oil markets are vulnerable to the steady drumbeat of bad economic data," said Gene Mcgillian, an analyst at Tradition Energy in Stamford, Connecticut. "Bad news from Fannie Mae, AIG and earlier GM all point to demand destruction," he added. The U.S. government restructured its bailout of American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), raising the package to a record $150 billion with easier terms, after a smaller rescue plan failed to stabilize the ailing insurance giant. China's spending package aims to boost domestic demand and help the world's forth largest economy ride out the credit crisis, but analysts said it would take time to filter through to the energy markets. "If you step back, you realize China's stimulus could take months, or even years, to affect energy markets," said Phil Flynn, an analyst at Alaron Trading. "After the initial boost to the market, the excitement is wearing off. It's an admission that China's economy is slowing." Saudi Arabia told refiners in Asia it would cut December supplies by 5 percent, signaling its adherence to an OPEC plan to cut output. Oil prices fell nearly 10 percent last week and dipped below $60 the previous week to their lowest level since March 2007, after a string of dismal economic reports from the United States sharpened fears of a protracted recession. (Additional reporting by Gene Ramos and Robert Gibbons in New York, Fayen Wong in Perth and Barbara Lewis and Alex Lawler in London; Editing by Walter Bagley) Labels: AIG, China, Circuit City, Fannie Mae, financial crisis, financial crisis bailout, General Motors Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Closures & Layoffs (Nov. 2-8)Mark Heschmeyer's weekly report, from CoStar.Another Week, Another Round of Fortune 500 Layoffs A Weekly Report on Future Corporate Downsizings In this week's issue: * CEO turnovers skyrocket. * Plus, a whole new round of major U.S. corporation closures and layoffs were announced this week including such firms as American Express, ArvinMeritor, Ball Corp., Centerline Holding Co., Columbia Sportswear Co., Cooper Tire & Rubber, Dell, Drew Industries, IWCO Direct, Maxim Integrated Products, Motorola, NBC Universal, Tenneco, Time Inc., Washington Post, Worthington Industries and others. Read the full report. Labels: closures and layoffs, financial crisis, Mark Heschmeyer, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Notes on the Foreclosure Crisis (T. Weisskopf)In case you missed it--we posted two new articles on Friday: notes on the foreclosure crisis, by Tom Weisskopf, and a primer on financialization, by Ramaa Vasudevan.Labels: financial crisis, foreclosures, Ramaa Vasudevan, Tom Weisskopf Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Politics of Studs Terkel (Roger Ebert)An amusing riposte to this annoying comment on Studs Terkel's work. The most recent episode of This American Life includes an astounding segment with interviews that were the basis of Terkel's Hard Times--highly recommended.To the Editor: Re “He Gave Voice to Many, Among Them Himself,” by Edward Rothstein (An Appraisal, Arts pages, Nov. 3): And who, Mr. Rothstein, is the Studs Terkel of the political right, seeking out the oral histories of those Enron employees who were recorded joking about “Grandma Millie,” a hypothetical victim of the rolling blackouts, and boasting about the millions they made for Enron while deliberately creating the California “energy crisis” of 2000-1? Who is listening to those whose savings were eroded by Wall Street executives, who paid themselves millions of dollars for the task? Perhaps we could recruit Mr. Rothstein to listen to the soldiers in Iraq who are fighting a war founded on lies and propaganda. I applaud Mr. Rothstein’s insight: “No part of history or human experience should be ignored, but all of it needs to be placed in a larger context.” If Studs Terkel was a Marxist, as the article suggests, what is Mr. Rothstein? Roger Ebert Chicago, Nov. 3, 2008 The writer is a film critic at The Chicago Sun-Times. Labels: Roger Ebert, Studs Terkel Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Maximum-Strength Remedy (Robert Reich)This is from Talking Points Memo; hat-tip to Ben Collins.By Robert Reich - November 9, 2008, 2:26PM This is not the Great Depression of the 1930s, but nor is it turning out to be merely a bad recession of the kind we've experienced periodically over the last half century. Call it a Mini Depression. The employment report last Friday shows job losses accelerating, along with the number of Americans working part time who'd rather be and need to be working full time. Retail sales have fallen off a cliff. Stock prices continue to drop. General Motors is on the brink of bankruptcy. The rate of home foreclosures is mounting. When Barack Obama takes office in January, he will inherit a mess. What to do? (Because I'm an informal economic adviser, I should warn anyone who reads this that it reflects only my thoughts and therefore should not be attributed to him or to anyone else advising him.) First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay. If they fail to do so, and creditors push them into reorganization under bankruptcy, they'll cut their payrolls, to be sure. But they're already cutting their payrolls. It's far from clear they'd cut more jobs under bankruptcy reorganization than they're already cutting under pressure to avoid bankruptcy and remain solvent. This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses. The real problem is on the demand side of the economy. Read the rest of the article. Labels: financial crisis, recession, Robert Reich Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). No GM/Chrysler DealAfter losing a staggering $4.2 billion in the 3rd quarter, GM has been forced to call off talks about it buying fellow beleaguered car maker Chrysler.Cerberus Capital Management, the private company that owns Chrysler, is still on the hunt for some kind of public or private lifeline. In a side note (in case you missed it here), Cerberus is chaired by former Bush administration Treasury Secretary John Snow and its board includes Dan Quayle, who was vice president under former president George H.W. Bush. Labels: auto industry, Cerberus Capital Management, Chrysler, Dan Quayle, General Motors, GM, John Snow Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Good Review of SubprimeThe excellent Julian Delasantellis, who contributes regularly to Asia Times, reviews Confessions of a Subprime Lender, by Richard Bitner, who worked in the industry and coundn't take it anymore. The review serves as a good refresher on some of the chronology, arcana and issues, and is just fun to read because of Delasantellis' writing style and wit.BOOK REVIEW Subprime--an (im)morality tale Confessions of a Subprime Lender by Richard Bitner Reviewed by Julian Delasantellis In 1949, the hard-boiled American crime writer Raymond Chandler observed that "Such is the brutalization of commercial ethics in this country that no one can feel anything more delicate than the velvet touch of a soft buck." It wasn't that "velvet touch of a soft buck" that the subprime mortgage business felt, and fell victim to, these past few years; it was the creamy caress of about 3 trillion of those soft bucks. It was the heady intoxication of this sensation that caused the industry to abandon all pre-existing standards of banking probity and morality, and this is the story that Richard Bitner tells in his new book, Confessions of a Subprime Lender. By 2006, Bitner, co-founder of subprime broker Kellner Mortgage, had seen so much of his industry's blatant balderdash, howling half truths, and malevolent mendacities that he could stand no more. Walking away from a business that had made him, and everyone in his business, insanely wealthy in an insanely brief amount of time, he pledged to write a book that would tell the truth about this business. Amazingly enough, considering the dross that winds up in the business sections of the bookstores these days (The Way of the Bushido Method to Sell Your Timeshare or, 12 Apostles=12 Successful Salescalls--The New Testament Sales, Commission and Wealth Plan) Bitner could not find a publisher for his work, so he self-published. Buzz spread and word got around, John Wiley and Sons put out an edition in early summer. On Amazon.com, the book is now ranked number 4 in the "mortgages" sub-category of Business and Investing/Real Estate Read the rest of the article Labels: Asia Times, banking regulation, financial crisis, financial crisis bailout, Julian delasantellis, mortgage meltdown, subprime lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Black Jobless Rate: 11.1% In OctoberFrom Bob Feldman:Despite the election of a Democratic Party majority in the U.S. Congress in November 2006, the official unemployment rate for Black workers was still 11.1 percent in October 2008 under the current U.S. economic system, according to the latest Bureau of Labor Statistics data. And if the conclusion of Harry Shutt's 1998 book The Trouble With Capitalism is accurate, even the recent election of Barack Obama and the creation of a Democratic Party-controlled White House staff (headed by Rahm Emanuel--a former managing director of the Wasserstein Perella investment bank, before it became part of Dresdner Kleinwort Wasserstein) isn't likely to soon reduce the Black jobless rate very much. According to Shutt: ...An assessment based on historical evidence and analysis of the more recent conjecture of economic forces leads us to the conclusiion that only a veritable miracle could avert an eventual...world-wide financial and economic collapse such that the organs of state (whether national or international) will be too impoverished to prevent...Political attention must soon begin to focus on alternatives to the profits system... --bf Labels: Black jobless rate, Bob Feldman, Harry Shutt, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Can Obama Be FDR? (Bob Kuttner)The following is an excerpt from Chapter 4 of Obama's Challenge by Robert Kuttner; it was posted on AlterNet.When Barack Obama takes office as America's forty-fourth president, he will face an acute, three-pronged economic challenge. The financial system will be in crisis to a greater degree than at any time since 1933. America's international imbalances will be on a worsening downward slide. And the economy will be in a deepening recession supercharged by falling consumer purchasing power, declining housing values, and cascading business losses. In addition, he faces four chronic problems that recession will only intensify. The recession will exacerbate a thirty-year trend of increasing inequality and insecurity. The crisis in energy and climate change will be deepening; the unreliability and cost of health care will be relentlessly worsening. The decay of America's public spaces and facilities will persist. All of this will require a more activist use of government than we've seen in at least four decades. Read the rest of the article. Labels: Barack Obama, Bob Kuttner, FDR, financial crisis, New Deal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 2-Day Downturn and Hedge Fund RedmptionsAlso via Yves Smith: Originally from Wall Street Journal.Friday, November 7, 2008 Hedgies Still Blowing Up the Markets, Oh My! A front page story in the Wall Street Journal discusses how continued forced selling by hedge funds was the proximate cause of the sharp selloff of the last two days (um, the simply lousy economic news. such as lousy payrolls, horrific retail sales, no sales of credit card bonds in the last month, and similarly not-so-cheery news from overseas had nothing to do with it). Deleveraging is destructive to asset prices. Some had hoped with the big credit default swap settlements October credit default swap settlements past (Freddie, Fannie, Lehman, WaMu) that the big impetus for hedge funds dumping assets would be largely past. We weren't so certain. First, most hedge funds have quarterly redemptions, and their investors were expected to ask for their money back in large numbers, in many cases because performance has been bad, but others factor are that investors want to reduce risk and (quelle surprise!) may need the cash. I am told typical arrangements are that withdrawal notices are due by 45 days after the end of the quarter and payment is to be made no later than 45 days after that. And unless the funds are very heavily in cash (not likely given their return ambitions), they need to sell SOMETHING to pay investors back. However, that pressure may not be as great as thought because some hedge funds are refusing or limiting redemptions. Why this does not fatally tarnish the entire concept is beyond me (I take honoring contractual agreements seriously), but All About Alpha tells us in "Stigma of redemption gates fading fast": Read the rest of the post Labels: financial crisis, hedge funds, Wall Street Journal, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Horrific Retail Sales; More Bankruptcies?From the New York Times; hat tip to (and opening comment by) Yves Smith (which is significant: she doesn't shock easily):Friday, November 7, 2008 "Retailers Report a Sales Collapse" The unusually dramatic headline comes from the New York Times. Note this drop was a not a surprise to some analysts such as Gary Shilling, who predicted a marked fall in retail sales, which when you allow for the fact that gas and food are not terribly discretionary, implies much greater declines in apparel and other categories. The story also reports that deep discounting is not enticing many consumers to buy. And why should it? Broke is broke. From the New York Times: Sales at the nation's largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains and signaling that this will probably be the weakest Christmas shopping season in decades. The remarkable slowdown hit luxury chains that sell $5,000 designer dresses as badly as stores that offer $18 packs of underwear, suggesting that consumers at all income levels are snapping their wallets shut. Sales at Neiman Marcus, the luxury department store, dropped nearly 28 percent in October compared with the same month last year. Sales fell 20 percent at Abercrombie & Fitch, nearly 17 percent at Saks, 16 percent at Gap and nearly that much at Nordstrom. Of the more than two dozen major retailers that reported on Thursday, most had sales declines at stores open at least a year, the majority of the decreases in double digits. Deep discounters like Wal-Mart and BJ's Wholesale Club reported gains... "October was every bit as bad we feared," said John D. Morris, a retailing analyst with Wachovia. "Maybe worse. October's numbers were so disappointing, particularly in the final week, which had to leave retailers in a state of high anxiety going into the holiday season." Indeed, the situation for retailers is so dire that it is creating opportunity for any consumers in a mood to spend money. Seven weeks before Christmas, stores are offering eye-catching bargains as they struggle to move merchandise. Read the rest of the post Labels: financial crisis, New York Times, retail, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On The Ratings AgenciesFrom Mother Jones:Credit Rating Exec: "We Sold Our Souls to the Devil" Internal documents show that while rating firms publicly defended their practices, executives privately wondered when the house of cards would fall. " Nick Baumann October 22, 2008 For years, credit rating agencies--the referees of Wall Street--insisted they were an impartial source of information, despite their financial reliance on the companies they rated. Then came the market meltdown--and a chorus of accusations that firms had artificially inflated their risk ratings to please their clients and gain a competitive edge. And now there's plenty of evidence to suggest the "referees" were unduly influenced by the players. According to internal documents released at a congressional hearing Tuesday, while rating agencies strenuously defended their independence publicly, some of their top executives acknowledged privately that they faced fundamental conflicts. As one executive at Moody's, a major credit rating agency, put it following an internal discussion on the implosion of the subprime mortgage market, "These errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue." The documents lend credibility to charges by Wall Street executives that the rating agencies deserve part of the blame for the current financial crisis. "The story of the credit rating agencies is a story of colossal failure," said Henry Waxman (D-Calif.), the chairman of the House Committee on Oversight and Government Reform, which is holding a series of hearings to investigate the causes of the market meltdown. (Mother Jones also covered hearings on Lehman Brothers and AIG.) Read the rest of the article Labels: banking regulation, financial crisis, financial crisis bailout, Ratings agencies Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). And If That Didn't Impress You......two items from the auto industry. From Reuters, again. Seems like some sort of nationalization of this industry is only a matter of time--and time, these days, is extra-short.First: Ford posts $3 billion loss, Toyota shares dive Fri Nov 7, 2008 8:50am EST By Chang-Ran Kim and Christiaan Hetzner TOKYO/FRANKFURT (Reuters) - Ford Motor Co posted a $2.98 billion quarterly operating loss and shares in world No. 1 automaker Toyota Motor Corp plunged on Friday after it warned this year's profits would hit a 13-year low. Ford also said it would cut salaried expenses by another 10 percent, following on a program that cut such costs 15 percent earlier in 2008. Analysts on average had expected Ford and General Motors Corp, which reports later on Friday, to post losses of roughly $2 billion each for the third quarter excluding one-time items, according to Reuters Estimates. In Germany both BMW, the world's largest premium carmaker, and its archrival Mercedes-Benz Cars of Daimler, posted sharp unit sales declines in October, citing continued weakness in U.S. and western European markets. Porsche is expected to report pretax profit fell 5.1 percent in the fiscal year to end-July, later on Friday. Toyota shares fell as much as 13 percent in reaction to Thursday's results. Car sales around the world are stalling, and analysts said the Japanese group's policy of breakneck expansion has left it especially exposed to an industry crunch brought on by the global financial crisis. The credit crisis has meant many consumers are unable to access loan to fund auto purchases. BMW suffered a comparatively mild 8.3 percent decline in group sales to 113,005 vehicles in October, while Mercedes-Benz Cars saw volumes fall 18.1 percent to 82,500 units. GM and Ford's results come at the end of a week that started with reports that U.S. auto sales plunged to the lowest annualized rate in a quarter century in the first month of the fourth quarter. GM has also said it plans to announce more cost cuts as part of quarterly results. Faced with accelerating cash burn--U.S. automakers have called for an industrywide rescue package. GM, which burned through more than $1 billion per month in the second quarter, warned on Wednesday the industry's prospects are dwindling fast due to the "near collapse" in demand for cars. Both BMW and Mercedes have reduced profit forecasts for their automobile businesses in two consecutive quarters following a sharp drop in demand. Nissan Motor and Suzuki Motor also issued profit warnings last month. (Reporting by Chang-Ran Kim, Taiga Uranaka; Writing by Victoria Bryan; Editing by Andrew Callus and Erica Billingham) And second, Chrysler cash drains away as crisis deepens: sources Fri Nov 7, 2008 4:55am EST By Poornima Gupta and Kevin KrolickiDETROIT (Reuters) - Chrysler LLC is rapidly burning through cash and being driven to prepare for a possible break-up if it can't clinch a merger with General Motors Corp or get government funding needed to ride out the economic crisis, people with knowledge of the situation said. Without new funding or a wrenching restructuring, executives have raised concern about the automaker's ability to finance its operations from existing cash beyond the first half of 2009, said the sources, who were not authorized to discuss Chrysler's performance. Chrysler has had to pay out over $100 million a month to support strained suppliers on top of a total $200 million support to sales through dealers in August and September as it suspended vehicle lease financing, the sources said. The $11.7 billion the struggling automaker said it had as of end-June has seen a substantial decline because of the company's deteriorating performance marked by a 35 percent slide in October sales and increasing cash incentives, they said. Chrysler and its owner Cerberus Capital Management LP declined to comment. Cerberus and GM had agreed last month on the broad terms of a merger of Chrysler's loss-making auto operations and those of its crosstown rival but the deal foundered when the Bush administration rebuffed a request for some $10 billion to support it, sources have said. That setback has put the focus on winning support for a broader federal rescue package for GM, Chrysler, Ford Motor Co and their suppliers that the industry argues would save jobs and protect benefits for retirees. But Chrysler has been forced to consider a more drastic set of backup plans that could include selling off key business lines -- including Jeep, considered its most valuable brand. It may also outsource its finance and human resources, sources said. As a step toward that hard-landing scenario, the automaker is moving to split up its replacement parts business based on brand so that its Chrysler, Jeep and Dodge operations could be completely separate, one source briefed on that plan said. That could make it easier to sell off an individual brand. LOBBYING WASHINGTON Chrysler Chief Executive Bob Nardelli joined GM CEO Rick Wagoner and Ford CEO Alan Mulally on Thursday in meetings with U.S. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reed. The three automakers lobbied the Democratic lawmakers -- who increased their power in Tuesday's election that also saw Barack Obama elected president -- for up to $50 billion in federal aid, sources said. The push for aid has been accompanied by increasingly dire warnings from industry executives and their political allies about the cost of inaction and the risk of a failure that would cost tens of thousands of manufacturing jobs. Chrysler does not release financial information. While executives, including Vice Chairman and President Tom LaSorda, once touted that lack of disclosure as a strength, the same lack of transparency could now complicate the automaker's efforts to seek aid under a federal rescue package. In addition, analysts have said Chrysler's ownership by Cerberus poses a political problem as a federal rescue could be criticized as a bailout for a secretive Wall Street firm known for its political contacts. Cerberus is chaired by former Bush administration Treasury Secretary John Snow and its board includes Dan Quayle, who was vice president under former president George H.W. Bush. Both GM and Ford are expected to post deep quarterly losses on Friday and announce further urgent steps to cut costs and conserve cash in the face of a plunge in auto sales to their lowest in around a quarter of a century. GM's president for North America Troy Clarke said late on Wednesday the government and industry faced a critical "100-day" window to secure financing and restructure. The sharp decline in U.S. auto sales that began in the summer and has since accelerated has hit Chrysler particularly hard. A pending asset sale is unlikely to be enough to save the day. Though Chrysler is pushing to complete a sale of its Viper sports car line this year, that is likely to bring in $80 million or less, said a person familiar with the brand's valuation. U.S. sales of the Chrysler, Jeep and Dodge brands were down almost 26 percent this year through October, and Chrysler's market share has slipped to just 11 percent in October, putting it in an almost dead-heat with Honda Motor Co for the No. 4 spot in the U.S. market. Under Cerberus, Chrysler's captive finance arm, Chrysler Financial, moved quickly to suspend lease financing in August when resale values of its SUV and truck-heavy line-up plunged and threatened deep losses. But Chrysler was forced to increase cash incentives by $2,000 per vehicle to offset the sudden move to drop leasing. That cost some $200 million in August and September, the automaker told dealers in late September. "The lifeboat is coming. We just have to keep rowing," Chrysler Vice Chairman Jim Press said in a briefing for dealers that also discussed the automaker's lobbying for government support, according to a person who heard the remarks. Separately, LaSorda told dealers at the same late September event that Chrysler, which depends on the U.S. market for some 90 percent of its sales, was pressing ahead with alliances and believed it was close to a deal for the Russian market. (Additional reporting by Jui Chakravorty in NEW YORK) (Editing by Ian Geoghegan) Labels: auto industry, financial crisis, financial crisis bailout Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Far Worse Than ThoughtFrom Reuters:October job losses worse than feared Fri Nov 7, 2008 8:49am EST WASHINGTON (Reuters) - Employers cut payrolls by 240,000 in October, much more severely than expected, while September registered the biggest monthly loss in jobs in nearly seven years, according to a government report on Friday that showed labor markets were sharply deteriorating. The Labor Department said the national unemployment rate shot up to 6.5 percent from 6.1 percent in September, the highest since March 1994. October's job cuts were much worse than anticipated by Wall Street economists who had forecast 200,000 would be lost. Even more strikingly, the department revised September's losses to 284,000--the highest since November 2001 just after the September terror attacks--and also revised August losses higher to 127,000. That meant 179,000 more jobs were cut in August and September than previously had been thought. In total over the three months through October, 651,000 jobs have been slashed from payrolls. In manufacturing alone, a whopping 90,000 jobs were cut in October--a period when 27,000 Boeing Co. assembly workers were on strike. That followed a loss of 56,000 factory jobs in September. (Reporting by Glenn Somerville, editing by Neil Stempleman) Labels: financial crisis, financial crisis bailout, US employment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Good Survey: How Bad in Emerging Markets?From Der Spiegel (translated into English, though). Hat tip to Yves SmithSPIEGEL ONLINE 11/04/2008 04:54 PM THE GHOST OF ARGENTINA What Happens when Countries Go Bankrupt? By SPIEGEL Staff First it was mortgage lenders. Then large banks began to wobble. Now, entire countries, including Ukraine and Pakistan, are facing financial ruin. The International Monetary Fund is there to help, but its pockets are only so deep. No, Alexander Lukyanchenko told reporters at a hastily convened press conference last Tuesday, there is "no reason whatsoever to spread panic." Anyone who was caught trying to throw people out into the street, he warned, would have the authorities to deal with. Lukyanchenko is the mayor of Donetsk, a city in eastern Ukraine with a population of a little more than one million. For generations, the residents of Donetsk have earned a living in the surrounding coalmines and steel mills, a rather profitable industry in the recent past. Donetsksta, a local steel producer, earned 1.3 billion euros ($1.65 billion) in revenues last year. But last Tuesday the mayor, returning from a meeting with business leaders, had bad news: two-thousand metalworkers would have to be furloughed. Lukyanchenko doesn't use the word furlough, instead noting that the workers will be doing "other, similar work." But every other blast furnace has already been shut down, and one of the city's largest holding companies is apparently gearing up for mass layoffs. Under these conditions, how could panic not be rampant in Donetsk, the capital of Ukraine's industrial heartland? In Mariupol, a steelworking city, a third of the workers have already been let go. The chemical industry, Ukraine's second-largest source of export revenue, is also ailing. In the capital Kiev, booming until recently, construction cranes are at a standstill while crowds jostle in front of currency exchange offices, eager to convert their assets into US dollars. Donetsk is in eastern Ukraine, 8,100 kilometers (5,030 miles) from New York's Wall Street and 2,700 kilometers (1,677 miles) from Canary Wharf, London's financial center. But such distances are now relative. The world financial crisis has reached a new level. No longer limited to banks and companies, it is now spreading like wildfire and engulfing entire economies. It has reached Asia and Latin America, Eastern Europe, Iceland the Seychelles, the Balkan nation of Serbia and Africa's southernmost country, South Africa. It is a development that has investors and speculators alike holding their breath. Some are pulling their money out of troubled countries, while others are betting on a continued decline -- and in doing so are only accelerating the downturn. Central banks are desperately trying to halt the downward trend, but in many cases the plunge seems unstoppable. Read the rest of the article Labels: currencies, Der Spiegel, Emerging markets, financial crisis, financial crisis bailout, IMF, World Bank, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Co-centric Vicious CyclesThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.The European Central Bank and Bank of England, as expected, cut interest rates (with the BoE coming down an unprecedented 1.5% to 3.0%), but exceedingly poor corporate and consumer outlooks are pulling stocks down anyway. In Asia, both the Japanese Nikkei and Hang Seng in Hong Kong endured terrible losses. Obama is putting on a full-court press to contain the damage (expect him to name Clinton ex-Treasury secretary Lawrence Summers or New York Fed chair Timothy Geither today to head the Treasury Department), but if stocks continue their slide, he'll have to announce some sort of stimulus proposal, probably involving infrastructure spending, very soon. It remains extremely worrying that extraordinary measures, like the BoE cut, and circumstances, like the hurry-up Obama transition, have exerted only temporary effects on a downward spiral in global markets that has seen trillions wiped away from pension funds and other forms of wealth people really rely on (not just the ill-gotten gains of the filthy-rich), in just a few weeks: there will be a real shock when people get their fourth-quarter 401 K statements, even if they don’t spend much on Christmas shopping, which will itself deliver another body-blow to the economy. And, meanwhile, hedge fund redemptions continue, and that cycle of deleveraging shows no sign of abating: in fact, be prepared for an uptick in hedge fund bankruptcies. What you have here is a series of co-centric vicious cycles, all collapsing into each other. What anyone can do to stop it is still anyone's guess. Tomorrow the employment report for October comes out, and I believe it will be horrible (expect 150,000 jobs to be gone). At this rate, the Obama administration could be worn out before it even officially takes office. Labels: Bank of England, Barack Obama, european central bank, financial crisis, Larry Peterson, larry Summers, stock market, Timothy Geither Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Yves Smith on a Big PuzzleShe blogs today about a real mystery in financial markets, i.e. why Lehman's CDO auction didn't turn into a disaster. This is rough going, but this issue is key to understanding how events have progressed since the Lehman Bankruptcy:WEDNESDAY, NOVEMBER 5, 2008 "Credit Swaps Top $33 Trillion, Depository Trust Says" Even though the (supposed) supervising grownups in the credit default swaps market keep making reassuring noises about the credit default swaps market, I am not entirely convinced, mainly because the picture is still somewhat murky. Witness the Bloomberg story today, which tells us that the CDS market is smaller than we thought, roughly $34 trillion in notional amount according to the DTCC versus a not-long-ago report of $62 trillion from the IMF. The Bloomberg story create the impression that the new smaller number is solely due to the netting, when other factors may have played a role. First, we have also four large settlements (Freddie, Fannie, Lehman, and WaMu). Second, my impression is that most CDS agreements run three to five years. With spreads widening massively in the credit crunch, plus certain formerly important protection writers no longer active (AIG, Ambac, MBIA, Bear) and hedge funds (another important source) less active in aggregate, one would imagine we have had some runoff, as outstanding agreements have matured and new ones have not been written in the same volume. The part that leaves me scratching my head is this: Read the rest of the post Labels: Credit Default Swaps, financial crisis bailout, Lehman Brothers, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). LIBOR: Still StuckFrom today's Financial Times (here's the main point: "While rates are coming down, traders say money market funds are still not willing to lend to banks at this juncture. The bulk of activity is being done through money market and commercial paper programmes instituted by the Fed, reinforcing the central bank's role as lender of sole resort."):Dollar lending rate reflects crunch easing By Michael Mackenzie in New York Tuesday Nov 4 2008 14:20 The benchmark floating rate for dollar lending on Tuesday fell below the level that prior to the bankruptcy of Lehman Brothers (NYSE:LEH) in mid-September, providing a further sign that the credit crunch is slowly easing. The decline in the three-month dollar London Interbank Offered Rate, however lags behind the Federal Reserve's action in cutting its overnight rate in half to 1 per cent last month. Interest rate futures price in a further cut for the Fed's rate to at least 0.75 per cent by the end of the year. At a setting of 2.71 per cent on Tuesday, the Libor benchmark for floating rate loans, mortgages and interest rate derivatives was below the 2.82 per cent level of early September. Libor has dropped from a peak of 4.82 per cent in early October when lending across the money and commercial paper markets halted. Read the rest of the article Labels: banking system, financial crisis bailout, Lehman Brothers, LIBOR Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Post-Election Hangover (short)US Markets have lost all their gains from yesterday, as of 12.44 pm EST. Europe and UK getting hit too, despite rate cut hopes there. Oil down 7% on the day.Labels: Barack Obama, financial crisis, stock markets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Shift in Economic Thinking (Lawrence Mishel)A statement on the economic implications of Barack Obama's historic election victory, by Lawrence Mishel, president of the Economic Policy Institute, a Washington DC think tank founded in 1986.New Day for U.S. Economic Policy At long last, the center of economic thinking in the United States has shifted, and we can declare with confidence and relief that the conservative era is over. It is now possible to build an economy with widely shared prosperity. The bundle of approaches favored by supply-siders from Ronald Reagan to George W. Bush, and embraced by candidate John McCain — featuring tax cuts for corporations and the rich; deregulation of business and financial activity; weak environmental, consumer and workplace protections; and unrestrained globalization — has been soundly rejected by voters, who overwhelmingly identified the economy as their single most important issue. It is now clear that the failed supply-side, market fundamentalist experiment has wrecked the economy. Misguided monetary policies, deregulation and lax oversight created stock market and housing bubbles that suddenly popped, erasing trillions of dollars in household wealth. Meanwhile, middle class wages and incomes have stagnated, inequality has soared, manufacturing has been put on life support, and millions have been thrown out of work. Voters realized that the policies that led us into the current crisis won't get us out. They want pragmatic government intervention to solve our energy problems, fix the health care system, restore manufacturing competitiveness, obtain more progressive taxation, generate broad-based wage growth, and provide retirement security for working Americans. Democrats were already aligning their policies to this new reality before the recent financial meltdown made change all the more urgent. This can be seen by comparing the proposals of the leading candidates in the recent Democratic primaries to those offered in 2000 and 2004. All the recent candidates emphasized major public investments in energy efficiency and alternative energy sources (green jobs), and endorsed universal health care proposals relying on a large, public plan (such as Medicare) alongside existing employer-provided plans. They recommended caution in moving ahead with further globalization and endorsed enforceable labor standards as a core element in trade policies. All were vocal in their support for a vibrant labor movement (and thus, the Employee Free Choice Act) and for substantially raising the minimum wage. There was less talk about balancing the budget and more talk about balancing the need for public investment with other fiscal goals. The fact that the American people are now open to change does not mean that they are no longer skeptical of government intervention. Who would not be skeptical after the last eight years of misguided or incompetent policies, a time when the effect of government intervention was mostly to erode individuals' constitutional rights? The task ahead is to fashion policies that will improve the economic circumstances of the vast majority, and thereby restore confidence. There is much to overcome. For roughly thirty years, with the exception of the late 1990s expansion, there has been little wage growth for the vast majority and increased economic insecurity, primarily related to health care and retirement security. The last business cycle from 2000 to 2007 failed to generate any growth for middle class working families — on average, they lost over $2,000 a year in inflation-adjusted income. This erosion of earning power happened even as the economy, through its workers, became increasingly productive. In fact, productivity growth — which measures the creation of goods and services per hour worked — has been historically high since 1995, but the fruits of that growth have gone to the already-wealthy. Our economy has been a huge skimming operation for the well-to-do. On top of these long-term problems, a new recession brought us to 6.1% unemployment in September, even before the global financial meltdown. Now we are looking at several years of high unemployment (peaking at 8% or more) and widespread income losses that will take many more years to overcome. To address this set of challenges we will need bold — even 'audacious' — policies. We at EPI have compiled an Agenda for Shared Prosperity to get us back on track and an economic recovery package to pull us out of the unfolding recession. The basic capacities of government will need to be rebuilt and policymakers will need to rigorously focus on cost-effective policies. The solutions will need to be ambitious, at the scale of the problems we face, rather than a timid tweaking at the margins. We certainly can no longer grow based on asset bubbles in housing or in stocks or from increased personal debt: the demand for goods and services from our increased productivity will need to come from consumers who earn family-supporting paychecks. We will need new government spending on infrastructure, education, health care and the safety net, re-regulation of the financial and insurance markets, changes in and enforcement of our labor laws. Above all, we need a guiding philosophy that understands the purpose of government is not to get out of the way, but to help lead the way through difficult times. Labels: Barack Obama, Economic Policy Institute, Lawrence Mishel, presidential election Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Good Piece on FinanceIn the UK monthly, Prospect. It covers the whole shebang, from the Efficient Markets Hypothesis to more mundane things like:A Greedy Giant Out of Control Jonathan Ford, Prospect, November, 2009 We used to think that finance performed a useful role, shunting capital to the most profitable outlets. Its growth was thus a function of success. But after the crunch, a new generation of critics, such as Paul Woolley, are challenging this thesis ... Let's look more closely at the croupier's take--the amount raked off each year by intermediaries as investors' money is shuffled. The starting point is the real returns earned on stock market investments. Of course, those are a bit sick right now, but over the long term they are between 5 and 6 per cent a year. The first croupier to appear on the scene is not a financier but a corporate executive. In 2002, for instance, the compensation of US executives in the form of share options was equivalent to 20 per cent of reported profits, according to Standard & Poor's. Bang goes one percentage point of the stock market return, even before the financiers arrive at the table. Dock another half a percentage point off for the fees paid by companies to investment banks for mergers and acquisitions and other services. Then one must not forget the costs of trading. These include commissions to brokers and stock exchanges, and the "spread" between the bid and offer prices of shares. Take these to be roughly 1 per cent of transaction value in aggregate. Thus, a fund manager with an average holding period of one year (meaning 100 per cent turnover of holdings each year) accrues annual costs of 1 per cent to clients. After this, returns fall to a mere 2.5 to 3.5 per cent. But things get even worse for retail investors. They must pay up-front charges when buying mutual funds of up to 7 per cent and higher management fees, averaging 1.3 per cent. Then management and administration fees take total expenses to about 2 per cent. In addition there is taxation to consider: in Britain stock purchases attract 0.5 per cent stamp duty and in US mutual funds pay capital gains on their trading profits. Once that lot is taken into account, returns can shrivel to less than 1 per cent. Read the rest of the article Labels: Efficient Markets Hypothesis, financial crisis, Jonathan Ford, Prospect, stock markets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A LIBOR PrimerPossibly to be used in tandem with our recent piece on commercial paper. From the London Review of Books:What's in a Number? Donald MacKenzie on the Importance of Libor Judged by the amount of money directly dependent on it, the British Bankers' Association's London Interbank Offered Rate matters more than any other set of numbers in the world. Libor anchors contracts amounting to some $300 trillion, the equivalent of $45,000 for every human being on the planet. It's a critical part of the infrastructure of financial markets but, like plumbing, doesn't usually get noticed. Only a handful of economists, and no other academics, have ever looked in any detail at Libor, and even the financial press didn't show much interest in how Libor is calculated until this spring, when there was sharp controversy over whether these crucial numbers could be trusted. The calculation of Libor is co-ordinated by just two people, who work in an unremarkable open-plan office in London's Docklands. I watched the process, which seemed utterly routine, a couple of years ago. Just after 11 a.m. on every weekday that's not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn’t sent in its estimates, and if the latter seem implausible--typos, for example, are fairly common--they’re checked, also with a quick call: 'Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? . . . Bit of a spread on the two month. Everyone else is coming in a good bit under that.' A simple computer program discards the lowest quarter and highest quarter of the estimates, and calculates the average of the remainder. The result is that day's Libor. The calculation is repeated for each of ten currencies and 15 loan durations (from overnight to 12 months), so 150 Libors are published daily: overnight sterling Libor, one-week euro Libor, one-month yen Libor, three-month US dollar Libor and so on. It's the back-up arrangements that tell you something about how much the calculation matters. The co-ordinators have dedicated phone lines laid into their homes so they can still work if a terrorist attack or other incident stops them reaching the office. A similarly equipped building, near the office, is kept in constant readiness, and there's a permanently staffed back-up site in a small town around 150 miles from London (I won't be any more precise than that). Its employees periodically work in the London office, so that they're ready to take over if need be. Read the rest of the article Labels: banking system, Donald MacKenzie, financial crisis, LIBOR, London Review of Books Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). SpoilsportThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Markets are rallying big time (as is oil, up 11% as the Saudis seem to have cut supply), no doubt encouraged by prospects of change--of any sort--from the policies of the current administration, but particularly if Obama wins, on this election day. But a number of items in the news urge severe caution. I'll give links to the essential stuff and provide a few tidbits. First, the domestic economy. Domestic manufacturing, and especially automaking, is in a slump the likes of which hasn't been seen since the severe hollowing-out of US manufacturing in the early '80s. And that wwith the automakers offering desperate discounts. Next up: finance. The Financial Times reported today on the fall of the collateralized loan market (remember collateralized debt obligations?). Combined with the difficulties of private equity, which D&S re-posted an article about yesterday, and continuing problems in shipping finance, which Yves Smith posted about, there are loads of reasons to be worried on this score, even as interbank markets show impressive signs of recovery and corporate earnings surprise on the upside. Commercial paper issuance, however, fell. Meanwhile, on the regulatory front, the Treasury appears set to purchase stakes in more firms, even those outside the banking and insurance sectors, and may purchase distressed assets directly, rather than through auction. The International Herald Tribune had a piece on what a secretive process the disbursement of funds to financial firms is turning into. Finally, on the international front, the Financial TImes' Lex column had a disturbing piece on the possible next shoe to drop in Asia, Japanese and Korean medium and small enterprises (it's a very short piece, and well worth reading); and Nouriel Roubini has some gloomy thoughts on the ability of China to rapidly turn into a demand-led economy, and whether the rapid decline in Chinese economic indicators presages a hard landing there. Labels: economic indicators, financial crisis, financial crisis bailout, Larry Peterson, Nouriel Roubini Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank Failures And Presidential TransitionsThis is from Bob Feldman:During periods of U.S. establishment presidential transitions in the past, U.S. commercial banks have sometimes failed. Presidential Transitions, by Laurin Henry, describes, for example, what happened after the 1932 presidential election: "In the final months of President Hoover's term, the nation reached the bottom of the depression. Financial panic swept the country and paralyzed most of the banking system... --bf Labels: bank failures, Bob Feldman, financial crisis, Herbert Hoover Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'You Can't Make This Stuff Up...'...is the universal response to this item circulating through the blogosphere this morning. From Clustershock Beta. Hat tip to Across the curve:Fed Hires Bear Stearns Risk Boss John Carney | Nov 3, 08 8:35 AM In a move that is sure to put to rest the notion that there are no second acts in American life, former Bear Stearns chief risk officer Michael Alix has landed a job in the office of the Federal Reserve charged with assessing the safety and soundness of domestic banking institutions. We suppose that Alix at least has plenty of experience with unsound banking institutions. He was the chief risk officer of Bear Stearns from 2006 until 2008. So, basically, he was the guy on the mast charged with yelling "iceberg" just before the titantic introduced its bow to a floating hunk of ice. Prior to that he ran credit risk management for Bear from 1996 to 2006, Jon Keehner at Bloomberg points out. That worked out just great. "Alix will be a senior adviser to William Rutledge, executive vice president of the bank supervision group, according to a statement on the New York Fed's Web site. Staff in the group 'assess the safety and soundness of domestic banking institutions,'" Keehner reports. Labels: banking regulation, Bear Stearns, financial crisis bailout, Michael Alix, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). GM Chrysler Deal Would Cause Massive LayoffsAs sales at US automakers continue to fall through the floor, Chrysler and GM are trying desperately to hammer out a merger as their sales and cash reserves evaporate. They are currently seeking $10-12 billion dollars in government support to cover merger-related expenses. It's unclear how the merger of two money-losing companies would combine to make a profitable one.UAW President Ron Gettelfinger has expressed alarm at the deal's potential for massive job losses. The latest estimates are that Chrysler alone would have to cut more than half of its current workforce of 67,000 employees, and an additional 50,000 jobs in related industries would be in danger, according to the consulting firm of Grant Thornton. To complicate matters, the two cash-starved companies are currently facing payments of $7 billion each by 2010 into a the voluntary Employee beneficiary association, or VEBA, a trust fund designed to cover the future health care costs for union retirees. Any changes to the fund resulting from a merger would need union approval. The UAW is trying to reinsert itself as a major player in the talks, and has recently hired top ex-auto industry execs to help with its lobbying efforts. Labels: auto industry, Chrysler, General Motors, GM, Ron Gettelfinger, UAW, VEBA Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Kaletsky: Transition to Begin ImmediatelyAnatole Kaletsky makes some very strong, but interesting claims. A must read:November 3, 2008 Change of guard could administer adrenalin shot Anatole Kaletsky The TImes Although President Bush will officially remain in office until January 20, there is a widespread recognition in Washington that the three-month power vacuum envisaged by the constitution will be unacceptable in the present financial crisis. If Mr Obama is elected, therefore, he will name a new Treasury Secretary almost immediately--the leading contenders being Tim Geithner, the New York Fed President; Larry Summers, President Clinton's last Treasury Secretary, and Paul Volcker, who chaired the Fed from 1980 to 1987. Offices have already been set aside for the new Secretary's team in the Treasury building in Washington and they should start shadowing their Bush counterparts before the end of this week. Read the rest of the article Labels: Anatole Kaletsky, Barack Obama, financial crisis, financial crisis bailout, george bush, Henry Paulson, Presidential transition, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). PE: Bankruptcy 'n Things 'R' UsOur July/August issue included a feature article on private equity by Orlando Segura, who worked in PE firms for several years. He concluded his insider's account thus:The legal framework that actively provides incentive for this industry to thrive has spawned a new breed of capitalism in which businesses are treated as assets to be bought and sold, rather than as social institutions that are sources of people's livelihood. It is perhaps wise to consider the question: What value do these firms confer upon our economy, and through it our society? Private equity firms do not incentivize innovation in the economy, they do not create jobs, and they largely do not actively manage the businesses they own.(Sorry--this article isn't posted online, but you can order a copy of that issue of the magazine here.) An article in today's New York Times provides new fodder for criticism of private equity firms. It seems that many of the companies that PE firms have bought via (highly) leveraged buyouts--ranging from Linens 'n Things and Toys "R" Us to Chrysler and GMAC--have been hit hard by the financial meltdown. (What is it with PE and companies with cheesy names? PE's slogan may become, "Bankruptcy 'n Things 'R' Us". Or will the proposed merger of GM and PE-owned Chrysler be called "GM 'n Chrysler"? Or "Gas-Guzzling SUVs 'R' Us"?) The choicest quote from this article, in an age of overheated doomsday proclamations, is from Josh Lerner, professor of investment banking at Harvard Business School: "There's absolutely going to be a lot of pain to go around. The big question is how apocalyptic it will be." [Emphasis ours.] Debt Linked to Buyouts Tightens the Economic Vise Read the rest of the article. Labels: bankruptcy, financial crisis, private equity Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). How to Thaw Credit, Now and ForeverIn The Great Crash of 2008, Mason Gaffney explained our current crisis as a manifestation of the roughly eighteen year real estate cycle--disastrously amplified by bad policy. Now he has published a sequel: How to Thaw Credit, Now and Forever. His solution may shock some readers, especially if they haven't seen his earlier essay: Stimulus: The False and the True. For Gaffney argues that to thaw credit we must PAY DOWN THE NATIONAL DEBT, cutting capital-intensive spending like the military, and raising taxes on economic rent. He begins: "Working capital is the bloodstream of economic life. It is physical capital, the fast turning inventories of goods in process and finished goods that supply materials to the worker, and feed and clothe her family. Short term commercial loans and trade credit buy it, but the capital is "real"-a fact often forgotten in the paper and virtual worlds of high finance whence come the highest inner circles of government. "The bloodstream metaphor harks back to François Quesnay, an 18th century French physician turned economist. Quesnay drew on William Harvey's (1578-1657) earlier discovery of how blood circulates. Adam Smith and other classical economists followed Quesnay, distinguishing "circulating capital" from "fixed capital," the kind that is stuck in the ground or otherwise lasts for many years. Today we call the bloodstream metaphor "macroeconomics", elaborated but not always improved from Quesnay's insights. "Now the economic blood is drained down, and what's left is slushy. We need to restore and thaw it, and get it circulating, right away as well as over time. To understand how, let's see what drained it away in the first place. "My thesis here is neither purely Keynesian, nor monetarist, nor Austrian, nor Georgist, but combines elements of all those models in ways that are off "mainstream" thinking today. The first three models suffer two major faults: they ignore the role of land as "fictitious capital" with a "wealth effect" that discourages real saving and investing; and they treat all taxes and government spending alike. The fourth (Georgist) model lacks a good concept of how capital circulates. Some readers may find it puzzling and alienating to proceed without one of the old familiar models in pure form. Considering where mainstream thinking has led us, and how dismal are its forecasts now, and how it lacks any positive guidance for recovery, it is timely to modify the mainstream. CONTINUED on http://www.masongaffney.org/essays/How_to_Thaw_Credit.pdf Past Econamici are posted to www.georgiststudies.org.Labels: credit crisis, tax policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). If You Could Use a Laugh About Now...From today's Independent. It has nothing to do with economics or the crisis. Consider it D&S's personal tribute to you for enduring another obnoxious and extra-long American presidential campaign. A quick word of introduction, though: back in 2000, a Canadian comedian--I wonder if it's the same one who appears in this story--managed to get into a Bush press conference passing as a journalist, and asked the candidate whether or not he was aware that "Prime Minister Poutine" of Canada (our largest trading partner) had given Mr. Bush his warm endorsement in his bid for the Michigan primary victory, and, for the presidency. Bush said something to the effect that he had always been an admirer of Prime Minister Poutine, who, after all, was a great believer in free trade. Needless to say, there never was a PM Poutine; Jean Chretien was the actual premier, and "poutine" in French Canada refers to a kind of cheese dip. Oh-I did cross-check this, and found it on Huffington Post, as well. Plus ca change...Palin falls for 'Sarkozy' prank call By Wesley Johnson, PA Sunday, 2 November 2008 Sarah Palin unwittingly took a prank call from a Canadian comedian who posed as French president Nicolas Sarkozy and told her she would make a good US leader one day. In the six-minute call, which will air on a Quebec radio station on the eve of the US presidential election, the governor of Alaska misses several hints that the conversation, in which the comedian uses an exaggerated French accent, is a joke. The McCain-Palin campaign later issued a statement which said Mrs Palin was "mildly amused" and added: "C'est la vie." During the call with Marc-Antoine Audette and Sebastien Trudel, a Montreal comedy duo known as the Masked Avengers, the moose-hunting Republican running mate talked about how she was a "careful shot", praised Mr Sarkozy, and asked him to give his wife, model-turned-singer Carla Bruni, "a big hug for me". Read the rest of the article Labels: Huffington Post, Jean Chretien, Nicholas Sarkozy, Sarah Palin, The Independent, The Masked Avengers Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Trade Deterioration ContinuesJust when you though things might--might--be staggering back to a point somewhat close to a vastly degraded normality, horrible news comes in on the trade front. This could be a huge problem in tandem with an expected slow Christmas and year-end accumulation of cash at the banks. And it's occurring as letters of credit, virtually a kind of currency among shippers and their banks, are not being honored. Again, Yves Smith:Sunday, November 2, 2008 More Grim News on the Trade Front Reader Michael appeared to be on a mission on Saturday and sent quite a few links on trade/shipping related matters. They were remarkably consistent in pointing to simply dreadful conditions and no expectation of near-term improvement. Indeed, further deterioration seems entirely possible. From Lloyd's List: Freight rates in the Asia-Europe trades have crashed to record lows as consumer demand continues to crumble, with the crisis compounded by the first signs of customer insolvencies.... A 20 ft container could now be shipped from Hong Kong to Hamburg for as little as $350, excluding surcharges, compared with around $1,400 per teu last summer. "In all my years in the business, I do not ever remember such difficult trade conditions," said the trade director of a big Asian line.... "Has it been as bad as this before? No, not in my 20 years," the trade manager at another global carrier concurred. Yves here. By definition, that includes the Asian crisis of 1997-1998. Read the rest of the post Labels: Lloyd's of London, Shipping, Trade, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Uncle Sam v. McWorldThe wonderful Yves Smith with yet another great post. Note that US Treasury bonds appear, ever so slightly, and in an unusual sense (reflected in value of CDS swaps, and not according to comparison with the benchmark US Treasury yields: i.e. you can't compare US Treasury performance to itself) to be mimicking the emerging-market sovereign bonds that have been getting so hammered lately. In this light, I recall that a few weeks ago McDonald's bonds too, were a better value than treasury bonds.Sunday, November 2, 2008 CDS Pricing in Increasing Treasury Default Risk We have noted that Treasuries (and the dollar) are the remaining bubbles, although some doubts are starting to surface on the Treasury front. Paul Amery at Prudent Bear gives a good recap: The tectonic plates underlying the whole superstructure of debt have started to shift. On the surface nothing remarkable is happening--the 30 year US Treasury bond yield recently hit an all-time low of 3.88%, as investors sought a safe haven during equity market turbulence. Yet while nominal bond yields have declined, the credit risk component of US Treasuries has been on an increasing trend since last year. According to data provided by CMA DataVision, the credit specialists, the 10-year credit default swap spread--a form of insurance contract against issuer default--has risen steadily - from 1.6 basis points (0.016%) in July 2007, to 16 basis points in March 2008, to 30 basis points in September, to over 40 basis points on October 27--see the chart below for the spread history so far this year. In other words the cost of insuring against a US government default has risen by 25 times in little over a year. Similar trends have been evident in the UK and German government bond markets. Read the rest of the post Labels: bond market, Credit Default Swaps, financial crisis bailout, McDonald's, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Positive Drivers in Negative EnvironmentThe Financial Times on US stocks' best weekly performance in 30 years. Note the followiing in particular:For the week, Tuesday overwhelmed all other sessions with a stunning 10.8 per cent advance after widespread selling of yen positions left traders with cash to invest in US stocks. The article is short, so I'll reproduce the whole thing. US stocks bouyant despite grim economic data By Alistair Gray in New York Published: October 31 2008 13:04 | Last updated: October 31 2008 20:44 US stocks extended their dramatic weekly gains on Friday as investors once again overlooked a fresh glut of grim economic data and hunted for bargains. The market finished in positive territory even though downbeat consumer data and a key measure of business activity illustrated the toll that the financial crisis had taken on the economy. A lacklustre morning session gave way to a sharp afternoon rally, which eased into the close. The S&P 500 closed up 1.5 per cent at 968.75, the Dow Jones Industrial Average 1.6 per cent at 9,324.69 and the Nasdaq Composite Index 1.3 per cent at 1,720.95. JPMorgan, up 9.7 per cent at $41.25, was the biggest winner on the Dow after the bank said it would modify terms on mortgages and delay foreclosures. The financial sector led the market gains, up 5.5 per cent. In spite of official confirmation that the US economy had shrunk, the market enjoyed its strongest week for more than three decades. For the week, Friday's rally left the S&P up 10.5 per cent, the Nasdaq up 10.9 per cent and the Dow up 11.3 per cent. Illustrating the market's wild volatility, the recovery was still not enough to stop the worst monthly sell-off since 1987. Further developments on Friday served as a reminder of the difficulties facing company earnings. Carnival tumbled 11.5 per cent to $25.40 after the cruise liner group suspended its post-December dividend, while Electronic Arts dropped 17.9 per cent to $22.78 after the video game publisher issued a profit warning. Meanwhile, Chevron edged up 0.6 per cent to $74.60 after spending much of the session in negative territory, even though the oil group disclosed that third-quarter profit had doubled on the back of soaring crude prices earlier in the summer. ExxonMobil, which struggled to find positive territory in the previous session despite unveiling a world-record corporate profit, slid another 1.2 per cent to $74.12. Traders were concerned about the prospects for energy groups as the oil price continued to slide. For the week, Tuesday overwhelmed all other sessions with a stunning 10.8 per cent advance after widespread selling of yen positions left traders with cash to invest in US stocks. The Federal Reserve's move to cut interest rates and the easing of strain in money markets also gave stocks a boost. In financials, regional banks ended the week 16.3 per cent higher after a host of them accepted government cash under its banking recapitalisation scheme. Airlines soared, up 7.4 per cent for the week. Boeing climbed 15.9 per cent during the week to $52.42 amid hopes that a machinists’ strike would be called off this weekend. Meanwhile, General Motors swung wildly and was on track to end the week down 2.7 per cent. Although Moody's downgraded its rating on the motor group, investors were heartened by reports that the government was considering providing financial assistance in a possible merger with Chrysler and that the group had resolved "major issues" with the potential partner's owner, Cerberus Capital Management. The latest chapter in the saga came on Friday when Reuters reported that the Bush administration had ruled out funding for a possible deal, and the stock fell 4.6 per cent to $5.79. Procter & Gamble gained 9.6 per cent for the week to $64.54, even though the consumer products group lowered the bottom end of its full-year earnings guidance. Motorola added 7.2 per cent to $5.37 in spite of the group posting an unexpected third-quarter loss and saying that the mobile device business spin-off would be delayed. The Chicago Board Options Exchange Volatility Index, known as Wall Street's fear gauge, shed 25.2 per cent over the week, although at 59.75 it continued to indicate signs of severe distress. Labels: financial crisis, financial crisis bailout, Financial Times, stock market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Jumping Before They Could Be PushedFrom today's Financial Times. Mercifully, and for once recently, the biggest news story of the day is relatively speaking, undramatic, and a positive one:JPMorgan to freeze foreclosures By Francesco Guerrera and Saskia Scholtes in New York Published: October 31 2008 20:51 | Last updated: October 31 2008 20:51 JPMorgan Chase has moved to ease the burden of struggling US homeowners and avoid taking over thousands of houses, revealing plans on Friday to renegotiate $70bn of mortgages and freeze foreclosures for up to three months. The measures are expected to stave off the threat of home repossessions for 400,000 families by cutting their mortgage bills through reductions in interest rates or principal repayments and other loan modifications. Read the rest of the article Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). How the Other Half RecapitalizesFrom today's International Herald Tribune:Barclays to raise 7.3 billion pounds in share sales, mostly to Mideast nations By Julia Werdigier Friday, October 31, 2008 LONDON: Barclays plans to raise 7.3 billion pounds by selling shares to Abu Dhabi and Qatar to meet Britain's new capital requirements for banks without the government's help. Barclays, one of Britain's biggest banks, said Friday that it would sell 5.8 billion pounds, or $9.4 billion, of convertible notes, which could leave the Middle Eastern investors with as much as 32 percent of the bank. An additional 1.5 billion pounds would be raised by selling securities to new and existing institutional shareholders. "One has to give Barclays credit for being able to raise that capital," said Adrian Darley of Resolution Asset Management in London. "But it is also dilutive for shareholders, and even though this is enough to keep them operating, the question for Barclays remains whether it's enough to give them flexibility to go after opportunities in the current market." Barclays said the new investments would also help broaden the its relationships in the Middle East and Asia, regions that gained clout in the global economy and expect to benefit from Barclays's expertise in risk management, equities and acquisition advice. Unlike Royal Bank of Scotland, HBOS and Lloyds TSB, Barclays has turned down government assistance to reach the new capital requirements because the money came with restrictions on bonuses, lending and dividend payments. The Barclays chief executive, John Varley, said that raising the capital itself would give Barclays more flexibility to benefit from opportunities that could arise because of the financial market downturn. Read the rest of the article Labels: Barclay's Bank, financial crisis bailout, Middle Eastern oil producers Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Not Just an American ProblemFrom today's Guardian:Rescued bank to pay millions in bonuses RBS 'making monkeys' out of the government, says Vince Cable Simon Bowers The Guardian, Saturday November 1 2008 Royal Bank of Scotland, which is being bailed out with 20bn pounds of taxpayers' money, has signalled it is preparing to pay bonuses to thousands of staff despite government pledges to crack down on City pay. The bank has set aside 1.79bn pounds to cover "staff costs" - including discretionary bonuses - at its investment banking division for the first six months of the year alone. The same division caused a 5.9bn pound writedown that wiped out the bank's profits for the same period. The government had demanded that boardroom directors at RBS should not receive bonuses this year and the chief executive, Sir Fred Goodwin, is walking away without a pay-off. But below boardroom level, RBS and other groups are preparing to pay bonuses to investment bankers who continue to generate profits. Read the rest of the article Labels: executive pay, financial crisis bailout, Liberal Democrats, Royal Bank of Scotland, Vince Cable Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Protesters Disrupt Frankfurt Stock ExchangeMissed this earlier this week--hat-tip to Ben Collins.FRANKFURT, Oct 27 (Reuters) - Protesters from the anti-establishment Attac movement entered the Frankfurt Stock Exchange on Monday, shouting slogans and waving banners denouncing financial markets. The incident, which at one stage saw an Attac banner cover the stock exchange's big board displaying a graph of Germany's benchmark DAX index .GDAXI of blue-chip stocks, lasted a few minutes, a Reuters photographer on the scene said. He put the number of protesters at about 15 and said three security guards escorted them from the building in the heart of Frankfurt's banking district. Nobody was injured and no property damaged. No one at stock exchange operator Deutsche Boerse was immediately available for comment and trading was not halted. "Disarm the financial markets," read one Attac banner. "Put people and the environment above shareholder value." Read |
